By JIM RUTLEDGE
WASHINGTON, D.C. — American farmers may breathe a sigh of relief following a recent announcement that the U.S. Commodity Futures Trading Commission (CFTC) struck a long overdue derivatives deal with the European Commission – an accord that staves off a massive disruption in global market regulations that could have fractured the $553 trillion derivatives business.
Timothy Massad, head of the CFTC, told the U.S. House Agriculture Committee on Feb. 10 that the deal exempts U.S. agricultural commodity derivatives trades because of their role in the U.S. economy and the importance for farmers and ranchers.
“The derivatives markets allow farmers to lock in a price for their crops, utilities to manage the cost of fuel and businesses of all types and sizes to hedge commercial risk. And, as a result, they shape the prices we all pay for food, energy and a host of other goods and services,” Massad explained.
Many farmers use commodities futures to hedge their market risk. In general, derivative use by farmer hedging is less risky because farmers are in possession of the physical product (crops or livestock) underlying the value of the derivative. Some may use futures markets for speculation/investing, but this is not related to any farming activity.
Massad said once the deal is fully implemented, it would permit U.S. and European central clearing houses (CCPs) to continue doing business in each other’s jurisdictions. For the agricultural community and the U.S. economy as a whole, the deal is a boost to the U.S. market, he said.
The timing of the U.S.-European deal was an unexpected announcement for the committee. Massad had been called to appear before the members to address the CFTC’s 2016 agenda.
In his opening statement, Committee Chair Michael Conaway (R-Texas) told Massad the committee was concerned about the 55 percent drop in farm income and the importance of strong futures and derivatives markets for end users, reforms to the Dobbs-Frank Act and the continued need to reauthorize the commission.
Last year, the House passed the Commodity-End User Relief Act to reauthorize the CFTC, but the action has stalled in the Senate. The CFTC has been unauthorized since September 2013.
Massad faced a barrage of questions, some critical, from a dozen members of the 44-member committee several addressing concerns over a harsh audit report issued by the CFTC’s Office of the Inspector General (OIG). Rep. Frank Lucas, (R-Okla.) addressed the OIG’s findings of apparent leasing issues among CTFC’s offices, citing “questionable practices” of holding unneeded and empty offices, “wasting taxpayer money.”
The OIG’s report was titled Improper Actions Relating to the Leasing of Office Space. Massad acknowledged the problem and said the CFTC is working with the General Service Administration (GSA) to find a solution, possibly turning the agency’s leasing responsibility over to the GSA, which manages most of the federal government’s office and property leases.
Rep. Rick Allen (R-Ga.) questioned Massad’s request for more funding to support CTFC’s expanded watchdog role, saying Massad should sublease its empty office spaces and use the savings as new funding. Massad cited government restrictions that prevent dumping unused space.
Reps. Trent Kelly (R.-Miss.) and Austin Scott (R-Ga.) both took a stronger position, telling the agency they would “get no more funding.” Other members raised similar questions, with Massad assuring the committee that the CFTC would find a solution to the leasing problem.
In a Senate hearing later in the day, Massad and the CFTC came under harsher leasing and accounting criticism from Ag Committee Chair Pat Roberts (R-Kan.), who lambasted the agency. He also demanded that the CFTC submit “prompt responses” to his inquiries by Feb. 17, so he could get “a clearer perspective of the circumstances surrounding how and why (the) CFTC’s errant accounting practices have materialized.”
An independent audit by the CPA firm KPMG, LLP found “errant accounting practices (that) conflict with U.S. generally accepted accounting principles … and have culminated in the improper recording of its lease obligations during 2014-2015.” The audit findings were reported by the Center for Financial Stability, an independent, nonpartisan and nonprofit Washington, D.C.-based think tank.
At the conclusion of the two-hour House hearing, Conaway said, “With America’s farmers and ranchers experiencing a collapse in commodity prices, it is imperative that our derivatives markets are working effectively so end users are able to have certainty in the marketplace during these challenging economic times.”
He further expressed his support for the CFTC, adding, “I am pushing hard to reauthorize the CFTC so that we can enact important reforms that will be bringing more order to the markets and add more certainty for the end users who rely on them.”