Court Vacates CFTC’s Position Limits Rule

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The CFTC’s final rule on position limits with respect to derivative contracts in 28 different physical commodities has been vacated and remanded back to the agency. Spot month limits under the rule had been set to go into effect on October 12, 2012.

On September 28, the U.S. District Court for the District of Columbia granted the motion for summary judgment of plaintiffs International Swaps and Derivatives Association (ISDA) and Securities Industry and Financial Markets Association (SIFMA), finding that, in promulgating the rule, the CFTC failed to first make a finding required by the Commodity Exchange Act (as modified by the Dodd-Frank Act) that the position limits were necessary to “diminish, eliminate, or prevent” the burden of undue speculation on interstate commerce. In a joint statement, the CEOs of ISDA and SIFMA stated: “The position limits rule would adversely impact commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility. On behalf of our members in the U.S. and around the world, we are pleased that the rule has been vacated and sent back to the CFTC for reconsideration.”

The CFTC may repromulgate the same or modified position limits, but will first have to make the required finding that the limits are necessary. This represents the first setback of this nature that the CFTC has encountered in rolling out its Dodd-Frank regulatory regime with respect to swaps.

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