The National Grain and Feed Association (NGFA) has submitted a statement supporting portions of a Commodity Futures Trading Commission (CFTC) proposed rulemaking that would remove outdated constraints on agricultural swap transactions as part of its implementation of the Dodd-Frank financial regulatory reform law.
Specifically, the NGFA supported the CFTC’s proposed regulations for not imposing additional regulatory restrictions on agricultural swaps than would apply to non-agricultural swap products, noting that safeguards added under the Dodd-Frank law provide “more-than-ample protection in the swaps marketplace for both agricultural and non-agricultural swaps.” The financial regulatory reform law changed the regulatory structure for all swaps and instituted several safeguards, including a requirement that only eligible contract participants engage in swaps unless cleared through a designated contract market. It also mandated registration, reporting, business standards, and capital and margining requirements for swap dealers and major swap participants. Given these safeguards, the NGFA said, “there is no compelling reason to place additional burdens on agricultural swaps.”
Established in 1896, the NGFA is the nation’s largest trade association comprising commercial hedgers of grains, oilseeds, feed ingredients and grain products. It comprises more than 1,000-member companies that operate more than 7,000 facilities and handle more than 70 percent of the U.S. grain and oilseed crop. Affiliated with the NGFA are 26 state and regional grain and feed trade associations. The NGFA also has strategic alliances with the North American Export Grain Association and Pet Food Institute.
In its statement, the NGFA also said that by defining agricultural trade options as swaps, the Dodd-Frank law could result in enhanced development and use of such products, as well as a broader range of risk-management tools. Agricultural trade options are off-exchange options that provide the right, but not the obligation, to make or take delivery of a specified commodity at a specified price within a specific time period.
The NGFA noted that previous CFTC regulations governing agricultural trade options had been “unwieldy” and overly restrictive, with high net worth requirements imposed on potential participants that resulted in such products largely being unused. The association also noted that the regulations would implement lower net worth requirements for “eligible contract participants” that could engage in swap transactions, including those for agricultural commodities.
Finally, while not part of this particular CFTC rulemaking, the NGFA also used the opportunity to reiterate its strong support for the agency implementing a “robust end-user exemption” from the mandatory clearing, capital and margin requirements as authorized under the Dodd-Frank law. Congress included a provision in the law that exempts commercial end-users of swaps from the clearing requirement so as not to burden them or their customers with added transaction costs, and in recognition that such commercial end-users present a much lower risk than financial entities that enter into swaps for investment or speculative purposes.
As it had done previously in responding to a separate CFTC rulemaking on the end-user exemption, the NGFA urged the agency to issue a final rule that also exempts counterparties of end-users from such requirements. Doing so, the NGFA said, would avoid additional costs and regulatory burdens that would “trickle down” to end-users, and ultimately their customers.