Judge puts CFTC on the spot

The Commodity Futures Trading Commission lost a big case this summer when an appeals court upheld an earlier decision refusing the CFTC the right to regulate spot forex contracts as futures.

The firm in the lawsuit, AlaronFX, was originally accused by the CFTC of selling futures contracts illegally, although the “futures” in question were actually spot forex contracts.

Legal experts say the case is important because it will give firms a much better idea of what distinguishes regulated contracts and unregulated contracts. That could help brokers who have been planning to add forex trading to their platform but have been thwarted by the CFTC.

And although the ruling concerned spot forex, the principle established in the case could just as easily apply to energy, precious metal or interest rate contracts. In his ruling, Judge Frank Easterbrook said, “these contracts look more like the business of a wholesaler in commodities such as metals or rare coins than like the system of trading in fungible contracts that characterize futures exchanges.”

The CFTC said it was disappointed in the decision and would ask the Appeals Court to reconsider its decision. Failing that, the CFTC could petition the U.S. Supreme Court to hear the case.