In another major victory for the Commodity Futures Trading Commission (CFTC), a federal appeals court in Washington, DC, Thursday upheld a lower court’s decision that found the agency did not act illegally in promulgating the Dodd-Frank regulations.

The Investment Company Institute and the U.S. Chamber of Commerce brought the action against the CFTC, arguing that the adopted Dodd-Frank regulations applying to derivatives trading were unlawfully adopted and invalid. The two groups sought to vacate and set aside the regulations, and to enjoin their enforcement.

The U.S. District Court for the District of Columbia “granted summary judgment in favor of the Commission. Because we agree with the district court that the Commission did not act unlawfully in promulgating the regulations, we affirm,” ruled the U.S. Court of Appeals for the District of Columbia Circuit.

Specifically, the two groups challenged a rule that would subject registered investment companies (RIC) engaged in derivatives trading to many of the Dodd-Frank requirements, such as reporting, record-keeping and investor disclosures. Prior to 2003, RICs engaged in very little derivatives trading activities, but that has since changed, according to the CFTC.

“Given this changed circumstance, and Dodd-Frank’s ‘more robust mandate to manage systemic risk and to ensure safe trading practices by entities involved in the derivatives markets,’ CFTC considered it necessary to narrow the exclusions from its derivatives regulation. Following this rule change, RICs that do not satisfy the exclusion requirements [for example, use commodity futures or commodity options contracts solely for bona fide hedging] must register with the CFTC,” the agency said.

It is the agency’s latest legal victory with respect to its Dodd-Frank regulation of the $300 trillion over-the-counter (OTC) derivatives market.

Earlier this month, U.S. District Judge Beryl A. Howell in Washington denied Bloomberg LP’s request for a preliminary injunction of the challenged regulations, saying that Bloomberg “lacks standing to challenge the Commission’s regulation and has not made a showing of imminent and irreparable harm sufficient to warrant the extraordinary relief of a preliminary injunction” (see Daily GPI, June 11).

The Dodd-Frank rules have been the target of a number of lawsuits. Last fall, the U.S. Court of Appeals for the District of Columbia Circuit rejected the agency’s initial rule on speculative trading, saying that Dodd-Frank “clearly and unambiguously” requires the CFTC to make a finding of necessity prior to imposing position limits. The International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association challenged the rule. It was remanded to the Commission for further consideration (see Daily GPI, Oct. 1, 2012). The agency has appealed the court decision and is said to be working on a new rule (see Daily GPI, May 2).

The CFTC rules are aimed at moving a significant portion of OTC trading activity to swap execution facilities to comply with Dodd-Frank, which was signed into federal law in 2010 (see Daily GPI, July 22, 2010). The legislation also requires swaps to be reported to trade repositories and centrally cleared. The OTC derivatives market, which lacked regulatory oversight, “contributed significantly” to the global financial crisis in 2008.

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