CFTC unveils plan to treat agricultural swaps like others

WASHINGTON Thu Jan 20, 2011 9:32am EST

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WASHINGTON (Reuters) - The U.S. futures regulator unveiled a plan on Thursday that would treat agricultural swaps just like other over-the-counter derivatives, a move that would open up the market to a wider range of participants.

Under the plan, the Commodity Futures Trading Commission would remove existing requirements that traders of agricultural swaps -- used by buyers and sellers of farm goods to protect against the risk of price movements -- have a net worth of at least $10 million.

Instead, participants will be subject to the same regulations as all traders in the swaps market, the CFTC said.

Among other conditions, those rules require swaps participants to have a net worth of at least $1 million, which would allow more farmers to use the products for hedging.

"It would actually open up the market to more participants," a CFTC official said during a background briefing for reporters.

Harmonizing agricultural swaps with the CFTC's other swaps regulations will eliminate about 40 pages of obsolete rules and 28 pages of obsolete forms, the official said.

The rules are part of the Dodd-Frank bank reform law, which gives the CFTC oversight of over-the-counter derivatives, worth $600 trillion globally.

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If a majority of the five commissioners at the helm of the CFTC vote in favor of the rule at a hearing on Thursday, it will be open to 60 days of public comment. They must vote again to finalize it.

Many of the CFTC's rules -- including those covering swap execution facilities and position limits -- have been hotly contested by groups and companies seeking to retain or gain turf in the OTC markets.

The futures regulator in recent weeks has delayed votes on a handful of rules after failing to muster enough support among its commissioners, and could run into trouble later this year when it must vote to finalize these measures.

During a special comment period held last October, all current participants and farm groups agreed that agricultural swaps should be harmonized with others.

Gavilon LLC, a grain firm based in Omaha, Nebraska, told the CFTC its current restrictions were "an unnecessary hurdle that prevents many market participants with legitimate commercial or investment interests from using agricultural options," and noted other parts of the Dodd-Frank law provide more oversight and protections for the market.

Other firms that weighed in on the issue included Barclays Capital, CME Group, Goldman Sachs, Macquarie, INTL FCStone, Cargill, and Land O'Lakes and other farmer-owned cooperatives.

Two respondents -- the Institute for Agriculture and Trade Policy and Robert Pollin of the University of Massachusetts-Amherst -- said agricultural swaps should be banned because they believe speculative trading has inflated food prices.

But the Dodd-Frank law did not intend for the CFTC to ban a tool that participants use for risk management, a CFTC official said during a briefing.

(Editing by Russell Blinch)

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