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The CFTC has published its final rule to exclude most swaps used for hedging purposes by municipal and other governmental utilities from counting against the $25 million swap dealer de minimis threshold that currently applies to swap dealing activities with “special entities” (i.e., governmental organizations, pension plans, and endowments). The final rule closely resembles the proposed rule, which was issued in response to widely voiced concerns that the standard de minimis limit was unduly limiting the number of counterparties willing to offer swaps to municipal and other governmental utilities.

Final Rule

Under the final rule, “utility operations-related swaps” with “utility special entities” will only count against the general $8 billion de minimis threshold (to be reduced to $3 billion at an undetermined phase-in date) applicable to a counterparty’s aggregate gross notional amount of swap-dealing swaps during any 12-month period and not the additional, much lower, $25 million limit applicable to swap dealing with special entities.

The rule defines “utility special entity” as a special entity that:

(i) Owns or operates electric or natural gas facilities, electric or natural gas operations or anticipated electric or natural gas facilities or operations;
(ii) Supplies natural gas or electric energy to other utility special entities;
(iii) Has public service obligations or anticipated public service obligations under Federal, State or local law or regulation to deliver electric energy or natural gas service to utility customers; or
(iv) Is a Federal power marketing agency as defined in Section 3 of the Federal Power Act, 16 U.S.C. 796(19).

The rule defines “utility operations-related swap” as a swap that meets the following conditions:

(i) A party to the swap is a utility special entity;
(ii) A utility special entity is using the swap [to hedge or mitigate commercial risk] in the manner described in § 50.50(c) of this chapter;
(iii) The swap is related to an exempt commodity [e.g., energy or metals commodity] as that term is defined in Section 1a(20) of the Act—or (new to the final rule) an agricultural commodity insofar as such commodity is used for fuel for generation of electricity or is otherwise used in the normal operations of the utility special entity; and
(iv) The swap is an electric energy or natural gas swap; or the swap is associated with: [t]he generation, production, purchase or sale of natural gas or electric energy, the supply of natural gas or electric energy to a utility special entity, or the delivery of natural gas or electric energy service to customers of a utility special entity; fuel supply for the facilities or operations of a utility special entity; compliance with an electric system reliability obligation; or compliance with an energy, energy efficiency, conservation, or renewable energy or environmental statute, regulation, or government order applicable to a utility special entity.

Differences From Proposed Rule

In addition to the extension to agricultural commodities described in item (iii) above, the final rule differs from the proposal in providing a safe harbor that allows a person relying on the utility special entity exclusion to rely on the written representations of a utility special entity counterparty that such counterparty is a utility special entity and that its swap with such person is a utility operations-related swap, unless such person has information that would cause a reasonable person to question the accuracy of such representations. Records of the representations must be kept in accordance with the CFTC’s 5-year record keeping requirement in 17 C.F.R. § 1.31. Unlike the proposed rule, the final rule does not require counterparties relying on the exclusion to file a notice of such reliance with the National Futures Association or to generally maintain books and records substantiating its eligibility to rely on the exclusion under Section 1.31.

Effective Date of Final Rule

The final rule becomes effective October 27, 2014. Until such time, parties may rely on the substantially similar relief provided by CFTC No-Action Letter No. 14-34 (Mar. 21, 2014).