CFTC faces second lawsuit over ‘anti-competitive’ rules

Progress on derivatives rules under Dodd-Frank has been dragged down further with the US Commodity Futures Trading Commission facing a second lawsuit and accusations of being anti-competitive.

Progress on derivatives rules under Dodd-Frank has been dragged down further with the US Commodity Futures Trading Commission (CFTC) facing a second lawsuit and accusations of being anti-competitive.

The Depository Trust and Clearing Corporation (DTCC), a US post-trade utility, has filed a suit against the CFTC, the US derivatives regulator, challenging its approval of rules that allow derivatives exchanges CME Group and IntercontinentalExchange (ICE) to send in-house cleared data to their own swap data repositories (SDRs).

“These rules jeopardise the underlying principles of Dodd-Frank, are inconsistent with the Commission’s own regulations, and compromise the ability of regulators and market participants to understand, assess and manage systemic risk,” DTCC general counsel Larry Thompson said.

“DTCC and [DTCC data repository] are market utilities and user-owned cooperatives and have now, after exhausting all regulatory channels, been forced to litigate to protect market participant choice, competition, and transparency and accountability in the global markets.”

CFTC is working on establishing derivatives rules under the Dodd-Frank Act, which is aimed in part at increasing transparency and regulatory oversight of the swap market. The Act requires swaps to be traded on exchange-like venues, known as swap execution facilities (SEF), and trades to be reported and cleared where possible.

However, moves by the CFTC have angered some market participants and service providers, with Bloomberg also filing a lawsuit against the Commission last month. The data vendor, which intends to launch a SEF, believes rules requiring a lower initial margin payment for swap futures compared to cleared swaps may limit liquidity on the new execution facilities.

The need to report swap trades to swap data repositories is also a concern for Bloomberg, as no such requirement exists for futures products.

CFTC U-turn

In the latest case against the CFTC, the DTCC, in its submission to court, accuses the US regulator of backtracking on its pro-competitive stance for cleared swap data reporting by approving “anti-competitive” rules for derivatives exchanges CME and ICE.

“Under the guise of these actions, the Commission made substantive changes to its regulations. As a consequence, two large swap clearing houses have Commission-approved rules requiring that the official reports of transactions cleared by such clearing houses be reported to their captive swap data repositories.”

The DTCC recalled two commissioners saying the approval constituted “a complete reinterpretation” of CFTC rules, and that “the action taken by the Commission … falls well short of the standards by which a federal agency should regulate an industry”.

The DTCC said Dodd-Frank’s core principles, as well as other provisions in the Commodity Exchange Act, did no allow for “unreasonable trade restraints and anti-competitive activities in trading, clearing and data reporting of transactions in the swaps market”.

While the CFTC adhered to the pro-competitive rules during the initial implementation of Dodd-Frank, it backed down when CME Group last year filed a complaint to court over the Commission’s reporting regime and proposed what it calls Rule 1001, the DTCC said.

CME dropped the case against the regulator, and a week later the CFTC provisionally approved the rule. ICE’s similar “captive SDR” rule was passed last month.

DTCC said it had spent millions of dollars to establish an SDR as a result of new derivatives regulation, and CFTC’S decision to approve CME and ICE rules directly affected and injured their investment.

“Clear misunderstanding”

However, CME’s COO of repository services, Jonathan Thursby, last month told there has been a “ clear misunderstanding”. 

“Under the existing rules by the CFTC, clearing organisations are required to report on the cleared data. They are required to select a swap data repository.

“Under those existing rules, CME codified its obligation under CME Rule 1001 which said it will report in the most easiest and efficient way to its repository. The CFTC affirmed that ruled, supported it and we are practicing that today,” he said.

“Market players had come up with a different working interpretation, which conflicted with what actually was in the regulation.”