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USDC-DC_Position-Limits-Rule-Injunction_092812 (1).pdf

USDC-DC_Position-Limits-Rule-Injunction_092812 (1).pdf

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11/30/2012

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UNITED STATES DISTRICT COURTFOR THE DISTRICT OF COLUMBIAINTERNATIONAL SWAPS ANDDERIVATIVES ASSOCIATION, et al.
 Plaintiffs,v.
UNITED STATES COMMODITYFUTURES TRADING COMMISSION
 Defendant.Civil Action No. 11-cv-2146 (RLW)
MEMORANDUM OPINION
Plaintiffs International Swaps and Derivatives Association (“ISDA”) and SecuritiesIndustry and Financial Markets Association (“SIFMA”) (collectively “Plaintiffs”) challenge arecent rulemaking by Defendant United States Commodity Futures Trading Commission(“CFTC” or “Commission”) setting position limits on derivatives tied to 28 physicalcommodities. See Position Limits for Futures and Swaps, 76 Fed. Reg. 71,626 (Nov. 18, 2011)(“Position Limits Rule”). The CFTC promulgated the Position Limits Rule pursuant to theDodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat.1376 (2010) (“Dodd-Frank”).The heart of Plaintiffs’ challenge is that the CFTC misinterpreted its statutory authorityunder the Commodity Exchange Act of 1936 (“CEA”), as amended by Dodd-Frank. The centralquestion for the Court, then, is whether the CFTC promulgated the Position Limits Rule based ona correct and permissible interpretation of the statute at issue. Before the Court are the followingmotions: 1) Plaintiffs’ Motion for Preliminary Injunction (Dkt. No. 14), Plaintiffs’ Motion forSummary Judgment (Dkt. No. 31) and Defendant’s Cross Motion for Summary Judgment (Dkt.No. 38). For the reasons set forth below, Plaintiffs’ Motion for Summary Judgment is
 
 
2
GRANTED
, the CFTC’s Cross-Motion for Summary Judgment is
DENIED,
and Plaintiffs’Motion for Preliminary Injunction is
DENIED AS MOOT
.
1
 
FACTUAL BACKGROUND
ISDA is a trade association with more than 825 members that “represents participants inthe privately negotiated derivatives industry.” (Compl. 9). SIFMA is an “association of hundreds of securities firms, banks, and asset managers” whose claimed mission is to “support astrong financial industry, investor opportunity, capital formation, job creation, and economicgrowth, while building trust and confidence in the financial markets.” (Id. ¶ 10). According toPlaintiffs, the commodity derivatives markets are “crucial for helping producers and purchasersof commodities manage risk, ensuring sufficient market liquidity for bona fide hedgers, andpromoting price discovery of the underlying market.” (Id. ¶ 15). The CFTC, of course, is anagency of the U.S. government with regulatory authority over the commodity derivatives market.
Relevant Derivatives Contracts
Three types of commodity derivatives are implicated in this case: futures contracts,options contracts and swaps. (Dkt. No. 31 at 5). A futures contract is a contract between partiesto buy or sell a specific quantity of a commodity at a particular date and location in the future.(Id. at 3). An options contract is a contract between parties where the buyer has the right, but notthe obligation, to buy or sell a specific quantity of a commodity at a point in the future. (Id.).
1
The Court finds it appropriate to consolidate consideration of the cross motions forsummary judgment with Plaintiffs’ Motion for Preliminary Injunction given that: the PositionLimits Rule has not yet gone into effect; briefing on summary judgment is ripe; the parties havehad a full and fair opportunity to present their entire cases on the merits and, thus, there is noprejudice from consolidation; and the parties have concurred that this case is properly disposedof on summary judgment. See Fed. Civ. P. Rule 65(a)(2); see also 11A Charles Alan Wright,Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2950, 239 (2d ed. 1995)(stating that consolidation will be considered proper “if it is clear that consolidation did notdetrimentally affect the litigants as, for example, when the parties in fact presented their entirecases . . . .”).
 
 
 
3Futures contracts and options contracts result in either physical delivery or a cash settlementbetween parties. (Id
.
). In a physical delivery contract, the buyer takes physical delivery of thecommodity when the contract expires. (Id.). At the conclusion of a cash-settled contract, a cashtransfer occurs that is equivalent to the difference between the price set forth in the contract andthe market price at the time the contract expires. (Id.). Swaps involve one or more exchanges of payments based on changes in the prices of specified underlying commodities withouttransferring ownership of the underlying commodity. (Id. at 5).A position limit “caps 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 givenperiod.” (Compl. ¶ 21). A position limit may impose a ceiling on either a “spot-month” positionor a “non-spot-month” position. (Id. at ¶ 22). A “spot month” is a specific period of time (whichvaries by commodity under the rules) that immediately precedes the date of delivery of thecommodity under the derivatives contract. (Id.). As Plaintiffs explain, “[a] spot-month positionlimit, therefore, caps the position that a trader may hold or control in contracts approaching theirexpiration. A non-spot-month position limit caps the position that may be held or controlled incontracts that expire in periods further in the future or in all months combined.” (Id.).
Commodity Exchange Act of 1936 and the 2010 Dodd-Frank Amendments
The main issue in this case is whether the Dodd-Frank amendments to Section 4a of theCEA (codified at 7 U.S.C. § 6a)
2
mandated that the CFTC impose a new position limits regimein the commodity derivatives market. It is undisputed that, prior to Dodd-Frank, the CEA vestedthe Commission with discretion to set position limits on futures and options contracts incommodity derivatives markets. See 7 U.S.C. § 6a (stating that CFTC has authority to proclaimand fix position limits “from time to time” “as the Commission finds are necessary to diminish,
2
This Court will refer to the statute by its United States Code number.

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