Wednesday, July 20, 2011

CFTC Adopts New Manipulation Standard

FT: US Derivatives Watchdog Gets More Firepower
NYT: Regulators Finalize New Derivatives Rules
WSJ: CFTC Expands Its Power to Pursue Fraud, Manipulation

Last week, the Commodity Futures Trading Commission (CFTC), the federal agency charged with regulating derivatives, finalized the first five new derivatives regulations required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. One of those rules will give more power to CFTC lawyers to pursue manipulation in derivatives and commodity markets. Under the new regulation, CFTC lawyers only need to prove that traders acted “recklessly.” Previously, however, CFTC lawyers had to prove that traders had the specific intent and the ability to distort market prices and that their actions in fact distorted the prices of derivatives or commodities. Under the former standard, the CFTC prevailed only once at trial in the past thirty-five years.

Under the new regulation, the CFTC is also expected to pursue insider trading cases. Its new manipulation regulation is based on the Securities and Exchange Commission’s insider trading regulation which also makes illegal for traders to trade using “material nonpublic” information. According to Gregory Mocek, a former CFTC Director of Enforcement, the CFTC will bring enforcement actions against large commodity producers who make trades using their knowledge about supply and demand in the markets without informing counterparties of such non-public information.

Some criticize that the new manipulation standard is “too broad” and difficult to enforce. "The lack of clarity on how the broad new standards in the final rules will be applied has the potential to chill legitimate trading and reduce market liquidity," said John M. Damgard, the president of the Futures Industry Association. Scott O’Malia, a Republican Commissioner on the CFTC also expressed concerns that the new standard is vague and may add “confusion to the markets.”

In addition to the manipulation standard, the CFTC also approved another regulation that requires hedge funds and large traders to submit daily reports about their derivatives trading. The CFTC still has to finalize over 40 new derivatives regulations and will not meet the July 16 deadline. The new regulation will apply to commodity futures as well as the over-the-counter swaps markets.

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