On September 16, 2014, the US District Court for the District of Columbia ruled in favor of the CFTC, upholding its Dodd-Frank cross-border derivatives rulemaking and related regulatory activity. The action was originally filed in December 2013 by four international trade associations representing large banks seeking to stop the CFTC from regulating swaps extraterritorially (see Legal Update, CFTC Sued over Dodd-Frank Cross-border Swaps Rules). The lawsuit claimed that the CFTC circumvented legal requirements for rulemaking by issuing less formal guidance, as well as altering rules without public input and failing to study the costs and economic impact of its cross-border rules.

The lawsuit focused on the CFTC's July 2013 cross-border guidance (see Practice Note, The Dodd-Frank Act: Cross-border Application of Swaps Rules: Final CFTC Cross-border Guidance and Related Rulemaking) and its November of 2013 staff advisory (see Legal Update, CFTC Closes Cross-border Swaps Compliance Loophole).

Under the November 2013 staff advisory, swaps arranged, negotiated or executed by persons in the US must comply with final Dodd-Frank Title VII transaction-level requirements if one of the parties to the swap is a swap dealer (SD) registered with the CFTC, regardless of the jurisdiction of organization or location of the counterparty. Shortly after the lawsuit was filed in late 2013, the CFTC issued no-action relief from compliance with the staff advisory. The ruling is timely, as the staff advisory will now become effective on December 31, 2014 (see Legal Update, CFTC Extends Relief for Non-US Swap Dealers from Dodd-Frank Transaction-level Requirements). The July 2013 final cross-border guidance is currently effective. For details on applicable transaction-level requirements, see Practice Note, The Dodd-Frank Act: Cross-border Application of Swaps Rules: Transaction-level Requirements.

In his opinion, Judge Friedman upheld most of the cross-border derivatives rules and remanded to the CFTC certain rules that the court determined were not supported by an adequate cost-benefit analysis. He pointed out that the banks' challenge "merely seek[s] to delay the inevitable," since Congress clearly indicated the intent for the swaps provisions of the 2010 Dodd-Frank Act to apply extraterritorially.

The following rules were remanded for the CFTC to perform a cost-benefit analysis of their extraterritorial application under 7 U.S.C § 19(a), though they remain in effect extraterritorially while the analysis is being performed:

This decision represents a major victory for the CFTC in its attempt to regulate swaps activity that it views as a threat to the US financial system.