The CFTC’s position limit rules were vacated in their entirety by the Court. Under the Court’s decision, the CFTC is able to re-adopt the prior rules, amend them, or drop them, subject to the requirement discussed below.
The argument between the CFTC, on the one hand, and ISDA, on the other, turned on their respective interpretations of Section 4a of the CEA.
Essentially, the CFTC argued that the Section was unambiguous in requiring the CFTC to set position limits on commodities without regard to any finding by the CFTC that such position limits were in the public interest. Conversely, ISDA argued that the Section was unambiguous in authorizing the CFTC to set position limits only if it found that such limits were in the public interest.
As a matter of statutory interpretation, the Court did not in fact fully side with either party. Rather, the Court held that the Section was ambiguous and might reasonably be read in either the manner favored by the CFTC or in the manner favored by ISDA. The Court then went on to find that because the CFTC had mistakenly read the Section as being unambiguous, the CFTC had mistakenly failed to use its regulatory authority to interpret the statute. In short, the Court did not find that the CFTC had to find that position limits served the social good before imposing them. Rather, the Court gave the CFTC two possible directions: (1) the CFTC can find that, although the CEA is ambiguous, the CFTC reasonably interprets the statute to impose position limits without consideration of whether they produce a social good, in which case it follows that the CFTC would then adopt position limits without further consideration of whether they provide a social benefit; or (2) the CFTC can find that the CEA requires the CFTC to make some determination that position limits will achieve a social good before adopting them, in which case the CFTC would presumably study the issue for the purpose of determining whether position limits will be to the good before determining what action to take.
The CFTC must now either appeal the decision or proceed to analyze the statute and determine its meaning.
Lofchie Comment: : Although the CFTC was the formal “loser” of the Court’s decision, as a financial regulatory lawyer, I view the outcome as a long-term victory for the CFTC as a financial regulator, for regulators generally, and for those who desire to see the U.S. regulatory system as serving a social purpose.
The argument advanced by the CFTC in support of the position limit rules — that the CFTC was required to make rules without regard to any finding of social good — is an intellectual and regulatory policy dead-end. The CFTC’s position that the benefit of the rules is essentially irrelevant, so long as rules are made, results in the conclusion that the substance or quality of the rules is irrelevant. For the regulatory function to be reduced to the manufacture of rules that are not subject to any test of advancing social policy, I would see as a defeat for not only CFTC, but for all those who work to adopt, implement and explain financial regulation.
In short, the Court’s decision has rescued the CFTC from being reduced to adopting rules that may be fundamentally detrimental to the country without considering the consequences of such adoptions. While some at the CFTC may view the decision as reducing the agency’s authority, the case should be viewed as increasing the CFTC’s authority to act only after exercising its expertise for the purpose of serving the public good.
Click here to view the court’s ruling in full. We have highlighted some of the key aspects of the Judge’s opinion in this copy.
See also: CFTC Chairman Gary Gensler’s statement of opposition. ISDA Comment on the decision.