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CFTC Proposes Reversing Course, Granting Private Right of Action in Energy Market Manipulation

Last week the Commodity Futures Trading Commission (CFTC) issued a notice of proposed order and request for comment proposing to allow a private right of action to enforce violations of the anti-manipulation, anti-fraud or scienter based provisions (Anti-fraud provisions) of the Commodity Exchange Act (CEA) in organized electricity markets.  The proposal is a controversial reversal of policy that critics say could open electricity market participants to increased costs and liability. After the Dodd-Frank Act expanded the CFTC’s jurisdiction under the CEA to include regulation of swaps, six regional transmission organizations (RTO) and independent system operators (ISO) petitioned the CFTC seeking exemptions from various provisions of the CEA for certain energy products traded in the electricity markets that the RTOs/ISOs administer.  These products include physical energy products traded with the ISOs/RTOs as well as financial transmission rights and other...

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CFTC Finalizes Exception for Swaps with Utility Special Entities

The Commodity Futures Trading Commission (CFTC) last week released a final rule excluding certain electricity and natural gas swaps with governmental agencies and municipalities from the lower de minimis threshold for swaps with special entities.  The rule makes permanent currently existing no-action relief previously issued by CFTC Staff.  The final rule is the result of a petition filed by advocates for public energy companies claiming that subjecting swap transactions with governmental entities to a lower de minimis threshold would reduce the number of available counterparties, raise market liquidity concerns and make it more difficult for public energy companies to mitigate risk.  To address these concerns the CFTC will allow certain swaps with special entities to be counted as regular swaps for purposes of swap dealer registration. Under the Commodity Exchange Act and the CFTC’s regulations, an entity is exempt from registration as a swap dealer if the...

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Energy Regulators FERC, CFTC Finally Reach Proactive Understanding on Jurisdiction and Information Sharing

Primary regulators of energy transactions, the Federal Energy Regulatory and Commodity Futures Trading Commissions (FERC, CFTC or jointly Participating Agencies) began the new year by entering on January 2 two overdue Memoranda of Understanding (MOU), one on overlapping jurisdictions, the other on sharing of information generated in connection with market surveillance and investigations into suspected market manipulation, fraud or abuse.  Both MOUs became effective immediately. FERC, with jurisdiction over physical natural gas and power transactions, and the CFTC, with jurisdiction over financially settled products such as energy futures and swaps, had battled in recent years over the reach of each other’s jurisdiction, culminating in a March 2013 decision of the U.S. Court of Appeals for the D.C. Circuit finding that FERC improperly invaded CFTC’s jurisdiction when, under authority of the Energy Policy Act of 2005, it sought to fine Amaranth Advisors trader...

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Transatlantic Derivatives Consensus: Landmark Step for EC/US Cooperation

by Simone Goligorsky and David McDonnell On 11 July 2013, the European Commission (EC) and the United States Commodity Futures Trading Commission (CFTC) announced a high-level joint understanding, known as the “Path Forward”, which details the shared future vision on the cross-border regulation of over-the-counter (OTC) derivatives (click here for the full announcement). This is a welcome announcement, given the concerns that many market participants had regarding the possibility of certain derivative transactions being subject to regulation on both sides of the Atlantic. The Path Forward has been produced as part of the package that was developed in order to promote the transparency of OTC derivatives markets and to lower the risks associated with them.  At the core of the Path Forward is the objective of avoiding what was viewed by some market participants as the ‘double treatment’ of derivatives, whereby the derivatives would...

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On Heels of European Raids, Energy Companies Face U.S. Class Actions

by Megan Morley White Oaks Fund LP, an Illinois private placement fund, filed a class action suit last week against BP PLC, Royal Dutch Shell PLC and Statoil ASA in the Southern District of New York.  White Oaks Fund v. BP PLC, et al., case number 1:13-cv-04553.  The complaint alleges that the energy companies colluded to distort the price of crude oil by supplying false pricing information to Platts, a publisher of benchmark prices in the energy industry, in violation of the Sherman and Commodity Exchange Acts.  Plaintiffs claim that defendant companies are sophisticated market participants who knew that the incorrect information they provided to Platts would impact crude oil futures and derivative contracts prices traded in the U.S. This action follows at least six civil litigations that have been filed against BP, Shell and Statoil after the European Commission (EC) and Norwegian Competition Authority raided the companies in...

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CFTC’s Dodd-Frank Rulemaking: Still a Work in Progress

by Robert Lamkin The Dodd-Frank Act was signed into law more than two years ago, but the energy industry remains mired in uncertainty as the U.S. Commodity Futures Trading Commission (CFTC) continues to finalize inter-related rules in a piecemeal fashion even as compliance obligations have taken effect. At least 14 proposed rulemakings (see table below) have yet to be finalized due to pending resolution on comments and petitions, and the CFTC is still sitting on proposed orders and petitions. In a joint filing, leading associations for the electric and natural gas industries requested a stay of the application of the rules because of the uncertainty caused by the Commission’s implementation schedule. On the first day of compliance, the CFTC provided limited relief through a number of no-action letters, but the request for a more comprehensive stay has been ignored. Below are some of the key proceedings for the energy industry. Major...

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FERC General Counsel Argues Applying Dodd-Frank Regulations to RTO/ISO Products is Potentially Harmful

by Elizabeth P. Philpott The Federal Energy Regulatory Commission (FERC) General Counsel recently argued to the Commodity Futures Trading Commission (CFTC) that “[a]pplying Dodd-Frank swap regulations to [regional transmission organization] RTO and [independent system operator] ISO products and services is not only unnecessary but also potentially harmful.” Transactions entered under RTO and ISO tariffs, according to the FERC General Counsel, should be exempt from the definition of “swap.” The FERC General Counsel made these arguments in August 21 comments, partially supporting the petition of the nation’s six RTO/ISOs asking the CFTC to exempt them from swaps regulation under the Commodity Exchange Act in connection with four types of electricity purchases and sales they offer pursuant to FERC- or Public Utility Commission of Texas-approved tariffs. The FERC General Counsel had to resort to comment in order to make the...

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D.C. District Court Rejects CFTC’s Position Limits Rule

by Ari Peskoe and William Friedman The Commodity Futures Trading Commission (CFTC) has met resistance in its attempt to implement parts of the Dodd-Frank financial reform less than two weeks before they were scheduled to go into effect.  On September 28, U.S. District Judge Robert L. Wilkins issued an opinion vacating the CFTC’s position limits rule and remanding it to the Commission. Judge Wilkins’ problem with the rule was not its substance but rather that the CFTC did not make necessary factual findings mandated by the Dodd-Frank Act.    The position limits rule was finalized in November and set spot-month position limits for both physical delivery and cash-settled contracts tied to 28 physical commodities, including natural gas and crude oil. The U.S. District Court for the District of Columbia vacated and remanded the rule because the CFTC made no findings about whether position limits were “necessary and...

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ICE Announces Conversion of Cleared OTC Energy Products to Futures

by Ari Peskoe IntercontinentalExchange (ICE) announced June 30 that it will convert all of its cleared over-the-counter (OTC) derivative products listed on its OTC energy market to futures.  Cleared North American natural gas, electric power, environmental products and natural gas liquids swaps will be listed as futures on the energy division of ICE Futures; cleared oil products will be listed as futures on ICE Futures Europe. The transition is in reaction to new regulations being phased in pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which are expected to make OTC swap trades more costly.  Currently, traders can exchange futures products, cleared OTC products, and uncleared OTC products on ICE’s platforms.  ICE’s cleared OTC products provide access to centralized clearing and settlement arrangements while reducing bilateral credit risk and capital required for OTC trades.  ICE currently...

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Electricity Industry May Escape Regulation Under New Swaps Rule

by Ari Peskoe In a joint-rulemaking finalized last month, the Commodities Future Trading Commission (CFTC) and the Securities Exchange Commission (SEC) declined to adopt specific exemptions for the electricity industry in its definitions of “swap dealers” and “major swap participants.” It is likely, however, that many industry participants will be able to take advantage of exemptions for swaps entered into for the purpose of hedging price risks related to physical positions and the de minimis exception, or that relevant transactions will be excluded from the definition of the term “swap.” Comments submitted by the industry on the proposed rule argued that the many unique characteristics of swaps related to electricity markets entitled them to special treatment by regulators.  For example, as opposed to many other physical commodities, electricity must be generated and transmitted at the instant it is needed, and...

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