February 25, 2016
Good morning and welcome to the first 2016 meeting of the CFTC’s reconstituted Energy and Environmental Markets Advisory Committee (“EEMAC”). I would like to welcome new members to the EEMAC and to today’s meeting: Ms. Susan Bergles, Assistant General Counsel, American Gas Association, Mr. Raymond A. Kahn, Board Member, Futures Industry Association, Mr. Michael Padgett, Vice President, Energy and Carbon Strategy, Alcoa Energy and Ms. Arushi Sharma Frank, Director of Regulatory Affairs and Counsel, Electric Power Supply Association. In addition, Professor Craig Pirrong, who was formerly an Associate Member, is now a full member. I welcome the Honorable Kenneth W. Anderson, Jr., Commissioner of the Public Utility Commission of Texas, who has come up from Austin to participate in our first panel. I also want to recognize and thank EEMAC member, Dena Wiggins, who will serve as today’s meeting Chair.
At our last meeting, I noted my grave concern about severe declines in the price of physical commodities. And those declines have intensified. Indeed, according to data provided to me by the CFTC Office of Chief Economist, the Bloomberg investable commodity index is down 53 percent since December 2010.1 According to another measure, commodity prices are at their weakest levels in 43 years.2 Falling commodity prices are acutely reflected in energy prices, with oil hovering around $30 per barrel. This is having a direct impact on American jobs with US energy producers, merchandisers, transporters, refiners and processors now facing their second and third rounds of lay-offs. The collapse in oil prices is also weighing heavily on the U.S. and European banking sector with adverse implications for U.S. and global economic growth.3
Of course, the CFTC plays no role in regulating the price of commodities, regardless of whether they are high or low. Still, as I have stressed previously, the CFTC must take care that it not inflict needless pain on our commodities markets, which are integral to the health of the U.S. economy. When farmers struggle to put food on their tables, energy producers face layoffs and so many energy-sector firms teeter at the edge of bankruptcy4, this agency must promote policies that do not needlessly impinge on the ability to hedge against plummeting prices. In this time of low growth economics, we must provide market participants with legal certainty and regulations whose benefits unambiguously justify their costs.
Panel I: Do the Commission’s Exemptive Orders Provide Enough Certainty?
Along those lines, in our first panel this morning, we will examine the CFTC’s proposed order exempting certain transactions in the market administered by Southwest Power Pool (“SPP”), a regional transmission organization (“RTO”), from most provisions of the Commodity Exchange Act (“CEA”) and CFTC rules (the “SPP Order”). As most of you know, the Federal Energy Regulatory Commission (“FERC”) created RTOs and independent system operators (“ISOs”) to “encourage competition by facilitating development of regional power markets and enhancing trading opportunities for a region’s buyers and sellers.”5 RTOs and ISOs are public utilities that the FERC—or, in the case of wholly intrastate RTO/ISOs, the state public utility commission—regulates more extensively than other public utilities or other commodity markets.6 The Dodd-Frank Act recognized that the FERC and state regulators maintain their authority to regulate and supervise transactions entered into pursuant to tariffs they approve,7 and instructed the CFTC and other electric power regulators to harmonize and streamline their regulation of these vital markets.8 Exemptive relief is a good way of achieving this result and accords with congressional intent.
The CFTC, however, has proposed to retain authority to enforce fraud, manipulation and other scienter-based violations of the CEA. Although the proposed regulatory text was silent on the matter, the preamble of the SPP Order suggests that the CFTC intends to permit private parties to bring suit involving the same offenses pursuant to section 22 of the CEA. It is also suggested that the CFTC intends the same result—permitting private lawsuits—in a similar final order exempting certain transactions offered or entered into on six other RTOs or ISOs (the “RTO-ISO Order”).9
This earlier RTO-ISO Order has already spawned private litigation that, many believe, threatens to disrupt coordination and certainty in the regulation of the electricity markets. Commenters have warned that permitting private suits will undermine regulatory certainty and could result in collateral attacks on the finely calibrated electricity market structure that state and federal regulators have enacted.
The first private suit filed since RTOs and ISOs received exemptive relief appears to bear out these predictions.10 There is concern that the CFTC’s seeming unwillingness to exempt the SPP transactions from the private right of action provided by section 22 of the CEA11 is a serious misstep. It may needlessly subject millions of American ratepayers to higher utility bills as a result of the consequent increase in litigation, court costs and settlement costs that will result from the proposed order. There are concerns that the proposed order will fail to protect low- and middle-income ratepayers by permitting private litigants to bring suit and meddle in heavily regulated markets that are at the heart of the U.S. economy. Today’s panel will examine these issues, consider the need for exemptive relief for RTO-ISO transactions and review the Commission’s exemptive orders in light of the congressional mandate for a streamlined, consistent regulatory approach to our nation’s vital electricity markets.
Panel II: The Swap Dealer De Minimis Exception
Our second panel will address the CFTC staff’s preliminary report regarding the swap dealer de minimis exception. The de minimis exception permits a market participant to engage in a limited amount of swap dealing—currently $8 billion—without having to register as a swap dealer, but that level will automatically drop to $3 billion on December 31, 2017 without further CFTC action.12
The staff has candidly acknowledged that the data used in the report was “limited,” not least because there is no indication in the swap data repositories whether a transaction was entered into for dealing purposes.13 The limited nature of the data was particularly acute in the context of non-financial commodity swaps, such as energy swaps, for which “total gross notional value of an entity’s dealing activity” was not available.14 As a result, the staff was not able to predict the consequences of raising or lowering the de minimis threshold for non-financial commodity derivatives like energy swaps.15 Instead, the staff suggested an alternative, using assumptions, some of which the CFTC has previously rejected, to identify dealing activity, particularly for non-financial commodity swaps.16
The CFTC staff has identified a range of policy factors to consider in setting the de minimis threshold, and has suggested a number of ways the CFTC could proceed, but has not recommended a specific course of action. Faced with this uncertainty, Congress recently expressed its preference that the CFTC complete a rulemaking raising the de minimis threshold to $8 billion or higher by February 16, 2016—a deadline that has passed.17
This panel will examine the CFTC staff’s report, its underlying assumptions, the available data and the range of policy responses available to the CFTC. It is appropriate that the CFTC provide market participants some certainty about the fate of the swap dealer de minimis level, as many market participants are already planning to reduce their activity in the swaps market in anticipation of the automatic decline in the de minimis threshold.
And as I have previously observed, the CFTC must be sensitive to trading liquidity—a need that the crisis in commodity prices only intensifies—as it crafts its policy response.18 Fortunately, we have a similar context to evaluate the likely impact the de minimis threshold can have on liquidity: as it has now recognized, the CFTC initially set the de minimis threshold for utility special entities too low. Consequently, utility special entities had to accept wide bid-ask spreads, if they could find liquidity at all.19 Fortunately, the CFTC remedied this matter by raising the de minimis threshold for utility special entities in a revised rule that the current Commission supported in the fall of 2014.20 The utility special entity de minimis example appears to be an excellent parallel for handling the broader swap dealer de minimis exception.
Discussion of EEMAC Report and Recommendations
In 2015, for the first time since the Dodd-Frank Act was enacted, the EEMAC satisfied its congressional mandate to hold meetings. In fact, it met twice as required.21 And today, again for the first time, the EEMAC submitted a report and recommendations to the CFTC pursuant to the Dodd-Frank Act.22 Under the law, this report was voted on by EEMAC’s nine statutory members and was not considered by its Associate members.
Adopted with an 8-1 vote, this report summarizes the EEMAC’s work in 2015, during which the EEMAC primarily considered the CFTC’s proposal to impose additional federal position limits on 28 physical commodity derivatives.23 The report also contains a pointed dissent.
The report concludes that “the CFTC should not finalize the position limits rule, as proposed,” and further provides four main recommendations to the Commission to make any final rule more workable.24
During our third panel, Jim Alison, a member of EEMAC and Chair of its first meeting in 2015 will summarize the report and its recommendations. After Jim, EEMAC member Tyson Slocum of Public Citizen will summarize the dissent. Thereafter, Dena Wiggins will moderate a discussion on the report.
It must be noted that the U.S. District Court has concluded that the CFTC is not under any unambiguous mandate to impose position limits.25 Therefore, and based on the recommendations of EEMAC before us today, I submit for the record that the CFTC should not and need not finalize its current position limits proposal.
In light of the value destruction currently plaguing U.S. energy and commodity markets, I believe it would be imprudent for the CFTC to move forward with the current proposal without lessening its adverse impact on orderly risk management by America’s commodity and energy producers and the consumers they serve.
Thank you to all of the witnesses who have prepared insightful presentations, and thank you to the CFTC staff who worked so hard to arrange this meeting. I am grateful to the Members and Associate Members of the EEMAC for volunteering their time and expertise.
I would be remiss if I did not note the characteristic grace and fortitude of my two fellow Commissioners in participating in the second market advisory committee in the past seventy-two hours. We three work hard to cover a lot of ground.
I would like to recognize Chairman Massad and Commissioner Bowen to make their opening remarks.
1 The Bloomberg Commodity Index weighs agricultural futures as 36.1 percent, energy futures (includes 15 percent crude oil) as 29.7 percent and metals as 34.2 percent of the index.
2 The Thomson Reuters/CoreCommodity CRB Index, a standard measure used to gauge the strength of the commodity markets dating back to the 1950s, has fallen to levels not seen since 1973. See Mark Zaccari, Bear Market Drops CRB Index to 43 Year Lows, See It Market (Jan. 26, 2016), http://www.seeitmarket.com/bear-market-drops-crb-commodities-index-to-43-year-lows-15245/.
3 It is currently estimated that the potential exposure of major U.S. lenders to the American energy industry is $123 billion, greater than the annual economic output of Ecuador. Lisa Abramowicz and Rani Molla, BA $123 Billion Chunk of Energy Debt, Bloomberg (Feb. 23, 2016), http://www.bloomberg.com/gadfly/articles/2016-02-23/big-u-s-banks-are-exposed-to-123-billion-in-energy-debt. See also Evan Soltas, Bad Energy Debt and the Banks, Economics & Thought (Feb. 23, 2016), http://esoltas.blogspot.com/2016/02/bad-energy-debt-and-banks.html.
4 Ernest Scheyder, “High Risk of Bankruptcy for One-Third of Oil Firms: Deloitte,” Reuters (Feb. 16, 2016) http://www.reuters.com/article/us-usa-shale-bankruptcy-idUSKCN0VP0O6. Approximately 175 companies are at risk of bankruptcy having incurred “more than $150 billion in debt[.]” Id.
5 FERC, Comment Letter on Proposed Order and Request for Comment on Petition of ISOs and RTOs for Exemption of Specified Transactions From Certain Provisions of the CEA, at 2 (Sept. 27, 2012).
6 FERC, Comment Letter on Proposed Order and Request for Comment on an Application for an Exemptive Order From Southwest Power Pool, Inc. From Certain Provisions of the Commodity Exchange Act Pursuant to the Authority Provided in Section 4(c)(6) of the Act, at 2 (June 22, 2015).
7 7 U.S.C. § 2(a)(I).
8 15 U.S.C. § 8308(a)(1) (2012) (directing the CFTC and the FERC to exercise their respective authorities to “ensure effective and efficient regulation in the public interest,” as well as to provide market participants certainty about the regulatory treatment of ISO-RTO transactions).
9 Although I was not yet a member of the Commission when it granted exemptive relief in the RTO-ISO Order, I support that decision. See Final Order in Response to a Petition From Certain Independent System Operators and Regional Transmission Organizations to Exempt Specified Transactions Authorized by a Tariff or Protocol Approved by the Federal Energy Regulatory Commission or the Public Utility Commission of Texas From Certain Provisions of the Commodity Exchange Act, 78 Fed. Reg. 19,880 (Apr. 2, 2013).
10 See Aspire Commodities LP v. GDF Suez Energy N. Am., Inc., Civil Action No. H–14–1111, 2015 WL 500482 (S.D. Tex. Feb. 3, 2015), appeal docketed, No. 15-20125 (5th Cir. Mar. 6, 2015) (“Aspire”).
11 7 U.S.C. § 25 (2012).
12 17 C.F.R. § 1.3(ggg)(4) (2015); Staff of the U.S. Commodity Futures Trading Commission, Swap Dealer De Minimis Exception Preliminary Report 1-2 (Nov. 18, 2015) (“Staff Report”).
13 Staff Report at 11-12; see also Statement of Commissioner J. Christopher Giancarlo on the Swap Dealer De Minimis Exception Preliminary Report (Nov. 18, 2015), http://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlostatement111815.
14 Staff Report at 18.
15 Id. at 48.
16 In particular, the Staff Report identifies transaction and counterparty counts as potential alternatives that could be used to identify dealing activity. Staff Report at 54-57. The Commission has previously rejected those factors in determining swap dealer status. Id. at 54 & n.90 (citing 77 Fed. Reg. at 33,630).
17 See H.R. Rep. No. 114-225, at 76 (Jul. 14, 2015), https://www.congress.gov/114/crpt/hrpt205/CRPT-114hrpt205.pdf; Accompanying Statement to the Consolidated Appropriations Act of 2016, Explanatory Statement, Division A, at 32 (Dec. 2015), http://docs.house.gov/meetings/RU/RU00/20151216/104298/HMTG-114-RU00-20151216-SD002.pdf.
18 See, e.g., J. Christopher Giancarlo, Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank 52-54 (Jan. 29, 2015), http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/sefwhitepaper012915.pdf; Opening Statement of Commissioner J. Christopher Giancarlo Before the CFTC’s Energy and Environmental Markets Advisory Committee (Feb. 26, 2015), http://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlostatement022615.
19 See generally Am. Pub. Power Ass’n, et al, Petition for Rulemaking to Amend CFTC Regulation 1.3(ggg)(4) (Jul. 12, 2012) http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/appallpcapgatapsbpaltr071212.pdf.
20 See Exclusion of Utility Operations-Related Swaps with Special Entities from De Minimis Threshold for Swaps with Special Entities, 79 Fed. Reg. 57767 (Sept. 26, 2014).
21 7 U.S.C. § 2(a)(15) (2012).
23 Position Limits for Derivatives, 78 Fed. Reg. 75,680 (Dec. 12, 2013).
24 EEMAC, Report on EEMAC’s 2015 Review and Consideration of the CFTC’s Proposed Rule on Position Limits 12 (2016).
25 Int’l Swaps & Derivatives Ass’n v. CFTC, 887 F. Supp. 2d 259, 267-68 (D.D.C. 2012), appeal dismissed, No. 12-5362 (D.C. Cir. Nov. 6, 2013).
Last Updated: February 25, 2016