The Commodity Futures Trading Commission's (CFTC) proposed rule aimed at averting disruptive practices in the swaps market is "overly vague," the Futures Industry Association (FIA) told the agency.
Section 747 of the Dodd-Frank Wall Street Reform Act, which was signed into law in July (see Daily GPI, July 22), "is vague and potentially broad enough to capture many legitimate trading activities. The language has the very real potential to harm market quality by chilling market participation, stifling liquidity and increasing spreads," said FIA, which represents futures commission merchants. These are brokers that accept orders and payment for commodity futures for execution on a futures exchange.
"While we are mindful of the adverse impacts of disorderly markets, we are at the same time concerned that there are no clear standards under Section 747. The terms 'disruption' or 'disruptive' are not sufficiently descriptive to have operational meaning, nor have they been defined," FIA said.
FIA called on the CFTC to:
"Violating bids or offers does not have a clear meaning in the futures and derivatives markets...The Commission should clarify that manipulative intent to create an artificial price is required to violate [the] prohibition on violating bids or offers. Most striking about the violating bids or offers prohibition is its lack of any required mental state," FIA said. "To remedy this the Commission must follow judicial precedent and its own past enforcement practices and clarify that violations of bids or offers are prohibited only if undertaken with specific manipulative intent."
As for defining the "orderly execution of transactions during the closing period," FIA said the CFTC "should clarify that traditionally accepted types of market manipulation, such as 'banging the close,' 'marking the close,' and pricing window manipulation fall under the prohibition of [Dodd-Frank]. Beyond those, the Commission must identify the other practices, if any, that will be deemed to constitute an 'intentional or reckless disregard for the orderly execution of transactions during the closing period."
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