Factbox: CFTC aims to prevent manipulation, disruption

(BestGrowthStock) – The U.S. Commodity Futures Trading Commission proposed rules on Tuesday aimed at cracking down on traders who try to manipulate markets, using new powers granted to the agency in the Wall Street reform law.

The agency also asked for public comments on how it should address disruptive market practices.

Here are details of the proposals:

PROHIBITION OF MARKET MANIPULATION

Goal: ban all forms of fraud and manipulation in all markets overseen by the CFTC, including swaps.

Comment period: 60 days

Final deadline for rule: July 2011

* Adds new provision to prohibit “intentionally or recklessly” using any kind of scheme to commit fraud, defined as any conduct that impairs, obstructs, or defeats the integrity of the market.

* The “recklessness” standard is considered easier to prove than specific intent.

* New measure is “broad, catch-all” provision that could catch infractions that fall through existing “gaps” in rules.

* Reaffirms existing four-part test for manipulation, but provides guidance on what “artificial price” entails to clear up legal confusion on whether standard was met.

* Bans making untrue or misleading statements “of a material fact,” or omitting material facts.

* Bans knowingly delivering false or misleading information regarding crops or conditions that can affect commodities.

* Penalties include civil fines ranging from $1 million or triple the monetary gain of each person for each violation, whichever is greater. Restitution also required.

DISRUPTIVE TRADING PRACTICES

Goal: seeks comments on what measures CFTC should adopt to address disruptive trading.

Comment period: 60 days

* Dodd-Frank reform law specifically bans three practices

— violating bids and offers, “banging the close” by acquiring a big position and then offsetting it before the close of trade, and “spoofing” — making bids or offers but canceling them before execution.

* Those three bans come into effect in July 2011 without further rule-making.

* CFTC is seeking comment on 18 questions about whether to go further with its new power, including potential rules on:

– testing, monitoring and use of algorithmic trading systems

– banning practices like “quote stuffing” — flooding the market with large numbers of rapid-fire orders and then canceling them almost immediately

– closing a potential loophole in its “spoofing” ban

* This is optional rulemaking. CFTC is not required to propose any new regulations, and does not face deadlines.

(Reporting by Ayesha Rascoe and Roberta Rampton; Editing by Lisa Shumaker)

Factbox: CFTC aims to prevent manipulation, disruption