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February 11, 2010 |
House of Representatives Passes OTC Derivatives Legislation — Should the Energy Industry Care? YES. On December 11, 2009, the U.S. House of Representatives passed legislation (H.R. 4173) that would adopt sweeping changes to how the various markets for over-the-counter ("OTC") derivatives, and the participants in those markets, are regulated in this country. The proposed legislation contains provisions addressing:
The legislation proposes a new regulatory market structure for OTC derivatives, including energy derivatives, by granting comprehensive new regulatory authority to the Commodity Futures Trading Commission ("CFTC"). Schiff Hardin has prepared a summary of this legislation, and we will continue to monitor the legislation as it moves to the Senate. Click here for a printable version of the summary Most natural gas and power derivatives (forwards, swaps and options) are presently exempt from the jurisdiction of the CFTC — unless the derivative is traded on a CFTC-regulated exchange. Such exchange-traded energy derivatives have been available on CFTC-regulated "designated contract markets" since the 1990s for natural gas derivatives, and for the last few years for a limited number of power derivatives. In addition, electronic "exempt commercial markets," subject to minimal CFTC oversight, list certain natural gas and power OTC derivative transactions for bilateral trading. CFTC-regulated "derivatives clearing organizations" offer clearing services for exchange-traded and certain OTC energy derivatives, and establish margining requirements for market participants who use such clearing services. Over the past decade, a robust bilateral OTC market for natural gas and electric power derivatives has developed. The Federal Energy Regulatory Commission ("FERC") has for decades regulated natural gas and power transactions in interstate commerce. Most market participants who buy and sell natural gas and power derivatives are subject to regulation by, and have reporting requirements to, FERC. FERC has also established by tariff certain regional transmission organization ("RTO") markets, in support of its regulatory objectives — to provide reliable and affordable energy to American consumers. These non-profit RTOs have stakeholder processes, credit mechanisms, transaction definitions, and ongoing regulatory activities that are quite different from those utilized by exchanges or other entities currently regulated by the CFTC. H.R. 4173 would establish a comprehensive new market structure for all transactions in natural gas and electric power derivatives. Energy companies — whether producers, merchant generators, marketing companies, utilities, cooperatives, municipalities, RTOs/ISOs or other natural gas or power market participants — should analyze the effects of the legislation on their businesses. If H.R. 4173 were to become law, all energy businesses would be affected in some way. All energy companies would need to understand how the CFTC works, how it regulates natural gas and power "swaps," and how the CFTC's new jurisdiction would change their costs of doing business and their commercial business and risk management activities. Various energy industry groups are analyzing H.R. 4173 and monitoring activities in the Senate on the companion legislation. Schiff Hardin's Energy and Public Utilities Group is doing so as well. If you would like to discuss how H.R. 4173 or other legislative proposals might affect your company, please contact Patricia Dondanville or another attorney from Schiff Hardin's Energy and Public Utilities Group. ABOUT SCHIFF HARDIN LLP Schiff Hardin is proud to have nationally recognized expertise in both the energy industry and its markets, and the regulation of commodity exchanges and markets and the professional participants in those markets. This unusual combination of expertise enables us to add immediate value as our energy industry clients analyze how the OTC derivatives legislation, should it become law, will affect their businesses. For more information, contact us. |