FYI
-----Original Message-----
From: Baird, Bob
Sent: Wednesday, December 06, 2000 3:51 PM
To: All Attorneys - Domestic; All Attorneys - International
Subject: New CFTC Rules under the CFTC's "New Regulatory Framework"



Summary of Email

This email discusses (1) the impact of the new rules on existing and pending
swap transactions or other derivatives, (2) the new exemption for bilateral
contracts, which replaces the swaps exemption and (3) some open questions
relating to furnishing of guarantees or other credit support for
transactions that rely on the new exemption for bilateral contracts.

As you know, on November 22, 2000 the Commodity Futures Trading Commission
(CFTC) approved final rules that will implement a "new regulatory
framework."  The new rules will become effective 60 days after their
publication in the Federal Register, which has not yet occurred.  Beth Ann
Dranguet and I are monitoring that publication date and will update you with
the effective date of the new rules as soon as we know it.

Existing and Pending Transactions.  Until the effective date of the new
rules, no changes are necessary to any swap or other derivative transaction
closed before the effective date.  All non-exempt, off-exchange futures
contracts remain illegal until the new rules take effect.  The new rules
will in no way call into question any transaction undertaken before they
become effective.

Swaps and Other Derivatives Under the New Rules.  Once the new rules become
effective, the swaps exemption will be replaced by the new Exemption for
Bilateral Transactions (attached).  Bilateral contracts can include any
contract that is either individually negotiated or traded on a facility
where a single party deals with multiple other parties (e.g. EnronOnline).
Thus, for the first time futures contracts can be traded over-the-counter.

Eligibility.   Only Eligible Participants can take advantage of the
Exemption for Bilateral Contracts.  The representation commonly made as to
"Eligible Swap Participant" status should be changed to refer to status as
an "Eligible Participant."  Under contracts covered by the new rule, each
party should represent that:

"It constitutes an "eligible participant" as such term is defined under the
regulations of the Commodity Futures Trading Commission, currently at 17
C.F.R. ?35.1(b)."

Since virtually every existing ISDA master agreement has the eligible swap
participant representation, confirmations for new transactions under old
ISDAs should include the eligible participant representation.

Differences between Eligible Participant and Eligible Swap Participant.  The
definition of "eligible participant" has changed slightly from the "eligible
swap participant"  definition.  Under the new rules:

1.      Any eligible participant can trade for its own account or through
another eligible participant.  This was previously permitted only by banks
and trust companies.
2.      In addition to banks and trust companies, a "foreign bank or a
branch or agency of a foreign bank (as defined in section 1(b) of the
International Bank Act of 1978 (12 U.S.C. ?3101(b))" is included as an
eligible participant.
3.      The category for insurance companies has changed to "an insurance
company that is regulated by a State or that is regulated by a foreign
government and is subject to comparable regulation (including a regulated
subsidiary or affiliate of such an insurance company)."
4.      Investment companies must have total assets exceeding $5 million to
be eligible.

Clearing.  To qualify for the Exemption for Bilateral Transactions, a
contract must be cleared through an authorized clearing organization if the
contract is "cleared."  Unfortunately, the CFTC does not define what it
means to be "cleared."  It does define the term "clearing organization" as
any person that provides a credit enhancement function in connection with
the netting and/or settling of payments and payment obligations.  This
definition is so broad and vague that it could be read to say that any
person who furnishes ordinary credit enhancement tools, such as a corporate
parent's guarantee of a subsidiary's swap transactions, must be an
authorized clearing organization in order for the transactions to be
eligible for the Exemption for Bilateral Contracts.  This is something that
may need to be clarified by the CFTC, because surely the CFTC did not mean
to cover ordinary parent or affiliate guarantees.

Authorized clearinghouses are:

1.      a recognized clearing organization (i.e. registered as such with the
CFTC);
2.      a securities clearing agency subject to SEC supervision;
3.      a clearing system organized as a bank or Edge Act corporation
subject to jurisdiction under the Federal Reserve or Comptroller of the
Currency; or
4.      a foreign clearing organization subject to similar regulation.

Perhaps one way to get around the problem is to rely on the Swaps Policy
Statement, which the CFTC has left untouched and has now adopted as a rule.
One of the Swaps Policy Statement requirements is the absence of a clearing
organization or margin system, but in explaining what it means by that it
states that "The ability to impose individualized credit enhancement
requirements to secure either changes in the credit risk of a counterparty
or increases in the credit exposure between two counterparties . . . would
not be affected."  Clearly individualized credit enhancements, such as a
corporate parent's guarantees, are permitted for transactions relying on the
Swaps Policy Statement.

I must confess that I am not sure we have wrestled this issue to ground, but
we do have some more time to study the rules before they take effect.  I
will keep you posted and let you know if we run this issue to ground in a
way that is more satisfactory.

MTEFs and DTFs.  We are still studying the rules for Exempt Multilateral
Transaction Execution Facilities (MTEFs) and for Derivative Transaction
Facilities (DTFs) and will provide you with more information at a later
date.


  http://www.cftc.gov/opa/RegframeworkPart35Bilateraltrans.pdf
<http://www.cftc.gov/opa/RegframeworkPart35Bilateraltrans.pdf>

          ++++++CONFIDENTIALITY NOTICE+++++
The information in this email may be confidential and/or privileged.  This
email is intended to be reviewed by only the individual or organization
named above.  If you are not the intended recipient or an authorized
representative of the intended recipient, you are hereby notified that any
review, dissemination or copying of this email and its attachments, if any,
or the information contained herein is prohibited.  If you have received
this email in error, please immediately notify the sender by return email
and delete this email from your system.  Thank You
 <<RegframeworkPart35Bilateraltrans.pdf.url>>

 - RegframeworkPart35Bilateraltrans.pdf.url