Expect the focus on manipulative behavior to continue for the foreseeable future.
Last week CFTC Chairman Timothy Massad told the Senate Banking Committee that the Commission is “aggressively pursuing wrongdoers,” regardless of size, and highlighted use of its Dodd-Frank anti-manipulation authority to bring cases where market participants distort prices.
Exchanges are also clamping down on traders. The CME Group adopted new rules banning disruptive trading practices such as spoofing, quote stuffing and banging the close. CME also provided a set of guidance and examples about permissible and prohibited tactics, which are available here.
Investors too are joining the fold to monitor for manipulative activities. Bloomberg reports that a pension fund sued more than a dozen major banks, alleging that the banks colluded to manipulate ISDAfix, a key benchmark for several derivatives products, in order to benefit other positions the banks held. The collusion allegation brings in anti-trust law, which could reward a plaintiff with triple damages and also brings a potential for criminal prosecution by the DOJ. The CFTC, which can only bring civil actions, has reportedly already referred this case to the DOJ for criminal consideration. (As an aside, expect antitrust enforcement to be a major focus generally: last week 13 states filed an amicus brief encouraging a federal appeals court to rule against a dominant market player that supposedly prevented a new market competitor from effectively accessing the market. See here. Private equity firms should take note.)
Manipulation is not just a topic of U.S. interest. A Dechert memo indicates that the UK’s Department of Energy and Climate Change is soliciting public comments on a proposal to make manipulation of the energy markets a criminal offense.
What can firms do to protect themselves? Periodic scrutiny of profits centers to check for possible manipulation is critical. Even inadvertent manipulation can land a firm in hot water.