A federal judge in the District of Columbia has thrown out much of a lawsuit challenging the Commodity Futures Trading Commission’s (CFTC) decision to allow the use of “captive” entities in meeting the new reporting requirements for swaps under the Dodd-Frank Act.
However, U.S. District Judge Amy Berman Jackson’s ruling leaves intact a key claim against the commission that such tying arrangements are “anticompetitive” in violation of the Act’s core principles.
The case is
DTCC Data Repository v. Commodity Futures Trading Commission.
‘Captive’ SDRs
The Dodd-Frank Act amended the Commodities Exchange Act to expressly authorize the regulation of swaps by the CFTC. Before the enactment of Dodd-Frank in 2010, this type of derivative had been largely unregulated.
Dodd-Frank specifically requires that most swaps be “cleared” by derivatives clearing organizations (DCOs), which are regulated by the commission. To increase the transparency of the transactions, Dodd-Frank also requires that data about the creation, terms and confirmation of swaps be reported to registered swap data repositories (SDRs), which are also regulated by the CFTC.
The plaintiffs in the case are Depository Trust & Clearing Corporation and DTCC Data Repository. Depository Trust is an SDR and a wholly owned, indirect subsidiary of DTCC Data.
Depository Trust and DTCC Data sued the CFTC in 2013, challenging a decision by the commission to permit DCOs to require that cleared swap data be reported to their affiliated, or “captive,” SDRs. The plaintiffs claimed that the commission violated Dodd-Frank and the agency’s own regulations by failing to prohibit these allegedly anticompetitive tying arrangements between DCOs and their captive SDRs.
According to the plaintiffs, the tying arrangements freeze independent SDRs like Depository Trust out of the marketplace. The plaintiffs further claimed that permitting DCOs to require that cleared swap data be reported to their affiliated SDRs imposed increased costs on market participants and imperiled the swaps market itself by causing the “duplication and fragmentation of swap data.”
In their lawsuit, the plaintiffs alleged that the CFTC violated the Administrative Procedure Act and the Commodity Exchange Act in three separate but interrelated ways regarding its regulation of swaps.
First, the plaintiffs alleged that the CFTC impermissibly reversed course after the commission’s published answers to Frequently Asked Questions (FAQs) originally indicated that DCOs would be prohibited from requiring that cleared swaps data be reported to their captive SDRs. The commission withdrew the three FAQs in question in November 2012, six weeks after issuing them.
Second, the plaintiffs challenged the commission’s approval of a new rule submitted by a DCO, Chicago Mercantile Exchange Inc., requiring that cleared swaps be reported to the company’s captive SDR. Chicago Mercantile Exchange is a wholly -owned subsidiary of a business that operates a prominent derivatives marketplace.
Third, the plaintiffs challenged the implementation of a similar rule by ICE Clear Credit, another DCO that is purportedly the world’s largest clearinghouse for credit default swaps. The rule, “ICE Rule 211,” requiring the use of the company’s captive SDR, was implemented under the self-certification provisions of the Commodities Exchange Act and the CFTC’s self-certification rule.
These provisions allow a rule to become effective on the entity’s self-certification alone, if the CFTC does not issue notice within 10 business days to stay the self-certification for further review or public comment.
Final agency action?
The CFTC moved to dismiss the claims relating to the FAQs and the self-certification of the ICE rule on the ground that they did not constitute “final agency actions” necessary for pursuing judicial review of a federal agency under the Administrative Procedure Act.
Judge Jackson agreed.
Regarding the commission’s withdrawal of its answers to FAQs on the issue of captive SDRs, the judge explained that the “withdrawal of the FAQs did not determine any rights or obligations, nor was it the culmination of a Commission decision-making process. Rather, the Commission or its staff withdrew the advice it had been posting online about a particular question, leaving that question open for later decision by the Commission.”
Concerning the self-certification of the ICE rule (“ICE Rule 211”), Jackson found that “since Congress has not articulated a limitation on the approval by operation of law of a rule like ICE Rule 211, there is no ‘discrete’ agency action to review, and the self-certification of ICE Rule 211 is not a reviewable ‘failure to act.’”
The judge’s March 10 decision dismissed three of the five claims brought against the CFTC by Depository Trust and DTCC.
The two remaining claims challenge the CFTC’s approval of Chicago Mercantile Exchange’s captive SDR rule, CME Rule 1001. The judge overruled the commission’s motion to dismiss as duplicative one of those remaining claims.
The CFTC opted not to seek dismissal of the plaintiffs’ other claim that its approval of CME Rule 1001 violated three sections of the Commodities Exchange Act relating to antitrust laws, in addition to various sections of the Administrative Procedure Act.
So the key question presented by the plaintiff’s lawsuit — whether it is unlawfully anticompetitive to allow derivatives clearing organizations to require the use of captive SDRs — remains to be decided by the court.
Read the decision in DTCC Data Repository v. Commodity Futures Trading Commission