Industry should monitor treatment of derivatives
May 4, 2010
While grain-based foods is not a major target of financial regulatory reform legislation working its way through the Senate, the industry would be wise to keep a close eye on the emerging legislation and its treatment of derivatives.
The smooth operation of futures markets for the hedging of ingredients is crucial for the financial health of food processing companies. While proposals currently on the table are said to provide exemptions for ingredient hedges from provisions tightening the rules around derivatives, some language in the bill would be unhelpful.
An example is wording that would give the Commodity Futures Trading Commission greater influence over setting contract margins.
“We feel that exchanges should have exclusive authority over futures margins,” said Jeff Borchardt, president of the Kansas City Board of Trade. “Our capital and reputation are at risk, and we feel that we are in the best position to determine our level of risk tolerance given the overall market environment.”
Disclosure rules imposed in the past few years have made hedging unnecessarily difficult for many publicly traded companies. It’s important that grain-based foods escapes the shrapnel that could emanate from Washington’s rush to take action in the wake of the 2008 financial meltdown on Wall Street.