A United States federal court on September 16, 2014, mostly tossed out all legal challenges brought by three industry groups to the cross-border guidance and policy statement initially issued by the Commodity Futures Trading Commission on July 12, 2013, and made effective on July 26, 2013. This guidance sought to explain how the CFTC would apply the Dodd-Frank Act’s provisions related to swaps—Title VII—and its newly implemented swaps rules in the cross-border context.
The CFTC’s guidance had been challenged by three industry associations: the Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association and the Institute of International Bankers.
In ruling generally against the plaintiffs, the court adopted the CFTC’s principal argument, mainly that the provision of Title VII extending the law’s reach extraterritorially when swaps activity outside the United States has a “direct and significant connection” with US commerce stands independently “without the need for implementing regulations.” As a result, the court said,
The CFTC was not required to issue any guidance (let alone binding rule) regarding its intended enforcement policies. …Indeed, the CFTC’s decision to provide such a non-binding policy statement benefits market participants and cannot now, all other things being equal, be turned against it.
As part of its decision in favor of the plaintiffs, the court ordered the CFTC to conduct a cost-benefit analysis in connection with the extraterritorial application of many of the CFTC’s rules addressed in its cross-border guidance. However, the court suggested that this review could be cursory. The court did not require the CFTC to cease applying any of its swaps rules extraterritorially in the interim.
In analyzing plaintiff’s challenges, the court first found that the industry associations had the ability under law (known as “standing”) to challenge the CFTC’s guidance and extraterritorial application of most of its Dodd-Frank swaps rules (in particular, most of its so-called transaction and entity level rules), except for provisions that describe factors that designated contract markets and swap execution facilities must consider when determining whether a swap must be traded on their facilities—so-called “made available to trade” determinations (trade execution rule). This is because, said the court,
it is the extraterritorial application of the statutory trade execution requirement – not the Trade Execution Rule – that requires foreign swap dealers …to execute “available to trade” swaps on SEF or DCM platforms.
The court then found that the CFTC’s guidance is not tantamount to a rule and thus, not subject to review at this time. This is because the guidance does not require, order or dictate an outcome. It is simply a general policy announcement, claimed the court.
According to the court,
Because the majority of the Cross-Border Action looks, walks and quacks like a policy statement, the Court holds that the majority of the Cross-Border Action is a policy statement.
Where the guidance specifically purports to interpret the Dodd-Frank provision related to Title VII’s extraterritorial application, it is an interpretation, said the court, but also not a rule.
The court expressly rejected plaintiffs’ claim that the guidance was “a carefully orchestrated charade" designed to shield the guidance from judicial review.
The court effectively disallowed all of plaintiffs’ challenges to the CFTC’s guidance and extraterritorial application of the relevant transaction and entity level rules, and dismissed outright plaintiffs’ challenge to the extraterritorial application of the agency's trade execution rule.
(Transaction level rules are those principally related to swaps transactions. The principal transaction level rules at issue in this lawsuit were those related to real time reporting, daily trading records, clearing determination, straight-through processing, trade execution, portfolio reconciliation, and documentation. Entity level rules are mainly those related to swaps dealers as institutions. The entity level rules most at issue in this lawsuit were the entity definition, swap entity registration, chief compliance officer, risk management, swap data repository reporting and large trader reporting.)
In ordering the CFTC to consider the costs and benefits of the extraterritorial application of many of its swaps rules—as requested by plaintiffs—the court determined not to delay implementation of the guidance and the extraterritorial application of the relevant swaps rules in the interim. This is because,
Based on [the] potential disruptive consequences, as well as the high likelihood the CFTC will be able to justify the substance of its inadequately explained Title VII rules on remand, the court concludes that [delaying] implementation] is unwarranted in this case.
As part of the CFTC's review, the court cautioned in a footnote that the agency “may not conclude …that the costs or extraterritorial application of a given [swaps rule] …so outweigh the benefits that the [swap rule] is flatly inapplicable abroad.”
This case was heard by the United States District Court for the District of Columbia. The decision was written by the Hon. Paul Friedman.
(Click here to read more information on the CFTC’s Guidance in the “CFTC Enacts Interpretive Guidance and Passes Exemptive Order Regarding Cross Border Swaps Transactions” in what is now Between Bridges, July 16, 2013. Click here to read more information on the industry associations’ lawsuit against the CFTC in the article “Three Industry Organizations File Lawsuit Against the CFTC Over Its Cross Border Guidance” in the December 2 to 6 and 9, 2013 edition of Bridging the Week.)
For more information, see:
SIFMA et al v. US Commodity Futures Trading Commission:
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