CFTC Submits Consolidated Reply in Opposition to Market Participants Motion for Summary Judgment
Commentary by Bob Zwirb
In a development to the lawsuit challenging the CFTC's Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations (the "Cross-Border Rule"), the CFTC submitted a consolidated reply in support of its cross-motion for summary judgment and in opposition to the ISDA, SIFMA and the Institute of International Bankers' (together, the "Associations") motion for summary judgment.
In its consolidated reply, the CFTC stated that the Associations' case "rests entirely on the mistaken premise that Congress required the CFTC to determine the cross-border application of Title VII – without ever saying so in any statute." According to the CFTC, Congress established a system of swaps regulation in Title VII, including a test for determining when it applies abroad, so that market participants cannot avoid reforms by shifting their swaps activities overseas. The CFTC stated that it has carried out its rulemaking duties under Title VII according to Congress's design, and has properly considered the costs and benefits of its own actions in accordance with the APA, including relevant comments, and has issued a policy statement ("Guidance") to inform the public of its views on the meaning and likely application of CEA Section 2(i) ("Jurisdiction of Commission; Liability of Principal for Act of Agent; Commodity Futures Trading Commission; Transaction in Interstate Commerce") to common swaps activities.
In response to the Associations' claim that the Guidance is really a set of rules that impose cross-border obligations, the CFTC stated that "the agency reasonably exercised its broad discretion" not to codify its policies through a rulemaking process. Thus, the CFTC stated, it is entitled to judgment as a matter of law, and the Court should grant the CFTC's consolidated motion to dismiss and "should refuse to upend the Dodd-Frank reforms" as the Associations demand.
See: CFTC Consolidated Reply.
Related news: Market Participants Support Challenge to CFTC Cross-Border Guidance (with Zwirb and Lofchie Comments) (April 9, 2014); Better Markets Amicus Brief Supports CFTC's Cross-Border Guidance (with Lofchie and Zwirb Comments) (March 20, 2014); CFTC Legal Memorandum to Dismiss Challenge to Its Cross-Border Guidance (with Lofchie and Zwirb Comments) (March 17, 2014); Chamber of Commerce Submits Amicus Brief Regarding Lawsuit against CFTC Cross-Border Rule (with Zwirb Comment) (February 4, 2014); Market Participants File Statement to Explain Their Standing in Lawsuit Challenging CFTC Cross-Border Guidance (January 28, 2014); Market Participants File Opposition to CFTC's Motion to Delay Judgment in Lawsuit Challenging CFTC Cross-Border Guidance (January 16, 2014); Market Participants File Amended Complaint Challenging CFTC Cross-Border Guidance (with Zwirb and Lofchie Comments) (January 7, 2014); 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 Commissioner O'Malia Dissents from CFTC Cross-Border Guidance Statement (with Lofchie Comment) (July 18, 2013); CFTC Approves Cross-Border Guidance and Exemptive Order (with Lofchie Comment) (July 12, 2013).
Commentary
The CEA's jurisdiction with respect to swaps and futures extends to certain activities occurring and certain persons located outside the United States. For futures, the application of the CEA to foreign activity, and the scope of the CFTC's extraterritorial authority, are spelled out largely in rulemaking, with interpretative policy guidance issued in supplementary manner in connection with such rules. See, e.g., CFTC Rule 4.7 and Part 30, and Appendices A-C. By contrast, for swaps, the CFTC insists that similar rulemaking is unnecessary for apprising the industry of its views or the approach it intends to take in assessing whether such transactions meet the extraterritorial jurisdiction test. Why rulemaking was necessary for determining the jurisdictional nexus for futures and, for that matter, for security-based swaps (as contemplated by the SEC), but not for swaps, is left unexplained.
The CFTC also insists that its guidance is "not enforceable by or against the agency" but that posture of unenforceability is intertwined with a statutory prohibition against dealing in swaps outside the United States without being registered where such dealing has a "direct and significant" connection with the U.S. If the extraterritorial guidance is not enforceable, as the CFTC assures us, then what happens to a foreign swap dealer who runs afoul of it while unregistered?
Regarding the fear of market participants "that the CFTC will enforce the law in accordance with its understanding of section 2(i)," the CFTC asserts that does not qualify as an "adverse consequence." It then goes on to state:
"While a policy statement cannot bind the agency or the public, it can inform the public of the agency's views on what the law requires. This is true even if it leads the public to believe the agency will bring enforcement actions if parties do not follow the law as the agency understands it" (emphasis added).
Needless to say, none of this seems very reassuring to a market participant that may legitimately fear a call from the CFTC Division of Enforcement if it does not follow what the law requires or the cross-border guidance "as the agency understands it," particularly as that understanding has not been informed by any rulemaking process of the type that is intended to be afforded to the public.