Market Matters Blog

It's been more than a year and a half since MF Global's collapse froze the funds of more than 30,000 customers. Most commodities customers have received nearly 90% of what was in their accounts, but the structural flaws MF Global and later Peregrine Financial Group exposed are just now being taken up by Congress. (And you thought the claims process was slow!)

It's time for the reauthorization of the Commodity Exchange Act, and the House Agriculture Committee holds its first hearing on the matter Tuesday. The chairmen of CME Group and IntercontinentalExchange Inc. will testify, as will the leaders of the primary self-regulatory organizations and INTL FCStone Chief Financial Officer William Dunaway.

While enhancing customer protections and other post-MFG concerns will play a large role in the discussion around reauthorizing the CFTC, expect high-frequency trading to play a large role in the conversation. When a fake tweet can cause the markets to crash and bounce back in a matter of minutes, the role of high speed traders -- and whether or not they actually take on risk -- needs a closer look.

A functional futures market is a crucial part of protecting the financial stability of farms and grain companies in an increasingly global and volatile marketplace. I'll be watching these hearings with interest over the next few weeks and months. Below is a press release from the National Grain and Feed Association outlining what they'd like Congress to consider in reauthorizing the Commodity Exchange Act.

WASHINGTON -- The National Grain and Feed Association (NGFA) is urging Congress to enhance protection for futures market customers when considering legislation this year to reauthorize the Commodity Futures Trading Commission later CFTC).

In a statement submitted this month to the Senate Agriculture Committee at the request of Committee Chairwoman Debbie Stabenow, D-Mich., and ranking Republican Thad Cochran, R-Miss., the NGFA focused on several potential improvements important to the grain, feed, processing and export industry. Meanwhile, the House Agriculture Committee is scheduled to begin hearings this week on CFTC reauthorization.

With the collapse of MF Global nearly two years ago, the NGFA noted that former futures customers in the aggregate still have not received 11 percent of their supposedly safe segregated funds that were held by the futures commission merchant (FCM). "Consequently, we believe that a primary focus of the (CFTC) reauthorization process must continue to be enhancing customer protections with the twin goals of preventing similar occurrences in the future and providing protection to customers in the event of another FCM insolvency," wrote the NGFA in its statement to the Senate Agriculture Committee.

To accomplish this, the NGFA recommended a series of reforms to the U.S. Bankruptcy Code, including:

-- clarifying that customers come first when prioritizing claims and distributing funds when a FCM fails;

-- strengthening and clarifying the CFTC's authority to administer FCM insolvencies, including the ability to appoint its own trustee to represent exclusively the interests of futures commodity customers;

-- removing existing so-called "safe harbor" protections for any transactions involving the misappropriation of a FCM's customer property, regardless of the intent behind the transfer (the current bankruptcy code denies such protection only when it can be proven that the FCM intended to defraud customers or creditors);

-- harmonizing CFTC rules and the bankruptcy code concerning the liquidation process for a commodity futures broker; and

-- authorizing the formation of customer committees specifically to represent futures market customer interests.

The NGFA said other potential customer protection enhancements could include creating insurance coverage in the event of FCM insolvencies. It said it was awaiting results of a comprehensive Futures Industry Association analysis of such potential products and their costs, as well as the outcome of an online survey of commodity futures customers' interest and input on such products.

"It is important to note that the solution on insurance to protect customers is not necessarily a government or legislated solution," the NGFA said. "It may be that some form of privately provided product is more cost-effective and appropriate."

In addition, the NGFA recommended establishment of a pilot program to test the concept of introducing an optional, fully segregated FCM account structure for futures market customers. "Creation of a fully segregated account structure necessarily would result in some additional costs that likely would be borne by customers utilizing such accounts," the NGFA said. "…[A] pilot program involving a limited number of commodity futures customers, FCMs, lenders and regulators would be useful for testing the mechanics and identifying the viability and true costs of a full-segregation structure."

The NGFA letter also expressed increasing industry concerns about the impacts of high-frequency trading on agricultural futures markets. With the caveat that administrative action by the CFTC could prove to be a more appropriate way to oversee high-frequency trading activities, the NGFA suggested Congress should review whether:

-- high-frequency traders should be required to register with the CFTC;

-- some form of margining should be required, even if no positions are held by high-frequency traders at day's end; and

-- other measures would help ensure high-frequency trading does not disrupt the hedging utility of futures markets.

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