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Trade Option Filing: Questions from the Gas Pump and Answers on Layaway

A few weeks ago, a friend texted me from a gas station.  He was gassing up his truck and wanted to know if he would have to report his fuel purchase as a Trade Option under Dodd-Frank Act (“DFA”) because he could buy anywhere from 0-22 gallons, at his “option.”  At the time, I was assisting clients with their Trade Option designation and filing so the text was as topic-appropriate as it was sarcastic.  Having gone through the first Trade Option filing deadline on March 1, 2014, I had some time to look back and reflect on the whole process.  I am starting to wonder if my friend’s question was much more profound than I realized at the time.  The following are some of my observations on the trade option designation and filing process for physical energy market participants, i.e., end-users.

Read more
bruleur de gaz

Gas Transportation and Storage Transactions Ruled Swaps Under The Dodd-Frank Act

On August 13, 2012, the commodity Futures Trading Commission (the “CFTC”) published a long-awaited final rule which defined the term “swap” pursuant to the Dodd-Frank Act (the “DFA”). This rule completes the “definitional phase” of the DFA and starts the clock for compliance for several important DFA final rules, including real-time reporting, business conduct standards, and registration of swap dealers and major swap participants. On October 12, 2012, market participants will be required to be in compliance with all applicable rules under the DFA.
For energy market participants, the “swap” definition final rule also clarified the treatment of certain transactions which are not traditionally deemed swaps but, nonetheless, were included in the final rule. In particular, the final rule includes guidance about commodity options embedded in forward contracts. The CFTC sets out criteria for determining whether a forward contract that contains an embedded option will be considered a swap or “an excluded non-financial commodity forward contract (and not a swap).” Further, the final rule provides additional conditions for determining whether a forward contract with embedded “volumetric” optionality is a swap or an excluded forward contract. These types of transactions are of particular interest to many energy companies because they appear to include some very common energy transactions: tolling, take-or-pay, full requirement, transmission or transportation, gas wellhead, and heat-rate transactions.

Read more
shutterstock_16137337 (2)

Miki Kolobara To Conduct A Dodd-Frank Seminar New York City

I will conduct a two-day, in-depth, Dodd-Frank Act seminar in New York City on June 28-29, 2012. This seminar will provide a review and analysis of the latest developments in the Dodd-Frank rulemaking process. It will include a detailed examination of the final rules, including Swap Dealer, Major Swap Participant, Trade Option Exemption, Real-Time Reporting and Recordkeeping, Business Conduct Standards, and the Market Manipulation Prohibition.

The seminar will also offer a cross-functional overview of some practical steps that energy market participants can take in order to better identify, quantify, and manage the risks and exposures from the Dodd-Frank Act. It will also offer a practitioner’s review of the hedging risks and challenges stemming from the Dodd-Frank regulation. In particular, it will examine the Dodd-Frank Act’s impact on creating and implementing trading/risk policies and procedures, master trading agreements, netting and collateral agreements, and related documentation.

To view the seminar agenda or register, please follow the attached link:

http://www.pgsenergy.com/classroom-seminar/U205/Special-Alert-Federally-Mandated-Changes-Impact-Energy-Trading-Hedging-Dodd/545

shutterstock_10750150

The Dodd-Frank Act Seminar for Energy Companies

On April 18, 2012, the long-awaited definitions of Swap Dealer, Major Swap Participants, and Eligible Contract Participant were adopted by the Commodity Futures Trading Commission (“CFTC”).  Also, at the same meeting, the CFTC adopted the final and interim rule regarding commodity options.  As these final rules continue to add more pieces to the Dodd-Frank Act puzzle, market participants are facing a tremendous task of identifying what needs to be done, depending on their respective classification under the Dodd-Frank Act.  Those who are most likely to be classified as end users for the purpose of the Dodd-Frank Act finally have some clarity as to their reporting and registration obligations under the Act.

Read more
Lit bulb

Kolobara Law Firm to Focus on Energy Trading Law

As of April 2, 2012, Kolobara Law Firm, LLC is available to assist market participants in the commodities and derivatives trading arena with their legal and compliance needs.  I wanted to offer a service that, as an in-house attorney, I often wished for: timely assistance without having to first spend a considerable amount of time educating outside help about the underlying business.  Kolobara Law Firm is focused on transactional and compliance matters related to commodities and derivatives trading, with particular emphasis on energy trading matters: transactions, risk management, and compliance.

Read more
shutterstock_30336412

Triangular Setoff in ISDA Master Agreement Rejected by Bankruptcy Court

On October 4, 2011, the United States Bankruptcy Court for the Southern District of New York issued a new opinion in the Lehman Brothers bankruptcy case.  The Court ruled that [section 553(a) of] the Bankruptcy Code prohibits a swap counterparty from setting off amounts owed to the debtor against amounts owed by the debtor to affiliates of the swap counterparty (“triangular setoff”), despite the Code’s safe harbor provisions and the language in the ISDA Master Agreement permitting such setoffs . In re Lehman Brothers, Inc., No. 08-01420 (JMP), 2011 WL 4553015 (Bankr. S.D.N.Y. Oct. 4, 2011).

Read more
j0438865

Establishing the Right Approach to Energy Trading Compliance in Light of Changing Regulation presentation

Slides prepared for the Energy Trading Operations and Technology Summit 2011, held in Houston, TX on November 16, 2011.

ETOT 2011 Slides

The Dodd-Frank Act: Implementation and Compliance for the Energy Industry seminar

Recently, I was asked to do a follow-up seminar on the Dodd-Frank Act.  The first seminar I conducted this past March was one of the most productive and enjoyable seminars I have ever done.  The seminar attendees were engaging and very anxious to share their own experiences with various aspects of the Dodd-Frank Act.  I learned a great deal from them and was happy to share my views on the upcoming changes in the energy trading universe.  I was amazed to learn how many different aspects of the Dodd-Frank Act will impact different energy market participants, and how nuanced those impacts can be.  Having the seminar attendees from different areas of energy business, including utilities, public power and gas, merchant generators, LDCs, and energy marketers, allows for a vibrant exchange of ideas and a unique learning opportunity.

Read more

The Dodd-Frank Act and the Jedi Mind Trick Therein

How the Wall Street Financial Reform Regulation Unfairly Penalizes Those Who Had Nothing to Do With the Financial Crisis of 2008

Recently, I was preparing to conduct a seminar for energy trading entities to discuss compliance with the Dodd-Frank Act.  As part of my preparation, I reviewed numerous rules including the “business conduct standards” rule.  In short, the rule proposes to impose certain obligations on swap dealers and major swap participants when trading or entering into swaps with, what the Act refers to as “special entities.”

As readers of this blog probably already know, the Dodd-Frank Act proposes to define two distinct types of entities involved in swap trading: swap dealers and major swap participants.  Swap dealers are those entities that are known in the industry as such, or that perform swap dealing activities.  Major swap participants, on the other hand, are those entities that hold significant swap positions in the market.  All other entities would arguably fall under a third category which has not been defined, but are commonly referred to as “end users.”  The majority of electric and natural gas utilities will likely fall into this category of end users.  Within the category of end users, the Dodd-Frank Act recognizes a sub-category called “special entities.” Notwithstanding that some may find a somewhat pejorative inference in the name itself, the category generally includes governmental or municipal entities, including public utilities.

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Why energy trading compliance?

The Energy Policy Act of 2005 (“EPAct”) significantly increased FERC’s authority to police energy markets, and the agency has demonstrated their willingness to vigorously exercise of these new enforcement powers.  The fact that FERC’s apparent focus is shifting, from that of a rate-setting and transmission regulating authority to that of a commodity trading and risk management enforcement agency, presents new challenges to market participants.  Markets depend on trust and accuracy of market information and transparency among its participants.  The enhanced penalties for violations of the EPAct provide sufficient incentive for all market participants to take the steps necessary to ensure compliance with the rules and to properly monitor and modify such compliance rules accordingly.

      Federal regulators can impose civil penalties of up to $1 million per violation for every day the violation occurs.  They can order disgorgement of profits and revoke a company’s market-based rate authority.  The courts can, in some circumstances, bar individuals from serving as an officer or director of an electric utility or natural gas company, as well as prohibiting such individuals from engaging in the business of buying or selling energy commodities or transmission services subject to FERC jurisdiction.

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Preventing Market Manipulation – Practical Considerations for Load Serving Entities and Local Distribution Companies

The sweeping new authority delegated to FERC pursuant to the 2005 Energy Policy Act (“EPAct”), combined with the discretionary nature of FERC’s enforcement authority, and the lack of precedent or detailed guidance on FERC’s prospective application of the Anti-Manipulation Rule (“Rule”) create uncertainty in the energy trading arena.  Until the Rule is defined in more detail, and clarified and tested in the courts, compliance emphasis should be comprehensive and continuous.  Energy markets (and related regulations) are constantly evolving and so should compliance programs.  This article outlines some of the issues to consider in creating and implementing a robust compliance program.

Enterprise-Wide Compliance Management 

The Rule injects a significant new risk aspect into the energy trading arena.  This risk can manifest itself as regulatory, market, legal, operational, financial, reputational or other risk and, therefore, needs to be managed in a comprehensive and coordinated manner.  As with any trading-related risk, there needs to be sufficient and timely communication across trading-related functions, such as the front office, middle office and back office, so the risk can be properly identified, quantified and managed.

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Trading and Risk Management Policies and Procedures Should be Reviewed and Amended to Adequately Implement the Pending Changes in Energy Trading Regulation

Energy trading market participants, trading in both physical commodity markets and financial derivatives markets, encounter a variety of risks and exposures in the marketplace. These exposures are not limited to underlying price volatility, but include credit, market, regulatory, legal, and cash flow risk, among others. In order to define, control, manage and report these exposures in a manner consistent with their financial and operational goals and objectives, a framework is established, generally in a form of trading and/or risk management policies and procedures, to define the parameters surrounding such trading and risk management activity.

The energy trading regulatory landscape is undergoing a major redesign: enhanced authority by FERC and CFTC; OTC Derivatives reform; migration of many OTC contracts to regulated exchanges.  These are only some of the forces that will have a lasting effect on all market participants, no matter the size, corporate structure, or commodity classification.

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Current financial reform legislation could create significant operational and financial risk for energy market participants

The financial fallout of 2008 is still reverberating throughout the world.  Many so called experts and pundits have already fixed the blame on derivatives instruments such as credit default swaps (“CDS”) and mortgage backed securities (“MBS”).  Unfortunatly, this oversimplified view has been readily embraced by many financial institutions, politicians, and regulators.  Rather than taking responsibility for the complete disregard of fundamental risk management practices, many have elected to simply blame derivatives (as if the derivatives had some genetic flaw that no one was aware of until the economic disaster happened).  The truth is that, like any other financial or risk management tool, derivatives are very beneficial and useful if used prudently and responsibly.

Energy market participants have shown a great deal of stability and resiliency throughout this financial storm.  Many energy companies were able to manage their financial and operational exposure by prudent and responsible risk management.  Often, such risk management involved using derivatives.  In particular, over the counter derivatives (“OTC”) allowed many energy companies to individually tailor their risk mitigation measures to their specific needs.  Without the benefit of these individually tailored transactions, many energy market participants would have to turn to regulated exchanges.  Many would not be able to find a product that exactly fits their operational needs.

Read more

Recent Articles

28
Mar
Lit bulb

Trade Option Filing: Questions from the Gas Pump and Answers on Layaway

A few weeks ago, a friend texted me from a gas station.  He was gassing up his truck and wanted to know if he would have to report his fuel purchase as a Trade Option under Dodd-Frank Act (“DFA”) because he could buy anywhere from 0-22 gallons, at his “option.”  At the time, I was assisting clients with their Trade Option designation and filing so the text was as topic-appropriate as it was sarcastic.  Having gone through the first Trade Option filing deadline on March 1, 2014, I had some time to look back and reflect on the whole process.  I am starting to wonder if my friend’s question was much more profound than I realized at the time.  The following are some of my observations on the trade option designation and filing process for physical energy market participants, i.e., end-users. Read more

4
Sep

Anti-Manipulation in Energy Market Regulation & Compliance Training

Ibannière internet am pleased to announce that I have been selected by a renowned international conference provider to conduct a two-day seminar titled “Anti-Manipulation in Energy Market Regulation & Compliance.”  The seminar will be held on October 8-9, 2013, at NBC Tower in Chicago.  I look forward to conducting this important seminar as part of my law firm’s ongoing efforts to educate market participants about the importance of an ongoing and proactive approach to energy trading compliance.

The seminar will be a comprehensive, in-depth, examination of some current and past developments relevant to anti-manipulation regulation and compliance.  In particular, I intend to focus on identifying and preventing manipulative conduct in the energy trading arena.  To that end, I plan to examine some recent regulatory and enforcement developments.  In particular, I will analyze certain trading and hedging strategies that recently have been identified as potentially manipulative.  i plan to examine the risks associated with trading physical and financial positions at same delivery points, anti-disruptive trading practices, uneconomic trading, dynamic hedging, and anti-manipulative conduct under the Dodd-Frank Act.

Also, I plan to offer an overview of the best industry practices and standards for creating and implementing a culture of compliance within an energy marketing organization.  Further, I will examine some unique steps that physical energy companies can implement to minimize their exposure to an inadvertent violation of the anti-manipulation rules.  In addition, the seminar will identify and offer solutions for the best practices in documentation negotiation and drafting including master trading agreements, confirmations, credit, and collateral and netting agreements.

For more information about the seminar, please click on the following link:

http://www.marcusevans-conferences-northamerican.com/marcusevans-conferences-event-details.asp?EventID=20564#.UidHOBtwuAl

14
Aug
bruleur de gaz

Gas Transportation and Storage Transactions Ruled Swaps Under The Dodd-Frank Act

On August 13, 2012, the commodity Futures Trading Commission (the “CFTC”) published a long-awaited final rule which defined the term “swap” pursuant to the Dodd-Frank Act (the “DFA”). This rule completes the “definitional phase” of the DFA and starts the clock for compliance for several important DFA final rules, including real-time reporting, business conduct standards, and registration of swap dealers and major swap participants. On October 12, 2012, market participants will be required to be in compliance with all applicable rules under the DFA.
For energy market participants, the “swap” definition final rule also clarified the treatment of certain transactions which are not traditionally deemed swaps but, nonetheless, were included in the final rule. In particular, the final rule includes guidance about commodity options embedded in forward contracts. The CFTC sets out criteria for determining whether a forward contract that contains an embedded option will be considered a swap or “an excluded non-financial commodity forward contract (and not a swap).” Further, the final rule provides additional conditions for determining whether a forward contract with embedded “volumetric” optionality is a swap or an excluded forward contract. These types of transactions are of particular interest to many energy companies because they appear to include some very common energy transactions: tolling, take-or-pay, full requirement, transmission or transportation, gas wellhead, and heat-rate transactions. Read more

19
Jun
shutterstock_16137337 (2)

Miki Kolobara To Conduct A Dodd-Frank Seminar New York City

I will conduct a two-day, in-depth, Dodd-Frank Act seminar in New York City on June 28-29, 2012. This seminar will provide a review and analysis of the latest developments in the Dodd-Frank rulemaking process. It will include a detailed examination of the final rules, including Swap Dealer, Major Swap Participant, Trade Option Exemption, Real-Time Reporting and Recordkeeping, Business Conduct Standards, and the Market Manipulation Prohibition.

The seminar will also offer a cross-functional overview of some practical steps that energy market participants can take in order to better identify, quantify, and manage the risks and exposures from the Dodd-Frank Act. It will also offer a practitioner’s review of the hedging risks and challenges stemming from the Dodd-Frank regulation. In particular, it will examine the Dodd-Frank Act’s impact on creating and implementing trading/risk policies and procedures, master trading agreements, netting and collateral agreements, and related documentation.

To view the seminar agenda or register, please follow the attached link:

http://www.pgsenergy.com/classroom-seminar/U205/Special-Alert-Federally-Mandated-Changes-Impact-Energy-Trading-Hedging-Dodd/545

23
Apr
shutterstock_10750150

The Dodd-Frank Act Seminar for Energy Companies

On April 18, 2012, the long-awaited definitions of Swap Dealer, Major Swap Participants, and Eligible Contract Participant were adopted by the Commodity Futures Trading Commission (“CFTC”).  Also, at the same meeting, the CFTC adopted the final and interim rule regarding commodity options.  As these final rules continue to add more pieces to the Dodd-Frank Act puzzle, market participants are facing a tremendous task of identifying what needs to be done, depending on their respective classification under the Dodd-Frank Act.  Those who are most likely to be classified as end users for the purpose of the Dodd-Frank Act finally have some clarity as to their reporting and registration obligations under the Act. Read more

15
Apr
Lit bulb

Kolobara Law Firm to Focus on Energy Trading Law

As of April 2, 2012, Kolobara Law Firm, LLC is available to assist market participants in the commodities and derivatives trading arena with their legal and compliance needs.  I wanted to offer a service that, as an in-house attorney, I often wished for: timely assistance without having to first spend a considerable amount of time educating outside help about the underlying business.  Kolobara Law Firm is focused on transactional and compliance matters related to commodities and derivatives trading, with particular emphasis on energy trading matters: transactions, risk management, and compliance. Read more

5
Feb
shutterstock_30336412

Triangular Setoff in ISDA Master Agreement Rejected by Bankruptcy Court

On October 4, 2011, the United States Bankruptcy Court for the Southern District of New York issued a new opinion in the Lehman Brothers bankruptcy case.  The Court ruled that [section 553(a) of] the Bankruptcy Code prohibits a swap counterparty from setting off amounts owed to the debtor against amounts owed by the debtor to affiliates of the swap counterparty (“triangular setoff”), despite the Code’s safe harbor provisions and the language in the ISDA Master Agreement permitting such setoffs . In re Lehman Brothers, Inc., No. 08-01420 (JMP), 2011 WL 4553015 (Bankr. S.D.N.Y. Oct. 4, 2011). Read more

12
Dec
j0438865

Establishing the Right Approach to Energy Trading Compliance in Light of Changing Regulation presentation

Slides prepared for the Energy Trading Operations and Technology Summit 2011, held in Houston, TX on November 16, 2011.

ETOT 2011 Slides

10
Nov

The Dodd-Frank Act: Implementation and Compliance for the Energy Industry seminar

Recently, I was asked to do a follow-up seminar on the Dodd-Frank Act.  The first seminar I conducted this past March was one of the most productive and enjoyable seminars I have ever done.  The seminar attendees were engaging and very anxious to share their own experiences with various aspects of the Dodd-Frank Act.  I learned a great deal from them and was happy to share my views on the upcoming changes in the energy trading universe.  I was amazed to learn how many different aspects of the Dodd-Frank Act will impact different energy market participants, and how nuanced those impacts can be.  Having the seminar attendees from different areas of energy business, including utilities, public power and gas, merchant generators, LDCs, and energy marketers, allows for a vibrant exchange of ideas and a unique learning opportunity. Read more

8
Nov

Practical Considerations for Creating and Implementing Hedging Strategies in the Dodd-Frank Act Era

Practical Considerations for Creating and Implementing Hedging StrategiesPractical Considerations for Creating and Implementing Hedging Strategies – slides

Presented at 4th Annual Risk Management in Energy Trading Conference on November 8, 2011, in Houston, TX.

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