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CFTC Finalizes Exception for Swaps with Utility Special Entities

The Commodity Futures Trading Commission (CFTC) last week released a final rule excluding certain electricity and natural gas swaps with governmental agencies and municipalities from the lower de minimis threshold for swaps with special entities.  The rule makes permanent currently existing no-action relief previously issued by CFTC Staff.  The final rule is the result of a petition filed by advocates for public energy companies claiming that subjecting swap transactions with governmental entities to a lower de minimis threshold would reduce the number of available counterparties, raise market liquidity concerns and make it more difficult for public energy companies to mitigate risk.  To address these concerns the CFTC will allow certain swaps with special entities to be counted as regular swaps for purposes of swap dealer registration.

Under the Commodity Exchange Act and the CFTC’s regulations, an entity is exempt from registration as a swap dealer if the aggregate notional value of the swaps it entered into during the preceding 12 month period does not exceed the de minimis threshold of $3 billion (subject to a phase-in level of $8 billion).  However, for swaps with special entities—federal or state agencies, municipalities, employee benefits plans, governmental plans and endowments—the de minimis threshold is only $25 million.  As a result, companies entering into swaps with special entities have to be aware of their counterparty’s special entity status and take care not to exceed the substantially lower de minimis threshold.

The CFTC’s new rule creates an exception to the $25 million special entity threshold, so that “utility operations-related swaps” entered into with “utility special entities” are subject to the general $3 billion de minimis threshold.  To qualify for the exception the swap must be with a special entity that owns or operates electric or natural gas facilities; associated with the generation, production, purchase or sale of electricity or natural gas; and for the purpose of hedging or mitigating commercial risk.  In explaining why the exception is necessary, the CFTC recognized that utility special entities have unique responsibilities to provide electricity or natural gas services that must be continuous and are important to public safety.  The CFTC also acknowledged that utility special entities often conduct swaps in localized and specialized markets, and the lower de minimis threshold could limit the number of willing counterparties to these important risk mitigation transactions.  The new rule treats utility special entities similarly to non-governmental entities and will reduce regulatory barriers to transacting with special entities.  The rule will become effective October 27, 2014.




CFTC’s Dodd-Frank Rulemaking: Still a Work in Progress

by Robert Lamkin

The Dodd-Frank Act was signed into law more than two years ago, but the energy industry remains mired in uncertainty as the U.S. Commodity Futures Trading Commission (CFTC) continues to finalize inter-related rules in a piecemeal fashion even as compliance obligations have taken effect. At least 14 proposed rulemakings (see table below) have yet to be finalized due to pending resolution on comments and petitions, and the CFTC is still sitting on proposed orders and petitions. In a joint filing, leading associations for the electric and natural gas industries requested a stay of the application of the rules because of the uncertainty caused by the Commission’s implementation schedule. On the first day of compliance, the CFTC provided limited relief through a number of no-action letters, but the request for a more comprehensive stay has been ignored. Below are some of the key proceedings for the energy industry.

Major industry trade associations petitioned the CFTC to exclude certain energy-related swaps with “Special Entities” (government entities, such as state agencies) from being included in the calculation of the de minimis threshold for Swap Dealer registration. The trade associations argued that the low threshold amount for swaps with Special Entities would decrease the number of potential counterparties to the swaps and raise costs. 

While the CFTC has not acted on that petition, the CFTC did issue no-action relief on October 12 to companies who remain under a threshold of $800 million for swaps with “Utility Special Entities” (special entities that are Federal power marketing agencies or that own/operate electric or natural gas facilities with public service obligations under Federal, state or local law), up from the rule’s $25 million threshold applicable to swaps with all Special Entities. To rely on the no-action relief, entities must provide notice of the exemption election to the CFTC by December 31, 2012, and thereafter on a quarterly basis, along with a list of relevant transactions. The CFTC’s no-action relief will remain in effect until the CFTC acts on the petition.

The energy industry has also been waiting for a final determination from the CFTC that energy products traded in FERC-recognized regional transmission organization (RTO) and independent system operator (ISO) markets will be exempt from CFTC regulation (other than provisions relating to the CFTC’s general anti-fraud, anti-manipulation and enforcement authority). In August, the CFTC published a proposed order that would exempt certain energy transactions, forward capacity transactions, financial transmission rights (FTR) transactions and certain other ISO/RTO transactions in FERC-recognized wholesale markets, including CAISO, PJM, NYISO, ISO-NE, MISO and ERCOT. The CFTC has not finalized the proposed order, but it did provide temporary relief on October 11, issuing a no-action letter for these energy products, which will remain in place until the earlier of the date the CFTC acts on the proposed order or March 31, 2013.

The CFTC issued additional no-action relief to provide for the Intercontinental Exchange’s (ICE) transition of all ICE swap products to CFTC-regulated futures. ICE announced in September that all of its cleared over-the-counter (OTC) [...]

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