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Last-Minute Action by CFTC Delays New Energy Swaps Rules

At the 11th hour Friday, the Commodity Futures Trading Commission granted CME Group, owner of the New York Mercantile Exchange (Nymex), and IntercontinentalExchange (ICE) limited relief until Dec. 31 from the Oct. 12 deadline to register as swap dealers.

In a letter, the Commission provided relief from the obligation that certain cleared swaps and swaps exchanged for futures referencing exempt commodities, such as energy commodities or metals, and agricultural commodities not be counted toward the threshold of $8 billion aggregate gross of notional amount of swaps. Exceeding the $8 billion threshold would subject a party to swap dealer registration under the Dodd-Frank Wall Street reforms.

The CFTC said its action was based on recent actions of ICE and Nymex to transition cleared swap activities to cleared futures contracts. The two exchanges have sought to transition a fair amount of swaps and over the counter (OTC) business to a cleared futures model before Dodd-Frank took hold (see NGI, Sept. 17).

"[ICE] has stated that it is accelerating its plans to transition cleared OTC energy swaps and options to futures as of Oct. 15, such that cleared North American natural gas electric power and environmental products will be listed as futures on ICE Futures U.S. energy division, while cleared oil products, freight, iron ore and natural gas liquid swaps will be listed as futures on ICE Futures Europe," the CFTC said. CME Group, parent of Nymex, has followed a similar route.

The CFTC "has also received information indicating that other trading platforms are contemplating offering futures contracts and/or options on futures contracts as replacements for or as alternatives to cleared swaps currently transacted on such platforms."

The limited transition relief "is warranted in order to provide participants in the market for cleared swaps and swaps exchanged for futures referencing exempt commodities and agricultural commodities sufficient time to determine whether and in what manner to transition those swap activities to similar products in the futures markets that will become available in the near future, and to enable any such transition to proceed in an orderly manner," the agency said.

"This relief will allow market participants in the CME market to transition their trading activity to futures markets under a more reasonable time line. The fact that market participants are fleeing the Commission's swap regulations is proof that the Commission has not developed clear and cost-effective rules," said Commissioner Scott O'Malia.

He estimated that CFTC would issue 18 no-action letters and Q&As in an attempt to provide temporary relief from the Dodd-Frank compliance deadline.

Earlier Friday the Commission issued another no-action letter to various swaps intermediaries, which delays registration until Dec. 31 and exempts them from enforcement action. The letter applies to an "introducing broker, commodity pool operator, commodity trading advisor, associated person, floor broker or floor trader."

The letter also provides a delay for any person who would be required to register solely because of their involvement with the "transition of certain contracts on ICE and Nymex to clearing as commodity futures and options."

Alongside the CFTC action Friday the CME issued an advisory to its customers that swaps trading could continue Monday on a business as usual basis until Dec. 31..."They can just keep doing what they're doing," a spokesman said, or customers could use new procedures CME has installed to accommodate the new CFTC rules.

Self-certification for block trades, using a lower threshold for CME's Clearport energy suite of products can be traded as swaps or as futures through Globex cross trades or through trading floor trades. There will be no change to margin treatments or existing cross margining, the CME spokesman said.

ICE appeared to be farther along in the transition. An ICE advisory said that as previously announced it would be transitioning all cleared OTC energy swaps to futures and options contracts on Monday, Oct. 15. "These products will continue to be listed and traded on the WebICE platform and cleared at ICE Clear Europe. Additionally, block trades and exchange for swaps will be offered, subject to the applicable requirements, in order to facilitate off-exchange transactions. "Accordingly, cleared North American natural gas, electrical power and physical environmental products will be listed as futures and options on ICE Futures U.S. (“IFUS”), a registered designated contract market."

In a separate no-action letter, CFTC granted relief to allow non-bank entities that are active in the physical energy markets to deal in swaps with publicly-owned, government-owned or federal agency utilities, such as municipals, that have an aggregate notional amount of up to $800 million annually, without having to register as swap dealers. The agency initially set the notional amount threshold at $25 million, which many argued would drive many non-bank firms away from trading with municipal firms in order to avoid the swap dealer designation.

As hedgers, speculators and regulators stumbled toward the brave new world of Dodd-Frank, one market participant commented, "The old world will cease to exist. There's a myriad of new rules and regulations that no one understands, that are open to various interpretations. It will take years to sort out. And it will be a very transparent world. All futures information is going to be online. It's going to push people away from bilateral swaps and move everything to exchanges."

In a letter sent to CFTC Thursday, a coalition of energy industry groups asked the commission to grant clarification and no-action relief to transportation and storage contracts for natural gas and other physical commodities.

The American Gas Association, American Petroleum Institute, Independent Petroleum Association of America and the Natural Gas Supply Association said in their letter that they support a recent request filed at CFTC by the Interstate Natural Gas Association of America regarding application of the forward contract exclusion to natural gas pipeline and natural gas storage agreements. They believe the exclusion should be extended to storage and transportation contracts for all physical commodities.

The groups "believe that Congress never intended for natural gas transportation and storage contracts, or transportation or storage contracts in other physical commodities, to be regulated as swaps and that the Commission did not intend to regulate them as such," according to their letter. "Natural gas transportation and storage contracts do not resemble and have never been considered options, and the Commission has not identified transportation or storage contracts in other physical commodities that resemble or are considered options."

Transportation and storage contracts "are significantly different" from options contracts, the groups said. Option holders pay a premium that gives them the right to later buy or sell a commodity at a fixed price regardless of changes in market price, while transportation and storage contracts use reservation and usage fees to pay for different components of the services "and such fee structure should not be the basis for characterization of such contracts as options," they said.

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