[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
ENERGY SPECULATION: IS GREATER REGULATION NECESSARY TO STOP PRICE
MANIPULATION?
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HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
DECEMBER 12, 2007
__________
Serial No. 110-78
Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
_____________
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46-477 PDF WASHINGTON : 2008
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COMMITTEE ON ENERGY AND COMMERCE
JOHN D. DINGELL, Michigan, Chairman
HENRY A. WAXMAN, California JOE BARTON, Texas
EDWARD J. MARKEY, Massachusetts Ranking Member
RICK BOUCHER, Virginia RALPH M. HALL, Texas
EDOLPHUS TOWNS, New York FRED UPTON, Michigan
FRANK PALLONE, Jr., New Jersey CLIFF STEARNS, Florida
BART GORDON, Tennessee NATHAN DEAL, Georgia
BOBBY L. RUSH, Illinois ED WHITFIELD, Kentucky
ANNA G. ESHOO, California BARBARA CUBIN, Wyoming
BART STUPAK, Michigan JOHN SHIMKUS, Illinois
ELIOT L. ENGEL, New York HEATHER WILSON, New Mexico
ALBERT R. WYNN, Maryland JOHN B. SHADEGG, Arizona
GENE GREEN, Texas CHARLES W. ``CHIP'' PICKERING,
DIANA DeGETTE, Colorado Mississippi
Vice Chairman VITO FOSSELLA, New York
LOIS CAPPS, California STEVE BUYER, Indiana
MICHAEL F. DOYLE, Pennsylvania GEORGE RADANOVICH, California
JANE HARMAN, California JOSEPH R. PITTS, Pennsylvania
TOM ALLEN, Maine MARY BONO, California
JAN SCHAKOWSKY, Illinois GREG WALDEN, Oregon
HILDA L. SOLIS, California LEE TERRY, Nebraska
CHARLES A. GONZALEZ, Texas MIKE FERGUSON, New Jersey
JAY INSLEE, Washington MIKE ROGERS, Michigan
TAMMY BALDWIN, Wisconsin SUE WILKINS MYRICK, North Carolina
MIKE ROSS, Arkansas JOHN SULLIVAN, Oklahoma
DARLENE HOOLEY, Oregon TIM MURPHY, Pennsylvania
ANTHONY D. WEINER, New York MICHAEL C. BURGESS, Texas
JIM MATHESON, Utah MARSHA BLACKBURN, Tennessee
G.K. BUTTERFIELD, North Carolina
CHARLIE MELANCON, Louisiana
JOHN BARROW, Georgia
BARON P. HILL, Indiana
______
Professional Staff
Dennis B. Fitzgibbons, Chief of Staff
Gregg A. Rothschild, Chief Counsel
Sharon E. Davis, Chief Clerk
David L. Cavicke, Minority Staff Director7*ERR03*
Subcommittee on Oversight and Investigations
BART STUPAK, Michigan, Chairman
DIANA DeGETTE, Colorado ED WHITFIELD, Kentucky
CHARLIE MELANCON, Louisiana Ranking Member
Vice Chairman GREG WALDEN, Oregon
HENRY A. WAXMAN, California MIKE FERGUSON, New Jersey
GENE GREEN, Texas TIM MURPHY, Pennsylvania
MIKE DOYLE, Pennsylvania MICHAEL C. BURGESS, Texas
JAN SCHAKOWSKY, Illinois MARSHA BLACKBURN, Tennessee
JAY INSLEE, Washington JOE BARTON, Texas (ex officio)
JOHN D. DINGELL, Michigan (ex
officio)
(ii)
C O N T E N T S
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Page
Stupak, Hon. Bart, a Representative in Congress from the State of
Michigan, opening statement.................................... 1
Whitfield, Hon. Ed, a Representative in Congress from the
Commonwealth of Kentucky, opening statement.................... 5
Dingell, Hon. John D., a Representative in Congress from the
State of Michigan, opening statement........................... 6
Burgess, Hon. Michael C., a Representative in Congress from the
State of Texas, opening statement.............................. 7
Green, Hon. Gene, a Representative in Congress from the State of
Texas, opening statement....................................... 9
Witnesses
Greenberger. Michael, professor of law and director, Center for
Health and Homeland Security, University of Maryland........... 10
Prepared statement........................................... 14
Answers to submitted questions............................... 281
Campbell, Laura, assistant manager, energy resources, Memphis
Light, Gas, and Water.......................................... 32
Prepared statement........................................... 34
Cota, Sean, president and co-owner, Cota & Cota Incorporated..... 40
Prepared statement........................................... 43
LaSala, Tom, chief regulatory officer, division of compliance and
risk management, New York Mercantile Exchange, Incorporated.... 55
Prepared statement........................................... 57
Vice, Charles A., president and chief operating officer,
Intercontinental Exchange, Incorporated........................ 88
Prepared statement........................................... 89
Answers to submitted questions............................... 284
Kelliher, Joseph T., Chairman, Federal Energy Regulatory
Commission..................................................... 128
Prepared statement........................................... 134
Lukken, Walter, Acting Chairman, U.S. Commodity Futures Trading
Commission..................................................... 188
Prepared statement........................................... 191
Answers to submitted questions............................... 286
Submitted Material
Staff Report, dated June 27, 2006................................ 218
Letter of December 10, 2007, from U.S. Commodity Futures Trading
Commission to Committee on Energy and Commerce................. 278
ENERGY SPECULATION: IS GREATER REGULATION NECESSARY TO STOP PRICE
MANIPULATION?
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WEDNESDAY, DECEMBER 12, 2007
House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Energy and Commerce,
Washington, DC.
The subcommittee met, pursuant to call, at 9:35 a.m., in
room 2123 of the Rayburn House Office Building, Hon. Bart
Stupak (chairman) presiding.
Members present: Representatives Melancon, Green, Barrow,
Inslee, Dingell, Whitfield, Walden, Murphy, Burgess, Blackburn,
and Barton.
Also present: Representatives Fossella and Shimkus.
Staff present: Richard Miller, Scott Schloegel, John
Arlington, John Sopko, Carly Hepola, Alan Slobodin, Dwight
Cates, and Kyle Chapman.
OPENING STATEMENT OF HON. BART STUPAK, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN
Mr. Stupak. The subcommittee will come to order.
Today we have a hearing titled ``Energy Speculation: Is
Greater Regulation Necessary to Stop Price Manipulation?''
Before we begin, I would like to make two quick comments. This
is the 19th hearing of the Oversight and Investigations
Subcommittee in 2007. I want to take a moment to thank all the
staff and the members for their hard work throughout the year.
This has been a very aggressive schedule, and I know staff on
both sides of the dais have logged countless hours of
investigations and research, and Members have done the same.
I also want to thank my good friend, Mr. Whitfield, the
ranking member, for his work and friendship on this
subcommittee. Due to the departure of the former Speaker, Mr.
Hastert, the minority re-drew their subcommittee assignments,
and this will be Mr. Whitfield's last hearing as ranking
member. However, you are going to remain on the committee, so
your expertise will still be shared with all of us, and we
thank you for your time and the courtesy you have shown me,
personally, as chairman of the subcommittee this year.
I would now like to recognize members for an opening
statement, and I will begin.
Of the 19 hearings this subcommittee has held this year,
today's hearing is perhaps the most technical and complex.
Americans do not sit around the dinner table and discuss
futures markets, swaps, position limits, look-alike contracts,
and exempt commercial markets. What families do talk about is
the cost of gas, oil, home heating oil, and propane. They talk
about how the high energy costs are literally taking food off
their table to pay for their basic needs, such as
transportation and warmth.
In 1 day, we saw a 45-percent hike in gasoline prices in my
district. In another energy spike example, one senior high-rise
in my district saw their natural gas bill jump from just over
$5,000 in November 2005 to an astonishing $13,000 one month
later, in December.
Futures contracts for energy are traded on New York
Mercantile Exchange, NYMEX, which is regulated by the Commodity
Futures Trading Commission, the CFTC. The unregulated
international exchange market was created by the Enron loophole
as part of the Commodity Futures Modernization Act of 2000.
Unregulated markets are known as dark markets, because
there is very little oversight of the trades. By trading on the
dark ICE market, traders can avoid CFTC rules, which are in
place to prevent price distortions and supply squeezes. This
makes it difficult for regulators to detect excessive large
positions, which could lead to price manipulation. Trading
volumes on this dark market have skyrocketed in the past 3
years and are now as large, or even larger, in some months as
the volumes traded on the regulated futures market.
[Chart shown.]
Chart 3 that is before us shows the quantity of natural gas
futures contracts on NYMEX and ICE are almost equal in 2006;
239 trillion cubic feet on NYMEX versus 237 trillion cubic feet
on ICE. To put this trading volume in perspective, the total
U.S. consumption of natural gas in 2006, represented by the
yellow, horizontal line near the bottom, was only 21.6 trillion
cubic feet. So why is trading on each market 10 times more than
necessary to supply America?
[Chart shown.]
Chart 4 shows that only 600,000 natural gas contracts were
traded on the dark ICE market in January 2005, but increased by
433 percent to 3.2 million contracts by October 2007. And why
is that? The spiraling growth in commodity trading and dark
markets has left regulators with a blind spot and the public
without information to track how non-commercial traders could
be affecting energy prices.
The CFTC has no control over dark markets, and they lack
enough staff to police the regulated markets, let alone the
unregulated dark markets. This lack of oversight means that
traders who exceed limits or who shun openness of futures
markets will merely take their business to the dark markets.
Less than one percent of futures contracts ever result in
physical delivery. Thus, most future trades are not interested
in delivery of a product. They are interested in profit. The
Energy Information Administration recently observed that oil
markets have been drawing increased interest and participation
from investors and financial entities without direct commercial
involvement in physical oil markets. A report from Lehman
Brothers entitled ``Frenzied Oil Futures Frustrate
Fundamentals'' states: ``The surge in oil markets to $90, the
mirror image of last winter's price fall, seems underpinned
more by financial flows and political risk than by fundamental
factors.''
Oil and gas trader Steven Schrock, who published the
Schrock Report on Energy Markets, wrote ``factors other than
supply and demand are now impacting the price. We now have to
factor in how the speculators are going to affect the market,
because they have different priorities in managing their
portfolios.'' Rather than a market that is serving a price
discovery function, we have a market that is more and more
driven by profits and excessive prices. Often it is speculation
based on fear, which leads to greed.
Because of the Enron loophole, several major energy
companies and hedge funds have been charged with price
manipulation. In February 2004, British Petroleum acquired 90
percent of all U.S. propane supplies. Once in control of the
market, BP intentionally withheld propane from the market and
charged buyers artificially inflated prices in a classic supply
squeeze. In a recent Court settlement, BP agrees to pay $303
million in penalties and restitution.
In July of this year, FERC and the CFTC brought anti-
manipulation cases against Amaranth, a Connecticut-based hedge
fund, which dominated natural gas financial markets for most of
2006 until its ultimate collapse in September of 2006. FERC
charged that Amaranth manipulated prices paid in the physical
natural gas markets by driving down natural gas futures
contracts through massive selling during the last 30 minutes of
trading for the months of March, April, and May 2006 contracts.
This then allowed Amaranth to profit from such larger short
positions traded on the dark ICE market that bet on this price
decline. FERC has proposed a $291 million in penalties and
disgorgement of unjust profits.
A June 2007 staff report by the Senate Permanent
Subcommittee on Investigations entitled ``Excess Speculation in
Natural Gas Market'' found Amaranth trading price increased
volatility to the point that traders deemed the price ``out of
whack'' with regard to supply and demand fundamentals. These
out-of-whack prices may have cost industrial, commercial, and
homeowners as much as $9 billion. When the regulated mark at
NYMEX directed Amaranth to reduce its excessive positions in
the natural gas contracts, Amaranth shifted 80 percent of its
gas contracts over to the dark ICE market, allowing them to
maintain and even increase their overall speculative position.
[Chart shown.]
Chart No. 6 shows that on August 28, 2006, Amaranth held
nearly 100,000 contracts for September on ICE. To put this in
perspective, by holding 100,000 contracts, a mere penny
increase in price would result in profit to Amaranth of $10
million. Amaranth traders knew this move would be invisible to
regulators. In an August 29 instant message about a large price
move, Amaranth lead trader wrote, ``classic pump and dump. Boy,
I bet you see some CFTC inquiries in the last 2 days.''
But another trader reminded him that most of the trades had
taken place on the dark ICE market, using swaps. He replied,
``only until the monitor swaps, no big deal.'' No big deal?
Tell that to the homeowners across America who are paying
record heating costs to heat their homes. Tell that to the
domestic manufacturers who are paying exponentially higher
energy prices to manufacture their goods. Tell that to the
people who have been laid off because the manufacturing plant
they worked in closed down and moved their operations offshore,
where energy and labor costs are lower. Tell that to Municipal
Gas Authority of Georgia, which buys natural gas for public
utilities in four States and took $18 million in losses, which
they contend was due to Amaranth's trading scheme.
In another case of market manipulation, in July of 2007
FERC and CFTC charged that the Energy Transfer Partners, ETP,
manipulated natural gas prices by using its dominant market
share in the Houston ship channel to force the price of natural
gas down in order to profit from much larger short positions,
many of which were held on the dark ICE market. This strategy
earned ETP nearly $70 million in unjust profits, according to
FERC. Driving down prices might seem to help consumers in the
short term. However, in the long run, distorting price signals
will drive up costs to consumers.
I would like to now play voice recordings of individuals
from the British Petroleum and Energy Transfer Partner cases.
Here they are, in their own words.
[Playing TV broadcast.]
Shades of Enron all over again. So what are possible
solutions to these problems of manipulation? CFTC recently
proposed legislation to regulate dark markets. Witnesses today
will explore whether these proposals go far enough to restore
integrity to energy markets or will increase oversight of the
dark market's drive energy commodity trading overseas to less
regulatory jurisdictions. ICE futures already trade oil,
gasoline, and heating oil swaps for U.S. delivery in London
under the UK's Financial Services Authority, which has weaker
market rules.
Another tool in addressing manipulation is ensuring FERC's
authority to police price manipulation trades that impact
delivery of energy. Legislative intent on the part of this
committee is clear. We fully expect the authority granted to
FERC through the Energy Policy Act of 2005 will be upheld. We
question whether CFTC, in trying to block FERC from enforcing
its anti-manipulation authority, is circumventing congressional
intent. Consumers could pay dearly if CFTC prevails, and this
committee is unlikely to be a bystander, should that unlikely
event occur.
A third possible solution which has been proposed by
Professor Michael Greenberger, who will testify before us
today, is for the CFTC to close the loophole that allows U.S.
traders to avoid CFTC regulation by using less regulated
foreign markets to trade energy commodities. There are also
several pending legislative proposals intended to address this
problem: H.R. 3009, The Market Trust Act of 2007, sponsored by
Representatives Barrow and Graves, H.R. 4066, Close the Enron
Loophole Act, introduced by Representative Welch from Vermont,
and H.R. 5942, Preventing Unfair Manipulation of Price Act,
which I introduced with Chairman Dingell.
In the end, what we need is less of the greed, of which we
just heard from the traders' own voices a few moments ago and
more honesty. We need to close the Enron loophole to close the
foreign market loophole, and we need additional enforcement by
the CFTC and FERC to clamp down on the fear and speculation
that lead to greed and market manipulation.
And with that, that is the end of my opening statement. I
would next like to yield to Ranking Member, Mr. Whitfield.
OPENING STATEMENT OF HON. ED WHITFIELD, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF KENTUCKY
Mr. Whitfield. Thank you, Chairman Stupak, and I appreciate
your comments about our working relationship on Oversight and
Investigation, and I have certainly enjoyed working with you
and look forward to continuing to do so as we move forward.
I also appreciate this hearing this morning, and today's
hearing will cover many diverse and complicated topics
regarding how energy markets operate and whether further
regulation is necessary. We will hear testimony about the lack
of market transparency and excess speculation in the designated
contract markets regulated by the Commodity Futures Trading
Commission and the Wholesale Energy Markets, regulated by the
Federal Energy Regulatory Commission. We will hear about
regulatory arbitrage between the regulated futures market
managed by the New York Mercantile Exchange and the unregulated
over-the-counter market managed by the Intercontinental
Exchange, or ICE.
These matters are important and complex. Daily trading
volumes in the energy markets have grown significantly over the
past few years. In January 2005, only 600,000 natural gas swaps
were traded on the ICE Exchange. This number has grown to 3.3
billion in October of 2007. Increased trading activity has had
an impact on price volatility, and concerns have been voiced
about excess speculation and its potential impact on energy
prices. Because of the crucial role energy prices have in our
economy, Congress must ensure that regulators have the tools to
protect energy consumers. As we consider all of these complex
matters, I think we all share one fundamental concern. Do the
prices consumers pay for energy represent fundamental supply
and demand conditions in the marketplace, or are prices
influenced by manipulation or other forces?
According to the testimony of Ms. Laura Campbell, who
represents the American Public Gas Association, the public
utilities have lost confidence in the natural gas markets. She
believes that market prices for natural gas are not an accurate
reflection of supply and demand. I look forward to hearing her
views, and I am sure that other members of the panel will also
have views on this.
However, there is some good news to report today from FERC.
In response to provisions we included in the Energy Policy Act
of 2005, FERC acted quickly to establish its office of
enforcement. As a result, FERC has an enhanced ability to
police the electricity and natural gas wholesale markets to
prevent market manipulation. We look forward to the testimony
of FERC Chairman Joe Kelliher regarding FERC's efforts to
protect energy consumers.
In his written testimony, Chairman Kelliher points out that
Congress gave FERC all the tools needed 2 years ago. And at
this time he testifies he does not believe that FERC needs any
additional legal authority to protect consumers from market
manipulation. I also look forward to the testimony of the New
York Mercantile Exchange and the Intercontinental Exchanges,
based in Atlanta. NYMEX is highly regulated by the CFTC, and
ICE is not regulated. As Congress considers changes to the
Commodity Exchange Act to increase regulation of over-the-
counter markets like ICE, we must ensure that FERC's consumer
protection authorities are not diminished in this process.
Fundamentally, FERC is a consumer protection agency. With
respect to the alleged manipulative trading by the hedge fund
Aeromat, FERC was the first to identify the problem and open an
investigation. CFTC followed behind FERC with its own
investigation, and I think this demonstrates the important and
aggressive role that they are playing in protecting the
American consumer.
Mr. Chairman, I was going to introduce Marsha Blackburn,
who I think has a constituent testifying, but she had to leave
for another matter. So I yield back my 32 seconds.
Mr. Stupak. I thank the gentleman, and hopefully Mrs.
Blackburn will be back, because she is a vital member of this
subcommittee. Next, I turn to the chairman of the full
committee, Mr. Dingell, for an opening statement, please.
OPENING STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN
Mr. Dingell. Mr. Chairman, thank you, and good morning. I
very much appreciate your holding this important hearing.
The cost of energy is becoming an ever-enlarging component
of the average citizen's household budget for electricity,
gasoline, heating, and for all kinds of products and services
based on hydrocarbons. Energy costs are rising rapidly for
industrial users as well. This in turn raises the price of
products and services in virtually every sector of the American
economy.
The collapse of Enron in late 2001 confirmed what many had
suspected. Not all the increases in energy prices are the
result of supply and demand. Much of Enron's business consisted
of speculative trading in electronic, over-the-counter market
exempt from regulation. It was virtually impossible for anyone,
including the government regulators, to know what Enron was
doing or how it was affecting the broader market. We now know
that Enron engaged in fraud on a massive scale and manipulated
California electronic and electric power markets, to the tune
of millions of dollars out of the pockets of American
consumers. Unfortunately, Enron was and is not alone. Over the
past 6 years, the rise in energy prices has been outpaced only
by the rise in speculation.
In short, energy speculation is a growth industry, and it
has gone global. A case in point is Amaranth. Over recent
months in 2006, Amaranth, a $9 billion hedge fund, dominated
trading in the U.S. natural gas contracts and intentionally
drove down the price of natural gas futures on NYMEX so that it
could make tens of millions of dollars on its undisclosed
holdings in the so-called dark markets, the unregulated over-
the-counter markets. This is not a victimless crime. In the
summer of 2006, Amaranth took enormous positions which appeared
to have inflated the price of natural gas for delivery in the
following winter. Businesses, utilities, schools, and
hospitals, as well as individual consumers, wound up paying
abnormally high rates as a result, to the benefit of Amaranth.
As a result, and according to a recent Senate report,
speculation of this nature may have added $20 to $25 per barrel
to the price of crude in 2006. The Industrial Energy Consumers
of America estimates that Amaranth's speculation alone cost
consumers of natural gas as much as $9 billion from April to
August of last year. At a time when people everywhere in this
country are paying record prices for gasoline and record prices
to heat their homes, government has a responsibility to put an
end to this speculative excess.
This raises the interesting question of what the Federal
Energy Regulation Commission, FERC, and the Commodity Futures
Trading Commission, CFTC, two agencies that share jurisdiction
over these matters, have done to address the problem. I
understand that FERC has made considerable progress over the
past years in providing its market surveillance capabilities to
be improved and to be better in exercising its enforcement
authorities. On the other hand, there are indications that CFTC
may have been more enthusiastic in granting exemptions from
regulation than it has been in routing out possible energy
market manipulations. I look forward, as do you and the members
of this committee, to exploring this matter further with CFTC.
I am also disappointed to see that CFTC has challenged
FERC's authority to investigate and pursue the energy market
manipulators, despite Congress's explicit granting of authority
to FERC in the Energy Policy Act of 2005. We will look forward
to explanations of this rather curious behavior. I would hope
that by the time we conclude this hearing, CFTC will have
rethought its views on this issue, and we will try and help
them to achieve that end.
Mr. Chairman, speculative excess in the energy market has
cost American consumers billions of dollars in unnecessary
energy costs. It is time for us to close the loopholes that
have allowed this unscrupulous consumer exploitation and see to
it that the Federal agencies do what it is they are supposed to
do to protect the American consumers. Thank you, Mr. Chairman.
Mr. Stupak. Thank you, Mr. Dingell. Mr. Burgess, for an
opening statement.
OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF TEXAS
Mr. Burgess. Thank you, Mr. Chairman. And just like
everyone else up here on the dais, I am concerned about the
manipulation of energy market prices and want to thank you and
Ranking Member Whitfield for holding the hearing today. This
subcommittee has a long standing in overseeing the health and
competitive prosperity of the American public. And although I
wasn't able to participate in the Enron hearings held before
this committee in 2001 and 2002, I am pleased to be able to
participate here today.
Like many members of this body, I hear from constituents on
a near-daily basis about the high prices they pay for their
energy needs. In fact, in Texas in November, we were paying $3
a gallon for gas. If we are paying $3 a gallon for gas in
November, I can promise you it will be at least a dollar higher
in May, because that is when our prices typically go up as we
have to transition to the summer blends because of regulations
under the Clean Air Act. I do find it odd that in November 2006
I was criticized for gas prices that were $2.20. In November
2007, no one is criticizing gas prices of $3 a gallon, but that
is a separate matter.
But I am looking forward to hearing from the witnesses on
the second panel today, who actually have the authority to
properly oversee commodities futures markets and wholesale
energy markets.
Manipulation of the natural gas market is especially
pertinent in my district, because the exploration of what is
known as tight gas reservoirs in a geologic formation known as
a Barnett shale in north Texas has become a very successful
exercise in drilling for clean, domestic energy and is a key to
the recent economic prosperity in the area of Texas that I
represent. In 2006, the Barnett shale was responsible for over
50,000 permanent jobs and over $225 million in revenues to
local governments in Texas--not to investors, to local
governments in Texas. I want to ensure that the price consumers
pay for natural gas is fair and that the natural gas is sold in
an open and competitive basis.
In economic terms, we need to ensure perfect competition.
More competition in the energy markets drives us towards less
collusion, and by the definition of perfect competition, no
producer, no consumer has the market power to influence or
manipulate prices. In true competitive markets, risk has
already been calculated, and a technical analyst will tell you
that all available information is already incorporated into the
market commodity price. Any manipulation of our open, free, and
competitive energy markets must be investigated publicly, and
that is what we are here about today. And for that, I am
grateful.
Now, Mr. Chairman, I just can't help but notice that,
because of the issue of global climate change, not so much in
this committee, but in other subcommittees, we have been
working on how to manage the issue of global climate change.
And you hear a lot of people talk about instituting a cap-and-
trade system as perhaps a method for regulating carbon in the
environment. And today's hearing brings up the question, who is
going to regulate this new cap-and-trade market? Will FERC
regulate it? Will some other entity be created or crafted to
regulate this? How do we guard against manipulation in really
what is going to be a new and untested market environment?
And, Mr. Chairman, I would just like to point out that we
may go from a situation where we are talking about from dark
markets to a dark America, because we are going to be replacing
all of America's energy with lethargy. But that is a separate
point as well.
From my understanding, through the Energy Policy Act of
2005, it is the intent of this committee and, in fact, the
intent of Congress, to provide the Federal Energy Regulatory
Commission with the necessary tools to enforce their anti-
manipulation authority. I believe this authority was given to
the Federal Energy Regulatory Commissions for reasons that will
be supported by their testimony here today. And certainly want
to welcome Chairman Kelliher back to the Energy and Commerce
Committee and thank him for his leadership in the matter.
Mr. Chairman, in the spirit of the holiday season, I am
going to yield back the minute of my time.
Mr. Stupak. You know I don't take carryovers. Mr. Green,
for opening statement, please.
OPENING STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TEXAS
Mr. Green. Thank you, Mr. Chairman, for holding the hearing
today on energy speculation. As a representative from Houston,
Texas, where we call ourselves energy capital of the world,
including the use and ship channel, I understand the critical
need for transparency in the marketplace. The debacle played
out by former energy giant Enron Corporation showcased to the
world what happens when lax government and private sector
oversight collapses under its own weight. Houston is the home
of many families who benefited from Enron during the good times
and suffered tremendously when it fell apart. Congress must
remain vigilant to help prevent similar failures and to ensure
American consumers are not being played by any future gaming of
the system. Unfortunately, recent allegations brought against a
small handful of U.S. companies indicate that gaming may
continue to manipulate the price of energy supplies in the
marketplace.
Our congressional district manufactures aviation fuel,
diesel gas for our trains, planes, cars, and trucks, and our
ships. Energy trading is supposed to help move these products
efficiently, and it does not add one gallon to our supply. But
then it can add substantial amount to the cost to the consumer.
Several economists' reports question whether the standard
economic principle, supply and demand, are no longer the sole
factors affecting energy prices. Current petroleum and natural
gas prices are set by a complex mix of factors, including
global crude prices, increased world and U.S. demand, gasoline
imports, extreme weather conditions, and geopolitical events.
Most of these factors are out of our control. What factors are
within our control, like the evidence of market manipulation, I
believe the appropriate Federal agency should find and
prosecute manipulation to the fullest extent of the Law.
To bring this problem home to an energy-producing area, in
2005, the CEO of Shell Western Hemisphere sat in my office and
said, we are transferring chemical jobs from the chemical plant
in Deer Park, Texas, that is in our district, to the
Netherlands because of the high price of natural gas. It just
so happens that ETP, the allegations of FERC, includes 2003 to
2005. Now I have to add the full statement. It was also the
high cost of healthcare in Deer Park, Texas, compared to the
Netherlands, which is also the purview of our full committee,
and I hope we would deal with that. But when you have someone
like Shell, who probably imports enough of their own, but they
use the trading market for either to sell back or maybe to buy
what they need for their chemical production, we see what
happens.
Both the Commodity Futures Trading Commission and the
Federal Energy Regulatory Commission have a complementary role
to play in protecting both the integrity in our markets and our
consumers. Closer attention should be paid to the largely
under-regulated over-the-counter markets which are a rapidly
growing segment of the marketplace. If energy supplies are
indeed manipulated, the consumer runs the risk of paying
distorted prices to drive, fly, heat, and cool our homes. No
one in Congress wants to see American families pay distorted
energy prices. If we can shine the bright light of
accountability on commodity transactions, we can help foster
fair and open and transparent markets for American consumers,
businesses, industry, and utilities.
Mr. Chairman, I hope today's panels will help flesh out
these complex issues, and I look forward to working with you
and other members on improving our transparency of our energy
markets. And I will actually have a better Christmas spirit. I
will yield back more than a minute. Thank you.
Mr. Stupak. Thank you. Mr. Walden, for an opening
statement, please. You are going to waive yours at this point
in time? That concludes the opening statements. It should be
noted for the record Mr. Barrow, who is from Georgia, was here.
He is up in Agriculture. He might be popping back down. Mrs.
Blackburn was here. Congressman Welch has entered a statement
for the record. I want to recognize you, Mr. Cota, for being
here. And on behalf of Mr. Welch, thank you. So it will be
entered in record without objection. Any objection, Mr.
Whitfield? Hearing none, it will be entered. That concludes the
opening statements by members of the subcommittee.
Mr. Stupak. I now call our first panel of witnesses to come
forward. On our first panel, we have Mr. Sean Cota, president
and co-owner of Cota & Cota, Incorporated; Ms. Laura Campbell,
assistant manager of energy resources at Memphis Light, Gas,
and Water; Mr. Tom LaSala, chief regulatory officer at the New
York Mercantile Exchange; Mr. Charles Vice, president and chief
operating officer at Intercontinental Exchange, ICE; Mr.
Michael Greenberger, professor of law and director of Center
for Health and Homeland Security at the University of Maryland.
It is the policy of this subcommittee to take all testimony
under oath. Please be advised that witnesses have the right
under the rules of the House to be advised by counsel during
your testimony. Do any of our witnesses wish to be represented
by counsel? Everyone is shaking their heads no. OK, then I am
going to ask you to please rise and raise your right hand to
take the oath. Let the record reflect that all witnesses
replied in the affirmative. You are now under oath. We are
going to start on my left, your right. Professor Greenberger,
if you would like to start, sir, for an opening statement, I
appreciate it.
STATEMENT OF MICHAEL GREENBERGER, PROFESSOR OF LAW, AND
DIRECTOR, CENTER FOR HEALTH AND HOMELAND SECURITY, UNIVERSITY
OF MARYLAND
Mr. Greenberger. Thank you, Chairman Stupak. In my
statement today, I have in the beginning a one-page summary,
which I think encapsulates everything I want to say. I have a
detailed statement that follows that is supported with
footnotes and academic information.
The agricultural industry founded the concept of futures
markets. In the 1960s and 1970s, futures markets were
introduced in the energy sector. The futures markets today and
historically have served a price discovery function. When
somebody goes to sell a commodity in the business world, they
most often look to the Wall Street Journal or some other
information to see what the futures price is, and that tells
them what a fair price is to sell or buy a commodity.
The agriculture industry learned the hard way that the
futures market, if unregulated, can be subject to manipulation,
excessive speculation, and fraud. And therefore the futures
price can be different than what economic fundamentals dictate.
The farmers got, in their words, in the late 19th century and
the early 20th century, ``screwed'' by the futures markets. And
in 1921, Congress began to introduce regulatory legislation,
which now comes to us in the form of the Commodity Exchange
Act, which was principally designed to regulate futures markets
to prevent excessive speculation, fraud, and manipulation so
when someone goes to sell their wheat or their natural gas or
their crude oil or their heating oil, and they look to the
newspaper or online data to see what the natural gas price is,
et cetera, that is an honest price. And that is the job of the
CFTC, to ensure it is an honest price.
In a lame duck session in December 2000, a 262-page bill
was added to an 11,000-page omnibus appropriation bill on the
Senate floor with no substantial consideration. And my view is
that nobody but the Wall Street lawyers who drafted that
legislation understood what that legislation meant. For today's
hearings, the intent of the President's Working Group and the
Senate draft, before it was amended late in the night in
December 2000, was that agriculture and energy commodities
would continue to be regulated fully by the CFTC. Late in the
night of December 2000, the word energy was struck from that
bill. So the Agriculture Committee made sure that the farmers
were still protected by the CFTC, but the energy sector was now
allowed to operate outside the confines of the CFTC.
Everybody agrees today that that loophole should be ended.
The problem is that people are offering thousands of pages of
bills to fix a simple thing. Stick the words ``or energy'' back
in so that energy will be regulated fully by the CFTC. And, for
simple purposes, that would mean ICE would be regulated like
NYMEX. NYMEX has chosen to be regulated for energy commodities.
ICE has chosen not to be regulated for energy commodities.
Because of the Enron loophole--and believe me, if Christmas
had come earlier that year, and that bill had not been passed--
we would still have an Enron today. It was Enron's undoing to
get that loophole through. That loophole allows ICE to be
unregulated, and Mr. LaSala has chosen to be regulated. The
CFTC prevents fraud and manipulation and excessive speculation
on NYMEX. They can't do it on ICE. It is as simple as that.
Now the Senate Permanent Investigating Committee, in a
bipartisan way, once in a Republican Congress, once in a
Democratic Congress, in 2006 and 2007, has pinpointed and
proven now, I think, beyond all doubt that the price you pay
for crude oil and the price you pay for natural gas has been
driven up by the kinds of conversations you broadcast there
today. And you heard those guys say the CFTC can't touch us
because ``or energy'' was dropped from agriculture or energy in
2000. Energy can now be traded without watching or reporting
for fraud, manipulation or excessive speculation.
And as Senator Levin and the Republicans as well in that
staff report have said, the economists say that at least $20,
maybe as high as $30, added to the price of crude oil is
because the futures price is being conducted with those kinds
of conversations and manipulated upward without any relation to
what supply/demand creates. $20 to $30, what does that mean for
gasoline, which is made by crude oil? What does that mean for
heating oil, which is made from crude oil? And what does it
mean for natural gas, which everybody is dependent on? And in
fact, the farmers were so dependent on it that Congressman
Graves, Republican, of Missouri, worked through a floor
amendment in the Republican-controlled House in December 2005
to do something about the unregulated price of natural gas. At
that point, it was $14 per million BTU. Within 6 weeks, it
dropped to $9, just because an amendment passed the House.
The day after Amaranth failed, the futures price of natural
gas dropped from about $8.50 to $4.50. The manipulator was
gone. Economic fundamentals took over. The price dropped about
$4 in a day, in half. What does that mean to your consumers?
Now, it jumped right back up to $10, and then hearings were
held on it. And it is now back at $7.
With a very simple legislative fix, adding ``or energy''
``and energy'' back into the Exchange Act, you can fix this
problem.
There is one other point I want to make. ICE not only
operates under this exemption--and, by the way, I want to say
ICE is not doing the manipulating here. ICE has used this
exemption to profit successfully. It is the traders on ICE that
are taking advantage of this exemption, not ICE. ICE not only
operates under this Enron loophole, but in 2000 they bought the
United Kingdom's International Petroleum Exchange. It is now
fully owned by ICE, which is a United States company. I
understand that while it is not relevant, those exchange
platforms are in the United States. And they are now trading
West Texas Intermediate Crude in direct competition with NYMEX.
Now, because the International Petroleum Exchange was a
foreign exchange, they said we need to get exemptions from the
CFTC or you will be discriminating against us on the basis of
world trade. We are a foreign company. Want to sell foreign
crude oil products, brand oil, on foreign terminals. Exempt us.
And the CFTC staff, not the commission, the staff, in a no-
action letter, said, fine. ICE, a U.S. company, bought the
International Petroleum Exchange. The CFTC staff never changed
the no-action letter. ICE decided it was going to trade U.S.-
delivered commodities. The CFTC never changed the no-action
letter.
All of the legislation that is being offered today does not
affect that foreign board of trade exemption, which allows ICE,
a U.S. company trading U.S.-delivered products, significantly
affecting the price of crude oil in the United States. They are
now regulated by the United Kingdom, not the CFTC. This
afternoon, the CFTC could go back to its offices and terminate
that no-action letter. It has a termination-at-will clause.
Now, if they did, ICE would come back----
Mr. Stupak. Well, sir, I am going to need you to wrap up
your----
Mr. Greenberger. OK, if they did, ICE would come back and
say, well, now we use the Enron loophole. So you have to close
the Enron loophole. You have to end U.S. companies' trading U.S
products saying they should be regulated by the United Kingdom.
When I am asked questions, I will tell you why the CFTC's
proposal to the Enron loophole is not a regulatory fix. It is
regulation in name only, and your consumers in February would
be screaming if you passed the CFTC legislation today. Thank
you.
[The prepared statement of Mr. Greenberger follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Stupak. Thank you, Professor. And Ms. Campbell, please,
for an opening statement.
STATEMENT OF LAURA CAMPBELL, ASSISTANT MANAGER, ENERGY
RESOURCES, MEMPHIS LIGHT, GAS AND WATER
Ms. Campbell. Chairman Stupak and members of the
subcommittee, I appreciate the opportunity to testify before
you today, and I thank you for calling this hearing to examine
the critically important issue of the need for greater
transparency in the energy markets.
My name is Laura Campbell, and I am the assistant manager
of energy resources for Memphis Light, Gas and Water, or MLGW.
MLGW is the Nation's largest three-service municipal utility,
and we currently provide services to over 420,000 customers. I
am testifying today on behalf of the American Public Gas
Association, or APGA.
APGA is the national association for publicly-owned natural
gas distribution systems. There are approximately 1,000 public
gas systems in 36 States, and almost 700 of these systems are
APGA members. Publicly-owned gas systems are not-for-profit,
retail distribution entities owned by and accountable to the
citizens they serve. APGA's top priority is the safe and
reliable delivery of affordable natural gas.
To bring gas prices back to affordable level, we ultimately
need to increase the supply of natural gas. However, also
critical is to restore public confidence in the natural gas
pricing. This requires the natural gas market to be fair,
orderly, and transparent so that the price consumers pay
reflects the fundamental supply-and-demand forces and not the
result of manipulation or abusive conduct. An appropriate level
of transparency does not currently exist, and that has led to a
growing lack of confidence by our members in the natural gas
market.
Without question, natural gas futures contracts traded on
NYMEX and financial contracts for natural gas traded on the
over-the-counter or OTC markets are economically linked. The
market for financial and natural gas contracts is composed of a
number of segments, which include futures contracts traded on
NYMEX, the financial contracts for natural gas traded on the
OTC markets. OTC contracts may be traded on multi-lateral
electronic trading facilities known as exempt commercial
markets, or ECMs. They also may be traded bilaterally on
electronic platforms through voice brokers and in direct
bilateral transactions between counter parties.
The impact of last year's activities by the Amaranth
advisors' hedge fund exemplifies both the linkage and the harm
caused by the lack of transparency in these markets. When the
positions accumulated by Amaranth began to unwind, gas prices
decreased. Unfortunately, many of APGA's members had already
locked in prices prior to that period at levels that did not
reflect the current supply-and-demand conditions.
As a result, the elevated prices during that period when
Amaranth held these exceedingly large positions, many of APGA's
members were forced to pay a premium, which was passed through
to their customers on their gas bill.
Today the Commodity Futures Trading Commission has
effective oversight of NYMEX, and the CFTC and the NYMEX
provide a significant level of transparency. But the simple
fact is that the CFTC's large trader reporting system, its
chief tool in detecting and deterring manipulative market
conduct, generally does not apply with respect to transactions
in the OTC markets. This lack of transparency in a very large
and rapidly growing segment of the natural gas market leaves
open the potential for participants to engage in manipulative
or other abusive trading strategies with little risk of early
detection by the CFTC until after the damage is done to the
market.
It simply makes no sense to have transparency with respect
to one small segment of the market and none with respect to a
larger and growing segment. Accordingly, APGA believes that
transparency in all segments of the market is critical to
ensure that the CFTC has a complete picture of the market. We
believe that the CFTC does not currently have the tools
necessary to police its beat. The CFTC has done a good job in
catching market abuses after the fact. However, by the time
these cases are discovered using the tools currently available
to government regulators, our members and their customers have
already been injured by the higher natural gas prices that
result from these abusive activities.
It is beyond dispute that the CFTC did not have a complete
picture of the full extent of Amaranth's trading position until
after Amaranth's collapse and that Amaranth was able to use the
current gaps in transparency to obscure their abusive
activities from the regulatory authorities while Amaranth was
engaging in those abuses. Greater transparency with respect to
the traders' large positions, whether entered into on a
regulated exchange or in the OTC markets in natural gas, will
provide the CFTC with the tools to detect and deter potential
manipulative activity before our members and their customers
suffer harm.
One additional issue I would like to briefly address
relates to the enforcement response to Amaranth. Both the CFTC
and FERC have brought enforcement actions against Amaranth.
FERC's enforcement action was the first brought under its anti-
manipulation authority contained in the Energy Policy Act of
2005. APGA supported congressional action to provide FERC with
this new anti-manipulation authority, and we support FERC's use
of this authority through its recent enforcement action.
APGA's view was then and remains that FERC's new anti-
manipulation authority affords consumers an important
additional measure of protection. We support having multiple
cops on the beat and urge the CFTC and FERC to work closely
together to provide consumers with the full measure of
protection that Congress intended.
The current situation is not irreversible. Congress can
provide American consumers with the protection they deserve by
passing legislation that would turn the lights on in these
currently dark markets. APGA looks forward to working with you
to accomplish this goal, and I will be happy to answer any
questions that you may have.
[The prepared statement of Ms. Campbell follows:]
Testimony of Laura Campbell
Chairman Stupak and Members of the Subcommittee, I
appreciate this opportunity to testify before you today and I
thank you for calling this hearing to examine the critically
important issue of the need for greater transparency in our
energy markets. My name is Laura Campbell and I am the
Assistant Manager of Energy Resources for Memphis Light Gas &
Water (MLGW). MLGW is the nation's largest three-service
municipal utility and currently provides service to more than
420,000 customers. Since 1939, MLGW has met the utility needs
of Memphis, Tennessee and Shelby County residents by delivering
reliable and affordable electricity, natural gas and water
service. Natural gas is the most popular means of residential
heating in the MLGW service area and we currently provide
natural gas to more than 313,000 customers.
I testify today on behalf of the American Public Gas
Association (APGA). APGA is the national association for
publicly-owned natural gas distribution systems. There are
approximately 1,000 public gas systems in 36 states and almost
700 of these systems are APGA members. Publicly-owned gas
systems are not-for-profit, retail distribution entities owned
by, and accountable to, the citizens they serve. They include
municipal gas distribution systems, public utility districts,
county districts, and other public agencies that have natural
gas distribution facilities.
APGA's members have lost confidence that the prices for
natural gas in the futures and the economically linked over-
the-counter (``OTC'') markets are an accurate reflection of
supply and demand conditions for natural gas. This lack of
confidence has increased over the past several years as
volatility in the natural gas market has drawn hedge funds and
others to the market. Restoring our trust in the validity of
the pricing in these markets requires a level of transparency
in natural gas markets which assures consumers that market
prices are a result of fundamental supply and demand forces and
not the result of manipulation or other abusive market conduct.
APGA strongly believes that this level of transparency
currently does not exist, and this has directly led to the
current lack of confidence in the natural gas marketplace.
Although APGA's number one priority is the safe and reliable
delivery of affordable natural gas, which ultimately will
require an increase in the supply of natural gas, it is equally
critical that public confidence in the pricing of natural gas
be restored through increased transparency.
APGA believes that statutory changes are necessary to
remedy the lack of market transparency which undermines the
public's confidence in the pricing integrity of these markets.
Accordingly, APGA has called upon Congress to move quickly to
pass legislation that would increase transparency in the
natural gas markets.
The Market in Natural Gas Contracts
The market for natural gas financial contracts is composed
of a number of segments. Contracts for the future delivery of
natural gas are traded on the New York Mercantile Exchange
(``NYMEX''), a designated contract market regulated by the
Commodity Futures Trading Commission (CFTC). Contracts for
natural gas are also traded in the OTC markets. OTC contracts
may be traded on multi-lateral electronic trading facilities
which are exempt from regulation as exchanges (``exempt
commercial markets'' or ``ECMs''). They may also be traded in
direct, bi-lateral transactions between counterparties, through
voice brokers or on electronic platforms. OTC contracts may be
settled financially or through physical delivery. Financially-
settled OTC contracts often are settled based upon NYMEX
settlement prices and physically delivered OTC contracts may
draw upon the same deliverable supplies as NYMEX contracts,
thus economically linking the various financial natural gas
market segments, including regulated futures markets, ECMs and
bilateral trading, whether conducted on an electronic trading
platform or otherwise.
The exemption under Section 2(h)(3) of the Act providing
for ECMs was added as part of the Commodity Futures
Modernization Act of 2000 (``CFMA''). In general, the greater
flexibility of a principles-based regulatory framework provided
for by the CFMA has worked exceedingly well with respect to the
regulated markets, as has the CFMA's overall concept of tiered
regulation based upon the characteristics of the trader and of
the commodity traded. However, since enactment of the CFMA,
changes in the nature of trading and the composition of traders
on ECMs warrant reconsideration of the provisions relating to
ECMs. More broadly, as discussed in greater detail below,
issues surrounding the lack of transparency are particularly
acute with respect to trading in contracts for natural gas and
the lack of transparency with respect to the market for natural
gas should be reconsidered. In this regard, differentiating the
appropriate regulatory response based upon the characteristics
of the particular commodity traded is consistent with the
overarching framework and philosophy of the CFMA.
Specifically, with respect to ECMs, there is scant
legislative or regulatory history with respect to the intent
behind the Section 2(h)(3) exemption. Nevertheless, the trading
platforms that have qualified for exemption under this
provision have evolved since enactment of the CFMA in a number
of ways. Initially, such markets tended to be an electronic
substitute for voice brokers with respect to the trading of OTC
contracts. Their participants were generally limited to those
in the trade and trading likely carried with it counterparty
credit exposure. Since then, however, ECMs have introduced
cleared transactions, effectively removing the counterparty
risk of such transactions which initially distinguished their
trading from trading on futures exchanges. In addition, ECMs
over the years have attracted greater numbers of non-trade
market participants, such as hedge funds. The introduction of
clearing of contracts that are financially settled based upon
the settlement prices of regulated futures contracts along with
this broader and deeper non-trade customer base has, over time,
rendered trading on some ECMs to be largely indistinguishable
from trading on regulated futures markets. These markets are
economically linked through arbitrage and the prices on one
affect prices on the other.
The economic links between the natural gas futures
contracts traded on NYMEX and those contracts, agreements and
transactions in natural gas traded in the OTC markets (which
include but are not limited only to trading on ECMs) are beyond
dispute. Without question, a participant's trading conduct in
one venue can affect, and has affected, the price of natural
gas contracts in the other. \1\
Increasingly, the price of natural gas in many supply
contracts between suppliers and local distribution companies
(``LDC"), including APGA members, is determined based upon
monthly price indexes closely tied to the monthly settlement of
the NYMEX futures contract. Accordingly, the futures market
serves as the centralized price discovery mechanism used in
pricing these natural gas supply contracts. Generally, futures
markets are recognized as providing an efficient and
transparent means for discovering commodity prices.\2\ However,
any failure of the futures price to reflect fundamental supply
and demand conditions results in prices for natural gas that
are distorted and which do not reflect its true value. This has
a direct affect on consumers all over the U.S., who as a result
of such price distortions, will not pay a price for the natural
gas that reflects bona fide demand and supply conditions. If
the futures price is manipulated or distorted, then the price a
consumer pays for the fuel needed to heat their home and cook
their meals will be similarly manipulated or distorted.
Today, the CFTC has effective oversight of NYMEX, and the
CFTC and NYMEX provide a significant level of transparency with
respect to NYMEX's price discovery function. But, the OTC
markets, which include but are not limited to ECMs, lack such
price transparency. The lack of transparency in a very large
and rapidly growing segment of the natural gas market leaves
open the potential for a participant to engage in manipulative
or other abusive trading strategies with little risk of early
detection; and for problems of potential market congestion to
go undetected by the CFTC until after the damage has been done
to the market. It simply makes no sense to have transparency
over one segment of the market and none over a much larger
segment, especially when the OTC markets are the fastest
growing sectors of the natural gas marketplace. APGA strongly
believes that it is in the best interest of consumers for
Congress to rectify this situation by passing legislation that
would ensure an adequate level of transparency with respect to
OTC contracts, agreements and transactions in natural gas.
Regulatory Oversight
NYMEX, as a designated contract market, is subject to
oversight by the CFTC. The primary tool used by the CFTC to
detect and deter possible manipulative activity in the
regulated futures markets is its large trader reporting system.
Using that regulatory framework, the CFTC collects information
regarding the positions of large traders who buy, sell or clear
natural gas contracts on NYMEX. The CFTC in turn makes
available to the public aggregate information concerning the
size of the market, the number of reportable positions, the
composition of traders (commercial/non-commercial) and their
concentration in the market, including the percentage of the
total positions held by each category of trader (commercial/
non-commercial).
The CFTC also relies on the information from its large
trader reporting system in its surveillance of the NYMEX
market. In conducting surveillance of the NYMEX natural gas
market, the CFTC considers whether the size of positions held
by the largest contract purchasers are greater than deliverable
supplies not already owned by the trader, the likelihood of
long traders demanding delivery, the extent to which contract
sellers are able to make delivery, whether the futures price is
reflective of the cash market value of the commodity and
whether the relationship between the expiring future and the
next delivery month is reflective of the underlying supply and
demand conditions in the cash market.\3\
Although the CFTC has issued ``special calls'' to one
electronic trading platform, and that platform has determined
to voluntarily provide information on traders' large
positions,[4] the CFTC's large trader reporting surveillance
system does not routinely reach traders' large OTC
positions.\5\ Despite the links between prices for the NYMEX
futures contract and the OTC markets in natural gas contracts,
this lack of transparency in a very large and rapidly growing
segment of the natural gas market leaves open the potential for
participants to engage in manipulative or other abusive trading
strategies with little risk of early detection and for problems
of potential market congestion to go undetected until after the
damage has been done to the market, ultimately harming the
consumers or producers of natural gas.
Amaranth Advisors LLC
Last year's implosion of Amaranth Advisors LLC
(``Amaranth'') and the impact it had upon prices exemplifies
these linkages and the impact they can have on natural gas
supply contracts for LDCs. Amaranth was a hedge fund based in
Greenwich, Connecticut, with over $9.2 billion under
management. Although Amaranth classified itself as a
diversified multi-strategy fund, the majority of its market
exposure and risk was held by a single Amaranth trader in the
OTC derivatives market for natural gas.
Amaranth reportedly accumulated excessively large long
positions and complex spread strategies far into the future.
Amaranth's speculative trading wagered that the relative
relationship in the price of natural gas between summer and
winter months would change as a result of shortages which might
develop in the future and a limited amount of storage capacity.
Because natural gas cannot be readily transported about the
globe to offset local shortages, the way for example oil can
be, the market for natural gas is particularly susceptible to
localized supply and demand imbalances. Amaranth's strategy was
reportedly based upon a presumption that hurricanes during the
summer of 2006 would make natural gas more expensive in 2007,
similar to the impact that hurricanes Katrina and Rita had had
on prices the previous year. As reported in the press, Amaranth
held open positions to buy or sell tens of billions of dollars
of natural gas.
As the hurricane season proceeded with very little
activity, the price of natural gas declined, and Amaranth lost
approximately $6 billion, most of it during a single week in
September 2006. The unwinding of these excessively large
positions and that of another previously failed $430 million
hedge fund-MotherRock- further contributed to the extreme
volatility in the price of natural gas. The Report by the
Senate Permanent Subcommittee on Investigations affirmed that
``Amaranth's massive trading distorted natural gas prices and
increased price volatility. \6\
The lack of OTC transparency and extreme price swings
surrounding the collapse of Amaranth have caused bona fide
hedgers to become reluctant to participate in the markets for
fear of locking-in prices that may be artificial.
Greater Transparency Needed
APGA members, and the customers served by them, do not
believe there is an adequate level of market transparency under
the current system. This lack of transparency leads to a
growing lack of confidence in the natural gas marketplace.
Although the CFTC operates a large trader reporting system to
enable it to conduct surveillance of the futures markets, it
cannot effectively monitor trading if it receives information
concerning positions taken in only one segment of the total
market. Without comprehensive large trader position reporting,
the government is currently handicapped in its ability to
detect and deter market misconduct. If a large trader acting
alone, or in concert with others, amasses a position in excess
of deliverable supplies and demands delivery on its position
and/or is in a position to control a high percentage of the
deliverable supplies, the potential for market congestion and
price manipulation exists.
Over the last several years, APGA has pushed for a level of
market transparency in financial contracts in natural gas that
would routinely, and prospectively, permit the CFTC to assemble
a complete picture of the overall size and potential impact of
a trader's position irrespective of whether the positions are
entered into on NYMEX, on an OTC multi-lateral electronic
trading facility which is exempt from regulation or through bi-
lateral OTC transactions, which can be conducted over the
telephone, through voice-brokers or via electronic platforms.
The passage of legislation is necessary to achieve this needed
level of transparency.
Bi-lateral trading
Because Amaranth's trading was largely conducted on both a
regulated futures exchange and on an unregulated electronic
trading facility, the immediate focus has been confined to the
relative inequality of transparency between those two multi-
lateral trading venues. Moreover, because the volume of
transactions in bi-lateral markets may not be as apparent as
the volume of transactions on exchanges or electronic trading
facilities there may be a tendency to discount the impact that
the bi-lateral markets have upon the price discovery process.
APGA believes that, to be comprehensive, a large trader
reporting system must include large positions amassed through
the OTC bi-lateral markets in addition to those accumulated on
futures exchanges or on OTC electronic trading facilities.
Bi-lateral trading can also take place on an electronic
trading venue that may be as attractive to traders as multi-
lateral trading facilities. Enron On-line, for example, was an
all-electronic, bi-lateral trading platform. Using this
platform, Enron offered to buy or sell contracts as the
universal counterparty to all other traders. On the Enron On-
line trading platform, only one participant--Enron--had the
ability to accept bids and offers of the multiple participants-
-its customers-- on the trading platform. This one-to-many
model constitutes a dealer's market and is a form of bi-lateral
trading.\7\
Section1a(33) of the Act further defines bi-lateral trading
by providing that, ``the term `trading facility' does not
include (i) a person or group of persons solely because the
person or group of persons constitutes, maintains, or provides
an electronic facility or system that enables participants to
negotiate the terms of and enter into bilateral transactions as
a result of communications exchanged by the parties and not
from interaction of multiple bids and multiple offers within a
predetermined, nondiscretionary automated trade matching and
execution algorithm. . . . .'' This means that it is also
possible to design an electronic platform for bi-lateral
trading whereby multiple parties display their bids and offers
which are open to acceptance by multiple parties, so long as
the consummation of the transaction is not made automatically
by a matching engine.
Both of these examples of bi-lateral electronic trading
platforms might very well qualify for exemption under the
current language of sections 2(g) and 2(h)(1) of the Commodity
Exchange Act. It is entirely foreseeable that if a CFTC large-
trader reporting regime were expanded to require the reporting
of positions entered into only on multi-lateral electronic
trading facilities and does not include bi-lateral electronic
trading platforms too, traders who wish to evade the new
reporting requirement would simply be able to move their
trading activities from an electronic trading facility to a bi-
lateral electronic trading platform, just as Amaranth moved its
trading from NYMEX to ICE.
Moreover, even in the absence of electronic trading, the
ability of traders to affect prices in the natural gas markets
through direct or voice-brokered bi-lateral trading should not
be underestimated. For example, a large hedge fund may trade
bi-laterally with a number of counterparty/dealers using
standard ISDA documentation. By using multiple counterparties
over an extended period of time, it would be possible for the
hedge fund to establish very large positions with each of the
dealer/counterparties. Each dealer in turn would enter into
transactions on NYMEX to offset the risk arising from the bi-
lateral transactions into which it has entered with the hedge
fund. In this way, the hedge fund's total position would come
to be reflected in the futures market.
Thus, a prolonged wave of buying by a hedge fund, even
through bi-lateral direct or voice-brokered OTC transactions,
can be translated into upward price pressure on the futures
exchange. As futures settlement approaches, the hedge fund's
bi-lateral purchases with multiple dealer/counterparties would
maintain or increase upward pressure on prices. By spreading
its trading through multiple counterparties, the hedge fund's
purchases would attract little attention and escape detection
by either NYMEX or the CFTC. In the absence of routine large-
trader reporting of bi-lateral transactions, the CFTC will only
see the various dealers' exchange positions and have no way of
tying them back to purchases by a single trader.
Need for Legislation
As previously stated in this testimony, establishing the
level of transparency that APGA maintains is warranted will
require the passage of legislation. There have been a number of
bills introduced in the House that directly address market
transparency. Those bills include the PUMP Act introduced by
Chairman Stupak, the Market TRUST Act introduced by Congressmen
Barrow (D-GA) and Graves (R-MO) and the Close the Enron
Loophole Act introduced by Congressman Welch (D-VT). The CFTC
has also recommended changes to the Act that would extend its
large trading reporting system and other regulatory
requirements to contracts traded on an ECM that are significant
price discovery contracts.\8\
APGA believes that the legislation that Congress enacts to
enhance transparency in these markets should require that large
traders report their positions regardless of whether they are
entered into on designated contract markets, on electronic
trading facilities, on OTC bi-lateral electronic trading
platforms, in the voice-brokered OTC markets or in direct
bilateral OTC markets. This would treat all trading positions
in financial natural gas contracts equally in terms of
reporting requirements. Extending large trader reporting to OTC
natural gas positions and to positions entered into on
electronic trading facilities will provide the CFTC with a
complete picture of the natural gas marketplace and ensure that
the cop on the beat has the tools necessary to be effective.
Although some have raised concerns about the costs of
expanding the large trader reporting system, APGA believes the
costs would be reasonable. Insofar as the CFTC's large trader
reporting system is already operational, there would be no need
to create an entirely new program to collect this information.
In addition, large traders, such as those which would be
required to report to the CFTC, will likely have automated
recordkeeping systems for their own internal risk management
purposes that could be adapted for the purpose of reporting
positions to the CFTC. APGA believes that the costs of a
comprehensive large trader reporting system for natural gas
would be reasonable and are far outweighed by the benefits in
terms of helping assure consumers that the market price is a
reflection of appropriate market forces.
Even if Congress determines to extend the CFTC's routine
large trader reporting system only to contracts traded on ECMs,
it should take care that the enhanced level of transparency is
not drawn too narrowly. In this regard, unlike some of the
legislative proposals such as the Market TRUST Act and the
Close the Enron Loophole Act which apply broadly to ECMs, the
CFTC's legislative recommendations apply only to those specific
contracts traded on an ECM that have been found to be a
significant price discovery contract. Where some contracts on
an ECM are found to be a significant price discovery contract
but other, related contracts are not, there is the danger that
in response to regulatory inquiries or disciplinary action, a
trader would move his positions to the less transparent, less
regulated contracts trading on the same trading platform. This
is the very course of action that Amaranth followed when, in
order to avoid regulatory scrutiny, it liquidated its positions
on NYMEX and opened similar positions on ICE. In order to avoid
this possibility, APGA urges Congress to extend the CFTC's
large trader reporting system to all contracts traded on an ECM
for a commodity the prices of which are discovered to a
material degree by trading on the ECM. In this way, a trader
will not be able to obscure its positions by moving them
between contracts, some regulated and others not, which are
traded on the same ECM.\9\
CFTC Enforcement Authority
The need to provide the CFTC with additional surveillance
tools through legislation does not imply that the CFTC has not
been vigilant in pursuing wrongdoers using its current
statutory enforcement authorities. In this regard, we note that
the CFTC has assessed over $300 million in penalties, and has
assessed over $2 billion overall in government settlements
relating to abuse of these markets. These actions affirm the
CFTC's vigor in pursuing misconduct in these markets. However,
while APGA applauds the CFTC's vigorous enforcement efforts to
address misconduct with respect to trading in the energy
markets, it notes that increased coordination between Federal
regulators is necessary to provide U.S. consumers with the full
measure of protection that Congress has provided.
In this regard, both the CFTC and the Federal Energy
Regulatory Commission (FERC) initiated enforcement actions
against Amaranth in connection with Amaranth's trading
activities in natural gas, alleging that Amaranth had engaged
in price manipulation. The CFTC brought a civil enforcement
action against Amaranth in the United States District Court for
the Southern District of New York. \10\ The FERC brought an
administrative action, issuing an Order to Show Cause and
Notice of Proposed Penalties with respect to Amaranth's trading
activities.\11\ Significantly, FERC's enforcement action was
the first brought by it under the anti-manipulation authority
granted to FERC by the Energy Policy Act of 2005, Pub. L. No.
109-58 (2005).
In response to FERC's commencement of its enforcement
action, Amaranth argued to the U.S. District Court that its
futures trading activities are subject to the exclusive
jurisdiction of the CFTC and beyond the jurisdiction of FERC.
FERC maintains that its authority to impose penalties upon
those who manipulate markets in natural gas applies not only to
direct participants in the physical gas markets, but also to
entities whose manipulative conduct in the financial markets
directly or indirectly impacts the price of FERC-jurisdictional
transactions. On September 28, 2007 the American Public Gas
Association, American Public Power Association (APPA) and
National Rural Electric Cooperative Association (NRECA) jointly
filed an amicus memorandum of law with the court in support of
FERC's authority to bring an enforcement action against
Amaranth in connection with Amaranth's futures-related trading
activities.
As a group that represents consumers, APGA supported
Congress' action in providing FERC with its new anti-
manipulation authority in the Energy Policy Act of 2005. APGA's
view was then, and remains, that the anti-manipulation
authority granted to FERC affords consumers an important
additional measure of protection. Accordingly, APGA urges the
CFTC and FERC to work closely together towards exercising their
respective authorities in a way that increases the protection
of energy consumers from market abuses, as we believe, Congress
intended.
In any event, it must be borne in mind that although these
efforts to punish those that manipulate or otherwise abuse
markets are important, catching and punishing those that
manipulate markets after a manipulation has occurred is not an
indication that the system is working. To the contrary, by the
time these cases are discovered using the tools currently
available to government regulators, our members, and their
customers, have already suffered the consequences of those
abuses in terms of higher natural gas prices. Greater
transparency with respect to traders' large positions, whether
entered into on a regulated exchange or in the OTC markets in
natural gas will provide the CFTC with the tools to detect and
deter potential manipulative activity before our members and
their customers suffer harm.
Finally, APGA believes that greater public involvement
would assist the CFTC as its policies necessarily evolve to
meet the challenge of these new conditions in the energy
markets. In this regard, APGA strongly commends the CFTC for
its recent announcement of its intention to establish an
Advisory Panel on Energy Markets composed of industry experts,
including representatives of consumer organizations, to offer
technical advice on issues relating to reporting and
surveillance of the markets. APGA believes this group will play
a valuable role in providing technical advice to the CFTC on
issues relating to reporting and surveillance of the markets. *
* * * *
Natural gas is a lifeblood of our economy and millions of
consumers depend on natural gas every day to meet their daily
needs. It is critical that the price those consumers are paying
for natural gas comes about through the operation of fair and
orderly markets and through appropriate market mechanisms that
establish a fair and transparent marketplace. Without giving
the government the tools to detect and deter manipulation,
market users and consumers of natural gas who depend on the
integrity of the natural gas market cannot have the confidence
in those markets that the public deserves.
----------
\1\ See ``Excessive Speculation in the Natural Gas
Market,'' Report of the U.S. Senate Permanent Subcommittee on
Investigations (June 25, 2007) (``PSI Report''). The PSI Report
on page 3 concluded that ``Traders use the natural gas contract
on NYMEX, called a futures contract, in the same way they use
the natural gas contract on ICE, called a swap. . . . The data
show that prices on one exchange affect the prices on the
other.''
\2\ See the Congressional findings in Section 3 of the
Commodity Exchange Act, 7 U.S.C. 1 et seq. (``Act''). Section
3 of the Act provides that, ``The transactions that are subject
to this Act are entered into regularly in interstate and
international commerce and are affected with a national public
interest by providing a means for . . . discovering prices, or
disseminating pricing information through trading in liquid,
fair and financially secure trading facilities.''
\3\ See letter to the Honorable Jeff Bingaman from the
Honorable Reuben Jeffery III, dated February 22, 2007.
\4\ Id, at 7. The CFTC presumably issued this call for
information under Section 2(h) (5) of the Act.
\5\ As explained in greater detail below, special calls are
generally considered to be extraordinary, rather than routine,
requirements. Although special calls may be an important
complement to routine reporting requirements in conducting
market surveillance, they are not a substitute for a
comprehensive large trader reporting system.
\6\ See PSI Report at p. 119
\7\ This stands in contrast to a many-to-many model which
is recognized as a multi-lateral trading venue. This
understanding is reflected in section 1a (33) of the Act, which
defines ``Trading Facility'' as a ``group of persons that . . .
provides a physical or electronic facility or system in which
multiple participants have the ability to execute or trade
agreements, contracts or transactions by accepting bids and
offers made by other participants that are open to multiple
participants in the facility or system.''
\8\ ``Report on the Oversight of Trading on Regulated
Futures Exchanges and Exempt Commercial Markets,'' Report of
the Commodity Futures Trading Commission, http://www.cftc.gov/
stellent/groups/public/@newsroom/documents/file/pr5403-07--
ecmreport.pdf (October 2007).
\9\ As part of this authority, the CFTC could determine
that particular contracts with de minimus levels of trading
would be exempt from the reporting requirement. This would
enable the CFTC to exempt particular contracts traded on the
ECM that are inactive or too illiquid to be used in this way by
a trader with large positions.
\10\ See, U.S. Commodity Futures Trading Commission v.
Amaranth Advisors, L.L.C., Amaranth Advisors (Calgary) ULC and
Brian Hunter, No. 07CIV 6682 (SDNY filed July 25, 2007).
\11\ Amaranth Advisors, LLC et al, Federal Energy
Regulatory Commission Docket No. IN07-26-001.
Mr. Stupak. Thank you, Ms. Campbell. Mr. Cota, please,
opening statement.
STATEMENT OF SEAN COTA, PRESIDENT AND CO-OWNER, COTA & COTA
INC.
Mr. Cota. Honorable Chairman Stupak, Ranking Member
Whitfield, and distinguished members of the committee, thank
you for this invitation to testify before you today. I
currently serve as the regional chair of Petroleum Marketers
Association of America, a national federation of 46 States in
regional associations representing over 8,000 independent fuel
marketers that account for about half the gasoline sold and
nearly all of the distillate sold to American consumers in the
United States. I am also the president of New England Fuel
Institute, which represents over 1,000 heating oil fuel dealers
in related service companies throughout the Northeast. NEFI
members' companies deliver approximately 40 percent of the
nation's heating oil, and many market diesel fuel, heating oil,
propane, kerosene, jet fuel, and off-road diesel and motor
vehicle fuels.
Finally, I provide insight today as a co-owner and
President of Cota & Cota of Bellows Falls, Vermont, a third-
generation family-owned and operated heating fuel provider in
southern Vermont and western New Hampshire. Unlike larger
energy companies, most retailer dealers are small, family-run
businesses. Also unlike larger energy companies, heating oil
and propane dealers deliver product directly to the doorstep of
American homes and businesses.
With the winter weather once again settling across the
country, American families are facing a new and cold reality.
In the Northeast, where consumers use over 80 percent of the
nation's heating oil, the increase in heating oil costs has
left them not only wondering how to fit the heating bill into
the family budget but also wondering--and this is the billion-
dollar question--why energy prices have skyrocketed so
abruptly.
Excessive speculation in the market is driving this runaway
train. Even the general secretary of OPEC said this week, ``the
market is not controlled by supply and demand. It is totally
controlled by speculators who consider oil as a financial
asset.'' The rise in heating oil prices and crude prices in
recent months has dragged with it nearly every single refined
product, especially heating oil. Since March 2007, when the
industry recognized the end of the peak heating season demand,
the wholesale price of heating oil had risen a remarkable 32
percent from $1.88 per gallon to $2.77 per gallon, despite
reports by the EIA that heating inventories remain well above
the 5-year average.
Home heating fuel dealers do not benefit from inflated
prices now set by activity in the energy commodities market.
For us, volatility and skyrocketing prices mean strained credit
lines with terminals, suppliers, and their banks, increased
cash demands. A load of heating oil to me now costs $27,000,
where just a few years ago it was less than $10,000. Struggling
families find it harder to pay their bills, further straining
the dealers' credit obligations with their banks and suppliers.
Consumers are more likely to use credit cards for their
purchases, due to hidden credit card company interchange fees,
and consumers ultimately pay more for their fuel. Federal and
State LIHEAP dollars, already at severely insufficient levels,
become diluted by rising prices, and each dollar invested in
the energy assistance program is only able to help fewer
families in need.
Additionally, many heating fuel companies like mine hedge
in an effort to protect consumers against roller-coaster-like
price volatility in energy commodity markets. Because of this
we strongly support open, transparent exchanges subject to the
rule of Law. In fact, it is essential to a business like me,
which began to offer fixed pricing to our consumers 20 years
ago. We enter into NYMEX-based futures contracts with our
suppliers, who purchase contracts for future delivery and then
resell these contracts to me for profit. In this way, companies
like mine are able to financially hedge heating fuels to the
benefit of the consumer and help protect them against
uncertainty and volatility.
However, the ability of commodities markets to set the
price based upon economic fundamentals has become less and less
reliable, and, as a result, so do our hedging programs. As the
influence of price setting functions under the under-regulated
markets continue to grow, American consumers are forced to ride
the same speculative roller coaster as the energy trader. My
Congressman, Peter Welch, from Vermont, has helped to bring
this important question for my State and for all American
consumers nationwide to these halls.
For far too long, insufficient oversight in transparency
has encouraged excessive speculation in creating a trading
environment that rewards misdeeds like the recent allegations
against Amaranth Hedge Funds in British Petroleum. Loopholes in
Federal Law have created what I call ``dark markets'', energy
trading environments that operate without adequate Federal
oversight or regulation. Today, the vast majority of trading
occurs in these markets.
We strongly urge that Congress make and take swift action
to bring these dark markets to light. We would recommend that,
one, closing the notorious Enron loophole ripped open by the
Commodities Futures Modernization Act, through which billions
of dollars have poured since it was created in 2001. Virtually
overnight, this loophole freed electronic trading from the
Federal oversight. Congress needs to close the loophole and
enclose it for all energy commodities, thereby returning the
CFTC to the statutory authority that it lost 7 years ago.
Two, investigate the CFTC's use of no-action letters, which
Professor Greenberger alluded to earlier, which I call the no-
action loophole. In this area, the CFTC could provide
regulatory exemptions to applicable foreign boards of trade
that offer contracts for delivery within the United States. The
current process may fail to provide sufficient public notice
and consultation and may not take into account the impact that
these letters have had on the market. Moreover, in order to
obtain such exemptions, the CFTC requires that a comparable
regulatory authority be presented in a country where these
exchanges operate. Congress should examine whether or not it
determined such regulatory authorities be comparable. And
finally, we are concerned that no-action letters may have been
approved for exchanges that sought to establish electronic
platforms overseas in order to circumvent U.S. regulatory
authority.
And three, provide adequate funding to the CFTC, which
currently receives approximately one tenth of the funding of
its sister regulator, the Securities and Exchange Commission.
We make these recommendations while acknowledging that there
are several different policy recommendations floating around on
Capitol Hill from an array of sources, including legislators,
the Commission, Administration officials, futures groups, and
commodity exchanges themselves. We ask that your deliberations
take into account all trading environments in all energy
commodities, not just the regulation of one commodity to the
exclusion of others.
Moreover, we urge lawmakers and Administration officials
take into account the impact of these reforms in rulemaking on
the American consumer and small businesses like mine. Again,
thank you, Mr. Chairman, and to your colleagues for this
opportunity to present my insight on this issue. And I am open
to any questions later.
[The prepared statement of Mr. Cota follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Stupak. Thank you. Mr. LaSala, please, opening
statement.
STATEMENT OF THOMAS F. LASALA, CHIEF REGULATORY OFFICER,
DIVISION OF COMPLIANCE AND RISK MANAGEMENT, NEW YORK MERCANTILE
EXCHANGE, INC.
Mr. LaSala. Yes, Mr. Chairman and members of the
subcommittee, my name is Tom LaSala, and I am the chief
regulatory officer of the New York Mercantile Exchange, Inc.
NYMEX is the world's largest forum for trading of physical-
commodity-based futures contracts, including energy and metals
products. NYMEX has been in business for 135 years and is a
federally chartered marketplace, fully regulated by the
Commodity Futures Trading Commission, both as a derivatives
clearing organization and as a designated contract market, or
DCM. A DCM maintains the highest and most comprehensive level
of regulatory oversight to which a derivatives trading facility
may be subject under current Law and regulation.
On behalf of the Exchange, its Board of Directors, and
shareholders, I thank you and the members of the Subcommittee
on Oversight and Investigations for the opportunity to
participate in today's hearing. NYMEX is regulated by the CFTC,
which by statute has long had exclusive jurisdiction over
futures contracts, trading, and markets. As a benchmark for
energy prices around the world, trading on NYMEX is
transparent, open, and competitive.
In the CFTC's direct monitoring of futures trading, NYMEX,
as a DCM, has an affirmative statutory obligation to act as a
self-regulatory organization, relying upon the standards set by
statute and by CFTC regulation and interpretation. As an SRO,
NYMEX routinely uses tools such as large trader reporting,
position accountability, and position limits to monitor and
police trading in our contracts. A new statutory tier of
trading facility, the Exempt Commercial Market, or ECM, was
added to the CFTC's governing statute in 2000. The ECM is
essentially exempt from substantive CFTC regulation and also
has no explicit SRO duties by statute. In addition, to date,
ECMs have not voluntarily assumed any SRO duties.
As a result of market changes that were not anticipated in
2000, such as the effective linking of trading on unregulated
venues with trading on regulated venues of competing products,
certain ECMs now serve in a price discovery role and thus
trigger public policy concerns and warrant a higher degree of
CFTC oversight and regulation. From its vantage point as a DCM,
NYMEX was able to observe firsthand how this regulatory
disparity operated in the failure of Amaranth, a $7 billion
hedge fund that focused upon trading of energy products that
was active in a NYMEX natural gas contract.
In August of 2006, NYMEX proactively took steps to maintain
the integrity of its markets by ordering Amaranth to reduce its
open positions in the National Gas Futures Contract. Instead,
Amaranth sharply increased its positions on the unregulated and
nontransparent ICE electronic trading platform. Because ICE and
NYMEX trading venues for natural gas are tightly linked and
highly interactive with each other, Amaranth's response to
NYMEX's regulatory directive admittedly reduced its positions
on NYMEX but did not reduce Amaranth's overall risk or the risk
to Amaranth's clearing member. Unfortunately neither NYMEX nor
the CFTC had efficient means to monitor Amaranth's positions on
ICE or to take steps to have Amaranth reduce its participation
in that trading venue.
A recent CFTC report to Congress recommends that such
contracts should be subject by statute to large trader
reporting, position limits, or position accountability, self-
regulatory oversight, obligations, and emergency authority for
both the CFTC and for the ECM itself. NYMEX strongly supports
the CFTC's legislative proposals. These proposals are also
supported by the President's Working Group on Financial
Markets.
Finally, Congress created the CFTC in 1974, providing the
new agency with exclusive jurisdiction over futures markets.
Congress intended the CFTC Act of 1974 to strengthen futures
regulation, create a comprehensive regulatory structure for
futures trading, and avoid regulatory gaps. Further, Congress
intended that the new agency be an expert in futures
regulation, a function which requires highly specialized
skills. The CFTC has demonstrated such expertise. In subsequent
reauthorizations, when Congress intended to create limited
exemptions to that authority, it has always done so through
express amendments of the CFTC's governing statute.
Consequently, most observers have concluded that Congress
did not intend to alter the CFTC's exclusive jurisdiction with
the Energy Policy Act of 2005. The contrary interpretation now
being pursued by FERC substantially harms futures markets by
adding the cost and uncertainty of conflicting standards. It
also severely undermines the ability of NYMEX and other
regulated exchanges to carry out their SRO responsibilities.
I thank you for your time today and welcome any subsequent
questions you may have.
[The prepared statement of Mr. LaSala follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Stupak. Thank you, Mr. LaSala. Mr. Vice, for an opening
statement, please, sir.
STATEMENT OF CHARLES A. VICE, PRESIDENT AND CHIEF OPERATING
OFFICER, INTERCONTINENTAL EXCHANGE, INC.
Mr. Vice. Chairman Stupak, Ranking Member Whitfield, I am
Chuck Vice, president and chief operating officer of the
Intercontinental Exchange, or ICE. We very much appreciate the
opportunity to appear before you today to give our views on
energy markets.
As background, ICE was established in 2000 as an over-the-
counter market. Since that time, ICE has grown significantly,
both through product and technology innovations as well as
through acquisition of other exchanges. Today ICE operates a
leading global marketplace in futures and OTC derivatives
across a variety of asset classes. Commercial hedgers use our
products to manage risks while investors provide liquidity
necessary to maintain and grow the markets. ICE hosts four
separate marketplaces on our electronic trading platform.
First there is ICE's OTC energy market, which operates
under the Commodity Exchange Act as an exempt commercial
market, or ECM. Second, there's ICE Futures Europe, formerly
known as the International Petroleum Exchange, which is
regulated by the UK Financial Services Authority. Third, there
is ICE Futures US, formerly known as the Board of Trade of the
City of New York, or the NYBOT, which is a CFTC-regulated, DCM
contract market. And fourth, there is the Winnipeg Commodity
Exchange, which is regulated by the Manitoba Securities
Commission.
ICE has always been and continues to be a strong proponent
of competitive markets and of regulatory oversight of those
markets. To that end, we have continuously worked with FERC,
the CFTC, and other regulatory agencies in the U.S. and abroad
to ensure that they have access to all relevant information
regarding trading activity in our markets. We strongly support
legislative and regulatory changes that will enhance the
quality of oversight and available information with respect to
the energy markets. Over the past several months, ICE has been
working with members of Congress to create an enhanced but
appropriate level of oversight over OTC energy markets that are
either economically linked to a designated contract market and
its price discovery function or serve a significant price
discovery function themselves.
By appropriate, ICE means that any regulatory changes that
are made need to reflect the varying nature of ICE's many OTC
markets and the key differences between contracts on ICE that
serve a significant price discovery function and those that do
not. We welcome the opportunity to work with the subcommittee
and its staff on these important issues.
Because OTC markets tend to be global in nature, most are
increasingly electronic. ICE responded to the transparency and
speed enjoyed in other OTC markets as an ECM by establishing
its many-to-many electronic marketplace for trading physical
energy commodities and financially settled derivatives or
swaps. In effect, ICE performs the same function as a voice
broker in the OTC market but does so through an electronic
platform. Voice brokers offer limited transparency and only
then to the largest firms. ICE, however, provides the same
high-quality information to all traders, large and small, and
at the same instant. ICE offers faster and more efficient
execution while providing regulators with a comprehensive audit
trail, none of which is available from voice brokers.
The introduction of ICE's platform has promoted competition
and innovation in the energy derivatives market to the benefit
of all market participants and consumers generally. As the CFTC
pointed out in its Senate PSI testimony, ``the ability to
manipulate prices on either NYMEX or ICE has likely been
reduced, given that ICE has broadened participation in
contracts for natural gas.'' Importantly, greater participation
means increased liquidity, lower transaction costs, and tighter
bid/ask spreads, which lowers the cost of hedging energy price
risk for businesses.
The problem with one-size-fits-all regulation can be
illustrated by contrasting the historic nature of futures
markets with the OTC markets. Recognizing the importance of
futures pricing benchmarks to the general public and the retail
accessibility of these markets, core principles were developed
to facilitate regulation of futures trading by the designated
contract market. The high level of liquidity typical in
benchmark contracts makes application of core principles, such
as market monitoring and position accountability, feasible and
appropriate. Suggesting that these same DCM core principles,
which were developed with the futures exchange model in mind,
should apply to all OTC contracts traded on an ECM market is
attempting to fit a square peg in a round hole.
While some level of additional reporting and a system of
accountability limits is appropriate for certain contracts,
most of the energy swaps on ICE are niche OTC products that
have little in common with futures benchmarks and are not
amenable to the application of DCM core principles.
I would now like to offer a quick comment on the CFTC/FERC
jurisdictional question. Although many believe that FERC and
CFTC's jurisdictions conflict, ICE believes they are
complementary. That said, overlapping regulation in any market
creates uncertainty over compliance with two separate varying
and sometimes conflicting legal standards. There is a clear
role for each regulator, and we believe that FERC and the CFTC
should be able to coordinate rather than duplicate their
responsibilities.
In conclusion, as an operator of global futures and OTC
markets and as a publicly-held company, ICE understands the
importance of ensuring the utmost confidence in its markets. To
that end, we have continuously worked with the CFTC and FERC to
ensure that they have access to all relevant information
regarding trading activity in our markets. Mr. Chairman, thank
you for the opportunity to share our views.
[The prepared statement of Charles A. Vice follows:]
Testimony of Charles A. Vice
1. ICE Operates a Transparent Platform. ICE provides a
reliable, transparent over-the-counter market for trading
physical energy commodities and financially-settled OTC
derivatives. ICE has promoted competition and innovation on the
derivatives market, which has lowered transaction costs for
energy users.
2. One Size Regulation Does not Fit All Markets or
Contracts. Many of the products on ICE are niche OTC products
that trade in illiquid markets. Applying Designated Contract
Market (DCM) core principles to these markets does not make
sense. ICE supports creating appropriate oversight of energy
markets that serve a significant price discovery market or
impact a significant price discovery market on a DCM. However,
the two-tier regulatory structure currently in place should be
kept for DCMs and Exempt Commercial Markets.
3. The Federal Energy Regulatory Commission and the
Commodity Futures Trading Commission have Complementary
Jurisdiction. ICE believes that FERC and the CFTC have
complementary jurisdiction in energy markets. However, dual
regulation would cause harm to the markets. There is a clear
role for each regulator to oversee the energy markets and FERC
and the CFTC should be able to coordinate their oversight and
enforcement responsibilities.
4. Funding of the CFTC. The CFTC is currently under-funded
and ICE supports increasing their budget. However, ICE urges
caution in levying a "transaction tax" or "user fee."
December 12, 2007
Chairman Stupak, Ranking Member Whitfield, I am Chuck Vice,
President and Chief Operating Officer of the
IntercontinentalExchange, Inc., or "ICE." We very much
appreciate the opportunity to appear before you today to give
our views on energy markets.
As background, ICE was established in 2000 as an over-the-
counter (OTC) market. Since that time, ICE has grown
significantly, both through its own market growth fostered by
ICE's product, technology and trading innovations, as well as
by acquisition of other markets to broaden its product
offerings.
Today, ICE operates a leading global marketplace in futures
and OTC derivatives across a variety of product classes,
including agricultural and energy commodities, foreign exchange
and equity indexes. Commercial hedgers use our products to
manage risk and investors provide necessary liquidity to the
markets. Headquartered in Atlanta, ICE has offices in New York,
Chicago, Houston, London, Singapore, Winnipeg and Calgary.
ICE hosts four separate markets on our electronic trading
platform - ICE's OTC energy market, which operates under the
Commodity Exchange Act (CEA) as an "exempt commercial market,"
or ECM, and three subsidiaries: ICE Futures Europe, formerly
known as the "International Petroleum Exchange," which is
regulated by the UK Financial Services Authority; ICE Futures
US, formerly known as "The Board of Trade of the City of New
York (NYBOT)," which is a CFTC-regulated Designated Contract
Market (DCM), and the Winnipeg Commodity Exchange, which is
regulated by the Manitoba Securities Commission.
ICE has always been and continues to be a strong proponent
of open and competitive markets in energy commodities and
related derivatives, and of regulatory oversight of those
markets. As an operator of global futures and OTC markets and
as a publicly-held company, we strive to ensure the utmost
confidence in the integrity of our markets and in the soundness
of our business model. To that end, we have continuously worked
with FERC, the CFTC and other regulatory agencies in the U.S.
and abroad in order to ensure that they have access to all
relevant information available to ICE regarding trading
activity on our markets and we will continue to work with all
relevant agencies in the future. ICE strongly supports
legislative and regulatory changes that will enhance the
quality of oversight and available information with respect to
the energy markets.
Over the past several months, ICE has been working with
members of Congress to create appropriate oversight of certain
energy markets that either impact a designated contract market,
and its price discovery function, or which separately serve a
significant price discovery function. By appropriate, ICE
believes that any legislative or regulatory changes that are
made need to reflect the different nature of ICE's varied
markets and the significant differences between contracts on
ICE that serve a significant price discovery function and those
that do not. We also believe that any consideration of possible
changes to the current regulatory structure must be based upon
an understanding of the operations of "exempt commercial
markets," such as ICE, and of the balance struck by Congress
and the CFTC between overseeing these markets while still
allowing them to function in the context of OTC trading by
commercial and institutional participants. We welcome the
opportunity to work with the Subcommittee and its staff on
these important issues.
ICE Operates a Transparent Platform
Broadly, because OTC markets tend to be global in nature,
most OTC markets are now conducted electronically across most
asset classes, including OTC markets for U.S interest rate
instruments, foreign exchange and debt securities. ICE
responded to the transparency and speed enjoyed in other OTC
markets by establishing its many-to-many electronic marketplace
for trading physical energy commodities and financially-settled
over-the-counter derivatives, primarily swaps, on energy
commodities. ICE in effect performs the same function as a
"voice broker" in the OTC market, but does so through an
electronic platform. Voice brokers offer limited transparency
and only then to the largest trading firms. ICE, however,
provides the same high quality information to all traders, big
and small, and at the same instant. The ICE electronic market
also offers faster and more efficient execution while providing
regulators with a comprehensive audit trail with respect to
orders entered, and transactions executed - none of which is
available from voice brokers. The introduction and development
of ICE's platform have promoted competition and innovation in
the energy derivatives market, to the benefit of all market
participants and consumers generally. The reliability of ICE's
markets has also resulted in an increasing preference for
electronic trading in these markets. NYMEX, in its recent
testimony before the Senate Permanent Subcommittee on
Investigations (the "Senate PSI"), noted that 80-85% of its
volume is now traded electronically, a development driven
largely by competition from ICE. The CFTC also pointed out, in
its Senate PSI testimony, that "the ability to manipulate
prices on either [NYMEX or ICE] has likely been reduced, given
that ICE has broadened participation in contracts for natural
gas." Importantly, greater participation means heightened
liquidity, which results in lower transaction costs and tighter
bid/ask spreads. This makes the cost of hedging energy price
risk lower, which results in cheaper operating costs for
businesses.
Participants on ICE enter bids and offers electronically
and are matched in accordance with an algorithm that executes
transactions on the basis of time and price priority.
Participants executing a transaction on our platform may settle
the transaction in one of two ways - on a bilateral basis,
settling the transaction directly between the two parties, or
on a cleared basis through LCH.Clearnet using the services of a
futures commission merchant that is a member of LCH.Clearnet.
In addition to providing the clearing house with daily
settlement prices, ICE is also responsible for maintaining data
connectivity to the clearing house.
It is important to note that there are substantial
differences between ICE's OTC market, other portions of the OTC
market, and the NYMEX futures market. These differences
necessarily inform and guide the appropriate level of oversight
and regulation of our markets. First, ICE is only one of many
global venues on which market participants can execute OTC
trades. A significant portion of OTC trading in natural gas is
executed through voice brokers or direct bilateral negotiation
between market counterparties. Of the available forums, only
ICE (and any other similarly-situated ECMs) is subject to CFTC
jurisdiction and the CFTC's regulations, or to limitations on
the nature of its participants.
Second, participants in the futures markets must either
become members of the relevant exchange or trade through a
futures commission merchant that is a member. In contrast,
ICE's OTC market, by law, is a "principals only" market in
which participants must have trades executed in their own names
on the system.
Third, the OTC market offers a substantially wider range of
products than the futures markets, including, for example,
hundreds of niche derivative contracts on natural gas and power
pricing at over 100 different delivery points in North America.
The availability of these niche markets on ICE has improved
transparency and lowered transaction costs via tighter bid-ask
spreads, but volume nonetheless remains very low at most
points. The market reality, for most of these illiquid points,
is that participation is limited to the very small number of
marketers, utilities, and others that have some intrinsic
supply or demand interest.
Fourth, the most liquid products traded in the OTC market
broadly and on the ICE OTC market specifically are cash-settled
swaps that require one party to pay to the other an amount
determined by the final settlement price in the corresponding
futures contracts but do not, and cannot, result in the
physical delivery or transfer of energy commodities. These
'lookalike' swaps have been widely used by OTC energy market
participants long before the creation of ICE. In fact, these
swaps are useful and common in any market for which there are
benchmark futures prices. Our Henry Hub natural gas swap, for
example, constitutes an important commercial hedging vehicle
and has served as an important complement to and a hedge for
the NYMEX Henry Hub natural gas futures contract. An
understanding of the ICE markets is critical to any
determination of the appropriate regulation of these markets.
ICE and its market participants, including energy
producers, distributors and users, benefited significantly from
the regulatory flexibility embodied in the CFMA through the ECM
structure established under section 2(h)(3) of the Act. The
tangible benefits to the marketplace included more efficient
hedging of energy price risk (tighter markets), greater price
transparency in all parts of the marketplace, and vastly
improved liquidity through the introduction of more
participants (and thus greater price competition) in the
markets. These benefits have not been limited to those brought
about directly by ICE's business and its product offerings, but
include those resulting from changes to the business models and
product offerings of other market participants that responded
to the competitive challenge presented by ICE's business.
As these markets have grown and developed since passage of
the CFMA, new regulatory challenges have emerged. ICE advocates
a targeted approach to any reform of the CEA. Such an approach
recognizes the unique characteristics of the many customized
markets that have evolved and the importance of continuing to
encourage market innovation.
One Size of Regulation Does Not Fit All Markets or Contracts
The problem with "one size fits all" regulation can best be
illustrated by contrasting the historic nature of futures
markets (limited number of actively traded benchmark contracts,
all transactions executed through a broker who can trade for
its own account or that of a retail customer) with the ECM OTC
swaps markets (large number of niche products, many illiquid
and thinly traded, principals only trading). Recognizing the
importance of futures pricing benchmarks to the general public
(a DCM is obligated to publish its prices to be used by the
broader market), and in recognition of the potential for
conflicts of interest due to members trading for their own
accounts alongside business transacted on behalf of customers,
some of whom were retail customers, DCM core principles were
developed to facilitate regulation of the markets by the DCM,
which acted as a self regulatory organization. The typical high
level of liquidity in benchmark contracts make application of
core principles such as market monitoring and position
accountability and limits feasible and appropriate.
Suggesting that these same DCM core principles, which were
developed with the futures exchange model in mind, should apply
to all OTC swap contracts traded on an ECM market is attempting
to fit the proverbial square peg in a round hole. While some
level of additional reporting and a system of position
accountability limits may be appropriate for certain contracts
- specifically, those that settle on a futures market contract
price and that are the true economic equivalent of a contract
actively traded on a regulated futures market - most of the
energy swaps available on ICE are niche OTC products that trade
in illiquid markets that are not amenable to the application of
DCM core principles. For example, how would an ECM actively
monitor an illiquid swaps market in an attempt to "prevent
manipulation" where price changes can be abrupt due to the
limited liquidity in the market? How would an ECM swaps market
administer accountability limits in a market that has only a
handful of market participants? Should the ECM question when a
single market participant holds 50% of the liquidity in an
illiquid market when the market participant is one of the only
providers of liquidity in the market?
It is important to analyze these questions not in
isolation, but in the context of market participants having
alternatives such as OTC voice brokers through which they can
conduct their business. Importantly, such OTC voice brokers can
even offer their customers the benefits of clearing through use
of block clearing facilities offered by NYMEX (and also by
ICE). Faced with constant inquiries or regular reporting by the
ECM related to legitimate market activity, and facing no such
monitoring when it transacts through a voice broker, market
participants might choose to conduct their business elsewhere.
It is for these and other reasons that Congress and the
Commission have developed the carefully calibrated two-tier
regulatory structure applicable to DCMs and ECMs. We believe
that the judgments made by Congress and the Commission thus far
have been prudent and should generally be maintained.
FERC and the CFTC have Complementary Jurisdiction
In 2005, Congress passed the Energy Policy Act, which
granted FERC broader authority to police manipulation in energy
markets. Although many believe that FERC and CFTC's
jurisdictions conflict, ICE believes that they complement each
other. As noted before, ICE operates a global company across
the span of energy markets: physical, OTC, and futures.
Accordingly, it works closely with FERC and the CFTC to help
ensure fair, competitive trading. ICE believes that FERC and
the CFTC are capable regulators in their respective areas in
the physical, OTC, and futures markets.
It is important that this jurisdiction remain
complimentary, however. Overlapping regulation of the same
conduct would likely result in harm to markets. Applying dual
regulation to energy markets would create uncertainty over
compliance with two separate, varying and sometimes conflicting
legal standards. The only certainty would be the increased cost
to U.S. businesses from having to comply with two regulators.
The possible effect would be that these firms, operating on a
global scale, would take their business overseas to other
trading venues. There is a clear role for each regulator to
oversee the energy markets, and we believe that FERC and the
CFTC should be able to coordinate, rather than duplicate, their
oversight and enforcement responsibilities.
Funding of the CFTC
ICE believes that the CFTC is currently under funded and we
support Congress increasing the CFTC's budget. ICE strongly
supports increasing the Commission's budget, but urges caution
in considering whether to levy a "transaction tax" or "user
fee" on futures transactions. As an operator of both domestic
and foreign futures exchanges, ICE recognizes that the futures
industry is highly competitive, on both a domestic and global
basis. Trading firms often operate on thin margins. A
transaction tax could double the trading costs for market
makers, who provide important liquidity to the market. If these
trading participants left all or some markets, that would take
important market liquidity with them. A recent study of
transaction taxes on futures markets found that a futures tax
would negatively impact volume and bid/ask spreads.\1\
Consumers would feel the brunt of this tax, as businesses would
be pass on the increased cost of offsetting price risk in less
liquid markets to them.
Further, it is questionable whether a transaction tax would
raise the revenue needed for the Commission. Again, firms
operate on thin margins and might choose to move their business
offshore or to less transparent markets. This would increase
the Commission's cost of surveillance, while decreasing taxable
transactions.
Conclusion
ICE has always been and continues to be a strong proponent
of open and competitive markets in energy commodities and other
derivatives, and of appropriate regulatory oversight of those
markets. As an operator of global futures and OTC markets, and
as a publicly-held company, ICE understands the importance of
ensuring the utmost confidence in its markets. To that end, we
have continuously worked with the CFTC and other regulatory
agencies in the U.S. and abroad in order to ensure that they
have access to all relevant information available to ICE
regarding trading activity on our markets. We have also worked
closely with Congress to address the regulatory challenges
presented by emerging markets and will continue to work
cooperatively for solutions that promote the best marketplace
possible.
Mr. Chairman, thank you for the opportunity to share our
views with you. I would be happy to answer any questions you
may have.
----------
\1\ Robin K. Chou and George H.K. Wang, Transaction Tax and
the Quality of the Taiwan Stock Index Futures, Journal of
Futures Markets, 1195-1216 (2006).
Mr. Stupak. Thank you, and thank you all for your
testimony. We will begin with questions. Mr. Barton, did you
wish to make an opening statement? It would be appropriate at
this time if you would like, before we begin questions.
Mr. Barton. Thank you, Chairman. Just very briefly. I will
submit my statement for the record, but this is a very
important hearing. We have energy prices nearing all-time
highs, and this issue of jurisdiction, I was chairman of the
Energy Conference 2 years ago, when we put in some language
that was specifically designed for what has happened at ICE and
what has happened with Amaranth. That wasn't serendipity. It
was conscious. We wanted to do more. We weren't allowed to. So
at the appropriate time, especially when Chairman Kelliher is
here, I will go into that in more detail.
But I am very supportive of this hearing, Mr. Chairman. I
remember explicitly this issue from 2 or 3 years ago, and if we
need to clarify and put additional statutory authority for the
FERC on the books, I am very willing to work with the majority
to do that.
Mr. Stupak. I thank the ranking member, and thank you for
your statement. We will go 5 minutes. We will start with myself
and go one or two rounds. Is that all right with you, Mr.
Walden?
All right, I will begin. Professor Greenberger, for some
time I have been saying if we could regulate these OTC trades,
or over-the-counter trades, we could reduce the price of barrel
oil by $20 or $30. People think I am just saying that. You are
a professor. Maybe they will listen to you. Explain how that
would work if we could do the regulation. How would it lower
the price of a barrel of oil $20 to $30, as you indicated?
Mr. Greenberger. Well, just let us take the example of
natural gas. I will get to barrel of oil. Amaranth, the day
before it failed, natural gas was about $8.50 per MBTU, million
BTU. The day after it failed, it went to $4.46. Senator Levin
and Senator Coleman, in their bipartisan report, show in detail
the way Amaranth gobbled up futures contracts to make it appear
that there was a shortage of natural gas on ICE when there was
no shortage.
In fact, NYMEX went to Amaranth and said, you guys are
going to kill yourselves. We want you to lower your positions.
Not only we want, we require it, because we are regulated.
Mr. Stupak. Correct.
Mr. Greenberger. The next day they moved to ICE. Senator
Levin's June 2006--Senator Levin, Senator Coleman have
economists' statements that the manipulation of the futures
prices, phony exchanges of contracts, buying up strategically
futures contracts, has added $20 to $30 to the barrel of crude
oil.
If ICE tomorrow was regulated like NYMEX and out from under
this phony foreign board of trade exemption, the price of crude
oil would start to drop. Just like when Congressman Graves went
to the floor in December of 2005 and said, enough of this
exemption on natural gas, it dropped from $14 per million BTU
to $9. Just the threat of regulation, these traders will think
someone is going to listen to these telephone calls.
[Chart shown.]
Mr. Stupak. Well, let us go here to--this is chart No. 3 I
had up earlier. The yellow line represents what we use as a
country, like 21 trillion cubic, but yet we are trading--and
that is 1 year's worth--200 and--what is it? I can't see here--
239 cubic feet, and 237 trillion cubic feet on ICE. Is all this
excess trading, if you will, is that what drives up the price?
Mr. Greenberger. Yes, because those guys, you heard their
phone conversations. They are playing games, and in the same
breath, they are saying, don't worry, guys. The CFTC can't
touch us.
Mr. Stupak. Because we are in the dark market.
Mr. Greenberger. The red with the blue, if you would listen
to their phone conversations, they would stop doing that
instantly. And the price of natural gas and crude oil would
drop by about a third.
Mr. Stupak. OK, Mr. Cota, I also mentioned in my opening
statement that the price of a gallon of gas jumped 45 cents in
1 day in my district. Have you seen the same thing in the
Northeast?
Mr. Cota. In the Northeast, particularly in heating fuels,
we had a rapid increase in price.
Mr. Stupak. The Northeast is more dependent on home heating
oil as opposed to natural gas in the rest of the country,
correct?
Mr. Cota. That is correct, but most of the commodities have
followed both crude oil and heating oil with energy pricing.
The one thing that has kept gasoline down a little bit has been
actually a glut of ethanol and some of that trading. Otherwise,
gasoline would be much higher than it is right now.
Mr. Stupak. OK, thank you. Ms. Campbell, you said in your
testimony that public gas utilities like yours have lost
confidence, that prices for natural gas in the futures and
economically linked over-the-counter markets are an accurate
reflection of supply and demand. Explain precisely what is
needed to remedy the problem of artificial prices in the
natural gas markets.
Ms. Campbell. Well, I think that Professor Greenberger has
covered that in that what we are seeing is some manipulation,
not so much the speculation but the manipulation. And so our
position is that greater transparency in that marketplace, via
the large trader reporting is really the answer to bring light,
as we call the dark markets, to bring light to those markets
such that we can see what is going on in those marketplaces and
therefore bring back the consumer confidence in those markets.
Mr. Stupak. Well, as a result of Amaranth's collapse, have
you or other American Public Gas Association members made an
estimate of the cost to your utilities and to consumers from
Amaranth's efforts to drive up the price in the winter of 2006-
07?
Ms. Campbell. Memphis Light, Gas, and Water has not, but I
know that the Municipal Gas Authority of Georgia, MGAG, has,
and their estimate was about $18 million cost to them due to
the Amaranth activities.
Mr. Stupak. Mr. LaSala, I think you indicated that NYMEX
supports CFTC's legislative proposal to regulate the exempt
commercial markets. Is that correct?
Mr. LaSala. Yes, sir.
Mr. Stupak. Are there specific improvements or changes
NYMEX would suggest to those proposals, ways you would think--
--
Mr. LaSala. Speaking to the proposals or beyond them, we
support----
Mr. Stupak. Beyond the proposals.
Mr. LaSala. We support the proposals so far as the items
that would trigger. You know, a linked market taking a
settlement price, the things--the market serving a price
discovery roles should trigger certain criteria. As we said,
large trader reporting, position limits, self-regulatory
authority and mandate that they have an SRO function as well as
emergency action powers.
Mr. Stupak. OK, you indicated in your testimony that
Amaranth, when notified by NYMEX of too large of a whole
position there, they then went to ICE. Have you seen that with
other energy traders where they have informed you they would
prefer to trade on an unregulated exchange rather than deal
with NYMEX rules on disclosure and position limits?
Mr. LaSala. That is a good question, Mr. Chairman. We have
certainly heard it before anecdotally from traders in the
marketplace when we have--we said earlier we administer hard
position limits on basically all of our contracts, all the
physical ones and many of the cash settled ones. When we have
tried to negotiate hedge exemptions where there have been like
substitutes, whether on Intercontinental, we have heard the
comment made, ``I would just as soon--you know, you are
beginning to tread so hard on me. I can easily move this
over.'' We have also heard it in the context of WTI insofar as
it affects the Foreign Board of Trade issue where, in direct
conversations, in I will call ``lessons learned from Amaranth''
where we made some changes, lowered any one-month
accountability levels, and also let us focus on them on a
futures only basis. Where, in a conversation with a trader, the
comment was made just simply I am being actively courted by the
UK entity ICE Futures, and basically you are pressing me to
want to shift gears.
Mr. Stupak. My time is up. Mr. Walden, questions, please.
We will second round. I have many more questions.
Mr. Walden. Thank you, Mr. Chairman. This is an issue that
I have been concerned about for some time. And in fact, in May
of 2005, organized a letter to the Government Accountability
Office now, asking for a full scale investigation signed by 19
of my colleagues because of concerns that had come to me. And
so, Mr. Chairman, I am glad we are having this hearing today
because if indeed the market is being manipulated, as it
appears it has been, then consumers are getting stuck with the
bill. And that is not right, and it is time for us to step in.
Professor Greenberger, I want to go to your issue about how
much you think this market manipulation or potential market
manipulation is adding to the price of crude oil because there
seems to be some dispute, not that we want to spend a lot of
time on that. But others, including the GAO, say there are
other factors involved, too. You really think that that is it,
and it is about a third?
Mr. Greenberger. I feel every confidence--now it is my
view--that it would drop at least $20. If this afternoon we
went home and knew that ICE was--those telephone calls on ICE
were going to be monitored, the phony games that are being
played would stop, and the price would drop.
Mr. Walden. And do you think just----
Mr. Greenberger. Not to zero. There are reasons it is up
near 100, but it would drop by about $20.
Mr. Walden. And do you think that just changing the
language in the CFTC Reauthorization adding energy adequate, or
does FERC need to have a role here?
Mr. Greenberger. No, FERC has got plenty of power. The
CFTC, ICE, and NYMEX are fighting that power as Mr. Barton made
clear. They have plenty of power in natural gas, but that is
enforcement power after the horse is out of the barn. If you
want to stop it to begin with, you have to regulate all of
these exchanges.
I would just like to make one quick point. The famous quote
is ``what would Jesus do?'' In forming this new legislation,
the mantra has been, to close the Enron loophole, what would
ICE do? Everybody is looking to ICE on how to close this
loophole. Mr. Vice says do not regulate all our contracts, just
the ones that ``significantly'' affect price discovery. So who
is going to have to prove that? I am going to have to prove
that. Ms. Campbell is going to have to prove what is
``significant.'' Mr. Cota, the CFTC will have to prove it. You
are going to have a contract-by-contract contest. Prior to the
Enron loophole, ICE would be a regulated entity as a whole.
Just one more point. ICE says to you, my gosh, we have all
these different contracts. One size doesn't fit all. Well,
first of all, for the consumer, one price fits all.
Mr. Walden. Correct.
Mr. Greenberger. Nobody is worried about the consumer.
Secondly, if I could just make this one point.
Mr. Walden. Make it quick. I only have 2 minutes.
Mr. Greenberger. OK, the Act allows the Commission to
create exemptions if ICE proves that they need less regulation.
Mr. Walden. Got it. All right, Mr. LaSala, if I could get
your attention for a second. I want to make sure I understood
what you were saying. Is it when NYMEX begins to put some
pressure on people in the market that you believe need a little
more regulatory oversight, they are sort of pushing back,
saying, we will just go over to ICE? Is that what you are
saying?
Mr. LaSala. I am not saying that is a universal statement.
Mr. Walden. No, but----
Mr. LaSala. But that has certainly absolutely come up. It
has come up in the context of the contracts that are natural-
gas oriented, that are offered on Intercontinental. And it has
also come up in the WTI contract, where there is a look-alike
on the FSA-regulated ICE futures.
Mr. Walden. Mr. Vice of ICE.
Mr. Vice. Sir?
Mr. Walden. What do we do here?
Mr. Vice. Well, I think, first of all there are--
particularly Professor Greenberger there, a number of issues
that have all gotten rolled up together. So I am trying to pull
the strings of that ball apart. You are talking about the ECM
market specifically and natural gas and Amaranth. ICE is
actually in complete agreement for the most part and has been
working with Congress and the other exchanges like NYMEX, the
President's Working Group, for some months now on additional
regulation for ECMs for contracts that are determined to be
significant price discovery contracts. And those are
determinations that the CFTC, for the most part, has drafted
and feel comfortable with. And it would be their determination
on what falls into that category. We----
Mr. Walden. Do you think adding the word energy into the
CFTC statute would provide proper regulatory oversight?
Mr. Vice. I think--I am not an expert.
Mr. Walden. That it would stop manipulation of this market?
Mr. Vice. I think the ECM category is a critically
important category. If you look, ICE came along as a start-up
company and competes fiercely with NYMEX today. It is one of
the only corners of the U.S. futures where you can find that
competition. And as a result, it has driven prices down. There
has been product innovation. A lot of good has come out of
that. What we are saying is, yes, that we agree there is room
for improvement. Let us do something thoughtful, deliberate,
and centering on the problem and not throw the baby out with
the bath water.
Mr. Walden. My time is expired, but I just--you know, as we
watch the sub-prime market implode, there seems to be some
correlation here about derivatives and regulatory oversight and
what went wrong. And I will tell you, a lot of consumers are
starting to feel that way on the energy side, and it is very
disconcerting. So I am not saying that is what is happening
here, but----
Mr. Vice. Well, there is no question all commodities are at
all-time highs. Metals, agriculture.
Mr. Walden. And I understand, and I understand demand and
supply curves and all of that. I also understand that we know
that there is market manipulation in these if there is a proper
regulation. And so we got to find that balance.
Mr. Stupak. Mr. Walden, if I could just take 1 second----
Mr. Walden. Yes.
Mr. Stupak. Take a look at this one. This says right here--
it is No. 7 in the book there. Mr. LaSala, you may want to look
at that, the book right there in front of you. This is exactly
what Mr. Walden is talking about.
[Chart shown.]
Mr. Stupak. This chart shows the volume shift from NYMEX to
ICE immediately after NYMEX imposed a rule earlier this year
which required traders of natural gas who want to hold more
than 1,000 positions going into the last day of trading prior
to the expiration of futures contract to disclose their
bilateral swaps, futures, and forward contract positions. So I
almost have to ask Mr. LaSala the same thing Mr. Walden was
asking. Why the shift? Why suddenly from NYMEX to ICE? Isn't it
the case that your new rule is really simply putting teeth into
existing 1,000-position contract or the contract limit there?
Mr. LaSala. Yes the policy shift again, with the March
future certainly put an added level of detail, formalized
submission on anyone who is excess of 1,000 contracts going
into the last day. We typically would allow that. We could
grant exemptions. This was a new procedure that came out in
discussions with our regulator and the FERC, and as far as----
Mr. Stupak. Well, that is your rule there, February 26,
2007, when the shift occurred, right?
Mr. LaSala. That is right. You see the curve shift out.
Mr. Stupak. Right.
Mr. LaSala. We imposed commencing with the March expiration
the higher standard, and immediately we see a significant drop-
off in volume on the last trading day, specifically, even the
30-minute closing range. And just as a note, some of the
concern in that loss in the 30-minute closing range is, at some
point does loss and volume impact price discovery? I don't have
an absolute metric to say at what point does it, but it could.
And the shift is obviously a startling one.
Mr. Greenberger. Mr. Stupak, I could fill this hearing room
with customers who have gone to NYMEX and said, you need to
regulate more strictly, and NYMEX has said, we really feel
sorry for you, but if we regulate more strictly we will lose
business to ICE. Don't forget ICE's ownership, Goldman Sachs,
Morgan Stanley, British Petroleum, they trade on NYMEX. NYMEX
has to pull its punches when it criticizes ICE, since it is
criticizing its own traders.
And No. 2, you talked about the sub-prime meltdown, 3, 4
months from now you are going to have a hearing on the sub-
prime meltdown, and you are going to find that this very same
legislation deregulated something called collateralized debt
obligations, CDOs. Those are futures contracts deregulated by
the CFMA. CitiBank lost $11 billion. That is why Chuck Prince
is not the CEO. You are going to hear about this CFMA coming
and going.
And the final point is, I will answer the question about
whether ICE would agree just to add ``or energy.'' They won't,
because that would mean they would be regulated altogether.
What they want everyone to do is go contract by contract on
thousands of contracts and prove significant price discovery.
Mr. Vice. First of all----
Mr. Stupak. Take the mike, though, if you want to comment
on it.
Mr. Vice. First of all, we are a publicly-held company so
we are not owned by those firms Mr. Greenberger just said. And
as I stated earlier, we think having that ECM category with
ability for, I think--the CFTC has referred to it as low-cost
on-ramp for competitors to get into this market--has been very
good for energy. Energy went from basically probably the back
end of the commodity market in terms of efficiency and
transparency and bid offer spreads to probably near the front
of the pack there. Yes, there is work to be done, but it
doesn't make sense to us to say there are only two flavors of
trading here: a regulated futures market with all the overhead
and all of the position limits and market monitoring and
emergency authority to order down positions. It is either that,
or it is an opaque voice broker market. There is nothing in
between.
And I think that people that are familiar and close to
these markets recognize that energy and quite possibly many
other commodity markets, there is an in-between. And it needs
some of both of those worlds. Otherwise, you are just--the
illiquid thousands of markets that Professor Greenberger refers
to will just go back to voice brokers. And you will have no
information, no audit trail about what anybody is doing in any
of those markets.
Mr. Stupak. All right, Kyle, could you put up exhibit 27? I
think Mr. Walden has a follow-up he would like based on the
back-and-forth we have been going here.
Mr. Walden. Yes, if I could, Mr. Chairman, I would just
like to get clarification on the difference between the end-of-
month data we just saw on that chart and sort of the contracts
year-to-date or annualized, because it looks like the numbers
have tracked pretty----
Mr. Stupak. Exhibit 27.
[Chart shown.]
Mr. Walden. It is Exhibit 27 in that book, and it shows in
the year 2006 NYMEX traded 23,019,000 contracts, natural gas
contracts. ICE did 24,040,000. 2007 year to date NYMEX is at
25,146,000. ICE is at 25,910,000. These annualized numbers
don't seem to show the volatility that the end-of-the-month day
numbers show, and I am curious if you could explain that to me,
why the difference and what the significance of the difference
is.
Mr. Vice. I will try to explain the difference, Tom, if you
don't mind. You go after me. One thing we haven't talked about
here is the NYMEX contract and the ICE swap traded OTC are not
the same thing. The NYMEX contract is a physically-delivered
natural gas future. If I want, I can hold that contract. I can
go to expiry and demand delivery and potentially squeeze a
market.
The ICE swap has no ability to do that. If I hold it until
expiration, I receive the NYMEX final settlement price. That is
it, and so what you find is these swaps were around long before
ICE was around. And in terms of market size, generally the
futures market is, generally in any commodity, is several times
larger than the underlying physical production. And the OTC
market is typically several times larger than the futures
exchange on any commodity you look at. So these numbers aren't
surprising at all.
But if you look at how people use the two products
differently, yes, they are economically linked. And we have
acknowledged that there should be some regulation recognizing
that. But they are used differently in that if I am a producer
or a consumer like Memphis Gas, I am buying gas out there, and
I am buying--in fact, this is the crux of FERC's argument in
the Amaranth case of why they have jurisdiction--because it
affected what is called next month physical gas trades, where
people buy gas at the NYMEX, plus a basis spread. NYMEX
settlement, plus a dime, plus 20 cents. And so a consumer may
buy gas on that basis.
So now it has locked in the basis price, but it has
exposure to the NYMEX settlement price. So to get rid of that
risk, they could go buy a swap for a fixed price and eliminate
that variability. But to maintain that perfect hedge they need
to hold that swap to delivery, not trade out of it, as you
would a natural gas future at NYMEX. You need to hold it to
delivery and actually receive the NYMEX settlement price
because you are going to pay the producer that same amount,
plus 10 cents. So they are used differently, and it is an
important point.
Mr. Greenberger. I would just add to that, Mr. Vice says
they are connected, the physical and non-physical markets. They
are identical, and anybody trying to tell you that there is a
difference between the two is blowing smoke. They are
identical, and in fact Mr. Cota is worried that physical
markets may be so unimportant that they may end physical
delivery, which would hurt the heating oil industry. And also,
Mr. Vice tells you that Morgan Stanley, Goldman Sachs have no
stake holding in that ICE company. They started that company,
and if you look at Senator Levin and Senator Coleman's report
on page 47, 48, they list Morgan Stanley, Goldman Sachs, and BP
as large stakeholders. They may have reduced their positions,
but they run--ICE is here for those companies.
Mr. Stupak. Mr. LaSala, I think you wanted to comment.
Mr. LaSala. I want to comment here because this is the crux
of this hearing and what we are doing. So----
Mr. Stupak. Did you want to say something, Mr. LaSala, and
then we will go on to Mr. Green for questioning?
Mr. LaSala. Absolutely. Again, they are different. One is
physically settled, one is cash settled, but they are
absolutely linked. And again I am bound by hard positions
limits. I have to manage them. Whether you want to say pre- the
new procedure or post- the new procedure, I have always been
bound with SRO responsibilities on that. And parties can--with
the ICE contract, there were no position limits whatsoever. So
someone could load up. And you can, since they are linked, and
I am asserting that, I think that others have done analysis and
asserted that. You can drive the price up by activity in that
market, and Mr. Vice is right. You don't have to get out. It is
a financially settled one, so buy it at lower increments, drive
it up, and get the final settlement price. If we agree that the
markets are linked, that is absolutely possible.
Mr. Vice. One quick comment. They are linked. They are
financially linked, and they should be looked at jointly in any
kind of regulatory oversight. Despite what Mr. LaSala has said,
though, NYMEX itself in early 2006 changed their rulemaking.
Previously their swap and their natural gas future were counted
together in administering position limits. They recognized that
they were different and broke them out. So I don't know how
they can say they are exactly the same, because their actions
indicate otherwise.
Mr. LaSala. If I may.
Mr. Vice. Sure.
Mr. LaSala. In connection with that, we also put out a
notice saying that untoward activity that, if you have position
in the cash commodity, which we have on our books and we can
monitor, if in fact there is underlying activity in the
physical that the cash is--if a settlement derived by, we will
prosecute you.
Mr. Stupak. Mr. Inslee, for questions.
Mr. Inslee. Thank you. Mr. Greenberger, your testimony is
astounding in its implications, assuming you are correct. And I
just want to ask you, tell me others who share your view of the
ramifications of these failures.
Mr. Greenberger. Well, Mr. Cota does. Ms. Campbell does.
Professor Frank Portnoy, at the University of San Diego, agrees
with my position. I think every State Attorney General's office
agrees with my position. And, by the way, if the CFTC/ICE
legislation to close the Enron loophole is passed in its
present format, the State Attorney Generals are going to have
to go contract by contract to prove what everybody knows.
Futures contracts cause significant price discovery.
If you make my change and put ``or energy'' back, ICE will
be fully regulated. If they have some reason not to be fully
regulated, they can apply to the CFTC for less regulation. But
it is their lawyers, Goldman Sachs, Morgan Stanley, who would
have to pay to get the change, not Mr. Cota, Ms. Campbell, and
me, who have to prove that their contracts under the CFTC cause
significant price discovery. Put the burden on ICE, not on the
public.
Mr. Inslee. So, game play for me those two different
mechanisms.
Mr. Greenberger. OK, I will game play it exactly. ICE has
hundreds of thousands of contracts. Mr. Cota is worried about
one contract. He thinks it has significant price discovery. He
is going to have to go to the CFTC and get engaged in a
hearing. The CFTC itself is going to have to have a hearing,
saying this contract, not the exchange, causes significant
price discovery. They make a finding after a lengthy hearing.
Is ICE or the traders going to challenge that in Court? You bet
your life. There will be injunctions. There will be Court
proceedings. The public and the CFTC will carry the burden
every step of the way.
If you add ``or energy'' back to the definition of
commodities that aren't exempt, just those two words, it will
be ICE's burden to show that they shouldn't be regulated like
NYMEX. They will have to carry the weight, Goldman Sachs,
Morgan Stanley, British Petroleum, not the poor heating oil guy
from Vermont. ICE will immediately be regulated and then have
to prove, if they have the ability to prove it, that they
should get less regulation, because Mr. Vice is worried that
there are all these different contracts, and you should worry
about them but not worry about the person back in your home
district that is paying 30-percent premium over supply/demand
for gas, heating oil, natural gas, and oil.
We shouldn't be worried about ICE and Goldman Sachs and
Morgan Stanley. We should worry about your constituents. Put
ICE back under regulation. Let ICE get out of it. ICE can get
exemption under the Act as it exists. Don't make your
constituents fight that battle on a case-by-case basis and then
have to go into Court, District Court, Circuit Court, and maybe
to the Supreme Court to show that one--and by the way, when
that one contract is determined for significant price
discovery, these traders are going to move to other contracts,
just the way they moved from NYMEX to ICE.
You will have spent years convincing them that one contract
causes significant price discovery. These guys will get on the
telephone just like you heard them. Mr. Stupak played those
recordings. And they will say, guess what, guys. We are moving
to a contract that isn't regulated.
Mr. Inslee. So you think those two words are worth 30
percent of the value of those products?
Mr. Greenberger. I absolutely do, and Enron had them taken
out, and Enron made $2 billion the next year, forcing the
California consumers to pay $40 billion in extra electricity
bills. Is it worth $40 billion to put two words in? It
certainly is.
Mr. Inslee. That is a pretty per-word rate. Mr. Vice, would
ICE be willing to give up its no-action exemption and register
as a designated contract market just as NYMEX has?
Mr. Vice. Are you referring to the Foreign Board of Trade?
Mr. Inslee. Yes.
Mr. Vice. Well, we--no, I think in the sense that the--I
don't know that it is a matter of do it or don't do it. I think
the CFTC went through a very deliberate, extensive, thoughtful
process with all of the associations in the industry, all of
the exchanges worldwide to really determine, what is a domestic
contract. Is it where the computers are? Is it where the
customers are? Is it where the contract is delivered? If it is
cash settled, is it where the index that it settles on is
delivered?
And I think what that process showed is that these are
global markets, and there are no easy answers there. In fact,
we have a U.S. DCM ourselves. We own the New York Board of
Trade. We own that in New York. It trades, for example,
agricultural products, coffee, cocoa, sugar, other things. None
of those products are delivered in the U.S. If that were the
criteria for deciding where regulation should occur, then
Brazil would oversee the regulation of those markets.
Many of the financial instruments are traded at the CME, so
those settle on London Interbank Overnight rates. So there are,
when you start trying to figure out where, on one of those
dimensions, where a market should be regulated, what that
conference showed that the CFTC went through is, you run into a
lot of problems. And I think the more pragmatic, more
practical, and more effective approach that they put in place
was a recognition of mutually-respected regulators and
information-sharing arrangements between those regulators.
So in fact, today what our UK exchange ICE Futures Europe
does, there is an information sharing----
Mr. Inslee. Could I ask you just a real quick question? I
am sorry to interrupt, but I want to make sure I understand it.
Are you trading today U.S. commodities or U.S. terminals
without being subject to the full panoply of CFTC regulations
and transparency requirements?
Mr. Vice. We are trading futures that settle on delivery
points to the U.S. and the position information is provided to
the regulator in the UK, the Financial Services Authority,
which is comparable to the CFTC. All that information is
provided to the CFTC.
Mr. Inslee. Do you think that is equivalent as full CFTC
regulation?
Mr. Vice. I do.
Mr. Greenberger. Mr. Inslee, if it was equivalent, they
would go to the CFTC.
Mr. Vice. Equivalently effective.
Mr. Greenberger. It is not just U.S. terminals and U.S.
contracts, he is in Atlanta, Georgia. They just happened to buy
a British Exchange. I signed a template for those foreign no-
action letters. It was for foreign exchanges trading foreign
products in a foreign country.
Mr. Inslee. Mr. Chair, I am out of time, but Mr. LaSala
wants to respond. Do you want to allow him or----
Mr. Stupak. Sure.
Mr. LaSala. Thank you.
Mr. Stupak. Then we will go to Mr. Barton.
Mr. LaSala. Just a comment. I think that, broadly speaking,
the Commission's no-action process has been effective. However,
things have changed insofar as certain contracts, basically
taking to a point where it is a similar posture as our posture
with the natural gas, where certain indicia are hit. For
example, taking the WTI settlement price. It is basically a
U.S. market that the no-action process should have the ability
for the CFTC to prospectively put certain other requirements. I
am not saying, make them a DCM. We are not saying, make them a
DCM, but maybe in the no-action process, having a comparable
position limit, having an absolutely comparable large trader
requirement would be appropriate. That would be our suggestion.
Ms. Campbell. Mr. Chairman, may I comment as well?
Mr. Stupak. Ms. Campbell.
Ms. Campbell. As far as APGA, our position is not that if
we bring light to the dark markets that this is going to bring
an immediate percentage change in the price. What we are
looking to do is increase the confidence in the market, that
this is truly the forces of supply and demand at work. And we
support the risk-based regulatory regime as it is in that we
have a tier in which ECMs can exist because they have brought a
great deal of value to my customers on a physical basis.
We are able to--where we used to get on the phone--we have
2 hours to buy gas every morning. We used to get on the phone
and call as many people as we could. Now we have a screen in
front of us, and we have this great deal of price discovery on
the physical side that we didn't have before.
But once we cross that line where we now have a natural gas
contract on ICE that is a look-alike contract to the NYMEX,
that is where we kind of cross that line, and we need to bring
greater transparency to that contract, the ICE contract, so
that we can see the full picture of the full marketplace. And
then the CFTC can do their job to detect and deter the
manipulation. Thank you.
Mr. Stupak. Thank you. Thank you, Mr. Inslee. Mr. Barton,
for questions, please.
Mr. Barton. Thank you, Mr. Chairman. I want to start out
reading something just--I want to, before I ask questions. Back
in 2002 and 2003, the beginning of 2004, when oil prices
started going up, and the price at the pump for gasoline
started going up, and we also had heating oil prices going up,
we had natural gas prices going up. We had a series of hearings
on this committee about what caused the price and whether there
was price gouging, things like this.
And I called the New York Mercantile executives to testify,
and I also met with them privately in my office, and they
talked about something called ICE, that was kind of the new kid
on the block. And what I was wanting to do was see if we
couldn't raise the margin call on buying these contracts,
because on the New York Merc, the margin requirement was
minimal.
And I asked, I said, how do you call--set the margin call?
And basically the answer I got was--they didn't put it in these
terms, but it was, like, we are financial bookies. We really
don't care. We just want what the price is. We just want to
create action, so we set the margin to create action. It is
almost like an over/under betting line on sporting events.
And anyway, the Merc said, if you really want to do
something, you are going to have to regulate this group called
ICE down in Atlanta, because they don't play by even the rules
that we play by. So in the Energy Policy Act of 2005, we put a
paragraph in. And the paragraph basically, ``it shall be
unlawful for any'', a-n-y, ``any entity, directly or
indirectly, to use or employ in connection with the purchase or
sale of natural gas or the purchase or sale of transportation
services subject to the jurisdiction of the commission'', which
is the FERC.
That was not serendipity. It was intentional. In fact, we
wanted to do more, but that was as much as we could get
approved on a bipartisan, bicameral basis. So this allegation
that somehow we didn't mean what the Law says is silly. And
this hearing shows that even this may not be enough, that we
may need to do more.
So, my question to the young lady from Memphis Light and
Gas, what do you get by trading on ICE that you don't get by
trading on the Merc, which is at least more transparent and
more regulated? What is it that Mr. Vice and his group have
that is so much better? Is it just a cheaper price to conduct
the transaction, or is there really some tangible benefit by
using ICE as opposed to a regulated exchange?
Ms. Campbell. Sure. Let me be sure I am clear. My comments
earlier were, we were trading on ICE as a physical commodity as
opposed to the futures. So every day we are out buying gas, the
physical gas, we are looking to ICE.
Mr. Barton. So you are not talking about these look-alike
contracts?
Ms. Campbell. We are not. I was not, but let me give you an
example. Many of our members are very small, and so their
volumes are very small. The NYMEX is for 10,000 MBTUs, which is
much more than what they would typically use. So they look to
hedge their risk through over-the-counter markets or through
ICE, which has a smaller volume. So there is value there.
There is value in the credit-worthiness. You mentioned
increasing the margins. Well, that may drive us out of the
market, because we don't have the cash position to maintain
those positions, so----
Mr. Barton. But you are not in the market to speculate.
Ms. Campbell. No, sir.
Mr. Barton. At least I would hope not. You are a
regulated----
Ms. Campbell. We are completely hedging.
Mr. Barton. Yes.
Ms. Campbell. And so the thing to be careful of, as we
start to look at what the right thing to do for these markets,
is to be sure that we don't price the actual hedgers out of the
market or do something that would put us out of the market.
Because when you think about it, the traders can go anywhere
and go, as we have said, to different markets. We have the
natural gas market, the NYMEX, the OTC, to depend on so that we
can lay off our risk, the price risk for the next winter. And
remember this market is twice as volatile as the stock market,
so we must do something to protect our customers on the price.
Mr. Barton. Well, is it--and I will give Mr. Vice a chance.
It is not fair to chastise his organization without giving him
a chance to reply. But when you look at the statistics and the
facts, the number of contracts that appear to be speculative in
the natural gas market and the oil and gas and oil markets are
skyrocketing 300 to 400 percent increases. We have the company,
the Amaranth, which tried to corner the natural gas market. And
when the Merc finally and the CFTC tried to put the brakes on
it, they just moved most of their contracts to the ICE
Exchange, just switched them over.
Mr. Vice, do you agree that speculators in--and in order to
have a market, there have to be speculators. So I am not
negative on speculators. I am somewhat negative when it looks
like the speculators dominate the market at the expense of the
hedgers that are physically trying to buy and sell to actually
provide a product and provide a service.
Do you agree that the speculators have affected the price
that consumers pay on the upside in the last 18 months?
Mr. Vice. I don't know that I can answer that question
other than--I am not going to make a statement like Professor
Greenberger. It would just be my opinion and nothing more.
Mr. Barton. Well, yours is a----
Mr. Vice. I think----
Mr. Barton. Technically, you are an informed opinion. I
mean----
Mr. Vice. If I knew the right price for these commodities,
I would be a trader, not----
Mr. Barton. No, I didn't say, the right price. I am saying,
everybody in the country seems to think that there is a
premium, and different people disagree about what it is. But $2
to $3 in MCF. We have heard as high as $30 a barrel of oil, and
you disagree with that, apparently.
Mr. Vice. Well, what I can say is that all commodities,
ags, metals, and energies, are all up dramatically. And part of
that is the demand of China, India, other demand on those
commodities, part of it is they are all traded in dollar-
denominated contracts. And the dollar is down 17, 18 percent in
the last 2 years. So that directly drives the price of those
up.
And all of those markets have gone--they are all
essentially electronic now, and there is no question in
moving--whether it is Eurodollars at the CME or natural gas at
NYMEX or anything else--moving from a floor-based exchange to
an electronic platform, you dramatically increase the
transparency, the efficiency. The bid/ask spreads tighten, and
the volumes go up dramatically. They do. And you see that in
our numbers, and you see it in futures exchanges across the
board.
Mr. Barton. Mr. Chairman, may I ask one more question?
Mr. Stupak. Sure.
Mr. Barton. Well, Mr. Vice, since your contract doesn't
require actual delivery, although less than one percent of the
futures contracts actually end up in delivery, other than being
a smaller contract, what advantages are there to using your
market versus the mercantile market? Why would people use you
if not purely for speculative purposes?
Mr. Vice. Well, I think you need a little history there. We
traded a contract bilaterally for a number of years on our
platform. It was the only place you could trade electronically.
If you wanted to trade the economic equivalent of the physical
future at NYMEX, you had to call a broker on the floor, and
people were not--it was not the best execution. The price you
were going to get was uncertain.
So on the screen over time, that became a very popular
thing, and that grew. And for a number of years, the only place
that you could hedge or speculate on the price of natural gas
electronically with all the benefits of trading
electronically--I said a minute ago, speed of execution,
transparency and so forth--was on ICE.
Mr. Barton. So you have an efficiency advantage?
Mr. Vice. We spent millions of dollars on our platform, on
the functionality and the speed of it and the distribution of
it. And that is some of the competition that I am referring to
in the ECM category. And NYMEX has responded. They have
dramatically----
Mr. Barton. So if we changed the Law and explicitly
regulate your market so you have to comply by the same rules,
you will stay in business because you have an efficiency edge
and you have a product differentiation that you think is
positive? You are not going to go out of business?
Mr. Vice. I think what we are saying for our major
contracts, like the Henry Hub contract, which the industry is
starting to call significant price discovery contracts, yes,
that is true. Those contracts, they behave to some extent like
a future and therefore are amenable to DCM-type core principles
being applied to them. We support that, and we are working with
members of Congress to that end.
We are also saying that there are hundreds, thousands of
other markets on our platform. One core principle, for example,
is coming up, is for publishing every day ``What is the open
interest? What are the settlement prices? What are the opening
and closing range?'' Some of those products may trade once a
week, and so to put the regulatory overhead on us but more
importantly the thousand participants that are on ICE to
somehow comply with any of that, the four or five Memphis Gas
or other types of utilities that might be trading a very
illiquid swap at some very liquid gas pipeline point, are going
to say, forget it. I will just, I will go back to the voice
broker.
Mr. Barton. Well, we can handle the exceptions, but when
you have thousands and thousands of contracts, and you have
companies moving between the two exchanges, based on the
regulatory reporting requirements, when you created a mirror
market, it would seem to me that the Federal regulators in the
Congress should make sure that everybody gets a fair shake and
it is not just used as a way to evade transparency and the very
things that you created your exchange allegedly to bring to the
market.
And with that, Mr. Chairman, thanks for the courtesy of the
extra time, and I yield back.
Mr. Stupak. You bet you. Mr. Melancon, for questions,
please.
Mr. Melancon. Thank you, Mr. Chairman. I came in a little
late, and I am still trying to put together the pieces of this
thing. I grew up in the shipping industry, and the only people
that make money trading sugar is the traders. The consumers are
the people that are selling, usually are the ones that are not
beneficiaries, and of course, what I found as I grew up was
that the slightest rumor caused the price to spike up or down.
And the reality is, it doesn't matter which way it goes, the
traders make money.
So, I think I am sitting here listening to an argument over
who is going to make money the easiest or the fastest or the
least regulated, I think Professor Greenberger hit the nail on
the head. This is all about making sure that the American
consumer is the person that comes out ahead. When Ms. Campbell
looks to purchase gas for Memphis, it is not about the broker
making money. It is a combination of what is the easiest thing
for me to do today to get the best price as quick as I can, if
I understand what you are doing.
So I guess it brings me to trying to figure out, you know,
we are looking at doing legislation. I am kind of a different
kind of guy. I am in the legislature, but I figure that we can
solve more problems sometimes without actually legislating. We
need to correct the problems, but I am more about mediating.
What I am seeing, I think, is a jurisdictional fight that
was started by the Congress. The regulations that became kind
of gray and the shifting of jurisdiction now had two agencies
that are out there that are conflicted, and one maybe not
talking to the other or both not talking to each other.
The question is: Can we bring some transparency, some
regulation that is fair to all, and through a memorandum of
understanding and jurisdictional oversight, whether it is joint
committee or not, to make sure that what is taking place in
this market is fair; that it doesn't allow for people to corner
the market, as I think happened recently. I don't know what
happened with the Hunt brothers when they tried to get all the
silver in the world, but that is probably why they started
trying to do some of the things legislatively that maybe
brought us to the problem.
There is probably some need, but is it extensive, or is it
minimal? And what MOU, with FERC and CFTC, more readily address
the issue?
Mr. Greenberger. If I can just explain one thing. The fight
between FERC and the CFTC only relates to enforcement of
natural gas. It has nothing to do with what traders have to do
from the get-go. It is only after the horse is out of the barn.
And only natural gas. And I hope minority counsel will tell
Mr. Barton, when you fixed the Energy Policy Act, as I
understand it, that was just natural gas. He has his consumers
coming in and saying gasoline, heating oil. Well, what he has
to tell his consumers is that ICE has two exemptions. They have
the Enron loophole, because they moved ``or energy'' out of the
CEA. And then, if you fix that, which is all the present
legislative fix is addressed to, you have to tell your
constituent that ICE, that is located in Atlanta, has Goldman
Sachs, Morgan Stanley, BP supporting it. Goldman Sachs tells
its customers, don't trade on NYMEX. ICE is in Atlanta.
Mr. Vice. I have to correct that.
Mr. Greenberger. Well, you had your chance, Mr. Vice. Yes,
you will have your chance. You have to tell your constituents
that ICE in Atlanta with all these great trading engines in the
United States, trading United States West Texas Intermediate,
we can't do anything about it because the staff of the CFTC
said ICE should be regulated by the United Kingdom. Try telling
people in Louisiana that an Atlanta company trading West Texas
crude on the United States engines is out of the control of the
United States.
Mr. Melancon. Isn't natural gas priced by countries or by
regions and not necessarily world price, like oil?
Mr. Greenberger. There are different kinds of gases, but
ICE is trading gas delivered in the United States.
Mr. Melancon. That is where I am----
Mr. Greenberger. Henry Hub.
Mr. Melancon. And I think I am familiar with where----
Mr. Greenberger. And they are competing with NYMEX, and,
poor NYMEX, they are suffering because they have to be
regulated by the CFTC. They are doing fine. NYMEX may be bought
by the New York Stock Exchange. It is the most profitable
exchange in the world. ICE says, don't do this to us. We have
all these small contracts. We don't have time to go to the CFTC
and use the exemptions in the statute to get these exempt. We
want you to regulate around us, because we have a great trading
engine, and we are great guys. Forget about telling the guy in
Louisiana that we are in Atlanta with a trading engine in the
United States trading United States-delivered products. But for
crude oil, you got to go to the United Kingdom to take care of
us. That doesn't make sense. People in Louisiana will not
understand that, and there is no legislation addressing that.
And the CFTC staff and the CFTC could fix that this afternoon
under existing legislation. It has nothing to do with FERC.
Mr. Cota. We, as an industry, like speculators. Speculators
are important. It is the excessive speculation that is the
killer. I could not offer futures contracts to my consumers
without having speculators in the market. The volume of
speculation has gone out of control. We are figuring that for
gasoline and heating oil, approximately 50 cents to a dollar a
gallon could be a result of excess speculation. The volumes of
trades are huge.
The contract that I am most familiar with is the heating
oil contract. The heating oil contract is about 8 billion
gallons in the U.S. annually. Well, that amount gets traded
amongst NYMEX and ICE--I am not sure how much is traded on ICE,
because there is no data that is reported to the markets
unless----
Mr. Vice. It is zero percent.
Mr. Cota. The volume of trades are about four times the
annual consumption per day. You know, is that too much trades?
You know, we focus a lot of the time on small contract. The
major contracts trade huge volumes daily of what the annual
volume is. And because you don't see the data--if it is illegal
to do a contract under a U.S. law, it is still illegal to do
it. Just nobody has any of the data. My brother-in-law from New
Jersey has often told me, he said, there is no body, there is
no crime. So these dark markets have no light on them. You
don't know what is occurring. Only the people that are doing
the trades know. What is wrong with oversight?
Mr. Melancon. Thank you. I ran out of time a couple of
minutes ago. Thank you, Mr. Chairman.
Mr. Stupak. Thank you, Mr. Melancon. Ms. Blackburn, for
questions, please.
Ms. Blackburn. Thank you, Mr. Chairman, and I want to
welcome all of our witnesses. I think that anyone who is
watching this hearing today is probably just spellbound with
the amount of debate between all of you. And they probably are
sitting there thinking, what is this going to end up costing
me? What does market manipulation cost me? And what does it
mean to my heating bill?
And, Mr. Chairman, I have a question for Ms. Campbell, but
before I ask it, I do want to welcome her. She is a
constituent. She lives in Fayette County, Tennessee, and does a
wonderful job for Memphis Light, Gas and Water. And I
appreciate the expertise that she has brought to the panel
today and also the manner in which she has presented it. And we
welcome you, and I thank you for that.
I do have a question for you in light of my comments. When
we talk about the market manipulation and in your testimony,
you talked about the Amaranth activity. What kind of cost
increase on a percentage basis do you pass on to your
customers? How much fluctuation do they see? And let us say if
natural gas were to go up a dollar MBTU--I think that is the
unit, correct? So if it went up a dollar for an MBTU, then how
much would that average customer see as an increase in their
bill when they rip that envelope open and pull it out and look
at it?
Ms. Campbell. Goodness, the way that our mechanism works--
and what you will find is that across the country, everyone's
cost recovery mechanism works a little differently. The way
ours works is that we look at what it costs us for gas this
month, and we immediately pass that through the next month on
our customers.
Ms. Blackburn. So you have a 1-month delay?
Ms. Campbell. It is a 1-month delay. So if there is a $1
increase in the price of natural gas, and it is currently at
about $7, so let us just say that it is a 20-percent increase,
then typically with our rate structure, almost all of that will
pass through. And it will be somewhere in the range of a 15- to
18-percent increase on our customers' bill because only of our
customers' bill 80 percent of it is natural gas, and 20 percent
of it is MLGW costs.
Ms. Blackburn. OK, thank you. So many times our
constituents think that it is due to the weather, and I think
that is an important point is that it is due to what the
manipulations are in the market. Based on that, Mr. Vice, let
me come to you. Let us say an average investor wants to know
what contracts have been sold on a certain day, and he wants to
know what contracts have been made in your market, in ICE's
market. So is that information readily available on a day-by-
day basis?
Mr. Vice. It is available for a fee.
Mrs. Blackburn. For a fee?
Mr. Vice. Yes.
Mrs. Blackburn. OK, and then what would that fee be?
Mr. Vice. I don't know the pricing of all our market data.
If you want a real-time screen to sit there and watch it----
Mrs. Blackburn. Why don't you get that and get it back to
me?
Mr. Vice. Sure, be happy to.
Mrs. Blackburn. OK, I think that that would be interesting
to know, because we may have investors out there that are
listening to all of this, and they are saying, my goodness, I
am hearing from Ms. Campbell that it is all passed through. It
is passed through on a month delay. There is this market out
there. It is called ICE. I wonder what these contracts are--who
they are being made with and what that pricing is every day.
Let me ask you this also. Is ICE going to implement an
electronic system that provides minute-by-minute and up-to-date
information for public investors? Do you plan to do that?
Mr. Vice. Well, when you say ICE, we have, as I said
earlier, we have a number of futures exchanges which already do
that. In our over-the-counter markets, which is where our
natural gas trades, we do do that. Keep in mind, our history up
to this point has been that we are an over-the-counter market,
which the point here is, means that it is a principals-only. It
is a professionals-only market. There is no retail access.
There are no brokers. I could not personally go into that
market and trade. There are $100 million asset requirements. So
it is utilities, like Memphis Gas. It is banks. It is energy
companies.
Mrs. Blackburn. OK.
Mr. Vice. And so until now, it has been a relatively small,
it is the wholesale market if you think of it that way.
Mrs. Blackburn. So you keep the firewall in place, since it
is a wholesale market. Mr. Greenberger, any comment to that?
Mr. Greenberger. Yes, you asked about what the price to
your consumer, and let me just read to you from the bipartisan
Senate staff report from the Senate Permanent Investigating
Committee under the auspices of Senator Coleman of Minnesota,
Senator Levin. The price for natural gas was $8.45 before
Amaranth collapsed. NYMEX said, you got to reduce your
position. They went over and moved all their trading over to
ICE. They went bankrupt. The day after they went bankrupt, the
price went down to $4.80.
``The Electric Power Research Institute described this
price collapse as stunning, one of the steepest declines ever.
Throughout this period, the market fundamentals of supply and
demand were largely unchanged.'' So eliminating that one
speculator from ICE almost dropped the price of natural gas,
which is a component of electricity, by one half. Now, that is
a school of scandal. Everybody saw what Amaranth did. So others
went right back into that market. It is back up to $7 now, but
if we weren't talking about deregulating, it would be up to
$10, where it was the day before people were talking about
introducing legislation. That is what your consumers are paying
too much.
Ms. Blackburn. Thank you, Mr. Greenberger. I am out of
time. Again, Ms. Campbell, thank you for being with us today,
and I yield back.
Mr. Stupak. Mr. Burgess, for questions.
Mr. Burgess. Thank you, Mr. Chairman. Mr. Vice, we may be a
lot of things on this subcommittee, but we are unfailingly
polite, and you were unable to respond to a statement that was
made a minute ago. And if I have reconstructed the statement
properly, I think it was that if you are on ICE, you can't
trade on NYMEX. You wanted to make a comment about that. So let
me give you a moment to do that.
Mr. Vice. Thank you, I appreciate that. Yes, I think
Professor Greenberger several times has alleged that Morgan
Stanley, Goldman Sachs own, control ICE, and he is saying
things as outrageous as they are telling their people not to
use NYMEX. In fact, those companies, I don't know if any of
them own any shares of ICE anymore. I am pretty sure some of
them don't. I know they probably own seats on the NYMEX, and
they are also actively starting up new competitors, new
businesses that will compete with us in various areas. So that
is just patently false. I mean, it doesn't even make sense if
you--that Goldman Sachs or anyone like that would be doing that
type of thing. Thank you for the opportunity.
Mr. Burgess. Well, I appreciate the clarification. Now, you
have talked about the electronic trading platform and the
investment that your exchange has made in that or, I guess, the
multiple exchanges that are involved or that make up ICE. And
you have referenced speed and transparency.
So that should be a good thing just from the perspective of
a consumer if the trades can be made more in real time, if
there is greater transparency. So, if, as Ms. Blackburn said,
the price is right, you can go and have the real-time screen
and know these things. That should be of benefit to the people
who are purchasing, I would think.
So my previous career was in healthcare, and the more we
can increase the speed of computing, and the more we can
increase transparency, these are seen as positive things for
the delivery of healthcare. And I would think the same could be
said for pricing in the energy markets. Has NYMEX, for example,
made this same, similar sort of investments into this
electronic trading platform? Does that seem to be something
that delivers value to the transactional process?
Mr. LaSala. Thank you. We certainly have transitioned into
an electronic forum. We are operating on our core contracts on
both venues, meaning a floor as well as electronic. But we
definitely have migrated to a point where approximately 80
percent of our futures volume is now electronic. So I think
that the marketplace has determined that the electronic medium
is efficient. And at a point in time if the marketplace decides
that that is the only form that they see as appropriate, we
would be responsive to it. But until then, there is still a use
for the floor.
Mr. Burgess. Well, it just seems like, in an era where most
young people today don't have any concept of what it means to
go to the bank and write a check for cash, they go to the ATM
and make withdrawals, it just seems like moving in a direction
of the electronic trading makes a lot of sense. And if we
create the right type of regulatory environment, it seems to
me, and I am just a casual observer to this process, but it
seems to me that the increased transparency could bring
problems to light much more quickly than we sometimes find
things in our current regulatory environment.
And I hate to keep going back to health analogies, but just
like when we created the database that now the FDA is going to
use to be able to flag problems with new medications in their
post-market surveys, it just seems like the data could be
collected on a real-time, ongoing basis by whatever regulatory
body, whether it be FERC or CFTC or some new entity that is
created. It just seems like that information would be delivered
to them real time.
Mr. LaSala. Well, just a point on that is that with the
electronic medium, we also have to, I believe from my
perspective, factor in is that when the contracts are similar,
the electronic medium even more moves to the point of linking
the markets, meaning that there are electronic devices that are
going to be on front-end systems that are going to treat the
NYMEX market and the ICE market as effectively one and the
same. So the notion of similar markets being linked, I think,
becomes even more relevant in an electronic forum.
Mr. Burgess. And is that a good thing or a bad thing? Does
it increase competition? Does that benefit the consumer or harm
the consumer?
Mr. LaSala. I think that, broadly speaking, it is a good
thing, but with it comes the points that I have made earlier,
that it moves the argument that, in fact, where one market is
unregulated but linked, it suggests that regulation that would
be good for the consumer would be appropriate.
Mr. Cota. These systems are very efficient in how they do
it, but the flows of money are just huge. People think that
there is an energy shortage. There is no energy shortage.
Inventories are at 5-year highs across the board. You take a
look 5 years ago, crude oil is trading at about $30 a barrel.
We are now at $90. The volumes of money--we have got a glut of
cash. The cash has moved out of the sub-prime market into the
energy market, and they are just driving the price through the
roof. It has nothing to do with supply and demand.
Mr. Burgess. Well, let me interrupt you for a minute,
because I do have to ask Professor Greenberger a question,
because I am just dying to hear the answer, and it kind of ties
into what you are--expensive. Oil is expensive. Starbucks
coffee probably costs $1,000 a barrel, but we keep buying it.
But here is the question, Mr. Greenberger, if oil is too
expensive, if crude is too expensive, why do we keep buying it?
Mr. Greenberger. Well, at some point there will be a stop,
but there has not been a stop now. It is almost at $100.
Predictions are--Mr. Cota was citing statistics--it will be at
$105 very shortly.
Mr. Burgess. But if we paid the same prices for energy at
the pump that the Europeans do, what would the cost of oil per
barrel be? If there weren't the taxes that the European markets
add to their finished product, if just gas, because of crude
price costs $7 a gallon in Denton, Texas, what would the price
of crude be?
Mr. Greenberger. Probably $150, but are you going to tell
your constituents, hey, Europeans pay more, and they are OK?
Don't worry about it?
Mr. Burgess. No, I am just asking the question. How
expensive does it have to get before we stop buying it?
Mr. Greenberger. There will be movements to move to
alternative fuels at some point.
Mr. Burgess. Well, and would not we argue that that is
something that this committee has spent a good deal of time and
other subcommittees talking about?
Mr. Greenberger. That is great, but do you want to have
that done on the backs of the consumer who are paying $30 for a
barrel that they don't need to pay? Wouldn't it be better----
Mr. Burgess. Not the question. The question is, if oil is
so expensive, why are we buying it?
Mr. Cota. We are rapidly approaching demand destruction.
Gasoline is relatively inelastic in demand. Heating use, we
have seen a reduce in heating consumption. I have also seen a
huge trend of paying with credit cards, because consumers are
out of cash. When you get to the demand destruction point, you
are going to have a collapse in this market, because the big
players in the markets can move money faster than any consumer,
more than Memphis Gas can.
Mr. Burgess. Purely from observational data, and I am not
arguing with you, because you guys are the experts, but purely
observational data, a year ago, market destruction meant that
Republicans lost the majority of the House because oil was $56
a barrel. $96 a barrel this year, and there seems to be no
penalty for it. And as I drive around the metroplex, I don't
see any diminution of the number of SUVs with a single occupant
on the freeways.
Mr. Greenberger. Mr. Burgess, there will be in February a
penalty if heating oil does not drop.
Mr. Burgess. But with global warming, there is not going to
be any need for heating fuel. We have actually obviated that
problem.
Mr. Greenberger. May I also take the privilege of
responding to one point?
Mr. Burgess. Sure.
Mr. Greenberger. I am citing----
Mr. Burgess. If it is OK with the chairman. I said, sure,
but he is running the show here.
Mr. Stupak. Go ahead.
Mr. Greenberger. This is the bipartisan June 27, 2006,
report that was put out by Republicans and Democratic staffers
under the chairmanship of the Republican Senator from
Minnesota, Mr. Coleman. On page 48 of that report, which no one
to today has said is wrong, says, ``according to one energy
trade publication, several of the large stakeholders, several
of the large ICE stakeholders, BP, Total, and Morgan Stanley
were ``doing their best to support the ICE WTC contract, with
Goldman Sachs directing its traders to use the ICE platform
rather than NYMEX.'' Now, I may be wrong, but if I am wrong,
Senator Coleman----
Mr. Vice. You are quoting an unnamed energy publication.
Mr. Greenberger. Market forces, big oil increases, market
reach, Energy Compass, March 24, 2006.
Mr. Burgess. Mr. Chairman, I think at this point, I am
going to yield back my time.
Mr. Stupak. What is the date of the report you are quoting
from, Professor?
Mr. Greenberger. It is June 27, 2006, pages 48 to 49. This
is the report where Senator Coleman, Senator Levin, through
their staff, say, when oil was $77, $20 to $30 was being added
by speculation.
Mr. Burgess. Mr. Chairman, do we have a copy of that?
Mr. Stupak. Yes, it is tab 24 in your document binder.
Mr. Burgess. I don't have a document binder. I am on the
minority.
Mr. Stupak. Jeff has one. Be nice to your staff.
Mr. Greenberger. I would say to any member of this
subcommittee that if you read nothing else, read the two
bipartisan staff reports of the Senate Permanent Investigating
Committee on speculation and crude oil prices and natural gas.
They are dated June 27, 2006, and June 25, 2007. The first
report says ``$20 to $30 added to crude oil price''. The second
report says ``Amaranth caused a $4 increase in natural gas''.
Both reports say, this has got to stop. The first report says,
the loophole has to be closed, and an Atlanta company with
United States trading engines and using United States-delivered
contracts should not be delivered by the United Kingdom.
Mr. Cota. And the GAO put out a report 3 weeks ago that
basically said similar things. That so much of the data is
unavailable you can't tell whether there is market manipulation
and again recommends that the CFTC regulate these markets.
Mr. Burgess. Mr. Chairman, are we going to have time for a
second round?
Mr. Stupak. If we get there, yes.
Mr. Burgess. OK.
Mr. Stupak. No one else on this side. Mr. Fossella, who is
a member of the full committee, but not the subcommittee. It
has always been the practice of this subcommittee to allow
members of the Energy and Commerce Committee, if they sit in,
to ask questions. So, without objection, Mr. Fossella, if you
would like to ask some questions. We will then go to a second
round, Mr. Burgess.
Mr. Fossella. Thank you very much, Mr. Chairman. Thanks for
the hearing, and thank you to the panel. I find it very
illuminating and great discussion. And maybe just to follow up,
because I am curious, I know that the essence is here is not
just whether more regulation is necessary but also impact on
consumers and speculation and in some ways manipulation. And if
I could just be clear, Professor, you made a pretty strong
statement before, under oath, that Goldman Sachs tells its
clients, I think you said, not to trade on NYMEX. You don't
know that for a fact, or do you?
Mr. Greenberger. I know what I have read by the bipartisan
Senate staff. It is in their report. I read that to you. That
is what I am basing my testimony on.
Mr. Fossella. OK.
Mr. Greenberger. That report, which is in an energy
publication----
Mr. Fossella. I understand. OK, so you are basing--I just
want to be clear. You cited that report, and based on that, you
believe that Goldman Sachs tells its traders not to trade on
NYMEX. Is that what you believe?
Mr. Greenberger. My statement is based on this report.
Mr. Fossella. Do you believe it to be true?
Mr. Greenberger. And I believe it to be true. I don't know
it to be true, but I believe it----
Mr. Fossella. OK, you believe that Goldman Sachs tells its
traders not to trade on NYMEX?
Mr. Greenberger. Yes, and I will tell you why.
Mr. Fossella. OK.
Mr. Greenberger. Goldman Sachs doesn't like NYMEX. They
didn't control NYMEX. NYMEX got created before Goldman Sachs
got in this business.
Mr. Fossella. OK, I just want to be clear.
Mr. Greenberger. Goldman Sachs----
Mr. Fossella. I am not here to defend Goldman Sachs. They
are a small player in the field. I recognize that, but they can
take care of themselves.
Mr. Greenberger. Goldman Sachs was not happy with NYMEX.
They didn't control NYMEX. They didn't have power there. They
helped create the Intercontinental Exchange insofar as it
trades these products that we are talking about. I base my
statement entirely on this staff report.
Mr. Fossella. Fair enough.
Mr. Stupak. And I think it would be appropriate at this
time to move to put the June 27, 2006, staff report as part of
the record. It will be made part of record, without objection.
Mr. Burgess. Mr. Chairman?
Mr. Stupak. Mr. Burgess, you are reserving the right to
object. Let me just be certain that we have the additional
minority staff views on the report, because they do take issue
with several of the points that have just been made by
Professor Greenberger.
Mr. Barton. Would Mr. Fossella yield for a point of
personal privilege?
Mr. Fossella. Sure.
Mr. Stupak. OK, well, let us finish with the motion. No
objection. Then we will put the June 27 and the minority views
in there, as Mr. Burgess suggested, in the record. Then it is
to Mr. Fossella, to Mr. Barton.
[The information appears at the conclusion of the hearing.]
Mr. Barton. I think it is a point of personal disclosure,
since we are bandying Goldman Sachs around so much, my daughter
is a trader for Goldman Sachs in New York City. So we need to
put that on the record, too, if we are going to be
investigating Goldman Sachs.
Mr. Fossella. I am just curious. Mr. LaSala, he has made
some statements about Goldman basing obviously and he clarified
his belief. Do you know that to be true, that Goldman Sachs
directs its trader not to trade on NYMEX?
Mr. LaSala. I have absolutely no idea as to what Goldman
Sachs tells their traders.
Mr. Fossella. Do you believe it? I mean, just trying to
get--I mean, he is making statements about NYMEX. Have you
heard that at all?
Mr. LaSala. I have not heard that, no.
Mr. Fossella. You have not? OK.
Mr. LaSala. I have seen that report, but I don't know
exactly what they----
Mr. Fossella. You want to talk about manipulation of the
markets. That is a pretty strong statement and a belief, OK. So
you don't believe it to be true. Mr. Cota, you mentioned
before, and if anybody else has a difference of opinion, I
would be curious. What is the difference between speculation
and excessive speculation?
Mr. Cota. It is the amount of contracts that are traded and
the positions of single parties and how much they hold.
Amaranth got caught, as an example, because they did their
trades on NYMEX or a portion of their trades on NYMEX. Their
February position for natural gas was about 70 percent of the
total U.S. natural gas production. That was just their
position. And they were trading all of those trades within the
last 15 minutes of the month before the contract expires,
because if you are not intending to take physical on a traded
market, you have to close out that position.
I put it akin to if a trader was going to do an option deal
to buy 70 percent of the single-family houses in the United
States in the last 15 minutes of the month, would that have an
impact? That would be excessive, perhaps. It depends what side
of the transaction you are on. Certainly I would hate to rent
that house afterwards, but that is the kind of excessive
speculation, I think, that we are talking about.
And when a single player has too much of a total position,
which is the large trader reporting, which is required by CFTC
for NYMEX, and NYMEX discloses, it is not done in the other
markets, that that becomes a problem for the whole validity of
the futures contract market for that segment of the market.
Mr. Fossella. But let me be clear, because I want to ask
one question, and maybe if each of you, because I am curious,
is excessive speculation in the eye of the beholder? I mean, is
there an objective standard? And would you point to 70 as--and
you could all just provide this in writing, because I don't
want to abuse my privilege here. And if you can provide that in
writing, in your opinion, what is the difference between--or
words--what is the difference between excessive speculation and
speculation?
But finally, it may be just a different perspective. Maybe
it is not different. In light of the liquidity and the depth of
our markets and the fact that we do live, as all has been
acknowledged, in a more global marketplace. And the essence of
this is whether greater regulation is necessary to stop price
manipulation. There has been much talk in the last year, year
and a half, about American competitiveness vis-a-vis the rest
of the world, taxes, regulation, accounting amortization, many
different points of view.
I think most folks are coming to the consensus that we are
not alone anymore. We never were, but, you know. Is there an
implication of greater or more regulation to the American
marketplace? And let me ask it a different way. If we go too
far in terms of more regulation, do we force international
players away from the U.S., taking capital and jobs with it? Is
that a concern or should be a concern? And I can go right down
the line, please.
Mr. Greenberger. That is an excellent question, because it
has been raised consistently as an argument against not
regulating ICE. Of course, ICE bought the UK Petroleum Exchange
and brought it to the United States. In the futures market, you
have to be where the action is. You could not control 30
percent of West Texas Intermediate Crude Futures contracts
trading in London, and they don't. They are in the United
States. You have to be near the product.
When I was at the CFTC, I was asked to create the exemption
to allow foreign boards of trade to bring their terminals in
the United States. Now, you could say I could voice broker
those trades. I could call them up in London and say make this
trade. Or I somehow could by computer transact my trade, but
the only way these exchanges could successfully sell their
foreign products was to have terminals in the United States.
For this product, Eurex, the largest German exchange, tried to
open up as a United States exchange because they couldn't make
it in the United States products trading in Europe.
Everybody wants to be here. Look at the list of foreign
exchanges that have asked for permission to have U.S.
terminals. They don't want you calling them in Europe. They
don't want you sending them in e-mail. They want you to be able
to sit down at a terminal physically located in the United
States to trade, so U.S. customers would trade.
This is a U.S. industry. Henry Hub Natural Gas, West Texas
Crude, other things, you have got to be in the United States.
Everybody wants to be here.
Mr. Fossella. OK, I am just saying, if we could make it a
little--because I don't want to again abuse my time and
privilege. If we could just give a sense whether we should be
concerned about that.
Ms. Campbell. Well, Memphis Light, Gas and Water is not
going overseas. So we are depending on this market, and the
natural gas market is certainly a domestic market. So I am less
concerned about that, but I do think that you need to be
measured in your response. And I think that transparency is
that measured response where your large traders report their
positions across the marketplace. And then that way it brings
light to the dark markets, and then you have the full picture
of the marketplace to determine manipulation.
Mr. Fossella. Thank you. Mr. Cota.
Mr. Cota. The U.S. energy market is where the action is at.
We are 20 percent of world demand. I think that if we had more
electronic trading disclosure done under a fuller regime by
CFTC you will actually see an increased flood of trading money
into the United States because the brokers around the world
have traditionally looked at this as a safe market. So you are
going to get more of the smaller players to play in our market
as a trading platform than in their other markets.
Whatever happens in Russia happens in Russia. You know, and
people in Russia know that. So the U.S. boards of trade have
always been a safer way of trading, and I think it would
enhance their ability to do worldwide trading. And because we
are a big part of the market. We are 20 percent of the world
market.
Mr. Fossella. Mr. LaSala.
Mr. LaSala. I think the U.S. boards of trade are robust,
and the points that I made earlier that you may have missed is
just simply that where U.S. based products potentially get
offered overseas under other regimes that our suggestion would
be that the CFTC could address this--and the no-action process
it good. It works, but there might be some consideration of
additional comparability standards or additional hurdles such
as position limits if we have them here that, if there is a
like contract offer in another regime, that the regulatory
regime, that they might be considered to be appropriate to be
imposed in the context of the no-action relief.
Mr. Fossella. Thank you. Mr. Vice.
Mr. Vice. I have two quick, specific examples, one on your
question about competitiveness, which is close to home. Our
second or third or maybe fourth of those most liquid contracts
on our ECM market, for example, is a fuel oil swap based on an
index for fuel oil delivered into Singapore. I am proud of the
fact that American ingenuity of this Atlanta company was able,
through a lot of hard work, to have traders which are
primarily--these are not U.S.-based traders.
These are Asian companies for the most part or Asian
branches of banks that are trading fuel oil delivered in
Singapore. Has little to nothing to do with the U.S. market,
and I think that is an example of if you put a futures-style
DCM rule across everything that is on our ECM, that market
would--we would lose that overnight, and it would go elsewhere.
So it is important to have that middle tier of----
Mr. Stupak. OK, you are going to have to answer his
question, or I am going to have to cut you off. We are way
over. So did you want to answer it or not, because you were
going to a different----
Mr. Vice. He was asking about American competitiveness.
Mr. Stupak. OK.
Mr. Vice. And I think overregulation, that is an example
close to home, where it would certainly hurt our
competitiveness and potentially cost jobs.
Mr. Fossella. OK, thank you, Mr. Chairman.
Mr. Stupak. Thank you, Mr. Fossella. And we have been
generous with time on everybody because I know it is a complex
issue, but I want to keep things moving. Mr. Green, for
questions.
Mr. Vice. One other thing. You asked about excessive
speculation. It is defined in the Commodities Act. Section 6A,
Commodities Act, defines excessive speculation.
Mr. Stupak. Mr. Green, your questions.
Mr. Green. And I appreciate on how we can deal with it. I
was wondering how we could deal with what, I think, our
witnesses said, deal with the products in the U.S. markets. I
say Texas market, because that seems like what we end up with a
lot. But how can we do that if there is fuel oil for the
Northeast? I think we shouldn't really care what is going on in
Singapore even though it has an effect on world price. But it
is not for the U.S. consumers, the U.S. market. But how can we
do that? Mr. Vice, we say Amaranth moved its trades from NYMEX
to ICE, and when they didn't like what NYMEX's orders were. If
only certain contracts on ICE are brought under regulation, for
example, U.S. contracts, what would ICE do if a trader in
response to the speculative position limit in a regulatory ICE
contract, would they simply move to a non-regulated? How would
that work?
Mr. Vice. Well, the language being contemplated is not
limited to U.S. It is up to the discretion on anything that is
on our ECM including that Singapore example I gave. If said it
is a significant price discovery contract, and we had to apply
these DCM core principles, then we would be responsible for
doing that.
I think one thing that might be helpful to understand, you
fall off a pretty big cliff in our market when you move from
talking about our Henry Hub look-alike swap, which is what most
of this is about. It is about 70 to 75 percent of our OTC
revenue, OK. And the No. 2 is a far, far distant No. 2.
Mr. Green. OK.
Mr. Vice. I mention that just because whereas people
compare what goes on in Henry to the futures contract at
NYMEX--and we acknowledge and are part of a discussion of how
do we--it does need some additional future-style regulation--is
important to realize that it is a big step to the next
contract, and when you move to that second contract--it is not
a look-alike contract. It may be even a Canadian-based
contract. I don't know. You get into a whole hodge-podge of
much less liquid contracts.
Mr. Green. Well, you satisfied one part that it has to be,
because I know there are tankers that come in that may go to a
refinery in Europe, or it could come to a refinery in our area
of the United States. And so we would need to have oversight
for that.
Ms. Campbell, you mentioned in your testimony the lack of
over-the-counter or transparency, and in your response to
questions, you have talked about that and the extreme price
swings surrounding the collapse of Amaranth, which has caused
some bona fide hedgers to become reluctant to participate in
the markets in fear of locking in prices that may be
artificial. Do you believe this reluctance to hedge will affect
your organization or the overall economy, that if they don't
have trust in those prices?
Ms. Campbell. Certainly it will. You know, we entered this
winter in trying to decide exactly how we were going to
approach it. Fortunately the CFTC put in the special call
provision, which gave us a measure of confidence in the natural
gas market. So we did put on the hedges that we typically
would, going into this winter.
But certainly, if you go back to the winter of 2 years ago,
when there were the hurricanes, if we had not had the hedges we
had in place, our customers would have been devastated. Just
last year, we had $12.5 million of bad debt. I can't even
imagine what it would have been the year before, had we not
hedged. So it does have a direct impact on the consumer and on
the overall economy.
Mr. Green. And should FERC have the authority to pursue the
market manipulation cases which span both the futures and the
physical market?
Ms. Campbell. Yes, sir, I believe they should. We supported
FERC's action on that. And I will say that we have a great deal
of confidence in both FERC and the CFTC, and we are hopeful
that they are going to work together to find some common ground
there on addressing that issue.
Mr. Green. OK. Mr. Chairman, I have no other questions.
Thank you.
Mr. Stupak. Thank you, Mr. Green. A couple questions. We
will go a second round here quickly, and we have been generous
with time with everybody, because it is a little complex and
technical area. Mr. LaSala, does NYMEX have what they call
mini-contracts to accommodate people like Ms. Campbell if they
want to do a smaller contract. Don't have something like that?
Mr. LaSala. We do have some cash-settled mini, half- or
quarter-sized version contracts. That is correct. Cash settled,
generally settled not on the last trading day, but they are
penultimately settled.
Mr. Stupak. Would that solve your issue of having to go to
ICE?
Ms. Campbell. Well, that innovation has come about just in
recent times, and so I would hope that that would have come
about, anyway. But I certainly think that the competition
between ICE and NYMEX has been healthy. And so, yes, it would
address that issue. We are glad to see the competition between
them, though, to make sure that we have those tools at hand.
Mr. Stupak. You mentioned 2 years ago, when the hurricanes
hit. Remember, I mentioned the high-rise in my district that
went from $5,000 to $7,000 in 1 month? That was that same
period, because of the hedge funds, and that cost is directly
passed on to consumers and one of the reason for the hearings
today. Mr. LaSala, let me ask you this. In your testimony, you
said, and I am quoting now, ``there is potential for systemic
financial risk from a market crisis involving significant
activity occurring on an unregulated trading venue, which could
arise from a mutualization of risk at the clearinghouse level,
where large positions on unregulated markets are not
monitored.'' What is your systemic failure, and could you
describe a credible scenario where unregulated markets could
trigger a systemic failure?
Mr. LaSala. Well, the example would be a scenario where a
party has gotten excessive position in an unregulated market
such as an ICE look-alike market. Granted, these positions are
in fact margined by another clearing organization. But they are
not regularly--they haven't been regularly monitored. And in
fact, you have a scenario where there is active volatility, and
no one is looking.
You know, again when you have this recent occurrence where
there is a special call in place--and we appreciate that. We
would like to see permanent regulation around it, but there
could also be other contracts where the regulator does not see
these underlying positions. And, in fact, there is a market
move, and the clearing member or members--remember, gentlemen,
many of the clients, these markets clear multiple houses.
So you have exposure being aggregated across multiple
firms, and not every firm knows what the position is of the
party necessarily at the other firms. So market event, in
positions that a Federal regulator does not see all of them,
could, in fact, cause a financial collapse of the client and
possibly take down the carrying firm or firms themselves.
Mr. Stupak. Mr. Vice, let me ask you with NYMEX's
statement. Do you agree there is a potential for systemic
financial risk from the market crisis involving significant
activity occurring on the unregulated trading venue arising
from the mutualization of risk at the clearing house level
where large positions are not monitored?
Mr. Vice. I essentially don't agree with it. I mean, in the
energy markets, between the NYMEX clearinghouse, and we use the
London Clearinghouse--we don't own that clearinghouse, but they
are both respected organizations with very strict risk
management policies in terms of how margin is calculated and
how collateral----
Mr. Stupak. Well, London has less restrictions than CFTC or
a NYMEX, right?
Mr. Vice. No, not at all.
Mr. Stupak. Really?
Mr. Vice. No, the clearinghouses--I don't know all the
rules, but the investment banks that are members of the NYMEX
clearinghouse are the same investment banks that are the
clearers that are members of the London Clearinghouse. And
London Clearinghouse actually, I think, is the largest
clearinghouse in the world. They clear the London Stock
Exchange, the financial futures in London, the London Metals
Exchange, and they clear our business as well.
But putting that aside for a minute, I think that the
clearing concepts introduced in the OTC markets by ICE and
NYMEX have made quite a service there in that so much of the
business is cleared at one of our clearinghouses. The OTC
business, whether you want to characterize it as unregulated or
somewhat regulated, the point there is that is far more secure
and far less vulnerable to systemic risk than the bilateral
positions that, say, took down Long Term Capital management or
that is at work in credit default swaps in the sub-prime mess,
where these products are not cleared. And these bilateral
parties don't know what is on the other party's books.
So I actually would argue the energy market, probably more
so than any other commodity, has less systemic risk than any
other.
Mr. Stupak. Well, that is why my pump-back legislation to
prevent unfair manipulation of prices deals with bilaterals.
Mr. Greenberger. I would say any--Refco failed. It was the
eighth largest FCM. It caused the 14th largest bankruptcy in
the fall of 2005. When it failed, people were worried about
systemic risk. I can assure you when Amaranth failed, even
though there has been a lot of damage, you cannot say there has
been systemic risk. But when Amaranth lost $6.6 billion in 4
days, I will say from my experience working with the
President's Working Group that the President's Working Group
was on the phone trying to figure out whether there would be a
systemic break. There can be a systemic break, and an
unregulated entity aggravates that, because you can't get the
data you need to see how big the problem is.
Mr. Stupak. Mr. Walden, for questions.
Mr. Walden. Thank you, Mr. Chairman. I just have a couple I
am going to throw your way, folks. This is a question for the
entire panel. Chairman Lukken, who is behind you there, of the
CFTC, recently conducted a study of hedge fund speculation in
the futures market, and that study concluded ``speculative
buying as a whole does not appear to drive up prices.''
Now, we have heard a lot about speculation of the market
driving up prices. Have you read that report? Are you familiar
with it? What are we missing here? Mr. Vice, will you keep it
kind of short, too, if possible.
Mr. Vice. I am vaguely familiar with it, so I don't know if
I can comment on the report specifically. But I would say
speculators speculate on prices going down as much as they
speculate on them going up. In fact, most of what Amaranth was
doing, I believe, was betting on the price going down as
opposed to the settlement prices going up. So to say that all
speculation is one way is kind of as false as saying that a
market can operate with only hedgers and no speculation.
Mr. Walden. All right, Mr. LaSala, can you comment on Mr.
Lukken's findings?
Mr. LaSala. Yes, sir. We conducted a similar analysis as
the Commission, and just broadly speaking, what it showed is
the hedge funds tended to chase volatility, not necessarily
create it. In our analysis, I think that most of the arithmetic
behind that was similar to the Commission's.
Mr. Walden. OK, now I am going to probably get to you all
later on that point, but I want to go back to Mr. LaSala. In
your testimony, you point out that NYMEX has experienced a 40
percent reduction in trading volume of natural gas futures on
the last day of each month because, I think you said, traders
wanted to avoid complying with your February 16, 2007, rule
change requiring open books.
Now, the chart I put up earlier today showed that overall,
year-to-date, the volumes were staying about the same. Given
that you think there is this pick-up that occurs the last day
of the month, or last 30 minutes of trading, or whatever, is
the volatility that is evidenced there the right index to be
setting the next month's price for natural gas in the market?
Mr. LaSala. Well, I think that the marketplace has found
that to absolutely be the case. The market has come to rely on
the NYMEX settlement price. We have seen, as you stated in
reference to my testimony earlier, there has been an exodus of
trading in the last 30 minutes. I don't know. I mean, there is
less volume now setting the price.
The volatility on that last day, you have the data, has
come in. There are other factors that might have affected.
Storage is up slightly. I am not sure what caused it, and I am
not sure--meaning that did the change in the policy create a
lower volatility, or is it a byproduct? It is a chicken and
egg. I am not sure what the cold of winter is going to do on
those 30-minute closes yet. We haven't seen them.
Mr. Walden. I get back to some of the oversight hearing we
did in this committee on Enron and the volatility of the
electric market, electricity market on the West Coast, where we
saw prices spike $1,000 or so. I mean, I would hate to have
thought that last bid, that last set of bids, was going to set
the price for the market for the next month, because it was
totally out of whack with the bulk of the market.
So help me understand that last 30 minutes that is setting
the, if I am correct, setting the price for the next month. How
much volume is there versus overall volume of gas sold? Does
that last 30 minutes represent the bulk of sales contracts, or
tell me how that part works.
Mr. LaSala. Just as a note, the 30-minute closing range, to
my knowledge, for purposes of rendering the final day
settlement, like some of our other energy contracts, is the
longest in the industry. There are other contracts that use the
median of the last bid or offer or the last bid or offer. The
volume in the 30-minute closing range is certainly less than
you would typically see over the course of the whole day on the
last day. And obviously we trade back months significantly more
volume.
I am not sure if I am completely following your question.
Forgive me.
Mr. Walden. Right, and you got to bear with me because I
don't do what you do in the industry. What I am trying to
figure out is, is that an accurate snapshot of the real price
in the market?
Mr. LaSala. We believe it is. I think the industry----
Mr. Walden. Ms. Campbell, do you agree with that? Mr. Cota?
Ms. Campbell. Absent any manipulation, yes. And I am
sitting here thinking, if not NYMEX, what would we use? And
really, the other things that we have at our----
Mr. Walden. I am not arguing whether or not it is NYMEX. I
am arguing whether or not that last 30 minutes is the right
look, and I realize--well, I am beginning to fully understand
how complex this market situation is and need for proper
regulation. But is that the right look?
Ms. Campbell. Well, it is certainly disconcerting to hear
that there are lower volumes in the last 30 minutes, but I
would say that so far we have not had an issue, other than what
we have seen in arrears from the actions that Amaranth was
taking in the last 30 minutes to try to manipulate the price.
Mr. Cota. What makes a difference about NYMEX is that when
you are in the physical market, you actually have to deliver
it. In the whole futures game and the physical market is a big
game of chicken, and whoever can hold out the last has the best
advantage. Amaranth, through its forced reduction in hedges,
had to get out of its trades early, so it was a blood bath.
What happens in the heating oil market, which is the one I
am most familiar with, is that the people that are playing out
those financial contracts in order to maintain the value as
high as possible, the money center banks, they will take
physical delivery of those markets. So they will take that
product, put it into storage, deliver it to the wholesale
market or to other contracts that they need to deliver because
they can play the game all the way out.
And that is good from a supply standpoint. From a pricing
standpoint, it all depends on the market. It is how bad is the
direction going at that particular time, and that is where the
large trader positions really make the biggest difference in my
opinion.
Mr. Walden. All right. Mr. LaSala.
Mr. LaSala. Just a point of clarity for the record. Number
one, all the prices that you are having in that 30-minute
closing range are all transparent. They are disseminated. The
other point being just by way of history, NYMEX doesn't
determine--I said before, we think it is accurate--the
marketplaces determine that. It is not necessarily my position
or NYMEX's. I am just going back 10 years. I recall when the
contract was first launched, the industry relied upon the
average of the last 3 days. It migrated to the last 2 days. It
migrated to the last day. Nowhere in there did NYMEX take a
position and say----
Mr. Walden. I wasn't alleging that at all.
Mr. LaSala. I know. I just want to be clear.
Mr. Walden. But as that window narrows, are you going to be
down to the last 30 seconds here?
Mr. Cota. Well, that has to do more with the physical
delivery rather than with the financial transaction. In my
segment of the business, we get re-priced all the time. I have
price changes three times a day, and if you are in the
wholesale segment of our market, what you will do is, you will
actually open trades and close trades. Whatever you think your
volume of storage is, you buy and sell that every day. And the
only thing you don't sell is what you think you are going to
sell that day.
So from a pricing standpoint, it is always priced in a
relationship to other futures contracts in the next traded
month for the spot month. So you are not locked into that price
in the last 30 minutes. You are locked into that supply. So if
you are relying on that supply for the next month, it is very
important. But from a pricing standpoint, there are a lot of
other ways to price the product.
Mr. Walden. OK. All right. Thank you, Mr. Chairman. Thank
you for your testimony.
Mr. Stupak. Mr. Green, for questions. Second round.
Mr. Green. No further questions for the panel.
Mr. Stupak. Let me welcome Mr. Shimkus, who is going to be
the new Ranking Member of O&I. Would you like to ask a few
questions on this? I know you are up to speed on it.
Mr. Shimkus. Yes, that is right. I can talk about mercury,
but, no, I just look forward to working with you, Bart, and I
look forward to working with those you call before this
Committee. And we want good government to operate, and we have
a great relationship. And I think we can do good things. Yield
back. Look forward to it.
Mr. Stupak. Mr. Barrow is not a member of the subcommittee,
but he has been here all day, and he is part of the Energy and
Commerce Committee. If you would like to ask some questions,
now would be the appropriate time.
Mr. Barrow. No question, Mr. Chairman. I want to thank you
for your consideration in allowing me to audit these
proceedings, and I thank the witnesses for their patience. I
have been running back and forth between here and markups in
other committees. Thank you, sir.
Mr. Stupak. Thank you. Mr. Burgess, if you have questions,
please.
Mr. Burgess. Let me just, if I could, get a point of
clarification from Mr. Vice. Does the market need speculators,
or do speculators bring anything of value to the marketplace?
Mr. Vice. Absolutely. I mean, the marketplace is all about
people that have risk and want to get rid of it, giving it to
people that are willing to take that risk on for a price. That
is how a market functions.
Mr. Burgess. So speculation in and of itself is not an evil
practice?
Mr. Vice. It is critical that it be part of the market,
yes.
Mr. Burgess. Does speculation bring any measure of
liquidity into the market?
Mr. Vice. Absolutely. It is essential.
Mr. Burgess. So it would be more difficult for the market
to function without some degree of speculation. Is that
correct?
Mr. Vice. That is correct.
Mr. Burgess. So it is more collusion between speculators
than it is the act of speculation itself that may cause a
difficulty?
Mr. Vice. I wouldn't use the word collusion, but it may be
periods of time for whatever reason that there is a majority of
opinion, speculative opinion, that prices are going up long
term or that prices are going down. And I am not smart enough
to say that is where energy is right now, but it is one
possible explanation.
Mr. Burgess. Well, is it possible that the transparency
brought by the entirely electronic platform would raise those
red flags more quickly than the floor activity or the voice
systems?
Mr. Vice. There is no question the electronic--it is fair
in the sense that everyone gets the same information at the
same time as opposed to paying for the rights to be on the
floor and getting the information early. So that, whether you
are Memphis Gas or you are Goldman Sachs or anybody else, you
are getting the same quality of information, the same depth, at
the same time, and the ability to act on it. And if you are the
first one that hits that bid, you get the trade.
Mr. Burgess. So the speed of information transfer is
actually in some ways transforming your business. Is that
correct?
Mr. Vice. That is correct.
Mr. Burgess. And again I would just offer the observation
that we need to be careful that we don't construct regulations
that in fact damage that transformation. In Congress, we are
inherently transactional. In my brief experience, sometimes the
transactional can become the enemy of the transformational, and
again I hope, Mr. Chairman, that we are careful about that.
Let me just take what little time I have left, and I know
we have had the report, the Excessive Speculation Staff Report
from June of 2007 placed into the record. I just want to read
the paragraph from the minority report because it is way at the
end of the report, and people may not get to that part. It
reads, and I am quoting, ``while we join with the majority in
making these recommendations, we are unable to reach some of
the same factual findings with the same degree of certitude.
For instance, although a number of facts presented in the
report support the conclusion that Amaranth's trading activity
was the primary cause of the large differences between winter
and summer futures prices that prevailed throughout 2006, other
facts seem to indicate the opposite, that the market
fundamentals and price changes influenced Amaranth's positions.
These facts suggest that, at least at times, Amaranth was
responding to the market rather than driving it. For example,
although the price of natural gas declined substantially after
Amaranth's demise, this alone does not prove that Amaranth's
ability to elevate prices above supply-and-demand fundamentals,
rather that the market may have simply reevaluated those
fundamentals in light of the hurricane season ending without a
major event and the prediction of a warm winter.
It is clear that different conclusions can be drawn from
the same set of facts.''
Thank you, Mr. Chairman. I will yield back the balance of
my time.
Mr. Stupak. Thank you. Let me ask one question, Mr. LaSala.
Regarding NYMEX's self-regulatory efforts, are they being
hamstrung when evaluating questionable activity or assessing
whether trades have a bona fide for exceeding accountability
limits or position limits by ICE, by trades on ICE? Are you
being hamstrung by their activities?
Mr. LaSala. By ICE's activities?
Mr. Stupak. Yes.
Mr. LaSala. The only way to respond to that is that I can't
firsthand see their activity.
Mr. Stupak. Correct.
Mr. LaSala. Can't see their activity, and I certainly can
conduct business. But one of the issues is by not having a
Federal regulator who also looks at it, I mean, I can be
misrepresented to by someone. For example, Amaranth. In the
Commission's case against Amaranth, there is a clear assertion
that they misrepresented to NYMEX certain things. Some of it,
what their exposure was. So, I am taking this back. I don't
know if----
Mr. Stupak. Well, you are the chief regulator and officer.
You have to look at things that are going on at NYMEX.
Mr. LaSala. That is right.
Mr. Stupak. Some things that may be questionable. You are
trying to evaluate it. So I guess, what I am trying to say,
when you are trying to assess whether traders have a bona fide
reason for exceeding accountability limits or their positions
limits and if they can go to ICE, does that hamstring you? Does
that hurt your ability to regulate your own market, your own
exchange?
Mr. LaSala. When they can go to an unregulated venue?
Mr. Stupak. Yes.
Mr. LaSala. Absolutely, albeit I do believe that those
positions on that exchange, which I think should be regulated
further, are positions that have exposure, meaning that I would
prospectively give them regard in evaluating some type of a
position exemption or accountability level. I would regard them
because I think that they are positions that are relevant.
Mr. Stupak. And that was your position rule in, what,
February 26, 2007, hearing in which you need that position rule
to better evaluate what was happening?
Mr. LaSala. That was the genesis of what that process was
about.
Mr. Stupak. OK, thank you. Further anyone?
Mr. Greenberger. Mr. Stupak?
Mr. Stupak. Yes.
Mr. Greenberger. If I could just add two quick points.
Mr. Stupak. Sure, Professor.
Mr. Greenberger. First of all, I think what Mr. LaSala said
should not be lost. It is not so much NYMEX not having that
information as the CFTC not having that information. The CFTC
has worked out an information sharing agreement, but an
information sharing agreement alone is not going to solve the
problem. With regard to the CFTC report that Mr. Walden
referred to, I believe that was written before Amaranth
collapsed and was only based--Mr. Lukken can correct me if I am
wrong--was only based on looking at NYMEX, not looking at ICE
where the speculation was excessive.
Everybody today agrees the Enron loophole has to be ended.
I think we are way over at the point of saying that there is
not excessive speculation. And with regard to speculation, yes,
there must be speculation. You can't have future markets
without speculation, and they should be electronic. That is
great, but the Act prevents excessive speculation.
Now, true, that is a fine line, but when NYMEX told
Amaranth to reduce its positions, it was saying, you are
excessively speculating, and you may bring us down, stop. And
they went over to ICE.
So CFTC, if it regulates, causes ICE to put position limits
in place that tell them to stop the excessive speculation.
Again, farmers learned this at the turn of the century. They
need speculation to hedge, but excessive speculation will kill
them.
And finally, with regard to the 2007 report and the
minority opinion, the 2006 report had no minority opinion in
it. And that was where the conclusion was reached that at least
$20 is being added speculative to the price of crude oil.
And both reports should be read, because the first one
deals with crude oil. The second one deals with natural gas.
Mr. Burgess. Mr. Chairman, I would just add in the final
paragraph of the minority views, the recommendation is for a
definition of what is excessive speculation, and they say
without a clear unequivocal definition of that term, the CFTC
and regulated exchanges will continue to have difficulty
monitoring and preventing price distortions. If we extend CFTC
oversight and regulation to the electronic, over-the-counter
exchanges, we must avoid unintended consequences, namely
creating incentives for traders to shift their business to the
far less transparent and unregulated bilateral voice brokered
markets. I will yield back.
Mr. Stupak. With that last sentence, that means you are a
cosponsor of my legislation in bilateral trades. Let me thank
this panel. It was a very good panel. We enjoyed having you
here, and, as you saw, for the given goal for members and
overtime, people were very interested in what you had to say.
And thank you for helping us in this complex, technical world.
Thank you. I will dismiss this panel. We will call forward
our second panel. Our second panel will be the Honorable Joseph
Kelliher, Chairman of the Federal Energy Regulatory Commission,
and the Honorable Walter Lukken, Acting Chairman of the
Commodity Futures Trading Commission. I should also note in the
audience is the Honorable Michael Dunne, Commissioner at the
Commodity Futures Trading Commission. Commissioner Dunne,
thanks for being here.
Now, gentlemen, it is the policy of this subcommittee to
take all testimony under oath. Please be advised that witnesses
have the right under the rules of the House to be advised by
counsel during their testimony. Do any of you wish to be
represented by counsel? Both indicated they do not. Let the
record reflect the two gentlemen have taken the oath and
replied in the affirmative, and you are now under oath. We will
begin with your opening statement. Mr. Kelliher, if would you
begin, please, sir.
STATEMENT OF JOSEPH T. KELLIHER, CHAIRMAN, FEDERAL ENERGY
REGULATORY COMMISSION
Mr. Kelliher. Thank you, Mr. Chairman. Mr. Chairman,
members of the subcommittee, thank you for the opportunity to
speak with you today about the Federal Energy Regulatory
Commission's role in protecting energy consumers against price
manipulation in wholesale energy markets. It is good to be back
at the committee.
My comments today will focus primarily on the steps FERC
has taken to ensure the integrity of wholesale gas markets and
prevent market manipulation under the new authorities granted
to it by Congress in the Energy Policy Act of 2005. I thank the
committee for supporting FERC's request for this additional
authority 2 years ago and credit the committee for recognizing
that FERC needed new regulatory tools to discharge its historic
duty to guard the consumer.
And particularly the Energy Policy Act amended our statutes
in several significant ways to protect against market
manipulation. First, it granted us expressed authority to
prevent market manipulation. It also gave us authority to issue
rules to assure greater price transparency and wholesale gas
markets as well as jurisdictional power markets. It also gave
the committee enhanced civil penalty authority.
At this time, I do not believe that FERC needs any
additional legal authority to protect consumers from market
manipulation. You gave us the tools we needed 2 years ago, and
we are using them. However, it is important that those tools
not be taken away from us or diminished.
The Energy Policy Act granted FERC express authority to
prevent market manipulation. This provides a strong grounding
for our efforts to oversee wholesale energy markets. Under our
final anti-manipulation rules, it is unlawful for any entity,
directly or indirectly, in connection with the purchase or sale
of electric energy or transmission services subject to FERC
jurisdiction or the purchase or sale of natural gas or
transportation service subject to FERC jurisdiction to engage
in duplicative or manipulative practices.
In two recent cases, FERC issued orders to show cause and
notices of proposed penalties in the course of market
manipulation investigations. Under these orders, FERC made
preliminary findings that two groups of companies and
individual traders, collectively Amaranth and Energy Transfer
Partners, may have manipulated energy markets. These orders do
not represent final determinations and make no final
conclusions. Both groups of respondents have been given the
opportunity to rebut the preliminary conclusions set forth in
the orders. However, if the final conclusions reflect the
preliminary findings, we propose to impose penalties that
approach the maximum for certain violations, $291 million for
the Amaranth entities and $167 million for the Energy Transfer
Partners entities for total civil penalties of $458 million.
Before I discuss the Amaranth and Energy Transfer Partners
investigation, it is important to recognize that natural gas is
traded in a wide variety of products. That was made clear in
the discussion on the earlier panel. Some of these products are
physical products, potentially subject to FERC jurisdiction.
Other products are futures or financial products subject to
CFTC jurisdiction.
However, month indexes used to price physical gas sales are
constructed using transactions with prices set in part by
futures prices. This is particularly true in the Eastern United
States and the Gulf Coast, as shown by the map that is attached
to my testimony. As a result, futures prices determine, in
part, the price of physical natural gas purchased by customers
and the effects on physical markets of changes in futures
prices are direct and significant.
Based on the evidence developed in the investigation, we
made a preliminary finding that Amaranth may have deliberately
obtained and then sold large futures positions in the last half
hour of trading on the settlement date and number of months in
order to manipulate prices downward. Thus, Amaranth may have
benefited from even larger opposing positions that they held on
ICE, and they did this full well knowing that their actions
would affect physical prices as well.
The Energy Transfer Partners investigation looked at a
different scenario where we believe, based on preliminary
conclusions, that Energy Transfer Partners may have manipulated
physical prices, physical transactions, in order to benefit
opposing positions they held in other physical products as well
as CFTC jurisdictional financial products.
Now, in both the Amaranth and the Energy Transfer Partners
cases, FERC began an investigation. We shared our information
fully with the CFTC, and the CFTC began its own investigations
of both matters soon thereafter. The two agencies cooperated
closely throughout these investigations. I think that is a
credit to the memorandum of understanding that the two agencies
entered into in October 2005, as directed by Congress.
I think the MOU has worked very successfully over the past
two years. Now, the MOU has worked very well and particularly
during these investigations, during the 14 months of the
Amaranth investigation as well as the 21 months of the Energy
Transfer Partners investigations, and it continues to operate
successfully. The two agencies conducted parallel
investigations that were very closely coordinated.
Now, this cooperation was significant. Market manipulation
can cross jurisdictional lines. It can cross product lines, as
shown by both the Amaranth and the Energy Transfer Partners
investigations. In a sense, one of these investigations
examined manipulation that may have occurred within CFTC
jurisdiction but affected FERC jurisdictional sales. The other
involved manipulation that may have occurred within FERC
jurisdictional markets that affected other CFTC jurisdictional
transactions.
Both investigations involved possible manipulation that may
have crossed the jurisdictional lines between the two agencies,
and cooperation between FERC and CFTC is essential in order to
police this kind of manipulation.
Now the enforcement actions, as I indicated, were
coordinated, very closely coordinated as were the
investigations themselves, and both agencies publicly praised
the investigations conducted by the other agencies when we took
coordinated enforcement action in July.
Now, since then Amaranth has raised arguments about whether
FERC has jurisdiction over manipulation of the monthly futures
price. Even before we issued our order to show cause in July,
Amaranth's lead trader, Brian Hunter, filed in the U.S.
District Court for the District of Columbia, seeking to enjoin
issuance of our Order, claiming that FERC lacked jurisdiction.
Judge Richard Leon denied their request for a temporary
restraining order, and just on Monday of this week, he also
denied the injunction.
Now, within weeks of the order to show cause, Amaranth also
filed a motion to stay FERC's action and civil action filed by
the CFTC against Amaranth in the U.S. District Court for the
Southern District of New York. Amaranth argued, among other
things, that we lacked jurisdiction, and CFTC has sole
jurisdiction over the conduct prescribed in our order to show
cause. Although CFTC opposed Amaranth's motion to stay our
order, CFTC maintained that it had exclusive jurisdiction over
all trading and natural gas futures.
This position would have the effect of preempting FERC's
ongoing enforcement proceeding against Amaranth, and I consider
this to have been a significant change in the CFTC position.
Now, at this point, the two agencies, we have a difference
of opinion about the proper interpretation of the anti-
manipulation provisions of the Energy Policy Act and how those
provisions should be interpreted in concert with the Commodity
Exchange Act, and this agreement will likely be resolved by the
Courts. And I think that is appropriate.
But I just want to emphasize that there is a great deal at
stake in this legal dispute. The key issue, the central issue,
is the reach of FERC's anti-manipulation authority, the extent
of our ability to protect consumers. If the attack on our
jurisdiction is successful, our ability to guard the consumers
from exploitation would be significantly reduced.
FERC and CFTC are different agencies with different duties.
We are a consumer protection agency. The CFTC has a different
mission. We have greater penalty authority than the CFTC and
are more likely to order disclosure of profits in a market
manipulation case, which holds out the promise to consumers
that they might be made whole.
It is also much harder for the CFTC to prove manipulation
that FERC since they operate under a high statutory standard.
And I think consumers see a difference between the agencies. I
think that is why the National Association of State Utility
Regulators and a host of individual state commissions have
declared support for FERC's position. They have even gone so
far as to enter the litigation, filing briefs in the New York
District Court supporting FERC.
But perhaps the best judge is the consumers themselves.
Various consumers groups have filed briefs in support of FERC
position, including one of the organizations represented on the
first panel, American Public Gas Association.
Now, at FERC, we recognize that CFTC has exclusive
jurisdiction to regulate aspects of future trading. FERC
respects the CFTC's exclusive jurisdiction in these areas, and
we do not seek to regulate futures or regulate NYMEX. And I do
not believe that our enforcement actions that we proposed
against Amaranth constitute regulation.
Now, FERC stands by our position that Amaranth's activities
fall within our jurisdiction insofar as they affect physical
sales of natural gas. We believe that the anti-manipulation and
the anti-manipulation provisions in the Energy Policy Act 2005
give FERC broad authority to sanction manipulative conduct when
it significantly affects jurisdictional sales.
Comments in floor debate on the Energy Policy Act clearly
indicate Congress's intent that FERC implement the broadest
possible prescriptions necessary to protect energy consumers.
I believe that the words in the statute mean something,
both the words that Congress chooses and the words it does not
choose. Here, the choices are significant. The FERC anti-
manipulation authority applies to ``any entity'' rather than
``a natural gas company'', a defined term set in Law 7 years
ago, meaning a company that engages in jurisdictional sales. We
are authorized by the statute the sanction manipulation that
directly or indirectly affects jurisdictional sales. And we can
sanction fraud and deceit in connection with jurisdictional
sales.
In addition, it is noteworthy that Congress included no
saving clause in the anti-manipulation provision of the Energy
Policy Act related to CFTC authority. I would be happy to
discuss statutory interpretation at greater length if that is
the will of the subcommittee.
Now, the question has been posed whether FERC should have
exercised its anti-manipulation authority. I think one of the
lessons of the California Western power crisis is that
manipulation can hurt gas and power consumers. That is why you
gave us the anti-manipulation authority 2 years ago. You gave
us the tools, and we have been using them.
I think FERC has a duty to guard the consumer from
exploitation, and exercise of our anti-manipulation authority
is necessary to discharge that duty. And I respectfully suggest
that if FERC had declined to use this anti-manipulation
authority, the subcommittee should have held a hearing today to
ask us why not.
Now, I regret that this disagreement between FERC and CFTC
has arisen in recent months, but I want to make it clear that
this disagreement over jurisdiction has not impeded cooperation
between the two agencies. We have a respectful disagreement
over interpretation of the anti-manipulation provisions of the
Energy Policy Act, a disagreement that, in my view, is best
resolved by the Courts.
But I also want to make it clear that I do not question
CFTC's commitment to prevent market manipulation. They are as
committed to preventing market manipulation as FERC. They have
demonstrated that by continuing to cooperate with FERC on
matters of mutual interest, notwithstanding their legal opinion
on the scope of our jurisdiction.
So I just want to reassure the subcommittee that this
disagreement has not impeded cooperation between the two
agencies on ongoing investigations in areas of mutual interest.
The MOU continues in place, and we continue to coordinate our
information gathering, and we continue to coordinate our
investigations.
Staff members from the two agencies continue to meet
periodically to discuss more general ides of common interest,
and the two agencies are discussing other ideas on how to
improve cooperation investigations going forward.
Now, in conclusion, the Energy Policy Act gave FERC the
tools that we need to oversee physical natural gas and electric
power markets. Over the last 2 years, we have moved both
carefully and quickly to implement the relevant provisions of
the Energy Policy Act, especially the anti-manipulation civil
penalty and the transparency authorities.
Our experience so far is that the new authorities gave us
the tools we needed to penalize and deter price manipulation,
and our track record shows how effective those authorities can
be. But I do not anticipate that we would need further
authorities. However, I do note that there is legislation being
considered earlier today that would amend the Commodity
Exchange Act. I think it is important, though, to make sure
that FERC authority to look into ICE markets is not diminished
by changes to the Commodity Exchange Act. And I ask the
committee for your assistance in that.
However, a legal question has arisen. Yes, sir.
Mr. Stupak. I am going to need you to wrap up.
Mr. Kelliher. Yes, sir.
Mr. Stupak. We are 7 minutes over, and we got votes now. I
want to get Mr. Lukken in yet before we go.
Mr. Kelliher. Can I have 10 seconds?
Mr. Stupak. Yes, quickly.
Mr. Kelliher. A legal question has arisen regarding one of
our most important new authorities. We think it is important to
clarify the extent of FERC authority in this area. We think
there is a great deal at stake, and we think the Court is the
right place to settle it. Thank you.
[The prepared statement of Mr. Kelliher follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Stupak. Thank you for your testimony. Mr. Lukken,
please, if you would, your testimony. We have four votes on the
floor, but we are going to get to this testimony, and then we
would recess for a bit. And then we will come back for
questions. Mr. Lukken, please.
STATEMENT OF WALTER LUKKEN, ACTING CHAIRMAN, U.S. COMMODITY
FUTURES TRADING COMMISSION.
Mr. Lukken. Thank you, Mr. Chairman, members of the
subcommittee. On behalf of the Commodity Futures Trading
Commission, I appreciate the opportunity to appear before you
today. The CFTC's mission is broadly two-fold: to protect the
public and market users from manipulation, fraud, and abusive
trading practices, and to promote open, competitive, and
financially sound markets for commodity futures and options.
Congress created the CFTC in 1974 as an independent agency
with the mandate to regulate commodity futures and options
markets in the United States. With the passage of the Commodity
Futures Modernization Act in 2000, the CFTC became the only
Federal financial regulator that operates under a principles-
based regulatory approach.
A principles-based system requires markets to meet certain
public outcomes in conducting the business operations. For
example, registered futures exchanges, also known as designated
contract markets, or DCMs, must comply with a set of core
principles in order to uphold their good standing as a
regulated exchange--ranging from maintaining adequate financial
safeguards to conducting market surveillance. As technology and
market conditions change, exchanges may discover more effective
ways to meet a mandate principle and their self-regulatory
responsibilities.
The CFTC's regulatory approach is complemented with a
strong enforcement arm. Robust enforcement is essential to
effective market regulation in order to punish and deter
abusive activity in our markets. I call this ``prudential
regulation with a bite'' and our enforcement record reflects
this bookends approach.
During the past 5 years, the Commission has filed a total
of 295 enforcement actions and obtained more than $1.8 billion
in total monetary sanctions, including restitution,
disgorgement, and civil monetary penalties. Protecting the
energy markets is vital to our national interests because of
the direct impact of energy prices on consumers and the economy
in general. In the energy sector, during the last 5 years, the
Commission has filed 39 enforcement actions, charging 64
individuals and companies with manipulation, attempted
manipulation, and/or false reporting.
To date, these actions have resulted in civil monetary
penalties of more than $434 million. Most recently, the CFTC
and Department of Justice obtained a record settlement of $303
million with BP for manipulating their propane gas market.
Indeed, we maintain a zero-tolerance policy toward anyone who
attempts to manipulate or disrupt prices in the energy markets.
On this front, I would also note our continued positive
working relationship with FERC on many enforcement matters. The
CFTC and FERC share the common goal of ensuring that the energy
markets remain free from manipulation.
Since the CFTC and FERC entered into a 2005 memorandum of
understanding on information sharing, our agencies have had a
good collaborative relationship. I am committed to continuing
to develop this cooperative relationship, given the inter-
relationship between futures and cash markets in the energy
sector. As the MOU recognizes, Congress provided the CFTC
exclusive jurisdiction over the futures markets. The policies
that support this jurisdictional grant by Congress are as
important today as they were when they were enacted 35 years
ago.
Exclusive jurisdiction of futures trading ensures that the
futures markets, where many commodities also have a separate
cash market regulator, will not face inconsistent and redundant
regulation and the uncertainty of differing legal standards.
But this does not mean that FERC and CFTC's respective
enforcement authorities cannot exist in complement of each
other, as evidenced by the solid working relationship we share
with other Federal and State enforcement authorities. I am
committed to striking this balance with FERC. Already, our
staffs have met to discuss possible ideas that would further
coordinate our missions. I am hopeful that these efforts will
help to align the implementation of our mandates going forward.
I would also like to touch on a recent CFTC proposal
specifically aimed to reduce concern on exempt commercial
markets or ECMs. Congress created the ECM category in 2000 to
allow commercial participants to trade energy and certain other
products in a light-touch regulatory environment. This spurred
innovation and competition to the ECM platform, provided a low
cost on-ramp to launch new ideas for contract design and
trading methodologies.
However, the success of this type of trading facility has
also led policymakers to reexamine whether the regulatory
requirements for these exchanges remain adequate. In September
the CFTC conducted an extensive hearing on ECMs, several of the
witnesses in the prior panel were part of those hearings. We
found that certain ECM energy contracts were performing as
virtual substitutes for regulated futures contract and may be
serving a significant price discovery role.
The Commission concluded that changes to our Act were
necessary in order to detect and prevent manipulation involving
ECM futures contracts that serve a significant price discovery
function. To that end, the Commission recommended legislative
changes in a report delivered to Congress that would require,
one, large trader position reporting of non-significant price
discovery contracts on ECMs; two, position limits or
accountability levels for these contracts; three, self-
regulatory responsibilities for ECMs; and four, CFTC emergency
authorities over these contracts.
This proposal, crafted in full consultation with the
President's Working Group on Financial Markets, has the support
of the entire Commission. I am pleased to report that the House
and Senate Agriculture Committees are actively considering
these recommendations. In fact, the full House Agriculture
Committee this morning marked up and passed out our
recommendations as part of their reauthorization mark.
With these important changes, I believe the CFTC's
principles-based approach, in combination with its enforcement
arm, will continue to be effective in policing our markets and
allowing this industry to continue on its upward path of
growth. With that, Mr. Chairman, I yield back the rest of my
time, and I appreciate the opportunity to testify today.
[The prepared statement of Mr. Lukken follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Stupak. Thank you, and thank both of you for appearing
here today. Unfortunately, we have four votes on the floor
right now. So I think we are going to recess until
approximately 1:30, 1:35. We should be back by then, and
hopefully we will have a chance to take questions, and more
members will be back then.
[Recess.]
Mr. Stupak. We have had the opening statements. We are
going to go on with questions. Mr. Kelliher, if I may start
with you, sir. Your testimony says, ``legislative proposals
intended to enclose the Enron loophole and give the CFTC
jurisdiction over ICE and other electronic trading venues could
affect FERC's ability to oversee natural gas and electric power
markets. Many of the same venues trade physical as well as
financial contracts, and any limitations on FERC's access to
that information could reduce its ability to oversee
jurisdictional market.'' What specific legislative proposals
are you referring to, and what authorities are at risk in terms
of FERC jurisdiction over trading in exempt commercial markets?
Mr. Kelliher. Well, we do currently have ability to get
information from ICE. First of all, we get information as a
client. We buy information. That was discussed in the first
panel. We actually think that information is very important to
us, but we also occasionally issue a friendly subpoena to ICE.
And we get additional information that is non-public from them,
and that information is very important to us to monitor markets
and look for possible market manipulation. If we were not able
to get that non-public information, it would impair our ability
to understand the market.
Mr. Stupak. Well, if it a friendly subpoena, is the
contents of the subpoena negotiated out before it is issued?
Mr. Kelliher. The subpoena, I won't say they invite, but
they--the information we get from them is very detailed market
information. But the companies that are engaged in
transactions, they are blind. They are Company X, Company Y.
Mr. Stupak. OK.
Mr. Kelliher. We sometimes want to know who Company X is,
and so that--and it is necessary to issue a subpoena. And then
they will identify the company. The information remains
nonpublic, but that is what we can do currently. We don't want
to lose that ability.
Mr. Stupak. Well, is there any language you would suggest
to us to ensure that there is no limitation on your ability to
access information and bring enforcement actions?
Mr. Kelliher. We can provide that information to you, sir.
Mr. Stupak. OK, in the Energy Transfer Partners case
brought by FERC, FERC alleged that the company used its market
power in the Houston Ship Channel to drive down the physical
price of natural gas and at the same time took a series of
short positions on ICE which bet that the price of natural gas
at that location would go down. FERC estimated $67 million in
unjust profits in just nine trading periods. What is noteworthy
is that FERC was alerted by a call to the enforcement hotline.
So would this case of alleged market manipulation have been
detected without your call to the hotline, without a call from
the hotline?
Mr. Kelliher. It might have, and FERC investigations, and
probably similar with CFTC, begin a number of different ways.
In the case of Amaranth, that investigation began by FERC staff
monitoring transactions at NYMEX, and NYMEX is a very
transparent market and just seeing some price movements that
didn't seem to make sense based on our understanding of market
fundamentals.
But hotline calls also are a source of--can begin an
investigation. Sometimes it is a FERC audit. Sometimes it is a
referral from another Federal agency. There really are about 10
different ways an investigation might begin, but in that case,
it was a hotline call from----
Mr. Stupak. Let me ask this. Has FERC initiated any
manipulation cases where prices were manipulated upward?
Mr. Kelliher. We have a number of nonpublic investigations
that I am not at liberty to discuss.
Mr. Stupak. Do you have a number of investigations going
now on the upward----
Mr. Kelliher. We have a good number of current
investigations. Some of them may involve upward manipulation.
Some of them may involve downward manipulation, but I actually
legally cannot discuss them without authorization from the
Commission. But I can offer a private briefing. I would be
happy to provide a private briefing to you after getting that
authorization.
Mr. Stupak. I am sure some members would be interested. Mr.
Kelliher, in the Amaranth case involving manipulation of
futures and derivatives markets during the months of February,
March, and April of 2006, which then drove down the prices paid
in FERC jurisdiction markets, has FERC investigated price
increases for 2006 and 2007 winter season that impacted prices
in the spring and summer of 2006, which was connected to
Amaranth trading standard strategies?
Mr. Kelliher. We did look at Amaranth trading activity in
other months, not just in those months.
Mr. Stupak. OK.
Mr. Kelliher. But we are not looking at manipulation of
futures. We are looking at manipulation of futures products
that affect physical gas consumers. It is entirely possible
Amaranth might have--it is hypothetically possible a company--I
want to be careful. A company could engage in manipulation of
futures that actually has no effect on physical gas consumers,
and we would have no interest in that manipulation.
Mr. Stupak. OK, has FERC given thought to expanding its
jurisdiction to cover enforcement of market manipulation
outside its current jurisdictional markets involving pipes and
wires such as heating oil, crude oil, propane, ethanol, or
other?
Mr. Kelliher. We have not requested that authority.
Mr. Stupak. Have you given thought to it? Have you
discussed it?
Mr. Kelliher. I think the question has been raised about
propane, and I think we have respectfully declined the request.
We have not sought that authority over propane and other
petroleum products in part because of the nature of our agency.
Our authority, with respect to oil, is we set rates for oil
pipelines. That is it, and so we have a fairly modest role in
oil pipelines that goes back 100 years actually. And the idea
of a dramatic expansion is----
Mr. Stupak. Well, that is why I asked involving pipes and
wires so the heating oil goes through pipes, crude oil,
propane, ethanol. It is all going to be going through pipes. So
I mean and if you are the agency that is there to protect the
consumer, think the consumer would expect that protection to be
extended.
Mr. Kelliher. We do comprehensively regulate natural gas
pipelines, and we do look for undo discrimination preference by
natural gas pipelines as they provide transportation service.
Mr. Stupak. Well, I am going to stop questions here. I will
have questions for Mr. Lukken. We will probably go a second
round, so I will turn to Mr. Barton for questions, please.
Mr. Barton. Thank you. Mr. Lukken, do you know who the
chairman of the Energy and Commerce Committee was in the last
Congress?
Mr. Lukken. I believe it was you, sir.
Mr. Barton. OK, do you know who the chairman of the Energy
Conference was that passed the Energy Policy Act of 2005 in the
last Congress?
Mr. Lukken. The same.
Mr. Barton. OK, do you know who put in section 315 of the
Energy Policy Act? What Member specifically wanted that
language included in the Law?
Mr. Lukken. I don't know.
Mr. Barton. Well, it was the chairman of the committee and
the chairman of the conference. Do you think that when it says,
``shall be unlawful for any entity, directly or indirectly, to
use or employ in connection with the purchase or sale of
natural gas or the purchase or sale of transportation services,
subject to the jurisdiction of the Commission, which is the
FERC, any manipulative deceptive device or contrivance, as
those terms are used in section 10B of the Security Exchange
Act of 1934, 15 U.S. Code, 78J/B in contravision of such rules
and regulations as the Commission may prescribe as necessary in
the public interest or for the protection of natural gas rate
payers'', do you think that any entity doesn't mean any entity?
Mr. Lukken. We certainly support the broad grant of
jurisdictional authority given to FERC in the EPACT of 2005.
However, our mandate is to uphold the Commodity Exchange Act,
which also has an exclusive jurisdiction provision enacted by
Congress in 1974 to protect against duplicative regulation and
differing legal standards in those markets.
So we have to read those two statutes in context.
Mr. Barton. Now, you are basically, if I understand your
agency's position, is that the Congress didn't know what it was
talking about here. I mean, you have no reason to know this,
but this was put in specifically because of my concerns about
this new exchange, the ICE exchange, and what they were doing.
I mean, I wanted to go a lot further, but because of concerns
from other committees and some of the stakeholders, we agreed
in a bipartisan, bicameral basis on this language.
So we have the FERC who gets this authority. They go out
and try to use it, and your agency says they can't do it. I
mean, do you think that Amaranth was--don't you believe that
Amaranth was trying to manipulate markets?
Mr. Lukken. Absolutely. That is why we have brought an
action against Amaranth for manipulating the futures markets,
and we have worked cooperatively with FERC to bring those
actions. And indeed, in our Court order, where the Judge has
asked our opinion on exclusive jurisdiction, we supported
FERC's ability to go forward with the proceeding, but we felt
compelled--it was the opinion of our general counsel and the
Commission that we have exclusive jurisdiction over these
contracts.
Mr. Barton. Well, then, there is no way you can have
exclusive jurisdiction with this statutory authority on the
books, and what I want to inform you of, as the acting
Chairman, is that this wasn't something serendipitous or
inadvertent. It was put in directly because of what since has
transpired, and Mr. Kelliher and his compadres at the FERC are
doing exactly or at least attempting to do exactly what we
hoped they would do, which is work with your agency but use
their own authorities to ferret out the bad actors and try to
make our markets more open and transparent and accessible in a
non-biased way to any willing participant.
So I don't see how your Agency or the Courts can rule,
unless they assume that the members of Congress who passed this
didn't know what we were talking about and didn't understand
the English language. But I want to put on the record at this
oversight hearing that this particular section was done at my
express request, because of concerns I had at the time about
speculation in the oil and gas markets, so that we could give
the FERC some authority, which was ambiguous at that time.
This is not ambiguous, and it is my understanding that the
lower Court has ruled that because it is a Federal statute, it
has to be decided at the Appellate Court. But I can't imagine
the Appellate Court reading this language and saying that FERC
can't do what they have been attempting to do. So I would
encourage you to work with the FERC, and you all decide how to
cooperate together instead of arguing on who should be doing it
in the first place.
There is more than enough work to go around. This is not an
area that we have too many regulators and too many overseers.
One could argue, given the budget problems that both of your
agencies have had and the cutbacks, that you should be working
much more closely together if the Law allows it to share
resources.
With that, Mr. Chairman, I am going to yield back. But
thank you again for holding this hearing. And thank both of you
gentlemen for participating.
Mr. Stupak. Thank you. Mr. Whitfield, questions, please.
Mr. Whitfield. Thank you, Mr. Chairman. Mr. Lukken, one
question I would like to ask you. The American Public Gas
Association has called for legislation that would require broad
market transparency for larger trading positions throughout the
exempt markets, including all over-the-counter and bilateral
trading. And your recent legislative proposal does not really
quite go that far, I believe.
Do you think that the CFTC should implement a broad market
transparency requirement throughout these exempt markets and
bilateral trading and over-the-counter as well?
Mr. Lukken. Well, what our proposal suggested to Congress
was that in these exempt commercial markets, when a contract
becomes a price discovery contract, a benchmark that others are
utilizing in interstate commerce, that additional regulatory
authority should occur in those areas. And we have recommended
four things.
One, large trader reporting system reports from that
exchange regarding those contracts so that we, as a
surveillance agency, can monitor the markets, make sure the
positions can't be manipulated by certain positions of traders.
Two, accountability and position limits, meaning that
NYMEX, which is a regulated market, now has position limits on
trading going into the closing of a contract. ICE will also
have to put position limits on those products. They will also
have to self-regulate themselves. They have to become their own
watchdog with responsibilities to the Commission as well as
give us emergency authority of those markets.
Now, you talk about in addition the bilateral markets
outside. It is our intention that our section 18.05 rule, 18.05
authority, gives us the ability to go into those bilateral
markets on a need-to-know basis to ask for that information.
Anything that is traded on an ECM or a DCM are regulated
markets and we are recommending those markets would also have
to keep records on any things related to those bilateral
transactions. So if you are holding a bilateral swap that may
affect the futures position, you have to keep those records for
5 years, and we would have the ability to go in and ask for
them if we see an anomaly in pricing on the marketplace.
Mr. Whitfield. Right, I came in as Joe Barton was asking
some questions, and I think he touched on this a little bit.
But on this Amaranth case, my impression is that FERC and your
agency have worked closely on that case. Is that correct?
Mr. Lukken. Correct.
Mr. Whitfield. You have shared information, but it is still
your agency's position that FERC really does not have legal
jurisdiction. Is that true?
Mr. Lukken. That is correct.
Mr. Whitfield. OK, and now my understanding, Mr. Kelliher,
that there has been some initial Court rulings on that very
point. Is that correct?
Mr. Kelliher. Yes, we have had at least three or perhaps
four decisions by the Courts. There have been attempts to
impose temporary restraining orders, stays, and injunctions on
our enforcement action. All of which have been rejected, one as
recently as Monday of this week.
Mr. Whitfield. Right.
Mr. Kelliher. And the decision Monday was interesting,
because it actually did discuss the statutory interpretation of
the anti-manipulation provision.
Mr. Whitfield. But the decision on Monday--give me a
synopsis of that Decision.
Mr. Kelliher. It was rejecting a request for an injunction,
and it was arguing that, I think in this case, I think it was
Amaranth or Mr. Hunter. Was this Amaranth? Hunter was the lead
trader at Amaranth, and he was seeking an injunction, and it
rejected his petition because it argued that he had failed by
quite a lot to demonstrate that there be any kind of
irreparable harm.
Mr. Whitfield. Right.
Mr. Kelliher. But they also went a little bit further, and
for them to grant an injunction, he would have to prove the
likelihood of success on the merits. The Court actually
discussed that to some extent and said, that would mean he
would have to prove that FERC has no authority under the anti-
manipulation provision of the Energy Policy Act. Now, the Court
had a brief discussion of that, suggesting that they thought
that he had no basis for that argument.
Mr. Whitfield. Well, I mean, I certainly agree with the
Court, and I think it has been very clear that this committee
feels like FERC does have jurisdiction. And certainly want to
commend FERC for the aggressive action they took in this case
and with that, Mr. Chairman, I will yield back the balance of
my time.
Mr. Stupak. Thank you. Mr. Lukken, let me follow up with
something Mr. Whitfield asked you. You were talking about the
bilaterals in rule 1805. That is sort of after the fact though,
isn't it? I mean, you can't look at it while these things are
going on. You get the information after the fact, correct?
Mr. Lukken. Well, we would be able to find out--in order
for a manipulation to occur, you need the means to manipulate
but also the profit motive.
Mr. Stupak. Right.
Mr. Lukken. So you need the means being the benchmark, the
pricing benchmark that we are looking at, and the profit center
being maybe these bilateral trades that are occurring. And so
what we have said is, if you are involved in the benchmark
markets, if you are looking at significant price discovery
markets and there is a pricing concern of ours, we have the
ability to go ask for that information in the bilateral
marketplace.
Mr. Stupak. Well, let me ask you this, do bilateral
markets, using standardized contracts, have an impact on the
discovery or the price discovery process for energy
commodities?
Mr. Lukken. We did not find a strong correlation in the
bilateral market as far as becoming a price discovery mechanism
in the exempt commercial markets. I would say, though, that it
is in our rule or the proposal we sent up to Congress, it does
not limit these potential price discovery contracts to only
clear trades. These could potentially go into bilateral
contracts as well that are traded on ECM.
Mr. Stupak. Yes, but our last panel, Mr. Cota, Professor
Greenberger, and Ms. Campbell of the American Gas, they all
thought that they do, in fact, have an impact, and they do have
an impact on the price discovery process.
Mr. Lukken. I believe they were referring to the ECM
product, bilateral products being traded on the ECMs. I was not
here for their entire testimony, but there are certainly
bilateral contracts trading on an exempt commercial market that
we will begin to see if those contracts become significant
price discovery contracts.
Mr. Stupak. In the book right there, go to tab No. 18, if
you would, please. Let me ask you a question. Tab 18 should be
the NYMEX large trader disclosure form. ``A NYMEX rule requires
traders who want to hold more than 1,000 contracts in a final
day of a trading of the prompt month to disclose all over-the-
counter and forward contract positions including those executed
through bilateral trades.'' Since disclosure is required in
this instance, is there a reason that large positions executed
in bilateral markets cannot be routinely reported to the CFTC?
Mr. Lukken. So this is them opening up their books? Well, I
think----
Mr. Stupak. Right, couldn't they do the same thing to you
so you could really look at it? Do you have real-time numbers
or at least a prompt month?
Mr. Lukken. I think the focus of our report was to really
look at where price discovery was occurring, which is on the
electronic marketplace. You know, this would be a lot of
information coming into our markets, and our surveillance
economists. You know, the marginal beneficial nature of these
bilateral contracts, we would be overwhelmed as far as an
agency in trying to monitor and put them into systems that
would be relevant for us. So I think for us the tailored focus
concern was going to be the ECMs and making sure we got that
information on an ad hoc basis to go into the bilateral markets
and ask for that information. But certainly we would be
overwhelmed if we were asked to receive information from the
entire bilateral market.
Mr. Stupak. Well, what is the size of the bilateral market?
Mr. Lukken. It dwarfs the exchange rated market. It is very
large.
Mr. Stupak. Well, isn't that room for more speculation and
more profit taking in the larger market as opposed to a small
one, which you are looking at?
Mr. Lukken. Well, again, if it starts to bleed into the
price discovery contracts, that is when the public interests
arise in our concerns and regulations.
Mr. Stupak. But you wouldn't know that until after the
fact. Wouldn't you have more current information if they were
required to disclose this form as they do at NYMEX?
Mr. Lukken. Well, they would be on our market's trading
that we would see. It wouldn't be after the fact. We would see
pricing anomalies on our marketplace.
Mr. Stupak. Let me ask you this question. Has the CFTC
assessed the risk of whether traders will move from ICE to
bilateral trading on overseas markets once a discovery regime
is imposed on trading of price discovery contracts? Do you
think they will move to foreign bilaterals?
Mr. Lukken. Well, in testimony at our hearing in September,
this was one of the listed points we asked witnesses to
address--the U.S. competitiveness issue, where the markets
would move. It seemed to be the consensus that this tailored
approach to regulation would be a way to get at the
information, make sure that manipulation was not occurring on
these ECM markets, but also ensure that markets didn't move
overseas. So that was the balance that we tried to strike.
Mr. Stupak. We heard concerns from the previous panel about
foreign boards of trade. Do you consider the UK Financial
Service Authority to have equivalent market rules as those
imposed by the CFTC in its designated contract markets?
Mr. Lukken. Equivalent may be too strong of a word, but
comparable. Certainly, in the international regulatory
community, they are one of the strongest regulators around, the
Financial Services Authority. In fact, they are quoted by many
in our Government and in the private sector as the model we
should be going towards.
Mr. Stupak. Does FSA, the Financial Services Authority in
the UK, do they require position limits on financially settled
contracts to prevent excessive speculation?
Mr. Lukken. They do not, but they also have different
requirements that our agency does not require. So again, this
is how these regulatory authorities have grown up and the
history of all with that.
Mr. Stupak. Then why would the CFTC then approve no-action
letters allowing foreign boards of trade to operate in the
U.S.? You said they are not equivalent. They are comparable. I
guess that is sort of a subjective standard. If they don't
require position limits on financially settled contracts, then
why would we give them these no-action letters, as you call it?
Mr. Lukken. The no-action letter, this is something we
debated at length at the Commission last year--we held hearings
on this. We looked into this, and no action, you must
understand, is almost the registration of these exchanges. They
have to come in, show us how these rules are comparable in the
UK to our rule books here at the exchanges. We go through a
broad analysis of the regulatory system in the United Kingdom
in making our----
Mr. Stupak. But isn't it sort of like, hold us to what we
say, not what we do?
Mr. Lukken. No, we condition the no-action arrangement with
receiving large trader information from these markets. So it is
not that these are outside of our view. In fact, one could
argue they have two regulators looking at these markets, both
the United Kingdom and our surveillance staff because we are
getting large trader reporting on a weekly basis, leading up to
the final week of expiration, and then on a daily basis.
Mr. Stupak. Well, you have a memorandum of agreement, don't
you, with the financial services in England?
Mr. Lukken. Yes.
Mr. Stupak. So what information is specifically shared
between you and the CFTC and FSA?
Mr. Lukken. It is large trader reporting information,
similar to what we get from market participants and exchanges
here in the United States. We also hold quarterly meetings with
them to discuss enforcement cases. Our surveillance economists
talk to them all the time on these issues.
Mr. Stupak. Let me ask you this, because Professor
Greenberger brought it up--has the CFTC assessed whether
trading on ICE futures for financial energy commodities, such
as the New York Harbor Reformulated Gasoline, New York Harbor
Heating Oil, or West Texas Intermediate Crude Oil, has an
impact on the price discovery on the NYMEX?
Mr. Lukken. ICE futures in Atlanta or ICE futures----
Mr. Stupak. In Atlanta.
Mr. Lukken. In Atlanta. What we looked at, and this is what
our rulemaking will go to and what the House Agriculture
Committee today marked up, is that if any of these products
become a significant price discovery contract traded on ICE on
the exempt market, we would be able to get this information
from them, once that occurs. So certainly we understand that
there can be an influence from these exempt markets on
regulated markets. And once that price discovery threshold is
met, regulation would occur.
Mr. Stupak. Would that same answer hold true if it was the
futures in the UK, ICE futures in UK, being closed out in UK?
Mr. Lukken. Well, they are a fully regulated exchange, so
they are being regulated by the United Kingdom.
Mr. Stupak. Can trading on ICE futures be used as part of a
strategy to manipulate energy prices?
Mr. Lukken. Sure, and we have brought cases on that.
Mr. Stupak. And why is the CFTC's approving no-action
letters, which allow U.S. traders to trade financial energy
commodities such as New York Harbor Gasoline, Heating Oil, or
West Texas Intermediate Crude Oil without requiring the trading
platform to become a designated contract market and subject to
your jurisdiction, the CFTC's jurisdiction?
Mr. Lukken. Well, it is a very good question, but these are
global commodities. Even though West Texas is in the name, the
oil is traded as a global commodity. It is relied on around the
world, and so we want to make sure that, as a world product,
that other nations around the world are also being open to our
markets. So by allowing access to the UK of our traders, with
conditions and full review by our staff, we also ensure that
our markets have access to other overseas so that our markets
here in the United States can grow.
Mr. Stupak. And without requiring the trading platform to
become a designated contract market, aren't you sort of only
hurting the integrity of the market?
Mr. Lukken. Well, this is the mutual recognition concept
that is currently being debated on the securities side right
now. In fact, the Securities and Exchange Commission is looking
into whether to adopt a similar, comparable, but not identical,
type of mutual recognition system that would most likely
recognize the UK FSA. So this is something that is the global
standard of how regulators talk to each other around the world
and interact. And we are certainly a leader in this area.
Mr. Stupak. My time has expired. Mr. Walden, for questions,
please.
Mr. Walden. Thank you, Mr. Chairman. Appreciate that. I
wanted to follow up with Mr. Lukken, with you. You heard me ask
Professor Greenberger about your report, and he said that your
report really was done before the collapse of Amaranth. Is that
accurate, and do you still stand by the conclusions of your
report that this speculative market isn't substantively driving
up the price of oil gas?
Mr. Lukken. Our report was done on crude oil. It was not
done on natural gas, which is the subject matter of the
Amaranth investigation. But it was dealing with a similar
commodity and how hedge funds and other speculative interests
behave in those markets. And it was the conclusion of our chief
economist and his staff that published the paper, that these
were really price followers more than price makers in those
markets. It has been updated. We have updated it up until most
recently, I think, through November I believe. Is that correct?
So it is updated to even account for the recent run-up in oil
prices as well.
Mr. Walden. And the conclusion remains the same?
Mr. Lukken. I think the conclusions have remained exactly
the same. Is that correct?
Mr. Walden. All right, Mr. Kelliher.
Mr. Lukken. Having said that, we do have controls in place
on speculation. We recognize it can be excessive, and we do
have certain things that we put into place to control against
that excessive speculation.
Mr. Walden. So I just want to clarify. You don't think it
is a $20 to $30 a barrel part of the margin in oil right now
then, speculation?
Mr. Lukken. I could only speculate. Sorry.
Mr. Walden. Have you had experience, or that is what I want
to know. And is there somebody making money through a
derivative through the--never mind. Go ahead.
Mr. Lukken. But we have looked into that claim that there
is a $30 premium. We don't know any economic basis on which we
are trying to figure out who said that. I think some of this
might be sort of gut feels of traders involved and analysts.
And those are real feelings that should be brought to light,
but we have based our findings on economic data that we have
through the positions of traders. And we feel more comfortable
talking about those positions.
Mr. Walden. All right. Yes, it is Professor Greenberger who
said in his testimony $20 to $30 a barrel. Mr. Kelliher, do you
have any comment on that?
Mr. Kelliher. No, I am not familiar with the CFTC analysis,
but I don't have any reason to dispute Chairman Lukken.
Mr. Walden. But from your own agency's perspective?
Mr. Kelliher. No, our authority in oil is just limited to
oil pipeline rates.
Mr. Walden. What about natural gas?
Mr. Kelliher. Natural gas, we have jurisdiction over
wholesale gas markets, pipelines, LNG projects.
Mr. Walden. But do you see speculation in that market as
described by some of the other witnesses today?
Mr. Kelliher. There is speculation, and there is risk
management. And I think similar to CFTC we view use speculation
by itself as harmful.
Mr. Walden. Right.
Mr. Kelliher. It is a necessary part of markets.
Mr. Walden. And so you don't see evidence of harmful
speculation then? Is that what you are saying?
Mr. Kelliher. We look for manipulation. Manipulation is
what we look for. We look for undo discrimination and
preference. Those are the evils that we are focused on. So we
are not looking for excessive speculation per se.
Mr. Walden. OK, so let me get the term right then. Let us
use manipulation of the market. You do see some of that
happening, has happened?
Mr. Kelliher. Yes.
Mr. Walden. And that more regulation is needed over ICE?
Mr. Kelliher. I will defer to CFTC on regulation of
futures. We think we have the authority we need at FERC to
regulate in our jurisdiction. We think you gave us the right
tools 2 years ago, and I defer to CFTC on what authority they
need.
Mr. Walden. And you think, Mr. Lukken, that the legislation
that came out of the Ag Committee today while we were holding
this hearing just coincidentally gave you the authority you
need?
Mr. Lukken. We believe, yes.
Mr. Walden. OK, I don't think I have any other questions,
Mr. Chairman. I again want to thank you for holding this
hearing. It is a very important issue. Thank you.
Mr. Stupak. Thank you. Mr. Green, for questions.
Mr. Green. Thank you, Mr. Chairman. Mr. Kelliher, the CFTC
has said it is exclusive regulator over futures markets.
Frankly, this is for both of you because our interest on the
committee is to see--we want the regulation, and we just happen
to have jurisdiction over FERC and obviously the Agriculture
Committee, I guess, has it over CFTC.
But the exclusive regulator of the futures market, do you
believe FERC's exercise of the anti-manipulation authority
weakens the CFTC's role? And adding into that, I have a
question about the memorandum of understanding. Is there some
way that--because energy is easier understood in FERC whereas
CFTC has so many other commodities they deal with other than
energy? And just appreciate an answer from both of you.
Mr. Kelliher. Go ahead.
Mr. Lukken. OK.
Mr. Green. Has it weakened CFTC's role if FERC exercises
the anti-manipulation authority under EPACT 2005?
Mr. Lukken. You know, one of our mandates is to make sure
that the markets are open, competitive, and transparent to
ensure the integrity of the market. And any time there is
confusion on differing legal standards, duplicative regulators
in the space, I think there is cause for concern that these
markets may choose other alternatives that they may have to
trade. So that is what we try to minimize.
I completely agree with Joe. We share the goal of
preventing manipulation no matter where it occurs. We hope that
there are no gaps, try to minimize duplication when we can. But
we think that these markets deserve legal certainty, and
certainly the exclusive jurisdiction provides that for these
markets.
Mr. Kelliher. And we don't think that our enforcement
action interferes with CFTC regulation. We don't think there is
a dual regulation here because there is one regulator. It is
the CFTC. There are two investigations that really have been
announced in recent months that are--they are not joint
investigations strictly speaking, but they are coordinated and
parallel investigations.
The other one, as I mentioned in my testimony, was the
Energy Transfer Partners investigation. In that case, that
involved, we believe, involved manipulation in FERC
jurisdictional markets, physical gas sales that affected other
physical gas products as well as financial products. So
manipulation occurred in our space, if you will, we think and
then extended to CFTC space.
Now they are conducting enforcement action of their own
that involves an area where FERC has exclusive jurisdiction. We
don't view that their enforcement action undermines or
threatens or impairs FERC's exclusive jurisdiction over
physical natural gas because they are not regulating in the
sense that we regulate that market. They are not setting a
rate. They are not revoking a blanket certificate. They are not
doing the things that are regulation under the Natural Gas Act.
So we don't see that their enforcement action undermines our
authority, and we similarly don't see why our enforcement
action undermines their authority. But it is an honest
disagreement.
Mr. Green. Well, how does MOU working if we can, we ought
to have the two agencies who complement each other really in
the energy markets that there can be--can there be a joint
effort? I mean I have never heard of agencies, Federal agencies
doing that. But it would seem like it would be needed in this,
particularly the sensitivity of the price fluctuations for my
industrial consumers but also for my constituents.
Mr. Lukken. Well, I think the original intent of the MOU
was on information sharing, making sure each of us could uphold
the mandate of their act. We have different legal
interpretations of what our acts require of us, so it is
difficult for an MOU to try to change what we believe the Law
to be, each of us respectively. So it is something, I think, we
are looking at. Our staff have talked about ideas of trying to
approach this to coordinate better, going forward to try to
avoid, as best we can, these situations in the future. But
again this is an honest legal dispute between the two agencies
that the Courts are currently and actively considering.
Mr. Green. Well, and that is my next question. Energy
Transfer Partners, CFTC is prosecuting alleged manipulation of
physical markets which was under FERC's jurisdiction because of
their effect on the futures market, which are under CFTC's. How
is that going to balance out? Because I guess I have an
interest because Energy Transfer Partners is doing things in my
area. I mean sure, nationwide, but at home.
Mr. Lukken. Our statutory mandate on manipulation covers
the futures markets, but Congress granted us also cash market
action. And up until 2005, we were the only people in that
space, so we brought lots of cash market authorities in light
of the western energy crisis and Enron debacle. So this is
something we are still trying to work out, how to best divide
the authority between the two agencies. But you raise a good
point, that maybe we should think about where the expertise of
each regulator lies and how that might help us to guide where
we divide jurisdiction.
Mr. Kelliher. And I would just like to comment. I really
don't think it is unusual that more than one Federal agency
might prosecute the same underlying offense. I mean it happened
a few years ago where CFTC was prosecuting false reporting with
respect to natural gas sales, and the Justice Department also
was taking fraud actions against the same companies and
individuals. So I don't think it is unusual that the same
activity might violate two different Laws that are administered
by two different agencies.
And we are not, for example, charging anyone with violating
the Commodity Exchange Act. CFTC is not charging anyone with
violating the Natural Gas Act. We both are given these
different duties by Congress, different responsibilities.
Sometimes the same behavior violates more than one Federal Law.
Mr. Green. Mr. Chairman, I know my time is up, but I don't
know what the bill is doing that has come out. It was just was
reported out today in Ag Committee, but I would hope it would
foster that relationship so, again, the beneficiary are the
citizens and whether it be corporate citizens or individuals
ones. And I know we don't have jurisdiction over that, but we
definitely have it on the floor and to be able to have an
interest in it, particularly when you come from energy-
producing areas or chemical-producing areas. So thank you, Mr.
Chairman.
Mr. Stupak. Thank you. Mr. Lukken, you indicate that,
besides Professor Greenberger, you don't know of anyone else
who agreed with the idea it is $20 to $30 more per barrel of
oil in the price that we are paying right now. Do you know a
Mr. Gatt of Oppenheimer and Company? Are you familiar with him?
Mr. Lukken. I understood he testified yesterday before the
Senate.
Mr. Stupak. He has indicated in a couple of articles, LA
Times, New York Times, it is $20 to $30 excess speculation
brings to the price of a barrel of oil. Are you familiar with
Ms. Foss, the chief energy economist at the Center for Energy
Economics at the University of Texas?
Mr. Lukken. I am not. I am sorry.
Mr. Stupak. OK, in the ENE News, Energy Environment News,
she also indicates $20 to $30. So there is a lot of support out
there. Kyle Cooper from the IAAF advisor out of Houston, Texas,
and Miami Herald they report the same things. So there is a lot
of authority besides Professor Greenberger. But let me ask you
this. Do you agree with Professor Greenberger's testimony that
the CFTC proposal will lead to further regulatory arbitrage
because once subject to CFTC regulation traders will simply
move their trading to other contracts which are exempt from
regulation?
Mr. Lukken. I don't agree with that. I think our proposal
is trying to get at the electronic exchange like facility,
which is the exempt markets. Now, people go to those markets
because of the benefits that these type of multilateral trading
facilities provide. Clearing, creditworthiness that those
markets provide, transparency of what the pricing might be
provided in the bilateral marketplace.
Mr. Stupak. Yes, but didn't NYMEX provide the same thing?
Mr. Lukken. Correct.
Mr. Stupak. So why did people move to ICE?
Mr. Lukken. Well, I am talking once our proposal is put
into place. Then we will have the ability to see these markets
to get the information----
Mr. Stupak. So you don't think they will move to bilaterals
either, through the phone or electronics?
Mr. Lukken. It is a different trading environment in the
multilateral space. I think those markets are beneficial, and
people come to them for a reason not purely regulation.
Mr. Stupak. Well, they go there to avoid regulation.
Mr. Lukken. Again, this is something we discussed as part
of our hearing in September, and these are the recommendations
we made.
Mr. Stupak. Mr. Kelliher, let me ask you this. In your
testimony, and we are talking about the exclusive jurisdiction
on future markets and your testimony, CFTC contends that FERC
lacks legal authority to prosecute Amaranth, you know, been all
through that. But in your testimony, you state, and I am
quoting now, ``it is much harder for CFTC to prove manipulation
than FERC.'' Why is this the case? Could you explain that a
little bit further? The way I look at it, why would the futures
industry rather have CFTC prosecuting their case as opposed to
FERC other than fines?
Mr. Kelliher. Well, there is a difference in penalty
authority, which you----
Mr. Stupak. Right.
Mr. Kelliher. I think our penalty authority is something
like eight times larger than CFTC. The one proposed change in
the Commodity Exchange Act, I will express an opinion, is in
the penalty provisions, and CFTC has proposed to have the same
kind of penalty authority we have, and I think that is
completely appropriate.
Mr. Lukken. And that was passed this morning.
Mr. Stupak. Congratulations.
Mr. Kelliher. So I think that is one reason why some
participants in the futures industry might prefer that FERC not
have any authority to pursue manipulation, the difference in
penalty authority, which may soon be eliminated. But we each
have an intent standard on manipulation. They have a specific
intent standard, which is my understanding. We have a lower
intent standard, and reckless disregard can constitute intent
for purposes of a FERC manipulation.
Mr. Stupak. So you have a broader standard?
Mr. Kelliher. Excuse me?
Mr. Stupak. A broader standard?
Mr. Kelliher. We have, I think it is fair to say, a lower
standard, where reckless disregard is sufficient to constitute
intent for a FERC manipulation case. That is because Congress 2
years ago gave us securities Laws to model, not commodities
Law.
Mr. Stupak. OK. Mr. Walden, anything further?
Mr. Walden. I do, Mr. Chairman. I think we are all trying
to figure out how much speculators may or may not--
manipulation. I will get the term correct here. How much
manipulation may or may add to the price of natural gas or oil.
And these Energy Information Administration testified recently,
I guess it was yesterday, and said they believe supply and
demand fundamentals, including strong world economic growth
driving and increasing consumption, moderate non-organization
of petroleum-exporting countries, OPEC supply growth, OPEC
members' production decisions, low OPEC spare production
capacity, tightness in global commercial inventories, worldwide
refining bottlenecks, and ongoing geopolitical risk, and
concerns about supply availability have been the main drivers
of oil price movements over the past several years. Do you
concur with that statement?
Mr. Lukken. Well, our staff that look at these markets
agree that fundamentals are very tight right now in these
markets. You look at supply, storage, geopolitical risk where
those production facilities are, demand from India and China.
There are lots of reasons fundamentally why those markets are
tight and why prices are high. Having said that, we still make
sure that controls are in place to look for excessive
speculation by any individual that tries to take advantage of
this tightness and move the markets, try to manipulate them.
That is why we have position limits. That is why we get
position trader data on a daily, real-time basis from these
folks, to see if this is occurring. So, yes, the fundamentals
are tight. We follow speculation closely, and we have controls
in place to make sure manipulation does not occur.
Mr. Walden. Let me ask you this, because I believe it was
Mr. Cota, is that right, who testified earlier, said that we
were at 5-year highs in supply. Is that accurate, and is it
that demand is also still exceeding even that 5-year estimate?
I may have gotten the data wrong. Maybe it is 5-year supply in
storage.
Mr. Lukken. I have just been informed by our chief
surveillance economist that crude oil storage is actually going
down. I think Mr.--was it Kato?
Mr. Walden. Cota.
Mr. Lukken. Cota, I am sorry.
Mr. Walden. I am sorry. My apologies.
Mr. Lukken. I should know that. I think he was talking
about heating oil. But as far as crude oil, storage has been
going down.
Mr. Walden. And natural gas? Where are we in terms of the
supply/demand curve on that?
Mr. Lukken. We actually have lots of natural gas right now.
We are at record highs, predictions of a warmer winter, no
hurricanes activity coming into last year has allowed supplies
to increase. So, it's a much more comfortable situation on the
natural gas.
Mr. Walden. So is the price going down then?
Mr. Lukken. Prices are at a lower level than historically
for natural gas.
Mr. Walden. Do you know what they are at right now in the
U.S.?
Mr. Kelliher. Seven-dollar range.
Mr. Walden. That is still a lot higher than it used to be,
right? I mean it seemed to me we ran a $2 to $3 natural gas for
a long time. I mean, I am glad it is down, but I hate to think
we are cheering at $7.
Mr. Kelliher. It is lower than what it was before the
hurricanes. Before Hurricanes Katrina and Rita, natural gas
prices had climbed significantly, and then they went very high
after the hurricanes. But they haven't quite retreated to where
they were a number of months before the hurricanes.
Mr. Walden. And when do we think that might happen, if
even?
Mr. Kelliher. It may not happen.
Mr. Walden. And the reason for that?
Mr. Kelliher. North American natural gas supply is no
longer sufficient to meet North American gas demand.
Mr. Walden. And what happens if Congress enacts some sort
of cap and trade system on especially coal? Do you see a shift
then to natural gas as a replacement source of power for coal?
I read a story recently that the number of coal plants that
have been put on hold that were planned to be constructed. Are
you seeing that trend?
Mr. Kelliher. We are seeing that as well. Some coal plants
are still being considered. Some are being approved, but there
has been very wide scale cancellation of coal plants. And the
Commission looked at this actually fairly recently, and we have
looked at under any scenario, any climate change scenario.
Well, under any climate change scenario, natural gas use will
go up in the United States. And it----
Mr. Walden. And that is because the pressure will be to
reduce coal as a fuel source for electricity?
Mr. Kelliher. For a number of reasons. First of all, if you
look at nuclear plants, they have a long lead time, for
example. Coal plants, some of the technology is not yet
available. Some of, you know, the sequestration.
Mr. Walden. Compression.
Mr. Kelliher. Some of the technologies are not available
now.
Mr. Walden. Right.
Mr. Kelliher. Wind, a lot of the wind potential is tied to
transmission expansions.
Mr. Walden. Right.
Mr. Kelliher. If you want to see wind expansion in this
country, we need to build a lot more transmission.
Mr. Walden. Thank you.
Mr. Kelliher. And transmission has a long lead time. So if
you add it all up, it really means we are placing a very big
bet on natural gas prices for the next 10 years, the
availability of supply as well as the price of supply, and that
is something that is important to understand as Congress----
Mr. Walden. And have your economists projected, given us
some models about what we can anticipate natural gas prices to
be based on different scenarios of cap-and-trade.
Mr. Kelliher. We have not. I think there probably are other
estimates, but we have not estimated that.
Mr. Walden. OK, I think that is something eventually we are
going to need, especially if Congress is going to mark up some
sort of cap and trade climate change legislation, whether it is
the straight carbon tax like Mr. Dingell, our Chairman,
proposed at 50 cents per gallon of gasoline, or whether it is
some other shift.
And then I think we have to remember--I understand that
electricity produced from natural gas still emits about two-
thirds the amount of carbon that coal-produced electricity
emits. So I mean you are reducing a third, but you are really
shifting the market to a commodity that is in great demand now.
And its resource is far more limited than coal, correct?
Mr. Kelliher. Yes, sir, I think that is true.
Mr. Walden. All right, are you starting to see in the
market any speculation, the good speculation--I won't go to
manipulation--but using your terms, to begin to hedge for what
may happen either globally or nationally when it comes to
carbon and carbon emissions and some sort of restrictions on
them?
Mr. Lukken. Well, I think part of the carbon gets to the
energy question, which is what you are referring to. And we are
seeing greater liquidity in out months of exchanges so that
people are now trading further into the future to hedge that
risk, which is beneficial for the marketplace. They can lock
down prices in order to manage their risk.
We also regulate an exempt market in this space, the
Chicago Climate Exchange, which is a voluntary exchange
organization. It gets participants who produce carbon to sign
up and to trade that carbon on a volunteer contractual basis.
And certainly that is a working example going forward that
Congress should study when they are looking at these type of
cap-and-trade systems.
Mr. Walden. All right. Thank you, Mr. Chairman. You have
been most generous with the excess time.
Mr. Stupak. One more, if I may. Mr. Lukken, CFTC's
principles include position limits for look-alike contracts on
ICE, such as natural gas swaps. And that is what was marked up
today, you said, in the Ag Committee?
Mr. Lukken. It is product neutral, so whatever the contract
might be.
Mr. Stupak. OK, explain the economic rationale for
including position limits then on financially settled
contracts. Is that so you don't have excess speculation?
Mr. Lukken. Well, because they can influence the physical
contract, they are based somewhat on the price of the physical
contract, that is why we require accountability limits, I
think, on the financials actually and position limits on the
physical contracts in New York. So this would treat these
contracts comparable to how they are treated on a regulated
exchange currently.
Mr. Stupak. OK. Go to tab 16 there in the book there. So we
talked about ICE, and it is basically a UK trading there. It is
foreign boards of trade receiving staff no-action letters
permitting direct access from the U.S. And there is a number of
them. Like the first one, Montreal. Do they have position
limits?
Mr. Lukken. I might have the wrong tab here.
Mr. Stupak. 16.
Mr. Lukken. I have the----
Mr. Stupak. You got the wrong one.
Mr. Lukken. Report on enforcement. I will double check
here.
Mr. Stupak. Hang on. We may have the wrong one for you. We
will have someone bring it down to you. We will have Kyle bring
it down to you, Mr. Lukken.
Mr. Lukken. OK.
Mr. Stupak. I am not sure you have the right one. We have
two binders up here, investigative binder and exhibit binder.
So all these have no-action letters. So I think we pretty much
established that ICE, probably about the eighth one down, ICE
Futures Europe, they have--that is UK--they have similar as us.
But what about the other ones, like Montreal here, Dubai,
Frankfort, Zurich, Amsterdam, Paris, Leipzig, Hong Kong. You go
to the next page. You go Sydney, Australia, Singapore, Tokyo,
Alberta, Mexico City, Barcelona. Do they have position limits?
Mr. Lukken. I think some do, some don't. This is again,
these have been issued over a series of over 10 years since
1996, I think was the first one. Again, we go through a full-
blown analysis by our staff looking at the regulatory regime
that is requesting this as well as the exchange itself, whether
it has rules in place to prevent manipulation and look for this
type of activity. Many of these are conditioned on certain
authorities that we receive, most recently the FSA document. We
require them to give us large trader information.
So we can tailor these to make sure that they are based on
risk that we are getting the information we need to conduct our
mandate.
Mr. Stupak. Well, I started to say that if they are large
traders and there is no position limits, it opens it up for
possibly more speculation, correct?
Mr. Lukken. Well, even though there are no position limits,
we still see the positions. So we have the ability, if we see a
large position that concerns us--it may not be a per se
violation, more than 500 contracts, but if it is above a level
that may draw concern by our economists, we are willing to call
these people up, talk to the UK authorities about it. We are
looking at this. It is just that the position limits, the hard
limits that some of our exchanges have in place aren't in place
in the UK.
Mr. Stupak. Well, how do you set that? How do you determine
under section 6A that we talked about earlier in the first
panel, speculation if you don't have the jurisdiction over
them? You see what I am trying to say? If they have the
letters, then you really don't have a lot of jurisdiction over
it. Then how do you know if you get to that excessive
speculation?
Mr. Lukken. We do have jurisdiction over these entities. We
are able to go in and take enforcement action against a U.S.
trader, performing a manipulation on a different market that
may affect our markets. That is within the reach of our
jurisdiction.
Mr. Stupak. Even on the foreign boards of trade?
Mr. Lukken. Yes.
Mr. Stupak. But they have to have some kind of action in
the U.S., do they not?
Mr. Lukken. Well, normally that is when our interests
arise, yes. If there is a U.S. customer trader----
Mr. Stupak. Or use a computer terminal in United States?
Mr. Lukken. Well, the computer terminal in this case, I
mean it is mostly U.S. access so it is U.S. participants. We
have not been given a situation where it is only a U.S.
computer terminal.
Mr. Stupak. So the access of the U.S. would be if it was
intended to reach the U.S. shores, the product?
Mr. Lukken. If it had an impact on our markets, we work
closely with the United Kingdom to try to go after that
activity.
Mr. Stupak. Well, I know UK, but I am talking about the
other ones like Dubai or Singapore.
Mr. Lukken. We just sent a couple of employees from our
enforcement staff to Dubai to investigate some dealings there.
So it certainly is something that we closely correlate with all
these jurisdictions.
Mr. Stupak. So any trade, future trade, as long as it has
some nexus to the United States would be subject to your
jurisdiction and enforcement?
Mr. Lukken. I am not sure legally how far we have tested
this. But certainly if we have a nexus to our markets or U.S.
customers, we will try to pursue that. And if not, we will work
closely with our foreign regulatory counterparts to go after
that activity.
Mr. Stupak. I was thinking more if this committee wrote
something that gave you very, very broad nexus, computer
terminal and intended shipment started for U.S., to give as
much jurisdiction as we can to have enforcement action to take
the excessive speculation out of these prices.
Mr. Lukken. I would be cautious. I mean, you have to
understand that many of the products traded here in the United
States, the largest product traded in the United States is the
Chicago Mercantile Exchange Euro Dollar contract, a product
that is based on the London, the Libor rate of interest rate.
Certainly any action that we try to impose--jurisdictional
authorities over things traded elsewhere, there may be the
possibility of reciprocal action by foreign authorities
limiting access to those products.
Mr. Stupak. Understood. Mr. Walden, anything further?
Mr. Walden. No.
Mr. Stupak. With that, let me thank both of you for your
time and your patience today with us. And thank you for your
testimony.
That concludes our questions. I want to thank all of our
witnesses for coming today and for your testimony. I ask
unanimous consent that our hearing record remain open for 30
days for additional questions for the record.
Without objection the record will remain open. I ask
unanimous consent that the contents of our document binder be
entered into the record. Without objection, they will be
entered.
That concludes our hearing. This meeting of the
subcommittee is adjourned.
[Whereupon, at 2:38 p.m., the subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
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