Market Manipulation Regulation
|FINAL RULE: The CFTC issued its final rule on Anti-Manipulation and Anti-Fraud at its July 7, 2011 open meeting.|
|Proposal Date||Final Rule||Effective Date|
|November 3, 2010||July 14, 2011||August 15, 2011|
|Proposal Date||Comment Deadline||Reopened Comment Period Deadline|
|November 8, 2010||December 23, 2010||July 22, 2013|
Section 753 of the Dodd-Frank Act gives the Commodity Futures Trading Commission (CFTC) and U.S. Securities and Exchange Commission (SEC) the authority to monitor and enforce "manipulative and deceptive" practices in the swaps, security-based swaps, and commodities markets. The rules are intended to mirror the SEC's Rule 10b-5, a powerful regulation used to combat fraud and manipulation in securities markets.
At its July 7, 2011 open meeting, the CFTC approved its final rules regarding market manipulation and fraud. The changes can be found in the following two rules:
- Final Rule 180.1, which "broadly prohibits manipulative and deceptive devices and contrivances, employed intentionally or recklessly, regardless of whether the conduct in question was intended to create or did create an artificial price." This rule employs a scienter requirement, in order "to ensure that good-faith mistakes or negligence will not constitute a violation of the final Rules."
- Final Rule 180.2, which "codifies the Commission’s long-standing authority to prohibit price manipulation by making it unlawful for any person, directly or indirectly, to manipulate or attempt to manipulate the price of any swap, or of any commodity in interstate commerce, or for future delivery on or subject to the rules of a registered entity." Rule 180.2 mirrors the text of new CEA section 6(c)(3), and will be guided by a "four-part test for manipulation":
- that the accused had the ability to influence market prices;
- that the accused specifically intended to create or effect a price or price trend that does not reflect legitimate forces of supply and demand;
- that artificial prices existed; and
- that the accused caused the artificial prices. Recklessness will not suffice under final Rule 180.2 as it will under final Rule 180.1.
While the commissioners are generally pleased with the final rules, some industry participants have voiced concerns about implementation. The Futures Industry Association (FIA), for example, expressed its "disappointment" that the commission did not adequately address issues raised in its comment letters. According to FIA president John Damgard, "We strongly support the CFTC's authority to pursue any and all deliberate attempts to manipulate prices or defraud participants in these markets, but 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."
Background to CFTC Final Rulemaking
At its October 26, 2010 open meeting, the CFTC approved a proposed rule regarding the prohibition of market manipulation. The proposal would amend the Commodity Exchange Act by adding language that specifically forbids:
- using or employing any device, scheme, or artifice to defraud;
- making untrue or misleading statement of material fact, or omit to state a material fact;
- engaging in fraudulent activity;
- delivering false or misleading reports;
- manipulating or attempting to manipulate the price of a swap or commodity.
Additional provisions prohibiting certain electronic trading practices such as "spoofing" were included in the proposal.
At its February 24, 2011 open meeting, the CFTC addressed the issue of disruptive trading practices. Though separate from "market manipulation," the commission ultimately decided that disruptive practices, especially those involving electronic markets, could be viewed as a form of market manipulation. Thus, instead of issuing a separate rule proposal, the commission opted to issue an "interpretive order" that offers guidance regarding existing rules on disruptive trade practices. For more information, click here.
Although the CFTC has been granted the authority over the majority of swaps transactions, swaps based on securities, security indexes and loans ("security-based swaps") will be under SEC jurisdiction. At its November 3, 2010 open meeting, the SEC approved a rule proposal regarding fraud, manipulation, and deception in conjunction with security-based swaps. The proposal entered the Federal Register on November 8, 2010. The deadline for public comments was December 23, 2010.
- C.F.T.C. Is Set to Get Tougher on Fraud. New York Times. Retrieved on May 19, 2011.
- Anti-Manipulation and Anti-Fraud Final Rules. CFTC. Retrieved on July 7, 2011.
- CFTC sets out new market manipulation rules. Finextra. Retrieved on July 8, 2011.
- Open Meeting on Third Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 3, 2011.
- Open Meeting on Twelfth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on February 26, 2011.
- Press Release - SEC Proposes New Rule to Prevent Fraud in Connection with Security-Based Swaps. SEC. Retrieved on November 3, 2010.