Peggy A. Heeg, Michael Loesch and Craig Oliver
September 20, 2011 view as PDF |
On September 16, 2011, the Commodity Futures Trading Commission's ("CFTC") Division of Market Oversight granted temporary relief from certain requirements of the CFTC's new rules governing large swaps trader reporting that became effective today, September 20, 2011. The large swaps trader reporting rules (the "Rules") establish a process for the CFTC to obtain data related to physical commodity swaps linked to specific futures contracts and establish new recordkeeping obligations applicable to large traders. The relief, which is limited to the reporting obligations of the Rules, is designed to enable the industry and the CFTC to develop and refine systems and processes to report specified swap data.
The Final Large Swaps Trader Reporting Rules
The new large trader reporting regime is significant because it establishes a systematic mechanism for the CFTC to receive, for the first time, data related to swaps linked to 46 physical commodity futures contracts. The Rules, which were unanimously approved in July, require daily large swap trader position reports from clearing organizations, clearing members, and swap dealers within a two-phase compliance schedule. The first prong of the two-phase compliance schedule under the Rules places reporting obligations on clearing organizations and clearing members and, prior to the temporary relief, was to become effective on September 20, 2011. The second prong, which will apply to non-clearing members swap dealers, will become effective when the final swap dealer rule is effective. The Rules, which were unanimously approved in July, require daily large swap trader position reports from clearing organizations, clearing members, and swap dealers within a two-phase compliance schedule. The temporary relief, however, delays compliance with the Rules for clearing organizations and clearing members until November 21, 2011 for cleared swaps and until January 20, 2012 for uncleared swaps. Other aspects of the Rules are not subject to relief and become effective on September 20, 2011, including the special call and recordkeeping provisions described below. Other aspects of the Rules are not subject to relief and become effective on September 20, 2011, including the special call and recordkeeping provisions described below.
Large Trader Recordkeeping Obligations and Series S Filings
The Rules contemplate two separate CFTC filings: one by the reporting entity (on Form 102S) and one by the large trader (on Form 40S). The Rules obligate the reporting entity to notify the CFTC within three days of when a counterparty holds a reportable position by filing Form 102S. A 102S filing identifies when a reporting entity's counterparty holds a reportable position, the "name, address, and contact information of the counterparty with the reportable account," and a "brief description of the nature of such person's paired swaps and swaptions' market activity."
Upon receipt of such a notification, the CFTC may then issue a special call to the large trader, requiring the trader to make a 40S filing – a more detailed identification report. As the current version of Form 40 covers information on positions in futures and options, traders would be required to complete the form as if the form covered information related to positions in paired swaps and swaptions.
Related to this anticipated special call, the Rules place new books and records obligations on large traders. Large traders are obligated to retain "books and records showing transactions in the cash commodity underlying such positions or its products and byproducts, and all commercial activities that are hedged or which have risks that are mitigated by such positions…." Required records must be kept for five years, during the first two of which the records must be "readily accessible." Although the Rules do not require that the large trader records be kept in any particular format, the scope of the recordkeeping obligation is broad, extending to transactions in cash commodities.
Together, the reports and records will allow the CFTC to identify the person(s) owning or controlling the trading of a reportable account, the person to contact regarding trading, the nature of the trading, whether the reportable account is related – by financial interest or control – to another account, and the principal occupation or business of the account owner. Additionally, the filings will provide the CFTC with information on whether the account is being used for hedging cash market exposure.
Data to be Reported
Clearing organizations, under the Rules, must submit to the CFTC a data record that identifies either gross long and gross short futures equivalent positions if the data record corresponds to a paired swap position, or gross long and gross short futures equivalent positions on a non-delta-adjusted basis if the data record corresponds to a paired swaption position. A data record, for the purposes of the Rules, can be thought of as a grouped subset of data elements that communicates a unique (non-repetitive) positional message to the CFTC.
In addition, clearing organizations are required to report a data record for each clearing member for each "reporting day" (i.e., the daily period of time between its usual and customary last internal valuation of paired swaps and the next such period). Lastly, clearing organizations are required to provide to the CFTC, for each futures equivalent month, end-of-reporting-day settlement prices for each cleared product and deltas for every unique swaption put and call, expiration date, and strike price.
Reporting entities, which are not clearing organizations, must provide positional reports when they have principal and counterparty reportable paired swap positions. A "reportable position" is defined as a position, in any one futures equivalent month, comprised of 50 or more futures equivalent "paired swaps or swaptions" based on the same commodity underlying one of the futures contracts listed in the Rules (a "Covered Futures Contract"). The reportable positions must be grouped separately by swaps and swaptions, then grouped by gross long or gross short contracts on a futures equivalent basis. The CFTC selected the 50-contract threshold based on discussions with market participants and believes such a threshold will provide it with a view of over 95% of the covered swaps markets.
Once a paired swap position becomes "reportable," all other paired swaps in the same commodity attributable to such trader become part of that trader's reportable position. As with reports by clearing organizations, paired swap positions must be represented and reported in futures equivalents. Reporting entities also are required to separately consider principal and counterparty positions on a gross basis as well as required to provide, for each reporting day, a data record that either identifies long and short paired swap positions (if the record pertains to swap positions) or long and short non-delta-adjusted paired swaption positions and long and short delta-adjusted swaption positions (if the record pertains to swaptions positions). For uncleared paired swaps, the regulations require a reporting entity to use economically reasonable and analytically supported deltas.
This article was prepared by Peggy A. Heeg (firstname.lastname@example.org or 713 651 8443), Michael Loesch (email@example.com or 202 662 4552) and Craig Oliver (firstname.lastname@example.org or 214 855 8139) from Fulbright's Energy Practice Group and Fulbright's Corporate Governance Practice Group.
 See Large Trader Reporting for Physical Commodity Swaps, 76 Fed. Reg. 43,851 (July 22, 2011).
 Specifically, for clearing organizations and clearing members, temporary relief is available from the requirements of Sections 20.3 and 20.4 of the Rules. See 76 Fed. Reg. at 43,863. The relief is conditioned upon applicable clearing organizations and clearing members submitting certain limited specified data to the CFTC during the relief period.
 The physical commodities include crude oil, coal, natural gas, heating oil, gasoline, gold, silver, copper, platinum, palladium, uranium, ethanol, steel, corn, oats, rice, soybeans, soybean meal, soybean oil, wheat, butter, cheese, dry whey, feeder cattle, live cattle, milk, dry milk, lumber, cocoa, coffee, orange juice, sugar, and cotton.
 The reporting entity is required to submit a 102S filing only once for each person associated with a reportable account unless prior filed information is no longer accurate. The CFTC is currently in the process of updating and making an electronic version of its current Forms 102 and 40, which, among other things, will include sections specifically for swaps and swaptions.
 A "paired swap or swaption" means an open swap or swaption that is (i) directly or indirectly linked, including being partially or fully settled on, or priced at a differential to, the price of any commodity futures contract listed in regulation 20.2 of the Rules; or (ii) directly or indirectly linked, including being partially or fully settled on, or priced at a differential to, the price of the same commodity for delivery at the same location or locations.
 76 Fed. Reg. at 43,864.
 See supra Note 4.
 The Rules require paired swap positions to be reported to the CFTC as futures equivalent positions in terms of a swap's related Covered Futures Contract. The Rules call for reporting in futures equivalents because such conversions are made by entities that deal in swaps to effectively manage residual price risks by entering in Covered Futures Contracts. Reporting in futures equivalents provides a measure of equivalency between positions in paired swaps and their related Covered Futures Contracts, which allows for more effective market surveillance and the monitoring of trading across futures and swaps.
 76 Fed. Reg. at 43,853.
 In the alternative, the Rules allow reporting entities to identify a reportable position as all positions on a gross basis in a consolidated account that are based on the same commodity, so long as this approach is consistently applied to all consolidated accounts for reporting purposes. This definition allows reporting entities to forgo the 50-contract threshold calculation, which may be complex or costly, prior to submitting reports to the CFTC.
 For the purpose of reporting in futures equivalents, paired swaps and swaptions that are based on commonly known diversified indices with publicly available weightings must be reported as if such indices underlie a single futures contract with monthly expirations for each calendar month and year. Bespoke indices, however, must be decomposed into their futures equivalent components and reported along with a commodity reference price, which will allow the CFTC to match such components to the bespoke index. A "commodity reference price" is defined as the price series (including derivatives contract and cash market prices or price indices) used by the parties to a swap or swaption to determine payments made, exchanged, or accrued under the terms of such contracts.
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Peggy A. Heeg