On September 17, 2014, the Commodities Futures Trading Commission (“CFTC”) issued a final rule, amending its regulations to permit a person to exclude utility operations-related swaps entered into with “utility special entities” when calculating the aggregate gross notional amount of that person’s swap positions. This exclusion is solely for purposes of the de minimis exception applicable to swaps with “special entities.”
Section 1a(49)(D) of the Commodity Exchange Act requires the CFTC to exclude an entity that engages in a “de minimis” amount of swap dealing from the statutory definition of “swap dealer.” This section also requires that the CFTC promulgate regulations establishing the parameters of this exclusion.
In carrying out this statutory mandate, the CTFC adopted Regulation 1.3(ggg) in 2012, which contained an exclusion from the definition of “swap dealer” for a person that has entered into swap positions connected to its swap dealing activities that, in the aggregate, do not exceed either of two aggregate gross notional amount thresholds during the proceeding twelve-month period. The two thresholds are: 1) the “General De Minimis Threshold,” which consists of a $3 billion ceiling, subject to a phase-in level of $8 billion; and 2) the “Special Entity De Minimis Threshold,” which consists of a $25 million ceiling for swaps in which the counterparty is a “special entity.” Regulation 23.401(c) further defines “special entity” to include federal and state agencies, cities, counties, municipalities, and “any instrumentality, department, or corporation…established by a State or Subdivision of a State,” among others.
On July 12, 2012, 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”) petitioned the CFTC to exclude from consideration, when determining whether a person has exceeded the Special Entity De Minimis Threshold of $25 million, swaps involving electric and gas utilities owned by state and local governments, and federal power marketing administrations—defined by the Petitioners as “utility special entities.” These parties were particularly concerned with “utility operations-related swaps,” or swaps that a utility enters into to hedge or mitigate commercial risk.
Under the CFTC’s final rule, such utility operations-related swaps are subject to the higher General De Minimis Threshold of $3 billion with a phase-in level of $8 billion, rather than the significantly smaller Special Entity De Minimis Threshold of $25 million. The CFTC found that this higher threshold was in the public interest, given the critical role that gas and electric distribution plays in public safety and commerce, and the important role that swaps play in the day-to-day business of the utility special entities that provide these services.
A copy of the CFTC’s final rule may be found here.