According to the springtime saying, April showers bring May flowers. However, in the United States District Court for the District of Columbia, an April lawsuit by Bloomberg LP against the Commodity Futures Trading Commission, has been followed by another lawsuit against the CFTC this first week of May by DTCC Data Repository and DTCC. Each of the plaintiffs allege, among other things, that the CFTC took actions harmful to them without conducting an adequate cost benefit analysis as required under the Commodity Exchange Act.
In the Bloomberg lawsuit, the plaintiff challenges the CFTC's enactment of a rule that requires clearing houses, in establishing margin rates for futures and cleared swaps, to factor a minimum liquidation time of one day for futures and options; one day also for swaps on agricultural commodities, energy commodities and metals; and five days for all other swaps.
According to Bloomberg, the Commission should have considered many factors in evaluating a clearing house's ability to liquidate a potential defaulting clearing member's positions in each product, including trading volume, open interest and predictable relationships with highly liquid products. Simply basing liquidation time on the type of product -- futures vs. swaps -- elevates form over substance, claims Bloomberg. According to their lawsuit, swaps and swap futures based on certain financial instruments are functionally interchangeable and requiring margin rates based on different liquidation times makes no sense. Moreover, in enacting the relevant rule, the CFTC failed to conduct a required cost benefit analysis; failed to provide interested persons a sufficient opportunity to participate in the relevant rule making; and engaged in an arbitrary and capricious action.
In this week's DTCC action, plaintiff's challenged the CFTC's approval of two clearing house rules (CME and ICE) mandating that data related to swaps cleared through each entity be reported to the captive or affiliated swap data repository of each institution, as opposed to allowing the participants to the initial transaction to choose their SDR themselves.
The CFTC's approval of these clearing house rules followed its allegedly consistent articulation of a position during most of 2012 that a clearing house, as part of its offer of clearing services, could not require market participants to use the entity's affiliated or captive SDR. Following the filing of a CME lawsuit related to this position during Fall 2012 (one that was subsequently withdrawn), the CFTC withdrew parts of a "Frequently Asked Questions" release that was consistent with this position, and on March 6, 2013, approved a CME Rule requiring reporting to CME's own SDR of data related to swaps cleared through CME. ICE had a similar requirement approved by self-certification to the CFTC effective 25 April 2013.
DTCC alleges that in withdrawing portions of its FAQ related to clearing house reporting of data to their captive or affiliated SDRs, the CFTC failed to conduct an adequate cost benefit analysis and permitted anti-competitive practices in violation of applicable law
Both lawsuits were filed in the same District Court as the case where ISDA prevailed against the CFTC alleging that the CFTC violated its statutory authority when it promulgated its position limit rules.
Both cases present interesting philosophical arguments grounded, in part, on dissents or separate opinions of at least two CFTC Commissioners, and probably are not the end of lawsuits related to CFTC rules implementing Title VII of Dodd Frank. April and May lawsuits may be followed by a flood of more.
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