Report of the Finance & Transactions Committee

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The period covered by this report is January 1, 2012, through December 31, 2012.*

I. OVERVIEW OF RECENT DEVELOPMENTS IN THE IMPLEMENTATION OF DODD-FRANK TITLE VII

The Finance and Transactions Committee Report published in the 2012 Energy Law Journal (2012 Report)1 examined how Dodd-Frank2 would impact the way energy companies conduct their hedging transactions. As of the end of the period covered by this report, the Commodity Futures Trading Commission (CFTC) now has published forty-one final rules and eight final orders.3 The CFTC also has issued sixty-four proposed rules, four advanced notices of proposed rulemaking, and six proposed exemptive orders.4 The Securities and Exchange Commission (SEC) has proposed or adopted rules for more than three-quarters of the mandatory rulemaking provisions.5

This report brings current the 2012 Report with updates examining the rules that have been finalized thus far and estimating the timing for establishing the key rules that remain. The report also provides an update on Federal Power Act (FPA) section 203 filings at the Federal Energy Regulatory Commission (FERC).

II. KEY FEATURES OF DODD-FRANK TITLE VII AFFECTING ENERGY COMPANIES

A. End-User Exception from Clearing and Exchange-Trading Requirements

The 2012 Report discussed the end-user exception from the mandatory clearing and exchange trading requirements under Dodd-Frank pursuant to section 2(h)(7) of the Commodity Exchange Act (CEA).6 On July 10, 2012, the CFTC issued its final rules related to the end-user exception.7 The final rule set forth the same criteria as appeared in the CFTC's proposed rule.8 A party may use this exception if it:

(i) is not a financial entity; (ii) is using swaps to hedge or mitigate commercial risk; and (iii) notifies the [CFTC] . . . how it generally meets its financial obligations associated with entering into non-cleared swaps.9

The CFTC adopted the same definition of "financial entity" as set forth in section 2(h)(7)(C)(i) of the CEA, which includes, among other things, swap dealers, major swap participants, and entities predominantly engaged in banking or financial activities.10

A party makes the election on a swap-by-swap basis.11 The regulations set forth two options for reporting a party's election. The party claiming the exception may either have the reporting party, at the time of swap execution, indicate its election, or make such election itself in an annual filing with the CFTC or swap data repository, as applicable.12

On November 29, 2012, the CFTC issued the first swaps clearing order, which is applicable to credit default and interest rate swaps.13 Category 3 entities will be required to clear such swaps or make an election for the end-user exception no later than September 9, 2013, with respect to such swaps entered into on or after that date.14 The CFTC has yet to issue clearing orders with respect to other categories of swaps, and to set the end-user exception election deadlines with respect to each category of swap.

B. Key Definitions: Swap Dealer and Major Swap Participant

1. Swap Dealer

On April 27, 2012, the CFTC and the SEC issued the final definitions of "swap dealer"15 and "major swap participant."16 The definition of swap dealer closely follows the statutory definition.17 A swap dealer is a person that:

(a) Holds itself out as a dealer in swaps;

(b) Makes a market in swaps;

(c) Regularly enters into swaps with counterparties as an ordinary course of business for its own account; or

(d) Engages in any activity causing itself to be commonly known in the trade as a dealer or market maker in swaps.18

Under the interpretive guidance provided by the CFTC and the SEC, the swap dealer determination should include all relevant facts and circumstances, and focus on the typical activities in the person's business.19 Examples of swap dealing activities include: (i) entering into swaps to satisfy "the business or risk management needs of a counterparty" or customer; (ii) "maintaining a separate profit and loss statement for swap activity"; and (iii) allocating staffand resources to "dealer-type activities. …