Market Manipulation Regulation - Comment Letters

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Gavel.png FINAL RULE: This page refers to the proposed rulemaking on the anti-manipulation and anti-fraud. The CFTC final rule was issued at its July 19 open meeting.
Dodd-Frank Timeline, Proposed Rule Regarding Prohibition of Market Manipulation
Proposal Date Final Rule Effective Date
November 3, 2010 July 14, 2011 August 15, 2011
Dodd-Frank Timeline, Prohibition Against Fraud, Manipulation, and Deception in Connection with Security-Based Swaps, SEC
Proposal Date Comment Deadline Reopened Comment Period Deadline
November 8, 2010 December 23, 2010 July 22, 2013

Comment letters regarding market manipulation regulation.

CFTC Comment Letters

Managed Funds Association - December 28, 2010

Prohibition of Market Manipulation, CFTC
December 28, 2010

Summary of the comment letter: "MFA urges the Commission to adopt rules and guidance that effectively clarify the rights and obligations of market participants. We believe that greater guidance in this area will clarify the lines between permissible and impermissible conduct and allow market participants to develop proper internal controls. To that end, we recommend that:

  1. The Commission should not import SEC Rule 10b-5 precedent to trading in the futures and derivatives markets;
  2. No new duties should be implied from the Commission‟s proposed rule beyond those to which participants in the futures and derivatives markets would otherwise be subject to by agreement or by operation of common law;
  3. In the alternative, the Commission should adopt a specific intent level of scienter necessary to violate its proposed Section 180.1, or the Commission should at a minimum impose an “extreme recklessness” level of scienter; and
  4. The Commission should clarify that Section 6(c)(3) of the CEA, as well as proposed Section 180.2, do not provide the Commission with any new enforcement authority beyond extending the Commission‟s anti-manipulation authority to swap transactions."
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FIA/ISDA/SIFMA - December 28, 2010

Prohibition of Market Manipulation, CFTC
December 28, 2010

Recommendations from the comment letter:

  • "The Commission should not incorporate the standards and case law under Rule 10b-5;
  • No new duties of disclosure, inquiry or diligence should be imposed between two sophisticated parties to a bilateral transaction. Such new duties may discourage legitimate trading activities, increase transaction costs and as a result reduce the liquidity

and depth of the markets;

  • The Commission should clarify that nothing in the proposed rule under Section 6(c)(1) will impede the ability of market participants to take positions and trade on the basis of material, nonpublic information they obtain legitimately;
  • Extreme recklessness, not recklessness alone, should be the scienter standard under the

Commission’s proposed rule under Section 6(c)(1);

  • The Commission should clarify the scope of the proposed rule under 6(c)(1) and the Commission’s already existing anti-manipulation authority under CEA Section 9(a)(2); and
  • The Commission should clarify that, aside from extending its enforcement authority to cover swaps, Section 6(c)(3) does not extend its enforcement authority."
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CME Group - January 3, 2011

Prohibition of Market Manipulation, CFTC
January 3, 2011

In the comment letter, CME Group explains how using SEC Rule 10b-5 as a model for the proposed rule is not universally adaptable, and thus, inappropriate. The letter cites several ubiquitous practices among market participants that, under the proposal, could be construed as "manipulative." Furthermore, the proposal offers "no guidance as to what types of conduct would qualify as an 'effort to influence', nor does it explain how market participants can distinguish an 'improper' from a 'proper' effect. CME Group offers several recommendations, including:

  • The proposed rule should not prohibit any market participant from trading on non-public "inside" information.
  • Futures market participants should not be required "to provide marketwide disclosure nor expansive duty to correct."
  • A "scienter standard" that requires a showing of "extreme recklessness" should be adopted.
  • The "in connection with" language from the proposal should be clarified to apply only in cases where transactions can be linked directly to "prohibited fraudulent or deceptive conduct."
  • Clarifications are needed in the language of "false reporting" and "price manipulation."
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Coalition of Physical Energy Companies - January 3, 2011

Prohibition of Market Manipulation, CFTC
January 3, 2011

From the comment letter:

"In contrast to securities markets, commodity markets are caveat emptor markets where no duty of disclosure is required and the value of a commodity (for a typically fungible pre-established quality and quantity of a commodity) is dependent on external factors such as supply, demand, weather, delivery location, etc. In the NOPR, the Commission indicates that it has modeled its proposal after SEC Rule 10b-5 'with modification to reflect the CFTC's distinct regulatory mission and responsibilities.'"

Attached to the letter is a "redline" version of the anti-manipulation proposal, with the coalition's suggested text.

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Carl Levin, U.S. Senate - January 3, 2011

Prohibition of Market Manipulation, CFTC
January 3, 2011

Senator Levin is the Chairman of the Permanent Subcommittee on Investigations. In the comment letter, the senator discusses the interconnectedness of financial markets, and highlights instances in which prices became "distorted," according to subcommittee investigations. Examples cited include the natural gas, wheat, and crude oil markets. The letter concludes with additional recommendations to clarify manipulative practices and prevent "cross-market and cross-product manipulations and disruptions."

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Working Group of Commercial Energy Firms - January 3, 2011

Prohibition of Market Manipulation, CFTC
January 3, 2011

Summary points from the comment letter:

  1. Adopt clear and enforceable rules.
  2. Identify jurisdictional boundaries.
  3. Require specific intent for market manipulation.

The Working Group is concerned with the "subjectivity" of the scienter requirement, and lack of clarity in "false reporting" and "disclosure of nonpublic information" sections of the proposal.

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Freddie Mac - January 3, 2011

Prohibition of Market Manipulation, CFTC
January 3, 2011

The comment letter is primarily concerned with "front running" - trading for one's own account ahead of a received customer order - and other misuse of customer information by swap dealers. Freddie Mac would like to see a strengthening of the language concerning such practices. Although the commission has planned to prohibit front running as part of its proposal on business conduct standards, Freddie Mac believes that the commission "should make clear that front running also is a form of fraud-based manipulation" under the proposed rule.

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American Bar Association - February 16, 2011

Prohibition of Market Manipulation, CFTC
February 16, 2011

Legal issues from the comment letter:

  • A Commission rule under Section 6(c)(1) should require fraud or deceit.
  • The Commission should make clear that Section 6(c)(1) and any rule thereunder does not embrace securities law theories that are incongruous with futures and derivatives markets.
  • Rules should require a showing of all elements of manipulation including intent.
  • Extreme recklessness is the proper standard for scienter with respect to the fraud and deception requirement.
  • Rules should make clear that new proscriptions do not impose any new duties of inquiry, diligence, or disclosure.

All points in the letter are accompanied by legal precedent.

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SEC Comment Letters

Managed Funds Association - March 29, 2011

Prohibition Against Fraud, Manipulation, and Deception in Connection with Security-Based Swaps
March 29, 2011

In the letter, MFA offers comments in the following categories:

  • "The importance of the security-based swaps market and honest markets, and the ambiguities created by proposed rule 9j-l;
  • The statutory authorization for a security-based swap anti-fraud rule;
  • Purchases or sales of security-based swaps;
  • Settlements of security-based swaps that are not purchases or sales;
  • The proposed definition of sale; and
  • Considerations for the cost-benefit analysis."
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SIFMA & ISDA - December 23, 2010

Prohibition Against Fraud, Manipulation, and Deception in Connection with Security-Based Swaps
December 23, 2010

From the comment letter:

  • "Application of Rule 9j-l to reference underlyings would distort market behavior.
  • The overbroad application of proposed rule 9j-l to actions unrelated to SBS investment decisions and the overextension of insider trading enforcement exposure will unduly inhibit legitimate market business activity.
  • The proposal exceeds the Commission's rulemaking authority."

The Securities Industry and Financial Markets Association (SIFMA) and the International Swaps and Derivatives Association Inc. (ISDA) also present two other issues of concern: credit default swaps and equity security-based swaps.

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The Loan Syndications & Trading Association - December 23, 2010

Prohibition Against Fraud, Manipulation, and Deception in Connection with Security-Based Swaps
December 23, 2010

From the comment letter:

  • "By introducing considerable uncertainty into the markets for security-based swaps and the reference underlying, the proposed rule would deter market participants from legitimate market and business activity and lead to a reduction in syndicated loans that are critical to corporate borrowers.
  • The ability of lenders to exercise their rights or remedies under credit agreements will be constrained by the uncertainty that routine business decisions could be recharacterized as manipulative of related security-based swaps.
  • In order to avoid allegations of misconduct or fraud by omission, counterparties may have to disclose proprietary information about their investment and trading activities and other confidential information to each other.
  • The proposed rule may expose lenders to charges of misconduct when they make collateral calls.
  • To ensure compliance with the Proposed Rule, large investors and lenders will have to implement complex and burdensome information gathering and monitoring systems within their organizations."
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