April 16, 2012 / 6:30 PM / 7 years ago

House Democrats back position limits

WASHINGTON (Reuters) - Barney Frank and 16 other House of Representatives Democrats have filed a friend-of-the-court brief in defense of a new rule curbing speculation in the commodities market that has been challenged by a financial industry lawsuit.

The U.S. Commodity Futures Trading Commission in October finalized the rule that it says fulfils a mandate under the 2010 Dodd-Frank financial oversight law to limit the number of contracts any trader can hold in certain commodities like gold and oil.

But financial industry groups have sued to stop the rules from taking effect, saying the curbs would irreparably harm the marketplace and arguing that Dodd-Frank did not explicitly require the agency to pass position limits.

The Dodd-Frank law gives the CFTC the power to set position limits to curb excessive speculation commodities markets, “as appropriate”.

Frank and his colleagues dismissed the industry groups’ argument, saying the law’s history and text make the requirement obvious.

“The intent of the language is clear: mandating the imposition of limits,” Frank and his colleagues wrote in a brief posted by the court on Monday. “Opinions to the contrary do not match the language or its legislative history.”

The Securities Industry and Financial Markets Association (SIFMA) and the International Swaps and Derivatives Association (ISDA) challenged the rule in December.

The debate over position limits has been heavily politicized. Some lawmakers have pushed for the CFTC to clamp down since early 2008, as oil and grain prices were shooting toward historic peaks.

However, traders and some Republican lawmakers have argued there is no evidence speculators inflate prices, and say curbs could make prices more volatile by removing liquidity and sending business to overseas markets.

The CFTC’s position limits rule was narrowly approved on October 18 in a 3-2 vote, with both Republican commissioners voting against the measure.

Even after the CFTC put the position limits in place, a handful of lawmakers, including Democratic Senator Bill Nelson, criticized the agency for not implementing the rule more quickly.

The rules are set to go into effect later this year.

Last week, 19 senators - a group that included Democrats and one independent - also filed a friend-of-the-court brief defending the CFTC’s right to put position limits in place.

SIFMA and ISDA argue that the regulations would force their members to drastically alter their businesses, cost them tens of millions of dollars, and send customers fleeing.

They also criticized the agency for failing to thoroughly review the economic impact of the rules on markets, which thrive on the liquidity provided by traders with big positions, they said.

Their suit asks the court to block temporarily the controversial new rules and strike them down completely.

Judge Robert Wilkins of the U.S. District Court for the District of Columbia said at a hearing in February that he would rule swiftly on the temporary halt to the rule.

Frank and the other House Democrats took part in the conference committee that worked out House and Senate differences to pass the final bill, their court filing says.

They say that not only does the legislative language require the CFTC to establish the position limits, but they added that the CFTC was not required to justify them through market analysis.

The CFTC is due to implement the limits in two phases. The agency must first finish its swaps definition before it can implement limits for the spot month. 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 case is International Swaps and Derivatives Association v. Commodity Futures Trading Commission, U.S. District Court, District of Columbia, No. 11-2146.

Reporting By Alexandra Alper; Editing by Tim Dobbyn

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