Better Markets Applauds CFTC Proposing a New Position Limits Rule
“After almost three years since the position limits rule was first proposed, after almost two years of litigation and facing still more years of litigation, the CFTC’s decision to voluntarily withdraw its appeal of the District Court’s procedural ruling and propose a new position limits rule is the right action to take. The drawn out legal proceedings have left commodity consumers, producers and markets unprotected for too long, with potentially years more delay before meaningful position limits are in place. The new rule will enable position limits to be in place much quicker and more comprehensively,” said Dennis Kelleher, President of Better Markets, Inc., an independent nonprofit organization that promotes the public interest in the financial markets.
“The commodity speculators and their allies have opposed this common sense financial reform for years and have grossly mischaracterized what the District Court did in this case. The court did not rule against the CFTC. Indeed, it didn’t even rule on the merits. The court made a purely procedural decision that the statute had an ambiguity in it and that the CFTC should address the ambiguity before the court could rule on the merits of the case. The court did not challenge any of the content of the rule, nor did it question the Commission’s statutory authority to impose position limits,” Mr. Kelleher said.
“Nevertheless, the legal process has dragged on. It has now been more than a year since the District Court decision and the Appeals Court decision is still months away. However, even that decision won’t be the end of the industry’s legal attack because it will almost certainly be followed by additional legal proceedings in the District Court, which would then lead to an appeal back to the Appeals Court. In short, the most optimistic case is for many more years of the industry’s litigation against the rule,” said Mr. Kelleher.
“The best and quickest option at this point is for the CFTC to propose a new rule, withdraw its appeal and proceed expeditiously in putting strong, comprehensive position limits in place. The CFTC is now doing just that,” Mr. Kelleher said.
“Better Markets’ evaluation of the new rule will depend on its content, which will be revealed at the CFTC’s public meeting next Tuesday, November 5th. In addition to addressing the District Court’s procedural issue, the CFTC must seize this opportunity to make some improvements and clarifications to the original rule. That rule, first proposed almost three years ago, set limits at a level too high to prevent excessive speculation. As Better Markets’ analysis has demonstrated, individual limits must be set at a level that restores the traditional commodity market balance of no more than 30% of open interest held by non-commercial firms. The original rule would have still enabled speculators to control much more than half of the market, just as they have done for the last several years since deregulation in the late 1990s and early 2000s,” said Mr. Kelleher.
“The original rule also did too little to target groups of traders using particularly harmful trading strategies. In particular, Commodity Index Traders (CITs) were demonstrably implicated in the hugely destructive price volatility of 2008, and have continued to exert an outsized and damaging influence in the markets. Congress explicitly empowered the CFTC to set tighter limits on any ‘group or class of traders’ such as this in the new financial reform law and the CFTC must use that authority to a fuller extent,” Mr. Kelleher said.
“The CFTC’s decision to withdraw the appeal, end the years of litigation and propose a new rule is an opportunity to get position limits back on track, addressing these crucial issues and restoring balance to the commodity markets. Those markets set prices for energy, food and various key industrial inputs. It is therefore essential that they function properly to promote economic growth and to protect businesses, households, and the world’s poor, all of whom are affected directly or indirectly by commodity prices. If done right, the new CFTC rule will stop the excessive financial speculation and the resulting price spikes and volatility, benefiting commodity consumers, producers and markets,” Mr. Kelleher concluded.
Better Markets is an independent, nonprofit, nonpartisan organization that promotes the public interest in financial reform in the domestic and global capital and commodity markets. Better Markets advocates for transparency, oversight, and accountability with the goal of a stronger, safer financial system that is less prone to crisis and failure, thereby eliminating or minimizing the need for more taxpayer funded bailouts.