Lobbyists for financial trade groups are trying to soften up the regulators who, in turn, may soften the new fraud and manipulation rules for the $600 trillion derivatives industry, reports the NYTimes, which then notes, it's a debate that seems to center on semantics.   Dodd-Frank requires the CFTC to shut down trading practices that disrupt markets, manipulate prices or amount to fraud.  Since August, financial firms have met with the CFTC on 15 or so occasions about proposed antifraud measures.

The CFTC has said it wants to set “broad” criteria for judging traders, and likely will take aim at schemes intended to mislead investors or manipulate the market.  The Commission also plans to punish “reckless” behavior.

Three industry trade groups expressed their collective concerns in a letter to the CFTC dated 12/28/10, warning the Commission to tread lightly as it writes the regulations.  Collectively, these trade groups or associations represent the nation’s biggest banks, asset managers and derivatives traders.

The industry groups are particularly concerned with how the CFTC defines "reskless behavior," and would like to see the CFTC raise the bar for proving fraud to “extreme recklessness.”  A further concern is that Dodd-Frank left the commission with substantial discretion to enforce the law.  The law does mandate checks on speculative trading. When extreme, speculation is said to cause wild price fluctuations, much to the dismay of consumers at the supermarket and the gas pump.

The law also requires the commission to ban three controversial trading practices, including one known as spoofing, where a trader will make a bogus bid on a commodity contract with the intention of canceling the bid before it is executed.  Dodd-Frank gave the commission the authority to ban other similar practices.

“This is the form of recklessness that effectively constitutes an affirmative intention” to commit fraud.  The “extreme recklessness” criteria would “ensure that its proposed rule does not sweep too broadly and prohibit routine and legitimate trading strategies.”

Prosecutors already find it difficult to prove fraud. As NYT DealBook reported, the Justice Department has not brought one criminal case against a major bank or financial executive for their involvement in the financial crisis.  And some lawmakers, including Senator Carl Levin, want the commission to bolster existing proposals.  Mr. Levin chairs the Permanent Subcommittee on Investigations, which has been scrutinizing disruptive trading practices over the last 5 years.

“While the proposed rules will make significant and welcome progress, they do not appear to fully capture all potentially manipulative and disruptive trading activities that occur in today’s high-speed, interconnected marketplace.”  - - Mr. Levin, in 1/3/11 letter to the CFTC.

For further details, go to:  [NYT Dealbook, 1/7; "Financial Lobbyists ..."]