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Trading Spaces? Will CFTC Move Into FERC's House?

Will the CFTC move Into FERC's house?
Fortnightly Magazine - January 2004

the argument of some at the CFTC that RTO/ISO markets fall within its jurisdiction. 13

Clearly the New York Mercantile Exchange (NYMEX) and the Chicago Board of Trade are "boards of trade," and FERC has not yet sought to exert jurisdiction (except as to discovery matters, a dispute that seems to have led to the language in H.R. 6) over them. But what about an RTO or ISO operating a day-ahead or hour-ahead market? Although the CEA has undergone numerous revisions since its initial implementation, the Act has always maintained a structure that requires all futures trading to be conducted on CFTC regulated exchanges. 14 As now envisioned (at least by FERC) and operating, RTO and ISO markets are regulated by FERC.

While it is not entirely clear whether an RTO or ISO operating a day ahead or forward market would be an organized exchange, discussions with CFTC officers suggest that at least some at the CFTC believe they fall within that definition. A key point is that not all transactions clear physically, so it does not appear clear that these transactions are forward contracts excluded under CEA section 1a(19).

Thus, at best, there is no bright line test that would take such a market out of CFTC jurisdiction. So one very big question is who makes the rules for such a market, which most of us have thought of as arguably operating as a self-regulating organization (SRO) under the jurisdiction of FERC. If those trading in electric and natural gas futures are within the exclusive jurisdiction of the CFTC, for example, how does FERC get the authority to require behavioral rules for those who trade in such markets? And what behavioral rules would CFTC apply?

A Different Philosophy: If the CFTC Held Sway

In this context, it may be useful to look at what the CFTC does and at its statutory mission.

There are a number of parallels between the regulation of the CFTC in the commodities markets and that of the Securities and Exchange Commission (SEC) in the securities markets under the SEA. The most basic point is that both view their mission as regulation of , not as regulation of prices. Thus the tools they have at their disposal are quite different than those tools expressly provided to FERC under the Power Act. The different tools result in quite disparate regulatory approaches originally taken by the three agencies.

Nevertheless, FERC is clearly attempting to move itself into a CFTC/SEC market regulator mode, where it regulates markets through RTO/ISO market monitors that report to it as well as to their own boards. With some simplification, the legal argument is that if FERC can control the operation of the market so as to assure a competitive result, it may then classify the resulting price as "just and reasonable." This approach also entails having market rules which become tariff requirements, so that all of those that work through the markets are contractually bound to the rules. 15 Following this line of reasoning, FERC has imposed, as a condition of being able to