Markets en Resolving the Food Crisis: Assessing Global Policy Reforms Since 2007 <div data-history-node-id="41680" class="node node--type-document node--view-mode-rss field-primary-category-agriculture has-field-primary-category no-field-teaser-image title-not-empty ds-1col clearfix"> <div class="field field--name-field-author field--type-entity-reference field--label-above"> <div class="field--label">Author</div> <div class="field__items"> <div class="field--item"><a href="/about/staff/timothy-wise" hreflang="en">Timothy Wise</a></div> <div class="field--item"><a href="/about/staff/sophia-murphy" hreflang="en">Sophia Murphy</a></div> </div> </div> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><h3>Executive summary</h3> <p>The recent spikes in global food-prices in 2007-08 served as a wake-up call to the global community on the inadequacies of our global food system. Commodity prices doubled, the estimated number of hungry people topped one billion and food riots spread through the developing world. A second price spike in 2010-11, which is expected to drive the global food import bill for 2011 to an astonishing $1.3 trillion, only deepened the sense that the policies and principles guiding agricultural development and food security were deeply flawed. </p> <p>There is now widespread agreement that international agricultural prices will remain significantly higher than precrisis levels for at least the next decade, with many warning that demand will outstrip supply by 2050 unless concerted action is taken to address the underlying problems with our food system.</p> <p>The crisis certainly awakened the global community. Since 2007, governments and international agencies have made food security a priority issue, and with a decidedly different tone. They stress the importance of agricultural development and food production in developing countries, the key role of small-scale farmers and women, the challenge of limited resources in a climate-constrained world, the important role of the state in “country-led” agricultural development programs, the critical role of public investment. For many, these priorities represent a sea change from policies that sought to free markets from government policies seen as hampering efficient resource allocation. Now that those policies and markets have failed to deliver food security, the debates over how countries and international institutions should manage our food system are more open than they have been in decades.</p> <p>The purpose of this report is to look beyond the proclamations and communiqués to assess what has really changed since the crisis erupted. While not exhaustive, the report looks at: Overseas Development Assistance, both in terms of how much and what is funded; Multilateral Development Banks’ policies and programs; selected U.N. agencies and initiatives, notably the Committee on Food Security (CFS); the G-20 group of economically powerful governments; and the U.N. Special Rapporteur on the right to food, who has injected a resonant “right to food” approach to the issue.</p> <p> </p> <ul> <li>low levels of investment in developing-country agriculture in general and small-scale agriculture in particular; </li> <li>reduced support for publicly funded research and development and increased reliance on private research;</li> <li>a reliance on international trade to meet domestic food needs in poor countries that can ill-afford the import dependence and declining local production; </li> <li> <div>a bias toward cash crops for export over food production for domestic markets; </div> </li> <li> <div>increasing land use for non-food agricultural crops such as biofuels for industrial uses;</div> </li> <li> <div>support for high-input agricultural methods over more environmentally sustainable low-input systems; </div> </li> <li> <div>inadequate attention to the linkages between climate change and food security; and </div> </li> <li> <div>deregulation of commodity markets and increasing financial speculation in agricultural commodities,  including staple food crops as well as land.</div> </li> </ul> <h4>Findings</h4> <div>Our review suggests that on the positive side, the food crisis was an important catalyst for change. As high prices persisted and public protest mounted, many governments were confronted with “moments of truth,” the cumulative result of which was to question some of the assumptions that had driven food and agriculture policy over the past few decades. This prompted renwed attention to agricultural development, reversing the long-standing neglect of agriculture as a vital economic sector. It also brought some important new funding, though at levels still far short of what is needed. </div> <div> </div> <div>The stated priorities for much of that funding suggest distinct improvement over the policies of the past few decades. The needs and political voices of small-scale farmers and women; environmental issues, including climate change; and, the weaknesses of international markets now receive more attention. The additional funding for these important areas is also driven by greater openness to country-led programs with strong state involvement, a marked change from past priorities. </div> <div> </div> <div>Our review suggests areas of great concern, though. We see neither the necessary urgency nor the willingness to change policies that contributed to the recent crisis. New international funding is welcome, but only $6.1 billion of the G-8’s pledged $22 billion, three-year commitment represents new money, and those pledges have been slow to materialize and are now threatened with cutbacks as developed countries adopt austerity measures. The overwhelming priority is to increase production. There are reasons to focus on this, specifically within low-income net-food importing countries. The setting of production targets at the global level, however, encourages an expansion in industrial agriculture and the consolidation of land holdings, including land grabs, and ignores environmental constraints and equity issues. </div> <div> </div> <div>Beyond funding, we find that the policies that contributed to the recent food-price crisis have gone largely unchanged, leaving global food security as fragile as ever. The world needs policies that discourage biofuels expansion, regulate financial speculation, limit irresponsible land investments, encourage the use of buffer stocks, move away from fossil fuel dependence and toward agro-ecological practices, and reform global agricultural trade rules to support rather than undermine food security objectives. </div> <div> </div> <div>Unfortunately, we find that the international institutions reviewed have shown too little resolve to address these issues. Although at the G-20 the world’s most economically powerful nations have asserted leadership on food security, their actions have been tepid if not counterproductive. This has had a chilling effect on reform efforts elsewhere in the international system, most notably at the United Nations. This raises important governance issues. The U.N.’s CFS is formally recognized by most institutions as the appropriate body to </div> <div>coordinate the global response to the food crisis, because of both its mandate and its inclusive, multi- takeholder structure. Yet in practice the G-20 has systematically constrained the reform agenda. Similarly, the WTO’s recent efforts to give the Doha Agenda more relevance by including food security issues in the form of restrictions on exporting countries’ use of export tariffs have failed, because many of the exporters (most of the G-20 members) refuse to surrender that policy space. Not surprisingly, importing countries’ wish for the same policy space with regard to their imports are now more determined than ever to insist on their rights.</div> <div> </div> <div>The recent food-price crisis exposed the fragility of the global food system. A paradigm shift is underway, caused by the deepening integration of agricultural, energy and financial markets in a resource-constrained world made more vulnerable by climate change. Powerful multinational firms dominate these markets. Many benefit from current policies and practices and their interests are a dominant influence in national and global policies—slowing, diverting, or halting needed action. This leaves international institutions promoting market-friendly reforms but resistant to imposing the concomitant regulations required to ensure well-functioning food and agricultural markets.</div> <div> </div> <div> <div>Three areas in particular demand decisive action:</div> <ul> <li>Biofuels expansion – There is a clear international consensus that current policies to encourage biofuel expansion, particularly in the United States and Europe, are a major contributor to rising demand, tight supplies and rising prices. Yet international institutions, from the G-20 to the U.N. High-Level Task Force to the CFS, have diluted their demands for actions to address this problem.</li> <li>Price volatility – High spikes in prices remain a major problem for poor people worldwide, and for foodimporting developing countries in particular. The policy goal, for effective market functioning and for food security, should be relatively stable prices that are remunerative to farmers and affordable to consumers. We find few concrete actions toward this goal. There is strong evidence that financial speculation contributed to recent food-price volatility, though there remains considerable debate on the subject. As an FAO report on the topic noted, there is no demonstrated benefit to the public of allowing such speculation, and the potential costs are huge. Precautionary regulations are warranted but few have been taken. Similarly, the lack of publicly held food reserves contributes to the shortages that make speculation possible while leaving vulnerable countries at risk. Reserves should be explored more actively than simply as emergency regional humanitarian policy instruments. </li> <li>Land grabs – The scale and pace of land grabs is truly alarming, driven by financial speculation and land-banking by sovereign wealth funds in resource-constrained nations. The consensus is that such investments are not good for either food security or development. As laudable as recent efforts are to promote “responsible agricultural investment,” these initiatives risk being “too little too late” for a fast-moving phenomenon. Meanwhile, international institutions, such as the World Bank, must do more to protect smallscale producers’ access to land. </li> </ul> <div> </div> <div>Fortunately, many developing countries are not waiting for international action or permission to more aggressively address the problems that can be dealt with at a national or regional level. Many of the Comprehensive Africa Agriculture Development Program (CAADP) projects in Africa, for example, emphasize the kinds of changes that are needed. CAADP has four pillars: land and water management, market access, food supply and hunger, and agricultural research. Bangladesh and other countries used food reserves to reduce the impact of the food-price spikes in far more ambitious efforts than the G-20 is proposing to support in West Africa. </div> <div> </div> <div>Developing-country governments will be central to bringing about such changes. They need the policy space to pursue their own solutions and they need the support of the international community to demand deeper reform in developed-country policies. The evidence discussed in this report suggests the paradigm shift has started but is incomplete. Many developing-country governments have chosen to step away from the prevailing orthodoxy of the last several decades and are again exploring a larger role for the public sector in governing agriculture and food. Donors, too, have shown some willingness to re-order priorities and to give greater space to agriculture, and to changing priorities within agricultural spending to acknowledge the need for more inclusive and sustainable outcomes. But they still resist more fundamental reform and continue to promote private investment and liberalized markets, relying on humanitarian aid and social safety nets to try to help those who are displaced by the policies.</div> <div> </div> <div>Perhaps not surprisingly, developed-country governments have yet to make the needed changes to their domestic policies. Comfortable with re-ordering development priorities, governments of rich countries have proved unwilling to look at their domestic agricultural economies to see what changes are needed there. If the most powerful countries are not willing to make the changes at home that would help international markets perform better, they should at a minimum stop undermining international efforts, at the U.N. and within </div> <div>and among developing countries, to address the fundamental causes of the food crisis.</div> </div> </div> <div class="field field--name-upload field--type-file field--label-above"> <div class="field--label">Upload</div> <div class="field__items"> <div class="field--item"><span class="file file--mime-application-pdf file--application-pdf icon-before"><span class="file-icon"><span class="icon glyphicon glyphicon-file text-primary" aria-hidden="true"></span></span><span class="file-link"><a href="" type="application/pdf; length=885806" title="Open file in new window" target="_blank" data-toggle="tooltip" data-placement="bottom">2012_01_17_ResolvingFoodCrisis_SM_TW.pdf</a></span><span class="file-size">865.04 KB</span></span></div> </div> </div> <div class="field field--name-field-primary-category field--type-entity-reference field--label-above"> <div class="field--label">Primary category</div> <div class="field--item"><a href="/agriculture2" hreflang="en">Agriculture</a></div> </div> </div> Wed, 18 Jan 2012 15:48:00 +0000 Andrew Ranallo 41680 at Revisiting Crisis by Design: Agricultural commodity exposure to financial market instruments and risks <div data-history-node-id="44233" class="node node--type-document node--view-mode-rss has-field-teaser-image title-not-empty ds-1col clearfix"> <div class="field field--name-field-author field--type-entity-reference field--label-above"> <div class="field--label">Author</div> <div class="field__items"> <div class="field--item"><a href="/about/staff/dr-steve-suppan" hreflang="en">Dr. Steve Suppan</a></div> </div> </div> <div class="field field--name-field-media field--type-entity-reference field--label-hidden field--items"> <div class="field--item"><article class="media media-image view-mode-feature"> <div class="field field--name-field-image field--type-image field--label-hidden field--item"> <img src="/sites/default/files/styles/feat/public/2019-05/Pig%20graph.jpg?itok=Pmz9bvPJ" width="950" height="590" alt="Hog market" typeof="foaf:Image" class="img-responsive" /> </div> </article> </div> </div> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><ul> <li class="Bulleted-list">The interconnectedness between farmers and the financial system, as well as between agricultural commodities and price risk management tools, has increased dramatically in recent years.</li> <li class="Bulleted-list">Relentless industry opposition to rules designed to prevent and limit excessive speculation by financial entities continues to make even limited reforms difficult to enforce.</li> <li class="Bulleted-list">U.S. commodity derivatives market contracts influence global commodity prices in part because they are traded in exchanges in dozens of countries, so U.S. market crises are likewise transmitted globally.</li> </ul> <p class="normal"><a id="_idTextAnchor000"></a>The extent of interconnectedness between farmers and the financial system and between agricultural commodity prices and financial risk management tools, such as futures and options contracts, has increased both in degree and kind over the last thirty years. By 1991, the author of <a href=";context=yjreg">“The Manipulation of Commodity Prices <span class="CharOverride-1">— </span>The Unprosecutable Crime”</a> had written that “The growth of commodity futures contracts in the last thirty years has been explosive.”<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-001-backlink">1</span></span></sup> However, it was not just that so many more contracts were being traded but that transactions of futures contracts based on interest rates and foreign currency exchange rates had greatly exceeded those of contracts based on the value of agricultural commodities.</p> <p class="normal">The consequences of a larger but poorly regulated financial system exploded public awareness during the 2007-2009 financial industry insolvencies. The largest banks were bailed out by <a href="">$29 trillion in Federal Reserve Bank emergency loans</a>,<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-002-backlink">2</span></span></sup> but the banks’ reckless practices cost the remainder of the U.S. economy not bailed out <a href="">$20 trillion “and counting”</a> according to a Better Markets report.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-003-backlink">3</span></span></sup> Among those practices was <a href="">excessive speculation</a> in physical commodity contracts that created a “boom and bust” in prices, whose mechanisms are described in detail below.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-004-backlink">4</span></span></sup></p> <p class="normal"><img alt="Commercial Contracts for Corn" data-entity-type="file" data-entity-uuid="d5469425-80fe-4335-bf1b-85aac93afa29" src="/sites/default/files/inline-images/FinancializationComponents.jpg" width="75%" /></p> <p class="normal">Standardized data on the interconnectedness between agricultural commodity contracts and financial commodity (e.g., interest rate, exchange rate) contracts is lacking. There is nothing in the <a href=",_Chapter_1_US/st99_1_0001_0001.pdfhttps:/,_Chapter_1_US/st99_1_0001_0001.pdf">Historical Highlights</a> of the USDA agricultural census, 1987 to 2017, to describe changes in the relationship of agriculture to the financial system since the farm mortgage crisis of the 1980s.<sup><span class="endnote-reference CharOverride-2"><span id="endnote-005-backlink">5</span></span></sup> The <a href="">“financial innovations” of 1987</a>, when <em><span class="Italicize">Crisis by Design</span></em> was published, were the stock market index futures derived from the value of stocks in the Standard &amp; Poor’s 500 index and other indices.<sup><span class="endnote-reference CharOverride-2"><span id="endnote-006-backlink">6</span></span></sup> But unless you were a farmer with corporate stock shares or a member of a cooperative that played the futures markets, in 1987 your exposure to the financial system was largely confined to mortgage interest rates and farmland valuations that served as collateral for loans from your banker.</p> <p class="normal">Today the interconnectedness of the financial and agricultural markets is pervasive. The United Nations Conference on Trade and Development uses an umbrella term to describe this interconnectedness for non-agricultural, as well as agricultural, commodities. <a href="">“Financialization” refers</a> <a id="_idTextAnchor001"></a>to both the deregulation of the financial services sector beginning the late 1980s and the increasing dominance of “self-regulated” or unregulated financial actors and instruments in the operations of formerly non-finance dominant firms.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-007-backlink">7</span></span></sup></p> <p class="normal">For example, in financialization, a company publicly known for producing meat, such as JBS, <a href="">makes more money speculating on the value of foreign exchange</a> contracts, ostensibly related to its commodity trading, than it does by producing and commercializing commodities.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-008-backlink">8</span></span></sup> In financialization, the actors, motives, contracts, trading technologies and even the trading venues change the role of financial services in relation to other economic sectors. <a id="_idTextAnchor002"></a>For agricultural and other physical commodities, the historic financial services role of assisting the price risk management of commercial entities trading in commodity derivatives markets, such as the Chicago Board of Trade (CBOT), changes to dominating the trading of physical commodity contracts as part of financial portfolio diversification for institutional clients, such as pension funds. The shift from commercial hedger dominance to financial entity dominance is illustrated in the <a href="">Better Markets tabulated charts</a> above for 1995-2014 CBOT corn contracts.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-009-backlink">9</span></span></sup> The charts report the percentage of corn contracts traded by commercial users and traders of corn. The Better Markets analysis does not explain the reduction from nearly 80% in 1999 to about 40% of commercial user and trader reported trades in 2010.</p> <p class="normal">However, a nearly certain factor in the financial entity dominance of the CBOT corn contract is the conversion in 2000 of the CBOT (and exchanges around the world) from being a nonprofit public utility to a for-profit corporation (termed “demutualization”) seeking to maximize trade volume and trading fees in hyper-speed electronic transactions and trade data reporting.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-010-backlink">10</span></span></sup> Another symbiotic factor in the dominance of financial speculators over commercial hedgers in physical commodity contracts was the Commodity Futures Modernization Act of 2000, which enabled legally limitless transactions by financial actors on the for-profit maximization exchanges.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-011-backlink">11</span></span></sup></p> <p class="normal">When <em><span class="Italicize">Crisis by Design</span></em> was published in 1987, regulated derivatives instruments were agricultural futures and options contracts, largely used by traders and processors to manage raw materials price risks, e.g., the grain cost of breakfast cereals. Those complex but practical financial instruments have been dwarfed by speculative financial trading greatly exceeding the price hedging needs of traders and processors. <a href="">By 2012, agricultural contracts were an infinitesimal fraction of financial futures</a> commodity contract transactions, both in number and value.<sup><span id="endnote-012-backlink">12</span></sup> When agricultural contracts are bundled with non-agricultural contracts into commodity index funds contracts, the fund formula, rather than supply and demand fundamentals, drive prices.</p> <p class="normal">Another factor affecting agricultural prices are Automated Trading Systems (ATS), computer trading algorithms responding to other algorithms, that transact 99% plus of financial commodity contracts and <a href="">almost 70% of agricultural contracts</a>.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-013-backlink">13</span></span></sup> Orthodox theory understands “liquidity” to refer to the volume of capital that enables transactions. What IATP has called ATS <a href="">“phantom liquidity”</a>,<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-014-backlink">14</span></span></sup> i.e., contracts that appear and disappear on trading screens too quickly for commercial hedger use, creates a series of micro-shocks to price formation that can induce price volatility and favors those with trading venue access via hyper-speed computing power.</p> <p class="normal">Relentless financial industry pressure has severely undermined the CFTC’s ability to regulate these markets. The CFTC depends on Congress for the resources to monitor trading data for possible cases of market manipulation and excessive speculation. Nowhere near adequate levels of resources have been provided, even as the number and complexity of the contracts under CFTC authority has increased exponentially. <a href="">Proposals to Congress</a> to make the CFTC a self-financed agency, like all other financial regulatory agencies, have failed.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-015-backlink">15</span></span></sup> As a result, CFTC enforcement depends on <a href="">market participant self-reporting of rule violations</a>,<sub><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-016-backlink">16</span></span></sub> which elicits enforcement actions, but is directed mostly at relatively small-scale traders.</p> <p class="normal">The CFTC delegates to the exchanges the authority to ensure that market participants <a href="">do not hold contract positions in excess of their hedging requirements</a>.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-017-backlink">17</span></span></sup> Effective exchange monitoring of excessive contract positions was weakened in 2000, when the three major nonprofit trading venues, the Chicago Mercantile Exchange, the CBOT and the New York Mercantile Exchange, <a href="">converted into for-profit shareholder corporations</a>.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-018-backlink">18</span></span></sup> They had a duty to shareholders to maximize transactions and trading fees, rather than monitor positions in the public interest.</p> <p class="normal">The failure of exchange self-regulation to effectively monitor position limits and prevent excessive speculation was a major factor in what a Better Markets report called the 2005-2010 <a href="">commodities “boom and bust.”</a><sup><span class="endnote-reference CharOverride-2"><span id="endnote-019-backlink">19</span></span></sup> Commodity index funds, such as those of Goldman Sachs/Standard and Poor’s, packaged agricultural futures contracts together with those of energy and metals contracts to which position limits did not apply. Pension funds, endowments and mutual funds bought the index products, not to hedge commodity price risks, but to “bet long” to increase prices, regardless of market supply demand fundamentals analyzed by commercial hedgers and traditional non-index speculators.</p> <p class="normal">The Dodd Frank Act of 2010 authorized the CFTC to set position limits, not just for more agricultural contracts than the eight authorized by the Commodity Exchange Act, but also for metals and energy contracts. However, a <a href="">successful Wall Street lawsuit in 2012</a><sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-020-backlink">20</span></span></sup> forced the CFTC to both re-propose the rule, review thousands of industry comments and provide a new cost-benefit analysis. By November 2013, when the rule was re-proposed to take into account dozens of Wall Street proposed loopholes, the CFTC had received <a href="">23,000 regulatory comments</a>.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-021-backlink">21</span></span></sup> Wall Street and the exchanges <a href="">continued to oppose</a> any significant limits on derivatives trading.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-022-backlink">22</span></span></sup></p> <p class="normal">W<a id="_idTextAnchor003"></a>hen futures contract prices fail to provide reliable benchmark prices for grain elevators, the <a href="">elevators may cease to allow farmers</a> to forward contract their grain and oilseed production before harvest.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-023-backlink">23</span></span></sup> Without forward contracting, farmers may lack the capital required for their operations and even living expenses.</p> <p class="normal">U.S. commodity market contracts are globally influential in no small part because they are traded in exchanges in dozens of countries. Many <a href="">developing country governments use these global derivatives prices as reference prices</a> for their agriculture policy.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-024-backlink">24</span></span></sup> If these derivatives prices are distorted by excessive speculation, policies based on the reference prices may be distorted too.</p> <p class="normal">Price shocks and volatility are what financialization actors seek to manage to their own benefit and that of their clients. Most public focus on ATS and algorithmic trading has concerned <a href="">price volatility and loss of risk management capacity in the stock markets</a>.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-025-backlink">25</span></span></sup> The exchanges must report open contract positions (bidders have not found sellers) at the end of the trading day. Because most ATS commodity trading strategies are designed to close out trading positions before the end of the day, it is very difficult for the agency to assess if excessive speculation in one or more contracts is occurring. The study of intraday price volatility and price disruption in commodities <a href="doi:10.3390/su11020396">recently undertaken by academics</a> <a href="">and by the CFTC</a><sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-026-backlink">26</span></span></sup> should become a basis for robust rulemaking.</p> <p class="normal">IATP has urged the CFTC to study the impact of market events with uncertain price effects, e.g., <a href="">the impact of African Swine Fever on lean hog futures prices</a>, and ATS price risk management capacity of such events.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-027-backlink">27</span></span></sup> As extreme weather events exacerbated by climate change increase in severity and prevalence, the impact of those events on agriculture commodity prices and price risk management capacity will <a href="">challenge the risk management capacity of all actors</a> in the commodity supply chains, including the CFTC and other commodity derivatives regulators.<sup><span class="endnote-reference _idGenCharOverride-1"><span id="endnote-028-backlink">28</span></span></sup> If regulators persist in allowing the purveyors of ATS to regulate themselves, they may soon find themselves in the position of regulators and legislators who allowed the Big Tech giants to self-regulate and now struggle to understand how these giants are disrupting economies and even democracies.</p> <h2 class="h2">Endnotes</h2> <ol> <li class="endnote"><span id="endnote-001">Jerry W. Markham, “Manipulation of Commodity Futures Prices—The Unprosecutable Crime,” <span class="Endnote-italicize">Yale Journal of Regulation</span>, 1991, at 285. <a href=";context=yjreg">;context=yjreg</a></span></li> <li class="endnote"><span id="endnote-002">James Andrew Felkerson, “$29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient,” Levy Economics Institute, Working Paper No. 698, December 2011. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-003">“The Cost of the Crisis: $20 trillion and counting,” Better Markets, July 2015.</span></li> <li class="endnote"><span id="endnote-004">“Excessive speculation in agricultural commodities: Selected writings 2008-2011,” Institute for Agriculture and Trade Policy, April 2011. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-005">“Historical Highlights: 2017 and Earlier Census Years,” U.S. Department of Agriculture. <a href=",_Chapter_1_US/st99_1_0001_0001.pdf">,_Chapter_1_US/st99_1_0001_0001.pdf</a>.</span></li> <li class="endnote"><span id="endnote-006">Christopher Matthews, “”25 Years Later: In the Crash of 1987 the Seeds of the Great Recession,” <span class="Endnote-italicize">Time</span>, October 22, 2012. <a href=""></a> </span></li> <li class="endnote"><span id="endnote-007">“Financial Liberalization and The Financialization of Commodity Markets,” United Nations Conference on Trade and Development, 2012. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-008">Steve Suppan, “New Beef Cattle (Derivatives) Math,” Institute for Agriculture and Trade Policy, February 6, 2018. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-009">“Position Limits for Derivatives,” Better Markets comment letter to the Commodity Futures Trading Commission, February 10, 2014. At 7. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-010">Roberta Karmel, “Turning Seats into Shares: Causes and Implications of Demutualization of Stock and Futures Exchanges,” <span class="Endnote-italicize">Hastings Law Journal</span>, Vol. 53:2. 2002. <a href=";context=hastings_law_journal">;context=hastings_law_journal</a>.</span></li> <li class="endnote"><span id="endnote-011">Lynn Stout, “How Deregulating Derivatives Lead to a Disaster, and Why Reregulating Them Can Prevent Another,” <span class="Endnote-italicize">Cornell Law Faculty Publications</span>, Paper 723. 2009. <a href=";context=facpub">;context=facpub</a>.</span></li> <li class="endnote"><span id="endnote-012">Suppan, “Ag swaps: A tiny boat on a vast financial data sea,” Institute for Agriculture and Trade Policy, September 5, 2012. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-013">“CFTC Staff Issues Report on Impact of Automated Trading on Futures Markets,” Commodity Futures Trading Commission, March 27, 2019. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-014">Suppan, “Phantom Liquidity and Agricultural Price Shocks,” Institute for Agriculture and Trade Policy, May 11, 2016. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-015">Americans for Financial Reform letter to the U.S. House of Representatives, June 16, 2014. <a href=""></a></span></li> <li class="endnote"><span id="endnote-016">David Enrich, “Regulator Wants Financial Industry to Self-Report Wrong-Doing,” <span class="Endnote-italicize">The New York Times</span>, September 24, 2017. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-017">“Speculative Limits,” Commodity Futures Trading Commission, undated, <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-018">E.g. “The Chicago Mercantile Exchange’s Proposed Demutualization Plan,” Commodity Futures Trading Commission, 2000. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-019">David Frenk and Wallace Turbeville, “Commodity Index Traders and Boom/Bust in Commodity Prices,” Better Markets, 2001. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-020"> Suppan, “U.S. Judge Thwarts Commodity Market Reform,” Institute for Agriculture and Trade Policy, October 10, 2012. <a href=""></a></span></li> <li class="endnote"><span id="endnote-021">Suppan, “Dodd Frank Position Limits on Commodity Contracts: Round 2,” Institute for Agriculture and Trade Policy, November 14, 2013. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-022">Suppan, “The last hurrah for speculative position limits?” Institute for Agriculture and Trade Policy, April 7, 2015. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-023">Nancy Allen, “Elevators squeezed by credit crunch, high costs, market prices,” <span class="Endnote-italicize">The Daily Standard</span>, April 12, 2008. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-024">Myong Goo Kang and Nayana Mahajan, “An introduction to market-based instruments for price risk management,” United Nations Food and Agriculture Organization, 2006, at 30-34. <a href=""></a></span></li> <li class="endnote"><span id="endnote-025">Robin Wigglesworth, “Volatility: how ’algos’ changed the rhythm of the market,” <span class="Endnote-italicize">Financial Times</span>, January 8, 2019. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-026"> “Impact of Automated Orders in Futures Markets,” Staff report, Commodity Futures Trading Commission, March 27, 2019. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-027">Philip Georgiadis, “Goldman jettisons all its commodity trading recommendations,” <span class="Endnote-italicize">Financial Times</span>, April 26, 2019. <a href=""></a>.</span></li> <li class="endnote"><span id="endnote-028">Suppan, “Market Risk Advisory Committee agenda item on Climate Related Market Risk,” Letter to the Commodity Futures Trading Commission, June 19, 2019. <a href=""></a>.</span></li> </ol> <hr /> <p><a href="" taraget="_blank">Download the PDF.</a></p> <hr /> <p><a href="" target="_blank">Read the introduction and the other eight pieces in the series.</a></p> <p> </p> </div> </div> Mon, 20 Apr 2020 05:25:39 +0000 Colleen Borgendale 44233 at Regulating agricultural futures markets to benefit producers, processors and consumers <span>Regulating agricultural futures markets to benefit producers, processors and consumers</span> <span><span lang="" about="/user/2863" typeof="schema:Person" property="schema:name" datatype="">Chris Palmquist</span></span> <span>Thu, 05/09/2019 - 12:25</span> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p><span><span><span><span><span>How difficult can it be to trade contracts based on the cash value of wheat, crude oil, unroasted coffee beans and other raw materials? Sure, there are future risks, physical and financial, but they can be usually managed with the help of trading exchanges, standardized data and lightning-fast computer technology. Political news, such as President Trump’s threat to increase U.S.</div> Thu, 09 May 2019 17:25:34 +0000 Chris Palmquist 43961 at USDA helps High Frequency Traders now; promises help for farmers later <span>USDA helps High Frequency Traders now; promises help for farmers later</span> <span><span lang="" about="/user/2863" typeof="schema:Person" property="schema:name" datatype="">Chris Palmquist</span></span> <span>Thu, 07/19/2018 - 11:58</span> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item">On July 10, USDA announced a change to the decades old policy of releasing its monthly World Agricultural Supply and Demand Estimate (WASDE) first to accredited media representatives and 90 minutes later to the public. In theory, the media interpret WASDE information to the benefit of their subscribers, including traders. But starting in August, the media will receive the WASDE report at the same time as everyone else, due to a policy change made with the analytic assistance of the Commodity Trading Futures Commission.</div> Thu, 19 Jul 2018 16:58:51 +0000 Chris Palmquist 43707 at Managing low and volatile ag price farmer anxiety? The CFTC goes to the Heartland <span>Managing low and volatile ag price farmer anxiety? The CFTC goes to the Heartland</span> <div class="field field--name-field-media field--type-entity-reference field--label-hidden field--items"> <div class="field--item"><article class="media media-image view-mode-feature"> <div class="field field--name-field-image field--type-image field--label-hidden field--item"> <img src="/sites/default/files/styles/feat/public/2018-04/7650332104_4a2a081758_k.jpg?itok=tcdrrY8v" width="950" height="590" alt="High Frequency Trading" typeof="foaf:Image" class="img-responsive" /> </div> <div class="field field--name-field-credit-flickr field--type-string field--label-hidden field--item">Used under creative commons license from <a href="">arselectronica</a></div> </article> </div> </div> <span><span lang="" about="/user/2863" typeof="schema:Person" property="schema:name" datatype="">Chris Palmquist</span></span> <span>Thu, 04/12/2018 - 10:11</span> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item">Dr. Steve Suppan shares his thoughts and observations from a meeting hosted by the Commodity Futures Trading Commission on agricultural derivatives contracts.</div> Thu, 12 Apr 2018 15:11:09 +0000 Chris Palmquist 43642 at Phantom Liquidity and Agricultural Price Shocks <span>Phantom Liquidity and Agricultural Price Shocks</span> <div class="field field--name-field-media field--type-entity-reference field--label-hidden field--items"> <div class="field--item"><article class="media media-image view-mode-feature"> <div class="field field--name-field-image field--type-image field--label-hidden field--item"> <img src="/sites/default/files/styles/feat/public/HFT_scrippsjschool.jpg?itok=xiSoMIyp" width="950" height="590" alt="Phantom Liquidity and Agricultural Price Shocks" typeof="foaf:Image" class="img-responsive" /> </div> <div class="field field--name-field-credit-flickr field--type-string field--label-hidden field--item">Used under creative commons license from <a href="">scrippsjschool</a></div> </article> </div> </div> <span><span lang="" about="/about/staff/account/colleen-borgendale" typeof="schema:Person" property="schema:name" datatype="">Colleen Borgendale</span></span> <span>Wed, 05/11/2016 - 11:22</span> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p>Defenders of high-frequency trading (HFT) <a href="" target="_blank">claim</a> that they provide necessary capital to commodity derivative markets that enable commercial users of commodities to trade in “liquid” markets, i.e., to manage price risks by buying and selling what they want, when they want.</p></div> Wed, 11 May 2016 16:22:49 +0000 Colleen Borgendale 43053 at Congress: Defending Wall Street in the Name of Defending Main Street, Again <span>Congress: Defending Wall Street in the Name of Defending Main Street, Again</span> <div class="field field--name-field-media field--type-entity-reference field--label-hidden field--items"> <div class="field--item"><article class="media media-image view-mode-feature"> <div class="field field--name-field-image field--type-image field--label-hidden field--item"> <img src="/sites/default/files/styles/feat/public/StevesBlog.jpg?itok=wI1zO_zc" width="950" height="590" alt="Congress: Defending Wall Street in the Name of Defending Main Street, Again" typeof="foaf:Image" class="img-responsive" /> </div> </article> </div> </div> <span><span lang="" about="/about/staff/account/colleen-borgendale" typeof="schema:Person" property="schema:name" datatype="">Colleen Borgendale</span></span> <span>Tue, 02/16/2016 - 15:18</span> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p>In a February 4 speech at the Georgetown University Law School, Commissioner Sharon Bowen, of the Commodity Futures Trading Commission (CFTC), <a href="">responded concisely</a> to one of two questions she was asked to discuss: “Is Wall Street reformed? The short answer is no.” The following blog illustrates just a few details entailed in that “no.”</p></div> Tue, 16 Feb 2016 21:18:08 +0000 Colleen Borgendale 43004 at Comment on the Proposed Margin Requirements for Uncleared Swaps for Swaps Dealers and Major Swaps Participants <div data-history-node-id="42979" class="node node--type-document node--view-mode-rss no-field-teaser-image title-not-empty ds-1col clearfix"> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p class="Normal ParaOverride-1">Christopher Kirkpatrick September 14, 2015</p> <p class="Normal ParaOverride-1">Secretary to the Commission <br /> Commodity Futures Trading Commission (CFTC) (Commission)<br /> Three Lafayette Center<br /> 1155 21st Street NW<br /> Washington, DC 20581</p> <p class="Normal">Submitted electronically at <a href=""></a></p> <p class="Normal"><span class="CharOverride-2">Comment on the Proposed Margin Requirements for Uncleared Swaps for Swaps Dealers and Major Swaps Participants</span>—<span class="CharOverride-3">Cross Border Application of Margin Requirements: RIN 3039—AC971</span></p> <p class="Normal">Dear Mr. Kirkpatrick,</p> <p class="Normal">The Institute for Agriculture and Trade Policy (IATP)<span class="Endnote-reference _idGenCharOverride-1">2</span> appreciates this opportunity to comment on the Commission’s above captioned Proposed Rule. We have not commented on the Commission’s past proposed rules for margining cross-border swaps, a very regrettable oversight, given the crucial role that such swaps played in 2007-2009 default cascades among Systemically Important Financial Institutions (SIFIs) that triggered the global economic recession.</p> <p class="Normal">IATP’s primary constituency affected by the Proposed Rule are the commercial end users of derivatives, specifically agricultural commodity derivative end users and the energy commodity end users whose energy inputs to agricultural production, e.g. diesel fuel and fertilizer, comprise an important part of agricultural cost of production. Historically, losses by commercial end users have not endangered the safety and soundness of SIFIs and other large financial institutions. </p> <p class="Normal">However, if commercial hedgers take on excessive risk in aggregate, their derivatives losses could threaten the financial capacity of agribusiness counterparties to manage price risks, and thus would endanger their commercial viability. Weak margin rules, e.g. not requiring commercial hedgers to post margins, might be an incentive for commercial hedgers to take on excessive risk. Therefore, IATP, a member of Americans for Financial Reform (AFR), supports the Commission’s proposal to “require swaps dealers to measure and monitor total aggregate risk related to end user swaps (e.g. 23.154(a)(6) and 23.155(a)(3) of the Proposed Rule).” We further support the AFR proposal to have the Commission “quantify and make public an analysis of the volume of financial entity swaps that could qualify for the commercial end user exemption.”<span class="Endnote-reference _idGenCharOverride-1">3</span> Few commercial hedgers are likely to have the resources to compete with exempted financial entities for liquidity in highly stressed markets. </p> <p class="Heading-1">General Comment</p> <p class="Normal">In June, the Bank for International Settlements (BIS) asked “Is the unthinkable becoming the routine?”<span class="Endnote-reference _idGenCharOverride-1">4</span> What has become routine is continued explicit and implicit central bank credit support for SIFIs and other large financial institutions at extraordinarily low interest rates because the unthinkable—another crisis among the SIFIs and another round of central bank bailouts of the recidivist SIFIs—is still plausible. Despite this massive support, the BIS identified a “broad economic malaise” that “reflects to a considerable extent the failure to come to grips with financial booms and busts that leave deep and enduring economic scars. In the long term, this [failure] runs the risk of entrenching instability and chronic weakness.”<span class="Endnote-reference _idGenCharOverride-1">5</span> </p> <p class="Normal">A crucial factor driving the “financial booms and busts” is the investor panic and credit freeze that results when the counterparty exposures of swaps dealers and major swaps participants (collectively Covered Swaps Entities, CSEs<a id="x.2782"></a>) are “uncleared,” i.e., not subject to the credit and business practice checks of centralized clearing, and when swaps trade data are unreported to regulators. Overleveraged and under-capitalized SIFIs and other CSEs are unable to cover losses in their exposures and their assets cannot be accurately evaluated by market participants or regulators in the opaque Over the Counter Derivatives markets. The panic extended to the highest reaches of the U.S. government. For example, in March 2009, President Obama believed the $600 billion in “toxic” (untradeable at any price) swaps held by Citigroup among its $1.6 trillion in assets made it the next candidate for bankruptcy resolution after the failure of Lehman Brothers. Only the refusal by Chief of Staff Rahm Emanuel and Secretary of Treasury Tim Geithner prevented plans for resolving Citigroup from advancing.<span class="Endnote-reference _idGenCharOverride-1">6</span> </p> <p class="Normal">The Federal Reserve Bank provided at least $29 trillion of emergency loans to make SIFIs and, indirectly, major swaps participants, whole from 2007 to 2010<span class="Endnote-reference _idGenCharOverride-1">7</span>. Nearly half of these emergency loans were provided to bailout foreign-headquartered SIFIs with large U.S. counterparty exposures or to foreign central banks ($8 trillion to the European Central Bank alone) to bailout other foreign CSEs with large U.S. exposures. Accordingly, the “Dodd Frank Wall Street Reform and Consumer Financial Protection Act of 2010” (DFA) requires the Commission to apply rules to the foreign affiliates and subsidiaries of U.S. CSEs whose swaps trading could have a significant effect on the U.S. economy. </p> <p class="Heading-1">The Proposed Rule</p> <p class="Normal">The Proposed Rule concerns the margining of swaps, a necessary tool for risk mitigation in derivatives trading and, more specifically, the application of margin rules to CSEs whose uncleared swaps activities are transacted outside the United States. The Commission acknowledges that its July 2013 cross-border Guidance allowing swaps not guaranteed by the U.S. parent of foreign CSEs to be exempt from the Guidance lead to the trade execution on foreign venues of swaps structured and marketed by U.S. parents. As noted in the proposed rule, “The Commission is aware that some non-U.S. CSEs [Covered Swaps Entities] removed guarantees in order to fall outside the scope of certain Dodd-Frank requirements” (Federal Register Vol. 80:134, July 14, 2015, p. 41385). The so-called “de-guaranteeing” by the non-U.S. CSEs of U.S. parents to avoid the DFA authorized rules has resulted in tens of billions of dollars of migrated swaps trades, mostly to London markets.<span class="Endnote-reference CharOverride-4">8</span> The risks and losses from those swaps could flow back to the U.S. economy, if only because of the reputational risk that a U.S. swaps dealer would suffer if it failed to cover the losses, even those declared by legal artifice to be “de-guaranteed,” of its foreign affiliates and subsidiaries. </p> <p class="Normal">With this Proposed Rule, IATP believes the Commission has taken a critical step to ensure that swaps transactions that have been “de-guaranteed” will not continue to elude effective regulation. The Commission’s decision to go beyond the Guidance’s cross border transaction level requirements to include cross-border entity level requirements, while maintaining consistency with the Prudential Regulators approach to cross-border (FR, 41379), will enable the regulation of swaps, no matter where they are executed. We are persuaded that monitoring and requiring the reporting to the Commission of the swaps trades of the non- U.S. CSEs, even if they are not formally guaranteed by a U.S. person, will improve the capacity of the Commission to carry out its DFA cross border obligations. </p> <p class="Normal">The cross-border swaps reporting to the Commission by Foreign Consolidated Subsidiaries will put the per entity swaps trading data of the non-U.S. CSEs on the consolidated financial statements of the U.S. parents, subject to U.S. Generally Accepted Accounting Principles. Counterparties will be better able to evaluate the risks of trading both with U.S. and non-U.S. CSEs by reading those consolidated financial statements. IATP strongly agrees with the Commission’s view that “the fact that an entity is included in the consolidated financial statement of another is an indication of potential risk to the other entity that offers a clear and objective standard for the application of margin requirements” (FR, 41385). That clear and objective standard will enable swaps counterparties to do accurate modeling of how much posting and collecting of margin they should do at both the transaction and entity level. </p> <p class="Normal">The Commission knows better than anyone that majorities on Wall Street and in Congress aim to cripple the Commission’s authority and budget.<span class="Endnote-reference _idGenCharOverride-1">9</span> Accordingly, the practical exercise of the Commissions’s authority over swaps is best carried out in strategic alliances with other financial regulators. As Commissioner Mark Wetjen stated, “The CFTC is currently understaffed. Meeting the challenge to monitor compliance with the complex and technical requirements of the Margin Rule as it applies to U.S. Foreign Affiliate Dealers today would be difficult. A cross-border approach that is substantively similar to the Prudential Regulators’ Approach may facilitate the Commission in meeting its supervisory challenge” (FR 41405). Commissioner Wetjen has good cause to be concerned about the capacity of Commission staff to monitor compliance with the margin rule. However, the staff will be aided in its monitoring duties by the Financial Stability Board’s (FSB) cross-border trade data aggregation mechanism, if and when the FSB member governments agree on the terms and operationalization of the mechanism.<span class="Endnote-reference _idGenCharOverride-1">10</span> </p> <p class="Normal">IATP urges the CFTC to seek the help of the Prudential Regulators, particularly those at the Federal Reserve Bank, to rebut the swaps dealers’ arguments that the proposed margin and capital reserve requirements for cross-border swaps will put U.S. parent firms at a competitive disadvantage with foreign CSEs, very often the foreign affiliates and subsidiaries of the U.S. parents, rather than Truly Foreign Dealers. </p> <p class="Heading-1">Specific comments and responses to questions posed by the Commission</p> <p class="Heading-2">The Proposed Rule: Overview</p> <p class="Normal">IATP’s strongly supports the Commission’s decision to apply the margin requirement rule on a firm-wide basis “irrespective of the domicile of the counterparties or where the trade is executed” (FR, 41381). IATP believes that the Commission’s proposed hybrid of entity and transaction level application of margin requirements provides the greatest opportunity for effective risk mitigation against swaps counterparty default. Assuming that a Unique Transaction Identifier is agreed upon under the auspices of the Financial Stability Board, as well as a Legal Entity Identifier, comprehensive cross-border monitoring and position aggregation of all data elements in transactions, including margin requirements for cleared and uncleared swaps, will be technologically and legally feasible.<span class="Endnote-reference _idGenCharOverride-1">11</span> </p> <p class="Normal">IATP agrees with the Commission that the possibility of substituted compliance for margining requirements and the methodology for calculating margins should be made available to non-U.S. CSEs in jurisdictions where the Commission has determined that the outcomes of margining requirements and calculation methodologies provide risk mitigation outcomes similar to those under the Proposed Rule. (FR, 41382). Our agreement is in principle, in concession to principles of international comity. IATP believes that the criteria for a comparability determination between jurisdictions is better specified in the Proposed Rule (FR, 41393) than in the Guidance. We nevertheless believe that the Final Rule on margins for uncleared swaps would benefit by an appendix that would illustrate comparable and quantitative outcomes of swaps margining in other jurisdictions with those under Commission authority, once margining requirements and margin calculation methodologies are agreed upon in those jurisdictions.</p> <p class="Heading-2">Key Definitions</p> <p class="Normal">“U.S. Person.” IATP agrees with the seven proposed criteria for the definition of “U.S. person” (FR, 41382). IATP agrees with the Commission that majority ownership is not a probative criterion for whether or not a CSE is a “U.S. person” to which the margining rule for uncleared swaps applies. (Responding to question 2, FR p. 41384) Ownership can be complex and variable over the life of a fund invested in cross-border swaps, so determining ownership at the transaction level could prove difficult and resource consuming. But our agreement with the Commission is not due to a belief that determination of ownership might require “overly burdensome due diligence” (FR, 41383). It is no doubt possible to disguise ownership of a CSE and whether a swaps counterparty is a “U.S. person” subject to the Commission’s authority, and thereby frustrated by the due diligence of prospective investors. However, if reporting to and surveillance by the Commission of the swaps transactions of U.S. and non-U.S. CSEs is comprehensive and standardized, the consolidated financial statements of the U.S. parents and Foreign Consolidated Subsidiaries will enable counterparties to determine whether they wish to unwind current positions and/or do future transactions with the U.S. parents and/or their non-U.S. CSEs. At that practical point, the majority ownership criterion of “U.S. person” becomes superfluous to the application of “U.S. person” in surveillance and possible enforcement activities. </p> <p class="Normal">IATP does not believe that the Commission’s definition of “U.S. Person” should be identical to the Securities and Exchange Commission’s definition and thereby “exclude certain designated (and any similar) international organizations, their agencies and pension plans” (FR, 41384, question 4a). An argument based on principles of international comity can and will be made for excluding “international organizations” from the definition of “U.S. person” to which DFA authorized rules and cross-border Guidance applies. The pension funds, endowments and other funds of “international organizations” may be traded by the non-U.S. CSEs of U.S. parents. However, principles of international comity apply to governments and intergovernmental organizations, not to all international organizations.<span class="Endnote-reference _idGenCharOverride-1">12</span> </p> <p class="Normal">Hence, the Commission should not adopt the broadly defined SEC exclusion. Intergovernmental organizations that may investment in swaps, such as the International Monetary Fund, the World Bank Group and the United Nations Secretariat, are counterparties who, though domiciled in the United States, cannot be subject to Commission authority as “U.S. persons.” However, such intergovernmental organization domiciled in the United States should be informed that if they are counterparties to swaps traded by non-U.S. CSEs of U.S. parents, their swaps trading will appear on the consolidated financial reporting of the U.S. parents. The Commission should advise such intergovernmental organizations that while it cannot require them to comply with margining and other cross-border requirements, they should voluntarily practice those requirements to realize the objectives of the intergovernmental investment charters. </p> <p class="Normal"><span class="CharOverride-2">“Guarantee”</span> The non-U.S. CSE legal stratagem of “de-guaranteeing” to evade DFA swaps requirements has invalidated the legal and financial purpose of a guarantee, exposing the U.S. economy, as well as the counterparties, to uncovered risks. Therefore, IATP believes that the Commission is prudent to propose that “the terms of the guarantee need not necessarily be included within the swap documentation (so long as legally enforceable rights are created under the laws of the relevant jurisdiction), provided that a swap counterparty has a legally enforceable right . . . to collect from the U.S. person in connection with the non-U.S. person’s obligations under the swap” (FR, 41384). In effect, the Commission is proposing that the definition of “guarantee” not be confined to the definition of “guarantee” in a swaps Master Agreement, such as that of the International Swaps and Derivatives Association (ISDA).</p> <p class="Normal">IATP supports this proposed definition of “guarantee,” rather than the broader definition in the Guidance, because the proposed definition would allow both the Commission and counterparties to a swap to pursue legal recourse in the event of a non-U.S. CSE default due to the misrepresentation of the guarantee, whether in a Master Agreement or not. (Responding to question 1, FR 41385). We agree with the Commission’s assumption that a non-U.S. CSE is likely to meet the definition of a Foreign Consolidated Subsidiary whose financial arrangements with the U.S. parent will constitute a guarantee, whether explicit or implicit (Responding to question 2, FR 41385).</p> <p class="Normal">Because the proposed definition is an implicit challenge to the authority of the ISDA Master Agreement, we would not be surprised if the ISDA and other financial industry organizations sue to prevent the finalization of the Proposed Rule and particularly this change in the definition of “guarantee.” Therefore, the Commission should consider including in the Final Rule a chapeau applied to the definitions according to which the abuse of Commission’s definitions and other rule components by U.S. and non-U.S. CSEs will be considered part of a CSE’s regulatory evasion strategy, subject to discipline under the regulatory evasion provisions of the Commodity Exchange Act. </p> <p class="Normal"><span class="CharOverride-2">“Foreign Consolidate Subsidiaries”</span> The Commission proposes to include under the Foreign Consolidated Subsidiaries (FCS) definition those non-U.S. CSEs whose uncleared swaps are not guaranteed by a U.S. person and whose counterparty default may have “negative impact on their U.S. parent and the U.S. financial system” (FR 41385). The CFTC must work with all Prudential Regulators to ensure that the financial reporting of U.S. parent swaps dealers, including reporting of swaps activities by their Foreign Consolidated Subsidiaries, be consolidated under U.S. general accepted accounting principles (U.S. GAAP), as proposed in the Commission’s margin rule (FR 41385). The proving ground of the bright line test as to whether the uncleared swaps trading of a non-U.S. CSE come under the FCS definition is the consolidated financial statement of the U.S. parent and the non-U.S. CSEs that it controls. </p> <p class="Normal">IATP believes that the proposed consolidation test should be used “in lieu of the control test proposed by the Prudential Regulators” (in response to question 2, FR, 41386). The consolidation test enables the Commission to have a more comprehensive and specified understanding of the total swaps activity of the U.S. parent and its non-U.S. CSEs, and enables the Commission to determine whether the initial and variation margin of the FCS is adequate to the transaction and entity level risks posed by their uncleared swaps. </p> <p class="Normal">However, uncleared swaps are sometimes used to move a counterparty’s debt off the balance sheet, so whether the evolution of U.S. GAAP will be adequate to capture the off-balance sheet swaps of FCSs cannot be assumed with certainty.<span class="Endnote-reference _idGenCharOverride-1">13</span> Given the post-Enron accounting scandals associated with the use and abuse of off-balance sheet accounting<span class="Endnote-reference _idGenCharOverride-1">14</span>, the definition of how the FSC’s consolidated finance reporting is to include a comprehensive and current accounting of off-balance sheet assets and debts should be reflected in the FCS definition. Furthermore, the professional backgrounds and allegiances of the members of the U.S. Federal Accounting Standards Board that determines changes to U.S. GAAP is a predictor of changes to those standards.<span class="Endnote-reference _idGenCharOverride-1">15</span> The Commission may wish to consider whether the definition of “Foreign Consolidated Subsidiary” should include an option for the consolidated financial reporting of the FCS to be carried out according to International Financial Reporting Standards<span class="Endnote-reference _idGenCharOverride-1">16</span>, in the event that these agree with U.S. FASB participation and those standards capture off-balance sheet swaps better than the U.S. GAAP. </p> <p class="Normal">IATP claims no expertise in accounting standards, but since the quality of U.S. GAAP is a critical factor in achieving the DFA purposes of consolidating cross-border swaps with those of the U.S. parent, the Commission should avail itself of expertise to ensure that the U.S. GAAP is adequate for capturing off-balance sheet accounting for the consolidated financial reporting of the U.S. CSE parent and its non-U.S. CSEs. Since the Proposed Rule would make substituted compliance for FCSs “broadly available . . . to the same extent as other non-U.S. CSEs whose obligations under the relevant swap are not guaranteed by a U.S. person,” (FR 41385) the Commission may find it necessary to review the use of International Financial Reporting Standards in foreign jurisdictions that are seeking substitute compliance for their swaps reporting standards. </p> <p class="Normal">IATP believes that the FCS definition should include non-U.S. CSEs whose U.S. parent is not required to prepare a consolidated financial statement (in response to question 4, FR 41386). While it is not likely that U.S. SIFIs and other large financial institutions that are publicly held companies would revert to a private partnership model of ownership to avoid inclusion under the FCS requirements, it is not inconceivable that a U.S. SIFI or other large financial institution might spin off its swaps trading entities as private partnerships. Such spun-off entities could elude a securities law requirement to file consolidated financial statements that would include the swaps activities of all of the non-U.S. CSEs of the U.S. parent entity. The purpose of the FCS designation and requirements would be partially vitiated if a private partnership CSE were able to maintain consolidated financial reports that were beyond the scope of the Commission’s regulatory authority.</p> <p class="Normal">Finally, inclusion of immediate and intermediate parent entities of the non-U.S. CSEs of the U.S. parent filing a consolidated financial report under the FCS definition may enable the Commission to determine if errors in the consolidated financial report originated with immediate or intermediate parents of the non-U.S. CSEs. While the ultimate U.S. parent would retain legal responsibility for the consolidated financial statement under the FCS definition, inclusion of the immediate and intermediate U.S. parents might enable the Commission to inform the ultimate U.S. parent in staff letters where the financial reporting of the immediate and intermediate U.S. parents did not include the non-U.S. CSE data. (responding to question 5, FR 41386). </p> <p class="Heading-2">Applicability of Margin Requirements to Cross-Border Uncleared Swaps</p> <p class="Normal">IATP agrees with the Commission that substituted compliance should not be available for the collection of margin by a U.S. CSE from the non-U.S. CSE counterparty for swaps guarantee by the U.S. parent. The Commission’s oversight of the safety and soundness of the U.S. parent requires that non-U.S. CSEs of the U.S. parents comply with the collection of margin, just as the U.S. CSEs of the U.S. parent are required to do. There must be no different treatment of non-U.S. CSEs in this respect (responding to question 1, FR 41387).</p> <p class="Normal">The Proposed Rule would provide for “limited substituted compliance for margin posted to (but not collected from) any non-U.S. counterparty (including a non-U.S. CSE) whose obligations under the uncleared swap are not guaranteed by a U.S. person” (FR 41387). IATP does not understand under what conditions and why substitute compliance could be available for the posting of margin. If, for example, the posting of margin in a non-U.S. jurisdiction allows for the re-hypothecation of non-cash collateral (e.g. junk bonds) for initial or variation margin, how would the Commission determinate that the posting of non-cash collateral by a non-U.S. CSE would still ensure the safety and soundness of the U.S. parent, taking into account the reputation risk and loss of business suffered by a U.S. parent that does not cover the losses of its non-U.S. CSEs, whether guaranteed or not? IATP would like the Commission to provide an illustrative example of a case in which substitute compliance might be granted to a non-U.S. swap counterparty. </p> <p class="Normal">IATP understands that the supervisory interest of a foreign regulator may be greater than that of the Commission when the uncleared swaps of a non-U.S. CSE are not guaranteed by a U.S. parent, since losses from such swaps might have a negative impact on the economy of the foreign regulator’s jurisdiction. Hence, the Commission proposes to make substitute compliance with the Commission’s margin requirements “more broadly available to a Foreign Consolidated Subsidiary whose obligations under the relevant swap are not guaranteed by a U.S. person” ( FR 41387). Such FCSs should not be treated the same, regarding compliance with the Commission’s margin requirements, as those non-U.S. CSEs whose relevant swaps are guaranteed by U.S. parents (in response to question 2.1, FR 41387).</p> <p class="Heading-2">Cost benefit considerations</p> <p class="Normal">IATP agrees with the Commission that “given that foreign jurisdictions do not yet have in place their margin rules, it is not possible to fully evaluate the costs and benefits associated with the Proposed Rule” (FR, 41394). Nevertheless, for the Commission’s future estimates of cost benefit considerations, we support the Commission’s proposal to use as its baseline for cost benefit estimates, “the swaps market as it would operate on the Proposed Margin Rules were [they] fully implemented” (FR, 41393). The Commodity Exchange Act does not require cost benefit analysis before the implementation of a Final Rule. Ex ante cost benefit estimates prior to implementation tend to be econometric projections that overstate costs to CSEs and vastly underestimate the benefits of safety and soundness to the SIFIs, CSEs and to the financial system as a whole.<span class="Endnote-reference _idGenCharOverride-1">17</span> In sum, at this stage of foreign jurisdiction rulemaking, IATP believes that the “Commission’s assumptions about the costs and benefits of the Proposed Rule [are] accurate” (FR, 41400). </p> <p class="Normal">The Commission’s question “Is swap market fragmentation detrimental to various market participants when there is post-trade transparency of swaps?” (question 4, FR 41400) anticipates a comment made by CSEs, and even foreign regulators, in response to the cross-border Guidance and other Commission rulemaking regarding rulemaking itself (and not regulatory arbitrage) for swap market fragmentation. In our view, making swaps transactions, recording and reporting standardized, comprehensive, in near real time and transparent—i.e. on par with futures and options—will reduce the opportunity for regulatory arbitrage that is mischaracterized as market fragmentation. If “fragmentation” results in more and better regulated markets that compete for trades on the basis of their integrity and transparency for futures, options and swaps, so be it. </p> <p class="Heading-1">Conclusion</p> <p class="Normal">The Proposed Rule has more components and raises more questions than we are capable of commenting on. IATP hopes that the forgoing comments aid the Commission and its staff to finalize within the coming year a margin rule that will help facilitate cross border swaps trading without imperiling the safety and soundness of U.S. parents and CSEs and the economic viability of commercial hedgers that use uncleared swaps. Table A of the Proposed Rule and its application gives both CSEs and foreign regulators specified and explicit requirements and offers a sound basis for cross-border comparability determinations.</p> <p class="Normal">IATP is aware that the cross-border negotiations with the European Commission continue to be difficult, because of the many interlocking rules of a cross border regime.<span class="Endnote-reference _idGenCharOverride-1">18</span> The Commission has granted European CSEs a long delay to September 2016 to resolve differences over where the Commission will require compliance by European Union member state CSEs and where substitute compliance may be available. Negotiations over margin calculation methodology are among the most important to ensures that both initial and variation margin is adequate in quantity and quality to serve, along with adequate capital reserve requirements, as a guarantor of the safety and soundness of the U.S. parents. IATP encourages the Commission to continue to insist on a gross margin calculation methodology, rather than the net margin methodology proposed by the European Commission’s Directorate of Financial Markets.<span class="Endnote-reference _idGenCharOverride-1">19</span></p> <p class="Heading-1">Endnotes</p> <p class="Endnote">1. <a href=""></a>.</p> <p class="Endnote">2. IATP is a U.S. nonprofit, 501(c)(3) nongovernmental organization, headquartered in Minneapolis, Minn., with an office in Washington, D.C. Our mission states, “The Institute for Agriculture and Trade Policy works locally and globally at the intersection of policy and practice to ensure fair and sustainable food, farm and trade systems.” To carry out this mission, as regards commodity market regulation, IATP has participated in the Commodity Markets Oversight Coalition (CMOC) since 2009, and the Derivatives Task Force of Americans for Financial Reform since 2010. IATP has submitted several comments on U.S. Commodity Futures Trading Commission rulemaking, and on consultation papers of the International Organization of Securities Commissions, Financial Stability Board, the European Securities and Markets Authority, and the European Commission’s Directorate General for Internal Markets.</p> <p class="Endnote">3. Americans for Financial Reform, Comment letter on “Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants”, RIN 3038-AC97,” December 2, 2014, at 10. <a href=";SearchText=Americans%20for%20Financial%20Reform">;SearchText=Americans%20for%20Financial%20Reform</a>.</p> <p class="Endnote">4. Bank for International Settlements, 85th Annual Report (1 April 2014- 31 March 2015), June 28, 2015, 2. <a href=""></a>.</p> <p class="Endnote">5. Ibid. </p> <p class="Endnote">6. Ron Suskind, The Confidence Men: Wall Street, Washington and the Education of a President, (New York: Harper Collins), 2025-220. </p> <p class="Endnote">7. James Andrew Felkerson, “”$29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient,” Levy Economics Institute, Working Paper 698, December 2011. <a href=""></a>.</p> <p class="Endnote">8. Charles Levinson, “U.S. banks moved billions of trades beyond Washington’s reach,” Reuters, August 21, 2015. <a href=""></a>.</p> <p class="Endnote">9. Peter Schroeder, “House Ag Chairman: No CFTC funding without reauthorization,” The Hill, July 29, 2015. <a href=""></a>.</p> <p class="Endnote">10. <a href=""></a>.</p> <p class="Endnote">11. “Feasibility study on approaches to aggregate OTC trade repository data,” Financial Stability Board, February 4, 2014, at 8-9. <a href=""></a>.</p> <p class="Endnote">12. <a href=""></a>.</p> <p class="Endnote">13. Marie Leon, “The Next Accounting Controversy,” CFO, April 30, 2009. <a href=""></a>.</p> <p class="Endnote">14. For a popularized summary of major off-balance sheet accounting scandals, see <a href=""></a> For recommendation on disciplining the use of off-balance sheet accounting, see Frank Partnoy and Lynne E. Turner, “Bringing transparency to off-balance sheet accounting,” in Make Markets Be Markets, Roosevelt Institute, 2010. <a href=""></a>.</p> <p class="Endnote">15. Karthik Ramanna, “Why ‘Fair Value’ Is the Rule,” Harvard Business Review, March 2013. <a href=""></a>.</p> <p class="Endnote">16. Ashley Harper et al, “The Impact of Switching to International Financial Reporting Standards on U.S. Businesses,” Journal of International Education Research, Vol. 8:4 (2012). <a href=";context=busi_fac_pubs">;context=busi_fac_pubs</a>.</p> <p class="Endnote">17. E.g. Dennis Kelleher, Stephen Hall and Katelynn Bradley, “Setting the Record Straight on Cost-Benefit Analysis and Financial Reform at the SEC,” Better Markets, July 31, 2012. <a href=""></a>.</p> <p class="Endnote">18. E.g. Neil Roland, “US-EU talks slow to advance on clearinghouse recognition, says Massad,” MLex Market Insight, September 11, 2015.</p> <p class="Endnote">19. <a href=""></a>.</p> </div> <div class="field field--name-upload field--type-file field--label-above"> <div class="field--label">Upload</div> <div class="field__items"> <div class="field--item"><span class="file file--mime-application-pdf file--application-pdf icon-before"><span class="file-icon"><span class="icon glyphicon glyphicon-file text-primary" aria-hidden="true"></span></span><span class="file-link"><a href="" type="application/pdf; length=162163" title="Open file in new window" target="_blank" data-toggle="tooltip" data-placement="bottom">2015_11_24_IATPMarginRuleComment.pdf</a></span><span class="file-size">158.36 KB</span></span></div> </div> </div> </div> Fri, 04 Dec 2015 00:00:30 +0000 Colleen Borgendale 42979 at The last hurrah for speculative position limits? <span>The last hurrah for speculative position limits?</span> <div class="field field--name-field-media field--type-entity-reference field--label-hidden field--items"> <div class="field--item"><article class="media media-image view-mode-feature"> <div class="field field--name-field-image field--type-image field--label-hidden field--item"> <img src="/sites/default/files/styles/feat/public/macAndCheese.jpg?itok=kcROmHwh" width="950" height="590" alt="The last hurrah for speculative position limits?" typeof="foaf:Image" class="img-responsive" /> </div> <div class="field field--name-field-caption field--type-text-long field--label-hidden field--item"><p>The CFTC filed a lawsuit against the Kraft Foods Group and its spin-off, Mondelez Global alleging they engaged in numerous “non-competitive trade practices” in the CBOT wheat contract.</p> </div> <div class="field field--name-field-credit-flickr field--type-string field--label-hidden field--item">Used under creative commons license from <a href="">srboisvert</a></div> </article> </div> </div> <span><span lang="" about="/about/staff/account/colleen-borgendale" typeof="schema:Person" property="schema:name" datatype="">Colleen Borgendale</span></span> <span>Tue, 04/07/2015 - 13:37</span> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p>For more than four years, IATP has been submitting comments on proposed U.S. regulations to limit the share of positions controlled by financial speculators in commodity derivatives markets. A position is a financial interest in one or more contracts of a commodity, e.g. Chicago Board of Trade No. 2 Yellow Corn.</p></div> Tue, 07 Apr 2015 18:37:02 +0000 Colleen Borgendale 42823 at Farmers and eaters lose, corporate money wins in budget deal <span>Farmers and eaters lose, corporate money wins in budget deal</span> <div class="field field--name-field-media field--type-entity-reference field--label-hidden field--items"> <div class="field--item"><article class="media media-image view-mode-feature"> <div class="field field--name-field-image field--type-image field--label-hidden field--item"> <img src="/sites/default/files/styles/feat/public/9416261667_3d66a2a4b5_o.jpg?itok=w9nwPf4x" width="950" height="590" alt="Farmers and eaters lose, corporate money wins in budget deal" typeof="foaf:Image" class="img-responsive" /> </div> <div class="field field--name-field-credit-flickr field--type-string field--label-hidden field--item">Used under creative commons license from <a href="">91223108@N02</a></div> </article> </div> </div> <span><span lang="" about="/about/staff/account/andrew-ranallo" typeof="schema:Person" property="schema:name" datatype="">Andrew Ranallo</span></span> <span>Thu, 12/11/2014 - 12:05</span> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p>The amazingly terrible new spending agreement reached by the House and Senate this week illustrates the heavy price we all pay for a government increasingly influenced by <a href="">big corporate and financial industry donors</a>.</p></div> Thu, 11 Dec 2014 18:05:46 +0000 Andrew Ranallo 42726 at