Remarks of Acting Chairman J. Christopher Giancarlo on Comments before the Montana Ag Summit

June 1, 2017

Good afternoon and thank you for that warm welcome. It’s an honor to be here in Montana. I hope you know how lucky you are to live here. I’d especially like to thank Senator Daines for inviting me to the Summit, a great opportunity to communicate directly with Montana’s Ag community. This is a great treat for me.

I’d like to discuss America’s derivatives markets and the ways in which the U.S. Commodity Futures Trading Commission (Commission or CFTC) is reducing regulatory burdens. How we are working for the farmers and ranchers who depend on our markets to hedge their risks.

I. Understanding Americans’ Concerns

But, first, I want to share a personal anecdote. When I was a practicing lawyer, I always tried to spend time with new clients at their business offices to learn what they did and how they did it. I believe you can’t truly serve someone you represent unless you first dig in and understand how they make a living.

When I was appointed as a Commissioner to the CFTC in 2014 – after 30 years in the private sector – I made a commitment to continue that practice and learn the businesses of the Ag, energy and other communities served by the Commission.

In my three years on the Commission, I have had the good fortune of travelling to over a dozen states across the country. I have met with a wide range of Ag and energy producers – including members of the Montana Stockgrowers Association and Charlie Bumgarner, at his wheat farm in Great Falls. I have also met with workers at grain elevators, cooperatives, factories, oil refineries, drilling rigs, exchanges and futures commission merchants (FCM) who serve American producers – including the hard working Americans at the EGT Shuttle Elevator Facility at Tunis.

I have come away from these meetings with the sense that everyday Americans worry that Washington politicians and bureaucrats have gotten in their way of earning a living. Americans are convinced that ill-conceived regulatory burdens are adding needless costs to their operations. They want the burdens removed so that they can build their dreams again. As Secretary Purdue said, “we need to get out of your way.”

That is why November’s election was so significant: Americans voted for a change in the direction of the country, a change back to economic growth and broad based prosperity. And, American derivatives markets regulated by the CFTC have a role to play to renew economic growth.

II. Derivatives Markets

As you know, Ag futures and other derivatives markets allow farm and ranch producers to hedge their production and price risks. A Montana farmer or rancher can enter into a futures contract to lock in a price and hedge risk associated with their upcoming production. Food processing companies can enter into futures contracts to hedge their input costs.

But even if you are not actively participating in the futures markets, you are still impacted by the prices. Commodity futures markets provide a critical source of information about future harvest prices. The U.S. Department of Agriculture (USDA) uses that information to make price projections, determine volatility measures and make payouts on crop insurance.¹ In 2015, almost 16,000 farm families in Montana were issued $101 million in crop insurance payments based, in part, on futures prices.² So even when farmers are not themselves buying and selling futures, they are counting on the exchanges and the CFTC to ensure that the markets have integrity.

III. Excessive Regulation

Now, it’s recognized the world over that America’s derivatives markets are the best and most innovative in the world, but they have been struggling recently, under the weight of flawed and excessive regulation. Our markets today are more fragmented, more concentrated, less liquid and less supportive of economic growth and renewal than in the past. The overly prescriptive regulation of American derivatives markets is part and parcel of the over-regulation of the U.S. economy. It thwarts the revival of American prosperity.

Farmers and ranchers that use our markets typically do so directly or indirectly through a FCM – the “stockbrokers” of the futures world. However, America’s FCMs are becoming an endangered species. FCMs continue to consolidate at an alarming rate with dire consequences for American agriculture and manufacturing.

Since 2008, there are over forty percent fewer FCMs in the marketplace – and many of those that left were ones that exclusively served the agricultural community.³ Some of the remaining FCMs have refused to retain their smaller, less active clients, including many small agricultural producers.⁴

Shortly before I joined the agency, a small family-owned FCM from Iowa testified before the House Agriculture Committee about the increased burdens of federal regulation.⁵ They said federal regulation was killing their business. Sadly, they had to close up shop less than a year later.⁶

These are troubling developments. They must be examined carefully. The fewer FCMs serving our farmers, the less farmers are able to hedge their risk.

We must not allow Washington regulations and Fed monetary policy to wipe out smaller, rural FCMs and their customers the same way Dodd-Frank regulations have wiped out small community banks across America’s agricultural landscape.⁷ I can’t speak for other agencies, but under President Trump, the CFTC is now under new management and we’re open for business with a new focus on customer service. The main job is to keep the main job, the main job. From here on out, the CFTC will call for changes in ill-considered rules adopted by federal bank regulators⁸ that unduly limit the scope of service provided by FCMs to America’s Ag producers.

IV. Protecting Farmers

As you know, we at the CFTC have a duty to oversee the markets that farmers and ranchers depend on to hedge their risks. In order for all segments of our economy to flourish, including cattle and wheat, we need thoughtful rules and regulations that encourage participation and innovation in our markets, not the opposite.

American farmers and ranchers were not the cause of the financial crisis. The CFTC must take care to avoid making farmers and ranchers collateral damage of regulations designed to curb bad behavior on Wall Street, not Main Street.

Of course, the CFTC plays no role in regulating the prices of commodities, regardless of whether they are high or low. Still, the CFTC must take care that it not inflict unnecessary pain on our commodity markets. The CFTC must promote policies that do not needlessly impinge on the ability to hedge against falling prices. We must provide market participants with legal certainty and regulations whose benefits unambiguously justify their costs.

The American people have entrusted the Trump Administration to turn the tide of over-regulation. Accordingly, financial market regulators, like the CFTC, must pursue their missions to foster open, transparent, competitive and financially sound markets in ways that best promote American economic growth and prosperity.

The time has come for our financial markets – and the efforts of those who regulate them – to be put more fully into the service of American economic recovery.

V. Project KISS

On February 24, 2017, President Trump issued an executive order furthering his regulatory reform agenda to stimulate economic revival.⁹ To achieve it, our first step is to reduce excessive regulatory burdens.

The President’s executive order directs federal agencies to establish Regulatory Reform Task Forces.¹⁰ Accordingly, I recently announced the launch of a new agency initiative to support President Trump’s executive order.

The initiative is Project KISS. It stands for “Keep It Simple Stupid.” Project KISS is an agency-wide review of CFTC rules, regulations and practices to make them simpler, less burdensome and less costly.

As part of that effort, Project KISS recently issued a call for recommendations from the public on regulatory reform. We now have portals on our website for the public to provide suggestions that we can look to implement.

Now, Project KISS is NOT about identifying rules for repeal or even rewrite. What it IS about is taking our existing rules as they are and applying them in ways that are simpler, less burdensome and less of a drag on the economy.

VI. Vigilant Oversight

One of the CFTC’s core responsibilities is to ensure that the prices discovered in the United States’ commodity markets reflect market fundamentals and are free from fraud and manipulation. Each and every day, our surveillance staff sifts through over 300 million trading records to identify anomalies and trades that are inconsistent with the forces of supply and demand.

Another part of our oversight is related to the futures contracts themselves. One of the greatest aspects about markets is their ability to evolve, change and adapt, and it is our job to make sure that the futures contracts offered by commodity exchanges keep pace.

Each asset class – agricultural, energy, metals and financial commodities – has a CFTC team devoted to oversight of those markets. For any given commodity that is traded, there are people at the CFTC who come to work every single day with the sole purpose of ensuring that the commodity exchanges and the contracts listed thereon operate efficiently and effectively.

Contract design is the domain of the exchanges, not of regulators. We have no business trying to design new futures contracts or trading platforms. Our job is not to run markets.

Yet, our job is to oversee them. If we hear complaints about a futures contract or our Ag Team discovers problems with it, we look to engage with the exchange that offers that contract to encourage them to resolve the problems. That is so, especially if we suspect possible manipulation. And, thereafter, we remain vigilant in our oversight of the exchange and the contract to ensure that they continue to perform as intended under our rules.

A. Live Cattle

For example, we were approached by the National Cattlemen’s Beef Association with concerns about the impact of high frequency trading on prices in the Live Cattle futures contract on certain dates in 2015 and 2016. We take such concerns very seriously.

Our agriculture futures market specialists in the CFTC’s surveillance and market intelligence branches did a thorough analysis of trading data across our markets. They examined the trading patterns and practices of all major types of market participants, including natural hedgers, market speculators, proprietary and high frequency traders and large asset managers. From that analysis, our market experts did not see patterns of behavior by any particular group that had an overall negative impact on the marketplace.

Nevertheless, our market intelligence and market surveillance branches will continue to carefully observe and analyze trading patterns and activities in these markets. Should we observe any inappropriate or improper activity, we will take any and all action that may be necessary or appropriate.

We are also aware of concerns raised by the Ranchers-Cattlemen Action Legal Fund about whether meat packers negatively impacted prices in the cash and futures markets in 2015.¹¹ Chairman Grassley asked the Government Accounting Office (GAO) to investigate these concerns, and we are helping the GAO in that effort.¹²

In addition to responding to concerns with market participants’ trading of the Live Cattle futures contract, the CFTC Ag Team analyzed the contract itself to ensure that it was designed appropriately. Our Ag Team worked cooperatively with the Chicago Mercantile Exchange (CME) and the cattle industry. We identified design issues that, when addressed, preserved and strengthened the stockyard delivery system and made the terms of the contract more transparent to market participants. Two weeks ago, the CME published for comment a set of proposals that are designed to improve the contract’s price discovery and risk management functions. The proposals seek to make the delivery process more efficient and ensuring the contract reflects cash market practices.¹³ The CME should be commended for these sensible improvements. Nevertheless, the CFTC will continue to monitor the contract as these improvements come into effect.

B. Hard Red Winter Wheat

Our CFTC Ag Team has also been working with farmers and industry groups to address challenges to convergence in the Hard Red Winter Wheat futures contract.

Convergence between cash and futures is essential to the price discovery and risk management function of a futures contract. Lack of convergence can have far reaching effects beyond the futures markets. Farmers, grain elevators, merchandisers and everyone else in the supply chain are dependent on prices in the futures markets for hedging. Any uncertainty in the price can filter back down to the elevator’s ability to secure credit and the producer’s ability to secure a forward contract with that elevator at a fair price.

The CFTC Ag Team, working cooperatively with farmers and industry groups, encouraged the Chicago Board of Trade (CBOT) to address the Hard Red Winter Wheat convergence issue. CBOT recently announced that they will be implementing a market-based storage rate into the contract in March of 2018, similar to what is already in place for the Soft Red Winter Wheat futures contract.¹⁴ We will be monitoring the contract to determine how the CBOT’s proposed modification addresses the existing convergence issues.

VII. Customer Education & Outreach

I have been blessed to travel as a federal official across our great country meeting with farmers and ranchers. I have been from New York to Florida to Michigan to Kentucky and Texas, and now, to Montana. Many Ag producers have told me that while their fathers or grandfathers used the futures markets to hedge risk, they don’t. They’ve told me that they simply don’t have sufficient access to information regarding the markets to feel comfortable using them. Some have told me that they’ve personally had to educate their local banks on the futures markets to secure financing.

While it’s up to each farmer and rancher to determine whether to and how to hedge their risks, it is vitally important that the next generation of farm families has access to and familiarity with a broad range of risk management tools – including Ag futures – that can be used to stabilize their income and improve their bottom line.

I’ve asked our Office of Customer Education and Outreach to assess whether there are any information gaps that may be preventing the new generation of farmers and ranchers from using our markets. I’d like to bridge any such gaps. I don’t ever want to hear about young people leaving the farm because they couldn’t manage price fluctuations from year-to-year. I invite you to share your views with us on how we can best serve our Ag community.

VIII. Conclusion

In conclusion, it is time for us to put our Ag futures markets back in support of American prosperity.

From the farmer in Livingston to the rancher in Dillon, hedging of production costs and crop and livestock prices is essential for successful farming and ranching. Efficient risk hedging is essential for successful risk taking. And, risk taking is essential for economic growth and prosperity.

The American people elected President Trump to turn the tide of over-regulation. Financial market regulators, like the CFTC, must pursue their missions in ways that best foster American economic renewal.

Americans are and have always been an aspirational people. Today, whatever our political point of view, we Americans seek a brighter and more prosperous future for our families and ourselves.

In January, we witnessed a new beginning for our country and a renewed promise for broad-based economic growth.

The time has come to redouble our efforts to rebuild American prosperity:

• To reduce regulatory burdens and flawed rules;
• To enhance the health and vitality of trading markets;
• To foster economic growth and broad-based prosperity; and
• To lift the prospects of everyone for greater health and harmony.

Thank you again, Senator Daines, for inviting me to participate in the Summit and to speak to you today.

¹ USDA, Informational Memorandum: PM-17-012, 2017 Crop Year (CY) Common Crop Insurance Policy and Area Risk Protection Insurance Projected Prices and Volatility Factors; Malting Barley Endorsement Projected Price Component and Volatility Factor; and Hybrid Seed Price Endorsement - Hybrid Seed Corn Prices (Mar. 1, 2017). Available at https://www.rma.usda.gov/bulletins/pm/2017/17-012.pdf.

² USDA, 2015 ARC/PLC Payments by State (Feb. 2, 2017). Available at https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/arc-plc/pdf/2015%20arc%20plc%20payments%20feb%202017.pdf.

³ CFTC, CFTC Ag Advisory Committee Statistics on FCM Trends for the period December 2005 thru December 2014 (Sept. 22, 2015). Available at http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/aac092215presentations_dsio.pdf.

⁴ Christian Berthelsen, SocGen's Bache Deal a Sign of Commodity Woes, MarketWatch (May 27, 2015, 2:44 AM), http://www.marketwatch.com/story/socgens-bache-deal-a-sign-of-commodity-woes-2015-05-27.

⁵ The Future of the CFTC: Perspectives on Customer Protections, Before the Subcommittee on General Farm Commodities and Risk Management of the House Committee on Agriculture, 113th Cong. 35-38 (2013) (statement of Theodore L. Johnson, President, Frontier Futures, Inc.). Available at https://archives-agriculture.house.gov/sites/republicans.agriculture.house.gov/files/pdf/10.2.16%20113-08%20-%2085418.pdf.

⁶ CFTC, Historical Futures Commission Merchants Financial Reports, http://www.cftc.gov/MarketReports/financialfcmdata/HistoricalFCMReports/index.htm (last visited on May 30, 2017).

⁷ Regulatory Burdens: The Impact of Dodd-Frank on Community Banking, Before the Subcommittee on Econonic Growth, Job Creation, and Regulatory Affairs of the House Committee on Oversight and Government Reform, 113th Cong. 3–7 (2013) (statement of Hester Peirce, Senior Research Fellow, The Mercatus Center at George Mason University). Available at https://oversight.house.gov/wp-content/uploads/2013/07/Hester-Peirce-Testimony.pdf. See also The Dodd-Frank Act Five Years Later: Are We More Prosperous?: Before the House Financial Services Committee, 114th Cong. 6 (2015) (statement of Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute). Available at https://financialservices.house.gov/uploadedfiles/114-47.pdf. See also David Smith, Consolidations, Regulations Pare Banks, Execs Say, Arkansas Online: Business (Sept. 20, 2015, 3:30 AM), http://www.arkansasonline.com/news/2015/sep/20/consolidations-regulations-pare-banks-e/?f=business.

⁸ Specifically, former CFTC Chairman Timothy Massad and current Commissioner Sharon Bowen have called for changes in the Supplementary Leverage Ratio (“SLR”). Timothy Massad, Chairman, CFTC, Remarks of Chairman Timothy Massad before the 2016 P.R.I.M.E. Finance Annual Conference (Jan. 25, 2016). Available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-38. Sharon Bowen, Commissioner, CFTC, What future for global regulation of financial markets? (Apr. 5, 2017). Available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opabowen-15. I recently explained that current CFTC analysis shows that the SLR inordinately restricts the amount of capital available for client trading needs without an equivalent benefit in bank balance sheet resiliency. J. Christopher Giancarlo, Acting Chairman, CFTC, Changing Swaps Trading Liquidity, Market Fragmentation and Regulatory Comity in Post-Reform Global Swaps Markets (May 10, 2017). Available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-22.

⁹ Exec. Order No. 13777, 82 Fed. Reg. 12285 (Feb. 24, 2017). Available at https://www.whitehouse.gov/the-press-office/2017/02/24/presidential-executive-order-enforcing-regulatory-reform-agenda.

¹⁰ Id.

¹¹ Letter from Bill Bullard, R-CALF, to Hon. Charles E. Grassley, Hon. Mike Lee, Hon. Patrick J. Leahy, and Hon. Amy Klobuchar, U.S. Senate (Mar. 28, 2016). Available at https://www.r-calfusa.com/wp-content/uploads/2013/04/160328-Fourth-Follow-up-Letter-to-Senate-Judiciary-Committee.pdf.

¹² Press Release, Hon. Charles E. Grassley, Judiciary Committee Senators Ask GAO for an Assessment of the 2015 U.S. Cattle Market Price Drop (Apr. 20, 2016), https://www.grassley.senate.gov/news/news-releases/judiciary-committee-senators-ask-gao-assessment-2015-us-cattle-market-price-drop.

¹³ CME Group, CME Group Planned Changes to Live Cattle Futures Contract Specifications (May 2017), http://www.cmegroup.com/company/files/planned-changes-to-live-cattle-futures-contract-specifications.pdf.

¹⁴ CME Group, Amendments to CBOT Chapters 7, 14H and 14N in Connection with the Implementation of Variable Storage Rate and Migration of Delivery Rules for KC HRW Wheat Futures Contracts (May 23, 2017), http://www.cmegroup.com/notices/market-regulation/2017/05/MKR05-23-17.html#pageNumber=1.

Last Updated: September 14, 2017