U.S. District Court for District of Columbia Strikes Down CFTC Position Limits Rule in Important Ruling for Clutch Group Clients in the Financial Services Industry

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The Court ruled in favor of industry trade associations alleging that the CFTC misinterpreted its statutory authority under the Dodd-Frank Act. CFTC held to strict standard in application of the Dodd-Frank Act. Clutch Group sees continued variability in rule-making but also an indication of a possible favorable trend for the financial industry.

We are helping our banking clients to comply with these market standards whilst ensuring that the cost of compliance doesn’t unnecessarily burden an already capital intensive business

On September 28, 2012, the U.S. District Court for the District of Columbia struck down a pending rule-making issued by the Commodity Futures Trading Commission (CFTC) establishing position limits for futures contracts, opinion contracts and swaps on 28 types of commodities (International Swaps and Derivatives Association, et. a. v. United States Commodity Futures Trading Commission. Civil Action No. 11-cv-2146 (RLW) (D.D.C. 2012)). The ruling contributes to a growing trend of Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203, 124 Stat. 1376 (2010)). litigation brought by industry groups and financial institutions opposing the highly complex legislation and required rule-makings.

In their motions for preliminary injunction (Dkt. No. 14) and summary judgment (Dkt. No. 31), the plaintiffs, The International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) alleged that the CFTC misinterpreted its authority under amendments to the Commodity Exchange Act, required by the Dodd-Frank Act.

The position limit rule provisions established ceilings on the maximum number of derivatives contracts to buy or sell a commodity that may be owned during a specified period of time (76 Fed. Reg. 71626 (Nov. 18, 2011)).

According to the Court’s decision, ISDA and SIFMA asserted that the Dodd-Frank Act required the CFTC to determine whether position limits were ‘necessary and appropriate’ to prevent ‘excessive speculation,’ whereas the CFTC interpreted the Dodd-Frank Act as mandating a new position limit regime regardless of necessity.

The Court’s decision ruled in favor of ISDA and SIFMA and vacated and remanded the rule to the CFTC. The rule was scheduled to take effect on October 12, 2012.

The CFTC is now charged with resolving ambiguities in the rule and determining whether position limits are necessary to regulate the commodities market going forward. “It’s been over two years since Dodd-Frank was signed into law, and what’s evident is that the market continues to struggle with constant fluctuation in potential rule-making. This case clearly demonstrates that as banks look to comply with the new regulations they need to remain nimble throughout their implementation of policies and procedures,” said Brandon Daniels, President of Managed Services at Clutch Group.    

The ruling marks a victory for the financial industry and its trade associations, and is one of the first in what is likely to be a drawn out wave of litigation surrounding the Dodd-Frank Act.

Since the Dodd-Frank Act was passed, several suits have been brought against federal regulators challenging the provisions of the legislation and its implementation.

In 2010, the Chamber of Commerce and Business Roundtable brought a suit against the Securities and Exchange Commission (SEC) for a shareholder rights rule (Business Roundtable, et. al. v. S.E.C. 647 F.3d 1144 (D.D.C. 2011)). This year, several financial institutions, the Competitive Enterprise Institute, three state attorneys general and the 60 Plus Association filed a lawsuit challenging the constitutionality of the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council (FSOC) (National Bank of Big Spring, Texas, et. al. v. Geithner, et. al., No. 1:12-cv-01032-esh).

Members of Congress have also joined the charge against the provisions of the Dodd-Frank Act. On September 27, over 50 senators, from both sides of the aisle, led by Senators Pat Toomey (R-PA) and Mark Warner (D-VA), sent a letter to federal regulators opposing Basel III capital standards, according to a press release from Senator Toomey’s office. The letter to the Federal Reserve, Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) voiced concerns with the compliance burden of Basel requirements on top of Dodd-Frank Act regulations. Congressmen have also sent letters to federal regulators addressing concerns with other rulemakings, including the Risk Retention rule, Volcker rule, and Ability to Repay rule.

While it is still not clear how the courts will rule in pending and future litigation surrounding the Dodd-Frank Act, the recent CFTC decision does reveal that the D.C. District Court will likely require federal agencies to strictly follow the statutory language of the Dodd-Frank Act and provide transparency around their interpretations and decision-making. Notably, similar future cases brought by industry trade associations in D.C. will go through the same district court.

This case and other Dodd-Frank Act litigation also demonstrate the growing muscle of industry trade associations and financial institution cooperation. In response to compliance concerns raised by industry groups this year, federal regulators such as the CTFC and CFPB have extended compliance and comment deadlines for rulemakings.

These trade associations have been spearheading litigation and advocacy, but also have been facilitative in meeting Dodd-Frank Act requirements. To illustrate, ISDA launched its Dodd-Frank Protocol initiative in August to allow swap market participants to alter ISDA Master Agreements to meet Dodd-Frank Act compliance requirements.    “The leadership of trade associations, like ISDA, in the development of Guidelines, Protocols and Documentation has contributed to our ability to provide flexible and comprehensive solutions for clients to mitigate the risk of improperly established policies and documentation practices. We are helping our banking clients to comply with these market standards whilst ensuring that the cost of compliance doesn’t unnecessarily burden an already capital intensive business,” said Varun Mehta, Vice President of Legal and Compliance Solutions at Clutch Group.

Clutch Group is working with its clients to facilitate ISDA agreement amendments. Moreover, Clutch Group has bolstered its services since the passage of the Dodd-Frank Act to help financial services firms adjust to and comply with the changing regulatory environment including the new CFPB, as well as additional over-the-counter (OTC) provisions, business continuity, mortgage analysis, and rulemaking developments such as the recent ruling on the CFTC rulemaking.

About Clutch Group
Clutch Group is a certified Minority Business Enterprise, consistently ranked as a Top Legal Process Outsourcing firm worldwide by the Black Book of Outsourcing, Dun & Bradstreet, Frost & Sullivan and Chambers Global. Last March, Clutch Group received the Top Business Award by DiversityBusiness.com, acknowledging the firm as one of the top businesses in the United States. DiversityBusiness.com is the nation’s leading multicultural social media website that links Fortune 500 companies to multicultural service suppliers.

Clutch Group is dedicated to delivering the professional services for law. Clutch Group leverages and incorporates innovative technology, process and legal expertise to help deliver cost-effective services. Founded in 2005 by attorneys from top law firms and business process pioneers, Clutch Group was among the first legal outsourcing providers and currently has offices in Washington, New York, Chicago and Bangalore, India.

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Varun Mehta
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