A coalition of energy firms has called on the Commodity Futures Trading Commission (CFTC) to issue a blanket one-year exclusion for exempt commercial commodities — energy and metals — from upcoming over-the-counter (OTC) market derivatives rules.

The Working Group of Commercial Energy Firms essentially is asking the Commission to maintain the status quo — or grandfather — the commodities that are currently subject to Section (h) of the Commodity Exchange Act (CEA) for the one-year period. These commodities still would be subject to the antifraud and manipulation provisions of the CEA, but they — if the CFTC grants the request — would be exempt from mandated clearing and trading requirements under the sweeping Dodd-Frank Wall Street Reform and Consumer Protection Act.

“We’re not trying to get out” of complying with the new Wall Street regulations, said an attorney with Hunton & Williams, which represented the group. “We need sufficient time to deal with the transition” to the new regulations, he noted.

The attorney declined to identify the companies that were in the working group. He noted that the exempt commodities account for a small part of the overall OTC derivatives market. “Given that exempt commodities constitute approximately 0.4% of the notional value of outstanding over-the-counter derivatives world wide, a blanket order will preserve Commission resources and allow the Commission to proceed in a timely manner with its rulemaking obligations” under the Wall Street reform measure, Hunton & Williams said in its filing on behalf of the working group at the CFTC.

“The issuance of a blanket order by the Commission…is in the public interest as the public has an interest in the establishment by the Commission of any orderly transition process designed to efficiently use its resources to implement its new authority,” the energy working group said.

In addition, the public wants to avoid “potentially harmful disruption to markets for exempt commodity and incurrence of unnecessary costs by commercial energy firms, either of which could result in increased energy prices;” and implement “the new framework for the regulation of derivatives set forth in…the Act in a manner that ensures that all persons transacting or operating in reliance on CEA..are treated in a uniform and orderly fashion,” the group said.

“Grandfathering all persons, particularly commercial energy firms that transact, operate or otherwise rely on CEA Section 2 (h)…as well as transactions subject to this statutory provision, for one year from the effective date [of the act] or for a period deemed appropriate by the Commission will help the Commission marshal its its resources to timely develop and implement its new rulemaking authorities under the Act.

“If the Commission decides not to issue a blanket order as requested…the Working Group respectfully requests that the Commission issue formal guidance regarding the procedural and substantiative requirements applicable to individual petitions submitted” under the Wall Street reform act.

In July President Obama signed the Democrat-crafted legislation overhauling the financial regulatory system.The legislation, which came nearly two years after the collapse of banks and Wall Street investment houses, called for OTC transactions to be traded on regulated exchanges, much like stocks, and to be cleared in clearinghouses in order to limit excessive speculation in markets. However, it provided a narrowly crafted clearing/trading exemption for large commercial traders that use derivatives to hedge the risk associated with trading of physical products or end-users that use derivatives to legitimately hedge their commercial risk rather than for speculative purposes (see NGI, July 19).

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