* CFTC passed rule as part of 2010 Dodd-Frank reform law
* Industry challenged CFTC's authority on position limits
* Judge rules that Dodd-Frank did not mandate limits
* Tosses rule back to CFTC for further consideration
* Marks victory for traders weeks before effective date
By Alexandra Alper
WASHINGTON, Sept 28 A U.S. judge knocked back on
Friday tough new rules to clamp down on excessive speculation in
commodity markets, handing an 11th-hour victory to Wall Street's
biggest banks and angering lawmakers concerned about high prices
for gasoline and other raw materials.
Just two weeks before the "position limits" rule was to take
effect, U.S. District Court Judge Robert Wilkins sent it back to
the U.S. Commodity Futures Trading Commission for further
consideration. The court said the Dodd-Frank law did not give
the agency a "clear and unambiguous mandate" to set position
limits without showing they were necessary.
It is the second legal setback for regulators struggling to
implement the sweeping reforms enacted after the 2008 financial
crisis and the first for any CFTC rule in the agency's history.
CFTC Chairman Gary Gensler, who had made reining in
speculation a top priority, said he was "disappointed" and
considering other options.
"I believe it is critically important that these position
limits be established as Congress required," Gensler said in a
Experts said the decision may embolden the financial
industry to push ahead with more lawsuits.
"I think outside of Washington, people expected that
Congress passes a law the President signs it and these things
can immediately go into effect, but it is clear the courts will
have a lot to say about how Dodd-Frank is implemented," said
James Overdahl, a former chief economist at the CFTC and current
vice president at NERA Economic Consulting.
Wilkins also found that the Dodd-Frank bill required the
CFTC to prove caps are "necessary" to diminish or prevent
excessive speculation. Experts have debated for years whether
speculation makes commodity prices more volatile.
The Securities Industry and Financial Markets Association
and the International Swaps and Derivatives Association, which
brought the suit against the agency, lauded the court decision.
The groups argued that the regulations would force their members
to drastically alter their businesses, cost them tens of
millions of dollars, and send customers fleeing.
The ruling is a victory for Wall Street banks like Goldman
Sachs and JP Morgan, which had feared the rule
would halt growth in their lucrative business selling commodity
derivatives to financial investors.
It also offers breathing room for other energy, metal and
grain traders who were unsure how the limits would apply to the
complex over-the-counter swaps market. Some feared they may
inadvertently violate the limits when the first phase came into
effect Oct. 12.
Wilkins, an appointee of President Barack Obama who joined
the bench in December 2010 after working as a corporate defense
lawyer, did not rule on whether the agency had sufficiently
weighed the economic benefits of the rule against the costs.
The cost-benefit issue was the crux of a court ruling last
year that rejected the Securities and Exchange Commission's
"proxy access" rule that would have made it easier for
shareholders to nominate directors to corporate boards.
Instead Friday's ruling said the Dodd-Frank law did not
compel the CFTC to make the rule unless the agency demonstrated
that position limits are "necessary".
Experts said that could make it harder for the CFTC to
prevail if it does appeal Wilkins' decision.
"Now that the 'necessity' issue is back in play it's unclear
what will happen," said one compliance executive at a major
commodity trader. "If it were just the cost/benefit issue it
might slow things down.... But necessity is a thornier issue, I
don't know they have the votes."
The agency only narrowly passed the position limit rule in
October 2011, in a bid to limit the number of contracts traders
can hold in 28 commodities, including oil, coffee and gold. The
two Republican commissioners on the five-member panel voted
against the limits, questioning the agency's authority to pass
Supporters of the measures were quick to blast the ruling.
Senator Bernie Sanders, an Independent from Vermont who has
strongly pushed for the trading curbs, on Friday called on the
CFTC to appeal the decision, noting Dodd-Frank "clearly
required" the CFTC to impose strict limits.
"Sadly, one judge has disagreed and is preventing even the
weakest rules on oil speculation limits to go into effect,"
Sanders said in a statement.
Lawmakers and President Barack Obama have argued that
regulators should be doing more to rein in traders who may be
driving up the price of oil for consumers. But Wall Street has
argued that regulators have not proven position limits would
curb speculation in markets and prevent disruptive price spikes.
Critics said position limits could inadvertently make
markets more volatile, not less, because traders would move
deals to overseas exchanges with looser regulations, reducing
liquidity in U.S. markets.
The ruling comes just as the CFTC shows it is getting tough
with excess speculation through enforcement of existing rules.
In the past month alone, firms and individuals have agreed to
pay the CFTC more than $2 million to settle charges involving
trades in cotton, oilseed and grain markets that are already
subject to limits.