By a very slim margin last Thursday, the Democratic majority of the Commodity Futures Trading Commission (CFTC) voted to appeal a federal court ruling that tossed out the agency's controversial final rule aimed at limiting speculative trading in the swaps market.
The three Democratic Commissioners -- Chairman Gary Gensler, Bart Chilton and Mark Wetjen -- agreed to proceed with an appeal of the September decision of U.S. District Judge Robert Wilkins, who held that the Dodd-Frank Wall Street Reform Act required the agency to "unambiguously" make a finding of necessity before imposing position limits.
As a result of the CFTC's failure to make such a finding, the judge vacated the CFTC's final rule, which established limits on speculative positions in 28 core physical commodity contracts, four of which are energy contracts: Nymex Henry Hub Natural Gas, Nymex Light Sweet Crude Oil, Nymex New York Harbor Gasoline Blendstock and New York Harbor Heating Oil (see NGI, Oct. 24, 2011).
Republican Commissioners Scott O'Malia and Jill Sommers voted against appealing the district court ruling to a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit.
In his dissent, O'Malia said the district court in its ruling "explicitly stated that the [Dodd-Frank] statute unambiguously requires a finding of necessity before establishing position limits. It went on to argue that subsequent parts of the statute are ambiguous. I continue to believe that the statute is crystal clear in calling for a necessity finding, and that this should be the end of the discussion."
Even if FERC "successfully appeals the ruling, there is a very good chance that the Commission would be right back in the district court to defend against plaintiffs' other challenges," O'Malia said.
"I believe it is critically important that these position limits be established as Congress required. I support the Commission's continued efforts to put in place position limits on speculative positions by appealing the September ruling," Gensler said. "While respecting the district court's decision, I strongly disagree, and our appeal lays out why the mark was missed on this important issue," Chilton said. "Our appeal should also send a message that the largest speculators on the planet can't litigate regulators to death. We will fight back. Your deep pockets can't protect you from what the law clearly states."
In addition to the appeal, "on which I expect we will prevail, we should promulgate yet another rule to provide a belt and suspenders approach to this important issue. That means we also [will] concurrently propose and finalize another position limits rule," Chilton said.
The International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association challenged the position limits rule in court in December, arguing that the agency adopted the rule without first determining that there was excessive speculation in commodity and swaps markets and failing to conduct a meaningful cost-benefit analysis of the rule (see NGI, Dec. 12, 2011).
The two associations contend that the position limits rule may harm commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility.
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