Lobbyists for financial speculators won a court victory over the Commodity Futures Trading Commission on September 28, delaying rules that would limit futures market speculation in energy and other physical commodities just two weeks before position limits were set to go into effect.
The CFTC rule, which was set to take effect Oct. 12, would have set speculative position limits for futures, options contracts and swaps tied to 28 physical commodities.
The International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association sued the CFTC over whether it had the authority under the Dodd-Frank Consumer Protection and Wall Street Reform Act to set position limits on the commodities that it had targeted. Judge Robert Wilkins of the US District Court for the District of Columbia ruled that the Dodd-Frank language was ambiguous, and that the CFTC therefore had gone beyond the law’s intent.
“The Dodd-Frank amendments do not constitute a clear and unambiguous mandate to set position limits, as the Commission argues,” Judge Wilkins said in his 34-page ruling.
CFTC boss Gary Gensler said, in comments released after 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.”
Now the CFTC is left to start over. This could mean it will start working on a new rule, according to news reports, but any new rule proposal would have to face future challenges. The CFTC might also consider appealing the verdict, but the Court of Appeals for the District of Columbia Circuit is reportedly notoriously conservative and thus unlikely to rule in the Commission’s favor. The CFTC already imposes speculative position limits (and enforces them aggressively) on on agricultural items like cotton, wheat and soybeans. According to Thomson Reuters, in the last week alone, “the CFTC has imposed civil monetary penalties and disgorgements” on JPMorgan, ANZ Bank, and a China-based individual investor, to settle accusations they breached federal speculative limits on cotton.
The CFTC’s rules on energy and other commodity position limits were backed in large part by corporates with high degrees of exposure to energy markets, such as airlines and other transportation companies, which have been vocal critics of what they see as speculators’ role in generating commodity volatility.