On September 28, 2012, the U.S. District Court for the District of Columbia vacated and remanded the Commodity Futures Trading Commission’s (“CFTC”) Position Limits Rule. The Court held that the CFTC incorrectly interpreted the Commodity Exchange Act of 1936 (“CEA”), as amended by the Dodd-Frank Act. Specifically, the Court held that the CFTC failed to make a necessity finding before promulgating its Position Limits Rule.
In its Notice of Proposed Rulemaking (“NOPR”), the CFTC interpreted the Dodd-Frank Act as requiring the agency to establish position limits in regard to certain physical commodity derivates and, as such, proposed to establish position limits for future contracts, option contracts, and swaps for 28 physical commodities. A position limit caps the maximum number of derivate contracts that a trader may purchase or sell over a set period. These limits are designed to prevent any trader from acquiring too large a share of the market.
The CFTC then promulgated these position limits in a 3-2 vote, without finding that such limits were “necessary and appropriate.” In defending the rulemaking, the CFTC argued that it was not required to make a finding that the position limits were necessary and appropriate before imposing them, because the CFTC interpreted the statute as “clearly and unambiguously” removing that requirement by mandating the imposition of position limits.
The Court disagreed with the CFTC’s position. In reaching its conclusion, the Court applied the two-part Chevron test used when an agency’s interpretation of a statute that it implements is challenged. In applying the Chevron test, the Court determines whether (1) Congress directly addressed the precise question at issue; and, if not, (2) whether the agency’s interpretation of the statute is reasonable.
In applying the first part of the Chevron test to the CFTC’s interpretation of the CEA, the Court determined that when read as a whole, the Dodd-Frank amendments did not represent a clear and unambiguous mandate to set position limits without a necessary and appropriate finding, but did appear to require the CFTC to set position limits. As amended by the Dodd-Frank Act, the CEA states that the agency “shall by rule, regulation, or order establish limits on the amount of positions, as appropriate.” By including the phrase “as appropriate,” the Court determined that Congress also intended that the CFTC should assess whether the position limits were needed and, thus, could not be read as a clear mandate to set position limits. Citing this and other ambiguities in the statute, the Court rejected the CFTC’s interpretation that the Dodd-Frank amendments clearly and unambiguously mandate that it must impose position limits. The Court explained, “[T]he CFTC’s error in this case was that it fundamentally misunderstood and failed to recognize the ambiguities in the statute.”
After concluding the first step of the Chevron analysis, the Court held that is was unable to review whether the CFTC’s interpretation of the Dodd-Frank amendments was reasonable under step two of Chevron. The Court stated that under the law, the Chevron step two analysis is only appropriate where an agency exercises its own judgment, and not appropriate where an agency believes that its interpretation is compelled by Congress.
The Court vacated and remanded the Position Limits Rule to the CFTC to “fill in the gaps and resolve the ambiguities.”
A copy of the Opinion can be found here.