by Ari Peskoe and William Friedman
The Commodity Futures Trading Commission (CFTC) has met resistance in its attempt to implement parts of the Dodd-Frank financial reform less than two weeks before they were scheduled to go into effect. On September 28, U.S. District Judge Robert L. Wilkins issued an opinion vacating the CFTC’s position limits rule and remanding it to the Commission. Judge Wilkins’ problem with the rule was not its substance but rather that the CFTC did not make necessary factual findings mandated by the Dodd-Frank Act.
The position limits rule was finalized in November and set spot-month position limits for both physical delivery and cash-settled contracts tied to 28 physical commodities, including natural gas and crude oil. The U.S. District Court for the District of Columbia vacated and remanded the rule because the CFTC made no findings about whether position limits were “necessary and appropriate” to “diminish, eliminate, or prevent excessive speculation” before imposing them, as the Dodd-Frank Act required. The CFTC contended that the Dodd-Frank Act mandated that the agency set position limits and went so far as argue that the CFTC had no discretion not to impose the limits.
The court disagreed with the CFTC’s interpretation and instead determined that Congress “clearly and unambiguously” required the Commission to make a finding of necessity prior to imposing position limits. The court found that the Commission has a longstanding requirement to make a finding of necessity under the Commodity Exchange Act (CEA). The CEA contains substantially similar language to Dodd-Frank, and the CFTC has made necessity findings before promulgating regulations for 45 years under the CEA. Given this history and the similarity in Congress’s mandate between the two statutes, the court was not convinced there was any reason the Commission should deviate from its previous practices. The court concluded that Dodd-Frank unambiguously requires that the Commission find that position limits are necessary prior to their imposition.
The court’s opinion leaves open the possibility of issuing a new rule about position limits after the CFTC makes a finding of necessity. Gary Gensler, Chairman of the CFTC, says the agency is “considering ways to proceed.” Gary Chilton, a Commission member, has called for a new proposal on position limits that satisfies the court’s objections. In a statement, Mr. Chilton vowed to continue the push for a position limits rule. Michael V. Dunn, the commissioner who provided the third vote in favor of the rule, has since left the CFTC.
The court did not rule on whether the agency must conduct a full cost-benefit analysis, leaving the question open to a future challenge should the Commission pass a new rule on position limits.