WASHINGTON (July 16, 2014) – The National Grain and Feed Association (NGFA) today commended Sens. Pat Roberts, R-Kan., and Heidi Heitkamp, D-N.D., for their bipartisan leadership in introducing legislation to resolve a problem that could put billions of dollars of futures customer funds at risk if another futures commission merchant (FCM) insolvency occurs.
“This legislation is critically important to farmers and ranchers, grain elevators and other agricultural hedgers,” said Randy Gordon, NGFA president. “It will protect futures customers from much higher levels of financial exposure and risk. It also will allow them to continue to utilize capital for hiring, risk management and hedging strategies, instead of changing a decades-old interpretation of the rule and needlessly tying up funds under an unnecessary regulation. It is our hope that the bill will be included in CFTC reauthorization legislation.”
The Risk Hedging Protection Act [S. 2601] would alleviate concerns raised by a broad range of futures market participants – including farmers and ranchers, grain merchants and futures brokers – regarding the so-called “residual interest” provision in a rule finalized last fall by the Commodity Futures Trading Commission (CFTC). If the rule is fully implemented, many farmers, ranchers and small hedgers could be driven out of using futures as a risk management tool due to higher costs and increased risk.
Under the residual interest provision, futures customers likely would be required to “pre-margin” their hedge accounts, potentially resulting in a doubling of the amount of funds sent to their FCMs, due to a drastically shorter time period during which margin funds must be received by the FCM – a reduction from the current three days to the morning of the day following a futures trade (known as T+1). The Roberts-Heitkamp bill would provide additional time until 6 p.m. eastern time on T+1, still tightening the time frame but allowing sufficient time so futures customers would not be required to pre-margin for market moves that may never occur.
In Congressional testimony, the NGFA has estimated that a typical country elevator, if required to pre-margin, could be required to submit twice as much margin money to maintain their futures accounts, thereby putting twice as much money at risk in another FCM insolvency.
The NGFA, established in 1896, consists of more than 1,050 grain, feed, processing, exporting and other grain-related companies that operate more than 7,000 facilities and handle more than 70 percent of all U.S. grains and oilseeds. Its membership includes grain elevators; feed and feed ingredient manufacturers; biofuels companies; grain and oilseed processors and millers; exporters; livestock and poultry integrators; and associated firms that provide goods and services to the nation’s grain, feed and processing industry. The NGFA also consists of 26 affiliated State and Regional Grain and Feed Associations, and has strategic alliances with Pet Food Institute and North American Export Grain Association.