CFTC's position limit rule vacated by court

A U.S. district court today vacated a controversial Commodity Futures Trading Commission (CFTC) rule that would have set position limits on derivatives tied to 28 physical commodities, and remanded the rule to the agency.

The International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) had challenged the rule, arguing that it was based on a fundamental misinterpretation of the CFTC’s authority under the Commodity Exchange Act of 1936 (CEA) as amended by Dodd-Frank.

Although the two organizations agreed that the CFTC had the discretion to establish position limits “as the Commission finds are necessary to diminish, eliminate, or prevent” the burden on interstate commerce caused by speculation, they argued that Commission had misinterpreted Dodd-Frank to mean that it must impose such limits “without regard to whether [they] were appropriate or necessary.”

The court noted the differing interpretations of Dodd-Frank, and ruled that “the CFTC’s error in this case was that it fundamentally misunderstood and failed to recognize the ambiguities in the statue.” Given these ambiguities, the court said in its opinion, “the law of this circuit…requires…that the court remand the rule to the agency so that it can fill in the gaps.”

In a joint statement released Friday, ISDA’s Chief Executive Officer Robert Pickel and SIFMA President and CEO T. Timothy Ryan lauded the court’s decision. “The position limits rule would adversely impact commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility,” the statement read. “On behalf of our members in the U.S. and around the world, we are pleased that the rule has been vacated and sent back to the CFTC for reconsideration.”

The proposed rule was controversial at the time of its passage, when the CFTC Commissioners approved it by a 3-2 vote. CFTC Chairman Gary Gensler was one of those supporting the position limits, along with Commissioner Bart Chilton, who called the rule “a most precious parameter that we should have proposed much earlier.” Commissioner Michael Dunn voted for the rule “in order to gather more information” on whether speculation was indeed distorting market prices. On the opposite side, Commissioners Jill Sommers and Scott O’Malia testified against the measure, with Sommers faulting the rule for “not analyz[ing], or in any way consider[ing] whether different limits are appropriate for different groups or classes of traders.”

In a statement following the court’s ruling, Commissioner Gary Gensler said that he was “disappointed by today’s ruling,” and that the agency was “considering ways to proceed.”

Read the full ruling here.

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