C.F.T.C. plans to address concerns about agricultural futures performance

by Jay Sjerven
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WASHINGTON — The Commodity Futures Trading Commission on June 3 announced policy initiatives to address concerns about the performance of agricultural futures markets raised during the agency’s April 22 roundtable in Washington. The roundtable was convened to discuss issues affecting agricultural futures markets, including the lack of convergence between the futures and cash prices, the impact of higher margin requirements and the role of speculators and commodity index traders.

"The commission is committed to ensuring our agricultural futures markets function properly in their risk-management and price-discovery roles," said acting C.F.T.C. chairman Walt Lukken and commissioners Michael Dunn, Jill Sommers and Bart Chilton in announcing the initiatives. "The commission recognizes that, although no single solution exists, there are several steps it can take to improve oversight of the futures markets and bring greater transparency and scrutiny to the types of traders in the marketplace, including large index traders."

The C.F.T.C. said it will develop a proposal to routinely require more detailed information from index traders and swaps dealers in the futures markets and review whether classification of these types of traders may be improved for regulatory and reporting purposes.

The commission voted to withdraw the proposed rulemakings that would have increased the federal speculative limit position limits on certain agricultural futures contracts and would have created a risk management hedge exemption from the federal speculative position limits for agricultural futures and option contracts.

Commissioners Lukken, Dunn, Sommers and Chilton said, "As part of this data gathering and policy review, the commission will be examining the policy of C.F.T.C. staff granting exemptive relief from C.F.T.C.’s federal speculative limits relating to agricultural commodity index trading. During this review period, the commission will be cautious and guarded before granting additional exemptions in this area."

The C.F.T.C. said it would move to provide greater risk management choices to farmers and agribusinesses. The commission directed C.F.T.C. staff to review the current agricultural trade options program and propose revisions to improve its effectiveness. This risk management program may provide producers with an alternative for hedging price risk with the added benefit of a fixed premium. The commission also directed staff to develop a proposal for allowing the clearing of agricultural swaps. This would provide farmers and grain merchandisers with another choice for managing price and basis risk with the benefit of centralized clearing and the regulatory transparency that accompanies clearing.

The commission further directed staff to develop a new monthly publication on trader data for agricultural and other markets to provide greater market transparency. The publication was slated for a July 2008 debut.

Also, the C.F.T.C. said its staff is coordinating with agricultural banking authorities, including the Federal Reserve Banks of Chicago and Kansas City as well as the Farm Credit Administration, regarding financing and credit issues arising from higher margins in the futures markets. As prices of all commodities rise, financing of margin levels becomes more difficult for commodity merchandisers and producers. The C.F.T.C. said it will work with agricultural lenders to facilitate an understanding of financing issues faced by market participants.

The commission asked its agricultural advisory committee, under the leadership of commissioner Dunn, to work on several issues it said were worthy of further industry input and study in coming months, including: developing solutions for improving convergence in the futures and cash markets; discussing practices of exchanges on determining margin, daily price limits and methodologies of setting settlement prices; facilitating discussion on the role and size of over-the-counter agricultural swaps; and, determining whether there are additional studies agricultural market users believe the commission should undertake relevant to current agricultural commodity prices.

The C.F.T.C. also disclosed it has been conducting an investigation of the February/March 2008 price run-up in the cotton futures markets. The agency said it ordinarily conducts enforcement investigations on a confidential basis but took the "extraordinary" step of disclosing the investigation "because of today’s unprecedented market conditions and concerns expressed by market participants" at the April 22 roundtable.

The National Grain and Feed Association commended the C.F.T.C. for its actions.

"We believe the influx of speculative investment capital into agricultural futures markets has contributed to futures market price volatility and has been among several factors that have led to a lack of convergence between futures and cash prices during the delivery period, undermining one of the bedrock fundamentals upon which hedging strategies are based," the N.G.F.A. said. "The actions announced by the C.F.T.C. represent a balanced set of initiatives that should help begin to address these critical concerns."

The N.G.F.A. said it looked forward to working with the agency’s agricultural advisory committee in fulfilling its tasks outlined in the C.F.T.C. statement.

This article can also be found in the digital edition of Food Business News, June 10, 2008, starting on Page 34. Click here to search that archive.

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