On July 10, 2012, the Commodity Futures Trading Commission
(CFTC) issued final rule clarifications and interpretations
of relative importance for companies involved in trading or
managing risks associated with any kind of energy and environmental
commodities. CFTC's rulemakings were made pursuant to its
obligation to implement certain purposes and requirements of the
Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act).
End-User Clearing Exception
CFTC implemented an exception (with accompanying criteria) for
non-financial entities and small financial institutions engaging in
swap transactions as a hedge against business or commercial risk.
Mandatory clearing requirements will not apply to such transactions
if one of the counterparties is a non-financial entity (e.g.,
energy utility or company) using the swap to hedge or mitigate
commercial risk. The final rule establishes criteria for
determining whether a swap hedges or mitigates commercial risk for
purposes of electing the exception. The rule also specifies the
information that counterparties taking the exception must report to
CFTC.
Forward Contract Exclusion, Applicability to Swap
Definition
CFTC also released an interpretation clarifying the scope of the
"forward contract exclusion" and its applicability to the
new "swap" definition. CFTC extended its historical
"Brent Interpretation" of the applicability of the
exclusion with respect to futures contracts to all non-financial
commodities for purposes of the swap definition. Book-out
transactions that apply the forward exclusion from the definition
of "future delivery" will now apply the exclusion from
the swap definition for all non-financial commodities. Market
participants that make or take delivery of an energy or
environmental commodity in the course of business, for example,
where book-out is effectuated by a subsequent negotiated agreement,
should be excluded from the statutory swap definition.
Environmental Commodities Are Not Swaps
CFTC importantly provided key guidance regarding what is and is
not a non-financial commodity. CFTC concluded that non-financial
commodities that may be physically delivered are exempt or
agricultural commodities. This clarification extends to
environmental commodities like carbon offset credits, emission
allowances and renewable energy credits (RECs), which therefore
qualify as non-financial commodities for purposes of exclusion from
the statutory swap definition.
Additional Energy Transaction Guidance
CFTC provided guidance regarding forwards with embedded
volumetric optionality. If the volumetric optionality is due to
physical factors or regulatory requirements beyond the control of
parties, that agreement, contract or transaction may be considered
a "forward" qualifying for the exclusion. CFTC is
requesting further public comment on the issue.
Finally, CFTC provided guidance on an array of other energy
industry topics. For example, the agency clarified that certain
types of arrangements, like fuel delivery agreements and physical
exchange transactions, are not swaps, nor are physical commercial
arrangements that are similar to leases (fact and circumstance
dependent). CFTC also clarified that certain energy management
agreements do not alter the nature of the energy transactions being
managed.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.
In November 2012, the U.S. District Court for the Eastern District of New York preliminarily approved a settlement agreement in the In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation.
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