Sellers under virtual power purchase agreements often agree to assume the duty to report the swap transactions contemplated by those agreements. Parties acting as reporting parties for Dodd-Frank purposes will be interested in the Roadmap to Achieve High Quality Swap Data (“Roadmap”) rulemakings currently under way at the Commodity Futures Trading Commission (“CFTC”).
As part of the Roadmap proceedings, the CFTC recently published proposed amendments to its regulations governing swap data reporting requirements and swap data repositories (“SDR”). 84 Fed. Reg. 21044 (May 13, 2019). Among other changes, the proposals would require an SDR to distribute to each reporting counterparty on a regular basis an “open swaps report” detailing the swap data maintained by the SDR for all open swaps, organized by the unique identifier created for each swap. SDRs would be required to distribute the open swaps reports to non-swap dealer (“non-SD”) reporting counterparties, which would encompass most energy firms acting as a reporting counterparty, on a monthly basis, no later than the end of the day Eastern Time on the day of the month that the SDR chooses to regularly distribute the reports. The reporting counterparty would then be required to compare its books and records against the report to determine if the swap data that the SDR maintains is complete and accurate. A non-SD reporting counterparty would be required to submit either a verification of data accuracy or a notice of discrepancy within 96 hours of the SDR providing the open swaps report. This would be a change from the current regulatory framework that is based on the concept of negative affirmation, whereby reported swap data is presumed accurate and confirmed if a counterparty does not inform the SDR of errors or omissions or otherwise make modifications to a trade record within a specified time period under SDR rules.
If a notice of discrepancy were filed, the error or omission must be corrected within three business days of that notice filing. The current regulations require that an error or omission be corrected “as soon as technologically practicable” following discovery, but the proposals would reinforce that requirement with the three-business-day time frame. If that three-business-day time frame cannot be met, the reporting party would be required immediately to inform the Director of the CFTC’s Division of Market Oversight, or the Director’s designee, in writing, of such errors or omissions and provide an initial assessment of the scope of the errors or omissions and an initial remediation plan for their correction.
The requirements for correcting errors or omissions would apply to both swap data required by Part 45 of the CFTC’s regulations (creation and continuation data) and to swap transaction and pricing data required by Part 43 of the CFTC’s regulations. However, the open swaps report provision would only apply to the former, although the preamble of the notice announcing the proposed amendments specifically requests comment on whether that report should also cover swap transaction and pricing data.
The CFTC also states in the preamble that it expects that a reporting counterparty that repeatedly discovers errors or omissions, especially if they follow a pattern, would evaluate its reporting systems to discover and correct any issues. This would include working with the relevant SDR to address any reporting issues. The CFTC further notes that it may consider a reporting counterparty that fails to perform such an evaluation and improvement in light of repeated errors not to be in compliance with the regulations.
The proposed amendments, which are available here, are part of the CFTC’s Roadmap, and constitute the first of three anticipated Roadmap rulemakings. The comment period on these proposed amendments closes July 29, 2019. When the CFTC proposes the next two rulemakings, it anticipates re-opening the comment period for this first proposal to provide market participants with an opportunity to comment collectively on the three rulemakings together. The CFTC also anticipates that key provisions of each rulemaking would have the same compliance date, regardless of when each rulemaking is adopted in final form. The CFTC intends to provide a sufficient implementation period for these various rulemakings to give SDRs and market participants enough time to implement and test the changes that would be required.
On March 5, 2014, the Commodity Futures Trading Commission (CFTC) and Federal Energy Regulatory Commission (FERC) announced that they had shared data for the first time under an information sharing Memorandum of Understanding (MOU) that was signed by the two agencies at the beginning of this year. The purpose of the MOU is to minimize duplicative information requests when the agencies are conducting market surveillance or investigating possible manipulation, fraud or market abuse. Congress directed the agencies to enter into the MOU as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
The data that is subject to sharing under the MOU relates to information about market participants as well as entities regulated by either agency. Accordingly, FERC may share data concerning Regional Transmission Organizations (RTOs), Independent System Operators (ISOs), and the independent market monitor of RTOs and ISOs, which is the North American Electric Reliability Corporation (NERC). The data subject to sharing also includes information about interstate pipelines and storage facilities, which are regulated by FERC, and designated contract markets, swap execution facilities, derivatives clearing organizations and swap data repositories, which are regulated by the CFTC. Any data shared by the agencies remains confidential unless it is used in an enforcement proceeding.
The agencies also announced the formation of a staff level Interagency Surveillance and Data Analytics Working Group to coordinate information sharing between the agencies and focus on data security, data sharing infrastructure, and the use of analytical tools for regulatory purposes.
Dodd-Frank mandated a second MOU between the agencies, which also was signed at the beginning of this year, that is intended to resolve conflicts concerning potential overlapping jurisdiction and avoiding conflicting or duplicative regulation. That MOU addresses circumstances where an entity seeks, or an agency considers sua sponte, an authorization or exemption to engage in activities that the agency thinks may also come within the other agency’s jurisdiction. This MOU has yet to be invoked. The second MOU specifically states that it “does not expand, alter or limit the . . . [a]gencies’ respective authorities pursuant to applicable statutes and regulations.” It therefore remains to be seen whether the agencies will cooperate and coordinate with respect to enforcement matters, or whether we will instead see the prospect of another Amaranth case with multiple actions brought by both agencies.
The agencies have taken a long time to get to this point. Dodd-Frank provided that the MOUs should be entered into by January 2011, and they were not actually entered into until three years later. In the interim, the CFTC gave priority to the promulgation of the dozens of regulations that it was also required to adopt under Dodd-Frank. In addition, last April the CFTC issued Orders exempting from the Commodity Exchange Act (1) certain electric operations transactions entered into by certain government and cooperatively-owned electric utility companies, and (2) certain transactions entered into by ISOs and RTOs that are authorized by a tariff or protocol approved by FERC or the Public Utility Commission of Texas.
The implementation of the information sharing MOU was carried out while each agency is being lead by an Acting Chairman. Hopefully, the sharing of information under the MOU signals an era of greater cooperation and coordination between FERC and the CFTC than has sometimes been the case in the past. It will be particularly important to observe this relationship as each agency gets new permanent leadership and the Dodd-Frank regulatory structure is developed. It is a further reminder that, even though the jurisdictional issues among international regulators arising from cross-border swap transactions have grabbed most of the market’s attention, there are jurisdictional issues among U.S. regulators that have yet to be resolved.