The US Commodity Futures Trading Commission (CFTC) has agreed to ease two proposed rules governing commodity derivative markets in an effort to alleviate the burden of Dodd-Frank reforms on corporations that are frequent users of commodity derivatives.
The rules pertain to the definition of “embedded volumetric optionality” contracts and record keeping requirements for trade options.
The CFTC today finalised a proposal to clarify when commodity forwards with embedded volumetric optionality are considered swaps – a designation that would increase regulatory burdens exponentially on corporates using the contracts. The agency also voted to reduce reporting and recordkeeping requirements for corporations using so-called trade options.
Corporations that hedge exposure through commodity derivatives had complained that the agency’s planned treatment of both contracts would make use of such hedging instruments prohibitively expensive and thereby hurt their ability to hedge future production or delivery of feedstocks.
New CFTC Chairman Timothy Massad had earlier pledged to “fine-tune” commodity derivative rules in order to ease the costs of hedging.
“I know contracts with [the embedded optionality] feature are important to many of you…We received a number of comments on this and we have incorporated some of the concerns in the final clarification,” said Massad in a speech before the National Energy Marketers Association.
“By clarifying how these agreements will be treated for regulatory purposes, the interpretation should make it easier for commercial companies to continue to use these types of contracts in their daily operations.”
The rules were voted on without a formal meeting and cannot be published until the SEC agrees with the changes.