Bloomberg L.P. v. Commodity Futures Trading Comm'n

• Decision Date: 07 June 2013
• Docket Number: Civil Action No. 13–523(BAH).
• Parties: BLOOMBERG L.P., Plaintiff, v. COMMODITY FUTURES TRADING COMMISSION, Defendant.
• Court: U.S. District Court — District of Columbia

949 F.Supp.2d 91

BLOOMBERG L.P., Plaintiff,

v.COMMODITY FUTURES TRADING COMMISSION, Defendant.

Civil Action No. 13–523(BAH).

United States District Court,

District of Columbia.

June 7, 2013.

Mario Matthew Cuomo, Thomas H. Golden, Willkie Farr & Gallagher LLP, New York, NY, Alex Christian Gesch, Misha Tseytlin, Eugene Scalia, Gibson, Dunn & Crutcher LLP, Washington, DC, for Plaintiff.

Leslie Randolph, Mary T. Connelly, Robert A. Schwartz, US Commodity Futures Trading Commission, Washington, DC, for Defendant.

MEMORANDUM OPINION

BERYL A. HOWELL, District Judge.

This is a challenge to a regulation, 17 C.F.R. § 39.13(g)(2)(ii), promulgated by the United States Commodity Futures Trading Commission (the “CFTC” or the “Commission”), which sets minimum liquidation times for swaps and futures contracts. The plaintiff Bloomberg L.P. (“Bloomberg”) claims, pursuant to the Administrative Procedure Act (“APA”), 5 U.S.C. §§ 500 et seq., that the Commission's regulation is both procedurally and substantively defective and must be set aside. Further, the plaintiff has applied for a preliminary injunction against the challenged regulation, claiming that a forthcoming phase of a related rule's implementation will cause the plaintiff imminent and irreparable harm if the minimum liquidation times are not enjoined. In this regard, Bloomberg alleges that, unless immediately enjoined, the Commission's regulation prescribing minimum liquidation times, when combined with other regulatory and market forces, will encourage the plaintiff's subscribers to migrate permanently to competitors' trading venues. The plaintiff, however, lacks standing to challenge the Commission's regulation and has not made a showing of imminent and irreparable harm sufficient to warrant the extraordinary relief of a preliminary injunction. Therefore, as discussed below, the Court denies the plaintiff's application for preliminary injunctive relief and dismisses this case for lack of standing.

I. BACKGROUND

Since this is an administrative law case, it is appropriate first to discuss generally the economic and regulatory framework of the challenged rule. Next, the Court will discuss the factual and procedural background of the particular rule being challenged.

A. Economic and Regulatory Framework

This case is about how the CFTC regulates the trading of derivatives. “Derivatives are financial contracts whose prices are determined by, or ‘derived’ from, the value of some underlying asset, rate, index, or event.” Nat'l Comm'n on the Causes of the Fin. & Econ. Crisis: The Financial Crisis Inquiry Report: Final Report 45–46 (2011). These instruments are not used to form capital or invest; rather, they are used for “hedging business risk or for speculating on changes in prices, interest rates, and the like.” Id. at 46. Although derivatives can come in many forms, there are two categories of derivatives implicated in this lawsuit: “swaps” and “futures.”

1. How Swaps and Futures Contracts Are Traded

“A ‘swap’ is a contract that typically involves an exchange of one or more payments based on the underlying value of a notional amount of one or more commodities, or other financial or economic interest,” and it “transfers between the parties the risk of future change in that value without also transferring an ownership interest in the underlying asset or liability.” Mem. in Supp. Pl.'s Appl. for Prelim. Inj. (“Pl.'s Mem.”) at 3–4, ECF No. 13 (citing 7 U.S.C. § 1a(47)). In essence, the two parties to a swap agreement trade (or “swap”) the cash flows stemming from the assets or liabilities underlying the agreement. For example, a fixed-to-floating interest rate swap is an agreement whereby one party agrees to pay the cash flows associated with a fixed interest rate, while the other party agrees to pay the cash flows associated with a referenced floating interest rate ( e.g., LIBOR). See, e.g., Financial Crisis Inquiry Report at 46. A “futures contract” or simply a “future,” by contrast, is “[a]n agreement to buy or sell a standardized asset (such as a commodity, stock, or foreign currency) at a fixed price at a future time.” Black's Law Dictionary 746 (9th ed. 2009).

Futures contracts or their functional equivalents have been traded for millennia. See, e.g., Michael P. Jamroz, The Net Capital Rule, 47 Bus. Law. 863, 890 n. 186 (1992) (“The ultimate origins of the futures markets can be traced to 2000 B.C., where ... ‘merchants of what is now Bahrein Island took goods on consignment for barter in India.’ ” (quoting Jerry W. Markham, The History of Commodity Futures Trading and Its Regulation 3 (1987)). In the United States, the first organized futures exchange was the Chicago Board of Trade, which officially began trading futures contracts in the 1860s. SeeMarkham, History of Commodity Futures Trading at 4. Indeed, “[b]y 1868, futures contracts had become standardized on the Chicago Board of Trade.” Id. at 5. For several decades, futures exchanges operated without any federal regulatory oversight until 1922 when Congress enacted the Grain Futures Act, Pub. L. No. 67–331, 42 Stat. 998, which for the first time ¹ required grain futures exchanges to be registered as “contract markets” and also required them to keep detailed records of trading information. See 42 Stat. at 1000 (providing for designation of “contract markets” by Secretary of Agriculture, and requiring contract markets to keep records of the terms of futures transactions).

In 1936, Congress replaced the Grain Futures Act with the Commodity Exchange Act (“CEA”), Pub. L. No. 74–675, 49 Stat. 1491, which broadened federal regulation of futures, established the Commodity Exchange Commission,² and granted that agency the power to regulate futures traders directly (as opposed to only regulating contract markets). See 49 Stat. at 1492. The CEA also, inter alia, (1) limited speculative positions that could be taken in futures markets, see id. § 5, and (2) established registration requirements for futures brokerage firms known as “futures commission merchants,” id. The Commodity Exchange Commission also “informally urged the exchanges to adopt minimum margin requirements,” even though the statute itself contained no authority to require the adoption of minimum margin rules. SeeMarkham, History of Commodity Futures Trading at 30. “Several exchanges agreed ... and adopted minimum margin rules.” Id.

In 1974, federal regulation of futures was expanded even further with the enactment of the Commodity Futures Trading Commission Act, Pub. L. No. 93–463, 88 Stat. 1389. That statute, which forms the basis of the current futures regulatory scheme, created the CFTC as an independent federal agency, authorized to seek injunctive relief, to alter the rules of a contract market, and to prescribe trading limits. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 365–66, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982); see also CFTC Act § 101, 88 Stat. at 1389 (establishing the CFTC “as an independent agency of the United States Government”).

Since the amendments to the CEA passed in the Futures Trading Act of 1982, the CEA has required futures to be traded on centralized exchanges known as “designated contract markets” (“DCMs”), see7 U.S.C. § 6(a); see also Futures Trading Act of 1982, Pub. L. No. 97–444, § 204, 96 Stat. 2294, 2299, which are subject to a variety of regulatory requirements that ensure transparency and prudent risk management. For example, a DCM is required to “make public daily information on settlement prices, volume, open interest, and opening and closing ranges for actively traded contracts on the contract market.” 7 U.S.C. § 7(d)(8). Specifically, DCMs are required to make information on prices, trading volume, and other trading information “readily available to the news media and the general public without charge, in a format that readily enables the consideration of such data, no later than the business day following the day to which the information pertains.” 17 C.F.R. §§ 16.01(e), 38.451. Additionally, every transaction executed on a DCM must be “cleared” through an entity called a “derivatives clearing organization” (“DCO”). See17 C.F.R. § 38.601(a); see also Part I.A.2 infra (discussing operation and regulation of DCOs).³

By contrast to the ancient roots of futures contracts, swaps are a much newer phenomenon. Although “there is some debate regarding the timing of the first modern swap agreement, scholars generally agree that the execution of a swap agreement between the World Bank and IBM [in 1981] was one of the earliest and most significant transactions in the development of the swap market.” Kristin N. Johnson, Things Fall Apart: Regulating the Credit Default Swap Commons, 82 U. Colo. L.Rev. 167, 193 n. 141 (2011); see also Charles R.P. Pouncy, Contemporary Financial Innovation: Orthodoxy and Alternatives, 51 SMU L.Rev. 505, 529–30 & n. 153 (1998) (tracing roots of the swaps market and discussing the 1981 IBM/World Bank currency swap transaction). Unlike futures, swaps were (before 2010) traded almost entirely in unregulated “over the counter” (“OTC”) markets, where large financial institutions acted as derivatives dealers.⁴See Financial Crisis Inquiry Report at 46. In OTC markets, transactions are not required to be cleared, dealers are not required to register with the government, and trading information is not required to be made public. See id.

Without regulatory oversight, “OTC derivatives rapidly spiraled out of control and out of sight, growing to $673 trillion in notional amount.” Id. at xxiv. OTC derivatives then “contributed significantly” to the global financial crisis in 2008, see id., and Congress responded by enacting the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd–Frank), Pub. L. No. 111–203, 124 Stat. 1376 (2010). Dodd–Frank, among other things, (1) placed swaps within the jurisdiction of the CFTC, see Dodd–Frank, § 722(a), 124 Stat. at 1672, ...