Dodd-Frank New Year’s Resolutions For Energy Companies And Other Swaps End Users

by Stinson Leonard Street - Dodd-Frank and the Jobs Act
Contact

The CFTC rulemaking whirlwind that was 2012 has come and gone, putting the agency’s comprehensive swap regulatory regime mostly in place. While many energy companies and other swaps end users found much to be happy about in the final rules adopted during 2012 (such as high de minimis levels and new exclusions with respect to swap dealer determinations, reporting obligations that in most instances fall on exchanges and swap dealers, and a district court’s rejection of the CFTC’s position limits rule), there are several important steps such companies should be taking during 2013 to ensure compliance with the new regime:

1. Identify your swap transactions and activities

This step is essential to determine what your company’s swap compliance obligations are and to make sure it has appropriate processes and controls in place for compliance. What type of swaps do you engage in? Who trades in them at your company? Who are your swap counterparties and how are they classified under Dodd-Frank? What are your volumes? Are some of your “forward contracts” at risk of actually being considered swaps? What sort of optionality do they contain? Do you engage in book-outs?

2. Confirm that you are not a swap dealer

The regulatory obligations imposed on swap dealers are substantial. Although the general threshold under the de minimis exception is quite high ($8 billion, phasing out to $3 billion, in gross notional amount of swaps over a 12-month period in connection with dealing activity), the threshold with respect to special entities (i.e., government bodies, pension plans, endowments) is considerably lower ($25 million in general; $800 million, plus notice requirement, with respect to utility special entities under temporary no-action relief).

3. Establish parameters and controls for your trading desks

Establish parameters and controls to prevent your transactional personnel from engaging in transactions that may subject you to regulatory obligations for which you are not prepared, or that may require pre-approval by a compliance manager or other flagging. What kinds of contracts can they trade in freely? What kind of contracts should they not trade in? What kind of transactions should they flag, before or after execution, for the attention of your compliance team?

4. Properly document your book-out transactions (back to October 12, 2012)

If your transactional personnel book out forward contracts over the phone (or maybe even IM), you should have processes in place to ensure such book-outs are properly documented. Under an interpretation in the CFTC’s final swap definition rule, effective October 12, 2012, oral book-outs must be followed in a commercially reasonable timeframe by a confirmation in written or electronic form. Not doing so creates risk that the transactions may be viewed as swaps, and thus be subject to the reporting and other compliance obligations applicable to swaps.

5. Prepare for swap reporting obligations (April 10, 2013)

All swaps must be reported to a swap data repository under the Dodd-Frank Act. However, end users, if trading with swap dealer counterparties or in on-exchange, cleared swaps, can generally avoid swap reporting obligations. Nonetheless, all end users trading in swaps will need to obtain a legal entity identifier (LEI) for reporting purposes, most by April 10, 2013, and should have processes and controls in place to ensure that they are not required to report swaps or are able to report them correctly and in a timely manner if they are a “reporting counterparty” with respect to any swaps.

6. Prepare for swap recordkeeping obligations (April 10, 2013)

All swap counterparties and swaps are subject to the CFTC’s recordkeeping obligations. Are you prepared to keep “full, complete, and systematic records” with respect to each swap? Such records must be kept for 5 years after the termination of a swap and meet “ready accessibility” requirements.

7. Preserve your ability to trade with swap dealer counterparties (May 1, 2013)

Even though you may not be a swap dealer, you may need to amend your ISDA and other master agreements with swap dealer counterparties to continue trading with such counterparties, in order to satisfy their Dodd-Frank compliance obligations. ISDA has published the August 2012 Dodd-Frank Protocol, which allows counterparties to amend their ISDA (and other) master agreements accordingly and has provided an online “ISDA Amend” process that allows counterparties to amend their master agreements with counterparties through an online exchange. Over 4800 parties have already adhered to the Protocol.

8. Prepare for end-user exception to mandatory clearing (September 9, 2013 for certain swaps)

If you’re planning to continue trading in uncleared swaps, you or your counterparty must satisfy the requirements of the “end user exception” to mandatory clearing, unless the swap is of a type the CFTC has not yet determined is “required to be cleared.” Are your swaps required to be cleared? Is one of the counterparties using the swap to “hedge or mitigate commercial risk,” as required to elect the exception? If an SEC filer, do you have the required board approval in place to trade in uncleared swaps and a process for annual or more frequent committee review based on appropriate triggering events?

9. Stay tuned for additional CFTC rulemakings, no-action and interpretive letters, and court challenges to CFTC rules

The CFTC has some important unfinished rulemakings to complete in 2013, and additional no-action and interpretive letters by the agency and court challenges to its rules are practically a certainty. Stay tuned during the year for further developments on position limits, capital and margin rules, and other important rulemaking areas.

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.

© Stinson Leonard Street - Dodd-Frank and the Jobs Act | Attorney Advertising

Written by:

Stinson Leonard Street - Dodd-Frank and the Jobs Act
Contact
more
less

Stinson Leonard Street - Dodd-Frank and the Jobs Act 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!