Comment Text:
Meeting with Vitol
Wednesday, February 16, 2011
Memo from
Fajfar, Mark
CFTC Staff :
Gary Gensler
Eric Juzenas
Terry Arbit
Mark Fajfar
Julian Hammar
Salman Banaei
External Attendees :
Mike Loya (Vitol Inc.)
Ronald S. Oppenheimer (Vitol Inc.)
Additional Information :
Vitol described its primary business as to trade physical commodities; it enters into swaps in connection with its physical business. Vitol does not market itself as being available to hedge risks for third parties. Vitol said that it does not offer risk management services. It does not have a derivative sales team and its swap counterparties do not include financial firms, such as pension funds or hedge funds.
Vitol believes the final definition of swap dealer should clarify what is meant by “accommodating demand for swaps.” For example, does this depend on the intent of the person who enters into the swap? Does whether a person is accommodating demand for swaps depend on whether the swap is related to a trade in the underlying physical commodity? Vitol believes that if a person does not enter into swaps with financial firms, and instead limits its swaps to counterparties with which it also trades the underlying physical commodity, then it is not accommodating demand for swaps.
Vitol also requested clarity on how the “accommodating demand” test would apply to bilaterally negotiated swaps, where each party proposes particular terms and makes counter-proposals. Vitol believes that in this situation, it is difficult to say which party has initiated the swap and which party is accommodating the other. Also, where a swap dealer seeks to enter into a swap with Vitol in order to lay off bespoke risks related to a physical commodity swap between the dealer and another customer, Vitol does not believe that it is accommodating the dealer’s demand for swaps. Generally, Vitol believes that since its swaps are with its trading counterparties, neither party is entering into the swap for the purpose of managing the risk of the other party or to accommodate its demand.
Rather, since Vitol is actively making bids and offers in the swap markets, it may be said to accommodate demand as a consequence of its activity (as opposed to as a purpose of its activity). The test of whether a person accommodates demand for swaps should be based on the person’s intent. Where the person does not have a “customer facing” swaps business – i.e., where it does not have a swaps sales team and it does not solicit financial firms or parties that are not active in the market for the underlying physical commodity – it is not a swap dealer.
Vitol believes that in the market for swaps on physical commodities, there are a large number of swaps between end-users. It is not the case that a dealer is involved in most such swaps.
