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D.C. District Court Rejects CFTC’s Position Limits Rule

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.




CFTC Interim Rule Limits Futures and Swaps Positions; Challenge Filed, Delay Rejected

by Ari Peskoe

After months of contentious debate, which included multiple delays, complaints to the U.S. Commodity Futures Trading Commission (CFTC) Inspector General, and a 3-2 vote along party lines, the CFTC’s interim final rule on position limits for futures and swaps was published in the Federal Register on November 18, 2011.  Position limits apply to four New York Mercantile Exchange energy contracts: Henry Hub Natural Gas (NG), Light Sweet Crude Oil (CL), New York Harbor Gasoline Blendstock (RB) and New York Harbor Heating Oil (HO).  Two weeks later, the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) filed a legal challenge to the rule, claiming that the CFTC lacks the authority to set position limits and alleging various procedural flaws in the rulemaking.  On January 4, the CFTC rejected a request by the two trade groups to delay implementation pending resolution of their lawsuit.

The interim final rule establishes position limits for 28 agricultural, energy and metals physical commodity futures and option contracts and physical commodity swaps that are economically equivalent to such contracts.  The rule sets limits for spot-month positions that apply immediately before delivery obligations are incurred or the contracts are liquidated and for non-spot month position limits that apply to positions a trader has in all contract months combined or in a single contract month.  Bona fide hedging is included among several exemptions from the position limits.

The CFTC adopted the position limit formulas on an interim basis and will solicit additional comments on the formulas.  The position limits will go into effect 60 days after the CFTC further defines the term “swap,” which is the subject of a proposed but not yet final rule released on May 23, 2011.

The trade groups’ lawsuit is the first ever suit challenging a CFTC rule and was filed in both the D.C. district and circuit courts because there is no precedent for the proper venue for a challenge to a CFTC rule.  According to the complaint filed at the District Court, Congress authorized the CFTC to establish position limits in the Dodd-Frank Wall Street Reform and Consumer Protection Act only if it first finds that such limits are necessary to diminish, eliminate or prevent excessive speculation.  Because the CFTC has not made that finding, the plaintiff petitioners contend that the CFTC presently lacks the authority to promulgate the position limits rule.  They also allege that the CFTC acted arbitrarily, capriciously, and contrary to the law under the Administrative Procedure Act by failing to support the position limits with specific evidence, ignoring contrary evidence in the record and insufficiently apprising the public of the basis of the proposed rule.

On January 4, the CFTC voted along party lines, again, not to delay implementation of the rule until the legal challenge is resolved.  The CFTC also filed a motion to dismiss for lack of subject matter jurisdiction at the circuit court arguing that the relevant statutes do not provide [...]

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