Message-ID: <27522324.1075860036479.JavaMail.evans@thyme> Date: Wed, 6 Dec 2000 08:01:00 -0800 (PST) From: rbaird@velaw.com To: mark.e.haedicke@enron.com, rob_walls@enron.com, rrogers@enron.com, jarmogi@enron.com, sara.shackleton@enron.com, nora.dobin@enron.com, mark.taylor@enron.com Subject: FW: New CFTC Rules under the CFTC's "New Regulatory Framework" Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: "Baird, Bob" X-To: "Haedicke Mark (Internet) (E-mail)" , "Rob Walls (E-mail)" , "Rex Rogers (E-mail)" , "Jim Armogida (E-mail)" , "Shackleton, Sara (Enron)" , "Dobin, Nora (Enron)" , "Taylor, Mark (Enron)" X-cc: X-bcc: X-Folder: \Mark_Taylor _Dec_2000\Notes Folders\Notes inbox X-Origin: Taylor-M X-FileName: mtaylor.nsf FYI -----Original Message----- From: Baird, Bob Sent: Wednesday, December 06, 2000 3:51 PM To: All Attorneys - Domestic; All Attorneys - International Subject: New CFTC Rules under the CFTC's "New Regulatory Framework" Summary of Email This email discusses (1) the impact of the new rules on existing and pending swap transactions or other derivatives, (2) the new exemption for bilateral contracts, which replaces the swaps exemption and (3) some open questions relating to furnishing of guarantees or other credit support for transactions that rely on the new exemption for bilateral contracts. As you know, on November 22, 2000 the Commodity Futures Trading Commission (CFTC) approved final rules that will implement a "new regulatory framework." The new rules will become effective 60 days after their publication in the Federal Register, which has not yet occurred. Beth Ann Dranguet and I are monitoring that publication date and will update you with the effective date of the new rules as soon as we know it. Existing and Pending Transactions. Until the effective date of the new rules, no changes are necessary to any swap or other derivative transaction closed before the effective date. All non-exempt, off-exchange futures contracts remain illegal until the new rules take effect. The new rules will in no way call into question any transaction undertaken before they become effective. Swaps and Other Derivatives Under the New Rules. Once the new rules become effective, the swaps exemption will be replaced by the new Exemption for Bilateral Transactions (attached). Bilateral contracts can include any contract that is either individually negotiated or traded on a facility where a single party deals with multiple other parties (e.g. EnronOnline). Thus, for the first time futures contracts can be traded over-the-counter. Eligibility. Only Eligible Participants can take advantage of the Exemption for Bilateral Contracts. The representation commonly made as to "Eligible Swap Participant" status should be changed to refer to status as an "Eligible Participant." Under contracts covered by the new rule, each party should represent that: "It constitutes an "eligible participant" as such term is defined under the regulations of the Commodity Futures Trading Commission, currently at 17 C.F.R. ?35.1(b)." Since virtually every existing ISDA master agreement has the eligible swap participant representation, confirmations for new transactions under old ISDAs should include the eligible participant representation. Differences between Eligible Participant and Eligible Swap Participant. The definition of "eligible participant" has changed slightly from the "eligible swap participant" definition. Under the new rules: 1. Any eligible participant can trade for its own account or through another eligible participant. This was previously permitted only by banks and trust companies. 2. In addition to banks and trust companies, a "foreign bank or a branch or agency of a foreign bank (as defined in section 1(b) of the International Bank Act of 1978 (12 U.S.C. ?3101(b))" is included as an eligible participant. 3. The category for insurance companies has changed to "an insurance company that is regulated by a State or that is regulated by a foreign government and is subject to comparable regulation (including a regulated subsidiary or affiliate of such an insurance company)." 4. Investment companies must have total assets exceeding $5 million to be eligible. Clearing. To qualify for the Exemption for Bilateral Transactions, a contract must be cleared through an authorized clearing organization if the contract is "cleared." Unfortunately, the CFTC does not define what it means to be "cleared." It does define the term "clearing organization" as any person that provides a credit enhancement function in connection with the netting and/or settling of payments and payment obligations. This definition is so broad and vague that it could be read to say that any person who furnishes ordinary credit enhancement tools, such as a corporate parent's guarantee of a subsidiary's swap transactions, must be an authorized clearing organization in order for the transactions to be eligible for the Exemption for Bilateral Contracts. This is something that may need to be clarified by the CFTC, because surely the CFTC did not mean to cover ordinary parent or affiliate guarantees. Authorized clearinghouses are: 1. a recognized clearing organization (i.e. registered as such with the CFTC); 2. a securities clearing agency subject to SEC supervision; 3. a clearing system organized as a bank or Edge Act corporation subject to jurisdiction under the Federal Reserve or Comptroller of the Currency; or 4. a foreign clearing organization subject to similar regulation. Perhaps one way to get around the problem is to rely on the Swaps Policy Statement, which the CFTC has left untouched and has now adopted as a rule. One of the Swaps Policy Statement requirements is the absence of a clearing organization or margin system, but in explaining what it means by that it states that "The ability to impose individualized credit enhancement requirements to secure either changes in the credit risk of a counterparty or increases in the credit exposure between two counterparties . . . would not be affected." Clearly individualized credit enhancements, such as a corporate parent's guarantees, are permitted for transactions relying on the Swaps Policy Statement. I must confess that I am not sure we have wrestled this issue to ground, but we do have some more time to study the rules before they take effect. I will keep you posted and let you know if we run this issue to ground in a way that is more satisfactory. MTEFs and DTFs. We are still studying the rules for Exempt Multilateral Transaction Execution Facilities (MTEFs) and for Derivative Transaction Facilities (DTFs) and will provide you with more information at a later date. http://www.cftc.gov/opa/RegframeworkPart35Bilateraltrans.pdf ++++++CONFIDENTIALITY NOTICE+++++ The information in this email may be confidential and/or privileged. This email is intended to be reviewed by only the individual or organization named above. 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