The National Grain and Feed Association (NGFA) has submitted a statement to the Commodity Futures Trading Commission (CFTC) urging that the agency clarify its proposed regulations by expressly excluding non-financial end users, including agricultural hedgers, from the margin and capital requirements that would apply to swap dealers and major swap participants.
The nation’s largest trade association comprising commercial hedgers of grains, oilseeds, feed and feed ingredients, and grain products also used the statement to reiterate its previous call for the CFTC to exclude agribusiness firms engaged in bona fide agricultural hedging activities from being classified as swap dealers, which would trigger a host of costly and burdensome regulations, including recordkeeping, reporting, business standards and practices, margin and capital requirements, and other new rules.
The rulemakings are part of the CFTC’s ongoing implementation of various provisions of the Dodd-Frank financial regulatory reform law. Among other things, the law requires the CFTC and Securities and Exchange Commission (SEC) to develop and implement regulations governing swaps, including determining what entities will be classified as swap dealers.
A swap is a commodity or financial instrument generally traded over-the-counter rather than on a regulated commodity exchange. 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. Swaps most commonly involve financial instruments and are used most heavily in the financial sector.
The NGFA’s statement asserted that Congress intended the swaps regulations to apply to market participants that present systemic risk to the U.S. financial system, not to agricultural hedgers. There is concern that a literal reading of the CFTC’s proposed definition of what constitutes a swap could ensnare thousands of agribusiness hedgers who offer risk-management tools to farmer-customers.
“The U.S. grain-marketing and risk-management system has been a model of efficiency, competitiveness and transparency,” the NGFA said in its statement to the CFTC. “Contracting practices, marketing and merchandising activities, and risk-management tools are well understood by market participants and regulators. Given the stability of the sector, we can see no reason to burden agribusiness firms engaged in hedging and providing risk-management services with costly new rules.”
Further, the NGFA said that the risk of being classified as swap dealers likely would cause agribusiness firms, potentially extending even to local country grain elevators, to limit the risk-management tools offered to producers. The NGFA said such a development would be contrary to the intent of the Dodd-Frank law, which contains provisions designed to enhance the range of risk-management tools agribusiness firms can offer producers to help them manage risk and enhance income.
Concerning the CFTC’s separate proposals to implement margin and capital requirements on swap dealers and major swap participants, the NGFA recommended that the agency “state clearly and definitively” that agribusiness hedgers will not be subject to, or affected by, such requirements. The NGFA said doing so is important so agricultural hedgers to not incur additional financial burdens on top of what already are greater borrowing requirements needed both to purchase relatively higher-priced commodities from producers and to finance margin calls on regulated futures exchanges to maintain futures market positions entered into to hedge market risks.