Securities and derivatives industry associations have filed a legal challenge in federal court to the recently adopted CFTC regulations establishing position limits for 28 physical commodity futures and economically equivalent swaps contracts. The new position limits, adopted October 18, cover both agricultural and formerly exempt commodities.
The Securities Industry and Financial Markets Association (SIFMA) and International Swaps and Derivatives Association (ISDA) filed a Petition for Review in the U.S. Court of Appeals for the District of Columbia Circuit Court, under Rule 15(a) of the Federal Rules of Procedure and the Commodity Exchange Act. Noting that there may be some question as to the proper forum for the challenge due to lack of direct precedent, the associations also filed a complaint in the District Court for the District of Columbia under the Administrative Procedure Act.
In the complaint, the associations argue the CFTC’s decision-making process in enacting the regulations was fundamentally flawed because the CFTC declined to analyze whether excessive speculation in commodity derivatives is a problem. The complaint asserts that the CFTC maintained that it was required to establish position limits without regard to their necessity or appropriateness because Congress did not give the Commission discretion in imposing limits, and consequently the CFTC ignored a number of studies and reports examining whether position limits are effective or necessary to address excessive speculation. According to the complaint, the Commission “grossly” misinterpreted its statutory authority.
However, said the industry groups, even if the CFTC were required to impose position limits, it acted arbitrarily, capriciously, and contrary to law by failing to support the specific limits with sufficient evidence, ignoring contrary evidence in the record, and insufficiently apprising members of the public of the basis for the proposed rule.
In the rulemaking notice, the Commission disagreed with comments asserting that it must first determine that position limits are necessary before imposing them, or that it may set limits only after it has conducted a complete study of the swaps market. In the agency’s interpretation, Congress did not give the Commission a choice, but rather directed the Commission to impose position limits and to do so expeditiously.
The associations also asserted that the CFTC failed to give serious consideration to the costs that the position limits rule will impose on commodity markets and the broader economy. In particular, the bona fide hedging exemption is “unnecessarily narrow”, limiting the ability of market participants to hedge their risks, and infrastructure costs will be substantial. In the view of the associations, the CFTC did not make a genuine effort to estimate these costs, instead citing its failure to obtain empirical data that would enable to assess the economic impact of the rule.
The CFTC asserted in the rulemaking notice that, wherever feasible, the Commission endeavored to quantify the costs and benefits of the final rules, and where quantification was not feasible, a qualitative assessment was performed. The rulemaking notice devoted a number of pages to analysis of costs and benefits, noting however that public comment letters provided little quantitative data regarding costs and benefits and that the Commission’s own quantitative data on swaps was limited. According to the notice, as the Commission gains further experience regarding the swaps market and market participants, it may reevaluate the scope of the contracts covered by the rule, including the definition of economically equivalent contracts.
This post was contributed by my colleague Lene Powell