Presentation from ACI's last Energy Trading Forum.

1. #EnergyTrading
ACI’s9th NationalForumonEnergy Trading
Compliance&RegulatoryEnforcement
James C. Allison
Manager, Corporate Studies and Initiatives
ConocoPhillips
Position Limits:
Calculation, Aggregation, Overlapping Jurisdiction, EU Developments and More
Kara L. Dutta
Assistant General Counsel
IntercontinentalExchange
Bruce B. Fekrat
Executive Director and Associate General Counsel
CME Group
June 5th – 6th, 2014
Julian E. Hammar
Of Counsel
Morrison Foerster
Tweeting about this conference?

2. #EnergyTrading
Top Priority 1st Speaker
Recent Developments: Upcoming CFTC Roundtable June 19, and
re-opened comment periods
Julian
What is in scope? Account aggregation and position aggregation
(and definition of included contracts)
Bruce
Hedge exemptions: Enumerated exemptions, rules and processes. Julian
Keeping track of positions on multiple exchanges or facilities Jim
Interaction with Exchange limits. Effect of new rules on how
exchanges set limits; loss of flexibility.
Kara
Impact on the market from treating physical delivery contracts and
financially settled contract differently
Bruce
Additional information is included in the slide packet.
Agenda
2

3. #EnergyTrading
Recent Developments
• Acting CFTC Chairman Mark Wetjen directed CFTC staff to hold a
public roundtable on June 19, 2014 to consider certain issues
related to hedging physical commodity derivatives and aggregation.
• CFTC re-opened the comment periods for the position limits and
aggregation proposals for a 3-week period starting June 12, 2014
and ending July 3, 2014.
• CFTC specifically asks market participants to comment on:
• Hedges of a physical commodity by a commercial enterprise,
including gross hedging, cross-commodity hedging, anticipatory
hedging and the process for obtaining a non-enumerated
exemption;
• The setting of spot month limits in physical-delivery and cash-
settled contracts and a conditional spot-month limit exemption;
• The setting of non-spot limits for wheat contracts; and
• Aggregation exemption for certain ownership interests greater
than 50% in an owned entity and aggregation based on
substantially identical trading strategies.

4. #EnergyTrading
Top Priority 1st Speaker
Recent Developments: Upcoming CFTC Roundtable June 19, and
re-opened comment periods
Julian
What is in scope? Account aggregation and position aggregation
(and definition of included contracts)
Bruce
Hedge exemptions: Enumerated exemptions, rules and processes. Julian
Keeping track of positions on multiple exchanges or facilities Jim
Interaction with Exchange limits. Effect of new rules on how
exchanges set limits; loss of flexibility.
Kara
Impact on the market from treating physical delivery contracts and
financially settled contract differently
Bruce
Additional information is included in the slide packet.
Agenda
4

5. #EnergyTrading
What is in scope?
ComparisonofcontractscoveredbyCFTClimits
5
Current part 150
limits
• Covers nine
specific
agricultural DCM
commodity
contracts (“legacy
contracts”)
Proposed part 150
limits
• Covers 28 DCM
contracts, including
legacy contracts
• Limits to be imposed
over all other physical
commodities at a later
time

6. #EnergyTrading
Definition of “referenced contract”
6
Included
• Same reference price as
underlying core referenced
futures contract (“CRFC”)
• Same location and same
commodity as CRFC
• Contract “partially settled” to
CRFC or same
location/commodity, including
intercommodity spread contracts
• Contract at a fixed differential to
CRFC or same
location/commodity
Excluded
• Basis contracts with both legs in
either same or substantially the
same commodity as CRFC
(“substantially the same”
commodities are defined
specifically in Appendix B – not
defined generally and therefore
a challenge for exchange-set
limits)
• Commodity index contracts with
two or more commodities that
are not the same nor
substantially the same (and not
a basis nor a spread contract)
Note: CFTC has published a “CFTC Staff Workbook of Commodity Derivative
Contracts” for referenced contracts

7. #EnergyTrading
Whosepositions are aggregated?
Viewofproposalfrom30,000feet
1. Major departure from current aggregation rules
» But no identification of problems in current rules
2. True, CFTC is “walking back” from the even more
extreme aggregation rules vacated in ISDA/SIFMA
vs. CFTC
» CFTC started walking back by re-proposing aggregation
rules in 2012, even before the court decision
3. BUT: CFTC’s new re-proposed aggregation rules of
2013 do not walk back nearly far enough
» Significant, negative impacts on traders, and on DCMs
and SEFs that must implement these new rules
7

8. #EnergyTrading
What would the new proposed
rules do?
1. Impose an owned entity aggregation requirement
» Must aggregate positions of entities in which a person
holds an ownership interest of 10% or more
» Some exemptions, but insufficient
2. Adopt SITS rule
» Must aggregate positions in accounts or pools with
“substantially identical trading strategies” (SITS)
3. Require DCMs/SEFs to adopt conforming rules
8

9. #EnergyTrading
Owned-entity aggregation
standard’s flaws
1. Prescribes enterprise-level aggregation, not entity-level
• Thereby penalizes complex corporate ownership structures
2. CFTC staff view: Owned entity aggregation has always been
required for ownership interest of 10% or more
• Inconsistent with text of Commodity Exchange Act
• CFTC has never said that
3. CFTC staff view: Ownership over 50% indicative of control
• Indicative of corporate control, maybe; not of control over trading
9

10. #EnergyTrading
What is the SITS rule?
1. Must aggregate all positions held or controlled in more
than one account or pool following “substantially
identical trading strategies”
2. Aggregation required under SITS rule even if positions
would otherwise be exempt from aggregation
3. No guidance as to meaning of “substantially identical”
4. Absurd results: Retail investor must aggregate positions
of $1B single-commodity index fund if he/she--
• Invests $10,000 in 2 such funds using same index
• Invests $10,000 in fund-of-funds that invests it in 2 such funds using same index – even if
investor doesn’t know
10

11. #EnergyTrading
Limits on spot-month positions
have teeth
•Set at low levels
• narrow estimated deliverable supply concept (long term
contracts excluded) and outdated numbers
•Aggregation of accounts will matter
•Restrictions on bona fide hedging
most impactful during spot-month

12. #EnergyTrading
Top Priority 1st Speaker
Recent Developments: Upcoming CFTC Roundtable June 19, and
re-opened comment periods
Julian
What is in scope? Account aggregation and position aggregation
(and definition of included contracts)
Bruce
Hedge exemptions: Enumerated exemptions, rules and processes. Julian
Keeping track of positions on multiple exchanges or facilities Jim
Interaction with Exchange limits. Effect of new rules on how
exchanges set limits; loss of flexibility.
Kara
Impact on the market from treating physical delivery contracts and
financially settled contract differently
Bruce
Additional information is included in the slide packet.
Agenda
12

13. #EnergyTrading
Hedging Exemptions: Key
Issues
• Orderly trading requirement: negligence/ordinary duty of
care standard (not just disruptive trading).
• Economically appropriate test: requires commercial
enterprise to take into account all inventory or products that
the commercial enterprise owns or controls.
• How a commercial enterprise is interpreted is critical.
• May require assessment of hedging activity at corporate
group level, as opposed to individual affiliates or other
business units, even where aggregation not required.
• No exemption for anticipated merchandizing activity for
unfilled storage capacity permitted under vacated rule.
• This may affect the ability to hedge the value of assets (e.g.
storage capacity) that are not currently operating.

14. #EnergyTrading
Hedging Exemptions (cont’d)
• New exemption for utilities hedging unfilled anticipated
requirements of customers where required or encouraged by
public utility commission.
• Cross-commodity hedges to qualify for safe harbor treatment
must meet qualitative and a new quantitative standard
(correlation of 0.8 for 36 mos.) (rebuttable presumption).
• Preamble states that natural gas generally is not a cross-
commodity hedge for power.
• Relief for non-enumerated hedge exemptions must be
obtained through an exemptive order from CFTC or a letter
from CFTC staff requested under reg. 140.99.
• Prior staff process under reg. 1.47 had timeframes for
decision, which are eliminated under the proposal.
• Concern that staff will not be able to respond to requests in
a commercial reasonable time.

15. #EnergyTrading
Top Priority 1st Speaker
Recent Developments: Upcoming CFTC Roundtable June 19, and
re-opened comment periods
Julian
What is in scope? Account aggregation and position aggregation
(and definition of included contracts)
Bruce
Hedge exemptions: Enumerated exemptions, rules and processes. Julian
Keeping track of positions on multiple exchanges or facilities Jim
Interaction with Exchange limits. Effect of new rules on how
exchanges set limits; loss of flexibility.
Kara
Impact on the market from treating physical delivery contracts and
financially settled contract differently
Bruce
Additional information is included in the slide packet.
Agenda
15

16. #EnergyTrading
Tracking across facilities
• Federal limits will apply to the aggregated entity’s
aggregated position
• Including all exchanges or other facilities and OTC
• To the extent the instruments are “referenced contracts”
• Therefore, you must track
• All sub-entities that are aggregated
• All transactions in referenced contracts
• In real time
• What if you have offsetting positions on different facilities?
• The proposed rule contemplated an exemption for this.
• Unclear how it would work in practice
• The exchanges need additional guidance from the CFTC on implementation processes
• Hypothetical for discussion:
• Assume my positions are for trading, not hedging
• Strategy is buy low/sell high
• By happenstance, all my “buys” are on exchange A, and all my “sells” on exchange B
• My net position is very nearly flat, but the position on each of Exchange A and Exchange B is a
multiple of the exchange limit.
16

17. #EnergyTrading
Top Priority 1st Speaker
Recent Developments: Upcoming CFTC Roundtable June 19, and
re-opened comment periods
Julian
What is in scope? Account aggregation and position aggregation
(and definition of included contracts)
Bruce
Hedge exemptions: Enumerated exemptions, rules and processes. Julian
Keeping track of positions on multiple exchanges or facilities Jim
Interaction with Exchange limits. Effect of new rules on how
exchanges set limits; loss of flexibility.
Kara
Impact on the market from treating physical delivery contracts and
financially settled contract differently
Bruce
Additional information is included in the slide packet.
Agenda
17

18. #EnergyTrading
Exchange Limits and Federal Limits
• If there are CFTC set limits, then DCMs and SEFs that are
trading facilities must set limits no higher than the CFTC
limits
• Same aggregation standards and definition of bona fide
hedging as the CFTC
• Netting: Under CFTC federal limits, Referenced Contracts
net outside of the spot month. For exchange limits,
market participants must apply for an exemption.
– Inter-market spread exemption: positions across
exchanges or OTC
– Intra-market spread exemption: e.g., calendar
spread

19. #EnergyTrading
Exchange Limits and Federal Limits
• The process for applying to the exchange for
exemptions should largely stay the same.
• The ability of the exchange to grant exemptions
will be modified. Currently, exchanges have
flexibility when granting hedge exemptions.
Under the Federal Limits, the burden of proof
shifts to the CFTC.

20. #EnergyTrading
Top Priority 1st Speaker
Recent Developments: Upcoming CFTC Roundtable June 19, and
re-opened comment periods
Julian
What is in scope? Account aggregation and position aggregation
(and definition of included contracts)
Bruce
Hedge exemptions: Enumerated exemptions, rules and processes. Julian
Keeping track of positions on multiple exchanges or facilities Jim
Interaction with Exchange limits. Effect of new rules on how
exchanges set limits; loss of flexibility.
Kara
Impact on the market from treating physical delivery contracts and
financially settled contract differently
Bruce
Additional information is included in the slide packet.
Agenda
20

21. #EnergyTrading
Treating physicaldeliverycontractsand
financiallysettled contract differently
•Different regulatory treatment in
the spot-month as to:
• So-called “five day rule” restriction
• Cross-commodity and unfilled production hedge
exemptions
• Swap pass through hedge exemption
• “Spread” exemption
•Five-times conditional limit

22. #EnergyTrading
Development outside the U.S.
•Europe
• The topic of Position Limits is included in MiFID II
• On May 22, ESMA released a Consultation document and a
Discussion document on MiFID II (see following slides)
• Comments due August 1, 2014.
• Consultation Paper
• Discussion Paper
•Canada
• Little notable progress
• Federal/Provincial coordination seems to be improving
22

23. #EnergyTrading
ESMA Draft Hedging Exclusion
• 11. The standard developed for the purpose of EMIR states that a derivative contract is objectively
measurable as reducing risks directly relating to the commercial activity when, by itself or in
combination with other derivative contracts it meets one of the following criteria:
• it covers the risks arising from the potential change in the value of assets, services, inputs, products,
commodities or liabilities that the non-financial counterparty or its group owns, produces, manufactures,
processes, provides, purchases, merchandises, leases, sells or incurs or reasonably anticipates owning,
producing, manufacturing, processing, providing, purchasing, merchandising, leasing, selling or incurring in
the normal course of its business;
• it covers the risks arising from the potential indirect impact on the value of assets, services, inputs, products,
commodities or liabilities referred to in point (1), resulting from fluctuation of interest rates, inflation rates,
foreign exchange rates or credit risk;
• it qualifies as a hedging contract pursuant to International Financial Reporting Standards (IFRS) adopted in
accordance with Article 3 of Regulation (EC) No 1606/2002 of the European Parliament and of the Council.
• 12. ESMA believes that the interpretation and consequent application of risk-reducing activity
should be consistent (recognising that EMIR addressed this question only in relation to OTC
trades) as far as possible with the RTS produced under EMIR.
• Q491: Do you agree with ESMA’s proposal to link the definition of a risk-reducing trade under
MiFID II to the definition applicable under EMIR? If you do not agree, what alternative definition
do you believe is appropriate?
From ESMA discussion paper 2014-548 at page 408 23

24. #EnergyTrading
ESMA Draft re Physical Settlement
• 1. Contracts must be physically settled if:
• i. the party to the contract entitled to receive the underlying commodity has an unrestricted and
unconditional right to physical delivery;
• ii. there is no option for either party to replace physical delivery with cash settlement;
• iii. the obligations under the contract cannot be cancelled out against obligations from other contracts
between the parties concerned.
• 2. The existence of force majeure provisions do not prevent a contract from being
characterised as “must be physically settled” for the purposes of further specifying
wholesale energy products under Section C 6 and C 6 energy derivative contracts.
• 3. The existence of other bona fide clauses rendering it impossible to perform the contract
on a physical settlement basis do not prevent a contract from being characterised as “must
be physically settled” for the purposes of further specifying wholesale energy products
under Section C 6 and C 6 energy derivative contracts.
• 4. Contracts that are physically settled have a broad range of delivery methods including the
following:
• i. physical delivery of the relevant goods themselves;
• ii. delivery of a document giving rights of an ownership nature to the relevant goods or the relevant quantity
of the goods concerned (such as a bill of lading or a warehouse warrant); or
• iii. another method of bringing about the transfer of rights of an ownership nature in relation to the relevant
quantity of goods without physically delivering them (including notification, scheduling or nomination to the
operator of an energy supply network) that entitles the recipient to the relevant quantity of the goods.
From ESMA consultation paper 2014-549 at page 282
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25. #EnergyTrading
Additional Information
25

26. #EnergyTrading
26
Overview
• Definition of Bona Fide Hedging
• Orderly Trading Requirement
• General Requirements
• Enumerated Hedging Positions
• Pass-Through Swaps
• Cross-Commodity Hedges
• Non-Enumerated Hedges
• Reports and Records

27. #EnergyTrading
27
Definition of Bona Fide Hedging
• To qualify as a bona fide hedge under the position limits
rule, transaction must:
• Meet orderly trading requirement;
• 3 general requirements traditionally associated with
hedging; and
• Qualify as a:
• specified, enumerated hedge,
• pass-through swap, or
• cross-commodity hedge.
• No non-enumerated exemption as part of definition (as
in existing definition).

28. #EnergyTrading
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Orderly Trading Requirement
• Negligence Standard/Ordinary duty of care – must be
aware of potential impact on market.
• Applies in addition to CFTC’s disruptive trading
practice authority.
• Unclear who at the CFTC determines when trading is
negligent.

29. #EnergyTrading
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General Requirements
3 general requirements:
(1) Temporary substitute test (physical commodities): represent a
substitute for transactions or positions made or to be taken at a later
time in a physical marketing channel.
(2) Economically appropriate test: requires commercial enterprise to
take into account all inventory or products that the commercial
enterprise owns or controls.
• How a commercial enterprise is interpreted is critical
• May require assessment of hedging activity at corporate group
level, as opposed to individual affiliates or other units, even
where no aggregation required.
(3) Change in value requirement (physical commodities): must be to
offset risks incidental to cash operations.

30. #EnergyTrading
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Enumerated Hedging Positions
• Enumerated hedges:
• Inventory and cash commodity purchase contracts
• Cash commodity sales contracts
• Unfilled anticipated requirements
• Utility hedging unfilled anticipated requirements of customers
where required or encouraged to by public utility commission –
New exemption not included in vacated rule
• Hedges by agents
• “Other” enumerated hedges:
• Unsold anticipated production
• Offsetting unfixed-price cash commodity sales and purchases
• Anticipated royalties
• Services

31. #EnergyTrading
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Enumerated Hedging (cont’d)
• No exemption for anticipated merchandizing activity for unfilled
storage capacity permitted under vacated rule.
• This may affect the ability to hedge the value of assets (e.g.
storage capacity) that are not currently operating.
• Entities required to aggregate positions under the aggregation
proposed rule shall be considered the same person for purposes
of determining whether they are eligible for a hedging exemption.
• CFTC expressly declined to recognize as bona fide hedges 6 out of
10 specific types of hedges that the Working Group of
Commercial Energy Firms had petitioned the CFTC to recognize
under the vacated rules.

32. #EnergyTrading
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Pass-Through Swaps
• “Pass-through swaps” are swaps executed opposite a
counterparty for whom the transaction would qualify as a
bona fide hedge.
• Benefit of the hedge may be “passed through” to the
non-hedging counterparty if it enters into a Referenced
Contract that reduces the risk of (e.g. offsets) the pass-
through swap.
• Non-hedging party would be able to exclude the pass-
through swap and the offsetting swap from its position
limit calculation.

33. #EnergyTrading
33
Pass-Through Swaps (cont’d)
• Requires written representation from counterparty that
the swap is a bona fide hedging position.
• Subject to the “5-day rule” for physical delivery
contracts:
• Not recognized as a bona fide hedge during the lesser
of the last 5 days of trading or the time period of the
swap month in the physical delivery contract.
• Vacated rule did not subject pass-through swaps to the
5-day rule.

34. #EnergyTrading
34
Cross-Commodity Hedges
• Cross-commodity hedging transactions are eligible for
the bona fide hedging exemption if:
• Fluctuations in value of the derivative are
“substantially related” to the fluctuations in value of
the actual or anticipated cash position or pass-
through swap and
• Meet the 5-day rule for physical delivery derivatives.

35. #EnergyTrading
35
Cross-Commodity Hedges (cont’d)
• Substantially related test: non-exclusive safe harbor
• Target commodity must have reasonable
commercial relationship to underlying commodity
and
• Target commodity must be offset by a position that
provides a quantitative correlation of at least 0.80
for 36 months
• Not required under existing or vacated rules
• Rebuttable presumption if does not meet
quantitative test

36. #EnergyTrading
36
Cross-Commodity Hedges (cont’d)
• Facts and circumstances for cross-commodity hedges
outside of the safe harbor determined on a case-by-case
basis upon application.
• Natural gas generally is not a cross-commodity hedge
for power per the Preamble.
• However, the Preamble clarifies that an electric
generator that owns or leases a natural gas generator
may qualify for an unfilled anticipated requirements
hedging exemption to meet a fixed-price power
commitment in the form of an electricity sale.

37. #EnergyTrading
37
Non-enumerated hedges
• Relief for non-enumerated hedging positions must be obtained:
• Interpretative Letter from CFTC staff requested pursuant to
CFTC Reg. 140.99 or
• Exemptive relief from CFTC under section 4a(a)(7) of the
Commodity Exchange Act.
• Prior staff process under CFTC reg. 1.47 (which included
timeframes for decision: 30 days to respond to a new request and
10 days for supplemental filings) would be eliminated.
• Concern that CFTC or its staff will not be able to respond to
requests in a commercially reasonable time.
• Not clear what standards will be used for evaluating requests,
which may further exacerbate timeliness issue.

38. #EnergyTrading
38
Reports and Records
• Reports:
• Form 204: required for any person seeking a bona fide hedging
exemption (submitted monthly)
• Form 304: applies to merchants and dealers of cotton (submitted weekly)
• Form 504: required to claim conditional spot-month limit exemption
(submitted daily during the spot month)
• Form 604: required to claim pass-through swap exemption (submitted
daily during the spot month)
• Form 704: required to claim anticipatory hedging exemptions (must
describe anticipated activity at last 10 days in advance of entering into
positions that exceed the relevant position limit)
• Records: persons claiming a hedge exemption must maintain complete
books and records concerning related cash, forward, futures, options and
swaps.

39. #EnergyTrading
Exchange Limits and Federal Limits
• The CFTC has proposed to eliminate the spread and
arbitrage exemptions.
• The CFTC will decide whether they believe a trade or
strategy is hedging or speculative:
• For example, staff currently believes that anticipatory
hedging is speculative.
• For example, the Southwest Hedge would be considered
speculative under the re-proposed Federal rule.