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FYI
---------------------- Forwarded by Martin Rosell/OSL/ECT on 04/10/99 11:59 --------------------------- Martin Rosell 04/10/99 12:59 To: Magnus Groth/OSL/ECT@ECT, Brynjar Wiersholm/OSL/ECT@ECT, Jan-Erland Bekeng/OSL/ECT@ECT, Didrik Thrane-Nielsen/OSL/ECT@ECT, Frank Overli/OSL/ECT@ECT, Morten E Pettersen/OSL/ECT@ECT, Bjarne Schieldrop/OSL/ECT@ECT cc: Matthew Landy/LON/ECT@ECT, Tomas Valnek/LON/ECT@ECT Subject: Deliberations of the Norwegian Commodity Derivatives Committee Please find attached a summary in English of the deliberations of the above Committee (Section 1.4 of its report). Currently, dealing in or otherwise offering investment services related to commodity derivatives is unregulated in Norway. From the report released by the Committee, it should be noted that it: (1) proposes to make market making and dealing in, and portfolio management services relating to, commodity derivatives subject to (i) the licensing requirements set forth in the Norwegian Securities Trading Act (Verdipapirloven) (the "Act") and (ii) the supervision of the Norwegian Credit Supervision (Kredittillsynet) (the "Supervision"); (2) proposes that entities engaged or anticipating to engage in the marketing of investment services in Norway solely relating to commodity derivatives (and no other financial instruments) - referred to as "commodity derivatives companies" (verdipapirforetak) by the Commission - are to apply for a limited licence for that particular activity; (3) points out that an ISD licence may not be relied upon by entities that desire to market investment services in Norway relating to commodity derivatives; (4) proposes that the dealing in commodity derivatives in Norway is to be carried out from a Norwegian public or private limited liability company unless carried out from an EU/EEA entity (non-EU/EEA entities (such as ECTRIC) will have to apply for a special governmental permit); (5) proposes that the provisions of the Act are to be made generally applicable to investment services in Norway relating to commodity derivatives (unless otherwise is specified in the Act); (6) proposes to expand the close-out netting provisions of the Act to also cover positions in commodity derivatives; and (7) holds that the provisions of CAD I (as implemented) and CAD II (to be implemented) should not automatically be made applicable to (non-ISD) commodity derivatives firms but that the Supervision should be given a mandate to impose the said provisions on individual entities. The legal technique proposed by the Commission to accomplish the foregoing is an expansion of the definition of "financial instrument" in the Act to also include commodity derivatives (whereby the Act will become generally applicable to commodity derivatives operations). It should be noted, however, that the Commission suggests that only cash- or physically-settled future and option contracts in commodities which are "marketable" in nature should be deemed "financial instruments" under the Act. The Commission sets out a few criteria to determine when a commodity derivative should be considered marketable, Among other things, the Commission points out that the fact that a derivative contract is not freely transferable should not by itself be determinative in this respect. Instead, it holds that standardised instruments and instruments traded on a market place should be viewed as marketable; as should also cash-settled commodity derivatives while contracts intended to lead to a physical settlement should not. In my view, this unnecessary complicated approach may lead to difficulties in determining whether a particular commodity derivative falls within or outside of the scope of the regulations proposed by the Committee. Most importantly, it may serve to offer a bankruptcy trustee a needless opening to question whether derivatives, for which there exist no liquid market (longer-term deals, temperature deals, etc.), should be made part of any close-out netting arrangement. Lastly, it should be stressed that the Commission's report is not a bill presented to Parliament. Whether it'll lead to legislation remains to be seen. The position will be monitored. Martin
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