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Big trading issues face CFTC panel this week

Agriculture.com Staff 04/21/2008 @ 2:36pm

CHICAGO, Illinois (Agriculture Online)--To discuss whether the agricultural markets are functioning as designed with regard to risk management and price discovery, the Commodity Futures Trading Commission will host a roundtable discussion Tuesday.

Margin levels, hedging in the agricultural futures markets, and price discovery are expected to be the major areas of discussion in Washington, D.C.

CBOT floor traders have mixed feelings on the success of the forum.

Matt Pierce, Futures International LLC, expects the CFTC panel discussion to accomplish little.

"There is too much contention on both sides of the argument to get anything done," Pierce says.

In general, floor traders want to see changes in how the market operates.

Pierce hopes the CFTC panel discusses how daily prices are settled.

"In my opinion, the market should settle daily prices against the electronic price (screen) vs. the open outcry settlement. This would eliminate what we've seen recently in the wheat market, where the price settled between the two platforms were between 6-8 cents different."

Pierce adds, "This difference in settlement price keeps people that want to trade away from this market. Even if you make money on a floor trade that closes at 1:15pm, you lose out on better profits when the screen trading opens later that same day at 6:30 pm."

Because 85% of the trades are conducted via the screen, Pierce says prices should be settled against the platform that has the most depth and visibility.

"You'll still have people in the pits but we'll be a secondary market, not a primary market. For option trading, the floor will remain the primary market and the screen the secondary" Pierce says.

Other floor traders see the CFTC forum as a political move.

"By doing this, they are allowing everyone to have their say," one floor trader who requested anonymity says. "It will mainly be a complaining session."

Because the Chicago Mercantile Exchange has made rules changes on how markets settle during the delivery period of a contract, the funds may have an ax to grind on how the markets are settled, the trader says.

PRICE CONVERGENCE

For the commercial traders, the broader issue is the lack of convergence of futures prices vs. cash prices.

At the CME, futures markets are being used as a vehicle to hedge cash contracts. Futures contracts are physically delivered. This means the person who holds a position until delivery is responsible for either making or taking a delivery of wheat, cotton, corn or soybeans. The problem is the futures price and the physical price of the commodity would not converge. Cash-settled products do not have the delivery component.

"CME will say these markets do force convergence in the delivery of these contracts. The problem is it doesn't occur until the last five days of a contract's life," the trader says.

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