The Hagstrom Report

Agriculture News As It Happens

NGFA, others urge review of financial protections

The National Grain and Feed Association and 18 other groups have written Congress and the Commodity Futures Trading Commission letters urging reviews of the protections in place for farmers and other businesses using trading firms, and proposing increased regulation.

The groups sent Congress a letter on Wednesday urging lawmakers to review the protections that were believed to be in place for customer-segregated funds found to be missing following the MF Global Inc. bankruptcy, NGFA said in a news release.

In a nearly identical letter to the CFTC the same day, the NGFA also urged the agency to review the adequacy of purported protections believed to exist for such customer-segregated accounts.

In the letter to Congress, the groups, which include national trade associations, banks and lending organizations, also urged members of the House and Senate agriculture committees “to assist in ensuring that customers’ commodity-segregated funds receive the highest priority in the hierarchy of claims as the bankruptcy trustee distributes funds, and that such customers not be considered unsecured creditors,” NGFA said.

The groups said the MF Global bankruptcy has “presented a major challenge in restoring confidence in the future use of exchange-traded risk-management tools.”

“We always have believed that the risk to customer funds when trading on exchanges was virtually zero,” the letter said. “Now, we see that is not the case.”

The groups also posed questions about whether it might be more appropriate to vest responsibility for holding and safeguarding customer funds in an entity other than exchanges’ clearing firms – such as the exchange itself or some other independent third party.

“Weaknesses in customer protections brought to light by MF Global’s failure have left customers unsure of whether segregated funds will continue to be fully available at other clearing firms,” they said. The groups also said that perhaps insurance provided through the Securities Investor Protection Corp. (SIPC) should be expanded to provide coverage for commodities, as well as securities.

The NGFA and the other signatories urged the House and Senate agriculture committees “to dig into issues” such as how frequently customer accounts were audited, by whom, and who was responsible for enforcement. They also ask investigators to look into whether requirements were administered in a proper and timely way immediately before the MF Global bankruptcy filing, whether changes are needed in the way segregated customer funds are allowed to be invested, and whether exchanges should bear some legal responsibility for customer funds “lost” in a bankruptcy and/or through malfeasance by a clearing member.

“The U.S. agricultural sector relies heavily on regulated exchanges for risk management,” the letter concluded. “The ability of both commercial and producer hedgers to use futures markets … depends on lenders agreeing to meet margin calls, which demands full confidence by all lenders in the safety of those funds. We must be confident the system works, that it properly safeguards customer funds, and that customers can have full confidence in continuing to utilize exchange-traded (risk-management) tools."

Other group signing the letter were:
  • AgriBank FCB
  • AgStar Financial Services, ACA
  • American Farm Bureau Federation
  • CoBank, ACB
  • Commerce Bank
  • Commodity Markets Council
  • Farm Credit Services of America
  • Independent Community Bankers of America
  • KeyBank Agribusiness
  • National Association of Wheat Growers
  • National Barley Growers Association
  • National Chicken Council
  • National Corn Growers Association
  • National Pork Producers Council
  • National Sunflower Association
  • Pet Food Institute
  • U.S. Canola Association.

NGFA (et al.) Letter to Congress on MF Global