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.