Meeting Date:
Wednesday, February 16, 2011
CFTC Staff:
Terry Arbit
Mark Fajfar
Lee Ann Duffy
Steve Kane
Greg Kuserk
Rose Troia
Somi Seong
Christopher Hower
Jason Shafer
Vivek Jain
Christopher Cummings
Organization(s):
Kraft Foods
Russell & Barron
Sutherland Asbill & Brennan LLP
External Attendees:
Mark Magnesen (Kraft Foods)
Johan Nystedt (Kraft Foods)
Werner Bossard (Kraft Foods)
Ulrike Bartels-Janssen (Kraft Foods)
Brian Folkerts (Kraft Foods)
James Cain (Sutherland Asbill & Brennan LLP)
Ed Barron (Russell & Barron)
Peter Curley (SEC)
Richard Grant (SEC)
Andrew Blake (SEC)
Additional Information:
The meeting discussed two subsidiaries that act as centralized hedging centers with respect to Kraft Foods’ operations outside of North America – Kraft Foods Finance Europe (KFFE) acts as in-house treasury and centralizes global cash management, and Taloca GmbH is a centralized procurement unit for globally managed commodities. KFFE uses currency swaps, forwards and options to manage foreign exchange risks. Taloca uses commodity futures, forwards and options to manage price and supply risks. KFFE and Taloca each enter into swaps with third-party dealers as necessary to lay off the risks of the consolidated group. (Kraft Foods also uses interest rate swaps, but this activity is not consolidated in hedging centers.)
Kraft Foods emphasized that KFFE and Taloca enter into swaps only up to the extent of actual currency and commodity positions of the consolidated group; that is, each hedge is with respect to an actual position. The swaps between KFFE or Taloca and third-party dealers are mirrored by transactions between KFFE or Taloca and their affiliates which have identical terms. (In some cases, KFFE acts as agent and the affiliate is actually the legal party to the swap with the third-party dealer.)
Kraft Foods believes that KFFE and Taloca should not be treated as a “financial entity” for purposes of the end-user exception from clearing in new section 2(h)(7) of the Commodity Exchange Act (CEA). Kraft Foods is concerned that the activities of KFFE and Taloca could be considered to be “financial in nature” as referred to in the definition of financial entity. Kraft Foods does not believe the activities described above were intended to be considered “financial in nature” for this purpose.
Kraft Foods also discussed the exemption from the definition of “financial entity” in paragraph (D). Kraft Foods is concerned that KFFE and Taloca are not actually agents for their affiliates. Kraft Foods believes the exemption should apply to KFFE and Taloca because they enter into swaps on behalf of and at the instruction of their affiliates.
The meeting also discussed the exclusion in the definition of major swap participant for swap positions that hedge or mitigate commercial risk. Kraft Foods believes the swaps that KFFE and Taloca enter into with third-party dealers should qualify for this exclusion, even though the swaps hedge the risks faced by KFFE and Taloca’s affiliates (rather than risks faced by KFFE and Taloca themselves). Kraft Foods believes this is appropriate because many of the currency swaps entered into by KFFE qualify for hedge accounting treatment. Also, Taloca limits its derivative activity (futures, forwards and options) to 80% of the actual commodity needs of its affiliates. Generally, Kraft Foods believes that the currently proposed interpretation of what constitutes hedging or mitigating commercial risk is appropriate and understandable, and should be applied in the final rule. Kraft Foods believes that the currently proposed interpretation would treat KFFE and Taloca’s swaps with third parties, described above, as hedging or mitigating commercial risk.
Regarding the swap dealer definition, Kraft Foods supports the proposed interpretation that the economic reality of the swaps between KFFE or Taloca and their affiliates is such that the swap activity is not equivalent to the activity with third parties and does not constitute swap dealing.
