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Enforcement Times Two

FERC and CFTC begin sharing information to target market manipulation in the energy industry.

Fortnightly Magazine - July 2014
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In 2005, Congress broadened enforcement authority at the Federal Energy Regulatory Commission (FERC) to reach the use of "any manipulative or deceptive device or contrivance" in connection with natural gas and electricity trading that is subject to FERC regulation. 1 Since then, FERC has significantly expanded its Office of Enforcement and has sent a strong signal that it intends to wield its new authority aggressively. Until recently, however, its enforcement efforts had been hampered by jurisdictional disputes with the Commodity Futures Trading Commission (CFTC) and, moreover, by the CFTC's reluctance to share with FERC its sophisticated Large Trader Reporting System ("LTRS") database containing detailed information on the futures, options, and swap positions of traders that exceed certain position limits or volume thresholds. 2

It is well-known that FERC and the CFTC have disagreed for years about the scope of their respective jurisdictions over the energy markets. 3 This disagreement has persisted despite the requirement in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) that FERC and the CFTC should have agreed on two memoranda of understanding (MOUs) by January 2011. 4 Their unwillingness to share information drew expressions of concern from the U.S. Senate as recently as last year. 5 In January 2014, however, three years after the initial deadline, FERC and the CFTC (jointly, the "Commissions") issued MOUs addressing a number of outstanding jurisdictional issues and agreeing to share information on markets under each of the Commissions' jurisdiction, 6 including giving FERC access to the CFTC's vast LTRS database. 7 With these new understandings, improved cooperation between the Commissions seems a reality. Indeed, the Commissions announced on March 5, 2014, that they had actually begun sharing information, and had formed a joint data surveillance and analysis task force to help coordinate the use of analytical tools for "regulatory purposes." 8

This closer working relationship between the Commissions heightens the enforcement risk for companies engaged in trading physical and financial energy products. Data from CFTC-regulated financial markets, and access to the CFTC's powerful data analysis tools, will provide FERC with new weapons in its beefed-up anti-manipulation efforts. Moreover, as FERC becomes more adept at spotting and investigating wrongdoing, experience shows that it will also become more aggressive in referring such matters to the Department of Justice (DOJ) for criminal investigation and prosecution. And recent events reflect that the CFTC is also entering a phase of increased cooperation with DOJ. The improved relationship among regulators and prosecutors strongly suggests that participants in the energy markets will face new threats of criminal investigations, and perhaps prosecutions, launched by DOJ.

In the remainder of this article, we review developments in this

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