President Signs Financial Reform Bill

In a razor thin vote of 60-39 last Thursday the Senate approved the Restoring American Financial Stability Act of 2010 (H.R. 4173), the latest attempt by Congress to help address problems that caused the recession, costing taxpayers $145 billion.

President Barack Obama signed the bill into law today.

Senator Blanche Lincoln, (D., Ark.), chairman of the Senate Agriculture Committee, and the one who helped craft the derivatives title said the bill " brings a $600 trillion unregulated derivatives market into the light of day, ending the days of Wall Street’s backroom deals and putting this money back on Main Street where it belongs. It also prevents excessive speculation, stabilizing energy prices for consumers and providing certainty in the commodity markets for our farmers and ranchers."

Her Republican counterpart on the committee, Saxby Chambliss, said that there was no disagreement among Republicans and Democrats that there needs to be greater market transparency, more derivatives clearing and compliance with a whole host of business conduct and efficient market operation regulations.

"I wholeheartedly support efforts to make the swaps market more transparent," Chambliss said. "This bill will provide that much needed transparency, but unfortunately, the overreaching nature of this legislation goes far beyond evaluating the market place and policing it for abuse. I cannot support the vast regulatory intrusion and costs that our businesses and consumers will face once this becomes law."

For agriculture it gives the government authority for setting aggregate speculative position limits for market participants across various exchanges to better regulate market manipulation.

It also requires derivatives to be traded in clearinghouses but has an exemption for legitimate end-users of commodities – the farms and businesses that physically use the commodities. Nearly all swaps, including over-the-counter derivatives, will be under mandatory trading rules.

Current exemptions for large financial speculators are effectively curtailed by listing the types of swaps subject to mandatory trading and clearing requirements. There are provisions to allow some flexibility on the part of the Commodities Futures Trading Council (CFTC) and the Securities and Exchange Commission to work with financial entities, such as small community banks, credit unions and the Farm Credit System.

There is strengthened authority for the CFTC and the SEC to determine if certain market actions are disruptive or manipulative, as well as improved authorities to take enforcement actions when deemed necessary. In addition, the Federal Reserve is provided authority to step in if it determines actions by large financial entities are acting in a disruptive or manipulative manner.

Derivatives are financial instruments whose value "derives" from something else, and farmers have increasingly turned to the derivatives market to sell their crops and livestock.

The question for producers is whether the new rules will make hedging more expensive. Some say new requirements on big players will create higher costs for small players, including the cash dealers will have to put aside to enter into private derivatives transactions.

Joel G. Newman, the American Feed Industry Association’s president and CEO, in a statement said the group is pleased with the reforms, many of which AFIA has called for over the past two years.

AFIA said it will immediately begin working with the CFTC and others to ensure the regulations drafted to put the new law into effect remain true to its goals for a "well-regulated futures market that protects bona fide hedgers against the impacts of the massive speculative limit exemptions."

Only three Republicans -- Susan Collins and Olympia Snowe of Maine and Scott Brown of Massachusetts -- voted with Democrats in the initial vote to end the debate which came up for a cloture vote earlier in the day on Thursday.