Judge Strikes Down Dodd-Frank Trading Rule

Wall Street notched another victory in the battle over regulation on Friday after a federal judge struck down a central piece of the Obama administration's financial overhaul.

The court decision dealt the latest blow to the Dodd-Frank Act, the regulatory crackdown passed in response to the financial crisis. The decision on Friday, aimed at the Commodity Futures Trading Commission‘s so-called position limits rule, is the second time a Dodd-Frank rule has suffered legal defeat.

The C.F.T.C. adopted the rule last year to place new restrictions on speculative trading, capping the number of derivatives contracts a trader can hold on 28 commodities. The agency aimed to rein in trading blamed for inflated prices at the gas pump and the grocery store.

The future of the rule is uncertain. Under the decision by the federal judge in Washington, the rule was vacated and sent back to the C.F.T.C. for “reconsideration.”

But in a statement on Friday, the ag ency indicated it might appeal the court decision.

“I believe it is critically important that these position limits be established as Congress required,” the agency's chairman, Gary Gensler, said in a statement on Friday. “I am disappointed by today's ruling, and we are considering ways to proceed.”

The case stems from a lawsuit that two Wall Street trade groups filed late last year. The Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association complained that the C.F.T.C. erred in writing the rule, saying it would have had the unintended effect of causing wild price swings.

In a joint statement, the groups said they were “pleased with today's ruling” but are “committed to working with the commission and other regulators to promote safe, efficient markets.”

The ruling is sure to embolden Wall Street as it shifts the attack on Dodd-Frank from piecemeal lobbying to broader legal challe nges. Industry groups are currently challenging another C.F.T.C. rule, while others are weighing lawsuits against the so-called Volcker Rule, a still-uncompleted plan to stop banks from trading with their own money.

Companies have already seen some success. A federal appeals court last summer struck down the Securities and Exchange Commission's proxy access rule, a Dodd-Frank policy that would have empowered shareholders to oust company directors. The court, which also would hear an appeal to the position limits rule, is friendly turf for Wall Street, tossing out S.E.C. rules six times in seven years.

The Commodity Futures Trading Commission, fearful of legal challenges, delayed its position limits rule on multiple occasions. It also tamed parts of the plan to accommodate concerns from traders.

But the concessions failed to placate Wall Street. The two trade groups point to the fine print of Dodd-Frank, saying the law leaves it to regulators to enforce posi tion limits only “as appropriate.” The groups argue that the law, in essence, required regulators to determine whether limits are necessary and appropriate before creating them.

For its part, the C.F.T.C. argued that Congress gave it no choice but to impose position limits.

While Judge Robert L. Wilkins vacated the rule, it was unclear whether he agreed with Wall Street's position. 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 prior to imposing them. “The answer is yes.”

But the judge appeared to contradict himself elsewhere in the ruling. “Ultimately, however, this court need not choose between the competing interpretations,” he wrote, because the law “is ambiguous as to the precise question at issue.”

Public Citizen, a group that supports position limits, said on Friday that “The winners and l osers from this ruling are clear: Wall Street wins, consumers lose.”

Bart Chilton, a Democratic member of the agency 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.

The rule would cap the number of derivatives contracts a trader can hold on 28 commodities, including energy products like oil for the first time. Until the agency adopted the plan, the limits covered only nine agricultural commodities, including corn and wheat.

“I will continue to push hard for a position limits rule, as mandated by Congress,” Mr. Chilton said in a statement on Friday. “This is clearly a setback but we can learn from it and continue this critical effort to help make our markets safe and fair.”