Grain News

NGFA and Ag Coalition Letter to CFTC Argues Proposed Rules Would Hurt, Not Help Customers

Date Posted: September 24, 2013

Washington—The National Grain and Feed Association (NGFA) and 20 coalition partners - representing national farm, ranch and agribusiness organizations - are urging Commodity Futures Trading Commission (CFTC) commissioners to change proposed rules that would hurt, not help, customers.

According to a letter sent by the 21 agricultural group on Sept. 18, "we support strongly the Commission's efforts to enhance futures customer protections.

"However, the capital charge and residual interest provisions of this rule will have the opposite impact - if adopted, customers will be exposed to significantly greater financial risk."

The letter outlines a number of negative consequences to customers and futures markets if the proposal is approved.

Given the dramatic changes the rule would impose on the way business is conducted in futures markets and the huge expense to customers, the letter urges that the commission perform a serious cost-benefit analysis before any action on the capital charge and residual interest provisions.

For example, the letter states, if adopted as proposed, these provisions likely will have the following impacts:

• Futures commission merchants (FCMs) will be forced either to use their own funds to "top up" residual interest - not feasible given the huge amounts involved - or, most likely, require that customers pre-margin hedge accounts.

• Many producers who use futures directly will be discouraged from using futures markets to hedge their production risk.

• Due to the significantly increased funding requirements of pre-margining - perhaps nearly double the amounts currently required - many small agribusiness hedgers will be forced to consider alternative risk management tools or be forced out of the market.

• Futures customers will be compelled to send excess margin to their FCMs in anticipation of future market movement on existing positions - many billions of dollars more than needed to cover existing positions - the last thing customers want to do now, in the wake of MF Global and Peregrine Financial Group.

• Much more customer money - perhaps twice as much - will be at risk in the event of another FCM insolvency.

• Futures customers will be compelled to borrow more money just to post margin on potential market moves - difficult for both lending banks and for customers to predict, and potentially difficult for smaller local banks. This increased borrowing requirement negatively affects a customer's ability to invest in their own business.

• The entire hedging process will be made less cost-efficient, thereby discouraging use of futures markets.

According to the letter, the coalition "believe(s) strongly that this fundamental change of direction by the Commission - after decades of consistent interpretation - deserves a serious effort to quantify benefits relative to the enormous costs and risks imposed on futures customers."

As such, the coalition, urges the Commission to "undertake a serious and thorough review prior to any action on the capital charge and residual interest provisions of the referenced rulemaking."

For additional information, read the coalition letter to the CFTC.

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