The Senate Committee on Agriculture Wednesday heard from a panel of market stakeholders during a hearing to reauthorize the Commodity Futures Trading Commission.
Panelists were invited to share their opinions of proposed new rules governing the CFTC as well as recent brokerage failures that have caused futures customers to question the market structure.
One such failure of MF Global in October, 2011, has been the center of much discussion for farmers, legislators and traders alike, serving as a call for tougher standards on futures markets.
"This Committee has been closely monitoring the MF Global case, where customer funds –money that rightly belonged to farmers, businesses, and individuals all across the country – went missing," Stabenow said in opening comments.
She said since then, the Ag Committee has focused on three goals: getting customers their money back, holding anyone engaged in wrongdoing accountable, and ensuring that proper customer protections are in place so that another failure doesn't occur.
Because of the failure of not only MF Global and another group, Peregrine Financial, along with data security breaches, unexplained price volatility and technology challenges, Stabenow said customer confidence has decreased.
A few proposed changes intended to protect customers in the event of another collapse include decreasing the time in which customers' margin calls must arrive to their futures commission merchant from the current three days to one day and changing the timing of FCMs' calculation of residual interest.
Several industry groups offered testimony during the hearing on proposed changes, including the National Grain and Feed Association. NGFA representative John Heck, senior vice president of The Scoular Company in Omaha, Neb., said the proposed changes could "radically alter" the way business is done in the futures industry.
Heck said decreasing the margin calls time would result in customers being required to send more money to their FCM, "potentially putting a greater amount of segregated customer funds at risk in the event of another FCM insolvency."
Additionally, he said changing the timing of FCMs' calculation of residual interest would "expose customers to much more risk."
In addition to comments on the CFTC rule, the NGFA also stated it believes the "U.S. bankruptcy code needs to be harmonized with the Commodity Exchange Act and CFTC regulations to clarify and ensure that customers come first in FCM insolvencies."
Testimony from Terrence Duffy, executive chairman and president of the CME Group, also reflected concern in the CFTC and proposed changes.
Duffy said at times the Commission has proposed "needless rules" on futures markets, which he said have a long history of oversight and regulation.
As NGFA did, he criticized the residual interest rule, noting its potential impacts on smaller FCMs.
"We believe this rule and others could have a very significant impact on certain sectors in the marketplace, particularly smaller FCMs that serve the agricultural community," he said.
He argued that the rule would require at all times an FCM's residual interest in segregated accounts should exceed the margin deficiencies of its customers. But that, he said, needs access to data in real time, which FCMs don't have.
"Without access to this data, FCMs will be required to maintain substantial residual interest in segregated accounts or require customers to significantly over-collateralize their accounts. We believe this will be a significant and unnecessary drain on liquidity that will make trading significantly more expensive for customers to hedge," he said.
Walter Lukken, CEO of the Futures Industry Association, made similar comments, noting that a provision requiring customers to pre-fund their margin would require customers to always keep excess funds in their FCM.
Though the plan for reauthorization did endure some criticism, Lukken in his testimony highlighted changes that deal with consumer protection.
"To a significant extent the proposed (CFTC) rules build upon and codify the recommendations that FIA made and rules the designated self-regulatory organizations have adopted," he said, noting that the group endorses the regulatory purposes in the proposed changes.
But, he said, the FIA did submit a letter to assist the Commission in "striking an appropriate balance among its several proposals to assure that the producers, processors and commercial market participants that use the derivatives markets to manage risks will be able to continue to have cost-effective access to the markets and a choice of FCMs"
The National Farmers Union praised the opportunity for a hearing on the CFTC, noting that Dodd-Frank placed larger responsibilities on the CFTC to protect customers.
"The MF Global and Peregrine debacles underscore the need for regulatory oversight of our financial and commodity markets. Now is not the time to turn back – CFTC must be allowed to continue in its important work," NFU President Roger Johnson concluded.
Complete testimony of all hearing participants is available here.