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CFTC Asked to Nix Physical Commodity Options from 'Swap' Definition

The Commodity Futures Trading Commission (CFTC) should not lump commodity options that are intended to and can only be settled physically in the same category as "swaps," said a coalition of mostly oil and gas producers in a recent plea to the agency.

A rule, which the CFTC voted out in mid-April, would subject physical commodity options to many of the same regulations under Title VII of Dodd-Frank Wall Street Reform Act as "swaps," including position limits and record-keeping and reporting requirements (see Daily GPI, April 19), the Coalition of Physical Energy Companies (COPE) said.

In a June 7 letter to the agency, COPE wrote that it "can discern no regulatory benefit for their [physical options] inclusion within the final definition of that term [swaps]. These physical trades cannot be utilized by speculators as they require physical delivery of the physical product and cannot settle financially...They cannot be exchange-traded or cleared [and thus] are outside of the swaps/derivatives world."

Physical commodity options "are exactly the type of sales Congress intended to exclude from the definition of 'swap' by providing that a transaction is not a swap 'so long as the transaction is intended to be physically settled," the group noted.

COPE members include 11 producers, processors and marketers, including Apache Corp., El Paso Corp., Enterprise Products Partners LP, Kinder Morgan, MarkWest Energy Partners, Noble Energy Inc., Shell Energy North America, SouthStar Energy Services and Targa Resources.

The coalition "seeks that the Commission exclude commodity options that are intended to and can only settle physically from the definition of swap and, therefore, the scope of the commodity options rule."

Commodity option transactions "are typically entered into to provide a participant in physical energy markets the ability to ensure the supply or sale of a physical product at a specified price. For example, a buyer of natural gas planning for its supply needs for the winter heating season may secure 'peaking supplies' to make sure it has physical product at a known price if colder than expected weather occurs. Further, a power generator may want to obtain the right to sell its physical product at a known price if spot market prices fall below a certain threshold. In these cases, there is either physical delivery or option expiration without exercise," the group told the CFTC.

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