Industry weighs solutions for futures market during Senate Ag hearing

By Sarah Gonzalez

© Copyright Agri-Pulse Communications, Inc.

WASHINGTON, August 2, 2012- During a Senate Agriculture Committee hearing Wednesday to examine the failures of MF Global and the Peregrine Financial Group, a witness on the second panel representing the National Grain and Feed Association said bankruptcy codes need to be harmonized with those at the CFTC. Grain Service Corporation Vice President Dianne Klemme noted the challenges the financial market's recent failures present to the agriculture industry.

“On its face, the PFG failure appears to have some key differences from MF Global - namely, that customer funds were intentionally misappropriated for a variety of illegitimate purposes over a very long period of time,” Klemme said. “However, the cumulative effect of MF Global and PFG failures occurring within a relatively short time - and especially the failure of PFG at a time when regulators presumably were on heightened alert for problems - has been a huge loss of confidence in regulators and in the adequacy of current rules to protect customer funds.”

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Klemme outlined several suggestions to improve the regulatory system, particularly for grain elevators operating in the futures markets through hedging and forward contracts. 

First, she suggested a pilot program for a full segregation system. She recognized that a fully segregated structure would include additional costs and “may not be workable for all customers,” but could serve to protect willing participants in a failure. 

“Because a fully segregated account structure may not prove to be a practical alternative for all customers,” Klemme also suggested insurance for commodity futures customer accounts “in much the same way that insurance protection currently exists for securities customers under the Securities Investor Protection Corporation (SIPC).”

Senate Agriculture Committee Chairwoman Debbie Stabenow, D-Mich., asked if this insurance model would be feasible, and CME Group Executive Chairman Terrence Duffy indicated that it would have to be modeled differently from SIPC.  

“In SIPC, clients do not pay for that insurance, the dealers pay for that insurance,” Duffy said. “We do not have a payment for the model in futures industry. It's a huge difference when you talk about who's going to fund these types of insurance programs.”

“If people want to pay for it we'd be happy to facilitate, but we need to understand there are huge differences” between SIPC and the futures industry, Duffy said. 

Although there would be specific differences, Klemme said the insurance fund could start as a short-term solution, a small pool funded by voluntary participants. “My customers would pay for it right now,” she added, suggesting that the insurance fund might be “something that could be totally optional for each individual customer, creating an aggregate pool of coverage that people could take or not take.”

Ranking Member Pat Roberts, R-Kan., appreciated the suggestions during the hearing Wednesday and said “that these folks here are those that really come up with policy suggestions that will make a difference.”

“MF Global and Peregrine are no ordinary bankruptcies,” said Roberts, R-Kan., in his opening statement. “Last fall, for the first time in history, the customers of a futures commission merchant's segregated funds were absconded. Then, what was once unthinkable, actually happened again, with the news from Iowa regarding the Peregrine Financial Group.”

Chairwoman Debbie Stabenow, D-Mich., described farmers and business who opened Peregrine accounts after MF Global collapse. “For these folks, lightening really does strike twice,” she said. “And they rightfully want to know why.”

Chairman Gary Gensler and Commissioner Jill Sommers of the Commodity Futures Trading Commission (CFTC), an oversight and regulatory body of the swaps and futures markets, provided testimonies at the hearing claiming that, given some adjustments, the commission would be able to restore confidence in the futures markets. 

“I know there are folks out there that believe the CFTC is moving too slowly - they're asking why aren't certain people in federal court already? I understand those frustrations,” Roberts said. “I also know that investigations are ongoing and we must be sensitive of how much information is disclosed.  We want to allow law enforcement to do their job so that we don't jeopardize an arrest or conviction.”

MF Global Trustee James Giddens said it would be an “uphill climb” to restore all of the missing $1.6 billion back to customers, but said “I am comfortable saying that distributions should certainly be in the 90 percent range.” He responded to submitted testimony from bankruptcy trustee Louis Freeh, who said 100 percent of the missing funds would be returned eventually. 


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