CFTC's new manipulation rules

The Commodity Futures Trading Commission has now adopted new rules - Regs. 180.1 and 180.2 - to implement the Dodd-Frank Act. They are intended to broaden the CFTC's power over market manipulations involving trickery (Reg. 180.1) and the pure use of raw market power (Reg. 180.2).

Reg. 180.1 seems to absorb the Securities & Exchange Commission's policy that reckless behavior is proof enough if deceptive measures are employed, even if the accused did not seek to affect market prices.

Reg. 180.2 seems to continue to use the CFTC's traditional test that, when brute force alone is used (without any flim-flam) it must be shown that the accused had the deliberate objective ("specific intent") to affect market prices - up, down or sideways.

While this approach appears to distinguish between schemes based on fraud (Reg. 180.1) and those where the 800-pound gorilla simply invades the chicken coop (Reg. 180.2), it will be to the considerable advantage of enforcement agencies and private plaintiffs to dig for anything that might be fraud in the latter situation because only reckless conduct would then be needed to find guilt.

In the future, counsel will need to comb through towering amounts of client records to guess whether Reg. 180.1 or Reg. 180.2 might be charged. And, of course, advising a client in advance of trading would be nearly impossible. Do it but leave no incriminating fingerprints? Do it but only a little? Don't do it?

Speculators are a wonderous gift to any risk management system, including the CFTC's markets. They take their lumps when the hedger wins, or they can score big if the hedger's worries prove to be unwarranted. This is privately-funded insurance at its very best.

How will counsel recommend action (or not) in this environment? I fear that the larger speculators, faced with wobbly legal advice, will simply indulge their love of fine art or fancy cars instead. If hedgers suffer, it would be a tragedy.

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