By Joy Ditto, Senior Vice President, Legislative and Political Affairs
The U.S. House is expected to take up next week legislation that would provide much-needed relief from Commodity Futures Trading Commission (CFTC) rules for public power utilities and other commercial end users of futures, options, swaps, and more risk management tools. Many of these provisions have already passed the House in standalone bills, but there is some belief that their best chance for enactment is as part of a broader package.
The Customer Protection and End-User Relief Act (H.R. 4413) comes in response to the CFTC’s ongoing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Out of concern that interest rate swaps, credit default swaps, and other sophisticated derivative financial instruments contributed to the 2007-2009 global financial meltdown, the Dodd-Frank Act placed — for the first time — the swaps marketplace under comprehensive federal regulation.
A swap is an agreement between two parties to exchange, or “swap,” cash flows at specified intervals during the life of the agreement. The payment amount is generally derived from the value or price of an agreed upon asset or commodity, such as the price of natural gas or power at a specific point of delivery. A swap can be used for speculation, but is used by end users to manage the risk of price fluctuations. For example, a utility which bought power at an index price could enter a swap where it agreed to pay an amount equal to a fixed price in exchange for a payment by the swap counterparty equal to the index price.
The Dodd-Frank Act promises to bring much needed oversight and clarity to the swaps marketplace and the American Public Power Association (APPA) has joined with other stakeholders to ensure CFTC has the resources to do the job.
APPA also supported the Dodd-Frank Act’s exemption for end users from the more costly and time-consuming aspects of its new swap and swap-dealer regulatory regime. In practice, though, CFTC rules have created a great deal of uncertainty as to what transactions are subject to the new regime; imposed substantial reporting and record-keeping requirements; and, generally, made it more difficult for public power utilities to hedge commercial risks.
Some consumer groups are opposed to the bill, arguing that it unravels Dodd-Frank and is a boon to large banks and swap dealers. At APPA, we continue to discuss these concerns and their potential impact on our members, but have also looked to Democrats and Republicans on the House Committee on Agriculture — which approved the bill with a unanimous and bipartisan vote on April 9, 2014 — for guidance on the bill’s overall impact.
The legislation — the main task of which is to reauthorize the CFTC – includes provisions to increase protections for futures, options, and swap customers; to reform the CFTC itself; and to amend and clarify the Dodd-Frank Act to provide relief for commercial end users. It incorporates a number of provisions which have already been approved by the House as standalone bills, including the Public Power Risk Management Act (PPRMA)(H.R. 1038)(S. 1802), which passed the House 423-0 last summer. PPRMA would require the CFTC to allow public power utilities to hedge their risk on an even playing field with others in the energy sector, including investor-owned utilities and rural cooperatives.
The House CFTC reauthorization bill would also:
• Prohibit CFTC from requiring posting of margin for transactions in which a counterparty claims the end-user exception;
• Provide that a forward contract with embedded or stand-alone volumetric optionality is not a swap;
• Require CFTC to take steps to avoid disclosing information that would put participants at a disadvantage in illiquid swaps markets; and
• Require the Government Accountability Office to conduct a study on the adequacy of CFTC’s resources in light of its additional responsibilities under the Dodd-Frank Act.
The Senate has not yet begun consideration of its own version of a bill to reauthorize the CFTC. Senate Agriculture Committee Chairwoman Debbie Stabenow (D-MI) has begun to hold hearings on possible changes to the Dodd-Frank Act to include in reauthorization. With Senate confirmation last week of three pending nominees to the CFTC, she could soon begin to move her own version of a bill.
The CFTC, under Acting Chairman Wetjen, has gone a long way to address end user concerns, but APPA believes that legislation to provide clarity, and certainty, is worth pursuing.