WG Consulting held an early morning breakfast seminar at the Houston Junior League to discuss the Dodd-Frank Compliance landscape as it currently stands as is expected to shape out--and how that effects energy businesses of all sizes today.

1. Thought Leadership
Breakfast Seminar
Dodd-Frank Compliance Overview
www.wgconsulting.com

2. Table of Contents
Objectives of the Act & Why Commodities?
Definition of a Swap – REALLY?
Nature of the Rules – A Prescription for Every Ailment
Implications on the Market, Systems, Processes and Programs
Page 2

3. Objectives of the Act & Why Commodities?
President Obama signed the Dodd Frank Wall Street Reform and Consumer Protection Act into
federal law on July 21, 2010
Objectives of Title VII: regulate the Over-the-Counter (“OTC”) swaps market
• Transparency:
• Registration
• Mandatory Exchange Trading
• Real Time Reporting
• Excessive Speculation
• Position Limits for Swaps
• Systemic Risk Management
• Mandatory Clearing
• Capital and Margining Requirements
• Participant Protections
• Anti-Manipulation Prohibitions
• Business Conduct Standards
Why Commodities?
• The Banking Crisis 2008/2009 (Bear Stearns, Lehman, AIG)
• Derivatives
• Price of Oil
As of September 2013
Page 3

4. Rulemaking Process and Implementation
Dodd Frank Act amended sections of the Commodity Exchange Act (“CEA”)
• CEA
• Law that governs the U.S. commodity futures … and now … swaps markets
• Commodity Futures Trading Commission (“CFTC”) writes the regulations that
implement the CEA and enforces the CEA and CFTC regulations
•
CFTC Regulations
CFTC identified 38 areas where rule writing was necessary in accordance with Title
VII of the Dodd-Frank Act
• Proposed Rules:
• CFTC drafts Proposed Rules and distributes them for public comment
• Final Rule:
• Each Final Rule consists of a:
• Preamble, which describes the public comments received and the
reasons for the CFTC’s final determination of the requirements
• Cost – benefit analysis
• An Effective Date and Compliance Date
• Once the Final Rule is published in the Federal Register, the “countdown to
compliance” begins
As of September 2013
Page 4

5. Key Definitions
Swap Dealer (SD)
• Holds itself out as a dealer in swaps; Makes a market in swaps; Regularly enters
into swaps with counterparties as an ordinary course of business for its own
account; Engages in activities causing itself to be commonly known in the trade as
a dealer or market maker in swaps
• De-minimis threshold for dealing: $8 billion aggregate gross notional swaps over
the preceding 12 months, decreasing to $3 billion in about 2.5 years; $25 million
gross notional over the preceding 12 months for swaps with “Special Entities”;
$800 million with Utility Special Entities
Major Swap Participant (MSP)
• Swaps positions are “substantial” and could have serious adverse effects on the
financial stability of the United States banking system
Non-Swap Dealer / Major Swap Participant (Non-SD/MSP)
• Any entity that does not meet the definition of a SD or MSP. Non-SD/MSPs are not
required to be registered with the CFTC, but they do have obligations under the
CFTC Final Rules. Non-SD/MSPs are often referred to as End Users
As of September 2013
Page 5

6. Key Definitions
Swap Execution Facility (SEF)
• An entity that serves as a facility, trading system, or platform in which multiple
participants have the ability to execute or trade swaps
Swap Data Repository (SDR)
• An entity that collects and maintains swap data information and records of executed
swap transactions and reports this swap transactional data to the public in real time.
There are currently 3 provisionally approved SDRs: ICE Trade Vault; CME Repository
Service; DTCC Data Repository
U.S. Person
• The CFTC definition of “U.S. person” includes:
• A natural person who is a U.S. resident.
• A corporation, partnership, LLC, trust, association, joint-stock company, fund or
other similar enterprise that 1) is incorporated in the U.S. or 2) has its principal
place of business in the U.S.
• Foreign branches of U.S. banks.
• Non-U.S. affiliates or subsidiaries: if majority-owned by a U.S. person and U.S.
person bears the risk of unlimited liability for the obligations of the affiliate or
subsidiary.
• Any entity not covered by this definition is considered a “non-U.S. person” for the
purposes of this CFTC Final Order.
As of September 2013
Page 6

7. Definition of a Swap – Really?
Swap
Generally:
• Commodity swaps and commodity options , whether or not physically
settled, are regulated under the CFTC Final Rules, subject to certain
Exclusions and Exemptions
• Exclusions exist for any sale of a nonfinancial commodity for deferred
shipment or delivery, so long as the transaction is intended to be physically
delivered (the Forward Contract Exclusion)
• Commodity Options are subject to the Trade Option Exception: Trade
Options are still deemed a swap, but are exempt from some of the DF swap
regulations
• In order to determine whether a transaction is a swap, excluded from the
definition of a swap, or exempt from some of the rules regulating swaps, the
CFTC will examine the facts and circumstances of each transaction
As of September 2013
Page 7

8. Definition of a Swap – Really?
Specifically:
• All financially-settled contracts (except futures and options on futures, insurance;
customer business arrangements such as a purchase, sale, lease or transfer of real
property)
• Physically-settled contracts that do not meet the Forward Contract Exclusion
• Forward Contract Exclusion requires:
• The contract pertains to a non-financial commodities (i.e. commodities that
can be physically delivered, such as metals);
• For deferred shipment or delivery; and
• Parties intend to physically deliver
Forward contracts that do not actually go to physical delivery (i.e. book outs,
offsets) may still qualify for the Forward Contract Exclusion provided that the
contracts are transacted between “commercial” entities entering into the
transaction for commercial purposes with the capability and intent of
taking/making physical delivery.
Designed to exempt transactions from the definition of a swap where the intent is
to transfer ownership of the commodity and not just its price risk.
As of September 2013
Page 8

9. Definition of a Swap – Really?
•
Commodity Options, whether physically or financially-settled
• Trade Options Exception:
• Offeror is an ECP or commercial/merchandiser entering into transaction solely for
purposes related to its business;
• Offeror has a reasonable basis to believe offeree is a commercial/merchandiser entering
into the transaction solely for purposes related to its business;
• Option must be intended to be physically-settled, so that if exercised, a sale of a physical
commodity would result for immediate or deferred delivery
• Commodity Options Embedded in Forward Contracts: excluded if the embedded option:
• May be used to adjust the forward price, but does not undermine the overall nature of
the contracts as a forward contract;
• Does not target the delivery term, so the predominant feature of the contract is actual
delivery, and
• Cannot be severed and marketed separately from the overall forward contract in which it
is embedded
• Forward Contracts with Embedded Volumetric Optionality: excluded if passes a seven part test:
#7: 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 … If
exercised for discretionary reasons (i.e. price), an option and therefore a swap.
• Usage Contracts: excluded if satisfies 5 conditions, including a two-part fee covering fixed and
variable costs, as well as the right to use the facility is legally established upon contract
execution.
As of September 2013
Page 9

10. Nature of CFTC Regulations Implementing DF
•
•
•
•
•
•
•
•
•
•
Highly Prescriptive
Definitional Uncertainty
Compliance Delays – No Action Relief
Still Pending
Subject to Legal Challenges
Good Practices (in some cases)
Documentation – Policies & Procedures
Monitoring to ensure compliance
Expensive to Implement
CFTC sympathetic to “end users”
• Commissioner Chilton’s April 3, 2013 “End User Bill of Rights”
• #1: Right to reasonable Dodd-Frank implementation: “I will not approve an
action against end-users seeking to comply with CFTC Dodd-Frank rules in good
faith, provided they act in ways consistent with a good faith intention to comply,
until after October 31, 2013.”
• #2 Right to legal certainty: “…The Commission should strive to provide the
market relief or clarity well in advance of a compliance date – last minute relief
and clarification should be avoided…I will not support an action against an end
user, exchange or anyone else on an issue deserving clarity that is the subject of
an outstanding request for interpretive guidance.”
As of September 2013
Page 10

11. General Requirements:
SDR Reporting
Basic Reporting Requirements
•
Elements of each swap transaction, whether cleared or uncleared, are required to be:
•
Made available to the public in real time (ASATP)
•
Reported to a SDR (historical and current swaps)
Purposes
•
Improve price discovery and transparency and promote fairness and efficiency in the swaps
market
•
Ensure swap data is current and readily available to Regulators to carry out their market
monitoring and enforcement duties
What is to be reported:
• Swap Creation Data:
• Primary Economic Terms (“PET”)
• Confirmation Data
• Swap Continuation Data:
• Life Cycle Event Data
• Valuation Data
• Corrections of Errors and Omissions
Who is to Report (for “off-facility”, non-cleared swaps)
•
SD -> MSP -> Non-SD/MSP Financial Entity ->Non-SD/MSP Non-Financial Entity
•
Non-SD/MSP U.S. Person executed with a Non-U.S. Person: Non-SD/MSP U.S. Person
•
Non-U.S. Persons: executed on a SEF/DCM/U.S. market or cleared on a DCO: agree
As of September 2013
Page 11

12. General Requirements:
Swap Data Recordkeeping
Non-SD/MSPs:
• Records: Keep full, complete, and systematic records, including all pertinent
data and memoranda, relating to each swap to which the Non-SD/MSP is a
counterparty
• Retention Period: Life of the swap, plus 5 years
• Form: Retain records in either electronic or paper form
• Readily Retrievable: retrievable within 5 business days
SDs/MSPs:
• Records: Keep full, complete, and systematic records, including all pertinent
data and memoranda, of all activities related to its swaps business relating to
to which the Non-SD/MSP is a counterparty
• Retention Period: Life of the swap, plus 5 years
• Form: Retain records in either electronic or paper form
• Readily Retrievable: readily accessible via real time electronic access
throughout life of swap plus 2 years and retrievable within 3 business days for
the remainder
As of September 2013
Page 12

13. General Requirements:
Internal Business Conduct Standards (IBC)
IBC constitutes specified duties and internal controls that SDs and MSPs are
required to implement to effectively monitor and manage the risks they incur
through their Swaps Activities (a SD/MSP’s activities related to swaps and any
product used to hedge such swaps), including:
•
•
•
•
•
•
•
•
•
•
Reporting, Recordkeeping, and Daily Trade Records
Risk Management Program
Monitoring of Position Limits
Diligent Supervision
Business Continuity and Disaster Recovery
General Information: Availability for Disclosures and Inspection
Anti-trust Considerations
Conflicts of Interest Policies and Procedures – Research
Conflicts of Interest Policies and Procedures – BTU and Clearing Unit
Designation of a Chief Compliance Officer
As of September 2013
Page 13

14. General Requirements:
External Business Conduct Standards (EBC)
EBC defines the pre-trade, time of execution and post trade duties a SD/MSP has to its
counterparties as part of its commodity Swaps Activities. The purpose of these duties is
to ensure the counterparties are treated fairly and are adequately informed and
protected.
Duties and actions include:
• Advisory activities incidental to SD/MSP business
• Written Compliance Policies and Procedures and Monitoring to ensure compliance
• Dealing with Counterparties – Generally
• Pre-Trade Duties; Time of Execution and Post Trade Actions; Record Retention
• Prohibition on Fraud, Manipulation and Other Abusive Practices
• Communications – Fair Dealing
• Recommendations to Counterparties – Institutional Suitability
• Rules or Dealing with Special Entities
• Acting as an Advisor to a Special Entity
• Acting as a Counterparty to a Special Entity
• Political Contributions
As of September 2013
Page 14

15. General Requirements:
Position Limits
Federal Position Limits
On Sept. 28, 2012, the CFTC Final Position Limit rule, in which commodity swaps
were subject to speculative position limits in order to limit “excessive
speculation” in commodity contracts, was vacated by a U.S. District Court.
The CFTC has decided to appeal the decision, and may be working towards
revising its earlier Final Rule to address the necessity of the Rule and the costbenefit of it.
Exchange Position Limits:
CME NYMEX/COMEX and ICE Futures US rules require owners of futures
contracts to comply with the speculative limits these DCMs apply to the
commodity futures contracts that they offer in their markets.
As of September 2013
Page 15

16. General Requirements:
Mandatory Clearing
• Section 723(a)(3) of the Dodd-Frank Act amends the Commodity Exchange Act (CEA) by
adding Section 2(h)(1), which makes it unlawful for any person to engage in a swap that
is required to be cleared unless that person submits the swap for clearing to a DCO.
• Section 723(a)(3) also added Section 2(h)(2) to the CEA. This section requires the
Commission to determine whether a swap is required to be cleared pursuant to either a
Commission initiated review or pursuant to a submission from a derivatives clearing
organization (DCO) for the review of a swap, or group, category, type, or class of swap.
• Section 723(a)(8) of the Dodd-Frank Act amends the CEA by adding Section 2(h)(8),
which requires that the execution of all clearable swaps occur on Designated Contract
Markets (DCMs) or Swap Execution Facilities (SEFs), except where no DCM or SEF makes
the swap available for trading.
• Non-SD/MSPs and other non-financial entities may elect the End-user Exception to the
clearing requirement if the swaps are eligible for the End-User Exception to Clearing.
• As of the date of this presentation, the Commission has not set an implementation
schedule for the mandatory clearing of commodity swaps.
As of September 2013
Page 16

17. General Requirements:
End User Exception To Clearing
Clearing requirements shall not apply to a swap if one of the counterparties to the swap
applies for the End-User Exception to Clearing and meets the following characteristics:
• Is not a Financial Entity
• Is using swaps to hedge or mitigate commercial risk
• Notifies the Commission, in a manner set forth by the Commission, how it generally
meets its financial obligations associated with entering into non-cleared swaps
• If the counterparty is an SEC filer, the counterparty must have the board of the SEC
filer or a committee thereof approve its decision to enter into uncleared swaps
pursuant to the End User Exception.
A party’s ability to elect the End User Exception for a particular swap is a function of the
purpose of the particular swap in question and is not limited to physical position hedging.
The use by non-financial entities of the end-user exception for financial risk-hedging must
be an incidental part (i.e. not central to) of the Electing Counterparty’s business.
The determination of whether the risk being hedged or mitigated is “commercial” will be
based on the underlying activity to which the risk relates, not on the type of entity
claiming the End User Exception.
As of September 2013
Page 17

18. General Requirements:
Margin
The CFTC has proposed regulations requiring that all SD/MSPs collect appropriate margin
from their Swap Counterparties.
Though the rule is not yet finalized, the proposed regulations offer margin calculation
methodologies and uncollateralized exposure limitations. SD/MSPs will not be required to
collect margin from non-SD/MSP counterparties unless uncollateralized exposure exceeds
certain thresholds set by the SD/MSP. It is very likely that collateral documentation is
going to be required for all swaps even if no collateral is expected to be transferred.
Non-SD/MSPs that are not currently required to post collateral will be required to put
credit support arrangements in place with their swap counterparties. It is recommended
that Non-SD/MSPs negotiate this documentation with their SD/MSP counterparties
carefully to ensure that appropriate thresholds for posting collateral are properly
documented.
As of September 2013
Page 18

19. General Requirements:
Prohibition on Fraud and Price Manipulation
In order to help promote integrity of the commodity markets and to protect market participants, the CFTC’s
Anti-Manipulation Final Rule broadly prohibits fraud and non-fraud based manipulation in connection with
any swap, contract of sale of any commodity in interstate commerce, or contract for future delivery on or
subject to the rules of any registered entity (i.e. Designated Contract Market or Swap Execution Facility).
Fraud–based manipulation makes it unlawful to intentionally or with reckless disregard make false or
misleading statements or be manipulative, fraudulent or deceptive, regardless of whether the conduct in
question was intended to create or did create an artificial price. Proof of knowledge, therefore, is not
required. The CFTC defines fraudulent conduct as conduct that impairs, obstructs or defeats a wellfunctioning market. “Reckless” is defined by the CFTC as an act or omission that “departs so far from the
standards of ordinary care that it is very difficult to believe the actor was not aware of what he or she was
doing.”
In contrast, non-fraud based manipulation requires specific intent, and the CFTC will be guided by the
traditional four part test for determining manipulation: 1. The accused had the ability to influence market
prices; 2. The accused specifically intended to create or effect a price or price trend that does not reflect
legitimate forces of supply and demand; 3. Artificial prices existed; and 4. The accused caused the artificial
prices.
Penalties for manipulation or attempted manipulation include a civil penalty of up to the greater of
$1,000,000 or triple damages. Criminal prosecution is also a potential result of a violation of the
manipulation prohibition.
As of September 2013
Page 19

20. Implications on the Market,
Systems, Processes and Programs
• Wider bid – offers
• Fewer market makers in certain markets
• Expanded hedging counterparties beyond traditional banks
• Movement to block trades
• Revised Counterparty documentation
• Clearing and collateral arrangements
• Cost of clearing vs. exempt from clearing and cost to report
• System automation
• Changes to operational and business processes to support swap protocols
• Automated monitoring to ensure compliance
• Documented Policies and Procedures
• Chief Compliance Officer rules
As of September 2013
Page 20

21. Regulatory Compliance Practice
Within Regulatory Compliance, WG SMEs apply our:
• Understanding of the:
• Mechanics of the underlying commercial trading and marketing activities
• Letter and intent of those external laws, rules and regulations that
govern these activities (“Applicable Rules”)
• Knowledge of the information systems and processes that are required to
support a Regulatory Risk Management Compliance Program (“Program”)
• Experience in developing and implementing this systematic approach to
Compliance
to help our clients establish and maintain a Program that effectively mitigates
the risk of violations, while evidencing the organization’s commitment to a
culture of compliance.
As of September 2013
Page 21

22. Financial Advisory Services
Financial Advisory
CFO Services
Financial & Operational
Reporting
Transaction
Advisory
Business Process & Controls
Process Improvement
Internal Controls
• SEC & IFRS
Reporting
• M&A Services (buy/sell
side)
• Sarbanes-Oxley
Compliance
• Private Equity Services
• External Audit
Preparation
• Business
Transformation
• Project Management
• Turnaround
Management
• Regulatory Reporting
• Capital Transaction
Services (equity & debt
raises)
• Technical Research
• Transaction Due Diligence
• Procure-to-Pay Process
• Controls Needs
Assessment & Program
Development
• Lender & Private Equity
Services
• Financial Reporting
Process
• Budgeting &
Forecasting
• Interim or Outsourced
Corporate Development
• Supply Chain /
Inventory Management
• Management Reporting
& Dashboards
• Valuation & Dispute
Resolution
• Demand Planning &
Forecasting
• Oil & Gas Reporting
• Restructuring Services
• Control Design &
Integration
• Interim CFO
• IPO Services
• Merger Integration
• Interim Controller / CAO
• Treasury Management
• Strategic Planning &
Analysis
• Federal & State Tax
• Quote-to-Cash Process
• Controls Risk
Assessment
• IT Controls
• Interim Personnel
• Controls Testing
• Fraud Investigations &
Forensics
• FCPA
• Change Management
As of September 2013
Page 22

23. Risk, Systems & Compliance Services
Regulatory
Compliance &
Dodd Frank
Solutions
Trading and
Risk
Management
•
•
•
•
ETRM System
Selection &
Implementation
•
Strategy &
Operations for
Front, Middle &
Back Office
•
Supply, Trading &
Risk Management
•
•
Interim CRO
•
•
•
As of September 2013
Enterprise
Performance
Management
(EPM)
Business
Intelligence (BI)
All aspects of DF
CFTC Final Rules
Implementation
•
Data Discovery
•
Visualization Design
Policies,
Procedures,
Manual Drafting
•
Dashboard Design
and Implementation
•
Analytical
Application Design &
Development
Training
Compliance
Program Reviews
and Testing
Trade Monitoring
Service
Regulatory
Reporting and
Recordkeeping
Compliance
Function
Outsourcing/
Interim CCO
•
•
Project
Management
•
Application
functionality
enhancement
and end user
training
•
Self-Discovery &
Analytics Training
•
Workflow Control
•
Areas of Expertise:
TIBCO Spotfire,
Oracle BIEE, SAP
BusinessObjects
•
Reporting
Strategy, Process
Review and
Optimization
Enterprise
Architecture
Strategy and
Roadmap
•
Interim and
Outsourced
Managed Services
•
Application
Upgrades and
Assessments
Enterprise
Resource
Planning (ERP)
•
System Selection
•
Implementation
•
Upgrades
•
Functional
Enhancements
•
•
•
•
Application
Integration
Areas of
Expertise: J.D.
Edwards, Oracle
eBusiness Suite,
PeopleSoft, SAP,
OGSYS
Managed
Services
Treasury
Services
•
•
Improvement and
Automation of
Treasury and
Finance Processes
Asset Based
Lending Facilities
(ABL) Set-up,
Automation and
Maintenance
Treasury and
Cash
Management
Functions
•
System Support
•
Process Design
•
Report
Management
•
Quality
Assurance
•
System
Assessment
•
Middle Tier
Administration
•
Database
Support
•
System
Forensics/Root
Cause Analysis
•
Middle and Back
Office
processing
Financial Analysis
Page 23

24. Regulatory Compliance Risk Mgmt. Services
Dodd Frank & CFTC Final Rules
Trade Monitoring Service
All aspects of CFTC Final Rules implementing Dodd Frank, including:
• Reporting requirements under Parts 43, 45, and 46 and LTR Part 20
• Business Conduct Standards (Internal and External)
• Confirmations, Portfolio Reconciliation, Portfolio Compression, and
Swap Documentation Standards
• Whistleblower Provisions
• End User Exception to Clearing
• Commodity Options
• Chief Compliance Officer duties
• Prohibition on Manipulation
• SD Registration and de-minimis calculations
• WG SMEs review our client’s trading activity against a variety of
Scenarios to identify potential areas of exposure for further
investigation
Services include:
• Explaining the requirements and validating the specifications
• Training applicable personnel on the Rules and the resulting
Policies, Procedures and Manuals
• Providing IT and business process support, including coding,
mapping and source system modifications
• Performing gap analyses, measuring current practices against the
requirements, and recommending solutions for closing those gaps
• Drafting Policies, Procedures and Manuals tailored to the client’s
commercial profile and internal controls
• Proposing monitoring activities to ensure compliance and prevent
evasion of the CEA and CFTC regulations.
• Reviews and testing
As of September 2013
• WG SMEs have designed the Scenarios and coded the logic
within its monitoring tools, and use these tools to analyze the
client’s trades and trading patterns
• These Scenarios incorporate the factors that underlie many of
the violations described in enforcement actions and
experienced by WG SMEs during our industry practice
• The basis of the approach is identifying trading anomalies
based on patterns of behavior, activities and market
movements , and applying the knowledge and experience of
WG SMEs to highlight targeted high risk activities for mitigation
• It is a robust, secure and cost effective approach that supports
our client’s efforts to take reasonable steps to prevent and
detect non-compliant activity, thus effectively mitigating the
risk of violations while satisfying Regulatory expectations
Page 24

25. Let’s Stay in Touch
Tim McKone
David Stephan
Dan Masch
David McIlrath
Managing Director,
Risk, Systems & Compliance
DStephan@wgconsulting.com
C: 713.359.6483
Director,
Regulatory Compliance
TMcKone@wgconsulting.com
C: 713.962.5586
Managing Director,
Trading and Risk Management
DMcilrath@wgconsulting.com
C: 713.517.1807
Director,
Regulatory Compliance
DMasch@wgconsulting.com
C: 832.863.6659
James Yu
Managing Director,
Trading & Risk Management
JYu@wgconsulting.com
C: 832.603.1572
www.wgconsulting.com
WG Consulting, LLC
@thewgcpromise
WG Consulting
WG Consulting 1415 Louisiana, Suite 3450 Houston, TX 77002
Page 25