CFTC approves customer protection rule despite agriculture's opposition

By Sarah Gonzalez

© Copyright Agri-Pulse Communications, Inc.



WASHINGTON, Oct. 31, 2013- Agricultural groups that represent members involved in the futures market opposed the Commodity Futures Trading Commission's (CFTC) approval of its latest customer protections rule Wednesday.

CFTC introduced the new customer protection rule, which requires futures commission merchants (FCM) to set aside their own cash to cover customer margins through a residual interest calculation, after the prolonged loss of customer funds due to the collapse of MF Global.

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The American Cotton Shippers Association, American Farm Bureau Federation, American Feed Industry Association, American Soybean Association, Commodity Markets Council, National Cattlemen's Beef Association, National Corn Growers Association, National Cotton Council, National Council of Farmer Cooperatives, National Grain and Feed Association, National Pork Producers Council and USA Rice Federation all oppose the final rule.

The groups noted that although the Commission improved on its initial draft, its decision to maintain an automatic trigger that would move the residual interest calculation by an FCM to first thing in the morning the day following the trade does not address obstacles that many small futures market participants in the agricultural sector face.

“Ultimately, this requirement likely will lead to smaller entities including farmers, ranchers and hedgers being disadvantaged disproportionately and being driven from futures markets as fewer risk management tools become economically feasible,” they stated.

Under the rule, FCMs must perform their residual interest calculation at the time of the first daily settlement - typically between 7-9 a.m. - a time that would ensure that FCMs would require pre-margining by customers, according to the National Grain and Feed Association (NGFA). The agricultural groups believe such a change would put about twice as much customer money at risk if another FCM insolvency like MF Global's occurs.

“The Commission failed to correct very specific provisions we believe are harmful to agricultural market participants,” the groups asserted.

CFTC Commissioners voted 3-1 to approve the rule, known as “Final Rule on Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations,” with Commissioner Scott O'Malia dissenting.

In his opening statement Wednesday, Chairman Gary Gensler said, “Market events…of these last two years highlighted that the Commission must do everything within our authorities and resources to strengthen oversight programs and protection of customer funds.”

However, Commissioner O'Malia said the provision creates “a false sense of security by imposing broad and ambiguous requirements and introducing another layer of governmental oversight.”

Along with the agricultural groups, O'Malia said his main concern with the final rule is the CFTC's reinterpretation of the residual interest deadline.

“Such a change would mean a drastic increase in pre-funding of margin, perhaps nearly double the amounts currently required,” O'Malia said. “As a result, many small agribusiness hedgers will have to consider alternative risk management tools or, even worse, will be forced out of the market.”

The Futures Industry Association (FIA) noted that in the final rule the Commission modified the residual interest requirement by phasing in the required changes over five years and by requiring a study and a roundtable to assess the impact of such changes. “We are concerned, however, that it may prove difficult for any future Commission to adjust or revise this policy,” FIA stated.

Additionally, FIA said changes required in the rule “will most disadvantage agricultural customers and small futures commission merchants.”

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