The National Grain and Feed Association (NGFA) has commended the Commodity Futures Trading Commission (CFTC) for proposing an action that would extend what otherwise would be an automatic mid-July implementation of many of the swaps-related provisions of the Dodd-Frank financial regulatory reform law.
The nation’s largest trade association comprising commercial hedgers of grains, oilseeds, feed ingredients and grain products previously had urged the agency to take action to ensure the continued availability of commonly used off-exchange agricultural options-based grain contracts under the Dodd-Frank law.
Comments are due by July 1 on the CFTC’s proposal to issue a so-called “exemptive relief order” for provisions of the new law scheduled to take effect on July 16 that are predicated upon the agency’s still-ongoing development of regulations defining various swap-related terms, including what constitutes a swap and what types of entities are considered to be “swap dealers.” In addition, the proposed order would apply to certain types of transactions that under Dodd-Frank no longer will be covered by exemptions or exclusions previously issued by the CFTC using its authority under the Commodity Exchange Act – including the agency’s authority to allow options on agricultural commodities. The CFTC’s proposed exemptive relief order, which was issued following a June 14 public meeting, would extend the swaps-related deadlines until either Dec. 31 or the effective date of its final regulations, whichever occurs earlier. The agency has indicated it will finalize the proposal soon after the public comment period ends.
The NGFA noted that existing marketing tools that utilize agricultural options will be superseded by the new law, which states that agricultural commodity options and agricultural swaps may not be offered until approved by the agency through rulemaking. While the CFTC believes it has the authority to allow agricultural swaps, it does not think authority exists under the Dodd-Frank law for agricultural commodity options to be offered until it issues final regulations defining swaps-related terminology.
A swap is a commodity or financial instrument generally traded over-the-counter rather than on a regulated commodity exchange. Swaps involve the exchange of one asset or liability for a similar asset or liability for the purpose of lengthening or shortening maturities or otherwise shifting risks, and are used most commonly in financial instruments.
The NGFA cited two off-exchange agricultural options-based marketing tools as examples of the kind of transactions that could be threatened unless the CFTC takes action:
- Over-the-counter agricultural options.
- Grain “re-po” agreements and similar types of transactions under which grain merchandisers elect to transfer title of grain to a lender or other market participant with an option to repurchase at a later date. These transactions have the advantage of having the lender or other market participant assume the futures position of the grain merchant, thereby relieving it of the responsibility for meeting potential margin calls while also providing access to working capital.
The NGFA said both types of transactions, as well as others that could be affected adversely, are valuable marketing tools. That is true especially during a period of higher commodity values and increased market volatility that can lead to substantially greater margin requirements to maintain market positions on exchange-traded futures and options contracts – which, in turn, require additional borrowing of capital at levels several times normal amounts, the NGFA noted.
“For these firms and for their lenders, having alternatives to traditional bank borrowing is critically important to managing their risk and enabling them to perform marketing and risk-management functions on behalf of producers,” the NGFA said. “These are not risky strategies that introduce the type of systemic risk the Dodd-Frank law was designed to address. Rather, they are commonly used, important risk-management tools which, if placed into regulatory limbo, would create additional financial challenges for the U.S. industry and agricultural producers.