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.

—————————————————————————

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.

—————————————————————————

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).

—————————————————————————

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

—————————————————————————

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.

—————————————————————————

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.

—————————————————————————

30 As noted above, the term “special entity” is defined in

CEA Section 4s(h)(2)(c) and Regulation 23.401(c).

—————————————————————————

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

—————————————————————————

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).

—————————————————————————

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?

—————————————————————————

32 See 77 FR 48238 (Aug. 13, 2012).

—————————————————————————

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.

—————————————————————————

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.

—————————————————————————

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.

—————————————————————————

38 44 U.S.C. 3501 et seq.

—————————————————————————

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

—————————————————————————

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.

—————————————————————————

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

—————————————————————————

41 See 77 FR at 30596, 30627-30628 (May 23, 2012).

42 See Id. at 30633.

—————————————————————————

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.

—————————————————————————

43 See Id. at 30707 (stating that the benefits of swap dealing

regulation include customer protection, market orderliness and

market transparency).

—————————————————————————

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.

—————————————————————————

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.

—————————————————————————

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