The Commodity Futures Trading Commission was sued again today. The complaint alleges that the CFTC undertook a major rulemaking effort without complying with the procedural requirements in the Commodity Exchange Act and the Administrative Procedure Act. It is a long overdue reminder to the CFTC of its obligation to make rules in accordance with the law.
Dodd-Frank gave the CFTC the huge swaps market to oversee, and the agency has spent the past three years putting in place a complex set of rules to govern it. Introducing transparency to a formerly dark market has been the rallying cry of this effort. One of the persistent questions asked about the new regulatory framework as it was developing was how it would apply outside the U.S. The swaps market is highly international, so these questions were not mere academic musings. The CFTC avoided the question at first, but eventually issued a guidance document that looks a lot like a binding rule. Through its web of definitions and directives, it draws into the CFTC's new regulatory framework many non-U.S. participants who are also regulated at home.
The complaint alleges that the CFTC failed to fulfill its cost-benefit mandate under the Commodity Exchange Act. The complaint further alleges that the CFTC violated the Administrative Procedure Act by failing to give people sufficient opportunity to weigh in on the CFTC's cross-border approach, ignoring the comments on extraterritorial application, and arbitrarily expanding Dodd-Frank's reach.
The CFTC repeatedly has employed illegitimate methods of imposing binding requirements in recent years. The guidance document is one of the most egregious examples of this pattern. It is time for the CFTC to make its case in court for why it has relied so heavily on nontransparent rulemaking methods to bring transparency to the swaps market.