Revolution in Manipulation Law: The New CFTC Rules and the Urgent Need for Economic and Empirical Analyses

Abstract

Two major banks have now admitted that their employees successfully manipulated worldwide interest rates through the London InterBank Offered Rate, the most widely used interest rate index. Libor is the interest rate term for trillions of dollars of swaps and loans, and its manipulation may have been used to extract billions of dollars. These allegations come just as commodities manipulation law has been dramatically reformed and the Commodity Futures Trading Commission (“CFTC”) given vast new regulatory powers. This Article provides the first extended, scholarly analysis of the CFTC’s new anti-manipulation rules. We consider the difficulty the rules address: commodities manipulation claims have traditionally faced nearly insuperable obstacles to success in prosecuting manipulations like that of Libor. We then analyze the new rules, including their extension of the CFTC’s powers to cover the swap market. The new rules appropriately lower the standards of pleading and proof, and yet the breadth of the new rules invites abuse. Both to implement the new rules and to prevent overuse, we argue for more elaborate, sophisticated, and creative economic analysis than ever before. We provide a wide-ranging overview of empirical tools for assessing manipulation claims, while re-engaging with a decades-old debate on the place of empiricism in the laws of evidence and intent. We provide detailed examples of how manipulation screens are necessary to complete Dodd-Frank’s revolution in manipulation law.

Keywords: Screen, Libor, CFTC, Swap, Manipulation, Dodd-Frank, Regulation, Law, Econometric, Flagging, Hunt Brothers, Silver