Saturday, September 29, 2012

Federal Judge Vacates and Remands CFTC’s Dodd-Frank Position Limits Rule on Derivatives

Section 4a(a)(1) of the Commodity Exchange Act, as amended by the Dodd-Frank Act, clearly and unambiguously requires the CFTC to make a finding of necessity prior to imposing position limits, said a federal judge (DC of DC). The plain text of the statute requires that position limits be set as the Commission finds are necessary to diminish, eliminate, or prevent excessive speculation. The court found that the CFTC did not promulgate its Position Limits Rule on derivatives based on a correct and permissible interpretation of the statute at issue. The text does not state that the CFTC may do away with or ignore the necessity requirement in its discretion. Thus, the court concluded that Sec. 4a(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 4a(a)(1). ISDA v. CFTC, DC of DC, Civil Action No. 11-cv-2146.

There is nothing in the plain language of the statute that supports the Commission’s argument that the discretion in Section 4a(a)(1) was somehow “converted” by Dodd-Frank. If anything, noted the court, the Dodd-Frank amendments are subject to the preexisting standards of Section 4a(a)(1), not the other way around. In these circumstances, the court vacated and remanded the position limits rule to the agency so that it can fill in the gaps and resolve the ambiguities. 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. The court reasoned vacating the rule was proper since it would be disruptive to the markets if the Position Limits Rule were allowed to go into effect while on remand. The Court found that vacatur of the rule now 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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