Market Participants Support Challenge to CFTC Cross-Border Guidance
Commentary by Bob Zwirb and Steven Lofchie
ISDA, SIFMA and the Institute of International Bankers ("IIB") (together, the "Associations") submitted a consolidated reply in support of their motion for summary judgment and in response to the CFTC's Cross-Motion for Summary Judgment and to Dismiss in Part, in the Associations' challenge to the CFTC's Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations (the "Cross-Border Rule"). The consolidated reply asks the Court to grant the Associations' motion for summary judgment and to deny the CFTC's cross-motion, arguing that:
- Though the CFTC defended the Cross-Border Rule as a policy statement, and contended that the Cross-Border Rule cannot possibly be a rule, as it contains disclaimers of any binding effect, the Cross-Border Rule nevertheless establishes who must register, which transactions must be cleared and other critical aspects of the CFTC's regulatory regime; therefore, it is a substantive rule.
- Because the CFTC did not properly address cross-border application in adopting the Title VII rules, those rules cannot apply overseas and are invalid to the extent to which they purport to do so.
- In addition to the procedural issues with the Cross-Border Rule, the Associations outline additional significant errors by the CFTC in the course of fashioning the Rule's specific provisions.
- Notwithstanding the CFTC's argument that the Associations' claims are not ripe for decision because the Cross-Border Rule adopted a "case-by-case approach" and "does not purport to express a view on all scenarios," the Cross-Border Rule is a substantive rule and therefore is reviewable.
- Finally, the Associations contend that the Court can and should remedy the CFTC's violation of basic rulemaking procedures. The Associations state that, contrary to the CFTC's claim, granting the request relief would "promote the public interest," foster uniform and transparent regulation, prevent lawless agency action and, ultimately, uphold the rule of law. The Associations quote N. Mariana Islands v. the United States, which found that "The public interest is served when administrative agencies comply with their obligations under the APA."
See: Plaintiffs' Consolidated Reply in Support of Their Motion for Summary Judgment.
Related news: 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 Associations' contention, that the Cross-Border Guidance is really a rule meant to bind the agency and regulated parties and not merely a policy statement or interpretation, is summed up in this description from their reply brief:
"Among other things, the Rule defined the critical term 'U.S. person'; determined what transactions must be included in an entity's portfolio for purposes of determining registration obligations; introduced a new classification of entities, 'affiliate conduits,' subject to 'transaction-level' requirements; set out a regime governing provision of contractual guarantees to non-U.S. entities; determined the compliance obligations of U.S. branches of foreign banks; and introduced a 'substituted compliance' framework to partially exempt entities operating in select foreign jurisdictions. The Rule determines who must register (and therefore comply) and what transactions will be regulated - undoubtedly central aspects of any regulatory regime."
Commentary
The CFTC should lose this suit as a matter of law. In many ways, though, the CFTC would benefit from such a loss, which would allow it to walk away from a material part of the flawed rulemaking and restart with a better approach. As things are progressing, the agency may have no choice. The House of Representatives today passed a bipartisan bill (supported by both the Republican and Democratic leaders of the House Agriculture Committee) that would effectively render the guidance moot (Section 359 of the bill, titled Cross-Border Regulation of Derivatives) and require the CFTC to adopt a formal rule governing cross-border jurisdiction within 180 days (not a long timeframe given the complexity of the issues). The CFTC is now stuck with guidance that it has conceded is not enforceable as an administrative matter, that makes very little sense as a matter of public policy, that has been rejected by both Republicans and Democrats in the House, and that may be rejected in the Senate as well (assuming that the issue continues to be addressed in a bipartisan manner).