Three financial associations have launched legal action claiming that the Commodity Futures Trading Commission’s publication of the so-called Cross-Border Rule in July was wrong and “exceeds the CFTC’s lawful authority”.
The Securities Industry and Financial Markets Association (SIFMA), the International Swaps and Derivatives Association (ISDA) and the Institute of International Bankers (IIB) filed a lawsuit against the CFTC in a Washington DC court yesterday (4 December).
Their complaint says that the Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations (the “Cross-Border Rule”) is “contrary to the spirit and the letter of international cooperation and may harm global markets”, they said in a joint press statement. They say that:
- The CFTC “unlawfully circumvented” legislation by characterising its regulations as “guidance”;
- Failed to conduct any cost-benefit analysis as required by law; and
- Conducted a flawed rule-making process.
The three associations say that the rule “violates existing agreements between global policymakers, and works against the G20 Commitment to implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets.
“The Cross-Border Rule further creates significant financial, legal and administrative burdens on market participants that could harm liquidity and the ability of end-users to manage their risks.”
European Commission “very surprised” by rule
The associations argue that the global commitment to regulatory coordination could be undermined and lead to potential conflicts. For example, “a firm could be required to execute the same trade on two different platforms and to clear the same transaction on two different clearinghouses. Transactions could be required to be reported in two jurisdictions,” they say.
They pointed out that the rule had recently been criticised by the European Commission. A spokeswoman for Michel Barnier, the EU Commissioner for the internal market and services, told Bloomberg in November: “We were very surprised by the latest CFTC rules which seem to us to go against both the letter and spirit of the path forward agreement. [The rules] are another step away from the kind of inter-operable global system that we want to build.”
ISDA chairman Stephen O’Connor said in the joint statement: “ISDA supports safe, efficient markets and works constructively with regulators around the world toward that end. The CFTC’s Cross-Border Rule, however, harm our mutual efforts to develop a robust, consistent and global framework for OTC derivatives regulation that reduces systemic risk. It harms financial markets and market participants and adversely impacts the ability of end-users to hedge their business and financial risks.”
IIB CEO Sally Miller said that her organisation had become “increasingly alarmed by what is proving to be an unceasing effort by the Commission to regulate the global swaps markets through unpredictable ‘guidance’ documents, advisories, and directives.”
The trade associations' press statement is available by clicking here.