Since September 2010, the Commodity Futures Trading Commission (CFTC) has issued nearly 50 notices and advance notices of proposed rulemaking to implement comprehensive amendments added to the Commodity Exchange Act (CEA) last July for regulating swaps, which were enacted with passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). As prescribed by Dodd-Frank, the various amendments are to take effect on the later of July 15, 2011 or 60 days after the CFTC adopts implementing rules, except where Dodd-Frank expressly imposes a different effective date. The unprecedented pace and ad hoc nature of the CFTC's rulemaking activities are generating criticism from affected parties who state that it is not possible to fully analyze the implications of the myriad proposals in a meaningful, integrated way.
Adding to the challenge, market users are still awaiting proposed rules (to be issued jointly with the SEC) that elaborate upon the Dodd-Frank definition of a “swap.” That definition and, importantly for commercial users, the scope of Dodd-Frank's commercial transaction exclusion from the term, are critical for differentiating between those transactions that will become subject to the new regulatory regime for swaps and those that will not. A number of commercial users are urging the CFTC to interpret the commercial transaction exclusion consistent with the forward contract analysis for classifying deferred delivery commercial merchandizing transactions as forward contracts that are excluded from regulation under the CEA as futures contracts, including extension of the CFTC's 1990 Brent oil interpretation covering commercial transactions where the parties terminate the delivery obligation for reasons of commercial convenience or necessity.
The CFTC's proposals will impact swaps activities of commercial users in many respects. Of note for the energy sector, the CFTC has proposed federal position limits for 28 core reference futures contracts and related derivatives on energy, agricultural, and metals commodities. The core reference contracts include futures on Henry Hub Natural Gas, Light Sweet Crude Oil, New York Harbor No. 2 Heating Oil, and New York Harbor Gasoline Blendstock listed on the New York Mercantile Exchange (NYMEX). The limits would apply to a market user's aggregate positions in a core reference contract and in related futures, options, swaps, or swaptions linked to the core contract via pricing cross-reference or common underlying commodity with the same delivery location or a delivery location where the commodity has substantially the same underlying supply and demand fundamentals. The proposal would require a market user to self-report to the CFTC when it holds or controls positions that exceed a CFTC-prescribed visibility level for the particular class of contracts defined by reference to the core contract. The proposal includes a hedge exemption from position limits, along with an exemption from aggregation at the holding company level of positions of non-financial entities owned by the holding company, provided that the holding company can demonstrate that each subsidiary's positions are independently controlled and managed. That condition would seem contrary to the central hedge desk function that many global commercial enterprises employ. Comments on the position limit rulemaking proposal may be submitted through March 28, 2011.
The CFTC also has issued proposed rules to implement the conditions for the end-user exception from mandatory clearing; proposed rules and interpretive guidance for defining the term swap dealer, which could capture certain commercial swap participants within its scope; and proposed rules governing exchanges that could result in NYMEX having to migrate many of the energy products it lists for trading in the ClearPort suite to trading on a swap execution facility.