1

Meeting with the 

CFTC on the 

Implementation 

of the 

Dodd-Frank Act 

November 15, 2010
2

Topics Slide

Dodd-Frank Legislative Background 3

Peabody Background 5

Peabody’s Hedging Activities 7

Dodd-Frank Issues for Discussion 9

Major Swap Categories 10

Swap Dealers 11

Major Swap Participants 13

Potential Impacts and Summary 14

Appendix 15

Table of Contents
Introduction

● Peabody Energy Corporation is a producer and supplier of coal and 

an End User of swaps to hedge commercial risks

● Peabody supports Congress‘s goal of preventing systemic risk

● Peabody hopes that its information will be of assistance to the 

Commission and its Staff in their efforts to develop rules that will 

achieve the legislative objectives of the Dodd-Frank financial 

reform legislation

3

Peabody thanks the Commission for the opportunity to discuss 

the use of swaps in the coal industry
Introduction

● Dodd-Frank principally focuses on establishing a 

regulatory regime for major swap participants and 

swap dealers 

● Congress also carefully crafted the law so that it should 

not diminish or impede the current ability of commercial 

businesses to use swaps to hedge and mitigate their 

commercial risks

4

Dodd-Frank’s primary purpose with respect to derivatives is to 

reduce systemic risk in the financial markets, increase 

transparency and promote market integrity
Peabody Energy: 127 Years Strong

● The world‘s largest private-sector coal company supplying the 

world‘s thermal and steel markets

● Headquartered in St. Louis, Missouri

● Majority interest holder in 28 coal mining operations located in the 

U.S. and Australia

● Currently controls approximately 9 billion tons of coal reserve

● Customers on six continents

● Employs approximately 5,600 in U.S.; 7,000 globally

● Known for safety, productivity and environmental excellence

● Coal mining business dates back to 1883
6

Peabody’s Global Portfolio

Dominion

Terminal

Dalrymple Bay

Newcastle

NCIG

Brisbane

Venezuela

Santa Cruz

Port Kembla

Gladstone

London

Beijing

St. Louis

Export terminal

Mongolia

Singapore

Jakarta

Tons in millions. 2009 sales volumes for consolidated results. Reserves are 2009 proven and probable. 

Peabody’s business operates in 3 primary segments: U.S. mining, 

Australian mining, and coal trading

X

Trading/Business 

Development Offices

Brisbane St. Louis

Newcastle Beijing

London Singapore

Ulaanbaatar Jakarta

Mining Operations

Position Sales Reserves

Wyoming PRB #1 137 3,015

Midwest #1 32 3,566

Colorado #1 8 240

Southwest #1 15 1,120

Australia #5 22 1,074
● Peabody uses futures, options, and swaps to hedge the commercial 

risks associated with its principal business of coal production 

including:

– Coal and transportation price risks

– Coal derivatives

– Freight derivatives

– Fuel price risks associated with mining

– U.S. domestic crude and diesel derivatives

– Singapore diesel and heavy oil derivatives

– Production mining costs associated with explosives

– U.S. natural gas derivatives

– Foreign exchange risks associated with Australian production costs 

– Foreign exchange derivatives 

– Interest rates

– Interest rate derivatives

7

Peabody, like other producers and manufacturers, is an End User 

and hedges its revenue opportunities and production costs with 

futures, options, and swaps

Peabody Corporate Hedging Activities
● Peabody trades physical coal and derivatives domestically and internationally by: 

– Purchase and resale of physical coal from and to 3rd parties

– Purchase and sale of coal futures, options, and swaps contracts to manage price 

risk

– Purchase and sale of ocean-going freight and related freight futures and swaps to 

manage transportation cost risks

● Peabody‘s U.S. based coal trading business uses physical and financial contracts

– U.S. based traders transact against U.S. market indices

– Counterparties are other coal producers, electric utilities, financial institutions, 

and large trading firms

– Currently, all futures and swaps with non-affiliates are cleared

● Peabody‘s International based coal trading business uses physical and financial 

contracts

– Traders based outside of U.S. transact against international indices

– Counterparties are coal producers, electric utilities, financial institutions, and large 

trading firms

– Currently, the vast majority of futures and swaps with non-affiliates are cleared

8

Peabody’s coal trading primarily uses futures, options, and 

swaps to manage commercial risks associated with buying, 

selling, and delivery of coal

Peabody does not act as an intermediary for financial derivatives

Peabody Coal Trading
● Coal is primarily a long term fixed price physical market 

with de minimis financial swap trading and therefore is 

not a Major Swap Category

● Define Major Swap Participants and Swap Dealers to 

distinguish them from commercial producers, 

recognizing that such commercial producers:

– Use swaps to hedge and mitigate commercial risks, and 

– Are in commodity markets that pose no threat to the U.S. 

Financial System

● Provide End User exemption from margining for hedging 

activity

9

Dodd-Frank Issues for Discussion
Coal is not a Major Swap Category

● The financial coal markets are de minimis as evident by the sum total of coal futures, 

options, and swaps representing:

– Less than .001% of the notional $600+ trillion OTC derivative market

– Less than .01% of contract volume of the cleared futures, options, and swaps market

– Less than .02% of contract open interest of the cleared futures, options and swaps market

– Less than .05% of contract interest of the cleared energy futures, options and swaps market

Cleared Market Open Interest - October 31, 2010

-

10

20

30

40

50

60

Energy 

Interest Rate 

Commodities

Equity Index 

Metals 

FX 

Weather 

Coal # Open Contracts (millions)

19,000

.02% *All data and computations on this page are estimates based on information publicly furnished by CME and Bloomberg

Coal futures, options, 

and swap trading 

activities are not 

material enough to 

impact the U.S. 

Financial System

Almost all actively 

traded domestic coal 

swaps are cleared

Major Swap Category

10
11

Entities that use swaps to actively manage price risks associated 

with production, sales, and transportation logistics of their 

businesses can often be active in markets. However, that alone 

should not elevate them to a “Swap Dealer.”

Characteristics Peabody

Swap 

Dealers

Actively participates in swap 

markets P P

Uses swaps to manage price 

risk P

Holds itself out as a market 

maker/professional 

intermediary for swaps

P

Runs a business to make 

money from the bid/ask spread 

through matched swap books

P

Creates, designs, or sells swap 

products P

Advises others with respect to 

swaps

P

Swap Dealers
Suggested Swap Dealer Definition

● The definition of ―Swap Dealer‖ should exclude an End 

User‘s swap activity for itself or an affiliated entity:

– For the purpose of hedging or mitigating commercial risks 

associated with the use, purchase, sale, growth, mining, 

extraction, transporting, processing, storage, merchandizing or 

production of non-financial commodities, or 

– That constitutes a de minimis quantity of swap dealing, i.e., 10% 

or less of the notional value of its swap transactions per swap 

category

12

We respectfully submit a proposed definition of 

“Swap Dealer” in the Appendix
Major Swap Participant

13

Dodd-Frank defines “Major Swap Participant” as a person who maintains a 

substantial position in a Major Swap Category AND whose outstanding 

swaps create substantial counterparty exposure that could have serious 

adverse effects on the financial stability of the U.S.

We respectfully submit a proposed definition of 

“Major Swap Participant” in the Appendix

Characteristics Peabody

Major Swap 

Participant

Actively participates in swap 

markets P P

Is not a Swap Dealer P P

Uses swaps to manage price 

risk P P

Maintains a substantial position 

in a Major Swap Category P

Creates substantial 

counterparty exposure that 

could have serious adverse 

effects on the U.S. financial 

stability

P
Potential Impacts and Summary 

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POTENTIAL IMPACTS OF OVER-INCLUSIVE DEFINITIONS

● Additional margining, clearing, and reporting requirements for swaps used 

by Peabody and those like it to hedge commercial risk may:

– Allocate scarce capital and resources away from re-investment in the 

coal mining business

– Slow job creation in the energy industry and related services

IN SUMMARY 

● Coal is primarily a long term fixed price physical market with de minimis 

financial swap trading and therefore is not a Major Swap Category

● Peabody and others that actively participate in swap markets (i) but are not 

market makers, (ii) do not run matched swap books, (iii) do not advise 

others on swaps, (iv) nor design swap products for others are not Swap 

Dealers

● Those whose positions in case of default that do not rise to the level of 

severely impacting U.S. Financial Markets are not Major Swap Participants

● End User exemption should protect companies that use swaps to hedge 

commercial risk because End Users do not pose a systemic risk

We ask the CFTC to consider Peabody’s proposed definitions 

for Major Swap Category, Swap Dealers, and Major 

Swap Participants set out in the Appendix
Proposed Definitions for Major Swap Category, 

Swap Dealer, Major Swap Participant

15

Appendix 
Definition of “Major Swap Category”

―Major swap category‖ as used in the definition of ―Major Swap 

Participant‖ in Section 1a(33) of the Act is defined to mean each 

swap based upon or involving any of the following specific categories 

of commodities:

1. Interest rates,

2. Credit risk or measures,

3. Security or security indices,

4. Index or measure of inflation,

5. Macroeconomic index or measure,

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6. Gold,

7. Silver,

8. Crude oil, 

9. Natural Gas,

10.Gasoline, and

11.Electric Power.
Definition of “Swap Dealer”

(1) Any person who, as a discrete and primary line of business

(i) holds itself out as a dealer in swaps;

(ii) regularly makes a market in swaps, that is, simultaneously and continuously at all times makes bids to buy and 

offers to sell the same swap or swaps for the principal purpose of profiting from the prevailing bid/ask spread and 

with the intention of promptly offsetting risk exposure from any executed transactions;

(iii) regularly enters into swaps for its own account on behalf of or for the benefit of non-affiliated counterparties as 

an ordinary course of business; or

(iv) engages in any activity causing the person to be commonly known in the trade as a dealer or market maker in 

swaps,

provided however, in no event shall an insured depository institution be considered to be a swap dealer to the 

extent it offers to enter into a swap with a customer in connection with originating a loan with that customer.

(2) INCLUSIONScope.A person may be designated as a swap dealer for a single type or single class or 

category of swap or activities and considered not to be a swap dealer for other types, classes, or categories of 

swaps or activities.

(3) EXCEPTIONExceptions.The term  ̳swap dealer‘ does not include a person that–

(i) enters into swaps for such person‘s own account, either individually or in a fiduciary capacity, but not as a part 

of a regular business,

(ii) engages in a de minimis quantity of swap dealing (where such constitutes 10% or less of the notional value of 

its swap transactions in any swap category), or 

(iii) enters into swaps for such person‘s own account, either individually or for an affiliated entity, in order to 

manage commercial risks associated with the use, purchase, sale, growth, mining, extraction, transporting, 

processing, storage, merchandizing or production of non-financial commodities.

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Definition of “Major Swap Participant”

The term  ̳major swap participant‘ means any person who is not a swap dealer, and:

(1) Maintains a substantial position in swaps for any of the major swap categories as determined by the Commissiondefined in [insert 

reference to regulation defining major swap categories] , and whose outstanding swaps create substantial counterparty exposure that 

would create a risk of serious adverse effects on the financial stability of the United States banking system or financial markets if the 

person were to default, after giving effect to any applicable notice requirement or grace period, in making any payment on or delivery 

due under all of such swaps on the same day and such default resulted in a liquidation of, an acceleration of obligations under, or an 

early termination of, all transactions under the documentation applicable to all such swaps; provided that the substantial position for 

purposes of this paragraph ( )(1) shall excludinge—

(i) Positions held for hedging or mitigating commercial risk; and

(ii) Positions maintained by any employee benefit plan (or any contract held by such a plan) as defined in paragraphs (3) and (32) of 

section of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002) for the primary purpose of hedging or mitigating any 

risk directly associated with the operation of the plan; or

(ii) Whose outstanding swaps create substantial counterparty exposure that could have serious adverse effects on the financial stability of the 

United States banking system or financial markets; or

(2)(i) Is a financial entity that is highly leveraged relative to the amount of capital it holds and that is not subject to capital requirements 

established by an appropriate Federal banking agency; and

(ii) Maintains a substantial position in outstanding swaps in any major swap category as determined by the Commissiondefined in [insert 

reference to regulation defining major swap categories].

(B) DEFINITION OF SUBSTANTIAL POSITION.—For purposes of subparagraph (A), the Commission shall define by rule or regulation the term 

 ̳substantial position‘ at the threshold that the Commission determines to be prudent for the effective monitoring, management, and 

oversight of entities that are systemically important or can significantly impact the financial system of the United States. In setting the 

definition under this subparagraph, the Commission shall consider the person‘s relative position in uncleared as opposed to cleared 

swaps and may take into consideration the value and quality of collateral held against counterparty exposures.

(3) SCOPE OF DESIGNATIONScope.—For purposes of subparagraph (A), aA person may be designated as a major swap participant for 1 or 

more categories of swaps without being classified as a major swap participant for all classes of swaps.

(4) EXCLUSIONS—The definition under this paragraph (xxx) shall not include an entity –

(i) wWhose primary business is providing financing, and uses derivatives for the purpose of hedging underlying commercial risks related to 

interest rate and foreign currency exposures, 90 percent or more of which arise from financing that facilitates the purchase or lease of 

products, 90 percent of more of which are manufactured by the parent company or another subsidiary of the parent company; or

(ii) enters into swaps for such person‘s own account, either individually or from an affiliated entity, in order to manage commercial risks 

associated with the use, purchase, sale, growth, mining, extraction, transporting, processing, storage, merchandizing or production of 

non-financial commodities.

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19

Meeting with the 

CFTC on the 

Implementation 

of the 

Dodd-Frank Act 

November 15, 2010