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CFTC Offers No-Action Relief on 'Swap Dealer' Definition Exceptions

The Commodity Futures Trading Commission's (CFTC) Division of Swap Dealer and Intermediary Oversight in a letter released Friday 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.

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.

The letter came in response to a July 2012 filing by a quintet of energy industry groups that asked for a narrow exclusion from swap dealer rules that were released two years ago (see Daily GPI, July 16, 2012; April 19, 2012).

"Under these rules, government-owned electric and gas utilities would see their ability to hedge against operational risks substantially hindered," according to the petition filed by the American Public Power Association, the Large Public Power Council, the American Public Gas Association, the Transmission Access Policy Study Group and the Bonneville Power Administration. "Under the exclusion being sought, government-owned utilities' swap transactions related to hedging the commercial risks of utility operations would not count toward the rule's de minimis threshold for swap dealing activity with special entities."

Commissioner Scott O'Malia called the relief "a step in the right direction to address the impact on certain utilities that are special entities that were inadvertently caught up" in the wake of CFTC rules.

"Although my preferred approach would be to address this issue through a rulemaking that is subject to the Administrative Procedure Act, I appreciate the Commission staff's effort to address some of the concerns that these entities have raised with the Commission. If the Commission is serious about helping end-users, I challenge the Commission to complete a new rule before the second anniversary of the petition seeking an amendment of Commission regulation."

The letter provides temporary no-action relief while CFTC considers the issues that were raised in the energy industry group's petition.

Defining terms in regulations promulgated under the Dodd-Frank Wall Street Reform and Customer Protection Act, including "swap dealers" and "major swap participants," has been a bone of contention at CFTC for years (see Daily GPI, Sept. 21, 2012; April 17, 2012; Feb. 22, 2012; Feb. 16, 2012; Dec. 20, 2010; Dec. 2, 2010).

Two major Dodd-Frank Wall Street regulatory reforms -- real-time reporting of swap transactions and swap dealer registration -- started in January 2013 (see Daily GPI, Jan. 4, 2013). In May, six West Coast senators said they were "increasingly concerned" that the $8 billion annual de minimis threshold exemption in the Dodd-Frank rules would allow the vast majority of the energy swap market to fly under the regulator's radar (see Daily GPI, May 21, 2013). They asked CFTC to consider modifying its interpretation of Dodd-Frank’s swap dealer definition "to ensure that the vast majority of energy swaps trading is under the oversight of the Commission."

But a coalition of five energy associations -- the American Gas Association, Independent Petroleum Association of America, Electric Power Supply Association, Edison Electric Institute and the National Rural Electric Cooperative Association -- urged CFTC not to lower the $8 billion de minimis threshold of swap dealing activity (see Daily GPI, June 12, 2013).

The threshold initially started at $100 million when the CFTC approved the proposed rule on swap dealers. If that had been approved, a greater number of market participants would have been classified as swap dealers and become subject to the Dodd-Frank requirements.

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