US CFTC's new manipulation standard may reignite turf war with FERC
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
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
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,
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
--Brian Scheid, email@example.com
Similar stories appear in Inside FERC.
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