CFTC rule threatens agricultural futures customers, say House Agriculture hearing witnesses
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WASHINGTON, Oct. 2, 2013- Futures market regulators and participants testified that certain elements of a rulemaking proposal issued by the Commodity Futures Trading Commission (CFTC) would harm the agricultural community. They testified during a hearing conducted by the House Agriculture Committee's Subcommittee on General Farm Commodities and Risk Management.
CFTC adopted several rules proposed by industry regulators CME Group and the National Futures Associations in the wake the MF Global and Peregrine Financial Group failures that resulted in stolen and lost customer funds. While most agree that additional customer protections are warranted, today's witnesses said certain provisions of a particular CFTC proposal may harm the industry, especially its agricultural customers.
“We must examine if the costs outweigh the benefits,” said Subcommittee Chairman Mike Conaway, R-Texas, regarding futures market regulations. “Farmers and ranchers who are supposed to be protected by this rule have expressed deep skepticism of it, which I share.”
Provisions of the proposed rule in question would decrease the time in which customers' margin calls must arrive to their Futures Commission Merchant (FCM) from the current three days to just one day. It would also change the timing of FCMs' calculation of “residual interest,” or the FCM's funds used to cover customer margins. CFTC's proposal would require that every customer be fully margined continually and at all times of day.
Rep. Frank Lucas, R-Okla., noted during the hearing that he and the other leaders of the House and Senate Agriculture Committees recently sent a letter to the CFTC regarding these concerns.
The National Grain and Feed Association (NGFA) testified that for years, grain hedgers and FCMs relied on a consistent interpretation of the Commodity Exchange Act by the CFTC. NGFA also sent a letter along with several other agricultural groups last month to the agency.
"Unfortunately, in the name of customer protection, that interpretation recently has been thrown into question by a new proposal from the CFTC that we believe would dramatically increase customer risk," said MJ Anderson, regional sales manager for The Andersons Inc. of Union City, Tenn., who testified on behalf of NGFA.
Daniel Roth, CEO of the National Futures Association, said his staff partnered with the CME Group to come up with a new system that requires daily confirmation reports of segregated funds, among other customer protection reforms.
“I think it clearly makes the regulatory structure stronger now that it was,” Roth said. “I'm glad so many of these rules are incorporated in the CFTC's rule proposals. But there are other aspects of that rule that are very troubling.”
“Unfortunately, the CFTC has proposed a bad rule,” reiterated Terrence A. Duffy, Executive Chairman and President, CME Group, Inc.
“The residual interest rule is not necessary to protect customer funds,” Duffy said. “Its costs and negative consequences outweigh any added protection.”
The residual interest rule would require FCMs to ensure that each customer account has full collateral at all times, which puts much greater pressure on the FCM and its customers.
“Customers will be required to double their margin requirements,” said Duffy. “This rule would make the marginally profitable FCM business unsustainable for many firms that serve the agricultural community, and may deprive them and their customers of access to futures markets.”
Theodore Johnson, President of Frontier Futures, Inc. in Cedar Rapids, Iowa, a small FCM with mostly farmers as customers, said the NFA and CFTC customer protection rules implemented since the MF Global and Peregrine debacles have greatly increased customer confidence. However, he said the proposed residual interest rule would negatively impact his business as soon as it is passed.
Johnson said the rule would force his company to choose between doubling capital or significantly increasing the funds required from customers to deposit to ensure they never have a margin call.
“The option to increase our capital by that much may not be possible, and increasing margins may cause many of our customers to either leave us for other firms or cease trading altogether,” he said.
Additionally, Johnson said the industry would be forced to consolidate as a result of the residual interest rule, and that “would mostly affect small to mid-sized FCMs.”
When Rep. Benishek asked the witnesses whether their concerns have issued a response from the CFTC, Roth said the commission told him their “hands are tied” at this point in the rulemaking process.
“I think there has been enough outcry on this that I'm hopeful the commission will ultimately adopt a rule that makes sense,” Roth said.
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