CFTC Must Defend Claim It Stymied Competition

WASHINGTON, D.C. (CN) - A federal judge preserved parts of a lawsuit that claims the U.S. Commodity Futures Trading Commission is squeezing an independent company out of the data repository business.

The 2010 Dodd-Frank Consumer Protection Act was enacted, in part, to improve regulation and transparency of previously unregulated markets in the wake of the 2008 financial crises. The Act gave the commission authority to regulate the swaps market and has since developed new regulations that improve transparency and reduces risk associated with it.

A swap is a financial derivative wherein two parties enter into an agreement to exchange one type of cash flow for another. Typically, swaps are used as a hedging tool to protect the parties from adverse movements in interest rates or market prices.

Under Dodd-Frank, swaps are "cleared" by a derivatives clearing organization, or DCO, and the data about swaps are to be reported to registered swap data repositories, or SDRs. The commission regulates both entities.

Plaintiff Depository Trust & Clearing Corporation is a clearinghouse and indirect subsidiary, DTCC Data Repository, is the accompanying repository.

The companies sued the CFTC in the federal court in Washington, D.C., alleging the commission illegally changed its rules for clearinghouses and repositories, creating an anti-competitive environment in the industry.

The lawsuit "challenges three interrelated actions by the CFTC. The first was the commission's reversal of its published pro-competitive statements regarding its cleared swap data reporting rules," according to the complaint. "The second was its administrative action approving a new Rule 1001 of the Chicago Mercantile Exchange Inc. (CME), which imposes anti-competitive data reporting requirements that the commission had barred in its earlier statement. The third was its approval by inaction of a similar ICE Clear Credit rule."

The plaintiffs allege the changes constitute a complete departure from the CFTC's final rule in violation of the Administrative Procedures Act (APA) and the Commodity Exchange Act.

"Under the guise of these actions, the commission made substantive changes to its regulations," the complaint states. "As a consequence, two large swap clearinghouses have commission-approved rules requiring that the official reports of transactions cleared by such clearinghouses be reported to their captive swap data repositories."

On June 28, 2013, the commission filed a motion to dismiss four of the five causes of action, alleging plaintiff's failure to state a claim, and that counts three and five duplicate two and four.

U.S. District Judge Amy Berman Jackson dismissed counts one, four and five for failure to state a claim "because plaintiffs failed to allege any final agency action that would be reviewable under the APA," according to her order.

Jackson specifically stated in her order that "counts IV and V challenge the commission's tacit approval of ICE Rule 211. But that rule was approved by operation of law, and therefore the court finds that counts IV and V do not present any agency action of 'failure to act' that would be subject to review under the APA."

She denied dismissal of count three because "it advances a unique legal theory and is not duplicative of count II," meaning the commission will have to answer for its approval of the CME Rule 1001. The commission did not move to dismiss count II.

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