Jan 23 2024
WASHINGTON – U.S. Senator Jerry Moran (R-Kan.) and U.S. Representative Zach Nunn (R-Iowa) led their colleagues in cautioning federal regulators on the harmful impact the proposed Basel III Endgame regulations would have on agriculture and energy industries.
“We have concerns that the GSIB Surcharge Proposal and the Basel III Endgame Proposal will generate disincentives for prudent risk management strategies and drive up the cost of hedging for end-users,” the members wrote. “Ultimately, consumers who are already facing elevated prices from record levels of inflation will pay the price at the grocery store and the gas station.”
“When farmers, ranchers, or other end users enter into futures or other centrally-cleared derivatives contracts to mitigate the risk they face from fluctuating commodity prices, they generally initiate the trade through a Futures Commission Merchant (FCM) registered with the CFTC,” the members continued. “FCMs provide market access to their clients through memberships at regulated derivatives exchanges and clearinghouses, and the vast majority of FCMs today are banks that will be subject to the proposals. Increasing regulatory capital charges for banks that provide end-users with access to these hedging markets and risk management tools is a misguided approach.”
This letter was also signed by Sens. John Boozman (R-Ark.), John Thune (R-S.D.), Roger Marshall (R-Kan.),Cindy Hyde Smith (R-Miss.), Mike Braun (R-Ind.), Cynthia Lummis (R-Wyo.), Kevin Cramer (R-N.D.), Tommy Tuberville (R-Ala.), Bill Hagerty (R-Tenn.), Katie Britt (R-Ala.), Thom Tillis (R-N.C.) and Representatives Jim Baird (R-Ind.), Andy Barr (R-Kentucky), Don Davis (D-N.C.), Monica De La Cruz (R-Texas), John Duarte (R-Calif.), Scott Fitzgerald (R-Wis.), Mike Flood (R-Neb.), French Hill (R-Ark.), Erin Houchin (R-Ind.), Dusty Johnson (R-S.D.), Trent Kelly (R-Miss.), Frank Lucas (R-Okla.), Blaine Luetkemeyer (R-Mo.), Dan Meuser (R-Penn.), Alex Mooney (R-W.V.), Wiley Nickel (D-N.C.), John Rose (R-Tenn.), Austin Scott (R-Ga.), Bryan Steil (R-Wis.), Glenn Thompson (R-Pa.) and Roger Williams (R-Texas).
This effort is supported by the American Farm Bureau Federation, National Milk Producers Federation, Louis Dreyfus Company, Commodity Markets Council, American Cotton Shippers Association, Futures Industry Association, International Swap Dealers Association, National Grain and Feed Association and National Futures Association.
The full letter can be found here and below.
Dear Vice Chair Barr, Chairman Gruenberg, and Acting Comptroller Hsu:
Futures and derivatives markets provide critical tools to manage risk for farmers, ranchers, grain and food processors, energy producers, and other important commercial end-users. We have concerns, however, that the GSIB Surcharge Proposal and the Basel III Endgame Proposal (the proposals) will generate disincentives for prudent risk management strategies and drive up the cost of hedging for end-users. Ultimately, consumers who are already facing elevated prices from record levels of inflation will pay the price at the grocery store and the gas station.
On the heels of inflation rates not seen in over 40 years, Americans are facing record high costs in grocery stores, at gas stations, and in their energy bills. Futures and derivatives markets play a stabilizing role for prices, helping to insulate consumers and businesses from market instability while involving minimal risk for end-users. For this reason, many nonfinancial firms that use derivatives for traditional hedging purposes were exempt from a number of regulations in the Dodd-Frank Act that would have made it more expensive for them to manage their risk. Former Senate Banking, Housing, and Urban Affairs Chairman Dodd, along with former Senate Agriculture, Nutrition, and Forestry Chairman Lincoln, highlighted the importance of preserving these tools in the Dodd-Frank Act. “Regulators, namely the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and the prudential regulators, must not make hedging so costly it becomes prohibitively expensive for end users to
manage their risks.”
As policymakers and stakeholders review the proposals, we remain concerned that the proposals ignore congressional intent to keep critical risk management tools accessible and low-cost.
When farmers, ranchers, or other end users enter into futures or other centrally-cleared derivatives contracts to mitigate the risk they face from fluctuating commodity prices, they generally initiate the trade through a Futures Commission Merchant (FCM) registered with the CFTC. FCMs provide market access to their clients through memberships at regulated derivatives exchanges and clearinghouses, and the vast majority of FCMs today are banks that will be subject to the proposals. Increasing regulatory capital charges for banks that provide end-users with access to these hedging markets and risk management tools is a misguided approach.
For another key hedging tool, uncleared swaps, the proposals would represent a massive increase in the cost of trading these instruments. The banking entities who facilitate these transactions as swap dealers allocate capital on a business line basis, and as a result, disproportionate capital requirements for a certain business line or trading desk may cause banks to decrease their offerings of these risk-reducing tools. As a result, liquidity in these markets could decrease dramatically, and the costs of hedging for end users would be driven even higher.
The Basel III Proposal’s public listing requirement would make it more expensive for privately owned investment-grade companies to hedge against risk, despite the lack of any empirical link between a public listing and creditworthiness. In addition, the new capital requirements for “Credit Valuation Adjustment” or “CVA” Risk on derivative transactions could further penalize end users. The new CVA requirements are most severe for derivative transactions with end users.
The GSIB Surcharge Proposal and Basel III Endgame Proposal substantially exceed the Basel III framework and go significantly further than what is being implemented in other jurisdictions, such as Europe. This will inevitably put end-users seeking to hedge and manage risk on an uneven playing field with competitors in other jurisdictions.
In turn, we respectfully ask that you respond to the following questions by February 16, 2024.
- Have you conducted any economic analysis about these disparities? Please provide your analysis with regard to the international consistency of the US proposals with other major jurisdictions, and, in particular, how the US and EU jurisdictions treat end users under the respective proposals.
- As you were developing these proposals, how was the end-user impact of increased capital charges for hedging and risk management tools factored into your decision-making? Have you produced any economic analysis about the impacts these proposals will have on end-users?
- How would increased FCM consolidation create more stability in the derivatives marketplace?
The impact of these bank capital proposals will have a direct effect on the economy and our constituents. It is vital to approach any proposal regarding increased capital requirements, particularly increased capital requirements for hedging and risk management tools, with careful consideration and input from industry as well as a comprehensive cost-benefit analysis.
With rising economic and geopolitical risks, now is not the time to increase costs for farmers’ cooperatives, energy producers, and food processors seeking to responsibly hedge against instability.
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