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.
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