The United States District Court for the District of Columbia set aside the Commodities Futures Trading Commission’s position limits rules under Part 151 of its regulations in a decision handed down on September 28, 2012. The lawsuit, which the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association brought, asserted that the Commission failed to interpret properly the extent of its rulemaking authority under Section 6a(a) of the Commodity Exchange Act, as amended by the Dodd-Frank Act.1 The District Court found that the Commission incorrectly concluded that Section 6a(a) mandated the Commission to set position limits without regard to whether the Commission would find that such limits were necessary and appropriate.
The position limits rules covered derivatives linked to 28 physical commodities — called “Core Referenced Futures Contracts”— spanning energy, metal, and agricultural commodities.2 The rules also required traders of Core Referenced Futures Contracts to aggregate positions held in multiple accounts. Throughout the rulemaking process, the Commission stated that the new language that Congress inserted via Dodd-Frank eliminated the need to find any undue burden on interstate commerce arising out of excessive speculation in derivatives linked to physical commodities, and eliminated the predicate for the Commission to find that any proposed position limits were necessary to secure market stability.
The District Court disagreed with the Commission’s claim. First, it found that Section 6a(a)(1)—the pre-existing portion of the statutory language on position limits — requires by its terms a finding of necessity prior to imposing position limits. Second, the District Court found that the remaining sections of 6a(a) — as added by Dodd-Frank — leave an ambiguity on their face as to whether that requirement of a finding of necessity remains applicable to the Commission’s imposition of position limits. The Commission did not address the statutory ambiguities in its final position limits rules since it had taken the view that the statutory language was unambiguous in requiring the Commission to set position limits without regard to whether it deemed the limits to be necessary and appropriate. Therefore, having found that conclusion to be erroneous, the District Court remanded the rules to the Commission to resolve the ambiguity. The District Court implied that it likely would show deference to the Commission’s decision in that regard under the standards set forth by the United States Supreme Court in Chevron USA Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984).
The District Court finally concluded that it was appropriate to vacate the rules while remanding the case to the Commission rather than leaving the rules in place on remand. Thus, the new position limits will not take effect for now, and only the existing position limits imposed by the Commission and the exchanges already in place will continue to be in effect.
At this time, it is unclear what steps the Commission will take in response to the Court’s action. It could appeal the decision to the United States Court of Appeals for the District of Columbia Circuit or simply accept the decision and proceed with the analysis as the District Court directed. In taking an appeal, the Commission could seek a stay of the District Court’s order vacating the rules, in which the rules could, in theory, still go into effect while an appeal is pending. That outcome is remote, however, and so it appears likely that the Commission will need to go through various procedures that will take time to complete, whether in its own administrative processes or in the courts or both, before any new set of position limits can be put in place.
Please feel free to reach out to your regular contacts at the firm if you have any questions about the matters addressed in this alert. In addition, you are welcome to contact any of the above members of the firm’s CFTC Working Group.
*This alert was co-authored by Geoffrey Aronow and Kenneth Kopelman.