Concerns exist over CFTC margin rules

House hearing emphasizes harmful impact of proposed rule to require farmers and FCMs to meet same-day margin calls.

FARMERS and the agricultural community have been loudly outspoken against a proposed rule by the Commodity Futures Trading Commission (CFTC) that could dramatically change business models and prohibitively increase costs for farmers and ranchers as well as small to medium-sized futures commission merchants (FCMs).

The House Agriculture Committee's subcommittee on general farm commodities and risk management heard testimony from witnesses and looked at the potential impact of the matter in a hearing Oct. 2.

Although the CFTC rule does take many appreciated steps to improve customer protections as intended, the most common concerns stem from a proposed decrease in time in which customers' margin calls must arrive to their FCM from the current three days to just one day and how to calculate residual interest on settling those customer accounts until margin calls are received.

The result could have a "devastating impact" on both end users and FCMs that service the agriculture industry by requiring more money up front, and "the net effect would be fewer farmers using the futures markets to hedge their risks and/or fewer FCMs to service those customers," said Daniel Roth, president and chief executive officer at the National Futures Assn.

MJ Anderson, regional sales manager for The Andersons Inc. in Union City, Tenn., who testified on behalf of the National Grain & Feed Assn., said in today's environment of money moving electronically, a single day is not sufficient for all customers to make margin calls that quickly. He said the fear is that FCMs will require customers to pre-margin their entire accounts.

The second provision would change the timing of FCMs' calculation of "residual interest," which are the funds an FCM contributes from its own money to "top up" customer accounts until margin calls are received.

For decades, this provision of the Commodity Exchange Act has been interpreted by CFTC as allowing a period of time for FCMs to do so, NGFA explained, but now, CFTC's proposal seeks to change that consistent historical interpretation to require that every customer be fully margined on a 24/7 basis.

Many members testified that CFTC said its "hands were tied" and that it must now require the margin call proposal as such.

Roth said never in 39 years has CFTC required this of FCMs.

CME Group executive chairman and president Terry Duffy testified that the residual interest rule is not necessary to protect customers funds.

"Its costs and negative consequences outweigh any added protection. ... The proposed rule will unnecessarily drain liquidity and increase the cost of hedging financial and commercial risk, especially for farmers and ranchers using our markets," he explained.

Duffy said CME believes that 80-90% of market participants would be able to collect margin by the end of the next day by 6 p.m. — a much more realistic expectation and an acceptable solution proposed by the Futures Industry Assn.

Duffy was asked about the five- to 10-year outlook under the proposed rule for smaller FCMs, specifically non-bank-owned entities. He said in a meeting with groups ranging from the American Farm Bureau Federation to the National Cattlemen's Beef Assn. that it's very evident that many of those who service small to midsize agricultural operations would be forced out of the market "five to 10 minutes after the rule passes."

If driven out of business, having fewer FCMs to facilitate risk management goals could actually increase systematic risk by concentrating risk among fewer firms.

In the end, customers would be sending much larger amounts to their FCMs, leading to much greater volume of funds being put at risk if another situation occurs like the MF Global bankruptcy.

In fact, Anderson testified, "if this rule had been in place when MF Global failed, perhaps twice as much customer money would have been missing, and a correspondingly larger amount still would not be returned to customers."

Anderson testified that if the rule is finalized with no changes, it would drive up the costs of buying grain from farmers. Because it's a low-margin business, FCMs may have to pass on some kind of fee to the farmer, and customers may have to share in those increased costs too.

During questioning, House Agriculture Committee chairman Frank Lucas (R., Okla.) asked if any of the six witnesses were optimistic that CFTC would re-propose the rule or make meaningful changes. He received no responses.

In a Sept. 25 letter to each of the CFTC commissioners, the top four members of the House and Senate agriculture committees urged them to take into consideration the widespread concern in the countryside regarding the rule.

In another letter to the commissioners sent Sept. 18, 21 national organizations, including commodity and grain groups, warned of the negative consequences if the troublesome margin provisions go into effect.

The House subcommittee has sponsored H.R. 1003, which would require both qualitative and quantitative cost/benefit analyses of potential regulations before issuing them — a provision welcomed by the groups.

Subcommittee chairman Rep. Michael Conaway (R., Texas) asked if changes could be made within the CFTC reauthorization legislation the committee will be considering soon if CFTC moves forward with the proposed rule.

Roth said qualifying language could be included that makes it clearer that the "commission's rule is invalid and not necessary," and H.R. 1003 could also be included in legislation reauthorizing CFTC.

Volume:85 Issue:41

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