Sent back to the drawing board after losing a legal challenge, the Commodity Futures Trading Commission is again trying to set position limits for commodities traders. With a 3-1 vote, it approved a new position limits proposal during a public meeting on Tuesday.

A complete rundown of how the proposed limits would be determined, and exemptions, can be found here and in an online fact sheet. The rule will initially apply to 28 physical commodities, among them oil, gasoline, corn, wheat, cotton, sugar, silver, and platinum.

The Dodd-Frank Act directed the CFTC to impose limits on speculative positions in physical commodity futures and options contracts. The intent was to curb excessive speculation and out-sized holdings that could manipulate prices, cause marketplace instability, or create competitive imbalances.

The CFTC finalized a rule in October 2011 but, one year later and days before it was to go into effect, a legal challenge halted it. The lawsuit, filed in U.S. District Court in the District of Columbia by the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association, argued that no determination was made, before the limits were imposed, and that the restrictions were either “necessary or appropriate.”  They also said the rule would “adversely impact commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility.” Last month, the Commission voluntarily dismissed its pending appeal and announced a new proposal was imminent.

Prior to Tuesday's vote, CFTC Chairman Gary Gensler said the rule, as a Congressional mandate, was not something his Commission could take many liberties with. He also defended the rulemaking in light of academic disagreements over the usefulness of trading caps. A review by the CFTC's Office of Chief Economist of 130 studies on the efficacy of position limits found they divided almost evenly in their conclusions: one-third said limits work, one-third said they don't, and another third drew no specific conclusion.

Gensler referred to this as “a classic jump ball,” because of a “demonstrable lack of consensus.” Nevertheless, he would “err on the side of caution” and give deference to the body of work that suggests there could be problems. Commissioner Bart Chilton agreed, suggesting that many of the contrary studies were likely biased and funded by critics of position limits. “News flash: industry group says industry not responsible for prices,” he said.

Chilton suggested a case study in why position limits are needed. In 2008 oil prices spiked and plummeted out of step with stable supply and demand forces. “Silver Thursday” a collapse in silver prices that sent markets into a panic in March of 1980 was also cited by CFTC staff to underscore how excessive speculation can bring about price swings.

The proposed rules establish two types of speculative limits: spot-month position limits and non-spot-month position limits. Spot-month position limits apply in the period immediately before delivery obligations are incurred for physical-delivery contracts, or a period immediately before contracts are liquidated by the clearinghouse based on referenced price for cash-settled contracts. Spot-month position limits for these contracts will be set at 25 percent of estimated deliverable supply. Non-spot-month position limits apply to positions a trader may have in all contract months combined or in a single contract month. For each contract, limits will be set at 10 percent of open interest in the first 25,000 contracts and 2.5 percent thereafter.

Exemptions are provided for “bona fide hedging positions.” The new version also eases up on how positions are aggregated among affiliates, a particular concern of banks. The CFTC estimates that approximately 400 traders may be affected by the proposed limits

O'Malia, a Republican, was the sole dissenting vote. The new proposal, he said, “fails to provide enough flexibility for commercial end-users to engage in necessary hedging activities” and still “fails to establish a useful process for end-users to seek hedging exemptions.”

“Unfortunately, the position limits rule that is being proposed today is not based upon a careful, disciplined review of market dynamics or the new data collected under our expanded oversight responsibilities provided for by the Dodd-Frank Act,” he added. “In its second attempt at establishing a broad position limit regime, the Commission relies on a new legal strategy—but not new data—in order to circumvent the spirit of the district court's decision.”