The Commodity Futures Trading Commission today waved the white flag and voluntarily dismissed its appeal of a court ruling that put commodity trading limits in limbo. Instead, the CFTC will craft a new version of the rule.

The decision preempts oral arguments that were scheduled to begin in November. A public meeting of commissioners to consider new proposals on position limits was scheduled for Nov. 5 prior to the decision to drop the appeal. It remains on the schedule.

As part of the Dodd-Frank Act, Congress directed the Commission to limit speculative positions in physical commodity futures and options contracts. It was an effort to prevent price manipulation by speculators. As of Oct. 12, 2012, the CFTC was set to start capping the maximum number of contracts that are bought and sold for 28 physical commodities, among them oil, gasoline, corn, wheat, cotton, sugar, silver, and platinum. Traders would have been required to aggregate their holdings when determining position limits.

The rule was intended to ensure that no single trader could obtain too large a share of the market, and to ensure competitiveness in the derivatives markets. That plan was derailed, however, after a ruling in the U.S. District Court in the District of Columbia on a legal challenge by the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association. They claimed the position limits rule, as crafted, would adversely affect commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility.

The crux of the legal challenge was that the CFTC misinterpreted its statutory authority under the Commodity Exchange Act, as amended by Dodd-Frank, when it set position limits. The plaintiffs argued, and U.S. District Judge Robert Wilkins agreed, that the limits should not go into effect and be remanded back to the CFTC. Wilkins said the CFTC had no “clear and unambiguous mandate” to set position limits under the Dodd-Frank Act. The CFTC appealed the ruling, with Chairman Gary Gensler pushing back that position limits are “critically important.”

Scott O'Malia, a Republican commissioner who opposed the appeal, supported the decision to drop it.He called the original rule a "legal dead end."

“The Commission should never have pursued an appeal in the first place,” O'Malia said in a statement. “As I pointed out at the time, the district court concluded that the Commission had failed to do its homework in drafting the rule.”

“The clear lesson for the Commission, then, was that it needed to go back to the drawing board and propose a new rule with the proper statutory and empirical foundation,” he added. “Instead, the Commission chose to take a dual-track approach and doubled down on its no-justification-needed stance in the old rule while simultaneously drafting a new proposed rule, investing unnecessary time and resources over the past eleven months."