History and Current 

Agricultural Swa

Agricultural Trade 

Before the

Commodity Futures Trading Com

Agricultural Advisory Comm

July 29, 2008
Introduction

 Agricultural swaps

 History Current Policy

 Agricultural trade options

 Trade options generally Agricultural trade options (ATOs), a sp Statutory and regulatory history of AT Current regulatory and market situatio Possible alternative approaches CFTC staff recommendations for ATO
History of Agricultural Sw

 Pre-1989 –

swap agreements (includi

swaps) subject to considerable legal u

 1989 –

Commission issues “Swaps P

Statement,” creating a non-exclusive transactions meeting the statement’s 

 1992 –

CFTC reauthorization legislati

CFTC broad exemptive authority (§ 4urges the Commission to issue an exepromoting legal certainty for swaps

 1993 –

CFTC adopts Part 35, exempt

meeting certain criteria from the exchrequirement of the CEA

 Part 35 applies to swaps on all comm Part 35 conditions covered on a later 
 2000 – The Commodity Futures Mode

(CFMA) includes new § 2(g), the “swawhich supersedes Part 35 for most co

 Section 2(g) applies to transactions in 

other than an agricultural commodity;” include:

 Between “eligible contract participan Subject to individual negotiation by p Not executed or traded on a “trading 

 Part 35 remains in effect for “agricu

commodities”
Policy: Conditions Gov

Part 35 Agricultural S

1. Entered into solely between “eligible s

participants”

(ESPs)

 ESP definition (§ 35.1(b)(2)(vi)) includ

formed solely for the specific purpose ESP”

with a net worth of $1 million tha

swap to manage a risk in connection w

2. Not part of a fungible class of agreem

standardized as to their material econ

3. Creditworthiness of any party would b

consideration in entering the swap (i.e

4. Not entered into and traded on or thro

multilateral transactions execution factraded on an exchange)
Part 35 Does Not Apply t

 Part 35 defines a “swap agreement” t

agreement ...

which is ... a commodity 

...(including any option to enter into aforegoing).”

 However, the preamble to t

he original 

notes that a commenter asked for clathe Part 35 swaps exemption (and noexemption from the ATO rules) applieexchange agricultural options

 The Commission replied: “Any off-exc

on an enumerated agricultural commocomply with Commission rule 32.13(gfrom the Act and Commission rules, aexemptive provision is available.”
Clearing of Agricultural S

 Under criteria 2 & 3 of the Part 3

a swap on an agricultural commbe cleared (absent special relief

 Criterion 2 –

fungibility

 Criterion 3 –

creditworthiness

 Clearing agricultural swaps wou

exemption under the Commissioexemptive authority (§ 4(c) of the 
CME Group Petiti

 On April 21, 2008, the CME Group su

petition asking the CFTC to exercise iauthority to permit the clearing of corn and corn, wheat and soybean calenda

 The petition was published for comme

2008 (73 FR 38403)

 The comment deadline is August 21, 2

 On May 21, 2008, the CME Group su

general petition asking the Commissioits §

4(c) exemptive authority to amen

permit the clearing of standardized ov(‘OTC’) agricultural swaps, subject to condition to protect the market and mparticipants.”

 The May 21 petition has not been pub

comment
Ethanol swaps

 The Commission has already all

clearing of ethanol swaps withoupetition

 This represents an implicit findin

ethanol is not an “agricultural copurposes of the CEA and, therefwithin the general §

2(g) swaps 
Agricultural Trade O
Trade Options Gene

Trade Option Definition:

A commodity option offered by a persreasonable basis to believe that the oto a producer, processor, or commercmerchant handling, the commodity whsubject of the commodity option transproducts or byproducts thereof, and thproducer, processor, commercial useoffered or enters into the commodity otransaction solely for purposes related as such.(CFTC Regulations, 

§ 32.4)
Regulatory Exemp

 Trade options are exempt from a

regulations except:



§ 32.8, prohibiting unlawful repre



§ 32.9, prohibiting fraud; and



§ 32.2, a general prohibition agathe “designated” agricultural comnamed in the Commodity Excha(CEA), (including wheat, corn, osoybean complex, livestock prodcotton), except as provided in thregulations (

§ 32.13)
Agricultural Trade Op

A Special Case

 As evidenced by the 

§ 32.2 proh

agricultural trade options are substricter regulatory treatment than options on other commodities, sor energy products.

 The unique status of ATOs is a f

their statutory and regulatory his
Statutory and Regulatory H

Agricultural Trade Op

 1936 –

Market problems blamed 

speculative abuses result in the including a ban on all options traoff-exchange) in the then reguladesignated agricultural commod

 1974 –

CFTC is created and is g

authority over options trading in regulated commodities (but statuoptions in designated agriculturacommodities remains in place)
 1981 – Commission initiates pilo

exchange-traded options in non-commodities

 1982 – Congress amends the C

statutory ban on agricultural opti

 1984 – Exchange-traded agricul

added to pilot program, but due recent experience with agricultuATO prohibition remains in place
 1987 – Exchange-traded option 

made permanent (ATO prohibitio

 1991 – Commission proposes a

regulations to lift the ban on ATOhave allowed ATOs to trade like in other commodities, subject onagainst misrepresentation and fr

 16 comments received, 9 for, 7 
 Opposing commenters include:

 Chicago Board of Trade National Grain Trade Council National Grain and Feed Associa Cargill, Inc.

 Proposed rules never acted upo

 1995 – Commission holds round

regarding ATO prohibition

 1997 – Commission publishes s

paper, “Policy Alternatives Relatand other Agricultural Risk-Shift
 1997 –

Commission publishes A

notice of proposed rulemaking (Jthen proposed rules (November) ATOs subject to regulatory cons

 1998 – Initial ATO regulations is

including rules regarding: registrdisclosure, minimum financial rereporting and recordkeeping, an for parties with a $10 million net requirement that options must be physical delivery

 No firms seek registration under 
 1999 – ATO rules revised to stre

reporting and disclosure requireallow cash settlement

 Only one firm registers as an Ag

Trade Option Merchant (ATOM)

 The registration is later withdraw There are currently no ATOM re

the ATO program is, effectively, 

 2000 – Commodity Futures Mod

Act (CFMA) modernizes futures (from prescriptive rules to princip
Current Regulatory 

Market Situation

 The agricultural community need

risk management tools to deal whighly volatile agricultural marke

 The existing ATO program clear

helping anybody

 Producers and agribusiness inte

had an additional 10 plus years further risk management experti
Possible Alternative Appr

1. Leave the present ATO rules in plac

 Pro: easiest, the path of least resistance Con: does not address the agricultural co

management needs

2. Modify the ATO rules to make them 

acceptable to potential registrants

 Pro: acceptable if workable regulations ar Con: hard to visualize workable regulation

 The current regulations have already be

the bone

 The only obvious potential logical chang

worth requirement t

o $1 million, would d

smaller producers without reviving the A
3.Revoke the ATO rules and allow AT

other trade options

 Pro: 

 Opens up new risk management poss

agricultural community;

 Resolves legal uncertainty about exist

may or may not be ATOs; and

 Reverses the CEA’s paternalistic attitu

farmers like the operators of any othe

 Con: Opens producers up to the poss

and economic loss in a new, less-reguenvironment
CFTC Staff Recommen

for ATOs

 Staff plans to recommend to the 

a proposed rule amendment withATO regulations

 If approved by the Commission, 

would be published for commenFederal Register

 Members of the AAC are encour

comment orally at today’s meetiwritten comments in response to Register notice
The Status of ATOs if th

Regulations were to be W

 ATOs would be subject to the sa

conditions as trade options on aagricultural) commodities:

 They could be offered only to a 

connection with its business as 

 They would be exempt from all C

regulations except:



§ 32.8, prohibiting unlawful repres



§ 32.9, prohibiting fraud