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Farm Press Release

For immediate release -- Monday, July 28, 1997.
Contact Bob Brammer -- 515-281-6699.

Miller Urges Caution by CFTC in Authorizing Off-Exchange Agricultural Trade Options

Commodity Futures Trading Commission considering rules to permit less-regulated offer and sale of "off-exchange trade options.

DES MOINES. Citing last year's problems with hedge-to-arrive contracts, Attorney General Tom Miller is urging the Commodity Futures Trading Commission to proceed with caution as the CFTC considers lifting a long-standing prohibition on the offer or sale of "off-exchange trade options" on certain agricultural commodities. The CFTC is the federal body that regulates trade in agricultural and other products.
The CFTC is considering the new rules in response to arguments that the change would benefit farmers and elevators because the off-exchange instruments could be customized in many ways to meet the needs of all parties and give farmers more choices in risk management. Today, agricultural options are traded only on regulated exchanges, such as the Chicago Board of Trade, and through licensed brokers. Like the HTA situation, Miller said, off-exchange sale of agricultural commodity options could result in "a lack of good information about the risk of the transaction for both the buyer and the seller; a lack of routine periodic information regarding either party's gain or loss in the contract; and a lack of effective accounting procedures separating each farmer's individual position from either the local elevator or other farmers' positions."

The letter also said permitting the off-exchange transactions could make it difficult for state regulators to evaluate the financial reports and solvency of grain dealers and grain warehouses.

"Finally," the letter said, "there is a concern that the use of off-exchange transactions will reduce farmers' ability to obtain accurate information on the volume and price of grain moving through market channels, thereby reducing their ability to accurately engage in price discovery."

Transactions made now through regulated exchanges and licensed brokers are fully disclosed and standardized.

Miller said his letter was aimed at underscoring key issues that the CFTC should address as it considers whether to lift the ban on off-exchange trading options, and what regulatory safeguards the CFTC should impose if it does lift the ban.

A trade option is a contractual agreement between two parties, such as a producer and an elevator, that provides for payment of a premium or fee to secure the right, but not the obligation, to make or take delivery of the commodity described in the contract.