Significant events of the past week include a hearing before the House Judiciary Committee on the implementation of Obamacare – and the legality of deferring enforcement; a new suit challenging the Commodities Futures Trading Commission (CFTC) ongoing attempts to regulate the complex international derivative swaps markets; concluding the latest chapter in protecting the Right Whale community, and ongoing issues of the social cost of carbon. No thread ties these events together – they are the just the skirmishes on this week’s regulatory battlefield.
Unlawful Dis-Regulation: Debate over the propriety of executive action heated up last week, when the House Judiciary Committee held a hearing on December 3, 2013, on The President’s Constitutional Duty to Faithfully Execute the Laws, focusing in many ways on the Administration’s management of Obamacare and delaying implementation of specific requirements. The Committee Chair described the process as an Administration that “unilaterally granted itself the extra-constitutional authority to amend the laws and to waive or suspend their enforcement.” While these hearings may make good political theater, the real question is whether a court would hold that the Administration has violated the Patient Protection and Affordable Care Act (PPACA) – or has just exercised its inherent prosecutorial or (more limited) administrative discretion. The analyses by the witnesses are worth a read, but what is missing is testimony from the Administration, particularly the Department of Justice (DOJ).
Latest in CFTC Suits: Three trade groups filed another suit against the Commodity Futures Trading Commission (CFTC) in the United States District Court for the District of Columbia, alleging this time that the CFTC promulgated “guidance” in violation the Administrative Procedure Act (APA) and the Commodity Exchange Act (CEA), in its Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations. Securities Industry and Financial Markets Association, et al. v CFTC, D.D.C. No. 13-cv-1916, Dk. 1 (Dec. 4, 2013).
Primer: A “derivative” is a financial instrument that derives its value from the performance of an underlying asset. A “swap” is a derivative contract that typically involves an exchange of one or more payments based on the notional amount of the underlying value of one or more assets, or other financial or economic interest, and that transfers between the parties the risk of future change in that value without also transferring an ownership interest in the underlying asset or liability. A “swap” therefore is a pure risk transfer, not an asset transfer.
The suit alleges that CFTC did not address the extraterritorial application of derivative swaps – i.e. the application to a foreign swap trader in a trade with a United States person – over a lengthy series of notice and comment rules until it reached the interpretive rule. The complaint alleges that the CFTC proposed guidance throughout, but ultimately adopted binding rules. The rule violated the APA by not undertaking notice and comment rulemaking on the binding application that had been questioned consistently throughout the prior guidance comments periods and prior binding rules, and a binding nature eschewed by the CFTC. The binding nature of the final interpretive rule became apparent from further CFTC advisories treating the interpretive rule as binding. Thus, the complaint argues that he CFTC violated the APA by not providing a public opportunity to comment on its binding nature and the CFTC failed to adequately respond to the previous comments on the issue of extraterritorial application.
► The accumulation of prior rules, public comments questioning the application of those rules to foreign traders, the CFTC’s averments of non-applicability, and, now the interpretive rule under challenge, lead to a serious question of how far back the CFTC must reach to certify the administrative record for the Interpretive Guidance.
Further, the complaint alleges that the CFTC violated the CEA by not undertaking at any point the economic cost-benefit analysis that is required by the CEA for the application to foreign traders. The resulting harm, the complaint argues, is that foreign traders will be less likely to trade with domestic traders.
SIFMA v. CFTC will pose a number of complex issues and challenges worthy of tracking.
Right Whale Status Quo & Economic Significance: The Department of Commerce (DOC), National Oceanographic and Atmospheric Administration (NOAA), eliminated the sunset date for speed restrictions on vessels transiting the spawning habitat of the right whale – so named for it being the right whale for rendering oil. Endangered Fish and Wildlife; Final Rule To Remove the Sunset Provision of the Final Rule Implementing Vessel Speed Restrictions To Reduce the Threat of Ship Collisions With North Atlantic Right Whales. Thus ends one chapter in a long, often bitter, and costly struggle between preservationists and the world’s shippers. Surprisingly, the final rule states that Office of Management and Budget (OMB) determined that the final rule is significant for purposes of Executive Order 12,866, but it does not qualify as economically significant – a variance from prior determinations in the Unified Agenda and OMB’s own docket.
► The change in determination is not uncommon, but the variance raises an old problem – establishing the baseline from which economic significance is measured. Although the rule has been in place for years, the termination of the rule’s speed limits by its sunset date would permit vessels to travel more efficiently. The question becomes whether the denial of that benefit is a cost that must be accounted. Whether for OMB’s purpose it is “economically significant” the true effect remains – costs must be passed along.
Social Cost of Carbon Non-Update: As noted previously, OMB has requested comments on its technical analysis of the social cost of carbon, taking an unusual but welcome step in exposing a basis for analysis to public comment. Unfortunately, OMB has failed to either segregate the social cost of carbon documents into a distinct docket, separate from other OMB-generated dockets or documents, or keep the public file current, a poor management habit that has been adopted by several agencies, undermining the public’s ability to follow the course of the docket development and the current comments.
► OMB should review all comments for posting and post all comments to a discrete docket within a very short period of receipt. This is not a difficult problem to resolve, it merely takes a little management. OMB’s lapse may encourage other agencies to take the same poor road.