ISDA and CFTC are fighting it out over commodity limit rules

Many readers were upset with the Sober Look post from two years ago named Energy speculation vs. hedging - regulate it all, ask questions later. Supposedly oil prices in the summer of 2008 had nothing to do with China’s and India’s rapid growth. It was all speculators. Right.

In fact a 2009 study showed that there is no evidence that futures trading impacts physical commodity pricing. We quote that study again here:

...the results indicate that in recent years the relationship between futures and physical commodity markets for industrial metals was not disturbed by financial investors. Instead, commodity spot prices changes are driven by world economy activity and financial investors are merely responding to these price changes. This conclusion is strongly confirmed by the economic developments in 2008.

But publicity driven politicians and zealous regulators (CFTC) continued on their war path to limit futures position holdings and impose other restrictions. Even without those limits in place, the threat of such action cause distortions in the market place such as ETFs trading at substantial premium to NAV (see Another ETF giving Larry a headache)
Today with the CFTC rules finalized, ISDA and SIFMA (Securities Industry and Financial Markets Association) finally filed a legal challenge to the CFTC’s new rules.

MarketWatch: The Associations believe that the Position Limits Rule may adversely impact commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility.
…
"The evidence is overwhelming that position limits are, at best, unnecessary and may, at worst, negatively impact commodity markets and users," Mr. Voldstad said. "Numerous studies have been conducted by government agencies and others into commodity price volatility and little, if any, support exists for the idea that speculation causes that volatility or that position limits curb speculation."
…
The Associations have filed suit in federal court in the District of Columbia, alleging that the CFTC:

• Erred in concluding that the Dodd-Frank Act required it to establish position limits without first determining whether they were even necessary; 
• Failed to present a reasoned analysis or consider all evidence in setting position limits;
• Failed to conduct an adequate cost-benefit analysis as required by law;
• Conducted a flawed rulemaking process that prevented commenters from meaningfully participating.

Markets regulation is vital in order to build investor confidence that in turn provides financing to corporations, municipalities, individuals etc. But we need smart regulation, not just what makes for good publicity or sells newspapers.