Two of the United States' leading grain organizations last week (May 10) urged the Commodity Futures Trading Commission (CFTC) to institute a 30-day public comment period to provide time to assess issues related to announced plans by the InterContinental Exchange (ICE) and CME Group to launch expanded electronic trading hours this month for grain and oilseed futures and options contracts.
In a joint letter to the CFTC, the National Grain and Feed Association (NGFA) and North American Export Grain Association (NAEGA) cited inadequate advance consideration with stakeholders of important ancillary issues raised by the two exchanges’ plans to expand electronic trading to 22 hours per day as justification for CFTC intervention. If the CFTC finds it is not feasible to institute a public comment period, the two groups urged the agency to approach both ICE and the CME Group to encourage them to self-initiate a delay in their respective scheduled implementation dates.
The NGFA and NAEGA also emphasized that any delay in the expansion of electronic trading necessitated by the opportunity for public comment should apply to all futures exchanges equally. This would include the Kansas City Board of Trade and MGEX (formerly the Minneapolis Grain Exchange) that have signaled they will follow suit with ICE and CME Group.
The NGFA and NAEGA stressed that they did not oppose “some reasonable and properly constructed expansion” of electronic trading hours, noting that some member companies believe doing so would enable hedging of cash grain and oilseed transactions over a longer period of the day.
But the NGFA and NAEGA said that as currently structured, both ICE’s plan to launch 22-hour electronic trading of new grain and oilseed contracts starting May 14 and the CME Group’s plan to expand its existing electronic trading to 22 hours effective May 20 “raise serious issues that could lead to competitive inequalities and impose significant additional costs” attributable to personnel requirements, as well as computer and accounting system changes.
Established in 1896, the NGFA consists of more than 1,050-member companies from all sectors of the grain elevator, feed and feed ingredient, integrated livestock and poultry, grain processing, biofuels and exporting business that operate about 7,000 facilities nationwide and handle more than 70 percent of all U.S. grains and oilseeds. The NGFA also consists of 26 affiliated state and regional grain and feed associations. NAEGA, established in 1912, consists of private and publicly owned companies and farmer-owned cooperatives that are involved in and provide services to the bulk grain and oilseed exporting industry. NAEGA members are engaged in the vast majority of U.S. grain and oilseed exports, whose value exceeds $50 billion annually.
“Neither the ICE contracts nor the CME Group’s plan to expand electronic trading hours were vetted properly with appropriate market participants” prior to their respective announcements, the NGFA and NAEGA said. “It is safe to say there are significant and substantive opposing views as to whether these plans, as currently constituted, are of net benefit” to those using the futures markets for hedging and risk-management.
The NGFA and NAEGA specifically cited the following concerns surrounding the expansion of electronic trading that warrant further evaluation:
- Allowing electronic trading to be open during the release of key statistical and economic reports issued by the U.S. Department of Agriculture. Currently, electronic and open-outcry trading does not begin until 9:30 a.m. Central time, two hours after the release of crop production, crop progress, grain stocks, planted acreage and other potentially market-moving USDA reports.
The NGFA and NAEGA said they believe it would be “prudent” that such reports be released while futures and options markets – including electronic trading – are closed, or that there be a “break” in trading activity to give market participants an opportunity to assess and analyze information and adjust their market positions before trading resumes. “Trading through the release of these reports could lead to extreme volatility immediately following their release,” the NGFA and NAEGA said. “Further, there is currently unequal access to USDA report data because of different Internet connection speeds and analysis capabilities.”
- The impact on back-office personnel, as well as computer and accounting systems used to reconcile trading activity, given different closing times for open-outcry (1:15 p.m. Central for CME Group’s CBOT contracts) and electronic trading (4 p.m. Central for CBOT contracts and 5 p.m. Central for ICE). The NGFA and NAEGA noted that the current 1:15 p.m. Central time closing for both open-outcry and electronic trading for CBOT grain and oilseed contracts provides sufficient time to allow firms to close out and reconcile their trading activities and perform required accounting and other back-office functions before electronic trading reopens at 6 p.m. “If electronic trading remains open through the late afternoon or early evening, firms – especially those operating in the Eastern time zone – will be faced with putting on extra personnel and/or paying overtime to work into the evening hours.” The NGFA and NAEGA also cited the difficulty confronting firms when trying to assess – in an extremely short time period – the types of software and systems changes that will be needed to accommodate expanded electronic trading hours and different closing times for open-outcry and electronic trading.
The two organizations also cited such practical concerns as:
- How cash grain purchasers will price bids to producers when open-outcry trading is closed and settlement prices have been established, while electronic trading remains open.
- The mechanics of how margin requirements will be determined by exchange clearinghouses given two different closing times – one for open-outcry and the other for electronic trading.
- Potential discrepancies between hedgers’ cash market positions and their brokerage statements at the end of the trading day.
“We believe there is no compelling reason why 22-hour electronic trading needs to begin immediately,” the NGFA and NAEGA concluded, noting that each of the issues raised would benefit from an opportunity for public comment and further dialogue with ICE and CME Group. “It is much preferable that expanded hours and new contracts be analyzed in a deliberate fashion for effects on cash and futures markets, market volatility and producer-customer relationships than to rush to implementation unnecessarily.”