A US court has rejected a proposal by the Commodity Futures Trading Commission that aimed to limit speculation in commodity markets.

The “position limits” rule was to take effect in two weeks. It would have capped holdings of futures and options for 28 commodities and their derivatives, from crude oil to corn and cocoa, expanding existing limits to contracts for any delivery month.

Robert Wilkins, a US district judge in Washington, said on Friday the CFTC failed to heed instructions from Congress requiring it to determine that its rule was “necessary to diminish, eliminate or prevent” excessive speculation.

In doing so, he agreed with arguments made by Wall Street groups seeking to overturn the proposal. The CFTC had argued that Congress simply instructed it to produce a rule, without first having to determine whether it was necessary.

Mr Wilkins said the agency was welcome to propose its rule again. It probably would first have to explain how and why its new rule would limit excessive speculation.

Gary Gensler, CFTC chairman, said: “The rule addresses Congress’ concern that no single trader is permitted to obtain too large a share of the market and that derivatives markets remain fair and competitive. 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,” Mr Gensler added.

Bart Chilton, CFTC commissioner, said: “This is obviously tough news for those of us who believe there’s too much speculative concentration in commodity futures and swap markets.”

The rule was part of the 2010 Dodd-Frank overhaul of financial regulation. It followed the 2008 surge in commodity prices that prompted lawmakers to address high petrol prices.

Wall Street financial groups and trade associations had united to oppose the proposal, flooding the CFTC with thousands of comment letters and then suing the agency after their arguments were rejected.

The International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association, which filed suit last December, said they were “pleased” with the court’s ruling.

Ken Bentsen, head of Sifma’s Washington office, said: “If we think a rule is grossly flawed or unnecessary . . . then we’re well within our rights to challenge that.”

Barney Frank, the retiring lawmaker who shepherded Dodd-Frank through the House of Representatives, said the ruling was “one more example of an ideological court” that was stifling the democratic process. House Democrats and 19 US senators had petitioned the court to rule in favour of the CFTC.

Mr Frank said that as courts impose stringent new requirements on the CFTC, Republicans in Congress are seeking to reduce the agency’s funding, putting it in the difficult position of needing to hire more staff to do more work but with less money.

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