The National Grain and Feed Association (NGFA) has commended the Commodity Futures Trading Commission (CFTC) for proposing to retain existing futures market speculative position limits for the grains, oilseeds, grain products and meat complex as part of its implementation of the Dodd-Frank financial regulatory reform law enacted by Congress last year.
The NGFA also strongly supported the agency’s proposal to provide hedge exemptions for non-bona fide swap participants only if their swap transactions or positions represent cash transactions and offset a bona fide counterparty’s cash market risks.
In a statement submitted to the CFTC, the NGFA said both proposals would help foster reliable and predictable convergence between cash and futures market values as futures contract expiration nears. The NGFA said such convergence is essential if agricultural futures markets are to remain viable for use by commercial hedgers like grain elevators, feed manufacturers, grain processors, farmers and others who rely upon them for price discovery and risk management.
“We believe strongly that the vastly increased participation of investment capital (in agricultural futures) markets has been a factor in the lack of convergence – not the only factor, but an important one,” the NGFA said. It noted that both the CME Group and Kansas City Board of Trade had faced challenges concerning the performance of their respective wheat futures contracts that resulted in changes to those contracts.
The NGFA advised the CFTC that retaining the existing futures market speculative position limits for the so-called “enumerated” agricultural commodities cited in the Commodity Exchange Act is the best course of action given “dramatic changes” in futures market participation in recent years, including the “very large” influx of nontraditional investment capital that at times has “threatened to overwhelm” some markets. Increasing such limits based upon higher open interest levels or deliverable supplies, the NGFA warned, could lead to “widely varying and disparate” speculative position limits between futures contracts offered by different commodity exchanges, with potentially damaging impacts on competition between exchanges for growth and liquidity; alterations to intermarket spreads or arbitrage opportunities; and abnormal concentrations of non-commercial open interest that could undermine market performance.
Open interest refers to the total number of outstanding futures market contracts in a delivery month or market that have not been liquidated by an offsetting transaction or fulfilled by delivery.
“The measure of whether (speculative) position limit changes are appropriate now should not be based solely on higher open-interest levels, which have been driven in part by new investment capital participation that has contributed to impaired performance and lack of convergence,” the NGFA told the CFTC. “Position limits should not be increased from current levels until the (agency) and the industry are convinced that (agricultural) futures markets are performing their price-discovery and risk-management roles adequately for traditional market participants – the bona fide commercial hedgers.”
In strongly supporting the CFTC’s proposal to prohibit non-bona fide swap dealers from circumventing speculative position limits – except in cases where the counterparty is a bona fide hedger, the NGFA said such “reasonable limits” are needed to ensure proper futures market performance for agricultural producers and commercial users. “…Applying (speculative) position limits to all non-bona fide hedge participants is appropriate, including on swap dealers that previously enjoyed an exemption and, consequently, virtually unlimited direct access to futures markets.” the NGFA said. “The CFTC will need to be vigilant in enforcing its account ownership and control procedures to ensure that non-bona fide investment and other financial entities do not act in ways that circumvent the intent of this rule.”