[Senate Hearing 109-332]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-332
 
     TO CONSIDER THE NOMINATION OF MR. REUBEN JEFFERY III AND THE 
 RENOMINATION OF MR. WALTER LUKKEN TO BE COMMISIONERS OF THE COMMODITY 
                            FUTURES TRADING

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION


                               __________

                              JUNE 9, 2005

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry


   Available via the World Wide Web:http://www.agriculture.senate.gov



                                 ______

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           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY



                   SAXBY CHAMBLISS, Georgia, Chairman

RICHARD G. LUGAR, Indiana            TOM HARKIN, Iowa
THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
PAT ROBERTS, Kansas                  MAX BAUCUS, Montana
JAMES M. TALENT, Missouri            BLANCHE L. LINCOLN, Arkansas
CRAIG THOMAS, Wyoming                DEBBIE A. STABENOW, Michigan
RICK SANTORUM, Pennsylvania          E. BENJAMIN NELSON, Nebraska
NORM COLEMAN, Minnesota              MARK DAYTON, Minnesota
MICHEAL D. CRAPO, Idaho              KEN SALAZAR, Colorado
CHARLES E. GRASSLEY, Iowa

            Martha Scott Poindexter, Majority Staff Director

                David L. Johnson, Majority Chief Counsel

              Steven Meeks, Majority Legislative Director

                      Robert E. Sturm, Chief Clerk

                Mark Halverson, Minority Staff Director

                                  (ii)

  
                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing(s):

To Consider the Nomination of Mr. Reuben Jeffery III and the 
  renomination of Mr. Walter Lukken to be Commissioners of the 
  Commodity Futures Trading......................................    01

                              ----------                              

                         Thursday, June 9, 2005
                    STATEMENTS PRESENTED BY SENATORS

Chambliss, Hon. Saxby, a U.S. Senator from Georgia, Chairman, 
  Committee on Agriculture, Nutrition, and Forestry..............    01
Lugar, Hon. Richard G., a U.S. Senator from Indiana..............    02
Salazar, Hon. Ken, a U.S. Senator from Colorado..................    03
                              ----------                              

                               WITNESSES

Jeffery, Reuben, III, Special Assistant to the President, 
  National Security Council, Washington, DC......................    06
Lukken, Walter, L., Commissioner, Commodity Futures Trading 
  Commission, Washington, DC.....................................    04
                              ----------                              

                                APPENDIX

Prepared Statements:
    Cochran, Hon. Thad...........................................    18
    Crapo, Hon. Mike.............................................    20
    Jeffery, Reuben III..........................................    21
    Lukken, Walter L.............................................    23
Document(s) Submitted for the Record:
    Jeffery, Reuben III (biography)..............................    45
    Lukken, Walter L. (biography)................................    28
Questions and Answers Submitted for the Record:
    Harkin, Hon. Tom.............................................    84
    Crapo, Hon. Mike.............................................    85
                              ----------                              



     TO CONSIDER THE NOMINATION OF MR. REUBEN JEFFERY III AND THE 
RENOMINATION OF MR. WALTER LUKKEN TO BE COMMISSIONERS OF THE COMMODITY 
                            FUTURES TRADING

                              ----------                              


                         THURSDAY, JUNE 9, 2005

                                        U.S. Senate
          Committee on Agriculture, Nutrition, and Forestry
                                                     Washington, DC
    The committee met, pursuant to notice, at 2:05 p.m., in 
room SR-332, Russell Senate Office Building, Hon. Saxby 
Chambliss, chairman of the committee, presiding.
    Present or submitting a statement: Senators Chambliss, 
Lugar, Harkin, and Salazar.

STATEMENT OF HON. SAXBY CHAMBLISS, A U.S. SENATOR FROM GEORGIA, 
  CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

    The Chairman. This hearing will come to order, and let me 
start by apologizing for keeping everybody from starting at 2 
o'clock. We had a little delay regarding the presiding officer 
in the chamber, as Senator Lugar can appreciate. Thank you for 
your patience.
    Good afternoon. We are pleased to be here today to consider 
the nomination of Mr. Reuben Jeffery III and the renomination 
of Mr. Walter Lukken to be Commissioners of the Commodity 
Futures Trading Commission. In addition to being nominated as a 
Commissioner, Mr. Jeffery has also been nominated to serve as 
Chairman of the CFTC. The qualifications of both of these 
nominees to serve on the Commission speak for themselves. Mr. 
Lukken has served as a Commissioner at the CFTC since 2002 and 
has done a great job during his tenure. Previously, Mr. Lukken 
was a staff member of this committee, handling futures and 
agricultural banking issues for Chairman Lugar. Mr. Jeffery has 
most recently served as Special Assistant to the President and 
Senior Director for International Economic Affairs at the 
National Security Council. Previously, he held the post of DC 
Representative of the Coalition Provisional Authority at the 
Pentagon. Before joining the Government, Mr. Jeffery spent 18 
years working in the financial sector for Goldman Sachs & 
Company.
    It is a pleasure to have both of you here today before this 
committee, and I commend the President for his selection of 
such qualified individuals. We look forward to hearing from you 
as we move your nominations forward.
    Senator Harkin was on the floor as I left, and when he gets 
here, if he does decide to come over here, we will give him an 
opportunity for any opening statement. First of all, before we 
turn to Senator Lugar, gentlemen, would both of you stand and 
raise your right hands? Do you swear that the testimony you are 
about to present is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Mr. Lukken. I do.
    Mr. Jeffery. I do.
    The Chairman. Individually, do you agree that, if 
confirmed, you will appear before any duly qualified and 
constituted committee of Congress if so asked?
    Mr. Lukken. I do.
    Mr. Jeffery. I do.
    The Chairman. All right. Thank you very much.
    I will now turn to my good friend and former chairman of 
this committee, now chairman of the Foreign Relations 
Committee, for any statement he would wish to make. Senator 
Lugar?

  STATEMENT OF HON. RICHARD LUGAR, A U.S. SENATOR FROM INDIANA

    Senator Lugar. Thank you very much, Mr. Chairman. This is a 
privilege to introduce, first of all, my friend Walt Lukken. He 
is a native of Richmond, Indiana, with good Hoosier roots, has 
a bachelor of science degree with honors from the Kelly School 
of Business at IU University, went on for further work at Lewis 
and Clark Law School in Portland, Oregon, with a juris 
doctorate degree from that institution; married Dana, and they 
have a son, William. His life has been exciting as a family man 
in addition.
    He came as an intern to our office in 1990, and we 
discovered immediately that he had running ability. And that, 
Mr. Chairman, is important because we field a team each year in 
this Capitol challenge business. That drew attention to Walt 
immediately.
    It led to his further employment in 1993 as a regular staff 
member.
    [Laughter.]
    Senator Lugar. A very distinguished tenure for 5 years in 
that capacity until, as you pointed out, Mr. Chairman, he came 
to this committee as a member who worked on the CFTC issues and 
other things related to that during the time of my 
chairmanship. He was instrumental in this extraordinarily 
important act, the Commodity Futures Modernization Act of 2000, 
which took quite a long time for us to pass. Everybody in the 
industry and those witnessing the hearing today will recall 
those struggles. It made an enormous difference in both the 
foundations of the exchanges, our relations with this committee 
and the Banking Committee, for example, and other committees 
who have had jurisdiction with financial affairs.
    As you visit the exchanges now--and I have had that 
privilege--they commend the Act as one that has made a large 
difference in terms of the quality of service they are able to 
give to the American people and the transparency to the world. 
Walt was instrumental all the way through in carrying the 
burden of that. It was not surprising that he attracted the 
attention of the President for his first nomination to a seat 
on the CFTC, and I am especially pleased the President has 
shown this confidence in him by bringing him back to the 
attention of our committee today.
    I would like also, while I have the floor, Mr. Chairman, to 
mention our pleasure at Reuben Jeffery III who is here as the 
President's nominee to chair the CFTC as well as to have 
membership on the Commission. He brings, as you pointed out, 
Mr. Chairman, extensive experience from the world of investment 
banking, most recently with Goldman, Sachs & Company, which he 
left in the aftermath of September 11, 2001, to serve as a 
Special Adviser to our President for Lower Manhattan 
development. He joined, very courageously, the staff of Jerry 
Bremer over in Baghdad as a senior adviser working on a variety 
of economic development initiatives. A member of our Foreign 
Relations staff, Patrick Garvey, knew Mr. Jeffery well and has 
testified to his remarkable abilities and his achievements 
during his tenure in Iraq, and we salute him for that.
    He continued work on the Iraq mission as Executive Director 
of the Coalition Provisional Authority's office in the Pentagon 
and most recently has been Special Assistant to the President 
and Senior Director for International Economic Affairs at the 
National Security Council. He has a remarkable background of 
public service as well as private expertise, and I am excited 
the President has nominated him for this position.
    The Chairman. Thank you very much, Senator. I think it goes 
without saying that since the Ag Committee has jurisdiction 
over CFTC, Mr. Lukken is now an official member of the Ag 
Committee running team.
    [Laughter.]
    The Chairman. That may have to be a condition of this 
confirmation now, Walt.
    Thank you very much, Senator Lugar, and, gentlemen, I think 
it goes without saying that a recommendation coming from one of 
the deans of the Senate and one of the true gentlemen of the 
Senate, one of the men that I have the most respect for, not 
just in this body but any body in the country. That says an 
awful lot for you, and we appreciate those comments Senator 
Lugar.
    Senator Salazar, would you like to offer any opening 
comments?

  STATEMENT OF HON. KEN SALAZAR, A U.S. SENATOR FROM COLORADO

    Senator Salazar. Thank you very much, Mr. Chairman and 
Senator Lugar. I want to thank you, Mr. Chairman, for holding 
this hearing, and, Mr. Jeffery, for your nomination, and, Mr. 
Lukken, for your nomination as well. I congratulate both of you 
for your past service as well as your future service, along 
with your families who are here, because I know that all of us 
cannot do what we do in our life if it were not for the 
wonderful support that we have from our families.
    I welcome both of you and your families, and I look forward 
to working with both of you in regard to your respective 
capacities at the CFTC. In your testimonies you both speak of 
maintaining the integrity of the CFTC by ensuring that the 
Commission works in a fair and transparent manner. I completely 
agree with you on that goal. I strongly believe in government 
accountability and oversight, and I look forward to working 
with the Commission to ensure that they have the tools in place 
to prohibit any sort of market manipulation or fraud.
    I congratulate the Commission on their good work. I am sure 
that with both of you we will continue to move the Commission 
forward in the same positive manner as it has over the last 
several years.
    I congratulate you. I think you are going to be among the 
many nominees that receive overwhelming bipartisan support.
    Thank you, Mr. Chairman.
    The Chairman. Gentlemen, we again welcome you here. I 
understand that per the understanding of the two of you, Mr. 
Lukken, you are going to go first with your presentation, 
followed by Mr. Jeffery. Welcome, and we look forward to 
hearing from you.

STATEMENT OF WALTER L. LUKKEN, COMMISSIONER, COMMODITY FUTURES 
               TRADING COMMISSION, WASHINGTON, DC

    Mr. Lukken. The protocol, by the way, of starting today was 
decided by the flip of a coin. I just want to note that for the 
record.
    Mr. Chairman, Senator Lugar, Senator Salazar, I'm honored 
to address this committee regarding my nomination to the 
Commodity Futures Trading Commission. I appreciate the kind 
introduction by my former boss, who still serves as my role 
model on good decisionmaking.
    I would note for him that we have started our own running 
team down at the CFTC, and we have poached a couple members of 
the Ag Committee. Eric Juzenas and Dave Stawick are now running 
for us at the CFTC, so be careful.
    [Laughter.]
    Mr. Lukken. I would like to recognize my wife, Dana, as 
well as my sister-in-law, Diana, in the audience, as well as 
several supportive friends and Commission colleagues in the 
audience today, including my hard-working staff who are sitting 
behind me, as well as Commission colleagues, including 
Commissioner Hatfield, who is sitting over to my right, and 
Commissioner Dunn, who is straight behind me--all familiar 
faces to those in the Senate and this committee.
    Last, I am honored to join Reuben Jeffery, my fellow 
nominee, and I hope this hearing is only the first of many 
times that we can collaborate on interests of the Commission.
    It has been almost 3 years since my first nomination 
hearing here at the committee, and that short expanse of time 
has brought significant change within the industry. In this 
period, the annual volume traded on U.S. futures exchanges 
surpassed one billion contracts for the first time and, 
incredibly, it is on pace to double that amount by year's end. 
Also worth noting is the common clearing platform by the 
Chicago Board of Trade and the Chicago Mercantile Exchange, 
which is expected to bring almost a billion and half dollars' 
worth of capital efficiencies to the market. The CME also 
became the first publicly traded U.S. exchange in either the 
equities or derivatives field during this time, and investors 
in this pioneering effort have been rewarded with a 430-percent 
increase in its share price. My tenure has also coincided with 
the arrival of new futures exchanges and products, including 
the launch of Eurex US and the listing of security futures 
products that happened as a result of the CFMA's passage. It is 
hard to believe that all this progress has occurred in such a 
short period of time that I have been down at the Commission. 
One can only imagine what this industry will look like in 2010, 
when the next term for which I am being considered expires.
    As regulators, we cannot stem the uncertainties of change 
but must adapt our models to fulfill the public mission 
entrusted to us. Thankfully, Congress--and, in particular, 
members of this committee--had the foresight to provide this 
agency with the flexible tools needed to oversee the 
marketplace with the passage of the Commodity Futures 
Modernization Act of 2000.
    The nature of these markets is to innovate, to compete, and 
to arbitrage at lightning speed. In crafting the CFMA, 
policymakers recognized that a regulatory structure should 
leverage these market characteristics to the advantage of the 
public interest and allow the agency to better anticipate 
problems.
    Much has been made in hearings of the flexibility provided 
businesses by the CFMA, but the adoption of a core principles 
model equally enhanced the Commission's ability to get in front 
of developing regulatory problem at a time of limited 
resources.
    The CFMA may have instructed our agency to walk softly in 
tailoring our regulations, but it also gave us the directive to 
carry a big stick when the law is broken. Since the passage of 
the CFMA, our agency has been aggressive in its enforcement 
efforts--whether shutting down boiler rooms who are defrauding 
the public, working with States and Federal authorities to lock 
up criminals, or pursuing corporate malfeasance as part of the 
President's Corporate Fraud Task Force. As a result of our 
investigation of manipulation in the energy markets, the 
Commission has settled with 27 companies and 20 individuals for 
nearly $300 million in fines. Such robust law enforcement 
authority serves as a powerful deterrent to wrongful activity 
and represents an important component of our overall regulatory 
program.
    Mr. Chairman, I am confident that the Commission is well 
positioned to meet approaching challenges, but would like to 
briefly mention some developing trends that will test this 
proposition. Unlike even 5 years ago, competitive forces are 
leading market participants to utilize alternative legal means 
to protect their interests, including the use of intellectual 
property rights and antitrust law--both matters of first 
impression for our agency that will require clarification of 
our responsibilities.
    Another challenge facing our agency is the globalization of 
our markets and the regulatory structures that underlie them. 
Whether opening markets to U.S. businesses or tracking down 
criminals that hide their ill-gotten gains overseas, the CFTC 
must work in close tandem with its foreign counterparts to 
ensure that the global community abides by the highest 
regulatory principles. As Chair of the CFTC's Global Markets 
Advisory Committee, I am committed to this end and will work 
with industry members and foreign regulators to guarantee a 
more harmonious global regulatory structure.
    In conclusion, Mr. Chairman, I am so proud to play a small 
role in this important and growing segment of our economy and 
to work side by side with the talented staff of the CFTC. With 
these changing markets, work remains for policymakers, and I am 
eager to be given the opportunity to roll up my sleeves and 
lend a hand in that effort, if confirmed by this body.
    Thank you for allowing me to testify, and I look forward to 
answering any of your questions.
    [The prepared statement of Mr. Lukken can be found in the 
appendix on page 23]
    [The biographical information of Mr. Lukken can be found in 
the appendix on page 28]
    The Chairman. Thank you very much, Commissioner Lukken. I 
am just wondering if you are going to have time to serve if you 
are going to be running for me, for Lugar, as well as the CFTC.
    [Laughter.]
    The Chairman. Thank you.
    Mr. Jeffery?

   STATEMENT OF REUBEN JEFFERY III, SPECIAL ASSISTANT TO THE 
      PRESIDENT, NATIONAL SECURITY COUNCIL, WASHINGTON, DC

    Mr. Jeffery. Mr. Chairman, Senator Lugar, Senator Salazar, 
thank you for the privilege of appearing before you today as 
nominee for Commissioner and Chairman of the Commodity Futures 
Trading Commission.
    Thank you, Senator Lugar, for that very kind introduction. 
I appreciate it. I would also like to thank the President for 
affording me this opportunity to be considered by your 
committee. Thanks also to your professional staff, which has 
been very responsive in helping me through the relevant 
preparations. Finally, I'd like to thank each of the 
Commissioners and the Commission staff, who have been generous 
with their time and patient in helping me prepare. In 
particular, the Acting Chairman has been especially gracious 
and forthcoming with information and encouragement. She 
couldn't be here with us today, but I thank her very much.
    I am proud to have with me today my wife, Robin, and our 
children, Jocelyn, Ben, and Bob, as well as various other 
friends and colleagues. I thank them all for taking the time to 
be here this afternoon.
    It is a great honor to be considered for the leadership of 
the CFTC in an era of ever increasing globalization, 
competition, and innovation across the broad sweep of the 
capital and commodities markets, and in particular, those 
within the ambit of the jurisdiction of the Commission.
    Prior to joining the administration, I spent 20 years in 
the financial world. During most of that period, I specialized 
in the financial sector, working with banks and insurance 
companies and other financial service entities, both in the 
United States and overseas. Through that work, I developed an 
appreciation of the importance of properly functioning markets 
in price discovery, risk management, competition, and 
innovation. I also observed that these markets are only 
effective when participants, both direct and indirect, have 
great confidence in the integrity and fairness of their 
operation.
    Whether the market is for an option on an interest rate or 
for a future on an agricultural commodity, the key elements of 
market efficiency and integrity are the same--willing buyers 
and sellers; the free flow of information; the financial 
soundness of the parties; and the perception on the part of 
both market participants and those otherwise affected by market 
activity that pricing and transactional information is derived 
in a fair and transparent manner. The Commission plays an 
absolutely crucial role in creating the conditions whereby 
those involved in commodity futures and options markets can 
have confidence in those markets. They know that there is a 
referee, and they know that fouls will be called. If confirmed 
as Commissioner and Chairman, I can assure you that I would 
work diligently with fellow Commissioners and Commission staff 
to fulfill the Commission's mandate to maintain the integrity 
of these markets.
    For the past 3 years, I have had the great privilege of 
working at both the White House and the Pentagon on a variety 
of national security and domestic and international economic 
policy issues. I have had the opportunity to work shoulder to 
shoulder with public servants from many departments and 
agencies, with men and women in uniform, and with appointed and 
elected officials. It will come as no surprise to each of you, 
Mr. Chairman and Senator Lugar, who have devoted the better 
part of your entire lives to public service, how impressive and 
dedicated are these individuals who have given their careers to 
working for the U.S. Government and the American public. I know 
that the men and women of the CFTC, like so many public 
servants, embody this ethic of service and commitment to 
mission. If confirmed, I would assume leadership of the 
Commission with a great sense of responsibility and tremendous 
pride in the organization.
    If confirmed, I would look to my fellow Commissioners, this 
committee, and various market participants for guidance as to 
issue identification and priorities. However, amongst my 
highest priorities would be the following three:
    First, to proceed expeditiously in working with this 
committee as you reauthorize the Commodity Exchange Act. This, 
of course, follows the Commodity Futures Modernization Act of 
2000, which, by any measure, was a path-breaking and in some 
senses revolutionary piece of legislation of which this 
committee should be very proud.
    Second, to vigorously execute the CFTC's legislative 
mandate to protect market participants through aggressive 
enforcement and maintain market integrity through appropriately 
calibrated market oversight and supervision. To this end, if 
confirmed, I would continue the efforts of the Commission to 
work closely with other departments and agencies in areas of 
common interest.
    Finally, I would work in the tradition of prior Chairmen to 
set a high bar of professional excellence within the Commission 
and buildupon a culture of teamwork and productivity, while 
maintaining the highest ethical standards.
    In closing, I would add that among many lessons learned 
during the past 3 years, I have developed a keen appreciation 
for the need for close working relationships with Congress and 
other departments and agencies on areas of mutual concern. If 
confirmed, I look forward to working closely with my fellow 
Commissioners, this committee, Congress, and other members of 
the President's Working Group on Financial Markets, on 
fulfilling the important mandate of the CFTC.
    Thank you very much, Mr. Chairman, Senator Lugar.
    [The prepared statement of Mr. Jeffery can be found in the 
appendix on page 21]
    [The biographical information of Mr. Jeffery can be found 
in the appendix on page 45]
    The Chairman. Thank you very much, Mr. Jeffery, and we 
appreciate those kinds words coming from you. Over the last 4 
years, you have not only been a great public servant yourself, 
but what a fascinating 4 years you have had. Thank you 
particularly for your service to freedom and democracy relative 
to the very important work you did at the Pentagon working for 
the reestablishment of freedom in Iraq.
    Senator Lugar, I will be happy to defer my questions to you 
for any that you might have.
    Senator Lugar. Well, thank you, Mr. Chairman.
    Let me just note that in your testimony, Mr. Lukken, you 
point out that the Commission, quite properly, has been careful 
not to rewrite the law or to expand excessively by 
interpretation what is involved, and yet at the same time you 
have been rigorous in enforcement of the law. The numbers of 
prosecutions, investigations that have led really to 
malefactors being excised out of the system has been impressive 
throughout this period.
    One area that we have explored in committee hearings over 
some time--and this precedes the law of 2000--is the work of 
the Commission in the energy area. I would like to hear really 
from both of you what you feel the future of the CFTC is in 
this area. I bring this up specifically because in previous 
iterations of CFTC legislation, energy was often specifically 
exempted or excepted from the whole business. This was, in 
fact, because of debate within this committee or with members 
of the Banking Committee or with others who were involved in 
the Congress who said grain is one thing and you might expand 
this to currencies, that is another, but get out of the energy 
field, don't touch electric power, don't get involved with coal 
or oil or what have you.
    Now, when the Enron problems arose, many people began to 
ask in public fora: Where were the regulators? Who should have 
been responsible or prescient with regard to all this? Granted, 
it was extremely complex, and people are still reading books 
like ``The Smartest Guys in the Room,'' or what have you, 
trying to figure out how all of this manipulation occurred. The 
fact is huge changes occurred in our economy. Various States 
were afflicted with all sorts of difficulties. Even now it is 
not really clear exactly what anybody would do about all this.
    Now, you are not supposed to rewrite the law. That happens 
over here on the congressional side. You have been, however, 
active in the energy field to some extent. What I would like to 
know from both of you, first of all, is: How has the energy 
regulation business changed since 2000, in this intervening 
period of 5 years or so? What recommendations do you have as to 
how it ought to change for the benefit of the American people, 
not for the Commission or for this committee, but really who 
ought to be in charge?
    Mr. Lukken. Thank you, Senator. I read ``The Smartest Guys 
in the Room,'' or the book that you referred to, on your 
recommendation. The Enron crisis was obviously mind-boggling. 
Energy, as you note, is an important part of our economy, 
something that affects producers in particular quite a bit. It 
is something that we spend a lot of time on at the Commission.
    In regards to what our role might be in that area, 
obviously you mentioned the enforcement role. When I first came 
down to the Commission in 2002, some of this was a case of 
first impression. We hadn't done much in this area up until 
then. Part of it was that the Act had just been enacted, the 
2000 Act, and we were still fleshing out what that meant. 
Really, the investigations in regards to the energy crisis had 
really just started to roll. Since then, obviously, we have 
collected quite a bit of money. We went after Enron and 
received a $35 million penalty against them for manipulating 
our markets. We have collected nearly $300 million in fines 
against energy companies. It is not only this post-crisis stuff 
we are talking about. We also have significant pre-crisis 
things that we do at the Commission as well.
    About 2 years ago, we did a rulemaking in the 2(h)(3) area, 
which you referred to as exempt markets. This is the area in 
which the CFTC has some limited authority. This was meant to 
try to target regulatory authority in this area. I think we 
have put some flesh on the bone here. We have required that if 
these markets start to become price discovery markets, we are 
allowed to ask for certain information from these marketplaces. 
We have special call authority, subpoena authority. Our fraud 
and manipulation authorities apply to these markets. You know, 
I think the CFTC has made progress in this area.
    We do, as you note, have certain recommendations in this 
area. Last year, in regards to the energy bill, we did make 
some recommendations to the Energy Committees in fixing our 4b 
authority, which would allow us to go after what they term 
principal-to-principal trades in this area. It also clarified 
our manipulation authority in regards to this area. I think 
these are good recommendations, and we stand firm behind them. 
Having been down there a couple years, I feel that our 
surveillance of these markets has improved.
    Mr. Jeffery. Senator, thank you. This is obviously an 
important area to the national economy and consumers around the 
country. It is one in which, if confirmed, I as Commissioner 
and Chairman would want to dive deeply into it to make sure I 
understood the relevant policy and regulatory considerations.
    I think it is worth underscoring what Senator Lugar said, 
and that is the vigor of the enforcement efforts of the CFTC to 
date when they have come across anything that looked like 
manipulative market behavior in the energy markets. Separately, 
the Commission has what is known as its Large Trader Reporting 
System. For a lot of these energy commodities, the reference 
pricing is determined on the NYMEX and other exchanges. The 
CFTC staff monitor closely trading patterns. A staff of trained 
economists studies those patterns, matches them up against 
known supply demand characteristics in the underlying 
industries and other factors with a view to looking for any 
inconsistencies and anticipating potential problems.
    Certainly, if confirmed, these are areas of endeavor for 
the Commission on which I would place a high priority.
    Senator Lugar. Well, thank you very much for those 
responses. I had the privilege of visiting the NYMEX exchange 
earlier this year, and it is impressive, the work that they are 
doing and giving pretty good intelligence to our entire 
economic system of the worldwide economic patterns in the best 
traditions of the futures markets. At the same time, they at 
least have the impression that you are watching them closely, 
that this is a short-leash situation because of the pressures 
that have come really from adverse publicity on energy markets. 
Thank you very much for those answers.
    Thank you, Mr. Chairman, for allowing me to ask these 
questions.
    The Chairman. Thank you.
    Senator Harkin has now joined us, and Tom, I will turn to 
you for any comments or questions you wish to make.
    Senator Harkin. Thank you very much, Mr. Chairman, and my 
apologies for being a little bit late here this afternoon, but 
I wanted to be here to join you in welcoming Commissioner 
Lukken--someone who is not unknown to us, who has been around 
for a long time in a great capacity, right, Senator Lugar--and 
Mr. Jeffery, our nominee for being the new chairman. If these 
nominees are confirmed, the full complement of five 
commissioners will be in place on the CFTC, and I believe that 
the Commission can best conduct its regulatory and oversight 
responsibilities with all five commissioners, so I hope we can 
move this expeditiously.
    As I said, Commissioner Lukken is well known by this 
committee from his years of service here with Senator Lugar. He 
has ably served as commissioner since August of 2002. Walt has 
been at the center of complex issues of globalization and 
future markets. His experience will be invaluable, and I am 
pleased that the President nominated Mr. Lukken for an 
additional term.
    Though I do not know Mr. Jeffery personally, I have looked 
at your record and you have an accomplished record in the 
private sector, more recently in Government service, and I 
believe that your experience in the international capital 
markets and corporate finance give you the knowledge of those 
issues that will be most helpful for the Commodity Futures 
Trading Commission.
    Mr. Chairman, thank you for calling this hearing. I look 
forward to helping do whatever I can to get these nominees 
through as expeditiously as possible.
    The only question I might have for Mr. Jeffery, since you 
came from the private financial markets, this is a softball 
question.
    [Laughter.]
    Senator Harkin. Real softball. Will we keep our futures 
markets here in America or will they go overseas?
    Mr. Jeffery. Sir, thank you very much for that question. 
One of the great benefits and challenges of the markets in 
which we operate today is globalization. It's with us in the 
futures markets and the options markets and the commodities 
markets, in just about everything we do.
    As commissioner, if confirmed, this is an area where the 
commissioners to date have spent a lot of time. We as 
commissioners going forward would continue to spend time in 
this area working to accomplish a number of things. Most 
importantly, to make sure, as markets globalize, if you will, 
that U.S. investors, U.S. market participants--exchanges, 
individuals, people who rely on those markets--enjoy the 
protections that this committee has enacted through the 
provisions of the Commodity Exchange Act.
    It's something, your question is something that touches on 
an area which is very broad, very important, and one that will 
continue to evolve in the months and the years to come and over 
which you can be sure that I as a commissioner, joining the 
other commissioners, will give our best efforts to try to 
understand, anticipate and manage.
    Senator Harkin. I appreciate that. I read your statement 
about the global market. We know that, and we have seen that 
happen in futures, options, derivatives, everything, but as you 
pointed out in your statement--I will not read it--that there 
have to be rules to the game.
    Mr. Jeffery. Correct.
    Senator Harkin. There have to be, as you say, many willing 
people in there, buyers and sellers. I have always felt one of 
the most important things is transparency. If you have 
transparency, and if you have many willing buyers and sellers, 
then you are OK as long as you have some rules to abide by. I 
just hope that as these markets are globalized that the rules 
that we have had, people invest, people do use our markets 
because of that. As long as we maintain that and set that as 
our standard for other markets to associate with us, then I 
have no fear that we will keep our futures industry here in the 
United States.
    I am just saying as you proceed as commissioner and with 
the Commission, just insist upon the open market, the 
transparency that people have come to rely upon here in our 
futures industry in this country. I thank you very much, Mr. 
Jeffery, look forward to working with you in the future.
    Walter, congratulations.
    Mr. Lukken. Thank you, Senator Harkin.
    The Chairman. Gentlemen, I want to pick up on something 
Senator Lugar was talking about, and that is this manipulation 
issue. During our hearings on the reauthorization of CFTC, we 
had a number of witnesses who talked about this issue. Mr. 
Lukken, we talked about the way the CFTC does this, and 
frankly, I was pretty impressed with the fact that on a regular 
basis you pick out trades at the height of a spike or the 
bottoming out after a spike, to try to figure out whether or 
not there is any manipulation there. That was some pretty 
impressive testimony that came out of the CFTC, as well as the 
study that has been done by the NYMEX, which essentially did 
the same thing.
    Mr. Jeffery, when you get there, I urge you to take a look 
at that if you have not had a chance to already because it is 
fascinating, first of all, and it is pretty interesting 
information that is contained in that study. I think it gives 
us a good picture of when somebody might try to manipulate the 
market, and if they do, here is how they do it. The conclusion 
by both CFTC, obviously, and NYMEX was that there was no 
manipulation of the market, that it was basically supply and 
demand. Certainly we hope that is the case hereafter, but 
without your oversight, we will not know that.
    I will tell you, Mr. Lukken, that the committee as a whole 
was impressed by that activity.
    I would be remiss if we did not compliment the service of 
Interim Chairman Ms. Brown-Hruska. She has testified before 
this committee, been very available to us, and I am sorry 
Sharon is not here today. Please pass on to her our 
appreciation to her for the great service as the interim 
chairman.
    Mr. Jeffery, let me start with a couple of questions for 
you. You have an impressive resume in the financial markets, 
and Senator Harkin just asked you a little bit about this. 
Generally, how would you see your past work experience as being 
a benefit to you at CFTC?
    Mr. Jeffery. Thank you, Mr. Chairman. We commented a few 
moments ago in the context of attempting to address Senator 
Harkin's question on some experience in international capital 
markets. I think in my opening remarks I talked a little bit 
about knowledge I like to think I have acquired over the years 
about markets in general, albeit the markets in which I'm most 
knowledgeable tend to be markets in financial products, foreign 
currencies, interest rates, bonds, et cetera. The underlying 
principles of transparency, of the free and open exchange of 
information, are common to those markets, to agricultural 
markets, to metals markets, and other markets.
    Finally, my primary area of expertise over the years was in 
the area of financial institutions, banking institutions, 
insurance companies, and other financial institutions. They are 
among both the largest originators and users of many of the 
futures and options products and instruments that trade on the 
markets that are within the purview of the Commission's 
jurisdiction. I think it's that sort of combination of 
experiences that will help me do a better job if confirmed as 
commissioner and chairman in evaluating these markets, 
anticipating challenges, and dealing with problems as they 
arise.
    The Chairman. Regarding the promotion of cross-border 
competition, Phase II of the Global Clearing Link between the 
Clearing Corporation and Eurex Clearing has been pending at the 
Commission since March. The comment period has closed, but the 
Agency has not yet promulgated its ruling on this issue. Once 
you take up your duties as chairman, will you ensure the 
committee that consideration of this pending ruling will be a 
priority?
    Mr. Jeffery. Mr. Chairman, yes. It's an issue with which I 
am generally familiar; but not specifically familiar, but to 
the extent it remains live and on the docket for the 
Commission, I will certainly make it a high priority.
    The Chairman. One issue which has been brought to the 
committee's attention is the need for definitions added in the 
Commodity Exchange Act for futures contracts on broad-based 
security indexes. Do you feel the addition of these definitions 
is necessary? If so, why?
    Mr. Jeffery. Mr. Chairman, this is an issue with which I do 
not have even general familiarity. The whole subject matter of 
security futures products, which were essentially made legal, 
or no longer illegal, by the Commodity Futures Modernization 
Act of 4 years ago, remains in need of further definition and 
discussion.
    Were I confirmed as chairman and commissioner, I would look 
forward to working with my fellow commissioners, Commission 
staff, independent market participants, the other agencies in 
fine tuning or establishing the rules of the road, be it the 
definition of broad-based index or otherwise by which these 
products can trade with appropriate market participant 
protections.
    The Chairman. In 2000 Congress made substantial changes to 
the Commodity Exchange Act with the passage of the Commodity 
Futures Modernization Act. The CFMA provided legal certainty 
for the over-the-counter swaps market and streamlined the 
regulatory process for exchange traded futures markets. The 
CFMA also shifted CFTC away from a prescriptive one-size-fits-
all rules-based regulatory approach to a more flexible approach 
that provides for varying levels of regulation depending on 
whether the market users are commercially sophisticated, and 
also whether the underlying commodity is more likely to be 
susceptible to manipulation.
    Do you feel the CFMA's approach to regulating futures 
markets is an appropriate regulatory model? Second, do you feel 
there are any additional changes that should have been made in 
2000 with the passage of the CFMA? Last, do you feel that any 
further changes to the CEA are needed in this reauthorization 
of CFTC?
    Mr. Jeffery. Thank you, Mr. Chairman. There are a number of 
parts to that question. The first part, is it an appropriate 
model? I think the experience to date and the facts speak for 
themselves. The CEA, as amended by the Commodities Futures 
Modernization Act of 2000, is generally regarded as a hallmark 
of legislative and regulatory success. The markets have grown 
substantially far beyond most people's expectations at the time 
of the amendments and without major market disruptions, 
challenges or issues having developed over that period.
    In terms of changes, I am aware of some of the changes that 
have been discussed and continue to be discussed with respect 
to the reauthorization of the Act. I would look forward again 
to working with my fellow commissioners, this committee, 
committee staff, Commission staff, and industry participants, 
to further develop a legislative proposal for this committee so 
you could advance the reauthorization with all deliberate 
speed.
    As far as other changes, other than the ones that have been 
talked about already in the context of discussions that have 
taken place, I'm not aware of any, but that doesn't mean that I 
might not become aware of some as I get deeper into the 
specifics of the factual context of these markets and the 
policy issues involved, which I would hope to do if confirmed 
as a commissioner.
    The Chairman. Let me prompt you on one of those. A case 
decided in the U.S. Court of Appeals for the Seventh Circuit, 
CFTC v. Zelener, has sparked some controversy among the futures 
industry. Many industry participants feel that a legislative 
change is needed to correct the problem they believe exists 
with cases like Zelener. What is your opinion on the necessity 
of a legislative change to address the Zelener case, and what 
do you feel, if not a legislative change, would be the best way 
to address that issue?
    Mr. Jeffery. Mr. Chairman, I'm not equipped to comment or 
answer that question specifically at this stage. I would say, 
coming back to basic principles, a core mission of the 
Commission is to make sure that we preserve the integrity of 
these markets, the markets over which the Commission has 
jurisdiction. To the extent there are loopholes or exceptions 
that are broadly acknowledged to be out there, that violate the 
letter and the spirit of the law, certainly those are areas 
which are deserving of Commission attention. Whether a 
legislative fix is required or not, I would defer judgment.
    The Chairman. Mr. Lukken, you chair the Global Markets 
Advisory Committee, whose goal is to obtain input on 
international market issues that affect the integrity and 
competitiveness of U.S. markets and U.S. firms engaged in 
global business. Through this time of globalization, what are 
some of the issues that CFTC faces in this area?
    Mr. Lukken. Thank you, Mr. Chairman. I think the principal 
one that we're seeing over and over again is opening markets to 
U.S. businesses, and making sure that the highest standards of 
regulation appear across any of the markets that U.S. 
businesses might be participating in. We work closely with the 
International Organization of Security Commissions, (IOSCO) 
overseas to set these principles, to get people to sign 
multilateral MOUs so that their laws meet the standards that 
U.S. participants are used to.
    This is a common theme. We work on bilateral agreements, 
multilateral agreements with different countries in order to 
make sure that those who are entering into transactions that 
may cross borders are protected under the laws that we are used 
to in the United States.
    I think the second issue that seems to be a common theme, 
especially in the commodities markets, is China. Certainly 
China is going to be a large demand market for U.S. 
agricultural commodities. One thing that we're looking at is 
providing the Chinese with expertise on how they might develop 
their derivatives markets. I've been working with those at the 
Treasury Department to make sure, as they're in discussions 
with the Chinese on opening up the foreign exchange markets to 
go from a fixed rate to a flexible rate, to make the case that 
derivatives markets might help in that transition, and as they 
go forward, that derivatives markets might give participants in 
those markets the ability to manage risk.
    This might allow the Chinese to be a little more 
forthcoming in going toward a flexible derivatives markets. We 
had Ambassador Speltz, who was our emissary in China, come and 
talk to our Global Markets Advisory Committee, as well as Randy 
Quarles, Assistant Secretary of International Affairs at 
Treasury. I would say that both opening markets and China seem 
to be subject martters that everybody is talking about. I know 
FIA and the industry is holding a conference in China in 
August, and so I'm looking forward to working with foreign 
regulators as well as the industry on resolving some of these 
issues.
    The Chairman. Mr. Lukken, in your article, 
``Reauthorization: Let the Debate Begin,'' published in the 
September 2004, Volume of the Futures and Derivatives Law 
Report, you wrote that the Congress should consider clarifying 
CFTC's fraud authority over retail, foreign currency futures 
transactions in legislation reauthorizing the CFTC. The article 
leaves the impression that this is an issue that is limited to 
foreign exchange transactions. However, on October 20, 2004, as 
you know, subsequent to the publication of your article, the 
Court of Appeals for the Seventh Circuit denied CFTC's petition 
to rehear the June 30, 2004 decision in CFTC v. Zelener. This 
now finalized the Court's decision in CFTC v. Zelener. Have 
your views on this issue changed in light of the Zelener 
decision? If so, how and why?
    Mr. Lukken. Thank you, Senator. I published that article 
before the Zelener decision came out. We've had some fine 
tuning issues on the fraud issue in the Forex area, solicitors 
who were unregistered and able to fraudulenlty offer Forex 
contracts outside of our jurisdiction. There is some tightening 
that needs to go on in that area that has been recommended, and 
I think these suggestions are consensus items among the 
industry and regulators.
    The Zelener issue is a different subject matter. That court 
narrowed the definition of futures contracts, and that is the 
basis of our jurisdiction, as you know, and this has the 
potential to cause a great deal of difficulty as we bring fraud 
cases in this area.
    The House Agriculture Committee, in consultation with this 
committee, asked the Commission to provide language in this 
area. We did, as a Commission. Acting Chair Brown-Hruska sent 
forward a letter that said that we needed to fix the Zelener 
decision at a minimum in the Forex area. This is something I 
support, that we should go forward with. Since the CFMA's 
passage, we've seen 74 cases in Forex, quite a bit of fraud. We 
see recidivists in this area. They keep popping up over and 
over and over again. This is a problem at the Agency, something 
we need to address, and as the language said to you, at a 
minimum this is what we should do in this fraud area.
    The Chairman. Could there be negative unintended 
consequences of a broader than foreign exchange legislative fix 
for the problems created by Zelener. If so, what do you think 
they are, and how could we best avoid those?
    Mr. Lukken. Well, the issue over what is the CFTC's 
jurisdiction was a hotly debated one in 2000, and this was 
dealing more on the regulatory side than the fraud side. There 
were quite a bit of discussions. It was a bipartisan discussion 
with the Clinton administration's Treasury Department involved. 
Lee Sachs, a Dennison University graduate who Senator Lugar is 
quite familiar with was leading the efforts on behalf of the 
Clinton administration. Congress was involved in that 
discussion. We came to the conclusion there were certain areas 
that did not need our regulatory authority in--over-the-counter 
derivatives--and that was the deal that was struck in 2000.
    Obviously, the Zelener decision cuts at some of that. I 
think the area that is of most concern to us is the fraud area. 
I don't think broadening our regulatory efforts would be 
helpful. This is, you know, the problem with trying to define 
what a futures contract is--you may be either over inclusive or 
under inclusive, which could be problematic either direction we 
head. I think there are ways to tailor our legislative fix to 
really go after the problem that we are perceiving or I'm 
perceiving down at the Commission, which is fraud.
    The Chairman. Well, as both of you know--Mr. Jeffery, we 
talked about this a little bit in our private conversation and 
Walt, you know from the testimony that has been before this 
committee on the reauthorization of CFTC, there is a little bit 
of difference in the community relative to just how far we 
ought to go relative to this Zelener fix. Should it be narrow, 
or should we broaden it out to some other potential areas, 
because if we do not, where are you going to be? How are you 
going to enforce something outside of the Forex measures? I 
would encourage you, Mr. Jeffery, with all due haste, to give 
this issue priority, and get back to this committee because 
Senator Harkin and I want to make sure that we move the CFTC 
reauthorization as soon as possible, and we expect to do that 
this summer. We want to do it hand in hand with you. There are 
some people who think we can do it with one sentence, and there 
are others who think we ought to go to a much greater length. 
We want to make sure we do the right thing when we do it.
    I wish you would give that priority and get back to us as 
soon as possible about that.
    Anything else, gentlemen?
    [No response.]
    The Chairman. Great. Well, again, thank you very much. We 
are going to leave the record open for any additional 
information till the close of business on Friday, June 10th. We 
hope to move these nominations out of committee next week, and 
get them to the floor. If anyone or their staff wishes to 
submit additional information, let us get it done by the end of 
Friday.
    Thank you very much. This hearing is concluded.
    [Whereupon, at 2:58 p.m., the committee was adjourned.]
      
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                            A P P E N D I X

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                         QUESTIONS AND ANSWERS

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