On September 28, 2012, the U.S. District Court for the District of Columbia issued a long-awaited decision vacating and remanding a rule issued by the Commodity Futures Trading Commission (“CFTC”) that would have imposed position limits on derivatives trading linked to 28 futures contracts, including the New York Mercantile Exchange (“NYMEX”) Henry Hub Natural Gas contract, the NYMEX Light Sweet Crude Oil contract, the NYMEX New York Harbor Gasoline Blendstock contract, and the NYMEX New York Harbor No. 2 Heating Oil contract. The CFTC position-limits rule,1 which was promulgated pursuant to the Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), was set to become enforceable on October 12, 2012 with respect to spot-month contracts linked to the designated futures contracts. Two industry groups challenged the rule soon after its issuance, arguing that the CFTC failed to determine the necessity of position limits before issuing the rule and failed to conduct a proper cost-benefit analysis in contravention of the Commodity Exchange Act and the Administrative Procedure Act. In its September 28 ruling, the district court found that while the CFTC had issued the rule on the understanding that Dodd-Frank plainly mandates the imposition of position limits, the statute is ambiguous as to whether the imposition of limits is mandatory or discretionary, and that the CFTC neither recognized this ambiguity nor brought its expertise to bear in resolving the ambiguity. The court therefore vacated the rule and remanded it to the CFTC for further consideration. The CFTC now must decide whether to appeal from the district court’s order and whether to seek an emergency stay of the order pending appeal. A stay of the district court’s order would effectively leave the CFTC rule in place until the appeals court issues a decision affirming or reversing the district court’s order. The CFTC has 60 days in which to file an appeal but is likely to act very quickly in the event it decides to challenge the district court order.
The CFTC’s Position-Limits Rule
The CFTC adopted its position-limits rule pursuant to authority granted under Section 4a of the Commodity Exchange Act, 7 U.S.C. § 6a, as amended by the Dodd-Frank Act (“Section 6a”). The position-limits rule establishes caps on the number of spot-month futures contracts2 and “economically equivalent” swaps that any person may hold with respect to the 28 designated futures contracts.3 The position-limits rule also establishes the circumstances under which a person must aggregate and attribute to itself positions held by other entities in which such person holds an ownership interest. Prior to the passage of Dodd-Frank, the CFTC had itself established position limits only with respect to certain agricultural futures and relied on futures exchanges (such as the NYMEX) to set limits with respect to energy and metals contracts.
Plaintiffs’ Challenge to the Position-Limits Rule and the CFTC’s Response
The plaintiffs in the case, the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association, challenged the position-limits rule on several grounds. First, the plaintiffs contended that the CFTC violated the Administrative Procedure Act and the Commodity Exchange Act by failing to make a determination that the position limits adopted by the rule were “necessary” and “appropriate” as the plaintiffs alleged the CFTC was required to do under Section 6a of the Commodity Exchange Act. Second, the plaintiffs contended that the agency unlawfully failed to conduct a sufficient evaluation of the cost and benefits of the position limits, pursuant to 7 U.S.C. § 19(a), prior to implementing the rule. Finally the plaintiffs alleged that the CFTC violated the Administrative Procedure Act by acting arbitrarily and capriciously in adopting the position-limits rule, in establishing specific position limits and related requirements and restrictions, and in failing to provide interested persons with a sufficient opportunity to meaningfully participate in the rulemaking process establishing the position-limits rule. The plaintiffs sought injunctive relief from the court.
The CFTC responded to the plaintiffs’ challenge by asserting that the Dodd-Frank Act required the agency to impose position limits on derivatives involving physical commodities regardless of whether the CFTC determined that the imposition of such limits was “necessary” or “appropriate.” Accordingly, the CFTC claimed, the agency had not acted unlawfully by implementing the directive of Congress mandated in the Dodd-Frank Act.
The District Court’s Decision
On September 28, 2012, some five months after the completion of briefing on summary judgment and two weeks before compliance with the rule was required, the district court issued its decision vacating the position-limits rule and remanding it to the CFTC. The court stated that the main issue in the case was “whether the Dodd-Frank amendments to Section 6a of the Commodity Exchange act mandated that the CFTC impose a new position limits regime in the commodity derivatives market.” ISDA v. CFTC, slip op. at 3 (emphasis added).
Because the controversy involves the CFTC’s interpretation of a statute it was charged by Congress with implementing, the court determined that it must apply the two-part test of Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), to determine whether the agency’s interpretation of the statute is permissible. Under step one of the Chevron test, a reviewing court must consider “whether Congress has directly spoken to the precise question at issue.” If Congress has clearly spoken, the court must give effect to the clear intention of Congress, notwithstanding a contrary interpretation by the agency. However, if the statute is silent or ambiguous, the court will proceed to Chevron step two and defer to the interpretation of the agency charged with administering the statute if the agency’s interpretation is based on a permissible construction of the statute. Under Chevron step two, however, the agency must recognize the statutory ambiguity and bring its expertise to bear in resolving that ambiguity in a permissible manner.
While the plaintiffs and the CFTC each contended that the statute unambiguously supported their position, the court determined that neither party’s interpretation necessarily followed from the statutory language taken as a whole. Therefore, the court found that “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.” Id. slip op. at 13. Because the court found that the statute is ambiguous on the issue, it remanded the position-limits rule to the CFTC so that the agency could resolve the statutory ambiguity utilizing its specific expertise.
The Court’s Ruling Under Step One of the Chevron Analysis
In interpreting the relevant statutory language, the court first found that, standing on its own, the provision of Section 6a(a)(1) of the Commodity Exchange Act clearly and unambiguously requires the CFTC to make a finding of necessity prior to imposing position limits. The relevant portion of Section 6a(a)(1) provides (emphasis added):
For the purpose of diminishing, eliminating, or preventing [a burden on interstate commerce from excessive speculation], the [CFTC] shall, from time to time, . . . 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 certain futures contracts or swaps] as the Commission finds are necessary to diminish, eliminate, or prevent such burden.
The court generally rejected several alternative arguments from the CFTC, which purported to interpret Section 6a(a)(1) in a manner that would not have required the CFTC to make a necessity finding prior to imposing any position limits.
But while the district court found that Section 6a(a)(1), standing alone, clearly and unambiguously requires the CFTC to make a “necessity finding” prior to imposing new position limits, it found the statute as a whole to be ambiguous on this point. Specifically, the court examined several other statutory subsections detailing how the agency should go about establishing position limits and what factors it should consider. The court concluded that Congress utilized “traditionally mandatory” language such as the words “shall” and “required” when describing the CFTC’s obligations under those subsections. Although the court found that the CFTC’s overall reading of Section 6a was not necessarily unreasonable, it stated that the agency’s interpretation was also not inevitable and therefore not mandatory. Accordingly, the court held that the Dodd-Frank amendments to Section 6a, taken as a whole, do not “constitute a clear and unambiguous mandate” to impose position limits without the CFTC making a “necessity finding” under Section 6a(a)(1).
The Court’s Ruling Under Step Two of the Chevron Analysis
Because the statute does not speak unambiguously to the issue, the court moved to the second step of the Chevron analysis. Under the second step of Chevron, a court will grant deference to the agency’s interpretation of ambiguous statutory language if the court finds the agency’s interpretation to be based on a permissible reading of the statute. In this case, however, the CFTC did not recognize any ambiguity in the relevant statutory language. Rather, the CFTC determined that Congress had spoken clearly and unambiguously in requiring the CFTC to impose position limits. The court held that because the CFTC did not recognize and address the statutory ambiguity, the agency’s interpretation was not entitled to deference. Id. slip op. at 36 (“It is well-settled in this Circuit that deference to an agency’s interpretation of a statute is not appropriate when the agency wrongly believes that interpretation is compelled by Congress.”) (internal quotation omitted). The court accordingly remanded the position-limits rule to the CFTC and directed the agency to “bring its experience and expertise to bear in light of competing interests at stake to resolve the ambiguities in the statute.” Id. slip op. at 38 (internal quotation omitted). The court stated that where an agency has failed to interpret an ambiguous statute it has been charged with administering, it “is not for the court to choose between competing meanings.” Id. slip op. at 38 (internal quotation omitted). Rather, the court stated that it was appropriate “to remand the rule to the agency so that it can fill in the gaps and resolve the ambiguities.” Id. slip op. at 39. Importantly, the court said it did not foreclose the possibility that the CFTC might reasonably conclude on remand, after analyzing the relevant statutory language, that it may permissibly impose position limits without first making findings that such limits are “necessary” or “appropriate.”4
Because the court determined that Section 6a is ambiguous and accordingly remanded the position-limits rule to the CFTC to permit it to resolve the ambiguities in the statute, the court held that it need not address the plaintiffs’ other claims that the rule and the specific limits and procedures it established violated the Administrative Procedure Act. For similar reasons, the court also declined to determine whether the agency improperly failed to conduct a sufficient cost-benefit analysis pursuant to 7 U.S.C. § 19(a).
Vacatur of the Position-Limits Rule
While recognizing that the CFTC might decide on remand to impose the same position limits that it imposed in the first instance (with or without findings that such limits are “necessary” or “appropriate”), the court exercised its discretion to vacate the position-limits rule in its entirety due to the seriousness of the CFTC’s error in failing to recognize and resolve the ambiguity in the statute, and also because of the market disruption that would result from allowing the rule to go into effect as written when the CFTC might reach a different result on remand.
Possibility of Appeal
The CFTC will have an opportunity to appeal the district court’s order to the U.S. Court of Appeals for the District of Columbia Circuit. If it files a notice of appeal, the CFTC could also seek an emergency stay of the district court's order, which, if granted, would permit the position-limits rule to go into effect pending the appeals process. Unless and until a stay of the district court’s order is granted and/or the order is overturned on appeal, the CFTC’s current position-limits rule has no force or effect and compliance with the rule is not required.
Click here to view the district court’s ruling in International Swaps and Derivatives Ass’n v. CFTC.