CFTC Expands Power to Pursue Fraud, Manipulation
Source: The Wall Street Journal, Jamila Trindle (7/7/11)
"Previous manipulation standards were nearly impossible to prove, which is why the commission has only won one case in 35 years."
Commodity regulators voted 5-0 to approve a rule that expands their ability to pursue fraud and manipulation in the derivatives markets they regulate, finishing the first major rule required by last year's Dodd-Frank financial-regulatory overhaul.
"We will use these tools to be a more effective cop on the beat, to promote market integrity and to protect market participants," CFTC Chairman Gary Gensler said.
With Thursday's vote, the regulators will now only have to prove that a trader acted recklessly, instead of proving that the trader intended to manipulate a market. Regulators also no longer have to show that a trader's actions actually had an effect on price, which was part of the previous standard for manipulation.
Critics have said that the rule is too broad and could be hard to enforce.
"The lack of clarity on how the broad new standards in the final rules will be applied has the potential to chill legitimate trading and reduce market liquidity," said John Damgard, the president of the Futures Industry Association.
Republican Commissioner Scott O'Malia said he had concerns about the "vagueness" adding "confusion to the markets."
Democratic Commissioner Bart Chilton said the current manipulation standard makes it nearly impossible for regulators to prove cases, which is why they have only won one case in 35 years. Mr. Chilton called the new rule "critical ammo in the commission's enforcement arsenal."
The rule becomes effective 30 days after publication in the Federal Register.
The vote marks the beginning of the final phase of rules writing required by the Dodd-Frank law. The law gave the CFTC new responsibility to regulate the over-the-counter derivatives market as well as expanded anti-manipulation authority.