Bloomberg LP weighs CFTC lawsuit over swap collateral rules

Response requested by March 19

Gavel Gavel

Bloomberg LP threatened to sue the top U.S. derivatives regulator unless it halts regulations setting higher collateral standards for swaps than comparable futures.

Bloomberg LP, the parent company of Bloomberg News, said the collateral rules are arbitrary and harm its plans to operate a swap-execution facility, according to a news release and letter yesterday from Eugene Scalia, partner at Gibson Dunn & Crutcher LLP.

Swaps that are converted to futures will “automatically be subject to a lower minimum liquidation time, which in turn will result in more favorable margin treatment,” Scalia said in the letter to the Commodity Futures Trading Commission. The different standards will drive business away from Bloomberg’s swap-execution facility, Scalia said.

The CFTC should stay the regulations, which set a five-day liquidation requirement for financial swaps compared with a one- day period for futures, Scalia said. He requested a response from the CFTC by March 19.

Steve Adamske, CFTC spokesman, declined to comment.

“This is a matter critical to the global financial markets,” Gregory Babyak, Bloomberg’s head of government affairs, said in a statement. “As a result, we have retained counsel to prepare to litigate in order to ensure that a flawed regulation -- which would cause significant public harm -- does not get implemented.”

Scalia, the son of U.S. Supreme Court Justice Antonin Scalia, has won cases challenging regulations imposed by the Securities and Exchange Commission. The CFTC is appealing a case Scalia won against a Dodd-Frank rule drafted to limit excessive speculation in commodity markets.

Scalia’s clients on regulatory matters include the U.S. Chamber of Commerce and the Investment Company Institute, the main trade association for mutual funds.

CME Group Inc., the world’s largest futures exchange, has created interest rate swap futures contracts, while Intercontinental Exchange Inc. said yesterday that it will offer credit swap futures beginning in May.

“With ICE, CME, and others able to offer futures products that have substantially lower margin requirements than swaps that otherwise are functionally interchangeable, the implications for SEFs (which cannot offer futures) are clear and profoundly disturbing,” Scalia said in the letter.

Bloomberg News

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