CFTC Sued over Dodd-Frank Cross-border Swaps Rules | Practical Law

CFTC Sued over Dodd-Frank Cross-border Swaps Rules | Practical Law

Banking and derivatives industry groups, including ISDA and SIFMA, have sued the CFTC over its Dodd-Frank cross-border swaps regulations, seeking to vacate the CFTC's July 2013 cross-border guidance and the recently issued related further guidance and staff advisories.

CFTC Sued over Dodd-Frank Cross-border Swaps Rules

Practical Law Legal Update 5-551-1748 (Approx. 4 pages)

CFTC Sued over Dodd-Frank Cross-border Swaps Rules

by Practical Law Finance
Published on 05 Dec 2013 • USA (National/Federal)
Banking and derivatives industry groups, including ISDA and SIFMA, have sued the CFTC over its Dodd-Frank cross-border swaps regulations, seeking to vacate the CFTC's July 2013 cross-border guidance and the recently issued related further guidance and staff advisories.
On December 5, 2013, four international trade associations representing the world's largest banks, including ISDA and SIFMA, filed a lawsuit against the CFTC in US federal court seeking to block the agency's Dodd-Frank cross-border derivatives rules. In the complaint, filed in the US District Court for the District of Columbia, the groups claim that the CFTC has circumvented legal requirements for rulemaking by issuing the cross-border rules as "guidance." The lawsuit alleges that:
  • The CFTC's cross-border guidance violates both the Administrative Procedure Act and the Commodity Exchange Act (CEA).
  • The CFTC failed to conduct a cost-benefit analysis with respect to the guidance, as required by law.
The complaint seeks:
The groups also claim the CFTC cross-border rules violate agreements between global leaders, including the US-EU "Path Forward" on the cross-border reach of Dodd-Frank swaps rules (see Legal Update, CFTC and EU Reach Accord on Derivatives Regulation; CFTC Issues Cross-border Guidance and Relief).
The cross-border rules subject non-US entities that enter into swaps with US persons, as well as certain swaps with an indirect connection to the US, to Dodd-Frank swaps rules. Barring no-action relief, these rules were likely to become effective for non-US parties entering into swaps with US persons on December 21, 2013 (January 14, 2014 for certain non-US swaps) (see Legal Update, CFTC Cross-border Rule Effective January 14).
Plaintiffs, which also include the Institute of International Bankers (IIB), a group with a membership of internationally headquartered banks from over 35 countries doing business in the US, are represented by Eugene Scalia (son of US Supreme Court Justice Antonin Scalia) of Gibson Dunn & Crutcher LLP. Scalia represented ISDA and SIFMA when they successfully sued the CFTC in the same court in 2012 over the agency's speculative commodity position limits rules (see Legal Update, CFTC Commodity Position Limits Rules Vacated by DC District Court), which the agency has re-proposed as a result of that ruling (see Practice Note, The Dodd-Frank Act: Commodity Position Limits).
The plaintiffs have taken the position that:
  • The CFTC's cross-border swaps rules would fragment global markets by imposing overlapping rules on market participants that would be subject to Dodd-Frank swaps rules as well as the rules of their home jurisdiction.
  • Because of these rules, non-US banks are no longer willing to enter into derivatives transactions with US banks for fear of triggering CFTC registration requirements. They have also refused to deal with non-US dealers that use US-based staff to arrange the transaction, due to the staff advisories.
  • The CFTC should conduct activity within a rules-based structure rather than by guidance.
  • The guidance and other cross-border releases provide inadequate relief, arbitrarily apply to market participants and allow for virtually no time for compliance.
  • US banks are being denied access to non-US multilateral swaps trading platforms due to anxiety about becoming subject to CFTC registration.
  • The CFTC's arbitrary and unilateral approach to cross-border regulation is "backdoor" rulemaking which has led to widespread market confusion and is creating significant impediments to the orderly functioning of financial markets worldwide.
CFTC Chairman Gary Gensler has consistently stated that tough cross-border rules are necessary to stop exposures that arise overseas from leaking back to the US, as occurred during the crisis.
Further details on the cross-border swaps lawsuit are provided by Reuters.
This Update is based on material provided by the Accelus service Compliance Complete, which provides regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges.