CFTC No-Action Letter (14-34) Raises De Minimis Threshold for Swaps with Utility Special Entities (with Lofchie Comment)

The CFTC's Division of Swap Dealer and Intermediary Oversight ("DSIO") issued a letter generally liberalizing the de minimis limits that would apply to an entity that is not registered as a swap dealer, but that seeks to enter into dealing swaps with certain power utilities that are within the definition of "special entity."

Under the CFTC's swap dealer registration requirement, an entity that engages in as little as $25 million in notional swaps activity with a "special entity" could be required to register as a swap dealer. Under a prior CFTC no-action letter (CFTC Letter No. 12-18), this limit had been raised to $800 million for utility commodity swaps, albeit subject to various conditions including that the swap dealing entity not be a "financial entity," a term that has a very broad definition, and thus which limited the benefits of the 12-18 no-action letter. The attached letter provides that for qualifying swaps with utilities that are special entities, unregistered swap dealers are subject only to the ordinary $8 billion notional limit before they are required to register as swap dealers. The relief is NOT available to all swaps with utilities; only to those swaps that satisfy the conditions of this letter, including obtaining certain representations from the utility. However, the prohibition on the unregistered swap dealer being a financial entity is withdrawn.

Lofchie Comment: Since the requirements of this new letter are somewhat different from the requirements of the prior letter, an entity could violate the law by reason of being unaware that the CFTC issued a letter that very day. Presumably, the CFTC does not actually intend this as a trap for the unwary, but the fact that the CFTC would operate in this manner reflects a certain institutional inattention to the reasonable concerns of the entities it regulates.More generally, the need to issue this letter reflects one of the larger problems with Dodd-Frank. Rather than reducing the problem of "too big to fail," Dodd-Frank has exacerbated the problem by reducingthe number of entities that are willing to act as swap dealers above the registration limits. While the letter lessens the problem on one set of transactions, this more worrisome effect remains. On a practical level, one step that the CFTC might consider is making permanent the $8 billion de minimis limit before an entity is required to register with the CFTC, rather than proceeding with the planned reduction to $3 billion.

See: CFTC Letter 14-34.See also:Statement of Commissioner Scott D. O'Malia; CFTC Letter No. 12-18.Related news: CFTC Staff Ratifies Cross-Margining of Customer Swaps Collateral (with Lofchie Comment) (October 19, 2012).