CFTC to offer new take on speculation-limits rule judge rejected

The top U.S. derivatives regulator will consider a reworked proposal to limit speculation blamed for price surges in energy, wheat and other commodities after Wall Street groups successfully challenged an earlier version.

The Commodity Futures Trading Commission will meet tomorrow in Washington to vote on releasing the proposal mandated by the 2010 Dodd-Frank Act that overhauled U.S. financial regulation. The CFTC rewrote the plan, which may cap the number of futures contracts a single firm can hold in 28 commodities, after a federal court rejected its previous proposal for failing to justify the reason for imposing position limits.

The measure will reveal how the agency responds to that legal setback for regulators implementing Dodd-Frank. Industry groups successfully challenged several rules mandated by the act by arguing that policy makers misread the statute or failed to consider input from businesses impacted by new rules.

“They are going to have to come forward with some type of economic analysis based on the markets that shows there is a real need to have a limitation imposed here,” said Thomas O. Gorman, a partner at Dorsey & Whitney LLP whose practice includes securities and commodities cases. “This was a controversial position the last time it came up.”

Congress told the CFTC to consider the rules after commodity prices soared in 2008 when wheat reached a record of $13.495 a bushel and oil soared to $147.27 a barrel. Related consumer prices rose as well, and airlines and other businesses sensitive to commodity prices blamed speculators for the surge. The CFTC’s rulemaking effort generated 13,000 public comments.

Like ‘Antitrust’

“Definitely, oil was the big issue,” said Tyson Slocum, energy-program director at Public Citizen, which advocated for position limits. “It’s kind of like an antitrust rule. It just limits the ability of one or a small handful of players to dominate a given market.”

The CFTC’s previous rule relied on an interpretation that the law didn’t require it to show position limits were necessary to diminish or prevent excessive speculation. Two Wall Street lobbying organizations, the International Swaps and Derivatives Association and Securities Industry and Financial Markets Association, asked a federal court in December 2011 to annul the rule.

The U.S. District Court for the District of Columbia ruled in their favor in September 2012. While agreeing that Dodd-Frank authorized the CFTC to limit trading in over-the-counter commodity swaps and exchange-traded futures, District Judge Robert L. Wilkins found the agency failed to consider whether limits were necessary or appropriate to limit speculation.

Withdrawing Appeal

CFTC Commissioner Bart Chilton said on Oct. 31 that he expects the agency to withdraw an appeal of the judge’s ruling after it issues the new proposal.

The rejected CFTC rule, issued in October 2011, limited traders to 25% of the supply of specific commodities available for futures contracts on each exchange. 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 measure 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.

Chilton and CFTC Chairman Gary Gensler, both Democrats, supported the earlier rule. Republican Commissioner Scott O’Malia opposed it.

If the four-member commission approves the draft rule today, businesses and other groups interested in the rule would have at least 30 days to provide feedback before regulators could vote adopt it.

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