Delegation Dilemma: CFTC Rule Allows Staff to Circumvent Notice and Comment Rulemaking

The Commodity Futures Trading Commission ("CFTC") published a final rule on April 30, 2024, altering how covered entities fulfill their large trader reporting obligations ("the LTR Rule") and granting CFTC staff significant authority to change the new reporting standards, potentially violating the Administrative Procedure Act's notice and comment requirement.

The CFTC's regulations require covered entities to report daily information regarding certain large derivatives positions. The CFTC uses this information for surveillance and reporting purposes. To facilitate this reporting, the CFTC established an 80-character submission standard in the 1980s. The CFTC adopted the LTR Rule because these requirements became outdated, error-prone, and inconsistent with other CFTC data-submission standards.

The LTR Rule removes the 80-character submission standard, delegates authority to the Director of the Office of Data and Technology to design a modern submission standard, and provides for a Guidebook specifying the form and manner for reporting. The LTR replaces outdated data fields with a new Appendix that maintains, revises, and adds certain required data elements, including product-specific elements. The Guidebook, among other things, designates FIXML as the data submission standard and provides for two submission methods. Though the proposed rule contained a 365-day compliance period, the final rule provides for 730 days in recognition of the significant implementation time required for reporting firms.

Although several industry participants expressed concern in their comment letters regarding staff authority to impose submission standards for large trader reports without notice and an opportunity to comment, the CFTC nevertheless adopted that structure in the LTR Rule, as it did previously in its Parts 20, 43, and 45 reporting regulations. The issue is that, just as the LTR Rule made significant changes that will impose substantial systems development and other costs (e.g., for updated compliance procedures), future staff changes to submission standards may also impose substantial costs on reporting firms, but without the notice and comment rulemaking required by the Administrative Procedure Act.

The track record of the Guidebook underscores that this risk of repeated, unchecked, cost-imposing changes is real for reporting firms. It currently stands at 107 pages and is on its tenth iteration—all before even taking effect. Reporting firms may wish to consider challenging future staff action pursuant to the LTR Rule if increased costs warrant it.

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