The House Ag Committee held a hearing Thursday which focused on implementation of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In his prepared opening statement, Agriculture Committee Ranking Member Collin Peterson, D-Minn., said it is important that we get this right and that the CFTC remain on track to implement the law in a responsible manner and as Congress intended.
"The provisions of Dodd-Frank will increase transparency," Peterson said. "Derivatives played a key role in the collapse of our financial markets. We had an over $600 trillion OTC derivatives market with no oversight, no transparency, and with no regulation. As a consequence of this and many other factors, the American taxpayer ended up having to bail out large financial institutions like AIG when the financial system fell apart."
Peterson said by requiring the big dealers to report and clear more of their swaps and move into more transparent marketplaces, commercial end users will be able to get a better picture of the swaps market and be better armed in their negotiations with these dealers. Peterson said if implemented properly, the derivative title of Dodd-Frank could prove to be a major benefit to commercial end users.
Ed Gallagher, president of Dairy Risk Management Services, a division of Dairy Farmers of America testified before the Committee saying the CFTC must ensure that farmer co-ops can continue to effectively manage risk and offer hedging tools to their farmer-owners. Gallagher was also representing the National Council of Farmer Cooperatives.
"NCFC believes that agricultural cooperatives should be treated as end-users since they aggregate the commercial risk of individual farmer-members and are treated as such by the CFTC," Gallagher said. "In addition, we seek an exclusion of farmer cooperatives from the definition of a swap dealer and an exemption of farmer co-ops from mandatory clearing or margining."
Gallagher provided an example of how farmer coops utilize derivatives. He said cooperatives are increasingly using OTC products to help them diversify their exposure by customizing their hedges. In addition, OTC derivatives offer cooperatives the ability to provide specialized products to farmers and ranchers. A co-op can aggregate its owner-members' small volume hedges or forward contracts and offset that risk with a futures contract or by entering into another customized hedge via the swaps market.