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DTCC Data Repository (U.S) LLC v. United States Commodity Futures Trading Commission

United States District Court, District of Columbia

March 10, 2014

DTCC DATA REPOSITORY (U.S.) LLC, et al., Plaintiffs,
v.
UNITED STATES COMMODITY FUTURES TRADING COMMISSION, Defendant

Page 10

For DTCC DATA REPOSITORY LLC, (U.S.), DEPOSITORY TRUST AND CLEARING CORPORATION, Plaintiffs: Andrew Michael Friedman, LEAD ATTORNEY, PATTON BOGGS, LLP, Washington, DC; John Louis Oberdorfer, Samantha R. Petrich, LEAD ATTORNEYS, PATTON BOGGS LLP, Washington, DC.

For UNITED STATES COMMODITY FUTURES TRADING COMMISSION, Defendant: Anne Whitford Stukes, Melissa C. Chiang, Robert A. Schwartz, LEAD ATTORNEYS, U.S. COMMODITY FUTURES TRADING COMMISSION, Washington, DC.

OPINION

AMY BERMAN JACKSON, United States District Judge.

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MEMORANDUM OPINION

The financial crisis of 2007 and 2008 has been widely attributed to the lack of regulation of certain derivatives markets, including the swaps market. Responding to that crisis, in 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (" Dodd-Frank" ), which established oversight for previously unregulated markets. Dodd-Frank granted the United States Commodity Futures Trading Commission (" CFTC" or " Commission" ) exclusive jurisdiction over the regulation of swaps, the type of derivative at issue in this case. The Commission, in turn, has promulgated new regulations establishing a framework for the oversight of swaps that will reduce risk and promote transparency, in line with the goals of Dodd-Frank.

Plaintiffs, The Depository Trust & Clearing Corporation (" DTCC" ) and DTCC Data Repository (U.S.) LLC (" DDR" ), challenge three separate but interrelated actions taken by the Commission, all of which relate to the Commission's new requirements for swaps. Defendants have moved to dismiss all but one count of the amended complaint. The Court will grant defendant's motion to dismiss Counts I, IV, and V because these counts do not allege any final agency action that is reviewable by this Court, and therefore fail to state a claim. The Court does not find, however, that Count III duplicates Count II, as defendants claim, and so it will deny the motion to dismiss Count III. Defendants do not seek to dismiss Count II.

I. Factual Background

A. Dodd-Frank and Swaps Regulation

A swap is a type of derivative that generally consists of an " agreement, contract, or transaction" between parties that is based on the value of an underlying asset or event. See 7 U.S.C. § 1a(47)(A) (2012). Until 2010, the Commission was precluded from regulating most swaps by its own policies and by Congressional mandate. See 54 Fed. Reg. 30,694 (July 21, 1989)

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(Commission policy statement); Commodity Futures Modernization Act of 2000, Pub. L. No. 106-554, 114 Stat. 2763 (2000). Then, in the wake of the financial crisis, Congress amended the Commodity Exchange Act, 7 U.S.C. § 1 et seq. (" CEA" ), through the Dodd-Frank Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010), and established an oversight and reporting regime for swaps. Congress vested authority to implement that regime in the Commission. 7 U.S.C. § 2(a)(1)(A).

Dodd-Frank requires that most swaps be " cleared" by a derivatives clearing organization (" DCO" ). 7 U.S.C. § 2(h). DCOs are regulated by the Commission. See 17 C.F.R. § 39.11 (2013). In the clearing process, a DCO substitutes its own credit for the credit of the original parties to a swap, thereby reducing risk and assuring the financial integrity of a swap transaction. See 7 U.S.C. § 1a(15)(A). To that end, the Commission requires DCOs to maintain significant financial resources. 17 C.F.R. § 39.11(a). The Commission also oversees DCOs in a variety of other ways, including by requiring them to submit changes to their internal rules for review. See 17 C.F.R. § 40.5 (voluntary submission of rules for Commission review and approval); id. § 40.6 (self-certification of rules).

Dodd-Frank also requires that data about swaps be reported to new entities called " registered swap data repositories" (" SDRs" ), which are also regulated by the Commission. 7 U.S.C. § § 2(a)(13)(G), 24a. This reporting requirement is intended to increase transparency by providing data both to the public and to regulators. See 17 C.F.R. § § 43, 45. The data to be reported includes data about the creation and confirmation of swaps. See 77 Fed. Reg. 2136 (Jan. 13, 2012). It also includes " continuation" data, which encompasses any changes made to the terms of a swap over its lifetime, including clearance by a DCO. Id.

B. Plaintiffs' Claims

Plaintiff DDR is a provisionally registered swap data repository, or SDR, and a wholly-owned, indirect subsidiary of plaintiff DTCC, which " provides critical infrastructure to serve participants in the financial industry." Am. Compl. ¶ ¶ 24-25. According to the amended complaint, plaintiff DDR is the only SDR that is not affiliated with a derivatives clearing organization, or DCO. Id. ¶ 80.

This litigation centers on the question of whether it is lawful for the Commission to permit DCOs to require that cleared swap data be reported to their affiliated, or " captive," SDRs. Plaintiffs believe that the Commission has violated the letter and spirit of Dodd-Frank and its own regulations by failing to prohibit what they characterize as " anticompetitive tying arrangements" between DCOs and their captive SDRs. Id. ¶ 78(b). Plaintiffs allege that these arrangements elbow any independent SDRs (that is, plaintiff DDR) out of the marketplace and reduce market participant choice. Id. ¶ 81. Plaintiffs also claim that permitting DCOs to require that cleared swap data be reported to their affiliated SDRs injures the public interest by imposing increased costs on market participants and by causing " duplication and fragmentation of swap data" that " [has] the potential to create significant systemic risk to the market as a whole." Id. ¶ 85-85(a) (citation and internal quotation marks omitted). Finally, plaintiffs allege that the Commission has unlawfully reversed course, and that until November 2012, it had clearly expressed that it would not permit DCOs to require that cleared swap data be reported to their captive SDRs. Id. ¶ 47.

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Plaintiffs allege that the CFTC violated the Administrative Procedure Act (" APA" ), 5 U.S.C. § 551 et seq., and the Commodity Exchange Act in three separate ways in connection with its regulation of swaps. First, in Count I, plaintiffs challenge the revisions of the Commission's published answers to Frequently Asked Questions (" FAQs" ) that originally indicated that DCOs would be prohibited from requiring that cleared swaps data be reported to their captive SDRs. Am. Compl. ¶ ¶ 88-91; id. Annex A at 3 [Dkt. # 15-1] (" FAQs" ). The three FAQs in question were withdrawn on November 28, 2012.[1] FAQs at 1. Plaintiffs claim that the withdrawal of the ...


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