The title of my 2010 Regulation piece on CFTC position limits characterized the agency’s attitude as: “No Theory? No Evidence? No Problem!” I had a problem with that attitude. So did a couple of industry groups, ISDA and SIFMA, and they sued seeking to block imposition of the limits. And Federal District Court Judge Robert Wilkens has a problem with it too. He vacated the rule and remanded it to the agency for reconsideration, and granted the plaintiffs’ summary judgment motion against the rule.
The decision turned on whether the CFTC had to find that position limits were necessary to prevent and diminish excessive speculation. The agency said no: it had no discretion, that Congress had mandated that it impose limits. The plaintiffs said yes: the plain language of the statute requires the CFTC to make a finding that limits are necessary because speculation is excessive and is causing unwarranted fluctuations in prices.
The agency further argued that imposition of limits were mandatory, whereas plaintiffs pointed to statutory language saying that Congress had granted the authority to impose limits “as appropriate.”
The judge was quite firm in his findings regarding necessity:
The precise question, therefore, is whether the language of Section 6a(a)(1) clearly and unambiguously requires the Commission to make a finding of necessity prior to imposing position limits. The answer is yes.
But the plaintiffs’ victory was not so clearcut as has been portrayed in the initial reporting on the decision. The judge noted that the two sides had unambiguous, but diametrically opposed interpretations of the statute. The judge disagreed with both, finding the statute ambiguous:
In sum, although each party believes the statute is clear and unambiguous, their respective “plain readings” compel different results. Ultimately, however, this Court need not choose between the competing interpretations. As explained below, Section 6a is ambiguous as to the precise question at issue: whether the CFTC is required to find that position limits are necessary and appropriate prior to imposing them. Because the Position Limits Rule is based on the CFTC’s erroneous conclusion that the CEA is unambiguous on this issue, the Court “may neither defer to the agency’s construction nor endorse plaintiffs’ construction.” See Humane Soc’y of U.S. v. Kempthorne, 579 F. Supp. 2d 7, 15 (D.D.C. 2008). Instead, the Court must remand this rule to the agency.
As a result, he chose not to choose between the parties’ diametric interpretations. So the rule will go back to the Commission. Presumably it will make a finding of necessity based on some attempt to stitch together some empirical evidence on the adverse impact of speculation. Presumably the plaintiffs will find this evidence unpersuasive (with good reason) and challenge the Commission’s finding, thereby setting up a further round of litigation. The results of this litigation would presumably depend on what is a satisfactory basis for a finding of necessity by the Commission. This seems to me to be a potentially far more contentious issue in which the courts may be more likely to defer to the agency’s discretion and judgment.
This decision does not address another challenge to the limits: that the CFTC failed to perform an adequate cost-benefit analysis as required by statute. That’s another big issue that would require a more discriminating critique of the substance of the Commission’s analysis by the courts.
So this decision is not the end of position limits. It is probably the end of the beginning, at best.
The concrete results in the short and medium term are beneficial, however. A bad rule that has no firm grounding in good economic thinking or empirical evidence, and which would impose substantial costs on markets and market participants, will not go into effect next week as planned. The Commission will be forced to confront these economic and empirical issues, and defend its judgments on these grounds: “Congress made me do it” will not suffice.
No doubt this process will be time consuming. It will certainly extend well past the election, and depending on the outcome of the election the matter may become moot. A Republican CFTC is much less likely to pursue position limits with the Javert-like intensity of a Gensler-led agency. But even under a Democratic administration, the CFTC’s will to pursue position limits will be sorely tested. It now faces a greater burden of providing some theory, and providing some evidence, or else it will continue to experience big problems in court.
A good day, a good result, but not a final one. The position limit wars will continue, but the battlefield looks far different today than it did when Frankendodd lurched out of the castle on The Hill, and when the CFTC did what it perceived to be the monster’s bidding.