On Tuesday, the Commodity Futures Trading Commission approved, by a 3-1 vote, a proposed rule on positions limits in commodities derivatives. The proposed rule reflects changes to an earlier rule on positions limits that was invalidated in 2012 by a Federal district court in the District of Columbia.
That decision, International Swaps and Derivatives Ass’n v. U.S. Commodity Futures Trading Com’n, rejected the Commission’s position that amendments made to the Commodities Exchange Act of 1934 by the Dodd Frank Act required the Commission to impose position limits in commodities derivatives contracts. The court ruled that “§ 6a(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 6a(a)(1)”. Id. at 270. Prior to the passage of Dodd Frank, the Commission had enjoyed discretionary power to implement such limits . In response to what it perceived as a Congressional mandate provided by Dodd Frank, the Commission implemented rules limiting positions in 28 commodities without officially considering whether excessive speculation actually existed in the market or even whether positions limits could effectively protect the market against the dangers of such speculation. Id. at 264.
Tuesday’s vote reflects the controversial nature of the positions limits rule, which passed over the strenuous Statement of Dissent of Commissioner O’Malia. In his Statement of Dissent, Commissioner O’Malia contended that the proposed rule offers only superficial compliance with the D.C. District Court’s finding that Dodd Frank does not actually require the CFTC to impose positions limits and that, in any case, the Commission cannot pass such regulations without first finding them necessary. Commissioner O’Malia argued that “the Commission relies on a new legal strategy—but not new data—in order to circumvent the spirit of the district court’s decision.” Id.
The Commission has declined to pursue an appeal of the D.C. Circuit’s decision in International Swaps and Derivatives and it remains to be seen whether the revised rule will become the subject of litigation in the future.