On March 15, 2016, the United States Environmental Protection Agency (EPA) and the Commodity Futures Trading Commission (CFTC) signed a memorandum of understanding (MOU) on the “Sharing of Information Available to EPA Related to the Functioning of Renewable Fuel and Related Markets.”
The MOU purports to respond to widespread concerns about fraud in the Renewable Identification Number (RIN) market. RINs are the currency used for compliance with EPA’s Renewable Volume Obligations under the Renewable Fuel Standard (RFS) program. Under the RFS, U.S. refiners and importers of gasoline or diesel fuel, known as “obligated parties,” are required to either use certain volumes of renewable fuel as transportation fuel each year, or obtain RINs to meet a Renewable Volume Obligation (RVO) specified by EPA annually for each obligated party. RINs are generated based on the volume of qualifying renewable fuel made available for transportation fuels in the United States. Obligated parties may generate or purchase RINs and then retire such RINs in order to demonstrate compliance with their RVO.
RINs can be traded separately from the renewable fuels from which they are derived. This has created the opportunity for RINs to be fraudulently created and traded by parties that have not actually produced or imported renewable fuels. The MOU memorializes the CFTC’s commitment to help EPA prevent fraud in the RIN market. As explained by the MOU, the agencies “intend to coordinate, cooperate and share information, including PBI [“Proprietary Business Information”], in the possession of the EPA with regard to the RIN and renewable fuels markets in connection with the respective regulatory and enforcement responsibilities . . . .”
The CFTC commits to using the information provided by EPA to “advise EPA on techniques that could be employed to minimize fraud, market abuses or other violations, and to conduct appropriate oversight in RIN and renewable fuel markets to aid EPA in successfully fulfilling the EPA’s statutory functions under Clean Air Act §211(o)(2)(A)(i)” (emphasis added). Although “conducting appropriate oversight” does not suggest that the CFTC will immediately assert jurisdiction over the RIN market, the MOU does not foreclose this possibility.
Indeed, the CFTC may seek to take a more active role in policing the RIN market, having been pressured to do so back in 2013 by Sen. Debbie Stabenow, D-Mich., chairwoman of the U.S. Senate Committee on Agriculture, Nutrition and Forestry, who in September 2013, sent a letter to the CFTC chairman soliciting the CFTC’s help in determining the causes of extraordinary volatility in the price of RINs. Sen. Stabenow asked the CFTC to inform her whether there are limits to the agency’s authority that could inhibit it from monitoring the RIN market. Sen. Stabenow’s request echoed concerns voiced in March 2013 by Sen. Ron Wyden, D-Ore., when he asked EPA to provide the Senate Energy and Natural Resources Committee with data on volatility and irregular trading in the RIN market.
The issue now appears to have gained some traction with the CFTC. According to the MOU, the CFTC will use the information provided by EPA to increase its “understanding of the operation of and participants in those markets.” Thus, while the CFTC has recently limited its oversight of some corners of the commodity markets, it may begin to increase its scrutiny of others. Regulation of trading markets can negatively impact liquidity, as the CFTC’s Dodd-Frank driven approach to the energy swaps market has shown.