United States Commodity Futures Trade Commission 2000

By: Sarah Carlye

2000-The CFTC transmits to Congress a staff report, “A New Regulatory Framework,” which recommends changes to the CFTC’s regulatory structure. The changes that are detailed will lessen the regulatory burdens on U.S. futures markets by creating a more flexible regulatory framework while providing the over-the-counter (OTC) markets with greater legal certainty. The Commodity Futures Modernization Act of 2000 will incorporate much of this framework. The use of electronic signatures in lieu of handwritten signatures by customers of futures commission merchants, clients of commodity trading advisors, and commodity pool participants is permitted. The Commission participates in the first annual international Internet Surf Day, which is organized by the International Organization of Securities Commissions (IOSCO). It targets futures and securities fraud and abuse on the Internet. Approximately 220 individuals from 21 regulators in 18 countries participated (the second Surf Day takes place on April 23, 2001). The CFTC and Securities and Exchange Commission announce an agreement providing for joint jurisdiction over security futures products (single stock futures and futures on narrow-based stock indices). The agreement is incorporated into the Commodity Futures Modernization Act of 2000 and allows the CFTC to retain exclusive jurisdiction over futures contracts on broad-based stock indices. Rules implementing the New Regulatory Framework are approved. These rules are later superseded by passage of the Commodity Futures Modernization Act of 2000 and most new rules were subsequently withdrawn. President Clinton signs into law the Commodity Futures Modernization Act of 2000. It reauthorizes the Commission for five years and overhauls the Commodity Exchange. At the same time, the CFTC withdraws most of the New Regulatory Framework, except the amendments to Regulation 1.25 concerning investment of customer funds by futures commission merchants and derivatives clearing organizations, which are made effective immediately with some technical corrections. The amendments permit investment of customer funds in new types of instruments, such as money market mutual funds.

2001-With the Commodity Futures Modernization Act’s clarification of the CFTC’s jurisdiction over retail foreign currency trading, the CFTC issues an advisory and a revised consumer alert regarding the offering of foreign currency trading opportunities to the retail public. The advisory explains how firms may lawfully offer foreign currency trading opportunities and the consumer alert warns the public of the risks of foreign currency trading, and of foreign currency scams. The first time, since the passage of the Commodity Futures Modernization Act, the CFTC uses its newly clarified authority to file a complaint charging fraud and the offering of illegal futures contracts against a firm soliciting retail investors to trade foreign currency contracts. More complaints are filed against dozens of firms that solicit retail investors to trade foreign currency over the next several years. The CFTC approves the application of EnergyClear Corporation for registration as a derivatives clearing organization under the Commodity Exchange Act. This is the first new derivative clearing organization that is not affiliated with a trading facility. Derivatives clearing organizations for the existing futures exchanges were grandfathered in under the Commodity Futures Modernization Act. The implementation of the Commodity Futures Modernization Act is kicked off by adopting new rules for the various types of exchanges (designated contract markets, derivatives transaction execution facilities, exempt boards of trade, and exempt commercial markets) created by the Act. There are different levels of regulatory oversight. The CFTC and the Securities and Exchange Commission adopt the first sets of rules to enable the trading of single stock futures and futures on narrow-based stock indexes. More rules are adopted during the next several months. Avista Energy, Inc. is ordered to pay $2.1 million to settle CFTC charges of manipulating electricity futures. There are several former Avista employees and a NYMEX floor broker are also charged with participating in the manipulative scheme. The CFTC adopts new rules for derivatives clearing organizations, which further implements the Commodity Futures Modernization Act. The CFTC’s New York office in the World Trade Center is destroyed in a terrorist attack (9-11); fortunately no Commission employees suffer serious injuries. The trading floor of the New York Board of Trade (NYBOT) is also destroyed and trading is disrupted on other exchanges. NYBOT soon resumes trading on a back-up trading floor it has maintained since the 1993 World Trade Center bombing until it moves into permanent space in the NYMEX building.

2002-The CFTC issues an Order pursuant to Section 409 of the Federal Deposit Insurance Corporation Improvement Act, added by the Commodity Futures Modernization Act, concerning the multilateral clearing activities of NOS Clearing ASA, a Norwegian clearinghouse. It is in connection with transactions entered into on the International Maritime Exchange. This is the first time the CFTC uses its authority under that section to determine that supervision by a foreign financial regulator of a multilateral clearing organization for over-the-counter (OTC) derivative instruments satisfies appropriate standards. A report on its own responses and those by industry participants to the terrorist attack on September 11, 2001 is released. The CFTC New York office moves into its new permanent space at 140 Broadway. “Report on the Study of the Commodity Exchange Act and the Commission’s Rules and Orders Governing the Conduct of Registrants Under the Act,” (also known as the Intermediaries Study) is released pursuant to Section 125 of the Commodity Futures Modernization Act. The CFTC restructures its staff organization to facilitate the implementation of the Commodity Futures Modernization Act. The functions previously performed by the Division of Trading and Markets and the Division of Economic Analysis are performed by the creation of two new divisions (Division of Market Oversight, and the Division of Clearing and Intermediary Oversight) and one new office (Office of the Chief Economist). President Bush issues an executive order, it creates the Corporate Fraud Task Force. The CFTC and Securities and Exchange Commission adopts the final rules needed to permit domestic trading in single stock futures, concerning margin, and the treatment of customer funds, respectively. Trading in single stock futures is launched on two new exchanges (OneChicago and NQLX). There is a 5 million dollar settlement is paid by Dynegy Marketing and Trade and West Coast Power to settle CFTC charges of attempted manipulation and false reporting of prices. During the next couple years, many energy companies settle similar claims under the Commodity Exchange Act that they intentionally reported false natural gas price and volume information to energy reporting firms in an attempt to affect prices of natural gas contracts. Some of the subsequent settlements are for $20 million or more.

2003-A joint conference on “Credit Issues in the Energy Market: Clearing & Other Solutions” is held by the CFTC and the Federal Energy Regulatory Commission. The CFTC charges the bankrupt Enron Corporation and a former Enron vice president with manipulating prices in the natural gas market. In addition they also charge Enron with operating an illegal, undesignated futures exchange, and offering illegal lumber futures contracts through Enron Online, its Internet trading platform. (Enron settles in May 2004 and the trader settles in July 2004). Exchange rules implementing a common clearing link between the Chicago Board of Trade and Chicago Mercantile Exchange are approved. The CFTC and the National Futures Association announce new rules to fight fraud in the retail off-exchange foreign currency market. The exchange approves or accepts self-certification of a record 348 new futures and option contracts during fiscal year 2003 (about 200 of these new contracts are single stock futures). The number of new non-single stock futures contracts easily exceeds the old record of 92 new contracts set in fiscal year 1996. The CFTC joins other members of the President’s Corporate Fraud Task Force in undercover “Operation Wooden Nickel” to prosecute individuals and companies allegedly stealing millions of dollars through sales of illegal foreign currency futures contracts.

2004-The US Futures Exchange, LLC (also known as Eurex US), is designated as a contract market for the automated trading of futures and options on futures contracts. It the first designated contract market to be owned by a foreign futures exchange. A Spanish language consumer protection advisory on commodity scams is released. The Enron Corporation receives the bankruptcy court’s permission to enter into a settlement with the CFTC that provides for a 35 million dollar civil monetary penalty. The U.S. Court of Appeals for the Seventh Circuit finds that certain foreign currency transactions were spot transactions rather than futures contracts, and, therefore, outside of CFTC jurisdiction in CFTC v. Zelener. The CFTC announces that it has completed the seven-month investigation of the sharp upward movement in prices in the natural gas market that occurred in late 2003. It states that its investigation did not uncover evidence that any entity or individual engaged in activity with an intent to cause an artificial price in natural gas in late 2003. The CFTC announces its participation (through a partnership with 19 other Federal agencies) in the launching of a new financial education website and toll-free hotline number. The mymoney.gov website and the 1-888-mymoney toll-free hotline is established to provide Americans easy access to information that can help them understand their money better.

2005-A two-day roundtable on cross-border derivatives issues, which is attended by 60 market participants and senior regulators, is held by the CFTC and the Committee jof European Securities Regulators (CESR) hold. The purpose of the roundtable is to hear the issues affecting those actively involved in transatlantic business in exchange-traded derivatives and related transactions, and to establish key areas where improvements can be made. A Communiqué requesting comment on a proposed work program to facilitate the conduct and supervision of a trans-Atlantic derivatives business is released with thehe final communiqué is issued on June 28, 2005. The CFTC holds another roundtable on commodity pool operators and the commodity pool industry that focuses on the growth, innovation, and regulation of the commodity pool industry and the challenges and issues faced by the industry. “Price Dynamics, Price Discovery and Large Futures Trader Interactions in the Energy Complex,” is released. The results suggest that MMT traders provide liquidity to large hedgers and not the other way around. The CFTC and the Federal Energy Regulatory Commission enter into a memorandum of understanding regarding the sharing of information and the confidential treatment of proprietary energy trading data (pursuant to the Energy Policy Act of 2005). Refco, Inc., (the parent company of Refco LLC), a large futures commission merchant, files for Chapter 11 bankruptcy, eight days after the company announced that its chairman, Philip R. Bennett, has hidden $430 million in bad debts from the company’s auditors and investors, and only two months after the company’s initial public offering. The futures commission merchant is not included in the bankruptcy filing and is subsequently sold to Man Financial. CFTC auditors and attorneys are actively engaged in re-confirming that Refco LLC’s customer funds on deposit remain uncompromised and that the capital requirements of Refco LLC continue to be met.

2006-The CFTC announces the filing and simultaneous settlement of charges against Shell Trading US Company (STUSCO) and Shell International Trading and Shipping Co. (STASCO), both companies’ ultimate parent is Royal Dutch Shell, and Nigel Catterall, who was the chief trader on behalf of STUSCO, for engaging in prearranged trades on the New York Mercantile Exchange (NYMEX) on five occasions between November 2003 and March 2004. The settlement also directs STASCO to pay a $200,000 civil penalty and Catterall to pay a $100,000 civil penalty. A public hearing to discuss issues related to self-regulation and self-regulatory organizations in the U.S. futures industry. A request is published in the Federal Register, by the CFTC for comment as part of a comprehensive review of its commitments of traders (COT) reports. The CFTC receives a record 4,659 comment letters in response to this notice. A public hearing is held on the issue of what constitutes a “board of trade, exchange, or market located outside the United States,” as that phrase is used in Section 4(a) of the Commodity Exchange Act. The CFTC announces the filing of a civil enforcement action in the U.S. District Court for the Northern District of Illinois against BP Products North America, Inc. (BP), alleging that BP manipulated the price of February 2004 TET physical propane and also charges BP with attempting to manipulate the price of April 2003 TET physical propane by attempting to corner the April 2003 TET physical propane market. Amaranth Advisors, LLC, a large hedge fund, reports that it has lost $6 billion of its capital, primarily due to losses on seasonal inter-month spread positions in futures and other derivatives on natural gas. Amaranth sells its natural gas and some other positions to JPMorgan Chase and Co. and Citadel Investment Group, LLC the next day. Amaranth then announces that it will close. After a public hearing on June 27, 2006, the CFTC issues a Statement of Policy that affirms the use of the staff no-action process for foreign boards of trade that seek to provide direct access for U.S. persons to their electronic trading systems. The CFTC and the U.K. Financial Services Authority (FSA) sign a memorandum of understanding concerning consultation, cooperation, and the exchange of information related to market oversight. A framework is established by the MOU for the CFTC and FSA to share information that the respective authorities need to detect potential abusive or manipulative trading practices that involve trading in related contracts on U.K. and U.S. derivatives exchanges. It provides the regulators with a more complete view of these markets for oversight purposes.

2007-The CFTC begins publishing the “COT-Supplemental.” The new report shows aggregate futures and options positions of index traders, as well as noncommercial and commercial traders in 12 selected agricultural commodities. The CFTC moves to strengthen futures exchange governance by issuing a guidance calling for increased public representation at key levels of decision-making, which includes boards of directors. A joint investor alert to warn of the dangers facing retail investors who are lured into foreign currency (forex) trading frauds is issued by the CFTC and the North American Securities Administrators Association (NASAA). An exchange traded credit derivative contract based on the Chicago Mercantile Exchange’s North American Investment Grade High Volatility Credit Index is approved. There is also an exemptive order to allow the Options Clearing Corporation to clear similar products to be traded on the Chicago Board Options Exchange issued on the same day. The Chicago Mercantile Exchange and the Chicago Board of Trade announce the completion of their merger. It forms the world’s largest futures exchange, the CME Group. The CFTC charges the hedge fund Amaranth and its former head energy trader, Brian Hunter, with attempting to manipulate the price of natural gas futures (February 24, 2006 and April 26, 2006) and also alleges that Amaranth tried to cover up the conduct by making false statements to the New York Mercantile Exchange. The CFTC charges Energy Transfer Partners, L.P. and three of its subsidiaries with attempting to manipulate the price of physical natural gas at the Houston Ship Channel (HSC) delivery hub (September and November 2005) and with attempting to manipulate the October 2005 and December 2005 HSC monthly index prices of natural gas published by Platts in its Inside FERC’s Gas Market Report (Inside FERC). The CFTC alleges that the conduct was designed to benefit basis swap positions established on the Intercontinental Exchange (ICE). The prices of the basis swaps were based in part on the Inside FERC index prices. On March 17, 2008, ETP and its subsidiaries agree to pay $10 million in civil monetary penalties to settle these charges. The CFTC holds a hearing to examine trading on regulated exchanges and Exempt Contract Markets (ECMs) as part of an ongoing review of energy futures trading. A report that includes recommendations to increase the oversight of some trading activity on ECMs is delivered to congress. BP Products North America, Inc. (BP) agrees to pay a total of $303 million in sanctions to settle charges of manipulation and attempted manipulation in the propane market. The establishment of a new Energy Markets Advisory Committee is announced. It provides a public forum to examine emerging issues related to the energy markets and the CFTC’s role in these markets under the Commodity Exchange Act. The CFTC and the SEC enter into a mutual cooperation agreement to enhance coordination and facilitate review of new derivative products. A roundtable discussion on the agricultural markets is held. Congress enacts the Food, Conservation, and Energy Act of 2008. The Act reauthorizes the CFTC until 2013 and gives the agency additional regulatory and enforcement tools that are needed .The CFTC announces a number of initiatives to increase transparency of the energy futures markets. Several policy initiatives aimed at addressing concerns in the agricultural futures markets is announced. The CFTC announces the formation of an interagency task force to evaluate developments in commodity markets. An international manipulation enforcement conference that is focused on global trading in the energy markets is hosted by the CFTC. The Commission staff amends the “no-action relief letter” under which ICE Futures Europe is permitted direct access to U.S. customers. The Interagency Task Force on Commodity Markets releases a staff report that offers a preliminary assessment of fundamental and market factors affecting the crude oil market. The ITF’s Interim Report on Crude Oil found that fundamental supply and demand factors provide the best explanation for the recent crude oil price increases. Optiver Holding BV, two of its subsidiaries, and three employees, are charged with manipulation and attempted manipulation of New York Mercantile Exchange (NYMEX) Light Sweet Crude Oil, New York Harbor Heating Oil, and New York Harbor Gasoline futures contracts during March 2007. The Retail Foreign Currency Fraud Enforcement Task Force is formed. The CFTC releases a staff report with Commission recommendations on activities of swap dealers and commodity index traders.

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