Later today, the White House nominee for Chair of the Commodity Futures Trading Commission (CFTC) Brian Quintenz will appear before the Senate Agriculture Committee. Quintenz is a former CFTC Commissioner. After leaving the CFTC, Mr. Quintenz became Head of Policy at the venture capital firm Andreesen Horowitz to lead its cryptocurrency lobbying effort. According to Reuters, in June, the U.S. Senate is likely to pass a bill to legitimize a type of cryptocurrency — stablecoins — whose value is pegged to that of the U.S. dollar, integrating crypto price and transaction volatility into the mainstream financial system.
The Senate Agriculture Committee oversees the CFTC and should not limit its questions to Mr. Quintenz exclusively to how the CFTC would regulate cryptocurrency. The CFTC regulates many entities and contracts, including agricultural futures and options contracts. Issues raised at a CFTC Agriculture Advisory Committee meeting and a CFTC staff roundtable may require the CFTC to propose guidance to industry or regulations.
The trading of agricultural futures and options contracts are supposed to result in reliable benchmarks for setting cash prices paid to farmers and ranchers at grain elevators and livestock auctions. While futures contracts lock in a price for the farm cooperative’s agent (Futures Commission Merchant or FCM) to protect (“hedge”) against sudden price declines,crop and livestock processors trade futures contracts to hedge against sudden price increases. The contracts require buyers to either deliver the commodity at the agreed future price by the contract’s expiration date, generally 90 days for agricultural contracts, or roll over the contract into the next trading period. Trading comes with various costs beyond paying the agreed futures price, FCM fees and exchanges fees.
We propose three questions for Mr. Quintenz’s Senate confirmation process that begins later today:
Question 1: Should the CFTC provide guidance to industry about clearing organizations’ automated margining methodologies in view of the increasing impact of extreme weather events on agricultural production (“deliverable supply” in CFTC contract terms), transportation (“delivery points” in contracts) and price volatility?
One of the above mentioned costs, the setting and recalibration of margin collateral required to purchase and hold a contract position, was the subject of a CFTC Agricultural Advisory Committee (AAC) meeting in December 2023. Senate committee agriculture members should ask Mr. Quintenz about the proposed near-total automation of calculating and applying margin collateral required by exchanges and their clearing (post-transaction) organizations. These AAC concerns were represented in a transcript of the meeting.
A presentation by the Chicago Mercantile Exchange (CME) Clearing’s Suzanne Sprague explained that the collateral margin required by CME’s Clearport was set by an automated calculation applied to transactions in all asset classes. The CME plans to complete the application of its automated margining methodology to agricultural contracts by the end of 2025 (page 34). Sprague invited input from AAC members, stating “It’s never too early to start thinking about what factors might need to be considered” (page 35) in developing and applying automated margin models to agricultural contracts.
One factor to consider is the CME value-at-risk model analysis of extreme weather events applied to the contracts it offers to market participants. One question for Senate Agriculture Committee members to ask of Mr. Quintenz should be about whether the CFTC should issue guidance to industry to ensure that automated margining is consistent with CFTC risk management program rules. Even if he believes that industry should self-regulate the development, modification, and application of its automated margining models, Senators and the public should know the basis for this belief. For example, if exchanges develop and apply automated models to contract positions by using artificial intelligence (AI), the Senators should understand the CFTC’s capacity to verify that AI can reliably incorporate the financial risks of the forecast increased severity and frequency of extreme weather events in margin models.
Question 2: What are the risks and benefits for farmers of 24/7/365 trading and clearing of agricultural contracts?
The CFTC Division of Clearing and Risk Management held a “Existing, New and Emerging Issues in Clearing” roundtable in October 2024. One of the discussion topics was the proposal to change the current trading dates and hours of U.S. exchanges towards 24/7/365 trading and clearing. For example, the New York Stock Exchange plans to extend its stock market trading day to 22 hours on one of its trading platforms to “keep up” with cryptocurrency exchanges such as Coinbase.
Currently, stocks and commodity contracts are traded about 252 days a year, to allow for exchange data aggregation for near real-time intraday monitoring and end of trading day reporting to the market and CFTC, and to prevent extreme price volatility that might trigger a CFTC investigation. Fully automated trading and clearing may be more efficient in terms of a personnel to volume of trading volume ratio, but will this change in exchange rules protect the interests of market participants, including farmers?
The issues in clearing roundtable transcript records participant observations, including their collective reluctance to express a viewpoint (page 17). The CFTC staff polled the participants to understand the “gist of things” (page 13) about clearing issues, and the question about whether 24/7 trading should be permitted divided the participants (page 55).
The argument for allowing 24/7 trading in equity markets is that retail investors will be able to monitor and adjust their portfolios whenever and wherever in response to non-U.S. events and prices in foreign exchanges. However, as Professor Hilary Allen testified to the U.S. House of Representatives in 2024, the CFTC “has no statutory investor protection mandate and limited experience regulating retail-dominated markets.” Currently, few farmers are retail investors in agricultural futures. They participate in the market through the larger capital pools of farm cooperatives whose FCMs trade on their behalf. Will farmers become retail customers to hedge price risks in Brazil or Korea if their FCMs do not want to trade 24/7?
A trader for Louis Dreyfus Company, a global agriculture merchant and processor, said “We need to be very careful before we just jump into 24/7 trading” (page 74). He said the cost of pre-funding margin collateral for 24/7 trading “will flow all the way up and down the agricultural food chain,” affecting producers and consumers (page 75). Another participant said 24/7 trading would result in “significant price disruptions” that would be attractive arbitrage opportunities for financial speculators but not for market participants, including farm cooperatives, using futures contracts to manage price risks in physical commodities (pages 78-79).
Question 3: Should the CFTC allow exchanges and clearing organizations to accept cryptocurrency “stablecoin” funding of margin collateral for purchasing and maintaining positions in agricultural futures contracts, and if so, with what guidance or regulations?
The feasibility of 24/7 trading and clearing is limited by the ability of market intermediaries to move margin collateral from banks or other sources to cover traders’ price risk exposures. One participant characterized the movement to 24/7/365 trading as “inevitable” because of unhedged risks accumulated globally over the weekend and on holidays but said that such trading should be backed by the “movement of collateral” (page 68). Another participant said that the J.P. Morgan Coin, a stablecoin whose value follows the exchange value of the U.S. dollar or other fiat currency on one-to-one ratio, “is moving hundreds of millions of dollars 24/7” in collateral (page 67).
However, the value of stablecoins is susceptible to price destabilization, which could destabilize markets in other assets classes to which stablecoins are contractually interconnected. For example, if stablecoin prices are disrupted by the hacking of the encrypted blockchain on which cryptocurrency transactions are recorded, the price disruption would migrate to any agricultural futures contract whose margin collateral is in the form of the disrupted stablecoins. As noted above, Congress is considering legislation to legitimize stablecoins as a means of payment, but without addressing stablecoin cyber-risks and the impact of stablecoin failures in contracts in the broader financial system, including agricultural futures.
Industry and congressional promoters of cryptocurrency have drafted legislation to grow the industry without measures to prevent contagion from stablecoin failures to non-crypto assets and markets. Therefore, Senate Agriculture Committee members should ask Mr. Quintenz about how the CFTC can prevent such contagion, particularly regarding agricultural contracts.
Conclusion
Given President Donald Trump’s promise to make the United States the “crypto capital of the planet”, Agricultural Committee members, even those from agricultural states, may ask Mr. Quintenz only how he will fulfill President Trump’s promise. There is plenty of evidence that mainstreaming and legitimizing cryptocurrencies in the U.S. financial system poses risks of a system wide crisis. Senators must ask Mr. Quintenz tough questions about:
- The risks to market participants of using stablecoins to collateralize agriculture futures trades.
- The risks and benefits of near total automation of margin collateralization required to trade agricultural futures.
- The technological and analytic feasibility of incorporating the price risks related to increasingly frequent and severe extreme weather events in automated margin model methodologies.
