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, [email protected]; Erik Remmler, Deputy Director, (202) 418-7630,
[email protected]; Christopher W. Cummings, Special Counsel, (202) 418-
5445, [email protected]; or Israel Goodman, Special Counsel, (202)
418-6715, [email protected], 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.
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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.
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\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).
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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\
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\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.
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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.
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\30\ As noted above, the term ``special entity'' is defined in
CEA Section 4s(h)(2)(c) and Regulation 23.401(c).
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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).
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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?
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\32\ See 77 FR 48238 (Aug. 13, 2012).
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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.
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\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.
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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.
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\38\ 44 U.S.C. 3501 et seq.
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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
[email protected] (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.
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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\
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\41\ See 77 FR at 30596, 30627-30628 (May 23, 2012).
\42\ See Id. at 30633.
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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.
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\43\ See Id. at 30707 (stating that the benefits of swap dealing
regulation include customer protection, market orderliness and
market transparency).
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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.
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\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.
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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