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CFTC Adopts Dodd-Frank Swap Rule Against Market Manipulation

The U.S. Commodity Futures Trading Commission adopted a Dodd-Frank Act rule designed to make it easier for the agency to prove fraud and manipulation in markets for derivatives and commodities such as oil and natural gas.

The rule, approved 5-0 by commissioners at a Washington meeting today, will ease current requirements that the agency’s enforcement lawyers demonstrate that artificial prices were set and prove traders intentionally manipulated markets. The new anti-manipulation rule will require the agency only to show that traders acted recklessly.

“This closes a significant gap, as it will broaden the types of cases we can pursue and improve the chances of prevailing over wrongdoers,” CFTC Chairman Gary Gensler said at the meeting.

The anti-manipulation rule is among the first of more than 40 Dodd-Frank rules to come up for a final vote at the CFTC. The financial-overhaul law aims to reduce risk and boost transparency in the $601 trillion global swaps market after largely unregulated trades helped fuel the 2008 credit crisis. CFTC rules will govern swaps traded by banks such as Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.

At least one commission member, Republican Scott O’Malia, expressed reservations about the rule.


“I have concerns that the anti-manipulation rule has not provided adequate clarity and that such vagueness as to the course of action that will be taken by the commission in enforcing this rule will add confusion to the markets,” O’Malia said before casting his vote in favor of the measure.

The rule will take effect 30 days after it is published in the Federal Register.

Dodd-Frank sought to give the agency broader powers to pursue fraud, manipulation and disruptive trading cases. The agency has won one anti-manipulation case in 35 years, according to Senator Maria Cantwell, the Washington Democrat who originally wrote Dodd-Frank’s anti-manipulation provision.

“They will perceive themselves as having an easier time to bring manipulation cases without having a smoking gun as they have in the past,” Geoffrey F. Aronow, a former director of enforcement at the CFTC and partner at Bingham McCutchen LLP, said in an interview yesterday.

The CFTC’s current anti-manipulation regulation relies on a four-part test that requires the agency to prove a trader had the ability to influence market prices, specifically intended to create a price not relying on market supply and demand, that artificial prices existed and that a trader caused those prices.

Weak Statute

The CFTC has had “probably one of the weakest statutes to try to go after manipulation,” Cantwell said in an interview yesterday.

Agency enforcement lawyers will make the new rule a “priority,” David Meister, head of CFTC enforcement, said at the meeting. “We will look to bring cases and investigate under this new authority,” he said.

The new rules may be finalized as the CFTC pursues one of its largest anti-manipulation civil cases. The agency filed a lawsuit in May against two traders and three firms that allegedly manipulated prices for crude oil derivatives in 2008, generating $50 million in what the CFTC called unlawful profits.

The lawsuit against Arcadia Petroleum Ltd. and Parnon Energy Inc. is “rubbish,” Norwegian-born billionaire John Fredriksen told Bloomberg News on May 25. Parnon and Arcadia, affiliated companies, are subsidiaries of Farahead Holdings, which is indirectly controlled by trusts set up by Fredriksen.

Crossing the Line

The new rule may create uncertainty in the market and take many years for traders to understand because of the new reckless standard, Aronow said. “I don’t believe the line will be very clear and the peril later for having found to have crossed the line will be very great,” he said.

The regulation will also allow enforcement lawyers to bring cases against trading on the basis of material non-public information that was obtained through fraud or deception or in breach of other preexisting duties, Meister said.

“We’ll be able to get at, for example, bad actors akin to insider traders,” Bart Chilton, CFTC commissioner, said in a prepared statement for the meeting.

Separately, the CFTC finalized Dodd-Frank rules governing the definition of agricultural derivatives, consumer protection provisions and physical commodity swap-data reporting.

46 Commodities

The data-reporting rule will for the first time provide a survey to the CFTC of cleared and uncleared swaps tied to 46 physical commodities, the agency said in a summary of the rule.

The data rule will help the CFTC determine limits on speculation in commodities such as oil, wheat and natural gas, Gensler said. The so-called position-limit proposal, approved in January, has been among the most contentious aspects of the agency’s Dodd-Frank rulemaking.

The agency’s proposal spurred about 12,000 public comments from supporters including Delta Air Lines Inc. as well as from opponents including Morgan Stanley and Cargill Inc. The CFTC has faced pressure from Democrats in Congress who have urged the agency to quickly implement the trading curbs, citing increases in commodity prices.

The agency hasn’t yet scheduled a meeting to finalize the position-limit rule.

The CFTC plans to hold meetings on July 19 and Aug. 4 and may approve Dodd-Frank proposals related to whistleblowers and registration for swap data repositories, Gensler told reporters after the meeting.

Commissioners also plan to vote on a proposal next week extending Dodd-Frank’s mid-July deadlines until as late as the end of the year, Gensler said.

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