Dodd-Frank Update: CFTC ISO/RTO Exemptive Order


On March 28, 2013, the Commodity Futures Trading Commission (“CFTC”) issued a final order exempting specified transactions by certain regional transmission organizations (“RTO”) and independent system operators (“ISO”) from all but the general anti-fraud and anti-manipulation prohibitions of the Commodity Exchange Act (“CEA”) and related CFTC regulations promulgated thereunder (“Exemptive Order”).1 This alert outlines the Exemptive Order.

I. Background

The Dodd-Frank Wall Street Reform and Consumer Protection Act2 (“Dodd-Frank”) amended the CEA to endow the CFTC with jurisdiction over swap transactions,3 which, unless exempted, would generally need to be cleared and traded on an exchange as opposed to traded in private bilateral over-the-counter transactions.4 “Swaps” under Dodd-Frank are broadly defined and subject to reporting and recordkeeping obligations, clearing and margining requirements, position limits, anti-fraud and anti-manipulation regulations. Pursuant to its exemptive authority under section 4(c)(6) of the CEA, the CFTC issued the Exemptive Order to (i) Electric Reliability Council of Texas, Inc., which is an ISO though is regulated by the Public Utility Commission of Texas (“PUCT”); (ii) three RTOs (Midwest Independent Transmission System Operator; ISO New England, Inc.; and PJM Interconnection, L.L.C.) regulated by the Federal Energy Regulatory Commission (“FERC”) and (iii) two ISOs (California Independent System Operator Corporation and New York Independent System Operator, Inc.) also regulated by FERC (collectively, the “Requesting Parties”). This order clarified some jurisdictional overlap between the CFTC and FERC.

II. The Exemptive Order

The Exemptive Order only applies to the above six entities and exempts the following transactions (“Covered Transactions”) in the Requesting Parties’ markets, so long as these transactions are executed pursuant to a tariff approved by FERC or PUCT:

  • Financial Transmission Rights;
  • Energy Transactions in Day-Ahead (typically providing for financial settlement) and Real-Time Markets (typically providing for physical settlement);
  • Forward Capacity Transactions; and
  • Reserve or Regulation Transactions.

The Exemptive Order only applies to the following entities:

  • “appropriate persons,” as defined in the CEA5;
  • “eligible contract participants,” as defined in the CEA and CFTC regulations6; or
  • persons who are in the business of: (i) generating, transmitting, or distributing electric energy, or (ii) providing electric energy services that are necessary to support the reliable operation of the transmission system. The Exemptive Order also extends to any person or class of persons offering, entering into, rendering advice, or rendering other services with respect to the Covered Transactions.

The CFTC clarified that “appropriate persons” may include demand service providers, public power systems, and governmental entities.

The exemption is subject to two conditions precedent, whereby the respective RTO/ISO must first: (i) comply with FERC Regulation 35.47 (or the PUCT equivalent under the PUCT Substantive Rules) regarding credit practices, as evidenced by an approved tariff, and (ii) obtain a legal opinion from outside counsel providing the CFTC with comfort that netting arrangements in place pursuant to FERC 35.47(d) provide the entity with enforceable setoff rights against counterparties in bankruptcy.7

Finally, the exemption is also subject to two conditions subsequent, whereby: (i) notification requests for information may not inhibit CFTC inquiries on the Requesting Parties, and (ii) information-sharing agreements must remain in place as between the CFTC and FERC or PUCT, as applicable, to the satisfaction of the CFTC.
1 Commodities Futures Trading Commission Final Order, 78 Fed. Reg. 19879 (April 2, 2013), available at:
2 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
3 Section 1a(47)(E) of the CEA (7 U.S.C. § 1a(47)(E)). Note that the Securities and Exchange Commission has jurisdiction over “security-based swaps.” See Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 Fed. Reg. 48208 (Aug. 13, 2012).
4 7 U.S.C. 2(h)(1), as amended by section 723(a)(3) of Dodd-Frank, provides in relevant part that “it shall be unlawful for any person to engage in a swap unless that person submits such swap for clearing to a derivatives clearing organization that is registered under the CEA or a derivatives clearing organization that is exempt from registration under the CEA if the swap is required to be cleared.”
5 7 U.S.C. 6(c)(3)(A)-(J).
6 7 U.S.C. la(18). “Further Definition of ‘Swap Dealer,’ ‘Security-Based Swap Dealer,’ ‘Major Swap Participant,’ ‘Major Security-Based Swap Participant,’ and ‘Eligible Contract Participant,’” 77 FR 30596, May 23, 2012.
7 18 C.F.R. 35.47.

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