Today the CFTC published its proposed rule that would exclude most swaps used by municipal utilities for hedging purposes from counting against the $25 million swap dealer de minimis threshold that currently applies to swaps with “special entities” (including municipal utilities, federal power marketing agencies, and other governmental organizations and pension plans and endowments). This should expand the pool of counterparties willing to enter into swaps with municipal utilities, as many counterparties previously avoided dealing with such utilities to avoid having to register as, and comply with the comprehensive regulatory requirements applicable to, swap dealers.

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

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

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

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

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

Any counterparty relying on the utility special entity exclusion to avoid registration as a swap dealer must file notice of such reliance with the National Futures Association.

At present, while the proposed rule is pending, parties may continue to rely on the $800 million de minimis threshold applicable to swaps with utility special entities pursuant to the conditions set forth in CFTC No-Action Letter No. 12-18.