Federal judge weighs whether to let regulators rein in oil speculators

Feb. 27, 2012
Federal judge weighs whether to let regulators rein in oil speculators
Kevin G. Hall | McClatchy Newspapers

WASHINGTON — A federal judge on Monday refused to halt efforts by a key regulator to limit excessive speculation in the trading of oil contracts — which is driving up oil and gasoline prices — but hinted that he might soon rule in favor of Wall Street and let speculation go unchecked.

Robert Wilkins, a judge on the U.S. District Court for the District of Columbia, declined a request for a preliminary injunction to halt the Commodity Futures Trading Commission from implementing a congressional mandate to limit how many oil contracts any single financial speculator or company can control.

However, Wilkins told both the CFTC and lawyers for the Securities Industry and Financial Markets Association and the International Swap and Derivatives Association that he expected to make a ruling soon on whether to hear the case. His line of questioning left both sides with the impression that he was concerned about how the regulatory agency has proceeded.

The two influential lobbies for Wall Street sought the injunction hoping to thwart what are called “position limits,” which were ordered by Congress as part of the landmark Dodd-Frank Act in 2010. The act was the broadest revamp of financial regulation since the Great Depression. The limits sought to prevent excessive speculation not just in oil but across the broad range of commodities, including farm products and metals.

Judge Wilkins expressed concern that Congress would direct the agency to impose market-wide limits without detailed study beforehand. President Barack Obama nominated Wilkins to the bench and the Senate confirmed him in 2010.

“That seems to me an astonishing position to take,” the judge told CFTC deputy general counsel Jonathan Marcus, who had said that Congress ordered the agency to first impose limits on oil trading, then other commodities.

As a sign of how high the stakes are, the trade groups hired Eugene Scalia to make their case. He’s the son of outspoken conservative Supreme Court Justice Antonin Scalia, and last year he won a key challenge to a Dodd-Frank rulemaking being carried out by the Securities and Exchange Commission. In that case, the courts struck down provisions that would have made it easier for shareholders to run candidates for corporate boards.

Congress ordered the CFTC to impose position limits, concerned that financial speculators now far outnumber producers, merchants and end users of oil and other commodities in the trading of contracts for future delivery of product _ known as futures contracts. Reporting by McClatchy has shown that these speculators now outnumber by more than 2-to-1 the traders who actually produce or consume oil.

Speculators, who play a necessary role in financial markets, historically have made up about 30 percent of futures trading. But now that ratio has reversed and some analysts contend that it’s distorting oil prices _ and soaking consumers in the process. The price on the New York Mercantile Exchange of futures contracts for next-month delivery of oil settled at $108.56 on Monday, up more than $23 a barrel since prices began climbing toward the end of October 2011.The nationwide average for a gallon of unleaded gasoline stood at $3.69 on Monday, up 29 cents from a month ago.

Monday’s court hearing was divorced from the real world, where prices are soaring ostensibly because of perceived supply threats given rising tensions between the West and Iran. Most of the court’s questions were about a 1981 law that similarly imposed limits on the trading of silver contracts, and the degree to which that rulemaking set precedent for the current marketplace intervention.

Judge Wilkins noted that the CFTC’s commissioners were in disagreement over whether limits were even needed, and the rulemaking being challenged narrowly passed the commission by a 3-2 vote.

That was a point seconded by Scalia, a high-profile partner in the law firm of Gibson, Dunn & Crutcher.

“It doesn’t require a rule at all we think,” Scalia argued, adding that there “is no disputing (that) these are significant ongoing costs” and that big Wall Street players such as Barclays and JPMorgan Chase “are going to incur costs … for a rule that is fundamentally flawed.”

The judge directed most of his questions at the CFTC’s Marcus, grilling him on financial sector complaints that the cost of complying with the new rules was burdensome and that there had not been enough analysis of costs vs. benefits. Marcus countered the judge’s questioning by noting that the Dodd-Frank Act explicitly directed the agency in four different places to quickly impose limits and called the costs to industry “minuscule” compared to their earnings.

Dennis Kelleher, president of the advocacy group Better Markets, sat through the court hearing and emerged concerned that the financial sector was chipping away at the intention of Congress.

“This is all about the industry trying to protect large dark (unregulated) markets,” he said, referring to the so-called over-the-counter markets, which are much larger than the regulated futures markets. Under Dodd-Frank they are slated for first-ever CFTC regulation.

The CFTC’s rules cannot take effect until the agency defines the over-the-counter products, called swaps, since the private bets involve swapping risk. That is scheduled to happen in April, which means limits on next-month contracts for oil could take place soon after that. Speculative limits on oil futures contracts that go out several months or even a couple of years would take effect somewhere around this December or early in 2013.