Millers are traditional hedgers and among the earliest users of futures contracts, going back more than 100 years. Throughout that time, millers have believed in the sanctity of the futures markets and the underlying contracts traded there.
Now, however, millers and other futures contract participants are experiencing a crisis of confidence in the markets as a result of the MF Global situation. Without confidence, managing risk and controlling costs will be far more difficult. This will impact every link of the vertically integrated grain chain from growers to handlers, millers, bakers and ultimately consumers.
In December 2011 NAMA wrote to the Senate and House Agriculture Committees recommending immediate implementation of the following actions to further begin to rebuild customer confidence in the markets:
- Congress should direct the U.S. Commodity Futures Trading Commission (CFTC) to immediately enact rules requiring customer segregated funds be kept in escrow accounts, in cash or very liquid government-backed instruments. We applaud the steps the CFTC took December 5 to narrow the types of investments approved for investing customer cash held on account, however we feel it does not go far enough to protect segregated customer funds.
- Congress should affirm that its intent in passing relevant laws call for funds from segregated accounts be distributed first to the customers that deposited them. Those funds are not the property of the MF Global bankruptcy estate.
- Congress should direct the CFTC to conduct an immediate audit, or the agency should request third party audited statements of all brokers and Futures Commission Merchants to ensure confidence that customer funds remain segregated.
- Congress should study the creation of an industry insurance fund to cover commodity futures contracts.
- Congress should conduct a complete review of CFTC audit procedures. It is our understanding that the CFTC audit of MF Global conducted in late summer only covered the firm’s activity through January. Including several months’ more activity might not have alerted auditors to the possibility of bankruptcy, but at the same time, there’s no reason not to make audits as current as possible.
Without taking the steps listed above, futures market participants will be left exposed to unnecessary risk. It is within the ability of Congress and the CFTC to minimize that risk.
NAMA has cautioned investigators about viewing speculators has inherently evil. Local speculative traders provide much-needed liquidity to the market and allow processors to hedge risk.
Last updated May 2012