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Newsome Denies Intention to Extend Jurisdiction to

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LONDON (–The chairman of the Commodity Futures Trading Commission sought to alleviate concerns that the CFTC sought to extend its authority over unregulated swaps, in a speech to the international derivatives conference of the Futures Industry Association/Futures Option Association in London.

The question of extended authority arose because of charges the CFTC brought against Enron Corp in March. The CFTC contended that in September 2001 Enron had modified its web-based electronic trading platform in ways that crossed the line from a true swaps platform to a (illegal, unregulated) futures exchange.

“We approach the issues of whether the Commodity Exchange Act applies to, and whether we have jurisdiction over, any particular transaction on the basis of the economic substance of the transaction,” said CFTC Chairman James Newsome. “Thus, where we have brought charges alleging operation of an unregistered futures exchange that involved the trading of contracts that may have been labeled or referred to as, quote, ‘swaps,’ it is because the economic substance of those transactions was that of a futures contract.”

He added that, in his view, U.S. Congress had acted appropriately in excluding “true swaps and forwards” from CFTC jurisdiction.

He noted, too, that there has been a good deal of enforcement activity of late, some of it resulting in multi-million dollar civil monetary penalties in the energy trading area. He did not name respondent companies in this speech, but much of his audience would have been aware, for example, that El Paso Corp., Houston, agreed to pay US$20 million in March to settle CFTC allegations that it reported fake natural gas trades to industry publications to influence the market.

“We remain actively engaged in other energy sector investigations, which may result in further charges being filed” against market participants, he said.

Later in his speech, Mr. Newsome addressed ongoing efforts to modernize and simplify regulations as they apply to commodity pool operators and futures commission merchants.

He said that the public comment period recently has passed with regard to a number of proposed rule modernizations. Some of these modifications would provide increased operational flexibility for CPOs.

Another would modernize the exemption for certain otherwise-regulated entities (banks, mutual funds, insurance companies) that wish to use the futures markets. Another would simplify the bunch-order process “and clarify respective responsibilities so that this mechanism’s promise of better executions and better pricing will be more accessible and greater numbers of customers can benefit.”

Although Mr. Newsome was not explicit about this in his London address, the proposed simplification of the bunching of orders actually involves six distinct rule changes: the expansion of the category of eligible customers from only certain sophisticated customers to all customers; expansion in the category of eligible account managers; a relaxation of the requirement that advisers must provide specified disclosures to customers before bunching orders (they now must simply make certain information available to customers upon request); a removal of the requirement that each account manager must provide certain certifications to the carrying futures commission merchant; modification of the standard against which allocations of fills must be judged; and modification of record-keeping requirements to clarify the delineation of responsibility between account managers and FCMs.

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