Subject: Interview on Enron Offering of Retail Swaps
From: [email-masked]
To: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Cc: legal <[email-masked]>
Date: Thu, 2 Aug 2001 12:27:44 -0700 (PDT)

This morning Enron was interviewed by the Federal Reserve, CFTC, SEC, and the Department of Treasury (also attending were the OCC and the FDIC).  Scott Gahn from the commercial group lead the discussion and Vicki Sharp (legal), Mark Taylor (legal) and I supported Scott on the legal and regulatory issues.
The goal in the meeting was to provide the agencies information so they can draft an interagency document on the retail swap market and its regulation by end of the year as required by the CFMA.

Going into the meeting we knew that the CFTC and the Fed were more likely to support the retail swap industry expansion, with the SEC and Treasury more interested in a regulatory structure that allows their "clients" , the banks and broker/dealers to offer the swaps and protect against systemic risk.  The agency which extended lead the meeting - in our case the CFTC.   The other firms interviewed are Goldman Sachs, Morgan Stanley, Lehman, JP Morgan-Chase, Bank of America, ISDA, and Blackbird.

First, we noted that our targeted customers are the small to medium size business, not the residential consumer.  We argued that we can offer bundled retail swaps to those not meeting the eligible contract participant (ECP) requirements in deregulated markets where physically deliver is legal and possible, but unbundling the swap from the physical prohibits retail swaps to non-ECP customers.  This is a large markets (8.1 million potential mass market and small mass market customers) and the benefits of swaps to manage the volatility of deregulating markets should not be reserved to the Fortune 1,000.   The consumers would be full requirements consumers, so speculation would be managed.  If speculation and market manipulation were to occur state and common-law antifraud provisions are available.

We were able to isolate the SEC at the beginning the meeting by noting that we were not planning equity swaps.  The Treasury representative asked questions about manipulation, consumer protection, and the California situation for retail consumers.The OCC was concerned about coordination with state financial regulators and if this would be a barrier to market entry.

The USG agency officials acknowledged that the retail swaps in energy and other commodities were useful risk management products, but some disagree as the regulatory treatment. At the end of meeting, Treasury said that "do you expect us to exempt Enron solely in from regulation in offering these products?".  We said yes if we are willing to offer sound risk management products to our customers 

Best development: The CFTC official pulled us aside after the meeting and said that while Treasury may not willing to solely exempting Enron, the CFTC has the authority and is willing to consider just an exemption.  The CFTC is  interested in acting quickly to offer regulatory relief and legal certainty for those firms interested in offering these products under the ECP level.  She wants to sit down with us very shortly to decide how best to get move this at the CFTC, either through a formal rulemaking or no action letter.   The goal would be to act before the swap report is released in December, avoid legislative changes (which we strongly oppose), and allow for product innovation.

Call with any questions and I will keep you updated.