Comment Text:
January 3, 2011
VIA Electronic Mail
Mr. David Stawick
Secretary of the Commission
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington, DC 20581
RE: Advanced Notice of Proposed Rulemaking On Disruptive Trading Practices
RIN No. 3038-AD4
Dear Mr. Stawick:
Commodity Markets Council (“CMC”), on behalf of its many members, welcomes the opportunity to submit the
following comments to the Commodity Futures Trading Commission (“CFTC” or “Commission”) regarding its
Advance Notice of Proposed Rulemaking (“ANPR”) with respect to Section 747 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (“Dodd-Frank”), Antidisruptive Trading Practices.
The new rules outlined in the Dodd-Frank Act are intended to protect fair and equitable trading; however, CMC is
concerned the statutory language is overly broad and if not implemented with precision could discourage market
participation. This fear was voiced by CMC and other industry groups at the CFTC roundtable on this topic and
we urge the Commission to strongly weigh it when drafting rules. There are three principles CMC would like to
see the CFTC follow in any future rulemaking:
1. The statutory language is vague and all implementing rules should provide precision and clarity in
order to facilitate legitimate trading activity.
2. Definitions of key terms need to be precisely crafted and the scope of application narrow.
3. The standard applied to “disruptive trade practices” should be intentional, deliberate or extreme
recklessness.
CMC is a trade association bringing together exchanges and their industry counterparts. The activities of our
members represent the complete spectrum of commercial users of all futures markets including energy and
agriculture. Specifically, our industry member firms are regular users of the Chicago Board of Trade, Chicago
Mercantile Exchange, ICE Futures US, Kansas City Board of Trade, Minneapolis Grain Exchange and the New
York Mercantile Exchange. CMC is uniquely positioned to provide the consensus views of commercial and end
users of derivatives. Our comments represent the collective view of CMC members.
The businesses of all our member firms depend upon the efficient and competitive functioning of the risk
management products traded on U.S. futures exchanges. Through the Commission’s diligent oversight efforts that
have fostered Exchange innovation and technology adoption, we have seen the commodity markets grow and
prosper. They have become deeper and more liquid, narrowing bid/ask spreads and improving hedging
effectiveness and price discovery. Meanwhile, liquidity, technology, clearing quality, price and customer service
have driven market selection. All of these developments serve the interests of the trade as well as the public.
Commodity Markets Council
January 3, 2011
Page 2 of 3
A. Vague Statutory Language
Section 747 of Dodd-Frank makes it unlawful for any person to engage in any trading practice or conduct 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 of the character of, or is commonly known as ‘spoofing’ (bidding or offering with the intent to
cancel the bid or offer before execution.”)
CMC believes this language is far too broad and will encompass within its expansive arms otherwise legitimate
trading practices and strategies. While the CMC shares Congress’ goals of greater market transparency and
preserved integrity, the vagueness of the language risks discouraging market participants from trading out of fear
their actions may later be determined illegal – with potentially severe consequences.
Additionally, the section grants the CFTC rulemaking authority to prohibit “… any other trading practice that is
disruptive of fair and equitable trading.” CMC encourages the Commission to narrowly interpret and clarify this
language. Arguably, it cedes legislative authority to the CFTC and raises serious constitutional issues regarding
separation of powers.
B. Definition and Clarify Needed
CMC wishes to add to the concerns we and other industry groups voiced at the Commission’s recent roundtable as
well as the rising chorus of industry participants who have decried the vagueness of the legislation’s language and
urges the CFTC to adopt regulations implementing Section 747 that provide clarity and precision in defining the
proscribed conduct. Absent clearly defined standards of conduct, legitimate trading practices will be chilled,
thereby affecting adversely the depth and liquidity of the futures and swaps markets. Congress could not have
intended such a result.
The statutory terms “violate bids and offers”, “orderly execution of transactions during the closing period” and
“spoofing” need clarity and precise definition. They can have multiple meanings from one context to the next. For
example, “violate bid and offers” has most frequently been associated with the open outcry environment. It
appears to have no application to the electronic trading world where matching algorithms preclude bids and offers
from being violated. CMC urges the Commission to draft rules clarifying the language and limiting its application
to open outcry venues and only intentional or extremely reckless actions to violate bids and offers are prohibited.
Similarly, CMC recommends the CFTC provide precise clarity on what is meant by orderly execution during the
“closing period” and “spoofing.” Market participants must be provided with specific standards to which to
conform their conduct. “Orderly execution”, “closing period” and “spoofing” without precise definition are
dangerously elastic terms.
C. Only Intentional Conduct Proscribed
With respect to the practices identified in (A) through (C) of Section 747, CMC believes it is imperative the
Commission also make clear that no violation occurs unless the person acts intentionally, deliberately or with
extreme recklessness. Extreme recklessness requires a showing either (1) that the alleged offender knew that the
conduct was prohibited or (2) that the conduct was so obviously wrong that the alleged offender must have known
it was prohibited. Any lesser standard may ensnare inadvertent actions within the ambit of proscribed conduct,
thereby chilling market participation and impairing liquidity.
Commodity Markets Council
January 3, 2011
Page 3 of 3
CMC urges the Commission, following extensive consultation with a broad spectrum of market participants, to
promulgate specific “rules of the road” within each of the statutory categories. Anything less poses a threat to
innocent traders and risks substantial harm to the markets. While the legislative goals are laudable, the means to
achieve them must be fair and clear for all market participants. We believe doing so will serve the interests of the
trade, lawmakers, regulators and the general public.
The CMC thanks the Commission for the opportunity to present its views on this most important subject. If you
have any questions or would like to discuss further, please do not hesitate to contact me via email at
[email protected] or via phone at (202) 842-0400 begin_of_the_skype_highlighting (202) 842-0400 end_of_the_skype_highlighting – ext. 101. Thank you in anticipation of
your attention to these comments.
Regards,
