Clifford Chance

Cross-Border Litigation Series: CFTC Requests Comment on its Proposed Interpretations of Statutory Disruptive Practices

29 March 2011

As part of last year’s financial reform legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), Congress amended the Commodity Exchange Act (“CEA”) to prohibit three trading practices it deemed “disruptive to fair and equitable trading” on registered futures and swaps markets. These new prohibitions will become effective on July 16, 2011. Specifically, the Dodd-Frank Act amends Section 4c(a) by adding subsection (5), which provides that:

“It shall be 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).”

New Section 4c(a)(6) empowers the Commodity Futures Trading Commission (“CFTC”) to promulgate whatever rules it deems reasonably necessary to prohibit the three statutory disruptive trading practices above, as well as any other trading practice that is “disruptive of fair and equitable trading.”

Late last year, the CFTC requested public comment on all aspects of 4c(a)(5) and hosted a roundtable panel to solicit market guidance before exercising its rulemaking power. The commenters and panelists sought clarification on several common issues: (i) the scope of prohibited conduct; (ii) statutory definitions; and (iii) the requisite scienter for each disruptive trading practice.

On March 18, 2011, the CFTC published a Proposed Interpretive Order (“the Order”) to clarify 4c(a)(5)’s reach and application. The Order, originally issued on February 24, 2011, seeks further public comment on the CFTC’s proposed interpretations, in anticipation of eventual rulemaking efforts. Comments are due by May 17, 2011 (see below for submission instructions).

Download PDF