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The latest CFTC rulemaking challenge

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On Thursday, the Chicago Mercantile Exchange (CME) sued the Commodity Futures Trading Commission (CFTC). This latest rulemaking challenge offers useful insight into the CFTC's undisciplined approach to implementing Dodd-Frank. The CME challenges the CFTC's aggressive reading of its statute, its failure to conduct adequate cost-benefit analysis, and its adoption of rules without adhering to the Administrative Procedure Act.

The CME runs a clearinghouse that stands to benefit from Dodd-Frank's new clearing mandate for OTC derivatives (swaps). It is challenging the CFTC's requirement that clearinghouses report swap transactions they clear to a swap data repository. The CME contends that the CFTC already can get access to the data by going right to the CME; an additional reporting requirement is neither statutorily mandated nor supported by cost-benefit analysis. The CME could cut out the middleman by registering as a swap data repository. The CFTC staff, however, allegedly is conditioning registration on CME's compliance with a requirement contained in a staff guidance document that appears to conflict with the CFTC's own rule. Meanwhile, the staff's temporary dispensation for the CME is set to expire next week.

Regardless of the substantive merits of the suit, it demonstrates how the CFTC's rushed and uncoordinated approach to rulemaking has added an avoidable layer of confusion to Dodd-Frank implementation.

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I am not sure what the CME plans on achieving with this lawsuit. There is a long history of the federal courts letting the CFTC do pretty much what it wants without interference from judicial oversight. This is in contrast with the administrative law courts seen in Social Security where the district courts and even the circuits get involved in micromanaging appeals, all the way down to remanding with instructions to revisit certain exhibit numbers or get an expert opinion. The contrast is striking. The earliest relevant case I found is from 1980 and another from 2007. There are others which could be cited:

Rosenthal and Co. v. CFTC (Seventh Circuit, 1980)

The petitioner maintains, inter alia, that the CFTC's order was entered without jurisdiction and in violation of its own regulations, that the method adopted by the CFTC for determining the legal sufficiency of complaints in reparation proceedings is at variance with the Administrative Procedure Act as well as with the requirements of due process of law, and that the complained of actions by the CFTC are inherently irrational, unreasonable, capricious, unfair, and prejudicial. Rosenthal, therefore, asks us to reverse the order of the CFTC and direct that the complaint against it be dismissed. The CFTC contradicts each of the petitioner's allegations about the legality of its order and the adequacy of its procedures and argues additionally that in any event this court is without jurisdiction to consider the merits of Rosenthal's complaint at this stage of the proceedings.

"The 1974 legislation envisioned the Commission's reparations proceedings as being analogous to the operation of a small claims court," in which a customer, often representing himself pro se, could obtain satisfaction of his claim.

If the claim is not then settled, the case is referred to an Administrative Law Judge for a formal adjudicatory proceeding.

The Commission's role in these proceedings is to provide a forum for the resolution of claims arising out of trading in commodity futures. The CFTC in its brief before this court characterizes itself as "a quasi-judicial administrative forum for adjudication of complaints." It apparently does not assume a prosecutorial role in formal adjudicatory proceedings or represent complainants in asserting their claims for damages. In general, complainants must either retain private counsel or represent themselves before the ALJ and in any subsequent stages of the reparation proceedings.

This court has previously refused to interject itself into ongoing proceedings before the CFTC. (Citations omitted.) Although those decisions involved exhaustion of administrative remedies, the underlying considerations are the same. The courts should be reluctant to interfere with administrative proceedings until they have reached their conclusion as long as important and clearly defined rights will not be sacrificed by deferring review. We perceive no such untoward consequences to Rosenthal in this case. Accordingly, we dissolve the injunction entered on October 21, 1979, and dismiss the petition for review for want of jurisdiction.

CFTC v. Lake Shore Asset Mgmt, (7th Cir. 2007)

Like hundreds if not thousands of similar provisions in the United States Code, it authorizes district courts to provide equitable relief but does not cover judicial procedure. Such a statute alters the common law--for example, it dispenses with the need to show irreparable injury, see CFTC v. Hunt, 591 F.2d 1211, 1220 (7th Cir. 1979)--but that effect on the substantive rules of decision does not imply that norms for the conduct of litigation have been discarded. The absence of a statutory time limit for ex parte relief no more implies that such relief may last forever than a statute's failure to mention an answer or testimony at a hearing implies that defendants are forbidden to answer the complaint or offer evidence when a hearing finally is held.

According to my old 37A Am Jur 2nd at 110, "Section 8 of the Commodity Exchange Act (7 USCS at 12) detailing the amount of public exposure the CFTC may give to the results of its investigations and statistical information gathered therefrom, has been held to be a statute within the scope of Exemption 3." (Hunt v. CFTC, Seventh Cir, 1979) and in 47 ALR Fed 439.

So FOIA doesn't apply to the CFTC, either.

I am not sure how Dodd-Frank affects all this, especially the apparent stare decisis of letting the CFTC do what it wants.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


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