1.  When Worlds Collide: Structured Products and Financial Transactions in Today’s  Energy Markets Tuesday, May 8, 2018

2. Moderator: S Diane Neal, Faculty, University of Houston Center for Law
Panelists: Ricardo Alicea, Vice President, Associate General Counsel, Goldman Sachs
Edwin Nazario, Counsel, Reed Smith
Stephen Smith, Jr., Director - Commodity Structuring, Wells Fargo Securities
Vanessa Tanaka, Counsel, Willkie Farr & Gallagher

3. Derivatives Transactions Prior to Master Agreements
With respect to the over the counter (OTC) derivatives market, prior to the formation of the International Swaps and Derivatives Association Inc. (ISDA) there was no standard documentation
Agreements were bespoke and terms varied between deals
Transaction costs were high
Lack of uniformity in legal terms led to uncertainty in the event of bankruptcy, litigation, etc.
Energy sector also lacked master agreements and faced similar challenges in connection with physical trading of power, gas and crude oil

4. History of Selected Derivatives Documentation
Evolution of Derivatives Documentation
ISDA Master Agreement
ISDA formed in 1985
In 1987 ISDA published the Interest Rate and Currency Exchange Agreement which covered multiple currencies and had cross border application; covered interest rate swaps as well as currency swaps
ISDA also published first definitions in 1987
In 1992 the 1987 agreement was revised to account for changes in market practice and changes in various laws

5. History of Selected Derivatives Documentation (cont’d)
ISDA published the New York law governed Credit Support Annex (CSA) in 1994, which grants a security interest to secured party
ISDA published the English law governed CSA in 1995, which transfers title in collateral to the party receiving the collateral
In 2002 ISDA published the 2002 ISDA Master Agreement, which accounted for various changes in law, inclusion of concepts like Force Majeure and changes in market practices
In 2005 ISDA published the ISDA Commodity Definitions
Protocols allow for multi-lateral adherence to amendments that address Dodd Frank, Mandatory Margin, Resolution Stay and other issues

6. History of Selected Derivatives Documentation (cont’d)
Edison Electric Institute (EEI) Master Agreement
In January 1999, a group of more than 80 market members created a working group to draft the EEI Master Agreement for trading power
The most recent was published on April 25, 2000
North American Energy Standards Board (NAESB) Agreement
Gas Industry Standards Board (GISB) Base Contract for Short Term Sale and Purchase of Natural Gas was created in 1996
Was the precursor for the NAESB Agreement
NAESB Base Contract for Sale and Purchase of Natural Gas was created in 2002 and updated in 2006

7. History of Selected Derivatives Documentation (cont’d)
Leadership for Energy Automated Processing (LEAP)
LEAP was formed in 2006 by a working group consisting of oil companies, banks and commodity companies for the purpose of creating a standardized form for the trading of domestic crude
The LEAP Master Agreement has since been revised to include transactions in Canada (if elected by the parties). Covers trading of crude oil, refined products, natural gas liquids, and/or liquefied petroleum gas (as elected by the parties)
The most recent version was published in 2015 (Version 3.0)

8. Current State of Documentation
Currently there are several Master Agreements across Product/Commodity types
ISDA Master Agreement (1992; 2002) (Multiple commodities)
EEI Master Agreement (Power)
NAESB Agreement (Natural Gas)
WSPP Agreement (Power)
Gas Electronic Data Interchange Agreement (EDI) (Gas)
LEAP Master Agreement (Oil)

9. Current State of Documentation
General Terms and Conditions (GTC’s)
Typically large market players publish and distribute their own GTC’s for use in their physical trades with counterparties
Level of use may not be as widespread as compared to some of the master agreements above
However, certain GTC’s are often used and provide a degree of certainty in the marketplace (e.g. Conoco GTC’s for the trading of crude oil)
Bespoke Agreements/Long Form Confirmations
Extremely tailored to particular deal
Can contain unique provisions not typically encountered in the general market

10. Standard Trading Documentation – Benefits
Reduced negotiation costs and time
Master Agreement and all transactions thereunder treated as a single agreement (allows setoff against a bankrupt counterparty)
Framework for all transactions between two parties (single commodity or different commodities)
Manages Legal Risk, for example:
Inadequate documentation
Counterparty lacks authority
Transaction not permitted by applicable law
Insolvency laws limit or alter contractual remedies
Tested documentation, e.g., ISDA enforceability opinions, bankruptcy precedent

11. Standard Trading Documentation – General Structure
ISDA Master Agreement
Preprinted form does not change
Schedule for making elections and amendments
Credit Support Annex follows same structure (preprinted & “paragraph 13”)
Product Annexes (Power, Gas, Oil, Emissions)
Definitions and other modifications may be added in a Confirmation (e.g., confirmations for complex/structured transactions)

12. Standard Trading Documentation – Provisions
Transaction Procedures;
Reps & Warranties;
Cover Costs/Liquidated Damages;
Payment Netting;
Events of Default;
Termination Remedies;
Force Majeure;
Credit;
Governing Law

13. Standard Trading Documentation – Challenges
Requirements for Qualified Financial Contracts
Credit: Initial Margin; Variation Margin; Letters of Credit; Adequate Assurance of Performance
Cease to be a Lender
Setoff/Lehman Bankruptcy
Gap Risk

14. Structured Transactions
May be documented using standard trading documentation
May contain elements of:
Financing
Credit intermediation
Basis Risk Management

15. Structured Transactions
Supply & Offtake Arrangements (oil)
Asset Management Agreements (gas)
Proven Reserves/VPPs (hydrocarbons)
Physical/financial prepays (power/gas)
Repos (oil, refined products)
Renewables (power)

16. Legal / Documentation Considerations
Loan-like provisions (UCC lien filings; covenant package)
True Sale of Goods / Recharacterization Risk
Netting
Violation of Lending Covenants (Negative covenants on debt, liens, ordinary course sale of goods, hedges)
Certainty of standardized docs (e.g., BK risk) vs. bespoke

17. Additional Considerations
Accounting;
Credit;
Compliance/ Regulatory
Sanctions
Money Laundering
Bribery
Internal Booking (Policies and Systems);
Legacy systems
Operational risks / manual vs. automated procedures
Internal Committee Approval;
Tax; and
Treasury/Finance

18. Structured Products and Financial Transactions in Today’s  Energy Markets
Questions?