1. What can energy companies expect from CFTC enforcement in 2019?
The Commodity Futures Trading Commission (CFTC) engaged in robust enforcement in 2018--filing 83 enforcement actions in fiscal year 2018, obtaining $947 million in civil monetary penalties, restitution and disgorgement1--and the trend is likely to continue in 2019. In regard to energy, the CFTC has brought a variety of cases in recent years, including:
(1) EOX Holdings (Sept. 2018): CFTC brought a complaint against an introducing broker and its employee, claiming that the employee allegedly disclosed material, non-public information about block trading of energy contracts of the broker's customers. The CFTC brought charges of manipulation and anti-disclosure against both the broker and the employee, and charges of inadequate recordkeeping and failure to supervise against the broker.2
(2) Geneva Trading (Sept. 2018): CFTC issued an order against an unregistered proprietary trading firm for alleged spoofing by three of its traders in futures contracts, including heating oil, RBOB gasoline and light sweet crude oil. The CFTC settled charges of manipulation against the company, resulting in a $1.5 million penalty.3
(3) Statoil ASA (Nov. 2017): CFTC issued an order against an energy company for allegedly attempting to manipulate a propane benchmark, resulting in a $4 million penalty.4
(4) Simon Posen (July 2017): CFTC issued an order against a trader for allegedly spoofing futures contracts on NYMEX in commodities, including crude oil futures, resulting in a $635,000 penalty.5
(5) Total Gas & Power (Dec. 2015): CFTC issued an order against a natural gas trading firm, and its employee, for allegedly attempting to manipulate natural gas monthly index settlement prices, resulting in a $3.6 million civil penalty.6
As seen by these examples, the CFTC's energy enforcement regime has been largely focused on manipulation, including spoofing, but also on other violations such as disclosure of material, non-public information.
2. How committed has CFTC enforcement been to its 2017 cooperation policy?
The CFTC has demonstrated considerable commitment to its 2017 revised cooperation guideline for companies.7 In its guideline, the CFTC notes that it defines "cooperation" as "more than ordinary cooperation or mere compliance with the requirements of law."8 The guideline further explains that to gain credit, the CFTC "looks to what a company voluntarily does, beyond what it is required to do," which would be considered "sincere, robustly cooperative, and indicative of a willingness to accept responsibility for the misconduct, where appropriate."9 The guideline further notes that the reward for cooperation ranges from reduced charges to no enforcement action at all.10
The CFTC has fleshed out this written policy through multiple enforcement actions in 2018. As seen across these cases, there is a range of behaviors that the CFTC consistently defines as cooperative, including:
(1) Providing information about violative conduct that the CFTC would not have obtained otherwise;11
(2) Being "candid" in their proffer of information;12
(3) Spending "hundreds of hours" identifying documents and information;13
(4) Beginning their cooperation "early" or "immediately";14
(5) Providing cooperation that is "substantial" or "material";15
(6) Identifying alleged co-conspirators;16
(7) Promptly suspending the alleged perpetrator upon being made aware of the alleged conduct;17
(8) Engaging in an internal review;18 and
(9) Enhancing their compliance program to better detect the violative behavior at issue.19
Consistent with its guideline, the CFTC declined to bring an enforcement action against a financial institution in a matter involving an alleged rogue employee because of the firm's robust cooperation.20
3. Given the cooperation policy, what should energy companies do if they suspect a CFTC violation has occurred within the company?
What has emerged from the guidance, enforcement matters and declination letter is that whether a company decides to cooperate with the CFTC depends on the specific facts and circumstances. Importantly, as noted, cooperation, in this context, is not the company meeting its legal obligations to respond to information requests, but the company going "beyond what it is required to do."21
Initially, if a company becomes aware of a potential violation, the first decision is whether to self-report. Self-reporting has its advantages from a cooperation perspective in that it puts the company on the best footing with the CFTC. The best example of a positive outcome from self-reporting is the aforementioned declination letter.22 However, declination may be harder to achieve where the violations involve more than the activities of a rogue employee, which was the case here.23 Moreover, several cases have shown that self-reporting is not a prerequisite for a company to be considered cooperative.24
Regardless of whether it self-reported, a company pursuing cooperation credit must meet a very high threshold since it must convince the CFTC that its level of cooperation is sufficiently "sincere" and "robust."25 Companies therefore must continually assess the benefit of pursuing potential cooperation credit against the loss from a strategy perspective of its voluntary actions. This is particularly the case since, though the CFTC notes in several cases that penalties are "substantially reduced" because of cooperation,26 the specific dollar value of such cooperation in any particular instance is unclear.
And even if the CFTC acknowledges that a company provided valuable cooperation, companies would similarly have to be thoughtful about the process of negotiating with the CFTC to receive a meaningful discount on their penalties as a reward for that cooperation. Therefore, clearly, if faced with conduct that the CFTC may consider violative, companies have complex decisions to make throughout about cooperation--from detection to final negotiation.
4. What impact could swap dealer requirements have on energy companies that trade derivatives?
Regarding the CFTC, one of the main concerns for energy users that use derivatives is that they may be defined as swap dealers, a registration category that carries relatively burdensome requirements.27 In 2018, the CFTC determined that as long as a company keeps its swap dealing activity to $8 billion or less in gross notional amount within the prior 12 months, it would not have to register.28 While the CFTC finalized the threshold, it did not, however, approve other aspects of the proposal which energy users supported, including providing an exemption for swaps that are exchange-traded or cleared, and using alternate measures of de minimis activity such as total number of counterparties or transactions.29 Advocacy may continue in 2019 to get some of these exemptions added to CFTC regulation, including through the reauthorization process. The CFTC also has yet to finalize a proposed capital rule for swap dealers. The proposal provides options for capital calculation for all dealers, but non-financial commercial entities can also avail themselves of a "tangible net worth" (TNW) approach, which is less burdensome.30 If the proposal were approved, many energy companies that decide to register as dealers would be able to avail themselves of the TNW safe harbor.