I support this enforcement action against HSBC Bank USA, N.A., and thank the Division of Enforcement for their hard work on this matter.  Fraud, manipulation, and disruptive trading practices have no place in our markets.  I commend the Division for their aggressive pursuit of wrongdoing to the fullest extent permissible by law.

However, I feel compelled to remind the Commission and staff of our public responsibility to adhere to administrative law and best practices for administrative agency policymaking.  See, e.g., Office of Management and Budget, Final Bulletin for Agency Good Guidance Practices, 72 Fed. Reg. 3432 (Jan. 25, 2007). By doing so, we can minimize the pitfalls of regulation by enforcement.

It is incumbent upon the Commission to be guided by these three key objectives in its speaking orders on enforcement actions: (1) provide regulatory clarity and clear expectations for compliance; (2) deter future violations to the greatest extent possible; and (3) avoid disruption to the markets and market participants.

Accordingly, in order to serve these objectives and provide robust legal discussion of authorities, the Commission must include its prior interpretations of the Commodity Exchange Act (CEA) as cited precedent in its speaking orders.

For example, the Commission promulgates regulations (usually through Administrative Procedure Act notice-and-comment rulemaking) to interpret and implement the CEA.  In addition, particularly with respect to Dodd-Frank amendments, the Commission issues interpretive guidance and policy statements to interpret and implement the CEA.

Such Commission interpretive guidance and policy statements are “agency action” voted on by the Commission, and are distinct from staff guidance such as staff letters and advisories that do not bind the Commission.

Under administrative law, agency guidance includes “interpretive rules and policy statements.”  See, e.g., Blake Emerson and Richard M. Levin, Agency Guidance through Interpretive Rules: Final Report (May 28, 2019), Administrative Conference of the United States Judicial Review Committee, available at https://www.acus.gov.  The Commission has issued such an “interpretive rule” (as opposed to a “legislative rule”) stylized as, or part of, an “interpretive guidance and policy statement.”  See, e.g., SIFMA v. CFTC, 67 F. Supp.3d 373, 424 (D.D.C. 2014).

Where the Commission has taken agency action to interpret the CEA, that Commission interpretation controls until the Commission changes its interpretation on a “reasoned basis.”  I emphasize this specific canon of administrative law, because the Commission does not often issue interpretive guidance, policy statements, or interpretive rules, and so it bears reminding now.

Therefore, I believe that cited precedents in consent orders for enforcement actions must include not only the CEA and Commission regulations, but also Commission interpretive guidance and policy statements, especially Commission interpretive rules.  This is particularly necessary for speaking orders where there is new precedent being created, or heightened sensitivity regarding the above objectives of providing regulatory clarity, deterring violations, or avoiding disruption.

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This is the first time that the Commission will find a violation of spoofing in voice brokered swaps markets under Section 4c(a)(5)(C) of the Act, 7 U.S.C. Section 6c(a)(5)(C) (“anti-spoofing provision”).

Because this is a case of first impression, the Commission must ensure that its Order meets these three objectives: (1) to provide regulatory clarity and clear expectations for compliance; (2) to deter future violations to the greatest extent possible; and (3) to avoid disruption to the markets and market participants.

To address these objectives, and in recognition of the need to distinguish legitimate trading activity from spoofing, the Commission engaged in substantial policymaking efforts over three years (from 2010-2013) to interpret and implement the anti-spoofing provision of the CEA, and established an incredibly extensive administrative record with public comment to support those efforts, including an advance notice of proposed rulemaking, public roundtable, proposed interpretive order, and finally, issued an Antidisruptive Practices Authority Interpretive Guidance and Policy Statement, 78 Fed. Reg. 31890 (May 28, 2013) (“2013 spoofing interpretation”).

The same concerns and considerations that were well-founded at that time remain of equal import today.  As registered entities such as swap execution facilities (SEFs) and market participants consider where to draw the line between legitimate trading activity in voice brokered markets and spoofing violations, it is informative to look to the Commission’s controlling 2013 spoofing interpretation:

“[T]he Commission interprets the statute to mean that a legitimate, good-faith cancellation or modification of orders (e.g. partially filled orders or properly placed stop-loss orders) would not violate CEA section 4c(a)(5)(C) . . . When distinguishing between legitimate trading . . . and “spoofing,” the Commission intends to evaluate the market context, the person’s pattern of trading activity . . . and other relevant facts and circumstances.”

Because the facts of the alleged spoofing violation in this case as described in the consent order are significantly different from previous cases involving electronic / algorithmic trading and order books, it is even more important for SEFs and market participants to note the Commission’s 2013 spoofing interpretation where the Commission identified four non-exclusive examples of spoofing behavior.

Although the facts in this case do not fall within the first three examples of “classic” spoofing behavior, it does fall within the fourth example: “submitting or canceling bids or offers with intent to create artificial price movements upwards or downwards.”

Further, the United States Court of Appeals for the Seventh Circuit stated in United States v. Coscia, 866 F.3d 782, 787, 795 (7th Cir. 2017), that spoofing “differs from legitimate trading, however, in that it can be employed to artificially move the market price of a stock or commodity up or down, instead of taking advantage of natural market advantages[] . . . Spoofing . . . requires an intent to cancel the order at the time it was placed” (emphasis in original).

This enforcement speaking order does not reference the Commission’s 2013 spoofing interpretation. Therefore, I have issued this statement on spoofing in voice brokered swaps markets to better provide regulatory clarity and clear expectations for compliance, deter future violations to the greatest extent possible, and avoid disruption to the markets and market participants.