On March 21, 2014, the CFTC's Division of Swap Dealer and Intermediary Oversight (DSIO) issued No-action Letter 14-34 (No-action 14-34), which permits the exclusion of utility operations-related swaps from de minimis swap dealer (SD) threshold calculations under CFTC Regulation 1.3(ggg). Public utilities are "special entities" under Dodd-Frank Title VII rules, and a much lower notional threshold applies for designation as an SD for parties that enter into swaps with special entities (see Practice Note, Is Your Client a Swap Dealer or Major Swap Participant?: Swaps Entered into with "Special Entities").

No-action 14-34 provides that DSIO will not recommend enforcement action against any person, or any other entity controlling, controlled by or under common control with that person, that fails to include utility operations-related swaps when determining whether it has entered into swaps as a result of its swap dealing activities (qualifying swaps) in excess of the special entity de minimis threshold, as long as it has not otherwise entered into qualifying swaps in excess of either:

No-action 14-34 was issued in response to a petition by several electric power industry representative groups which:

No-action 14-34 supersedes No-action Letter 12-18 (No-action 12-18), which provided relief from SD registration requirements if utility commodity swaps connected with a person's qualifying swap activities with utility special entities over the course of the immediately preceding 12 months had an aggregate gross notional amount of no more than $800 million (see Legal Updates, Making Sense of All the No-action Swaps Action: CFTC No-action and Other Relief on Threshold Swap Dealer and MSP Calculation Exclusions and No-action Guidance on SD, MSP and CPO Rules under Dodd-Frank Issued by CFTC). The relief provided under No-action 14-34 will remain in effect until the effective date of any final CFTC action regarding the petition, which ultimately seeks an amendment of CFTC Regulation 1.3(ggg)(4).

This exemption is welcome in the marketplace by both dealers and utilities because it facilitates liquidity and reduces costs in the energy swaps markets. This liquidity had been threatened because market participants were fearful of being designated as swap dealers as a result of entering into swaps with utility special entities. This is because SDs are subject to an extensive framework of Dodd-Frank rules on both external and internal business conduct for SDs that is costly and cumbersome to adhere to (see The Dodd-Frank Act: Requirements for Swap Dealers and MSPs Checklist), including special external business conduct standards for swaps entered into with special entities (see Swap Dealers and MSPs: Final Dodd-Frank External Business Conduct (EBC) Rules: Swaps with Special Entities). Those rules will not apply to these swaps, which reduces cost for the end-user utility, and therefore for the public. However, depriving end-user public entities of certain Title VII protections that they may have benefitted from somewhat reduces this public benefit.

Update: The CFTC has issued a proposed rule, which would transform this temporary no-action relief into a permanent CFTC Rule. To be eligible for this relief under the proposal, the entity that wishes to exclude its utility swaps from its calculation of its aggregate notional amount of swaps with Special Entities for purposes of determining whether it is an SD would be required to file a one-time electronic notice with the National Futures Association (NFA). This rule proposal is not intended to have any effect on the relief provided by No-action 14-34 and this proposal's interaction with No-action 14-34 will be addressed if and when the proposal becomes a final rule. The proposal was announced on May 30, 2014, and will and will be open for comments for 30 days after its publication in the Federal Register.