NOTICE DATE:  July 1, 2013

NOTICE TYPE:  M-A070113-01 Legal

SHORT DESCRIPTION:  Notice of CFTC Exemption Order and forthcoming NPRR concerning “Appropriate Person” Standard


LONG DESCRIPTION:  On March 28, 2013, the Commodity Futures Trading Commission (CFTC) issued a final order granting the request of ERCOT and other Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) for an exemption of certain transactions from all but the anti-manipulation and anti-fraud provisions of the Commodity Exchange Act (CEA) and the CFTC’s implementing rules. 

The order provides that the exemption is dependent on the satisfaction of the following conditions:

1)    A demonstration by the ISO that it has fully complied with the risk and credit practices mandated by Federal Energy Regulatory Commission (FERC) regulation 35.47 (18 C.F.R. § 35.47), or in the case of ERCOT, that it has implemented standards that are the same (or substantially the same) as those set forth in that regulation, and that the Public Utility Commission of Texas (PUCT) has allowed all necessary Protocol revisions to take effect;


2)    The CFTC’s acceptance of a memorandum from the ISO/RTO’s outside counsel providing assurance that the ISO/RTO’s netting arrangements ensure sufficient rights to set-off in the event of a market participant’s bankruptcy;


3)    The continued effectiveness of acceptable information-sharing between the FERC and the CFTC, or in the case of ERCOT, “the [CFTC’s] ability to request, and obtain, on an as-needed basis from ERCOT, concurrently with the provision of written notice to PUCT and in connection with an inquiry consistent with the CEA and [CFTC] regulations, positional and transactional data within ERCOT's possession for products in ERCOT’s markets that are related to markets that are subject to the CFTC’s jurisdiction, including any pertinent information concerning such data, and ERCOT’s compliance with such requests by sharing the requested information.”


4)    The adoption of amendments to tariffs or Protocols to ensure the confidentiality of any CFTC request for information presented to the ISO/RTO pursuant to the agency’s investigative authority.


On March 29, 2013, the CFTC’s Division of Clearing and Risk, Division of Swap Dealer and Intermediary Oversight and Division of Market Oversight, acting pursuant to delegated authority, issued a “no-action letter” that allowed the ISOs until April 30, 2013, to obtain approval of the memorandum required under the second of the above conditions and allowed the ISOs until September 30, 2013, to adopt tariff or Protocol amendments under the fourth requirement.  

Each of the above four conditions has been met with regard to transactions occurring in the ERCOT market.  Over the last two years, ERCOT has adopted a number of Nodal Protocol Revision Requests (NPRRs) to effectuate risk and credit practices that meet, or substantially comply with, the requirements of FERC regulation 35.47, including:

·         NPRR391, Shortening RTM Settlement and Payment Timeline and Eliminate ACH as a Mode of Payment;

·         NPRR400, Eliminate Unsecured Credit for CRR Auctions and for Future Credit Exposure and Eliminate Netting of FCE with CCE;

·         NPRR438, Additional Minimum Counter-Party Qualification Requirements, Including Risk Management Capability Requirements; and

·         NPRR458, Establishment of ERCOT’s Central Counterparty Role.

Further, in March 2013, ERCOT adopted NPRR518, Removal of Notification Requirement for Disclosures of Protected Information Required by CFTC, which exempted ERCOT from providing notice to an affected Market Participant before disclosing pertinent information to the CFTC as part of an official investigation.  This NPRR met the fourth condition of the exemption order and also facilitates ERCOT’s compliance with the third condition in the order.

On April 26, 2013, the CFTC’s Division of Clearing and Risk formally accepted the memorandum of ERCOT’s outside counsel regarding ERCOT’s right of set-off in bankruptcy, thus satisfying the second of the above requirements. 

Although ERCOT has met each of the conditions for the exemption, the exemption does not necessarily apply to all entities currently transacting in the ERCOT market.  The CEA provides that any CFTC-ordered exemption applies only to transactions occurring between “appropriate persons,” which term is defined to include only certain kinds of financial institutions.  See 7 U.S.C. § 6(c)(3).  However, the CEA also gives the CFTC limited authority to determine that other entities not specifically named in the act may be considered “appropriate persons.”  See 7 U.S.C. § 6(c)(3)(K).  The CFTC exercised that authority in the exemption order, expanding the list of “appropriate persons” to include all entities that: (1) are “eligible contract participants,” as that term is defined in the CEA and CFTC regulations; or (2) 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.”

Because the CFTC has now clarified the meaning of “appropriate persons,” the ERCOT Protocols must be revised by September 30, 2013, to comport with this definition in order to ensure that all ERCOT market transactions fall within the scope of the exemption order.  Transactions involving any entity that does not meet the “appropriate persons” standard could subject ERCOT to regulation under the CEA. 

As such, ERCOT will submit an NPRR to require that all Counter-Parties transacting in ERCOT meet the “appropriate persons” standard established in the exemption order.  The NPRR will also require that each Counter-Party annually certify that it meets the “appropriate person” standard.  ERCOT will seek urgent status for this NPRR with the intent to obtain final approval at the September 17, 2013 ERCOT Board of Directors meeting in order to accommodate the expiration of the CFTC’s enforcement grace period on September 30, 2013, after which date all transactions not involving “appropriate persons” will be subject to the CFTC’s enforcement authority.

ADDITIONAL INFORMATION:  The following documents are posted to the ERCOT website at

·         The CFTC’s final exemption order of March 28, 2013;

·         The CFTC’s no-action letter of March 29, 2013; and

·         The CFTC’s letter of April 26, 2013, accepting ERCOT’s memorandum of assurance regarding rights of set-off.

CONTACT:  If you have any questions, please contact Chad V. Seely, Assistant General Counsel, at (512) 225-7035, or [log in to unmask]. You may also call the general ERCOT Client Services phone number at (512) 248-3900 or contact ERCOT Client Services via email at [log in to unmask].

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