By Rich Heidorn Jr.
PJM Insider

PJM’s announcement last week that it may deny trading privileges to as many as 55 small market participants provoked both praise and criticism from financial traders.

PJM said that it would bar members from most trading if they are unable to qualify for the Dodd-Frank exemption approved by the Commodity Futures Trading Commission last month.

“This is good for the market,” said Pat Sunseri, of financial trader Twin Cities Energy, LLC. Sunseri said PJM’s move will eliminate severely undercapitalized companies whose strategy is “hit it big or leave the market holding the bag.”

Attorney Carol Smoots, who represents the Financial Marketers Coalition, called PJM’s response an overreaction, although she said her coalition members won’t be affected.  “This approach will close the market out to smaller companies,” she said. “The market isn’t protected by making sure a company is of sufficient size; big companies can cause huge defaults. The market is protected by reasonable collateral policies.”

 “Appropriate Persons”

The CFTC agreed March 28 to largely exempt from its regulations Financial Transmission Rights, day ahead and real time energy transactions, forward capacity transactions and reserve regulation transactions, sales that are already regulated by the Federal Energy Regulatory Commission. However, the CFTC said the exemption did not apply to financial market participants that cannot qualify as “appropriate persons” under the Commodity Exchange Act (CEA).

“We can’t be convinced that if we transact with a party not meeting the exemption that we’re not transacting a swap” under Dodd-Frank rules, PJM General Counsel Vince Duane told a special meeting of the Markets and Reliability Committee Thursday.  Being deemed a swap dealer could subject PJM to CFTC reporting requirements, he said.

PJM Chief Financial Officer Suzanne Daugherty said that about 55 financial traders that have not provided PJM with financial statements may fall outside the exemption.

CFTC’s definition of appropriate persons includes banks and broker-dealers regulated by the Securities Exchange Act, futures traders regulated under the CEA and other companies with a net worth exceeding $1 million or total assets exceeding $5 million.

The commission order also exempted those participating “in the generation, transmission, or distribution of electric energy” but declined to extend the exemption to all those participating in RTO and ISO markets.

The only parties not exempt in RTOs, the commission said, are “market participants that can demonstrate neither the financial wherewithal nor the requisite business activities and congruent expertise to qualify as appropriate persons under” the Commodity Exchange Act.

Daugherty said PJM will give financial traders not otherwise exempt the opportunity to provide financial statements establishing their qualification for the exemption under the $1 million/$5 million threshold.

Duane said those not meeting the CFTC exemption would still be able to take transmission service under the PJM tariff. “It primarily will affect those trading in FTRs and the energy market,” he said.

Reaction Varied

Twin Cities’ Sunseri said PJM’s move will help eliminate irresponsible financial traders.

“I don’t want people with $50,000 cash slinging huge megawatts [trading positions] that that could blow up any day of the week,” Sunseri said. “Without a company having adequate funding to bear losses, it delegitimizes our sector and promotes a negative stereotype from other market members.”

Smoots, however, said PJM’s action is unnecessary and anticompetitive. She took issue with Duane’s conclusion that allowing trading by companies not covered by the exemption might subject PJM to regulation as a swaps dealer. “There’s nothing in the order to suggest that,” she said.

The Dodd-Frank Wall Street reform act encouraged the CFTC’s jurisdictional handoff by inserting a section in the Commodity Exchange Act underscoring FERC’s authority over RTO transactions. But it is unclear whether CFTC’s action will end its turf skirmishes with FERC because the agency retained its right to police RTO trades under its anti-fraud and anti-manipulation authority.

Next Steps

The CFTC included several conditions in its exemption, including a requirement that PJM maintain the confidentiality of any subpoenas the commission issues for information about PJM members. PJM will amend its Operating Agreement to comply.

PJM will need to modify its Operating Agreement and tariff to bar the non-exempt participants from trading. Other regional transmission organizations and independent system operators have said they will take similar action, Duane said. CFTC issued a “no action” letter giving PJM and other regions until Sept. 30 to comply with its conditions.

PJM will brief members on its response at an MRC conference call April 18and at the Members Committee Information Webinar April 22. It will seek approval of the proposed OATT and OA changes from the MRC April 25 and the Members Committee on May 16. Assuming a filing with FERC in late May, the changes would take effect by Sept. 30.