Message-ID: <25278044.1075859666268.JavaMail.evans@thyme> Date: Wed, 29 Nov 2000 02:45:00 -0800 (PST) From: rbaird@velaw.com To: mark.taylor@enron.com, mark.e.haedicke@enron.com, kristina.mordaunt@enron.com, nora.dobin@enron.com, rrogers@enron.com, jarmogi@enron.com, sara.shackleton@enron.com Subject: New CFTC rules Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: "Baird, Bob" X-To: "Taylor, Mark (Enron)" , "Haedicke Mark (Internet) (E-mail)" , "Mordaunt, Kristina (Enron)" , "Dobin, Nora (Enron)" , "Rex Rogers (E-mail)" , "Jim Armogida (E-mail)" , "Shackleton, Sara (Enron)" X-cc: X-bcc: X-Folder: \Mark_Haedicke_Dec2000_1\Notes Folders\All documents X-Origin: Haedicke-M X-FileName: mhaedic.nsf [This is a message I sent internally to all V&E lawyers. I know there is a lot in here that some of you already know about, but I thought I'd share it with you]. Except for the clearing organization rules, which appear to me to be a mess, I think this should make life simpler for Sara and Jim in dealing with equity derivatives, for Mark Taylor, Sara and others in dealing with principal-to-principal negotiated derivatives, and perhaps for EnronOnline. Nora, this may pose some interesting questions relative to DealBench. And, of course, if and to the extent that Enron wants to set up or otherwise get involved in multiple participant B2B Internet trading sites that involve transactions that will be completed on-line, there will be some issues that need to be addressed] This should be viewed as a very preliminary report because I have not had a chance to study the new rules carefully. I will send more complete information later. Last week the Commodities Futures Trading Commission adopted its "new regulatory framework," a series of rules that I believe will greatly expand the breadth, depth, height, weight and size of the CFTC's bureaucracy and the scope of the CFTC's regulatory involvement in all sorts of things (including financial guarantees) that it has not attempted to regulate heretofore. The CFTC described this rule making as a "regulatory reinvention." Indeed, the CFTC has reinvented itself without Congressional authorization to do so. In particular, under the new rules, for the first time the CFTC's "board of trade" regulation is not confined to markets in which "speculators" participate. In effect, it has extended its "board of trade" regulatory reach into a portion of the over-the-counter market that involves only business participants. Probably the biggest headache for all of us will be the new rules relating to Clearing Organizations, defined as "a person who provides credit enhancement functions" with respect to certain transactions, including transactions that rely on the new bilateral contract exemption discussed below. In many cases it will be illegal for a company that does not register with and become regulated by the CFTC as a Recognized Clearing Organization (RCO) to provide credit enhancement functions. I obviously need to study the rules further, but my initial read is that the rules are a disaster in drafting. For example, I don't think that the CFTC intended to say that a parent company cannot guarantee a swap entered into by its subsidiary unless the parent company registers as an RCO, but on my initial reading it appears to me that the rule is not at all clear and could be read that way. So if you are working on any transaction that involves a guarantee of a swap or other transaction that is exempt under the new exemption for bilateral contracts, you need to run this issue to ground before you close. The rules don't become effective, however, until 60 days after they are published in the Federal Register. There are some good things about the new rules. The new exemption for bilateral contracts greatly liberalizes the swaps exemption and expands it so that it covers contracts other than swaps. It provides greater certainty regarding the enforceability of derivatives and, in most cases, of contracts for physical delivery of commodities. The bilateral contracts exemption, however, is unavailable for contracts entered into through "Multiple Transaction Execution Facilities" or MTEFs. Multiple participant B2B Internet trading sites will be classified as MTEFs, unless participants are required to go off-line to complete the contracts (as, for example, CheMatch requires its participants to do). Under the new rules, multiple participant B2B Internet trading sites that involve swaps and other derivative contracts completed on-line must submit themselves to CFTC regulation as "Derivatives Transaction Facilities" or DTFs. Moreover, an MTEF that trades only in physical delivery contracts can achieve contract enforcement certainty of the type offered by the exemption for bilateral contracts only if it submits itself to regulation as a DTF. The MTEF definition excludes any Internet trading site, such as EnronOnline, that involves a single party offering to enter into trades with multiple parties, and therefore the sponsor of such a site can take advantage of the exemption for bilateral contracts without submitting itself to CFTC regulation. DTFs must not permit any person other than an "eligible commercial participant" to trade. The term "eligible commercial participant" is defined in the rule and includes, generally, commercial counterparties and financial intermediaries. Although the CFTC promises that its regulation of DTFs will be more light handed that that historically applied to U.S. futures exchanges, the new regulatory framework is likely to result in significant regulatory oversight of multiple participant B2B Internet trading sites that register as DTFs. Under the new rules, each sponsor must determine whether to restrict trading on its site to avoid CFTC regulation or to submit to regulation. Robert S. Baird Vinson & Elkins L.L.P. 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