THE Senate Agriculture Committee began the process of reauthorizing the Commodities Futures Trading Commission (CFTC) in a July 17 hearing that featured testimony from a range of witnesses, including market participants, end users and regulators.
The hearing also focused on implementation of the Dodd-Frank Wall Street Reform & Consumer Protection Act as well as helping protect customer funds in the wake of the MF Global and Peregrine Financial bankruptcies.
"We need to examine lessons from the past and consider ongoing challenges to the system," Senate Agriculture Committee chair Debbie Stabenow (D., Mich.) said. "We want to make sure the agency that is responsible for protecting these markets has the authority, staff and modern technology it needs to do its job."
Daniel Roth, president and chief executive officer of the National Futures Assn., said all of the organization's attention is focused on customer protection, which, after enjoying an impeccable record for a while, has taken a serious hit to its reputation in the last 18 months.
Terrance Duffy, executive chairman and president of CME Group, told the committee he firmly believes in one-line authorization of CFTC, without additional burdens or changes.
CFTC already must deal extensively with the new Dodd-Frank regulations and tightening up actions after the two commodity firms' bankruptcies.
Duffy said he feels that the industry has benefited greatly from internal actions the agency has taken to address immediate needs.
Duffy noted that the futures markets need less regulation but rules with more teeth rather than rules that are easily circumvented.
Stabenow said she intends to tackle CFTC reauthorization in a bipartisan fashion in the committee. Additional hearings as well as staff briefings will be held to more closely examine the issues presented, she added.
The Obama Administration's fiscal 2014 budget proposes to increase the CFTC budget by $109 million to $315 million and to fund the entire amount with a "user fee" levied on futures and derivatives trades.
CFTC doesn't have a funding stream, which Stabenow recognized as a serious impediment to funding the agency.
Duffy warned, though, that the user fee will impose a $315 million-per-year "transaction tax" on marketing making, which would greatly affect market liquidity.
He projected that it would cost the industry $1.5 billion in liquidity and made reference to how a mere 1% tax in India quickly took out a third of the country's market participants recently.
"Imposing this new tax would increase the cost of business for all customers, even those the Administration wants to exempt, because it would reduce liquidity, increase volatility and impair the efficient use of U.S. futures markets," Duffy testified. "It will make it more difficult and expensive for farmers, ranchers and other end users to hedge commodity price risk in the market. This will force farmers and other market participants to pass along these higher costs to consumers in the form of higher food prices."
In the wake of the MF Global and Peregrine bankruptcies, some have advocated establishing an insurance scheme to protect futures customers.
Duffy warned that "any such proposal must be analyzed in light of the costs and potentially limited efficacy of such an approach due the extraordinarily large amount of funds held in U.S. segregation."
The futures industry, led by the Futures Industry Assn., is researching various insurance mechanisms in order to provide a quantitative, data-based analysis that will enable policy-makers and market participants to determine whether insurance for futures would be viable.
Duffy said he expects more insight into how such an insurance product might work by mid-September. He noted that he feels very strongly that any insurance products should not be legislated, or else the segregated funds business could be "crushed overnight."
In questioning, Sen. Heidi Heitkamp (D., N.D.) cautioned that it would be very difficult to develop a meaningful product in the private sector and said she thinks taxpayers should partake in some of that risk just as they do with flood insurance and crop insurance.
Walter Lukken, president and CEO of the Futures Industry Assn., and John Heck, senior vice president of The Scoular Co., both testified about concerns regarding margin calls.
Lukken raised concerns about customers being asked to pre-fund their margin calls, which would force grain elevators to keep excess funds at the futures commission merchant (FCM) at all times.
Another provision cited by Heck, who testified on behalf of the National Grain & Feed Assn., would decrease the time in which customers' margin calls must arrive to their FCM from the current three days to just one.
He said the grain and feed association also objects to CFTC's proposal that would change the timing of an FCM's calculation of "residual interest" — the funds the FCM contributes from its own money to "top up" customer accounts until margin calls are received.
For decades, CFTC has interpreted this provision of the Commodity Exchange Act as allowing a period of time for FCMs to do so.
The CFTC proposal also seeks to change that consistent historical interpretation to require that every customer be fully margined on a continual, 24/7 basis. n