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From Securities Regulation Daily, September 1, 2015

CFTC reports progress on cost-benefit analysis in SIFMA rule challenge

By Lene Powell, J.D.

In a joint status report following remand for additional consideration of many of its Dodd-Frank swaps rulemakings, the CFTC and several industry associations reported that the agency has clarified its earlier consideration of costs and benefits and reviewed public comments on whether further cost-benefit analysis is needed on the cross-border application of certain CFTC rules. CFTC staff is currently working on recommendations to assist the Commission in its deliberations. In addition, the CFTC has proposed amendments to a swaps reporting rule that was one of the remanded rulemakings (Securities Industry and Financial Markets Association v. CFTC, September 1, 2015).

Rule challenge and remand. Three industry groups (SIFMA, the International Swaps and Derivatives Association (ISDA), and the Institute of International Bankers) brought a broad legal challenge to the CFTC’s swaps rules implementing the derivatives title of the Dodd-Frank Act. Among other grounds, the associations argued that the CFTC did not adequately evaluate costs and benefits of the rules or define the scope of the rules’ extraterritorial application. In September 2014, the federal district court for the District of Columbia dismissed most of the suit, granting summary judgment for the CFTC regarding its cross-border action, large trader reporting, straight-through processing, and clearing determination rules.

However, the court said the CFTC had not met the “not particularly demanding” statutory requirements for cost-benefit analysis regarding the cross-border application of certain rules. Therefore, the court remanded the following rules to the CFTC for further cost-benefit analysis: transaction-level real-time reporting, daily trading records, and portfolio reconciliation and documentation rules and the entity-level entity definition, swap entity registration, risk management, chief compliance officer, SDR reporting, historical SDR reporting rules, and the SEF registration rules.

CFTC activities following remand. In March 2015, the CFTC published an Initial Response to the court order. First, the Response clarified that in the swaps rulemakings, the CFTC considered all available evidence. If there was no evidence showing differences in costs and benefits between foreign and domestic swaps activities, the CFTC did not explicitly characterize costs or benefits as foreign or domestic. Unless location was specifically mentioned, the cost-benefit discussion considered the effects of CFTC rules on all business activity subject to CFTC regulations, whether because the activity was physically located in the U.S. or had a connection with or effect on U.S. commerce under section 2(i) of the Commodity Exchange Act.

Second, the Response asked for public comment on whether any further consideration or explanation of costs and benefits was needed to respond to the court’s mandate. The CFTC received four comments in response, including comments from plaintiffs as well as the Japanese Bankers Association and UBS Securities LLC. The plaintiffs believe that the CFTC should conduct further analyses that include “meaningful consideration” of the costs and benefits of applying the remanded rules extraterritorially, and that the Commission should then publish those analyses and invite further public comment. According to the CFTC, staff has reviewed these comments and is currently formulating recommendations to assist the Commission’s deliberation.

Proposed amendments to swaps reporting rule. For reasons unrelated to the litigation, on August 19, 2015, the CFTC issued a Notice of Proposed Rulemaking regarding the SDR Reporting Rule, which was one of the remanded rules. Based on practical experience following implementation of the rule, the CFTC is considering changes relating to the reporting of cleared swaps. As part of the proposal, the CFTC requested comment regarding whether the costs and benefits of the proposed amendments’ overseas application are different than those for their domestic application.

The case is No. 13-1916 (PLF).

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