Market Matters Blog

CFTC Fixes Ag Concerns on Residual Interest

The leadership turnover at the Commodity Futures Trading Commission is proving to be a good development for agriculture. On Monday, the four commissioners -- three of which are new to the office -- unanimously agreed to remove a provision of the controversial customer protections rule that would have forced futures users to pre-fund potential margin calls.

This is the "residual interest" problem that brokerages catering to agriculture clients resisted so loudly more than a year ago. As written in the final rule, futures commission merchants were required to move the calculation of residual interest -- how much of the FCM's own funds needed to be contributed to hedge accounts to cover any missing margin payments -- from the close of business the day following the trade to 9 a.m. the day following the trade, starting in 2018. The rule required CFTC to conduct a feasibility study, but set an automatic deadline on the change that could only be overturned by a vote of the CFTC commissioners. Monday's action removes the automatic deadline.

"The deadline will still move to 6:00 pm as of November 14 of this year, and we will still conduct a study of the practicability of making the deadline earlier," CFTC Chairman Timothy Massad said in his opening statement at public meeting on Monday. "An earlier residual interest deadline better protects customers from one another, in line with the statute, but we want to make sure we move deliberately so that the model works best for customers in light of all of their interests, since the deadline will affect how much margin customers have to post and when."

The revisions have been published in the Federal Register and there's a 60-day comment period before the rule becomes final.

P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]

If you recall, the CFTC's customer protections rule was aimed at finding solutions to the problems that led to millions of dollars of end-user capital being tied up in MF Global's bankruptcy. During CFTC's investigation of the incident, the CFTC commissioners seemed amazed that as long as the total margin of all an FCM's customers met the total required, the FCM was deemed in compliance. That meant that some customers who had excess margin in their accounts covered for the customers with inadequate margin, which isn't how CFTC interpreted the Commodity Exchange Act. CFTC took steps to make sure that doesn't happen, and instead required FCMS -- the firm that places the buy or sell order with the clearinghouse -- to use their own capital to top up accounts that came up short, called residual interest.

In an advisory issued Tuesday, the National Grain and Feed Association noted that FCMs have told the group the new 6 p.m. deadline would not force pre-margining. It also brings the rule closer in line with a CFTC reauthorization bill passed by the House of Representatives earlier this year.

Perhaps the most notable factor behind this change is the persistence and outreach of industry groups like NGFA. The three new members of the CFTC -- Massad, Sharon Bowen and Christopher Giancarlo -- have no agriculture background but wide experience in the realm of swaps and derivatives. Mark Wetjen, the remaining commissioner, grew up in Iowa and have relatives that farm.

NGFA reached out to the new commissioners to help educate them on how agriculture and agribusiness works. Given Giancarlo's opening statement at Monday's meeting, it's pretty clear NGFA and other agriculture groups' efforts are working. Here's a portion of what he said:

"I support the issuance of the proposed rule before us on the residual interest deadline for futures commission merchants (FCMs). Without it, the so-called and, perhaps, misnamed "customer protection" rule finalized in October 2013 would likely result in significant harm to the core constituents of this Commission: the American agriculture producers who use futures to manage the everyday risk associated with farming and ranching.

"As it stands, the rule will cause farmers and ranchers to prefund their futures margin accounts due to onerous requirements forcing FCMs to hold large amounts of cash in order to pay clearinghouses at the start of trading on the next business day. Without revision, the increased costs of pre-funding accounts will likely drive many small and medium-sized agricultural producers out of the marketplace. It would likely force a further reduction in the already strained FCM community that serves the agricultural community.

"Last week, I visited a grain elevator in southern Indiana and a family farm in rural Kentucky. I had lunch with around a dozen small family farmers, some of whom use futures products to manage price and production risk. Simply put, they could not fathom why the CFTC would adopt a rule requiring them to pre-fund margin accounts. They saw our rule as insuring that they would actually lose MORE of their money --- not less -- in the event of a future failure of another MF Global or Peregrine Financial."

The Senate Agriculture Committee is likely to take up the task of reauthorizing the CFTC in the next two years, and it will be interesting to see if this new, stronger relationship between agriculture and its regulators stands the test of time.

(CZ/SK)

P[] D[728x170] M[320x75] OOP[F] ADUNIT[] T[]
P[L2] D[728x90] M[320x50] OOP[F] ADUNIT[] T[]

Comments

To comment, please Log In or Join our Community .