CFTC Submits Reply in Support of Its Motion to File Supplemental Declaration in CFTC Cross-Border Guidance Case
Commentary by Bob Zwirb
In response to SIFMA, ISDA, and the Institute of International Bankers (the "Associations") opposition to the CFTC's request to file a supplemental declaration, the CFTC submitted a reply to the Court stating that the Associations' opposition only underscores the declaration's relevance to the CFTC Cross-Border Guidance case.
According to the CFTC, the Associations have advanced inconsistent theories regarding how to interpret CEA Section 2(i). The CFTC explained that one of these theories, which coincides with the CFTC's interpretation, is supported by an internally-circulated SIFMA document filed in the CFTC's supplemental declaration ("SIFMA's Note").
Additionally, the CFTC explained that despite the Associations' argument in its opposition that SIFMA's Note only mentioned the word "guidance" once, it "clearly" refers to the CFTC Guidance as guidance, which is "direct evidence" contradicting the Associations' claims that "they reasonably believe the Guidance to be a binding rule."
The CFTC further argued that SIFMA's Note demonstrates that there were multiple reasons for Plaintiff's members to de-guarantee swaps. Consequently, there was no coercion by the CFTC guidance to de-guarantee so there is no standing in this case. According to the CFTC, "if SIFMA's Note is not considered, there is no evidence at all of why the Plaintiffs' members have changed their business practices, disabling the Court from assuring itself of its own jurisdiction."
See: CFTC's Reply in Support of Motion to File Supplemental Declaration. Related news: Associations Submit Opposition to CFTC Motion to File Supplemental Declaration in SIFMA v. CFTC Cross-Border Guidance Case (with Zwirb Comment) (July 23, 2014); Parties Submit Supplemental Briefs in SIFMA v. CFTC Cross-Border Guidance Case (with Zwirb and Lofchie Comments) (July 21, 2014); CFTC Files Supplemental Declaration in CFTC Cross-Border Guidance Case (with Zwirb Comment) (July 17, 2014); Associations Submit Response to CFTC's Notice of Supplemental Authority in CFTC Cross-Border Guidance Case (June 26, 2014); Court Requests Supplemental Briefs from Parties in SIFMA v. CFTC Cross-Border Guidance Case (June 24, 2014); SIFMA v. CFTC Cross-Border Guidance Case Reassigned to New Judge (June 19, 2014); Judge Grants Amici Motion for Leave to File Brief in Support of CFTC; CFTC Submits Notice of Supplemental Authority in SIFMA v. CFTC Cross-Border Guidance Case (with Lofchie Comment) (June 18, 2014); Congressional Democrats' Amicus Brief Sides with CFTC in SIFMA v. CFTC (with Lofchie Comment and Energy Metro Desk Article Quoting Commissioner O'Malia) (March 24, 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 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).
Commentary
Even if one accepts the notion advanced by the CFTC that the Plaintiffs should be held accountable in court for what SIFMA communicated in a document meant for political purposes, i.e., as "a list of talking points for industry lobbyists to defend the practice in discussions with congressional lawmakers and regulators," the CFTC's interpretation of the message conveyed in that document seems strained.
First, the CFTC claims that SIFMA's Note concedes that Congress, not the CFTC, "set the standards" for cross-border regulation of swap transactions. But in the same sentence, SIFMA's Note states that those standards were "implemented" by the CFTC. A reasonable implication - the most reasonable implication - of that sentence would be that the standards set by Congress were implemented by the CFTC through the usual course-through rulemaking. Indeed, a few sentences later, SIFMA's Note observes that "[t]he CFTC applied its rules to offshore swaps . . . "
Second, the CFTC pounces upon the Note's one-time use of the term "guidance" in the following sentence as proof that SIFMA understood that the CFTC's action did not constitute a binding rule: "Based upon regulators' guidance, the termination of U.S. guarantees should be encouraged, not labeled as evasion." The CFTC would have a better case if the term "regulator" had not been stated in the plural; in the plural, it is clearly being used to refer to multiple regulators here and abroad. The placement of that apostrophe after, rather than within, the word "regulators" is inconsistent with the CFTC's interpretation.
Third, the CFTC claims that the Note's encouragement of the practice of "de-guaranteeing" swaps and its discussion of the benefits of such practice demonstrates the lack of injury, and accordingly, the lack of standing here. But if the CFTC was effectively forcing swap counterparties to terminate guarantees in order to conduct swaps business overseas "in response to, and in order to comply with, new regulations," as the Note puts it, it seems more that the swap parties were responding to a rule that created a substantial burden, rather than an admission that such "guidance" was largely irrelevant. In this regard, the CFTC's position seems inherently unlikely: why would the trade associations go to the bother of challenging the guidance if it were not materially burdensome?