The Commodity Futures Trading Commission (CFTC) is readying yet another attempt to set limits on speculative trading and swaps positions in a proposed rule expected to come out early in 2020.
CFTC Chairman Heath Tarbert told DTN in an interview last week that a draft for a proposed rule is on his desk for review.
“We’re reading through it, thinking about it, we’re reaching out to key stakeholders just to make sure we get it as right as it can be, knowing position limits is just a tough issue,” Tarbert said. “So there may not be universal acclaim, but nonetheless, we want to get a position limits rule out there that is reasonable, that achieves the targeted objective that no one can squeeze or corner our markets, and is not disruptive to the current marketplace.”
The regulatory battle over position limits for speculative traders in futures goes back to the 2010 Dodd-Frank Act. A federal judge struck down a 2011 rule a year later as the judge ruled the CFTC was required to prove that position limits were necessary to reduce or prevent excessive speculation in the markets.
The CFTC re-proposed a rule in 2013 and then followed up with another proposal in 2016, each time trying to distinguish the difference between a speculator and a bona fide hedger in the markets.
The proposal would affect an array of agricultural, energy, metal and other commodities traded on major exchanges. The purpose is to prevent a small number of traders from cornering a market, but exempt limits for bona fide hedging in physical commodities.
Tarbert’s predecessor as chairman, Christopher Giancarlo, wanted to launch another proposal for position limits before he left office. Tarbert said the new draft incorporates a lot of comments and recommendations going back as far as the 2011 rule. The CFTC’s Agricultural Advisory committee raised a number of issues with the 2016 proposal. Tarbert said the commission staff is reaching out to relevant stakeholders ahead of time on specific agricultural products.
“We will re-propose it again because the 2016 version, a lot of people had concerns, particularly American agriculture,” Tarbert said. “What we want to [do] is so different from that, so we will re-propose it early next year — early 2020 — with the hopes of finalizing by the end of 2020.”
The crux of the debate remains over how to define who is a speculative trader and who is a bona fide hedger. Limits apply only to speculative traders, but then the question becomes how do you define a commercial trader/hedger and how do you define a bona fide hedge?
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“I think we have made it very clear we will come down on the side of assuring all current risk-management practices are treated as bona fide hedges so if anyone really does have a commercial risk they are trying to mitigate, they are not subject to the position limits,” Tarbert said.
Todd Kemp, senior vice president for marketing at the National Grain and Feed Association, said each successive proposal from CFTC has gotten a little better. Earlier position-limit proposals had tried to lump all industries together.
“That one-size-fits-all approach doesn’t work, and it was really a threat to exclude traditional hedging strategies our industry had used for decades,” Kemp said. “So our task at the time was to try to educate the CFTC on some real hedging strategies that needed to be bona fide.”
Though NGFA doesn’t know specifically what may be in the rule, Kemp thinks it will be “much more palatable to our industry than some of the earlier versions were.”
In looking at the balance for needing speculators in the market and when the futures may be overloaded with hedge funds and the like, Kemp said the main issue still comes back to the need for convergence between the cash and futures markets.
“That convergence between cash and futures has got to be dependable, it’s got to be consistent,” Kemp said. “It’s not always perfect, but that’s sort of a fundamental principle of futures markets that really needs to work. And I guess that’s the measuring stick with which we’ve evaluated all of these proposals over the years.”
Grains and oilseed commercial traders remain core customers who rely on futures to manage risk, Kemp noted, and help farmers manage their risk as well. NCGFA became concerned about the role of speculative traders in 2008 when commodity markets spiked as hedge funds and index funds had large one-way positions for long periods of time and would not relinquish those positions.
“We had real problems with convergence then, so we certainly don’t want to see those problems reoccur,” Kemp said.
Tarbert was confirmed as CFTC chairman back in July to a term that runs until mid-April 2024. Tarbert came to the CFTC after having served as a Treasury Undersecretary for International Affairs earlier in the Trump administration. He also served as special counsel for the U.S. Senate Banking, House and Urban Affairs Committee during the drafting of the Dodd-Frank Act.
Prior to his confirmation, Tarbert also received strong backing from several major agricultural commodity groups during his nomination that wrote senators citing Tarbert’s intent focused on “learning the issues and challenges facing the agriculture sector and advocating on our behalf.” The ag groups cited Tarbert’s support for continuing an agricultural commodity conference started under Giancarlo.
While the goal right now is to get a position limits rule out the door, the CFTC will again have an agricultural advisory meeting in the Kansas City area in April and Tarbert said he expects the rule will be a topic of discussion there.
Tarbert said he also is planning to hold a formal public CFTC meeting in Kansas City as well, the first time outside of Washington.
“And if it goes well, we’ll look at having more of them, as well, because it’s really important we don’t exist in a Washington bubble — that we get out there; but I think having the full commission meet and see us is important as well.”
During a congressional hearing last year, Giancarlo expressed concern that fewer farmers were using futures tools for risk management, partially due to crop insurance coverage. Tarbert said he has not heard that concern, saying that, in some cases, farmers are individually using futures products and in other cases, they are working with their co-op and locking in the prices so the risk management is there, but the co-ops actually use the futures markets.
“The real issue is not whether we want more farmers themselves actually using the futures markets, but making sure whatever price discovery or risk-management needs are met, ultimately, whether it’s through an intermediary or whether they are individually using futures products,” Tarbert said.
Tarbert said he had recently visited a farm cooperative in Kansas that offered a suite of products that gave farmers different options to use the futures markets. Still, not every farmer is prepared for futures hedging, especially when it comes to the expectations of margin calls.
“The futures markets can be really helpful, but you have to make sure you fully understand the risks involved with margins and everything else.”
While the CFTC works on its position-limits rule, the commission has been operating since 2013 without an official reauthorization bill from Congress. The Senate Agriculture Committee has held hearings this year and the House Agriculture Committee passed its bill on a voice vote last month.
Tarbert said the House bill is “evolutionary, not revolutionary,” but it does contain some specific language allowing the CFTC to receive more trading information in the emerging spot market on “digital assets.”
“It’s a way, I think, of gaining greater insight for us into the digital assets and market, which I think can be particularly fragmented and opaque nowadays,” Tarbert said. “There are a lot of exchanges out there over the internet, but they are not the traditionally regulated exchanges by us or the SEC.”
Tarbert also highlighted the CFTC continues to look at concerns about consolidation among futures commission merchants that agriculture and other industries rely on. More than four years ago, the issue was raised within the CFTC’s Agricultural Advisory Committee that futures commission merchants (FCMs) are consolidating. That trend has only continued since then. A decade ago, the CFTC showed 71 FCMs that carried customer assets, but that number has now fallen to 55.
“The concern is if you are an independent futures commission merchant, can you survive?” Tarbert said. “Because if the answer is no, then we need to know why. It may be something out of our control like interest rates and things of that nature, but if there is anything we can do, consistent with our statutes and customer protection, to make things better for the independent FCMs that serve ag, then that’s something that I’m interested in doing.”
Kemp said commissioners and staff are more attuned to some of the concerns in agriculture than in the days just following the passage of Dodd-Frank. Tarbert stressed that it’s critical to keep futures markets as viable risk management tools for farmers going forward.
“I’ve said if these markets aren’t working for farmers and ranchers, then they aren’t working. So while we do our tackling of 21st century commodities and digital assets, I want to make sure the agency doesn’t lose sight of that cornerstone of why we were created, which is agriculture,” Tarbert said.
Chris Clayton can be reached at Chris.Clayton@dtn.com
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