Industry Groups File Suit Over CFTC Cross-Border Interpretive Guidance
SIFMA, ISDA and the Institute of International Bankers (IIB) have filed suit against the CFTC in the D.C. District Court asserting that the CFTC's Cross-Border Interpretive Guidance is impermissible rulemaking prohibited by the Administrative Procedure Act and the Commodity Exchange Act. In July 2013, the CFTC issued its 78 page Interpretive Guidance, which set forth the CFTC's interpretation on a host of swap issues, including what constitutes a "U.S. Person" for purposes of swap regulations enacted pursuant to Title VII of the Dodd-Frank Act and when registration may be required for Non-U.S. Persons. The complaint filed by SIFMA, ISDA and IIB asserts that the Interpretive Guidance is, in actuality, rulemaking and that as a result, the CFTC was required to follow procedures mandated by the Administrative Procedure Act and the Commodity Exchange Act for the adoption of regulations, including providing a cost-benefit analysis of the guidance. The complaint also challenges the November 14, 2013 Advisory described in greater detail below.
CFTC Issues New Swaps Report
On November 20, 2013, the CFTC issued its initial weekly swaps report, which covers the interest rate and credit asset classes that comprise about 90% of the approximately $400 trillion swaps market. The report provides three views of the swaps market: the gross notional outstanding value, the weekly transactions measured by dollar volume, and the weekly transactions measured by ticket volume. For each asset class, the report provides detailed breakdowns of the swaps market by product type, currency (six major currencies), tenor, participant type, and whether swaps are cleared or uncleared.
The report shows that over the last month, approximately 70% of new transactions in the interest rate swaps market were cleared. As of November 8, the outstanding notional amount of market facing interest rate swaps totaled $320 trillion, and 61% of those swaps were cleared. Just 21% of the interest rate swaps market was cleared in 2008.
The Weekly Swaps Report is modeled on the CFTC’s Commitments of Traders report. The swaps report will be published each Wednesday at 3:30 p.m. Data for the week ending on a given Friday will appear in the report on the second following Wednesday (i.e., 12 days later). For example, data for the week ending November 8 appears in the report published on November 20.
Controversial Advisory on Cross-Border Swap Requirements Issued by CFTC
The Division of Swap Dealer and Intermediary Oversight (DSIO) has issued an Advisory which sought to clarify when Transaction-Level Requirements (further explained in the CFTC's prior Interpretive Guidance on the application of cross-border swaps rules) must be met by registered non-U.S. swap dealers. In the Advisory, the DSIO states that a registered non-U.S. swaps dealer regularly using U.S. based personnel or agents to arrange, negotiate, or execute a swap with a non-U.S. person, must comply with the Transaction-Level Requirements. In its Advisory, DSIO also stated that based on the Dodd-Frank Act, the CFTC has a strong supervisory interest in swap dealing activities that occur within the United States regardless of the location of the counterparties.
The Advisory was met with criticism by Financial Services Committee Chairman Jeb Hensarling (R-TX) who called the Advisory "arbitrary and capricious" and believed that the DSIO was improperly deciding matters better suited for Congressional debate. On November 26, the CFTC issued No Action Relief delaying the effectiveness of the Advisory until January 14, 2014. The Advisory was also recently challenged by SIFMA, ISDA and the IIB in its lawsuit against the CFTC concerning the CFTC's Cross-Border Interpretive Guidance issued in July 2013.
CFTC Proposes Position Limits on Energy and Other Commodities and Aggregation Amendments
The CFTC recently released two notices of proposed rulemaking addressing position limits and aggregation. The first set of proposed rules would establish limits on speculative positions in 28 physical commodity futures contracts traded pursuant to the rules of a designated contract market and swaps that are “economically equivalent” to those contracts. The proposed rules would establish two types of speculative limits—1) spot-month position limits, which will be set generally at 25% of estimated deliverable supply; and 2) non-spot-month position limits, which will be set using the 10/2.5 formula (i.e., 10% of the contract’s first 25,000 of open interest and 2.5% thereafter).The proposed rules also modify the CFTC's current definition of a bona fide hedge for purposes of position limits as well as amend certain regulations concerning account aggregation standards and guidelines for exchange-set position limits. The CFTC estimates that approximately 400 traders will be affected by the proposed limits. The CFTC had previously proposed position limits for futures and swaps in October 2011, but the rules were vacated by the D.C. district court and remanded to the CFTC in September 2012.
In its second proposed rulemaking the CFTC proposed an “aggregation” policy, which includes rules to determine how accounts and positions must be aggregated. In general, aggregation is required when entities are under common control. The proposal provides for certain exemptions from aggregation for the following situations:
- Sharing of information would create a "reasonable risk" of a violation of a federal, state or foreign jurisdiction law or rule;
- An ownership interest is less than 50 percent and trading is independently controlled;
- An ownership interest is greater than 50 percent in a non-consolidated entity whose trading is independently controlled, and an applicant certifies that such entity's positions either qualify as bona fide hedging positions or do not exceed 20 percent of any position limit; or
- Ownership of less than 50 percent results from broker-dealer activities in the normal course of business.
Comments on the aggregation of positions rulemaking are due by January 14, 2014.