CFTC's Backdoor Rulemaking Avoids Scrutiny

The Commodity Futures Trading Commission (CFTC) won a partial victory in court earlier this week in a challenge brought by the Depository Trust & Clearing Corporation (DTCC). In DTCC Data Repository (U.S.), LLC v. U.S. Commodity Futures Trading Commission, No. 13-0624, 2014 U.S. Dist. Lexis 30195 (D.D.C. Mar. 10, 2014), the court allowed the suit to proceed, but dismissed several claims, including one that challenged a staff action. The court’s ruling with respect to this claim is important because the CFTC has made a practice of taking key actions through means other than judicially reviewable notice-and-comment rulemaking.

DTCC hopes to become the go-to trade data repository under the new Dodd-Frank swap transaction reporting requirements. The data reporting business built around Dodd-Frank likely will be a lucrative one, so it is not surprising that entities that clear swap transactions would not want DTCC to be the default swap data repository. Instead, they want the transactions they clear to be reported to their affiliated swap data repositories. The CFTC took several steps that enabled the clearinghouses to direct trade reporting to their affiliated swap data repositories. These steps are the basis for DTCC’s suit.

Of particular interest is the court’s dismissal of the claim that was based on the modification of a set of staff answers to frequently asked questions (FAQs). The CFTC released the FAQs at issue on October 11, 2012 and modified them on November 28, 2012. The initial version prohibited clearinghouses from requiring the use of their captive data repositories. The modified version deleted this prohibition. As the CFTC explained when it modified the FAQs, those issues would now be considered in connection with the Commission’s review of a related rule submission by a clearinghouse, the Chicago Mercantile Exchange (CME). The change came after the CME filed a complaint alleging, among other things, that “CFTC staff has taken the position that CME must amend its [swap data repository] application to show compliance with the FAQ before staff will recommend approving the application.” Complaint at ¶ 86, Chicago Mercantile Exchange, Inc. v. U.S. Commodity Futures Trading Commission, No. 12—01820 (Nov. 8, 2012). After the FAQs were modified, the CME dropped its suit, and the CFTC eventually approved its rule.

DTCC challenged the withdrawal of the FAQs under the Administrative Procedure Act. The court dismissed that part of the suit because “the withdrawal of the FAQs did not determine any rights or obligations, nor was it the culmination of a Commission decision-making process.” DTCC v. CFTC, 2014 U.S. Dist. Lexis at *12. The court noted—but did not base its dismissal on—the CFTC’s insistence that these FAQs were withdrawn by the staff, rather than the CFTC’s official decision-makers—its politically accountable commissioners. Id. at *11-12.

The court reasonably concluded that the withdrawal of the FAQs was not the CFTC’s final word in the swap data reporting matter. Nevertheless, the DTCC case, together with the allegations in the dropped CME suit, highlights the important role that staff FAQs play in the implementation of Dodd-Frank. FAQs can determine the business prospects of the different entities seeking to carve out a niche in the swaps markets that Dodd-Frank has built. Despite their deep impact on the markets and the people that use them, decisions to issue, modify, and withdraw FAQs may be immune from judicial review. The court may have correctly decided not to focus on the FAQs in this case, but courts should be on the watch for CFTC attempts to impose binding obligations through staff-level pronouncements.

More by | Hester Peirce Hester Peirce , Law.com Contributor
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