CFTC Penalizes Dairy Company for Acting as Unregistered FCM

Bob Zwirb Commentary by Bob Zwirb

The CFTC fined Davisco Foods International, Inc., a dairy and food ingredient company based in Le Sueur, Minnesota ("Davisco"), $150,000 for accepting orders placed by milk suppliers for the purchase and sale of milk futures contracts without being registered as a Futures Commission Merchant ("FCM").

According to the CFTC Order, milk suppliers who signed up for a hedging program offered by Davisco placed orders with the company, which it then submitted to its broker. The orders were then executed by the broker on behalf of the milk suppliers using Davisco's own trading accounts, with the suppliers receiving credits and debits to their accounts with Davisco. Although Davisco did not charge for this service, the CFTC found that the company was acting as an FCM, and thus violated the CEA by failing to register as an FCM.

Commentary

Bob Zwirb
Bob Zwirb

Perhaps the most revealing part of this Order occurs at the end, where the CFTC states that "[a]lthough Davisco did not profit from these activities, its business received a benefit from offering the FCM services to its clients." Well, apparently, so did the respondent's clients, who were able to hedge their supplies in a cost-effective manner. If any of them complained, it doesn't appear in the CFTC's Order.

So what appears to be going on is that the Enforcement Division is hammering a food service company for providing an efficient and convenient service for its clients because its activity came within the definition of acting as an FCM. Although Davisco neither charged for nor profited from this service, and merely "passed through" any profits and losses as credits and debits to its suppliers, it now is subject to a substantial fine and likely will no longer be able to offer this beneficial program to its suppliers given the costs and burdens associated with becoming an FCM. Although registration issues involving FCMs can raise legitimate concerns involving customer protection and possible insolvency, the arrangement here appears to be benign.

At a time when regulatory agencies regularly decry the lack of budgetary resources to pursue their enforcement missions – witness the CFTC's recently departed enforcement director complaining about the "massive amount of misconduct in the market we're just not pursuing . . . [due to] limited resources" – it is comforting to know that the CFTC still has the resources to go after such harmless, low-hanging fruit. Too often, when cost-benefit analysis is advocated by a new administration with a fresh outlook, the focus is limited to regulatory programs, not enforcement policy. This case illustrates why such a narrow focus is unwise, and why prioritizing in the latter case may be more important.

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