```

[Federal Register Volume 79, Number 187 (Friday, September 26, 2014)]
[Rules and Regulations]
[Pages 57767-57782]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-22966]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AE19

Exclusion of Utility Operations-Related Swaps With Utility 
Special Entities From De Minimis Threshold for Swaps With Special 
Entities

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is amending its regulations (Amendments) in order to permit a person to 
exclude utility operations-related swaps entered into with utility 
special entities in calculating the aggregate gross notional amount of 
the person's swap positions, solely for purposes of the de minimis 
exception applicable to swaps with special entities.

DATES: Effective October 27, 2014.

FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, (202) 418-
6700, gbarnett@cftc.gov; Erik Remmler, Deputy Director, (202) 418-7630, 
eremmler@cftc.gov; Christopher W. Cummings, Special Counsel, (202) 418-
5445, ccummings@cftc.gov; or Israel Goodman, Special Counsel, (202) 
418-6715, igoodman@cftc.gov, Division of Swap Dealer and Intermediary 
Oversight, Commodity Futures Trading Commission, 1155 21st Street NW., 
Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

A. De Minimis Exception From Swap Dealer Definition

    Section 1a(49) \1\ of the Commodity Exchange Act (CEA or Act) 
defines the term ``swap dealer.'' CEA Section 1a(49)(D) requires the 
Commission to exempt from swap dealer designation an entity that 
engages in a de minimis quantity of swap dealing, and to promulgate 
regulations to establish factors for making a determination to so 
exempt such an entity. Pursuant to this mandate, on April 27, 2012, the 
Commission adopted Regulation 1.3(ggg), which further defines the term 
``swap dealer.'' \2\ Regulation 1.3(ggg) became effective on July 23, 
2012, and

[[Page 57768]]

registration of swap dealers began in December, 2012.\3\
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    \1\ 7 U.S.C. 1a(49) (2012). The CEA is found at 7 U.S.C. 1 et 
seq. (2012) and can be accessed through the Commission's Web site, 
www.cftc.gov.
    \2\ See 77 FR 30596 (Swap Dealer Definition Adopting Release).
    \3\ The further definition of the term ``swap'' is found in 
Regulation 1.3(xxx), which became effective October 12, 2012. See 77 
FR 48208. See also Regulation 3.10(a)(1)(v)(C), which establishes 
that each person who comes within the swap dealer definition from 
and after the effective date of that definition is subject to 
registration as a swap dealer with the Commission.
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    Specifically, the Commission adopted in Regulation 1.3(ggg)(4) an 
exception from the swap dealer definition for a person that has entered 
into swap positions connected with its swap dealing activities that, in 
the aggregate, do not exceed, during the preceding twelve-month period, 
either of two aggregate gross notional amount thresholds: (i) $3 
billion, subject to a phase in level of $8 billion \4\ (General De 
Minimis Threshold), and (ii) $25 million with regard to swaps in which 
the counterparty is a ``special entity'' (Special Entity De Minimis 
Threshold). CEA Section 4s(h)(2)(C) and Regulation 23.401(c) define the 
term ``special entity'' to include: a Federal agency; a State, State 
agency, city, county, municipality, or other political subdivision of a 
State; any employee benefit plan as defined under the Employee 
Retirement Income Security Act of 1974 (ERISA); any government plan as 
defined under ERISA; and any endowment. Regulation 23.401(c) adds to 
the special entity definition ``any instrumentality, department, or a 
corporation of or established by a State or subdivision of a State.''
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    \4\ The Commission set the General De Minimis Threshold at an 
initial phase-in level of $8 billion as of July 23, 2012, the 
effective date of the Swap Dealer Definition Adopting Release. Upon 
termination of the phase-in period this amount will decrease to $3 
billion (or such alternative amount as the Commission may adopt by 
rulemaking) in accordance with the phase-in procedure outlined in 
Regulation 1.3(ggg)(4)(ii).
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B. Petition for Rulemaking

    On July 12, 2012, the Commission received a petition for rulemaking 
that sought an amendment of Regulation 1.3(ggg)(4) (Petition).\5\ The 
Petition requested that the Commission amend the regulation to exclude 
from consideration, in determining whether a person has exceeded the 
Special Entity De Minimis Threshold, swaps to which the Petitioners and 
certain other special entities (collectively defined in the Petition as 
``utility special entities'') \6\ are counterparties and that relate to 
the Petitioners' and other utility special entities' utility operations 
(defined in the Petition as ``utility operations-related swaps'').\7\
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    \5\ Petition for Rulemaking to Amend CFTC Regulation 
1.3(ggg)(4), dated July 12, 2012. The Petition was filed by the 
American Public Power Association, the Large Public Power Council, 
the American Public Gas Association, the Transmission Access Policy 
Study Group and the Bonneville Power Administration (Petitioners). 
The Petition and the comment letters that were submitted in support 
of it are available at http://sirt.cftc.gov/sirt/sirt.aspx?Topic=PendingFilingsandActionsAD&Key=23845.
    \6\ The Petition defined the term ``utility special entity'' to 
mean a government special entity that ``owns or operates electric or 
natural gas facilities or electric or natural gas operations (or 
anticipated facilities or operations), supplies natural gas and/or 
electric energy to other utility special entities, has public 
service obligations (or anticipated public service obligations) 
under Federal, State or local law or regulation to deliver electric 
energy and/or natural gas service to utility customers, or is a 
Federal power marketing agency as defined in Section 3 of the 
Federal Power Act (16 U.S.C. 796(19)).''
    \7\ The Petition defined the term ``utility operations-related 
swap'' to mean any swap that a utility special entity enters into 
``to hedge or mitigate commercial risk'' (as that phrase is used in 
CEA Section 2(h)(7)(A)(ii)) ``intrinsically related to the electric 
or natural gas facilities that the utility special entity owns or 
operates or its electric or natural gas operations (or anticipated 
facilities or operations), or to the utility special entity's supply 
of natural gas and/or electric energy to other utility special 
entities or to its public service obligations (or anticipated public 
service obligations) to deliver electric energy or natural gas 
service to utility customers.''
    The Petition defined the term ``intrinsically related'' to 
include all transactions related to ``(i) the generation or 
production, purchase or sale, and transmission or transportation of 
electric energy or natural gas, or the supply of natural gas and/or 
electric energy to other utility special entities, or delivery of 
electric energy or natural gas service to utility customers, (ii) 
all fuel supply for the utility special entity's electric facilities 
or operations, (iii) compliance with electric system reliability 
obligations applicable to the utility special entity, its electric 
facilities or operations, (iv) compliance with energy, energy 
efficiency, conservation or renewable energy or environmental 
statutes, regulations or government orders applicable to the utility 
special entity, its facilities or operations, or (v) any other 
electric or natural gas utility operations-related swap to which the 
utility special entity is a party.''
    Finally, the Petition stated that a ``utility operations-related 
swap'' did not include ``a swap based or derived on, or referencing, 
commodities in the interest rates, credit, equity or currency asset 
classes, or a product type or category in the `other commodity' 
asset class that is based or derived on, or referencing, metals, or 
agricultural commodities or crude oil or gasoline commodities of any 
grade not used as fuel for electric generation.''
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    The amendment requested by the Petition would have had the effect 
of allowing a person, in any rolling twelve-month period, to engage in 
utility operations-related swaps with utility special entities up to an 
aggregate gross notional amount not to exceed (together with other 
swaps in which the person was engaged) the General De Minimis Threshold 
(currently $8 billion) without being required to register as a swap 
dealer. In support of this amendment, the Petition claimed that:

    The rule amendment is necessary in order to preserve 
uninterrupted and cost-effective access to the customized, 
nonfinancial commodity swaps that Petitioners and other Utility 
Special Entities [as defined in the Petition] use to hedge or 
mitigate commercial risks arising from their utility facilities, 
operations and public service obligations.\8\
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    \8\ Petition at 2.

The Petition further explained that this amendment was needed in order 
to increase the number of counterparties available to utility special 
entities to enter into swaps that are necessary for the efficient 
conduct of the businesses and operations of utility special entities.

C. CFTC Staff Letter No. 12-18 \9\
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    \9\ October 12, 2012. This letter can be accessed on the 
Commission's Web site at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-18.pdf.
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    As the October 12, 2012 effective date for Regulation 1.3(xxx) 
(defining the term ``swap'') approached,\10\ Petitioners requested no-
action relief from the de minimis threshold for swaps with certain 
special entities. In CFTC Staff Letter No. 12-18 (Staff Letter 12-18), 
the Commission's Division of Swap Dealer and Intermediary Oversight 
(Division) \11\ concluded that, in light of the representations made in 
support of the request and in view of the impending effective date for 
the swap dealer registration requirement, it was appropriate to provide 
certain registration no-action relief with respect to the Special 
Entity De Minimis Threshold for persons entering into utility related 
swaps with utility special entities. Thus, in Staff Letter 12-18 the 
Division stated that it would not recommend that the Commission 
commence an enforcement action against a person for failure to apply to 
be registered as a swap dealer, if:
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    \10\ See 77 FR 48208. Swaps entered into after the effective 
date of the final rule defining the term ``swap'' were required to 
be counted for purposes of determining whether a person's dealing 
activity exceeded the Special Entity De Minimis Threshold and the 
General De Minimis Threshold. See Regulation 1.3(ggg)(4)(i).
    \11\ The Division is responsible for, among other things, 
overseeing compliance with the registration requirements applicable 
to swap dealers.

    (1) The utility commodity swaps connected with the person's swap 
dealing activities into which the person--or any other entity 
controlling, controlled by or under common control with the person--
enters over the course of the immediately preceding 12 months (or 
following October 12, 2012, if that period is less than 12 months) 
have an aggregate gross notional amount of no more than $800 
million;
    (2) the person is not otherwise within the definition of the 
term ``swap dealer,'' as provided in 17 CFR 1.3(ggg) (i.e., the 
person--or any other entity controlling, controlled by or under 
common control with the person--has not entered into swaps as a 
result of its swap dealing activities in excess of the general de 
minimis threshold or (not

[[Page 57769]]

counting utility commodity swaps) the special entity de minimis 
threshold); \12\ and
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    \12\ Division staff emphasized in the letter that the aggregate 
gross notional amount of a person's utility commodity swaps would 
reduce the $8 billion aggregate gross notional amount under the 
General De Minimis Threshold for that person.
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    (3) the person is not a ``financial entity,'' as defined in 
section 2(h)(7)(C)(i) of the CEA.

    For purposes of Staff Letter 12-18, Division staff defined the term 
``utility commodity swap'' to mean a swap where: (1) A party to the 
swap is a utility special entity; (2) a utility special entity is using 
the swap in the manner described in Regulation 1.3(ggg)(6)(iii); \13\ 
and (3) the swap is related to an exempt commodity in which both 
parties to the swap transact as part of the normal course of their 
physical energy businesses. The relief made available by Staff Letter 
12-18 was not self-executing. Rather, to take advantage of the no-
action relief, a person was required to claim the relief by filing with 
the Division a notice that, among other things, identified each utility 
special entity with which the person has entered into utility commodity 
swaps connected with the person's swap dealing activities, and that 
stated with respect to each such utility special entity the total gross 
notional amount of such utility commodity swaps. Quarterly notice 
filings were also required.
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    \13\ That is, the utility special entity is using the swap to 
hedge a physical position, as described in Regulation 
1.3(ggg)(6)(iii).
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D. CFTC Staff Letter No. 14-34 \14\
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    \14\ This letter can be accessed on the Commission's Web site, 
at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-34.pdf.
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    Subsequent to the issuance of CFTC Staff Letter 12-18, certain of 
the Petitioners claimed that specific features of Staff Letter 12-18 
(e.g., the requirement to establish that the utility special entity is 
using the swap to hedge a physical position in an exempt commodity, and 
the requirement to establish that the counterparty seeking relief is 
not a ``financial entity'') imposed administrative costs or created 
legal uncertainty such that would-be counterparties were dissuaded from 
entering into relevant swaps.\15\ The Petitioners' Letter renewed their 
request for the relief sought in the previously-filed Petition.
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    \15\ Letter from Petitioners to Gary Gensler, CFTC Chairman, 
dated Nov. 19, 2013 (Petitioners' Letter), available at http://sirt.cftc.gov/sirt/sirt.aspx?Topic=PendingFilingsandActionsAD&Key=23845. (One of the 
original Petitioners did not, however, participate in this follow up 
letter.)
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    In response to these concerns, on March 21, 2014, the Division 
issued CFTC Staff Letter No. 14-34 (Staff Letter 14-34), which 
superseded and broadened the relief provided in Staff Letter 12-18. 
Specifically, in Staff Letter 14-34 the Division stated that it would 
not recommend that the Commission commence an enforcement action 
against a person for failure to apply to be registered as a swap dealer 
if the person--or any other entity controlling, controlled by, or under 
common control with the person--does not include ``utility operations-
related swaps,'' as defined in Staff Letter 14-34, in calculating 
whether it has exceeded the Special Entity De Minimis Threshold, 
provided that the person's swap dealing activities have not exceeded 
the General De Minimis Threshold.

II. The Proposal

    On June 2, 2014, the Commission published for comment in the 
Federal Register a proposal to amend Regulation 1.3(ggg)(4) to permit a 
person to exclude ``utility operations-related swaps'' (as proposed to 
be defined) transacted with ``utility special entities'' (as also 
proposed to be defined) in calculating the aggregate gross notional 
amount of the person's swap positions, solely for purposes of the 
Special Entity De Minimis Threshold (Proposal).\16\ Under the Proposal, 
such utility operations-related swaps would be subject to the higher 
General De Minimis Threshold applicable to swaps with persons that are 
not special entities. The Commission is adopting the Proposal subject 
to certain changes, as noted below.
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    \16\ 79 FR 31238.
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    In issuing the Proposal, the Commission recognized that utility 
special entities have a specialized purpose--i.e., they provide 
electricity and natural gas production and/or distribution to their 
customers--and they thus have a unique obligation, in that the 
commodity services they provide must be continuous, and those services 
are important to public safety. The Commission also expressed the view 
that utility operations-related swaps have become an integral part of 
providing continuous service and managing costs in connection 
therewith.\17\
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    \17\ 79 FR at 31241.
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    Further, the Commission noted that:

[t]he specialized nature of utility special entities distinguishes 
them from other types of special entities (e.g., public pension 
plans or municipal governments) in that the conduct of their 
business routinely involves, and indeed often depends upon access 
to, specific types of swap transactions that permit them to manage 
the risks of their businesses and to be able to provide electricity 
and natural gas consistently. As a consequence, they not only need 
regular access to swaps that directly affect the smooth operation of 
their business activities, but also are more likely to have 
developed expertise with swaps directly related to their operations. 
While the Special Entity De Minimis Threshold may represent a 
reasonable protection for other types of special entities that enter 
into swaps intermittently and whose activities do not depend on a 
consistent use of particular swaps, for the reasons stated above, 
the Commission believes that its application to utility operations-
related swaps with utility special entities is not as necessary for 
their regular operation.\18\
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    \18\ Id. The Commission did not propose to alter, and is not now 
altering, the Special Entity De Minimis Threshold with respect to 
other types of swaps or special entities.

    The Commission also stated in the Proposal its belief that, because 
the swaps used by utility special entities are typically conducted in 
localized and specialized markets and the number of available 
counterparties may be limited, the $25 million amount of the existing 
Special Entity De Minimis Threshold may deter those counterparties from 
engaging in utility operations-related swaps. Given the obligations of 
utility special entities to provide continuous service to customers, 
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the Commission concluded that:

the public interest would be better served if the likely 
counterparties for utility operations-related swaps are able to 
provide liquidity to this limited segment of the market without 
registering as swap dealers solely on account of exceeding the 
Special Entity De Minimis Threshold. In addition, given the 
expertise utility special entities are likely to have with utility 
operations-related swaps, the need for a lower de minimis threshold 
for dealing activity in such swaps with utility special entities is 
reduced.\19\
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    \19\ Id.

    Accordingly, the Commission proposed to amend its regulations in 
order to permit a person to exclude specified swaps (i.e., utility 
operations-related swaps) entered into with a defined subset of special 
entities (i.e., utility special entities) when calculating whether the 
person's swap dealing activities exceed the Special Entity De Minimis 
Threshold. As stated above, the Commission is adopting the Proposal, 
subject to certain changes discussed below.

A. Adding an Exclusion for Utility Operations-Related Swaps With 
Utility Special Entities

    Regulation 1.3(ggg) defines the term ``swap dealer.'' The Proposal 
sought to amend Regulation 1.3(ggg)(4)(i) to permit persons engaging in 
utility operations-related swaps with utility special entities to 
exclude such swaps solely for purposes of determining

[[Page 57770]]

whether they have exceeded the Special Entity De Minimis Threshold. 
This was to be done by redesignating existing Regulation 1.3(ggg)(4)(i) 
as Regulation 1.3(ggg)(4)(i)(A), placing the text ``In General'' before 
the redesignated regulation and adding a new Regulation 
1.3(ggg)(4)(i)(B), captioned ``Utility Special Entities.''
    As proposed, Regulation 1.3(ggg)(4)(i)(B)(1) provided that solely 
for purposes of determining whether a person's swap dealing activity 
has exceeded the $25 million aggregate gross notional amount threshold 
set forth in Regulation 1.3(ggg)(4)(i)(A) for swaps in which the 
counterparty is a special entity, a person may exclude utility 
operations-related swaps in which the counterparty is a utility special 
entity. Proposed Regulation 1.3(ggg)(4)(i)(B)(1) would not, however, 
have permitted a person to exclude the aggregate gross notional amount 
of such utility operations-related swaps in determining whether the 
person had exceeded the General De Minimis Threshold.
    Proposed Regulation 1.3(ggg)(4)(i)(B)(4) would have required a 
person to file a one-time notice with the National Futures Association 
(NFA) to rely on the exclusion provided by the new rule.\20\ The 
proposed notice provision would have required a representation from the 
person claiming the exclusion (i.e., the counterparty to the utility 
special entity) that the person meets the criteria of the exclusion for 
utility operations-related swaps with utility special entities.
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    \20\ NFA is a futures association registered as such with the 
Commission pursuant to CEA Section 17.
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    The Commission noted in the Proposal that while Congress adopted 
additional protections for special entities when engaging in swap 
transactions, such as the heightened business conduct requirements 
imposed on swap dealers advising and dealing with special entities,\21\ 
the Proposal would permit persons to engage in a greater aggregate 
gross notional amount of swaps with utility special entities without 
registering as a swap dealer. As a result, utility special entities 
engaging in such swaps with persons not registered as swap dealers 
would not have the protections provided by the statutory and regulatory 
provisions applicable to registered swap dealers, both general and 
specific to dealing activities with special entities. Accordingly, the 
Commission explained that it proposed the notice filing requirement as 
a measure to help the Commission monitor compliance with the swap 
dealer registration requirement, and to better ensure that the 
exclusion under the Proposal would serve its intended purpose.\22\
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    \21\ See CEA Sections 4s(h)(4) and 4s(h)(5).
    \22\ See 79 FR 31238, 31242.
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    However, as explained below, after considering the comments it 
received on this issue, the Commission has determined not to adopt in 
Regulation 1.3(ggg)(4)(i)(B) the proposed notice filing requirement.
    Additionally, a person relying on the exclusion under the Proposal 
would have been required to maintain in accordance with Regulation 1.31 
books and records that substantiate its eligibility to rely on this 
exclusion.\23\ As explained below, the Commission has adopted in 
Regulation 1.3(ggg)(4)(i)(B)(4) a provision that requires the person to 
maintain specifically the written representations, if any, provided to 
it by utility special entities and upon which it has relied in 
determining that the utility special entities and the utility 
operations-related swaps the person engages in meet the criteria of the 
exclusion in Regulation 1.3(ggg)(4)(i)(B)(1).
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    \23\ This requirement is consistent with the requirements of 
other similar Commission regulations, such as the requirement in 
Regulation 4.7 that commodity pool operators and commodity trading 
advisors claiming relief under that regulation maintain books and 
records relating to their eligibility to claim that relief.
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B. New Definitions

1. ``Utility Special Entity''
    Proposed Regulation 1.3(ggg)(4)(i)(B)(2) defined the term ``utility 
special entity'' to mean a special entity \24\ that owns or operates 
electric or natural gas facilities, electric or natural gas operations 
or anticipated electric or natural gas facilities or operations; 
supplies natural gas or electric energy to other utility special 
entities; 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 is a 
Federal power marketing agency as defined in Section 3 of the Federal 
Power Act, 16 U.S.C. 796(19).
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    \24\ As noted above, CEA Section 4s(h)(2)(c) and Regulation 
23.401(c) define the term ``special entity.''
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2. ``Utility Operations-Related Swap''
    Proposed Regulation 1.3(ggg)(4)(i)(B)(3) defined the term ``utility 
operations-related swap'' to mean a swap to which at least one of the 
parties is a utility special entity that is using the swap to hedge or 
mitigate commercial risk,\25\ and that is related to an exempt 
commodity.\26\ In addition, the swap would have to be an electric 
energy or natural gas swap, or associated with the operations or 
compliance obligations of a utility special entity in a manner more 
fully set forth in proposed Regulation 1.3(ggg)(4)(i)(B)(3)(iv).
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    \25\ As explained below, in Regulation 1.3(ggg)(4)(i)(B)(3)(ii) 
as adopted, the Commission revised the language from what was 
proposed to read ``(ii) A utility special entity is using the swap 
to hedge or mitigate a commercial risk as defined in Sec.  50.50(c) 
of this chapter'' (instead of ``in the manner described in Sec.  
50.50(c)'').
    \26\ As noted below, the regulation as adopted would permit the 
swap to be related to 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.
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    The Commission noted in the Proposal that:

in determining whether a person may rely on the proposed exclusion 
for utility operations-related swaps with utility special entities, 
it may not always be possible for the person to establish with 
absolute certainty that a counterparty is a utility special entity, 
that the counterparty is using a swap to hedge or mitigate 
commercial risk, that the swap is related to an exempt commodity, or 
that the swap meets the other requirements to come within the 
definition of a utility operations-related swap. Therefore, the 
Commission intends to take the position that a person seeking to 
rely on the (proposed) exclusion may reasonably rely upon a 
representation by the utility special entity that it is a utility 
special entity and that the swap is a utility operations-related 
swap, as such terms are defined in proposed Regulation 
1.3(ggg)(4)(i)(B), so long as the person was not aware, and should 
not reasonably have been aware, of facts indicating the 
contrary.\27\

    \27\ 79 FR 32138, 31242. This position is consistent with the 
Commission's approach to permitting reliance on representations for 
other purposes, such as the requirement in Regulation 50.50(b)(3) 
that a reporting party have a reasonable basis to believe that its 
counterparty meets the requirements for the exception to the 
clearing requirement for end-users. See 77 FR 42560, 42570.

    As noted below, the Commission has adopted this position in 
Regulation 1.3(ggg)(4)(i)(B)(4).

III. Comments and Responses

    In the Proposal, the Commission sought comments generally regarding 
the nature and application of the proposed exclusion for utility 
operations-related swaps with utility special entities for purposes of 
determining whether a person's swap dealing activities exceed the 
Special Entity De Minimis Threshold. The Proposal also set forth a non-
exclusive list of questions to which the Commission sought 
responses.\28\
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    \28\ 79 FR 31238, 31242-31423. In the Proposal, the Commission 
asked for and received comments on the possible benefits of revising 
its interpretation regarding forward contracts with embedded 
volumetric optionality. The Commission has decided that this matter 
is outside the scope of the present rulemaking. Accordingly, the 
Commission has asked staff to evaluate this issue separately and to 
consider the comments received in undertaking the evaluation.

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[[Page 57771]]

    The Commission received ten comment letters in response to the 
Proposal, from or on behalf of entities identifying themselves as 
utility special entities, companies engaged in providing physical 
energy and related activities, industry and trade associations and 
commercial end users of energy provided by utility special 
entities.\29\ All of the comment letters were supportive of the 
proposed amendments to Regulation 1.3(ggg)(4)(i) in general, although 
some recommended revisions to, or deletion of, specific provisions. 
Several letters provided responses to certain of the specific questions 
the Commission posed in the Proposal.
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    \29\ Comment letters were submitted by: Arizona Utility Special 
Entities (AZ Entities Comment Letter) (July 2, 2014); Electrical 
District No. 3 of Pinal County, Arizona (ED3 Comment Letter) (June 
26, 2014); City of Redding, CA (City of Redding Comment Letter) 
(July 1, 2014); Coalition of Physical Energy Companies (COPE Comment 
Letter) (July 2, 2014); EDF Trading North America LLC (EDFTNA 
Comment Letter) (July 2, 2014); Edison Electric Institute (EEI 
Comment Letter) (July 2, 2014); The Commercial Energy Working Group 
(Working Group Comment Letter) (July 2, 2014); Electric Power Supply 
Association (EPSA Comment Letter) (July 2, 2014); the International 
Energy Credit Association (IECA Comment Letter) (July 2, 2014); and 
NFP Electric Coalition (NFP Comment Letter) (July 2, 2014).
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    Commenters generally agreed that the proposed exclusion was 
necessary to address the issues facing utility special entities, and 
that the proposed exclusion would benefit utility special entities and 
the public interest without compromising the regulatory policy of 
protecting special entities generally.
    Specifically, a number of commenters agreed that utility special 
entities serve a unique role in the energy commodity markets; namely, 
utility special entities have an obligation to provide continuous and 
reliable electric and natural gas service to the public, which is 
crucial to public safety.\30\
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    \30\ See, e.g., Working Group Comment Letter; ED3 Comment 
Letter; City of Redding Comment Letter.
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    Commenters also stated that utility special entities require access 
to the swap markets in order to hedge or mitigate their commercial 
risks, and a lack of available counterparties imposes costs on utility 
special entities that ultimately are passed on to consumers. Commenters 
similarly stated that the number of potential counterparties for 
utility operations-related swaps was generally limited due to the 
unique nature of the energy markets in which utility special entities 
operate, and that the Special Entity De Minimis Threshold, and the 
regulatory burdens associated with it, discouraged this already limited 
number of potential counterparties from entering into swaps with 
utility special entities.\31\ Many commenters noted further that 
utility special entities are sophisticated market participants who have 
expertise in physical and financial energy markets, and that hedging 
and managing commercial risk is a core competency of utility special 
entities.\32\ For these reasons, commenters asserted that utility 
operations-related swaps with utility special entities should be 
treated differently than other swaps with special entities.\33\ In the 
view of these commenters, utility special entities should be treated 
the same way as investor-owned utilities with regard to the application 
of the General De Minimis Threshold.
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    \31\ See, e.g., AZ Utility Special Entities Comment Letter; NFP 
Comment Letter; Working Group Comment Letter; ED3 Comment Letter.
    \32\ See, e.g., Id.; EEI Comment Letter.
    \33\ See Id.
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A. Proposed Regulation 1.3(ggg)(4)(i)(B)(2): ``Utility Special Entity''

    The Commission received few comments specifically directed to its 
proposed definition of ``utility special entity.'' One commenter stated 
its agreement with the Commission's definition as proposed.\34\ Another 
asked the Commission to expand the definition of ``utility special 
entity'' to include governmental entities, such as school districts, 
housing authorities, fire departments, water and waste management 
utilities, involved in large-scale competitive physical procurement of 
electric energy or natural gas.\35\ Like utility special entities, the 
commenter asserted, these governmental entities have a critical and 
continuous need for natural gas and electricity, and they face unique, 
regional market structures wherein the universe of potential 
counterparties may be further limited to market participants active in 
a particular geographic region.
---------------------------------------------------------------------------

    \34\ See NFP Comment Letter.
    \35\ See Working Group Comment Letter.
---------------------------------------------------------------------------

    The Commission has not, however, so expanded the definition of 
``utility special entity'' in Regulation 1.3(ggg)(4)(i)(B) as adopted. 
In declining to make this change, the Commission notes that utility 
special entities are a distinct subset of special entities, for which 
the Commission believes it is appropriate to relax the safeguards that 
would otherwise apply with respect to their swap transactions, but 
solely in the context of utility operations-related swaps. As stated in 
the preamble of the Proposal, utility special entities provide electric 
or natural gas energy to customers, and this is the primary purpose 
for, and business of, utility special entities; and they typically have 
public service obligations to provide uninterrupted service to such 
customers. In order to meet their obligations and to provide continuous 
service to customers in a cost-effective manner, utility special 
entities have an ongoing need to hedge their commercial risks through 
utility operations-related swaps. Moreover, utility special entities 
have significant experience and expertise with respect to utility 
operations-related swaps and the commodities to which those swaps 
relate. The other types of special entities mentioned by the commenter 
are more in the nature of end users of electric or natural gas energy. 
While they may have a limited need to hedge electric and natural gas 
purchases, doing so is not a fundamental aspect of their general 
operations (e.g., education, housing, firefighting, etc.); neither 
their operations nor their obligations are analogous to those of 
utility special entities; and they are less likely to have the same 
level of experience with utility operations-related swaps and the 
commodities underlying those swaps as utility special entities. In 
balancing the public interest of providing additional regulatory 
protections for special entities against the public interest that 
utility special entities be able to effectively manage their commercial 
risk, the Commission is providing a targeted and tailored exclusion, 
based on the unique characteristics of utility special entities 
discussed above. However, the special entities as to which the 
commenter recommended expanding the Proposal do not have the same 
characteristics as utility special entities, and do not implicate the 
same policy considerations. Therefore, an exclusion from the Special 
Entity De Minimis Threshold for such special entities is not in the 
public interest as it is for utility special entities. Accordingly, the 
Commission has not expanded the definition of ``utility special 
entity'' in Regulation 1.3(ggg)(4)(i)(B) as adopted.

B. Proposed Regulation 1.3(ggg)(4)(i)(B)(3): ``Utility Operations-
Related Swap''

    One commenter recommended that the Commission adopt the definition 
of utility operations-related swap as proposed, stating that the 
definition encompasses the range of utility supply commodities 
necessary to provide

[[Page 57772]]

utility special entities the relief intended by the Proposal.\36\
---------------------------------------------------------------------------

    \36\ See City of Redding Comment Letter.
---------------------------------------------------------------------------

    Another commenter recommended that the Commission should not 
include the requirement in proposed Regulation 
1.3(ggg)(4)(i)(B)(3)(iii) that the swap be related to an ``exempt 
commodity'' in order to be a utility operations-related swap. This 
requirement, in the view of the commenter, would add ambiguity to the 
definition because the Commission's regulations and interpretations 
implementing its jurisdiction over swaps do not consistently use the 
pre-Dodd-Frank Act \37\ categorizations of ``exempt commodity,'' 
``agricultural commodity'' and ``excluded commodity'' to classify 
swaps.\38\ The commenter expressed the view that the Dodd-Frank Act and 
the Commission's regulations regarding the definition of ``swap'' do 
not use the term ``exempt commodity'' but instead distinguish swaps 
involving ``nonfinancial commodities'' from four asset classes of 
financial commodity swaps (involving rates, credit, currencies and 
equities); therefore, the definition of utility operations-related swap 
should also follow that approach. Alternatively, the commenter 
recommended that if the Commission retained in the definition, as 
adopted, the proposed requirement that the swap be related to an exempt 
commodity, then the Commission: (1) Should clarify that all 
``nonfinancial commodities'' (other than agricultural commodities) are 
exempt commodities; and (2) should expand the proposed definition of 
utility operations-related swap to include swaps related to 
agricultural commodities, as, the commenter claimed, there are 
agricultural commodities that are used for fuel for electric 
generation, or that may otherwise be ``associated with utility 
operations.''
---------------------------------------------------------------------------

    \37\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. No. 111-203, 124 Stat. 1376 (2010).
    \38\ See NFP Comment Letter.
---------------------------------------------------------------------------

    Several other commenters similarly recommended that the Commission 
conform the proposed definition of utility operations-related swap to 
the definition of the term ``Exempt Non-Financial Energy Transaction'' 
contained in the Commission's Order Exempting, Pursuant to Authority of 
the Commodity Exchange Act, Certain Transactions Between Entities 
Described in the Federal Power Act, and Other Electric Cooperatives, 
(April 2nd Order).\39\ In the view of these commenters, conforming the 
definition with the April 2nd Order would provide greater clarity to 
market participants and would allow for a more seamless implementation 
of the exclusion in proposed Regulation 1.3(ggg)(4)(i)(B), since market 
participants are already familiar with the ``Exempt Non-Financial 
Energy Transaction'' definition in the April 2nd Order.
---------------------------------------------------------------------------

    \39\ 78 FR 19670. See EPSA, IECA and NFP Comment Letters. The 
April 2nd Order provides that the term ``Exempt Non-Financial Energy 
Transaction'' means ``any agreement, contract, or transaction based 
upon a `commodity,' as such term is defined in CEA section 1a(9) and 
Commission regulation 1.3(e), that would not have been entered into, 
but for an Exempt Entity's need to manage supply and/or price risks 
arising from its existing or anticipated public service obligations 
to physically generate, transmit, and/or deliver electric energy 
service to customers. The term `Exempt Non-Financial Energy 
Transaction' excludes agreements, contracts, and transactions based 
upon, derived from, or referencing any interest rate, credit, equity 
or currency asset class, or any grade of a metal, or any 
agricultural product, or any grade of crude oil or gasoline that is 
not used as fuel for electric energy generation. The term `Exempt 
Non-Financial Energy Transaction' also excludes agreements, 
contracts, or transactions entered into on or subject to the rules 
of a registered entity, submitted for clearing to a derivatives 
clearing organization, and/or reported to a swap data repository.'' 
Id. at 19688.
    The April 2nd Order limits Exempt Non-Financial Energy 
Transactions to specifically defined categories of transactions, 
which the April 2nd Order provides may exist as stand-alone 
agreements or as components of larger agreements that combine these 
categories. The April 2nd Order identifies these categories of 
transactions as follows: (1) Electric energy delivered; (2) 
generation capacity; (3) transmission services; (4) fuel delivered; 
(5) cross-commodity pricing; and (6) other goods and services. Id.
---------------------------------------------------------------------------

    The Commission is addressing these comments in two parts: (1) 
Whether the Commission should adopt as proposed a utility operations-
related swap definition requiring that the swap be ``related to an 
exempt commodity, as that term is defined in Section 1a(20) of the 
Act,'' or the Commission should adopt in the definition another type of 
limiting criteria, as identified by the commenters; and (2) whether the 
Commission should adopt a definition of utility operations-related swap 
that includes certain ``agricultural commodities'' as that term is 
defined in Regulation 1.3(zz).
    After considering the commenters' arguments, the Commission has 
determined to adopt in Regulation 1.3(ggg)(4)(i)(B)(3) the proposed 
requirement that a utility operations-related swap must relate to an 
exempt commodity.\40\ The Proposal responded to the request in the 
Petition to provide relief for counterparties to certain types of swaps 
used by utility special entities to hedge their day-to-day operational 
activities. The Proposal noted that: utility special entities have a 
greater need for these swaps than for other types of swaps and that 
need is ongoing; the underlying commodities identified in such swaps 
and the counterparties for such swaps are often regional (e.g., the 
location for delivery of the commodity and the location of the 
operations of the counterparties); these swaps relate to underlying 
commodities which utility special entities regularly use as part of 
their normal operations; and with respect to such swaps, utility 
special entities generally have a level of expertise and 
sophistication. Given these factors, the Proposal allowed for a limited 
reduction in the protections that the Special Entity De Minimis 
Threshold would provide for utility special entities, in order to 
increase the number of counterparties available for utility special 
entities that need to use these types of swaps.
---------------------------------------------------------------------------

    \40\ The requirement that a swap must relate to an exempt 
commodity was included in Staff Letter 12-18.
---------------------------------------------------------------------------

    However, as stated in the preamble to the Proposal, the Commission 
recognizes that the Special Entity De Minimis Threshold is generally 
appropriate in light of the special protections that Title VII of the 
Dodd-Frank Act provides to special entities.\41\ In keeping with the 
statutory and regulatory objective of providing additional protections 
for special entities generally, the Commission believes that the 
definition of utility operations-related swap in Regulation 
1.3(ggg)(4)(i)(B)(3) should be written to exclude swaps that are not 
related to commodities used by utility special entities in the ordinary 
course of their daily operations. In this way, utility special entities 
would be treated in the same way as other special entities with regard 
to swaps that do not implicate the policies underlying the proposed 
exclusion.
---------------------------------------------------------------------------

    \41\ See 79 FR at 31245.
---------------------------------------------------------------------------

    The commenters' recommendation that the definition of utility 
operations-related swaps conform to the definition of the term ``Exempt 
Non-Financial Energy Transaction'' contained in the April 2nd Order is 
misplaced, because the April 2nd Order addresses transactions between a 
limited set of counterparties and was based on different underlying 
policy considerations. In accordance with CEA Section 4(c)(6),\42\ the 
April 2nd Order

[[Page 57773]]

broadly exempts from most requirements of the CEA and Commission 
regulations all ``Exempt Non-Financial Energy Transactions'' entered 
into solely between Exempt Entities.\43\ The scope of the transactions 
covered by the exemption was defined in the context of both this unique 
``closed loop'' market (i.e., transactions where both parties are 
Exempt Entities) and also the underlying policies for the exemption. 
More specifically, the Commission determined that such transactions 
between not-for-profit utilities (in a closed loop) will not materially 
impair price discovery or the functioning of markets regulated by the 
Commission.\44\ The Commission also determined that the not-for-profit 
structure and governance model of all Exempt Entities reduce the 
incentives and other conditions that traditionally lead to fraudulent 
or manipulative trading activity, and should therefore mitigate the 
need for prescriptive federal oversight.\45\ Thus, the transactions and 
circumstances addressed by the April 2nd Order--and the underlying 
statutory and regulatory policy considerations--are not analogous to 
those addressed and implicated by the Proposal.\46\
---------------------------------------------------------------------------

    \42\ As discussed by the Commission in the preamble to the April 
2nd Order, CEA Section 4(c)(6) ``builds upon the Commission's 
existing 4(c) exemptive authority by providing that the Commission 
`shall . . . exempt from the requirements of th[e] Act an agreement, 
contract, or transaction that is entered into * * * between entities 
described in section 201(f) of the Federal Power Act (16 U.S.C. 
824(f)),' but only `[i]f the Commission determines that the 
exemption would be consistent with the public interest and the 
purposes of [the Act].' '' 78 FR at 19671.
    \43\ The term ``Exempt Entity'' is defined in the April 2nd 
Order as ``(i) any electric facility or utility that is wholly owned 
by a government entity, as described in Federal Power Act (`FPA') 
section 201(f), 16 U.S.C. 824(f); (ii) any electric facility or 
utility that is wholly owned by an Indian tribe recognized by the 
U.S. government pursuant to section 104 of the Act of November 2, 
1994, 25 U.S.C. 479a-1; (iii) any electric facility or utility that 
is wholly owned by a cooperative, regardless of such cooperative's 
status pursuant to FPA section 201(f), so long as the cooperative is 
treated as such under Internal Revenue Code section 501(c)(12) or 
1381(a)(2)(C), 26 U.S.C. 501(c)(12), 1381(a)(2)(C), and exists for 
the primary purpose of providing electric energy service to its 
member/owner customers at cost; or (iv) any other entity that is 
wholly owned, directly or indirectly, by any one or more of the 
foregoing. The term `Exempt Entity' does not include any `financial 
entity,' as defined in CEA section 2(h)(7)(C).'' 78 FR at 19688.
    \44\ Id. at 19679.
    \45\ Id. This rationale is not applicable to transactions 
between a utility special entity and a counterparty that is not a 
utility special entity.
    \46\ The NFP Comment Letter asserts that ``Members of [NFP] 
(including utility special entities) are `Exempt Entities' as such 
term is defined in the [April 2nd Order].'' Even assuming this would 
be the case with respect to all utility special entities, not just 
NFP members, the April 2nd Order is limited to transactions ``solely 
between Exempt Entities,'' whereas the exclusion in Regulation 
1.3(ggg)(4)(i)(B) will apply to swaps where only one party is a 
utility special entity.
---------------------------------------------------------------------------

    Similarly, the commenters' recommendation that the Commission base 
the definition of utility operations-related swap on the distinction 
between nonfinancial commodities and commodities related to the four 
financial asset classes would allow for swaps related to commodities 
that are not regularly used by utility special entities to be included 
in the definition of utility operations-related swap.\47\ While the 
Commission believes that all of the types of swaps that fall within the 
four financial asset classes noted should be excluded from the defined 
term, there are many other swaps--both financial and non-financial--
that also should not be included in the definition given the rationale 
for providing the exclusion for utility special entities in a way that 
is balanced with the need to maintain appropriate protections for 
special entities generally.
---------------------------------------------------------------------------

    \47\ The Commission employed the term ``nonfinancial commodity'' 
in the preamble of the Federal Register release adopting the 
definition of the term ``swap'' to discuss a category of 
transactions for which the forward exclusion would apply. See 77 FR 
48208, 48227 et seq., n.205. As such, that term serves a purpose in 
the swap definition regulation that is functionally different from 
the utility operations-related swap definition that the Commission 
is adopting in this Federal Register release.
---------------------------------------------------------------------------

    This can be illustrated by considering the definition in the April 
2nd Order to which the commenters referred. The definition of the term 
``Exempt Non-Financial Energy Transaction'' in the April 2nd Order 
excludes transactions ``referencing any interest rate, credit, equity 
or currency asset class or any grade of a metal, or any agricultural 
product, or any grade of crude oil or gasoline that is not used as fuel 
for electric energy generation.'' As such, the April 2nd Order carves 
out from the relief it provided both swaps in the four delineated 
financial asset classes and swaps related to certain physical 
commodities, to the extent those commodities are not used by the 
utility special entities for electric energy generation.
    However, the April 2nd Order criteria may create gaps and 
uncertainty in the definition of utility operations-related swaps that 
could both result in ambiguity for market participants and overly 
reduce the general protections intended for special entities, including 
utility special entities. The April 2nd Order does not define the terms 
``interest rate asset class,'' ``credit asset class,'' ``equity asset 
class'' or ``currency asset class.'' Although the meaning of these 
terms may be generally understood, the lack of a definition creates a 
degree of ambiguity. For example, it is generally understood that the 
exclusion provided in the final regulation should not include interest 
rate swaps that special entities might use to hedge interest rate risk 
related to their bonds. However, such a hedge could be accomplished 
indirectly by entering into a bond price swap either on their bonds or 
less directly, on a bond price index. As another example, it is also 
unclear whether the definition in the April 2nd Order would exclude a 
total return swap on a utility special entity's bonds (or any other 
bonds for that matter). Although special entities should not be barred 
from entering into such swaps, in the absence of an exclusion for such 
swaps, the low Special Entity De Minimis Threshold would require that a 
person dealing in such swaps with a special entity (in excess of the 
$25 million amount) be registered as a swap dealer, irrespective of 
whether the special entity is a utility special entity. This is 
consistent with the statutory intent to provide greater protections for 
special entities generally. In this way, the protections provided for 
special entities by the swap dealer regulations would apply to swaps of 
this nature to which any kind of special entity is a party, including 
utility special entities.
    Finally, while the criteria in the April 2nd Order except out 
certain specified physical commodities as described above, those 
exceptions are fairly specific and would not except out a swap 
referencing any other physical commodity to the extent the swap might 
be shown to ``manage supply and/or price risks arising from [an 
entity's] existing or anticipated public service obligations.'' That 
approach provides a significant amount of flexibility in determining 
which swaps fit within the definition. For some purposes, this 
flexibility can be helpful in that determining when a swap is being 
used to ``manage,'' or ``hedge or mitigate'' (the term in Regulation 
1.3(ggg)(4)(i)(B)(3)(ii) as adopted that serves a similar function) 
risk can be highly fact specific and to a degree subjective. This 
flexibility, while beneficial in some contexts, can create a degree of 
ambiguity because it allows for different interpretations based on the 
facts and circumstances. This ambiguity may have been acceptable in the 
context of the April 2nd Order because it addressed only swaps between 
``Exempt Entities'' (e.g., not involving commercial dealers or 
financial entities) and because the April 2nd Order involves different 
public policy considerations, as described above. On the other hand, 
this ambiguity could result in overly-weakened protections for special 
entities if incorporated into the Amendments.
    Maintaining in Regulation 1.3(ggg)(4)(i)(B)(3)(iii) the requirement 
that utility operations-related swaps must relate to exempt commodities 
mitigates this ambiguity and helps maintain the protections intended 
for

[[Page 57774]]

special entities by the Dodd-Frank Act and the Commission's 
regulations. The term ``exempt commodity'' is defined as a commodity 
that is not an ``excluded commodity'' or an ``agricultural commodity.'' 
Briefly stated, excluded commodities (agricultural commodities are 
addressed below) encompass swaps referencing the four financial classes 
identified in the April 2nd Order and swaps related to: debt 
instruments; indexes or measures of inflation or other macroeconomic 
indexes or measures; commodities based on rates, differentials, indexes 
or measures of economic or commercial risk, return or value that are 
not based in substantial part on the value of a narrow group of 
commodities or are based solely on one or more commodities that have no 
cash market; or commodities based on any occurrence or contingency that 
is out of the control of the parties and associated with an economic 
consequence.\48\ Accordingly, maintaining in Regulation 
1.3(ggg)(4)(i)(B)(3)(iii) as adopted the proposed requirement that the 
swap relate to an ``exempt commodity'' would limit the final regulation 
to types of swaps that a utility special entity may need to operate 
effectively while at the same time excluding swaps that relate to many 
types of commodities that are not generally used in special utility 
entity operations.
---------------------------------------------------------------------------

    \48\ See 7 U.S.C. 1a(19).
---------------------------------------------------------------------------

    Notwithstanding the foregoing, the term ``excluded commodity'' has 
a degree of complexity. Accordingly, by this Federal Register release, 
the Commission is taking the position that the requirement in 
Regulation 1.3(ggg)(4)(i)(B)(3)(iii) that the swap ``relate to an 
exempt commodity'' includes swaps that reference any physical commodity 
involved in a utility special entity's normal operations. For example, 
the requirement in Regulation 1.3(ggg)(4)(i)(B)(3)(iii) as adopted 
would include a swap based on: the price of a grade of oil or coal that 
the utility special entity purchases to fuel its power generation 
facilities; a narrow index of grades of oil or coal that includes that 
grade of oil or coal; electricity generated or distributed by a utility 
special entity or potentially needed for peak power; or water needed to 
power hydroelectric generating facilities of the entity.\49\ On the 
other hand, a swap based on a broad commodity index, a bond price, 
inflation indexes or weather occurrences would not meet the requirement 
in Regulation 1.3(ggg)(4)(i)(B)(3)(iii).
---------------------------------------------------------------------------

    \49\ The foregoing list of examples is not intended to be an 
exhaustive list of commodities on which a swap must be based such 
that the swap would come within the definition of the term ``utility 
operations-related swap.'' Rather, it is being provided to 
illustrate how to apply the definition in the context of utility 
special entity operations.
---------------------------------------------------------------------------

    Regarding the commenter's request to include in the final utility 
operations-related swap definition agricultural commodities used for 
certain utility purposes,\50\ the Commission acknowledges that it is 
possible that a utility special entity may use agricultural 
commodities, such as ethanol or wood chips, in its normal operations 
and therefore the definition could be expanded for this purpose. The 
Commission is concerned, however, that including agricultural 
commodities generally in the definition may broaden the definition too 
much because generally, agricultural commodities are not used in energy 
utility operations. Accordingly, the Commission is adopting in 
Regulation 1.3(ggg)(4)(i)(B)(3)(iii) a definition of utility 
operations-related swap that includes swaps relating to agricultural 
commodities that are used for fuel for electric generation or are 
otherwise used in the normal operations of the utility special entity.
---------------------------------------------------------------------------

    \50\ See NFP Comment Letter.
---------------------------------------------------------------------------

    One commenter recommended that the Commission adopt in lieu of the 
proposed term and definition of ``utility operations-related swap'' a 
term and definition of ``utility operations-related transaction,'' 
which would include all non-financial commodity transactions for 
deferred shipment or delivery where the parties intend physical 
settlement at the time the transaction was executed (including stand-
alone or embedded options or optionalities), claiming this was 
necessary to provide utility special entities with the relief they 
required.\51\ Alternatively, the commenter asked that prior to, or 
concurrently with, the issuance of a regulation adopting the ``utility 
operations-related swap'' definition, the Commission act on the 
commenter's request for reconsideration of the Commission's 
interpretation of CEA Section 1a(47) that all commodity options are 
swaps, and clarify the scope of the Commission's jurisdiction over 
nonfinancial commodity swaps.\52\ Further, the commenter urged the 
Commission to provide guidance that all transactions used by a utility 
special entity to hedge or mitigate commercial risks, and that have the 
benefit of Commission exclusion by interpretation or an order exempting 
them from the Commission's jurisdiction over swaps, are also excluded 
from the Special Entity De Minimis Threshold.
---------------------------------------------------------------------------

    \51\ Id.
    \52\ In its October 12, 2012, comment letter on the Commission's 
proposed regulations to further define the terms ``swap'' and ``swap 
dealer,'' NFP had asked the Commission to reconsider its conclusion 
that ``commodity options are swaps under the statutory swap 
definition.'' See 77 FR 48208, 48236 (Aug. 13, 2012). NFP's letter 
may be accessed at: http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=59235&SearchText=.
---------------------------------------------------------------------------

    The Commission is declining to adopt any of these recommendations. 
An entity may be a swap dealer (and be subject to regulation as such) 
if that entity is dealing in ``swaps,'' as defined in the CEA and the 
Commission's regulations. Whether any particular transaction of the 
types identified by the commenter is or is not a swap may be fact-
dependent. Accordingly, the broad statements requested from the 
Commission by the comment could effectively amount to an interpretation 
or modification of the definition of the term ``swap.'' The Commission 
did not also propose to modify or interpret the definition of the term 
``swap'' when it issued the Proposal. Rather, in proposing Regulation 
1.3(ggg)(4)(i)(B)(3), the Commission intended to define a subset of 
swaps as utility operations-related swaps. Thus, the commenter 
effectively has asked the Commission to go beyond the scope of the 
Proposal and to interpret or modify the definition of the term ``swap'' 
in order to provide relief that is broader than what the Proposal 
contemplated. The Commission notes, however, that under the definition 
of swap dealer in Regulation 1.3(ggg), any transactions identified in 
the comment that are not ``swaps,'' as defined in the CEA and the 
Commission's regulations, are not counted for purposes of the Special 
Entity De Minimis Threshold or the General De Minimis Threshold.
    Another commenter \53\ recommended that in lieu of the proposed 
text of Regulation 1.3(ggg)(4)(i)(B)(3)(ii) the Commission should adopt 
the following text: ``(ii) A utility special entity is using the swap 
to hedge or mitigate commercial risk as defined in Sec.  50.50(c) of 
this chapter.'' \54\ Otherwise, the commenter claimed, the requirement 
could be misinterpreted to mean that a utility operations-related swap 
must be used to invoke an exception to the mandatory clearing 
requirement in order to qualify for the proposed exclusion.
---------------------------------------------------------------------------

    \53\ See Working Group Comment Letter.
    \54\ The proposed text read: ``(ii) A utility special entity is 
using the swap in the manner described in Sec.  50.50(c) of this 
chapter.''
---------------------------------------------------------------------------

    The Commission finds that this recommendation is consistent with 
the intent of the Proposal and that it would provide greater clarity. 
Accordingly, the

[[Page 57775]]

Commission is adopting in Regulation 1.3(ggg)(4)(i)(B)(3)(ii) the 
recommended text quoted above.
    The same commenter also recommended that the Commission confirm 
that proposed Regulation 1.3(ggg)(4)(i)(B) would apply to a swap that 
unwinds an existing hedge. The commenter expressed the view that market 
participants often hedge dynamically to optimize the value of 
underlying physical assets or portfolios, and may modify hedging 
structures related to a physical asset or position when the relevant 
pricing relationships applicable to the asset change. Dynamic hedging, 
according to the commenter, may involve leaving an asset or position 
unhedged when necessary to mitigate lost opportunity cost risk, which 
may require hedges to be established, unwound, and re-established on an 
iterative basis over time. The commenter noted that in the preamble of 
the Federal Register release announcing the adoption of Regulation 
50.50(c), the Commission stated that ``qualification as bona fide 
hedging does not require hedges, once entered into, to remain static. 
The Commission recognizes that entities may update their hedges 
periodically when pricing relationships or market factors applicable to 
the hedges change.'' \55\ In light of this statement, the Commission 
agrees with the recommendation. Accordingly, the Commission confirms 
that the language quoted above concerning bona fide hedging is equally 
applicable to transactions qualifying under Regulation 
1.3(ggg)(4)(i)(B).
---------------------------------------------------------------------------

    \55\ 77 FR 42560, 42575 n. 69.
---------------------------------------------------------------------------

C. Comments Addressing Both Definitions

    A commenter \56\ urged the Commission to ensure that the 
definitions of ``utility special entity'' and ``utility operations-
related swap'' follow as closely as possible the analogous provisions 
of Staff Letter 14-34 (which provides relief for utility special 
entities pending a final rulemaking by the Commission), in order to 
minimize the burden on counterparties in transitioning from reliance on 
that no-action letter to reliance on the new regulation. In this 
regard, the commenter asked the Commission to determine whether the 
benefits associated with any proposed deviation from the terms of Staff 
Letter 14-34 outweigh the costs and burdens of the deviation to market 
participants.
---------------------------------------------------------------------------

    \56\ See EDFTNA Comment Letter.
---------------------------------------------------------------------------

    In response, the Commission notes that the text of the analogous 
provisions in Staff Letter 14-34 is similar, but less specific (e.g., 
it does not require that the swap be related to an exempt commodity), 
and therefore the wording of the letter is subject to greater 
interpretive flexibility that could lead to unintended consequences. 
Staff Letter 14-34 was intended to provide short-term relief until 
regulatory changes could be implemented, whereas the final regulation 
will be a more permanent solution. While the Commission is sympathetic 
to the concerns expressed by the commenter regarding continuity, it is 
more important to define these terms precisely to effect the regulatory 
and policy purposes of the regulation.
    Accordingly, from and after the effective date of the Amendments, 
the relief made available by Staff Letter 14-34 will terminate, except 
with respect to swaps entered into in reliance upon Staff Letter 14-34 
prior to such effective date. In recognition of the fact that some 
persons may have entered into swaps in reliance on Staff Letter 14-34, 
the Commission is clarifying that such persons may continue to rely 
upon the relief provided in Staff Letter 14-34 with respect to swaps 
entered into prior to the effective date of the Amendments.\57\
---------------------------------------------------------------------------

    \57\ Such swaps would, however, need to be counted for purposes 
of the General De Minimis Threshold, as provided in Staff Letter 14-
34.
---------------------------------------------------------------------------

    Five commenters \58\ asked that the Commission include in the text 
of the final rule (and not just in the preamble text of the adopting 
release) a provision that a person seeking to rely on the exclusion 
from the $25 million Special Entity De Minimis Threshold be able to 
rely on representations from the utility special entity for the basis 
of the exclusion, provided the reliance is made in good faith. One of 
the five commenters \59\ also suggested the representations be in 
writing and another of these commenters \60\ suggested text for the 
purpose.
---------------------------------------------------------------------------

    \58\ See EEI, COPE, EDFTNA, IECA and NFP Comment Letters.
    \59\ See COPE Comment Letter.
    \60\ See NFP Comment Letter.
---------------------------------------------------------------------------

    The Commission believes that explicitly stating in Regulation 
1.3(ggg)(4)(i)(B) that a person may rely upon a written representation 
from a utility special entity will ensure that prospective 
counterparties are aware that such reliance is permitted under the 
regulation, and the Commission is doing so in Regulation 
1.3(ggg)(4)(i)(B)(4).

D. Proposed Regulation 1.3(ggg)(4)(i)(B)(4): Notice Filing Requirement

    In the Proposal, the Commission solicited comment on the proposed 
notice requirement provision, specifically asking whether it would 
enable the Commission to achieve the objectives of the notice 
provision, as stated in the Proposal. One commenter supported the 
notice provision, stating that the requirement will provide the 
Commission with visibility to monitor the entities utilizing the 
exclusion.\61\ Another commenter voiced support for the purposes of the 
notice provision, stating that the Commission should be able to 
identify the entities that elect to rely on the exclusion in order to 
ensure that the exclusion serves the intended purpose of enabling 
utility special entities to manage operational risks in a cost-
effective manner while simultaneously monitoring compliance with the 
swap dealer registration requirements.\62\
---------------------------------------------------------------------------

    \61\ See City of Redding Comment Letter.
    \62\ See EDFTNA Comment Letter. The commenter did not agree, 
however, that the Commission's objective of identifying relying 
entities would be served by requiring such entities to file a notice 
with NFA.
---------------------------------------------------------------------------

    Six commenters \63\ stated that the Commission should not adopt the 
proposed notice provision because it would impose unnecessary 
regulatory risks and burdens in that the proposed attestation 
requirement would create personal liability regarding factual issues 
that are in the control of the utility special entity, not the person 
making the attestation, and because the criteria would relate to swaps 
to be executed in the future. The commenters predicted that these risks 
and burdens would discourage persons from serving as counterparties to 
utility special entities, which would be contrary to the purpose of the 
Proposal. They also pointed out that counterparties relying on any 
other de minimis exclusion are not subject to a notice requirement and 
asserted that the Commission had not provided any justification for 
treating persons who serve as counterparties to utility special 
entities any differently.
---------------------------------------------------------------------------

    \63\ See EPSA, EDFTNA, Working Group, IECA, NFP and EEI Comment 
Letters.
---------------------------------------------------------------------------

    Three of the six commenters \64\ disputed the rationale for the 
proposed notice provision set forth in the Proposal (that Congress has 
determined that special entities need additional protection and the 
notice filing will help the Commission monitor these transactions), 
stating that the Commission acknowledged in the

[[Page 57776]]

Proposal that utility special entities are sophisticated and 
experienced market participants, and contending that utility 
operations-related swaps will be reported to swap data repositories 
(``SDRs'') and, as such, the Commission can already see which entities 
are entering into swap transactions with utility special entities.
---------------------------------------------------------------------------

    \64\ See EEI, Working Group and NFP Comment Letters.
---------------------------------------------------------------------------

    After considering the comments it received on this issue, the 
Commission has determined not to retain the notice filing requirement 
in the final regulation.\65\ However, the Commission believes that it 
is important that it obtain information regarding whether 
counterparties to utility special entities are relying on the exclusion 
in Regulation 1.3(ggg)(4)(i)(B) and therefore do not need to register 
as swap dealers and generally how the exclusion is affecting the 
markets for utility operations-related swaps. Accordingly, the 
Commission has directed its staff to assess possible amendments to the 
Commission's regulations that would provide the Commission with such 
information, including, potentially, amendments to Part 45 of the 
Commission's regulations to add a data reporting field identifying 
utility operations-related swaps when they are reported to SDRs.
---------------------------------------------------------------------------

    \65\ Accordingly proposed Regulation 1.3(ggg)(4)(i)(B)(5) (which 
set forth the requirement to keep certain records) is renumbered as 
Regulation 1.3(ggg)(4)(i)(B)(4) in the final regulation.
---------------------------------------------------------------------------

E. Proposed Regulation 1.3(ggg)(4)(i)(B)(5): Books and Records 
Requirement

    Seven commenters stated that the Commission should not adopt any 
recordkeeping requirement in the final regulation, claiming that such a 
requirement would be unnecessary and redundant.\66\ Counterparties to 
swaps are already required to maintain appropriate records for purposes 
of demonstrating compliance with the General De Minimis Threshold. As 
such, the commenters said, the Commission has access to this 
information and additional recordkeeping requirements for utility 
operations-related swap transactions are not needed.
---------------------------------------------------------------------------

    \66\ See EEI, EPSA, NFP, COPE, Working Group, IECA, and EDFTNA 
Comment Letters.
---------------------------------------------------------------------------

    Two of the seven commenters \67\ went on to recommend that if the 
Commission were to specify any additional books and records to be kept, 
it should not repeat the deliberate vagueness of Regulation 45.2. One 
commenter \68\ suggested that the Commission should specify that a 
record of a counterparty's representation that it is eligible for the 
exclusion should be sufficient, because, it asserted, a counterparty 
relying on such a representation may not necessarily have any other 
records demonstrating that the exclusion applies.
---------------------------------------------------------------------------

    \67\ See COPE and Working Group Comment Letters.
    \68\ See COPE Comment Letter.
---------------------------------------------------------------------------

    The Commission believes that, while the general recordkeeping 
requirement in the Proposal would provide greater oversight 
capabilities, it could be burdensome relative to the benefits it would 
provide. As commenters noted, Part 45 of the Commission's regulations 
imposes general recordkeeping requirements upon persons that are 
counterparties to swaps, whether or not such persons are within the 
swap dealer definition and therefore subject to the requirement to 
register as such,\69\ and the Commission agrees that such records would 
include those necessary to demonstrate the person's compliance with the 
General De Minimis Threshold. Accordingly, a record of each utility 
special entity's representation that it is a utility special entity and 
that the swap is a utility operations-related swap, together with the 
general recordkeeping requirements under Part 45, should provide the 
Commission with sufficient information for compliance purposes.
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    \69\ See, e.g., Regulation 45.2(b) (``All non-SD/MSP 
counterparties subject to the jurisdiction of the Commission shall 
keep full, complete, and systematic records, together with all 
pertinent data and memoranda, with respect to each swap in which 
they are a counterparty . . . .'')
---------------------------------------------------------------------------

    Therefore, the Commission is including in the regulation as adopted 
the change suggested by one of the commenters \70\ by requiring in 
Regulation 1.3(ggg)(4)(i)(B)(4) as adopted only that each person who 
relies on the written representation of a utility special entity retain 
such representation among its required records, in accordance with 
Regulation 1.31. Including this requirement in the final regulation 
makes clear that records of such written representations, if received, 
are a necessary element of the records required to be kept pursuant to 
the general requirements of Part 45.
---------------------------------------------------------------------------

    \70\ See COPE Comment Letter.
---------------------------------------------------------------------------

F. Comments Addressing Specific Questions Asked by the Commission

1. Question 8--Appropriateness of the De Minimis Threshold
    The Commission asked whether the $8 billion General De Minimis 
Threshold was appropriate in the context of utility operations-related 
swaps or whether a higher or lower threshold should be adopted.
    Two commenters offered support for the Commission's application of 
the General De Minimis Threshold to utility operations-related swaps, 
stating that applying that threshold strikes the appropriate regulatory 
policy balance,\71\ and that it would level the playing field between 
utility special entities and investor-owned utilities.\72\
---------------------------------------------------------------------------

    \71\ See NFP Comment Letter.
    \72\ See City of Redding Comment Letter.
---------------------------------------------------------------------------

    Five commenters encouraged the Commission to revisit the General De 
Minimis Threshold and to eliminate any automatic reset to any lower 
threshold.\73\ These commenters also stated that the Commission should 
not adopt a separate threshold for utility operations-related swaps 
with utility special entities that was lower than the General De 
Minimis Threshold, as it would create confusion and serve to limit the 
number of counterparties willing to transact with utility special 
entities.
---------------------------------------------------------------------------

    \73\ See EEI, EDFTNA, Working Group, IECA, and NFP Comment 
Letters.
---------------------------------------------------------------------------

    The second comment (eliminating an automatic reset of the General 
De Minimis Threshold) is beyond the scope of the Proposal and this 
rulemaking. With regard to the third comment, the Commission did not 
propose and is not adopting a separate threshold below the General De 
Minimis Threshold, and accordingly no changes to the Proposal are 
called for by these comments.
2. Question 9--Appropriateness of Limiting Counterparty Eligibility
    Question 9 in the Proposal asked whether the nature of the person 
entering into swaps with a utility special entity should be a factor in 
determining whether the person can rely on the exclusion (e.g., by 
limiting the exclusion to persons who are not ``financial entities,'' 
as provided in Staff Letter 12-18). Two commenters \74\ asserted that 
the Commission should not impose limitations on the types of 
counterparties eligible to rely on Regulation 1.3(ggg)(4)(i)(B), 
arguing that such limitations would likely restrict the number of 
counterparties available to utility special entities without providing 
an associated benefit. The commenters believed that the substantial 
costs and burdens associated with registration as a swap dealer would 
likely cause an entity with even the slightest reservation regarding 
its ability to rely on the exclusion to err on the side of caution and 
decline to transact otherwise qualifying swaps with utility special 
entities.
---------------------------------------------------------------------------

    \74\ See EDFTNA and Working Group Comment Letters.
---------------------------------------------------------------------------

    The Commission has concluded that restrictions such as excluding 
financial entities from relying on the exclusion

[[Page 57777]]

would have a chilling effect on some potential market participants who 
provide energy merchant services without providing significant 
regulatory benefits. Given that such entities would be subject to 
registration as a swap dealer if they exceed the $8 billion General De 
Minimis Threshold, the Commission agrees that barring financial 
entities from taking advantage of the exclusion could thwart the 
purpose of the rulemaking while providing minimal additional regulatory 
protections. Therefore, the Commission is not adopting in Regulation 
1.3(ggg)(4)(i)(B) any limitations on the persons who are permitted to 
rely upon the exclusion provided by the regulation.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \75\ requires that Federal 
agencies consider whether the rules they propose will have a 
significant economic impact on a substantial number of small entities 
and, if so, they must provide a regulatory flexibility analysis 
respecting the impact. Whenever an agency publishes a general notice of 
proposed rulemaking for any rule, pursuant to the notice-and-comment 
provisions of the Administrative Procedure Act \76\ a regulatory 
flexibility analysis or certification typically is required.\77\
---------------------------------------------------------------------------

    \75\ 5 U.S.C. 601 et seq.
    \76\ 5 U.S.C. 553. The Administrative Procedure Act is found at 
5 U.S.C. 500 et seq.
    \77\ See 5 U.S.C. 601(2), 603-05.
---------------------------------------------------------------------------

    The Commission stated in the Proposal that the proposed amendments, 
if adopted, would not have a significant economic impact on affected 
persons because they would primarily relieve such persons from 
regulatory obligations (e.g., reporting, recordkeeping and business 
conduct requirements) that would otherwise apply to them if they had to 
register as swap dealers. The Commission further stated that to the 
extent that any small entities opted to rely on the exclusion, the 
notice requirement would not have a significant economic impact on 
those entities. Finally, it noted that the number of potential 
counterparties seeking to rely on the proposed exclusion may be 
limited, given the local nature of the relevant markets.
    Accordingly, the Chairman, on behalf of the Commission, certified 
pursuant to 5 U.S.C. 605(b) that the Proposal will not have a 
significant economic impact on a substantial number of small 
entities.\78\
---------------------------------------------------------------------------

    \78\ 79 FR 31238 at 31243-31244.
---------------------------------------------------------------------------

    Two commenters addressed the Commission's RFA discussion.\79\ Both 
commenters argued that the Commission's preliminary estimate that 100 
persons would seek to rely upon the exclusion provided in Regulation 
1.3(ggg)(4)(i)(B) was low, with one commenter positing that the 
Commission underestimated the number of counterparties by a factor of 
twenty.\80\ The commenters argued that even an inconsequential notice 
filing could dissuade a potential counterparty from engaging in swaps 
with a utility special entity, given the lack of any comparable filing 
requirement if the counterparty were to offer the same swap to an 
investor-owned utility. The commenters argued that the vast majority of 
utility special entities are small entities, and that the cumulative 
economic impact on those small entities would be significant.
---------------------------------------------------------------------------

    \79\ See NFP and IECA Comment Letters.
    \80\ This estimate is contained in NFP's letter to the Office of 
Information and Regulatory Affairs of the Office of Management and 
Budget concerning the Commission's PRA analysis. A copy of the 
letter is attached as Attachment C to the NFP Comment Letter.
---------------------------------------------------------------------------

    In response, the Commission notes first that the RFA does not 
require the Commission to consider whether a proposed rulemaking will 
have a significant economic impact on persons indirectly affected by 
that rulemaking. The entities directly affected by the Amendments are 
counterparties to utility special entities, not the utility special 
entities themselves. Furthermore, the Commission is not required to 
conduct a full regulatory flexibility analysis under the RFA because 
the Amendments will not have a significant economic impact on any such 
small entities.
    The Commission's preliminary estimate of the number of persons who 
would rely on Regulation 1.3(ggg)(4)(i)(B) was based on the information 
available to the Commission at the time and was provided with the hope 
of generating industry comment. The Commission questions the accuracy 
of the one commenter's estimate of the number of persons who will rely 
on Regulation 1.3(ggg)(4)(i)(B), which appears to have been based, at 
least in part, on a limited sampling of a handful of utility special 
entities and does not appear to sufficiently factor in the possibility 
that utility special entities may transact with many of the same 
counterparties. However, even accepting the commenter's estimate 
(which, for the reasons stated above, the Commission believes may be 
high), the Commission believes that the Amendments will not have a 
significant economic impact on small entities.
    While it may be that some counterparties to utility special 
entities are small entities, not all of them may find need to rely on 
Regulation 1.3(ggg)(4)(i)(B). For example, counterparties who are small 
entities may be entering into swaps with utility special entities to 
hedge physical positions as set forth in Regulation 1.3(ggg)(6)(iii). 
Such swaps would not be counted toward any de minimis threshold.
    For those small entities who, as counterparties to utility special 
entities, do rely on Regulation 1.3(ggg)(4)(i)(B), the Commission does 
not believe the burdens of Regulation 1.3(ggg)(4)(i)(B) will be 
significant. As discussed above, the Commission has not included in 
Regulation 1.3(ggg)(4)(i)(B) as adopted the proposed notice filing 
requirement. With respect to any recordkeeping obligations arising out 
of Regulation 1.3(ggg)(4)(i)(B), the Commission believes that many 
counterparties will rely on a representation by the utility special 
entity that it and the swap meet the requirements of the final 
regulation, and such a representation will most likely be included in 
swap documentation that a counterparty is already required to keep 
under existing regulations. Thus, the Commission believes that the 
economic impact resulting from the obligations imposed by the 
Amendments for record keeping purposes will not be significant.

B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \81\ provides that an agency may 
not conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a valid control number 
from the Office of Management and Budget (OMB). The Proposal contained 
notification and recordkeeping requirements that are collections of 
information within the meaning of the PRA. Accordingly, the Commission 
submitted the required information collection requests to OMB.
---------------------------------------------------------------------------

    \81\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

1. Collections of Information
    Regulation 1.3(ggg)(4)(i)(B) creates an exclusion from the Special 
Entity De Minimis Threshold with regard to specified swaps (utility 
operations-related swaps) entered into with a defined subset of special 
entities (utility special entities). As noted, the Proposal contained 
two elements that would qualify as collections of information. First, 
as proposed, a person seeking to rely on the exclusion would have been

[[Page 57778]]

required to file a one-time notice, to be filed electronically with 
NFA, and containing the person's name, address, and a contact, as well 
as a signed representation that the person meets the criteria of the 
exclusion for utility operations-related swaps in Regulation 
1.3(ggg)(4)(i)(B). Based upon the limited information available to the 
Commission at the time of the Proposal, the Commission preliminarily 
used a conservative estimate of 100 potential counterparties of utility 
special entities, estimated that the filing of the notice and ongoing 
verification of compliance would take 1.2 hours annually, and 
calculated an annual reporting burden of $79,680. On that basis, the 
Commission requested a new collection of information control number 
from OMB and invited public comment on its paperwork burden 
calculations or the notice filing requirement.
    Second, as proposed, Regulation 1.3(ggg)(4)(i)(B) also required a 
person seeking to rely on the proposed exclusion for utility 
operations-related swaps to maintain books and records in accordance 
with Regulation 1.31 to substantiate its eligibility. As noted above, 
the Commission preliminarily estimated that 100 persons may seek to 
rely on the exclusion for utility operations-related swaps, if adopted. 
The Commission estimated that the recordkeeping requirement would take 
one hour annually, and calculated an annual recordkeeping burden of 
$16,100. On this basis, the Commission submitted a request to amend OMB 
Control Number 3038-0090 and invited public comment on its paperwork 
burden calculations and the recordkeeping requirement.
2. Information Collection Comments
    The Commission invited comment on any aspect of the information 
collection requirements discussed in the Proposal. One commenter 
addressed the Commission's PRA estimates.\82\ The commenter expressed 
the view that the Commission had failed to explain the need for the 
notice filing requirement or the ways in which the Commission would use 
the information so obtained, and predicted that the costs of utility 
operations-related swaps would be increased due to regulatory risk to 
potential counterparties, costs of collecting data, and arranging to 
file the notice with NFA. The commenter further stated that the 
Commission had not identified the additional books or records that 
would be required to be kept, over and above the existing requirements 
applicable to persons engaging in swaps, or how the Commission would 
use that additional information. Moreover, the commenter asserted that 
the Commission had underestimated the gross annual reporting burden by 
a factor of twenty.
---------------------------------------------------------------------------

    \82\ See NFP Comment Letter.
---------------------------------------------------------------------------

    In response to these comments, the Commission notes that in 
adopting Regulation 1.3(ggg)(4)(i)(B) it has made significant changes 
to the regulation as proposed. After consideration of the comments 
received, and as stated above, the Commission has determined not to 
adopt in Regulation 1.3(ggg)(4)(i)(B) a notice filing requirement.
    This eliminates the first collection described above.\83\ In 
addition, as adopted, Regulation 1.3(ggg)(4)(i)(B)(4) permits a person 
to rely upon a written representation obtained from a utility special 
entity that it is a utility special entity under the regulation, and 
that the swap the person engages in with the utility special entity is 
a utility operations-related swap. The regulation does not, then, 
contain a general recordkeeping requirement to substantiate a person's 
eligibility to rely on the exclusion. Instead, the only recordkeeping 
requirement the Commission has adopted is that the person keep, in 
accordance with Regulation 1.31, any written representations the person 
may have obtained from utility special entities in accordance with 
Regulation 1.3(ggg)(4)(i)(B)(4) as adopted. As commenters noted, 
counterparties to swaps are already subject to recordkeeping 
requirements under Part 45 of the Commission's regulations, and those 
requirements, together with the requirement in Regulation 
1.3(ggg)(4)(i)(B)(4) to retain any such written representations, should 
be sufficient for the Commission's compliance purposes. This is a 
reduction from the paperwork burden for the second collection described 
above and as proposed.
---------------------------------------------------------------------------

    \83\ In response to the Commission's request for a new control 
number for this collection, OMB granted new OMB Control Number 3038-
0109. However, because the Commission has determined not to adopt 
the proposed notice filing requirement, Commission staff will 
request that OMB discontinue that control number.
---------------------------------------------------------------------------

    The PRA requires, in part, that each collection of information 
submitted to OMB is necessary for the proper performance of the 
functions of the agency, including that the information has practical 
utility. In the submissions to OMB for the Proposal, the Commission 
identified the reasons why the collection is necessary for the agency 
and how it will use the information.
    The requirement to keep a record of the written representation that 
a counterparty obtains from a utility special entity and on which the 
counterparty relies in determining that it is eligible for the 
exclusion in Regulation 1.3(ggg)(4)(i)(B) will enable the Commission to 
quickly and efficiently confirm that persons relying on the exclusion 
are eligible to rely on the exclusion.
    As the Commission stated in the Proposal, the number of 100 
potential respondents for PRA purposes (i.e., counterparties to engage 
in utility operations-related swaps with utility special entities) was 
a preliminary and conservative estimate based on the limited 
information available to the Commission at the time. One commenter 
argued that this estimate understated the actual PRA burden by a factor 
of 20.\84\ As mentioned above, the Commission questions the accuracy of 
this estimate, which appears to have been based, at least in part, on a 
limited sampling of a handful of utility special entities and does not 
appear to sufficiently factor in the possibility that utility special 
entities may transact with many of the same counterparties. 
Nevertheless, the Commission has recalculated its PRA burden estimates 
using the commenter's estimate. The recalculation takes into account 
the Commission's determination not to adopt in Regulation 
1.3(ggg)(4)(i)(B) the proposed notice filing requirement. The 
recalculation also takes into account a reduction in the estimate from 
the Proposal of the average burden hours due to the Commission's belief 
that any additional recordkeeping costs imposed by the Amendments are 
likely to be small, as most of the costs are most likely already being 
incurred.\85\
---------------------------------------------------------------------------

    \84\ See NFP Comment Letter.
    \85\ The Commission believes that the costs that are already 
being incurred include costs to the person using the exclusion to 
monitor its swap trading activity with special entities. Prior to 
the adoption of this exclusion, these persons would be subject to 
registration as a swap dealer if their swap dealing exceeded the 
Special Entity De Minimis Threshold. Therefore, these persons are 
likely already monitoring their dealing activity with all special 
entities. The additional costs would only be the cost of separately 
monitoring their dealing in utility operations-related swaps with 
utility special entities.
---------------------------------------------------------------------------

    Accordingly, the Commission has recalculated the estimated burden 
from that set forth in the Proposal, using an estimate of 2,000 
respondents and reducing the annual burden hours \86\ by half, as 
follows:
---------------------------------------------------------------------------

    \86\ The hourly rate used in the burden estimate of the 
recordkeeping requirement is the same as the hourly rate for a 
financial analyst ($161/hour), which was used for purposes of the 
Commission's cost benefit considerations in the swap dealer 
definition regulations that are being amended by the Amendments. See 
77 FR at 30715, n.1359.

---------------------------------------------------------------------------

[[Page 57779]]

---------------------------------------------------------------------------
    Recordkeeping requirement:

    Number of Respondents: 2,000.
    Frequency of Response: Annually.
    Average Burden Hours per Response: 0.5.
    Estimated Gross Annual Reporting Burden: $161,000.
    On this basis, the Commission is amending its requests to OMB with 
respect to Control Number 3038-0090 for the recordkeeping requirement.

C. Cost-Benefit Considerations

    CEA Section 15(a) requires the Commission to consider the costs and 
benefits of its actions before promulgating a regulation under the CEA 
or issuing certain orders. CEA Section 15(a) further specifies that the 
costs and benefits shall be evaluated in light of five broad areas of 
market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. The Commission 
considers the costs and benefits resulting from its discretionary 
determinations with respect to the Section 15(a) factors, and seeks 
comments from interested persons regarding the nature and extent of 
such costs and benefits.
    1. Background. The Commission is amending its regulations to permit 
a person to exclude utility operations-related swaps with utility 
special entities in calculating the aggregate gross notional amount of 
the person's swap positions for purposes of the Special Entity De 
Minimis Threshold.
    As discussed above, CEA Section 1a(49) defines the term ``swap 
dealer,'' and Regulation 1.3(ggg) further defines that term. A person 
who comes within the swap dealer definition is subject to registration 
as such with the Commission and the regulatory requirements applicable 
to swap dealers.\87\ Regulation 1.3(ggg)(4)(i) provides an exception 
from the swap dealer definition for persons who engage in a de minimis 
amount of swap dealing activity. Without the adoption of Regulation 
1.3(ggg)(4)(i)(B), persons who engage in swap dealing activity with 
special entities, including utility special entities, are excepted from 
the swap dealer definition so long as the swap positions connected with 
those dealing activities into which the person enters over the course 
of the immediately preceding 12 months have an aggregate gross notional 
amount of no more than $25 million (i.e., the Special Entity De Minimis 
Threshold). These regulatory provisions set the baseline for the 
Commission's consideration of the costs and benefits of the Amendments. 
That is, the Commission considered the costs and benefits that would 
result from allowing persons to exclude utility operations-related 
swaps with utility special entities from the Special Entity De Minimis 
Threshold ($25 million), such that the de minimis threshold with 
respect to such swaps would be the same as for swaps not involving a 
special entity (i.e., the General De Minimis Threshold, currently set 
at $8 billion), subject to the requirements set forth in the 
Amendments.\88\
---------------------------------------------------------------------------

    \87\ See, e.g., Part 23 of the Commission's regulations.
    \88\ While Staff Letter 14-34 provided no-action relief in 
certain circumstances, and subject to certain requirements, that are 
similar to those of the Amendments, the Commission believes that 
Staff Letter 14-34 did not set or affect the baseline from which the 
Commission considered the costs and benefits of the Proposal. This 
is because Staff Letter 14-34 only stated the position of the 
Division that it would not recommend enforcement action to the 
Commission and, further, that the letter and the positions taken 
therein do not necessarily represent the position or view of the 
Commission or any other office or division of the Commission.
---------------------------------------------------------------------------

    The Commission invited comments from the public on all aspects of 
its preliminary consideration of costs and benefits associated with the 
Proposal, and the Cost-Benefit Considerations section of the Proposal 
was followed by a set of specific questions. While those who commented 
on the Proposal did not specifically address the Cost-Benefit 
Considerations section of the Proposal, certain of the comments raised 
issues with respect to the Commission's cost-benefit considerations. 
Accordingly, although the Commission has addressed those comments above 
in connection with the specific proposed regulatory provision of the 
Amendments to which they referred, the Commission is also referencing 
those comments in the discussion that follows.
    2. Costs. As noted by the Commission in the Swap Dealer Definition 
Adopting Release, ``a de minimis exception, by its nature, will 
eliminate key counterparty protections provided by Title VII for 
particular users of swaps . . . [and] [t]he broader the exception, the 
greater the loss of protection.'' \89\ In adopting the Special Entity 
De Minimis Threshold, the Commission explained that the $25 million 
threshold was ``appropriate in light of the special protections that 
Title VII affords to special entities.'' The Commission also recognized 
the ``serious concerns raised by commenters'' regarding the application 
of the de minimis exception to swap dealing with special entities in 
light of losses that special entities have incurred in the financial 
markets.\90\
---------------------------------------------------------------------------

    \89\ See 77 FR at 30596, 30627-30628.
    \90\ See 77 FR at 30633.
---------------------------------------------------------------------------

    One effect of the Amendments is that a greater quantity of swap 
dealing with utility special entities will potentially be undertaken 
without the benefits to utility special entities of that dealing 
activity being subject to swap dealer regulation.\91\ In addition, the 
Amendments will impose costs associated with ascertaining whether a 
person is eligible to rely on the proposed exclusion for utility 
operations-related swaps. Finally, to the extent that a person relying 
on the exclusion would be required to keep books and records it would 
not otherwise keep, that represents another potential cost. The 
Commission invited comment regarding the extent of all of these costs, 
and any other costs that would result from adoption of the Proposal, 
including estimates of monetary or other measurements thereof.
---------------------------------------------------------------------------

    \91\ See 77 FR at 30707 (stating that the benefits of swap 
dealing regulation include customer protection, market orderliness 
and market transparency).
---------------------------------------------------------------------------

    Certain comments characterized the compliance and other costs of 
making the notice filing and keeping the books and records called for 
under the Proposal as excessive, not justified, and likely to deter 
counterparties from engaging in swaps with utility special 
entities.\92\ As noted above, the Commission has determined not to 
adopt the proposed notice filing requirement, and has reduced the scope 
of the recordkeeping requirement under the final regulation to only 
include a requirement to keep the written representations, if any, from 
utility special entities.\93\ As a result, the costs associated with 
the proposed notice requirement have been eliminated, and the 
Commission believes the costs associated with the recordkeeping 
requirement on an individual basis will be less than the estimate 
contained in the Proposal.\94\
---------------------------------------------------------------------------

    \92\ See, e.g., NFP and IECA Comment Letters.
    \93\ The Commission notes that acquiring written representations 
to verify that a counterparty is a utility special entity and the 
swap is a utility operations-related swap in accordance with 
Regulation 1.3(ggg)(4)(i)(B)(4) is elective.
    \94\ The Commission has provided above an estimate of the annual 
costs associated with the recordkeeping requirement for purposes of 
the PRA.
---------------------------------------------------------------------------

    3. Benefits. With respect to benefits, the Commission explained in 
the Proposal its belief that the exclusion in Regulation 
1.3(ggg)(4)(i)(B) will benefit utility special entities and the public 
by

[[Page 57780]]

encouraging a greater number of prospective counterparties to engage 
with utility special entities in utility operations-related swaps.\95\ 
Because of the local and particularized nature of electric and natural 
gas production and distribution, the number of potential swap 
counterparties for utility special entities seeking to hedge commercial 
risk is more limited than for other special entities seeking to hedge 
non-physical commodities. The number of counterparties to utility 
special entities may be further limited due to the unique obligation of 
these utilities to provide continuous service to the public. These 
considerations may be more critical given the important role energy 
services play in public safety and commerce. Thus, potentially 
increasing the number of counterparties to utility special entities may 
be in the public interest.
---------------------------------------------------------------------------

    \95\ The Commission explained in the Swap Dealer Definition 
Adopting Release that ``[i]n principle, a higher [de minimis] 
threshold would promote a larger pool of swap-dealing entities 
(since entities with swap dealing activity below the threshold need 
not incur costs to comply with swap dealer regulations), meaning 
more potential counterparties available to swap users.'' See 77 FR 
at 30707.
---------------------------------------------------------------------------

    Accordingly, increasing the number of potential counterparties 
available for utility special entities to engage in operations-related 
hedging transactions may (i) result in a lower cost to hedge (i.e., 
lower spreads) and (ii) enable utility special entities to better 
manage their business. This should, in turn, help utility special 
entities meet their obligations to provide continuous services to the 
public in a cost-effective manner, and will help protect the public 
interest and safety that is dependent on such energy services. The 
Commission sought comments regarding these benefits and any other 
benefits resulting from adoption of the Proposal, and to the extent 
they can be quantified, estimates of the monetary or other value 
thereof.
    While commenters did not specifically address the Commission's 
consideration of the costs and benefits of the Proposal, certain of the 
comments raise issues with respect to the Commission's costs and 
benefits considerations. Specifically, as discussed with respect to the 
comments the Commission received on its RFA analysis, the proper 
baseline from which to consider the costs and benefits of the 
regulation is the state of affairs at the time the regulation is to be 
adopted (i.e., a counterparty to a utility special entity is required 
to register as a swap dealer if they exceed the Special Entity De 
Minimis Threshold). Registration as a swap dealer entails costs that a 
person who can take advantage of the exclusion in Regulation 
1.3(ggg)(4)(i)(B) would not have to incur.
    As noted above, some of the commenters were of the view that the 
notice filing and recordkeeping requirements are unjustified or 
inadequately supported by the explanation in the Proposal. The 
commenters further stated that the Commission could monitor use of the 
exclusion by using existing data reported to the SDRs. As noted above, 
the Commission has not included a notice filing requirement in 
Regulation 1.3(ggg)(4)(i)(B) as adopted. As a result, the costs 
associated with the notice filing requirement that were identified in 
the Proposal have been eliminated.
    Although there are additional costs associated with maintaining 
records pertaining to the use of the exclusion, such costs are likely 
to be incremental since most persons relying on the exclusion are 
likely to rely on a representation from their counterparty, a utility 
special entity, that it qualifies as a utility special entity and that 
the swap transaction is a utility operations-related swap within the 
meaning of the final regulation. Such a representation would likely be 
added to the swap documentation that counterparties are already 
required to maintain under existing regulations or that they maintain 
in the normal course of their business.
    The general recordkeeping requirement that was included in the 
Proposal has been reduced to a requirement to retain only the written 
representations, if any, that a person receives from a utility special 
entity. Accordingly, the recordkeeping costs of the Amendments on an 
individual basis will be less than as estimated in the Proposal. The 
requirement to keep those written representations will enable the 
Commission to quickly and efficiently confirm that persons relying on 
the exclusion are eligible to rely on the exclusion.
    Additionally, expanding the definition of utility operations-
related swap to include swaps related to certain agricultural 
commodities will provide benefits to utility special entities that use 
such swaps in their normal operations, and in a manner consistent with 
the purposes of the regulation. However, the Commission notes that 
there may be costs associated with expanding the definition. 
Specifically, an overbroad definition that does not properly balance 
the need to provide additional regulatory protections for special 
entities, including utility special entities, against the policies for 
the exclusion would be contrary to the public interest.
    4. Section 15(a). Section 15(a) of the CEA requires the Commission 
to consider the effects of its actions in light of the following five 
factors:
    a. Protection of Market Participants and the Public. Again, as 
noted by the Commission in the Swap Dealer Definition Adopting Release, 
``a de minimis exception, by its nature, will eliminate key 
counterparty protections provided by Title VII for particular users of 
swaps . . . [and] [t]he broader the exception, the greater the loss of 
protection.'' \96\ In adopting the Special Entity De Minimis Threshold, 
the Commission explained that the $25 million threshold was 
``appropriate in light of the special protections that Title VII 
affords to special entities.'' \97\ The Commission also recognized the 
``serious concerns raised by commenters'' regarding the application of 
the de minimis exception to swap dealing with special entities in light 
of losses that special entities had incurred in the financial markets 
in connection with the 2008 financial crisis.\98\ By allowing more 
persons who are not registered as swap dealers to engage in certain 
swaps with utility special entities, fewer special entities will have 
the benefit of the special entity protections as a result of the 
Amendments. However, given the narrow tailoring of the exclusion and 
the requirements persons must meet to rely on the exclusion, the 
Commission believes the costs of such reduced protections to the 
affected utilities, market participants and the public may be limited. 
Moreover, these costs will be counteracted by the benefits the 
Amendments will provide to utility special entities and the public, 
namely, enabling utility special entities to efficiently hedge and 
manage risk, and to meet their obligations to provide vital energy 
services to the public in a consistent and cost-effective manner.
---------------------------------------------------------------------------

    \96\ 77 FR at 30596, 30627-30628.
    \97\ Id. at 30633.
    \98\ Id.
---------------------------------------------------------------------------

    b. Efficiency, Competitiveness, and Financial Integrity of Markets. 
The Commission believes that the Amendments will enhance efficiency and 
competitiveness in the electricity and natural gas markets by 
encouraging prospective counterparties to engage in swap transactions 
with utility special entities. The availability of additional swap 
counterparties in these markets will enhance competition between 
counterparties, which will, in turn, benefit utility special entities 
by potentially lowering their transaction

[[Page 57781]]

costs. Further, because the exclusion is narrowly tailored, the 
Commission believes that removing the protections provided by swap 
dealer registration and regulation for some utility special entity 
counterparties will not noticeably impact the integrity of the swaps 
market.
    c. Price Discovery. It is unlikely that facilitating more 
counterparties for utility special entities to trade with will have a 
significant impact on price discovery. Price discovery is the process 
by which prices for underlying commodities may be determined or 
inferred through market prices. The addition of more counterparties 
willing to trade with utility special entities may improve, and should 
not adversely impact, the prices that the utility special entities 
receive on their swap contract transactions. Better pricing might 
enhance price discovery if the bid-ask spreads in transactions 
involving utility special entities narrow due to more competition, but 
the Commission cannot be sure this will be the case as the potential 
improved pricing might not occur or could be negligible.
    d. Sound Risk Management. The Commission believes that if 
counterparties refrain from transacting in swaps with utility special 
entities because of the regulatory costs associated with swap dealer 
registration and regulation, the ability of utility special entities to 
hedge commercial risks will be impaired, particularly in cases for 
which the number of counterparties available becomes very limited. 
Mitigating the costs and regulatory concerns of potential 
counterparties by permitting them to transact with utility special 
entities without being subject to swap dealer registration and 
regulation will enable utility special entities to better manage their 
commercial risk.
    e. Other Public Interest Considerations. As discussed above, the 
Commission believes the Amendments will enable utility special entities 
to practice sound, cost-effective risk management and to more 
effectively operate and conduct their business. This may, in turn, help 
utility special entities meet their obligations to provide continuous 
services to the public in a more cost-effective manner.

List of Subjects in 17 CFR Part 1

    De minimis exception, Registration, Special entities, Swap dealers, 
Swaps, Utility operations-related swaps, Utility special entities.

    For the reasons discussed in the preamble, the Commission amends 17 
CFR part 1 as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for part 1 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9, 
10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012).

0
2. In Sec.  1.3, revise paragraph (ggg)(4)(i) to read as follows:

Sec.  1.3  Definitions.

* * * * *
    (ggg) * * *
    (4) De minimis exception--(i)(A) In general. Except as provided in 
paragraph (ggg)(4)(vi) of this section, a person that is not currently 
registered as a swap dealer shall be deemed not to be a swap dealer as 
a result of its swap dealing activity involving counterparties, so long 
as the swap positions connected with those dealing activities into 
which the person--or any other entity controlling, controlled by or 
under common control with the person--enters over the course of the 
immediately preceding 12 months (or following the effective date of 
final rules implementing Section 1a(47) of the Act, 7 U.S.C. 1a(47), if 
that period is less than 12 months) have an aggregate gross notional 
amount of no more than $3 billion, subject to a phase in level of an 
aggregate gross notional amount of no more than $8 billion applied in 
accordance with paragraph (ggg)(4)(ii) of this section, and an 
aggregate gross notional amount of no more than $25 million with regard 
to swaps in which the counterparty is a ``special entity'' (as that 
term is defined in Section 4s(h)(2)(C) of the Act, 7 U.S.C. 
6s(h)(2)(C), and Sec.  23.401(c) of this chapter), except as provided 
in paragraph (ggg)(4)(i)(B) of this section. For purposes of this 
paragraph, if the stated notional amount of a swap is leveraged or 
enhanced by the structure of the swap, the calculation shall be based 
on the effective notional amount of the swap rather than on the stated 
notional amount.
    (B) Utility Special Entities. (1) Solely for purposes of 
determining whether a person's swap dealing activity has exceeded the 
$25 million aggregate gross notional amount threshold set forth in 
paragraph (ggg)(4)(i)(A) of this section for swaps in which the 
counterparty is a special entity, a person may exclude ``utility 
operations-related swaps'' in which the counterparty is a ``utility 
special entity.''
    (2) For purposes of this paragraph (4)(i)(B), a ``utility special 
entity'' is a special entity, as that term is defined in Section 
4s(h)(2)(C) of the Act, 7 U.S.C. 6s(h)(2)(C), and Sec.  23.401(c) of 
this chapter, 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).
    (3) For purposes of this paragraph (ggg)(4)(i)(B), a ``utility 
operations-related swap'' is 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 as defined in Sec.  50.50(c) of this chapter;
    (iii) The swap is related to an exempt commodity, as that term is 
defined in Section 1a(20) of the Act, 7 U.S.C. 1a(20), or to an 
agricultural commodity insofar as such agricultural 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: The 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.
    (4) A person seeking to rely on the exclusion in paragraph 
(ggg)(4)(i)(B)(1) of this section may rely on the written 
representations of the utility special entity that it is a utility 
special entity and that the swap is a utility operations-related swap, 
as such terms are defined in paragraphs (ggg)(4)(i)(B)(2) and (3) of 
this section, respectively, unless it has information that would cause 
a reasonable person to question the accuracy of the representation. The

[[Page 57782]]

person must keep such representation in accordance with Sec.  1.31.
* * * * *

    Issued in Washington, DC, on September 23, 2014, by the 
Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Exclusion of Utility Operations-Related Swaps With 
Utility Special Entities From De Minimis Threshold for Swaps With 
Special Entities--Commission Voting Summary and Chairman's Statement

Appendix 1--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Wetjen, Bowen, 
and Giancarlo voted in the affirmative. No Commissioner voted in the 
negative.

Appendix 2--Statement of Chairman Timothy G. Massad

    I support this final rule pertaining to the swap activities of 
small utility companies. These companies are responsible for keeping 
the lights on in communities across our country, for heating and 
cooling our homes, and powering the kitchen appliances that we use 
every day to feed our families. To do their job, they must manage 
the risk of their own fuel costs, and to do that, they must be able 
to access the energy commodity markets. This final rule will help 
make sure they can do so.
    In the Dodd-Frank Act, Congress directed the Commission to 
impose heightened standards on swap dealers in their swap activities 
with Federal, state and municipal government agencies and certain 
other so-called ``special entities.'' This was in response to the 
instances where swap dealers may have failed to disclose material 
risks of swap transactions to municipal entities or otherwise acted 
improperly, which often resulted in massive losses to the 
municipality.
    Because Congress defined ``special entity'' broadly, when the 
Commission implemented this Congressional directive through a 
previous rulemaking, the rule was applied to many utility companies 
that are government-owned. These companies, which serve communities 
across our nation, engage in energy swaps. The counterparties with 
whom they transact business were often not registered swap dealers, 
nor were they the dealers that engaged in the abusive practices that 
led to Congress's concerns. The imposition of these requirements 
through a designation as a swap dealer could unduly burden their 
business and thereby threaten the ability of our local utility 
companies to manage their risks. This rule fixes that problem.
    This final rule benefited from public comment. In key respects, 
we made adjustments to our initial proposal to address concerns 
raised during the notice and comment process.
    Implementing this final rule is an important step in our effort 
to finish the job of implementing the Dodd-Frank Act and will help 
us achieve the full benefit of the new regulatory framework, while 
at the same time protecting the interests of--and minimizing the 
burdens on--commercial end-users who depend on the derivatives 
markets to hedge normal business risks.

[FR Doc. 2014-22966 Filed 9-25-14; 8:45 am]
BILLING CODE 6351-01-P
```