By: Noelle Indelicato
The Commodity Futures Trading Commission (CFTC) has ramped up Wall Street regulatory enforcement in 2012. The CFTC released its Enforcement Division’s annual results on October 5, 2012, stating that it imposed more than $585 million in sanctions in fiscal year 2012. Only $450 million in sanctions were imposed in fiscal year 2011. This increase is largely due to the $200 million fine the CFTC imposed on Barclays PLC for attempted manipulation of the London Interbank Offered Rate (LIBOR) and other benchmark interest rates. In fact, this is the CFTC’s largest fine ever.
The CFTC plans to continue this heightened enforcement, especially considering that the agency’s authority has been expanded under The Dodd-Frank Wall Street Reform and Consumer Protection Act. According to CFTC Chairman, Gary Gensler, “The Wall Street reform bill will – for the first time – bring comprehensive regulation to the swaps marketplace.” Thus, as the rules become effective, the CFTC will have greater authority to regulate the previously loosely regulated swaps market. However, the CFTC may face an uphill battle trying to use its expanded enforcement power.
Congress and Wall Street disapprove of the CFTC’s expansive regulatory authority demonstrated by their recent actions. Wall Street lobbyists and Republicans in Congress have collaboratively proposed the Fiscal Year 2013 Agriculture Appropriations Bill. This bill would reduce the CFTC’s funding by $25 million from 2012 to 2013, which counteracts the CFTC’s request for additional funding for fiscal year 2013. This would effectively deprive the CFTC of the appropriate resources it needs to regulate. With this bill, Congress intends to make it more difficult for the CFTC to implement rules regarding swap dealers, position limits, and the registration of commodity trading advisors.
The Dodd-Frank provision on speculative position limits has also been successfully challenged before Judge Robert Wilkins of the U.S. District Court in Washington D.C. as of September 28, 2012. The International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) on behalf of Goldman Sachs, JPMorgan, Barclays, Morgan Stanley and other commodity traders disputed the CFTC’s authority under Dodd-Frank to impose position limits intended to limit speculative commodities trading. The Plaintiffs challenged the rules in 17 C.F.R. § 151 that set position limits on futures, options, and swaps on twenty-eight commodities and ultimately won on a motion for summary judgment.
Position limit rules were intended to limit the number of derivatives contracts a trader could hold to protect consumers from speculative commodities trading, which has been known to inflate prices. Moreover, the new rules were meant to curb risky transactions that cause inflated prices and skewed valuations that can lead to financial crisis. The rules were set to become effective on October 12, 2012. Instead, the court has halted implementation by holding that the CFTC exceeded its authority by enforcing position limits that were not “‘necessary’ to diminish, prevent or eliminate excessive speculation.” Section 737 of Dodd-Frank states that regulators can enforce position limits only “as appropriate.” Judge Wilkins opined that the position limit rules were not properly justified by the agency.
The district court’s ruling diminishes the CFTC’s expanded authority to regulate under Dodd Frank. Thus the CFTC is expected to appeal this decision. Gary Gensler, Chairman of the CFTC, maintains, “it is critically important that these position limits be established as Congress required.” However, in light of Judge Wilkins’ holding, apparently what Congress intended is questionable. Consequently, Commissioner Bart Chilton has even proposed that the commission rewrite the rule for position limits to strengthen the agency’s justifications for its purpose and to ensure that the rule will withstand judicial scrutiny.
It will be interesting to see whether the CFTC is successfully able to appeal the district court holding or re-propose the position limits rules without further setbacks. The CFTC’s ability to continue to rev up its enforcement activity in the midst of a budget cut arguably depends upon how the agency responds to this judicial rebuke of its authority.