On July 21, 2010, President Obama signed the Wall Street Reform and Consumer Protection Act. Title VII of the Act, entitled “The Wall Street Transparency and Accountability Act,” amended the Commodity Exchange Act (CEA) to establish a comprehensive new regulatory framework for swaps and security-based swaps.The legislation was enacted to reduce risk, increase transparency and promote market integrity within the financial system.

However, certain provisions of the Dodd-Frank Act (DFA) are said to impact cooperatives’ ability to offer price risk management tools to producers in the future.

The House Committee on Agriculture recently began holding a series of hearings to review the implementation of the derivatives provisions (Title VII) included in the DFA. Here are excerpts from the remarks made at hearings last month.

“The complexity of Title VII shouldn’t be underestimated, but neither should the far-reaching impact it will have on our economy. Title VII isn’t just about financial firms – it has the potential to impact every segment of our economy, from farmers and ranchers, to manufacturers and energy companies, to health care and technology.

“I am concerned that the regulators may be considering rules at odds with the statute or with congressional intent. Although it may not have been perfect, Congress included an exemption in Dodd-Frank for end-users from the margin, clearing and exchange trading requirements. Yet, there are growing concerns among end-users that they may be subject to margin requirements for their over-the-counter trades – an outcome that is clearly inconsistent with congressional intent. Such a requirement will create a significant disincentive to responsible risk management practices that provide price certainty and stability, and allow companies to remain focused on their core businesses.”

Frank Lucas
Chairman of the House Committee on Agriculture

“We learned a number of important lessons from the financial crisis and lack of regulation of OTC financial markets, and Congress crafted legislation that, we hope, reduces the likelihood of a repetition of that near-disaster. However, it is important to emphasize that regulated futures markets and futures clearing houses operated flawlessly.

“We support the over-arching goals of DFA to reduce systemic risk through central clearing and exchange trading of derivatives, to increase data transparency and price discovery, and to prevent fraud and market manipulation.

Unfortunately, DFA left many important issues to be resolved by regulators with little or ambiguous direction and set unnecessarily tight deadlines on rule-makings by the agencies charged with implementation of the Act.

“CME believes the [Commodity Futures Trading Commission] has proposed rules inconsistent with DFA or that impose unjustified costs and burdens on both the industry and the Commission.

We ask Congress to extend the rule-making schedule under DFA to allow time for industry professionals of various viewpoints to fully express their views and concerns to the Commission and for the Commission to have a realistic opportunity to respond to those views and assess the costs and burdens imposed by the new regulations.

We urge Congress to ensure that implementation of DFA is consistent with the congressional directives in the Act and does not unnecessarily harm hedging and risk transfer markets that U.S. companies depend upon to reduce business risks and increase economic growth.”

Terrence A. Duffy
Executive chairman, CME Group, Inc.

“Due to market volatility in recent years, cooperatives are increasingly using over-the-counter (OTC) derivative products to help them diversify their exposure by customizing their hedges. In addition, OTC derivatives offer cooperatives the ability to provide specialized products to farmers and ranchers to help them better manage their risk and returns.

A co-op can aggregate its owner-members’ small volume hedges or forward contracts and offset that risk with a futures contract or by entering into another customized hedge via the swaps market.

“The National Council of Farmer’s Cooperatives (NCFC) believes that agricultural cooperatives should be treated as end-users since they aggregate the commercial risk of individual farmer-members and are treated as such by the Commodity Futures Trading Commission (CFTC) currently.

In addition, we seek an exclusion of farmer cooperatives from the definition of a swap dealer and an exemption of farmer co-ops from mandatory clearing or margining.”

Ed Gallagher
President of Dairy Risk Management Services, a division of Dairy Farmers of America, and vice president of risk management for Dairylea Cooperative

“Data clearly show that the geographic segment of the U.S. cattle industry represented by the 16 states represented by the members of this subcommittee is declining rapidly in terms of the number of beef cattle operations, the size of the beef cow herd and the volume of cattle and calf production.

“A shrinking industry unable to keep pace with domestic consumption is, undeniably, an industry in serious trouble – the kind of serious trouble that warrants sweeping remedial reforms such as those Congress passed in the Wall Street Reform Act.

“A principal factor driving the rapid contraction of the U.S. cattle industry is a dysfunctional cattle market that lacks robust competition and adequate transparency, which results in a marketplace that is subject to manipulation and distortion.

“R-CALF USA is particularly concerned with the practice whereby large beef packers, which are legitimate hedgers for a certain volume of cattle, enter the commodity futures markets also as speculators with the intent and effect of manipulating the futures (and hence the cash price) of cattle.

These beef packers should not be entitled to the end-user exception for speculative trades beyond their physical needs for slaughter cattle.”

Bill Bullard
CEO, R-CALF USA