Expressing “alarm” that the Commodity Futures Trading Commission (CFTC) is not registering all swap dealers that are active in energy markets, six prominent West Coast senators said they are “increasingly concerned” that the $8 billion annual de minimis threshold exemption in the agency’s Dodd-Frank Wall Street Reform Act rules may allow the vast majority of the energy swap market to fly under the regulator’s radar.

“We are concerned that [the] CFTC is failing to bring energy swap dealers under its oversight, which limits CFTC’s ability to monitor for manipulation, excessive speculation and systemic risk in energy markets. We request that CFTC closely analyze this matter and propose solutions that will bring oversight to energy swap dealers as soon as possible,” wrote Democratic Sens. Dianne Feinstein and Barbara Boxer of California, Ron Wyden and Jeff Merkley of Oregon, and Maria Cantwell and Patty Murray of Washington, in a letter last week to CFTC Chairman Gary Gensler.

In 2012, the CFTC concluded that $8 billion or less annually amounts to a “de minimis” exemption from the Dodd-Frank rules related to swaps dealing. It proposed to lower the threshold to $3 billion in three to five years, subject to a series of studies. “In your statement in support of this exemption, you stated: ‘I believe that the final swap dealer definition will encompass the vast majority of swap dealing activity, as Congress intended,'” the senators wrote to Gensler.

However, “numerous energy firms have avoided ‘swap dealer’ registration and oversight. Multiple petitions and filings to CFTC by government-owned utilities clearly demonstrate that the overwhelming majority of natural gas and electric swap market counterparties are not registered as swap dealers.

“Furthermore, CFTC’s preliminary list of registered swap dealers excludes established energy market makers in U.S. energy commodities. For instance, BP, a firm with more than 4,000 traders on which CFTC imposed $303 million in sanctions for propane market manipulation in 2007, has not registered as a swap dealer or major swap participant,” they wrote.

The senators called on the agency to assess how many energy swap dealers have registered with the CFTC and how many energy swap dealers are claiming an exemption from CFTC’s registration requirement; estimate what portion of energy swaps trading is currently being executed by registered swap dealers, and estimate what percentage of energy swaps trading will come under CFTC oversight if the de minimis exemption threshold is lowered to $3 billion; and analyze how the failure of major swap dealers to register with the CFTC affects the Commission’s ability to prevent manipulation, fraud, and excessive speculation in energy swap markets.

“Finally, if these assessments show that CFTC’s definition of ‘swap dealer’ exempts a statistically significant portion of energy swaps trading from oversight, we ask [the] CFTC to modify its interpretation of the Dodd-Frank Act’s ‘swap dealer’ definition in order to ensure that the vast majority of energy swaps trading is under the oversight of the Commission,” the senators said.

The Commission moved a step closer earlier this month in completing its work on Dodd-Frank regulation by approving four final rules, the most notable of which involved swap execution facilities in which market participants must enter bids and offers to a party looking to execute a swap (see NGI, May 20).

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