The position-limits rules passed last year by the Commodity Futures Trading Commission (CFTC) landed with a thud. The rules propose to govern derivatives tied to 28 different commodities and limit both certain on-exchange futures as well some off-exchange options on futures and swaps. Generally viewed as weak, the rules nevertheless drew protest — and a legal challenge — from financial industry members.
As that lawsuit winds its way through the court system, traders may be wondering what framework for enforcement will be used when — and if — the rules ultimately are implemented. Court cases discussing the conduct that constitutes market manipulation can serve as one place to look for guidance.
The Commodity Exchange Act (CEA) makes it unlawful for anyone to manipulate — or try to manipulate — the price of a nationally traded commodity. Traders who suspect manipulation as the source of their losses can sue the person or group they think tried to influence market prices. To succeed, these claims need to show the creation of an artificial market price. Proving artificial price means demonstrating that something other than legitimate market forces affected a commodity’s price during the period of alleged manipulation. Sometimes an otherwise legitimate transaction may run afoul of the CEA if it is combined with an improper motive.
Though breaking (or following) any surviving position-limit rule won’t by itself determine a claim of manipulation, the analytical framework behind a legal claim of manipulation may very well be what determines the ultimate sanction should a position-limit rule violation occur. In addition, a market manipulation claim remains a stand-alone way for traders to recover losses when something other than legitimate market forces are at work.