Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

International Swaps and Derivatives Association, et al. v. United States Commodity Futures Trading Commission

September 28, 2012

INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, ET AL. PLAINTIFFS,
v.
UNITED STATES COMMODITY FUTURES TRADING COMMISSION DEFENDANT.



The opinion of the court was delivered by: Robert L. Wilkins United States District Judge

MEMORANDUM OPINION

Plaintiffs International Swaps and Derivatives Association ("ISDA") and Securities Industry and Financial Markets Association ("SIFMA") (collectively "Plaintiffs") challenge a recent rulemaking by Defendant United States Commodity Futures Trading Commission ("CFTC" or "Commission") setting position limits on derivatives tied to 28 physical commodities. See Position Limits for Futures and Swaps, 76 Fed. Reg. 71,626 (Nov. 18, 2011) ("Position Limits Rule"). The CFTC promulgated the Position Limits Rule pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) ("Dodd-Frank").

The heart of Plaintiffs' challenge is that the CFTC misinterpreted its statutory authority under the Commodity Exchange Act of 1936 ("CEA"), as amended by Dodd-Frank. The central question for the Court, then, is whether the CFTC promulgated the Position Limits Rule based on a correct and permissible interpretation of the statute at issue. Before the Court are the following motions: 1) Plaintiffs' Motion for Preliminary Injunction (Dkt. No. 14), Plaintiffs' Motion for Summary Judgment (Dkt. No. 31) and Defendant's Cross Motion for Summary Judgment (Dkt. No. 38). For the reasons set forth below, Plaintiffs' Motion for Summary Judgment is GRANTED, the CFTC's Cross-Motion for Summary Judgment is DENIED, and Plaintiffs' Motion for Preliminary Injunction is DENIED AS MOOT.*fn1

FACTUAL BACKGROUND

ISDA is a trade association with more than 825 members that "represents participants in the privately negotiated derivatives industry." (Compl. ¶ 9). SIFMA is an "association of hundreds of securities firms, banks, and asset managers" whose claimed mission is to "support a strong financial industry, investor opportunity, capital formation, job creation, and economic growth, while building trust and confidence in the financial markets." (Id. ¶ 10). According to Plaintiffs, the commodity derivatives markets are "crucial for helping producers and purchasers of commodities manage risk, ensuring sufficient market liquidity for bona fide hedgers, and promoting price discovery of the underlying market." (Id. ¶ 15). The CFTC, of course, is an agency of the U.S. government with regulatory authority over the commodity derivatives market.

Relevant Derivatives Contracts

Three types of commodity derivatives are implicated in this case: futures contracts, options contracts and swaps. (Dkt. No. 31 at 5). A futures contract is a contract between parties to buy or sell a specific quantity of a commodity at a particular date and location in the future. (Id. at 3). An options contract is a contract between parties where the buyer has the right, but not the obligation, to buy or sell a specific quantity of a commodity at a point in the future. (Id.).

Futures contracts and options contracts result in either physical delivery or a cash settlement between parties. (Id.). In a physical delivery contract, the buyer takes physical delivery of the commodity when the contract expires. (Id.). At the conclusion of a cash-settled contract, a cash transfer occurs that is equivalent to the difference between the price set forth in the contract and the market price at the time the contract expires. (Id.). Swaps involve one or more exchanges of payments based on changes in the prices of specified underlying commodities without transferring ownership of the underlying commodity. (Id. at 5).

A position limit "caps the maximum number of derivatives contracts to purchase (long) or sell (short) a commodity that an individual trader or group of traders may own during a given period." (Compl. ¶ 21). A position limit may impose a ceiling on either a "spot-month" position or a "non-spot-month" position. (Id. at ¶ 22). A "spot month" is a specific period of time (which varies by commodity under the rules) that immediately precedes the date of delivery of the commodity under the derivatives contract. (Id.). As Plaintiffs explain, "[a] spot-month position limit, therefore, caps the position that a trader may hold or control in contracts approaching their expiration. A non-spot-month position limit caps the position that may be held or controlled in contracts that expire in periods further in the future or in all months combined." (Id.).

Commodity Exchange Act of 1936 and the 2010 Dodd-Frank Amendments

The main issue in this case is whether the Dodd-Frank amendments to Section 4a of the CEA (codified at 7 U.S.C. § 6a)*fn2 mandated that the CFTC impose a new position limits regime in the commodity derivatives market. It is undisputed that, prior to Dodd-Frank, the CEA vested the Commission with discretion to set position limits on futures and options contracts in commodity derivatives markets. See 7 U.S.C. § 6a (stating that CFTC has authority to proclaim and fix position limits "from time to time" "as the Commission finds are necessary to diminish, eliminate, or prevent [excessive speculation]."). Title VII of the Dodd-Frank Act amended Section 6a in several respects. The full text of Section 6a, with the Dodd-Frank amendments reflected in red-lined format, is attached to this Opinion as Appendix A.

The Position Limits Rule

Notice of Proposed Rulemaking

Dodd-Frank went into effect on July 21, 2010. On January 26, 2011, the CFTC issued a Notice of Proposed Rulemaking ("NPRM"), stating that Title VII of Dodd-Frank "requires" the Commission "to establish position limits for certain physical commodity derivatives." Position Limits for Derivatives, 76 Fed. Reg. 4,752 (Jan. 26, 2011). At an open meeting on January 13, 2011 prior to the issuance of the NPRM, Commissioner Michael V. Dunn stated that, "to date CFTC staff has been unable to find any reliable economic analysis to support either the contention that excessive speculation is affecting the market we regulate or that position limits will prevent excessive speculation." Transcript of Open Meeting on the Ninth Series of Proposed Rulemakings Under the Dodd-Frank Act at 9 (Jan. 13, 2011). Dunn also shared his "fear" that "at best position limits are a cure for a disease that does not exist, or at worst it's a placebo for one that does." Id. Commissioners Jill Sommers and Scott D. O'Malia also expressed fundamental concerns with the position limits proposal before the agency. Id. at 12-15; 18-22.

In the NPRM, the CFTC proposed to establish position limits for futures contracts, options contracts and swaps for 28 physical commodities. In discussing its statutory authority, the CFTC stated its view that it was: not required to find that an undue burden on interstate commerce resulting from excessive speculation exists or is likely to occur in the future in order to impose position limits. Nor is the Commission required to make an affirmative finding that position limits are necessary to prevent sudden or unreasonable fluctuations or unwarranted changes in prices or otherwise necessary for market protection. Rather the Commission may impose position limits prophylactically, based on its reasonable judgment that such limits are necessary for the purpose of 'diminishing, eliminating, or preventing' such burdens on interstate commerce . . . .

76 Fed. Reg. at 4754 (emphasis added). The CFTC stated that the "basic statutory mandate in section [6]a of the Act to establish position limits to prevent 'undue burdens' associated with 'excessive speculation' has remained unchanged-and has been reaffirmed by Congress several times-over the past seven decades." Id. In discussing the Dodd-Frank amendments to Section 6a, the Commission noted that:

[P]ursuant to the Dodd-Frank Act, Congress significantly expanded the Commission's authority and mandate to establish position limits beyond futures and options contracts to include, for example, economically equivalent derivatives. Congress expressly directed the Commission to set limits in accordance with the standards set forth in sections [6]a(a)(1) and [6]a(a)(3) of the Act, thereby reaffirming the Commission's authority to establish position limits as it finds necessary in its discretion to address excessive speculation.

Id. at 4755 (emphasis added). At this stage of the rulemaking, therefore, when discussing the "standards set forth in section [6]a(a)(1)," the Commission directly referred to its authority to "establish position limits as it finds necessary in its discretion to address excessive speculation." Id.

The Final Rule

During an open meeting on October 18, 2011, the CFTC adopted the Position Limits Rule by a vote of 3 to 2. 76 Fed. Reg. at 71,699. Chairman Gary Gensler and Commissioner Bart Chilton voted in favor of the Rule, with Commissioner Dunn providing the third vote for the majority. (Dkt. No. 31 at 10-11); 76 Fed. Reg. at 71,699. Dunn stated that "no one has presented this agency any reliable economic analysis to support either the contention that excessive speculation is affecting the market we regulate or that position limits will prevent the excessive speculation." Transcript of Open Meeting on Two Final Rule Proposals Under the Dodd-Frank Act (hereinafter "10/18/11 Tr. at __") at 13 (Oct. 18, 2011). Dunn expressed his opinion that "position limits may harm the very markets we're intending to protect." Id. at 14. Despite the fact that his opinion on position limits still "ha[d] not changed," Dunn voted in favor of the Rule because he believed Congress had required the Commission to impose position limits:

Position limits are, in my opinion, a sideshow that has unnecessarily diverted human and fiscal resources away from actions to prevent another financial crisis. To be clear, no one has proven that the looming specter of excessive speculation in the futures market re-regulated even exist, let alone played any role whatsoever in the financial crisis of 2008. Even so, Congress has tasked the CFTC with preventing excessive speculation by imposing position limits. This is the law. The law is clear, and I will follow the law. 10/18/11 Tr. at 11, 13 (emphasis added).

Commissioner Gensler supported Commissioner Dunn's view, stating that by "the Dodd-Frank Act, Congress mandated that the CFTC set aggregate position limits for certain physical commodity derivatives." 76 Fed. Reg. at 71,626, 71,699. The final rule reflected the Commission's view that it was compelled to produce a certain result: "Congress did not give the Commission a choice. Congress directed the Commission to impose position limits and to do so expeditiously." 76 Fed. Reg. at 71,628 (emphasis added).

Commissioners Sommers and O'Malia voted against the final rule and published written dissents. Sommers claimed that, while she was not philosophically opposed to position limits, she did "not believe position limits will control prices or market volatility" in this market. 76 Fed. Reg. at 71,699. Sommers claimed that the rule would inflict the greatest harm on bona fide hedgers and "ironically" may "result in increased food and energy costs for consumers." Id. Sommers claimed that, in her view, the Commission had "chosen to go way beyond what is in the statute and have created a very complicated regulation that has the potential to irreparably harm these vital markets." 76 Fed. Reg. at 71,700. By enacting the Rule, she believed that "[the CFTC] is setting itself up for an enormous failure." 76 Fed. Reg. at 71,699.

Commissioner O'Malia claimed that, although he had a number of serious concerns about the Rule, his "principal disagreement is with the Commission's restrictive interpretation of the statutory mandate under Section 4a [7 U.S.C. § 6a] of the [CEA] to establish position limits without making a determination that such limits are necessary and effective in relation to the identifiable burdens of excessive speculation on interstate commerce." Id. at 71,700 (emphasis added). As O'Malia stated, "the Commission ignores the fact that in the context of the Act, such discretion is broad enough to permit the Commission to not impose limits if they are not appropriate." Id. at 71,701. In O'Malia's view, the CFTC had "fail[ed] to comply with Congressional intent" and "misse[d] an opportunity to determine and define the type and extent of speculation that is likely to cause sudden, unreasonable and/or unwarranted commodity price movements so that it can respond with rules that are reasonable and appropriate." Id. at 71,700. O'Malia also faulted the Commission for promulgating the rule without any evidence that the position limits would actually benefit the market:

 "Historically, the Commission has taken a much more disciplined and fact-based approach in considering the question of position limits; a process that is lacking from the current proposal." Id. at 71,700.

 "The Commission voted on this multifaceted rule package without the benefit of performing an objective factual analysis based on the necessary data to determine whether these particular limits . . . will effectively prevent or deter excessive speculation." Id. at 71,702.

 "By failing to put forward data evidencing that commodity prices are threatened by the negative influence of a defined level of speculation that we can define as 'excessive speculation,' and that today's measures are appropriate (i.e. necessary and effective) in light of such findings, I believe that we have failed under the Administrative Procedure Act to provide a meaningful and informed opportunity for public comment." Id.

In the Position Limits Rule, the CFTC established spot-month and non-spot-month position limits for all "Referenced Contracts" as defined under the Rule. (Dkt. No. 31 at 13). A Referenced Contract: is defined as a Core Referenced Futures Contract or a futures contract, options contract, swap or swaption directly or indirectly linked to either the price of a Core Referenced Futures Contract or to the price of the commodity underlying a Core Referenced Futures Contract for delivery at the same location as the commodity underlying the relevant Core Referenced Futures Contract.

Id. (internal quotation marks omitted). The Rule identifies 28 Core Referenced Futures Contracts that will be subject to its provisions. Id. The Rule specifies that spot-month position limits shall be based on one-quarter of the estimated spot month deliverable supply as established by the Commission, and will apply to both physical delivery and cash-settled contracts separately. Id. at 14. For non-spot-months, different position limit rules apply for legacy Referenced Contracts and non-legacy Referenced Contracts. Id. at 15. Legacy Referenced Contracts are contracts that were previously subject to position limits by the CFTC. Id. These contracts will remain subject to the pre-existing regulations set forth in 17 C.F.R. § 150, although the Rule raised the pre-existing limits to higher levels. Id.

Non-legacy Referenced Contracts are contracts that were not previously subject to position limits. Id. The position limits for these contracts are fixed by the Commission based on "10 percent of the first 25,000 contracts of average all-months combined aggregated open interest with a marginal increase of 2.5 percent thereafter." Id. In addition to these regulations, the Rule also established circumstances where a trader must aggregate positions held in multiple accounts. Id. at 16. Subject to some exceptions, traders must aggregate all counts in which they have at least a 10% ownership or equity interest. Id.

Claims

Plaintiffs assert the following claims against the CFTC based on the Position Limits Rule: 1) Count One: Violation of the CEA and APA-Failure to Determine the Rule to be Necessary and Appropriate under 7 U.S.C. § 6a(a)(1), (a)(2)(A), (a)(5)(A)); 2) Count Two: Violation of the CEA-Insufficient Evaluation of Costs and Benefits under 7 U.S.C. § 19(a); 3) Count Three: Violation of the APA-Arbitrary and Capricious Agency Action in Promulgating the Position Limits Rule; 4) Count Four: Violation of the APA-Arbitrary and Capricious Agency Action in Establishing Specific Position Limits and Adopting Related Requirements and Restrictions; 5) Count Five: Violation of the APA-Failure to Provide Interested Persons A Sufficient Opportunity to Meaningfully Participate in the Rulemaking; and 6) Count Six: Claim for Injunctive Relief.

ANALYSIS

I.Standard of Review

When ruling on a summary judgment motion in a case involving final review of an agency action under the APA, the standards of Federal Rule of Civil Procedure 56(c) do not apply because of the limited role of the court in reviewing the administrative record.*fn3 See Charter Operators of Alaska v. Blank, 844 F. Supp. 2d 122, 126-27 (D.D.C. 2012). Summary judgment serves as a mechanism for deciding, as a matter of law, whether the administrative record supports the agency action and whether the agency action is consistent with the APA standard of review. See Richards v. INS, 554 F.2d 1173, 1177 & n.28 (D.C. Cir. 1977). The district court must "review the administrative record to determine whether the agency's decision was arbitrary and capricious, and whether its findings were based on substantial evidence." Forsyth Memorial Hosp., Inc. v. Sebelius, 639 F.3d 534, 537 (D.C. Cir. 2011) (citing Troy Corp. v. Browner, 120 F.3d 277, 281 (D.C. Cir. 1997)).

II.The Parties' Arguments Regarding the Interpretation of the Dodd-Frank Amendments

This case largely turns on whether the CFTC, in promulgating the Position Limits Rule, correctly interpreted Section 6a as amended by Dodd-Frank. Although both sides forcefully argue that the statute is clear and unambiguous, their respective interpretations lead to two very different results: one which mandates the Commission to set position limits without regard to whether they are necessary or appropriate, and one which requires the Commission to find such limits are necessary and appropriate before imposing them.

Plaintiffs argue that Section 6a is clear and unambiguous, and that the statute required the CFTC to make statutorily-required findings of necessity prior to promulgating the Position Limits Rule. (Dkt. No. 31 at 18-19). Plaintiffs argue that the CFTC misinterpreted the plain text of Dodd-Frank to mean that the CFTC mustimpose position limits without regard to whether such limits were appropriate or necessary. Plaintiffs argue that the statutory requirement included an obligation to determine whether specific position limits and the specific commodities to which they were tied were necessary and appropriate. (Dkt. No. 14 at 19).

Plaintiffs point out that, under Section 6a(a)(1), the CFTC has the discretion to establish position limits from time to time "as the Commission finds are necessary to diminish, eliminate, or prevent" the burden on interstate commerce caused by excessive speculation. (Id.at 19). Under Plaintiffs' view, that necessity standard applies to any position limits set pursuant to Dodd-Frank because the Dodd-Frank amendments expressly incorporate that standard. See § 6a(a)(2) (stating that position limits shall be established "[i]n accordance with the standards set forth in paragraph (1) of this subsection . . . ."); (Dkt. No. 31 at 20-21).

Plaintiffs also argue that the CFTC failed to find that it was appropriate to set position limits, in violation of the clear language of Sections 6a(a)(2) and (a)(5). See §§ 6a(a)(2)(A) ("the Commission shall by rule, regulation, or order establish limits on the amount of positions, as appropriate . . . that may be held by any person . . . .") (emphasis added); 6a(a)(5) ("the Commission shall establish limits on the amount of positions, including aggregate position limits, as appropriate, . . .) (emphasis added). Plaintiffs argue that the "as appropriate" clauses in Sections 6a(a)(2) and (a)(5) modify "shall," thus imposing a requirement on the CFTC that it shall only set limits if the Commission finds it "appropriate" to do so.

Finally, Plaintiffs argue that the CFTC's interpretation of the statute is internally inconsistent. By imposing position limits for contracts related to only certain (and not all) commodities, the Commission "acknowledged that it had the discretion to establish position limits for some commodity contracts and not others." (Dkt. No. 14 at 23). As Plaintiffs point out, however, the text of Section 6a "nowhere distinguishes between different commodities." (Dkt. No. 14 at 23; Dkt. No. 31 at 22); 76 Fed. Reg. at 71,665. Plaintiffs argue that "if, as the Commission concedes, the statute does not require the Commission to establish position limits for all commodities, there is no textual basis to conclude that it is required to regulate any of them." (Dkt. No. 14 at 23). Because there is no dispute that the CFTC failed to find that the imposition of position limits was necessary and appropriate, Plaintiffs ask this Court to vacate and remand the Rule to the agency.

For its part, the Commission also argues that Section 6a is clear and unambiguous. The Commission, however, takes the unwavering position that Congress mandated the agency to set position limits and stripped it of all discretion not to impose limits. The CFTC argues that it was not required to find that position limits were necessary or appropriate before imposing them and that, by adding Sections 6a(a)(2)-(7), Congress made the imposition of speculative limits mandatory. (Dkt. No. 25 at 20-23). Specifically, the CFTC points out that Congress stated that "with respect to physical commodities . . . the Commission shall by rule, regulation or order establish limits on the amounts of positions, as appropriate, . . . that may be held by any person . . ." § 6a(a)(2)(A); (Dkt. No. 25at 24).

The Commission also argues that Congress referred to the position limits as "required" and imposed time limits on the agency under Sections 6a(a)(2)(B)(i) (". . . the limitsrequiredunder subparagraph (A) shallbe established within 180 days . . ." and 6a(a)(2)(B)(ii) (". . . the limits requiredunder subparagraph (A) shall be established within 270 days . . ."), further reflecting the fact that the Dodd-Frank amendments were a mandate to set position limits. The CFTC points to other mandatory language to support its view, including Sections 6a(a)(2)(C) ("in establishing the limits required under subparagraph (A) . . .") and 6a(a)(3) ("in establishing the limits required in paragraph (2), the Commission, as appropriate, shallset limits . . . ."). According to the CFTC, if Congress intended for the CFTC to establish limits on a case-by-case basis, it would not have required that the limits be imposed on such short deadlines. Moreover, the CFTC argues that, under Plaintiffs' view, the Dodd-Frank amendments to Section 6a would be rendered meaningless.

Finally, the CFTC argues that, under Dodd-Frank, Congress directed the Commission to "conduct a study of the effects (if any) of the position limits imposed . . . within 12 months after the imposition of the limits." Congress further directed that the Commission "shall" submit a copy of that report to Congress, and Congress shall conduct a hearing within 30 days. See 15 U.S.C.§ 8307. According to the Commission, the reporting requirement is further evidence that the Dodd-Frank amendments compelled and mandated the Commission to set limits.

In sum, although each party believes the statute is clear and unambiguous, their respective "plain readings" compel different results. Ultimately, however, this Court need not choose between the competing interpretations. As explained below, Section 6a is ambiguous as to the precise question at issue: whether the CFTC is required to find that position limits are necessary and appropriate prior to imposing them. Because the Position Limits Rule is based on the CFTC's erroneous conclusion that the CEA is unambiguous on this issue, the Court "may neither defer to the agency's construction nor endorse plaintiffs' construction." See Humane Soc'y of U.S. v. Kempthorne, 579 F. Supp. 2d 7, 15 (D.D.C. 2008). Instead, the Court must remand this rule to the agency.

III.The CFTC's Interpretation of Section 6a as Amended by Dodd-Frank

a.Chevron Step One

Because this case involves the CFTC's interpretation of a statute it is charged with implementing, this Court applies the two-part test of Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). See Peter Pan Bus Lines, Inc. v. Fed. Motor Carrier Safety Admin., 471 F.3d 1350, 1353 (D.C. Cir. 2006). Under step one of the Chevron test, the Court first must consider "whether Congress has directly spoken to the precise question at issue." Pub. Citizen v. Nuclear Regulatory Comm'n, 901 F.2d 147, 154 (D.C. Cir. 1990) (quoting Chevron, 467 U.S. at 842). If so, the Court and the agency "must give effect to the unambiguously expressed intent of Congress." Arizona v. Thompson, 281 F.3d 248, 253 (D.C. Cir. 2002) (quoting Chevron, 467 U.S. at 842--43); seealso Northeast Hosp. Corp. v. Sebelius, 657 F.3d 1, 4 (D.C. Cir. 2011) (citing Chevron, 467 U.S. at 842--43).

Under Chevron Step One, the Court examines the statute de novo, employing traditional tools of statutory construction. Nat'l Ass'n of Clean Air Agencies v. EPA, 489 F.3d 1221, 1228 (D.C. Cir. 2007). The Court must assess the statutory text at issue, the statute as a whole, and review legislative history where appropriate. Coal Employment Project v. Dole, 889 F.2d 1127, 1131 (D.C. Cir. 1989) (citing K Mart Corp. v. Cartier, Inc., 486 U.S. 281 (1988) and Ohio v. U.S. Dep't of the Interior, 880 F.2d 432, 441 (D.C. Cir. 1989)). "This inquiry using the traditional tools of construction may be characterized as a search for the plain meaning of the statute. If this search yields a clear result, then Congress has expressed its intention as to the question, and deference [to the agency's interpretation] is not appropriate." Bell Atl. Tel. Co. v. FCC, 131 F.3d 1044, 1047 (D.C. Cir. 1997) (citing Hammontree v. NLRB, 894 F.2d 438, 441 (D.C. Cir. 1990)).

If, however, the statute is silent or ambiguous, the Court moves on to Chevron Step Two and defers to the agency's interpretation if it is based on a permissible construction of the statute. Peter Pan, 471 F.3d at 1353 (internal quotation marks and citations omitted). "A statute is considered ambiguous [under Chevron] if it can be read more than one way." Am. Fed'n of Labor & Cong. of Indus. Org. v. Fed. Election Comm'n, 333 F.3d 168, 173 (D.C. Cir. 2003) (citing United States v. Nofziger, 878 F.2d 442, 446-47 (D.C. Cir. 1989)). "Because the judiciary functions as the final authority on issues of statutory construction, an agency is given no deference at all on the question whether a statute is ambiguous." Wells Fargo Bank, N.A. v. Fed. Deposit Ins. Corp., 310 F.3d 202, 205-06 (D.C. Cir. 2002) (internal citations and quotation marks omitted).

i.Section 6a(a)(1) Plainly Requires the CFTC to Find That Position Limits are Necessary.

The first question for the Court is whether Section 6a(a)(1) requires the Commission to find that position limits are necessary prior to imposing them. This is important, of course, because the so-called "mandate" of Dodd-Frank in Section 6a(a)(2) expressly incorporates the "standards" of paragraph (1). The relevant portion of Section 6a(a)(1) states:

For the purpose of diminishing, eliminating, or preventing such burden, the Commission shall, from time to time, after due notice and opportunity for hearing, by rule, regulation, or order, proclaim and fix such limits on the amounts of trading which may be done or positions which may be held by any person . . . under contracts of sale of such commodity for future delivery on or subject to the rules of any contract market or derivatives transaction execution facility, or swaps traded on or subject to the rules of a designated contract market or a swap execution facility, or swaps not traded on or subject to the rules of a designated contract market or a swap execution facility that performs a significant price discovery function with respect to a registered entity, as the Commission finds are necessary to diminish, eliminate, or prevent such burden. § 6a(a)(1) (emphasis added).

The Commission does not argue-nor could it-that this section standing alone strips the agency of any discretion not to set position limits if it would be unnecessary to do so. In fact, the statute expressly directs the agency to set position limits "from time to time." Id. The precise question, therefore, is whether the language of Section 6a(a)(1) clearly and unambiguously requires the Commission to make a finding of necessity prior to imposing position limits. The answer is yes.

The contested language in Section 6a(a)(1) has remained largely unchanged from the initial passage of the CEA to the Dodd-Frank amendments. ComparePub. L. No. 74-675, ch. 545, 49 Stat. 1491, 1492 (June 15, 1936) ("For the purpose of diminishing, eliminating, or preventing such burden,the commission shall, from time to time . . . proclaim and fix such limits on the amount of trading . . . which may be done by any person as the commission finds is necessary to diminish, eliminate or prevent such burden.") (emphasis added) with Pub. L. No. 111-203, Title VII, § 737(a) to (c), 124 Stat. 1722 (July 21, 2010) ("For the purpose of diminishing, eliminating, or preventing such burden, the Commission shall, from time to time . . . proclaim and fix such limits on the amounts of trading which may be done or positions which may be held by any person . . . as the Commission finds are necessary to diminish, eliminate, or prevent such burden.") (emphasis added).*fn4

Consistent with this longstanding requirement, the Commission made necessity findings in its rulemakings establishing position limits for 45 years after the passage of the CEA. SeeIn the Matter of Limits on Position and Daily Trading in Wheat, Corn, Oats, Barley, Rye and Flaxseed for Future Delivery, 3 Fed. Reg. 3145, 3146 (Dec. 24, 1938) ("[T]rading in any one grain for future delivery on a contract market, by a person who holds or controls a speculative net position of more than 2,000,000 bushels, long or short in any one future or in all futures combined in such grain on such contract market, tends to cause sudden and unreasonable fluctuations and changes in the price of such grain . . . in order to diminish, eliminate, or prevent the undue burden of excessive speculation in grain futures which causes unwarranted price changes, it is necessary to establish limits on the amount of speculative trading under contracts of sale of grain for future delivery on contract markets, which may be done by any one person.") (emphasis added); see also In the Matter of Limits on Position and Daily Trading in Cotton for Future Delivery, 5 Fed. Reg. 3,198 (Aug. 28, 1940); Limits on Position and Daily Trading in Eggs for Future Delivery, 16 Fed. Reg. 8,106 (Aug. 16, 1951); Limits on Position and Daily Trading in Cottonseed Oil for Future Delivery, 18 Fed. Reg. 443 (Jan. 22, 1953); Limits on Position and Daily Trading in Soybean Oil for Future Delivery, 18 Fed. Reg. 444 (Jan. 22, 1953); Limits on Position and Daily Trading in Lard for Future Delivery, 18 Fed. Reg. 445 (Jan. 22, 1953); Limits on Position and Daily Trading in Onions for Future Delivery, 21 Fed. Reg. 5,575 (July 25, 1956).

The CFTC argues that, although it made necessity findings in these prior rulemakings, the agency never stated that a finding of necessity was required. (Dkt. No. 38 at 19, n.12). This argument is without merit. The plain text of the statute requires that position limits be set "as the Commission finds are necessary to diminish, eliminate, or prevent [excessive speculation]." § 6a(a)(1). The text does not state (nor has it ever) that the CFTC may do away with or ignore the necessity requirement in its discretion. There is no ambiguity as to whether the statute requires the CFTC to make such findings, and the CFTC has never apparently treated the statute as ambiguous on this point. Accordingly, the Court concludes 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).

ii.The Commission's Arguments That Section 6a(a)(1) Does Not Require a Necessity Finding Are Unavailing.

For 45 years after the passage of the CEA, the CFTC made necessity findings prior to imposing position limits under Section 6a(a). The CFTC has not cited to any express interpretation in which the CFTC took the position that no necessity finding was required. Nor has the CFTC cited to any prior interpretation in which the CFTC took the position that the specific language of Section 6a(a) (now Section 6a(a)(1)) was ambiguous on this point. Fully aware that Section 6a(a)(1) is problematic for its current position, the CFTC makes a number of arguments in an attempt to get out from underneath the statute's plain language ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.