DTCC Sues CFTC Over Swap Data Repository Rules

Yesterday, Depository Trust & Clearing Corp. (DTCC) filed a lawsuit against the top regulator of derivatives to against the agency for approving a rule that permits the Chicago Mercantile Exchange to run a captive swap data repository.

According to a statement from DTCC, the lawsuit challenges three interrelated actions by the U.S. Commodity Futures Trading Commission.

From DTCC’s Compliant:

The first was the Commission’s reversal of its published pro-competitive statements regarding its cleared swap data reporting rules. The second was its administrative action approving a new Rule 1001 of the Chicago Mercantile Exchange, which imposes anti-competitive data reporting requirements that the Commission had barred in its earlier statements. The third was its approval by inaction of a similar ICE Clear Credit rule.

The lawsuit is asking a federal court to vacate (a.k.a. cancel or rescind) the Commission’s approval of Chicago Mercantile Exchange’s Rule 1001 and InterContinental Exchange’s Rule 211. DTCC contends that the CME and ICE rules are anticompetitive and undermine the core precompetitive principles of Dodd-Frank. According to DTCC, the rules sanction anticompetitive behavior by allowing these clearinghouses to require customers to report cleared swap data to their own or captive swap data repository.

On Nov. 12, 2012, CME alleged in its lawsuit that the requirement to report to a non -affiliated SDR imposes costly, cumbersome, or duplicative requirements on CME, according to the complaint.

CME sued the top U.S. futures regulator because it didn’t want to report non-public swaps data to a third party. CME, which already collects data as a clearinghouse, felt it could do the job on it own.

On March 8, the CFTC decided to allow CME Group to report derivatives trades to its own swaps data repository, a move that was fiercely opposed by the Depository Trust and Clearing Corp.

[For more on Swap Data Reporting War Breaks Out, see Ivy Schmerken’s related story.]

DTCC: issued the following statement yesterday:

“Under the threat of a CME lawsuit last fall, the CFTC ignored the Administrative Procedure Act (APA) and the Commodity Exchange Act (CEA) and took action that paved the way for approval of these Rules. The Commission failed to properly consider the anticompetitive effects of Rules 1001 and 211, and did not comply with the legally required administrative or cost-benefit analysis procedures.stated DTCC General Counsel Larry Thompson.

In its compliant, DTCC said that originally the CFTC agreed with the Congress’ mandate and finalized rules that called for all data for a given transaction to be reported to a single SDR to prevent fragmentation of data across multiple SDRs.

DTCC maintains that allowing multiple SDRs would make it harder for regulators to view or aggregate all the data about swaps and make it harder for counterparties to view the data they reported to SDRs.

DTCC, an industry owned utility providing post-trade services to financial firms, said it invested millions of dollars in establishing its own SDR for OTC derivatives based on the regulatory framework that there would be a competitive market for swaps data reporting. The concern from DTCC is that designated clearinghouses like CME or ICE, could collectively or individually accrue most of the swaps data in their own SDRs.

“These Rules jeopardize the underlying principles of Dodd-Frank, are inconsistent with the Commission’s own regulations, and compromise the ability of regulators and market participants to understand, assess and manage systemic risk. DTCC and DDR are market utilities and user-owned cooperatives and have now, after exhausting all regulatory channels, been forced to litigate to protect market participant choice, competition, and transparency and accountability in the global markets,” stated DTCC’s Thompson in yesterday’s media release.