Washington, 28 September (Argus) — A US federal court today threw out the US Commodity Futures Trading Commission's (CFTC) much-watched position limits rule for oil and other commodities, just two weeks before the regulation was to take effect.
In a major blow to the CFTC's two-year-long effort to implement the Dodd-Frank Wall Street Reform and Consumer Protection law, US District Court judge Robert Wilkins in Washington DC ordered the agency to reconsider the rule that would have imposed caps on spot month futures, options and economically equivalent swaps contracts for 28 commodities, including crude, natural gas, heating oil and gasoline.
The new speculative limits were slated to take effect on 12 October.
But Wilkins ruled today the CFTC, when crafting the regulation, failed to take into account ambiguities inherent in the language of the statute. Wilkins vacated the rule, sending it back to the CFTC to grapple with those ambiguities.
The position limits were designed to try to ensure that no single trader could obtain too large a share of the market. But the rulemaking was controversial from the start. The CFTC finally voted to approve a final position limits rule in October 2011, by a three-to-two vote.
The International Swaps and Derivatives Association (ISDA), and the Securities Industry and Financial Markets Association (SIFMA) then filed suit in US District Court for the District of Columbia, hoping to block the rule.
The trade groups argued US Congress intended the CFTC to gather evidence to determine whether excessive speculation was harming the commodity markets and to impose position limits were appropriate and necessary to ensure they did not create an undue burden on the economy.
The CFTC argued that Congress had mandated it set position limits and had stripped it of any discretion not to set those caps.
Wilkins concluded both interpretations were “plausible readings of the statute
Members of Congress weighed in, insisted they had intended for the agency to establish position limits. But Wilkins said he was left “with no clear indication of Congress' intent.”
Faced with such ambiguity, “it is incumbent upon the agency not to rest simply on its parsing of the statutory language. It must bring its experience and expertise to bear in light of competing interests at stake,” Wilkins said.
CFTC chairman Gary Gensler said he was disappointed by the judge's ruling.
“I believe it is critically important that these position limits be established as Congress required,” he said, adding that CFTC officials now “are considering ways to proceed.”
ISDA and SIFMA were pleased with the decision, saying the position limits rule as it was about to be implemented would “adversely impact commodities markets and market participants” by reducing liquidity and increasing price volatility.
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