Milling & Baking News - November 1, 2011 - 33

Food industry gives nod to new speculative limits on futures
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would include both futures and swaps activity, and exemptions from these limits would be significantly tightened. Spot-month speculative limits for enumerated agricultural commodities would not be affected under the C.F.T.C.’s final rule adopted Oct. 18. Indications were the spot-month limits approved by the C.F.T.C. would take effect 60 days after the agency publishes a final rule on product definitions (including the definition of a swap), which was expected to occur in early 2012. It was expected non-spot-month limits will become effective after the C.F.T.C. is able to gather one year’s open-interest data on futures and swaps. It also was expected the final regulations will tighten eligibility for hedge exemptions. Most importantly, they would limit hedge exemptions for swap dealers to their business with counterparties that also would qualify for a hedge exemption. Todd Kemp, director of marketing and treasurer of the National Grain and Feed Association, indicated this was consistent with an N.G.F.A. recommendation to the C.F.T.C. two years ago and may help impose “reasonable limits on investment participation in futures markets.” The C.F.T.C.’s final regulations on speculative position limits also were expected to contain provisions implementing a definition of bona fide hedging. The bona fide hedge definition in the Dodd-Frank law is very similar to the definition as applied historically by the agency, Mr. Kemp observed. However, the C.F.T.C.’s proposed rule earlier this year would have narrowed transactions qualifying for bona fide hedge status. The bona fide hedge provisions in the final regulation were not yet known outside the agency, Mr. Kemp said. “There reportedly will be a number of examples of transactions the commission will view as bona fide hedges,” he said. “However, based upon statements from commissioners during the Oct. 18 meeting, those examples will not constitute an exhaustive list of transactions that would be considered to be bona fide hedges; rather, they are intended to be illustrative based upon what the C.F.T.C.’s staff believes exist currently.
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For now, it appears likely that most current bona fide hedging transactions for enumerated agricultural commodities will continue to qualify as bona fide hedges; but that will need to be confirmed by a careful reading of the final rule language.” Robb MacKie, president and chief executive officer of the American Bakers Association, said, “The C.F.T.C.’s vote in favor of position limits is a step in the right direction, although we were hoping for more. This new rule marks the return of the markets to their original intent — a

“While the new rule does increase the current position limits, before today’s vote, index funds had no limits due to hedge exemptions,” Mr. Martin said. “Index funds will soon have restrictions on investments similar to those placed on traditional speculators. These new limits will lead to decreasing volatility, returning some certainty to the market.” Mr. Martin said the A.B.A. will continue to work with the C.F.T.C. to address the issue of high position limits as well as possible exemptions to the limits during the rule’s implementation over the next year. “While the text of the C.F.T.C.’s final regulations has not been released yet — and will warrant close examination

‘This new rule marks the return of the markets to their original intent — a way for bakers and farmers to manage their respective risks. We commend the C.F.T.C. for taking a bold step forward today to address extreme volatility in the wheat market.’
— Robb MacKie, president and chief executive ofﬁcer, American Bakers Association

way for bakers and farmers to manage their respective risks. We commend the C.F.T.C. for taking a bold step forward today to address extreme volatility in the wheat market.” Cory Martin, the A.B.A.’s senior manager of government relations, added, “A.B.A.’s position all along has been for the removal of hedge exemptions on index funds and redefining them as traditional speculators. The new rule will place limits on index funds, which will prohibit their ability to buy and hold hundreds of thousands of contracts, with some exemptions remaining.” The A.B.A. has been engaged in discussions with the C.F.T.C. since late 2007 on this issue. “This has been one of the A.B.A.’s top priorities since the 2008 wheat crisis,” Mr. MacKie said. “Our members, most notably bakers engaged with the A.B.A. Commodity and Agricultural Policy Committee, have worked tirelessly to create solutions to decreasing market volatility. Their proposal to the C.F.T.C. to remove hedge exemptions and impose limits on index fund investment in the market played a critical role in today’s vote.” One area of concern for the industry was that the new rule still allowed position limits bakers viewed as too high.

once it is — the N.G.F.A. does conceptually support the C.F.T.C.’s action to continue to apply speculative position limits for enumerated agricultural commodities, which include grains and oilseeds,” said Randy Gordon, vice-president of the N.G.F.A. “We believe speculative position limits are a reasonable way to help prevent investment capital from overwhelming these comparatively small markets and to help promote efficient contract performance for bona fide hedgers. “The N.G.F.A. also supports the agency’s action to limit hedge exemptions for swap dealers to the portion of their business with counterparties that are bona fide hedgers. This important reform will enhance contract performance and help encourage that convergence occurs in a timely and predictable manner for traditional market participants who are hedging physical commodity exposure.” Mr. Gordon said the N.G.F.A. has concerns about the C.F.T.C.’s interpretation of the bona fide hedge definition contained in the Dodd-Frank law and said his organization will review the final rule with the policy goal of maintaining the bona fide hedging status of commercial hedgers as traditionally applied by the agency. MBN
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