On September 28, 2012, Judge Robert L. Wilkins of the United States District Court for the District of Columbia issued an opinion vacating the Commodity Futures Trading Commission’s (“CFTC”) attempted imposition of position limits pursuant to the Dodd-Frank Act (“Dodd-Frank”). International Swaps & Derivatives Ass’n v. CFTC, Civil Action 11-cv-2146 (Memorandum Opinion). Specifically, the Memorandum Opinion grants a motion for summary judgment filed by the International Swaps and Derivatives Association (“ISDA”) and finds that the CFTC misinterpreted its authority under Dodd-Frank.

A position limit is a cap on “the maximum number of derivatives contracts to purchase (long) or sell (short) a commodity that an individual trader or group of traders may own during a given period.” Memorandum Opinion at p. 3 (quoting ISDA Complaint ¶ 21). While the Commodities and Exchange Act (“CEA”) has always permitted the CFTC to impose position limits if “necessary to diminish, eliminate, or prevent [excessive speculation],” Dodd-Frank amended the CEA in a manner that could be interpreted as requiring their imposition. On October 18, 2011, the CFTC voted 3-2 to impose position limits on 28 derivatives contracts.  Position Limits for Derivatives, 76 Fed. Reg. 71,626 (Nov. 18, 2011) [pdf] . Many of the commissioners expressed skepticism that the position limits rule would be beneficial, but stated that Dodd-Frank required the CFTC to impose such limits. The CFTC also concluded that Dodd-Frank required the imposition of position limits even if it made no finding of necessity.

The Memorandum Opinion finds that the CFTC misinterpreted Dodd-Frank’s amendments to the CEA. The court concludes that Dodd-Frank did not unambiguously eliminate the CEA’s longstanding requirement that the CFTC find position limits to be necessary prior to imposing them. Memorandum Opinion at pp. 38-39. The court finds that the Dodd-Frank amendments to the CEA are ambiguous with respect to whether the CFTC is required to make a finding of necessity. Id. The court, therefore, granted ISDA’s motion for summary judgment and remanded the matter to the CFTC to bring its expertise to bear when evaluating the ambiguities in the Dodd-Frank amendments regarding position limits. Id. at p. 43.

The Memorandum Opinion also vacates the CFTC’s position limits order, finding that vacation is appropriate when an agency has “fundamentally misunderstood” the relevant statute. Memorandum Opinion at p. 42. In addition, the court notes that it would be difficult to restore the status quo ante if the position limits rule were permitting to go into effect pending the CFTC’s consideration on remand and the CFTC determined on remand that position limits were inappropriate. Id. at pp. 42-43.