Bloomberg suit against CFTC thrown out
A federal judge has dismissed Bloomberg LP’s lawsuit seeking to prevent the U.S. Commodity Futures Trading Commission from implementing certain rules for derivative transactions.
U.S. District Judge Beryl A. Howell of the District of Columbia said the company failed to make a showing of “imminent and irreparable harm” requiring a preliminary injunction.
She denied Bloomberg’s request for an injunction June 7 and the new rules went into effect June 10.
“We respectfully disagree with the judge’s ruling,” Bloomberg’s head of government affairs Greg Babyak said in a statement.
According to the Babyak, the company believes the CFTC’s rules will “have a negative impact on the cleared swaps market.” Bloomberg plans to “press forward with [its] legal challenge,” he added.
Bloomberg’s lawsuit, filed in April, said new CFTC swap regulations favored large exchanges and could cost the company potential customers for its proposed derivatives clearing platform.
In a swap transaction two parties exchange periodic fixed-rate payments for variable-rate payments based on a changing market index to hedge against future risk.
Prior to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, swaps were traded without regulation “over-the-counter.”
Congress enacted Dodd-Frank to provide regulation over a market that “spiraled out of control” and “‘contributed significantly’ to the global financial crisis in 2008,” according to Judge Howell’s opinion.
Bloomberg’s lawsuit centered on Dodd-Frank’s requirement that swap transactions operate through a clearinghouse, the opinion says.
A clearinghouse acts as an intermediary between the two swap parties. One of the proposed rules set the initial margin or collateral a clearing organization must post to offset any potential default losses. Another rule sets minimum liquidation times the clearinghouse must use when determining the amount of margin to post. A liquidation time is the hypothetical time it will take the clearinghouse to sell the position of a swap counter-party.
Bloomberg asked the court for a preliminary injunction to stop enforcement of the new margin and liquidation time rules. The company said the rules were economically disastrous for the swap market and its own derivative clearing operation.
According to Bloomberg, the new rules favor larger exchanges that process futures trades because the greater margin rules will force the “futurization” of swaps. The company said the longer liquidation time for swaps will force companies to create new financial products called “swap futures.” The hypothetical swap futures will trade as a future to avoid the longer liquidation time and greater margin because the rules for futures impose a much shorter liquidation time, Bloomberg argued.
Judge Howell found for the CFTC, saying Bloomberg did not have standing to file the suit because the company’s fear of economic harm assumed a “worst-case scenario” that is “not currently taking place.”
Bloomberg’s arguments that exchanges “are imminently likely to set liquidation times for financial swap futures at a level lower than that for financial swaps” are simply hypotheses and assumptions insufficient to establish standing, she wrote.