NGFA Tells CFTC to Revise New Regulatory Framework

August 21, 2000

The National Grain and Feed Association has urged the Commodity Futures Trading Commission to amend its proposed new regulatory framework for futures contracts to provide regulatory relief to agricultural futures and options contracts. In a statement filed with the CFTC on its proposed new regulatory framework, on which comments are due today (Aug. 21), the NGFA cautioned that the agency’s historic practice of heavily regulating agricultural futures markets runs the risk of potentially restricting access to useful risk-management tools by farmers and commercial users.

"…[I]t is perceived that (under the CFTC proposal) every other (non-agricultural) market will be given more freedom and greater access to a wider range of risk-management tools, while agriculture is granted little, if any, additional contracting and risk-management flexibility," wrote NGFA Risk Management Committee Chair Tom Coyle, general manager of Chicago and Illinois River Marketing LLC, a subsidiary of Nidera Inc., Chicago. "Agricultural markets are not, in our judgment, sufficiently different from other markets to justify the proposed disparity in regulatory treatment."

The CFTC’s proposed new regulatory framework would divide regulated futures, options and other markets into three classes of regulation: 1) "recognized futures exchanges" that would be regulated in a manner similar to current exchanges; 2) "derivatives transaction facilities" that would be subject to less-direct regulatory involvement by the CFTC, but would still be subject to oversight by the agency; and 3) "multilateral transaction execution facilities" that no longer would be monitored actively by the CFTC and would be subject only to enforcement of the antifraud and anti-manipulation provisions of the Commodity Exchange Act.

In its proposal, the CFTC said that while agricultural markets might be considered as eligible for trading as a less-regulated "derivatives transaction facility," these markets will be subject to more rigorous tests, analyzed on a case-by-case basis "…if determined to have a sufficiently liquid and deep cash market and a surveillance history based upon actual trading experience to provide assurance that the contract is highly unlikely to be manipulated."

The NGFA told the CFTC that there are few, if any, markets – agricultural or otherwise – that have such unlimited supplies that they cannot be manipulated. So, it said, "[w]e take issue with the CFTC’s premise that there is somehow a bright defining line among exchange products being traded (i.e., those that are subject to manipulation and those that are not)." The NGFA said it agreed that "there should be some controls in place to protect against manipulation, but there may be more limited (and less costly) ways for markets and the CFTC to effectively police and deter manipulation without a continuation of existing regulations in their entirety."

NGFA supported the CFTC’s proposal to reduce some of the regulatory burdens imposed on "intermediaries," such as futures commission merchants and introducing brokers, because the changes would contribute to improved market efficiency and performance.