Washington (Platts)--24Nov2010/1222 pm EST/1722 GMT

A new market manipulation standard proposed by the US Commodity Futures Trading Commission could launch another jurisdictional war between the agency and the Federal Energy Regulatory Commission and reignite tensions created during the 2007 case against Amaranth Advisors, lawyers said this week.

"If this doesn't get worked out behind the scenes somehow, it's going to be a problem," said Catherine Krupka, a partner at the law firm Sutherland Asbill and Brennan and chair of the firm's electric regulatory practice group.

The CFTC's proposed anti-manipulation rule, which was unveiled last month and is currently subject to a two-month public comment period, is mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and is similar to the anti-manipulation powers granted to FERC in 2005.

The rule will alter the CFTC's current anti-manipulation standard in which the CFTC has to prove intent to manipulate prices and that an action resulted in an artificial price. It also "muddies" the jurisdictional areas covered by FERC and the CFTC, according to Sharon Brown-Hruska, a former CFTC acting chairman and commissioner and a current vice president in the securities and finance practice at NERA Economic Consulting.

"Both now perceive themselves to be vigorous enforcement agencies in this space and you may see both pursuing the same [cases]," Brown-Hruska said. "This is kind of an area ripe for both entities to assert jurisdiction over certain types of contracts that they feel some type of wrong-doing might have occurred."

The issue largely centers on how broadly the CFTC interprets the term "swap" when setting up its new over-the-counter derivatives regulatory regime, as required by Dodd-Frank, Brown-Hruska said.

If the CFTC interprets certain forward physical contracts as swaps, for example, it could make a claim that these contracts, currently the jurisdiction of FERC, belong under its purview, she said.

"The swaps definition could be really broad, and some contracts in the power sphere could be interpreted to be part of their bailiwick," Brown-Hruska said.

Krupka said that the issue depends on how each agency interprets its own manipulation powers, which could allow either agency to examine manipulative behavior "in connection" with the markets it oversees. This means that, for example, while FERC could reach into the futures market if it feels trading has a connection to wrongdoing in physical power or gas markets, the CFTC could reach into the trading of an Independent System Operator or transactions in the physical gas markets if it feels it affects the derivatives markets, Krupka said.

The two agencies in 2007 squabbled over whether FERC had the jurisdiction to penalize Amaranth Advisors for alleged manipulation of the gas futures market. While the CFTC at the time asserted that it has "exclusive jurisdiction" over futures trading -- even going so far as to intervene in the case of former head trader Brian Hunter -- FERC said Amaranth's activities in 2006 affected the price of physical gas, under its purview.

Additionally, in cases of jurisdictional crossover, prosecutions by one agency could be crippled if the other agency finds a trader not guilty of manipulation, Krupka said.

"They're going to have to agree behind the scenes how they're going to manage that," Krupka said.

CFTC Commissioner Bart Chilton, who lobbied heavily for these new manipulation powers for the agency, said the issue is "not really" a concern, but declined to comment further.

Under a requirement in Dodd-Frank, the CFTC and FERC are working on drafting two memorandums of understanding on information sharing and procedures for applying their regulatory authorities. The MOUs are due by late January. --Brian Scheid, brian_scheid@platts.com

Similar stories appear in Inside FERC. See more information at http://www.platts.com/Products/insideferc