Regulation of Specialist Commodity Dealers in the United States

1
Regulation of Specialist Commodity Dealers in
the United States

• 19 October 2005
• Jonathan Marsh
• Partner
• Hunton Williams
• Fleetway House
• 25 Farringdon Street
• London EC4A 4AB
• Tel [phone]
• Fax [phone]

2
Introduction The Regulatory Framework of
Commodity Derivatives

• Commodity Futures Trading Commission (CFTC)
• Commodity Exchange Act (CEA)
• Securities and Exchange Commission (SEC)
• Securities Acts of 1933 and 1934
• Laws of Individual States
• Bucket Shop laws

3
Regulation of OTC Derivatives Under the CFMA

• Under the Commodity Futures Modernization Act of
  2000 (CFMA)
• Bilateral transactions between eligible contract
  participants in excluded commodities or
  exempt commodities are not subject to
  regulation under the CEA, provided these
  transactions are not executed on a trading
  facility

4
Part 1 of the Rule Eligible Contract
Participants

• Eligible Contract Participant is very broadly
  defined it includes, when acting for their own
  account
• Financial institutions (including foreign banks)
• Insurance companies
• Investment companies (e.g. mutual funds)
• Corporations, partnerships or other
  organisations
• with assets gt 10 million or
• that are guaranteed by an entity with assets gt
  10 million or
• with assets gt 1 million, that enter into an OTC
  transaction in the normal course of business or
  to manage risk
• Individuals with assets gt 10 million, or gt 5
  million if the OTC transaction is used to manage
  risk associated with an owned asset

5
Part 2 of the Rule Excluded and Exempt
Commodities

• Excluded Commodities are broadly defined and
  encompass interest rate, exchange rate, currency
  and other measures of economic or commercial
  risk most derivative financial products are
  covered
• Exempt Commodities are commodities that are not
  excluded commodities or agricultural commodities
  e.g. energy, metals, bandwidth and chemicals

6
Part 3 of the Rule Trading Facility

• A Trading Facility is an organised exchange or
  electronic facility on which multiple parties
  make trades without negotiating individual terms
• This definition specifically excludes facilities
  that enable participants to negotiate terms or
  facilities on which bids, offers and acceptances
  are non-binding

7
Commodity transactions inside the scope of the CEA

• If the commodities are not excluded or exempt, or
  transaction takes place on a trading facility,
  they will be within the jurisdiction of the CFTC
  under the CEA and therefore subject to numerous
  regulations including regulations governing
  commodities brokers
• CFTC also regulates markets on which commodity
  derivatives are traded

8
Treatment of agricultural commodities

• Agricultural commodities fall within the scope of
  the CEA for historic reasons

9
Distinctions between US and UK/post-MiFID EEA

• US regulation makes a significant distinction
  between on-exchange and OTC transactions
• US distinguishes between different types of
  commodity e.g. special treatment of agricultural
  commodities
• US does not have a specialist commodity dealer
  exclusion equivalent to MiFID Article 2(1)(k)

10
Summary

• The CFMA Rule
• Bilateral transactions between eligible contract
  participants in excluded commodities or
  exempt commodities are not subject to
  regulation under the CEA, provided these
  transactions are not executed on a trading
  facility