In 2010 Congress passed the Dodd-Frank Wall Street Reform
and Consumer Protection Act with the primary goal of re-regulating the
financial system with stronger consumer protections and greater transparency. But
the act's broadly written rules also inadvertently folded in an array of day-to-day
transactions carried out by the U.S. energy industry, which frequently uses derivative
contracts that are not easily standardized.
Of major concern to energy companies was the possible
inclusion of physically deliverable forward contracts as swaps and being designated
as swaps dealers if the notional value of their transactions fell into ranges
as low as $100 million annually.
Energy companies often enter into long- and short-term physical
transactions to buy and sell electricity, natural gas and other fuels to serve
customer needs, and sometimes use financial hedges to manage volatile prices,
outlines Reuters.
After two years of deliberation, federal regulators have at
last approved a definition for swaps under the Dodd-Frank Wall Street Reform
and Consumer Protection Agency, which includes crucial exemptions for many
energy companies.
The two agencies overseeing the implementation of the new
rules - the Commodity Futures Trading Commission and the Securities Exchange
Commission - approved the rule on Wednesday, setting in motion more than 20
separate regulations that were waiting only on a definition for swaps.
The financial instruments are intended to help control the
risks facing companies by exchanging two distinct streams of revenue. However,
there were some worries that certain contracts allowing energy companies to
purchase fuel in response to changing consumer demand could fall under the
definition, potentially raising costs around the country.
Risk magazine notes that the CFTC ultimately proved
receptive to concerns from the energy industry about unnecessarily raising
costs in a sector that relied on swaps contracts for legitimate hedging, both
with the definition of swaps and the inclusion of an end-user exemption to
clearing requirements.
Businesses meeting the newly revised definition of a swap
dealers will have 60 days to register after the final rule is published.
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