Commodity Futures Trading Commission 

Agricultural Advisory Committee 

30th Meeting, July 21, 2004 

Status Report on Agricultural Trade Options 

Introduction 

At the last meeting of the AAC, Paul Architzel, Chief Counsel of the Division of 

Economic Analysis, was available to answer your questions concerning agricultural trade 

options (ATOs). Now that Paul has left the Commission, I seem to have inherited the 

title of resident legal expert on ATOs. I approach this role feeling rather like a house 

painter who’s been asked to stand in for Vincent Van Gogh. Nevertheless, I will do my 

best to bring you up to date. 

I have been asked to give the committee a status report on agricultural trade options 

issues. I will cover three main points: (1) a brief statutory and regulatory history of 

ATOs; (2) a recap of the ATO discussions from the last meeting of this committee; and 

(3) some questions and issues regarding ATOs and other over-the-counter agricultural 

contracts that the committee may wish to consider at future AAC meetings. 

Statutory and Regulatory History of ATOs 

Going all the way back to 1936, problems blamed on speculative abuses led to a statutory 

ban on all options trading. The ban applied to both on- and off-exchange options in the 

basic agricultural commodities – the only commodities then regulated. When the CFTC 

was created in 1974, it was given expanded jurisdiction over futures and options in all 

commodities, including plenary authority over options trading in non-agricultural 

commodities. The Commission used that authority to allow exchange-traded options in 

non-agricultural commodities. 

However, the statutory ban on agricultural options was left in place. Only after the 

Commission’s 1982 reauthorization was that statutory ban lifted, which allowed the 

Commission to authorize exchange-traded agricultural options. Even then, the 

Commission let stand a regulatory prohibition on off-exchange agricultural trade options 

(ATOs) – even though trade options in all other commodities could be offered to 

commercial users subject only to an antifraud rule. 

It was not until 1997 that the Commission finally proposed lifting the regulatory ban and 

permitting agricultural trade options. Rules to allow ATOs, subject to registration, 

disclosure, recordkeeping, reporting and other requirements, were published in April 

1998. The rules met with what we in Washington would characterize as “limited 

success,” which is to say that nobody participated in the ATO program. In December 

1999, the ATO rules were further amended to permit cash settlement and streamline 

registration and disclosure requirements. Under the amended rules, one firm has 

registered as an agricultural trade option merchant. 
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Recap of ATO Discussions from Last AAC Meeting 

At the time of the last AAC meeting, in March 2001, a little over three years ago, the 

Commission was considering new regulations to implement the provisions of the 

Commodity Futures Modernization Act. Thus, the relevant agenda item was entitled, 

“Review of agricultural trade options (ATOs) and other risk management alternatives in 

light of the CFMA and proposed regulatory changes.” The committee heard from a panel 

of three speakers, Jack Dougherty, of Kent Feeds, Bill Dodds of The Andersons (and 

NGFA) and Melinda Schramm, Chairman of the National Introducing Brokers 

Association. 

The Committee asked Mr. Dougherty to appear because his firm, Kent Feeds, was (and 

still is) the only firm to register as an agricultural trade option merchant. Mr. Dougherty 

explained that Kent Feeds developed its ATO program to help their feed customers – 

independent hog producers – manage their risks and stay in business. By offering put 

options to producers, Kent allows them to lock in a minimum price for their hogs and, at 

the same time, they can lock in a price for the amount of feed necessary to raise the 

number of hogs covered by the option. The program is fairly simple and straightforward 

and Mr. Dougherty said Kent had not experienced any problems complying with the 

Commission’s regulations. He did note that the program would not have been possible 

without the 1999 amendments to allow cash settlement of ATOs, since the original rules 

required the option grantor to take delivery of the physical commodity, which would have 

been impractical for a feed manufacturer such as Kent Feeds. 

Mr. Dodds stated the NGFA’s view that “ATO issues are simply a part of a much broader 

issue, the need for greater legal certainty for off-exchange forward agricultural 

contracts.” He noted that cash forward contracting is the predominant form of price risk 

management used by grain producers and others, but uncertainty about how the CFTC 

might view certain contract terms, and the resulting perceived litigation risk, may reduce 

the use of otherwise beneficial contracts. Mr. Dodds submitted hypothetical examples of 

a number of contract terms and asked how the Commission would view each example. 

The Commission’s Division of Economic Analysis responded to Mr. Dodds’ questions on 

August 1, 2001 and a copy of that letter was sent to each member of the AAC. With 

respect to the ATO program, Mr. Dodds suggested that the Commission should approach 

commercials in the grain, cotton, livestock and other commodity sectors and ask what 

changes are needed in the ATO program to attract them to begin writing trade options. 

Ms. Schramm expressed the view of the NIBA that the ATO program is under-utilized 

because “the current large players in the gain trade” are reluctant to open themselves up 

to registration with the Commission or other regulation. Instead, they are “hid[ing] 

behind the forwards exclusion” and offering transactions that are very “ATO-like,” but 

are doing so without the disclosures and other customer protections offered by the 

Commission’s regulations. Ms. Schramm suggested that, if the ATO regulations were 

further relaxed, “the atmosphere for fraud on the customer would definitely be 

increased.” 
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Questions and Issues Concerning ATOs and Other OTC Agricultural Contracts 

My third and final topic is questions and issues regarding ATOs and other agricultural 

contracts that might be appropriate for the Committee to consider at some future meeting. 

Let me just read through this list. Some of these are questions that were sent out to the 

Committee in advance of the last AAC meeting and still remain unanswered; others have 

come up since that last meeting. 

Agricultural Trade Options 

1. Why hasn’t the current ATO program been more utilized? Is the program’s 

limited use a function of the ATO rules? Is it due to the generally low 

commodity prices experienced since the rules came into effect (i.e., why use an 

option to lock in a loss)? Or is it due to competition from government price 

support programs (i.e., why pay a premium for something you can get from the 

government for free)? 

2. Should the ATO rules be amended so that the exemption from the rules is based 

only on the $10 million net worth requirement, rather than the current threepronged test (thus allowing hedge funds to participate in ATOs and provide 

liquidity to the OTC agricultural derivatives market)? 

3. The CFMA’s thrust is to have tiered regulation based on the nature of the 

participant. As noted, the ATO rules provide for an exemption for participants 

with $10 million net worth. Should the ATO net worth exemption level be set at 

a lower level – perhaps $1 million as some have suggested? 

4. Would such an approach disenfranchise smaller producers? That is, if ATOs 

could be offered to producers with $1 million net worth and above without any 

regulatory requirements, would elevators or other option grantors have any 

incentive to offer the regulated instruments to smaller producers? 

5. If the ATO program is further modified, should the Commission retain the 

prohibition against producers writing ATOs (and thereby assuming the potentially 

greater risks associated with granting options)? 

6. Should the Commission drop the ATO program altogether and allow trade options 

in agricultural commodities to trade without any regulatory restrictions, subject 

only to a general anti-fraud rule, just like trade options in other commodities? 

7. Would allowing unrestricted trading in ATOs (or imposing some lesser level of 

deregulation) increase the potential for fraud against producers? 

Other Agricultural Derivatives Contracts 
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1. Is any significant amount of business currently being done in bilateral agricultural 

commodity swaps? 

2. The CFMA’s swaps exclusion, § 2(g), does not apply to agricultural commodities. 

Agricultural swaps remain subject to the more restrictive provisions of Part 35 of 

the Commission’s rules (the pre-CFMA regulatory swaps exemption). Part 35 

remains on the books solely to govern agricultural swaps. Should Part 35 be 

amended to allow bilateral agricultural swaps to trade subject to the same 

conditions as bilateral swaps in other commodities (e.g., allowing agricultural 

swaps to be fungible and standardized)? 

3. The CFMA allows for future CFTC rulemaking to permit the enumerated 

agricultural commodities to trade on DTFs. At what point in the development of 

B2B trading platforms should the Commission consider such rule changes? What 

criteria should the Commission look at in proposing ground rules for agricultural 

commodities on DTFs?