Dunn v. Commodity Futures Trading Commission – Oral Argument – November 13, 1996

Media for Dunn v. Commodity Futures Trading Commission

Audio Transcription for Opinion Announcement – February 25, 1997 in Dunn v. Commodity Futures Trading Commission

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William H. Rehnquist:

We’ll hear argument now in No. 95-1181, William C. Dunn and Delta Consultants, Inc. v. Commodity Futures Trading Commission.

Mr. Stumpp.

Gary D. Stumpp:

Mr. Chief Justice, and may it please the Court:

The Treasury Amendment to the Commodity Exchange Act, which is quoted in full on page 1 of our brief, provides in pertinent part, nothing in this chapter shall be deemed to govern or in any way be applicable to transactions in foreign currency unless such transactions involve the sale thereof for future delivery conducted on a board of trade.

The question presented in this case is whether the Treasury Amendment excludes off-exchange foreign currency options from CEA regulation, thus whether off-exchange foreign currency options are transactions in the foreign currency within the Treasury Amendment–

Sandra Day O’Connor:

Now, if it were a… an off-exchange futures deal–

Gary D. Stumpp:

–I’m sorry?

Sandra Day O’Connor:

–If it were an off-exchange futures–

Gary D. Stumpp:

Yes, Your Honor.

Sandra Day O’Connor:

–agreement that we were dealing with, I guess the Commodity Futures Trading Commission… both parties agree, it wouldn’t have jurisdiction?

Gary D. Stumpp:

I believe… yes, both parties would agree, Your Honor.

The only dispute is because it’s an off-exchange foreign currency option transaction rather than an off-exchange–

Sandra Day O’Connor:

Why shouldn’t futures and options be treated the same?

Gary D. Stumpp:

–I believe they should be, Your Honor, and I believe both of them are exempt by the Treasury Amendment, as long as they’re off-exchange transactions in foreign currency, whether in futures or in options.

Sandra Day O’Connor:

Although the Treasury Amendment didn’t really speak of the options.

Gary D. Stumpp:

No.

The Treasury Amendment spoke broadly, Your Honor, of transactions in foreign currency.

It did not limit it to foreign currency futures.

It spoke broadly of transactions in foreign currency.

And accordingly, the ordinary meaning of the phrase would indicate that any transaction in which foreign currency is the subject matter would be excluded by the Treasury Amendment… off-exchange.

Sandra Day O’Connor:

But there are some holdings that distinguish transactions in from a future or an option agreement.

Gary D. Stumpp:

I would think the holdings Your Honor is referring to are certain holdings that have distinguished off-exchange futures from off-exchange options, along the lines that an option until exercised does not become a transaction in the foreign currency itself.

And if those are the decisions to which Your Honor is referring, I think they were… first, I think both courts that decided that way were dicta because you were dealing with exchange traded futures, although that was not the ground on which the courts went, and therefore it would be subject… it would not be subject to the act.

Antonin Scalia:

Exchange traded futures or exchange traded options?

Gary D. Stumpp:

In the two cases I believe Justice O’Connor is referring to… is the Chicago Board of Trade and the American Board of Trade case… they both dealt with off-exchange options on foreign currencies, and–

David H. Souter:

She said futures I think.

Gary D. Stumpp:

–Thank you.

Your Honor.

Ruth Bader Ginsburg:

But you… would you run by me what you said about dictum because the Second Circuit said we might have gone on another ground but we didn’t.

The ground that we went on was the first one.

Ruth Bader Ginsburg:

So–

Gary D. Stumpp:

As I said, Your Honor, I believe that the holding in the American Board of Trade case on which the court below relied in this case was dicta because it was on-exchange trading.

However–

Ruth Bader Ginsburg:

–But in that earlier case, the court didn’t decide it on the basis that it was on-exchange trading.

It decided it on the basis that it was an option.

Right?

Gary D. Stumpp:

–No.

I agree, Your Honor.

I’m not questioning the way the court got there.

I’m saying they could have gotten there another way, but obviously the way the court did decide, they did not go on an on-exchange/off-exchange–

Ruth Bader Ginsburg:

Is their holding.

Gary D. Stumpp:

–The holding in American Board of Trade was options do not become transactions in foreign currency–

Ruth Bader Ginsburg:

Right.

Gary D. Stumpp:

–until they’re exercised.

Ruth Bader Ginsburg:

Right.

Gary D. Stumpp:

The court below recognized that they could have gone on a different basis–

Ruth Bader Ginsburg:

But didn’t.

Gary D. Stumpp:

–but did not, and accordingly could not overrule the decision of the prior panel and noted the conflict with the Fourth Circuit and indicated that that… such a conflict was for this Court to resolve.

Ruth Bader Ginsburg:

Yes.

Well, I just wanted to be clear that you recognized it was a holding.

Gary D. Stumpp:

Oh, I… my only point, Your Honor, was I said I thought it could have been dicta, but clearly that is not the way the court, the Second Circuit, went.

Ruth Bader Ginsburg:

Right.

Gary D. Stumpp:

The question, thus, is whether the off-exchange foreign currency options are transactions in foreign currency within the Treasury Amendment and thus exempt from regulation under the Commodity Exchange Act.

We submit that that question should be answered in the affirmative for two reasons.

The ordinary meaning of the phrase transactions in foreign currency means any commercial dealings involving foreign currency or any dealings where foreign currency is the subject matter of the transaction.

Here off-exchange foreign currency options that were traded are dealings and they are… and they do have foreign currency as the subject matter.

Accordingly, under the ordinary meaning of the Treasury Amendment, they are exempt from Commodity Exchange Act regulation by the Treasury Amendment.

The second reason really confirms the first.

The congressional purpose in enacting the Treasury Amendment was to exclude off-exchange foreign currency transactions of whatever type from the Commodity Exchange Act.

David H. Souter:

Well, you say whatever type.

David H. Souter:

Now, this type was not known at the time of the amendment.

Right?

Gary D. Stumpp:

That’s true, Your Honor.

There was not the established market there is for off-exchange foreign currency markets in 1974.

David H. Souter:

Tell me who were the traders that the Treasury had in mind when it proposed this amendment.

I take it it’s the large banks I assume.

Gary D. Stumpp:

The majority… the off-exchange interbank market is primarily composed of the major banks.

David H. Souter:

All right.

Gary D. Stumpp:

And in fact the trading in this case was done in such banks.

David H. Souter:

Now, are the major… that’s in part an answer to my next question.

Are the same major banks for whom the Treasury had concern at the time the amendment was proposed engaging in the kind of option trading which is the subject of this case?

Gary D. Stumpp:

I’m only unclear, Your Honor, if you’re asking back in 1974 or–

David H. Souter:

No.

I know in ’74 they couldn’t have, but today.

They’re trading options the same way they used to be trading futures.

Gary D. Stumpp:

–They’re trading–

David H. Souter:

As they’re now–

Gary D. Stumpp:

–They are trading foreign currency options now, Your Honor.

In fact, I believe from the amici briefs that were submitted by the banks and the industry associations, it indicates the hundreds of billions of dollars that are trade in that market on a–

David H. Souter:

–So that if the concern at the time the amendment was originally proposed was to keep this business within the United States, or keeps the… keep the American banks competitive, that concern of policy I presume then would be just as applicable to options trading today as it was for future tradings then.

Gary D. Stumpp:

–I think that’s precisely correct, Your Honor.

I would also note that although the primary perhaps concern with the Treasury Amendment related to the large banks, that was not the only concern.

The Treasury Department noted that it was also to affect the traders and investors that were dealing in this off-exchange market.

So, I will not deny that the majority of the traders were the major banks, but they are not the only traders who are dealing in this market either then or now.

Anthony M. Kennedy:

If… as I understood your answer to Justice Souter, there were very few traders other than the large banks in options in foreign currency.

How about options in Government securities?

Gary D. Stumpp:

Again, Your Honor, are we speaking then or now?

Anthony M. Kennedy:

Then.

Gary D. Stumpp:

I don’t know what traders existed back in ’74 in the Government securities market.

I would certainly assume that the major banks were trading there.

Gary D. Stumpp:

The Treasury Department in its letter spoke generally of this off-exchange market referring to banks, referring to investors.

The CFTC itself has indicated there are other participants, abritrageurs, import-export companies, et cetera, dealing in the general foreign currency market.

I have not individually focused underneath that in terms of–

Anthony M. Kennedy:

One of the concerns that I have is that whatever we say here with reference to foreign securities… options in foreign currencies is going to apply also to options in Government securities.

And there’s a suggestion in some of the briefs that accepting your position would lead to a substantial regulatory gap.

So, just during the course of your remarks, I hope you could address that.

Gary D. Stumpp:

–All right, Your Honor.

The second meaning that I… or the second reason I was suggesting the question should be answer in the affirmative was the congressional purpose in enacting this to exclude the entire off-exchange market from regulation under the Commodity Exchange Act.

And as has been suggested by the… some of the questions today, that unless that decision is reversed and foreign currency options are held to be excluded by the Treasury Amendment, the congressional purpose in enacting it would be defeated and the vast majority of foreign currency options may move to banks and institutions without the United States.

Now, to provide just a brief description of petitioners’ activities in this case, petitioner Dunn was the President of petitioner Delta Consultants which served as an advisor concerning foreign currency transactions to various investment companies.

However, the foreign currency options that were transacted were not traded with investors and they were not traded on a board of trade.

Instead, the transactions were entered into in the international off-exchange interbank market with major banks, primarily Credit Lyonnais, Bank Julius Baer, Societe Generale, and Chase, and are different from the foreign currency futures contracts that are traded on exchanges and which the CFTC does regulate.

The district court rejected the argument that the Treasury Amendment provided an exclusion for these off-exchange foreign currency options and therefore there was no subject matter jurisdiction.

The Second Circuit affirmed but did not independently analyze the Treasury Amendment exclusion.

We submit the decision should be reversed.

Petitioners here engaged in transactions in foreign currency.

Those transactions were not conducted on a board of trade, and thus the Treasury Amendment excludes CEA regulation of petitioners off-exchange foreign currency trading.

As this Court has held, where the terms of a statute are not defined in the statute or have no common law… established common law meaning, they must be given their ordinary meaning.

And here the ordinary meaning of transactions in foreign currency are any dealings where foreign currency is the subject matter.

Really then we’re dealing with the meaning of four words in the Treasury Amendment, transactions in foreign currency.

The CFTC concedes these are transactions.

There is no issue that foreign currency is involved.

So, the dispute comes down to the meaning of the word in as used in the four-word phrase transactions in foreign currency.

Ruth Bader Ginsburg:

Why couldn’t in have a narrower meaning given that the statute also uses the word involving?

We think of transactions in interstate commerce as different from transactions affecting interstate commerce.

We have that kind of difference in the law.

Why shouldn’t it apply here?

Gary D. Stumpp:

Because there is no indication of any congressional purpose to indicate such a distinction.

I think that the argument being made by respondents is that Congress selected the word in to draw a rather critical regulatory distinction, and I don’t think there’s any indication that that was the intent of Congress to do so.

There would be no reason why if that in fact were the intent, the Treasury Amendment would not simply have been drafted as transactions in foreign currency futures as opposed to leaving the broad description of transactions in foreign currency.

Antonin Scalia:

Is there some reason in policy why you would want to distinguish between the two?

Gary D. Stumpp:

There is no reason why I would wish to distinguish between the two.

Antonin Scalia:

Why one would wish to distinguish between the two then.

Gary D. Stumpp:

I don’t think that there would be a reason in light of the legislative intent indicated in enacting the statute.

The Treasury Department letter which was submitted as the Commodity Exchange Act… the amendments were being proposed and the definition of commodity was being substantially expanded beyond the traditional agricultural commodities, the Treasury Department was concerned that that language might include foreign currency transactions and communicated that concern to Congress.

Most of the specific discussion contained in the Treasury Department’s letter referred to foreign currency futures.

However, the specific language which the Treasury Department proposed and which Congress enacted as the Treasury Amendment does not speak of foreign currency futures.

It speaks more generally and more broadly of transactions in foreign currency.

So, there would be no reason to take that approach unless the intent were to exclude the entire field of off-exchange foreign currency futures.

Indeed, the respondents point out that, as has already been commented on, in 1974 there was not an established market for off-exchange foreign currency options.

Thus, it really doesn’t make sense to suggest that without such a market Congress intentionally chose the word in to distinguish futures from an options market which did not yet exist to any real extent.

So, accordingly, I think the ordinary meaning and the most logical meaning, which is confirmed by the congressional purpose, is that transactions in foreign currency was a broad exclusion to this new expansion of the definition of commodity under the CEA and accordingly should be given that effect by this Court, namely, to exclude the entire field of off-exchange foreign currency transactions, whether those transactions happen to be in the nature of futures, options, or any other type of transaction that there may be.

David H. Souter:

Because we’re going to have to draw the distinction with respect to the sort of recapture proviso at the end, aren’t we, because that refers to sales for future delivery?

So, that’s going to draw back the futures contracts, but it’s not going to draw back the options contracts.

Gary D. Stumpp:

I do not agree, Your Honor, that the savings clause only relates to futures.

I think the savings clause exempts from… the Treasury Amendment excludes all off-exchange transactions in foreign currency, and the savings clause brings back those in the language of the statute which involve the sale thereof for future delivery conducted on a board of trade.

David H. Souter:

But sale for future delivery is a fairly straightforward description, isn’t it, of the future versus the options contract?

Gary D. Stumpp:

I would say, Your Honor, that the description of sale for future delivery would include both futures and options.

I think the act in different places uses phrases such as a contract of sale for future delivery.

Here it’s a broader phrased sale thereof for future delivery.

So–

Anthony M. Kennedy:

If you were describing an option alone, would you use the word delivery?

You don’t deliver under one of these kinds of options.

You don’t deliver anything, do you?

Gary D. Stumpp:

–Well, I think you deliver under an option as much as you deliver under a future because–

Stephen G. Breyer:

But you don’t deliver until you… until somebody exercises the option; whereas, under the futures contract, if the contract is not canceled, you do have to deliver.

Isn’t that right?

Gary D. Stumpp:

–Oh, that’s true, but my point is first that most futures contracts are offset rather than actual delivery being made under them, and the nature of the transaction is both futures and options are derivative transactions.

They are not transactions actually involving the underlying commodity, whatever that commodity might be.

It’s not–

Antonin Scalia:

Well, whether actually delivered or not, whether they’re offset instead of executed, doesn’t alter whether they are a sale for future delivery.

When the sale occurs, it is a sale for future delivery.

Gary D. Stumpp:

–And I believe that is true for both options and futures.

Antonin Scalia:

An option is not a sale at all.

It’s an option to make a purchase and a commitment to make a future sale if the option to make a purchase is exercised.

Gary D. Stumpp:

From the writer’s standpoint, Your Honor, there’s an obligation.

Perhaps from the buyer’s standpoint, he might have the decision to make as to whether to exercise the option, but from the standpoint of the writer of the option, he’s obligated to make whatever, depending on whether it’s a put or call option… to make delivery or to get out of the contract, offset the contract in the same way you would do with a futures contract.

Sandra Day O’Connor:

Mr. Stumpp, I thought section… 7 U.S. Code, section 6(c) had some specific bearing on this case, and it’s entitled Regulated Option Trading and says that no person shall offer to enter into or enter the execution of any transaction involving any commodity regulated under this chapter which is of the character of or is commonly known to the trade as an option contrary to any rule, regulation, or order of the Commission.

And then subsection (f) of the same section says that nothing in this chapter is deemed to govern or be applicable to any transaction in an option on foreign currency traded on a national security exchange.

Apparently the purpose there is to preserve SEC jurisdiction.

Gary D. Stumpp:

On 6c(f), that’s exactly the purpose, Your Honor.

Sandra Day O’Connor:

Yes, but on the first… on subparagraph (b) it seems to give to the Commodity Futures Trading Commission the power to regulate or prohibit some transaction in the character of an option.

Gary D. Stumpp:

That’s true.

I don’t think there’s a dispute that the CFTC has general jurisdiction over options.

However, when specifically dealing with foreign currency… or transactions in foreign currency, whether those transactions are options, futures, or any other type of transaction in foreign currency, those, provided they occur off exchange are exempt from the Commodity Exchange Act pursuant to the Treasury Amendment.

There are other provisions.

Section 2(i) of the Commodity Exchange Act also gives regulation authority to the CFTC over options.

But again, those are options… regulation generally resides in the CFTC which is not disputed.

However, if the option is in foreign currency, if it is a transaction in foreign currency, the Treasury Amendment pulls it out, exempts it from the Commodity Exchange Act, whether it be under section 6c(b), section 2(i), or any other section.

The Treasury Amendment would exclude them from regulation under the act.

The ordinary meaning, as I’ve stated, of transactions in foreign currency basically is any transaction where the subject matter involved is foreign currency.

The CFTC–

Sandra Day O’Connor:

But to reach your conclusion, you have to say, as you do apparently, that an option with respect to foreign currency is a transaction in foreign currency.

That’s necessary for your result.

Gary D. Stumpp:

–An option is as much a transaction in foreign currency as a future is, Your Honor.

Antonin Scalia:

Would you look at, let’s see, section 6(c).

Where is it?

It’s on page 6a of the Government’s–

Gary D. Stumpp:

Brief on the merits, Your Honor.

Antonin Scalia:

–Brief on the merits, and it’s item 2 on page 6a which is section 6c(d)(2).

Antonin Scalia:

The Commission shall issue regulations that permit grantors and futures commission merchants to offer to enter into… enter into… or confirm the execution of, any commodity option transaction on a physical commodity subject to the provisions of.

Elsewhere the act speaks of an option transaction on a commodity, and you’re saying that the earlier expression, transaction in, includes options.

Doesn’t this later language suggest that transaction in does not refer to options?

Options are on the commodity, not in the commodity.

Gary D. Stumpp:

Well, first, Your Honor, I don’t agree with that kind of a conclusion.

The CFTC or the respondents have spent a great deal of time arguing that transactions in are different from transactions involving.

Your Honor is now suggesting transactions on.

The meaning, particularly in light of the way the Treasury Amendment came up, was clearly to exempt the field.

The Treasury Department proposed the specific language and Congress adopted the language.

I think it is clear that again if the intent were only to exclude futures, it would have been easy to say transactions in foreign currency futures.

The language selected by Congress as proposed by the Treasury Department which wished to exclude CFTC regulation in the entire off-exchange foreign currency market was simply transactions in foreign currency.

The fact that the act in different places may provide regulations for options generally does not detract from the exclusion that the Treasury Amendment provided for those transactions in foreign currency whether they happen to be options or any other type of transaction in that foreign currency.

I would also note that, and getting back to one of the prior points in terms of delivery as a future compared to an option, is that the CFTC respondents argue that options only create a right rather than an obligation to purchase or sell the commodity.

That type of distinction is really inaccurate because it doesn’t properly describe a future itself.

Under the act there have been determinations that futures… instruments can be futures without that type of purchase and sale obligation.

The CFTC… if purchase and sale of the underlying commodity were an actual requirement of being a futures contract, then the CFTC would not have been able to approve a number of exchanged-traded, cash-settled futures.

Where there are no… where they can be no delivery, there is no obligation to purchase or sell the underlying commodity, and in fact some of these, such as Eurodollars… the underlying commodity doesn’t really exist.

You couldn’t deliver.

You have to cash settle.

So, the delivery aspect in an attempt to differentiate futures and options simply does not work because that is not an accurate description of commodity futures contracts themselves.

William H. Rehnquist:

Why couldn’t you deliver Eurodollars, Mr. Stumpp?

Gary D. Stumpp:

They don’t exist as such.

William H. Rehnquist:

That’s a good reason.

[Laughter]

May I ask–

–In answer to the gap problem that has been raised, one of your friends said that what Dunn/Delta are doing… that doesn’t fall between the regulators because clearly what Dunn is doing falls within the SEC bailiwick because you are… what you’re doing is having contracts with your investors and those would count as securities.

Do you agree that that would be so, that you might escape the CFTC, but you’re with the SEC?

Gary D. Stumpp:

Speaking here, Your Honor, I don’t think there is any regulatory gap because even the CFTC’s complaint describes the investments that were entered into here as investment strategies, and I think that would fall within the definition of investment contracts for SEC jurisdictional purposes.

So, I don’t think there is any regulatory gap.

I think there is no jurisdiction of the CFTC over these transactions, but it is not to suggest that there is not jurisdiction of other agencies, most appropriately the SEC, to regulate those type of transactions.

Gary D. Stumpp:

As I said, the transactions were not made between petitioners and the individual investors.

The transactions were made between… with the major banks.

The investors were not counter-parties to any of the off-exchange foreign currency options that were transacted here.

Stephen G. Breyer:

If we think that the language is open to either interpretation, and at the time they enacted it, nobody really thought about the options market developing, and if there’s a good practical way to get your… the industry’s concerns dealt with through negotiations between Treasury and CFTC dividing responsibility, why wouldn’t we then, other things being equal, say, all right, the people who administer this, apparently the Treasury and the CFTC, think it’s better to read the language as inclusive and then get the exclusion through negotiation with the industry between the agencies?

It introduces more flexibility, deal more subtly with congressional and Treasury purposes, et cetera.

Why not go in that direction?

I’m not saying I would.

I’m just trying to get your response to it.

Gary D. Stumpp:

First, Your Honor, I’d note that it might not have been intended that way, but I think your question has a hypothetical element to it simply because the CFTC and the Treasury Department most certainly do not agree over the way this provision is read.

I think perhaps the–

Stephen G. Breyer:

But I was thinking they could work out… they don’t agree.

Gary D. Stumpp:

–They don’t agree.

They have filed amicus briefs in the Fourth Circuit in Salomon Forex.

They filed amicus briefs on opposite sides of the issue, and that was 4 years ago.

In fact, in the opposition to the petition for certiorari in this case, which was jointly submitted by the CFTC and the Treasury Department, one of the reasons that were offered why this Court should not grant cert was that there might be a chance the agencies would work it out between themselves.

Stephen G. Breyer:

Right.

Gary D. Stumpp:

Obviously–

Stephen G. Breyer:

I noted that that brief was filed for the Commodity Futures Trading Commission and for the United States as amicus curiae, whereas the opposition on the merits is just for the CFTC.

Gary D. Stumpp:

–That’s right.

The Treasury Department, I think it’s fair to say, does not share the view of the CFTC.

Antonin Scalia:

And this thing was called the Treasury Amendment, wasn’t it?

Gary D. Stumpp:

Yes, it was, Your Honor.

Antonin Scalia:

Because it was introduced by the Treasury Department.

Gary D. Stumpp:

Specifically by… or specifically enacted as they proposed it.

Ruth Bader Ginsburg:

But if I may just vary Justice Breyer’s question, yes, these agencies right now do not seem to be in agreement, but if this Court made a decision that would say what the law is, then does it follow that there are going to be this tight regulation then that would drive everyone to the London or other markets instead of reasonable exemptions being made?

Gary D. Stumpp:

I think that that’s… obviously, it’s a hypothetical because it hasn’t happened, Your Honor.

I think that in the number of years the dispute has existed, if it were possible to reach some kind of agreement without a direction from this Court, I think it would have happened by this time.

Antonin Scalia:

Well, isn’t your answer that if Treasury were that confident, they would never have introduced the Treasury Amendment?

If they were content to rely upon the good offices of the communities… Commodity Futures Trading Commission, they wouldn’t have introduced the amendment at all.

They would have just said we’ll cut our deal with the Commission.

Antonin Scalia:

We know they’re reasonable people.

Gary D. Stumpp:

I will agree with that observation.

[Laughter]

If I may, Your Honor, if there’s no further questions, Mr. Chief Justice, at this time I’d like to reserve whatever remains for rebuttal.

William H. Rehnquist:

Very well, Mr. Stumpp.

Mr. Minear, we’ll hear from you.

Jeffrey P. Minear:

Thank you, Mr. Chief Justice, and may it please the Court:

We submit that foreign currency futures are transactions in foreign currency, but foreign currency options are not.

We think that is the most accurate and sensible interpretation of the Treasury Amendment’s text.

Sandra Day O’Connor:

Well, so you both agree that it’s a… an option is a transaction in.

Jeffrey P. Minear:

No.

I… we disagree that–

Sandra Day O’Connor:

Then I misunderstood you.

Jeffrey P. Minear:

–Yes.

A… we say that a futures contract is properly described as a transaction in a commodity because it is an actual sale of the commodity although at a… for settlement and delivery at a later date.

An options contract by contrast is a sale of a future right to buy or sell the commodity.

It involves the commodity, but it is not a transaction in the commodity itself.

Sandra Day O’Connor:

Is it a transaction involving a commodity?

Jeffrey P. Minear:

It would be fair to characterize it as a transaction involving a commodity.

And in fact, that is how the CEA actually characterizes it, and it’s one of the reasons why we have concerns with treating a transaction in foreign currency as a transaction in foreign currency options.

Petitioners argue–

John Paul Stevens:

May I clarify one thing at the outset, Mr. Minear?

Justice Kennedy pointed out that the statute also applies to Federal Government securities.

Jeffrey P. Minear:

–That’s correct.

John Paul Stevens:

And the Chicago Board of Trade has filed a brief in which they express concern about the status of off-exchange transactions in Federal securities.

And as I understand your position, they would… the options and the futures transactions would be treated differently in that security as well as foreign exchange.

Jeffrey P. Minear:

To a large extent, that is true, Your Honor.

Let me first say that Government securities are traded on the exchanges, on the Chicago Board of Trade.

John Paul Stevens:

Correct, but they’re concerned about the off-exchange transactions.

Jeffrey P. Minear:

Yes.

Jeffrey P. Minear:

There the Chicago Board of Trade is concerned that that type of trading introduces the possibility of fraud, just as the CFTC is concerned as well.

John Paul Stevens:

And your position is that the trading in options will… would be regulated, but trading in futures would not.

Jeffrey P. Minear:

That is true.

John Paul Stevens:

Yes.

Jeffrey P. Minear:

I think it’s also important to point out, however, that it’s not clear if there is actually a market off… over the counter in Government security options.

There certainly is a market in Government security futures and there is a market on options on Government security futures, but we do not have anything in the record–

John Paul Stevens:

But the irony then is you would retain the power to regulate the less… I mean, the market that may not exist, namely, the options, and you would have no power to regulate the market we know exists in futures.

Jeffrey P. Minear:

–Well, that simply reflects what happened in 1974.

When Congress enacted the CEA in 1974, it was sweeping in a large number of new commodities that were subject to regulation.

At that time all options had been prohibited.

There was no allowable option trading on the regulated commodities.

The Treasury Department noted that could raise problems with regard to certain futures trading in foreign currency, as well as trading in certain types of other financial instruments, and it responded to that market condition that existed at that time.

I think it’s important to understand also that Congress also provided that the CFTC can exempt transactions if in fact it determines that it is appropriate not to regulate them.

So, Congress actually did provide for these types of problems, these new markets that would emerge.

John Paul Stevens:

Well, it could exempt… but it could not regulate the futures, the off-exchange trading in futures.

Jeffrey P. Minear:

It could not.

John Paul Stevens:

Yes.

Jeffrey P. Minear:

That is correct.

Sandra Day O’Connor:

Now, what regulations has the CFTC imposed on the market in foreign currency options?

Jeffrey P. Minear:

Generally foreign currency options would be subject to the usual requirements of a contract market and the usual requirements that govern options trading.

For the most part, options trading off of exchanges is not allowed.

There are certain exemptions that do apply, however.

Sandra Day O’Connor:

They just prohibit it.

Jeffrey P. Minear:

They have largely prohibited it with certain very important exceptions, however.

There is a dealer exception which covers people who are dealing in the retail trade of a particular commodity at issue.

There’s a trade option exemption also that deals with people who are engaging in a transaction for a commercial purpose.

And then there’s also what is known as the swap exemption which covers certain types of transactions which may or may not be futures or options but, the CFTC has determined, can safely be subject to… can be engaged in without substantial problems of fraud.

Sandra Day O’Connor:

Could it be said that the trade here was under one of the exceptions?

Commercial?

Jeffrey P. Minear:

No, I do not believe that they would qualify for any of the exceptions here.

Jeffrey P. Minear:

And in fact, the trading that was involved here is exactly the problem that Congress was concerned about in 1974, the so-called Ponzi scheme of trading in naked options and then not being able to cover–

Antonin Scalia:

I think Congress was also concerned that the Treasury Department ought to have control over matters that involve trading in foreign currency which probably affect our own currency as well.

The CFTC is an independent regulatory agency, isn’t it?

Jeffrey P. Minear:

–That is correct.

Antonin Scalia:

It can do what it wants and the President cannot alter its decision.

Jeffrey P. Minear:

That is largely true.

Antonin Scalia:

I think Congress was concerned that these decisions should lie with the President of the United States through the Treasury Department, and I don’t see, as far as the impact of that upon our national life is concerned, how options are any different from futures.

You’re talking about fiddling around with foreign currency, and given the international market that now exists, you’re talking about fiddling around with our currency.

Jeffrey P. Minear:

Well, it’s not clear, Your Honor, first of all, in the record what effects this will have on the foreign currency markets.

But I think more specifically to your point, I think we have to look to what Congress really intended, and what it said in the statute.

That is what we have used as the guide here.

Antonin Scalia:

Well, I certainly don’t think that just the use of the word in… it bears the meaning you want to give it, but if that same terminology had been used in some legislation, I can just envision the Government coming up here and saying… let’s say, an SEC authorization says that it can regulate transactions in something, and you would say, well, it’s ridiculous to think that you can avoid all of this by simply dealing in options.

Of course, options are transactions in that kind of thing.

I don’t think Congress had that distinction in its mind when it drew this thing.

So, we’re really–

Jeffrey P. Minear:

We think what… we think… Congress had in its mind was the problem of futures trading and not options trading, and we think the language it used actually indicates that.

And it’s a good deal more than simply the word in.

We also ask you to look at two other provisions of the CEA, section 2(i) which describes the CFTC’s exclusive jurisdiction, and section 6(c) which grants the CFTC authority to regulate options.

In both of those cases–

Antonin Scalia:

–Where are those in your brief?

Jeffrey P. Minear:

–Yes, those are in our brief.

The section 2(i) appears at page 1a of the appendix, and the relevant provision of section 6(c) which is subsection (b) appears at page 4.

What you note with regard to both of–

Sandra Day O’Connor:

There’s no sound coming out of your speaker.

Are you not speaking into it or is there a problem?

Jeffrey P. Minear:

–I’m not sure if there is a problem.

Sandra Day O’Connor:

It’s not connected.

Jeffrey P. Minear:

I will try and speak more loudly if that would be of assistance.

Sandra Day O’Connor:

I think you’ll have to because it isn’t working.

That might be a good idea.

Sandra Day O’Connor:

That or don’t say anything important.

[Laughter]

Jeffrey P. Minear:

I would much prefer to speak to the important matters here.

And in that regard, I think the provisions… these two provisions that I’ve cited are important and very significant because they both mention… they discuss options and they both describe them as transactions involving the commodity, and they both use very specific language to talk about options.

I think what’s clear throughout the CEA is that when Congress meant to deal with options, it dealt with them quite specifically.

It either mentioned them by name or it used the transactions involving terminology.

That same language is found also in section 2(a) of the CEA.

And we think that that is very significant in determining what Congress meant when it used the more restrictive phrase transactions in foreign currency.

Stephen G. Breyer:

To go back to Justice Scalia’s question for a minute–

Jeffrey P. Minear:

Yes.

Stephen G. Breyer:

–I’m… it may well be that the language determines this in your favor, but if it does not and if it really is open and if Congress did in fact regulate… exempt the foreign transactions for the reasons set out in the Treasury letter, then is there any reason why, in a world where options transactions now serve the same purposes and are used to the same extent as futures transactions, the result should differ?

Jeffrey P. Minear:

Yes.

Stephen G. Breyer:

I mean if the language is open and the world is such that the purpose is the same and the Treasury Department apparently thinks that’s what it meant.

Jeffrey P. Minear:

Yes, we think there is a very good reason–

Stephen G. Breyer:

What is that?

Jeffrey P. Minear:

–that they shculd be treated differently, and that is Congress’ historic concern that options posed a more serious risk of fraud than futures.

Stephen G. Breyer:

If that isn’t so, that is to say, if in today’s world it’s just as easy to be fraudulent or not fraudulent in respect to a futures transaction when engaged in by thousands of people as a options transaction, then what do we do?

Jeffrey P. Minear:

Well, I think–

Stephen G. Breyer:

I mean, is it like the Commerce Clause not foreseeing the automobile?

Jeffrey P. Minear:

–I think it’s a matter of the Court looking to the expertise of two bodies: first, Congress which has continued to regulate options more strictly and has vested authority for exceptions with the CFTC; and then the CFTC itself and its assessment of whether these markets do pose a serious risk or not.

The CFTC carefully examined the options market in the newly regulated commodities in 1976.

It initially decided to deregulate that market and it found that there were numerous problems with fraud in the marketplace.

In 1978 it reimposed those limitations.

Antonin Scalia:

But if they trusted the FTC to make these determinations, they wouldn’t have needed the Treasury Amendment.

They would have said that the CFTC has exemption authority.

We will rely upon their good offices, unreversible by the President of the United States, to exempt those things that need exempting.

They were not willing to do that.

Jeffrey P. Minear:

I think what Congress was doing in 1974, it was looking at the markets that existed at that time, and it was saying, yes, we feel we can safely exempt the foreign currency futures market, the only market that existed and the only market that was described in the Treasury Amendment’s… the Treasury Department’s correspondence respecting the Treasury Amendment.

As to future markets that might develop, CFTC would be given the authority to make those judgments based on its ability to gather the facts and make–

William H. Rehnquist:

Well, no, but the legislative findings deal with… in section 5 deal with both futures and options.

Jeffrey P. Minear:

–Yes, that is true, and again I think section 5 is probably most notable for the fact that it distinguishes between transactions in commodities and options.

William H. Rehnquist:

I thought you were saying that Congress really wasn’t thinking about options at all when it passed this bill.

Jeffrey P. Minear:

It was not to a large extent, and with regard to section 5–

William H. Rehnquist:

Well, then why did it include options in the legislative findings?

Jeffrey P. Minear:

–The legislative findings… you’re talking about the last two sentences of that section which appear on page 3a.

William H. Rehnquist:

Well, I presume those are as good as any other findings.

Jeffrey P. Minear:

But those findings were added in 1983, some time after 1974.

Many of these markets have grown dramatically.

I think that’s the most remarkable effect about the commodities market, is they have been subject to dramatic expansion since 1974.

And the CFTC is exercising judgment in terms of where there are serious problems of fraud.

They believe there are serious problems of fraud in the foreign currency market as indicated by this very case, and in fact–

Ruth Bader Ginsburg:

With respect to this very case, Mr. Minear, the point that was made I think in the Chase Manhattan brief about the SEC has ample jurisdiction to take care of this kind of operation.

Jeffrey P. Minear:

–That is not necessarily true, Your Honor.

That… I think that that brief suggested that some of these transactions would be… would fall within the description of an investment contract, and therefore would be a security for purposes of the Securities and Exchange Act.

The problem with that is that you can avoid the investment contract terminology… or the requirement… the satisfy… you can avoid a… creating a transaction that is an investment contract by simply how you structure it.

So, fraudulent bucket shops can in fact avoid that problem by simply avoiding a… structuring their dealings in a way that does not create an investment contract.

So, there’s still a residual need for CFTC oversight in some of these areas unless–

Anthony M. Kennedy:

Isn’t it true also, or is it… it’s something I picked up from one of the briefs… that as the traders become more and more sophisticated, it’s harder to tell a difference in a futures and an option, and you can even have an option on a future, et cetera, et cetera?

Isn’t it very difficult sometimes to tell which of the two it is?

Jeffrey P. Minear:

–It could be.

It depends.

I think that the swap exemption is an example of that.

It discusses the fact that there are very sophisticated transactions that are being engaged in that may have the aspects of a future but are not actually a future.

And in those situations, the CFTC has carefully looked at the transactions, has indicated which ones they think are permissible and which ones are not.

And that is in fact a very reasonable way to go forward with respect to these–

Ruth Bader Ginsburg:

But if they are so close that you can’t tell them apart, what sense would it make to say that the futures are out but the options are in?

Jeffrey P. Minear:

–Well, we think that what Congress did in 1974 is it looked at the futures market as it existed then and said those… that area is exempt.

There are no… there will not be CFTC regulation in that area.

But as to these new instruments that come in, we’ll make a case-by-case determination.

We’ll vest that authority with the CFTC which has the authority and the time and the expertise to evaluate these transactions and determine whether or not they’re serving a useful market purpose and whether or not they pose an unacceptable risk of fraud in the marketplace.

Anthony M. Kennedy:

Mr. Minear, don’t futures and options involve the same market participants?

I’m not sure the sense of regulating one and not the other.

And if you regulate the options market, it seems to me, particularly if they’re the same participants and it’s the same general market, that you’re affecting futures anyway.

Jeffrey P. Minear:

Well, I think all of these can raise very complex economic questions in terms of the relationship between the options market and the futures market.

But I think we can say this, that with regard to commercial expectations, the futures market is secure.

With regard to the newly created options market, those questions ought to be evaluated by someone.

We shouldn’t simply provide an open-ended exception that says… simply says that anything that involves a foreign currency is going to be exempt from regulation.

Anthony M. Kennedy:

Well, then maybe you need to adopt the Board of Trade’s position that they’re both subject to the act.

Jeffrey P. Minear:

No.

We think the problem with that position is it runs into the difficulty with the board of trade proviso that was discussed earlier.

It’s clear that Congress did want futures transactions to be… that were conducted on a board of trade to be subject to CFTC regulation.

So, we think that that’s a textual problem of taking that approach.

Stephen G. Breyer:

Could you refer me to something just in respect to your answer to Justice Kennedy?

I had assumed throughout this we weren’t discussing no regulation of fraud.

I thought the issue was who would regulate: CFTC on the one hand or SEC and Treasury on the other.

Now you’re saying that if we hold that the CFTC does not have the authority, no one has the authority in respect to a significant number of off-exchange option currency transactions.

Now, is that so?

Is that what you’re saying, and if it is, where would I find out the scope of that problem?

Jeffrey P. Minear:

Yes, we are saying that there would be… if you hold that options are excluded, there will be a significant portion of the market that will not be subject to regulation by anyone.

The Treasury Department does not directly regulate these markets for fraud.

It does regulate banks for safety and soundness, and as long as these transactions take place in the interbank market, that provides some substantial protection.

But any other protection would have to come from another agency.

Those agencies would be the CFTC or the SEC.

The problem with SEC regulation here is unless the transaction involved qualifies as an investment contract under this Court’s decision in Howey, there would not be–

Antonin Scalia:

Who monitors futures contracts for fraud?

Jeffrey P. Minear:

–No one is monitoring the futures contracts for fraud, and in part that was because–

Antonin Scalia:

So, it works there.

Why can’t it work here?

Jeffrey P. Minear:

–The… and again, we’re talking–

Antonin Scalia:

Is there some rule that everybody has to be regulated or–

Jeffrey P. Minear:

–Let me clarify this again that with regard to the over-the-counter market, there is no CFTC direct regulation of futures, but that was based on the Congress… congressional determination that that was not necessary.

Congress has never made an–

Antonin Scalia:

–That’s begging the question.

I mean, you’re just begging the very question.

Did they make that determination just for futures or for all transactions involving foreign currency?

You point out that they do use the term involving to refer to options.

Jeffrey P. Minear:

–That’s correct.

Antonin Scalia:

But they also use the term on to refer to options.

So, they’re obviously not using any consistent language.

Jeffrey P. Minear:

I think the context–

Antonin Scalia:

They use in, they use on, they use involving.

Jeffrey P. Minear:

–I think you will find that they refer to transactions in options in only one case and that’s in section 6c(f) where they say, transactions… where they actually refer to that the CFTC would have no jurisdiction over transactions in options on foreign currency traded on a national securities exchange.

Now, it’s clear when Congress uses the term transactions in, I think they’re talking about a very specific type of transaction.

It is accurate to describe an option as a transaction in an option, a foreign currency option.

I do not think it’s accurate to describe as a transaction involving… or an options transaction as a transaction in the foreign currency, the underlying commodity itself.

John Paul Stevens:

But the problem with that argument is the unless such transactions involve at the end of the subsection.

That is obviously a subcategory of those which are in.

Jeffrey P. Minear:

That’s right.

And so that… and that supports our view I believe.

John Paul Stevens:

Not if involve is the broader term.

Jeffrey P. Minear:

Our view is this, that the transactions in foreign currency would include spot transactions, would include cash forward transactions, and would include futures transactions.

All three of those transactions involve situations where you’re actually purchasing the underlying commodity.

If you enter into one of those transactions and do nothing else, you will receive the commodity that’s involved.

We think that options are different because they do not have that distinction.

All you’re buying in that case is a right.

You’re not buying the underlying commodity.

Sandra Day O’Connor:

But, Mr. Minear, now do you agree that if the petitioners had engaged in exactly the same scheme, including misrepresentations and all, with their customers in trading in off-exchange foreign currency futures, the CFTC would have no jurisdiction over it?

Jeffrey P. Minear:

We think that would–

Sandra Day O’Connor:

Same conduct exactly–

Jeffrey P. Minear:

–There would be one–

Sandra Day O’Connor:

–but in connection with futures.

Jeffrey P. Minear:

–Excuse me, Your Honor.

There would be one question that we’d ask, whether this is conducted on a board of trade or not.

But let’s assume it’s not on a–

Sandra Day O’Connor:

No.

Let’s say it’s an off-exchange.

Jeffrey P. Minear:

–Well, board of trade is not necessarily–

Sandra Day O’Connor:

They’re off, not a board of trade.

Jeffrey P. Minear:

–with your hypothetical assuming it’s not on a board of trade.

Sandra Day O’Connor:

Yes.

Jeffrey P. Minear:

In that situation it’s true that the CFTC would not be able to bring an enforcement action, but it might be far more difficult to bring that type of fraudulent scheme and let me explain why.

I think this is important.

That options are peculiarly subject to fraud because they’re very easy to market to an unsuspecting public.

They can be sold very much like a lottery ticket.

The way–

Sandra Day O’Connor:

An option can?

Jeffrey P. Minear:

–An option can because what you’re telling the person is, here, you pay this premium, a small premium, and you… and the sky is the limit on what you might get in the form of your investment return.

A futures contract… to explain a futures contract to an investor would be no simple matter to begin with.

But beyond that, it also… they have to explain to the person that you’re making an investment in a future purchase and you might be obligated to buy that future commodity.

Much of this has really to do with the market mentality.

Sandra Day O’Connor:

Wouldn’t there be even less reason to find an exception for an option where the buyer doesn’t have to go ahead with it?

He can not exercise the option.

Jeffrey P. Minear:

The difficulty here–

Sandra Day O’Connor:

I mean, it’s just a strange argument it seems to me.

Jeffrey P. Minear:

–Well, I think that this… the answer here is largely a part of history and largely a part of market psychology.

But it has always been easier to market options than… fraudulently than futures.

William H. Rehnquist:

Well, how do you know that?

Jeffrey P. Minear:

I think Congress made that determination in terms of how it decided in 1922, since 1922, that there would be no options.

Options would not be sold on agricultural commodities because they posed such a danger of fraud, but futures would be allowed.

And that was the law from 1922 until 1974.

William H. Rehnquist:

And so all that proves is what you’re saying was true in 1922.

It doesn’t prove it’s true now.

Jeffrey P. Minear:

And what it proves is that in 1974, the relevant time for determining the Treasury Amendment, Congress continued to hold that view.

William H. Rehnquist:

Well, if we adopt your view of the Treasury Amendment, not if we adopt the petitioners’.

Jeffrey P. Minear:

Well, even apart from the Treasury Amendment, Congress continued to impose a ban on options in 1974 even though it was allowing trading in the futures market.

It simply–

Antonin Scalia:

Mr. Minear, has anybody… who’s representing the President’s position in this case?

I assume that’s Treasury’s position since he controls Treasury.

Jeffrey P. Minear:

–Yes, that’s right.

Let me tell you candidly what occurred in this case.

The Solicitor General was called upon to make a determination between the Treasury Department and the CFTC in terms of what is the appropriate position to take on this case.

He looked at the statutory language here and made the determination that the CFTC’s view was more in accord with the statutory language, and that’s why we’re taking that position in this case.

So, this does represent the view of the Solicitor General in determining what is the best reading of this statute.

Antonin Scalia:

Thank you.

Jeffrey P. Minear:

Now I’d like to point to some other textual indicia because I think we haven’t really spent much time talking about those.

One of the things that I think is significant about the Treasury Amendment is it actually does include certain types of options within its reach.

It makes specific reference to security warrants and also repurchase options.

So, Congress was aware that certain options would be included in the exclusion here.

Yet, it nevertheless decided against including foreign currency options.

One would think that if Congress had intended to include foreign currency options within the exclusion, it would have said so expressly like it did with regard to the other options that were involved here.

We think that they also… that this… we also find textual support from the board of trade proviso.

This has been discussed by the–

Anthony M. Kennedy:

Does the word transactions in modify just foreign currency?

Jeffrey P. Minear:

–No.

It modifies all six of the items that are described there.

Anthony M. Kennedy:

So, then you do have transactions in an option.

Jeffrey P. Minear:

Yes, in repurchase options which in that case were specialized… is a specialized type of option.

But I think what it indicates here is that Congress–

Anthony M. Kennedy:

That means you can have a transaction in an option.

Jeffrey P. Minear:

–You can have a transaction in an option, and we… our view would be different if Congress had said transactions in foreign currency options, but it simply said transactions in foreign currency.

Jeffrey P. Minear:

That’s what lies at the heart of our view here on the statutory text.

In the Treasury Amendment, Congress said… exempted transactions in certain items.

It did not include foreign currency options among those, even though it included foreign currency–

Anthony M. Kennedy:

I guess there’s no such thing–

Jeffrey P. Minear:

–even though it included other kinds of options.

Anthony M. Kennedy:

–There’s no such thing as a repurchase future I suppose.

Jeffrey P. Minear:

I think not, and in fact I think that is true.

John Paul Stevens:

Would you help me out with the term repurchase options?

What is the universe that that encompasses?

Jeffrey P. Minear:

This is actually an area where there’s some uncertainty, but let me explain.

We do know what repurchase agreements are, that the repurchase–

John Paul Stevens:

But we don’t know what repurchase options are.

Jeffrey P. Minear:

–We think options are options on repurchase agreements, and we think that Congress might have been looking forward to the possibility of options on repurchase agreements.

Now, I don’t know if that market exists or not.

John Paul Stevens:

And the universe that repurchase agreements covers, is that all agricultural commodities?

Jeffrey P. Minear:

No.

It’s primarily Government securities.

In fact, I think it’s… that term is used almost exclusively.

If you look to a financial dictionary, you’d find that when we talk about repurchase agreements, we’re largely talking about parking Government securities with one holder for a temporary period and then selling them back.

So, what we really have here with repurchase options… and I think this Congress was envisioning the possibility that repurchase agreements might be included.

Repurchase–

John Paul Stevens:

Help me again.

A repurchase agreement is a commitment by the Government to rebuy a previously issued security.

Is that what it is?

Jeffrey P. Minear:

–Yes, although this more often takes place between banks.

They can take place between the Federal Reserve Board and a bank or between the banks.

John Paul Stevens:

I see.

Jeffrey P. Minear:

But these are all Government securities, so they fall within the Government security exemption anyway.

Antonin Scalia:

Mr. Minear, if we should disagree with you and hold that options are included within the exemption, do you think the language at the end of that Treasury Amendment, unless such transactions involve the sale thereof for future delivery conducted on a board of trade… do you think that that is… can be applied to options?

Jeffrey P. Minear:

We think it cannot be applied to options.

Jeffrey P. Minear:

There’s a possible argument–

Antonin Scalia:

You’re going to be in big trouble if we disagree with you then.

Jeffrey P. Minear:

–Yes, I think that’s right.

I think that might well be the case.

But again, we have to look at what the words of the statute say, and that is what we’ve used as our guide here.

The term, unless such transactions involve the sale thereof for future delivery… and I’m reading on page 2a of our appendix.

We think that’s a term of art that really refers specifically to futures, and I think you can see that if you look directly below at section 5 which says transactions… this is the legislative finding section.

Transactions in commodities involving the sale thereof for future delivery is commonly conducted on boards of trade and known as futures.

So, that proviso–

William H. Rehnquist:

Mr. Minear, you said some part of that legislative finding was added in 1983?

Jeffrey P. Minear:

–Yes.

William H. Rehnquist:

What was added and what was put in in 1974?

Jeffrey P. Minear:

The 1974 language actually I think can be traced back to 1922.

I believe–

William H. Rehnquist:

But what was added in 1983 that wasn’t there… but was there in 1974?

Jeffrey P. Minear:

–The language respecting options which appears on page 3a of our appendix, and it begins at about halfway below the page.

William H. Rehnquist:

Furthermore?

Jeffrey P. Minear:

Furthermore, transactions which are of the character of and are commonly known to the trade as options.

Again, here’s Congress using the term, very specific term, options when it means to deal with options.

William H. Rehnquist:

And that was added in 1983.

Jeffrey P. Minear:

That was added in 1983.

Now, I would like to reemphasize a point here that I think is very important to bear in mind, and that is the Treasury Amendment is an exemption from a general regulatory program, and if there are doubts about its reach, we think the more narrow interpretation is the preferred one here.

That rule has particular force where Congress has appointed an expert agency, namely, the CFTC to… and given it authority to provide further exemptions from the regulatory program.

It’s the CFTC that has the expertise in this area and can make those determinations of whether or not the transactions at issue pose the threat of fraud that was the underlying concern of the securities… the Commodity Exchange Act when it was enacted in 1936 and when it was expanded in 1974.

We think that petitioners’ non-textual argument really is ultimately unpersuasive.

Their notion is simply that it would be illogical for Congress to exempt both foreign currency futures and foreign currency options because they serve similar marketing and hedging functions.

But ultimately Congress has always recognized the difference between futures and options.

It has done so in the agricultural commodities, and we believe it has done so in these other commodities as well.

We think Congress has drawn a line here, and it has drawn a line between foreign currency futures and options.

It had a reasonable and sound basis for drawing that line, namely, the fact that options pose more serious risks of fraud.

Jeffrey P. Minear:

Finally, the last point I would like to make is although we believe that the statutory language here is clear, if you disagree with us on that, then it’s appropriate to give deference to the CFTC’s view as the administrative agency that is administering the statute.

William H. Rehnquist:

But that would be a matter of the agency’s jurisdiction, wouldn’t it?

We don’t ordinarily give deference on the jurisdictional point.

Jeffrey P. Minear:

I think that you do in fact.

In fact, in CFTC v. Schor, this Court made that point.

It was a question whether CFTC had jurisdiction over reparation proceedings, but you did recognize that we do… it’s almost inevitable… inevitably necessary to give deference to an agency’s determination.

Stephen G. Breyer:

Yes, but that isn’t a rule in thin air.

That’s the rule of what Congress would have liked the courts to do.

Jeffrey P. Minear:

Yes.

Stephen G. Breyer:

And if anything here where it’s the Treasury Amendment, why wouldn’t you think Congress would like the courts to pay particular attention to the Treasury, if anyone?

Jeffrey P. Minear:

Well, we think that the Court’s explanation of deference in Smiley is that Congress has delegated this authority to the agency that’s charged with administration of the statute.

Sandra Day O’Connor:

But on this point, hasn’t the Government taken different positions at times and said that both futures and options in foreign currency were excluded from CFTC jurisdiction?

Isn’t that the position the Government has taken at times in the past.

Jeffrey P. Minear:

The United States filed a brief in the Fourth Circuit–

Sandra Day O’Connor:

Exactly.

Jeffrey P. Minear:

–taking that position.

Sandra Day O’Connor:

And so why is any deference owed here?

Isn’t it a litigation position and not anything entitled to deference?

Jeffrey P. Minear:

Well, the CFTC’s position is not a litigation position.

The Commission voted on whether or not to bring this suit, and so it is conducted with sufficient authoritativeness and deliberateness to be entitled to deference.

I see my time has expired.

William H. Rehnquist:

Thank you, Mr. Minear.

Mr. Stumpp, you have 1 minute remaining.

To just briefly touch on a few points raised, the exemptions, the dealer trade option and swap exemption, I think are adequately covered in the amici briefs.

They’re limited exemptions.

They’re certainly well subject to CFTC interpretation, modification, or withdrawal.

The point that continues to be made concerning that options have been dealt with differently by the CFTC.

As I said it is not relevant once you… once the CFTC acknowledges, as they have, that the foreign currency options market didn’t exist at that time and the agricultural options regulation, whatever purpose may have been served specifically dealing with agricultural options, would not be relevant to the expansion of the definition of commodity in the ’74 amendments beyond the traditional agricultural commodities.

Thank you, Mr. Stumpp.

The case is submitted.