The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) will have a major impact on the energy industry. The Act dramatically expands the Commodity Futures Trading Commission's (CFTC) jurisdiction regarding over-the-counter derivatives and enables what Chairman Gary Gensler has promised to be "robust oversight" of the over-the-counter derivatives marketplace. The CFTC has identified 30 key subject areas that will require rulemaking. Because the Act leaves much to the CFTC's discretion, the choices made in the CFTC rulemaking processes will largely determine the regulatory impact to energy companies. Examples of critical concern to energy companies and risk managers include:
- How the CFTC will define the terms "swap dealer," "major swap participant," "commercial risk," and "bona fide hedges," which will determine the extent to which end users of swaps are exempted from burdensome capital, margin, and clearing requirements.
- Whether the CFTC's anti-manipulation rules will sweep more broadly than existing market manipulation regulations of the Federal Trade Commission, the Federal Energy Regulatory Commission, and the Securities Exchange Commission.
The CFTC rulemaking process, which will unfold over the next year, has already begun with some important deadlines in the near term. Further, the CFTC is currently soliciting input on its website on the rule-writing process for all 30 subject areas referenced above.
Hogan Lovells is providing its clients a number of services in connection with the Act, including:
- monitoring all CFTC rulemakings that impact the energy industry;
- providing client-specific strategic analysis of the impact of the rulemakings on the client's business objectives; and
- helping clients protect their strategic interests and shape the regulatory process by developing tailored, effective comments in the CFTC rulemakings.
KEY ISSUES IN THE CFTC RULEMAKING PROCESS FOR ENERGY COMPANIES
Specification of who must clear swaps
- Definition of "Major Swap Participant," including the definition of "substantial position"
- Definition of "commercial risk" for the purposes of the end user clearing exemption and the definition of Major Swap Participant
- Definition of Swap Dealer, including the determination of the de minimis quantity of swap trading below which entities do not qualify as Swap Dealers
- Formulation of rules designed to prevent evasion of the clearing requirement and/or abuse of the end user clearing exemption
Capital and margin
- Capital requirement levels for non-bank Swap Dealers and Major Swap Participants
- Initial and variation margin levels for non-bank Swap Dealers and Major Swap Participants
- Clarification of vague language in the Act that could be read to apply the margin requirement to end users
- Aggregate position limits for swaps that perform a significant price discovery function, excluding bona fide hedging transactions
- Definition of bona fide hedging transactions
- Determination of which swaps perform a significant price discover function
Manipulation, disruptive trading practices, business conduct rules and whistleblower protections
- Determination of the scope of the CFTC's anti-manipulation authority (as expanded in the Act)
- Definition of disruptive trading practices and rules to prevent such practices
- A new program in which whistleblowers may receive 10% to 30% of monetary sanctions resulting from information they provide
Data collection and reporting
- Reporting of uncleared swaps to swap data repositories
- Special reporting and recordkeeping rules for large swap traders
- Public real time reporting of swap data