The only Republican member of the Commodity Futures Trading Commission told a House Agriculture subcommittee this week that Congress should consider formally excluding end-users from the definition of a swaps dealer, but even he noted that farm co-ops have already been excluded.


Scott O’Malia
“Given the policy challenges that the commission faces regarding the fair treatment of end-users, I would encourage Congress to expressly exclude end-users from the swap dealer definition,” CFTC Commissioner Scott O’Malia told the House Agriculture General Farm Commodities and Risk Management Subcommittee at a hearing on Tuesday.

But he added he was pleased that “the commission has provided cooperatives representing smaller financial institutions, such as credit unions or farm credit organizations, an exemption for clearing certain swaps.”

“The smaller institutions themselves have already been exempted, but after receiving requests from the cooperatives that represent groups of such organizations, the commission has exempted them as well,” O’Malia said. “Cooperatives act on behalf of their members, the end-users, when they transact in the financial markets. Therefore, the same clearing exemption should be available to these groups.”


Scott Cordes
Scott Cordes, president of CHS Hedging, Inc., a St. Paul firm, told the subcommittee on Wednesday on behalf of the National Council of Farmer Cooperatives that co-ops “appreciate the guidance set forth regarding the forward exclusion in the product definitions rule.”

“That guidance provided certainty about what constitutes an excluded forward contract, as forward contracts in non-financial commodities that contain embedded price options would be excluded forward contracts and not considered to be ‘swaps,’” Cordes added.

However, he said, “some NCFC members have raised concerns over the appropriate treatment of forward contracts commonly used in physical supply arrangements that contain volumetric optionality.”

Cordes also said that co-ops appreciate the work the CFTC has done in proposing new rules in customer protection subsequent to the failure of MF Global and Peregrine Financial Group, but are concerned with the potential unintended consequences that a “one-size-fits-all” regulation may have on hedgers and smaller future commission merchants (FCMs).

“In addition to increased costs for hedgers, this proposed rule would be more burdensome to smaller firms like farmer cooperative-owned FCMs, which largely deal only with hedgers,” Cordes said.

He noted that one provision would require an FCM to take a capital charge with respect to any margin call that is outstanding for more than one business day, as opposed to the current practice of three business days.

“This proposed rule,” he continued, “would clearly disadvantage smaller FCMs and many retail customers. Many smaller hedgers do not transfer funds by wire, but rather write checks. As such, it is common practice for farmer cooperative-owned FCMs to pay the clearing houses or the clearing FCMs in advance of receiving customer funds. By adding the additional capital charge after just one day, FCMs will possibly be forced to require their customers to wire transfer/ACH funds or maintain excessive funds in their account.”

Cordes also noted that another provision would require that an FCM’s residual interest in the customer-segregated account must at all times be sufficient to exceed the sum of the margin deficits that the FCM’s customers have in their accounts.

“This requirement is counter to the historical interpretation, which requires an FCM to maintain residual interest to cover customer-segregated accounts with negative net liquidating balances (debit equity),” he said. “This gives an FCM time to collect customer funds prior to the time a payment must be made to the clearing house.”


Lance Kotschwar
Lance Kotschwar, senior compliance attorney, Gavilon Group, LLC, in Omaha, said that the Commodity Markets Council, which is composed of the commodity exchanges and their industry counterparts, are concerned that “the CFTC’s efforts to implement new swap regulatory rules have now morphed into a crusade of rewriting many long-standing futures market regulations that Congress, via Dodd-Frank, never contemplated.”

“Even more problematic is that this regulatory barrage is occurring almost entirely without consideration of real costs on commodity producers or consumers,” Kotschwar said. “The additional regulatory costs that the CFTC is forcing upon end-users and commercial participants will ultimately be passed on to the consumers of commodity products and will also reduce market liquidity, further raising the costs of risk management, and ultimately the cost of finished agricultural and energy goods.”


Rep. Michael Conaway, R-Texas
After the two days of hearings, Rep. Michael Conaway, R-Texas, the subcommittee chairman, said he fears that CFTC “overreach” will impact end-users and lead to higher costs for consumers.

“I am concerned about the impact that delays and last-minute no-action letters are having on how market participants manage their businesses,” Conaway said.

“The lack of certainty has no doubt cost many companies valuable capital and changed their strategic thinking,” he said. “Regulations should be created and exist to protect markets, not destroy them.”

The National Farmers Union, which did not testify, said in a news release that it disagrees with arguments that Dodd-Frank and many other market regulations should be repealed.

“Instead, Dodd-Frank must be fine-tuned and perfected, and regulators like the CFTC be provided the resources needed to do the job,” NFU President Roger Johnson said.