On the September 28, US district judge Robert Wilkins rejected a proposal by the Commodity and Futures Trading Commission (CFTC) to introduce position limits in the commodities markets. What does the mean for the implementation of the controversial trading curbs?
At the heart of the case was CFTC’s belief that it has a clear mandate from congress to introduce position limits in commodities to prevent what it perceives as excessive speculation in these markets. This was countered by ISDA and SIFMA, which both claimed that the CFTC needed to first prove that there is speculation in the commodity markets and therefore that position limits are necessary.
“This case largely turns on whether the CFTC, in promulgating the Position Limits Rule, correctly interpreted [the Commodity Exchange Act] Section 6a as amended by Dodd-Frank,” reads Wilkins’ judgment.
Section 6a states that: "The Commission shall, from time to time, after due notice and opportunity for hearing, by rule, regulation, or order, proclaim and fix such limits ... as the Commission finds may be necessary to diminish, eliminate or prevent the burden of excessive speculation.”
The court didn’t actually agree with either side in this debate outright; instead it concluded that Section 6a is ambiguous with regards to whether the CFTC is required to find evidence of “excessive speculation” prior to imposing position limits.
Wilkins concluded that “because the Position Limits Rule is based on the CFTC’s erroneous conclusion that the CEA is unambiguous on this issue” it had to remand the case to the agency without endorsing or rejecting either side’s interpretation.
This decision represents a significant blow to the commission’s avowed goal of introducing position limits. Shortly after the decision was announced, IntercontinentalExchange and the CME Group released statements indicating that, because of the court ruling, they will not be adopting the new positions limits.
In response to the decision CFTC chairman, Gary Gensler said that the commission will look for other ways to proceed with introducing the position limits.
Bart Chilton’s comments in an address to the G20 AMIS roundtable in Rome were slightly more explicit in terms of what he thinks the next course of action is.
He conceded that “the international bankers have temporarily prevailed on this lawsuit battle” before adding that “I, for one, will continue to push hard for what Congress mandated – a position limits rule”.
So how does Chilton plan to do this?
Firstly, he argued said the CFTC should immediately appeal the court decision and in order to allow it to go forward with its plans.
Secondly, Chilton said that the agency should start drafting another rule proposal to address any concerns the court had and suggested that the CFTC produce an interim final rule with a 15 day comment period.
Thirdly, he called on international regulators “to look into and address the issues raised by the massive influx of commodity investor money into commodity markets”.
While Chilton makes it sound so easy, the reality is that the CFTC now faces a battle to introduce the position limits.
The CFTC could go to court and appeal the decision, but the appeal would pivot on whether or not Wilkins was correct in his assertions that the Dodd-Frank amendment to the CEA was ambiguous.
The CFTC could avoid going back to court if they conducted a study that proved that there is too much speculation in the commodity markets. But as Neal Wolkoff, counsel at Richardson & Patel and former head of ELX, points out, if the CFTC had this evidence then it would have certainly used it before now.
“I think that it’s extremely unlikely that they will be able to come up with any meaningful data to support the correlation between position limit proposals and what’s called ‘excessive speculation’,” he said.
As for a mass movement from regulators around the world to investigate and impose new regulations on the commodities market, this is unlikely considering the difficulties in harmonising regulation even between the US and Europe.
It is also possible that the legislation itself could be amended so that the CFTC is given a clear and unambiguous mandate to impose position limits. The problem with this though, is that then politics get involved.
“Then it becomes a political judgment, and right now it’s election season so it’s hard to imagine that anyone is going to re-open a statute to deal with a hornet’s nest of an issue right before the election,” said Wolkoff.
He added that seeking a legislative solution ahead of the election is also unlikely given that when Dodd-Frank passed there was a democratic house and a democratic senate, but that now there is a republican house and democratic senate and no one knows which parties will be in control of either house in four weeks time.
The rhetoric coming out of the CFTC is that it still wants to find a way to push though its position limits proposals. However, given that all the conventional options available to the commission look unlikely to succeed it remains decidedly unclear what the next step is.