DRW Investments Sues to Forestall CFTC Enforcement Action

DRW Investments LLC, a Chicago-based investment firm, filed a pre-emptive lawsuit against the Commodity Futures Trading Commission seeking a court’s finding that the company didn’t breach derivatives trading regulations.

DRW Investments and its principal, Donald R. Wilson, sued the CFTC today in federal court in Chicago, saying its case is a response to the agency’s “stated intention to bring an enforcement action.”

“The CFTC’s action would depend on an erroneous and legally untenable claim,” that DRW violated anti-manipulation provisions of the Commodity Exchange Act by placing orders at prices differing from those of similar, though not identical, over-the-counter swaps, DRW said in a statement.

At issue are interest-rate swap futures contracts traded on the Nasdaq OMX Futures Exchange and cleared through the International Derivatives Clearinghouse from August 2010 through September 2011.

Wilson and the company, a unit of DRW Holdings LLC, alleged that when the trades were carried out, no regulation or rule made them illegal and an attempt by the agency to do so now would violate their constitutional right to fair notice of what activities would be considered market manipulation.

Steve Adamske, a CFTC spokesman, declined to comment on DRW’s lawsuit.

Rate Swaps

Interest-rate swaps -- exchanges of interest-rate exposure from floating to fixed or vice versa for a notional amount of money -- are used by speculators and those looking to hedge risks.

Such transactions can be cleared through exchanges such as the International Derivatives Clearing House used in DRW’s transactions, which acts as an intermediary between counterparties, or over the counter with no intermediary.

DRW claims the regulator in August 2011 began reviewing whether the IDCH swaps contract orders produced an “artificial price” because they deviated from prevailing yields of comparable OTC swaps. Those swaps weren’t economically equivalent, according to the firm’s complaint.

In April, the regulator sent DRW a Wells notice, setting forth its preliminary intent to start an enforcement action for alleged market manipulative trading, according to the firm.

“The fact that they’re going to this kind of extreme response indicates that they haven’t been able to moderate the investigation or the charges,” James Cox, a law professor at Duke University School of Law in Durham, North Carolina, said of DRW’s filing today in a phone interview. “This is a transparently calculated judgment to frame things for a public relations perspective.”

The case is DRW Investments LLC v. U.S. Commodity Futures Trading Commission, 13-cv-06630, U.S. District Court, Northern District of Illinois (Chicago).

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