On May 30, 2014, the Commodity Futures Trading Commission (“CFTC”) issued a proposed rule to exclude utility operations-related swaps with utility special entities in calculating the aggregate amount of an entity’s swap positions for the purposes of the special entity de minimis threshold. The proposed rule follows CFTC Letter No. 14-34, which provided temporary enforcement relief for parties failing to register as a swap dealer with respect to utility business-related swaps with public power utilities. If the proposed rule is adopted, a party entering into a swap with an electric or natural gas utility special entity hedging commercial risk will not be required to apply the value of such swap to the $25 million special entity de minimis threshold but instead will apply the value of such swap to the general de minimis threshold (see April 1, 2014 edition of the WER).
Under the Commodity Exchange Act and CFTC regulations, a special entity includes Federal agencies; State agencies; any political subdivision of a State; and any instrumentality, department, or corporation of or established by a State or subdivision of a State. Notably, CFTC’s definition of utility special entities would include special entities that own or operate electric or natural gas facilities or operations, such as the Los Angeles Department of Water and Power.
Under CFTC’s proposed rule, utility operations-related swaps with utility special entities would be excluded from the calculation of the Special Entity De Minimis Threshold. Utility operations-related swaps with utility special entities would still be included in the calculation of the General De Minimis Threshold. In order to rely on the exclusion, a person would have to file a one-time notice with the National Futures Association.
In its proposed rule, CFTC noted that utilities have an obligation to provide continuous services that are important to public safety. Furthermore, CFTC argued that utility operations-related swaps are an important part of managing costs in connection with providing continuous service. CFTC also recognized that because utility special entities operate in specialized markets with a limited number of available counterparties, the $25 million Special Entity De Minimis Threshold may deter those counterparties from engaging in utility operations-related swaps. Accordingly, CFTC excluded utility operations-related swaps with utility special entities from the Special Entity De Minimis Threshold calculation in order to maintain the liquidity of those specialized markets so utilities can provide continuous service.
Comments on the proposed rule are due July 2, 2014. A copy of the proposed rule is available here.