On Friday September 29, Judge Wilkins for the U.S. District Court for the District of Columbia vacated a Dodd-Frank rule issued by the CFTC setting limits on the number of derivatives contracts that an individual trader or group of traders can own during a given period of time. The Court’s ruling turned on whether Dodd-Frank “clearly and unambiguously” mandated the creation of position limits on derivatives contracts with or without first determining whether those limits were necessary and appropriate.
Two trade groups brought suit, arguing that the correct interpretation of the statute requires a determination of necessity before setting position limits. The CFTC argued that there was no substantive necessity requirement at all. Both the trade groups and the CFTC argued that the statutory language was clear and unambiguous, and that their different interpretations were correct.
Judge Wilkins disagreed with the trade groups and the CFTC, finding that the section of Dodd-Frank authorizing the creation of position limits is ambiguous, and that the CFTC must do further work to find the correct meaning of, and intent behind, the section. Early in the opinion, Judge Wilkins also said that the CFTC must first find that position limits are necessary and appropriate before creating a rule.
Two of the three commissioners who initially voted to institute the position limits rule stated that they had done so without prior findings of necessity only because the language of Dodd-Frank mandated the creation of position limit rules within a certain timeframe. Commissioner Dunn, who voted for the rule, had expressed doubts that position limits would actually prevent excessive speculation, or that excessive speculation greatly affects futures markets. Since the CFTC’s reading of Dodd-Frank has now been called into question, it is unclear whether those commissioners will support a new position limits rule.