Sec. Indus. & Fin. Markets Ass'n v. U.S. Commodity Futures Trading Comm'n

Decision Date16 September 2014
Docket NumberCivil Action No. 13–1916 PLF
Citation67 F.Supp.3d 373
CourtU.S. District Court — District of Columbia
PartiesSecurities Industry and Financial Markets Association, et al., Plaintiffs, v. United States Commodity Futures Trading Commission, Defendant.

Eugene Scalia, Jason J. Mendro, Mithun Mansinghani, Gibson, Dunn & Crutcher, LLP, Washington, DC, for Plaintiffs.

Robert A. Schwartz, Kavita Kumar Puri, Martin B. White, U.S. Commodity Futures Trading Commission, Washington, DC, for Defendant.


PAUL L. FRIEDMAN, United States District Judge

In 2010, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd–Frank Act”), Pub.L. No. 111–203, 124 Stat. 1376, as a legislative response to the 2008 financial crisis. Title VII of the Dodd–Frank Act provided the United States Commodity Futures Trading Commission (CFTC) with jurisdiction over the previously unregulated derivative swaps market. Congress provided that the provisions of Title VII, as well as any rules or regulations issued by the CFTC, “shall not apply to activities outside the United States unless those activities ... have a direct and significant connection with activities in, or effect on, commerce of the United States.” 7 U.S.C. § 2(i). Over the next three years, the CFTC promulgated over a dozen regulations under its Title VII authority, but did not address in those regulations the scope of their extraterritorial application under Section 2(i). On July 26, 2013, the CFTC promulgated its Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed.Reg. 45292 (July 26, 2013) (the “Cross–Border Action”), in which it announced its policy regarding the scope of the extraterritorial applications of its so-called Title VII Rules pursuant to Section 2(i).

On December 4, 2013, plaintiffs Securities Industry and Financial Markets Association (SIFMA), International Swaps and Derivatives Association (“ISDA”), and the Institute of International Bankers (“IIB”)—all trade associations representing financial institutions involved in swaps dealing and trading—filed this lawsuit against the CFTC. Plaintiffs seek vacatur of the Cross–Border Action on procedural and substantive grounds, partial vacatur of the Title VII Rules, and an injunction to prevent the CFTC from applying the Title VII Rules extraterritorially in the absence of a properly promulgated regulation addressing the Rules' extraterritorial applications.

Now pending before the Court are the CFTC's partial motion to dismiss and the parties' cross-motions for summary judgment. Having considered the briefs and other filings of the parties and amici, the administrative record, the oral arguments presented by counsel for the parties on July 30, 2014, and the controlling law, the Court will: (1) grant the CFTC's motion to dismiss as to the Trade Execution Rule; (2) grant the CFTC's motion for summary judgment as to the Cross–Border Action and the Large Trader Reporting, Straight–Through Processing, and Clearing Determination Rules; (3) grant plaintiffs' motion for summary judgment as to the other challenged Title VII Rules; and (4) remand those Rules to the CFTC for its consideration of the costs and benefits of their extraterritorial applications.


The Commodity Exchange Act (“CEA”) regulates the trading of commodity futures, including derivatives. Derivatives are types of “contracts deriving their value from underlying assets.” Inv. Co. Inst. v. CFTC (“ICI ”), 720 F.3d 370, 372 (D.C.Cir.2013). Derivative swaps are a particular type of derivative “in which two counterparties agree to exchange or ‘swap’ payments with each other as a result of such things as changes in a stock price, interest rate or commodity price.” U.S. Sec. Exchange Comm'n, The Regulatory Regime for Security–Based Swaps 3 (2012), available at; see also 7 U.S.C. § 1a(47)(A)(ii).

The use of over-the-counter derivative swaps—swaps executed bilaterally rather than over an exchange—boomed in the 1980s and 1990s. This unprecedented growth prompted a debate over whether swaps should be regulated like other derivatives, such as futures contracts and stock options. See Inv. Co. Inst. v. CFTC, 891 F.Supp.2d 162, 171 (D.D.C.2012), aff'd, 720 F.3d 370 (D.C.Cir.2013).1 In passing the Commodity Futures Modernization Act (“CFMA”), Pub.L. No. 106–554, 114 Stat. 2763, in 2000, Congress sided with the proponents of deregulation and barred the CFTC and the United States Securities and Exchange Commission (SEC) from regulating most derivative swaps markets. See 7 U.S.C. § 2(g) (2002).

The CFMA left the markets for most derivative swaps “essentially unregulated and unmonitored—effectively dark—in most respects,” and those markets flourished until the 2008 financial crisis. Inv. Co. Inst., 891 F.Supp.2d at 171 (internal quotation marks omitted). The lack of transparency in over-the-counter derivative markets, which contained millions of contracts between systemically important financial institutions, “contributed significantly to th [e] crisis.” Final Report of the Nat'l Comm'n on the Causes of the Fin. and Econ. Crisis in the United States at xxiv-xxv (2011), available at http://–FCIC/pdf/GPO–FCIC.pdf. While up until the mid–2000s derivatives were “generally regarded as a beneficial financial innovation that distributed financial risk more efficiently and made the financial system more stable, resilient, and resistant to shock ... [t]he [financial] crisis essentially reversed this view.” Inv. Co. Inst., 891 F.Supp.2d at 173 (citation omitted) (internal quotation marks omitted).

Prior to the crisis, firms had used derivatives “to construct highly leveraged speculative positions, which generated enormous losses that threatened to bankrupt not only the firms themselves, but also their creditors and trading partners.” Rena S. Miller & Kathleen Ann Ruane, Cong. Research Serv., R41398, The Dodd–Frank Wall Street Reform and Consumer Protection Act: Title VII, Derivatives 1 (2012). That the over-the-counter derivative markets “depended on the financial stability of a dozen or so major dealers” only compounded the problem: [f]ailure of a dealer would have resulted in the nullification of trillions of dollars' worth of contracts and would have exposed derivatives counterparties to sudden risk and loss, exacerbating the cycle of deleveraging and withholding of credit that characterized the [financial] crisis.” Id. Although derivative dealing “was not generally the direct source of financial weakness, a collapse of the $600 trillion dollar ... derivatives market was imminent absent” the injection of [h]undreds of billions of dollars in government credit.”Id.

The over-the-counter derivative markets' contributions to the 2008 financial crisis were not limited to swaps executed on U.S. soil between U.S. counterparties. As plaintiffs recognize, [t]he swaps market is truly global: a single swap may be negotiated and executed between counterparties located in two different countries, booked in a third country and risk-managed in a fourth country.” Comment from SIFMA on Swap Entity Registration Rule, Feb. 3, 2013, at 2 (footnote omitted) (Joint Appendix (“JA”) at 1144).

U.S.-based financial services conglomerates—like many of plaintiffs' members—operate in global swaps markets not only as direct counterparties, but also through relationships with their foreign branches, affiliates, and subsidiaries. “The modern U.S. financial services conglomerate is a U.S. parent holding company comprised of hundreds, if not thousands, of U.S. and foreign branches, affiliates, and subsidiaries.” Declaration of Sayee Srinivasan, Chief Economist, CFTC (“Srinivasan Decl.”), Mar. 14, 2014 [Dkt. No. 28–2] ¶ 5. These multinational firms operate “though complex legal and operational structures ... created and maintained to efficiently serve particular purposes as part [of] the firms' overall profit-making business.” Id. ¶ 16. The firms' operations through foreign subsidiaries and affiliates balance “legal, operational, tax, and accounting considerations and facilitate the [firms'] ability to serve clients in various markets around the world.” Id.

Although legally distinct from their affiliates and subsidiaries, the U.S.-parent firms “routinely commingle losses and gains from U.S. and non-U.S. affiliates, subsidiaries and branches on their consolidated financial statements.” Srinivasan Decl. ¶ 5. As a result, “risks taken by foreign affiliates, subsidiaries, and branches of U.S. parent companies are usually borne by the U.S. parent.” Id. ; see also, e.g., Declaration of Don Thompson, Managing Director & Associate General Counsel, JPMorgan Chase & Co. (“JPMorgan Decl.”), Jan. 27, 2014 [Dkt. No. 22–1] ¶ 6 ([C]osts incurred by JPMorgan's affiliates and branches are ultimately borne by JPMorgan itself, because all are part of the same corporate group.”). Indeed, U.S. parent corporations often expressly “guarantee” the swap obligations of their foreign affiliates and subsidiaries through contracts. Srinivasan Decl. ¶ 6; see also JPMorgan Decl. ¶ 4. Under these “guarantee” provisions, the U.S. parent must step in and fulfill the swap obligations if the relevant foreign affiliate or subsidiary defaults on its obligations. Srinivasan Decl. ¶ 6; JPMorgan Decl. ¶ 4. These guarantees are an “integral part of the swap” because they assuage counterparty concerns that the foreign affiliate or subsidiary will be unable to meet its swap obligations. Srinivasan Decl. ¶ 6.

Several poster children for the 2008 financial crisis demonstrate the impact that overseas over-the-counter derivative swaps trading can have on a U.S. parent corporation. American International Group (“AIG”) nearly failed because of risks incurred by the swaps trading operations in the London branch of its subsidiary, AIG...

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