The Commodity Futures Trading Commission's Agricultural Advisory Committee held a discussion on 14 December to discuss futures margining in the agricultural markets. The advisory committee also heard a presentation by Seth Meyer, the US Agriculture Department’s chief economist, about global events that are impacting the US futures markets.
CFTC Chairman Rostin Behnam highlighted the important role derivatives markets serve for the agriculture community. He also used his opening statement to highlight that the CFTC and the Center for Risk Management Education and Research (CRMER) at Kansas State University will host an agriculture focused conference on 11-12 April, 2024 in Overland Park, Kansas. This conference will also include the next meeting of the advisory committee.
When seeking input about topics for the next advisory committee meeting, Patrick Coyle of the National Grain and Feed Association highlighted the pending US bank capital proposals and the NGFA’s concerns about the resulting costs for hedgers. Coyle also raised concern about the consolidation in the number of futures commission merchants and warned that smaller users of the markets might be impacted more than larger entities.
Panel: Futures Margining and the Agricultural Markets
Suzanne Sprague, global head of clearing and post-trade services for CME Group, gave a presentation about how CME Clearing sets margin levels. Sprague said CME is transparent about its margin process and publishes margin levels for its most popular products in the major asset classes and provides a variety of tools that customers can use to do margin analysis themselves. Sprague also discussed the SPAN 2 margin framework that CME Clearing is beginning to roll out. She was asked by advisory committee members about the responsiveness of this margin framework compared to the prior framework. Sprague said it is intended to be more automated and reactive than the prior model.
Jeff Reardon, a financial advisor at White Commercial Corporation, an introducing broker based in Florida, said his company works with commercial hedgers on the smaller side of the agricultural industry. A significant source of anxiety for its customers is access to capital during times of market stress so they can maintain their hedges. Reardon said initial margin increases – particularly large increases during times of market stress – have a significant impact on its customers in the agriculture community.
Joe Barker, senior director of commodity brokerage at CHS Hedging, talked about how FCMs have capital requirements that ebb and flow with the amount of customer funds they hold. This means that as initial margin increases, so do the capital requirements of an FCM. Barker also talked about alternatives market participants might choose, other than futures and options, such as cash contracts. Barker said it is very common for agricultural producers to use cash contracts as their main margining tool and then wherever they are going to deliver their product they have a futures and options account to manage that price risk. Barker went on to say that this works out great for the grower, because they lock in prices but the downside of this strategy is that they have less flexibility than if they do their own hedging.
Gerry Corcoran, chairman and CEO at R.J. O'Brien, who represents FIA on the Agricultural Advisory Committee, said he endorses the FIA best practices paper that calls on exchanges to set a higher minimum margin requirement to help offset potential spikes. Corcoran noted that higher margin means higher costs for producers and end-users in some ways however it is hard to thread the needle about the stress events that occur and when the exchange debits an FCM’s account. Corcoran emphasized how important it is for FCMs to work with their customers to ensure their hedges are maintained during market stress events. Related to CME’s SPAN 2 implementation, Corcoran noted that there might be some growing pains with the new margin framework’s implementation but ultimately he expects that it will make the markets safer once everyone gets accustomed to it.
Official statements and documents
