Dramatic Federal Court Ruling Vacates CFTC Positions Limit Rule

September 28, 2012

Commodity Futures Trading Commission

In International Swaps And Derivatives Association, et al., Plaintiffs, v. United States Commodity Futures Trading Commission, Defendant (D. Col., 11-cv-2146 (RLW), September 28, 2012), Plaintiffs International Swaps And Derivatives Association ("ISDA") and the Securities Industry and Financial Markets Association ("SIFMA") challenged Defendant CFTC's recent rule that set position limits on derivatives tied to 28 physical commodities. See, Position Limits for Futures and Swaps, 76 Fed. Reg. 71,626 (Nov. 18, 2011) ("Position Limits Rule"), promulgated pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) ("Dodd-Frank").  The proposed rule was controversial from its inception and the CFTC passed it by a vote of only  3 (Gensler, Chilton and Dunn) versus 2 (Sommers and O'Malia) on October 18, 2011.

Plaintiffs asserted that the CFTC misinterpreted its statutory authority under the Commodity Exchange Act of 1936 ("CEA") when it promulgated the Position Limits Rule and, accordingly, there was an incorrect and impermissible interpretation of the statute at issue. In framing the issue for its consideration, the Court stated on page 10 of its Opinion:

This case largely turns on whether the CFTC, in promulgating the Position Limits Rule, correctly interpreted Section 6a as amended by Dodd-Frank. Although both sides forcefully argue that the statute is clear and unambiguous, their respective interpretations lead to two very different results: one which mandates the Commission to set position limits without regard to whether they are necessary or appropriate, and one which requires the Commission to find such limits are necessary and appropriate before imposing them.

The Court granted Plaintiffs' Motion for Summary Judgment thereby vacating the Positions Limit Ruleand remanding the matter back to the CFTC.

As a threshold finding, the Court early on telegraphed the direction of its ultimate holding. For example, on pages 17 and 18 of the Opinion, we are told that:

Accordingly, the Court concludes that § 6a(a)(1) unambiguously requires that, prior to imposing position limits, the Commission find that position limits are necessary to "diminish, eliminate, or prevent" the burden described in Section 6a(a)(1).

. . .

For 45 years after the passage of the CEA, the CFTC made necessity findings prior to imposing position limits under  Section 6a(a). The CFTC has not cited to any express interpretation in which the CFTC took the position that no necessity finding was required. Nor has the CFTC cited to any prior interpretation in which the CFTC took the position that the specific language of Section 6a(a) (now Section 6a(a)(1)) was ambiguous on this point. Fully aware that Section 6a(a)(1) is problematic for its current position, the CFTC makes a number of arguments in an attempt to get out from underneath the statute's plain language requiring a necessity finding. Notwithstanding the CFTC's various-and at times inconsistent-interpretations, the necessity requirement remains in Section 6a(a)(1). . .

In enunciating the basis for its decision, the Court held on pages 42 and 43 of the Opinion:

[T]he CFTC's error in this case was that it fundamentally misunderstood and failed to recognize the ambiguities in the statute. In circumstances such as this, our Circuit has found it appropriate to vacate the agency action on remand. See, e.g., Peter Pan, 471 F.3d at 1354-55; Nat'l Cement, 494 F.3d at 1077; PDK Labs., 362 F.3d at 799. By failing to acknowledge the statutory ambiguities in Section 6a, the CFTC instead relied exclusively on a "plain meaning" reading of the statute. The agency failed to bring its expertise and experience to bear when interpreting the statute and offered no explanation for how its interpretation comported with the policy objectives of the Act. The Court cannot be sure that the agency will interpret the statute in the same way and arrive at the same conclusion after further review and cannot be sure whether a similar position limits rule will withstand challenge under the APA. See Humane Soc'y, 579 F. Supp. 2d at 21.

Second, it would be far more disruptive if the Position Limits Rule were allowed to go into effect while on remand. As Plaintiffs note, remand without vacatur is often warranted once a rule has gone into effect and, as such, there is no apparent way to restore the status quo. (Dkt. No. 31 at 18, n.12); Sugar Cane Growers Coop. of Florida v. Veneman, 289 F.3d 89, 97 (D.C. Cir. 2002) (holding that remand without vacatur was warranted where the rule had already gone into effect and, as such "[t]he egg ha[d] been scrambled and there [was] no apparent way to restore the status quo ante."). In this case, the Position Limits Rule, which according to both parties is a significant and unprecedented change in the operation of the commodity derivatives market, has not yet gone into effect. Moreover, the CFTC itself is reviewing and possibly revising its aggregation policies. (Dkt. Nos. 61, 63). The Court finds that vacatur of the rule would merely maintain the status quo and cause far less disruption than vacating the regime after it has gone into effect.

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