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Dodd-Frank and Electric Utilities
Understanding the new mosaic of commodities trading regulations.
public ultimately would shoulder. 77 The reality is that, by implementing a $25 million threshold, the CFTC limited the number of market participants that were willing to deal with special entities. 78 Counterparties that would be below the initial $8 billion threshold might not be willing to trade with special entities out of concern for exceeding the special entity $25 million de minimis threshold, which could, in turn, trigger regulatory issues for the non-special entity counterparties. 79
In response to repeated requests from various special entities, the commission issued no-action relief allowing the de minimis threshold to be increased to $800 million for utility commodity swaps. 80 Specifically, the no-action relief stated that commission wouldn’t recommend the commencement of an enforcement action against a person for failure to apply to be registered as a swap dealer, if: i) the utility commodity swaps 81 have an aggregate gross notional amount of no more than $800 million over a 12 month period; ii) the person isn’t otherwise a swap dealer; and iii) the person isn’t a financial entity, as defined in the CEA. Unfortunately, this no-action relief is limited to only those entities that provided the required notice to the CFTC. Specifically, to take advantage of the no-action relief and avoid the swap dealer registration, an entity was required to provide notice to the CFTC by Dec. 31, 2012. 82 As such, if an entity that desired to be a counterparty in certain utility commodity swaps with municipal utilities or other public power agencies didn’t provide such notice, based on a strict reading of the relief granted, the special entity $25 million de minimis threshold, and not the higher $800 million threshold, applies. Therefore, if an entity desires to rely on the higher threshold, but didn’t provide the required notice, separate authorization from the CFTC is required.
As the Dodd-Lincoln Letter indicates, the intent of Dodd-Frank wasn’t to regulate the activities of end-users, such as electric and natural gas utilities. The mosaic of rules and interpretations issued by the CFTC implementing the Act has generally provided a pathway for utilities to follow, whereby these types of end-users won’t be subject to every layer of Dodd-Frank’s comprehensive regulatory regime. In order to mitigate the regulatory burdens, a utility must be mindful to avoid transactions that would be considered swaps or aren’t covered by one of the many exemptions. Furthermore, if a utility enters into financial transactions that are swaps, the utility must be cognizant of the thresholds that, if crossed, would render such entities swap dealers or major swap participants.
4. See, e.g., the individual comments of Edison Electric Institute, American Gas Association, Electric Power Supply Association filed on Sept. 20, 2010 in response to the Advance Notice of Proposed Rulemaking and Request for Comments, Definitions Contained in Title VII of Dodd-Frank Wall Street Reform and Consumer