Tuesday the Commodity Futures Trading Commission’s Agricultural Advisory Committee met for the first time since July 2013, allowing the new wave of commissioners to hear from market participants on key issues pertinent to the industry, most notably how to calculate deliverable supply for commodities in establishing position limits and what constitutes a bona fide hedger.
The new CFTC Chairman Commissioner Timothy Massad opened up the meeting sharing that in the six months since he and Commissioners Christopher Giancarlo and Sharon Bowen joined the board, they’ve made changes to relieve any undue burdens to commercial end users and address specific agricultural concerns.
Important to agriculture were actions taken on residual interest. The new residual requirements required futures commission merchants (FCM) to maintain their own capital and interest in any segmented accounts or customers’ counts in margins by the close of the next business day (commonly referred to as T plus one).
The residual interest deadline was defined under a rule established in November 2013 as the time of the next business day of the daily settlement cycles of the derivative clearing organizations that cleared the respective futures positions.
Giancarlo said he was pleased to join his fellow commissioners in preventing an automatic shift in how futures commission merchants (FCMs) collect residual interest.
“The shift would have caused farmers and ranchers to pre-fund their margin accounts. It would have been tremendously expensive and would have increased risk exposure. It would have undoubtedly forced many smaller players out of the marketplace and left them subject to the price swings of cash markets,” he said in opening comments.
Scott Cordes, president of CHS Hedging Inc. and on behalf of the National Council of Farmer Cooperatives, said as the residual interest was originally headed was going to be a “real problem” for local cooperatives operating as hedgers who would have to prefund their margin accounts. He noted in the T plus 1 environment that is currently in place today, so far it’s going pretty well. “It’s probably something we can live with,” he said.
He did say he would like to see more insight into how this change reacts on a major market move, such as going from $5 corn to $7 corn and the stress that could put on the system. “We want to commend the commission at least for taking a positive step, and let’s take a time out here and not push towards T plus zero so quickly.”
Tom Kadlec, representing the Futures Industry Assn. and president of ADM Investor Services, said it’s imperative that the costs and effects on customers be calculated and communicated before changing the residual interest levels.
Another major topic of the day was how to establish deliverable supply and guidance for physical delivery versus cash settled contracts. The definition of a bona fide hedger within its position limits also has major implications to agricultural users. Recently the CFTC extended the comment period for its position limits rule.
Curtis Friesen, representing the National Corn Growers Association, and hedges nearly all of his production from his 1,000 acre farm in Nebraska. He said he’s been asked by his FCM for an ACH for direct access to his checking account. He said he’s not going to grant them access to his checking account, just for them to be able to cover the margin.
“I’d just give someone an opportunity to steal more money from me in the future, and I won’t let that happen. I’ll find a different way to hedge,” he shared.
MJ Anderson, originations manager for Andersons Grain and on behalf of the National Grain and Feed Assn., said the strictest interpretation of a bona fide hedger could move the market away from futures and more towards cash markets. The forward market currently has the preferred ability to send price signals to producers to grow the crop that returns the most, Anderson said.
“If you limit participation in the futures market you may blur some of the signals to the producer on what he needs to be growing which could lead to a supply disruption down the road,” Anderson said, adding it is all that more crucial for the CFTC to take a close look at what constitutes a bona fide hedge.