The latest Dodd-Frank lawsuit was filed yesterday against the Commodity Futures Trading Commission by the DTCC Data Repository. It is a front in the fight between competitors for control of a market created by Dodd-Frank--the market for collecting data about swaps transactions. The CFTC is standing very uncomfortably in the middle of this fight because of its undisciplined process for setting the rules of the game.
DTCC has its heart set on being the one-stop-shop for swaps data, which Dodd-Frank requires swap market participants to report to a registered swap data repository. When a swap transaction is executed, it gets reported to a data repository. When that same swap transaction is cleared--and turns into two new swaps, each one with the clearinghouse as a counterparty--the two new swaps also have to be reported. DTCC's hopes for a reporting monopoly are not shared by the Chicago Mercantile Exchange (CME), a clearinghouse with lots of market power and its own data repository.
At the core, this is a commercial dispute between powerful players without a neat solution. On the one hand, it makes sense for clearinghouses like the CME to double as swap data repositories for cleared swaps. On the other hand, it makes sense to have in one repository data about the original swap and the swaps created in the clearing process that replace it.
Any hope of neatly resolving the dispute was greatly complicated by the CFTC's carelessness. Dodd-Frank muddied the waters by failing to identify to whom the reporting obligation for cleared swaps belongs and where such swaps should be reported. In a January 2012 rulemaking, the CFTC required all swaps to be reported to a repository, but did not clearly specify who had the right to choose the repository. The CFTC's staff issued a set of frequently asked questions that opined that the choice of repository lies with the parties to the original swap and that clearinghouses cannot require the parties to use an affiliated repository.
The CME filed a lawsuit and submitted a rule for CFTC approval that would require all swaps cleared with it to be reported to its affiliated repository. The CFTC disavowed the contradictory staff interpretations and approved the rule. The CME dismissed its suit. It was then DTCC's turn to sue. DTCC contends that the CFTC's "abrupt withdrawal of the FAQs" and its approval of the CME's rule violated the Administrative Procedure Act, cost-benefit analysis requirements, Dodd-Frank, and the CFTC's own regulations.
The lawsuit raises important administrative law questions. The CFTC relies heavily on staff guidance documents (such as the frequently asked questions at issue here) and other non-rules (such as the CME rule approval at issue here). Rules are being made outside of the rulemaking process and without the procedural protections of that process. Regardless of which side deserves to prevail in this dispute, neither side should have to operate under a CFTC regime that is a patchwork of ambiguous rules, ad hoc orders, and wavering staff answers to frequently asked questions.