A federal district court has handed the Commodity Futures Trading Commission (CFTC) a substantial victory, largely rejecting a legal challenge to the agency’s cross-border interpretive guidance brought by financial trade associations such as SIFMA and ISDA. The court’s Opinion means that, absent a successful appeal, the CFTC’s Guidance and its cross-border application of its Dodd-Frank swap rules are here to stay. The price of the CFTC’s victory, though, was the court’s conclusion that the Guidance is non-binding, so that the question of whether the CFTC is overreaching in applying its swap rules overseas can still be raised in defense of future CFTC enforcement actions.
The duck test
The heart of the court’s Opinion upholding the Guidance was that the Guidance is a “policy statement” of how the CFTC expects to apply Dodd-Frank in the cross-border context, combined with an “interpretive rule” in which the CFTC gave its construction of the statutory text in section 2(i) of the Commodity Exchange Act (enacted as part of Dodd-Frank). Because neither a policy statement nor an interpretive rule is binding on the CFTC or market participants, the Opinion held that the Guidance is not reviewable by the court.
Rather, in the words of the Opinion:
If and when the CFTC applies the [Guidance] in an enforcement action or lawsuit, it will be reviewable in the context of that action . . .
The Opinion added:
The Court will not question the CFTC’s decision to proceed in interpreting and applying Section 2(i) on a case-by-case basis through [enforcement] adjudication . . .
The court invoked the “duck test” (if it looks like a duck, walks like a duck, and quacks like a duck, it is a duck) to reject the trade associations’ efforts to categorize the Guidance as a binding “legislative rule” that would be reviewable in court. The Opinion stated:
Because the majority of the [Guidance] looks, walks, and quacks like a policy statement, the Court holds that the majority of the [Guidance] is a policy statement [with the remainder being an interpretive rule].
Limited CFTC cost-benefit consideration of Dodd-Frank rules required
In addition to the Guidance, the trade associations also challenged many of the Dodd-Frank swap rules that the CFTC is applying to conduct overseas. The Opinion generally rejected this challenge, too.
The court did send some rules back to the CFTC for further consideration of the costs and benefits of an extraterritorial application of those rules. However, the court made clear its view that it is likely the CFTC can do so while still reaching the same results.
Significantly, the CFTC’s Dodd-Frank swap rules all remain in effect while the agency conducts its additional, limited, cost-benefit consideration.
The disposition of the trade associations’ challenges to specific CFTC swap rules in the court’s Order was as follows:
- Challenge to Trade Execution Rule (establishing procedure for determining swaps that are “made available to trade”): Dismissed because trade associations lack standing, and because no comments were filed on the extraterritorial application of this rule;
- Challenge to Large Swap Trader Reporting, Straight-Through Processing, and Clearing Determination Rules: Summary judgment granted to CFTC because no comments were filed on the extraterritorial application (including costs and benefits) of these rules; and
- Challenge to remaining rules: Remanded to CFTC for further, limited, cost-benefit consideration, though the rules remain in effect:
- real-time reporting;
- daily trading records;
- portfolio reconciliation and swap documentation;
- entity definitions;
- swap dealer registration;
- risk management;
- chief compliance officer;
- Swap Data Reporting (SDR);
- historical swap data reporting; and
- Swap Execution Facility (SEF) registration.