The Commodity Futures Trading Commission (CFTC) should issue a list of the kind of natural gas and electricity contracts and transactions that are excluded from the definition of “swaps,” the general counsel for FERC said.
“This type of list would help provide regulatory certainty in the energy industries,” wrote the Federal Energy Regulatory Commission’s (FERC) Michael Bardee in a recent letter to the CFTC. “If the CFTC chooses to adopt a list of excluded commercial merchandising agreements involving electricity and natural gas, it should be made clear that the list is not intended to be exhaustive and comprehensive.”
Bardee’s comments were in response to the CFTC’s proposed rule in April in which the agency sought to define swap products as required by the Dodd-Frank Wall Street Reform Act (see Daily GPI, April 28). Significantly for the energy markets, the notice of proposed rulemaking (NOPR) excluded forward contracts in nonfinancial commodities from the swaps definition. The CFTC has yet to issue a final rule defining swaps.
In the NOPR, “the CFTC provides guidance on the applicability of the exclusion from the definition of the term ‘swap’ under CEA [Commodity Exchange Act] with respect to nonfinancial commodities (which would include electricity and natural gas). Specifically, the CFTC states that forward contracts with respect to nonfinancial commodities are ‘commercial merchandising transactions,’ the primary purpose of which is to transfer ownership of the commodity and not to transfer solely its price risk,” Bardee said.
“We have previously submitted comments on other proposed Dodd-Frank implementing rules in which we raised concerns that the CFTC’s regulation of swaps could, depending on how broadly the term ‘swap’ is construed, lead to inconsistent regulation of participants and transactions in the wholesale electricity and natural gas markets subject to FERC jurisdiction,” he said.
Notably, “we are concerned that transactions such as financial transmission rights, forward capacity sales and day-ahead market transactions conducted in the organized [electric] markets that FERC regulates, i.e. regional transmission organizations and independent system operators, could be subject to regulation as ‘swaps,’ dependent on how that term is defined,” he said.
“Based on these concerns, we have stated that the CFTC should interpret and apply the CEA, as amended by Dodd-Frank, to ensure that CFTC jurisdiction and FERC jurisdiction do not overlap (except as determined by Congress in anti-manipulation contexts).”
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