Market Participants Support Challenge to CFTC Cross-Border Guidance

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.”

Lofchie Comment: 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 yesterday 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).