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Published February 15, 2011, 11:22 AM

Ag committee reviews Dodd-Frank bill

WASHINGTON — The Republican and Democratic lines of questioning couldn’t have been more different Feb. 10 when the House Agriculture Committee held a hearing to review the impact of the Commodity Futures Trading Commission’s implementation of the swaps and derivatives title of the Dodd-Frank financial services bill on farmers, co-ops, agribusinesses and other entities.

By: Jerry Hagstrom, Special to Agweek

WASHINGTON — The Republican and Democratic lines of questioning couldn’t have been more different Feb. 10 when the House Agriculture Committee held a hearing to review the impact of the Commodity Futures Trading Commission’s implementation of the swaps and derivatives title of the Dodd-Frank financial services bill on farmers, co-ops, agribusinesses and other entities.

Republicans raised fears of overregulation of the markets that farmers, ranchers and businesses use to manage their risk, while Democrats recalled the 2008 financial crisis and said the financial community is trying to hold on to its advantages.

“We are hearing from companies across the country that the rule-making process is moving too quickly,” House Agriculture Committee Chairman Frank Lucas, R-Okla., told Commodity Futures Trading Commission Chairman Gary Gensler. He then asked Gensler if he would like more time rather than meet a July deadline for implementing the bill.

Gensler did not ask for more time, but said, “We are human. Some of these rules will be put in place after July.” He added, however, that the CFTC needs a bigger budget to implement the Dodd-Frank law properly.

For end-users of derivatives such as farmers and cooperatives, Lucas said, Congress included in Dodd-Frank an exemption from the margin, clearing and exchange trading requirements that it inserted for financial firms. He noted that end-users are worried the CFTC may make them subject to margin requirements for their over-the-counter trades, but said if that is the outcome, it would be “clearly inconsistent with congressional intent.”

Edward Gallagher, president of Dairy Risk Management Services, a division of Dairy Farmers of America, testified on behalf of the National Council of Farmer Cooperatives, saying he fears the CFTC’s proposed rule would sweep co-ops into regulations intended for swap dealers, increasing costs and inhibiting co-ops’ ability to provide risk management to producers. Gallagher also is vice president of economics and risk management at Dairylea Coop..

Different risks

Gensler said Congress recognized in the Dodd-Frank bill that transactions involving nonfinancial entities do not present the same risk to the financial system as those solely between financial entities, and said the commission is reflecting that view in its rules.

“We’re very sensitive to end users,” Gensler said. “They need products to hedge their risk.”

Gensler also said most dairy co-ops’ derivatives are not swaps — over-the-counter derivatives that do not go through clearing houses — but forward contracts “with embedded options.”

”I believe end users will benefit from greater liquidity because there will be more transparency,” Gensler said.

Rep. Tim Johnson, R-Ill, said that he fears the CFTC’s rules will require more entities to register than originally anticipated.

House Agriculture Committee ranking member Collin Peterson, D-Minn., who chaired the committee when Congress wrote the law, said derivatives played a key role in the collapse of U.S. financial markets.

“We had an over $600 trillion OTC derivatives market with no oversight, no transparency, and with no regulation,” Peterson said. “As a consequence of this and many other factors, the American taxpayer ended up having to bail out large financial institutions like AIG when the financial system fell apart.”

Staying prepared

Peterson said mandatory clearing of over-the-counter swaps and requiring major swap participants and dealers to back up their deals with additional capital should bring greater stability to the swaps marketplace and help make sure taxpayer dollars won’t be needed to rescue large financial firms again.

“By requiring the big dealers to report and clear more of their swaps and move into more transparent marketplaces, commercial end users will be able to get a better picture of the swaps market and be better armed in their negotiations with these dealers,” he said.

Peterson acknowledged a lot of confusion and misinformation remains with regard to commercial end users.

“I’m not sure who is ginning all this up,” he said. Noting that there having been articles on the “banking elite” try to hold on to their profitable businesses, Peterson said, “If implemented properly, the derivative title of Dodd-Frank could prove to be a major benefit to commercial end users.”

Rep. Leonard Boswell, D-Iowa, asked Gensler, “What’s the resistance to transparency? Information does sometimes lead to profits,” Gensler said. “I honor this. I was on Wall Street for 18 years. Congress adjusted the information advantage toward the end user and away from the financial community.”

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