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Traders Call Derivative Rules Illegal & Unfair

WASHINGTON (CN) - Swaps and derivatives traders sued the U.S. Commodity Futures Trading Commission, claiming its new guidelines for cross-border trading are thinly veiled regulations that were adopted illegally.

The Securities Industry and Financial Markets Association, joined by the International Swaps and Derivatives Association and the Institute of International Bankers, sued the CFTC in Federal Court to try to stop the new guidelines from taking effect.

"The Commission has promulgated, in the guise of 'guidance,' an expansive new body of regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act that seeks to extend the CFTC's authority and requirements across the globe," the complaint states.

"In doing so, the Commission failed to conduct the cost-benefit analysis required by law or to comply with other essential prerequisites of rulemaking under the APA [Administrative Procedure Act] and the CEA [Commodity Exchange Act]. This flawed attempt to act as the paramount regulator of international swaps trading, even where there is no significant connection with United States commerce, will harm investors, impair U.S. and foreign businesses, impose inconsistent, duplicative requirements on firms that are regulated by other nations, and exceeds the CFTC's lawful authority."

The traders claim the regulations fall under Title VII of Dodd Frank, a section of the reform bill regulating domestic trading, without making mention of its authority over international trading.

According to the complaint, the CFTC bypassed required rule-making procedures by applying Title VII regulations to international trading by issuing the rule as guidance.

"This 'guidance,' referred to herein as the 'Cross-Border Rule,' spans 78 pages in the Federal Register and includes 650 footnotes and numerous charts and appendices; establishes a host of new regulatory definitions; and contains myriad directors for financial institutions and investors around the globe," the complaint states.

Title VII regulations were created in response to the 2008 financial crisis in an attempt to make swaps and derivatives markets more transparent. Bankers and traders, with allies in Congress have fought furiously against attempts to regulate the complex financial instruments.

But the traders say in the 63-page lawsuit: "The financial industry and derivatives users have strived to comply with the CFTC's recent regulations and have invested significant resources in furtherance of that aim. Plaintiffs do not object to, and do not seek to alter, the domestic application of the Commission's Title VII rules. However, the CFTC's burgeoning disregard for statutory responsibilities when applying those rules in the case of non-U.S. entities and transactions compels legal action."

The groups want the court to vacate the Commission's guidance, and an injunction preventing it from implementing international swaps regulations without going through the legal channels laid out by federal law.

The traders are represented by Eugene Scalia, son of U.S. Supreme Court Justice Antonin Scalia, of Gibson Dunn & Crutcher.

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