The Commodity Futures Trading Commission is taking steps to improve oversight of the futures markets and bring greater transparency and scrutiny to the types of traders in the marketplace, including large index traders.
According to a CFTC news release, the policy initiatives are aimed at addressing concerns including the lack of convergence between the futures and cash prices, the impact of higher margin requirements, and the role of speculators and commodity index traders. The concerns were raised at a CFTC forum April 22 in Washington, D.C.
The National Grain and Feed Association commended the agency for “prudent, well-reasoned steps that should begin to address some of the core issues that have contributed to futures market volatility and the lack of convergence.”
Sen. Tom Harkin, D-Iowa, chairman of the Senate Committee on Agriculture, Nutrition and Forestry, noted, “Commodity markets are always uncertain, but record high agricultural and energy prices merit additional scrutiny, so this announcement outlines a prudent approach and it's urgently needed for American commodity producers and consumers.”
For index trading and speculators, the CFTC will develop a proposal to routinely require more detailed information from index traders and swaps dealers in the futures markets, and review whether classification of these types of traders can be improved for regulatory and reporting purposes.
In addition, the commission has voted to withdraw the proposed rulemakings that would have increased the federal speculative position limits on certain agricultural futures contracts and created a risk management hedge exemption from the federal speculative position limits for agricultural futures and option contracts.
The CFTC noted in the press release, “As part of this data gathering and policy review, the commission will be examining the policy of CFTC staff granting exemptive relief from the CFTC's federal speculative position limits relating to agricultural commodity index trading. During this review period, the commission will be cautious and guarded before granting additional exemptions in this area.”
For farmers and agribusiness, the CFTC will review and propose revisions to improve the effectiveness of the current agricultural trade options program. According to the CFTC, this risk management program may provide producers with an alternative for hedging price risk with the added benefit of a fixed premium.
The CFTC plans to develop a proposal for allowing the clearing of agricultural swaps. This initiative will provide farmers and grain merchandisers with another choice for managing price and basis risk with the benefit of centralized clearing and the regulatory transparency that accompanies clearing.
The CFTC will publish a monthly publication on trader data for agricultural and other markets, beginning in July 2008, to provide greater market transparency.
The CFTC has also launched an investigation into the February-March 2008 price run-up in the cotton futures markets. The specifics of the ongoing investigation remain confidential.
The CFTC is coordinating with agricultural banking authorities, including the Federal Reserve Banks of Chicago and Kansas City as well as the Farm Credit Administration, regarding financing and credit issues arising from higher margins in the futures markets.
The Agricultural Advisory Committee, under the leadership of Commissioner Michael Dunn, will work on several issues worthy of further industry input and study in the coming months, including:
- Developing solutions for improving convergence in the futures and cash markets.
- Discussing practices of exchanges on determining margin, daily price limits and methodologies of setting settlement prices.
- Facilitating discussion on the role and size of over-the-counter agricultural swaps.
- Determining whether there are additional studies agricultural market users believe the Commission should undertake relevant to current agricultural commodity prices.