Despite some intra-agency sparring over the issue, the Commodity Futures Trading Commission (CFTC) Thursday voted out a proposed interpretive order that prohibits disruptive trading practices in the multi-trillion-dollar swaps market.
By a vote of 4-1 the proposed interpretive order cleared the Commission, with Commissioner Jill Sommers dissenting. The proposal would make it unlawful for any person to engage in any "trading, practice or conduct that violates bids or offers;" or demonstrates "intentional or reckless disregard" for the orderly execution of transactions during the closing period -- a practice that is known as "spoofing," where a trader enters into a bid or offer with the intent of canceling the transaction before execution.
In objecting to the interpretive order, Sommers said it duplicated the agency's existing authority and was vague. "When it was first suggested that [the Dodd-Frank Wall Street Reform Act] would contain a section that outlawed disruptive trading practices, I and others at the Commission believed that it was unnecessary because the Commission already had the authority to prosecute such activity and, in fact, had prosecuted such activity successfully in the past," she said during the 12th public meeting to consider proposals to implement reforms under the Dodd-Frank Act.
Moreover, when the draft language was "first discussed among Commission staff, it was my view and the view of others...that the language was too vague," Sommers said. "We suggested that in order to remedy the vagueness, the Commission would need to promulgate rules that put the public and market participants on notice of what conduct was prohibited.
"I'm disappointed that we do not have proposed rules before us today. And I do not believe that the proposed interpretive order is sufficient to take the place of rules," she said. Sommers also criticized the Commission for failing to do extensive cost-benefit analyses on the proposals that it has issued since August.
The CFTC had issued a proposed rule on disruptive trading in October, which trading firm executives asked the agency to clarify because they said they feared large orders or harmless trading strategies could become the target of enforcement action (see Daily GPI, Oct. 27, 2010).
"I'm pleased [that] we're doing the interpretive rule," said Commissioner Bart Chilton.
Commissioner Michael Dunn said he was "particularly interested" in the interpretive order for two reasons. First, he noted there has been "widespread support" for the goal of eliminating disruptive trading practices from the markets. "Second, most commentators called for greater clarity to help them understand how we interpret the concept of disruptive practices."
"After one round of comments and a roundtable, we have taken [the] middle ground" on the issue of disruptive trading practices by issuing the proposed interpretive order, said Commissioner Scott O'Malia.
By 5-0 the Commission voted out rules that would set the required time frame for a swap dealer (SD), major swap participant (MSP), futures commission merchant, swap execution facility and designated contract market to submit contracts, agreement or transactions to a derivatives clearing organization (DCO) for clearing. The rules are open for comment until March 21.
With respect to swaps that are subject to mandatory clearing, an SD or MSP would have to submit the swap for clearing as soon "technologically practicable following execution, but not later than the close of business on the day of execution," the CFTC said.
But SDs and MSPs would be given greater latitude in submitting swaps that are not subject to mandatory clearing. These swaps would have to be submitted not later than the next business day after execution of the swaps or the agreement to clear, if later than execution.
In addition to a timeline for submitting swap transactions to DCOs, the CFTC proposed time frames for processing and clearing swap transactions.
Moreover, the CFTC has issued a proposal requiring a DCO to have rules that would allow for the prompt transfer of all or a portion of a DCO customer's portfolio of positions and related funds to a receiving member within the DCO, without requiring the close-out and rebooking of the positions prior to the requested transfer.
Chairman Gary Gensler said the Commission's next public meeting on Dodd-Frank rulemakings would be at the end of March.
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