International bankers have "temporarily prevailed" on the lawsuit challenging the Commodity Futures Trading Commission's (CFTC) rule limiting speculative trading in commodity derivatives, but the "struggle isn't over," CFTC Commissioner Bart Chilton vowed last Tuesday as trading exchanges backed off their previous plans of altering their own position limit rules.
"I, for one, will continue to push hard for what Congress mandated: a position limits rule. I think the court opinion is deeply flawed," he said in a speech to the G-20's Agricultural Market Information System Roundtable on Public-Private Dialogue in Rome, Italy.
Chairman Gary Gensler, who also was traveling in Europe last week, told a Reuters reporter that the agency would press forward with a new rule to curb excessive speculation in the swaps markets -- a key provision of the Dodd-Frank Wall Street Reform Act -- and would seek advice from CFTC attorneys on whether to appeal the court's decision.
"It wouldn't surprise me [if the CFTC appealed it]. The rule is important to Chairman [Gensler] and Chilton, but I hope they go back to the drawing board" on position limits, said a gas industry participant in the Dodd-Frank rulemaking process at the Commission.
The rule, which the CFTC passed last October, established limits to curb "excessive speculation" in 28 core physical commodity contracts, four of which are energy contracts: Nymex Henry Hub Natural Gas, Nymex Light Sweet Crude Oil, Nymex New York Harbor Gasoline Blendstock and Nymex New York Harbor Heating Oil (see NGI, Oct. 24, 2011).
"The evidence of excessive speculation [in these markets] was not conclusive," the gas industry participant said. "I think it [the court ruling is] a serious blow to the CFTC's Dodd-Frank implementation and I hope it brings them to the table" to discuss more of the issues.
Two Wall Street groups challenged the rule in court in December, arguing that the CFTC adopted the rule without first determining that there was excessive speculation in commodity and swaps markets and failed to conduct a meaningful cost-benefit analysis of the rule (see NGI, Dec. 12, 2011). The arguments echoed those of the two Republicans on the CFTC: Commissioners Scott O'Malia and Jill Sommers.
On Sept. 28, the U.S. Court of Appeals for the District Circuit vacated and remanded the CFTC's rule (see NGI, Oct. 1). Judge Robert Wilkins ruled that "the precise question...is whether the language of Section 6a(a)(1) [of Dodd-Frank] clearly and unambiguously requires the Commission to make a finding of necessity [as to whether excessive speculation exists] prior to imposing position limits. The answer is yes."
Following the ruling, both IntercontinentalExchange (ICE) and CME Group said last week that they were scrapping revisions to their current position limit rules, which the exchange operators had planned in order to comply with the new regulatory landscape.
"In light of the action by the district court, the exchanges have withdrawn Submission No. 12-299, which was submitted to the CFTC on Sept. 27, 2012, and indicated that the exchanges were adopting revisions to Rule 559 (Position Limits and Exemptions) in connection with the Commission's Position Limits Rule," CME said in an email notice. "The exchanges will not be adopting any revisions to Rule 559 at this time and will continue to consider all requests for exemptions subject to the existing provisions of Rule 559."
In the wake of the court ruling, "I'm publicly suggesting (right here and now) that we do a few things to help remedy the circumstances," Chilton said in Rome last week. "Position limits are simply too important...The agency should immediately appeal the court decision and seek a stay in order to allow us to go forward.
"Second, we should start drafting yet another rule proposal to address any concerns the court had, drafted in a way that satisfies the objections raised by the court. I am confident we can do so. Any additional proposal should be done on an expedited time frame. We already know what most folks think. So I suggest we do what is called an interim final rule with a short comment period, perhaps 15 days. This would allow us to quickly do what we had planned, and the exchanges and market participants had already planned to do in 10 days."
The Commission could also take another route -- call on Congress to amend Dodd-Frank to address Wilkins' concerns about the law requiring a finding of necessity (excessive speculation) before the agency can impose position limits.
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