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US rules to curb speculation in commodity markets may have fuelled the sell-off in crop markets which drove soybean futures below $15 a bushel for the first time since July, and driven corn futures $1 a bushel below record highs. Mike O'Dea, senior risk management consultant at FCStone, and one of the leading market commentators, urged agricultural commodity investors to become versed in the smallprint of the US Dodd-Frank trading reforms, after market rumour blamed them for accelerating the sell-off in crop futures.
FCStone had received "a lot of" comments from investors that the Dodd-Frank revamp was encouraging liquidation which saw soybean futures on Monday drop to a three-month low. "Dodd-Frank is going to have a lot of effect on the futures market," Mr O'Dea told a grains conference in London, even as futures revived on Tuesday, with corn standing up 0.9% at $7.43 ¾ a bushel. Wheat for December was 0.8% higher at $8.54 ¾ a bushel, and soybeans for November up 0.5% at $15.00 ¼ a bushel.
The sell-off talk centres on rules on swap positions, for which the Dodd-Frank regime tightens requirements for investors to hold collateral against positions which historical rules have treated as, in effect, hedged against each other. They will now have to provide margin cover "against both sides of the trade", Mr O'Dea said. The implications of the regulations appeared to imply that "people will have to get out swap positions because they will be handled differently". Separately, Richard Feltes at broker RJ O'Brien noted "rumoured Dodd-Frank-forced liquidation of swap positions" among reasons for Monday's market declines.
October 12 was one of the deadlines for Dodd-Frank reforms, although implementation of some measures has been delayed by a court ruling last month. The source also said that the reforms could, long-term, prove beneficial for the market in "driving out weak players", if at the expense of short-term volatility. The rules have come at a time when speculators have relatively large net long holdings in Chicago corn and, especially, soybean futures and options, with the liquidation of these positions seen as a major impact on prices.