UPDATE 1-U.S. clearing house looks to intervene in CME compliance row

Mon Nov 12, 2012 11:04pm EST

By Douwe Miedema

NEW YORK Nov 12 (Reuters) - The Depository Trust and Clearing Corp (DTCC), a U.S. clearing house, sought to intervene Monday in a lawsuit by the CME Group that would allow the exchange operator 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 to prevent the regulator 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 a license for New York-based DTCC to function as an SDR, which are meant to shed more light on the opaque derivatives market that stood at the center of the financial crisis.

In a motion filed with the U.S. District Court in Washington, D.C., DTCC said the CME lawsuit would harm the clearing house if it were successful and that it was against public interest.

"If granted, the requested injunction will disrupt and dismantle the regulatory regime favoring transparency in the derivatives markets," said DTCC, which had earlier sent a letter to the CTFC warning it was considering legal action.

CME, which operates the Chicago Mercantile Exchange, the Chicago Board of Trade and the New York Mercantile Exchange, said in a statement Monday that the swap rules would impose "costly, cumbersome, and duplicative requirements" on trading houses.

The CFTC could not immediately be reached for comment.

OVERHAUL

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 part 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 successfully challenges 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 that 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 differs in that there is no industry consensus about the issue, as the CME is advancing a more narrow commercial interest.

The International Swaps and Derivatives Association lobby group on Friday 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 watchdog 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 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.

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