CFTC to move forward in appeal of judge’s decision to strike down position limits rule

Gary Gensler

The Commodity Futures Trading Commission voted 3-2 last week to move forward on its appeal of a federal judge’s decision that struck down the commission’s position limits rule.
“The rule addresses Congress’ concern that no single trader be permitted to obtain too large a share of the market, and that derivatives markets remain fair and competitive,” Gary Gensler, the chairman of the CFTC, said, Compliance Week reports. “I believe it is critically important that these position limits be established as Congress required.”

Under the Dodd-Frank Act, the CFTC is required to establish a rule to limit speculation in commodity futures and options as well as swaps as part of an effort to limit price manipulation by speculators.

Beginning in October, the CFTC was poised to limit the maximum number of contracts for 28 physical commodities, including silver, gasoline, oil, cotton, corn, wheat, sugar and platinum. The rule would have forced traders to aggregate their holdings when determining their position limits.

A U.S. district judge, however, struck down the rule, signifying a win for the International Swaps and Derivatives Association and Securities Industry and Financial Markets Association, both of which challenged the rule and said it would reduce liquidity and increase price volatility in the commodities markets, Compliance Week reports.

The challenge originated from the alleged misinterpretation by the CFTC of its statutory authority granted by the Commodity Exchange Act when it established position limits. SIFMA and ISDA said that the CFTC did not determine whether the restrictions were “necessary or appropriate” before it imposed the limits.

Commissioner Bart Chilton said that the appeal sends a message to challengers that “the largest speculators on the planet can’t litigate regulators to death,” adding that “deep pockets can’t protect you from what the law clearly states,” according to Compliance Week.

Commissioner Scott O’Malia, who voted against appealing the judge’s decision, said that even if the CFTC succeeds in appealing the ruling, “there is a very good chance” that the case would return the court and the CFTC would have defend against further challenges.

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