Bill softens blow of CFTC's margin requirements

Roberts and Heitkamp introduce bill to extend timeframe for margin requirements for futures customers.

A bipartisan bill was introduced July 16 that would alleviate concerns raised by a broad range of futures market participants - including farmers and ranchers, grain merchants and futures brokers - regarding the so-called "residual interest" provision in a rule finalized last fall by the Commodity Futures Trading Commission (CFTC). 

If the rule is fully implemented, many farmers, ranchers and small hedgers could be driven out of using futures as a risk management tool due to higher costs and increased risk, industry participants fear.   

U.S. Senators Pat Roberts (R., Kan.) and Heidi Heitkamp’s (D., N.D.) bill, S. 2601, the Risk Hedging Protection Act, provides futures customers with an additional day to get their needed payments to brokers to meet the margin call, while still protecting customers and the financial markets.

“As the Senate Agriculture committee works to reauthorize the Commodity Exchange Act, one of my biggest priorities is protecting end users like farmers, ranchers and grain elevators from over-burdensome or unrealistic regulations,” Roberts said. “This legislation ensures that the CFTC rules work in the countryside as well as on paper.”

Roberts, a former ranking member of the Senate Agriculture, Nutrition and Forestry Committee, has been a vocal opponent to the residual interest requirements. He questioned former CFTC Chairman Gary Gensler on the proposed rules at a Senate Agriculture Committee hearing in February of 2013, and wrote the President regarding the rule and its impacts on rural America.

Current CFTC regulation requires margins in three days. Starting in November under the customer protection rule finalized by CFTC last fall, it will go to 6 pm on the day following the futures trade (T+1) and then four years later it is scheduled to move to morning of T+1. 

The National Grain and Feed Assn. explained the Roberts-Heitkamp bill would provide additional time until 6 p.m. eastern time on T+1, still tightening the time frame but allowing sufficient time so futures customers would not be required to pre-margin for market moves that may never occur. 

In Congressional testimony, NGFA has estimated that a typical country elevator, if required to pre-margin, could be required to submit twice as much margin money to maintain their futures accounts, thereby putting twice as much money at risk in another futures commission merchant (FCM) insolvency such as MF Global and Peregrine. 

NGFA president Randy Gordon said it will allow futures customers to continue to “utilize capital for hiring, risk management and hedging strategies, instead of changing decades-old implementation of the rule and needlessly tying up funds under an unnecessary regulation.” Gordon said it is NGFA’s hope that the bill would be included in CFTC reauthorization legislation.

The House previously approved its CFTC reauthorization bill and a similar provision is included in the bill. Senate Agriculture Committee chairwoman Debbie Stabenow (D., Mich.) has not formally proposed a Senate bill for reauthorization, but has indicated she plans to do so, possibly yet this year.

For text of the bill go here. For a one pager on the bill go here.

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