A year after Dodd-Frank, CFTC tackles manipulation

WASHINGTON Thu Jul 7, 2011 2:02pm EDT

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WASHINGTON (Reuters) - The U.S. futures regulator on Thursday launched a frenzied effort to finalize nearly 50 rules as it reinvents itself as an overseer of the swaps market.

The Commodity Futures Trading Commission, which has been beset by delays as it carries out last year's Dodd-Frank financial reform law, on Thursday finalized five rules, including one that will give it more muscle to crack down on market manipulation and fraud.

"This closes a significant gap as it will broaden the types of cases we will pursue and improve the chance of prevailing over wrongdoers," said Gary Gensler, the CFTC's chairman. "It is a significant rule."

The rule, largely similar to a draft released in October, lowers the CFTC's standard of proof by only requiring the agency to show that a trader acted recklessly. For the first time, it also would allow the CFTC to prosecute fraud-based manipulation.

Previously, the CFTC had to prove an individual intended to manipulate prices -- evidence that is difficult to find through e-mails or phone calls -- and that the trader caused an artificial price to occur.

The CFTC has claimed only a single victory in a manipulation suit in its history: a case that accused a trader of gaming electricity futures in 1998. The case dragged on for over a decade before the agency won.

The agency hopes this new standard and its aggressive new enforcement chief, David Meister, will help it bring more cases such as the landmark one the CFTC filed in May. "This rule will be a priority for the Division of Enforcement," Meister said.

In May, the CFTC sued two well-known traders and two trading firms owned by Norwegian billionaire John Fredriksen for allegedly making $50 million by squeezing markets in 2008. [ID:nN03171984]

The commission voted unanimously to adopt the new anti-manipulation power. However, Republican Commissioner Scott O'Malia raised fears it may inject confusion into the markets until the CFTC clarifies how it will use it.

Geoffrey Aronow, a partner with the law firm of Bingham McCutchen and a former CFTC enforcement director, said it will take years, even decades, to establish precedents on what cases the CFTC will prosecute and how the courts will rule.

"In the meantime, unless the final notice provides clear guidance, it will be difficult for traders to know where the line is between legal and illegal conduct, with dire consequences resulting from the wrong judgment," he said.

PREDICTIONS OF HAPHAZARD RULEMAKING

The CFTC has struggled to keep pace with the rulemaking timetable laid out in Dodd-Frank as the agency writes a regulatory framework for the previously opaque $600 trillion over-the-counter derivatives market.

The agency proposed last month an implementation plan that would delay some swap rules.

Despite being behind schedule, the CFTC is kicking into high gear. The agency expects to vote on at least 17 rules during July and August, 20 rules in September and October and nine rules in November and December, according to Jill Sommers, a CFTC Republican commissioner.

"If we stick to such as a schedule, I foresee a process that haphazardly requires votes to be taken when the Commission has not had the time to sufficiently consider all of the implications of the final rules," said Sommers.

The next CFTC meetings are scheduled for July 19 and August 4. Gensler said the CFTC could consider whistle-blower , swap data repository registration, clearing mandates and agricultural swaps rules during these meetings.

Among the other rules the CFTC finalized on Thursday was enhanced reporting requirements for major traders in physical swaps.

The CFTC rule requires clearinghouses, their members and swap dealers to make daily reports of large swaps positions in 46 commodities.

The daily reports will help fill the gap in knowledge about the commodity swaps market and help the agency police position limits until new swaps data repositories are up and running.

The CFTC has collected detailed information on swaps positions held by the largest financial traders each month through a "special call" since June 2008.

The futures regulator increased the number of clearing members and swap dealers that would be required to report positions of 50 or more "economically equivalent" swaps (on a futures-equivalent basis) in any one month to 200 from a preliminary estimate of about 180. It left its estimate on the number of clearinghouses that will be impacted at five.

The final rules for anti-manipulation go into effect 30 days after official publication in the Federal Register, or around mid-August. The large trader rule would go into effect 60 days after publication for clearinghouses and members; swap dealers would not be covered until CFTC finalizes its swap dealer definition rule.

The CFTC also adopted on Thursday rules clarifying the definition of an agricultural commodity and consumer privacy.

(Editing by Alden Bentley and Karey Wutkowski; Editing by David Gregorio and Jim Marshall)

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Comments (3)
xyz2055 wrote:
This is a start but it isn’t nearly enough. Rather than all these complicated schemes that will require extra labor to monitor and prosecute why not just change 1 simple rule in the commodities market. You can’t take out a contract unless you plan to take delivery. I’ve seen estimates where up to 80% of the trades in the oil commodity market are by speculators. Why shouldn’t the goal of market regulation be to maintain supply and demand economics. By limiting trades to suppliers and end users isn’t that what would be accomplished?

Jul 07, 2011 11:48am EDT  --  Report as abuse
Greenspan2 wrote:
Taking delivery requirements sounds reasonable. That could explain Goldman’s investment in oil storage companies.

Jul 07, 2011 2:17pm EDT  --  Report as abuse
xyz2055 wrote:
Greenspan2.while I can’t find any information on the pseudo Hedge Fund (Goldman Sachs) investing in oil storage companies, they have in the past talked about the shortage of oil storage capacity around the world. Which has merit. If you look at the historical inventory at Cushing, Oklahoma it’s virtually a straight line up. The inventory in Cushing sets a new high almost every other month. Consider that and then consider the fact that oil usage (globally) only increased by 1.9% in 2010. Last month when Obama asked the Saudi’s to raise production they agreed only if the U.S. would guarantee them buyers for the oil. The Saudi’s had cut production about 3 months ago because they didn’t have enough buyer’s then and lacked the additional storage capacity. Those facts should tell you that the world is currently oversupplied in oil. So why are prices still see-sawing upward? Wall Street speculators. And the Orinoco Belt is just starting to be developed (enough oil to supply the whole world by itself for the next 17 years). And there is still Anwar, Alaska that is virtually untapped and loaded with oil.

Jul 07, 2011 4:06pm EDT  --  Report as abuse
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