We saw it coming 35 years ago. Recently the Federal Energy Regulatory Commission (FERC) sued a hedge fund, Amaranth Advisors, for purportedly manipulating the price of natural gas futures contracts on the New York Mercantile Exchange. Asked where it thought it obtained jurisdiction to bring futures manipulation cases when Commodity Futures Trading Commission (CFTC) enjoys "exclusive jurisdiction" over all US futures markets, the FERC responded that futures prices affect the underlying physical natural gas markets over which it has clear authority and, therefore, FERC has a right to attack the root cause of that disruption.
Meanwhile, CFTC is politely disagreeing while the courts draw them ever closer to direct confrontation. The situation has been made even more awkward by the fact that FERC and CFTC have pledged full cooperation in policing their respective markets and have even conducted some joint investigations when both the futures markets and the physical markets might be imperiled.
Why should we care? Because it is an issue worth billions of dollars to the futures community. What if every federal, state and local authority with an arguable claim of "interest" in a commodity, service or other object of futures trading were to demand a voice in the regulation of futures markets for the same reason articulated by FERC? Those markets would probably be crushed under the burden, or suffer immense costs of operation to be passed along to users (also known as readers).
In 1973, I was retained by Chicago Board of Trade to try (hard) to assure that the new federal regulatory agency for futures that was under discussion in Congress, would be the industry's only master. Why? Because we were no longer your father's grain markets (appropriately regulated by the Department of Agriculture). The Chicago Mercantile Exchange had launched foreign currency futures, Comex had listed precious metal futures, and my own client was quietly - not to disturb, in particular, the Securities and Exchange Commission (SEC) - developing the world's first interest rate futures contract.
To make a long story short, Congress adopted my language conveying to the new CFTC not only exclusive jurisdiction over the futures markets but also over just about anything that those markets might choose to trade. While "commodity" used to conjure images of corn or soybeans, it includes today stock indices, weather patterns, credit defaults and ever more, because of that effort. Later, under the Shad/Johnson Accord as CFTC chair, we laid to rest the only remaining legal hurdle to new product development, namely, we confirmed that despite 70+ mentions in the statute of "future delivery" the markets could create futures contracts where delivery was not even allowed.
But, back to the present. The US futures community has come out strong for CFTC on this issue. It has filed an amicus brief with a federal court urging it to block, or at least to postpone, the FERC proceeding in favour of an action brought for the same purpose by CFTC. The stakes, as mentioned, are huge. If FERC can attack behaviour on the futures markets because it could indirectly impact matters within its own jurisdiction, the regulatory wannabes will gush forth for their own piece of the action. It makes no more sense actually even less today than it did in the 1970s.
The commissions record of jurisdictional defense has not been perfect, however. In 2000, it agreed to allow SEC to co-regulate futures contracts involving single stocks or bonds, or involving smaller stock indexes. Why? Because the futures contracts could indirectly impact the stock and bond markets. This is exactly what the FERC is contending! Logic suggests that, if the argument was accepted then, why not now? And why not for other authorities that will queue up behind FERC? In my unsolicited opinion, however, mistakes that cannot be rectified nevertheless need not be compounded, either.
This is a profound moment in the history of the US futures community. Make no mistake about it.
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