[Federal Register Volume 75, Number 211 (Tuesday, November 2, 2010)]
[Proposed Rules]
[Pages 67301-67303]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-27547]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
RIN Number 3038-AD26
Antidisruptive Practices Authority Contained in the Dodd-Frank
Wall Street Reform and Consumer Protection Act
AGENCY: Commodity Futures Trading Commission.
ACTION: Advance notice of proposed rulemaking; request for comments.
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SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act
(the ``Dodd-Frank Act'') amends section 4c(a) of the Commodity Exchange
Act (``CEA'') in section 747 to expressly prohibit certain trading
practices deemed disruptive of fair and equitable trading. The
Commodity Futures Trading Commission (``Commission'') is issuing this
advance notice of proposed rulemaking and request for public comment to
assist the Commission in promulgating such rules and regulations to
meet the requirements of section 747.
DATES: Comments must be in writing and received by January 3, 2011.
ADDRESSES: You may submit comments, identified by RIN number AD26, by
any of the following methods:
Agency Web site, via its Comments Online process: Comments
may be submitted to: http://comments.cftc.gov. Follow the instructions
for submitting comments on the Web site.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that is exempt from disclosure under the Freedom of
Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the established procedures in
CFTC Regulation 145.9.\1\
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\1\ 17 CFR 145.9.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT: Robert Pease, Counsel to the Director
of Enforcement, 202-418-5863, [email protected], or Mark D. Higgins,
Counsel to the Director of Enforcement, 202-418-5864,
[email protected], Division of Enforcement, Commodity Futures Trading
Commission, Three Lafayette Centre, 1151 21st Street, NW., Washington,
DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\2\ Title VII
of the Dodd-Frank Act \3\ amended the Commodity Exchange Act (``CEA'')
\4\ 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, among other things: (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. Section 747 of the Dodd-Frank Act amends
section 4c(a) of the CEA to add a new section entitled ``Disruptive
Practices.''
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\2\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law No. 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.
\3\ Pursuant to Section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\4\ 7 U.S.C. 1 et seq. (2006).
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II. Solicitation for Comments About Disruptive Practices Pursuant to
Dodd-Frank Act Section 747
In section 747 of the Dodd-Frank Act, Congress amended the CEA to
expressly prohibit certain trading practices that it determined were
disruptive of fair and equitable trading. Dodd-Frank section 747 amends
section 4c(a) of the CEA to make 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,
[[Page 67302]]
``spoofing'' (bidding or offering with the intent to cancel the bid or
offer before execution).
Dodd-Frank section 747 also amends section 4c(a) by granting the
Commission authority to promulgate such ``rules and regulations as, in
the judgment of the Commission, are reasonably necessary to prohibit
the trading practices'' enumerated in section 747 ``and any other
trading practice that is disruptive of fair and equitable trading.''
The prohibition on the disruptive practices specified in new section
4c(a) will become effective 360 days after the enactment of the Dodd-
Frank Act.
The Commission invites comment on all aspects of Dodd-Frank Act
section 747. In particular, commenters are encouraged to address the
following questions:
1. Should the Commission provide additional guidance as to the
nature of the conduct that is prohibited by the specifically
enumerated practices in paragraphs (A-C)?
2. With respect to the practice enumerated in paragraph (A)--
violating bids and offers--how should the provision be applied in
the context of electronic trading platforms with pre-determined
order-matching algorithms that preclude a trader from executing an
order against a quote other than the best one available? In
particular, should the provision apply to ``buying the board'' in an
illiquid market? \5\
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\5\ Specifically, in a sufficiently illiquid market, a trader
might enter an order for a large quantity at a price that is so far
beyond the best available resting quote that the order executes
against all resting quotes. In doing so, the trader would establish
a new artificial best bid or offer that does not reflect market
forces. See In re Henner, 30 Agric. Dec. 1151, 1155 (1971)
(Defendant ``bought the board''--accepted all outstanding offers--
and then bid for a single contract well in excess of the previously
prevailing price. He was sanctioned for manipulating the price of
egg futures; the fact that he paid more than necessary for shell egg
futures was the basis for finding an artificial price).
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3. How should the Commission distinguish between orderly and
disorderly trading during the closing period as articulated in
paragraph (B)? What factors should a factfinder consider in this
inquiry?
4. How should ``orderly execution'' be defined? How should the
closing period be defined? Should the definition of closing period
include:
a. Daily settlement periods?
b. Some period prior to contract expiration?
c. Trading periods used to establish indices or pricing
references?
5. Should the Commission recognize that a trading practice or
conduct outside of the closing period is actionable so long as it
``demonstrates intentional or reckless disregard for the execution
of transactions during the closing period?''
6. Should (B) extend to order activity as well as consummated
transactions?
7. Should executing brokers have an obligation to ensure that
customer trades are not disruptive trade practices? If so, in what
circumstances? What pre-trade risk checks should executing brokers
have in place to ensure customers using their automated trading
systems, execution systems or access to their trading platforms do
not engage in disruptive trade practices?
8. How should the Commission distinguish ``spoofing,'' as
articulated in paragraph (C), from legitimate trading activity where
an individual enters an order larger than necessary with the
intention to cancel part of the order to ensure that his or her
order is filled?
9. Should the Commission separately specify and prohibit the
following practices as distinct from ``spoofing'' as articulated in
paragraph (C)? Or should these practices be considered a form of
``spoofing'' that is prohibited by paragraph (C)?
a. Submitting or cancelling bids or offers to overload the
quotation system of a registered entity, or delay another person's
execution of trades;
b. Submitting or cancelling multiple bids or offers to cause a
material price movement;
c. Submitting or cancelling multiple bids or offers to create an
appearance of market depth that is false.
10. Does partial fill of an order or series of orders
necessarily exempt that activity from being defined as ``spoofing''?
11. Are there ways to more clearly distinguish the practice of
spoofing from the submission, modification, and cancelation of
orders that may occur in the normal course of business?
12. Should the Commission specify an additional disruptive
trading practice concerning the disorderly execution of particularly
large orders during periods other than the closing period? If so, at
what size should this provision become effective and how should the
Commission distinguish between orderly and disorderly trading?
13. Should the Commission specify and prohibit other additional
practices as disruptive of fair and equitable trading?
14. Should the Commission articulate specific duties of
supervision relating to the prohibited trading practices articulated
in paragraphs (A-C) (as well as any other trading practice that the
Commission determines to be disruptive of fair and equitable
trading) to supplement the general duty to supervise contained in
Commission Regulation 166.3? To which entities should these duties
of supervision apply?
15. Should the Commission consider promulgating rules to
regulate the use of algorithmic or automated trading systems to
prevent disruptive trading practices? If so, what kinds of rules
should the Commission consider?
16. Should the Commission consider promulgating rules to
regulate the design of algorithmic or automated trading systems to
prevent disruptive trading practices? If so, what kinds of rules
should the Commission consider?
17. Should the Commission consider promulgating rules to
regulate the supervision and monitoring of algorithmic or automated
trading systems to prevent disruptive trading practices? If so, what
kinds of rules should the Commission consider?
18. Should the Commission promulgate additional rules
specifically applicable to the use of algorithmic trading
methodologies and programs that are reasonably necessary to prevent
algorithmic trading systems from disrupting fair and equitable
markets? If so, what kinds of rules should the Commission consider?
19. Should algorithmic traders be held accountable if they
disrupt fair and equitable trading? If so, how?
When commenting on the above questions, please comment generally
and specifically, and please include empirical data and other
information in support of such comments, where appropriate and
available, regarding any of the comments provided and please also take
into account the statutory text of Dodd-Frank Act section 747,
reprinted herein as follows:
Sec. 747. ANTIDISRUPTIVE PRACTICES AUTHORITY
Section 4c(a) of the Commodity Exchange Act (7 U.S.C. 6c(a)) (as
amended by section 746) is amended by adding at the end the
following:
``(5) Disruptive practices.--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).
``(6) Rulemaking authority.--The Commission may make and
promulgate such rules and regulations as, in the judgment of the
Commission, are reasonably necessary to prohibit the trading
practices described in paragraph (5) and any other trading practice
that is disruptive of fair and equitable trading.
``(7) Use of swaps to defraud.--It shall be unlawful for any
person to enter into a swap knowing, or acting in reckless disregard
of the fact, that its counterparty will use the swap as part of a
device, scheme, or artifice to defraud any third party.''
Dated: October 26, 2010.
By the Commodity Futures Trading Commission.
David A. Stawick,
Secretary of the Commission.
Statement of Chairman Gary Gensler Anti-Disruptive Practices Authority
Contained in Title VII of Dodd-Frank Wall Street Reform and Consumer
Protection Act, October 26, 2010
I support the proposed Advanced Notice of Proposed Rulemaking
concerning disruptive trading practices. Congress expressly prohibited
three trading practices that it deemed were disruptive of fair and
equitable trading. In addition, Congress granted the Commission
authority to prohibit other
[[Page 67303]]
trading practices that are disruptive of fair and equitable trading.
Today's advanced notice of proposed rulemaking asks 18 questions, the
answers to which will inform moving forward with a proposed rule on
this issue. Commission staff also will lead a roundtable on December 2
on disruptive trading practices. I am particularly interested in
hearing from the public on algorithmic trading. In addition to the
public comments and the December 2 roundtable, we will benefit from the
input of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory
Issues.
[FR Doc. 2010-27547 Filed 11-1-10; 8:45 am]
BILLING CODE 6351-01-P