Farm and commodity groups have submitted comments to the Senate Agriculture Committee regarding the reauthorization of the Commodity Futures Trading Commission, asking for stronger protections for futures market customers following the collapse of brokerage firms such as MF Global.
The comments were solicited by Sen. Debbie Stabenow, D-Mich., Chairwoman of the Senate Ag Committee, and Sen. Thad Cochran, R-Miss., ranking member, to be used as suggested improvements prior to CFTC reauthorization.
In its comments, the National Grain and Feed Association pointed out that on average, futures customers have not received 11% of their segregated funds that were held by the Futures Commission Merchant MF Global. Consequently, NGFA said a primary focus of the reauthorization process should be to enhance customer protections to protect against future brokerage insolvencies.
The group suggested reforming the bankruptcy code by: clarifying that customers come first in a Futures Commission Merchant failure; allowing the CFTC to appoint its own trustee in an FCM failure; removing protections that involve misappropriation of FCM customer property; coordinating CFTC rules and the bankruptcy code concerning FCM liquidation; and authorizing the formation of committees specifically to represent futures market customers.
An additional option, NGFA suggested, would be create insurance coverage for FCM insolvencies. The group is awaiting results of a Futures Industry Association analysis of such an option and its cost, as well as the outcome of an online survey of commodity futures customers' interest and input on such products.
"It is important to note that the solution on insurance to protect customers is not necessarily a government or legislated solution," the NGFA said. "It may be that some form of privately provided product is more cost-effective and appropriate."
In addition, the NGFA recommended establishment of a pilot program to test the concept of introducing an optional, fully segregated FCM account structure for futures market customers.
The NGFA letter also expressed increasing industry concerns about the impacts of high-frequency trading on agricultural futures markets. Though the group said administrative action would be more appropriate, other options include: requiring high-frequency traders to register with CFTC; require margining, even if no positions are held by HFTs at day's end; and adding other measures to ensure HFT does not disrupt hedging in futures markets.
The National Farmers Union also submitted comments to the Senate Ag Committee. NFU President Roger Johnson asked for increased penalties for violators, investigating HFT, limiting the role of index funds, and curbing excessive speculation.
"At the time of their creation, commodity markets were designed to serve as a tool for commercial end-users and hedgers to mitigate price and uncertainty risks faced in their enterprises," Johnson said. "The commodity markets were – and still should be – used to establish fair prices according to supply and demand fundamentals. Unfortunately, massive positions held by speculators and a culture of deregulation has distorted these markets."
The CFTC's statutory authorization expires in September. The House Ag Commitee will hold a hearing regarding the reauthorization Tuesday.