As the CFTC’s first move in its monumental task of implementing the swap trading provisions of Dodd-Frank, the agency yesterday announced a joint Advanced Notice of Proposed Rulemaking (“ANOPR”) with the SEC seeking comments on the many critical definitions that will establish the scope of the agencies’ jurisdiction and of important categories that will affect the level of regulation faced by companies trading energy swaps. Notably, these definitions include the following terms:
- “Swap” – which will establish the boundaries of CFTC jurisdiction under the Dodd-Frank amendments to the Commodity Exchange Act;
- “Swap dealer” – which will subject qualifying entities to new registration, capital and margin, reporting, recordkeeping, and business conduct requirements and will depend on critical concepts such as “market-making,” regularly entering into swaps “as an ordinary course of business” for one’s own account, and a “de minimis” exception; and
- “Major swap participant” – which will subject qualifying entities to the same kinds of requirements imposed on swap dealers and will depend on critical concepts such as “substantial positions” in swaps, hedging of “commercial risk” (the so-called end user exemption), and the creation of “substantial counterparty exposure” or “serious adverse effects” on the financial stability of U.S. markets.
Companies engaged in swap transactions in the energy sector, whether to speculate or to hedge risk, will have a tremendous amount at stake in this first of the over 60-plus rulemakings expected from the CFTC (which the CFTC has grouped into 30 categories) regarding the swap trading provisions in Dodd-Frank. Comments on the ANOPR, which will inform draft definitions subject to further comment after publication in a CFTC NOPR, are due within 30 days of publication of the ANOPR in the Federal Register.