On August 28, IATP co-filed a friend of the court (amicus curiae) brief with Better Markets and the Consumer Federation of America to the U.S. Supreme Court. The brief asks the Court to review and overturn a lower court decision that would allow foreign entities trading on U.S. exchanges to manipulate contracts, in violation of the Commodity Exchange Act, merely because the contracts are traded from locations outside the United States. Four Supreme Court Justices must agree to hear the case before it is put on the Court’s docket.
A Better Markets press release summarizes the amicus brief and the lower court ruling, which concerns the manipulation of a crucial futures contract, the London Interbank Offered Rate (LIBOR). Until June 30, LIBOR set the benchmark rate at which major banks lend to each other for the short-term loans that are critical to financing commerce. Because the LIBOR was susceptible to manipulation, it was phased out and replaced with the Secured Overnight Finance Rate (SOFR). If the lower court’s ruling stands, foreign entities could manipulate SOFR contracts on U.S. exchanges if trades are transacted from outside the U.S. Given the apparent disparity between the LIBOR contract and the agricultural futures contracts that are IATP’s primary concern in derivatives markets, why did IATP join the amicus brief?
As we explain in the amicus brief, “Market manipulation and excessive speculation in derivatives contracts disrupt price formation and weaken the ability of derivatives markets to provide reliable price benchmarks used by physical commodity producers, processors, and traders in the forward contracting and auctioning of raw materials used in consumer and industrial goods in the United States and internationally. Agricultural lenders and traders likewise depend on interest rate and foreign exchange derivatives to be uncorrupted benchmarks to facilitate remunerative lending and trade.” Additionally, we noted that of the 46 regulatory comment letters IATP has submitted to the Commodity Futures Trading Commission (CFTC) since 2010, three of them concern cross-border trading of derivatives contracts by the foreign subsidiaries and affiliates of U.S. headquartered firms. (IATP criticized the Trump administration CFTC’s proposed rule on cross border trading as exceedingly difficult to enforce.)
If the CFTC is inhibited from investigating and taking enforcement actions against suspected price manipulation of a contract because of the foreign location of the trader, market integrity will suffer. If grain elevators cannot rely on the futures market for a reliable benchmark price for forward contracting, they may stop offering forward contracts to farmers. Because a forward contract is an important form of loan collateral, lack of a forward contract likely will increase a farmer’s credits cost. Rather than pay the increased margin collateral required to trade in contracts whose price volatility is exacerbated by market manipulation, some agricultural market participants will reduce their futures trading or withdraw from the futures contract market until integrity has been restored.
In sum, farmers, ranchers and other agricultural market participants have a strong interest in the case of Laydon v. Cooperatieve Rabobank U.A., No. 23-80. (Co-incidentally, Rabobank, headquartered in the Netherlands and the defendant in the case, is a global agribusiness lender with a major U.S. presence.) If foreign entities are allowed to manipulate an interest rate futures contract with impunity, they might also seek agricultural futures contracts as a lucrative opportunity for manipulation.
If four Justices agree to hear this case, there are ample grounds for the Supreme Court to overturn the lower court ruling and uphold the CFTC’s authority to investigate and take enforcement actions against market manipulation whether the perpetrator is based in the U.S. or abroad