Court halts CFTC efforts to slow derivatives speculation

A federal court has halted efforts by the Commodity Futures Trading Commission (CFTC) to implement portions of the Dodd-Frank financial reform law regulating derivatives.

A U.S. District Court judge ruled Friday that it was unclear whether the CFTC could go ahead and set limits on the amount of positions a trader could hold in various commodities without first deciding the rule was necessary and appropriate. The CFTC had hoped the rules would help it curb speculative trading in the derivatives market, which came under scrutiny following the 2008 financial crisis.

“Although the court does not foreclose the possibility that the CFTC could, in the exercise of its discretion, determine that it should impose position limits without a finding of necessity and appropriateness, it is not plain and clear that the statute requires this result,” the judge said, according to Bloomberg.

After the ruling, CFTC Chairman Gary Gensler maintained such position limits were "critically important" to controlling risk in the derivatives market, and while the commission was "disappointed" by the ruling, it would now be looking for new ways to proceed.

"As part of the Dodd-Frank Act, Congress directed the Commission to impose limits on speculative positions in physical commodity futures and options contracts and economically equivalent swaps," he said. "The Rule addresses Congress’ concern that that no single trader is permitted to obtain too large a share of the market, and that derivatives markets remain fair and competitive."

The ruling hands a win to the two financial industry groups that brought forward the suit in December: the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association. The pair argued the CFTC failed to study whether the rule was called for before forging ahead, and sought to delay the rules.

---