Global Carbon Opportunity (Cayman) Fund Ltd. v. CME Group Inc.

The federal district court for the Southern District of New York dismissed plaintiff investment funds’ lawsuit against New York Mercantile Exchange, Inc. (NYMEX) and its operator alleging that NYMEX violated the Commodity Exchange Act (CEA) and asserting state law claims against both defendants in connection with positions the plaintiffs held in carbon offset credit contracts. The plaintiffs held long positions in the Global Emissions Offset Futures Contract (GEO Futures Contract) created by NYMEX and certified to the Commodity Futures Trading Commission (CFTC) in 2021. The GEO Futures Contract allowed contracts for delivery of physical carbon offset credits that met certain criteria that included eligibility for the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which the court described as requiring airline operators “to track and report carbon emissions and then demonstrate that they have met the carbon offsetting requirements for the applicable compliance period or ‘phase.’” The plaintiffs’ positions were worth less after NYMEX published a report in May 2023 stating that emissions units for physical delivery to settle the contracts were CORSIA-eligible emissions units for a “Pilot Phase (2021-2023)” and not CORSIA-eligible emissions units for a “First Phase (2024-2026).” Because the Pilot Phase credits could no longer be used by airlines to satisfy CORSIA obligations after January 1, 2024, the market value of the credits the plaintiffs would receive was diminished. The court found that the plaintiffs did not allege a “failure to enforce a rule” within the narrow private right of action created under the CEA, which the court said “permits a trader to sue only when a registered entity refuses to police third-party misconduct under an existing rule.” The court said the plaintiffs’ challenge to NYMEX’s report was instead “a type of dispute Congress consigned to exchange oversight and CFTC review, not to private litigation.” The court also dismissed the plaintiffs’ state law claims, finding that the plaintiffs did not adequately plead diversity of citizenship sufficient to support federal subject matter jurisdiction for the claims and declining to exercise supplemental jurisdiction.