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Market Participants File Amended Complaint Challenging CFTC Cross-Border Guidance

District Judge Paul Friedman of the D.C. District Court issued a long-awaited opinion in the ongoing lawsuit filed by SIFMA, ISDA, and the Institute of International Bankers (the "Associations") against the CFTC Cross-Border Guidance. The Associations filed the lawsuit on December 4, 2013, seeking to vacate the CFTC Cross-Border Guidance on procedural and substantive grounds. The lawsuit alleged that the CFTC unlawfully circumvented the requirements of the Administrative Procedure Act and the CEA by portraying its regulations as "guidance."

Judge Friedman said the CFTC was well within its discretion" to proceed as it did through guidance, rather than rulemaking, and that the CFTC did not act "arbitrarily or capriciously" with respect to its refusal to address the scope of the Title VII Rules extraterritorial application within the Title VII Rules. The Court ruled that the Cross-Border Guidance "reads like a non-binding policy statement" that has no binding legal effect and that market participants are "free to ignore" it.

The Court did, however, agree with the Associations' that the CFTC failed to adequately consider the costs and benefits of some of the Title VII Rules, as required by CEA Section 19, rendering the CFTC's cost-benefit analyses for these Rules "arbitrary and capricious" under the APA.

Overall, the Court said that the majority of the Associations' claims failed because Congress had "clearly indicated" that the swaps provisions within Dodd-Frank Title VII, including rules prescribed by the CFTC, "apply extraterritorially whenever the jurisdictional nexus" is Section 2(i) is applied. The Court therefore: (i) dismissed the Associations' claims as to the Trade Execution Rule, (ii) granted summary judgment to the CFTC as to the Associations' claims regarding the Cross-Border Guidance and certain Title VII Rules, (iii) granted summary judgment to the Associations' as to the remaining Title VII Rules, and (iv) directed the CFTC to conduct adequate cost-benefit analysis for those remaining Title VII Rules.

See: SIFMA v. CFTC Amended Complaint; SIFMA Motion for Summary Judgment; SIFMA v. CFTC Civil Docket; CFTC Motion to Hold in Abeyance; SIFMA Motion for Expedited Consideration of Summary Judgment.

Related news:
Market Participants File Lawsuit Challenging CFTC Cross-Border Guidance for Being a Rule Adopted in Violation of the APA (with Lofchie Comment) (December 4, 2013); CFTC Comparability Determinations for Six Jurisdictions and Related No-Action Letter (No-Action Letter 13-75) (with Lofchie Comment) (with Lofchie YouTube Selection) (December 20, 2013) CFTC Issues No-Action Relief for Dealers in Five Jurisdictions from Certain Entity-Level Internal Business Conduct Requirements (CFTC Letter 13-78) (with Lofchie Comment) (December 23, 2013); CFTC Publishes Comparability Determinations (Fed. Reg.) (December 27, 2013).

Commentary

As an illustration of just how helter-skelter the CFTC's rulemaking process has been, following the filing of this amended complaint, the CFTC initiated two actions affecting its cross-border policy that likely will necessitate further amendment of the complaint: (i) a request for public comment on a staff advisory regarding the applicability of "transaction-level" requirements for swaps to the activity of CFTC-registered, non-U.S. swap dealers entering into swaps with non-U.S. persons where the swaps may be agented by individuals located in the U.S., and (ii) a no-action letter (Letter 14-01) providing a nine-month extension of no-action relief, previously granted in Letter 13-71, that grants a "waiver" from enforcement of a staff advisory extending Commission guidance. How these two actions will affect the course of litigation remains to be determined, but the moving target of the CFTC's cross-border policy actions illustrates the difficulty the parties will have in even describing the CFTC's regulations giving rise to the complaint.

We have commented at length regarding what we believe to have been the flawed administrative process pursued by the CFTC to regulate swap activity that takes place abroad - activity that the plaintiffs describe as "an unceasing effort by the Commission to regulate the global swaps markets through unpredictable 'guidance' documents, advisories, and directives, and to force the CFTC instead to abide by the requirements for rulemaking laid down by Congress." The CFTC counters by stating that it chose the non-binding guidance route rather than rulemaking "because of the rapidly evolving market and regulatory landscape," a justification that seems rather flawed, given that what seems to "evolve" most rapidly and unpredictably is the CFTC itself.

Even beyond these concerns about process and the state of the economy, there is arguably even a larger policy issue: by what authority does the CFTC arrogate itself to be the global financial regulator of swaps, an international market involving all of the major financial institutions of the world? Even if the CFTC had the authority to play such a role, it would not have the expertise, the experience, the personnel or the resources.

Commentary

As an illustration of just how helter-skelter the CFTC's rulemaking process has been, following the filing of this amended complaint, the CFTC initiated two actions affecting its cross-border policy that likely will necessitate further amendment of the complaint: (i) a request for public comment on a staff advisory regarding the applicability of "transaction-level" requirements for swaps to the activity of CFTC-registered, non-U.S. swap dealers entering into swaps with non-U.S. persons where the swaps may be agented by individuals located in the U.S., and (ii) a no-action letter (Letter 14-01) providing a nine-month extension of no-action relief, previously granted in Letter 13-71, that grants a "waiver" from enforcement of a staff advisory extending Commission guidance. How these two actions will affect the course of litigation remains to be determined, but the moving target of the CFTC's cross-border policy actions illustrates the difficulty the parties will have in even describing the CFTC's regulations giving rise to the complaint.

We have commented at length regarding what we believe to have been the flawed administrative process pursued by the CFTC to regulate swap activity that takes place abroad - activity that the plaintiffs describe as "an unceasing effort by the Commission to regulate the global swaps markets through unpredictable 'guidance' documents, advisories, and directives, and to force the CFTC instead to abide by the requirements for rulemaking laid down by Congress." The CFTC counters by stating that it chose the non-binding guidance route rather than rulemaking "because of the rapidly evolving market and regulatory landscape," a justification that seems rather flawed, given that what seems to "evolve" most rapidly and unpredictably is the CFTC itself.

Even beyond these concerns about process and the state of the economy, there is arguably even a larger policy issue: by what authority does the CFTC arrogate itself to be the global financial regulator of swaps, an international market involving all of the major financial institutions of the world? Even if the CFTC had the authority to play such a role, it would not have the expertise, the experience, the personnel or the resources.

Commentary

Since the day that the CFTC issued its cross-border guidance, we have stated our belief that the guidance was issued in violation of the Administrative Procedure Act. (See relevant Cadwalader commentary dated July 18, 2013 and July 12, 2013.)

If the CFTC loses this case, it could be forced to return to square one in establishing its regulations relating to swaps since it will be required to reconsider the costs and benefits of many of its most significant adopted rules. This seems an incredible waste, given the time and effort spent by well intentioned agency personnel and those in the industry who tried to comply with the CFTC's rules. This is unfortunate, but it would certainly achieve a better long-term result for the domestic and global economy. If the new Chairman and the incoming Commissioners to the CFTC are able to coordinate the rulemaking of the CFTC with that of the SEC, there is every reason to believe that starting anew would be better than building on top of the marshland of agency guidance.

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