CFTC Energy and Environmental Markets Advisory Committee Meeting

Commodity Futures Trading Commission (CFTC)

Energy and Environmental Markets Advisory Committee (EEMAC) Meeting

Thursday, February 25, 2016 

Key Topics & Takeaways

  • Report on the De Minimis Exception: CFTC staff indicated a final report on the swap dealer de minimis exception would be forthcoming, following review of comments received on the preliminary report.
  • Automatic Lowering: Several panelists raised concerns regarding the possible automatic lowering of the de minimis threshold to $3 billion, and asked the Commission to take immediate action to avoid such an outcome, due to the negative impact on commercial firms and liquidity concerns.
  • CFTC Action: Panelists additionally cautioned that CFTC action to lower the de minimis threshold would be ill-advised, as the data on energy and commodity markets necessary for an informed decision is not currently available.
  • EEMAC Report: An EEMAC report regarding the CFTC’s position limits proposal was released (by a vote of 8-1), which concluded that the Commission should not finalize the rule, as proposed.  The dissenting view expressed concern with the contents of the report and the process surrounding its drafting and release.


Opening Remarks

Commissioner Giancarlo

In his opening remarks, Commissioner Giancarlo expressed concerns regarding “severe declines in the price of physical commodities” and the resulting negative impact on American jobs in US energy markets, as well as the US and European banking sectors.  Giancarlo stated that, while the Commission does not play a role in regulating commodity prices, the agency must be careful not to adopt policies that do not “needlessly impinge the ability to hedge against plummeting prices” and “provide markets participants with regulations whose benefits unambiguously justify their costs.” 

Giancarlo acknowledged that the CFTC staff’s Swap Dealer De Minimis Exception Preliminary Report (the De Minimis Report) examined limited data.  Part of the problem, he highlighted, was that swap data repositories (SDRs) do not indicate whether a transaction was entered into for dealing purposes.  He further noted that “data was particularly spotty for non-financial commodity swaps, such as energy swaps, where the total gross notional value of an entity’s dealing activity was not available.”  As a result, Giancarlo expressed that it is “impossible to assess the consequences of changing the de minimis threshold for energy swaps and similar products.”  Lastly, Giancarlo pointed out that, in light of such data issues, “Congress recently expressed its preference that the CFTC complete a rulemaking raising the de minimis threshold to 8 billion or higher and get it done by February 16, 2016,” a deadline, he noted, that has passed. 

Chairman Massad

Chairman Massad highlighted several steps that the Commission has taken to address commercial-end user concerns.  In regards to the De Minimis Report, the Chairman noted that it shows how far the Commission has come in increasing and improving the quality of its data reporting regime, but admitted that such data, as admitted in the Report, is “far from perfect.”  Massad stated that the CFTC continues to work towards enhancing the “quality and consistency of data.” 

Commissioner Bowen

In her opening remarks, Commissioner Bowen stated that she looked forward to discussions regarding the De Minimis Report, and her belief that “it is time to assess whether there is any data-based rationale for deviating from the path laid out in the rules, namely ending the phase-in in 2017, and then dropping to the $3 billion threshold.”  Lastly, Bowen reiterated her call to finalize the position limits rule, arguing that “[i]t is time to make a decision on outstanding issues like aggregation and delegation, finalize this rule and close the book on this chapter of the position limits saga.” 

Panel I: Do Commission Exemptions for RTO/ISOs Transactions Strike the Right Balance?

The first panel discussed the CFTC’s proposed order exempting certain transactions offered or entered into in a market administered by Southwest Power Pool, a regional transmission organization (RTO) subject to the Federal Energy Regulation Commission’s regulatory framework. 

Panel materials may be found here:

Panel II: CFTC Staff Swap Dealer De Minimis Exception Preliminary Report

Eileen Flaherty, Director of the Division of Swap Dealer and Intermediary Oversight (DSIO)

Flaherty began the panel with a brief overview of the De Minimis Report, which was jointly issued by the DSIO and Office of Chief Economist (OCE).  Flaherty noted that the Commission staff’ issued the request for comment to help inform public discussion and seek views on whether the $8 billion and/or $3 billion notional levels were appropriate.  Flaherty further explained that there is interest in determining whether alternative methods may be appropriate to determine the appropriate level for swap dealer registration, such as transaction counts, counterparty counts or some combination with a notional value threshold. 

Sayee Srinivasan, Chief Economist, OCE

Srinivasan provided context around the data staff used to develop the De Minimis Report.  He explained that analysis of current data is challenging, due to missing or incomplete data (such as the lack of flags which could identify “dealing activity”) and thus required staff to make assumptions. 

Flaherty briefly discussed some of the comments received in response to the De Minimis Report.  She explained that 24 comments were received by a cross section of respondents.  Initial observations indicated a majority of commenters believed that the de minimis threshold should be $8 billion or greater, and that the Commission must take action to adopt an interim final rule which prevents an automatic reduction to $3 billion, she explained.  Flaherty closed in noting that staff is reviewing the comments and will seek to issue a final report. 

Lael Campbell, Commodity Markets Council and David McIndoe, Commercial Energy Working Group,presented  on the De Minimis exception from the perspective of commercial entities.  Campbell advocated for the EEMAC to recommend that the CFTC: 1.) issue an interim final rule setting the de minimis threshold at $8 billion, as soon as possible; 2.) improve its data analytics before taking further action regarding the de minimis threshold; 3.) consider whether its regulatory objectives are not sufficiently met with a de minimis threshold of $8 billion; and 4.) issue its final capital rule before making decisions regarding the de minimis threshold. 

Campbell stressed the importance of the Commission providing clarity on the status of the de minimis threshold in a timely matter, as the threshold is calculated using a 12-month look back period which would require impacted entities to make significant changes to policies and procedures well in advance of a possible automatic drop to $3 billion notional at the end of 2017. 

McIndoe discussed the possible impacts on commercial firms should the threshold automatically drop to $3 billion.  He claimed that such a drop would not materially advance any Commission policy objectives, and would harm commercial entities, who would see a dramatic rise in their cost of doing business. 

McIndoe highlighted specific concerns with issues raised in the De Minimis Report, including discussion of whether the concepts of counterparty and transaction counts were appropriate measures.  He explained that commercial entities have gone to great lengths to adapt policies and procedures to the current swap dealer definitions, and argued that any changes to that would result in significant changes to current compliance structures.  Further, he stated that counterparty and transaction counts are “numerical” measures, while the swap dealer definition is focused on qualitative behavior.  Lastly, McIndoe stated that commercial entities are greatly concerned with the uncertainty of what the de minimis threshold will be, which currently impacts business decisions and results in costs. 

McIndoe expressed support for keeping the de minimis threshold at $8 billion, arguing that this level “the regulatory objectives set out by Congress and identified by the [CFTC].”  He also noted that commercial firms have been able to adapt their businesses to successfully fit within the $8 billion threshold level. 

Campbell highlighted additional concerns should the threshold be lowered from $8 billion, explaining that such action would result in a decision by commercial firms to lower activity in swap dealing, which will result in less liquidity that will ultimately hurt end-users.  He further noted such a reduction would lead to “[i]ncreased concentration of transactions and to a limited number of counterparties, increased hedging costs, increased volatility in commodity prices – and ultimately those are passed on to the end-use consumer.”  Campbell then highlighted the fact that businesses ceased transacting with special entities due to a $20 million threshold, which required CFTC action to rectify the issue.

McIndoe argued that there is no data available that adequately gauges the impact of a drop in the $8 billion threshold on commercial and commodity derivatives markets, and that the Commission should first seek to obtain this data in order to reach an informed decision. 

Question & Answers

Lopa Parikh, Edison Electric Institute

Parikh added that energy and commodity swaps pricing can be very volatile, thus requiring that “the aggregate effective notational amount is set at a level that accommodates that volatility” and that the threshold is high enough to reflect that underlying volatility. 

Professor Craig Pirrong, University of Houston

Pirrong noted there may be better metrics than currently being utilized to determine “who is a swap dealer,” as the use of notional amounts does not match up with risk. 

Tyson Slocum, Public Citizen

Slocum stated that he wished to hear more from those who believed a drop to a $3 billion threshold was appropriate, and that further discussions incorporating these views were necessary before further action could be taken.

Ron Oppenheimer, Commercial Energy Working Group

Oppeheimer re-emphasized previously noted concerns that any change to the threshold would require market participants to begin making significant changes to business policies and procedures as soon as possible.  He then expressed concern that with staff currently reviewing comments in response to its preliminary report and intention to issue a final report, this could lead to a situation where market participants will not have certainty until the end of the year – something that should be avoided. 

Michael Prokop, Deloitte and Touche, LLP

Prokop noted that some firms are already taking measures to adapt to a lower de minimis threshold, and thus economic impacts are already being felt.

Russ Wasson, National Rural Electric Cooperative Association

Wasson explained that while electric cooperatives are not special entities, they have significant concerns about a lowered threshold, as it may cause them to lose access to willing counterparties to conduct their swaps hedging activities.

Sue Kelly, American Public Power Association

Kelly echoed Wasson’s concerns, noting that special entities were significantly impacted due to a lower de minimis threshold, which saw a reduction of available counterparties until the CFTC took action.  She noted that members have seen counterparties return, and expressed the view that further information justifying whether or not to lower the threshold is needed.

James Allison, JCA Advisory Services LLC

Allison noted that following his review of data contained in the De Minimis Report, he concluded that a more appropriate threshold would be closer to $100 billion.  He argued that the threshold was originally set too low, due to a lack of data, and there is now risk the Commission would be “overinvesting” in regulating too many entities that might unnecessarily fall subject to swap dealer registration requirements.

Slocum questioned whether the costs associated with swap dealer registration were significantly burdensome for firms who may fall within scope should the threshold be lowered.  McIndoe responded that the true costs and burdens are largely unknown, and will remain so until the Commission finalizes its capital rules. 

Slocum then asked Commission staff to describe the data challenges further, specifically relating to incomplete information.  Srinivasan explained that the process is iterative, and the Commission is taking steps to address issues and challenges which are expected to improve the quality of data in the coming years.

Dena Wiggins, Natural Gas Supply Association

Wiggins noted concerns that market participants will be forced to make a choice between leaving a market versus bearing the costs associated with swap dealer registration.  Campbell cautioned that should the costs exceed value for commercial firms, they may leave the business altogether, and that those costs might not need to be that high, as it is “ancillary” in many cases to their core focus. 

Paul Hughes, Southern Company

Hughes queried what the regulatory benefits would be in lowering the threshold, and whether that would justify costs.  Flaherty noted that staff does not have a view, but highlighted that Congress sought to address concerns relating to systemic risk, transparency and counterparty protections via swap dealer registration requirements. 

Frank called attention back to points raised during the recent meeting of the Commission’s Technology Advisory Committee meeting, highlighting that it may be beneficial for the Commission to focus first on dedicating resources to analyzing and harmonizing data, which would help to inform discussions regarding the de minimis threshold. 

Presentation: EEMAC’s Report Summarizing its 2015 Proceedings & Closing Remarks

Allison began discussions regarding the EEMAC report (the Report) on the CFTC’s position limits proposal, noting that the committee members (not including associate members) voted to release the report by a vote of 8-1.  Next, he provided an overview of the EEMAC’s findings, which ultimately concluded that the Commission should not finalize the position limits rule, as proposed.  The Report specifically found: 1.) there is no evidence that Federal position limits would be necessary to reduce or deter excess speculation; 2.) the proposal would serve to exacerbate liquidity concerns; 3.) that proposed requirements around “bona fide hedging” are unnecessarily restrictive; and 4.) exchanges should play a larger role in the processing and granting of hedging exemptions. 

Allison explained that the Report recommends that, if the Commission should decide to impose position limits, it must address flaws in relation to bona fide hedges and phase requirements, beginning with only spot months and reserving action for outer months until more experience and data is available. 

Slocum expressed his dissenting view, where he raised significant concerns regarding the contents of the report and the process under which it was created.  He argued that the drafting process was not collaborative and fully inclusive of the membership of the EEMAC, that the findings in the report are skewed by the views of EEMAC members who oppose the imposition of position limits, that the report “selectively” ignores research in support of position limits and that the CFTC and not-for-profit exchanges should play the central role in establishing position limits and addressing hedge exemptions. 

Todd Creek, ICAP Energy LLC, expressed support for the report, noting concern that the position limits rules as proposed would serve to exacerbate liquidity problems. 

Pirrong noted that the EEMAC Report was drafted at the request of Commissioner Giancarlo, who stated that the Commission was required to take such action under the Dodd-Frank Act.  He further stated that the Report was drafted based on transcripts from two meetings where the contents of the report were debated. 

Commissioner Giancarlo stressed that he asked Pirrong and Allison to draft the report, staying within the strict confines of the contents of the transcripts which are in the public record, and that the nine members of the EEMAC voted to release the report.  He then noted that the membership of the EEMAC was agreed upon by all of the Commissioners, but that they will seek to review whether there is an appropriate balance on an ongoing basis. 

Commissioner Bowen commented that she believes it is important to have the opportunity to hear from diverse viewpoints and perspectives, especially “the ultimate end-user or every-day citizen.” 

Chairman Massad expressed his hope to bring people together to craft a rule that works.  He noted that Congress has directed the establishment of a rule, and that federal position limits on agricultural commodities have been in place for decades without a detrimental effect to liquidity.  He then stated that “being against any position limits rule on the basis that it may affect liquidity or constrict hedging strikes me as a difficult position to defend from a practical standpoint.” 

Additional information about this event can be accessed here