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House Bill Exempts End-Users from Margin Requirements

The House last week overwhelmingly passed legislation to exempt commercial end-users from margin requirements and ease regulations for affiliate transactions.

The twin bills would prohibit regulators from requiring exempt manufacturers and commercial swap users -- parties not engaged in speculation -- to pay margins (HR 2682) and would exempt inter-affiliate swaps transactions from certain Dodd-Frank requirements (HR 2779). The first bill on margins cleared the Senate by 370 to 24, while the second was adopted by 357 to 36. The measures were voted out of the House Appropriations Committee in late January (see NGI, Jan. 30).

"We were encouraged by the House votes. But it doesn't solve the whole thing," said John Shelk, president of the Electric Power Supply Association. "While we greatly appreciate [the House] action and commend the sponsors of the legislation...there are several moving pieces necessary to prevent the CFTC [Commodity Futures Trading Commission] and other regulators from over-reaching. EPSA also strongly urges Congress to act on Rep. [Randy] Hultgren's [R-IL] bill, HR 3527, which clarifies how regulators should and should not define 'swap dealers' and other key terms that if left unaddressed could still make energy risk management more difficult and most costly," he said.

"We don't want to leave any opening in the [Dodd-Frank] law for the CFTC to drag us into this mess," Shelk said.

While debating the Dodd-Frank Wall Street Reform Act in 2010, Congress made it clear that the Section VII derivatives title was not meant to impose margin requirements on end-users. However regulators believe the derivatives title gave them the authority to impose margin requirements on end-users. The legislation clarifies that Doff-Frank did not provide them with that authority.

Shelk believes the bipartisan vote in the House was a major win for energy. "EPSA and our allies in a broad coalition of energy end-users of risk management products subject to CFTC regulation applaud the overwhelming majorities of each party that came together [Monday] to adopt these companion pieces of legislation," Shelk said.

The Senate has yet to take up a comparable measure. "The eyes are now on the Senate," he said.

In other action last week, the CFTC's Division of Market Oversight issued an advisory reminding market participants that any claimed bona fide hedge exemption from speculative position limits under the Dodd-Frank reform act would be subject to a special call in connection with the claimed exemption.

Specifically, the Commission may use its special call authorities -- if it has questions about a transaction -- to request market participants to provide information related, but not limited, to positions owned or controlled by that party claiming the exemption; trading done pursuant to the claimed exemption; any swaps, futures, options or cash market positions that support the claim of exemption; relevant business relationships supporting a claim of exemption; their related cash, futures and swaps positions and transactions; and in certain instances, a list of pass-through swap counterparties for pass-through swap exemptions.

The division said it issued the advisory at this time because there will be new traders and new commodities subject to position limits (and the related exemption reporting requirements) under the Commission's new speculative position limit rules, which were issued last October (see NGI, Oct. 24, 2011); and the division believes that it is important to highlight and clarify the process and record-keeping requirements associated with claiming a hedge exemption from the Commission's position limit rules.

The CFTC's rule on speculative position limits, which has yet to be implemented, establishes limits on speculative positions in 28 core physical commodity contracts, four of which are energy contracts: Nymex Henry Hub Natural Gas, Nymex Light Sweet Crude Oil, Nymex New York Harbor Gasoline Blendstock and Nymex New York Harbor Heating Oil.

The advisory said these special call authorities remain an active tool for use by the Commission and the division and directs market participants to comply in a timely manner with any such request for information.

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