(Article changed on October 20, 2012 at 15:57)
(Article changed on October 17, 2012 at 21:30)
(Article changed on October 17, 2012 at 17:41)
Distilled down to the simple basics, the "rationale" behind ISDA v. CFTC, which neutralizes a key provision of Dodd-Frank, is simple. Nothing in the law--no newly enacted statute, no regulatory practice, no clear expression of intent by Congress--has changed since 1936.
Imagine a Federal District Court Judge who interpreted telecom law by referencing the Radio Act of 1927, while disregarding the Federal Communication Act of 1934, which first established the FCC. Or imagine a judge who interpreted bank regulations based on the Aldrich-Vreeland Act of 1908, and disregarded the impact of the Federal Reserve Act of 1913, which first established the Fed.
ISDA v. CFTC, handed down on September 28, 2012, is that kind of travesty. District Court Judge Robert L. Wilkins cherry-picked his history and his statutes in a way that served to emasculate a key part of Dodd-Frank.
Putting it all in context, and unraveling all of his dissemblance, takes a bit of explaining. So let's start out with the smoking gun.
The Smoking Gun
Judge Wilkins purports to interpret a single statute, 7 U.S.C Section 6(a)(1), which directs the Commodity Futures Trading Commission (which Wilkins refers to as "the Commission" or "the CFTC") to impose position limits on certain commodity futures contracts. It says:
Excessive speculation in any commodity under contracts of sale of such commodity for future delivery "is an undue and unnecessary burden on interstate commerce in such commodity. For the purpose of diminishing, eliminating, or preventing such burden, the Commission shall" proclaim and fix such limits on the amounts of trading which may be done or positions which may be held by any person" as the Commission finds are necessary to diminish, eliminate, or prevent such burden.
The statute, in its original incarnation, was part of the Commodity Exchange Act of 1936 (which Wilkins refers to as "the CEA"). Wilkins writes:
The contested language in Section 6a(a)(1) has remained largely unchanged from the initial passage of the CEA to the Dodd-Frank amendments" The text does not state (nor has it ever) that the CFTC may do away with or ignore the necessity requirement in its discretion. There is no ambiguity as to whether the statute requires the CFTC to make such findings, and the CFTC has never apparently treated the statute as ambiguous on this point.
Accordingly, the Court concludes that Section 6a(a)(1) unambiguously requires that, prior to imposing position limits, the Commission find that position limits are necessary to "diminish, eliminate, or prevent" the burden described in Section 6a(a)(1)" For 45 years after the passage of the CEA, the CFTC made necessity findings prior to imposing position limits under Section 6a(a). I
Simple arithmetic destroys his "legislative history." The CFTC never existed prior to April 1975, when it was established pursuant to the passage of the Commodity Futures Trading Commission Act of 1974. So it was impossible for the CFTC to do anything for 45 years.
The 1974 Act, which dramatically revamped the entire regulatory structure for overseeing futures contracts, awarded the CFTC had brand new, more expansive, regulatory powers, just as the Federal Communication Act of 1934 set up the FCC with new regulatory powers, and just as the Federal Reserve Act of 1913 set up the Fed with new regulatory powers.
As the Comptroller General explained in a 1978 Report:
The Commission, an independent agency, was created by the Commodity Futures Trading Commission Act of 1974 on recommendation of GAO. The agency has broad regulatory powers, which its predecessor, the Commodity Exchange Authority in the Department of Agriculture, did not.
The Problems With "Excessive Speculation"
It may be worthwhile to recap why excessive speculation has caused such wreckage in commodity markets. Only a small percentage of commodity trades are executed on regulated exchanges, such as the CME. But the vast majority of over-the-counter trades are priced according to the benchmarks set by the exchanges. So, for instance, a bilateral sale of natural gas in Los Angeles might priced at a premium over the price of gas sold at the Henry Hub in Louisiana, according to prices set by contracts traded on the NYMEX in New York. If there are no position limits on the exchanges, then it's very easy to corner the market in a commodity and manipulate prices up or down.