July 11, 2012
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.