Commentary: Dodd-Frank shouldn’t end swaps at year end
Right now, over-the-counter agricultural swaps are mostly unregulated. But that shouldn’t be a point of concern. These instruments had nothing to do with the financial meltdown.
Nevertheless, this new round of Dodd-Frank rules would impose a slew of new requirements on these instruments. Buyers and sellers would have to trade them on approved exchanges, and they would need to have a certain level of capital on hand to trade. Reporting rules regarding profits and losses would be ratcheted up.
There would also be mandatory “clearing,” meaning swap trades would be required to run through certified middlemen. This is a particularly backward idea.
The over-the-counter agriculture swap market has been running safely and efficiently for years without mandatory middlemen. No one — not even the regulators charged with implementing Dodd-Frank — claims otherwise.
On the other hand, the traditional futures market operating under mandatory clearing rules has been home to some of the biggest financial meltdowns of the last few years. About a billion dollars evaporated before the brokerage firm MF Global declared bankruptcy in October 2011. And Peregrine Financial had racked up a $200 million shortfall in customer funds before it was forced to shut down in July.
The clearing rules regulators are so eager to foist on over-the-counter agricultural swaps were in full force for both MF Global and Peregrine. And yet, the system still suffered massive losses. This regulatory structure is obviously broken.
So, implementing Dodd-Frank as planned means forcing agriculture swaps to move from a regulatory environment that is universally acknowledged to be working well to one that has failed repeatedly to prevent fraud and abuse.
That’s just senseless.
Over-regulation can be just as dangerous and costly as under-regulation. And in this case, these invasive Dodd-Frank rules could dramatically drive up operation costs for farmers, ranchers and others involved in food production. The rise in expenses would, in turn, be passed along to American consumers in the form of higher food prices.
Some farmers would no doubt be driven out of the swaps market altogether.
With no way to manage financial risk, the next hurricane or tornado could put them out of business.
At the very least, regulators need to give themselves more time to study this issue by installing a three-year moratorium on the Dodd-Frank rules governing agricultural commodities. Blindly marching ahead and imposing strict new requirements on these instruments would wind up doing substantially more harm than good.