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COMMODITY FUTURES TRADING COMMISSION

AGRICULTURAL ADVISORY COMMITTEE

29th MEETING

Wednesday, March 28, 2001

1:40 p.m.

Three Lafayette Centre

Suite 1000

1155 21st Street, N.W.

Washington, D.C. 20581
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P A R T I C I P A N T S

MEMBERS PRESENT:

David D. Spears, Commissioner, Committee Chair

Trenna R. Grabowski, American Agri-Women

John Blanchfield, American Bankers Association

Neal P. Gillen, American Cotton Shippers

 Association

Bob Metz, American Soybean Association

Richard Gupton, Independent Community Bankers

Brian Dierlam, National Cattlemen's Beef

 Association

William P. Roenigk, National Chicken Council

Susan Keith, National Corn Growers Association

William A. Dodds, National Grain and Feed

 Association

Elizabeth Haws, National Grain Trade Council

Robert L. White, National Grange

Gary C. Martin, North American Export Grain

 Association

Phyllis Honor, USDA, Risk Management Agency

ALSO PRESENT:

James E. Newsome, Acting Chairman CFTC

Thomas J. Erickson, Commissioner

Melinda Schramm, National Introducing Brokers Association

Jack Dougherty, Kent Feeds, Inc.
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C O N T E N T S

 PAGE

Welcoming Remarks

 Commissioner David D. Spears

 Committee Chair 3

The Commodity Futures Modernization Act

of 2000 [CFMA] and Proposed Changes to

CFTC Regulations

 Paul Architzel, Chief Counsel

 DEA, CFTC 13

"Special Procedures to Encourage and 

Facilitate Bona Fide Hedging by 

Agricultural Producers," New Section 4p

of the Commodity Exchange Act, as added by

the CFMA

 Rob Hobson, Senior Economist

 DEA, CFTC 44

Review of Agricultural Trade Options [ATOs]

and Other Risk Management Alternatives in

Light of CFMA and Proposed Regulatory 

Changes 56

 Jack Dougherty, Kent Feeds, Inc. 61

 Bill Dodds

 National Grain and Feed Association 69

 Melinda Schramm

 National Introducing Brokers Association 76

Warehouse Act of 2000 - Implications for

Agricultural Futures 129

 David Lehman 130

Report on Current Activities by USDA's

Risk Management Agency 136
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 Phyllis Honor, Acting Administrator

 Risk Management Agency 138
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P R O C E E D I N G S

CHAIRMAN SPEARS: Good afternoon. It's time to 

get started. We're missing a few members that are 

supposed to be here. I'm sure they'll come in in a few 

minutes. I want to start by first thanking all of you 

for attending this 29th Meeting of the Commission's 

Agricultural Advisory Committee. I recognize that 

participating in these meetings means a significant 

commitment of time, effort, and expense on all your parts 

and for all concerned.

We certainly want you to be aware that the 

commissioners and the staff of the CFTC truly appreciate 

your contributions to the commission's decision-making 

process. Today's agenda consists of topics that the 

commission is very interested in getting input from the 

committee members.

In addition, I have included other topics that 

are more for informational purposes for the committee 

members themselves.

The first topic today addresses the Commodity 

Futures Modernization Act, the CFMA, of 2000, which 

Congress passed at the close of its last session. The 

CFMA represents the most significant change in this 
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country's futures regulatory system since 1974 

legislation that enacted the creation of the CFTC.

On March 9, the commission published the first 

of several rulemaking proposals necessary to implement 

the CFMA. Our first speaker today, Paul Architzel, Chief 

Counsel of the Division of Economic Analysis, has been 

the commission's point man in developing the new 

regulatory structure mandated by the CFMA.

Paul will brief us on the provisions of the 

CFMA and the proposed rules that are of particular 

significance to the agricultural community themselves.

As I noted, these rules were published on March 

9 with a 30 day comment period. Therefore, we are within 

the 30 day comment period which expires April 9, and the 

transcript of this portion of the meeting will be used as 

part of the official record in regard to the comment 

period.

Following that, Ron Hobson, also a member of 

Economic Analysis staff, will review a particular CFMA 

provision aimed specifically at agriculture entitled 

"Special Procedures to Facilitate and Encourage Bona Fide 

Hedging by Ag Producers."
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Following that, we will have a topic entitled 

"Review of Ag Trade Options and Other Risk Management 

Alternatives in Light of the CFMA and Proposed Regulatory 

Changes." During that time period, we will have a panel 

of speakers who will hopefully provoke ideas and debate 

for an open dialogue among the committee members and the 

commission in regard to ag trade options and ag bilateral 

transactions.

I hope that portion of the meeting will provide 

significant opportunity for input. As I mentioned, we 

will have presentations today both for receiving input 

from the committee members, which will be vitally 

important to the commission, as well as presentations 

that will be utilized for information purposes for the 

committee members, such as the presentation on the 

Warehouse Act of 2000 and its implications for 

agriculture.

In addition, we're fortunate to have USDA Risk 

Management Agency here today represented at the 

commission, and they will provide an update on their 

activities as well as we'll have staff reporting on 

recent development by electronic trading facilities 

across the country.
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I look forward to a productive meeting today. 

I'd like to get started by introducing my fellow 

commissioners and then we'll have introduction of the 

committee members themselves.

First, I'd like to introduce Acting Chairman 

Jim Newsome. As you know, Jim is no stranger to this 

group, part of agriculture for a number of years. So, 

Jim, any comments you might have.

ACTING CHAIRMAN NEWSOME: Thank you, Chairman 

Spears, and they will be brief. I wanted to echo 

Commissioner Spears' welcome to this group. I want to 

thank him and his staff for the tremendous amount of time 

and effort that they put into organizing and chairing 

this most important advisory council at the commission.

Personally I want to thank everyone for 

sacrificing time away from their businesses and/or 

offices to be here. We recognize that that is a real 

sacrifice and we very much appreciate the opportunity to 

discuss issues of mutual importance to both the 

commission and to all in the agricultural community.

I think obviously this advisory committee is 

extremely important, not only to the commission, but also 

to our authorizing committees. As each of you are 
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totally aware, the only carveout in the new act came from 

the ag commodity side, and I think that's due to the 

respect you have from the commission and to the respect 

that you have from Congress.

I wanted to thank each of you for the visionary 

approach that you all took in looking at the Commodity 

Futures Modernization Act and for allowing the 

flexibility, as Congress drafted that act, and then for 

also entrusting your faith in the commission to move 

forward with a flexible approach in the future and to 

continue discussion over regulatory needs and having the 

capability of decreasing that regulatory touch if it 

becomes necessary in the future. I think that's a very 

important part of the act, and certainly one that will 

lead to much more discussion as time and technology 

continue on.

So we very much appreciate you taking time to 

be here and I know I for one look forward to the 

discussion today. Thank you, Dave.

CHAIRMAN SPEARS: Thank you, Chairman Newsome. 

I want to also introduce Commissioner Tom Erickson. Tom, 

any thoughts or comments you want to add at this point in 

time?
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COMMISSIONER ERICKSON: Thank you very much, 

Dave. It is a pleasure to be here and I just echo your 

welcome to everyone who has come today. Agriculture is 

certainly changing as rapidly as any other sector of the 

financial economy that we've got responsibilities over, 

and I look forward very much to your input on issues 

we're facing. Thank you.

CHAIRMAN SPEARS: Thank you, Tom. The fourth 

commissioner, Commissioner Barbara Holum, the senior 

commissioner at the commission, unfortunately could not 

be here today. She planned to be here, but she called in 

this morning with a family emergency, so she sent her 

apologies, and I know that she's very much interested in 

input from this group as well. Her staff is here, and 

she will, I'm sure, provide her input as to what happened 

at the meeting.

Let's start then with introductions around the 

table. As tradition, we will have each member introduce 

himself and the organization they represent. So I'll 

start to my right with Trenna. Trenna, if you'll start 

and introduce yourself and the organization you're with. 

I might note that as most of you know who have been here 

before, after you speak, please turn the microphone off. 
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We have a problem. If there are more than two or three 

on at one time, they don't work.

So after you get done speaking, please just hit 

the button and turn it off. So, Trenna.

MS. GRABOWSKI: Thank you. I'm Trenna 

Grabowski with American Agri-Women.

MR. BLANCHFIELD: I'm John Blanchfield with the 

American Bankers Association.

MR. GILLEN: I'm Neal Gillen, the American 

Cotton Shippers Association.

MR. METZ: Bob Metz. I represent the American 

Soybeans Association.

MR. GUPTON: Richard Gupton with Independent 

Community Bankers.

MR. DIERLAM: My name is Brian Dierlam with the 

National Cattlemen's Beef Association.

MR. ROENIGK: Good afternoon. I'm Bill Roenigk 

with the National Chicken Council.

MS. KEITH: Susan Keith with the National Corn 

Growers Association.

MS. HAWS: Elizabeth Haws with the National 

Grain Trade Council.
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MR. DODDS: Good afternoon. I'm Bill Dodds 

representing the National Grain and Feed Association.

MS. SCHRAMM: I'm Melinda Schramm with the 

National Introducing Brokers Association.

MR. DOUGHERTY: I'm Jack Dougherty with Kent 

Feeds.

MR. WHITE: My name is Robert White and I 

represent the National Grange.

MR. MARTIN: Gary Martin with North American 

Export Grain Association.

MS. HONOR: My name is Phyllis Honor and I'm 

with the U.S. Department of Agriculture's Risk Management 

Agency.

CHAIRMAN SPEARS: Again, thank you all for 

being here. I also want to give at this point in time a 

special thanks and recognition to my staff who put this 

meeting together, starting with Debyn Brown, who serves 

as my administrative assistant. She did most of the leg 

work putting the meeting together and it would not be 

possible without her help. And also recognize Alan Ott 

and Don Heitman from my staff who have also been very 

helpful in the process.
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Let's start then with the first item on the 

agenda, if there are no questions, and that is with Paul 

Architzel. As I mentioned earlier, Paul is going to 

provide an update to the committee regarding the 

Commodity Futures Modernization Act of 2000, which 

Congress passed late in the session.

As I noted, we just put out for comment on 

March 9 the first of several proposed rulemakings in 

regard to that act. So with that, Paul, I'll turn it 

over to you to provide an update to the committee with 

regard to how it pertains to agriculture.

MR. ARCHITZEL: Okay. Thank you. It's a 

pleasure to be here and to brief you on the Commodity 

Futures Modernization Act, our implementing regulations 

and how they relate to agriculture.

One of the comments that we heard about the 

Commodity Exchange Act before the most recent amendment 

was that it was very complicated and hard to understand, 

and thank goodness we have this amendment because now 

it's really very clear.

[Laughter.]

MR. ARCHITZEL: What I would like to do is go 

through and give you a very brief overview of the act, of 
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the rules that we've proposed to implement the markets 

part of the market transactions, execution facilities 

part of our proposal to implement the act, and to 

highlight how they relate to agriculture.

First of all, let me start with an overview of 

the CFMA. The purposes for the CFMA were to reduce 

systemic risk, to provide greater flexibility for trading 

of futures and options, and that includes making the law 

more flexible with regard to new technologies, structural 

changes in the business organization of the exchanges, 

and to permit stock futures to trade.

Also, to move the commission from a direct to 

an oversight regulation and to provide legal certainty 

for OTC instruments.

The new statutory framework was based on the 

same concepts and structures as recommended to the 

commission by the commission's task force which I spoke 

about last year to the Ag Advisory Committee.

The task force had four recommendations, 

actually five here. One, to use core principles and 

statements of best practices; to separately address 

various functions in the futures industry, namely trade 

execution, intermediation and clearing; that the 
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regulations and the law should reflect the nature of the 

commodity, the nature of the market participant, and 

whether or not intermediation was used in executing the 

transaction and in clearing the transaction; that markets 

based on their characteristics should be able to choose 

the regulatory tier in which they want to operate; and 

that CFTC recognition should be reserved for markets that 

meet minimum international regulatory standards.

All of these concepts to some degree or another 

have been incorporated into the CFMA and now are 

operative in the law governing futures contracts.

The statutory framework itself now as amended 

by the CMFA is governed by two items, one, the commodity 

and how susceptible the commodity is to manipulation, and 

secondly, the participant. Is the participant an 

institutional trader? Is it a commercial or is it a 

retail trader?

Based on the commodity and the participant, 

these two variants, there are various exclusions or 

exemptions from the act or the trading of OTC derivative 

instruments and there is tiered regulation for exchange 

traded instruments, and I'll go into each of these 

separately.
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Let's begin looking at the OTC markets, those 

that are excluded or exempt from CFTC regulation. The 

first exclusion is the Treasury Amendment exclusion, and 

these are for instruments that are based upon foreign 

currency, government securities, repos, mortgage purchase 

commitments and other similar instruments.

Now, these instruments are excluded from the 

act unless they are traded on an organized exchange, they 

are traded by retail type traders, non-eligible contract 

participants, or they are traded other than on a 

principal to principal basis.

In addition, the new act provided that retail 

traders trading FOREX, it would be legal to trade FOREX 

through an FCM, a broker dealer or a bank. Otherwise, it 

is not legal to trade them OTC with regard to retail 

trading.

Okay. Now there is an exclusion from the 

commission for bilateral OTC transactions. If it's a 

financial commodity, if it's a financial futures type 

commodity, traded by eligible contract participants, it's 

excluded from the act. If it's a physical commodity or 

one of the more exotic commodities--and examples would be 

oil, or an exotic commodity might be broadband--it's 
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excluded from the act if it's traded bilaterally between 

eligible contract participants and it's subject to 

individual negotiation.

Now, those physical commodities may also be 

exempt from the act if they're not subject to individual 

negotiation, but basically if it's a financial future and 

it's traded bilaterally or it's a physical commodity, 

other than agricultural, and it's traded bilaterally, 

it's excluded from the act.

We also have an exclusion from the act for 

electronic trading facilities that are trading those 

kinds of instruments. First of all, if it's a financial 

future or a financial type commodity, and it's traded 

principal to principal between eligible contract

participants, it's excluded.

If it's a physical commodity like oil or like 

broadband, and it's traded principal to principal between 

eligible commercials, it's not excluded from the act. 

It's exempt from a lot of commission regulation, but it's 

subject to a number of requirements relating to the 

potential manipulability of the instruments, and those 

are the anti-fraud provision, the anti-manipulation 

provision, of course, a recordkeeping requirement, a 
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price dissemination requirement, and reporting 

requirements.

So if it's something like oil, it can be traded 

electronically principal to principal by eligible 

commercials and it will be subject to those kinds of 

requirements, but it will not be affirmatively regulated 

by the commission.

Now that leaves agricultural commodities. 

Agricultural commodities are a separate category of 

commodities in this OTC world. The act did not address 

agricultural commodities, and we're not talking about the 

enumerated agricultural commodities which are listed in 

the Commodity Exchange Act from 1936 forward.

This is an undefined term and it says 

agricultural commodity. So it's broader than the ones 

we're used to thinking about under the act. It's broader 

than the list of wheat, oats, et cetera, and it includes 

the international soft commodities and any other 

commodity which is agricultural. Again, it's an 

undefined term.

Now, because it's not mentioned in the act, it 

comes under our current swaps exemption, and our swaps 
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exemption is found in Part 35 of the Commodity Exchange 

Act.

So, again, if it's agricultural, it's not 

exempted or excluded in the act. Instead you have to 

look to commission regulations. Now, we have in our 

rules in Part 35 a swaps exemption, and here are the 

requirements to qualify for it.

It can only be between eligible swap 

participants. It can't be fungible. It can't be 

standardized. Creditworthiness has to be material 

consideration. It can't be entered into on a 

multilateral transaction execution facility, MTEF or 

exchange, and it can only be cleared pursuant to 

permission from the commission subject to a petition.

Finally, it's subject to rules on the 

agricultural trade options which will be a discussion for 

later in the meeting.

So this is the existing Part 35. As you can 

see, it has more requirements than the exclusion provided 

for financial instruments and more requirements provided 

for than the exemption for physical instruments that are 

traded bilaterally.
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The issue for future consideration is whether 

or not the commission's regulation for these OTC 

bilateral instruments for agricultural commodities, 

whether Part 35 should be amended to make it look more 

like the exclusions and/or exemptions for bilateral 

transactions in the other commodities.

Originally, when we put out our framework as a 

final rule back in December, and that was withdrawn when 

the act was amended, when that was enacted, bilateral 

contracts between eligible parties not traded on an 

exchange on MTEF were exempt, and that was the only 

requirement. The other requirement was that if they were 

cleared, that the clearing organization be overseen by 

federal regulator.

So that's what the commission had proposed for 

all commodities. What we have now is the act has 

excluded financial commodities and physical commodities. 

It hasn't done anything for agricultural commodities, and 

the question is should we amend Part 35, the existing 

Part 35, to make it look more like the treatment that's 

given to other commodities?

Now, there also was a proposal that the 

commission made to clarify that the above criteria that 
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would have been applied under the withdrawn rules would 

apply to OTC agricultural options by any party meeting a 

$10 million exemption level without any other criteria 

applying.

So despite the fact Part 35 has a lot of bells 

and whistles, we had proposed that if you were above $10 

million, then whatever the rule was for bilateral 

transactions generally, it would apply for options on 

agricultural commodities. And that proposal was put out 

and is pending.

So the bottom line is should Part 35 be 

amended? Now it applies only to agricultural 

commodities, and the question is what should that rule 

look like? Are there any questions on the OTC part? 

Okay.

Let's go on then to exchange traded futures and 

options. Under the act, there are two regulated markets: 

designated contract markets and registered derivatives 

transaction execution facilities.

We also have two exempt markets: the exempt 

board of trade and exempt commercial market. Now, in the 

regulated markets, the designated contract market, any 

trader can trade in that market and any commodity can be 
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listed for trading, and the requirements are going to be 

core principles which are included in the act.

If a designated contract market adheres to the 

core principles, then it legally can trade any commodity 

any trader can trade in a designated contract market.

Now, enumerated agricultural commodities must 

be traded on designated contract markets under the CFMA 

unless the commission adopts a rulemaking permitting 

otherwise. So the rule, right now the rule of thumb is 

if it's an enumerated agricultural commodity, it must 

trade on a designated contract market.

CHAIRMAN SPEARS: Paul, would you please just 

briefly mention what those enumerated ag commodities are?

MR. ARCHITZEL: Sure. The enumerated 

agricultural commodities are those that are listed in the 

act and they are those which are the largest commodities, 

I guess, that are traded and they're the ones that 

currently are traded on contract markets.

They would include wheat, rice, livestock, 

livestock products. What other big ones have I left out? 

Corn. Corn, soybeans. What else? The soybean complex. 

Cotton.
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Okay. The ones that are not included would be 

the international soft commodities like cocoa, sugar and 

coffee. Those are not enumerated in the act.

We have a few that we've designated in the last 

couple of years that also are not enumerated like there's 

a Gulf shrimp contract. There's a high fructose 

contract. Those are not enumerated in the act. Most of 

the ones that are trading on designated contract markets 

today and that were trading in December are enumerated.

Okay. Now, our implementing rules--I'm going 

now into our implementing rules, how we're going to 

implement the CFMA. The first thing we've done is give 

some guidance for designation of new entrants by 

applicant. If you currently are a contract marketer or a 

contract market, you're automatically grandfathered, and 

under the new act, you stay a contract market.

But if you want to get into the business of 

being a contract market, we have rules now that we're 

proposing for what you need to do in that application. 

The application requires that you demonstrate compliance 

with Section 5(b) of the act, the core principles, the 

Part 38 rules which are the rules we are proposing, and 

that you provide us a copy of the rules and an 
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explanation of how you meet the requirements if it's not 

clear on its face.

One of the things we did in--okay--the 

procedures that we are using, under the act it's 180 days

to get approved. That's how much time Congress said that 

we should take. Instead, we have a fast track provision 

which we've used in the past with very good results. It 

basically provides that after 60 days a new applicant is 

designated as long as there are no amendments to their 

application.

As part of this process, we interpreted some of 

the core principles because the provisions in the act 

didn't apply in all cases or they may have been unclear 

in one respect or another. So we included some 

interpretations in the rules on how these would apply.

The first one is that preventing manipulation, 

that requirement, that core element, includes the 

requirement that there be a dedicated regulatory 

apparatus at the exchange.

Secondly, the fair and equitable trading rules 

that's provided for in the core principle includes the 

requirement that market participants have available to 

them information on prices, bids and offers. The bids 
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and offers part of the equation was not included in the 

act, and we, as a matter of rulemaking, have interpreted 

bids and offers to be included in what Congress meant had 

to be included in the fair and equitable trading 

requirement.

We also said that disciplinary procedures in 

non-intermediated markets can be satisfied by denial of 

access. This is looking forward to the new kind of 

market structures that we may have. We may not always 

have intermediated markets and where we don't have an 

intermediary or where there is no FCM trading in the 

market, then discipline may take the course, the form, of 

just denial of access to the market.

We also address fitness standards and said if 

it's a nonmembership type of exchange, the fitness 

standard applies to the owners of the facility. So that 

if someone has an exchange which they own, that owner has 

to meet a fitness requirement, the same as members do 

today.

And finally we provided general guidance on the 

meaning of all the core principles in an appendix. Okay. 

The rules on product listing are found in a new part of 

our rules called Part 40.
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Now, under the CFMA, any rule changes to 

contracts in the enumerated agricultural commodities that 

affect a month with open interest have to be submitted to 

the commission for prior approval. So this is the 

current situation that we had before the CFMA was that 

all material rules had to be submitted to the commission-

-terms and conditions of the contracts--for approval.

Under the CFMA, as it's amended the act, only 

rules affecting those enumerated agricultural commodities 

affecting months with open interest need to be submitted 

to the commission for prior approval.

If it's not, what we've done in the rulemaking 

is we've defined what material means because only 

material changes had to be submitted to us, and we said 

the following kinds of rules weren't material: rules 

relating to trading hours, lists of delivery facilities, 

rule changes relating to options on futures, and 

deductions in tic size.

Any other rules that affect a month with open 

interest would have to be submitted to the commission for 

prior approval, and we would use the same kind of fast 

track rulemaking procedure that we have in place now, 
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which is if it comes in and there are no changes, it's 

approved after 30 days.

We also permit--the act permits voluntary 

submission of rules for commission approval. It says 

prior to their implementation. The commission has by 

this rulemaking said they actually can submit rules for 

approval at any time. It doesn't have to be prior to 

their implementation.

This is not the agricultural rules that must be 

submitted. It would be all others. So if it's a rule 

affecting, let's say, a trading month that didn't have 

open interest so they're not required--the exchange is 

not required to submit it to us for approval--they can if 

they want to voluntarily. What we said is you don't have 

to submit that for approval before you put it into 

effect. You can submit it at any time.

Now, why would an exchange choose to put a rule 

into effect first and then submit it for approval? Well, 

it may be a situation where if there is no open interest 

and the change needs to be done very quickly in order to 

prevent or to address a situation of deliverable supply, 

let's say, they may choose to put into effect and then 
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submit it for approval, and that would be permitted under 

the proposed rule that is out for comment now.

Finally, the act, the CFMA says that all other 

changes, all changes to rule terms need to be certified 

by the exchange that they meet the requirements of the 

act and the commission's rules. And what we've done is 

we've said not all rules have to be certified. We've 

applied a rule of reason and said there are some rules 

that don't have to be certified because even before not 

all rules had to be approved by us, so we're saying only 

those rules which are really material, which are really 

important rules, need to be certified.

There are kinds of rules like relating to the 

color of jackets people wear, administration, things like 

that, that don't have to be certified. You just have to 

give us notice at some point.

Okay. We have a couple of additional 

requirements. One is that upon request, information 

relating to the business of the contract market be 

provided to us, and that includes trade details so that 

the kind of audit trail information that is provided in 

the course of trading needs to be provided to us and any 

other information which we request.
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And upon request, the exchange would need to 

make a demonstration that it complies with core 

principles. And that's basically how the new world 

applies to designated contract markets. It won't look 

too different from how things are now. The main 

difference is the rule approval process. Are there any 

questions about that before I move on? Okay.

Then let me move on next to DTFs. DTFs, we 

have rules and a new proposed Part 37. Now, the first 

thing is the CFMA says that the enumerated agricultural 

commodities may trade on a DTF only following a 

rulemaking by the commission to permit them to do so.

At the current time, no agricultural commodity 

can trade on a DTF because we haven't done a rulemaking 

to permit them to. So there are no procedures in place 

for them to list that kind of enumerated agricultural 

contract on a DTF.

The proposed rules that we have reserve a space 

for those in the future. Now, Congress didn't say we 

must--in some of the clauses, Congress said we must do 

rulemaking to allow this kind of activity to occur, and 

sometimes they've given us deadlines where you must do it 

within six months.
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In this case, there is no mandate by Congress 

that the commission do rules to permit agricultural 

commodities to trade on a DTF. Instead it's permissive. 

It says you can't trade those kinds of contracts on the 

DTF unless the commission does a rulemaking to permit it, 

and it's an open question of whether or not it's a good 

idea.

The issues that would be considered, I think, 

in looking at that is how do DTFs develop? Do we have 

those kinds of markets? Will they develop so that you'll 

have multiple markets trading the same commodity and will 

that affect centralized pricing? And once we have some 

of those questions answered, then the next question 

becomes would this be a good thing to apply to the 

enumerated agricultural commodities?

So this is something which the commission in 

the future may consider, but certainly at this point, the 

rule is agricultural commodities would only be traded on 

a designated contract market.

Nevertheless, I'd like to just highlight for 

you very quickly what's in the DTF section of the act and 

the commission rules so that when we do get to that point 
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of considering it, if we do, you'll have an idea of what 

a DTF would look like.

First of all, the characteristics are again 

broken down to market trader, commodity, and the 

requirements. Okay. A DTF can be a DTF. There's two 

ways for it to be a DTF. One is by the nature of the 

trader. And if they are eligible traders, and this would 

be mostly institutional traders, and if there are any 

retail traders that are trading through an FCM having $20 

million of net capital, and which is a member of a 

clearing organization, then they can trade the following 

commodities.

Number one, as I said before, no enumerated 

agricultural commodities right now. There would have to 

be a nearly inexhaustible deliverable supply or a 

deliverable supply sufficiently large and highly unlikely 

to be manipulated, or one with no cash market.

The commission by rules has proposed a rule to 

say that if it's one of those commodities that's excluded 

from the act for purposes of OTC trading, it satisfies 

these delivery tests. So what we've done is we've said 

those excluded commodities, the financial futures type 

commodity, meet the tests for A, B and C.
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The other kinds of commodities that could trade 

on this eligible trader DTF include security futures and 

on a case-by-case basis, depending on the market and 

surveillance history, those commodities which are highly 

unlikely to be manipulated. Now, commodities that could 

try and make that case-by-case demonstration to the 

commission would include the non-enumerated agricultural 

commodities. So those would be things like coffee, 

sugar, cocoa. Other ones which are not listed in the act 

could qualify right now to trade on a DTF if they could 

make this case-by-case demonstration.

There's another kind of DTF. This DTF has 

different criteria to be eligible to be a DTF. The first 

is that it be only for eligible commercial entities. So 

this market is for eligible traders, eligible 

commercials. If they are commercial traders in this 

market, only commercial traders, then a different set of 

commodities can trade there.

The commodities that eligible commercial 

traders can trade are any commodity except for the 

enumerated agricultural commodities. So you can be a DTF 

in one of two ways, either the top way, which is the 

institutional trader, retail traders trading through a 
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higher level FCM, and you can only trade certain 

commodities, namely the financial futures, or if you do 

it on a case-by-case basis, those particular ones that 

the commission approves, or if you trade in a DTF only 

having commercial traders there, it can be any commodity 

other than enumerated agricultural commodities.

Again, the commission will in the future be 

able to address this issue about whether enumerated 

agricultural commodities could trade here.

Now the requirements again are for registration 

it's a DTF or core principles. So in that respect, they 

are very similar to designated contract markets, but 

there are fewer core principles than the designated 

contract markets. The DTF is more of a disclosure-based 

market and the core principles tend to reflect that, that 

there is more flexibility in the trading rules permitted.

Okay. Let's just talk briefly about the 

registration procedures for a DTF. Again, there are no 

new enumerated agricultural commodities that currently 

can trade on the DTF, but those markets who are currently 

designated contract markets could notify the commission 

and by notifying us could thereby become eligible to 

operate a DTF.
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If you wanted to form a new market, you can 

apply to us for registration. And the time for having 

that application acted on under the act is 180 days and 

under our rules would be 30 days under a fast track 

provision, again, having no amendments.

Okay. Again, the market upon request would 

have to provide the commission with a demonstration that 

it complies with core principles and this market operates 

differently in that we would rely on special calls for 

information from people for our market surveillance 

function. The designated contract markets would operate 

just as they do today and are operating just as they did 

yesterday, in that the large trader reporting system is 

required of all people trading in the market with 

reportable positions.

In the DTF, on the other hand, the commission 

would be relying on special calls to the DTF itself, to 

FCMs if there are intermediaries involved, or to 

participants. We also would rely upon the market serving 

any foreign brokers or traders with any subpoenas or 

request for information from the commission.

Finally, there are two types of exempt markets 

which are exempt from commission regulation. There are 
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exempt boards of trade, exempt commercial markets, and 

neither of them can list agricultural commodities.

Just go give you a very broad overview of 

these, the exempt board of trade is only for eligible 

contract participants. The commodities that can be 

traded on it are those with nearly inexhaustible 

deliverable supplies, and there are certain requirements 

that attach to them. One is that they notify the

commission of the fact that they're operating, there's an 

anti-fraud provision, anti-manipulation, there's a price 

discovery provision, and it has to operate a separate 

subsidiary from contract markets. So if you're an 

exchange, and you want to operate an exempt board of 

trade, then you'll have to operate it as a separate legal 

subsidiary and a separate market.

Again, you won't have agricultural commodities 

in the exempt board of trade. In order to meet these 

tests, it must be one of the financial futures type of 

instruments.

The exempt commercial market I already 

discussed somewhat. Those would be for eligible 

commercial entities trading principal to principal on an 

electronic facility, they would be for the exempt 
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commodities, and there are a number of requirements that 

attach to those.

Finally, with regard to implementation of our 

rules, the CFMA already is enacted and is in effect and 

our rules provide that while they're proposed, the 

commission will not take action against anyone. We've 

provided a no action for those people who adhere to the 

proposed rules.

Now, of course, in the way rulemakings go, the 

rules could be changed later on and then you would have 

to comply with the final rules, but for now, if you 

adhere to the proposed rules, then that will satisfy the 

requirements of the law.

The last thing I'd like to just touch on is 

where the other rulemakings stand that we initially 

withdrew in December. The clearing rules should be 

reproposed shortly. The rules on intermediaries, the 

amendments to Rule 1.25, which is what FCMs can do with 

segregated customer funds, has already become final. The 

rule on predispute arbitration provisions is being 

proposed as part of the market rules that are now 

currently out for comment.
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And the remaining rules on intermediaries will 

be considered and reproposed at some time in the future.

Finally, the rules on bilateral transactions, 

on swaps, which was withdrawn in December, would be under 

consideration, and I understand it's on the agenda for 

this group to discuss later, and this is the difference 

from what we proposed in December to now.

In December, our rule on swaps would have 

applied to all commodities and now the rule only applies 

to agricultural commodities because the law itself 

applies to all other commodities.

CHAIRMAN SPEARS: Thank you, Paul. I know that 

was a very complicated issue to get down to in a few 

minutes, and you did an excellent job. I also know that 

there were a number of the committee members getting 

writer's cramp trying to keep up with you. I would 

assume, Paul--am I correct--that people could get copies 

of your slides later on at some point in time for 

committee members that are interested?

MR. ARCHITZEL: If people have email, the 

easiest way would be to--I can email them to you, email 

you the presentation, and that probably is the most 
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efficient way. So if you have a business card, and you 

want to hand it to me, or Debyn.

CHAIRMAN SPEARS: Or my staff. We can make 

sure that you get copies.

MR. ARCHITZEL: We'll be happy to get it to 

you.

CHAIRMAN SPEARS: And again, Paul is going to 

be available later on in discussion as we get into the 

topic regarding OTC market and ag trade options. Paul 

will be available because he touched on some of those 

issues just briefly there.

The bottom line, a couple of quick things. As 

you would expect, I think it would be fair to say that 

the rules that Paul outlined are consistent with the act 

that Congress passed, and I think consistent also with 

input from prior Ag Advisory Committee meetings, where 

you guys provided comments about rulemakings and 

contracts with open interest and those kind of things.

So, from my perspective, I think it's fairly 

consistent with what this committee has advised the 

commission in the past.

Again, we'll come back to the OTC market in a 

little bit, but are there any questions or comments about 
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the rules that Paul outlined, the CFMA itself and how it 

applies to agriculture? As he pointed out very clearly, 

ag is kind of special. We already know that, but ag is 

treated differently compared to all other commodities in 

the act. I think that was by design, certainly from the 

wishes of the ag community, but I think it's important 

the agriculture community recognize that everybody else 

is somewhat different than agriculture.

MR. GILLEN: Mr. Chairman.

CHAIRMAN SPEARS: Yes, Neal.

MR. GILLEN: Could I just correct the record 

and note that the recommendations reflect the opinions of 

some of the committee?

[Laughter.]

CHAIRMAN SPEARS: Point of order well taken. 

Also, in your packet, I think there is a document like 

this little sheet like the chart sheet. That also 

attempts--put together by Don Heitman on my staff--

attempts to outline what we just talked about in two or 

three pages. So for your members, it kind of outlines, 

lays it out, I think pretty simply how commodities are 

treated and how ag is treated compared to everybody else.
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I also just want to note just quickly here, as 

you recognize, Paul is an invaluable resource to the 

commission. And I wanted to note that last year, Paul 

was chosen to receive the Presidential Rank Award for 

Distinguished Excellence by a public servant. So Paul 

received that award last year for the year 2000, and it 

was very well deserved, Paul.

The next topic on the agenda I wanted to take 

for a few minutes and have Ron Hobson, Senior Economist 

of Economic Analysis Division, come up and just outline 

for your information purposes a provision that was added 

in the act specifically entitled "Special Procedures to 

Encourage and Facilitate Bona Fide Hedging by 

Agricultural Producers."

I believe this provision was added by Neal 

Smith from Michigan, Congressman Nick Smith--excuse me--

Nick Smith from Michigan, not Neal--Nick Smith, and it's 

section 4p of the act, and I've asked Ron Hobson to kind 

of summarize that and make this committee aware of that 

provision because it has ongoing implications. So, Ron.

MR. HOBSON: Thank you, Commissioner Spears. 

We thought that before we finished discussing the 

Commodity Futures Modernization Act, we'd bring to your 
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attention a rather obscure provision of that act that you 

might be able to help us with.

As Commissioner Spears indicated, we're kind of 

seeking long-term help here. We don't expect you to come 

up with any solutions today but maybe in future meetings 

this could be a topic of discussion.

Specifically, Section 121 of the CFMA adds a 

new Section 4p to the Commodity Exchange Act, and this 

new section is entitled "Special Procedures to Encourage 

and Facilitate Bona Fide Hedging by Agricultural 

Producers."

I believe each of you, each of the committee 

members, was provided with a copy of this provision, and 

there were copies out front as well. I'm not going to go 

through and read it. I want to kind of summarize it and 

bring up some of the issues that we're concerned with.

As Commissioner Spears mentioned, this 

provision was introduced or inserted in the act by 

Congressman Smith, and my understanding is that he was 

also responsible for, at least partly responsible for, 

the risk management education provision of the 1996 Fair 

Act, and so that may give us some insight into the 

objectives of this provision because there is no 
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legislative history. It kind of appeared out of nowhere 

in some respects.

As the title of this new provision suggests, 

the title again, "Special Procedures to Encourage Bona 

Fide Hedging," the purpose is to encourage agricultural 

producers to use futures and options for hedging.

This is a somewhat different slant as an 

objective for the commission since we are a regulatory 

agency and not a promotional entity. Nevertheless, the 

commission has always put a value on educated market 

participants as an important component of a well 

functioning market. Toward this end, the commission and 

its staff have participated over the years in numerous 

educational activities and have attempted to provide 

information on the markets to the public.

In particular, the commission recently revamped 

its web site. I don't know if you've had a chance to 

look at it. This has just been within the last month or 

so, and the objective of that revision was to provide 

more market and regulatory information in a more easily 

accessible form to the public.

In addition, for the past five years, the 

commission has been an active participant in the USDA 
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Risk Management Education Initiative, which was mandated 

by the 1996 Fair Act.

Since it appears, as Commissioner Spears 

mentioned, it appears that this provision provides for 

kind of an ongoing obligation on the commission--we have 

to provide a report to Congress at the end of a year, but 

that doesn't appear to be the end of it. And given that 

ongoing obligation from the standpoint of this overall 

objective of this provision, the encouragement of hedging 

and futures and options, the most valuable input that 

this committee could provide us would be guidance 

concerning possible additional educational activities 

that the commission might undertake in the future to 

further facilitate the markets.

Going from kind of the general to the specific, 

we would also--and maybe even more so-- appreciate your 

input on some of the specific provisions of this new 

section. Basically these provisions relate to contract 

terms on delivery and quantities. They also relate to 

costs of transacting relating to margins and also to 

educational activities as they're undertaken by the 

exchanges.
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On that last point, I should mention that the 

exchanges in general, the futures exchanges in general, 

and the exchanges on which agricultural products are 

traded in particular have historically done a very good 

job of providing educational materials and information to 

the public. They undertake educational courses and 

provide, of course, data on the markets, and so even 

though this provision, new provision of the act, directs 

the commission to encourage the exchanges to engage in 

these activities, it shouldn't be misunderstood that the 

exchanges have not pursued these activities vigorously 

over the years.

It's in their interest to have commercial 

participation in their markets. With regard to a couple 

of the other specific provisions of the act, of this 

provision of the act, 4p, there is a provision that talks 

about the importance of providing for orderly delivery as 

a prerequisite for commercial hedging participation. 

We've always been mindful and the exchanges have always 

been mindful of the importance of economical and 

commercially sold delivery provisions.

My concern in kind of reading this provision 

might be that it is suggesting that additional delivery 
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points be added to futures contracts, and while that 

might be useful in some circumstances, the commission and 

the exchanges have always also been very mindful of the 

importance of the tradeoff between contract specificity 

and basis risk.

So these are kind of the issues that we're kind 

of grappling with with regard to this new provision, and 

as we attempt to respond to Congress with a report on 

these issues, the committee's input and guidance would be 

most helpful. Thank you.

CHAIRMAN SPEARS: Thank you, Ron. Again, as 

Ron pointed out, this is kind of a new obscure provision, 

but I wanted to certainly make the committee aware of it 

because it could come up in future discussions with the 

Congressman or with the Ag Committee, and we'd be at this 

time open to any initial comments. This might be the 

first time you guys have heard of this provision. You 

may have seen it before, but are there any initial 

comments or feedback to the committee or to the 

commission at this point in time, and we look forward to 

other comments in the future?
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MR. GILLEN: Mr. Chairman, I would just like to 

have the record reflect that the word "orderly" does not 

mean additional in the context of delivery points.

MR. WHITE: Mr. Chairman.

CHAIRMAN SPEARS: Yes.

MR. WHITE: I have a question as to the 

understanding when he said additional delivery points. 

Could he clarify that a little bit for me?

CHAIRMAN SPEARS: Yeah, Ron, would you please 

do that?

MR. HOBSON: I just, again, we have no 

legislative history on this, and I've been the only one 

kind of that's really focused on this here at the 

commission. And like I say, we've always been mindful of 

orderly delivery provisions. The "additional" is kind of 

my speculation as to why this general language might have 

been put in this provision, considering that the title of 

the provision is "Encouraging Producers to Use Futures 

and Options."

There have been market observers and 

participants in the past who have claimed that the 

markets would be more useful if there were more delivery 

sites for certain contracts, and my only point is that 
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that may not always be the case, that there is--and I am 

kind of--like I say, I'm kind of speculating as to the 

motives behind this provision. That may not have been 

Nick Smith's intention at all, but my first point was 

that we've always been very careful about delivery.

MR. GILLEN: I would just point out that there 

is a greater majority viewpoint that a proliferation of 

delivery points debilitates the contract.

MR. HOBSON: Well, and I'm highly aware of 

that. That's why I made the point that there is a 

tradeoff between delivery points and basis risk.

CHAIRMAN SPEARS: I think it's fair to say that 

that was, Ron, your personal speculation--

MR. HOBSON: Yeah.

CHAIRMAN SPEARS: --at that point in time.

MR. HOBSON: That was my personal speculation 

of what was intended here because it wasn't clear to me 

what otherwise what the intention was. So--

CHAIRMAN SPEARS: But this is an issue that 

we're going to have to wrestle with, I think, as we go 

forward over the course of the next year and make a 

report to Congress at the end of this year.
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I would expect to come back before this 

committee at a future Ag Advisory Committee meeting, but 

as we go through this time period, any thoughts that 

committee members have they provide to us today or in the 

future, not necessarily at a meeting, but just pick up 

the phone, give myself a call or any of the commissioners 

a call, or EA staff, it would be very helpful, because 

we're kind of wrestling with what to do with this other 

than, you know, there are other agencies out there 

providing similar efforts, and so there is no need to 

duplicate things, but we also need to be mindful as to 

what Congress asks us to do.

MR. HOBSON: Yeah, this is kind of the whole 

point was that this is a fairly vaguely worded provision, 

and we need some help.

CHAIRMAN SPEARS: Tom, do you have something?

COMMISSIONER ERICKSON: Just briefly, Mr. 

Chairman. I appreciate the last comments you made 

because one of the things we're going to be looking at is 

the one year deadline and that, I think, is December 21. 

So any help we can get from this organization would be 

helpful from my perspective. Thanks.
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CHAIRMAN SPEARS: Brian, do you have something 

to add?

MR. DIERLAM: Yes, sir, Mr. Chairman. I was 

fortunate, or depending on how you look at it, was at the 

markup when this language was inserted into the bill, and 

it's my understanding in his characterization of this, 

Mr. Smith's characterization, was that the current 5,000 

bushels per contract for some producers wasn't enough to 

make it worthwhile to enter into a contract, which is 

where number three of this provision, the minimum 

contracts, minimum quantities so that other producers 

that don't meet that level would be able to participate 

in contracts and then would be able to deliver that 

amount at some location.

And it's my understanding that at some point, 

he had some constituents or some folks that had had some 

problems trying to engage in using futures and things. 

It just didn't work out so well for them, which is my 

understanding of where the genesis of this temporary 

storage cost issue came from.

CHAIRMAN SPEARS: That's very helpful, Brian. 

Bill.
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MR. DODDS: I have had a couple of phone calls 

on this subject. Being a Michigan resident, I'm 

surprised I didn't get more.

[Laughter.]

MR. DODDS: A couple of things that came up in 

the conversations with his staffers. One was commodity 

Chicago Board of Trade prices relative to cash grain 

prices. Two was the size of the contract he thought was 

too big for the small players which is what our colleague 

down the table said. And three, they thought they didn't 

understand the margin requirements relative to trading a 

Chicago Board of Trade contract.

And I would guess because of where Mr. Smith is 

from, there are some tales of the old Toledo discussions 

that exist, and my personal opinion is the present 

contract is working fine.

CHAIRMAN SPEARS: That's very helpful, Bill, 

and do I take it that you're volunteering to head up a 

task force to address this?

[Laughter.]

MR. GILLEN: Mr. Chairman, one of the things--

we will address this later on--and the issue of 

agricultural trade options where contracts can be 
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tailored for producers to deliver quantities lower than 

the contract specification, but the commission in its 

wisdom precludes such practices.

CHAIRMAN SPEARS: That provides a perfect segue 

into the next topic. Neal, thank you. The next agenda 

item does deal with ag trade options and other ag risk 

management alternatives such as ag swaps. And to help 

frame the topic, let me just briefly review the rather 

complicated history of ag options.

As most people in this room know, going 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. When CFTC 

was created in 1974, it was given expanded jurisdiction 

over futures and options and all commodities.

However, the statutory ban on ag options was 

left in place. Only after the commission's 1982 

reauthorization was that statutory ban lifted allowing 

the offer and sale of exchange-traded options. Even 

then, the commission let stand a regulatory prohibition 

on off-exchange ag trade options even though trade 

options in all other commodities could be offered to 

commercial users subject only to anti-fraud rule.
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In 1997, the commission finally proposed 

lifting the regulatory ban and permitting off-exchange ag 

trade options. Rules to allow ATOs was published in 

April 1998, but no firms took advantage of the ATO 

program.

In December 1999, the ATO rules were further 

implemented to permit cash settlement and streamline 

registration and disclosure requirements. As was pointed 

out previously, issues concerning ATOs and other ag 

derivative contracts are particularly relevant today in 

the context of the CFMA and the proposed rules that Paul 

outlined.

The CFMA excludes or exempts bilateral 

transactions in most commodities from CFTC regulation, 

but does not address bilateral transaction in agriculture 

commodities, as Paul outlined.

This raises the question of whether and to what 

extent bilateral transactions in ag commodities such as 

ag commodity swaps should be exempt from regulation? 

Furthermore, if bilateral transactions are given 

regulatory relief, should ag trade options be given 

consistent relief?
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Discussions of ATOs is particularly appropriate 

at this time because, number one, the commission needs to 

consider more thoroughly just how ATOs fit within a new 

regulatory framework, and number two, as noted, the 

current ATO program even with the December 1999 

amendments to simplify the program has seen very limited 

use, with only one firm thus far registered as an ag 

trade option merchant, and that is Kent Feeds, Inc.

In my mind, the bottom line boils down to--and 

this is where we very drastically or very importantly 

need your input--the two issues. One, as Paul outlined, 

to what extent should bilateral transactions in ag 

commodities such as ag swaps be exempt from regulation?

And number two tied to this, but a separate 

issue, is what to do with the ATO program given its 

limited use so far? The question is why it has had 

limited use and one can answer the question why? Is it 

due to market conditions? Is it due to the regulations 

and restrictions on the program as some have suggested? 

A combination of the two? Or other reasons?

Now, I've asked Paul to be available to assist 

us during this discussion. Again, we're looking for 

input from the committee members as to what to do with 
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bilateral transactions on ag commodities and what to do 

with the ATO program. Paul, I think, in his comments did 

a good job outlining those issues, and as we get into 

discussion later on, Paul will be available to address it 

further.

I've also asked--as I mentioned, Kent Feeds 

thus far is the only registered ATOM offering ATOs to 

producers. We're fortunate today to have Jack Dougherty 

of Kent Feeds with us, and we've asked him to describe 

their option program to the committee members and their 

experiences.

In addition to Jack, I've asked Bill Dodds, who 

is a member of this committee, to outline NGFA's views on 

ATOs and OTCs contracting issues. As we all know, NGFA 

has long been in the forefront as to the proposals 

addressing this issue.

And finally, in the course of reviewing these 

issues, it's also important to look at risk management in 

a broader context. Particularly, we should look at 

issues involving introducing brokers, the frontline 

providers of derivatives based risk management services 

to farmers. Thus, I've asked Melissa Schramm of the 

National Introducing Brokers Association to join us and 
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join the panel to give us the IB perspective on these 

issues.

At this point, I would like to have each of the 

panelists, Jack, Bill and Melinda, take about ten minutes 

or so to give us their perspective, their experiences. 

And I hope to use the remaining portion of the time to 

discuss these issues and to provide input to the 

commission from committee members regarding bilateral 

transaction on ag commodities and ATOs.

So, with that, I'd like to turn the program 

over to Jack first. Thank you, Jack, for being here. As 

all committee members, and Melinda as well, and committee 

members, they have volunteered their time and their 

effort and their expenses to come in to present this 

information to the commission. So I want to thank Jack 

in advance for being here and, Jack, I turn over the 

program to you.

MR. DOUGHERTY: I'd like to thank the committee 

for the opportunity to at least let people know what 

we're doing. It's kind of an honor to be number one, but 

sometimes it's a little bit of a problem to be the only 

one. Kent Feeds is a feed manufacturer that's located in 

the Midwest with a history that goes back to 1927.
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For many years, we were driven by demand for 

swine feeds. In the last few years, we've seen that 

market change dramatically, concerning the raising of 

hogs. We've always targeted as a company the independent 

producers with our products and sold them exclusively 

through dealers.

1998 hit the independent hog producer very hard 

and many of our customers exited the market, and it was 

at that time that we developed quite a concern to see 

what we could do as a company to help some of these 

independent producers at least manage their risk and stay 

in business. As we checked with customers and people 

that we knew were in the business, and what they did for 

risk management, quite frankly we found that many of them 

didn't do a whole lot.

Futures contracts and options would have 

provided these people with adequate protection to avoid 

the disaster of 1998, but they didn't use them. We began 

to explore ways that we could help our customers make 

better use of these risk management tools. The most 

attractive instrument from our standpoint was an option 

contract. The mind-set of many of our customers is, 

yeah, I'd like a guaranteed price, but if the price goes 
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up, I want to be sure that I can participate in the up 

side.

And we developed a program that allowed hog 

producers to purchase options from Kent Feeds and to lock 

the price of feed in to raise the appropriate amount of 

animals for that option.

A program would not have been possible under 

the current conditions without some changes that were 

made in the 1999 Federal Register, one of them being cash 

settlement. Under the original provisions, to operate a 

program like that, we would have had to take delivery of 

the hogs and that was virtually impossible for us to do. 

We would then have had to turn around and market them 

ourselves.

That was beyond the scope of what we wanted to 

do. With that change in the cash settlement provision, 

we could now enter into agreements with our customers and 

provide them with put options. The only band of the 

spectrum that we use in this whole program is lean hog 

put options. So any of the things that deal with grain, 

we don't handle any of those. Just a very, very narrow 

band, and just puts. We don't deal in calls.
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This change allowed Kent Feeds to go forward 

and register as an ATOM. The registration process itself 

was from our standpoint quite simple. NFA was very 

helpful. The form was two pages, and it was mailed to us 

as soon as it was ready and we became registered on March 

6 of 2000, as the first and to this date as the only 

ATOM.

We also registered at that time three 

individuals as associated persons, and there again 

encountered no problems with that process.

Meeting the other requirements has been a 

little bit of a discovery process for us. And the 

commission has been as helpful as possible in giving us 

direction where to send reports and items like that, and 

I think we're still in a little bit of a discovering mode 

on that.

Kent uses, like I said, this is a very narrow 

option. And our program is geared towards the 

independent hog producer with the idea of establishing a 

floor price for him. We've tailored our program to be 

flexible in that it allows various size contracts with 

our customers. We set a minimum as 200 hogs which is 
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roughly about the size of one contract, but after that, 

it's any number of hogs that individual wants to do.

Our main interest in this whole program is to 

sell animal nutrition, and we saw this as a vehicle by 

which we could ensure these people to stay in business 

and use our products. We do want to make it clear that 

in no way is Kent Feeds attempting to be a broker in any 

sense of the word.

The only thing that we offer is put options on 

hogs. If our customers want to do something else, if 

they want to do some kind of straddle position, if they 

want to do a futures contract, that's not our business. 

And we'd be happy to tell them that they need to contact 

people that are in that business. We are just doing put 

options.

We only offer that one form and the ability to 

customize the program to fit the need of the user was a 

great advantage of the ATOM as we saw it. Kent Feeds, 

the way that we manage the risk it's just extremely 

simple. We sell the producer the option and then we turn 

around and cover the option on a vehicle traded by CME. 

It's a pretty simple process.
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We do our deal with the producer himself. When

that's done on the phone, that's done. He knows exactly 

what he pays. It's not a bid ask process. It's a quote, 

and he takes it or he doesn't. The amount of exposure to 

us is virtually nonexistent even though we may have a few 

hogs here or there that don't quite fill a contract, but 

in the long run that comes out to be pretty even.

We've been registered as an ATOM just over a 

year now, and we see the program works, but the dynamics 

of the hog market have changed in the past year. Quite 

frankly, prices have improved quite a bit. So we've seen 

a very limited use of our program.

We still feel that it's a very viable risk 

management tool in the way that we're using it because it 

does satisfy the need of providing a basic amount of 

protection. We plan to continue the program and look at 

ways that we can make people more aware of it. We do use 

our dealers to let people know that we do have this 

program available, and the only other thing we may look 

at is if there is some way for us to facilitate this in

the cattle side of things, but it becomes a little harder 

for us because the size of the contract doesn't allow 

enough, whereas the hog contract at 200 plus is a 
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contract size, where the cattle one about 30, 33, is the 

only amount of cattle that can be on there.

We feel that the program is really 

underutilized by our customers. It's relatively easy for 

us to manage everything. Everything is on a segregated 

basis and we don't feel any pressure that we would be 

extra-scrutinized for running the program and for having 

anything looked at.

In fact, we've been fairly pleased with the 

cooperation of the commission. Those are pretty much the 

comments that I had as far as how we're running the 

program and what we're doing with our particular segment 

of the ATOM.

CHAIRMAN SPEARS: Thank you. Are there any 

particular questions before we get into open discussion 

for Jack about their program as it stands today? Thank 

you, Jack. Look forward to your participation and 

further discussion with the committee members.

Next, I'd like to have Bill Dodds outline. As 

I mentioned earlier, NGFA has long been active in this 

arena dealing with this issue, and I'd like to have Bill 

kind of put forth in a few minutes, Bill, your 
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perspective as a committee member, but also as NGFA's 

position in regard to this issue. Thank you.

MR. DODDS: Commissioner Spears, other 

commissioners, members of the Ag Advisory Committee and 

guests, the National Grain and Feed Association 

appreciates the opportunity to present its views on 

agricultural trade options and other risk management 

alternatives.

However, the National Grain and Feed 

Association believes that the ATO issues are simply a 

part of a much broader issue, the need for greater legal 

certainty for off-exchange forward agricultural 

contracts.

The National Grain and Feed Association has 

commented repeatedly on these issues in the past several 

years in statements made to this committee, in proposed 

rulemaking and in congressional testimony. Such comments 

have centered on the fact that cash forward contracting 

is the predominant form for price risk management used by 

grain producers and others. But there is uncertainty 

about how the CFTC views certain contract terms, and 

unless steps are taken by the CFTC, the perceived 
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litigation risk may diminish the use of some beneficial 

contracts.

To illustrate the effect of some legal 

uncertainties, consider the following examples. And I 

would say these examples come up at our risk management 

committee meeting within National Grain and Feed. They 

come up at the National Grain and Feed Country Elevator 

Council meeting where we have 700 country elevators, and 

we have producers, country elevators, terminals, and we 

have our lawyers there also.

The farmer has forward contracted a certain 

amount of grain with an elevator and experiences crop 

problems, maybe a crop failure. Several questions always 

arise. Is it legal and permissible for the elevator and 

the farmer to settle that contract with cash?

What if the farmer only has a partial crop lost 

and needs the balance to feed his livestock? Is it okay 

to settle that contract for cash?

Is it okay for the farmer and the elevator to 

roll the contract forward to the next crop year? Let's 

say the farmer rolls it to the next harvest period, can 

he then roll it to another delivery period? If so, how 

many rolls are considered legal?
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What if the elevator has an administrative fee 

stated in the contract to apply to any situation where 

the farmer and the elevator mutually agree to contract 

cancellation?

What if the farmer actually grows a normal crop 

but decides he has the better market opportunity 

somewhere else? Is it okay for the elevator and the 

farmer to mutually agree to contract cancellation and let 

him deliver his grain somewhere else?

Example two: A farmer and an elevator enter 

into a hedge-to-arrive contract for delivery of grain at 

a fixed futures price, the basis to be determined at a 

later date.

Market prices increase during the summer. The 

farmer decides that he wants to cash settle the contract 

and wait until the market increases more, and then 

reprice the commodity again. Is it legally okay for the 

elevator to accommodate the farmer?

How many repricings are okay from this 

perspective of the CFTC and the Commodity Exchange Act 

before a hedge-to-arrive contract is viewed as an illegal 

futures?
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Example three: A farmer and an elevator enter 

into a multiple year contract for grain at fixed futures 

prices, again, the basis to be determined later. Is a 

multiple year fully fixed futures price contract legal 

and acceptable?

What if the nearby futures are more attractive 

than the futures of the following crop year and the 

farmer desires to price 50 percent of the next year's 

crop with the current crop year futures? It that legal?

In terms of public policy, then it is 

imperative that the regulatory and statutory lines be 

clearly established as to what is permitted in cash 

contracting, what is subject to CFTC jurisdiction and 

what is not.

Part of the resolution of this issue may lie in 

a viable agricultural trade option program. After 

several years of offering the program, only one entity 

has registered to be an agricultural trade option 

merchant. Clearly something is wrong with the design of 

the program. The very narrow participation is not a 

legitimate test of the program and the kind of trade 

option contracts and their benefits that could be offered 

to producers.
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We could offer theories of what is wrong with 

the program, but the fact is that if the CFTC wants a 

viable pilot program for trade options, the commissioners 

and staff need to approach the commercial sectors of the 

grain, cotton, livestock and other commodities and ask a 

simple question:

What changes are needed in the program to 

attract your business to begin writing trade options?

This question has to be posed to the commercial 

sector. Why the commercial sector? They are the market 

makers. Those entities can best tell the CFTC what 

impediments must be lifted to achieve a viable test of 

trade options in the agricultural sector.

One final point needs to be made. Agricultural 

trade options, particularly under the structure traded at 

the CFTC that only permits producers to purchase 

agricultural trade options. In there simplest form, 

trade options add a single new feature to the cash 

forward contract: the right of the seller of cash 

commodities to not deliver.

Who in the market place is most likely to 

confront a situation where delivery is very difficult or 

very expensive or whatever other reason? Certainly, the 
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farmer is at most risk because of potential crop failure. 

Establishing a price up front for non-delivery simply 

allows the farmer to market earlier in the crop year and 

maybe more aggressively, taking advantage of market 

situations that might otherwise be passed up.

Thus, from our perspective, we would continue 

to challenge the farm organizations to examine the 

potential value of agricultural trade options. If you 

agree that agricultural trade options hold considerable 

promise, we would encourage those farm organizations to 

make its views known to the CFTC.

And I would just add after listening to Jack's 

presentation that that is a very viable good service for 

his livestock producers knowing what I know about price 

risk management. Thanks.

CHAIRMAN SPEARS: Thank you, Bill. I think 

we'll try to, when we get into general discussion, I may 

ask Paul just to briefly--I don't think we can respond to 

all your questions in your testimony, but we can try to--

I think Matt is probably going to hand them out. But I 

know what you're trying to accomplish and I appreciate 

that.
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But I may ask Paul to briefly touch base on it 

if it's appropriate at that point in time. As I 

mentioned earlier, an important sector dealing with ag 

risk management and dealing with agricultural producers 

is the IB community, and we've asked Melinda Schramm, who 

is--I believe your title, Melinda, is executive director?

MS. SCHRAMM: I'm the chairman of the board of 

directors.

CHAIRMAN SPEARS: Chairman of the board-- I'm 

sorry--of the National Introducing Brokers Association. 

So with that, Melinda, without any further introduction, 

would you please provide us your thoughts and comments?

MS. SCHRAMM: Thank you, Commissioner. You'll 

excuse me. I'm at that age, so I'm going to have to take 

these off in order to read my prepared statement. I'm 

Melinda Schramm. I'm the president of the MHS Capital 

Resource, Inc. It's a CFTC registrant and NFA member 

located in Chicago, Illinois.

I've been a part of the futures industry for 

about 25 years. My company specializes in writing for 

the financial industry professional and for lobbying the 

interests of those professionals.
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I'm also the founder and chairman of the board 

of the National Introducing Brokers Association, or the 

NIBA, which is celebrating its tenth year in existence 

this year. The NIBA counts among its members both 

guaranteed and non-guaranteed introducing brokers along 

with 11 futures commissions and five domestic exchanges.

It's organized as a not-for-profit association 

whose mission is to help the futures professional and 

specialist stay in business at a highly professional 

level. We do this at our annual conference, our 

newsletter and regularly scheduled meetings and councils 

with our regulators, Congress, and others concerned with 

issues affecting the industry.

The NIBA has been asked to testify in the House 

of Representatives regarding issues including risk 

management education, the CFTC Act itself, and hedge-toarrive contracts in the grain industry.

We have also prepared statements for the CFTC 

regarding such diverse topics as exchange delivery 

points, the Commodity Futures Modernization Act, the 

advent of security futures, required disclosure documents 

for managed accounts, and ethical standards and behavior 

in the industry as a whole.
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The NIBA board of directors consists of eight 

to nine elected IBs, elected by the membership for a 

three year term, plus two representatives from our FCM 

members and representatives from our exchange members.

Before I address the specific topics that the 

commission has laid out for our panel, I wanted to take a 

few minutes of my time to draw this committee a visual 

picture of the IB. Many of you may have never met any 

other IBs except myself. Many of you may not have other 

dealings, other business dealings with introducing 

brokers. In order to help you make some decisions which 

will greatly affect our business lives, I wanted you to 

know who we are and what we do, what kind of clients we 

service, what products we trade.

In May of 1999, I wrote a book called The 

Complete IB Handbook, which was published by the Chicago 

Mercantile Exchange. The purpose of the guide was to put 

all the information that anybody might want who wanted to 

start an introducing broker business into one book.

I covered such topics as creating a business 

plan, registration requirements, selecting an FCM, 

negotiating contracts with sales people, and even 

surviving your first NFA audit. I gathered the data 
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through personal interviews and a written survey of 

industry registrants and our regulators. 127 introducing 

broker offices responded, and those responses came from 

all over the United States.

Here is the some of the information that they 

shared with me. An IB owner is typically a college 

educated male. In 1999, less than six percent of the 

total number of introducing broker offices were owned by 

women. Nearly every owner had a college education at the 

minimum with about half of those majoring in an ag 

business or a farm operation and most of the others in 

economics, accounting, or other financially related 

areas.

Less than 30 percent of the IBs registered at 

the time of the survey were registered as independent 

introducing brokers. Those often considered themselves 

specialists in one kind of market such as the energies or 

in cotton or in the particular style of trading such as 

in managed accounts.

The IBs who registered as guaranteed gave us 

the following reasons generally: They believed it was 

less expensive. They believed there was less paperwork 

and reporting required. They believed that there was 
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less direct compliance responsibility. They also said 

that the IB principals were generally less experienced or 

had no experience at running their own business. And 

finally, guaranteed introducing brokers were thought to 

get more support in their sales and marketing efforts 

from the FCM or from the broker himself than the 

independent introducing brokers.

In 1999, Illinois was the state with the most 

IBs registered and members of the NFA. And that number 

was 248. Delaware, New Hampshire, Utah and Vermont only 

had one IB office in each in those states, and Hawaii and 

West Virginia had no offices at all registered that 

spring.

When IBs look for clearing arrangements with an 

FCM, they report that reputation of the firm is the 

number one reason for choosing that FCM. Rates, the 

clearing rates or the fees which are charged to do the 

transactions rank second in order of importance to the 

IB. And the category "other" ranked third. Other 

included such diverse things as who the management was, 

who owned the company, who were the main traders, and 

whether or not the FCM offered managed account programs.
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Research was the most consistently ranked last 

in importance to the IB looking for a clearing 

arrangement. This is a change from just a very few years 

ago when research could only be gotten through your FCM. 

It's obviously a change that technology has helped to 

bring about.

A total of 211 FCMs were registered with the 

CFTC that spring and members of the NFA, but only 40 of 

those FCMs did business with guaranteed introducing 

brokers.

Since the NFA does not keep separate records 

about FCM relationships with IIBs, or independent 

introducing brokers, only firms with GIBs can be easily 

identified. 12 FCMs were guaranteeing about 750 IB 

offices of the total approximately 1,200 IB offices or 

GIB offices that were registered then.

An IB owner typically has at least three and 

one half years experience in the futures business before 

opening an IB office. The majority of IB owners I spoke 

to had between nine and 14 years experience in our 

industry and the IB office itself had been registered for 

six years or more. I spoke to an IB owner who had 
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actually been registered in some capacity in the industry 

for over 35 years.

Some of the IBs are also registered as CTAs. A 

few are farm management specialists or consultants and 

about 12 percent in the spring of 1999 were registered as 

security brokers or dealers. Some IB offices provided 

complete risk management services such as crop insurance, 

cash marketing or other producer related management 

services.

At the time of our survey, nearly 80 percent of 

the total volume of trading done in the 127 offices 

responding was done in futures rather than in options.

About 50 percent of the IBs told us they trade 

most heavily in grain and livestock markets. This is a 

significant change since the FIA survey of the early '90s 

found that about 80 percent of IBs were to be considered 

agricultural.

The next most heavily traded contracts were 

indices with the metals and the soft markets the least 

traded by IBs. IB offices reported in the spring of 1999 

that no significant volume was being traded on markets 

outside the U.S. by their customers. Over 90 percent of 

the IBs placed orders in the E-mini S&P market at the CME 
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regularly, and a few IBs, and I think there were about 

ten of them all together, said that as much as 20 percent 

of their total business is done in the S&P contract. 

About 50 percent trade the Project A contracts at the 

Chicago Board of Trade.

A typical IB office has five to six APs, or 

associated persons, or sales persons, registered with it. 

Three of the offices responding reported that they had 25 

or more APs working in their office.

Only one office responding to the survey was 

minority owned, and fewer than 15 percent of the offices 

responding had even one woman registered.

IB offices recruit APs among friends and former 

clients and from local newspaper advertising. Some also 

hire from the floor employees that they are using at 

their FCMs.

A typical IB office services 250 to 300 clients 

per year. Again, that's a big change in the last ten 

years, up from only 50 or 60 clients, most significantly 

due to technological advances. About two-thirds of the 

total number of clients in each office are what we would 

call active. The others are seasonal or occasional 

traders. Those also would include the bona fide hedgers.
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A few offices which provide the specialized 

services along with futures and options such as foreign 

management consulting have only 30 to 50 clients on the 

books. And three IBs reported in 1990 that their offices 

were serving over 2000 active clients per year. When we 

asked the question what is the average length of time an 

account stays open with you, 80 percent of the IBs said 

they were still servicing some of the clients they opened 

when they first opened for business.

IB offices service a variety of clients, 

hedgers and speculators alike. Those which work 

primarily in the ag market areas tend to service small to 

medium size rancher and farmer. Because these offices 

are no longer servicing only local clients, they provide 

education and research to any size or type client who 

wants that information.

Virtually all IB offices use some form of 

electronic order entry. Generally, it's the system which 

their FCM has developed or purchased and requires all the 

offices in its system to use.

Nearly every IB uses the internet to solicit 

for customer leads. Some offices have their own web 

sites. Others are just links or addresses from the FCM. 
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Most of the IBs who have a web site post both news and 

education as well as information about the IB itself such 

as who are the principals, who does the trading, how long 

the IB has been in business, if the office has a 

specialty, and what other kinds of services the customer 

may find at the office.

Account forms or opening account documents can 

most often be downloaded from the sites. That background 

information is the long way around to addressing today's 

topics, specifically, the ag trade options, other ag 

derivatives and IB concerns related to the agricultural 

issues. The opinions that I'm expressing today are those 

of the IB members of the association. Some of the FCM 

members concur, others do not.

Number one, the agricultural trade options. 

Our membership is of the belief that the current ATO 

program has not been more utilized because none of the 

current large players in the grain trade want to open 

themselves to the type of regulation which registration 

with the CFTC and the NFA insists upon.

Most of the firms offering ATOs have so far 

been able to hide behind the forwards exclusion clause to 

do essentially full-blown futures business by what 
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appears to be a form of their own contrived ATO-like 

program without having licensed brokers and without 

having to disclose risks, strategies, fees and pitfalls, 

and without having to answer or account to their 

customers in the manner that the IBS and FCMs are 

required to do by the commission and the NFA.

Currently, unregistered ATO providers are not 

disclosing what the strategies are which are being 

utilized or what the risks involved may be. As the 

strategies have become more and more complicated over the 

past years, it's common to see providers who have no 

training in futures and options products diligently pitch 

the ATO program developed by their company without any 

better knowledge of the product than the producer to whom 

they are speaking.

The history of option and option-like products 

promoted by unregistered or minimally registered trained 

individuals to relatively unsophisticated participants is 

consistently negative, even when done with the best 

intentions. Just in the past few years, we've seen on 

several occasions that neither the seller or the buyer 

has the required familiarity with both the product and 
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its potential behavior during periods of volatility or 

sustained price movement.

Most often the smaller the end user, the less 

appropriate the ATO-like product becomes. Additionally, 

one IB pointed out that the tools and benefits that the 

grain trade argued that ATOs would offer apparently 

provide no marketing alternatives or benefits above and 

beyond what exchange traded futures and options currently 

allow.

So the need to offer ATOs at all would seem 

pretty limited. As much as most members of the NIBA 

would generally like to see less government regulation in 

every aspect of our business lives, most agree that no 

changes in the current ATO program should be made. 

Allowing unrestricted trading in ATOs or imposing some 

lesser level of deregulation would as the commission 

suggests in its questions to the three of us on this 

panel increase the potential for fraud against producers.

If the commission drops either the threepronged approach or changes the minimum net worth 

requirement so that ATO users would find themselves 

trading in a less regulated environment, the result could 
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be that smaller producers will be disenfranchised, along 

with the IB community and small grain companies.

In addition, the probable result will be that 

larger provider consortiums will simply develop product 

which will allow all these smaller producers to be lumped 

together as one trading unit. No risk disclosure, no 

proper account identification, no segregation of consumer 

funds will take place. A customer will lose all current 

regulated protections.

We have only to look at the hog industry to see 

the consequences of corporatization in American 

agriculture and how quickly those consequences will 

occur. Likewise, the goal of some of the larger grain 

companies seems to be to use such products as ATOs to 

gain greater control over production, guarantee 

themselves a steady supply of crop upon demand, and not 

have to bid aggressively for production throughout the 

majority of the year.

The effect of the scenario will be that basis 

levels will suffer, the flat price will suffer, and 

farmers will become employees of these grain consortiums. 

While some changes in the ag segment of this industry are 

likely inevitable, dropping ATO registration and 
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regulation programs might very well create the 

environment above in as little as two to three years 

time. Just imagine one big grain company controlling all 

of American agriculture in the way Microsoft controls the 

software on virtually every PC in this country.

In response to the commission's questions 

regarding ATOs, one NIBA association member asked if 

comment on this issue was ever solicited from members of 

state grain and feed organizations as opposed to the 

large commercial agricultural concerns. Have those 

organizations seen an outcry from the people who would 

use them to make these products available?

In any case, the commission should recall that 

its mandate is not to provide product to consumers, but 

to make sure that those providing the product are 

adequately trained and regulated, and those using the 

product are adequately protected.

More specifically to your question as to 

whether producers should be able to write ATOs? While 

most NIBA members agree that farmers should have every 

benefit and advantage that big companies have, several 

members noted that as recently as just last week, they 

were hearing about companies which encouraged farmers to 
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enter a transaction which basically sold a call option 

limiting the farmers maximum selling price for a premium 

that was far substandard to current market prices.

In particular, this association member reports 

that the actual transaction was selling a call option for 

six cents that was currently trading on the Chicago Board 

of Trade for 12 cents, and being charged nearly $300 in 

commissions for that transaction.

Since my first meeting in 1994 with then 

Chairperson Mary Shapiro, the NIBA has time and time 

again voiced the practical business concern that by 

allowing unrestricted trading in ATOs, registered and 

regulated members of the professional futures and options 

community are disadvantaged by being put on a less than 

level playing field with those people or entities who 

would offer such products without the need to answer to 

compliance and supervision arms of the CFTC, the NFA, and 

their exchanges.

We believe the atmosphere for fraud on the 

customer would definitely be increased. Effects suffered 

by the farming community will include mismanagement of 

pricing and marketing risk along with increased elevator 

failures.
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We encourage the commission to look back to the 

hedge-to-arrive contracts of just a couple of years ago. 

Add to that the fact that many of the new contracts 

currently being offered are far more complicated. Throw 

in a little bit of desperation from the producer due to a 

tight economy and low prices, and you get a recipe ripe 

for disaster.

With regard to other agricultural derivative 

contracts, in this area, the NIBA is somewhat divided. 

Most members are not aware of any significant amount of 

bilateral agricultural commodity swaps currently going 

on. IB members and some FCMs believe that a platform 

which provides unified trading of cash and derivatives 

rather than the current versus-cash method is not an 

improvement at all and may even be impossible to 

construct due to the lack of a centralized cash 

marketplace.

One member commented that he couldn't see how 

these contracts would be constructed unless they were 

based on exchange traded regional basis contracts.

Another member said that unified platforms 

would mean to him more deregulation, greater complexity 

of the tools offered, and more opportunity for 
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unscrupulous, undertrained providers to sell complicated 

products to producers which neither party truly 

understands.

All NIBA IB members and many FCMs oppose 

parallel ag contracts or moving the ags to DTFs. The 

association believes this move would ultimately drive 

commercial volume to the less regulated market and would 

weaken contract markets by destroying their fundamental 

ability to allow transparent price discovery.

One IB member commented that the only way to 

provide producers more effective and attractive risk 

management strategies is to force all the participants to 

meet the same level of regulation. It appeared to him 

that the commission's intent with the CFMA was to 

construct a tiered market system that would fracture the 

agricultural markets into so many segments that only the 

largest commercial entities would be able to survive.

He along with several IB members of the NIBA 

was unable to see how allowing ag products on DTFs led to 

better price discovery, which is the absolute necessity 

for an efficient marketplace which continues to have 

value to its users.
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And interestingly, many association members 

said they would be in favor of more versus less 

regulation as proposed in the current exchange versus DTF 

scenario, because in this time of HTA complications and 

other financial disasters, including the ones we've seen 

in the stock market frenzy and collapse, we've seen that 

the public's greed and willingness to accept unreasonable 

amounts of risk in the face of clear fundamental good 

business judgment indicates that these same people will 

not always self-manage and self-regulate risk.

And finally, to address the issue on 

introducing broker concerns, a few of the NIBA members 

noted that at the end of 1998, there were to their 

knowledge approximately 10,000 elevators and feedlots in 

the United States. We can't really tell how many were 

registered as IBs because, number one, the NFA doesn't 

keep records on the type of business done in the IB 

offices, and number two, many of the entities function as 

branch offices rather than as IBs because of the 

registration requirements.

But we do know that we have a few elevators and 

feedlots as members of our association.
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The NIBA is generally opposed to reducing 

registration requirements for IBs. Our business entails 

utilizing highly leveraged financial products. Amateurs 

and part-timers bring with them problems such as 

unfamiliarity with the product, inability to assess the 

client's goals and risk capacity, and inattentiveness to 

both the markets and the clients. Diminished regulation 

requirements will attract operators seeking to take 

advantage of that lack of registration and regulation.

Our association members, IBs and FCMs alike, 

would like to see more registered IBs in the industry, 

but not at the expense of the investing public.

Neither the current registration or the Series 

3 commodity exam is a significant impediment to 

registering or to engaging in the business. Therefore, 

the NIBA is of the belief that the rule changes would not 

substantially increase in number of registered 

introducing brokers.

However, we do believe that more firms would 

register if the CFTC more aggressively enforced their 

rules by forcing elevators that are currently trading 

futures and options and offering ATO programs and their 
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like to register and properly license their operators as 

APs.

Further, it's always seemed a bit peculiar to 

us that the commission cannot pursue action against 

entities which have not registered but which look to the 

public like CFTC registrants and offer products which 

purport to extend the benefits of exchange traded 

products. To mangle a phrase, if it quacks like a 

regulated futures or options product, it should be 

regulated as one.

In response to the commission posed question, 

what rule changes would allow registered IBs to offer 

more effective or more attractive risk management 

alternatives to their producer clients, the NIBA 

membership responds:

(1) The fact that IBs generally cannot sell 

commodity firms with a Series 3 license, but stockbrokers 

with a Series 7 can is totally unreasonable. This should 

be reexamined by the commission.

(2) The movement to streamline disclosure 

statements and options disclosure statements will be very 

beneficial to the IB attempting to solicit new business.
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(3) Exchanges or other trading facilities 

should be encouraged to develop risk management tools in 

cooperation with such organizations as the USDA, farm 

bureaus and even local agribusinesses. Then we'll be 

able to offer and provide tools which the producer truly 

wants, which he truly needs, and which he truly 

understands how to use.

Before I close my prepared remarks, I want to 

address two of the other issues this committee is 

scheduled to take before it, and you'll be happy to know 

that it's only two more pages.

CHAIRMAN SPEARS: Melinda, if you could 

summarize that because we're already behind schedule by 

about 30 minutes now.

MS. SCHRAMM: Absolutely.

CHAIRMAN SPEARS: So if you would just take 

your two pages and summarize in a couple of sentences, 

I'd appreciate it because we do need to reserve some time 

for discussion on this topic.

MS. SCHRAMM: Absolutely. The two issues were 

that the NIBA is looking forward to a new day at the 

USDA. We're looking forward to a new day of working in 

cooperation in developing risk management product.
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And secondly, with regard to the single stock 

futures, we are looking forward to what the commission 

has to offer. We're happy that the commission has been 

very strong in holding the line with regard to the 

selling requirements. However, we are disappointed in 

both the margining and a tax ramification of those 

requirements and would like to visit those issues with 

you all further.

That being said, we appreciate the opportunity 

to come before this panel, and I would be happy to take 

any other questions or expand. Thank you, Commissioner.

CHAIRMAN SPEARS: Thank you, Melinda. Well, 

where do we go from here is the question, I guess, that 

the commission is looking for input from this committee? 

As you can tell, there is a divergent--as the panel 

outlined, there are a number of different views out there 

in regard to what to do with bilateral transactions, what 

to do with ag trade options, and how it affects different 

people's lives and businesses.

I know this commission is very interested in 

this committee's input as to where do we go from here. 

We've heard from one--the only person so far--ATOM who's 

using the program with some success. I've heard today, I 
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think it's fair to say, that the reason why--now keep in 

mind there are two issues here. One is--and Paul, I may 

ask you to help outline these issues in a minute, but in 

my mind there are two issues.

One we've addressed is the ATO program. We're 

two years into the program. It's had limited use so far. 

Is that because of the design of the program, as some 

people suggested? Or is it due to the market conditions, 

as others have suggested? You know some folks have 

suggested, as Bill did, that it's the commercial people 

who will be utilizing, offering the program, and it's up 

to them to decide how to design the program as opposed to 

the ag producers.

The other issue before us, as Paul outlined in 

his introductory comments, is what to do with bilateral 

transactions on an undefined term of ag commodities? How 

do we treat ag swaps and ag commodities on that basis? 

Should they be exempt from regulation as other 

provisions? So, Paul, do you have any words of insight 

or thoughts to maybe put us on track to facilitate some 

discussion from the committee?

MR. ARCHITZEL: I guess I have a couple. One 

is the NGFA raised a number of questions with regard to 
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what kinds of contracts would be considered to be forward 

contracts and what would fall under the forward contract 

exclusion, and that's been an issue that has been a longstanding issue.

I think there are mechanisms to address that. 

For example, we have outstanding a Office of General 

Counsel interpretation that goes back many years to 1987 

which had in it a discussion of various hypothetical type 

of contracts and gave an official view of the General 

Counsel's office on whether or not those were forward 

contracts, and I think that really is the most profitable 

way to get guidance in an official way on what kinds of 

contracting practices would flow within the forward 

contract exclusion, and then that it makes sense that if 

contracting practices are different and have grown since 

1987 to revisit that in that kind of setting.

And that really would require a request from 

any of you around the table or anyone from the public 

that the commission consider certain types of contracts 

or the commission staff rather and give an opinion on 

those. So that would be one place to start.

As a general matter, responding to those 

contracting situations, however, I think we all know that 
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a forward contract which has run its time period both 

parties can go back and renegotiate a contract and not 

affect the nature of the fact that it's a forward 

contract.

So it's important to distinguish from the types 

of examples given between those contracts where both 

parties because of crop failure or some other type of 

situation renegotiate a contract after the contract has 

been entered into from a contract which provides for 

certain features at the time it's entered into. And 

that's an important distinction that I think we all are 

sensitive to and that in looking through the examples 

later, certainly that that's something that distinguishes 

many of the examples and should be looked at very 

carefully.

MR. GILLEN: Paul, one of the questions posed 

by Bill was rolling a contract forward, and in 1996, the 

commission issued I call it a derivative, but I don't 

know the status now, which precluded a producer in a 

contract from rolling forward past the last delivery 

month in that particular crop year. That, in effect, is 

the custom and usage of the cotton trade, and I was just 
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wondering if that edict is still in effect here at the 

commission?

MR. ARCHITZEL: I think what you're referring 

to is a staff advisory which was issued on the prudential 

nature of inter-crop year spreading, and that was not a 

commission pronouncement, and it did not discuss the 

legality and whether or not such a contract was a forward 

contract or not. What it discussed was the prudential 

nature of inter-crop year spreading. So from that 

perspective, it was an advisory statement of the staff.

To the extent that that contracting practice is 

one which you would like further clarification on, the 

appropriate mechanism is to provide the commission staff 

with a written description of it, and to provide us with 

an opportunity to consider it and respond in a considered 

way to it.

MR. GILLEN: Well, virtually all of our 

contracts preclude that practice because you're just 

begging trouble. That's why.

MR. ARCHITZEL: And that was the basis of the 

staff's advice, and again it was an advisory opinion that 

inter-crop year spreading is an imprudent practice. It 

doesn't say whether it's a legal practice of not.
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CHAIRMAN SPEARS: Are there any comments or 

questions, other comments, questions, regarding where we 

go from here regarding the ATO program or bilateral 

transactions per ag commodities, whether they should be 

exempt or to what level exemption they should be? Neal?

MR. GILLEN: Yeah, I really appreciated Bill 

Dougherty's explanation of what they're doing, and in 

effect it's rather simple, and one could make the 

argument that why should such practices be regulated. 

You know that's just an opinion. Insofar as question 

number one, I think Mr. Dougherty answered that question 

insofar as whether or not low prices have any effect 

because he indicated, in effect, you could make the 

argument that these type of instruments are more valuable 

to a producer in times of low prices because a product 

can be offered way out when you can see light in the 

marketplace.

You know I just go down to number seven, and in 

effect--question number seven.

CHAIRMAN SPEARS: That was sent out in the 

advance packet.

MR. GILLEN: Yeah, in the packet you sent out. 

Go down, right down to question number seven, and give a 
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resounding yes. But there is something in process here 

at the commission that Paul may be able to comment on, 

and that is the Cargill Case. There is a decision by the 

ALJ. It's under appeal now, but ultimately the ruling in 

that case will be dispositive, could be dispositive of 

this issue.

MR. ARCHITZEL: Actually, that is under appeal 

so it's not appropriate for me to comment on it or for it 

to be a matter of discussion now. You are correct there 

has been a decision by an ALJ. It has been appealed by 

our Division of Enforcement to the commission. So it's 

currently pending with the commission. So it really 

isn't a matter that we can discuss now, other than you're 

also right to say that some of the issues in that case 

would have a bearing on the commission's policy 

ultimately on what it does with regulations regarding 

ATOs.

You did mention two things which I think are 

noteworthy. One is that the program that Kent Feeds 

outlined is rather simple and understandable and user 

friendly from what I was hearing, and that is what the 

commission's rules intended it to be.
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You also asked why should such a simple program 

be regulated, and I think that the reason there is a 

history of the commission grappling with this issue of 

regulation of ATOs is because there had been in the past 

abusive practice with regard to trading options, 

particularly because, unlike futures, where there is the 

need for an individual to know his customer, in the case 

of futures where a premium may be paid fully up front, it 

has lent itself to abusive practices in the past.

So that the kinds of regulations we have 

segregating customer funds cover those kinds of 

provisions were intended to address the possible abuses 

we might see, and it becomes a policy question for the 

commission and for this committee to discuss is whether 

the cost of our regulations and how they work is so 

burdensome that it is too costly to prevent the kinds of 

harm that we envision might happen, and that's a judgment 

question that certainly this committee and the commission 

has grappled with.

MR. GILLEN: Well, I appreciate that, Paul, but 

you can make the argument that, as Bill said, the trade 

has rendered its judgment. It's of no value to producers 

unless some innovation can take place, and there is no 
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incentive for innovation with regulation. Thank you for 

considering it anyway.

CHAIRMAN SPEARS: I appreciate that, Neal. I 

think that it's fair to say that one reason why we're 

addressing this issue today, it is a new day and we're at 

this commission, myself and I believe other commissioners 

present, are open to addressing this issue in light of a 

new act and where we go from here to make a program 

workable. Bob, you wanted to say something?

MR. METZ: Yes, thank you, commissioner. I 

want to make clear I'm not speaking for the American 

Soybean Association but for myself personally. I am a 

production farmer. My wife and I are both full-time 

farmers. That is the only place we receive our income. 

We obviously use futures; we use options. But as was 

pointed out, the majority of production ag does use 

contracts to move their grain.

And this is basically because we not only need 

the futures, but we need to capture the basis, and we 

also need an orderly movement of our grain off our farms. 

We store all the grain at harvest. We need that orderly 

movement of grain off our farms through the winter 
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through the summer months. Up north, you can't move it 

during the spring because of road restrictions.

So we need an opportunity to move this grain. 

As far as production goes, ag production, most people 

would say that it's probably a good practice to have a 

third of your grain sold this time of the year, a third 

of your grain sold mid-summer, while there is still a lot 

of risk. Once the risk is out of it, generally the 

market is out of it, too. I'm strictly talking from the 

farmer's point of view.

So we normally would try to have two-thirds of 

our grain sold when the crop is about half grown. That, 

of course, gives us some risk. The 1988 drought, by midJune, it was fairly obvious that we were not going to be 

able to fill our contracts. I don't know if it was 

legal, but I know I wrote a check to get out of those 

contracts, and I felt very good about writing that check 

even though it was fairly large because I had a huge risk 

hanging over my head.

So then I think anything that can be done --

and these ag trade options look like possibly a good 

opportunity for production ag as a way of limiting risk. 

I think the Crop Insurance Program has greatly helped 
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because you can also get an increase in the market when 

there is a drought. If this is the way out, ag trade 

options for the actual producers, I personally think it's 

probably a pretty good option. I do think we need some 

oversight on it. Just to have all kinds of contracts out 

there I think puts farmers at risk. Thank you.

CHAIRMAN SPEARS: Any other comments or 

questions? Richard, do you have something you want to 

add?

MR. GUPTON: Yeah, just a few things. The only 

thing I would recommend, I guess, is potentially with 

these questions that are pretty well presented do some 

type of survey for the different commodity groups and 

bankers on ATOs particularly, and as far as the banking 

perspective, there may be regulatory problems with ATOs, 

and you might want to consult the OCC or the FDIC. I 

don't know if you all have done that, but just would 

recommend that as well.

CHAIRMAN SPEARS: Thank you. Elizabeth, you 

wanted to comment?

MS. HAWS: Yeah. I do have a comment. This is 

a new day and I think it's a unique timing of opportunity 

for this committee because as we look at this, you know, 
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as potential for assisting producers, I mean we're all 

here, we're of the mind-set to find market-base 

alternatives to help producers out.

And as we, you know, listen to the farm policy 

debate going on down the street, I think this is a unique 

opportunity for us in this room that we could provide a 

tool to the farmers. So before we throw everything out, 

let's find what the farmers need. I mean we're sitting 

here and this is a tool that we can provide to them. So 

let's look at this carefully before we ditch this 

opportunity.

CHAIRMAN SPEARS: Thank you. Brian.

MR. DIERLAM: Thank you, commissioner. 

Specific to the Part 35 exemption--I know we had talked 

about this in the past--the Part 35 exemption 

requirements that were in place in the past, particularly 

on ag commodities, are in place today for eligible 

participants can engage in bilateral agricultural swaps; 

is that correct?

CHAIRMAN SPEARS: That's it?

[Laughter.]

MR. ARCHITZEL: That's an important question. 

Yes, the current Part 35 is in effect and ag swaps are 
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permitted. The only issue before us is whether the Part

35 requirements should be streamlined to be more 

reflective of the requirements for swaps that are in the 

act for other commodities.

CHAIRMAN SPEARS: Brian, I was just joking. I 

mean this committee always looks forward to your counsel 

and comments, and you are always very well read in your 

comments. So that's one thing, I guess, that is going to 

be helpful, I think for the commission to have a better 

grasp, understanding in what activity is out there in the 

ag swap.

I think that Melinda alluded to that, what 

level there is out there. There is some question--we 

know it exists, but there is no real foundation as to 

what the exact number or level of activity is regarding 

to bilateral transactions in that market. So that would 

be helpful, I think, if we had that information as well.

Brian?

MR. DIERLAM: To follow up a little bit on 

that, I think as we look at risk management and one of 

the things going into the regulations that was pulled 

back in the legislation that passed that you're currently 

in rulemaking on, as you look to manage systemic risk, 
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which was one of the main purposes of the bill and the 

legislation and the rulemaking, there are certain types 

of risks that a lot of folks in our industry have a very 

difficult time managing, and to the extent that we can 

address those issues, some can be addressed through a 

Part 35 exemption, some can be addressed through looking 

at issues surrounding legal certainty.

All of those types of things if we can look at 

them all play a role in reducing the systemic risk. As 

I've talked to different folks on the packing side, folks 

on the retailing side, people want, consumers want to 

know what is their beef going to cost down the road, and 

they want the packer to provide it.

The packer wants a way to lock up some supply 

so that they have some certainty, and one of the things 

that's important is the risk management system that 

facilitates all that. Now, the marketplace can provide 

it in terms of exchanges offering new types of contracts 

for different sizes or different volumes or different 

products, and certainly the more products you offer, the 

question always comes in about what's the liquidity going 

to be?
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Are we going to drain liquidity? But there is 

a tradeoff and a balance between liquidity, between basis 

risk, between volatility, that folks out there are trying 

to find that balance. So to the extent that Part 35 

exemption exists, to the extent that we can address some 

of these legal certainties, I think we can go a long way 

in providing the types of products that the marketplace 

needs to manage risk so that at the end of the day we've 

got risk covered and not creating, not holding an amount 

of risk that we can't hedge at the marketplace, because 

that in the end of the day is systemic risk, is risk that 

the marketplace can't manage.

So to the extent we can look at a number of 

these things, it will go a long way in providing the risk 

management tools that I think the beef industry needs.

CHAIRMAN SPEARS: Bill.

MR. DODDS: I don't know if this is relevant or 

not, but as it relates to ATOs, about eight percent--this 

is a personal statement now--about eight percent of our 

business is options versus futures on exchanges. I would 

just say those are hedges related to cash contracts and 

it also adds to the liquidity of the futures market, I 

think.
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CHAIRMAN SPEARS: Other comments or questions 

from the committee members? Well, I'll come back--Jim, 

just a second. I just want to make a quick comment and I 

know that Jim wants to make a comment here. I'd like to 

note, as we talked about earlier, the transcript of this 

meeting will be put into the public comment file on the 

proposed new regulatory framework and our proposed rules.

If committee members would like to provide 

comments on this issue, and the other issues we talked 

about before, written comments, you know, before April 9 

or even after April 9, that would be very helpful to the 

commission, I believe.

Again, the deadline is April 9, but I don't 

know that there has ever been a case where the commission 

has refused to accept a comment letter after the comment 

period is closed. We're always open to comments at any 

point in time.

These are issues that we're going to have to 

wrestle with as we go forward so if committee members 

would like to just maybe provide written answers to 

questions that we provided in the background memo, that 

would be helpful or any time, at any point in time. So 

with that, before we close this topic and go on to other 
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topics, I'd like to ask Jim if he had something he 

wanted to say?

ACTING CHAIRMAN NEWSOME: Thank you, Dave. I 

had just a couple of comments and then one question I 

wanted to ask. First, I wanted to thank Mr. Dodds and 

Kent Feeds for reaching out, for offering this product at 

least to a portion of your swine producers and showing 

that, at least under your situation, it can work and it 

can be successful.

I think Bill raises some legitimate issues. I 

think there are issues that have been discussed for a 

long, long time, and I think certainly issues that are 

worthy of more discussion and looking at by the 

commission. I think maybe an effective ag trade option 

could at least potentially solve some of those problems.

Melinda, in regard to your comments, you know, 

as sometimes happens, we agree to disagree on some 

things, and I think that's just an area, at least on a 

portion of what you said. I think that a few of your 

comments may be a little far-reaching or worst case 

scenario, at least, and one thing in particular I would 

disagree with your thoughts on, at least the needs for an 

ag trade option type program.
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You know I come from a small family farm and 

fully recognize that as many risk management 

opportunities as we can develop and provide that are 

realistic, as Elizabeth said, I think have real value. I 

also realize that futures only provide one slice of the 

pie of the total risk management pie as we look at it, 

and there are lots of other opportunities.

Obviously, I think, as we look at ag trade 

options, at least there is the appearance that we have 

yet to get it right because of a lack of usage of the 

program, and I think it warrants the commission going 

back and revisiting the issue, but it's a difficult 

issue. I know that everyone would like for the 

commission at least to attempt to define these cash 

markets and the futures markets, but unfortunately the 

problem becomes that when you do that, there is always 

somebody who is looking after you defined it for a way 

around it. And it certainly becomes more simple to find 

that way around it.

And I think we have to look at the history in 

this business of at least farmers being taken advantage 

of, and, you know, our role is to protect the public 

good, and we take that responsibility very seriously and 
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are going to continue to try and take that responsibility 

very seriously. So when we get into an issue like this, 

it does become difficult. That doesn't mean that we are 

sensitive to everyone's desires and everyone's needs. 

But if it was simple to solve it, it would have been 

solved a long time ago, and obviously it's not.

The one question, Melinda, I wanted to ask, 

given your comments about the small and medium-size grain 

elevators and maybe the lack of desire, the lack of 

knowledge to offer an ag trade option type contract, has 

your organization or members that you've talked to 

discussed the idea of going to those elevators and at 

least attempting to serve as the agent for the elevator 

in providing these types of contracts to producers? It 

seems to me that would be a legitimate thing for you to 

do, and I just wondered.

MS. SCHRAMM: Our organization has attempted to 

provide educational programs for their customers or has 

attempted to partner up with them in terms of 

presentations to their customers. They haven't always 

been met with success. Sometimes they have though. And 

I wouldn't want to leave the impression that the 

introducing broker is stuck in the last millennium or is 
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stuck some place before the Modernization Act took 

effect.

He definitely has attempted to come forward. 

Mostly those types of programs that are being offered 

have actually been brought to his attention by the 

customer himself. The customer himself will come in and 

compare what he's doing in the futures and the options 

market with what he might be doing in a local scenario.

So the transaction and the action that's taking 

place locally is often brought to the attention of the IB 

by the customer who is a customer of both of the 

entities. I think that our association is very eager to 

partner, to have relationships with people who are 

offering all styles and all types of risk management. 

That includes some perhaps form of an ATO, some perhaps 

form of other risk management product, but we would not 

want to see it go either unregulated or unregistered in 

any way. Thank you.

CHAIRMAN SPEARS: Are there? Trenna, go ahead.

MS. GRABOWSKI: Yes, thank you, commissioner. 

This would be in the nature of what Bob said, this would 

be my opinion as opposed to an official opinion of 

American Agri-Women, but I would reiterate Bob's comments 
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that any time we as farmers can have another risk 

management tool available, it certainly is beneficial to 

us.

Putting on my other hat, which is an accounting 

and CPA hat, I recall the dreadful misunderstanding and 

the ramifications from the hedge-to-arrive contracts. 

And I guess in the whole discussion of agricultural trade 

options, I think something very, very important to be 

said is that education and an understanding on the part 

of the folks who would be using any of these risk 

management tools is of paramount importance, and it's one 

thing to sit around a table and talk about it. It's 

another thing to get out into the country, and it's still 

another thing far removed when the discussion goes around 

the coffee shop table, as to what I did or what I heard 

that Henry Jones did, and therefore since it worked for 

him, then absolutely it will work for me.

And I think this is not in any way putting 

farmers down. It's just that this is another option--

pardon the word--but it's another possibility of 

something that can be utilized and utilized very 

effectively, but I think the education must be there so 
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that people who are going to be utilizing it will 

understand how to do it.

CHAIRMAN SPEARS: Thank you very much. Sure, 

Neal, go ahead.

MR. GILLEN: I ask Trenna and Bob a question, 

whether or not the concept of marketing clubs has reached 

your production areas?

MR. METZ: Sure, we have marketing clubs in our 

area, and we use a lot of advisors, and I think that's 

part of the problem why things haven't taken off. There 

have been very few opportunities as far as farmers are 

concerned for forward contracting.

In soybeans in the last two years, probably a 

week in May last year, we've had--well, to be above loan 

rate, and normally you don't do any contracting unless 

you're above loan rate. We had some opportunities now in 

February on spring wheat and corn, but they were pretty 

short opportunities. So the markets themselves have 

probably stopped us from using some of these. We've had 

nice opportunities, but they've been short.

MS. GRABOWSKI: I would agree. Marketing clubs 

are a lot more fun to be a part of in a bull market, and 

there have been marketing clubs in our area, but frankly 
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over the last couple of years, folks have lost interest 

because it's not as fun, much fun to price on the way 

down.

MR. GILLEN: I just want to--Carl Anderson at 

Texas A&M oversees the marketing club concept in the 

state of Texas, which has been going now for about three 

years. I was at a meeting with him recently, and in the 

past, even in this past year, with mixed production 

producers, cotton an grains, throughout the state of 

Texas, the members of the marketing club averaged $33,000 

more in net income.

This program is funded by the state of Texas. 

I think they have a million dollars and the producers 

pay--and there is a waiting list to get into some of 

these clubs--$300 fees. And he utilizes an ongoing 

education program.

CHAIRMAN SPEARS: Trenna.

MS. GRABOWSKI: Oh, thank you. I think that 

might be one of the things that might be considered. The 

marketing clubs in our area have taken an unstructured 

approach, and possibly the structure backed by an 

institution such as Texas A&M and in my area maybe 

University of Illinois is something that would certainly 
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facilitate farmers get involved and would keep the ball 

rolling even during times when interest might seem to 

lag.

CHAIRMAN SPEARS: Okay. Any other comments or 

questions? Yeah, Bob.

MR. WHITE: One comment. I think that some 

hindrance to being concerned about marketing comes with

the government program in that what do they tell a 

farmer? They say go to the insurance agency, manage your 

risk by covering your crop with insurance, here's a set 

price, and I sometimes think that farmers manage their 

risk that way more than being concerned about marketing.

I see that happening in my area even though, 

you know, they know there is marketing tools there. I 

think they've become involved with the government looking 

out for them, and so they're more apt to manage it by 

crop insurance than what the government is going to pay 

when fall comes.

CHAIRMAN SPEARS: Thank you, Bob. Well, we're 

way behind schedule, and I'll take the responsibility for 

that. I apologize for that. But I thought this issue 

was very important to get on the table in front of us. 

The input from the committee is very important, but 
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equally important, I believe, is to put the issue before 

you because it is a live issue that we're going to have 

to grapple with and wrestle with at the commission over 

the next few months. So any follow-up thoughts or 

comments that you have will be extremely helpful.

Again, I want to thank all the panel members 

for coming, Melinda and Jack. Jack, you were put in the 

spotlight as the only ATOM. You handled it very well. I 

appreciate it. Do you have any thoughts or closing 

comments you'd like to add before we move off the 

subject?

MR. DOUGHERTY: Well, I think that just the way 

that we've utilized the program in such a narrow scope to 

me says there is a lot of ways to use this program that's 

the benefit to, in our case, the livestock producer, but 

to the grain farmer also. It just needs a little bit of 

creativeness, and speaking from a company standpoint, so 

far we found not a lot of trouble meeting the regulations 

and segregating the system as it is required, and I just 

think that it does bring a lot to the table, and like 

some of them have mentioned around here, it's one more 

tool that a guy can use, a producer can use, to best 
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market his products and put profit to his bottom line and 

our concern is that he stays in business.

CHAIRMAN SPEARS: Thank you, Jack. As I 

mentioned, we are behind schedule. We're going to go 

ahead and instead of taking a break, we're going to go 

ahead and move in. We're going to have the next three or 

four topics shorten themselves down from 15 minutes each 

to about five minutes each. We're still about 20 minutes 

away from being done.

If folks would like to grab a cup of coffee and 

some cookies and some pop out there while we're moving 

forward, then go ahead and do so. Also, rest rooms are 

downstairs, but I think in the interest of--well, let's 

just take a five minute quick break, but we're going to 

start back in five minutes and people can bring their 

cookies and pop back to the table.

[Whereupon, a short break was taken.]

CHAIRMAN SPEARS: Let's go ahead and get 

started. We're going to bypass Fred Linse, who is the 

Chief of the Ag Commodity Units for EA. I believe there 

is some information in the packet that Fred put together 

that kind of outlines. Fred was going to kind of explain 

what the Warehouse Act was, and there is--okay--my crack 
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staff just pointed out that in Fred's document, dated 

March 9, that was in your packet, there is a typo, and 

the memo dated March 9 to me from Fred that was provided 

to you guys, the typo at the bottom of the page says 

1994. It should say '95, 1995. So there is one typo. 

Thank you, Alan, for your contribution to the meeting.

With that, we're going to, like I said, this is 

Fred's memo. He was going to introduce the topic, but I 

think it's more important for us to hear from David 

Lehman with the Chicago Board of Trade as they are 

probably the primary exchange that has dealt with this 

issue in regard to the corn and soybean complex. So with 

that, David, I'd like to turn it over to you, and you'd 

outline the implications for this Warehouse Act as it 

deals with your exchange. Thank you.

MR. LEHMAN: Thank you, Commissioner Spears and 

I apologize, Fred, but really what I'm going to talk 

about today isn't really so much to do with the changes 

in the Warehouse Act, although if down the road the 

program that I'm going to give you just a brief overview 

of today will be expanded to warehouse receipt 

commodities.
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The Board of Trade next month will be 

implementing an electronic delivery system for corn and 

soybean shipping certificates. This system dovetails in 

with the new Illinois River delivery system that was 

implemented in January of 2000, and obviously avoided the 

past restrictions in the Warehouse Act of requiring a 

paper or physical warehouse receipt to be in existence 

for warehouse receipts.

As I said, this Illinois River system uses 

shipping certificates, Board of Trade delivery 

instrument, and as a result, effective with the May 2001 

deliveries, we will convert this system to totally 

electronic delivery system. The conversion process, and 

I might just point out, there are a couple of handouts 

out front, a notice from our Secretary's office that 

explains the implementation of the system, and conversion 

procedure, and also notices from our Board of Trading 

Clearing Corporation who will be operating the system and 

who developed the software for the system.

In this conversion process, later on in April 

here in a couple of weeks, holders of paper certificates 

will need to convert those into electronic certificates. 

If they choose not to convert them, they can continue to 
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carry that piece of paper, and it's still valid claim on 

the loading capacity of the issuing firm.

They could also cancel the paper and load out 

the grain that that paper certificate represents. The 

conversion process is really just a matter of the holder 

taking the paper certificate back to the agent, which is 

a clearing firm that represents the shipper or the 

regular firm and requesting an electronic version.

The agent then creates that electronic version 

and submits it to our registrar, which is also a part of 

the electronic system for registration, and at that 

point, the paper certificate will be canceled. The 

electronic certificates, once they're registered, then 

will be free transferred back to the clearing firm that 

holds or represents the customer who is holding or was 

holding the paper certificate.

The advantages of this system, I think, are 

pretty obvious of removing paper, in creating efficiency 

by going to an electronic system. One specific cost 

saving that the system will create is there will no 

longer be an expiration on certificates. So firms that 

issue certificates, delivery firms, won't have to reissue 

those every six months or every year. In the case of 
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corn and beans, it's every six months. That's about 

$100,000 a year cost on firms.

The system is a dedicated network. It's the 

Board of Trade Clearing Corporation's customer network so 

only clearing firms will be able to access the system. 

It will increase the integrity and safety over the 

current system of manually carrying warehouse receipts 

and paper shipping certificates from one clearing firm to 

another and also manually handling the money transfer.

The invoicing also will be done by the 

electronic system and that will all be automated. As I 

mentioned, the payment for deliveries will be done via 

the system through the SWIFT banking system that is 

currently used for the daily pay collect margin 

transfers. The ownership of the certificate will occur 

electronically as well, facilitated by the clearing 

corporation, and another feature is its storage payments 

are automatically debited and credited on the 18th of 

every month so that will enhance the timeliness of 

storage payments.

These last two slides are just screen prints of 

what the system looks like. It's kind of hard to read, I 

think, but this is the main menu. This system is built 
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on top of the OTIS delivery system that the Board of 

Trade already has in place so it's something that our 

users are really already pretty familiar with.

And there is one last slide of once some 

electronic certificates are created just what the 

registered agent will see. As I said, the implementation 

this year is for corn and soybeans only. Our 

expectations are to move and expand that into warehouse 

receipt markets, wheat, oats, rice, once the Warehouse 

Act rules are in place to allow electronic warehouse 

receipts for those markets.

Soybean meal and soybean oil also can be 

implemented in the second stage. As we speak, I think in 

about two minutes ago, the first training session 

started, 2:30 this afternoon, in Chicago. We have half a 

dozen training sessions set up for clearing firms, for 

registered agents, and shippers themselves, regular firms

if they want to come in and look at the system.

I think eventually also the next generation of 

the system will include a web application access for 

banks and also for entities that aren't currently 

customers of clearing firms. That's something that the 

Clearing Corporation has had some discussions with banks 
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on in the last few weeks. So that's the system. Any 

questions I'll be happy to answer them. Thank you.

MR. GILLEN: Do you anticipate beginning with 

electronic from the outset so you don't have a paper 

certificate?

MR. LEHMAN: Yes, we do. We will mandate 

participation or participation in this system is 

mandatory so that as of the May deliveries for corn and 

soybeans, in order to participate in the delivery system, 

you must use an electronic certificate.

MR. GILLEN: Maybe Bill Dodds, Bill, do you 

anticipate going electronic at the elevator level like we 

have in cotton at the gin level, warehouse level?

MR. DODDS: I think we will. As far as this is 

concerned, it's overdue and the quicker the better.

MR. LEHMAN: We've got about 2,000 corn 

certificates outstanding right now, and about 300 

soybeans. I think there is about 4,000 wheat receipts 

out. So it would--and there are 10,000 oil receipts on 

the street. So we've got some much more large volume 

delivery contracts coming in the future for this system.

CHAIRMAN SPEARS: Any other questions for 

David? Again, David, I want to thank you for your coming 
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to the meeting. Your contribution as always is very much 

appreciated. You've been a contributor to this committee 

for a number of years, and it's greatly appreciated, as I 

said.

Also, before we move on, I want to acknowledge 

Fred Linse. Fred, thank you for--he's sitting over 

there--Fred, thank you for the memo, and I apologize for 

cutting you time, but so be it.

[Laughter.]

CHAIRMAN SPEARS: Got to have a little bit of 

fun. Our last topic, I'm going to ask Phyllis Honor, who 

is the Acting Administrator of the Risk Management 

Agency. These last two or three topics were primarily on 

the agenda for information purposes for the committee 

members, and I think it's important that this agency has 

an excellent relationship with RMA. As you know, they've 

been a member of the committee for a number of years, and 

have been ably represented by Ken Ackerman, who is in the 

audience as well. In previous years Ken has been a very 

valuable member to the committee.

I know Phyllis has done an excellent job in her 

role as acting administrator, the time that she's been 

acting. So she has graciously volunteered to shorten her 
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presentation from an hour and a half--no--down to roughly 

five, ten minutes. So Phyllis take as much time as you 

want because we're going to go ahead and not--you'll be 

the last topic on the--we're saving the best for last. 

You're going to be the last topic on the agenda.

John Bird who put together the information for 

the last topic, which was recent developments in 

electronic derivatives trading, has graciously said that 

all his information is in your packet. So there is no 

use in him getting up just repeating what's already 

there. You can read that at your leisure. And we'll 

save that topic for a later time, future meetings. I 

think it will be appropriate. It will be probably a more 

timely topic in the future as more exchanges come to the 

market dealing with ag contracts. So with that, I'll 

turn it over to you, Phyllis. Thank you.

MS. HONOR: You've already had some pretty 

weighty discussions here this afternoon, and we have a 

lot of food for thought. And I know that people want to 

move on. I am, as you have just said, the Acting 

Administrator, having been in the position since the 

change in administration in January, a little over two 
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months, and everything that I have touched has blown up 

on me.

[Laughter.]

MS. HONOR: And I do not intend to go easily 

into a new area of operation without lots of discussion 

and deliberation. Ken did a great job of being an 

administrator even though I was not always kind to him 

while he was there. My sins have come home to me.

[Laughter.]

MS. HONOR: I'm not a program expert. My 

background is accounting and business administration, and 

I was the chief financial officer. I was the bean 

counter and wondering how you were spending your money 

and now I have to deal with the bigger issues.

In June of the past year, we had an 

Agricultural Risk Protection Act passed, and it 

significantly changed the way in which we operate, and so 

what this act does is it provides us a great deal of 

money, money in the tune of $8.2 billion to spend over 

five years to improve crop insurance. That's a lot of 

money and a big, big mission.

And what it does is it provides a number of 

incentives and things to farmers. It makes our buy-up 
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coverage more affordable and it offered a premium 

discount so they would buy more crop insurance, and I was 

pleased to hear the positive comments about our products 

that you have stated here, and that's only due to the 

efforts of people who are back at the office working on 

products now and also the leadership that Ken provided 

during the time that he was there. And I have every 

reason to believe that the incoming administration will 

do the same thing.

But what you want to know today is about our 

risk management education program, and also about a new 

initiative for livestock. The act that was passed did, 

in fact, provide--mandate a new pilot approach for 

livestock pilot program, and this has limited up to $75 

million over five years. That's a lot of money, and it 

is a new area for us.

It provides $10 million in the current fiscal 

year and in the following, and so in 2001 and 2002, we 

have $10 million to put into a livestock program. We 

have, of course, the dairy options pilot program that you 

may already know about and, of course, the risk 

management education, those kinds of things that you 

talked about today that are important that you want to 
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know about. And we would be pleased to come back and go 

into more detail about those programs with you.

But I think that what you want to know is 

what's up with livestock and the risk management agency. 

The act provided a definition for livestock and in the 

subsection, the term "livestock" includes but is not 

limited to cattle, sheep, swine, goats and poultry. So 

these are the areas that they identify as livestock.

And the program requires that the corporation 

shall conduct two or more pilot programs to evaluate the 

effectiveness of risk management tools for livestock 

producers including the use of futures and options, 

contracts and policies and plans of insurance that 

protect the interest of livestock producers.

So the act does, in fact, allow us to enter 

into that very, very dangerous area for us of futures and 

options, and I say for us because that's not our 

background. That's not what we normally do in this very 

technical area, and, you know, we've been in developing 

programs, and we've had some, some work in the options 

area with our options pilot program, but we are by no 

means the staff with the competence to do this.
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And so what has happened is--and our pilot 

program is in Section 523, our livestock pilot program--

and it provides that livestock producers with reasonable 

protection that the financial risk of price or income 

fluctuation inherent in the production and marketing of 

livestock is what we're talking about, and the protection 

for production losses.

Now, the perils that have been identified as 

those that impact livestock that we're concerned about is 

financial risk of price or income fluctuations, 

production losses and poisoning and disease. And I'm 

telling you we didn't think about disease until the most 

recent things that are occurring to us now.

So I guess it's quite timely that it happened 

because that would be something that we would be 

covering, and we would not have thought about the advent 

of hoof and mouth and the other things, the mad cow, that 

other places have to consider at this time.

Where are we at this? At this time, the act 

was passed and we became aware of our new 

responsibilities. In the past, we developed our own. We 

did our own R&D, our own research and development on 

products, and we contracted out portions of that, and so 
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we have some very good technicians in developing programs 

in the old style programs that we have, but we're in the 

21st century now and the needs of farmers have changed 

and they need more products and more tools.

And so the tools that we traditionally provided 

to them, while still good, we need to expand and provide 

some different types and we need to have a vehicle to do 

that. And so the Congress in its wisdom has said that we 

need to contract out, and so they provided us authority 

to contract out.

And so that's what we're doing, and this past 

year we spent a lot of time taking people who know how to 

do the job and teaching them out to be contractors out 

and overseeing the job. Now that's a struggle because, 

you know, people who know how to do things want to 

continue to do it. They don't necessarily want to help 

other people learn how to do it and watch others do it. 

So that's been an internal challenge for us to get our 

people to become the people who develop task orders and 

write programs and review others in their efforts to 

develop programs.

So we do have a proposal that did come in that 

we're consulting on now and developing, a livestock 
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proposal. It came in and we were not pleased with it, 

and so we're still working on it. We also have a task 

order out that will help us to understand what we have to 

address, and that task order will tell us what livestock 

producers need because we really don't know.

And it would also tell us what livestock 

producers are willing to pay for, what is feasible, and 

generally what we can do within the language of the new 

legislation. Now, we have many vehicles that we can use 

to accomplish our new responsibility in this area.

We can contract out for development. We can do 

what's 508(h) submissions which is private sector 

development of a program and bring to us and we put on 

line.

We also have and do receive unsolicited 

proposals. I'm sort of hoping that people here in the 

audience will know of others and will pass the word 

around that we do have this program and perhaps we will 

get more proposals in. And then we have partnerships 

through cooperative agreements, and those are the 

vehicles that we have available to us to use for our new 

livestock initiatives that we now have authority to do.
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The bottom line in terms of that is that we're 

in the development stages of determining just what we 

will do and how we will do the things that will be 

necessary to help the producers meet their risk in the 

livestock area. It's an entirely new area, and actually 

as I was listening to some of the discussion here, it's 

really a very frightening area for the things that you 

have to consider, and I'm certainly hoping that I will 

not be so graced with this job long enough to make all 

the decisions on that program.

[Laughter.]

MS. HONOR: I hope I can pass that off to a 

wiser person. But that's where we are with it. Now you 

need to know that we are moving very, very cautiously in 

this area. Another thing that happened with the passage 

of the act that I'm pleased with--my colleagues are not--

is that we have an expanded role of our board. And the 

board has a greater role in the management of our 

corporation and they make lots of decisions that they 

were not involved in before.

And in 1938 when the Crop Insurance Act first 

came out, the board of directors was move involved in the 

management and decision-making process, and over the 
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years that has declined and it has changed. And the 

Congress decided that that needed to move back because a 

lot of the decisions that we're making are based upon our 

experience with the program that needs to be changed, and 

so we need a broader view.

And so the act says that our new board is made 

up of the Under Secretary of the Farm and Foreign 

Agriculture Section, an additional Under Secretary, which 

the Secretary will decide upon, the USDA Chief Economist-

-I think that's very important because we are fortunate 

to have Keith Collins as our economist, and he's a very 

intelligent and learned guy, and he asks a lot of 

questions, and he causes us to do a lot of thinking, and 

I'm very pleased to have him serving on our board, 

particularly while I'm serving in this role.

Also, the position that I hold acting is also a 

member of the board. It's a non-voting member now. Four 

farmers, at least one of which has crop insurance 

experience. So we, the board, has expanded and our board 

will be made up of farmers, and we're hoping to have 

farmers from across the United States to participate, and 

we need an individual who is knowledgeable in reinsurance 

or regulation on our board.
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The reason that I'm bringing this up is that 

the legislation said that we had to have a new board by 

April 1, and that has been extended to the 13th.

[Laughter.]

MS. HONOR: But I know that you know a lot of 

people who could help us, and I know this is the place to 

bring this--April 13. At least it won't conflict with 

your tax day.

And so I have a handout that I'm going to give 

you and so if you know any individuals who would be 

interested in serving on our board, I'd be pleased to 

have more nominations of broad-based background and more 

experience, and it would be very, very important that we 

have that in our deliberative process because we have a 

lot of things to do, and we need as much support, as much 

information, as much background as we move into these new 

areas as we can, and so my biggest pitch today is to make 

sure that we get that out.

That's not an assignment that normally civil 

servants would do so I go very cautiously in that, but 

our time is short. So that's not normally what I would 

do. That's not normally my role, but our time is short, 

and I do need to get the message out, and I saw this is 
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an opportunity to do that. So I beg your forgiveness of 

me for imposing on you in this way.

That's generally where we are in this, and I 

would be more than pleased to come back at another time 

and go more extensively in exactly what we're doing, talk 

to you a little more about our DOT program, and also 

about our risk management education program, which Craig 

Witt runs, and we're available, we're down the street. 

I'm getting a lot more visitors from people who want to 

know what's going on, and want to come in and talk about 

how do we get new programs on line because now you bring 

the programs to us, we don't generate them anymore.

So those programs that people are interested 

in, they just prepare them, develop the proposals and 

submit them to us, and we take a look at them, and you 

can develop them, and then they have to be reviewed and 

then taken to our board.

So we have a whole new process, but we have an 

opportunity to try a lot of new things. I know I've gone 

very quickly. I'm from the South, but I do talk fast, 

and I hope that you are able to get something out of the 

discussion. Thank you.
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MS. KEITH: Phyllis, Susan Keith with the 

National Corn Growers. I just wondered if you have any 

preliminary data on program participation this year with 

the higher subsidy rates? I've heard anecdotally sales 

are up, but I haven't--

MS. HONOR: Yes. The sales are up, and, no, I 

don't have the figures with me. I should have them 

because I was--you know, I still retained some of my CFO 

duties, and I was working on the budget presentation this 

morning, and we did have some numbers, but then I went to 

a very contentious meeting following that and I've 

forgotten our numbers.

[Laughter.]

MS. HONOR: I know that they are up because 

that's the first thing that we did was to get all the 

package out that we could to the producers, and we had 

adjusted our accounting systems to be able to account for 

that. But I know that it's up, I want to say maybe 25 

percent, but I'm not sure. So if you'll give me your 

card and number, I can get that back to you.

Yeah, I know we've done a good job and it's up, 

but I don't know exactly what it is.

CHAIRMAN SPEARS: Bob.
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MR. METZ: I'd like to thank you for the 

improvements in crop insurance. I was in Washington last 

week and I guarantee you the senators and congressmen 

that I visited with, I did thank them for the work 

they've done in crop insurance. I think as agriculture 

enters a new age, it just becomes more important everyday 

that we have good solid crop insurance. And I think it 

is going in the right direction, so thank you.

MS. HONOR: I needed that today after the 

meeting I had. I like to tell people--I don't know if 

Ken ever agreed with this because he never agreed with me 

when he was there--

[Laughter.]

MS. HONOR: --that crop insurance is the 

program for the 21st century because the government is 

involved in helping to subsidize it, the private industry 

delivers it, and the producer pays part of the cost. And 

that's really where we want to go. We want to get the 

government as much out of people's decision-making and 

sponsorship and get people more involved in what they do.

And it goes back to the questions that have 

been raised here and the discussion that we've had is 

that sometimes people don't know what they're getting 
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because they think the government is doing it all for 

them, and we have to get to the point where people are 

more involved in their decision-making and understand it 

more because our products that we have for them are 

products that they can understand.

MR. DIERLAM: Ms. Honor, I work with the 

National Cattlemen's Beef Association, and we just 

submitted a letter a few weeks ago to the Kansas City 

Risk Management Office that we'd like to participate and 

provide resources to the contractors that are developing 

the programs, particularly all pasture, range, and forage 

products, and then as we look specifically to the futures 

and options part of that, we definitely want to be able 

to consult.

We do have concerns on some implementation 

side, on some subsidy levels, and on federal money being 

used to go into the markets per se, but we'd like to sure 

be in a position to be able to discuss that, but we're 

definitely supportive, particularly on the pasture, range 

and forage side, working with Risk Management Agency and 

your contractors to develop programs that are going to 

work for calf producers out in the countryside.
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MS. HONOR: That too is a new program that was 

introduced as of the act that we have just implemented 

and is moving alongside. I think it's going to be an 

improving program over the next year as we get out of the 

learning curve which is very high right now, but I thank 

you for hanging in there with us.

MR. DODDS: Phyllis, crop insurance is good. 

Like Bob, our producers like it. I haven't read the act, 

but I've heard that there is some language in there that 

might dictate that CFTC is exempt from regulation in this 

livestock risk management venture? Have you?

CHAIRMAN SPEARS: My understanding is that 

you're right, Bill, I think the--Ken, you're well aware 

of this language.

[Laughter.]

CHAIRMAN SPEARS: It is outside of purview 

regulation, this portion of the program. Ken. Come to 

the microphone so we can get you on tape.

MR. ACKERMAN: I'm kind of used to being a 

potted plant. It's very nice. There is a portion in the 

statute that says within the livestock pilot program, a 

new product that is, in fact, approved by FCIC for 
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reinsurance would not be considered a trade option for 

purposes of the FCIC trade option rules.

CHAIRMAN SPEARS: We talked about this once 

before at a prior advisory committee meeting, and it was 

an issue that came before us, and then now is now part of 

RMA purview.

MR. GILLEN: Mr. Chairman.

CHAIRMAN SPEARS: Yes.

MR. GILLEN: I don't want to rain on Ms. 

Honor's parade, but--

MS. HONOR: It's already been rained on today.

MR. GILLEN: --but it seems that Ken Ackerman 

might have done too good a job. The Delta Farm Press 

earlier this week had an article indicating that maybe 

the Crop Insurance Program was too good because 

production is up substantially in the mid-south region, 

and it may well be that not only crop insurance but the 

fact that cotton is the best thing to plant for producers 

in that particular region compared given the low price of 

beans.

CHAIRMAN SPEARS: Phyllis, you might, you 

mentioned that you're looking for nominations to your 
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board. Now is the name of the board the FCIC board or 

what?

MS. HONOR: Yes.

CHAIRMAN SPEARS: Okay. So there are a number 

of producer groups here and we would certainly appreciate 

your pitch. Maybe some of these producer groups have an 

opportunity here within the next two weeks to present 

some names to your board that would be knowledgeable from 

corn, soybeans, wheat, livestock, whatever. So do you 

have anything else, Phyllis?

MS. HONOR: No, that's all.

CHAIRMAN SPEARS: Okay. Again, thank you for 

coming, Phyllis. It's very timely as it's been quite 

evident, I think, that our lines with the different acts 

of Congress last year, the lines between our two agencies 

are somewhat blurred, and have somewhat come together, 

because we now have some education responsibility. You 

have some livestock programs to administer so. There are 

some tendencies to be some blurring of lines between our 

two separate agencies.

So I think it behooves us to continue 

communication as we have in the past, and I think it 

fuller demonstrates the need to have you guys as members 
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of this Ag Advisory Committee. So we thank you for your 

attendance and for your help and look forward to your 

assistance in the future. Go ahead.

MS. HONOR: Well, I thank you also, and I think 

that relationship has already been established in the 

fact that the administrator sits on this committee and 

that you also sit on our Risk Management Education 

Advisory Committee. So I think that the communication 

channels are already there for our agencies to know 

what's going on at both places, and we need to continue 

to keep those there.

CHAIRMAN SPEARS: Appreciate that. With that, 

what was just handed out to you guys a minute ago while 

Mrs. Honor was talking was John Bird's portion of the 

program. I misspoke earlier. I thought he said it was 

in your packets. It was not. It was on the table in our 

office. Again, thanks to my crack staff--I think what's 

on here is a list of the various internet based, 

electronic ag market internet sites that are out there 

today, as well as copies of the slides that he was going 

to present. So hopefully, that will be helpful to you 

guys if you have a chance to review that.
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Well, are there any issues that need to come 

before this committee? Due to time management, we are 

now back almost on schedule. And we are set to adjourn 

at five o'clock, and it's almost five o'clock. Before I 

do adjourn, I wanted to have the opportunity once again 

to thank everyone for coming, for staying through the 

entire program.

I want to thank the panelists who came, Melinda 

and for Jack as well, to make their presentations to the 

group, and Bill as well, as he is a member of the 

committee. I think that we accomplished some things 

today. I recognize these are difficult issues. These 

are issues that are put before you on a relatively short 

basis, but they are issues that we're going to wrestle 

with, as I said before, and grapple with over the course 

of the next few months, and again I would stress the need 

for any future follow-up correspondence, comments, input, 

meetings, whatever it would take, to assist us in these 

matters, as we try to put together proposed rules on how 

to address ATOs and how to address bilateral ag 

transactions or bilateral transactions in ag commodities.

So with that, I want to thank you all for 

coming, for being patient, and for being flexible in your 
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schedules. I wanted to give Jim one last opportunity. 

Jim, did you have anything that you want to add before we 

close?

ACTING CHAIRMAN NEWSOME: No.

CHAIRMAN SPEARS: Okay. Wise chairman. Thank 

you again, and we look forward to working with you as 

always. Thank you.

[Whereupon, at 5:00 p.m., the meeting was 

adjourned.]