Disruptive Trading Practices Regulation - Comment Letters

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Gavel.png FINAL RULE: This page refers to the proposed rulemaking on disruptive trading practices. For a summary of the interpretive guidance of May 2013, click here.
Timeline, Interpretive Guidance on Disruptive Practices
Proposal Date Comment Deadline Final Rule Issue
March 18, 2011 May 17, 2011 May 16, 2013

Comment letters addressing disruptive trading practices. Letters dated prior to January 3, 2011 addressed the advance notice of proposed rulemaking (ANPR) from the CFTC Open Meeting, October 26, 2010. Subsequent letters address the proposed interpretive order from the February 24, 2011 meeting.

Futures Industry Association - December 23, 2010

Advanced Notice of Proposed Rulemaking on Disruptive Trading Practices
December 23, 2010

Summary of the comment letter:

  • The statute is "vague and unenforceable."
  • The commission should establish policies and procedures for market users to address possible market disruptions.
  • Brokers must be given a safe harbor should the broker choose not to execute a customer trade after having implemented policies and procedures designed to prevent disruption.
  • Current commission rules sufficiently address disruptive practices.
  • Additional rules must not stifle innovation.
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Managed Funds Association - December 28, 2010

Advanced Notice of Proposed Rulemaking on Disruptive Trading Practices
December 28, 2010

From the comment letter: "In summary, MFA submits the following recommendations:

  • The Commission should continue its policy of delegating supervisory and disciplinary authority in the area of market disruptions to the exchanges;
  • However, if the Commissions promulgates rules, it should adopt rules that define specifically and narrowly the prohibited disruptive trading practices;
  • The Commission should interpret and confine Section 747 to well-established legal standards and principles set forth in the DiPlacido3 precedent and in a manner that remains faithful to the plain language of Section 747;
  • Violating bids or offers is impermissibly vague and any potential rule should not be actionable in the absence of manipulative intent to influence price;
  • Demonstrating an “intentional or reckless disregard for the orderly execution of transactions during the closing period” should be understood to refer to trading activities similar to marking the close and should not be actionable in the absence of manipulative intent or, at the minimum, extreme recklessness;
  • “Spoofing” should be narrowly defined and should take into account the distinct market structure, practices and customs of the futures and derivatives markets; and
  • The Commission should provide clarity as to the type of conduct that constitutes anti-disruptive practices in the context of algorithmic and high-frequency trading, and any potential rulemaking should be principles-based and not hinder the ability of these traders to continue to add value to the markets."
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CME Group - January 3, 2011

Advanced Notice of Proposed Rulemaking on Disruptive Trading Practices
January 3, 2011

From the comment letter:

"Clearly, there is shared interest among market participants, exchanges, and regulators in having market and regulatory infrastructures that promote fair, transparent, and efficient markets and that mitigate exposure to risks that threaten the integrity and stability of the markets. In that context, however, market participants also desire clarity with respect to the rules and fairness and consistency in regard to their enforcement."

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Minneapolis Grain Exchange - January 3, 2011

Advanced Notice of Proposed Rulemaking on Disruptive Trading Practices
January 3, 2011

From the comment letter:

"The determination whether there has been disruptive activity and a corresponding violation depends on the facts and circumstances of each case. Some market activity may be intended to have a disruptive impact while other nearly identical activity may have legitimate business purposes. Prosecution of a specific violation should be viewed in light of all relevant facts and circumstances and proven by the Commission with substantive evidence. If the Commission narrowly defines an act as disruptive, innocent parties could unintentionally be captured while others with malicious intent may escape the literal application of the rule."

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Intercontinental Exchange - January 3, 2011

Advanced Notice of Proposed Rulemaking on Disruptive Trading Practices
January 3, 2011

From the comment letter:

"ICE supports the Commission's efforts to promote open and competitive markets while improving the ability to deter improper trading practices that are disruptive to legitimate trading and orderly markets. However, the practices set forth in paragraphs (A) through (C) of Section 747 of Dodd-Frank are extremely vague and unclear regarding what trading activity is illegal, which could have a chilling effect on legitimate trading activity. ICE urges the Commission to exercise due care in any rulemaking to ensure that it does not unintentionally discourage legitimate trading activity by market participants. Failure to do so could impose real costs on end users of markets by impeding price discovery, liquidity and efficiency of the marketplace."

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Investment Company Institute - January 3, 2011

Advanced Notice of Proposed Rulemaking on Disruptive Trading Practices
January 3, 2011

"In past comments on proposals to reform the rules overseeing the financial markets, the Institute has recommended that regulators examine whether any new regulations are necessary to address certain trading strategies that should be considered as improper or manipulative activity. Recent technological advances in trading have allowed these trading strategies to be employed more easily and cheaply, thereby lowering the risk to users of these strategies. This, in turn, has made trading more challenging for funds that are interested in buying and selling large positions and that can be disadvantaged by market participants that trade in front of their orders."

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ISDA/SIFMA - January 3, 2011

Advanced Notice of Proposed Rulemaking on Disruptive Trading Practices
January 3, 2011


"The Associations have two primary concerns with respect to Section 747 of the Dodd-Frank Act and the Commission’s rulemaking under it:

  • First, we believe that the while the terms used in Section 747 and in the ANPR may have limited application in certain markets, they are not commonly understood to have a particular meaning in the swaps markets. These terms lack definition, which makes them susceptible to being interpreted to sweep in a range of completely appropriate conduct. Moreover, it is not at all clear what relevance, if any, these terms will have in the swaps markets as they develop as a result of the implementation of regulations under the Dodd-Frank Act. Imputing to the swaps market practices that may have no relevance may result in regulations that are misdirected or misapplied.
  • Second, by adopting distinct rules to deal specifically with “disruptive” trading practices separately from the Commission’s current broad anti-manipulation authority under Section 9(a)(2) of the CEA and from the enhanced authority contained in Section 6(c) of the CEA (as amended by Section 753 of the Dodd-Frank Act), the Commission risks creating a patchwork of overlapping and inconsistent standards that are ultimately designed to prohibit the same conduct, complicating the ability of market participants to implement effective compliance programs. Similarly, by treating the Section 747 “use of swaps to defraud” provision separately from the related Section 753 material, the Commission may miss the opportunity to achieve much desired regulatory consistency and coherence."
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Commodity Markets Council - January 3, 2011

Advanced Notice of Proposed Rulemaking on Disruptive Trading Practices
January 3, 2011

Summary of the comment letter:

The Commodity Markets Council would like to see the three principles followed in any CFTC rulemaking on disruptive paractices:

  • The statutory language is vague and all implementing rules should provide precision and clarity in order to facilitate legitimate trading activity;
  • Definitions of key terms need to be precisely crafted and the scope of application narrow; and
  • The standard applied to “disruptive trade practices” should be intentional, deliberate or extreme recklessness.
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Newedge - January 5, 2011

Advanced Notice of Proposed Rulemaking on Disruptive Trading Practices
January 3, 2011

According to the comment letter:

Newedge believes that Section 4c(a)(5) of the Commodity Exchange Act (i.e., Section 747 of Dodd-Frank):

  • is unconstitutionally vague;
  • was (and is) unnecessary given other CEA provisions;
  • should be repealed by Congress, or, at minimum, clarified; and
  • will likely have a negative impact on liquidity and transparency.
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MarketAxess - May 16, 2011

Antidisruptive Practices
May 16, 2011

From the comment letter:

  • A counterparty must be permitted to take into account counterparty credit risk when entering into an uncleared swap.
  • A swap executed on a SEF's RFQ system cannot violate bids or offers.
  • The CFTC should clarify "best execution standard."
  • The CFTC should clarify "closing period" as it pertains to "daily settlement period."
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Managed Funds Association - May 16, 2011

Antidisruptive Practices
May 16, 2011

Recommendations from the comment letter:

  • "Despite the Commission‟s agreement that a “multi-layered, coordinated approach is required to prevent disruptive trading practices and ensure fair and equitable trading,” MFA believes that the Commission should delegate in the first instance supervisory and disciplinary authority in the area of market disruption to the swap execution facilities (“SEFs”) and designated contract markets (“DCMs”);
  • If the Commission chooses to promulgate rules or issue a Final Interpretive Order, the Commission should continue to refine the definitions of “violates bids or offers,” “closing period” and “orderly,” and “spoofing” so these terms specifically and narrowly describe the conduct proscribed by Section 747;
  • In addition, although the Commission specified intent requirements for Sections 4c(a)(5)(B) and 4c(a)(5)(C), MFA maintains that Section 4c(a)(5)(A) should also contain an intent requirement and should not be actionable in the absence of a manipulative intent to influence price, and that the intent requirements for Sections 4c(a)(5)(B) and 4c(a)(5)(C) should be heightened so as to exclude the prohibition of legitimate conduct."
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FIA/SIFMA - May 17, 2011

Antidisruptive Practices
May 17, 2011

Recommendations from the comment letter:

  • The Commission should identify specific problems that would necessitate additional enforcement authority to prosecute disruptive trading practices.
  • The statute is impermissibly vague and unenforceable. The Commission should further refine definitions of key terms and clarify their meaning so as to sufficiently guide the conduct of market participants.
  • The Commission should affirm that any rules or orders apply only to the three categories enumerated in Section 747.
  • The Commission should further clarify its authority in the context of algorithmic and high-frequency trading entities.
  • Any rules or final orders should reinforce the existing distinct and complementary roles of the Commission and the exchanges.
  • The Commission must clarify that CEA Section 4c(a)(7) (“Use of Swaps to Defraud”) will only be violated if a party violates a pre-existing duty.
  • Executing brokers must be given safe harbor from customer liability and from the Commission’s authority in certain circumstances.
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International Swaps and Derivatives Association - May 17, 2011

Antidisruptive Practices
May 17, 2011

"ISDA submits that the Proposed Guidance would benefit from the following:

  • Express Identification of Facilities Subject to Subsection 5 The Commission’s discussion in the Proposed Guidance leads to the conclusion that only a narrow group of “order-book” facilities carrying highly uniform and liquid products are suitable to be subject to Subsection 5. (Proposed Guidance at 14946.) Express acknowledgment of that fact would promote clarity as to the intent and application of Subsection 5.
  • Combined and Consistent Rulemaking with Section 753. Section 753 of the Dodd-Frank Act (“Section 753”), which concerns market manipulation, overlaps with Subsection 5 in a number of respects. Joint and consistent guidance on both sections would increase predictability of application."
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GFI Group - May 16, 2011

Antidisruptive Practices
May 16, 2011

From the comment letter:

"GFI recommennds that the Commission modify the Proposed Interpretation to clarify that a market participant that trades on a SEF will not be deemed to violate Section 4c(a)(5)(A) if it buys at a price that is higher than the lowest offer price that is available to that market participant on that SEF, or sells at a price that is lower than the highest bid price that is available to that market participant on that SEF, if the market participant buys or sells at such price based on factors in addition to price."

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CME Group - May 17, 2011

Antidisruptive Practices
May 17, 2011

According to the comment letter, although the interpretive order "clarifies such terms as 'spoofing,' 'violates bids and offers,' 'orderly,' 'closing period,'" CME Group does not believe that the order "offers the necessary guidance to market participants." CME Group further states that the proposed order "is still unclear in several important respects" as to prohibited behavior, and thus is "still susceptible to constitutional challenge."

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References

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