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From Securities Regulation Daily, May 27, 2014

CFTC provides relief for end-users on special utility swaps, recordkeeping requirements

By Lene Powell, J.D.

CFTC Acting Chairman Mark Wetjen and Commissioner Scott O’Malia announced three measures designed to assist swaps end-users and promote trading on swap execution facilities (SEFs) and designated contract markets (DCMs). The Commission proposed to amend regulations to exclude utility operations-related swaps from the special entity de minimis threshold for registration as a swap dealer. The Division of Swap Dealer and Intermediary Oversight issued no-action relief relating to certain recordkeeping provisions relating to written communications. In addition, the CFTC opened comment periods for two previous proposals relating to position limits in anticipation of a roundtable on the subject scheduled for June 19.

“These proposals collectively reflect our continuing efforts to ensure that market regulations accomplish their intended function without creating negative, unintended consequences, in particular for commercial end-users,” said Acting Chairman Wetjen.

Swaps with utility special entities. Under Section 1a(49) of the Commodity Exchange Act, entities that engage in a de minimis quantity of swap dealing, as defined, are exempted from swap dealer designation. In implementing this section, CFTC Regulation 1.3(ggg)(4) includes an exception from the swap dealer definition for a person that enters 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 general de minimis threshold is $3 billion, subject to a phase-in level of $8 billion, and the threshold for swaps in which the counterparty is a “special entity” is $25 million. Among others, the term “special entity” includes “any instrumentality, department, or a corporation of or established by a State or subdivision of a State.”

In 2012, the CFTC received a rulemaking petition asking that the regulation be amended to exclude, when considering whether a person has exceeded the special entity de minimis threshold, swaps to which the petitioners and certain other special entities (collectively defined as “utility special entities”) are counterparties and that relate to the petitioners’ and other utility special entities’ utility operations (defined as “utility operations-related swaps”). The petition defined “utility operations-related swaps” as swaps that hedge or mitigate commercial risks “intrinsically related” to the electric or natural gas facilities that the utility special entity owns or operates or its electric or natural gas. The CFTC Division of Swap Dealer and Intermediary Oversight granted temporary limited no-action relief for utility commodity swaps in Staff Letter 12-18, saying it would not recommend enforcement action against a person for failure to apply for registration as a swap dealer if the person’s utility commodity swaps over the previous 12 months did not exceed an aggregate gross notional amount of $800 million. Subsequently, in Staff Letter 14-34, staff superseded and broadened the relief, providing that the Division would not recommend enforcement action if a person did not include “utility operations-related swaps” in calculating its swap-dealing activity for purposes of the special entity de minimis threshold.

The proposed amendment would allow persons engaging in utility operations-related swaps with utility special entities, as defined, to exclude such swaps solely for purposes of calculating whether such persons’ swap dealing activities have exceeded the special entity de minimis threshold. The amendment would not permit persons to exclude the gross notional amount of such utility operations-related swaps in determining whether the person has exceeded the general de minimis threshold. To rely on the exclusion provided by the new rule, a person would be required to file a one-time notice with the National Futures Association (NFA), providing specified information. In the release, the Commission asked a number of questions for public comment.

No-action relief re: 1.35(a) recordkeeping. Regulation 1.35(a) requires a member of a DCM or SEF to keep records of transactions relating to its business of dealing in commodity interests and related cash or forward transactions, in a way that is identifiable and searchable by transaction. The enumerated forms of communication include oral communications, but the regulation provides that the requirement does not apply to a member of a DCM or SEF that is not required to register with the CFTC (a “covered member”). The Commodity Markets Council requested relief from the requirement as to certain written communications, explaining that although many of its members are members of DCMs and will become members of SEFs, they are not otherwise required to register with the CFTC. Therefore, they are exempt from the requirement to record oral communications, but still must keep written communications.

The Division of Market Oversight and Division of Swap Dealer and Intermediary Oversight granted the request for relief, saying they would not recommend enforcement action against a covered member for failure to comply with the requirement under Regulation 1.35(a) to record text messages or with the requirement under Regulation 1.35(a) to keep the records required to be kept under Regulation 1.35 in a form and manner identifiable and searchable by transaction. However, covered members will still be required to keep all other written records (including other types of electronic and digital media such as emails and instant messages) required under Regulation 1.35(a).

Position limits: public comment. The CFTC has scheduled a public roundtable on position limits for June 19, 2014. To provide interested parties with an opportunity to comment on the issues to be discussed, the agency will open comment periods for two previous proposals, the Position Limits Proposal and the Aggregation Proposal, for a three-week period starting June 12, 2014 and ending July 3, 2014. Comments should be limited to the following issues: hedges of a physical commodity by a commercial enterprise, including gross hedging, cross-commodity hedging, anticipatory hedging, and the process for obtaining a non-enumerated exemption; the setting of spot month limits in physical-delivery and cash-settled contracts and a conditional spot-month limit exemption; the setting of non-spot limits for wheat contracts; the aggregation exemption for certain ownership interests of greater than 50 percent in an owned entity; and aggregation based on substantially identical trading strategies.

MainStory: TopStory Derivatives CommodityFutures Swaps

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