This week, the Obama Administration released its proposed legislation on the derivatives market, including revisions to the "Over The Counter" (OTC) market that is essential for independent producers' hedging activities.

As part of its ongoing effort to help shape energy policy, IPAA staff – including chairman Buddy Kleemeier, vice chairman Bruce Vincent, president and CEO Barry Russell, and vice president of government relations Lee Fuller – discussed the legislation and the industry's concerns about the scope of commodity market regulation with Commodity Futures Trading Commission (CTFC) chairman Gary Gensler and Commissioner Bart Chilton.

The following memo was sent by Kleemeier detailing those meetings.

MEMO FROM IPAA CHAIRMAN BUDDY KLEEMEIER

On August 12, IPAA Vice Chairman Bruce Vincent, IPAA President and CEO Barry Russell, IPAA VP of Government Relations Lee Fuller and I discussed the commodity market pending regulation that has generated significant angst for the independent producer community with two CFTC commissioners. We first met with Gary Gensler, the new CFTC chairman and later visited with Brad Chilton. These were very productive discussions that significantly improved our understanding of their intentions. I wanted to share my reactions with you.

The salient issues that seemed most disconcerting before these meetings were: 

• If the OTC market was regulated would existing credit margining arrangements survive regulation, or would cash margining be required? 
• Would existing commodity swaps and other OTC positions be allowed to expire or be forced to close prior to contract expiry?
• Would contract limits be imposed on OTC contracts and how would any limits be balanced between OTC and NYMEX markets?

Gary Gensler meeting
We met with Chairman Gensler in his conference room at the CFTC. Chairman Gensler was very accommodating and obviously has a keen grasp of the financial markets. He comes to the CFTC after a long career with Goldman Sachs, at the Treasury Department and as Senate staff.

After we explained the issues that were of concern to us, he indicated that he and the Administration wanted to regulate all the commodity markets, but they did not seek to make unnecessary changes to the OTC market.

He indicated that the Administration's "ask" from Congress issued on August 11, 2010, was to grant the CFTC and SEC the authority to regulate the OTC market, but not necessarily dictate the specific rules on how the OTC market would be regulated.

Chairman Gensler suggested that it would probably take Congress until mid-2010 to pass the requisite legislation and that it would take the SEC and CFTC another 18 months to conduct hearings and promulgate new rules.

The Chairman understands the difficulties caused by forcing producers to move from credit margins to cash margins. He understands the necessity of not forcing existing contracts to be negated or closed prematurely. And, his vision on contract limits would be expressed in terms of a percentage of the overall market volume, rather than specific volume limits now in place by NYMEX.

Bart Chilton discussion
Commissioner Bart Chilton joined the same IPAA participants plus Susan Ginsberg (IPAA VP of Crude Oil and Natural Gas Regulatory Affairs) on a conference call that afternoon. Commissioner Chilton has been a CFTC commissioner for two years and his experience is grounded in agriculture commodities. He has previously served as both House and Senate staff and has been in various Executive Branch roles, primarily at the Department of Agriculture.

He was very receptive to our concerns and comments. He said his intent was to regulate but not change procedures that were working.

He wants the commodity markets to be liquid and accurately reflect commodity prices set by a fair market reflecting supply and demand forces. We suggested to him that IPAA supported transparency in all commodity markets so long as specific positions of a counter party are held confidential.

We suggested that if volume limits were imposed by CFTC that any such limits would generate the most benefit to market stability if restricted to the prompt 90 day period. We suggested that any rule that required producers to post cash margins would directly impact independent producer's ability to fund drilling and other capital projects. 

Commissioner Chilton also respects sanctity of contracts and would not impose early contract termination to initiate new CFTC rules, rather stage in new rules after existing contract termination.

These meeting provided a far better insight of the attitudes held by the two key policymakers regarding potential regulation of the OTC markets and significantly diminished the apprehensions I had about their intent. IPAA's future work will first involve the direction of legislation and then with the CFTC. These meetings were a good start in developing a working relationship with these commissioners.

– Buddy