Agricultural Swaps Regulation - Comment Letters

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Dodd-Frank Timeline, Commodity Options and Agricultural Swaps
Final Rule-Swaps Effective Date - Swaps Effective Date-Options
August 10, 2011 December 31, 2011 June 26, 2012

Comment letters addressing agricultural swaps regulation. Letters submitted between October and December 2010 addressed the advance notice of proposed rulemaking (ANPRM) on agricultural swaps and commodities. Of these letters, many also addressed the CFTC proposed rule on the agricultural commodity definition.

Letters dates in late March-early April 2011 addressed the final set of proposed rules, which were approved at the CFTC Open Meeting, January 20, 2011.

Commodity Options and Agricultural Swaps Working Group - April 11, 2011

Commodity Options and Agricultural Swaps
Agricultural Commodities Definition
April 11, 2011

The comment letter was submitted by the law firm Cadwallader, Wickersham & Taft LLC on behalf of the the Commodity Options and Agricultural Swaps Working Group, which consists of the following entities:

  • Barclays Capital,
  • Citigroup,
  • Credit Suisse Securities (USA),
  • JPMorgan Chase & Co.,
  • Morgan Stanley, and
  • Wells Fargo & Company.

The Working Group requests that the commission "reconsider its proposal to regulate options on physical commodities as swaps," and instead permit options on physical commodities to be traded "subject only to the conditions that the transaction:

  1. is intended to be physically settled upon exercise, and
  2. meets the requirements currently set forth in Commission Regulation 32.4 for trade options."

The letter suggests that, until its rules regarding the defining of the term "swap,", its ruling on agricultural swaps should be deferred.


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National Council of Farmer Cooperatives - April 4, 2011

Commodity Options and Agricultural Swaps
April 4, 2011

From the comment letter:

"While NCFC encourages allowing agricultural swaps to trade on SEFs and DCMs, NCFC members do not believe that their specific needs can largely be met by those trading platforms. The low volume, odd lot amounts and routinely customized products in agriculture would not be of great enough significance to be formally listed or centrally cleared.

Additionally, any increased requirement for capital and margin could render the cost of the transaction higher than the value of providing a needed risk management tool. This would increase the price risk to cooperatives and farmers, and would be counter to the intent of the Dodd-Frank Act to decrease risk to the market place. Finally, agricultural swap transactions by cooperatives do not pose a significant risk to the health of the U.S. financial system."

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Amcot - April 1, 2011

Commodity Options and Agricultural Swaps
March 29, 2011

From the comment letter:

"In the case of several agricultural commodities, excessive speculation and volatility has rendered the futures market almost unusable for both buyers and sellers of the physical commodity and its end-users because the financial resources required to support both physical and futures positions have become such a burden that they impede interstate commerce."

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CME Group - March 29, 2011

Commodity Options and Agricultural Swaps
March 29, 2011

From the comment letter:

"We agree with the commission's assessment that subjecting agricultural swaps to Dodd-Frank's regulatory regime would be consistent with the public interest. Permitting agricultural swaps to transact under the same terms and conditions of other swaps will provide greater certainty and stability to the agricultural swaps market and will advance many of Dodd-Frank's goals, including increased pre-trade price transparency, and the reduction of systemic risk through the use of central party clearinghouses. Applying the same rules to agricultural swaps as to all other types of swaps will also ensure that only appropriate persons enter into agricultural swaps."

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Federal Energy Regulatory Commission - April 4, 2011

Commodity Options and Agricultural Swaps
April 4, 2011

From the comment letter:

"We have previously submitted comments on other proposed Dodd-Frank implementing rules in which we explained that, depending on how broadly the term "swap" is construed, CFTC regulation of swaps could lead to inconsistent regulation of participants and transactions subject to FERC jurisdiction, and in particular the organized electricity markets.4 For example, we noted that forward capacity sales in organized markets (i.e., regional transmission organizations and independent system operators) could be subject to regulation as "swaps," depending on how that term is defined...Under the proposed rule, these and other such arrangements could be subjected to potentially conflicting regulation by the CFTC and FERC."

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Futures Industry Association/International Swaps and Derivatives Association - April 1, 2011

Commodity Options and Agricultural Swaps
April 1, 2011

The Futures Industry Association (FIA) and International Swaps and Derivatives Association (ISDA) support the proposed rule, which would "remove any need for distinguishing between an agricultural commodity and a non-agricultural commodity for the purpose of identifying the law applicable to a swap transaction." Further, agricultural swaps should be subject to the same legal requirements as other commodity swaps. Finally, the FIA and ISDA provide brief answers to seven questions posed by the CFTC in the rule proposal.

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Futures Industry Association - October 22, 2010

Agricultural Swaps ANPRM
October 22, 2010

From the comment letter:

"FIA believes that agricultural swap transactions should be subject to the same regulatory regime as other categories of swaps, and that there is no basis for imposing a separate system of regulation on agricultural swaps. It is recommended that the CFTC confirm that agricultural swaps (including options) are encompassed within the definition of "swaps" under the Dodd-Frank Act, make a separate determination as to the agricultural swaps that should be subject to the clearing and execution requirements under Dodd-Frank, and extend all of the regulatory requirements under Dodd-Frank, such as reporting, to agricultural swaps."

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International Swaps & Derivatives Association - October 27, 2010

Agricultural Swaps ANPRM
October 27, 2010

From the comment letter:

"The ISDA requests the commission adopt rules that place agricultural swaps on 'an even regulatory plane' with other commodities. It is suggested that additional restrictions may impede the transfer of risk between producers, hedgers, and commercial end-users."

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Cargill Risk Management - October 27, 2010

Agricultural Swaps ANPRM
October 27, 2010

From the comment letter:

"Agricultural swaps and OTC options have served the public good by allowing agricultural producers and processors to hedge their commodity price exposure economically and efficiently. Given that agricultural swaps have performed well, and that additional protections for all swaps arc established under Dodd-Frank, we see no need or purpose for imposing additional regulatory requirements on agricultural swaps and options.

"Any additional requirements would discourage and make the use of these instruments less economical, penalizing hedgers seeking to mitigate risk. In implementing the provisions of the Dodd-Frank Act, therefore, the Commission should adopt rules that would encourage the continued use of these valuable hedging tools. Consideration should be given to expanding hedging opportunities by allowing agricultural trade options to non-ECPs, provided the additional protections above are also established for this category of end-user."

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The Gavilon Group - October 28, 2010

Agricultural Commodities Definitions
Agricultural Swaps ANPRM
October 28, 2010 (updated and reissued December 23, 2010 to address Swaps Definitions NPRM)

In this letter, Gavilon requests, and provides arguments for, several key issues regarding agricultural swaps:

  • Any rule governing agricultural swaps proposed by the Commission allow for swaps and options on agricultural commodities to the same extent as other commodity swaps are permitted under the Dodd-Frank Act; i.e., allowing an entity who qualifies as a swap dealer or major swap participant for one type, class, or category of agricultural commodity not to be considered as a swap dealer or major swap participant for other types, classes, or categories of agricultural commodities.
  • Retain the end-user exemption with respect to commodities for which end-users will be hedging commercial risk.
  • Consider adopting a rule for agricultural swaps that treats swaps, swaptions, and options the same.
  • The Commission Should Adopt its Proposed Definition of "Agricultural Commodity."
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CME Group - October 28, 2010

Agricultural Commodity Definition Agricultural Swaps ANPRM
October 28, 2010

From the comment letter:

"In effect, Dodd-Frank appears to give the CFTC three basic choices for agricultural swaps:

  1. Retain the status quo — the Part 35 exemption would remain unaltered and parties could still apply for individual exemptions under CEA § 4(c);
  2. Develop a specific regulatory regime for agricultural swaps under Section 4(c); or
  3. Treat agricultural swaps the same as all other swaps for regulatory purposes under the CEA and repeal Part 35 CME Group strongly favors the third choice described above: equal treatment for agricultural commodity swaps and repeal of Part 35.

...

"CME Group strongly favors the third choice described above: equal treatment for agricultural commodity swaps and repeal of Part 35. Derivatives trading was born in the U.S. two centuries ago in agricultural markets. Agricultural markets are as valuable to our nation's economy as any other, and in many instances more valuable. Statutory regulatory structures and restrictions that are good for other physical commodity swap markets in energy and precious metals, for example, are good for agricultural commodities as well. Dodd-Frank's various mandates on clearing and exchange-trading transparency, dealer regulation, and amplified business conduct standards should apply to agricultural swaps activities on the same terms as other swaps. Similarly, as with all other swaps, only Eligible Contract Participants ("ECPs") should transact in agricultural commodity swaps unless on a fully-regulated DCM."

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Consortium of Agricultural Producers - October 28, 2010

Advanced Notice of Proposed Rulemaking and Request For Public Comment on Agricultural Swaps (Federal Register Release 75 FR 59666)
October 28, 2010

This letter was co-signed by these agricultural organizations:

  • American Farm Bureau Federation
  • American Soybean Association
  • Commodity Markets Council
  • National Association of Wheat Growers
  • National Cattlemen’s Beef Association
  • National Corn Growers Association

The groups urge the Commission to treat swaps for all commodities harmoniously; the comprehensive regulation of swaps should not be based on distinctions among commodity types.

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References

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