[JURIST] Wall Street organizations International Swaps and Derivatives Association (ISDA) and Securities Industry and Financial Markets Association (SIFMA) [official websites] on Friday filed a lawsuit challenging a regulation [complaint, text] implemented by the Commodity Futures Trading Commission (CFTC) [official website] that limits speculative trading. The CFTC adopted a Position Limits Rule on October 18 on the grounds that the rule was authorized by the Commodities Exchange Act [CFTC backgrounder], and published the rule in the Federal Register. The regulation restricts the maximum number of derivatives contracts to purchase or sell a commodity a trader or group of traders may hold during a specified period of time. The trade groups argue that, in contravention of the Administrative Procedure Act (APA) [text], the Commission acted “arbitrarily, capriciously, and contrary to law” by failing to support the regulation with sufficient evidence and that the Commission was not obligated by statute to implement the position limits:

Congress did not require the Commission to establish position limits without regard to whether they would harm the US economy by increasing the cost of food, energy, and other necessities. Rather, Congress authorized the Commission to establish position limits only if it first finds that they “are necessary to diminish, eliminate, or prevent” “an undue and unnecessary burden on interstate commerce” caused by “[e]xcessive speculation,” and are otherwise “appropriate.” The Commission did not make those findings here.

The trade groups further argue that the Commission’s cost/benefit analysis of the rule was inadequate, and are seeking injunctive relief.

The CFTC has been tasked with regulating the derivatives market as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act [text, PDF]. The Act was signed into law [JURIST report] by President Barack Obama in July 2010 and created the new regulatory council to monitor financial institutions in order to prevent companies from becoming “too big to fail.” In addition to creating the US Financial Stability Oversight Council (FSOC) [official website], the legislation also gives the Federal Reserve [official website] new oversight over the largest financial institutions, creates a bureau of consumer protection, introduces multitudes of new regulations on derivatives and other financial instruments and limits the amount of capital banks can invest in hedge funds. JURIST contributor Andrew Cali-Vasquez argues that position limit regulations may carry unexpected consequences [JURIST op-ed] that “could impinge upon the operations of domestic businesses by reducing the availability of financing.”