Todd Henderson Sees Benefits for Farmers in the Future of Derivatives Markets

How the Future of Derivatives Markets Can Benefit Farmers

Regulation is justified when it serves the public interest, but it is frequently motivated by the economic self-interest of powerful groups. Economists call this the “bootleggers and Baptists” phenomenon—those likely to profit from trade in illicit alcohol push for regulation alongside the moralists hoping to protect the vulnerable.

The battle over the future of derivatives markets, playing out now at the Commodity Futures Trading Commission, is a modern-day example. The debate revolves around a proposal from FTX, a licensed derivatives exchange, to permit the offering of futures contracts on margin, which would be subject to a new way of calculating collateral and of handling margin calls.

Currently, if you want to make a bet on the future price of corn (or the stock market or interest rates), you can do so by putting up a fraction of the actual cost of the bet—typically 10%—with an intermediary bank. If the bet moves against you, the bank may require you to put more money down to ensure the bet has sufficient collateral. Existing derivatives exchanges make these determinations at the end of each trading day.

Read more at The Wall Street Journal