Swaps & Derivatives Traders in a Tizzy

     WASHINGTON (CN) – Securities and commodities traders and banks claim the U.S. Commodity Futures Trading Commission promulgated an illegal rule meant to curb excessive speculation – because, the traders say, excessive speculation isn’t a real problem.
     The International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association, both composed of banks and securities firms from around the globe, sued the CFTC in Federal Court, claiming that its “position limits” final rule violates the Commodity Exchange Act and the Administrative Procedure Act.
     According to the complaint: “In a closely divided 3-2 vote, in which dissenting commissioners and numerous members of the public expressed significant concerns, the Commission promulgated a rule setting hard position limits on derivatives contracts tied to twenty-eight different commodities – a rule ostensibly designed to curb ‘excessive speculation.’ See 76 Fed. Reg. 71,626 (Nov. 18, 2011) (‘Position Limits Rule’ or ‘Rule’). Such limits will constrain activity in markets that have long been recognized as providing important benefits to market participants and the broader economy.”
     The rule sets limits on the number of derivatives contracts a trader may buy or sell during a given period.
     The traders claim the CFTC mistakenly claim that the Dodd-Frank Wall Street Reform and Consumer Protection Act require such limits, regardless of whether they could damage the U.S. economy.
     “Because of that interpretation, the Commission expressly stated that it was ignoring ‘a number of studies and reports addressing the issue of whether position limits are effective or necessary to address excessive speculation,'” the traders claim.
     They claim the rule will make it more difficult for market participants to manage risk and for markets to remain efficient in establishing commodity prices, and that investors will suffer the high costs of redesigning trading strategies and building new infrastructure.
     “Rather than making a genuine effort to estimate those costs, the Commission cited its own failure to obtain empirical data that would enable it to assess the impact of the Position Limits Rule and acknowledged in its findings that the Rule was justified only ‘to the extent’ that it would achieve its intended objectives,” the complaint states.
     Even if Dodd-Frank did require position limits, the traders say, the CFTC violated the Administrative Procedure Act by failing to take into account public comment, which the traders say was overwhelmingly critical of the rule.
     “Commenters further noted that the Commission had come forward with ‘no empirical basis to conclude excessive speculation has burdened or harmed modern markets in any way,'” the traders say claim.
     Some commenters argued that even if excessive speculation were a problem, the commission does not have any evidence that position limits are a useful tool to combat the issue, and failed to take into account the harm that limits will inflict on investors and the economy.
     “In the final rule, the Commission did not present evidence that excessive speculation was a problem in commodity markets or that position limits were a necessary or appropriate way to combat excessive speculation,” the traders say. “Instead, the Commission announced that … it was now interpreting the provisions that the Dodd-Frank Act added … to require the establishment of position limits without regard to their necessity or appropriateness.” (Emphasis in original.)
     The groups want the court to vacate the rule as arbitrary and capricious.
     They are represented by Miguel Estrada with Gibson Dunn.

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