30-Day FRN

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Federal Register / Vol. 79, No. 105 / Monday, June 2, 2014 / Proposed Rules

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
Commodity Futures Trading
Commission.
ACTION: Proposed rule.

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AGENCY:

SUMMARY: The Commodity Futures
Trading Commission (Commission or
CFTC) is proposing to amend its
regulations (Proposal) to permit a
person to exclude utility operationsrelated 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
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
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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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
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
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.
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

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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.
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 operationsrelated swaps’’).8
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).
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=PendingFilingsandActions
AD&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

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Federal Register / Vol. 79, No. 105 / Monday, June 2, 2014 / Proposed Rules
The amendment requested by the
Petition would have the effect of
allowing a person, in any rolling twelvemonth 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
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.

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C. CFTC Staff Letter No. 12–18 9
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
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.
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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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:
(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
(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
10 This

letter was received on October 8, 2012.
Division is responsible for, among other
things, overseeing compliance with the registration
requirements applicable to swap dealers.
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.
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.
11 The

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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
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
The relief made available by Staff
Letter 12–18 was not self-executing.
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.
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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Federal Register / Vol. 79, No. 105 / Monday, June 2, 2014 / Proposed Rules

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.
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 nonfinancial 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.
19 The notice was required to be provided by
December 31, 2012, and on a quarterly basis
thereafter.

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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
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
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.
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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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.
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
(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.
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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Federal Register / Vol. 79, No. 105 / Monday, June 2, 2014 / Proposed Rules
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 operationsrelated 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
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
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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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 operationsrelated 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

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31241

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
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
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.
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.

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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.
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
B. New Definitions

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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
28 See

CEA Sections 4s(h)(4) and 4s(h)(5).
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.
30 As noted above, the term ‘‘special entity’’ is
defined in CEA Section 4s(h)(2)(c) and Regulation
23.401(c).
29 This

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definition of ‘‘utility special entity’’ in
the Petition.
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 operationsrelated 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
III. Request for Comments
The Commission seeks comments
regarding the nature and application of
an exclusion for utility operationsrelated 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
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).

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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

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Federal Register / Vol. 79, No. 105 / Monday, June 2, 2014 / Proposed Rules
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 operationsrelated 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?

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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 costeffective 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 operationsrelated 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 nondealing 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
32 See

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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?
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
33 5

U.S.C. 601 et seq.
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,
34 5

77 FR 48238 (Aug. 13, 2012).

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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.
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.

emcdonald on DSK67QTVN1PROD with PROPOSALS

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

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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

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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,

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emcdonald on DSK67QTVN1PROD with PROPOSALS

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

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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
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
39 See, e.g., Part 23 of the Commission’s
regulations.
40 While Staff Letter 14–34 currently provides noaction 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.
41 See 77 FR at 30596, 30627–30628 (May 23,
2012).
42 See Id. at 30633.

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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.
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.
Accordingly, increasing the number of
potential counterparties available to
utility special entities will enable utility
special entities to practice sound, costeffective risk management and to
43 See Id. at 30707 (stating that the benefits of
swap dealing regulation include customer
protection, market orderliness and market
transparency).
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.

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Federal Register / Vol. 79, No. 105 / Monday, June 2, 2014 / Proposed Rules

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

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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

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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
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).

2. Amend § 1.3 by revising paragraph
(ggg)(4)(i) to read as follows:

■

§ 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

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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 § 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 § 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 operationsrelated 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
§ 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

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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 § 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

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31247

FEDERAL COMMUNICATIONS
COMMISSION
47 CFR Parts 1, 2, 90, 95, and 96
[GN Docket No. 12–354; FCC 14–49]

Commission Seeks Comment on
Shared Commercial Operations in the
3550–3650 MHz Band
Federal Communications
Commission.
ACTION: Proposed rule.
AGENCY:

SUMMARY: In this further notice of
proposed rulemaking, the Commission
seeks comment on specific rule
proposals for the establishment of a new
Citizens Broadband Radio Service in the
3550–3650 MHz band (3.5 GHz Band).
DATES: Submit comments on or before
July 14, 2014 and reply comments on or
before August 1, 2014.
ADDRESSES: You may submit comments,
identified by GN Docket No. 12–354, by
any of the following methods:
D Federal Communications
Commission’s Web site: http://
fjallfoss.fcc.gov/ecfs2/. Follow the
instructions for submitting comments.
D Mail: All hand-delivered or
messenger-delivered paper filings for
the Commission’s Secretary must be
delivered to FCC Headquarters at 445
12th St. SW., Room TW–A325,
Washington, DC 20554. The filing hours
are 8:00 a.m. to 7:00 p.m. All hand
deliveries must be held together with
rubber bands or fasteners. Any
envelopes and boxes must be disposed
of before entering the building.
Commercial overnight mail (other than
U.S. Postal Service Express Mail and
Priority Mail) must be sent to 9300 East
Hampton Drive, Capitol Heights, MD
20743. U.S. Postal Service first-class,
Express, and Priority mail must be
addressed to 445 12th Street SW.,
Washington DC 20554.
D People with Disabilities: Contact the
FCC to request reasonable
accommodations (accessible format
documents, sign language interpreters,
CART, etc.) by email: [email protected]
or phone: 202–418–0530 or TTY: 202–
418–0432.
For detailed instructions for
submitting comments and additional
information on the rulemaking process,
see the SUPPLEMENTARY INFORMATION
section of this document.
FOR FURTHER INFORMATION CONTACT: Paul
Powell, Attorney Advisor, Wireless
Bureau—Mobility Division at (202) 418–
1613 or [email protected].
SUPPLEMENTARY INFORMATION: This is a
summary of the Commission’s Further
Notice of Proposed Rulemaking in GN

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