The nation’s largest trade association comprising commercial hedgers of grains, oilseeds, feed and feed ingredients, and grain products on June 7 had urged the agency to take action to extend what otherwise would be an automatic mid-July implementation of provisions of the Dodd-Frank financial regulatory reform law that pertain to swaps and exclusions previously granted by the CFTC to certain types of transactions.
The CFTC on June 17 responded by proposing to issue a so-called “exemptive relief order” for provisions of the new law scheduled to take effect on July 16 that are predicated upon the agency’s still-ongoing development of regulations defining various swap-related terms, including what constitutes a swap and what types of entities are considered to be “swap dealers.” In addition, the proposed order would apply to certain types of transactions that under the Dodd-Frank law no longer will be covered by exemptions or exclusions previously issued by the CFTC using its authority under the Commodity Exchange Act – including the agency’s authority to allow options on agricultural commodities.
The CFTC’s proposed exemptive relief order, which was issued following a June 14 public meeting, would extend the swaps-related deadlines until either Dec. 31 or the effective date of its final regulations, whichever occurs earlier. The agency has indicated it will finalize the proposal soon after the end of the public comment period on July 1.
The NGFA noted that existing marketing tools that utilize agricultural options will be superseded by the new law, which states that agricultural commodity options and agricultural swaps may not be offered until approved by the agency through rulemaking. While the CFTC believes it has the authority to allow agricultural swaps, it does not think authority exists under the Dodd-Frank law for agricultural commodity options to be offered until it issues final regulations defining swaps-related terminology.
The NGFA cited two off-exchange agricultural options-based marketing tools as examples of the kind of transactions that could be threatened unless the CFTC takes action:
• Over-the-counter agricultural options.
• Grain “re-po” agreements and similar types of transactions under which grain merchandisers elect to transfer title of grain to a lender or other market participant with an option to repurchase at a later date. These transactions have the advantage of having the lender or other market participant assume the futures position of the grain merchant, thereby relieving it of the responsibility for meeting potential margin calls while also providing access to working capital.
“We believe the commission’s proposed order will address our concerns and ensure that hedgers and agricultural producers will be able to access a full range of risk-management tools, which are especially important in the current environment of relatively higher commodity price values and concerns about access to sufficient financial resources to manage price and inventory risks,” the NGFA told the CFTC.