NGFA opposes elements of CFTC-proposed rule that would ‘increase customers’ risk’

The National Grain and Feed Association (NGFA) has told Congress that there may be a need to address, as part of the legislative process reauthorising the Commodity Futures Trading Commission (CFTC), a proposed rule issued by the agency that would radically alter the way business is done in the futures industry.

The NGFA testified at a hearing conducted by the senate agriculture committee, chaired by Sen. Debbie Stabenow, D-Mich., that focused on issues congress should consider during the CFTC reauthorisation process.

“A rule proposed by CFTC would radically change the way business is done in the futures industry, and we believe strongly – despite CFTC’s goal of enhancing customer protection – that two provisions of the rule actually would dramatically increase customers’ risk,” testified John Heck, senior vice president of The Scoular Company in Omaha, Nebraska.  Heck serves as chairman of NGFA’s finance and administration committee, co-chairs the association’s customer protectiontTask force, and serves on the NGFA’s board of directors and executive committee.

The first provision of the proposed rule cited by Heck would decrease the time in which customers’ margin calls must arrive to their futures commission merchant (FCM) from the current three days to just one day.  If it didn’t, the FCM would have to take a capital charge for that “undermargined” amount.

The NGFA is “urging the CFTC to maintain the current three-day timeline,” Heck said.  “Otherwise, we fear FCMs would require their customers to pre-margin their hedge accounts.  That would result in customers being required to send more money to their FCM, potentially putting a greater amount of segregated customer funds at risk in the event of another FCM insolvency.”

The second provision of CFTC’s proposal objectionable to the NGFA would change the timing of FCMs’ calculation of “residual interest,” which are the funds the FCM contributes from its own money to “top up” customer accounts until margin calls are received.  For decades, this provision of the Commodity Exchange Act has been interpreted by the agency as allowing a period of time for FCMs to do so.  But the CFTC’s proposal seeks to change that consistent historical interpretation to require that every customer be fully margined on a continual, 24/7 basis.

“Contrary to the commission’s intent, this proposal actually exposes futures customers to much more risk,” said Heck.  He provided the committee with an example of a typical country elevator whose financial exposure under the proposal would nearly double if another FCM insolvency occurs.
In addition to comments on the CFTC rule, the NGFA also stated it believes the “U.S. bankruptcy code needs to be harmonised with the Commodity Exchange Act and CFTC regulations to clarify and ensure that customers come first in FCM insolvencies.”

English: Whole grain wheat Svenska: Fullkornsvete (Photo credit: Wikipedia)