ISDA and SIFMA Sue CFTC Over Dodd-Frank Commodity Position Limits

ISDA and SIFMA filed a lawsuit against the CFTC in the US District Court for the District of Columbia and a petition for review in the US Court of Appeals for the District of Columbia alleging that the CFTC overreached when it issued final rules on position limits for speculative physical commodity futures and related swaps and derivatives under the Dodd Frank Act.

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On December 2, 2011, industry groups ISDA and SIFMA filed a lawsuit against the CFTC in the US District Court for the District of Columbia and a petition for review in the US Court of Appeals for the District of Columbia, alleging that the CFTC overreached its authority under the Dodd-Frank Act when it issued final Dodd-Frank rules on commodity position limits ...show full speedread

On December 2, 2011, industry groups ISDA and SIFMA filed a lawsuit against the CFTC in the US District Court for the District of Columbia and a petition for review in the US Court of Appeals for the District of Columbia, alleging that the CFTC overreached its authority under the Dodd-Frank Act when it issued final Dodd-Frank rules on commodity position limits.

The groups claim that recently issued final rules on speculative position limits for physical commodity swaps and related rules will make it harder to hedge the risks that market participants take to provide physical commodities to the public which, in turn, will lead to higher prices for those commodities. The lawsuit and petition allege that the CFTC did not satisfy several basic requirements under the Dodd-Frank Act before adopting the final position limits rules.

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On December 2, 2011, industry groups ISDA (www.practicallaw.com/5-386-5186) and SIFMA (www.practicallaw.com/3-386-4480) filed a lawsuit against the CFTC in the US District Court for the District of Columbia (District Court) and a petition for review in the US Court of Appeals for the District of Columbia (Court of Appeals) alleging that the CFTC overreached its authority under the Dodd-Frank Act when it issued final Dodd-Frank rules on commodity position limits.

In the suit, the first of its kind ever brought by the derivatives industry, the groups claim that recently issued final rules on speculative position limits for physical commodity swaps and related rules will make it harder to hedge the risks that market participants take to provide physical commodities to the public which, in turn, will lead to higher prices for those commodities.

The CFTC's final position limits rules, approved on October 18, 2011 in a 3-2 vote, establish, among other measures, spot-month and non-spot-month limits on speculative positions in 28 physical commodity futures contracts and their economically equivalent futures, options and swaps. The lawsuit and petition allege that the rules "lacked a reasoned basis" and that the CFTC did not satisfy several basic requirements under the Dodd-Frank Act before adopting final position limits rules, including:

  • Determining that position limits were both necessary and appropriate under the Dodd-Frank Act.

  • Conducting a sufficient cost-benefit analysis of the position limits rules.

  • Presenting a reasoned analysis in setting position limits or considering all evidence as to whether:

    • excessive speculation has an impact on the commodities market; and

    • position limits are a useful tool in combating excessive speculation.

ISDA and SIFMA also argue in the suit that the CFTC misinterpreted the language of the Dodd-Frank Act as requiring it to set position limits, whether or not position limits were determined to be necessary or appropriate under the Act to prevent burdens on interstate commerce from excessive speculation.

The industry groups allege that the position limit rules will impose significant costs on both the commodities markets and the broader economy by, among other things:

  • Making it harder for market participants to manage risk, reducing liquidity in these markets and increasing volatility.

  • Impairing the efficiency of markets to establish commodity prices (often referred to as the price discovery function).

  • Causing market participants to incur substantial costs in redesigning their trading and hedging strategies and building new infrastructure.

The suit and petition ask the District Court and the Court of Appeals, respectively, to vacate and set aside the final position limits rules in their entirety and to enjoin the CFTC from implementing those rules. In its petition filed with the Court of Appeals, the industry groups also ask it to find that the position limits rules are unlawful under the Administrative Procedure Act and the Commodity Exchange Act (CEA). The groups filed both a suit and petition because they assert that this is the first action of its kind and there is no direct precedent as to which forum is proper.

Earlier this year the US Chamber of Commerce and the Business Roundtable sued the SEC over Dodd-Frank proxy access rules that would have given stockholders greater rights to nominate and elect directors (see Legal Update, DC Circuit Strikes Down SEC Proxy Access Rule 14a-11 (www.practicallaw.com/0-507-0276)). The Court of Appeals struck down that rule, reasoning that the SEC did not adequately weigh the rule's costs and benefits before implementation. The SEC did not appeal.

For more information on the CFTC's rules on position limits, see Summary of the Dodd-Frank Act: Swaps and Derivatives: Position Limits (www.practicallaw.com/3-502-8950) and Legal Update, CFTC Approves Final Position Limits for Physical Commodity Futures and Swaps under Dodd-Frank (www.practicallaw.com/9-509-4169).

Court Documents:

International Swaps and Derivatives Association and Securities Industry and Financial Markets Association v. United States Commodity Futures Trading Commission, No. 1:11-cv-02146 (D.D.C. Dec. 2, 2011).

International Swaps and Derivatives Association and Securities Industry and Financial Markets Association v. United States Commodity Futures Trading Commission, No. 11-1469 (D.C. Cir. Dec. 2, 2011).

 
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