CFTC head sees merit in commodity swaps

By Christine Stebbins

CHICAGO (Reuters) - Exchange-cleared swap contracts for agricultural commodities have economic merits and should probably be "encouraged" as a derivative market, Walter Lukken, acting head of the Commodity Futures Trading Commission, said on Wednesday.

Lukken told the annual Reuters Regulation Summit in Washington that the industry comment period on a proposal to list and clear such swaps for physical cocoa, coffee and sugar by the Intercontinental Exchange (ICE.N: Quote, Profile, Research, Stock Buzz) had just closed.

"It's something we're considering and reviewing," he said, adding that he hoped "we'll have something in the next month or so" in the way of a decision.

Swaps are widely used as over-the-counter agreements between buyers and sellers of commodities and financial instruments, with terms tailored to meet their needs on fixed pricing for supplies. Swaps act as a hedge for the risks of sharp price swings.

The risk of default by one's counter-party is part of such transactions. But the New York Mercantile Exchange NMX.N has developed a huge market in central clearing of such contracts in the energy industry, one of the attractions that drew a merger bid for NYMEX last week from CME Group CME.N.

ICE, a chief rival of CME, is trying to tap into that market with agricultural swaps of soft commodities. But CME, with the huge grain and oilseed markets at its CBOT division, is also looking at CFTC's evaluation carefully.

"This is similar to what NYMEX has done for energy products through their ClearPort system. It gives a central counterparty for these over-the-counter trades that happen. This is something I think as a policy we should be encouraging," Lukken said.

"In a market where counterparty risk was a problem -- where people were walking away from trades -- we want them to control the safety of a central counterparty that a clearing system provides. That's something we'll have to look at, whether we can do that for agricultural products," Lukken said.  Continued...