CARboN dERIVATIVES REGULATIoN IN ACESA
T he American Clean Energy and Security Act expressly permits trading of carbon de- rivatives but subjects them to a strict regulatory regime. Moreover, in addition to its provisions dealing specically with carbon derivatives, AC- ESA implements dramatic changes to derivatives regulation generally, and to energy derivatives in particular.
by the CFMA, was to require that all derivatives be traded on “designated contract markets,” that is, on exchanges. To obtain and retain contract market status, exchanges were obligated to self- regulate and take measures to prevent and di- minish manipulation and excessive speculation. Failure to do so could result in revocation of the contract market designation.
In order to put ACESA’s derivatives provisions in context, some historical background is use- ful. e Federal government rst regulated cer- tain agricultural futures contracts in 1922, with the passage of the Grain Futures Act (GFA). is Act was amended in 1936 and renamed the Com- modity Exchange Act (CEA). e CEA enlarged the set of commodities covered and imposed additional regulatory restrictions. e CEA has been amended over the years, with the most important of these changes occurring with the Commodity Futures Modernization Act (CFMA) of 2000. ACESA reverses many of the changes adopted in the CFMA.
e stated purpose of Federal commodity de-
rivatives regulation is to prevent and diminish manipulation and excessive speculation, and to ensure fair practices and honest dealing in de- rivatives trading. To achieve these objectives, the original regulatory schema in the GFA, which was continued in the CEA until its amendment
ese provisions eectively precluded o-ex-
change trading of derivatives. at is, they out- lawed OTC derivatives trading. However, the CEA did permit trading of cash market contracts, such as contracts between farmers and grain pro- cessors to sell the next harvest’s grain.
In the 1970s and 1980s, market participants cre- ated new instruments that had futures-like fea- tures but were designed as securities. In addition, during the 1980s, nancial institutions introduced new derivatives contracts, notably swaps, with futures-like characteristics. ese innovations placed the CEA regulatory regime under tremen- dous stress. ere was a clear demand by market participants to trade instruments that were substi- tutes for futures and to trade them over-the-coun- ter. e Commodity Futures Trading Commission (CFTC) responded by granting one-o exemp- tions from the contract market requirement, but this only created another set of diculties. In par- ticular, it created legal uncertainty because of the
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