CFTC Proposes Exemptions to Regulation of Transactions in ISO/RTO Markets as “Swaps” Under CEA

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

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The Commodity Futures Trading Commission (CFTC) has proposed to exempt specific transactions in FERC-administered ISO and RTO markets and the Electric Reliability Council of Texas (ERCOT) from the provisions of the Commodity Exchange Act (CEA).   The CFTC’s proposed exemption defines – then exempts as defined – the following specific transactions  from the CEA in the CAISO, PJM  NYISO, ISO-NE, MISO and ERCOT (hereinafter the “Petitioners.”)

             (i) Financial Transmission Rights

             (ii) Energy Transactions – transactions in the Day-Ahead Market or Real Time Market

             (iii) Forward Capacity Transactions

             (iv) Reserve or Regulation Transactions

No transactions, other than the ones specifically defined, would be exempt from the CEA.  As an example, the CFTC rejected exempting transactions that could be considered a “purchase or sale of a product or service that is directly related to and a logical outgrowth of any of the Petitioners’ [ISOs and RTOs, ERCOT] core functions as an ISO/RTO .. and all services related thereto.”   

More specifically, the CFTC refused to exempt virtual bids/transactions and convergence transactions except to the extent that such transactions would be within the four transactions specifically indentified.

The CFTC proposed two specific conditions on the exemptions – (1) that ERCOT enter into an acceptable information sharing agreement with the CFTC and (2) that no RTO or ISO is required to inform a member of the ISO or RTO prior to responding to a subpoena or request for information from the CFTC.

The CFTC is considering and seeking comments on whether to condition the exemption granted in at least two other ways.  First, the CFTC is considering whether each Petitioner must “comply with and fully implement, the requirements set forth in Order No. 741 [credit reforms final rule]” (emphasis added.)   One obvious question is what the CFTC means by “fully implementing” and whether it would rely on a FERC determination or make an independent determination that an ISO/RTO and ERCOT has complied with and fully implemented Order No. 741.   In addition, an issue will be whether ERCOT has complied with and implemented Order No. 741, given that it was not subject to the requirements of Order No. 741.

Second, the Petitioners represented that they either were or planning to become “central counterparties” – i.e., within a particular market, the buyer to every seller and the seller to every buyer.   The CFTC is concerned, however, whether the central counterparty structure would give the ISO/RTOs set-off rights in bankruptcy and is considering and seeking comment whether to condition the exemption on the submission of a “well-reasoned legal memorandum from, or a legal opinion of, outside counsel that, in the Commission’s [CFTC’s] sole discretion, provides the Commission with adequate assurance that the approach selected by the Petitioner will in fact provide the Petitioner with set-off rights in a bankruptcy proceeding.”  

Comments on the proposed exemption are due thirty (30) days from publication in the Federal Register.

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.

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