By Emily Stephenson and Sarah N. Lynch
WASHINGTON Dec 4 Three Wall Street trade groups
sued the U.S. Commodity Futures Trading Commission on Wednesday
in hopes of beating back tough overseas trading guidelines they
fear could hurt markets and cut profits.
The groups accused the CFTC in their lawsuit of avoiding a
rigorous rulemaking process, tacking changes on to the
guidelines without seeking public input, and failing to study
economic impacts of the regulation and its costs to industry.
They also said the lawsuit aims to stop the CFTC from what
they described as an "unceasing effort" to seize authority over
the global swaps market by publishing hasty, unpredictable
advisory documents instead of issuing formal rules.
"This action, which has been taken so far outside the bounds
of normal regulatory course ... needs to be addressed through
the court system," Judd Gregg, chief executive of the Securities
Industry and Financial Markets Association (SIFMA), told
SIFMA, the International Swaps and Derivatives Association
(ISDA) and the Institute of International Bankers (IIB) filed
the suit in U.S. District Court for the District of Columbia.
A spokesman for the CFTC did not have an immediate comment.
The CFTC, the nation's top swaps regulator, was required by
the 2010 Dodd-Frank law to write dozens of rules bringing the
$630 trillion market under federal oversight for the first time.
Regulators were also instructed to determine how their rules
should apply to U.S. companies with operations overseas.
The issue sparked a trans-Atlantic conflict with banks and
European regulators who did not want companies to have to comply
with both U.S. and foreign rules.
Complicating matters, the U.S. Securities and Exchange
Commission, which oversees a small portion of the swaps market
regarding equities and some credit instruments, has taken a
different approach. It is pursuing a formal rule that will
govern how its regulations apply across the globe.
The CFTC gave final approval in July to guidance that would
generally let the overseas branches of U.S. banks follow foreign
swaps regulations, as long as they are roughly comparable to
The guidance was subjected to public comment and approved by
the commission, with Republican Commissioner Scott O'Malia
But the groups challenging the guidance said they were
alarmed by follow-up "advisories" issued by CFTC staff at the
request of Chairman Gary Gensler, a Democrat. Those were not
released for comment beforehand or voted on publicly.
Two advisories, issued on Nov. 14 and 15, greatly expanded
the scope of the CFTC's rules to include swaps that were
negotiated in the United States, even if the trades were booked
offshore and outside of the U.S. marketplace.
The trade groups said the change would be costly for firms
that were complying with an earlier interpretation of the rules
and should have gone through the full public comment process.
"This lawsuit comes in direct response to Chairman Gensler's
decision to ignore the rule of law and disregard
long-established procedures at the CFTC for adopting new rules,"
Republican Representative Frank Lucas, who chairs the House of
Representatives' agriculture committee, said in a statement.
Should the challenge prevail, it could detract from
Gensler's legacy as chairman. His term ends on Jan. 3.
He has gained a reputation as an especially aggressive
financial regulator in his push to finalize tough
interpretations of new regulations required by Dodd-Frank.
The lead attorney representing the trade groups, Eugene
Scalia of Gibson Dunn & Crutcher, has a track record of often
winning legal challenges to Wall Street regulations.
The CFTC has had mixed success in defending against legal
challenges during Gensler's tenure.
The agency lost one case filed by SIFMA and ISDA against a
set of rules to rein in how banks and other large traders place
bets in the commodity markets.
But it has successfully beaten back other challenges,
including one filed against the agency by Bloomberg LP over
derivatives rules and another lawsuit filed by industry groups
that targeted fund registration requirements.
Joel S. Telpner, a partner at law firm Jones Day, said the
court may wish to take a narrow approach to the challenge to
avoid creating major confusion.
"It creates somewhat of a challenge or dilemma for the court
on having to face the reality that if they throw out the
cross-border guidance at this point, how does it impact all of
the other rules that were issued?" he said.
The court may focus on just the procedural issue of whether
the CFTC should have issued formal rules rather than guidance,
he said, to avoid creating ambiguity about whether the
cross-border requirements still apply.