Margin call requirements trouble ag marketplace

House Agriculture Subcommittee holds hearing emphasizing devastating impact of CFTC proposed rule on margin requirements.

The House Agriculture Subcommittee on General Farm Commodities and Risk Management held its fourth hearing on the future of the Commodity Futures Trading Commission (CFTC) in advance of writing legislation to reauthorize the agency. Of top concern today was provisions within a CFTC rule impacting margin requirements.

Although the 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 who service the ag industry by requiring more money up front. "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 National Futures Assn.

MJ Anderson, regional sales manager for The Andersons Inc, Union City, Tenn., who testified on behalf of the National Grain and 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 testified the fear is that FCMs would require customers pre-margin their entire accounts.

The second provision would change the timing of FCMs' calculation of "residual interest," which are the funds the 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 the agency as allowing a period of time for FCMs to do so, NGFA explained.  But now, the CFTC's proposal seeks to change that consistent historical interpretation to require that every customer be fully margined on a 24/7 basis.

If driven out of business, 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 at risk if another MF Global situation occurs. 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."

In a letter Sept. 25 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.

Also in a letter Sept. 18 to the commissioners, 21 national organizations including commodity and grain groups warned of the negative consequences if the troublesome margin provisions go into effect. The subcommittee has sponsored H.R. 1003, which would require both qualitative and quantitative cost-benefit analysis of potential regulations before issuing them, a provision welcomed by the groups. 

This is expected to be the final hearing in the series on the future of the CFTC. The first one was a full committee hearing to gain perspectives from the market. The last two were subcommittee proceedings to hear from the CFTC Commissioners and end-users directly.


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