Wall Street groups contest CFTC cross-border guidelines

Reuters

By Emily Stephenson and Sarah N. Lynch

WASHINGTON, Dec 4 (Reuters) - Three Wall Street trade groupssued the U.S. Commodity Futures Trading Commission on Wednesdayin hopes of beating back tough overseas trading guidelines theyfear could hurt markets and cut profits.

The groups accused the CFTC in their lawsuit of avoiding arigorous rulemaking process, tacking changes on to theguidelines without seeking public input, and failing to studyeconomic impacts of the regulation and its costs to industry.

They also said the lawsuit aims to stop the CFTC from whatthey described as an "unceasing effort" to seize authority overthe global swaps market by publishing hasty, unpredictableadvisory documents instead of issuing formal rules.

"This action, which has been taken so far outside the boundsof normal regulatory course ... needs to be addressed throughthe court system," Judd Gregg, chief executive of the SecuritiesIndustry and Financial Markets Association (SIFMA), toldReuters.

SIFMA, the International Swaps and Derivatives Association(ISDA) and the Institute of International Bankers (IIB) filedthe suit in U.S. District Court for the District of Columbia.

A spokesman for the CFTC did not have an immediate comment.

The CFTC, the nation's top swaps regulator, was required bythe 2010 Dodd-Frank law to write dozens of rules bringing the$630 trillion market under federal oversight for the first time.Regulators were also instructed to determine how their rulesshould apply to U.S. companies with operations overseas.

The issue sparked a trans-Atlantic conflict with banks andEuropean regulators who did not want companies to have to complywith both U.S. and foreign rules.

Complicating matters, the U.S. Securities and ExchangeCommission, which oversees a small portion of the swaps marketregarding equities and some credit instruments, has taken adifferent approach. It is pursuing a formal rule that willgovern how its regulations apply across the globe.

The CFTC gave final approval in July to guidance that wouldgenerally let the overseas branches of U.S. banks follow foreignswaps regulations, as long as they are roughly comparable toU.S. rules.

The guidance was subjected to public comment and approved bythe commission, with Republican Commissioner Scott O'Maliadissenting.

But the groups challenging the guidance said they werealarmed by follow-up "advisories" issued by CFTC staff at therequest of Chairman Gary Gensler, a Democrat. Those were notreleased for comment beforehand or voted on publicly.

Two advisories, issued on Nov. 14 and 15, greatly expandedthe scope of the CFTC's rules to include swaps that werenegotiated in the United States, even if the trades were bookedoffshore and outside of the U.S. marketplace.

The trade groups said the change would be costly for firmsthat were complying with an earlier interpretation of the rulesand should have gone through the full public comment process.

"This lawsuit comes in direct response to Chairman Gensler'sdecision to ignore the rule of law and disregardlong-established procedures at the CFTC for adopting new rules,"Republican Representative Frank Lucas, who chairs the House ofRepresentatives' agriculture committee, said in a statement.

GENSLER'S LEGACY

Should the challenge prevail, it could detract fromGensler's legacy as chairman. His term ends on Jan. 3.

He has gained a reputation as an especially aggressivefinancial regulator in his push to finalize toughinterpretations of new regulations required by Dodd-Frank.

The lead attorney representing the trade groups, EugeneScalia of Gibson Dunn & Crutcher, has a track record of oftenwinning legal challenges to Wall Street regulations.

The CFTC has had mixed success in defending against legalchallenges during Gensler's tenure.

The agency lost one case filed by SIFMA and ISDA against aset of rules to rein in how banks and other large traders placebets in the commodity markets.

But it has successfully beaten back other challenges,including one filed against the agency by Bloomberg LP overderivatives rules and another lawsuit filed by industry groupsthat targeted fund registration requirements.

Joel S. Telpner, a partner at law firm Jones Day, said thecourt may wish to take a narrow approach to the challenge toavoid creating major confusion.

"It creates somewhat of a challenge or dilemma for the courton having to face the reality that if they throw out thecross-border guidance at this point, how does it impact all ofthe other rules that were issued?" he said.

The court may focus on just the procedural issue of whetherthe CFTC should have issued formal rules rather than guidance,he said, to avoid creating ambiguity about whether thecross-border requirements still apply.

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