A Simple Framework for Determining Whether Dodd-Frank Applies to Your Energy Trade

by Akin Gump Strauss Hauer & Feld LLP
Contact

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or the “Act”) authorizes the Commodity Futures Trading Commission (“CFTC”) to comprehensively regulate energy trading activities.  Dodd-Frank is intended to increase transparency and reduce the risk of counterparty default, but to accomplish these objectives it imposes considerable regulatory burdens.  What features of a given contract might trigger regulation under Dodd-Frank and what might such regulation entail?  While each transaction will require fact-specific analysis, these six questions provide a simple framework for analyzing most energy trades.

1. Is this contract a “swap”?

Dodd-Frank applies to a wide variety of energy-related agreements, contracts and transactions classified as “swaps.”  The CFTC’s final rule defining the term “swap” runs 160 pages in the Federal Register,1 and the agency can grant exceptions on a case-by-case basis.  The specific terms and conditions of each transaction must be carefully considered in light of the CFTC’s evolving and complex rules.

The CFTC’s definition of “swap” generally includes financial derivatives such as contracts-for-differences that are settled against a price index or a futures contract.2 Forward contracts that are intended to be physically settled, contracts for full requirements or full output that are intended to be physically settled, and leases and lease-like arrangements such as tolling agreements generally are not regulated as swaps.3

There are important exceptions for “end users,” bona fide hedging, and trades in organized electric markets; however, even if an exception applies, the contract still may be subject to Dodd-Frank’s data collection and reporting requirements if it meets the definition of “swap.

2. Is the company an Eligible Contract Participant?

If the contract is a swap and no exception applies, then it needs to be executed on an organized exchange or else each party needs to qualify as an Eligible Contract Participant (“ECP”).  Only ECPs may enter into bilateral, over-the-counter swaps.  ECPs include entities that have, or have a guarantor that has, $10 million in assets.4 Entities with a net worth of only $1 million may be considered ECPs, but only with respect to swaps that are entered into for the purpose of hedging risk.5

3. Is the company a “Swap Dealer” or “Major Swap Participant”?

Swap Dealers and Major Swap Participants are subject to extensive regulation under Dodd-Frank so market participants will want to avoid these designations.  It is unlikely that any single transaction will result in a company falling into either of these categories, although any company that engages in a large volume of swaps needs to be aware of how these categories are defined and what exemptions could apply. 

Again, the CFTC’s rules are complex.  The final rule defining the terms “swap dealer” and “major swap participant” runs 169 Federal Register pages.6

In general, a swap dealer is a person who:  (a) holds themself out as a dealer in swaps; (b) makes a market in swaps; (c) regularly enters into swaps in the ordinary course of business; or (d) engages in any activity causing them to be known as a swap dealer.7  If a company engages in activities that could cause it to be classified as a swap dealer, it may fall under the “de minimis exception” which excludes a company from the “swap dealer” category if, over the immediately preceding 12-month period, its aggregate swap dealing activities do not exceed the gross “notional amount” of $3 billion ($8 billion during the initial phase-in period),8 excluding hedges.9  Entities under common control are considered one company for the purposes of this calculation.10

In general, a “major swap participant” is a person other than a swap dealer that (a) maintains a substantial position in swaps for any of the major swap categories, excluding positions for hedging or mitigating commercial risk, (b) has outstanding swaps that create substantial counterparty exposure that could have “serious adverse effects” on the financial stability of the U.S. banking system or financial system, or (c) is a highly leveraged financial entity that maintains a substantial position in any major swap category.11  The intent is to identify those entities whose exposure to swaps poses market risks that, in the view of the CFTC, warrant enhanced regulatory oversight and control.

4. Is the contract subject to mandatory clearing requirements?

As of December 2013, only interest rate swaps and credit default swaps are subject to mandatory clearing,12 but the CFTC has stated that other classes of swaps may become subject to mandatory clearing in the future. 

5. Is the contract subject to position limits? 

The CFTC has issued proposed rules regarding speculative position limits for certain products, but there are currently no position limit rules in effect.13 The proposed speculative position limits would apply to financial derivatives that settle against four core energy commodity futures contracts and economically equivalent products.  The core energy commodity futures contracts are (1) New York Mercantile Exchange Light Sweet Crude Oil, (2) New York Mercantile Exchange New York Harbor ULSO, (3) New York Mercantile Exchange RBOB Gasoline Blendstock, and (4) New York Mercantile Exchange Henry Hub Natural Gas.  For more information on speculative position limits, see our December 23, 2013 blog, “CFTC Re-Proposes Position Limits for Certain Commodity Futures Contracts and Economically Equivalent Swaps.”

6. Is the contract subject to mandatory reporting and recordkeeping requirements?

Companies are required to keep full, complete and systematic records of all swaps to which they are counterparties.  Information on a swap must be retained for at least five years following termination of the swap.  These records must be readily retrievable throughout the life of the swap and for two years thereafter, but can then be archived.14   

All swaps must be reported to a swap data repository.  If the swap was not cleared on an exchange, then one of the parties must do the reporting.  If one party is a Swap Dealer, Major Swap Participant, or a financial entity, that entity will be responsible for reporting the swap.  If neither party falls into those categories, the parties must determine between themselves which entity will be responsible for reporting.15


1 Further Definition of “Swap,” “Security-Based Swap” and “Security-Based Swap Agreement,” 77 Fed. Reg. 48208 (Aug. 13, 2012).

2 See 7 U.S.C. § 1a(47)(A) (2012).

3 See id. § 1a(47)(B); Further Definition of “Swap,” “Security-Based Swap” and “Security-Based Swap Agreement,” 77 Fed. Reg. 48,208, 48,227-43 (Aug. 13, 2012).

4 7 U.S.C. § 1a(18).

5 Id.

6 Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,” 77 Fed. Reg. 30596 (May 23, 2012).

7 7 U.S.C. § 1a(49); 17 C.F.R. § 1.3(ggg).

8 In May 2015, the CFTC staff will prepare a study of the derivative markets.  Nine months after this study, the CFTC may end the phase-in period or propose new de minimis rules.  Otherwise, the five-year phase-in period will automatically terminate in October 2017.  17 C.F.R. § 1.3(ggg)(4)(ii).

9 7 U.S.C. § 1a(49)(D); 17 C.F.R. § 1.3(ggg)(4).

10 Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,” 77 Fed. Reg. 30,596, 30,631 (May 23, 2012) (“Further Definition”).

11 7 U.S.C. § 1a(33); 17 C.F.R. § 1.3(hhh)(1)(ii)(C).

12 Clearing Requirement Determination Under § 2(h) of the CEA, 77 Fed. Reg. 74,284 (Dec. 13, 2012).

13 Position Limits for Derivatives, 78 Fed. Reg. 75680 (December 12, 2013).

14 Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. 2136, 2141-42 (Jan. 13, 2012).

15 Id. at 2137, 2153.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Akin Gump Strauss Hauer & Feld LLP | Attorney Advertising

Written by:

Akin Gump Strauss Hauer & Feld LLP
Contact
more
less

Akin Gump Strauss Hauer & Feld LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!