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View from the Hill Blog: CFTC & SEC Rule to Protect Agriculture

By Grace Boatright, View from the Hill National Grange Legislative Blog (4/28/11)

  APRIL 30, 2011 --

Farming cooperatives and physical commodities traders across the country can now breathe a sigh of relief. The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) voted yesterday to exclude commodities futures, as well as insurance policies and home-heating oil contracts, from swaps regulations required under the Dodd-Frank Act. The Dodd-Frank Act, Chris Dodd and Barney Frank’s answer to the 2008 financial meltdown was signed by President Obama in July of 2010. However, several aspects of the bill, which sought to implement new regulatory reforms on Wall Street, were vague in their implementation and cost. One such aspect was the regulation to be imposed on commodity futures and whether farming cooperatives, such as Dairy Farmers of America, should be defined as swap dealers or end-users. Had these farming cooperatives been labeled as swap dealers, they would have become subject to numerous regulations and capital requirements. Having them formally excluded is a great victory for the agricultural industry. The forward contracts purchased by farmers and others in the agriculture community allow them to hedge against swings in market prices caused by natural disasters or other unforeseen events. Without these contracts, America’s growers and others who depend on the sale of commodities for their livelihoods would have been left incredibly vulnerable.

In addition to settling the issue of definitions, Wednesday’s proposal also settled the issue of which agency would regulate what. Dodd-Frank originally gave the CFTC and the SEC parallel control over the swaps market, creating some confusion over who should specifically be in charge of what sector of the nearly $585 trillion global swaps market. It has been decided that the CFTC will oversee swaps linked to interest rates and commodities, and the SEC will control swaps linked to loans and other securities. 

However, despite this victory, the debate on Dodd-Frank is far from over. House Agriculture Committee Chairman Frank Lucas has introduced H.R. 1573, a bill to extend the deadline for implementing Dodd-Frank’s derivatives provisions by 18 months. Lucas claims; “The bill gives the regulatory agencies more time to effectively meet the objectives of the derivatives title, to prioritize deliberation over speed, to consider the costs and benefits, and to understand the cumulative impact of the rules.” A derivative refers to an instrument whose value depends on the future performance of a financial asset, such as a commodity. Commodity derivatives allow an investor to profit from the rise in value of a commodity without actually possessing it. Historically, farmers have used them to protect themselves against risk; promising to sell crops in the future at a pre-determined price.

Advocates of financial reform, such as the U.S. Treasury Department, continue to oppose any effort to slow down the implementation of Dodd-Frank’s regulations. CFTC Commissioner Bart Chilton has warned “While regulatory agencies may not be able to make every deadline required under the reform bill…the urgency Congress has already placed on getting reforms implemented is just as important today as it was when this good and needed legislation became law.” H.R 1573 is scheduled for full committee consideration and markup by the House Agriculture Committee on May 4, 2011.

-Grace Boatright
National Grange Programs Assistant

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