1. Regulation of “Specialist Commodity Dealers” in the United States 19 October 2005 Jonathan Marsh Partner Hunton & Williams Fleetway House 25 Farringdon Street London EC4A 4AB Tel: 020 7246 5706 Fax: 020 7246 5772

2. Introduction: The Regulatory Framework of Commodity Derivatives  Commodity Futures Trading Commission (“CFTC”)  Commodity Exchange Act (“CEA”)  Securities and Exchange Commission (“SEC”)  Securities Acts of 1933 and 1934  Laws of Individual States  “Bucket Shop” laws

3. Regulation of OTC Derivatives Under the CFMA Under the Commodity Futures Modernization Act of 2000 (“CFMA”): Bilateral transactions between “ eligible contract participants ” in “ excluded commodities ” or “ exempt commodities ” are not subject to regulation under the CEA, provided these transactions are not executed on a “trading facility”

4. Part 1 of the Rule: Eligible Contract Participants  “Eligible Contract Participant” is very broadly defined; it includes, when acting for their own account:  Financial institutions (including foreign banks)  Insurance companies  Investment companies ( e.g. mutual funds)  Corporations, partnerships or other organisations:  with assets > $10 million; or  that are guaranteed by an entity with assets > $10 million; or  with assets > $1 million, that enter into an OTC transaction in the normal course of business or to manage risk  Individuals with assets > $10 million, or > $5 million if the OTC transaction is used to manage risk associated with an owned asset

5. Part 2 of the Rule: Excluded and Exempt Commodities  “Excluded Commodities” are broadly defined and encompass interest rate, exchange rate, currency and other measures of economic or commercial risk; most derivative financial products are covered  “Exempt Commodities” are commodities that are not excluded commodities or agricultural commodities e.g. energy, metals, bandwidth and chemicals

6. Part 3 of the Rule: Trading Facility  A “Trading Facility” is an organised exchange or electronic facility on which multiple parties make trades without negotiating individual terms  This definition specifically excludes facilities that enable participants to negotiate terms or facilities on which bids, offers and acceptances are non-binding

7. Commodity transactions inside the scope of the CEA  If the commodities are not excluded or exempt, or transaction takes place on a trading facility, they will be within the jurisdiction of the CFTC under the CEA and therefore subject to numerous regulations including regulations governing commodities brokers  CFTC also regulates markets on which commodity derivatives are traded

8. Treatment of agricultural commodities  Agricultural commodities fall within the scope of the CEA for historic reasons

9. Distinctions between US and UK/post-MiFID EEA  US regulation makes a significant distinction between on-exchange and OTC transactions  US distinguishes between different types of commodity e.g. special treatment of agricultural commodities  US does not have a “specialist commodity dealer” exclusion equivalent to MiFID Article 2(1)(k)

10. Summary The CFMA Rule: Bilateral transactions between “ eligible contract participants ” in “ excluded commodities ” or “ exempt commodities ” are not subject to regulation under the CEA, provided these transactions are not executed on a “ trading facility ”