CMC Testifies at House Agriculture Committee Hearing

The House Agriculture Committee held a hearing earlier this week focusing on Title VII (derivatives) regulatory issues in the Dodd-Frank Act (DFA).  CMC was invited to testify as part of a panel of experts, and we were able to be represented by Todd Thul, Risk Manager at Cargill.

Among the high priority issues that CMC addressed in our testimony were inter-affiliate swaps transactions, recording and recordkeeping requirements, entity definitions, and cost-benefit analysis.  But the bulk of our testimony focused on an issue that is vital – given the CFTC’s imminent rulemaking on October 18 – for many of our members’ businesses, which is bona fide and anticipatory hedging.  We opined that the CFTC’s proposed rule on the topic is inconsistent with the DFA and has the potential to have calamitous effects in the cash commodity markets.  Based on recent press reports, we stated that the CFTC’s rule would reduce the industry’s ability to continue offering the same suite of risk management tools to farmers that they are accustomed to using, and that the merchandising of grain could be curtailed as a result.  As serious as these issues are for farmers, the implications are far broader with the potential to impact energy markets as well.

In short, unless dramatically revised, the CFTC’s approach will severely limit the ability of grain handlers to participate in the market and impede the ability to offer competitive bids to farmers, manage risk, provide liquidity and move agriculture products from origin to destination.  The irony is that limiting commercial participation in the market actually introduces volatility. Clearly this is not what Congress intended.

The Coalition of Derivatives end Users, of which CMC is a part, also testified at the hearing (as represented by Constellation Energy) on inter-affiliate swaps transactions, margin requirements, entity definitions and cost-benefit analysis.


CMC Meets with Congressional Staff on Affiliate Transactions

CMC met with staff from the offices of Reps. Stivers (Republican – Ohio) and Fudge (Democrat – Ohio) to discuss the regulation of inter-affiliate swaps transactions by the CFTC. The meeting was called by the Coalition for Derivatives End-Users, a group that CMC frequently collaborates with. At a hearing earlier this week, Rep. Fudge asked Chairman Gary Gensler about inter-affiliate swaps transactions, and Chairman Gensler’s response focused only on how non-financial end-users don’t need to worry about complying with clearing requirements for affiliate swaps because these end-users are exempted from clearing anyway. However, we pointed out to the staffers that in addition to clearing, margin requirements and reporting are also big issues for end-users who engage in affiliate swaps, and the CFTC needs to provide some kind of exemption from these rules for end-users who transact such swaps.

CMC specifically pointed to a letter that had been sent by our member, Kraft Foods, to the CFTC on this topic in February 2011. We elaborated on Kraft’s argument in the letter that several end-users centralize their hedging operations in a centralized hedging center within the corporate treasury function. This centralized hedging center is responsible, among other things, for transacting inter-affiliate swaps among the parent entity and its subsidiaries/affiliates, which, for all those swaps that are purely internal within the company, does not pose an increase in systemic risk and should therefore not be regulated in the same way as external “street-facing” swaps. Moreover, we pointed out that it would be contrary to congressional intent if these types of purely internal swaps caused an end-user to be classified as a Swap Dealer or Major Swap Participant, when it clearly does not belong in those categories.

Staff for Reps. Stivers and Fudge are considering putting together a bipartisan bill to exempt end-users who trade inter-affiliate swaps from the same types of swaps regulations that SDs and MSPs would have to comply with.