Wall Street groups sue CFTC on foreign derivatives crackdown

A trio of financial industry groups have filed a lawsuit against the Commodity Futures Trading Commission, pushing back against new rules aimed at cracking down on derivatives abroad.

The lawsuit, filed Wednesday, charges that the watchdog “unlawfully circumvented” the rule-making process by writing rules as “guidance.” In addition, they argue the regulator failed to conduct necessary cost-benefit analysis of the rules, engaged in a “flawed rulemaking process,” and put in place a regulatory framework that is “contrary to the spirit and the letter of international cooperation and may harm global markets.”

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"The CFTC's arbitrary and unilateral approach to cross-border regulation is backdoor rulemaking which has led to widespread market confusion and is creating significant impediments to the orderly functioning of financial markets worldwide,” said former Sen. Judd Gregg (R-N.H.), now head of the Securities Industry and Financial Markets Association.

In addition to SIFMA, the International Swaps and Derivatives Association, and the Institute of International Bankers also joined the lawsuit.

The lawsuit, the latest of several the financial industry has filed to challenge rule-making tied to the Dodd-Frank financial reform law, targets a particular provision that is aimed at ensuring banks do not skirt new rules cracking down on trading in complex financial derivatives.

Specifically, the CFTC unveiled guidance in July that stipulated that U.S. banks that engaged in derivatives trades under its foreign operations would not have to meet tough U.S. regulations on those trades only if the relevant foreign rules were comparable.

The CFTC’s efforts to keep an eye on derivatives activity abroad has rankled some lawmakers on Capitol Hill, as well as their European counterparts. The Wall Street groups argued Wednesday that the regulator is engaged in an “unceasing effort” to crack down on derivatives using “unpredictable” guidance methods instead of the formal, but much slower-moving, rule-making process.

In addition to his role at SIFMA, Gregg also is a columnist for The Hill.