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FIA Special Report: CFTC Agricultural Advisory Discusses Position Limits

Dec. 12, 2014

On Dec. 9, the Commodity Futures Trading Commission's Agricultural Advisory Committee held nearly an all-day meeting to discuss certain aspects of the agency's proposed position limits rules and other issues. It was the first meeting of this committee since July 2013.

"Our goal is not to create unnecessary burdens on commercial end-users but to build a reliable, orderly framework for oversight in which vibrant markets can thrive," CFTC Chairman Tim Massad said at the beginning of the meeting.

The advisory committee consists of more than 30 participants representing a broad swathe of agricultural groups ranging from grain producers to cattle and livestock representatives. The advisory committee has no authority to set rules, but it provides an opportunity for market participants to raise their concerns directly with CFTC officials and provides a window into the agency's rulemaking plans. 

During the meeting they discussed issues related to position limits such as estimates of deliverable supply and briefly touched on the definition of bona fide hedging. They also commented on the CFTC's residual interest rule, applauding the agency for reconsidering the implementation timetable.

Click Here for Opening Statements, Background Documents and Presentations

Agricultural Economy

In a first for the committee, U.S. Agriculture Secretary Tom Vilsack briefed the members on the state of the U.S. agricultural economy. Vilsack did not discuss any derivatives-related issues, but his appearance was welcomed by members of the advisory committee as a signal of cooperation between the two agencies.

The committee meeting then turned to the implications of the agricultural economy for the CFTC and designated contract markets. David Lehman, managing director of commodity research and product development at CME Group, and Greg Kuserk, deputy director of product review at the CFTC's division of market oversight, discussed the general processes for setting position limits for new contracts, the importance of price convergence between cash and futures markets, and the management of risks associated with the basis of a contract.

Residual Interest

Tom Smith, deputy director in the CFTC's division of swap dealer and intermediary oversight, gave a brief description of the CFTC's residual interest rule. Smith maintained that the intent of the rule is to ensure that if there is an under-margined account at an FCM, it will not be covered by another customer's funds.

The current deadline for funding under-margined accounts is now set to 6:00 p.m. on the day of settlement, which is generally referenced as "T plus 1, close of business". This deadline was set to change automatically in December 2018 to an earlier time of clearinghouse settlement, but in November the CFTC proposed a rule clarifying that the deadline would not be moved any earlier without CFTC rulemaking action. This change was welcomed by participants on the advisory committee.

Curtis Friesen, representing the National Corn Growers Association, said a tighter deadline would require that an FCM have direct access to a customer's account and warned that this would drive corn growers out of the futures markets. He also suggested that FCM customers who are bona fide hedgers should be treated differently than speculators with respect to residual interest.

Tom Kadlec, president of ADM Investor Services, who was speaking on behalf of FIA, said his firm is working through the challenges of the current T plus 1 deadline. "It's imperative that we calculate the costs and the effects on all of our customers," he said. He added that he would be willing to participate in the CFTC's study on the feasibility of moving the residual interest deadline earlier.

Scott Cordes, speaking for the National Council of Farmer Cooperatives, cautioned CFTC officials to consider how FCMs manage excess funds of customers, warning that the residual interest requirements could cause delays in the flow of funds back to customers.

Position Limits 

Panelists in the afternoon turned to a discussion on position limits and much of this centered on the process for reviewing and updating estimates of the deliverable supply of a physical commodity, which are used to calculate and set spot month position limits. Several panelists highlighted the importance of giving market participants ample time when these estimates are adjusted, noting that these changes could affect existing positions of bona fide hedgers.

Joe Kovanda of the National Cattleman's Beef Association said it would be prudent of the CFTC and exchanges to monitor deliverable supply on a more frequent basis. On the other hand, Bryan Dierlam, director of government affairs at Cargill who was speaking on behalf of the International Swaps and Derivatives Association, cautioned officials against automatically and frequently changing limits. He said going through a mechanical process of changing them every few years "isn't necessary" if the markets are working appropriately. "I think what you want to know is: Are the markets working? Is there convergence?" he said.

Edward Gallagher, representing the National Milk Producers Federation, cautioned against taking a one-size-fits-all approach in its position limits rule. He also noted that Congress did not mandate that limits be set to 25% of deliverable supply-the long-standing policy at the CFTC.

CFTC Commissioner Chris Giancarlo asked CFTC staff what the logic was behind setting limits at 25% of deliverable supply and whether this limit was still appropriate. Steven Sherrod, senior economist in the CFTC's division of market oversight, responded that the 25% limit has been "a rule of thumb" used since the 1930s. CFTC officials also noted that spot limits imposed by exchanges are normally lower than the CFTC's 25% threshold.

Bona Fide Hedge Definition

Massad said the CFTC is working to develop an appropriate definition of bona fide hedging for the purpose of applying position limits, but did not describe the agency's thinking on this issue in detail. Several members of the committee suggested that this issue should be a topic of discussion at the next agricultural advisory meeting, which is slated for the summer.

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