II-O0017

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Todd Kemp <tkemp@ngfa.org>

Monday, October 11, 2010 1:42 PM

OTCDefinitions <OTCDefinitions@CFTC.gov>; EndUser

<EndUser@CFTC.gov>; AgSwaps <AgSwaps@CFTC.gov>; PosLimits

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NGFA Comments on Dodd-Frank Act

cftc pre-proposal stmt 10-10. docx

Please see the attached pre-proposal comments from the National Grain and Feed

Association on several issues to be addressed during the CFTC’s rulemakings to implement

the Dodd-Frank Act.

Todd E. Kemp

Director of Marketing/Treasurer

National Grain and Feed Association

1250 Eye St. NW, Ste. 1003

Washington, DC 20005

Phone: (202) 289-0873

FAX: (202) 289-5388

E-mail: tkemp@ngfa.org
October 11, 2010

Mr. David Stawick

Secretary

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street, NW

Washington, DC 20581

Dear Mr. Secretary:

The National Grain and Feed Association (NGFA) appreciates the opportunity to provide preproposal comments on issues facing the Commodity Futures Trading Commission (CFTC) as it works to

implement the Dodd-Frank Wall Street Reform and Consumer Protection Act. More detailed comments

on the subjects discussed herein will be submitted by the NGFA as CFTC proposals are published.

However, it is our hope that this input can assist the Commission as it develops new regulations that will

provide appropriate oversight to U.S. futures and derivatives markets without overly constricting newproduct development and capital formation.

The NGFA is the national non-profit trade association representing more than 1,000 companies

that operate an estimated 7,000 facilities nationwide in the grain, feed and processing industry. Member

firms range from quite small to very large, both privately owned and cooperative, and handle or process

in excess of 70% of all U.S. grains and oilseeds annually. Companies include grain elevators, feed mills,

flour mills, oilseed processors, biofuels producers/co-product merchandisers, futures commission

merchants and brokers, and related commercial businesses.

A common thread for NGFA-member firms is that they rely on efficient futures markets to

provide price discovery and risk management for their commercial businesses. In particular, consistent

and predictable convergence of cash and futures values is of primary importance to the NGFA. A

number of rulemakings being undertaken by the CFTC will directly or indirectly impact the risk

management instruments used by the NGFA’s member companies. With that in mind the NGFA offers

the following pre-proposal comments to the Commission.

Speculative Position Limits

The Dodd-Frank Act requires that CFTC establish speculative position limits for all commodities,

including agricultural commodities. Such limits already are in place for the enumerated agricultural

commodities (corn, wheat, soybeans, livestock, cotton), albeit established through a different regulatory

process. Position limits are extremely important in agricultural markets, which must function effectively

for traditional commercial hedgers. Especially in today’s marketplace, with index funds and other

investment vehicles seeking enhanced returns, maintaining appropriate position limits is of paramount

importance.
The method currently in place for establishing position limits has functioned well - exchanges

may propose revisions to limits, subject to review by industry and the public and approval by the CFTC.

Historically, the NGFA has been generally supportive of occasional requests by exchanges to increase

position limits. However, futures price volatility in recent years and vastly increased participation by

nontraditional participants has altered the situation and, at times, threatened the viability of exchangedtraded futures for commercial grain hedgers. The rapid escalation of agricultural futures prices during

2008, and a resulting disconnect of cash and futures values, dramatically increased risks for grain

purchasers/hedgers and caused extreme financial stress due to massive margining requirements.

Today, conditions exist that could presage a repeat of those conditions. With investment capital

now seeking enhanced returns and many advisors recommending commodities as an investment vehicle,

it appears the stage is set for another investment-fueled spike in futures prices - an increase we fear will

be largely unrelated to market fundamentals and could again result in extreme financial stresses. If this

happens, grain buyers may be forced to limit their grain purchases from U.S. agricultural producers, as

occurred in 2008.

For these reasons, the NGFA believes it would be imprudent of CFTC to change current

speculative position limits for the enumerated agricultural commodities. We strongly urge the CFTC to

use proper functioning of futures markets for traditional commercial users - i.e., convergence of cash and

futures - as the primary consideration in establishing position limits. We also urge the CFTC to review

corporate linkage issues through which speculative firms might technically comply with position limits

through separate entities while coordinating positions that would circumvent the intent of the rule.

Bona Fide Hedge Definition

Closely related to the issue of establishing speculative position limits is administration by CFTC

of the bonafide hedge definition. The Dodd-Frank Act contains a very specific definition of a bonafide

hedge, virtually identical to the definition used by the Commission. Although leaving authority for the

definition with the Commission would have been the preferable course by Congress, the NGFA generally

supports the Dodd-Frank definition as appropriate.

Clearly, the law’s intent is that bona fide hedgers are those commercial firms hedging legitimate

commercial risk directly related to purchases/sales or changes in value of physical commodities. We do

not perceive that the intent of Congress in Dodd-Frank is in any way intended to alter the way CFTC

defines bonafide hedgers, as applied to entities that are proven to be in the cash commodity trade as

buyers or sellers. In that vein, the NGFA believes that CFTC should use its authority to grant hedge

exemptions to financial institutions, index funds, hedge funds or other nontraditional participants in

agricultural futures markets extremely sparingly and only if it can be demonstrated clearly that such

exemptions will not harm contract performance for traditional hedgers.

Further, we believe a rulemaking on position limits and the bona fide hedging definition offers an

opportunity to reexamine the CFTC’s current swaps exemption. Essentially, the swaps exemption

provides unlimited access to futures markets for swap dealers, an indirect route to futures markets that

allows investment capital to evade speculative position limits. The NGFA believes strongly that this

exemption has contributed significantly to futures volatility and lack of convergence in agricultural future

markets.

Consistent with the NGFA submission to CFTC on June 16, 2009, in response to CFTC’s March

24, 2009, "Concept Release on Whether to Eliminate the Bona Fide Hedge Exemption for Certain Swap

Dealers and Create a New Limited Risk Management Exemption From Speculative Positions Limits"

(copy attached), the NGFA urges that CFTC "look through" swap transactions and allow hedge
exemptions to be granted only for that portion of swap dealers’ business where the swap dealers’

counterparties are entities that otherwise would have qualified for a hedge exemption. All other swap

dealer business should be subject to speculative position limits. We believe this adjustment to the swaps

exemption would result in more appropriate levels of investment participation in agricultural futures and

greatly enhanced futures contract performance for traditional hedgers.

End-User Exemption

In the Dodd-Frank law, Congress clearly intended to establish a commercial end-user exemption

from many of the requirements that will face OTC derivatives users. While the construction of the

exemption in the law may be somewhat ambiguous, that intent was made clear in letters and floor

statements by Congressional leaders. The NGFA believes that such an exemption for commercial endusers is not only merited, but also highly needed. We submit that CFTC should issue a clear and concise

statement establishing the end-user exemption for similar kinds of commercial participants as described

above in the bonafide hedge discussion. We do not believe Congress intended to burden these

commercial end-users or their customers with the increased costs and regulatory burdens of exchangeclearing, margining, and capital requirements.

It is problematic that the end-user exemption in Dodd-Frank may not appear to extend to the

counterparty of the commercial end-user in an OTC swap transaction. Increasing the regulatory

requirements of the counterparty certainly will result in those costs being factored into total costs of the

transaction, thereby increasing costs to the commercial end-user - and likely achieving little or no added

protections in the marketplace. The NGFA suggests that CFTC consider extending the end-user

exemption to counterparties like swap dealers in instances where the dealer is doing business with a

commercial end-user. In essence, this would be a "look through" process similar to that discussed in the

bonafide hedge section above. Such an action would help keep costs at a reasonable level for

commercial end-users and their customers to the benefit of the entire U.S. economy.

A~ricultural Swaps

The NGFA will submit more extensive comments concerning agricultural swaps in response to

the series of questions posed in CFTC’s Advance Notice of Proposed Rulemaking (ANPR) published on

September 28, 2010. In general, we offer the following preliminary input:

1) The regulatory structure under which agricultural swaps function should be the same as for other

types of swaps. Like other swaps, ag swaps will be subject to extensive capital and margin

requirements, business conduct standards, and reporting, recordkeeping, and documentation

requirements. We believe these provisions of Dodd-Frank will provide more-than-sufficient

safeguards to the market and to swap participants. Piling on additional requirements for ag swaps

would put such instruments and those who use them at a competitive disadvantage and amount to

regulatory overkill. Generally, participants in swap transactions are larger, knowledgeable and

sophisticated parties that do not need additional regulatory protections.

2) As detailed above, a robust and clearly defined commercial end-user exemption for ag swaps

from clearing, capital, and margining requirements will need to be stated by the CFTC.

Swap Dealer Definition

In the Dodd-Frank Act, a "swap dealer" is specifically defined as a market participant meeting

one or more of four conditions. One of those conditions is that the person or firm "... regularly enters into

swaps with counterparties as an ordinary course of business for its own account;".
In general, the NGFA believes that swaps are not widely utilized among grain, feed and

processing firms in the course of their commercial business - we will provide more detail on the extent of

swap use in response to the ag swaps ANPR. The vast majority of risk management activity among

commercial firms in the grain, feed and processing industry involves buying or selling futures contracts

on a regulated futures exchange.

However, some firms may enter into swap agreements from time to time as an alternative risk

management vehicle to hedge their physical commodity risk. Such occasional activity should not subject

a firm to being defined as a swap dealer and incurring the regulatory requirements and costs that come

with it. Certainly, these firms that utilize swaps only occasionally are not considered by themselves or

their customers to be swap dealers. The NGFA suggests that CFTC exempt occasional swap participants

from the swap dealer definition. Alternatively, some de minimis usage of swaps could be established that

would exclude participants from the definition.

The NGFA looks forward to continuing discussions with the Commission on provisions of DoddFrank that impact our industry. We appreciate the opportunity to provide this input as rulemakings

proceed.

Sincerely,

Matt Bruns

Chair, Risk Management Committee