Updated: What Does “Hedge or Mitigate Commercial Risk” Mean? How Will Energy Producers and Consumers Prove They Are “Commercial End Users” Under the Dodd-Frank Act?

09/05/2012

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or the “Act”) attempts to sort through the energy trading and hedging market to protect “commercial end users” from new regulatory burdens intended for trading firms and financial institutions. The objective is to separate the large number of companies that use swaps like insurance to manage fluctuating prices on the one hand, from the small number of sophisticated energy traders and financial institutions, who would bear the brunt of the new regulation, on the other. An important criteria used by the statute and proposed regulations is whether a potential commercial end user’s swaps act to “hedge or mitigate commercial risk.” The statute and final rules have a number of tests and reporting requirements to determine whether swaps “hedge or mitigate commercial risk,” which rely on legal, accounting and financial concepts.

This paper examines these concepts, and updates the legal analysis from a prior version of this paper dated February 24, 2012. To read the full paper, click on the PDF linked below.

PDF - Updated-Hedging-or-Mitigating-Commercial-Risk-paper.pdf

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