Antidisruptive Practices Authority, 31890-31897 [2013-12365]

Download as PDF 31890 Federal Register / Vol. 78, No. 102 / Tuesday, May 28, 2013 / Notices consultations are requested, the statement of the reasons and justifications for the determination subsequent to the delivery of the statement to Panama. Confidential Information’’ to the full extent permitted by law. Janet E. Heinzen, Acting Chairman, Committee for the Implementation of Textile Agreements. [FR Doc. 2013–12630 Filed 5–24–13; 8:45 am] mstockstill on DSK4VPTVN1PROD with NOTICES Request for Comment on the Interim Procedures BILLING CODE 3510–DS–P Comments must be received no later than June 27, 2013, and in the following format: (1) Comments must be in English. (2) Comments must be submitted electronically or in hard copy, with original signatures. (3) Comments submitted electronically, via email, must be either in PDF or Word format, and sent to the following email address: OTEXA_PANAMA@trade.gov. The email version of the comments must include an original electronic signature. Further, the comments must have a bolded heading stating ‘‘Public Version’’, and no business confidential information may be included. The email version of the comments will be posted for public review on the Panama TPA Safeguard Web site. (4) Comments submitted in hard copy must include original signatures and must be mailed to the Chairman, Committee for the Implementation of Textile Agreements, Room 30003, U.S. Department of Commerce, 14th Street and Constitution Avenue NW., Washington, DC 20230. All comments submitted in hard copy will be made available for public inspection at the Office of Textiles and Apparel, Room 30003, U.S. Department of Commerce, 14th Street and Constitution Avenue NW., Washington, DC, between the hours of 8:30 a.m. and 5:00 p.m. on business days. In addition, comments submitted in hard copy will also be posted for public review on the Panama TPA Safeguard Web site. (5) Any business confidential information upon which an interested person wishes to rely may only be included in a hard copy version of the comments. Brackets must be placed around all business confidential information. Comments containing business confidential information must have a bolded heading stating ‘‘Confidential Version.’’ Attachments considered business confidential information must have a heading stating ‘‘Business Confidential Information’’. The Committee will protect from disclosure any business confidential information that is marked ‘‘Business VerDate Mar<15>2010 17:46 May 24, 2013 Jkt 229001 COMMODITY FUTURES TRADING COMMISSION RIN 3038–AD96 Antidisruptive Practices Authority Commodity Futures Trading Commission. ACTION: Interpretive guidance and policy statement. AGENCY: SUMMARY: The Commodity Futures Trading Commission (the ‘‘Commission’’ or ‘‘CFTC’’) is issuing this interpretive guidance and policy statement (‘‘interpretive statement’’) to provide guidance on section 747 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the ‘‘DoddFrank Act’’), which prohibits certain disruptive trading, practices, or conduct as set forth in new section 4c(a)(5) of the Commodity Exchange Act (the ‘‘CEA’’). This interpretive statement will provide market participants and the public with guidance on the scope and application of the statutory prohibitions set forth in CEA section 4c(a)(5). DATES: This interpretive statement will become effective May 28, 2013. FOR FURTHER INFORMATION CONTACT: David Meister, Director, Division of Enforcement, dmeister@cftc.gov, Vincent McGonagle, Senior Deputy Director, Division of Enforcement, vmcgonagle@cftc.gov or Robert Pease, Counsel to the Director of Enforcement, 202–418–5863, rpease@cftc.gov; Three Lafayette Centre, 1151 21st Street NW., Washington, DC 20581. SUPPLEMENTARY INFORMATION: Prohibition of Disruptive Practices I. Statutory and Regulatory Authorities On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’).1 Title VII of the Dodd-Frank Act 2 amended the Commodity Exchange Act (‘‘CEA’’) 3 to 1 See Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Public Law 111– 203, 124 Stat. 1376 (2010). The text of the DoddFrank Act may be accessed at http://www.cftc.gov./ LawRegulation/OTCDERIVATIVES/index.htm. 2 Pursuant to section 701 of the Dodd-Frank Act, Title VII may be cited as the ‘‘Wall Street Transparency and Accountability Act of 2010.’’ 3 7 U.S.C. 1 et seq. PO 00000 Frm 00007 Fmt 4703 Sfmt 4703 establish a comprehensive new regulatory framework for swaps and security-based swaps. The legislation was enacted to reduce risk, increase transparency, and promote market integrity within the financial system by doing, among other things, the following: (1) Providing for the registration and comprehensive regulation of swap dealers and major swap participants; (2) imposing clearing and trade execution requirements on standardized derivative products; (3) creating robust recordkeeping and realtime reporting regimes; and (4) enhancing the Commission’s rulemaking and enforcement authorities with respect to, among others, all registered entities and intermediaries subject to the Commission’s oversight. Section 747 of the Dodd-Frank Act amends section 4c(a) of the CEA (‘‘Prohibited Transactions’’) to add a new section entitled ‘‘Disruptive Practices.’’ New CEA section 4c(a)(5) makes it unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that—(A) violates bids or offers; (B) demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or (C) is, is of the character of, or is commonly known to the trade as, ‘‘spoofing’’ (bidding or offering with the intent to cancel the bid or offer before execution). Dodd-Frank Act section 747 also amends section 4c(a) of the CEA by granting the Commission authority under new section 4c(a)(6) of the CEA to promulgate such ‘‘rules and regulations as, in the judgment of the Commission, are reasonably necessary to prohibit the trading practices’’ enumerated therein ‘‘and any other trading practice that is disruptive of fair and equitable trading.’’ 4 The Commission is issuing this interpretive guidance and policy statement (‘‘interpretive statement’’) to provide market participants and the public with guidance on the manner in which it intends to apply the statutory prohibitions set forth in section 4c(a)(5) of the CEA. The public has the ability to present facts and circumstances that would inform the application of these policies. 4 7 U.S.C. 4(a)(6). At this time, the Commission is only providing interpretive guidance on the disruptive trading, practices, or conduct discussed herein. The Commission does not foreclose subsequent promulgation of rules and regulations pursuant to CEA section 4c(a)(6). The Commission also notes that new CEA section 4c(a)(5) is selfeffectuating. E:\FR\FM\28MYN1.SGM 28MYN1 Federal Register / Vol. 78, No. 102 / Tuesday, May 28, 2013 / Notices II. Proposed Interpretive Order On March 18, 2011, the Commission issued a proposed interpretive order (‘‘Proposed Order’’) providing proposed interpretive guidance on the three new statutory provisions of section 4c(a)(5) of the CEA.5 In the Proposed Order, the Commission stated that CEA section 4c(a)(5) applied to trading, practices, or conduct on registered entities, including designated contract markets (‘‘DCMs’’) and swap execution facilities (‘‘SEFs’’).6 The Proposed Order also provided that CEA section 4c(a)(5) would not apply to block trades, bilaterally negotiated swap transactions, or exchanges for related positions (‘‘EFRPs’’) transacted in accordance with the rules of a DCM or SEF.7 With respect to CEA section 4c(a)(5)(A)’s prohibition on violating bids and offers, the Proposed Order stated that a person is prohibited from buying a contract at a price that is higher than the lowest available offer price and/or from selling a contract at a price that is lower than the highest available bid price.8 Such conduct, regardless of intent, disrupts the foundation of fair and equitable trading. The Commission further proposed that CEA section 4c(a)(5)(A) was a per se offense where the Commission would not be required to show that a person violating bids or offers did so with any intent to disrupt fair and equitable trading.9 In the Proposed Order, the Commission also stated that CEA section 4c(a)(5)(A) is applicable in any trading environment where a person exercises some control over the selection of bids and offers against which they transact, including when using an automated trading system that operates without pre-determined matching algorithms.10 The Commission further explained that CEA section 4c(a)(5)(A) does not apply where a person is unable to violate a bid or offer—i.e., when a person is using an order matching algorithm.11 The mstockstill on DSK4VPTVN1PROD with NOTICES 5 76 FR 14943 (Mar. 18, 2011). On November 2, 2010, the Commission issued an Advance Notice of Proposed Rulemaking (the ‘‘ANPR’’) asking for public comment on section 747 of the Dodd-Frank Act. 75 FR 67301 (Nov. 2, 2010). The ANPR formed the basis for a roundtable held on December 2, 2010, by Commission staff in Washington, DC. The Commission subsequently terminated the ANPR on March 18, 2011. 76 FR 14826 (Mar. 18, 2011). 6 76 FR at 14945. The Commission also stated that a trade does not become subject to CEA section 4c(a)(5) because it is reported to a swap data repository, even though such swap data repository is a registered entity. 7 Id. at 14946. 8 Id. 9 Id. 10 Id. 11 Id. VerDate Mar<15>2010 17:46 May 24, 2013 Jkt 229001 Commission also proposed that CEA section 4c(a)(5)(A) would not apply where an individual is executing a sequence of trades to buy all available bids or sell to all available offers on an order book in accordance with the rules of the facility on which the trades were executed.12 In regard to CEA section 4c(a)(5)(B), the provision for orderly execution during the closing period, the Commission interpreted the provisions as requiring that a market participant must at least act recklessly to violate CEA section 4c(a)(5)(B).13 The Proposed Order stated that accidental, or even negligent trading, is not a sufficient basis for the Commission to claim a violation has occurred under CEA section 4c(a)(5)(B). The Proposed Order also generally defined the closing period as the period in the contract or trade when the settlement price is determined under the rules of that registered entity.14 The Proposed Order also explained that while CEA section 4c(a)(5)(B) encompasses any trading, practices, or conduct inside the closing period that affects the orderly execution of transactions during the closing period, disruptive conduct outside the closing period may also form the basis for investigations of potential CEA section 4c(a)(5)(B) violations.15 Section 4c(a)(5)(B) violations may also include executed orders, as well as bids and offers submitted by market participants for the purpose of disrupting fair and equitable trading.16 When determining whether a person violated CEA section 4c(a)(5)(B), the Commission proposed to evaluate the facts and circumstances as of the time the person engaged in the trading, practices, or conduct.17 The Commission proposed to use existing concepts of orderliness when assessing whether trades were executed, or orders were submitted, in an orderly fashion in the time periods prior to and during the closing period.18 The Proposed Order also expressed that market participants should assess market conditions and consider how their trading practices and conduct would affect the orderly execution of transactions during the closing period.19 With respect to CEA section 4c(a)(5)(C), the Proposed Order stated 12 Id. 13 Id. 14 Id. 15 Id. 16 Id. 17 Id. 18 Id. 19 Id. PO 00000 Frm 00008 Fmt 4703 Sfmt 4703 31891 that a market participant must act with some degree of intent to violate the ‘‘spoofing’’ provision.20 Reckless trading, practices, or conduct would not violate CEA section 4c(a)(5)(C); instead, a person must intend to cancel a bid or offer before execution.21 Additionally, orders, modifications, or cancellations would not be considered ‘‘spoofing’’ if they were submitted as part of a legitimate, good-faith attempt to consummate a trade.22 While the Proposed Order did not exempt partial fills from CEA section 4c(a)(5)(C), legitimate, good-faith cancellations of partially filled orders would not violate CEA section 4c(a)(5)(C).23 Similar to the Commission’s proposed approach to CEA section 4c(a)(5)(B), the Commission proposed to evaluate the facts and circumstances when distinguishing between legitimate trading and ‘‘spoofing’’ behavior.24 Under the Proposed Order, CEA section 4c(a)(5)(C) covers bid and offer activity on all registered entities, including all bids and offers in pre-open periods or during exchange-controlled trading halts. The Proposed Order also provided three non-exclusive examples of ‘‘spoofing’’ behavior.25 The Commission further proposed that CEA section 4c(a)(5)(C) does not cover nonexecutable market communications such as requests for quotes and other authorized pre-trade communications.26 Finally, the Commission proposed that a violation of CEA section 4c(a)(5)(C) does not require a pattern of activity, even a single instance of trading activity can be disruptive of fair and equitable trading.27 The Commission requested comment on all aspects of the Proposed Order, with the comment period ending on May 17, 2011. In response to the Proposed Order, the Commission received 16 comments from industry members, trade associations, exchanges, and other members of the public.28 In 20 Id. 21 Id. 22 Id. 23 Id. 24 Id. 25 The Proposed Order described ‘‘spoofing’’ to include the following: (i) Submitting or cancelling bids or offers to overload the quotation system of a registered entity, (ii) submitting or cancelling bids or offers to delay another person’s execution of trades, and (iii) submitting or cancelling multiple bids or offers to create an appearance of false market depth. 76 FR at 14946. 26 76 FR at 14946. 27 Id. 28 Appendix 3 contains the list of commenters that responded to the Proposed Order. The comment letters may be accessed through http:// comments.cftc.gov/PublicComments/CommentList. aspx?id=893. E:\FR\FM\28MYN1.SGM 28MYN1 31892 Federal Register / Vol. 78, No. 102 / Tuesday, May 28, 2013 / Notices drafting this interpretive statement, the Commission also considered the ANPR and December 2, 2010 roundtable comments, as well as comments related to section 747 of the Dodd-Frank Act that were filed in response to the SEF notice of proposed rulemaking (the ‘‘SEF NPRM’’).29 III. Comments on the Proposed Order A. General Applicability of CEA Section 4c(a)(5) 1. Comments In response to the Proposed Order, several commenters requested additional guidance and suggested that additional clarity was needed regarding how the Commission would interpret and apply new CEA section 4c(a)(5).30 Some commenters supported the statutory requirement in new CEA section 4c(a)(5) to prohibit the enumerated trading practices and prevent the disruption of fair and equitable trading.31 Other commenters noted that the Commission should recognize the complementary role of the exchanges and continue relying on the exchanges’ self-regulatory organization (‘‘SRO’’) authority to identify and pursue trading practices that are manipulative or detrimental to the exchange’s markets.32 Commenters also requested that CEA section 4c(a)(5) violations be limited to those trading platforms on DCMs or SEFs that have order book functionality.33 Lastly, some 29 76 FR 1214 (Jan. 7, 2011). e.g., FIA at 2 (‘‘The Proposed Order does not go far enough in offering guidance to market participants.’’); ICE at 2 (‘‘Additional clarity is required with respect to the Commission’s interpretation and guidance regarding paragraphs (A) through (C) of Section 747.’’). 31 See, e.g., ISDA at 2 (‘‘ISDA supports the Commission’s effort to facilitate fair and equitable trading on registered entities by issuing guidance as to the parameters of the three statutory disruptive practices found in Subsection 5.’’); ICE at 2 (‘‘ICE continues to support the Commission’s efforts to promote open and competitive markets while improving the ability to deter improper trading practices that are disruptive to legitimate trading and orderly markets.’’); Barnard at 2 (‘‘I welcome and support your proposed interpretive order. It brings clarity to the antidisruptive practices authority, and strikes the right balance between rules- and principles-based regulation.’’). 32 See, e.g., ICE at 5 (‘‘ICE respectfully suggests that the Commission continue to rely on exchange SRO authority to identify and pursue trading practices that are determined to be manipulative or detrimental to the exchange’s markets, including practices that are the character of spoofing.’’); FIA at 7 (‘‘The Associations believe that any rulemaking under 747 must reinforce the distinct yet complementary roles of the Commission and the exchanges.’’); and CMC at 2 (‘‘SROs and the Commission historically have served distinct but largely complementary roles.’’). 33 See, e.g., ISDA at 2 (‘‘Subsection 5, though stated to apply to all ‘‘registered entities’’—that is . . . swap execution facilities (‘SEFs’) and mstockstill on DSK4VPTVN1PROD with NOTICES 30 See, VerDate Mar<15>2010 17:46 May 24, 2013 Jkt 229001 commenters requested that the Commission incorporate a manipulative intent requirement into its new antidisruptive practices authority to ensure that the prohibitions in CEA section 4c(a)(5) do not capture legitimate trading practices that may be indistinguishable from the proposed prohibited conduct.34 2. Commission Guidance The Commission recognizes commenters’ requests for additional guidance on CEA section 4c(a)(5) and is issuing this interpretive statement to clarify how the Commission interprets and intends to apply the three statutory provisions of CEA section 4c(a)(5). With respect to the role of exchanges in ensuring fair and equitable markets, the Commission agrees with commenters that exchanges serve an important role in preventing the disruptive practices prohibited in CEA section 4c(a)(5) and ensuring fair and equitable trading in CFTC-regulated markets. The Commission declines the request by commenters to interpret CEA section 4c(a)(5) as applying to only those trading platforms or venues that have order book functionality. In accordance with the statutory language of CEA section 4c(a)(5), the Commission interprets CEA section 4c(a)(5) to apply to any trading, practices or conduct on a registered entity 35 such as a DCM or SEF.36 Depending on the particular facts and circumstances, CEA section 4c(a)(5) violations may also occur on trading platforms or venues that are distinct from order books, even if such platforms or venues may have similar functionality. The Commission also declines commenters’ requests to read a designated contract markets (‘DCMs’)—should be clearly limited at the outset only to those orderbook trading facilities within the Commission’s proposed regulation, 17 CFR 37.9(a)(1)(i)(C), for the definition of ‘order book.’’’). 34 See, e.g., FIA at 5 (‘‘Unfortunately, the antidisruptive practices authority captures many legitimate trading practices which, without a manipulative intent requirement, are objectively indistinguishable from the proposed prohibited conduct.’’). 35 Section 1a(40) of the CEA defines ‘‘registered entity’’ as ‘‘(A) a board of trade designated as a contract market under section 5; (B) a derivatives clearing organization registered under section 5b; (C) a board of trade designated as a contract market under section 5f; (D) a swap execution facility registered under section 5h; (E) a swap data repository registered under section 21; and (F) with respect to a contract that the Commission determines is a significant price discovery contract, any electronic trading facility on which the contract is executed or traded.’’ 7 U.S.C. 1a(40). 36 The Commission confirms that a trade does not become subject to CEA section 4c(a)(5) solely because it is reported on a swap data repository, even though a swap data repository is a registered entity. PO 00000 Frm 00009 Fmt 4703 Sfmt 4703 manipulative intent requirement into the CEA section 4c(a)(5) prohibitions. The Commission interprets the prohibitions in CEA section 4c(a)(5) provisions to be distinct statutory provisions from the anti-manipulation provisions in section 753 of the DoddFrank Act; the Commission does not interpret the CEA section 4c(a)(5) violations as including any manipulative intent requirement. Including such a manipulative intent requirement is contrary to the statutory language. The Commission does not intend to apply CEA section 4c(a)(5) to either block trades or exchanges for related positions (‘‘EFRPs’’) that are transacted in accordance with Commission regulation 1.38. In addition to these general comments on CEA section 4c(a)(5), commenters provided comments on the three new statutory provisions, which are discussed in the following sections. B. Violating Bids and Offers 1. Comments to the Proposed Interpretive Order Commenters requested that the Commission modify its interpretation that a CEA section 4c(a)(5)(A) violation is a per se offense and incorporate a requirement that a person must intend to disrupt fair and equitable trading.37 Commenters noted that the Commission’s interpretation that the violation of bids or offers is a per se offense conflicts with exchange rules.38 Other commenters requested that the Commission adopt either a ‘‘specific’’ intent or ‘‘extreme recklessness’’ standard for CEA section 4c(a)(5)(A).39 Commenters to the Proposed Order also requested guidance on how CEA section 4c(a)(5)(A) would apply to the trading of swaps on SEFs.40 In particular, commenters stated that end-users should have discretion when choosing a 37 See, e.g., Working Group at 3 (‘‘The Working Group strongly recommends that the Commission interpret new CEA Section 4c(a)(5)(A) as requiring an intent to disrupt the market.’’). 38 See, e.g., CME at 4 (‘‘Contrary to the Commission’s assertion, this broad construction is not consistent with exchange rules, which only proscribe market participants’ intentional violation of bids and offers.’’). 39 See, e.g., CMC at 3 (‘‘The Commission should clarify that only intentional or extremely reckless action to violate transparent bids or offers contravenes this prohibition.’’). 40 See, e.g., FIA at 4 (‘‘The Associations recommend that the Commission provide further clarification. One example is the application to swap execution facilities (‘SEFs’)’’); BF at 14 (‘‘We further recommend that the CFTC confirm that transactions executed other than on a SEF’s central order book will not be deemed to ‘‘violate bids or offers’’ for purposes of CEA Section 4c(a)(5)(A), regardless of their price level.’’ E:\FR\FM\28MYN1.SGM 28MYN1 Federal Register / Vol. 78, No. 102 / Tuesday, May 28, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES counterparty and also requested clarification on whether market participants may consider additional non-price factors when trading on a SEF.41 Commenters also requested guidance on whether CEA section 4c(a)(5)(A)’s prohibition applies to bids and offers on non-cleared swaps.42 Commenters also stated that swaps with different clearing destinations should not be deemed comparable for the purposes of CEA section 4c(a)(5)(A).43 Commenters further asked whether CEA section 4c(a)(5)(A) requires market participants to transact at the best price across a particular SEF’s different trading systems or platforms, such as the SEF’s order book and request-forquote system. Commenters also asked for clarification on how CEA section 4c(a)(5)(A) applies to request-for-quote systems on SEFs and whether requestfor-quotes (‘‘RFQs’’) must interact with the SEF’s order book or centralized electronic screen.44 One commenter stated that the Proposed Order would effectively impose a ‘‘trade through’’ requirement on market participants executing swap transactions across a particular SEF’s trading systems or platforms.45 Commenters further requested that the Commission confirm that the final order would not create a best execution requirement across multiple SEFs.46 A commenter also agreed with the statement in the Proposed Order that 41 See, e.g., Coalition at 4 (‘‘An interpretation that precludes end-users from exercising discretion in its counterparty selection could force end-users to make sub-optimal decisions when determining the most suitable swap counterparty on a given transaction.’’). 42 See, e.g., MarketAxess at 3 (‘‘The final order should make clear that the CFTC’s interpretation of new CEA § 4c(a)(5)(A) does not apply to uncleared swaps.’’). 43 See, e.g., Consolidated Banks at 14 (‘‘Nor should swaps with different bilateral counterparties or clearing destinations be deemed comparable to each other for such purposes.’’). 44 See, e.g., MarketAxess at 3 (‘‘We ask that the Commission confirm in its final Interpretive Order that a person would not violate bids or offers by buying or selling a contract on a SEF’s Request for Quote System when that contract is available to buy or sell at a ‘better’ price through another permitted execution method offered by that SEF such as an Order Book or a centralized electronic screen.’’). 45 See, e.g., GFI at 2 (‘‘GFI believes that the Proposed Interpretation would effectively impose a trade-through rule on SEFs that utilize trading methods that are not strictly automated, and that such a requirement is neither required by the DoddFrank Act nor furthers the purposes of the CEA.’’). 46 See, e.g., Working Group at 3 (‘‘The Working Group supports the Commission’s statement ‘section 4c(a)(5)(A) does not create any sort of best execution standard across multiple trading platforms and markets; rather, a person’s obligation to not violate bids or offers is confined to the specific trading venue which he or she is utilizing at a particular time’ and strongly recommends that such interpretation of new CEA Section 4c(a)(5)(A) be adopted in any final interpretive order.’’). VerDate Mar<15>2010 17:46 May 24, 2013 Jkt 229001 CEA section 4c(a)(5)(A) should not apply where an individual is ‘‘buying the board’’ and executing a sequence of trades to buy all available bids or sell to all available offers on the order book in accordance with the rules of the facility executing the trades.47 2. Commission Guidance The Commission declines requests to interpret CEA section 4c(a)(5)(A) as applying only where a person intends to disrupt fair and equitable trading. The Commission interprets CEA section 4c(a)(5)(A) as a per se offense. Congress did not include an intent requirement in CEA section 4c(a)(5)(A) as it did in both CEA sections 4c(a)(5)(B) and 4c(a)(5)(C). Therefore, the Commission does not interpret CEA section 4c(a)(5)(A) as requiring the Commission to show that a person acted with scienter in violating bids and offers (e.g., that a person acted with either the intent to disrupt fair and equitable trading or with the intent to violate bids and offers). Unlike certain exchange rules that prohibit the intentional violation of bids and offers, the statutory language of CEA section 4c(a)(5)(A) does not contain a similar intent requirement.48 While the Commission’s determination of whether to bring an enforcement action depends on facts and circumstances, the Commission does not, for example, intend to exercise its discretion to bring an enforcement action against an individual who, purely by accident, makes a one-off trade in violation of CEA section 4c(a)(5)(A). Whether such an accidental violation gives rise to some other violation of the CEA or Commission regulations depends, again, on the facts and circumstances of the particular situation. As a general matter, the Commission interprets CEA section 4c(a)(5)(A) as operating in any trading environment where a person is not utilizing trading algorithms that automatically match the best price for bids and offers. With respect to SEFs, the Commission interprets CEA section 4c(a)(5)(A) as being applicable only when a person is using a SEF’s ‘‘order book,’’ and not when a person uses a SEF’s other execution methods (such as the RFQ system in conjunction with the order book). The Commission recognizes that market participants may consider a number of factors in addition to price when trading or executing less liquid swaps, which are more likely to be 47 See CME at 3 (‘‘We also concur with the Commission’s determination that this section does not apply where an individual is ‘buying the board.’ ’’). 48 See, e.g., New York Mercantile Exchange Rule 514.A.3; Minneapolis Grain Exchange Rule 731.00. PO 00000 Frm 00010 Fmt 4703 Sfmt 4703 31893 traded on a SEF’s RFQ system or a different execution method. However, as SEFs and the swaps markets evolve, the Commission may revisit these issues in the future. The Commission agrees with commenters that parties trading noncleared swaps may take into consideration factors other than price, such as counterparty risk, when determining how to best execute their trades.49 Therefore, the Commission interprets CEA section 4c(a)(5)(A) as not applying to non-cleared swap transactions, even if they are transacted on or through a registered entity. In such swap transactions, the credit considerations of the counterparties are important components of choosing which bid or offer to accept. The Commission also agrees with commenters that parties may take into account clearing considerations, such as the use of a particular clearing house, when trading cleared swaps on certain platforms on a SEF or on a DCM.50 The Commission interprets CEA section 4c(a)(5)(A)’s prohibition as not applying to bids or offers on swaps that would be cleared at different clearing houses because each clearing house may have different cost, risk, and material clearing features.51 For example, the choice of a clearing house may affect a party’s net and gross outstanding exposures, which may result in differing capital and cost of financing effects. Additionally, the pricing of swaps may also incorporate other potential considerations such as the available credit capacity at the clearing member or clearing house, margining arrangements, or post-trade market risk. Therefore, the Commission interprets CEA section 4(c)(a)(5)(A) as prohibiting a person from buying a contract on a registered entity at a price that is higher than the lowest available price offered for such contract or selling a contract on a registered entity at a price that is lower than the highest available price bid for such contract subject to the situations described above. Such 49 See, e.g., Coalition at 3 (‘‘To understand the impact of applying section 4c(a)(5)(A) to noncleared transactions executed off-facility, we have to understand how corporate treasurers have a fiduciary duty to optimize numerous factors—not solely the transaction price of a particular derivative—in achieving ‘best execution’ ’’). 50 As stated previously, the Commission interprets new CEA section 4c(a)(5)(A) as applying to any cleared swap traded on a SEF’s order book, regardless of whether such cleared swap is subject to the mandatory trade execution requirement of new CEA section 2(h). 51 See, e.g., GFI at 2 (‘‘Because market participants that execute transactions on a SEF may clear their transactions at different clearinghouses, they must have the flexibility to take factors other than price into account when executing transactions on a SEF.’’). E:\FR\FM\28MYN1.SGM 28MYN1 31894 Federal Register / Vol. 78, No. 102 / Tuesday, May 28, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES conduct, regardless of intent, disrupts fair and equitable trading by damaging the price discovery function of CFTCregulated markets. By adopting a policy that market participants cannot execute trades at prices that do not accurately reflect the best price for such contracts, this interpretive statement furthers the CEA’s purpose of ensuring the integrity of the price discovery process by helping ensure that the prices disseminated to market users and the public reflect bona fide prices that accurately reflect the normal forces of supply and demand. The Commission further recognizes that at any particular time the best price in one trading environment such as a particular SEF may differ from the best price in a different trading environment such as a second, distinct SEF. Accordingly, the Commission does not interpret CEA section 4c(a)(5)(A) as creating any sort of best execution standard across multiple registered entities, including SEFs or DCMs; rather, the Commission interprets a person’s obligation to not violate bids or offers as applying only to the specific registered entity being utilized at a particular time.52 The Commission does not interpret CEA section 4c(a)(5)(A) as applying where an individual is executing a sequence of trades to buy all available offers or sell to all available bids on an order book in accordance with the rules of the facility on which the trades were executed. Similar to the treatment of block trades and EFRPs described above, the Commission expects that ‘‘buying the board’’ transactions, absent other facts and circumstances, would not violate CEA section 4c(a)(5) or disrupt fair and equitable trading. 52 A person’s obligation to not violate bids or offers is confined to the particular SEF or DCM he is utilizing at a particular time and does not extend across multiple SEFs or DCMs or between different trading systems or platforms within a particular SEF or DCM, such as between a pit and any electronic trading platform within a DCM or a SEF’s ‘‘order book’’ and RFQ system in conjunction with the order book. However, as the swaps and SEF markets evolve, the Commission may revisit these issues in other Commission regulations. For example, the Commission may consider whether a person’s obligation to not violate bids or offers when trading swaps should extend across multiple SEFs or DCMs or across a particular SEF’s different trading systems or platforms, including whether the CEA section 4c(a)(5)(A) prohibition should apply to the scenario where market participants can access multiple SEFs through one trading platform. VerDate Mar<15>2010 17:46 May 24, 2013 Jkt 229001 C. Disregard for the Orderly Execution of Transactions During the Closing Period 1. Comments to the Proposed Interpretive Order Commenters supported the Commission’s proposed guidance that accidental or negligent conduct does not constitute a violation of new CEA section 4c(a)(5)(B).53 With respect to the scienter required for a CEA section 4c(a)(5)(B) violation, commenters requested that the Commission require, at a minimum, a scienter of ‘‘extreme recklessness.’’ 54 Commenters also stated that manipulative intent should be required to violate CEA section 4(c)(a)(5)(B) and that these prohibitions should be limited to manipulative conduct such as ‘‘banging’’ or ‘‘marking the close.’’ 55 Commenters requested that the Commission provide additional clarity regarding the meaning of the term ‘‘closing period’’ as used in CEA section 4c(a)(5)(B).56 Commenters expressed the view that, unlike futures, certain swaps, such as physical products that are priced using indices, do not have defined closing periods.57 Some commenters disagreed with the Commission’s view that the prohibition on disorderly execution of transactions should extend to conduct occurring outside the closing period.58 53 See, e.g., CME at 4 (‘‘We commend the Commission for clarifying that, consistent with the plain language of Section 747, accidental or negligent conduct does not constitute a violation of subsection (B).’’). 54 See id. (‘‘We believe that the Commission should provide in its final order that a violation of subsection (B) requires a showing of scienter—that is, that the person acted knowingly, intentionally, or with extreme recklessness to commit the prohibited conduct.’’). 55 See, e.g., FIA at 5 (‘‘The Commission should clarify that traditionally accepted types of market manipulation, such as ‘banging the close,’ ‘marking the close’ and pricing window manipulation fall under Section 4c(a)(5)(B). . . . Additionally, the Commission should clarify that manipulative intent is required to violate Section 4c(a)(5)(B)’’). 56 See, e.g., BGA at 3 (‘‘BGA is concerned that the Commission has not provided sufficient clarity around the terms ‘orderly execution,’ ‘disruptive conduct,’ or ‘closing period.’ ’’); CME at 5 (‘‘We understand that the Commission cannot precisely define the parameters of ‘orderly execution’ and whether certain executions during the closing period are ‘orderly’ must necessarily be inferred from the totality of the facts and circumstances. Indeed, we noted in our comment letter in response to the ANPR that ‘orderly execution’ can be evaluated only in the context of the specific instrument, market conditions, and participant circumstances at the time in question.’’). 57 See id. (‘‘It appears that the Commission is changing the definition of ‘closing period’ relating to physical products that are pricing using indices or benchmarks. These products do not have defined closing periods; therefore, it is inappropriate to apply a ‘closing period’ concept to them.’’). 58 See, e.g., CME at 6 (‘‘It is unclear how trading practices or conduct outside of the ‘closing period’ PO 00000 Frm 00011 Fmt 4703 Sfmt 4703 Commenters also requested that the Commission further clarify the term ‘‘orderly execution’’ as set forth in section CEA section 4c(a)(5)(B).59 Commenters stated that the Commission should not engage in post hoc evaluations as to what types of trading, conduct, or practices violate CEA section 4c(a)(5)(B).60 Commenters also claimed that having the Commission rely on concepts of orderliness as developed in securities law precedent was problematic because of the significant differences between the securities and CFTC-regulated markets.61 Commenters further stated that requiring market participants to assess market conditions before trading conflicts with the Commission’s assertion that CEA section 4c(a)(5)(B) will not capture legitimate trading behavior.62 Commenters also noted that in today’s highly automated trading environments, it is impractical for market participants to assess market conditions prior to the entry of each order.63 would demonstrate intentional or reckless disregard for the orderly execution of transactions during the closing period.’’). 59 See, e.g., BGA at 3 (‘‘BGA is concerned that the Commission has not provided sufficient clarity around the terms ‘orderly execution,’ ‘disruptive conduct,’ or ‘closing period.’ ’’); CME at 5 (‘‘We understand that the Commission cannot precisely define the parameters of ‘orderly execution’ and whether certain executions during the closing period are ‘orderly’ must necessarily be inferred from the totality of the facts and circumstances. Indeed, we noted in our comment letter in response to the ANPR that ‘orderly execution’ can be evaluated only in the context of the specific instrument, market conditions, and participant circumstances at the time in question.’’). 60 See, e.g., MFA at 4 (‘‘The definition of the term ‘orderly’ is not only vague, but also subjective and would allow for post hoc judgments as to what constitutes violative, disruptive conduct.’’); FIA at 5 (‘‘Market participants should not fear that their trading activity may be the subject of a post hoc analysis which labels a trade or a series of trades ‘‘disruptive.’ ’’). 61 See, e.g., CME at 6–7 (‘‘In light of these and other significant differences that exist in their respective market and regulatory structures, as well as the fundamental purposes of the markets, we caution the Commission against importing securities-based concepts to the derivatives markets.’’). 62 See id. (Requiring participants to assess market conditions and consider how their trading may affect orderly execution during the closing period is ‘‘at odds with the Commission’s assertion that this section ‘will not capture legitimate trading behavior and is not a trade for those who act in good faith.’ ’’). 63 See, e.g., CME at 4 (‘‘Given today’s highly automated environment and the millisecond speed with which liquidity can be sourced, consumed and withdrawn, it is impractical to require such analysis prior to the entry of each order, much less presume that market participants can always accurately assess market conditions or divine market impact, particularly during the closing period which is often the most volatile period of the day and a period in which certainty of execution may be a more material consideration than price.’’). E:\FR\FM\28MYN1.SGM 28MYN1 Federal Register / Vol. 78, No. 102 / Tuesday, May 28, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES 2. Commission Guidance The Commission interprets Congress’s inclusion of a scienter requirement in CEA section 4c(a)(5)(B) as meaning that accidental, or even negligent, trading, practices, or conduct will not be a sufficient basis for the Commission to claim a violation under CEA section 4c(a)(5)(B). The Commission interprets CEA section 4c(a)(5)(B) as requiring a market participant to at least act recklessly to violate CEA section 4c(a)(5)(B).64 The Commission declines to interpret CEA section 4c(a)(5)(B) to include either an extreme recklessness standard or a manipulative intent requirement because this modification would alter the scienter standard mandated by the statute, which prohibits conduct that demonstrates ‘‘intentional or reckless disregard for the orderly execution of transactions during the closing period.’’ 65 Recklessness is a well-established scienter standard, which has consistently been defined as conduct that ‘‘departs so far from the standards of ordinary care that it is very difficult to believe the actor was not aware of what he or she was doing.’’ 66 Consistent with long-standing precedent under commodities and securities law, the Commission intends to apply this commonly-known definition of recklessness to CEA section 4c(a)(5)(B). A person with manipulative intent, such as one attempting to ‘‘bang’’ or ‘‘mark the close’’ may also intend to disrupt 64 See, e.g., Hammond v. Smith Barney, Harris Upham & Company, Inc., [1990–1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,617 (CFTC Mar. 1, 1990) (scienter requires proof that a defendant committed the alleged wrongful acts ‘‘intentionally or with reckless disregard for his duties under the Act’’); Drexel Burnham Lambert, Inc. v. CFTC, 850 F.2d 742, 748 (DC Cir. 1988) (holding that recklessness is sufficient to satisfy scienter requirement and that a reckless act is one where there is so little care that it is ‘‘difficult to believe the [actor] was not aware of what he was doing’’) (quoting First Commodity Corp. v. CFTC, 676 F.2d 1, 7 (1st Cir. 1982)). 65 7 U.S.C. 4c(a)(5)(B). 66 Drexel Burnham Lambert Inc. at 748; see also Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977), cert. denied, 434 U.S. 875 (1977) (holding that recklessness under SEC Rule 10b–5 means ‘‘an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it’’) (internal quotation marks and citation omitted); SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072, 1093– 94 (9th Cir. 2010) (‘‘scienter [under SEC Rule 10b– 5] requires either deliberate recklessness or conscious recklessness, and [ ] it includes a subjective inquiry turning on the defendant’s actual state of mind’’) (internal quotation marks and citations omitted). See also, the final rules issued by the Commission on July 14, 2011 (Prohibition on the Employment, or Attempted Employment, of Manipulation and Deceptive Devices and Prohibition on Price Manipulation), 76 FR, July 14, 2011. VerDate Mar<15>2010 17:46 May 24, 2013 Jkt 229001 the orderly execution of transactions during the closing period, but the finding of a manipulative intent is not a prerequisite for a finding of a violation of CEA section 4c(a)(5)(B). The Commission interprets the prohibition in CEA section 4c(a)(5)(B) to apply to any trading, conduct, or practices occurring within the closing period that demonstrates an intentional or reckless disregard for the orderly execution of transactions during the closing period. The Commission interprets the closing period to be defined generally as the period in the contract or trade when the settlement price is determined under the rules of a trading facility such as a DCM or SEF. Closing periods may include the time period in which a daily settlement price is determined, the expiration day for a futures contract, and any period of time in which the cash-market transaction prices for a physical commodity are used in establishing a settlement price for a futures contract, option, or swap (as defined by the CEA). With respect to swaps, the Commission interprets a swap as being subject to the provisions of section 4c(a)(5)(B) if a DCM or SEF determines that a settlement or pricing period exists for that particular swap.67 Additionally, the Commission’s policy is that conduct outside the closing period may also disrupt the orderly execution of transactions during the closing period and may thus form the basis of a violation under CEA section 4c(a)(5)(B) and any other applicable CEA sections. For example, a CEA section 4c(a)(5)(B) violation may occur when a market participant accumulates a large position in a product or contract in the period immediately preceding the closing period with the intent (or reckless disregard) to disrupt the orderly execution of transactions during that product’s, or a similar product’s, defined closing period. The Commission interprets CEA section 4c(a)(5)(B) violations as including not only executed orders by market participants that disrupt the orderly execution of transactions during the closing period, but also any bids and offers submitted by market participants that disrupt the orderly execution of transactions during the closing period. For example, bids and offers submitted by a person, even if they are not 67 The Commission disagrees with commenters that physical products priced using indices or benchmarks do not have defined closing periods. For physical products priced using indices, price reporting agencies may use the transaction prices during a certain window of time to calculate price indexes. Market participants have the same ability to disrupt trading during these windows of time as they do during the closing periods as defined by the DCM or SEF. PO 00000 Frm 00012 Fmt 4703 Sfmt 4703 31895 executed against by other market participants, may disrupt orderly trading in the closing period by sending false signals to the marketplace that consequently affect the trading behavior of market participants in the closing period. As such, bids and offers submitted by a person who intends to cancel the bid or offer before execution may have violations of both CEA section 4c(a)(5)(B), a disruption of orderly trading in the closing period, and CEA section 4c(a)(5)(C), ‘‘spoofing.’’ Similar to other scienter-based violations of the CEA, the Commission intends to consider all of the relevant facts and circumstances when determining whether a person violated CEA section 4c(a)(5)(B). The Commission recognizes that an evaluation of ‘‘orderly execution’’ should be based on the totality of the facts and circumstances as of the time the person engaged in the relevant trading, practices, or conduct—i.e., the Commission intends to consider what the person knew or should have known, and the information available at the time he or she was engaging in the conduct at issue. For example, a CEA section 4c(a)(5)(B) violation would not occur simply because a person’s execution of orders during the closing period had a substantial effect on a contract’s settlement price; rather, such person’s conduct must also demonstrate an intentional or reckless disregard for the orderly execution of transactions during the closing period. While the Commission recognizes there are differences between securities markets and CFTC-regulated markets, fundamental concepts of how an orderly market should function are similar in both markets. In light of the differences between these two markets, the Commission will be guided, but not controlled, by the substantial body of judicial precedent applying the concepts of orderly markets established by the courts with respect to the securities markets. To this end, the Commission’s policy is that an orderly market may be characterized by, among other things, parameters such as a rational relationship between consecutive prices, a strong correlation between price changes and the volume of trades, levels of volatility that do not dramatically reduce liquidity, accurate relationships between the price of a derivative and the underlying such as a physical commodity or financial instrument, and reasonable spreads between contracts for near months and E:\FR\FM\28MYN1.SGM 28MYN1 31896 Federal Register / Vol. 78, No. 102 / Tuesday, May 28, 2013 / Notices for remote months.68 For example, trading in a manner that intentionally or recklessly causes the price relationships between the price of a derivative and the underlying commodity to diverge, or cause spreads between contracts for near months and for remote months to diverge could constitute a violation of the statute. Finally, the Commission recommends that market participants should assess market conditions and consider how their trading practices and conduct affect the orderly execution of transactions during the closing period. Market participants should assess market conditions before placing a bid or offer, or executing an order, because this will help prevent market participants from engaging in trading, practices, or conduct that disrupts fair and equitable trading in CFTC-regulated markets. D. ‘‘Spoofing’’ 1. Comments to the Proposed Interpretive Order mstockstill on DSK4VPTVN1PROD with NOTICES Commenters requested additional Commission guidance on the definition of ‘‘spoofing’’ as set forth in CEA section 4c(a)(5)(C).69 Commenters stated that any violations should not capture legitimate trading behavior. For example, to differentiate ‘‘spoofing’’ from legitimate trading behavior, commenters state that any person violating CEA section 4c(a)(5)(C) must also intend to mislead market participants and to exploit that deception for the spoofing entity’s benefit.70 Commenters further requested that if a bid or offer has the risk of being hit or lifted by the market, for any period of time, such trading activity should be exempt from being classified as a ‘‘spoofing’’ violation.71 Commenters 68 While the role of market specialists is unique to the securities markets as of this time, the economic concepts applicable to orderly markets in securities markets may help guide the Commission when analyzing orderly trading in CFTC-regulated markets. 69 See, e.g., ICE at 4 (‘‘The Commission should provide additional guidance as to what specific types of improper trading practices or activity would be broadly characterized as being spoofing and ‘of the character of’ spoofing.’’). 70 See, e.g., CMC at 4 (‘‘The distinguishing characteristic between ‘spoofing’ that should be covered by Section 747(C) and the legitimate cancellation of other unfilled or partially filled orders is that ‘spoofing’ involves the intent to enter non bona fide orders for the purpose of misleading market participants and exploiting that deception for the spoofing entity’s benefit.’’). 71 See, e.g., BGA at 4 (‘‘BGA recommends the Commission clarify that, if a bid or offer has the risk of being hit or lifted by the market, for any period VerDate Mar<15>2010 17:46 May 24, 2013 Jkt 229001 expressed a similar view that partial fills should also be exempt from the definition of ‘‘spoofing.’’ 72 Lastly, one commenter stated CEA section 4c(a)(5)(C) violations should only be applicable to order-book facilities.73 2. Commission Guidance The Commission interprets a CEA section 4c(a)(5)(C) violation as requiring a market participant to act with some degree of intent, or scienter, beyond recklessness to engage in the ‘‘spoofing’’ trading practices prohibited by CEA section 4c(a)(5)(C). Because CEA section 4c(a)(5)(C) requires that a person intend to cancel a bid or offer before execution, the Commission does not interpret reckless trading, practices, or conduct as constituting a ‘‘spoofing’’ violation.74 Additionally, the Commission interprets that a spoofing violation will not occur when the person’s intent when cancelling a bid or offer before execution was to cancel such bid or offer as part of a legitimate, good-faith attempt to consummate a trade. Thus, the Commission interprets the statute to mean that a legitimate, good-faith cancellation or modification of orders (e.g., partially filled orders or properly placed stop-loss orders) would not violate section CEA 4c(a)(5)(C). However, the Commission does not interpret a partial fill as automatically exempt from being classified as ‘‘spoofing’’ and violating CEA section 4c(a)(5)(C). When distinguishing between legitimate trading (such as trading involving partial executions) and ‘‘spoofing,’’ the Commission intends to evaluate the market context, the person’s pattern of trading activity (including fill characteristics), and other relevant facts and circumstances. For example, if a person’s intent when placing a bid or offer was to cancel the entire bid or offer prior to execution and not attempt to consummate a legitimate of time, this activity be deemed legitimate conduct and not be deemed ‘spoofing.’ ’’). 72 See, e.g., FIA at 6 (‘‘Traders engage in legitimate trading practices that are unintentionally captured by Section 747’s definition of ‘spoofing.’ For example, traders may enter larger than necessary orders to ensure their hedging or delivery needs are met and, once met, they may then cancel part of the original order.’’). 73 See, e.g., ISDA at 4 (‘‘The entire Proposed Guidance discussion of spoofing is in exchange terminology and facially applicable only in an exchange environment. Again, we believe this is, if applicable at all, applicable at this time only to Order-Book facilities.’’). 74 Similar to violations under CEA section 4c(a)(5)(B), the Commission does not interpret CEA section 4c(a)(5)(C) as reaching accidental or negligent trading, practices, or conduct. PO 00000 Frm 00013 Fmt 4703 Sfmt 4703 trade, regardless of whether such bid or offer was subsequently partially filled, that conduct may violate CEA section 4c(a)(5)(C). The Commission interprets and intends to apply CEA section 4c(a)(5)(C) as covering bid and offer activity on all products traded on all registered entities, including DCMs and SEFs. The Commission further interprets CEA section 4c(a)(5)(C) to include all bids and offers in pre-open periods or during other exchange-controlled trading halts. As noted earlier, the Commission does not interpret CEA section 4c(a)(5)(C) as restricting ‘‘spoofing’’ violations to trading platforms and venues only having order book functionality. ‘‘Spoofing’’ may possibly occur on any trading platform or venue where a market participant has the ability to either (a) send executable bids and offers to market participants or (b) transact against resting orders. The Commission provides four nonexclusive examples of possible situations for when market participants are engaged in ‘‘spoofing’’ behavior,75 including: (i) Submitting or cancelling bids or offers to overload the quotation system of a registered entity, (ii) submitting or cancelling bids or offers to delay another person’s execution of trades, (iii) submitting or cancelling multiple bids or offers to create an appearance of false market depth, and (iv) submitting or canceling bids or offers with intent to create artificial price movements upwards or downwards. The Commission also does not intend to apply the ‘‘spoofing’’ provision as covering market communications such as authorized pretrade communications. As with other intent-based violations, the Commission intends to distinguish between legitimate trading and ‘‘spoofing’’ by evaluating all of the facts and circumstances of each particular case, including a person’s trading practices and patterns. The Commission does not interpret a CEA section 4c(a)(5)(C) violation as requiring a pattern of activity; the Commission interprets CEA section 4c(a)(5)(C) such that even a single instance of trading activity can violate CEA section 4c(a)(5)(C), provided that the activity is conducted with the prohibited intent. Issued in Washington, DC, on May 20, 2013, by the Commission. Christopher J. Kirkpatrick, Deputy Secretary of the Commission. 75 See E:\FR\FM\28MYN1.SGM 76 FR at 14947. 28MYN1 Federal Register / Vol. 78, No. 102 / Tuesday, May 28, 2013 / Notices Appendices to Antidisruptive Practices Authority—Commission Voting Summary; Statements of Commissioners; and List of Roundtable Participants and Commenters Appendix 1—Commission Voting Summary On this matter, Chairman Gensler and Commissioners Sommers, Chilton, O’Malia, and Wetjen voted in the affirmative. No Commissioners voted in the negative. Appendix 2—Statement of Chairman Gary Gensler I support the Interpretive Guidance and Policy Statement regarding disruptive practices on swap execution facilities and designated contract markets. As part of market reform, Congress expressly prohibited certain trading practices that were deemed disruptive of fair and equitable trading on CFTC-registered entities, such as swap execution facilities and designated contract markets. These provisions are important because it is a core mission of the CFTC to protect the markets against abusive and disruptive practices, particularly those that impede critical price discovery functions. The Interpretive Guidance and Policy Statement provides additional guidance to market participants regarding the scope of conduct and trading practices that would violate the law. For instance, the Commission interprets this provision, section 747 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, to apply to any trading, practices or conduct on registered SEFs or DCMs. The guidance addresses the comments the Commission received in response to the proposal, including a roundtable. mstockstill on DSK4VPTVN1PROD with NOTICES Appendix 3—Parties Submitting Comment Letters in Response To Disruptive Trading Practices Proposed Interpretive Order Banking Firms Consolidated (‘‘BF’’) Better Markets (‘‘BM’’) BG Americas & Global LNG (‘‘BGA’’) Chris Barnard Coalition for Derivatives End Users (‘‘Coalition’’) CME Group (‘‘CME’’) Commodity Markets Council (‘‘CMC’’) Futures Industry Association/Securities Industry and Financial Markets Association (‘‘FIA’’) GFI Group, Inc. (‘‘GFI’’) Hampton Technology Resources (‘‘HTR’’) InterContinentalExchange (‘‘ICE’’) International Swaps and Derivatives Association (‘‘ISDA’’) Managed Funds Association (‘‘MFA’’) MarketAxess Minneapolis Grain Exchange (‘‘MGE’’) Working Group of Commercial Energy Firms (‘‘Working Group’’) [FR Doc. 2013–12365 Filed 5–24–13; 8:45 am] BILLING CODE 6351–01–P VerDate Mar<15>2010 17:46 May 24, 2013 Jkt 229001 CONSUMER PRODUCT SAFETY COMMISSION [Docket No. CPSC–2011–0074] Agency Information Collection Activities; Proposed Collection; Comment Request; CPSC Table Saw User Survey Consumer Product Safety Commission. ACTION: Notice. AGENCY: SUMMARY: The Consumer Product Safety Commission (CPSC or Commission) is announcing an opportunity for public comment on the proposed collection of certain information by the agency. Under the Paperwork Reduction Act of 1995 (PRA), federal agencies are required to publish notice in the Federal Register concerning each proposed collection of information and to allow 60 days for public comment in response to the notice. This notice solicits comments on a survey of table saw users to determine the effectiveness of modular blade guards. DATES: Submit written or electronic comments on the collection of information by July 29, 2013. ADDRESSES: You may submit comments, identified by Docket No. CPSC–2011– 0074, by any of the following methods: Electronic Submissions: Submit electronic comments to the Federal eRulemaking Portal at: http:// www.regulations.gov. Follow the instructions for submitting comments. The Commission does not accept comments submitted by electronic mail (email), except through www.regulations.gov. The Commission encourages you to submit electronic comments by using the Federal eRulemaking Portal, as described above. Written Submissions: Submit written submissions in the following way: Mail/ Hand delivery/Courier (for paper, disk, or CD–ROM submissions), preferably in five copies, to: Office of the Secretary, Consumer Product Safety Commission, Room 820, 4330 East West Highway, Bethesda, MD 20814; telephone (301) 504–7923. Instructions: All submissions received must include the agency name and docket number for this notice. All comments received may be posted without change, including any personal identifiers, contact information, or other personal information provided, to: http://www.regulations.gov. Do not submit confidential business information, trade secret information, or other sensitive or protected information that you do not want to be available to the public. If furnished at all, such PO 00000 Frm 00014 Fmt 4703 Sfmt 4703 31897 information should be submitted in writing. Docket: For access to the docket to read background documents or comments received, go to: http:// www.regulations.gov, and insert the docket number, CPSC–2011–0074, into the ‘‘Search’’ box, and follow the prompts. A copy of the draft survey is available at http://www.regulations.gov under Docket No. CPSC–2011–0074, Supporting and Related Materials. FOR FURTHER INFORMATION CONTACT: Robert H. Squibb, Consumer Product Safety Commission, 4330 East-West Highway, Bethesda, MD 20814; (301) 504–7815, or by email to: rsquibb@cpsc.gov. SUPPLEMENTARY INFORMATION: Under the PRA (44 U.S.C. 3501–3520), federal agencies must obtain approval from the Office of Management and Budget (OMB) for each collection of information they conduct or sponsor. ‘‘Collection of information’’ is defined in 44 U.S.C. 3502(3) and 5 CFR 1320.3(c) and includes agency requests or requirements that members of the public submit reports, keep records, or provide information to a third party. Section 3506(c)(2)(A) of the PRA (44 U.S.C. 3506(c)(2)(A)) requires federal agencies to provide a 60-day notice in the Federal Register concerning each proposed collection of information before submitting the collection to OMB for approval. Accordingly, the CPSC is publishing notice of the proposed collection of information set forth in this document. A. Table Saw User Survey The CPSC is considering whether a new performance safety standard is needed to address an unreasonable risk of injury associated with table saws. On October 11, 2011, the Commission published an advance notice of proposed rulemaking (ANPR) for table saws, under the Consumer Product Safety Act (CPSA), 15 U.S.C. 2051– 2084. (76 FR 62678). The ANPR explained that under the current voluntary standard, UL 987, Stationary and Fixed Electric Tools, published in November 2007, a new modular blade guard design, developed by a joint venture of the leading table saw manufacturers, expanded the table saw guarding requirements. The new blade guard did not consist of a hood, but rather, a top-barrier guarding element and two side-barrier guarding elements. The new modular guard design was intended to be an improvement over traditional hood guard designs, by providing better visibility, by being easier to remove and install, and by E:\FR\FM\28MYN1.SGM 28MYN1

Agencies

[Federal Register Volume 78, Number 102 (Tuesday, May 28, 2013)]
[Notices]
[Pages 31890-31897]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-12365]


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COMMODITY FUTURES TRADING COMMISSION

RIN 3038-AD96


Antidisruptive Practices Authority

AGENCY: Commodity Futures Trading Commission.

ACTION: Interpretive guidance and policy statement.

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SUMMARY: The Commodity Futures Trading Commission (the ``Commission'' 
or ``CFTC'') is issuing this interpretive guidance and policy statement 
(``interpretive statement'') to provide guidance on section 747 of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (the ``Dodd-
Frank Act''), which prohibits certain disruptive trading, practices, or 
conduct as set forth in new section 4c(a)(5) of the Commodity Exchange 
Act (the ``CEA''). This interpretive statement will provide market 
participants and the public with guidance on the scope and application 
of the statutory prohibitions set forth in CEA section 4c(a)(5).

DATES: This interpretive statement will become effective May 28, 2013.

FOR FURTHER INFORMATION CONTACT: David Meister, Director, Division of 
Enforcement, dmeister@cftc.gov, Vincent McGonagle, Senior Deputy 
Director, Division of Enforcement, vmcgonagle@cftc.gov or Robert Pease, 
Counsel to the Director of Enforcement, 202-418-5863, rpease@cftc.gov; 
Three Lafayette Centre, 1151 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Prohibition of Disruptive Practices

I. Statutory and Regulatory Authorities

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ Title VII 
of the Dodd-Frank Act \2\ amended the Commodity Exchange Act (``CEA'') 
\3\ to establish a comprehensive new regulatory framework for swaps and 
security-based swaps. The legislation was enacted to reduce risk, 
increase transparency, and promote market integrity within the 
financial system by doing, among other things, the following: (1) 
Providing for the registration and comprehensive regulation of swap 
dealers and major swap participants; (2) imposing clearing and trade 
execution requirements on standardized derivative products; (3) 
creating robust recordkeeping and real-time reporting regimes; and (4) 
enhancing the Commission's rulemaking and enforcement authorities with 
respect to, among others, all registered entities and intermediaries 
subject to the Commission's oversight.
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010, Public Law 111-203, 124 Stat. 1376 (2010). The text of 
the Dodd-Frank Act may be accessed at http://www.cftc.gov./
LawRegulation/OTCDERIVATIVES/index.htm.
    \2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \3\ 7 U.S.C. 1 et seq.
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    Section 747 of the Dodd-Frank Act amends section 4c(a) of the CEA 
(``Prohibited Transactions'') to add a new section entitled 
``Disruptive Practices.'' New CEA section 4c(a)(5) makes it unlawful 
for any person to engage in any trading, practice, or conduct on or 
subject to the rules of a registered entity that--(A) violates bids or 
offers; (B) demonstrates intentional or reckless disregard for the 
orderly execution of transactions during the closing period; or (C) is, 
is of the character of, or is commonly known to the trade as, 
``spoofing'' (bidding or offering with the intent to cancel the bid or 
offer before execution).
    Dodd-Frank Act section 747 also amends section 4c(a) of the CEA by 
granting the Commission authority under new section 4c(a)(6) of the CEA 
to promulgate such ``rules and regulations as, in the judgment of the 
Commission, are reasonably necessary to prohibit the trading 
practices'' enumerated therein ``and any other trading practice that is 
disruptive of fair and equitable trading.'' \4\
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    \4\ 7 U.S.C. 4(a)(6). At this time, the Commission is only 
providing interpretive guidance on the disruptive trading, 
practices, or conduct discussed herein. The Commission does not 
foreclose subsequent promulgation of rules and regulations pursuant 
to CEA section 4c(a)(6). The Commission also notes that new CEA 
section 4c(a)(5) is self-effectuating.
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    The Commission is issuing this interpretive guidance and policy 
statement (``interpretive statement'') to provide market participants 
and the public with guidance on the manner in which it intends to apply 
the statutory prohibitions set forth in section 4c(a)(5) of the CEA. 
The public has the ability to present facts and circumstances that 
would inform the application of these policies.

[[Page 31891]]

II. Proposed Interpretive Order

    On March 18, 2011, the Commission issued a proposed interpretive 
order (``Proposed Order'') providing proposed interpretive guidance on 
the three new statutory provisions of section 4c(a)(5) of the CEA.\5\ 
In the Proposed Order, the Commission stated that CEA section 4c(a)(5) 
applied to trading, practices, or conduct on registered entities, 
including designated contract markets (``DCMs'') and swap execution 
facilities (``SEFs'').\6\ The Proposed Order also provided that CEA 
section 4c(a)(5) would not apply to block trades, bilaterally 
negotiated swap transactions, or exchanges for related positions 
(``EFRPs'') transacted in accordance with the rules of a DCM or SEF.\7\
---------------------------------------------------------------------------

    \5\ 76 FR 14943 (Mar. 18, 2011). On November 2, 2010, the 
Commission issued an Advance Notice of Proposed Rulemaking (the 
``ANPR'') asking for public comment on section 747 of the Dodd-Frank 
Act. 75 FR 67301 (Nov. 2, 2010). The ANPR formed the basis for a 
roundtable held on December 2, 2010, by Commission staff in 
Washington, DC. The Commission subsequently terminated the ANPR on 
March 18, 2011. 76 FR 14826 (Mar. 18, 2011).
    \6\ 76 FR at 14945. The Commission also stated that a trade does 
not become subject to CEA section 4c(a)(5) because it is reported to 
a swap data repository, even though such swap data repository is a 
registered entity.
    \7\ Id. at 14946.
---------------------------------------------------------------------------

    With respect to CEA section 4c(a)(5)(A)'s prohibition on violating 
bids and offers, the Proposed Order stated that a person is prohibited 
from buying a contract at a price that is higher than the lowest 
available offer price and/or from selling a contract at a price that is 
lower than the highest available bid price.\8\ Such conduct, regardless 
of intent, disrupts the foundation of fair and equitable trading. The 
Commission further proposed that CEA section 4c(a)(5)(A) was a per se 
offense where the Commission would not be required to show that a 
person violating bids or offers did so with any intent to disrupt fair 
and equitable trading.\9\
---------------------------------------------------------------------------

    \8\ Id.
    \9\ Id.
---------------------------------------------------------------------------

    In the Proposed Order, the Commission also stated that CEA section 
4c(a)(5)(A) is applicable in any trading environment where a person 
exercises some control over the selection of bids and offers against 
which they transact, including when using an automated trading system 
that operates without pre-determined matching algorithms.\10\ The 
Commission further explained that CEA section 4c(a)(5)(A) does not 
apply where a person is unable to violate a bid or offer--i.e., when a 
person is using an order matching algorithm.\11\ The Commission also 
proposed that CEA section 4c(a)(5)(A) would not apply where an 
individual is executing a sequence of trades to buy all available bids 
or sell to all available offers on an order book in accordance with the 
rules of the facility on which the trades were executed.\12\
---------------------------------------------------------------------------

    \10\ Id.
    \11\ Id.
    \12\ Id.
---------------------------------------------------------------------------

    In regard to CEA section 4c(a)(5)(B), the provision for orderly 
execution during the closing period, the Commission interpreted the 
provisions as requiring that a market participant must at least act 
recklessly to violate CEA section 4c(a)(5)(B).\13\ The Proposed Order 
stated that accidental, or even negligent trading, is not a sufficient 
basis for the Commission to claim a violation has occurred under CEA 
section 4c(a)(5)(B). The Proposed Order also generally defined the 
closing period as the period in the contract or trade when the 
settlement price is determined under the rules of that registered 
entity.\14\
---------------------------------------------------------------------------

    \13\ Id.
    \14\ Id.
---------------------------------------------------------------------------

    The Proposed Order also explained that while CEA section 
4c(a)(5)(B) encompasses any trading, practices, or conduct inside the 
closing period that affects the orderly execution of transactions 
during the closing period, disruptive conduct outside the closing 
period may also form the basis for investigations of potential CEA 
section 4c(a)(5)(B) violations.\15\ Section 4c(a)(5)(B) violations may 
also include executed orders, as well as bids and offers submitted by 
market participants for the purpose of disrupting fair and equitable 
trading.\16\
---------------------------------------------------------------------------

    \15\ Id.
    \16\ Id.
---------------------------------------------------------------------------

    When determining whether a person violated CEA section 4c(a)(5)(B), 
the Commission proposed to evaluate the facts and circumstances as of 
the time the person engaged in the trading, practices, or conduct.\17\ 
The Commission proposed to use existing concepts of orderliness when 
assessing whether trades were executed, or orders were submitted, in an 
orderly fashion in the time periods prior to and during the closing 
period.\18\ The Proposed Order also expressed that market participants 
should assess market conditions and consider how their trading 
practices and conduct would affect the orderly execution of 
transactions during the closing period.\19\
---------------------------------------------------------------------------

    \17\ Id.
    \18\ Id.
    \19\ Id.
---------------------------------------------------------------------------

    With respect to CEA section 4c(a)(5)(C), the Proposed Order stated 
that a market participant must act with some degree of intent to 
violate the ``spoofing'' provision.\20\ Reckless trading, practices, or 
conduct would not violate CEA section 4c(a)(5)(C); instead, a person 
must intend to cancel a bid or offer before execution.\21\ 
Additionally, orders, modifications, or cancellations would not be 
considered ``spoofing'' if they were submitted as part of a legitimate, 
good-faith attempt to consummate a trade.\22\ While the Proposed Order 
did not exempt partial fills from CEA section 4c(a)(5)(C), legitimate, 
good-faith cancellations of partially filled orders would not violate 
CEA section 4c(a)(5)(C).\23\ Similar to the Commission's proposed 
approach to CEA section 4c(a)(5)(B), the Commission proposed to 
evaluate the facts and circumstances when distinguishing between 
legitimate trading and ``spoofing'' behavior.\24\
---------------------------------------------------------------------------

    \20\ Id.
    \21\ Id.
    \22\ Id.
    \23\ Id.
    \24\ Id.
---------------------------------------------------------------------------

    Under the Proposed Order, CEA section 4c(a)(5)(C) covers bid and 
offer activity on all registered entities, including all bids and 
offers in pre-open periods or during exchange-controlled trading halts. 
The Proposed Order also provided three non-exclusive examples of 
``spoofing'' behavior.\25\ The Commission further proposed that CEA 
section 4c(a)(5)(C) does not cover non-executable market communications 
such as requests for quotes and other authorized pre-trade 
communications.\26\ Finally, the Commission proposed that a violation 
of CEA section 4c(a)(5)(C) does not require a pattern of activity, even 
a single instance of trading activity can be disruptive of fair and 
equitable trading.\27\
---------------------------------------------------------------------------

    \25\ The Proposed Order described ``spoofing'' to include the 
following: (i) Submitting or cancelling bids or offers to overload 
the quotation system of a registered entity, (ii) submitting or 
cancelling bids or offers to delay another person's execution of 
trades, and (iii) submitting or cancelling multiple bids or offers 
to create an appearance of false market depth. 76 FR at 14946.
    \26\ 76 FR at 14946.
    \27\ Id.
---------------------------------------------------------------------------

    The Commission requested comment on all aspects of the Proposed 
Order, with the comment period ending on May 17, 2011. In response to 
the Proposed Order, the Commission received 16 comments from industry 
members, trade associations, exchanges, and other members of the 
public.\28\ In

[[Page 31892]]

drafting this interpretive statement, the Commission also considered 
the ANPR and December 2, 2010 roundtable comments, as well as comments 
related to section 747 of the Dodd-Frank Act that were filed in 
response to the SEF notice of proposed rulemaking (the ``SEF 
NPRM'').\29\
---------------------------------------------------------------------------

    \28\ Appendix 3 contains the list of commenters that responded 
to the Proposed Order. The comment letters may be accessed through 
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=893.
    \29\ 76 FR 1214 (Jan. 7, 2011).
---------------------------------------------------------------------------

III. Comments on the Proposed Order

A. General Applicability of CEA Section 4c(a)(5)

1. Comments
    In response to the Proposed Order, several commenters requested 
additional guidance and suggested that additional clarity was needed 
regarding how the Commission would interpret and apply new CEA section 
4c(a)(5).\30\ Some commenters supported the statutory requirement in 
new CEA section 4c(a)(5) to prohibit the enumerated trading practices 
and prevent the disruption of fair and equitable trading.\31\ Other 
commenters noted that the Commission should recognize the complementary 
role of the exchanges and continue relying on the exchanges' self-
regulatory organization (``SRO'') authority to identify and pursue 
trading practices that are manipulative or detrimental to the 
exchange's markets.\32\ Commenters also requested that CEA section 
4c(a)(5) violations be limited to those trading platforms on DCMs or 
SEFs that have order book functionality.\33\ Lastly, some commenters 
requested that the Commission incorporate a manipulative intent 
requirement into its new antidisruptive practices authority to ensure 
that the prohibitions in CEA section 4c(a)(5) do not capture legitimate 
trading practices that may be indistinguishable from the proposed 
prohibited conduct.\34\
---------------------------------------------------------------------------

    \30\ See, e.g., FIA at 2 (``The Proposed Order does not go far 
enough in offering guidance to market participants.''); ICE at 2 
(``Additional clarity is required with respect to the Commission's 
interpretation and guidance regarding paragraphs (A) through (C) of 
Section 747.'').
    \31\ See, e.g., ISDA at 2 (``ISDA supports the Commission's 
effort to facilitate fair and equitable trading on registered 
entities by issuing guidance as to the parameters of the three 
statutory disruptive practices found in Subsection 5.''); ICE at 2 
(``ICE continues to support the Commission's efforts to promote open 
and competitive markets while improving the ability to deter 
improper trading practices that are disruptive to legitimate trading 
and orderly markets.''); Barnard at 2 (``I welcome and support your 
proposed interpretive order. It brings clarity to the antidisruptive 
practices authority, and strikes the right balance between rules- 
and principles-based regulation.'').
    \32\ See, e.g., ICE at 5 (``ICE respectfully suggests that the 
Commission continue to rely on exchange SRO authority to identify 
and pursue trading practices that are determined to be manipulative 
or detrimental to the exchange's markets, including practices that 
are the character of spoofing.''); FIA at 7 (``The Associations 
believe that any rulemaking under 747 must reinforce the distinct 
yet complementary roles of the Commission and the exchanges.''); and 
CMC at 2 (``SROs and the Commission historically have served 
distinct but largely complementary roles.'').
    \33\ See, e.g., ISDA at 2 (``Subsection 5, though stated to 
apply to all ``registered entities''--that is . . . swap execution 
facilities (`SEFs') and designated contract markets (`DCMs')--should 
be clearly limited at the outset only to those order-book trading 
facilities within the Commission's proposed regulation, 17 CFR 
37.9(a)(1)(i)(C), for the definition of `order book.''').
    \34\ See, e.g., FIA at 5 (``Unfortunately, the antidisruptive 
practices authority captures many legitimate trading practices 
which, without a manipulative intent requirement, are objectively 
indistinguishable from the proposed prohibited conduct.'').
---------------------------------------------------------------------------

2. Commission Guidance
    The Commission recognizes commenters' requests for additional 
guidance on CEA section 4c(a)(5) and is issuing this interpretive 
statement to clarify how the Commission interprets and intends to apply 
the three statutory provisions of CEA section 4c(a)(5). With respect to 
the role of exchanges in ensuring fair and equitable markets, the 
Commission agrees with commenters that exchanges serve an important 
role in preventing the disruptive practices prohibited in CEA section 
4c(a)(5) and ensuring fair and equitable trading in CFTC-regulated 
markets.
    The Commission declines the request by commenters to interpret CEA 
section 4c(a)(5) as applying to only those trading platforms or venues 
that have order book functionality. In accordance with the statutory 
language of CEA section 4c(a)(5), the Commission interprets CEA section 
4c(a)(5) to apply to any trading, practices or conduct on a registered 
entity \35\ such as a DCM or SEF.\36\ Depending on the particular facts 
and circumstances, CEA section 4c(a)(5) violations may also occur on 
trading platforms or venues that are distinct from order books, even if 
such platforms or venues may have similar functionality.
---------------------------------------------------------------------------

    \35\ Section 1a(40) of the CEA defines ``registered entity'' as 
``(A) a board of trade designated as a contract market under section 
5; (B) a derivatives clearing organization registered under section 
5b; (C) a board of trade designated as a contract market under 
section 5f; (D) a swap execution facility registered under section 
5h; (E) a swap data repository registered under section 21; and (F) 
with respect to a contract that the Commission determines is a 
significant price discovery contract, any electronic trading 
facility on which the contract is executed or traded.'' 7 U.S.C. 
1a(40).
    \36\ The Commission confirms that a trade does not become 
subject to CEA section 4c(a)(5) solely because it is reported on a 
swap data repository, even though a swap data repository is a 
registered entity.
---------------------------------------------------------------------------

    The Commission also declines commenters' requests to read a 
manipulative intent requirement into the CEA section 4c(a)(5) 
prohibitions. The Commission interprets the prohibitions in CEA section 
4c(a)(5) provisions to be distinct statutory provisions from the anti-
manipulation provisions in section 753 of the Dodd-Frank Act; the 
Commission does not interpret the CEA section 4c(a)(5) violations as 
including any manipulative intent requirement. Including such a 
manipulative intent requirement is contrary to the statutory language.
    The Commission does not intend to apply CEA section 4c(a)(5) to 
either block trades or exchanges for related positions (``EFRPs'') that 
are transacted in accordance with Commission regulation 1.38.
    In addition to these general comments on CEA section 4c(a)(5), 
commenters provided comments on the three new statutory provisions, 
which are discussed in the following sections.

B. Violating Bids and Offers

1. Comments to the Proposed Interpretive Order
    Commenters requested that the Commission modify its interpretation 
that a CEA section 4c(a)(5)(A) violation is a per se offense and 
incorporate a requirement that a person must intend to disrupt fair and 
equitable trading.\37\ Commenters noted that the Commission's 
interpretation that the violation of bids or offers is a per se offense 
conflicts with exchange rules.\38\ Other commenters requested that the 
Commission adopt either a ``specific'' intent or ``extreme 
recklessness'' standard for CEA section 4c(a)(5)(A).\39\ Commenters to 
the Proposed Order also requested guidance on how CEA section 
4c(a)(5)(A) would apply to the trading of swaps on SEFs.\40\ In 
particular, commenters stated that end-users should have discretion 
when choosing a

[[Page 31893]]

counterparty and also requested clarification on whether market 
participants may consider additional non-price factors when trading on 
a SEF.\41\ Commenters also requested guidance on whether CEA section 
4c(a)(5)(A)'s prohibition applies to bids and offers on non-cleared 
swaps.\42\ Commenters also stated that swaps with different clearing 
destinations should not be deemed comparable for the purposes of CEA 
section 4c(a)(5)(A).\43\
---------------------------------------------------------------------------

    \37\ See, e.g., Working Group at 3 (``The Working Group strongly 
recommends that the Commission interpret new CEA Section 4c(a)(5)(A) 
as requiring an intent to disrupt the market.'').
    \38\ See, e.g., CME at 4 (``Contrary to the Commission's 
assertion, this broad construction is not consistent with exchange 
rules, which only proscribe market participants' intentional 
violation of bids and offers.'').
    \39\ See, e.g., CMC at 3 (``The Commission should clarify that 
only intentional or extremely reckless action to violate transparent 
bids or offers contravenes this prohibition.'').
    \40\ See, e.g., FIA at 4 (``The Associations recommend that the 
Commission provide further clarification. One example is the 
application to swap execution facilities (`SEFs')''); BF at 14 (``We 
further recommend that the CFTC confirm that transactions executed 
other than on a SEF's central order book will not be deemed to 
``violate bids or offers'' for purposes of CEA Section 4c(a)(5)(A), 
regardless of their price level.''
    \41\ See, e.g., Coalition at 4 (``An interpretation that 
precludes end-users from exercising discretion in its counterparty 
selection could force end-users to make sub-optimal decisions when 
determining the most suitable swap counterparty on a given 
transaction.'').
    \42\ See, e.g., MarketAxess at 3 (``The final order should make 
clear that the CFTC's interpretation of new CEA Sec.  4c(a)(5)(A) 
does not apply to uncleared swaps.'').
    \43\ See, e.g., Consolidated Banks at 14 (``Nor should swaps 
with different bilateral counterparties or clearing destinations be 
deemed comparable to each other for such purposes.'').
---------------------------------------------------------------------------

    Commenters further asked whether CEA section 4c(a)(5)(A) requires 
market participants to transact at the best price across a particular 
SEF's different trading systems or platforms, such as the SEF's order 
book and request-for-quote system. Commenters also asked for 
clarification on how CEA section 4c(a)(5)(A) applies to request-for-
quote systems on SEFs and whether request-for-quotes (``RFQs'') must 
interact with the SEF's order book or centralized electronic 
screen.\44\ One commenter stated that the Proposed Order would 
effectively impose a ``trade through'' requirement on market 
participants executing swap transactions across a particular SEF's 
trading systems or platforms.\45\ Commenters further requested that the 
Commission confirm that the final order would not create a best 
execution requirement across multiple SEFs.\46\
---------------------------------------------------------------------------

    \44\ See, e.g., MarketAxess at 3 (``We ask that the Commission 
confirm in its final Interpretive Order that a person would not 
violate bids or offers by buying or selling a contract on a SEF's 
Request for Quote System when that contract is available to buy or 
sell at a `better' price through another permitted execution method 
offered by that SEF such as an Order Book or a centralized 
electronic screen.'').
    \45\ See, e.g., GFI at 2 (``GFI believes that the Proposed 
Interpretation would effectively impose a trade-through rule on SEFs 
that utilize trading methods that are not strictly automated, and 
that such a requirement is neither required by the Dodd-Frank Act 
nor furthers the purposes of the CEA.'').
    \46\ See, e.g., Working Group at 3 (``The Working Group supports 
the Commission's statement `section 4c(a)(5)(A) does not create any 
sort of best execution standard across multiple trading platforms 
and markets; rather, a person's obligation to not violate bids or 
offers is confined to the specific trading venue which he or she is 
utilizing at a particular time' and strongly recommends that such 
interpretation of new CEA Section 4c(a)(5)(A) be adopted in any 
final interpretive order.'').
---------------------------------------------------------------------------

    A commenter also agreed with the statement in the Proposed Order 
that CEA section 4c(a)(5)(A) should not apply where an individual is 
``buying the board'' and executing a sequence of trades to buy all 
available bids or sell to all available offers on the order book in 
accordance with the rules of the facility executing the trades.\47\
---------------------------------------------------------------------------

    \47\ See CME at 3 (``We also concur with the Commission's 
determination that this section does not apply where an individual 
is `buying the board.' '').
---------------------------------------------------------------------------

2. Commission Guidance
    The Commission declines requests to interpret CEA section 
4c(a)(5)(A) as applying only where a person intends to disrupt fair and 
equitable trading. The Commission interprets CEA section 4c(a)(5)(A) as 
a per se offense. Congress did not include an intent requirement in CEA 
section 4c(a)(5)(A) as it did in both CEA sections 4c(a)(5)(B) and 
4c(a)(5)(C). Therefore, the Commission does not interpret CEA section 
4c(a)(5)(A) as requiring the Commission to show that a person acted 
with scienter in violating bids and offers (e.g., that a person acted 
with either the intent to disrupt fair and equitable trading or with 
the intent to violate bids and offers). Unlike certain exchange rules 
that prohibit the intentional violation of bids and offers, the 
statutory language of CEA section 4c(a)(5)(A) does not contain a 
similar intent requirement.\48\ While the Commission's determination of 
whether to bring an enforcement action depends on facts and 
circumstances, the Commission does not, for example, intend to exercise 
its discretion to bring an enforcement action against an individual 
who, purely by accident, makes a one-off trade in violation of CEA 
section 4c(a)(5)(A). Whether such an accidental violation gives rise to 
some other violation of the CEA or Commission regulations depends, 
again, on the facts and circumstances of the particular situation.
---------------------------------------------------------------------------

    \48\ See, e.g., New York Mercantile Exchange Rule 514.A.3; 
Minneapolis Grain Exchange Rule 731.00.
---------------------------------------------------------------------------

    As a general matter, the Commission interprets CEA section 
4c(a)(5)(A) as operating in any trading environment where a person is 
not utilizing trading algorithms that automatically match the best 
price for bids and offers. With respect to SEFs, the Commission 
interprets CEA section 4c(a)(5)(A) as being applicable only when a 
person is using a SEF's ``order book,'' and not when a person uses a 
SEF's other execution methods (such as the RFQ system in conjunction 
with the order book). The Commission recognizes that market 
participants may consider a number of factors in addition to price when 
trading or executing less liquid swaps, which are more likely to be 
traded on a SEF's RFQ system or a different execution method. However, 
as SEFs and the swaps markets evolve, the Commission may revisit these 
issues in the future. The Commission agrees with commenters that 
parties trading non-cleared swaps may take into consideration factors 
other than price, such as counterparty risk, when determining how to 
best execute their trades.\49\ Therefore, the Commission interprets CEA 
section 4c(a)(5)(A) as not applying to non-cleared swap transactions, 
even if they are transacted on or through a registered entity. In such 
swap transactions, the credit considerations of the counterparties are 
important components of choosing which bid or offer to accept.
---------------------------------------------------------------------------

    \49\ See, e.g., Coalition at 3 (``To understand the impact of 
applying section 4c(a)(5)(A) to non-cleared transactions executed 
off-facility, we have to understand how corporate treasurers have a 
fiduciary duty to optimize numerous factors--not solely the 
transaction price of a particular derivative--in achieving `best 
execution' '').
---------------------------------------------------------------------------

    The Commission also agrees with commenters that parties may take 
into account clearing considerations, such as the use of a particular 
clearing house, when trading cleared swaps on certain platforms on a 
SEF or on a DCM.\50\ The Commission interprets CEA section 
4c(a)(5)(A)'s prohibition as not applying to bids or offers on swaps 
that would be cleared at different clearing houses because each 
clearing house may have different cost, risk, and material clearing 
features.\51\ For example, the choice of a clearing house may affect a 
party's net and gross outstanding exposures, which may result in 
differing capital and cost of financing effects. Additionally, the 
pricing of swaps may also incorporate other potential considerations 
such as the available credit capacity at the clearing member or 
clearing house, margining arrangements, or post-trade market risk.
---------------------------------------------------------------------------

    \50\ As stated previously, the Commission interprets new CEA 
section 4c(a)(5)(A) as applying to any cleared swap traded on a 
SEF's order book, regardless of whether such cleared swap is subject 
to the mandatory trade execution requirement of new CEA section 
2(h).
    \51\ See, e.g., GFI at 2 (``Because market participants that 
execute transactions on a SEF may clear their transactions at 
different clearinghouses, they must have the flexibility to take 
factors other than price into account when executing transactions on 
a SEF.'').
---------------------------------------------------------------------------

    Therefore, the Commission interprets CEA section 4(c)(a)(5)(A) as 
prohibiting a person from buying a contract on a registered entity at a 
price that is higher than the lowest available price offered for such 
contract or selling a contract on a registered entity at a price that 
is lower than the highest available price bid for such contract subject 
to the situations described above. Such

[[Page 31894]]

conduct, regardless of intent, disrupts fair and equitable trading by 
damaging the price discovery function of CFTC-regulated markets. By 
adopting a policy that market participants cannot execute trades at 
prices that do not accurately reflect the best price for such 
contracts, this interpretive statement furthers the CEA's purpose of 
ensuring the integrity of the price discovery process by helping ensure 
that the prices disseminated to market users and the public reflect 
bona fide prices that accurately reflect the normal forces of supply 
and demand.
    The Commission further recognizes that at any particular time the 
best price in one trading environment such as a particular SEF may 
differ from the best price in a different trading environment such as a 
second, distinct SEF. Accordingly, the Commission does not interpret 
CEA section 4c(a)(5)(A) as creating any sort of best execution standard 
across multiple registered entities, including SEFs or DCMs; rather, 
the Commission interprets a person's obligation to not violate bids or 
offers as applying only to the specific registered entity being 
utilized at a particular time.\52\
---------------------------------------------------------------------------

    \52\ A person's obligation to not violate bids or offers is 
confined to the particular SEF or DCM he is utilizing at a 
particular time and does not extend across multiple SEFs or DCMs or 
between different trading systems or platforms within a particular 
SEF or DCM, such as between a pit and any electronic trading 
platform within a DCM or a SEF's ``order book'' and RFQ system in 
conjunction with the order book. However, as the swaps and SEF 
markets evolve, the Commission may revisit these issues in other 
Commission regulations. For example, the Commission may consider 
whether a person's obligation to not violate bids or offers when 
trading swaps should extend across multiple SEFs or DCMs or across a 
particular SEF's different trading systems or platforms, including 
whether the CEA section 4c(a)(5)(A) prohibition should apply to the 
scenario where market participants can access multiple SEFs through 
one trading platform.
---------------------------------------------------------------------------

    The Commission does not interpret CEA section 4c(a)(5)(A) as 
applying where an individual is executing a sequence of trades to buy 
all available offers or sell to all available bids on an order book in 
accordance with the rules of the facility on which the trades were 
executed. Similar to the treatment of block trades and EFRPs described 
above, the Commission expects that ``buying the board'' transactions, 
absent other facts and circumstances, would not violate CEA section 
4c(a)(5) or disrupt fair and equitable trading.

C. Disregard for the Orderly Execution of Transactions During the 
Closing Period

1. Comments to the Proposed Interpretive Order
    Commenters supported the Commission's proposed guidance that 
accidental or negligent conduct does not constitute a violation of new 
CEA section 4c(a)(5)(B).\53\ With respect to the scienter required for 
a CEA section 4c(a)(5)(B) violation, commenters requested that the 
Commission require, at a minimum, a scienter of ``extreme 
recklessness.'' \54\ Commenters also stated that manipulative intent 
should be required to violate CEA section 4(c)(a)(5)(B) and that these 
prohibitions should be limited to manipulative conduct such as 
``banging'' or ``marking the close.'' \55\
---------------------------------------------------------------------------

    \53\ See, e.g., CME at 4 (``We commend the Commission for 
clarifying that, consistent with the plain language of Section 747, 
accidental or negligent conduct does not constitute a violation of 
subsection (B).'').
    \54\ See id. (``We believe that the Commission should provide in 
its final order that a violation of subsection (B) requires a 
showing of scienter--that is, that the person acted knowingly, 
intentionally, or with extreme recklessness to commit the prohibited 
conduct.'').
    \55\ See, e.g., FIA at 5 (``The Commission should clarify that 
traditionally accepted types of market manipulation, such as 
`banging the close,' `marking the close' and pricing window 
manipulation fall under Section 4c(a)(5)(B). . . . Additionally, the 
Commission should clarify that manipulative intent is required to 
violate Section 4c(a)(5)(B)'').
---------------------------------------------------------------------------

    Commenters requested that the Commission provide additional clarity 
regarding the meaning of the term ``closing period'' as used in CEA 
section 4c(a)(5)(B).\56\ Commenters expressed the view that, unlike 
futures, certain swaps, such as physical products that are priced using 
indices, do not have defined closing periods.\57\ Some commenters 
disagreed with the Commission's view that the prohibition on disorderly 
execution of transactions should extend to conduct occurring outside 
the closing period.\58\
---------------------------------------------------------------------------

    \56\ See, e.g., BGA at 3 (``BGA is concerned that the Commission 
has not provided sufficient clarity around the terms `orderly 
execution,' `disruptive conduct,' or `closing period.' ''); CME at 5 
(``We understand that the Commission cannot precisely define the 
parameters of `orderly execution' and whether certain executions 
during the closing period are `orderly' must necessarily be inferred 
from the totality of the facts and circumstances. Indeed, we noted 
in our comment letter in response to the ANPR that `orderly 
execution' can be evaluated only in the context of the specific 
instrument, market conditions, and participant circumstances at the 
time in question.'').
    \57\ See id. (``It appears that the Commission is changing the 
definition of `closing period' relating to physical products that 
are pricing using indices or benchmarks. These products do not have 
defined closing periods; therefore, it is inappropriate to apply a 
`closing period' concept to them.'').
    \58\ See, e.g., CME at 6 (``It is unclear how trading practices 
or conduct outside of the `closing period' would demonstrate 
intentional or reckless disregard for the orderly execution of 
transactions during the closing period.'').
---------------------------------------------------------------------------

    Commenters also requested that the Commission further clarify the 
term ``orderly execution'' as set forth in section CEA section 
4c(a)(5)(B).\59\ Commenters stated that the Commission should not 
engage in post hoc evaluations as to what types of trading, conduct, or 
practices violate CEA section 4c(a)(5)(B).\60\ Commenters also claimed 
that having the Commission rely on concepts of orderliness as developed 
in securities law precedent was problematic because of the significant 
differences between the securities and CFTC-regulated markets.\61\ 
Commenters further stated that requiring market participants to assess 
market conditions before trading conflicts with the Commission's 
assertion that CEA section 4c(a)(5)(B) will not capture legitimate 
trading behavior.\62\ Commenters also noted that in today's highly 
automated trading environments, it is impractical for market 
participants to assess market conditions prior to the entry of each 
order.\63\
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    \59\ See, e.g., BGA at 3 (``BGA is concerned that the Commission 
has not provided sufficient clarity around the terms `orderly 
execution,' `disruptive conduct,' or `closing period.' ''); CME at 5 
(``We understand that the Commission cannot precisely define the 
parameters of `orderly execution' and whether certain executions 
during the closing period are `orderly' must necessarily be inferred 
from the totality of the facts and circumstances. Indeed, we noted 
in our comment letter in response to the ANPR that `orderly 
execution' can be evaluated only in the context of the specific 
instrument, market conditions, and participant circumstances at the 
time in question.'').
    \60\ See, e.g., MFA at 4 (``The definition of the term `orderly' 
is not only vague, but also subjective and would allow for post hoc 
judgments as to what constitutes violative, disruptive conduct.''); 
FIA at 5 (``Market participants should not fear that their trading 
activity may be the subject of a post hoc analysis which labels a 
trade or a series of trades ``disruptive.' '').
    \61\ See, e.g., CME at 6-7 (``In light of these and other 
significant differences that exist in their respective market and 
regulatory structures, as well as the fundamental purposes of the 
markets, we caution the Commission against importing securities-
based concepts to the derivatives markets.'').
    \62\ See id. (Requiring participants to assess market conditions 
and consider how their trading may affect orderly execution during 
the closing period is ``at odds with the Commission's assertion that 
this section `will not capture legitimate trading behavior and is 
not a trade for those who act in good faith.' '').
    \63\ See, e.g., CME at 4 (``Given today's highly automated 
environment and the millisecond speed with which liquidity can be 
sourced, consumed and withdrawn, it is impractical to require such 
analysis prior to the entry of each order, much less presume that 
market participants can always accurately assess market conditions 
or divine market impact, particularly during the closing period 
which is often the most volatile period of the day and a period in 
which certainty of execution may be a more material consideration 
than price.'').

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[[Page 31895]]

2. Commission Guidance
    The Commission interprets Congress's inclusion of a scienter 
requirement in CEA section 4c(a)(5)(B) as meaning that accidental, or 
even negligent, trading, practices, or conduct will not be a sufficient 
basis for the Commission to claim a violation under CEA section 
4c(a)(5)(B). The Commission interprets CEA section 4c(a)(5)(B) as 
requiring a market participant to at least act recklessly to violate 
CEA section 4c(a)(5)(B).\64\ The Commission declines to interpret CEA 
section 4c(a)(5)(B) to include either an extreme recklessness standard 
or a manipulative intent requirement because this modification would 
alter the scienter standard mandated by the statute, which prohibits 
conduct that demonstrates ``intentional or reckless disregard for the 
orderly execution of transactions during the closing period.'' \65\ 
Recklessness is a well-established scienter standard, which has 
consistently been defined as conduct that ``departs so far from the 
standards of ordinary care that it is very difficult to believe the 
actor was not aware of what he or she was doing.'' \66\ Consistent with 
long-standing precedent under commodities and securities law, the 
Commission intends to apply this commonly-known definition of 
recklessness to CEA section 4c(a)(5)(B). A person with manipulative 
intent, such as one attempting to ``bang'' or ``mark the close'' may 
also intend to disrupt the orderly execution of transactions during the 
closing period, but the finding of a manipulative intent is not a 
prerequisite for a finding of a violation of CEA section 4c(a)(5)(B).
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    \64\ See, e.g., Hammond v. Smith Barney, Harris Upham & Company, 
Inc., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 24,617 
(CFTC Mar. 1, 1990) (scienter requires proof that a defendant 
committed the alleged wrongful acts ``intentionally or with reckless 
disregard for his duties under the Act''); Drexel Burnham Lambert, 
Inc. v. CFTC, 850 F.2d 742, 748 (DC Cir. 1988) (holding that 
recklessness is sufficient to satisfy scienter requirement and that 
a reckless act is one where there is so little care that it is 
``difficult to believe the [actor] was not aware of what he was 
doing'') (quoting First Commodity Corp. v. CFTC, 676 F.2d 1, 7 (1st 
Cir. 1982)).
    \65\ 7 U.S.C. 4c(a)(5)(B).
    \66\ Drexel Burnham Lambert Inc. at 748; see also Sundstrand 
Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977), cert. 
denied, 434 U.S. 875 (1977) (holding that recklessness under SEC 
Rule 10b-5 means ``an extreme departure from the standards of 
ordinary care, and which presents a danger of misleading buyers or 
sellers that is either known to the defendant or is so obvious that 
the actor must have been aware of it'') (internal quotation marks 
and citation omitted); SEC v. Platforms Wireless Int'l Corp., 617 
F.3d 1072, 1093-94 (9th Cir. 2010) (``scienter [under SEC Rule 10b-
5] requires either deliberate recklessness or conscious 
recklessness, and [ ] it includes a subjective inquiry turning on 
the defendant's actual state of mind'') (internal quotation marks 
and citations omitted). See also, the final rules issued by the 
Commission on July 14, 2011 (Prohibition on the Employment, or 
Attempted Employment, of Manipulation and Deceptive Devices and 
Prohibition on Price Manipulation), 76 FR, July 14, 2011.
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    The Commission interprets the prohibition in CEA section 
4c(a)(5)(B) to apply to any trading, conduct, or practices occurring 
within the closing period that demonstrates an intentional or reckless 
disregard for the orderly execution of transactions during the closing 
period. The Commission interprets the closing period to be defined 
generally as the period in the contract or trade when the settlement 
price is determined under the rules of a trading facility such as a DCM 
or SEF. Closing periods may include the time period in which a daily 
settlement price is determined, the expiration day for a futures 
contract, and any period of time in which the cash-market transaction 
prices for a physical commodity are used in establishing a settlement 
price for a futures contract, option, or swap (as defined by the CEA). 
With respect to swaps, the Commission interprets a swap as being 
subject to the provisions of section 4c(a)(5)(B) if a DCM or SEF 
determines that a settlement or pricing period exists for that 
particular swap.\67\ Additionally, the Commission's policy is that 
conduct outside the closing period may also disrupt the orderly 
execution of transactions during the closing period and may thus form 
the basis of a violation under CEA section 4c(a)(5)(B) and any other 
applicable CEA sections. For example, a CEA section 4c(a)(5)(B) 
violation may occur when a market participant accumulates a large 
position in a product or contract in the period immediately preceding 
the closing period with the intent (or reckless disregard) to disrupt 
the orderly execution of transactions during that product's, or a 
similar product's, defined closing period.
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    \67\ The Commission disagrees with commenters that physical 
products priced using indices or benchmarks do not have defined 
closing periods. For physical products priced using indices, price 
reporting agencies may use the transaction prices during a certain 
window of time to calculate price indexes. Market participants have 
the same ability to disrupt trading during these windows of time as 
they do during the closing periods as defined by the DCM or SEF.
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    The Commission interprets CEA section 4c(a)(5)(B) violations as 
including not only executed orders by market participants that disrupt 
the orderly execution of transactions during the closing period, but 
also any bids and offers submitted by market participants that disrupt 
the orderly execution of transactions during the closing period. For 
example, bids and offers submitted by a person, even if they are not 
executed against by other market participants, may disrupt orderly 
trading in the closing period by sending false signals to the 
marketplace that consequently affect the trading behavior of market 
participants in the closing period. As such, bids and offers submitted 
by a person who intends to cancel the bid or offer before execution may 
have violations of both CEA section 4c(a)(5)(B), a disruption of 
orderly trading in the closing period, and CEA section 4c(a)(5)(C), 
``spoofing.''
    Similar to other scienter-based violations of the CEA, the 
Commission intends to consider all of the relevant facts and 
circumstances when determining whether a person violated CEA section 
4c(a)(5)(B). The Commission recognizes that an evaluation of ``orderly 
execution'' should be based on the totality of the facts and 
circumstances as of the time the person engaged in the relevant 
trading, practices, or conduct--i.e., the Commission intends to 
consider what the person knew or should have known, and the information 
available at the time he or she was engaging in the conduct at issue. 
For example, a CEA section 4c(a)(5)(B) violation would not occur simply 
because a person's execution of orders during the closing period had a 
substantial effect on a contract's settlement price; rather, such 
person's conduct must also demonstrate an intentional or reckless 
disregard for the orderly execution of transactions during the closing 
period.
    While the Commission recognizes there are differences between 
securities markets and CFTC-regulated markets, fundamental concepts of 
how an orderly market should function are similar in both markets. In 
light of the differences between these two markets, the Commission will 
be guided, but not controlled, by the substantial body of judicial 
precedent applying the concepts of orderly markets established by the 
courts with respect to the securities markets. To this end, the 
Commission's policy is that an orderly market may be characterized by, 
among other things, parameters such as a rational relationship between 
consecutive prices, a strong correlation between price changes and the 
volume of trades, levels of volatility that do not dramatically reduce 
liquidity, accurate relationships between the price of a derivative and 
the underlying such as a physical commodity or financial instrument, 
and reasonable spreads between contracts for near months and

[[Page 31896]]

for remote months.\68\ For example, trading in a manner that 
intentionally or recklessly causes the price relationships between the 
price of a derivative and the underlying commodity to diverge, or cause 
spreads between contracts for near months and for remote months to 
diverge could constitute a violation of the statute.
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    \68\ While the role of market specialists is unique to the 
securities markets as of this time, the economic concepts applicable 
to orderly markets in securities markets may help guide the 
Commission when analyzing orderly trading in CFTC-regulated markets.
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    Finally, the Commission recommends that market participants should 
assess market conditions and consider how their trading practices and 
conduct affect the orderly execution of transactions during the closing 
period. Market participants should assess market conditions before 
placing a bid or offer, or executing an order, because this will help 
prevent market participants from engaging in trading, practices, or 
conduct that disrupts fair and equitable trading in CFTC-regulated 
markets.

D. ``Spoofing''

1. Comments to the Proposed Interpretive Order
    Commenters requested additional Commission guidance on the 
definition of ``spoofing'' as set forth in CEA section 4c(a)(5)(C).\69\ 
Commenters stated that any violations should not capture legitimate 
trading behavior. For example, to differentiate ``spoofing'' from 
legitimate trading behavior, commenters state that any person violating 
CEA section 4c(a)(5)(C) must also intend to mislead market participants 
and to exploit that deception for the spoofing entity's benefit.\70\ 
Commenters further requested that if a bid or offer has the risk of 
being hit or lifted by the market, for any period of time, such trading 
activity should be exempt from being classified as a ``spoofing'' 
violation.\71\ Commenters expressed a similar view that partial fills 
should also be exempt from the definition of ``spoofing.'' \72\ Lastly, 
one commenter stated CEA section 4c(a)(5)(C) violations should only be 
applicable to order-book facilities.\73\
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    \69\ See, e.g., ICE at 4 (``The Commission should provide 
additional guidance as to what specific types of improper trading 
practices or activity would be broadly characterized as being 
spoofing and `of the character of' spoofing.'').
    \70\ See, e.g., CMC at 4 (``The distinguishing characteristic 
between `spoofing' that should be covered by Section 747(C) and the 
legitimate cancellation of other unfilled or partially filled orders 
is that `spoofing' involves the intent to enter non bona fide orders 
for the purpose of misleading market participants and exploiting 
that deception for the spoofing entity's benefit.'').
    \71\ See, e.g., BGA at 4 (``BGA recommends the Commission 
clarify that, if a bid or offer has the risk of being hit or lifted 
by the market, for any period of time, this activity be deemed 
legitimate conduct and not be deemed `spoofing.' '').
    \72\ See, e.g., FIA at 6 (``Traders engage in legitimate trading 
practices that are unintentionally captured by Section 747's 
definition of `spoofing.' For example, traders may enter larger than 
necessary orders to ensure their hedging or delivery needs are met 
and, once met, they may then cancel part of the original order.'').
    \73\ See, e.g., ISDA at 4 (``The entire Proposed Guidance 
discussion of spoofing is in exchange terminology and facially 
applicable only in an exchange environment. Again, we believe this 
is, if applicable at all, applicable at this time only to Order-Book 
facilities.'').
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2. Commission Guidance
    The Commission interprets a CEA section 4c(a)(5)(C) violation as 
requiring a market participant to act with some degree of intent, or 
scienter, beyond recklessness to engage in the ``spoofing'' trading 
practices prohibited by CEA section 4c(a)(5)(C). Because CEA section 
4c(a)(5)(C) requires that a person intend to cancel a bid or offer 
before execution, the Commission does not interpret reckless trading, 
practices, or conduct as constituting a ``spoofing'' violation.\74\ 
Additionally, the Commission interprets that a spoofing violation will 
not occur when the person's intent when cancelling a bid or offer 
before execution was to cancel such bid or offer as part of a 
legitimate, good-faith attempt to consummate a trade. Thus, the 
Commission interprets the statute to mean that a legitimate, good-faith 
cancellation or modification of orders (e.g., partially filled orders 
or properly placed stop-loss orders) would not violate section CEA 
4c(a)(5)(C). However, the Commission does not interpret a partial fill 
as automatically exempt from being classified as ``spoofing'' and 
violating CEA section 4c(a)(5)(C).
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    \74\ Similar to violations under CEA section 4c(a)(5)(B), the 
Commission does not interpret CEA section 4c(a)(5)(C) as reaching 
accidental or negligent trading, practices, or conduct.
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    When distinguishing between legitimate trading (such as trading 
involving partial executions) and ``spoofing,'' the Commission intends 
to evaluate the market context, the person's pattern of trading 
activity (including fill characteristics), and other relevant facts and 
circumstances. For example, if a person's intent when placing a bid or 
offer was to cancel the entire bid or offer prior to execution and not 
attempt to consummate a legitimate trade, regardless of whether such 
bid or offer was subsequently partially filled, that conduct may 
violate CEA section 4c(a)(5)(C).
    The Commission interprets and intends to apply CEA section 
4c(a)(5)(C) as covering bid and offer activity on all products traded 
on all registered entities, including DCMs and SEFs. The Commission 
further interprets CEA section 4c(a)(5)(C) to include all bids and 
offers in pre-open periods or during other exchange-controlled trading 
halts. As noted earlier, the Commission does not interpret CEA section 
4c(a)(5)(C) as restricting ``spoofing'' violations to trading platforms 
and venues only having order book functionality. ``Spoofing'' may 
possibly occur on any trading platform or venue where a market 
participant has the ability to either (a) send executable bids and 
offers to market participants or (b) transact against resting orders.
    The Commission provides four non-exclusive examples of possible 
situations for when market participants are engaged in ``spoofing'' 
behavior,\75\ including: (i) Submitting or cancelling bids or offers to 
overload the quotation system of a registered entity, (ii) submitting 
or cancelling bids or offers to delay another person's execution of 
trades, (iii) submitting or cancelling multiple bids or offers to 
create an appearance of false market depth, and (iv) submitting or 
canceling bids or offers with intent to create artificial price 
movements upwards or downwards. The Commission also does not intend to 
apply the ``spoofing'' provision as covering market communications such 
as authorized pre-trade communications.
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    \75\ See 76 FR at 14947.
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    As with other intent-based violations, the Commission intends to 
distinguish between legitimate trading and ``spoofing'' by evaluating 
all of the facts and circumstances of each particular case, including a 
person's trading practices and patterns. The Commission does not 
interpret a CEA section 4c(a)(5)(C) violation as requiring a pattern of 
activity; the Commission interprets CEA section 4c(a)(5)(C) such that 
even a single instance of trading activity can violate CEA section 
4c(a)(5)(C), provided that the activity is conducted with the 
prohibited intent.

    Issued in Washington, DC, on May 20, 2013, by the Commission.
Christopher J. Kirkpatrick,
Deputy Secretary of the Commission.

[[Page 31897]]

Appendices to Antidisruptive Practices Authority--Commission Voting 
Summary; Statements of Commissioners; and List of Roundtable 
Participants and Commenters

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Sommers, 
Chilton, O'Malia, and Wetjen voted in the affirmative. No 
Commissioners voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the Interpretive Guidance and Policy Statement 
regarding disruptive practices on swap execution facilities and 
designated contract markets. As part of market reform, Congress 
expressly prohibited certain trading practices that were deemed 
disruptive of fair and equitable trading on CFTC-registered 
entities, such as swap execution facilities and designated contract 
markets.
    These provisions are important because it is a core mission of 
the CFTC to protect the markets against abusive and disruptive 
practices, particularly those that impede critical price discovery 
functions.
    The Interpretive Guidance and Policy Statement provides 
additional guidance to market participants regarding the scope of 
conduct and trading practices that would violate the law. For 
instance, the Commission interprets this provision, section 747 of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act, to 
apply to any trading, practices or conduct on registered SEFs or 
DCMs.
    The guidance addresses the comments the Commission received in 
response to the proposal, including a roundtable.

Appendix 3--Parties Submitting Comment Letters in Response To 
Disruptive Trading Practices Proposed Interpretive Order

Banking Firms Consolidated (``BF'')
Better Markets (``BM'')
BG Americas & Global LNG (``BGA'')
Chris Barnard
Coalition for Derivatives End Users (``Coalition'')
CME Group (``CME'')
Commodity Markets Council (``CMC'')
Futures Industry Association/Securities Industry and Financial 
Markets Association (``FIA'')
GFI Group, Inc. (``GFI'')
Hampton Technology Resources (``HTR'')
InterContinentalExchange (``ICE'')
International Swaps and Derivatives Association (``ISDA'')
Managed Funds Association (``MFA'')
MarketAxess
Minneapolis Grain Exchange (``MGE'')
Working Group of Commercial Energy Firms (``Working Group'')

[FR Doc. 2013-12365 Filed 5-24-13; 8:45 am]
BILLING CODE 6351-01-P