U.S. Senator Pat Roberts this week said Commodities Futures Trading Commission (CFTC) proposed regulations on “residual risk” are far-reaching and concerning and may drive farmers and ranchers from managing risk in the futures market due to costs and red tape.
Senator Roberts, a senior member of the Senate Committee on Agriculture, Nutrition and Forestry, made the following remarks to CFTC Chairman Gary Gensler, at a hearing regarding oversight of the Commodities Futures Trading Commission:
“I have a few questions based on my continuing concerns over how the CFTC approaches regulation, and in particular the need for a full and proper cost-benefit analysis of the regulations you are charged with implementing.
“I raise these issues, because I am concerned with what those within the future’s industry describe as an ad hoc approach to regulation, particularly in regards to the Dodd-Frank Act rules, thus creating great uncertainty among the participants in these markets.
“Based on the industry feedback I’ve seen, the CFTC’s proposal on residual risk may be the most far reaching and concerning regulation yet.
“It has been described as ‘an industry killing rule’ that ‘jeopardizes the entire existence of the model’ and is ‘likely to raise the overall level of risk to all participants in the market.’
At issue is a part of a CFTC proposed rule that requires at all times, residual interest in a customer’s account to exceed margin deficiencies.
Roberts went on to question Chairman Gensler saying, “In the same proposal, the CFTC would require ‘FCMs to be in compliance with margin deficiencies at all times.’ However, option values and margins are currently not available in real time. In order to meet these requirements, initial margins would likely have to double. Why would the CFTC propose a rule that is practically impossible to meet, that increases costs to customers, and increases their risk exposure?”
Roberts noted that the majority of Kansans in the commodity markets are not large banks, but instead are small business owners, including farmers and ranchers.
“Many of these folks are in rural areas and they still meet their margin calls by check. Requiring them to post margin calls more than once a day will certainly increase their transaction costs possibly to prohibitive levels. I’m sure it is not the intention of the CFTC to force small clients out of the futures market, so how would you expect these customers to stay in the market?”
Chairman Gensler responded that they had received about 125 letters from the comment period and said he would take a look at their complaints.
Senator Roberts is an outspoken critic of the CFTC in the wake of the collapse of MF Global and Peregrine Financial.