July 23, 2014

CFTC Interim Rule Limits Futures and Swaps Positions; Challenge Filed, Delay Rejected

After months of contentious debate, which included multiple delays, complaints to the U.S. Commodity Futures Trading Commission (CFTC) Inspector General, and a 3-2 vote along party lines, the CFTC’s interim final rule on position limits for futures and swaps was published in the Federal Register on November 18, 2011. Position limits apply to four New York Mercantile Exchange energy contracts: Henry Hub Natural Gas (NG), Light Sweet Crude Oil (CL), New York Harbor Gasoline Blendstock (RB) and New York Harbor Heating Oil (HO). Two weeks later, the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) filed a legal challenge to the rule, claiming that the CFTC lacks the authority to set position limits and alleging various procedural flaws in the rulemaking. On January 4, the CFTC rejected a request by the two trade groups to delay implementation pending resolution of their lawsuit.

The interim final rule establishes position limits for 28 agricultural, energy and metals physical commodity futures and option contracts and physical commodity swaps that are economically equivalent to such contracts. The rule sets limits for spot-month positions that apply immediately before delivery obligations are incurred or the contracts are liquidated and for non-spot month position limits that apply to positions a trader has in all contract months combined or in a single contract month. Bona fide hedging is included among several exemptions from the position limits.

The CFTC adopted the position limit formulas on an interim basis and will solicit additional comments on the formulas. The position limits will go into effect 60 days after the CFTC further defines the term “swap,” which is the subject of a proposed but not yet final rule released on May 23, 2011.

The trade groups’ lawsuit is the first ever suit challenging a CFTC rule and was filed in both the D.C. district and circuit courts because there is no precedent for the proper venue for a challenge to a CFTC rule. According to the complaint filed at the District Court, Congress authorized the CFTC to establish position limits in the Dodd-Frank Wall Street Reform and Consumer Protection Act only if it first finds that such limits are necessary to diminish, eliminate or prevent excessive speculation. Because the CFTC has not made that finding, the plaintiff petitioners contend that the CFTC presently lacks the authority to promulgate the position limits rule. They also allege that the CFTC acted arbitrarily, capriciously, and contrary to the law under the Administrative Procedure Act by failing to support the position limits with specific evidence, ignoring contrary evidence in the record and insufficiently apprising the public of the basis of the proposed rule.

On January 4, the CFTC voted along party lines, again, not to delay implementation of the rule until the legal challenge is resolved. The CFTC also filed a motion to dismiss for lack of subject matter jurisdiction at the circuit court arguing that the relevant statutes do not provide for direct appellate review and that the case should be heard first in district court. On January 9, the trade groups filed a motion requesting that the circuit court stay the effective date of the rule while the litigation is pending.

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