April <6> 10, 2000

Position Paper
On Behalf of the Energy Group
CFTC Reform

This Position Paper is submitted on behalf of the entities listed on the attached appendix (collectively, the “Energy Group”).  The members of the Energy Group consist of oil and gas producers, refiners, processors and marketers as well as electric utilities and marketers of electricity.  Members of the Energy Group are active participants in the principal domestic and international physical, futures and over-the-counter (“OTC”) derivatives markets for energy products including oil, natural gas and electricity.  

This Paper sets forth the position of the Energy Group on revisions to the Commodity Exchange Act and regulatory relief proposals of the Commodity Futures Trading Commission (“CFTC”).  For over a decade, the Energy Group has been a strong and consistent advocate of the proposition that commercial markets for energy products do not require federal regulation.  This position is reflected in Congress’ endorsement and the CFTC’s adoption of the Energy Exemption in 1993, providing a broad exemption from the provisions of the CEA for commercial transactions in energy products.  Since the adoption of that exemption (and before), we are not aware of any problems of any kind associated with the substantial volume of trading in energy products in the United States.

In setting forth the proposals in this Paper, the Energy Group continues to believe that markets for energy products of any kind, as long as they involve commercial participants, do not require CFTC oversight.  At the same time, provided the clarifications and relief set forth in this Paper can be accomplished, the Energy Group is prepared to support a limited, effective role for the CFTC as set forth herein.  

In setting forth the five-point plan in this Paper, the Energy Group primarily is seeking administrative relief and clarification.  However, the Energy Group also is seeking to assure that any legislative change is consistent with and does not adversely affect the administrative relief and clarification that it is seeking.  

1.	Expanded Energy Exemption Relief.  In April 1993 the CFTC issued a broad exemption from the CEA and CFTC regulations for oil and gas products.  The Energy Group seeks an expanded exemption from the CEA and CFTC regulations to cover all physical commodities (including electricity) and to clarify the scope of the exemption to permit cash settlement and non-delivery in accordance with market conventions in each particular commodity market.

2.	Physical and Financial Commodity Swaps to Be Treated the Same.  Bilateral (non-exchange) swap-like transactions between eligible swap participants should be subject to identical regulatory or legislative relief, regardless of whether the underlying commodity is a physical commodity (energy) or a financial commodity (interest rates).  To the extent that Congress is prepared to expand the CFTC Swaps Exemption into a statutory exclusion from the CEA, the Energy Group advocates that that exclusion also apply to physical commodity OTC transactions.  Just as with Energy Exemption products, there is no evidence of any fraud or other abuse with respect to OTC energy transactions that can justify any less relief or less need for legal certainty.  

3.	Definition of Multilateral Transaction Execution Facility (“MTEF”).  The CFTC’s current regulatory relief package triggers off of the term MTEF which has not been clearly defined.  Transactions not conducted on an MTEF would be eligible for the Swaps Exemption and other regulatory relief.  The Energy Group advocates that the <term MTEF should be defined and> CFTC should confirm that the term MTEF should be limited to systems that are open to all participants where all participants have the ability to execute transactions on the system against all other parties.  This is the way futures exchanges work today.  With counterparty credit screens and filters blocking trading with unapproved counterparties, many trading systems are more like electronic replacements for voice brokers than they are like regulated futures exchanges.  This clarification would avoid an unintended, expansive reach of CFTC jurisdiction.

4.	Clarify the Definition of “Clearing” and Allow Clearing Subject to CFTC or Other Regulatory Oversight.  The CFTC and others have suggested that the regulation of clearing activities be separated from exchange regulation.  The Energy Group endorses this proposal but believes that, before it can move forward, a meaningful definition of “clearing” is required.  Futures exchange clearing has long been recognized and should be defined as a system that mutualizes risk.  Credit supported structures including insurance and reinsurance should not be included in the term “clearing”.  Otherwise, any individual firm’s trading operation could be considered a clearinghouse.  With an appropriately clarified definition of “clearing”, the Energy Group advocates that, to the extent that clearing is subject to <federal oversight, there be a choice of oversight regulators that includes the CFTC. The Energy Group does not object to a role for banking or securities regulators, but seeks assurance that> governmental oversight, the choice of oversight regulator <for clearing> include the CFTC.

5.	CFTC Jurisdiction Over Energy Derivatives MTEFs.  The Energy Group has followed with interest the recent CFTC Staff Report outlining a new regulatory framework. Within that Framework, the Energy Group supports expanding the category of MTEFs exempt from CFTC regulation (currently proposed to be limited to financial derivatives) to include energy derivatives, particularly where the participants are limited to commercials.  At the same time, with proper clarifications, the Energy Group is prepared to support the light-handed regulatory oversight category of “derivative transaction facility” (DTF) for energy derivatives MTEFs.  A DTF category that focuses its requirements on fair, unbiased trading systems, technological sufficiency and operator integrity along with clarification <that> of the scope of commercials <are> eligible <DTF participants> to participate on a DTF can bring needed legal certainty to evolving platforms and businesses.  The Energy Group is ready to work with the Commission to achieve this important result.

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