Proposed Legislation Affecting Energy Trading

Transcription

1 Proposed Legislation Affecting Energy Trading Proposed Legislation Responding to the Substantial Increase in the Price of Energy Commodities SUMMARY As a result of recent substantial increases in the price of crude oil and other commodities, Congress has been focusing intense scrutiny on transactions involving energy commodities. Among other things, concerns have been raised in Congress about the possible role of speculators and commodity inde investors in the rise of energy prices, off-echange energy trading, and trading on non-u.s. echanges. Based on these concerns, a significant number of bills have been introduced in Congress. The spreadsheet attached lists the current proposed legislation and the major issues addressed in each of these. Although the situation on Capitol Hill regarding this issue is changing daily, this memorandum reflects and summarizes the current state of affairs. Congress is epected to focus on this legislation when it returns from its Fourth of July recess on July 8, IMPACT OF PROPOSED LEGISLATION As of June 27, 2008, twenty-two bills related to speculation in the energy markets have been proposed in Congress, with more epected to be introduced. Although the content and focus of the bills vary, the proposals as a whole address several core issues. This memorandum provides a general summary of these issues, which have been characterized as proposals to close the so-called London, Swaps, and Enron. In addition, certain bills would require increased transparency and reporting in connection with energy transactions, increase margin requirements on energy transactions, epand the resources available to the Commodity Futures Trading Commission and restrict or prohibit participation in the energy markets by certain categories of participants. The attached spreadsheet lists the specific bills and the general categories of issues each bill addresses. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 London. The London refers to no-action relief that the Commodity Futures Trading Commission (the CFTC ) has granted to non-u.s. echanges that permit U.S. traders to trade electronically and directly on the echanges, without the echanges being regulated as designated contract markets by the CFTC. The principal echange on which Congress has focused is ICE Futures Europe, which trades futures on West Teas Intermediate crude oil, the benchmark grade of U.S.- deliverable crude oil. The proposed legislation would eliminate all eisting CFTC no-action relief for foreign boards of trade ( FBOT ) that offer U.S. persons the ability to trade energy futures that settle against a U.S.-listed futures contract, or energy futures based on an energy commodity that is deliverable in the U.S. or through a computer terminal located in the U.S. Any future CFTC eemptions for FBOTs would require public notice and comment and would not be permitted to be granted on a no-action basis. Prior to granting an FBOT authority to offer contracts to U.S. persons, the CFTC would be required to determine that the FBOT (i) makes public certain daily information, (ii) adopts certain position limits, (iii) has the authority to limit, reduce, or liquidate any position, (iv) provides information to the CFTC comparable to the information necessary to publish the Commitment of Traders report, and (v) regularly notifies the CFTC before implementing any regulatory changes of interest to the CFTC. Swaps. The Swaps refers to hedging eemptions from speculative position limits on futures that the CFTC has granted to dealers entering into swaps with institutional investors and funds, as well as others. Certain bills would close the Swaps by requiring an eamination of the underlying swap counterparties, and their purposes and intentions in entering into the swaps, in determining the eligibility of swaps dealers for hedge eemptions. These bills would also require the CFTC to set limits on aggregate positions for all energy transactions, including echange and over-thecounter ( OTC ) transactions. In effect, the proposals to eliminate the so-called Swaps would treat swaps as speculative transactions if the counterparties are entering into the swaps for speculative or investment rather than traditional hedging purposes. Enron. The Enron refers to a set of eemptions adopted in the Commodity Futures Modernization Act of 2000 ( CFMA ) that allowed eempt commercial markets and other types of trading facilities to be available to commercial and institutional market participants without being subject to the full range of regulation applicable to echanges. In fact, only one of these eemptions which has nothing to do with eempt commercial markets was actually applicable to Enron, but the label has been used inappropriately in Congress and the media to refer to a broader range of CFMA eemptions. The proposed legislation would generally close the so-called Enron by redefining energy commodities as no longer being eligible for eemption under the CFMA. As a result, all energy commodity transactions eecuted on a previously eempt trading facility, such as Intercontinental Echange, would be required to be eecuted on a fully regulated futures echange (a designated contract market ), subject to full oversight by the CFTC. These proposals would not affect traditional bilateral over-the-counter transactions. -2-

3 Transparency/Restrictions on Inde Investors. Certain proposals would require entities that enter into bilateral energy transactions to provide the CFTC with information on large positions. The CFTC would also be required to report publicly detailed information from inde traders, speculators, and swap dealers in energy commodities and to review inde trading to determine if it is adversely impacting price discovery and whether additional controls are required. In addition, a number of the proposals would impose recordkeeping requirements. Increases CFTC Resources/Authority. The proposed legislation would increase staffing and other resources available to the CFTC. Increases Margin Requirements. The proposed legislation would impose substantial increases in margin levels for all oil futures transactions. Ban on Unregulated Speculative Trading. Certain bills would prohibit any market participants without the ability to produce, manufacture, or accept delivery of crude oil from trading in the over-the-counter ( OTC ) energy derivatives market. Other Issues. Other bills would enact various amendments to the Commodity Echange Act or other statutes, including enhanced CFTC authority and studies of the effects of speculation in the domestic and foreign futures markets, international regulation of energy markets, and other matters related to the crude oil and energy markets. * * * Copyright Sullivan & Cromwell LLP

4 ABOUT SULLIVAN & CROMWELL LLP Sullivan & Cromwell LLP is a global law firm that advises on major domestic and cross-border M&A, finance and corporate transactions, significant litigation and corporate investigations, and comple regulatory, ta and estate planning matters. Founded in 1879, Sullivan & Cromwell LLP has more than 700 lawyers on four continents, with four offices in the U.S., including its headquarters in New York, three offices in Europe, two in Australia and three in Asia. CONTACTING SULLIVAN & CROMWELL LLP This publication is provided by Sullivan & Cromwell LLP as a service to clients and colleagues. The information contained in this publication should not be construed as legal advice. Questions regarding the matters discussed in this publication may be directed to any of our lawyers listed below, or to any other Sullivan & Cromwell LLP lawyer with whom you have consulted in the past on similar matters. If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Jennifer Rish ( ; rishj@sullcrom.com) or Alison Alifano ( ; alifanoa@sullcrom.com) in our New York office. CONTACTS New York Kenneth M. Raisler raislerk@sullcrom.com David J. Gilberg gilbergd@sullcrom.com NY12527:

5 Legislation Increasing Transparency and Accountability in Oil Prices Act (S. 3130, Durbin D-IL) Prevent Unfair Manipulation of Prices (PUMP) Act (H.R. 6330, Stupak D-MI) Oil Trading Transparency Act (S. 2995, Levin D-MI) London Swaps Enron Transparency/ Restrictions on Inde Trading Increases CFTC Resources/ Authority Increases Margin Requirements Consumer-First Energy Act (S. 3044, Reid D- NV) Policing U.S. Oil Commodities Markets Act (S. 3122, Cantwell D-WA) Close the London Act (S. 3129, Levin D-MI) Oil Speculation Control Act of 2008 (S. 3131, Feinstein D-CA) Rep. Barton's bill (H.R. 6130, R-TX) Rep. Larson's bill (H.R. 6264, D-CT) Increasing Transparency and Accountability in Oil Prices Act (H.R. 6334, Etheridge D-NC) Sen. Nelson's bill (S. 3134, D-FL) Rep. Van Hollen (H.R. 6341, D-MD) End Oil Speculation Act of 2008 (S. 3183, Dorgan D-ND) Oil Speculation Reduction Act (H.R. 6279, Chabot R-OH) Close the London Act (H.R. 6284, Matheson D-UT) Commodity Futures Restoration Act (H.R. 6372, Hill D-IN) Sen. Lieberman s Proposals (I-CT) Ban on Unregulated Speculative Trading -5-