Judge to CFTC: Heads You Win, Tails You Win Too

Mercatus Center reports:

Last week was a big week for the Commodity Futures Trading Commission. As Commissioner Sharon Bowen pointed out, the CFTC held its first meeting at which "all of the Commissioners have arrived after passage of the Dodd Frank Act." Also this week, a judge largely upheld CFTC guidance regarding the extraterritorial application of CFTC rules governing swaps (a type of derivative). In doing so, the judge gave the freshly minted CFTC commissioners a green light to continue the bad practices of their predecessors.

The lawsuit, which was brought by several industry organizations, came in response to an 80-page, 650-footnote CFTC guidance document that-along with some letters issued by the CFTC staff-defined the scope of the agency's extraterritorial jurisdiction. The industry argued that the CFTC essentially wrote a binding rule without calling it a rule and thus avoided requirements that govern binding rulemaking.

The judge thought the CFTC's approach was just fine: The CFTC's guidance "looks, walks, and quacks like a policy statement," not like a binding rule. This conclusion rested in part on the agency's assurances to the judge that it did not consider itself to be bound by the policy statement. It could depart from it whenever it wanted. As the court sees it, companies also can choose not to be bound by the guidance. Sure, the CFTC's last chairman told companies that they should comply with it, but that "encouragement merely conveys the CFTC's understandable desire that market participants voluntarily comply with the otherwise nonbinding policies within the Cross Border Action."

Since the guidance isn't binding, the industry can't challenge it in court. The CFTC also avoids the accountability that comes from statutory requirements to involve the public in the rulemaking process and analyze the costs and benefits of the guidance.

Imagine that.