External Meetings: Meeting with American Gas Association

The meeting discussed the seven factor test in the rules further defining the term “swap” regarding whether an instrument with embedded volumetric optionality is a forward contract, a trade option or a swap.  (See 77 FR at 48238)  In particular, the meeting focused on the seventh factor, which requires that “The exercise or non-exercise of the embedded volumetric optionality is based primarily on physical factors, or regulatory requirements, that are outside the control of the parties and are influencing demand for, or supply of, the nonfinancial commodity.”~The American Gas Association (AGA) members were of the view that this seventh factor should be tested at the time of signing the master contract in question, as opposed to at the time that a party to the contract makes its decision whether to exercise the embedded volumetric optionality.  The AGA members referred to the comment letter AGA filed on this issue on October 12, 2012 (Comment No. 58873).~Also, the AGA members thought that if an instrument such as a peak supply agreement relating to natural gas did not satisfy the seventh factor, it should be treated as a trade option.  In this case, the parties to the contract should be required to report the trade option on the CFTC’s Form TO on an annual basis.~The AGA members also requested additional guidance regarding the sixth factor, which requires that both parties to the instrument are commercial parties.  The AGA members asked for guidance whether a financial entity that is a marketer of natural gas, and buys and sells natural gas as part of its regular business, would be considered to be a commercial party.~Last, the AGA members requested confirmation that Part 46 of the CFTC’s regulations (regarding reporting of legacy instruments) does not apply to trade options.