NGFA tells CFTC ‘Robust and clearly defined' end-user exemption needed for swaps

By Agri-Pulse Staff

© Copyright Agri-Pulse Communications, Inc.

Washington, Nov. 10 - The National Grain and Feed Association (NGFA) wants the Commodity Futures Trading Commission (CFTC) to apply the same regulatory approach to agricultural swap transactions as it does for non-agricultural swaps when imposing rules implementing the Dodd-Frank financial regulatory reform law.

In a statement submitted to the CFTC in response to a series of questions posed by the agency in an advance notice of proposed rulemaking, the NGFA noted that most commercial grain, feed and processing companies use exchange-traded futures and options contracts to manage market risk. But the association noted that a number of firms also engage in agricultural swaps - customized derivative contracts that are traded over-the-counter rather than on futures exchanges - as a complementary risk-management strategy and/or to facilitate their ability to offer cash grain contracts and other risk-management tools to producers.

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Given that parties entering into agricultural swaps tend to be larger, sophisticated entities that are capable of managing risks posed by such transactions, the NGFA said it saw “no reason why the regulatory structure for agricultural swaps should be any different than the regulatory structure for other types of swap transactions” under the Dodd-Frank law.

The NGFA said that agricultural swaps pose no systemic risks to the marketplace, noting it was unaware of any significant trading problems involving participants in such transactions, nor any incidents of fraud or abuse. The NGFA also noted that such swap transactions also would be subject to extensive capital and margin requirements, business conduct standards, and reporting, recordkeeping and document requirements imposed under the Dodd-Frank financial regulatory reform law.

“We believe the cumulative effect of these provisions will provide more-than-sufficient safeguards to the market and to swap participants,” the NGFA said. “Imposing additional requirements on agricultural swaps is unnecessary and would put such instruments and those who use them at a competitive disadvantage . . . We see no reason to provide for disparate regulatory treatment that would serve only to limit risk-management alternatives and liquidity, and constrict the development of new products, without any corresponding market-protection benefits.”

The NGFA also reminded the agency that requiring all agricultural swaps to be cleared through a regulated commodity futures exchange could be difficult to achieve given that such transactions represent a relatively smaller share and a potentially less liquid market than nonagricultural swaps. In addition, the unique, customized and varied nature of many swaps also could preclude the level of standardization required for clearing on a commodity exchange. For these reasons, the NGFA recommended that the CFTC permit agricultural swaps to be traded over-the-counter in a manner consistent with other swaps - but still be subject to the reporting requirements embodied in the financial regulatory reform law.

The NGFA's statement also urged the CFTC to grant a “robust and clearly defined” exemption from the law's requirements pertaining to capital net worth, margining and exchange-clearing of such transactions for commercial end-users, such as grain, feed and grain processing firms that use agricultural swaps for risk-management purposes. The law provides for such an exemption for commercial end-users, the NGFA noted, adding that, “clearly, Congress did not intend to label commercial end-users as swap dealers, nor to burden commercial end-users or their customers with the increased costs and regulatory burdens” associated with such requirements.

In addition, the NGFA urged the CFTC to consider extending the end-user exemption to counterparties of end-users like swap dealers to the extent they are doing business with a commercial end user. The NGFA noted that such counterparties likely would bear the regulatory costs associated with clearing requirements for swap transactions, with little additional protection being provided to market participants. The NGFA's statement also suggested that such a “look-through” policy approach be applied to firms that aggregate agricultural swaps on behalf of their owners or customers and then lay off the risk to third parties. “These aggregators play an important role in delivering risk management services to agricultural producers and agribusiness firm,” the NGFA said.

“Stipulating special rules or 'carve-outs' for agricultural swaps simply would undermine” their use, the NGFA said, and “is unnecessary” given other protections embedded in the Dodd-Frank financial regulatory reform law.

The CFTC is expected to issue proposed regulations governing agricultural swaps in the next few months, which will be subject to public comment before being finalized.

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