[Federal Register Volume 81, Number 54 (Monday, March 21, 2016)]
[Rules and Regulations]
[Pages 14966-14975]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06260]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 32

RIN 3038-AE26


Trade Options

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (the ``Commission'' 
or the ``CFTC'') is issuing a final rule to amend the limited trade 
options exemption in the Commission's regulations, as described herein, 
with respect to the following subject areas: Reporting requirements for 
trade option counterparties that are not swap dealers or major swap 
participants; recordkeeping requirements for trade option 
counterparties that are not swap dealers or major swap participants; 
and certain non-substantive amendments.

DATES: Effective date: The effective date for this final rule is March 
21, 2016.

FOR FURTHER INFORMATION CONTACT: David N. Pepper, Special Counsel, 
Division of Market Oversight, at (202) 418-5565 or [email protected]; or 
Mark Fajfar, Assistant General Counsel, Office of the General Counsel, 
at (202) 418-6636 or [email protected], Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, 
DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Introduction

A. Background

    In April 2012, pursuant to section 4c(b) of the Commodity Exchange 
Act (the ``CEA'' or the ``Act''),\1\ the Commission issued a final rule 
to repeal and replace part 32 of its regulations concerning commodity 
options.\2\ The Commission undertook this effort to address section 721 
of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act 
(the ``Dodd-Frank Act'' or ``Dodd-Frank''),\3\ which, among other 
things, amended the CEA to define the term ``swap'' to include 
commodity options.\4\ Notably, Sec.  32.2(a) provides the

[[Page 14967]]

general rule that commodity option transactions must be conducted in 
compliance with any Commission rule, regulation, or order otherwise 
applicable to any other swap.\5\
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    \1\ 7 U.S.C. 6c(b) (providing that no person shall offer to 
enter into, enter into or confirm the execution of, any transaction 
involving any commodity regulated under this chapter which is of the 
character of, or is commonly known to the trade as an ``option'' 
contrary to any rule, regulation, or order of the Commission 
prohibiting any such transaction or allowing any such transaction 
under such terms and conditions as the Commission shall prescribe).
    \2\ See Commodity Options, 77 FR 25320 (Apr. 27, 2012) 
(``Commodity Options Release''). The Commission also issued certain 
conforming amendments to parts 3 and 33 of its regulations. See id. 
The Commission's regulations are set forth in chapter I of title 17 
of the Code of Federal Regulations.
    \3\ Public Law 111-203, 124 Stat. 1376 (2010).
    \4\ See 7 U.S.C. 1a(47)(A)(i) (defining ``swap'' to include an 
option of any kind that is for the purchase or sale, or based on the 
value, of 1 or more commodities''); 7 U.S.C. 1a(47)(B)(i) (excluding 
options on futures from the definition of ``swap''); 7 U.S.C. 1a(36) 
(defining an ``option'' as an agreement, contract, or transaction 
that is of the character of, or is commonly known to the trade as, 
an ``option''). The Commission defines ``commodity option'' or 
``commodity option transaction'' as any transaction or agreement in 
interstate commerce which is or is held out to be of the character 
of, or is commonly known to the trade as, an ``option,'' 
``privilege,'' ``indemnity,'' ``bid,'' ``offer,'' ``call,'' ``put,'' 
``advance guaranty'' or ``decline guaranty'' and which is subject to 
regulation under the Act and Commission regulations. See 17 CFR 
1.3(hh).
    \5\ See 17 CFR 32.2.
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    In response to requests from commenters, the Commission added a 
limited exception to this general rule for physically delivered 
commodity options purchased by commercial users of the commodities 
underlying the options (the ``trade option exemption'').\6\ Adopted as 
an interim final rule, Sec.  32.3 provides that qualifying commodity 
options are generally exempt from the swap requirements of the CEA and 
the Commission's regulations, subject to certain specified conditions. 
To qualify for the trade option exemption, a commodity option 
transaction must meet the following requirements: (1) The offeror is 
either an eligible contract participant (``ECP'') \7\ or a producer, 
processor, commercial user of, or merchant handling the commodity that 
is the subject of the commodity option transaction, or the products or 
byproducts thereof (a ``commercial party'') that offers or enters into 
the commodity option transaction solely for purposes related to its 
business as such; (2) the offeree is, and the offeror reasonably 
believes the offeree to be, a commercial party that is offered or 
enters into the transaction solely for purposes related to its business 
as such; and (3) the option is intended to be physically settled so 
that, if exercised, the option would result in the sale of an exempt or 
agricultural commodity \8\ for immediate or deferred shipment or 
delivery.\9\
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    \6\ See 77 FR at 25326-29. See also 17 CFR 32.2(b), 32.3. The 
interim final rule continued the Commission's long history of 
providing special treatment to ``trade options'' dating back to the 
Commission's original trade option exemption in 1976. See Regulation 
and Fraud in Connection with Commodity and Commodity Option 
Transactions, 41 FR 5108 (Nov. 18, 1976).
    \7\ See 7 U.S.C. 1a(18) (defining ``eligible contract 
participant''); 17 CFR 1.3(m) (further defining ``eligible contract 
participant'').
    \8\ See 7 U.S.C. 1a(20) (defining ``exempt commodity'' to mean a 
commodity that is not an agricultural commodity or an ``excluded 
commodity,'' as defined in 7 U.S.C. 1a(19)); 17 CFR 1.3(zz) 
(defining ``agricultural commodity''). Examples of exempt 
commodities include energy commodities and metals.
    \9\ See 17 CFR 32.3(a).
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    Commodity option transactions that meet these requirements are 
generally exempt from the provisions of the Act and any Commission 
rule, regulation, or order promulgated or issued thereunder, otherwise 
applicable to any other swap, except for the requirements enumerated in 
Sec.  32.3(b)-(d).\10\ These requirements include: Recordkeeping and 
reporting requirements; \11\ large trader reporting requirements in 
part 20; \12\ position limits under part 151; \13\ certain 
recordkeeping, reporting, and risk management duties applicable to swap 
dealers (``SDs'') and major swap participants (``MSPs'') in subparts F 
and J of part 23; \14\ capital and margin requirements for SDs and MSPs 
under CEA section 4s(e); \15\ and any applicable antifraud and anti-
manipulation provisions.\16\
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    \10\ See 17 CFR 32.3(a), (b)-(d).
    \11\ See 17 CFR 32.3(b).
    \12\ See 17 CFR 32.3(c)(1). Applying Sec.  32.3(c)(1), reporting 
entities as defined in part 20--swap dealers and clearing members--
must consider their counterparty's trade option positions just as 
they would consider any other swap position for the purpose of 
determining whether a particular counterparty has a consolidated 
account with a reportable position. See 17 CFR 20.1. A trade option 
counterparty would not be responsible for filing large trader 
reports unless it qualifies as a ``reporting entity,'' as that term 
is defined in Sec.  20.1.
    \13\ See 17 CFR 32.3(c)(2). See also Int'l Swaps & Derivatives 
Ass'n v. U.S. Commodity Futures Trading Comm'n, 887 F. Supp. 2d 259, 
270 (D.D.C. 2012), vacating the part 151 rulemaking, Position Limits 
for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011).
    \14\ See 17 CFR 32.3(c)(3)-(4). Note that Sec.  32.3(c)(4) 
explicitly incorporates Sec. Sec.  23.201 and 23.204, which require 
counterparties that are SD/MSPs to comply with part 45 recordkeeping 
and reporting requirements, respectively, in connection with all 
their swaps activities (including all their trade option 
activities). See 17 CFR 23.201(c), 23.204(a).
    \15\ See 17 CFR 32.3(c)(5).
    \16\ See 17 CFR 32.3(d). Note that Sec.  32.2 also preserves the 
continued application of Sec.  32.4, which specifically prohibits 
fraud in connection with commodity option transactions, to commodity 
options subject to the trade option exemption. See 17 CFR 32.2, 
32.4.
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    In adopting Sec.  32.3,\17\ the Commission stated that the trade 
option exemption is generally intended to permit parties to hedge or 
otherwise enter into commodity option transactions for commercial 
purposes without being subject to the full Dodd-Frank swaps regime.\18\ 
This limited exemption continued the Commission's longstanding practice 
of providing commercial participants in trade options with relief from 
certain requirements that would otherwise apply to commodity 
options.\19\ The Commission further explained that the applicable 
conditions in Sec.  32.3(b)-(d) were primarily intended to preserve a 
level of visibility into the market for trade options while still 
reducing the regulatory compliance burden for trade option 
participants.\20\
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    \17\ In the year following the Commission's adoption of the 
trade option exemption, the Commission's Division of Market 
Oversight (``DMO'') issued a series of no-action letters granting 
relief from certain conditions in the trade option exemption. See 
CFTC No-Action Letter No. 12-06 (Aug. 14, 2012), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-06.pdf; CFTC No-Action Letter No. 12-41 (Dec. 5, 2012), available 
at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-41.pdf; CFTC No-Action Letter No. 13-08 (Apr. 5, 2013), 
available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-08.pdf. CFTC No-Action Letter No. 13-08 (``No-
Action Letter 13-08'') provides that DMO would not recommend that 
the Commission commence an enforcement action against a market 
participant that is a Non-SD/MSP for failing to comply with the part 
45 reporting requirements, as required by Sec.  32.3(b)(1), provided 
that such Non-SD/MSP meets certain conditions, including reporting 
such exempt commodity option transactions via Form TO and notifying 
DMO no later than 30 days after entering into trade options having 
an aggregate notional value in excess of $1 billion during any 
calendar year. No-Action Letter 13-08 at 3-4. No-Action Letter 13-08 
also grants relief from certain swap recordkeeping requirements in 
part 45 for a Non-SD/MSP that complies with the recordkeeping 
requirements set forth in Sec.  45.2, provided that if the 
counterparty to the trade option at issue is an SD or an MSP, the 
Non-SD/MSP obtains a legal entity identifier (``LEI'') pursuant to 
Sec.  45.6. Id. at 4-5. DMO will withdraw the no-action relief 
provided pursuant to No-Action Letter 13-08 upon the effective date 
of this final rule.
    \18\ See 77 FR at 25326, n.39. The limited trade option 
exemption in Sec.  32.3 operates as a general exemption from the 
rules otherwise applicable to swaps, subject to the conditions 
enumerated in Sec.  32.3. For example, trade options do not factor 
into the determination of whether a market participant is an SD or 
MSP; trade options are exempt from the rules on mandatory clearing; 
and trade options are exempt from the rules related to real-time 
reporting of swaps transactions. The provisions identified in this 
list are not intended to constitute an exclusive or exhaustive list 
of the swaps requirements from which trade options are exempt.
    \19\ See Regulation and Fraud in Connection with Commodity and 
Commodity Option Transactions, 41 FR 51808 (Nov. 24, 1976) (adopting 
an exemption from the general requirement that commodity options be 
traded on-exchange for commodity option transaction for certain 
transactions involving commercial parties); Suspension of the Offer 
and Sale of Commodity Options, 43 FR 16153, 16155 (Apr. 17, 1978) 
(adopting a rule suspending all trading in commodity options other 
than such exempt trade options); Trade Options on the Enumerated 
Agricultural Commodities, 63 FR 18821 (Apr. 16, 1998) (authorizing 
the off-exchange trading of trade options in agricultural 
commodities).
    \20\ See 77 FR at 25326-27.
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B. Existing Reporting Requirements for Trade Option Counterparties That 
Are Non-SD/MSPs

    Pursuant to Sec.  32.3(b)(1), the determination as to whether a 
trade option must be reported pursuant to part 45 is based on the 
status of the parties to the trade option and whether or not they have 
previously reported swaps to an appropriate swap data repository 
(``SDR'') pursuant to part 45.\21\ If a trade option involves at least 
one counterparty (whether as buyer or seller) that has (1) become 
obligated to comply with the reporting requirements of part 45, (2) as 
a reporting party, (3) during the twelve month period

[[Page 14968]]

preceding the date on which the trade option is entered into, (4) in 
connection with any non-trade option swap trading activity, then such 
trade option must also be reported pursuant to the reporting 
requirements of part 45. If only one counterparty to a trade option has 
previously complied with the part 45 reporting provisions, as described 
above, then that counterparty shall be the part 45 reporting 
counterparty for the trade option. If both counterparties have 
previously complied with the part 45 reporting provisions, as described 
above, then the part 45 rules for determining the reporting 
counterparty will apply.\22\
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    \21\ See 17 CFR 32.3(b)(1).
    \22\ See 17 CFR 45.8.
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    To the extent that neither counterparty to a trade option has 
previously submitted reports to an SDR as a result of its swap trading 
activities as described above, then such trade option is not required 
to be reported pursuant to part 45. Instead, Sec.  32.3(b)(2) requires 
that each counterparty to an otherwise unreported trade option (i.e., a 
trade option that is not required to be reported to an SDR by either 
counterparty pursuant to Sec.  32.3(b)(1) and part 45) completes and 
submits to the Commission an annual Form TO filing providing notice 
that the counterparty has entered into one or more unreported trade 
options during the prior calendar year.\23\ Form TO requires an 
unreported trade option counterparty to: (1) Provide its name and 
contact information; (2) identify the categories of commodities 
(agricultural, metals, energy, or other) underlying one or more 
unreported trade options which it entered into during the prior 
calendar year; and (3) for each commodity category, identify the 
approximate aggregate value of the underlying physical commodities that 
it either delivered or received in connection with the exercise of 
unreported trade options during the prior calendar year. Counterparties 
to otherwise unreported trade options must submit a Form TO filing by 
March 1 following the end of any calendar year during which they 
entered into one or more unreported trade options.\24\ In adopting 
Sec.  32.3, the Commission stated that Form TO was intended to provide 
the Commission with a level of visibility into the market for 
unreported trade options that is ``minimally intrusive,'' thereby 
allowing it to identify market participants from whom it should collect 
additional information, or whom it should subject to additional 
reporting obligations in the future.\25\
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    \23\ Form TO is set out in appendix A to part 32 of the 
Commission's regulations.
    \24\ In 2014, approximately 330 Non-SD/MSPs submitted Form TO 
filings to the Commission, approximately 200 of which indicated 
delivering or receiving less than $10 million worth of physical 
commodities in connection with exercising unreported trade options 
in 2013, which was the first year in which Sec.  32.3 and Form TO 
reporting became effective. In 2015, approximately 349 Non-SD/MSPs 
submitted Form TO filings to the Commission, approximately 150 of 
which indicated delivering or receiving less than $10 million worth 
of physical commodities.
    \25\ See 77 FR at 25327-28.
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C. Existing Recordkeeping Requirements for Trade Option Counterparties 
That Are Non-SD/MSPs

    Commission regulation Sec.  32.3(b) provides that in connection 
with any commodity option transaction that is eligible for the trade 
option exemption, every counterparty shall comply with the swap data 
recordkeeping requirements of part 45, as otherwise applicable to any 
swap transaction.\26\ In discussing the trade option exemption 
conditions, however, the Commission noted in the preamble to the 
Commodity Options Release that ``[t]hese conditions include a 
recordkeeping requirement for any trade option activity, i.e., the 
recordkeeping requirements of 17 CFR 45.2,'' and did not reference or 
discuss any other provision of part 45 that contains recordkeeping 
requirements.\27\
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    \26\ See 17 CFR 32.3(b).
    \27\ See 77 FR at 25327.
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    Pursuant to Commission regulation Sec.  45.2, records must be 
maintained by all trade option participants and made available to the 
Commission as specified therein.\28\ Notably, Sec.  45.2 applies 
different recordkeeping requirements, depending on the nature of the 
counterparty. For example, if a trade option counterparty is an SD or 
MSP, it would be subject to the recordkeeping provisions of Sec.  
45.2(a). If a counterparty is a Non-SD/MSP, it would be subject to the 
less stringent recordkeeping requirements of Sec.  45.2(b).\29\ 
Additional recordkeeping requirements in part 45, separate and apart 
from those specified in Sec.  45.2 and which would apply to all trade 
option counterparties by operation of Sec.  32.3(b) include:
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    \28\ 17 CFR 32.3(b), 45.2.
    \29\ In the case of Non-SD/MSPs, the primary recordkeeping 
requirements are set out in Sec.  45.2(b), which requires Non-SD/
MSPs to keep ``full, complete and systematic records, together with 
all pertinent data and memoranda, with respect to each swap in which 
they are a counterparty.'' Non-SD/MSPs are also subject to the other 
general recordkeeping requirements of Sec.  45.2, such as the 
requirement that records must be maintained for 5 years following 
the final termination of the swap and must be retrievable within 5 
days. See 17 CFR 45.2(c).
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     Each swap must be identified in all recordkeeping by the 
use of a unique swap identifier (``USI''); \30\
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    \30\ 17 CFR 45.5.
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     Each counterparty to any swap must be identified in all 
recordkeeping by means of a single LEI; \31\ and
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    \31\ Each counterparty to any swap subject to the Commission's 
jurisdiction must be identified in all recordkeeping and all swap 
data reporting pursuant to part 45 by means of a single LEI as 
specified in Sec.  45.6. See 17 CFR 45.6.
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     Each swap must be identified in all recordkeeping by means 
of a unique product identifier (``UPI'') and product classification 
system.\32\
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    \32\ 17 CFR 45.7.
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D. Trade Options Notice of Proposed Rulemaking

    On May 7, 2015, the Commission published in the Federal Register a 
notice of proposed rulemaking that included several proposed amendments 
to the limited exemption for trade options in Commission regulation 
Sec.  32.3 (``the Proposal'').\33\ The Commission proposed 
modifications to the recordkeeping and reporting requirements in 
existing Sec.  32.3(b) that are applicable to trade option 
counterparties that are Non-SD/MSPs. The Commission also proposed a 
non-substantive amendment to existing Sec.  32.3(c) to eliminate the 
reference to the now-vacated part 151 position limits requirements. 
These proposed amendments were generally intended to relax reporting 
and recordkeeping requirements where two commercial parties enter into 
trade options with each other in connection with their respective 
businesses while maintaining regulatory insight into the market for 
unreported trade options.
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    \33\ Trade Options, Notice of Proposed Rulemaking, 80 FR 26200 
(May 7, 2015), available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2015-11020a.pdf.
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    The Commission requested comment on all aspects of the 
Proposal.\34\ In response, the Commission received nine comment 
letters.\35\ Some of these

[[Page 14969]]

comment letters raised issues concerning the treatment of trade 
options, and, more generally, commodity options, in relation to the 
swap definition.\36\ However, in the Proposal, the Commission did not 
address the general treatment of commodity options, including trade 
options, in relation to the swap definition, nor did the Commission 
solicit comments on such definitional issues. Rather, as discussed 
above, the Proposal contained only specific proposed modifications to 
the recordkeeping and reporting requirements in Sec.  32.3(b) that are 
applicable to trade option counterparties that are Non-SD/MSPs, as well 
as a proposed non-substantive amendment to Sec.  32.3(c). Since issues 
concerning the treatment of commodity options in relation to the swap 
definition fall outside the scope of the Proposal, the Commission 
declines to address such definitional issues in this final rule.
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    \34\ See 80 FR at 26202. Initially, comments on the Proposal 
were due on or before June 8, 2015. Then, on June 2, 2015, the 
Commission extended the comment period for the Proposal through June 
22, 2015, in light of the Commission's then recently-published 
interpretation concerning forward contracts with embedded volumetric 
optionality. See Forward Contracts with Embedded Volumetric 
Optionality, 80 FR 28239 (May 18, 2015).
    \35\ All comment letters are available through the Commission's 
Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1580. Comments addressing the Trade Options NPRM 
were received from the following parties: The American Gas 
Association (``AGA''); The American Public Gas Association 
(``APGA''); The American Public Power Association, Edison Electric 
Institute, Electric Power Supply Association, Large Public Power 
Council, National Rural Electric Cooperative Association (``Electric 
Associations''); The Coalition of Physical Energy Companies 
(``COPE''); Cogen Technologies Linden Venture, L.P. (``Linden''); 
The Commercial Energy Working Group (``CEWG''); The International 
Energy Credit Association (``IECA''); The Natural Gas Supply 
Association (``NGSA''); and Southern Company Services Inc. on behalf 
of and as agent for Alabama Power Co., Georgia Power Co., Gulf Power 
Co., Mississippi Power Co., and Southern Power Co. (``Southern'').
    \36\ See, e.g., IECA at 8-13; Linden at 2-8; Electric 
Associations at 6-10; AGA at 2-5; and Southern at 6-8.
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    The following section will address the comments received on 
specific aspects of the Proposal in connection with explaining each of 
the amended regulations adopted herein.

II. Discussion of Revised Regulations

A. Revised Reporting Requirements for Trade Option Counterparties That 
Are Non-SD/MSPs

1. Elimination of Part 45 Reporting Requirements for Trade Option 
Counterparties That Are Non-SD/MSPs
    The Commission proposed to amend Sec.  32.3(b) such that a Non-SD/
MSP will under no circumstances be subject to part 45 reporting 
requirements with respect to its trade option activities.\37\ The 
Commission explained in the Proposal that this proposed amendment was 
intended to reduce reporting burdens for Non-SD/MSP trade option 
counterparties, many of whom face technical and logistical impediments 
that prevent timely compliance with part 45 reporting requirements.\38\
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    \37\ See 80 FR at 26203. Note that trade option counterparties 
that are SD/MSPs would continue to comply with the swap data 
reporting requirements of part 45, including where the counterparty 
is a Non-SD/MSP, as they would in connection with any other swap 
transaction. See 17 CFR 32.3(c)(4) [renumbered 32.3(c)(3)], 23.201 
and 23.204.
    \38\ Id.
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    NGSA, IECA, and APGA each supported deletion of part 45 reporting 
requirements for trade option counterparties that are Non-SD/MSPs.\39\ 
No commenter opposed deletion.
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    \39\ See NGSA at 1 (``The elimination of Part 45 reporting . . . 
for [Non-SD/MSP] counterparties to trade options will eliminate 
costs that stem from those reporting efforts, and this is a welcome 
change in reporting requirements.''); see also IECA at 2; APGA at 2.
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    The Commission recognizes that many parties who are not SDs or MSPs 
and do not engage in significant swap activity apart from trade options 
do not have the infrastructure in place to support part 45 reporting to 
an SDR and that instituting such infrastructure would be costly, 
particularly for small end users. Therefore, the Commission believes 
that these parties, who apart from their trade option activities would 
have very limited reporting obligations under part 45, should not be 
required to comply with part 45 reporting requirements solely on the 
basis of having had to report a minimal number of historical or inter-
affiliate swaps during the same twelve-month period.
    Accordingly, for the reasons set forth above and in the Proposal, 
the Commission is adopting amended regulation Sec.  32.3(b), as 
proposed, by eliminating part 45 reporting requirements for trade 
option counterparties that are Non-SD/MSPs.
2. Elimination of the Form TO Notice Filing Requirement
    The Commission proposed to amend Commission regulation Sec.  
32.3(b) such that a Non-SD/MSP would not be required to report 
otherwise unreported trade options on Form TO.\40\ The Commission 
further proposed to delete Form TO from appendix A to part 32. The 
Commission explained in the Proposal that these proposed amendments 
were intended to reduce reporting burdens for Non-SD/MSP trade option 
counterparties, many of whom face significant costs in preparing Form 
TO.\41\
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    \40\ See 80 FR at 26203.
    \41\ Id.
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    AGA, Electric Associations, CEWG, APGA and NGSA each supported 
deletion of the Form TO reporting requirement.\42\ No commenter opposed 
deletion of Form TO. AGA commented that the proposed elimination of 
Form TO could ``reduce a significant compliance cost and obviate the 
need for small end-users to track and report their trade options 
activity for a given calendar year.'' \43\ Electric Associations 
commented that ``Form TO imposes substantial costs on end-users for 
personnel, legal advice and infrastructure,'' and completing Form TO 
requires an end-user to ``continuously track the commodity trade 
options it enters into, identify which of the commodity trade options 
have and have not been reported, and track the commodity trade options 
exercised. . . .'' \44\ CEWG commented that ``elimination of the 
obligation to file Form TO will allow [Non-SD/MSP trade option 
counterparties] to (i) reduce the amount of resources dedicated to 
identifying and tracking their trade options and (ii) reallocate 
resources for optimal utilization.'' \45\ COPE commented that filing 
the actual Form TO is not burdensome, but rather it is the underlying 
tracking that is burdensome.\46\
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    \42\ See, e.g., AGA at 2, 8; Electric Associations at 1, 5; CEWG 
at 2; APGA at 2; NGSA at 1.
    \43\ AGA at 8.
    \44\ See Electric Associations at 5.
    \45\ CEWG at 2.
    \46\ See COPE at 2.
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    The Commission recognizes that completing Form TO imposes costs and 
burdens on Non-SD/MSPs who enter into trade options, especially small 
end users. The Commission notes that Form TO data, which is submitted 
annually, consists of approximated aggregate values of otherwise 
unreported trade options exercised within three broad ranges, and 
within four ``commodity categories.'' \47\ The Commission believes 
that, in view of the relatively limited surveillance and regulatory 
oversight benefits to be derived by the Commission from Form TO data, 
which is approximated, aggregated and undifferentiated, completion and 
submission of Form TO should no longer be required.
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    \47\ Form TO requires Non-SD/MSP trade option counterparties to 
report the approximate size of unreported trade options exercised in 
the prior calendar year within three dollar-value ranges: Less than 
$10 million, between $10 million and $100 million, and over $100 
million. Form TO also requires Non-SD/MSP trade option 
counterparties to indicate the ``commodity category'' in which they 
entered into one or more unreported trade options: Agricultural, 
metals, energy or ``other.'' See appendix A to part 32 of the 
Commission's regulations.
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    Accordingly, for the reasons set forth above, the Commission is 
amending regulation Sec.  32.3(b), as proposed, by deleting the Form TO 
reporting requirement in connection with otherwise unreported trade 
options. Additionally, as proposed, the Commission is deleting appendix 
A to part 32, which contains Form TO.
3. The Proposed $1 Billion Notice and Alternative Notice Provisions 
Have Not Been Adopted
    The Commission proposed to further amend Sec.  32.3(b) by adding a 
new requirement that Non-SD/MSP trade

[[Page 14970]]

option counterparties provide notice by email to DMO within 30 days 
after entering into trade options, whether reported or unreported, that 
have an aggregate notional value in excess of $1 billion in any 
calendar year (the ``$1 Billion Notice'').\48\ The Commission further 
proposed that, as an alternative to filing the $1 Billion Notice, a 
Non-SD/MSP could provide notice by email to DMO that it reasonably 
expects to enter into trade options, whether reported or unreported, 
having an aggregate notional value in excess of $1 billion during any 
calendar year (the ``Alternative Notice'').\49\ Collectively, the $1 
Billion Notice and the Alternative Notice were referred to in the 
proposal as the ``Notice Requirement.'' \50\ The Commission explained 
in the Proposal that in light of the other proposed amendments that 
would generally remove reporting requirements for Non-SD/MSP 
counterparties to trade options, the proposed Notice Requirement would 
provide the Commission insight into the size of the market for 
unreported trade options and the identities of the most significant 
market participants, and would help guide the Commission's efforts to 
collect additional information through its authority to obtain copies 
of books or records should market circumstances dictate.\51\
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    \48\ See 80 FR at 26203-04. As discussed above, the no-action 
relief provided by No-Action Letter 13-08 to Non-SD/MSP trade option 
counterparties from part 45 reporting requirements is also 
conditioned on the Non-SD/MSP providing DMO with a $1 Billion 
Notice. See note 17 and accompanying text, supra. In 2013, 2014 and 
2015, DMO received $1 Billion Notices from nine, sixteen and fifteen 
Non-SD/MSPs, respectively. Most of these $1 Billion Notices were 
filed on behalf of large, well known energy companies.
    \49\ See 80 FR at 26203-04. The Commission proposed that Non-SD/
MSPs who provide the Alternative Notice would not be required to 
demonstrate that they actually entered into trade options with an 
aggregate notional value of $1 billion or more in the applicable 
calendar year.
    \50\ 80 FR at 26203.
    \51\ See 80 FR at 26203-04.
---------------------------------------------------------------------------

    Electric Associations, COPE and Southern each recommended against 
adoption of the proposed Notice Requirement.\52\ Electric Associations 
commented that it would be burdensome for Non-SD/MSPs to track and 
value trade options ``in a manner different than their ordinary 
tracking, measuring and recordkeeping for other cash commodity 
transactions (intended to be physically settled),'' and that such 
burden would be greater for smaller entities, which would need to track 
and value their trade options throughout the year, than it would be for 
large Non-SD/MSP counterparties, which could merely send the proposed 
Alternative Notice email to the Commission in January of each year.\53\ 
Southern commented that elimination of the Form TO reporting 
requirement would not be as meaningful if the Commission adopts the 
proposed $1 Billion Notice, because a Non-SD/MSP would nevertheless be 
required ``to classify, value and track their trade options'' all 
towards compliance with the Notice Requirement.\54\
---------------------------------------------------------------------------

    \52\ See Electric Associations at 4-6; Cope at 3; Southern at 2-
3.
    \53\ See Electric Associations at 5-6.
    \54\ See Southern at 2-3.
---------------------------------------------------------------------------

    AGA generally supported the Notice Requirement reporting framework, 
but commented that it is especially difficult to value many common 
types of trade options, such as long-term trade options and trade 
options with open-ended price or quantity terms, towards compliance 
with the proposed $1 Billion Notice.\55\
---------------------------------------------------------------------------

    \55\ See AGA at 5-8.
---------------------------------------------------------------------------

    The Commission recognizes that the relief provided by eliminating 
Form TO and part 45 reporting for trade option counterparties that are 
Non-SD/MSPs would be more meaningful if Non-SD/MSP trade option 
counterparties are not required to classify, value and track their 
trade options for the exclusive purpose of complying with the proposed 
Notice Requirement. The Commission also recognizes that commenters have 
expressed that trade options, especially trade options that have a long 
duration or open price or quantity terms, may be difficult to value. 
Thus, the burdens on Non-SD/MSP trade option counterparties to 
classify, value and track their trade options towards compliance with 
the proposed Notice Requirement could be significant, and it is not 
evident that there are any steps these counterparties could take to 
more accurately classify, value and track their trade options, given 
the uncertainties inherent in this type of contract. Therefore, in view 
of the relatively limited use of such data (which would be submitted in 
aggregate form and not categorized by commodity or by instrumentation) 
for surveillance and regulatory oversight purposes, the Commission does 
not believe that the proposed Notice Requirement is necessary.
    Accordingly, for the reasons set forth above, the Commission has 
chosen not to adopt as part of this final rule the proposed Notice 
Requirement, i.e., the proposed $1 Billion Notice and Alternative 
Notice requirements.

B. Revised Recordkeeping Requirements for Trade Option Counterparties 
That Are Non-SD/MSPs

    The Commission proposed to amend Sec.  32.3(b) to clarify that 
trade option counterparties that are Non-SD/MSPs need not identify 
their trade options in all recordkeeping by means of either a USI or 
UPI, as required by Sec. Sec.  45.5 and 45.7.\56\ Rather, with respect 
to part 45 recordkeeping requirements, the Commission proposed to 
clarify that trade option counterparties that are Non-SD/MSPs need only 
comply with the applicable recordkeeping provisions in Sec.  45.2,\57\ 
along with the following proposed qualification: The Non-SD/MSP trade 
option counterparty must obtain an LEI pursuant to Sec.  45.6 and 
provide such LEI to its counterparty if that counterparty is an SD/MSP. 
This proposed amendment would allow a trade option counterparty that is 
an SD/MSP to comply with applicable part 45 swap data recordkeeping and 
reporting obligations by properly identifying its Non-SD/MSP trade 
option counterparty by that counterparty's LEI.\58\
---------------------------------------------------------------------------

    \56\ See 80 FR at 26204; see also notes 30-32 and accompanying 
text, supra.
    \57\ Trade option counterparties that are SD/MSPs shall continue 
to comply with the swap data recordkeeping requirements of part 45, 
as they would in connection with any other swap. See 17 CFR 32.3(c).
    \58\ An SD/MSP that otherwise would report the trade option at 
issue pursuant to Sec.  32.3(c) is required to identify its 
counterparty to the trade option by that counterparty's LEI in all 
recordkeeping as well as all swap data reporting. See 17 CFR 23.201, 
23.204, and 45.6.
---------------------------------------------------------------------------

    Electric Associations, COPE, IECA and Southern each recommended 
further reduction of trade option recordkeeping requirements for Non-
SD/MSPs.\59\ Electric Associations commented that various types of end-
users currently maintain records of trade options in ``different 
systems, in different formats and for different retention periods than 
transactions referencing the same commodities that are intended to be 
financially settled, causing such records to not be retrievable in the 
same manner or format, or as quickly, as financially settled 
transactions.'' \60\ COPE commented that compliance with part 45 
recordkeeping requirements in connection with trade options is 
burdensome for end-users, who must ``identify and segregate trade 
options from other physical contracts, maintain the material required 
by CFTC regulations, and be prepared to provide requested data to the 
CFTC within five

[[Page 14971]]

days.'' \61\ COPE recommended allowing physical end-users to keep 
records of trade options ``in a manner no less stringent than that used 
for their physical commercial agreements, with an obligation to provide 
copies to the CFTC in a commercially reasonable time upon request.'' 
\62\ Southern recommended that the Commission provide further relief by 
permitting Non-SD/MSPs to ``maintain the documents that they would 
otherwise already maintain in their ordinary course of business.'' \63\ 
Southern further commented that the recordkeeping requirements under 
Sec.  45.2(b) are ``very broad and vague,'' and that carrying forward 
these requirements will result in a ``tremendous burden'' on Non-SD/
MSPs, who ``will need to undergo a significant effort to ensure `full, 
complete, and systematic records, together will all pertinent data and 
memoranda' are maintained for every trade option.'' \64\ The Commission 
did not receive any comments specifically addressing the requirement 
that a Non-SD/MSP trade option counterparty would need to obtain an LEI 
pursuant to Sec.  45.6 and provide such LEI to its counterparty if that 
counterparty is an SD/MSP.
---------------------------------------------------------------------------

    \59\ See Electric Associations at 10-11; COPE at 2-3; IECA at 2-
5; Southern at 4-5.
    \60\ Electric Associations at 11.
    \61\ COPE at 2-3.
    \62\ Id. at 3.
    \63\ Southern at 4.
    \64\ Id.
---------------------------------------------------------------------------

    The Commission recognizes that requiring Non-SD/MSPs to comply with 
the swap data recordkeeping requirements of part 45 in connection with 
their trade options may result in burdens and costs for such 
participants, especially for small end users. The Commission believes 
that it would be appropriate to alleviate such burdens and costs for 
these market participants, without compromising the Commission's 
ability to properly oversee trade option activities. In particular, the 
Commission expects that Non-SD/MSPs maintain records concerning their 
trade option activities in the ordinary course of business. 
Furthermore, the Commission will remain able to collect information 
concerning trade option activities as necessary. For example, where a 
Non-SD/MSP enters into a trade option opposite an SD/MSP, the SD/MSP 
counterparty must continue to comply with all applicable swaps-related 
recordkeeping and reporting requirements of part 45 with respect to 
that transaction.\65\ In order to facilitate such reporting and 
recordkeeping by trade option counterparties that are SD/MSPs, the 
Commission will adopt, as proposed, the requirement that a Non-SD/MSP 
trade option counterparty must obtain an LEI pursuant to Sec.  45.6 and 
provide such LEI to its counterparty if that counterparty is an SD/MSP. 
As stated above, this requirement allows an SD/MSP to properly identify 
its Non-SD/MSP trade option counterparty by that counterparty's LEI in 
all swap data recordkeeping and reporting relating to that 
transaction.\66\ As a result, the Commission will be able to gain 
insight into any trade option entered into by a Non-SD/MSP opposite a 
counterparty that is an SD/MSP. Additionally, under Sec.  
32.3(c)(2)[renumbered Sec.  32.3(c)(1)], Non-SD/MSPs that are clearing 
members shall continue to comply with part 20 reporting and 
recordkeeping requirements in connection with their trade option 
activities.\67\
---------------------------------------------------------------------------

    \65\ Trade option counterparties that are SD/MSPs shall continue 
to comply with the swap data recordkeeping and reporting 
requirements of part 45, as they would in connection with any other 
swap. See 17 CFR 32.3(c).
    \66\ See 17 CFR 32.3(c).
    \67\ 17 CFR 32.3(c)(1); 17 CFR part 20. A clearing member, as 
defined in Sec.  20.1, means any person who is a member of, or 
enjoys the privilege of, clearing trades in its own name through a 
clearing organization. Section 20.6(d) requires that all books and 
records required to be kept under Sec.  20.6 shall be furnished upon 
request to the Commission along with any pertinent information 
concerning such positions, transactions, or activities. The 
recordkeeping duties imposed by Sec.  20.6 are in accordance with 
the requirements of Regulation 1.31. See 17 CFR 20.6(a)-(b).
---------------------------------------------------------------------------

    Accordingly, the Commission is amending regulation Sec.  32.3(b) by 
deleting the requirement that a Non-SD/MSP must comply with the 
recordkeeping requirements of part 45 (as otherwise applicable to any 
swap) in connection with its trade option activities, subject to the 
exception that a Non-SD/MSP trade option counterparty must obtain an 
LEI pursuant to Sec.  45.6 and provide such LEI to its counterparty if 
that counterparty is an SD/MSP.

C. Applicability of Position Limits to Trade Options

    Existing Commission regulation Sec.  32.3(c)(2) subjects trade 
options to part 151 position limits, to the same extent that part 151 
would apply in connection with any other swap.\68\ However, as stated 
above, part 151 has been vacated.\69\ Furthermore, trade options are 
not subject to position limits under the Commission's current part 150 
position limit regime.\70\
---------------------------------------------------------------------------

    \68\ See 17 CFR 32.3(c)(2).
    \69\ See note 13 and accompanying text, supra.
    \70\ Under current Sec.  150.2, position limits apply to 
agricultural futures in nine listed commodities and options on those 
futures. Since trade options are not options on futures, Sec.  150.2 
position limits do not currently apply to such transactions. See 17 
CFR 150.2.
---------------------------------------------------------------------------

    In the Proposal, the Commission proposed to amend existing Sec.  
32.3(c) by deleting Sec.  32.3(c)(2), including the reference to 
vacated part 151, because position limits do not currently apply to 
trade options. The Commission explained in the Proposal that this would 
not be a substantive change.\71\ Accordingly, for the reasons stated 
above, the Commission is deleting the cross-reference to vacated part 
151 position limits from Sec.  32.3(c), as proposed.
---------------------------------------------------------------------------

    \71\ 80 FR at 26204-05.
---------------------------------------------------------------------------

    Several commenters requested assurance from the Commission that 
federal speculative position limits will not apply to trade options in 
the future as a result of the pending position limits rulemaking, which 
remains in the proposed rulemaking stage.\72\ The Commission believes 
that federal speculative position limits should not apply to trade 
options. To that end, the Commission intends to address this matter in 
the context of the proposed rulemaking on position limits, if such rule 
is adopted.
---------------------------------------------------------------------------

    \72\ See, e.g., AGA at 8-9; Electric Associations at 14-15; CEWG 
at 2-3; APGA at 2; NGSA at 2; IECA at 6-7; Southern at 5-6. On 
December 12, 2013, the Commission published in the Federal Register 
a notice of proposed rulemaking to establish speculative position 
limits for 28 exempt and agricultural commodity futures and options 
contracts and the physical commodity swaps that are economically 
equivalent to such contracts, including trade options. See Position 
Limits for Derivatives, Proposed Rules, 78 FR 75680 (Dec. 12, 2013) 
(``Position Limits Proposal''). Therein, the Commission proposed 
replacing the cross-reference to vacated part 151 in Sec.  
32.3(c)(2) with a cross-reference to amended part 150 position 
limits. See 78 FR at 75711. As an alternative in the Position Limits 
Proposal, the Commission proposed to exclude trade options from 
speculative position limits and proposed an exemption for commodity 
derivative contracts that offset the risk of trade options.
---------------------------------------------------------------------------

III. Related Matters

A. Cost Benefit Analysis

1. Background
    As discussed above, the Commission is adopting amendments to the 
trade option exemption in Sec.  32.3 that: (1) Eliminate the part 45 
reporting requirement for trade option counterparties that are Non-SD/
MSPs; (2) eliminate the Form TO filing requirement; (3) eliminate the 
part 45 recordkeeping requirements for trade option counterparties that 
are Non-SD/MSPs, with the exception being that a Non-SD/MSP trade 
option counterparty must obtain an LEI pursuant to Sec.  45.6 and 
provide such LEI to its counterparty if that counterparty is an SD/MSP; 
and (4) eliminate reference to the now-vacated part 151 position 
limits. In issuing this final rule, the Commission

[[Page 14972]]

has reviewed all relevant comment letters and taken into account 
significant issues raised therein.\73\
---------------------------------------------------------------------------

    \73\ See note 35 and accompanying text, supra.
---------------------------------------------------------------------------

    The Commission believes that the baseline for this cost and benefit 
consideration is existing Sec.  32.3. Although No-Action Letter 13-08, 
as discussed above, has offered no-action relief that is similar to 
certain aspects of the relief provided by this final rule, as a no-
action letter, it only represents the position of the issuing Division 
or Office and cannot bind the Commission or other Commission staff.\74\ 
Consequently, the Commission believes that No-Action Letter 13-08 
should not set or affect the baseline against which the Commission 
considers the costs and benefits of this final rule.
---------------------------------------------------------------------------

    \74\ See 17 CFR 140.99(a)(2). See also No-Action Letter 13-08 at 
5.
---------------------------------------------------------------------------

    In the Proposal, the Commission invited comment on all aspects of 
its consideration of the costs and benefits associated with the 
Proposal, and the five factors the Commission is required to consider 
under CEA section 15(a). The Commission did not receive any comments 
from the public in this regard.
2. Costs
    The Commission has considered whether elimination of part 45 
reporting and recordkeeping requirements for trade option 
counterparties that are Non-SD/MSPs and the Form TO filing requirement 
could potentially reduce the amount of information available to the 
Commission to fulfill its regulatory mission, which could be a cost to 
the markets or the general public. However, the Commission shall remain 
able to collect sufficient information concerning trade option 
activities to fulfill its regulatory mission.\75\
---------------------------------------------------------------------------

    \75\ See notes 65-67 and accompanying text.
---------------------------------------------------------------------------

    The Commission expects that Non-SD/MSPs will continue to maintain 
records concerning their trade option activities in the ordinary course 
of business. Additionally, where a Non-SD/MSP enters into a trade 
option opposite an SD/MSP, the SD/MSP counterparty must continue to 
comply with all applicable swaps-related recordkeeping and reporting 
requirements of part 45 with respect to that transaction. In order to 
facilitate such reporting and recordkeeping by trade option 
counterparties that are SD/MSPs, the Commission has adopted a 
requirement in amended Sec.  32.3(b) that a Non-SD/MSP trade option 
counterparty must obtain an LEI pursuant to Sec.  45.6 and provide such 
LEI to its counterparty if that counterparty is an SD/MSP. As stated 
above, this requirement allows an SD/MSP to properly identify its Non-
SD/MSP trade option counterparty by that counterparty's LEI in all swap 
data recordkeeping and reporting.\76\ Thus, the Commission may continue 
to gain insight into any trade option entered into by a Non-SD/MSP 
opposite a counterparty that is an SD/MSP. Furthermore, under Sec.  
32.3(c)(1), Non-SD/MSPs that are clearing members shall continue to 
comply with part 20 reporting and recordkeeping requirements in 
connection with their trade option activities. Therefore, the 
Commission believes that this final rule will not impose any additional 
costs on the markets themselves, or on the general public.
---------------------------------------------------------------------------

    \76\ See 17 CFR 32.3(b).
---------------------------------------------------------------------------

3. Benefits
    The Commission believes that this final rule has the benefit of 
reducing the regulatory burdens imposed by Sec.  32.3(b), particularly 
through the elimination of part 45 reporting and recordkeeping 
requirements for trade option counterparties that are Non-SD/MSPs and 
the Form TO filing requirement, each of which commenters have described 
as burdensome.\77\
---------------------------------------------------------------------------

    \77\ See notes 39, 42-46, and 59-64, and accompanying text, 
supra.
---------------------------------------------------------------------------

4. Section 15(a) Factors
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\78\ Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
section 15(a) factors.
---------------------------------------------------------------------------

    \78\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

a. Protection of Market Participants and the Public
    The Commission recognizes that there may be trade-offs between 
reducing regulatory burdens and ensuring that the Commission has 
sufficient information to fulfill its regulatory mission. As discussed 
above, the amendments to Sec.  32.3 reduce some of the regulatory 
burdens on end users while still maintaining the Commission's insight 
into the market for trade options, as necessary, to protect the public.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
    The Commission believes that the amendments to Sec.  32.3 will 
reduce reporting and recordkeeping burdens on Non-SD/MSPs in the market 
for trade options, and will allow them to reallocate resources 
dedicated to trade options reporting to other more efficient purposes. 
Despite the deletion of swaps-related recordkeeping requirements in 
connection with trade options between two Non-SD/MSP counterparties, 
the Commission shall remain able to collect information concerning 
trade options as necessary to use in its market oversight role, thereby 
fulfilling the purposes of the CEA.\79\
---------------------------------------------------------------------------

    \79\ See, e.g., 7 U.S.C. 5 (stating that it is a purpose of the 
CEA to deter disruptions to market integrity). See also notes 65-67 
and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that the amendments to Sec.  32.3 will not 
have any competitiveness impact because the amendments apply to all 
Non-SD/MSP trade option counterparties in the same way. Although the 
obligations of SD/MSPs under the amended rule differ from those of Non-
SD/MSPs, the Commission does not believe that these differences relate 
to any factors of competition between the two types of trade option 
counterparties.
c. Price Discovery
    The Commission believes that the amendments to Sec.  32.3 will 
likely not have a significant impact on price discovery. Given that 
trade options are not subject to the real-time reporting requirements 
applicable to other swaps, meaning that current prices of consummated 
trade options are likely not available to many market participants, the 
Commission believes any effect on price discovery will be negligible.
d. Sound Risk Management Practices
    The Commission believes that this final rule will not have a 
meaningful adverse effect on the risk management practices of the 
affected market participants and end users. Although the final rule is 
intended to reduce some of the regulatory burdens on certain market 
participants and end users, the Commission expects that where two Non-
SD/MSPs enter into a trade option with one another, each participant 
will continue to maintain records concerning that contract, and its 
exercise, in its ordinary course of business. Furthermore, the 
Commission shall

[[Page 14973]]

remain able to collect information concerning trade options as 
necessary to fulfill its regulatory mission.
e. Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations for this final rule. As noted above, these amendments to 
Sec.  32.3 will reduce some regulatory burdens while maintaining the 
Commission's access to information to fulfill its regulatory mission.

B. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') requires that agencies 
consider whether the rules they issue will have a significant economic 
impact on a substantial number of small entities and, if so, provide a 
regulatory flexibility analysis respecting the impact.\80\ The final 
rule, in amending Sec.  32.3, will affect the recordkeeping and 
reporting requirements for Non-SD/MSP counterparties relying on the 
trade option exemption in Sec.  32.3. Pursuant to the eligibility 
requirements in Sec.  32.3(a), such a Non-SD/MSP may be an ECP and/or a 
commercial party (i.e., a producer, processor, or commercial user of, 
or a merchant handling the exempt or agricultural commodity that is the 
subject of the commodity option transaction, or the products or by-
products thereof) offering or entering into the trade option solely for 
purposes related to its business as such. Although the Commission has 
previously determined that ECPs are not small entities for RFA 
purposes,\81\ the Commission is not in a position to determine whether 
non-ECP commercial parties affected by the amendments would include a 
substantial number of small entities on which the rule would have a 
significant economic impact because Sec.  32.3 does not subject such 
entities to a minimum net worth requirement, allowing commercial 
entities of any economic status to enter into exempt trade options. 
Therefore, pursuant to 5 U.S.C. 604, the Commission offers this 
regulatory flexibility analysis addressing the impact of the proposal 
on small entities:
---------------------------------------------------------------------------

    \80\ See 5 U.S.C. 601 et seq.
    \81\ See Opting Out of Segregation, 66 FR 20740, 20743 (Apr. 25, 
2001).

---------------------------------------------------------------------------
(1) A Statement of the Need for, and Objectives of, the Rule.

    The Commission is taking this regulatory action to modify the trade 
option exemption in Sec.  32.3 in response to comments from Non-SD/MSPs 
that the regulatory burdens currently imposed by Sec.  32.3 are 
unnecessarily burdensome. The objective for issuing this rule is to 
reduce the recordkeeping and reporting obligations for trade option 
counterparties that are Non-SD/MSPs. As stated above, the legal basis 
for the rule is the Commission's plenary options authority in CEA 
section 4c(b).

(2) Summary of the significant issues raised by public comment on the 
Commission's initial analysis, the Commission's assessment of such 
issues, and a statement of any changes made as a result of such 
comments.

    The Commission did not receive any comment on the initial 
regulatory flexibility analysis.

(3) A description of, and an estimate of, the number of small entities 
to which the rule will apply or an explanation of why no such estimate 
is available.

    The small entities to which the rule may apply are those commercial 
parties that would not qualify as ECPs and/or that fall within the 
definition of a ``small entity'' under the RFA, including size 
standards established by the Small Business Administration.\82\ 
Although more than 300 Non-SD/MSPs have reported their use of trade 
options to the Commission annually through Form TO, the limited 
information provided by Form TO is not sufficient for the Commission to 
determine whether and how many of those Non-SD/MSPs qualify as small 
entities under the RFA.
---------------------------------------------------------------------------

    \82\ See id. See also 5 U.S.C. 601(3) (defining ``small 
business'' to have the same meaning as the term ``small business 
concern'' in the Small Business Act); 15 U.S.C. 632(a)(1) (defining 
``small business concern'' to include an agricultural enterprise 
with annual receipts not in excess of $750,000); 13 CFR 121.201 
(establishing size standards for small business concerns).

(4) A description of the projected reporting, recordkeeping, and other 
compliance requirements of the rule, including an estimate of the 
classes of small entities which will be subject to the requirement and 
the type of professional skills necessary for preparation of the report 
---------------------------------------------------------------------------
or record.

    The rule will relieve trade option counterparties that are Non-SD/
MSPs, which may include small entities, from certain recordkeeping and 
reporting requirements that would otherwise apply to them in connection 
with their trade option activities, such as part 45 reporting and 
recordkeeping requirements, and Form TO reporting requirements.

(5) A description of any significant alternatives to the rule which 
accomplish the stated objectives of applicable statutes and which 
minimize any significant economic impact of the rule on small entities.

    A potential alternative to relieving Non-SD/MSPs, which may include 
small entities, from certain recordkeeping and reporting requirements 
would be to either (1) not amend the current rule, which would maintain 
certain recordkeeping and reporting requirements that Non-SD/MSPs have 
represented are onerous, or (2) create a rule with more specific 
reporting and recordkeeping parameters for specific entities. The 
Commission believes that this final rule will have a positive economic 
impact on Non-SD/MSPs that are small entities because it would 
generally relax reporting and recordkeeping requirements across all 
trade option counterparties that are Non-SD/MSPs.
    Therefore, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that this final rule will not 
have a significant economic impact on a substantial number of small 
entities.

C. Paperwork Reduction Act

    The purposes of the Paperwork Reduction Act of 1995 (``PRA'') are, 
among other things, to minimize the paperwork burden to the private 
sector, ensure that any collection of information by a government 
agency is put to the greatest possible uses, and minimize duplicative 
information collections across the government.\83\ The PRA applies to 
all information, ``regardless of form or format,'' whenever the 
government is ``obtaining, causing to be obtained [or] soliciting'' 
information, and includes required disclosure to third parties or the 
public, of facts or opinions, when the information collection calls for 
answers to identical questions posed to, or identical reporting or 
recordkeeping requirements imposed on, ten or more persons.\84\ The PRA 
requirements have been determined to include not only mandatory but 
also voluntary information collections, and include both written and 
oral communications.\85\ Under the PRA, an agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid control number from 
the Office of Management and Budget (``OMB'').
---------------------------------------------------------------------------

    \83\ See 44 U.S.C. 3501.
    \84\ See 44 U.S.C. 3502.
    \85\ See 5 CFR 1320.3(c)(1).
---------------------------------------------------------------------------

    The Commission believes that this final rule will not impose any 
new information collection requirements that require approval of OMB 
under the PRA. As a general matter, the final rule relaxes reporting 
and recordkeeping

[[Page 14974]]

requirements for Non-SD/MSPs entering into trade options in connection 
with their respective businesses, including the withdrawal and removal 
of Form TO. Additionally, the Commission has chosen not to adopt as 
part of this final rule the proposed Notice Requirement, i.e., the 
proposed $1 Billion Notice and Alternative Notice requirements. Since 
this final rule does not impose any new information collection 
requirements, the final rule therefore does not result in the creation 
of any new information collection subject to OMB review or approval 
under the PRA. Furthermore, the Commission believes that this final 
rule will not cause a material net reduction in the current part 45 PRA 
burden estimates (OMB control number 3038-0096) to the extent that such 
reduced recordkeeping and reporting burdens for trade option 
counterparties that are Non-SD/MSPs will be insubstantial when compared 
to the overall part 45 PRA burden estimate as it relates to Non-SD/
MSPs.
    Accordingly, since there is no longer a need for Form TO, and since 
there will not be any other reporting or recordkeeping requirement 
falling under OMB Control Number 3038-0106, the Commission will file a 
request with OMB to discontinue OMB Control Number 3038-0106 (Form TO, 
Annual Notice Filing for Counterparties to Unreported Trade Options).

List of Subjects in 17 CFR Part 32

    Commodity futures, Consumer protection, Fraud, Reporting and 
recordkeeping requirements.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR part 32 as follows:

PART 32--REGULATION OF COMMODITY OPTION TRANSACTIONS

0
1. The authority citation for part 32 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 6c, and 12a, unless otherwise noted.


0
2. Revise Sec.  32.3 to read as follows:


Sec.  32.3  Trade options.

    (a) Subject to paragraphs (b), (c), and (d) of this section, the 
provisions of the Act, including any Commission rule, regulation, or 
order thereunder, otherwise applicable to any other swap shall not 
apply to, and any person or group of persons may offer to enter into, 
enter into, confirm the execution of, maintain a position in, or 
otherwise conduct activity related to, any transaction in interstate 
commerce that is a commodity option transaction, provided that:
    (1) Such commodity option transaction must be offered by a person 
that has a reasonable basis to believe that the transaction is offered 
to an offeree as described in paragraph (a)(2) of this section. In 
addition, the offeror must be either:
    (i) An eligible contract participant, as defined in section 1a(18) 
of the Act, as further jointly defined or interpreted by the Commission 
and the Securities and Exchange Commission or expanded by the 
Commission pursuant to section 1a(18)(C) of the Act; or
    (ii) A producer, processor, or commercial user of, or a merchant 
handling the commodity that is the subject of the commodity option 
transaction, or the products or by-products thereof, and such offeror 
is offering or entering into the commodity option transaction solely 
for purposes related to its business as such;
    (2) The offeree must be a producer, processor, or commercial user 
of, or a merchant handling the commodity that is the subject of the 
commodity option transaction, or the products or by-products thereof, 
and such offeree is offered or entering into the commodity option 
transaction solely for purposes related to its business as such; and
    (3) The commodity option must be intended to be physically settled, 
so that, if exercised, the option would result in the sale of an exempt 
or agricultural commodity for immediate or deferred shipment or 
delivery.
    (b) In connection with any commodity option transaction entered 
into pursuant to paragraph (a) of this section, every counterparty that 
is not a swap dealer or major swap participant shall obtain a legal 
entity identifier pursuant to Sec.  45.6 of this chapter if the 
counterparty to the transaction involved is a swap dealer or major swap 
participant, and provide such legal entity identifier to the swap 
dealer or major swap participant counterparty.
    (c) In connection with any commodity option transaction entered 
into pursuant to paragraph (a) of this section, the following 
provisions shall apply to every trade option counterparty to the same 
extent that such provisions would apply to such person in connection 
with any other swap:
    (1) Part 20 (Swaps Large Trader Reporting) of this chapter;
    (2) Subpart J of part 23 (Duties of Swap Dealers and Major Swap 
Participants) of this chapter;
    (3) Sections 23.200, 23.201, 23.203, and 23.204 of subpart F of 
part 23 (Reporting and Recordkeeping Requirements for Swap Dealers and 
Major Swap Participants) of this chapter; and
    (4) Section 4s(e) of the Act (Capital and Margin Requirements for 
Swap Dealers and Major Swap Participants).
    (d) Any person or group of persons offering to enter into, entering 
into, confirming the execution of, maintaining a position in, or 
otherwise conducting activity related to a commodity option transaction 
in interstate commerce pursuant to paragraph (a) of this section shall 
remain subject to part 180 (Prohibition Against Manipulation) and Sec.  
23.410 (Prohibition on Fraud, Manipulation, and other Abusive 
Practices) of this chapter and the antifraud, anti-manipulation, and 
enforcement provisions of sections 2, 4b, 4c, 4o, 4s(h)(1)(A), 
4s(h)(4)(A), 6, 6c, 6d, 9, and 13 of the Act.
    (e) The Commission may, by order, upon written request or upon its 
own motion, exempt any person, either unconditionally or on a temporary 
or other conditional basis, from any provisions of this part, and the 
provisions of the Act, including any Commission rule, regulation, or 
order thereunder, otherwise applicable to any other swap, other than 
Sec.  32.4, part 180 (Prohibition Against Manipulation), and Sec.  
23.410 (Prohibition on Fraud, Manipulation, and other Abusive 
Practices) of this chapter, and the antifraud, anti-manipulation, and 
enforcement provisions of sections 2, 4b, 4c, 4o, 4s(h)(1)(A), 
4s(h)(4)(A), 6, 6c, 6d, 9, and 13 of the Act, if it finds, in its 
discretion, that it would not be contrary to the public interest to 
grant such exemption.


Appendix A to 17 CFR part 32  [Removed]

0
3. Remove appendix A to 17 CFR part 32.

    Issued in Washington, DC, on March 16, 2016, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Trade Options--Commission Voting Summary, Chairman's 
Statement, and Commissioner's Statement

Appendix 1--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Bowen and 
Giancarlo voted in the affirmative. No Commissioner voted in the 
negative.

Appendix 2--Statement of Chairman Timothy G. Massad

    Today, the CFTC has taken another important step to address the 
concerns of commercial end-users who rely on the

[[Page 14975]]

derivatives markets to hedge risk--and who, we should always 
remember, did not cause the financial crisis. Trade options are a 
type of commodity option primarily used in the agricultural, energy 
and manufacturing sectors. Today, the Commission has finalized some 
amendments to its rules that recognize trade options are different 
from the swaps that are the focus of the Dodd-Frank reforms. These 
changes will reduce the burdens on these commercial businesses and 
allow them to better address commercial risk.
    The action we have taken today will eliminate any potential 
obligation of commercial participants, who are not swap dealers (SD) 
or major swap participants (MSP), to report trade options to a swap 
data repository. We also have eliminated the requirement that these 
entities must report their trade option activities on ``Form TO,'' 
and we have eliminated Form TO altogether. Further, we have ended 
the swap-related recordkeeping requirements for these end-users in 
connection with their trade option activities, although when 
transacting in trade options with SDs or MSPs, they will need to 
obtain a legal entity identifier. These changes will reduce burdens 
and costs for trade option counterparties that are not SDs or MSPs 
and, in particular, for smaller end-users.
    We also have decided not to impose a requirement in the proposed 
rule that a commercial participant would need to provide notice to 
the Commission of its trade options activities if such activities 
have a value of more than $1 billion in any calendar year. This 
followed careful consideration of the benefits of such information 
to the Commission, as compared with the difficulties commercial end-
users would face in valuating, tracking, and classifying their trade 
options.
    I'm pleased that today we have addressed some reasonable 
concerns of commercial end-users who are the critical users of the 
derivatives markets. This is just one of the many actions we have 
taken in this regard. We will continue to evaluate our rules with an 
eye towards the concerns of these businesses. I thank my fellow 
Commissioners for supporting today's action.

Appendix 3--Concurring Statement of Commissioner Sharon Y. Bowen

    Our ruling today provides additional clarity for trade options, 
but I encourage market participants to look at it closely.
    Trade options have been caught in a difficult legal bind. 
Congress sought to ensure that people could not evade our swaps 
regulations. It did so by both having a very broad definition of a 
swap, while also limiting this Commission's authority to exempt 
swaps by regulation.
    Fortunately, however, Congress preserved the Commission's 
authority to exempt trade options, which is the authority we are 
once again using today. Importantly, this exemption provides 
additional legal certainty that our interpretations cannot. But we 
cannot overrule the Commodity Exchange Act with regulations and 
interpretations; we will always be bound by that statute. Therefore, 
I want to caution anyone tempted to rely on an interpretation to 
avoid CFTC jurisdiction when it comes to options.
    I fully recognize the difficulty in distinguishing between 
different types of physical contracts. If a particular contract or 
an element of a contract serves an economic purpose similar to an 
option, I believe the best course of action is to exercise caution 
and not assume your contract is outside of our jurisdiction based on 
an interpretation. While it may seem fine for a person using these 
contracts to hope that the interpretation is not called into 
question, I believe it would be wise, as a backstop, to make sure it 
also falls within the trade option exemption.

[FR Doc. 2016-06260 Filed 3-18-16; 8:45 am]
 BILLING CODE 6351-01-P