In its attempt to investigate and curb natural gas market manipulation, FERC's encroachment into the purview of the Commodity Futures Trading Commission (CFTC) could lead to jurisdictional conflicts and an onerous burden for market participants, industry leaders told Capitol Hill lawmakers last week.
A subcommittee of the House Committee on Agriculture is reviewing a reauthorization of the Commodity Exchange Act (CEA), and on Wednesday the subcommittee heard from futures exchange executives. A hearing in July by the committee had focused on commodities trading and regulation (see NGI, July 16).
What specifically concerns the industry and many lawmakers as the CEA is reconsidered is the possible jurisdictional dispute between the Federal Energy Regulatory Commission (FERC) and the CFTC. FERC monitors the physical gas market; the CFTC monitors the futures market. In July, the two federal agencies separately instigated investigations against failed hedge fund Amaranth Advisors LLC for allegedly manipulating gas prices (see NGI, July 30). And on Friday, they both sought to control their interests in the investigation through litigation (see related story).
"There is a growing fear that recent FERC actions may be encroaching upon the CFTC's exclusive jurisdiction over the futures markets," said Rep. Bob Etheridge (D-NC), chair of the House Subcommittee on General Farm Commodities and Risk Management. "I do not know why the FERC chose to take an enforcement action, which has called its own authority into question."
Etheridge, who oversaw the congressional hearing, noted that the Energy Policy Act of 2005 (EPAct) broadened FERC's authority to investigate energy market manipulation and to impose fines. However, he said Congress intended for the CFTC to have exclusive jurisdiction over the futures markets, including the New York Mercantile Exchange (Nymex).
"For the CFTC to fail to assert its exclusive jurisdiction, when appropriate, would equal a failure to uphold the will of Congress," Etheridge said.
Nymex President Jim Newsome, who testified at the hearing, agreed. Congress "unambiguously gave" the CFTC exclusive jurisdiction to regulate the futures markets, he said.
If FERC were to prevail in its action against Amaranth, said Newsome, Congress could attempt to regulate other types of futures markets. He said the Department of Agriculture could try to regulate futures trading in farm crops; the Department of Treasury could attempt the same over the bond and currency futures markets.
"Multiple regulators cripple us globally," Newsome said. He told lawmakers of instances where FERC "has been coming in, almost demanding that we make changes to certain settlements that the CFTC had already approved...We are caught in the middle of two federal agencies, and it's not useful to our market."
Nymex "believes strongly that the CFTC currently has and should continue to have exclusive authority and jurisdiction over futures transactions and markets," said Newsome. "To vary from this prudent structure would only create confusion, inconsistency and uncertainty, ultimately harming the vitality and effectiveness of derivatives markets as well as the broader economy relying upon such markets for price discovery and hedging of risk."
Jeffrey Sprecher, CEO of IntercontinentalExchange (ICE), said his company had worked "continuously with the CFTC and other regulatory agencies in the U.S. and abroad in order to ensure that they have access to all relevant information available to ICE regarding trading activity on our markets. We have also worked closely with Congress to address the regulatory challenges presented by emerging markets and will continue to work cooperatively for solutions that promote the best marketplace possible."
However, Sprecher noted that "in prescribing regulation, it is important to consider the fundamental nature of the market in question and avoid engaging in a superficial 'one size fits all' analysis that would unduly burden the efficient operation of markets and potentially stifle innovation. In short, the level of regulation should fit the market in question both in terms of the users who can access the market as well as the amenability of the market to active monitoring and the prevention of manipulative activity."
John Damgard, president of the Futures Industry Association, rejected claims by FERC Chairman Joseph Kelliher Jr. that the Commission was not attempting to regulate futures markets and was only working to protect customers that buy natural gas (see NGI, Sept. 3).
"FERC's latest assertion is that there is a regulatory gap in policing futures market manipulation," said Damgard. "Nothing could be further from the truth. The CFTC has comprehensive, time-tested futures price antimanipulation authority. It vigorously enforces the law. FERC and the CFTC should work together. Each has enormous and important responsibilities. By double-teaming futures trading, however, FERC is actually diverting resources from those duties. Exclusive means just what it says. It was sound policy in 1974 and remains sound policy today."
FERC "claims its cash transaction antimanipulation authority allows it to police the futures markets themselves because futures prices are used in entering into cash transactions," said Damgard. "But Congress knew that one purpose of futures trading is to provide pricing information that nonfutures market participants can rely upon in their commercial dealings...Congress made a choice; in our view, the right choice. It said CFTC jurisdiction over futures was exclusive. The dictionary defines exclusive as 'not shared with others.'"
Giving CFTC exclusive jurisdiction, said Damgard, prevents "U.S. futures markets, professionals and market participants from bearing the cost of 'duplicative or conflicting' regulation. And it wanted to entrust the nationally important economic activity in futures markets to the oversight of one expert regulator, the CFTC." He said "no court has ever accepted the position advanced by FERC. And no court should. Exclusive jurisdiction is vitally important to the proper functioning of the futures markets. It must be preserved."
Following the hearing, key House energy lawmakers expressed support for FERC and the CFTC working together to combat manipulation in energy markets, saying that their jurisdictional authorities were complementary.
"Efforts by FERC to protect the wholesale energy markets from manipulation are not inconsistent with the CFTC's exclusive day-to-day regulation of futures exchanges, futures contract terms, trading rules, and the like. We do not view these regulatory jurisdictions as conflicting or duplicative but rather as complementary," said Rep. John D. Dingell (D-MI), chairman of the House Energy and Commerce Committee, and Rep. Joe Barton (R-TX), the ranking member of the panel, in a recent letter to Kelliher and CFTC Chairman Walter Lukken.
Citing the broad new oversight power and civil penalty authority given to FERC in the EPAct, the House lawmakers said they expected FERC to "engage in active oversight and to make appropriate and vigorous use of these new authorities in order to provide for the integrity of those markets, fair competition and the protection of consumers."
The EPAct required the CFTC and FERC to develop a memorandum of understanding to encourage the sharing of information between the two agencies. "It was clear then, and remains clear now, that energy markets, and manipulation schemes seeking to exploit them, straddle the discrete regulatory jurisdictions of your two agencies. In recognition of this deep interconnectedness, it did not make sense to use to retain the previous administrative burdens for sharing information," Dingell and Barton said.
"Our clear intent [in EPAct] was for your two agencies to work together, share information, conduct joint investigations and find and prosecute market manipulation wherever it might take place," they noted.
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