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CFTC Will Appeal Decision that Halted Commodity Position Limits

Joe Mont | November 16, 2012

On Wednesday afternoon, the Commodity Futures Trading Commission announced it will move forward with an appeal of a federal district court's decision vacating its recent position limits rule.  The decision was approved by a 3-2 vote.

As part of the Dodd-Frank Act, Congress directed the Commission to limit speculative positions in physical commodity futures and options contracts and economically equivalent swaps. It was an effort to prevent price manipulation by speculators.

As of Oct. 12, the CFTC was set to start capping the maximum number of contracts that are bought and sold for 28 physical commodities, among them oil, gasoline, corn, wheat, cotton, sugar, silver, and platinum. Traders would have been required to aggregate their holdings when determining position limits.

That plan was derailed, however, after a ruling in the U.S. District Court in the District of Columbia on a legal challenge by the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA).

The groups said the position limits rule would adversely affect commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility.

The crux of their challenge was that the CFTC misinterpreted its statutory authority under the Commodity Exchange Act, as amended by Dodd-Frank, when it set position limits. The plaintiffs argued that no determination was made, before the limits were imposed, that the restrictions were either “necessary or appropriate.” They argued, and U.S. District Judge Robert Wilkins agreed, that the limits should not go into effect and be remanded back to the CFTC. Wilkins said the CFTC had no “clear and unambiguous mandate” to set position limits under the Dodd-Frank Act.

Now, after weeks of speculation that it would do so, the CFTC has decided to appeal that decision.

“The rule addresses Congress' concern that that no single trader be permitted to obtain too large a share of the market, and that derivatives markets remain fair and competitive,” CFTC Chairman Gary Gensler said in a statement. “I believe it is critically important that these position limits be established as Congress required.”

“Our appeal should send a message that the largest speculators on the planet can't litigate regulators to death,” Commissioner Bart Chilton said with a comment directed at the challengers. “We will fight back. Your deep pockets can't protect you from what the law clearly states. Consumers will benefit from speculative position limits.”

Commissioner Scott O'Malia voted against pursuing the appeal, joining with fellow Republican Jill Sommers.

“Regrettably, instead of taking the opportunity to revise its flawed reading of the statute, the Commission has decided to double down on its no-justification-needed stance by appealing the district court's ruling,” he said. “We can certainly agree on this: the Commission needed to explain itself much more than to say, ‘Congress made us do it.' And yet, with this appeal, the Commission is simply repeating this unacceptable rationale in the vain hope that another court will somehow find it acceptable.”

Even if the Commission successfully appeals the ruling, “there is a very good chance “ it would be right back in court to defend against the plaintiffs' other challenges, including their argument that it failed to adequately weigh the costs and benefits of the rule.,” he added.