Bloomberg News

CFTC Rule Restraining Speculation Rejected by U.S. Judge

September 28, 2012

The U.S. Commodity Futures Trading Commission rule restraining speculation was rejected by a federal judge, handing a victory to two Wall Street groups that challenged the constraints.

U.S. District Judge Robert Wilkins in Washington today ruled that the 2010 Dodd-Frank Act is unclear as to whether the agency was ordered by Congress to cap the number of contracts a trader can have in oil, natural gas and other commodities without first assessing whether the rule was necessary and appropriate.

“Although the court does not foreclose the possibility that the CFTC could, in the exercise of its discretion, determine that it should impose position limits without a finding of necessity and appropriateness, it is not plain and clear that the statute requires this result,” the judge said in his 43-page ruling.

The International Swaps and Derivatives Association Inc. and the Securities Industry and Financial Markets Association sued the commission, arguing that the CFTC never studied whether the regulation was “necessary and appropriate” or quantified the costs tied to implementing the rule. The groups represent banks and asset managers including JPMorgan Chase & Co. (JPM:US), Goldman Sachs Group Inc. (GS:US) and Morgan Stanley. (MS:US)

‘Tough News’

The position limits were set to begin taking effect Oct. 12.

The associations, in one of the financial industry’s highest-profile efforts to weaken Dodd-Frank, filed suit in two federal courts in Washington in December to challenge the rule.

“I believe it is critically important that these position limits be established as Congress required,” CFTC Chairman Gary Gensler said in an e-mailed statement. “I am disappointed by today’s ruling, and we are considering ways to proceed.”

The commission estimated that the limits would affect 85 energy trading firms, 12 metals traders and 84 traders of certain agricultural contracts.

“This is obviously tough news for those of us who believe there’s too much speculative concentration in commodity futures and swap markets,” Bart Chilton, one of three Democrats on the CFTC, said in an e-mail statement. “There’s no question that huge individual trader positions have the potential to influence prices in a way that hurts legitimate hedgers and ultimately consumers.”

Soybeans, Oats

The limits applied to 28 physical commodity futures and their financially equivalent swaps including contracts for corn, wheat, soybeans, oats, cotton, oil, heating oil, gasoline, cocoa, milk, sugar, silver, palladium and platinum.

The rule called for traders to aggregate their positions, a change that may have affected large firms with multiple strategies. It also would have tightened an exemption allowing so-called bona fide hedgers to exceed the caps.

The groups sought to temporarily block the rule from taking effect while the judge considered its legality.

Preparing to comply with the rule “would impose immediate, irreversible costs on JPMorgan that will number in the millions of dollars,” Michael Camacho, JPMorgan’s head of global sales and structuring, said in a court filing seeking an injunction.

Wilkins, however, vacated the rule and sent it back to the commission.

The rule is among the most controversial provisions of Dodd-Frank, and spurred more than 13,000 public comments to the CFTC from supporters including Delta Air Lines Inc. (DAL:US) and opponents such as Barclays. The agency voted 3-2 at an Oct. 18 meeting to approve the final regulation, with Jill E. Sommers and Scott O’Malia, both Republicans, voting in opposition.

The case is International Swaps and Derivatives Association v. U.S. Commodity Futures Trading Commission, 11-02146, U.S. District Court, District of Columbia (Washington).

To contact the reporter on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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