Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

At its open meeting on May 16, 2013, the Commodity Futures Trading Commission will vote on the final interpretative rule for disruptive trading practices under Section 747 of the Dodd-Frank Act. That order should be of interest to CFTC compliance managers. But FERC (Federal Energy Regulatory Commission) compliance managers should also take note because FERC would surely find trading practices—disruptive under the Dodd-Frank Act—also disruptive (and manipulative) under the anti-manipulation provisions of the Natural Gas Act and the Federal Power Act.

Section 747 of the Dodd-Frank Act makes it unlawful under the Commodity Exchange Act (Section 4c(a)(5)) to engage in any trading, practice or conduct on or subject to the rules of a registered entity that (i) violates bids or offers, (ii) demonstrates intentional disregard for the orderly execution of transactions during the closing period or (iii) would be considered “spoofing” (bidding or offering with the intent to cancel the bid or offer before execution.)

On March 18, 2011, the CFTC took comments on its proposed interpretation of Section 747. In that proposal, the CFTC said a market participant would violate the “bids or offers provision” by buying a contract at a price that is higher than the lowest available offer price and/or selling a contract at a price that is lower than the highest available bid price.  On the “orderly execution” provision, the CFTC said it would look for reckless conduct during the closing period (the period in the contract or trade when the daily settlement price is determined under the rules of that trading facility) and apply current commodities and securities precedent in reviewing the appropriateness of that conduct.  On the spoofing provision, the CFTC said that spoofing also includes, but is not limited to, “(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 or (iii) submitting or cancelling multiple bids to create an appearance of false market depth.”

At its upcoming May 16 meeting, the CFTC will vote on the final interpretive rule. The CFTC’s decision should be of interest to CFTC compliance managers but also FERC compliance managers. While FERC does not specifically prohibit disruptive practices, its regulations do make it unlawful for any entity to “use or employ any device, scheme or artifice to defraud” or to “engage in any act, practice or course of business that operates as a fraud or deceit upon any entity” in FERC wholesale gas and electric markets. 18 C.F.R § 1c.2.  To the extent that a disruptive practice results in wholesale electric and natural gas prices that do not reflect the forces of supply and demand, FERC would find the disruptive practice manipulative.  Energy Transfer Partners. 120 FERC ¶ 61,086 at P 71 (2007).(“Market manipulation is harmful and inconsistent with free markets.  One of FERC’s most important responsibilities is to exercise regulatory oversight to assure that wholesale energy markets are free, open and fair, where supply and demand may freely meet at prices uninfluenced by manipulation.”) (emphasis added)

In a future Dodd-Frank blog post, we will be summarizing the final interpretative rule regarding disruptive practices.