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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: 020 7246 5706 Fax: 020 7246 5772. Introduction: The Regulatory Framework of Commodity Derivatives.

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regulation of specialist commodity dealers in the united states

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: 020 7246 5706

Fax: 020 7246 5772

introduction the regulatory framework of commodity derivatives
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
regulation of otc derivatives under the cfma
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”

part 1 of the rule eligible contract participants
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 > $10 million; or
      • that are guaranteed by an entity with assets > $10 million; or
      • with assets > $1 million, that enter into an OTC transaction in the normal course of business or to manage risk
    • Individuals with assets > $10 million, or > $5 million if the OTC transaction is used to manage risk associated with an owned asset
part 2 of the rule excluded and exempt commodities
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
part 3 of the rule trading facility
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
commodity transactions inside the scope of the cea
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
treatment of agricultural commodities
Treatment of agricultural commodities
  • Agricultural commodities fall within the scope of the CEA for historic reasons
distinctions between us and uk post mifid eea
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)
summary
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”