STATEMENT OF THE AMERICAN FARM BUREAU FEDERATION TO THE SENATE AGRICULTURE COMMITTEE REGARDING THE COMMODITY EXCHANGE ACT, S. 257 Presented by Ron Warfield, President Illinois Farm Bureau

February 13, 1997

STATEMENT OF
THE AMERICAN FARM BUREAU FEDERATION

TO THE SENATE AGRICULTURE COMMITTEE

REGARDING THE COMMODITY EXCHANGE ACT, S. 257

Presented by Ron Warfield, President Illinois Farm Bureau

February 13, 1997

Mr. Chairman, members of the Committee, my name is Ron Warfield and I am president of the Illinois Farm Bureau. Today I will be presenting testimony on behalf of the American Farm Bureau Federation of which I am a member of the Board of Directors. Mr. Chairman, I am a corn and soybean farmer from Illinois. I farm 1,800 acres of corn and soybeans and market 1,000 head of cattle annually. The farmers and ranchers I represent today are keenly interested in the efficiency and integrity of the futures markets.

The Federal Agriculture Improvement and Reform Act of 1996 (FAIR Act) made a significant positive step by allowing farmers to produce directly for commodity markets without government intervention. This will expose farmers to both tremendous opportunity and greatly increased risk. Many farmers who have traditionally relied on deficiency payments as a price risk management tool will now begin to look elsewhere. In short, agriculture's need for futures markets is likely to expand in the future.

Mr. Chairman, I appreciate your efforts and your committee's efforts to ensure that U.S. futures markets are both healthy and innovative but also effectively regulated. This is clearly not an easy balance to attain. Farmers and ranchers understand that the commodity exchanges are at a competitive disadvantage if unwarranted regulation interferes with the development of new products that expand volume and reduce costs. At the same time, farmers and ranchers insist that regulatory authority and oversight of futures markets by the Commodity Future Trading Commission (CFTC) be maintained. Utilization of futures markets depends on producer trust in the integrity of the markets. As you consider S. 257 be sure that a regulatory balance that ensures producer confidence is maintained.

I know the committee will thoroughly review the recent proposals by CFTC which establish a "fast track" contract market designation process and initiates an expedited process for consideration of exchange rules. These important changes supported by Farm Bureau could accomplish some of the goals of S. 257.

Farm Bureau has provided the committee with a detailed discussion of both the areas of S. 257 which we support and those for which we have concerns. I want to address several specific issues where we believe achieving a proper balance between exchange autonomy and adequate regulations is critical:

Section 4. Exemption Authority:

Farm Bureau policy supports lifting of the ban on the trading of agricultural trade options. However, we believe that it may be appropriate for the exchange to retain the authority to set certain conditions for fiduciary responsibility and risk disclosure as minimum conditions for writers of such options. The proposed statutory exemptions contained in this section will reduce the ability of the CFTC to take appropriate enforcement actions to ensure proper actions by all participants in the market. Existing statutes provide adequate flexibility for firms to operate and conduct business. If more legal certainty is needed by market participants who wish to conduct business under the exemptions provided by Part 35 of the Commission's rules, we urge that such certainty be developed through a reform and revision of the regulations rather than through sweeping statutory exemptive grants.

Section 5. Designation of a Board of Trade as a Contract Market:

While we support the concept of streamlining the procedures for contract market designation, we have concerns regarding the proposal put forth in this section. We believe that the proposal in this section does not adequately protect the public interest, nor does it provide sufficient opportunity for appropriate regulatory oversight of such markets. The proposal put forth by the CFTC in 1996 which incorporates the bill's concept of automatic approval provides sufficient relief from undue regulatory burden. It is important that the public have opportunity for. comment before contract proposals are allowed to trade on regulated exchanges. The proposal contained in this section would effectively preclude such input as well as severely restrict the ability of the CFTC to interact with the exchange to prevent defective contracts. In as much as farmers and ranchers rely on exchange-traded contracts to provide accurate price discovery, it Is important that all of those involved with or affected by contract markets be assured that adequate review is undertaken to ensure the integrity of such contracts prior to their approval for public trading. We believe that a minimum of 30 days be required to be allowed for public comment on all such proposals.

Section 6. Delivery by Federally Licensed Warehouses:

We are very concerned by recent reductions in the available storage capacity of delivery points for corn and soybean contracts traded on the Chicago Board of Trade (CBOT). In the absence of action by the membership of the CBOT to rectify this situation, it is necessary for other federally licensed warehouses to be allowed to make delivery on futures contracts with appropriate notice. We agree that this approach is not the most desirable situation and would support deletion of this provision if appropriate action is taken by the CBOT to ensure contract integrity.

We believe that the delivery process should be structured in such a manner that it fosters orderly convergence of the futures and the cash markets at the time the futures contract expires. Convergence is the cornerstone of the grains futures market and should be the primary focus when considering any change in the delivery system. Delivery systems must be designed that retain this component of the futures market. If it is determined that the U.S. grain marketing system has become so decentralized that reliance on a few fixed-point delivery locations can no longer facilitate orderly markets and convergence, then we would urge the exchange to investigate cash settlement or other non-delivery settlement mechanisms.

Section 7. Submission of Rules to the Commission:

The changes proposed by this section have already been addressed by the regulatory streamlining undertaken by the exchange. The time limit imposed under this section would unduly restrict the ability of the CFTC to engage in proper review of certain exchange rules. This could undermine the integrity of the markets and lead to market disruptions.

Mr. Chairman, as I have indicated, we understand the difficulty in striking a balance between appropriate regulation of futures markets and the autonomy necessary to be innovative. We look forward to working with you and other members of the committee to ensure that S. 257 maintains the appropriate balance.