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From Securities Regulation Daily, June 10, 2013

Bloomberg Fails to Win Injunction Against CFTC OTC Swaps Regulation

By Matthew Garza, J.D.

The federal district court sitting in Washington, D.C., has ruled that Bloomberg L.P. lacked standing to challenge a CFTC rule on swaps that it said would hurt its Bloomberg Professional terminals service and nascent swaps execution facility. The company said it has invested in the creation of a subsidiary swap execution facility and taken “substantial steps” toward creating the infrastructure to operate the facility, and unless enjoined, the regulation would encourage its subscribers to migrate permanently to its competitors’ trading venues. After discussing the CFTC’s rulemaking process in detail, the court held that that Bloomberg did not have standing to challenge the rule and did not show imminent and irreparable harm sufficient to warrant a preliminary injunction (Bloomberg L.P. v. CFTC, June 7, 2013, Howell, B.).

Minimum liquidation times. The rule, codified at 17 CFR §39.13(g)(2)(ii), sets minimum liquidation times for swaps and futures contracts used by derivatives clearing organizations (DCOs) in the calculation of the risk of a particular trade. DCOs use this liquidity calculation as well as other inputs to measure a trade’s risk and volatility in order to set margin requirements. A longer liquidation time typically creates a larger margin requirement for the trade.

Final rule. After considering a “diverse array” of public comments on the proposed rule, the CFTC published a final rule on November 8, 2011, that went into effect on January 9, 2012. The court noted that the final rule requires a derivatives clearing organization to set (A) “[a] minimum liquidation time that is one day for futures and options,” (B) “[a] minimum liquidation time that is one day for swaps on agricultural commodities, energy commodities, and metals,” (C) “[a] minimum liquidation time that is five days for all other swaps,” or (D) “[s]uch longer liquidation time as is appropriate based on the specific characteristics of a particular product or portfolio.”

Cost-benefit analysis. The final rule discussed the costs and benefits of the rule, as the CFTC is required to do by the Commodity Exchange Act, the court noted. The considerations discussed included: protection of market participants and the public; efficiency, competitiveness, and financial integrity of futures markets; price discovery; sound risk management principles; and other public interest considerations. The court said that each factor was discussed in turn in the adopting release.

Standing. Bloomberg did not satisfy any of three constitutional minimum elements of standing, the court held, meaning it did not show (1) an injury in fact; (2) a causal connection between the injury and the complained-of conduct; or (3) the likelihood that the injury would be redressed by a favorable decision. Although it did not reach the merits because of Bloomberg’s lack of standing, the court opined that even if Bloomberg was able to establish standing, it was not close to establishing the “high standard for irreparable injury” necessary to obtain a preliminary injunction. “The presence of the plaintiff’s injury is based entirely on a series of worst-case scenario assumptions that are anything but certain to occur,” the court wrote.

Attorneys: Alex Christian Gesch (Gibson, Dunn & Crutcher, LLP) and Mario Matthew Cuomo (Willkie, Farr & Gallagher LLP) for Bloomberg L.P. Leslie Randolph for the United States Commodity Futures Trading Commission.

Companies: Bloomberg L.P.

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