Agriculture coalition says CFTC proposal will harm futures market

By Agri-Pulse staff

© Copyright Agri-Pulse Communications, Inc.



WASHINGTON, Sept. 24, 2013-- National farm, ranch and agribusiness organizations asked Commodity Futures Trading Commission (CFTC) commissioners to change proposed rules regarding futures market customer protections.

The letter sent by 21 agricultural groups on Sept. 18 asserted that the capital charge and residual interest provisions of a proposed rule will be harmful for customers.

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“We support strongly the Commission's efforts to enhance futures customer protections,” the letter states. “However, the capital charge and residual interest provisions of this rule will have the opposite impact - if adopted, customers will be exposed to significantly greater financial risk."

The groups asked the commission perform a cost-benefit analysis before any action on the capital charge and residual interest provisions. According to the letter, the provisions will have several negative consequences if they are adopted as proposed.

As a result of the rule, futures commission merchants (FCMs) may be forced to require customers to pre-margin hedge accounts and many producers who use futures directly will be discouraged from using futures markets to hedge their production risk.

The letter also stated that increased funding requirements of pre-margining can be nearly double the amounts currently required, meaning that many small agribusiness hedgers will be forced to consider alternative risk management tools or be forced out of the market.

Futures customers will be compelled to send excess margin to their FCMs in anticipation of future market movement on existing positions, which the letter said is “the last thing customers want to do now, in the wake of MF Global and Peregrine Financial Group.”

Potentially twice as much more customer money will be at risk in the event of another FCM insolvency if the rules are approved, the letter added. 

Overall, “the entire hedging process will be made less cost-efficient, thereby discouraging use of futures markets,” the groups asserted.

According the letter, the coalition "believe(s) strongly that this fundamental change of direction by the Commission - after decades of consistent interpretation - deserves a serious effort to quantify benefits relative to the enormous costs and risks imposed on futures customers."

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