On June 21-22, attorneys, compliance professionals and commodity traders gathered in Houston to discuss current compliance issues and the state of commodity markets, with a focus on energy raw materials as well as carbon and environmental products. The following themes emerged from panels with speakers from private industry, consultants, and regulators, such as the Commodity Futures Trading Commission (“CFTC”), Federal Energy Regulatory Commission (“FERC”), and National Futures Association (“NFA”).
In 2021 and 2022, the industry saw a record number of enforcement actions from the CFTC and NFA, with record settlement amounts. The enforcement focused on fraud and manipulation, enforcement of the Foreign Corrupt Practices Act (“FCPA”) and misappropriation of material non-public information in commodity markets, failure to record in capacity appropriate and material breaches of regulations, such as reporting. It is important to note that in addition to enforcement by traditional market regulators, the Department of Justice (“DOJ”) has been much more actively involved in commodity derivatives market enforcement traditionally relegated to the CFTC, FERC, NFA and the Securities and Exchange Commission (“SECOND”).
2. Core Digital Assets
The application of financial engineering is rapidly spreading beyond cryptocurrencies to physical commodity markets. Blockchain is increasingly being used to track commodity transactions and non-fungible tokens (“NFTs”), and other smart contracts are helping end users trade commodities and ensure more efficient and accurate delivery . These applications are at the crossroads of the jurisdictional reach of the SEC, CFTC, and FERC, with significant overlap in regularity. The DOJ will likely continue to be actively involved in overseeing these markets as part of its wire fraud authorities, while market regulators clarify their regulatory scope.
3. ESG and environmental raw materials
Environmental, social and governance (“ESG”) initiatives in commodity markets are at the forefront of commodity trading strategies, with a focus on climate change mitigation and environmental commodity trading . Compliance markets and voluntary carbon mitigation markets are growing rapidly under the aegis of local authorities (such as CCA and RGGI) as well as commonly accepted voluntary industry standards and registries (such as ACR , CAR and Verra). The CFTC recently issued a Request for Information (“RFI”) to assess the scope of the markets and its likely jurisdictional reach.
4. Market volatility
The war in Ukraine and the unprecedented global sanctions imposed on Russia, which, together with Ukraine, is the world’s largest supplier of many essential commodities, such as natural gas, crude oil, agricultural products and fertilizers, have put a strain on commodity markets and may even further disrupt commodity and commodity derivatives markets. Market volatility leads to significantly higher and more frequent margin calls, which increases trading costs; as a result, many commodity contracts moved from exchanges to over-the-counter markets. These trends call for increased compliance monitoring from both the exchange and clearing side of markets and the end-user and market intermediary side.
5. Improved Compliance
Discussions during the FIA conference demonstrated that the category of unregulated commodity traders no longer exists and that there are registered and unregistered market participants – but all are regulated and all are subject to the potential application of CFTC, SEC, FERC, NFA or DOJ. This requires better assessment of operational, regularity and compliance risks and the design of more comprehensive compliance policies and procedures as well as business continuity and disaster recovery procedures.
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