Minding Ag's Business

The Bona Fides

Katie Micik Dehlinger
By  Katie Micik Dehlinger , Farm Business Editor
The comment period for the CFTC's latest position limits proposal ends on April 29, and CFTC Chairman Heath Tarbert said he intends to finalize the rule before the end of the year. (DTN file photo)

Latin may be the root of Romance languages like English, but it's easy to forget how often we use pure Latin phrases in our everyday lexicon. Several have reached new heights of popularity recently. Quid pro quo comes to mind. While it literally translates as "something for something," it has an underhanded connotation the English translation misses.

Bona fide is another common Latin phrase regular DTN readers will recognize from recent news. Meaning "with good faith" in Latin, the English language tends to use it interchangeably with "genuine" or "real"; however, the Latin phrase generally also confers extra clout or importance.

When the Commodity Futures Trading Commission released a new position limits proposal -- what I've been told is actually the fifth attempt at creating such a rule, not the fourth as I reported previously -- it was clear the futures market regulator was taking a different approach, particularly toward bona fide hedges.

The phrase roughly translates to a good-faith effort to protect yourself or your business from a financial loss. But ask anyone who has been in this boxing ring with CFTC before, and they'll tell you defining a bona fide hedge is far more complicated than it seems.

Todd Kemp, vice president of marketing and treasurer at the National Grain and Feed Association, is one of those people. He told DTN the CFTC's most recent proposal appears to be a vast improvement over the agency's previous attempts, particularly its 2013 effort, which was watered down and re-proposed in 2016. Neither was finalized. (For more details on what the proposed rule contains, please read: https://www.dtnpf.com/….)

"Our concern back at that time was that the commission was taking a one-size-fits-all approach across all these markets and all these commodities where they were trying to implement position limits," Kemp said. "The view was, I think, at that time, that agriculture was the same as metals, was the same as financials, was the same as this, that and another market. And in the process of trying to ride herd on all of those various commodities, we were concerned some of the bona fide hedging strategies that had been recognized as such for years might be excluded from what was considered bona fide in that proposal."

Of chief concern: anticipatory hedging.

When an elevator buys grain from a farmer, it usually takes a futures position to protect its business from losing money on that grain while it's in storage. Elevators also use the markets to offset risks that may be particular to that local area, like a bumper crop or significant prevented planting acreage, even if that's not the case nationally. That's considered a hedge in anticipation of upcoming conditions, and it's been recognized as a bona fide hedging strategy by CME Group, the exchange where most grains are traded, for a long time.

Previous attempts at this rule considered an anticipatory hedge as a speculative position, and therefore subject to additional position limits. However, this time around, anticipatory hedging is on the CFTC's enumerated list of bona fide hedging strategies.

Enumerated -- another word with Latin roots -- is used here to convey the specificity of the list. Only the strategies outlined by CFTC in the rule will receive a bona fide hedging exemption, similar to how the Constitution enumerates the specific responsibilities of Congress. If a hedging strategy isn't on the list, it will be subject to a review process.

Heath Tarbert, the current chairman of the CFTC, told DTN there's a reference to anticipatory merchandising in the statute authorizing the commission, and after reviewing all of the comments from previous rulemakings, it was clear that it was a top concern.

"I guess the concern has been if you're too loosey goosey with anticipatory merchandising, the exception could swallow the rule," he said. "So what we did -- rather than just say no anticipatory merchandising and therefore eliminate a whole class of bona fide hedging -- what we did was put some guardrails around it."

Those guardrails require market participants claiming the exemption to be in the physical industry and only allow that strategy 12 months into the future.

For Tarbert, the entire proposal is about achieving the right balance. "There's enough trading that there's liquidity, but not so much trading that it's quote-unquote 'excessive.' Making sure we leverage the exchanges, but we, the CFTC, retain the proper oversight role. Making sure that we have limits in place that they're not so high that they don't really become limits at all, but they're not too low that they hurt the people. Making sure we have bona fide hedging, and not hedging that isn't genuine and becomes a loophole.

"Throughout this entire proposal, and with the benefit of 10 years of comment, in particular from the ag community, we've tried to strike that balance at every level," he said.

While the proposal would mean higher speculative position limits in the grain contracts, which have had position limits for a long time, Tarbert argues the volume of trading in those markets has increased dramatically since those limits were put in place. Yet that's one of the areas where he's most solicitous of input.

"We're going to go after squeezes and the types of manipulation we're concerned about, but we're not going to overdo it and start introducing what I call medicine that has side effects. We're going to try to prescribe the right amount of medicine, but we're also going to lay out why we do this," he said.

The proposed rule includes a series of questions, such as whether the limits should go into effect all at once or gradually. Tarbert said he's very open to feedback, although he doesn't intend to extend the window of time for receiving that input. The comment period on the rule closes April 29, and he hopes to issue the final rule before the end of 2020.

NGFA's Kemp said this version of the rule looks like a "big step in the right direction, but inevitably in a rule of this scope, there's going to be something of concern. We have appreciated the commission's willingness to consider the concerns of agribusiness hedgers, and it looks to us like they've really made some big improvements and are pretty close to getting it right."

You can view all 500-plus pages of the rule here: https://cftc.gov/…

Katie Dehlinger can be reached at katie.dehlinger@dtn.com

Follow her on Twitter at @KatieD_DTN



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