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September 21, 2011

Summary of the Rule on Agricultural Commodity Definition

WHAT’S THE RULE? The Commodity Futures Trading Commission on July 13 approved a final rule that would for the first time define the term “agricultural commodity” to better regulate the swaps market and place such commodities under the same oversight as other trades. The rule spelled out specific commodities such as wheat, cotton and corn to be covered, as well as more general products. It also applied to commodity-based indexes that are largely based on agricultural commodities.

WHY IS IT IMPORTANT? The definition is critical to ensure that traders cannot evade forthcoming rules to impose position limits to prevent excessive speculation in commodity markets. Such speculation has triggered higher prices in a whole range of products that Americans use such as heating oil, gas, coffee and wheat.

WHAT DID BETTER MARKETS ARGUE?  We wrote the initial rule opened up loopholes for trading agricultural swaps, specifically those based on an index compromised of more than one price or product. For example, a trader could easily circumvent position limits on a swap based on one-third each of wheat, corn, and soy because there was no requirement for such combinations to be covered under the rule. Instead, Better Markets argued that such swaps should be disaggregated, and be evaluated on a proportional basis.

WHAT DID THE AGENCY DO? The CFTC listened and accepted some of our arguments. The final rule mandated that an index swap would be covered under the definition if it is based more than 50 percent on agricultural products. The rule also required that if an index swap is used to circumvent position limits, it will be disaggregated into its components so that it can fall under the regulation.

Proposed rule

Final rule



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