In what surely is the first of many legal challenges to new CFTC rules based on the Dodd-Frank Act, the International Swaps and Derivatives Association (ISDA) and Securities Industry and Financial Markets Association (Sifma) recently filed a lawsuit challenging the newly passed position limits rule.
The rule, which passed the CFTC along a party-line vote, was adopted in October and aims to reduce "excess speculation" by expanding position limits to 28 different commodities. It expands the scope of existing CFTC limits on futures and options contracts to those in swaps based on agricultural contracts, energy and metals.
"A lot of what we’re talking about here isn’t specific to position limits, but more related to the process and analysis that the Commission has gone through," says Robert Pickel, executive vice-chairman at ISDA. "Why we think this particular rule is ripe for challenge is the fact that a majority of the Commission, including Commissioner Michael Dunn who no longer is there, said they didn’t see the value of position limits; they thought position limits actually might harm the markets."
Dodd-Frank significantly increased the jurisdiction of the CFTC by adding the over-the-counter (OTC) swaps markets to those it already oversees. Howard Tai, senior analyst at Aite Group, is not surprised swap advocacy groups are challenging rules. "The CFTC is exerting their jurisdiction into ISDA’s turf with its position limits on swaps, which are an OTC instrument, and ISDA is a self-regulated industry organization that governs the OTC contractual space," he says. "The last thing they want to do is have a regulator like the CFTC get in their crosshairs. Of course they’re going to fight this."
The lawsuit largely centers on the CFTC’s procedure in passing the rules as well as the agency’s interpretation of Dodd-Frank.
One of the chief complaints is that the CFTC neglected to do an adequate cost-benefit analysis of the rule. Willa Bruckner, partner at Alston & Bird LLP, says the lawsuit is asking, "With the questions in the academic and industry circles, how can the CFTC address those concerns in a one-page cost-benefit analysis?"
This isn’t the first time a regulator has been challenged on the basis of cost-benefit analysis. Earlier this year the Securities and Exchange Commission had a rule on proxy access overturned in court because the court ruled it had failed to do a proper cost-benefit analysis.
The day before the filing, Treasury Secretary Tim Geithner warned of "efforts to use cost-benefit analysis as roadblocks to reform, and other efforts to slow the pace of implementation of regulation in the hopes of watering it down." He said the Administration is "going to fight to preserve" essential Dodd-Frank reforms.
Pickel says the cost-benefit analysis needs to be an integral part of any decisions regulators make on rules that affect the markets. "These agencies are charged by their own statutes to do these cost-benefit analyses and it’s a matter of good government to require that to be done. If you think that hasn’t been done adequately, you should raise that as a concern," he says.
Although the Futures Industry Association (FIA) is not part of the lawsuit, in a statement it said, "We have disagreed with the CFTC’s decision to move forward with this rule in areas where we believe Congressional intent has not been followed or where the agency’s analysis has been flawed. It is appropriate that this rulemaking is being brought for judicial review."
ISDA and Sifma want to stay the rule pending this litigation. A CFTC spokesman declined to comment.