Proposed CFTC/SEC Regulations May Affect RECs, Carbon Offsets/Credits, FTRs and Energy Forward Contracts
by Lawrence Patent (Washington, DC)
The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) recently published proposed regulations that would further define the term “swap” under the Commodity Exchange Act, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). 76 Fed. Reg. 29818 (May 23, 2011).
Three items therein may be of particular interest to energy companies. With respect to the forward contract exclusion from the definition of “swap,” the CFTC stated that it would interpret this provision consistent with its historical interpretation of the forward contract exclusion from the definition of the term “future delivery.” Further, book-out transactions in nonfinancial commodities that meet the requirements of the CFTC’s 1990 “Brent Interpretation,” and that are effectuated by a subsequent, separately negotiated agreement, also will qualify for the forward contract exclusion from the swap definition.
The second issue relates to so-called environmental commodities, such as emissions allowances, carbon offsets/credits, or renewable energy certificates. The CFTC requests specific comment on whether these instruments should qualify for the forward contract exclusion from the swap definition, and asks those arguing in favor to describe the instruments and how transactions can be physically settled where the “commodity” lacks a physical existence, other than on paper. In another context in the same set of proposals, the CFTC distinguishes between foreign exchange forwards (excluded) and non-deliverable (due to restrictions on currency delivery by the country of issuance) foreign exchange forwards, which are not excluded from the swap definition.
The last item concerns transactions in Regional Transmission Organizations and Independent System Operators, including financial transmission rights (FTRs). Because Section 722 of Dodd-Frank gives the CFTC specific exemptive authority regarding instruments regulated by the Federal Energy Regulatory Commission (FERC), the CFTC and SEC have determined not to address FTRs in the joint definitional rulemaking. Instead, persons with concerns about whether FERC-regulated products may be considered swaps or futures should request an exemption pursuant to Section 722 of Dodd-Frank.
The comment period on these proposals will close on July 22, 2011.
