In response to the court’s ruling in SIFMA v. CFTC, the CFTC has issued a release supplementing the preambles to certain of its rulemakings that had been challenged in the litigation to clarify that the costs and benefits identified in those rulemakings applied both domestically and extraterritorially to swaps activities subject to CFTC regulation. In the release, the CFTC also requested comments on whether and to what extent such preambles may need to be further supplemented in particular respect of the extraterritorial costs and benefits of such rulemakings.
On March 10, 2015, the Commodity Futures Trading Commission (the CFTC or theCommission) released its initial response (the Release) to the United States District Court for the District of Columbia's remand order in Securities Industry and Financial Markets Association, et al., v. United States Commodity Futures Trading Commission, No. 13-1916 (PLF) (D.D.C. September 16, 2014) (SIFMA v. CFTC). The order remanded eight swaps-related rulemakings (which altogether comprise ten rules) to the CFTC to address what the court held to be inadequacies in the Commission's explanation of its consideration of costs and benefits in those rulemakings. In the Release, the Commission supplemented the preambles to the remanded rulemakings by clarifying that the costs and benefits identified in such rulemakings applied both to domestic swaps activities and to activities outside the United States that are subject to the Commission's swaps rules by operation of section 2(i) of the Commodity Exchange Act (the CEA). The Commission also used the Release to solicit comments on whether there are cross-border costs or benefits associated with the remanded rules that differ from those associated with activities within the United States. Following the Commission's review of such comments, it will publish a further response to the District Court's remand order which would include any supplementation of, or changes to, its consideration of the costs and benefits of the rules as set forth in the rule preambles.
On December 4, 2013, the Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association, and the Institute of Institutional Bankers sued the CFTC in the United States District Court for the District of Columbia challenging on various grounds the Commission's Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations (the Cross Border Guidance), as well as the extraterritorial application of fourteen of the rules (comprised within twelve rulemakings) promulgated by the CFTC to implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding swaps. On September 16, 2014, the court issued a decision, granting summary judgment to the Commission on most issues.
Major Holdings and Court Action
Among the major holdings of the court regarding the cross-border application of the Commission's rules were (1) that because the Cross-Border Guidance is a statement of Commission policy and not a legislative rulemaking, the Cross-Border Guidance is not subject to judicial review, (2) that Section 2(i) of the CEA is a self-effectuating provision that makes Commission swaps rules apply to business activities outside the United States to the extent they meet the test set forth in the statutory language, and, therefore, the Commission's substantive rules do not need to specify their international scope since that was done by statute, (3) that the Commission was not tasked with reconsidering the costs and benefits of Congress' decision that the CFTC's swaps rules apply to certain overseas activities or of Congress' determination of the test for ascertaining which overseas activities would be so covered by such rules, (4) that the Commission can enforce its rules overseas in reliance on section 2(i) and need not define the precise scope of section 2(i) each time it promulgates a substantive swaps rule but rather can address issues of the scope of section 2(i) as they arise, and (5) that in the challenged rules, the Commission reasonably determined not to address issues of geographical scope and to simply rely on the statute (i.e., section 2(i)) to define the rules' application to activities outside of the United States.
Notwithstanding the foregoing holdings, the court also held that in the preambles for ten of the challenged rules, promulgated as part of eight rulemakings, the Commission should have, but did not, state whether the costs and benefits identified in the rule preambles applied not only to domestic swaps activities, but also to swaps activities outside the United States. Specifically, the court held that the Commission should have discussed whether and to what extent the costs and benefits as to overseas activity may differ from those related to domestic application of the rules and, on that basis, the court described the rules as inadequately explained. Therefore the court remanded to the Commission the eight rulemakings encompassing the rules in question (without vacating such rulemakings ) for the Commission to better explain its position on whether the costs and benefits identified in the rule preambles applies to overseas activities, and to explain any relevant differences.
In response to the court's remand order, the Commission issued the Release to supplement the preambles of the remanded rulemakings and to clarify that the Commission functionally considered the extraterritorial costs and benefits of such rulemakings even where the Commission did not specifically refer to matters of location. The Commission also made a formal request for comments in the Release because the court's remand order stated that the Commission needs also to make explicit which of the costs and benefits identified in the rule preambles similarly apply to the rules' extraterritorial applications. The Commission asked four questions for the purpose of assisting it in determining whether any further consideration or explanation – beyond that contained in the original rule preambles and the Release – is needed to respond to the court's remand order. The four questions on which the Commission requested comment are as follows:
- Are there any benefits or costs that the Commission identified in any of the rule preambles that do not apply, or apply to a different extent, to the relevant rule's extraterritorial applications?
- Are there any costs or benefits that are unique to one or more of the rules' extraterritorial applications? If so, please specify how.
- Put another way, are the types of costs and benefits that arise from the extraterritorial application of any of the rules different from those that arise from the domestic application? If so, how and to what extent?
- If significant differences exist in the costs and benefits of the extraterritorial and domestic application of one or more of the rules, what are the implications of those differences for the substantive requirements of the rule or rules?
Please feel free to contact any of the Allen & Overy attorneys listed below with questions or if you require further consultation regarding these or any other issues raised by the Release.