Thursday, July 7, 2011

US derivatives watchdog gets more firepower

This is a big deal.  Recklessness is an interesting word they choose to use. 

This article appeared via FT here:

"The main US derivatives regulator has approved rules boosting the agency’s legal firepower against market manipulation after winning only one case at trial in its 36-year history.
The rules, adopted over the objections of hedge funds and the futures industry, will allow the Commodity Futures Trading Commission lawyers to cite recklessness as a reason to sue traders for manipulation. Previous rules required proof that traders had distorted prices.

The commission’s five-person board unanimously passed the manipulation standard, making it the first of dozens of new derivatives regulations to be finalized since passage of the Dodd-Frank financial reforms almost one year ago. Snowed under by its workload and facing budget limitations, the agency will miss statutory deadlines for derivatives rules.The agency has also made it illegal to trade on privileged information obtained through fraud, deception or the breach of an executive’s duty. Until now, commodity markets had few constraints on insider trading.
“In the past, the CFTC has had the ability to prosecute manipulation, but to prevail it had to prove the specific intent of the accused to create an artificial price,” Gary Gensler, CFTC chairman, said. “This closes a significant gap as it will broaden the types of cases we can pursue and improve the chances of prevailing over wrongdoers.”

The new rules will apply not only to commodity futures – the CFTC’s traditional bailiwick – but the over-the-counter US swaps markets the agency now oversees after Dodd-Frank.
The new manipulation standard is modelled on a looser one long in place at the Securities and Exchange Commission, the main securities regulator. The CFTC has extracted large settlements from defendants, including a $303m fine against BP in 2007 over charges it manipulated propane markets, but won only one manipulation case at trial.
In May the CFTC charged oil trader Arcadia Petroleum and its affiliates with manipulating US crude futures, illegally reaping more than $50m. Arcadia denies the accusation.
Lawyers said the new rules give the CFTC power to rein in improper insider trading. Unlike in securities markets, futures and derivatives markets rules do not require corporate insiders to disclose material information before trading on it.

But David Meister, CFTC director of enforcement, said traders using ill-gotten non-public information to commit fraud and deceit in breach of their existing duties “will now be subject to a commission enforcement action”.

Gregory Mocek, a former CFTC director of enforcement now at Cadwalader, Wickersham & Taft, said the implications were huge.

“For the first time in history, the CFTC is taking the position that it can pursue insider trading against people other than exchange or government officials,” he said.

“According to today’s release, it appears that the CFTC will pursue insider trading cases in certain situations where large commodity producers use their market knowledge of supply and demand, trade off of that information, and fail to inform counterparties of the non-public information.”" 

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