By: Adam Eldean, Senior Production Editor

Introduction

On July 16, 2013, the Federal Energy Regulatory Commission (“FERC”) issued an order assessing civil penalties for an alleged violation of FERC’s Anti-Manipulation Rule by Barclays Bank PLC (“Barclays”) for manipulative energy trading in and around California from November 2006 to December 2008.[1] The Order calls for $435 million in civil penalties against the company, $15 million for one of the traders, and $1 million each for three additional traders.[2] The Order also calls for a disgorgement of unjust profits in the amount of $34.9 million that would go to low-income home energy assistance programs in Arizona, California, Oregon, and Washington.[3] Barclays, concerned with rebuilding its reputation damaged by its Libor-fixing scandal, intends to take the federal regulator to court over the allegations.[4]

One of the important elements necessary to show a violation of FERC’s Anti-Manipulation Rule is determining whether the conduct in question was “in connection with” a transaction that is subject to FERC’s jurisdiction.[5] The “in connection with” element was recently fleshed out in the recent decision of Hunter v. FERC, where the Commodities Futures Trading Commission (“CFTC”) and FERC fought for the right to penalize Brian Hunter for his alleged manipulative trading.[6] Although both agencies were attempting to serve the public interest and their respective legislative mandates, the CFTC emerged successful in the battle for jurisdiction, with the court finding the CFTC having exclusive jurisdiction over futures trading regulation.[7]

The allegations against Barclays involve both the trading of monthly or term fixed-price physical products, which are understood to be under FERC’s jurisdiction, and trading of fixed-for-floating financial swaps, which are not so clearly subject to FERC’s jurisdiction.[8] Taking a look at FERC’s previous jurisdictional battle in Hunter v. FERC can prove helpful in predicting whether the Barclays court battle could further restrict FERC’s enforcement actions against manipulative trading.

Reigning Back FERC

Brian Hunter, an employee of the hedge fund Amaranth, traded natural gas futures contracts on the New York Mercantile Exchange.[9] According to FERC, Hunter sold a significant number of futures contracts during three months in 2006 with the sales ranging from 14.4% to 19.4% of market volume.[10] Given the volume and the timing of the trades, Hunter’s sales reduced the settlement price for natural gas and his portfolio benefited from these sales because he positioned his assets in the natural gas market to capitalize on a price decrease.[11] After lengthy proceedings, FERC determined that Hunter’s trades in futures markets manipulated the price of physical natural gas and imposed a $30 million penalty against Hunter.[12]

The D.C. Circuit found that the Commodity Exchange Act gives the CFTC “exclusive jurisdiction” involving contracts of a sale of a commodity for future delivery, traded, or executed, which includes trading of natural gas futures contracts.[13] Hunter’s trading scheme—trading natural gas futures contracts with the intent to manipulate the price of natural gas in another market—involved transactions of a commodity futures contract that falls squarely within the CFTC’s jurisdiction.[14] FERC attempted to argue that although the CFTC and FERC have exclusive jurisdiction over day-to-day regulation of their respective markets, when manipulation in one market affects the other market, both agencies have an enforcement role.[15] The court found no support for this argument in the CEA, referencing the strong “exclusive jurisdiction” language, striking a major blow to FERC’s attempts to apply its enforcement authority to commodities futures contracts that affect prices in the FERC-jurisdictional markets.[16]

Distinguishing Hunter v. FERC

FERC will likely emphasize in the Barclays case that the manipulative trading occurred in the physical electricity market, and not in the futures market, as was the case in Hunter. FERC alleges that the series of physical transactions were made to affect an index “which sets the price of both non-jurisdictional and jurisdictional transactions.”[17] Barclays purchased and sold either long or short physical positions that have physical delivery operations.[18] Because Barclays could not meet physical delivery operations, Barclays would then trade Dailies to flatten out their net physical position, which contributed to the alleged manipulative scheme.[19] FERC sees this as uneconomical physical trading with an intention to benefit financial swap positions that Barclays held.[20]

Because the manipulative trading was allegedly done in Barclays’ physical holdings, Hunter v. FERC appears to be distinguishable. Although the bank allegedly made its money from its financial swap positions, because the manipulative trading was arguably done “in connection with” a transaction that is subject to FERC’s jurisdiction, the scheme appears to be a more clear case to support FERC’s enforcement actions in cross-market manipulation.