WASHINGTON A U.S. judge said on Monday he planned to rule quickly on whether to temporarily block controversial new regulations that were adopted by the Obama administration as part of an effort to reduce speculation in the commodities markets.
The U.S. Commodity Futures Trading Commission and groups representing the financial industry clashed in federal court over whether the agency overstepped its bounds by imposing restrictions last year to limit the number of contracts traders can hold in 28-commodities, including oil, coffee and gold.
A lawyer for the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association told the court the regulations would force their members to drastically alter their businesses, cost them tens of millions of dollars, and send customers fleeing.
"It's indisputable that these long-term costs will occur," said Eugene Scalia, who argued on behalf of the financial industry. "Customers once lost can't be assumed to come back...That's a very significant cost of this rule," he said.
Scalia noted that the CFTC's cost estimate of $50 million to comply with the rule each year was "a bit low" and warned that firms will likely have to shed business to meet the new regulations.
Judge Robert Wilkins of the U.S. District Court for the District of Columbia spent more than an hour hearing arguments over a motion for a preliminary injunction sought by the financial industry, which argued the regulations limiting the number of commodity futures and swaps contracts a trader could hold were not sufficiently justified.
The judge declined to rule directly from the bench on whether to grant an injunction while he considers the merits of the regulations, but said that he "will try to get a ruling out to you as quickly as possible."
A ruling could derail the CFTC's plans to gradually implement position limits, which it passed last October.
Jonathan Marcus, who argued for the CFTC, said the agency could implement limits for the spot month by June, but the regulator must first finish its swaps definition before it can do so. The final limits for all contract months can only be set a few months after the agency has collected a year's worth of swaps data, a process that is expected to end in August.
The CFTC pinned its support for the new regulations on a 1981 law as well as a requirement from Congress under the 2010 Dodd-Frank law that the agency has argued mandated an expeditious implementation of position limits.
"I think that would frustrate Congress' intent. Clearly Congress wanted limits," said Marcus. He told the court the groups failed to meet the threshold for a preliminary injunction saying "there is no way those numbers rise to irreparable harm."
Marcus said while some members need to spend money to comply with the new rules the costs "are miniscule" for a business that takes in billions of dollars in revenue and that the rules would only affect the biggest traders.
Marcus also defended the underlying regulation, saying that the agency "conducted a thorough cost-benefit analysis."
Scalia, however, said the rule would force the industry to shoulder additional costs that could never be recovered and force their members to permanently alter their trading strategies.
"The irreparable harm here is clear," he said.
Regardless of Wilkins' decision, his ruling will likely be appealed to the U.S. Court of Appeals for the District of Columbia Circuit.
The CFTC's groundbreaking rule, put in place to restrict the number of contracts a trader can hold in commodities such as gold and oil, was narrowly approved by the agency's five commissioners on October 18 by a vote of 3-2. One of the commissioners who opposed the rule, Republican Scott O'Malia, was at the hearing but declined to speak afterward.
The position limits rule has turned into arguably the most contested measure to make its way out of the agency. Even the CFTC's own commissioners were unable to agree if limits are necessary and whether the agency has gone beyond its legal mandate by putting them in place.
(Reporting By Christopher Doering and Jeremy Pelofsky; Editing by Lisa Shumaker and Alden Bentley)