Dodging Dodd‐Frank: Excessive Speculation, Commodities Markets, and the Burden of Proof

• Date: 01 January 2015
• DOI: http://doi.org/10.1111/lapo.12033
• Author: James W. Williams
• Published date: 01 January 2015

Dodging Dodd-Frank: Excessive Speculation,

Commodities Markets, and the Burden of Proof

JAMES W. WILLIAMS

Inspired by the wave of regulatory rulemaking, which followed the 2008 financial

crisis and the passage of the Dodd-Frank Act, this article examines the efforts of

the Commodities Futures Trading Commission to implement one such rule: Rule

76 FR 4752. Born of concerns with the impact of financial speculators on com-

modities prices, the rule calls for the expanded use of position limits to control

“excessive speculation” in US commodities markets. In documenting the political

and legal life of this rule from its roots in policy reports through to its suspension

by a federal judge, the article explores the place of “evidence” in the rulemaking

process. Particular attention is devoted to the growing evidentiary burden placed

on financial regulators who are expected to frame market problems in terms of

quantitative, price-based forms of harm. In the case of position limits, this has

involved statistical analyses of the causal connections between excessive specula-

tion and commodities prices and the use of a single statistical test: Granger

causality. By examining the parameters and limitations of this test, the article

offers a valuable window into the unique challenges of financial regulation and

their roots in questions of knowledge, evidence, and proof.

INTRODUCTION

Passed in the wake of the financial crisis of 2008, the Dodd-Frank Wall Street

Reform and Consumer Protection Act (2010) has been hailed as one of the

most extensive interventions in US financial markets since the New Deal era

reforms of the 1930s. Mandating 348 rulemakings across twenty different

agencies, the legislative package has spurred a torrent of regulatory

rulemaking on matters ranging from proprietary trading, to capital require-

ments, to greater market transparency. Despite this burst of legislative energy,

the implementation of these rules has been halting to say the least. Many

proposed rules have foundered in the face of fierce opposition and intense

industry lobbying both behind the scenes and through the formal comment

I would like to thank the editor and the three anonymous reviewers for their helpful comments

and valuable insights. They were instrumental in revising the article.

Address correspondence to James W. Williams, Department of Social Science, York Univer-

sity, 4700 Keele Street, Toronto, Ontario, Canada M3J 1P3. Telephone: 416-736-2100 x 20547;

E-mail: jamesw1@yorku.ca.

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LAW & POLICY, Vol. 37, Nos 1–2, January–April 2015 ISSN 0265–8240

© 2015 The Author

Law & Policy © 2015 The University of Denver/Colorado Seminary

doi: 10.1111/lapo.12033

process. None of this is especially surprising. Resistance, delay, and circum-

vention are age-old industry tactics. And yet, the barriers thrown in the way of

Dodd-Frank are not simply a case of business as usual. In a series of

groundbreaking cases, key rules promulgated by the Securities Exchange

Commission (SEC) and the Commodity Futures Trading Commission

(CFTC) have been challenged and subsequently vacated primarily on eviden-

tiary grounds with district courts chiding the agencies for their failure to

provide sufficiently robust cost-benefit analyses. Through these forms of

judicial intervention, matters of evidence, the treatment of empirical research,

and the ability to articulate, quantify, and monetize projected costs and

benefits have emerged as central to the Dodd-Frank implementation effort.

This article takes aim at these shifting standards of regulatory rulemaking

in the financial sphere and their roots in evidentiary formats and econometric

techniques, which privilege quantitative and statistical forms of analysis. The

specific context for this examination is one of the less widely acknowledged

although no less controversial rules emanating from Dodd-Frank, Rule 76

FR 4752.1Motivated less by the subprime crisis and more by the crisis of

escalating food and energy prices, this provision mandates the CFTC to use

position limits2to restrict the flow of speculative capital into markets ranging

from metals, to oil and gas, to agricultural commodities. The ensuing

rulemaking process has been extremely contentious with the rule triggering

thousands of comment letters as well as a lawsuit against the CFTC spear-

headed by two Wall Street trade groups. At the center of these debates have

been the evidentiary grounds of the rule itself. Drawing from correlational

and experiential evidence, proponents have argued that “excessive specula-

tion” is clearly implicated in harmful price swings and that position limits are

a necessary remedy. Detractors have meanwhile pointed to academic

research, which they claim is more scientifically robust and which has failed

to detect a clear causal relationship between speculative positions and com-

modity price movements thus raising doubts about the merits of an expanded

position limits regime. In documenting these competing views of “acceptable

evidence,” and examining how the latter came to dominate as the issue

migrated from the policy to the judicial sphere, this article offers a valuable

window into the increasingly difficult work of financial regulation and the

challenge of articulating market troubles in terms of specific price-based

effects and quantitative signs of harm. An essential question is thus the type

of evidentiary burden being imposed on regulators as a result of Dodd-Frank

maneuverings and the ability of regulators, using available tools, data, and

resources, to satisfy this burden.

The analysis proceeds through the following sections. The first section

situates the position limits debate in the context of larger developments

involving the role of evidence and expertise in the legal and regulatory sphere.

This includes the growing reliance on scientific and statistical measures of

harm as well as the greater willingness of the courts to step in as the arbiters

of last resort determining whether regulators have satisfied their obligations

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© 2015 The Author

Law & Policy © 2015 The University of Denver/Colorado Seminary

in individual cases. The next section delves into the position limits debate

exploring the different forms of evidence brought to bear on the relationship

between “excessive speculation” and commodities prices and examining how

the standards of acceptable evidence shifted as the debate migrated through

various social, political, and legal spheres. The third section takes aim at the

academic research used to undergird claims that excessive speculation is not

a significant driver of commodities prices, research that relies almost exclu-

sively on a single econometric test. In examining the limitations of this test,

known as Granger causality, and its ability to distill the causal connections

between investor positions and price movements, the push toward quantifi-

cation is placed in a more critical light with available econometric methods

constrained both by internal parameters and sensitivities and by a limited

view of “price” itself. Drawing from recent work in the Social Studies of

Finance (SSF), an alternative view of price as a social, material, and techno-

logical accomplishment is presented, which further problematizes not only

the search for conclusive evidence or “proof” of the causal connections

between speculative investments and observed price movements, but also the

ability of econometrics to provide clear and irrefutable articulations of price-

based forms of financial harm. The conclusion draws out the implications of

this analysis for regulatory rulemaking, including the benefits of conceiving

of regulatory struggles in terms of epistemic challenges and competing con-

structions of proof as opposed to well-worn accounts of capture, complicity,

and purely interest-based politics.

LAW, SCIENCE, AND FINANCIAL REGULATION

The debate over position limits and the links between speculation and com-

modities prices is set against the backdrop of a series of larger transforma-

tions in the relationships between law and science, and the shifting standards

and evidentiary thresholds governing what qualifies or counts as acceptable

evidence in legal and regulatory proceedings (Edmond 2004; Mercer 2002;

Jasanoff 1995). Emerging from campaigns against “junk science” in the

1980s and early 1990s, a key moment in these transformations was a shift in

the admissibility standards for expert evidence in US civil law, specifically the

Daubert trilogy of cases (Daubert v Merrell Dow Pharmaceuticals 1993;

General Electric Co. v Joiner 1997; Kumho Tire Co. v Carmichael 1999),

which not only placed more power in the hands of judges to determine

whether to admit expert testimony, but also codified a series of specific

standards according to which this evidence is to be adjudged. This included

an emphasis on methodological “gold standards,” such as the randomized

controlled trial and the epidemiological study as well as evidence that can be

scientifically verified and validated based on epistemic conventions of “sound

science,” namely, falsifiability, peer review, and known error rates. Whether

embedded in Daubert itself, or how judges have subsequently taken up the

Williams DODGING DODD-FRANK 121

© 2015 The Author

Law & Policy © 2015 The University of Denver/Colorado Seminary