RMA Clarifies Certain Milk Trading Practices

Risk Management Agency Program Announcement

Contact: Eric Edgington (202) 690-2539
Eric_Edgington@wdc.usda.gov

Washington, Nov. 7, 2001 -- USDA's Risk Management Agency has alerted approved brokers and others under the Dairy Options Pilot Program that certain milk option trading practices are not permitted and may violate Federal commodity laws and rules of the Commodity Futures Trading Commission. The clarifications, effective immediately, will strengthen the integrity of the program and were made with the consultation of the CFTC. DOPP is an educational program that gives eligible dairy producers an opportunity to learn how futures and options markets work and provides first-hand experience in buying milk put options contracts to ensure a minimum price for their milk.

The following trading activities are prohibited for dairy producers while they participate in DOPP:

• Selling milk put options, except to liquidate a previously-purchased DOPP position;
• Selling "synthetic" milk put options, which are defined as the sale of milk call options combined with the purchase of milk futures contracts; or
• Executing any other combination of options and futures that would effectively nullify the hedge created by the producer's purchased DOPP milk put options.

These prohibited activities apply to all trading accounts in which DOPP participants have a financial interest.

Introducing brokers who participate in DOPP are prohibited from:

• Encouraging the use of the prohibited trading activities stated above;
• Soliciting transactions that employ these prohibited activities;
• Accepting orders for such transactions from participating DOPP producers;
• Arranging for these prohibited trading activities in accounts administered by other introducing brokers, including those who are not approved by DOPP;
• Participating in any other trading activity that has as its objective the conversion of the DOPP premium subsidy to a direct cash benefit; and
• Entering into any type of arrangement with a DOPP participant to share in profits resulting from the sale or exercise of positions held in DOPP accounts.

Ordering equal but opposite option trades with the intent to avoid a bona fide market transaction and the associated market risk may violate the Commodity Exchange Act or CFTC's regulations. RMA will cooperate fully with the CFTC, the National Futures Association, and other State and Federal agencies in the investigation and prosecution of all cases involving suspected wash trading, cross trades, accommodation trades, fraud, or other trading irregularities. RMA's memorandum on prohibited trading practices in the DOPP program, may be found at www.rma.usda.gov.