CFTC to Appeal Ruling Rejecting Dodd-Frank Trading Limits

Court's decision blocked limits on positions in physical commodity futures scheduled to take effect last month.

The U.S. Commodity Futures Trading Commission will appeal a judge’s ruling that rejected efforts to curb speculative derivatives trading after the 2008 financial crisis.

The commission filed a notice of appeal today in federal court in Washington, seeking to ask a three-judge panel to reverse a ruling by U.S. District Judge Robert Wilkins that said the CFTC failed to assess whether limiting the number of contracts a trader can have in oil, natural gas or other commodities was necessary and appropriate.

“The rule addresses Congress’s 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 today. “I believe it is critically important that these position limits be established as Congress required.”

The decision, which blocked rules scheduled to take effect Oct. 12, was a victory for two Wall Street groups that challenged the constraints imposed under the 2010 Dodd-Frank Act. The Securities Industry and Financial Markets Association and International Swaps and Derivatives Association Inc., in one of the financial industry’s highest-profile efforts to weaken Dodd-Frank, sued in two federal courts in Washington in December.

The case is one of several brought by the financial industry as it pushes back against tighter regulations passed after the 2008 credit crisis. On Nov. 8, CME Group Inc., the world’s largest futures market, sued the commission challenging cleared-swaps reporting requirements imposed under Dodd-Frank.

The CFTC voted 3-2 to appeal the speculation limits ruling, according to Steve Adamske, the agency’s spokesman.

“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,” Scott O’Malia, one of two Republicans on the commission, said in a dissent released today.

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


Commodity Futures

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.

“Our appeal should also send a message that the largest speculators in the world can’t litigate regulators to death,” said Bart Chilton, one of three Democrats on the CFTC and a supporter of the trading curbs. “Your deep pockets can’t protect you from what the law clearly states.”

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. and opponents such as Barclays Plc. The agency voted 3-2 at an Oct. 18, 2011, meeting to approve the final regulation, with its two Republican commissioners voting in opposition.

The associations that sued represent JPMorgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley and other banks and energy-trading firms.

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).

Bloomberg News

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