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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.
William Friedman, associate in McDermott's Energy
Advisory practice, contributed to this article.
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