[This story previously appeared in Securities Regulation Daily.]
By Lene Powell, J.D.
In a conflict over whether derivatives clearinghouses may require swap data reporting to their own captive swap data repositories, the CFTC said it properly approved a CME Group rule that set forth such a requirement, and that rival depository DTCC’s assertion that the CFTC’s approval of the CME rule was “arbitrary and capricious” was wrong (DTCC Data Repository (U.S.) LLC v. CFTC, August 28, 2014).
Swap reporting dispute. As part of comprehensive swaps reform, the Dodd-Frank Act created a new entity, "swap data repository" (SDR) which provides a central facility for swap data reporting and recordkeeping. All swaps must be reported to registered SDRs. The Depository Trust & Clearing Corporation (DTCC) and the CME Group both have registered repositories.
Against the opposition of DTCC, the CME Group gained CFTC approval in March 2013 to require that information about swap transactions to be reported to its own captive data repository. Under the approved CME rule, for all swaps cleared by the CME's clearing house, the CME reports creation and continuation data to CME's own swap data repository. At the request of a swap counterparty, the CME will also send a duplicate of the data to a second SDR.
In May 2013, DTCC sued the CFTC in federal district court, arguing that the agency’s approval of the CME rule and withdrawal of previously published staff-issued FAQs violated the Commodity Exchange Act (CEA) and Administrative Procedure Act (APA), as well as pro-competitive core principles and mandates of the Dodd-Frank Act. Specifically, DTCC contended that the Commission violated the APA by not conducting full notice and comment rulemaking proceedings and not preparing cost-benefit analyses for the withdrawal of the FAQs and the review of CME Rule 1001. DTCC asked the court to declare the CFTC's approval of the CME rule void.
CFTC’s approval of the CME rule. Both sides moved for summary judgment. In its memorandum, the CFTC said that it properly approved CME Rule 1001 using normal statutory procedures for approving a registered entity’s self-regulatory rule, rather than APA notice-and-comment rulemaking procedures applicable to CFTC regulations.
First, said the CFTC, CME Rule 1001 was not a CFTC rule, but a self-regulatory rule of an entity registered with the CFTC. Under 7 U.S.C. § 7a-2(c), the applicable statutory standard for self-regulatory rule approvals, the CFTC was required to approve the CME rule unless it found that the rule was “inconsistent” with the CEA or CFTC regulations. Because it was not, the CFTC’s approval of the rule was “perfectly legitimate” under the APA.
Second, the CFTC did not amend its own regulations by approving the CME rule. The FAQs issued by the CFTC were a non-binding staff interpretation, and thus the CFTC was not required to engage in notice-and-comment rulemaking before reaching conclusions that differed from statements in the FAQ. The CFTC’s Part 45 regulations do not grant entities a right to select the SDR that receive swap data, as asserted by DTCC. In fact, the CFTC deliberately declined to create a right to select the SDR, because in practice such a rule could give an SDR substantially owned by swap dealers—like DTCC’s SDR—a dominant market position with respect to swap data reporting within its asset class or even all swaps.
The CFTC noted that because all SDRs are registered with the CFTC and subject to the same requirements, the CFTC does not have a stake in which SDR receives the swap data, only that the data is reported to an SDR.
Pro-competitive mandates. The CFTC said the court should reject DTCC’s claim that the CFTC was arbitrary and capricious for approving CME Rule 1001, notwithstanding DTCC’s arguments about anticompetitive effects. First, the CFTC was not required to undertake an antitrust analysis under 7 U.S.C. § 19(b) before approving the CME rule. That statutory section applies only to rules of a contract market or registered futures association, and CME Rule 1001 is a rule of CME Clearing, a registered derivatives clearing organization (DCO), which is neither a contract market nor a futures association.
In addition, although the CFTC was not required to conduct an antitrust analysis under 7 U.S.C. § 19(b), the agency did consider the substantive points that DTCC raised related to that section, along with Core Principle N, a provision that forbids a DCO from adopting any rule that results in an “unreasonable restraint of trade,” or imposing any “material anticompetitive burden,” unless necessary or appropriate to achieve the purposes of the CEA. The record before the agency indicated that DTCC—not CME—received the lion’s share of cleared swap data reporting. The CFTC considered market power in individual asset classes for CME, and concluded that CME did not have market power in either interest rate swaps or credit swaps, or in the provision of clearing services for swaps by CFTC-registered DCOs.
As to DTCC’s contention that CME’s market share of cleared swaps has grown with the passage of time, the CFTC observed that this was not in the administrative record when the CFTC was considering CME Rule 1001, and was therefore not properly before the court.
The case is No. 1:13-cv-00624-ABJ.