CFTC Position Limit Rules Challenged in Lawsuit by ISDA and SIFMA
On Friday, December 2, 2011, the International Swaps and Derivatives Association ("ISDA") and the Securities Industry and Financial Markets Association ("SIFMA") jointly filed a lawsuit in the U.S. District Court for the District of Columbia against the Commodity Futures Trading Commission ("CFTC") and a petition for review in the U.S. Court of Appeals for the District of Columbia Circuit challenging the final rules establishing speculative position limits on certain physical commodity futures and option contracts (the "Position Limit Rules"), which were adopted by the CFTC at its October 18, 2011 meeting.1
The lawsuit focuses on whether and how the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires the CFTC to set position limits and alleges that the CFTC did not satisfy requirements under the Dodd-Frank Act to exercise discretion and make a determination that position limits are necessary and appropriate before adopting such rules. In the lawsuit and the petition, ISDA and SIFMA ask the District Court and the Court of Appeals to vacate and set aside the Position Limits Rules and enjoin the CFTC from implementing such rules.
The Position Limit Rules were issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and were scheduled to take effect in January 2011 (60 days following the date of publication in the Federal Register).2 In addition to providing for speculative position limits on 28 physical commodity futures and option contracts, the Position Limit Rules also included exemptions for bona fide hedging transactions, pre-existing positions and certain positions controlled by an "independent account controller," as well as requirements for periodic reporting of positions in excess of specified threshold levels.
Following a period of intense public comment and internal division, the CFTC had approved the Position Limit Rules by a narrow 3-2 vote. At the October 18 meeting, dissenting Commissioners Scott O'Malia and Jill Sommers had criticized the basis for adopting the rules, and even Commissioner Michael Dunn, who voted in favor of the rules, observed that "no one has presented to this agency any reliable economic analysis to support either the contention that excessive speculation is affecting the markets we regulate or that position limits will prevent excessive speculation... my fear is that position limits are, at best, a cure for a disease that does not exist or a placebo for one that does."
Basis of Challenge
In the complaint filed with the U.S. District Court, ISDA and SIFMA argue that the Position Limit Rules should be vacated because, in adopting the Position Limit Rules, the CFTC:
- erred in concluding that the Dodd-Frank Act required it to establish position limits without first determining whether they were even necessary;
- failed to present a reasoned analysis or consider all evidence in setting the position limits; and
- failed to conduct an adequate cost-benefit analysis as required by law.
Notably, the complaint filed by ISDA and SIFMA quotes at length from the CFTC Commissioners' own statements made at the time of the vote.
In the petition filed with the Court of Appeals,3 ISDA and SIFMA as petitioners further ask the Court of Appeals to hold the Position Limit Rules unlawful under the Administrative Procedure Act (5 U.S.C. §§ 551 et seq.) and Sections 4a and 15(a) of the Commodity Exchange Act (7 U.S.C. §§ 6a, 19(a)).
At the time of this publication, although the CFTC issued proposed rules on October 18, 2011 that would extend its rulemaking deadline through July 16, 2012, the CFTC has not formally modified its timetable issued earlier this year4 for finalizing the remainder of the rules needed to fully implement the Dodd-Frank Act. The lawsuit and the petition challenge one of the key rules that the CFTC has managed to finalize and casts doubt on the ability of the CFTC to meet its existing timetable for the large number of rules remaining to be finalized by the end of 2011 and in the first quarter of 2012 thereunder.
Please watch for further client alerts for updates on the status of the Position Limit Rules and other areas of the CFTC’s Dodd-Frank Act rulemaking.
For more information, please contact one of the lawyers below.
1 The Position Limit Rules were published in the Federal Register on November 18, 2011.
2 See "Update on CFTC Rulemaking: CFTC Issues Final Rules on Position Limits for Commodity Futures and Swaps," Nov. 16, 2011, available here.
3 The petition indicates that ISDA and SIFMA chose to file the petition simultaneously with the lawsuit out of an abundance of caution due to potential uncertainty as to the proper forum to file the challenge.
4 See "Update on CFTC Dodd-Frank Rulemaking: CFTC Outlines Rulemaking and Implementation Timelines and Announces Delays in Large Trader Reporting Requirements," Oct. 17, 2011, available here.