The Commodity Futures Trading Commission just can’t catch a break.

Since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010,[1] the CFTC has experienced one setback after another in its efforts to implement the Act’s financial reforms.  Resistance from industry and the courts, coupled with chronic budgetary problems due to lack of congressional funding, has made it particularly difficult for the agency to carry out its mandated rulemaking for the commodity futures marketplace.

A recent decision from the U.S. District Court for the District of Columbia just made that process more difficult.  On September 28, the court rejected the CFTC’s final rule[2] implementing position limits in commodity markets.[3] The position limits rule would have restricted the number of derivative contracts a trader can own that are tied to a single underlying commodity.  The contracts subject to the rule include futures contracts, options contracts, and swaps.  In proposing the rule, the CFTC had sought to establish position limits on 28 specified commodities, including gold and natural gas.[4] By restricting the number of contracts a trader can own, the CFTC was attempting to carry out Dodd-Frank’s mandate of curbing speculation in the commodities markets, which can drive up the price of consumer goods like gas at the pump.  The position limits rule was also intended to ensure transparent and liquid financial markets.[5]

The CFTC promulgated the position limits rule pursuant to § 6a of the Commodity Exchange Act of 1936,[6] which gave the Commission authority to impose limits it deems “necessary to diminish, eliminate, or prevent” market speculation posing an “undue and unnecessary burden on interstate commerce.”[7] Since its enactment, this section of the CEA has been interpreted as requiring the Commission to demonstrate the necessity and appropriateness of the position limits before implementing them.[8] The Dodd-Frank Act amended this section of the CEA by adding the new subsection on position limits for physical commodities, stipulating that the Commission “shall by rule, regulation, or order establish limits on the amount of positions, as appropriate.”[9] The new subsection expressly incorporated the “standards set forth in paragraph (1),”[10] which was largely unaffected by the Dodd-Frank amendments and includes the “necessary” language set forth above. The question before the D.C. court, then, was whether the amended § 6a still requires the Commission to make necessity findings to justify new position limits in commodity markets—pursuant to the “necessary” language above—or whether its mandate under Dodd-Frank gives it the authority—pursuant to the “shall” language in the amendment—to impose the limits even without such a showing.

The International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association filed suit challenging the rule.  They argued that the amended statute is “clear and unambiguous” in requiring necessity findings,[11] while the Commission countered that the “shall” language mandates that it set limits regardless of such findings.[12] In evaluating the parties’ competing statutory interpretations, the court held that § 6a unambiguously required the Commission to make a necessity finding.[13] Because the Commission “fundamentally misunderstood and failed to recognize the ambiguities of the statute,”[14] the court vacated the position limits rule and remanded it to the Commission to resolve these ambiguities.

The CFTC recently announced that it would appeal the district court’s decision.[15] Given that the D.C. Court of Appeals would review the case, however, the CFTC would do well to tread carefully.  In the last few months, the D.C. Circuit has shown little reluctance in striking down agency rules, including those proposed by the Securities and Exchange Commission[16] and the Environmental Protection Agency.[17] The court’s rejection of the SEC’s proxy access rule—which would have enabled shareholders to remove corporate directors—was the first time a Dodd-Frank rule was struck down.[18] The CFTC seems determined to prevent its position limits rule from becoming the second Dodd-Frank regulation thrown out by the D.C. Circuit.  In his statement supporting the appeal, Commissioner Bart Chilton argued that, although he predicts the appeal will be successful, the Commission should promulgate another rule as a backup plan.[19] Considering the D.C. Circuit’s recent series of decisions blocking agency rules, the CFTC should follow Chilton’s recommendation to ensure that this important piece of the Dodd-Frank Act is implemented.

—Brian Tengel is a general member of MJEAL.


The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.

[1] Pub. L. No. 111-203, 124 Stat. 1376 (2010), available at http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm.

[2] Position Limits for Futures and Swaps, 76 Fed. Reg. 71,626 (Nov. 18, 2011) (to be codified at 17 C.F.R. Pts. 1, 150, 151), http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-28809-1a.pdf.

[3] Int’l Swaps & Derivatives Ass’n v. U.S. Commodity Futures Trading Comm’n, No. 11-cv-2146, slip op. (D.D.C. Sept. 28, 2012), https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2011cv2146-69.

[4] Ben Protess, Regulatory Prepares to Appeal Dodd-Frank Court Ruling, N.Y. Times, Oct. 9, 2012, http://dealbook.nytimes.com/2012/10/09/regulator-prepare-to-appeal-dodd-frank-court-ruling/.

[5] Press Release, Commodity Futures Trading Comm’n Office of Pub. Affairs, Q & A – Position Limits for Derivatives, http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/pl_qa.pdf.

[6] 7 U.S.C. § 6a(a)(1).

[7] Id.

[8] Ari Peskoe, D.C. District Court Rejects CFTC’s Position Limits Rule, The National L. Rev. (Oct. 7, 2012), http://www.natlawreview.com/article/dc-district-court-rejects-cftc-s-position-limits-rule.

[9] 7 U.S.C. § 6a(a)(2)(A).

[10] Id.

[11] Int’t Swaps & Derivatives Ass’n, supra note 3, at 10.

[12] Int’t Swaps & Derivatives Ass’n, supra note 3, at 12.

[13] Int’l Swaps & Derivatives Ass’n, supra note 3, at 15.

[14] Int’l Swaps & Derivatives Ass’n, supra note 3, at 42.

[15] Press Release, Commodity Futures Trading Comm’n, CFTC Approves Position Limit Appeal (Nov. 15, 2012), http://www.cftc.gov/PressRoom/PressReleases/pr6413-12.

[16] Jessica Holzer, Court Deals Blow to SEC, Activists, Wall St. J., July 23, 2011, http://online.wsj.com/article/SB10001424053111903554904576461932431478332.html.

[17] Neela Banerjee, Court Strikes Down EPA Pollution Rule, L.A. Times, Aug. 22, 2012, http://articles.latimes.com/2012/aug/22/nation/la-na-court-epa-20120822.

[18] Ben Protess, Judge Strikes Down a Dodd-Frank Trading Rule, N.Y. Times, Sept. 28, 2012, http://dealbook.nytimes.com/2012/09/28/judge-strikes-down-dodd-frank-trading-rule/.

[19] Press Release, Commodity Futures Trading Comm’n, Comm’r Bart Chilton Statement Regarding the CFTC’s Position Limits Appeal (Nov. 15, 2012), http://www.cftc.gov/PressRoom/SpeechesTestimony/chiltonstatement111512.