Updated: June 3, 2010 (Initial publication: May 3, 2010)
Sectorial Analysis
II-6.14 : The CME Group challenges the Commodity Futures Trading Commission’s January 26, 2010 proposition to regulate speculation on energy futures, option contracts, and derivatives.
Main information
The Commodity Futures Trading Commission (CFTC) published a proposition to regulate speculation through futures and option contracts on the over-the-counter energy market on January 26, 2010. This proposition is being challenged by the CME Group (the principal American futures market operator), which claims that the CFTC does not have a legal mandate to regulate over-the-counter trading in energy, because such action would have to be authorised by a specific law.
Context and Summary
Brief commentary
The disagreement between CME and the CFTC can essentially be resumed by referencing the eternal debate over whether the law should be interpreted restrictively or broadly.
The CFTC adopts a broad point of view: since it is in charge of regulating transparency and excessive speculation on the futures market, it considers that over-the-counter options contracts and futures, which are traded on markets it regulates, come within its purview. It considers that “energy” is being traded, and that it has a mandate to control speculation on this good, which is having adverse effects on the market.
The CME, on the other hand, adopts a restrictive interpretation of the law. The CME considers that “energy” is not at all being traded. The CME merely serves as a listing for private contracts between private investors, which merely happen to be instruments for speculating on the price of energy. There is no “energy” being bought or sold, and therefore, the CFTC does not have a mandate to regulate such private transactions between private parties.
In a classical conception of Regulation, a power that a law has not explicitly granted the regulator does not exist. However, in a modern, or non-classical, conception, the Law grants the Regulator with a mission: necessity knows no law, and as long as the Regulator’s action is proportional and necessary to fulfil its teleological mission, it is legally justified.
Therefore, in this case, we can say that the claim made by the CME group—that the CFTC is incompetent to regulate over-the-counter transactions of this sort—is irrelevant: the CFTC has been entrusted with the mission of controlling excessive speculation that leads to harmful fluctuations in commodity prices. Clearly, the private contracts involved in over-the-counter energy transactions that are listed by the CME group are an example of speculation that adversely affects the energy market.
Therefore, the CFTC is perfectly justified in applying a regulatory framework to this type of transaction, for it is fulfilling its mission.
However, the financial stakes at hand for the CME group are enormous. One can therefore expect that should the CFTC pursue in its attempt to regulate over-the-counter energy transactions, the affair will end up in a Federal Appeals Court, and perhaps even in the United States Supreme Court.
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