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One size fits all approach not working for cotton market

Members of the U.S. cotton industry testifying before the Commodity Futures Trading Commission in April said U.S. futures markets should get away from a “one size fits all” approach and require more transparency for index fund trades.

Here are recommendations from Woods Eastland, Staplcotn CEO and director of AMCOT, which represents the nation's four major cotton cooperatives:

  • Redesign the weekly CFTC position of traders report so that commercial accounts be divided into two categories — hedgers involved as a commercial enterprise in the production, distribution or consumption of the physical agricultural commodity and hedgers not so involved.

  • Require that any part of the position of an index fund with a hedge exemption that exceeds the dollar allocation or the percentage of funds allocated to that commodity, as defined in its prospectus and recorded with the CFTC, be subject to speculative position limits and speculative margin and be reported weekly to the CFTC.

  • Require that contract markets recognize at least three classes of traders — hedgers involved as commercial enterprises in the production, distribution or consumption of the physical agricultural commodity, other hedgers, and speculators. Initial margin required should be mandated so that commercial enterprise hedgers have the lowest margin, other hedgers next, and speculators the highest. The spread of initial margin between commercial enterprise hedgers and speculators must be significantly greater that the current spread between hedgers and speculators.

  • Analyze what regulatory changes are necessary to restore a balance in agricultural contract markets. This would include, but not be limited to:

    1. Establish the maximum size of speculative limits that can be approved for a particular market on a market-by-market basis, and not on a “one size fits all” basis.

    2. Require market participants to report weekly to the CFTC all positions held in the contract market that are offsetting swap and OTC (over the counter) contracts, so that the CFTC can have that information available to monitor possible price disruptive behavior.

    3. Require that daily trading range limits be established in agricultural contract markets for futures and options.

    4. Require that contract markets are organized on a for profit basis contract with an independent third party to provide their market surveillance function. All copies of the independent third party's reports should be forwarded to at least two public members of the contract market's board.

  • Investigate the events in the cotton futures market of Feb. 20 to March 20, which constituted an undue burden on interstate commerce under the act, to determine what caused the unreasonable fluctuations and unwarranted changes in price.

Joe Nicosia, Allenberg Cotton Co. CEO and incoming president of the American Cotton Shippers Association, added these recommendations on behalf of ACSA:

  • The CFTC should require the reporting of all swap and OTC contracts by market participants, and determine the aggregation of positions from all sources, including the exchanges, swaps, OTCs, and all other trading entities. All non-traditional hedge accounts, those not involved in the commercial enterprise of physically trading bales of cotton, should be reported as a separate individual category.

  • Require that the ICE (Intercontinental Exchange) and its clearing members adhere to the practice of margining futures to futures settlements and options to option settlements and that only those involved in the physical handling of the agricultural commodity (cotton) be eligible for hedge margin levels.

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