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
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.
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Statements, Background Documents and Presentations
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
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
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.
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.