Washington, 27 July 2010

An official with the U.S. futures regulator said he is "itching" to use new authority to combat disruptive trading practices, a move he hoped will end decades of futile efforts by the agency to prosecute suspected offenders.

Provisions included in the sweeping financial reform package signed into law this month will make it easier for the U.S. Commodity Futures Trading Commission to prove its case when traders try to manipulate oil, natural gas, corn or other commodity prices.

"The law is going to be much stronger with the new bill. I'm itching to use the authority," said Bart Chilton, a CFTC commissioner, in an interview with Reuters. "This new disruptive practices (authority) will allow us to go after trading that can disrupt and contort markets," he said.

Chilton has long said there were "impossibly high" standards in place for the CFTC to prove manipulation, resulting in a dismal record of prosecuting suspected offenders. In its 36-year history, the CFTC has successfully prosecuted and won one only manipulation case.

A major case against BP is one example of the hurdles CFTC has faced targeting traders in recent years. In 2007, BP Products North America agreed to pay a record $303 million in sanctions for attempting to manipulate the propane market.

But a U.S. judge highlighted problems with the manipulation law when he later dismissed charges against four individual BP traders charged in the case, citing "a confusing and incomplete" set of laws.

Until the new law, the CFTC had to prove an individual intended to manipulate prices -- evidence that was often difficult to find through e-mails or phone calls, Chilton has said. It also had to show the person had the market power to move the price of a commodity and that they caused an artificial price to occur. Now, the CFTC will only have to show the trader acted in a manner that had the potential to disrupt the market, making it easier for the CFTC to prove its case.

"There was this whole area of trading we didn't prosecute and so that's why this new authority -- disruptive trading practices -- is one you're going to see more than anything in the future," said Chilton.

"My guess is you're going to see a lot of these cases once we start using it and building the case up. It's going to be a good thing for the markets, for the economy and for consumers," he said.

Chilton said the CFTC could 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.

POSITION LIMITS IN SIGHT: CHILTON

During the interview, Chilton also said the agency already is moving aggressively to overhaul a proposal for limiting the number of speculative contracts traders can hold in physical commodity markets.

CFTC drafted a plan for limits on energy positions for futures markets in January. But the new financial reform law gives the agency jurisdiction of the over-the-counter derivatives markets, requiring it to create limits across both the OTC and futures markets in 180 days.

Chilton said the CFTC should err on the high side, proposing generous position limits before considering whether to ratchet them down. "I'm not saying we make them excessively high. I want them to be meaningful but I don't want them to be so restrictive that we encourage market migration. Finding that balance is important," said Chilton.

ENDS --