March 14, 2016
Good morning, ladies and gentlemen. Thank you for your warm welcome. Before I begin, let me say that my remarks reflect my own views and do not necessarily constitute the views of the Commodity Futures Trading Commission (CFTC or Commission), my fellow CFTC commissioners or the CFTC staff.
At the outset, let me be very transparent. I am a life-long New Jerseyan. Although agriculture is an important part1 of New Jersey’s economy, I worked in New York City and London for most of my career, first as a lawyer, and then as an executive for a financial firm that operated trading platforms for derivatives. I did not grow up on a farm.
However, I want to share an anecdote about when I was a corporate lawyer. In my practice, I would always try to spend time with new clients at their offices learning their businesses. You can’t truly help someone you represent unless you dig in to understand how they make a living. As a newly minted Commissioner almost two years ago, I made a commitment to continue that practice and learn the business of the agricultural community, or “end-users” as you have been coined in Washington parlance.
As a Commissioner, I have travelled to Indiana, Kentucky, Illinois, Iowa and Minnesota to meet with cattle, pork, poultry, corn, soybean, dairy and various other Ag producers. I have also met with a number of cooperatives, manufacturers and futures commission merchants (FCMs) who serve American producers. For example, I learned from Consolidated Grain in Jeffersonville, Indiana, that German Rye was imported to their elevators to make Kentucky whiskey because, at the time, it cost too much to import Canadian Rye due to the North Dakota shale oil revolution that dramatically increased the cost of North American rail transport.
One of the starkest realizations I have come to understand is that many of the everyday working people I met on farms and in factories don’t know and don’t care what Washington does, as long as politicians and bureaucrats stay out of their way. They are concerned that increasing ill-conceived regulatory burdens on small operations are adding needless costs to their operations, which harm the producer community. They are concerned about the steep drop in commodity prices, which is having an immediate impact on their bottom lines (and personal checkbooks). These declines are real and are eating away at their livelihoods.
No one can argue that these are good times for America’s farmers. Last year, the U.S. Department of Agriculture (USDA) issued a report further dampening its already-bleak projections for the American farming sector.2 In 2015, net farm income will plummet 36 percent from the previous year, reaching its lowest level in nine years.3 Farmers have not faced such a pronounced freefall since 1983.4 Farm income is expected to slide even further in 2016.5
Further, the ability for agricultural producers to hedge their risk is being threatened by an ever-consolidating FCM industry based in New York and Chicago that increasingly imposes strict limits on customer size and capacity.6 As I have said before, the number of FCMs has dramatically fallen in the past 40 years: from over 400 in the late 1970s, to 154 before the 2008 financial crisis,7 and down to just 55 active firms serving customers today.8 As the number of FCMs has dwindled, systemic risk has increased with the five largest firms accounting for more than 70 percent of the market.9 We must not allow Washington regulations to wipe out smaller, rural FCMs and their customers the same way Dodd-Frank regulations have wiped out small community banks across America’s agriculture landscape.10
As I have previously noted, I have deep concerns about severe declines in the price of physical commodities.11 And those declines have intensified. Indeed, according to data provided to me recently by the CFTC Office of Chief Economist, the Bloomberg investable commodity index is down 53 percent since December 2010.12 According to another measure, commodity prices are at their weakest levels in 43 years.13
Of course, the CFTC plays no role in regulating the price of commodities, regardless of whether they are high or low. Still, as I have stressed previously, the CFTC must take care that it not inflict needless pain on our commodities markets, which are integral to the health of the U.S. economy. When farmers struggle to put food on their tables, the CFTC must promote policies that do not needlessly impinge on the ability to hedge against plummeting prices. In this time of low growth economics, we must provide market participants with legal certainty and regulations whose benefits unambiguously justify their costs.
On the point of a new rule justifying its costs, let me give you some good news. Last spring, the CFTC finalized a “customer protection” rule that amended Commission regulation 1.22 so that the residual interest deadline for FCMs did not automatically adjust to the start of business the next morning after a trade, and instead would remain at the close of business the next day following a trade. In plain English, we prevented a rule from going into effect that would have required producers to pre-fund their margin accounts. In late 2014 when I met with family farmers in Shelby County, Kentucky, they could not fathom why the CFTC would propose a rule requiring them to pre-fund their margin accounts. They saw our rule as insuring that they would actually lose MORE of their money – not less – in the event of a future failure of another MF Global or Peregrine Financial. Fortunately, the current Commission saw the error of that proposal, and my staff fought hard to ensure that any change to the residual interest deadline in the future can only occur if a new rule is proposed and the public has time to comment on its impact. A recent CFTC staff public roundtable saw these comments echoed.
Now, some more good news, sort of. Last December, after numerous iterations, several comment periods, significant legislative interest from Congress, and months of negotiating, the Commission finalized a change to one of our recordkeeping rules. While that may sound benign, let me give you some background. In 2012, the Commission revised long-standing Rule 1.35 despite the fact that the Dodd-Frank Act14 contained no mandate to change the CFTC’s recordkeeping rules.15 The revised rule proved to be unworkable. Its publication was followed by requests for no-action relief and a public roundtable at which entities impacted by the rule voiced their inability to tie all communications leading to the execution of a transaction to a particular transaction or transactions. End-user exchange members pointed out that business that was once conducted by telephone had moved to text messaging, so the carve out in the rule for oral communications had little utility. They pointed out that it was simply not technologically feasible to keep pre-trade text messages in a form and manner “identifiable and searchable by transaction.” Further, bipartisan Congressional action on the rule’s unworkable nature made it clear that the Commission should re-open the rule to lessen the burden on market participants not registered with the CFTC.16
In November 2014, the CFTC did propose changes to Rule 1.35.17 Unfortunately, I could not support that proposal because it did not go far enough in addressing concerns about the feasibility and cost of compliance.18 It continued to contain provisions that were overly burdensome in practice for certain covered entities. For example, the proposal kept 2012 rule revisions that required the keeping of all oral and written records that lead to the execution of a transaction in a commodity interest and related cash or forward transaction, in a form and manner “identifiable and searchable by transaction.”19 This “searchable” requirement also conflicted with the requirements of Commission Rule 1.31, which applies to all books and records required to be kept by the Commodity Exchange Act and Commission regulations.
Appropriately, the final revisions to Rule 1.35 address many of the issues I raised when I voted against the proposed changes in 2014.20 End-user exchange members that are not registered or required to be registered with the Commission now must only keep transaction records, which is a logical and prudent course of regulatory policy. Text messages are also excluded from the recordkeeping requirement for end-users, but communications through internet-based messaging services, such as i-Messages, must be kept on file. While not perfect, I believe the final Rule 1.35 generally gets the balance right.
Yet, what Washington regulators giveth, they can easily taketh away. Last November, the CFTC proposed a rule called Regulation Automated Trading, or “Reg AT,” again in Washington-speak.21 This rule took almost two years to craft and is, in essence, a registration scheme. Yet, registration is not policy and policy is not registration. The relatively simple process of registering users of trading algorithms does not begin to address the hard public policy considerations that arise from the automation revolution in modern markets.
Unfortunately, for America’s grain industry and the producers who rely on you, if your firms use any type of automation with respect to futures trading, even if you use a simple automated excel spreadsheet that facilitates trading, you may be captured by Regulation AT. Many unregistered market participants, and I suspect there are several in this room, would be forced to register for the first time with the CFTC as “floor traders” due to the very broad definition of “algorithmic trading.”22 As new floor traders, the same market participants that were just provided relief from unnecessary and burdensome recordkeeping requirements under Rule 1.35 would now be paradoxically recaptured.
If captured, firms newly registered with the CFTC will be forced to tie together all “written communications provided or received concerning quotes, bids, offers, instructions, trading, and prices that lead to the execution of a transaction.”23 As I said in my statement accompanying the Notice of Proposed Rulemaking for Regulation AT, I encourage market participants to carefully review and consider the compliance and cost consequences of that potential new regulatory regime and compare it to today’s common-sense revisions to Rule 1.35.
Regulators must always balance the public’s interest in collecting commercial information for use in investigations and enforcement, against costs and burdens placed on American commerce and industry and the jobs they generate. In this protracted period of weak economic growth with an enormous number of Americans out of the workforce, we must scrupulously avoid needless red tape and compliance costs that are invariably passed along through higher costs for everyday items like a loaf of bread or a gallon of gasoline, milk or winter heating oil. The common refrain I hear again and again is that Washington does not listen to everyday Americans. It imposes rules and regulations without regard to their obvious impact on ordinary people. I am hopeful that the CFTC will listen to the public’s thoughts on the two rules I just described to you, and ultimately balance the regulatory burden with the benefits that are needed to maintain the safe, vibrant and effective hedging markets. Thank you.
1 In 2014, the agriculture industry contributed $809 million to the Gross Domestic Product (in current dollars) of New Jersey. See U.S. Department of Commerce, Bureau of Economic Analysis, Regional Data, GDP & Personal Income, Gross Domestic Product (GDP) by State (millions of current dollars), http://www.bea.gov/iTable/iTable.cfm?reqid=70&step=1&isuri=1&acrdn=2#reqid=70&step=10&isuri=1&7003=200&7035=-1&7004=naics&7005=-1&7006=34000&7036=-1&7001=1200&7002=1&7090=70&7007=2014&7093=levels (last visited Mar. 10, 2016).
2 U.S. Dep’t of Agriculture, August 2015 Farm Sector Income Forecast 1, 9 (2015), http://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/2015-farm-sector-income-forecast.aspx.
4 Id. at 1.
5 U.S. Dep’t of Agriculture, August 2016 Farm Sector Income Forecast, (2016), http://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/2016-farm-sector-income-forecast.aspx.
6 See Testimony Before the Subcomm. on General Farm Commodities and Risk Management of the H. Comm. on Agriculture on the Future of CFTC: Perspectives on Customer Protections, 113th Cong. 50 (2013) (statement of Theodore L. Johnson, President, Frontier Futures, Inc.), http://agriculture.house.gov/sites/republicans.agriculture.house.gov/files/transcripts/113/113-08.pdf.
7 CFTC, Selected FCM Financial Data as of December 31, 2007, http://www.cftc.gov/files/tm/fcm/fcmdata1207.pdf (last visited May 26, 2015) (excludes firms registered solely as retail foreign exchange dealers).
8 CFTC, Selected FCM Financial Data as of December 31, 2015, http://www.cftc.gov/ucm/groups/public/@financialdataforfcms/documents/file/fcmdata1215.pdf (last visited March 11, 2016) (excludes firms registered solely as retail foreign exchange dealers).
9 Joe Rennison, Nomura Exits Swaps Clearing for US and European Customers, Financial Times, May 12, 2015, available at http://www.ft.com/intl/cms/s/0/e1883676-f896-11e4-be00-00144feab7de.html#axzz3bSYWViZ4 (based on amount of customer collateral required according to CFTC data).
10 Testimony Before the Subcomm. on Economic Growth, Job Creation, and Regulatory Affairs of the H. Comm. on Oversight and Government Reform on the Impact of Dodd-Frank on Community Banking, 113th Cong. 1, 3–7 (2013) (statement of Hester Peirce, Senior Research Fellow, The Mercatus Center at George Mason University), https://oversight.house.gov/wp-content/uploads/2013/07/Hester-Peirce-Testimony.pdf; see also Testimony Before the H. Financial Services Comm. on The Dodd-Frank Act Five Years Later: Are We More Prosperous?, 114th Cong. 6 (2015) (statement of Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute); David Smith, Consolidations, Regulations Pare Banks, Execs Say, Arkansas Online (Sept. 20, 2015), http://www.arkansasonline.com/news/2015/sep/20/consolidations-regulations-pare-banks-e/?f=business.
11 Opening Statement of Commissioner J. Christopher Giancarlo Before the Second Meeting of the CFTC’s Energy and Environmental Markets Advisory Committee, July 29, 2015, http://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlostatement072915.
12 The Bloomberg Commodity Index weighs agricultural futures as 36.1 percent, energy futures (includes 15 percent crude oil) as 29.7 percent and metals as 34.2 percent of the index.
13 The Thomson Reuters/CoreCommodity CRB Index, a standard measure used to gauge the strength of the commodity markets dating back to the 1950s, has fallen to levels not seen since 1973. See Mark Zaccari, Bear Market Drops CRB Index to 43 Year Lows, See It Market Jan. 26, 2016, http://www.seeitmarket.com/bear-market-drops-crb-commodities-index-to-43-year-lows-15245/.
14 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
15 See Adaptation of Regulations to Incorporate Swaps-Records of Transactions, 77 FR 75523 (Dec. 21, 2012), available at https://www.gpo.gov/fdsys/pkg/FR-2012-12-21/pdf/2012-30691.pdf.
16 See H.R. 4413, the Customer Protection and End-User Relief Act, Sec. 353 (113th Congress) and H.R. 2289, the Commodity End-User Relief Act, Sec. 308 (114th Congress).
17 See Records of Commodity Interest and Related Cash or Forward Transactions, 79 FR 68140 (Nov. 14, 2014), available at http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2014-26983a.pdf.
18 See id. at 68147-148 (Dissenting Statement of Commissioner J. Christopher Giancarlo).
19 See supra note 17.
20 See Records of Commodity Interest and Related Cash or Forward Transactions, 80 FR 80247 (Dec. 24, 2015), available at http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2015-32416a.pdf.
21 See Regulation Automated Trading, 80 FR 78823 (Dec. 17, 2015), available at https://www.gpo.gov/fdsys/pkg/FR-2015-12-17/pdf/2015-30533.pdf.
22 Id. See definition of “Algorithmic Trading” in proposed Commission regulation 1.3(ssss), which is very broad and would appear to capture market participants using off-the-shelf type automated systems or simple excel spreadsheets to automate trading.
23 Emphasis added; See Commission Rule 1.35(a)(1)(iii) (defining “written pre-trade communications”) and Rule 1.35(a)(2)(ii) (requiring all “floor traders” to keep all “written pre-trade communications”).
Last Updated: March 14, 2016