This week’s enforcement update covers:
- Commodity Trading Adviser (CTA) violation settled with CFTC;
- CFTC and Kraft file motions for summary judgment;
- CFTC files 12 enforcement actions addressing registration, position limits, recordkeeping, supervision and reporting;
- Seventh Circuit upholds Illinois zero emissions credits for nuclear facilities;
- Judge denies class action lawsuit alleging antitrust violations in New England gas market;
- CFTC Staff issues report on impact of U.S. tight oil on NYMEX WTI futures contract;
- CFTC orders BNP Paribas to pay $90 million penalty for attempted manipulation and false reporting of U.S. Dollar ISDAFIX benchmark swap rates; and
- FERC issues notice of intent to revoke MBR authority to five entities for failure to file EQRs.
CFTC issues enforcement order for unregistered CTA. On Friday, September 14, CFTC issued an order finding that Mobius Risk Group LLC was an unregistered Commodity Trading Advisor (CTA). CFTC found that Mobius held itself out generally to the public as a CTA and had more than 15 clients. The Commodity Exchange Act defines a CTA as a person who for compensation or profit, engages in the business of advising others, either directly or through publications, writings or electronic media as to the value of or advisability of trading in, among other things, commodity futures, commodity options, swaps, and retail forex transactions. CTAs with more than 15 clients are required to register. The failure abide with this resulted in a settlement for Mobius with the CFTC, and civil penalty of $75,000.
The facts: Mobius acts as an independent energy risk advisory firm providing market guidance to producers, consumers, and capital market participants. During the relevant period, Mobius provided some clients with advice and recommendations concerning physical commodity trading. Mobius also provided certain clients with advice, reports, and/or analyses concerning value of or advisability of trading in over-the-counter (OTC) swaps and commodity options in oil, natural gas, and liquefied natural gas. For example, Mobius provided several clients with trading or hedging strategies, which included OTC swaps and/or commodity options for reducing client’s energy risks. Each client signed an agreement with Mobius for varying levels of services, some of which related to financial risk management. Mobius’ swaps and commodity options advisory services are part of its regular business. Clients paid a flat fee for Mobius’ technology and reporting, advisory services pertaining to physical and/or financial commodity trading, or a combination thereof. From at least October 2012 to August 15, 2018, Mobius made use of the mails, emails, telephone and the Internet, to conduct its business as a CTA. Mobius held itself out generally to the public as a CTA through, for example, its public website by offering risk management services to eligible contract participants on financial commodities such as oil, natural gas, interest rates, and foreign exchange, among other commodities. The services Mobius publicly offered included: (a) customized risk strategy development; (b) risk strategy management; (c) market analysis and monitoring; (d) market forecasting; and (e) trade execution (as agent). These various services include advice concerning OTC swaps and commodity options. In addition, during the course of the preceding twelve months, Mobius furnished commodity trading advice to more than fifteen persons. Such advisory services were not solely incidental to Mobius’ business.
CFTC and Kraft file motions for summary judgment. On September 14, the CFTC and Defendants Kraft Foods Group, Inc. and Mondelēz Global LLC (Kraft) filed motions for summary judgment in the U.S. District Court for the Northern District of Illinois. The CFTC filed a motion for summary judgment on Count III (speculative position limit violations) and Count IV (wash sales, fictitious sales, and non-competitive trading). According to the CFTC, Kraft exceeded the 600-contract speculative position limit for wheat futures on nine days in the December 2011 wheat futures contract traded on the Chicago Board of Trade, and Kraft engaged in thirty-three Exchange of Futures for Physical transactions between 2010 and 2012 that constituted wash sales and caused non-bona fide prices to be reported.
Kraft argues that there is no genuine issue of material fact as to an essential element of the CFTC’s market manipulation claim because the CFTC cannot prove that Kraft sent a false signal that deceived the market. In addition, Kraft asserts that there is no record evidence from which a reasonable jury could conclude that Kraft’s conduct influenced prices. With respect to the position limit claim (Count III), Kraft argues that it fails because the CME provided Kraft a valid exemption from those limits. Finally, Kraft claims that the non-competitive trading claim (Count IV) fails for multiple reasons, including that offsetting Kraft’s own positions was not a wash sale or fictitious sale because it negated no market risk to Kraft.
CFTC files 12 enforcement actions addressing registration, position limits, recordkeeping, supervision and reporting. In addition to the Mobius settlement discussed above, on September 14, the CFTC issued 11 other orders filing and simultaneously settling charges against various respondents for violations of the Commodity Exchange Act and CFTC regulations, including for position limits, recordkeeping, registration, reporting, and failure to supervise violations. James McDonald, CFTC Director of Enforcement, stated: “These Orders reflect the CFTC’s commitment to protecting the public by enforcing the recordkeeping, registration, reporting, and supervision requirements in the Act and Regulations. These requirements are critical to the CFTC’s mission to protect market participants and to ensure market integrity: (i) on the front end, by requiring entities and individuals to register with the CFTC prior to doing business in the commodities markets, (ii) on an ongoing basis by requiring registrants to diligently supervise their employees and ensure compliance with the Act and Regulations, and (iii) on the back end by ensuring proper records are maintained and made available to the CFTC, allowing fraud and other misconduct to be detected and remediated. As these actions show, the Commission will continue to vigorously enforce these requirements.”
Seventh Circuit upholds Illinois zero emission credits for nuclear facilities. On September 13, the U.S. Court of Appeals for the Seventh Circuit issued a decision affirming the district court in upholding the Illinois zero emission credit (ZEC) program for the state’s nuclear generation facilities. The Seventh Circuit rejected the appellants’ preemption claims, asserting that “because states retain authority over power generation, a state policy that affects price only by increasing the quantity of power available for sale is not preempted by federal law.” According to the Seventh Circuit, the exercise of powers reserved to the states does not lead to preemption; rather, they are an inevitable consequence of a system in which power is shared between state and national governments. In addition, the Seventh Circuit rejected the appellants’ dormant Commerce Clause arguments, ruling that Illinois has not engaged in any discrimination beyond what is required by the rule that a state must regulate within its borders.
Judge denies class action lawsuit alleging antitrust violations in New England gas market. On September 11, Judge Denise J. Casper of the U.S. District Court for the District of Massachusetts issued an order dismissing a putative class action lawsuit brought by retail electricity consumers residing in New England against Eversource Energy and Avangrid, Inc., alleging violations of the Sherman Act and various state consumer protection and antitrust laws. Plaintiffs alleged that Defendants restricted New England’s supply of natural gas, and, as a result, caused New Englanders to pay nearly $3.6 billion dollars more for retail electricity. Judge Casper ruled that the filed rate doctrine bars Plaintiffs from seeking damages for the alleged violations of federal and state law. In addition, Judge Casper ruled that even if the filed rate doctrine did not bar Plaintiffs’ antitrust claims, those claims would not survive Defendants’ motions to dismiss because Plaintiffs lack standing to bring their claims and for the additional reason that Plaintiffs have failed to state a cognizable antitrust monopolization claim.
As we previously reported, FERC issued a release in February 2018 stating that a FERC staff inquiry revealed no evidence of anticompetitive withholding of natural gas pipeline capacity on Algonquin Gas Transmission by New England shippers. The inquiry arose out of allegations made by the Environmental Defense Fund (EDF) in an August 2017 white paper, which asserted that local gas distribution companies in New England had engaged in practices to withhold pipeline capacity on the Algonquin system in order to drive up gas and/or power prices in the region. FERC staff determined that EDF’s study was flawed and led to incorrect conclusions about the alleged withholding. FERC staff found no evidence of capacity withholding.
CFTC Staff issues report on impact of U.S. tight oil on NYMEX WTI futures contract. On September 6, the CFTC’s Market Intelligence Branch (MIB) issued a report that analyzes activity in the NYMEX WTI futures contract. The report highlights research findings from recent analysis of activity in NYMEX WTI futures contracts as U.S. crude production from tight oil has grown. CFTC staff analyzed futures trading volume and open interest across all listed expirations from January 2003 through March 2018. In particular, CFTC staff found that:
- As a whole, volume and open interest in the contract remains robust;
- At a more granular level, open interest in futures contracts for delivery five or more years into the future has declined;
- The decline in open interest of NYMEX WTI contracts for delivery five or more years in the future has been primarily due to structural changes in physical crude oil caused by the growth of U.S. tight oil production; and
- The overall price level for oil and developments in financial regulation may have had a secondary effect on open interest for NYMEX WTI contracts for delivery five or more years in the future.
This report is part of a series of MIB reports analyzing current and emerging market issues to assist the CFTC in making informed policy. MIB staff will publish additional reports on issues of current market interest, such as market liquidity and volatility.
CFTC orders BNP Paribas to pay $90 million penalty for attempted manipulation and false reporting of U.S. Dollar ISDAFIX benchmark swap rates. On August 29, the CFTC issued an order filing and settling charges against BNP Paribas Securities Corp. (BNP Paribas) for attempted manipulation of the ISDAFIX benchmark and requiring BNP Paribas to pay a $90 million civil monetary penalty. The CFTC’s order finds that over a five-year period, beginning around May 2007 and continuing through at least August 2012, BNP Paribas attempted to manipulate the U.S. Dollar USD ISDAFIX, a leading global benchmark referenced in a range of interest rate products, to benefit BNP Paribas’s derivatives positions in instruments such as cash-settled options on interest rate swaps and certain exotic structured products. According to the order, BNP Paribas traders attempted to manipulate the USD ISDAFIX by bidding, offering, and executing transactions of swap spreads at the critical 11:00 a.m. fixing time in order to affect the “print,” i.e., the reference rates captured at 11:00 a.m. and sent to submitting banks. In addition, the CFTC’s order alleges that BNP Paribas traders attempted to manipulate the USD ISDAFIX by making USD ISDAFIX submissions higher or lower for the purpose of benefitting derivative positions priced or valued against the benchmark. The CFTC’s order also recognizes BNP Paribas’s cooperation with the Division of Enforcement’s investigation.
FERC issues notice of intent to revoke MBR authority to five entities for failure to file EQRs. On August 21, FERC issued an order of intent to revoke the market-based rate authority of five public utilities with market-based rate authorization that failed to file their Electric Quarterly Reports. FERC’s order notifies these public utilities that their market-based rate authorizations will be revoked unless they comply with FERC’s requirements within 15 days of the date of issuance of the order.