Pursuant to Regulation 1.55 in Part 1 of the Commodity Exchange Act, the Commodity Futures Trading Commission requires that each futures commission merchant provide specific disclosure documents that are intended to explain the risks of opening a commodity futures account in general and to provide information that would be material to a customer's decision to entrust funds to and to do business with a particular futures commission merchant. The information below addresses these requirements.
Financial information regarding the Company, including how the Company invests and holds customer funds, can be found on the NFA website http://www.nfa.futures.org/basicnet/welcome.aspx
Financial information for all FCMs can be found on the CFTC website at http://www.cftc.gov/MarketReports/FinancialDataforFCMs
The risk of loss in trading commodity futures contracts can be substantial. You should, therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should be aware of the following points:
1. You may sustain a total loss of the funds that you deposit with your broker to establish or maintain a position in the commodity futures market, and you may incur losses beyond these amounts. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position. If you do not provide the required funds within the time required by your broker, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account.
2. The funds you deposit with a futures commission merchant for trading futures positions are not protected by insurance in the event of the bankruptcy or insolvency of the futures commission merchant, or in the event your funds are misappropriated.
3. The funds you deposit with a futures commission merchant for trading futures positions are not protected by the Securities Investor Protection Corporation even if the futures commission merchant is registered with the Securities and Exchange Commission as a broker or dealer.
4. The funds you deposit with a futures commission merchant are generally not guaranteed or insured by a derivatives clearing organization in the event of the bankruptcy or insolvency of the futures commission merchant, or if the futures commission merchant is otherwise unable to refund your funds. Certain derivatives clearing organizations, however, may have programs that provide limited insurance to customers. You should inquire of your futures commission merchant whether your funds will be insured by a derivatives clearing organization and you should understand the benefits and limitations of such insurance programs.
5. The funds you deposit with a futures commission merchant are not held by the futures commission merchant in a separate account for your individual benefit. Futures commission merchants commingle the funds received from customers in one or more accounts and you may be exposed to losses incurred by other customers if the futures commission merchant does not have sufficient capital to cover such other customers' trading losses.
6. The funds you deposit with a futures commission merchant may be invested by the futures commission merchant in certain types of financial instruments that have been approved by the Commission for the purpose of such investments. Permitted investments are listed in Commission Regulation 1.25 and include: U.S. government securities; municipal securities; money market mutual funds; and certain corporate notes and bonds. The futures commission merchant may retain the interest and other earnings realized from its investment of customer funds. You should be familiar with the types of financial instruments that a futures commission merchant may invest customer funds in.
7. Futures commission merchants are permitted to deposit customer funds with affiliated entities, such as affiliated banks, securities brokers or dealers, or foreign brokers. You should inquire as to whether your futures commission merchant deposits funds with affiliates and assess whether such deposits by the futures commission merchant with its affiliates increases the risks to your funds.
8. You should consult your futures commission merchant concerning the nature of the protections available to safeguard funds or property deposited for your account.
9. Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example, when the market reaches a daily price fluctuation limit (“limit move”).
10. All futures positions involve risk, and a “spread” position may not be less risky than an outright “long” or “short” position.
11. The high degree of leverage (gearing) that is often obtainable in futures trading because of the small margin requirements can work against you as well as for you. Leverage (gearing) can lead to large losses as well as gains.
12. In addition to the risks noted in the paragraphs enumerated above, you should be familiar with the futures commission merchant you select to entrust your funds for trading futures positions. The Commodity Futures Trading Commission requires each futures commission merchant to make publicly available on its Web site firm specific disclosures and financial information to assist you with your assessment and selection of a futures commission merchant. Information regarding this futures commission merchant may be obtained by visiting our Web site, www.chshedging.com.
ALL OF THE POINTS NOTED ABOVE APPLY TO ALL FUTURES TRADING WHETHER FOREIGN OR DOMESTIC. IN ADDITION, IF YOU ARE CONTEMPLATING TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS, YOU SHOULD BE AWARE OF THE FOLLOWING ADDITIONAL RISKS:
13. Foreign futures transactions involve executing and clearing trades on a foreign exchange. This is the case even if the foreign exchange is formally “linked” to a domestic exchange, whereby a trade executed on one exchange liquidates or establishes a position on the other exchange. No domestic organization regulates the activities of a foreign exchange, including the execution, delivery, and clearing of transactions on such an exchange, and no domestic regulator has the power to compel enforcement of the rules of the foreign exchange or the laws of the foreign country. Moreover, such laws or regulations will vary depending on the foreign country in which the transaction occurs. For these reasons, customers who trade on foreign exchanges may not be afforded certain of the protections which apply to domestic transactions, including the right to use domestic alternative dispute resolution procedures. In particular, funds received from customers to margin foreign futures transactions may not be provided the same protections as funds received to margin futures transactions on domestic exchanges. Before you trade, you should familiarize yourself with the foreign rules which will apply to your particular transaction.
14. Finally, you should be aware that the price of any foreign futures or option contract and, therefore, the potential profit and loss resulting therefrom, may be affected by any fluctuation in the foreign exchange rate between the time the order is placed and the foreign futures contract is liquidated or the foreign option contract is liquidated or exercised.
THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER ASPECTS OF THE COMMODITY MARKETS.
The business address for all principals is 5500 Cenex Drive, Inver Grove Heights, MN 55077.
C.Nelson Neale, Vice President CHS Inc./President CHS Hedging LLC
Nelson joined CHS Hedging as vice president, CHS Inc. in May 2019 and currently serves as President, CHS Hedging. As President, Nelson is responsible for management and profitability of its commercial and producer programs. He is a proven risk management, finance and business development leader, with expertise in trading, insurance, agriculture and commodity environments. Prior to joining CHS Hedging, he spent seven years at Land O’Lakes and its subsidiary WinField United, as head of services and member of the leadership team. Other WinField United positions included director and head, finance and risk programs; and president, WinSure Captive Insurance Company. Positions outside of the cooperative system included consulting, senior management, and global risk and commodity trading positions with Oliver Wyman Consulting, Inc., New York, N.Y.; The World Bank, Washington, D.C.; Tyson Foods, Springdale, Ark.; UBS Investment Bank, Stamford, Conn.; and Enron, Inc., Houston, Texas
Joe Barker, Director of Commercial Brokerage Services, CHS Hedging LLC
Joe has spent 16 years providing commodity price risk management services for agricultural clients of CHS Hedging. He began in the Indianapolis branch office as a commodity broker in 2000. From 2007 to 2014, he was the branch manager of the Kansas City office and spent the several years in the Indianapolis office. Joe served on the Kansas City of Board of Trade and was on the KCBT Clearing Corporation Board of Directors while in Kansas City. He serves on an ad hoc committee for the National Council of Farmer Cooperatives as well as the Ag Advisory Committee for the CFTC, Joe provides industry perspective and policy feedback to the CFTC during its rule-making process related to implementation of the Dodd-Frank Act.
Kent Beadle, Director of Producer Brokerage Services, CHS Hedging LLC
Kent is the marketing manager for Russell Consulting where he focuses on analyzing the commodity and financial markets for all Russell Consulting clients and their associates. In that role, he also leads regular teleconferences and publishes the weekly e-newsletter. In addition, he helps manage the CHS Pro Advantage contract that is a collaboration with CHS Inc., offering growers access to professional pricing for a portion of their crops. Kent has been analyzing markets since 1985 where he had various roles with CHS Hedging and the parent company CHS Inc.
Paula Barjesteh, Director of Finance and Risk & Chief Financial Officer, CHS Hedging LLC
Paula is the Chief Financial Officer and Director of Finance and Risk for CHS Hedging LLC where her primary responsibilities include managing financial, regulatory, risk and operations for CHS Hedging. She oversees functions within operations, treasury and research, and ensures back office and business intelligence systems support the company’s needs. Paula’s previous role was in the CHS grain marketing department as the Assistant Grain Accounting Manager where she oversaw a team that manages grain trade contracts for multiple commodities, futures and modes of transportation. Prior to joining CHS, Paula held a variety of roles with Cargill in their hedge fund subsidiary CarVal Investors, including Treasury Manager and Financial Control Director, where she oversaw $10 billion assets under management in loan portfolios, corporate securities and commercial real estate.
John Griffith, Chairman of CHS Hedging Board of Managers and Sr Vice President, Global Grain Marketing and Renewable Fuels
John is responsible for CHS global commodity and renewable fuels trading, supply chain management and risk management, including, CHS Hedging, which offers commodity brokerage services to growers and partner cooperatives. He is a member of many trade associations and serves as a director on numerous boards including the Minneapolis Grain Exchange, North American Export Grain Association, North American Millers Association and the Market Street Terminal LLC.
Jean Briand, Chief Accounting Officer and Senior Vice President Finance, CHS Inc
Jean is responsible for enterprice-wide financial control, planning and reporting. He also leads financial shared services and strategic sourcing efforts. Jean is tasked with driving the effectiveness and efficiency of finance activities across CHS. He is a certified public accountant and a certified managerial accountant.
Dustin Haaland, Director of Renewable Fuels and Additives Supply, CHS Inc
Dustin, leads the team that handles procurement, merchandising and distribution of ethanol and biodiesel blended into Cenex ® branded an unbranded fuels. He is responsible for Renewable Identification Numbers (RINS) trading and refinery asset compliance with the Renewalbe Fuels Standard (RFS). In addition, he leads quality assurance initiatives and additive supply efforts to ensure the highest quality for CHS refiened and renewable fuel products.
Tom Malecha, Senior Vice President of Processing and Food Ingredients, CHS Inc
Tom is responsible for management and oversight of ethanol and soybean processing facilities and businesses in the U.S., China, and Israel. He serves on the board of managers for CHS Hedging and has previously served on the board of directors of the National Oilseed Processors association (NOPA).
Steve Neelly, Senior Merchandiser, CHS Inc
Steve is responsible for grain and oilseeds marketing, risk management and logistics at CHSowned farm supply locations. Previously, he served as director of grain trading in St. Paul, Minn. and manager at the Lincoln, Neb. grain marketing office. Steve has been in the grain industry for more than 25 years and is a manager on the CHS Hedging board.
Brent Dickson, Director of Credit and Collections
Brent Dickson leads the underwriting and collection functions for CHS Capital and the retail credit applications and analysis that are processed. He also coordinates the funding activities of CHS Capital and other receivable financings. Brent’s career began as a location manager at the River Country Cooperative in South St. Paul and progressed at CHS including staff auditor, financial analyst, controller, and most recently as Treasury Director where he managed banking relationships, oversaw the cash management function, managed interest rate risk, and supported the Treasurer and the Capital Committee of the CHS Board of Directors with equity management and the overall capital structure. Brent earned his undergraduate degree in business administration from Augsburg College and his MBA from the University of St. Thomas.
CHS Hedging, LLC (“CHS Hedging” or “Company”) is a Futures Commission Merchant (“FCM”) that provides full-service commodity price risk management and market intelligence to its customers, primarily through the use of exchange-traded futures and options but also through the use of non-cleared, over-the-counter products. The Company has remained focused on the agriculture and energy sectors, which compliments the businesses of its parent, CHS Inc. CHS Hedging utilizes 98% of its assets, for exchange-cleared activity and 0.3% for over-the-counter activity. Of the 98%, 76% is related to customer business and 24% to affiliates of the Company. CHS Hedging utilizes 100% of its net capital, for exchange-cleared activity and 0.0% for over-thecounter activity. Of the 100%, 98% is related to customer business and 2% to affiliates of the Company.
CHS Hedging provides individualized consulting and education in the areas of agriculture, energy and crop nutrients. The Company’s wholly owned subsidiary Russell Consulting Group provides an avenue to offer marketing and financial advice to crop and livestock producers. The Energy Risk Management Program puts dedicated energy market expertise to work for commercial energy business. And the Crop Nutrient Risk Management Program delivers consultation for crop nutrient dealers and retailers, with a special emphasis on inventory and risk transfer strategies. CHS Hedging uses approximately 2% of its assets and 0% of its net capital for consulting and education.
The customer base of CHS Hedging consists primarily of commercial agriculture and energy businesses, such as grain elevators and energy supply companies, and individual and corporate farmers and ranchers. The Company also offers futures and options clearing services to other FCMs on a limited basis. CHS Hedging customers are primarily located in the U.S.A., with less than 1% of its active customer accounts domiciled outside of the country.
CHS Hedging’s customers primarily trade in the agriculture and energy markets. The Company clears grain trades directly at the Chicago Board of Trade and the Minneapolis Grain Exchange. For the clearing of other products, the Company utilizes R. J. O’Brien & Associates, LLC and SG Americas Securities Holdings, LLC as carrying brokers. The Company requires that FCMs meet certain criteria with regard to capitalization, access to liquidity, creditworthiness, concentration and regulatory and supervisory compliance.
CHS Hedging holds customer funds on deposit with clearinghouses, FCMs, and banks. CHS Hedging investments are in compliance with CFTC regulation 1.25, which dictates how customer funds in a segregated account can be invested. The Company does not invest customer funds with its parent or affiliates. The Company requires that bank depositories be U.S.-chartered commercial banks rated at least an A1 by Moody’s and/or A by S&P for long-term deposits. The ratings for short-term borrowings must be at least P-1 for Moody’s and A-1- for S&P. The banks’ actual and stress-test pro forma leverage and risk-based regulatory capital ratios must well exceed the regulatory minimums. Further consideration will be given to the bank’s risk management structure, legal actions, operational reliability and concentration risk. Like CHS Hedging, clearinghouses and other FCMs must adhere to the regulations of the Commodity Exchange Act.
CHS Inc., the parent of CHS Hedging and other affiliates, is a cooperative that engages in a variety of business activities relating to energy, grains and foods. Operations include refineries, rural retail locations, processing, marketing, and distribution.
CHS has identified a number of material risks that could adversely affect its business, including commodity prices and economic downturns and risks; competition; environmental liabilities; real or perceived quality, safety or health risks associate with its products; seasonality; business interruptions and casualty losses; its cooperative structure; industry consolidation; alternative fuels; volatile agronomy business; technological improvements in agriculture; joint ventures where CHS has limited control; and changes in laws and regulations regarding tax, environment, energy and agriculture. A substantially material adverse event for CHS could affect the Company’s ability to obtain liquidity and capital from CHS on a timely basis. Revenues, results of operations and cash flow could also be adversely affected. Such an event could also damage CHS Hedging’s reputation by association.
A clearinghouse or FCM may fail to meet its obligations to CHS Hedging or other industry participants. The Company has contributed to the guaranty funds of the Chicago Board of Trade and the Minneapolis Grain Exchange. In the event of a default, the guaranty deposits may be accessed to cover unpaid obligations of the defaulting party.
CHS Hedging serves many customers in the agriculture and energy sectors that are similarly situated in terms of their business activities. Consolidation among customers and with other entities that are not customers could affect revenue and operating results of the Company if the customer chooses to move all or part of its business to another FCM. Sustained conditions of either lower prices and volatility or extremely high prices and volatility, which can be driven by factors such as weather and growing conditions, supply and demand and activities of other market participants, could also have a negative effect on revenue, operating results and cash flow.
The regulations governing the FCM industry are subject to change. CHS Hedging is committed to maintaining compliance with the rules and engages with regulators, industry groups and other FCMs to provide input regarding proposed rulemaking. Regulatory changes may affect the Company’s ability to maintain its current structure and profitability.
Liquidity & Capital Risk
CHS Hedging obtains liquidity and capital exclusively from CHS and/or affiliates on an as needed basis. As such, the Company is dependent on the creditworthiness of the parent to ensure that adequate funds are available in case of need. CHS has one or more lines of credit with a consortium of banks that impose specific covenants in order to maintain the financial health of CHS and the safety of the banks’ investments. A breach of the covenants or other catastrophic financial failure of the parent could have a material effect on the Company’s access to liquidity and capital.
Leverage & Liability Risk
The regulatory leverage risk of the Company is primarily driven by the proprietary trading of the parent and affiliates for the purpose of hedging commodity and other business-related risks. CHS Hedging does not itself maintain a proprietary position. If the business attributable to the parent and affiliates rises, there may be additional risk to the Company’s balance sheet if a substantially material event occurs with the parent or an affiliate. Other than proprietary trading, the Company may also carry an intercompany net payable to the parent for settlement of various payables and receivables.
CHS Hedging maintains a conservative investment approach and utilizes only investments that meet the requirements of CFTC Rule 1.25. Although very safe, these investments are not 100% guaranteed and the Company itself bears the financial risk if any investment fails to perform as expected.
CHS Hedging has established a Risk Management Program that is designed to monitor and manage the risks associated with the Company’s role as an FCM. The Company has a Risk Management Unit as established by Senior Management, that is responsible for identification of risks, establishment of risk tolerance limits, periodic risk exposure reports, and supervision, review and testing of the relevant policies and procedures. CHS Hedging also has a designated Risk Manager who is responsible for monitoring the risks of the Company. Relevant policies and procedures include the Risk Management Program, FCM Compliance Manual, Liquidity, Excess Customer Funds, Information Systems Security, Anti-money Laundering, Privacy, Electronic Communications and Red Flags policies.
The Chicago Board of Trade, part of CME Group, Inc., is the DSRO for CHS Hedging. The web address is www.cmegroup.com.
In May 2017, the Minneapolis Grain Exchange, Inc. (“MGEX”) filed a disciplinary action against CHS Hedging alleging violations of various technical MGEX rules over a period of several months. MGEX also charged CHS Hedging with engaging in “uncommercial conduct” as a result of those underlying alleged violations. In response to MGEX, CHS Hedging argued that the underlying alleged violations were basically clerical errors and certainly did not rise to the level of “uncommercial conduct”. After several calls, discussions and a meeting at MGEX, CHS Hedging and MGEX reached a mutually acceptable settlement agreement pursuant to which CHS Hedging agreed to pay $250,000 without admitting that the alleged violations occurred. Additionally:
(1) In CHS Hedging v. Steffensen, CHS asserted a breach of contract action to enforce a personal guaranty executed by the defendant for amounts owed to CHS Hedging. The matter has been resolved through settlement with judgment to be entered in favor of CHS.
(2) In LeAnn Pierce, Chapter 7 Bankruptcy Trustee v. CHS Hedging, an NFA arbitration proceeding, the bankruptcy trustee for H&I Grain alleges that CHS Hedging is somehow responsible for losses that H&I inflicted by engaging in speculative trading. CHS disputes the allegations and is vigorously defending against the claims.
(3) In CHS Capital Inc. v. J.E.S. Farms Partnership et al., the defendants counterclaimed asserting alleged misconduct on the part of CHS Hedging. CHS disputes the allegations and is vigorously defending against the counterclaims.
Information about filing a complaint can be found at: http://www.cftc.gov/ConsumerProtection/FileaTiporComplaint/index.htm or
The following items can be found at www.chshedging.com/disclosure:
• Annual report information for the most recent fiscal year
• Daily statements of customer segregated, secured and cleared swaps funds for the most current 12-month period
• Monthly 1-FR FCM report information for the most current 12-month period
• Summary monthly capital balances as of the last day of each month for the 12 most recent months
• Protection of Customer Funds Overview, including information about segregation, collateral management, investments and futures commission merchants
Financial information regarding the Company, including how the Company invests and holds customer funds, can be found on the NFA website at http://www.nfa.futures.org/basicnet/welcome.aspx.
Financial information for all FCMs can be found on the CFTC website at https://www.cftc.gov/MarketReports/financialfcmdata/index.htm.