WSPP Dodd-Frank Presentation

Dodd-Frank Swap Regulations 

and the WSPP Agreement 

WSPP Contract Subcommittee Meeting 

Arnold Podgorsky and Patrick Morand 

September 11, 2012 

www.wrightlaw.com

Overview of the Swap Regulations 

• CFTC issued several rules interpreting how it will 

implement Dodd-Frank swap regulation: 

– Swap Definition Final Rule 

– Commodity Options Final and Interim Final Rules 

– End-User Exception Final Rule 

• The following is our summary of what those 

rules provide 

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• Dodd-Frank says if your transaction is a swap 

transaction, then: 

– it must be executed on a designated contract market 

(“DCM”) or a swap execution facility (“SEF”) 

– it must be cleared through a derivatives clearing 

organization (“DCO”) 

• Note: for simplicity, we’ll refer to DCMs, SEFs, and DCOs 

collectively as “exchanges” 

– and it must be reported to a swap data repository or 

to the CTFC itself 

• Unless an exclusion, exemption, or exception 

applies… 



(cont.) 

Best 

OK 

Eh 

No 

Bueno 

Forward Contract 

Exclusion 

Trade Option 

Exemption 

End-User 

Exception 

No applicable 

exclusion, exemption, 

or exception 

•No regulatory requirements 

(CFTC retains its anti-manipulation jurisdiction 

in all cases) 

•Recordkeeping requirements apply (less 

stringent for non-SD & MSP) 

•Possible reporting requirements depending 

on whether either counterparty has any nontrade 

option activity during the year 

•No need to execute and clear the transaction 

on an exchange, but… 

•Reporting requirements apply to one of the 

counterparties 

•Full swap regulations apply: 

•execute and clear on an exchange 

•reporting requirements apply 

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(cont.) 

• Forward Contract Exclusion 

– An exclusion from the definition of swap for: 

• any sale of a nonfinancial commodity 

• for deferred shipment or delivery 

• that is intended to be physically settled 

– Nonfinancial commodities include capacity and 

energy products, as well as RECs and emissions 



(cont.) 

• Forward Contract with Embedded Option 

1. may be used to adjust the forward contract price; 

may not undermine the overall nature of the contract 

as a forward contract 

2. does not target the delivery term, so that the 

predominant feature of the contract is actual 

delivery; and 

3. cannot be severed and marketed separately from 

the overall forward contract in which it is embedded


(cont.) 

• Forward Contract with Embedded Volumetric Optionality 

1. does not undermine the overall nature of the contract as a 

forward contract 

2. the predominant feature of the contract is actual delivery 

3. cannot be severed and marketed separately from the overall 

contract in which it is embedded 

4. the seller intends to deliver if the optionality is exercised 

5. the buyer intends to take delivery if it exercises the embedded 

volumetric optionality 

6. both parties are commercial parties 

7. the exercise or non-exercise of the embedded volumetric 

optionality is based primarily on physical factors, or regulatory 

requirements, that are outside the control of the parties and are 

influencing demand for, or supply of, the nonfinancial 

commodity.


(cont.) 

• Trade Option Exemption 

– CFTC says all commodity options are swaps, but 

some (trade options) are exempt where: 

1. the seller is either an eligible contract participant (generally 

a financial house) or a producer, processor, commercial 

user, etc. of the commodity and is entering into the 

transaction solely for purposes related to its business 

2. the buyer of the commodity option is producer, processor, 

commercial user, etc. of the commodity and is entering into 

the transaction solely for purposes related to its business 

3. both parties intend that the commodity option be physically 

settled, so that, if exercised, the option would result in 

delivery


(cont.) 

• End-User Exception 

– CFTC says the clearing requirement for swaps will 

not apply where one of the counterparties to the 

swap: 

1. is not a financial entity 

2. is using the swap to hedge or mitigate 

commercial risk 

3. notifies CFTC how it generally meets its financial 

obligations associated with entering into the noncleared 

swaps

WSPP Agreement Transaction As 


• The WSPP Agreement provides generally for 

forward contract transactions 

• The WSPP Agreement provides for transactions: 

– in nonfinancial commodities (energy, capacity, and 

RECs) 

– that are intended to be physically settled



• CFTC says “book-outs” are within the forward 

contract exclusion where: 

– where two counterparties have multiple, offsetting 

positions with each other, and rather than requiring 

the effectuation of redundant deliveries and the 

assumption of risks attendant thereto, the two 

counterparties may, but are not obligated to, 

terminate their contracts and forego the deliveries and 

instead negotiate payment-of-differences pursuant to 

a separate cancellation agreement referred to as a 

book-out 




• The WSPP Agreement provides two definitions 

of “Bookout” as follows: 

– a transaction where prior to the time performance is 

to commence under a Confirmation, the Parties enter 

into a second (substitute) transaction for the purpose 

of fulfilling their respective obligations under that 

Confirmation by offset rather than physical delivery 

– a transaction where after non-performance under a 

Confirmation, the Parties enter into a second 

(substitute) transaction for the purpose of finally 

settling losses incurred by the Performing Party due 

to non-performance of such Confirmation. 




• The first WSPP definition seems to conform to the CFTC 

standard, although it does not appear in any of the 

substantive provisions of the WSPP Agreement 

– Discussion Point: Should this definition be retained? 

Should it be referenced in other substantive 

provisions? 

• The second definition seems to be describing something 

very different from the CFTC standard 

– Discussion Point: Should this definition be retained? 

Should it be called something else? 




• CFTC says “netting” is within the forward 

contract exclusion: 

– this refers to physical netting between two 

counterparties at a common delivery point 

• The WSPP Agreement refers to “Netting” in the 

context of netting of payments 

– Discussion Point: Should the WSPP Agreement 

expressly provide for physical netting? 




• CFTC also addresses contract provisions for 

force majeure, termination for default, and 

liquidated damages 

• The corresponding WSPP Agreement provisions 

seem consistent with these standards 

• Discussion Point: does anyone see otherwise? 


WSPP Agreement Transaction As Forward 

Contract With Embedded Option 

• The WSPP Agreement provides that the price 

for a transaction may be a “floating price” based 

on an index, etc. 

• This provision seems consistent with the forward 

contract with embedded option standard 

• Discussion Point: does anyone see otherwise? 



Contract With Embedded Volumetric Optionality 

• Assuming the first six elements are satisfied, how do 

transactions under the WSPP Service Schedules satisfy 

the seventh element? 

7. the exercise or non-exercise of the embedded volumetric 

optionality is based primarily on physical factors, or regulatory 

requirements, that are outside the control of the parties and are 

influencing demand for, or supply of, the nonfinancial 

commodity. 




• Service Schedule A 

– energy is sold only to the extent seller determines to 

deliver or buyer agrees to take delivery 

– the factors influencing these decisions could be 

physical or regulatory, but they also could be purely 

economic 

– Discussion Point: is this optionality consistent with the 

forward contract exclusion? 




• Service Schedule B 

– the factors for curtailing the delivery amount mostly 

seem consistent with the forward contract exclusion 

(e.g., physical = output is reduced, emergency, etc. 

and regulatory = need to meet public utility 

obligations) 

– Discussion Point: but do the recall provisions create 

an optionality that is inconsistent with the forward 

contract exclusion? 




• Service Schedule C 

– this seems the most straightforward with no 

optionality 

– Discussion Point: but does the demand right create 

an optionality that is inconsistent with the forward 

contract exclusion? 




• RECs 

– Resource Contingent RECs and Resource Contingent 

Bundled RECs seem to satisfy all seven elements 

• Discussion Point: but does permitting the parties to agree to 

other circumstances for non-delivery make the optionality 

problematic? 

– Discussion Point: do Facility As-Run RECs and 

Facility As-Run Bundled RECs present the same 

issues of element 7 as the other Service Schedules? 


WSPP Agreement Option Transactions 

• The definition of Physically-Settled Options 

under the WSPP Agreement seem to satisfy the 

trade option exemption 

• Discussion Point: do any adjustments need to be 

made to the language of Sections 16.1 or 36? 


WSPP Agreement and the End-User 

Exception 

• Discussion Point: should any language be 

added to the WSPP Agreement (confirmation?) 

to assist in compliance with the documentation 

requirements? 


CFTC Proposed Order/Rules 

• RTO/ISO transaction exemption 

• Coop/Muni transaction exemption (NOPR) 

• Inter-Affiliate transaction exemption (NOPR) 


Contact 

For more information, please contact: 

Arnold Podgorsky 

podgorsky@wrightlaw.com 

202-393-1200 

Patrick Morand 

morand@wrightlaw.com 

202-393-1200 

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www.wrightlaw.com 25

WSPP Dodd-Frank Presentation

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