Issue:
In this decade, commodities have emerged as an asset
class and as a result, there has been a significant
increase in the trading of grain, livestock and
energy futures contracts by nontraditional traders.
New players, such as commodity funds, index funds,
managed funds, and swap dealers trading with
commercial funds have altered the mix of
participants in commodity futures markets and
likewise have altered futures market performance.
Issues surrounding price levels, price convergence
and overall price volatility have caused traditional
users of futures markets, including farmers and
ranchers, to question whether or not these markets
are adequately fulfilling their traditional roles of
price discovery and risk transfer.
Recent
Activity ~ October 5:
The Convergence Subcommittee of the Commodity
Futures Trading Committee’s (CFTC) Agriculture
Advisory Committee has released its
report
on ways to address problems in the wheat
market. While the subcommittee focused on
wheat, the report has implications for other
commodities that have seen similar issues with a
lack of convergence between futures and cash
prices. The subcommittee was formed in April
and held three public conference calls to
formulate their recommendations, which will be
considered by the full advisory committee during
a meeting on October 29.
Convergence,
especially in wheat, has been on ongoing problem
in the agriculture markets that has become even
more significant over the last 18 months. A
year ago, CFTC requested and AFBF submitted
comments on proposed amendments to the Chicago
Board of Trade (CBOT) wheat futures contract.
AFBF generally supported the amendments and
raised other issues for consideration. In
December, CFTC approved the amendments and CBOT
made changes to its Soft Red Wheat (SRW) Wheat
futures contract. The convergence subcommittee
recommended additional changes when contract
performance did not significantly improve.
Update ~ August 27:
House
Agriculture Committee Chairman Collin Peterson (D-Minn.)
and Financial Services Committee Chairman Barney
Frank (D-Mass.) have released the attached
concept paper
on derivatives regulation. Legislative language
will be developed in September with the Financial
Services Committee marking up the legislation,
followed by an Agriculture Committee mark-up.
The concept paper is
the result of a long review by both committees of
futures trading and other financial markets. The
financial crisis increased Congressional focus on
over-the-counter (OTC) trades and credit default
swaps.
Action on this issue
is a high priority for Congress, as well as the
administration which has released its own proposal
for financial regulatory reform.
Key Points of the
Peterson/Frank Outline Are:
1)
It
preserves authorities of the Commodity Futures
Trading Commission (CFTC), which was the primary
interest of Farm Bureau.
2) The
Securities and Exchange Commission (SEC) and CFTC
would share jurisdiction, with regulatory oversight
determined by
regulation of the underlying asset on which the
derivative is based.
3)
The
Financial Services Oversight Council would resolve
any disputes between the two agencies.
4)
The
draft proposal requires reporting of all OTC
derivatives transactions, which is supported by Farm
Bureau because we support
increased transparency in all futures and financial
instrument transactions. If enacted, this would be
the first time all OTC
transactions would be cleared through an entity
regulated by the CFTC or SEC.
Background:
This
webpage is the result of a recommendation from the
KFB Wheat Advisory Committee to the Board of
Directors to “review, research and disseminate to
members information regarding futures market
transparency, regulation and the influence of “fund”
investment on the futures market and on futures
prices.”
Because this topic
is so tremendously broad and continually evolving,
the method chosen is to provide a survey of
available research. KFB staff will continually
review pertinent research and analysis, relying
heavily on USDA, CFTC and University efforts,
providing links to papers and presentations that
provide members with sound information. While all
research and information is important, those links
near the top are more recommended than those near
the bottom of our listing.
In summary, evidence
suggests that managed and index funds built long
positions as prices increased into the summer of
2008 and that these long positions declined into
2009 as commodity prices both declined and became
less volatile. As we look into the future and
address policy, it is important to note that futures
markets and market prices are continually evolving;
fund managers change tactics and regulatory agencies
and exchanges have already begun to implement some
modifications to contract specifications and have
acted swiftly to identify market performance
problems and discuss or enact solutions. As an
industry, we may well find that enough changes have
been made and that a recent Economic Research
Service bulletin’s conclusion is correct in that,
“Time and further research are needed to assess
whether performance concerns will continue or
dissipate in futures markets and whether further
modifications in contract design and market
regulation are warranted.”
