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Judge Throws Commodity Position Limit Rules Back to CFTC

Joe Mont | October 1, 2012

A federal court has put a stop to limits the Commodity Futures Trading Commission was set to impose on firms trading in certain commodity contracts in an effort to prevent price manipulation by speculators.

The lawsuit, International Swaps and Derivatives Association v. U.S. Commodity Futures Trading Commission, was filed in U.S. District Court in the District of Columbia by the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA). The trade associations challenged CFTC rulemaking that, as of Oct. 12, was to begin 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.

The crux of the plaintiff's 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.

“As part of the Dodd-Frank Act, Congress directed the Commission to impose limits on speculative positions in physical commodity futures and options contracts and economically equivalent swaps,” CFTC Chairman Gary Gensler said in response to the ruling. “The rule addresses Congress' concern that that no single trader is permitted to obtain too large a share of the market, and that derivatives markets remain fair and competitive. I believe it is critically important that these position limits be established as Congress required. I am disappointed by [the] ruling, and we are considering ways to proceed.”

Among those in Washington critical of the court decision was U.S. Sen. Bernie Sanders (I-Vt.) who called it “another victory for Wall Street speculators who have been given a green light to rip off the American people at the gas pump.”

“The Dodd-Frank Act clearly required the CFTC to impose strict limits on oil and gasoline trading to eliminate, prevent, or diminish excessive oil speculation,” he added. “Sadly, one judge has disagreed and is preventing even the weakest rules on oil speculation limits to go into effect.”

The ruling, as expected, drew praise from the lawsuits plaintiffs.

In a joint statement, ISDA and SIFMA said the position limits rule would have “adversely impacted commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility.”