* Wall Street slaps CFTC with suit over trading crackdown
* Groups says position limit plan lacked reason
* First ever suit faced by CFTC
(Updates with more context)
WASHINGTON, Dec 2 (Reuters) - Two major financial trade groups sued the U.S. futures regulator on Friday over new rules to crack down on commodity speculation, launching a second legal assault against the biggest U.S. financial overhaul in decades.
The suit, which had been widely expected given years of fierce debate over the need for so-called "position limits", the groups said the Commodity Futures Trading Commission's rule to prevent excessive speculation in markets like oil and gold was procedurally flawed and "lacked a reasoned basis."
The Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association also argued that the agency had not conducted sufficient cost-benefit analysis of the tough new limits, which they say would will hurt the markets by reducing liquidity and increasing volatility.
"The evidence is overwhelming that position limits are, at best, unnecessary and may, at worst, negatively impact commodity markets and users,” ISDA Chief Executive Conrad Voldstad said in a statement.
"It has the potential to harm markets at a time when they can least afford it," Voldstad and SIFMA President and Chief Executive Officer T. Timothy Ryan, Jr., said.
The suit, the first ever against a CFTC rule, was filed in federal court in the District of Columbia.
The broadside from Wall Street comes amid intensifying efforts by the financial sector and Republicans to push back regulators' efforts to implement last year's sweeping Dodd-Frank reforms, including starving the CFTC of funds.
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Ever since it was first mooted following the commodity spike in 2008, the notion of position limits that would cap the number of futures and swaps contracts that any single trader can hold has been decried by most on Wall Street and in the industry as a misguided political attempt to cap soaring prices.
The CFTC narrowly approved in October its position limits rule by a 3-2 vote, but there was already significant internal dissent within the agency on whether the rule was even needed.
“The CFTC has been preparing for this since shortly after the passage of Dodd-Frank and long before any rules were promulgated," said said Michael Greenberger, a law professor at the University of Maryland and the CFTC's former director of trading and markets.
"They have brought in very able counsel and simply bringing a suit does not mean the rules are yet in any way in jeopardy. Challenges to rules brought under Dodd-Frank are going to be par for the course."
EARLY DISSENT ON RULE
Republican commissioners Jill Sommers and Scott O'Malia opposed the measure. O'Malia said the agency had overreached its mandate and echoed the industry's argument that there was no "empirical evidence" to substantiate the rule.
Other regulators are already facing the legal backlash.
After an eight-month battle, the Securities and Exchange Commission in July had its first reversal of a Dodd-Frank rule when a federal appeals court found the SEC had conducted a flawed economic analysis to support a rule that would make it easier for shareholders to nominate directors to corporate boards.
The CFTC's final version of its position limits measure was viewed as offering some relief for the industry, relenting on several contentious provisions from an earlier draft.
But it would still have sweeping impact on big banks like Morgan Stanley (MS.N) and traders including grains giant Cargill, forcing them to scale back businesses, and likely staunching the flow of financial capital into commodities.
The CFTC has estimated the measure would cost the industry $100 million in the first year.
All the position limit rules will be phased in over time, with the final limits for all contract months set only after the agency has collected a year's worth of swaps data.
That process will likely be finished late into 2012, CFTC has said.
(Reporting by Christopher Doering; additional reporting by David Sheppard in New York; Editing by Russell Blinch and Alden Bentley)
((Washington newsroom, +1 202 898-8329, fax +1 202-898-8383)) Keywords: FINANCIAL LIMITS/LAWSUIT
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