On October 18, 2011, the Commodity Futures Trading Commission (the “CFTC”) adopted final rules (the “Position Limit Rules”), pursuant to Section 737 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that set position limits for certain futures contracts, options contracts and swaps on 28 agricultural, energy, and metal commodities (the “Referenced Contracts”). The Position Limit Rules were set to take effect on October 12, 2012 (the “Effective Date”), at which time traders would have to comply with certain limits on the number of Referenced Contracts they may own during a given time period, unless an exemption to such limits is available.
In December 2011, the International Swaps and Derivatives Association (“ISDA”) and the Securities Industry and Financial Markets Association (“SIFMA,” and together with ISDA, the “Plaintiffs”) filed a complaint in the U.S. District Court for the District of Columbia (the “Court”) challenging the validity of the Position Limit Rules. The Courts decision turns on language in the Dodd-Frank Act that states that the “CFTC shall, from time to time, proclaim and fix position limits, as the CFTC finds necessary to diminish, eliminate or prevent the burden of sudden or unreasonable fluctuations or unwarranted changes in the price of a commodity.” The Plaintiffs argued that this provision requires the CFTC to make a determination that position limits are necessary to diminish, eliminate or prevent such a burden before adopting such position. On the other hand, the CFTC argued that it was not required to make any such determination and that the Dodd-Frank Act unambiguously mandated the CFTC to impose such position limits.
The Court held that the Dodd-Frank Act is ambiguous as to whether the CFTC was mandated to impose position limits or if they must first make a determination that position limits are necessary before imposing such limits. Therefore, the Court determined that the CFTC relied on an incorrect understanding of the Dodd-Frank Act in believing it to be unambiguous, vacated the Position Limit Rules and remanded them to the CFTC. The CFTC must now make a determination as to whether Congress intended to mandate the imposition of position limits or appeal the Court’s ruling. Regardless of which course of action the CFTC chooses, the Position Limit Rules will not go into effect on October 12, 2012.