The CFTC has published a Notice of Proposed Rulemaking (NOPR) with respect to its anti-manipulation authority over swaps, commodities, and futures markets under the Dodd-Frank Act. Two rules are proposed. The first implements the new section 6(c)(1) of the Commodity Exchange Act (CEA), patterned after section 10(b) of the Securities Exchange Act of 1934. Similar to the manner in which section 10(b) has been enforced, the CFTC proposed to interpret CEA section 6(c)(1) as a broad, catch-all provision reaching fraud in all its forms—that is, intentional or reckless conduct that deceives or defrauds market participants. The CFTC included some discussion in the NOPR regarding how it intends to interpret various elements of this proposed rule:
- Manipulative or Deceptive Devices or Contrivances—to be given a broad, remedial reading, embracing the use or attempted use of any manipulative or deceptive contrivance for the purpose of impairing, obstructing, or defeating the integrity of the swaps, commodities, or futures markets
- “Scienter”—requires intent or recklessness to deceive, manipulate or defraud
- “In Connection With” a transaction under CFTC jurisdiction—relevant conduct must have been reasonably calculated to influence market participants
- Attempt—attempted fraud is captured by the prohibition
- Materiality—to be measured objectively, i.e. whether a reasonable person would have considered the alleged misrepresentation or omission significant
The second proposed rule implements new section 6(c)(3) of the Dodd-Frank Act, regarding the CFTC’s continued authority regarding price manipulation and attempted price manipulation. The Commission proposes to continue interpreting this prohibition to encompass every effort to improperly influence the price of a swap, commodity or futures contract that is intended to interfere with the legitimate forces of supply and demand in the marketplace. Early manipulation cases involving “corners” and “squeezes” have provided the relevant framework, which requires that the Commission establish the following to prove a violation:
- That the accused had the ability to influence market prices;
- That they specifically intended to do so;
- That artificial prices existed; and
- That the accused caused the artificial prices.
Finally, the CFTC also published an advanced NOPR (ANOPR) with respect to its antidisruptive practices authority under the Dodd-Frank Act. The ANOPR requests comments on how to implement amended section 4c(a) of the CEA, which makes it unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of CFTC-registered entities that:
- Violates bids or offers;
- Demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or
- Is, is of the character of, or is commonly known to the trade as “spoofing” (bidding or offering with the intent to cancel the bid or offer before execution).
Specifically, the Commission asks commenters to address 19 different questions posed in the ANOPR. Notably, several of the questions concern whether the Commission should promulgate rules to regulate the use of algorithmic or automated trading systems to prevent disruptive trading practices.