DTCC Faults CME's Suit Against CFTC

CME Group Inc.'s lawsuit over U.S. Commodity Futures Trading Commission swap-data rules will undermine efforts to boost transparency following the 2008 credit crisis, the Depository Trust & Clearing Corp. said.

The suit, filed in federal court on Nov. 8, “threatens to dismantle and disrupt the entire regulatory regime statutorily mandated by the Dodd-Frank Act in order to preserve CME's exclusive access to data that it acquires through its role as a derivatives clearing organization,” DTCC General Counsel Larry E. Thompson said in a letter to the CFTC yesterday.

CME, the Chicago-based exchange operator that runs a swaps clearinghouse, is seeking an injunction against CFTC rules for reporting private trade information, claiming that submissions to so-called swap-data repositories would be redundant. DTCC, based in New York, is one of the firms given CFTC approval to run data repositories for interest rate and credit-default swaps, among other types of trades.

Dodd-Frank, the 2010 financial regulation overhaul, directed the CFTC and Securities and Exchange Commission to write rules for swap-data repositories to give regulators a better view on prices and volume in a $648 trillion market dominated by banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Deutsche Bank AG.

The CFTC has granted provisional registration to DTCC Data Repository LLC and ICE Trade Vault LLC, a repository operated by Atlanta-based Intercontinental Exchange Inc. for information on energy, interest rate, credit and other swaps.

“One of the essential parts of financial reform is promoting transparency; transparency both to the public and to regulators,” CFTC Chairman Gary Gensler said in a Sept. 20 interview after the agency announced DTCC's registration.

Steve Adamske, the CFTC's spokesman, didn't respond to telephone and e-mail requests for comment while U.S. government offices are closed for observance of Veterans Day.

CME said in the lawsuit that it is awaiting a response from CFTC on its June 7 application to become a data repository. The company said in its suit that it must comply with the cleared swap reporting rules tomorrow.

“CME believes the cleared swap regulatory rules will impose costly, cumbersome, and duplicative requirements” on derivatives clearinghouses, Laurie Bischel, spokeswoman for CME, said in an e-mail today.

The lawsuit and DTCC response highlight the revenue potential from collecting market data, said Darrell Duffie, a professor at Stanford University's Graduate School of Business. “Even if the fees are quite modest, at some point in the future it could be quite valuable to be the owner of these data,” Duffie said in a telephone interview.

Frequent Questions

After the data-repository rulemaking, the CFTC's staff on Oct. 11 published a document on frequently asked questions about reporting. CME said the document contradicted the rules by saying buyers and sellers of a swap would be allowed to decide which database would get trade information.

“To the extent the FAQ requires CME to report nonpublic regulatory data on cleared swaps to SDRs chosen by the original swap counterparties, CME will suffer harm,” Mark D. Young, a Washington-based partner at Skadden, Arps, Slate, Meagher & Flom LLP representing CME, said in the lawsuit.

The financial industry has spent a year planning for the new data repositories and invested hundreds of millions of dollars to comply with rules, according to DTCC.

The DTCC data repository “has significant concerns with the potential negative consequences of a judicial challenge or commission action to remove the necessity for a legal dispute,” Thompson said in the letter. “DTCC is currently considering its possible responses to the suit and resulting Commission activity, including possible judicial recourse.”

Fragmented information about the market across multiple data repositories risks undermining Dodd-Frank's goals by threatening regulators' ability to view consolidated positions and patterns of manipulative or abusive trading, according to DTCC.

“It is critical that swap data is reported to and maintained by one SDR throughout the life of the contract,” Thompson said.

DTCC doesn't object to CME or any other clearinghouse “keeping a copy of the cleared trade as long as they send a copy of the cleared trade to the SDR in accordance to their customer's choice,” Thompson said in an e-mail statement today. “Copies of data are not an issue, however, customer direction regarding where trades should be sent for official record-keeping in the SDR is key.”

The case is Chicago Mercantile Exchange Inc. v. U.S. Commodity Futures Trading Commission, 12-cv-01820, U.S. District Court, District of Columbia (Washington).

Bloomberg News

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