Comment Text:
Definitions Meeting with Vitol General Counsel
Tuesday, February 15, 2011
Memo from
Fajfar, Mark
CFTC Staff :
Mark Fajfar
Julian Hammar
Dave Aron
Vivek Jain
Greg Kuserk
Rose Troia
Somi Seong
Stephen Kane
External Attendees :
Ronald S. Oppenheimer (Vitol Inc.)
Additional Information :
Vitol described its physical trading business in energy commodities and, to a lesser extent, metals commodities and sugar. Vitol naturally has a long position in commodities and therefore takes a short position in futures and swaps related to the commodities. The large majority of Vitol’s swaps and futures are cleared.
The discussion focused on whether Vitol’s swap activities would constitute swap dealing. Vitol believes that entering into a swap in response to a request from another party would not in itself constitute swap dealing if the request is rooted solely in a pre-existing commercial relationship in the corresponding physical commodity. In such a case, Vitol is entering into the swap based on its own view of the market and in connection with its physical position with the same counterparty.
Vitol made the following points about the proposed swap dealer definition:
1 The definition should provide more clarity and not use terms such as “tend to” or “likely” in describing the activity that constitutes swap dealing.
2 The reference to whether a person accommodates demand from other parties is difficult to interpret. Frequently, negotiations regarding a swap are a fluid dialogue where each party proposes certain terms and makes counterproposals. Also, each party benefits from the swap, so it is difficult to say which party is accommodating the other.
3 The definition should include clear indicia of swap dealing, which would include having a swap sales team and actively promoting the availability of swaps.
4 The designation as a swap dealer should be made on a commodity-specific basis. For example, a person could be a swap dealer for crude oil but not for natural gas, if the person enters into swaps for both commodities but engages in dealing activities with respect to only one.
5 The final rule should clarify how the designation as a swap dealer is made, and what process a person would follow to limit the designation to particular commodities.
Vitol believes the final rule should identify market practices that, in themselves, do not constitute swap dealing, such as active trading, making continuous bids and offers, and leaving bids and offers open, so long as these activities are limited to physical commodities that the person is actively trading. Vitol believes that participating on both sides of a market is not necessarily market-making. An active trader may make bids and offers on both sides of a market to attract interest where the market is not currently active in order to execute trades at a later time. Overall, Vitol believes that swap dealers should be identified by their sales activity and other promotion to swap counterparties that are not active in the physical market for the relevant commodity. Persons who limit their swap activities to counterparties that are also active in the relevant physical market would not be swap dealers.
Regarding the threshold for de minimis swap dealing, Vitol believes the dollar amount threshold should be eliminated. Also, the thresholds for number of swaps and number of customers should be measured on a commodity-specific basis (e.g., a person could have a certain number of swaps/customers for crude oil, a certain number for natural gas, etc.). The de minimis thresholds should also be justified by a cost/benefit analysis.
