In a statement submitted this month to the Senate Agriculture Committee at the request of committee chairwoman Debbie Stabenow, D-Mich., and ranking Republican Thad Cochran, R-Miss., the NGFA focused on several potential improvements important to the grain, feed, processing and export industry. Meanwhile, the House Agriculture Committee is scheduled to begin hearings this week on CFTC reauthorisation.
With the collapse of MF Global nearly two years ago, the NGFA noted that former futures customers in the aggregate still have not received 11 percent of their supposedly safe segregated funds that were held by the futures commission merchant (FCM). “Consequently, we believe that a primary focus of the (CFTC) reauthorisation process must continue to be enhancing customer protections with the twin goals of preventing similar occurrences in the future and providing protection to customers in the event of another FCM insolvency,” wrote the NGFA in its statement to the Senate Agriculture Committee.
To accomplish this, the NGFA recommended a series of reforms to the U.S. Bankruptcy Code, including:
- clarifying that customers come first when prioritising claims and distributing funds when a FCM fails
- strengthening and clarifying the CFTC’s authority to administer FCM insolvencies, including the ability to appoint its own trustee to represent exclusively the interests of futures commodity customers
- removing existing so-called “safe harbor” protections for any transactions involving the misappropriation of a FCM’s customer property, regardless of the intent behind the transfer (the current bankruptcy code denies such protection only when it can be proven that the FCM intended to defraud customers or creditors)
- harmonising CFTC rules and the bankruptcy code concerning the liquidation process for a commodity futures broker; and authorising the formation of customer committees specifically to represent futures market customer interests.
The NGFA said other potential customer protection enhancements could include creating insurance coverage in the event of FCM insolvencies. It said it was awaiting results of a comprehensive Futures Industry Association analysis of such potential products and their costs, as well as the outcome of an online survey of commodity futures customers’ interest and input on such products.
“It is important to note that the solution on insurance to protect customers is not necessarily a government or legislated solution,” the NGFA said. “It may be that some form of privately provided product is more cost-effective and appropriate.”
In addition, the NGFA recommended establishment of a pilot program to test the concept of introducing an optional, fully segregated FCM account structure for futures market customers.
“Creation of a fully segregated account structure necessarily would result in some additional costs that likely would be borne by customers utilising such accounts,” the NGFA said. “…[A] pilot program involving a limited number of commodity futures customers, FCMs, lenders and regulators would be useful for testing the mechanics and identifying the viability and true costs of a full-segregation structure.”
The NGFA letter also expressed increasing industry concerns about the impacts of high-frequency trading on agricultural futures markets. With the caveat that administrative action by the CFTC could prove to be a more appropriate way to oversee high-frequency trading activities, the NGFA suggested Congress should review whether:
- high-frequency traders should be required to register with the CFTC;
- some form of marginisng should be required, even if no positions are held by high-frequency traders at day’s end;
- other measures would help ensure high-frequency trading does not disrupt the hedging utility of futures markets.
