Update on the Dodd-Frank Act.

• Author: Enochs, Craig R.

1. FINAL RULES AND ORDERS A. Exemption for Transactions between FPA 201(f) and Similar Entities B. Exemption of Specified Transactions in Regional Transmission Organization or Independent System Operator Markets C. Legal Entity Identifiers and the CICI Number Requirement D. Clearing Exemption for Swaps Between Certain Affiliates E. Policy Statement on Anti-Disruptive Trading Practices II. NO-ACTION LETTERS A. No-Action Letter 12-17 (October 12, 2012): Swap Guarantors as ECPs B. No-Action Letter 13-08 (April 5, 2013): Trade Options C. No-Action Letter 13-10 (April 9, 2013): Relief with Respect to the Compliance Date of 4-10-13 for Reporting Obligations under Part 43, 45 and 46 of the CFTC's Regulations D. No-Action Letter 13-22 (June 4, 2013): Relief from the Clearing Requirement for Swaps Entered into by Eligible Treasury Affiliates III. JUDICIAL DECISIONS A. Challenge to the CFTC Position Limits Rule: ISDA v. CFTC B. Public Disclosure of Payments to Governments: API v. SEC IV. ISDA COMPLIANCE DOCUMENTATION A. Swap Guarantors as ECPs B. ISDA Protocols V. CONCLUSION Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") is intended to provide a comprehensive framework for the regulation of over-the-counter ("OTC") derivatives. (1) The obligations of companies transacting in swaps in the natural gas and power markets have been shaped by recent court cases and by multiple final rules, no-action letters, and interpretive guidance and policy statements of the Commodity Futures Trading Commission (the "CFTC"). This paper identifies and discusses some of the developments in those areas arising since late 2012, with particular emphasis given to those developments that most impact end users.

1. FINAL RULES AND ORDERS

   From late 2012 through 2013, the CFTC has proposed rules, responded to comments, provided policy statements, and promulgated final orders. This section summarizes recent orders exempting certain transactions between government and cooperatively-owned electric utilities, transactions in certain regional transmission organization ("RTO") or independent system operator (ISO) markets, the CICI-number requirement, the clearing exemption for swaps between affiliates, and a policy statement regarding the CFTC's interpretation of certain antidisruptive trading practice rules.

   1. Exemption for Transactions between FPA 201(f) and Similar Entities

      Section 201(f) of the Federal Power Act ("FPA") exempts certain government and cooperatively-owned electric utilities ("201(f) Entities") from the Federal Energy Regulatory Commission's ("FERC") jurisdiction. (2) Similarly, Dodd-Frank provides the CFTC the discretion to exempt from the Commodity Exchange Act ("CEA") certain transactions between 201(f) Entities if the exemption is consistent with public interest and the CEA's purpose. (3) In April 2013 the CFTC adopted a final order that exempts specific non-financial energy derivative transactions between 201(f) Entities and/or other similar entities from most of Dodd-Frank's amendments to the CEA, including: (1) Electric Energy Delivered transactions; (2) Generation Capacity transactions; (3) Transmission Services transactions; (4) Fuel Delivered transactions; (5) Cross-Commodity Pricing transactions; or (6) other goods and services transactions related to sharing the costs and benefits of construction, operation, and maintenance of generation or transmission facilities. (4)

      The order's exemption is not absolute. The CFTC explicitly reserves its general anti-fraud and anti-manipulation authority, enforcement authority, and its general authority to inspect books and records. (5) Further, the exemption requires both an eligible entity and an eligible transaction. To be exempt, the entity must not be a "financial entity" according to the provisions of the CEA (6) and must fit within one of the following categories:

      1. A 201(f) government-owned electric utility or facility;

      2. A cooperative-owned electric utility or facility that either

         a. Receives financing from the Rural Utilities Service, or

         b. Sells less than four million megawatts of electricity per year;

      3. An electric utility or facility owned by a small non-profit cooperative that does not otherwise qualify under FPA Section 201(f); or

      4. A federally-recognized Indian tribe-owned electric utility or facility. (7)

         Additionally, any contemplated transaction must:

      1. Be entered into for the purpose of managing supply and/or price risk arising from the entities' existing or anticipated public service obligations to physically generate, transmit, and/or deliver electric energy to customers;

      2. Not be cleared;

      3. Be associated with an obligation to make or take physical delivery and not be used for speculation; and

      4. Not reference or be based on any financial asset class of a commodity.

   2. Exemption of Specified Transactions in Regional Transmission Organization or Independent System Operator Markets

      In April 2013, the CFTC approved a final order that provides it the ability to exempt transactions from certain provisions of the CEA and Dodd-Frank. (8) The CFTC has exempted these transactions and left the door open for future additional exemptions because it recognizes that FERC or Public Utility Commission of Texas ("PUCT") regulation of the exempted transactions would cause any CFTC regulations to be unnecessary and redundant. (9)

      If transactions can be shown to have been entered into and regulated on a RTO or ISO market pursuant to a FERC or PUCT approval tariff, the order exempts the following transactions from Dodd-Frank's requirements: (1) Financial Transmission Rights and Congestion Revenue Rights; (2) energy transactions in day-ahead and real-time markets; (3) forward capacity transactions; and (4) reserve or regulation transactions. (10)

      Additionally, to qualify for an exemption, a transaction offered or sold in a RTO or ISO market must be entered into by either (i) an "appropriate person," (ii) an "eligible contract participant" ("ECP"), or (iii) a "person who actively participates in the generation, transmission, or distribution of electric energy. (11) Importantly, bilateral transactions between RTO or ISO market participants are not included in this exemption and may be swaps subject to Dodd-Frank. (12)

   3. Legal Entity Identifiers and the CICI Number Requirement

      The CFTC adopted a final rule regarding Legal Entity Identifiers ("LEI") in January 2012. (13) That rule provides that each counterparty to any swap subject to the CFTC's jurisdiction must be identified in all recordkeeping and data reporting by a single LEI issued pursuant to the CFTC's rules. (14) The Department of Market Oversight ("DMO") and Office of Data and Technology also issued a reminder that all swap participants that are not either a swap dealer ("SD") or major swap participant ("MSP") were required to have obtained an LEI (currently termed a CFTC Interim Compliance Identifier or "CICI") by April 10, 2013. (15) CICI numbers may be obtained, and CICI status may be confirmed, through the CICI Utility web portal. (16)

   4. Clearing Exemption for Swaps Between Certain Affiliates

      In April 2013, the CFTC amended 17 C.F.R. part 50 to except certain inter-affiliate swaps from the general clearing requirement established by CEA section 2(h)(1)(A). 17 By promulgating the new rule, the CFTC recognized that inter-affiliate transactions "provide an important risk management role within corporate groups ... and ... if properly risk-managed, may be beneficial to the entity as a whole." (18) It further concluded that the exemption is "appropriate for the transactions at issue, promotes responsible financial innovation and fair competition, and is consistent with the public interest." (19) Pursuant to the rule, effective June 10, 2013, clearing is not required if:

      1. The counterparties report their financials on a consolidated basis;

      2. One party owns the other, or they are owned by a common third party;

      3. Both parties comply with the relevant rule provisions;

      4. The swap is subject to a centralized risk management program that is reasonably designed to monitor and manage the risks associated with the swap;

      5. One of the parties reports the trade information to a swap data repository ("SDR"); and

      6. If one of the affiliates is located in a foreign jurisdiction, certain other requirements are met. (20)

   5. Policy Statement on Anti-Disruptive Trading Practices (21)

      1. Pre-Dodd-Frank: Price Manipulation

         Before Dodd-Frank, the CFTC was responsible for determining and enforcing the CEA's prohibitions on price manipulation. Courts variously applied the following four-part test to determine price manipulation by a market participant:

         a. The person had the ability to influence market prices;

         b. The person had the specific intent to create a price that does not reflect supply and demand;

         c. Artificial prices existed; and

         d. The person caused the artificial prices. (22)

      2. Post-Dodd-Frank: Price Manipulation and Fraud

         Dodd-Frank has expanded the CFTC's authority to include fraud in commodity sales as well as market manipulation. (23) A new test for market manipulation of swaps and physical commodity contracts was added as well as a prohibition on trading on material non-public information in breach of a pre-existing duty. (24) The CFTC's new authority is set forth in 17 C.F.R. part 180 and Dodd-Frank sections 747 and 753. (25)

         a. 17 C.F.R. [section] 180.1

         Rule 180.1 is intended to be a broad catchall clause capturing intentional or reckless misconduct. (26) While rule 180.1 is virtually identical to section 10(b) of the Securities Exchange Act of 1934 ('"34 Act"), (27) the CFTC stated it will merely be guided--not controlled--by prior section 10(b) precedents. (28) Thus while some precedent exists under section 10(b) as to how the CFTC might enforce this rule, it is unclear at this time the extent to which the CFTC will deviate from such precedent when enforcing rule 180.1.

         The rule...