Today the Senate passed on a 60-39 vote the conference report for financial reform legislation, formally entitled the Dodd-Frank Wall Street Reform and Consumer Protection Act, that imposes new rules on the financial system and establishes a new consumer protection agency.  The bill will now go to the President for signature.  The passage of this legislation was a major success for APGA as it increases consumer protection while retaining the ability of public gas systems to use the over-the-counter market to hedge on behalf of their consumers as well as to enter into prepays. 

Among other things, the bill establishes new rules on the trading of derivatives and it was this section that was a focus of APGA.  Over the past several years APGA has testified numerous times before Congress and the Commodity Futures Trading Commission (CFTC) in regard to the need for greater transparency and strong oversight, both of which the bill strongly addresses.  APGA also supported a provision in the bill that changes the legal standard the CFTC must meet to prove market manipulation.  Specifically, the legislation would change the standard from requiring the CFTC to prove specific intent to a recklessness standard. The recklessness standard is the standard that the Securities Exchange Commission, Federal Trade Commission and Federal Energy Regulatory Commission have utilized.

APGA also successfully worked with other energy end-users in pushing back against efforts to require all end-users to clear their transactions.  The mandated clearing of all OTC transactions would require a public gas system to post initial margin and to meet potential margin calls whenever required on little notice.  APGA argued that requiring a public gas system to clear its transactions would significantly impair that system’s hedging strategy and place an increased financial and operational burden on the communities and consumers they serve.  APGA also successfully worked to replace language in the bill that would place a fiduciary duty on a swap dealer when entering into swaps with all State and local governments and instrumentalities.  APGA was extremely concerned that swap dealers will be less inclined to make a deal with public gas systems if they have to act as their fiduciary.  The fiduciary duty language was replaced in conference committee with language that established, among other things, additional requirements on a swap dealer when they enter into transactions with a State or local government. 

This new language imposes a requirement that a municipality, including a public gas system, have in place an “independent representative” that evaluates swap transactions in which the entity is involved in. APGA communicated to Congress that in some cases a utility already has an employee in place whose job it is to handle the day to day hedging operations of the system and it is unlikely that a third party would have the knowledge of the in-house employee.  In addition, the significant additional costs of hiring a third-party will be passed directly onto consumers.  APGA was able to obtain a clarification on the Senate floor as part of a colloquy between Agriculture Committee Chairman Lincoln and Chairman Harkin which communicates congressional intent that an “independent representative” only has to be independent of the Swap Dealer or Major Swap Participant and an in-house employee can be used to fill this role.

Another issue in the bill which APGA is working on relates to ambiguous language that could give the CFTC the authority to impose margin requirements on end-user transactions exempted from the mandatory clearing requirements.  APGA is working with other end-users and members of Congress to provide direction to the CFTC that margin requirements should not be imposed on end-user transactions.    

It is anticipated that the President will sign this bill in the very near future.  A copy of the derivatives title is available on the APGA website at www.apga.org.  Although the bill has passed, a great deal of work remains as the legislation requires the CFTC to conduct approximately 200 rulemakings on a variety of issues.  If you have any questions on this article, please contact Dave Schryver of APGA’s staff by phone at 202-464-2742 or by email at dschryver@apga.org.  

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