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Groups say prohibiting hedge exemptions would harm futures marketGroups say prohibiting hedge exemptions would harm futures market

Process ensures convergence of futures and cash prices.

July 22, 2016

1 Min Read
Groups say prohibiting hedge exemptions would harm futures market

The American Soybean Assn., along with the National Corn Growers Assn., recently sent a letter to Commodity Futures Trading Commission secretary Christopher Kirkpatrick expressing opposition to a proposal that would prohibit hedge exemptions for spread transactions during the last five days of trading of a futures contract, when convergence is expected to occur.

“One important element of risk management, price discovery and hedging is predictable convergence between the cash and futures price. Convergence between cash and futures prices occurs as the futures contract moves toward expiration, often in the final closing days of the life of the contract,” their letter stated. “Convergence occurs because buyers of futures contracts decide if they are going to take delivery of grain or sell back their futures contracts while sellers of futures contracts decide if they will make delivery of grain or buy back their futures contracts.”

The letter emphasizes that this process ensures that when the futures contract expires, the prices of cash and futures converge.

“Confidence in this process allows farmers to receive loans to operate their business, market their grain or hedge their risk. It allows buyers to have a ready market for our grain, users of the crops we produce to lock in long-term contracts for the products they produce or consume and exporters to make long-term sales to global customers,” the groups stated. “If, at expiration, the futures price is not an accurate proxy for the cash price, then the utility of the futures market as a risk management and price discovery instrument is lost.”

The letter states that a prohibition on holding spread transactions would prevent convergence and harm the price discovery function of the market.

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