Font Size: AAA // Print // Bookmark

2013-12365

  • Federal Register, Volume 78 Issue 102 (Tuesday, May 28, 2013)[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 http://www.cftc.gov./

    LawRegulation/OTCDERIVATIVES/index.htm.

    \2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may

    be cited as the ``Wall Street Transparency and Accountability Act of

    2010.''

    \3\ 7 U.S.C. 1 et seq.

    ---------------------------------------------------------------------------

    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

    http://comments.cftc.gov/PublicComments/CommentList.aspx?id=893.

    \29\ 76 FR 1214 (Jan. 7, 2011).

    ---------------------------------------------------------------------------

    III. Comments on the Proposed Order

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

    1. Comments

    In response to the Proposed Order, several commenters requested

    additional guidance and suggested that additional clarity was needed

    regarding how the Commission would interpret and apply new CEA section

    4c(a)(5).\30\ Some commenters supported the statutory requirement in

    new CEA section 4c(a)(5) to prohibit the enumerated trading practices

    and prevent the disruption of fair and equitable trading.\31\ Other

    commenters noted that the Commission should recognize the complementary

    role of the exchanges and continue relying on the exchanges' self-

    regulatory organization (``SRO'') authority to identify and pursue

    trading practices that are manipulative or detrimental to the

    exchange's markets.\32\ Commenters also requested that CEA section

    4c(a)(5) violations be limited to those trading platforms on DCMs or

    SEFs that have order book functionality.\33\ Lastly, some commenters

    requested that the Commission incorporate a manipulative intent

    requirement into its new antidisruptive practices authority to ensure

    that the prohibitions in CEA section 4c(a)(5) do not capture legitimate

    trading practices that may be indistinguishable from the proposed

    prohibited conduct.\34\

    ---------------------------------------------------------------------------

    \30\ See, e.g., FIA at 2 (``The Proposed Order does not go far

    enough in offering guidance to market participants.''); ICE at 2

    (``Additional clarity is required with respect to the Commission's

    interpretation and guidance regarding paragraphs (A) through (C) of

    Section 747.'').

    \31\ See, e.g., ISDA at 2 (``ISDA supports the Commission's

    effort to facilitate fair and equitable trading on registered

    entities by issuing guidance as to the parameters of the three

    statutory disruptive practices found in Subsection 5.''); ICE at 2

    (``ICE continues to support the Commission's efforts to promote open

    and competitive markets while improving the ability to deter

    improper trading practices that are disruptive to legitimate trading

    and orderly markets.''); Barnard at 2 (``I welcome and support your

    proposed interpretive order. It brings clarity to the antidisruptive

    practices authority, and strikes the right balance between rules-

    and principles-based regulation.'').

    \32\ See, e.g., ICE at 5 (``ICE respectfully suggests that the

    Commission continue to rely on exchange SRO authority to identify

    and pursue trading practices that are determined to be manipulative

    or detrimental to the exchange's markets, including practices that

    are the character of spoofing.''); FIA at 7 (``The Associations

    believe that any rulemaking under 747 must reinforce the distinct

    yet complementary roles of the Commission and the exchanges.''); and

    CMC at 2 (``SROs and the Commission historically have served

    distinct but largely complementary roles.'').

    \33\ See, e.g., ISDA at 2 (``Subsection 5, though stated to

    apply to all ``registered entities''--that is . . . swap execution

    facilities (`SEFs') and designated contract markets (`DCMs')--should

    be clearly limited at the outset only to those order-book trading

    facilities within the Commission's proposed regulation, 17 CFR

    37.9(a)(1)(i)(C), for the definition of `order book.''').

    \34\ See, e.g., FIA at 5 (``Unfortunately, the antidisruptive

    practices authority captures many legitimate trading practices

    which, without a manipulative intent requirement, are objectively

    indistinguishable from the proposed prohibited conduct.'').

    ---------------------------------------------------------------------------

    2. Commission Guidance

    The Commission recognizes commenters' requests for additional

    guidance on CEA section 4c(a)(5) and is issuing this interpretive

    statement to clarify how the Commission interprets and intends to apply

    the three statutory provisions of CEA section 4c(a)(5). With respect to

    the role of exchanges in ensuring fair and equitable markets, the

    Commission agrees with commenters that exchanges serve an important

    role in preventing the disruptive practices prohibited in CEA section

    4c(a)(5) and ensuring fair and equitable trading in CFTC-regulated

    markets.

    The Commission declines the request by commenters to interpret CEA

    section 4c(a)(5) as applying to only those trading platforms or venues

    that have order book functionality. In accordance with the statutory

    language of CEA section 4c(a)(5), the Commission interprets CEA section

    4c(a)(5) to apply to any trading, practices or conduct on a registered

    entity \35\ such as a DCM or SEF.\36\ Depending on the particular facts

    and circumstances, CEA section 4c(a)(5) violations may also occur on

    trading platforms or venues that are distinct from order books, even if

    such platforms or venues may have similar functionality.

    ---------------------------------------------------------------------------

    \35\ Section 1a(40) of the CEA defines ``registered entity'' as

    ``(A) a board of trade designated as a contract market under section

    5; (B) a derivatives clearing organization registered under section

    5b; (C) a board of trade designated as a contract market under

    section 5f; (D) a swap execution facility registered under section

    5h; (E) a swap data repository registered under section 21; and (F)

    with respect to a contract that the Commission determines is a

    significant price discovery contract, any electronic trading

    facility on which the contract is executed or traded.'' 7 U.S.C.

    1a(40).

    \36\ The Commission confirms that a trade does not become

    subject to CEA section 4c(a)(5) solely because it is reported on a

    swap data repository, even though a swap data repository is a

    registered entity.

    ---------------------------------------------------------------------------

    The Commission also declines commenters' requests to read a

    manipulative intent requirement into the CEA section 4c(a)(5)

    prohibitions. The Commission interprets the prohibitions in CEA section

    4c(a)(5) provisions to be distinct statutory provisions from the anti-

    manipulation provisions in section 753 of the Dodd-Frank Act; the

    Commission does not interpret the CEA section 4c(a)(5) violations as

    including any manipulative intent requirement. Including such a

    manipulative intent requirement is contrary to the statutory language.

    The Commission does not intend to apply CEA section 4c(a)(5) to

    either block trades or exchanges for related positions (``EFRPs'') that

    are transacted in accordance with Commission regulation 1.38.

    In addition to these general comments on CEA section 4c(a)(5),

    commenters provided comments on the three new statutory provisions,

    which are discussed in the following sections.

    B. Violating Bids and Offers

    1. Comments to the Proposed Interpretive Order

    Commenters requested that the Commission modify its interpretation

    that a CEA section 4c(a)(5)(A) violation is a per se offense and

    incorporate a requirement that a person must intend to disrupt fair and

    equitable trading.\37\ Commenters noted that the Commission's

    interpretation that the violation of bids or offers is a per se offense

    conflicts with exchange rules.\38\ Other commenters requested that the

    Commission adopt either a ``specific'' intent or ``extreme

    recklessness'' standard for CEA section 4c(a)(5)(A).\39\ Commenters to

    the Proposed Order also requested guidance on how CEA section

    4c(a)(5)(A) would apply to the trading of swaps on SEFs.\40\ In

    particular, commenters stated that end-users should have discretion

    when choosing a

    [[Page 31893]]

    counterparty and also requested clarification on whether market

    participants may consider additional non-price factors when trading on

    a SEF.\41\ Commenters also requested guidance on whether CEA section

    4c(a)(5)(A)'s prohibition applies to bids and offers on non-cleared

    swaps.\42\ Commenters also stated that swaps with different clearing

    destinations should not be deemed comparable for the purposes of CEA

    section 4c(a)(5)(A).\43\

    ---------------------------------------------------------------------------

    \37\ See, e.g., Working Group at 3 (``The Working Group strongly

    recommends that the Commission interpret new CEA Section 4c(a)(5)(A)

    as requiring an intent to disrupt the market.'').

    \38\ See, e.g., CME at 4 (``Contrary to the Commission's

    assertion, this broad construction is not consistent with exchange

    rules, which only proscribe market participants' intentional

    violation of bids and offers.'').

    \39\ See, e.g., CMC at 3 (``The Commission should clarify that

    only intentional or extremely reckless action to violate transparent

    bids or offers contravenes this prohibition.'').

    \40\ See, e.g., FIA at 4 (``The Associations recommend that the

    Commission provide further clarification. One example is the

    application to swap execution facilities (`SEFs')''); BF at 14 (``We

    further recommend that the CFTC confirm that transactions executed

    other than on a SEF's central order book will not be deemed to

    ``violate bids or offers'' for purposes of CEA Section 4c(a)(5)(A),

    regardless of their price level.''

    \41\ See, e.g., Coalition at 4 (``An interpretation that

    precludes end-users from exercising discretion in its counterparty

    selection could force end-users to make sub-optimal decisions when

    determining the most suitable swap counterparty on a given

    transaction.'').

    \42\ See, e.g., MarketAxess at 3 (``The final order should make

    clear that the CFTC's interpretation of new CEA Sec. 4c(a)(5)(A)

    does not apply to uncleared swaps.'').

    \43\ See, e.g., Consolidated Banks at 14 (``Nor should swaps

    with different bilateral counterparties or clearing destinations be

    deemed comparable to each other for such purposes.'').

    ---------------------------------------------------------------------------

    Commenters further asked whether CEA section 4c(a)(5)(A) requires

    market participants to transact at the best price across a particular

    SEF's different trading systems or platforms, such as the SEF's order

    book and request-for-quote system. Commenters also asked for

    clarification on how CEA section 4c(a)(5)(A) applies to request-for-

    quote systems on SEFs and whether request-for-quotes (``RFQs'') must

    interact with the SEF's order book or centralized electronic

    screen.\44\ One commenter stated that the Proposed Order would

    effectively impose a ``trade through'' requirement on market

    participants executing swap transactions across a particular SEF's

    trading systems or platforms.\45\ Commenters further requested that the

    Commission confirm that the final order would not create a best

    execution requirement across multiple SEFs.\46\

    ---------------------------------------------------------------------------

    \44\ See, e.g., MarketAxess at 3 (``We ask that the Commission

    confirm in its final Interpretive Order that a person would not

    violate bids or offers by buying or selling a contract on a SEF's

    Request for Quote System when that contract is available to buy or

    sell at a `better' price through another permitted execution method

    offered by that SEF such as an Order Book or a centralized

    electronic screen.'').

    \45\ See, e.g., GFI at 2 (``GFI believes that the Proposed

    Interpretation would effectively impose a trade-through rule on SEFs

    that utilize trading methods that are not strictly automated, and

    that such a requirement is neither required by the Dodd-Frank Act

    nor furthers the purposes of the CEA.'').

    \46\ See, e.g., Working Group at 3 (``The Working Group supports

    the Commission's statement `section 4c(a)(5)(A) does not create any

    sort of best execution standard across multiple trading platforms

    and markets; rather, a person's obligation to not violate bids or

    offers is confined to the specific trading venue which he or she is

    utilizing at a particular time' and strongly recommends that such

    interpretation of new CEA Section 4c(a)(5)(A) be adopted in any

    final interpretive order.'').

    ---------------------------------------------------------------------------

    A commenter also agreed with the statement in the Proposed Order

    that CEA section 4c(a)(5)(A) should not apply where an individual is

    ``buying the board'' and executing a sequence of trades to buy all

    available bids or sell to all available offers on the order book in

    accordance with the rules of the facility executing the trades.\47\

    ---------------------------------------------------------------------------

    \47\ See CME at 3 (``We also concur with the Commission's

    determination that this section does not apply where an individual

    is `buying the board.' '').

    ---------------------------------------------------------------------------

    2. Commission Guidance

    The Commission declines requests to interpret CEA section

    4c(a)(5)(A) as applying only where a person intends to disrupt fair and

    equitable trading. The Commission interprets CEA section 4c(a)(5)(A) as

    a per se offense. Congress did not include an intent requirement in CEA

    section 4c(a)(5)(A) as it did in both CEA sections 4c(a)(5)(B) and

    4c(a)(5)(C). Therefore, the Commission does not interpret CEA section

    4c(a)(5)(A) as requiring the Commission to show that a person acted

    with scienter in violating bids and offers (e.g., that a person acted

    with either the intent to disrupt fair and equitable trading or with

    the intent to violate bids and offers). Unlike certain exchange rules

    that prohibit the intentional violation of bids and offers, the

    statutory language of CEA section 4c(a)(5)(A) does not contain a

    similar intent requirement.\48\ While the Commission's determination of

    whether to bring an enforcement action depends on facts and

    circumstances, the Commission does not, for example, intend to exercise

    its discretion to bring an enforcement action against an individual

    who, purely by accident, makes a one-off trade in violation of CEA

    section 4c(a)(5)(A). Whether such an accidental violation gives rise to

    some other violation of the CEA or Commission regulations depends,

    again, on the facts and circumstances of the particular situation.

    ---------------------------------------------------------------------------

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

    Minneapolis Grain Exchange Rule 731.00.

    ---------------------------------------------------------------------------

    As a general matter, the Commission interprets CEA section

    4c(a)(5)(A) as operating in any trading environment where a person is

    not utilizing trading algorithms that automatically match the best

    price for bids and offers. With respect to SEFs, the Commission

    interprets CEA section 4c(a)(5)(A) as being applicable only when a

    person is using a SEF's ``order book,'' and not when a person uses a

    SEF's other execution methods (such as the RFQ system in conjunction

    with the order book). The Commission recognizes that market

    participants may consider a number of factors in addition to price when

    trading or executing less liquid swaps, which are more likely to be

    traded on a SEF's RFQ system or a different execution method. However,

    as SEFs and the swaps markets evolve, the Commission may revisit these

    issues in the future. The Commission agrees with commenters that

    parties trading non-cleared swaps may take into consideration factors

    other than price, such as counterparty risk, when determining how to

    best execute their trades.\49\ Therefore, the Commission interprets CEA

    section 4c(a)(5)(A) as not applying to non-cleared swap transactions,

    even if they are transacted on or through a registered entity. In such

    swap transactions, the credit considerations of the counterparties are

    important components of choosing which bid or offer to accept.

    ---------------------------------------------------------------------------

    \49\ See, e.g., Coalition at 3 (``To understand the impact of

    applying section 4c(a)(5)(A) to non-cleared transactions executed

    off-facility, we have to understand how corporate treasurers have a

    fiduciary duty to optimize numerous factors--not solely the

    transaction price of a particular derivative--in achieving `best

    execution' '').

    ---------------------------------------------------------------------------

    The Commission also agrees with commenters that parties may take

    into account clearing considerations, such as the use of a particular

    clearing house, when trading cleared swaps on certain platforms on a

    SEF or on a DCM.\50\ The Commission interprets CEA section

    4c(a)(5)(A)'s prohibition as not applying to bids or offers on swaps

    that would be cleared at different clearing houses because each

    clearing house may have different cost, risk, and material clearing

    features.\51\ For example, the choice of a clearing house may affect a

    party's net and gross outstanding exposures, which may result in

    differing capital and cost of financing effects. Additionally, the

    pricing of swaps may also incorporate other potential considerations

    such as the available credit capacity at the clearing member or

    clearing house, margining arrangements, or post-trade market risk.

    ---------------------------------------------------------------------------

    \50\ As stated previously, the Commission interprets new CEA

    section 4c(a)(5)(A) as applying to any cleared swap traded on a

    SEF's order book, regardless of whether such cleared swap is subject

    to the mandatory trade execution requirement of new CEA section

    2(h).

    \51\ See, e.g., GFI at 2 (``Because market participants that

    execute transactions on a SEF may clear their transactions at

    different clearinghouses, they must have the flexibility to take

    factors other than price into account when executing transactions on

    a SEF.'').

    ---------------------------------------------------------------------------

    Therefore, the Commission interprets CEA section 4(c)(a)(5)(A) as

    prohibiting a person from buying a contract on a registered entity at a

    price that is higher than the lowest available price offered for such

    contract or selling a contract on a registered entity at a price that

    is lower than the highest available price bid for such contract subject

    to the situations described above. Such

    [[Page 31894]]

    conduct, regardless of intent, disrupts fair and equitable trading by

    damaging the price discovery function of CFTC-regulated markets. By

    adopting a policy that market participants cannot execute trades at

    prices that do not accurately reflect the best price for such

    contracts, this interpretive statement furthers the CEA's purpose of

    ensuring the integrity of the price discovery process by helping ensure

    that the prices disseminated to market users and the public reflect

    bona fide prices that accurately reflect the normal forces of supply

    and demand.

    The Commission further recognizes that at any particular time the

    best price in one trading environment such as a particular SEF may

    differ from the best price in a different trading environment such as a

    second, distinct SEF. Accordingly, the Commission does not interpret

    CEA section 4c(a)(5)(A) as creating any sort of best execution standard

    across multiple registered entities, including SEFs or DCMs; rather,

    the Commission interprets a person's obligation to not violate bids or

    offers as applying only to the specific registered entity being

    utilized at a particular time.\52\

    ---------------------------------------------------------------------------

    \52\ A person's obligation to not violate bids or offers is

    confined to the particular SEF or DCM he is utilizing at a

    particular time and does not extend across multiple SEFs or DCMs or

    between different trading systems or platforms within a particular

    SEF or DCM, such as between a pit and any electronic trading

    platform within a DCM or a SEF's ``order book'' and RFQ system in

    conjunction with the order book. However, as the swaps and SEF

    markets evolve, the Commission may revisit these issues in other

    Commission regulations. For example, the Commission may consider

    whether a person's obligation to not violate bids or offers when

    trading swaps should extend across multiple SEFs or DCMs or across a

    particular SEF's different trading systems or platforms, including

    whether the CEA section 4c(a)(5)(A) prohibition should apply to the

    scenario where market participants can access multiple SEFs through

    one trading platform.

    ---------------------------------------------------------------------------

    The Commission does not interpret CEA section 4c(a)(5)(A) as

    applying where an individual is executing a sequence of trades to buy

    all available offers or sell to all available bids on an order book in

    accordance with the rules of the facility on which the trades were

    executed. Similar to the treatment of block trades and EFRPs described

    above, the Commission expects that ``buying the board'' transactions,

    absent other facts and circumstances, would not violate CEA section

    4c(a)(5) or disrupt fair and equitable trading.

    C. Disregard for the Orderly Execution of Transactions During the

    Closing Period

    1. Comments to the Proposed Interpretive Order

    Commenters supported the Commission's proposed guidance that

    accidental or negligent conduct does not constitute a violation of new

    CEA section 4c(a)(5)(B).\53\ With respect to the scienter required for

    a CEA section 4c(a)(5)(B) violation, commenters requested that the

    Commission require, at a minimum, a scienter of ``extreme

    recklessness.'' \54\ Commenters also stated that manipulative intent

    should be required to violate CEA section 4(c)(a)(5)(B) and that these

    prohibitions should be limited to manipulative conduct such as

    ``banging'' or ``marking the close.'' \55\

    ---------------------------------------------------------------------------

    \53\ See, e.g., CME at 4 (``We commend the Commission for

    clarifying that, consistent with the plain language of Section 747,

    accidental or negligent conduct does not constitute a violation of

    subsection (B).'').

    \54\ See id. (``We believe that the Commission should provide in

    its final order that a violation of subsection (B) requires a

    showing of scienter--that is, that the person acted knowingly,

    intentionally, or with extreme recklessness to commit the prohibited

    conduct.'').

    \55\ See, e.g., FIA at 5 (``The Commission should clarify that

    traditionally accepted types of market manipulation, such as

    `banging the close,' `marking the close' and pricing window

    manipulation fall under Section 4c(a)(5)(B). . . . Additionally, the

    Commission should clarify that manipulative intent is required to

    violate Section 4c(a)(5)(B)'').

    ---------------------------------------------------------------------------

    Commenters requested that the Commission provide additional clarity

    regarding the meaning of the term ``closing period'' as used in CEA

    section 4c(a)(5)(B).\56\ Commenters expressed the view that, unlike

    futures, certain swaps, such as physical products that are priced using

    indices, do not have defined closing periods.\57\ Some commenters

    disagreed with the Commission's view that the prohibition on disorderly

    execution of transactions should extend to conduct occurring outside

    the closing period.\58\

    ---------------------------------------------------------------------------

    \56\ See, e.g., BGA at 3 (``BGA is concerned that the Commission

    has not provided sufficient clarity around the terms `orderly

    execution,' `disruptive conduct,' or `closing period.' ''); CME at 5

    (``We understand that the Commission cannot precisely define the

    parameters of `orderly execution' and whether certain executions

    during the closing period are `orderly' must necessarily be inferred

    from the totality of the facts and circumstances. Indeed, we noted

    in our comment letter in response to the ANPR that `orderly

    execution' can be evaluated only in the context of the specific

    instrument, market conditions, and participant circumstances at the

    time in question.'').

    \57\ See id. (``It appears that the Commission is changing the

    definition of `closing period' relating to physical products that

    are pricing using indices or benchmarks. These products do not have

    defined closing periods; therefore, it is inappropriate to apply a

    `closing period' concept to them.'').

    \58\ See, e.g., CME at 6 (``It is unclear how trading practices

    or conduct outside of the `closing period' would demonstrate

    intentional or reckless disregard for the orderly execution of

    transactions during the closing period.'').

    ---------------------------------------------------------------------------

    Commenters also requested that the Commission further clarify the

    term ``orderly execution'' as set forth in section CEA section

    4c(a)(5)(B).\59\ Commenters stated that the Commission should not

    engage in post hoc evaluations as to what types of trading, conduct, or

    practices violate CEA section 4c(a)(5)(B).\60\ Commenters also claimed

    that having the Commission rely on concepts of orderliness as developed

    in securities law precedent was problematic because of the significant

    differences between the securities and CFTC-regulated markets.\61\

    Commenters further stated that requiring market participants to assess

    market conditions before trading conflicts with the Commission's

    assertion that CEA section 4c(a)(5)(B) will not capture legitimate

    trading behavior.\62\ Commenters also noted that in today's highly

    automated trading environments, it is impractical for market

    participants to assess market conditions prior to the entry of each

    order.\63\

    ---------------------------------------------------------------------------

    \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.'').

    ---------------------------------------------------------------------------

    [[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.

    ---------------------------------------------------------------------------

    \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\

    ---------------------------------------------------------------------------

    \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

    Last Updated: May 28, 2013



See Also:

OpenGov Logo

CFTC's Commitment to Open Government

Gavel and Book

Follow the Status of Enforcement Actions