The Commodity Futures Trading Commission finalized a rule on Tuesday that alleviates one of the grain industry’s biggest concerns about the customer protection rule — automatic changes to when firms need to post collateral.
Timothy Massad, chairman of the CFTC, explained to attendees at the National Grain and Feed Association annual convention that he envisions a different path for the futures regulator: pragmatic, balanced, and willing to listen.
“The key way I like to think about our job is we should be measuring market success from how well the markets are serving end users,” he said. “So a key priority for me is to address some of the issues end users have raised with our rules.”
CFTC finalized the customer protections rule in October 2013. The most controversial part of the rulemaking dealt with what happens when a customer’s account has insufficient margin. The futures commission merchant (FCM) commits its own capital — referred to as residual interest — to cover the difference until the customer tops off his margin account.
Currently, the deadline for when FCMs must make sure all accounts are properly margined is 6 p.m. on the day following the trade, but the rule would automatically change that deadline to 9 a.m. the day following the trade in 2018. That’s the part that frustrated the grain industry. It meant that customers would likely have to commit more margin funds to their account than were actually required, which would put more customer money at risk in the case of another FCM failure like MF Global.
Massad said the rule finalized Tuesday removes the automatic change in the deadline.
“An earlier deadline can help make sure that FCMs always hold sufficient margin and do not use one customer’s margin to support another customer, but it can also impose costs on customers who must deliver margin sooner,” Massad said. “We will do a study of how well the current rule and deadline are working, the practicability of changing the deadline, and the costs and benefits of any change.”
Any future change to the residual interest deadline would require another proposed rulemaking and public comment period.
NGFA President Randy Gordon said changes to the residual interest rule are a very good example of how the CFTC’s focus has changed since Massad and two other commissioners took the helm last summer. They’ve adopted a more studious approach, looking back at the rules passed in the wake of the Dodd-Frank financial legislation and looking to improve them.
“It’s a new CFTC. We’ve found them to be very good to work with,” Gordon said. “He asks really good questions, and he’s at least very open to hearing the dialogue. I think too often in the past that didn’t happen to the degree it should have. He understands, I think maybe better than his predecessor, that a cookie-cutter approach to these kinds of regulations really doesn’t work very well, and that ag is different. It’s not where most of the risk was in the financial meltdown.”
Massad declined to compare himself to his predecessor, Gary Gensler, but he did say the CFTC faces a different task now than it did post-crisis. In those days, Congress gave CFTC a mandate to create a regulatory framework for the swaps market within a year.
“That was a tough challenge. We are in a position now where we can say, OK, most of those rules have now been written, let’s try to go back and look at which ones need fine tuning,” Massad said. “Obviously in the case of position limits, it’s a vital rule and that’s why we are taking our time and trying to listen very carefully.”
CFTC must define a bona fide hedge as part of the position limits rule, and many of NGFA’s members expressed concerns that anticipatory hedging and cross-commodity hedging could be reclassified as speculative trading. NGFA and its Risk Management Committee have submitted formal comments to the CFTC and have been working to explain to the commissioners how a wide variety of strategies help grain elevators offset risk.
“I think the broad category of anticipatory hedging is one that needs to be recognized,” Massad said in response to a question from the audience. “We’re working through all of that. We’ve gotten a lot of input, and we recognize that hedging strategies are complex. The challenge for us is how to write rules that work. That’s why we’re taking some time.”