Ag groups ask CFTC to hold off on customer-protection rule

Published on: Oct 29, 2013

The National Grain and Feed Association (NGFA) and 15 other agricultural organizations, which represent virtually all segments of U.S. production agriculture and agribusiness that use futures markets for risk management, has submitted a letter to the Commodity Futures Trading Commission (CFTC) urging changes to a CFTC-proposed futures market customer-protection rule slated for a vote on Oct. 30.

In the letter to CFTC Chairman Gary Gensler and other commissioners, the organizations state they "strongly support efforts to enhance customer protection, but we cannot support action by the commission in the name of customer protection that is funded on the backs of America's farmers, ranchers and agribusiness hedgers." 

NGFA and other signatories remain concerned about the impacts of the customer protection rule's residual interest provision, and recommend the agency study the matter more thoroughly.  The groups said the current CFTC staff draft of the proposed rule, if adopted, will expose futures market customers to significantly greater financial risk.

In the letter, the organizations recommend that a "study be done without assumption of outcome and that the rule not mandate that a futures commission merchant (FCM) must take affirmative action to reverse a predetermination made now.  To do otherwise would undermine the study itself and would unnecessarily subject commodity hedgers to heightened financial risk to the extent that some participants likely would be driven out of futures markets."

The current CFTC staff draft would mandate that FCMs perform their residual interest calculation at the time of the first daily settlement - typically between 7-9 a.m. - a time that would ensure that FCMs would require pre-margining by customers.  The agricultural groups believe such a change would put about twice as much customer money at risk if another FCM insolvency occurs, such as happened with MF Global. 

The residual interest calculation refers to the requirement that FCMs "square up" all of their individual customer accounts to ensure that the amount exceeds any deficits in margining money due.

In addition, regarding the rule's capital charge provision, NGFA and other organizations are concerned that a one-day time period is not sufficient for all margin funds to be received by FCMs.  This portion of the CFTC proposal would require FCMs to take a capital charge for customer, noncustomer and omnibus accounts that are under-margined for more than one business day after a margin call is issued, rather than the three days that is customary now.

"Especially for farmers, ranchers and smaller agribusiness hedgers, who still send margin calls by check, one day is infeasible and would lead FCMs to require pre-margining," the groups wrote.  "We again urge the commission to maintain the current three-day period before a capital charge must be taken by the FCM."

The correspondence was a follow-up to a Sept. 18 letter to Congress concerning the residual interest and capital charge provisions of the customer-protection rule soon to be finalized by the commission.