Norman Bay, Director of FERC’s Office of Enforcement, testified yesterday before the Senate Subcommittee on Financial Institutions and Consumer Protection regarding regulations for financial holding companies and physical commodities.
In prepared remarks, Mr. Bay stated that FERC has the “tools necessary to effectively police FERC-regulated markets” but identified two regulatory limitations to its oversight efforts. First, he noted that FERC’s surveillance program lacks data from certain financial markets regulated by the CFTC. These financial markets are “interrelated” with physical markets regulated by FERC, and FERC has found that some market participants could use positions in one market unlawfully to benefit a position in another. Mr. Bay highlighted the recent information sharing agreements between FERC and the CFTC, and urged the agencies to work together in implementing them.
Second, Mr. Bay identified the jurisdictional “uncertainty” caused by the D.C. Circuit’s decision in Hunter v. FERC, 711 F.3d 155 (D.C. Cir. 2013). In Hunter, the court ruled that FERC lacked jurisdiction to bring manipulation charges over futures contracts regulated by the CFTC, even if the activity affected physical markets regulated by FERC. Mr. Bay claimed that some market participants interpret Hunter “to cover not only manipulation in the futures market, but also many additional transactions and products, including those squarely within FERC’s jurisdictional markets.” He suggested a “legislative fix to eliminate uncertainty on this matter”.
Mr. Bay also testified about the role of financial institutions in physical markets, stressing that FERC treats these institutions in the same manner as traditional market participants, such as generators and utilities. He recognized that financial institutions have long played a role in physical markets, noting that their role has declined in recent years. He highlighted the benefits financial institutions can play in markets, such as by providing liquidity, and did not take a position on whether there are emerging trends of potential manipulation caused by financial institutions. His testimony echoed a large academic literature that also concludes that financial participants facilitate well-functioning markets.
Representatives for the CFTC and Board of Governors of the Federal Reserve System also testified.