Financial Reform Act and the CFTC:

Financial Reform Act May Make Some Gas and Electricity Marketing Subject to the CFTC’s Jurisdiction

We would like to share with you some information about how electric and natural gas companies may fall under the U.S. Commodity Futures Trading Commission (“CFTC”) regulations as a result of the recently enacted financial reform law, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Financial Reform Act”).

Background

The CFTC provides oversight of certain organized, financial markets in which commodities trade, including markets for energy commodities like electric power and natural gas.  The CFTC’s oversight of over-the-counter (“OTC”) derivatives is currently limited.

Financial Reform Act

The Financial Reform Act provisions related to the CFTC become effective on July 21, 2011.  These provisions include:

• Requiring clearing and exchange trading for derivatives contracts that are eligible for clearing and accepted by newly established derivatives clearing organizations;
• Providing the CFTC with exclusive jurisdiction over all agreements, contracts or transactions deemed to be “swaps;”
• Defining “swap” very broadly to include almost every kind of derivative;
• Imposing new capital and margin requirements and various reporting obligations on OTC swap dealers and most large OTC swap participants;
• Requiring swap dealers and most major swap participants dealing with commodities to register with the CFTC.

Why You May Have an Interest in CFTC Proceedings

The Financial Reform Act allows the CFTC to set specific criteria for determining whether a party is a “swap dealer” or a “major swap participant.”  Depending on the outcome of the CFTC rulemaking process, electric or gas companies may fall into one of these definitions and thus become subject to CFTC regulations.  The CFTC must issue a final rule on these definitions by July 16, 2011.  The CFTC may issue a Notice of Proposed Rulemaking as early as this fall.  This rulemaking is one of approximately 30 rulemakings that the CFTC will be engaged in as a result of the Financial Reform Act.  The CFTC is encouraging preliminary comments to provide input on the rule-writing process.

There are also jurisdictional issues between FERC and the CFTC.  Because the term “swap” is so broadly defined, the CFTC could interpret a “swap” to cover certain financially-settling transactions in wholesale physical energy markets subject to FERC oversight and regulation. The Financial Reform Act requires the CFTC and FERC to enter into a Memorandum of Understanding regarding their respective authority.  The Financial Reform Act permits the CFTC to exempt from the classification of “swaps” those contracts entered into pursuant to a FERC or state agency tariff or rate schedule.  Our sense is that FERC Commissioner Moeller will most likely deal with these issues.  Despite recent jurisdictional conflicts between the CTFC and FERC, there is a history of cooperation between FERC and the CFTC.  Back in 2005, FERC entered into a memorandum of understanding with the CFTC regarding the sharing of information and the confidential treatment of proprietary energy trading data.

Going Forward

We strongly encourage our clients with significant power or gas marketing activities to participate in these CFTC rulemakings. We will be monitoring these rulemaking proceedings and we will update you on these developments in future client e-mails.  If you plan to participate in these CFTC rulemakings, we would be happy to assist you in preparing comments.  Please contact us.

For a complete list of the approximately 30 CFTC rulemakings required by the Financial Reform Act, please visit http://www.cftc.gov/LawRegulation/OTCDerivatives/otc_rules.html

Please contact Toni Frost or Joe Fina for additional information.