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CFTC, FERC Butt Heads over Jurisdiction in Futures Market

November 10, 2008
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In a brief filed last Monday in federal appeals court in Washington, DC, the Commodity Futures Trading Commission (CFTC) butted heads with the Federal Energy Regulatory Commission (FERC) over the issue of whether FERC has jurisdiction in cases where the manipulation of natural gas futures trades subsequently influences the price of physical gas transactions.

The CFTC intervened in an appeal of Brian Hunter, a former gas trader for failed hedge fund Amaranth Advisors LLC. He is challenging FERC's authority to bring an enforcement action against him for allegedly manipulating the settlement prices of certain gas futures contracts traded on the New York Mercantile Exchange (Nymex). FERC contends that his manipulation of futures trading influenced FERC-jurisdictional physical gas prices in violation of the Natural Gas Act (NGA).

Hunter is appealing a July ruling by the U.S. District Court for the District of Columbia, which denied his request for a judgment declaring that FERC's assertion of authority in the natural gas futures markets violates a number of federal laws (see NGI, Aug. 4).

The CFTC has adopted the position of Hunter on the jurisdictional issue, arguing that FERC overstepped the authority granted to it by Congress in the Energy Policy Act of 2005 (EPAct) and encroached on the jurisdictional turf of the CFTC in the futures market. FERC accused Hunter and Amaranth Advisors of market manipulation in an order to show cause (OSC), which was issued in July 2007 (see NGI, July 30, 2007). The case still is pending at the Commission.

"The text of both the Commodity Exchange Act (CEA) and the NGA, the legislative histories of the two statutes, and the case law interpreting and applying the exclusive jurisdiction provision in the CEA, will support the conclusion that FERC has no jurisdiction over the futures trading at issue in this case," the CFTC told the appellate court.

The key issue for the court to decide is "whether Congress, in granting FERC new anti-manipulation powers in the Energy Policy Act of 2005 (amending the Natural Gas Act) and authorizing FERC to promulgate implementing rules, repealed or otherwise circumscribed the CFTC's long-standing exclusive jurisdiction over futures trading on futures exchanges."

There is "nothing in the EPAct [that] even remotely affects the long-standing exclusive jurisdiction of the CFTC with respect to futures trading on designated contract markets such as Nymex. FERC's assertions to the contrary misread both the text and legislative history of the EPAct," the CFTC argued.

"There is no regulatory gap to be addressed because the CFTC possesses ample authority to detect and prosecute manipulative futures trading -- and indeed has done so regarding certain trading by Mr. Hunter."

In July U.S. District Judge Richard Leon agreed with FERC's claim that Hunter was using the jurisdictional argument to in effect challenge the OSC, and as such the appeal should be brought in a court of appeals rather than district court.

"It is clear that the principal target of Hunter's declaratory judgment claim is the OSC itself, not FERC's jurisdictional authority. And since the court of appeals has exclusive jurisdiction over challenges to orders issued by FERC...this court lacks jurisdiction over Hunter's claim," Leon said at the time.

In December 2007 Leon also rejected Hunter's plea to enjoin FERC from proceeding with its enforcement action against him for allegedly manipulating the gas futures markets in 2006 (see NGI, Dec. 17, 2007).

Amaranth Advisors raised the issue of FERC's jurisdiction over its futures market activities in a court proceeding last November (see NGI, Nov. 5, 2007). U.S. District Judge Denny Chin for the Southern District of New York said the jurisdictional issue was best left up to an appellate court. However he said he believed "Congress intended the CFTC and FERC to coordinate their efforts, at least to some degree," especially when they bring enforcement actions against the same company for similar actions.

FERC's July 2007 show cause order alleged that Amaranth, several affiliates and former traders (including Hunter), by manipulating natural gas futures on Nymex, influenced prices in the physical gas markets. The agency said many participants in physical gas markets use the settlement price of the Nymex gas futures contract to determine the price of FERC-jurisdictional physical gas transactions. The CFTC filed a similar complaint against Amaranth and Hunter for attempted gas market manipulation one day before FERC brought its enforcement action (see NGI, July 30, 2007). The Amaranth hedge fund was liquidated in late 2006 after losing $6 billion on natural gas trades.

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