For Release:May 15, 1996
The Full Text, updated with footnotes, is also available.
CFTC's Division of Economic Analysis Issues Statements
of Policy and Guidance Relating to "Hedge-to-Arrive" Contracts
The Commodity Futures Trading Commission's Division of Economic Analysis today issued two Statements relating to contracts popularly known as "Hedge-to-Arrive" contracts. The first is a Statement of Policy concerning the mutual decision by producers and elevators to use cash payments in unwinding, working-out, or terminating such contracts. The second is a Statement of Guidance regarding the risk implications of particular features and practices associated with hedge-to-arrive contracts for the future delivery of grain.
Statement of Policy. In recent months the Division of Economic Analysis (Division) has received a number of inquiries and information regarding certain transactions and contracting practices relating to Hedge-to-Arrive (HTA) and similar contracts between agricultural producers and merchants. Based upon earlier court and staff guidance, persons who have experienced losses on these contracts and who may, for financial reasons, wish to restructure their arrangements, may have concluded that failure to deliver on a particular agricultural contract was what determined, among other things, whether the transaction in question is, or was at the time of its inception, subject to the forward contract exclusion of the Commodity Exchange Act. In light of the unprecedented nature of current market conditions, the Division has issued a Statement of Policy to provide certainty to producers and elevators. Under this Policy, the Division will not determine the status of any HTA contracts existing as of May 15, 1996, under the forward contract exclusion of the Commodity Exchange Act based on the fact that the parties mutually agree by a separately negotiated settlement, entered into subsequent to entry into the original contract, to unwind, arrange a work-out, or restructure the original transaction through cash payments, wholly or in part.
Statement of Guidance. The Division also has explained its views on the application of the principles of prudent risk-reduction to the structure of HTA contracts by providing a Statement of Guidance. Reportedly, in certain HTA contracts, the price to be paid for the commodity involved references a futures contract month which expires prior to the crop-year in which harvest is anticipated, or that the quantity of the commodity to be delivered or the location for delivery may not adhere to normal merchandizing practices.
In its Statement of Guidance, the Division states its view that, as a general prudential matter in merchandizing contracts, only the sequential rolling of the reference price between months which are clearly within the same crop-year during which the commodity is, or will be, in a deliverable state would be a prudent risk-reduction practice. In addition, general prudence requires that the quantity to be delivered and the delivery location reflect normal merchandizing practice.
In providing these Statements of Policy and Guidance, the Division is not taking a position on the validity or legality of any individual contract. The text of the Division's Statements of Policy and Guidance is attached. The text of the Division's statments together with certain accompanying explanatory material prepared by the Division is available from the Office of Public Affairs, and through the Commission's Home Page at http://www.cftc.gov/
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Statement of Policy in Connection With the Unwinding of Certain
Existing Contracts for the Delivery of Grain
With regard to any contract, account, or agreement which is of the character of, or is commonly known to the trade as a Hedge-to-Arrive or Flexible Hedge-To-Arrive contract for the future delivery of grain:
The Division of Economic Analysis will not determine the status of any such contracts existing as of May 15, 1996, under the forward contract exclusion of section 1a(11) of the Commodity Exchange Act based on the fact that the parties mutually agree by a separately- negotiated settlement, entered into subsequent to entry into the original contract, to unwind, arrange a work-out, or restructure the original transaction through cash payments, wholly or in part.
Statement of Guidance Regarding Certain Contracting Practices
With regard to any contract, account, or agreement which is of the character of, or is commonly known to the trade as a Hedge-to-Arrive or Flexible Hedge-To-Arrive contract for the future delivery of grain;
The Division of Economic Analysis concludes that prudent risk-reduction requires that such contracts:
1.require mandatory delivery, absent an intervening event such as a crop failure, of a specified quantity and grade of grain at a specified location and reference price by a specified date within the crop-year during which the crop is harvested;
2.be for a quantity to be delivered which is reasonably related to the producer's annual production, not committed elsewhere and normally available for merchandizing and at a location whereby delivery can be made by the producer under normal merchandizing practices;
3.specify a delivery date and futures contract month reference price which coincides with the crop-year during which the grain will be harvested; and
4.permit, where such contracts include provisions allowing the "rolling" of reference prices, that reference prices only be rolled sequentially from a nearby to a more deferred futures contract month in the same crop-year within which the grain is, or will be, harvested, to reflect production and the inventory-carrying nature of the cash position.
For purposes of this Statement of Guidance, the applicable sequential futures market reference months, by crop year, are as follows:
|Futures Contract Reference Months by Crop Year|
First and Last Sequential
Dec. - Jul.
Dec. - Jul.
Sept. - Jul.
Nov. - Aug.
Jul. - May
Jul. - May
Sept. - May
* Transition months generally should not be rolled either to or from the old or new crop-year, respectively.
Note:Contracts which adhere to, and do not materially deviate from, the above Guidance regarding prudent risk-reduction, would be construed by the Division of Economic Analysis to fall within the forward contract exclusion of section 1a(11) of the Commodity Exchange Act.
Issued in Washington, D.C. this 15th day of May, 1996, by the Division of Economic Analysis, Commodity Futures Trading Commission.