[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
              HEARING TO REVIEW TRADING IN ENERGY MARKETS

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

                                HEARING

                               BEFORE THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 24, 2008

                               __________

                           Serial No. 110-38


          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov



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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania,            BOB GOODLATTE, Virginia, Ranking 
    Vice Chairman                    Minority Member
MIKE McINTYRE, North Carolina        TERRY EVERETT, Alabama
BOB ETHERIDGE, North Carolina        FRANK D. LUCAS, Oklahoma
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 ROBIN HAYES, North Carolina
DENNIS A. CARDOZA, California        TIMOTHY V. JOHNSON, Illinois
DAVID SCOTT, Georgia                 SAM GRAVES, Missouri
JIM MARSHALL, Georgia                MIKE ROGERS, Alabama
STEPHANIE HERSETH SANDLIN, South     STEVE KING, Iowa
Dakota                               MARILYN N. MUSGRAVE, Colorado
HENRY CUELLAR, Texas                 RANDY NEUGEBAUER, Texas
JIM COSTA, California                CHARLES W. BOUSTANY, Jr., 
JOHN T. SALAZAR, Colorado            Louisiana
BRAD ELLSWORTH, Indiana              JOHN R. ``RANDY'' KUHL, Jr., New 
NANCY E. BOYDA, Kansas               York
ZACHARY T. SPACE, Ohio               VIRGINIA FOXX, North Carolina
TIMOTHY J. WALZ, Minnesota           K. MICHAEL CONAWAY, Texas
KIRSTEN E. GILLIBRAND, New York      JEFF FORTENBERRY, Nebraska
STEVE KAGEN, Wisconsin               JEAN SCHMIDT, Ohio
EARL POMEROY, North Dakota           ADRIAN SMITH, Nebraska
LINCOLN DAVIS, Tennessee             TIM WALBERG, Michigan
JOHN BARROW, Georgia                 BOB LATTA, Ohio
NICK LAMPSON, Texas
JOE DONNELLY, Indiana
TIM MAHONEY, Florida
TRAVIS W. CHILDERS, Mississippi

                                 ______

                           Professional Staff

                    Robert L. Larew, Chief of Staff

                     Andrew W. Baker, Chief Counsel

                 April Slayton, Communications Director

           William E. O'Conner, Jr., Minority Staff Director

                                  (ii)


                             C O N T E N T S

                              ----------                              
                                                                   Page
Goodlatte, Hon. Bob, a Representative in Congress from Virginia, 
  opening statement..............................................     4
Kagen, Hon. Steve, a Representative in Congress from Wisconsin, 
  prepared statement.............................................     7
Moran, Hon. Jerry, a Representative in Congress from Kansas, 
  opening statement..............................................     6
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................     1
    Prepared statement...........................................     3
Salazar, Hon. John T., a Representative in Congress from 
  Colorado, prepared statement...................................     7

                                Witness

Lukken, Hon. Walter, Acting Chairman, Commodity Futures Trading 
  Commission, Washington, D.C.; accompanied by John Fenton, 
  Director of Surveillance, Division of Market Oversight, 
  Commodity Futures Trading Commission...........................     8
    Prepared statement...........................................    11


              HEARING TO REVIEW TRADING IN ENERGY MARKETS

                              ----------                              


                         TUESDAY, JUNE 24, 2008

                          House of Representatives,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 2:40 p.m., in Room 
1300, Longworth House Office Building, Hon. Collin C. Peterson 
[Chairman of the Committee] presiding.
    Present: Representatives Peterson, Holden, Etheridge, 
Boswell, Baca, Scott, Marshall, Herseth Sandlin, Cuellar, 
Salazar, Ellsworth, Boyda, Space, Gillibrand, Kagen, Pomeroy, 
Barrow, Lampson, Donnelly, Mahoney, Childers, Goodlatte, Lucas, 
Moran, Graves, Rogers, Neugebauer, Boustany, Kuhl, Conaway, 
Fortenberry, Schmidt, Smith, and Latta.
    Staff Present: Christy Birdsong, Adam Durand, Alejandra 
Gonzalez-Arias, Scott Kuschmider, Clark Ogilvie, Kristin 
Sosanie, Kevin Kramp, Josh Maxwell, and Jamie Weyer.

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE 
                   IN CONGRESS FROM MINNESOTA

    The Chairman. The Committee will come to order. I want to 
welcome Members of the Committee to today's hearing. And I 
appreciate everyone's patience and flexibility to accommodate 
the Committee moving this important hearing forward by a day.
    I would also like to extend a welcome to Mr. Walt Lukken, 
the Acting Chairman of the CFTC, who is appearing again today. 
He met with us last week. We appreciate your being here. And 
Jill Sommers, one of the Commissioners, is also with us. 
Welcome.
    The Agriculture Committee, as everyone knows, has 
legislative jurisdiction over CFTC and the futures markets, and 
we intend to examine the issue of energy market trading 
thoughtfully and carefully. Chairman Lukken and his colleagues 
at the CFTC are getting used to seeing a lot of different 
hearing rooms in the House and Senate to explain possible 
manipulation or excessive speculation in energy trading, 
specifically the crude oil market.
    Ever since a commodity trader in New York made the first 
trade of $100 barrel of oil in the first week of January for no 
other reason than to say that he could be the first one to do 
it, 2008 has come to symbolize one record after another in 
crude oil futures. Summer has just begun, and we aren't even 
halfway through the year, and the historic $100 oil trade 
already seems like a distant memory.
    We don't need to talk to too many of our constituents 
before we hear about how high energy costs are hurting 
everyone's pocketbook and really changing how people are living 
their lives. Our Committee knows this firsthand because one of 
the great untold stories of the farm bill from the big city 
papers was that farm incomes were soaring. But, no one 
mentioned how high oil prices were making input costs higher 
than ever, squeezing the bottom line of our agricultural 
producers. And farmers and ranchers often cannot pass these 
costs on down the line the way wholesalers, retailers and other 
businesses can.
    Despite the rhetoric coming from all sides, there is no 
silver bullet solution to high energy costs. In my personal 
opinion, our problems are both supply and demand related. We 
need to do whatever we can to encourage production here in 
America. I am for domestic drilling. I am for coal. I am for 
nuclear. I am for renewable, solar, wind, greater conservation, 
whatever it takes to get us off of foreign oil. Not everybody 
agrees with me on that, but my position has been clear for a 
long time, and that was before we started seeing triple-digit 
oil prices.
    There is a growing chorus of voices who believe that a 
flood of speculative money in energy futures prices is driving 
prices upward. It is true that a greater number of well-
capitalized investors have entered the commodities futures 
markets seeking greater returns than they may have 
traditionally found in cash or securities. It is also true that 
these institutional investors are playing a larger role in 
futures markets.
    Speculators have always played a vital role in the 
commodity markets, taking on price risks that producers and 
consumers are seeking to avoid. But, apparently to some people 
too much speculation means that the markets are no longer 
functioning as they were intended. These critics have taken aim 
at the West Texas Intermediate crude oil contract in 
particular. Under current law, U.S. traders can execute 
transactions on this contract on both the New York--the NYMEX, 
a CFTC-regulated exchange, and on London's ICE Exchange, which 
is regulated by the United Kingdom's Financial Services 
Authority. CFTC, however, has information on positions of 
traders on NYMEX that they don't have on traders on ICE. The 
idea that we have a dual system with differing rules for the 
same essential commodity delivered inside our country is not 
easily explained to our constituents.
    One of CFTC's primary responsibilities is to ensure that 
commodities markets operate free from fraud and manipulation. 
Chairman Lukken is here today to answer questions about the 
crude oil market from supply and demand factors, to market 
transparency, to possible manipulation. I hope Chairman Lukken 
will also shed some light on CFTC's latest proposal to ensure 
similar disclosure requirements, position limits and 
accountability levels for U.S. energy commodities traded on 
foreign markets, like ICE's WTI crude oil contract, and how 
that might affect prices.
    My friend and colleague Bob Etheridge has been a strong 
leader on CFTC issues as Chairman of the General Farm 
Commodities and Risk Management Subcommittee. He has introduced 
a bill to codify CFTC's latest proposal on foreign boards of 
trade as well as to provide a much-needed increase in CFTC's 
staff level, which is at a 33 year low despite a six fold 
increase in trading volumes since 2000. We had intended to mark 
that bill up in Committee today and even amend it to strengthen 
its provisions and have it apply to other commodities, not just 
energy. Because of the multiple legislative proposals that have 
been introduced, we will use this hearing and subsequent 
hearings, in July, to examine speculation in energy markets 
thoughtfully and carefully and to separate the facts from 
rhetoric. And I look forward to Mr. Etheridge taking the lead 
in drafting legislation to address the role of speculators in 
the energy markets here and abroad.
    And I just will say to people that right now, we are 
looking at probably the Wednesday after we come back from the 
Fourth of July recess to have a full Committee hearing where I 
would intend to bring all of the bills that have been 
introduced on this subject into the Committee, and to bring all 
of the experts on all the different sides into the Committee. 
We will focus on the actual legislation that has been 
introduced and go through each one of them and get both sides, 
or the six sides or whatever there are, on each piece of 
legislation so this Committee can understand what each bill 
does, who is for it, who is against it, who has information 
that they think we should know about it. I don't know how long 
that process is going to take.
    I don't know how many more bills are going to be introduced 
before then, probably a few, but we will operate in a 
methodical manner. We will go through this and take whatever 
time it takes to understand all of this with the idea at the 
end of the day to have a product out of this Committee that we 
can have a consensus on, and I would hope a bipartisan 
consensus, to move us in the direction that we think is the 
right thing for this country.
    So that is our intention. And you know this is going to be 
a high priority for this Committee now that the farm bill is 
done. And I look forward to working with everybody through that 
process.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress From Minnesota

    I want to welcome Members of the Committee to today's hearing. I 
appreciate everyone's patience and flexibility to accommodate the 
Committee moving this important hearing forward by a day. I would also 
like to extend a welcome to Mr. Walter Lukken, the acting Chairman of 
the Commodity Futures Trading Commission for appearing today. The 
Agriculture Committee has legislative jurisdiction over CFTC and 
futures markets, and we intend to examine the issue of energy market 
trading thoughtfully and carefully.
    Chairman Lukken and his colleagues at CFTC are getting used to 
seeing a lot of different hearing rooms in the House and Senate to 
explain possible manipulation or excessive speculation in energy 
trading, specifically the crude oil market. Ever since a commodities 
trader in New York made the first trade of $100 barrel of oil in the 
first week of January for no other reason than to say he could be the 
first one to do it, 2008 has come to symbolize one record after another 
in crude oil futures. Summer has just begun, we aren't even halfway 
through the year, and that historic $100 oil trade already seems like a 
distant memory.
    We don't need to talk to too many of our constituents before we 
hear about how high energy costs are hurting everyone's pocketbook and 
really changing how people are living their lives. Our Committee knows 
this first-hand. One of the great untold stories of the farm bill from 
the big city papers was that farm income was soaring, but no one 
mentioned how high oil prices were making input costs higher than ever, 
squeezing the bottom line of our agricultural producers. And farmers 
and ranchers cannot pass those costs on down the line the way 
wholesalers, retailers and other businesses can.
    Despite the rhetoric coming from all sides, there is no silver 
bullet solution to high energy costs. In my personal opinion, our 
problems are both supply and demand related. We need to do whatever we 
can to encourage production in America. I am for domestic drilling, I 
am for coal, I am for nuclear, I am for renewable, solar, wind, greater 
conservation, whatever it takes to get us off of foreign oil.
    Not everyone agrees with me on that, but my position has been clear 
for a long time, and that was before we started seeing triple-digit 
oil.
    There is a growing chorus of voices who believe a flood of 
speculative money in energy futures markets is driving prices upward. 
It is true that a greater number of well-capitalized investors have 
entered commodities futures markets, seeking greater returns than they 
have traditionally found in cash and securities. It is also true that 
these institutional investors are playing a larger role in futures 
markets. Speculators have always played a vital role in commodities 
markets, taking on the price risk that producers and consumers are 
seeking to avoid. But apparently to some people, too much speculation 
means that the markets are no longer functioning as they were intended.
    These critics have taken aim at the West Texas Intermediate crude 
oil contract in particular. Under current law, U.S. traders can execute 
transactions on this contract on both the New York Mercantile Exchange, 
a CFTC-regulated exchange, and on London's InterContinental Exchange, 
an exchange regulated by the United Kingdom's Financial Services 
Authority. CFTC, however, has information on the positions of traders 
on NYMEX that they don't have on the traders on ICE. The idea that we 
have a dual system with differing rules for the same essential 
commodity delivered inside our country is not easily explained to our 
constituents.
    One of CFTC's primary responsibilities is to ensure that 
commodities markets operate free from fraud and manipulation. Chairman 
Lukken is here today to answer questions about the crude oil market, 
from supply and demand factors, to market transparency to possible 
manipulation. I hope Chairman Lukken will also shed some light on 
CFTC's latest proposal to ensure similar disclosure requirements, 
position limits and accountability levels for U.S. energy commodities 
traded on foreign markets, like ICE's WTI crude oil contract, and how 
that might affect energy prices.
    My friend and colleague, Bob Etheridge, has been a strong leader on 
CFTC issues as Chairman of the General Farm Commodities and Risk 
Management Subcommittee.
    He has introduced a bill to codify CFTC's latest proposal on 
foreign boards of trade as well as to provide a much-needed increase in 
CFTC's staff level, which is at a 33 year low despite a six fold 
increase in trading volume since 2000. We had intended to mark that 
bill up in Committee today and even amend it to strengthen its 
provisions and have it apply to other commodities, not just energy; but 
because of the multiple legislative proposals that have been 
introduced, we will use this hearing and subsequent hearings in July to 
examine speculation in energy markets thoughtfully and carefully and to 
separate the facts from the rhetoric. I look forward to Mr. Etheridge 
taking the lead in drafting legislation to address the role of 
speculators in energy markets here and abroad.
    I look forward to today's testimony and questions and would now 
yield to my friend and Ranking Member of this Committee, Mr. Goodlatte, 
for an opening statement.

    The Chairman. So I look forward to the testimony today. I 
look forward to the questions and would yield to the gentleman 
from Virginia, my good friend and Ranking Member, Mr. 
Goodlatte, who we intend to have engage with us on this issue 
just like we did on the farm bill and hopefully come out with a 
similar outcome.

 OPENING STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN 
                     CONGRESS FROM VIRGINIA

    Mr. Goodlatte. Well, thank you, Mr. Chairman, and I do 
thank you for holding this hearing today. I welcome the 
opportunity to examine speculation in the futures markets and 
its effect on high energy prices.
    Concern over excessive speculation and manipulation which 
challenges the role of our futures markets to discover accurate 
market prices is a concern that has survived the transition 
from my chairmanship to yours. When I was Chairman, the 
Committee spent quite a bit of time exercising our oversight 
authority by examining the underlying market fundamentals of 
supply and demand and bringing to light the enforcement efforts 
of the CFTC.
    Recently the Commodity Futures Trading Commission announced 
several initiatives utilizing their existing authority which 
allow them to gather data from areas of the market that we 
previously had very little information about. These new efforts 
will bring greater transparency, and I look forward to hearing 
more about the implementation of these new initiatives.
    I understand that the market is constantly evolving, and I 
applaud your efforts, Mr. Chairman, and the efforts of Mr. 
Etheridge and Mr. Moran to make sure the CFTC has everything it 
needs to evolve with the market.
    There are many factors contributing to the high prices of 
energy, and I urge caution in blaming only speculators. 
Speculators add liquidity to the markets and play a critical 
role in the market system that benefits traditional users of 
the market. Imposing artificial limits on speculation could 
cause speculators to dump their positions and create unintended 
consequences that could be devastating to everyone.
    While this Congress continues to only discuss high energy 
prices, our constituents across the country are getting hit 
hard in the pocketbooks with $4 a gallon gasoline, higher 
electricity prices, higher natural gas prices, et cetera. I 
agree with you, Mr. Chairman, that the Congress should be 
taking an ``all of the above'' approach to addressing this 
problem. We need to increase the supply of domestic sources of 
energy of all kinds, oil, natural gas, clean-burning coal, 
nuclear power, various new technologies. And we need to 
incentivize greater conservation as well.
    It is unfortunate that this Committee does not have 
jurisdiction over all of those issues, because I believe in a 
strong bipartisan way we would indeed be taking the lead on 
increasing energy supplies for our country and addressing this 
problem. It seems, however, that the Majority's plan outside of 
this Committee to move towards energy independence includes 
limiting domestic energy production and imposing new government 
mandates that will prove to be costly and burdensome to the 
American people.
    Congress should be working this week to act on the many 
proposals that contain energy supply solutions. We must 
diversify our energy supplies by accessing our domestic sources 
of oil in Alaska, the Rockies and offshore; continuing the 
development of alternative fuels, clean-coal technologies; and 
encouraging the production of more nuclear sites which provide 
CO2 emission free energy.
    The work we have scheduled today in Subcommittee and 
throughout the week on the House floor will not do much to 
address the energy concerns of our country. It is important 
that we get to the bottom of the issue that is before us today. 
And so again I thank you for holding the hearing, and I look 
forward to hearing from our witness.
    Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman.
    The gentleman from Kansas.

  OPENING STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN 
                      CONGRESS FROM KANSAS

    Mr. Moran. Mr. Chairman, thank you. I will make only a 
brief statement. It is good to be back in the Agriculture 
Committee room, and I appreciate the sentiments expressed by 
both you and the Ranking Member, the gentleman from Virginia, 
as you described this issue. It does seem to be receiving 
significant and perhaps unnecessary attention, and from my 
perspective, there are a lot more things that we could be doing 
as a Congress to try to decrease the price and slow the 
increased cost of energy in this country. This is a component, 
but we ought not use it as a scapegoat to avoid dealing with 
other more direct and substantial issues in regard to our 
country's energy policy. I appreciate very much the sentiments 
expressed by you and Mr. Goodlatte in that regard.
    I look forward to working with you and my Chairman, Mr. 
Etheridge, as we continue to pursue the adequate oversight role 
at CFTC and make certain that the markets adequately protect 
consumers and investors in the United States and around the 
world. It is a very important industry in our country, worthy 
of our attention, and I appreciate our Committee utilizing its 
jurisdiction to provide additional oversight and understanding 
of the issues we will hear of today.
    Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman.
    I now recognize the gentleman from Virginia for an 
announcement.
    Mr. Goodlatte. Mr. Chairman, thank you. I am proud and 
pleased to announce the appointment of Mr. Boustany as the 
Ranking Member of the Subcommittee on Department Operations, 
Oversight, Nutrition, and Forestry, a Subcommittee that I once 
served as the Ranking Member on and chaired, and I hope that 
this will be a good opportunity for him and the Committee.
    Mr. Boustany represents Louisiana's Seventh District and 
has served on the Agriculture Committee since his first term in 
Congress. He was an active participant in the drafting of the 
2007 Farm Bill and has been committed to southwest Louisiana's 
recovery effort from Hurricane Katrina.
    His professional background as a physician and strong 
interest in health care policy make him particularly well 
suited for the role of Ranking Member of the Subcommittee. As a 
cardiovascular surgeon with over 20 years of experience, he 
brings a unique perspective to the evaluation of nutrition 
programs and other important issues within the Subcommittee's 
jurisdiction. He has always been a pleasure to work with, and I 
am sure my colleagues will agree that we look forward to 
working with him in this new role. Congratulations.
    Mr. Boustany. Mr. Chairman, I just want to say I appreciate 
this vote of confidence from the Ranking Member on our side, 
and I look forward to working with you, our Ranking Member and 
the entire Committee on the issues before us. Thank you.
    The Chairman. I thank the gentleman, and congratulations.
    I now would like to recognize the newest Member of the 
Committee who has just arrived and was elected by a special 
election in the First District of Mississippi, and has been 
appointed to the Agriculture Committee. We are very pleased to 
have him with us. He represents an agriculture district that is 
probably most famous for being the district that was the 
district of Mr. Jamie Whitten for, what, 50 some years.
    Mr. Childers. Fifty-three.
    The Chairman. Are you going to last 53 years?
    Mr. Childers. Probably not.
    The Chairman. But anyway, we are very pleased to have him 
with us in the Congress and, more importantly, to have him as a 
Member of the Agriculture Committee. And I will be happy to 
recognize the gentleman if he would have anything that you 
would like to share with us about your district; or if not, 
that is okay, too.
    Mr. Childers. Thank you, Mr. Chairman. I am just happy to 
be here. Thank you.
    The Chairman. Thank you very much. And let's welcome Mr. 
Childers to the Committee.
    I see that he learned from Mr. Whitten and others that--
back in the old days that freshmen were not supposed to say 
anything until their third term. A long tradition in the South, 
right?
    Mr. Childers. Yes.
    The Chairman. The Chair would request that other Members 
submit their opening statements for the record so the witness 
may begin his testimony and we ensure that there is ample time 
for questions.
    [The prepared statements of Mr. Salazar and Mr. Kagen 
follow:]

    Prepared Statement of Hon. John T. Salazar, a Representative in 
                         Congress From Colorado

    Good afternoon. I would like to thank Chairman Peterson and Ranking 
Member Goodlatte for holding this important and timely hearing.
    I also want to thank the Commodity Futures Trading Commission 
(CFTC) Acting Chairman, Walter Lukken, for coming to testify before us 
today.
    I am anxious to hear from Mr. Lukken regarding CFTC's efforts to 
maintain reasonable costs during these changing market conditions.
    With the plight of our current economy, it is vital that we ensure 
that our nation's futures markets operate as fairly as possible.
    All Americans are affected by the cost of commodities, thereby 
making it necessary that these prices maintain control through supply 
and demand.
    I am glad that the leadership of the Agriculture Committee brought 
forth this discussion and thank both the Chairman and Ranking Member 
for this judicious hearing.
                                 ______
                                 
 Prepared Statement of Hon. Steve Kagen, a Representative in Congress 
                             From Wisconsin

    Chairman Peterson and Ranking Member Goodlatte, thank you for 
holding today's hearing to discuss energy trading and the challenges 
facing the CFTC. I appreciate this opportunity to discuss such an 
important issue.
    Everywhere in Wisconsin, and across the U.S., people are asking for 
help to cut the cost of gasoline and diesel fuels. People are having a 
tough time just keeping their heads above water, and are using entire 
paychecks to pay for their gasoline, just to make it to work, to the 
grocery store and to the doctor.
    There are many things Congress can't do--we can't decrease demand 
of oil from China and India, we can't immediately increase the decline 
of the dollar and we can't demand an increased oil supply from the 
Middle East. We can, however, provide complete and accurate 
transparency, oversight and provide sufficient resources to the CFTC so 
that the rules and regulations under which they operate does not 
contribute to price manipulation, speculation and unduly high energy 
prices.
    I am anxious to hear from Chairman Lukken on the CFTC's recent 
actions to combat the problems they face due to the overwhelming amount 
of daily data they must process, the record energy and agricultural 
commodity prices, international regulation disparities and general 
insight into whether he believes it to be true that index traders and 
swap dealers are pumping so much money into futures markets that we 
don't know the amount of total trading occurring and it is in fact 
falsely inflating energy prices, thus creating a ``bubble.''
    Thank you very much for the time.

    The Chairman. We welcome to the table Mr. Walter Lukken, 
the Acting Chairman of the U.S. Commodity Futures Trading 
Commission in Washington, D.C., somebody that we have come to 
know and had continuing and more frequent discussions with, and 
I assume we will have more as time goes on.
    So, Mr. Lukken, we appreciate your making the time for us 
today, and you can begin when you are ready.

  STATEMENT OF HON. WALTER LUKKEN, ACTING CHAIRMAN, COMMODITY 
                  FUTURES TRADING COMMISSION,
         WASHINGTON, D.C.; ACCOMPANIED BY JOHN FENTON,
          DIRECTOR OF SURVEILLANCE, DIVISION OF MARKET
        OVERSIGHT, COMMODITY FUTURES TRADING COMMISSION

    Mr. Lukken. Thank you, Chairman Peterson, Ranking Member 
Goodlatte, and other distinguished Members of the Committee. 
Thank you for allowing me to testify today. I apologize if this 
testimony sounds a bit familiar, but I have testified twice 
this week, once last week, but I believe my testimony today 
outlines the steps we are taking in order to ensure that these 
markets are operating efficiently.
    During the last few years, the futures markets have changed 
dramatically in size and complexity, experiencing 500 percent 
growth in both size of volume and products listed. Today 
exchanges are technology-driven corporations that trade 
electronically 24 hours a day all around the globe. 
Approximately $5 trillion of notional transactions flow through 
these U.S. exchanges daily. This description alone would make 
the oversight of these markets a challenge for regulators, but 
add to it the subprime crisis, record energy and agricultural 
commodity prices, the influx of financial funds in the futures 
markets and historic low staffing levels at the CFTC, and it is 
clear that these are challenging times for this regulator.
    Recent substantial increases in the price of crude oil have 
put considerable strain on U.S. households. These issues are a 
matter of intense focus at the Commission due to the key roles 
that the futures markets play in the price discovery of this 
commodity.
    The CFTC recognizes that these markets and their 
participants have evolved significantly in the last several 
years. Concerns have been raised recently regarding the role of 
speculators and index traders in our markets. As prices have 
escalated, the CFTC has pursued an active agenda to ensure that 
the commodity futures markets are operating free of distortion. 
These initiatives fall into five broad categories: One, 
increasing information and transparency; two, ensuring proper 
market controls; three, continuing aggressive enforcement 
efforts; four, improving oversight coordination; and five, 
seeking increased funding.
    The proper oversight of markets requires transparency. 
Market regulators must receive the necessary information to 
conduct surveillance of market activity, study long-term 
financial trends and evaluate policy changes as circumstances 
evolve. The backbone of the CFTC's Market Surveillance Program 
is its large trader reporting system. All traders must file 
daily with the CFTC their futures and options positions in the 
markets. This information enables the CFTC surveillance 
economists to oversee all traders of size to ensure that these 
markets are not being manipulated by participants.
    As markets have become electronic and global, the CFTC has 
been working to expand its data collection to accommodate these 
trends. On May 29, the CFTC announced an agreement with the 
U.K. Financial Services Authority to greatly expand the trader 
data already received from ICE Futures Europe on its linked 
crude oil contract that settles off the NYMEX crude oil 
benchmark, including receiving equivalent daily large trader 
reports on all months traded. This cross-border information 
sharing is unprecedented among global regulators.
    The CFTC has also taken action to improve the transparency 
of index traders and swap dealers in the energy markets. In 
late May, the CFTC announced that it will use its special call 
authorities to gather more detailed data from swap dealers on 
the amount of index trading in the markets, and to examine 
whether index traders are being properly classified for 
regulatory and reporting purposes. These information requests 
have been sent, and the CFTC expects in the coming weeks to 
receive detailed information about these index funds and other 
transactions flowing through swap dealers. After analyzing this 
data, the CFTC will provide a report to Congress by September 
15 regarding the scope of index trading in the energy markets 
and whether recommendations for improved practices and controls 
should be implemented.
    Beginning last fall and finalized last month with this 
Committee's leadership, the Commission worked with Congress to 
enact legislation as part of the farm bill requiring exempt 
commercial markets that trade linked energy contracts to 
provide the CFTC with large trader reports and impose position 
limits and accountability levels on such products. Congress and 
this agency believe that these authorities were necessary to 
protect the regulated energy marketplace.
    As noted earlier, linkages between contracts is not purely 
a domestic occurrence, but also happens across international 
borders. Most energy and agricultural commodities are global 
commodities operating in a global marketplace, and the U.S. 
futures markets have been facing the challenges of cross-border 
trading and regulation for years.
    For more than a decade, the CFTC has utilized its mutual 
recognition process for foreign exchanges that allows U.S. 
institutions access to those markets by striking the balance 
between protecting the U.S.-regulated marketplace and 
acknowledgement that increased globalization for commodity 
markets requires international cooperation and coordination 
between governments.
    With this balance in mind, last week the CFTC announced 
modifications to its foreign boards of trade process. After 
consultation with the British FSA, the CFTC revised the access 
letter of ICE Futures Europe to require the implementation of 
position and accountability limits on its linked crude oil 
contract. The CFTC will also require other foreign exchanges 
that seek such access to provide the CFTC with large trader 
reports, as well as to impose position and accountability 
limits. This combination of enhanced information data and 
market controls will help the CFTC in its surveillance of the 
regulated domestic marketplaces while preserving the benefits 
of its mutual recognition program.
    During these turbulent economic times, the environment is 
ripe for those wanting to illegally manipulate the markets. In 
late May, the Commission took the extraordinary step of 
disclosing that in December of 2007 its Division of Enforcement 
launched a nationwide crude oil investigation into the prices 
of oil and the practices surrounding crude oil, including the 
purchase, transportation, storage and trading of crude oil and 
related derivative products. Strong enforcement at this time is 
imperative.
    Given the size of the CFTC and the enormity of the global 
marketplace, the CFTC must also engage others in government as 
we seek to meet our important mission. Two weeks ago the CFTC 
announced the formation of an interagency task force to 
evaluate developments in the commodity markets, which includes 
staff from the CFTC, the Federal Reserve, the Department of 
Treasury, the SEC, the Department of Energy, and the U.S. 
Department of Agriculture. We have also invited the FTC and 
FERC to participate as well, given their expertise in these 
areas. The task force is intended to bring together the best 
and brightest minds in government to aid the public and 
regulatory understanding of the forces behind these come-on WTI 
prices.
    If the CFTC sounds busy, it is, especially given that 
agency staffing levels are near record low numbers. Since the 
CFTC opened its doors 33 years ago, the volume on futures 
exchanges in the United States has increased 8,000 percent, 
while the CFTC staffing numbers have fallen 12 percent. As the 
agency embarks on new authorities and initiatives in order to 
respond to changing market conditions, it is imperative that 
these be met with adequate resources.
    The CFTC is in the midst of implementing its new farm bill 
authorities, which may require programmatic changes at the 
agency as well as old-fashioned hard work from a staff that is 
already under considerable strain. Additionally, the agency 
staff is racing to implement the new initiatives I have just 
outlined in my testimony. Recall as well that our employees are 
full-time regulators charged with overseeing the markets each 
and every day. Without proper funding, this agency will not be 
able to sustain this pace much longer.
    In summary, the Commission shares this Committee's concern 
for the condition in the energy markets and the effects of high 
crude oil prices on all Americans. These are difficult economic 
times, and the Commission recognizes the need to respond 
accordingly to ensure that the futures markets are working for 
all citizens.
    Thank you very much, and I would welcome any questions you 
may have.
    [The prepared statement of Mr. Lukken follows:]

 Prepared Statement of Hon. Walter Lukken, Acting Chairman, Commodity 
              Futures Trading Commission, Washington, D.C.

    Chairman Peterson, Ranking Member Goodlatte, and other 
distinguished Members, thank you for inviting me to testify before this 
Committee on the role, responsibilities, and resources of the Commodity 
Futures Trading Commission (Commission or CFTC).
    During the last few years, the futures markets have changed 
dramatically in size and complexity, experiencing 500 percent growth in 
both volume and products listed. Once member-owned and dominated by 
open-outcry trading, today exchanges are technology-driven corporations 
that primarily trade electronically, 24 hours a day, all around the 
globe. Approximately $5 trillion of notional transactions flow through 
these U.S. exchanges and clearing houses daily. This description alone 
would make the oversight of these markets a challenge for regulators. 
But add to it the subprime crisis, record energy and agricultural 
commodity prices, the influx of financial funds in futures, and 
historic low staffing levels at the CFTC, and it is clear that these 
are challenging times for this agency.
    Recent substantial increases in the price of crude oil and other 
commodities have had a significant impact on American consumers and 
have put considerable strain on U.S. households. These issues are a 
matter of intense focus at the Commission due to the key role that 
futures markets play in the price discovery process. The CFTC shares 
the concerns of Americans and Congress, and we are committed to 
ensuring that our nation's futures markets operate fairly and 
efficiently, and that the prices of commodities, including crude oil, 
are determined by the fundamental forces of supply and demand, rather 
than abusive or manipulative practices.
    The CFTC recognizes that these markets and their participants have 
evolved significantly in the last several years. Concerns have been 
raised recently regarding the role of speculators and index traders in 
the commodity markets. As prices have escalated, the CFTC has pursued 
an active agenda to ensure that the commodity futures markets are 
operating free of distortion as the agency looks to better understand 
the implications of these structural market developments. The 
Commission has undertaken several initiatives directed to enhancing the 
oversight of the energy and agricultural markets. These initiatives 
fall into five broad categories: (1) Increasing Information and 
Transparency, (2) Ensuring Proper Market Controls, (3) Continuing 
Aggressive Enforcement Efforts, (4) Improving Oversight Coordination, 
and (5) Seeking Increased Funding.
(1) Enhancing Information and Transparency.
    The proper oversight of markets requires transparency. Market 
regulators must receive the necessary information to conduct 
surveillance of market activity, study long-term financial trends, and 
evaluate policy changes as circumstances evolve. The backbone of the 
CFTC's market surveillance program is the large trader reporting 
system, through which the CFTC receives daily data showing all large 
traders' futures and options positions in the markets. This information 
enables the CFTC's surveillance economists to oversee all traders of 
size to ensure that no one is attempting to manipulate the futures 
markets. This amount and detail of trade data collected and analyzed at 
the CFTC is unprecedented among financial regulatory agencies.
    As markets have become electronic and global, the CFTC has been 
working to expand and enhance its technology and trade data collection 
to accommodate these trends. Last spring, the CFTC announced a major 
technology purchase that will modernize our trade practice surveillance 
system to enhance basic trade surveillance and permit nearly real-time 
analyses of all trading activity. Investments in technology are 
critical for the CFTC to sort through the millions of pieces of 
information generated by these electronic markets daily.
    The CFTC is also working to increase the amount and quality of the 
trader data we receive from the markets. In late May, the CFTC 
announced an agreement with the U.K. Financial Services Authority (FSA) 
to expand the trader data received from ICE Futures Europe on its cash-
settled light sweet crude oil contract that settles off the NYMEX 
benchmark crude oil contract. When first listed in 2006, this linkage 
between the two contracts caused the Commission and its surveillance 
staff to be concerned that regulators would not be able to observe the 
entirety of a trader's position in both markets. Once the surveillance 
issue was identified, the CFTC worked with its foreign counterpart, the 
FSA, to share large trader data for these linked contracts to ensure 
that traders were not gaming one market to influence the other. At that 
time, the CFTC's agreement with the FSA provided the CFTC with weekly 
trader information, and daily information in the final trading week, to 
facilitate the ability of the CFTC and FSA to oversee trading in these 
related contracts.
    Building on these efforts, the CFTC and FSA 2 weeks ago announced 
an expanded information-sharing arrangement, including: (1) providing 
daily large trader positions in the linked ICE Futures Europe crude oil 
contract, (2) extending trader information sharing to all contract 
months, (3) a near-term commitment to improve the identification of 
market end users to be completed within 2 months, (4) improved 
formatting so trading information can be seamlessly integrated into the 
CFTC's surveillance system, and (5) CFTC notification when traders 
exceed NYMEX position accountability levels. This cross-border 
information sharing is unprecedented among global regulators.
    The CFTC also has taken action to improve the transparency of index 
traders and swap dealers in the energy markets. There is public concern 
about the amount of index money flowing into the futures markets. 
Pensions, endowments, and other long-term investors increasingly are 
investing a portion of their portfolios in a broad mix of commodities 
in order to diversify their holdings and reduce volatility and risk. 
Unlike traditional speculative trading by hedge funds and other managed 
money, index investors are typically non-leveraged entities utilizing a 
long-term buy-and-hold strategy. Most of this type of investment comes 
through major Wall Street swap dealers that sell their clients broad 
exposure to the commodity markets through an over-the-counter commodity 
index contract. Swap dealers then are exposed to commodity price risk 
as a result of aggregating these transactions and must utilize the 
futures markets to manage their own remaining residual risk. This 
``netting out'' of risk by swap dealers before coming to the futures 
markets makes it difficult for regulators to determine the total amount 
of index trading occurring in the energy markets.
    As a result, the Commission decided to issue special calls for 
information about commodity index trading, principally to swap dealers 
through whom most of this trading takes place in the over-the-counter 
(OTC) market. Some market commentary has pointed to long-only index 
trading as part of the reason for the sharp increases in energy prices. 
Through its large trader reporting system, the Commission has highly 
accurate information on all swap dealer positions in all regulated U.S. 
futures markets, including energy futures markets. However, swap 
dealers' futures positions can represent hedges of very complex 
``books'' of many different types of OTC derivative and cash 
transactions. Therefore, swap dealers' futures positions do not 
necessarily correspond accurately with the amount of index trading that 
is occurring in the OTC market. In order to better understand the 
extent and possible impact of index trading, the Commission has issued 
special calls to swap dealers requiring them to provide information on 
commodity index transactions.
    After analyzing this data, the Commission and its staff will 
provide a report to Congress by September 15, 2008 regarding the scope 
of commodity index trading in the futures markets and recommendations 
for improved practices and controls, should they be required.
(2) Ensuring Proper Market Controls.
    Last fall, the Commission announced its intention to address the 
mounting regulatory concerns surrounding exempt commercial markets that 
trade over-the-counter energy products. The Commission held a public 
hearing and worked with Congress to enact legislation as part of the 
farm bill requiring exempt commercial markets that trade contracts 
linked to regulated U.S. futures contracts to provide the CFTC with 
large trader reports and impose position and accountability limits on 
such products. Congress and this agency believed that these authorities 
were necessary to protect the regulated energy marketplace.
    As noted earlier, linkages between contracts are not purely a 
domestic occurrence but also happen across international borders. Most 
energy and agricultural commodities are global commodities operating in 
a global marketplace, and the U.S. futures markets have been facing the 
challenges of cross-border trading and regulation for many years.
    For more than a decade, the CFTC has worked to develop 
international regulatory networks, to increase international 
cooperation, and--most importantly--to maintain and improve oversight 
of U.S. futures markets in the face of increasing globalization. Over 
the years, the CFTC has developed a mutual recognition process that 
strikes the balance between the need for U.S. regulators to maintain 
confidence in the functioning and integrity of our markets, and the 
acknowledgement that the increased globalization of commodity markets 
requires international cooperation and coordination.
    With this balance in mind, the CFTC last week announced 
modifications to its foreign boards of trade process. After 
consultation with the British FSA, the CFTC conditioned ICE Futures 
Europe's direct access to U.S. customers on implementation of position 
and accountability limits on its linked crude oil contract. In 
addition, ICE Futures Europe will adopt hedge exemption requirements 
similar to those in the U.S. and report any violations of those 
requirements to the CFTC. The CFTC has amended ICE Futures Europe's 
direct access letter to reflect this change. The CFTC will also require 
other foreign exchanges that seek such direct access to provide the 
CFTC with comparable large trader reports and to impose comparable 
position and accountability limits for any products linked with U.S. 
regulated futures contracts. This combination of enhanced information 
data and additional market controls will help the CFTC in its 
surveillance of its regulated domestic exchanges while preserving the 
benefits of a mutual recognition program that has enabled proper global 
oversight over the last decade.
    The amended direct access letter also formalizes the recently 
announced information-sharing agreement between the CFTC and the FSA by 
requiring ICE Futures Europe to provide the CFTC with detailed market 
information, equivalent to U.S. standards for market surveillance, as a 
condition of receiving direct access to U.S. customers. The CFTC will 
incorporate this new data into the CFTC's Commitments of Traders 
Report, which is a weekly report categorizing traders and positions.
    The Commission's staff intends to apply these new direct access 
conditions to any future requests by foreign exchanges for direct 
access to U.S. customers, where the exchange in question lists a 
contract that settles against contracts listed on any U.S. exchange. 
These revisions to the foreign boards of trade program will provide the 
CFTC with additional oversight tools to monitor linked contracts. This 
combination of enhanced trading data and additional market controls 
will help the CFTC in its surveillance of regulated domestic exchanges, 
while preserving the benefits of our international mutual recognition 
program, which has permitted cross-border oversight of global markets 
over the last decade.
(3) Continuing Aggressive Enforcement Efforts.
    During these turbulent market conditions for crude oil, the 
environment is ripe for those wanting to illegally manipulate the 
markets and, as a result, the Commission has stepped up its already 
aggressive enforcement presence. In late May, the Commission took the 
extraordinary step of disclosing that in December 2007, its Division of 
Enforcement launched a nationwide crude oil investigation into 
practices surrounding the purchase, transportation, storage, and 
trading of crude oil and related derivatives contracts. Although the 
Commission conducts its enforcement investigations in full 
confidentiality, today's unprecedented market conditions and the desire 
to maintain public confidence justified disclosing the existence of 
this investigation.
    Since December 2002 to the present time, the Commission has filed a 
total of 39 enforcement actions charging a total of 64 defendants with 
violations involving the energy markets. The agency has assessed almost 
half a billion dollars in civil monetary penalties in settlement of 
these enforcement actions. The Commission also has achieved great 
success in this area by working cooperatively with the Department of 
Justice on over 35 criminal actions concerning energy market 
misconduct. Strong enforcement is imperative during this time.
(4) Improving Oversight Coordination.
    Given the CFTC's size and the enormity of the global marketplace, 
the CFTC must engage others in government as we seek to meet our 
important mission. Last week, the CFTC announced the formation of a 
CFTC-led interagency task force to evaluate developments in the 
commodity markets. The task force-which includes staff representatives 
from the CFTC, Federal Reserve, Department of the Treasury, Securities 
and Exchange Commission, Department of Energy, and Department of 
Agriculture--is examining investor practices, fundamental supply and 
demand factors, and the role of speculators and index traders in the 
commodity markets. It is intended to bring together the best and 
brightest minds in government to aid public and regulatory 
understanding of the forces that are affecting the functioning of these 
markets. We convened the first meeting last week and will strive to 
complete this work quickly and make public the results.
    The CFTC also recently hosted its second international enforcement 
conference--a 2 day event focusing on global trading in the energy 
markets with senior enforcement officials from ten countries. Our goal 
was to enhance the ability of the CFTC and its fellow regulators to 
detect and deter misconduct affecting commodity prices in the energy 
sector, and I am confident that it was a success that will bear the 
fruit of coordinated international enforcement for manipulation.
(5) Seeking Increased Funding.
    If the CFTC sounds busy, it is--especially given that the agency's 
staffing levels are near record low numbers. Since the CFTC opened its 
doors 33 years ago, the volume on futures exchanges has grown 8,000 
percent while the CFTC's staffing numbers have fallen 12 percent. The 
following chart shows the exponential growth in contract volume, 
compared to CFTC staff numbers.





    The CFTC is in the midst of implementing its new farm bill 
authorities, which require many programmatic changes and plain old hard 
work from a staff that is already under significant strain. 
Additionally, the agency's staff is racing to implement the many recent 
agency initiatives I outlined earlier in my testimony. Recall as well 
that our employees are also full-time regulators, charged with 
overseeing these markets each and every day, upholding the agency 
mission to safeguard the futures markets. Given our staffing numbers, 
the agency is working beyond its steady state capacity and is unable to 
sustain the current situation for much longer without being forced to 
make Hobson's choices about which critical projects should be completed 
and which ones will be delayed. And while we welcome discussions of any 
appropriate and necessary legislative or agency changes, our agency is 
clearly unable to accommodate additional tasks at our current resource 
and personnel level.
    On Tuesday, June 17, I testified at a joint hearing of the Senate 
Appropriations and Agriculture Committees to support the Commission's 
request for additional appropriations from Congress. In making this 
request, the Commission was mindful of the need to maintain fiscal 
restraint in appropriations and the competing needs of other parts of 
the Federal Government. However, we believe that the proposed funding 
level of $157,000,000 is the appropriate level of resources required to 
fulfill our immediate responsibilities. The increase will restore 
staffing to a level last sustained almost 2 decades ago when market 
volume, innovation, and complexity were significantly less than today 
and when the agency did not yet have to face the expanded workload 
brought on by globalization of the marketplace and the emergence and 
widespread use of derivatives and hedge funds. This of course means the 
Commission is now doing much more with less and continues to deliver a 
good return on investment for the American taxpayer. The Commission's 
ratio of workload to resources has always been lean compared to other 
financial regulators. But we have reached our limit and cannot uphold 
our mission without immediate additional resources.
    In summary, I want to thank the Committee for inviting me to 
testify today. The Commission shares the Committee's concern for 
current conditions in the energy markets and for the effects of high 
crude oil and gas prices on American consumers, workers, and 
businesses. These are difficult times in the futures markets, and the 
Commission recognizes the need to respond accordingly. As I stated in 
my earlier testimony--and it bears repeating given the challenges of 
the last several weeks--I am deeply proud of our highly skilled and 
productive staff. This small Federal agency is working hard to protect 
the public and the market users from manipulation, fraud, and abusive 
practices in order to ensure that the futures markets are working 
properly.
    Thank you for the opportunity to appear before you today on behalf 
of the CFTC. I would be happy to answer any questions you may have.

    The Chairman. I thank you, Commissioner, and again 
appreciate you being us.
    As we always do, we are going to recognize people by 
seniority as either for the people that were here when the 
Committee started, and then as people come in.
    First of all, in the--as I understand it, the Agriculture 
Appropriations Subcommittee has authorized more money. Could 
you tell us what action has been taken here in the House 
concerning how much more money, and people, they have allocated 
at this point?
    Mr. Lukken. The President's budget mark for the CFTC was 
$130 million. The House Agriculture Subcommittee for 
Appropriations recently gave us $135 million. As a result of 
their efforts, we have asked on top of the $130 for an 
additional $27 million, $21 million to increase our staffing 
levels by roughly 100 FTEs to get us up to historic levels of 
where we need to be. Second, the implementation of the farm 
bill requires us to regulate new markets, known as exempt 
commercial markets. This Committee helped enact this provision 
that will require additional staff as well. And, so we have 
asked for an additional $6 million on top of the $21 million 
for a total of $27 million.
    The Chairman. So the $21 million gives you another 100 
people?
    Mr. Lukken. Roughly about 100, correct.
    The Chairman. And what is $130; that is your existing 
budget?
    Mr. Lukken. $130 million was the President's mark. Our 
current budget is about $112 million.
    The Chairman. So that increase from $112 to $130, what did 
that buy?
    Mr. Lukken. We are also updating technology, so a lot of 
that has to do deal with trying to improve the surveillance 
system that we are doing. So a lot of that was dedicated 
towards technology, but I believe that got us up to 475 FTEs.
    The Chairman. So it bought you some additional----
    Mr. Lukken. Absolutely. And FTEs are not equivalent to 
people, so we might be above that, but certainly it is more 
people.
    The Chairman. Well, we applaud the agreement that you have 
put together, and I think you are moving in the right 
direction. I would just say that given what has transpired 
around here in the last week or so, and how this thing is 
ginning up, we also applaud the fact that you are going to have 
some kind of report back to us by the 15th of September. But I 
am not sure we have until the 15th of September. So I don't 
know if there is any way to speed that up, and I am not putting 
you on the spot here, but, probably stating something obvious 
that you already know, that we may not have until the 15th, 
because I understand the intention is for us to go out of 
session by the 26th of September and not be back for a lame 
duck this year. So there is going to be a lot of pressure for 
us to move sooner rather than later. So the sooner you can get 
us information, the better.
    And in spite of the work that you have done, we still have 
people saying to us--I just had some people in just a little 
bit ago--``Anybody that is doing business in the United States 
should be regulated by the CFTC on the same basis.'' I think 
there are a number of bills that move us in this direction and 
so forth. So, my question is if, say we did that, that we moved 
to bring in all of the exempt commercial market and the over-
the-counter and all of this under the regulation, with the same 
margin requirements and transparency and all that stuff, what 
in your estimation would happen at that point if we did that? 
Would a bunch of money come out of the market? If so, how much? 
Do you have any kind of crystal ball as to what would happen if 
we did that?
    Mr. Lukken. I think from the CFTC's perspective we want to 
ensure that we are getting the best data from the entirety of 
the marketplace that we can. The goal is transparency, and that 
is the goal that we have tried to achieve through our mutual 
recognition program. So what we are getting from the London 
markets currently under this new agreement will be equivalent 
to what we are receiving from NYMEX, so that we are able to put 
this data into our systems seamlessly and see the entirety of 
the marketplace.
    On top of that, we have announced last week that we put 
foreign boards of trade under limits that are equivalent to 
what NYMEX is putting on their markets. If we somehow required 
these businesses to come in and register in the United States, 
my worry is that they would decide not to do that, and the 
leverage that we have currently in order to see these markets 
would disappear.
    We have to recognize that these are global markets, that 
the New York Stock Exchange is now married to LIFFE and to 
Euronext in Europe, and that we have to as regulators get 
together and engage each other to ensure that we raise 
standards globally. We have chosen to follow that path, not to 
say that everybody has to come to the United States and abide 
by our rules, but let's try to get people to raise their 
standards internationally so we can recognize this global 
environment. And I think it has been very effective, and I 
think we are going to start seeing that with the London markets 
as well once this information starts to flow in.
    The Chairman. Thank you, Commissioner.
    The gentleman from Virginia Mr. Goodlatte.
    Mr. Goodlatte. Well, thank you, Mr. Chairman.
    Mr. Lukken, welcome. We are pleased to have you with us 
today. And I want to follow up on the questions asked by the 
Chairman about the CFTC's regulatory relationship with ICE 
Futures Europe. Can you explain a little more about why a 
foreign government can regulate an American exchange?
    Mr. Lukken. Well, the exchange that the foreign government 
is regulating is the foreign exchange. The foreign exchange was 
previously named the International Petroleum Exchange--it had 
been in existence for 25 years in London trading primarily the 
Brent contract. They were bought by an American holding 
company, ICE, located in Atlanta, but their Board is a 
completely separate Board. Their Chairman, Sir Robert Reid, was 
here yesterday testifying from London.
    And so certainly they want access to U.S. customers as a 
foreign board of trade, like our U.S. exchanges want access 
from foreign institutions trading on them. So we have taken the 
tack that it is important to recognize this is principally 
regulated, as it has been for 25 years in London, but we would 
condition that with important information, information sharing, 
limits, and all the things that we go through to ensure that 
they are a comparable regulator. And we are comfortable that 
they are.
    Mr. Goodlatte. What types of information or data sets do 
you get from NYMEX that you do not get from ICE Futures Europe?
    Mr. Lukken. I think under the current agreement it is going 
to be the same.
    Mr. Goodlatte. And how do you get that information from 
them, or how will you get that from them?
    Mr. Lukken. I believe this goes through the FSA that--but 
then they forward it on seamlessly to us under this agreement.
    Mr. Goodlatte. And can you explain the advantages of 
trading the identical contract on ICE Futures Europe versus on 
NYMEX?
    Mr. Lukken. Well, I think competition is always healthy for 
those in the markets, and so it has brought down prices for 
commercial hedgers in the field. I think the advantages 
originally were the electronic platform versus an open outcry. 
That has changed dramatically since NYMEX went electronic, and 
actually NYMEX is gaining back market share. And you don't hear 
about that very often, but actually the London market is losing 
market share currently. So we haven't seen a wholesale shift of 
participants overseas. We actually have seen business coming 
back to the United States recently. 
    Mr. Goodlatte. Would you say that trades on ICE Futures 
Europe are less transparent than trades on NYMEX?
    Mr. Lukken. I think now we are going to get the data, we 
are going to put it into our Commitment of Trader Reports. We 
are going to treat this equivalent to how we treat NYMEX data.
    Mr. Goodlatte. And how quickly will that happen?
    Mr. Lukken. We are trying to get the end-user information 
included within the next 2 months. That was stated when the 
agreement was announced. After the end-user information is 
included, and after some technological operation changes, it 
will be included, but by the end of summer.
    Mr. Goodlatte. And what enforcement activity can you engage 
in against ICE Futures Europe traders?
    Mr. Lukken. Our section 9(a) authority is expansive 
covering manipulation in interstate commerce, so we certainly 
can go after activity by U.S. participants anywhere if it is 
affecting our marketplace.
    Mr. Goodlatte. And have you?
    Mr. Lukken. Yes. We certainly have worked internationally 
to go after this type of activity. Most people talk about the 
Sumitomo crisis, remember back, the copper trading happening 
elsewhere. That is a good example of our manipulation 
authorities being used overseas.
    Mr. Goodlatte. Let me ask you about the ``Enron loophole.'' 
How would you define that?
    Mr. Lukken. Well, the ``Enron loophole,'' as this Committee 
did fix as part of the farm bill, was really trying to ensure 
that exchanges weren't developing elsewhere that served a price 
discovery function. We want to make sure that if people are 
using these markets to discover prices in interstate commerce, 
that we have the proper controls in place, large trader reports 
and position limits, and that is what this Committee did. It is 
going to be very effective once we implement it.
    Mr. Goodlatte. Are you satisfied that the new authority 
that was put into the farm bill, which virtually everybody on 
this Committee supported, is sufficient to close the so-called 
Enron loophole?
    Mr. Lukken. Absolutely.
    Mr. Goodlatte. Do you think there is any additional 
authority that you would need to identify and eliminate the 
type of activity that is defined by this loophole?
    Mr. Lukken. No, sir.
    Mr. Goodlatte. So you would say that effectively with the 
implementation of those rules changes, the Enron loophole has 
been closed?
    Mr. Lukken. Certainly, but as regulators, as conditions 
evolve, we are always trying to keep an open eye out for things 
we need more, but currently, no, we think we will have enough 
authority.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Pennsylvania Mr. Holden.
    Mr. Holden. Mr. Lukken, how much does trading in one market 
such as NYMEX or the London Exchange or any over-the-counter 
market have an effect on trading in other markets?
    Mr. Lukken. Well, it depends on if those markets are 
linked. So, for example, when this became a concern in 2006 is 
when the London market began to link directly to the NYMEX 
contract. And so that when that occurs, we have concerns, 
because you can influence the ultimate price of the NYMEX 
market. That is also why we address the linkage in exempt 
commercial markets as part of the farm bill. The key is when 
they are linked to each other.
    Mr. Holden. Do you believe that some markets are being 
manipulated through the use of other markets?
    Mr. Lukken. We have not seen evidence that one market is 
being systematically used to manipulate the price of any 
commodity, but we are always looking out for that. We are the 
policemen of the markets. You can't prevent all crime, but when 
you do, you go at it aggressively, and that is what we have 
tried to do. And so I can't rule it out completely, but 
certainly that is something we have not seen systematically 
happening.
    Mr. Holden. There have been many statements at other 
Congressional hearings and in the media that a specific dollar 
amount or a specific percentage of the price of crude oil is 
due to speculation. Has the Commission examined these claims or 
asked the proponents upon what these figures are based?
    Mr. Lukken. We have reached out with our economic staff to 
look at these issues on a daily basis to find out what data 
they are using. Are they using our data? Are they using other 
economic models to come up with these numbers? And to date we 
have not had anybody come back to us with hard economic 
evidence of where they get their prices.
    Mr. Holden. So the information you receive is not showing 
correlation?
    Mr. Lukken. No, but we welcome information, if somebody has 
data that explains why prices should be lower, that is 
something we want to know about so we can factor that into our 
decisions.
    Mr. Holden. Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman.
    The gentleman from Kansas Mr. Moran.
    Mr. Moran. Mr. Chairman, thank you.
    Mr. Lukken, thank you for joining us. You are a very in-
demand figure on Capitol Hill these days. And I am thinking 
about, I remember your first appearance before this Committee 
or Subcommittee, and you have matured over the period of time 
that I have known you in our respective positions, and I 
appreciate your expertise.
    Speculation that oil prices will rise rather than fall has 
dropped dramatically since--I am reading from an article--has 
dropped dramatically since we crossed the $100 mark. The net 
long position on the New York Mercantile Exchange fell from 
113,337 contracts on March 11th to 25,246 by June 10th. So 
nearly as many traders are now shorting oil as are going long. 
More. Purely financial speculators need not play futures at 
all. They can simply buy or short the exchange-traded U.S. Oil 
Fund, which tracks the price of West Texas crude. The Wall 
Street Journal reports that short interest in that fund is up 
140 percent since January, outnumbering long bets by 2 to 1. 
Speculators, in other words, are increasingly leaning towards 
betting the price of oil will go down, not up. Is that an 
accurate portrayal of the markets?
    Mr. Lukken. Well, certainly in the economic data we look 
at, there are: traditional speculators, which are the hedge 
funds; the people that are in and out of the markets every day; 
and then, what is also being lumped in with those hedge fund-
type speculators, are swap dealers. So, if you look at just the 
traditional speculators, they are pretty flat in the market, 
and have been so since the price run-up began in January 2007, 
at about four percent net long. So, there are about as many 
positions on the long side that would benefit from the markets 
going up, as on the short side that would benefit going down.
    Now, if you look at just the swap dealers, these are the 
people who bring the index trading into the marketplace; they 
enter into contracts with different clients, net up that risk, 
and come to the futures market to manage that risk. They also 
are even less long--they are almost on the zero line as many 
longs as short.
    So again, we haven't seen support for the theory that 
everybody is on the buy side of this market, and that is 
driving up prices. The evidence is, we have not seen that, we 
will continue to look at it, but currently you are correct.
    Mr. Moran. Which would--I assume a reasonable conclusion 
from that would be that speculation is not driving up the 
underlying price of the commodity. Is that a fair conclusion 
from----
    Mr. Lukken. That is one inference you can draw, sure.
    Mr. Moran. And then in regard to index funds, they exit the 
market prior to contract termination because the funds don't 
take delivery of the commodity. If index funds had the ability 
to move the market, wouldn't any run-up in price in the back-
month contracts be accompanied with a price drop in the front-
month when the index funds exit their position by shorting the 
market? So you are in for a short period of time. If you can 
drive up the price while you are in, you would drive the price 
down when you get out?
    Mr. Lukken. I think that is a good point to make. The index 
traders, they in essence have a buy and hold strategy in the 
commodity markets. They never get into the delivery month, so 
they are not affecting actual physical delivery of crude oil in 
any way. But what they do is they hold positions, and then each 
month, to roll into the later contract month, they sell. They 
sell in the front-month, which we would think would have a 
downward pressure, price pressure, in those months, and they 
buy in the later months. So we have not seen that when they are 
selling prices that go down or stay down in those markets as 
expiration of the contract occurs.
    So again, we are looking for the smoking gun in regards to 
these index traders. We haven't seen it yet, but that is a very 
good point to make. Once they get in the market, there is 
offsetting buying and selling occurring by these index traders.
    Mr. Moran. Mr. Chairman, Chairman Lukken, at the 
Subcommittee hearing that Mr. Etheridge held a few weeks ago, 
my concern was about convergence or lack of convergence. Any 
developments in your analysis since you last testified before 
us about the cash price converging; has anything changed?
    Mr. Lukken. Well Commissioner Mike Dunn, who chairs our ag 
advisory committee, was in Chicago this week working with the 
exchanges on developing ideas to help improve convergence. He 
is holding an Agricultural Advisory Committee at the end of 
July to talk about ideas on how to improve convergence on 
agricultural products, so I look forward to hearing what Mike 
has to say. But we are working hard to find improvements in 
that area.
    Mr. Moran. Thank you, Mr. Chairman, for the opportunity to 
question Mr. Lukken.
    The Chairman. I thank the gentleman.
    The gentleman from North Carolina Mr. Etheridge.
    Mr. Etheridge. Thank you, Mr. Chairman.
    Chairman Lukken, thank you for being here today.
    As you know, I have introduced legislation that--you 
touched on it, and each Member has--will help give the CFTC the 
resources and the authority that it needs to help you ensure 
that, as you said, ``Manipulation and excessive speculation are 
not occurring in the energy markets.'' And I hear every day 
from constituents, as I am sure every other Member on this 
panel does, who are struggling to make ends meet while gas 
prices and diesel fuel prices are skyrocketing. This Sunday at 
my church, one of my constituents told me he is going out of 
business because he can't continue at the current rate to drive 
his truck and put fuel in; it is taking half of it. And 
Congress and the CFTC must ensure--I think this is critical--
that investors are not able to artificially increase the price 
of oil while hardworking families are suffering. I think you 
agree with that.
    With that said, I want to ask you a question about the bill 
that I introduced which deals with foreign boards of trade 
popularly known as the London loophole. You touched on it 
earlier. As you know, the bill deals only with energy 
commodities delivered in the United States. I was planning on 
amending that bill's provision to apply to any contract traded 
on a designated contract market or other registered entity in 
the United States, because if there is a problem with the WTI 
being traded overseas, I think we ought to address it. I 
certainly would like to. But I also want to make sure that we 
are addressing any potential future problem that might occur if 
one day these foreign markets start trading in contracts linked 
to corn farmers and corn futures, wheat contracts, or even 
ethanol, which I understand that they haven't figured out 
whether that is going to be an agricultural commodity or an 
energy commodity.
    Do you believe such an expansion to cover other commodities 
is prudent given the potential for growth in these markets?
    Mr. Lukken. I do. I think, especially, in the physical 
commodities. I think that it is most important to concentrate 
on the energy and agricultural commodities. I would have to 
think, though, on whether it makes sense on the financial side.
    There are lots of linked contracts that our markets link to 
as well. For example, the largest contract traded in Chicago is 
the CME Eurodollar market that is linked to an overseas index, 
so we want to be sure that we are not causing retaliation from 
others as a result of some of these ideas. But I think it makes 
a lot of sense when you are dealing principally with 
agricultural and energy commodities.
    Mr. Etheridge. I would appreciate if you do a bit of 
thinking and work with your staff and get back to us on that. 
It seems to me that we have three kinds of participants in the 
futures market. We have the bona fide hedger you talked about 
earlier, who either plans to take delivery on the futures 
contract or buy and sell the underlying commodity so that they 
have need to hedge against the price changes. And I don't think 
anyone thinks they are driving the market. You touched on that 
earlier.
    Then there are the pure speculators, and by that I mean 
there are people who do not qualify for hedge exemption, so 
they are bound by the exchange's speculation limits. People are 
concerned about their activity. But that is not the focus of my 
question.
    I am interested in those speculators who do obtain hedge 
exemptions, although they are not hedging against ownership of 
the underlying commodity. Just so you will be prepared, I plan 
to submit a question in writing seeking details about the 
position of these traders in the NYMEX WTI crude oil markets 
over time, because some people charge that this is a loophole 
and a departure from the spirit and the intent of the CEA.
    But for now, please explain the history of the hedge 
exemption and how the hedge exemptions arise.
    Mr. Lukken. Well, this is something that dates back to the 
early 1990s. The policy was put into place about 1991 at the 
CFTC by the Commission, but it even predates that. In the 1986 
reauthorization of the CFTC, Congress strongly urged the CFTC 
to revisit its exemptions to include this type of an exemption 
for risk management, looking at the growth of the this sort of 
aggregation that occurs through swap dealers.
    So this is something under the strong urging of Congress--
in the legislative history of that Act--they asked the 
Commission to look into this, and the Commission did. They had 
a Financial Products Advisory Committee that looked into the 
issue, held public hearings, discussed this, and ultimately 
came to the conclusion that swap dealers deserved an exemption 
under the hedge exemption rules. And the reason they did this, 
and, of course, we are revisiting this and whether this is 
right or wrong, but the reason they did this is swap dealers 
were going to clients, lots of them commercial clients, that 
could come directly to the markets and receive exemptions, but 
they are aggregating these positions. They were also 
aggregating other positions, such as index traders, and then 
were coming to the market, and they needed to offset the risk 
that offering these clients risk-management products--they 
needed a venue to offset that risk. And the futures markets, as 
you know, are price discovery markets, but they are also risk-
management markets, and so this was seen as a way for these 
entities to manage risk.
    Currently we are reviewing that policy. We are going to get 
data from the swap dealers to figure this out, whether it still 
makes sense, and whether there are people evading limits. But 
something I think is important to remember, we don't want to 
cut off a venue for institutions like banks to manage risk. We 
are looking at the Bear Stearns crisis currently where they 
didn't have a regulated venue for credit default swaps and 
other products. It is important to make sure that they have an 
avenue to a very transparent market where prices are set.
    So we have to look at those, balancing those two ideas, 
making sure that proper controls are in place, that people 
aren't evading purposely position limits, but also ensuring 
that they can manage risk in a very transparent, regulated 
avenue.
    Mr. Etheridge. Thank you, Mr. Chairman. I yield back.
    The Chairman. I thank the gentleman.
    The gentleman from Texas Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Mr. Chairman, thank you for being here.
    Would you say that the discovery price for oil today--are 
you comfortable that whatever oil closed at today on the 
markets, if it is closed yet, is the price of oil?
    Mr. Lukken. Well, our economists work closely with the 
data, the fundamental data that they receive from EIA and other 
sources around the world to make sure that markets are 
reflecting supply and demand. But we also have the issue of 
making sure that any one participant is not, or collectively 
with others are not, driving artificially the prices of oil and 
other commodities. Our trained economists have been doing this 
for 30 years. They are comfortable that this is the price of 
crude oil in the markets.
    Mr. Neugebauer. And why do they say that crude oil is $130 
a barrel? Why do they think that is a legitimate price for oil? 
What do they think causes that?
    Mr. Lukken. Well, there are several factors to consider. We 
are at flat production, world production, in oil. That has been 
the case now for the last 3 years. Certainly, demand in the 
non-OECD countries; China and India in particular has been 
growing much more than the demand has been shrinking in the 
developed countries. Those factors on top of a decrease in the 
value of the dollar over time have played a role into the 
current prices. I can't explain every up and down in the market 
every day, but certainly I think our belief is that these are 
reflecting powerful fundamental forces.
    Mr. Neugebauer. I don't want to put words in your mouth, 
but I want to repeat what I think I heard you say. What I heard 
you say is your economists say the world is not producing 
enough crude oil, and the demand is increasing at a faster rate 
than the production. It is a supply and demand issue here, and 
that relatively for those things to happen, for that to change, 
you either have to reduce the demand, or we have to increase 
the supply; is that correct?
    Mr. Lukken. That is absolutely correct, but also our job is 
to ensure that speculators are not driving this. So even if a 
small chance that it may be happening, it is worth overturning 
every rock to ensure it is not occurring, and that is what we 
are trying to do. That is why we are asking for the additional 
information, the additional transparency to ensure that it is 
fundamentals that are driving these prices.
    Mr. Neugebauer. I think you brought up another issue, and 
one which we discussed, and that is that the oil is traded in 
dollars, and the dollar has dropped pretty significantly over 
the last 2 or 3 years. And really the rest of the world is not 
paying $130 a barrel, but in many cases considerably less 
depending on the currency. And so basically, if the dollar were 
stronger, oil would actually be a much lesser price; is that 
correct?
    Mr. Lukken. Our economists believe it is a factor.
    Mr. Neugebauer. And some people say that if you were to 
wave your magic wand and take all of these unregulated markets, 
put it under your umbrella, that oil would drop $30, $40, $50 a 
barrel. Do you believe that is true?
    Mr. Lukken. I don't think there is a silver bullet here. I 
wish there was. But certainly there are steps we can take, 
measures we can put into place to ensure that somebody is not 
trying to game the system to the disadvantage of consumers. But 
I am not certain that anything that we do will end up affecting 
the price of crude oil.
    Mr. Neugebauer. And so really what your job is going to be 
is to determine if the markets are transparent, number one, and 
second, that there is not anybody gaming the system. And so if 
you answer those two questions, then the current price of oil 
is the current price of oil. Is that----
    Mr. Lukken. I certainly think that transparency and 
sunshine are healthy for markets. That, what we are trying to 
do is to ensure that everybody is being seen and treated fairly 
no matter where the point of entry into the central 
marketplace. And, that is why we have addressed the foreign 
boards of trade issue, why we have addressed the exempt 
commercial market issue with the help of this Committee, and 
why we are looking into the swaps issue to get more 
information. We want to make sure that no one is trying to 
evade limits or controls in place, and we are taking steps to 
do that.
    Mr. Neugebauer. Thank you. I yield back.
    The Chairman. The gentleman from Georgia, Mr. Scott.
    Mr. Scott. Thank you very much, Mr. Chairman.
    Welcome back again, Mr. Lukken.
    I would like to get to about a couple of points, but before 
I do, I would like to address the ICE situation very quickly, 
get your response to a few things that I want to clear up and 
make sure the record is clear.
    First of all, you would agree that ICE Futures of Europe, 
while owned by ICE in Atlanta, is indeed a completely 
autonomous company with its own Board and has been regulated by 
the Financial Services Authority for over 25 years?
    Mr. Lukken. Yes, it is.
    Mr. Scott. Okay. And would you also agree that it is--is it 
not true that the WTI volumes did not rise on ICE Futures 
Europe and London but actually decreased slightly as prices 
skyrocketed upward?
    Mr. Lukken. That is correct.
    Mr. Scott. All right. And when we look at market share, 
that ICE has 15 percent market share, and if you look at the 
open interests and options and positions combined, which is 
generally accepted as the true price driver for the contract; 
NYMEX holds 85 percent of this market. Wouldn't this indicate 
that this does not represent a flight of speculation to the 
London market or a pace driver as the prices increase 
significantly?
    Mr. Lukken. We have not seen a flight to London as a result 
of the price increase.
    Mr. Scott. And also, if ICE adheres to the new regulations 
that you propose and the Financial Services Authority agrees, 
will ICE effectively be playing by the same rules as the United 
States NYMEX?
    Mr. Lukken. In regards to large share reports and position 
limits, yes.
    Mr. Scott. And is any further regulation needed on that 
point?
    Mr. Lukken. In our view, to surveil the markets to prevent 
manipulation, no.
    Mr. Scott. All right. Thank you.
    Now, let me just go, generally--I appreciate that. I wanted 
to clear those points up for ICE.
    Let me go to this. Recently, as a matter of fact, on 
Sunday, they had this meeting in Jeddah, Saudi Arabia. And at 
that meeting, the Saudis agreed to go ahead and increase their 
output up to really, right now, first 300,000 in May, and then 
now another 200,000 barrels per day, so their output is 9.7 
billion barrels a day.
    Now, the issue becomes, what is causing this price 
volatility? We say it is a problem of demand, supply and 
demand. And they made a point of saying that--and I want to get 
your opinion on it--that they blame billions of dollars of 
investment in oil as a hedge against the weakening dollar.
    And given the fact that the world's oil market is traded in 
our currency, the dollar, which is weakening, what role is that 
playing in this price volatility?
    Mr. Lukken. Obviously, the dollar is not something the CFTC 
normally gets involved in talking about, the policies 
surrounding a weak or strong dollar. But our economists 
certainly consider it a factor in the price of crude oil 
currently.
    Mr. Scott. Okay.
    Now, finally, you asked for additional resources, 
particularly in personnel and funding, so that you could 
complete your mission. I think we have worked on that. We also 
have crafted some solution for many of these issues with CFMA 
reauthorization which is contained in this farm bill.
    So, in your opinion, do you think it may be more prudent to 
wait for the new regulatory authority given to you in the farm 
bill that we just passed, along with the additional resources 
we have given you through our appropriations, to take effect 
before we move with more regulations?
    Mr. Lukken. I do. I mean, I think this is something that, 
in a bipartisan way, that Congress came to enact as part of the 
farm bill. Let's allow it to come into law and to implement it 
before we start revoking it or repealing it. I just think that 
it should be implemented after the enormous amount of work that 
went into it, the thoughtful work that went into it, to ensure 
that these markets are working correctly.
    Mr. Scott. Now, finally, my time is up, but how--and you 
are approaching, and we want to get transparency--how, very 
specifically, do you plan to achieve greater transparency and 
regulation?
    Mr. Lukken. Well, on the foreign boards of trade issue, we 
are now going to get better data from ICE London and be able to 
put that into our Commitment of Trader Reports, hopefully, 
soon.
    Also, we're looking into the swap dealer market to find out 
what that business is doing, and hopefully bring greater 
transparency to some of these transactions as well.
    So I think, again, transparency is imperative to well-
functioning markets, and those two steps are going to take our 
efforts along that way.
    Mr. Scott. Thank you, Mr. Lukken.
    The Chairman. I thank the gentleman.
    The gentleman from Louisiana, Mr. Boustany.
    Mr. Boustany. Thank you, Mr. Chairman.
    First, let me applaud you, Chairman Lukken, for your 
vigorously leadership in creating this interagency task force. 
This is very welcome news, and we look forward to hearing 
further what the findings are going to be.
    Also, I want to applaud you on implementing the mutual 
recognition program. I think it is a very important step.
    Given the very tight supply and demand equation, which we 
all acknowledge, and the fact that Venezuelan production is 
undergoing degradation, and Mexican production is undergoing 
degradation, we are seeing a shift toward heavy oil from light 
crude, clearly we all recognize this tight supply-demand 
problem.
    Does that amplify the volume of trading and the degree of 
speculation that occurs in the market?
    Mr. Lukken. I think it certainly amplifies potential 
volatility of the market. So, any little bit of information 
with these tight conditions can have significant price swings, 
which we have seen in recent days.
    So I am not sure whether we have seen any additional 
speculative interest. Over a long period of time, we have 
obviously seen more speculators. I think, over the last 3 
years, it has been about two percent more traditional 
speculators in the markets, which is growth but not significant 
growth.
    Swap dealers have grown considerably, about seven percent 
during that last 3 year period of time.
    So, yes, I think there is a lot. During this price run-up, 
people are looking to manage risk and speculate. But that also 
could be very healthy in bringing the right information to the 
market, so that liquidity is an important function of our 
markets and helps to make sure they are efficient.
    Mr. Boustany. You have mentioned that in answers to 
previous questions, as well, and also focused on the 
transparency side. I guess I am concerned that if we try to 
implement regulations and arbitrary caps on these markets, 
could we drive business outside of U.S. jurisdiction, which, if 
you couple that with the weak dollar and also the potential 
that we are hearing about to shift oil transactions from 
dollars to potentially Euros, that could be devastating for the 
U.S., could it not be?
    Mr. Lukken. Absolutely. And these markets, as you know, are 
electronic markets, they can go anywhere; most likely, to 
developed countries such as the U.K. I mean, we certainly know 
that there is a market there that would be willing to take our 
benchmark away from us. Hong Kong and others around the world 
would be willing to list any of these contracts electronically.
    So I think it is a better tack to ensure that we engage: 
others around the world, make sure the standards are proper and 
the highest around the world, ensure that we are getting the 
right information and have the right controls in place, so that 
no one is able to manipulate prices.
    Mr. Boustany. I guess I am concerned, because I have read 
that Dubai is looking at two potential electronic trading 
venues, which is more diversification in this ``globalized'' 
market. But if that were coupled with a shift from dollars to 
Euros for transactions, and possibly even other currencies, 
this could really add tremendous complexity to what your job is 
going to be. But, clearly, I think it would be detrimental for 
U.S. interests in the long run.
    Do we have a clear-cut--well, maybe that is the wrong 
adjective. Do we have an agreed-upon definition of ``excessive 
speculation?''
    Mr. Lukken. The Commodity Exchange Act mentions ``excessive 
speculation'' in the preface of wanting us to put speculative 
limits onto certain contracts, but has no defined concept in 
the Act.
    Mr. Boustany. Okay. So that is still somewhat of an 
arbitrary distinction that is codified?
    Mr. Lukken. Correct.
    Mr. Boustany. Okay.
    And one final question. With regard to the Enron loophole--
and, clearly, we took steps in the farm bill--how long do you 
think it will take to implement what was codified in the farm 
bill?
    Mr. Lukken. We are working as fast as we can, but I think 
we were given 180 days in order to come out with the first 
proposed rulemaking in that area. And so we are going to meet 
those deadlines.
    Mr. Boustany. I thank you.
    And I yield back. That is all I have.
    The Chairman. The gentleman from Georgia, Mr. Marshall.
    Mr. Marshall. Thank you, Mr. Chairman. Thank you for 
holding this hearing. Also, thank you for putting off the 
markup and planning to move this thing a little bit more 
cautiously down the line. I think we are playing with something 
that is terribly important to our markets, to ag, to the 
consumer, and we don't want to mess it up.
    Mr. Lukken, glad you are here. You, in your testimony, 
described the deal that has now been struck that would require 
additional information from ICE Futures and consequently make 
the information the CFTC is receiving from ICE Future 
comparable to what the CFTC receives from NYMEX. Consequently, 
you kind of feel that CFTC has what it needs in order to 
properly supervise the activities of ICE Futures.
    I am curious as to how that deal came about. Was it FSA 
insisting upon the deal?
    Mr. Lukken. Absolutely not. It was the CFTC trying to work 
with the FSA to reach this agreement.
    Mr. Marshall. Well, I guess I am kind of curious to know 
whether or not the agreement was actually reached with ICE 
Futures Europe.
    Mr. Lukken. It was. It was. This is something we worked 
with both parties to reach an agreement on.
    Mr. Marshall. Well, why would FSA even have been involved, 
actually? It seems to me that the question was whether or not 
ICE Futures was going to agree to regulations, that it didn't 
have to, since it was a European-based or British-based entity, 
and that you would have worked directly with ICE to get ICE to 
agree that ICE Futures would be subjected to this. And then, in 
your testimony, you described it as an announcement made by 
CFTC and FSA.
    Mr. Lukken. I think I described it as a consultation with 
the FSA, and that is probably the proper term; that we worked 
with ICE to reach the agreement, because these were linked 
contracts with U.S. markets. But we, as we always have to do, 
is ensure that the foreign regulators, who are the primary 
regulators of these markets, understand why we are doing it. 
And that is what we worked with them to understand.
    And so, they have the ability--this will be a rule change 
on ICE. FSA will have to review that rule change. We wanted to 
make sure they were properly informed and consulted on the 
issue, so that they understand why the CFTC was asking for this 
additional requirement.
    Mr. Marshall. Are you saying that you had to have FSA 
involvement in order to accomplish the objective, or you wanted 
to have FSA involvement?
    Mr. Lukken. Well, our No Action letter does not require 
that we involve FSA.
    Mr. Marshall. I understand that. But the way you got ICE to 
agree was by talking about the No Action letter and saying, 
``Hey, look, under the circumstances, we are going to have 
to''----
    Mr. Lukken. Correct. That is correct.
    Mr. Marshall. Okay. It just seems to me that it would be 
wonderful if we could somehow manage to develop a better 
working relationship with all of the regulators around the 
globe, and a good start would be our British counterparts. And 
I applaud you for heading in that direction by involving FSA as 
much as possible.
    But, just for the record, it seems to me that CFTC worked 
with ICE Futures to accomplish this. And that is principally 
what happened. It wasn't that FSA concluded all of a sudden 
that this is information that needed to be provided. It is that 
the CFTC decided that this is information that needed to be 
provided, and you worked with ICE to get that done.
    Mr. Lukken. That is absolutely correct. But then we also 
worked with our foreign counterparts to ensure they understood 
what was going on.
    Mr. Marshall. Okay.
    The Chairman has already mentioned this September 15th date 
for you to report back the results of your investigation is 
troublesome for us. Is it possible for, say, staff from the 
Agriculture Committee to be assigned to be involved with your 
staff, as you go through the process here, so that we can get 
feedback earlier on how this is evolving, what direction does 
it seem to be headed in?
    Mr. Lukken. We will certainly consult with this Committee, 
as we start to make progress. The reason the target date is 
September 15th is that we are not going to start getting the 
data until late July from these organizations.
    And, again, these are multi-billion dollar books that are 
not in standardized futures terms, but in individually 
negotiated contracts that we will have to convert into 
contracts that we understand. So this is going to take a bit of 
work from a staff that is already pretty strained, trying to 
get our arms around all these initiatives.
    The hope is that it can be completed by September 15th. If 
we can do it earlier, we will. But, certainly, it is a good 
idea to consult with the Committee staff early on.
    Mr. Marshall. As you know, there are a number of credible 
folks out there that are arguing that the run-up is partially 
due to these index funds. We have talked a lot about that.
    It would be very helpful to me if you or somebody on your 
staff could perhaps share with the Committee itself something 
in writing which, in layman's terms, describes why this is 
wrong-headed.
    You know, the idea that a lot of money that wasn't in a 
market comes into that market and yet doesn't cause an increase 
in prices in that market is a little odd. I mean, it is just 
not intuitively obvious. And if you could, in a very simple, 
straightforward, anybody-can-understand-it way, provide us with 
a description of why that is the case, as your staff and you 
seem to be contending, it would be enormously helpful to all of 
us.
    Thank you, Mr. Chairman. I am beyond my time.
    The Chairman. I thank the gentleman.
    The gentleman from New York, Mr. Kuhl.
    Mr. Kuhl. Thank you, Mr. Chairman. Once again, I would like 
to also thank you for holding this hearing and join with Mr. 
Marshall and other Members who say that your wisdom in putting 
off the markup on some of these bills is great and is to be 
complimented. Because I think it will allow us to really cover 
the issue completely in a couple of weeks, as things become 
more apparent.
    And thank you, Chairman Lukken, for being here.
    I just want to clarify, I guess for probably about the 
fourth time, what I thought I heard you say, because it is not 
what I am hearing from people back home. And that is that I 
thought I heard you say that speculators are not a reason for 
the increase of the price of oil. Was that what I heard you 
say?
    Mr. Lukken. That, yes, our economists that look at this 
feel that the fundamentals of supply and demand are the 
principal reason behind the price.
    Mr. Kuhl. How do you explain--how do you suggest I explain 
to people back home when they say, ``Oh, it is those 
speculators making millions upon millions of dollars that are 
driving up the price of oil.'' How would you explain it from 
your position and knowledge as a regulator?
    Mr. Lukken. Well, I think speculators, as this Committee 
knows, provide a healthy mix of participants in the market to 
ensure there is a buyer for every seller and a seller for every 
buyer. That has been the case for the 150 years that these 
markets have been around.
    Our job has been, always has been, to put proper controls 
in place on speculators. So that is what we are trying to 
ensure, that there are proper controls, to ensure there is not 
too much speculation in the market, and that the commercials 
are getting the prices they need to manage risk.
    And so, that is the exercise that we have been undergoing 
over the last year; first, dealing with exempt commercial 
markets, most recently with foreign boards of trade. Now we are 
turning to swap dealers and whether there is anybody evading 
limits there.
    So we are taking steps to ensure that markets are not being 
overrun by speculative interests. But, to date, we have not 
seen evidence of that. As my chart shows, these people are flat 
in the market. They are not all on the long side of the market, 
betting it will go up. So it is difficult to say there is a 
smoking gun there. But we continue to look.
    Mr. Kuhl. Okay.
    And just for my own curiosity, when you look at speculators 
and their activity as a regulator, what would stand out, from 
what you are able to observe, that would indicate to you that 
there was a speculator trying to game the system?
    I mean, you have had that experience in the past, I am 
sure. It is not necessarily in the energy commodities but in 
other areas. How do they do that?
    Mr. Lukken. Well, typically, they hold a large controlling 
position in a market, particularly in the delivery month. When 
there is a threat of delivery of the physical product and they 
are holding a large position--and they may also be holding a 
large position elsewhere. They may benefit from driving down 
prices or driving up prices.
    And so, famously we saw this with Amaranth, where they 
tried to push down prices, using the futures markets as the 
mechanism to push down prices, but they held a large position 
in the over-the-counter market that would profit as a result of 
their action. So they may have lost money in one market, a 
small amount of money, but they made a lot of money elsewhere.
    And so we have tried, through the efforts of this 
Committee, to ensure we are seeing all of those different 
pieces, whether it is exempt markets, whether it is foreign 
markets, whether it is the regulated marketplace, to ensure 
somebody is not gaming one of those markets off of each other.
    Mr. Kuhl. And you also mentioned that your economists had 
looked at the influence, if you will, of the declining dollar 
over the years. And I am curious as to whether or not you are 
able to quantify that in any way. Can you say that over a set 
period of time, say, the last 2 years, that the dollar has lost 
ten percent of its purchasing power and, as a result thereof, 
the price of oil has gone up ten percent on the other side? And 
how do you figure that into the mix of looking at speculators?
    Mr. Lukken. We can provide you with some different figures 
on this. I will ask our economists whether they have been able 
to quantify it. But it is significant.
    Mr. Kuhl. Okay.
    And last, I am not familiar with swap transactions or swap 
traders. Can you tell me a little bit about that?
    Mr. Lukken. Well, if you are a commercial business, let's 
say you are a refinery or United Airlines. You have risk on the 
price of crude oil and gasoline and fuel oil and other things, 
and you may go to a Wall Street institution to help you manage 
that risk. And they could get into the risk-management markets, 
both the futures markets and the physical markets even, to help 
you manage the risk in those markets. So it is a very 
customized product, tailored to the needs of a different 
client.
    And what those swap dealers do at the end of the day is 
they combine all of these clients together and, through their 
risk-management systems, come up with a net figure that they 
need to come on to the regulated markets in order to manage.
    So the regulated markets provide a standardized way for 
them to come and manage risk on a regulated exchange. And it 
has proven to be very helpful over the years to help those 
institutions do that.
    Mr. Kuhl. Okay. I think I understand it a little better 
now.
    Thank you, Mr. Chairman. I yield back.
    The Chairman. I thank the gentleman.
    We are finally using some of our technology here. You can 
see this on the screen, Mr. Lukken.
    And maybe you could comment on this chart. I am not even 
sure where this came from. But this has been shown to me 
before, where it shows the net swaps position really haven't 
changed, that the net speculative positions--it looks like it 
kind of tracks the price until it gets to about October of 
2007, and then there is a divergence that happens from then on, 
where the speculative positions stay the same and the price 
goes way up.
    Is this an accurate chart? And maybe this comes from your 
information; I am not sure.


    Lukken. This is our information.And the net speculative 
positions, again, these are the traditional speculators that 
everybody thinks of speculators in the markets, those day 
traders and hedge funds that are in the markets.
    The net swaps position, again, are these swap dealers that 
are managing the risks of different clients in our markets. 
That is, swap dealers are the institutions that bring index 
funds, the pension funds, the endowments. They bring those into 
the marketplace.
    So as you can see, swap dealers have obviously a lot of 
short positions that they are also bringing to the marketplace, 
as well as the long index money. So we have seen them virtually 
flat the market over the last year or so during this price run-
up. That seems a bit counterintuitive to what we would expect. 
We would think that if they were pushing up prices they would 
be very long in the market.
    Again, with net speculative positions, they are also 
relative flat. They are averaging about four percent net long 
over the same period of time.
    So, again, we are trying to figure out whether this data 
points to a smoking gun by any participant type. And it really 
has not shown that any one of these participants seems to be 
driving the markets higher.
    The Chairman. If people will indulge me 1 more minute here.
    What about this information that people keep putting out 
that we have, like, $260 billion more money in the market than 
we had 5 years ago? You know, and they are blaming these swaps 
and whatever for that, pension funds. But these charts don't 
seem to indicate that. Where is that $250 billion? Where did 
that come from?
    Mr. Lukken. Well, there are not very accurate figures in 
regards to the amount of money coming into index funds. Index 
funds are primarily an over-the-counter contract. They are not 
traded into the futures markets directly. And I think a lot of 
the $260 billion figure that has been quoted, much of that is 
just the appreciation of the commodities themselves. It is not 
necessarily new money coming into the marketplace.
    So a lot of that is coming directly to swap dealers. Swap 
dealers are entering into these transactions, selling their 
Goldman Sachs commodity index to different individual pension 
funds and entities, endowments out there. But then Goldman 
Sachs turns around with a variety of other client businesses 
and comes to our markets. And you could see, based on the swap 
position data, they are bringing a lot of short positions to 
the market, most likely commercial businesses.
    So commercial businesses, although they have shrunk as a 
percentage in the futures markets over a period of time, some 
of them may be coming through swap dealers now, because they 
are given certain client services that they get through swap 
dealers that they may not get through directly investing in the 
futures market.
    So this is all something that we are going to get better 
information in the coming weeks from swap dealers, so that we 
can make informed decisions on what controls, if any, need to 
be put onto that type of business.
    The Chairman. Thank you.
    The gentleman from Georgia, Mr. Barrow.
    Mr. Barrow. I have no questions, Mr. Chairman.
    The Chairman. All right.
    Mr. Donnelly from Indiana.
    Mr. Donnelly. Thank you, Mr. Chairman.
    Thank you, Mr. Lukken, for being here, and I appreciate 
your presence.
    Let me ask you this: What do you believe would be the 
impact on the price of oil and gas if you increased the margin 
requirement to 35 percent?
    Mr. Lukken. Well, margin in the futures market is used to 
manage the price risk for the clearinghouse, so clearinghouses 
in futures markets set a margin to ensure that one default by 
any trader will not take down the clearinghouse. It has been 
very effective over the 150 years that margins have been used 
for this.
    I am not certain that raising margins would have the effect 
that people would like it to have, which is driving down 
prices. It certainly would be a cost of doing business, may 
drive businesses overseas to London markets and unregulated 
markets. I think that is dangerous.
    Certainly, the other thing is that they think it will drive 
index trading out of the market as a result of this. Well, 
these pension funds have a dollar for every investment in the 
futures markets, so they have the ability to meet these margin 
calls. So I am not sure it actually would have the effect of 
driving them out of the markets.
    Mr. Donnelly. How about requiring the ability to take 
physical possession?
    Mr. Lukken. Well, speculators are necessary for the 
markets. I think if you had the provision that only those that 
were commercial businesses in the market, it would be a one-
sided teeter-totter. I mean, there would be no one on the other 
side of the transaction to be the buyer of every seller or the 
seller of every buyer. So we have to have healthy speculation 
in the markets in order for these markets to work.
    But, yes, we have controls in place, especially during 
expiration, to ensure that speculators are getting out of the 
markets at the end, when they need to be out of the markets, to 
ensure that the price discovery function is working.
    Mr. Donnelly. Well, let me ask you this: Has the mix of 
people with these contracts gone much more heavily toward the 
speculative side over the last 5 years?
    Mr. Lukken. It certainly has.
    Mr. Donnelly. And doesn't that have a dramatic effect on 
the price? Or do you feel it has no effect?
    Mr. Lukken. Well, that is something we are studying. The 
traditional speculators, over the last 3 years--I have the data 
for that--they have increased from about 34 percent of the 
market to 36 percent.
    The swap dealers are being lumped by some in with the 
traditional speculators. Again, we don't know how much of that 
swap business is commercial business or speculative business or 
index trading. So that is something we will have to determine 
to find out what exactly is the mix in our markets currently.
    Mr. Donnelly. Well, do you think--and bear with me, because 
I am not an expert on this like you are. However, do you think 
that when a Southwest Airlines or another organization comes in 
to hedge their costs, by actually being in a market that has a 
number of speculators looking to get out in the next few months 
thereafter, does that not make it much more difficult and more 
costly?
    Mr. Lukken. Well, if there are not speculators bringing 
liquidity, it does make it difficult for them to get out of 
positions. And Southwest famously locked into the price of oil, 
I believe, through a swap dealer in order to lock in those 
prices, who then came into our markets to help manage that 
risk. United Airlines does the same with Morgan Stanley.
    So there are lots of commercial businesses that are using 
swap dealers to manage risk. We are going to get better 
information so we can make better-informed decisions in the 
future.
    Mr. Donnelly. And I have talked to some folks who I would 
call expert on this who have indicated that--people involved in 
airlines and others, who have indicated that they felt that at 
least $40 a barrel was attributable to the increase in the 
speculative dealers increasing so dramatically into the market.
    Would you disagree with that?
    Mr. Lukken. Well, there are lots of views, obviously, about 
where the price should be, some above the current price; I hear 
from those folks on occasion. We certainly hear about the ones 
that believe it should be lower.
    So our job is to ensure that the markets are reflecting 
fundamentals of supply and demand. So I can't say that I know 
what the correct price is. I let the markets do that. But our 
job is to ensure the markets are trying to do the best they can 
to function to reflect current market prices. And that is why 
we are taking these additional steps, to ensure of that.
    Mr. Donnelly. And if I could ask you one more question--and 
I sure appreciate your pointed answers. Am I wrong in saying 
that, in the last month or so, the tracking has indicated 
supply, on almost a daily basis, has exceeded demand?
    Mr. Lukken. Well, I would certainly--again, I am not an oil 
analyst expert, but these are certainly tight, tight 
fundamentals. So we do have some good news on occasion, which 
is helpful. But certainly these tight markets have kept it in 
the range of the $130.
    Mr. Donnelly. Well, you mentioned that you focus on supply 
and demand. And am I wrong in saying that supply has exceeded 
demand on almost a daily basis recently and, at the same time, 
we have seen the price increase go up?
    Mr. Lukken. I do have our Chief Surveillance Economist that 
might be able to give a little more data on what he is seeing 
directly in the markets.
    Mr. Fenton. Well, I think we have not seen supply going up 
more than demand. U.S. crude oil stocks have actually gone down 
in recent weeks.
    Mr. Donnelly. Demand usage drops and supply increases. So 
what you are telling me is your experience is that you have 
seen demand actually outstrip supply recently?
    Mr. Fenton. Stocks are going down, which is an indication--
crude oil stocks are going down in the United States. It is 
true that, for the first time, there seems to be an effect in 
demand of higher prices, in particular in gasoline consumption.
    Mr. Donnelly. Has there been a drop in demand?
    Mr. Fenton. There has been.
    Mr. Donnelly. And have supplies dropped, as well?
    Mr. Fenton. U.S. crude oil stocks have dropped.
    Mr. Donnelly. Thank you very much.
    The Chairman. I thank the gentleman.
    The gentleman from Texas, Mr. Conaway.
    Mr. Conaway. Thank you, Mr. Chairman.
    Mr. Lukken, the December 2007 investigation that you 
started, is that the report that will come in September, or is 
that something else?
    Mr. Lukken. This is an enforcement investigation, so this 
is looking into allegations of manipulation that are occurring 
in the markets.
    Mr. Conaway. Okay. And that investigation is proceeding the 
way you hoped it would?
    Mr. Lukken. Absolutely.
    Mr. Conaway. Okay. We looked forward to that hard 
information or, actually, facts, because an awful lot of the 
talk show hosts and the talking heads simply make stuff up and 
then act like it is the real deal. I mean, if I told you that 
redheaded chickens were the reason--my colleague asked what to 
say to his folks back home that make erroneous statements. And 
the first thing to tell them, ``You are making a wrong 
statement.''
    Here in America, we sometimes think we are the absolute 
center of the universe, with all of our regulatory changes. The 
recent dustup in the London Times, Financial Times, about this 
proposed regulation that we would require ICE Futures Europe to 
do some things unilaterally, and that some guy named--Economic 
Minister Ed Balls has some sort of a clause that, ``Use of the 
Balls clause''--this is in an article in yesterday's Financial 
Times--``Use of the Balls clause would be a nuclear option. But 
it is time for the FSA and the U.K. Government to remind the 
U.S. Senate--and, by extension, us--that they know the launch 
codes.''
    What is your reaction to their being miffed at our 
considering additional regulations?
    Mr. Lukken. I think it is imperative for us to try to 
engage our foreign counterparts. I think this recognizes how 
global these markets currently are.
    And so, for us, the FSA is a strong partner of the CFTC. We 
talk to them almost daily about these markets, what is going on 
with them, about what is going on not only in ICE but also the 
LIFFE exchange, another important futures market based in 
London.
    And so, for us, we have to engage. We can't turn away from 
foreign regulators and require everybody to come to the United 
States to register. There are certain things and requirements 
that are important that we have to get from different foreign 
counterparts that may be trading products linked to the U.S. 
products, but there could be retribution, as you are noting.
    If we start down this line and start requiring everybody to 
come to register in the United States, our exchanges will have 
the same put on them elsewhere around the world. And our 
exchanges are trying to break into those different countries 
around the world.
    So I think it is a dangerous road to go down. It is better 
to try to engage foreign regulators to raise foreign standards.
    Mr. Conaway. Okay.
    Help me with the math. You said that the growth in 
speculators was up two percent. That is two percent in the 
number of people doing it, the positions?
    Mr. Lukken. That is market share, market share of types of 
participants.
    Mr. Conaway. Okay. And the swaps were then a seven percent 
increase in market share? Okay. Thank you.
    Our Chairman said earlier that we might not have time to 
gather facts before we pull the trigger, or something similar 
to that; ready, aim, fire. I am hoping that his deliberate 
approach in July will act as a cooling agent on some of the 
hot-headed folks perhaps on the other side of the building, 
that we could, in fact, gather facts and understand what we are 
doing before we pull the trigger on some wide-sweeping 
regulation that we don't know what impact that it does have.
    I yield back.
    The Chairman. I thank the gentleman.
    The gentlelady from Kansas, Mrs. Boyda.
    Mrs. Boyda. Thank you very much, Mr. Chairman.
    And thank you for your testimony today.
    You have been in front of me before, and I have said I am 
really trying to get my head around all of this. So I am going 
to ask you some questions, and we will see where this goes.
    And I appreciate very much that we are having this 
conversation today. When one person sits in front of me, I am 
going, ``Wow, that is interesting. There is one person.''
    And so we have a number of credible sources that are saying 
oil is X number of dollars, $30, $40, you pick what they are 
saying.
    Could I ask you to do your level best to move into a chair 
right next to yours and act like you were they for a moment and 
tell me what they would say?
    Mr. Lukken. I think there is an instinctual feel about what 
is going on in the markets, that it has to be something other 
than supply and demand. And I understand that. I am sympathetic 
with that.
    Mrs. Boyda. Are these people who don't understand your job, 
then?
    Mr. Lukken. Well, some of them are in our markets, but a 
variety of them come from other fields, but aren't specific to 
the futures markets.
    And they are different animals; I mean, I think that is 
important to point out. In the securities markets, there can be 
a win-win when somebody buys and sells a stock. Both the buyer 
and the winner or the buyer and the seller can profit as a 
result of that transaction. In the futures markets, they are 
zero-sum gains. For every dollar that is gained, there is a 
dollar that is lost at the end of the day.
    In the long run that makes sure that the right information 
is getting into the market. If you are wrong, you are not going 
to be in the business very long. That is why it is important to 
understand that it is not necessarily only buy pressure that is 
going to lead to higher prices.
    Mrs. Boyda. Let me just ask another question. When I look 
at these swap positions down here, from what I understand with 
China and India just growing and their energy usage growing in 
really just exponential ways, if we were just talking about a 
market-driven scenario here, supply and demand and the perfect 
market, my hunch would be that the price would continue to go 
up.
    And so you have some huge positions here that are swaps, 
and they are betting that they are going to go down. Which, 
again, would say to me intuitively, if this is just a market 
position, then do we see plug-in hybrids taking over? Are we 
going to have electric cars, hydrogen vehicles soon, while 
these contracts are still taking place?
    So we don't have any short-term solution to a real energy 
crisis. And so, in my mind, demand is going to go up and--do 
you see where I am going with this?
    Certainly, demand is going to go up worldwide. We don't see 
any real quick fix to say we are going to have production go up 
that fast. So if I were a betting woman, if we are just working 
in a--then I would say, ``Boy, I bet demand is going to go 
up.'' Half of the people who have the biggest positions in here 
say that it is going to go down, and I have to wonder if they 
know something that I don't know.
    Mr. Lukken. Well, certainly, demand destruction is 
beginning to happen in some of these markets. We are seeing, 
for example, in the United States, people changing behaviors in 
order to----
    Mrs. Boyda. But we don't see any of those really. I think 
we all agree that there probably isn't going to be any real 
short-term dynamic change in the market.
    Mr. Lukken. But we are seeing, for example, with China's 
recent announcement that it is going to stop subsidizing gas, 
potentially raising up to 20 percent the price of gasoline in 
China, that is going to have real effect on people, whether 
they drive and consume energy in China. Others may follow suit.
    So we are going to see--supply is difficult. It takes a 
longer-term view. But on the demand side, I think you are going 
to see some demand destruction going up.
    Mrs. Boyda. Can I just ask one other question too? When you 
say you get the speculators out of the market when it gets 
close to the delivery date, what does that mean?
    Mr. Lukken. Well, speculators, at the end, when the futures 
price becomes the current price they have to get out of the 
marketplace.
    Mrs. Boyda. And do you know that these are speculators 
only? Do they identify themselves as speculators?
    Mr. Lukken. They identify themselves. And they have to get 
down to certain positions at the end to ensure that they are 
not controlling a large enough futures contract that could 
manipulate the market.
    Mrs. Boyda. Let me just ask one more question then.
    Mr. Lukken. Sure.
    Mrs. Boyda. It seems like these swap positions are pretty 
huge; they are big. And yet you say that--and I am really just 
trying to understand--but you say, we want to make sure that 
there isn't anything that could, in fact, sway the market.
    Why would these swap positions, which represent huge, huge 
monied interests, why would they not be able to affect the 
market?
    Mr. Lukken. Well, typically they are aggregating a lot of 
clients. So instead of the entire group of customers going to 
the futures market individually, they can combine all of their 
positions with one entity and have them manage the risk in the 
futures market. That is what swap positions do: they have 
people who are long, they have people who are short, and they 
combine all of these at the end of the day and manage their 
risk in our markets.
    What we are doing is unwinding all of these to find out if 
there is any individual client of these swap dealers that may 
cause us concern, that they are moving markets, evading limits, 
all the things that we look out for. This is something we are 
going to get back to this Committee with as quickly as 
possible.
    Mrs. Boyda. All right. Thank you.
    The Chairman. I thank the gentlelady.
    The gentleman from Nebraska, Mr. Fortenberry.
    Mr. Fortenberry. Thank you, Mr. Chairman, for holding this 
hearing.
    And thank you, Chairman Lukken, for appearing today.
    Let's go back again to the essential question. On Monday, a 
hedge fund manager and oil company advisor testified on Capitol 
Hill that it was his perspective that the increased regulation 
would drop the price of a barrel of oil to $65-$70 in about 30 
days.
    With that said, this is not meant to be a challenge to you, 
but I want to unpack precisely what you are saying, because it 
seems to me you are saying two things. One is, you do believe 
that the futures markets are an accurate indicator of 
underlying fundamentals. And yet, at the same time, you have 
pointed to the fact that there has been an enormous increase in 
speculative activity, that speculators actually hold a higher 
percent of overall market activity. It was very important to 
act on closing the Enron loophole. You are concerned about 
transparency, particularly in the swap markets.
    So that indicates that, again, there is a reasonableness of 
concern that speculative activity, or the acceleration of 
speculative activity at the moment, leaves the question as to 
whether it is a driver of price, creating an artificial price 
beyond the underlying fundamentals.
    I would like you to respond to that.
    Mr. Lukken. We do not have any direct evidence that 
speculators or index money seems to be moving these markets.
    And the way we look at this--and the data is very good with 
the agricultural markets--we look at a variety of different 
agricultural products that have large institutional money 
coming into them. And so this is corn, soybeans, hogs, cattle, 
all of them.
    The largest, percentage-wise, of the markets that have 
institutional index fund money in them are cattle and hogs, 
around over 40 percent. And so you would think, theoretically, 
that they would have the highest prices of all, as a result of 
this institutional money. Until recently, it has actually been 
negative. It is in positive territory now, but they are 
certainly some of the weaker commodities that we have seen with 
all this institutional money.
    If it is correlated, you would think we would see higher 
prices. We see other markets with no institutional money, such 
as the Minneapolis Grain Exchange and wheat. So no index 
trading is going into those markets. Again, huge price run-ups 
in those markets, without any of this buy-side pressure that is 
being talked about. And so, why is that occurring?
    Of late, for the last 3 months, we have actually seen a 
decrease in index money in the agricultural markets. It is flat 
or slightly decreasing over the last 3 months during price 
rises for commodities.
    So, again, we are looking for a smoking gun. We have not 
found it. That doesn't mean we shouldn't continue to look, to 
try to get better data, to try to see if there is some 
correlation here. But, to date, we haven't found the evidence.
    Mr. Fortenberry. I had looked into this question a number 
of weeks back, when we began to experience the significant 
spikes. And the economists, the analysts back then were saying 
$10-$40 is the effect of speculation in these markets.
    And, again, let's go back to the testimony of this hedge 
fund manager who said increased regulation would drop it back 
to $65-$70 in 30 days. Now, there is concern there that this 
might push activity overseas, and we have talked a lot about 
that.
    But let's tick through the types of regulation that this 
person would be referring to and look at the possible effects.
    Mr. Lukken. Well, I think he is talking about banning 
institutional investment, so prohibiting pension funds and 
others from investing any of their money into the markets. I 
think that is a bad idea. I don't think we should limit the 
free flow of capital in a market system. I think there are ways 
that we could try to manage that money and develop best 
practices. That is something that we are thinking about. That 
is why we are trying to get better data in this area.
    But to take drastic steps with the hope that this would 
drop prices in half, it is intoxicating, I agree. I mean, boy, 
if I were a consumer, I would love to hear that, that there are 
steps that we could take to drop prices in half. But I think we 
need to be measured, I think we need to be careful. Because, 
once these markets go, they may never come back.
    Mr. Fortenberry. All right.
    Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman.
    The gentleman from Ohio, Mr. Space.
    Mr. Space. Thank you, Mr. Chairman.
    Did I hear you or your associate correctly, that the supply 
of oil has been outpacing demand in recent history, the last 30 
days?
    Mr. Lukken. Supply has been dropping, the U.S. supply. I 
think we have had a drop below the 5 year average. It is much 
below the 5 year average of U.S. stocks.
    Mr. Space. In response to a question that my colleague from 
Indiana asked, is supply being outpaced by demand right now, or 
is it vice versa? In the last 30 days, has supply been 
outpacing demand?
    Mr. Lukken. Well, supply has been dropping. We had some 
drop-off in demand in the U.S. as well, and it is very 
difficult to measure. But, certainly, we have had indications 
that supplies are below the 5 year average.
    Mr. Space. Okay. Maybe I misunderstood it, but I thought 
the response was that supply has been outpacing demand, at 
least over the last 30 days. Did I misunderstand that?
    Mr. Lukken. You mean that supply has been increasing?
    Mr. Space. Yes. Right.
    Mr. Lukken. No, it has been decreasing.
    Mr. Space. All right.
    Speculation, from my understanding, at least, of your 
testimony, proper speculation is a necessary ingredient within 
the marketplace, right?
    So when we talk about speculation, there are two kinds, as 
I, again, understand it: appropriate proper speculation or 
improper excessive speculation, which would be more attuned to 
manipulation. Is that correct?
    Mr. Lukken. Well, manipulation and speculation are 
different concepts. Manipulation is one person or maybe a 
couple of people trying to intentionally move the market for 
profit without risk.
    Mr. Space. Right. The example you used--I can't remember 
the specifics--seemed to be describing manipulation, as opposed 
to speculation.
    Mr. Lukken. Right. And it is typically a short-term 
occurrence. You just need it to happen for a day in order to 
profit, and then you gain your profits.
    I think what people are concerned about with speculation 
is, is there is an asset bubble occurring in a different 
commodity as a result of the types of participants in the 
markets.
    Our tools have typically been used to prevent manipulation, 
not necessarily managing types of participants in our market, 
but this is something we are trying to get our arms around.
    Mr. Space. Well, how would you define--speculation is 
different from manipulation. Perhaps even improper speculation 
is different from manipulation of the market. How would you 
define--I mean, I know that you indicated the that there has 
been no standard or definition--but how would you define 
``excessive speculation?''
    Mr. Lukken. Well, I think ``excessive speculation'' is when 
the markets aren't functioning properly, that we see 
distortions in prices. And so, currently, I think our 
economists feel that the fundamentals seem to be explaining the 
markets.
    But, certainly, at some point, I think you are right, I 
mean, excessive speculation can lead to markets not functioning 
correctly. But, to date, we have no evidence that that is 
occurring.
    Mr. Space. That excessive speculation is occurring, or 
that, if it is, it is affecting market price?
    Mr. Lukken. That is correct.
    Mr. Space. The oversight and the enforcement and other 
goals that you outline in your testimony, will that provide 
meaningful control or prohibition against excessive 
speculation--not manipulation, but speculation?
    Mr. Lukken. Which ones?
    Mr. Space. Well, the oversight that you point to or the 
greater enforcement, will that provide a meaningful counter 
against, again, not manipulation, but excessive speculation?
    Mr. Lukken. Well, certainly, trying to coordinate with 
others in government will help us to try to get a better 
understanding of this. So, in regards to what is going on in 
the foreign markets, that has an effect on speculators. And 
what we are studying now with the list of government entities 
that I laid out is trying to figure out whether these new 
participant types, like index funds and swap dealers, are 
having some structural effect on our markets.
    Mr. Space. If they are having a structural effect, can we 
effectively regulate or eliminate them, in your opinion, and 
not put ourselves at a disadvantage in the international 
economy?
    Mr. Lukken. Well, that is something that we would be 
striving to do. Certainly, we are going to look at all the 
tools that we have, once we get the data, and make a 
determination of what is happening. Certainly, that is going to 
be our first priority. If we need additional tools we will ask 
Congress for them.
    Mr. Space. Thank you.
    I have nothing further.
    The Chairman. I thank the gentleman.
    The gentleman from Wisconsin, Mr. Kagen.
    Mr. Kagen. Thank you, Mr. Chairman, for holding this very 
important meeting.
    And thank you, Commissioner, for being here today. We have 
limited time, and I know you have limited time, but I want to 
express my gratitude for your public service.
    Mr. Lukken. Thank you.
    Mr. Kagen. So I only have a few questions for you.
    Mr. Lukken. Good.
    Mr. Kagen. The first one is a simple one. Do you believe in 
the free markets, free and transparent markets?
    Mr. Lukken. I do, absolutely.
    Mr. Kagen. That is good. Do you believe that the Arabian 
kingdom and OPEC believe in free markets?
    Mr. Lukken. I can't comment on that.
    Mr. Kagen. Well, isn't it a fact that Saudi Arabia and 
other members of OPEC manipulate not just the price but the 
supply of oil?
    Mr. Lukken. Cartels are not free market organizations.
    Mr. Kagen. So we are really confronting a manipulative, 
government-sponsored, speculative oil marketplace, aren't we? 
Something you can't control anything about.
    Mr. Lukken. I do not disagree.
    Mr. Kagen. So rather than being a Commissioner of a very 
powerful CFTC, you are like the sign in my neighborhood that 
says ``Neighborhood Watch,'' which means that the neighbor is 
going to watch somebody rob me without doing anything.
    So, in your recent past on the CFTC, how many people have 
you discovered were cheating the system? How many people have 
you caught cheating? And what sort of dollar amounts and fines 
have you levied?
    Mr. Lukken. Well, over the last 5 years, in just the energy 
area in particular, we have had about 40 entities we have 
caught trying to manipulate or game the energy markets for 
about half a billion dollars' worth of fines.
    Mr. Kagen. Half a billion dollars.
    Mr. Lukken. $440 million.
    Mr. Kagen. Does that $440 million go back to your 
Commission so you can hire more people, or do we have to tax 
people? Where does that money go?
    Mr. Lukken. I wish it did. No, it goes to the General Fund 
at the Treasury.
    Mr. Kagen. All right. So we are working hard to get some of 
that money you found from cheaters from your Neighborhood Watch 
activities back into your Commission so you can beef up your 
policing activity.
    Is it possible for anyone to cheat the system? And if so, 
if you were one of these market speculators, what would you 
recommend you and I do together to game the system to make 
money?
    Mr. Lukken. We cannot prohibit people from cheating the 
system. There are going to be fraudsters, no matter where we 
try to close loopholes. We do the best we can to police them, 
and I think we do a very effective job at that.
    But we also have to ensure that the regulated marketplace, 
the price discovery marketplace, is protected. And there are 
lots of different things that might be available to influence 
that, whether it is foreign exchanges, exempt markets, even the 
over-the-counter market where we can get information on a need-
to-know basis through our rules.
    So we are always trying to ensure that we have good 
information to make informed decisions and then to go 
aggressively after these people when they break the law.
    Mr. Kagen. Well, I appreciate that, and I appreciate the 
fact of you finding the cheaters whenever you can. But it is 
kind of like policing our border. We, in the Arizona region, 
may have caught 300,000 or 400,000 people trying to enter the 
United States illegally, but that doesn't tell us how many 
people slipped through.
    Do you have any ``guesstimate'' about what dollar amount 
you are missing in fines because of cheaters you are not 
catching?
    Mr. Lukken. I don't. But we could use more enforcement 
policemen on this job. If we do get additional funding a lot of 
those individuals will be going to our Enforcement Department, 
to ensure that we are litigating these people out of the 
business.
    Mr. Kagen. You have also mentioned earlier in your 
testimony that you do believe that we are seeing a supply and 
demand marketplace within the commodities exchange. Is that 
true?
    Mr. Lukken. Correct.
    Mr. Kagen. So forget about the fact that it is a controlled 
marketplace with regard to OPEC and other countries, such as 
Iran, Mexico, and Venezuela, that may regulate and manipulate 
the supply of oil. Forget about the manipulation. Within what 
you are doing, you think there is an open marketplace, and you 
think that supplies of oil are adequate; is that true?
    Mr. Lukken. I wouldn't say they are adequate, but certainly 
supply and demand factors are being reflected properly in our 
marketplace.
    Mr. Kagen. Because there is another government agency that 
would disagree with that. The Energy Information Agency has 
stated that, in January of this year, 335,000 barrels a day of 
diesel were exported by American companies because we had too 
much.
    So, in the early part of 2008, when demand was going down, 
we were exporting diesel fuel, and yet prices went up. Can you 
explain that?
    Mr. Lukken. Well, diesel fuel is a fuel that Europeans 
primarily use in their cars, but also China, as they build 
different entities and houses and whatever they are building, 
they use this in the heavy equipment that they use to operate 
their machines.
    So the rest of the world is very demanding of diesel, and 
that is the reason that we were exporting it to those nations.
    Mr. Kagen. The other reason for the increasing surge in oil 
prices--and I use that word with every meaning that surrounds 
it--has to be the decline in the value of our purchasing power 
of the United States dollar.
    Is it true that the dollar has lost 38 percent of its value 
versus the Euro in the last year? As an economist, would you 
agree with that?
    Mr. Lukken. I am not sure on the exact figure, but it 
certainly has lost value over the last several years.
    Mr. Kagen. So, really, when we talk about the surge in oil 
prices, we really have to talk about all commodities, 
everything that we need to survive, whether it is food, 
shelter, clothing, whether it is paying for rent, electricity, 
everything that American citizens, the people I represent in 
Wisconsin, the price of everything has gone up. It is not just 
about oil, is it? It is about the fact that your purchasing 
power of the dollar has fallen down.
    And wouldn't you agree, as an economist, that that is in 
large part because of this Administration's economic policy of 
borrow and spend and borrow and spend without paying their 
bills?
    Mr. Lukken. Well, certainly, the dollar is a factor.
    Mr. Kagen. I see. So you wouldn't want to comment about the 
Administration's economic policy.
    Mr. Lukken. That is above my pay grade.
    Mr. Kagen. All right. Well, maybe, with more funding for 
your CFTC, we could increase your pay grade to answer that type 
of question.
    [Laughter.]
    Mr. Kagen. I see my time has expired, but I thank you for 
your openness and your honesty. And I look forward to beefing 
up your patrol, so you are no longer the Neighborhood Watch.
    The Chairman. I thank the gentleman.
    The gentleman from Florida Mr. Mahoney.
    Mr. Mahoney. Thank you, Mr. Chairman, for being here. And 
one of the problems with being the most junior Member on the 
Committee is you get to go last, and everybody takes your good 
questions.
    Mrs. Gillibrand. You are not last.
    Mr. Mahoney. Almost.
    A couple things. I wanted to really focus in on, first of 
all, this--we are talking about excessive speculation and the 
fact that in a year's time we have gone from $70 to almost $140 
a barrel. That is pretty excessive. And we have talked about 
and I have heard other Members trying to justify drilling by 
demand versus supply. And I am a Blue Dog Democrat, so I am all 
concerned about fiscal responsibility, and obviously there has 
been a devaluation of the dollar, and all that is factoring 
into it. But you don't run the exchanges. Your job is to make 
sure that the people running them and the people participating 
in them are doing the right things.
    Mr. Lukken. Correct.
    Mr. Mahoney. And in your testimony you kept on talking 
about these agreements with ICE. The first question I have is 
that if I were a sovereign fund, and I thought I came up with a 
strategy for trading oil futures, how many different places on 
this planet could I go to and purchase a futures contract?
    Mr. Lukken. There are lots of futures exchanges around the 
world. Certainly in the western world there are multiple 
futures exchanges.
    Mr. Mahoney. So there are a lot of places that I could go 
to, and I don't even to have to trade directly, I could go 
through a dealer, right?
    Mr. Lukken. Yes.
    Mr. Mahoney. My question to you, you are touting this 
agreement with ICE as a way to start to get your arms around 
who these traders are. When you take a look at the entire 
globe, what percentage of trades do you have visibility on in 
terms of who is making these trades and who is behind these 
trades?
    Mr. Lukken. Roughly I think the U.S. has about 43 percent 
market share in the global-traded futures contracts.
    Mr. Mahoney. So you are seeing 43 percent of the entire 
pie. So if I am somebody and I am sitting back, and one of the 
things that is very interesting is we have gone from, what did 
you call it, a shout system where people would have to go down 
and bid. Now we have this global exchange, so somebody sitting 
in Dubai or somebody sitting in Los Angeles with a large amount 
of money, with access to these global information systems could 
have a system whereby they are basically arbitraging the 
various exchange rates around the globe; is that not correct?
    Mr. Lukken. I think that is correct. I would like to point 
out, though, that any time it links back to a U.S. product, 
though, we have this surveillance system in place to try to get 
all that information. So if they are trading the Bund contract, 
the German long-term bond contract, in Germany, that is really 
not of interest of the CFTC. It is of interest of the BaFin in 
Germany that they oversee their markets. And the same with the 
London currency markets and other markets they may oversee. But 
if it has a linkage back to our markets, that is when our new 
process kicks into place, and we get the information, and they 
must obey U.S. position limits in order to get access to U.S. 
customers.
    Mr. Mahoney. It seems to me that up--getting back to 
fundamentals, we have had this huge influx of capital. 
Obviously people are buying contracts at higher and higher 
rates. This chart everybody looks at is interesting, but 
basically it is balancing out the longs versus shorts, which 
really doesn't get back to excessive speculation in terms of 
people trying to game the system. And we are trying to manage 
this, and you are trying to manage this, and you don't have the 
tools or the authority to really have transparency in the 
market; is that correct?
    Mr. Lukken. I think we do of the things where there is a 
public interest. I mean, I don't want to have to be overseeing 
the Japanese yen commodity regulator.
    Mr. Mahoney. I am talking about things like corn, things 
like oil. You are trying to figure out how to be able to see 
who is doing the trades and are behind the trades, but you only 
see 40 percent of that today, correct?
    Mr. Lukken. Of those types of contracts we see 100 percent 
of the on-exchange activity. The crude oil markets, the New 
York and London, we are going to see all that. The agricultural 
markets are primarily here, so we see all of that. The ECM 
markets, the exempt commercial markets, where natural gas is 
traded as well as New York, due to the leadership of this 
Committee, we are now going to see that data as well.
    Mr. Mahoney. And when you see the data, the transparency, 
what are you looking at? Are you looking at who the dealers are 
who are doing these transactions? Or are you actually seeing 
who the people who are who are actually placing the orders?
    Mr. Lukken. Of the people who are coming onto our markets 
directly, we are seeing the end-users, no matter if they go 
through a middleman or not. The swap dealers, we are going to 
ask for that information even though their clients are not 
trading futures positions. We are going to break that out so we 
understand what positions to bring greater transparency to 
those types of dealers.
    Mr. Mahoney. And is it possible that--last question. Is it 
possible that a big sovereign fund could take advantage of the 
world market and the arbitrage opportunities and, given the 
volume that is out there on any given day, could be a force in 
the market?
    Mr. Lukken. In our markets we track this. There is one 
small sovereign wealth fund that is currently in our market, so 
not a very sizeable position. It is something we are going to 
ask for additional data from the swap dealers to see if swap 
dealers may be bringing sovereign wealth money into the 
marketplace through these Wall Street firms. We will have 
better data on that in the coming weeks.
    Mr. Mahoney. And just to finish, all I just have to say is 
that when I take a look at the data, and I take a look at the 
supply and demand, and I take a look at all the economic 
indicators, it is very obvious, common sense tells you that 
there is something going on in the marketplace. And it seems to 
me that the challenge that you have is we have gone to a 
digital global situation, and trying to have oversight and 
enforcement is difficult. And I also hear you say that you feel 
like you are understaffed and undermanned to be able to take on 
this challenge; that you are not only worried about these oil 
markets, but all these other commodities, foreign and other 
things. And I hear the plea for more resources because of the 
greater challenge and the more sophistication of the markets; 
is that not correct?
    Mr. Lukken. Absolutely. We didn't even get into the corn 
market today. We need to make sure they are properly 
functioning as well. So, we need bodies.
    Mr. Mahoney. I thank you very much. The sophistication of 
global markets, whether it be the stock exchanges or commodity, 
has just changed the game so dramatically in terms of 
strategies, how people trade. And the other thing is that 
people are working very hard to try to conceal trades and 
trading strategies, and you are trying to figure out how to 
``unconceal'' them. So it is a very, very difficult job.
    Thank you very much, Mr. Chairman.
    The Chairman. I thank the gentleman.
    And the gentlelady from New York is recognized, and she is 
commended for her patience.
    Mrs. Gillibrand. Thank you.
    Thank you, Mr. Chairman, and thank you so much for coming 
here and tolerating our many questions.
    The reason why you may sense some confusion from the 
Members on this Committee is that we as Congress Members have 
been having testimony over the last several weeks on this. And 
there was a hearing in front of the Energy and Commerce 
Subcommittee on Oversight and Investigations on June 23rd on 
energy market speculation. And the testimony in that hearing 
was very specific.
    Fadel Gheit from Oppenheimer says the reason why he thinks 
there is increased price is due to speculation, and he says 
there has been no unexpected changes in the oil industry 
fundamentals in the last 12 months before which crude prices 
were below $65 a barrel. In fact, the market expected more 
demand growth in that time than has actually occurred. So his 
conclusion is that world oil production is economic at the 
price of $65, so the cause must be speculation.
    He wants a raise in the margin requirements, 50 percent. He 
wants to set trading volume limits by commercials in relation 
to physical needs. He wants to require full disclosure by 
investment banks of oil-trading results and bar investment 
banks and other financial traders from owning energy assets.
    Another one of the witnesses was Edward Krapels from the 
Energy Security Analysis. He had similar conclusions. He wanted 
greater disclosure for IPE and ICE, impose position limits and 
reduce leverage available.
    Roger Diwan from PFC Energy also had similar conclusions.
    And one of the witnesses Mr. Masters, I thought, had an 
interesting way to describe it. He says there is supply-demand 
and demand, and there is physical demand, which is the 
consumption that we talk about in America. And in America what 
I read in the paper is that consumption has actually gone down 
because people are very--especially folks in my district--very 
concerned about the high price of gasoline, and they really 
can't afford to do all the things they would normally do. So 
consumption has actually gone down.
    And then the second demand is the paper demand, which is 
what we are talking about today, the speculation in the 
markets, and that is when you have the influx of enormous 
amounts of capital over the last several years.
    So I would like you to comment on how their conclusions can 
be so opposite to yours, because you are saying it is just 
supply and demand. But again, consumption is going down, 
particularly in America. And we have read in the paper that 
Saudi Arabia has now reached agreements that they will increase 
supply for us. So please give us your thoughts.
    Mr. Lukken. Certainly, I testified yesterday as well at 
this hearing, so I was able to hear from all the analysts that 
were a part of that hearing.
    For us, we look at this very carefully, the data, and what 
is going on in these markets. In regards to supply, certainly 
we have seen in Saudi Arabia's announcement, my understanding--
and Chairman Newsome today testified on this on the Senate 
side--that this is a heavy type of crude oil that is not easily 
refined and may not have the benefit and market impact that 
some would have expected it to have.
    So on the supply factors--and we are seeing demand decrease 
here in the United States, but the oil analysts that we talk to 
tend to look at the undeveloped countries and the demand that 
is still continuing to grow in other places such as China and 
India. So, if we start to see demand destruction as well there, 
that may have an impact on some of this.
    Again, we are looking, everybody is looking, for a simple 
solution to all this, and I wish we had it. But we are going to 
put the proper controls in place of all this type of money to 
ensure that excess speculation is not driving prices. We have 
taken steps to do that----
    Mrs. Gillibrand. But can you address the different kinds of 
demand, because, again, this is paper demand. They are not 
taking ownership of this oil--I mean, they are not taking 
delivery of the oil. So when you are talking about demand, yes, 
there are a lot of people in the market today because they are 
going to make money. They know the price of oil is going to go 
up, so they are going to continue to try to make money. But 
that is not the same as consumption. So can you differentiate 
when you talk about demand? Because it is confusing.
    Mr. Lukken. Right. And demand is probably a wrong term in 
the futures markets, because there is demand on the short side 
and demand on the long side, and so people are trying to find 
what the right price is. And every short position is trying to 
get the right price, because every time the price goes up, they 
lose money because of that, and vice versa with the longs. And 
so there is an incentive, there is no bias on the long side for 
speculating.
    I think that is important. The reason a lot of people don't 
like speculators is because they make money coming and going, 
when the markets are going up and when the markets are going 
down. But they provide the liquidity, the shock absorber, to 
allow those markets to function. So we are trying to find the 
right balance in all of that. But we have not seen this sort of 
this buy-side-only demand that was discussed yesterday, and I 
think this chart tries to describe this.
    Ms. Gillibrand. But do you see any--in the vast volumes of 
money that is in the market now, do you see risk in the ability 
of a sovereign wealth fund, for example, to give the potential 
to foreign authorities to actually manipulate our market, and 
if you do, what would that manipulation look like?
    Mr. Lukken. Well, typically manipulation is when you have 
too large of a position given the underlying supply of the 
commodity, and that you can move markets around as a result of 
that. And so we have a telescoping system in place that brings 
positions down for traders in our markets to ensure that they 
can at the end of the expiration of the contract--that they 
cannot manipulate the markets.
    So we would treat sovereign wealth funds like we treat any 
participant, whether you are commercial or speculative. We make 
sure they get out of the market so they don't control prices. 
If they are in our market as a commercial participant in our 
markets, we would expect them to behave as commercials. We 
would try to get the information we need from them to ensure 
they are behaving properly.
    Mrs. Gillibrand. Thank you for your testimony.
    Thank you, Mr. Chairman.
    The Chairman. I thank the gentlelady.
    I am going to give Mr. Goodlatte an opportunity if he wants 
to close, but is--getting back to this chart, is there any 
money going into the oil markets that is not on this chart?
    Mr. Lukken. The commercial participants, that is the 
largest category. And they would likely be on the short side 
because they are trying to lock in prices and typically are on 
the short side of the market. This is probably also reflective 
of the speculative positions, because speculators are taking 
the opposite sides of those trades. So they are not in this, 
but we could put that on there for you.
    The Chairman. I was confused when you were explaining--and 
I get all mixed up on these different terms, but are there 
speculators and swaps that you don't know about that are not on 
this chart?
    Mr. Lukken. Well, swap, the swaps positions----
    The Chairman. Business is going on in this commodity that 
you have had no idea about, and so you can't put it on here.
    Mr. Lukken. Well, these are futures positions. So the net 
speculative positions are speculators in the futures markets. 
The swap dealers' positions are futures positions that they are 
managing their risk in our markets. But we are not looking at 
the second layer under swap dealers, which are all their 
clients' positions.
    The Chairman. That is what I was getting at, because not 
all of this position is hedged in your market.
    Mr. Lukken. Right. And that is the data----
    The Chairman. We don't know what that is. That is what I 
was getting at, correct?
    Mr. Lukken. Correct.
    The Chairman. Do you have any idea how much that is?
    Mr. Lukken. No. But----
    The Chairman. Does anybody know how much it is? Nobody 
knows?
    Mr. Lukken. Well, nobody knows currently. People are 
guessing what the amount of index trading is coming into the 
energy markets. There are ways to try to extrapolate from what 
is happening in the agriculture markets to get to the energy 
estimates. But right now, no, we currently don't know.
    The Chairman. So this is what you are trying to find out by 
September 15?
    Mr. Lukken. We will be finding that out over the next 
month.
    The Chairman. How are you going to find that out?
    Mr. Lukken. We have used our special call authorities, 
which is section 1805 of our regulations. We can ask for 
additional information from any participant in our markets, and 
so we have asked the major swap dealers, Goldman Sachs, 
JPMorgan, Morgan Stanley and others, to give us access to, 
report to us on what is happening in their underlying books.
    The Chairman. And they are cooperating?
    Mr. Lukken. Absolutely.
    The Chairman. Well, I think it would be good if you can put 
those commercial positions on here. And then if there is some 
way that you could--I don't know if you can do this, but if you 
can give us a chart that shows how much of this increase in 
these funds came from just the increase in the underlying 
commodities, the increase in price, because, like wheat is 
three and a half times what it used to be. I don't know how it 
is for all the other different commodities, but I am sure they 
are all considerably more.
    Is there some way to put that on a chart so we can get some 
idea if you are saying $260 billion, some of it is just an 
increase in price of commodities?
    Mr. Lukken. We can certainly do it for agricultural 
commodities right now. Once we get this data from the swap 
dealers, we will be able to do that as well for energy.
    The Chairman. Good. I think that is important information 
that we need to have. And people--I make this mistake--they get 
mixed up between regulation and transparency and just 
information. And I am one of those that believes that if you 
can get all this stuff out in the public, and the public has 
access to it, and they can get to it every day, and it is all 
transparent, that is the best thing you can do.
    We have done that now hopefully in the livestock market in 
the farm bill by requiring USDA to set up a database that the 
average farmer out there in Minnesota or Iowa can go out in the 
morning and see what happened all over the country the day 
before. We think that will do more to give us the right outcome 
than anything else we can do.
    So the more we can get all this information pinned down, if 
you can help us do that, because there is a lot of 
misinformation out there. There are a lot of people looking for 
an easy--I just had the airline executives in, and they bought 
into this idea that you have to regulate everything, and then 
everything is going to be fine. And in the conversation, 
apparently they are using the swaps market, which is going to 
be maybe in question if we do that.
    So it is--I don't know. We have a lot to learn. I have a 
lot to learn. I think the Committee does. And, again, what I 
want to have happen here at the end of the day is that we get 
the right outcome for the country and for these markets. So 
thank you for being here.
    Mr. Goodlatte.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    Mr. Chairman, some of the concerns we have heard expressed 
here today and heard in the testimony yesterday in the Energy 
and Commerce Committee relates to the thought that speculators 
can get into these energy futures trading markets too cheaply, 
that somehow this is contributing to the excessive price that 
we are seeing or what some people see in the price of a barrel 
of oil. Do you agree with that?
    Mr. Lukken. No. I mean, I think they are referring to 
margin, and somehow margin is leading to excessive speculation. 
Margin, again, is a different concept in the securities 
markets. It is not a down payment on buying a stock. It is not 
a down payment on buying oil. This is really what we are doing 
in these markets is managing price risk. We not buying the 
ultimate barrel of oil.
    And so margin, if you raise it is going to force these 
people elsewhere potentially and----
    Mr. Goodlatte. When you say ``elsewhere,'' do you mean into 
other speculative markets or into other energy markets that 
would be outside the jurisdiction of your regulatory authority?
    Mr. Lukken. It certainly could move to London. It certainly 
could move to other electronic exchanges around the world. It 
certainly could move into the over-the-counter market, and, 
again, if we limit the over-the-counter market's ability to 
manage risk on-exchange, that could create systemic problems 
with unmanaged, unhedged, over-the-counter risk. So I think it 
is better and more appropriate to try to keep this within in 
the regulated marketplace as best we can with controls, with 
transparency, as the Chairman mentioned, is enormously helpful. 
So I think there are things we can do, steps we can make to 
ensure speculation is not overriding these markets.
    Mr. Goodlatte. Do you have authority to change those 
margins without----
    Mr. Lukken. We have emergency authority. It is very broad. 
We have never exercised it to increase margins in the history 
of the agency. We have only used our emergency authorities two 
or three times in our past, normally during an active 
manipulation, during the Hunt silver crisis and other times, 
but certainly not to try to influence prices.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman, and I thank all of the 
Committee Members, and, Mr. Lukken, you especially for putting 
up with us for the last 2\1/2\ hours, and I am sure we are 
going to have more discussions in the future. And if you can--
the more information you can get us and the other Members on 
the other Committees, if you can get them to pay attention, the 
better off everybody is going to be. So thank you very much.
    Mr. Lukken. Thank you.
    The Chairman. I forgot. We have to adjourn. Under the rules 
of the Committee, the record of today's hearing will remain 
open for 10 days to receive additional material, supplementary 
written responses from the witness to any question posed by a 
Member to the panel.
     And this hearing of the Committee on Agriculture is hereby 
adjourned.
    [Whereupon, at 4:53 p.m., the Committee was adjourned.]

                                  
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