On March 21, 2014, the Commodity Futures Trading Commission’s (“CFTC”) Division of Swap Dealer and Intermediary Oversight (“Division of Oversight”) issued a letter (“CFTC Letter No. 14-34”) concluding, subject to certain conditions, it would not recommend enforcement action against a party for failure to register as a swap dealer with respect to utility business-related swaps with public power utilities. The Division stated that allowing utility special entities to enter into “a larger volume of swaps with persons that are not registered [swap dealers] is not likely to raise the types of risks that the Commission’s [swap dealer] registration requirements are intended to prevent.” This “no action relief” is considered temporary while the CFTC considers a petition on the question, and will expire when the CFTC acts (or decides not to act) on the petition.
CFTC Commissioner Scott O’Malia issued a statement in conjunction with the release of the letter explaining that the “relief is a step in the right direction to address the impact on certain utilities that are special entities that were inadvertently caught up by the [CFTC’s] rules.” The American Public Power Association stated that the letter “puts public power utilities on an even playing field with investor-owned utilities and rural electric cooperatives in seeking counterparties to commercial operations-related swaps.”
Under the CFTC’s regulations, a party that regularly enters into swaps with counterparties in the ordinary course of business for its own account normally must register as a swap dealer and become subject to the Dodd-Frank requirements. The regulations, however, contain an exemption from this required registration. The registration requirement does not apply to a market participant who has entered into swap positions that, over the past twelve months in aggregate, do not exceed either: (i) $3 billion, subject to a phase in level of $8 billion (the “general de minimis threshold”), and (ii) $25 million where the counterparty is a “special entity” (referred to as the “special entity de minimis threshold”).
After the swap deal registration rule was published, multiple public power agencies (“Public Utility Parties”) jointly filed a petition requesting a rulemaking to amend the regulations. Concerned that the rule would reduce the number of potential counterparties for the nonfinancial commodity swaps used to mitigate commercial risks arising from their utility operations, the Public Utility Parties sought to exclude from the special entity de minimis threshold swaps with special entities that own or operate electric or natural gas facilities or operations (“utility special entities”) that relate to their utility operations (“utility commodity swaps”).
In response, the CFTC Division of Oversight issued CFTC Letter No. 12-18 wherein it acknowledged that utility special entities “have a unique obligation to provide continuous service to the public,” that the “service is crucial to public safety,” and a “significant reduction in the number of swap counterparties available to the utility special entities could be especially harmful to the public interest.” CFTC Letter No. 12-18 provided no action relief for market participants who: (i) provide notice to the Division of Oversight that they are applying for the no action relief; (ii) are not financial entities as defined by the CFTC rules; (iii) engage in utility commodity swaps with utility special entities; and (iv) have swap dealing activities over the immediately preceding 12 months that total an aggregate amount of no more than $800 million.
Subsequent to the issuance of CFTC Letter No. 12-18, certain of the Public Utility Parties remained concerned that many potential counterparties would continue to be stifled by the rule’s requirements due to procedural burden or ambiguity as to qualification. The CFTC Division of Oversight then issued CFTC Letter No. 14-34 to further empower utility special entities to find appropriate counterparties for swaps. In the letter, the CFTC provides no action relief that enables a market participant to deal in utility-related swaps with utility special entities up to the general de minimis aggregate $8 billion threshold without registering as a swap dealer. The special entity de minimis threshold continues to apply to non-utility operations-related swaps with utility special entities. CFTC Letter No. 14-34 provides temporary respite from the regulations while the CFTC further considers the issue, continuing until the effective date of any final CFTC action. CFTC Letter No. 14-34 expressly supersedes CFTC Letter No. 12-18 which is no longer active.
To view CFTC Letter No. 14-34, click here.