[ by Howard Haykin ]

To the dismay of federal regulators, it appears that various elements of the Dodd-Frank Reform Act are being chipped away - in a sense, creating gap-toothed regulations.  It happened on Friday, 9/28/12, when a federal judge struck down a central piece of the Obama administration's financial overhaul.  The court decision was directed at CFTC's so-called position limits rule, and it is the 2nd time a Dodd-Frank rule has suffered legal defeat.

The CFTC adopted the rule last year to place new restrictions on speculative trading, capping the number of derivatives contracts a trader can hold on certain commodities. The primary aim of the restriction was to rein in trading blamed for inflated prices at the gas pump and the grocery store.

Uncertain Future. Will the CFTC appeal the court decision?  That is, at best, uncertain.  Judge Robert Wilkins of the U.S. District Court for the District of Columbia vacated the rule, sending it back to the CFTC for "further proceedings."  Following the ruling, the CFTC issued a statement hinting that it might appeal the court decision.

Chairman Gary Gensler had this to say: "I believe it is critically important that these position limits be established as Congress required.  I am disappointed by today's ruling, and we are considering ways to proceed."

The case entered the legal system when, late last year, 2 Wall Street trade groups filed the complaint - SIFMA and ISDA (International Swaps and Derivatives Association).  Their complaint was that the CFTC erred in writing the rule, saying it would have had the unintended effect of causing wild price swings.  The groups are obviously pleased with Friday's ruling and they issued a joint statement to that effect.

Possible Impact of the Ruling. The ruling may encourage those 2 Wall Street groups and others to revise the attack on Dodd-Frank - rather than resort to piecemeal lobbying, they may move forward with broader legal challenges.  Presently, the industry is challenging another CFTC rule, and other lawsuits are being contemplated. 

Previous Success at Chipping Away at Volcker Rule. Last summer, a federal appeals court struck down the SEC's proxy access rule, a Dodd-Frank policy that would have empowered shareholders to oust company directors.  This same court, which would be the one to hear an appeal to the position limits rule, is viewed as generally being Wall Street-friendly - having tossed out SEC rules 6 times in 7 years.

Anticipating that it would face numerous and widespread legal challenges, the CFTC made certain changes that effectively tamed parts of the rule before allowing it to go effective.  For one things, In one case, the CFTC delayed its position limits rule on multiple occasions. It also tamed parts of the plan to accommodate concerns from traders.  But the concessions were not enough.  [C-I Note:  Give them an inch and they'll ask for a mile.]   

SIFMA and ISDA says that Dodd-Frank leaves it up to regulators to enforce position limits only "as appropriate."  And these groups argue that the law, in essence, required regulators to determine whether limits are necessary and appropriate before creating them.  The CFTC responds that Congress gave it no choice but to impose position limits.

Court Ruling.  Notwithstanding the opposing sides' positions, Judge Wilkins vacated the rule, saying the agency did not have a clear mandate to set position limits.  Yet, it was unclear whether he agreed with Wall Street's arguments. In a ruling on Friday, the judge said that the central question in the case is whether Dodd-Frank "clearly and unambiguously" requires the agency to conclude the limits are necessary before imposing them. "The answer is yes."

The judge also appeared to contradict himself elsewhere in the ruling:  "Ultimately, however, this court need not choose between the competing interpretations" because the law "is ambiguous as to the precise question at issue."

Bart Chilton, an outspoken CFTC (Democratic) commissioner who championed position limits, argued that the rule would protect consumers from speculative commodities trading. The trading, he and the rule's other supporters say, have sent energy costs and food prices soaring.  And Mr. Chilton added these assurances: 

"I will continue to push hard for a position limits rule, as mandated by Congress.  This is clearly a setback but we can learn from it and continue this critical effort to help make our markets safe and fair."

For further details, go to:  [Dealbook, 9/28/12].