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ambiguous status of these exemptions; there was a very real possibility that the CFTC exemptions would not stand a legal challenge and that bil- lions and eventually trillions of dollars in notional amount of derivatives transactions not executed on exchanges would be found unlawful.

ACESA adds carbon derivatives to the list of agri- cultural commodities that are subject to all provi- sions of the CEA, including the exchange trading requirement. us, ACESA requires that carbon derivatives be traded on exchange and subjects them to the most restrictive regulatory regime.

Congress responded in 2000 by passing the CFMA. is law created a tripartite hierarchy of derivatives. Agricultural derivatives continued to be subject to the contract market requirement, and o-exchange traded agricultural derivatives could be traded only with express CFTC exemp- tion from the exchange trading requirement. An- other group of commodities, including notably energy commodities, were exempted from certain provisions of the CEA, and in particular, from the exchange-trading requirement; these commodi- ties were still subject to the anti-manipulation and anti-fraud provisions of the Act. A third set, including things like “an interest rate, exchange rate, currency, security, security index, credit risk or measure, debt or equity instrument, index or measure of ination, or other macroeconomic index or measure” were excluded altogether from all provisions of the CEA.

Moreover, the bill changes regulations for energy commodities and other previously exempt com- modities. In particular, it eliminates the exemp- tions and exclusions for energy commodity trans- actions and therefore requires exchange trading of energy commodities. e CFTC may grant exemptions from the exchange-trading require- ment, but only if the contract is cleared through a CFTC approved clearinghouse. ere is a fur- ther possibility for exemption from this clearing requirement, but only for “highly customized” transactions. In addition, ACESA extends the clearing requirement to previously excluded com- modities. at is, these products can be traded o-exchange, but only if they are cleared. Again, there is the possibility for an exemption from the clearing requirement for highly customized transactions, but the criteria for exemption are quite strict.

e CFMA secured legal certainty for OTC deriv- atives and contributed to a proliferation of these products in both nancial instruments (e.g., credit default swaps or “CDS”) and physical commodi- ties (especially energy). But these OTC derivatives markets, especially CDS, received widespread (and, in my view, wholly wrongheaded) blame for the nancial crisis of 2008-2009. us, in the aer- math of the crisis, there have been numerous ini- tiatives in Congress to reverse the CFMA. ACESA is a perfect reection of this zeitgeist.

In a nutshell, under ACESA, most commodities, including carbon, must be traded on exchanges; virtually all of those that aren’t must be cleared; and only a very limited set of contracts meeting very special terms can escape the clearing re- quirement, and then only aer receiving a waiver from the CFTC. us, ACESA imposes a regula- tory regime that is a throwback to that designed in 1922, and is in fact more restrictive in some respects.12

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For instance, the GFA did not require central clearing of contracts. e Department of Agriculture, the original regulator of US futures markets, did use its power to revoke contract market designation to compel the Chicago Board of Trade to adopt clearing in 1925.

E N E R G Y S E C U R I T Y I N I T I AT I V E

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