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CFTC Moves to Protect Energy End-Users From 'Unintended Consequences' of Dodd-Frank

The Commodity Futures Trading Commission (CFTC) has taken action on three issues that Chairman Mark Wetjen said will have a lasting impact on energy-end users that may have fallen victim to "negative, unintended consequences" of the Dodd Frank Financial Reform Act.

In April, energy industry representatives at a CFTC public roundtable told the agency that a previously approved swap product definition rule needed to be clarified or repealed (see Daily GPI, April 3; July 11, 2012). In announcing the CFTC actions last week, Wetjen made it clear that the agency is listening to the industry.

"These proposals collectively reflect our continuing efforts to ensure that market regulations accomplish their intended function without creating negative, unintended consequences, in particular for commercial end-users,” Wetjen said. CFTC took actions to benefit utility special entities, further consider certain hedging practices for commercial market participants, and promote end-user trading on swap execution facilities (SEF) and designated contract markets (DCM).

In its first action, CFTC issued a proposed rule amendment to adjust the de minimis threshold for determining if an entity that enters into swaps with utility special entities must register as a swap dealer. The proposal would amend CFTC's swap dealer definition to permit an person dealing in "utility operations-related swaps" with "utility special entities" to exclude those swaps in determining whether that person has exceeded the de minimis threshold specific to dealing with special entities. But such swaps would be counted for determining whether the general dealing de minimis threshold applies. The public comment period on the proposed rule amendment will close 30 days after the proposal's publication in the Federal Register.

In March, CFTC said it would provide no-action relief from certain requirements in the exception from the definition of the term "swap dealer," a decision that excludes utility operations-related swaps from the calculation of the de minimis threshold (see Daily GPI, March 24). The no-action relief allows entities to deal in utility operations-related swaps and not be required to register as swap dealers, provided that the aggregate gross notional amount of swap dealing activity doesn't exceed $8 billion per year, CFTC said.

CFTC has scheduled a public roundtable to discuss position limits for physical commodity derivatives from 9:30 a.m. to 3:30 p.m. Thursday, June 19, at the agency's headquarters in Washington, DC. The roundtable will focus on hedges of physical commodities by commercial enterprises, including gross hedging, cross-commodity hedging, anticipatory hedging, and the process for obtaining a non-enumerated exemption.

"In order to provide interested parties with an opportunity to comment on the issues to be discussed at that roundtable, the Commission is opening comment periods for two previous proposals, the Position Limits Proposal and the Aggregation Proposal, for a three-week period starting June 12, 2014 (one week before the roundtable) and ending July 3, 2014 (two weeks following the roundtable)," CFTC said.

The Commission asked market participants to comment on hedges of a physical commodity by a commercial enterprise, including gross hedging, cross-commodity hedging, anticipatory hedging, and the process for obtaining a non-enumerated exemption; the setting of spot month limits in physical-delivery and cash-settled contracts and a conditional spot-month limit exemption; the setting of non-spot limits for wheat contracts; the aggregation exemption for certain ownership interests of greater than 50 percent in an owned entity; and aggregation based on substantially identical trading strategies.

And in an effort to incentivize trading on SEFs and DCMs, the CFTC's Division of Swap Dealer and Intermediary Oversight and Division of Market Oversight issued a no-action letter that provides relief with respect to compliance with certain recordkeeping provisions of Regulation 1.35(a) to members of designated contract markets or swap execution facilities that are not registered or required to be registered with the Commission. The letter provides relief, pending further CFTC action, to covered members with respect to complying with requirements to keep electronic text messages and to keep records in a form and manner identifiable and searchable by transaction.

"Today marks a significant victory for the end-user community and for the Commission's rulemaking process," said Commissioner Scott O'Malia. "End-users will win today, with the proposal fixing the special entity rule and further relief from rule 1.35, which applied unworkable and costly recording requirements. The relief will remain effective until the Commission revisits the rule to appropriately tailor the rule's requirements to the relevant entities and more carefully consider the costs and technological feasibility of compliance with the rule. I am pleased that the Commission has chosen to confront the shortcomings in its rules by using the proper process that is consistent with the Administrative Procedure Act."

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