Senate Approves Amendment to Financial Reform Bill to Combat Manipulation in Derivatives Markets
On May 6, 2010, the Senate approved an amendment to the financial reform bill, S3217, authored by Senator Maria Cantwell (D-WA) designed to strengthen enforcement powers over commodity and derivatives trading. The amendment authorizes the CFTC to go after manipulation and attempted manipulation in the swaps and commodities markets. It makes it unlawful to manipulate or attempt to manipulate the price of a swap or commodity using any manipulative device or contrivance. According to Sen. Cantwell, current law makes it very difficult for the CFTC to prove that someone had specific intent to manipulate, and that is a very difficult standard to prove. Most individuals don’t write an e-mail, for example, saying they intend to manipulated prices, but that is currently what the law requires the CFTC to prove, specific intent to manipulate. As a result of this, the federal courts have recognized that with the CFTC’s weaker anti-manipulation standard, market manipulation cases generally have not fared so well. In fact, the law is so weak that in the CFTC’s 35-year history, it has only had one successfully prosecuted case of market manipulation. Cong, Record, May 6, 2010, S3348.
The language in the Cantwell Amendment is patterned after the law that the SEC uses to go after fraud and manipulation; that there can be no manipulative devices or contrivances. It is a strong and clear legal standard that allows regulators to successfully go after reckless and manipulative behavior. The amendment tracks the Securities Act in part because federal case law is clear that when the Congress uses language identical to that used in another statute, Congress intended for the courts and the Commission to interpret the new authority in a similar manner, and Congress has made sure that its intention is clear.
In the 75 years since the enactment of the Securities and Exchange Act, a substantial body of case law has developed around the words manipulative or deceptive devices or contrivances. Speaking in support of the Cantwell Amendment, Senator Blanche Lincoln, Chair of the Agriculture Committee, noted that market manipulation is an ever present danger in derivatives trading. Derivatives are leveraged transactions, she said, and there are numerous opportunities for traders to abuse their positions in order to game the market to their advantage.
The Dodd-Lincoln derivative title to S3217 strengthens existing law to target specific market abuses that have arisen in recent years. These abuses are outlawed as disruptive practices in section 747 of the legislation. The Cantwell Amendment takes the significant step of adding a new and versatile standard for deceptive and manipulative practices under the Commodity Exchange Act. It addresses false reporting and authorizes private rights of action that will aid the CFTC in its enforcement effort. Cong, Record, May 6, 2010, S3349.