Position Limits Regulation - Court Decision

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Gavel.png FINAL RULE: Position Limits for Futures and Swaps approved at CFTC Open Meeting, October 18, 2011. However, on September 28, 2012, a U.S. Federal Court threw out the CFTC position limits rules, forcing the commission to consider redrafting the rules.
Dodd-Frank Timeline, Position Limits for Derivatives
Interim and Final Rule VACATED BY COURT ORDER Re-proposed Rule Issue Comment Deadline (reopen February 26, 2015)
November 18, 2011 September 28, 2012 November 5, 2013 March 28, 2015

Position limits are intended to protect futures markets from excessive speculation that could cause unreasonable or unwarranted price fluctuations and are sometimes referred to as "speculative position limits", or "speculative limits". The Commodity Exchange Act (CEA) authorized the CFTC to impose limits on the size of speculative positions in futures markets.

The CFTC issued its final rules on position limits in October 2011. Compliance for spot month positions was to become effective on October 12, 2012, but in September 2012, a U.S. District Court vacated the rule and remanded it back to the CFTC. Though the commission initially filed an appeal of the ruling, it opted instead to withdraw the appeal and redraft a proposed rule, which was approved on November 5, 2013. The proposal entered the Federal Register on December 12, 2013, but the comment period has been reopened three times in 2014. [1]

On November 15, 2012, the CFTC formally appealed the September 28th ruling in the U.S. District Court of Appeals for the District of Columbia.[2]

Background

One of the provisions of the Dodd-Frank Act was a mandate that the CFTC "limit the amount of positions, other than bona fide hedging positions, that may be held by any person with respect to physical commodity futures and option contracts in exempt and agricultural commodities traded on or subject to the rules of a designated contract market (DCM), as appropriate." [3] The CFTC issued its final rule at a meeting October 18, 2011.

The rule became effective January 17, 2012, but a compliance was not set at that time, pending the finalization of swap entity and product definitions. After those rules were finalized in August 2012, the compliance date for spot month futures and "economically equivalent" swaps was set at October 12, 2012.

Lawsuit Filed by ISDA and SIFMA

  • On December 12, 2011, the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) made a motion before the CFTC for a stay of the effective date of the position limits rules pending judicial review. On January 3, 2012, the commission denied the motion. To view the ISDA/SIFMA position, and the commission's denial, click HERE.
  • After the CFTC denied the motion for a stay of the effective date, ISDA and SIFMA filed a motion with the U.S. Court of Appeals on January 9, 2012, arguing that the CFTC used "flawed analysis," failed to consider costs and benefits, and that a majority of commissioners believed it to be unnecessary, but that one commissioner held a "mistaken view that Congress required it."[4] The case was dismissed by the appeals court, who said it first required a lower court ruling. On February 7, 2012, ISDA and SIFMA refiled the suit in U.S. District court, requesting a delay of the rule while the rule is being challenged.[5]
  • On September 28, 2012, a federal judge ruled in favor of ISDA and SIFMA, that the position limits rule should not be imposed because the CFTC did not first take steps to determine whether such limits were "reasonable and appropriate.[6]

Statement Regarding District Court Ruling by Robert Pickel, ISDA CEO, and Timothy Ryan, Jr., SIFMA President and CEO, September 28, 2012

“ISDA and SIFMA are pleased with today’s ruling by the D.C. District Court in their suit against the Commodity Futures Trading Commission’s (CFTC) final rule that limits the positions that investors may own in certain commodities. The Court’s ruling today vacates the rule and remands it back to the CFTC. The position limits rule would adversely impact commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility. On behalf of our members in the U.S. and around the world, we are pleased that the rule has been vacated and sent back to the CFTC for reconsideration. We are committed to working with the Commission and other regulators to promote safe, efficient markets.” [7]

Statement of Chairman Gary Gensler on Position Limits September 28, 2012

“As part of the Dodd-Frank Act, Congress directed the Commission to impose limits on speculative positions in physical commodity futures and options contracts and economically equivalent swaps. The Rule addresses Congress’ concern that that no single trader is permitted to obtain too large a share of the market, and that derivatives markets remain fair and competitive. I believe it is critically important that these position limits be established as Congress required. I am disappointed by today’s ruling, and we are considering ways to proceed.”[8]

Related Document: Court Order Vacating the CFTC Position Limits Rule

References

  1. Judge throws out CFTC's position limits rul. Reuters. Retrieved on October 2, 2012.
  2. US futures regulators appeal position limits decision. CNBC. Retrieved on November 15, 2012.
  3. Final Regulations on Position Limits for Futures and Swaps. CFTC. Retrieved on October 18, 2011.
  4. Wall Street Groups Seek Delay of CFTC Position Limits Rule. Business Week. Retrieved on January 23, 2012.
  5. Wall Street Groups Seek to Delay CFTC Rule Limiting Speculation. Bloomberg. Retrieved on February 8, 2012.
  6. CFTC Rule Restraining Speculation Rejected by U.S. Judge. Bloomberg. Retrieved on September 28, 2012.
  7. Statement Regarding District Court Ruling on ISDA/SIFMA Position Limits Lawsuit. ISDA. Retrieved on October 2, 2012.
  8. Statement of Chairman Gary Gensler on Position Limits September 28, 2012. CFTC. Retrieved on October 2, 2012.

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