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CME Lawsuit opens New Front Against Finance Watchdogs

A lawsuit by U.S. exchange operator CME Group added to a groundswell of legal challenges facing regulators rewriting global financial rules, potentially opening up a new front in the fight over the reforms.

A lawsuit by U.S. exchange operator CME Group added to a groundswell of legal challenges facing regulators rewriting global financial rules, potentially opening up a new front in the fight over the reforms.

The CME - the biggest operator of U.S. futures exchanges - sued on Thursday the chief U.S. derivatives regulator because the CME does not want to report non-public swap transaction data to a third party.

Instead, the CME, which already collects a great amount of data by virtue of being a swap clearinghouse, believes it can do the job itself. It is frustrated that the Commodity Futures Trading Commission (CFTC) has not yet ruled on its application to qualify as a so-called swaps data repository (SDR).

The CFTC declined to comment.

The suit is one of a growing number of challenges of the 2010 Dodd-Frank law, named after the two U.S. politicians who spearheaded the reforms designed to prevent a repeat of the global financial crisis.

Shedding greater light on the commercially lucrative derivatives industry is a major part of the law.

The lawsuit comes just days after Republican Mitt Romney lost his bid for the White House to incumbent President Barack Obama, meaning financial industry groups face fewer legislative and regulatory options to weaken reforms.

But this lawsuit is different in that it does not necessarily represent the views of the larger industry, raising questions about whether individual companies will unleash a flood of more narrow suits, dragging down the overall implementation of Dodd-Frank in the process.

The rule targeted in the CME suit would require "derivatives clearing organizations" such as CME to report cleared swap transactions to these new swaps data repositories.

The derivatives industry successfully challenged another CFTC rule in September, when a judge decided that the watchdog had no explicit mandate to introduce a new rule to curb speculation in commodity markets by putting caps on trading positions.

The judge said the CFTC had to first prove that such "position limits" were necessary to prevent market disruptions. The industry had also challenged the rule on the basis that the CFTC did not adequately weigh its costs and benefits.

The CME's case is different even if it uses the same argument of the lack of a cost-benefit analysis, because the CME is advancing its own interest much more directly.

In a sign that industry-wide support was lacking, one leading trade body distanced itself from the CME and its plans to set up its own SDR, saying that the more data repositories there were, the less market transparency.

"Proliferation of swap data repositories and fragmentation of market data can be harmful to regulatory transparency," a spokeswoman for the International Swaps and Derivatives Association (ISDA) said in a statement.

The CFTC will not approve the CME's application to qualify as an SDR unless it agrees to send data to rival firms operating competing SDRs, CME said in the lawsuit.

The requirement is unnecessarily costly, it says, because it already collects the swaps data when it clears the contracts and the CFTC could simply access that data directly.

IntercontinentalExchange Inc and the Depository Trust and Clearing Corp already have won approval for their swaps data repositories.

The CFTC - led by Gary Gensler, a former Goldman Sachs banker - suffered a setback in October, when it was forced to delay a crucial set of rules aimed at making the derivatives market more stable and less opaque.

And regulators from Europe and Asia criticized the regulator in a public hearing this week for its aggressive stance on how its rules apply to international banks and traders.

The Securities and Exchange Commission - which is also writing parts of the Dodd-Frank regulation - has also seen several of its rules challenged in the courts.

The CME case is Chicago Mercantile Exchange Inc. v. U.S. Commodity Futures Trading Commission, U.S District Court for the District of Columbia, No. 12-cv-1820.

(Reporting by Douwe Miedema and Ann Saphir; Editing by Karey Wutkowski and Tim Dobbyn)

Copyright 2010 by Reuters. All rights reserved.

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