WASHINGTON (CN) - Bloomberg LP sued the Commodity Futures Trading Commission, challenging its creation of different rules for swaps and futures and options.
In its federal complaint, Bloomberg claims the CFTC rule violates the Commodities Exchange Act and the Administrative Procedure Act.
The CFTC adopted the final rule in November 2011, establishing guidelines that require derivatives clearing organizations to use a minimum liquidation time of one day for futures and options, a one-day minimum for swaps on agricultural commodities, energy commodities and metals, and a minimum liquidation time of five days for all other swaps.
"These requirements apply to all swaps trading, including on OTC [over the counter] swap platforms, such as those available on the Bloomberg Professional service, in the period before the Commission's SEF [swap execution facilities] rulemaking is completed and SEFs become operative," Bloomberg claims.
"By contrast, a financial swap that - in the words of the Chairman of the CFTC - has been 'relabeled' as a 'swap futures' contract will automatically be subject to a one-day minimum liquidation time, without regard to any risk or liquidity considerations. This will result in more favorable margin treatment for the 'swap futures' contract than for a functionally comparable financial swap that has not been 'futurized' and remains subject to a five-day liquidation time."
Bloomberg claims that derivatives clearing organizations (DCOs) should have the power to establish liquidation times for certain products, a notion it claims was echoed by CFTC Commissioner Scott O'Malia, who objected to the rule.
"In announcing its new minimum liquidation requirements for the first time in the final rule, the Commission violated the APA by failing to give plaintiff and other members of the public notice and the opportunity to comment on the new regulatory approach and its consequences," the complaint states. "The Commission compounded its error by repeatedly deploying arbitrary and capricious reasoning to explain its action. The Commission based its minimum liquidation times on the purported voluntary practices of DCOs prior to the passage of the Dodd-Frank Act, practices that the Commission considered to be reasonable and prudent."
Bloomberg's financial software and terminals provides analytics and equity trading advice for the company's 300,000 subscribers worldwide, though in its complaint, the company said it will expand through the creation of its own swap execution facility.
"Bloomberg intends to operate a SEF in order to facilitate trading in the swaps market, as soon as the CFTC's ongoing SEF rulemaking is completed," the complaint states.
Bloomberg claims the CFTC ignored the numerous public comments that encouraged it to allow DCOs to determine the appropriate liquidation time based on the characteristics and actual liquidity of each product.
It asks the court to vacate and set aside the rule, and enjoin the CFTC from implementing minimum liquidation requirements that are longer for swaps than for futures contracts.
Bloomberg is represented by Eugene Scalia with Gibson Dunn.
Scalia is the son of U.S. Supreme Court Justice Antonin Scalia.
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