On April 4, 2016, the US Securities and Exchange Commission (SEC) and the US Commodity Futures Trading Commission (CFTC), after consultation with the Board of Governors of the Federal Reserve System, jointly issued proposed guidance regarding certain (1) electric power capacity contracts and (2) natural gas peaking contracts. The proposal intends to clarify the agencies’ joint interpretation of “swap” in their Products Release and concludes that these two types of contracts are customary commercial arrangements that do not constitute “swaps.” The proposed guidance also states that this interpretation is not intended to affect the CFTC’s existing interpretation of when an agreement, contract or transaction with embedded volumetric optionality would be considered a forward contract. The CFTC views the proposed guidance as complementary to the treatment of trade options, including the recent CFTC final rule eliminating otherwise required book-keeping and record-keeping for end users under the trade option exemption.

In the proposed guidance, the CFTC and SEC invite specific comments regarding the following:

  1. Are there natural gas and electric power contracts that would not qualify as trade options within the scope of CFTC regulation 32.3 but which would be covered by the proposed guidance? If so, should the proposed guidance be limited, so that it encompasses only contracts that qualify as trade options? Why or why not?
  2. Does the proposed guidance provide sufficient clarity on whether the specific types of natural gas and electric power contracts in question should or should not be considered to be swaps? If not, how should the guidance be revised to provide more clarity?
  3. Are there other facts and circumstances that the CFTC should consider in determining whether the contracts described in Part II.A. of the proposed guidance are swaps? If so, what are these factors?
  4. Are there contracts (other than those described in Part II.A.) that are entered into by participants in the electric power and natural gas markets and that are necessitated by, or closely tied to, compliance with regulatory obligations or frameworks that are similar to those described in Part II.A.?
  5. Are there other types of commodity contracts, outside of the electric power and natural gas markets, which are necessitated by, or closely tied to, compliance with regulatory obligations or frameworks that should be considered under the interpretation in the Products Release? If so, describe these contracts and the regulatory obligations and frameworks to which they are closely tied.
  6. Are there public interest considerations regarding the natural gas and electric power contracts in question that should be reflected in the proposed guidance? If so, why and how?
  7. Does the proposed guidance provide sufficient clarity that it does not supersede or modify the CFTC Office of General Counsel (OGC) FAQ referenced in footnote 34? Is there any potential overlap between the proposed guidance and the CFTC OGC FAQ that should be further clarified? If so, what elements of the proposed guidance should be clarified to indicate that the proposed guidance does not supersede or modify the CFTC OGC FAQ?
  8. With respect to natural gas peaking contracts, are there natural gas providers other than local distribution companies (LDCs)—such as Intrastate and Interstate Natural Gas Pipelines (as defined by the Energy Information Administration)—that are subject to regulatory obligations to prioritize and serve residential demand for natural gas, which obligate them to curtail service to electric utilities under certain circumstances? If so, explain.

Comments are due within 60 days of publication of the proposed guidance in the Federal Register and may be made in any of the following ways:

  • Online, via the CFTC web site or the Federal eRulemaking Portal. (On the latter, under “Help,” click “How to Use Regulations.gov” and then “Submit a Comment.”)
  • Mail: Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581.
  • Hand deliver/courier to Mr. Kirkpatrick.