Financial Services Bulletin: Action At The CFTC, SEC, And Fed

by Perkins Coie
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The CFTC Issues a Final Order to Exempt Certain Derivative Transactions between Government and Co-Op Electric Utilities

On Thursday, March 28, 2013, the Commodity Futures Trading Commission (the "CFTC") approved a final order that exempts certain non-financial energy derivative transactions between and amongst government-owned electric utilities and cooperatively-owned electric utilities from most of the requirements of the Commodity Exchange Act (the "CEA") and the CFTC's regulations, subject to certain anti-fraud, anti-manipulation, and record inspection conditions.  The order is issued pursuant to Section 4(c)(6)(c) of the CEA, as added by Section 722(f) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the " Dodd-Frank Act"), which directs the CFTC to provide exemptions for certain transactions between certain electric utilities if such exemptions are in the public interest.  The transactions covered by the final order are entered into for the primary purpose of managing supply or price risks arising from current or anticipated public service obligations to physically generate, transmit, and deliver electric energy service to customers.  Under the final order the CFTC retains its general anti-fraud and anti-manipulation authority, as well as certain scienter-based prohibitions under the CEA, and can continue to inspect the books and records associated with the covered transactions.

Read the CFTC press release

The CFTC Issues a Final Order to Exempt Certain Transactions of Regional Transmission Organizations and Independent System Operators

On Thursday, March 28, 2013, the CFTC approved a final order that exempts certain specified transactions of Regional Transmission Organizations ("RTOs") and Independent System Operators ("ISOs") from certain provisions of the CEA and CFTC regulations pursuant to Section 4(c)(6) of the CEA and Section 712(f) of the Dodd-Frank Act.  The order is in response to a petition from certain RTOs and ISOs that are subject to regulation by either the Federal Energy Regulatory Commission ("FERC") or the Public Utility Commission of Texas ("PUCT").  The final order exempts the purchase or sale of specifically defined "financial transmission rights," "energy transactions," "forward capacity transactions," and "reserve or regulation transactions" that are offered or sold in a market administered by one of the petitioning RTOs or ISOs pursuant to a tariff or protocol that has been approved or permitted to take effect by FERC or PUCT.  The final order also exempts persons offering, entering into, rendering advice, or rendering other services with respect to those transactions.

To be eligible for the exemption, the transactions must be entered into by persons who are: (1) "appropriate persons," as defined in Section 4(c)(3)(A) through (J) of the CEA; (2) "eligible contract participants," as defined in Section 1a(18) of the CEA and CFTC regulations; or (3) in the business of (i) generating, transmitting, or distributing electric energy, or (ii) providing electric energy services that are necessary to support the reliable operation of the transmission system.  Under the order the CFTC’s anti-fraud and anti-manipulation authority and scienter-based prohibitions will continue to apply.  The exemption is also subject to certain conditions stated within the final order.

Read the CFTC release

The CFTC Approves Final Rules on the Supervision of Associated Persons of Swap Dealers and Major Swap Participants

On Friday, March 29, 2013, the CFTC approved a final rule pursuant to Title VII of the Dodd-Frank Act governing dual and multiple associations of associated persons ("APs") of swap dealers ("SDs"), major swap participants ("MSPs"), and other CFTC registrants.  The final rule clarifies that each SD, MSP, and other CFTC registrant with whom an AP is associated, is required to supervise the AP, and is jointly and severally responsible for the activities of the AP with respect to customers common to it and any other SD, MSP or other CFTC registrant.

Read the CFTC press release

The CFTC Approves Final Rules Exempting Certain Inter-Affiliate Swaps

On Monday, April 1, 2013, the CFTC issued a final rule exempting swaps between certain affiliated entities within a corporate group from the clearing requirement in Section 2(h)(1)(A) of the CEA, enacted under Title VII of the Dodd-Frank Act, and CFTC regulations.  The CFTC approved this final rule pursuant to its authority under section 4(c)(1) of the CEA, which grants the CFTC general exemptive authority.  The final rule permits affiliated counterparties to elect not to clear a swap subject to the clearing requirement if those counterparties are majority-owned affiliates whose financial statements are included in the same consolidated financial statements.  In addition, both affiliated counterparties must elect not to clear the swap, the terms of the swap must be documented in a swap trading relationship document (or comply with the requirements of CFTC regulation 23.504 if one of the affiliated counterparties is a swap dealer or a major swap participant), the swap must be subject to a centralized risk management program that is reasonably designed to monitor and manage the risks associated with the swap (or if one of the affiliated counterparties is a swap dealer or a major swap participant, the requirements of CFTC regulation 23.600 must be met), and each swap entered into by the affiliated counterparties with unaffiliated counterparties must be cleared.

The CFTC also clarified the status of inter-affiliate swaps during the period before the final rule becomes effective (60 days after publication of the final rule in the Federal Register), providing that the clearing requirement will not apply until the effective date of these final rules to swaps executed between affiliated counterparties that are majority-owned, report their financial statements on a consolidated basis, and elect not to clear such swaps.

Read the CFTC press release

The SEC Approves Amendments to the Rule Proposing Requirements of Dually-Registered Clearing Agencies

On Wednesday, April 3, 2013, the Securities and Exchange Commission ("SEC") issued a final rule affirming recent amendments to Rule 19b-4 under the Securities Exchange Act of 1934 (the "Exchange Act") in connection with filings of proposed rule changes by certain registered clearing agencies and expanding on those amendments.  The final rule also makes corresponding technical modifications to the General Instructions for Form 19b-4 under the Exchange Act.

Section 763(b) of the Dodd-Frank Act requires certain clearing agencies registered with the CFTC to comply with all requirements of the Exchange Act and the rules and regulations applicable to clearing agencies registered thereunder including, for example, the obligation to file proposed rule changes under Section 19(b) of the Exchange Act.  The amendments to Rule 19b-4 and the instructions to Form 19b-4 are intended to streamline the rule filing process in areas involving certain activities concerning non-security products that may be subject to duplicative or inconsistent regulation as a result of, in part, certain provisions under Section 763(b) of the Dodd-Frank Act.

Read the SEC rule release

The Fed Finalizes Definitions of "Predominantly Engaged In Financial Activities" and "Significant" Nonbank Financial Company and Bank Holding Company

On Wednesday, April 3, 2013, the Federal Reserve Board announced approval of a final rule that establishes the requirements for determining when a company is "predominantly engaged in financial activities."  The requirements will be used by the Financial Stability Oversight Council (the "FSOC") when it considers the potential designation of a nonbank financial company for consolidated supervision by the Federal Reserve.

Pursuant to Section 113 of the Dodd-Frank Act, a nonbank financial company can only be designated by the FSOC for supervision by the Federal Reserve if it is "predominantly engaged in financial activities."  Under the final rule, a company is considered to be predominantly engaged in financial activities if 85 percent or more of the company's revenues or assets are related to activities that are defined as financial in nature under the Bank Holding Company Act.  Additionally, the FSOC may issue recommendations for primary financial regulatory agencies to apply new or heightened standards to a financial activity or practice conducted by companies that are predominantly engaged in financial activities.

The final rule also defines the terms "significant nonbank financial company" and "significant bank holding company."  Among the factors the FSOC must consider when determining whether to designate a nonbank financial company for consolidated supervision by the Federal Reserve is the extent and nature of the company's transactions and relationships with other significant nonbank financial companies and significant bank holding companies.  If designated, those nonbank financial companies will be required to submit reports to the Federal Reserve, the FSOC, and the Federal Deposit Insurance Corporation on the company's credit exposure to other significant nonbank financial companies and significant bank holding companies as well as the credit exposure of such significant entities to the company.  A firm will be considered significant if it has $50 billion or more in total consolidated assets or has been designated by the FSOC as systemically important.

Read the Federal Reserve Board press release

The Fed Issues Foreign Exchange Transaction Rules

On Thursday, April 4, 2013, the Federal Reserve Board announced a final rule establishing the standards for banking organizations regulated by the Federal Reserve that engage in certain types of foreign exchange transactions with retail customers.

As amended by Section 742(c)(2) of the Dodd-Frank Act, the CEA provides that a United States financial institution for which there is a federal regulatory agency shall not enter into, or offer to enter into, certain types of foreign exchange transactions described in section 2(c)(2)(B)(i)(I) of the CEA with a retail customer except pursuant to a rule or regulation of a Federal regulatory agency allowing the transaction under such terms and conditions as the Federal regulatory agency prescribes.  The final rule permits such transactions for entities regulated by the Federal Reserve and establishes requirements for risk disclosures to customers, recordkeeping, business conduct, and documentation for retail foreign exchange transactions.  Regulated institutions engaging in such transactions will be required to notify the Federal Reserve and to be well capitalized.  They will also be required in advance of any transaction to collect a margin amount from retail customers for foreign exchange transactions at the same rate required by similar rules of the CFTC, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation.

The types of transactions covered by the rule include foreign exchange transactions that are futures or options on futures, over-the-counter options on foreign currency, and so-called rolling spot transactions.  The rule covers entities regulated by the Federal Reserve including state-chartered banks that are members of the Federal Reserve System, bank and savings and loan holding companies, Edge Act corporations, and uninsured, state-licensed branches and agencies of foreign banks.

Read the Federal Reserve Board press release

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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