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From Securities Regulation Daily, March 10, 2014

Independent swap data repository’s challenge of CFTC’s approval of “anticompetitive” clearinghouse conduct allowed to proceed

By Lene Powell, J.D.

Where an independent swap data repository challenged the actions of the CFTC in permitting clearinghouses to require that swaps data be reported to their own captive repositories, the District Court for the District of Columbia dismissed several counts of the complaint as not based on “final agency actions” reviewable under the Administrative Procedure Act (APA), but allowed counts based on the CFTC’s approval of a rule submission by one clearinghouse to proceed (DTCC Data Repository v. CFTC, March 10, 2014, Jackson, A.).

Background. The Dodd-Frank Act extended oversight of the CFTC over the previously unregulated over-the-counter derivatives market, in part by requiring swaps data to be reported to a newly-created type of entity, the swaps data repository (SDR). Existing clearinghouses established their own SDRs and registered them. DTCC Data Repository (DDR) is a provisionally registered SDR, and is a wholly owned, indirect subsidiary of plaintiff DTCC, which provides post-trade market infrastructure for multiple asset classes, including derivatives. According to the amended complaint, DDR is the only SDR that is not affiliated with a derivatives clearing organization (DCO).

DDR argued that the CFTC violated the Dodd-Frank Act and its own regulations by failing to prohibit “anticompetitive tying arrangements” between DCOs and their captive SDRs, with the result that independent repositories such as DDR are being elbowed out of the marketplace, and costs and systemic risks are increased. Specifically, DDR alleged that the CFTC allowed clearinghouses to require that cleared swap data be reported to their affiliated, or “captive,” repositories, and that the CFTC violated the APA in three related actions: (1) revising a Frequently Asked Questions (FAQ) document that originally indicated that DCOs would be prohibited from requiring that cleared swaps data be reported to their captive SDRs; (2) approving a new rule submitted by the Chicago Mercantile Exchange (CME) that required that cleared swaps be reported to CME’s captive SDR; and (3) allowing the self-certification of a similar rule by ICE Clear Credit.

Three counts dismissed as not “final agency action.” The CFTC argued that the count based on the revision of the FAQ should be dismissed because it failed to state a claim upon which relief could be granted, as it did not allege any final agency action. The court agreed, finding that the withdrawal of three questions from the FAQ was not a reviewable final agency action because an agency action is not final if it is “only the ruling of a subordinate official,” and the FAQs plainly stated that they reflected the views of Commission staff, not of the Commission itself. Further, the withdrawal was not a final action because it did not determine any rights or obligations, nor was it the culmination of a Commission decision-making process.

The self-certification by ICE Clear Credit was also not a reviewable final agency action, because it was approved by operation of law and therefore did not present any agency action or “failure to act” subject to review under the APA. Because Congress did not articulate a limitation on the approval by operation of law of a rule like ICE Rule 211, there was no “discrete” agency action to review, and the self-certification of ICE Rule 211 was not a reviewable “failure to act.” The court distinguished precedent in Amador County. v. Salazar (2011), noting that the permissive language of the Commodity Exchange Act (CEA) (that the self-certification is effective “unless” the Commission acts, and the Commission “may” issue a stay) was in contrast to the congressionally imposed mandate found in the Indian Gaming Regulatory Act. The brief 10-day review period Congress supplied in the CEA further supported the conclusion that Congress did not intend to impose a duty on the Commission to do a searching review of every rule or rule amendment that passes through the self-certification process.

Challenge of CFTC’s approval of CME rule allowed to proceed. In Count II, DDR alleged that the Commission’s approval of the CME rule violated APA Secs. 553 and 701 to 706, and three sections of the CEA relating to antitrust laws and considerations: Secs. 7a-1(c)(2)(N), 19(b), and 24a(f). In Count III, the plaintiffs claimed that the Commission’s approval of the CME rule violated the same sections of the APA, as well as CEA Sec. 7a-2(c)(5)(A), which governs the Commission’s approval of new rules. The CFTC did not challenge Count II, but argued that Count III was duplicative of Count II.

The court found that the different legal theories advanced in Counts II and III did not constitute identical allegations, and that Count III advanced a unique legal theory that was not duplicative of Count II. Accordingly, these counts were allowed to proceed.

The case is No. 13-0624 (ABJ).

Attorneys: Andrew Michael Friedman (Patton Boggs, LLP) for DTCC Data Repository LLC and Depository Trust and Clearing Corp. Anne Whitford Stukes for the SEC.

Companies: DTCC Data Repository LLC; Depository Trust and Clearing Corp.

MainStory: TopStory ClearanceSettlement Derivatives DoddFrankAct Swaps DistrictofColumbiaNews

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