Milling & Baking News - May 4, 2010 - 20

Washington 

Exchanges and industry voice
concerns over finance reform bill

excess margin, which would have
only exacerbated the margin credit
financing problems."
Mr. Borchardt was critical of the
any new contract unless it violated bill's casting aside of certain benContinued from Page 1
efits derived from the Commodity
swaps, unless exempted by the the C.E.A.
Section 134 also would repeal the Futures Modernization Act of 2000
C.F.T.C., which reflects the current
procedures required of the C.F.T.C. including provisions that enabled
policy.
The bill would require swaps to be before it may bring an enforcement exchanges and clearing organicleared on an exchange or another action against a registered entity zations to certify rules and rule
derivatives-based clearing organi- for violation of a core principle of changes on two days' notice instead
zation with the C.F.T.C. authorized the C.E.A., so such actions may be of the 17-day process as proposed
to determine which swaps are to be brought on the same basis as any in the bill.
Mr. Borchardt said there was no
cleared. There would be exemptions other C.F.T.C. enforcement action.
Officials of the Kansas City Board occasion during the last 10 years
from the clearing requirements for
nonfinancial institutions, e.g. end of Trade expressed concerns espe- when a rule certification was found
users such as manufacturers, agri- cially with regard to Sections 125 to be invalid by the C.F.T.C. and he
culture companies and commodity and 134 of the agriculture commit- saw no need to change the current
tee's bill now incorporated into the process that he said helps domestic
producers.
exchanges respond quickly to comThe S.E.C. and the C.F.T.C. would overall financial reform bill.
First, there was the concern that petitive threats from over-the-counbe authorized to report on any swap
or securities-based swap found to should the C.F.T.C. be given au- ter and foreign markets.
The bill's provision in Section
be detrimental to the stability of fi- thority over contract margins and
134 eliminating current procenancial markets. In the event of
dures for the C.F.T.C. to bring
a future financial crisis, federal
'We feel that
an enforcement action against
assistance to swaps entities in
exchanges or other registered enconnection with their trading
exchanges should
tities for violating a "core prinin swaps or securities-based
have exclusive
ciple" was counterproductive
swaps would be prohibited. The
authority over
with regard to fostering a coopbill would impose registration
erative regulatory environment,
and reporting requirements
futures margins.
Mr. Borchardt said. Currently,
on swap dealers and require
Our capital and
the C.F.T.C. is required to notify
public reporting of aggregate
reputation are at risk.'
an exchange of an alleged vioswap data.
- Jeff Borchardt, president of the
lation of a core principle, and a
Section 125 of the agriculKansas City Board of Trade
30-day "cure period" enables the
ture committee's bill would
exchange to achieve compliance.
grant the C.F.T.C. rulemaking
The exchanges and agriculture
authority over futures margins and margin-setting criteria, the agency,
impose specific criteria for margin- while not setting margins itself, industry organizations were sucsetting, but the bill would not au- would influence the level of all ex- cessful in persuading the agriculture committee to modify the bill's
thorize the C.F.T.C. to set margins change contract margins.
for specific contracts.
"We feel that exchanges should language directed at "insider tradThe C.F.T.C. would be authorized have exclusive authority over fu- ing" before it was voted on. Both
to impose speculative position limits tures margins," said Jeff Borchardt, the National Grain and Feed Ason swaps that perform or affect a sig- president of the Kansas City Board sociation and the Commodity Marnificant price-discovery function.
of Trade. "Our capital and reputa- kets Council lobbied the committee
Section 134 of the agriculture tion are at risk, and we feel that we saying they supported the intent of
committee's bill would provide a are in the best position to determine the original measure, which was to
new process for prior approval of our level of risk tolerance given the ensure U.S. government employees
not trade on non-public, governrules and rule amendments sought overall market environment.
by exchanges and clearing orga"A perfect example of this was ment information obtained by virnizations. These entities would late 2007 to early 2008, when grain tue of their positions, or commuhave to provide a seven-business- prices soared to record levels. We nicate such information to others.
day precertification notice to the made the business decision, given But the original language used in
C.F.T.C. regarding new rules and the margin credit financing stress the measure to accomplish this end
rule amendments, including all placed on commercial grain com- was too expansive and might have
relevant information. Once a new panies and banks, to set our margin "chilled" necessary communicarule or rule amendment is officially levels based on the current daily tions between private entities and
certified, the C.F.T.C. would have price limit. When wheat was trad- agencies of the government such as
10 business days to review the rule ing under a 60c limit, our margins the U.S. Department of Agriculture,
or rule amendment for compliance were 60c. When limits expanded to the Department of Energy and the
with the Commodities Exchange 90c, we increased margins to 90c. As C.F.T.C., the associations asserted.
The insider trading provision ulAct. The agency would be required soon as limits contracted back to
to approve the rule or amendment 60c, we lowered margins to 60c. timately approved by the commitunless it violated the C.E.A., and This practice allowed us to cover tee accommodated the primary conthe C.F.T.C. would have to approve our daily risk without collecting cerns of industry. MBN
20 / May 4, 2010 Milling & Baking News

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Milling & Baking News - May 4, 2010

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