 |
| Sharon Brown-Hruska |
Commodity Futures Trading Commission Acting Chair Sharon Brown-Hruska told DW last week the CFTC will explore every avenue to gain jurisdiction over forward trades that look and smell like futures. The determination to get these types of trades under the CFTC stems from a court decision in the summer in which the CFTC attempted to prosecute Michael Zelener, president of British Capital Group, for defrauding customers, but was told the particular types of trades involved weren't under the CFTC's watch. "Our view is that this type of fraud is in violation of our statute and that we have jurisdiction in this area," Brown-Hruska said.
The circuit court's decision only affects dealers in Illinois, Indiana and Wisconsin. But because its scope includes Chicago, home of the futures market, there is a concern that other circuit courts will look to this case to make informed decisions on futures contracts. The commission expects to hear from the Solicitor General next month on whether it has permission to take British Capital Group to the Supreme Court. If this option doesn't materialize it will take a legislative route, according to Brown-Hruska, who said she is not yet in a position to detail that strategy.
In October the Senate and House Agriculture Committees, which oversee the CFTC, will reauthorize it. Until that date, the commission can express its concerns to the committees. Brown-Hruska said, "I think this is a topic for reauthorization," but insisted the commission would exhaust the judicial avenue before tapping the legislative one.
Congress could set the record straight by revising the definition of a futures contract in the Commodity Exchange Act to combat the circuit court ruling. Brown-Hruska said going to Congress has been floated around, but suggested the Treasury Department may be a more appropriate place to turn. She said the commission has a good history of working with the department.
The U.S. Seventh Circuit Court said British Capital Group's trades were outside the CFTC's jurisdiction because automatic rollovers of spot transactions sold to speculative retail customers did not equal exchange-style offsets for futures contracts. The court viewed Zelener's transactions as spot or forward contracts, not futures, in part because they lacked standardized terms, explained Howard Schneider, a partner with KMZ Rosenman in New York.
The ruling came despite the fact that none of the transactions resulted in deliveries, a typical feature of spot and forward contracts, since the court considered delivery an after-the-fact consideration, explained Schneider. "It's a huge set back for the CFTC in terms of enforcement in that area," he said, adding that forex dealers can model their contracts according to Zelener's document so they won't be regulated by the commission. If these types of trade do not fall under the CFTC, they would be policed by state or local prosecutors.
