Several financial industry trade groups said on Tuesday that the Commodity Futures Trading Commission risks causing confusion and reducing legitimate trading practices if it fails to clearly outline what practices are prohibited under its new anti-manipulation authority.
The Futures Industry Association, the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Associations said in a joint letter the CFTC must describe legitimate trading practices with those it has determined can lead to market manipulation.
They warned the CFTC it should clarify that nothing in the proposed rule will stop market traders from taking positions and trading using material, nonpublic information that they have obtained legally. In addition, it urged the CFTC to show what new antifraud authority it has now that it did not have in the past.
This causes confusion and uncertainty to market participants who require straightforward guidance about the types of behavior that are prohibited, the groups said in the letter.
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 CFTC is grappling with how to give markets more direction on how it intends to carry out a ban in the Dodd-Frank law on three disruptive practices -- and whether regulators should go further and rein in high-frequency traders.
Beginning in July, the Dodd-Frank act requires the CFTC to ban certain trading practices. This includes banging the close, acquiring a big position and then offsetting it before trading ends, and spoofing, where a trader makes bids or offers but cancels them before execution.
At a roundtable this month, traders and academics had few suggestions for the CFTC as to what the new rules should look like.
The CFTC will now only have to show a trader acted in a manner that had the potential to disrupt the market, making it easier for the CFTC to prove its case. In its 36-year history, the CFTC has successfully prosecuted and won only one manipulation case in the futures markets.
In the past, CFTC had to prove an individual intended to manipulate prices -- evidence that was often difficult to find through e-mails or phone calls. It also had to show the person had the market power to move the price of a commodity and that the trader caused a price in the market that otherwise would not have occurred.
(Editing by David Gregorio)