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Footnote 513 lawsuit- can the CFTC win by losing?

A short update on developments in the Footnote 513 Guidance case filed by ISDA, SIFMA and the IIB (the “Plaintiffs”) against the CFTC in early December 2013. A win for the Plaintiffs on the issue of cross-border guidance will render a large proportion of the CFTC’s rules and consequent enforcement actions open to substantive legal challenge. Regular readers will recall that the Plaintiffs filed the lawsuit alleging that the CFTC unlawfully bypassed the Administrative Procedures Act by conflating a significant extension to a rule with the legally less onerous concept of “guidance”. Their case states that “this overreach could cause significant global fragmentation in markets”, reducing liquidity and causing harm to market participants. Furthermore, this harm is compounded by the lack of APA-mandated cost-benefit analyses of the regulation’s impact.

On 20th December 2013, the CFTC issued eight “comparability determinations”, assessing the extent to which the swap dealers of six non-US nations were in compliance with the cross-border guidance. On 27th December 2013 the Plaintiffs filed an amended complaint incorporating reference to the comparability test, charging the CFTC with ten counts of violations of the APA, and requesting summary judgement on vacating the Cross-Border Rule altogether. On the same day, the CFTC sought for a motion to delay judgement, pending their application for dismissal.

At the first hearing of the case on the 14th January 2014, the Court queried that the Plaintiffs had sufficient standing and requested clarification. The Plaintiffs responded there is “little question” as to their standing to mount a legal challenge, and supplied the Court with declarations from six of their members, stating that they had “suffered actual injury as a result of both the Cross-Border Rule and the extraterritorial application that the Commission evidently contends the Title VII Rules have of their own force”.

This is a case that both sides will fight with tenacity in full proportion to its consequence. Whatever the final outcome, the case represents an interesting dichotomy between the short and medium-term interests of both parties. If the Plaintiffs (finally) win, they will gain short-term profit from a regulation “holiday”, as the CFTC rebuilds its rules; medium-term they will be subject to a more cogent, enforceable and “less-loopholed” set of regulations. Conversely, if the CFTC wins, short-term they will benefit from the vindication of their approach; medium-term they will continue building their house on the shakiest of foundations. There are a number of rulings which have been “guided” with similar disdain to the APA and are equally suitable for legal challenge; a win for the CFTC would be merely kicking the legal challenge can down the road. In the long-term, inasmuch as both the market and the regulators would benefit from clarity, a loss for the CFTC may make (eventual) winners of both sides.

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