Commodities options and futures trading act vote
Section of the Dodd-Frank Act defines the term "swap" to include "a put, call, cap, floor, collar, or similar option of any kind that is for the purchase or sale, or based on the value, of 1 or more However, options on physical commodities are included in the statutory definition of "swap. According to the CFTC, the final Swap Definitional Rule will contain guidance to assist market participants in determining whether a physical transaction that contains optionality is a swap.
The CFTC addressed many of the core comments submitted by market participants. The principal change that the CFTC adopted, in response to comments, was to rescind its prior proposal to withdraw the trade option exemption and to effectively restore that exemption through the IFR with modifications to reflect its authority over swaps.
In further response to concerns about impacts on commercial end users, the CFTC underscored the discussion of physical forward transactions in its February Swap Definitional Rule. Additionally, the CFTC discussed the comments it received regarding transactions regulated by the Federal Energy Regulatory Commission, but it did not make any policy decision regarding these transactions in the Commodity Options Final Rule.
The Commodity Options Final Rule contains an IFR that establishes a new "trade option exemption" for certain physical delivery commodity options. The proposed rule would have removed the trade option exemption without implementing a replacement. As discussed above, the Commodity Options Final Rule permits commodity options to be transacted pursuant to all rules applicable to swaps. Commenters noted that many non-ECPs enter into commodity options transactions and thus the rule would have prohibited those participants from transacting in OTC physical options unless granted exemptive relief.
To address these concerns, the new trade option exemption exempts qualifying trade options from many, but not all, of the rules that apply to swaps. To qualify for the new trade option exemption, a transaction must meet the following three requirements:. The offeror must "reasonably believe" that the offeree meets the requirements for being an offeree under the regulation. In determining whether the option, if exercised, is a "forward," the CFTC pointed out, as instructive, the discussion of "forwards" in the proposed Swap Definitional Rule and "such other guidance" that may be adopted in the final Swap Definitional Rule.
The IFR applies only to an option that, if exercised, is intended for physical delivery and that is purchased by a commercial end user of the underlying commodity.
Conversely, commodity option transactions that include embedded optionality that affect volume but do not allow for zero physical delivery should be addressed under the forward contract exclusion in the final Swap Definitional Rule. Although the trade option exemption provides a general exemption from the rules otherwise applicable to swaps, such as mandatory clearing and exchange trading, the IFR subjects exempted trade options to certain enumerated rules otherwise applicable to swaps.
Under the IFR, all trade options are subject to the recordkeeping requirements of 17 C. In relation to reporting trade options, market participants that must comply with the swap reporting rules for other swaps besides trade options will be required to report trade options just like the other swaps it reports. If neither counterparty is required to report a trade option under part 45, then both counterparties must submit an annual filing to the CFTC, described further below.
If only one counterparty previously had to comply with part 45, then that counterparty is the reporting counterparty. If both counterparties had to previously report, then the determination of which counterparty will report is determined pursuant to the normal hierarchy in the swap reporting rules.
If neither party is required to report under this rule, then both counterparties must make an. Filers must provide the following information in Form TO:.
We're going to hear more now about the effects of that law, the Commodity Futures Modernization Act, and the players behind it. We're joined by Michael Hirsh, who's written about this for Newsweek. Why don't you talk about this period leading up to the passage of this law in , and what was going on at that time with the derivatives market? How big was it? Well, it was much smaller, much, much smaller.
And that is the main claim that's made by those who were for deregulation, or lack of regulation at the time is that, you know, it was impossible to see this coming. But essentially, what happened is in , in the spring of that year, Brooksley Born, who was then the chairwoman of the Commodity Futures Trading Commission, began to get increasingly worried about this market that was increasing in size and that was utterly unregulated by any government - derivatives, basically. And she developed a general proposal to begin the discussion of how to regulate the derivatives market.
And that led to a very confrontational meeting of the President's Working Group when then-Treasury Secretary Bob Rubin and Alan Greenspan, the Federal Reserve chairman, told her that this was a very potentially damaging proposal, to even to begin discussing derivatives might drive the market overseas. And they quashed it, in effect. And she was really a Cassandra-like voice at the time. She was predicting that, look, really bad things could happen here if we're not paying attention. I mean, it was very interesting.
It was a clash of Wall Street and the legal world Brooksley Born was from. She was a lawyer through and through, and she was concerned that there simply wasn't a legal framework in place, whereas people like Rubin and Greenspan were, you know, much more creatures of Wall Street. And she lost that clash of culture. And then in the subsequent months, what happened was the President's Working Group met again in November '99 and agreed that credit default swaps should go largely unregulated.
And that was influential in helping to pass the Commodity Futures Modernization Act a little over a year later, in late Well, let's talk about that, that law. This was inserted - many, many pages inserted into a broader bill by then-Senator Phil Gramm, Republican of Texas. But it had the support of the Clinton administration, key players in the Clinton administration, and Democratic senators.
How did it get passed? Was anybody paying attention? I mean, it was stuck in the middle of this 10,page authorization bill, and it happened very quickly. Summers, who had replaced Rubin, did give testimony in which he said very plainly that he thought swaps should be largely unregulated as derivatives. He did give some caveats, saying, you know, we should keep some protections against fraud and manipulation and so on.
But it did have his imprimatur and the letter from the Treasury Department supporting, for the most part, the Commodity Futures Modernization Act, as it was drafted, was used by Phil Gramm at the time as part of his campaign to help sell it. The law is passed December , derivatives credit default swaps remain unregulated.