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Ag hearing reveals CFTC rule concerns

During Senate Ag Committee hearing last week on the reauthorization of the Commodity Futures Trading Commission, two groups testified that a CFTC-proposed rule on margin requirements would negatively impact farmers and the businesses that serve them.

The National Grain and Feed Association’s John Heck testified that two provisions of the rule proposed last November would dramatically increase customer risk. He claims congressional action could be necessary to clarify the matter, if the CFTC continues to contend that its hands are tied due to Commodity Exchange Act provisions, one of which at issue currently would decrease the time in which customer margin calls must arrive to their futures commission merchant (FCM) to just a single day. NGFA urges the CFTC to maintain the existing three-day timeline. Otherwise, Heck says NGFA fears futures commission merchants would require their customers to pre-margin their hedge accounts, which he says would result in customers being required to send more money to their futures commission merchant, which in turn puts a greater amount of segregated customer funds at risk in the event of another FCM insolvency.

The other provision of concern to NGFA would change the timing of the calculation of residual interest; Heck says that proposal exposes futures customers to even more risk. If the provisions stay in place, Heck sees some customers exiting futures markets in favor of lower-cost risk management alternatives. NGFA believes that possible exodus would be most clearly seen among agricultural producers who utilize futures for risk management purposes, and among smaller grain-hedging firms.

Futures Industry Association President and CEO Walter Lukken also talked about the reinterpretation of the residual interest application of the Commodity Exchange Act. He testified it would result in a tremendous drain on liquidity that will make trading significantly more expensive for customers hedging their financial or commercial risks, and will adversely affect the ability of many futures commission merchants to operate effectively.

A House Ag Subcommittee is holding hearings on the CFTC reauthorization this week. The General Farm Commodities and Risk Management Subcommittee met Tuesday to discuss commission perspectives; CFTC Commissioners Scott O’Malia and Mark Wetjen testified Tuesday. The hearing Wednesday focuses on end-user perspectives.