OMAHA (DTN) -- Farm groups, grain elevators and energy companies are pushing back against proposals that could move commodity futures toward 24-hour, seven-day-a-week trading, warning the changes could make it more costly and complicated for farmers and commercial firms to hedge price risk.
The Commodity Futures Trading Commission (CFTC) is considering how to regulate expanded 24/7 trading and a newer type of derivative known as a perpetual contract, initially involving energy commodities such as crude oil and natural gas. A public comment period on proposed changes ended last week.
Agricultural groups are especially concerned that such changes starting in energy markets could eventually spill into corn, soybean and other agricultural futures.
The debate pits traditional industries that use futures to hedge physical commodities against newer trading platforms that argue innovative markets should remain open overnight and weekends when geopolitical events, weather or other market-moving news occur.
Agricultural groups are especially concerned that changes beginning in energy markets could eventually migrate into grain and other agricultural futures.
Mike Seyfert, president and CEO of the National Grain and Feed Association, said in an interview with DTN that NGFA members are unanimously opposed to extending 24/7 trading to agricultural futures. Physical commodity markets, he said, operate differently from cryptocurrency and other continuously traded assets.
"It's the delivery aspect and the pause in the markets that are really what create that convergence that you have between cash and futures," Seyfert said.
Periods when futures markets are closed give elevators, processors and other commercial hedgers time to evaluate cash and futures prices and the economics of physical grain delivery. The underlying cash grain market also does not trade around the clock.
Weekend trading also could require grain companies to post additional margin before banks close on Friday. Seyfert said larger companies might be able to absorb those requirements, but tying up capital could become costly for smaller and midsized grain businesses and farmer cooperatives. Firms also would face the expense of monitoring positions around the clock.
The concerns extend beyond grain futures. Agricultural companies also hedge energy products, Seyfert said, meaning a move toward 24/7 energy trading could affect agricultural businesses even if grain futures retain their existing trading hours.
TRADITIONAL VERSUS PERPETUAL CONTRACTS
While traditional commodity futures expire in specific contract months, perpetual contracts work differently. They have no expiration date. Instead, payments between buyers and sellers are periodically adjusted to keep the contract's price close to the underlying market. A trader theoretically can maintain the position indefinitely as long as enough money is maintained in the account to cover it.
Supporters argue perpetual markets allow traders to maintain continuous exposure without repeatedly rolling positions into later futures contracts.
FARM GROUPS: KEEP 24/7 OUT OF AG
Along with grain elevators, farmer and commodity groups are warning the CFTC that allowing perpetual trading in energy markets would set a disruptive precedent for agricultural futures. They see the lack of expiring contracts and physical delivery commitment as a problem. Those features keep the traditional futures tied to the cash commodity. They also worry that perpetual contracts could siphon trading volume away from the futures contracts farmers, elevators and processors rely on for hedging.
The Commodity Markets Council, whose board includes major exchanges along with companies such as Bunge, Cargill, CHS Hedging, Louis Dreyfus and Scoular, said 24/7 trading "could disrupt the price discovery function these markets serve and could displace the U.S. futures market role as a benchmark price discovery venue. This would be disruptive to our members and disastrous for the U.S."
The National Council of Farmer Cooperatives (NCFC) said farmers and cooperatives could face higher hedging costs from 24/7 trading. Cash bids and basis levels generally are not updated on weekends, meaning a sharp move in futures Saturday or Sunday could occur without corresponding changes in the cash market.
NCFC also gave the example of a farmer who directs a cooperative to lock in diesel prices when futures reach a specified price. A continuously traded energy contract could reach that price on Saturday while the traditional futures contract used for the hedge is closed. By Monday, the traditional contract could reopen above the trigger price without the farmer's hedge ever being executed.
The National Corn Growers Association (NCGA) likewise opposed 24/7 trading for agricultural contracts and cautioned against changes in energy markets that could establish a precedent eventually extended to agriculture.
"As a physically delivered commodity, corn growers may have many concerns regarding perpetual contracts," NCGA stated. The group added that it appreciated that agricultural products are not currently being considered for perpetual contracts and CFTC Chairman Michael Selig's recognition that agricultural markets have unique concerns.
The American Cotton Shippers Association (ACSA) also warned that market structures developed initially for crypto, equities and other continuously traded assets could eventually "bleed into agricultural derivatives markets" with serious consequences for commercial hedgers. ACSA said extending trading hours could reduce liquidity, complicate margin management and require commercial hedgers to monitor markets around the clock.
ENERGY GROUPS ALIGNED
Traditional energy companies largely side with agricultural hedgers. The American Petroleum Institute and Natural Gas Supply Association cautioned that continuous trading could increase compliance and operating costs, exacerbate volatility and impose additional burdens on commercial hedgers without comparable benefits.
"These markets are large, physical, operationally complex, and deeply connected to benchmark prices used throughout the energy economy," API and NGSA stated. "The Commission should not allow trading hours to outpace the infrastructure needed to support safe clearing and settlement."
The American Fuel & Petroleum Manufacturers (AFPM) similarly opposed perpetual contracts and continuous trading in existing futures contracts.
Intercontinental Exchange (ICE), which operates major energy and agricultural futures markets, took a more measured position. ICE said trading hours should be determined product by product and warned that thin weekend trading could distort price discovery and increase default and manipulation risks. ICE also noted that the current clearing system does not support continuous movement of collateral when banks are closed.
THE GENIE IS OUT OF THE BOTTLE
The debate over physical commodities grew out of a broader regulatory fight over perpetual contracts that began in cryptocurrency markets.
CME Group sued the CFTC in mid-June after the commission approved prediction platform Kalshi in late May to list a perpetual contract based on Bitcoin as a futures contract instead of a swap.
CME argued the CFTC violated the Commodity Exchange Act by approving Kalshi's Bitcoin perpetual contract as a futures contract, potentially opening the door for other exchanges to offer similar products under futures-market rules. CME contends that action circumvents regulatory limits Congress imposed after the 2008 financial crisis.
CME then tested the waters when CME-owned New York Mercantile Exchange planned in early July to offer a self-certified 24/7 10-barrel West Texas Intermediate (WTI) oil futures contract. CFTC immediately stayed the contract. CFTC Chairman Selig also criticized CME for moving before the commission had set broader rules.
CME Group, in its comments last week, said the commission has "lacked a consistent and principled framework" for 24/7 trading and has "no clearly articulated standard" in the area. CME said it does not have an "institutional preference" on whether derivative markets move toward 24/7 trading but pointed out that various prediction markets are already trading 24/7 in benchmark commodity products.
"The genie, in other words, is already out of the bottle," CME wrote.
CME argued that if such trading is occurring, market participants should be able to hedge over the weekend in a transparent, CFTC-regulated market.
INNOVATORS SUPPORT 24/7 TRADES
Newer trading platforms and cryptocurrency advocates take the opposite view, arguing that market-moving events don't stop when traditional exchanges close.
Kalshi supports expanding standard futures to 24/7 trading on a case-by-case basis. Kalshi also said the commission should not categorically prohibit perpetual contracts on physically delivered or storable commodities, such as energy contracts.
Kalshi acknowledged some markets, "such as agricultural products," are less suited for 24/7 trading "given their customer bases, regional nature, and specialized hedging practices."
The Hyperliquid Policy Center, founded earlier this year, contends blockchain-based markets can handle continuous margin calls and liquidation issues. The policy center is tied to Singapore-based Hyperliquid Labs, a decentralized exchange that President Donald Trump said he would like to allow into the U.S. market.
"I understand that Mike (Selig) is also working to bring Hyperliquid into the United States in a fully compliant and legal fashion. Working very hard on that," Trump said at a White House event with Selig on Aug. 19.
Also see, "CFTC Chair Says Regulations Have Made Risk Management More Costly for Farmers," https://www.dtnpf.com/…
DTN Headline News
DTN Blogs & Forums
