WASHINGTON – U.S. Senator Tommy Tuberville (R-AL), Alabama’s voice on the Senate Agriculture Committee, today joined U.S. Senator Jerry Moran (R-Kan.), U.S. Representative Zach Nunn (R-Iowa), and other congressional colleagues in cautioning federal financial regulators on the harmful impact the proposed Basel III Endgame capital proposal would have on the agriculture and energy industries.
Senator Tuberville voiced his opposition to Biden regulators’ bank capital proposal last month in an American Banker op-ed.
“We have concerns that the GSIB Surcharge Proposal and the Basel III Endgame Proposal will generate disincentives for prudent risk management strategies and drive up the cost of hedging for end-users,” Senator Tuberville and his colleagues wrote in their letter to Biden bank regulators. “Ultimately, consumers who are already facing elevated prices from record levels of inflation will pay the price at the grocery store and the gas station.”
“When farmers, ranchers, or other end users enter into futures or other centrally-cleared derivatives contracts to mitigate the risk they face from fluctuating commodity prices, they generally initiate the trade through a Futures Commission Merchant (FCM) registered with the CFTC,” Senator Tuberville and his colleagues continued. “FCMs provide market access to their clients through memberships at regulated derivatives exchanges and clearinghouses, and the vast majority of FCMs today are banks that will be subject to the proposals. Increasing regulatory capital charges for banks that provide end-users with access to these hedging markets and risk management tools is a misguided approach.”
This letter was also signed by Sens. John Boozman (R-Ark.), John Thune (R-S.D.), Roger Marshall (R-Kan.),Cindy Hyde Smith (R-Miss.), Mike Braun (R-Ind.), Cynthia Lummis (R-Wyo.), Kevin Cramer (R-N.D.), Bill Hagerty (R-Tenn.), Katie Britt (R-Ala.), Thom Tillis (R-N.C.) and Representatives Jim Baird (R-Ind.), Andy Barr (R-Kentucky), Don Davis (D-N.C.), Monica De La Cruz (R-Texas), John Duarte (R-Calif.), Scott Fitzgerald (R-Wis.), Mike Flood (R-Neb.), French Hill (R-Ark.), Erin Houchin (R-Ind.), Dusty Johnson (R-S.D.), Trent Kelly (R-Miss.), Frank Lucas (R-Okla.), Blaine Luetkemeyer (R-Mo.), Dan Meuser (R-Penn.), Alex Mooney (R-W.V.), Wiley Nickel (D-N.C.), John Rose (R-Tenn.), Austin Scott (R-Ga.), Bryan Steil (R-Wis.), Glenn Thompson (R-Pa.) and Roger Williams (R-Texas).
This effort is supported by the American Farm Bureau Federation, National Milk Producers Federation, Louis Dreyfus Company, Commodity Markets Council, American Cotton Shippers Association, Futures Industry Association, International Swap Dealers Association, National Grain and Feed Association and National Futures Association.
The full letter can be found here and below.
Dear Vice Chair Barr, Chairman Gruenberg, and Acting Comptroller Hsu:
Futures and derivatives markets provide critical tools to manage risk for farmers, ranchers, grain and food processors, energy producers, and other important commercial end-users. We have concerns, however, that the GSIB Surcharge Proposal and the Basel III Endgame Proposal (the proposals) will generate disincentives for prudent risk management strategies and drive up the cost of hedging for end-users. Ultimately, consumers who are already facing elevated prices from record levels of inflation will pay the price at the grocery store and the gas station.
On the heels of inflation rates not seen in over 40 years, Americans are facing record high costs in grocery stores, at gas stations, and in their energy bills. Futures and derivatives markets play a stabilizing role for prices, helping to insulate consumers and businesses from market instability while involving minimal risk for end-users. For this reason, many nonfinancial firms that use derivatives for traditional hedging purposes were exempt from a number of regulations in the Dodd-Frank Act that would have made it more expensive for them to manage their risk. Former Senate Banking, Housing, and Urban Affairs Chairman Dodd, along with former Senate Agriculture, Nutrition, and Forestry Chairman Lincoln, highlighted the importance of preserving these tools in the Dodd-Frank Act. “Regulators, namely the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and the prudential regulators, must not make hedging so costly it becomes prohibitively expensive for end users to manage their risks.”
As policymakers and stakeholders review the proposals, we remain concerned that the proposals ignore congressional intent to keep critical risk management tools accessible and low-cost.
When farmers, ranchers, or other end users enter into futures or other centrally-cleared derivatives contracts to mitigate the risk they face from fluctuating commodity prices, they generally initiate the trade through a Futures Commission Merchant (FCM) registered with the CFTC. FCMs provide market access to their clients through memberships at regulated derivatives exchanges and clearinghouses, and the vast majority of FCMs today are banks that will be subject to the proposals. Increasing regulatory capital charges for banks that provide end-users with access to these hedging markets and risk management tools is a misguided approach.
For another key hedging tool, uncleared swaps, the proposals would represent a massive increase in the cost of trading these instruments. The banking entities who facilitate these transactions as swap dealers allocate capital on a business line basis, and as a result, disproportionate capital requirements for a certain business line or trading desk may cause banks to decrease their offerings of these risk-reducing tools. As a result, liquidity in these markets could decrease dramatically, and the costs of hedging for end users would be driven even higher.
The Basel III Proposal’s public listing requirement would make it more expensive for privately owned investment-grade companies to hedge against risk, despite the lack of any empirical link between a public listing and creditworthiness. In addition, the new capital requirements for “Credit Valuation Adjustment” or “CVA” Risk on derivative transactions could further penalize end users. The new CVA requirements are most severe for derivative transactions with end users.
The GSIB Surcharge Proposal and Basel III Endgame Proposal substantially exceed the Basel III framework and go significantly further than what is being implemented in other jurisdictions, such as Europe. This will inevitably put end-users seeking to hedge and manage risk on an uneven playing field with competitors in other jurisdictions.
In turn, we respectfully ask that you respond to the following questions by February 16, 2024.
- Have you conducted any economic analysis about these disparities? Please provide your analysis with regard to the international consistency of the US proposals with other major jurisdictions, and, in particular, how the US and EU jurisdictions treat end users under the respective proposals.
- As you were developing these proposals, how was the end-user impact of increased capital charges for hedging and risk management tools factored into your decision-making? Have you produced any economic analysis about the impacts these proposals will have on end-users?
- How would increased FCM consolidation create more stability in the derivatives marketplace?
The impact of these bank capital proposals will have a direct effect on the economy and our constituents. It is vital to approach any proposal regarding increased capital requirements, particularly increased capital requirements for hedging and risk management tools, with careful consideration and input from industry as well as a comprehensive cost-benefit analysis.
With rising economic and geopolitical risks, now is not the time to increase costs for farmers’ cooperatives, energy producers, and food processors seeking to responsibly hedge against instability.
BACKGROUND
As Alabama’s voice on the Senate Committee on Agriculture, Nutrition, and Forestry, Coach Tuberville is committed to supporting Alabama’s farmers and producers.
In November, Coach Tuberville’s office encouraged crop and livestock producers in Alabama to consider the USDA emergency loan and disaster assistance programs to help them recover financially from the prolonged drought affecting the state.
Coach has led the charge in calling out the Biden Administration for a proposed rule that would allow unions to coerce and pressure temporary foreign agriculture workers into unionization. Coach submitted a comment letter in November expressing strong opposition to the Biden Administration’s proposed H-2A regulation. In the letter, he outlined how the proposed rule would hurt farmers and producers who rely on seasonal workers through the H-2A program for farm labor. Coach also joined Senator Cindy Hyde-Smith (R-MS) in sending another letter requesting an extension of the comment period for the proposed rule, but the request for the extension was denied by DOL.
Coach introduced the Black Vulture Relief Act to allow farmers and ranchers to protect their newborn livestock from black vultures without burdensome government interference.
During recent Farm Bill listening sessions throughout Alabama, Coach heard the concerns of peanut, cotton, and soybean farmers who are struggling in Joe Biden’s economy.
In September 2023, Senator Tuberville introduced the Farmers’ Market Expansion Act to add tree nuts, including pecans, to USDA’s Seniors’ Farmers’ Market Nutrition Program. This would provide a new market for pecan producers and allow seniors increased access to nutritious, locally-sourced pecan products.
In July 2023, Senator Tuberville introduced two pieces of legislation—the Farm Board Act and the Mid-South Oilseed Double Cropping Study Act of 2023—to improve opportunities and representation for Alabama’s agriculture community.
The Farm Board Act, which Senator Tuberville introduced with Senator Raphael Warnock (D-GA), and Senator Peter Welch (D-VT) would make changes to the Federal Crop Insurance Corporation’s (FCIC) ten-member Board of Directors. The FCIC is a government-owned corporation that finances the federal crop insurance program’s (FCIP’s) operations. There are currently four seats for agricultural producers on the board, of which one must be a producer of specialty crops. This bill designates two of the remaining three open seats for farmers on the FCIC Board as (1) a producer of livestock and crops, and (2) an underserved producer, respectively.
The Mid-South Oilseed Double Cropping Study Act of 2023, led by Senator Tommy Tuberville (R-AL), Senator Katie Britt (R-AL), Senator Bill Hagerty (R-TN), and Marsha Blackburn (R-TN), would request a study from the USDA Risk Management Agency (RMA) on the gap in crop insurance coverage for certain winter oilseed crops, specifically canola and rapeseed, and double cropping policies. For farmers to take advantage of opportunities in renewable diesel and Sustainable Aviation Fuel, they need the assurance that crop insurance—such as Catastrophic Risk Protection, Yield Protection, Revenue Protection, or Revenue Protection with Harvest Price Exclusion—will be eligible in their counties for these crops and practices. To address crop insurance gaps that may exist, RMA and FCIC need analysis of winter oilseed crop and double-cropping production practices and opportunities.
These bills build on Senator Tuberville’s legislation to address issues facing our agriculture community such as the Foreign Adversary Risk Management (FARM) Act, which would establish safeguards against foreign purchases of American farmland. Alabama is one of the most susceptible states to foreign agriculture influence, with our state having the third-highest amount of foreign-owned land in the country.
Senator Tuberville is also concerned with rising input costs continuing to cut into farmers’ bottom lines and making it difficult to do what they do best: farm. That’s why he helped introduce legislation to eliminate the federal Estate Tax, often called the Death Tax, to prevent any more family farms from going out of business due to this burdensome regulation. Instead of inhibiting production, the federal government needs to focus on creating an economic environment that preserves small businesses and family farms and incentivizes the next generation to enter the industry to continue feeding and fueling our nation.
Senator Tuberville also helped introduce the Feral Swine Eradication Act to extend and make permanent the pilot program established in the 2018 Farm Bill. The legislation would continue to safeguard public health, agriculture, and local ecosystems against the threat of feral swine. Feral swine impede farmers’ livelihoods and our national food supply, causing more than $1.5 billion in damages annually. Over the last five years, feral swine have impacted more than 173,000 acres in Alabama.
This year, Senator Tuberville was named the top Republican of the AG Subcommittee on Rural Development and Energy, which enables him to build on his work to expand broadband access for rural communities.
Senator Tuberville’s first hearing as Ranking Member of Rural Development and Energy—titled “Rural Broadband: Connecting our Communities to the Digital Economy”—focused on ways to expand broadband access in rural communities and incorporate these programs in the 2023 Farm Bill. Senator Tuberville invited Rainsville native and CEO of Farmers Telecommunications Cooperative Inc. (FTC), Frank Johnson, to testify before the subcommittee about successful broadband expansion technologies he’s seen through his work to increase service speeds for rural areas.
In addition to the Subcommittee on Rural Development and Energy, Senator Tuberville serves on the Subcommittee on Commodities, Risk Management, and Trade, and Subcommittee on Food and Nutrition, Specialty Crops, Organics, and Research.
Senator Tommy Tuberville represents Alabama in the United States Senate and is a member of the Senate Armed Services, Agriculture, Veterans’ Affairs, and HELP Committees.
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