Washington, 14 October 2010

The U.S. Commodity Futures Trading Commission will gain powers under new rules to crack down on sophisticated market-manipulation schemes that had largely escaped its enforcement efforts in the past, a former official said in an interview.

The futures regulatory body had previously focused mostly on smaller retail foreign exchange fraud and Ponzi rackets because regulations made it hard to prove market manipulation, said Greg Mocek, a former CFTC enforcement chief.

The rules that the agency must still craft in detail will mean more investigations into cases of suspected price manipulation. Because the scope of these schemes is much greater, fines collected by the CFTC will probably surge, he said.

The regulations will be part of sweeping Wall Street reforms. The agency's new powers were authorized by the Dodd-Frank act, which gave regulators oversight of the $615 trillion over-the-counter swaps market.

"Clearly, there will be more cases, more investigations ... now that they got this new authority," said Mocek, now a partner at McDermott Will & Emery in Washington.

"I think there is no doubt that the new statute will allow them to collect higher fines, at least when it comes to pursuing fraud and manipulation in the institutional markets," he said.

The financial crisis has lent urgency to a drive to stamp out wrongdoing and corrupt practices on Wall Street, and bigger fines are expected to have a stronger deterrent effect on potential financial criminals.

EASIER TO PROVE MANIPULATION

The CFTC will now only have to show a trader acted in a manner that had the potential to disrupt the market, making it easier for the CFTC to prove its case. In its 36-year history, the CFTC has successfully prosecuted and won only one manipulation case in the futures markets.

The new powers from the Dodd-Frank bill put the CFTC on a similar legal footing as the Securities and Exchange Commission and Federal Energy Regulatory Commission, Mocek said.

In the past, CFTC had to prove an individual intended to manipulate prices -- evidence that was often difficult to find through e-mails or phone calls. It also had to show the person had the market power to move the price of a commodity and that the trader caused a price in the market that otherwise would not have occurred.

The hurdles led CFTC to shift its resources toward enforcing violations such as retail foreign exchange fraud and Ponzi schemes, which were easier to prosecute but generated smaller fines, Mocek said.

The CFTC filed 42 percent more enforcement actions in fiscal year 2010, which ended Sept 30, than it did in 2008, but total penalties and fines declined 70 percent from the record amount obtained two years ago. Going forward, the CFTC has said it will target "spoofing" - - where a trader makes a bid or offer and cancels it before it's carried out -- and " banging the close," when a trader acquires a substantial position leading up to the closing period, and then offsets the position before the end of trading to try to manipulate closing prices.

The CFTC also has said it will look at high-frequency trading and algorithmic strategies to see whether they disrupt markets and should face more rules. Congress left it up to the CFTC to interpret the rules, a delicate effort Mocek said could lead to problems such as a reduction in electronic trading if it's not done properly.

"The details will determine whether (these) are sledge hammers or screw drivers," said Mocek.

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