Why ISDA Has Resorted to the Courts

Last week ISDA and SIFMA filed a lawsuit in federal court challenging the CFTC’s position limits rule (see the joint press release and associated documents). This marks the first time the Association has ever sued anyone, much less a regulator. It was a step that we debated extensively. After all the progress ISDA and our members have made in creating safer, more efficient markets, we did not want to give anyone the impression that we are against meaningful regulatory reform. In the end, the decision to file the suit was one that our board strongly supported. It’s worth spending some time explaining how and why the lawsuit came about.

First, it’s clear that the CFTC has the authority to create position limits. That is in the Commodity Exchange Act, as amended by the Dodd-Frank Act.  But what we disagreed with was:

1) The majority of the CFTC found they were required to create position limits. We read the statute to mean that position limits should be put in place when the CFTC found them to be necessary and appropriate. The CFTC made no such finding. Indeed, one of the yes votes warned the limits might do more harm than good.

2) Despite a torrent of comments and numerous studies by academic and government bodies, the CFTC ignored the evidence in proceeding with the rule. Agencies are required by administrative law to consider comments.

3) There really was no cost-benefit analysis. We’ve seen this before and it is very unsettling, especially when this is also required by law.

Could we not have voiced our concerns with the CFTC? The truth is, we should have and we did. We joined thousands of other commenters and submitted several separate letters to the CFTC on position limits. When we filed the legal challenge, the position limits rule was in final form. The decision about the rule had been made. It was not going to be changed with further dialogue.

We felt the final rule was not only negative in and of itself; it also made a terrible model for position limits for other products and for developing other rules. We would very much like to see a good faith cost-benefit analysis of other rules as they are finalized. We point to our paper on electronic execution as the type of analysis that should be done.

But what effect will our lawsuit have? We hope to get an injunction on the effectiveness of the rule. We also hope to get instructions from the court to have the CFTC make findings that position limits are necessary, that they heed public comment, that they structure position limits that suit each commodity separately and that the cost of implementation does not exceed any supposed benefits. We’ll see how the court decides. In the meantime, we have reiterated our commitment to work constructively with global regulators, including the CFTC, to make recommendations, provide information and pro-actively work to get reform right.

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