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2014-12469

  • Federal Register, Volume 79 Issue 105 (Monday, June 2, 2014)

    [Federal Register Volume 79, Number 105 (Monday, June 2, 2014)]

    [Proposed Rules]

    [Pages 31238-31247]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2014-12469]

    [[Page 31238]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 1

    RIN 3038-AE19

    Exclusion of Utility Operations-Related Swaps With Utility

    Special Entities From De Minimis Threshold for Swaps With Special

    Entities

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rule.

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    SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

    is proposing to amend its regulations (Proposal) to permit a person to

    exclude utility operations-related swaps with utility special entities

    in calculating the aggregate gross notional amount of the person's swap

    positions solely for purposes of the de minimis exception applicable to

    swaps with special entities.

    DATES: Comments must be received on or before July 2, 2014.

    ADDRESSES: You may submit comments, identified by RIN number 3038-AE19,

    by any of the following methods:

    Agency Web site: http://comments.cftc.gov;

    Mail: Secretary of the Commission, Commodity Futures

    Trading Commission, Three Lafayette Centre, 1155 21st Street NW.,

    Washington, DC 20581;

    Hand delivery/courier: Same as Mail, above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow instructions for submitting comments.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    www.cftc.gov. You should submit only information that you wish to make

    available publicly. If you wish the Commission to consider information

    that is exempt from disclosure under the Freedom of Information Act, a

    petition for confidential treatment of the exempt information may be

    submitted according to the procedure established in CFTC Regulation

    145.9.\1\

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    \1\ The Commission's regulations are found at 17 CFR Ch. I

    (2013) and can be accessed through the Commission's Web site.

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    The Commission reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from www.cftc.gov that it may deem to be inappropriate for

    publication, such as obscene language. All submissions that have been

    redacted or removed that contain comments on the merits of the

    rulemaking will be retained in the public comment file and will be

    considered as required under the Administrative Procedure Act and other

    applicable laws, and may be accessible under the Freedom of Information

    Act.

    FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, (202) 418-

    6700, gbarnett@cftc.gov; Erik Remmler, Deputy Director, (202) 418-7630,

    eremmler@cftc.gov; Christopher W. Cummings, Special Counsel, (202) 418-

    5445, ccummings@cftc.gov; or Israel Goodman, Special Counsel, (202)

    418-6715, igoodman@cftc.gov, Division of Swap Dealer and Intermediary

    Oversight, Commodity Futures Trading Commission, 1155 21st Street NW.,

    Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    A. De Minimis Exception From Swap Dealer Definition

    Section 1a(49) \2\ of the Commodity Exchange Act (CEA or Act)

    defines the term ``swap dealer.'' CEA Section 1a(49)(D) requires the

    Commission to exempt from swap dealer designation an entity that

    engages in a de minimis quantity of swap dealing, and to promulgate

    regulations to establish factors for making a determination to so

    exempt such entities. Pursuant to this mandate, on April 27, 2012, the

    Commission adopted Regulation 1.3(ggg), which further defines the term

    ``swap dealer.'' \3\ Regulation 1.3(ggg) became effective on July 23,

    2012, and registration as a swap dealer was required beginning October

    12, 2012.\4\

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    \2\ 7 U.S.C. 1a(49) (2012). The CEA can be accessed through the

    Commission's Web site.

    \3\ See 77 FR 30596 (May 23, 2012) (Swap Dealer Definition

    Adopting Release).

    \4\ The further definition of the term ``swap'' is found in

    Regulation 1.3(xxx), which became effective October 12, 2012. See 77

    FR 48208 (Aug. 13, 2012). See also Regulation 3.10(a)(1)(v)(C),

    which establishes that each person who comes within the swap dealer

    definition from and after the effective date of that definition is

    subject to registration as a swap dealer with the Commission.

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    Regulation 1.3(ggg)(4) includes an exception from the swap dealer

    definition for a person that has entered into swap positions connected

    with its swap dealing activities that, in the aggregate, do not exceed,

    during the preceding twelve-month period, either of two aggregate gross

    notional amount thresholds. The two aggregate gross notional amount

    thresholds are: (i) $3 billion, subject to a phase in level of $8

    billion \5\ (General De Minimis Threshold), and (ii) $25 million with

    regard to swaps in which the counterparty is a ``special entity''

    (Special Entity De Minimis Threshold). CEA Section 4s(h)(2)(C) and

    Regulation 23.401(c) define the term ``special entity'' to include: A

    Federal agency; a State, State agency, city, county, municipality, or

    other political subdivision of a State; any employee benefit plan as

    defined under the Employee Retirement Income Security Act of 1974

    (ERISA); any government plan as defined under ERISA; and any endowment.

    Regulation 23.401(c) adds ``any instrumentality, department, or a

    corporation of or established by a State or subdivision of a State'' to

    the definition.

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    \5\ The Commission set the General De Minimis Threshold at an

    initial phase-in level of $8 billion as of July 23, 2012, the

    effective date of the Swap Dealer Definition Adopting Release. Upon

    termination of the phase-in period this amount will decrease to $3

    billion (or such alternative amount as the Commission may adopt by

    rulemaking) in accordance with the phase-in procedure outlined in

    Regulation 1.3(ggg)(4)(ii).

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    B. Petition for Rulemaking

    On July 12, 2012, the Commission received a petition for rulemaking

    that sought an amendment of Regulation 1.3(ggg)(4) (Petition).\6\ The

    Petition requested that the regulation be amended to exclude from

    consideration, in determining whether a person has exceeded the Special

    Entity De Minimis Threshold, swaps to which the Petitioners and certain

    other special entities (collectively defined in the Petition as

    ``utility special entities'' \7\) are counterparties and that relate to

    the Petitioners' and other utility special entities' utility operations

    (defined in the Petition as ``utility operations-related swaps'').\8\

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    \6\ Petition for Rulemaking to Amend CFTC Regulation

    1.3(ggg)(4), dated July 12, 2012. The Petition was 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 (Petitioners).

    The Petition and the comment letters that were submitted in support

    of it are available at http://sirt.cftc.gov/sirt/sirt.aspx?Topic=PendingFilingsandActionsAD&Key=23845.

    \7\ The Petition defined the term ``utility special entity'' to

    mean a government special entity that--

    owns or operates electric or natural gas facilities or electric

    or natural gas operations (or anticipated facilities or operations),

    supplies natural gas and/or electric energy to other utility special

    entities, has public service obligations (or anticipated public

    service obligations) under Federal, State or local law or regulation

    to deliver electric energy and/or natural gas service to utility

    customers, or is a Federal power marketing agency as defined in

    Section 3 of the Federal Power Act (16 U.S.C. 796(19)).

    \8\ The Petition defined the term ``utility operations-related

    swap'' to mean any swap that a utility special entity enters into

    ``to hedge or mitigate commercial risks'' (as that phrase is used in

    CEA Section 2(h)(7)(A)(ii))--

    intrinsically related to the electric or natural gas facilities

    that the utility special entity owns or operates or its electric or

    natural gas operations (or anticipated facilities or operations), or

    to the utility special entity's supply of natural gas and/or

    electric energy to other utility special entities or to its public

    service obligations (or anticipated public service obligations) to

    deliver electric energy or natural gas service to utility customers.

    The Petition defined the term ``intrinsically related'' to

    include all transactions related to:

    (i) The generation or production, purchase or sale, and

    transmission or transportation of electric energy or natural gas, or

    the supply of natural gas and/or electric energy to other utility

    special entities, or delivery of electric energy or natural gas

    service to utility customers, (ii) all fuel supply for the utility

    special entity's electric facilities or operations, (iii) compliance

    with electric system reliability obligations applicable to the

    utility special entity, its electric facilities or operations, (iv)

    compliance with energy, energy efficiency, conservation or renewable

    energy or environmental statutes, regulations or government orders

    applicable to the utility special entity, its facilities or

    operations, or (v) any other electric or natural gas utility

    operations-related swap to which the utility special entity is a

    party.

    Finally, the Petition stated that a ``utility operations-related

    swap'' did not include:

    A swap based or derived on, or referencing, commodities in the

    interest rates, credit, equity, or currency asset classes, or a

    product type or category in the `other commodity' asset class that

    is based or derived on, or referencing, metals, or agricultural

    commodities or crude oil or gasoline commodities of any grade not

    used as fuel for electric generation.

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    [[Page 31239]]

    The amendment requested by the Petition would have the effect of

    allowing a person, in any rolling twelve-month period, to deal in

    utility-related swaps with utility special entities up to an aggregate

    gross notional amount not to exceed (together with other swaps in which

    the person was engaged) the General De Minimis Threshold (currently $8

    billion) without being required to register as a swap dealer. In

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    support of this amendment, the Petition claimed that:

    The rule amendment is necessary in order to preserve

    uninterrupted and cost-effective access to the customized,

    nonfinancial commodity swaps that Petitioners and other Utility

    Special Entities [as defined in the Petition] use to hedge or

    mitigate commercial risks arising from their utility facilities,

    operations and public service obligations.

    The Petition explained that this amendment was necessary in order to

    increase the number of counterparties available to utility special

    entities to enter into swaps that are necessary for the efficient

    conduct of the businesses and operations of utility special entities.

    C. CFTC Staff Letter No. 12-18 9

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    \9\ [2012-2013 Transfer Binder] Comm. L. Fut. Rep. (CCH) ]

    32,409 (October 12, 2012). (Staff Letter 12-18). The letter can be

    accessed on the Commission's Web site at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-18.pdf.

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    As the October 12, 2012, effective date for Regulation 1.3(ggg) and

    the other regulations announced in the Swap Dealer Definition Adopting

    Release approached, Petitioners submitted to the Commission and several

    of its divisions a letter requesting no-action relief from the de

    minimis threshold for swaps with certain special entities.\10\ In Staff

    Letter 12-18, the staff of the Commission's Division of Swap Dealer and

    Intermediary Oversight (Division),\11\ concluded that, in light of the

    representations made in support of the request and in view of the

    impending effective date for the swap dealer registration requirement,

    it was appropriate to provide temporary, limited no-action relief with

    respect to the Special Entity De Minimis Threshold for persons dealing

    in utility related swaps with utility special entities. Staff Letter

    12-18 stated that the Division would not recommend that the Commission

    commence an enforcement action against a person for failure to apply to

    be registered as a swap dealer, if:

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    \10\ This letter was received on October 8, 2012.

    \11\ The Division is responsible for, among other things,

    overseeing compliance with the registration requirements applicable

    to swap dealers.

    (1) the Utility Commodity Swaps connected with the person's swap

    dealing activities into which the person--or any other entity

    controlling, controlled by or under common control with the person--

    enters over the course of the immediately preceding 12 months (or

    following October 12, 2012, if that period is less than 12 months)

    have an aggregate gross notional amount of no more than $800

    million;

    (2) the person is not otherwise within the definition of the

    term ``swap dealer,'' as provided in 17 CFR 1.3(ggg) (i.e., the

    person--or any other entity controlling, controlled by or under

    common control with the person--has not entered into swaps as a

    result of its swap dealing activities in excess of the General De

    Minimis Threshold or (not counting Utility Commodity Swaps) the

    Special Entity De Minimis Threshold); \12\ and

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    \12\ Division staff emphasized that the aggregate gross notional

    amount of a person's utility commodity swaps would reduce the $8

    billion aggregate gross notional amount General De Minimis Threshold

    for that person.

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    (3) the person is not a ``financial entity,'' as defined in

    section 2(h)(7)(C)(i) of the CEA.

    For purposes of Staff Letter 12-18, Division staff defined the term

    ``utility commodity swap'' \13\ to mean a swap where: (1) A party to

    the swap is a utility special entity; \14\ (2) a utility special entity

    is using the swap in the manner described in Regulation

    1.3(ggg)(6)(iii); \15\ and (3) the swap is related to an exempt

    commodity in which both parties to the swap transact as part of the

    normal course of their physical energy businesses.\16\

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    \13\ Based on conversations with industry participants, Division

    staff decided to use a definition for ``utility commodity swap''

    that encompassed the transactions that utility special entities

    believed were necessary to their business, while avoiding an over-

    expansive application of the relief.

    \14\ Either or both parties to the swap could be a utility

    special entity. For purposes of Staff Letter 12-18, Division staff

    employed the definition of ``utility special entity'' set forth in

    the Petition.

    \15\ That is, the utility special entity is using the swap to

    hedge a physical position, as described in Regulation

    1.3(ggg)(6)(iii).

    \16\ As defined in CEA Section 1a(20), an ``exempt commodity''

    is one that is neither an agricultural commodity, nor an ``excluded

    commodity'' as defined in CEA Section 1a(19) (which encompasses

    interest rates, exchange rates, and other instruments, indices and

    measures of a generally financial nature). At the time Staff Letter

    12-18 was issued, Division staff believed it was necessary to limit

    the relief the Division was providing to situations involving an

    exempt commodity in which both parties transact as part of the

    normal course of their physical energy businesses.

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    The Division selected the $800 million aggregate gross notional

    amount threshold, which is ten percent of the current General De

    Minimis Threshold of $8 billion, based on suggestions made by certain

    of the Petitioners and other commenters responding to the Commission's

    proposed further definition of the term ``swap dealer.'' In a joint

    comment letter on that proposed definition, two persons recommended a

    de minimis threshold for swaps with special entities that would be one-

    tenth of the General De Minimis Threshold for exclusion from the ``swap

    dealer'' definition.\17\ Another joint comment letter on the proposed

    further definition of the term ``swap dealer'' (whose signatories

    included two of the Petitioners) concurred with this

    recommendation.\18\

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    \17\ Those commenters stated that the Commission should: Set the

    threshold for the [general] de minimis exception at 1/1,000th of a

    percent of the aggregate gross notional size of the U.S. swap market

    over the preceding 12 months, or 1/10,000th of a percent of the

    aggregate gross notional size of the U.S. swap market over the

    preceding 12 months for swaps in which the counterparty is a

    `special entity.' This level of swap dealing activity more

    accurately corresponds to an amount that arguably could pose a

    potential risk to the stability of the financial system. Joint

    comment letter from the Edison Electric Institute and Electric Power

    Supply Association dated Feb. 22, 2011, at pages 10-11. The letter

    can be accessed at the Commission's Web site. See http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=27918.

    \18\ See joint comment letter from the National Rural Electric

    Cooperative Association, the American Public Power Association and

    the Large Public Power Council dated Feb. 22, 2011, at 18. The

    letter can be accessed at the Commission's Web site. See http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=27917. Four

    other comment letters on the Commission's proposed further

    definition of the term ``swap dealer'' from energy market

    participants also recommended that the overall de minimis threshold

    be set at 1/1,000th of a percent of the aggregate gross notional

    size of the U.S. swap market and that the de minimis threshold for

    swaps with special entities be set at 1/10,000th of a percent of the

    aggregate gross notional size. See the Swap Dealer Definition

    Adopting Release, 77 FR at 30627, n.390.

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    The relief made available by Staff Letter 12-18 was not self-

    executing.

    [[Page 31240]]

    Rather, to claim the relief, a person was required to file with the

    Division a notice \19\ that, among other things, identified each

    utility special entity with which the person has entered into utility

    commodity swaps connected with the person's swap dealing activities,

    and that stated with respect to each such utility special entity the

    total gross notional amount of such utility commodity swaps.

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    \19\ The notice was required to be provided by December 31,

    2012, and on a quarterly basis thereafter.

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    Division staff based its decision to provide relief on several

    reasons. For one, the Petitioners had represented that that commodity

    and swap markets are likely to be local and particularized for utility

    special entities (as opposed to other special entities that do not

    provide public utility services). Pricing and other terms of

    electricity and natural gas swaps may vary significantly from region to

    region so that only market participants active in the physical energy

    markets in a particular region are able to enter into swaps with the

    utility special entities. Thus, staff also understood that the

    counterparties to the utility special entities for hedging swaps were

    generally other non-financial entities that are active in the physical

    markets for these products. As a result, the number of counterparties

    available to the utility special entities is likely to be limited.

    Second, staff understood that utility special entities have a

    unique obligation to provide continuous service to the public;

    moreover, this continuous service is crucial to public safety. This

    also may limit the availability of counterparties to utility special

    entities if, for example, a utility special entity must arrange hedges

    covering a continuous period of time without interruption. While other

    special entities, such as municipal governments, also serve the public

    interest, they do not have the same obligations to provide a continuous

    supply of a commodity (e.g., electricity or natural gas). Thus, the

    need for utility special entities to use physical commodity swaps is

    different from their need to use other types of swaps, and it is

    different from the need for other special entities to use swaps.

    Finally, a significant reduction in the number of swap

    counterparties available to utility special entities could be

    especially harmful to the public interest in view of the importance of

    the energy services provided by the utility special entities.

    D. CFTC Staff Letter No. 14-34

    Subsequent to the issuance of Staff Letter 12-18, certain

    Petitioners acknowledged to the Commission the relief the letter had

    made available, but also raised concerns regarding the effects of the

    conditions imposed upon persons seeking to avail themselves of that

    relief, and regarding continuing regulatory uncertainty surrounding

    some transactions with utility special entities.\20\ They characterized

    specific features of Staff Letter 12-18 (e.g., the requirement to

    establish that the utility special entity is using the swap to hedge a

    physical position in an exempt commodity, and the requirement to

    establish that the counterparty seeking relief is not a ``financial

    entity'') as imposing administrative costs or creating legal

    uncertainty such that would-be counterparties were dissuaded from

    entering into relevant swaps. The Petitioners' Letter thus renewed the

    relief requested in the previously-filed Petition, claiming that

    counterparties that had become reluctant to deal with utility special

    entities were not taking Staff Letter 12-18 as a reason to resume

    entering into swaps with those entities.\21\

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    \20\ Letter from Petitioners to Gary Gensler, CFTC Chairman,

    dated Nov. 19, 2013 (Petitioners' Letter), available at http://sirt.cftc.gov/sirt/sirt.aspx?Topic=PendingFilingsandActionsAD&Key=23845. (One of the

    original Petitioners did not, however, participate in this follow up

    letter.) More recently, one of the Petitioners asserted to the

    Commission that based on an informal survey it conducted, public

    power utilities subject to the Special Entity De Minimis Threshold

    have on average lost a large percentage of their potential

    counterparties, and that granting the request made in the Petition

    would provide a substantial increase in potential counterparties to

    the affected utilities. See Letter from the American Public Power

    Association to Mark Wetjen, Acting CFTC Chairman, dated March 6,

    2014.

    \21\ On March 11, 2013, a bill (H.R. 1038) was introduced in the

    U.S. House of Representatives that would amend the CEA to require

    the Commission to treat a ``utility operations-related swap''

    entered into with a ``utility special entity'' as though the swap

    were entered into with an entity that was not a special entity. The

    bill would add definitions for ``utility special entity'' and

    ``utility operations-related swap.'' H.R. 1038 was passed in the

    House on June 12, 2013. On December 11, 2013, a companion bill with

    the same text as H.R. 1038 was introduced in the Senate (S. 1802),

    and that bill was referred to the Committee on Agriculture,

    Nutrition and Forestry on the same date.

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    In response to these concerns, on March 21, 2014, the Division

    issued CFTC Staff Letter No. 14-34 (Staff Letter 14-34),\22\ which

    superseded and broadened the relief provided in Staff Letter 12-18.

    Specifically, Staff Letter 14-34 stated that the Division would not

    recommend that the Commission commence an enforcement action against a

    person for failure to register as a swap dealer if the person--or any

    other entity controlling, controlled by or under common control with

    the person--does not include ``utility operations-related swaps'' in

    calculating whether it has exceeded the Special Entity De Minimis

    Threshold, provided that the person's swap dealing activities have not

    exceeded the General De Minimis Threshold, including utility

    operations-related swaps.

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    \22\ The letter can be accessed on the Commission's Web site at

    http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-34.pdf.

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    For purposes of Staff Letter 14-34, a swap is a ``utility

    operations-related swap'' if:

    (1) A party to the swap is a utility special entity; \23\

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    \23\ For purposes of Staff Letter 14-34, Division staff

    continued to employ the definition of ``utility special entity'' set

    forth in the Petition.

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    (2) The utility special entity has represented to the other

    party that it is using the swap in the manner described in 17 CFR

    50.50(c); and

    (3) The swap is either (i) an electric energy or natural gas

    swap; or (ii) The utility special entity has represented to the

    other party that the swap is associated with: (a) The generation,

    production, purchase or sale of natural gas or electric energy, the

    supply of natural gas or electric energy to a utility, or the

    delivery of natural gas or electric energy service to utility

    customers; (b) Fuel supply for the facilities or operations of a

    utility; (c) Compliance with an electric system reliability

    obligation; or (d) Compliance with an energy, energy efficiency,

    conservation, or renewable energy or environmental statute,

    regulation, or government order applicable to a utility.

    The Division explained in Staff Letter 14-34 that it was revising

    the relief provided in Staff Letter 12-18 based on its understanding

    from discussions with market participants that (1) doing so would allow

    utility special entities to significantly increase the number of swap

    counterparties available to utility special entities and thereby lessen

    potential harm to the public interest in view of the importance of the

    energy services provided by utility special entities; and (2) acting to

    increase the volume of utility operations-related swaps between utility

    special entities and persons not registered as a swap dealer would

    likely not raise the types of risks that swap dealer registration is

    intended to prevent.

    The Commission does not intend the Proposal to have any effect on

    the eligibility requirements for the relief currently available under

    Staff Letter 14-34. In the event the Commission adopts the regulations

    being proposed herein, the Commission will discuss in the adopting

    Federal Register release the effect of those regulations on the relief

    provided under Staff Letter 14-34.

    [[Page 31241]]

    II. The Proposal

    The Commission recognizes that utility special entities have a

    specialized purpose--they provide electricity and natural gas

    production and/or distribution to their customers. Utility special

    entities have a unique obligation in that the services they provide

    must be continuous and are important to public safety. Furthermore, the

    Commission is of the view that utility operations-related swaps have

    become an integral part of providing continuous service and managing

    costs in connection therewith.

    The specialized nature of utility special entities distinguishes

    them from other types of special entities (e.g., public pension plans

    or municipal governments) in that the conduct of their business

    routinely involves, and indeed often depends upon access to, specific

    types of swap transactions that permit them to manage the risks of

    their businesses and to be able to provide electricity and natural gas

    consistently. As a consequence, they not only need regular access to

    swaps that directly affect the smooth operation of their business

    activities, but also are more likely to have developed expertise with

    swaps directly related to their operations. While the Special Entity De

    Minimis Threshold may represent a reasonable protection for other types

    of special entities that enter into swaps intermittently and whose

    activities do not depend on a consistent use of particular swaps, for

    the reasons stated above, the Commission believes that its application

    to utility operations-related swaps with utility special entities is

    not as necessary for their regular operation.\24\

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    \24\ The Commission is not considering, as part of this proposed

    rulemaking, altering the Special Entity De Minimis Threshold with

    respect to other types of swaps or special entities.

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    The Commission believes that it is important to address the

    concerns raised in the Petition regarding the ability of utility

    special entities to hedge the commercial risks of their electric and

    natural gas production and delivery businesses including the

    availability of counterparties with whom utility special entities can

    enter into customized swaps. The Commission believes that, because the

    swaps used by utility special entities are typically conducted in

    localized and specialized markets and the number of available

    counterparties may be limited, the $25 million amount of the existing

    Special Entity De Minimis Threshold may deter those counterparties from

    engaging in utility operations-related swaps. Given the obligations of

    utility special entities to provide continuous service to customers,

    the Commission preliminarily believes that the public interest would be

    better served if the likely counterparties for utility operations-

    related swaps are able to provide liquidity to this limited segment of

    the market without registering as swap dealers solely on account of

    exceeding the Special Entity De Minimis Threshold. In addition, given

    the expertise utility special entities are likely to have with utility

    operations-related swaps, the need for a lower de minimis threshold for

    dealing activity in such swaps with utility special entities is

    reduced.

    Accordingly, the Proposal would permit a person to exclude

    specified swaps (i.e., utility operations-related swaps) entered into

    with a defined subset of special entities (i.e., utility special

    entities) when calculating whether the person has exceeded the Special

    Entity De Minimis Threshold. In light of the foregoing and the

    Commission's further deliberations in this area, the Commission is now

    proposing to amend its regulations in order to permit persons engaging

    in utility operations-related swaps with utility special entities (as

    these terms are defined in the Proposal) to exclude such swaps solely

    for purposes of calculating whether such persons' swap dealing

    activities have exceeded the Special Entity De Minimis Threshold.

    A. Adding an Exclusion for Utility Operations-Related Swaps With

    Utility Special Entities

    Regulation 1.3(ggg) defines the term ``swap dealer.'' Currently,

    Regulation 1.3(ggg)(4)(i) provides for a de minimis exception from the

    swap dealer definition, under either the General De Minimis Threshold

    or the Special Entity De Minimis Threshold. The Proposal would amend

    Regulation 1.3(ggg)(4)(i) to permit persons engaging in utility

    operations-related swaps with utility special entities to exclude such

    swaps solely for purposes of determining whether they have exceeded the

    Special Entities De Minimis Threshold. This would be done by

    redesignating current Regulation 1.3(ggg)(4)(i) as Regulation

    1.3(ggg)(4)(i)(A), placing the text ``In General'' before the

    redesignated regulation and adding a new Regulation 1.3(ggg)(4)(i)(B),

    captioned ``Utility Special Entities.''

    Regulation 1.3(ggg)(4)(i)(B)(1) would provide that solely for

    purposes of determining whether a person's swap dealing activity has

    exceeded the $25 million aggregate gross notional amount threshold set

    forth in Regulation (ggg)(4)(i)(A) for swaps in which the counterparty

    is a special entity, a person may exclude utility operations-related

    swaps in which the counterparty is a utility special entity. Proposed

    Regulation 1.3(ggg)(4)(i)(B)(1) would not, however, permit a person to

    exclude the gross notional amount of such utility operations-related

    swaps in determining whether the person has exceeded the General De

    Minimis Threshold. In other words, a person would add the aggregate

    gross notional amount of the utility operations-related swaps it enters

    into with utility special entities to the gross notional amount of any

    other swaps entered into by it during the preceding twelve months in

    determining whether the person has exceeded the General De Minimis

    Threshold.\25\

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    \25\ A person likewise would include the aggregate gross

    notional amount of swaps entered into with other types of special

    entities to the same extent required for swaps generally in

    determining whether the person's swap dealing activity has exceeded

    the General De Minimis Threshold.

    ---------------------------------------------------------------------------

    As is the case for other swaps, in calculating the gross notional

    amount of utility operations-related swap positions entered into with

    utility special entities, a person must also include swap positions

    entered into by any entity controlling, controlled by or under common

    control with the person, and if a stated notional amount of a swap is

    leveraged or enhanced by the structure of the swap, the threshold

    calculation would be required to be based ``on the effective notional

    amount of the swap rather than on the stated notional amount.''

    Under the Proposal, a person would be required to file a one-time

    notice to rely on the exclusion provided by the new rule.\26\

    Specifically, the notice would be required to be filed electronically

    with the National Futures Association (NFA),\27\ to provide such

    information as the person's name, address, and a contact, and to

    contain a

    [[Page 31242]]

    representation that the person meets the criteria of the exclusion for

    utility operations-related swaps with utility special entities in

    Regulation 1.3(ggg)(4)(i)(B). Congress has determined that special

    entities merit additional protections when engaging in swap

    transactions, and has adopted, for example, heightened business conduct

    requirements on swap dealers advising and dealing with special

    entities.\28\ Because the Proposal, if adopted, would permit persons to

    engage in a greater aggregate gross notional amount of swaps with

    utility special entities, who Congress has determined warrant

    additional protections under the CEA, without registering as swap

    dealers (and becoming subject to corresponding business conduct

    standards), it is important that the Commission be able to know who the

    persons are that rely on the exclusion under the Proposal. The proposed

    notice filing will help the Commission to monitor compliance with the

    swap dealer registration requirement, and better ensure that the

    exclusion under the Proposal serves the intended purpose of enabling

    utility special entities to manage operational risks in a cost-

    effective way.

    ---------------------------------------------------------------------------

    \26\ See proposed Regulation 1.3(ggg)(4)(i)(B)(4).

    \27\ NFA is a futures association registered as such with the

    Commission pursuant to CEA Section 17. Although persons relying on

    the exclusion in Regulation 1.3(ggg)(4)(i)(A) would be outside the

    swap dealer definition and therefore not subject to the requirement

    in Regulation 170.16 that a swap dealer must become an NFA member, a

    requirement to file a notice with NFA would be consistent with past

    action the Commission has taken with regard to requiring other

    persons seeking to rely on an exception or exclusion from a term

    defined in the Act--i.e., by requiring such persons to file a notice

    with NFA. See, e.g., 62 FR 52088 (Oct. 6, 1997), authorizing NFA to

    process notices of eligibility for exclusion from the definition of

    the term ``commodity pool operator'' under Regulation 4.5, and 72 FR

    1658 (Jan. 16, 2007), establishing that a person seeking an

    exclusion under Regulation 4.5 must file its claim with NFA

    electronically. In the event the Commission adopts the proposing

    filing requirement, it will concurrently delegate to NFA the

    authority to accept the filing.

    \28\ See CEA Sections 4s(h)(4) and 4s(h)(5).

    ---------------------------------------------------------------------------

    Additionally, a person relying on the exclusion under the Proposal

    would be required to maintain in accordance with Regulation 1.31 books

    and records that substantiate its eligibility to rely on this

    exclusion.\29\

    ---------------------------------------------------------------------------

    \29\ This requirement is consistent with other similar

    Commission regulations, such as the requirement in Regulation 4.7

    that commodity pool operators and commodity trading advisors

    claiming relief under that regulation maintain books and records

    relating to their eligibility to claim that relief.

    ---------------------------------------------------------------------------

    B. New Definitions

    1. ``Utility Special Entity''

    Proposed Regulation 1.3(ggg)(4)(i)(B)(2) would define the term

    ``utility special entity'' to mean a special entity \30\ that owns or

    operates electric or natural gas facilities, electric or natural gas

    operations or anticipated electric or natural gas facilities or

    operations; supplies natural gas or electric energy to other utility

    special entities; has public service obligations or anticipated public

    service obligations under Federal, State or local law or regulation to

    deliver electric energy or natural gas service to utility customers; or

    is a Federal power marketing agency as defined in Section 3 of the

    Federal Power Act, 16 U.S.C. 796(19). This definition is essentially

    identical to the definition of ``utility special entity'' in the

    Petition.

    ---------------------------------------------------------------------------

    \30\ As noted above, the term ``special entity'' is defined in

    CEA Section 4s(h)(2)(c) and Regulation 23.401(c).

    ---------------------------------------------------------------------------

    2. ``Utility Operations-Related Swap''

    Proposed Regulation 1.3(ggg)(4)(i)(B)(3) would define the term

    ``utility operations-related swap,'' to mean a swap to which at least

    one of the parties is a utility special entity that is using the swap

    to hedge or mitigate commercial risk, and that is related to an exempt

    commodity. In addition, the swap must be an electric energy or natural

    gas swap, or associated with the operations or compliance obligations

    of a utility special entity in a manner more fully set forth in

    Regulation 1.3(ggg)(4)(i)(B)(3)(iv).

    In this regard, the Commission notes that, in determining whether a

    person may rely on the proposed exclusion for utility operations-

    related swaps with utility special entities, it may not always be

    possible for the person to establish with absolute certainty that a

    counterparty is a utility special entity, that the counterparty is

    using a swap to hedge or mitigate commercial risk, that the swap is

    related to an exempt commodity, or that the swap meets the other

    requirements to come within the definition of a utility operations-

    related swap. Therefore, the Commission intends to take the position

    that a person seeking to rely on the (proposed) exclusion may

    reasonably rely upon a representation by the utility special entity

    that it is a utility special entity and that the swap is a utility

    operations-related swap, as such terms are defined in proposed

    Regulation 1.3(ggg)(4)(i)(B), so long as the person was not aware, and

    should not reasonably have been aware, of facts indicating the

    contrary.\31\

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    \31\ This position is consistent with the Commission's approach

    to permitting reliance on representations for other purposes, such

    as the requirement in Regulation 50.50(b)(3) that a reporting party

    have a reasonable basis to believe that its counterparty meets the

    requirements for the exception to the clearing requirement for end-

    users. See 77 FR 42560, 42570 (July 19, 2012).

    ---------------------------------------------------------------------------

    III. Request for Comments

    The Commission seeks comments regarding the nature and application

    of an exclusion for utility operations-related swaps with utility

    special entities for purposes of calculating whether a person's swap

    dealing activities have exceeded the Special Entity De Minimis

    Threshold, as provided for in the Proposal. Set forth below, then, is a

    non-exclusive list of questions to which the Commission seeks

    responses.

    1. Will the Proposal enable utility special entities to adequately

    hedge their operational risks in a cost-effective manner by entering

    into utility operations-related swaps? If not, explain why, and

    indicate ways in which the Proposal could be modified in order to

    accomplish this goal.

    2. Are there factual errors or omissions in the Commission's

    understanding and analysis of the issues faced by utility special

    entities and the efforts to date to resolve those issues?

    3. Is it appropriate to treat utility operations-related swaps with

    utility special entities differently than other swaps with special

    entities for purposes of determining whether a person is a swap dealer?

    4. Does the definition of utility operations-related swap in

    proposed Regulation 1.3(ggg)(i)(4)(B)(3) adequately encompass the range

    of swap transactions with respect to which it is appropriate to, in

    effect, set a higher de minimis threshold in the context of persons

    dealing with utility special entities? If not, in what way(s) should

    the definition be expanded or narrowed and why? More specifically,

    should the scope of the swaps identified in Regulation

    1.3(ggg)(i)(4)(B)(3)(iv) be expanded or narrowed? Are there swaps that

    would meet the requirements of Regulation 1.3(ggg)(i)(4)(B)(3)(i), (ii)

    and (iii), but not of Regulation 1.3(ggg)(i)(4)(B)(3)(iv) that should

    be included? Is Regulation 1.3(ggg)(i)(4)(B)(3)(iv) too restrictive or

    not restrictive enough?

    5. One of the conditions to coming within the definition of the

    term ``utility operations-related swap'' is that the party to the swap

    that is a utility special entity is using the swap in the manner

    prescribed in Regulation 50.50(c)--i.e., to hedge or mitigate

    commercial risk. What issues might there be in determining whether a

    swap constitutes hedging activity for purposes of complying with this

    proposed rule? Is reference to Regulation 50.50(c) for defining hedging

    activities appropriate? Are there alternative definitions that should

    be considered (e.g., Regulation 1.3(ggg)(6)(iii))? Should the

    definitions for hedging activities in Regulation 50.50(c) and

    Regulation 1.3(ggg)(6)(iii) be harmonized? If so, how (e.g., by

    following Regulation 50.50(c) or Regulation 1.3(ggg)(6)(iii) or some

    iteration of both) and why? Please provide any estimates of costs of

    compliance with any proposed alternative as compared to the cost of

    compliance with Regulation 50.50(c).

    6. Another condition to coming within the proposed definition of

    the term ``utility operations-related swap'' is that the swap be

    related to an exempt commodity (as defined in CEA Section 1a(20)). Is

    this condition appropriate? If

    [[Page 31243]]

    not, why not and/or how and why should it be modified?

    7. Should the definition of utility operations-related swap be

    limited to swaps in which both parties to the swap transact as part of

    the normal course of their physical energy businesses?

    8. The Proposal would allow persons to, in effect, treat utility

    operations-related swaps in which the counterparty is a utility special

    entity like swaps with a counterparty that is not a special entity in

    determining whether the person has exceeded a de minimis threshold

    under Regulation 1.3(ggg)(4)(i)(A). Thus, utility operations-related

    swaps with utility special entities would be subject to the General De

    Minimis Threshold under Regulation 1.3(ggg)(4)(i), which is currently

    set at the $8 billion phase in level. Is that an appropriate threshold,

    or should the de minimis threshold for such swaps be higher or lower?

    What considerations support using a different amount? Should the de

    minimis threshold for utility operations-related swaps be set at $3

    billion, the level of the General De Minimis Threshold without

    application of the $8 billion phase-in level, in light of the special

    protections afforded to special entities under the CEA? Should the

    threshold be set at an amount equal to a percentage of the gross

    notional amount of the General De Minimis Threshold, such that an

    increase or decrease in the gross notional amount of the General De

    Minimis Threshold would result in a proportionate change in the de

    minimis threshold for utility operations-related swaps?

    9. Should the nature of the person entering into swaps with a

    utility special entity determine whether the person can rely on the

    exclusion for utility operations-related swaps under the Proposal

    (e.g., by limiting the exclusion to persons who are not ``financial

    entities,'' as Staff Letter 12-18 limited relief to such persons)? If

    so, what characteristics or factors should be considered?

    10. Should the Commission specify the books and records a person

    must maintain to substantiate that the person may rely on the

    (proposed) exclusion for utility operations-related swaps?

    11. Would the Proposal impact the Commission's ability to carry out

    its market oversight responsibilities with regard to the overall

    derivatives market? If so, how?

    12. To what extent, if any, would the Proposal reduce transparency

    with regard to utility operations-related swaps, counterparties to such

    transactions or the broader derivatives market?

    13. Does the Proposal serve the public interest? In what ways? How

    could the Proposal be improved to better serve the public interest?

    14. How should the Commission balance the public interest in having

    the additional protections that a de minimis threshold for transactions

    with utility special entities that is lower than the General De Minimis

    Threshold would afford, versus the public interest in maintaining the

    ability for utility special entities to enter hedging transactions?

    15. As noted above, it is important that the Commission be able to

    know who the persons are that rely on the exclusion under the Proposal

    to monitor compliance with the swap dealer registration requirement,

    and better ensure that the exclusion under the Proposal serves the

    intended purpose of enabling utility special entities to manage

    operational risks in a cost-effective way. Will the notice requirement

    in proposed Regulation 1.3(ggg)(4)(i)(B)(4) enable the Commission to

    achieve these objectives? If not, why? Is there an alternative method

    for the Commission to obtain the relevant information and achieve the

    stated objectives without requiring a notice filing?

    16. Are there any special entities (or types of special entities)

    who come within the proposed definition of ``utility special entity''

    (as set forth in proposed Regulation 1.3(ggg)(4)(i)(B)(2)), but are not

    likely to have expertise in utility operations-related swaps? If yes,

    describe those entities. Should persons dealing in swaps with those

    entities be treated differently than persons dealing with other utility

    special entities under the Proposal?

    17. Should the description of swap dealing activity in the swap

    dealer definition be more specifically described for the purposes of

    defining swap dealing with utility special entities? What specific

    dealing or non-dealing activities should be taken into account given

    the nature of utility special entities? Have any compliance issues

    arisen with respect to the description of swap dealing activity in the

    swap dealer definition? If so, how should the Commission clarify the

    description?

    18. Will utility special entities benefit if the Commission revised

    its interpretation regarding forward contracts with embedded volumetric

    optionality as described in the swap definition adopting release? \32\

    If so, how? Is the seven element interpretation appropriate for

    determining whether a forward contract with volumetric optionality

    qualifies for the forward contract exclusion from the definition of a

    swap? If not, should the Commission revise the interpretation or adopt

    an alternative standard? If so, what should the revised interpretation

    or standard be?

    ---------------------------------------------------------------------------

    \32\ See 77 FR 48238 (Aug. 13, 2012).

    ---------------------------------------------------------------------------

    19. Regulation 1.3(ggg)(6)(iv) provides that swaps entered into by

    a floor trader who meets certain conditions do not need to be counted

    in determining whether the floor trader is a swap dealer. Should the

    Commission afford similar treatment to swaps entered into with utility

    special entities by their counterparties? For purposes of the de

    minimis calculation under the swap dealer definition, why should the

    Commission hold floor traders and entities dealing with utility special

    entities to different standards?

    The Commission welcomes comments on any other issues concerning the

    subject matter of this Federal Register release and the de minimis

    exception from the swap dealer definition for persons engaging in swap

    transactions with special entities, in general.

    IV. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act \33\ requires that Federal agencies

    consider whether the rules they propose will have a significant

    economic impact on a substantial number of small entities and, if so,

    they must provide a regulatory flexibility analysis respecting the

    impact. Whenever an agency publishes a general notice of proposed

    rulemaking for any rule, pursuant to the notice-and-comment provisions

    of the Administrative Procedure Act \34\ a regulatory flexibility

    analysis or certification typically is required.\35\ The Proposal, if

    adopted, will not have a significant economic impact on affected

    persons because the Proposal will primarily relieve them from

    regulatory obligations that would otherwise apply to them. That is, the

    (proposed) exclusion for utility operations-related swaps will permit

    counterparties to engage with utility special entities in utility

    operations-related swaps to a degree that would, absent the proposed

    exclusion, require them to register with the Commission as a swap

    dealer, and to comply with regulations applicable to swap dealers.\36\

    While the Proposal does

    [[Page 31244]]

    require a notice filing in order to rely on the (proposed) exclusion

    for utility operations-related swaps, to the extent that any small

    entities opt to rely on the exclusion, the notice requirement will not

    have a significant economic impact on those entities.\37\ Moreover, the

    number of potential counterparties seeking to rely on the (proposed)

    exclusion may be limited, given the local nature of the relevant

    markets.

    ---------------------------------------------------------------------------

    \33\ 5 U.S.C. 601 et seq.

    \34\ 5 U.S.C. 553. The Administrative Procedure Act is found at

    5 U.S.C. 500 et seq.

    \35\ See 5 U.S.C. 601(2), 603-05.

    \36\ See, e.g., Part 23 of the Commission's regulations, which

    establishes, among other things, reporting, recordkeeping and

    business conduct requirements for swap dealers.

    \37\ See 77 FR 2613, 2620 (Jan. 19, 2012), wherein the

    Commission stated that in the experience of the Commission,

    complying with the registration process regulations--a far more

    burdensome process than the notice filing that would be required

    under the Proposal--has not had a significant economic effect on a

    substantial number of small entities.

    ---------------------------------------------------------------------------

    Accordingly, the Chairman, on behalf of the Commission, hereby

    certifies pursuant to 5 U.S.C. 605(b) that the Proposal will not have a

    significant economic impact on a substantial number of small entities.

    B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \38\ provides that an agency may

    not conduct or sponsor, and a person is not required to respond to, a

    collection of information unless it displays a valid control number

    from the Office of Management and Budget (OMB). This rulemaking

    contains notification and recordkeeping requirements that are

    collections of information within the meaning of the PRA. Accordingly,

    the Commission will submit the required information collection requests

    to OMB.

    ---------------------------------------------------------------------------

    \38\ 44 U.S.C. 3501 et seq.

    ---------------------------------------------------------------------------

    1. Collections of Information

    This rulemaking contains two elements that would qualify as

    collections of information. First, proposed Regulation

    1.3(ggg)(4)(i)(B) would create an exclusion from the Special Entity De

    Minimis Threshold with regard to specified swaps (utility operations-

    related swaps) entered into with a defined subset of special entities

    (utility special entities). As proposed, a person seeking to rely on

    the exclusion would be required to file a one-time notice.

    Specifically, and as explained above, the notice would be required to

    be filed electronically with NFA, to provide such information as the

    person's name, address, and a contact, and to contain a representation

    that the person meets the criteria of the exclusion for utility

    operations-related swaps in Regulation 1.3(ggg)(4)(i)(B). Based upon

    the information currently available to the Commission, an accurate

    estimate of the persons who may rely on the exclusion under the

    Proposal, if adopted, cannot be made. Nevertheless, the Commission is

    preliminarily using a conservative estimate of 100 potential

    counterparties of utility special entities. The Commission invites

    comments regarding whether this is a reasonable estimate to use for PRA

    paperwork burden calculations.

    Commission staff estimates that ascertaining whether a person is

    eligible to rely on the exclusion for utility operations-related swaps

    under the Proposal will take no more than one hour. Because the

    information required for the notice is readily known to the person,

    staff estimates that preparing and filing the notice will take no more

    than one-half hour. The notice will be filed only once, but a person

    who has filed a notice will periodically check to ensure that it

    remains eligible. Staff estimates that because such verification will

    be based on information within the person's control, it will not

    require more than an hour annually.

    Consequently, the Commission preliminarily estimates the burden

    associated with the required notice filing would be as follows:

    Number of Respondents: 100.

    Frequency of Response: Annually (initial filing and ongoing

    compliance).

    Average Burden Hours per Response: 1.2.

    Estimated gross annual reporting burden: $79,680.

    On this basis, the Commission will request a new collection of

    information control number from OMB.

    Proposed Regulation 1.3(ggg)(4)(i)(B) would also require a person

    seeking to rely on the proposed exclusion for utility operations-

    related swaps to maintain books and records in accordance with

    Regulation 1.31 that substantiate its eligibility. The Commission notes

    that it has previously requested and obtained OMB Control Number 3038-

    0090 pertaining to Regulation 1.31. The Commission preliminarily

    believes that each person claiming the proposed exclusion will need to

    establish a procedure to maintain the necessary books and records

    substantiating ongoing eligibility with for reliance on the proposed

    exclusion. In addition, each such person will incur some burden to

    create and maintain relevant records. As noted above, the Commission

    preliminarily estimates 100 persons may seek to rely on the exclusion

    for utility operations-related swaps under the Proposal, if adopted.

    Although the books and records required to substantiate initial and

    ongoing eligibility to rely on the exclusion will be books and records

    that the person has already prepared in the course of engaging in

    utility operations-related swaps, Commission staff estimates that the

    person will incur an hour of burden initially and an hour annually

    thereafter as a result of consulting and reviewing those books and

    records. Consequently, the Commission preliminarily estimates the

    recordkeeping burden associated with the proposed Regulation

    1.3(ggg)(4)(i)(B) would be as follows:

    Number of Respondents: 100.

    Frequency of Response: Annually.

    Average Burden Hours per Response: 1.

    Estimated gross annual reporting burden: $16,100.

    On this basis, the Commission will submit a request to amend OMB

    Control Number 3038-0090. The Commission preliminarily believes that

    the persons who are likely to rely on the exclusion for utility

    operations-related swaps may already have procedures in place to comply

    with this requirement so that actual burdens may be less--and possibly

    much less--for those persons.

    2. Information Collection Comments

    The Commission invites comment on any aspect of the proposed

    information collection requirements discussed above. Pursuant to 44

    U.S.C. 3506(c)(2)(B), the Commission will consider public comments on

    such proposed requirements in:

    Evaluating whether the proposed collection of information

    is necessary for the proper performance of the functions of the

    Commission, including whether the information will have a practical

    use;

    Evaluating the accuracy of the Commission's estimate of

    the burden of the proposed collection of information, including the

    validity of the methodology and assumptions used;

    Enhancing the quality, utility, and clarity of the

    information proposed to be collected; and

    Minimizing the burden of collection of information on

    those who are to respond, including through the use of appropriate

    automated, electronic, mechanical, or other technological information

    collection techniques.

    Copies of the submission from the Commission to OMB are available

    from the CFTC Clearance Officer, 1155 21st Street NW., Washington, DC

    20581, (202) 418-5160 or from http://RegInfo.gov. Persons desiring to

    submit comments on the proposed information collection requirements

    should send those comments to:

    The Office of Information and Regulatory Affairs, Office

    of Management and Budget, Room 10235,

    [[Page 31245]]

    New Executive Office Building, Washington, DC 20503, Attn: Desk Officer

    of the Commodity Futures Trading Commission;

    (202) 395-6566 (fax); or

    OIRAsubmissions@omb.eop.gov (email).

    Please provide the Commission with a copy of submitted comments so

    that all comments can be summarized and addressed in the final

    rulemaking, and please refer to the ADDRESSES section of this

    rulemaking for instructions on submitting comments to the Commission.

    OMB is required to make a decision concerning the proposed information

    collection requirements between thirty (30) and sixty (60) days after

    publication of the Proposal in the Federal Register. Therefore, a

    comment to OMB is best assured of receiving full consideration if OMB

    (as well as the Commission) receives it within thirty (30) days of

    publication of the Proposal. The time frame for commenting on the PRA

    does not affect the deadline established by the Commission on the

    Proposal, provided in the DATES section of this rulemaking.

    C. Cost-Benefit Considerations

    CEA Section 15(a) requires the Commission to consider the costs and

    benefits of its actions before promulgating a regulation under the CEA

    or issuing certain orders. CEA Section 15(a) further specifies that the

    costs and benefits shall be evaluated in light of five broad areas of

    market and public concern: (1) Protection of market participants and

    the public; (2) efficiency, competitiveness and financial integrity of

    futures markets; (3) price discovery; (4) sound risk management

    practices; and (5) other public interest considerations. The Commission

    considers the costs and benefits resulting from its discretionary

    determinations with respect to the Section 15(a) factors, and seeks

    comments from interested persons regarding the nature and extent of

    such costs and benefits.

    1. Background. The Commission is proposing to amend its regulations

    to permit a person to exclude utility operations-related swaps with

    utility special entities (as such terms are defined in the Proposal) in

    calculating the aggregate gross notional amount of the person's swap

    positions for purposes of the Special Entity De Minimis Threshold.

    As discussed above, CEA Section 1a(49) defines the term ``swap

    dealer,'' and Regulation 1.3(ggg) further defines that term. A person

    who comes within the swap dealer definition is subject to registration

    as such with the Commission and the regulatory requirements applicable

    to swap dealers.\39\ Regulation 1.3(ggg)(4)(i) provides an exception

    from the swap dealer definition for persons who engage in a de minimis

    amount of swap dealing activity. Currently, under Regulation

    1.3(ggg)(4)(i) persons who engage in swap dealing activity with special

    entities are excepted from the swap dealer definition so long as the

    swap positions connected with those dealing activities into which the

    person enters over the course of the immediately preceding 12 months

    have an aggregate gross notional amount of no more than $25 million

    (i.e., the Special Entity De Minimis Threshold). These regulatory

    provisions set the baseline for the Commission's consideration of the

    costs and benefits of the Proposal. That is, the Commission considers

    the costs and benefits that would result from allowing persons to

    exclude utility operations-related swaps with utility special entities

    from the Special Entity De Minimis Threshold ($25 million), such that

    the de minimis threshold with respect to such swaps would the same as

    for swaps not involving a special entity (i.e., the General De Minimis

    Threshold, currently set at $8 billion), subject to the requirements

    set forth in the Proposal.\40\

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    \39\ See, e.g., Part 23 of the Commission's regulations.

    \40\ While Staff Letter 14-34 currently provides no-action

    relief in circumstances, and subject to requirements, that are

    substantially similar to those of the Proposal, the Commission

    preliminarily believes that Staff Letter 14-34 should not set or

    affect the baseline from which the Commission considers the costs

    and benefits of the Proposal. This is because, as it indicates,

    Staff Letter 14-34 does necessarily represent the position or view

    of the Commission or any other office or division of the Commission.

    ---------------------------------------------------------------------------

    2. Costs. As noted by the Commission in the Swap Dealer Definition

    Adopting Release, ``a de minimis exception, by its nature, will

    eliminate key counterparty protections provided by Title VII for

    particular users of swaps . . . [and] [t]he broader the exception, the

    greater the loss of protection.'' \41\ In adopting the Special Entity

    De Minimis Threshold, the Commission explained that the $25 million

    threshold was ``appropriate in light of the special protections that

    Title VII affords to special entities.'' The Commission also recognized

    the ``serious concerns raised by commenters'' regarding the application

    of the de minimis exception to swap dealing with special entities in

    light of losses that special entities have incurred in the financial

    markets.\42\

    ---------------------------------------------------------------------------

    \41\ See 77 FR at 30596, 30627-30628 (May 23, 2012).

    \42\ See Id. at 30633.

    ---------------------------------------------------------------------------

    Under the Proposal, a greater quantity of swap dealing with utility

    special entities would potentially be undertaken without the benefits

    to utility special entities of that dealing activity being subject to

    swap dealer regulation.\43\ In addition, the Proposal will impose costs

    associated with ascertaining whether a person is eligible to rely on

    the proposed exclusion for utility operations-related swaps and the

    preparation and submission of the notice required to rely on the

    exclusion under proposed Regulation 1.3(ggg)(4)(i)(B)(2). Finally, to

    the extent that a person relying on the exclusion under the Proposal

    would be required to keep books and records it would not otherwise

    keep, in order to substantiate its eligibility for the exclusion, that

    represents another potential cost. Comments are invited regarding the

    extent of all of these costs, and any other costs that would result

    from adoption of the Proposal, including estimates of monetary or other

    measurements thereof.

    ---------------------------------------------------------------------------

    \43\ See Id. at 30707 (stating that the benefits of swap dealing

    regulation include customer protection, market orderliness and

    market transparency).

    ---------------------------------------------------------------------------

    3. Benefits. With respect to benefits, the Commission preliminarily

    believes that the Proposal will benefit utility special entities and

    the public by encouraging a greater number of prospective

    counterparties to engage with utility special entities in utility

    operations-related swaps.\44\ Because of the local and particularized

    nature of the electric and natural gas production and distribution, the

    number of potential swap counterparties for utility special entities

    seeking to hedge commercial risk is more limited than for other special

    entities seeking to hedge non-physical commodities. The number of

    counterparties to utility special entities may be further limited due

    to the unique obligation of utilities to provide continuous service to

    the public. These considerations may be more critical given the

    important role energy services play in public safety and commerce.

    Thus, limiting the number of counterparties to utility special entities

    could be counter to the public interest.

    ---------------------------------------------------------------------------

    \44\ The Commission explained in the Swap Dealer Definition

    Adopting Release that ``[i]n principle, a higher [de minimis]

    threshold would promote a larger pool of swap-dealing entities

    (since entities with swap dealing activity below the threshold need

    not incur costs to comply with swap dealer regulations), meaning

    more potential counterparties available to swap users.'' See Id.

    ---------------------------------------------------------------------------

    Accordingly, increasing the number of potential counterparties

    available to utility special entities will enable utility special

    entities to practice sound, cost-effective risk management and to

    [[Page 31246]]

    efficiently operate and conduct their business. This will, in turn,

    help utility special entities meet their obligations to provide

    continuous services to the public in a cost-effective manner, and will

    help protect the public interest and safety that is dependent on such

    energy services. Comments are sought regarding these benefits and any

    other benefits resulting from adoption of the Proposal, and to the

    extent they can be quantified, estimates of the monetary or other value

    thereof.

    4. Section 15(a). Section 15(a) of the CEA requires the Commission

    to consider the effects of its actions in light of the following five

    factors:

    a. Protection of Market Participants and the Public. The Proposal

    will allow utility special entities to engage in certain swaps to a

    greater extent than other special entities, without the protections of

    swap dealer registration and regulation. However, given the limited

    circumstances for which the proposed exclusion would apply, and the

    requirements persons must meet to rely on the exclusion, the Commission

    preliminarily believes the costs to the affected utilities, market

    participants and the public will be limited. Moreover, these costs will

    be counteracted by the benefits the Proposal will provide to utility

    special entities and the public, namely, enabling utility special

    entities to efficiently hedge and manage risk, and to meet their

    obligations to provide vital energy services to the public in a

    consistent and cost-effective manner.

    b. Efficiency, Competitiveness, and Financial Integrity of Markets.

    The Commission preliminarily believes that the Proposal will enhance

    efficiency and competitiveness in the electricity and natural gas

    markets by encouraging prospective counterparties to engage in swap

    transactions with utility special entities. The availability of

    additional swap counterparties in these markets will enhance

    competition between counterparties, which will, in turn benefit utility

    special entities by lowering transaction costs for utility special

    entities.

    c. Price Discovery. It is unlikely that facilitating more

    counterparties for utility special entities to trade with will have a

    significant impact on price discovery. Price discovery is the process

    by which prices for underlying commodities may be determined or

    inferred through market prices. The addition of more counterparties

    willing to trade with utility special entities may improve, but not

    necessarily adversely impact, the prices that the utility special

    entities receive on their swap contract transactions, but the overall

    effect on the determined or inferred prices for the underlying

    commodities is indeterminate. Interested persons are invited to comment

    on this conclusion.

    d. Sound Risk Management. The Commission preliminarily believes

    that if counterparties refrain from transacting in swaps with utility

    special entities because of the regulatory costs associated with swap

    dealer registration and regulation, the ability of utility special

    entities to hedge commercial risks will be impaired, particularly in

    cases for which the number of counterparties available becomes very

    limited. Mitigating the costs and regulatory concerns of potential

    counterparties by permitting them to transact with utility special

    entities without being subject to swap dealer registration and

    regulation will enable utility special entities to better manage their

    commercial risk.

    e. Other Public Interest Considerations. As discussed above, the

    Commission preliminarily believes the proposed rule will enable utility

    special entities to practice sound, cost-effective risk management and

    to more effectively operate and conduct their business. This may, in

    turn, help utility special entities meet their obligations to provide

    continuous services to the public in a more cost-effective manner.

    5. Request for Comment

    The Commission invites comments from the public on all aspects of

    its preliminary consideration of costs and benefits associated with the

    Proposal. The questions below relate to areas that the Commission

    preliminarily believes may be relevant. In addressing these or any

    other aspect of the Commission's preliminary assessment, commenters are

    encouraged to submit any data or other information that they may have

    quantifying or qualifying the costs and benefits of the Proposal.

    a. What are the costs and benefits to market participants, if any,

    associated with the Proposal? Please explain and, to the extent

    possible, quantify these costs.

    b. What are the costs and benefits to the public associated with

    the Proposal? Please explain and, to the extent possible, quantify

    these costs.

    c. Would a de minimis threshold other than the General De Minimis

    threshold for transactions with utility special entities as set forth

    in the Proposal impact the costs and/or benefits to market participants

    or the public? Is there a threshold level that would be optimal, i.e.,

    maximize net benefits?

    d. Has the Commission identified all of the relevant categories of

    costs and benefits in its preliminary consideration of the costs and

    benefits associated with the Proposal? Please describe any additional

    categories of costs or benefits that the Commission should consider

    with respect to the Proposal.

    e. To what extent does the Proposal protect market participants and

    the public? How, if at all, could the Proposal be altered to better

    protect market participants and the public?

    f. How, if at all, does the Proposal affect the efficiency,

    competitiveness, and financial integrity of markets?

    g. How, if at all, does the Proposal affect price discovery for

    utility operations-related swaps? For the swaps market more generally?

    h. How, if at all, does the Proposal affect sound risk management

    for utility special entities? For participants in the swaps market more

    generally?

    i. How, if at all, does the Proposal affect the public interest?

    List of Subjects in 17 CFR Part 1

    De minimis exception, Registration, Special Entities, Swap dealers,

    Swaps, Utility operations-related swaps, Utility special entities.

    For the reasons discussed in the preamble, the Commission proposes

    to amend 17 CFR part 1 as follows:

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    0

    1. The authority citation for part 1 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,

    6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8,

    9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24

    (2012).

    0

    2. Amend Sec. 1.3 by revising paragraph (ggg)(4)(i) to read as

    follows:

    Sec. 1.3 Definitions.

    * * * * *

    (ggg) * * *

    (4) De minimis exception--(i)(A) In General. Except as provided in

    paragraph (ggg)(4)(vi) of this section, a person that is not currently

    registered as a swap dealer shall be deemed not to be a swap dealer as

    a result of its swap dealing activity involving counterparties, so long

    as the swap positions connected with those dealing activities into

    which the person--or any other entity controlling, controlled by or

    under common control with the person--enters over the course of the

    immediately preceding 12 months (or following the effective date of

    final rules implementing Section 1a(47) of the Act, 7 U.S.C. 1a(47), if

    that period is less than 12 months) have an aggregate gross

    [[Page 31247]]

    notional amount of no more than $3 billion, subject to a phase in level

    of an aggregate gross notional amount of no more than $8 billion

    applied in accordance with paragraph (ggg)(4)(ii) of this section, and

    an aggregate gross notional amount of no more than $25 million with

    regard to swaps in which the counterparty is a ``special entity'' (as

    that term is defined in Section 4s(h)(2)(C) of the Act, 7 U.S.C.

    6s(h)(2)(C), and Sec. 23.401(c) of this chapter), except as provided

    in paragraph (ggg)(4)(i)(B) of this section. For purposes of this

    paragraph, if the stated notional amount of a swap is leveraged or

    enhanced by the structure of the swap, the calculation shall be based

    on the effective notional amount of the swap rather than on the stated

    notional amount.

    (B) Utility Special Entities. (1) Solely for purposes of

    determining whether a person's swap dealing activity has exceeded the

    $25 million aggregate gross notional amount threshold set forth in

    paragraph (ggg)(4)(i)(A) of this section for swaps in which the

    counterparty is a special entity, a person may exclude ``utility

    operations-related swaps'' in which the counterparty is a ``utility

    special entity.''

    (2) For purposes of this paragraph (4)(i)(B) a ``utility special

    entity'' is a special entity, as that term is defined in Section

    4s(h)(2)(C) of the Act, 7 U.S.C. 6s(h)(2)(C), and Sec. 23.401(c) of

    this chapter, that:

    (i) Owns or operates electric or natural gas facilities, electric

    or natural gas operations or anticipated electric or natural gas

    facilities or operations;

    (ii) Supplies natural gas or electric energy to other utility

    special entities;

    (iii) Has public service obligations or anticipated public service

    obligations under Federal, State or local law or regulation to deliver

    electric energy or natural gas service to utility customers; or

    (iv) Is a Federal power marketing agency as defined in Section 3 of

    the Federal Power Act, 16 U.S.C. 796(19).

    (3) For purposes of this paragraph (ggg)(4)(i)(B) a ``utility

    operations-related swap'' is a swap that meets the following

    conditions:

    (i) A party to the swap is a utility special entity;

    (ii) A utility special entity is using the swap in the manner

    described in Sec. 50.50(c) of this chapter;

    (iii) The swap is related to an exempt commodity, as that term is

    defined in Section 1a(20) of the Act; and

    (iv) The swap is an electric energy or natural gas swap; or the

    swap is associated with: The generation, production, purchase or sale

    of natural gas or electric energy, the supply of natural gas or

    electric energy to a utility special entity, or the delivery of natural

    gas or electric energy service to customers of a utility special

    entity; fuel supply for the facilities or operations of a utility

    special entity; compliance with an electric system reliability

    obligation; or compliance with an energy, energy efficiency,

    conservation, or renewable energy or environmental statute, regulation,

    or government order applicable to a utility special entity.

    (4) Any person relying upon the exclusion in paragraph

    (ggg)(4)(i)(B)(1) of this section must file electronically with the

    National Futures Association a Notice of Reliance on Exclusion for

    Utility Operations-Related Swaps with Utility Special Entities. The

    notice must be filed by no later than [effective date of final rule] or

    the date the person first engages in such swaps, whichever is later.

    The notice must contain: The person's name, main business address, and

    main telephone number; the name of a contact; and a statement signed by

    an individual with authority to bind the person that the person meets

    the criteria for the exclusion in Regulation 1.3(ggg)(4)(i)(B)

    (paragraph (ggg)(4)(i)(B) of this section).

    (5) Each person who relies on the exclusion in paragraph

    (ggg)(4)(i)(B) of this section must maintain books and records, in

    accordance with Sec. 1.31, that substantiate its eligibility to rely

    on the exclusion in paragraph (ggg)(4)(i)(B) of this section.

    * * * * *

    Issued in Washington, DC, on May 23, 2014, by the Commission.

    Christopher J. Kirkpatrick,

    Deputy Secretary of the Commission.

    Note: The following appendix will not appear in the Code of

    Federal Regulations.

    Appendix to Exclusion of Utility Operations-Related Swaps With Utility

    Special Entities From De Minimis Threshold for Swaps With Special

    Entities--Commission Voting Summary

    On this matter, Acting Chairman Wetjen and Commissioner O'Malia

    voted in the affirmative. No Commissioner voted in the negative.

    [FR Doc. 2014-12469 Filed 5-30-14; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: June 2, 2014



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