ISDA and Sifma filed lawsuits on December 2, challenging the Commodity Futures Trading Commissions position-limits rule, which aims to cap speculation in commodities by limiting the amounts that can be held.
The rule sets CFTC-administered limits on speculative positions in 28 core commodity futures contracts.
This will happen in two phases.
First, spot-month limits will be 25% of the deliverable supply, and, second, limits will then be set for positions in all non-spot contract months after one year of open interest data has been collated.
These limits will be 10% of the contract's first 25,000 of open interest and 2.5% thereafter.
The position-limits rule was passed by CFTC after several delays and after a split vote on October 18.
The CFTC has five commissioners: chairman Gary Gensler, Jill Sommers, Bart Chilton, Scott OMalia and Mark Wetjen (who replaced Michael Dunn in late October after the vote had taken place).
Gensler and Chilton voted for the rule, with OMalia and Sommers dissenting. Dunn voted in favour but commented:
Position limits, at best a cure for a disease that does not exist... may harm the very markets were trying to protect.
ISDA and Sifma claim that he only voted for the rule:
because of his misreading of the law.
By resorting to the courts, ISDA and Sifma are upping the ante on the issue and illustrating the extent to which the dysfunction in the markets is increasing the pressure between participants and regulators.
Conrad Voldstad, chief executive at ISDA, and its executive vice-chairman Robert Pickel stated:
This marks the first time ISDA has ever sued anyone, much less a regulator. It was a step that we debated extensively. After all the progress ISDA and our members have made in creating safer, more efficient markets, we did not want to give anyone the impression that we are against meaningful regulatory reform.
The lawsuit states that the position-limits rule should be invalidated because CFTC: concluded that Dodd-Frank required it to establish position limits without first determining whether they were necessary; did not present a reasoned analysis or consider all evidence before setting position limits; and did not conduct an adequate cost-benefit analysis as required by law.
Unfortunately the position limits rule as adopted by the CFTC was poorly crafted based on an incorrect reading of the law and absent any sound economic or cost benefit analysis, ISDA and Sifma claim. "The evidence is overwhelming that position limits are at best unnecessary and may, at worst, negatively impact commodity markets and users.
The associations are aware their move is essentially the last roll of the dice.
Could we not have voiced our concerns with the CFTC? The truth is, we should have and we did, say Voldstad and Pickel. We joined thousands of other commenters and submitted several separate letters to the CFTC on position limits. When we filed the legal challenge, the position limits rule was in final form. The decision about the rule had been made. It was not going to be changed with further dialogue.
The associations want an injunction on the effectiveness of the rule, and instructions from the court to instruct the CFTC prove that position limits are necessary, that they structure position limits that suit each commodity separately and that the cost of implementation does not exceed any supposed benefits.
To find out whether they will achieve this will now take months of expensive litigation.