WASHINGTON, August 2, 2012 -As the House and Senate Agriculture Committees continue their investigations into the recent Peregrine financial group failure and MF Global’s loss of customer funds last year, agricultural cooperatives and small financial institutions desperate for market certainty also brace for potential regulations being finalized under the Dodd-Frank Act.
The Senate Agriculture Committee is hosting a hearing Wednesday morning over “how customer protections can be strengthened to prevent future misuse of customer funds in the futures markets,” with Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler as a witness.
In a House Agriculture Committee hearing last week with Gensler over the same issue, Chairman Frank Lucas, R-Okla., said “there are some in this town who argue that we need more regulations. But the fact is new regulations mean nothing when regulators are not enforcing the existing rules on the books.”
However, Gensler maintained his agency completed significant enforcement actions in the past two years, emphasizing the Peregrine incident is one of “direct deception.”
“The financial system needs common sense rules of the road and to do more on customer protection,” Gensler said. “We’ve brought significantly more enforcement actions. The Peregrine situation highlights that we need to take a closer look at self-regulatory system.”
That system, he said, “has served the nation in many tough market environments,” adding that the CFTC is “focused on how to improve it, not uproot the whole thing, but to change it and enhance it.”
This month, the CFTC approved final definitions of the “end-user” exemption, which mandates that Dodd-Frank clearing requirements do not apply to a swap if one of the swap’s counterparties is not a financial entity or is participating in risk-mitigation or hedging, among other exceptions.
Within the Dodd-Frank rules finalized by the CFTC so far, agricultural entities hedging against risk are exempt from the definition of “swap dealer” and the requirements and costs that go along with complying with swap dealer regulations under Dodd-Frank. The CFTC provided exceptions for agricultural cooperatives’ hedging activities in their finalized definition of “swap,” as well.
However, the CFTC has several more rules to finalize under the sweeping regulatory bill. For that reason, National Council of Farmer Cooperatives (NCFC) President Chuck Conner said his organization has “desperately called on CFTC to help us get into compliance” and to view the co-ops group as a partner in efforts to comply with the law.
“We know as a result of Dodd-Frank, there are going to be additional reporting requirements,” Conner said. “These are very complex rules, as well as the requirements associated with them. It’s going to be very difficult to understand the rules of the game going forward.”
He observed a good working relationship with CFTC in the process so far. “They’ve taken time to learn about the cooperative business structure,” he said, noting that CFTC chose in their final rules definitions not to categorize agricultural cooperatives’ activity as swap dealing.
Although the definitions indicate co-ops would no longer be required to register as swap dealers under finalized Dodd-Frank rulemakings, NCFC members are “crying out” for the ability to participate in risk management activities, Conner said. “Having that confidence, being able to manage your risk and know that is your customer’s money is really fundamental to the system working,” he added.
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