DERIVATIVES: Position limits appeal, new rule on the way

Thu Nov 15, 2012 1:50pm EST

NEW YORK, Nov 15 (IFR) - The Commodity Futures Trading Commission is set to file an appeal following a District Court ruling against the agency's attempt to impose position limits on commodity derivative markets, despite earlier speculation that it might not be the best avenue for the agency to pursue.

In addition, it will likely file a new, separate rule-making before the end of the year, said CFTC Commissioner Bart Chilton this week.

With a November 27 deadline for appeal, questions remain as to whether or not the CFTC is nimble enough to establish empirical proof for the necessity of position limits.

Chilton told IFR on the sidelines of the Financial Technologies' Forum annual OTC Derivatives Operations and Processing Conference on Wednesday that Commission staff would be ready with the required evidence in time for the appeal.

He cited that his office's staff had been put to task on the relevant analyses the Monday morning after the Friday judgement was handed down by Judge Wilkins.

He added that the Commission can impose a new rule while the appeal process is ongoing either by citing the analysis itself or as a 'prophylactic measure' against speculative trading practices.

He also confirmed he would be recommending a limited comment period of 15 days since the Commission likely won't be fundamentally changing the constructs of a new rule.

The appeal comes in response to a decision handed down by Judge Wilkins in favour of two industry groups; the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association.

They argued the CFTC did not provide an adequate cost-benefit analysis proving that speculative position limits were in fact mandatory under Dodd-Frank's statutory language.

A position limit "caps the maximum number of derivatives contracts to purchase (long) or sell (short) a commodity that an individual trader or group of traders may own during a given period," according to the ISDA/SIFMA lawsuit.

The original rule-making was disparaged by commodities market participants who felt limits would be harmful to the market.

"Limiting positions along the futures curve limits the free flow of capital and diminishes the efficiency of capital markets and would result in higher volatility and less stability," said Sal Gilberte, president and CIO of Vermont-based commodity exchange-traded product provider Teucrium when the ruling was handed down in October.

During the deliberations, 19 Senators and a committee of Democrats from the House of Representatives wrote separately to Judge Wilkins in support of the CFTC. The senators stated that Dodd-Frank was "designed and intended" to make position limits mandatory.

But Judge Wilkins disagreed, saying that the CFTC should have done more to show the limits were mandatory.

"The agency failed to bring its expertise and experience to bear when interpreting the statute and offered no explanation for how its interpretation comported with the policy objectives of the Act," he wrote in his decision.

"The Court cannot be sure that the agency will interpret the statute in the same way and arrive at the same conclusion after further review and cannot be sure whether a similar position limits rule will withstand challenge under the Administrative Procedure Act."

(This story will appear in the Nov 17 issue of the International Financing Review, a Thomson Reuters publication; www.ifre.com)

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