Notice of Proposed Order and Request for Comment on an Application for an Exemptive Order From Southwest Power Pool, Inc. From Certain Provisions of the Commodity Exchange Act Pursuant to the Authority Provided in Section 4(c)(6) of the Act

Federal RegisterMay 21, 2015

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COMMODITY FUTURES TRADING COMMISSION

Notice of Proposed Order and Request for Comment on an Application for an Exemptive Order From Southwest Power Pool, Inc. From Certain Provisions of the Commodity Exchange Act Pursuant to the Authority Provided in Section 4(c)(6) of the Act

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Notice of proposed order and request for comment.

SUMMARY:

The Commodity Futures Trading Commission (“CFTC” or “Commission”) is requesting comment on a proposed exemption issued in response to an application from Southwest Power Pool, Inc. to exempt certain Transmission Congestion Rights, Energy Transactions, and Operating Reserve Transactions from the provisions of the Commodity Exchange Act and Commission regulations.

DATES:

Comments must be received on or before June 22, 2015.

ADDRESSES:

You may submit comments by any of the following methods:

•

CFTC Web site: http://comments.cftc.gov.

Follow the instructions for submitting comments through the Comments Online process on the Web site.

•

Mail:

Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

•

Hand Delivery/Courier:

Same as Mail, above.

•

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

Please submit your comments using only one of these methods.

All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to

http://www.cftc.gov.

You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act, a petition for confidential treatment of the exempt information may be submitted according to the established procedures in 145.9 of the Commission's regulations, 17 CFR 145.9.

The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from

http://www.cftc.gov

that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of this action will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT:

Robert Wasserman, Chief Counsel, 202-418-5092,

rwasserman@cftc.gov,

or Alicia Lewis, Special Counsel, 202-418-5862,

alewis@cftc.gov,

Division of Clearing and Risk; David P. Van Wagner, Chief Counsel, 202-418-5481,

dvanwagner@cftc.gov,

or Riva Spear Adriance, Senior Special Counsel, 201-418-5494,

radriance@cftc.gov,

Division of Market Oversight, in each case at the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Overview

The Commission is requesting comment on a proposed exemption (the “Proposed Exemption”) issued in response to an application (“Exemption Application”)

from Southwest Power Pool, Inc. (“SPP” or “Applicant”) to exempt certain Transmission Congestion Rights, Energy Transactions, and Operating Reserve Transactions (collectively, the “Covered Transactions”) from the provisions of the Commodity Exchange Act (“CEA” or “Act”)

and Commission regulations. The Proposed Exemption would exempt contracts, agreements and transactions for the purchase or sale of the limited electric energy-related products that are specifically described within the Proposed Exemption from the provisions of the CEA and Commission regulations, with the exception of the Commission's general anti-fraud and anti-manipulation authority, and scienter-based prohibitions, under sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4

4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9, and 13 of the Act, and any implementing regulations promulgated under these sections including, but not limited to, Commission regulations 23.410(a) and (b), 32.4 and part 180. To be eligible for the Proposed Exemption, the contract, agreement or transaction would be required to be offered or entered into in a market administered by SPP, pursuant to SPP's tariff (“Tariff”), for the purposes of allocating SPP's physical resources, and the Tariff would be required to have been approved or permitted to have taken effect by the Federal Energy Regulatory Commission (“FERC”). The exemption as proposed would extend to any person or class of persons entering into the Covered Transactions or rendering services with respect to the Covered Transactions, including offering the Covered Transactions or rendering advice with respect to the Covered Transactions. The contract, agreement or transaction would be required to be offered or entered into by persons who are “appropriate persons,” as defined in sections 4(c)(3)(A) through (J) of the Act,

“eligible contract participants,” as defined in section 1a(18) of the Act and Commission regulation 1.3(m),

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. Finally, the exemption would be subject to other conditions set forth therein. Authority for issuing the exemption is found in section 4(c)(6) of the Act.

In the Matter of the Application for an Exemptive Order Under Section 4(c) of the Commodity Exchange Act by Southwest Power Pool, Inc., Oct. 17, 2013, as amended Aug. 1, 2014.

7 U.S.C. 1

et seq.

7 U.S.C. 6(c)(3)(A)-(J).

7 U.S.C. 1a(18); 17 CFR 1.3(m).

see also

infra

section III.C.

II. Statutory Background

For a fuller discussion,

see

Proposed Order and Request for Comment on a Petition from Certain Independent System Operators and Regional Transmission Organizations to Exempt Specified Transactions Authorized by a Tariff or Protocol Approved by the Federal Energy Regulatory Commission or the Public Utility Commission of Texas From Certain Provisions of the Commodity Exchange Act, 77 FR 52138, 52139-52140, Aug. 28, 2012.

On July 21, 2010, President Obama signed the Dodd-Frank Act. Title VII of the Dodd-Frank Act amended the CEA

and altered the scope of the Commission's exclusive jurisdiction.

In particular, it expanded the Commission's exclusive jurisdiction, which had included futures traded, executed, and cleared on CFTC-regulated exchanges and clearinghouses, to also cover swaps traded, executed, or cleared on CFTC-regulated exchanges or clearinghouses.

As a result, the Commission's exclusive jurisdiction now includes swaps as well as futures.

7 U.S.C. 1

et seq.

Section 722(e) of the Dodd Frank Act.

See

7 U.S.C. 2(a)(1)(A). The Dodd-Frank Act also added section 2(h)(1)(A), which requires swaps to be cleared if required to be cleared and not subject to a clearing exception or exemption.

See

7 U.S.C. 2(h)(1)(A).

See id.

The Dodd-Frank Act also added a savings clause that addresses the roles of the Commission, FERC, and state regulatory authorities as they relate to certain agreements, contracts, or transactions traded pursuant to the tariff or rate schedule of an RTO that has been approved by FERC or the state regulatory authority.

Toward that end, paragraph (I) of CEA section 2(a)(1) repeats the Commission's exclusive jurisdiction, clarifies that the Commission retains its authorities over agreements, contracts or transactions traded pursuant to FERC- or state-approved tariff or rate schedules,

and explains that the FERC and state agencies preserve their existing authorities over agreements, contracts, or transactions “entered into pursuant to a tariff or rate schedule approved by [FERC] or a State regulatory agency,” that are “(I) not `executed, traded, or cleared on' an entity or trading facility subject to registration” or “(II) executed, traded, or cleared on a registered entity or trading facility owned or operated by” an RTO.

See

7 U.S.C. 2(a)(1)(I).

See

7 U.S.C. 2(a)(1)(I)(i) and (ii).

7 U.S.C. 2(a)(1)(I)(i)(II).

The Dodd-Frank Act granted the Commission specific powers to exempt certain contracts, agreements, or transactions from duties otherwise required by statute or Commission regulation by adding, as relevant here, new section 4(c)(6)(A) to the CEA, providing for exemptions for certain transactions entered into pursuant to a tariff or rate schedule approved or permitted to take effect by FERC.

The Commission must act “in accordance with” sections 4(c)(1) and (2) of the CEA, when issuing an exemption under section 4(c)(6). Section 4(c)(1) grants the Commission the authority to exempt any agreement, contract, or transaction or class of transactions, including swaps, from certain provisions of the CEA, in order to “promote responsible economic or financial innovation and fair competition.”

Section 4(c)(2)

of the Act further provides that the Commission may not grant exemptive relief unless it determines that: (1) The exemption would be consistent with the public interest and the purposes of the CEA; (2) the transaction will be entered into solely between “appropriate persons,” as that term is defined in section 4(c);

and (3) the exemption

will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory responsibilities under the CEA.

In enacting section 4(c), Congress noted that the purpose of the provision is to give the Commission a means of providing certainty and stability to existing and emerging markets so that financial innovation and market development can proceed in an effective and competitive manner.

7 U.S.C. 6(c)(1).

7 U.S.C. 6(c)(2).

Section 4(c)(3) of the CEA further outlines who may constitute an appropriate person for the purpose of a particular 4(c) exemption and

includes, as relevant to this Proposed Exemption: (a) any person that qualifies for one of ten defined categories of appropriate persons; or (b) such other persons that the Commission determines to be appropriate in light of their financial or other qualifications, or the applicability of appropriate regulatory protections. 7 U.S.C. 6(c)(3).

7 U.S.C. 6(c)(2).

H.R. Rep. No. 102-978, 102d Cong. 2d Sess. at 82-83 (1992).

III. Background

A. Introduction

SPP is subject to regulation by FERC.

SPP asserts that the regulatory framework administered by FERC, as applicable to its RTO market, would apply to the transactions for which an exemption has been requested.

See

Exemption Application at 2-3.

See id.

at 17.

B. FERC

In 1920, Congress established the Federal Power Commission (“FPC”).

The FPC was reorganized into FERC in 1977.

FERC is an independent agency that regulates the interstate transmission of electric energy, natural gas and oil.

FERC's mission is to “assist consumers in obtaining reliable, efficient and sustainable energy services at a reasonable cost through appropriate regulatory and market means.”

This mission is accomplished by pursuing two primary goals. First, FERC seeks to ensure that rates, terms and conditions for wholesale transactions and transmission of electric energy and natural gas are just, reasonable and not unduly discriminatory or preferential.

Second, FERC seeks to promote the development of safe, reliable and efficient energy infrastructure that serves the public interest.

Both Congress and FERC, through a series of legislative acts and FERC orders, have sought to establish a system whereby wholesale electric energy generation and transmission in the United States is governed by two guiding principles: Regulation with respect to wholesale electric energy transmission,

and competition when dealing with wholesale generation.

Federal Power Act, 16 U.S.C. 791a

et se.

The Department of Energy Organization Act, Public Law 95-91, section 401, 91 Stat. 565, 582 (1977) (codified as amended at 42 U.S.C. 7171 (1988)).

See

42 U.S.C. 7172.

See

FERC Strategic Plan for Fiscal Years 2009-2014, 3 (Feb. 2012),

available at http://www.ferc.gov/about/strat-docs/FY-09-14-strat-plan-print.pdf.

Id.

See

16 U.S.C. 796(24) (stating that “ `wholesale transmission services' means the transmission of electric energy sold, or to be sold, at wholesale in interstate commerce.”).

See generally,

Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, 61 FR 21540, Apr. 24, 1996 (“FERC Order 888”).

see also

infra

section VI.

“Operating Reserve Transactions” allow SPP to purchase through auction or otherwise as permitted in its Tariff, for the benefit of load serving entities (“LSEs”) and resources, the right, during a period of time specified in SPP's Tariff, to require the seller to operate electric facilities in a physical state such that the facilities can increase or decrease the rate of injection or withdrawal of a specified quantity of electric energy into or from the electric energy transmission system operated by SPP with a Reserve Transaction (meaning physical performance by the seller's facilities within a response interval specified in SPP's Tariff) or an Area Control Error Regulation Transaction (meaning prompt physical performance by the seller's facilities as specified in SPP's Tariff).

consideration for such delivery, or withholding of delivery, the seller receives compensation of the type specified in section VI below.

In all cases, the value, quantity and specifications of such Transactions for SPP for any period of time are limited to the physical capability of the electric transmission system operated by SPP for that period of time.

These Transactions are typically used to address unforeseen fluctuations in the level of electric energy demand experienced on the electric transmission system.

See

Exemption Application at 14-15. The RTO-ISO Order refers to “Reserve or Regulation Transactions.” SPP's markets refer to such

transactions collectively as “Operating Reserve.”

See

RTO-ISO Order at 19913-14.

see also

infra

section VI.

See id.;

see also

RTO-ISO Order at 19914.

B. Conditions

The Proposed Exemption would be subject to certain conditions that are consistent with the RTO-ISO Order. First, all parties to the agreements, contracts or transactions that are covered by the Proposed Exemption must be “appropriate persons,” as such term is defined in sections 4(c)(3)(A) through (J) of the Act, “eligible contract participants,” as such term is defined in section 1a(18)(A) of the Act and in Commission regulation 1.3(m),

That is, the Commission is proposing to use its authority pursuant to CEA section 4(c)(3)(K) to include eligible contract participants as appropriate persons for the purposes of this Order.

See infra

note 75 and accompanying text;

see also

7 U.S.C. 1a(18) and “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.

Consistent with the RTO-ISO Order, the Commission is also proposing to use its authority pursuant to CEA section 4(c)(3)(K) to include 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.

See

RTO-ISO Order at 19899, 19913.

Second, the agreements, contracts or transactions that are covered by the Proposed Exemption must be offered or sold pursuant to SPP's Tariff, which has been approved or permitted to take effect by FERC.

Third, neither SPP's Tariff nor other governing documents may include any requirement that SPP notify a member prior to providing information to the Commission in response to a subpoena or other request for information or documentation.

Finally, information-sharing arrangements that are satisfactory to the Commission between the Commission and FERC must remain in full force and effect.

This condition also requires that SPP comply with the Commission's requests on an as-needed basis for related transactional and positional market data.

As discussed in section VI.A. below, the CFTC and FERC signed a Memorandum of Understanding (“MOU”) on January 2, 2014, which addresses the sharing of information in connection with market surveillance and investigations into potential market manipulation, fraud or abuse. The MOU is

available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/cftcfercismou2014.pdf.

C. Additional Limitations

As discussed above, the Commission proposes to exempt the Transactions pursuant to section 4(c)(6) of the Act based upon representations made in the Exemption Application and in the supporting materials provided by SPP and its counsel, and any material change or omission in the facts and circumstances that alter the grounds for the Proposed Exemption might require the Commission to reconsider its finding that the exemption is appropriate and/or in the public interest and consistent with the purposes of the CEA (these limitations are, again, consistent with the RTO-ISO Order).

As represented in the Exemption Application, the exemption requested by SPP relates to Covered Transactions that are primarily entered into by commercial participants that are in the business of generating, transmitting and distributing electric energy.

In addition, the Commission notes that it appears that SPP was established for the purpose of providing affordable, reliable electric energy to consumers within its geographic region.

Critically, these Covered Transactions are an essential means, designed by FERC as an integral part of its statutory responsibilities, to enable the reliable delivery of affordable electric energy.

The Commission also notes that each of the Covered Transactions taking place on SPP's markets is monitored by both a market administrator (SPP) and an independent market monitor (“SPP Market Monitor”) responsible to FERC.

Finally, as discussed above, each Covered Transaction is directly tied to the physical capabilities of SPP's electric energy grid.

As more fully described below,

and on the basis of the aforementioned representations, the Commission proposes to find that the Proposed Exemption for the Covered Transactions would be in the public interest. To be clear, however, financial transactions that are not tied to the allocation of the physical capabilities of an electric transmission grid would not be suitable for exemption because such activity would not be inextricably linked to the physical delivery of electric energy.

See

RTO-ISO Order at 19914-15.

See

Exemption Application at 17.

See id.

at 2, 17.

See generally,

FERC Order 888; FERC Order 2000; 18 CFR 35.34(k)(2);

see also

Exemption Application at 17.

See id.

at 12-15.

See

discussions

infra

sections V.B., V.D., and V.E.

V. Section 4(c) Analysis

A. Overview of CEA Section 4(c)

1. Sections 4(c)(6)(A) and (B)

The Dodd-Frank Act amended CEA section 4(c) to add sections 4(c)(6)(A) and (B), which provide for exemptions for certain transactions entered into: (a) Pursuant to a tariff or rate schedule approved or permitted to take effect by FERC, or (b) pursuant to a tariff or rate schedule establishing rates or charges for, or protocols governing, the sale of electric energy approved or permitted to take effect by the regulatory authority of the State or municipality having jurisdiction to regulate rates and charges for the sale of electric energy within the State or municipality, as eligible for exemption pursuant to the Commission's 4(c) exemptive authority.

Indeed, section 4(c)(6) provides that “[i]f the Commission determines that the exemption would be consistent with the public interest and the purposes of this chapter, the Commission

shall”

issue such an exemption.

However, any exemption considered under section 4(c)(6)(A) and/or (B) must be done “in accordance with [CEA section 4(c)(1) and (2)].”

The exemption language in section 4(c)(6) states: If the Commission determines that the exemption would be consistent with the public interest and the purposes of this Act, the Commission shall, in accordance with paragraphs (1) and (2), exempt from the requirements of this Act an agreement, contract, or transaction that is entered into—(A) pursuant to a tariff or rate schedule approved or permitted to take effect by the Federal Energy Regulatory Commission; (B)pursuant to a tariff or rate schedule establishing rates or charges for, or protocols governing, the sale of electric energy approved or permitted to take effect by the regulatory authority of the State or municipality having jurisdiction to regulate rates and charges for the sale of electric energy within the State or municipality; or (C) between entities described in section 201(f) of the Federal Power Act (16 U.S.C. 824(f)).

Id.

(emphasis added).

CEA section 4(c)(6) explicitly directs the Commission to consider any exemption proposed under 4(c)(6) “in accordance with [CEA section 4(c)(1) and (2)].”

2. Section 4(c)(1)

CEA section 4(c)(1) requires that the Commission act “by rule, regulation or order, after notice and opportunity for hearing.” It also provides that the Commission may act “either unconditionally or on stated terms or conditions or for stated periods and either retroactively or prospectively or both” and that the Commission may provide exemption from any provisions of the CEA except subparagraphs (C)(ii) and (D) of section 2(a)(1).

3. Section 4(c)(2)

CEA section 4(c)(2) requires the Commission to determine that: To the extent an exemption provides relief from any of the requirements of CEA section 4(a), the requirement should not be applied to the agreement, contract or transaction; the exempted agreement, contract, or transactions will be entered into solely between appropriate persons;

and the exemption will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory duties under the CEA.

See

CEA 4(c)(2)(B)(i) and the discussion of CEA section 4(c)(3) below.

CEA section 4(c)(2)(A) also requires that the exemption would be consistent with the public interest and the purposes of the CEA, but that requirement duplicates the requirement of section 4(c)(6).

4. Section 4(c)(3)

CEA section 4(c)(3) outlines who may constitute an appropriate person for the purpose of a 4(c) exemption, including as relevant to this Proposed Exemption: (a) Any person that fits in one of ten defined categories of appropriate persons; or (b) such other persons that the Commission determines to be appropriate in light of their financial or other qualifications, or the applicability of appropriate regulatory protections.

Section 4(c)(3), 7 U.S.C. 6(c)(3), provides that the term “appropriate person” shall be limited to the following persons or classes thereof: (A) A bank or trust company (acting in an individual or fiduciary capacity); (B) A savings association; (C) An insurance company; (D) An investment company subject to regulation under the Investment Company Act of 1940 (15 U.S.C. 80a-1

et seq.

); (E) A commodity pool formed or operated by a person subject to regulation under this Act; (F) A corporation, partnership, proprietorship, organization, trust, or other business entity with a net worth exceeding $1,000,000 or total assets exceeding $5,000,000, or the obligations of which under the agreement, contract or transaction are guaranteed or otherwise supported by a letter of credit or keepwell, support, or other agreement by any such entity or by an entity referred to in subparagraph (A), (B), (C), (H), (I), or (K) of this paragraph; (G) An employee benefit plan with assets exceeding $1,000,000, or whose investment decisions are made by a bank, trust company, insurance company, investment adviser registered under the Investment Advisers Act of 1940 (15 U.S.C. 80a-1

et seq.

), or a commodity trading advisor subject to regulation under this Act; (H) Any governmental entity (including the United States, any state, 4-1 or any foreign government) or political subdivision thereof, or any multinational or supranational entity or any instrumentality, agency, or department of any of the foregoing; (I) A broker-dealer subject to regulation under the Securities Exchange Act of 1934 (15 U.S.C. 78a

et seq.

) acting on its own behalf or on behalf of another appropriate person; (J) A futures commission merchant, floor broker, or floor trader subject to regulation under this Act acting on its own behalf or on behalf of another appropriate person; (K) Such other persons that the Commission determines to be appropriate in light of their financial or other qualifications, or the applicability of appropriate regulatory protections.

B. Proposed CEA Section 4(c) Determinations

In connection with the Proposed Exemption, the Commission has considered the request to exempt the Covered Transaction from most provisions of the Act, and proposes to determine that: (i) The Proposed Exemption is consistent with the public interest and the purposes of the CEA; (ii) CEA section 4(a) should not apply to the Covered Transactions or entities eligible for the Proposed Exemption, (iii) the persons eligible to rely on the Proposed Exemption are appropriate persons pursuant to CEA section 4(c)(3); and (iv) the Proposed Exemption will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory duties under the CEA.

1. Consistent With the Public Interest and the Purposes of the CEA

As required by CEA section 4(c)(2)(A), as well as section 4(c)(6), the Commission proposes to determine that the Proposed Exemption is consistent with the public interest and the purposes of the CEA. Section 3(a) of the CEA provides that transactions subject to the CEA affect the national public interest by providing a means for managing and assuming price risk, discovering prices, or disseminating pricing information through trading in liquid, fair and financially secure trading facilities.

Section 3(b) of the CEA identifies the purposes of the CEA:

7 U.S.C. 5(a).

It is the purpose of this Act to serve the public interests described in subsection (a) through a system of effective self-regulation of trading facilities, clearing systems, market participants and market professionals under the oversight of the Commission. To foster these public interests, it is further the purpose of this Act to deter and prevent price manipulation or any other disruptions to market integrity; to ensure the financial integrity of all transactions subject to this Act and the avoidance of systemic risk; to protect all market participants from fraudulent or other abusive sales practices and misuses of customer assets; and to promote responsible innovation and fair competition among boards of trade, other markets and market participants.

7 U.S.C. 5(b).

SPP asserts that the Proposed Exemption would be consistent with the public interest and purposes of the CEA,

stating generally that: (a) The Covered Transactions have been, and are, subject to a long-standing, comprehensive regulatory framework for the offer and sale of the Transactions established by FERC; and (b) the Covered Transactions administered by SPP are part of, and inextricably linked to, the organized wholesale electric energy markets that are subject to FERC regulation and oversight.

For example, SPP explains that FERC Order 2000 (which, along with FERC Order 888, encouraged the formation of RTOs and ISOs to operate the electronic transmission grid and to create organized wholesale electric markets) requires an RTO to demonstrate that it has four minimum characteristics: (1) Independence from any market participant; (2) a scope and regional configuration which enables the RTO to maintain reliability and effectively perform its required functions; (3) operational authority for its activities, including being the security coordinator for the facilities that it controls; and (4) short-term reliability.

In addition, SPP states that an RTO must demonstrate to FERC that it performs certain self-regulatory and/or market monitoring functions.

SPP also represents that it

is “responsible for ensur[ing] the development and operation of market mechanisms to manage transmission congestion”

and to establish “market mechanisms [that] must accommodate broad participation by all market participants, and must provide all transmission customers with efficient price signals that show the consequences of their transmission usage decisions.”

See

Exemption Application at 17.

See id.

See

Exemption Application at 18; 18 CFR 35.34(j).

SPP states that the Covered Transactions will take place on markets that are monitored by both a market administrator (SPP) and an independent market monitor (the “SPP Market Monitor”).

See

Exemption Application at 17. SPP also states that it “must employ a transmission pricing system that promotes efficient use and expansion of transmission and generation facilities; develop and implement procedures to address parallel path flow issues within its region and with other regions; serve as a provider of last resort of all ancillary services required by FERC Order No. 888 including ensuring that its transmission customers have access to a Real-Time balancing market; be the single OASIS (Open-Access Same-Time Information System) site administrator for all transmission facilities under its control and independently calculate Total Transmission Capacity and Available Transmission Capability; provide reliable, efficient, and not unduly discriminatory transmission service, it must provide for objective monitoring of markets it operates or administers to identify market design flaws, market power abuses and opportunities for efficiency improvements; be responsible for planning, and for directing or arranging, necessary transmission expansions, additions, and upgrades; and ensure the integration

of reliability practices within an interconnection and market interface practices among regions).” Exemption Application at 18; 18 CFR 35.34(k).

See

Exemption Application at 18.

See

Exemption Application at 18-19; 18 CFR 35.34(k)(2).

SPP also explains that the Covered Transactions are entered into by commercial participants that are in the business of generating, transmitting, and distributing electric energy,

and that SPP was established for the purpose of providing affordable, reliable electric energy to consumers within their geographic region.

Furthermore, the Covered Transactions that take place on SPP's markets are overseen by a market monitoring function, required by FERC to identify manipulation of electric energy on SPP's markets.

See generally,

Exemption Application at 17.

See id.

Fundamental to the Commission's “public interest” and “purposes of the [Act]” analysis is the fact that the Covered Transactions are inextricably tied to SPP's physical delivery of electric energy, as represented in the Exemption Application.

Another important factor is that the Proposed Exemption is explicitly limited to Covered Transactions taking place on markets that are monitored by the SPP Market Monitor, SPP, or both, and FERC. In contrast, an exemption for transactions that are not so monitored, or not related to the physical capacity of an electric transmission grid, or not directly linked to the physical generation and transmission of electric energy, or not limited to appropriate persons,

is unlikely to be in the public interest or consistent with the purposes of the CEA and would be outside the scope of this exemption.

See id.

at 12-15, 17 (describing the Covered Transactions and noting that each of them “is part of, and inextricably linked to, the organized wholesale electric energy markets that are subject to FERC regulation and oversight”).

See

appropriate persons discussion

infra

section V.B.3.

Finally, and as discussed in detail below, the extent to which the Proposed Exemption is consistent with the public interest and the purposes of the Act can, in major part, be assessed by the extent to which the Tariff and activities of SPP, and supervision by FERC, are congruent with, and sufficiently accomplish, the regulatory objectives of the relevant core principles (“Core Principles”) set forth in the CEA for derivatives clearing organizations (“DCOs”) and swap execution facilities (“SEFs”). Specifically, ensuring the financial integrity of the Covered Transactions and the avoidance of systemic risk, as well as protection from the misuse of participant assets, are addressed by the core principles for DCOs. Providing a means for managing or assuming price risk and discovering prices, as well as prevention of price manipulation and other disruptions to market integrity, are addressed by the core principles for SEFs. Deterrence of price manipulation (or other disruptions to market integrity) and protection of market participants from fraudulent sales practices is achieved by the Commission retaining and exercising its jurisdiction over these matters. Therefore, the Commission has incorporated its DCO and SEF core principle analyses, set forth below, into its consideration of the Proposed Exemption's consistency with the public interest and the purposes of the Act. In the same way, the Commission has considered how the public interest and the purposes of the CEA are also addressed by the manner in which SPP complies with FERC's Credit Reform Policy.

See

FERC Credit Reform Policy discussion

infra

section V.C.

Based on this review, the Commission proposes to determine that the Proposed Exemption is consistent with the public interest and the purposes of the CEA,

and the Commission is specifically requesting comment on whether the Proposed Exemption is consistent with the public interest and the purposes of the Act.

The Commission notes that such a determination would be consistent with a similar determination made in the RTO-ISO Order.

See

RTO-ISO Order at 19895.

2. CEA Section 4(a) Should Not Apply to the Transactions or Entities Eligible for the Proposed Exemption

CEA section 4(c)(2)(A) requires, in part, that the Commission determine that the Covered Transactions described in the Proposed Exemption should not be subject to CEA section 4(a)—generally, the Commission's exchange trading requirement for a contract for the purchase or sale of a commodity for future delivery. Based in major part on SPP's representations, the Commission has reviewed the Covered Transactions, SPP, and its markets using the CEA Core Principle requirements applicable to a DCO and to a SEF as a framework for its public interest and purposes of the CEA determination.

As further support for this determination, the Commission also is relying on the public interest and the purposes of the Act analysis in subsection V.B.4 below. In so doing, the Commission proposes to determine that, due to the FERC regulatory scheme and the RTO market structure applicable to the Covered Transactions, the linkage between the Covered Transactions and that regulatory scheme, and the unique nature of the market participants that would be eligible to rely on the Proposed Exemption,

CEA section 4(a) should not apply to the Covered Transactions under the Proposed Exemption.

See

DCO core principle analysis

infra

section V.D.;

see also

SEF core principle analysis

infra

section V.E.

See

appropriate persons analysis

infra

section V.B.3.

The Commission notes that such a determination would be consistent with a similar determination made in the RTO-ISO Order.

See

RTO-ISO Order at 19895.

The Commission is requesting comment on whether its Proposed Exemption of the Covered Transactions from CEA section 4(a) is appropriate.

3. Appropriate Persons

Section 4(c)(2)(B)(i) of the CEA requires that the Commission determine that the Proposed Exemption is restricted to Covered Transactions entered into solely between “appropriate persons,” as that term is defined in section 4(c)(3) of the Act. Section 4(c)(3) defines the term “appropriate person” to include: (1) Any person that falls within one of the ten categories of persons delineated in sections 4(c)(3)(A) through (J) of the Act; or (2) such other persons that the Commission determines to be appropriate pursuant to the limited authority provided by section 4(c)(3)(K).

The Commission may determine that persons that do not meet the requirements of sections 4(c)(3)(A) through (J) are “appropriate persons” for purposes of section 4(c) only if it determines that such persons “are appropriate in light of their financial or other qualifications, or the applicability of regulatory protections.”

See supra

note 75.

Id.

SPP asserts that its market participants fit within the “appropriate person” requirement under CEA section 4(c)(3) and as set forth in the RTO-ISO Order, relying primarily on two categories of appropriate persons. The first category includes those entities that have a net worth exceeding $1,000,000

or total assets exceeding $5,000,000, as identified in CEA section 4(c)(3)(F).

The second group of appropriate persons would fall within a grouping under CEA section 4(c)(3)(K), which includes persons deemed appropriate by the Commission “in light of their financial or other qualifications, or the applicability of appropriate regulatory protection.”

CEA section 4(c)(3)(F) provides that the following entities are “appropriate persons” that the Commission may exempt under CEA section 4(a). The relevant text of 4(c)(3)(F) provides: “A corporation, partnership, proprietorship, organization, trust, or other business entity with a net worth exceeding $1,000,000 or total assets exceeding $5,000,000, or the obligations of which under the agreement, contract or transaction are guaranteed or otherwise supported by a letter of credit or keepwell, support, or other agreement by any such entity or by an entity referred to in subparagraph (A), (B), (C), (H), (I), or (K) of this paragraph.” 7 U.S.C. 6(c)(3)(F).

7 U.S.C. 6(c)(3)(K).

SPP explains that FERC has instructed all RTOs and ISOs subject to FERC supervision to create minimum standards for market participants. SPP states that:

In FERC Order No. 741, FERC directed each RTOs and ISOs to establish minimum criteria for market participants. FERC did not specify the criteria the RTOs or ISOs should apply, but rather directed them to establish criteria through their stakeholder processes.

Exemption Application at 20 (citations omitted).

SPP further states that its Tariff includes minimum capitalization criteria that require market participants to have at a minimum: (a) A tangible net worth of $1,000,000; (b) assets of $10,000,000; (c) a credit rating of BBB- or its equivalent; (d) a guaranty through which the Guarantor is used to meet alternatives (a) through (c); or (e) a minimum deposit of $200,000 in financial security, plus, if the participant's estimated market exposure is greater than $100,000, double the amount of any financial security required under the SPP Tariff.

Id.

SPP represents that its Tariff contains the Appropriate Person Requirement set forth in RTO-ISO Order.

See

Exemption Application at 21; Exemption Application Attachments at 11-12;

see also

RTO-ISO Order at 19913.

Consistent with CEA section 4(c)(3), the Commission is proposing to limit the Proposed Exemption to persons who are “appropriate persons,” as defined in sections 4(c)(3)(A) through (J) of the Act,

100

“eligible contract participants,” as defined in section 1a(18) of the Act and in Commission regulation 1.3(m),

101

102

100

7 U.S.C. 6(c)(3)(A)-(J).

101

7 U.S.C. 1a(18);

see also

102

The Commission notes that the proposed limitation on the Proposed Exemption is consistent with the RTO-ISO Order. RTO-ISO Order at 19913.

The Commission is requesting comment on whether such limitation on the Proposed Exemption is appropriate.

4. Effect on the Commission's or Any Contract Market's Ability To Discharge Its Regulatory or Self-Regulatory Duties Under the CEA

CEA section 4(c)(2)(B)(ii) requires the Commission to make a determination whether the Covered Transactions subject to the Proposed Exemption will have a material adverse effect on the ability of the Commission or any contract markets to perform regulatory or self-regulatory duties.

103

In making this determination, the Commission should consider such regulatory concerns as “market surveillance, financial integrity of participants, protection of customers and trade practice enforcement.”

104

These considerations are similar to the purposes of the CEA as defined in section 3, initially addressed in the public interest and purposes of the CEA discussion.

103

7 U.S.C. 6(c)(2)(B).

104

See

H.R. No. 978, 102d Cong. 2d Sess. 79 (1992).

SPP contends that the Proposed Exemption will not have a material adverse effect on the Commission's or any contract market's ability to discharge its regulatory function,

105

asserting that:

105

See

Exemption Application at 22.

Under Section 4(d) of the Act, the Commission will retain authority to conduct investigations to determine whether SPP is in compliance with any exemption granted in response to this request. . . . [T]he requested exemptions would also preserve the Commission's existing enforcement jurisdiction over fraud and manipulation. This is consistent with section 722 of the Dodd-Frank Act, the existing MOU between the FERC and the Commission and other protocols for inter-agency cooperation. SPP will continue to retain records related to the Transactions, consistent with existing obligations under FERC regulations.

The regulation of exchange-traded futures contracts and significant price discovery contracts (“SPDCs”) will be unaffected by the requested exemptions. Futures contracts based on electricity prices set in SPP's markets that are traded on a designated contract market and SPDCs will continue to be regulated by and subject to the requirements of the Commission. No current requirement or practice of SPP or of a contract market will be affected by the Commission's granting the requested exemptions.

106

See id.

These factors appear to support the Proposed Exemption. In addition, the limitation of the Proposed Exemption to Covered Transactions between certain appropriate persons avoids potential issues regarding financial integrity and customer protection.

Moreover, the Proposed Exemption does not exempt SPP from certain CEA provisions, including, but not limited to, sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4

, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9, and 13 of the Act, and any implementing regulations promulgated thereunder including, but not limited to, Commission regulations 23.410(a) and (b), 32.4, and part 180, to the extent that those sections prohibit fraud or manipulation of the price of any swap, contract for the sale of a commodity in interstate commerce, or for future delivery on or subject to the rules of any contract market. Therefore, the Commission retains authority to pursue fraudulent or manipulative conduct.

107

Nor did SPP seek an exemption from these provisions.

See id.

at 1.

In addition, it appears that granting the Proposed Exemption for the Covered Transactions would not have a material adverse effect on the ability of any contract market to discharge its self-regulatory duties under the Act. With respect to TCRs and Operating Reserve Transactions, these transactions do not appear to be used for price discovery or as settlement prices for other transactions in Commission-regulated markets. Therefore, the Proposed Exemption should not have a material adverse effect on any contract market carrying out its self-regulatory function.

With respect to Energy Transactions, these transactions do have a relationship to Commission-regulated markets because they can serve as a source of settlement prices for other transactions within Commission jurisdiction. Granting the Proposed Exemption, however, should not pose regulatory burdens on a contract market because, as discussed in more detail below, SPP has market monitoring systems in place to detect and deter manipulation that takes place on its markets. Also, as a condition of the Proposed Exemption, the Commission would be able to obtain data from FERC with respect to activity on SPP's markets that may impact trading on Commission-regulated markets.

Finally, the Commission notes that if the Covered Transactions ever could be used in combination with trading

activity or in a position in a DCM contract to conduct market abuse, both the Commission and DCMs have sufficient independent authority over DCM market participants to monitor for such activity.

108

Typically, cross-market abuse schemes will involve a reportable position in the DCM contract involved. In such cases, Commission regulation 18.05 requires the reportable trader to keep books and records evidencing all details concerning cash and over-the-counter positions and transactions in the underlying commodity and to provide such data to the Commission upon demand. Likewise, Commission regulation 38.254(a) requires that DCMs have rules that require traders to keep records of their trading, including records of their activity in the underlying commodity and related derivatives markets, and make such records available, upon request, to the DCM.

109

Similar recordkeeping requirements apply to swaps.

110

108

The Commission notes that its authority to prosecute market abuses involving the Covered Transactions would not be limited to instances where the Covered Transactions were part of some cross-market scheme involving DCM trading activity.

109

Final Rulemaking—Core Principles and Other Requirements for Designated Contract Markets, 72 FR 36612, June 19, 2012.

110

See

Commission regulations 20.6, 20.7, 37.404, 37.500, 37.502, 37.503, and 45.2, which were adopted following the Dodd-Frank Act's expansion of the Commission's jurisdiction to cover swaps;

see

7 U.S.C. 2(a)(1)(A);

see also

RTO-ISO Order at 19913.

In addition, SPP requires that its market participants satisfy specified credit requirements

177

and provide an attestation of their risk management capabilities.

178

SPP represents that its Tariff contains requirements that enable SPP to periodically review and verify a market participant's risk management policies, practices, and procedures pertaining to its activities in SPP's markets.

179

SPP may select market participants for review on a random basis and/or based upon identified risk factors such as, but not limited to, the SPP markets in which the market participant is transacting, the magnitude of the market participant's transactions, or the volume of the market participant's open positions.

180

SPP further represents that successful completion of SPP's verification is required for a selected market participant's continued eligibility to participate in SPP's markets.

181

In addition to requiring a market participant to describe its risk management capabilities and procedures, SPP represents that the attestation requires a market participant to describe whether it is engaged in hedging, describe the employees who perform the risk management procedures, define the special training, skills, experience, and industry tenure of those employees, and provide any additional information in determining the risk management capabilities of the market participant.

182

Market participants also are required to notify SPP of material adverse changes in their financial conditions.

183

It appears from the foregoing that SPP's arrangements with respect to participant eligibility requirements are congruent with, and sufficiently accomplish, the regulatory objectives of Core Principle C in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

177

Id.

at 11.

178

Id.

at 11-12.

179

Id.

at 12.

180

Id.

181

Id.

182

Id.

183

Id.

4. DCO Core Principle D: Risk Management

DCO Core Principle D requires each DCO to demonstrate the ability to manage the risks associated with discharging the responsibilities of a DCO through the use of appropriate tools and procedures.

184

As amended by the Dodd-Frank Act, Core Principle D also requires a DCO to: (1) Measure and monitor its credit exposures to each clearing member daily; (2) through margin requirements and other risk control mechanisms, limit its exposure to potential losses from a clearing member default; (3) require sufficient margin from its clearing members to cover potential exposures in normal market conditions; and (4) use risk-based models and parameters in setting margin requirements that are reviewed on a regular basis.

185

184

7 U.S.C. 7a-1(c)(2)(D).

185

Id.

a. Risk Management Framework

SPP represents that the risk management provisions set forth in SPP's Tariff provide SPP with appropriate tools and procedures to manage the risk associated with operating its wholesale and related markets.

186

As part of the tools and procedures that RTOs use to manage the risks associated with their activities, FERC regulation 35.47(b) mandates that RTOs have billing periods and settlement periods of no more than seven days.

187

As discussed above, FERC found a shorter cycle necessary to promote market liquidity and a necessary change “to reduce default risk, the costs of which would be socialized across market participants and, in certain events, of market disruptions that could undermine overall market function.”

188

Recognizing the correlation between a reduction in the “settlement cycle” and a reduction in costs attributed to a default, FERC stated that shorter cycles reduce the amount of unpaid debt left outstanding, which, in turn, reduces “the size of any default and therefore reduces the likelihood of the default leading to a disruption in the market such as cascading defaults and dramatically reduced market liquidity.”

189

SPP represents that it has a Tariff in place that limits billing periods and settlement periods to no more than seven days.

190

186

See

Exemption Application Attachments at 15-27.

187

18 CFR 35.47(b).

188

FERC Original Order 741 at 65946.

189

Id.

190

Exemption Application Attachments at 17;

see

FERC Order 741 Implementation Chart at 3.

In addition, an RTO's participation standards can include the supervision of a market participant's risk management program.

191

As discussed in section V.C., FERC Order 741 states that an RTO could include periodic verification of market participant's capability to engage in risk management or hedging or to out-source that capability “to make sure each market participant has adequate risk management capabilities and adequate capital to engage in trading with minimal risk, and related costs, to the market as a whole.”

192

SPP represents that it has a verification program in place.

193

On the basis of the representations contained in the Exemption Application, it appears that these policies and procedures, are congruent with, and will sufficiently accomplish, the regulatory objectives of DCO Core Principle D with respect to SPP's risk management framework. The Commission seeks comment with respect to this preliminary conclusion.

191

See supra

note 127.

192

See

FERC Original Order 741 at 65946.

193

Exemption Application Attachments at 16;

see

FERC Order 741 Implementation Chart at 8-9.

b. Measurement and Monitoring of Credit Exposure

SPP represents that its risk management procedures measure, monitor, and mitigate its credit exposure to market participants.

194

In addition, SPP states that it calculates credit exposure daily.

195

SPP further states that it uses a highly customized system that collects data from multiple SPP systems to provide accurate and up-to-date credit exposures for each market participant.

196

It appears that, for the most part, given the unique characteristics of the wholesale electric markets, and particularly those of the TCR and equivalent markets, the practices specified in the Exemption Application appear congruent with, and to accomplish sufficiently, with respect to SPP, DCO Core Principle D's objective that a DCO measure its credit exposure to each of its clearing members. The Commission seeks comment with respect to this preliminary conclusion.

194

See

Exemption Application Attachments at 11, 18-20.

195

Id.

at 18. For TCR auctions, SPP represents that its system calculates credit exposure for each bid or offer in real-time and compares the market participant's credit limit available. Bids and offers are systematically rejected if they contribute to exceeding the market participant's available credit.

See id.

196

See id.

c. Unsecured Credit

SPP represents that a market participant is required to have credit that is sufficient to support its market activities or total potential exposure.

197

SPP further represents that this credit can either be in the form of (i) unsecured credit granted by SPP, and/or (ii) financial security

198

provided by the market participant to SPP.

199

FERC regulation 35.47(a) requires RTOs to have tariff provisions that “[l]imit the amount of unsecured credit extended by [an RTO] to no more than $50 million for each market participant.” As mentioned above,

200

in capping the use of unsecured credit at $50 million, FERC stated its belief that RTOs “could withstand a default of this magnitude by a single market participant,” thereby limiting an RTO's exposure to potential losses from defaults by its market participants. SPP represents that its Tariff limits the amount of unsecured credit extended to any market participant to no more than $25 million and therefore, complies with FERC regulation 35.47(a).

201

Moreover, FERC regulation 35.47(c) prohibits the use of unsecured credit in the FTR markets and equivalent markets because, according to FERC, risks arising out of the FTR markets are “difficult to quantify,” and eliminating the use of unsecured credit in these markets avoids the unforeseen and substantial costs for an RTO in the event of a default. SPP states that unsecured credit is unavailable for TCR activity and that its Tariff complies with FERC regulation 35.47(c).

202

SPP further states that a market participant is required to provide financial security to support all of its TCR activity.

197

See id.

SPP indicates that a market participant's total potential exposure is a calculated value applied to assure that the market participant engages in activities within its total credit limit as determined by SPP. The total potential exposure is based on the market participant's estimated

cumulative financial obligation under the SPP Tariff or otherwise to SPP, excluding TCR activity. SPP calculates a market participant's potential exposure to nonpayment separately for each category of service (except TCR activity) and then sums this information to obtain the amount of total potential exposure.

See id.

at 19.

198

SPP represents that it only accepts financial security that is in the form of cash deposits or irrevocable letters of credit, or if the market participant is a Federal Power Marketing Agency, a Federal Power Marketing Agency Letter executed by an officer of the agency that includes an attestation that the agency is lawfully allowed to participate in the SPP TCR market and that any debt the agency incurs from such participation is a debt of the United States, and that identifies the current appropriations for the agency from the United States Congress and verifies that such amount meets or exceeds the amount required to satisfy the credit requirements set forth in the SPP Credit Policy. SPP further represents that it requires financial security for any activity where a market participant's total potential exposure is greater than the unsecured credit granted to the market participant.

See id.

at 18-19.

199

A market participant's total credit limit is the amount of any unsecured credit allowance approved by SPP plus the amount of any financial security the market participant has provided to SPP.

Id.

200

See supra

note 116.

201

See

FERC Order 741 Implementation Chart at 2; Exemption Application Attachments at 19-20.

202

See

FERC Order 741 Implementation Chart at 3; Exemption Application Attachments at 18-19.

Since FERC regulations 35.47(a) and 35.47(c) appear to be designed to manage risk and limit an RTO's exposure to potential losses from a market participant, SPP's compliance with these requirements would appear to be congruent with, and to accomplish sufficiently, the regulatory objectives of Core Principle D, with respect to unsecured credit, in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

d. Limiting Exposure to Potential Losses Through Use of Risk Control Mechanisms and Grace Period To Cure

SPP represents that it requires a market participant to either pay SPP invoices to reduce its credit exposure and/or post additional financial security (collateral) whenever there is a total potential exposure violation, specifically (1) the participant's total potential exposure equals or exceeds that participant's unsecured credit and posted financial security (excluding any financial security provided for TCR activity), and/or (2) the credit required for a market participant's TCR activity exceeds the financial security provided by the market participant to support the activity.

203

Moreover, FERC regulation 35.47(e) limits the time period by which a market participant must cure a collateral call to no more than two days. In Original Order 741, FERC stated that a two day time period for curing collateral calls balances the need for granting market participants sufficient time to make funding arrangements for collateral calls with the need to minimize uncertainty as to a participant's ability to participate in the market as well as the risk and costs of a default by a participant. By requiring each RTO to include this two day cure period in its tariff provisions, FERC regulation 35.47(e) appears to both promote the active management of risks associated with the discharge of an RTO's responsibilities, while at the same time limiting the potential losses from defaults by market participants. SPP represents that it has implemented this requirement.

204

If a market participant fails to pay SPP invoices and/or post additional financial security within the requisite two day period, SPP represents that this failure to cure is considered a default and SPP has a wide array of remedies available, including remedies available at law or in equity

205

and assessing a variety of sanctions against the market participant.

206

Depending on the timing and number of events of defaults, SPP will suspend any unsecured credit allowances, and if an event of default is not cured within in the requisite two day period, SPP may terminate the market participant's rights under the SPP credit policy and may terminate service in accordance with the SPP Tariff and applicable law. If the event of default is that the market participant is in bankruptcy or has commenced bankruptcy proceedings, SPP will immediately suspend the market participant's unsecured credit and may terminate the market participant's rights under the SPP credit policy, and SPP may terminate service in accordance with the SPP Tariff and applicable law. The SPP Tariff also sets forth procedures to close out and liquidate TCRs held by a defaulting market participant.

207

203

See

Exemption Application Attachments at 20-21.

204

See

FERC Order 741 Implementation Chart at 5; Exemption Application Attachments at 21.

205

SPP states that such remedies include, but are not limited to, bringing suit or otherwise initiating monetary damages, injunctive relief, specific performance, and relief available under the Federal Power Act, except to the extent such remedy is limited under the SPP Credit Policy.

See

Exemption Application Attachments at 22.

206

See

Exemption Application Attachments at 21;

see

DCO Core Principle G discussion

infra.

207

See id.

On the basis of these representations, it appears that the requirements to post additional financial security and cure collateral calls in no more than two days help SPP manage risk and limit its exposure against potential losses from a market participant. These requirements appear to be congruent with, and to accomplish sufficiently, the regulatory objectives of DCO Core Principle D, with respect to limiting exposure to potential losses through the use of risk control mechanisms and the grace period to cure, in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

e. Calls for Additional Collateral Due to a Material Adverse Change

FERC regulation 35.47(g) requires RTOs to specify in their tariffs the conditions under which they will request additional collateral due to a material adverse change. However, as stated by FERC, this list of conditions is not meant to be exhaustive, and RTOs are permitted to use “their discretion to request additional collateral in response to unusual or unforeseen circumstances.”

208

SPP represents that

its Tariff complies with these requirements.

209

Since SPP does not appear to be limited in its ability to call for additional collateral in unusual or unforeseen circumstances, FERC regulation 35.47(g) appears to support some of DCO Core Principle D's objectives, namely that a DCO have appropriate tools and procedures to manage the risks associated with discharging its responsibilities, and that a DCO limit its exposure to potential losses from defaults by clearing members. FERC has noted that information regarding when an RTO will request additional collateral due to a material adverse change may help to “avoid any confusion, particularly during times of market duress, as to when such a clause may be invoked,”

210

while at the same time preventing a market participant from “exploit[ing] ambiguity as to when a market administrator may invoke a `material adverse change.' ”

211

As such, this policy appears to help avoid potentially harmful delays or disruptions that could subject SPP to unnecessary damage, and thus is congruent with, and appears to accomplish sufficiently, the regulatory objectives of Core Principle D, with respect to calls for additional collateral due to a material adverse change, in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

208

FERC Original Order 741 at 65957.

209

See

FERC Order 741 Implementation Chart at 7-8.

210

FERC Original Order 741 at 65958.

211

Id.

f. Margin Requirement and Use of Risk-Based Models and Parameters in Setting Margin

As discussed previously, SPP represents that it requires a market participant to maintain unsecured credit and/or post financial security (collectively, “margin”) that is sufficient to support its market activities or total potential exposure at all times.

212

As represented by SPP, these practices appear to be congruent with, and to accomplish sufficiently, the regulatory objectives of DCO Core Principle D, with respect to a margin requirement and the use of risk-based models and parameters in setting margin, in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

212

See

Exemption Application Attachments at 22-23.

g. Ability To Offset Market Obligations

FERC regulation 35.47(d) requires RTOs to either (1) establish a single counterparty to all market participant transactions, (2) require each market participant to grant a security interest in the receivables of its transactions to the relevant RTO, or (3) provide another method of supporting netting that provides a similar level of protection to the market that is approved by FERC. Otherwise, RTOs are prohibited from netting market participants' transactions and required to establish credit based on market participants' gross obligations. FERC regulation 35.47(d), which attempts to ensure that, in the event of a bankruptcy, RTOs are not prohibited from offsetting accounts receivable against accounts payable, is congruent with the regulatory objectives of Core Principle D. In effect, this requirement appears to attempt to clarify an RTO's legal status to take title to transactions in an effort to establish mutuality in the transactions as legal support for set-off in bankruptcy.

213

This clarification, in turn, would seem to limit an RTO's exposure to potential losses from defaults by market participants.

213

See supra

note 123.

SPP represents that it is a central counterparty and that its Tariff indicates that SPP is the counterparty to the Covered Transactions.

214

SPP has submitted a memorandum of outside counsel that states that SPP's counterparty arrangements will provide SPP with enforceable rights of set off against a market participant in the event of the market participant's bankruptcy.

215

214

Exemption Application Attachments at 23;

see

FERC Order 741 Implementation Chart at 4-5.

215

As part of the Exemption Application, SPP provided the Commission with a legal opinion that, provided the Commission with assurance that the netting arrangements contained in the approach selected by SPP to satisfy the obligations contained in FERC regulation 35.47(d) will, in fact, provide SPP with enforceable rights of setoff against any of its market participants under title 11 of the United States Code in the event of the bankruptcy of the market participant.

See

Memorandum regarding Enforceability of Netting Practices from Hunton and Williams to SPP dated December 2, 2013.

Compliance with FERC regulation 35.47(d) appears to be congruent with, and to accomplish sufficiently, Core Principle D's regulatory objectives, with respect to the ability to offset market obligations, in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

5. DCO Core Principle E: Settlement Procedures

Among the requirements set forth by Core Principle E are the requirements that a DCO (a) have the ability to complete settlements on a timely basis under varying circumstances, and (b) maintain an adequate record of the flow of funds associated with each transaction that the DCO clears.

216

7 U.S.C. 7a-1(c)(2)(E)(i) and (iv).

SPP represents that it has policies and procedures that contain detailed procedures regarding data and record-keeping, and that it has billing periods and settlement periods of no more than seven days each (for a total of 14 days).

217

Specifically, the SPP Tariff requires SPP to invoice market participants for market transactions on a weekly basis detailing all charges and payments.

218

Market participants are required to make payments equal to the net charge on the invoice by 5:00 p.m. on the third business day following the date of the invoice, while SPP makes payments to the market participants equal to the net credit on the invoice by 5:00 p.m. on the fifth business day following the date of the invoice.

219

In addition, SPP represents that it maintains records concerning the flow of funds involved in the settlements by market participants.

220

While this approach does not meet the standards applicable to registered DCOs,

221

it appears to be congruent with, and to accomplish sufficiently, the regulatory objectives of DCO Core Principle E in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment on this preliminary conclusion.

217

See

Exemption Application Attachments at 28-29.

218

Id.

at 28.

219

Id.

at 28-29.

220

Id.

at 29.

221

See

17 CFR 39.14(b) (requiring daily settlements).

6. DCO Core Principle F: Treatment of Funds

DCO Core Principle F requires a DCO to have standards and procedures designed to protect and ensure the safety of member and participant funds, to hold such funds in a manner that would minimize the risk of loss or delay in access by the DCO to the funds, and to invest such funds in instruments with minimal credit, market, and liquidity risks.

222

7 U.S.C. 7a-1(c)(2)(F).

SPP represents that it has Tariff provisions that accomplish the regulatory goals of DCO Core Principle F.

223

SPP maintains separate accounts

for the funds it receives or holds from market participants that are invoiced for market transactions.

224

In addition, SPP represents that the SPP Tariff requires SPP to deposit cash collateral received from a market participant/customer in a segregated, interest bearing account in SPP's name, with all of the interest accruing to the benefit of the market participant/customer.

225

As represented by SPP, these practices appear congruent with, and to accomplish sufficiently, the regulatory objectives of DCO Core Principle F in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

223

See

Exemption Application Attachments at 30.

224

Id.

As discussed above, SPP represents that pursuant to the SPP tariff, market participants pay amounts they owe by the third business day after being invoiced, and SPP pays amounts owed to market participants pertaining to market transactions by the fifth business day after the invoice is issued.

225

Id.

7. DCO Core Principle G: Default Rules and Procedures

DCO Core Principle G requires a DCO to have rules and procedures designed to allow for the efficient, fair, and safe management of events when members or participants become insolvent or otherwise default on their obligations to the DCO.

226

Core Principle G also requires a DCO to clearly state its default procedures, make publicly available its default rules, and ensure that it may take timely action to contain losses and liquidity pressures and to continue meeting each of its obligations.

227

226

7 U.S.C. 7a-1(c)(2)(G)(i).

227

7 U.S.C. 7a-1(c)(2)(G)(ii).

a. General Default Procedures

SPP represents that it has Tariff procedures that address events surrounding the insolvency or default of a market participant.

228

For example, SPP represents that its Tariff identifies events of default (

e.g.

, failure to post any financial security required under the SPP credit policy, failure to pay in full amounts payable, unless cured, events of insolvency, defaults under the credit policy, and failure to provide information under the credit policy in a timely manner), describes the cure period associated with an event of default, and describes the actions to be taken in the event of default and detail the remedies available to SPP—which may include, among other things, suspension of unsecured credit allowances, termination of services in accordance with the SPP Tariff, termination of market activity, and close out and liquidation of TCRs held by a defaulting market participant.

229

As detailed above, in the event that the remedies outlined in SPP's Tariff are insufficient to timely cure a default, SPP has the right to socialize losses from the default among other market participants by, for example, “short-paying” such other participants.

230

228

See

Exemption Application Attachments at 32-35.

229

Id.

at 32-33. SPP states that these remedies are without prejudice to other remedies. SPP also may exercise any rights or remedies it may have at law or in equity, including, but not limited to, bringing suit or otherwise initiating monetary damages, injunctive relief, specific performance, and relief available under the Federal Power Act, except to the extent such remedy is limited under the SPP Credit Policy.

Id.

at 33.

230

See supra

notes 148 and 149 and accompanying text.

b. Setoff

Generally speaking, it is a well-established tenet of clearing that a DCO acts as the buyer to every seller and as the seller to every buyer, thereby substituting the DCO's credit for bilateral counter-party risk. As such, when a DCO is involved, there is little question as to the identity of a counterparty to a given transaction. However, because an RTO can act as agent for its participants, there could be ambiguity as to the identity of a counterparty to a given transaction. As a result, in the event of a bankruptcy of a market participant and in the event of a lack of the mutuality of obligation required by the Bankruptcy Code,

231

an RTO may be liable to pay a bankrupt market participant for transactions in which that participant is owed funds, without the ability to offset amounts owed by that participant with respect to other transactions. Stated differently, although the defaulting market participant may owe money to the RTO, if the RTO also owes money to such participant, the RTO may be required to pay the defaulting participant the full amount owed without being able to offset the amounts owed by that participant to the RTO, which latter amounts may be relegated to claims in the bankruptcy proceedings. As more fully described in section V.D.4.g., the memorandum of counsel provided by SPP addresses this issue.

231

See

11 U.S.C. 553.

The foregoing arrangements appear congruent to, and to accomplish sufficiently, the regulatory objectives of DCO Core Principle G in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

8. DCO Core Principle H: Rule Enforcement

DCO Core Principle H requires a DCO to (1) maintain adequate arrangements and resources for the effective monitoring and enforcement of compliance with its rules and for resolution of disputes, (2) have the authority and ability to discipline, limit, suspend, or terminate a clearing member's activities for violations of those rules, and (3) report to the Commission regarding rule enforcement activities and sanctions imposed against members and participants.

232

7 U.S.C. 7a-1(c)(2)(H).

SPP represents that it maintains a Tariff or other procedures that accomplish the regulatory goals of DCO Core Principle H.

233

SPP maintains that its Bylaws, Membership Agreement and Tariff contain substantial rules governing member, customer, and market participant conduct, and provide SPP with the ability to discipline such conduct and report certain conduct to FERC.

234

SPP has,

e.g.

, the power to take a range of actions against participants that fail to pay, pay late, or fail to comply with SPP's credit policy.

235

In addition, SPP's Bylaws, Membership Agreement and Tariff establish dispute resolution procedures.

236

233

Exemption Application Attachments at 36-40.

234

Id.

at 36.

235

Id.

at 38-39.

236

Id.

at 36, 40.

Based on SPP's representations, it appears that these practices are congruent with, and sufficiently accomplish, the regulatory objectives of DCO Core Principle H in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

9. DCO Core Principle I: System Safeguards

DCO Core Principle I requires a DCO to demonstrate that: (1) It has established and will maintain a program of oversight and risk analysis to ensure that its automated systems function properly and have adequate capacity and security, and (2) it has established and will maintain emergency procedures and a plan for disaster recovery and will periodically test backup facilities to ensure daily processing, clearing and settlement of transactions.

237

Core Principle I also requires that a DCO establish and maintain emergency procedures, backup facilities, and a plan for disaster recovery that allows for the timely recovery and resumption of the DCO's

operations and the fulfillment of each of its obligations and responsibilities.

238

237

7 U.S.C. 7a-1(c)(2)(I)(i)-(ii).

238

7 U.S.C. 7a-1(c)(2)(I)(iii).

SPP represents that it has policies and procedures that accomplish the regulatory goals of DCO Core Principle I,

239

albeit in a manner that is somewhat different than the way in which a DCO complies with DCO Core Principle I. This is because SPP is also responsible for managing power reliably and, thus, requires additional operational safeguards to specifically address that function. For example, SPP is subject to reliability rules established by the North American Electric Reliability Corporation.

240

In order to comply with these rules, SPP has procedures in place to address emergency situations and maintains redundant communication and computer systems, and redundant primary and back-up control centers in separate secured locations.

241

SPP also has implemented on- and off-site data storage and back-up.

242

SPP has emergency preparedness, business continuity, and disaster recovery plans, which are reviewed and updated on a regular basis.

243

SPP also conducts periodic emergency drills and mock disaster scenarios to ensure the readiness of back-up facilities and personnel. Multiple SPP business units, including SPP's Internal Audit Department, work to review, test, and update SPP's business continuity plans.

244

In addition, SPP has a business continuity plan to provide for the calculation of market prices in the event of Day-Ahead Market or Real-Time Balancing Market system failures or isolation of portions of the SPP market from the rest of the market footprint.

245

239

See generally,

Exemption Application Attachments at 41-43.

240

See id.

at 41.

241

See id.

242

See id.

243

See id.

at 42.

244

See id.

245

See id.

Based on SPP's representations, it appears that these system safeguard practices are congruent with, and accomplish sufficiently, the regulatory objectives of DCO Core Principle I in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

10. DCO Core Principle J: Reporting

DCO Core Principle J requires a DCO to provide to the Commission all information that the Commission determines to be necessary to conduct oversight of the DCO.

246

SPP represents that it has adopted substantial data and information disclosure provisions, which enables SPP to provide information to the Commission, including information deemed confidential by market participants.

247

Moreover, pursuant to SPP's Tariff and FERC regulations, FERC has access to the information that it would need to oversee SPP.

248

With respect to the disclosure of confidential information received from market participants, SPP states that it has adopted procedures to allow for disclosure of such information to FERC and state regulatory agencies.

249

These procedures apply both to SPP and the SPP Market Monitor. SPP represents that its Tariff permits the disclosure of confidential information to the Commission.

250

In addition, when SPP receives a request that involves a market participant's confidential information, SPP is not required to provide notice to such market participant(s), where the Commission or FERC, or their respective staffs, are the party requesting the confidential information.

251

246

7 U.S.C. 7a-1(c)(2)(J).

247

See

Exemption Application Attachments at 44-46.

248

Id.

249

Id.

at 44.

250

See

Exemption Application at 22; Exemption Application Attachments at 44-45.

251

See

Exemption Application Attachments at 44-45.

Based on the foregoing, including SPP's representations, it appears that these practices are congruent with, and sufficiently accomplish, the regulatory objectives of Core Principle J in the context of Petitioners' activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

11. DCO Core Principle K: Recordkeeping

DCO Core Principle K requires a DCO to maintain records of all activities related to its business as a DCO in a form and manner acceptable to the Commission for a period of not less than five years.

252

7 U.S.C. 7a-1(c)(2)(K).

SPP represents that its practices satisfy the regulatory goals of DCO Core Principle K because it has adequate recordkeeping requirements or systems.

253

SPP represents that it complies with FERC's comprehensive regulations governing public utility recordkeeping, many of which require retention of data for at least five years.

254

In addition, under SPP's Standards of Conduct, SPP is required to maintain records showing the transactions under the SPP Tariff for a period of 5 years unless otherwise provided in the Tariff or by law or regulation.

255

SPP retains such records in either electronic or paper format. SPP further represents that its Market Monitoring Plan requires all market data and information held by SPP or the SPP Market Monitor to be retained for a minimum period of three years, and requires market participants to retain such data in their possession for a minimum period of three years.

256

253

Exemption Application Attachments at 48.

254

Exemption Application Attachments at 47;

see

18 CFR part 125.

255

Exemption Application Attachments at 47.

256

Id.

Based on these regulations and SPP's representations, it appears that these practices are congruent with, and sufficiently accomplish, the regulatory objectives of DCO Core Principle K in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

12. DCO Core Principle L: Public Information

DCO Core Principle L requires a DCO to make information concerning the rules and operating procedures governing its clearing and settlement systems (including default procedures) available to market participants.

257

Core Principle L also requires a DCO to provide market participants with sufficient information to enable them to identify and evaluate accurately the risks and costs associated with using the DCO's services, and to disclose publicly and to the Commission information concerning: (1) The terms and conditions of each contract, agreement, and transaction cleared and settled by the DCO; (2) the fees that the DCO charges its members and participants; (3) the DCO's margin-setting methodology, and the size and composition of its financial resources package; (4) daily settlement prices, volume, and open interest for each contract the DCO settles or clears; and (5) any other matter relevant to participation in the DCO's settlement and clearing activities.

258

257

7 U.S.C. 7a-1(c)(2)(L)(i)-(ii).

258

7 U.S.C. 7a-1(c)(2)(L)(iii).

SPP represents that it makes its Tariff and related governing documents, such as the SPP Bylaws, Membership Agreement, and the IM Protocols, publicly available on its Web site, which, in turn, allows market participants (and the public) to access information about the rules and operations of the SPP markets, including among other things, participant and product eligibility requirements, credit requirements for

market participants, default procedures and default allocations, settlement procedures, SPP fees, and extensive data regarding market and transmission system operations, policies, and procedures.

259

See

Exemption Application Attachments at 49-50.

Based on SPP's representations, it appears that these practices are congruent with, and sufficiently accomplish, the regulatory objectives of DCO Core Principle L in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

13. DCO Core Principle M: Information Sharing

DCO Core Principle M requires a DCO to enter into and abide by the terms of all appropriate and applicable domestic and international information-sharing agreements, and use relevant information obtained from the agreements in carrying out the DCO's risk management program.

260

7 U.S.C. 7a-1(c)(2)(M).

SPP represents that it has policies and procedures that allow it to share information with, and receive information from, other entities as necessary to carry out its risk management functions.

261

SPP represents that its Tariff, Bylaws, Membership Agreement, and Standards of Conduct set forth rules for SPP's information sharing with SPP members, market participants, regulatory agencies, and other stakeholders.

262

SPP further represents that it has executed “Joint Operating Agreements,” with interconnected electric transmission providers, such as (among others) the Midcontinent Independent System Operator, to provide for the sharing of certain transmission system planning and operational information between SPP and the counterparty.

263

Moreover, SPP represents that its Tariff contains procedures to allow for disclosure to the Commission, FERC and state regulatory agencies of confidential information it receives from a market participant.

264

SPP states that notice of such request is not provided to the market participant when the Commission, FERC or their respective staffs are the party requesting the confidential information.

265

261

See generally,

Exemption Application Attachments at 52-55;

see also

DCO Core Principle J discussion

supra.

262

See id.

at 52.

263

See id.

at 53.

264

See

Exemption Application Attachments at 54.

265

Id.

Based on the foregoing and SPP's representations, it appears that these practices are congruent with, and sufficiently accomplish, the regulatory objectives of Core Principle M in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

14. DCO Core Principle N: Antitrust

DCO Core Principle N requires a DCO to avoid, unless necessary or appropriate to achieve the purposes of the CEA, adopting any rule or taking any action that results in any unreasonable restraint of trade, or imposing any material anticompetitive burden.

266

7 U.S.C. 7a-1(c)(2)(N).

As discussed above, the formation of SPP and other RTOs and ISOs was encouraged by FERC (pursuant to FERC Orders 888 and 2000) in order to foster greater competition in the electric energy generation sectors by allowing open access to transmission lines.

267

In addition, SPP represents that its rules and actions are subject to continued oversight by FERC and the SPP Market Monitor.

268

Such oversight could detect activities such as undue concentrations or market power, discriminatory treatment of market participants or other anticompetitive behavior.

269

267

See

FERC Order 888; FERC Order 2000.

268

See

Exemption Application Attachments at 56.

269

See id.

Based on SPP's representations, it appears that SPP's existence and practices are congruent with, and sufficiently accomplish, the regulatory objectives of Core Principle N. The Commission seeks comment with respect to this preliminary conclusion.

15. DCO Core Principle O: Governance and Fitness Standards

DCO Core Principle O requires a DCO to establish governance arrangements that are transparent to fulfill public interest requirements and to permit the consideration of the views of owners and participants.

270

A DCO must also establish and enforce appropriate fitness standards for directors, members of any disciplinary committee, members of the DCO, any other individual or entity with direct access to the settlement or clearing activities of the DCO, and any party affiliated with any of the foregoing individuals or entities.

271

270

7 U.S.C. 7a-1(c)(2)(O)(i).

271

7 U.S.C. 7a-1(c)(2)(O)(ii)

SPP represents that its Tariff, governing documents, and applicable state law set forth specific governance standards that are consistent with the regulatory goals which address, for example, director independence and fitness requirements.

272

In addition, SPP asserts that FERC Orders 719 and 2000 set out certain minimum governance structures for RTOs. SPP states that Order 719 requires sets forth minimum standards for RTO governance regarding responsiveness to stakeholders. Specifically, Order 719 directed RTOs to adopt means for direct access to their boards of directors for customers and stakeholders and established obligations for RTOs to increase responsiveness to customers and stakeholders using four responsiveness criteria: (1) Inclusiveness; (2) fairness in balancing diverse interests; (3) representation of minority positions; and (4) ongoing responsiveness.

273

SPP asserts that FERC Order 2000 likewise identified minimum characteristics that RTOs must exhibit, including, independence from all market participants.

274

272

See

Exemption Application Attachments at 57-61.

273

See

FERC Order 719. SPP represents that FERC has determined that SPP has met the governance criteria for stakeholder responsiveness set forth in FERC Order 719.

See

Exemption Application Attachments at 58.

274

See

Exemption Application Attachments at 57 (citing to FERC Order 2000). SPP represents that all SPP Officers and employees are required to execute a statement certifying they have read the SPP Standards of Conduct (which outline the independence requirements for all SPP employees) upon employment and annually thereafter, and to complete an annual review of the Standards of Conduct and certification thereof. The Standards of Conduct govern and limit employee conduct regarding: (1) Involvement in marketing of electric energy; (2) handling and disclosure of confidential information and transmission system information; (3) access to facilities; (4) implementation of the SPP Tariff; (5) recordkeeping; (6) investments; (7) relationships with other parties; (8) reporting of violations of the Standards of Conduct; and (9) conflicts of interest.

Id.

at 61.

Based on SPP's representations, it appears that SPP's governance structure is congruent with, and sufficiently accomplishes, the regulatory objectives of DCO Core Principle O in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

16. DCO Core Principle P: Conflicts of Interest

Pursuant to DCO Core Principle P, each DCO must establish and enforce rules to minimize conflicts of interest in the decision-making process of the DCO.

275

In addition, each DCO must establish a process for resolving conflicts of interest.

276

275

7 U.S.C. 7a-1(c)(2)(P)(i).

276

7 U.S.C. 7a-1(c)(2)(P)(ii).

SPP represents that it has adopted stringent conflict of interest requirements as well as a process for resolving such conflicts in its Standards of Conduct for members of its board of

directors and its employees (including officers).

277

The Standards of Conduct for board members and employees require such individuals to, among other things, avoid activities that are contrary to the interests of SPP.

278

SPP further represents that members of the SPP Board of Directors are also subject to conflict of interest and independence standards set forth in the SPP Bylaws.

279

277

See

Exemption Application Attachments at 62-64;

see, e.g.,

sections 9.3-9.5 of Attachment to the October 2014 Supplemental Letter.

278

See

Exemption Application Attachments at 62-64.

279

See id.

at 62; October 2014 Supplemental Letter at 4.

In addition to the Standards of Conduct, SPP asserts that the SPP Market Monitor and all of its employees must comply with additional independence and ethics standards set forth in the SPP Tariff, including prohibiting: (a) Material affiliation with any market participant or any affiliate of a market participant; (b) serving as an officer, employee, or partner of a market participant; (c) material financial interest in any market participant or any affiliate of a market participant (allowing for such potential exceptions as mutual funds and non-directed investments); (d) engaging in any market transactions other than the performance of their duties under the Tariff; (e) receiving compensation, other than by SPP, for any expert witness testimony or other commercial services to SPP or to any other party in connection with any legal or regulatory proceeding or commercial transaction relating to SPP; and (f) acceptance of anything of value from a market participant in excess of a

de minimis

amount.

280

See

Exemption Application Attachments at 63-64.

Based upon SPP's representations, it appears that the conflict of interest policies SPP has adopted and that the requirements SPP is subject to are congruent with, and sufficiently accomplish, the regulatory objectives of DCO Core Principle P in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

17. DCO Core Principle Q: Composition of Governing Boards

DCO Core Principle Q provides that each DCO shall ensure that the composition of the governing board or committee of the derivatives clearing organization includes market participants.

281

7 U.S.C. 7a-1(c)(2)(Q).

FERC regulations require that an RTO “must have a decision making process that is independent of control by any market participant or class of participants.”

282

However, FERC also requires that each RTO “adopt business practices and procedures that achieve Commission-approved independent system operator and regional transmission organization board of directors' responsiveness to customers and other stakeholders and satisfy [specified] criteria.”

283

SPP represents that its Bylaws require members of its board of directors to be independent of any member, and that board members may not be a director, officer, or employee of, or have a direct business relationship or affiliation with or a financial interest in a member or customer of services provided by SPP.

284

SPP further represents that the composition of its board of directors is influenced by SPP's members through the nomination and election process.

285

In addition, SPP asserts that its members and market participants have ample opportunity to express their viewpoints to the board of directors through member committees, market participant committees, taskforces, and working groups.

286

282

See

18 CFR 35.34(j)(1)(ii).

283

See

18 CFR 35.28(g)(6).

284

See

Exemption Application Attachments at 65. SPP also notes that except for the President of SPP, no other board member may be an employee of SPP.

Id.

285

See id.

SPP states that its Corporate Governance Committee, which includes member representatives, nominates candidates for board positions.

286

See id.

Based on SPP's representations, and the regulations and supervision of FERC, it appears that these practices are congruent with, and sufficiently accomplish, the regulatory objectives of DCO Core Principle Q in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

18. DCO Core Principle R: Legal Risk

DCO Core Principle R requires a DCO to have a well-founded, transparent, and enforceable legal framework for each aspect of its activities.

287

7 U.S.C. 7a-1(c)(2)(R).

SPP asserts that it operates under a transparent and comprehensive legal framework that is grounded in the Federal Power Act and administered by FERC.

288

Indeed, SPP asserts that it is subject to FERC orders rules and regulations and that SPP operates pursuant to a Tariff that has been reviewed and approved by FERC.

289

SPP further asserts that its Tariff states that SPP is the counterparty to the Covered Transactions.

290

Moreover, with respect to eligibility for setoff in bankruptcy, SPP has submitted a separate legal memorandum of outside counsel that SPP's counterparty arrangements will provide SPP with enforceable rights of set off against a market participant in the event of the market participant's bankruptcy.

291

288

See

Exemption Application Attachments at 68.

289

See id.

290

See id.

291

See id.;

see

discussion

supra

section V.D.4.g.

Based on SPP's representations, it appears that this framework is congruent with, and sufficiently accomplishes, the regulatory objectives of Core Principle R in the context of SPP's activities with respect to the Covered Transactions. The Commission seeks comment with respect to this preliminary conclusion.

SEF Core Principle Analysis

1. SEF Core Principle 1: Compliance With Core Principles

SEF Core Principle 1 requires a SEF to comply with the Core Principles described in part 37 of the Commission's Regulations.

292

SPP represents that, although that there are differences between it and registered SEFs and it is principally regulated by FERC, SPP's practices are consistent with the SEF core principles.

293

In addition, SPP represents that, though its methods are different than those employed by a registered SEF, its practices and the comprehensive regulatory regime of FERC achieve the goals of, and are consistent with, the policies of the Act.

294

292

7 U.S.C. 7b-3(f)(1).

293

See

Exemption Application Attachments at 70-71.

294

Id.

As demonstrated by the following analysis, based upon SPP's representations and the Core Principle discussions below, and in the context of SPP's activities with respect to the Covered Transactions within the scope of this Proposed Exemption, the Commission has made a preliminary determination that in the context of SPP's activities with respect to the Covered Transactions within the scope of this Proposed Exemption, SPP's practices appear congruent with, and to accomplish sufficiently, the regulatory objectives of each SEF Core Principle. The Commission requests comment with respect to this preliminary determination.

2. SEF Core Principle 2: Compliance With Rules

SEF Core Principle 2 requires a SEF to establish and enforce compliance with any rule of the SEF.

295

A SEF is also required to (1) establish and enforce rules with respect to trading, trade processing, and participation that will deter market abuses and (2) have the capacity to detect, investigate and enforce those rules, including a means to (i) provide market participants with impartial access to the market, and (ii) capture information that may be used in establishing whether rule violations have occurred.

296

295

7 U.S.C. 7b-3(f)(2).

296

SEF Core Principle 2 also requires a SEF to establish rules governing the operation of the facility, including trading procedures, and provide rules that, when a swap is subject to the mandatory clearing requirement, hold swap dealers and major swap participants responsible for compliance with the mandatory trading requirement under section 2(h)(8) of the Act.

According to SPP, each of the Covered Transactions takes place on markets that are monitored by both SPP and the SPP Market Monitor (its independent market monitor responsible to FERC). In addition, SPP states that an RTO must demonstrate to FERC that it performs certain self-regulatory and/or market monitoring functions.

297

According to SPP, it is required to satisfy four minimum characteristics as a FERC-approved RTO: (1) Independence from any market participant; (2) a scope and regional configuration which enables the RTO or ISO to maintain reliability and effectively perform its required functions; (3) operational authority for its activities, including being the security coordinator for the facilities that it controls; and (4) short-term reliability, as well as other requirements FERC imposes on RTOs. Exemption Application at 18.

SPP asserts that FERC Order Nos. 719 and 2000 require RTOs to employ a Market Monitor to monitor the conduct of both the RTO and its market participants with regard to all RTO markets and services, stating that the SPP Market Monitor is an independent department within SPP that reports directly to the SPP Board of Directors, except that the President of SPP (a member of the Board of Directors) is excluded from participating in oversight of the Market Monitor. Moreover, according to SPP, it is obligated to ensure that the Market Monitor is appropriately staffed and provided with sufficient resources and access to data to carry out its duties under the Tariff.

298

Exemption Application Attachments at 73-74.

SPP represents that it has transparent rules for its market, including rules to deter abuses, market monitoring and mitigation plans aimed at discovering and addressing potential and actual abuses, and has enforcement mechanisms that allow SPP and the SPP Market Monitor to, among other things, monitor its markets, investigate suspected Tariff violations, take actions against violators and refer potential violations to FERC.

299

See

Exemption Application at 17;

see also

Exemption Application Attachments at 72-76.

Based on the foregoing, it appears that SPP's practices are consistent with, and sufficiently accomplish, the regulatory goals of SEF Core Principle 2 in the context of SPP's activities with respect to the Covered Transactions. The Commission requests comment with respect to this preliminary determination.

3. SEF Core Principle 3: Swaps Not Readily Susceptible to Manipulation

SEF Core Principle 3 requires a SEF submitting a contract to the Commission for certification or approval to demonstrate that the swap is not readily susceptible to manipulation.

300

SPP represents that it has detailed rules in its Tariff and IM Protocols to deter, detect, and prevent market manipulation in the SPP markets, and a staffed and resourced Market Monitor to implement the rules.

301

SPP also makes specific representations regarding its cash-settled energy transactions, transmission congestion rights and capacity and reserve transactions to demonstrate that they are consistent with the Commission's focus in the RTO-ISO Order.

302

SPP also indicated that the Covered Transactions for which SPP is seeking an exemption under Section 4(c) of the CEA include the three categories of transactions mentioned above, as well as any product or any modifications that are offered in the future pursuant to the FERC-approved Tariff that do not alter the characteristics of the transactions in a way that would cause them to fall outside of the definitions in the RTO-ISO Order.

303

300

7 U.S.C. 7b-3(f)(3).

301

See

Exemption Application Attachments at 77-79.

302

See

Exemption Application Attachments at 79-81.

303

See

Exemption Application at 11.

a. Cash-Settled Energy Transactions

SPP defines Energy Transactions as transactions in the SPP Day-Ahead-Market or Real-Time Balancing Market for the purchase or sale of a specified quantity of electric energy at a specified location (including virtual bids and offers) where among other conditions, the aggregate cleared volume of both physical and cash-settled energy transactions for any period of time is limited by the physical capability of the electric energy transmission system operated by SPP for that period of time.

304

SPP further indicates that the purpose of the virtual transactions in the Day-Ahead-Market is to promote convergence between the Day-Ahead-Market and Real-Time Balancing Market prices, which reduces price volatility normally found in electric markets.

305

304

See

Exemption Application at 13-14. SPP represents that its definition is similar to the definition for energy transactions used by the Commission in the RTO-ISO Order (

see

RTO-ISO Order at 19913, Order section VI.5.b(1), (2) and (3), which, according to SPP, contain the same provisions as SPP's definition).

305

See

Exemption Application Attachments at 79.

SPP indicates that its representations to the Commission are similar to that of other RTOs and ISOs to which the RTO-ISO Order was issued with respect to SEF Core Principle 3.

306

The Commission understands that the SPP Market Monitor operated by SPP has been organized in such a way that both the Real-Time Balancing and Day-Ahead markets are monitored to identify suspicious trading activity and that the SPP Market Monitor notifies FERC of suspicious activity, including transactions that involve repeated losses.

307

Furthermore, SPP represents that they are obligated to ensure that the SPP Market Monitor is appropriately staffed and provided with sufficient resources and access to data to carry out its duties under its Tariff.

308

306

Exemption Application Attachments at 80.

307

Id.

308

Id.

at 78, 83.

Based on SPP's representations regarding the surveillance carried out by its SPP Market Monitor and the method by which the Day-Ahead and Real-Time Balancing auctions are conducted, it appears that SPP's policies and procedures to mitigate the susceptibility of Energy Transactions to manipulation are congruent with, and sufficiently accomplish, the regulatory objectives of SEF Core Principle 3 in the context of SPP's activities with respect to the Energy Transactions. The Commission seeks comment with respect to this preliminary conclusion.

b. Transmission Congestion Rights

SPP represents that a Transmission Congestion Right (“TCR”) is a transaction that entitles one party to receive, and obligates another party to pay, an amount based solely on the difference the price of electric energy, established on an electric energy market administered by SPP, at a specified source and a specified sink.

309

Based

upon SPP's representations, the Commission understands TCRs to be cash-settled contracts that entitle the holder to a payment equal to the difference in the price of electric energy between the specified source and the specified sink. The difference in price between the two them represents the settlement price. The price at each node (source or sink) is established through auctions cond

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