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


 
    HEARING TO REVIEW DRAMATIC MOVEMENTS IN AGRICULTURE AND ENERGY 
                               COMMODITY 
                                MARKETS 

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

                                HEARING

                               BEFORE THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                      THURSDAY, SEPTEMBER 11, 2008

                               __________

                           Serial No. 110-47


          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
Etheridge, Hon. Bob, a Representative in Congress from North 
  Carolina, opening statement....................................     1
    Prepared statement...........................................     2
Everett, Hon. Terry, a Representative in Congress from Alabama, 
  prepared statement.............................................     5
Goodlatte, Hon. Bob, a Representative in Congress from Virginia, 
  opening statement..............................................     3
Holden, Hon. Tim, a Representative in Congress from Pennsylvania, 
  opening statement..............................................     1
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, prepared statement..................................     4

                                Witness

Lukken, Hon. Walter, Acting Chairman, Commodity Futures Trading 
  Commission, Washington, D.C....................................     6
    Prepared statement...........................................     8
    Submitted report.............................................    13


                       HEARING TO REVIEW DRAMATIC
                      MOVEMENTS IN AGRICULTURE AND
                        ENERGY COMMODITY MARKETS

                              ----------                              


                      THURSDAY, SEPTEMBER 11, 2008

                          House of Representatives,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 1:04 p.m., in Room 
1300, Longworth House Office Building, Hon. Tim Holden [Vice 
Chairman of the Committee] presiding.
    Members present: Representatives Holden, Etheridge, Baca, 
Scott, Marshall, Cuellar, Boyda, Space, Gillibrand, Kagen, 
Pomeroy, Barrow, Goodlatte, Lucas, Moran, Rogers, Neugebauer, 
Kuhl, Foxx, Conaway, Smith, Walberg, and Latta.
    Staff present: Adam Durand, Alejandra Gonzalez-Arias, Scott 
Kuschmider, Rob Larew, Clark Ogilvie, John Riley, Bryan 
Dierlam, Tamara Hinton, Kevin Kramp, and Jamie Weyer.

   OPENING STATEMENT OF HON. TIM HOLDEN, A REPRESENTATIVE IN 
                   CONGRESS FROM PENNSYLVANIA

    Mr. Holden. The meeting will come to order. I think 
everyone is aware that the Chairman's mother has passed away so 
the Chairman is in Minnesota today. The funeral is today. So I 
think it is appropriate now if we would ask everyone to please 
stand for a moment of silence.
    The Chairman thought it was very important that we move 
forward with this hearing even under the circumstances. So at 
this time, I would like to turn over the gavel to the Chairman 
of the Subcommittee on General Farm Commodities and Risk 
Management, the gentleman from North Carolina, Mr. Etheridge.

 OPENING STATEMENT OF HON. BOB ETHERIDGE, A REPRESENTATIVE IN 
                  CONGRESS FROM NORTH CAROLINA

    Mr. Etheridge [presiding.] I thank the gentleman. And let 
me welcome all of our guests here today. And I thank you, Mr. 
Holden. And I would like to echo your sentiments with regards 
to our thoughts and prayers being with the Chairman today 
because, having lost my mother recently, I know it is a very 
difficult time.
    As everyone knows, for the past several months the Members 
of this Committee have been taking a hard look at the commodity 
markets and energy and agriculture in response to concerns that 
excessive speculation may be having an undue impact on 
commodity prices. We have held several hearings and produced 
legislation in this area: H.R. 6604, the Commodity Markets 
Transparency and Accountability Act of 2008, introduced by 
Chairman Peterson and myself, that was considered on the House 
floor.
    In May of this year the Commodity Futures Trading 
Commission announced an effort to obtain detailed information 
concerning over-the-counter trading and physical commodities in 
order to get a clear look at index trading in commodities and 
its impacts on markets, as well as to review the activities of 
swap dealers in these markets. While others have tried to get a 
handle on speculation on the level of trading and impact of 
these market participants, the CFTC in its report that it will 
present today has hard data regarding trading activities of 
these market participants. As such, it should provide the most 
accurate look at index trading and swap dealer participation in 
the OTC market.
    I know Chairman Peterson wanted to wait for the results of 
this report before moving forward with legislation. But now we 
will have the benefit of this information before we return to 
consideration of commodity futures legislation.
    Since our bill was considered by the full House, much has 
happened that raises additional questions. Oil prices have 
dropped considerably, the CFTC announced a reclassification of 
trades from commercial to noncommercial in its Commitments of 
Traders report. While this report covers information from 
January through June of this year, I also know that the CFTC 
continues to collect this OTC data and has information for July 
and August.
    I hope, Chairman Lukken, either during your oral 
presentation or during the Q&A, you can talk about what the 
data you have collected for July and August says when prices 
fell and what it has to show us or tell us.
    I also expect you will get questions about reclassification 
of certain trading from commercial to noncommercial. While all 
of us are glad to see the price of oil decline in recent 
months, it does not relieve the Commission, this Committee, or 
Congress of our responsibility to make sure that commodity 
markets are operating effectively, efficiently and fairly. To 
that extent I look forward to hearing today's testimony.
    [The prepared statement of Mr. Etheridge follows:]

Prepared Statement of Hon. Bob Etheridge, a Representative in Congress 
                          From North Carolina
    Thank you Mr. Holden, and I echo your sentiments with regard to our 
thoughts and prayers being with Chairman Peterson today. I want to 
thank everyone for joining us today.
    As everyone knows, for the past several months the Members of this 
Committee have been taking a hard look at commodity markets in energy 
and agriculture in response to concerns that excessive speculation may 
be having an undue impact on commodity prices.
    We held several hearings and produced legislation in this area, 
H.R. 6604, the Commodity Markets Transparency and Accountability Act of 
2008 introduced by the Chairman and myself, that was considered on the 
House floor.
    In May of this year, the Commodity Futures Trading Commission 
announced an effort to obtain detailed information concerning over-the-
counter trading in physical commodities in order to get a clear picture 
of index trading in commodities and its impact on markets as well as to 
review the activities of swap dealers in these markets.
    While others have tried to extrapolate or speculate on the level of 
trading and impact of these market participants, the CFTC in its report 
it will present today has hard data regarding trading activity of these 
market participants.
    As such, it should provide the most accurate picture of index 
trading and swap dealer participation in the OTC market.
    I know Chairman Peterson wanted to wait for the results of this 
report before moving forward with legislation. But now we will have the 
benefit of this information before we return to consideration of 
commodity futures legislation.
    Since our bill was considered by the full House, much has happened 
that raises additional questions. Oil prices have dropped considerably.
    The CFTC announced a reclassification of trades from commercial to 
noncommercial in its Commitment of Traders report. While this report 
covers information from January through June of this year, I also know 
that the CFTC continues to collect this OTC data and has information 
for July and August.
    I hope, Chairman Lukken, either during your oral presentation or 
during the question and answer period, you can talk about what the data 
you have collected for July and August, when prices fell, has to show 
us.
    I also expect you will get questions about the reclassification of 
certain trading from commercial to noncommercial.
    While all of us are glad to see the price of oil decline in recent 
months, it does not relieve the Commission, this Committee or Congress 
of our responsibility to make sure that commodity markets are operating 
effectively, efficiently, and fairly. To that extent, I look forward to 
hearing today's testimony.
    Before I turn to our witness, I now turn to the gentleman from 
Virginia, the Ranking Member, Mr. Goodlatte for his opening statement.

    Mr. Etheridge. But before I turn to our witnesses, I now 
turn to the gentleman from Virginia, the Ranking Member, Mr. 
Goodlatte, for his opening statement.

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

    Mr. Goodlatte. Thank you. And I want to start by thanking 
you and Chairman Peterson not only for calling this hearing 
today, but for working on this issue in a very bipartisan way. 
It has involved many Members on both sides of the aisle in 
making sure that we proceed to examine the issues carefully. 
But, also to do it in a manner that does not cause us to do 
something precipitous that could affect the markets in ways 
that would be detrimental to both the producers and consumers 
of energy and agricultural commodities.
    This is part of a series of hearings this Committee has 
called, to learn more about the nature of our present-day 
commodity markets and whether or not activity on those markets 
is unjustly influencing the price of oil. I commend this 
Committee for taking a proactive approach to try to understand 
and monitor this issue and conduct appropriate oversight so 
that we can make an informed decision about whether or not 
commodity markets need greater transparency and accountability.
    Today we will hear from the CFTC's Chairman Walt Lukken. 
Mr. Lukken and his staff have spent a lot of hours and a great 
deal of work over the past 3 months to produce a report on the 
futures markets. We appreciate their efforts, especially for 
keeping to an aggressive timetable to produce a report that 
will be useful to this Committee. We hope this report will be a 
reference point in determining the role index fund-related 
activity in the OTC markets and commodity futures has played, 
if any, in the recent rapid increase in energy and agricultural 
prices in the United States.
    However, as we move forward today, it is important to 
remember the implications of our actions on both the energy and 
agricultural markets. We must resist measures that may have an 
impact on one class of commodities at the expense of others. 
Such actions can and will directly impact the livelihood of our 
agricultural producers.
    Also, it is supremely important to note that the findings 
of this report and the legislation that stems from it will not 
reduce the price of oil. It will not relieve the burden many 
Americans face at the gas pump. In order to achieve that very 
important goal, Congress must focus on creating a strong energy 
policy that, above all else, increases the domestic supply of 
all energy sources and promotes energy independence.
    Mr. Chairman, I look forward to and welcome the testimony 
of our witness today, and again regret that the Chairman could 
not be with us because of the unfortunate passing of his 
mother. And our prayers go out to him and his father and the 
rest of his family. And we hope that they will find relief and 
that all of the blessings that his family has enjoyed from 
their mother will live with them and the grief will pass. Thank 
you Mr. Chairman.
    Mr. Etheridge. I thank the gentleman. And I was going to 
recognize my friend Mr. Moran, but he is not here. The chair 
would request that other Members submit their opening 
statements for the record so the witness may begin his 
testimony and that we may ensure that we will have adequate 
time for questions, given that we may have--and let me just say 
we may have some floor votes coming up this afternoon. Mr. 
Chairman, if we do, we will take appropriate action to that.
    [The prepared statements of Mr. Peterson and Mr. Everett 
follow:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress From Minnesota
    I want to thank my friend and colleague, General Farm Commodities 
and Risk Management Subcommittee Chairman Bob Etheridge, for holding 
today's important hearing in my absence.
    The purpose of today's hearing is to hear from the Commodity 
Futures Trading Commission (CFTC), the chief regulator of U.S. futures 
markets, about the continued volatility in the markets for energy and 
agricultural commodities. CFTC is here today to release a report that 
is expected to provide fresh data to help answer questions about the 
amount of index fund participation and the depth of financial 
speculation in these markets, which are questions this Committee has 
been asking for several months in the wake of record commodity prices.
    Since this Committee last met, further interest in this issue has 
been raised because of the rapid decrease in crude oil futures and 
other commodity prices, raising the possibility that a mass sell-off by 
large speculators in these markets triggered the price decline. In 
addition, recent news reports about CFTC's reclassification of certain 
traders have sparked debate about swap dealer activity and whether all 
swap dealers are engaged in speculative trading.
    There is already sufficient evidence that pensions, endowments, and 
other long-term investors are playing a bigger role in futures markets 
by investing in a broad mix of commodities as a way to diversify their 
holdings and reduce volatility and risk. Instead of directly purchasing 
futures contracts, much of this investment comes through large 
institutional swap dealers through an over-the-counter commodity index 
contract. The chain of transactions that swap dealers make in order to 
reduce their own exposure to commodity price risk has made it difficult 
for regulators to determine the total amount of index trading occurring 
in the energy markets.
    In order to better understand the extent and possible impact of 
index trading, the Commission issued special calls to swap dealers 
requiring them to provide information on commodity index trading. 
Having analyzed this data, the Commission and its staff are here today 
to report to Congress regarding the scope of commodity index trading in 
the futures markets and, should they be necessary, recommendations for 
administrative and legislative action.
    I would also like to hear about CFTC's July reclassification moving 
certain swap dealer positions in the crude oil market from commercial 
to noncommercial. The reclassification of a single large trader meant 
that noncommercial traders comprised about half of the open interest in 
West Texas Intermediate crude oil futures and options on the New York 
Mercantile Exchange. This new data showed that market speculators may 
have been more involved in the crude oil market than previously 
thought, while raising new questions about the CFTC's methods in 
classifying speculators and commercial hedgers.
    I also look forward to a continued discussion with CFTC about H.R. 
6604 in light of this new information. H.R. 6604 is a bipartisan bill 
that passed the House Agriculture Committee earlier this year by voice 
vote and would strengthen oversight of the commodity and futures 
markets for energy and agricultural commodities. Among its provisions 
to promote increased transparency in these markets are the codification 
of CFTC's recommendations in examining the true extent of index and 
other passive fund participation.
    CFTC's report on index trader classification will assist this 
Committee and this Congress greatly in examining speculator 
participation in futures markets as we continue moving forward on a 
bipartisan, consensus solution to improve transparency and restore 
confidence in our futures markets.
                                 ______
                                 
Prepared Statement of Hon. Terry Everett, a Representative in Congress 
                              From Alabama
    Thank you Chairman Peterson. I would also like to thank Acting 
Chairman Walter Lukken of the Commodity Futures Trading Commission for 
coming before the Committee again today to update us on what his agency 
has found in their report regarding swap dealers.
    As energy prices have remained high in the United States this 
summer, Americans are extremely concerned and angry. As we know, the 
increase cost of fuel is related to growth in global demand--
particularly in countries like India and China, need for more 
production, and the need for more refinery capacity in the United 
States. Additionally, there is a question on whether the increasing 
activities of energy being sold on the commodity market may be having a 
significant influence on the rise of prices for commodities like crude 
oil or natural gas.
    Why is this a concern? The increased cost of energy is not only 
being seen at the gas pump or our electric bills, but in the cost of 
groceries and other goods. Additionally, there is a concern over the 
future of American's safety net due to the vast amounts of money that 
are flowing into the futures market that are linked to pensions, 
endowments and other long-term investors. And when the American people 
see the cost of crude oil shooting up $11 in 1 day, some are beginning 
to question whether the trading market is contributing to the high cost 
of fuels. Whether this is just coming from American's skepticism of 
trading and fear or based on some real concerns is still unclear.
    Over the last few years, the futures market has grown over 500 
percent and is done with little transparency. Due to the change of the 
nature of the market and the drastic increases in the trading of fuels, 
it is important that we ensure that the appropriate safeguards are in 
place and there is transparency in the market to prevent any 
manipulation.
    I am pleased that Chairman Lukken was able to keep his promise to 
the Committee in reporting back to Congress on the results of CFTC's 
investigation this summer. I understand this must have been a difficult 
thing to accomplish with historically low number of staff. I thank you 
and your staff for the hard work.
    This study and any further action taken by Congress regarding 
commodity future trades is critical to the stabilization of the market. 
I understand that you will suggest to the Committee that we need to re-
evaluate classifications of some of the dealers, develop additional 
reporting and more accurate assessment of activities, and re-evaluate 
some of the existing exemptions. I look forward to your testimony in 
pointing out what impact these changes would have on the markets and 
would any of these provisions had prevented the high price of fuel if 
they were already in place.
    Chairman Lukken, I do hope that you will also discuss the report 
that was released this week by Michael Masters that has been receiving 
significant press coverage. I believe his report is claiming that the 
fall in oil prices this summer was the result of excessive speculation 
playing a role in the rise of oil earlier this year. In recent weeks, 
we have seen that investors have pulled over $39 billion out of the 
commodity markets. At the same time, we have seen prices of gas going 
from above $4.00 and dropping to prices around $3.60 in various parts 
of the country. Of course other factors such as changes in the demand 
by consumers, increase production, and increase value of the dollar may 
have had some influence in the decline and may also be the reason why 
the price is still as high as they are today. However, if the results 
of this report are accurate, it does seem to suggest that the market 
may be influencing commodity prices to some extent. I am interested in 
hearing what the recommendations offered today would do to address 
these claims.
    I look forward to Chairman Lukken's testimony as well as his 
answers to many of our questions about what is needed to ensure the 
American people that markets are not artificially inflating the cost of 
fuel.

    Mr. Etheridge. We would also remind you that your full 
testimony will be entered into the record, and if you would be 
willing to summarize it. I would like to welcome you today. 
Chairman Lukken who is the Acting Chairman of the Commodity 
Futures Trading Commission and also acknowledge the presence of 
Commissioner Sommers who is with us also. Thank you. And, Mr. 
Lukken, please begin when you are ready.

  STATEMENT OF HON. WALTER LUKKEN, ACTING CHAIRMAN, COMMODITY 
          FUTURES TRADING COMMISSION, WASHINGTON, D.C.

    Mr. Lukken. Thank you Chairman Etheridge, Ranking Member 
Goodlatte, and other distinguished Members here today, for 
inviting me to testify regarding the Commission's recent review 
of the trading activities of swap dealers.
    One of the core missions of the CFTC is protecting the 
sanctity of the central price discovery process on futures 
exchanges. If prices are not reflecting fundamentals of supply 
and demand, the futures markets are not functioning properly 
and all Americans suffer.
    With the growth of electronic trading, globalization and 
financial innovation, we have witnessed the development of 
satellite financial markets that complement and compete with 
the centralized and regulated futures markets in the United 
States. During the last year, the CFTC has systematically been 
reviewing these developments to determine whether these 
satellites are having an impact on the centralized price 
discovery process and to make regulatory adjustments as needed.
    As you know, a combination of Congressional and Commission 
action has resulted in increased regulation of trading on 
exempt commercial markets and increased transparency in 
reporting of trading on foreign boards of trade that seek 
access to trade contracts linked to any U.S. contract markets. 
More recently, we have been reviewing the role of swap dealers 
and index traders and whether their connection to the futures 
markets is having an impact on the price of commodities.
    In May, the CFTC announced that it would use its special 
call authority to gather new detailed data from swap dealers on 
the amount of index trading occurring in the over-the-counter 
markets. The CFTC staff has collected and analyzed an 
unprecedented data set. And today I am pleased to present the 
CFTC staff report with Commission recommendations. I would note 
that Commissioner Chilton dissented from the Commission 
recommendations, which is included in our final report.
    Although this has proven to be a huge undertaking for our 
staff and the agency, it is a critical endeavor to ensure that 
our markets are functioning properly. The special call was 
intended to capture all commodity index trading activity for 
month-end dates beginning December 31, 2007 through June 30, 
2008, and continuing thereafter.
    While the preliminary survey results represent the best 
data currently available on swap dealers and commodity index 
traders, there are limitations to the data due to time and 
resource constraints and the complexity and amount of data 
received.
    With that in mind, the CFTC staff report found that on June 
30, 2008, the last snapshot we looked at, the total net amount 
of commodity index trading, both over-the-counter and on-
exchange, stood at $200 billion. Of this amount $161 billion 
was tied to commodities traded on U.S. markets regulated by the 
CFTC. Although a sizable amount of this $161 billion figure may 
not reach the futures markets due to internal netting by swap 
dealers, to put that number in context, it represents about 17 
percent of the roughly $1 trillion of notional value for those 
same commodities traded on-exchange.
    To determine whether this increase in notional amounts was 
due to commodity price appreciation or increases in new swap 
positions, staff analyzed certain key index commodities 
including crude oil, corn, wheat, and cotton. For NYMEX crude 
oil, the net notional amount of commodity index investment rose 
from about $39 billion in December to around $51 billion in 
June, an increase of more than 30 percent. However, this rise 
appears to have resulted from the increase in the price of oil 
which rose from approximately $96 per barrel to $140 per barrel 
over that period of time.
    Measured in standardized futures contract equivalents these 
figures equate to an 11 percent decline in aggregate positions 
of commodity index participants during this 6 month period from 
approximately 408,000 contracts to 363,000 contracts. The 
numbers of futures equivalent positions held by index investors 
in other agriculture commodities appeared to remain relatively 
stable during this volatile 6 month period.
    When looking at the types of entities investing in 
commodity indexes, not surprisingly, staff found a significant 
percentage of those index investments held by pension funds, 
endowments and other large institutions. The CFTC staff survey 
also revealed that nine percent of the commodity index 
investments were held by several sovereign wealth funds located 
in North America, Europe and Asia.
    Staff also looked to determine whether the clients of swap 
dealers were putting on positions that would have exceeded 
exchange position limits or accountability levels when combined 
with the client's on-exchange activity.
    Looking at our most recent snapshot of June 30th, of the 
550 clients identified in the more than 30 markets analyzed, 
the survey showed 35 instances across 13 markets where 18 
noncommercial traders appeared to have an aggregate on-exchange 
and over-the-counter position above a speculative limit or an 
exchange accountability level.
    While these combined positions do not violate current 
regulations and the excess amounts were generally small, 
information regarding those who significantly exceeded limits 
or levels would be useful in the CFTC surveillance of the 
central futures markets.
    In light of the preliminary data and findings, the 
Commission believes that certain constructive steps can and 
should be taken. It presents several recommendations including: 
a complete review of the trader classification categories, 
including the removal of swap dealers from the commercial 
category and the creation of a new swap dealer classification 
for reporting purposes; the development and publication of a 
new periodic supplemental report on OTC swap dealer activity 
modeled after this report; the creation of a new CFTC Office of 
Data Collection whose sole mission is to collect, verify, audit 
and publish all of the agency's Commitments of Traders 
information; the establishment of more detailed reporting 
standards for certain large traders on regulated futures 
exchanges to ensure a more precise picture of their trading 
activity; the development of an advanced notice of proposed 
rulemaking that would review eliminating the bona fide hedge 
exemption for swap dealers and replace it with a limited risk 
management exemption; and the request that the Commission be 
provided with adequate funding to meet its current mission, the 
expanded activities outlined today, and any other additional 
responsibilities.
    While the report's findings are useful and instructive; the 
data collection analysis needs to continue if the agency is to 
get a clear picture on this vast marketplace. However, these 
preliminary recommendations represent enhanced transparency, 
increased reporting and information, and improved controls and 
practices in overseeing these markets while keeping our futures 
markets competitive, open and on U.S. soil.
    In conclusion, the CFTC must remain diligent in fulfilling 
its critical public mission. I certainly want to thank the 40 
CFTC staff who put over 4,000 staff hours into the completion 
of this report. I can attest firsthand, and some of them are 
with us here today, that the CFTC is working hard to protect 
the public and I commend their extraordinary efforts.
    I thank you very much for the opportunity to appear today, 
and I welcome any questions the Committee 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 Etheridge, Ranking Member Goodlatte, and other 
distinguished Members, thank you for inviting me to testify before this 
Committee about the Commodity Futures Trading Commission's (CFTC or 
Commission) review of recent trading activity in the futures markets.
    One of the core missions of the CFTC is protecting the sanctity, 
effectiveness and efficiency of the central price discovery process on 
futures exchanges. If prices are not reflecting fundamental factors of 
supply and demand, the futures markets are not functioning properly and 
all Americans suffer. Recent record prices in energy and agricultural 
commodities have underscored this point. If there is a lack of 
confidence in the validity of the price of a commodity, commercial 
participants will be less likely to manage risk in the futures markets. 
Furthermore, those involved with commercial merchandising of a physical 
commodity, such as a utility or grain elevator, will be hesitant to 
forward contract with customers if there is doubt about the basis of a 
price discovered on the futures markets. This is why the CFTC's core 
mission of protecting the central price discovery process is so 
important.
    With the growth of electronic trading, globalization and financial 
innovation, we have witnessed the development of satellite financial 
markets that complement and compete with the centralized and regulated 
futures markets in the United States. During the last year, the CFTC 
has systematically been reviewing these developments to determine 
whether these satellite markets are having an impact on the centralized 
price discovery process and to make regulatory adjustments as needed.
    Last summer the CFTC began with an examination of Exempt Commercial 
Markets (ECMs)--those less-regulated electronic trading platforms that 
allow institutions to trade certain over-the-counter swap contracts. 
After holding a hearing on the matter, the CFTC provided a report and 
recommendations to this Committee that grants additional authorities to 
the agency when products on these exchanges begin to serve as 
significant price discovery contracts that may be linked to the 
regulated marketplace. I want to thank this Committee for including 
those recommendations as part of the recently-enacted farm bill, which 
we are in the midst of implementing.
    Linkages between markets are not purely a domestic occurrence but 
also exist across international borders. In May and June, the CFTC 
announced certain modifications to its Foreign Board of Trade (FBOT) 
policy that imposes conditions on the process that allows FBOTs to 
directly access U.S. participants. The conditions include position and 
accountability limits on any contract whose price is linked to the 
price of a U.S. contract traded on an exchange. The CFTC also announced 
it is enhancing its ongoing information sharing by requiring daily 
large trader reports on these linked contracts. These improvements were 
necessary due to the possibility that these linked markets could 
influence prices on the centralized futures market in the United 
States.
    For both ECMs and FBOTs, this combination of enhanced information 
data and additional market controls will help the CFTC in its 
surveillance of its regulated domestic exchanges when these satellite 
markets have the ability to impact the price discovery process.
    Today's hearing is meant to review the role of swap dealers and 
index traders and whether their connection to the futures markets is 
having an impact on the price of commodities. There is public and 
Congressional concern about the amount of index money flowing into the 
commodity markets and whether this passive investment is impacting the 
price discovery process that consumers and producers rely on. In May, 
the CFTC announced that it would use its special call authority to 
gather more detailed data from swap dealers on the amount of index 
trading occurring in the OTC markets and to examine whether index 
traders are being properly classified for regulatory and reporting 
purposes.
    The CFTC staff in this report has collected and compiled 
substantial information on index funds and other transactions that are 
being conducted through swap dealers. I committed to Congress that we 
would provide this report no later than September 15. Given this 
Committee's hearing and interest in the report, I am pleased to present 
the CFTC's staff report with Commission recommendations. Although this 
has proven to be a huge undertaking for our staff and the agency, it is 
a critical endeavor to ensure that our markets are functioning 
properly.
CFTC Report on Swap Dealer and Index Trader Activity
    This staff report represents a survey of swap dealers and commodity 
index funds to better characterize their activity and understand their 
potential to influence the futures markets. This type of a compelled 
survey relating to off-exchange activity is unprecedented, but the 
growth and evolution in futures market participation and growing public 
concern regarding off-exchange activity supported the need for this 
extraordinary regulatory inquiry.
    In June 2008, Commission staff initiated a special call to futures 
traders, which included 43 request letters issued to 32 entities and 
their sub-entities. These entities include swap dealers engaged in 
commodity index business, other large swap dealers, and commodity index 
funds. The special call required all entities to provide data relating 
to their total activity in the futures and OTC markets, and to 
categorize the activities of their customers for month-end dates 
beginning December 31, 2007 through June 30, 2008, and continuing 
thereafter.
    The scope of the survey attempts to answer the following questions:

How much total commodity index trading is occurring in both the OTC and 
        on-exchange markets?

How much commodity index trading is occurring by specific commodity in 
        both the OTC and on-exchange markets?

What are the major types of index investors?

What types of clients utilize swap dealers to trade OTC commodity 
        transactions?

To what extent would the swap clients have exceeded position limits or 
        accountability levels had their OTC swap positions been taken 
        on-exchange?

    The preliminary survey results represent the best data currently 
available to the staff and the results present the best available 
snapshot of swap dealers and commodity index traders for the relevant 
time period. However, as a result of the survey limitations, there may 
be a margin of error in the precision of the data, which will improve 
as the staff continues to work with the relevant firms and to further 
review and refine the data. As entities continue to provide monthly 
data to the Commission in response to their ongoing obligation to 
comply with the special call, Commission staff will continue to examine 
the data, refine the specific requests, and further develop the 
analysis.
Findings:
    In analyzing the total OTC and on-exchange positions for index 
trading, the report focuses on three quarterly snapshots--December 31, 
2007, March 31, 2008, and June 30, 2008 and has thus far revealed the 
following data:

Total Net Commodity Index Investments: The estimated aggregate net 
        amount of all commodity index trading (combined OTC and on-
        exchange activity) on June 30, 2008 was $200 billion, of which 
        $161 billion was tied to commodities traded on U.S. markets 
        regulated by the CFTC. Of the $161 billion combined total, a 
        significant amount of the OTC portion of that total likely is 
        never brought to the U.S. futures markets.

Net Notional Index Values Versus Total Notional Market Values: For 
        comparison purposes, the total notional value on June 30, 2008 
        of all futures and options open contracts for the 33 U.S. 
        exchange-traded markets that are included in major commodity 
        indexes was $945 billion--the $161 billion net notional index 
        value was approximately 17 percent of this total.

     The total notional value of futures and options open 
            contracts on June 30, 2008 for NYMEX crude oil was $405 
            billion--the $51 billion net notional index value was 
            approximately 13 percent of this total.

     The total notional value of futures and options open 
            contracts on June 30, 2008 for CBOT wheat was $19 billion--
            the $9 billion net notional index value was approximately 
            47 percent of this total.

     The total notional value of futures and options open 
            contracts on June 30, 2008 for CBOT corn was $74 billion--
            the $13 billion net notional index value was approximately 
            18 percent of this total.

     The total notional value of futures and options open 
            contracts on June 30, 2008 for ICE-Futures cotton was $13 
            billion--the $3 billion net notional index value was 
            approximately 23 percent of this total.

Crude Oil Index Activity: While oil prices rose during the period 
        December 31, 2007 to June 30, 2008, the activity of commodity 
        index traders during this period reflected a net decline of 
        swap contracts as measured in standardized futures equivalents.

     During this period, the net notional amount of 
            commodity index investment related to NYMEX crude oil rose 
            from about $39 billion to $51 billion--an increase of more 
            than 30 percent. This rise in notional value, however, 
            appears to have resulted entirely from the increase in the 
            price of oil, which rose from approximately $96 per barrel 
            to $140 per barrel--an increase of 46 percent.

     Measured in standardized futures contract equivalents, 
            the aggregate long positions of commodity index 
            participants in NYMEX crude oil declined by approximately 
            45,000 contracts during this 6 month period--from 
            approximately 408,000 contracts on December 31, 2007 to 
            approximately 363,000 contracts on June 30, 2008. This 
            amounts to approximately an 11 percent decline.

Types of Index Investors: Of the total net notional value of funds 
        invested in commodity indexes on June 30, 2008, approximately 
        24 percent was held by ``Index Funds,'' 42 percent by 
        ``Institutional Investors,'' nine percent by ``Sovereign Wealth 
        Funds,'' and 25 percent by ``Other'' traders.

Clients Exceeding Position Limits or Accountability Levels: On June 30, 
        2008, of the 550 clients identified in the more than 30 markets 
        analyzed, the survey data shows 18 noncommercial traders in 13 
        markets who appeared to have an aggregate (all on-exchange 
        futures positions plus all OTC equivalent futures combined) 
        position that would have been above a speculative limit or an 
        exchange accountability level if all the positions were on-
        exchange. These 18 noncommercial traders were responsible for 
        35 instances of either exceeding a speculative limit or an 
        exchange accountability level through their aggregate on-
        exchange and OTC trading that day. Of these instances:

     8 were above the NYMEX accountability levels in the 
            natural gas market;

     6 were above the NYMEX accountability levels in the 
            crude oil market;

     6 were above the speculative limit on the CBOT wheat 
            market;

     3 were above the speculative limit on the CBOT soybean 
            market; and

     12 were in the remaining nine markets.

    These combined positions do not violate current law or regulations 
and the amounts by which each trader exceeded a limit or level were 
generally small. However, there are a few instances where a 
noncommercial client's combined on-exchange futures positions and OTC 
equivalent futures positions significantly exceeded a position limit or 
exchange accountability level.
    In light of the preliminary data and findings set forth herein, the 
Commission believes that, at a minimum, certain constructive steps can 
and should be taken and presents the following preliminary 
recommendations, several of which may benefit from legislative 
codification. The Commission will consider whether further 
recommendations are necessary as this survey and analysis continues.
Preliminary Recommendations:

1. Remove Swap Dealer from Commercial Category and Create New Swap 
        Dealer Classification for Reporting Purposes: In order to 
        provide for increased transparency of the exchange traded 
        futures and options markets, the Commission has instructed the 
        staff to develop a proposal to enhance and improve the CFTC's 
        weekly Commitments of Traders (COT) Report by including more 
        delineated trader classification categories beyond commercial 
        and noncommercial, which may include at a minimum the addition 
        of a separate category identifying the trading of swap dealers.

2. Develop and Publish a New Periodic Supplemental Report on OTC Swap 
        Dealer Activity: In order to provide for increased transparency 
        of OTC swap and commodity index activity, the Commission has 
        instructed the staff to develop a proposal to collect and 
        publish a periodic supplemental report on swap dealer activity. 
        This report will provide a periodic ``look through'' from swap 
        dealers to their clients and identify the types and amounts of 
        trading occurring through these intermediaries, including index 
        trading.

3. Create a New CFTC Office of Data Collection with Enhanced Procedures 
        and Staffing: In order to enhance the agency's data collection 
        and dissemination responsibilities, the Commission has 
        instructed its staff to develop a proposal to create a new 
        office within the Division of Market Oversight, whose sole 
        mission is to collect, verify, audit, and publish all the 
        agency's COT information. The Commission has also instructed 
        the staff to review its policies and procedures regarding data 
        collection and to develop recommendations for improvements.

4. Develop ``Long Form'' Reporting for Certain Large Traders to More 
        Accurately Assess Type of Trading Activity: The Commission has 
        instructed staff to develop a supplemental information form for 
        certain large traders on regulated futures exchanges that would 
        collect additional information regarding the underlying 
        transactions of these traders so there is a more precise 
        understanding of the type and amount of trading occurring on 
        these regulated markets.

5. Review Whether to Eliminate Bona Fide Hedge Exemptions for Swap 
        Dealers and Create New Limited Risk Management Exemptions: The 
        Commission has instructed staff to develop an advanced notice 
        of proposed rulemaking that would review whether to eliminate 
        the bona fide hedge exemption for swap dealers and replace it 
        with a limited risk management exemption that is conditioned 
        upon, among other things: (1) an obligation to report to the 
        CFTC and applicable self regulatory organizations when certain 
        noncommercial swap clients reach a certain position level; and/
        or (2) a certification that none of a swap dealer's 
        noncommercial swap clients exceed specified position limits in 
        related exchange-traded commodities.

6. Additional Staffing and Resources: The Commission believes that 
        substantial additional resources will be required to 
        successfully implement the above recommendations. The CFTC 
        devoted more than 30 employees and 4000 staff hours to this 
        survey, which the Commission is now recommending to produce on 
        a periodic basis. Other new responsibilities will also require 
        similar additional staff time and resources. Accordingly, the 
        Commission respectfully recommends that Congress provide the 
        Commission with funding adequate to meet its current mission, 
        the expanded activities outlined herein, and any other 
        additional responsibilities that Congress asks it to discharge.

7. Encourage Clearing of OTC Transactions: The Commission believes that 
        market integrity, transparency and availability of information 
        related to OTC derivatives are improved when these transactions 
        are subject to centralized clearing. Accordingly, the 
        Commission will continue to promote policies that enhance and 
        facilitate clearing of OTC derivatives whenever possible.

8. Review of Swap Dealer Commodity Research Independence: Many 
        commodity swap dealers are large financial institutions engaged 
        in a range of related financial activity, including commodity 
        market research. Questions have been raised as to whether swap 
        dealer futures trading activity is sufficiently independent of 
        any related and published commodity market research. 
        Accordingly, the Commission has instructed the staff to utilize 
        existing authorities to conduct a review of the independence of 
        swap dealers' futures trading activities from affiliated 
        commodity research and report back to the Commission with any 
        findings.

    In sum, this special call data and analysis has given the CFTC a 
snapshot of the OTC market. While the report's findings are useful and 
instructive, the data collection and analysis need to continue if the 
agency is to get a clearer, moving picture of this vast marketplace. 
The Commission's recommendations include enhanced transparency, 
increased reporting and information, and an overall modernization of 
several rules, regulations and practices used to oversee the markets. 
These changes will improve controls while ensuring that our futures 
markets remain competitive, open, and on U.S. soil.
Conclusion
    The CFTC must remain diligent in fulfilling its critical public 
mission, and I expect this fall will continue to be busy on that front. 
Next week, I will be attending a meeting of the Technical Committee of 
the International Organization of Securities Commissions (IOSCO), which 
is the international standard setter for securities and futures 
markets. During the formal meeting, I plan to discuss the recent 
volatility of the futures markets and whether the current international 
standards for derivatives markets are adequate or need further review 
in light of current market conditions. Separately, on the domestic 
front, the Interagency Task Force on Commodity Markets continues its 
work on a final report on commodity market conditions and will make 
public its findings as soon as possible.
    It is also important to note that the legislative, regulatory, and 
policy developments outlined today occur in tandem with our robust 
enforcement program. That program continues to ferret out price 
manipulations or attempted manipulations of our nation's vital 
commodity markets.
    I cannot close my testimony without directly addressing the 
agency's funding situation. As I have testified in recent months and 
weeks, the lack of appropriate and predictable funding over the course 
of many years has had a negative impact on our staffing situation, 
rendering it unsustainable for the long run. Nothing has brought this 
point to bear more than our work on the swaps report, to which the CFTC 
has devoted more than 30 employees and 4,000 staff hours.
    The agency is operating under a $111 million budget and at its 
lowest staffing levels in its history. And yet, we have been asked to 
do more and more with less. As Congress considers any new authorities 
and initiatives in order to respond to changing market conditions, it 
is imperative that Congress provide the CFTC with adequate funding for 
its current duties and additional funding for any new ones. Due to 
funding shortfalls, the agency cannot take on any additional 
responsibilities without making very difficult sacrifices in other 
mission-critical areas.
    The CFTC 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.


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    Mr. Etheridge. I thank the gentleman.
    The chair would like to remind Members that they will be 
recognized for questions in order of seniority for Members who 
were here at the start of the hearing. After that, the Members 
will be recognized in order of their arrival. I appreciate the 
Members understanding of this. And with that, I recognize 
myself for 5 minutes.
    As you know, a report was distributed yesterday which 
painted a slightly different view of index fund participation 
and commodity prices. The report by hedge fund manager Michael 
Masters claimed index funds had a notational value of $317 
billion invested in commodities from July 2008, but your report 
claimed it to be $200 billion for June of 2008.
    I seriously doubt that 1 month can account for the $117 
billion difference between your figures and his figures. Your 
figure is based on information you received from market 
participants. Their figure is estimated by extrapolating from 
the CFTC's commodity index trading supplement to the 
Commitments of Traders report and mathematically applied to 
information publicly known about the composition of various 
indexes.
    So I have a few questions. First, if $161 billion is tied 
to U.S. commodities I assume the rest is tied to foreign trade 
commodities; is that correct?
    Mr. Lukken. Correct. In mostly the London Medal Exchange 
located in London.
    Mr. Etheridge. Now, how confident are you that your special 
call captured all or a significant amount of the data regarding 
index trading; i.e., are there any avenues for index traders 
that your special call did not capture?
    And, finally, assuming you disagree with the methodology of 
Mr. Masters' claim, what are the a flaws in his approach to 
give him such an inflated number?
    Mr. Lukken. Well, our staff who have compiled this report 
feel comfortable that the net we cast for these index traders 
was brought up to capture virtually all activity in this area. 
Index trading, it is important to remember, has to be indexed 
off of a futures market, regulated futures markets, which we 
see that data. So we know the major participants that are also 
participating over-the-counter in these index markets. We are 
able to identify them, the 32 entities that we sent letters to, 
and we feel very confident that we captured all of that 
activity. I think staff is confident in that $200 billion 
number.
    Mr. Etheridge. I assume you are familiar enough, then, with 
H.R. 6604, the Commodity Markets Transparency and 
Accountability Act of 2008, that Chairman Peterson and I 
introduced in the House and was considered a little over a 
month ago. The bill, among other things, would have the 
Commission setting position limits, providing for greater 
transparency in the over-the-counter market and limiting hedge 
exemptions to those who can demonstrate a true need for the 
underlying physical commodity. Let us assume that bill became 
law today. What additional resources in terms of staffing and 
technology would be necessary to implement the new law and how 
much would all this cost in 2009 and 2010?
    Mr. Lukken. We have asked our staff, our budget staff, to 
take a look at this. It is roughly $35 million to implement 
those provisions, which equates to about 160 FTE staff 
employees at the agency.
    Mr. Etheridge. And we will come back to that first question 
in just a minute, because I want to get all three of them in. I 
will let you answer them together. The Commission report covers 
January through June of 2008, just a 6 month slice; however, 
commodities have been rising, not as dramatically as they were 
since 2006, but they were rising. Does the Commission have 
over-the-counter data for prior to January of this year; i.e., 
2006 and 2005?
    Mr. Lukken. Our compelled survey did not cover anything 
before December 31, 2007.
    Mr. Etheridge. But you can get that data?
    Mr. Lukken. We could ask for it certainly.
    Mr. Etheridge. And my other question is, does it have data 
for July and August when commodity prices started to decline, 
and is there any plan or intention to look at these other 
periods? Let me tell you why I ask this question. Because if 
you look at this slice only, you really don't have a lot to 
work with. You need to go back before it started up, and when 
it went down, and then you can start finding out what was going 
on in the process. And I think that is very important, and I 
would hope the Commission would take a look at that.
    And now I am going to let you go back. I hope the answer to 
that is yes. If not----
    Mr. Lukken. Well, we certainly want to continue to look at 
the data going forward. Because we have been compiling and 
analyzing the June, March, and December data, we have not had 
an opportunity to look at July, August, and now we are into 
September. But it is certainly our intention to continue to 
follow these trends to see what is happening in these markets. 
We tried to, over that 6 month period of time, capture the 
largest run-up in commodities that we saw. Certainly there were 
record prices for most commodities during that period, the 
largest run-up in crude during that period. And I will be 
honest, given the sort of limited resources we had and the time 
constraints we were under, we had to choose which period to go 
after, and that seemed like a logical one to begin with to look 
at.
    Mr. Etheridge. Well, it seems to me if you don't go back, 
though, you don't have the numbers to know where it came from 
or how it got in. I assume you still want to answer the 
question dealing with your disagreement with Mr. Masters' 
report.
    Mr. Lukken. Our data is a direct, compelled, survey under 
law that we sent out to all of these registrants, the people 
who are in our markets, asking them directly how much index 
money is occurring in the markets. I believe Mr. Masters has 
extrapolated using some of our public data that we put out, and 
then sort of reverse engineered. But in the course of doing so 
there are several major assumptions that have to be made and a 
potential for a large margin of error. But, again, this is the 
best data we have on index trading out there because it is 
directly coming from those who are participating in those 
markets.
    Mr. Etheridge. The gentleman from Virginia.
    Mr. Goodlatte. Thank you Mr. Chairman. Chairman Lukken, 
some have alleged that the important distinction between 
commodities futures and financial futures were lost to 
regulators. Would you care to comment on it?
    Mr. Lukken. Well, in the futures markets people are not 
necessarily buying a barrel of oil in the futures markets; they 
are buying the change in price of a commodity. I know there are 
a lot of people who think that buying and selling in futures 
markets are similar to the stock markets where you are bidding 
on one commodity, but that is not the case. In the futures 
markets you are able to continue to write, both on the short 
side and long side of the market, a limitless amount of 
contracts as long as you can come to agreement on what you 
believe is the price.
    That is a distinction. The futures markets have some 
mechanisms that link the two. And certainly the delivery 
process in the futures markets is how that occurs. But most of 
this under today's discussion, index money, never reaches the 
delivery month. It is moved out of forward months into future 
months before delivery ever occurs. I think that is important 
to point out for today's discussion.
    Mr. Goodlatte. Do you agree with others that say that 
speculative bubbles can't form so long as physical hedgers are 
the dominant group in the marketplace?
    Mr. Lukken. I think commercial participants are extremely 
important in order for markets to function correctly. And we 
want to try to promote healthy participation among commercials 
as best we can. Everybody brings information to the markets, 
whether you are speculators or commercials. Commercials have 
very valuable information. But those that are speculators are 
bringing valuable information, as well. And if they are wrong, 
they are not going to be in business very long. So we want to 
make sure there is a healthy blend, but certainly commercial 
participation is imperative.
    Mr. Goodlatte. So how does that comport with the testimony 
that the CFTC's Agriculture Advisory Committee received about 
the problems of the delivery mechanisms in future ag futures 
contracts?
    Mr. Lukken. Certainly we have seen problems with the 
Chicago Board of Trade wheat contract. We have held two public 
meetings to discuss that, one in the spring and one over the 
summer, under chairmanship of Commissioner Dunn, who runs our 
Agriculture Advisory Committee. From that, we tasked the 
Chicago Board of Trade to go out and try to make changes to 
their contract terms. And they have come back with 
recommendations that are currently under Commission review. And 
we will have to decide--over a 45 day period--whether to 
approve that or not. We are closely looking at that, trying to 
get additional input, through comments, on whether this goes 
far enough. But we look forward to reviewing that over the next 
45 days.
    Mr. Goodlatte. Do you think that putting position limits on 
OTC or swap transactions would encourage more activity on the 
regulated exchanges?
    Mr. Lukken. It is difficult to tell. I think it would 
encourage some transactions to come on-exchange, but it also 
equally could force things either overseas or into the over-
the-counter market overseas. So it is difficult to know.
    And, most importantly, it would be very difficult to police 
as a regulatory agency. Right now everything comes through a 
clearinghouse, a very centralized facility, for us to oversee. 
The over-the-counter market is very vast, large and dispersed, 
and it would be very difficult to impose those position limits.
    Mr. Goodlatte. You testified about the net notional index 
value for several important commodities. These numbers differ 
from other independent reports which suggest that speculator 
demand for those commodities is much higher. How do you explain 
the dramatic difference between the CFTC numbers and the other 
independent reports?
    Mr. Lukken. Well, again this is referring to the Masters' 
report that came out yesterday. Again, not knowing exactly his 
methodology--and our staff is looking at how he came to his 
figures--but there is a lot of margin of error in reverse-
engineering these numbers.
    Mr. Goodlatte. In your discussion about types of index 
investors, you delineated between index funds and institutional 
investors. Can you describe the difference between the two 
categories and explain the investing strategy for each?
    Mr. Lukken. Well, institutional investors are primarily 
pension funds and endowments. They are seeking long-term 
exposure to commodity assets. Index investors are themselves 
running an index fund. But they may not want to manage this 
directly themselves. And so they may go to another swap dealer 
in order to do that for them. And they have clients that would 
benefit from these index investments--so they are part of that 
category. It is mostly endowment and pensions that are the 
customers of these index investments.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    Mr. Etheridge. I thank the gentleman. The gentlelady from 
Kansas, Mrs. Boyda, for 5 minutes.
    Mrs. Boyda. Thank you very much, Mr. Chairman, and thank 
you for coming back again. It is a complicated and dense 
subject, so we appreciate your adding some light to it.
    My question is just basically--if you would comment--you 
have made some recommendations: Enhanced transparency, 
increased reporting and information, overall modernization of 
several rules. When we get that done, and I have ultimate faith 
that this body will actually get that done, I know some people 
are not believing that we will get it; but when we get that 
done, what kind of an impact would you say that that would have 
on prices right now?
    And I am not asking you to get down to the dollar or cent 
or anything, but little impact, big impact, what do you think 
we are going to find out once we do it?
    Mr. Lukken. As a regulator, it is difficult to project what 
might have an impact on prices. I think our role should be 
making sure the markets are working efficiently and reflecting 
supply and demand.
    Mrs. Boyda. Do you think it will have an impact on prices?
    Mr. Lukken. Well, I think it could help. Transparency will 
help to provide for efficiency in the market. Transparency is 
healthy to the marketplace, to the regulators, to all. I think 
the more we can do on that front, the more assurance we can 
have that prices are actually reflecting the supply and demand, 
will mean more confidence that that is exactly what is 
occurring.
    I think this paradigm shift in prices over the last year 
has all of us scratching our heads, what is going on, this has 
not been seen. Certainly opening the drapes, opening the doors, 
and shedding light on all of this is going to be helpful. Like 
I said, it is difficult for me to project how this is going to 
affect prices, but certainly transparency helps.
    Mrs. Boyda. And I think, if for no other reason, it helps 
the American people have additional confidence, and that is 
certainly worth doing as well.
    I have no further questions. I yield back. But thank you 
again for you and your staff's service.
    Mr. Etheridge. I thank the gentlelady. The gentleman from 
Oklahoma, Mr. Lucas.
    Mr. Lucas. Thank you Mr. Chairman.
    Chairman Lukken, let us turn back to the wheat market again 
for just a moment. Recent attention back home has been focused 
on not just the fact of the high prices in the market, but on 
the spread between cash and futures and what we all commonly 
refer to--what is referred to as basis.
    The basis has been at a historic weak level with cash 
prices well below the futures price. I think the cash price 
today is an unbelievable $1.90 under the futures market at the 
delivery point.
    As you mentioned earlier, participants in the wheat futures 
market have been meeting and discussing steps to address these 
abnormal weak basis levels. In your opinion, have the steps 
that have been proposed so far, will they solve the problem; or 
do the markets need further reforms?
    Mr. Lukken. Well, this is out for comment right now and we, 
as a policy, don't like to draw conclusions until we hear from 
all of the public on these issues. But certainly I think these 
are steps in the right direction. I am not certain whether 
there are enough steps in this area, but it is something we 
want to hear from all comers before we make a final decision.
    But you are exactly right. This is extremely troubling to 
the industry, and to the regulator, in whether these additional 
fees and delivery points are going to be enough. I know the 
idea of forced load-out, forced delivery, is being kicked 
around. But that also has some downsides. And so we are open to 
listening to the debate and trying to make a decision over the 
next 45 days.
    Mr. Lucas. One last question along that line, Mr. Chairman. 
Any idea why the index investors were so interested in wheat? I 
think the stats I have seen is of the $19 billion in value in 
contracts, 47 percent of that was held by what would be 
referred to as index investors.
    Mr. Lukken. As these index funds put a certain percentage 
in different commodities, oftentimes they may not take into 
account the size of the underlying market. So wheat is one you 
point out where it seems to be a bigger percentage than others.
    When looking at the data, and what was happening for wheat 
over this period of time, there didn't seem to be a strong 
correlation: Such as, index money was moving in, prices were 
moving up. There was actually some inverse correlation during 
that period of time. It is a limited data set, we will give you 
that. But we are still trying to figure out why people might be 
interested more in this area and whether there is any direct 
correlation between index money and prices.
    Mr. Lucas. Well, I appreciate that, Mr. Chairman. And 
clearly it has got the attention of the folks out in the 
countryside considering the gyrations that we have been through 
this year.
    With that, Mr. Chairman, I would yield back.
    Mr. Etheridge. I thank the gentleman. I now recognize the 
gentleman from Wisconsin, Mr. Kagen.
    Mr. Kagen. Thank you, Mr. Chairman. I am very interested to 
hear if you have caught anybody else that might be cheating 
during the time that you have been doing this study.
    Mr. Lukken. Cheating?
    Mr. Kagen. Manipulating the marketplace.
    Mr. Lukken. We announced early this summer that we have a 
nationwide crude oil investigation. And the first announcement 
of a case we brought was, I believe, in July--or it may have 
been June, I forget--against Optiver hedge fund for trying to 
manipulate the crude oil markets. We continue our 
investigation. We have a dozen of other inquiries out there 
that we continue to pursue. And it is a very fruitful endeavor, 
I believe.
    Mr. Kagen. Do you have sufficient staff to carry out that 
duty?
    Mr. Lukken. We would like more.
    Mr. Kagen. And do you have a number? One hundred thirty 
people is the number in your report.
    Mr. Lukken. Well, that is just for the regulatory side. 
These are our litigators, our enforcement guys. And a 
significant amount of our staff is devoted to this nationwide 
crude oil investigation. But there are other areas, 
agricultural products, foreign currency, in fact, we have 
devoted a team to just that area recently. So we certainly 
could use extra bodies. I am not sure I could put a figure on 
it but it would be significant.
    Mr. Kagen. One of the areas of interest to me in your 
report has to do with the types of index investors, and 
particularly the nine percent being the sovereign wealth fund. 
Could you explain in some detail what that means to the 
marketplace?
    Mr. Lukken. I think there was concern among the public and 
Congress of whether sovereign wealth funds, those funds that 
are controlled by governments, may be trying to artificially 
move around commodities, in particular oil. This is something 
we wanted to get a better handle on, how much sovereign wealth 
fund activity was occurring in the swap dealer markets. Again, 
nine percent, some will argue whether that is a lot or a 
little. But certainly as you looked at the type of regions 
involved, there weren't oil producing states that we saw in 
these markets in the nine percent. They were mostly European, 
North American, a couple Asian funds. It is illustrative in 
some ways. We are not sure how many definitive conclusions we 
can draw from the data, though.
    Mr. Kagen. So the rumor that is out there that the Iraqi 
Government was buying oil off the marketplace wasn't true; you 
don't see that happening?
    Mr. Lukken. Our staff did not undercover that information.
    Mr. Kagen. Thank you very much. I yield back my time.
    Mr. Etheridge. I thank the gentleman. The gentleman from 
Texas, Mr. Neugebauer.
    Mr. Neugebauer. Thank you.
    Welcome back, Chairman Lukken. You are getting to be a 
regular visitor here and you get frequent flier points. I don't 
want to put words in your mouth, but I want to recap what I 
heard you say and then give you an opportunity to respond. You 
went out and looked at this data set for about the first two 
quarters of this year; took additional data, went back and 
compared it to the data that you already collect on an ongoing 
basis. And what I heard you say is you found some activities by 
some of these outside the normal regulatory realm that maybe 
were trading some larger position limits than would have been 
allowed had they been in a regulated environment; is that 
correct?
    Mr. Lukken. Yes. We tried to, and there was concern that 
swap dealers were providing a loophole that some people were 
putting on positions through swap dealers in order to avoid 
running up on limits on-exchange. And so, as I mentioned, there 
were 18 noncommercial participants, those people who have been 
subject to limits, that ran up against these--had they combined 
their on-exchange and off-exchange activity, they would have 
run up against these limits.
    Having said that, it was a nonsignificant amount in excess. 
If people are looking for an excessive loophole here, it didn't 
seem to us to be excessive. However, 18 is 18, you know. The 
rules of the game should be the same. And so it depends on how 
you approach this. But it is something that we want to further 
consider, is whether in looking at granting exemptions to swap 
dealers, whether there should be some limits on this type of 
activity.
    Mr. Neugebauer. Did you get enough--in the sweep for that 
data did you get enough information on their trading activity 
to then go back and look at activity in the marketplace? Did 
you get any sense that there was any activity there that would 
lead you to believe that there was market manipulation going 
on?
    Mr. Lukken. We haven't been able to conduct that analysis 
yet. That is something we are doing, though, to make sure that 
none of this activity was troubling from a market surveillance 
point of view, so that is something we are looking into. But it 
is not something definitively you can say causes us concern at 
this time.
    Mr. Neugebauer. So would that mean your final report--as I 
understand it, is this an interim report that you released now?
    Mr. Lukken. It is hard for me to commit to doing something 
given our staff resources. You know our hope is, and my 
intention is, to try to do a follow-up on this at some point in 
the near future. But again, the 40 people that were dedicated 
to this job were also doing a full-time job of monitoring the 
markets and other things, and I am not sure they can continue 
on this pace indefinitely. But, yes, that is--our hope is to 
provide further analysis down the road.
    Mr. Neugebauer. In the recommendations from your initial 
analysis here, does that require any Congressional activity for 
you to carry those out, or are they within the scope of, do you 
feel, like the regulatory authority?
    Mr. Lukken. I mentioned our special call. And typically in 
the past, special call means special. It doesn't mean routine. 
We have traditionally gone after data on a need-to-know basis. 
If we saw something abnormal in the markets, we have used our 
special call to get more information. But over time we have had 
to stretch and use this as a more routine collection device. I 
think we would benefit from having some codification of that if 
that is something Congress wants to do. I think that actually 
is something as part of the Peterson bill that came out of this 
Committee, so that would be helpful.
    Mr. Neugebauer. I know one of the things that you told us 
when you were here, either last time or the time before, was 
that you were corresponding or having communications with other 
markets and other exchanges, foreign exchanges I guess. Did you 
find them cooperative, and do they show a similar interest in 
making sure that there is integrity and transparency in the 
marketplace?
    Mr. Lukken. They are very cooperative. I used to go to the 
International Organization of Securities Commissions. They are 
the international standard setting body for regulators around 
the world. And I have to admit, the CFTC was more of a tier two 
regulator during that period of time. Now we are sort of the 
life of the party. Everybody wants to know what is happening in 
the commodity markets.
    Next week, I am going overseas to the Technical Committee 
of IOSCO where this is going to be agenda item number one: What 
should regulators be doing differently in regards to 
commodities; how can we coordinate our efforts; how can we 
share information better? I am looking forward to playing a 
leadership role in next week's discussions.
    Mr. Neugebauer. I heard you say one thing, and this is a 
final comment, and I was glad to hear you say that. And there 
is a misconception out there about what the role of the 
regulators are, whether it is the CFTC or SEC. It is to make 
sure that there is integrity and transparency in the market. It 
is not to cause prices to go up or prices to go down, or people 
not to lose money or people to make money. So when I see some 
people trying to approach this process, this is a way that we 
can make oil prices go down or this is a way we can make 
commodity prices go down--not everybody wants prices to 
necessarily go down. And so I appreciate the caution that you 
have taken in this of approaching it from what is the correct 
perspective. And that is just focusing on the integrity, the 
transparency of those markets.
    At the same time, we recognize we do not dominate all of 
these markets, and there are other alternatives that people can 
go and look at and trade and make these same transactions in 
other places. And we would like for them to continue to do that 
in our markets. I think it makes our markets better, it makes 
them stronger. So I appreciate your efforts and look forward 
to--one last question.
    Mr. Etheridge. I thank the gentleman for his comment. His 
time has expired. The gentleman from Ohio, Mr. Space.
    Mr. Space. Thank you, Mr. Chairman.
    Thank you, Mr. Chairman, as well for joining us today. I 
want to focus my inquiry into the types of clients utilizing 
swap dealers for over-the-counter commodity transactions. Your 
preliminary recommendations reference a recommendation, at 
least that is what it appears to me, to eliminate the hedge 
exemption for swap dealers and create new limited risk 
management exemptions.
    And specifically I understand from your report that a 
significant percentage of those clients are institutional 
investors.
    Mr. Lukken. Yes.
    Mr. Space. What is the percentage?
    Mr. Lukken. I think they were in the 30--I don't know.
    Mr. Space. Forty-two percent, perhaps.
    Mr. Lukken. You probably have it in front of you. I can 
find it. But it is 35 to 40 percent maybe.
    Mr. Space. Now, you also reference in these recommendations 
that, first of all, either an obligation to report to the CFTC 
and the applicable self-regulatory organizations when certain 
noncommercial swap clients reach a certain position level; and/
or a certification that none of the swap dealers, noncommercial 
swap clients, exceed specified position limits in related 
exchange traded commodities.
    Do you have any recommendations; more specific than that? 
What is the extent at which current procedures--or, put better, 
what measures can be taken to ensure that the system serves its 
traditional price setting function with respect to those two 
issues.
    Mr. Lukken. I think the concern with the swaps exemption 
has traditionally been that it could be allowing a great deal 
of noncommercial participation that could not have participated 
that they come directly to the market. That is one reason that 
we looked to see how many instances there were of people going 
over these limits.
    I think, as a matter of fairness and consistency, we 
should--if we are going to place limits on the regulated 
exchange, on ECMs, on foreign boards of trade, and now looking 
at swap dealers and their linkage to the market, this is 
something we should consider seriously as an agency--of holding 
the swap dealers' clients to position limits; that had they 
gone directly to an exchange, they would not exceed a position 
limit.
    I think equally as important is getting that information 
for our surveillance. If somebody is holding an enormous 
position off-exchange and they also have a position on-
exchange, that is of significant interest to us in case they 
are trying to game one off the other.
    I think we want to explore it, but based on this survey, we 
don't have a definitive recommendation beyond going down this 
path to look at it. But, it would be an effective way of trying 
to provide confidence that people aren't using the swap 
exemption as a loophole.
    Mr. Space. So I guess you don't have definitive 
recommendations beyond addressing the need to address that 
problem.
    Mr. Lukken. The problem of spec limits more broadly in the 
over-the-counter market?
    Mr. Space. Right.
    Mr. Lukken. Well, again, because we know swap dealers are 
coming to the market to lay off positions, because they are 
coming to us for hedge exemptions, there is that direct linkage 
to our market. A lot of the over-the-counter market never comes 
to the futures markets to offset those positions, and it is 
much more dispersed. We were talking 32 entities that we 
covered versus hundreds, and more than that, in the over-the-
counter markets. I think this was an effective step to try to 
address that nexus.
    Mr. Space. Thank you. I yield back.
    Mr. Etheridge. I thank the gentleman. The gentleman from 
Texas, Mr. Conaway.
    Mr. Conaway. Thank you Mr. Chairman.
    Mr. Lukken, thank you for coming today. My recollection of 
your testimony the last time you were here was that you and 
your staff had found no evidence to support the idea that 
speculation was having undue influence on the price of crude 
oil. With that as a backdrop, how does your testimony today 
differ from that?
    Mr. Lukken. Our economists, as well as the interim task 
force report on speculation that came out in July, did not find 
evidence, direct evidence, that speculators were systematically 
driving up prices. I don't think we have changed our position 
on that. We are still looking. The task force continues its 
work, and hopefully will come out with something in the coming 
weeks.
    Certainly today, trying to look at index money in 
particular, there doesn't seem to be clear evidence looking at 
crude oil where positions were actually coming down in futures 
equivalent positions during the time of the crude oil's biggest 
price run-up. It doesn't seem that there is a correlation there 
between price and investment.
    So again, this is, as the Chairman noted, a limited data 
set. But just on this snapshot, there doesn't appear to be 
strong evidence that speculation, and in particular this index 
money, is driving up prices.
    Mr. Conaway. There is a recent story in the newspaper 
relative to a scheme that was reported that a particular 
trader--and that might be the wrong phrase--contributed 
mightily to the run-up in the price of oil, and then got on the 
other side of that and profited when it came down dramatically 
in July and August. Can you mechanically do that?
    Mr. Lukken. Certainly that is what traders try to do; they 
try to guess trends.
    Mr. Conaway. It is one thing to guess a trend; it is 
something else to be the trend.
    Mr. Lukken. I haven't seen that story, but if the trader is 
causing the run-up and causing the run-down, that is of concern 
to us. And that is what we look for every day: Do you have a 
large enough position to drive up prices, to corner the market, 
to squeeze it to drive up prices? That is something our 
economists do every day.
    Mr. Conaway. Help us understand just the mechanics of how 
that works. In other words, if you have a position that pushed 
the price up, how do you get out of that position and profit on 
the way down without losing profit on the way up? Mechanically 
how does a trader, or whoever it is doing that, make that work?
    Mr. Lukken. Typically on the way up, they are buying long 
positions. And then when they think there is going to be a 
price break, they can start selling--buying short positions 
that would profit. And that will offset those long positions 
and they will then profit on the way down. I am not a trader so 
I can't get into the extreme nuance of it, but that is in 
essence the mechanics.
    Mr. Conaway. You had some reluctance to answering the 
Chairman's direct question about going back to periods before 
December 31, 2007 and doing the same kind of analysis. Is your 
reluctance because you just simply don't have the staff and the 
staff time to do that?
    Mr. Lukken. It is staff and resources. And as you go 
farther and farther back in time, the businesses that keep 
records, the records become less and less reliable the farther 
you go back. If we went back to 2003 or 2004 when this started, 
we are not even sure that some of these firms would have 
maintained those records. So we are certain of the reliability 
of the records and the information from this 6 month period.
    Mr. Conaway. Did you learn enough out of this study to set 
in place, in an ideal world with the right amount of staff and 
resources, a scheme that would keep you, like I say, as live a 
basis as you could going forward, monitoring the kind of stuff 
that you think based on what you found you need to monitor? Do 
these recommendations encompass all of the things you need to 
do to be able to be live?
    Because I assume finding something that happened 12 months 
ago is not nearly as valuable as finding it happening yesterday 
or the day before. So have you got the resources you need to do 
to be able to be as current with all that data gathering as you 
could, need to be?
    Mr. Lukken. The codification of some of these transparency 
provisions is helpful. But a lot of this is just modernization 
of technology, making sure we have the tools to follow all this 
information correctly and trying to sort of piece this stuff 
together.
    Mr. Conaway. Is that your recommendation three, the Office 
of CFTC Data Collection?
    Mr. Lukken. That is part of it. It is to make sure that we 
are spending the right amount of attention on getting this 
information in and classifying it properly and auditing it and 
verifying it.
    Mr. Conaway. You are talking about people as well as the 
hardware and software that go along with the collection 
process.
    Mr. Lukken. Yes, all of the above.
    Mr. Conaway. Thank you Mr. Chairman. I yield back.
    Mr. Etheridge. I thank the gentleman. The gentlelady from 
New York, Mrs. Gillibrand.
    Mrs. Gillibrand. Hi. Thank you for coming. Thank you, Mr. 
Chairman, for holding this hearing. I want to talk about some 
of your recommendations, and then I want to talk about the 
objections to your report that is in your appendix.
    First, your final recommendation of review of swap dealer 
commodity research independence, your report states that 
questions have been raised as to whether swap dealer futures 
trading activities, are sufficiently independent of any related 
or published commodity market research. You are therefore going 
to instruct the staff to conduct a review of the independence 
of swap dealers futures trading activities from affiliated 
commodity research and report back to the Commission. What do 
you expect to find?
    Mr. Lukken. Well, we have heard complaints, and rightly so, 
of concerns that swap dealers, the research arm of a swap 
dealer may come out and say, ``We expect oil to go to $150 a 
barrel or $200 a barrel,'' and not knowing exactly what the 
independence between that research department and the trading 
arm might be.
    Now, certain parts of Sarbanes-Oxley, for these publicly 
held companies, ensure independence in some of these areas. But 
this is a new area for the Commodity Exchange Act and we need 
to find out more information, whether disclosure of what their 
positions may be--would that be useful? But certainly, we are 
trying to ensure that there is strong independence between, and 
firewalls between, those two parts of the Wall Street 
institution, the research and the trading arm. That is 
something we are looking at, whether there is enough 
independence now or not, and then we will come back with 
recommendations, either administrative or legislative.
    Mrs. Gillibrand. And when do you expect those 
recommendations to be ready?
    Mr. Lukken. As quickly as we can. I think that is something 
we are in the midst of researching, but hopefully as soon as 
possible.
    Mrs. Gillibrand. In your Appendix G, Commissioner Bart 
Chilton wrote a dissenting letter, and he cites to many experts 
saying that speculation did have a role in oil prices--
particularly Alan Greenspan--financial speculation did play a 
significant part in the rapid increase in oil prices and other 
financial sources. And his recommendations are different than 
yours.
    And I want to go through what he recommends and then get 
your thoughts on them, why you disagree with that 
recommendation, or why you think that is not the right 
approach.
    His first recommendation is he wants to request that 
Congress provide specific statutory authority to allow the 
Commission to obtain data regarding over-the-counter 
transactions that may impact exchange-traded markets.
    Mr. Lukken. Actually, we have a recommendation to continue 
routine reporting by swap dealers in our markets. So we, in a 
different way, have recommended something very similar. And as 
I have mentioned, this would benefit from legislative 
codification.
    Mrs. Gillibrand. And the second recommendation is you 
request that Congress provide specific statutory authority to 
allow the Commission to address market disturbances or 
violations of the Commodity Exchange Act based on the data 
received pursuant--regarding over-the-counter transactions. Do 
you think that is a good recommendation?
    Mr. Lukken. This was a very specific report to swap 
dealers. This recommendation seemed to go beyond the swap 
dealer report. I think trying to understand what a market 
disturbance might be is difficult and subject to 
interpretation. And personally I just had concerns about the 
broad context of going after the entirety of the over-the-
counter market and policing that market.
    Mrs. Gillibrand. And then a third recommendation, I think 
you will agree with. He wants to request that Congress provide 
immediate authorization appropriations for at least 100 
additional FTEs to carry out these new responsibilities. Is 
that the amount of staffing increase that you would need to 
follow up with your research to continue to do the kinds of 
transparency actions that you would like to do?
    Mr. Lukken. I think 100 is the low figure. So I guess that 
it is at least 100. But that was before even these additional 
recommendations, so it is going to be north of that.
    Mrs. Gillibrand. And the other complaint he makes in his 
letter, and I just want to get your thoughts on it, he said 
that he thought that the conclusions that underlie the 
recommendations regarding the causality link between index 
traders and price movement, particularly in crude oil, that 
they did not appear necessarily to be ineluctably linked to the 
data received. He thought there was, summarizing, that there 
was some insufficient time to do the kind of analysis and 
information gathering that would be required and that therefore 
the data was flawed.
    Mr. Lukken. We did not make hard and fast conclusions. We 
tried to, as much as possible, just provide the facts of what 
they show, trying to let people draw their own conclusions. 
What the facts showed in regards to crude oil, that although 
notional value for crude oil and index investment was going up 
over that 6 month period of time, if you break that into future 
contract equivalents it is actually decreasing in position 
levels. So having said all that, we still are making eight 
recommendations on trying to improve transparency. We haven't 
drawn conclusions based on this data set. We actually think 
that there are some things we can learn better going forward.
    Mrs. Gillibrand. Thank you.
    Mr. Etheridge. I thank the gentlelady. The gentleman from 
Kansas, Mr. Moran.
    Mr. Moran. Mr. Chairman, thank you very much.
    Mr. Chairman, welcome back to our Committee. Much of what 
we are talking about today is based upon the study, the 
analysis of information that you gathered, what you have seen 
over a short period of time. Let me first ask about the 
reliability of that data. The information that you obtained 
under the special call, what compels those receiving those 
requests to answer it accurately and truthfully?
    Mr. Lukken. Well, it is under penalty of law. They would be 
fined and we would go after these individuals, 
administratively, if they violated and falsely reported.
    Mr. Moran. So we ought to have to a reasonably high level 
of assurance that the conclusions that you and others are 
drawing from this information is based upon accurate, truthful 
information?
    Mr. Lukken. It's compelled. I apologize for interrupting, 
but we had 100 percent compliance.
    Mr. Moran. Good. We had--I think the impetus for this 
Committee's work began really because of oil prices, and we 
were looking at petroleum and the futures market as it relates 
to petroleum. I think there was a number of Members of this 
Committee, including its leadership, who became interested in 
the agriculture commodity aspect of futures trading as we got 
involved in the issues.
    Is there any conclusion--is the information that you 
garnered and the conclusions that you have drawn, are there any 
different conclusions for agricultural commodities versus the 
oil markets or is the information kind of all encompassing. Are 
they the same kind of conclusions and results regardless of 
what the commodity is that is being traded?
    Mr. Lukken. I think if you are looking for correlations, 
and that is probably the most important thing, we did not see 
correlations of prices across commodities during this period of 
time. In fact, in oil we saw an inverse correlation. But in 
other commodities it was correlated at times and not correlated 
at other times. So there didn't seem to be a constant trend of 
investment and prices tracking together. So I would say that 
was consistent across the commodities we studied.
    Mr. Moran. So regardless of what the commodity was, the 
conclusions, the evidence is the same.
    Mr. Lukken. It seemed to us, yes.
    Mr. Moran. Which is no correlation or minimal correlation.
    Mr. Lukken. This, again, is a very limited data set, but 
from what we've looked at, yes.
    Mr. Moran. The information you presented shows that 
contracts held by index funds actually decreased during the 
period when oil prices went from $96 a barrel to $140 a barrel; 
is that true?
    Mr. Lukken. Correct.
    Mr. Moran. Given that data, is the obvious or realistic, 
reasonable conclusion that there is no correlation between the 
increased price and the activity in the market?
    Mr. Lukken. Again, it is hard for us to make those 
definitive conclusions. There doesn't seem to be evidence based 
on the limited data set that that is the case. I would say, as 
the prices were going up extremely fast in oil, one explanation 
for why positions may have been coming down is these index 
funds have to rebalance their portfolios because they got too 
invested in one commodity versus another. And oil was going up 
faster than most commodities, although there were lots of price 
rises going on at this time, so it makes some sense that they 
may have been counterbalancing by selling in order to get the 
portfolios aligned. That is something we are trying to get more 
information about. But that has some basis for what we are 
seeing.
    Mr. Moran. Mr. Chairman, the CFTC recommendations that is 
included in your testimony, I really can only find one item in 
that list that requires Congressional action and that is the 
additional staff and funding. Is that a correct assessment and 
do you feel confident that, given the additional resources and, 
I suppose, the authorities granted in the farm bill, that you 
have sufficient tools at your disposal to oversee and regulate 
these markets?
    Mr. Lukken. I think resources are priority number one for 
us. There are a lot of things we can do under the current 
authority to oversee these markets and to modernize our 
systems.
    I would say recommendations one and two would benefit from 
codification. As I mentioned, we are having to stretch our 
legal authority to go after some of this over-the-counter 
activity. We can do it, but it would help to have Congress' 
blessing behind it.
    Mr. Moran. Should we do that codification before you 
complete what you, I guess reluctantly, are doing in an 
expanded study and analysis? Should we wait for additional--to 
get out of the short time frame, the snapshot picture, should 
we be waiting before we codify, or is the information now 
sufficient that we ought to move forward legislatively?
    Mr. Lukken. I don't think there is a requirement one way or 
another. I think we are going to continue to pursue this. It 
would certainly benefit knowing that Congress has given us this 
authority in clear fashion and that we should be doing this.
    Mr. Moran. Chairman Lukken, thank you very much for your 
testimony.
    Mr. Chairman, thank you for the opportunity to question.
    Mr. Etheridge. I thank the gentleman.
    The gentleman from Georgia, Mr. Marshall for 5 minutes.
    Mr. Marshall. Thank you, Mr. Chairman.
    It would have been very helpful to all of us--no surprise--
that had we had this report before the hearing and had an 
opportunity to digest it--I am sure it is extremely 
complicated. We have been stuck in other matters and just from 
a few things you said just a minute ago, Mr. Lukken, I guess I 
have to conclude that the report and your analysis didn't 
really provide you with enough information. You don't have 
enough information based upon the analysis that you have done 
so far to be comfortable one way or another about all these 
different issues that are facing us that we are wrestling with; 
is that correct?
    Mr. Lukken. I think that is correct, yes.
    Mr. Marshall. You have on page 3 a chart which is lists 
total OTC and on-exchange commodity index investment activity. 
We have been asking for disaggregation in a lot of different 
ways. It probably would be helpful if you could break that 
down: on-exchange, off-exchange and an index fund presence. So 
the same kind of chart, but instead of lumping everything 
together break it down and give us that information, and you 
probably do have that information available to you.
    Mr. Lukken. I think we certainly do have the information of 
index funds that are trading directly to manage this in the 
markets. Swap dealers----
    Mr. Marshall. Can't tell where it is coming from.
    Mr. Lukken. Well, it is over-the-counter, but they 
aggregate a bunch of things together before coming to the 
exchange to manage that risk. So a portion of that could be 
index trading, but it is difficult to tell because it is an 
amalgam of lots of single commodities, swap business as well 
as----
    Mr. Marshall. It would be real helpful to us if you could 
take a stab at that. And I know it would be very difficult 
because you can't really tell where all of this is coming from 
or what is motivating a particular trader to organize trading 
on a lot of different--across an awful lot of different 
commodities, but it would be very helpful if you could. You 
know, the argument we have repeatedly heard is that it is 
index-fund-type positions, these passive long positions on-
exchange, on the regulated markets that have been causing price 
problems. And so this graph doesn't help us as much as maybe 
the underlying information would be able to help us.
    I guess I have to ask you. You have had a lot of time to 
wrestle with this. You have probably gone through multiple 
drafts. I have been inquiring for several weeks, when is this 
coming out? When's it coming out? And you have had lots of 
conversations with your fellow Commissioners and with staff. 
What are going to be the eye poppers here as people with 
expertise read through this, as the press reads through this 
and starts asking questions of people with expertise? What are 
people going to be surprised by? What is going to be the 
headline or what is going to be the news so that we are not 
surprised?
    Mr. Lukken. Well, looking at the notional value--I think it 
is significant; $200 billion is a significant amount. It is 
probably less than had been estimated by others in the public. 
Certainly those over limits, had they come on-exchange, there 
were 18 noncommercial participants we found.
    Mr. Marshall. Do we know whether they were long or short?
    Mr. Lukken. Yes, we do note that on the report. It is on 
both sides of the markets. But it wasn't excessive, but 
certainly they were over limits.
    Mr. Marshall. There was a newspaper article that appeared 
in The Post. This is 3 or 4 weeks ago. I can't tell you who 
wrote it. I can't really remember many of the details. But it 
suggested that a company had been able to--maybe it was 11 
percent. You know the article I am talking about right now?
    Mr. Lukken. Yes.
    Mr. Marshall. Were they long or short?
    Mr. Lukken. They were short to market.
    Mr. Marshall. If I recall correctly, The Post article was 
sort of suggesting that they were long, and that was part of 
the explanation--and their ability to get beyond their limits, 
plus being long is part of the explanation for higher prices; 
and yet you are saying, in fact, they were short.
    Mr. Lukken. They were a short spread trader. This was part 
of our survey when we were collecting data from individuals. A 
trader we thought was a swap dealer was actually more of an 
investment fund. And so as soon as we found out that 
information we, the next available time, changed their 
classification in our public reporting. But, again, that 
figure--they were net short the market and they were also 
spread over many months in that 10 percent figure.
    Mr. Marshall. During that period of time they must have 
lost an awful lot of money, basically. They were probably very 
unhappy campers. Because if I recall correctly things were 
going up.
    Mr. Lukken. I think during that period of time, yes.
    Mr. Marshall. Mr. Chairman, obviously, we are all going to 
need, our staff is going to need time to digest all of this. I 
guess we will have to have a second hearing, maybe, with 
Chairman Lukken. I don't know. We really can't question too 
much on a report that we have just gotten with testimony that 
we just received.
    Thank you for chairing the hearing. I look forward to 
additional work on this subject.
    Mr. Lukken. And we are certainly willing to come up 
privately and brief Members. It is a lot to digest, so we 
welcome the opportunity to come up and talk to Members 
privately.
    Mr. Etheridge. I thank the gentleman; and before we close, 
Mr. Chairman, let me follow up on what Mr. Marshall said.
    There have been many press accounts about the Commission's 
re-classification of certain positions in the oil market from 
commercial to noncommercial, and he alluded to it a few minutes 
ago. These reports claim that speculators now account for 81 
percent of oil contracts traded on NYMEX. Can you tell us more 
about the re-classification? How much of the market did these 
positions represent? What is the nature of the business of the 
entity so reclassified? And was a need for re-classification 
due to the misrepresentation of activities by the entity or by 
a mistake made by the Commission?
    Mr. Lukken. The classification system is for public 
reporting purposes. Internationally, we get a lot of 
information about different traders--much more detailed 
information that we receive every day, and we are able to track 
their activities. So whether you are classified as commercial 
or noncommercial doesn't mean we are not watching you or 
monitoring you as closely as any other trader. And certainly it 
does not mean that you can gain an exemption as a result of 
being a commercial or a noncommercial entity. Whether you get a 
hedge exemption or not is a separate question, and that is 
important to note.
    But as I mentioned, swap dealers are currently classified 
as commercial. And we learned that this entity was more of an 
investor and acting more as a hedge fund and decided to 
reclassify that position. I think it was 10 or 11 percent of 
the crude oil market. As was noted by Congressman Marshall, 
they were short the market; and most of it was spread trading, 
meaning they were selling and buying at the same time over a 
long-term time horizon.
    That is what occurred. I have instructed staff to try to 
figure out whether this was a problem of ours or this was miss-
classified by mistake, whether it was intentional. And that is 
something we are looking into.
    We are certainly, as part of the recommendations, creating 
a new office to try to elevate this to make sure that we are 
classifying things correctly; and we are auditing things on a 
periodic basis and that we are able to verify this 
independently. We are trying to take steps to make sure this 
doesn't happen in the future.
    Mr. Etheridge. That would be something this Committee would 
be very interested in, and I appreciate you at least letting 
the Chairman and Ranking Member know what your conclusion to 
this is.
    The gentleman from Georgia for one additional question.
    Mr. Marshall. Thank you, Mr. Chairman.
    I don't know whether you covered this in your 
recommendations. I just haven't had an opportunity to look at 
them. We have talked a lot about it, and many people suggested 
that additional transparency would be quite helpful and that 
perhaps the market could make the appropriate adjustments. We 
wouldn't have to be worrying about what the motivation was 
underlying a particular position. We could conceivably say we 
are not troubled by the idea that people are taking long-term 
positions just to acquire commodity interests, as opposed to 
the traditional speculator who is trying to figure out price 
and things like that, if we had more transparency.
    And I have heard folks say that your Commitments of Traders 
report is not all that helpful. I understand that it is 
accessed an awful lot, but it doesn't help a great deal, 
because it is very difficult to figure out what it really means 
as far as the underlying motivations of the traders are 
concerned.
    And someone suggested that both OTC and on-exchange, those 
who were doing deals, should be required as part of the deal, 
the two parties, to characterize what this deal is and why it 
is being done--and that is just every transaction that is 
done--in some uniform fashion that can get dumped into an 
appropriate software program, controlled by you so that you are 
in a position--not perhaps even more regularly than weekly--to 
describe where everybody's positions are in all these different 
markets and what is motivating them.
    That means that the individual would continue to have their 
private business kept confidential, whether they are OTC or 
they are on-exchange, but it would also mean that the market 
generally--if some program like that could be developed and it 
could be refined enough--that generally the market could see 
what the heck is going on and take appropriate adjustments and 
make appropriate adjustments.
    Have you all been considering that? Are you working on 
that, improving on the Commission and considering what might be 
done where the over-the-counter market transactions are 
concerned?
    Mr. Lukken. I think you point out that, especially as the 
businesses becomes larger and more complex, our Commitments of 
Traders classification of noncommercial versus commercial has 
become less precise. I think we see and have seen in this 
exercise that there are some commercial entities that do some 
speculative activity and noncommercials that may do some 
limited commercial activity.
    I think what we have recommended in this report is: first, 
to try to come up with better classifications. It may be 
getting rid of noncommercial, commercial, but, at a minimum, 
let's break out swap dealer activities so we can see what is 
happening with this type of entity.
    Second, we recommended what we termed a long form 
reporting. If you are a large enough trader in our markets, we 
will get more detailed information about your trading activity. 
I'm not sure we can track transaction to transaction, but 
certainly, we would try to figure out what percentage of your 
business is what and what is going on, so we can classify you 
appropriately.
    You mentioned the over-the-counter markets. One of our 
recommendations as well is to do some routine type of report 
like we have done today of swap dealer activity. So, we at 
least get a window into the market on occasion to see what is 
happening, whether trends are changing. I think that would be 
useful for the transparency purposes.
    Mr. Marshall. And that is pretty much the extent of what 
you are considering. You are not going beyond that.
    Mr. Lukken. That is in the recommendations of the report.
    Mr. Marshall. Thank you, Mr. Chairman.
    Mr. Etheridge. I thank the gentleman.
    The gentleman from Kansas for closing remarks.
    Mr. Moran. Mr. Chairman, I just would thank you, 
particularly Mr. Peterson, for conducting this hearing and 
offer my condolences to Mr. Peterson and his family.
    I appreciate the testimony today of the Chairman of the 
CFTC. I look forward to the opportunity to further analyze what 
we are being told. I look forward to additional reports from 
the CFTC and encourage my colleagues to be supportive of 
additional funding and personnel for the Commission.
    And again, Mr. Chairman, thank you very much for the 
opportunity to be with you here today.
    Mr. Etheridge. I thank the gentleman.
    Chairman Lukken, let me just say, as you know, we have just 
gotten the report, haven't had a chance to read it. As we do 
that, just please know there may be additional questions coming 
to the Commission along with requests and, depending upon what 
we get, could very well at some point have another opportunity 
to come back to the Hill and spend some time together.
    Under the rules of the Committee, the record of today's 
hearing will remain open for 10 days to receive additional 
material and supplemental written responses from the witness to 
any question posed by a Member to the panel.
    This hearing of the Committee on Agriculture is adjourned.
    [Whereupon, at 2:21 p.m., the Committee was adjourned.]

                                  
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