The opinion of the court was delivered by: WEINFELD
This is an action by Commodity Exchange, Inc. ("Comex") for a declaratory judgment and an injunction against the enforcement of a decision by the defendant, Commodity Futures Trading Commission (the "Commission") which disapproved Comex's "straddle rules," which have been in effect since approximately 1970. The parties are in accord that there are no disputed fact issues; accordingly, each moves for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure.
In 1974, after an extensive re-examination of federal legislation of futures trading which experience had demonstrated, in many instances, had failed to achieve its intended purpose of public protection, Congress extensively amended the Commodity Exchange Act (the "Act")
as a "comprehensive regulatory structure to oversee the volatile and esoteric futures trading complex"
to ensure "fair practice and honest dealing on the commodity exchanges."
Among other matters, Congress created the Commodity Futures Trading Commission as an independent regulatory agency to administer and enforce its provisions and vested in the Commission broad rulemaking power.
Comex is a non-profit membership corporation organized in 1933 to provide a market for the trading of futures contracts principally in gold, silver and copper. On July 18, 1975 it was designated by the Commission as a contract market to trade futures contracts.
Under section 5a(12) of the Act, all contract markets are required to submit to the Commission for approval all "bylaws, rules, regulations and resolutions" (collectively "rules") before they become effective.
Pursuant thereto, Comex submitted its rules to the Commission. Due to time constraints imposed by the Act, the new Commission was unable to conduct an in-depth study of the existing rules of the different boards of trade; consequently, it adopted Commission Rule 1.53 requiring contract markets to enforce their rules in effect on July 18, 1975 unless any such rule had been disapproved by the Commission.
Section 5a(12) further provides that "after appropriate notice and opportunity for hearing" the Commission may disapprove any contract market rule it finds is in violation of the Act or its regulations. On June 30, 1980 the Commission invoked this authority for the first time by a public notice that it intended to consider whether to disapprove the Comex trading rules at issue here.
In April 1981, after proceedings detailed below, the Commission disapproved such rules.
Comex challenges the disapproval on three separate grounds. First, it contends that the Commission violated its rights under the Administrative Procedure Act ("APA")
and the due process clause of the United States Constitution in that the Commission followed informal rulemaking procedures rather than formal rulemaking or adjudicatory procedures. Second, that the Commission based its decision on impermissible criteria. Third, that its decision was arbitrary and capricious and without adequate support in the record.
A commodity futures contract is a standardized agreement for the purchase or sale of a specified quantity of a commodity at a fixed date in the future.
The seller of a futures contract commits himself to deliver the commodity at a future time and the buyer agrees to accept delivery at an agreed upon price. A profit is made or a loss incurred through "trading" these contracts in advance of their execution dates. The trading is accomplished by purchasing or selling offsetting contracts for the same commodity and future date but at a different price.
The three Comex rules at issue here concern "straddle" trading of futures contracts. As described by the Commission:
(a) "spread" or "straddle" is defined herein as the simultaneous sale of one or more contracts in a futures delivery month against the purchase of the same number of contracts in another futures delivery month in the same commodity. In contrast, an "outright" trade is the simple purchase or sale of a contract or contracts in a single delivery month. Any combination of listed futures delivery months may be used to execute a straddle transaction.
Thus, a straddle involves holding two offsetting contracts but of different months. For example, a July-December silver straddle may be composed of a contract to buy silver for delivery in July at $ 12 per ounce and a corresponding contract to sell silver in December at $ 13 per ounce. The difference in price between the two "legs" of the straddle is called the differential.
A straddle can be accomplished in two ways. Under one method, "legging in," a trader constructs the straddle by executing two separate trades, one for each leg of the straddle. Alternatively, the straddle may be created by "trading the differential" where the traders first bid or offer on the size of the differential for a specific two-month combination. The differentials for any given straddle combination change over time allowing straddles to be traded for profit.
The rules disapproved by the Commission were Comex General Trading Rule 502, paragraph 2; Silver Rule 1(b) and Gold Rule 1(b) (the "Straddle Session Rules"). These rules authorized Comex to conduct a special trading session limited exclusively to the trading of straddles after the close of regular trading hours (the "Straddle Session"). This Straddle Session was conducted under its own procedures whereby a Comex official would announce possible straddle month combinations, list all orders and then offset them to the extent possible.
Bidding or offering for the excess orders then takes place and the price established for these orders is applied retrospectively to cover all others. Thus, unlike straddle trades executed during the regular session, price is not established by competitive bids or offers for each straddle trade; further, trading during the session is limited to straddles.
Comex has conducted Straddle Sessions in silver futures on a regular basis for the last ten years. These Straddle Session Rules were in effect on July 18, 1975, when the Commission adopted Rule 1.53 requiring contract markets to enforce their existing rules unless disapproved by the Commission.
In August 1976, the Commission began its study of Comex's Straddle Session and in December of that year its staff presented a report recommending its elimination. Between that time and March 1980, under Commission instructions, the staff continued its examination of the Straddle Session. It met several times with members of Comex; received written submissions from Comex of its views as well as from others; observed the operation of the Straddle Session on approximately 10 occasions and discussed its operation with floor traders and industry representatives.
On March 20, 1980 the staff notified Comex that it intended to recommend that the Commission disapprove the Straddle Session Rules and provided it with the reasons for its recommendation.
On June 30, 1980, the Commission gave public notice of its proposed disapproval of the Straddle Session Rules setting forth the grounds for disapproval, and inviting written comments from all interested persons.
In response, the Commission received an extensive comment letter from the President of Comex together with an economic study of the Straddle Session commissioned by Comex and letters from seven Comex member firms all in support of continuation of the Straddle Session.
Comex therein requested an opportunity to be heard orally or to submit an elaboration of its comments and arguments; however, this was not granted.
On April 21, 1981, the Commission held an "open meeting"
on the proposed rule disapproval. Such a meeting before the Commissioners is open only in the sense that the public may observe the meeting; it may not participate.
At the meeting, members of the Commission's staff made an oral presentation in support of its recommendation of disapproval and responded to questions from the Commissioners. A staff member in presenting the matter to the Commission noted that Comex and the staff had an exchange of views and that Comex disagreed with the recommended action. After consideration of Comex's written submission, the Commission voted to adopt its staff's recommendation of disapproval.
The Commission's action did not eliminate straddle trading; such trades can still be conducted, as they always have been, on the floor of the Exchange during regular trading hours. Rather, its action was limited to disapproval of the rules under which the special Straddle Session was conducted after the close of regular trading hours. Notice of disapproval together with a detailed explanation of the Commission's ...