LEGISLATION designed to increase transparency and better regulate risk within the financial community may actually be more restrictive to futures commission merchants (FCMs).
In testimony before the House Agriculture Committee May 21, industry leaders explained some of the downfalls with the Dodd-Frank Wall Street Reform & Consumer Protection Act.
Committee chairman Frank Lucas (R., Okla.) said, "This committee has heard from numerous market participants, and all of them have the same concerns. They fear that some of these regulations will make using derivatives so expensive that businesses will be forced to scale back or stop using them to hedge against risk."
Lucas said the committee will continue to hold hearings in the coming weeks to hear perspectives from end users, futures customers and the Commodity Futures Trading Commission (CFTC) so members have a complete picture of how the agency is working and what improvements need to be made in advance of writing legislation to reauthorize CFTC.
Futures industry leaders testified last Tuesday that the proposals on residual interest and capital charges would substantially increase the cost of hedging and would disproportionately affect small to midsized FCMs.
William Dunaway, chief financial officer for FCStone, explained that non-bank swap dealers may have to hold up to 100 times more capital to cover margins compared to banks with the same portfolio.
FCStone services more than 20,000 mostly midsized commercial customers, including producers, processors and end users. Dunaway said FCStone's customers handle more than 40% of domestic corn, soybean and wheat production. He testified that proposed changes "will adversely affect the markets' functioning, impose unnecessary costs on us and our customers and will limit our customers' ability to manage their risks."
Walter Lukken, president and chief executive officer of the Futures Industry Assn., added that agricultural customers are very concerned that the proposed rules could lead to further consolidation of smaller FCMs, and he believes the CFTC rule "warrants further review."
The proposed rule also would shorten the time frame for capital charges on underfunded collateral accounts to one day after a margin call is issued versus the current three-day grace period. Dunaway said a two-day deadline "is more reasonable and equitable" for both foreign customers and farmers.
A more welcomed rule change is enhancing FCM recordkeeping through the filing of electronic daily segregation balances.
Daniel Roth, president and CEO of the National Futures Assn., said this rule takes a "giant step" in how firms are monitored and can more quickly identify any suspicious behavior.
In the wake of the collapse of both MF Global and Peregrine Financial, some have advocated establishing an insurance scheme to protect futures customers.
"It is important to note that the solution on insurance to protect customers is not necessarily a government or legislated solution. It may be that some form of privately provided product is more cost-effective and appropriate," the National Grain & Feed Assn. said in a statement it submitted this month to the Senate Agriculture Committee.
The organization previously testified in support of examining insurance options during hearings last year.
Both Roth and Lukken testified that they are awaiting results of a comprehensive analysis of such potential products and their costs, as well as the outcome of an online survey of commodity futures customers' interest in and input on such products.
Roth said results are expected within the next six weeks and will then be shared with the House and Senate agriculture committees.