The Court's Ruling

On September 28, the United States District Court for the District of Columbia struck down a new position limit rule that the U.S. Commodity Futures Trading Commission (CFTC) had promulgated in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).1 The rule, 17 CFR 151, which was scheduled to become effective on October 12, would have imposed limits on the position that any trader or group of traders could take in 28 different commodities, including NYMEX Light Sweet Crude, NYMEX Henry Hub Natural Gas, NYMEX NY Harbor Gasoline Blendstock, and NYMEX NY Harbor Heating Oil contracts, either through swaps or futures. Separate aggregation rules, which were still under consideration by the CFTC when the court's ruling was issued, would require a trader to aggregate its positions with positions held by entities that the trader controls. Shortly after the position limits were adopted, the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) initiated the lawsuit that led to the court's ruling.

The court struck down the position limits rule, concluding that the CFTC wrongly took the position that Dodd-Frank unambiguously required the CFTC to impose the position limits regardless of whether they were necessary or appropriate.2 The court ruled that, before imposing position limits, the CFTC should have (1) determined whether the statute required it to make a factual finding, after gathering appropriate evidence, that the position limits were necessary to "diminish, eliminate, or prevent" a burden on interstate commerce caused by excessive speculation in the underlying commodities, and (2) if required, make such a finding. The court remanded the position limits rule to the CFTC to make this determination and, if necessary, the factual finding.3

It is interesting to note that amicus briefs were submitted in support of the CFTC's position by both the House Democratic Members of the Conference Committee and 19 current U.S. Senators, some of whom were involved in the development of the Dodd-Frank Act. Both amicus briefs stated, in essence, that the CFTC was not required to make a finding that the position limits would address possible harm from speculative trading, but rather was simply mandated to promulgate the position limits. The court found these statements unpersuasive. 

Next Steps

The CFTC now has three main options: appeal the ruling to the circuit court, make a factual finding that the position limits are necessary to address possible harm from speculative trading in the underlying commodities, or acknowledge the ambiguity in the statute and exercise its discretion to determine that such a finding is not required. Either of the latter two options would be subject to further challenge in the courts. 

It remains unclear what the CFTC will do next. CFTC Chairman Gary Gensler and another one of the five commissioners (Bart Chilton) are clearly supportive of the limits. Shortly following the court's ruling, Chairman Gensler issued a statement saying that the position limits protect market integrity and that he intended to push forward with them.

One other commissioner (Michael Dunn, since replaced) commented when the position limits were proposed that there was no evidence before the commission that excessive speculation is affecting the market, and that the position limits might even harm the market. He nonetheless voted in favor of the position limits because he believed that Congress had required the CFTC to promulgate them. The other two commissioners (Scott O'Malia and Jill Sommers) voted against the limits. Commissioner Sommers expressed the view that position limits might do more harm than good, while Commissioner O'Malia noted that he believed that the CFTC was required, and had failed, to make a determination that the limits were necessary and would be effective. 

Alternatively, Congress could amend Dodd-Frank to expressly provide that no such finding is required, although some have questioned whether the political will exists for this type of legislative action. 

Footnotes

1 The final position limits rule was published in the Federal Register on November 18, 2011. See 76 Fed. Reg. at 71,626.

2 The ruling had no effect on the so-called "legacy" position limits, which remain in place with respect to futures contracts in certain agricultural commodities.

3 The court declined to rule on whether the CFTC overreached its authority in proposing the aggregation requirement because the requirement is still under consideration by the CFTC.

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