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Market Participants Uncertain About Proposed CFTC Protection Rule

House Ag subcommittee tasked with smoothing provisions intended to avoid another MF Global debacle

Published on: Oct 3, 2013

The House Agriculture Subcommittee on General Farm Commodities Wednesday kicked off the fourth installment in a series of hearings to review and reauthorize the Commodity Futures Trading Commission, taking time to hear feedback about the impacts of a proposed consumer protection rule.

The rule, proposed in light of the infamous MF Global and Peregrine Financial (PFG) failures, aims to protect market participants by shortening the length of time customers' margin calls must arrive to their futures commission merchant from the current three days to one day and changing the timing of FCMs' calculation of residual interest.

The proposed rule, however, has received mixed reaction from market users and legislators alike. Feedback at the hearing Wednesday from witnesses including CME Group Chairman Terrence Duffy, National Futures Association President Daniel Roth, and the National Grain and Feed Association representative Michael Anderson, The Andersons, Inc., was no different.

House Ag subcommittee tasked with smoothing provisions intended to avoid another MF Global debacle
House Ag subcommittee tasked with smoothing provisions intended to avoid another MF Global debacle

While CME's Duffy said elements of the proposal do in fact enhance customer protections and mitigate risks of improper transfers of consumer funds, the residual interest requirement inhibits effective use of the market structure.

Duffy argued that the proposed rules will also require customers to double their margin requirements, or FCMs will be required to contribute very large sums as "residual interest." That, he explained would "make the marginally profitable FCM business unsustainable."

A similar stance was reflected in comments prepared by MJ Anderson, representative of the National Grain and Feed Association and regional sales manager of The Andersons, Inc. Anderson said altering rules for margin calls and residual interest proposals would end up "dramatically changing the way business has been conducted in futures markets for decades."

He argued that if the residual interest changes – which essentially require customers to send more money to their FCM – would have been in place during the MF Global situation, twice as much money would have gone missing.

Wednesday's hearing is expected to be the final hearing in the series on the future of the CFTC. The first one was a full committee hearing to gain perspectives from the market. The last two were subcommittee proceedings to hear from the CFTC Commissioners and end-users directly.