The National Grain and Feed Association (NGFA) commended the Commodity Futures Trading Commission (CFTC) for removing outdated constraints that previously existed for certain types of off-exchange agricultural transactions when it voted unanimously last week to issue final regulations on agricultural swap transactions.
Specifically, the NGFA praised the CFTC for not imposing any additional regulatory restrictions on agricultural swaps than would apply to non-agricultural swap products. The NGFA noted that safeguards incorporated under the Dodd-Frank law provide “more-than-ample protection in the swaps marketplace for both agricultural and non-agricultural swaps,” and that there was “no compelling reason to place additional (regulatory) burdens on agricultural swaps.”
The rulemaking is part of the CFTC’s ongoing implementation of the Dodd-Frank financial regulatory reform law enacted by Congress last year.
The Dodd-Frank law, among other things, requires that swaps be cleared through a designated contract market or swap-execution facility. The law also mandated registration, reporting, business standards, and capital and margining requirements for swap dealers and major swap participants. In separate comments submitted to the agency earlier this year, the NGFA urged the CFTC to exempt bona-fide hedgers and end-users of agricultural commodities from costly and burdensome regulations that will apply to swap dealers. Congress specifically included in the law a provision 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. Final regulations on the types of entities considered to be swap dealers or major swap participants have not been issued yet by the CFTC.
Swaps are commodities or financial instruments generally traded over-the-counter rather than on a regulated commodity exchange, and 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. They are used most prevalently in financial instruments.
The CFTC voted 5-0 during its public meeting on Aug. 4 to approve issuing final regulations on agricultural swaps. During the public meeting, CFTC staff members quoted heavily from the statement of support submitted by the NGFA in April in response to the agency’s initial proposal and request for comments. The final regulations are scheduled to be published in the Federal Register later this week.
The NGFA said it believes categorizing swaps involving agricultural commodities in the same way as those for non-agricultural products will create a regulatory framework that could encourage the development of additional risk-management tools for use by agricultural producers and facilities involved in grain-handling, feed manufacturing and grain processing operations.
In particular, the NGFA had noted that the CFTC’s “overly restrictive” previous rules applying to agricultural trade options – which included high net-worth requirements for those participating in such transactions – had resulted in limited-to-no-use of such instruments. That situation, the NGFA said, will be remedied by the CFTC’s final regulations, which will result in lower net-worth requirements for “eligible contract participants” that could engage in swap transactions, including those for agricultural commodities. 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.