[Federal Register Volume 80, Number 98 (Thursday, May 21, 2015)]
[Notices]
[Pages 29490-29522]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12346]



[[Page 29489]]

Vol. 80

Thursday,

No. 98

May 21, 2015

Part V





 Commodity Futures Trading Commission





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 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; Notice

  Federal Register / Vol. 80 , No. 98 / Thursday, May 21, 2015 / 
Notices  

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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.

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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, [email protected], or Alicia Lewis, Special Counsel, 202-
418-5862, [email protected], Division of Clearing and Risk; David P. Van 
Wagner, Chief Counsel, 202-418-5481, [email protected], or Riva Spear 
Adriance, Senior Special Counsel, 201-418-5494, [email protected], 
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'') \1\ 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'') \2\ 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), 4o, 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,\3\ ``eligible contract 
participants,'' as defined in section 1a(18) of the Act and Commission 
regulation 1.3(m),\4\ 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.\5\
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    \1\ 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.
    \2\ 7 U.S.C. 1 et seq.
    \3\ 7 U.S.C. 6(c)(3)(A)-(J).
    \4\ 7 U.S.C. 1a(18); 17 CFR 1.3(m). See also, ``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.
    \5\ 7 U.S.C. 6(c)(6).
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    The Commission seeks comment on the Exemption Application, the 
Proposed Exemption and related questions. A copy of the Exemption 
Application is available on the Commission's Web site at: http://sirt.cftc.gov/sirt/sirt.aspx?Topic=CommissionOrdersandOtherActionsAD&Key=29485.

 Table of Contents

I. The Exemption Application
II. Statutory Background
III. Background
    A. Introduction
    B. FERC
    C. Prior Commission Order
IV. Scope of the Exemption
    A. Transactions Subject to the Exemption
    B. Conditions
    C. Additional Limitations
V. Section 4(c) Analysis
    A. Overview of CEA Section 4(c)
    B. Proposed CEA Section 4(c) Determinations
    C. FERC Credit Reform Policy
    D. DCO Core Principle Analysis
    E. SEF Core Principle Analysis
VI. Proposed Exemption

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    A. Discussion of Proposed Exemption
    B. Proposed Exemption
VII. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
VIII. Request for Comment

I. The Exemption Application

    On October 17, 2013, SPP filed an Exemption Application \6\ with 
the Commission requesting that the Commission exercise its authority 
under section 4(c)(6) of the CEA \7\ and section 712(f) of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank 
Act'') \8\ to exempt certain contracts, agreements and transactions for 
the purchase or sale of specified electric energy products, that are 
offered pursuant to a FERC-approved Tariff, from most provisions of the 
Act.\9\ SPP is a Regional Transmission Organization (``RTO'') subject 
to regulation by FERC. As described in greater detail below, FERC 
encouraged the formation of RTOs to administer the electric energy 
transmission grid on a regional basis.\10\
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    \6\ SPP filed an amended Exemption Application on August 1, 
2014. Citations herein to ``Exemption Application'' are to the 
amended Exemption Application.
    \7\ 7 U.S.C. 6(c)(6).
    \8\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 
(2010). The text of the Dodd-Frank Act may be accessed at http://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htm.
    \9\ See Exemption Application at 1.
    \10\ See id. at 2 n. 7.
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    SPP specifically requests that the Commission exempt from most 
provisions of the CEA certain ``transmission congestion rights,'' 
``energy transactions,'' and ``operating reserve transactions,'' as 
those terms are defined in the Exemption Application, if such 
transactions are offered or entered into pursuant to a Tariff under 
which SPP operates that has been approved by FERC, as well as any 
persons (including SPP, its members and its market participants) 
offering, entering into, rendering advice, or rendering other services 
with respect to such transactions.\11\ SPP asserts that each of the 
transactions for which an exemption is requested is: (a) Subject to a 
long-standing, comprehensive regulatory framework for the offer and 
sale of such transactions established by FERC, and (b) part of, and 
inextricably linked to, SPP's delivery of electric energy and the 
organized wholesale electric energy markets that are subject to 
regulation and oversight by FERC.\12\ SPP expressly excludes from the 
Exemption Application any request for relief from 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), 4o, 
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,\13\ and such provisions explicitly have been 
carved out of the Proposed Exemption. SPP asserts that it is seeking 
the requested exemption in order to provide greater legal certainty 
with respect to the regulatory requirements that apply to the 
transactions that are the subject of the Exemption Application.\14\
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    \11\ See id. at 11-15.
    \12\ See id. at 17.
    \13\ See id. at 1.
    \14\ See id. at 11.
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    As discussed further below, the relief that SPP is requesting is 
substantially similar to the relief the Commission granted other RTOs 
and Independent System Operators (``ISOs'') in April of 2013.\15\
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    \15\ Final Order in Response to 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 Pursuant to the Authority Provided in the Act, 78 FR 
19880, April 2, 2013 (``RTO-ISO Order''); see also infra section 
III.C.
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II. Statutory Background \16\
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    \16\ 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.
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    On July 21, 2010, President Obama signed the Dodd-Frank Act. Title 
VII of the Dodd-Frank Act amended the CEA \17\ and altered the scope of 
the Commission's exclusive jurisdiction.\18\ 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.\19\ As a result, the 
Commission's exclusive jurisdiction now includes swaps as well as 
futures.\20\
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    \17\ 7 U.S.C. 1 et seq.
    \18\ Section 722(e) of the Dodd Frank Act.
    \19\ 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).
    \20\ See id.
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    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.\21\ 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,\22\ 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.\23\
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    \21\ See 7 U.S.C. 2(a)(1)(I).
    \22\ See 7 U.S.C. 2(a)(1)(I)(i) and (ii).
    \23\ 7 U.S.C. 2(a)(1)(I)(i)(II).
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    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.'' 
\24\ Section 4(c)(2) \25\ 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); \26\ and (3) the exemption

[[Page 29492]]

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.\27\ 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.\28\
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    \24\ 7 U.S.C. 6(c)(1).
    \25\ 7 U.S.C. 6(c)(2).
    \26\ 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).
    \27\ 7 U.S.C. 6(c)(2).
    \28\ H.R. Rep. No. 102-978, 102d Cong. 2d Sess. at 82-83 (1992).
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III. Background

A. Introduction

    SPP is subject to regulation by FERC.\29\ 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.\30\
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    \29\ See Exemption Application at 2-3.
    \30\ See id. at 17.
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B. FERC

    In 1920, Congress established the Federal Power Commission 
(``FPC'').\31\ The FPC was reorganized into FERC in 1977.\32\ FERC is 
an independent agency that regulates the interstate transmission of 
electric energy, natural gas and oil.\33\ 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.'' \34\ 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.\35\ Second, FERC seeks to promote the development of 
safe, reliable and efficient energy infrastructure that serves the 
public interest.\36\ 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,\37\ and competition 
when dealing with wholesale generation.\38\
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    \31\ Federal Power Act, 16 U.S.C. 791a et se.
    \32\ 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)).
    \33\ See 42 U.S.C. 7172.
    \34\ 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.
    \35\ Id.
    \36\ Id.
    \37\ 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.'').
    \38\ 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 
FERC's discussion of electric competition, available at http://www.ferc.gov/industries/electric/indus-act/competition.asp (stating 
that ``[FERC]'s core responsibility is to `guard the consumer from 
exploitation by non-competitive electric power companies.' '').
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    In 1996, FERC issued FERC Order 888, which promoted competition in 
the generation market by ensuring fair access and market treatment by 
transmission customers.\39\ Specifically, FERC Order 888 sought to 
``remedy both existing and future undue discrimination in the industry 
and realize the significant customer benefits that will come with open 
access.'' \40\ FERC Order 888 encouraged the formation of ISOs as a 
potentially effective means for accomplishing non-discriminatory open 
access to the transmission of electric energy.\41\
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    \39\ See FERC Order 888.
    \40\ FERC Order 888 at 21541.
    \41\ FERC Order 888 at 21594. Under the old system, one party 
could own both generation and transmission resources, giving 
preferential treatment to its own and affiliated entities. See 
generally, FERC Order 888.
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    In addition, FERC has issued orders that address areas such as 
increased RTO participation by transmission utilities, increased use of 
long-term firm transmission rights, increased investment in 
transmission infrastructure, reduced transmission congestion, and the 
use of demand-response.\42\ According to SPP, the roles, 
responsibilities, and services of ISOs and RTOs under FERC's Order 888, 
Order 2000, and other applicable FERC orders and requirements, are 
substantially similar.\43\ The end result of this series of FERC orders 
is that a regulatory system has been established that requires RTOs and 
ISOs to comply with numerous FERC rules designed to improve both the 
reliability of the physical operations of electric transmission systems 
as well as the competitiveness of electric energy markets. The 
requirements imposed by the various FERC orders seek to ensure that 
FERC is able to accomplish its two main goals; ensuring that rates, 
terms and conditions are just, reasonable and not unduly discriminatory 
or preferential, while promoting the development of safe, reliable and 
efficient energy infrastructure that serves the public interest.
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    \42\ See, e.g., FERC Order No. 2000, 65 FR 809 (2000) (``FERC 
Order 2000'') (encouraging transmission utilities to join RTOs); 
FERC Order No. 681, 71 FR 43294 (2006), FERC Stats. & Regs. ] 31,222 
(2006), order on reh'g, Order No. 679-A, 72 FR 1152, Jan. 10, 2007, 
FERC Stats. & Regs. ] 31,236, order on reh'g, 119 FERC ] 61,062 
(2007) (finalizing guidelines for ISOs to follow in developing 
proposals to provide long-term firm transmission rights in organized 
electric energy markets); FERC Order No. 679, 71 FR 43294 (2006) 
(finalizing rules to increase investment in the nation's aging 
transmission infrastructure, and to promote electric energy 
reliability and lower costs for consumers, by reducing transmission 
congestion); FERC Order No. 890, 72 FR 12266 (2007) (modifying 
existing rules to promote the nondiscriminatory and just operation 
of transmission systems); FERC Order No. 719-A, 74 FR 37776 (2009) 
(``FERC Order 719'') (implementing the use of demand-response (the 
process of requiring electric energy consumers to reduce their 
electric energy use during times of heightened demand), and 
encouraging the use of long-term electric energy contracts and 
strengthening the role of market monitors).
    \43\ See Exemption Application at 2-3 n. 7.
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C. Prior Commission Order

    On April 2, 2013, the Commission issued the RTO-ISO Order which 
exempts specified transactions of particular RTOs and ISOs from certain 
provisions of the CEA and Commission regulations.\44\ Under the RTO-ISO 
Order, a transaction may be covered by the scope of the RTO-ISO Order 
so long as the transaction falls within the definitions of ``Financial 
Transmission Rights,'' ``Energy Transactions,'' ``Forward Capacity 
Transactions,'' or ``Reserve or Regulation Transactions,'' \45\ is 
offered or sold in a market administered by one of the petitioning RTOs 
or ISOs \46\ pursuant to a tariff, rate schedule, or protocol that has 
been approved or permitted to take effect by FERC or the Public Utility 
Commission of Texas, and complies with all other

[[Page 29493]]

enumerated terms and conditions in the RTO-ISO Order.\47\
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    \44\ See RTO-ISO Order. The RTO-ISO Order does not, however, 
provide an exemption from sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4o, 
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.
    \45\ While the RTO-ISO Order included ``Forward Capacity 
Transactions'' in the scope of transactions for which the exemption 
was granted, the Commission notes that SPP's markets do not include 
such transactions. See Exemption Application at 11 n. 50.
    \46\ SPP was not one of the RTOs or ISOs that petitioned for the 
RTO-ISO Order.
    \47\ Such terms and conditions include a requirement that, to be 
eligible for the exemption, the transactions must be entered into by 
persons who are: (1) ``appropriate persons,'' as defined in section 
4(c)(3)(A) through (J) of the CEA; (2) ``eligible contract 
participants,'' as defined in section 1a(18) of the CEA and in 
Commission regulation 1.3(m); or (3) 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 (collectively, 
``Appropriate Persons Requirement''). RTO-ISO Order at 19913.
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    In the RTO-ISO Order, the Commission excepted certain CEA 
provisions pertaining to fraud and manipulation, and scienter-based 
prohibitions, from the exemption.\48\ Neither the proposed nor the 
final RTO-ISO Order discussed, referred to, or mentioned CEA section 
22,\49\ which provides for private rights of action for damages against 
persons who violate the CEA, or persons who willfully aid, abet, 
counsel, induce, or procure the commission of a violation of the Act.
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    \48\ See supra note 44.
    \49\ See 7 U.S.C. 25.
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    By enacting CEA section 22, Congress provided private rights of 
action as a means for addressing violations of the Act alternative to 
Commission enforcement action. It would be highly unusual for the 
Commission to reserve to itself the power to pursue claims for fraud 
and manipulation--a power that includes the option of seeking 
restitution for persons who have sustained losses from such violations 
or a disgorgement of gains received in connection with such violations 
\50\--while at the same time denying private rights of action and 
damages remedies for the same violations. Moreover, if the Commission 
intended to take such a differentiated approach (i.e., to limit the 
rights of private persons to bring such claims while reserving to 
itself the right to bring the same claims), the RTO-ISO Order would 
have included a discussion or analysis of the reasons therefore. Thus, 
the Commission did not intend to create such a limitation, and believes 
that the RTO-ISO Order does not prevent private claims for fraud or 
manipulation under the Act. For the avoidance of doubt, the Commission 
notes that this view equally applies to SPP's Proposed Exemption. 
Therefore, the Proposed Exemption also would not preclude such private 
claims.
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    \50\ See 7 U.S.C. 13a-1(d)(3).
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IV. Scope of the Exemption

A. Transactions Subject to the Exemption

    After due consideration, the Commission proposes to exempt certain 
Transmission Congestion Rights (``TCRs''), Energy Transactions, and 
Operating Reserve Transactions, each as defined below, pursuant to 
section 4(c)(6) of the Act.\51\
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    \51\ SPP represents that the terms ``Transmission Congestion 
Right,'' ``Energy Transactions,'' and ``Operating Reserve 
Transactions'' are SPP's equivalent of the following terms set forth 
in the RTO-ISO Order: ``Financial Transmission Right,'' ``Energy 
Transactions,'' and ``Reserve or Regulation Transactions,'' 
respectively. SPP also avers that its transactions are defined in a 
manner consistent with the terms set forth in the RTO-ISO Order. 
Exemption Application at 12-15. In addition, SPP states that these 
classes of contracts, agreements, and transactions for the purchase 
and sale of a product or service that is directly related to, and a 
logical outgrowth of, any of SPP's core functions as an RTO and all 
services related thereto comprise the Covered Transactions. Id. at 
15.
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    A TCR \52\ is a transaction, however named, that entitles one party 
to receive, and obligates another party to pay, an amount based solely 
on the difference between the price for electric energy, established on 
an electric energy market administered by SPP, at a specified source 
(i.e., where electric energy is deemed injected into SPP's grid) and a 
specified sink (i.e., where electric energy is deemed withdrawn from 
SPP's grid).\53\ As more fully described below, the Proposed Exemption 
applies only to TCRs where each TCR is linked to, and the aggregate 
volume of TCRs for any period of time is limited by, the physical 
capability (after accounting for counterflow) of SPP's electric energy 
transmission system for such period; SPP serves as the market 
administrator for the market on which the TCRs are transacted; each 
party to the transaction is a market participant of SPP (or is SPP 
itself) and the transaction is executed on a market administered by 
SPP; and the transaction does not require any party to make or take 
physical delivery of electric energy.\54\
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    \52\ SPP's markets will also include Auction Revenue Rights 
(``ARRs''). ARRs are allocated to transmission customers based on 
historical network load or transmission service reservations (or 
equivalent service taken under a grandfathered agreement between a 
SPP transmission owner and a customer). ARRs are granted exclusively 
to transmission service customers (i.e., not to other market 
participants or speculators) based on their transmission service (or 
grandfathered service) and are subject to SPP's simultaneous 
feasibility analysis of the capability of the SPP Transmission 
System. ARRs are not traded in SPP's market; instead, ARRs entitle 
the holder to a share of revenues from SPP-administered transmission 
congestion right auctions or may be ``self-converted'' at the 
customer's election into a transmission congestion right. Exemption 
Application at 12 n. 54.
    \53\ Exemption Application at 12. SPP represents that the 
definition of TCR is similar to the definition of financial 
transmission right (``FTR'') in the RTO-ISO Order. However, the 
Commission notes that the definition of TCR does not include TCR 
options whereas the RTO-ISO Order's definition of FTR includes such 
rights in the form of options. Id.; cf. RTO-ISO Order at 19913 
(defining the term FTR to include FTRs and FTRs in the form of 
options).
    \54\ See Exemption Application at 12-13. As noted above, the 
definition of TCR is similar to the FTR definition used by the 
Commission in the RTO-ISO Order. See RTO-ISO Order at 19912.
---------------------------------------------------------------------------

    ``Energy Transactions'' are transactions in the SPP ``Day-Ahead 
Market'' or ``Real-Time Balancing Market,'' as those terms are defined 
in the Proposed Exemption, for the purchase or sale of a specified 
quantity of electric energy at a specified location (including virtual 
bids and offers) where the price of electric energy is established at 
the time the transaction is executed.\55\ Performance occurs in the 
Real-Time Balancing Market by either the physical delivery or receipt 
of the specified electric energy or a cash payment or receipt at the 
price established in the Day-Ahead Market or Real-Time Balancing 
Market; and 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.\56\
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    \55\ See Exemption Application at 13. The definition of Energy 
Transactions is similar to the definition used by the Commission in 
the RTO-ISO Order. See RTO-ISO Order at 19913; see also infra 
section VI.
    \56\ See Exemption Application at 13-14; 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).\57\ In

[[Page 29494]]

consideration for such delivery, or withholding of delivery, the seller 
receives compensation of the type specified in section VI below.\58\ 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.\59\ These Transactions are typically used to address unforeseen 
fluctuations in the level of electric energy demand experienced on the 
electric transmission system.
---------------------------------------------------------------------------

    \57\ 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.
    \58\ See Exemption Application at 14-15; see also infra section 
VI.
    \59\ 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),\60\ 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.\61\
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    \60\ 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.
    \61\ 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.\62\ This condition also requires that SPP comply with 
the Commission's requests on an as-needed basis for related 
transactional and positional market data.
---------------------------------------------------------------------------

    \62\ 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).\63\ 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.\64\ 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.\65\ 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.\66\ 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.\67\ Finally, as discussed above, 
each Covered Transaction is directly tied to the physical capabilities 
of SPP's electric energy grid.\68\ As more fully described below,\69\ 
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.
---------------------------------------------------------------------------

    \63\ See RTO-ISO Order at 19914-15.
    \64\ See Exemption Application at 17.
    \65\ See id. at 2, 17.
    \66\ See generally, FERC Order 888; FERC Order 2000; 18 CFR 
35.34(k)(2); see also Exemption Application at 17.
    \67\ Exemption Application at 17.
    \68\ See id. at 12-15.
    \69\ See discussions infra sections V.B., V.D., and V.E.
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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.\70\ 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.\71\ 
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)].'' \72\
---------------------------------------------------------------------------

    \70\ 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)).
    \71\ Id. (emphasis added).
    \72\ 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)].''

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[[Page 29495]]

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; \73\ 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.\74\
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    \73\ See CEA 4(c)(2)(B)(i) and the discussion of CEA section 
4(c)(3) below.
    \74\ 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.\75\
---------------------------------------------------------------------------

    \75\ 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.\76\ Section 3(b) of the CEA identifies the purposes 
of the CEA:
---------------------------------------------------------------------------

    \76\ 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.\77\
---------------------------------------------------------------------------

    \77\ 7 U.S.C. 5(b).

    SPP asserts that the Proposed Exemption would be consistent with 
the public interest and purposes of the CEA,\78\ 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.\79\ 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.\80\ In addition, SPP states 
that an RTO must demonstrate to FERC that it performs certain self-
regulatory and/or market monitoring functions.\81\ SPP also represents 
that it

[[Page 29496]]

is ``responsible for ensur[ing] the development and operation of market 
mechanisms to manage transmission congestion'' \82\ 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.'' \83\
---------------------------------------------------------------------------

    \78\ See Exemption Application at 17.
    \79\ See id.
    \80\ See Exemption Application at 18; 18 CFR 35.34(j).
    \81\ 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).
    \82\ See Exemption Application at 18.
    \83\ 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,\84\ and that SPP was 
established for the purpose of providing affordable, reliable electric 
energy to consumers within their geographic region.\85\ 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.\86\
---------------------------------------------------------------------------

    \84\ See generally, Exemption Application at 17.
    \85\ See id.
    \86\ 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.\87\ 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,\88\ 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.
---------------------------------------------------------------------------

    \87\ 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'').
    \88\ 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.\89\
---------------------------------------------------------------------------

    \89\ 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,\90\ and the Commission is specifically requesting 
comment on whether the Proposed Exemption is consistent with the public 
interest and the purposes of the Act.
---------------------------------------------------------------------------

    \90\ 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.\91\ 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,\92\ CEA section 4(a) should not apply to the Covered 
Transactions under the Proposed Exemption.\93\
---------------------------------------------------------------------------

    \91\ See DCO core principle analysis infra section V.D.; see 
also SEF core principle analysis infra section V.E.
    \92\ See appropriate persons analysis infra section V.B.3.
    \93\ 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).\94\ 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.'' \95\
---------------------------------------------------------------------------

    \94\ See supra note 75.
    \95\ 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

[[Page 29497]]

or total assets exceeding $5,000,000, as identified in CEA section 
4(c)(3)(F).\96\ 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.'' \97\
---------------------------------------------------------------------------

    \96\ 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).
    \97\ 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.\98\
---------------------------------------------------------------------------

    \98\ 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.\99\
---------------------------------------------------------------------------

    \99\ 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\ 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.\102\
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    \100\ 7 U.S.C. 6(c)(3)(A)-(J).
    \101\ 7 U.S.C. 1a(18); see also ``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.
    \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\
---------------------------------------------------------------------------

    \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), 4o, 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\
---------------------------------------------------------------------------

    \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

[[Page 29498]]

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\
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    \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 supra note 19 and 
accompanying text. For physical commodity swaps, Commission 
regulations 20.6 and 20.7 require a 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. Regulation 45.2 
requires certain reporting entities, as denominated in the 
regulation, to keep full, complete, and systematic records, together 
with all pertinent data and memoranda, of all activities related to 
the business of such entity or persons with respect to swaps and 
available to the Commission via real time electronic access. In 
addition, under regulations 37.404, 37.500, 37.502 and 37.503, SEFs 
must have rules that require their swap participants to keep books 
and records evidencing all details concerning cash and over-the-
counter positions and transactions in the underlying commodity, to 
allow examination of those books and records, and the provision of 
such information to the Commission upon demand.
---------------------------------------------------------------------------

    The CFTC is requesting comment as to whether the Proposed Exemption 
will 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 Act, and, if so, what conditions can or should be 
imposed on the Order to mitigate such effects.

C. FERC Credit Reform Policy

    On October 21, 2010, FERC amended its regulations to encourage 
clear and consistent risk and credit practices in the organized 
wholesale electric markets to, inter alia, ``ensure that all rates 
charged for the transmission or sale of electric energy in interstate 
commerce are just, reasonable, and not unduly discriminatory or 
preferential.'' \111\
---------------------------------------------------------------------------

    \111\ 75 FR 65942, 65942, Oct. 21, 2010 (the ``FERC Original 
Order 741''). These requirements were later slightly amended and 
clarified in an order on rehearing. See 76 FR 10492, Feb. 25, 2011 
(``FERC Revised Order 741,'' and together with Original Order 741, 
``FERC Order 741'').
---------------------------------------------------------------------------

    In effect, FERC Order 741 requires those RTOs that are subject to 
FERC supervision to implement the following reforms: ``shortened 
settlement timeframes, restrictions on the use of unsecured credit, 
elimination of unsecured credit in all [FTRs] or equivalent markets, 
adoption of steps to address the risk that RTOs . . . may not be 
allowed to use netting and set-offs, establishment of minimum criteria 
for market participation, clarification regarding the organized 
markets' administrators' ability to invoke `material adverse change' 
clauses to demand additional collateral from participants, and adoption 
of a two-day grace period for `curing' collateral calls.'' \112\
---------------------------------------------------------------------------

    \112\ FERC Revised Order 741 at 10492-93.
---------------------------------------------------------------------------

    As discussed in more detail below, particularly in section V.D., 
the requirements set forth in FERC Order 741 appear to achieve goals 
similar to the regulatory objectives of the Commission's DCO Core 
Principles.
    FERC regulation 35.47(c) calls for the elimination of unsecured 
credit in the FTR markets and equivalent markets.\113\ This requirement 
appears to be congruent with Core Principle D's requirement that each 
DCO limit its exposure to potential losses from defaults by clearing 
members. Because, according to FERC, risks arising out of the FTR 
markets are ``difficult to quantify,'' \114\ eliminating the use of 
unsecured credit in these markets may help avoid the unforeseen and 
substantial costs for an RTO in the event of a default.\115\ Thus, the 
requirement set forth in regulation 35.47(c) appears to advance the 
objectives of Core Principle D by reducing risk and minimizing the 
effect of defaults through the elimination of unsecured credit in the 
FTR and equivalent markets.
---------------------------------------------------------------------------

    \113\ 18 CFR 35.47(c).
    \114\ Specifically, FERC stated that ``the risk associated with 
the potentially rapidly changing value of FTRs warrants adoption of 
risk management measures, including the elimination of unsecured 
credit. Because financial transmission rights have a longer-dated 
obligation to perform which can run from a month to a year or more, 
they have unique risks that distinguish them from other wholesale 
electric markets, and the value of a financial transmission right 
depends on unforeseeable events, including unplanned outages and 
unanticipated weather conditions. Moreover, financial transmission 
rights are relatively illiquid, adding to the inherent risk in their 
valuation.'' FERC Original Order 741 at 65950.
    \115\ Id. at 65949.
---------------------------------------------------------------------------

    In addition, 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.'' 
\116\ This requirement appears to be congruent with one of the 
regulatory objectives of Core Principle D, as implemented by Commission 
regulation 39.13, specifically the requirement that each DCO limit its 
exposure to potential losses from defaults by clearing members. 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,'' \117\ thereby limiting an RTO's exposure 
to potential losses from defaults by its market participants. Thus, it 
seems both Core Principle D and FERC regulation 35.47(a) help protect 
the markets and their participants from unacceptable disruptions, 
albeit in different ways and to a different extent.
---------------------------------------------------------------------------

    \116\ In addition, FERC regulation 35.47(a) states that ``where 
a corporate family includes more than one market participant 
participating in the same [RTO], the limit on the amount of 
unsecured credit extended by that [RTO] shall be no more than $50 
million for the corporate family.'' 18 CFR 35.47(a).
    \117\ FERC Original Order 741 at 65948.
---------------------------------------------------------------------------

    FERC regulation 35.47(b) mandates that RTOs have billing periods 
and settlement periods of no more than seven days.\118\ While this 
mandate does not meet the standards applicable to registered DCOs,\119\ 
it supports Core Principle D's requirement that each DCO have 
appropriate tools and procedures to manage the risks associated with 
discharging its responsibilities. In promulgating FERC regulation 
35.47(b), 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.'' \120\ Recognizing the correlation between a reduction in 
the length of 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

[[Page 29499]]

the default leading to a disruption in the market such as cascading 
defaults and dramatically reduced market liquidity.'' \121\ Thus, FERC 
regulation 35.47(b) appears to aid RTOs in managing the risks 
associated with their responsibilities, which also appears to support 
Core Principle D's goals.
---------------------------------------------------------------------------

    \118\ 18 CFR 35.47(b).
    \119\ See 17 CFR 39.14(b) (requiring daily settlements).
    \120\ FERC Original Order 741 at 65946.
    \121\ Id.
---------------------------------------------------------------------------

    FERC regulation 35.47(d) requires RTOs to ensure the enforceability 
of their netting arrangements in the event of the insolvency of a 
member by doing one of the following: (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.\122\ In the alternative, the RTOs 
would be prohibited from netting market participants' transactions, and 
required to establish credit based on each market participant's gross 
obligations. Congruent to the regulatory objectives of Core Principles 
D and G, FERC regulation 35.47(d) attempts to ensure that, in the event 
of a bankruptcy of a participant, RTOs are not prohibited from 
offsetting accounts receivable against accounts payable. In effect, 
this requirement attempts 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.\123\ This 
clarification, in turn, would appear to limit an RTO's exposure to 
potential losses from defaults by market participants.
---------------------------------------------------------------------------

    \122\ 18 CFR 35.47(d).
    \123\ See 11 U.S.C. 553; see generally, In re SemCrude, L.P., 
399 B.R. 388 (Bankr. D. Del. 2009), aff'd, 428 B.R. 590 (D. Del. 
2010).
---------------------------------------------------------------------------

    FERC regulation 35.47(e) limits the time period within which a 
market participant must cure a collateral call to no more than two 
days.\124\ This requirement appears to be congruent with Core Principle 
D's requirement that each DCO limit its exposure to potential losses 
from defaults by clearing members. In Original Order 741, FERC stated 
that a two day time period for curing collateral calls balances (1) the 
need for granting market participants sufficient time to make funding 
arrangements for collateral calls with (2) 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 the credit 
provisions of its tariff language, 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.
---------------------------------------------------------------------------

    \124\ 18 CFR 35.47(e).
---------------------------------------------------------------------------

    FERC regulation 35.47(f) imposes minimum market participant 
eligibility requirements that apply consistently to all market 
participants and, as set forth in the preamble to Original Order 741, 
requires RTOs to engage in periodic verification of market participant 
risk management policies and procedures.\125\ The Commission believes 
that the requirements set forth in FERC regulation 35.47(f) appear 
congruent with some of the regulatory objectives of DCO Core Principle 
C, as implemented by Commission regulation 39.12. In general, DCO Core 
Principle C requires each DCO to establish appropriate admission and 
continuing eligibility standards for members of, and participants in, a 
DCO that are objective, publicly disclosed, and permit fair and open 
access.\126\ In addition, Core Principle C also requires that each DCO 
establish and implement procedures to verify compliance with each 
participation and membership requirement, on an ongoing basis.\127\ 
Similarly, while FERC regulation 35.47(f) does not prescribe the 
particular participation standards that must be implemented, as 
suggested in the preamble to Original Order 741, these standards should 
address ``adequate capitalization, the ability to respond to RTO 
direction and expertise in risk management'' \128\ and ensure that 
proposed tariff language ``is just and reasonable and not unduly 
discriminatory.'' \129\ Moreover, FERC specifically stated that these 
participation standards ``could include the capability to engage in 
risk management or hedging or to out-source this capability with 
periodic compliance verification, to make sure that 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.'' \130\ Thus, both DCO Core Principle C and 
Order 741 appear to promote fair and open access for market 
participants as well as impose compliance verification requirements.
---------------------------------------------------------------------------

    \125\ 18 CFR 35.47(f).
    \126\ 7 U.S.C. 7a-1(c)(2)(C).
    \127\ Id.
    \128\ FERC Original Order 741 at 65956.
    \129\ Id.
    \130\ Id.
---------------------------------------------------------------------------

    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.\131\ FERC, however, noted that the 
examples set forth in each RTO's tariffs are not exhaustive and that 
ISOs and RTOs are permitted to use ``their discretion to request 
additional collateral in response to unusual or unforeseen 
circumstances.'' \132\ The Commission believes that the requirements 
set forth in FERC regulation 35.47(g) appear congruent with the 
following DCO Core Principle D requirements: (1) That DCOs have 
appropriate tools and procedures to manage the risks associated with 
discharging its responsibilities, and (2) that DCOs limit their 
exposure to potential losses from defaults by clearing members.\133\ By 
requiring RTOs to actively consider the circumstances that could give 
rise to a material adverse change, FERC appears to be encouraging RTOs 
to actively manage their risks to ``avoid any confusion, particularly 
during times of market duress, as to when such a clause may be 
invoked.'' \134\ Moreover, such clarification could prevent a market 
participant's ability to ``exploit ambiguity as to when a market 
administrator may invoke a `material adverse change,' or a market 
administrator may be uncertain as to when it may invoke a `material 
adverse change,' '' \135\ thereby avoiding potentially harmful delays 
or disruptions that could subject the RTOs to unnecessary damage.
---------------------------------------------------------------------------

    \131\ 18 CFR 35.47(g).
    \132\ FERC Original Order 741 at 65957.
    \133\ 7 U.S.C. 7a-1(c)(2)(D).
    \134\ FERC Original Order 741 at 65958.
    \135\ Id.
---------------------------------------------------------------------------

    SPP represents that it has complied with, and fully implemented, 
the requirements set forth in Order 741.\136\
---------------------------------------------------------------------------

    \136\ See Exemption Application at 3-4; FERC Order 741 
Implementation Chart.
---------------------------------------------------------------------------

D. DCO Core Principle Analysis

1. DCO Core Principle A: Compliance With Core Principles
    DCO Core Principle A requires a DCO to comply with each core 
principle set forth in section 5b(c)(2) of the CEA, as well as any 
requirement that the Commission may impose by rule or regulation 
pursuant to section 8a(5) of the Act for a DCO to be registered and 
maintain its registration.\137\ In addition, Core Principle A states 
that a DCO shall have reasonable discretion in establishing the manner 
by which it complies with each core principle

[[Page 29500]]

subject to any rule or regulation prescribed by the Commission.\138\
---------------------------------------------------------------------------

    \137\ 7 U.S.C. 7a-1(c)(2)(A)(i).
    \138\ 7 U.S.C. 7a-1(c)(2)(A)(ii).
---------------------------------------------------------------------------

    SPP represents that, although it is principally regulated by FERC 
and that there are differences between it and registered DCOs, SPP's 
practices are consistent with the core principles for DCOs.\139\ SPP 
represents that, though its methods are different than those employed 
by a registered DCO, its practices and the comprehensive regulatory 
regime of FERC achieve the goals of, and are consistent with, the 
policies of the Act.\140\ 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, SPP's practices appear congruent with, and to 
accomplish sufficiently, the regulatory objectives of each DCO Core 
Principle. The Commission seeks comment with respect to this 
preliminary conclusion.
---------------------------------------------------------------------------

    \139\ Exemption Application Attachments at 1.
    \140\ Id.
---------------------------------------------------------------------------

2. DCO Core Principle B: Financial and Operational Resources
    DCO Core Principle B requires a DCO to have adequate financial, 
operational, and managerial resources to discharge each of its 
responsibilities.\141\ In addition, a DCO must have financial resources 
that, at a minimum, exceed the total amount that would: (i) Enable the 
DCO to meet its financial obligations to its clearing members 
notwithstanding a default by the clearing member creating the largest 
financial exposure for the DCO in extreme but plausible market 
conditions; and (ii) enable the DCO to cover its operating costs for a 
period of 1 year, as calculated on a rolling basis.\142\
---------------------------------------------------------------------------

    \141\ 7 U.S.C. 7a-1(c)(2)(B)(i).
    \142\ 7 U.S.C. 7a-1(c)(2)(B)(ii).
---------------------------------------------------------------------------

a. Financial Resources
    SPP represents that it maintains sufficient financial resources to 
meet its financial obligations to its members notwithstanding a default 
by the member creating the largest financial exposure for that 
organization in extreme but plausible market conditions.\143\ As an 
initial matter, SPP must take the following steps to address the 
outstanding obligation: (i) Segregate funds held by SPP with respect to 
the defaulting market participant; (ii) draw on collateral provided by 
the defaulting market participant; (iii) seek to recover from any 
guarantor of the defaulting market participant; (iv) seek to exercise 
other remedies under the credit support documents provided by the 
defaulting market participant; and (v) pursue other available remedies 
for defaults, including, without limitation, initiating a filing with 
FERC to terminate the Service Agreement of the defaulting market 
participant.\144\ Further, if these steps are inadequate to cover the 
obligation, SPP represents that its Tariff permits SPP to mutualize the 
loss among the non-defaulting market participants to whom SPP would 
otherwise be obligated.\145\ Therefore, SPP will then make reduced 
payments to the non-defaulting market participants receiving revenues 
for market services associated with the outstanding obligation.\146\ 
SPP represents that the payment to a non-defaulting market participant 
will be reduced in amount equal to such non-defaulting market 
participant's pro-rata share of the outstanding obligation.\147\ This 
process is often referred to as ``short-paying.'' \148\ SPP further 
represents that once SPP deems the obligation as uncollectible, the 
short-pay would be ``uplifted'' or ``socialized'' more broadly across 
the market, with the losses reallocated among all non-defaulting market 
participants.\149\
---------------------------------------------------------------------------

    \143\ See Exemption Application Attachments at 3.
    \144\ Id.
    \145\ See Exemption Application Attachments at 4; Letter from 
SPP to the Commission dated October 7, 2014 Providing Clarifying 
Information in Support of Amended Application for Exemptive Order 
(``October 2014 Supplemental Letter'') at 3.
    \146\ Id.
    \147\ Id.
    \148\ See Notice of 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, 
52149, Aug. 28, 2012.
    \149\ See Exemption Application Attachments at 4. SPP states 
that the loss would be allocated pro-rata to all non-defaulting 
market participants who conducted business in the market during the 
period covered by the invoice(s) associated with the loss, including 
those market participants who had not been owed revenues. See also 
October 2014 Supplemental Letter at 3.
---------------------------------------------------------------------------

    On the basis of these representations, the Commission believes that 
SPP's financial resource requirements appear to be congruent with, and 
to accomplish sufficiently, the regulatory objectives of DCO Core 
Principle B in the context of SPP's activities with respect to the 
Covered Transactions. The Commission seeks comment with respect to this 
preliminary conclusion.
b. Operational Resources
    SPP represents that it has sufficient operational resources to 
cover its operating costs through a Tariff Administration Charge 
(``Charge'') allocated to its participants and set forth in Schedule 1-
A of its Tariff.\150\ SPP represents that the amount of the Charge is 
not subject to annual approval by FERC, but SPP submits an 
informational filing to FERC on an annual basis outlining its budget 
and this Charge.\151\ SPP further represents that the Charge is based 
on expected costs for the following year.\152\ Under the regulatory 
structure in the wholesale electric industry, market participants are 
obligated to pay the fees required by SPP,\153\ and are thus, in a 
sense, a ``captive audience.'' SPP also represents that to the extent 
that an SPP member terminates its membership, its Bylaws and Membership 
Agreement require that the member pay its share of SPP's outstanding 
financial obligations, including principal and interest on SPP debt 
obligations.\154\ These provisions protect SPP and its remaining 
members from increased financial exposure due to a member's termination 
of its participation in SPP. SPP further represents that the Bylaws 
also provide SPP with the ability to assess a charge to all SPP members 
to recover any SPP costs that SPP is not otherwise able to collect 
under its Tariff and other governing documents, which further insures 
that SPP will have sufficient operational resources to satisfy its 
obligations.\155\ Therefore, these policies and procedures appear to be 
consistent with, and to accomplish sufficiently, the regulatory 
objectives of DCO Core Principle B in the context of the Covered 
Transactions. The Commission seeks comment with respect to this 
preliminary conclusion.
---------------------------------------------------------------------------

    \150\ See Exemption Application Attachments at 6-7. SPP states 
that the charge is allocated to their market participants based on 
each megawatt of transmission capacity reserved during the year. Id.
    \151\ Id. at 7.
    \152\ Id. at 6-8.
    \153\ Id. at 7.
    \154\ Id.
    \155\ Id.
---------------------------------------------------------------------------

c. Managerial Resources
    SPP represents that it has adequate managerial resources to 
discharge its responsibilities as an organized wholesale electric 
energy market.\156\ The Commission notes that FERC Order 888 sets forth 
the principles used by FERC to assess ISO proposals and requires that 
ISOs have appropriate incentives for efficient management and 
administration.\157\ This requirement

[[Page 29501]]

provides that ISOs should procure the services needed for such 
management and administration in an open competitive market, similar to 
how Core Principle B requires a DCO to possess managerial resources 
necessary to discharge each responsibility of the DCO. In addition, 
FERC Order 2000 requires that RTOs have an open architecture so that 
the RTO and its members have the flexibility to improve their 
organizations in the future in terms of structure, geographic scope, 
market support and operations in order to adapt to an environment that 
is rapidly changing and meet market needs.\158\
---------------------------------------------------------------------------

    \156\ See id. at 9.
    \157\ See generally, FERC Order 888 at 21540. In addition to 
establishing ISOs, FERC Order 888 mandated that all public utilities 
file open access transmission tariffs that contain minimum terms and 
conditions for non-discriminatory service. As a public utility 
transmission provider, SPP is obligated to comply with the open 
access requirements of FERC Order 888, which includes the 
requirement for appropriate incentives for efficient management and 
administration. See Exemption Application at 2-3 n. 7.
    \158\ FERC Order 2000 at 502.
---------------------------------------------------------------------------

    SPP represents that it has sufficient human resources to fulfill 
its obligations to its members, market participants, and 
customers.\159\ SPP represents that it employs more than 500 employees 
with experience in engineering, market operations, legal and regulatory 
compliance, finance and credit, and other disciplines, that carry out 
SPP market and services and support the various SPP member 
organizational groups.\160\ Based on these representations, SPP's 
managerial resources appear to be consistent with, and to accomplish 
sufficiently, the regulatory objectives of DCO Core Principle B in the 
context of the Covered Transactions. The Commission seeks comment with 
respect to this preliminary conclusion.
---------------------------------------------------------------------------

    \159\ See Exemption Application Attachments at 8-9.
    \160\ Id. at 8.
---------------------------------------------------------------------------

3. DCO Core Principle C: Participant and Product Eligibility
    DCO Core Principle C requires each DCO to establish appropriate 
admission and continuing eligibility standards for member and 
participants (including sufficient financial resources and operational 
capacity), as well as to establish procedures to verify, on an ongoing 
basis, member and participant compliance with such requirements.\161\ 
The DCO's participant and membership requirements must also be 
objective, be publicly disclosed, and permit fair and open access.\162\ 
In addition, Core Principle C obligates each DCO to establish 
appropriate standards for determining the eligibility of agreements, 
contracts, or transactions submitted to the DCO for clearing.\163\
---------------------------------------------------------------------------

    \161\ 7 U.S.C. 7a-1(c)(2)(C).
    \162\ Id.
    \163\ Id. As set forth above, the exemption that would be 
provided by the Proposed Exemption would be available only with 
respect to the transactions specifically delineated therein. 
Accordingly, the DCO Core Principle C analysis is limited to a 
discussion of SPP's participant eligibility requirements.
---------------------------------------------------------------------------

a. FERC Credit Policy Requirements
    As discussed above, the FERC Credit Policy appears to impose 
participant eligibility requirements that are consistent with 
regulatory objectives of DCO Core Principle C.\164\ In the FERC Credit 
Policy, FERC notes that ``[h]aving minimum criteria in place can help 
minimize the dangers of mutualized defaults posed by inadequately 
prepared or under-capitalized participants.'' \165\ Specifically, FERC 
regulation 35.47(f) requires organized wholesale electric markets to 
adopt tariff provisions that require minimum market participant 
eligibility criteria.\166\ Though the regulation does not prescribe the 
particular participation standards that must be implemented; in the 
rule's preamble, FERC suggests that such standards should address 
``adequate capitalization, the ability to respond to RTO direction and 
expertise in risk management.'' \167\ Regarding risk management, FERC 
further suggests that minimum participant eligibility criteria should 
``include the capability to engage in risk management or hedging or to 
out-source this capability with periodic compliance verification.'' 
\168\ Although market participant criteria may vary among different 
types of market participants, all market participants must be subject 
to some minimum criteria.\169\ An RTO subject to FERC's supervision is 
obligated to establish market participant criteria, even if the RTO 
applies vigorous standards in determining the creditworthiness of its 
market participants.\170\
---------------------------------------------------------------------------

    \164\ See supra note 128.
    \165\ FERC Original Order 741 at 65955.
    \166\ 18 CFR 35.47(f).
    \167\ FERC Original Order 741 at 65956.
    \168\ Id.
    \169\ Although the FERC Credit Policy states that FERC ``directs 
that [the market participation criteria] apply to all market 
participants rather than only certain participants,'' FERC clarified 
this comment in its Order of Rehearing by stating that its intent 
``was that there be minimum criteria for all market participants and 
not that all market participants necessarily be held to the same 
criteria'' based upon, for example, the size of the participant's 
positions. See FERC Revised Order 741 at n. 43. This approach 
appears to be consistent with Commission regulation 39.12, which 
implements Core Principle C and requires that participation 
requirements for DCO members be risk-based.
    \170\ See FERC Original Order 741 at 65956 (noting that ``An . . 
. RTO's ``ability to accurately assess a market participant's 
creditworthiness is not infallible'' and ``[w]hile an analysis of 
creditworthiness may capture whether the market participant has 
adequate capital, it may not capture other risks, such as whether 
the market participant has adequate expertise to transact in an RTO 
. . . market.'').
---------------------------------------------------------------------------

    Because the minimum participation criteria adopted by SPP is 
included in its Tariff, which is publicly available on SPP's Web site, 
such criteria is publicly disclosed. In addition, FERC notes that it 
reviews proposed tariff language ``to ensure that it is just and 
reasonable and not unduly discriminatory,'' \171\ which practice would 
appear to be consistent with DCO Core Principle C's directive that 
market participation standards permit fair and open access.
---------------------------------------------------------------------------

    \171\ Id.
---------------------------------------------------------------------------

b. SPP's Representations
    SPP represents that it has adopted minimum participant eligibility 
criteria that include capitalization requirements (which permits 
participation by less-well-capitalized members if they post additional 
collateral), as well as certain minimum eligibility 
qualifications.\172\ The minimum capitalization requirements state that 
a market participant must possess either: (i) A tangible net worth of 
$1,000,000; (ii) assets of $10,000,000; (iii) a credit rating of BBB- 
or its equivalent; or (iv) a guaranty where the guarantor meets one of 
those requirements. Alternatively, if the market participant cannot 
meet one of those requirements, it may provide a deposit of $200,000, 
which is segregated and unavailable to be used as financial security 
for market transactions. If, under this alternative provision, the 
market participant's expected market exposure exceeds $100,000, it must 
also provide twice the amount of financial security otherwise required 
pursuant to the SPP Tariff.\173\ The capitalization requirements appear 
to be risk-based in that the requirements may vary by type of market 
and/or type or size of participant.\174\
---------------------------------------------------------------------------

    \172\ See Exemption Application Attachments at 11-12.
    \173\ Id. at 12.
    \174\ See id.
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    SPP represents that its Tariff includes minimum eligibility 
requirements consistent with the RTO-ISO Order's Appropriate Persons 
Requirement.\175\ Specifically, in order to participate in SPP's 
markets, each market participant must demonstrate to SPP that it 
qualifies as (a) an appropriate person as that term is defined under 
section 4(c)(3)(A) through (J) of the CEA; (b) an eligible contract 
participant (``ECP'') as that term is defined in Section 1a(18) of the 
CEA and in Commission regulation 1.3(m); or (c) a person or entity that 
is in the business of: (i) Generating transmitting or distributing 
electric energy or (ii) providing electric services

[[Page 29502]]

that are necessary to support the reliable operation of the 
transmission system.\176\
---------------------------------------------------------------------------

    \175\ Id.; see also Exemption Application at 21.
    \176\ Exemption Application Attachments at 12; 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.
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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\

[[Page 29503]]

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

[[Page 29504]]

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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

[[Page 29505]]

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\
---------------------------------------------------------------------------

    \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

[[Page 29506]]

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\
---------------------------------------------------------------------------

    \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

[[Page 29507]]

market participants, default procedures and default allocations, 
settlement procedures, SPP fees, and extensive data regarding market 
and transmission system operations, policies, and procedures.\259\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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

[[Page 29508]]

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.

E. 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.

[[Page 29509]]

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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

[[Page 29510]]

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 conducted on the Day-Ahead market 
of SPP. The Commission notes that in the RTO-ISO Order, it made a 
preliminary determination that the Real-Time Balancing and Day-Ahead 
markets, which set energy transaction prices on SPP's platform, appears 
to be consistent with SEF Core Principle 3. The Commission seeks 
comment regarding whether this preliminary conclusion is correct.
---------------------------------------------------------------------------

    \309\ As noted above, TCRs are SPP's equivalent transaction to 
what was referred in the RTO-ISO Order as ``Financial Transmission 
Rights'' or ``FTRs.'' See Exemption Application at 1 n. 3; see also, 
Exemption Application at 12 n. 54 and accompanying text.
---------------------------------------------------------------------------

    As previously discussed, SPP and the SPP Market Monitor conduct 
market surveillance of both the Real-Time Balancing and Day-Ahead 
markets to identify manipulation of the price of electric energy. In 
the event unusual trading activity is detected by the SPP Market 
Monitor, the SPP Market Monitor will immediately contact FERC's Office 
of Enforcement, so that an investigation into the unusual activity may 
begin.\310\ Although the price of TCRs may be altered by the 
manipulation of the Real-Time Balancing or Day-Ahead markets, FERC 
requires that the Applicant have systems to monitor for such activity.
---------------------------------------------------------------------------

    \310\ See Exemption Application Attachments at 81.
---------------------------------------------------------------------------

    The Commission believes that SPP's policies and procedures should 
mitigate the susceptibility of TCRs to manipulation and that they are 
congruent with, and sufficiently accomplish, the regulatory objectives 
of SEF Core Principle 3 in the context of SPP's activities with respect 
to TCRs. The Commission seeks comment with respect to this preliminary 
conclusion.
c. Reserve Transactions Market
    SPP has proposed a Reserve Transactions Market.\311\ Reserve 
Transactions are entered into pursuant to auctions carried out by 
SPP.\312\ However, unlike the auctions for the Real-Time Balancing and 
Day-Ahead markets, the auctions for reserve transactions simply allow 
SPP to accept bids submitted by market participants that have the 
ability to inject electric energy into SPP's electric energy 
transmission system.\313\
---------------------------------------------------------------------------

    \311\ The Commission notes that while the RTO-ISO Order also 
addressed Forward Capacity Transactions Market, SPP's Exemption 
Application does not propose such transactions.
    \312\ See Exemption Application at 14-15.
    \313\ See id.
---------------------------------------------------------------------------

    The Commission notes that SPP would apply the same oversight 
policies and procedures to Reserve Transactions that it applies to 
Energy Transactions and FTRs. The Commission believes that these 
measures appear to be consistent with, and to accomplish sufficiently, 
the regulatory objectives of SEF Core Principle 3 in the context of 
SPP's activities with respect to Reserve Transactions. The Commission 
seeks comment with respect to this preliminary conclusion.
4. SEF Core Principle 4: Monitoring of Trading and Trade Processing
    SEF Core Principle 4 requires a SEF to establish and enforce rules 
or terms and conditions defining trading procedures to be used in 
entering and executing orders traded on or through the SEF and 
procedures for the processing of swaps on or through the SEF.\314\ SEFs 
are also required to establish a system to monitor trading in swaps to 
prevent manipulation, price distortion and disruptions of the delivery 
or cash settlement process through surveillance, compliance and 
disciplinary practices and procedures. The main goal of this Core 
Principle is to monitor trading activity to detect or deter market 
participants from manipulating the price or deliverable supply of a 
commodity.
---------------------------------------------------------------------------

    \314\ 7 U.S.C. 7b-3(f)(4).
---------------------------------------------------------------------------

a. Energy Transactions
    Generally, SPP's Tariff lists how Energy Transactions are to be 
entered into the trading platform.\315\ Using these procedures, the SPP 
Market Monitor is able to track the Energy Transactions submitted by 
market participants and identify trading activity that could be 
manipulative. As a result, SPP's policies and procedures regarding 
monitoring of trading and trade processing appear to be consistent 
with, and to accomplish sufficiently, the regulatory objectives of SEF 
Core Principle 4 in the context of SPP's activities with respect to 
Energy Transactions. The Commission seeks comment with respect to this 
preliminary conclusion.
---------------------------------------------------------------------------

    \315\ See generally, Exemption Application Attachments at 82-86.
---------------------------------------------------------------------------

b. TCRs \316\
---------------------------------------------------------------------------

    \316\ As noted above, the RTO-ISO Order used the term FTRs. See 
Exemption Application at 12 n. 54 (noting that TCR is SPP's 
equivalent of FTR in the RTO-ISO Order).
---------------------------------------------------------------------------

    The process by which the TCR allocation and auction takes place 
provides SPP with a basic system that allows SPP to determine which 
market participants hold TCRs. According to SPP's Tariff, and similar 
to other RTOs, SPP offers ARRs to eligible transmission customers to 
address their exposure to transmission congestion costs, which is based 
on their transmission service or network load, with SPP performing a 
simultaneous feasibility analysis to ensure that ARR awards do not 
exceed physical system capability. SPP then conducts auctions for TCRs, 
and also oversees a secondary TCR market. SPP systems track ownership 
of ARRs and TCRs, including transfers of TCR ownership in the secondary 
market and SPP verification that secondary TCR owners qualify under 
SPP's TCR creditworthiness requirements. SPP applies to this market the 
market monitoring and mitigation plans that SPP has developed for all 
markets and services under the SPP Tariff.\317\
---------------------------------------------------------------------------

    \317\ See generally, Exemption Application Attachments at 82-86.
---------------------------------------------------------------------------

    Based on the foregoing representations, it appears that SPP's 
policies and procedures regarding the monitoring of trading and trade 
processing are consistent with, and to accomplish sufficiently, the 
regulatory objectives of SEF Core Principle 4 in the context of SPP's 
activities with respect to TCRs. The Commission seeks comment with 
respect to this preliminary conclusion.
c. Reserve Transactions
    As discussed above, the auction process used for Reserve 
Transactions differs from the process used in the Real-Time Balancing 
and Day-Ahead markets.\318\ Furthermore, Reserve Transactions are not 
used to limit exposure to price volatility, discover prices or engage 
in arbitrage. The transactions are predominantly bilateral agreements 
between SPP and certain of SPP's market participants for the provision 
of electric energy in order to meet the technical requirements 
necessary to operate the electric transmission system. The contracts 
are not readily susceptible to manipulation and there is no market 
trading that must be monitored to prevent manipulation or congestion of 
the physical delivery market. As a result, SPP's policies and 
procedures regarding the monitoring of trading and trade processing 
appear to be consistent with, and to accomplish sufficiently, the 
regulatory objectives of SEF Core Principle 4 in the context of SPP's 
activities with respect to Capacity and Reserve Transactions. The

[[Page 29511]]

Commission seeks comment with respect to this preliminary conclusion.
---------------------------------------------------------------------------

    \318\ The Commission notes that SPP does not propose a Forward 
Capacity Market.
---------------------------------------------------------------------------

5. SEF Core Principle 5: Ability To Obtain Information
    SEF Core Principle 5 requires a SEF to establish and enforce rules 
that will allow it to obtain any necessary information to perform the 
functions described in section 733 of the Dodd-Frank Act, provide 
information to the Commission upon request, and have the capacity to 
carry-out such international information-sharing agreements as the 
Commission may require.\319\ As discussed above,\320\ SPP represents 
that it has rules in place that require market participants to submit 
information to SPP upon request so that SPP may conduct investigations 
and provide or give access to such information to the SPP Market 
Monitor and FERC.\321\ On the basis of these representations, it 
appears that SPP's practices are consistent with, and sufficiently 
accomplish, the regulatory goals of SEF Core Principle 5. The 
Commission seeks comment with respect to this preliminary 
determination.
---------------------------------------------------------------------------

    \319\ 7 U.S.C. 7b-3(f)(5).
    \320\ See generally, discussions supra in sections V.D.10. and 
V.D.13.
    \321\ See generally, Exemption Application Attachments at 87-89.
---------------------------------------------------------------------------

6. SEF Core Principle 6: Position Limits or Accountability
    SEF Core Principle 6 requires SEFs that are trading facilities, as 
that term is defined in CEA section 1a(51), to establish position 
limits or position accountability for speculators, as is necessary and 
appropriate, for each swap traded on the SEF in order to reduce the 
potential threat of market manipulation or congestion, especially 
during trading in the delivery month.\322\ While the markets 
administered by SPP are subject to the SPP Market Monitor (as discussed 
above in section IV.C.), SPP does not have position limits or position 
accountability thresholds for speculators in order to reduce the 
potential threat of market manipulation or congestion.
---------------------------------------------------------------------------

    \322\ 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.
---------------------------------------------------------------------------

    The Commission notes that in the RTO-ISO Order, it did not impose 
position limits on the transactions covered by the Order. Instead, 
without making any determinations regarding the merits of the concerns 
regarding position limits raised in comments responding to that 
proposal, the Commission stated that it accepted the Requesting 
Parties' representations that the physical capability of their 
transmission grids limits the size of positions that any single market 
participant can take at a given time.\323\ Furthermore, the Commission 
stated that as the RTO-ISO Order limited each transaction category it 
covered to the physical capability of the transmission grid, the 
Commission stated its belief that imposing position limits on the 
transactions covered by that Order was not necessary at that time in 
order to make the requisite public interest and purposes of the CEA 
determinations.\324\
---------------------------------------------------------------------------

    \323\ RTO-ISO Order at 19902.
    \324\ Id.
---------------------------------------------------------------------------

    According to SPP's Exemption Application, each category of 
transactions for which SPP is requesting relief would be limited by the 
physical capability of the transmission grid and that the physical 
capability of its transmission grid limits the size of positions that 
any single market participant can take at a given time.\325\ On the 
basis of SPP's representations, and consistent with the RTO-ISO Order, 
the Commission is preliminarily determining that it is not necessary, 
when considering the requisite public interest and purposes of the CEA 
determinations, to impose position limits on SPP's Integrated 
Marketplace. The Commission seeks comment with respect to this 
preliminary determination.
---------------------------------------------------------------------------

    \325\ See Exemption Application at 12-15, 17; Exemption 
Application Attachments at 90-93.
---------------------------------------------------------------------------

7. SEF Core Principle 7: Financial Integrity of Transactions
    SEF Core Principle 7 requires a SEF to establish and enforce rules 
and procedures for ensuring the financial integrity of swaps entered on 
or through the facilities of the SEF, including the clearance and 
settlement of swaps pursuant to section 2(h)(1) of the CEA.
a. Risk Management Requirements and Credit Policies
    SPP represents that its risk management provisions provide it with 
appropriate tools and procedures to manage risk associated with 
operating its wholesale and related markets.\326\ According to SPP, the 
credit policy contained in its Tariff includes, in compliance with 
FERC's Order No. 741, minimum capitalization requirements and an 
attestation of a market participant's risk management 
capabilities.\327\ The attestation requires that the market participant 
describe its risk management capabilities and procedures and 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. Market participants also are required to notify SPP 
of material adverse changes in their financial conditions.\328\
---------------------------------------------------------------------------

    \326\ See Exemption Application at 17-20; Exemption Application 
Attachments at 94-100.
    \327\ See Exemption Application Attachments at 94.
    \328\ Id.
---------------------------------------------------------------------------

    SPP represents that its credit policy provides the process by which 
SPP will periodically review and verify a market participant's risk 
management policies, practices, and procedures pertaining to its 
activities in SPP, as well as procedures for SPP to complete credit 
assessments. Successful completion of SPP's verification is required 
for a selected market participant's continued eligibility to 
participate in the SPP markets.\329\
---------------------------------------------------------------------------

    \329\ See Exemption Application Attachments at 95.
---------------------------------------------------------------------------

b. Minimum Financial Standards and Ongoing Monitoring for Compliance
    In addition, based on SPP's representations, it appears that SPP's 
policies and procedures include minimum financial standards and 
creditworthiness standards for their market participants.\330\ 
Moreover, SPP represents that its policies and procedures, require SPP 
to monitor, on an ongoing basis, their market participants for 
compliance with such standards.\331\
---------------------------------------------------------------------------

    \330\ See, e.g., Exemption Application Attachments at 10-14, 96-
100. SPP requires market participants to demonstrate and maintain 
the certain minimum financial requirements. The Commission notes 
that SPP has represented that it has market participants that may 
not meet the definition of eligible contract participant as defined 
by the CEA, but are ``appropriate persons'' for purposes of the 4(c) 
exemption. See Exemption Application Attachments at 11-12, 16-17, 
60, 95. The Commission proposes to condition the granting of the 
4(c) request on all parties to the agreement, contract or 
transaction being (1) ``appropriate persons,'' as defined sections 
4(c)(3)(A) through (J) of the Act; (2) ``eligible contract 
participants'' as defined in section 1a(18)(A) of the Act and in 
Commission regulation 1.3(m); or (3) a person who actively 
participates in the generation, transmission, or distribution of 
electric energy,'' as defined in paragraph 5(h) of the Proposed 
Exemption. See provision 2.b. of the Proposed Exemption.
    \331\ See, e.g., Exemption Application Attachments at 12-14, 16-
20, 24-25, 96-97, 99-100. For example, according to SPP, it 
completes credit assessments annually and has access to and reviews 
multiple rating agency and industry advisories on market participant 
activities. Id. at 95.
---------------------------------------------------------------------------

c. Establishment of a Central Counterparty
    As discussed in section V.C. above, FERC regulation 35.47(d) 
requires RTOs

[[Page 29512]]

and ISOs to (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 ISO, or (3) provide another method of supporting 
netting that provides a similar level of protection to the market that 
is approved by FERC.\332\
---------------------------------------------------------------------------

    \332\ 18 CFR 35.47(d).
---------------------------------------------------------------------------

    According to SPP, in compliance with FERC Order No. 741's 
requirement to establish the ability to net and offset market 
obligations in bankruptcy, SPP is the counterparty to certain market 
transactions that are pooled within the Integrated Marketplace.\333\ 
SPP also is the counterparty with each market participant for that 
market participant's Integrated Marketplace agreements and transactions 
in the TCR Market, Day-Ahead Market, and Real-Time Balancing Market, 
with specified exclusions regarding bilateral transactions between 
market participants, and self-committed, self-scheduled, and self-
supplied arrangements.\334\ SPP also is the counterparty to TCR and ARR 
instruments held by market participants.
---------------------------------------------------------------------------

    \333\ SPP represents that it has become a central counterparty 
and that its Tariff indicates that SPP will be the counterparty to 
certain market transactions that are pooled in SPP's market. See 
Exemption Application Attachments at 95 n. 450; see generally, 
Exemption Application at 19-21, Exemption Application Attachments at 
94-100, and FERC Order 741 Implementation Chart at 4.
    \334\ See Exemption Application Attachments at 96 n. 453 and 
accompanying text. SPP represents that it is not the counterparty to 
agreements and transactions for transmission service and certain 
ancillary services, which are not agreements and transactions in the 
Integrated Marketplace. Id.
---------------------------------------------------------------------------

    As noted in section V.D.4.g. above, SPP submitted a legal 
memorandum from outside counsel that states that SPP's counterparty 
arrangements will provide SPP with enforceable rights of set-off in the 
event of the market participant's bankruptcy.
d. Conclusion
    Issues regarding risk management requirements, financial standards, 
and the use of a central counterparty are also addressed within the 
context of DCO Core Principle D. The Commission's preliminary 
conclusion that SPP's policies and procedures are congruent with, and 
sufficiently accomplish, the regulatory objectives of Core Principle D 
in the context of SPP's activities with respect to the Covered 
Transactions is relevant in considering SEF Core Principle 7.
    Based on the foregoing analysis, including the representations and 
submissions of SPP, SPP's policies and procedures appear to be 
consistent with, and to accomplish sufficiently, the regulatory 
objectives of SEF Core Principle 7 in the context of SPP's activities 
with respect to the Covered Transactions. The Commission seeks comment 
with respect to this preliminary conclusion.
8. SEF Core Principle 8: Emergency Authority
    SEF Core Principle 8 requires that SEFs adopt rules to provide for 
the exercise of emergency authority.\335\ The SEF should have 
procedures and guidelines for decision-making and implementation of 
emergency intervention in the market. The SEF should have the authority 
to perform various actions, including without limitation: Liquidating 
or transferring open positions in the market, suspending or curtailing 
trading in any swap, and taking such market actions as the Commission 
may direct. In addition, SEFs must provide prompt notification and 
explanation to the Commission of the exercise of emergency 
authority.\336\
---------------------------------------------------------------------------

    \335\ 7 U.S.C. 7b-3(f)(8).
    \336\ Final Rulemaking--Core Principles and Other Requirements 
for Swap Execution Facilities, 78 FR 33476, 33536, June 4, 2013.
---------------------------------------------------------------------------

    SPP represents that its Tariff generally provides a wide range of 
authorities to address emergency situations, and that its emergency 
authority provisions are similar to those of the RTOs/ISOs covered by 
the RTO-ISO Order.\337\ According to SPP, its Tariff and applicable law 
includes provisions to address a market participant's default on its 
obligations, including the ability, in the event of default, to suspend 
any unsecured credit allowances, terminate the market participant's 
rights under the SPP credit policy, terminate service, liquidate a 
market participant's TCR positions in the Integrated Marketplace, as 
well as the authority to suspend or curtail trading in its 
markets.\338\
---------------------------------------------------------------------------

    \337\ See Exemption Application Attachments at 101-103.
    \338\ Id. SPP notes that its Tariff also provides for SPP's 
response to transmission system emergency conditions related to the 
physical operation of the system. See also system safeguards 
discussion infra section V.E.14. In addition, SPP notes that it is 
revenue neutral with respect to all market transactions and services 
that SPP provides, and that shortfalls resulting from a failure of 
one or more market participants to pay market service invoices are 
socialized among the market participants receiving revenues for the 
market services associated with the unpaid obligations. For 
discussion of financial integrity of transactions, see section V.E.7 
for SEF Core Principle 7, Financial Integrity of Transactions 
discussion.
---------------------------------------------------------------------------

    Just as the SEF's have rules in place that require them to take 
emergency actions to protect the markets by ``including imposing or 
modifying position limits, imposing or modifying price limits, imposing 
or modifying intraday market restrictions, imposing special margin 
requirements, ordering the liquidation or transfer of open positions in 
any contract, ordering the fixing of a settlement price,'' SPP 
represents that it may take actions to protect its markets. SPP states 
that if the SPP Market Monitor discovers any weaknesses or failures in 
market design that requires immediate corrective action, the SPP Market 
Monitor may request that the president of SPP authorize an immediate 
FERC filing to implement a corrective action while the appropriate SPP 
organizational group considers a solution, and that SPP has additional 
Tariff provisions to govern the calculation of market prices in the 
event of a failure of either the Day-Ahead Market or Real-Time 
Balancing Market systems, as well as calculation of prices in the event 
that a portion of the SPP system becomes isolated from the remainder of 
the market.\339\
---------------------------------------------------------------------------

    \339\ Exemption Application Attachments at 103.
---------------------------------------------------------------------------

    Based on the foregoing representations, it appears that SPP's 
policies and procedures regarding the exercise of emergency authority 
are congruent with, and sufficiently accomplish, the regulatory 
objectives of SEF Core Principle 8 in the context of SPP's activities 
with respect to the Covered Transactions. The Commission seeks comment 
with respect to this preliminary conclusion.
9. SEF Core Principle 9: Timely Publication of Trading Information
    SEF Core Principle 9 requires a SEF to make public timely 
information on price, trading volume, and other data on swaps to the 
extent prescribed by the Commission.\340\ In addition, SEFs are 
required to have the capacity to electronically capture and transmit 
trade information with respect to transactions executed on the 
SEF.\341\
---------------------------------------------------------------------------

    \340\ 7 U.S.C. 7b-3f(9)(A).
    \341\ 7 U.S.C. 7b-3f(9)(B).
---------------------------------------------------------------------------

    SPP represents that its Tariff requires the timely publication of 
trading information, and SPP is subject to FERC's Open Access Same-Time 
Information System (``OASIS'') regulations and publishes market 
operation and grid management data on the SPP OASIS.\342\ SPP also 
asserts that it is able to publicly release market operations and grid 
management information using their OASIS program.\343\ This system 
transmits information which includes market

[[Page 29513]]

results, the market clearing price and volume.\344\
---------------------------------------------------------------------------

    \342\ See Exemption Application Attachments at 104-106. See, 
e.g., id. at 104, n. 492; see also id. at 106.
    \343\ See id. at 104.
    \344\ See id.; see also October 2014 Supplemental Letter at 3.
---------------------------------------------------------------------------

    Based on the foregoing representations, it appears that SPP's 
policies and procedures regarding the publication of trading 
information are congruent with, and sufficiently accomplish, the 
regulatory objectives of SEF Core Principle 9 in the context of SPP's 
activities with respect to the Covered Transactions. The Commission 
seeks comment with respect to this preliminary conclusion.
10. SEF Core Principle 10: Recordkeeping and Reporting
    SEF Core Principle 10 requires a SEF to maintain records of all 
activity relating to the business of the SEF, report such information 
to the Commission and to keep swaps information open to inspection by 
the Commission.\345\ SPP represents that it has adopted data retention 
and disclosure policies and is required to comply with FERC regulations 
regarding data retention and disclosure.\346\ In addition, SPP 
represents that its Tariff requires its market participants to provide 
the SPP Market Monitor with certain information on a regular and ad hoc 
basis for use in its market monitoring activities.\347\ SPP further 
represents that it is required to comply with FERC regulations 
regarding the maintenance of information by public utilities.\348\
---------------------------------------------------------------------------

    \345\ 7 U.S.C. 7b-3(f)(10).
    \346\ See generally, Exemption Application Attachments at 107-
111; see also, October 2014 Supplemental Letter at 3.
    \347\ See generally, Exemption Application Attachments at 107 n. 
503 and accompanying text; see also id. at 111.
    \348\ See, e.g., id. at 111.
---------------------------------------------------------------------------

    Based on SPP's representations and the discussion regarding DCO 
Core Principles J and K above,\349\ it appears that these practices are 
congruent with, and sufficiently accomplish the regulatory objectives 
of SEF Core Principle 10 in the context of SPP's activities with 
respect to the Covered Transactions. The Commission seeks comment with 
respect to this preliminary conclusion.
---------------------------------------------------------------------------

    \349\ See discussions supra sections V.D.10. and V.D.11.
---------------------------------------------------------------------------

11. SEF Core Principle 11: Antitrust Considerations
    SEF Core Principle 11 prevents a SEF from adopting any rule or 
taking any action that results in any unreasonable restraint of trade, 
or imposes any material anticompetitive burden, unless necessary or 
appropriate to achieve the purposes of the Act.\350\ As discussed 
above, FERC established the RTO/ISO system to promote competition in 
the electric energy market.\351\ SPP represents that its rates and 
actions are subject to the oversight of FERC.\352\ SPP further 
represents that FERC and the SPP Market Monitor review trading activity 
to identify anticompetitive behavior and market design flaws.\353\
---------------------------------------------------------------------------

    \350\ 7 U.S.C. 7b-3(f)(11).
    \351\ See generally, discussion in section III.B, including 
consideration of FERC Orders 888 and 2000; see also Exemption 
Application Attachments at 112; see also discussion supra section 
V.D.14.
    \352\ See generally, Exemption Application Attachments at 112.
    \353\ Id.
---------------------------------------------------------------------------

    Based on SPP's representations and the discussion of DCO Core 
Principle N above,\354\ it appears that SPP's existence and practices 
are congruent with, and sufficiently accomplish, the regulatory 
objectives of SEF Core Principle 11 in the context of SPP's activities 
with respect to the Covered Transactions. The Commission seeks comment 
on this preliminary conclusion.
---------------------------------------------------------------------------

    \354\ See also, discussion supra section V.D.14.
---------------------------------------------------------------------------

12. SEF Core Principle 12: Conflicts of Interest
    Core Principle 12 requires a SEF to establish and enforce rules to 
minimize conflicts of interest and establish a process for resolving 
conflicts of interest.\355\ FERC Order 888 requires ISOs to adopt or 
enforce strict conflict of interest policies.\356\ Similarly, FERC 
Order 2000 requires RTOs to be independent of any market participant, 
and to include in their demonstration of independence that the RTO, its 
employees, and any non-stakeholder directors do not have financial 
interests in any market participant.\357\
---------------------------------------------------------------------------

    \355\ 7 U.S.C. 7b-3(f)(12).
    \356\ See FERC Order 888 at 281.
    \357\ See FERC Order 2000 at 709; 18 CFR 35.34(j)(1).
---------------------------------------------------------------------------

    SPP represents that it meets the requirements of FERC's Order No. 
2000. Moreover, it represents that it has developed extensive standards 
of conduct and conflict of interest provisions for members of the Board 
of Directors and employees (including officers).\358\ SPP's 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.\359\ 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.\360\
---------------------------------------------------------------------------

    \358\ See Exemption Application Attachments at 113-115, and 
October 2014 Supplemental Letter at 4-5 (see, e.g., SPP 
representation that ``[m]embers of the SPP Board of Directors are 
subject to Conflict of Interest and Independence standards set forth 
in the SPP Bylaws,'' and that ``SPP Officers are required to execute 
the Standards of Conduct upon employment. SPP staff members are 
required to execute the Standards of Conduct upon employment and 
annually thereafter.'' In addition, SPP represents ``SPP's 
discussion of DCO Core Principles O and P also supports SPP's 
discussion of SEF Core Principle 12.'' October 2014 Supplemental 
Letter at 4-5. See also discussion supra section V.D.16, DCO Core 
Principle P.
    \359\ Exemption Application Attachments at 113-115; October 2014 
Supplemental Letter at 4-5.
    \360\ Id.
---------------------------------------------------------------------------

    Based on SPP's representations and the discussion of DCO Core 
Principle P above,\361\ it appears that SPP's conflict of interest 
policies and the requirements SPP is subject to are congruent with, and 
sufficiently accomplish, the regulatory objectives of SEF Core 
Principle 12 in the context of SPP's activities with respect to the 
Covered Transactions. The Commission seeks comment with respect to this 
preliminary conclusion.
---------------------------------------------------------------------------

    \361\ Id. See also DCO Core Principle P discussion supra section 
V.D.16.
---------------------------------------------------------------------------

13. SEF Core Principle 13: Financial Resources
    SEF Core Principle 13 requires a SEF to have adequate financial, 
operational and managerial resources to discharge each responsibility 
of the SEF.\362\ In addition, the financial resources of a SEF are 
considered to be adequate if the value of the financial resources 
exceeds the total amount that would enable the SEF to cover the 
operating costs of the SEF for a 1-year period, as calculated on a 
rolling basis.\363\
---------------------------------------------------------------------------

    \362\ 7 U.S.C. 7b-3(f)(13)(A).
    \363\ 7 U.S.C. 7b-3(f)(13)(B).
---------------------------------------------------------------------------

    SPP represents that it has adopted provisions to ensure adequate 
financial, operational and managerial resources to

[[Page 29514]]

discharge its responsibilities.\364\ For example, SPP states that it is 
revenue neutral with respect to all market transactions and services 
that it provides, that it has rules in place that allow it to collect 
revenue from market participants sufficient for each of their 
operations, that it imposes strict creditworthiness and collateral 
requirements on market participants to reduce the possibility of a 
market participant's default and mitigate the impact of such a default 
on SPP's ability to meet its obligations to other market participants, 
and has authority to terminate a market participant's ability to 
transact in the market in situations of default or bankruptcy.\365\ SPP 
further represents to it has sufficient operational resources to 
fulfill its obligations, and has adequate managerial resources to 
operate its systems.\366\ In addition, SPP states that FERC Orders 888 
and 2000 provides RTOs with incentives and imposes requirements to 
promote effective management of RTOs.\367\ SPP represents that it has 
sufficient staff necessary for its operations, and has sufficient human 
resources to fulfill its obligations to its members, market 
participants, and customers.\368\
---------------------------------------------------------------------------

    \364\ See Exemption Application Attachments at 116.
    \365\ Id. at 116-120.
    \366\ Id. at 118-119.
    \367\ Id. at 119.
    \368\ Id. at 118-120; see also DCO Core Principle B analysis 
supra.
---------------------------------------------------------------------------

    Based on SPP's representations and the discussion regarding DCO 
Core Principle B above,\369\ it appears that SPP's practices are 
congruent with, and sufficiently accomplish, the regulatory objectives 
of SEF Core Principle 13 in the context of SPP's activities with 
respect to the Covered Transactions. The Commission seeks comment with 
respect to this preliminary conclusion.
---------------------------------------------------------------------------

    \369\ Id. at 116-120; see also DCO Core Principle B discussion 
supra section V.D.2.
---------------------------------------------------------------------------

14. SEF Core Principle 14: System Safeguards
    SEF Core Principle 14 requires a SEF to establish and maintain a 
program of risk analysis and oversight to identify and minimize sources 
of operational risk, through the development of appropriate controls 
and procedures, and automated systems, that are reliable and secure, 
and have adequate scalable capacity.\370\ Moreover, a SEF must 
establish and maintain emergency procedures, backup facilities, and a 
plan for disaster recovery that allows for the timely recovery and 
resumption of operations, and the fulfillment of the responsibilities 
and obligations of the SEF.\371\ The SEF must also conduct tests to 
verify that the backup resources of the SEF are sufficient to ensure 
continued order processing and trade matching, price reporting, market 
surveillance, and maintenance of a comprehensive and accurate audit 
trail.\372\
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    \370\ 7 U.S.C. 7b-3(f)(14)(A).
    \371\ 7 U.S.C. 7b-3(f)(14)(B).
    \372\ 7 U.S.C. 7b-3(f)(14)(C).
---------------------------------------------------------------------------

    SPP represents that it has developed and adopted system safeguard 
controls and procedures to identify and minimize operational risk, 
including back-up facilities, emergencies and disaster.\373\ Indeed, 
SPP states that as a North American Electric Reliability Corporation 
registered entity, it is required to comply with mandatory electric 
reliability standards that include (among other things) protecting 
against risk to control centers, information systems and 
communications, thus, requires additional operational safeguards to 
specifically address that function.\374\
---------------------------------------------------------------------------

    \373\ See generally, Exemption Application Attachments at 41-43, 
121-123.
    \374\ See Exemption Application Attachments at 121-123; see 
also, supra notes 239-245 and accompanying text.
---------------------------------------------------------------------------

    For example, SPP represents that in order to comply with these 
requirements, it has computer systems that incorporate adequate 
business continuity and disaster recovery functionality.\375\ SPP has 
installed and maintains redundant communications and computer systems, 
has redundant primary and back-up control centers in separate secured 
locations, and has implemented on- and off-site data storage and back-
up.\376\ Furthermore, SPP states that it has emergency preparedness, 
business continuity and disaster recovery plans that are regularly 
reviewed and updated, and it conducts periodic emergency drills and 
mock disaster scenarios to ensure the readiness of backup facilities 
and personnel.\377\ Multiple SPP business units, including SPP's 
Internal Audit Department, work to review, test, and update SPP's 
business continuity plans. 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. Separately, if the SPP Market Monitor discovers any weakness 
or failures in market design that requires immediate corrective action, 
the Market Monitor may request authorization for an immediate FERC 
filing to implement a corrective action while a solution is being 
considered.\378\
---------------------------------------------------------------------------

    \375\ See Exemption Application Attachments at 41-43, 121-123.
    \376\ See id.
    \377\ See id. at 42, 122.
    \378\ See id. at 122-123.
---------------------------------------------------------------------------

    Based on SPP's representations as well as the discussion regarding 
DCO Core Principle I above,\379\ it appears that SPP's practices are 
congruent with, and sufficiently accomplish, the regulatory objectives 
of SEF Core Principle 14 in the context of SPP's activities with 
respect to the Covered Transactions. The Commission seeks comment with 
respect to this preliminary conclusion.
---------------------------------------------------------------------------

    \379\ See id. at 121-123; see also discussion supra section 
V.D.9.
---------------------------------------------------------------------------

15. SEF Core Principle 15: Designation of Chief Compliance Officer
    SEF Core Principle 15 requires that a SEF designate an individual 
as Chief Compliance Officer, with specific delineated duties.\380\ The 
Chief Compliance Officer for a SEF would be responsible for reporting 
to the board and ensuring that the SEF is in compliance with the SEF 
rules.
---------------------------------------------------------------------------

    \380\ See 7 U.S. C. 7b-3(f)(15). This provision requires that 
the chief compliance officer (i) report directly to the board or to 
the senior officer of the facility; (ii) review compliance with the 
core principles in this subsection; (iii) in consultation with the 
board of the facility, a body performing a function similar to that 
of a board, or the senior officer of the facility, resolve any 
conflicts of interest that may arise; (iv) be responsible for 
establishing and administering the policies and procedures required 
to be established pursuant to this section; (v) ensure compliance 
with this Act and the rules and regulations issued under this Act, 
including rules prescribed by the Commission pursuant to this 
section; and (vi) establish procedures for the remediation of 
noncompliance issues found during compliance office reviews, look 
backs, internal or external audit findings, self-reported errors, or 
through validated complaints.
---------------------------------------------------------------------------

    SPP represents that it has a Chief Compliance Officer, who is 
responsible for overseeing compliance, internal audit and market 
monitoring.\381\ In addition, SPP's Board of Director's Oversight 
Committee is responsible for overseeing the process of monitoring 
compliance with SPP and NERC policies, including market monitoring and 
internal compliance with NERC Operating Standards, while its Finance 
Committee oversees SPP's compliance with financially-based legal and 
regulatory requirements.\382\
---------------------------------------------------------------------------

    \381\ See Exemption Application Attachments at 124-125. SPP also 
has a compliance department.
    \382\ See id.
---------------------------------------------------------------------------

    Based on SPP's representations, it appears that SPP's practices are 
congruent with, and sufficiently accomplish, the regulatory objectives 
of SEF Core Principle 15 in the context of SPP's activities with 
respect to the Covered Transactions. The Commission

[[Page 29515]]

seeks comment with respect to this preliminary conclusion.

VI. Proposed Exemption

A. Discussion of Proposed Exemption

    Pursuant to the authority provided by section 4(c)(6) of the 
CEA,\383\ in accordance with CEA sections 4(c)(1) and (2), and 
consistent with the Commission's determination that the statutory 
requirements for granting an exemption pursuant to section 4(c)(6) of 
the Act have been satisfied, the Commission is proposing to issue the 
exemption described in the Proposed Exemption set forth below. The 
Proposed Exemption would exempt, subject to the limitations and 
conditions contained therein, contracts, agreements and transactions 
for the purchase and sale of certain electric energy-related products, 
including specifically-defined ``transmission congestion rights,'' 
``energy transactions,'' and ``operating reserve transactions,'' from 
most provisions of the CEA. The Commission is proposing to explicitly 
exclude from the exemption relief the Commission's general anti-fraud 
and anti-manipulation authority, and scienter-based prohibitions, under 
CEA sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 
6(c), 6(d), 6(e), 6c, 6d, 8, 9, and 13, 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.\384\ 
The preservation of the Commission's anti-fraud and anti-manipulation 
authority provided by these provisions generally is consistent with 
both the scope of the exemption requested in the Exemption Application 
\385\ and recent Commission practice.\386\
---------------------------------------------------------------------------

    \383\ 7 U.S.C. 6(c).
    \384\ 17 CFR 23.410(a)-(b), 32.4, and part 180.
    \385\ See Exemption Application at 1. SPP requested relief from 
``all provisions of the CEA and Commission rules thereunder, except 
the Commission's general anti-fraud and anti-manipulation authority, 
and scienter-based prohibitions, under CEA sections 2(a)(1)(B), 
4(d), 4b, 4c(b), 4o, 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)-(b), 32.4 and part 180.'' The 
Proposed Exemption simply would preserve the Commission's authority 
under the delineated provisions and their implementing regulations 
without caveat, in order to avoid ambiguity as to what conduct 
remains prohibited.
    \386\ See, e.g., Order (1) Pursuant to Section 4(c) of the 
Commodity Exchange Act, Permitting the Kansas City Board of Trade 
Clearing Corporation To Clear Over-the-Counter Wheat Calendar Swaps, 
(2) Pursuant to Section 4d of the Commodity Exchange Act, Permitting 
Customer Positions in Such Cleared-Only Swaps and Associated Funds 
To Be Commingled With Other Positions and Funds Held in Customer 
Segregated Accounts, 75 FR 34983, 34985 (2010), and (3) RTO-ISO 
Order at 19880.
---------------------------------------------------------------------------

    The particular categories of contracts, agreements and transactions 
to which the Proposed Exemption would apply correspond to the types of 
transactions for which relief was explicitly requested in the Exemption 
Application.\387\ SPP requested relief for three specific types of 
transactions and the Proposed Exemption would exempt those 
transactions. With respect to those transactions, the Exemption 
Application also included the parenthetical ``(including convergence or 
virtual bids and offers).'' \388\ The Commission notes that such 
transactions would be included within the scope of the exemption if 
they would qualify as the transmission congestion rights, energy 
transactions, or operating reserve transactions for which relief is 
explicitly provided within the exemption. SPP also has requested relief 
for ``the purchase and sale of a product or service that is directly 
related to, and a logical outgrowth of, any of SPP's core functions as 
an RTO and all services related thereto.'' \389\ The Commission has 
determined that it would be inappropriate, and, accordingly, has 
declined to propose that the exemption be extended beyond the scope of 
the transactions that are specifically defined in the Proposed 
Exemption. As noted above, the authority to issue an exemption from the 
CEA provided by section 4(c) of the Act may not be automatically or 
mechanically exercised. Rather, the Commission is required to 
affirmatively determine, inter alia, that the exemption would be 
consistent with the public interest and the purposes of the Act.\390\ 
With respect to the three groups of transactions explicitly detailed in 
the Proposed Exemption, the Commission's proposed finding that the 
Proposed Exemption would be in the public interest and would be 
consistent with the purposes of the CEA was grounded, in part, on 
certain transaction characteristics and market circumstances described 
in the Exemption Application that may or may not be shared by other, as 
yet undefined, transactions engaged in by SPP or other RTO market 
participants.\391\ Similarly, unidentified transactions might include 
novel features or have market implications or risks that are not 
present in the specified transactions. Such elements may impact the 
Commission's required section CEA 4(c) public interest analysis or may 
warrant the attachment of additional or differing terms and conditions 
to any relief provided. Due to the potential for adverse consequences 
resulting from an exemption that includes transactions whose qualities 
and effect on the broader market cannot be fully appreciated absent 
further specification, it does not appear that the Commission can 
justify a conclusion that it would be in the public interest to provide 
an exemption of the full breadth requested. The Commission notes, 
however, that it has requested comment on whether the proposed scope of 
the exemption is sufficient to allow for innovation and, if not, how 
the scope could be expanded, without exempting products that may be 
substantially different from those reviewed by the Commission. The 
Commission also notes that it stands ready to review promptly any 
additional applications for an exemption pursuant to section 4(c)(6), 
in accordance with CEA sections 4(c)(1) and (2), of the CEA for other 
precisely defined products.
---------------------------------------------------------------------------

    \387\ Exemption Application at 11-15.
    \388\ Id. at 12.
    \389\ Id. at 15.
    \390\ 7 U.S.C. 6(c).
    \391\ For example, the transactions that are included within the 
scope of the Proposed Exemption appear to be limited to those tied 
to the physical capacity of SPP's electric energy grid. Exemption 
Application at 11-15.
---------------------------------------------------------------------------

    The scope of the Proposed Exemption is limited by two additional 
factors. First, it is restricted to agreements, contracts or 
transactions where all parties thereto are either: (1) Entities 
described in section 4(c)(3)(A) through (J) of the CEA; \392\ (2) 
``eligible contract participants,'' as defined in section 1a(18) of the 
Act \393\ or in Commission regulation 1.3(m); \394\ or (3) a person who 
actively participates in the generation, transmission, or distribution 
of electric energy.\395\ Although SPP has requested an exemption 
pursuant to section 4(c)(6) of the CEA, any exemption pursuant to this 
subsection must be issued ``in accordance with'' sections 4(c)(1) and 
4(c)(2).\396\ Section 4(c)(2) prohibits the Commission from issuing an 
exemption pursuant to section 4(c) unless the Commission determines 
that the agreement, contract or transaction ``will be entered into 
solely between `appropriate persons.' '' Appropriate persons include 
those entities explicitly delineated in sections 4(c)(3)(A) through (J) 
of the Act as well as others that the Commission, under the 
discretionary authority provided by

[[Page 29516]]

section 4(c)(3)(K), deems to be appropriate persons ``in light of their 
financial or other qualifications, or the applicability of appropriate 
regulatory protections.''\397\ As noted above, the Commission has 
proposed to determine that eligible contract participants, as defined 
in section 1a(18) of the Act or in Commission regulation 1.3(m), and 
persons that ``active[ly] participat[e] in the generation, transmission 
or distribution of electric energy'' \398\ should be considered 
appropriate persons for purposes of the Proposed Exemption.\399\
---------------------------------------------------------------------------

    \392\ 7 U.S.C. 6(c)(3)(A)-(J).
    \393\ 7 U.S.C. 1a(18).
    \394\ 17 CFR 1.3(m).
    \395\ Consistent with the RTO-ISO Order, the term ``a person who 
actively participates in the generation, transmission, or 
distribution of electric energy'' is defined as a person that is in 
the business of: (1) Generating, transmitting, or distributing 
electric energy or (2) providing electric energy services that are 
necessary to support the reliable operation of the transmission 
system. RTO-ISO Order at 19897.
    \396\ 7 U.S.C. 6(c).
    \397\ 7 U.S.C. 6(c)(3).
    \398\ See supra note 395.
    \399\ See discussion supra section V.B.3.
---------------------------------------------------------------------------

    Second, in order to be eligible for the exemption that would be 
provided by the Proposed Exemption, the agreement, contract or 
transaction also must be offered or sold pursuant to SPP's ``Tariff'' 
and the tariff must have been approved by FERC. This requirement 
reflects the range of the Commission's authority as set forth in 
section 4(c)(6) \400\ of the CEA and is consistent with the scope of 
the relief requested.\401\
---------------------------------------------------------------------------

    \400\ See discussion supra section V.A.
    \401\ Exemption Application at 1.
---------------------------------------------------------------------------

    Consistent with the range of the statutory authority explicitly 
provided by CEA section 4(c), the Proposed Exemption would extend the 
exemption to the agreements, contracts or transactions set forth 
therein and ``any person or class of persons offering, entering into, 
rendering advice, or rendering other services with respect to'' such 
transactions. In addition, for as long as the Proposed Exemption would 
remain in effect, SPP would be able to avail itself of the Proposed 
Exemption with respect to all three expressly-identified groups of 
products, regardless of whether or not SPP offers the particular 
product at the present time. That is, SPP would not be required to 
request future supplemental relief for a product that it does not 
currently offer, but that qualifies as one of the three types of 
transactions in the Proposed Exemption. SPP's Exemption Application 
requested an exemption of the scope provided and the Exemption 
Application was analyzed accordingly.\402\
---------------------------------------------------------------------------

    \402\ SPP requests that ``the exemptive Order it seeks apply to 
each relevant class of contracts, agreements or transactions offered 
or entered into under SPP's FERC-approved Tariff that will be in 
effect . . . 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.'' Exemption 
Application at 11.
---------------------------------------------------------------------------

    The Proposed Exemption indicates that, when a final order is 
issued, it would be made effective upon publication. The Proposed 
Exemption also contains two information-sharing conditions. First, the 
Proposed Exemption is expressly conditioned upon the continuation of 
information sharing arrangements between the Commission and FERC. The 
Commission notes that the CFTC and FERC have executed several MOUs 
since 2005, pursuant to which the agencies have shared information 
successfully. Most recently, the Commission and FERC signed an MOU on 
January 2, 2014 which provides for the sharing of information for use 
in analyzing market activities and protecting market integrity.\403\ 
The terms of this MOU provide that FERC will furnish information in its 
possession to the CFTC upon its request and will notify the CFTC if any 
information requested by it is not in FERC's possession. Moreover, the 
Proposed Exemption requires SPP to comply with the Commission's 
requests through FERC to share, on an as-needed basis and in connection 
with an inquiry consistent with the CEA and Commission regulations, 
positional and transactional data within SPP's possession for products 
in its markets that are related to markets that are subject to the 
Commission's jurisdiction, including any pertinent information 
concerning such data.\404\ Second, the Proposed Exemption includes an 
information-sharing condition that requires that neither SPP's Tariff 
nor any other SPP governing documents shall include any requirement 
that SPP notify its members prior to providing information to the 
Commission in response to a subpoena or other request for information 
or documentation.\405\ The Commission specifically requests comment on 
this condition and as to whether there may be an alternative condition 
that the Commission might use to achieve the same result.
---------------------------------------------------------------------------

    \403\ MOU, available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/cftcfercismou2014.pdf.
    \404\ SPP further represents that it will comply with the 
Commission's requests for related transactional and positional 
market data. See Exemption Application at 22.
    \405\ SPP represents that its Tariff permits the sharing of 
information with the Commission without prior notice to market 
participants. See Exemption Application at 22; Exemption Application 
Attachments at 52, 54.
---------------------------------------------------------------------------

    Finally, the Proposed Exemption expressly notes that it is based 
upon the representations made in the Exemption Application, including 
those representations with respect to compliance with FERC regulation 
35.47. It is also based on supporting materials provided to the 
Commission by SPP and its counsel, including a legal memorandum that, 
in the Commission's sole discretion, provides 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. 
Any material change or omission in the facts and circumstances pursuant 
to which the Proposed Exemption is granted might require the Commission 
to reconsider its finding that the exemption contained therein is 
appropriate and/or in the public interest. The Commission has also 
explicitly reserved the discretionary authority to suspend, terminate 
or otherwise modify or restrict the exemption provided. The reservation 
of these rights is consistent with prior Commission practice and is 
necessary to provide the Commission with the flexibility to address 
relevant facts or circumstances as they arise.

B. Proposed Exemption

    Upon due consideration and consistent with the determinations set 
forth above, the Commission hereby proposes to issue the following 
order (``Order''):
    Pursuant to its authority under section 4(c)(6) of the Commodity 
Exchange Act (``CEA'' or Act'') and in accordance with sections 4(c)(1) 
and (2) of the Act, the Commodity Futures Trading Commission (``CFTC'' 
or ``Commission'')
    1. Exempts, subject to the conditions and limitations specified 
herein, the execution of the electric energy-related agreements, 
contracts, and transactions that are specified in paragraph 2 of this 
Order and any person or class of persons offering, entering into, 
rendering advice, or rendering other services with respect thereto, 
from all provisions of the CEA, except, in each case, the Commission's 
general anti-fraud and anti-manipulation authority, and scienter-based 
prohibitions, under CEA sections 2(a)(1)(B), 4(d), 4b, 4c(b), 4o, 
4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 6d, 8, 9, and 13, 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.
    2. Scope. This exemption applies only to agreements, contracts and 
transactions that satisfy each of the following requirements:

[[Page 29517]]

    a. The agreement, contract or transaction is for the purchase and 
sale of one of the following electric energy-related products:
    (1) ``Transmission Congestion Rights'' defined in paragraph 5(a) of 
this Order, except that the exemption shall only apply to such 
Transmission Congestion Rights where:
    (a) Each Transmission Congestion Right is linked to, and the 
aggregate volume of Transmission Congestion Rights for any period of 
time is limited by, the physical capability (after accounting for 
counterflow) of the electric energy transmission system operated by SPP 
for such period;
    (b) SPP serves as the market administrator for the market on which 
the Transmission Congestion Rights are transacted;
    (c) Each party to the transaction is a member of SPP (or is SPP 
itself) and the transaction is executed on a market administered by 
SPP; and
    (d) The transaction does not require any party to make or take 
physical delivery of electric energy.
    (2) ``Energy Transactions'' as defined in paragraph 5(b) of this 
Order.
    (3) ``Operating Reserve Transactions'' as defined in paragraph 5(c) 
of this Order.
    b. Each party to the agreement, contract or transaction is:
    (1) An ``appropriate person,'' as defined sections 4(c)(3)(A) 
through (J) of the CEA;
    (2) an ``eligible contract participant,'' as defined in section 
1a(18)(A) of the CEA and in Commission regulation 1.3(m); or
    (3) a ``person who actively participates in the generation, 
transmission, or distribution of electric energy,'' as defined in 
paragraph 5(f) of this Order.
    c. The agreement, contract or transaction is offered or sold 
pursuant to SPP's Tariff and that Tariff has been approved by the 
Federal Energy Regulatory Commission (``FERC'').
    3. Applicability to SPP. Subject to the conditions contained in the 
Order, the Order applies to SPP with respect to the transactions 
described in paragraph 2 of this Order.
    4. Conditions. The exemption provided by this Order is expressly 
conditioned upon the following:
    a. Information sharing: Information sharing arrangements between 
the Commission and FERC that are acceptable to the Commission continue 
to be in effect, and SPP's compliance with the Commission's requests 
through FERC to share, on an as-needed basis and in connection with an 
inquiry consistent with the CEA and Commission regulations, positional 
and transactional data within SPP's possession for products in SPP's 
markets that are related to markets that are subject to the 
Commission's jurisdiction, including any pertinent information 
concerning such data.
    b. Notification of requests for information: Neither the Tariff nor 
any other governing documents of SPP shall include any requirement that 
SPP notify its members prior to providing information to the Commission 
in response to a subpoena or other request for information or 
documentation.
    5. Definitions. The following definitions shall apply for purposes 
of this Order:
    a. A ``Transmission Congestion Right'' is a transaction, however 
named, that entitles one party to receive, and obligates another party 
to pay, an amount based solely on the difference between the price for 
electric energy, established on an electric energy market administered 
by SPP, at a specified source (i.e., where electric energy is deemed 
injected into the grid of SPP) and a specified sink (i.e., where 
electric energy is deemed withdrawn from the grid of SPP).
    b. ``Energy Transactions'' are transactions in a ``Day-Ahead 
Market'' or ``Real-Time Balancing Market,'' as those terms are defined 
in paragraphs 5(d) and 5(e) of this Order, for the purchase or sale of 
a specified quantity of electric energy at a specified location 
(including virtual bids and offers), where:
    (1) The price of the electric energy is established at the time the 
transaction is executed;
    (2) Performance occurs in the Real-Time Balancing Market by either:
    (a) Delivery or receipt of the specified electric energy, or
    (b) A cash payment or receipt at the price established in the Day-
Ahead Market or Real-Time Balancing Market (as permitted by SPP in its 
Tariff); and
    (3) 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.
    c. ``Operating Reserve Transactions'' are transactions:
    (1) In which SPP, for the benefit of load-serving entities and 
resources, purchases, through auction, the right, during a period of 
time as specified in SPP's Tariff, to require the seller of such right 
to operate electric energy 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) Physical performance by the seller's facilities within a 
response time interval specified in SPP's Tariff (Reserve Transaction); 
or
    (b) prompt physical performance by the seller's facilities (Area 
Control Error Regulation Transaction);
    (2) For which the seller receives, in consideration, one or more of 
the following:
    (a) Payment at the price established in SPP's Day-Ahead or Real-
Time Balancing Market, as those terms are defined in paragraphs 5(d) 
and 5(e) of this Order, price for electric energy applicable whenever 
SPP exercises its right that electric energy be delivered (including 
``Demand Response,'' as defined in paragraph 5(g) of this Order);
    (b) Compensation for the opportunity cost of not supplying or 
consuming electric energy or other services during any period during 
which SPP requires that the seller not supply energy or other services;
    (c) An upfront payment determined through the auction administered 
by SPP for this service;
    (d) An additional amount indexed to the frequency, duration, or 
other attributes of physical performance as specified in SPP's Tariff; 
and
    (3) In which the value, quantity, and specifications of such 
transactions for SPP for any period of time shall be limited to the 
physical capability of the electric energy transmission system operated 
by SPP for that period of time.
    d. ``Day-Ahead Market'' means an electric energy market 
administered by SPP on which the price of electric energy at a 
specified location is determined, in accordance with SPP's Tariff, for 
specified time periods, none of which is later than the second 
operating day following the day on which the Day Ahead Market clears.
    e. ``Real-Time Balancing Market'' means an electric energy market 
administered by SPP on which the price of electric energy at a 
specified location is determined, in accordance with SPP's Tariff, for 
specified time periods within the same 24-hour period.
    f. ``Person who actively participates in the generation, 
transmission, or distribution of electric energy'' means a person that 
is in the business of: (1) Generating, transmitting, or distributing 
electric energy; or (2) providing electric energy services that are 
necessary to support the reliable operation of the transmission system.
    g. ``Demand Response'' means the right of SPP to require that 
certain sellers of such rights curtail consumption of electric energy 
from the

[[Page 29518]]

electric energy transmission system operated by SPP during a future 
period of time as specified in SPP's Tariff.
    h. ``SPP'' means Southwest Power Pool, Inc. or any successor in 
interest to Southwest Power Pool.
    i. ``Tariff.'' Reference to a SPP ``Tariff'' includes a tariff, 
rate schedule or protocol.
    j. ``Exemption Application'' means the application for an exemptive 
order under 4(c)(6) of the CEA filed by SPP on October 17, 2013, as 
amended August 1, 2014.
    6. Effective Date. This Order is effective upon publication in the 
Federal Register.
    7. Delegation of Authority. The Commission hereby delegates, until 
such time as the Commission orders otherwise, to the Director of the 
Division of Market Oversight (``Division'') and to such members of the 
Division's staff acting under his or her direction as he or she may 
designate, in consultation with the General Counsel or such members of 
the General Counsel's staff acting under his or her direction as he or 
she may designate, the authority to request information from SPP 
pursuant to sections 4(a)(1) and 4(a)(2) of this Order.
    This Order is based upon the representations made in the Exemption 
Application for an exemptive order under 4(c) of the CEA filed by 
SPP,\406\ including those representations with respect to compliance 
with FERC regulation 35.47. It is also based on supporting materials 
provided to the Commission by SPP and its counsel, including a legal 
memorandum that, in the Commission's sole discretion, provides 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. Any material change or omission in the facts and 
circumstances pursuant to which this Order is granted might require the 
Commission to reconsider its finding that the exemption contained 
therein is appropriate and/or consistent with the public interest and 
purposes of the CEA. Further, the Commission reserves the right, in its 
discretion, to revisit any of the terms and conditions of the relief 
provided herein, including but not limited to, making a determination 
that certain entities and transactions described herein should be 
subject to the Commission's full jurisdiction, and to condition, 
suspend, terminate or otherwise modify or restrict the exemption 
granted in this Order, as appropriate, upon its own motion.
---------------------------------------------------------------------------

    \406\ In the Matter of the Application for an Exemptive Order 
Under Section 4(c) of the Commodity Exchange Act by Southwest Power 
Pool, Inc., amended Aug. 1, 2014.
---------------------------------------------------------------------------

VII. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies 
consider whether the Proposed Exemption will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis respecting the impact.\407\ 
The Commission believes that the Proposed Exemption will not have a 
significant economic impact on a substantial number of small entities. 
The Proposed Exemption includes entities that qualify as (1) 
``appropriate persons'' pursuant to CEA sections 4(c)(3)(A) through 
(J), (2) ``eligible contract participants,'' as defined in CEA section 
1a(18)(A) and Commission regulation 1.3(m), or (3) 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. The 
Proposed Exemption also would include any person or class of persons 
offering, entering into, rendering advice or rendering other services 
with respect to the transactions set forth above.\408\ The Commission 
previously determined that ECPs are not ``small entities'' for purposes 
of the RFA.\409\ In addition, the Commission believes that SPP should 
not be considered a small entity based on the central role it plays in 
the operation of the electronic transmission grid and the creation of 
organized wholesale electric markets that are subject to FERC 
regulatory oversight,\410\ analogous to functions performed by DCMs and 
DCOs, which the Commission has determined not to be small 
entities.\411\
---------------------------------------------------------------------------

    \407\ 5 U.S.C. 601 et seq.
    \408\ Under CEA section 2(e), only ECPs are permitted to 
participate in a swap subject to the end-user clearing exception.
    \409\ See Opting Out of Segregation, 66 FR 20740, 20743, Apr. 
25, 2001.
    \410\ See Enhancement of Electricity Market Surveillance and 
Analysis Through Ongoing Electronic Delivery of Data from Regional 
Transmission Organizations and Independent System Operators, 77 FR 
26674 at 26685-26686, May 7, 2012 (RFA analysis as conducted by FERC 
regarding six RTOs and ISOs, including SPP).
    Commission staff also performed an independent RFA analysis 
based on Subsector 221 of Sector 22 (utilities companies) of the SBA 
which defines any small utility corporation as one that does not 
have more than 250 employees. See 13 CFR 121.201 (1-1-15 Edition). 
Staff concludes that SPP is not a small entity, since SPP represents 
that it employs more than 500 employees. See Exemption Application 
Attachments at 8.
    \411\ See A New Regulatory Framework for Clearing Organizations, 
66 FR 45604 at 45609, Aug. 29, 2001 (DCOs); Policy Statement and 
Establishment of Definitions of ``Small Entities'' for Purposes of 
the Regulatory Flexibility Act, 47 FR 18618 at 18618-18619, Apr. 30, 
1982 (DCMs).
---------------------------------------------------------------------------

    Accordingly, the Commission does not expect the Proposed Exemption 
to have a significant impact on a substantial number of entities. 
Therefore, the Chairman, on behalf of the Commission, hereby certifies, 
pursuant to 5 U.S.C. 605(b), that the Proposed Exemption would not have 
a significant economic impact on a substantial number of small 
entities. The Commission invites the public to comment on whether the 
entities covered by the Proposed Exemption should be considered small 
entities for purposes of the RFA, and, if so, whether there is a 
significant impact on a substantial number of entities.

B. Paperwork Reduction Act

    The purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501 
et seq. (``PRA'') are, among other things, to minimize the paperwork 
burden to the private sector, ensure that any collection of information 
by a government agency is put to the greatest possible uses, and 
minimize duplicative information collections across the government. The 
PRA applies to all information, ``regardless of form or format,'' 
whenever the government is ``obtaining, causing to be obtained [or] 
soliciting'' information, and includes and requires ``disclosure to 
third parties or the public, of facts or opinions,'' when the 
information collection calls for ``answers to identical questions posed 
to, or identical reporting or recordkeeping requirements imposed on, 
ten or more persons.'' The Proposed Exemption provides that the 
exemption is expressly conditioned upon information sharing 
arrangements between the Commission and FERC that are acceptable to the 
Commission continue to be in effect. The PRA would not apply in this 
case given that the exemption would not impose any new recordkeeping or 
information collection requirements, or other collections of 
information on ten or more persons that require approval of the Office 
of Management and Budget (``OMB'').

[[Page 29519]]

C. Cost-Benefit Considerations

1. Consideration of Costs and Benefits
a. Introduction
    Section 15(a) of the CEA \412\ requires the Commission to 
``consider the costs and benefits'' of its actions before promulgating 
a regulation under the CEA or issuing certain orders. In proposing this 
exemption, the Commission is required by section 4(c)(6) to ensure the 
same is consistent with the public interest. In much the same way, 
section 15(a) further specifies that the costs and benefits shall be 
evaluated in light of five broad areas of market and public concern: 
(1) Protection of market participants and the public; (2) efficiency, 
competitiveness and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission considers the costs and 
benefits resulting from its discretionary determinations with respect 
to the section 15(a) factors.
---------------------------------------------------------------------------

    \412\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    As discussed above, in response to an Exemption Application from 
SPP, the Commission is proposing to exempt certain transactions from 
the provisions of the CEA and Commission regulations with the exception 
of those prohibiting fraud and manipulation (i.e., sections 2(a)(1)(B), 
4(d), 4b, 4c(b), 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6(c), 6(d), 6(e), 6c, 
6d, 8, 9, and 13, 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). The Proposed Exemption is 
transaction-specific--that is, it would exempt contracts, agreements 
and transactions for the purchase or sale of the limited set of 
electric energy-related products that are offered or entered into in a 
market administered by SPP pursuant to SPP's Tariff for the purposes of 
allocating its physical resources.
    More specifically, the Commission is proposing to exempt from most 
provisions of the CEA certain ``transmission congestion rights,'' 
``energy transactions,'' and ``operating reserve transactions,'' as 
those terms are defined in the Proposed Exemption (collectively 
referred to as Covered Transactions), if such transactions are offered 
or entered into pursuant to a Tariff under which SPP operates that has 
been approved or permitted to take effect by FERC. The Proposed 
Exemption would extend to a person who is: (1) An ``appropriate 
person,'' as defined in CEA sections 4(c)(3)(A) through (J); (2) an 
``eligible contract participant,'' as defined in CEA section 1a(18)(A) 
and in Commission regulation 1.3(m); or (3) a person who actively 
participates in the generation, transmission, or distribution of 
electric energy.\413\ The Proposed Exemption also would extend to any 
person or class of persons offering, entering into, rendering advice or 
rendering other services with respect to the Covered Transactions. 
Important to the Commission's Proposed Exemption is SPP's 
representation that the aforementioned transactions are: (i) Tied to 
the physical capacity of SPP's electric energy grids; (ii) used to 
promote the reliable delivery of electric energy; and (iii) are 
intended for use by commercial participants that are in the business of 
generating, transmitting and distributing electric energy.\414\ In 
other words, these are not purely financial transactions; rather, they 
are inextricably linked to, and limited by, the capacity of the grid to 
physically deliver electric energy.\415\
---------------------------------------------------------------------------

    \413\ See supra note 395.
    \414\ See Exemption Application at 17.
    \415\ Id.
---------------------------------------------------------------------------

    In the discussion that follows, the Commission considers the costs 
and benefits of the Proposed Exemption to the public and market 
participants generally, including the costs and benefits of the 
conditions precedent that must be satisfied before SPP may claim the 
exemption.
b. Proposed Baseline
    The Commission's proposed baseline for consideration of the costs 
and benefits of this Proposed Exemption are the costs and benefits that 
the public and market participants (including SPP) would experience in 
the absence of this proposed regulatory action. In other words, the 
proposed baseline is an alternative situation in which the Commission 
takes no action and exercises jurisdiction, meaning that the 
transactions that are the subject of this Exemption Application would 
be required to comply with all of the CEA and Commission regulations, 
as applicable. In such a scenario, the public and market participants 
would experience the full benefits and costs related to the CEA and 
Commission regulations, but as discussed in detail above, the 
transactions would still be subject to the congruent regulatory regime 
of FERC.
    The Commission also considers the regulatory landscape as it exists 
outside the context of the Dodd-Frank Act's enactment. In this 
instance, it also is important to highlight SPP's representation that 
each of the transactions for which an exemption is requested is already 
subject to a long-standing, comprehensive regulatory framework for the 
offer and sale of such transactions established by FERC.\416\ For 
example, the costs and benefits attendant to the Commission's condition 
that transactions be entered into between ``appropriate persons'' as 
described in CEA section 4(c)(3) has an analog outside the context of 
the Dodd-Frank Act in FERC's minimum criteria for RTO market 
participants as set forth in FERC Order 741. Moreover, the Commission 
has granted similar relief to other RTOs and ISOs regulated by either 
FERC or the Public Utility Commission of Texas.\417\
---------------------------------------------------------------------------

    \416\ Id.
    \417\ RTO-ISO Order. See supra section III.C.
---------------------------------------------------------------------------

    In the discussion that follows, where reasonably feasible, the 
Commission endeavors to estimate quantifiable dollar costs of the 
Proposed Exemption. The benefits and costs of the Proposed Exemption, 
however, are not presently susceptible to meaningful quantification. 
Most of the costs arise from limitations on the scope of the Proposed 
Exemption, and many of the benefits tied to those limitations arise 
from avoiding defaults and their implications that are clearly large in 
magnitude, but impracticable to estimate. Where it is unable to 
quantify, the Commission discusses proposed costs and benefits in 
qualitative terms.
c. Costs
    The Proposed Exemption is exemptive and would provide ``appropriate 
persons'' engaging in the Covered Transactions relief from certain of 
the requirements of the CEA and attendant Commission regulations. As 
with any exemptive rule or order, the Proposed Exemption is permissive, 
meaning that SPP was not required to request it and is not required to 
rely on it. Accordingly, the Commission assumes that SPP would rely on 
the Proposed Exemption only if the anticipated benefits to SPP outweigh 
the costs of the exemption. Here, the Proposed Exemption identifies 
certain conditions to the grant of the Proposed Exemption. The 
Commission is of the view that, as a result of the conditions, SPP, 
market participants and the public would experience minimal, if any, 
ongoing costs as a result of these conditions because, as SPP certifies 
pursuant to CFTC Rule 140.99(c)(3)(ii), the attendant conditions are 
substantially similar to requirements that SPP and its market 
participants

[[Page 29520]]

already incur in complying with FERC regulations.
    The condition that all parties to the agreements, contracts or 
transactions that are covered by the Proposed Exemption must be (1) an 
``appropriate person,'' as defined in sections 4(c)(3)(A) through (J) 
of the CEA; (2) an ``eligible contract participant,'' as defined in 
section 1a(18)(A) of the CEA and in Commission regulation 1.3(m); or 
(3) a ``person who actively participates in the generation, 
transmission, or distribution of electric energy'' \418\--is not likely 
to impose any significant, incremental costs on SPP because its 
existing legal and regulatory obligations under the FPA and FERC 
regulations mandate that only eligible market participants may engage 
in the Covered Transactions, as explained above.\419\
---------------------------------------------------------------------------

    \418\ See supra notes 393-395.
    \419\ See supra section V.B.3.
---------------------------------------------------------------------------

    The second condition is that the Covered Transactions must be 
offered or sold pursuant to SPP's Tariff--which has been approved or 
permitted to take effect by FERC. This is a statutory requirement for 
the exemption set forth in CEA section 4(c)(6) and therefore is not a 
cost attributable to an act of discretion by the Commission.\420\ 
Moreover, requiring that SPP not operate outside its Tariff 
requirements derives from existing legal requirements and is not a cost 
attributable to this proposal.
---------------------------------------------------------------------------

    \420\ See 7 U.S.C. 6(c)(6)(A), (B).
---------------------------------------------------------------------------

    As discussed above, FERC imposes on SPP, and its market monitor, 
various information management requirements.\421\ These existing 
requirements are not materially different from the condition, in the 
Proposed Exemption, that 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, 
special call, or other request for information or documentation. SPP 
indicated in its Exemption Application that on March 1, 2014, FERC 
accepted a revision to SPP's Tariff governing the sharing of 
information that meets this proposed condition.\422\ The Commission 
requests comment as to whether a provision in the Proposed Exemption 
that effectively requires SPP continues to meet this condition imposes 
a significant burden or increase in cost on SPP, and whether there are 
alternative conditions that may be used to achieve a similar result. 
Further, SPP has agreed to provide any information to the Commission 
upon request that will further enable the Commission to perform its 
regulatory and enforcement duties. While the Commission is mindful that 
the process of responding to subpoenas or requests for information 
involves costs, the requirement to respond to such subpoenas and 
requests for information, and thus the associated costs, is independent 
of the current Proposed Exemption.
---------------------------------------------------------------------------

    \421\ See supra section V.B.1.
    \422\ SPP represents that its Tariff requires the sharing of 
information with the Commission without prior notice to market 
participants. See Exemption Application Attachments at 52, 54.
---------------------------------------------------------------------------

    Finally, the condition that information sharing arrangements that 
are satisfactory to the Commission between the Commission and FERC must 
be in full force and effect is not a cost to SPP or to other members of 
the public and has been an inter-agency norm since 2005.\423\ Moreover, 
the condition that SPP comply with the Commission's requests on an as-
needed basis for related transactional and positional market data will 
impose only minimal costs on SPP to respond because the Commission 
contemplates that any information requested will already be in SPP's 
possession.\424\
---------------------------------------------------------------------------

    \423\ The CFTC and FERC first signed an MOU on October 12, 2005. 
On January 2, 2014, as directed by Congress under the Dodd-Frank 
Act, the Commission and FERC entered into an MOU, which superseded 
the 2005 MOU and provided for the sharing of information for use in 
analyzing market activities and protecting market integrity. See 
supra note 62.
    \424\ See supra section IV.B.
---------------------------------------------------------------------------

d. Benefits
    In proposing this exemption, the Commission is required by section 
4(c)(6) to ensure that it is consistent with the public interest. In 
much the same way, CEA section 15(a) requires that the Commission 
consider the benefits to the public of its action. In meeting its 
public interest obligations under both 4(c)(6) and 15(a), the 
Commission in sections V.B.1., V.D., and V.E. proposes a detailed 
consideration of the nature of the transactions and FERC's regulatory 
regime, including whether the protections provided by that regime is, 
at a minimum, congruent with the Commission's oversight of DCOs and 
SEFs.
    This exercise is not rote; rather, in proposing that this exemption 
is in the public interest, the Commission's comprehensive action 
benefits the public and market participants in several substantial 
ways, as discussed below. First, the parameters for the Covered 
Transactions set forth in the Proposed Exemption limit the financial 
risk that may impact the markets. The mitigation of such risk inures to 
the benefit of SPP, market participants and the public, especially 
SPP's members and electric energy ratepayers.
    The condition that only ``appropriate persons'' may enter the 
Covered Transactions benefits the public and the entities that fall 
under the ``appropriate persons'' definition themselves, by ensuring 
that (1) only persons with resources sufficient to understand and 
manage the risks of the transactions are permitted to engage in the 
same, and (2) persons without such resources do not impose credit costs 
on other participants (and the ratepayers for such other participants). 
Further, the condition requiring that the Covered Transactions only be 
offered or sold pursuant to a FERC-approved tariff benefits the public 
by, for example, ensuring that the Covered Transactions are subject to 
a regulatory regime that is focused on the physical provision of 
reliable electric energy, and also has credit requirements that are 
designed to achieve risk management goals congruent with the regulatory 
objectives of the Commission's DCO and SEF Core Principles. Absent 
these and other similar limitations on participant- and financial-
eligibility, the integrity of the markets at issue could be compromised 
and members and ratepayers left unprotected from potentially 
significant losses resulting from purely financial, speculative 
activity.
    Finally, the Commission's retention of its authority to redress any 
fraud or manipulation in connection with the Covered Transactions 
protects market participants and the public generally, as well as the 
financial markets for electric energy products. For example, the 
Proposed Exemption is conditioned upon effective information sharing 
arrangements between the FERC and the Commission being in place. 
Through such an arrangement, the Commission expects that it will be 
able to request information necessary to examine whether activity on 
SPP's markets is adversely affecting the Commission-regulated markets. 
Further, the Proposed Exemption is conditioned upon the Commission's 
ability to obtain certain data within SPP's possession from SPP. 
Through this condition, the Commission expects that it will be able to 
continue discharging its regulatory duties under the CEA. Further, the 
condition that SPP may not, in the future, maintain any Tariff 
provisions that would require SPP to notify members prior to providing 
the Commission with information will help maximize the effectiveness of 
the Commission's enforcement program.

[[Page 29521]]

e. Consideration of Alternatives
    The Commission considered alternatives to the proposed rulemaking. 
For instance, the Commission could have chosen: (i) Not to propose an 
exemption or (ii), as SPP requested, to provide relief for ``the 
purchase and sale of a product or service that is directly related to, 
and a logical outgrowth of, any of SPP's core functions as an RTO . . . 
and all services related thereto.'' Regarding this latter request, the 
Commission understands the Exemption Application as requesting relief 
for transactions not yet in existence. In this exemption, the 
Commission proposes what it considers a measured approach--in terms of 
the implicated costs and benefits of the exemption--given its current 
understanding of the Covered Transactions.
    Regarding the first alternative, the Commission considered that 
Congress, in the Dodd-Frank Act, required the Commission to exempt 
certain contracts, agreements or transactions from duties otherwise 
required by statute or Commission regulation by adding a new section 
that requires the Commission to exempt from its regulatory oversight 
agreements, contracts, or transactions traded pursuant to an RTO tariff 
that has been approved or permitted to take effect by FERC, where such 
exemption was in the public interest and consistent with the purposes 
of the CEA. Having concluded that the Proposed Exemption meets those 
tests, the Commission proposes that a no exemption alternative would be 
inconsistent with Congressional intent and contrary to the public 
interest. At the same time, however, the Commission believes it would 
also be inappropriate to adopt the second alternative.
    The second alternative would extend the Proposed Exemption to 
future products that are ``logical outgrowths'' of the Covered 
Transactions. The Commission proposes that such alternative would be 
contrary to the Commission's obligation under section 4(c) of the Act. 
As noted above, the authority to issue an exemption from the CEA 
provided by section 4(c) of the Act may not be automatically or 
mechanically exercised. Rather, the Commission is required to 
affirmatively determine, inter alia, that the exemption would be 
consistent with the public interest and the purposes of the Act.
    The Commission is concerned that such an open-ended definition 
could present risks beyond those contemplated. At the same time, the 
Commission believes that any new transactions that fall within the 
Covered Transactions, which are explicitly defined in the Proposed 
Exemption, and any modifications to existing transactions that do not 
alter the Covered Transactions' characteristics in a way that would 
cause them to fall outside those definitions, that are offered by SPP 
pursuant to a FERC-approved Tariff, are intended to be included within 
the Proposed Exemption. This provides a benefit in that no supplemental 
relief for such products would be required, which is a cost mitigating 
efficiency gain for SPP. Moreover, unidentified transactions might 
include novel features or have market implications or risks that are 
beyond evaluation at the present time, and are not present in the 
specified transactions.
2. Consideration of CEA Section 15(a) Factors
a. Protection of Market Participants and the Public
    In proposing the exemption as it did, the Commission endeavored to 
provide relief that was in the public interest. A key component of that 
consideration is the assessment of how the Proposed Exemption protects 
market participants and the public. As discussed above, market 
participants and the public are protected by the existing regulatory 
structure that includes congruent regulatory goals, and by the four 
conditions placed upon the proposed relief by requiring, inter alia, 
that: (i) Only those with the financial wherewithal are permitted to 
engage in the transactions; (ii) the transactions at issue must be 
within the scope of SPP's FERC-approved Tariff; (iii) no advance notice 
to members of information requests to SPP from the Commission; and (iv) 
the Commission and FERC, must continue to have an information sharing 
arrangement in full force and effect. In addition, the Proposed 
Exemption is limited to the transactions identified and defined herein. 
In this way, the Commission eliminates the potential that as-yet-
unknown transactions not linked to the physicality of the electric 
system may be offered or sold under this Proposed Exemption, protecting 
market participants and the public from risk that might arise from sale 
of such unknown transactions.
b. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    In this Proposed Exemption, the Commission considered its effect on 
the efficiency, competitiveness, and financial integrity of the markets 
subject to the Commission's jurisdiction. As means of increasing 
competition and efficiency, the Commission recognizes that entities 
falling under the ``appropriate persons'' definition will benefit from 
increased competition among RTOs benefiting from this type of exemption 
with the addition of SPP to the existing ones and will be able to 
engage in the Covered Transactions in a more efficient manner. Further, 
the Commission's retention of its full enforcement authority will help 
ensure that any misconduct in connection with the exempted transactions 
does not jeopardize the financial integrity of the markets under the 
Commission's jurisdiction.
c. Price Discovery
    As discussed above in section V.B.4, with respect to TCRs and 
Operating Reserve Transactions, these transactions do not appear to 
directly impact transactions taking place on Commission-regulated 
markets--they are not used for price discovery and are not used as 
settlement prices for other transactions in Commission-regulated 
markets.
    With respect to Energy Transactions, these transactions have a 
relationship to Commission-regulated markets because they can serve as 
a source of settlement prices for other transactions subject to the 
Commission's jurisdiction. Granting the Proposed Exemption, however, 
does not mean that these transactions will be unregulated. To the 
contrary, as explained in more detail above, SPP has a market 
monitoring system in place to detect and deter manipulation that takes 
place on its markets. Further, as noted above, the Commission retains 
all of its anti-fraud and anti-manipulation authority as a condition of 
the Proposed Exemption.
d. Sound Risk Management Practices
    As with the other areas of cost-benefit consideration, the 
Commission's evaluation of sound risk management practices occurs 
throughout this release, notably in sections V.D.4.a. and V.E.7.a. 
which consider SPP's risk management policies and procedures, and the 
related requirements of FERC (in particular, FERC Order 741 on Credit 
Policies), in light of the Commission's risk management requirements 
for DCOs and SEFs.
    In addition, the Commission believes that the Proposed Exemption 
will allow market participants who are eligible for this exemption to 
more effectively manage their operational risk arising from the non-
storable nature of electric energy and fluctuating end-user demand for 
it.

[[Page 29522]]

e. Other Public Interest Considerations
    The Commission proposes that because these transactions are part 
of, and inextricably linked to, the organized wholesale, physical 
electric energy markets that are subject to regulation and oversight of 
FERC, the Commission's Proposed Exemption, with its attendant 
conditions, requirements, and limitations, is in the public interest. 
The Commission recognizes that the Proposed Exemption supports eligible 
market participants' supply of affordable and reliable electric energy 
to the public by exempting their use of the Covered Transactions from 
CEA.
3. Request for Public Comment on Costs and Benefits
    The Commission invites public comment on its cost-benefit 
considerations and dollar cost estimates, including the consideration 
of reasonable alternatives. Commenters are invited to submit any data 
or other information that they may have quantifying or qualifying the 
costs and benefits of the proposal with their comment letters.

VIII. Request for Comment

    The Commission requests comment on all aspects of its Proposed 
Exemption. In addition, the Commission specifically requests comment on 
the specific provisions and issues highlighted in the discussion above 
and on the issues presented in this section. For each comment 
submitted, please provide a detailed rationale supporting the response.
    1. Has the Commission used the appropriate standard in analyzing 
whether the Proposed Exemption is in the public interest?
    2. Is the scope set forth for the Proposed Exemption sufficient to 
allow for innovation? Why or why not? If not, how should the scope be 
modified to allow for innovation without exempting products that may be 
materially different from those reviewed by the Commission? Should the 
Commission exempt such products without considering whether such 
exemption is in the public interest? In answering this question, please 
consider that SPP may separately petition the Commission for an 
amendment of any final order granted in this matter. In addition, 
please consider that the Commission has, to a certain extent, addressed 
these innovation questions in the RTO-ISO Order.
    3. Should the Proposed Exemption be conditioned upon the 
requirement that SPP cooperate with the Commission in its conduct of 
special calls/further requests for information with respect to 
contracts, agreements or transactions that are, or are related to, the 
contracts, agreements, or transactions that are the subject of the 
Proposed Exemption?
    4. What is the basis for the conclusion that SPP does, or does not, 
provide to the public sufficient timely information on price, trading 
volume, and other data with respect to the markets for the contracts, 
agreements and transactions that are the subject of the Proposed 
Exemption? What Tariff provisions, if any, requires it to do so or 
precludes it from doing so?
    5. What is the basis for the conclusion that the Proposed Exemption 
will, or will not, have any material adverse effect on the Commission's 
ability to discharge its regulatory duties under the CEA, or on any 
contract market's ability to discharge its self-regulatory duties under 
the CEA?
    6. What are the bases for the conclusions that SPP's Tariff, 
practices, and procedures do, or do not, appropriately address the 
regulatory goals of each of the DCO and SEF Core Principles?
    7. What factors support, or detract from, the Commission's 
preliminary conclusion that TCRs, Energy Transactions, and Operating 
Reserve Transactions are not susceptible to manipulation for the 
reasons stated above? What is the basis for the conclusion that market 
participants can, or cannot, use Energy Transactions to manipulate 
electric energy prices without detection by the SPP Market Monitor?
    8. What is the basis for the conclusion that SPP has, or has not, 
satisfied applicable market monitoring requirements with respect to 
TCRs, Energy Transactions, and Operating Reserve Transactions? What is 
the basis for the conclusion that the record-keeping functions 
performed by SPP is, or is not, appropriate to address any concerns 
raised by the market monitoring process? What is the basis for the 
conclusion that the market monitoring functions performed by SPP and 
the SPP Market Monitor do, or do not, provide adequate safeguards to 
prevent the manipulation of SPP's markets?
    9. What are the bases for the conclusions that SPP does, or does 
not, adequately satisfy the SEF requirements for (a) recordkeeping and 
reporting, (b) preventing restraints on trade or imposing any material 
anticompetitive burden, (c) minimizing conflicts of interest, (d) 
providing adequate financial resources, (e) establishing system 
safeguards and (f) designating a CCO? Specifically, do the procedures 
and principles in place allow SPP to meet the requirements of SEF core 
principles 10-15?
    10. What is the basis for the conclusion that SPP's eligibility 
requirements for participants are, or are not, appropriate to ensure 
that market participants can adequately bear the risks associated with 
the Participants markets?
    11. What is the basis for the conclusion that SPP does, or does 
not, have adequate rules in place to allow it to deal with emergency 
situations as they arise? What deficiencies, if any, are there with 
respect to SPP's emergency procedures that would prevent SPP from 
taking necessary action to address sudden market problems?
    12. What would be the basis for the conclusion that SPP should not 
receive relief that is substantially similar to the relief the 
Commission granted other RTOs and ISOs in the RTO-ISO Order?
    13. The Commission invites comment on its consideration of the 
costs and benefits of the Proposed Exemption, including the costs of 
any information requirements imposed therein. The Commission also seeks 
comment on the costs and benefits of this Proposed Exemption, 
including, but not limited to, those costs and benefits specified 
within this proposal. Commenters are also are invited to submit any 
data or other information that they may have quantifying or qualifying 
the costs and benefits of the proposal with their comment letters.

    Issued in Washington, DC, on May 18, 2015, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

Appendix to 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--Commission Voting 
Summary

    On this matter, Chairman Massad and Commissioners Wetjen, Bowen, 
and Giancarlo voted in the affirmative. No Commissioner voted in the 
negative.

[FR Doc. 2015-12346 Filed 5-20-15; 8:45 am]
 BILLING CODE 6351-01-P