Though it often does not make headlines, the alphabet soup of federal regulators continues to turn out hundreds if not thousands of pages of regulations each day. In just the past three years, the Commodity Futures Trading Commission alone has produced 67 final rules and thousands upon thousands of pages of regulations required by the Dodd-Frank Act of 2010 regarding everything from swap dealers to business conduct standards.
As a result of the new CFTC Dodd-Frank regulations, the commodity markets relied upon by farmers and ranchers for risk management are more transparent, especially to the CFTC as their primary regulator. However, this transparency has come at a cost to market participants through both intended and unintended consequences. Moreover, many of these costs have yet to be directly felt by individual farmers and ranchers.
Customer protection rule
One relevant issue is the CFTC’s recently finalized customer protection rule, which aims to protect farmers and ranchers from problems like those which resulted from the bankruptcies of MF Global and Peregrine. However, the residual interest provisions of the rule, which shorten the time customers have to post collateral to cover their margin deficits, is a case in which rules intended to protect customers – the farmers and ranchers who utilize futures markets for hedging – may have the unintended consequence of increasing customer risk by driving up risk management costs for the same farmers and ranchers the rule is intended to protect.
Though the CFTC asserts they do not believe the rule as proposed will have a negative impact on small farmers, the CFTC recognized the need for additional study of this issue and mandated a study be completed within 30 months of the issuance of the rule.
Still, the value of such a study is questionable when the CFTC has already pre-judged its result by altering the margin deadline before the results can be seen. In the words of CFTC Commissioner Scott O’Malia, it is this type of “ready-fire-aim” regulatory fiat – where outcomes are pre-defined regardless of the study of costs and benefits – which we find disconcerting.
However, to comply with the new regulations, we recommend that farmers and ranchers work with their lenders to establish third-party agreements with brokers through a line of credit. While these agreements will come at some cost, we believe this is the most cost-effective approach to post margin on a more expedited timeline as required by these regulations.
Another issue of importance to farmers and ranchers is the recently revised CFTC Rule 1.35 which requires all communications leading to a futures or swap transaction to be recorded, including voice and text message recording.
Voice recording systems cost upwards of $50,000, which is cost-prohibitive for most of those who work with farmers, ranchers, and small elevators.
Another new regulation which adds costs for farmers and ranchers is the requirement to register for a CICI legal entity identification number in order to participate in derivatives markets. Though this $200 registration is a rounding error for large agribusinesses, it is a meaningful cost for small farmers and ranchers.
We respect and appreciate the work of CFTC staff in writing dozens of rules under the compressed timeline given by the Dodd-Frank Act, but remain concerned that CFTC cost-benefit analyses have not adequately recognized the costs to small farmers and ranchers – the very people the agency was created to protect. Though the Dodd-Frank Act has given the CFTC additional responsibility to regulate financial markets including derivatives traded by large banks, it must recognize that its regulations and any resulting increased costs have a material and significant impact on farmers and ranchers.
Agriculture is the backbone of the American economy and for decades has utilized futures markets in order to provide a crucial risk management function not just for merchants and processors but for producers and consumers as well. We are concerned that rulemaking in Washington D.C. does not fully consider the impact on framers and ranchers, and limits access to crucial risk management markets and thus may increase rather than reduce risk.
We applaud the reconstitution of the Agricultural Advisory Committee to gather important feedback and advice to the Commission as it implements Dodd-Frank. Well-functioning markets need to be accessible to all farmers and ranchers, from small to large. Farmers and ranchers need to continue to work with their trade associations to share their concerns on final and proposed regulations with CFTC staff and commissioners, as well as members of Congress, to ensure our views are heard.
- Gregg Doud is President of the Commodity Markets Council. Michael V. Dunn is Senior Policy Advisor at Patton Boggs LLP