ABA Business Law Section

Derivatives & Futures Law Committee

Winter Meeting

Naples, Florida

Saturday, January 20, 2018

9:30 a.m. to 10:45 a.m.

COMPETITION ISSUES IN THE COMMODITIES MARKETS

Moderator for the Program:

David Yeres – Clifford Chance US LLP

Speakers:
Susanna Buergel – Paul, Weiss, Rifkind, Wharton & Garrison LLP
Daniel Davis – Commodity Futures Trading Commission
Christopher Lovell – Lovell Stewart Halebian Jacobson LLP
Gretchen Lowe – Commodity Futures Trading Commission
William McCoy – Morgan Stanley
ABA Business Law Section Derivatives & Futures Law Committee Winter Meeting

Outline for Panel

“Competition Issues in the Commodities Markets”

I. Introduction of Panelists

II. Overview CEA competition-related provisions

III. CFTC and DOJ enforcement of competition-related conduct

IV. Responding to CFTC or DOJ inquiries into commodities and futures market practices

V. Private civil litigation featuring antitrust and CEA allegations

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COMPETITION ISSUES IN THE COMMODITIES MARKETS

TO BE PRESENTED AT:

ABA BUSINESS LAW SECTION, DERIVATIVES &FUTURES LAW COMMITTEE WINTER

MEETING – COMPETITION ISSUES IN THE COMMODITIES MARKETS PANEL1

January 2018
CLIFFORD CHANCE US LLP
DAVID YERES2

1. Introduction

The CFTC typically prosecutes two main types of wrongdoing: fraud and market manipulation.3
CEA market manipulation often involves conduct that is intended to create an artificial price
through control of a market either individually or as part of a conspiracy with other market
participants. This conduct is remarkably similar to the conduct that is prohibited by US antitrust
laws, which seek to combat anticompetitive activity. As a result, many of the CFTC's recent
settlements for market manipulation included parallel investigations by DOJ prosecutors,
including the DOJ Antitrust Division. As highlighted below, conduct that can be prosecuted as
market manipulation by the CFTC often also constitutes conduct that can be prosecuted as an
antitrust violation by the DOJ.

2. The Sherman Act

US antitrust law regulates and promotes marketplace competition. The most important US
antitrust statute is the Sherman Act of 1890 ("Sherman Act"), which prohibits a wide variety of
anticompetitive conduct. Section 1 deals with concerted activity that is harmful to competition by
prohibiting agreements by two or more parties that unreasonably restrain trade.4 Section 2
addresses single-firm abuses of market power, prohibiting monopolizations and monopolistic
behavior.5

Section 1 of the Sherman Act prohibits every contract, combination, or conspiracy "in restraint of
trade or commerce among the several States, or with foreign nations."6 However, as the US
Supreme Court has recognized, any sort of contract or agreement concerning trade will restrain

1 This publication does not necessarily deal with every important topic or cover every aspect of the topics with
which it deals. It is not designed to provide legal or other advice.
2 Assisted by Brendan J. Stuart, Clifford Chance US LLP.
3 PHILIP MCBRIDE JOHNSON & THOMAS LEE HAZEN, DERIVATIVES REGULATION §§ 1.15[1] (3d ed. 2004).
4 15 U.S.C. § 1 (2012).
5 15 U.S.C. §§ 1-2.
6 15 U.S.C. § 1.

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trade in some way.7 Moreover, many forms of market collaboration produce benefits for the
economy and the public. For example, a joint venture may help bring new products to market and
reduce prices for consumers. Therefore, courts have long concluded that Section 1 does not work
to prohibit all restraints of trade, but rather only those that are deemed "unreasonable."8 To answer
this fundamental question of whether conduct suspected of violating the Sherman Act constitutes
an "unreasonable restraint of trade," courts have developed two modes of analysis.

Most restraints of trade are analyzed under the "rule of reason."9 The rule of reason is a general
inquiry into whether, based on all of the circumstances, the relevant conduct constitutes an
unreasonable restraint on competition.10 When applying the rule of reason courts will engage in
an extensive, fact-driven analysis of all relevant factors relating to the restraint, such as information
about the market in which the restraint occurred and "the restraint's history, nature, and effect."11
Ultimately, the goal of the analysis is to determine whether, on balance, the conduct’s
procompetitive benefits are outweighed by the conduct's harmful effects on competition, and is
therefore "unreasonable."12

Some restraints, however, are so antithetical to the ideals of free and open competition the Sherman
Act is meant to protect, that they are deemed to violate Section 1 without any inquiry into their
procompetitive benefits or justifications.13 Such restraints are referred to as "per se" violations of
the Sherman Act. Because application of per se rules denies the defendant the opportunity to
articulate any explanations or justifications for the relevant restraint, only certain specific types of
conduct will be treated as per se violations.

To determine whether an alleged Sherman Act violation calls for rule of reason analysis or per se
treatment, courts typically look first at the structure of the alleged agreement and whether it
involves a "horizontal" or "vertical" restraint. Horizontal restraints are those formed by direct
competitors operating at the same level of a supply or distribution chain, such as an agreement
among competing steel manufacturers. Vertical restraints are those between entities at different
levels of a distribution chain, such as an agreement between a steel manufacturer and a steel
distributor.

7 Bd. of Trade of City of Chicago v. United States, 246 U.S. 231, 244 (1918) ("Every agreement concerning trade,
every regulation of trade, restrains. To bind, to restrain, is of their very essence.").
8 See Standard Oil Co. v. United States, 221 U.S. 1, 60 (1911) (holding that reasonableness "was intended to be the
measure used for the purpose of determining whether in a given case a particular act had or had not brought about
the wrong against which [Sherman Act § 1] provided").
9 See Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006) (explaining that the Supreme Court "presumptively applies rule
of reason analysis" in determining whether a restraint violates Section 1).
10 See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 885 (2007).
11 Id.
12 See id. (“In its design and function the rule distinguishes between restraints with anticompetitive effect that are
harmful to the consumer and restraints stimulating competition that in the consumer’s best interest.”).
13 See Dagher, 547 U.S. at 5 (“Per se liability is reserved for only those agreements that are ‘so plainly
anticompetitive that no elaborate study of the industry is needed to establish their illegality.’”).

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Courts apply the rule of reason to all vertical restraints of trade, while certain forms of horizontal
conduct will be subjected to per se treatment.14 If an agreement among horizontal competitors
creates a naked restraint on price or output and facially appears to restrict competition or decrease
output, it will be deemed a per se illegal violation of Section 1. The most obvious example of a
per se violation is an agreement among competitors to fix prices.15 Other examples of per se illegal
conduct include horizontal agreements allocate markets or customers, rig bids, or engage in group
boycotts.

Section 2 of the Sherman Act prohibits illegal monopolies and monopolizations of "any part of the
trade or commerce."16 Monopoly is the "[c]ontrol or advantage obtained by one supplier or
producer over the commercial market within a given region,"17 and monopoly power is "the power
to control prices or exclude competition."18 Because a monopoly may be "thrust upon" or created
by accident due to market changes or "superior skill, foresight, and industry"19 and it would be
unfair to impose criminal penalties and civil liabilities in such situations under the Sherman Act,
one must have both monopoly power and intent to monopolize to violate Section 2.20

To determine the monopoly power (i.e. market share) of an alleged monopolist, one must define
the relevant market and the power to control prices or output and exclude competition.21 A
manufacturer's control of the relevant market depends on the availability of alternative
commodities for buyers,22 meaning monopoly power increases or decreases as the number of
substitutes decreases or increases, respectively. The relevant market, then, consists of
"commodities reasonably interchangeable by consumers for the same purposes," and
substitutability is "largely gauged by the purchase of competing products for similar uses
considering the price, characteristics and adaptability."23 Thus, courts examine how different the
goods are in character or use and "how far buyers will go to substitute,"24 while being cautious not
to distort the results25 by taking note of the geography, interindustry competition, and relevant

14 See Leegin, 551 U.S. at 894-899. Courts may in some cases apply a “quick look” rule of reason applies where an
agreement creates a naked restraint on price or output but the application of per se illegality is inappropriate
because procompetitive justifications exist. See NCAA v. Bd. of Regents of the U. of Okla., 468 U.S. 85 (1984);
United States v. Brown U., 5 F.3d 658 (3d Cir. 1993).
15 United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 218 (1940).
16 15 U.S.C. § 2.
17 Monopoly, BLACK'S LAW DICTIONARY (10th ed. 2014).
18 United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956) [hereinafter du Pont].
19 United States v. Aluminum Co. of Am., 148 F.2d 416, 429-30 (2d Cir. 1945) [hereinafter Alcoa].
20 Id. at 430, 432 ("In order to fall within § 2, the monopolist must have both the power to monopolize, and the intent
to monopolize.").
21 See du Pont, 351 U.S. at 380-404.
22 Id. at 380.
23 Id. at 395, 380.
24 Id. at 393.
25 United State v. Grinnell Corp., 384 U.S. 563, 587 (1966).

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submarkets.26 With respect to market harm, courts analyzing potential antitrust violations are
concerned with harm to the competitive process, not to the competitors in the market.27

Regarding intent, an alleged monopolist must commit some act, or use its monopoly power, in a
manner that reflects the actor's intent to monopolize.28 Generally, relevant "bad acts" consist of
exclusion of competitors, unnatural growth, and use of unduly coercive means for market
dominance, and the "bad intent" consists of predatory or retaliatory motives. Principal "bad acts"
for purposes of Section 2 include: refusal to deal, unlawful leveraging, price squeezing, and
predatory pricing.

Unilateral refusal to deal satisfies the intent element of the two prong test for a Section 2 violation
if the actor impairs opportunities of rivals and either does not further competition on the merits or
does so in an unnecessarily restrictive way. Unlawful leveraging conduct violates Section 2 where
an actor uses its monopoly power in one market to wrongfully acquire a monopoly in a second
market. A price squeeze exists where wholesale prices are raised and a retailer cuts down its own
retail price below cost, committing predatory pricing. Predatory pricing exists where an actor
engages in below-cost pricing (i.e. profit sacrifice) with a reasonable probability of recoupment of
lost profits in the future.

3. The CEA's General Provisions Regarding Competition

The CEA, which "regulates futures, options on futures, commodity options, and certain other
derivatives to establish a comprehensive new regulatory framework for swaps and security-based
swaps,"29 contains numerous provisions that explicitly refer to antitrust law and principles. Under
Section 3(b), one of the CEA's purposes is "to promote responsible innovation and fair competition
among boards of trade, other markets and market participants."30 Under Section 15, the CFTC
must consider antitrust laws to protect public interest and "endeavor to take the least
anticompetitive means of achieving the objectives" of the CEA.31 Section 4s(j)(6), labeled
"Antitrust Considerations," was added by the Dodd-Frank Act and prohibits swap dealers and
major swap participants from "adopt[ing] any process or tak[ing] any action that results in any
unreasonable restraint of trade; or impos[ing] any material anticompetitive burden on trading or
clearing."32 Additionally, pursuant to Section 6c(a), the CFTC has authority to take action against
any registered entity or other person who is engaging in any practice that "is restraining trading in
any commodity for future delivery or any swap."33 This language echoes the prohibition on

26 Id. at 393; F.T.C. v. Whole Foods Mkt., Inc., 548 F.3d 1028, 1037-39 (D.C. Cir. 2008).
27 NYNEX Corp. v. Discon, Inc., 525 U.S. 128, 135 (1998).
28 Alcoa., supra note 129, at 431-32.
29 Gregory Scorpino, Expanding the Reach of the Commodity Exchange Act's Antitrust Considerations, 45 HOFSTRA
L. REV. 573, 587 (2016).
30 7 U.S.C. § 5(b).
31 7 U.S.C. § 19.
32 7 U.S.C. § 6s(j)(6).
33 7 U.S.C. § 9(1)(A).

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restraint of trade that lies at the heart of the antitrust laws, which continue to have a major impact
on CEA market manipulation jurisprudence.

Section 3(b) (7 U.S.C. § 5)

Section 3(b) of the CEA states:

It is the purpose of [the CEA] to serve the public interests […] through a system of
effective self-regulation of trading facilities, clearing systems, market participants
and market professionals under the oversight of the [CFTC]. To foster these public
interests, it is further the purpose of [the CEA] to deter and prevent price
manipulation or any other disruptions to market integrity; to ensure the financial
integrity of all transactions […] and the avoidance of systemic risk; to protect all
market participants from fraudulent or other abusive sales practices and misuses of
customer assets; and to promote responsible innovation and fair competition among
boards of trade, other markets and market participants.34

These stated intentions provide an "intelligible principle" focused on preserving market integrity
and protecting market participants by preventing fraudulent and abusive trading practices.35

Section 15 (7 U.S.C. § 19)

Titled "Consideration of costs and benefits and antitrust laws," Section 15 of the CEA directs the
CFTC to consider the costs and benefits of its action, given considerations of, inter alia, protection
of market participants and the public as well as efficiency, competitiveness, and financial integrity
of futures markets.36 It also requires the CFTC to "take into consideration the public interest to be
protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving
the objectives" of the CEA, as well as the policies and purposes of the statute in issuing any order,
adopting any rule or regulation, or requiring or approving "any bylaw, rule, or regulation of a
contract market or registered futures association."37 Thus, Section 15 circumscribes the antitrust-
relevant considerations of the CFTC's rulemaking and enforcement functions.

Section 4s(j)(6) (7 U.S.C. § 6s(j)(6))

Labeled "Antitrust Considerations," Section 4s(j)(6) states:

Unless necessary or appropriate to achieve the purposes of this chapter, a swap

dealer or major swap participant shall not—

34 7 U.S.C. § 5(b).
35 U.S. Commodity Futures Trading Comm'n v. Oystacher, 203 F. Supp. 3d 934, 952 (N.D. Ill. 2016) (citing J.W.
Hampton, Jr. & Co. v. United States, 276 U.S. 394, 409).
36 7 U.S.C. § 19(a).
37 7 U.S.C. § 19(b).

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(A) adopt any process or take any action that results in any unreasonable
restraint of trade; or

(B) impose any material anticompetitive burden on trading or clearing.

From this statutory language, the CFTC has developed new regulations on anticompetitive conduct
in swaps markets. Under 17 CFR § 23.607, the CFTC prohibits any swap dealer or "major swap
participant" from adopting any process or taking any action that results in an "unreasonable
restraint of trade" or imposes a material "anticompetitive burden on trading or clearing, unless
necessary or appropriate to achieve the purposes of" the Commodity Exchange Act.

These new provisions contain language borrowed directly from antitrust law jurisprudence.
Section 1 of the Sherman Act prohibits agreements and combinations "in restraint of trade."
However, as discussed above, courts have interpreted the Sherman Act to only prohibit
"unreasonable" restraints of trade. The notion of "reasonableness" in the antitrust context is simple
enough to describe. Conduct with legitimate, procompetitive justifications that outweighs their
detrimental impact on competition is beyond the scope of prosecution under the antitrust laws.
The complexity comes in determining whether in a particular case, the relevant conduct's
anticompetitive effect is outweighed by its procompetitive benefits.

While there are no cases to date interpreting Section 4s(j)(6) or the CFTC's rules promulgated
pursuant to that provision, use of the term "unreasonable restraint of trade" indicates that Congress
and the CFTC intended to introduce the concept of reasonableness as it is understood under the
antitrust laws. Thus, the decades of judicial precedent distinguishing "unreasonable" restraints
that are harmful to competition and consumers, from "reasonable" restraints that are beneficial to
trade, ought to serve as persuasive authority on the proper application of these new provisions.

Section 6c (7 U.S.C. § 13a-1)

Under Section 6c(a) of the CEA, the CFTC can bring civil actions in federal courts whenever the
CFTC believes that an entity or person "has engaged, is engaging, or is about to engage in any act
or practice constituting a violation" of the CEA or is "restraining trading in any commodity for
future delivery or any swap" to enjoin such act or practice or to enforce compliance. 38 Although
the statute lists "restraining trading" to suggest discussions of antitrust laws, all cases deal with
issues of injunctions or remedies based on alleged violations of a specific CEA provision, not
restraint of trade which is less concrete than a specific statutory violation and which may be better
addressed by antitrust laws.

4. Corners and Monopolizations

One form of conduct that could simultaneously violate both the CEA and the antitrust laws is the
market "corner" or "squeeze". A corner is an operation where a person or an entity buys all
available supply of a commodity to manipulate the price charged to potential purchasers of the
commodity.39 Similarly, a "squeeze" refers to a situation in which a party holds a dominant long

38 7 U.S.C. § 13a-1(a).
39 JERRY W. MARKHAM, LAW ENFORCEMENT AND THE HISTORY OF FINANCIAL MARKET MANIPULATION 3 (2014).

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position in a commodity, but does not have direct control over the entire supply of the commodity
in the market. A successful squeeze involves a party acquiring a sufficiently dominant market
position to raise the price at which short-positioned parties can settle their holdings.

As discussed more fully below, the act of buying or controlling all or nearly all of the supply of a
commodity could potentially violate the anti-manipulation provisions of the CEA.40 However,
such behavior could also run afoul of the Sherman Act. Establishing a position of dominant market
power and abusing that power to manipulate prices could also violate the anti-monopoly provisions
of Section 2 of the Sherman Act. At least one court has noted that a "corner amounts to nearly a
monopoly of a cash commodity, coupled with the ownership of long futures contracts in excess of
the amount of that commodity, so that shorts—who because of the monopoly cannot obtain the
cash commodity to deliver on their contracts—are forced to offset their contract with the long at a
price which he dictates, which of course is as high as he can prudently make it."41 Moreover, while
it is possible for a single party to corner or squeeze a market, in cases where two or more
individuals or firms work together to execute a corner or squeeze, such concerted activity may be
deemed a violation of Sherman Act Section 1.

In fact, before the CEA or Grain Futures Act of 1922 were enacted, corners and squeezes were
challenged under the Sherman Act. In United States v. Patten, the government charged four
individuals with violations of Section 1 and 2 of the Sherman Act based on an alleged attempt to
corner the cotton market on the New York Cotton Exchange.42 The indictment alleged that the
conspirators purchased cotton futures on the NYCE "greatly in excess of the amount available for
delivery when deliveries should become due," and thus created an "abnormal demand" on the part
of short sellers who "would pay excessive prices to obtain cotton for delivery upon their
contracts."43 While the trial court acknowledged that "corners are illegal," it nevertheless
concluded that corners "cannot, strictly speaking, be called a combination in restraint of
competition."44 The court reasoned that corners, at least temporarily, actually increase competition
and that "it is more than doubtful whether a combination to run a corner restrains competition at
all."45

On appeal, the Supreme Court reversed, holding that corners do constitute a restraint of trade
within the meaning of Section 1 of the Sherman Act.46 The Court explained that corners "thwart
the usual operation of . . . supply and demand," "withdraw the commodity from the normal current
of trade," "enhance the [commodity's] price artificially," "hamper users and consumers in
satisfying their needs," and "produce practically the same evils as does the suppression of
competition."47 The Court concluded that because the defendants' conspiracy "would directly and

40 See Cargill, Inc. v. Hardin, 452 F.2d 1154 (8th Cir. 1971).
41 Id. at 1162.
42 United States v. Patten, 187 F. 664 (S.D.N.Y. 1911).
43 Id. at 667.
44 Id. at 668.
45 Id. at 669.
46 United States v. Patten, 226 U.S. 525 (1913).
47 Id. at 542.

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materially impede" the interstate market for cotton, the defendants "inflict[ed] upon the public the
injuries which the anti-trust act is designed to prevent."48

In another early case, a grain dealer sued a grain trader on the Chicago Board of Trade with
monopolizing the corn market in Chicago in violation of Section 2 of the Sherman Act.49 The
defendant purchased large amounts of July 1931 deliverable corn, while also holding futures
contracts for "July corn" that "exceeded the supply of corn available for delivery in Chicago in
July." The defendant ultimately acquired warehouse receipts for all the July corn available in
Chicago, while owning contracts for delivery of an additional 1.5 million bushels. Plaintiff alleged
that these purchases were "made with the intention . . . of withholding the commodity from the
market and thereby causing a sharp increase in its price."50 The plaintiff also alleged that the
defendant thereby became the "dictator" of the price of corn in Chicago and was able to force those
unable to deliver, including the plaintiff, to settle their contracts for "an excessive sum of money."51

The trial court granted a directed verdict in the defendant's favor based on insufficient proof of
monopolization of interstate commerce. The Seventh Circuit reversed. The court acknowledged
that "only when a monopoly of some part of interstate commerce is involved does jurisdiction
attach to the federal government," but disagreed that the defendant's purchases in Chicago of corn
futures contracts for corn to be delivered in Chicago was wholly intrastate in nature.52 The court
observed that corn flowed into the Chicago market from across the country and "necessarily passed
to the defendant in satisfaction of his contracts of purchase."53 Moreover, the Seventh Circuit
highlighted the influence of the Chicago market on the country’s broader corn market.54 The Court
then held that there was substantial evidence that the defendant "monopolize[d] that part of
interstate commerce represented by his contracts for future delivery in July, viz., 90 per cent of the
available corn of the commercial visible supply of the entire country."55

Case Study: Hunt Brothers Silver Manipulation

In the 1970s, commodities speculators, Nelson Bunker Hunt and Herbert Hunt – known as the
Hunt Brothers – together with several other silver futures traders and brokerage houses amassed
silver reserves and futures contracts in an effort to corner the silver market. The Hunts and their
co-conspirators built up a massive long position in physical silver, in addition to acquiring at least
$3 billion in silvers futures contracts. Between 1979 and 1980, the price of silver rose from less
than $9 an ounce to as high as $50 an ounce, before eventually collapsing in March 1980 and
triggering a financial emergency referred to as the "Silver Crisis." During this period, the Hunts
demanded delivery of the silver on their contracts while taking care to ensure their holdings were

48 Id. at 543.
49 Peto v. Howell, 101 F.2d 353 (7th Cir. 1938).
50 Id. at 355.
51 Id.
52 Id. at 359-60.
53 Id. at 359.
54 Id. at 358-59.
55 Id. at 359.

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kept in various locations and not re-delivered back to them. The prices fell only after the CBOT
implemented emergency rules imposing silver position limits, increased margin requirements, and
trading for liquidation only on US silver futures.

The CFTC investigated and charged the Hunt Brothers, as well as several of their co-conspirators,
with manipulation in violation of the CEA for their attempt to squeeze the silver market. As a
result of the CFTC's enforcement action, both Hunt Brothers agreed to a $10 million civil penalty
and a lifetime ban from trading on CEA-covered commodity exchanges.

The Hunt Brothers' silver manipulation also spawned a number of private civil actions, in which
plaintiffs, in addition to violations of the CEA, also alleged violations of Sections 1 and 2 of the
Sherman Act.56 In an action by a Peruvian state-owned mining company, a jury found that the
Hunts violated both the CEA and the antitrust laws (and, additionally, committed RICO violations
and common law fraud) and awarded the plaintiffs a judgment of $132 million.57

Case Study: Sumitomo Copper Manipulation

In 1995-1996, Sumitomo, a Japanese corporation and one of the world’s largest refiners, sellers,
and traders of copper and copper futures attempted to manipulate the copper market. The CFTC
found that Sumitomo, in collaboration with US copper merchant Global Minerals and Metals and
others, "established and maintained large and dominating futures positions in copper metal on the
London Metal Exchange . . . which directly and predictably caused copper prices . . . to reach
artificially high levels."58 At certain times during the fourth quarter of 2015, Sumitomo and the
US copper merchant controlled up to 100% of LME copper stocks, while also maintaining large
and controlling LME futures positions. Sumitomo reaped significant profits by eventually selling
at the artificially high prices it created. The CFTC concluded that Sumitomo's conduct reflected
an intentional effort to manipulate copper prices and charged Sumitomo with violating the CEA.
Sumitomo agreed to pay a fine of $150 million to settle the charges.59

Sumitomo's attempt to corner the copper market also sparked several civil suits by private
plaintiffs. Sumitomo and its co-conspirators settled a private class action based on CEA violations
for $134,600,000, which was described at the time as "the largest class action recovery in the 75
plus year history of the Commodity Exchange Act."60 Private plaintiffs also launched lawsuits
against Sumitomo and other members of the conspiracy alleging violations of the Sherman Act.61
Plaintiffs alleged that Sumitomo, Global Minerals and Metals—a US copper merchant in
coordination with whom Sumitomo acquired its massive position in copper—and several others,

56 See Minpeco, S.A. v. ContiCommodity Serv., 673 F. Supp. 684 (S.D.N.Y. 1987).
57 See Minpeco, S.A. v. Hunt, 718 F. Supp. 168 (S.D.N.Y. 1989).
58 See In re Sumitomo Corp., CFTC No. 98-14 (May 11, 1998).
59 Id.
60 See In re Sumitomo Copper Litig., 74 F. Supp. 2d 393, 395 (S.D.N.Y. 1999).
61 See e.g., Loeb Industries, Inc. v. Sumitomo Corp., 306 F.3d 469 (7th Cir. 2002).

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conspired together in a conspiracy to "fix and maintain the price of copper at artificially high levels
from September 1993 to June 1996."62

5. False Reporting and Collusion

False reporting, which is prohibited by the CEA, could also violate the Sherman Act if an actor
knowingly provides false or misleading information through interstate commerce in concert with
others to manipulate price. False reporting is transmission or delivery of market reports or
information through interstate commerce which are false, misleading, or inaccurate and which
affect or tend to affect the price of a commodity in interstate commerce.63 Collusion is an
agreement between two or more persons to defraud another of his or her rights or obtain any object
forbidden by law.64

For example, entities and individuals involved in setting benchmark interest rates have been
charged with violating both the CEA and the Sherman Act by making false reports to manipulate
or attempt to manipulate price. Section 6b(a) of the CEA prohibits any person from willfully
making any false reports or misleading statements in connection with sale of any commodity,65 and
courts have recognized that "one of the most common manipulative devices [is] the floating of
false rumors which affect futures prices"66 through a false impression concerning supply and
demand and the willingness of others to enter into trades at specified prices. Under Section 1 of
the Sherman Act, all horizontal price-fixing agreements and conspiracies are illegal per se (i.e.,
illegal regardless of their objectives, mechanisms, or effects due to their actual or potential threat
to the economy),67 including "conspiracies and agreements to rig benchmark interest rates and
Forex benchmark rates that serve as components to the prices of derivatives and other financial
instruments."68

Additionally, in follow-on civil cases, plaintiffs alleged that competitor banks and interdealer
brokers not only violated Section 6b(a) of the CEA through false reports but also engaged in a
horizontal price-fixing cartel in violation of Section 1 of the Sherman Act by colluding to
artificially set the benchmark interest rates that served as components of the prices of interest rate
swaps and other derivatives.69 These plaintiffs alleged that, from 2005 to 2012, employees at
several of the world's largest banks and interdealer brokers conspired with their co-workers and
employees at competing banks and interdealer brokers "to rig LIBOR and other benchmark interest
rates of various tenors and currencies by coordinating their submissions to panels that set those

62 Id.
63 U.S. Commodity Futures Trading Comm'n v. Atha, 420 F. Supp. 2d 1373, 1380 (N.D. Ga. 2006) (citing United
States v. Valencia, 394 F.3d 352, 354-55 (5th Cir. 2004)).
64 Lincoln Printing Co. v. Middle W. Utils. Co., 74 F.2d 779, 784 (7th Cir.1935).
65 7 U.S.C. § 6b(a).
66 Cargill, 452 F.2d at 1163.
67 Socony-Vacuum, 310 U.S. at 226 n.59.
68 Gregory Scorpino, Expanding the Reach of the Commodity Exchange Act's Antitrust Considerations, 45 HOFSTRA
L. REV. 573, 607 (2016).
69 Id. at 581.

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rates."70 Because the banks were direct competitors in selling and buying derivatives and other
financial instruments that were premised on LIBOR, the benchmark interest rate-rigging
conspiracies and schemes allegedly violated Section 1 of the Sherman Act through "the warping
of market factors affecting the prices for LIBOR-based financial instruments."71

Case Study: United States v. Deutsche Bank AG, 15-cr-61 (D.Ct. filed on April 23, 2015)

As part of its settlement of the DOJ and CFTC's investigation into LIBOR and EURIBOR
manipulation, Deutsche Bank was charged with one-count of wire fraud and one-count of price
fixing in violation of the Sherman Act pursuant to a deferred prosecution agreement with the DOJ,
filed with the United States District Court of Connecticut on April 23, 2015. The DOJ alleged that
Deutsche Bank violated the Sherman Act due to its participation in a scheme by Deutsche Bank
traders to coordinate their EURIBOR requests with traders at other banks to benefit their trading
positions from at least June 2005 through October 2008.

According to the filed agreement, the Bank derivatives traders, whose compensation was directly
connected to their trading in LIBOR-based financial products, engaged in efforts to move these
benchmark rates in a direction favorable to their trading positions. Specifically, the derivatives
traders requested that LIBOR submitters at Deutsche Bank and other banks submit contributions
favorable to trading positions, rather than rates that complied with the definition of LIBOR.
Through agreements made between Deutsche Bank employees and traders at other banks – in
person, over emails, chats, and calls – Deutsche Bank worked with other banks to manipulate
LIBOR contributions. As a result, Deutsche Bank made false reports regarding the U.S. dollar
LIBOR and EURIBOR and its submissions were not made in accordance with the BBA definitions
and criteria, violating § 6b(a) of the CEA in addition to § 1 of the Sherman Act.

6. CDS & Boycotts/Price-Fixing

There have also been accusations of market manipulation related to the transition of certain
commodities and derivatives from over-the-counter ("OTC") to on-exchange trading. In a number
of actions, plaintiffs have alleged that dealers and others who benefited from the OTC system
colluded to ensure that new, more efficient markets were not established. For example, some of
the world's largest banks are accused of acting as a "cartel" to stifle competition in markets for
credit default swaps ("CDS"), which are swaps "whose payoffs are derived from the occurrence or
non-occurrence of a 'credit event' of some reference entity or entities, such as the bankruptcy of an
identified corporation" and which "may be used as credit protection device that exchanges a set
value for a debt security upon a default or other credit event."72

Antitrust concerns arise from CDS transactions because they are traded OTC and the markets for
many types of OTC swaps are dominated by only a handful of large banks, thereby making it easier
for cartel activity (e.g. a group boycott) to occur.

70 Id. at 576.
71 Gelboim v. Bank of Am. Corp., 823 F.3d 759, 776 (2d Cir. 2016)
72 Timothy E. Lynch, Derivatives: A Twenty-First Century Understanding, 43 LOY. U. CHI. L. J. 1, 22 (2011); JERRY
W. MARKHAM, LAW ENFORCEMENT AND THE HISTORY OF FINANCIAL MARKET MANIPULATION 7 (2014).

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Clifford Chance US LLP

For example, on June 8, 2017, Tera Group Inc. ("Tera") filed a lawsuit, alleging that Bank of
America Corp., Citigroup Inc., J.P. Morgan Chase & Co., and nine other banks73 conspired to keep
Tera from entering into a $9.9 trillion credit default swap market.74 Tera alleged that the banks
coordinated to boycott its TeraExchange platform by refusing to send it any CDS transactions and
to clear and settle any CDS trades that customers wanted to handle through the platform. By using
their combined 95 percent market share to enforce an opaque and inefficient protocol for trading,
the banks allegedly increased their profits and kept traders in the dark about prices while instilling
fear of retaliation in traders who defected to rival platforms.

Case Study: In re Credit Default Swaps Antitrust Litigation, 13-md-2476 (S.D.N.Y. filed Oct.
22, 2013)

Private plaintiffs alleged that the defendant banks, who were the primary OTC CDS dealers,
colluded to "squash the threat" of a proposed CME/Citadel CDS exchange, which would have
eliminated their control of market information, and colluded to ensure that no clearinghouse had
the capability to threaten their market dominance.

According to the complaint, the defendant banks engaged in this behavior because they were able
to receive supra-competitive profits in the OTC market, as they had structured the market to be
highly opaque. In particular, the complaint alleged that the defendant banks denied market
participants accurate real-time price-data that could be used to determine whether the price that a
dealer quoted was accurate. Instead, the market was forced to rely on price quotes from dealers or
non-binding price runs, which would often change after a counterparty expressed interest in a
contract. Counterparties were unable to determine the bid-ask spread for CDS contracts because
that information was kept private. As a result, plaintiffs claimed that the banks were able to receive
supra-competitive profits because the bid-ask spread was grossly inflated.

The complaint alleged that as a result of this behavior there was demand for an exchange-based
CDS market, which would be more transparent, efficient, and competitive. According to plaintiffs,
the defendant banks blocked the proposed CME/Citadel Credit Market Derivatives Exchange
("CMDX") from creating a central limit order booking, open-access market by boycotting CMDX
and forcing ISDA and Markit to deny CMDX the licenses that it would need to operate.
Additionally, the complaint alleged that the defendant banks colluded to stop other clearinghouses
from forming exchanges by either refusing to deal with the entity or by taking control of the risk
committees to create barriers to entry in the market. The complaint alleged further that the
defendant banks also colluded to drive business to ICE Clear, which it claims was created by the
defendant banks and ICE for the purpose of furthering their market domination.

In October 2015, the defendant banks reached a $1.9 billion settlement, for which the court granted
preliminary approval, and, in April 2016, the court granted final approval. Finding that the
prerequisites under Federal Rule of Civil Procedure 23 were met, the court certified a class defined
as all persons who, during the period of January 1, 2008 through September 25, 2015, purchased
CDS from or sold CDS to the dealer defendants in any covered transaction. It concluded that the

73 The other defendants are Barclays Plc, BNP Paribas SA, Credit Suisse Group AG, Deutsche Bank AG , Goldman
Sachs Group Inc, HSBC Holdings Plc , Morgan Stanley, Royal Bank of Scotland Group Plc and UBS Group AG.
74 Tera Group Inc. v. Citigroup Inc., No. 17-CV-04302 (S.D.N.Y. June 8, 2017).

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Clifford Chance US LLP

settlement was fairly negotiated and in good faith and that the value of present recovery
outweighed the possibility of future relief after a drawn-out litigation.

7. Key Distinctions between CEA and Sherman Act Claims

While the CEA and the antitrust laws can in many circumstances cover overlapping types of
conduct, there are important differences as to what is required to establish liability under each.

One key area of distinction is the state of mind that a plaintiff or prosecutor must show the
defendant had to prove a violation of the CEA or the Sherman Act. Generally speaking, CEA
manipulation claims require a showing of specific intent to create an artificial price with respect
to a covered commodity. In the seminal Indian Farm Bureau case, the Commission held that a
"specific intent to create an 'artificial' or 'distorted' price is a sine qua non of manipulation."75 Cases
based on attempted manipulation also require a showing of specific intent to create an artificial
price.76 The specific intent requirement is based on concerns that a weaker standard would blur
line between unlawful activity and "innocent trading activity" that is only regarded as unlawful
manipulation "with the advantage of hindsight."77

In contrast, violations of Section 1 of the Sherman Act do not require a showing of "specific intent
to restrain trade."78 Rather, Section 1 violations are subject only to a "general intent" requirement,
meaning that by knowingly participating in an anticompetitive conspiracy, the defendant's intent
to restrain trade is presumed.79 Given the CEA's stricter intent standards, there may be cases in
which there is evidence of a defendant's participation in an anticompetitive conspiracy sufficient
to sustain a claim under Section 1 of the Sherman Act, but insufficient evidence that that defendant
had a specific intent to manipulate prices.

The Sherman Act's intent requirements are more closely aligned with the CEA's for claims under
Section 2. A monopolization claim requires a "willful" acquisition or maintenance of monopoly
power. This generally means something more than just an intent to increase market share or
customers. Attempted monopolization claims, like manipulation claims, require proof of a specific
intent to monopolize, as do claims for conspiracy to monopolize.

The CEA and the Sherman Act may also be somewhat more closely aligned on intent with respect
to claims under CEA Section 6(c)(1), a product of the 2010 Dodd-Frank Act's amendments to the

75 In re Indiana Farm Bureau Coop. Ass'n, Inc., [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,796,
1982 WL 30249, at *3 (Dec. 17, 1982).
76 See U.S. Commodity Futures Trading Comm'n v. Wilson, No. 13-CV-7884 (S.D.N.Y. Sept. 30, 2016) (rejecting
argument by CFTC that in attempted manipulation cases, the CFTC need only prove that defendant had a specific
intent to "affect market prices").
77 In re Indiana Farm Bureau, 1982 WL 30249, at *3.
78 See United States v. Gillen, 458 F. Supp. 887, 893 (M.D. Pa 1978) (citing Socony-Vacuum, 310 U.S. 150).
79 See id.; see also U.S. DEP'T OF JUSTICE, U.S. ATTORNEYS’ MANUAL, ANTITRUST RESOURCE MANUAL § 1 (“In a
Sherman Act criminal case, general intent must be proven. Customarily, however, proof of the existence of a
price fixing, or bid rigging or market allocation agreement is sufficient to establish intent to do what the defendants
agreed among themselves to do.”), available at: https://www.justice.gov/usam/antitrust-resource-manual-1-
attorney-generals-policy-statement.

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Clifford Chance US LLP

CEA, and CFTC Rule 180.1.80 Rule 180.1, which was modeled after the SEC Rule 10b-5, prohibits
the use of manipulative or deceptive devices in connection with commodity or swap transactions.
The CFTC has asserted that for violations of 6(c)(1) and Rule 180.1, it need only show that the
defendant acted "recklessly," a lower standard than specific intent. While courts have had few
opportunities to analyze Rule 180.1, at least one court has held that a claim under 6(c)(1) can be
sustained by showing that the defendant's conduct was "an extreme departure from the standards
of ordinary care" and presented a danger of misleading buyers or sellers so obvious that the
defendant "must have been aware of it."81 However, that court also held that because Section
6(c)(1) is an anti-fraud provision, alleged violations must meet the heightened pleading standards
under Federal Rule of Civil Procedure 9(b).82 Ultimately, while the case law dealing with Rule
180.1 is still developing, recklessness is a potentially easier standard to overcome than specific
intent, but likely still more challenging to meet than Sherman Act Section 1's general intent
standard.

Another key area of distinction is whether an overt act in furtherance of the anticompetitive or
manipulative scheme must be shown to establish a violation under the CEA or the Sherman Act.
To prove manipulation under the CEA, in addition to showing that the defendant intended to
manipulate prices in the relevant market, it must also be shown that the defendant succeeded in
creating an artificial price.83 To prove attempted manipulation, it must still be shown that the
defendant intended to manipulate prices and took some overt act in furtherance of that intent.84
Similarly, for monopolization claims under Section 2 of the Sherman Act, it must be shown that
the defendant successfully acquired or maintained monopoly power, or in attempt cases, engaged
in exclusionary conduct with the with the intent of achieving monopoly power.

Section 1 of the Sherman Act, on the other hand, prohibits agreements in restraint of trade. It is
not necessary to show that a defendant took any particular act in furtherance of the anticompetitive
conspiracy, only that the defendant agreed with a co-conspirator to restrain trade.85 Accordingly,
the differing requirements as to overt acts may mean that in certain cases, conduct that cannot be
targeted under the CEA may still violate the Sherman Act. While competitors who merely discuss
and agree to coordinate on prices or output, but do not take concrete steps in furtherance of the
agreement, are potentially liable under the antitrust laws, the CFTC would likely refrain from
taking action against such conduct in the absence of successful price manipulation or an overt act
in furtherance of the agreement to manipulate prices.

80 See 7 U.S.C.§ 9(1); 17 C.F.R. § 180.1.

81 See U.S. Commodity Futures Trading Comm'n v. Kraft Foods Group, Inc., 153 F. Supp. 3d 996, 1015 (N.D. Ill.
2015).
82 Id.
83 See In re Indiana Farm Bureau Coop. Ass'n, Inc., 1982 WL 30249, at *3.
84 U.S. Commodity Futures Trading Comm'n v. Bradley, 408 F. Supp. 2d 1214, 1220 (N.D. Okla. 2005).
85 See United States v. Rose, 449 F.3d 627 (5th Cir. 2006) ("Conspiracies under the Sherman Act are not dependent
on any overt act other than the act of conspiring.").

14
 PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

THE TREASURY AMENDMENT

TO BE PRESENTED AT:
ABA BUSINESS LAW SECTION, DERIVATIVES & FUTURES LAW
COMMITTEE WINTER MEETING
COMPETITION ISSUES IN THE COMMODITIES MARKETS PANEL

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

SUSANNA BUERGEL

In recent years, private plaintiffs have brought numerous actions asserting

violations of the Commodity Exchange Act of 1936 (“CEA”) in relation to derivatives

trading in various financial instruments influenced by so called “benchmark rates.” This

wave of litigation raises an interesting gating question: are the private plaintiffs in such

cases permitted to bring such claims in the first instance? The answer may lie with the

“Treasury Amendment,” an underutilized provision of the Commodities Exchange Act

which precludes suits under the CEA based on transactions in a subset of financial

instruments, in favor of enforcement by the agencies (such as the Securities Exchange

Commission (“SEC”)) holding broad regulatory authority. The Treasury Amendment, in

short, limits private plaintiffs’ ability to bring certain actions for relief under the CEA.

The materials below provide a brief background and history of the

Treasury Amendment and discussion of relevant case law. In particular, this discussion

focuses on the scope of the Treasury Amendment exclusion before and after the

watershed case of Dunn v. CFTC. The case law after Dunn largely has turned on two key

questions: the nature of the “board of trade” in which the financial instruments are

traded, if any, and the definition of a “futures contract” covered by the provision.

Together, these terms of art introduce ambiguity into the meaning and scope of the

Treasury Amendment and play a potentially outcome-determinative role in litigation of

 2

CEA claims. Thus, as the complexity of the derivatives markets continues to increase, it

is crucial for both the plaintiff and defense bars to better understand the scope of the

Treasury Amendment.

I. The History of the Treasury Amendment

Adopted over four decades ago, the Treasury Amendment has been

applied in only a limited number of circumstances. Due to its sparse use, there is a dearth

of cases which address its intricacies. Nonetheless, the relevant cases are best viewed in

two categories: those that came before and those that follow Dunn v. CFTC, 519 U.S.

465 (1997).

A. The Treasury Amendment: 1974–1997

In 1974, Congress passed the Commodity Futures Trading Commission

Act (“CFTC Act”), which significantly altered the Commodity Exchange Act of 1936

(“CEA”). The CFTC Act amended the CEA by, among other things, exempting

transactions in certain financial instruments from the CEA’s coverage and the newly-

created CFTC’s jurisdiction. See Commodity Futures Trading Commission Act of 1974,

Pub. L. No. 93-463, 88 Stat. 138 (1974). Thus, if an entity dealt in one of the exempted

financial instruments, a plaintiff would not have a cause of action against that entity

under the CEA unless that transaction involved “a sale . . . for future delivery” (i.e., a

futures contract) and was conducted on an organized board of trade. This provision

became known as the Treasury Amendment. See S. Rep. No. 93-1131, at 5887-89 (1974)

(outlining this view in a letter from the Department of the Treasury to Congress).

The Treasury Department proposed these exemptions, in part, out of

concern that the CFTC Act’s broad language could undesirably subject various categories

of transactions to the CFTC’s regulation, such as those between “large, sophisticated

 3

institutional participants” involving government securities, foreign currencies, and more.

See id. at 5889. The Treasury believed the CFTC’s regulation of such transactions could

be harmful in light of the preexisting regulations of those transactions by the Office of the

Comptroller of the Currency and the Federal Reserve. See id. at 5888. As a result,

Congress adopted the Treasury’s proposal, almost verbatim. See CFTC v. Frankwell

Bullion Ltd., 99 F.3d 299, 303 (9th Cir. 1996). The original Treasury Amendment text

read as follows:

Nothing in this chapter shall be deemed to govern or in any way be

applicable to transactions in foreign currency, security warrants, security
rights, resales of installment loan contracts, repurchase options,
government securities, or mortgages and mortgage purchase
commitments, unless such transactions involve the sale thereof for future
delivery conducted on a board of trade.

7 U.S.C. § 2(ii) (1976) (emphasis added).

In adopting the Treasury Amendment, Congress provided that the newly

created CFTC should not “infringe on the jurisdiction of the [SEC] or other government

agencies” and agreed with the Treasury Department that “regulation by the [CFTC] of

transactions in the specified financial instruments, . . . which generally are between banks

and other sophisticated institutional participants, is unnecessary, unless executed on a

formally organized futures exchange.” S. Rep. No. 93-1131, at 5863-64 (1974)

(emphasis added). This understanding of the need for the Treasury Amendment was

gleaned from the legislative history by at least one federal circuit in the decade after its

adoption. See Bd. of Trade of the City of Chi. v. S.E.C., 677 F.2d 1137, 1154 (7th Cir.

1982) (“From the legislative history, it is quite clear that the Treasury Amendment was

adopted by Congress only to prevent dual regulation by the CFTC and bank regulatory
 4

agencies of the banks and other sophisticated institutions that ordinarily trade in the

enumerated financial instruments.”), vacated as moot, 459 U.S. 1026 (1982).

B. Dunn, Amendments to the CEA, and the Treasury Amendment:

1997–Present

In 1997, the Supreme Court decided Dunn v. CFTC, significantly

impacting the interpretation of the CEA and the Treasury Amendment.

1. Dunn v. CFTC

Prior to 1997, federal courts viewed options on one of the instruments

enumerated in the Treasury Amendment as beyond the scope of the exemption, and thus

subject to the jurisdiction of the CEA. However, in Dunn, the Court held that options on

one of the exempted instruments were “transactions in” those instruments and therefore

were completely exempt from CEA coverage, unless transacted on a “board of trade.”

519 U.S. 465, 469-70 (1997). Although the issue before the Court was restricted to the

exemption for foreign currencies, it is widely accepted that the opinion’s language

applies to the other enumerated exemptions, including government securities. See U.S.

Regulation of International Securities and Derivatives Markets, § 12.16[4] at 12-124

n.491 (11th ed. 2015) (“Of course, the import of the Dunn holding applied equally to the

other financial instruments enumerated in the Treasury Amendment.”).

Despite the Court rendering a clear opinion with regard to options, the

Court left “board of trade” undefined. This ambiguity has led to disparate interpretations

of the phrase. See U.S. Gov’t Accountability Off., GAO/GGD-97-50, The Commodity

Exchange Act: Legal and Regulatory Issues Remain 22-27 (1997). Nonetheless, most

courts have taken the position articulated in CFTC v. Standard Forex, Inc., No. 93-CV-

0088 (CPS), 1993 WL 809966, at *11 (E.D.N.Y. 1993), that while some off-exchange
 5

transactions may be covered by the CEA, off-exchange transactions between

sophisticated institutions cannot be categorized as conducted on “boards of trade” and

thus are exempted from CEA coverage. See, e.g., CFTC v. G7 Advisory Servs., LLC, 406

F. Supp. 2d 1289, 1294 (S.D. Fla. 2005) (noting that “the majority of courts interpreting

this language have concluded that the Treasury Amendment exempted only interbank

transactions in foreign currency from CFTC regulation”); Lehman Bros. Commercial

Corp. v. Minmetals Int’l Non-Ferrous Metals Trading Co., 179 F. Supp. 2d 118, 156-57

(S.D.N.Y. 2000) (holding that “conducted on a board of trade” also encompasses trades

made off-exchange “as long as the transactions were not conducted between two banks”).

This distinction will be discussed in greater detail below.

2. Amendments to the CEA

Despite three amendments to the CEA since 1974, the overall purpose,

meaning, and text of the Treasury Amendment has remained largely unchanged. In 2000,

Congress enacted the Commodities Futures Modernization Act of 2000 (“CFMA”) in an

attempt to, among other things, clarify the discrepancy among courts as to the extent of

the Treasury Amendment’s exemption of off-exchange transactions, and to ease

regulation of derivative transactions involving institutions. See H.R. Rep. No. 106-

711(III), at 45-47 (2000) (“[T]he legislation excludes from the CEA financial derivatives

contracts traded off exchange by eligible contract participants.”); Jerry W. Markham,

Broker-Dealer Operations and Regulations Under the Securities and Commodities Laws,

§ 2:43 (2d ed. 2011). While the CFMA clarified the CFTC’s jurisdiction, the essential

purpose of the Treasury Amendment’s exemptions remained intact. See id.

 6

Eight years later, Congress enacted the CFTC Reauthorization Act of

2008, which largely addressed anti-fraud provisions and foreign currency transactions.

See Pub. L. No. 110-246, 122 Stat. 1651 (2008). This Act, inter alia, “clarified the

Commission’s jurisdiction over retail [Foreign Exchange] transactions, [and] also created

the retail foreign exchange dealer designation, a new category of CFTC registrant for

firms serving as counterparties in retail forex transactions.” Jason E. Friedman, CFTC v.

Gibraltar Monetary Corp. and Vicarious Liability Under the Commodity Exchange Act,

79 Fordham L. Rev. 737, 748 (2010).

Then, in 2010, Congress enacted the Dodd-Frank Wall Street Reform and

Consumer Protection Act (“Dodd-Frank”), a sweeping act affecting many aspects of the

CEA. Pub. L. No. 111-203, 124 Stat. 1376. While much of Dodd-Frank is irrelevant to

the Treasury Amendment, there are aspects worth noting. In particular, Dodd-Frank

“clarif[ied] the overlapping jurisdiction between the [CFTC] and the [SEC] over

securities futures.” Dodd-Frank Wall Street Reform and Consumer Protection Act: Law

Explanation and Analysis, (CCH) ¶ 3035 (2010). Dodd-Frank also gave the CFTC

“exclusive enforcement authority over swaps,” except as provided in the newly amended

CEA § 4b-1, which carves out authority to enforce provisions dealing with swap dealers

or major swap participants by prudential regulators of those swaps. Id. at ¶ 3130.

Furthermore, Dodd-Frank clarified the CFTC’s authority to regulate specific retail

commodity transactions such as those with “persons who are not eligible contract

participants or eligible commercial entities, and over retail contracts that are leveraged,

margined or financed by the offeror or counterparty.” Id. at ¶ 3135. Finally, the

 7

legislation added prohibitions with regard to market manipulation and created new

procedures for CFTC cases involving market manipulation. Id. at ¶ 3155.

In the wake of Dodd-Frank, the Treasury Amendment exempts from CEA

coverage any “agreement, contract, or transaction in” foreign currency, government

securities, security rights, and mortgages or mortgage purchase commitments, among

other enumerated instruments, unless the agreement, contract, or transaction is:

(i) a contract of sale of a commodity for future delivery (or an

option on such a contract), or an option on a commodity (other
than foreign currency or a security or a group or index of
securities), that is executed or traded on an organized exchange;
(ii) a swap; or (iii) an option on foreign currency executed or
traded on an organized exchange that is not a national securities
exchange registered pursuant to section 6(a) of the Securities
Exchange Act of 1934.

7 U.S.C. § 2(c)(1)-(2) (2012).

II. The Progeny of Dunn

For a transaction in an enumerated instrument to fall outside the Treasury

Amendment exemption, it generally must be both a futures contract and sold on an

organized board of trade. But see 7 U.S.C. § 2(c)(1)-(2) (2012) (listing additional

exceptions to the Treasury Amendment exemption under Dodd-Frank that apply to

specific types of derivatives products). In the wake of Dunn, litigation arose focusing on

each of these two elements: whether a transaction occurred on a “board of trade,” and

whether it involved a “futures contracts” within the meaning of the exemption.

A. Defining a Board of Trade

While Dunn squarely addressed the scope of “transaction in” a financial

instrument with regards to options, it failed to define the phrase “board of trade.” Due to

this ambiguity, litigants have attempted to distinguish Dunn by arguing that the relevant
 8

transactions did not occur on a board of trade and therefore do not fall within the CEA’s

coverage. Disagreement among federal courts over the scope of off-exchange, or non-

board of trade, transactions has led to two interpretations: that the Treasury Amendment

exempts all off-exchange transactions, or that it exempts only off-exchange transactions

already regulated or those between sophisticated institutions.

The minority of courts have read Dunn to hold that the Treasury

Amendment exempts all off-exchange transactions in the enumerated instruments from

the CEA’s coverage regardless of other regulatory schemes overseeing that conduct or

the participants in the transaction. For example, in Kwiatkowski v. Bear Stearns Co.,

plaintiffs argued that their OTC transactions with Bear Stearns constituted a transaction

on a “board of trade.” No. 96-CIV-4798 (JGK), 1997 WL 538819, at *10 (S.D.N.Y.

Aug. 29, 1997). Relying on Dunn, the court concluded that “principal-to-principal,

privately-negotiated agreements” were not “conducted on a board of trade within the

meaning of the Treasury Amendment.” Id. The court further noted that “‘board of trade’

means only ‘a formally organized futures exchange.’” Id. This opinion, however, was

not well received. Numerous courts have rejected the Kwiatkowski holding as too broad,

on the grounds that Dunn never defined the universe of transactions that occur on a

“board of trade.” See, e.g., CFTC v. G7 Advisory Servs., LLC, 406 F. Supp. 2d 1289,

1295 (S.D. Fla. 2005) (noting Kwiatkowski was “based on a misreading of Dunn” as

“Dunn did not address the question of whether the transactions were conducted on an

organized exchange”); Lehman Bros. Commercial Corp. v. Minmetals Int’l Non-Ferrous

Metals Trading Co., 179 F. Supp. 2d 118, 157 n.28 (S.D.N.Y. 2000) (finding that

Kwiatkowski’s conclusion that Dunn required a reading of “conducted on a board of

 9

trade” to mean only “on-exchange transactions” went too far as Dunn never reached this

issue); Rosner v. Emperor Int’l Exch. Co., No. 95 CIV. 10906 (KTD), 1998 WL 255437,

at *6 (S.D.N.Y. May 20, 1998) (noting that Kwiatkowski was based on a misreading of

Dunn because “[t]he Supreme Court did not rule in Dunn that the Treasury Amendment

excluded OTC transactions in foreign currency”).

In contrast, the majority of courts have held that the CEA only exempts

off-exchange transactions already overseen by another regulatory scheme or those

between sophisticated institutions. For example, in Rosner v. Emperor International

Exchange Co., the court was tasked with defining a “board of trade” for the purposes of

the Treasury Amendment. No. 95-CV-10906 (KTD), 1998 WL 255437, at *4-5

(S.D.N.Y. May 20, 1998). Defendants argued that their foreign currency forward

contracts were not conducted on a board of trade because they occurred on an off-

exchange market. See id. at *4. The court rejected this argument, partially on the

grounds “that Congress ‘intended to exempt only interbank transactions that were already

regulated by the banking regulatory agencies’” and the transactions at issue “ were not

interbank transactions and not subject to government regulation other than under the

CEA.” Id. at *5 (quoting CFTC v. Standard Forex, Inc., No. CV–93–0088 (CPS), 1993

WL 809966, at *10 (E.D.N.Y. 1993)).

Similarly, in CFTC v. Standard Forex, Inc., No. CV–93–0088 (CPS),

1993 WL 809966, at *11 (E.D.N.Y. 1993), the court rejected the notion that “board of

trade” means only a “formally organized futures exchange.” Instead, the court concluded

that the proper understanding of “organized exchanges” include “situations where private

unsophisticated investors are transactional participants.” Id.; see also Minmetals, 179 F.
 10

Supp. 2d at 156-57 (“‘[C]onducted on a board of trade’ . . . also encompasses trades that

were made off exchange, i.e., not on an organized futures exchange, as long as the

transactions were not conducted between two banks.”). The CFTC itself has expressed

this same interpretation of the Treasury Amendment. In Dubois v. Alaron Trading Corp.,

U.S. CFTC ¶12,061, 1997 WL 282724 (May 28, 1997), the CFTC attempted to reconcile

the inconsistent opinions defining the scope of the Treasury Amendment. In doing so,

the CFTC concluded that the transactions at issue were not excluded by the Treasury

Amendment, “because they are standardized contracts mass-marketed to relatively

unsophisticated individuals.” Id. at *8. Therefore, the sophistication—or lack-thereof—

of the involved parties may be the central factor in a court’s evaluation of whether the

contracts were traded on a “board of trade.”

This split in the case law is critical: a court that follows the minority line

of cases, including Kwiatkowski, might hold that any transactions not conducted on a

formal board of exchange would be exempted from the CEA. By contrast, a court that

follows the majority of cases would conduct a second level of inquiry into whether the

particular transaction at issue already is governed by a separate regulatory scheme aside

from the CEA, or into the level of sophistication of the parties participating in the trade.

B. Defining Transactions in Futures Contracts

As previously noted, in order for a transaction in an enumerated security

to fall within the coverage of the CEA today, it must be both a futures contract and sold

on an organized board of trade (or, alternatively, it must fall under another exception to

the exclusion, such as those that apply to swaps or to certain options traded in organized

exchanges other than national securities exchanges). See 7 U.S.C. § 2(c)(1)-(2) (2012).
 11

Consequently, a significant portion of the post-Dunn analysis has focused on whether a

particular category of transactions are transactions in a futures contract.

In CFTC v. International Foreign Currency, Inc., defendants, in an

attempt to distinguish Dunn, argued that they had transacted on spot markets and not with

futures contracts. 334 F. Supp. 2d 305, 310 (E.D.N.Y. 2004). In holding that defendants

in fact had transacted with futures contracts, the court identified five factors, “distilled

from case law and regulatory authorities,” to aide in determining if the relevant

transactions were, in fact, futures contracts: “(i) an obligation to make or take delivery of

a commodity in the future; (ii) an ability to offset the putative obligation to make or take

delivery and thus realize a gain or loss on the intervening price fluctuation; (iii) a purpose

to speculate on the intervening price changes without actually having to acquire the

underlying commodity; (iv) standardization of contract terms; and, (v) a margin system

of investing.” Id.

III. Conclusion

Outstanding questions remain about many critical aspects of the Treasury

Amendment, including the definitions of “board of trade” and of “futures contracts.”

Members of both the plaintiff and defense bars must carefully watch how the courts

navigate and fill in these gaps, and consider the potential implications of this rule at early

stages in litigation.

These issues are particularly critical at the outset of any litigation: the

Treasury Amendment severely limits the number of individuals who may bring a valid

CEA claim. As a result, the activities and identify of the lead plaintiff in any action may

be subject to intense scrutiny—including both the nature of the plaintiff’s transactions

and the identity and sophistication of the plaintiff itself.

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Members of the defense bar also must keep the Treasury Amendment in

mind when first analyzing complaints. Class action claims in particular often are brought

on behalf of classes of plaintiffs who transacted in a wide variety of financial

instruments. A defendant may be able to narrow a potential class on the grounds that

certain members’ specific transactions do not grant them access to any of the exceptions

to the Treasury Amendment.

Finally, this is an area of law in which there is likely to be significant

development. As discussed, there are a number of large, outcome determinative

inconsistencies in the definition of terms contained within the Treasury Amendment

exemptions. A court’s resolution on these ambiguities can radically change the outcome

of any specific litigation. Moreover, the only Supreme Court case addressing the

Treasury Amendment, Dunn, was issued on narrow grounds. Thus, there remains little

clear guidance on these complicated and critical issues. With the recent expansion in

“rate manipulation” cases, it is likely that the circuit courts, and perhaps the Supreme

Court, eventually will be asked to make a definitive interpretation on these issues.

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