The International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) have filed a legal challenge to the Commodity Futures Trading Commission’s (CFTC) controversial final rule on position limits.

In a petition filed earlier this month in the U.S. District Court for the District of Columbia, the two groups argued 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.

The two associations contend that the position limits rule may adversely impact commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility.

“ISDA, SIFMA and our members in the U.S. and around the world strongly support financial regulatory reform…Unfortunately, the position limits rule as adopted by the CFTC was poorly crafted based on an incorrect reading of the law, and absent any sound economic or cost-benefit analysis,” said ISDA CEO Conrad Voldstad and SIFMA President T. Timothy Ryan Jr.

“The evidence is overwhelming that position limits are, at best, unnecessary and may, at worst, negatively impact commodity markets and users,” Voldstad said.

“It is critical that regulatory rulemaking stemming from the Dodd-Frank Act is done right, with the proper analysis to ensure that any new rules do not impede the function of the markets they are meant to protect. The position limits rule fails this test. As a result, we are compelled to exercise our rights and seek relief from the courts,” Ryan said.

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). Because of the controversial nature of the rule, a court challenge was expected.

With O’Malia and Sommers dissenting, the rule cleared the Commission by a vote of 3-2. It establishes 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 Nymex New York Harbor Heating Oil.

CFTC Chairman Gary Gensler and Commissioner Bart Chilton were the rule’s biggest proponents. But they had to drum up a third vote, and it was clear that Gensler had to make several concessions to win over Commissioner Michael Dunn, who had been on the fence. Dunn has since left the CFTC and has been succeeded by Commissioner Mark Wetjen.

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