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CFTC- we got it wrong (but only a little bit)

The CFTC has announced three actions to remedy a small subset of problems created by its own legislation. “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. Bipartisan support for the actions was echoed by Scott O’Malia, “Today marks a significant victory for the end-user community and for the Commission’s rulemaking process… I am pleased that the Commission has chosen to confront the shortcomings in its rules by using the proper process that is consistent with the Administrative Procedure Act”. A brief summary follows:

  • Proposal to amend the swap dealer de minimis regulations. On 21st March the Agency issued a no-action letter exempting utility operations related swaps[1] from the $25 mln. sub-threshold calculation for swaps with special entities[2]. Since October 2013 when the swap dealer rules came into force, fearing that they may exceed the threshold and thereby trigger the obligation to register, a number of energy firms had refused to deal with public utilities. The no-action letter removed this category of swaps from the special entities calculation, while retaining their contribution to the general $8bn de minimis threshold, enabling utilities to transact with firms who are not registered as swap dealers. The proposed amendment will accomplish the same ends, but as a regulation it will have the full force of law, rather than the no-action letter’s mere statement of intent.
  • Reopening the public comment period for the proposed position limits rules. The CFTC has requested comment from market participants on substantive aspects of the hedging and aggregation exemptions to the Position Limits Proposal and Aggregation of Positions Proposal. The comment period extension is limited to those elements of the proposals that apply to “hedges of a physical commodity by a commercial enterprise”. The new comment period will run from 12th June 2014 to 3rd July 2014. The agency will also host a public roundtable on the 19th June 2014 to discuss hedging issues in physical commodity derivatives. The extension will go some way to pre-empting the usual criticism, and consequent litigation, that the CFTC has an autocratic disdain for the obligations of the Administrative Procedures Act.
  • No-Action Letter relieving certain SEF\DCM members from particular record-keeping requirements under Rule 1.35(a). The letter, which is not time-limited, applies to SEF\DCM members who are not required to be registered with the CFTC, acting to exempt them from the obligation to keep a record of all communications concerned with commodity trading.

While the above actions are all technical, specific and limited in scope; they represent more evidence of a changing culture at the top of the CFTC. They are an implicit acknowledgement that, at least as far as end-users are concerned, the existing rules have resulted in unfortunate and unforeseen consequences. It remains to be seen, if this new attitude of flexibility and willingness to remediate will extend to the remaining 99% of Dodd-Frank.

[1] An electric energy or natural gas swap in which at least one of the parties is a “special entity”

[2] Special entities are quasi-Governmental organisations such as publicly owned utilities

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