LBMA/LPPM Precious Metals Conference 01/10/2013. Dodd Frank and Precious Metals: Where Are We Now? LBMA/LPPM Precious Metals Conference

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1 Dodd Frank and Precious Metals: Where Are We Now? LBMA/LPPM Precious Metals Conference Rome, Italy 1 October 2013 John Bullock, IPMI Dodd Frank Act Intent to REFORM Wall Street and Banking 848 pages hundreds of sections Three sections deal in precious metals: 737. Position Limits Conflict Minerals Disclosure of Payments for Resource Extraction. Session 5A Bullock 1

2 Section 737. Position Limits Directs U.S. Commodity Futures Trading Commission (CFTC) to: establish limits on the amount of positions, as appropriate, other than bona fide hedge positions, that may be held by any person with respect to commodities. CFTC Position Limits Rule Sets Speculative Position Limits for 28 Commodities Including Gold, Silver, Platinum, Palladium Position Limits for Spot Month, All Months Based on Deliverable Supply (Spot Month) and Open Interest: Futures + Cleared and Uncleared Swaps (Non Spot Months) Session 5A Bullock 2

3 Spot Month Position Limits: 25% of estimated deliverable supply: Contracts: Gold (GC) 3,000 (100oz) ~$400mm Silver (SI) 1,500 (5000oz) ~$150mm Platinum (PL) 500 (50oz) ~$ 40mm Palladium (PA) 650 (100oz) ~$ 45mm Non Spot Months Position Limits: Much Higher, But Not Yet Calculated To be Set by CFTC after Data Collection: Formula is Set by Rule: Combine all open interest: Futures + Cleared and Uncleared Swaps 10% of first 25,000 contracts open interest +2.5% of combined open interest > 25,000 Session 5A Bullock 3

4 Exemption for Bona Fide Hedge: Must Represent a Substitute for a Physical Market Transaction Economically Appropriate to Reduce Risk Associated with Specific Activities in Physical Market Appendix B Examples (76 FR 71696) Traders may Petition CFTC for Relief Impact CFTC Estimate: The Commission estimates, on an annual basis, 12 traders in metal Referenced Contracts would hold or control positions that could exceed the spot month position limits. The Commission projects that the non spot month position limits would affect, on an annual basis, twenty five traders in metal Referenced Contracts. Session 5A Bullock 4

5 Court Challenge: ISDA v. CFTC Challenge Filed: US District Court, Washington ISDA Arguments: No Evidence of Market Manipulation No Necessity for Position Limits Necessity is a Legal Precondition for Limits CFTC Counter: Dodd Frank 737 Requires Limits No Finding of Market Necessity Required Court Challenge: ISDA v. CFTC Result: ISDA prevails, CFTC Rule Set Aside and Remanded (28 September 2012). Court Reasons: Dodd Frank 737 is Ambiguous CFTC Must Interpret Law and Try Again. CFTC Response: Appeal to US Court of Appeals (16 December 2012) Session 5A Bullock 5

6 Appeal: ISDA v. CFTC CFTC Argument: Same as in District Court Congress Requires Position Limits ISDA Counter: Same as in District Court No Need for Limits, Therefore Limits Not Allowed Case Status: All Briefs Filed Oral Argument on 25 November 2013 Decision: early 2014 Appeal: ISDA v. CFTC What Will Court of Appeals Do? IF Decision for CFTC: Position Limits Rule is Reinstated and In Effect, Without Change IF Decision for ISDA: Position Limits Rule Remanded to CFTC for Another Rulemaking: More Legal Interpretation by SEC Maybe Required Findings Maybe No Substantial Change Session 5A Bullock 6

7 Section Conflict Minerals Directs the SEC to require publicly traded manufacturers to report their use of gold from the Democratic Republic of the Congo (DRC) and nine adjoining countries ( Covered Countries ), and their efforts to determine if that gold supports armed groups in the DRC. SEC Conflict Minerals Rule Requires Investigation of Origin of Gold Unknown Origin is Not DRC Conflict Free For Practical Purposes, Origin Presumed to be Covered Countries Unless Other Origin Reasonably Certain If Gold has Covered Country Origin: Rule Requires Investigation of Mine + Involvement of Armed Groups, Audited Requires Adverse Designation of Products Requires Report to SEC and to Public Session 5A Bullock 7

8 Court Challenge: NAM v. SEC Challenge Filed, US District Court, Washington NAM Arguments: Massive Cost but No Benefit to DRC SEC Failed to Follow Rules for Making Rules First Amendment Bars Compelled Political Speech SEC Counter: Dodd Frank 1502 Requires This Disclosure No Requirement for SEC to Find Any Benefit First Amendment Not Applicable Court Challenge: NAM v. SEC Result: SEC Prevails, Conflict Minerals Rule Upheld (23 July 2013). Court Reasons: Benefits Are Set by Congress, Not by SEC; SEC Analysis of Issues was Sufficient; First Amendment Protection Standard for Commercial Speech was Satisfied. NAM Response: Appeal to US Court of Appeals (12 August 2013) Session 5A Bullock 8

9 Appeal: NAM v. SEC NAM Argument: Same as in District Court SEC Counter: Brief to be Filed, Probably Same as in District Court Case Status: All Briefs to be Filed by 13 November 2013 Oral Argument Not Yet Scheduled Decision: early 2014 Appeal: NAM v. SEC What Will Court of Appeals Do? IF Decision for NAM: Conflict Minerals Rule Remanded to SEC for Another Rulemaking: More Legal Interpretation by SEC Maybe More Required Findings Maybe No Substantive Change IF Decision for SEC: Conflict Minerals Rule is Reinstated and In Effect, Without Change Session 5A Bullock 9

10 Section Payment Disclosure Directs Securities and Exchange Commission (SEC) to require publicly traded companies to report information relating to any payment made to a foreign government for the purpose of the commercial development of oil, natural gas, or minerals. SEC Payment Disclosure Rule Requires All Payments for Resource Extraction Equal to or Greater than US$ 100,000 For Each Project To Each Government To Be Reported to SEC and to Public No Exceptions for Foreign Government Law Session 5A Bullock 10

11 Court Challenge: API v. SEC Challenge Filed, US District Court, Washington API Arguments: Massive Cost but No Benefit No Exception for Foreign Law First Amendment Bars Compelled Speech SEC Counter: Dodd Frank 1504 Requires This Disclosure No Requirement for SEC to Find Any Benefit Exceptions Encourage Bad Foreign Law First Amendment Not Applicable Court Challenge: API v. SEC Result: API prevails, Payment Disclosure Rule Set Aside and Remanded (2 July 2013). Court Reasons: Full, Detailed Public Disclosure Not Unambiguously Required by Congress; SEC Analysis of Exceptions for Foreign Law Not Sufficient, Given Their Massive Cost. SEC Response: No Appeal (3 September 2013), SEC Will Propose Another Disclosure Rule. Session 5A Bullock 11

12 Legal Analysis For Government Side: Agency Rulemaking Strongly Favored in Law Very High Burden to Overturn Agency Rules Dodd Frank Clear IN PART on These Issues For Industry Side: Dodd Frank Act Not Clear IN PART The SEC Rules are Political, Vulnerable to Challenge Conclusions Three Dodd Frank Sections Challenged: Two Industry Wins in District Court One Industry Appeal Still Pending One SEC Appeal Still Pending But: All Dodd Frank Sections Will Still Exist Decisions in Earlt 2014, But Even If All Industry Challenges Prevail, There Will be Three New Rules Created by CFTC, SEC. Session 5A Bullock 12