In a major victory for market speculators, a federal court in Washington, DC, late Friday tossed out the Commodity Futures Trading Commission's controversial final rule aimed at limiting speculative trading in the swaps market.
"The position limit rule is vacated and remanded to the Commission for further proceeding," wrote District Judge Robert Wilkins in the opinion. The CFTC had asked the court to consider remanding the final rule without vacating it, but it rejected that request.
In the court ruling, "the precise question...is whether the language of Section 6a(a)(1) clearly and unambiguously requires the Commission to make a finding of necessity prior to imposing position limits. The answer is yes," the court said.
"I am disappointed by today's ruling, and we are considering ways to proceed," said CFTC Chairman Gary Gensler. "As part of the Dodd-Frank Act, Congress directed the Commission to impose limits on speculative positions in physical commodity futures and options contracts and economically equivalent swaps. The rule addresses Congress' concern that no single trader is permitted to obtain too large a share of the market, and that derivatives markets remain fair and competitive. I believe it is critically important that these position limits be established as Congress required."
The International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association challenged the rule in court in December, arguing that the agency 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. The arguments echoed those of the two Republicans on the CFTC, Commissioners Scott O'Malia and Jill Sommers. Gensler and Democratic Commissioners Bart Chilton and Michael Dunn backed the rule.
The two associations contend that the position limits rule may harm commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility.
In mid-October the Commission narrowly voted out the rule seeking to prevent excessive speculation in commodity futures contracts and economically equivalent swaps (see NGI, Oct. 24, 2011).
With O'Malia and Sommers dissenting, the rule cleared the Commission by a vote of 3-2. It established limits on speculative positions 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 New York Harbor Heating Oil.
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