Antidisruptive Practices Authority, 31890-31897 [2013-12365]
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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]
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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
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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 https://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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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.
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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
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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.
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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.
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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 https://
comments.cftc.gov/PublicComments/CommentList.
aspx?id=893.
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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
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30 See,
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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.
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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.’’
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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.’’).
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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.
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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.’’).
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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.
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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’
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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.’’).
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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.
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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.
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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
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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
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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
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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.
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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
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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: https://
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:
https://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: https://
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 https://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]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
RIN 3038-AD96
Antidisruptive Practices Authority
AGENCY: Commodity Futures Trading Commission.
ACTION: Interpretive guidance and policy statement.
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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 https://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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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
https://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.
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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\
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\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\
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\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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.'').
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\75\ See 76 FR at 14947.
---------------------------------------------------------------------------
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
