CFTC Issues Order of Registration for the Natural Gas Exchange Inc.
Commentary by Bob Zwirb
The CFTC issued an Order of Registration to the Natural Gas Exchange Inc. ("NGX"), a foreign board of trade located in Calgary, Alberta, Canada. Under the Order, NGX is permitted to provide its identified members or other participants located in the U.S. with direct access to its electronic order entry and trade matching system. The Order is the first issued by the Commission pursuant to Part 48 of the Commission's regulations ("Registration of Foreign Boards of Trade"), which provide that such an Order may be issued to a foreign board of trade that possesses, among other things, the attributes of an established, organized exchange and which is subject to continued oversight by a regulator that provides comprehensive supervision and regulation which is comparable to the supervision and regulation exercised by the Commission.
NGX submitted an application for registration which included, among other things, representations that NGX and its regulatory authority, the Alberta Securities Commission, satisfy the requirements for registration set forth in regulation 48.7. Accordingly, the Commission granted NGX an Order of Registration. The terms and conditions applicable to the Order include, among others, that NGX shall comply with the applicable conditions of registration specified in Commission regulation 48.8 and any additional conditions that the Commission deems necessary and may impose, and that NGX shall fulfill each of the representations it made in support of the application for registration. NGX has operated in the U.S. as an Exempt Commercial Market ("ECM"), under then-current Section 2(h)(5) of the Commodity Exchange Act, since November 5, 2002, and has been registered as a derivatives clearing organization since 2008.
See: NSX Order and related CFTC Press Release.
Commentary
This action by the CFTC reflects regulatory cross-currents. First, it involves an energy trading platform that previously operated as an Exempt Commercial Market largely, but not completely, free of regulation under former Section 2(h)(5) of the CEA. That exemption was eliminated by the Dodd-Frank Act, which forced NGX to register as another entity, in this case a board of trade, and since it is located in Canada, a foreign board of trade under new Part 48 of the CFTC's rules, which provides a comprehensive registration scheme for such non-U.S. entities. Before Dodd-Frank, all ECMs could operate under a very light regulatory regime that did not involve registration and non-U.S. futures exchanges could provide access to U.S. customers via a relatively simple no-action process. So what previously was treated simply as a trading platform requiring a little regulation is now treated as a board of trade comparable to a fully-regulated DCM. Moreover, what previously was subject to a simple no-action approval process, i.e., a foreign board of trade offering U.S. investors with direct access, now requires full registration. While the saving grace of this new regime is its allowance for substituted compliance with a comparable form foreign regulation, in the end, that is only a mitigating factor for all the changes that such entities must now endure. Only time will tell whether forcing non-U.S. ECMs to register as foreign boards of trade in this manner is beneficial to any degree.