Judicial Developments: CFTC Position Limits Rule Struck Down by the Courts
On September 29, 2012, the US District Court for the District of Columbia struck down the position limits rule promulgated by the Commodity Futures Trading Commission ("CFTC") that would have gone into effect October 12, 2012, limiting the positions that investors could own in commodity futures, options and swaps.
The International Swaps and Derivatives Association ("ISDA") and the Securities Industry and Financial Markets Association ("SIFMA") filed a lawsuit in federal court challenging the CFTC's position limit rule on December 2, 2011.
The main issue before the District Court was whether the CFTC correctly interpreted Section 6a of the Commodity Exchange Act ("CEA") as "clearly and unambiguously" requiring the CFTC to impose position limits. While the CFTC interpreted the section as mandating the CFTC to impose position limits, the court disagreed and found that Section 6a "clearly and unambiguously requires the Commission to make a finding of necessity prior to imposing position limits." Because the CFTC had not first proven that imposing position limits in commodity markets was necessary to prevent speculation in markets such as energy, grain and metal, the rule was vacated.
While the Chairman of the CFTC, Gary Gensler, issued a statement expressing his disappointment with the ruling, ISDA issued a statement expressing its approval, noting that "[t]he position limits rule would [have] adversely impact[ed] commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility."
ISDA and SIFMA also filed a motion with the CFTC seeking to stay the effective date of the rules pending resolution of the federal lawsuit. The CFTC, however, denied this motion on January 3, 2012. Had the District Court not rendered a decision prior to October 12, 2012, the rules would have gone into effect pending resolution of the court proceedings.
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