NGFA's Todd Kemp, vice president of marketing and treasurer, recently participated in a question-and-answer forum with Thomson Reuters on the Commodity Futures Trading Commission's (CFTC) proposed speculative position limit rule.
The Global Ag Forum is an online chat room for global grain traders and analysts. For more information, contact Christine Stebbins or see more at Thomson Reuters.
During the session, Kemp shared his insights - with more than 500 participants - on the CFTC's proposed rule, which establishes limits on 28 agriculture futures and options as well as swaps, an aggregation proposal and exemptions for bona fide hedge positions.
CFTC first published the latest proposed position limit rule in December 2013 as part of Dodd-Frank Law rule-making. Amid continued concerns about the rule among traditional grain hedgers, CFTC reopened its comment period for the rule from Dec. 9 to Jan. 22. .)
Reprinted with permission, a transcript of the session follows.
Q: What is the grain industry's biggest concern about CFTC's rule?
A: There have been speculative position limits for grain and oilseed contracts for years - and NGFA believes the right kind of position-limit regime is important to ensure convergence and contract performance.
However, NGFA's biggest concern is the CFTC's attempt to redefine/reinterpret what constitutes a bona fide hedge. The new definition in the proposed rule would narrow the definition dramatically and would exclude many hedging strategies used routinely in the grain, feed, processing and export sectors - all strategies that the commission has recognized as bona fide for years.
That has implications for margining, for tax treatment, for bids that grain purchasers will be able to provide to producers - imposes new restrictions and new costs on hedging.
In addition, NGFA's second biggest concern is the new CFTC-proposed formulas that would establish spot-month and all-months-combined position limits. NGFA does not believe the formulas make sense for grain and oilseed contracts, and would result in some very large increases. NGFA has recommended to the CFTC that the exchanges maintain authority to establish position limits that make sense, in consultation with customers.
Q: Could you share a couple examples of how grain handlers hedge now that would not be viewed as "bona fide" under the new rule?
A: A simple example:
A grain company buys grain from producers during harvest - over the weekend when markets are closed. The company wants to hedge that before the weekend. Under the current proposal, it appears that would not be considered a bona fide hedge. At the least, it is thrown into question because it is not a strategy that is enumerated in the CFTC rule.
That is part of the problem. It appears under this proposal that only hedging strategies the CFTC specifically enumerates would be considered bona fide. NGFA has made the case that CFTC needs to allow flexibility for various hedging strategies, as has worked well for our industry in the past.
Q: What are the chances of the bona fide definition being changed in the rule? Any sense whether the new commissioners sitting on the CFTC will adjust the proposal?
A: NGFA is cautiously optimistic that when the commission considers the final rule, it will contain a friendlier provision on bona fide hedging. Remember, the court shot down its initial proposal, but before that, NGFA resolved the bona fide hedging issue and the CFTC had agreed to continue historical treatment of bona fide hedging. Now this latest proposal - which has been out there more than a year - is forcing NGFA to go back and fight the same battle again. However, it appears the new commissioners are gaining an appreciation for NGFA's view.
In addition, NGFA believes it is important to get a fifth commissioner nominated and confirmed to fill the vacant Republican seat - and it should be someone who understands the futures industry and understands concerns of production agriculture and agribusiness hedgers. NGFA hopes that will occur, and believes the industry's voice was heard.
Q: Following up on your comment about position limits, can you share a little more on what it is about the formulas that results in the largeincreases for ag specs?
A: The formula for spot-month limits would be based on estimated deliverable supplies. While an exact number is unknown, numerous grain/oilseed contracts would see very large position limit increases, which opens the door to problems with convergence. However, the proposal does call for maintaining spot-month limits at their current levels for the first two years, a position the NGFA supports. For all-months-combined limits, the commission has proposed a formula based on open interest - again, NGFA questions whether that is the right metric. Limits must telescope down to spot-month limits in an orderly way.
As previously mentioned, NGFA recommended leaving authority with the exchanges to establish appropriate position limits lower than federal limits that would be set using the new formulas.
NGFA also recommended that authority to grant hedge exemptions should be left with exchanges rather than the CFTC taking that authority. It is difficult to imagine CFTC issuing an efficient and timely process of hedge exemptions.
Q: When do expect CFTC to finalize the rule?
A: Chairman Timothy Massad has said it is more important to get it right than to get it fast - NGFA could not agree more. The association is urging the commission to take a deliberate approach to ensure it fully understands hedging strategies at risk before moving to the final rule. Having said that, it is possible the commission will consider a final rule in first half of 2015.
Q: Is there anything you wanted to share regarding the aggregation proposal also included in the rule?
A: No, nothing in particular - that is a wrinkle the NGFA has not delved into deeply.
Change of pace: NGFA would like to compliment the commission on its proposal to revise the residual interest rule that has been so problematic. The comment period on a proposal closed last week. Essentially, it would fix the time of futures commissions members' (FCMs') residual interest calculation at 6 p.m. the day following a futures trade, rather than moving it to the morning of the day after the trade - NGFA thinks that removes the threat of futures customers being required to pre-margin their hedge accounts. NGFA strongly supports the CFTC proposal and is encouraged that agriculture's voice was heard.
It also should be noted that Congress will consider CFTC reauthorization legislation this year. Last year, the House passed a good bill, but the Senate did not act before adjournment - so it has to start over. The House legislation contained some good things bill that NGFA would like to fast-forward into new legislation. However, it is likely there will be attempts to "fine-tune" or "gut" Dodd-Frank that could complicate final passage. It will be interesting to see how it all plays out.Vice President of Marketing and Treasurer Todd Kemp is responsible for the overall management and direction of the NGFA's membership recruitment, development and retention programs. He is principal staff liaison to the Membership and Marketing Committee, Risk Management Committee and Finance and Administration Committee. He also spearheads the marketing of NGFA products and services.
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