Jennings Strouss has been advising utility clients on regulatory and business issues for over 70 years. The firm’s experience includes advising governmental utility clients on compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), and rules of the Commodity Futures Trading Commission (CFTC) and FERC affecting energy trading.
Following the issuance of temporary no-action relief by the CFTC, reporting obligations applicable to end-users are beginning to take effect for energy commodity swaps. There are three basic types of transactional reporting requirements imposed by the CFTC in regulations implementing the Dodd-Frank Act, including reporting of historical swaps, new swaps, and commodity trade options.
We provide guidance on:
- criteria that must be met to qualify as an “eligible contract participant,” which can trade swaps bilaterally or to elect the end-user exception to the mandatory clearing requirement for swaps
- the International Swaps and Derivatives Association (ISDA) DF Supplements to the standard form ISDA contract, as well as amended versions developed by the International Energy Credit Association (IECA)
- the establishment of a governmental utility’s own “qualified independent representative” to advise it on transactions with swap dealers and related policies, procedures, and legal agreements
- requests for no-action letters and petitions for exemptive relief from the CFTC
Our services include a compliance readiness assessment and recommendations on specific steps that governmental utilities must take to comply with CFTC’s rules. We also assist governmental utilities with updates to their energy risk management policies, document retention policies, and controls to mitigate risks of noncompliance.
We begin with a comprehensive assessment of the current compliance status of a utility client’s trading and hedging activities under the Dodd-Frank Act and the rules of the CFTC implementing that Act. Our services include an analysis of strategies, contracts, and data from the utility’s trade capture systems, as well as the utility’s financial investments, to:
- determine whether the utility meets the definition of an Eligible Contract Participant (ECP), which can engage in bilateral swap transactions conducted off of a regulated exchange
- confirm that the utility does not fall within the CFTC’s definition of a Swap Dealer or Major Swap Participant
This type of assessment is essential even for governmental utilities that engage in relatively little or no financial swap transactions because the CFTC has interpreted the definition of a swap broadly to include many types of physical transactions, including options.
We then present the utility client with a legal analysis of any compliance gaps and recommend practical guidance on steps the utility should take so that it is, or will be, in full compliance with all applicable legal requirements by the deadlines established by the CFTC. We also classify contracts/transactions and provide rationales for those classifications to be included in governmental utilities’ files, including grounds for finding a contract/transaction to be a swap or to qualify as an exempt commodity trade option, an exempt transaction between 201(f) entities, or exempt RTO/ISO transaction. Our analysis includes:
- whether the utility’s contracts/transactions may qualify for the forward contract exclusion from the definition of a swap, rendering them exempt from the Dodd-Frank Act and CFTC rules, except for limited authority the CFTC possesses over fraud and manipulation of the price of any commodity, including a physical commodity, in interstate commerce
- whether the utility’s contracts/transactions may qualify for the physical commodity trade option exemption, rendering them partially exempt from the CFTC’s rules
- whether the utility’s swap transactions may qualify as hedging, rendering them eligible for the end-user exception to the mandatory clearing requirement, or whether they may instead be viewed by the CFTC as speculation, trading or investing, rendering them ineligible for the end-user exception to the mandatory clearing requirement
Along with such classifications, we provide guidance on reporting processes, as well as representations and warranties to be included in contracts to qualify for an exclusion or exemption.
After the analysis is complete, our attorneys provide the client with a summary of all CFTC rules applicable to the utility and the deadlines for complying with those rules. They also offer a legal opinion on what steps the utility must take to comply with those rules, along with recommendations on changes or enhancements to the utility’s recordkeeping and data retention policies and procedures, risk management policies and procedures, and operational support systems and processes, such as deal capture, tagging, bookouts, etc.
Jennings Strouss also provides comprehensive compliance training on the Dodd-Frank Act and CFTC rules to utility managers and staff onsite at their offices.