Three groups representing financial interests Tuesday urged the Commodity Futures Trading Commission (CFTC) to not incorporate the antifraud rule used in securities markets into the futures and derivatives markets.
In a letter to the CFTC, the Futures Industry Association (FIA), the Securities Industry and Financial Markets Association (SIFMA) and the International Swaps and Derivatives Association (ISDA) called on "the Commission not to incorporate the securities standards and case law under Rule 10b-5 that are largely inapplicable and cannot easily be adapted to the futures and derivatives markets, due to the fundamental differences in the structures of the two market frameworks."
The securities laws "are designed to promote the raising of capital by corporations and to protect the public retail investors who may purchase or sell securities. Rule 10b-5 functions as part of a system developed to protect against fraud largely through disclosure of issuer-specific information to ensure that all market participants, including retail investors, have equal access to material information," the associations said.
"In contrast, participants in the futures and derivatives markets do not rely on analogous issue-specific information when deciding whether to transact. As an initial matter there is no 'issuer' in the futures and derivatives market," they said.
"Unlike the securities antifraud laws and rules, which are designed primarily for investor protection, the antifraud provisions in the futures markets are focused in large part, although not exclusively, on protections against manipulation. This, as well, argues for a separate rule that is designed to address futures and derivatives market practices and relationships, not the wholesale adoption of a rule designed for a different regime."
Moreover, the FIA, SIFMA and ISDA called on the CFTC to clarify that the proposed antimanipulation rule does not impose any new duties of disclosure, inquiry or diligence. They said such a requirement was not mandated or intended under the Dodd-Frank Wall Street Reform Act and "will serve only to increase the transaction and operational costs of legitimate trading activities."
The associations further recommended that extreme recklessness, not recklessness alone, be the appropriate threshold for violation of the proposed antimanipulation rule. Such a standard would "not sweep too broadly and prohibit routine and legitimate trading strategies," they said.
The groups also asked the Commission to clarify to what extent the Dodd-Frank Act expands the agency's existing antifraud authority under the Commodity Exchange Act. "The Commission has expressly stated in its proposing release that its authority under Section 9(a)(2) remains unaffected by the proposed rules and thus will remain available as an enforcement mechanism which may be used in concert with the proposed rule.
"This causes confusion and uncertainty to market participants who require straightforward guidance about the types of behavior that are prohibited. Market participants faced with overlapping and potentially inconsistent rules relating to the same activities are likely to reduce their participation because of the risk that activity permitted by one provision may be penalized under another," the associations said.
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