Co-authored by Allison Wuertz.
The United States District Court for the District of Columbia granted summary judgment for plaintiffs International Swaps and Derivatives Association (ISDA) and Securities Industry and Financial Markets Association (SIFMA), holding that a recent rulemaking by the Commodity Futures Trading Commission setting position limits on futures contracts, options contracts and swaps tied to 28 physical commodities (the Position Limits Rule) was not authorized. The court ordered that the rule, which had not yet taken effect, must be vacated. As the court acknowledged, both parties believe that the Position Limits Rule “is a significant and unprecedented change in the operation of the commodity derivatives market,” and therefore the court’s decision to vacate and remand—when it could have remanded without vacatur—is significant.
Prior to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Commodities Exchange Act of 1936 (the CEA) permitted, but did not require, the CFTC to set position limits on futures and options contracts. The CFTC asserted that it was now “required” by amendments that the Dodd-Frank Act made to the CEA to set position limits for certain physical commodity derivatives. Plaintiffs disagreed and argued that the CFTC misinterpreted the impact of the Dodd-Frank Act on the CEA and that the setting of such position limits was still discretionary and therefore required a finding of necessity. Plaintiffs also argued that the CFTC’s reading of the Dodd-Frank Act on this point was internally inconsistent, as it resulted in the CFTC having discretion to set position limits as to certain commodities but not others, despite the fact that the relevant provision of the CEA never distinguishes among commodities.
The court ultimately agreed with the plaintiffs after applying the two-part Chevron deference test. First, the court found that there were at least two plausible readings of the CEA as amended by the Dodd-Frank Act, and thus the court could not uphold the CFTC’s interpretation of the Dodd-Frank Act amendments under Chevron Step One. Second, the court agreed with the CFTC concession that it was not entitled to deference under Chevron Step Two. As it was unable to uphold the CFTC’s interpretation of the Dodd-Frank amendments to the CEA, the District of Columbia vacated the Position Limits Rule and remanded the matter back to the CFTC for further rulemaking.
Int’l Swaps & Derivatives Assoc., et al. v. US Commodity Futures Trading Comm’n, Civil Action No. 11-cv-2164 (RLW) (D.D.C. September 28, 2012).