Co-op witness calls for certainty on cross-hedging, no user fees
Farmers and their traders need either the Commodity Futures Trading Commission or Congress to provide certainty that cross-hedging, a practice used to hedge risk for commodities that do not have futures contracts, is bona fide, a representative of the National Council of Farmer Cooperatives told the Senate Agriculture Committee at a hearing on the reauthorization of the CFTC.
“It is NCFC’s view that any federal speculative position limits rule should not unduly burden commercial end-users who utilize derivatives markets for economically appropriate risk management activities,” said Joe Barker, director of brokerage services for CHS Hedging, a subsidiary of CHS Inc., a farmer-owned cooperative and a grain, energy and foods company in Minnesota.
“Specifically, we have continued to advocate that the CFTC recognize common commercial hedging practices, such as anticipatory hedging and cross hedging, as bona fide hedges in that rule.”
Barker explained that companies buying, shipping and selling durum wheat use contracts for other types of wheat to hedge risk. He said the CFTC may address the bona fide hedging question in a rule but said, “I would encourage this committee to also keep a close eye on the bona fide hedge definition as the rule is rewritten.”
Barker also said that the CFTC needs resources to do its job properly, but urged the committee not to impose user fees.
“Agriculture is a high-volume, low-margin industry, and incremental increases in costs, whether passed on from an exchange or imposed directly on a cooperative trickle down and impact farmers,” he said.
“We fear a further increase in cost structure due to higher transaction costs would discourage prudent hedging practices. To be clear, a user fee would result in an increase in risk being absorbed in the agriculture community, and would likely reduce the desire for participants, such as agricultural producers, to hedge their price risk.”
But Dennis Kelleher, president and CEO of Better Markets, disagreed, saying the CFTC desperately needs the money to enforce the Dodd-Frank law and deal with emerging issues such as cybersecurity and cryptocurrencies.
Kelleher said “a small CFTC funding fee would not harm market liquidity.”
He noted that the fee would be small compared with execution fees.
“The decision to hedge or not can make a difference of tens if not hundreds of thousands of dollars to an individual farmer or business,” Kelleher said.
“It is inconceivable that true end-users or their customer — facilitating brokers — would be driven away from the market by a modest fee in this general range. The case for CFTC self-funding through transaction fees has only gotten stronger over the last several years, as trading volume has steadily increased.”
Barker said that the CFTC has “largely resolved administratively” most of the Dodd-Frank issues such as record-keeping requirements on end users, but credited the committee with “encouraging CFTC to ensure that the agriculture industry has affordable access to risk management tools.”
Barker also said that the agriculture markets “are in a period of increased volatility fueled by ongoing international trade negotiations and an extremely wet spring that has cause the slowest corn and soybean planting progress on record. The trade issues have led to dramatic price swings in the prices of grain, livestock and dairy markets over the past 12 months.”
Thomas Sexton, president and CEO of the National Futures Association, said that, in the reauthorization, Congress should also provide certainty that if there is a shortfall in customer segregated funds, the term “customer funds” would include all assets of the FCM (futures commission merchants) until customers had been made whole.”
A district court decision cast doubt on the validity of the CFTC’s rule to that effect, he said, saying “Congress should remove that doubt and ensure that customers have priority if there is a shortfall in segregated funds.”
Walter Lukken, president and CEO of the Futures Industry Association, an organization that represents clearing firms, exchanges, clearinghouses, trading firms and commodities specialists, technology vendors and law firms serving the industry, said FIA also supports “legislative clarification to resolve legal uncertainty in futures commission merchant bankruptcies as to the definition of “customer property.”
“The sanctity of segregated customer funds remains an important tenet of the CFTC’s customer protection regime and FIA stands ready to assist the committee on this clarification,” Lukken said.
Senate Agriculture Committee ranking member Debbie Stabenow, D-Mich., said that she finds it “very troubling” that the CFTC appears ready to push through new customer protection and cross-border rules before Heath Tarbert, President Donald Trump’s Senate-confirmed nominee for CFTC chairman, takes over in July. ❖
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