The Commodity Futures Trading Commission (CFTC) approved two final rules on April 18 that will help farmers, cooperative, handlers, grain elevators, and other agricultural businesses avoid unintended regulation under the Dodd-Frank Wall Street Reform Act, which has been a priority for NMPF during the past two years.
The first of these rules defines “Commodity Options” subject to regulation by the Commission. The Commission excluded most of the ancillary “trade options” (including penalties, buyouts, etc.) in contracts whose main purpose is not the option, but to buy and sell physical commodities. This exclusion was in response to comments – including those from NMPF – noting that excessive regulation of trade options in commercial contracts would paralyze American business, and urging CFTC to define an effective exclusion.
The second rule defined “swap dealers.” Many farmer cooperatives, grain elevators, and handlers provide farmers effective specialized risk management services. Initial versions of this rule would have defined such services as “swap dealing,” subjecting the service provider to heavy reporting requirement and limits on their business, driving many of them out of the risk management business, and making effective risk management difficult or impossible for many farmers to find. The final rule 1) provides an exception for bona fide hedging of physical commodity risk, 2) exempts affiliate transactions such as cooperative-member dealing, and 3) provides an additional de minimis exemption for other commodity trading of up to $8 billion in transactions per year. This $8 billion exemption phases down to $3 billion per year, which will allow agricultural businesses to adjust to the new rules.
These rules are the culmination of two years of work by NMPF in making the Dodd-Frank rules manageable for farmers and their cooperatives. This began with ensuring that the original legislation provided for substantial end-user exemptions, and continued through a long series of CFTC notices and rules which NMPF has reviewed and commented upon. Many of these rules, as initially proposed, would have brought agricultural businesses under heavy regulatory burdens, imposed extreme record-keeping requirements, set unworkable position limits, and discouraged many current providers of farm risk management services from continuing in that business. NMPF, along with other agricultural commodity groups, submitted comments, attended meetings, and made a strong case for agriculture’s risk management needs. Ultimately, CFTC recognized these needs and provided for effective differentiation in the rules between speculation and commercial agricultural hedging.