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January 5, 1982

AMERICAN STOCK EXCHANGE, INC. and Amex Commodities Clearing Corporation, Plaintiffs,
The COMMODITY FUTURES TRADING COMMISSION, Philip McBride Johnson, Chairman of the Commodity Futures Trading Commission, James M. Stone, Read P. Dunn, Jr. and David G. Gartner, Commissioners of the Commodity Futures Trading Commission, Defendants

The opinion of the court was delivered by: WEINFELD

This is an action by the American Stock Exchange Inc. and its wholly owned subsidiary, Amex Commodities Clearing Corporation (collectively "Amex"), to declare null and void regulations adopted by the defendants, the Commodity Futures Trading Commission and its members (collectively "Commission"), which authorized a pilot program for the trading of options on commodity futures contracts on domestic commodity exchanges, designated by the Commission as contracts markets for option trading. The matter is now before the Court on Amex's application for a preliminary injunction restraining the Commission from implementing and enforcing the regulations and on the Commission's cross-motion to dismiss the complaint pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of subject matter jurisdiction and Rule 12(b)(6) thereof for failure to state a claim upon which relief can be granted. Amex seeks relief essentially upon a charge that it will be excluded from participation if the pilot program is allowed to become operational and it will suffer irreparable injury, since it is highly likely that it will be effectively barred from competing in the commodity options market unless the program provides for the simultaneous inclusion of options on physical commodities. The precise claim of irreparable injury and the basis of attack upon the regulations as an arbitrary measure is discussed in greater detail hereafter.

A proper understanding of the respective contentions of the parties requires a reference to the statutory history governing commodities options and commodities futures contracts. In 1936 Congress, concerned with a record of excessive price movements and severe disruptions in the futures markets attributable to speculative trading in options, prohibited option trading in certain agricultural commodities by the Commodity Exchange Act of 1936 ("1936 Act"). *fn1" However, in the years that followed the passage of the 1936 Act, from 1936 to 1974, options in other commodities not enumerated in the 1936 Act were sold without any regulatory safeguards. During this period, there were widespread abuses and massive frauds by unscrupulous firms and others, as a result of which customers who had purchased such unregulated options were defrauded of millions of dollars. *fn2" In 1974 Congress, in an effort to remedy these abuses, enacted the Commodity Futures Trading Commission Act ("1974 Act") *fn3" which significantly amended the 1936 Act. The 1974 Act established the Commodity Futures Trading Commission, the defendant herein, as an independent regulatory agency with plenary rule-making power and delegated nearly unfettered authority to the Commission to regulate, or indeed ban, the trading in commodity options and commodity futures contracts in the United States. *fn4" The 1974 Act continued the absolute ban on option trading for commodities listed in the 1936 Act *fn5" but granted the new Commission exclusive authority to regulate and permit other options to be written and traded in compliance with rules to be promulgated by the Commission. *fn6" However, continued fraudulent and abusive practices under the Commission's interim rules prompted Congress by the Futures Trading Act of 1978 ("1978 Act") *fn7" to extend the ban of option trading to those commodities which first became subject to regulation in 1974. Directly pertinent to the issues presented here is that Congress further provided that such ban continue until the Commission submitted to the designated House and Senate oversight committees (1) documentation of its ability to regulate successfully such transactions, including its proposed rules and regulations, and (2) the expiration of thirty calendar days of continuous session of Congress after the date of transmittal. *fn8"

A proposed rule for trading in commodity options has been the subject of study by the Commission and its staff over a long period. *fn9" In 1977, the Commission proposed rules for a limited program permitting exchange trading of options on futures *fn10" and options on physicals *fn11" but no action *fn12" was taken and the matter of trading in options was the subject of further study by the Commission. In June 1981, it published for comment the proposed rules at issue here to establish a three-year pilot program to determine whether, and in what manner, exchange option trading should be permitted. This proposal was more restrictive than that considered in 1977. Under the proposal, the pilot program would be limited to options on futures contracts and participation would be restricted to those exchanges which have active, liquid markets in the underlying futures contracts. *fn13"

 While the Commission was of the view that priority should be given to regulations permitting trading of commodity options involving futures contracts, it invited comments regarding the expansion of the pilot program to include options on physical commodities. *fn14" Among others, Amex responded and urged upon the Commission that it not exclude options on physical commodities from its pilot program setting forth in great detail its reasons in a sixteen-page letter, much of which was a repeat of representations made with respect to the 1977 proposed regulation. Essentially, the hard thrust of its position is that options on physicals and options on futures are financial instruments that are very close economic substitutes. Indeed, Amex urged that options on physicals would be preferable to options on futures contracts for both economic and regulatory reasons. *fn15" The Commission apparently was not persuaded by the arguments advanced by Amex and others and on September 8, 1981 adopted the proposed regulation. It was submitted to the oversight committees of the House *fn16" and Senate *fn17" before whom the Chairman of the Commission and the staff personnel appeared and explained the regulatory approach, including the reasons for not including options on physicals. While the oversight committees had no power to veto the proposal, no adverse action was noted or taken. On November 3, 1981, the final rule was published in the Federal Register *fn18" and became effective on December 3, 1981.

 Amex seeks to enjoin the enforcement of the new regulation until further regulations are adopted to provide simultaneous commencement of trading options on physicals. Amex asserts three specific claims: (1) that the adoption of the regulation was arbitrary, capricious and an abuse of discretion contrary to the best interests of the public and contrary to the intent of Congress and, therefore, in excess of the Commission's statutory authority; (2) that the regulations are anticompetitive and in contravention of section 15 of the 1936 Act *fn19" which requires the Commission in adopting new rules or regulations to endeavor to take the least anticompetitive means, thereby constituting an act in excess of the Commission's statutory authority; and (3) that the denial to plaintiffs of the opportunity to sell options on physical commodities while permitting other exchanges to sell an alleged competing product-options on commodities futures-constitutes wrongful deprivation of their property in violation of due process and denies them the equal protection of the laws in violation of the Fifth Amendment of the United States Constitution.

 In order to prevail on the motion for preliminary injunctive relief, Amex must show not only irreparable injury but, in addition, likelihood of success on the merits or that there are sufficiently serious questions going to the merits to make them a fair ground of litigation and a balance of hardships tipping decidedly towards it. *fn20"

 First, we consider Amex's claim for preliminary injunctive relief. This rests in the main upon a contention, variously and strenuously stated, that authorizing options on futures to go forward under the pilot program without at the same time including options on physicals will, because the two types of options are closely related products, "grant an overwhelming competitive advantage to those few exchanges initially permitted to trade in options on futures" and present "a nearly insurmountable obstacle to the successful implementation of trading of options on physicals" at a later time because traders will prefer an already established liquid market. *fn21"

 The self-deprecation by Amex of its ability to compete as a subsequent entrant into an existing market wherein, as phrased by it, those who are permitted to trade in options on futures will have a decided headstart, is far from persuasive. Plaintiffs' dire prediction of anticompetitive consequences is a far cry from the much vaunted boast of private enterprise's capacity to enter into an existing market already dominated by others. A newcomer's entry into a strongly competitive market with the capacity to survive and exist is not unknown in our private enterprise system. Indeed, if as Amex argues, options on physicals are a more desirable product than options on futures, any headstart in favor of those trading in options on futures should prove no obstacle to those who desire to trade in options on physicals, whenever, and if, the Commission decides to authorize such trading.

 Moreover, the claim of immediate irreparable injury because the Commission "will act to designate contract markets for trading in options on futures ... and trading will begin soon thereafter" is more apparent than real and is greatly diminished by the factual situation. While the effective date of the regulation under attack is December 3, 1981, it is not self-operative. Before an exchange may begin trading options, it must apply to the Commission for designation as a contract market to trade the underlying futures contracts and any applications that are submitted must be reviewed by the Commission to determine compliance with the pilot program. *fn22" The Chairman of the Commission, in his briefing of the Congressional committees, stated that he did not expect the pilot program to become operational until the summer of 1982 and that significant trading would not begin until 1983, because the first year would be spent reviewing the proposed applications and getting the system into place. *fn23" Further, the Commission in confining the regulation at the start to options on futures did not foreclose consideration of extending the rule to include options on physicals. Quite to the contrary, it stated that it had under consideration the issues raised with respect to the inclusion of options on physicals and that it would "make every effort to resolve these regulatory issues in time to inaugurate trading in options on physical commodities when trading in options on futures contracts begins." *fn24"

 The mere fact that plaintiffs must wait until the Commission decides whether the pilot program shall include physicals does not stamp its rule as unreasonable, arbitrary or capricious. Under all the circumstances, the claim of irreparable injury in support of a preliminary injunction rests upon conjectural, speculative and unrealistic grounds. However disappointed plaintiffs may be that options on physicals are not presently included in the pilot program, there has been no showing of irreparable injury to warrant intervention by the Court to stay the present regulation. The Court, in consideration of the cross-motion made by the Commission to dismiss, as hereafter noted, concludes that plaintiffs have failed to state a claim upon which relief can be granted from which it necessarily follows that Amex has also failed to establish a likelihood of success upon the merits.

 Motion to Dismiss

 Whether the complaint states a cause of action on which relief could be granted, presents a question of law. *fn25" Plaintiffs, to prevail upon their complaint, have the burden to establish their claim that the rule was "arbitrary and capricious." The standard for review of final agency action is section 706 of the Administrative Procedure Act which provides that the "reviewing court shall ... hold wrongful and set aside agency action, findings, and conclusions" found to be "arbitrary, capricious and an abuse of discretion, or otherwise not in accordance with law" *fn26" or if the action failed to meet statutory, procedural or constitutional requirements. To make such a finding, the Court must take into account all relevant factors and decide whether there has been a clear error of judgment. Although this inquiry into the facts is to be searching, careful and an in-depth review, the Court is not empowered to substitute its judgment for that of the agency; rather, the Court's inquiry is to determine whether the agency's decision is rational-the result of reasoned decisionmaking. *fn27" On this motion, the Court has before it a full administrative record, the briefing by the Commission of the House and Senate oversight committees, as well as comments that were received from interested parties, including those from Amex. Thus the validity of the Commission's actions stands or falls upon this record which contains the underlying reasons for its determination. *fn28"

 The rule was not a rush to judgment. When initially proposed in broader terms in 1977 and again in June 1981 in more restricted form, the Commission invited comments from interested parties. As already noted, Amex pressed for inclusion of physicals in the rule. Its position was the subject of correspondence between it and the Commission. In reaching its decision, a number of factors tilted the scale in favor of embarking on the three-year pilot program initially limited to options on futures. The reasons which underlay the Commission's actions were stated by the Chairman of the Commission before the House and Senate oversight committees. In substance, the Commission was of the view that there was greater ease of regulation of options on futures since it was familiar and experienced with futures markets and futures contracts; that most of the fundamental features of the pilot program could readily be "folded into" existing programs governing futures trading. *fn29" On the other hand, it was felt that options on physicals presented significantly different problems, particularly because the sponsoring exchange would be a stock exchange with which the Commission had no experience and over which it had no supervisory powers. *fn30" As stated by the Commission's Director, Division of Trading and Marketing at an open meeting of the Commission, "it takes a long time to designate a new exchange. It doesn't take nearly as much time to add an option contract to an already existing contract market." *fn31" Another factor was the limited resources available to the Commission, particularly in light of the prospect of a reduced budget under the current Administration's policy thereby affecting the availability of supervision and enforcement personnel in two of the three pilot years.

 In its June 1981 published rule proposal, the Commission also noted that there were a number of issues unique in regulating options on physicals and solicited comment thereon. These issues centered about the type of regulatory framework to be established for trading options on physicals and the interaction between a market for options on physicals and a market for options on futures. *fn32" An important but unresolved issue as to which there was a difference of opinion was whether ...

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