Record-keeping by elevators will cost too much, grain association fears
By MATEUSZ PERKOWSKI
Feed manufacturers and farm cooperatives are worried that proposed financial reforms will impose massive new record-keeping requirements, like recording phone conversations.
The federal government is writing new regulations to implement reforms passed by Congress last year as part of the Dodd-Frank Act.
The law was passed in the wake of the 2008 financial crisis to provide the U.S. Commodity Futures Trading Commission with greater authority to oversee financial derivatives known as swaps.
In a swap, a company agrees over a period of time to pay a fixed price for a set amount of a commodity to another party, which in turn agrees to pay an amount based on a fluctuating price index for the commodity. By "swapping" those payments, the price volatility is reduced.
Major dealers and users of swaps would need to "retain all oral and written communications" about commodity transactions for five years "whether communicated by telephone, voice mail, facsimile, instant messaging, chat rooms, electronic mail, mobile device or other digital or electronic media," according to the proposed rule.
The CFTC relies on voice recordings to establish knowledge and intent in cases involving market manipulation, false reporting and similar abuses, the agency said.
The commission's enforcement capabilities have been limited in cases where voice recordings were not available, according to CFTC.
The National Grain and Feed Association is afraid grain buyers who are members of regulated exchanges will be required to comply with the record-keeping rules at great expense.
"It would certainly be burdensome for hundreds of country elevators having to install new technology to record oral communications," said Todd Kemp, marketing director for the trade group.
The employees of elevators, feed mills and processors would have to record conversations with farmers and then categorize each recording according to the parties and transactions involved, he said.
Even grain buyers who aren't members of a regulated exchange -- and thus aren't subject to the record-keeping rules -- would be affected by the precedent-setting language in the rule, Kemp said.
That's because the wording of the regulations appears to extend the CFTC's jurisdiction to the cash market for commodities, rather than just financial securities and derivatives, he said.
"It's an area where CFTC has traditionally not had authority," Kemp said. "This rule seems to go contrary to that principle."
The National Grain and Feed Association plans to tell agency officials about its concerns and convince them to narrow the scope of the proposal, he said.
Chuck Conner, president and CEO of the National Council of Farmer Cooperatives, said the group recognizes the CFTC's need to examine relevant records.
"Basic transparency, basic reporting, we understand that's a necessary thing," he said.
However, expanding those requirements to include every conversation between farmers and regulated buyers would go too far, Conner said.
"To say, 'doesn't pass the common sense test' is about as fair a characterization as I can describe," he said.
Conner said he's also nervous about how the CFTC will define swaps, swap dealers and how broadly it will carve out regulatory exemptions for end users of commodities.
The agency plans to release those details this autumn.
Cooperatives have increasingly relied on swaps to reduce price volatility, Conner said. "The market can move dollars (per bushel) over the course of a few days."
Such transactions are useful because they don't require cooperatives to post collateral, known as a margin requirement, as traditional futures contracts do, he said.
Also, some crops don't have an active futures market to rely upon for risk management, which makes swaps an appealing option, Conner said.
If farmers and other end users of such crops -- rather than just speculators -- must trade swaps through a clearinghouse and make margin payments, it may dissuade them from using those options, he said.
"If anything, they need more tools available to them," said Conner.