U.S. clearing house mulls legal action in row over compliance

NEW YORK Mon Nov 12, 2012 12:29pm EST

NEW YORK (Reuters) - The Depository Trust and Clearing Corp (DTCC) will consider judicial action if the top U.S. derivatives regulator gives in to a legal challenge by exchange operator CME Group that would allow CME to avoid making changes to comply with new regulations.

CME, the biggest operator of U.S. futures exchanges, last week filed a lawsuit against the Commodity Futures Trading Commission asking that the CFTC be prevented from enforcing reporting rules on trading in swaps that passed after the 2008 financial crisis.

CME is challenging the requirement that exchanges make available non-public reports of cleared swap transactions to new CFTC-registered entities called swap data repositories, or SDRs.

The CFTC has already granted New York-based Depository Trust and Clearing (DTCC) a license to function as an SDR.

"DTCC has significant concerns with the potential negative consequences of a judicial challenge or Commission action to remove the necessity for a legal dispute," Depository Trust said in the letter to CFTC Chairman Gary Gensler.

"DTCC is currently considering its possible responses to the suit and resulting Commission activity, including possible judicial recourse," DTCC said in the letter, which was dated November 11 and shared with Reuters.

CME, which operates the Chicago Mercantile Exchange, the Chicago Board of Trade and the New York Mercantile Exchange, had no immediate comment on the letter. The CFTC could not immediately be reached for comment.

Swaps data warehouses are meant to shed more light on the opaque derivatives market, which stood at the center of the 2008 financial crisis.

Swaps - a catch-all phrase for many kinds of often highly complex and lightly regulated financial instruments - will need to be traded on exchange-like platforms in what is expected to lead to an overhaul of the lucrative business.

In large parts they will also need to be cleared, and transaction data will need to be centrally stored in the SDRs.

The CFTC has not yet responded to a request by the CME to function as an SDR. CME does not trade swaps but like the DTCC also offers clearing services.

As a result, CME will need to report transaction data to a rival from the close of business on Tuesday, unless it can challenge the CFTC in court, or the Washington-based regulator grants the futures exchange a further reprieve.

The CME, which already collects a great amount of data by virtue of being a swap clearinghouse, believes it can do the job itself and it would be costly to use a third party.

The case is one of a growing number of legal challenges facing U.S. regulators, but it is different in that there is no industry consensus about the issue, as CME is advancing a more narrow commercial interest.

Already on Friday, the International Swaps and Derivatives Association lobby group distanced itself from CME by warning against a proliferation of data warehouses.

The CFTC suffered a setback in October, when it was forced to delay a crucial set of rules aimed at making the derivatives market more stable and less opaque.

And regulators from Europe and Asia criticized the regulator in a public hearing last week for its aggressive stance on how its rules apply to international banks and traders.

The Securities and Exchange Commission - which is also writing parts of the Dodd-Frank regulation - has also seen several of its rules challenged in the courts.

The CME case is Chicago Mercantile Exchange Inc. v. U.S. Commodity Futures Trading Commission, U.S. District Court for the District of Columbia, No. 12-cv-1820. (Reporting by Douwe Miedema; Editing by Leslie Adler)

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