[Senate Hearing 110-731]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-731

  ROLE, RESPONSIBILITIES, AND RESOURCE NEEDS OF THE COMMODITY FUTURES 
   TRADING COMMISSION FOR OVERSIGHT OF ENERGY MARKET AND OIL FUTURES 
                               CONTRACTS

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

                             JOINT HEARING

                               before the

           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

                                and the

       SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT

                                 of the

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                            SPECIAL HEARING

                     JUNE 17, 2008--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations



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                      COMMITTEE ON APPROPRIATIONS

                ROBERT C. BYRD, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont            TED STEVENS, Alaska
TOM HARKIN, Iowa                     ARLEN SPECTER, Pennsylvania
BARBARA A. MIKULSKI, Maryland        PETE V. DOMENICI, New Mexico
HERB KOHL, Wisconsin                 CHRISTOPHER S. BOND, Missouri
PATTY MURRAY, Washington             MITCH McCONNELL, Kentucky
BYRON L. DORGAN, North Dakota        RICHARD C. SHELBY, Alabama
DIANNE FEINSTEIN, California         JUDD GREGG, New Hampshire
RICHARD J. DURBIN, Illinois          ROBERT F. BENNETT, Utah
TIM JOHNSON, South Dakota            LARRY CRAIG, Idaho
MARY L. LANDRIEU, Louisiana          KAY BAILEY HUTCHISON, Texas
JACK REED, Rhode Island              SAM BROWNBACK, Kansas
FRANK R. LAUTENBERG, New Jersey      WAYNE ALLARD, Colorado
BEN NELSON, Nebraska                 LAMAR ALEXANDER, Tennessee

                    Charles Kieffer, Staff Director
                  Bruce Evans, Minority Staff Director
                                 ------                                

       Subcommittee on Financial Services and General Government

                 RICHARD J. DURBIN, Illinois, Chairman
PATTY MURRAY, Washington             SAM BROWNBACK, Kansas
MARY L. LANDRIEU, Louisiana          CHRISTOPHER S. BOND, Missouri
FRANK R. LAUTENBERG, New Jersey      RICHARD C. SHELBY, Alabama
BEN NELSON, Nebraska                 WAYNE ALLARD, Colorado
ROBERT C. BYRD, West Virginia (ex    THAD COCHRAN, Mississippi (ex 
    officio)                             officio)

                           Professional Staff

                             Marianne Upton
                         Diana Gourlay Hamilton
                        Mary Dietrich (Minority)
                        Rachel Jones (Minority)
                       LaShawnda Smith (Minority)

                         Administrative Support

                              Robert Rich
           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

                       TOM HARKIN, Iowa, Chairman
PATRICK J. LEAHY, Vermont            SAXBY CHAMBLISS, Georgia
KENT CONRAD, North Dakota            RICHARD G. LUGAR, Indiana
MAX BAUCUS, Montana                  THAD COCHRAN, Mississippi
BLANCHE L. LINCOLN, Arkansas         MITCH McCONNELL, Kentucky
DEBBIE A. STABENOW, Michigan         PAT ROBERTS, Kansas
E. BENJAMIN NELSON, Nebraska         LINDSEY GRAHAM, South Carolina
KEN SALAZAR, Colorado                NORM COLEMAN, Minnesota
SHERROD BROWN, Ohio                  MICHAEL D. CRAPO, Idaho
ROBERT P. CASEY, Jr., Pennsylvania   JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota             CHARLES E. GRASSLEY, Iowa

                Mark Halverson, Majority Staff Director
                    Jessica L. Williams, Chief Clerk
            Martha Scott Poindexter, Minority Staff Director
                 Vernie Hubert, Minority Chief Counsel









                            C O N T E N T S

                              ----------                              
                                                                   Page

Opening Statement of Senator Richard J. Durbin...................     1
Prepared Statement of Senator Thad Cochran.......................     4
Statement of Senator Tom Harkin..................................     4
Statement of Senator Sam Brownback...............................     6
Statement of Senator Saxby Chambliss.............................     7
Statement of Walter Lukken, Acting Chairman, Commodity Futures 
  Trading Commission.............................................    10
    Prepared Statement of........................................    14
Enhancing Information and Transparency...........................    14
Ensuring Proper Market Controls..................................    15
Continuing Aggressive Enforcement Efforts........................    16
Improving Oversight Coordination.................................    16
Seeking Increased Funding........................................    16
Statement of Dr. Mark Cooper, Director of Research, Consumer 
  Federation of America..........................................    44
    Prepared Statement of........................................    46
Irresponsible Deregulation is the Primary Cause of the 
  Speculative Bubble.............................................    47
The Problem of Hyper-speculation Afflicts a Wide Range of Markets    49
Regulatory Reform is the Way to Solve the Problem................    58
Statement of Terrence A. Duffy, Executive Chairman, CME Group, 
  Inc............................................................    59
    Prepared Statement of........................................    61
Speculation is Essential to Efficient, Liquid Markets............    62
Raising Margin Above Prudential Levels is Counterproductive......    64
The CFTC's Exclusive Jurisdiction Over Trading on CFTC Regulated 
  Markets Must be Preserved......................................    67
Position Limits on Foreign Boards of Trade Listing Clones of U.S. 
  DCM Listed Contracts...........................................    67
The Exemption for Commercial Markets in Energy Products, Even as 
  Limited by the Recent Amendment of the CEA, is Unnecessary and 
  Creates Information Gaps.......................................    68
Statement of James C. May, President and Chief Executive Officer, 
  Air Transport Association......................................    69
    Prepared Statement of........................................    70
Statement of Dr. James Newsome, President and CEO, New York 
  Mercantile Exchange............................................    72
    Prepared Statement of........................................    73
Market Oversight and Transparency................................    74
Recent CFTC Announcement.........................................    75
Foreign Boards of Trade..........................................    76
Market Analysis of the CFTC-regulated Energy Exchange............    76
Demand...........................................................    77
Supply...........................................................    78
Analysis of Participation in NYMEX's Crude Oil Futures Contract..    78
Margins..........................................................    79
Statement of Charles A. Vice, President and Chief Operating 
  Officer, Intercontinental Exchange.............................    80
    Prepared Statement of........................................    82
ICE Futures Europe...............................................    82
Regulation of ICE Futures Europe.................................    83
ICE Futures Europe's Role in the Global Oil Markets..............    83
CFTC's Mutual Recognition System.................................    84
The Price of Oil.................................................    85
Solutions........................................................    86
Additional Committee Questions...................................    88
Questions Submitted to Walter Lukken.............................    89
Question Submitted by Senator Charles E. Grassley................    89
Questions Submitted by Senator Ben Nelson........................    89
Questions Submitted by Senator Pat Roberts.......................    95
Questions Submitted to James C. May..............................    95
Question Submitted by Senator Saxby Chambliss....................    95
Questions Submitted by Senator Charles E. Grassley...............    96
Questions Submitted to Mark Cooper...............................    98
Questions Submitted by Senator Pat Roberts.......................    98
Questions Submitted by Senator Saxby Chambliss...................    99
Questions Submitted by Senator Charles E. Grassley...............    99
Questions Submitted to Mark Cooper and James C. May..............   100
Questions Submitted by Senator Charles E. Grassley...............   100
Questions Submitted to Terrence A. Duffy.........................   101
Question Submitted by Senator Pat Roberts........................   101
Question Submitted by Senator Saxby Chambliss....................   101
Questions Submitted by Senator Charles E. Grassley...............   101
Questions Submitted to Dr. James Newsome.........................   102
Questions Submitted by Senator Charles E. Grassley...............   102
Question Submitted by Senator Pat Roberts........................   104
Questions Submitted to Charles A. Vice...........................   105
Question Submitted by Senator Pat Roberts........................   105
Questions Submitted by Senator Charles E. Grassley...............   105

 
  ROLE, RESPONSIBILITIES, AND RESOURCE NEEDS OF THE COMMODITY FUTURES 
   TRADING COMMISSION FOR OVERSIGHT OF ENERGY MARKET AND OIL FUTURES 
                               CONTRACTS

                              ----------                              


                         TUESDAY, JUNE 17, 2008

        U.S. Senate, Committee on Appropriations, 
            Subcommittee on Financial Services and General 
            Government and the Committee on Agriculture, 
            Nutrition, and Forestry,
                                                    Washington, DC.
    The subcommittees met at 10:30 a.m., in room SD-192, 
Dirksen Senate Office Building, Hon. Richard J. Durbin 
(chairman) presiding.
    Present: Senators Durbin, Murray, Ben Nelson, Brownback, 
Harkin, Dorgan, Lincoln, Salazar, Brown, Klobuchar, Chambliss, 
Lugar, Roberts, Crapo, and Thune.


             opening statement of senator richard j. durbin


    Senator Durbin. I am pleased to welcome you to this joint 
hearing of the Senate Financial Services and General Government 
Appropriations Subcommittee and the Senate Committee on 
Agriculture, Nutrition, and Forestry. I am pleased to share the 
leadership task today with my colleague and friend, Senator Tom 
Harkin, chairman of the Agriculture Committee, which has 
authorizing jurisdiction over the Commodity Futures Trading 
Commission (CFTC). I want to also welcome the ranking members, 
Senator Brownback from the appropriations side, Senator 
Chambliss from the authorizing side.
    Together we want to examine the role and responsibilities 
of the Commodity Futures Trading Commission, looking at your 
oversight of energy markets and oil futures and consider 
whether the agency has the resources it needs to fulfill its 
mission.
    I welcome my colleagues who have joined me on the dais from 
both committees in this rare, maybe unprecedented joint 
meeting. I am pleased to welcome Acting Chairman Walter Lukken 
of the CFTC. I also want to note that CFTC Commissioners Mike 
Dunn, Bart Chilton, and Jill Sommers are in attendance. I thank 
them all.
    Our second panel will include Dr. Mark Rogers of the 
Consumer Federation of America, Terry Duffy of the CME Group in 
Chicago (CME), Dr. Jim Newsome of NYMEX, Charles Vice of ICE, 
the Intercontinental Exchange, and Jim May of the Air Transport 
Association.
    Just a moment of prefatory remarks. Senator Harkin and I--
our hearts are back home, even though we are here today with 
this important topic, because of the suffering which is taking 
place in the Midwest with flood waters. As Tom and I were just 
noting, the disaster which hit Iowa is now headed downstream 
and many of us are going to be facing similar challenges, and 
our hearts and prayers go to all those who are suffering, being 
separated from their homes and businesses and communities. Our 
American family comes together when there are such natural 
disasters to help in these situations, and I am sure that the 
President and Congress will do no less because of this 
devastation in the middle west.
    Less than 2 weeks ago, the price of a barrel of oil on the 
futures market reached $139. In 2 days--2 days--the price rose 
$16, more than 10 percent. Did I miss some war in the Middle 
East? Was there an oil supply disruption that occurred in that 
period of time? The answer is no.
    Something is going on in the oil futures markets beyond the 
fundamentals of supply and demand. And with the economy in a 
tailspin and the average price for a gallon of gas over $4, it 
is absolutely critical that we meet and take a look at it.
    But here is one thing. No one knows for sure what is going 
on here. That is why we are conducting this hearing. The 
regulator of the oil futures markets is the CFTC. Chairman 
Lukken, who we will hear from shortly, has stated on several 
occasions that the CFTC does not believe there is market 
manipulation. Well, that may be true, but maybe it is not. I 
honestly do not know if the CFTC has the resources or the data 
to be able to make any definitive judgment about this market. 
And if it is true that the market is not being manipulated, I 
think that there still could be excessive speculation that is 
driving up the price of oil beyond pure supply and demand.
    Manipulating the price of a future is clearly illegal. 
Simply speculating on whether the price of a future is going up 
or down is normal. That is what traders do. But excessive 
speculation in which large positions are taken that divorce the 
overall price of the commodity from its natural price is 
problematic for consumers and businesses and is really 
threatening our economy.
    In the case of oil, every American family and business is 
hurting from the rampant rise in prices in recent months. Is 
excessive speculation taking place? Why is the price of oil 
futures rising so quickly? There are too many questions to even 
answer in this joint hearing.
    Is the fact that stock markets are not an appealing place 
to invest driving people into the energy futures markets?
    Is it that investors are worried about inflation, using oil 
to hedge against the risk like they used to use gold?
    Is it the hugely deflated dollar exchange rate that is 
behind this or new investment vehicles such as commodity index 
funds driving up futures prices or investment bank analysts 
issuing reports predicting huge increases in oil prices in part 
because the same banks will profit if that happens or 
regulatory differences between the CFTC, which oversees 
American trading, and the Financial Services Authority (FSA), 
which oversees British trading, allowing traders to hide 
manipulative crude oil positions from the CFTC?
    Is it the lack of true oversight of these markets that has 
encouraged institutional traders to take speculative positions 
through overseas markets or over-the-counter (OTC) trades, 
positions they cannot take in other markets?
    You know, the list of questions goes on and on. The answers 
are scarce.
    Given the importance of the price of energy to families and 
businesses in Illinois and across the Nation, I think this is 
the reason why we are coming together and why we need to take 
this very seriously.
    I have introduced a bill with 15 co-sponsors entitled 
``Increasing Transparency and Accountability in Oil Prices''. 
This bill would provide more people and better technology to 
the CFTC to help them understand the situation. It would also 
give them far greater visibility to the traders and the 
transactions that are involved.
    Specifically, it authorizes the CFTC to hire an additional 
100 employees, FTEs, and expresses the sense of the Senate for 
the need of an emergency supplemental request from the 
President for this funding.
    Second, it closes the London loophole by treating oil 
traders located in London as if they were trading in the United 
States for regulatory purposes. So the CFTC would have access 
to oil trades on all exchanges rather than just the trades that 
take place physically in our country.
    Third, it requires more detailed reporting to the CFTC for 
index funds and swap dealers who typically take long positions 
that might drive up the price of oil.
    Fourth, it moves the CFTC Inspector General out of the CFTC 
Chairman's Office to ensure objectivity.
    And fifth, it calls for a Government Accountability Office 
study of the existing international regulatory regime that 
should be preventing excessive speculation and manipulation.
    Many of these ideas are not new. Senators, our colleagues, 
have joined us in this inquiry before, and some will be here 
today. Senators Levin, Feinstein, Cantwell, and Dorgan have 
been very active, and of course, Chairman Bingaman and Chairman 
Harkin have been leaders on these issues as well.
    The CFTC needs more cops on the beat. It needs more 
information. It needs more authority. If the run-up in crude 
oil prices is being driven by large trader banks, pension 
banks, and hedge funds, then speculators have more to do with 
high gasoline prices than Saudi sheikhs.
    And I have to ask, how can we possibly believe the CFTC is 
policing market manipulation in the energy markets and 
consistently ignores some of the massive trades that are going 
on in overseas markets and on OTC markets? I mean, that clearly 
is part of the responsibility of making sure that these are 
honest, transparent markets and that we actually know what is 
happening.
    There has been a lot of speculation about speculation and 
what impact it has on the price of oil. The honest answer is 
today, Chairman Lukken, you do not have enough information. 
Some of that information is not coming your way because you and 
your predecessors consciously said we do not want to know. It 
is a separate market that we are not going to regulate. I think 
the time has come for that information to be available to you 
and to the American people so that we can avoid any possibility 
of market manipulation.


               prepared statement of senator thad cochran


    Before you begin, Senator Harkin, the subcommittee has 
received a statement from Senator Thad Cochran that he would 
like to have included in the record.
    [The statement follows:]
               Prepared Statement of Senator Thad Cochran
    Mr. Chairman, I would like to begin by thanking Senator Durbin and 
Senator Harkin for holding this joint hearing of the committees of 
jurisdiction over the Commodity Futures Trading Commission.
    The Commodity Futures Trading Commission has the important role of 
ensuring that commodity markets function in an efficient manner, 
consistent with applicable laws and regulations. It is important for 
Congress to understand that it is not the role of the Commission to 
implement regulations to force the price of commodities up or down. In 
addition, Congress must carefully review any additional regulations 
which may do economic harm by forcing investors to abandon regulated 
markets. Regulations should not eliminate the price discovery functions 
of the market or prevent individuals from lawfully hedging against 
market risk.
    I am pleased that the Commodity Futures Trading Commission has 
announced new initiatives to address the concerns which have been 
raised by agriculture industries. I applaud Acting Commissioner 
Lukken's leadership for recently hosting a roundtable discussion with 
agriculture leaders from around the country to discuss the problems 
within the futures market and consider suggestions that would provide 
stability without altering an individual's ability to hedge against 
market risk.
    It is important that Congress be fully informed about the resource 
needs of the Commodity Futures Trading Commission. As the volume of 
futures trading increases, it is understandable that the current 
resources of the Commission could be strained. I hope the 
administration will advise Congress if additional funding is required 
and submit a request for appropriations that are clearly required to 
carry out its responsibilities.
    I thank the panelists for appearing before the committees today and 
I look forward to their testimony.

    Senator Durbin. Chairman Harkin.

                    STATEMENT OF SENATOR TOM HARKIN

    Senator Harkin. Thank you very much, Mr. Chairman. I am 
pleased to help co-chair this hearing with the Subcommittee on 
Financial Services and General Government, along with Senator 
Brownback and Senator Chambliss.
    Again, just to repeat what you said, we are holding this 
hearing to address both the mission and the funding of the 
Commodity Futures Trading Commission. The CFTC has critical 
regulatory responsibility to protect the integrity, fairness, 
and transparency of our Nation's futures, options, and 
derivatives markets. A lot of times people wonder what these 
markets are all about. Well, they affect the life of every 
single American in this country on a daily basis. The prices 
that consumers pay for everything from gasoline to a loaf of 
bread are directly affected by the prices that are discovered 
on these markets. That is why it is so critical that these 
markets function without manipulation and without excessive 
speculation.
    The CFTC must have the authority, the resources, and the 
resolve to ensure that the prices discovered by the commodity 
futures markets reflect the fundamentals of supply and demand. 
The CFTC has a critical responsibility to protect customers, 
market integrity, and the public while also promoting efficient 
and internationally competitive futures and derivatives 
markets.
    With good reason, there has been a great deal of interest 
in restoring fuller CFTC authority to monitor and take 
appropriate regulatory action in the derivatives market in 
energy. The farm bill that was enacted last month includes 
important additional authority to monitor exempt commercial 
market trading of oil, natural gas, and other commodities for 
contracts that perform significant price discovery functions. 
So they have just gotten that, and I am going to be curious to 
find out how they are going to implement it.
    In the last few weeks, the CFTC announced energy market 
initiatives to expand international surveillance of crude oil 
trading and agricultural market initiatives, to review the role 
of index trading and speculators in the agricultural 
commodities, to improve market transparency, and to take steps 
to ensure that farmers have the tools they need to manage the 
risk in these times of volatile markets. Now, again, these were 
just announced by the CFTC in the last couple of weeks.
    Today we will hear from witnesses who will provide their 
insight and recommendations as to what further steps we need to 
take. And given the dramatic increases in prices that Senator 
Durbin just talked about, we cannot tarry much longer. The 
American Automobile Association (AAA) reports that gasoline 
prices have risen 30 percent in the last year. At the end of 
May, corn prices rose 54 percent from May of last year, and 
they are continuing to rise this month because of all the 
flooding and everything. It is essential that we determine what 
we can do to ensure that these markets function properly.
    I have often said that when you come to oil and corn, 
demand is pretty inelastic. There is not much substitute out 
there. Well, I guess there is a substitute for oil and that is 
not to use so much of it. But when it comes to corn that you 
feed the hogs and cattle and poultry and everything else, there 
is really not much of a substitute there.
    So we also have to ensure that the CFTC has the resources 
it needs. The volume of futures exchanges has grown 
exponentially. Staffing is down. Futures are traded every hour 
of every day, 7 days a week, in both the regulated exchanges 
and over-the-counter transactions. The CFTC must have the human 
and technological resources to stay abreast of the market 
activity.
    You will remember I asked this question at the confirmation 
hearings about staffing and staffing requirements and resources 
that are needed. It just does not seem to me that with the huge 
growth that we have had, that you can do the same job as you 
did 20 years ago, 30 years. How long have I been here? Since 
1975 when we started this outfit. With all of the exponential 
growth in all these markets worldwide, we did not have this 30 
years ago. Yet, we have got less people working there now. Now, 
I know technology has helped a lot. You can do a lot more with 
technology than perhaps with personnel. I understand that. But 
I still have a nagging feeling that we do not have the 
resources at the Commodity Futures Trading Commission to really 
get a handle on this appropriately.
    So, again, I thank you, Mr. Chairman, for calling this 
hearing. I know sometimes it gets esoteric, but having followed 
the CFTC all these years, I will say this. There is no entity 
right now in America more important to the consumers of this 
country and the essentials of what they need--and that is food 
and fuel--than the CFTC. Thank you very much, Mr. Chairman.
    Senator Durbin. Senator Brownback.

                   STATEMENT OF SENATOR SAM BROWNBACK

    Senator Brownback. Thank you very much, Mr. Chairman. I 
appreciate that you are holding this hearing, along with 
Chairman Harkin. I am pleased to be here. I am glad the acting 
chairman is here as well.
    I would like to note at the outset that my colleague, Pat 
Roberts, is here on the dais with us. We have disasters going 
on in our State as well, as did Manhattan, Kansas and Chapman. 
We have had several tornadoes this past year and our thoughts 
and prayers go out to those communities.
    Mr. Chairman, oil prices are too high. Gasoline prices are 
too high. America is far too dependent on foreign oil. We know 
all of that. We know we are too reliant on foreign oil, 
especially from unstable parts of the world. There is no 
question that Americans are suffering and family budgets are 
being squeezed tighter and tighter by rising gasoline and food 
prices.
    Today, in conjunction with the Committee on Agriculture, 
our subcommittee will examine one aspect of this issue, namely 
the role of futures markets in generating higher and higher 
energy prices. I want to reiterate that this is only one aspect 
of this issue. I think it is a very important one. It is one I 
have spent quite a bit of time thinking about what all is 
taking place here and what we can do to have a positive impact 
on price reduction because it sure looks like to me there is a 
lot of speculation in these prices. I get this from just 
looking around, but also from a number of knowledgeable people 
saying that the fundamentals do not support these prices. Most 
of this speculation is expressed through the CFTC and actions 
and positions that people take.
    There has been much written regarding the role that 
speculators and index funds have played in driving the price of 
petroleum products higher and higher.
    I am pleased that we have witnesses from both the CME and 
NYMEX testifying before us today, along with the Acting 
Chairman of the Commodity Futures Trading Commission. I hope 
you can offer us your front-line assessment of what is 
happening in the futures market, what problems need to be 
addressed, and what we in Congress should be doing globally. 
This is a global issue and must be handled in a global context.
    I have had a number of knowledgeable individuals suggest 
the commodity index funds have played a significant role in 
driving up energy prices specifically and all commodities 
generally.
    On the other hand, I heard from economists who suggest we 
may be experiencing a bubble in commodity prices. They point 
out that unlike the stock market, futures markets are zero sum 
games. For every dollar a futures market participant makes, 
another market participant loses a dollar.
    I noted at the outset of this hearing that commodity prices 
are one of the key aspects of the current problem, and that is 
why I am appreciative that we are holding this hearing today. 
We have got a good set of panels but before we move ahead I 
want to put a few other thoughts forward.
    One is a bipartisan bill that a number of us are soon to 
introduce called the Open Fuels Standard Act that allows and 
would require that one-half of our new cars would be flex fuel 
by 2012 so that we are not held hostage to oil and so that we 
may have other options, whether it be ethanol or methanol. I 
believe we will have strong bipartisan effort so we can get off 
of the oil addiction and have some other options.
    Another issue I think we must face is that we cannot 
continue to limit domestic development and exploration. We have 
done that. That has happened for years. It cannot be allowed to 
continue. It makes us more dependent upon foreign sources. 
These are supply and demand issues, and I think we have got to 
get at that.
    And what I would hope, Mr. Chairman, in your position as 
the number two person in the United States Senate, that we 
would put these items together and we would look at those or 
maybe a couple of others and let us move something forward. 
There is nothing more important that faces the American public 
right now. I think these are key pieces of it that we could 
develop and work on together, but we cannot drop any of them 
off. They need to all be here so that we can drive these energy 
prices down so the American family can have a little bit of 
money left over after the month instead of pumping it all into 
their gas tank.
    I appreciate your holding the hearing.
    Senator Durbin. Senator Chambliss.

                  STATEMENT OF SENATOR SAXBY CHAMBLISS

    Senator Chambliss. Thank you very much, Chairman Durbin. I 
commend both you and Chairman Harkin for holding this hearing 
this morning.
    Let me just say that all Americans have you folks in 
Illinois, Iowa, and throughout the Midwest in our thoughts and 
prayers. We all have had some difficult issues this year with 
the tornadoes and whatnot through the Southeast, and we are 
certainly thinking about all of your folks.
    There has been far too much discussion about the matters 
that we are going to be talking about outside the committees of 
jurisdiction, and I am happy that we are now turning our 
attention to hearing from these witnesses so that the 
Agriculture Committee can take the lead in coordinating any 
necessary oversight or legislative action.
    While I recognize that the resources of the Commodity 
Futures Trading Commission are insufficient when compared to 
the increased workload they are experiencing and I am pleased 
that we will be taking a thorough look at that issue today, I 
would like to focus my comments on the particular issues that 
do fall within the jurisdiction of the Agriculture Committee.
    Several pieces of legislation, which have been introduced, 
address speculation in the energy markets and several hearings 
have been held in many different Senate committees on the 
topic. I have heard several Senators speak on the Senate floor 
about this matter, and I would like to take this opportunity to 
sort of set the record straight based upon the facts that we 
have seen from an Agriculture Committee perspective.
    First, I think it is very irrational that some in Congress 
have gone so far as to blame the Acting Chairman of the 
Commodity Futures Trading Commission for $4 gasoline when, in 
fact, the Acting Chairman of CFTC, Walt Lukken, who will be 
testifying before us today, has probably done more than anyone 
to try and shed some light on what is actually occurring in the 
markets.
    Last year he launched an investigation into practices 
surrounding trading of crude oil and related derivative 
contracts.
    He recently developed an interagency task force with the 
Federal Reserve, the Department of the Treasury, the Securities 
and Exchange Commission (SEC), the Department of Energy, and 
the Department of Agriculture (USDA) to study the role of 
speculators and index traders in energy markets.
    The Acting Chairman also created and convened the Energy 
Markets Advisory Committee to look into energy market 
transparency, including the impact that trading on foreign 
boards of trade is having on such markets.
    Further, Acting Chairman Lukken led efforts to develop an 
agreement with a key foreign board of trade to ensure that the 
CFTC has access to the trading data they need to monitor 
activity in the global oil market.
    And in the past month, he has begun requiring traders to 
provide monthly reports of their index trading; information 
that should help the Commission determine the impact of index 
trading on the market. Certainly, Acting Chairman Lukken, you 
have made great strides in trying to create more and better 
transparency, and we should all be grateful for that.
    These recent efforts, again, all initiated by Acting 
Chairman Lukken, will provide the data necessary to make an 
informed and rational decision of how speculation is affecting 
the price of oil. I believe we should not rush to legislate an 
uninformed solution, particularly when we might create more 
problems by driving speculators into markets for which the CFTC 
receives no trading data and has no ability to monitor.
    And I agree with you, Senator Durbin, in your quote as I 
wrote it down, ``too many questions to be answered in this 
hearing''. And I think you are exactly right. That is why I am 
pleased we are starting here, and I look forward to working 
with you, as well as Chairman Harkin, on additional hearings.
    In addition, simply assigning blame will not yield real 
results, particularly when the main problem is supply and 
demand. In this case, the data that I have seen so far does not 
show that blaming speculators will yield the result that we are 
all looking for, and that is lower gas prices.
    Here is a chart. This shows who is holding large positions, 
those over 350 contracts, in west Texas intermediate (WTI) 
crude oil contracts on the New York Mercantile Exchange where 
approximately 70 percent of trading for the WTI occurs. The 
data shows that while there may have been an increase in market 
participation overall, the proportion of positions held by 
commercial participants, those who can physically deliver crude 
oil or accept delivery of crude oil, and noncommercial 
positions, those held by speculators, has not changed over the 
past 2 years. Speculation in this contract by noncommercial 
participants seems to have held steady at about 20 percent.
    So if we are to fault market speculators for current gas 
prices, we cannot blame it on their increased market 
participation when we compare their level of participation to 
that of commercial participants. Rather, we need to allow the 
CFTC to implement those initiatives that they have just 
recently announced and complete their ongoing investigation. 
With this critical information, we can then make a real 
assessment of any role speculators are playing.
    Some of our colleagues also like to claim that excessive 
speculation is occurring on unregulated foreign exchanges. 
Well, let us be clear. Any exchange in any country can list the 
west Texas intermediate crude contract for trading without any 
approval from CFTC. Just because west Texas intermediate crude 
is physically delivered in the United States does not mean that 
the United States can prevent other foreign boards of trade 
from listing and allowing traders to trade the contract on 
their platforms.
    However, if these foreign boards of trade want to make 
their trading screens available to U.S. traders, then they must 
seek approval from the CFTC. Often this is done through what is 
known as a no action letter. The no action letter, which is 
obtained from the Division of Market Oversight at the CFTC, 
very simply absolves these boards of trade located outside the 
United States from the requirement to become a designated 
contract market so long as the regulatory regime in their 
country has determined to sufficiently regulate their 
activities in order to protect U.S. customers. These letters 
are granted only after the CFTC determines that the regulatory 
body in the country in which the foreign board of trade is 
located will supply the CFTC with regular market surveillance 
information, as well as meet other conditions required by the 
CFTC.
    In the absence of such a letter, there would be no required 
coordination or information sharing between the U.S. regulatory 
authority, the CFTC, and the foreign based regulatory 
authority. Yet, the contracts would still be allowed to be 
traded on these foreign boards. Now, that seems to be truly a 
dark market and not one that I am interested in encouraging.
    The no action letter process, whereby foreign boards of 
trade seek to accommodate the CFTC's demands prior to being 
allowed to offer contracts in the United States actually helps 
the CFTC ensure that they receive adequate data to monitor the 
activities of these foreign exchanges.
    The example most often used by several of my colleagues is 
the trading of the west Texas intermediate crude contract on 
the London-based exchange, ICE Futures Europe. Yes, the CFTC, 
through no action relief, allows ICE to offer this contract to 
U.S. traders. In exchange, ICE Futures Europe has agreed to 
notify the CFTC when traders exceed position accountability 
levels established by U.S. exchanges for the WTI crude oil 
contract.
    Additionally, the United Kingdom's regulatory authority, 
the Financial Services Authority, has been supplying the CFTC 
with requested surveillance data for several years.
    And just last month, the CFTC worked with the United 
Kingdom regulators so that they will now provide the CFTC with 
daily large trader positions, as well as more detailed 
identification of market end users. The CFTC will review this 
data and determine if there is any manipulation occurring. That 
is their job, and we should insist that they get this 
information and properly review it before we request that they 
revoke no action letters and really force traders into the dark 
where CFTC has no ability to monitor what is occurring.
    While I am discussing foreign boards of trade and ICE in 
particular, here is a chart that actually shows the volume of 
shares and open interest in the west Texas intermediate crude 
oil contract since it was listed on ICE in June 2006. The green 
line also shows the settlement price of this particular crude 
oil contract. You can see that beginning in August 2007, when 
the price began to rise sharply, the open interest on ICE and 
the share of market volume traded on ICE was actually falling.
    Again, we need to be cautious that we get our facts 
straight before we start pointing fingers at what some Senators 
have called excessive speculation on a foreign board of trade. 
The American people are interested in real solutions. Simply 
blaming foreign boards of trade or the regulatory agency for 
not overseeing these foreign boards of trade properly for the 
problems we are facing is irresponsible, particularly when the 
data does not support the accusation.
    I am happy to work with my colleagues on efforts to find 
solutions to high gas prices but only after we have all the 
facts. So Chairman Durbin, Chairman Harkin, I again appreciate 
your holding this opportunity to let us begin gathering those 
facts.
    Senator Durbin. Thank you, Senator Chambliss.
    Chairman Lukken, the floor is yours.
STATEMENT OF WALTER LUKKEN, ACTING CHAIRMAN, COMMODITY 
            FUTURES TRADING COMMISSION
    Mr. Lukken. Chairman Durbin, Chairman Harkin, members of 
the committees, I appreciate being invited here to talk about 
the CFTC's role, responsibilities, and resources at the agency.
    During the last few years, the futures markets have changed 
dramatically in size and complexity, experiencing 500 percent 
growth in both volume and products listed. Once member-owned 
and dominated by open-outcry trading, today exchanges are 
technology-driven corporations that primarily trade 
electronically, 24 hours a day, all around the globe. 
Approximately $5 trillion of notional transactions flow through 
these U.S. exchanges and clearing houses every day. This 
description alone would make the oversight of these markets a 
challenge for regulators, but add to it the subprime crisis, 
record energy and agricultural prices, the influx of financial 
funds into futures, and historic low staffing levels at the 
CFTC, and it is clear that these are challenging times for this 
agency.
    Recent substantial increases in the price of crude oil and 
other commodities have had a major impact on American consumers 
and put a considerable strain on U.S. households. These issues 
are a matter of intense focus at the Commission due to the key 
role that the futures markets play in the price discovery 
process.
    The CFTC recognizes that these markets and their 
participants have evolved significantly in the last several 
years. Concerns have been raised recently regarding the role of 
speculators and index traders in the commodity markets. As 
prices have escalated, the CFTC has pursued an active agenda to 
ensure that the commodity futures markets are operating free of 
distortion. The Commission has undertaken several initiatives 
directed to enhancing the oversight of the energy and 
agricultural markets. These initiatives fall into five broad 
categories: one, increasing information and transparency; two, 
ensuring proper market controls; three, continuing aggressive 
enforcement efforts; four, improving oversight coordination; 
and five, seeking increased funding.
    The proper oversight of markets requires transparency. 
Market regulators must receive the necessary information to 
conduct surveillance of market activity, study long-term 
financial trends, and evaluate policy changes as circumstances 
evolve. The backbone of the CFTC's market surveillance program 
is the large trader reporting program. All large traders must 
file daily with the CFTC their futures and options positions in 
the markets. This information enables the CFTC's surveillance 
economists to oversee all traders of size to ensure that no one 
is attempting to manipulate the futures markets.
    As markets have become electronic and global, the CFTC has 
been working to expand and enhance its technology and trade 
data collection to accommodate these trends. Last spring, the 
CFTC announced a major technology purchase that will modernize 
our trade practice surveillance system, allowing the CFTC to 
more effectively sort through the millions of pieces of 
information generated by these electronic markets daily.
    The CFTC is also working to increase the amount and quality 
of trader data we receive from the markets. Two weeks ago, the 
CFTC announced an agreement with the U.K. FSA to expand on the 
trader data already received from ICE Futures Europe on its 
linked crude oil contract that settles off the NYMEX crude oil 
benchmark. This agreement includes providing large trader data 
for the linked crude oil contract daily, extending trader 
information-sharing to all months traded, improving the 
identification of market end users to be completed in 2 months, 
and improving the formatting so trading information can be 
seamlessly integrated into the CFTC's surveillance system. This 
cross-border information sharing is unprecedented among global 
regulators.
    The CFTC has also taken action to improve the transparency 
of index traders and swap dealers in the energy markets. There 
is public concern about the amount of index money flowing into 
the futures markets. Two weeks ago, the CFTC announced that it 
would use its special call authorities to gather more detailed 
data from swap dealers on the amount of index trading in the 
markets and to examine whether index traders are properly 
classified for regulatory and reporting purposes. These 
information requests have been sent and the CFTC expects in the 
coming weeks to begin receiving more detailed information on 
index funds and other transactions that are being conducted 
through swap dealers. After analyzing this data, the CFTC will 
provide a report to Congress by September 15 regarding the 
scope of the commodity index trading in the futures markets and 
recommendations for improved practices and controls, should 
they be required.
    The Commission must also ensure proper controls in the 
marketplace. Last fall, the Commission announced its intention 
to address the mounting regulatory concerns surrounding exempt 
commercial markets that trade OTC energy products. The 
Commission held a public hearing and worked with Congress to 
enact legislation as part of the farm bill to oversee exempt 
commercial markets that trade these linked energy contracts and 
to provide the CFTC with large trader reports and impose 
position limits and accountability limits on such products. 
Congress and this agency believed that these authorities were 
necessary for the regulated energy marketplace.
    As noted earlier, linkages between contracts are not purely 
a domestic occurrence, but also happen internationally across 
borders. Most energy and agricultural commodities are global 
commodities operating in a global marketplace, and the U.S. 
futures markets have been facing the challenges of cross-border 
trading and regulation for many years.
    For more than a decade, the CFTC has worked to develop 
international regulatory networks to increase international 
cooperation and, most importantly, to maintain and improve U.S. 
futures markets oversight in the face of increasing 
globalization. Over the years, the CFTC has developed a mutual 
recognition process that strikes the balance between the need 
for U.S. regulators to maintain confidence in the functioning 
and integrity of the markets and the acknowledgement that 
increased globalization of commodity markets requires 
international coordination and cooperation.
    With this balance in mind, today the CFTC is announcing 
modifications to its foreign board of trade process. After 
consultation with the British FSA, the CFTC is announcing that 
ICE Futures Europe has agreed to begin the process of 
implementing position and accountability limits on its linked 
crude oil contracts. The CFTC has revised ICE Futures Europe's 
no action letter to reflect this change. The CFTC will also 
require other foreign exchanges that seek such direct access to 
provide the CFTC with comparable large trader reports and to 
impose comparable position and accountability limits for any 
products linked with a U.S. futures contract. This combination 
of enhanced information sharing and additional market controls 
will help the CFTC in its surveillance of its regulated 
domestic exchanges while preserving the benefits of its mutual 
recognition program.
    During these turbulent market conditions for crude oil, the 
environment is ripe for those wanting to illegally manipulate 
the markets, and as a result, the Commission has stepped up its 
already aggressive enforcement efforts. Two weeks ago, the 
Commission took the extraordinary step of disclosing that in 
December 2007, its Division of Enforcement launched a 
nationwide crude oil investigation into practices surrounding 
the purchase, transportation, storage, and trading of crude oil 
and related derivatives contracts. Strong enforcement is 
imperative during this time.
    Given the CFTC's size and the enormity of the global 
marketplace, the CFTC must also engage others in Government as 
we seek to find important information about these markets. Last 
week, the CFTC announced the formation of an interagency task 
force to evaluate developments in the commodity markets, which 
includes staff from the CFTC, the Federal Reserve, the 
Department of the Treasury, the SEC, the Department of Energy, 
and the USDA. It is intended to bring together the best and 
brightest minds in Government to aid public and regulatory 
understanding of the forces that are affecting the functioning 
of these markets.
    If the CFTC sounds busy, it is, especially given the 
agency's staffing levels are near record low numbers. Since the 
CFTC opened its doors 33 years ago, the volume on futures 
exchanges has grown 8,000 percent, while the CFTC staffing 
numbers have fallen 12 percent. The agency's lack of funding 
over the course of many years has had a negative impact on our 
staffing situation, rendering it unsustainable for the long 
run. The CFTC is a small agency doing an extraordinary job 
under difficult circumstances. The dedicated and skilled 
individuals at the CFTC are working tirelessly to ensure the 
integrity of these markets. The recent fiscal year budget 
allowed for moderate hiring and additional technology 
investments, and we deeply appreciate your support, Mr. 
Chairman, for this funding.
    However, as the agency embarks on new authorities and 
initiatives in order to respond to changing market conditions, 
it is imperative that the CFTC receive additional resources. 
The CFTC is in the midst of implementing its new farm bill 
authorities which require many programmatic changes and plain 
old hard work for a staff that is already under significant 
strain. Additionally, the agency's staff is racing to implement 
the many recent agency initiatives I outlined earlier in my 
testimony. Recall as well that our employees are also full-time 
regulators charged with overseeing these markets each and every 
day, upholding the agency's mission to safeguard the futures 
markets. Given our staffing numbers, the agency is working 
beyond its steady state capacity and is unable to sustain the 
current situation for much longer without being forced to make 
tough decisions about which critical projects should be 
completed and which ones should be delayed.
    Given these new authorities and the unprecedented market 
conditions of the day, the Commission requested an additional 
$27 million beyond the President's $130 million budget number 
of fiscal year 2009, which would allow the agency to hire 
approximately 100 additional staff. In making the request, the 
Commission is mindful of the need to maintain fiscal restraint 
in appropriations and the competing needs of other parts of the 
Federal Government. However, we believe that this proposed 
funding level is the appropriate level of resources required to 
fulfill our immediate and growing responsibilities.
    In summary, I want to thank these committees for the 
support they have shown this agency over the years. Under 
Chairman Harkin's leadership, last month the Senate Agriculture 
Committee successfully reauthorized this agency with important 
modifications to our authority. I also appreciate the 
legislation that Chairman Durbin introduced last week that 
requests additional funding for the CFTC and incorporates some 
of the initiatives I have outlined today.
    As I stated in my earlier testimony--and it bears 
repeating, given the challenges of the last several weeks--I am 
deeply proud of our highly skilled and productive staff. This 
small agency is working hard to protect the public from 
manipulation, fraud, and abuse in order to ensure that the 
futures markets are working properly.
    Thank you very much for allowing me to testify this 
morning, and I welcome any questions you may have.
    [The statement follows:]
                  Prepared Statement of Walter Lukken
    Chairman Durbin and Chairman Harkin and other distinguished 
members, thank you for inviting me to testify before these Committees 
on the role, responsibilities and resources of the Commodity Futures 
Trading Commission (Commission or CFTC).
    During the last few years, the futures markets have changed 
dramatically in size and complexity, experiencing 500 percent growth in 
both volume and products listed. Once member-owned and dominated by 
open-outcry trading, today exchanges are technology-driven corporations 
that primarily trade electronically, 24 hours a day, all around the 
globe. Approximately $5 trillion of notional transactions flow through 
these U.S. exchanges and clearing houses daily. This description alone 
would make the oversight of these markets a challenge for regulators. 
But add to it the sub-prime crisis, record energy and agricultural 
commodity prices, the influx of financial funds in futures, and 
historic low staffing levels at the CFTC and it is clear that these are 
challenging times for this agency.
    Recent substantial increases in the price of crude oil and other 
commodities have had a significant impact on American consumers and 
have put considerable strain on U.S. households. These issues are a 
matter of intense focus at the Commission due to the key role that 
futures markets play in the price discovery process. We share the 
concerns of Americans and Congress, and the CFTC is committed to 
ensuring that our nation's futures markets operate fairly and 
efficiently, and that commodity prices are determined by the 
fundamental forces of supply and demand, rather than abusive or 
manipulative practices.
    The CFTC recognizes that these markets and their participants have 
evolved significantly in the last several years. Concerns have been 
raised recently regarding the role of speculators and index traders in 
the commodity markets. As prices have escalated, the CFTC has pursued 
an active agenda to ensure that the commodity futures markets are 
operating free of distortion as the agency looks to better understand 
the implications of these structural market developments. The 
Commission has undertaken several initiatives directed to enhancing the 
oversight of the energy and agricultural markets. These initiatives 
fall into five broad categories: (1) Increasing Information and 
Transparency; (2) Ensuring Proper Market Controls; (3) Continuing 
Aggressive Enforcement Efforts; (4) Improving Oversight Coordination; 
and (5) Seeking Increased Funding.
                 enhancing information and transparency
    The proper oversight of markets requires transparency. Market 
regulators must receive the necessary information to conduct 
surveillance of market activity, study long-term financial trends and 
evaluate policy changes as circumstances evolve. The backbone of the 
CFTC's market surveillance program is the large trader reporting 
system. All large traders must file daily with the CFTC their futures 
and options positions in the markets. This information enables the 
CFTC's surveillance economists to oversee all traders of size to ensure 
that no one is attempting to manipulate the futures markets. This 
amount and detail of trade data collected and analyzed at the CFTC is 
unprecedented among regulatory financial agencies.
    As markets have become electronic and global, the CFTC has been 
working to expand and enhance its technology and trade data collection 
to accommodate these trends. Last spring, the CFTC announced a major 
technology purchase that will modernize our trade practice surveillance 
system to enhance basic trade surveillance and permit nearly real-time 
analyses of all trading activity. Investments in technology are 
critical for the CFTC to sort through the millions of pieces of 
information generated by these electronic markets daily.
    The CFTC is also working to increase the amount and quality of the 
trader data we receive from the markets. Two weeks ago, the CFTC 
announced an agreement with the U.K. Financial Services Authority (FSA) 
to expand the trader data received from ICE Futures Europe on its cash-
settled light sweet crude oil contract that settles off the NYMEX 
benchmark crude oil contract. When first listed in 2006, this linkage 
between the two contracts caused the Commission and its surveillance 
staff to be concerned that regulators would not be able to observe the 
entirety of a trader's position in both markets. Once the surveillance 
issue was identified, the CFTC worked with its foreign counterpart, the 
FSA, to share large trader data for these linked contracts to ensure 
that traders were not gaming one market to influence the other. At that 
time, the CFTC's agreement with the FSA provided the CFTC with weekly 
trader information, and daily information in the final trading week, to 
facilitate the ability of the CFTC and FSA to oversee trading in these 
related contracts.
    Building on these efforts, the CFTC and FSA two weeks ago announced 
an expanded information-sharing arrangement, including: (1) providing 
daily large trader positions in the linked ICE Futures Europe crude oil 
contract; (2) extending trader information sharing to all contract 
months; (3) a near-term commitment to improve the identification of 
market end users to be completed within 2 months; (4) improved 
formatting so trading information can be seamlessly integrated into the 
CFTC's surveillance system; and (5) CFTC notification when traders 
exceed NYMEX position accountability levels. This cross-border 
information sharing is unprecedented among global regulators.
    The CFTC also has taken action to improve the transparency of index 
traders and swap dealers in the energy markets. There is public concern 
about the amount of index money flowing into the futures markets. 
Pensions, endowments and other long-term investors increasingly are 
investing a portion of their portfolios in a broad mix of commodities 
in order to diversify their holdings and reduce volatility and risk. 
Unlike traditional speculative trading by hedge funds and other managed 
money, index investors are typically non-leveraged entities utilizing a 
long-term buy and hold strategy. Most of this type of investment comes 
through major Wall Street swap dealers that sell their clients broad 
exposure to the commodity markets through an over-the-counter commodity 
index contract. Swap dealers then are exposed to commodity price risk 
as a result of aggregating these transactions and must utilize the 
futures markets to manage their own remaining residual risk. This 
``netting out'' of risk by swap dealers before coming to the futures 
markets makes it difficult for regulators to determine the total amount 
of index trading occurring in the energy markets.
    Two weeks ago, the CFTC announced that it would use its special 
call authorities to gather more detailed data from swap dealers on the 
amount of index trading in the markets and to examine whether index 
traders are properly classified for regulatory and reporting purposes. 
These information requests have been sent and the CFTC expects in the 
coming weeks to begin receiving more detailed information on index 
funds and other transactions that are being conducted through swap 
dealers. After analyzing this data, the CFTC will provide a report to 
Congress by September 15 regarding the scope of commodity index trading 
in the futures markets and recommendations for improved practices and 
controls should they be required.
                    ensuring proper market controls
    Last fall, the Commission announced its intention to address the 
mounting regulatory concerns surrounding exempt commercial markets that 
trade over-the-counter energy products. The Commission held a public 
hearing and worked with Congress to enact legislation as part of the 
Farm Bill requiring exempt commercial markets that trade contracts 
linked to regulated U.S. futures contracts to provide the CFTC with 
large trader reports and impose position and accountability limits on 
such products. Congress and this agency believed that these authorities 
were necessary to protect the regulated energy marketplace.
    As noted earlier, linkages between contracts are not purely a 
domestic occurrence but also happen across international borders. Most 
energy and agricultural commodities are global commodities operating in 
a global marketplace, and the U.S. futures markets have been facing the 
challenges of cross-border trading and regulation for many years.
    For more than a decade, the CFTC has worked to develop 
international regulatory networks, to increase international 
cooperation, and--most importantly--to maintain and improve oversight 
of U.S. futures markets in the face of increasing globalization. Over 
the years, the CFTC has developed a mutual recognition process that 
strikes the balance between the need for U.S. regulators to maintain 
confidence in the functioning and integrity of our markets, and the 
acknowledgement that the increased globalization of commodity markets 
requires international cooperation and coordination.
    With this balance in mind, today the CFTC is announcing 
modifications to its Foreign Board of Trade process. After consultation 
with the British FSA, the CFTC is announcing that ICE Futures Europe 
has agreed to begin the process of implementing position and 
accountability limits on its linked crude oil contract. The CFTC is 
currently revising its access letter to reflect this change. The CFTC 
will also require other foreign exchanges that seek such direct access 
to provide the CFTC with comparable large trader reports and to impose 
comparable position and accountability limits for any products linked 
with U.S. regulated futures contracts. This combination of enhanced 
information data and additional market controls will help the CFTC in 
its surveillance of its regulated domestic exchanges while preserving 
the benefits of its mutual recognition program that has enabled proper 
global oversight over the last decade.
               continuing aggressive enforcement efforts
    During these turbulent market conditions for crude oil, the 
environment is ripe for those wanting to illegally manipulate the 
markets and as a result, the Commission has stepped up its already 
aggressive enforcement presence. Two weeks ago, the Commission took the 
extraordinary step of disclosing that in December 2007, its Division of 
Enforcement launched a nationwide crude oil investigation into 
practices surrounding the purchase, transportation, storage, and 
trading of crude oil and related derivatives contracts. Although the 
Commission conducts its enforcement investigations in full 
confidentiality, today's unprecedented market conditions and the desire 
to maintain public confidence justified disclosing the existence of 
this investigation.
    Since December 2002 to the present time, the Commission has filed a 
total of 39 enforcement actions charging a total of 64 defendants with 
violations involving the energy markets. The agency has assessed almost 
half a billion dollars in civil monetary penalties in settlement of 
these enforcement actions. The Commission also has achieved great 
success in this area by working cooperatively with the Department of 
Justice on over 35 criminal actions concerning energy market 
misconduct. Strong enforcement is imperative during this time.
                    improving oversight coordination
    Given the CFTC's size and the enormity of the global marketplace, 
the CFTC must engage others in Government as we seek to meet our 
important mission. Last week, the CFTC announced the formation of a 
CFTC-led interagency task force to evaluate developments in the 
commodity markets. The task force--which includes staff representatives 
from the CFTC, Federal Reserve, Department of the Treasury, Securities 
and Exchange Commission, Department of Energy, and Department of 
Agriculture--is examining investor practices, fundamental supply and 
demand factors, and the role of speculators and index traders in the 
commodity markets. It is intended to bring together the best and 
brightest minds in Government to aid public and regulatory 
understanding of the forces that are affecting the functioning of these 
markets. We convened the first meeting last week and will strive to 
complete this work quickly and make public the results.
    The CFTC also recently hosted its second international enforcement 
conference--a 2-day event focusing on global trading in the energy 
markets with senior enforcement officials from 10 countries. Our goal 
was to enhance the ability of the CFTC and its fellow regulators to 
detect and deter misconduct affecting commodity prices in the energy 
sector, and I am confident that it was a success that will bear the 
fruit of coordinated international enforcement for manipulation.
                       seeking increased funding
    If the CFTC sounds busy, it is--especially given that the agency's 
staffing levels are near record low numbers. Since the CFTC opened its 
doors 33 years ago, the volume on futures exchanges has grown 8,000 
percent while the CFTC's staffing numbers have fallen 12 percent. The 
following chart shows the exponential growth in contract volume, 
compared to CFTC staff numbers.



    The CFTC's resources simply have not kept pace with the growth of 
the markets and the growth of similar financial regulators. As you can 
see, the CFTC lags other comparable agencies in funding levels by 
substantial margins. This agency's lack of funding over the course of 
many years has had a negative impact on our staffing situation, 
rendering it unsustainable for the long run.






    The CFTC is a small agency doing an extraordinary job under 
difficult circumstances. The dedicated and skilled individuals at the 
CFTC are working tirelessly to ensure the integrity of the markets. The 
recent fiscal year budget allowed for moderate hiring and additional 
technology investments. We deeply appreciate your support to secure 
increased funding and have acted quickly to bring on additional staff 
to handle the agency's increasing workload.
    However, as the agency embarks on new authorities and initiatives 
in order to respond to changing market conditions, it is imperative 
that the CFTC receive additional funding. The CFTC is in the midst of 
implementing its new Farm Bill authorities, which require many 
programmatic changes and plain old hard work from a staff that is 
already under significant strain. Additionally, the agency's staff is 
racing to implement the many recent agency initiatives I outlined 
earlier in my testimony. Recall as well that our employees are also 
full-time regulators, charged with overseeing these markets each and 
every day, upholding the agency mission to safeguard the futures 
markets. Given our staffing numbers, the agency is working beyond its 
steady state capacity and is unable to sustain the current situation 
for much longer without being forced to make Hobson's choices about 
which critical projects should be completed and which ones will be 
delayed. And while we welcome discussions of any appropriate and 
necessary legislative or agency changes, our agency is clearly unable 
to accommodate additional tasks at our current resource and personnel 
level.
    As you are aware, the administration has proposed for the 
Commission a budget of $130,000,000 for fiscal year 2009. The 
Commission is very appreciative of the budget proposal--which 
reinforces the reversal of an almost two-decade-long downward trend in 
real funding. The $130,000,000 is greatly needed to continue the 
implementation of the long-delayed information technology modernization 
initiative first begun in fiscal year 2008, and enables us to take the 
first steps to address our staffing shortage.
    Given these new authorities and the unprecedented market conditions 
of the day--conditions that could not have been anticipated when the 
fiscal year 2009 budget was first formulated last summer--we welcome 
this hearing at a critical and opportune time. After reviewing the 
impact of recent initiatives and the projections associated with 
legislative changes, the Commission is requesting an additional 
$27,000,000 for a total of $157,000,000 and 596 FTEs. The additional 
$27,000,000 is comprised of $21,000,000 to continue existing efforts to 
ensure the integrity of the futures and options markets and $6,000,000 
to undertake new responsibilities as mandated in the Farm Bill of 2008.
    In making this request, the Commission is mindful of the need to 
maintain fiscal restraint in appropriations and the competing needs of 
other parts of the Federal Government. However, we believe that the 
proposed funding level of $157,000,000 is the appropriate level of 
resources required to fulfill our immediate responsibilities. The 
increase will restore staffing to a level last sustained almost two 
decades ago when market volume, innovation, and complexity were 
significantly less than today and when the agency did not yet have to 
face the expanded workload brought on by globalization of the 
marketplace and the emergence and widespread use of derivatives and 
hedge funds. This of course means the Commission is now doing much more 
with less and continues to deliver a good return on investment for the 
American taxpayer. The Commission's ratio of workload to resources has 
always been lean compared to other financial regulators. But we have 
reached our limit and cannot uphold our mission without immediate 
additional resources.
    In summary, I want to thank these Committees for the support they 
have shown this agency over the years. Under Chairman Harkin's 
leadership, last month the Senate Agriculture Committee successfully 
reauthorized this agency with important modifications to our authority. 
I also appreciate the legislation that Chairman Durbin introduced last 
week that requests additional funding for the CFTC and incorporates 
some of the initiatives I have outlined today. As I stated in my 
earlier testimony, and it bears repeating given the challenges of the 
last several weeks, I am deeply proud of our highly skilled and 
productive staff. This small Federal agency is working hard to protect 
the public and the market users from manipulation, fraud, and abusive 
practices in order to ensure that the futures markets are working 
properly.
    Thank you for the opportunity to appear before you today on behalf 
of the CFTC. I would be happy to answer any questions you may have.

    Senator Durbin. Thanks, Chairman Lukken.
    The CFTC's mission, as stated in the law, is to protect 
market users and the public from fraud, manipulation, and abuse 
of practices related to the sale of commodity and financial 
futures and options, to foster an open, competitive and 
financially sound futures and options market.
    Back a few years ago there was a request from Enron 
relative to OTC trades in energy futures, and there was 
included in the bill passed in the waning hours of the 106th 
Congress a provision which exempted these OTC electronic 
exchanges from CFTC oversight.
    Then at a later period, in January 2006, your agency 
decided that ICE futures related to energy would not be subject 
to the same reporting requirements, large trader reporting 
requirements, as trades, for example, at NYMEX here in the 
United States.
    So my question to you is twofold because of this 
announcement that you made today. When you take a look at the 
volume of trading in energy futures, combining what we know 
that you regulate here in the United States, ICE's 
transactions, and OTC transactions, what percentage are you 
currently regulating before the issuance of this new order? In 
other words, what percentage of the market is being watched 
closely to see if there is fraud, abuse, and manipulation?
    Mr. Lukken. I think what is of greatest concern for the 
CFTC is the price discovery markets which I would say are the 
ICE markets in London, as well as the NYMEX markets. So that is 
where we focus our attention. As mentioned, in our mission, 
price discovery is an important part of that element.
    Senator Durbin. I am going into a specific question. What 
percentage of this price discovery are you currently 
regulating? In other words, what percentage of the market do 
you feel is reporting to you the large trader reports so that 
we can see if there is any manipulation? Is it one-third, one-
half, three-fourths?
    Mr. Lukken. I am not sure I can give you exact percentages. 
I am not sure of the OTC trades. Since that is not reported.
    Senator Durbin. Precisely. Precisely. And that is one of 
the reasons we are here. You do not know. You cannot answer 
that question because there is no regulation of OTC markets.
    Now, let me ask you about what you have announced today. Is 
this going to lead to comparable regulation and disclosure by 
the ICE exchange on energy futures as those who are involved at 
NYMEX?
    Mr. Lukken. Absolutely.
    Senator Durbin. Exactly comparable. By what statutory 
authority can you do this?
    Mr. Lukken. Through our no action letter, we are going to 
receive large trader reports that are exactly the same as we 
will be receiving from NYMEX. ICE is implementing position 
limits, as well as accountability limits that are----
    Senator Durbin. So the regulation is identical.
    Mr. Lukken. For those provisions. And this will also come 
into our commitment of trader reports as well so that we are 
able to show the public what is happening not only on our 
markets but also what is happening in London as well. So people 
will get to see the entirety, the transparency that I think 
people have been looking for.
    Senator Durbin. Will this only relate to trading based in 
America?
    Mr. Lukken. No. We receive the entirety of all the trading 
that is going on in London for this product.
    Senator Durbin. So for west Texas intermediate, if someone 
in France is buying a contract through ICE in the future, they 
will have to make the same disclosures to CFTC as an American 
trading through NYMEX today for the same WTI.
    Mr. Lukken. Yes. And that is the beneficial thing of this 
program, is we get to see non-U.S. participants in the market. 
And that is why our recognition program has been so useful, 
seeing the rest of the world that is trading these products.
    Senator Durbin. And if there is a Dubai exchange opened, 
which is going to trade in WTI in the future, what will be the 
position of the CFTC?
    Mr. Lukken. The exact same position.
    Senator Durbin. The same requirement of large trader 
reports.
    Mr. Lukken. And accountability and position limits.
    Senator Durbin. Now, what are you going to do about OTC, 
over-the-counter trades, these look-alike trades?
    Mr. Lukken. Well, this was our announcement 2 weeks ago. We 
have asked for additional information from swap dealers to find 
out what types of transactions they are bringing onto the 
futures markets. So this will give us a look through into what 
types of transactions that may include. Index traders, which a 
lot of people have concern about, other types of swaps----
    Senator Durbin. So will require the same reports then from 
the OTC markets that are going to be required of NYMEX and ICE 
and the future Dubai exchange?
    Mr. Lukken. Well, we are going to have to look at the data 
before we can make any determination.
    Senator Durbin. Do you have the authority to ask for large 
trader reports for OTC trades?
    Mr. Lukken. For OTC, if it is linked to the futures 
markets, we will have to determine whether we can get that 
information.
    Senator Durbin. What I understand is the law that we passed 
in 2006, if I am not mistaken--pardon me--in the year 2000, the 
Modernization Act, here took away that authority for the CFTC 
for OTC trades. You say you have the authority or you do not?
    Mr. Lukken. Well, right now the farm bill closed this 
perceived gap for OTC swaps that are traded electronically--
once they start to link to the regulated marketplace, we can 
get this data.
    Senator Durbin. So you will have the same authority, large 
trader reports in the same detail for all of the energy futures 
markets that we know of.
    Mr. Lukken. Right, for those traded on an electronic 
exchange.
    Senator Durbin. I did not dwell much on the appropriations 
side of this, but let me just say at the outset, I think you 
are right. Those who wanted to get Government off our back 
ended up taking the cops off the beat, and so we saw a dramatic 
increase in the transactions taking place here, and I am afraid 
it has been to the detriment of our economy. I think it is 
important that you have the qualified professionals and 
computer technology to keep up with this expanding market.
    Chairman Harkin.
    Senator Harkin. Thank you very much, Mr. Chairman.
    Just about the time I think I have a good handle on some of 
the different trading that is going on in commodities, 
something new comes up and I ask where did this come from. And 
what I would like you to go into a little bit more is this 
netting out of the position of the index traders that are 
coming into the market and how that works. What is the extenet 
of this activity? You put out a special call on this--right--to 
get more information.
    Mr. Lukken. Correct.
    Senator Harkin. Could you just elaborate a little bit more 
how this netting out is affecting our futures markets?
    Mr. Lukken. Well, we typically have not looked through the 
futures markets to get data from index traders. Swap dealers 
are Wall Street firms that aggregate lots of their clients' 
businesses together. These clients may have different exposures 
that they want to manage risk on. It may be different airlines 
around the world that are trying to get risk management 
exposure through these Wall Street firms. There may be others 
that want broad index exposures, pension funds and endowments. 
Some may be long the market, some may be short the market. Swap 
dealers provide a tailored service to bring all those together, 
sell them products. They figure out what the residual risk 
might be left over for the firm itself, and then they turn 
around in the futures markets to manage that.
    So typically we have not looked past what the futures 
markets positions have been. It is unprecedented for us to do 
this. And it will be complex. We are going through the billion 
dollar portfolios of large Wall Street firms to figure this out 
and trying to convert this into the equivalence of futures 
contracts. So it is going to be a difficult proposition, a 
complex proposition, but something we have to do to bring 
transparency to these markets so we have a better understanding 
of what is going on.
    Senator Harkin. Tell me more about the danger of this 
netting out. What could it lead to? If you do not get a handle 
on it, you do not understand it, what could it lead to?
    Mr. Lukken. Well, I think there are concerns that people, 
through swap dealers, might be trying to evade position limits. 
Speculators that might go directly to the market are going 
through swap dealers in order to avoid those limits. So that is 
something we will be looking for.
    But the futures markets are helpful for these firms. We do 
not want these firms to not manage the risk of their exposures. 
We do not want a systemic event where they melt down and they 
have not been able to manage risk in the futures markets. So we 
are going to have to find a balance, finding the right 
controls, the right transparency for these, but it is complex. 
Like I said, hopefully by September 15, hopefully sooner, we 
are going to try to get recommendations to Congress on this.
    Senator Harkin. By September 15?
    Mr. Lukken. Yes, sir.
    Senator Harkin. By then you will know the magnitude of it?
    Mr. Lukken. Yes, sir.
    Senator Harkin. Will you also be making it more transparent 
for the public to understand this, for us to understand it?
    Mr. Lukken. That is our hope, is that we can start putting 
into a lot of our public data some of these transactions.
    Senator Harkin. Now, mostly we are talking about energy 
here, but is some of the same thing taking place in 
agricultural markets, agricultural commodities?
    Mr. Lukken. Yes, and we put out a commitment of trader 
report weekly that does break out index trading for 
agricultural markets. The reason we are able to do that is the 
swap dealers are almost one for one selling index products to 
clients and turning around and managing that entire risk in the 
futures markets. So we know for certain that swap dealers' 
books are index trading in the agricultural futures.
    It is not the case for energy. That is why it is a more 
difficult proposition, why it has been harder for us to get at 
this data, but it is imperative we do get the data. And that is 
why we, 2 weeks ago, announced that we are going to put out 
special calls to get it.
    Senator Harkin. So to sum up, would you say this relatively 
new facet where all these index traders are coming in now and 
these large firms are trying to net it out to cover their 
exposure--has this really grown substantially? How much has 
this grown in the last couple years?
    Mr. Lukken. It certainly has grown. We are trying to figure 
out how much it has grown. I think the estimates range anywhere 
from $150 billion to $250 billion on the high end. But it is 
difficult to tell, and that is something we are trying to 
figure out.
    And then also what is its impact? We have anecdotal 
evidence. Obviously, when you see an influx and a rise in 
prices, that raises concerns, but we also have evidence where 
in cash and cattle, which have a very high percentage of index 
trading--I'm sorry--of hogs and cattle, a very high percentage 
of index trading they are down negative for the year. So, yes, 
we are trying to find the smoking gun, and that is what this 
data will help us to find out.
    Senator Harkin. Thank you, Mr. Chairman.
    Senator Durbin. Senator Brownback.
    Senator Brownback. Thank you, Mr. Chairman.
    Chairman Lukken, who are the swap dealers? Who are the 
major swap dealers?
    Mr. Lukken. Wall Street firms such as Goldman Sachs, Morgan 
Stanley, J.P. Morgan, those sorts.
    Senator Brownback. Are there a lot of them or is this a 
small universe of very large players?
    Mr. Lukken. Anywhere in the range of 5 to 10 Wall Street 
firms.
    Senator Brownback. That are doing this $150 billion to $250 
billion investing in the commodities?
    Mr. Lukken. That is correct.
    Senator Brownback. I am curious just on a couple of things. 
Because of the high volatility of futures markets in 
commodities, should Congress look at whether these are suitable 
investments for pension funds altogether? These are very 
volatile markets, and yet you apparently have a lot of pension 
fund monies going into them.
    Mr. Lukken. Correct. Well, that is something that we are 
trying to get better information on. As I mentioned, this 
special call that went out will get us the data to try to find 
out exactly how much is going in, what its impact might be, and 
then whether there are controls we can put onto these types of 
investments to make a recommendation for Congress.
    We also have convened this interagency task force. This is 
not just a micro participant level question for the CFTC, but 
also we are trying to get the people who see the macro 
fundamentals of these markets, such as the USDA, Department of 
Energy, the Federal Reserve, to bring in their expertise and 
their economists to look at this data as well. Hopefully this 
collective group, along with our information requests, can help 
bring more understanding to these markets.
    Senator Brownback. Well, I raise a real question whether or 
not these are suitable investment vehicles for pension funds. I 
mean, we are going through a subprime housing market meltdown 
because there was a new investment vehicle of sorts that was 
really ramped up in a major way, and now we are suffering the 
consequences. Are we going to see that if there is a bust in 
this futures market bubble in a number of these pension funds? 
So I think that is well worth looking at.
    One of the things I want to ask you is, would increasing 
margins have any practical impact on the activities of pension 
funds and index funds in the commodity markets?
    Mr. Lukken. Margins in the futures markets are different 
than the securities markets. Margins in a securities market are 
a down payment on buying stock. A margin--or they call it a 
performance bond in the futures market--is trying to cover a 1-
day price move of the commodity because in the futures markets, 
you are not buying the underlying commodity. You are buying the 
change in price when you buy it and sell it. And so a margin 
has been used to cover those price moves and ensure and protect 
the clearing house from default, and this has worked incredibly 
well over the 150 years of the futures markets. Raising margin 
to try to limit participation and drive down prices----
    Senator Brownback. Let me be tighter on my question. 
Raising margins on speculators or those noncommercial interests 
or those entering into the swap market that are noncommercial 
players.
    Mr. Lukken. Right. I think if you raise margin--I would 
assume that people want to try to drive speculators and drive 
prices down. I am not sure that would be the ultimate effect. 
Certainly, it would probably drive these markets elsewhere 
where there are competitive choices--overseas or OTC. So that 
is a concern. I think there are more direct ways to try to get 
at this activity through transparency and spec limits that we 
currently have in place.
    Senator Brownback. Well, I appreciate what you are 
announcing on London today because I think that is a major 
step, getting them to comply to the same standards as are 
taking place here. And I think we are going to have to do this 
in other markets as well. But I would think we would need to 
look at the same thing on speculative or noncommercial players 
in the swap market as well.
    I had people suggest to me to apply higher margins on long 
positions than on short positions. Now, that seems that would 
be a manipulative move by the Government, but a number of 
people are getting to their wit's end on what these markets are 
doing in driving up prices that seems to be far and above what 
the fundamentals support.
    Do you have a thought on making a different margin position 
on long versus shorts?
    Mr. Lukken. Again, I think if you take it away from what it 
was intended to do, protect the clearing house, and trying to 
manage prices using margin I think is a dangerous precedent.
    Senator Brownback. Well, I think we need to get at the 
question of these volatile markets on pension funds. Pension 
funds drive them up. But if we are in a speculative bubble, 
they could see huge losses on a near-term basis because bubbles 
are--by their very nature--things that pop, and then you have a 
big problem on the other end, as we have experienced.
    Thank you, Mr. Chairman.
    Senator Durbin. Senator Chambliss.
    Senator Chambliss. Thank you, Mr. Chairman.
    Mr. Lukken, we have heard some call for revocation of the 
no action letter process. I am somewhat concerned about that 
because I think it adds to the transparency. Can you describe 
for us the process whereby the Division of Market Oversight at 
CFTC issues those letters and what would happen if they were 
halted?
    Mr. Lukken. The no action process was begun in 1996 at the 
agency trying to deal with some of the global considerations of 
futures trading markets existing around the world. Rather than 
require all U.S. participants--or foreign markets to come and 
register everywhere around the world, a system of mutual 
recognition was developed. And this allows the home regulator 
to be the primary regulator, but the CFTC has to go through an 
analysis to ensure that the home regulator is comparable to the 
CFTC's regulatory objectives. And so that is what we do, what 
we go through when somebody comes in from a foreign board of 
trade. We look at their regulatory status and their systems, 
and we make sure that it has comparable regulatory objectives.
    But we can also condition these no action letters, and this 
is where we gain our leverage with these entities. As you 
mentioned, anybody can list these contracts without our 
approval, but when they want U.S. participant access, we can 
condition it to get the information, as we announced today, to 
impose position limits and accountability limits. And the 
benefit is not only do we get to see the U.S. participants on 
those markets, but we also get to see the foreign participants. 
It would be completely opaque to us had we not issued these no 
action letters.
    So I think it has been helpful for us as a recognition 
program to recognize the global marketplace we live in, but 
also ensure proper controls are in place and that we are 
getting the proper surveillance information from these markets.
    Senator Chambliss. Let me go back to I think what you were 
getting to with Senator Brownback's first line of questioning 
there. Some Senators have suggested that CFTC should increase 
the margin requirements for crude oil trading, and that seems 
to be confusing what the margins in the futures markets are 
truly designed to ensure, which is they are a performance bond 
against potential loss on an open futures contract and are not 
to be used to restrict market volume volatility or price.
    Can you explain a little bit about how individual clearing 
houses and not the CFTC develop margin formulas or, more 
accurately, performance bond formulas?
    Mr. Lukken. Well, they look historically at volatility in 
price changes in the markets. They want to make sure that every 
day the winners are able to be paid by the losers and that 
there is not a chance or a high degree of default of one of 
their customers. If there is a default, a lot of bad things 
happen. Potentially, if people walk away from trades, that 
could lead to a systemic event in the clearing system and it 
could ripple through our economy. So this is why margin is such 
an imperative and first point of protection for the CFTC and it 
is why we hold it sacred in protecting the clearing house.
    The clearing house every day, using a computer program 
called SPAN, looks at volatility in the prices in the markets. 
They run the formulas to make sure that they are covering these 
1-day price moves, and they do it with excess capacity in mind, 
knowing that it could go beyond a traditional 1-day move. And 
when we look at this, we see that they are covering about 99-
point-something percent of the moves in a typical year. That is 
very good. They are doing exactly what they need to be doing to 
protect the clearing house.
    Using it for other purposes, again, gets into dangerous 
territory. Hopefully, we would never use it when prices are low 
trying to bring up prices or prices are too high, to try to 
bring them down. I just think it is dangerous precedent to set 
when we have other, more specific tailored controls in place.
    Senator Chambliss. As Acting Chairman, you have done a 
great deal to ensure that we have more transparency in the 
futures market on energy, and I believe transparency is the key 
to gathering the necessary information we need to determine if 
speculators are playing a role in oil prices. Could you briefly 
describe the efforts that you have initiated?
    Mr. Lukken. Well, certainly beginning with the exempt 
commercial markets, the so-called ``Enron loophole,'' we wanted 
to make sure that those markets were giving us the proper data, 
the proper transparency. And this was a topic of conversation, 
obviously, in the Congress and something that was raised at the 
CFTC when I first took over. We held a hearing on that, 
reported to Congress the need to give us the information for 
these exempt commercial markets. Congress thankfully passed 
that as part of the farm bill. So that is bringing additional 
transparency to us.
    On the foreign markets, we have turned to and worked with 
the FSA to get the proper data. We are now receiving virtually 
identical large trader reports from ICE Futures Europe on these 
trades so we can seamlessly put these into our systems. That is 
extremely helpful.
    Swap dealers and the ``swaps loophole,'' as it is called--
that is what we are trying to get information on. We are going 
to try to find more information with swap dealers, with index 
traders to try to bring additional transparency and sunshine to 
what is going on. It is difficult. It is complex. But it is 
going to help us to make informed decisions at the agency.
    Senator Chambliss. Thank you, Mr. Chairman.
    Senator Durbin. Thank you very much.
    We are going to use the so-called early bird rule, and on 
the Democratic side, I note the following Senators as they 
arrived: Senators Brown, Salazar, Murray, Dorgan, Klobuchar, 
and Lincoln. On the Republican side: Senators Roberts, Lugar, 
Crapo, and Thune. And I will now call on Senator Salazar.
    Senator Salazar. Thank you very much, Chairman Durbin and 
Chairman Harkin and others, for holding this hearing.
    I have a question relating to the so-called elimination of 
the funny money and margin requirements and the capital reserve 
requirements. I know for all of us, whenever we are back in our 
States, we get asked what can we do about the high cost of gas, 
with the high cost of food, and there is a lot of pain all 
across America. But it seems like many people are saying that 
it is speculation that is really driving a lot of these high 
costs, especially in the area of gas and diesel.
    I have a letter from a person that I know well who runs one 
of the largest oil and gas exploration companies in Colorado, a 
person I have known for a long time. And he says to me, Dear 
Ken, I share your concerns that the prices of oil and natural 
gas, not to mention basic foodstuffs, are escalating too 
rapidly. I believe the strongest short-term influence on price 
is the world's extraordinary speculation in these commodities, 
fostered by light and overly generous regulation. And he goes 
on.
    But the central question is why should the United States 
Congress not order the increase in commodity contract margins 
from 5 percent to perhaps 40 percent. So some of the 
recommendations that we have heard from many people are what we 
ought to be able to do is to get a handle on this speculation 
by increasing margin requirements and reserve requirements so 
that we do not have anyone walking up these large supplies of 
oil with very little money.
    What is your response to that kind of reform, Mr. Lukken?
    Mr. Lukken. Well, certainly we have taken steps to try to 
address the concerns about speculation starting with aggressive 
enforcement, but also beyond that trying to increase 
transparency, as I have laid out, to ensure that everybody sees 
what is going on in the markets. I think there is lots of fear 
that there are speculators not currently being made a part of 
our reporting mechanism. And so that is something we have to 
ensure that they are doing.
    Senator Salazar. Let me be more specific. I know you are 
trying to increase transparency so the world knows what is 
going on, but should we as a Congress in our ability to pass 
legislation to enhance regulation through the CFTC require 
margin requirements and reserve requirements to try to take 
speculation out of the market? Is that a good idea? Is it a bad 
idea?
    Mr. Lukken. Right. As I mentioned, using margin, I think is 
a very blunt tool and may potentially drive these markets 
overseas. Although we are very glad that NYMEX is the benchmark 
of crude oil contracts, I would hate if that shifted somewhere 
else around the world or if a lot of this trading went 
underground where we could not see it. So I think margin would 
be a very blunt instrument and could potentially move these 
businesses overseas.
    Senator Salazar. How about capital reserve requirements?
    Mr. Lukken. We typically follow the Basel rules on capital, 
and we are not a part of the Basel Committee--that is mainly 
run out of the Fed and through the bank regulators and the SEC. 
But it is certainly something that we try to consult with them 
on.
    Senator Salazar. There is some notion also that there are 
good traders and there are bad traders out there, and that one 
of the things that we ought to do is to have a much more 
aggressive oversight of the traders that are participating in 
these markets. Would you as the Acting Chairman of the CFTC 
propose or think it is a good idea that we have registration 
and certification of traders in these markets?
    Mr. Lukken. Well, we certainly get all the data from the 
traders. Typically, our registrants--we have to register pool 
operators. We have to register those who advise people about 
commodity investments. We have to register futures commission 
merchants, which is our equivalent of broker-dealers in the 
securities markets. So we have lots of registration. Not all 
traders are registered, but we certainly do get to see every 
trader position and we have strong enforcement efforts to go 
after those individuals, should they try to manipulate the 
markets.
    Senator Salazar. But if you do not have the traders now 
registered, how do you know whether or not there is that kind 
of manipulation going on by those traders?
    Mr. Lukken. Well, we see those traders' positions. They may 
not go through an official registration with the agency, but we 
see who they are, what they are doing, and if they are in any 
way manipulating the markets, we can take strong action against 
them.
    Senator Salazar. The broader question here, in terms of--
people are saying speculation accounts for 30-40 percent of the 
high price that we are seeing. Do you agree with that 
conclusion or not?
    Mr. Lukken. Well, we try to look at this from the data that 
we have. We are trying to figure out--our chief economist has 
testified that we are trying to see if speculators are 
systematically driving the prices. We have not seen evidence 
from our data. It is difficult to prove a negative. And we 
certainly encourage those that are saying this, you know, where 
the prices should be and that speculators are doing this, to 
provide the data to us so that we can look at it and make an 
informed decision. But currently now, we have not found a 
smoking gun.
    Nevertheless, we are not sitting. We are definitely taking 
constructive steps to make sure the markets are working 
correctly, that there is not excessive speculation driving the 
markets. And those are the steps I outlined today in my 
testimony.
    Senator Salazar. Thank you, Mr. Chairman.
    Senator Durbin. Thank you very much, Senator Salazar.
    Senator Roberts has deferred to Senator Lugar, whom I will 
now recognize.
    Senator Lugar. Well, thank you very much, Mr. Chairman.
    I think that a constructive action that the Senate can take 
would be to confirm the three nominees for the CFTC Board. Here 
we are discussing today a monumental problem, and we are 
stressing the need for more budget, and I would agree with the 
chairman that is certainly imperative if they are to have staff 
and if they are to meet this objective. I would just say that 
the American people anticipate action on the part of us, in 
addition to the CFTC, and our part of it, it seems to me, ought 
to be to confirm three out of the five nominees so that in fact 
there is a structure to do the job.
    Now, beyond that, I am just simply impressed by the fact 
that the speculation side, at least as I have read about it--
and you would know more, Chairman Lukken--that is maybe 30 to 
40 percent in the energy business, and that maybe true for corn 
likewise or for beans, which you have not got into today, but 
which is also a part of your purview.
    A very large portion of that appears to be, if not the 
pension funds, some group of people who are supporting at least 
that idea that they are going to make money for people that 
they are trying to represent by going long on oil. They get 
into the market and they do not leave. So they are not coming 
and going, there is not an influence daily or monthly or what 
have you on the price.
    I think Milton Friedman, in his thesis on speculation in 
1953, said, in fact, if the speculators are right, if these are 
fairly bright people--and they try to be because their living 
depends upon it, as well as their clients'--then they smooth 
out the pricing situation. They create a situation in which the 
rest of the market is informed.
    Now, in the current predicament with oil, OPEC to a large 
extent controls supply. Demand is only controlled ultimately by 
price. That is the hurt that we all feel. The fact is, as 
prices have risen, we rebel against that. We wish this was not 
the case. We have not taken steps as a Nation really to 
increase our supply of oil particularly, and yet at the same 
time, we are very unhappy the price is higher. But it does 
affect ultimately what occurs.
    Now, Friedman also pointed out if the speculators as a 
group are absolutely stupid and dull, so then we have trouble--
because at that point, they are going to lose money and there 
will be a crater of the markets. So there is always going to be 
an argument on the philosophy of speculation on the basis that 
the majority of people who are making these investments, 
passive as they may be, are probably right, that there is a 
shortage of whatever it is and therefore, they will make money 
over a long period of time, some of them, months and years.
    Now, what I just simply wanted to use the rest of my time 
to say is I believe that the actions that you have taken are 
very positive actions. In fact, amazing that you have reached 
that agreement with ICE in Great Britain so rapidly. It must 
mean that a number of people in Great Britain and in world 
markets sense precisely what we are talking about today, and 
that is the imperative need for transparency in a worldwide 
sense, these screens that you describe that we can all look at. 
To the extent that you can get all the screens up with these 
so-called no action letters, more power to you because then it 
does make the information available. We may not like the 
information. We may wish the price was coming down on oil, not 
up, but at least we are informed and then can take actions as 
individual consumers, as a Government, or as people to mount 
this.
    So I have no questions of you. I just am pleased to have 
these 5 minutes to comment because I believe the progress of 
the Commission, even with three of five unconfirmed, has been 
exemplary, and I hope that you will have more progress.
    Thank you, Mr. Chairman.
    Senator Durbin. Thank you, Senator Lugar.
    Senator Murray.
    Senator Murray. Thank you very much, Mr. Chairman, both 
chairmen's ranking members. I really appreciate you having this 
hearing today. I think it is very timely and very important.
    I was home this weekend. I went to the gas station on 
Sunday, and I paid $4.45 a gallon. So people who are paying $25 
or $30 just a few years ago are paying $50 or $60. This has a 
huge impact on families' pocketbooks. It is affecting 
absolutely everyone from small businesses to our school 
districts, to our transit agencies, and obviously to families. 
Farmers in our State are really being hurt right now. Some of 
our State's farmers are saying they are spending up to $500 per 
day. That is about 60 percent up from last year on diesel costs 
alone. So we are just getting into the harvest season right 
now. These costs are going up on top of record fertilizer 
prices. I mean, this is really impacting everyone in our 
economy. The rising cost of food, health care--I mean, I do not 
have to say it. This is real and it is big.
    So I wanted to ask you whether you think there are any 
short-term things we can do to reduce the speculative premium 
on fuel prices and bring some relief to these families.
    Mr. Lukken. Well, certainly the steps that we tried to 
outline today about trying to ensure that there is equivalent 
position and accountability limits at all points of entry for 
the crude oil markets--we addressed the London exchanges to 
ensure that there are proper speculative and accountability 
limits there. That is useful.
    The farm bill that was just implemented--we are also 
putting position and accountability limits and large trader 
reporting on those entities, those swap dealing markets that 
are electronically traded.
    Senator Murray. Do you think we will see some relief in the 
short term from those steps?
    Mr. Lukken. It is difficult to say. I am not sure short-
term relief is going to be a result of some of these measures, 
but certainly we are going to get greater transparency in these 
markets so that we are assured that these markets are not being 
manipulated. I guess the concern is that these markets are 
acting irrationally, but I am not sure I can lay that at any 
one participant's doorstep. But certainly we need the proper 
controls in place for speculative behavior to ensure that they 
are not artificially driving the markets.
    Senator Murray. Well, as you know, in my home State of 
Washington back in 2001, the west coast saw this western energy 
crisis, and for years the industry regulators and 
representatives testified before us time and time again that 
market forces were the source of skyrocketing electricity 
costs. It was not until we actually saw the tapes of those 
traders that we realized there were manipulative schemes going 
on at Enron. So you understand I come from my perspective a 
little bit skeptical of some of the people who are saying that 
this is different.
    I think we do have a lot of important lessons that we did 
learn from that Enron scandal, the potential for moral hazard 
when industry is left unchecked. It reminded us of the 
importance of market transparency that you have talked about, 
strong Government oversight.
    Now, I know the fundamentals of the oil prices are 
different and unique, but I am very concerned about the 
rhetoric that I am hearing that just dismisses the possibility 
that market manipulation is occurring.
    Can you tell me is the CFTC able to rule out market 
manipulation as a factor affecting these skyrocketing fuel 
prices?
    Mr. Lukken. Well, market manipulation is different, I 
think, than what we have been discussing, sort of this upward 
pressure that speculators may or may not be having on prices. 
Manipulation is an illegal act of somebody individually or 
cooperatively with others trying to game the system for a 
profit without risk. And so that is what we look for. In 
December, we announced we have a national crude oil 
investigation that is looking into storage practices, how these 
things are purchased in the cash markets, as well as the 
derivatives markets, pipelines, shipping, all these things that 
factor into the price of crude oil. We are moving forward with 
that investigation and hope to have results in the coming time 
period.
    Senator Murray. When will we know what you have found?
    Mr. Lukken. Well, these cases have to be developed, and 
these are complex legal cases. But hopefully, soon.
    Senator Murray. Is there any question in your mind that we 
should be looking for or are you finding solid evidence that 
you think does not lead to market manipulation?
    Mr. Lukken. We have seen cases in the past where people 
attempt to manipulate the markets by holding one leg of their 
position on the futures markets where they can benefit, but 
then doing something outside of our view. So these transparency 
measures we mentioned are helpful. We are able, under current 
law, to go after OTC positions when we see problematic trading 
on the futures markets, and we do that quite frequently.
    Manipulation is typically a very short-term move of the 
market for profit. It should not be confused with sort of this 
upward pressure we are discussing.
    Senator Murray. But right now we cannot rule it out.
    Mr. Lukken. No. We always are looking for manipulation. In 
fact, we settled our record manipulation case last fall with BP 
for manipulating the propane markets. So it happens all the 
time, and we go after it aggressively.
    Senator Murray. And your budget request gives you enough 
resources to be able to go after that.
    Mr. Lukken. The request we made today for an extra $27 
million certainly would give us the enforcement tools to go 
after this, yes.
    Senator Murray. Because I do think we need to know the 
answers to those questions, Mr. Chairman. Thank you very much.
    Senator Durbin. Thanks, Senator Murray.
    Senator Roberts.
    Senator Roberts. Thank you, Mr. Chairman. And I want to 
associate myself with your remarks and that of my colleague 
from Kansas in regards to your very timely statement with our 
concern and our prayers for people who are suffering from the 
weather damage, floods. We just went through another round of 
tornadoes in Kansas. I do not know what we did to Mother 
Nature, but she sure is responding in a way that we do not 
like. And it was due to the tornadoes that we experienced--and 
Sam and I were out in Chapman that lost about 70 percent of the 
town and in Manhattan, home of the ever-optimistic and fighting 
Wild Cats of Kansas State, but the tornado did not do that much 
damage to the university but did to the community.
    And then a little small town called Soldier. At the south 
edge of the town of Soldier, there is John Growell and Larry 
Holiday, two farm families, two cattle operations. And both 
couples were in the basement when the storm hit and then awoke 
to find no house, nothing, no operation. But both farms were 
swarming with people to help pick up and burn up and haul off 
the rubble. In a shorter time period than we think, I think 
both John and Larry will be back in business.
    Now, I am standing there talking to a guy who has lost his 
home. I am standing there talking to a person where a tornado 
completely just wiped him out, he and his neighbor across the 
highway. Does he talk about the tornado? He just stands there 
and said, look at all the friends that I have got. But he said, 
Senator, what I really want to talk to you about are these high 
fuel prices. And that is amazing. I mean, that shows you the 
real concern on the part of people. Senator Murray was talking 
about the same thing.
    Chairman Lukken, thank you for quickly responding to my 
questions from your nomination hearing nearly 2 weeks ago.
    Let me say that basically I am just going to cut to the 
chase. Your challenge is that before you can implement all the 
changes that we gave you in the farm bill, many are calling for 
greater authorities. I do not know if we are pushing the rope 
or not. One suggestion is to increase the margin requirements. 
Senator Salazar talked about that. We are going to hear 
testimony on the second panel on both sides of this issue. 
Currently the exchanges, obviously, set their own margin rates 
to protect themselves and to cover their liabilities.
    Based on comments and responses to the CFTC's agricultural 
market roundtable back in April, what effect would increased 
margin rates have on agricultural producers and, in particular, 
the grain elevators? They are going through a very tough time, 
as you know. There are people that say what is good for energy 
is good for agriculture. I am not sure that is the case. Now, 
you answered that in part with Senator Salazar, but tell me 
what the CFTC's agricultural market roundtable in April would 
say or did say about the increased margin rates on the 
producer, more especially the elevator.
    Mr. Lukken. Well, margin rates, as you mentioned, have been 
going up. They are going up because of higher prices. And the 
clearing house is making sure that people are able to cover 
losses, potential losses, in case of default. This has had a 
tremendous impact on agricultural producers and merchandisers, 
especially we saw in the cotton markets where a couple-day 
price run-up caused cotton merchandisers having to go to their 
banks to find hundreds of millions of dollars of lines of 
credit at a time when credit was shrinking in the markets. This 
was a terrible situation. And so what we have tried to do in 
the futures markets is to work with the exchanges to develop 
good practices for setting margins, but we have also had to 
reach out to people outside of our normal responsibilities, 
which are the banks, the agricultural lending authorities that 
oversee a lot of these agricultural loans.
    And so we had the Farm Credit Administration, we had the 
Kansas City Fed at our recent agricultural forum. We have been 
talking to the Chicago Fed, the Farm Credit Administration, and 
all these folks together to try to collectively think through 
these situations so that farmers can meet these margins, so 
that they are not exposed to risk when prices move. It has been 
difficult. I mean, corn, above $7. It is a difficult situation 
right now for all people in agriculture, and we are trying to 
facilitate a discussion with lenders on the margin issue.
    Senator Roberts. Senator Chambliss informed me corn just 
went to $9. Oh, no. I am sorry. He says no, no, that is not the 
case. Well, he certainly got my attention at any rate.
    Mr. Lukken. It got my attention too.
    Senator Roberts. No. Let us not have any heart attacks.
    I want thank you for your statement. I have a feeling here, 
Mr. Chairman, that everybody in America and their dog is aware 
of the fact that fuel prices have gone up dramatically. We talk 
about supply and demand. I do not think there is an instant 
answer here. And we talk about speculation, whether that is 20 
to 30 percent.
    But when I was talking to those two gentlemen who lost 
their houses and their operations in Kansas, I said, well, you 
know the CFTC is conducting an investigation on this. And they 
said, who? I said, the CFTC. I had to say the Commodity Futures 
Trading Commission. Here are two cattlemen that basically were 
somewhat aware of what you do but not really, and I think there 
are a lot of folks in agriculture and a lot of folks around the 
country that are just really not aware that you exist and that 
there are $5 trillion of notional transactions that now flow 
through the U.S. exchanges and the clearing houses daily.
    I commend you. I am trying to find your statement here. Two 
weeks ago the Commission took the extraordinary step of 
disclosing that in December 2007, its Division of Enforcement 
launched a nationwide crude oil investigation into practices 
surrounding the purchase, transportation, storage, and trading 
of crude oil and related derivatives contracts. And you are 
going to make a report to us on September 15. I am not sure the 
American public knows that. I sure hope they know it now that 
you are doing your job and you are doing that.
    And then you have this unique task force which includes 
staff representatives of CFTC, obviously, the Federal Reserve, 
the Department of the Treasury, the Securities and Exchange 
Commission, the Department of Energy, the Department of 
Agriculture, all examining investor practices, fundamental 
supply and demand factors and the role of speculators and index 
traders in the commodity markets. So I commend you for doing 
that. And I do not think a lot of people doing a lot of the 
finger pointing are really aware of that.
    I think we should not tarry, as the chairman has said. We 
do not even have you out of the Agriculture Committee yet in 
terms of not being active, let alone on the floor. So I think 
you ought to be confirmed, along with the new commissioners.
    And we need to see if this new authority works before we 
add more authority on, I would hope. Maybe there is something 
there with the new authority that we could add in.
    And we need to get the funding, Mr. Chairman. I back you 
all the way on this funding. We ought to have the $157 million 
or billion or whatever it is. You can pick.
    But at any rate, on the funding issue--I see I am over at 
least 2:25. That was the price of corn back in 19--whenever it 
was. So I better quit at that point.
    But we need to quit tarrying on our part as well in regard 
to the funding issue and getting you confirmed and waiting on 
your report. And thank you for a very good statement.
    Senator Durbin. I have remaining on the list Senators 
Dorgan, Klobuchar, and Lincoln. Senator Dorgan.
    Senator Dorgan. Mr. Chairman, thank you very much. Thank 
you for allowing me to sit in on this subcommittee. I serve, of 
course, on five other subcommittees.
    Mr. Lukken, I was looking at the statements that you have 
made, and it seems to me you have already made a judgment about 
whether there is excess speculation or whether there is 
manipulation in the markets. I would say to my colleague from 
Kansas, I do not mind pointing fingers. If there is excess 
speculation that is driving up the cost of energy, I say let us 
point some fingers and find a way to get that excess 
speculation wrung out of the system.
    But, Mr. Lukken, on May 7, you said, we can say with a high 
degree of confidence that people are not manipulating the 
energy markets. That was May 2008. And I believe you just told 
the chairman that you do not know what quantity of contracts 
you regulate or do not regulate. How can you, on May 7, say 
that you can say anything with a high degree of confidence?
    Mr. Lukken. We talked about this a bit earlier, but 
manipulation is different than I think what people are 
concerned about--an asset bubble in commodities. Manipulation 
under our law is somebody intentionally individually or with a 
group of individuals trying to push up prices illegally. It can 
occur and we have not seen the entire marketplace collaborating 
together to manipulate.
    But having said that, we are taking significant steps to 
ensure the latter, which is ensuring that there is not an 
artificial price due to these structural changes in the 
markets, which are index traders, swap dealers, we are trying 
to get more information about these new market participants, 
what they are bringing to the market, and how that is impacting 
prices. That is something we have announced today, that we are, 
by September 15, going to provide to Congress some 
recommendations on practices for those types of participants.
    Senator Dorgan. So you're saying that what you said in May 
does not apply to the issue of speculation. It applies to 
manipulation, which you say is distinct from speculation.
    But you have indicated in July last year, January this 
year, and February this year, that the markets are functioning 
well. The exchanges are functioning well. The underlying 
fundamentals of the markets have been reflecting price. That 
would suggest to me that you do not pay much attention to this 
issue or do not give much credence to the issue of whether 
there is excess speculation.
    Again, I would ask the question, if, in response to Senator 
Durbin, you do not have the foggiest idea what percent of the 
contracts you are seeing or regulating, how would you have a 
conclusion about whether there is excess speculation in these 
markets?
    Mr. Lukken. Well, we certainly see all the contracts that 
are discovering prices, and that is our main focus, those 
contracts that people are referencing every day. How do you 
know that the price of oil is $130-plus a day? Well, it is 
traded on the NYMEX, and that is the price discovery mechanism. 
We work very hard to protect that entity, and that is why we 
are going to ask for additional information from exempt 
commercial markets which also service price discovery, from the 
London markets that also service price discovery, and the 
NYMEX, the regulated markets. So that is where we focus our 
attention.
    If we see problems in the over-the-counter markets, we have 
the authority to reach out and get that information on a need 
to know basis, and that has been very helpful.
    Senator Dorgan. But, Mr. Lukken, you do not have a 
classification of what is speculative. My understanding is you 
are classifying as commercial accounts that which could be pure 
speculation. I guess I am trying to understand where your mind 
is on this. There are a lot of folks who have said--and I think 
with some credibility--that there is a substantial amount of 
speculation in these markets, excess speculation. This is not 
new. We have seen speculation in markets before. We understand 
the result of it. We understand the consequences of it, and it 
is what requires regulators to be aggressive and active in 
trying to deal with it.
    Now, let me go to these no action letters. The staff of the 
foreign board of trade no action letters--did they contemplate 
that exchanges that may be owned in part or in whole by 
American interests would escape the CFTC regulation on U.S. 
exchanges even when they trade on U.S. exchanges?
    Mr. Lukken. This was the International Petroleum Exchange, 
a British exchange started in the 1980s. It was, as you 
mentioned, bought by ICE here in the United States, but it has 
been regulated by the Financial Services Authority for 20-plus 
years. Its compliance department is there. Its board is there. 
And up until 2006, they did not list any contracts dealing with 
the United States. When they did, we held a hearing. We did a 
rulemaking, and we changed our policy to get additional 
information from these markets. And that has provided a great 
transparency to the markets.
    We recently announced that we are getting additional 
information that is comparable to our regulated marketplace, 
and today we announced we are getting position and 
accountability limits for those markets. So we have taken 
constructive steps to ensure that these markets are properly--
--
    Senator Dorgan. I see what you are announcing in the last 
few weeks when there is a great deal of pressure, but I must 
say that you approved a foreign entity, partially owned or 
substantially owned by U.S. interests, to put computer 
terminals in a U.S. city and trade in a circumstance that 
should have represented in my judgment regulated trading here 
in this country.
    I am out of time, so let me ask this question. Do you 
think, based on what you know now, that what has happened to 
the price oil and therefore gasoline in the last 15-17 months 
is simply the fundamentals? Because you have said that several 
times. As you know, 4 of the last 5 months, we have seen 
increased crude oil supplies in this country. In 4 of the last 
5 months, demand is going down. If supply was going up, demand 
is going down, and price is going up like a Roman candle, and 
you are sitting there saying, it is just the fundamentals, do 
you still think that it is the fundamentals and there is no 
significant speculation problem here?
    Mr. Lukken. Well, obviously, there are powerful 
fundamentals in play in these markets. The Dollar, when we look 
at it, could potentially have as much as a 25 percent impact on 
commodity prices.
    But regardless of that, our job is to ensure excessive 
speculation is not artificially driving prices, and that is 
what we have done with our constructive steps over the last 9 
months. Again, we are full-time regulators even beyond the 
initiatives we have announced today, the farm bill legislation 
that we are implementing, the reports that we are going to 
provide to Congress. So it is a strain on an agency that is low 
on staff.
    Senator Dorgan. I just observe that your constructive steps 
over the last 9 months are at odds with your statements in 
recent months. I mean, you have already made the statement that 
this is just the fundamentals at work, which is a way of saying 
you all that are finger pointing on excess speculation----
    Mr. Lukken. I would look at the actions that the CFTC has 
taken over the last year, and I think it is pretty powerful.
    Senator Dorgan. Well, I am just looking at what you have 
said and what you have told the American people and what you 
have told the Congress. I believe it is at odds with aggressive 
action to try to respond to this. It seems to me you have 
already made a decision about your position on this issue.
    Senator Durbin. Thank you, Senator Dorgan.
    Senator Harkin had to leave but wanted me to add for the 
record, because this has been raised by a couple Senators, on 
the nominations to the Commodity Futures Trading Commission, 
that the Agriculture Committee received answers to written 
questions from the nominees on Friday, June 13, and that he 
will be moving on this information very soon.
    We have Senator Thune.
    Senator Thune. Thank you, Mr. Chairman.
    Mr. Lukken, what percentage of--maybe this question has 
been asked. If it has, then I apologize. But what percentage of 
long energy contracts are held by noncommercial investors would 
you say?
    Mr. Lukken. By noncommercials? I am not sure I have those--
I think it is near 30 percent. I have my staff here, but I 
think it is around----
    Senator Thune. Do you have any idea how that percentage has 
changed over the past 10 years?
    Mr. Lukken. I think it has been roughly the same 
percentage-wise, maybe slightly increased.
    Senator Thune. Has that had any impact on market price? Has 
the amount of those who are taking those types of positions--if 
that has, in fact, impacted price?
    Mr. Lukken. I think that is something we are studying. We 
have not seen direct evidence of that, but we are taking steps 
to try to ensure that it is not.
    Senator Thune. And the CFTC does have the authority and/or 
the resources to track that sort of information.
    Mr. Lukken. Well, we are asking for additional transparency 
into certain activities, such as swap dealers and index 
trading, and we are also asking for more funding for technology 
and other resources and people in order to go after this type 
of activity.
    Senator Thune. You said in your testimony the backbone of 
the CFTC's market surveillance program is the large trader 
reporting system. All large traders must file daily with the 
CFTC their futures and options positions in the market. This 
information enables CFTC's surveillance economists to oversee 
all traders of size to ensure that no one is attempting to 
manipulate the futures markets. That is your quote.
    Just how well is that large trader reporting system working 
today in your estimation?
    Mr. Lukken. Well, as far as the technology, that is 
something we definitely need to modernize. We are taking steps 
to do that over time. I think it has worked as a control on the 
market very well. I mean, our concern typically in the futures 
markets is as these prices expire, that somebody--similar to 
the Hunt silver crisis in the 1980s--could hold a large futures 
position, at the same time holding the underlying cash market, 
owning silver, for example. That causes manipulation. That 
causes severe distortions in the prices. We have controls in 
place to ensure that no one is holding a large enough of a 
futures position to try to distort the markets. And we can ask 
for information and jawbone them and ask them for economic 
justification, and ultimately ask them to get out of their 
positions. So this has worked very well over the years to try 
to prevent this.
    But even if manipulation occurs, we have aggressively gone 
after manipulation over the last--especially since the 
California energy crisis, assessing nearly $500 million worth 
of penalties against these people trying to manipulate the 
markets.
    Senator Thune. Basically you have alluded to in your 
statement today the manpower and resource constraints that the 
commission is dealing with. Can you assure the committee today 
that no one is attempting to manipulate either the energy or 
any other commodity futures markets?
    Mr. Lukken. No, I cannot. But we are looking for it and we 
are policing it aggressively if we find it. Policemen cannot 
always prevent crime, but crime happens and you go after it as 
aggressively as you can. And it is the same for the markets. 
You cannot stop all bad actors. We have systems in place to try 
to stop it, if we can, and if we cannot, we go after it on the 
enforcement side.
    Senator Thune. Do you believe then that there are problems 
due to lack of transparency? It has been, again, also mentioned 
earlier today with energy commodities with U.S. delivery points 
that are traded on exempt commercial markets, foreign boards of 
trade, such as the ICE.
    Mr. Lukken. Well, certainly transparency is helpful for 
regulators, and that is what we have tried to improve on over 
the 2 years that this contract has been listed. We immediately 
started getting information from that contract in 2006. A month 
ago, we reached an agreement with FSA to get almost exactly the 
same information that we are getting from NYMEX now that can be 
seamlessly put into our systems. That is helpful.
    Today we announced additional controls on those markets. So 
I think we feel very comfortable that we are seeing these 
markets and trying to ensure that manipulation is not happening 
on those markets as well.
    Senator Thune. Specifically, what issues do you think are 
created by a lack of transparency in these markets? If you do 
not have that kind of information.
    Mr. Lukken. Well, seeing more of these transactions ensures 
that we can prevent manipulation when it occurs. It also allows 
us to understand sort of the intent behind some of these 
traders. Right now, we are asking for additional information 
for swap dealers and index traders. There is a lack of clarity 
in our data about how much is coming into our markets. We are 
going to start receiving that soon and hopefully can make 
informed decisions about that information in a report to 
Congress.
    Senator Thune. I would encourage you in all these steps 
that you are taking that I think are great. We look forward to 
the September 15 deadline. There is a widely held view, I think 
as you know, across this country that this is contributing to 
these volatile swings, and the more information, the better. 
Transparency in a lot of ways has got to be a part of the 
solution.
    And if there are tools that you lack today or things that 
you need legislative authority or direction to accomplish, we 
would certainly appreciate and welcome those suggestions 
because we want--at least I do--to see the steps that we take 
actually correct the problems that exist out there, not create 
additional problems. So it is going to be very important that 
as you pursue some of these initiatives that you have 
undertaken, that you share your findings with us. There is a 
clear mood out there, I think, in the public that something 
needs to be done. Thank you.
    Thanks, Mr. Chairman.
    Senator Durbin. Thank you, Senator Thune.
    Senator Klobuchar.
    Senator Klobuchar. Thank you, Mr. Chairman. Thanks for 
holding this hearing.
    Mr. Chairman, I was listening to the other Senators 
thinking what I saw at home, people waiting in line at a Costco 
station, going around the block in their minivans because they 
are just trying to save a few bucks. Or people I talked to in 
rural Minnesota can only afford to fill up one-half their tank, 
just because they do not have the pocket change to fill it.
    And I was listening to what you were saying to Senator 
Thune about the criminal analogy. I am a former prosecutor. 
That was my old job, and we would always say you can have all 
the laws you want on the books, but you need people to enforce 
them.
    And you should know I was just out with 50 Minnesota high 
school students who remembered my old job. As I walked into the 
hearing, they said, Amy, is that a murder prosecution going on 
in there? And you should be happy to know I said, no, that it 
was not.
    But I wanted to ask you about this. We always say follow 
the money, and you find the bad guys. But you need the tools to 
do that.
    And we had an interesting Commerce hearing maybe you heard 
about a few weeks ago with Senators Dorgan and Cantwell and 
others. And one of the witnesses talked about how the rule used 
to be before this Enron loophole got in the middle of the night 
in the year 2000, I think, that the burden shifted with that 
loophole and that still really has not been fixed. The burden, 
which we always cared about as prosecutors, used to be on the 
traders to show that something should not be regulated, and now 
it has shifted to you, to the CFTC, to say that something 
should be regulated.
    Would you like that burden to be shifted back? Because, as 
far as I understand, the Enron loophole closure that we did in 
the farm bill did not fix that.
    Mr. Lukken. Well, I think what we fixed in the farm bill 
was the most important aspect, which is the price discovery 
mechanism that has occurred in over-the-counter markets for 
electronic exchanges. And so that was something that we were 
able to get additional information, put position limits and 
accountability on those types of transactions. That has been 
truly helpful.
    I think what has been referred to--I am not sure if Mr. 
Greenberger's testimony----
    Senator Klobuchar. I think that was him, yes.
    Mr. Lukken. Yes, in regard to 2(g), another exclusion for 
swaps in our act.
    And the main concern is that we do not have manipulation 
authority as a result of this. Our enforcement staff has been 
going after people manipulating these markets for many years 
since then, since 2000. We have never lost on this issue that 
we do not have manipulation authority.
    Senator Klobuchar. So you do not care about having--for us, 
as prosecutors, it was a big deal who had the burden.
    Mr. Lukken. Again, we have not lost a case on this matter. 
So it has not affected us.
    But the more important thing is what we did in the farm 
bill, which is ensuring that as these price discovery markets 
develop, that we have the proper information and proper 
controls in place.
    Senator Klobuchar. Exactly, and that was helpful, but from 
what I have heard, in addition to this burden issue, there is 
also the issue of foreign exchanges. I know you have gotten ICE 
to make some agreements and that you are going to get more 
data, but you can have all the information you want, and if you 
do not have the authority to prosecute, the authority to 
regulate, we are not going to get the results.
    And you know, the oil companies testified before Congress 
saying that oil should be trading at $55 a barrel instead of 
where it is. And Senator Dorgan was asking about the 
fundamentals of the market. It seems that something is going on 
here.
    And to me, the more enforcement actions that you do, 
whether it means more cops on the beat through more funding or 
more tools in your hands, that you would want to set those 
examples. And what I just find frustrating is that--I 
understand you are taking some measures here, but I would think 
you would want an even stronger law. And what I am asking you 
is what other things can we do to strengthen your hand.
    Mr. Lukken. Okay, thank you.
    Senator Klobuchar. No. I am asking you right now.
    Mr. Lukken. Well, certainly funding is something we cannot 
do on our own and something that we have talked about in my 
testimony. But we are taking the initiatives to try to get 
better information and after we look at the swap dealers and 
the index traders and the amount of monies and whether controls 
are necessary, if there are legislative fixes coming from that, 
we will certainly make sure that Congress knows about it.
    Senator Klobuchar. But even when you have reached this 
agreement and ICE is going to give you more data and do some 
things differently, does that really give you the authority to 
go after some of these foreign exchanges? I guess we will be 
hearing that from the next panel.
    Mr. Lukken. Well, we certainly have the ability to go after 
U.S. participants that are trying to game London versus the 
United States. We can sue them under our manipulation 
authority.
    The no action letter is the biggest tool we have against 
these exchanges. We can just pull it if they are not enforcing 
their laws or not enforcing limits, they are not overseeing the 
markets as we think they should. So that is a very powerful 
tool as well.
    Senator Klobuchar. Okay, but what is the difference between 
how you can regulate one of our exchanges versus what you can 
do with ICE? I mean, there still must be differences between 
your powers.
    Mr. Lukken. Well, certainly there are differences, but we 
also have to recognize that we are in a global economy.
    Senator Klobuchar. But what are the differences? Just so I 
can tell those people in line at Costco. It is not going to 
make them feel good to say the Dubai exchange is regulating 
them.
    Mr. Lukken. As far as the oversight of the markets, they 
are almost the same. We have self-policing authorities both on 
regulated exchanges, compliance departments, to make sure that 
people are not manipulating the markets. The London exchange 
requires the same. They require their exchanges to police these 
markets effectively.
    What we have added on top of everything else--the 6,000-
page rule book that FSA has for their registrants--is 
information that we need to surveil the markets, which is 
getting this 25 percent of the market share that they hold. We 
are going to get all those traders, and not just U.S. 
participants, but foreign participants we would not normally 
see. We are getting additional insights into these markets that 
we would not have but for this recognition----
    Senator Klobuchar. And I understand that. I have run out of 
time here.
    You do not want a burden shift. Is this correct? You do not 
want to get back what you had before 2000?
    Mr. Lukken. I am not sure of the burden shift, the legal 
argument. I have to admit I have not----
    Senator Klobuchar. Well, maybe we could write it down and 
then you guys can write back to us.
    Mr. Lukken. Okay. We can try to answer your----
    Senator Klobuchar. Okay, thank you.
    Senator Durbin. Thank you, Senator Klobuchar.
    We have one more panel, and I know Senator Lincoln and 
Senator Nelson have waited patiently. We have been told that 
one of the panelists has to leave by 1 o'clock, so we are going 
to ask people to stick as close as they can to the 5-minute 
rule. Senator Lincoln. No pressure.
    Senator Lincoln. Thanks. Well, it has all been said, but 
not everybody has said it. Is that how it goes?
    A special thanks to the chairman and the ranking from both 
the committees for having the hearing today.
    You know, I think we have all come to the conclusion that 
high energy and commodity prices have a tremendous impact on 
our constituents, and I think we have all shared stories. I 
visited with a director of a senior feeding program in my home 
State where not only were the high prices becoming a problem 
for food, but the fuel prices were phenomenal, to the extent 
that they were freezing meals instead of delivering them every 
day and delivering meals five and six at a time. And I asked 
her what impact that had made, and she said, well, one of our 
longstanding constituents passed away because nobody came to 
see him over 6 days because he had 6 days of meals' worth in 
his freezer. It has a real impact on the working people across 
this country.
    I think at least most of us realize that there are multiple 
issues driving higher commodities and energy prices, whether it 
is the weak dollar, strong demand from emerging world 
economies, geopolitical tensions in some of these oil-producing 
regions, weather-related supply shortfalls. We have had wheat 
crops under water. We know our neighbors to the north in Iowa 
and Indiana with flood waters, increased production of ethanol. 
All of these things have a direct impact.
    I think we all remain unclear about what the size of the 
impact that this huge influx of investment in commodities 
futures markets, particularly from institutional investors, is 
having. And so we are looking to you to be helpful to us in 
terms of what percentage of this is a part of this problem that 
we are seeing. We know there are long-term solutions to oil 
prices in terms of renewable fuels, but what is our best avenue 
to make an immediate and greater impact on the real lives of 
people that we represent in our States?
    A couple of the questions that I had and a lot of people 
have already asked--but I think it was Senator Brownback that 
asked you about the swaps basically. I guess you were listing 
some of the firms that deal in swaps, Goldman and J.P. Morgan, 
and others. What percentage of those firms' dealings do you 
think are in swaps and in that tool?
    Mr. Lukken. I think a large portion of their book is swap 
transactions. Again, they internally net out the risk before 
they come to the futures markets, but those pressures--it would 
be helpful to understand what is underlying those futures 
markets positions, and that is what we are attempting to find 
out. As I mentioned before, it is very complex to unwind the 
book of a multibillion-dollar firm, but it is something we are 
attempting to do over the next few weeks and hopefully report 
back to Congress some more transparency in this area.
    Senator Lincoln. But I think your average person would 
probably think that it is a small percentage of what they do, 
and yet, I do not think it is from what I am seeing and 
hearing. It is going to be a large percentage of what these 
financial houses are involved with.
    Mr. Lukken. And interestingly enough on crude oil, I looked 
at the most recent stats for swap dealers. Their positions are 
roughly as much long as they are short. So they are only about 
a few hundred thousand contracts long, which may sound like a 
lot, but they are almost flat in their book, meaning that they 
are offering risk management products not only to people who 
are looking for the prices to increase, but also people who are 
trying to hedge transactions, commercial businesses on the 
short side that are looking for risk management products. So 
this is helpful. Swap dealers do provide a service of allowing 
people to manage risk in the markets, and that is helpful. And 
that is something we want to preserve.
    Senator Lincoln. Very real people like pensions and other 
groups too, which is a large portion of their operations as 
well. So I think that is important.
    The last thing I just wanted to--I want to make sure I am 
clear. We keep questioning you about the OTC, the over the 
counter. You cannot do anything about that until it has 
happened. Right?
    Mr. Lukken. Well, if we see an ongoing manipulation in the 
futures markets, we can reach into the OTC markets to see what 
their positions are and hopefully try to prevent things from 
happening. But typically we----
    Senator Lincoln. But that is not something you do on a 
regular basis. There is nothing that triggers you to do that.
    Mr. Lukken. And the difficulty of the OTC markets is that 
they are not standardized, transparent. A lot of these are very 
individualized, negotiated transactions. It would be difficult. 
And the enormity of the task of getting all this information 
in, making some sense of it, what might be influencing prices, 
what is not--it would be very difficult, very expensive for the 
agency to do. What we do is try to concentrate on the price 
discovery markets to ensure that they are not being manipulated 
or artificially driven with the ability to reach into the OTC 
markets on a need-to-know basis.
    Senator Lincoln. Just one quick thing. As you are 
undertaking this transparency initiative regarding the swaps, 
do you anticipate any policy changes in the information that 
you are gathering?
    Mr. Lukken. I do not want to prejudge the issue, but 
certainly we are open to looking at all options.
    Senator Lincoln. Great.
    Thank you, Mr. Chairman.
    Senator Durbin. Thank you, Senator Lincoln.
    Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman.
    When did you first become aware that there was at least a 
perceived problem in excessive speculation, at least that some 
people believed that there was excessive speculation? When did 
you first become aware of that concern?
    Mr. Lukken. Well, certainly during the price run-up, people 
started to talk about this, and we wanted to make sure that our 
controls in place were proper. So certainly over the period of 
time that people have been concerned, over the last 6 to 9 
months.
    Senator Nelson. At what point in the run-up? Where was the 
flash point from your standpoint? Obviously, from the 
standpoint of others, it was probably sooner than it was for 
you, but where did you first decide there could be a problem 
here?
    Mr. Lukken. No. We certainly started taking steps in 
regards to some of these actions as much as 1 year ago.
    Senator Nelson. $50, $60? What I am trying to get to is 
what number or numbers caused you more concern than not?
    Mr. Lukken. I am not sure I can put a certain number on it, 
but we have been working actively over the last----
    Senator Nelson. 6 months?
    Mr. Lukken [continuing]. 9 to 12 months on all these 
initiatives.
    Senator Nelson. Well, but then why are we waiting until 
September to have a report back? You know, the sense of urgency 
on the street seems to be different than the sense of urgency 
in the bureaucracy. And we have to match that sense of urgency. 
It does not seem to be matched, as far as I am concerned, if we 
are waiting until September.
    And then in terms of the tools, you do have certain tools. 
Have you chosen to exercise some of those tools to dip into the 
market to spot check, to audit to find out what is going on?
    Mr. Lukken. Well, that is what we are doing now with the 
swap markets. We are reaching into those markets in an 
unprecedented way. We have never reached beyond the futures 
markets to see what an underlying customer's book might be.
    Senator Nelson. Well, why did we not do that back 9, 10 
months ago when you began to see things moving faster than they 
had moved previously? I think you would agree that the run-up 
was unprecedented in terms of the size and perhaps even in 
terms of the timing. Is that accurate?
    Mr. Lukken. Well, we are certainly, given our resources and 
staffing levels, doing as much as we can as fast as we can, 
probably beyond capacity right now. So we are doing it as 
quickly as we can.
    Senator Nelson. We have had emergency legislation. If that 
were the case, then why were we not made aware to be able to 
move more quickly on appropriations instead of in this process 
right now?
    You know, I do not recall any other potential legislation 
outside of the farm bill. Is there other potential legislation 
that was offered or suggested by your agency to us?
    Mr. Lukken. Beyond the farm bill? No. We have tried to 
provide technical assistance to the Agriculture Committee on 
different proposals that they had.
    Senator Nelson. But any other suggestions as to what we 
might have done in that bill or in other legislation to help 
deal with this issue?
    Mr. Lukken. Well, certainly if we feel that we need more 
legislative authority coming out of this request for 
information from swap dealers and index traders, we will ask 
for it.
    Senator Nelson. Okay.
    Well, you know, we talk about silver and what happens and 
why we try to protect those markets in terms of outside 
acquisition, such as the Chrysler Building. Silver is optional. 
The Chrysler Building, sort of optional. But commodities, in 
terms of food and fuel, are not optional items.
    Can you tell us? Is the next target going to be a commodity 
market for healthcare costs? That certainly would have a great 
deal of impact on people if somebody, aside from insurance, but 
in the market start protecting. Is that happening today? Do you 
know, is somebody trying to do that?
    Mr. Lukken. I am not aware of anything----
    Senator Nelson. If they were, would you be interested in it 
and concerned about, and would you think that you had the 
adequate tools to deal with something like that today?
    Mr. Lukken. If there was a contract listed for healthcare 
issues?
    Senator Nelson. Forward contracts of not insurance policies 
but for forward contracts of healthcare providers, not the 
insurers.
    Mr. Lukken. It was a futures contract, it would certainly 
be under our jurisdiction.
    Senator Nelson. Well, I know it would, but would that be 
different than worrying about silver?
    Mr. Lukken. Absolutely not. We treat every commodity the 
same.
    Senator Nelson. Maybe that is part of the problem. Maybe 
that is part of the problem. We do not recognize, we do not 
define the differences between silver/healthcare, silver/fuel, 
silver/food. It seems to me that there is a need to prioritize, 
and if your agency cannot prioritize, if you do not have the 
authority to do it, maybe that is something that we ought to 
establish so that we get beyond what Will Rogers was reportedly 
to have said about commodities. Somebody buying something that 
they do not expect to get from somebody who does not have it.
    And if you cannot see that there is a tie between 
speculation today, between those who are buying the forward 
contracts for their own future needs and those who are putting 
them in hedge funds or putting them in pension plans, and it is 
all treated the same, we are not going to get out of this mess 
no matter what you report to us on September 15.
    Thank you, Mr. Chairman.
    Senator Durbin. Thank you, Senator Nelson.
    Chairman Lukken, thank you for your testimony today.
    I ask the second panel to take the chairs at the table here 
and apologize that this has gone on a little longer than 
expected, but it is because of the intense interest. Fifteen 
Senators came to this room today. That is a pretty substantial 
turnout in the United States Senate, and I think it is an 
indication of how important this issue is. I thank Senator 
Harkin for this joint hearing. I thank all my colleagues who 
have been part of this.
    Again, Chairman Lukken, thank you for coming. I appreciate 
that very much. And all the commissioners. If you would like to 
stay, you are welcome to do so.
    So on the second panel, Mark Cooper is here, Director of 
Research, Consumer Federation of America; Terrence Duffy, 
Executive Chairman of the CME Group from Chicago; Jim May, 
President and Chief Executive Officer of the Air Transport 
Association; Dr. James Newsome, CEO and President of the New 
York Mercantile Exchange; and Charles Vice, President and Chief 
Operating Officer of the Intercontinental Exchange.
    Your statements will be made part of the record. Again, I 
apologize that the hearing has gone on a little longer than we 
expected, but it is a good thing. It is an indication of the 
level of interest. So if you would give us your best executive 
summary for the record, we may have time to ask a few questions 
here, though we are a little bit pressed.
    Mr. Cooper, would you like to start?
STATEMENT OF DR. MARK COOPER, DIRECTOR OF RESEARCH, 
            CONSUMER FEDERATION OF AMERICA
    Dr. Cooper. Thank you, Mr. Chairman, members of the 
committee.
    The story has been told many times, but the lessons have 
still not been learned. The lack of effective prudential 
regulation of financial and commodity markets leads to 
excessive speculation that disrupts the economy and costs 
consumers hundreds of billions of dollars.
    Two years ago, the Senate Permanent Subcommittee on 
Investigations estimated the speculative premium on oil at $20 
to $30 a barrel when the price was $77. Today the premium is 
over $40 a barrel, $1 a gallon.
    Oil executives have testified in Congress that it costs $50 
to find and deliver a barrel of oil to a refinery. OPEC says it 
is defending $80 a barrel, but the speculators have driven the 
price to over $130 a barrel and the declining dollar does not 
account for more than one-quarter of that.
    Over the past 2 years, the speculative premium has cost the 
typical American household $1,500, if we include natural gas, 
and the economy over $500 billion. $500 billion down the drain 
3 years after granting the exemption, and the CFTC discovers it 
does not have enough information, that the foreign boards of 
trade do not set adequate position limits and accountability 
limits, that there might be a problem with OTC and swap trades. 
Frankly, they have waited far too long.
    In March 2006, I wrote a report for four Midwest attorneys 
general that concluded that something was wrong in the natural 
gas market. We came to Washington and we shared it with the 
CFTC, and they assured us that they had their finger on the 
pulse of that market. You may recall that March 2006 was the 
month when Amaranth was running its corner and the CFTC did not 
have a clue.
    You are perfectly right to be skeptical about the program 
and assurances that have been offered to you today. The 2 
years' worth of assurances since we and the permanent 
subcommittee first sounded the alarm were full of hot air. The 
CFTC now admits that they really did not know.
    Congress must enact broad reforms that close the loopholes, 
remove the discretion that was given to the CFTC, and compel it 
to do its job. No more discretion for administrators to decide 
that this foreign board of trade can go under these terms. This 
is your job to protect the American public.
    There are five areas in which we believe action is 
necessary.
    One, we have to chase the bad guys out. All traders must 
register and be certified. All trading must be reported across 
all transactions.
    Two, eliminate the funny money. Reserve margin requirements 
must be increased and capital reserve requirements must be 
increased as well. It is too easy to leverage in this market 
and trade on thin air by asset-light corporations like Enron 
who do not have the backing to withstand serious problems.
    Three, reduce the ability to push up prices. Lower position 
limits and tie position limits and margin requirements to the 
needs of physical traders. That is who this market is supposed 
to serve, not speculators and investors. We must ban conflicts 
of interest so that people who issue loud reports and then 
profit from them have to stop. That is what got us into trouble 
with the tech bubble.
    Four, restore the proper function of commodity markets and 
their regulators. Close all the loopholes. Enforce meaningful 
speculation limits. Do honest analysis by classifying traders 
correctly. The numbers we have seen here and heard about here 
today about who the speculators are include big banks as 
commercials. They do not belong there. Make sure you find out 
who they are counting when they tell you that the positions 
have not changed. And remember, a few hundred thousand 
contracts is actually a huge quantity of oil, equal to 1 
month's supply that that handful of companies is holding. So 
understand how big they are and what they can do.
    Finally, we must redirect investment to productive long-
term uses. It is too easy. We reward too much flipping stuff in 
our economy. We need a short-term capital gains tax. We used to 
have one. And that will restore the balance between long-term 
investments and short-term investments. We should move the 
pension funds out of this. We should move the institutional 
index funds out of it.
    Now, the speculators will say this will squeeze liquidity 
out of the market, but in fact, these markets suffer from 
excess liquidity. And the malfunctioning markets and abusive 
practices that afflict commodity trading today were illegal and 
largely unheard of just a decade ago. The unregulated markets 
and exotic financial instruments that were allowed by the 
irrational exuberance for deregulation in the Commodity Futures 
Modernization Act over the past decade have done vastly more 
harm than good. We were better off without them.
    If the Congress restores order, I guarantee you the foreign 
boards of trade will, in fact, comply. They need to trade in 
legal American documents, and the individual traders, frankly, 
will comply too. They do not want to have to go to places like 
Bangladesh and Zimbabwe which do not have extradition treaties, 
and they certainly do not want to live in Leavenworth if they 
do not obey the law.
    Be firm. Re-establish order. We can regulate American 
commodities and America markets. Thank you.
    Senator Durbin. Thank you, Mr. Cooper.
    [The statement follows:]
                 Prepared Statement of Dr. Mark Cooper
    Mr. Chairman and Members of the Committee, My name is Dr. Mark 
Cooper. I am Director of Research at the Consumer Federation of 
America. I greatly appreciate the opportunity to testify today on the 
immense burden that the speculative bubble in commodities is placing on 
American households.
    The story has been told many times, but the lessons have still not 
been learned. The lack of effective prudential regulation of financial 
and commodity markets leads to excessive speculation, bubbles and 
bursts that disrupt the economy and cost consumers hundreds of billions 
of dollars.
    Congressional studies, like that prepared by the Senate Permanent 
Subcommittee on Investigations, Committee on Homeland Security and 
Governmental Affairs \1\ and industry analyses \2\ have become 
convinced that speculation is contributing to skyrocketing energy 
prices--by adding as much as $40 per barrel or more. Natural gas prices 
have been afflicted by a speculative premium of a similar order of 
magnitude.\3\ Since the Senate Permanent Subcommittee on Investigations 
first flagged this problem 2 years ago, the speculative bubble in the 
energy complex has cost the economy more than $500 billion--i.e. half a 
trillion dollars. Expenditures for household energy have more than 
doubled in the past 6 years and speculation has played a significant 
part in that run up.\4\ In the past 2 years, the speculative bubble has 
cost consumers over $1,500. Speculation in food commodities is adding 
billions to the burden.
---------------------------------------------------------------------------
    \1\ Senate Permanent Subcommittee on Investigations, Committee on 
Homeland Security, The Role of Market Speculation in Rising Oil and Gas 
Prices: A Need to Put the Cop Back on the Beat (June 27, 2006).
    \2\ Akira Yanagisawa, Decomposition Analysis of the Soaring Crude 
Oil Prices: Analyzing the Effects of Fundamentals and Premium 
(Institute of Energy Economics, March 2008; Robert J. Shapiro and Nam 
D. Pham, An Analysis of Spot and Futures Prices for Natural Gas: The 
Roles of Economic Fundamental, Market.
    \3\ Mark Cooper, The Role of Supply, Demand and Financial Commodity 
Markets in the Natural Gas Price Spiral, A report Prepared for the 
Midwest Attorney General Natural Gas Working Group (Illinois, Iowa, 
Missouri, and Wisconsin (March, 2006) Structure, Speculation and 
Manipulation (August, 2006).
    \4\ Statement of Dr. Mark Cooper, ``Consumer Effects of Retail Gas 
Prices,'' Judiciary Committee Antitrust Task Force, United States House 
of Representative, May 7, 2008.
---------------------------------------------------------------------------
    While this speculative bubble imposes this cost on consumers and 
the Nation, the Commodity Futures Trading Commission (CFTC) did nothing 
to slow the speculative rampage. On the contrary, it insisted that the 
markets were functioning properly, that the problem was entirely caused 
by fundamentals, and that excessive speculation was not a problem. It 
went so far as to distort its own data to hide the problem, while it 
continued to irresponsibly deregulate trading.
    While market fundamentals have pushed prices up, the evidence is 
now overwhelming that speculation has made matters much worse. In an 
analysis of natural gas markets I prepared for four Midwest attorneys 
general a few months before the Permanent Subcommittee on 
Investigations issued its first report on speculation, I showed that 
there is a powerful interaction between physical market problems and 
financial market problems that creates a vicious, anti-consumer price 
spiral (see Exhibit 1). There is not doubt that speculation has been a 
major contributor to recent price increases and consumers are now 
paying a huge speculative premium.
  irresponsible deregulation is the primary cause of the speculative 
                                 bubble
    The speculators will say we cannot live without these trading 
practices, but the malfunctioning markets and abusive practices that 
afflict commodity trading today were illegal and largely unheard of 
just a decade ago. The unregulated markets and exotic financial 
instruments that were allowed by irrational exuberance for deregulation 
over the past decade have done vastly more harm than good. We were 
better off without them.




    If the Congress subjects these markets and practices to effective 
regulatory oversight, it will restore commodity markets to their proper 
and useful function in society. More importantly, subjecting these 
markets to sound prudential regulation is the only way to bring down 
gasoline and food prices in the short term because it will burst the 
speculative bubble that has taken hold of commodity trading.
    Speculative bubbles have diverse origins and are difficult to 
analyze and predict, but there is widespread agreement that the 
underlying cause of the bubble in recent years is a massive influx of 
money into the commodity markets. ``Disappointing'' returns on stocks 
and other investments are frequently cited as a reason that the money 
has rushed into commodities, but there is also no doubt that lax 
oversight and easy terms have made these markets magnets for money.
    The Commodity Futures Modernization Act of 2000 (CFMA), which was 
slipped into an omnibus bill with no hearings or debate at the eleventh 
hour of a lame duck session of Congress, created what is known as the 
``Enron loophole,'' allowing a huge trade in energy commodities and 
other financial instruments, that is beyond regulatory oversight. The 
CFTC has added insult to injury by issuing ``no action letters'' 
allowing contracts designated in U.S. commodities to be traded without 
exercising oversight over those contracts. It has allowed foreign 
exchanges to trade in U.S. commodities on U.S. soil, subject to 
foreign, not U.S. regulatory review.
    Where commodities are traded on exchanges that are subject to U.S. 
regulatory authority, the rules are far too lax. Traders in stocks are 
required to meet margin requirements of 50 percent. Traders who buy an 
energy commodity on an exchange only have to meet a margin requirement 
of 5-7 percent. This low margin requirement allows people to leverage 
their assets multiply their trading volume. Capital reserves for 
traders are far too low--creating ``asset-lite'' companies (like Enron) 
who do not have adequate equity to ensure soundness. Simply put, low 
margin and reserve requirements artificially inflate the amount of 
trading that takes place. The exchanges also set limits on positions 
that are far too high, allowing single entities to control large 
quantities of supply, and, in the case of natural gas, have a very 
short settlement window, which means a small number of trades set the 
closing price.
    Institutional investors and new trading instruments like index 
funds have poured hundreds of billions of dollars into commodity 
markets at such a rate that speculation overwhelms the markets, 
accounting for the vast majority of trading. The markets no longer 
provide their proper role to assist commercial traders, buyers and 
sellers who actually use the physical commodities, to hedge and smooth 
their physical production and consumption of the commodities. Instead, 
the contracts have become assets, traded hundreds of times without ever 
being physically delivered. The volatility and speculation driving 
price increases have forced smaller commercial traders out of the 
market. The exchanges have allowed this to happen by failing to impose 
effective speculation limits or position limits. The CFTC has obscured 
by problem by misclassifying large speculators (banks like Goldman 
Sachs and Merrill Lynch) as commercial traders.
   the problem of hyper-speculation afflicts a wide range of markets
Natural Gas
    In March of 2006 I published a report for the Attorneys General of 
Illinois, Iowa, Missouri, and Wisconsin that concluded that all was not 
right in natural gas financial markets. The report showed a close 
correlation between the escalation of prices and changes in trading 
policies and practices (see Exhibit 2). The report combined that 
empirical observation with a detailed explanation of the cause of the 
problem, which is excerpted below.




  --Thus, while there is a spiral of upward pressure on prices 
        radiating from the physical market and filtered through 
        regulation, this analysis shows that the financial commodity 
        markets may be dramatically accentuating the problem of high 
        and volatile prices.
  --Defenders of the financial markets want to blame the whole problem 
        on the physical markets and even claim that traders will help 
        solve the problem. But the evidence suggests that the financial 
        commodity market bears at least some of the blame for pushing 
        prices up. Today, the evidence that the financial commodity 
        markets are significantly accelerating price increases in 
        natural gas markets is circumstantial, but quite strong.
  --The overall pattern of prices supports the proposition that they 
        have run up beyond anything that is justified by the problems 
        in the physical market.
    --We have a commodity that is vulnerable to abuse, in a new market 
            that has been under-regulated from its birth.
    --Public policy adopted in 2000 further reduced regulation and 
            opened the door to counterproductive, if not outright 
            manipulative, behaviors and pushed prices higher.
    --We have a clear theory about how consumers could be hurt in this 
            market.
    --The problem is that both the structure of the market and the 
            behaviors of market players are biased in favor of higher 
            prices and against consumers.
    --We have evidence at the micro levels of a pervasive pattern of 
            past abuses and rumors about suspicious behavior in the 
            current market.\5\
---------------------------------------------------------------------------
    \5\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, p. 88.
---------------------------------------------------------------------------
  --There are several ways in which financial markets may be magnifying 
        the upwardly volatile spiral of prices and contribute to the 
        ratchet:
    --Financial markets thrive on volatility and volume, but volatility 
            and volume have costs. Producers of gas demand to be paid a 
            higher premium to bring their gas to market sooner rather 
            than later. Traders demand to be rewarded for the risks 
            they incur, risks that are increased by the trading process 
            itself.
    --The influx of traders fuels volatility and raises concerns about 
            abusive or manipulative trading practices.
  --Econometric analyses of the natural gas markets in recent years 
        raise important questions as to how well the natural gas 
        markets work. Given the uncertainty about the functioning of 
        these markets, the claim that the market price is always right 
        because it's the market price should be questioned:
    --The economic analysis does not support the claim that these 
            markets operate efficiently to establish prices.
    --Risk premiums, which raise the price substantially (10-20 
            percent), are high and rising.
    --Prices are well above the underlying costs of production.
  --The operation of financial markets is no accident. Trading reflects 
        the rules that are established--by law and through self-
        organization. The most troubling part about natural gas trading 
        is that policy makers really have no clue about what goes on:
    --The majority of transactions take place in markets that are 
            largely unregulated.
    --These over-the-counter markets, reported in unaudited, 
            unregulated indices, are a major factor in setting the 
            price of natural gas. And these unaudited, unregulated 
            markets have behaved very poorly in recent years, with 
            numerous instances of misreporting of prices.
  --Even where there is light-handed regulation, the rules are 
        inadequate to protect the public:
    --Players in the natural gas markets can hold very large positions 
            without having to disclose the size of their positions to 
            any regulatory authority, and a small number of large 
            players can influence the price that consumers pay in a 
            very short period of time and under circumstances that 
            place the consumer at risk.
    --Index prices are often based on a small number of self-reported 
            transactions and there are no mechanisms for determining if 
            such transactions represent an accurate sampling of the 
            natural gas market. When even the hint of accountability 
            was imposed by merely being asked to certify the veracity 
            of reported transactions, traders stopped reporting.\6\
---------------------------------------------------------------------------
    \6\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, p. 9.
---------------------------------------------------------------------------
    --There has been a failure of public policy at every level to build 
            a system that protects the public. The structure of the 
            physical markets induces conduct that has created and is 
            sustaining a tight market. The structure of the financial 
            commodities markets induces conduct that magnifies upward 
            pressures on prices . . . 
    --The financial markets are not only largely unregulated, they are 
            structured in such a way that there are a large number of 
            small buyers who have weakened incentives and limited 
            ability to resist price increases facing a small number of 
            large sellers who have a strong incentive and a much 
            greater ability to hold out for higher prices. Holding out 
            on the supply side may simply mean buying and holding 
            assets in the ground or positions in the futures market and 
            waiting for buyers who need the commodity to blink.
    --Most troubling is the fact that many of the impacts of many of 
            the legislative and regulatory policies that have worked to 
            the detriment of consumers were predictable and 
            preventable, given the nature of the commodity and the type 
            of market that Congress and the regulatory agencies in 
            Washington created.\7\
---------------------------------------------------------------------------
    \7\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, p. 89.
---------------------------------------------------------------------------
    When the Federal Energy Regulatory Commission got wind of the 
report, without ever talking to us about it, they ridiculed it at an 
open meeting of the Commission. The Chairman of the FERC, reflecting 
the party line of the administration, insisted that all the price 
gyrations were the result of market fundamentals. He was absolutely 
certain that the FERC had its finger on the pulse of the commodity 
markets. He was absolutely wrong.\8\ At the very moment he was 
rejecting our analysis, unbeknownst to him, the Amaranth corner was 
taking place. Neither the FERC nor the CFTC had a clue about what was 
going on.
---------------------------------------------------------------------------
    \8\ A point-by-point response to the FERC's misguided comments on 
the report was provided to but never acknowledged by the Commission 
(Letter Appendix to Cooper, The Role of Supply, Demand and Financial).
---------------------------------------------------------------------------
    Missing a massive manipulation is embarrassing, but the real damage 
came when the blind ignorance of the FERC led it to waste the chance to 
use its newly minted powers under the Energy Policy Act of 2005 to 
follow our recommendations to adopt a broad view of abusive behaviors 
that afflict energy commodity markets.\9\ As I wrote in the natural gas 
report:
---------------------------------------------------------------------------
    \9\ Federal Energy Regulatory Commission, Order No. 670, 
Prohibition of Energy Market Manipulation, Docket No. RM06-3-000, 
January 19, 2006; Memorandum of Understanding Between The Federal 
Energy Regulatory Commission and the Commodity Futures Trading in 
Commission Regarding Information Sharing and Treatment of Proprietary 
Trading and Other Information, October 12, 2005.
---------------------------------------------------------------------------
  --The FERC has also issued rules implementing the Energy Policy Act 
        of 2005 that change its market monitoring procedures and 
        implement new powers granted in the Act. It has entered into a 
        vague memorandum of understanding about sharing information. 
        The foregoing analysis demonstrates that a lot more than 
        manipulation is at issue in the natural gas price spiral and 
        suggests that much more needs to be done. Both the FERC and the 
        CFTC are looking for a very narrow range of manipulative 
        behaviors with a very narrow telescope. Unlike other physical 
        commodities, a vast amount of trading of natural gas goes on in 
        the over-the-counter markets that are hidden from the view and 
        beyond the authority of these agencies. The indices that are 
        based on this unregulated market activity have been unreliable 
        and remain subject to doubt.
  --In the case of regulated activities the changes at the FERC 
        replicate the weaknesses of the CFTC approach by adopting its 
        definitions and case law. It may be illegal to contrive to 
        manipulate markets and there are new fines if you are caught 
        doing so, but the FERC is going to have great difficulty 
        proving manipulation, when prices are ``moved.'' It is 
        precisely for this reason that the CFTC and the exchanges 
        subject to its jurisdiction do more than rely on narrowly 
        defined manipulation statutes to prevent abuse.\10\
---------------------------------------------------------------------------
    \10\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, p. 93
---------------------------------------------------------------------------
    The FERC and the CFTC have failed to adopt a broad view of abuses 
in financial markets. They cannot see the abuse because they are not 
looking for it. My earlier analysis of natural gas markets identified 
the numerous ways that prices can be moved by actions that are well 
below the radar of the FERC and the CFTC.
  --There are strands in this literature that identify potential and 
        actual abusive practices . . . 
  --manipulation facilitated by large positions,
  --lack of transparency,
  --structural advantages enjoyed by large traders or the exercise of 
        market power,
  --insider trading and self-dealing,
  --trading practices that accelerate market trends, perhaps causing 
        them to overshoot.\11\
---------------------------------------------------------------------------
    \11\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, p. 68.
---------------------------------------------------------------------------
    Instead of taking a hard look at the broad pattern of abuse, the 
FERC adopted a very narrow view of manipulation, taking on the existing 
CFTC case law and definitions. Instead of providing new and vigorous 
oversight over the natural gas market, we have a second cop walking the 
same beat with it eyes half shut.
    Unfortunately, the Federal Trade Commission has started down the 
same useless path. The lengthy discussion of intension (scienter) in 
the advanced notice of proposed rule making points the FTC down the 
same dead end path that the FERC took. The FTC needs to break out of 
the narrow ``scienter'' manipulation view to identify and attack the 
broad range of practices and structural conditions that can and have 
been moving prices in the markets.\12\
---------------------------------------------------------------------------
    \12\ Federal Trade Commission, Prohibition on Market Manipulation 
and False Information in Subtitle B of the Energy Independence and 
Security Act of 2007, 16 CFR 317.
---------------------------------------------------------------------------
    Policymakers must recognize that certain commodities are 
fundamentally different. Energy is at the top of the list of 
commodities that have special vulnerabilities, but energy commodities 
are not alone. The transformation of commodity markets into speculative 
engines is hurting food commodities as well. The description I wrote of 
natural gas applies to greater or lesser degree to the entire energy 
complex and many food commodities.
  --Because natural gas is a physical commodity that is actually 
        consumed (unlike a pure financial instrument), difficult to 
        store, and expensive to transport, natural gas markets are 
        challenging . . . The key elements identified are the supply-
        side difficulties of production, transportation and storage, 
        and the demand-side challenges of providing for a continuous 
        flow of energy to meet inflexible demand, which is subject to 
        seasonal consumption patterns. ``[T]he deliverables in money 
        markets consist of a ``piece of paper'' or its electronic 
        equivalent, which are easily stored and transferred and are 
        insensitive to weather conditions. Energy markets paint a more 
        complicated picture. Energies respond to the dynamic interplay 
        between producing and using; transferring and storing; buying 
        and selling--and ultimately ``burning'' actual physical 
        products. Issues of storage, transport, weather and 
        technological advances play a major role here. In energy 
        markets, the supply side concerns not only the storage and 
        transfer of the actual commodity, but also how to get the 
        actual commodity out of the ground. The end user truly consumes 
        the asset. Residential users need energy for heating in the 
        winter and cooling in the summer, and industrial users' own 
        products continually depend on energy to keep the plants 
        running and to avoid the high cost of stopping and restarting 
        them. Each of these energy participants--be they producers or 
        end users--deals with a different set of fundamental drivers, 
        which in turn affect the behavior of energy markets . . . 
  --What makes energies so different is the excessive number of 
        fundamental price drivers, which cause extremely complex price 
        behavior.''
  --Complexity of physical characteristics translates into a highly 
        vulnerable product in this commodity market.
  --``Although the formal analysis examines transportation costs as the 
        source of friction, the consumption distortion results suggest 
        that any friction that makes it costly to return a commodity to 
        its original owners (such as storage costs or search costs) may 
        facilitate manipulation.
  --The extent of market power depends on supply and demand conditions, 
        seasonal factors, and transport costs. These transport cost 
        related frictions are likely to be important in many markets, 
        including grains, non-precious metals, and petroleum products.
  --Transportation costs are an example of an economic friction that 
        isolates geographically dispersed consumers. The results 
        therefore suggest that any form of transactions cost that 
        impedes the transfer of a commodity among consumers can make 
        manipulation possible.\13\
---------------------------------------------------------------------------
    \13\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, pp. 28-29
---------------------------------------------------------------------------
    These characteristics demand much more vigorous oversight of energy 
and food commodity markets than other commodities, especially financial 
instruments and precious metals that have few physical uses. 
Unfortunately, for about a decade we have had much less oversight of 
energy markets. More broadly, the transformation of commodity markets 
generally has created problems for physical markets. When commodity 
markets lose touch with the underlying physical market fundamentals, 
they do more harm than good.
    Physical traders get frozen out. I found this in my study of the 
natural gas market. The utilities that actually sell the gas to the 
consumer could not play in the hyper-inflated commodity markets. They 
simply tied their purchases to the indexes, hoped for the best and let 
the consumer suffer the consequences.
  --There is a general consensus that utilities are not in the markets 
        as hedgers, although a small number are. Moreover, there is a 
        belief that hedging has declined, as volatility and large 
        financial players have moved into the market.
  --``Most utilities have stopped hedging and instead rely on the fuel-
        adjustment clause that allows them to pass on to consumers . . 
        . Many utilities exited trading, Duke being the last one. The 
        point is they are not really in the game except for 
        Constellation, Sempra, Dominion, and a few others. That more 
        customers are exposed to price risk because they are passing on 
        the higher costs to customers.''
  --Cooper said many utilities probably have stopped hedging in such a 
        risky environment because they have to eat their losses if they 
        miscalculate. ``Utilities are not in the business of predicting 
        prices,'' he said. ``They don't care what the price it. They 
        pass it on to customers.''
  --While the institutional context in which utilities function 
        certainly restricts their inclination to play in the financial 
        market, as volatility and prices mount, it becomes more 
        burdensome for all users. The cost of hedging becomes higher 
        and higher.
  --But with gas above $10/mmBtu and futures market direction 
        unpredictable, even hedging and other risk management tools are 
        becoming more and more expensive--raising the question of 
        whether the benefit is worth the cost . . . 
  --For example, Invista uses financial derivatives, collars and 
        similar tools to hedge against current market conditions. But 
        gas at $10/mmbut or higher and unprecedented volatility ``makes 
        all of these actions a little more costly,'' Poole noted. ``It 
        raises the question: is the elimination of price volatility 
        worth the cost?''
  --And while Invista has the money and in-house expertise to handle 
        risk management activities internally rather than farming them 
        out to marketers or energy service companies, ``unfortunately, 
        for smaller-volume companies that may not be a feasible 
        option.''
  --Tying prices to indices is the ultimate short-term strategy. This 
        institutional view raises concerns because the capital-
        intensive infrastructure of the industry has historically been 
        financed by long-term contracts. The deregulation and 
        unbundling of the industry inevitably shortened the time 
        horizon of the participant. Flexibility and choice loosens 
        commitments and makes ``bypass'' possible. Pipelines cannot 
        count on shippers as much as in the past. Utilities cannot 
        count on load as much as in the past. Merchants demand faster 
        recovery of costs.
  --In fact, a major impetus for restructuring of the natural gas 
        industry was the high social cost associated with rigid long-
        term contractual arrangements . . . 
  --With the natural-gas sector restructuring . . . trading 
        arrangements have become much more short term and flexible in 
        both price and in terms and conditions. We have observed this 
        phenomenon throughout the natural-gas sector, from gas 
        procurement, gas storage, and retail transactions, to capacity 
        contracting for pipeline services.
  --Long-term commitments to transportation and storage facilities, 
        exposes the contracting parties to greater risk in this 
        environment, especially where long-term commitments to supply 
        cannot be secured. The mismatch between the incentive structure 
        and the necessary time horizon results in missed opportunities. 
        For example, Jack Flautt, Managing Director of March & McLean, 
        suggested there is an anomaly in the storage investment area. 
        It is strange, in his view, that investors are not trampling 
        one another to participate in the storage development market. 
        ``The value of storage today is greater than at any time in my 
        lifetime,'' but Flautt reported he gets only blank stares from 
        bankers at the suggestion.
  --The hesitance of public utility commissions to push utilities to 
        jump back in to long-term commitments is understandable and the 
        task of realigning risks is challenging.\14\
---------------------------------------------------------------------------
    \14\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, p. 83.
---------------------------------------------------------------------------
Petroleum
    The problems that have afflicted natural gas have afflicted other 
energy commodities as I explained in my natural gas analysis . . . 
  --Natural gas markets share this pattern of abuse with other energy 
        markets. Unilateral actions by any of a number of individuals 
        in any of a number of circumstances provide a landscape in 
        which upward price movements are probable. ``There are regular 
        squeezes in the Brent [oil] market . . . The whole trick is to 
        collect more money in CFDs [contract for differences] than you 
        lose on the physical squeeze . . . People seem to do it in 
        turn. It depends on who's smart enough to move in a way nobody 
        notices until it happens.''
  --In a case brought by a private party in late 2001, the practical 
        reality was revealed.
  --Tosco won a settlement claiming that Arcadia Petroleum (a British 
        subsidiary of the Japanese firm Mitsui) engineered an elaborate 
        scheme to manipulate oil prices in September of 2001 through 
        the use of OTC derivatives and a large cash market position to 
        corner the market in Brent crude oil. As a result, the price of 
        Brent crude soared between August 21st and September 5th and 
        pushed its price to a premium over West Texas Intermediate 
        crude oil (WTI) . . . 
  --Dated Brent, which acts as a price marker for many international 
        grades, is physical crude traded on an informal market, rather 
        than a regulated futures exchange. This lack of regulation 
        poses problems for oil producers and consumers seeking a fair 
        price . . . A typical Brent squeeze involves a company quietly 
        building a strong position in short-term swaps called contracts 
        for difference, or CFD's, for a differential not reflected in 
        current prices. The company then buys enough cargoes in the 
        dated Brent market to drive the physical price higher, which 
        boosts the CFD differential . . . 
  --The Company may lose money on the physical side, but it's more than 
        compensated for by profits on its offsetting paper position in 
        the short-term swaps market.'' \15\
---------------------------------------------------------------------------
    \15\ Cooper, Mark Cooper, The Role of Supply, Demand and Financial 
Commodity Markets in the Natural Gas Price Spiral, p. 64.
---------------------------------------------------------------------------
    The problem in oil markets has continued to mount, as I explained 
in a law review article written in 2007.
  --On April 29, 2006, the New York Times ran a front-page article 
        under the headline ``Trading Frenzy Adds to Jump in Price of 
        Oil.'' \16\ The Times article opens with a brief paragraph on 
        the conditions in the physical market but then devotes about 36 
        column inches to the proposition that financial markets are 
        adding to the price increase.
---------------------------------------------------------------------------
    \16\ Jad Mouawad & Heather Timmons, Trading Frenzy Adds to Jump in 
Price of Oil, N.Y. TIMES, Apr. 29, 2006, at A-1.
---------------------------------------------------------------------------
  --``A global economic boom, sharply higher demand, extraordinarily 
        tight supplies and domestic instability in many of the world's 
        top oil-producing countries--in that environment higher oil 
        prices were inevitable.
  --But crude oil is not merely a physical commodity . . . It has also 
        become a valuable financial asset, bought and sold in 
        electronic exchanges by traders around the world. And they, 
        too, have helped push prices higher . . .
  --``Gold prices do not go up because jewelers need more gold, they go 
        up because gold is an investment,'' said Roger Diwan, a partner 
        with PFC Energy, a Washington-based consultant. ``The same has 
        happened to oil . . .''
  --``It is the case,'' complained BP's chief executive, Lord Browne, 
        ``that the price of oil has gone up while nothing has changed 
        physically.'' \17\
---------------------------------------------------------------------------
    \17\ Id.
---------------------------------------------------------------------------
  --Three key factors serve to drive the price spiral higher: volume, 
        volatility, and risk . . . 
  --The structure and availability of markets plays a role in allowing 
        the volumes to increase.
  --Changes in the way oil is traded have contributed their part as 
        well. On Nymex, oil contracts held mostly by hedge funds--
        essentially private investment vehicles for the wealthy and 
        institutions, run by traders who share risk and reward with 
        their partners--rose above 1 billion barrels this month, twice 
        the amount held 5 years ago.
  --Beyond that, trading has also increased outside official exchanges, 
        including swaps or over-the-counter trades conducted directly 
        between, say, a bank and an airline . . .
  --Such trading is a 24-hour business. And more sophisticated 
        electronic technology allows more money to pour into oil, 
        quicker than ever before, from anywhere in the world.
  --The influx of new money is sustained by movements of different 
        institutions and individuals into the market. ``Everybody is 
        jumping into commodities and there is a log of cash chasing 
        oil,'' said Philip K. Verleger Jr., a consultant and former 
        senior advisor on energy policy at the Treasury Department.''
  --This fundamental observation had been offered a couple of years 
        earlier in a front page Wall Street Journal article entitled, 
        ``Oil Brings Surge in Speculators Betting on Prices: Large 
        Investors Playing Ongoing Rise is Increasing Demand and Price 
        Itself.''
  --Oil has become a speculator's paradise. Surging energy prices have 
        attracted a horde of investors--and their feverish betting on 
        rising prices has itself contributed to the climb.
  --These investors have driven up volume on commodities' exchanges and 
        prompted a large push among Wall Street banks and brokerage 
        firms . . . to beef up energy-trading capabilities. As the 
        action has picked up in the past year, those profiting include 
        large, well-known hedge funds, an emerging group of high-
        rollers, as well as descendants of once-highflying energy-
        trading shops such as Enron Corp.\18\
---------------------------------------------------------------------------
    \18\ Id.
---------------------------------------------------------------------------
    A recent paper from the Japanese Ministry of Economy Trade and 
Industry (METI) has echoed my conclusion and the conclusion of the 
Senate Permanent Subcommittee on Investigations.
  --According to the METI paper, during the second half of 2007, when 
        the physical price of Wet Texas Intermediate crude averaged 
        $US90 a barrel, market speculation, geopolitical risk and 
        currency factors were responsible for $US30-$US40 of the price.
  --The average WTI ``fundamental price,'' consistent with the 
        underlying supply/demand situation, was around $US60/barrel 
        during the December half-year, according to the paper, citing 
        research for the Institute of Energy Economics in Japan.
  --Last week the benchmark WTI futures contract touched $US135/bbl, 
        more than double the level of a year previously.
  --``We cannot say exactly what the fundamental price is at the 
        moment,'' a METI official said yesterday. ``But we believe the 
        increases this year in the market price have much to do with 
        the influx of speculative money.\19\
---------------------------------------------------------------------------
    \19\ Peter Alford, ``Japan Blames Speculators for Oil Hike,'' May 
28, 2008.
---------------------------------------------------------------------------
    The study from the Institute on Energy Economics mentioned above 
draws a direct link between the growth in speculation and the rising 
price.
  --In the futures market, oil-futures trading at New York Mercantile 
        Exchange (NYMEX) are expanding faster than actual spots. While 
        the futures markets are designed to hedge price fluctuations 
        risks, oil is becoming a commodity, making the futures market 
        something like an alternative investment target. As a result, 
        long position by speculators (``non-commercial'' and ``non-
        reportable'') conspicuously leads to a rise in the oil prices 
        in more cases.\20\
---------------------------------------------------------------------------
    \20\ Akira Yanagisawa, Decomposition Analysis of the Soaring Crude 
Oil Prices: Analyzing the Effects of Fundamentals and Premium 
(Institute of Energy Economics, March 2008), p. 5.
---------------------------------------------------------------------------
    Exhibit 3 presents an updated version of the analysis that linked 
prices to changes in trading policy and practices base on spot prices 
for both natural gas and oil. It shows the close correlation of price 
movements and major institutional/structural changes in trading. The 
sharp increase in spot prices for West Texas Intermediate crude since 
early 2007 stands out. This actually links directly to one of the key 
policy issues that we have identified.
    The Intercontinental Exchange, located in Atlanta, was granted a 
``no action letter'' to trade contracts for West Texas Intermediate 
crude, exempt from U.S., regulation. There has been a rapid increase in 
trading Exhibit 4 shows this by contrasting the growth of open 
positions in West Texas Intermediate and Brent crude, another major 
marker crude. Starting in 2006 and accelerating in 2007 and 2008, the 
open positions in West Texas Intermediate left Brent crude behind. The 
extraordinary increase in the volume of trading puts upward pre






Food
    The plague of the ``influx of speculative money'' has now spread to 
food commodities. For instance, the evidence is mounting that 
speculation is contributing to the run up in food commodity prices that 
we have experienced over the past year. Speculation can be seen as 
contributing to price increases and volatility, as a study from the 
University of Wisconsin recently noted.
  --One unique aspect of the market the last year has been the size of 
        the non-commercial position in the futures market for corn. 
        Speculative traders have significantly increased their net long 
        position over the last year, while non-commercial traders have 
        tended to be net short. Note that corn prices have been highly 
        correlated with the net positions of non-commercial traders 
        since the first quarter of 2006/2007, and the speculators have 
        had large net long positions most of the year. It is important 
        to note that this does not imply causality, only correlation. 
        However, there does appear to be reason to study more carefully 
        the impact of speculative activity on both price levels and 
        volatility.\21\
---------------------------------------------------------------------------
    \21\ T. Randall Fortenbery and Hwanil Park, The Effect of Ethanol 
Production on the U.S. National Corn Price, University of Wisconsin-
Madison, Department of Agricultural Economics, Staff Paper 523, April 
2008, p. 16.
---------------------------------------------------------------------------
    The disutility of hyper-inflated commodity markets was recently 
underscored by a study of food commodities conducted by Texas A&M 
University.
  --The increased activity in futures markets has had the unexpected 
        consequence of reducing producer's ability to manage price risk 
        using futures markets. The large influx of money into the 
        markets, typically long positions, has pushed commodities to 
        extremely high levels. But, these funds also quickly move large 
        amounts of money in and out of positions. This has generated 
        much more price volatility in the futures markets. In response, 
        the exchanges have increased the daily move limits for most of 
        the agricultural commodities over the past 6 months . . . 
  --The up and down volatility in the market and expanded trading price 
        limits mean that more margin calls occur. Small elevators and 
        even large grain companies and cotton merchants, who are 
        trading even larger volumes, not to mention farmers doing their 
        own price risk management, have been unable to make the margin 
        calls.
  --Producers, elevators, and companies use bank financing to finance 
        their businesses and the price risk management. As the margin 
        calls have increased, they have exhausted their ability to 
        finance their normal hedging activities and have therefore been 
        forced out of the market.\22\
---------------------------------------------------------------------------
    \22\ David P Anderson, et al. The Effects of Ethanol on Texas Food 
and Feed, Agricultural and Food Policy Center, Texas A&M University, 
April 10, 2008, p. 32.
---------------------------------------------------------------------------
    Simply put, commercial entities that need the physical commodities 
to run their enterprises are priced out of the market. If you do not 
have deep pockets, are tied to the physical schedule of production and 
consumption, and live in the real world of bank finance, hyper-inflated 
commodity markets are a big part of the problem, not the solution.
           regulatory reform is the way to solve the problem
    It would be reassuring if we could blame the current speculative 
bubble on the arrogance, ignorance and ineptitude of the regulatory 
agencies with oversight responsibilities. If that were the case, we 
could just fire the commissioners and secretaries and clean up the 
problem. Unfortunately, there is a more fundamental problem that must 
be addressed. Federal authorities must look broadly at the conditions 
in modern financial markets that feed volatility, amp up volume, and 
increase risk and policymakers must impose new structural oversight on 
these markets to return them to their proper role, as institutions that 
help smooth the functioning of physical markets. They have become 
centers of idle speculation that do vastly more harm than good.
    With the commodities markets finally overwhelmed by speculation and 
the Congress empowering other agencies to do the job that the CFTC has 
failed to do, the CFTC has belatedly admitted that it did not have 
sufficient information to perform its primary function of preventing 
excessive speculation. The administration has formed a task force to 
look into the problem. The CFTC has finally asked that the foreign 
regulators to whom it abdicated its responsibility, to impose some 
order. Begging foreign exchanges for data and foreign regulators to act 
responsibly is not only embarrassing; it is absurd when the CFTC has 
not put its own house in order. These proposals are too little too 
late. The CFTC must be forced to assert regulatory authority over 
trading within the Untied States and trading in financial instruments 
designated in U.S. commodities.
    Too much money chasing too few goods in the commodity markets has 
created the upward spiral, amping up volume, increasing volatility and 
adding to risk. We must turn down the volume in commodity markets. 
Sound prudential regulation is the key to restoring order.
    The failure of the CFTC to act responsibly and in the past and the 
weak-kneed reaction to the dire crisis in commodity markets in the 
present ensure that Americans will continue to the victims of excessive 
speculation. Congress must enact broad reforms that close the 
loopholes, remove the discretion that was given to the CFTC and compel 
it to do its job. There are five areas in which reform is necessary, 
with a variety of policy making institutions needing to take action. It 
is a big job, but a $500 billion hit on the economy and household 
budgets that are being devastated by rising prices of basic necessities 
demand the effort.
Chase out the bad guys
    All traders must register and be certified (for honesty and 
competence, like bankers and brokers). All trading must be reported 
across all transactions.
    The CFMA created a market in over the counter trading that is 
beyond regulatory scrutiny. These dark markets have played a prominent 
role in major manipulations. Without comprehensive registration and 
reporting, there will always be room for mischief that is out of sight 
to the regulator. Large traders should be required to register and 
report their entire positions in those commodities across all markets. 
Registration and reporting should trigger scrutiny to ensure the good 
character, integrity and competence of traders.
Eliminate the funny money
    Raise margin requirements. Increase capital reserve requirements.
    We need to restore the balance between speculation and productive 
investment. Margin requirements on organized exchanges are a fraction 
of the margin requirements on stocks. If it is cheaper to put your 
money into speculation, why bother with real investment. The margin 
requirement for commodity trading among non-commercial traders should 
be 50 percent higher than the margin requirement for investment in 
stocks, but more lenient terms should apply to physical traders. 
Capital requirements should be increased to further reduce the amount 
of leverage in these markets and dampen excessive risk taking.
Reduce the ability to push prices up
    Lower position limits and tie position limits and margin policies 
to needs of physical traders. Lengthen settlement windows. Ban 
conflicts of interest (analyst's reports that enrich analyst's 
portfolios).
    Large position limits and short settlement periods invite efforts 
to influence prices. They should be reformed to reduce the risk. The 
practice of hyping prices by firms that stand to profit from the 
predictions should be should be banned.
Restore the proper functioning of commodity markets and their 
        regulators
    Enforce meaningful speculative limits. Do honest analysis (classify 
traders correctly). Close the loopholes (foreign boards of Trade 
exemptions, the Enron and swaps loopholes). Create minimum criminal 
penalties for violation of commodity laws
    Public policy must return the futures markets to their function of 
supporting the operation of physical markets. Speculation should not be 
allowed to dominate these markets, and limits should ensure that 
genuine commercial traders are a substantial majority of the market by 
imposing strict speculative limits. Traders must be properly classified 
to ensure this outcome.
    We must not only close the Enron-loophole, which allowed vast 
swathes of trading to take place with no oversight, but also ensure 
vigorous enforcement of registration and reporting requirements. We 
must take back the authority we have given to foreign exchanges and 
stop abandoning authority to private actors.
    Failure to comply should result in mandatory jail terms. Fines are 
not enough to dissuade abuse in these commodity markets because there 
is just too much money to be made.
Redirect investment to productive long-term uses
    Put a tax on short-term capital gains. Move pension funds out of 
speculation. Ban institutional index funds.
    We must level the playing field between long-term productive 
investment and short-term speculative gains, with a tax on short-term 
capital gains between 33 and 50 percent to make holding productive 
investments for long periods as attractive as flipping short-term 
financial paper.
    Speculators will insist that they will just go abroad, but the 
Congress need not fear such an outcome. If the United States is 
determined to assert jurisdiction over trading in the United States and 
for U.S. commodities, foreign exchanges will comply. To survive they 
desperately need to have access to legal instruments for U.S.-traded 
commodities. Individuals may chose to become expatriates and move to 
countries that chose not to comply, or they may break the law, but 
vigorous enforcement will put a stop to it. I suspect that the vast 
majority of traders do not want to live in places like Zimbabwe or 
Leavenworth, Bangladesh or Sing Sing.
    If we do not do more than the half hearted approaches that are on 
the table, we will continue to lurch from crisis to crisis. American 
consumers are suffering needlessly from this speculative bubble in 
vital necessities. It is time for thorough reform and re-regulation of 
the financial commodity markets.

    Senator Durbin. Mr. Duffy.
STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN, CME 
            GROUP, INC.
    Mr. Duffy. Thank you, Mr. Chairman. I am Terry Duffy, the 
Executive Chairman of CME Group, and I want to thank you, 
Chairman Durbin and Chairman Harkin and Ranking Members 
Brownback and Chambliss, for this opportunity to present our 
views.
    CME Group was formed by the 2007 merger of the Chicago 
Mercantile Exchange and the Chicago Board of Trade Holdings. 
CME Group is the parent of CME, Inc. and the Board of Trade of 
the city of Chicago. CME Group also owns Swapstream Operating 
Services, an OTC trading facility, and owns an interest in 
FXMarketspace Limited, an FX trading platform that is 
authorized and regulated by the Financial Services Authority.
    CME Group offers a neutral marketplace. We serve the global 
risk management needs of our customers. Our agricultural 
markets also provide important price discovery that producers 
and processors rely on to make economic decisions. We do not 
profit from higher food or energy prices. Our congressionally 
mandated role is to operate fair markets that foster price 
discovery and the hedging of economic risks in a transparent, 
self-regulated environment, overseen by the CFTC.
    CME Group provides a comprehensive selection of benchmark 
products across all major asset classes, including futures and 
options based on interest rates, equity indexes, foreign 
exchange, agricultural commodities, ethanol, and alternative 
investments such as weather and real estate. We also offer 
order routing, execution and clearing services to other 
exchanges.
    We unequivocally support your efforts to materially improve 
the enforcement capabilities of the CFTC and to do so in a 
manner that does not increase the costs of trading on fully 
regulated U.S. contract markets. We are enthusiastic supporters 
of broadly expanding the mandatory reporting of energy trading 
and position information to the Commission. We believe that 
disclosure of trading and position information to the 
regulator, with sufficient resources to analyze and act on 
unusual or suspicious activities, will deter most potential 
manipulators and assure punishment for those foolish enough to 
attempt a manipulation when all of their actions are visible to 
the regulator. This is the philosophy upon which our internal 
regulation has been based and why it has been so successful.
    We also clearly understand that the recent surge in many of 
the prices of commodities, particularly energy, has inspired 
Congress to look for assurance that the only price drivers are 
legitimate supply and demand factors.
    As Senator Durbin noted, we have all witnessed the flooding 
crisis in Iowa and other Midwestern towns. We offer our 
sympathy to the victims and their families who are being 
displaced by these extreme weather conditions. Obviously, 
weather and other fundamentals are at play and pressuring the 
prices of agricultural commodities.
    Some, however, who claim expertise or special knowledge 
have asserted that price inflation is caused by speculators 
and/or passive index funds that have invested billions in 
commodity markets. The more cautious critics have suggested 
that there may be a froth of inflation caused by speculation. 
Our careful, up-to-date evaluation of market participants and 
trading patterns in the commodities traded at CME Group are to 
the contrary. I have explained our findings and conclusions in 
my written testimony. We also will be placing relevant 
information on our website, which will permit others to review 
our findings to date respecting the impact of speculation in 
our markets.
    Our economists make convincing arguments that neither 
speculators nor index funds are distorting commodity prices. As 
you can see from the slide attached, corn prices have increased 
more than 158 percent during the last 2 years, while index fund 
participation has declined slightly from 15 percent of the open 
interest to 12 percent of the open interest.
    In the second slide, which shows corn prices and the 
positions of noncommercials since the beginning of the year, 
the percentage of open interest held by noncommercials has 
declined as corn prices have continued to rise.
    Previous studies have concluded that speculation has not 
been responsible for any significant, persistent volatility in 
futures markets. Nonetheless, we are strong proponents of 
securing all of the relevant information from all sources and 
fairly testing the hypothesis and reconfirming previous 
academic studies.
    While we expect that the evidence respecting the impact of 
speculation and index trading in energy markets will parallel 
the results we have found in our own markets, we agree that 
there is no reason to rely entirely on economic theory when the 
data is or can be made available. We support the CFTC's and 
Congress' efforts to secure this data and to assure that a 
thorough analysis informs any subsequent legislation or 
administrative efforts to deal with any uneconomic price 
inflation.
    I want to thank you for your time and attention this 
afternoon, and I look forward to answering any of your 
questions.
    Senator Durbin. Thank you, Mr. Duffy.
    [The statement follows:]
                Prepared Statement of Terrence A. Duffy
    I am Terrence Duffy, Executive Chairman of Chicago Mercantile 
Exchange Group Inc. (``CME Group'' or ``CME'') Thank you Chairmen 
Durbin and Harkin and Ranking Members Brownback and Chambliss for this 
opportunity to present our views.
    CME Group was formed by the 2007 merger of Chicago Mercantile 
Exchange Holdings Inc. and CBOT Holdings Inc. CME Group is the parent 
of CME Inc. and The Board of Trade of the City of Chicago Inc. (the 
``CME Group Exchanges''). CME Group also owns Swapstream Operating 
Services Limited, an OTC trading facility, and owns an interest in 
FXMarketspace Limited, an FX trading platform that is authorized and 
regulated by the Financial Services Authority. The CME Group Exchanges 
are neutral market places. They serve the global risk management needs 
of our customers and producers and processors who rely on price 
discovery provided by our competitive markets to make important 
economic decisions. We do not profit from higher food or energy prices. 
Our congressionally mandated role is to operate fair markets that 
foster price discovery and the hedging of economic risks in a 
transparent, self-regulated environment, overseen by the CFTC.
    The CME Group Exchanges offer a comprehensive selection of 
benchmark products across all major asset classes, including futures 
and options based on interest rates, equity indexes, foreign exchange, 
agricultural commodities, energy, and alternative investment products 
such as weather and real estate. We also offer order routing, execution 
and clearing services to other exchanges.
    We unequivocally support your efforts to materially improve the 
enforcement capabilities and machinery of the CFTC and to do so in a 
manner that does not increase the costs of trading on fully regulated 
U.S. contract markets. We also are enthusiastic supporters of broadly 
expanding the mandatory reporting of energy trading and position 
information to the Commission. We share the view of regulators and 
legislators most famously expressed by Justice Louis Brandeis:

    ``Publicity is justly commended as a remedy for social and 
industrial diseases. Sunlight is said to be the best of disinfectants; 
electric light the most efficient policeman.''--Justice Louis Brandeis, 
Other People's Money, and How the Bankers Use It, 1933

    We believe that disclosure of trading and position information to a 
regulator with sufficient resources to analyze and act on unusual or 
suspicious activities will deter most potential manipulators and assure 
punishment of those foolish enough to attempt a manipulation when all 
of their actions are visible to the regulator. This is the philosophy 
upon which our internal market regulation has been based and why it has 
been so successful.
    We also clearly understand that the recent surge in the prices of 
many commodities, particularly energy, has inspired Congress to look 
for assurance that the only price drivers are legitimate supply and 
demand factors. Some who claim expertise or special knowledge have 
asserted that the entire price inflation can be laid at the door of 
speculators and/or passive index funds that have invested billions in 
commodity contracts. The more cautious critics have suggested that 
there may be a froth of inflation caused by speculation. Our careful, 
up-to-date evaluation of market participants and trading patterns in 
the commodities traded at CME and CBOT are to the contrary as I will 
explain below. We will be placing relevant information on our website, 
which will permit others to review our findings to date respecting the 
impact of speculation on our markets.
    Our economists make convincing arguments that neither speculators 
nor index funds are distorting commodity prices. Previous studies have 
concluded that speculation has not been responsible for any 
significant, persistent volatility in futures markets. Nonetheless, we 
are strong proponents of securing all of the relevant information from 
all sources and fairly testing the hypothesis and reconfirming previous 
academic studies. While we expect that the evidence respecting the 
impact of speculation and index trading in energy markets will parallel 
the results we have found in our own markets, we agree that there is no 
reason to rely entirely on economic theory when the data is or can be 
made available. We support the CFTC's and Congress's efforts to secure 
this data and to assure that a thorough analysis informs any subsequent 
legislative or administrative efforts to deal with uneconomic price 
inflation.
         speculation is essential to efficient, liquid markets
    Current fuel and food prices are shocking and painful to consumers 
and the economy. Unfortunately, the pressure to reverse rising prices 
has led some to look for a simple, causal agent that can be neutralized 
with the stroke of a pen. The favored culprit is the traditional 
villain--speculators. But speculators sell when they think prices are 
too high and buy when they think prices are too low. They are not a 
unified voting block and are on both sides of every market. Speculative 
selling and buying send signals to producers and processors that help 
keep our economy on an even keel. High futures prices for corn induced 
farmers to bring new acreage to market. High forward energy prices 
encourage exploration and new technology to exploit existing untapped 
reserves and conservation and other behavioral changes to adjust 
demand.
    Futures markets perform two essential functions--they create a 
venue for price discovery and they permit low cost hedging of risk. 
Futures markets depend on short and long term speculators to make 
markets and provide liquidity for hedgers. Futures markets could not 
operate effectively without speculators and speculators will not use 
futures markets if artificial barriers or tolls impede their access. 
Blaming speculators for high prices diverts attention from the real 
causes of rising prices and does not contribute to a solution.
    The weight of the evidence and informed opinion confirms that the 
high prices are a consequence of normal supply and demand factors. The 
Wall Street Journal surveyed a significant cross section of economists 
who agreed that: ``The global surge in food and energy prices is being 
driven primarily by fundamental market conditions, rather than an 
investment bubble . . .'' \1\
---------------------------------------------------------------------------
    \1\ Bubble Isn't Big Factor in Inflation, By Phil Izzo (May 9, 
2008; Page A2).
---------------------------------------------------------------------------
    The traditional production/consumption cycle that has governed 
prices in commodity markets is stressed by the confluence of a number 
of factors. David Hightower, author of the Hightower report summed up 
the supply/demand situation in corn last year as follows: ``We have 
experienced three consecutive years of record corn production . . . and 
three consecutive years of declining ending reserves. Supply has put 
its best team on the field and demand keeps winning.''
    We have identified six significant factors that are influencing the 
supply and demand for grains and oilseeds; each is important.
  --Weather/Disease/Pestilence;
  --Increasing per capita consumption in the emerging markets;
  --The dramatic impact of the demand for grain and oil seeds as feed 
        stock for biofuel;
  --Reactionary governmental trade policies; and
  --Financial Market turmoil, including a weakened dollar.
    These factors combine to create volatile markets and increased 
prices.
    Weather/Disease/Pestilence.--This is of course a traditional factor 
in the grain markets. Wheat recently attained all-time record prices, 
coincident with 60-year lows in world stockpiles. In the past 2 years 
there have been production shortfalls in Australia, Argentina, Europe, 
North America, and the Ukraine due to a combination of drought in some 
places, untimely rains in others, and even infestation by the 
Eurygaster beetle.
    Per Capita Consumption in Emerging Markets.--While some projections 
imply a slowing population growth in this century, global population is 
still growing and from an ever increasing base. In the short-run, GNP 
and personal income levels in the large emerging market countries such 
as India, China, Russia, and Brazil are creating unprecedented per 
capita demand growth for animal protein. As is common in human history, 
as a society grows richer, its diet expands to include additional 
animal protein in the form of meat and dairy. According to a report on 
Bloomberg.com, worldwide meat consumption is forecast to increase by 
more than half by 2020; most of the new demand will come from China. 
The implications for grain demand will be staggering. Already in just 
the past 12 years, China has gone from a net exporter of soybeans to 
the world's largest importer of soybeans with soybean imports projected 
to easily exceed 30 million tons in 2007. Never before in history have 
we witnessed the impact of 2 billion people asking for a higher 
standard of living at the same time.
    Growth in Biofuels.--The mandate to produce biofuels created 
additional market stress. The expectation is for continued growth in 
biofuel use/demand; politics rather than logic is at work--resulting in 
continued demand growth for feed grains and vegetable oils. To 
illustrate this point; The 2005 energy bill in the United States 
spurred the rush to plant approximately 93 million acres of corn in 
2007, the highest level since World War II. The USDA recently reported 
that corn based ethanol production will continue to rise placing 
additional demands on the crop: ``driven by continued expansion in 
ethanol production capacity, corn use for ethanol is projected at 4.1 
billion bushels 2008-09, up 28 percent from the current year 
projection. Ethanol corn will now account for 31 percent of total corn 
use, up from a projected 25 percent for 2007-08.'' The amount of corn 
used in ethanol production just 5 years ago was approximately 10 
percent. In addition to the U.S. initiative, the EU enacted legislation 
that will require significantly increased use of biofuel fuel by 2010. 
The problem is that there simply is not enough land to set aside in all 
of the EU to meet these ambitious requirements; they will need to 
import significantly higher levels of either finished product or higher 
levels of oilseeds in order to produce the needed biofuel.
    Reactionary Government Trade Policies.--During the last 3 months, 
there has been an ever expanding pattern of increasing export tariffs 
and decreasing import tariffs on grains and oilseeds by foreign 
governments. Russia extended a grain export tariff from April 30 to 
July 1. In addition, they have placed an export ban upon their grain to 
the four CIS (Commonwealth of Independent States) members designed to 
prevent re-export of Russian grain to third countries. Argentina 
extended their wheat export closure to April 8, and announced a new, 
higher soy export tax that will rise by 7-9 percentage points based 
upon current prices. India increased its grain export tariffs while 
lowering import tariffs on edible oils. China has announced a further 
increase in edible oil imports in 2007-08 with projections currently up 
an additional 14 percent. South Korea announced the emergency lifting 
of import tariffs on 70 price sensitive products, including wheat and 
corn in an effort to confront rising inflation. The pattern we are 
witnessing is one of keeping domestic production off the global market 
while lowering barriers for the acquisition of grains and oils from the 
global market resulting in increased demand for U.S. grain and Oil Seed 
products.
    Financial Market Turmoil.--The events that began in the sub-prime 
sector of the financial markets are now spreading out with very serious 
and negative consequences throughout the Nation's banking sector. 
Restrictive lending policies are having deleterious effects within our 
market place. High volatility leads to higher margins, large 
directional price moves require significant continuing variation 
deposits and all of this comes at a time when money is difficult to 
obtain.
    In addition to concerns expressed about speculators in general, 
there have been more specific suggestions that money managers and hedge 
funds that operate under defined strategies may have impaired the price 
discovery process. The CFTC's staff responded to question implying that 
managed money traders, particularly hedge funds, ``may exert undue 
collective influence on markets and thus move prices in ways that 
hinder the market's price discovery role, reduce the effectiveness of 
hedges constructed with contracts from those markets and raise trading 
costs.'' CFTC's professional staff conducted an analysis in 2005 which 
came to the following conclusions: \2\
---------------------------------------------------------------------------
    \2\ http://www.cftc.gov/opa/press05/opa5074-05.htm.

    ``Using a unique set of data from the Commodity Futures Trading 
Commission (CFTC), the staff studied the relationship between futures 
prices and the positions of managed money traders (MMTs), commonly 
known as hedge funds, for the natural gas and crude oil futures 
markets. The staff also examined the relationship between the positions 
of MMTs and positions of other categories of traders (e.g., floor 
traders, merchants, manufacturers, commercial banks, dealers) for the 
same markets.
    The results suggest that on average, MMT participants do not change 
their positions as frequently as other participants, primarily those 
who are hedgers. The staff found that there is a significant 
correlation (negative) between MMT positions and other participant's 
positions (including the largest hedgers), and results suggest that it 
is the MMT traders who are providing liquidity to the large hedgers and 
not the other way around.
    The staff also found that most of the MMT position changes in the 
very short run are triggered by hedging participants changing their 
positions. That is, the price changes that prompt large hedgers to 
alter their positions in the very short run eventually ripple through 
to MMT participants who will change their positions in response. The 
staff also found no evidence of a link between price changes and MMT 
positions (conditional on other participants trading) in the natural 
gas market, and find a significantly negative relationship between MMT 
position changes and price changes (conditional on other participants 
trading) in the crude oil market.''

    In recent congressional testimony the CFTC has reaffirmed the 
validity of this 2005 analysis.\3\ It is instructive that CFTC's 
analysis parallels the conclusions of many other economists who have 
also studied the issue of causation in the context of speculators and 
commodity futures prices.\4\
---------------------------------------------------------------------------
    \3\ During his appearance before the Senate Appropriations 
Committee on May 7, 2008, CFTC's Acting Chairman Walt Lukken stated 
that the CFTC's recent revisitation of the 2005 study using more 
current data for energy market trading affirmed the conclusions reached 
in the 2005 study. This conclusion mirrors the views of the majority of 
53 economists surveyed by the Wall Street Journal in May 2008 which 
indicated that the global surge in food and energy prices is being 
driven primarily by fundamental market conditions, rather than an 
investment bubble. Wall Street Journal, May 9, 2008, page A-2. 
Similarly, the U.S. Department of Energy's Energy Information Agency's 
most recent ``Short Term Energy Outlook'' published in May 6, 2008 
evidenced the tightness in world oil markets, with growth in world oil 
consumption outstripping growth in production in non-OPEC nations by 
over 1 million bbls/day, and dramatically increased demand coming from 
China, India, and other parts of the developing world.
    \4\ See, for example, Antoshin and Samiei's analysis of the IMF 
research on the direction of the ``causal arrow'' between speculation 
and commodity prices in ``Has Speculation Contributed to Higher 
Commodity Prices?'' in World Economic Outlook (September 2006):
    ``On the other hand, the simultaneous increase in prices and in 
investor interest, especially by speculators and index traders, in 
commodity futures markets in recent years can potentially magnify the 
impact of supply-demand imbalances on prices. Some have argued that 
high investor activity has increased price volatility and pushed prices 
above levels justified by fundamentals, thus increasing the potential 
for instability in the commodity and energy markets.
    What does the empirical evidence suggest? A formal assessment is 
hampered by data and methodological problems, including the difficulty 
of identifying speculative and hedging-related trades. Despite such 
problems, however, a number of recent studies seem to suggest that 
speculation has not systematically contributed to higher commodity 
prices or increased price volatility. For example, recent IMF staff 
analysis (September 2006 World Economic Outlook, Box 5.1) shows that 
speculative activity tends to respond to price movements (rather than 
the other way around), suggesting that the causality runs from prices 
to changes in speculative positions. In addition, the Commodity Futures 
trading Commission has argued that speculation may have reduced price 
volatility by increasing market liquidity, which allowed market 
participants to adjust their portfolios, thereby encouraging entry by 
new participants.''
---------------------------------------------------------------------------
      raising margin above prudential levels is counterproductive
    Neither the CFTC's study nor careful marshalling of the supply/
demand factors driving the market has calmed the critics who demand an 
easy solution to high prices, which they claim can be mandated without 
cost or consequence. This vocal group insists that driving speculators 
from the markets will bring prices back to the correct level. Worse 
still, they argue for driving speculators from the market by 
Government-mandated increases in margins.
    Legislation has been proposed to mandate increases in margin, by 
which is meant the performance bond required of futures traders to 
guarantee performance of their contractual obligations to the clearing 
house. The theory behind the legislation is that speculators who have 
long positions and whose participation in the futures markets is 
assumed to have caused price escalation, will be driven from the market 
and prices will retrench to a more comfortable level. This idea is 
flawed.
    First, it assumes that speculators are all on the long side of the 
market and that this herd approach to trading has driven prices above 
their legitimate equilibrium level. All of our internal studies and all 
of the academic work supports the opposite view, namely that 
speculators are about equally divided on both sides of the market.
    Second, increasing margin to artificially high levels is most 
likely to cause a price spike rather than to systematically lessen 
commodity prices. We strongly believe that efforts to mandate price by 
direct price control or by indirect actions distort future production 
and cause costly misallocation of resources of production.
    Performance bond is generally set at a level to cover, with a high 
degree of confidence, any change in the underlying value of a futures 
contract during a single day of trading. It has nothing to do with the 
notional or face amount of the contract. For example, performance bond 
on a $36,700 CBOT corn contract is currently set at $2,025 while 
performance bond on a $100,000 30-year bond contract is set at $3,510. 
In each case, the holder of the contract must make good on his losses 
and conversely gets credit for his gains on a daily basis. Our clearing 
system continuously holds 100 percent collateral for a near worst case 
loss scenario. The cost of depositing collateral or cash with the 
clearing house is considered a cost of trading.
    The imposition of artificially high performance bonds is a tax on 
trading as it raises a trader's cost. It has been repeatedly 
demonstrated, and ever more so as markets have become electronic and 
available from anywhere on the globe, that excess performance bond 
levels will drive users away from transparent, regulated U.S. futures 
markets and into opaque, unregulated OTC markets with less liquidity, 
less price transparency and no public accounting for traders' 
positions. This is a net loss to the congressionally defined purpose of 
creating fair, efficient and well-functioning energy and commodity 
markets.
    Our extensive market regulation experience and our experience with 
previous efforts to control commodity prices by means of adjusting the 
level of performance bond has established that artificially increasing 
margins is not effective. Raising margins to drive speculators on the 
long side of the market out of the market in a time of upward trending 
prices does not work. The speculators who have been long have been 
collecting the profits on their positions and are in an especially 
strong position to meet any additional margin call. Moreover, they are 
well aware that the short side of the market has been losing money and 
probably has been forced to borrow to support their short hedges.
    A North Dakota farmer who sold corn futures at a new high of $5 a 
bushel and locked in a $2 per bushel profit needs to be able to carry 
his hedge until his crop is harvested. A single contract is 5,000 
bushels and margin is now set at $1,000 per contract. Assume the farmer 
had sold 100 contracts. Corn was $7 this morning and the farmer has 
been forced to go to his bank to borrow $25,000100=$1,000,000 to 
continue to carry the position. What should the long speculator expect 
when margins are raised and the farmer is forced to borrow $3 million 
or more to continue to hold his position? The cost to hedgers can be 
expected to be even more severe when the country is in the midst of a 
severe credit crunch.
    Moreover, there is no evidence that artificially increasing 
performance bonds will drive well-capitalized index funds or other 
passive long-only investors to sell or that the impact of any such 
selling would be beneficial or positive for hedgers and commercial 
users of futures markets. Generally, these investors are not leveraged 
and are in the best position to margin up to 100 percent. Long index 
traders will not be driven from the market because they already have a 
fully collateralized account that is held on behalf of their clients. 
By increasing the amount of those funds that are required to be posted 
for margin, the index trader just transfers treasury bills from one 
account to an account accessible to the clearing house. There is no 
cost to this class of trader.
    Performance bonds are designed to ensure that contractual 
obligations are met and that clearing houses can fulfill their 
responsibilities; they are not intended to create incentives or 
disincentives for trading decisions. Based on our strong track record 
of zero credit defaults in the 100-plus year history of CME Clearing, 
we believe our current system for calculating margin is the most 
prudent and sound approach to margining. Mandating arbitrary margin 
levels would not improve the functioning of energy and commodity 
futures markets and would interfere with the prudential risk management 
practices of central counterparty clearing houses.
    Others have suggested excluding pension funds and index funds from 
participating in commodity futures markets. These funds are using 
commodity exposure to decrease volatility in their portfolios. Barring 
them from regulated U.S. futures markets will only push them offshore 
or into over-the-counter trading. These funds will continue to need 
commodities as an asset class and will need to find ways to invest on 
behalf of their clients. We believe it would be prudent to ensure this 
investment occurs on a regulated market instead of driving this capital 
into opaque markets.
    CME Group has conducted a thorough review of the impact of index 
trading and speculative trading on its primary agricultural markets. We 
have found a negative correlation between price increases and index 
fund buying.
    While we favor a broader study of the impact of index fund trading, 
we do not think it is appropriate to cast those funds as a villain in 
price inflation until the study is completed. Especially since in 
theory it is not likely that the index funds are having a detrimental 
impact. Index funds buy and hold. They may have some small impact on 
days when new money enters the market and they create additional net 
long positions, but those changes are transitory. The important 
statistic in this regard is new net positions not overall positions.
    After the flow of new money into the market from the index funds, 
the price will, in the absence of other factors, revert to the 
equilibrium dictated by current supply and demand factors because the 
index traders simply sit and hold the positions until they roll to the 
next delivery month. Traders making informed trades should be expected 
to drive the market to equilibrium.
    All price changes take place at the margin as those traders with 
information, meaning that they are hedging or expressing an opinion 
based on knowledge, buy and sell. Even if 30 percent of the open 
interest in a particular contract month of a commodity is held by index 
funds, buying and selling by a few traders based on need and knowledge 
drive the market to its fair equilibrium price. The open positions of 
the index traders have no impact on prices driven by informed trading 
activity.
    Regulated futures markets and the CFTC have the means and the will 
to limit speculation that might distort prices or distort the movement 
of commodities in interstate commerce. Acting Chairman Lukken's recent 
testimony before the Subcommittee on Oversight and Investigations of 
the Committee on Energy and Commerce United States House of 
Representatives (December 12, 2007) \5\ offers a clear description of 
these powers and how they are used.
---------------------------------------------------------------------------
    \5\ http://www.cftc.gov/stellent/groups/public/@newsroom/documents/
speechandtestimony/opalukken-32.pdf.

    CEA Section 5(d)(5) requires that an exchange, ``[t]o reduce the 
potential threat of market manipulation or congestion, especially 
during trading in the delivery month . . . shall adopt position 
limitations or position accountability for speculators, where necessary 
and appropriate.''
    All agricultural and natural resource futures and options contracts 
are subject to either Commission or exchange spot month speculative 
position limits--and many financial futures and options are as well. 
With respect to such exchange spot month speculative position limits, 
the Commission's guidance specifies that DCMs should adopt a spot month 
limit of no more than one-fourth of the estimated spot month 
deliverable supply, calculated separately for each contract month. For 
cash settled contracts, the spot month limit should be no greater than 
necessary to minimize the potential for manipulation or distortion of 
the contract's or underlying commodity's price. For the primary 
agricultural contracts (corn, wheat, oats, soybeans, soybean meal, and 
soybean oil), speculative limits are established in the Commodity 
Exchange Act and changes must be approved via a petition and public 
rulemaking process.
    With respect to trading outside the spot month, the Commission 
typically does not require speculative position limits. Under the 
Commission's guidance, an exchange may replace position limits with 
position accountability for contracts on financial instruments, 
intangible commodities, or certain tangible commodities. If a market 
has accountability rules, a trader--whether speculating or hedging--is 
not subject to a specific limit. Once a trader reaches a preset 
accountability level, however, the trader must provide information 
about his position upon request by the exchange. In addition, position 
accountability rules provide an exchange with authority to restrict a 
trader from increasing his or her position.
    Finally, in order to achieve the purposes of the speculative 
position limits, the Commission and the DCMs treat multiple positions 
held on a DCM's market that are subject to common ownership or control 
as if they were held by a single trader. Accounts are considered to be 
under common ownership if there is a 10 percent or greater financial 
interest. The rules are applied in a manner calculated to aggregate 
related accounts.
    Violations of exchange-set or Commission-set limits are subject to 
disciplinary action, and the Commission, or a DCM, may institute 
enforcement action against violations of exchange speculative limit 
rules that have been approved by the Commission. To this end, the 
Commission approves all position limit rules, including those for 
contracts that have been self-certified by a DCM.
    It is clear that speculation is an important component of the 
futures markets, but there is a point when excessive speculation can be 
damaging to the markets. As a result, the CFTC closely monitors the 
markets and the large players in the markets, in addition to position 
and accountability limits, to detect potentially damaging excessive 
speculation and potential manipulative behavior.
   the cftc's exclusive jurisdiction over trading on cftc regulated 
                       markets must be preserved
    CME Group plans to join with other leading participants in the 
financial services industry to respond to the FTC's request for 
comments respecting its proposed rule respecting false reporting and 
manipulative activities in the wholesale oil market. We are concerned 
that the FTC's jurisdictional reach could come into conflict with the 
CFTC's exclusive jurisdiction respecting futures trading. While the 
statute very clearly limits the FTC's jurisdiction to conduct in 
connection with ``the purchase or sale of crude oil, gasoline or 
petroleum distillates at wholesale,'' FERC, which has similar 
authority, has read ``in connection with'' to give it authority over 
conduct that took place entirely on a futures exchange.
    In 1974, Congress recognized the overriding importance of 
entrusting to the expertise of the CFTC the exclusive regulatory 
authority over the Nation's futures markets. Congress preempted other 
Federal and State rules that would either assert parallel jurisdiction 
over the futures markets or produce conflicts with the CFTC regulatory 
regime. This system has produced the best regulated, most innovative 
and efficient futures market in the world.
    As markets evolve and become more interrelated such agency 
``boundary disputes'' can be expected and for the most part the 
agencies usually take pains to accommodate one another to allow each to 
accomplish the mission Congress mandated for them. We are concerned by 
the Federal Energy Regulatory Commission's (FERC) claim of jurisdiction 
in the Amaranth case, where the only manipulative trading alleged took 
place on a futures exchange. FERC has refused to recognize and yield to 
the CFTC's exclusive jurisdiction. The result is that participants in 
the natural gas futures markets no longer have legal certainty as to 
the legal standard governing their transactions.
    The recently enacted farm bill demonstrates the continued vitality 
of the CFTC's exclusive jurisdiction. Congress reauthorized the CFTC 
for another 5 years and granted the CFTC new authority to regulate 
certain exempt commercial markets that are active enough to constitute 
price discovery markets.
 position limits on foreign boards of trade listing clones of u.s. dcm 
                            listed contracts
    Position limits are a device to promote liquidation and orderly 
delivery in physical contracts. If two markets share the same physical 
delivery contract it is consistent to apply a single limit across both 
markets. However, we are not aware of a foreign board of trade that 
lists a physically deliverable futures contract that is a clone of a 
U.S. DCM's listed contract.
    The ICE U.K. market lists a WTI crude oil contract that is traded 
and settled based on the settlement prices of the NYMEX WTI contract. 
The ordinary reasons for imposing position limits on futures markets do 
not apply in such a case. It is possible to imagine a trader who is 
long a limit position at NYMEX and double that position at ICE U.K. 
That trader might expect to profit, if not caught, by driving up the 
settlement price on the final day of trading on NYMEX by standing for 
delivery, even though he would be required to store and then sell the 
oil back at a loss, in the hope to profit from the settlement on ICE. 
Of course, such behavior will be obvious to the regulators and the 
markets and the manipulator would neither enjoy the profits nor much 
additional freedom. Moreover, the impact on the price of oil would be 
transitory.
    Our theoretical understanding aside, we support a temporary 
imposition of position limits on the ICE Futures U.K. WTI contract 
until the CFTC is able to secure and analyze a more complete data set 
respecting the impact of speculation and/or indexed commodity trading 
on price inflation. We do not imagine that any harm will be done and 
this action will allay concerns.
   the exemption for commercial markets in energy products, even as 
limited by the recent amendment of the cea, is unnecessary and creates 
                            information gaps
    Section 5(b) of the Commodity Exchange Act charges the Commission 
with a duty to oversee ``a system of effective self-regulation of 
trading facilities, clearing systems, market participants and market 
professionals'' and to ``to deter and prevent price manipulation or any 
other disruptions to market integrity; to ensure the financial 
integrity of all transactions subject to this chapter and the avoidance 
of systemic risk; to protect all market participants from fraudulent or 
other abusive sales practices.''
    These ``purposes'' and the statutory exemption for Commercial 
Markets found in Section 2(h)(3) are in conflict. The key purposes 
mandated by Congress in Section 5(b) are jeopardized if trading 
facilities for contracts in exempt commodities are permitted to coexist 
with regulated futures exchanges that list those same commodities. ECMs 
do not have any system of ``effective self regulation'' of their 
facilities or of their market participants. Their contracts are traded 
based on the prices of commodities that have limited supplies and that 
have often been the subject of manipulative activity and disruptive 
market behavior. There is no mechanism in place ``to deter and prevent 
price manipulation or any other disruptions to market integrity.'' The 
Commission cannot track the build up of dominant positions. At best the 
Commission has power to punish such conduct after the fact. We find 
this to be a serious problem that is at odds with Congress's intent 
behind the CFMA, which, if left unaddressed, jeopardizes the public's 
confidence in the CFTC's ability to do its job.
    The Section 2(h)(3) exemption for unregulated commercial markets 
should be eliminated. You can't fix the problem by merely changing 
reporting requirements. In order to secure accurate reports a market 
needs an effective surveillance and compliance system. This requires 
that an effective system of self regulation must be put in place. The 
logical conclusion is you must implement at least the core principles 
required of a DTEF to get a useful result.
    In the aftermath of the Amaranth controversy, Congress provided 
CFTC new authorities in the farm bill to regulate ``significant price 
discovery contracts'' on platforms like ICE by requiring those 
platforms to meet certain core principles drawn from the longer list 
applicable to fully regulated exchanges. What is clear is that when 
Congress wants to insure fair dealing and regulatory propriety it uses 
as its comparative yardstick the regulatory regime imposed on America's 
fully regulated exchanges.
    Trading that is conducted on fully regulated exchanges is an open 
book to which you already have complete access and accountability. 
Indeed, CFTC monitors that exchange trading daily and has repeatedly 
opined that speculation on those fully regulated exchanges does not 
raise regulatory concerns. But that is not the case with the other 
forms of energy commodity trading, which lie outside the reach of CFTC 
regulation and are far larger in size in terms of trading volume.
                               conclusion
    CFTC regulated futures markets have demonstrated their importance 
to the economy, the Nation's competitive strength and America's 
international financial leadership. Imposing arbitrary increases in 
margins in these markets, as has been suggested as a way to control 
prices, will result in the exportation of these markets to overseas 
competitors and to unregulated and non-transparent over-the-counter 
markets. We have the means and the power to protect markets against 
speculative excesses on our markets and are committed to doing so.
    Similarly, James Burkhard, managing director of Cambrindge Energy 
Research Associates testified to the Senate Energy Committee on April 
3, 2008 that: ``In a sufficiently liquid market, the number and value 
of trades is too large for speculators to unilaterally create and 
sustain a price trend, either up or down. The growing role of non-
commercial investors can accentuate a given price trend, but the 
primary reasons for rising oil prices in recent years are rooted in the 
fundamentals of demand and supply, geopolitical risks, and rising 
industry costs. The decline in the value of the dollar has also played 
a role, particularly since the credit crisis first erupted last summer, 
when energy and other commodities became caught up in the upheaval in 
the global economy. To be sure, the balance between oil demand and 
supply is integral to oil price formation and will remain so. But `new 
fundamentals'--new cost structures and global financial dynamics--are 
behind the momentum that pushed oil prices to record highs around $110 
a barrel, ahead of the previous inflation-adjusted high of $103.59 set 
in April 1980.''

    Senator Durbin. Jim May is the President and Chief 
Executive Officer, Air Transport Association (ATA). Mr. May, 
thank you.
STATEMENT OF JAMES C. MAY, PRESIDENT AND CHIEF 
            EXECUTIVE OFFICER, AIR TRANSPORT 
            ASSOCIATION
    Mr. May. Thank you, Mr. Chairman. In the interest of your 
time, let me abbreviate my written remarks and concentrate on a 
couple or three key issues.
    First of all, it is my disturbing duty today to report to 
you that ATA has just changed its forecast for 2008, and we now 
project that this industry domestically is going to lose 
somewhere between $7 billion and $13 billion. That is a $10 
billion midpoint, and if that is the case, it will be on par 
with the worst year in the history of this business.
    Those numbers are due exclusively to the cost of fuel. We 
are going to spend $62 billion this year on fuel. By way of 
comparison, that is greater than the total of the 4 years in 
the first 4 years of this decade. We are going to spend $20 
billion more than last year. So we have, as you might imagine, 
a rooting interest in what is going on here.
    That is a worse shock than 9/11. It means that we are going 
to have some 14,000 to 15,000 employees who are going to have 
lost their jobs by the end of this year.
    It means that as many as 200 United States communities will 
lose all air service. I counted up quickly this morning some 30 
communities represented by members of this committee.
    We are laying down older planes. We are eliminating orders 
for new aircraft. And it is a matter that impacts this industry 
dramatically.
    Our average one-way fare--average across the country--is 
about $191 right now. Take out $25-$30 for taxes and fees, and 
we are spending $138 on fuel alone per passenger today. That 
leaves us with about $27 per passenger to cover every other 
expense in the business.
    If Congress does not turn things around soon, the impact on 
the overall economy will be dramatic. This industry contributes 
well over $600 billion to the U.S. economy. That is 10 million 
jobs. And if we begin to cut back service to these small 
communities, especially small rural communities, across this 
country, it is going to have a devastating effect.
    So I am sitting here listening to this testimony this 
morning. You have some stark fundamental choices. The first 
choice is status quo. We can continue to blame high oil prices 
on China and India and the weak dollar. Or you can look a 
little beyond that. You can study the problem and report back 
in 6 months or 6 weeks.
    I note that the CFTC is going to report back sometime in 
September of this year. Well, I would suggest to you if status 
quo becomes the course of the day, we will not be here to see 
the results of it. There are already nine carriers that have 
declared bankruptcy. There will be others if the prices of oil 
continue at $135. Anything north of $100, they are going to 
continue.
    Now, I do not come here as an expert in trading. You have 
got people on this panel who are experts and regulators. I can 
suggest to you that the president of Shell Oil is suggesting 
that the fundamental proper price for oil is somewhere between 
$35 and $65 a barrel. One of his colleagues said $90 a barrel. 
I can suggest to you that John Kilduff, who I think is a well 
recognized name in the business, M.F. Global Energy Risk, 
thinks that there is $20 to $30 a barrel that is a premium, if 
you will, for speculation. Goldman Sachs has expressed some 
concerns.
    And I take you to something that you are familiar with, as 
I close it out, and it is the Senate Permanent Subcommittee on 
Investigations that all members and the staff are very well 
aware of. It has been around for years and years and always 
done great work. They say the following. Foreign exchanges such 
as ICE are allowed to accept energy trades from persons in the 
United States and elsewhere to ``operate with no regulatory 
oversight, no obligation to ensure its products are traded in a 
fair and orderly manner, and no obligation to prevent excessive 
speculation.'' That is this Senate's Permanent Subcommittee on 
Investigations.
    They go on and I will close with this because you have a 
very critical job in front of you. What do we do about these 
high oil prices? We know that there are many supply side 
solutions, conservation, others that are longer term, but 
immediate term, if there is an issue, what do you do? And I 
think that is not an easy task.
    I would leave you with the findings of the permanent 
subcommittee. Congress needs to level the regulatory playing 
field between the NYMEX and ICE exchanges, increase energy 
price transparency, and strengthen the ability of the CFTC to 
analyze market transactions and police U.S. energy commodity 
markets.
    Two, it is essential that CFTC have access to daily reports 
of large trades for energy commodities.
    And three, surveillance tools have not matched the 
subsequent growth in commodity trading, electronic trading, 
speculative trading, et cetera.
    Mr. Chairman, you have introduced legislation. I think at 
the last count, 37 of your colleagues in the Senate have 
introduced one form of legislation or another. We do not have 
as an industry time for status quo. We do not have time as an 
industry to wait. It is going to impact not just airlines, but 
the entire U.S. economy. Anything we can do to help you in your 
deliberations, we are happy to volunteer.
    Senator Durbin. Thank you, Mr. May. That was sobering 
testimony, but I am glad it is part of the record. And I hope 
all my colleagues will read it very closely.
    [The statement follows:]
                   Prepared Statement of James C. May
    Chairman Harkin, Chairman Durbin, and members of the committees, I 
welcome your leadership--in particular, Senator Durbin's--in examining 
the catastrophic impact of high fuel prices on the airline industry and 
the Nation's economy. I hope that the unusual nature of this combined 
Agriculture Committee and Appropriations Subcommittee hearing is an 
indication that Congress will move swiftly to find a solution.
    My task today is to deliver what I consider to be an extremely 
disturbing report on the state of the Nation's airline industry. Today, 
we are revising our forecast: this country's airlines expect to lose in 
the range of $10 billion this year--a loss equal to or greater than the 
worst year in this industry's history. High fuel prices are the sole 
reason. This year, we will spend more than $60 billion on fuel, at 
least $20 billion more than last year and slightly more than our 
combined fuel bill for the first 4 years of this decade.
    Sadly, 2008 could turn out to be the worst year in the industry's 
history. Unlike the temporary revenue hits from SARS, 9/11, and other 
one-time demand shocks, the airlines now are facing a massive 
structural increase--with no end in sight--in a virtually 
uncontrollable cost. Moreover, there is little low-hanging fruit left 
to harvest. Unfortunately, not even Chapter 11 can lower the price of 
fuel.
    To many members of Congress, $10 billion is not a lot of money. Let 
me try to add some context. More than 14,000 airline jobs have been cut 
so far this year, and that is just the tip of the iceberg. It is not 
unrealistic to think that by cutting capacity, more than 200 
communities could lose all commercial air service by early next year. 
Orders for new planes have been slashed and hundreds of older, less 
efficient planes have been taken out of service. We are burning through 
cash at unprecedented rates, barely surviving from month to month. The 
Nation's airlines will not ever fully recover from this economic blow, 
and more airlines--in addition to the eight that have already filed for 
bankruptcy or stopped operating--may simply shut down. That means even 
more job losses and untold harm to families and the economy.
    I assure you that airlines are not gouging passengers with higher 
fares. As of June 1, analysts [Boyd Group] estimate the average gross 
fare, including all fees and taxes and all recent fare hikes, is $191. 
Eliminating fees and taxes brings it to $166. At current jet fuel 
prices, the cost of fuel per passenger is $138.80. That leaves only 
$27.37 to pay for every other cost--labor, airport fees, insurance, and 
facilities, to name but a few.
    Committee members and Congress, for that matter, may ask why the 
country should care that its airlines are on the brink of financial 
disaster and--some would say--about to implode. The answer is simple: 
this Nation's economy is inextricably linked to the viability of its 
air transportation system. If the airlines continue to spiral downward, 
so will the economy. Aviation contributes $690 billion to the U.S. 
GDP--that's equal to heating oil costs for 376 million households for 
one winter, 24 million new cars, and 10 million new jobs.
    If Congress does not turn things around very soon, the impact on 
the country's economy will be even worse. Analysts are predicting that 
a 20 percent reduction in capacity may not be enough to save the 
industry. If 200-plus communities lose all service, airline hubs will 
be decimated, tens of thousands more jobs will be eliminated, and 
tourist destinations will be devastated by huge cuts in the number of 
flights. Realistically, rural areas will be hit the hardest by the 
cuts, leaving thousands of square miles without air service.
    This is not what we want to happen in this country. Ask any local 
chamber of commerce and they will tell you that convenient air service 
is absolutely critical to economic growth. Without it, businesses are 
isolated, communities fade away because they never recover from 
staggering job losses.
    Mr. Chairmen, Congress has a choice: stay with the status quo or 
make the hard decisions. The status quo means continuing to blame high 
oil prices on the weak dollar and growing demand from China and India. 
Status quo means forming yet another commission or task force to study 
the problem and report back in 6 months. The airlines won't be around 
much longer if the status quo wins the day.
    I am not an expert in the trading of energy commodity futures. In 
addition to the supply-side solutions where relief is on the long-term 
horizon, leading commodities experts believe that crude oil prices 
today are unnecessarily high due, in large part, to excessive market 
manipulation for which there are short-term solutions. As these experts 
tell us:
  --The proper range for oil prices should be ``somewhere between $35 
        and $65 a barrel.''--John Hofmeister, President of Shell Oil 
        Co.
  --There may now be upwards of $25 to $30 of speculation in the price 
        of crude, which continues to soar despite soaring stockpiles in 
        the United States.--MF Global Energy Risk Management Group
  --The increasing prevalence of futures contracts has transformed the 
        nature of oil markets. It is no longer only about the value of 
        oil as an energy commodity, but also . . . oil as a financial 
        asset.--Goldman Sachs
  --If the crude oil market is not physically tight now, there is at 
        least a belief on the part of a bullish speculator that it will 
        become so later. What has driven the market so far, so far, in 
        our view, is that such a high percentage of the speculative 
        trade has become aligned in one direction.--Tim Evans, Citi 
        Futures Perspective
  --It also seems hard to dispute that the growth in the size of 
        futures and options trade has something to do with the price 
        movement . . . [W]e believe that growth in NYMEX trade has 
        certainly made it more dominant relative to the physical market 
        in setting prices than in the past.--Tim Evans, Citi Futures 
        Perspective
    Mr. Chairmen, this country does not need another Enron scandal. 
Enron destroyed its pensions, its investors and its employees. One of 
the most disturbing aspects of the current energy market is that 
studies have shown that the airline and other transportation industries 
such as trucking have been victimized by loopholes in the law. We have 
to restore CFTC's authority to prevent improper and excess speculation 
in the energy sector. Foreign exchanges, such as ICE are allowed to 
accept energy trades from persons in the United States, and elsewhere, 
and ``to operate with no regulatory oversight, no obligation to ensure 
its products are traded in a fair and orderly manner, and no obligation 
to prevent excessive speculation.'' Mr. Chairman, that quote is from 
the Senate Permanent Subcommittee on Investigations. Some aspects of 
problems caused by the Enron loophole were addressed in the farm bill--
and those reforms are a good step forward--but more legislative changes 
are needed.
    Mr. Chairmen, all we are seeking are common-sense measures to 
ensure transparency and an even footing between traders and 
speculators. I defer to your insight on ways to increase transparency 
and fairness in the energy commodity futures market--to reel back the 
overwhelming odds now favoring speculators and institutional investors, 
particularly those trading on foreign exchanges.
    We need action, not more studies or expert commissions. Many have 
suggested a way forward: totally close the loopholes that permit large 
institutional traders to avoid any real oversight or financial 
requirements; curtail extremely risky investments by pension funds that 
jeopardize savings for employees across the country; eliminate trading 
advantages for the huge speculative traders over those who plan to use 
the products they buy rather than trading them over and over again for 
unbelievable profits; and make the commodity market true to supply-and-
demand fundamentals.
    As the Permanent Subcommittee on Investigations of the Senate 
Homeland Security and Government Affairs Committee found:
  --Congress needs to ``level the regulatory playing field between the 
        NYMEX and the ICE exchanges, increase energy price 
        transparency, and strengthen the ability of CFTC to analyze 
        market transactions and police U.S. energy commodity markets.''
  --It is ``essential'' that CFTC have ``access to daily reports of 
        large trades of energy commodities . . . to deter and detect 
        price manipulation.''
  --CFTC ``surveillance tools have not matched the subsequent growth in 
        commodity trading, electronic trading and speculative trading, 
        especially for energy products.'' ``The energy futures market 
        is really about whether families will be able to afford to heat 
        their homes and fill up at the pump.'' ``More and more trading 
        occurs on electronic markets without oversight.''
    Mr. Chairmen and committee members, your leadership and insight are 
greatly appreciated.
    As I said at the beginning of my remarks, if Congress does not act 
soon, this country will not have a viable airline industry. Thank you.

    Senator Durbin. Dr. James Newsome is CEO and President of 
the New York Mercantile Exchange. Dr. Newsome.
STATEMENT OF DR. JAMES NEWSOME, PRESIDENT AND CEO, NEW 
            YORK MERCANTILE EXCHANGE
    Dr. Newsome. Thank you, Mr. Chairman, Senator Lugar. On 
behalf of the New York Mercantile Exchange, thanks for the 
opportunity to appear before this joint committee to address 
what we believe are the most important issues facing the global 
and domestic economies, as well as those of U.S. customers.
    The Senate Agriculture Committee was primarily responsible 
for the drafting and passage of the Commodity Futures 
Modernization Act of 2000, still recognized as the gold 
standard for U.S. financial policy. I would like to share 
partial ownership as chair of the CFTC who was responsible for 
implementing that act in 2000. 99 percent of this act holds 
true today as outstanding policy. However, we did not have a 
crystal ball and it was impossible to determine how some 
markets would develop. And on at least two occasions, markets 
have developed differently than anyone anticipated.
    First, the development of the over-the-counter natural gas 
market after the collapse of Enron which became much more 
exchange-like and actually started contributing to price 
discovery. This scenario was investigated by Senator Levin's 
office after the implosion of Amaranth and was addressed with 
the passage of this latest farm bill.
    Second, the listing of U.S.-delivered energy contracts by 
foreign boards of trade under their no action authority without 
the transparency and position limits provided by U.S. exchanges 
to the CFTC. NYMEX began raising this issue 2 years ago and 
today it must be addressed.
    We believe there are two important policy components.
    One, transparency. Complete transparency is fundamental for 
competitive markets. The same large trader reporting for all 
U.S. and foreign boards of trade trading U.S. products is 
critical for the CFTC to determine whether there is either 
manipulation or substantive speculative activity. Further 
delineation of large trader reports to include customer 
positions behind swap dealers and the banks we think is 
imperative to addressing overall transparency.
    Second, position limits. If a foreign board of trade 
decides that it wants to list U.S.-delivered contracts, which 
it has the right to do, then they must abide by U.S. position 
limits to control speculative activity just as U.S. exchanges 
currently do.
    Finally, with regard to the CFTC resources, we believe that 
the CFTC has long been on a downward spiral regarding real 
resources and personnel. This has to be addressed. You are 
addressing it, and it is supported fully by the New York 
Mercantile Exchange.
    Thank you, Mr. Chairman.
    Senator Durbin. Thank you very much.
    [The statement follows:]
                Prepared Statement of Dr. James Newsome
    Mr. Chairman and participants in this joint hearing, my name is Jim 
Newsome and I am the President and Chief Executive Officer of the New 
York Mercantile Exchange, Inc. (NYMEX or Exchange). NYMEX is the 
world's largest forum for trading and clearing physical-commodity based 
futures contracts, including energy and metals products, and has been 
in the business for more than 135 years. NYMEX is a federally chartered 
marketplace, fully regulated by the Commodity Futures Trading 
Commission (CFTC or Commission) both as a ``derivatives clearing 
organization'' (DCO) and as a ``designated contract market'' (DCM), 
which is the highest and most comprehensive level of regulatory 
oversight to which a derivatives trading facility may be subject under 
current law and regulation.
    On behalf of the Exchange, its Board of Directors and shareholders, 
I want to express our appreciation to the committees for holding 
today's hearing on the role, responsibilities and resource needs of the 
CFTC, with particular focus on the oversight of energy markets and oil 
futures contracts. In the last several years, trading volume on 
regulated markets has expanded dramatically, yet, according to 
published reports, the CFTC's current staffing levels fall even below 
the levels in place when the agency commenced operations over 30 years 
ago. Like most industry participants, we believe that the Commission is 
doing a fine job in the face of severe budget, staffing and technology 
constraints.
    We also believe that a compelling case can be made for immediate 
increases in the size of the CFTC's operating budget. My own views on 
the need for remedying this mismatch between duties and resources stem 
in part from my service as Chairman of the CFTC from 2002-2004 during 
the period when we were continuing to implement the provisions of the 
landmark Commodity Futures Modernization Act of 2000 (CFMA). As 
anticipated, that law brought new competition and enhanced innovation 
in derivatives markets, which contributed to the explosion in trading 
volume. It is imperative that the CFTC have all of the tools that it 
needs to carry out fully its obligation to maintain the integrity of 
U.S. futures markets.
                               background
    NYMEX energy futures markets are highly liquid and transparent, 
representing the views and expectations of a wide variety of 
participants from every sector of the energy marketplace. Customers 
from jurisdictions around the globe can submit orders for execution on 
Globex. The price agreed upon for sale of any futures contract trade is 
immediately transmitted to the Exchange's electronic price reporting 
system and to the news wires and information vendors who inform the 
world of accurate futures prices.
    Price signals are the most efficient transmitters of economic 
information, telling us when supplies are short or in surplus, when 
demand is robust or wanting, or when we should take notice of longer-
term trends. NYMEX futures markets are the messengers carrying this 
information from the energy industry to the public. The wide 
dissemination of futures prices generates competition in the 
establishment of current cash values for commodities.
    Analysis of the actual market data from the regulated exchange, 
which is the best evidence available to date, indicates that prices in 
our markets continue to be determined by fundamental market forces. 
Specifically, uncertainty about the availability of supply due to 
political and security factors, uncertainty about the actual levels of 
continuing growth of demand in developing parts of the world, and 
uncertainty about currency fluctuations materially weigh into the 
fundamental analysis.
    In addition, the available data indicate that commercials continue 
to provide the majority of open interest in crude oil futures. 
Moreover, the extent of non-commercial participation in crude oil as a 
percent of open interest on NYMEX has actually declined over the last 
year. There is no evidence to date either that the trading by non-
commercials has impaired the price discovery function of our markets.
    NYMEX is the benchmark for energy prices around the world. Trading 
on NYMEX is transparent, open and competitive and highly regulated. 
NYMEX does not trade in the market or otherwise hold any market 
positions in any of its listed contracts, and, being price neutral, 
does not influence price movement or set prices for commodities trading 
on the exchange. Instead, NYMEX provides trading forums that are 
structured as pure auction markets for traders to come together and to 
execute trades at competitively determined prices that best reflect 
what market participants think prices will be in the future, given 
today's information.
    The public benefits of commodity markets, including increased 
market efficiencies, price discovery and risk management, are enjoyed 
by the full range of entities operating in the U.S. economy, whether or 
not they trade directly in the futures markets. Everyone in our economy 
is a public beneficiary of vibrant, efficient commodity markets, from 
the U.S. Treasury, which saves substantially on its debt financing 
costs, to every food processor or farmer, every consumer and company 
that uses energy products for their daily transportation, heating and 
manufacturing needs, and anyone who relies on publicly available 
futures prices as an accurate benchmark. Legislative proposals intended 
to decrease overall liquidity and/or speculative participation, such as 
substantially increasing margin levels, would greatly harm the 
regulated market and damage the all important hedging and price 
discovery functions that provide important benefits to consumers and to 
the economy as a whole.
                   market oversight and transparency
    NYMEX has a strong historic and ongoing commitment to its self-
regulatory organization responsibilities. The NYMEX regulatory program 
has a current annual budget of approximately $6.2 million, which 
reflects a significant commitment to both staff and technology. 
Generally NYMEX must comply with a number of broad, performance-based 
Core Principles applicable to DCMs that are fully subject to the CFTC's 
regulation and oversight. Of particular note is the series of Core 
Principles that pertain to markets and to market surveillance. A DCM 
must monitor trading to prevent manipulation, price distortion and 
disruptions of the delivery or cash-settlement process. Furthermore, to 
reduce the potential threat of market manipulation or congestion, the 
DCM must adopt position limits or position accountability for a listed 
contract, where necessary or appropriate.
    NYMEX has numerous surveillance tools that are used routinely to 
ensure fair and orderly trading on our markets. The principal tool that 
is used by DCMs to monitor trading for purposes of market integrity is 
the large trader reporting system. For energy contracts, the reportable 
position levels are distinct for each contract listed by the Exchange 
for trading. The levels are set by NYMEX and are specified by rule 
amendments that are submitted to the CFTC, following consultation and 
coordination with the CFTC staff. The reportable level for the NYMEX 
physically delivered crude oil contract is 350. The NYMEX Market 
Surveillance staff routinely reviews price activity in both futures and 
cash markets, focusing on whether the futures markets prices are 
converging with the spot physical market as the NYMEX contract nears 
expiration.
    Large trader data are reviewed daily to monitor reportable 
positions in the market. On a daily basis, NYMEX collects the 
identities of all participants who maintain open positions that exceed 
set reporting levels as of the close of business the prior day. These 
data are used to identify position concentrations requiring further 
review and focus by Exchange staff.
    By rule, NYMEX also maintains and enforces limits on the size of 
positions that any one market participant may hold in a listed 
contract. These limits are set at a level that restricts the ability of 
speculators to carry large positions on NYMEX and also restricts the 
opportunity to engage in possible manipulative activity on NYMEX. 
Futures markets traditionally list futures and options contracts as a 
series of calendar contract months. For an expiring contract month in 
which trading is terminating, NYMEX uses a hard expiration position 
limit. The hard position limit for the NYMEX physically settled crude 
oil contract (CL futures) is 3,000 contracts. Breaching the position 
limit can result in disciplinary action being taken by the Exchange.
    NYMEX also maintains a program that allows for certain market 
participants to apply for targeted exemptions from the position limits 
in place on expiring contracts. Such hedge exemptions are granted on a 
case-by-case basis following adequate demonstration of bona fide 
hedging activity involving the underlying physical cash commodity or 
involving related swap agreements.
    For back months of the CL futures contract, NYMEX currently 
maintains an any-one-month/accountability level of 10,000 contracts and 
an all-months-combined position accountability level of 20,000 
contracts. When position accountability levels are exceeded, Exchange 
staff conducts heightened review and possible inquiry into the nature 
of the position which ultimately may result in NYMEX staff directing 
the market participant to reduce its positions.
                        recent cftc announcement
    The CFTC recently announced several new initiatives to increase the 
transparency of energy futures markets. NYMEX has advocated for greater 
transparency of futures activity linked to U.S. exchanges occurring on 
markets regulated by foreign regulators. We support the initiatives put 
forward by the Commission, which can only enhance the CFTC's regulatory 
mission.
    One initiative is intended to expand information-sharing received 
from the U.K. Financial Services Authority for surveillance of energy 
commodity contracts with U.S. delivery points, including West Texas 
Intermediate crude oil futures contracts. The agreement includes 
implementing expanded information-sharing to provide the CFTC with 
daily large trader positions in the U.K. WTI crude oil contracts. NYMEX 
believes that including large trader reporting is an important market 
surveillance tool that provides important transparency to the market 
and to regulators.
    NYMEX has advocated similar requirements for certain contracts 
traded on exempt commercial markets (ECM) and for foreign boards of 
trade (FBOT) that offer energy commodities with U.S. delivery points, 
such as the ICE Futures WTI contract. Position accountability levels 
and large trader reporting requirements, among others, were recently 
adopted into law for certain contracts traded on ECMs as an amendment 
to the farm bill. We believe that this new law will address the 
significant regulatory gap identified in the context of the Amaranth 
collapse.
    NYMEX continues to believe that the same requirements should be 
imposed on FBOTs for contracts that directly affect U.S. consumers and 
the economy as a whole, such as the ICE WTI futures contract. Two years 
ago, the CFTC had authority over and could directly see 100 percent of 
the futures trading activity in the WTI futures contract. Today they 
regulate and can only directly see approximately 70 percent of that 
market. Thus, NYMEX believes that the ``no-action'' letter under which 
ICE Futures lists the WTI contract should be conditioned to require: 
(1) position accountability levels and/or position limits, as 
appropriate; and (2) large trader reporting. These requirements should 
mirror the requirements imposed on U.S. designated contract markets.
    As noted above, another fundamental market surveillance and 
integrity tool is the use of position accountability levels and 
position limits. We believe strongly requiring FBOTs offering contracts 
with U.S. delivery points to impose position limits and/or 
accountability levels would be enormously positive and would strengthen 
the overall integrity of energy futures markets. This is particularly 
true when the contract trading on the FBOT has a U.S. delivery point 
and has a price that is linked to the settlement price of a U.S. 
regulated contract, such as the ICE WTI futures contract.
    Moreover, the CFTC announced its intent to develop a proposal that 
would routinely require more detailed information from index traders 
and swaps dealers in the futures markets, and to review whether 
classification of these types of traders can be improved for regulatory 
and reporting purposes. Some commentators have recently made sweeping 
assertions regarding the impact of index traders on the basis of 
distorted and patently erroneous information. Consequently, the 
Exchange believes that it will be useful to the development of 
thoughtful public policy for the CFTC to obtain more precise data so as 
to better assess the amount and impact of this type of trading in the 
markets. We look forward to the implementation of this proposal.
    Finally, in response to the CFTC's extraordinary step of publicly 
acknowledging an ongoing investigation into crude oil practices 
generally, we have reaffirmed our long-standing commitment to provide 
full assistance to the CFTC on enforcement matters in order to ensure 
the integrity of U.S. markets.
                        foreign boards of trade
    While much of the focus on Capitol Hill has been on domestically 
based ECMs, similar issues potentially could arise with regard to U.S.-
based products that are listed for trading on FBOT. As a note, NYMEX 
has long been a champion of vigorous competition and of greater 
globalization of services and products. As a rapidly growing global 
market presence, we have offices in London and Singapore.
    We also note that there have been substantial advances in 
technology since the former era of closed end proprietary trading 
systems. New exchanges have emerged that operate on a solely electronic 
basis, and products have now been listed under the CFTC staff no-action 
process that are parallel (if not identical) to other products listed 
by existing U.S. exchanges that are subject to full CFTC regulation.
    NYMEX believes that it would be prudent from time to time for the 
Commission or Commission staff to conduct a thorough review of foreign 
markets operating in the U.S. under existing staff no-action letters. A 
primary goal should be a ``regulatory gap'' analysis that can identify 
significant regulatory differences in the foreign board of trade's 
program that may raise significant market oversight and transparency 
concerns for U.S. regulators. The Commission should adopt a measured 
approach that will protect the regulatory and public policy objectives 
that have been tried and proven over the years, and that will further 
enhance the strong relationships developed with other international 
regulators.
    In our recent experience, ``regulatory arbitrage'' is not a 
hypothetical concern but is actually already underway for certain of 
our listed products. This process could actually harm markets because 
of the distortion of market efficiency occurring when customers make 
choices among the same or similar products on the basis of differences 
in regulatory treatment among providers rather than on the basis of 
intrinsic distinctions in the products themselves or in related 
services. In addition, regulatory arbitrage potentially diminishes the 
breadth and depth of the CFTC's regulatory authority and, consequently, 
reduces much needed market transparency.
         market analysis of the cftc-regulated energy exchange
    NYMEX staff monitors the supply and demand fundamentals in the 
underlying cash market to ensure that NYMEX futures prices generally 
are consistent with ongoing, cash market price movements and that there 
are no price distortions. In a highly transparent, regulated and 
competitive market, prices are affected primarily by fundamental market 
forces. Currently, uncertainty in the global crude market regarding 
geopolitical issues, refinery shutdowns and increasing global usage, as 
well as devaluation of the U.S. Dollar, are clearly having an impact on 
the assessment of market fundamentals. One may view such factors as 
contributing an uncertainty or risk premium to the usual analysis of 
supply and demand data. Indeed, such factors now may fairly be viewed 
as part of the new fundamentals of these commodities.
    Before turning to analysis of specific market factors, we note an 
article that appeared last month in the Wall Street Journal (WSJ). The 
WSJ conducted a survey from May 2-6, 2008 of 53 economists. According 
to that survey, the majority of economists have concluded that ``the 
global surge in food and energy prices is being driven primarily by 
fundamental market conditions, rather than an investment bubble.'' 
``Bubble is not Big Factor in Inflation,'' May 9, 2008, page A-2. 
Fifty-one percent of those respondents said that demand from India and 
China was the prime factor in soaring energy prices, and 41 percent 
said that demand was the chief contributor to rising food costs. 
Constraint in supply was cited second most often; 20 percent blamed 
supply problems for higher food prices, and 15 percent for increasing 
energy prices. One economist noted that it was a combination of demand 
and supply issues.
    The demand and supply fundamentals in the oil markets continue to 
be the driving factors in high oil prices. In a recent Energy 
Information Administration (EIA) Short-Term Energy Outlook, published 
on May 6, 2008, the demand and supply situation is summarized as 
follows:

    ``The oil supply system continues to operate at near capacity and 
remains vulnerable to both actual and perceived supply disruptions. The 
supply and demand balance for the remainder of the year is tighter than 
in last month's Outlook. World oil markets are particularly tight 
during the first half of 2008, with year-over-year growth in world oil 
consumption outstripping growth in non-Organization of the Petroleum 
Exporting Countries (OPEC) production by over 1 million barrels per 
day. The combination of rising global demand, fairly normal seasonal 
inventory patterns, slow gains in non-OPEC supply, and low levels of 
available surplus production capacity is providing firm support for 
prices.''

    I wish to highlight this finding: growth in consumption has 
outstripped growth in non-OPEC production by over 1 million barrels per 
day. That is substantially tighter than a snug fit. Indeed, that may be 
said to be more akin to a chokehold. Conventional wisdom, borne out by 
substantial experience from over seas as well as here in North America, 
is that the short-run worldwide demand for petroleum products such as 
gasoline--especially retail demand--is highly inelastic: consumption 
does not decrease by much in the face of significant price rises. With 
projected demand exceeding supply by 1 million barrels per day, the 
only way a market with highly inelastic demand will equilibrate is 
through a substantive rise in price. The upward pressure has been there 
and, according to these projections, will continue to be there.
                                 demand
    At NYMEX, we understand the difficulty of assembling accurate and 
timely information on non-OECD petroleum consumption and the 
corresponding challenge in projecting non-OECD consumption. However, 
the latest EIA Short-Term Energy Outlook projections provide important 
insight into the current state of global demand. EIA projects that 
world oil demand will grow by 1.2 million barrels per day in 2008, up a 
healthy 1.4 percent, with China accounting for 35 percent of this 
demand growth. The EIA predicts China's oil consumption will rise by 
0.4 million barrels per day in 2008, up 5.6 percent from its record-
high levels achieved in 2007. Almost all of the oil growth in 2008 is 
projected to come from the non-OECD countries, led by China, India, 
Middle Eastern countries, and Russia. U.S. oil demand is actually 
projected to decline slightly by 0.9 percent in 2008.
    As a practical consideration, the most accurate data on energy 
consumption applies to the United States, followed by the OECD. 
However, the strongest source of projected energy demand is from the 
far-less visible reaches of developing countries such as China, India 
and the Middle East. While we respect EIA's efforts to project these 
numbers, we would caution anyone on oversimplifying the challenge of 
accurately assessing the demand in these countries, much less 
projecting it. The only thing we can be certain of is the relentless 
increase in petroleum demand pushed each year by the millions of people 
making the transition from less-developed circumstances to the 
beginnings of middle-class circumstances.
    Currently, China is putting more than 8 million new cars on the 
road each year. Does anyone doubt that the average driver is increasing 
his/her amount of driving each year? India, the Middle East and Russia 
are experiencing similar transitions. We believe the sheer uncertainty 
around consumption in these economies, in combination with the 
extremely tight world market conditions, is a strong influence on price 
volatility in the world oil market. In concert with the tight market 
conditions and inelastic demand for petroleum products we highlighted 
above, that volatility is oscillating around ever increasing prices.
    It is key to realize that the market tightness and the market's 
struggle to discern actual demand in growing and developing economies 
are both fundamental influences in the world oil market. The most 
visible signs of these conditions are the transparent market mechanisms 
that reside in the world today, such as NYMEX's futures and options 
markets, where prices are discovered and risk is managed. These 
mechanisms operate immediately. Compare that to fundamental market 
information, such as the consumption data referred to above. 
Consumption data, even for the most advanced economies that have been 
collecting these data and refining the process for collecting these 
data for decades (by the International Energy Agency), are provided on 
a preliminary basis 6 weeks after the fact. The data are then further 
refined 4 weeks later and again four weeks after that; all of this for 
a monthly statistic, which at the time of the final revision is 14 
weeks after the month.
    When you add onto that process the fact that the most dynamic 
component of consumption emanates not from those economies but from 
others where data collection is materially less advanced and the 
quality of the data much less certain, then the importance of immediate 
price discovery and transparency becomes even more evident. In a 
tightly supplied market where demand is highly inelastic, the only 
check on rising prices is competition and the price transparency and 
market liquidity that provide the support for it. Anything that reduces 
price transparency and liquidity under these market conditions will 
result in shifting price discovery to the collection of uncoordinated, 
opaque and, at times, esoteric mechanisms that comprise the cash market 
that provides limited transparency; a market not informed by the 
immediate discovery of value but by the relatively untimely release of 
fundamental information that is of uncertain quality and that provides 
limited transparency.
                                 supply
    On the supply side, global production of crude oil was relatively 
flat in 2007, despite rising demand and rising prices. It is important 
to note that this rising demand did not provoke a significant supply 
response. The EIA Short-Term Energy Outlook points to the slow growth 
in non-OPEC oil supplies, along with the OPEC quota constraints, which 
have given ``firm support for prices.''
    Further, the geopolitical risks provide added uncertainty to the 
oil supply outlook. Moreover, various state-owned oil companies have 
not been investing adequately in oil production. Venezuela nationalized 
assets owned by U.S. oil companies and has generally proved to be an 
unreliable partner. Mexico's major oil field has been depleted, and 
Mexico will not allow United States companies to engage in deep water 
drilling. Colombian rebels have been blowing up pipelines with some 
frequency, and are being financially backed by the Venezuelan 
Government. Nigerian rebel forces routinely shut down oil fields--
either through strikes, terrorism or sabotage. Russia has suffered a 
decline in production. Finally, U.S. production has declined 
dramatically in the past 20 years, and promising new drilling areas are 
generally not being opened up in this country due to environmental 
considerations.
    In addition, the price for crude in Euros has risen, but much more 
modestly. For instance, the last time the Dollar and Euro were 
exchanged at par was during December 2002 when the spot price of oil 
was about $27 per barrel. By the end of April 2008, the price of oil in 
Dollars had risen 340 percent while the price in Euros had risen 180 
percent, a substantial difference. Attached is a chart showing the 
price of oil in Dollars and Euros since 2000. So, while supply and 
demand fundamentals are the major determinants of price, at the margin, 
as the value of the dollar goes down, it may be providing some upward 
pressure on the price of oil in dollars so that it stays constant in 
value with the value of crude in Euros.
    In the face of these market factors, NYMEX provides a level of 
economic stability to the market by offering a reliable and well-
regulated price discovery and risk management mechanism. Our highly 
transparent, open and competitive market continues to work according to 
design.
    analysis of participation in nymex's crude oil futures contract
    Data analysis conducted by our Research Department indicates that 
the percentage of open interest in NYMEX Crude Oil futures held by non-
commercial participants relative to commercial participants actually 
decreased over the last year even at the same time that prices were 
increasing. NYMEX staff reviewed the percentage of open interest in the 
NYMEX Crude Oil futures contract held by non-commercial longs and 
shorts relative to that held by commercial longs and shorts. The review 
period commenced at the beginning of 2006 and continues through to the 
present. During the last year, commercial longs and shorts consistently 
have comprised between 60 and 70 percent of all open interest.
    On the other hand, non-commercial longs and shorts consistently 
have been in the range of 25-30 percent of the open interest Thus, non-
commercials holding long or buy positions have not been participating 
in the market to the extent that they could have a significant impact 
on market price. Moreover, as noted, the extent of non-commercial 
participation in the crude oil energy futures contract has actually 
declined since the levels observed last summer. It should also be noted 
that the percentage of non-commercial longs (as a percentage of all 
long or buy open positions) is generally within just a few percentage 
points of the percentage of non-commercial shorts (as a percentage of 
all short or sell positions). In other words, non-commercial 
participants are not providing disproportionate pressure on the long or 
buy side of the crude oil futures market. Instead, non-commercials are 
relatively balanced between buy and sell open positions for NYMEX crude 
oil futures. In addition, ``hedge funds'' identified in analysis 
conducted by NYMEX staff only accounted for approximately 5 percent of 
the total volume in the NYMEX Light Sweet Crude Oil contract in 2007.
                                margins
    In futures markets, margins function as financial performance bonds 
and are employed to manage financial risk and to ensure financial 
integrity. A futures margin deposit has the economic function of 
ensuring the smooth and efficient functioning of futures markets and 
the financial integrity of transactions cleared by a futures 
clearinghouse. Margin levels are routinely adjusted in response to 
market volatility. At NYMEX, margin generally is collected to cover a 
99 percent probability of a likely 1-day price move, based on an 
analysis of historical and implied data.
    Some have suggested that the answer to higher crude oil prices is 
to impose substantially greater margins on energy futures markets 
regulated by the CFTC. We believe that this approach is misguided. As 
previously noted, in a highly transparent, regulated and competitive 
market, prices are affected primarily by fundamental market forces and 
imposing more onerous margin levels will not affect price levels. 
Currently, uncertainty in the global crude market regarding 
geopolitical issues, refinery shutdowns and increasing global usage, as 
well as devaluation of the U.S. Dollar, are now market fundamentals. 
Adjusting margin levels significantly upward will not change the 
underlying market fundamentals. Furthermore, given the reality of 
global competition in energy derivatives, increasing crude oil margins 
on futures markets regulated by the CFTC inevitably will force trading 
volume away from regulated and transparent U.S. exchanges into the 
unlit corners of unregulated venues and onto less regulated and more 
opaque overseas markets.
    Finally, Exchange staff has examined trends in margin levels at the 
Exchange going back to early 2000. The data clearly indicate that 
higher margin levels lead rather than follow increases in the price of 
crude oil futures products. In other words, when Exchange staff, in 
exercising their independent and neutral business judgment, determined 
to increase margin levels in response to changes in crude oil 
volatility levels, the higher margin levels were followed not by lower 
prices but instead by yet higher crude prices.
                               conclusion
    At all times during periods of volatility in the market, NYMEX has 
been the source for transparent prices in the energy markets as well as 
the principal vehicle by which market participants achieve stability. 
Futures markets provide the means by which to achieve price certainty 
and lock-in prices. Our price reporting systems, which provide 
information to the world's vendors, have worked flawlessly and without 
delay. The NYMEX marketplace continues to perform its responsibility to 
provide regulated forums that ensure open, competitive and transparent 
energy pricing. The market uncertainty and mayhem and further 
devastation to consumers that would unfold is clear if NYMEX were 
unable to perform its duty and prices were determined behind closed 
doors. Policies that would inevitably result in reducing transparency 
and liquidity would only succeed in conferring market power unto those 
who would benefit from price increases in the crude oil market, a 
market that is so prominently characterized by the inflexible demand of 
its end-users. Transparency and liquidity are the foundation that 
supports competition in the oil market.
    Over the last several years, NYMEX has worked closely with 
congressional leaders providing information and other assistance on 
legislative initiatives that would add greater transparency to 
unregulated derivatives venues. We believe that these measures reflect 
a consensus regarding the need for greater transparency and oversight 
for certain specified products now trading in unregulated over-the-
counter electronic trading markets.
    We also hope that Congress does not misinterpret the lessons of the 
recent past by moving to impose new arbitrary and onerous burdens on 
futures exchanges, which are the most highly regulated and transparent 
segment of U.S. derivatives markets. Such steps would shift trading 
from regulated and transparent markets to unregulated and 
nontransparent markets and, thus, would constitute a significant step 
backward in transparency and market integrity. As markets continue to 
evolve, there is a regulatory and public interest rationale for 
increasing transparency in other venues in order to ensure that the 
CFTC has the data it needs to properly carry out its statutory duties.
    I thank you for the opportunity to share the viewpoint of the New 
York Mercantile Exchange with you today. I will be happy to answer any 
questions that any members of the committees may have.

    Senator Durbin. Mr. Vice is President and Chief Operating 
Officer of the Intercontinental Exchange. Thank you for joining 
us.
STATEMENT OF CHARLES A. VICE, PRESIDENT AND CHIEF 
            OPERATING OFFICER, INTERCONTINENTAL 
            EXCHANGE
    Mr. Vice. Thank you, Chairman Durbin.
    ICE operates several global futures marketplaces and OTC 
derivatives markets across a variety of product classes, 
including agricultural and energy commodities, foreign exchange 
and equity indexes. Headquartered in Atlanta, ICE has large 
offices in New York and London and smaller presences in several 
other cities around the world.
    ICE owns and hosts four separate markets on its trading and 
clearing platforms, three regulated futures exchanges that were 
separately acquired over the last 7 years and one over-the-
counter market.
    My brief remarks today will focus on our energy futures 
exchange, ICE Futures Europe, acquired by ICE in 2001. Founded 
in London 27 years ago as the International Petroleum Exchange, 
this market is a recognized investment exchange, or RIE, under 
the supervision of the U.K. Financial Services Authority. 
Though a subsidiary of ICE, ICE Futures Europe has its own 
majority independent board and separate regulatory and 
operational staff. This degree of separateness from the parent 
group is mandated by the FSA in order for the exchange to 
maintain its status as a recognized body and self-regulatory 
organization.
    As the home of the Brent crude and gas oil futures 
contracts, ICE Futures Europe has, since its inception, been 
the leading energy futures exchange in Europe. To complement 
its Brent crude contract, the exchange in 2006 added a future 
that settles on the next-to-last day settlement price as set 
somebody the NYMEX west Texas intermediate crude oil contract. 
Since the launch of electronic trading by NYMEX on CME's 
trading system, most of the growth in trading of WTI crude oil 
has been on the NYMEX rather than the ICE market. Nevertheless, 
the ICE WTI contract is an important contract for ICE Futures 
Europe as it is used by commercial participants to hedge 
exposure to small differences in WTI and Brent prices. Notably, 
NYMEX similarly offers a cash-settled Brent crude oil future 
settling on ICE Futures Europe's final settlement price for 
precisely the same reason.
    Today ICE has a relatively small 15 percent share of total 
WTI futures equivalent open interest while NYMEX retains the 
remaining 85 percent.
    ICE Futures Europe provides access to traders in the United 
States as a foreign board of trade operating under a CFTC no 
action letter issued in 1999 and amended several times. In 
granting a no action letter, the CFTC examines our trading 
status, our exchange's status in our home jurisdiction, and our 
rules and enforcement. Since Congress created this framework, 
the CFTC has granted no action relief to at least 20 foreign 
boards of trade.
    Other countries have reciprocal policies in place upon 
which U.S. exchanges like the CME, NYMEX, and ICE Futures U.S. 
rely to offer access to their markets in more than 50 
jurisdictions around the world. Disregard for this mutual 
recognition system would impair the competitiveness of U.S. 
exchanges abroad and represent a major step back for global 
cooperation and information sharing.
    Consistent with this framework, ICE Futures Europe shares 
WTI trader positions with the CFTC through the agency's 
memorandum of understanding with the FSA. We require daily 
large trader reporting for members of all contract positions in 
nearby months that are over a given threshold, which for WTI is 
100 lots. Where such positions are not held for members on 
account, members are responsible for reporting the name of 
their customer who holds the position. This information is 
collected on a daily basis and shared with the FSA and for our 
WTI contract, the CFTC.
    ICE Futures Europe recently agreed to enhance this 
reporting to including WTI positions for all contract months 
and to notify the CFTC if a trader exceeds position 
accountability levels similar to those on U.S. exchanges. I 
would note as of today with the modified no action letter by 
the CFTC, this goes even further to actually place position 
limits and accountability limits that we administer on that WTI 
contract.
    Much like the CFTC, the FSA is a principles-based 
regulator. As such ICE Futures Europe must comply with core 
principles that are similar to those imposed on CFTC-regulated 
exchanges. As an REI, ICE Futures Europe maintains a robust 
market monitoring program and has rules to prohibit and 
penalize misconduct. Market surveillance staff monitor trading 
on a real-time basis and review activity to identify any 
unusual trading patterns that warrant further investigation. 
Our systems maintain a detailed audit trail of every order and 
trade. For all contracts, ICE Futures Europe has the authority 
to take disciplinary action against its members and to order a 
member to reduce the size of a position that it considers to be 
too large. This is principally of concern in physically 
delivered contracts.
    In concluding, ICE remains a strong proponent of open and 
competitive markets and of appropriate regulatory oversight of 
those markets. We recognize the severe impact of high crude oil 
prices on the U.S. economy and understand the congressional 
desire to leave no stone unturned. However, with a mere 15 
percent share of global WTI open interest on a futures 
equivalent basis, we feel it is highly unlikely that the ICE 
Futures WTI market is the primary driver of WTI prices.
    Furthermore, we note that prices for virtually all 
agricultural and natural resource futures contracts, not to 
mention nonexchange traded commodities, have surged at rates 
similar to crude oil and in some cases even more sharply and 
with greater volatility. Since none of these other commodities 
are known to feature a foreign board of trade offering a 
futures settling on a U.S. contract, it seems highly unlikely 
that the small differences in United States and United Kingdom 
regulation account for much, if any, of the dramatic rise in 
the price of WTI crude oil.
    Despite our view that additional restrictions on ICE 
Futures Europe are unlikely to lower oil prices, we nonetheless 
look forward to working with Congress and the CFTC to ensure 
that their concerns with regard to our WTI contract are fully 
addressed while remaining fully compliant with obligations to 
our home regulator, the FSA.
    Thank you.
    [The statement follows:]
                 Prepared Statement of Charles A. Vice
    Chairman Durbin and Chairman Harkin, Ranking Members Chambliss and 
Brownback, I am Chuck Vice, President and Chief Operating Officer of 
the IntercontinentalExchange, Inc., or ICE. We very much appreciate the 
opportunity to appear before you today to give our views on energy 
markets.
    ICE operates a leading global marketplace in futures and OTC 
derivatives across a variety of product classes, including agricultural 
and energy commodities, foreign exchange, and equity indexes. 
Commercial hedgers use our products to manage risk and investors 
provide necessary liquidity to the markets. Headquartered in Atlanta, 
ICE has offices in New York, Chicago, Houston, London, Singapore, 
Winnipeg, and Calgary.
    ICE owns and hosts four separate markets on its electronic trading 
platform--three regulated futures exchange subsidiaries which were 
individually acquired over the last 7 years and one over the counter 
energy market, which operates under the Commodity Exchange Act (CEA) as 
an ``exempt commercial market,'' or ECM. ICE's regulated futures 
exchanges include ICE Futures Europe, formerly known as the 
International Petroleum Exchange, which is a Recognized Investment 
Exchange, or RIE, headquartered in London and under the supervision of 
the U.K. Financial Services Authority (FSA); ICE Futures U.S., formerly 
known as The Board of Trade of the City of New York (NYBOT), which is a 
CFTC-regulated Designated Contract Market (DCM) headquartered in New 
York; and ICE Futures Canada, formerly known as the Winnipeg Commodity 
Exchange, which is regulated by the Manitoba Securities Commission and 
headquartered in Winnipeg, Manitoba.
    ICE has always been and continues to be a strong proponent of open 
and competitive markets in energy commodities and related derivatives, 
and of appropriate regulatory oversight of those markets. As an 
operator of global futures and OTC markets and as a publicly-held 
company, we strive to maintain the utmost confidence in the integrity 
of our markets and in the soundness of our business model. To that end, 
we have continuously worked with the CFTC, the FERC, and regulatory 
agencies abroad in order to ensure that they have access to all 
relevant information available to ICE regarding trading activity on our 
markets and we will continue to work with all relevant agencies in the 
future.
                           ice futures europe
    I would like to take the opportunity today to discuss ICE's U.K. 
exchange subsidiary, ICE Futures Europe. ICE Futures Europe, formerly 
known as the International Petroleum Exchange (IPE), was formed in 1981 
and acquired by ICE in 2001. Since its formation, ICE Futures Europe 
has operated as a self regulatory organization, and since 1986, has 
operated as an RIE under the supervision of the FSA. In this regard, 
ICE Futures Europe is the U.K. equivalent of what is known as a 
designated contract market, or DCM, in the United States, and is 
regulated by the equivalent of the Commodity Futures Trading 
Commission, or CFTC.
    As the home of the Brent Crude Futures contract and the Gas Oil 
Futures Contract, ICE Futures Europe is, and has been since its 
inception, the leading energy futures exchange in Europe. Though a 
subsidiary of ICE, ICE Futures Europe has its own majority independent 
board and separate regulatory and operational staff. This degree of 
separateness from the parent group is mandated by the FSA in order for 
the exchange to maintain its status as a recognized body and self 
regulatory organization.
    It is important to note that ICE Futures Europe, like the leading 
U.S. exchanges, is a global exchange. It is authorized to provide 
trading access in 51 jurisdictions around the world. ICE Futures 
Europe's customer base includes the largest energy companies and 
investment banks in the world, and its flagship contract, the Brent 
Crude Oil futures contract, is a global benchmark for the price of 
crude oil. In addition to its energy contracts, ICE Futures Europe 
partners with and hosts the European Climate Exchange, the largest pan-
European exchange for carbon emissions trading.
                    regulation of ice futures europe
    ICE Futures Europe is a RIE, subject to the regulation of the FSA. 
Much like the CFTC, the FSA is a principles-based regulator. As such, 
ICE Futures Europe must comply with core principles, which are similar 
to those imposed on CFTC regulated designated contract markets. 
Further, as part of its regulatory structure FSA incorporates the 
European Union's Markets in Financial Instruments Directive's (MiFID) 
principles. MiFID serves as regulatory backbone for the 30 member 
states of the European Economic Area. The FSA has been recognized 
globally for its leadership in global derivatives market regulation.
    As a recognized investment exchange supervised by the FSA, ICE 
Futures Europe has a robust market-monitoring program. Like U.S.-based 
exchanges, ICE Futures Europe has detailed exchange rules to prohibit 
misconduct, with which members must comply, as well as enforcement 
authority that penalizes misconduct.
    ICE Futures Europe monitors trading on its markets on a real-time 
basis. Trained staff supervise our markets every hour of the day. They 
use a variety of market-supervision tools and are responsible for 
ensuring that there is a ``fair and orderly'' market at all times. Our 
staff reviews trading activity each day to identify any unusual trading 
patterns that warrant further investigation. Our systems maintain a 
detailed audit trail of every order entered and every trade executed 
and allow compliance experts to drill into trading activity in great 
detail.
    We conduct large trader reporting which obliges members to report 
to the exchange on a daily basis contract positions over a given 
threshold that is currently 100 lots for WTI. Where such positions are 
not held for a member's own account, members are responsible for 
reporting the name of their customer who holds the position. This 
information is collected on a daily basis and shared with the FSA, 
and--for our WTI contract--with the CFTC.
    For all contracts ICE Futures Europe has the authority to order a 
member to reduce the size of a position that it considers to be too 
large. This is principally of concern in physically-delivered contracts 
where it appears that a member might have the ability to `squeeze' the 
market by controlling a large amount of the contracts to be delivered. 
In practice it is rare for the exchange to need to mandate the 
reduction of positions as members wish to avoid disputes with the 
exchange and will take steps to reduce positions following enquiries 
from the exchange.
    ICE Futures Europe also has the authority to take disciplinary 
action against its own members. Where necessary it can also notify the 
FSA, the CFTC or other regulators where it would be more appropriate 
for them to take action.
          ice futures europe's role in the global oil markets
    Since its inception, ICE Futures Europe has been a leader in the 
European crude oil markets. The exchange is the home of the Brent crude 
oil contract, which has traded in London for 25 years. Brent Crude Oil 
and West Texas Intermediate (WTI) crude oil grades (and to a lesser 
extent the OPEC Basket and the Dubai Crude Oil) set the global price of 
oil. The Brent Crude Oil contract is a light, sweet grade of oil and 
thus is highly correlated with the light, sweet WTI, which is slightly 
lighter. As one would expect in a global market, the two contracts 
usually settle within a few dollars of each other. This has been true 
since long before ICE purchased the IPE.
    ICE Futures Europe introduced its cash settled WTI futures contract 
in 2006 to compliment its Brent crude oil contract. The ICE Futures 
Europe WTI contract is cash settled at expiry against the penultimate 
trading day settlement price established by the NYMEX WTI physically 
delivered futures contract. Our contract had been launched by ICE 
several years prior as an OTC swap used primarily by dealers to hedge 
their customer business. At that time, the NYMEX WTI futures contract 
was available for trading only on the NYMEX floor. Volume in our OTC 
WTI swap grew as users found that an electronically traded instrument 
offered far superior price transparency and execution compared to the 
NYMEX floor. In response to these growing volumes, we converted our WTI 
OTC swap to a cash-settled WTI future at ICE Futures Europe to 
complement our existing Brent crude oil contract. NYMEX subsequently 
responded to market demands for electronic trading and has recaptured 
some of the open interest that initially came to ICE Futures Europe. 
Following NYMEX' introduction of electronic trading, most of the growth 
in trading of WTI crude oil has been on the NYMEX, as demonstrated by 
the NYMEX's rising market share and faster growth rate relative to the 
ICE WTI contract. Nevertheless, the ICE WTI contract is an important 
contract for ICE Futures Europe, as it is used by commercial market 
participants to create spread positions with the Brent Crude Oil 
Contract to hedge exposure to locational differences in the price of 
global crude oil. Notably, NYMEX offers a cash settled Brent crude oil 
future for precisely the same reason. Today, ICE has a relatively small 
15 percent share of total WTI futures equivalent open interest, while 
NYMEX retains the remaining 85 percent.
    Nevertheless, it is clearly important that the CFTC, along with 
other regulators, have visibility into the entire WTI market given its 
oversight responsibility with respect to NYMEX. Thus, after introducing 
the WTI contract in 2006, ICE Futures Europe began sharing information 
with the CFTC through the CFTC's memorandum of understanding with the 
FSA. In the original information sharing agreement, ICE Futures Europe 
provides trader position data for the prompt 2 months in the WTI 
contract on a weekly basis. As the contract reaches expiration, this 
reporting frequency is increased to a daily basis each month. Recently, 
again working with the CFTC and FSA, ICE Futures Europe agreed to an 
enhanced information sharing arrangement. This arrangement allows the 
CFTC to receive daily position data, for all contract months at the 
client level. In addition, ICE Futures Europe has agreed to notify the 
CFTC if a trader exceeds position accountability levels similar to 
those on U.S. DCMs. To our knowledge, the level of information provided 
through the enhanced information sharing agreement represents a first 
of its kind in cross-border information sharing between regulators.
                    cftc's mutual recognition system
    ICE Futures Europe operates in the United States as a foreign board 
of trade. As background, in the Futures Trading Act of 1982, Congress 
exempted foreign boards of trade from having to register as a DCM. This 
became the cornerstone of the CFTC's mutual recognition system. In 
1996, the Commission issued a no-action letter allowing a German 
exchange, Eurex, to offer direct electronic access to U.S. customers. 
The basis of the Commission's ruling was the recognition that Eurex's 
regulator and regulatory scheme is comparable to that of the CFTC. In 
1999, the Commission gave the International Petroleum Exchange no-
action relief to enable U.S. based customers to access its electronic 
market. In 2006, pursuant the no-action letter granted to the IPE, ICE 
Futures Europe offered the WTI crude oil contract to U.S. based 
customers.
    Through the market evolutions of the past 25 years, including 
increased globalization, the no-action process has proven highly 
effective tool for providing information to the U.S. regulator on 
foreign markets. The CFTC examines several key factors prior to 
granting relief. These include:
  --the automated trading system (including the order-matching system, 
        the audit trail, response time, reliability, security, and, of 
        particular importance, adherence to the International 
        Organization of Securities Commission principles for screen-
        based trading); the terms and conditions of contracts proposed 
        to be listed;
  --settlement and clearing (including financial requirements and 
        default procedures); the regulatory regime governing the 
        foreign board of trade in its home jurisdiction;
  --the foreign board of trade's status in its home jurisdiction and 
        its rules and enforcement thereof (including market 
        surveillance and trade practice surveillance); and
  --existing information sharing agreements with the foreign board of 
        trade, and the foreign board of trade's regulatory authority.
    Since adopting this policy, the CFTC has granted no-action relief 
to at least 20 foreign boards of trade. In 2006, the CFTC re-examined 
the no-action process and after a hearing, determined that the no-
action policy was an effective tool for both regulatory cooperation and 
competition.
    This mutual recognition system is now a backbone in the global 
regulatory network. As Benn Steil, Director of International Economics 
at the Council of Foreign Relations noted, ``the U.S. activities of one 
beneficiary alone [of the no-action process], Eurex have had a 
tremendous effect in accelerating the move to more efficient electronic 
trading, in motivating exchanges to demutualize, . . . in reducing 
trading fees, and in stimulating new product development.'' This is in 
turn has lead to futures transactions that are faster and less 
susceptible to manipulation or other bad acts than they were a decade 
ago, which has greatly reduced the price of risk management and 
transactional costs to participants in the commodity markets.
    It is important to recognize that there is no single agency today 
that can police all global markets, thus we must rely on foreign 
regulators if the United States is to remain part of the international 
marketplace. Other countries have similar policies in place, upon which 
U.S. exchanges rely. The Chicago Mercantile Exchange, NYMEX, and ICE 
Futures U.S. all rely on mutual recognition by foreign regulators to 
offer global access in those jurisdictions. Failure of the mutual 
recognition system would greatly impair the competitiveness of U.S. 
exchanges abroad and represent a major step back for U.S. markets. It 
is also important to note that the CFTC only can get information on 
foreign traders trading foreign contracts through information sharing 
agreements with foreign regulators.
                            the price of oil
    ICE recognizes that the rising price of oil has many adverse 
effects on the U.S. economy and is painful for U.S. citizens. It is 
tempting to place blame for higher prices on the futures markets, but 
futures markets serve as the messenger not the fundamental driver of 
prices. The prices for almost all commodities, including wheat, corn, 
soybeans, precious and base metals have surged at the rates similar to 
crude oil and in some cases even more sharply and with greater 
volatility. It should be noted that in virtually all of these other 
commodity products, there are no foreign boards of trade offering a 
contract settling on a U.S. exchange contract to blame. It is also 
important to note that the price of many non-exchange traded 
commodities have increased, in some cases even more dramatically, than 
those traded on an exchange indicating that properly regulated markets, 
whether domestic or foreign, should not be the scapegoat for rising 
prices.
    The crude oil market, more than most other commodity markets, is 
global. The United States imports approximately 58 percent of its crude 
oil from outside the United States. Because crude oil is a global 
market, regulating the trading of crude oil futures requires 
international regulatory cooperation, and it is misguided to assume 
that any one regulator can obtain the entire market picture without the 
cooperation of regulators in other countries trading other grades of 
crude oil.
    In addition, attempts to artificially influence market prices 
through government action have historically failed, often with 
unintended consequences that have been damaging and difficult to 
repair. One such attempt suggests altering the margining requirements 
for futures contracts to approximate margining in the securities 
markets. This concept is misguided due to the economic and contractual 
differences between the purchase of a security and of a futures 
contract. When a stock is purchased, margin signifies a partial payment 
on an ownership stake in a company with the balance loaned by the 
customer's broker. It represents a financing arrangement between the 
broker and the customer. The stock is immediately delivered to the 
buyer and the transaction is complete from an exchange and 
clearinghouse perspective. In contrast, margining in futures markets, 
far from representing a financing arrangement, is the means by which 
the clearinghouse ensures that there are no losses suffered if and when 
a member defaults. As a result, futures margin rates are set based on 
complex mathematical models of contract price history and represent the 
largest 1 or 2 day price move at an extremely high confidence level. 
When a futures contract is traded, the buyer and seller take on 
obligations to take and make, respectively, delivery of the commodity 
at some later date. Margin represents a performance bond to ensure 
ultimate delivery or payment. Margins on futures contracts are central 
to the counterparty risk management systems for clearinghouses. 
Legislative interference with a basic market mechanism such as margin 
levels could lead to a number of unintended consequences. Dramatically 
higher margin rates for futures trading in the United States could 
shift significant exchange-traded volume back into the OTC market where 
firms would be exposed to the same counterparty risks roiling credit 
default swap and other markets today. Significantly higher margin rates 
would likely damage liquidity which would widen the bid-offer spread 
and increase execution costs for all. Furthermore, failure to adjust 
margins on a global basis could simply drive trading to overseas 
markets. Finally, and most tellingly, margin rates for ICE Futures 
Europe's crude oil contracts have already been raised 300 percent in 
the last year due to increased volatility, with no real effect on 
either the composition of the market or the price of oil.
    Attempts to drive ``speculation'' from the market should also be 
avoided. It is important to note that speculation does not equal 
manipulation. Exchanges around the world are required to prevent, 
detect, and punish manipulation or attempts to manipulate markets. 
Speculation has always been an essential component of all markets 
whether prices are falling or rising. There is a common misconception 
that speculators only bet on prices rising--this assumption has no 
basis in fact, and often speculators have a net short bias. Ultimately, 
futures markets involve contracts in which one side of the market is 
attempting to predict where the price of a commodity will go in the 
future, and the other side of the market is attempting to sell or hedge 
its price risk with respect what the price of a commodity will be in 
the future. Importantly, neither of these market participants knows 
what the future will bring. Speculators are simply participants with a 
view about the future price of a commodity who are willing to put 
capital to work in assuming the price risk transferred from commercial 
participants. Speculators are a necessary component of the futures 
markets, providing liquidity and important pricing information to 
markets. Without speculators, futures markets would be established 
solely by commercial participants, in essence, pricing by cartel.
                               solutions
    Again, the utility function of futures markets is to send important 
price signals about the future price of commodities as determined by 
market forces. That said, Congress must insure that markets remain 
open, transparent and competitive. Global market participants must have 
regulatory certainty in order to transact confidently in the U.S. 
markets or they will seek other solutions. We agree with many of you 
here that the CFTC is under-funded and that Congress should increase 
the CFTC's budget. ICE strongly supports the budget increase as 
outlined in Chairman Durbin's bill. Second, the crude oil market is a 
global market, with many grades of crude substitutable for one another 
under traded contracts. Regulation of such a market requires global 
regulatory cooperation, and ICE strongly supports a study of the 
international regulation of energy markets. Finally, ICE supports the 
cooperative efforts that presently exist between the CFTC, the FSA, and 
other regulators around the world, and urges Congress not to disturb 
these relationships through over-reaching legislation. It is impossible 
to regulate a global market from a single jurisdiction, and no country 
can legitimately contend that it has the sole right to be the 
jurisdiction in which vibrant commodity markets exist to serve the 
needs of both domestic and foreign market participants. Over-reaching 
legislation could also trigger regulatory retaliation from other 
jurisdictions, impacting the ability of domestic exchanges to operate 
in other jurisdictions.
                               conclusion
    ICE has always been and continues to be a strong proponent of open 
and competitive markets in energy commodities and derivatives, and of 
appropriate regulatory oversight of those markets. As an operator of 
regulated futures exchanges in the United States, the U.K., and Canada, 
and as a publicly held company, ICE recognizes the importance of 
upholding the utmost confidence in its markets. However, with a mere 15 
percent market share of global WTI, on a futures equivalent basis, we 
feel it is highly unlikely that the ICE Futures Europe's WTI market is 
the primary driver of WTI prices. Therefore, any expectation that WTI 
crude oil prices will fall as a result of increased restrictions on 
this relatively small portion of that market are likely to go unmet. 
Nonetheless, we recognize the severe impact of high crude oil prices on 
the U.S. economy and understand the congressional desire to ``leave no 
stone unturned.'' As a result, we look forward to working with Congress 
and the CFTC to ensure that their concerns with regard to the ICE 
Futures Europe WTI contract are fully addressed while remaining fully 
compliant with obligations to the primary regulator, the FSA, and U.K. 
law.
    Mr. Chairman, thank you for the opportunity to share our views and 
facts about our market operation with you. I would be happy to answer 
any questions you may have.

    Senator Durbin. Thanks, Mr. Vice.
    And let me say to the panel, thank you for your patience in 
waiting and I am sorry that we are running short on time here. 
I see Senator Lugar is leaving, so I will just have maybe one 
or two questions.
    Mr. Vice, this announcement today by the Commodity Futures 
Trading Commission about this new no action letter, which 
apparently has become at least a partial action letter--did you 
negotiate with the CFTC leading up to the announcement of this 
new regulation?
    Mr. Vice. We did not negotiate with them. They made us 
aware of what they were planning because we do have obligations 
to our home regulator, the FSA. And pursuant to the information 
sharing and cooperation agreement with the FSA, as you might 
imagine, we and they have an interest in making sure that both 
regulators get what they need out of this.
    Senator Durbin. And is it your understanding that as a 
result of this, that you will be subject to the same type of 
disclosure, transparency, and regulation as those who trade on 
NYMEX today?
    Mr. Vice. We are essentially subject to that already via 
the FSA, and beyond that, we do have----
    Senator Durbin. But that is the British authority. This is 
for the American authority.
    Mr. Vice. Right. And via the information-sharing agreement, 
many of the core principles with regard to information the CFTC 
collects from NYMEX and U.S. exchanges, we are providing today 
via the FSA. We recently agreed to increase that reporting and 
extend it to all contract months and then, to answer your 
question, with the memorandum of understanding today, we will 
actually be applying and enforcing position limits, 
accountability limits on the WTI contracts.
    Senator Durbin. A level playing field.
    Mr. Vice. Yes.
    Senator Durbin. Mr. Newsome, I do not know if this question 
goes to you or Mr. Duffy. If there is a Dubai exchange, will it 
be subject to the same standards of disclosure, transparency, 
and accountability to the CFTC?
    Dr. Newsome. Two comments, Mr. Chairman. One there are 
currently two Dubai exchanges in existence, one of which NYMEX 
is a primary partner in. They do not list the WTI contract. If 
at some point in the future they do, they will absolutely 
provide the position limits and same large trader reporting 
that is subject to U.S.-regulated exchanges.
    The other Dubai entity we are not a component of. They do 
not have a no action letter from the CFTC. They do list a WTI 
contract and are not providing anything to the CFTC.
    Senator Durbin. So this Dubai exchange that NYMEX and CME 
are interested in does not list WTI.
    Dr. Newsome. Correct.
    Senator Durbin. A separate Dubai exchange does.
    Dr. Newsome. Correct.
    Senator Durbin. I want to make sure it is clear. You do not 
know whether or not they will be covered by this CFTC standard?
    Dr. Newsome. To my knowledge, they have not applied for a 
no action letter from the CFTC to date and therefore are not 
supplying any of the information that we supply or that ICE 
intends to supply.
    Senator Durbin. Mr. Cooper, the Enron loophole. There has 
been suggestion here that the new farm bill is going to close 
the loophole. Is that your impression?
    Dr. Cooper. It closes it to a significant extent, but the 
key questions that Senator Klobuchar asked I think are really 
important. Prior to 2000, all these instruments were regulated, 
and the question is whether or not the presumption should be 
for regulation of these instruments and then let the CFTC make 
exceptions so that the trader bears the burden of proof, which 
we think is the right way. The way it is structured now the 
presumption is against regulation and then the CFTC bears the 
burden of proving it needs regulation.
    Senator Durbin. Does the farm bill change that?
    Dr. Cooper. No, the farm bill does not change the 
presumption. And so you have now got this problem of having the 
CFTC to go through all of these contracts traded on all of 
these exchanges and prove that it needs to regulate. That is 
backwards from our point of view.
    Senator Durbin. Mr. Duffy, the whole concept of more 
disclosure and transparency and accountability to the CFTC--is 
that consistent with your vision? I know that you have a 
transaction with NYMEX that has been approved now. Is that 
consistent with your vision of how these markets should work?
    Mr. Duffy. Yes, and we are very encouraged by Chairman 
Lukken's comments and announcements from this morning as it 
relates to energy and metals. We have been on the record for 
many years now, Senator, stating that we believe that the 
energy and other exempt commercial markets should be under the 
same regulation as what the CME Group provides today. So, yes, 
we are very much in agreement.
    Senator Durbin. Mr. May, I met with your board recently, 
and it was a gloomy meeting. I am glad your testimony today is 
part of the record. I am sorry that you had to give it.
    As you listen to these overall hearings and the speculation 
about speculation, you are a businessman. You do not come to 
this as some bleeding heart liberal. How do you view it?
    Mr. May. Mr. Chairman, I think that a number of suggestions 
have been put on the table this morning. Some of them 
apparently have been addressed by recent activities of the 
CFTC. But there are some very clear loopholes that need to be 
addressed. There are some real issues with who is permitted to 
invest in these commodities in terms of pension funds. We 
really need to make sure that there is transparency and 
fairness in the market. I think this committee is interested in 
assuring that is the case. My absolute bottom line is that this 
needs to happen sooner rather than later.
    Senator Durbin. We met maybe 2 or 3 weeks ago in your 
office here in Washington. I will have to tell you. I do not 
know if this CFTC announcement was meant to coincide with this 
hearing. If it did, then maybe this hearing was worth the 
effort that we put into it.
    But we are not going to stop. There is more that needs to 
be done in terms of this disclosure and transparency. I cannot 
answer the question about whether there is market manipulation, 
and honestly Mr. Lukken has a lot of markets he cannot even see 
at this point. He has no authority to look into, but he 
believes he will have more authority. And we are going to hold 
him to that standard.

                     ADDITIONAL COMMITTEE QUESTIONS

    I can make this promise to you as chairman of this 
appropriations subcommittee, Mr. Lukken is going to have more 
soldiers to march into battle. There will be more people 
involved in market oversight and surveillance. We are going to 
give him additional resources for computer technology. There 
will be more cops on the beat, but as Senator Klobuchar alluded 
to in her questioning, the person at the top has to decide to 
use those tools to make sure that people know that we are not 
going to brook this kind speculation that might go overboard.
    [The following questions were not asked at the hearing, but 
were submitted to the witnesses for response subsequent to the 
hearing:]
                  Questions Submitted to Walter Lukken
           Question Submitted by Senator Charles E. Grassley
    Question. In 2007, the CFTC issued a ``no-action'' letter thereby 
declining to regulate the trading of the West Texas Intermediate (WTI) 
oil contracts on the Dubai Exchange. There appears to be a significant 
amount of trading in WTI contracts both on the Dubai Exchange and the 
Intercontinental Exchange in London. Given that, do you think CTFC has 
a responsibility to regulate WTI trading in these offshore exchanges? 
If not, why?
    Answer. The CFTC should assert jurisdiction over all contracts 
designated in U.S. commodities and traded within the United States. The 
Dubai exchange fits that description and should be regulated.
                                 ______
                                 
               Questions Submitted by Senator Ben Nelson
    Question. The term ``speculator'' has certainly become a pejorative 
of late and I wanted to further explore the concepts of speculation and 
manipulation. I understand that some speculation in commodities can be 
a good thing for the market, providing liquidity and even providing 
some checks on prices in a functioning market. I also understand that 
market ``speculation'' isn't the same as market ``manipulation.'' 
However, what we are seeing now with index speculation in such large 
sums entering the market in recent years and the steep rise in prices 
during the same time period raises serious concerns about this new form 
of speculation and what it means to the markets and those that rely 
upon them, as well as consumers and the economy as a whole. So my 
questions are these:
    Where do you draw the line between speculation and manipulation--or 
the line between good speculation and bad speculation?
    Answer. Speculation is trading to profit from anticipated price 
changes. Manipulation is intentionally acting to cause artificial price 
changes and to profit from those changes. Speculation in the futures 
markets aids the markets in their proper hedging and price discovery 
functions. If any type of trading, including speculation, distorts 
prices on, and disrupts the proper functioning of, futures markets, 
that is detrimental to efficient functioning of the markets.
    Question. At what point is there too much speculation, or when does 
speculation become too out-of-balance or too removed from market 
fundamentals to be good for the market, inflating prices beyond where 
the fundamentals would put them? For example, if hundreds of billions 
of dollars have entered the market through index funds or other similar 
vehicles all falling under the category of ``speculation,'' and the 
bulk of it is taking a long position in the market, doesn't that have a 
dramatic affect on the market by driving up prices and possibly 
inflating them beyond fundamental levels?
    Answer. Section 4a of the Commodity Exchange Act (``CEA'') states 
that ``[e]xcessive speculation in any commodity under contracts of sale 
of such commodity for future delivery made on or subject to the rules 
of contract markets or derivatives transaction execution facilities 
causing sudden or unreasonable fluctuations or unwarranted changes in 
the price of such commodity, is an undue and unnecessary burden on 
interstate commerce . . .'' Accordingly, speculation is excessive when 
it causes sudden or unreasonable fluctuations or unwarranted changes in 
prices. In accord with the directives in Section 4a, as well as the 
statutory Core Principle with respect to position limits for futures 
exchanges in Section 5(d)(5) of the CEA, the Commodity Futures Trading 
Commission (``Commission'' or ``CFTC'') has set speculative limits on 
the positions of individual traders for many agricultural futures 
contracts and requires the exchanges to set position limits or 
accountability levels for other futures contracts.
    Today, however, the concern is not that some individual traders are 
exceeding speculative limits, rather it's whether the total level or 
balance of speculation is actually causing price increases above that 
warranted by market fundamentals. Ultimately, the function of the 
market is to process various opinions to form a price at which a 
balance is reached in terms of those participants that believe prices 
will rise and those that believe they will fall. In a free market, if 
too many participants with a particular view of market fundamentals 
enter the market and push prices in a certain direction, participants 
with contrary views would be expected to enter the market on the 
opposite side to move prices back to where they believe they should be.
    To better understand the dynamics of trading activity in the 
current markets, the Commission is engaged in a study of the futures 
markets. The Commission is looking at the effect of the influx of index 
funds into the futures markets, either directly or indirectly as the 
result of hedging by swaps dealers, as part of the study. The results 
of this study are expected on or before September 15, 2008.
    In addition, in order to better understand the effects of 
speculative trading on commodity prices, the Commission has formed an 
interagency task force, enlisting the assistance of staff from the 
Departments of Agriculture, Energy and Treasury, the Board of Governors 
of the Federal Reserve, Federal Trade Commission, and the Securities 
and Exchange Commission. The Commission has also consulted a number of 
academic researchers. The Interagency Task Force released an interim 
report on the crude oil markets on July 22, 2008 and continues its 
work.
    Question. What exactly is CFTC's definition of market manipulation?
    Answer. Section 9(a)(2) of the CEA provides that it is unlawful for 
``[a]ny person to manipulate or attempt to manipulate the price of any 
commodity in interstate commerce, or for future delivery on or subject 
to the rules of any registered entity, or to corner or attempt to 
corner any such commodity . . .'' Sections 6(c) and 6(d) of the CEA 
contain similar language. The CEA does not include a definition of 
manipulation, but courts and the Commission have developed case law on 
the subject. Sustaining a charge of manipulation requires establishing 
four elements by a preponderance of the evidence: (1) the party had the 
ability to influence market prices; (2) the party specifically intended 
to influence market prices; (3) an artificial price existed; and (4) 
the party caused the artificial price. In re Cox, [1986-1987 Transfer 
Binder] Comm. Fut. L. Rep. (CCH)  23,786 at 34,061 (CFTC July 15, 
1987). To prove the intent element of manipulation or attempted 
manipulation, it must be shown that the party ``acted (or failed to 
act) with the purpose or conscious object of causing or effecting a 
price or price trend in the market that did not reflect the legitimate 
forces of supply and demand.'' In re Indiana Farm Bureau Cooperative 
Association, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH)  
21,796 at 27,281 (CFTC Dec. 17, 1982).
    Question. Does this technical definition of manipulation miss fail 
to address the realities of what is going on in the markets now? There 
may well be serious damage to the markets, consumers and the economy 
from large scale index speculation even though it does not fit the 
traditional definition of market manipulation because it lacks certain 
fundamental elements--not the least of which is an intent to 
manipulate.
    Answer. As indicated above, intent has been held to be a key 
element of a manipulation violation under the CEA. Nevertheless, in 
addition to the Commission's role in policing the markets to ensure 
they are free from manipulators, the Commission also conducts active 
surveillance of the markets and their participants. The Commission's 
surveillance program is intended to detect and deter manipulation and 
market abuses, but it goes beyond preventing manipulation to preventing 
disruptions of the markets and other problems where the markets are not 
functioning properly. In connection with its ongoing surveillance 
efforts, the Commission is studying index trading and is prepared to 
act, if necessary.
    Question. Does CFTC have the authority and capability to address 
the larger, systemic problems from this form of index speculation that 
may be driving price inflation across the board as opposed to the 
authority and capability for going after individuals who purposefully 
trying to manipulate prices? If so, what is CFTC doing to address these 
problems? If not, what authority does CFTC need?
    Answer. The Commission has both the authority to police the markets 
for manipulation and the required tools to find and to manage 
``excessive speculation'' as described in Section 4a of the CEA. The 
Commission's strong enforcement program is constantly obtaining and 
reviewing data and materials to make sure manipulators are brought to 
justice. Additionally, the Commission's surveillance program regularly 
reviews all reported data.
    Specifically, the Commission has been actively gathering 
information about the role of index funds in the markets. In late May, 
the CFTC utilized its special call authorities to gather more detailed 
data from swap dealers on the amount of off-exchange index trading in 
the markets and to examine whether index traders are properly 
classified for regulatory and reporting purposes. Information requests 
have been issued, and the CFTC has begun receiving the first round of 
more detailed information on index funds and other transactions that 
are being conducted through swap dealers. With this data, the CFTC will 
provide findings to Congress as soon as practicable--and no later than 
September 15th--regarding the scope of commodity index trading in the 
futures markets and recommendations for improved practices and 
controls, should the Commission conclude that they are required.
    Question. If this new form of index speculation is not a kind of 
market manipulation, how does CFTC classify it and does CFTC 
nevertheless consider it a significantly problematic aspect of the 
market and a component of current price run-ups such that it may need 
to be addressed?
    Answer. At this time, nothing about the increased speculation in 
the commodities futures markets indicates that it has the same effect 
as a market manipulation. Our economic analysis to date indicates that 
supply and demand factors are the best explanation for the recent 
increase in crude oil prices, for example. However, the CFTC is aware 
of the concerns about the influx of index trading into the futures 
markets and is also aware of the current high prices of many 
commodities. As indicated above, the Commission is currently seeking 
additional data concerning speculative trading and is gathering more 
detailed data from swap dealers. After the data is received, the CFTC 
will review the data and determine if changes are necessary to the 
current way information is processed and reported.
    Question. Why are index speculators such as Goldman Sachs 
classified as commercial traders when other speculators are classified 
as non-commercial? What impact has that had on the markets and prices 
as compared to benefits from traditional forms of speculation?
    Answer. Some index traders do, in fact, hold positions directly in 
the futures markets and those positions are considered speculative 
positions and are subject to existing position limits and position 
accountability levels. Most index traders, however, do not participate 
directly in the futures markets. Rather, they participate indirectly as 
customers of swaps dealers. A swaps dealer, usually a bank, sells a 
contract to one of its clients, perhaps a pension fund, such that the 
swaps dealer will pay its client an investment return amount based on 
an index of several commodity futures prices. The swaps dealer then has 
a commercial risk that the prices of those commodities in the index 
will increase. Therefore, the swaps dealer now has a commodity price 
exposure to hedge, and swaps dealers often come to the futures markets 
to do that.
    Since 1991, the Commission has viewed the positions of swaps 
dealers in the futures markets taken to offset their commodity price 
risks to their customers as bona fide hedging positions. This is 
consistent with congressional directives concerning modernization of 
both the criteria for hedge exemptions and the process for considering 
exemption requests. Specifically, during the CFTC reauthorization 
process in 1986, Congress directed the Commission to apply modern 
portfolio-based risk management concepts to its hedge exemption 
process, which allowed greater flexibility to the exemption and enabled 
financial institutions to have greater access to the regulated 
exchange-traded derivatives markets. See House Committee on 
Agriculture, Futures Trading Act of 1986, H.R. Rep. No. 624, 99th 
Cong., 2d Sess. 44-46 (1986) (``strongly urg[ing] the [CFTC] to 
undertake a review of its hedging definition . . . and to consider 
giving certain concepts, uses, and strategies `non-speculative' 
treatment'' including risk management by portfolio managers, and other 
trading strategies involving the use of financial futures including, 
but not limited to, asset allocation); Senate Committee on Agriculture, 
Nutrition and Forestry, Futures Trading Act of 1986, S. Rep. No. 291, 
99th Cong., 2d Sess. at 21-22 (1986) (CFTC must consider ``whether the 
concept of prudent risk management [should] be incorporated in the 
general definition of hedging as an alternative to this risk reduction 
standard'').
    Question. In your testimony you state that trading by index 
investors is not like ``traditional speculative trading by hedge funds 
and other managed money.'' You go on to state that most of ``this type 
of investment comes through major Wall Street swap dealers that sell 
their clients broad exposure to the commodity markets through an over-
the-counter commodity index contract.'' Can you please explain this 
further? In particular, if there are hundreds of billions of dollars 
affecting the commodities markets through ``swaps'' and ``over-the-
counter'' trades, how does this not raise serious concerns for the 
commercials utilizing the markets for hedging purposes and to consumers 
purchasing end products? If index investor trading is not like 
traditional speculative trading then doesn't that require CFTC to 
figure out what it is, what it is doing to the markets and how best to 
deal with it? What has CFTC done in that regard?
    Answer. As explained above, many of the index traders are offering 
their clients broad exposure to commodities markets as a way to 
diversify the risk of their portfolio against other asset classes such 
as equities or real estate. The Commission has been actively gathering 
information about the role of index funds in the markets. In late May, 
the CFTC utilized its special call authorities to gather more detailed 
data from swaps dealers on the amount of off-exchange index trading in 
the markets and to examine whether index traders are properly 
classified for regulatory and reporting purposes. Information requests 
have been issued, and the CFTC has begun receiving the first round of 
more detailed information on index funds and other transactions that 
are being conducted through swaps dealers. With this data, the CFTC 
will provide findings to Congress as soon as practicable--and no later 
than September 15th--regarding the scope of commodity index trading in 
the futures markets and recommendations for improved practices and 
controls, should the Commission conclude that they are required.
    Question. What is the purpose to the commodities market of 
``swaps'' and ``over-the-counter'' trades between large entities or 
investment vehicles that are not hedging and will never have any 
physical connection to the commodities themselves? How does this 
improve liquidity or the functioning of the commodities markets?
    Answer. The commodity futures markets provide a means of hedging 
risks taken on by swaps dealers in the course of their swaps business. 
Some of the business engaged in by swaps dealers is with large 
commercial participants who seek to use individually tailored swaps to 
more precisely hedge their market exposures or to transact in 
quantities that might be disruptive if executed directly on a futures 
market. For example, some airlines use swaps contracts rather than 
futures contracts to hedge their jet fuel purchases because a jet fuel 
futures contract does not exist. Other users of swaps contracts enter 
into them for speculative reasons. Like all speculators, entities that 
are not hedging a physical position or risk, are doing so for 
investment and profit purposes. All speculators provide market 
liquidity for hedgers using the same markets. Therefore, the buying of 
futures contracts by swaps dealers to hedge over-the-counter positions 
or the buying by a speculator in the market, provides short hedgers 
(like agricultural producers) with increased liquidity for trade 
execution.
    Question. Commodity price increases in the past year have been 
extraordinary and some fear that a bubble has developed in the 
Commodities markets. Many point to the arrival of large numbers of new 
investors and a myriad of new investment vehicles, many of them 
involving derivative instruments that are traded outside the confines 
of regulated markets as significant contributors to these increases. I 
have read competing estimates for the amount of money coming into the 
commodities markets through these new investors and vehicles and 
welcome your estimate as well. However, there seems to be strong 
agreement that a lot of money has moved into these markets in the last 
few years. I have been hearing from many farmers and grain elevators 
regarding their concerns and their inability to utilize the futures 
markets for hedging and risk management purposes and, of course, I have 
heard from many drivers about the price of gas. I have also heard 
concerns about the cash market being below the futures markets, which 
some believe signal something other than market fundamentals behind the 
price increases.
    It is my understanding that the CFTC has not found anything 
inappropriate in this situation to date, is that a correct 
understanding?
    Answer. The CFTC has not found that the large increase in commodity 
prices over the past year is the result of systematic manipulation or 
other violations of the Commodity Exchange Act. That is not to say that 
violations have not occurred or been investigated. In fact, the 
Commission just recently announced the filing of a complaint against 
Optiver for alleged manipulation of the heating oil, crude oil and 
gasoline futures contracts traded on the NYMEX. This is in addition to 
the numerous manipulation, attempted manipulation and false reporting 
cases the Commission has brought in recent years and I have no doubt 
there will be more. The Commission has a strong enforcement program 
with a proven track record. In energy alone, the agency's Division of 
Enforcement has brought 42 cases against 72 respondents/defendants and 
assessed fines of more than $400 million since 2002.
    In addition to our enforcement effort, our surveillance efforts are 
focused on detecting and deterring potential manipulation or abusive 
trading practices. The current situation of high prices and limited 
deliverable supplies makes our surveillance efforts all the more 
important. The Commission also recently announced several agriculture 
and energy initiatives targeted to ensure that the futures markets are 
operating efficiently.
    Question. What specifically is CFTC looking for under this broad 
concept of ``inappropriate'' conduct, actions or market behavior; does 
it extend beyond simple market manipulation to other actions that can 
damage the markets, market participants and the national economy such 
as inflated prices or a bubble? If not, is CFTC able and prepared to 
expand its oversight and regulatory actions to address these broader 
issues?
    Answer. Broadly speaking, the Commission seeks to protect market 
users and the public from fraud, manipulation, and abusive trading 
practices and to foster open, competitive, and financially sound 
markets. The Commission seeks to protect the price discovery and 
hedging functions of the futures markets. If the markets are not 
performing their price discovery function, then behavior that causes 
that failure is inappropriate. The Commission is studying whether the 
increased level of futures market activity is impacting the price 
discovery function in the markets. The Commission's mission is not to 
prevent traders from speculating or to administer prices, but it is to 
prevent traders from disrupting markets.
    Question. In other words, what is your answer to the proverbial 
``missing the forest for the trees'' problem--is it possible that CFTC 
is missing anything in its analysis?
    Answer. While the CFTC's focus has been on deterring, detecting and 
penalizing those who violate the Commodity Exchange Act, new entrants 
in the markets like index funds require a broader view to determine 
whether there is a possible negative effect. Accordingly, the 
Commission has spent considerable time and resources looking at broad 
issues, including: the roles of new market entrants like hedge and 
index funds; structural changes and convergence in agricultural 
markets; globalization and foreign boards of trade; technology; and 
financial integrity. The Commission is working on these matters and, as 
I stated above, has enlisted the assistance of others as well. In 
addition to working with other Federal agencies, the CFTC has three 
advisory committees in the areas of energy, agriculture and global 
markets and meets with them regularly.
    Question. In your testimony you discuss the Commission's lack of 
adequate resources and staff for the additional authority granted by 
the Farm Bill and for the unprecedented nature of today's markets. But 
this influx of index money and speculation didn't just begin in 2008, 
or 2007 for that matter.
    How far behind is CFTC and why has it been allowed to fall behind?
    Answer. For the fiscal year, 2009 the CFTC estimates that a budget 
of $157,000,000, supporting approximately 596 FTE, would provide the 
appropriate level of resources needed to perform our mission.
    The $157,000,000 is based on the Commission's fiscal year 2009 OMB 
budget estimate (of $151,000,000 and 567 FTEs) which was formulated 
last summer and submitted to the OMB and the Congress in September 
2007. Since that submission, Congress enacted the Farm Bill in May 
2008, which conferred additional responsibilities to the Commission. 
Shortly after the bill became law, the Commission informed the OMB and 
the Congress that implementation of the new authorities in the Bill 
would require an estimated additional $6,000,000 and 29 FTEs for a 
total of $157,000,000 and 596 FTEs.
    Every September, the Commission submits an OMB budget estimate to 
the OMB and the Congress. The OMB budget estimate is a detailed 
justification of the dollar and staff resources required for the budget 
year. The level of resources requested by the CFTC has generally been 
higher than the level provided for in the President's budget and the 
level eventually appropriated by the Congress. Congressional 
appropriations are the Commission's sole source of funding.
    Question. When did this shortfall in funding and staff first become 
evident and what was done about it then?
    Answer. The Commission has been under-staffed and under-funded for 
many years. The table below summarizes, for the twelve-year period 
1997-2007, the CFTC's estimate of budgetary resources required as 
submitted to the OMB and the Congress. The table also includes the 
amount requested by the OMB and ultimately funded by the Congress.

                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                     CFTC Budget Estimate to   The President's Budget      Final Appropriation
                                               OMB           ---------------------------------------------------
            Fiscal Year            --------------------------
                                       Amount        FTE         Amount        FTE         Amount        FTE
----------------------------------------------------------------------------------------------------------------
1997..............................        $63.4          640        $56.5          600        $55.1          553
1998..............................         63.8          640         60.1          600         58.1          560
1999..............................         64.6          621         63.4          600         61.3          567
2000..............................         67.7          621         67.7          621         62.8          567
2001..............................         74.4          650         72.0          621         68.1          546
2002..............................         81.0          600         70.4          510     \1\ 87.5          509
2003..............................         92.5          574         82.8          537         85.4          521
2004..............................        110.5          574         88.4          489         89.9          517
2005..............................        110.6          583         95.3          505         93.6          487
2006..............................        112.1          572         99.4          491         97.4          493
2007..............................        130.1          540        127.4          540         98.0          437
2008..............................        143.7          557        116.0          475        111.3          465
----------------------------------------------------------------------------------------------------------------
\1\ Provided for post 9/11/01 Emergency Supplemental of $17 million.

    Question. If large portions of the trading are now being done off-
exchange either via ``swaps'' or ``over-the-counter'' trades, then what 
good will adding more regulators do for the markets if so much of the 
trading that affects the markets is being done outside the regulated 
markets?
    Answer. Additional staff would be employed by the Commission to 
fortify the enforcement and surveillance missions of the agency and to 
support those functions, including the Commission's anti-manipulation 
authority over cash and off-exchange transactions (which it has used 
aggressively). As indicated above, the Commission is seeking more 
information from swaps dealers concerning their trading and, after 
analyzing the information we receive, we may make changes to the way 
the Commission collects and analyzes data.
    But it also should be noted that, separate from swaps and over-the-
counter trades, trading volume on the regulated futures exchanges has 
grown tremendously during the past several years. Since 2000, volume on 
U.S. exchanges has grown six-fold as traders increasingly seek the 
price certainty and clearing benefits of the futures markets regulated 
by the CFTC. Approximately $5 trillion of notional transactions flow 
through these U.S. exchanges and clearinghouses daily. We have no doubt 
that additional resources are necessary for the Commission to continue 
to effectively monitor and police these markets.
    Question. Finally, I want to return to the issue of index 
speculation by looking at a commodity that is near and dear to the 
state of Nebraska and at the center of a few controversies right now--
corn. Friday's Commitment of Traders report indicated that the 
``traditional'' funds were long 115,000 contracts of corn with the 
index funds long 427,000 contracts of corn. These combined fund longs 
are estimated to equal well over 2 billion bushels of corn (542,000 
contracts). The index funds represent 78.8 percent or 1.6 billion 
bushels of this, while it is estimated that index funds today represent 
about 30 percent of the total open interest in corn and they are always 
long. By comparison, ethanol usage of corn is expected to be about 3 
billion bushels or 23 percent of total corn usage, according to USDA. 
Also as of last Friday, index fund long was more than 167,000 contracts 
of soybeans, over 70,000 contracts of soybean oil and 188,000 contracts 
of Chicago wheat. We've seen corn prices almost double in the last year 
and certainly some of that is due to fundamental supply and demand 
concerns, which we are able to track and understand. What we don't seem 
to have any knowledge or understanding of, however, is how much of this 
price is due to speculative demand--especially index speculation.
    Question. Is it safe to say that if an estimated 3 billion bushels 
of corn demand from ethanol has an upward pressure on prices, that a 
potential 1.6 billion bushels of long index speculation would have an 
upward pressure on prices as well? Has anyone at CFTC estimated just 
what impact this is having on commodities prices and what have you 
found?
    Answer. There are some critical differences in the demand for corn 
represented by the use of corn for ethanol and that represented by the 
purchase of futures contracts to buy corn. In the physical market corn 
is actually consumed. In the futures market, the long trader rarely 
takes delivery but, instead, usually offsets its long contract before 
delivery. The terms of index contracts require the dealer to roll out 
of the spot markets and into a deferred month by selling the spot month 
contract and simultaneously buying the next month's contract, thus 
maintaining a position and never taking delivery. No corn is ever 
actually consumed through index trading.
    The second important difference is that there is a finite amount of 
corn. Every bushel taken off the market and fed to livestock or used to 
produce ethanol leaves one less bushel available for sale. With 
decreased supply, if demand continues unabated, the price will rise. On 
the other hand, if a trader buys futures contracts, the number of 
contracts is unlimited as long as others are willing to sell.
    This is not to say the financial markets for futures contracts are 
entirely divorced from the cash markets for physical grain. The two are 
linked by the ability to deliver on the futures contract, there is 
arbitrage between the two markets, and the cash markets use the futures 
markets as an important source of information about anticipated prices. 
Due to all of these factors, the issue you raise requires careful 
review. As discussed above the Commission staff has been studying 
various aspects of the effect of speculation on prices carefully and 
will report on the results.
    Question. Does it make sense to consider this index speculation 
another category of ``demand'' for corn and other commodities and how 
would that affect the markets and CFTC's role and responsibilities?
    Answer. The role of index traders in today's futures markets is of 
great interest to the public. The Commission is endeavoring to learn 
more about this group of traders. In addition, to provide additional 
transparency, the Commission has been able to publish information on 
the position of index traders in agricultural futures as a supplemental 
to the Commitments of Traders report. Publication of index traders' 
positions in the energy futures is a more difficult task but methods to 
provide that information are being considered.
                                 ______
                                 
               Questions Submitted by Senator Pat Roberts
    Question. Chairman Lukken, there has been a lot of negative talk 
about speculation in the marketplace. I agree, that if manipulation in 
the market exists, or if true prices are not reflected, then regulators 
must utilize the tools and authorities Congress has provided to go 
after those bad actors. However, as always, I'm concerned about the law 
of unintended consequences. What value does speculation bring to the 
futures markets? What are the potential impacts on both energy and 
agriculture futures markets if speculators were prevented from 
participating?
    Answer. Futures markets require both speculators and hedgers. 
Speculators provide the market liquidity to allow hedgers to manage 
various commercial risks. Placing limitations on the amount of 
speculation in a futures market, whether by an individual trader or all 
traders, necessarily limits the amount of liquidity in the marketplace. 
Such limitations may restrict the ability of hedgers to manage risks, 
and may limit information flow into the marketplace, which could in 
turn negatively affect the price discovery process and the hedging 
function of the marketplace. As agricultural and energy producers are 
often short hedgers and as commercials generally tend to be short, a 
limitation on speculation tends to be a restriction on buyers. 
Ultimately, if long speculation is artificially driven from the market, 
the potential short-term advantage of lower prices could lead to 
production shortages, higher demand, and even higher prices for both 
energy and agricultural commodities.
    Question. Several countries with increasingly high energy 
consumption growth rates like China are heavily subsidizing consumer 
energy costs. Reuters recently reported that for the first time ever, 
China has become a net importer of gasoline. They continue to consume 
without their consumers feeling the pain of global price increases. 
What affects do non-market based policies like this have on the price 
of crude oil?
    Answer. Usually, when demand increases and supply remains constant, 
prices increases. This is the general situation today in the world 
market for crude oil. When commodity prices are subsidized, it has the 
effect of increasing demand for the commodity. In a worldwide market 
like that for crude oil, increases in consumption in one part of the 
world due to increased demand have the effect of raising prices to some 
degree everywhere else.
                                 ______
                                 
                  Questions Submitted to James C. May
             Question Submitted by Senator Saxby Chambliss
    Question. I am very sympathetic to the struggles our airline and 
other transportation industries are facing, which is why I really want 
to get into the detail of what the contributing factors truly are. In 
particular, I would like to know what specific information do you 
believe ICE Futures is not providing to the CFTC or their regulatory 
agency, the Financial Services Authority, to prevent manipulation?
    Answer. The ATA believes ICE Futures and the British Financial 
Services Authority should be required to make information available to 
the CFTC on a daily basis, without separate requests from the CFTC, so 
that the CFTC can continuously monitor transactions made by persons in 
the United States regarding transactions, or based on transactions, 
relating to U.S. futures contracts, or transactions priced off U.S. 
futures contracts, for commodities for delivery in the United States.
    ICE Futures, the Dubai Exchange, or ICE Futures London may comply, 
if they so choose, with specific requests from CFTC for information. 
However, such information would likely not be current and would likely 
focus on a particular time period or a particular trading entity and 
thus would not present the CFTC with an opportunity to comprehensively 
and routinely, monitor transactions affecting, or relating to, 
commodities with delivery points in the United States entered into by 
U.S. citizens or residents, or through U.S. based trading terminals.
    The thorough, bipartisan Senate Permanent Subcommittee on 
Investigations joint report (June 25, 2007, ``Excessive Speculation in 
the Natural Gas Market'') said that the Enron and swaps loopholes 
allowed ICE to accept energy trades from persons in the United States, 
and elsewhere, and ``operates with no regulatory oversight, no 
obligation to ensure its products are traded in a fair and orderly 
manner, and no obligation to prevent excessive speculation.'' Page 119, 
Senate Investigations Report. That subcommittee report noted that the 
``Enron loophole, which was inserted into the law in 2000 at the 
request of Enron and others, exempts electronic energy exchanges such 
as ICE from CFTC oversight and regulation.''
    In addition, that report noted that trading in the unregulated 
swaps market affects the regulated futures market because traders can 
replace futures contracts on NYMEX with swaps contracts on ICE. Page 
120, Senate Investigations Report.
    They concluded that ``[e]liminating these loopholes would level the 
regulatory playing field between the NYMEX and ICE exchanges, increase 
energy price transparency, and strengthen the ability of the CFTC to 
analyze market transactions and police U.S. energy commodity markets.'' 
They further noted that it is ``essential'' that CFTC have ``access to 
daily reports of large trades of energy commodities . . . to deter and 
detect price manipulation.'' Page 120, Senate Investigations Report.
    Clearly, more recent agreements with officials in Dubai and at the 
Financial Services Authority will result in more reporting as long as 
those agreements continue in effect. Nonetheless, there are significant 
benefits to be gained by statutory changes to lock-in and assure strong 
and continuing CFTC oversight over, or at the least comparable 
reporting, position, and transparency requirements for, those foreign 
exchanges regarding transactions on behalf of U.S. residents, or made 
through U.S. terminals or other facilities, and involving U.S. 
contracts or commodities for delivery in the United States.
                                 ______
                                 
           Questions Submitted by Senator Charles E. Grassley
    Question. Do you think that the CFTC has acted aggressively enough 
to determine the impact of institutional investors and speculators on 
commodity markets?
    Answer. No, I do not. The CFTC has statutory authorities that it 
has only recently begun to utilize to monitor and regulate commodities 
markets. That said, the copious recordkeeping and reporting exceptions 
contained in the Commodity Exchange Act make it difficult for the CFTC 
to receive the ongoing, continuous flow of information about 
transactions affecting, related to, or based on, the U.S. futures 
markets. Thus, while more could have been done to date, the law limits 
the CFTC's ability to be aggressive in some cases. A bipartisan Senate 
Permanent Subcommittee on Investigations joint report (June 25, 2007, 
``Excessive Speculation in the Natural Gas Market'') noted that the 
``Enron loophole, which was inserted into the law in 2000 at the 
request of Enron and others, exempts electronic energy exchanges such 
as ICE [the electronic Intercontinental Exchange] from CFTC oversight 
and regulation.''
    There have been many recent reports and testimony about the 
significant upward price pressure that passive, institutional investors 
bring to bear on the markets because they buy long, regardless of price 
signals, and keep ``rolling over'' their long positions. Assets 
allocated to commodity index trading is up $13 billion since the end of 
2003, as prices went up 183 percent according to testimony of Michael 
Masters, Masters Capital Management/May 20, 2008, before the Committee 
on Homeland Security and Governmental Affairs. Citi Futures 
Perspective, May 12, 2008, noted regarding crude oil that there has 
been a 425 percent increase in open interest in the last five years 
which greatly exceeded the corresponding growth in the physical oil 
market.
    This is happening not just in the oil sector. On April 22, 2008, 
American Farm Bureau Federation testimony noted ``the role of 
speculative and commodity index-related trading in agriculture futures 
markets, while growing for some time, has reached historic levels and 
added to the uncertainty in these markets.'' Speculators ``are now 
playing an exponentially greater role than ever before. . . . Market 
analysts report a continued, massive inflow of capital into the grain 
pits, much of it by long-only, passively managed index funds that buy 
futures and roll them forward according to a set schedule.''
    Mr. Fadel Gheit, managing director and senior oil analyst at 
Oppenheimer Equity Research noted at a June 23, 2008, hearing (House 
Subcommittee on Oversight and Investigation of the Committee on Energy 
and Commerce) that, `` I do not believe the current record crude oil 
price is justified by market fundamentals of supply and demand . . . I 
believe the surge in crude oil price, which more than doubled in the 
last 12 months, was mainly due to excessive speculation and not due to 
an unexpected shift in market fundamentals.''
    Testimony of Michael Masters, Masters Capital Management, noted 
that the vast majority of index speculators do not trade based on the 
underlying supply and demand fundamentals of the individual physical 
commodities but simply buy on a continuing basis, ``rolling over'' 
positions as needed.
    Question. Do you believe there is evidence that crude oil prices 
are being driven by speculators? If so, what do you believe is the 
CFTC's responsibility with regard to limiting the amount of 
institutional speculation?
    Answer. Yes, I do think evidence exists showing the recent upward 
pressure caused by excessive speculation regarding on oil prices. As I 
mentioned in my earlier answer, Mr. Fadel Gheit, managing director and 
senior oil analyst at Oppenheimer Equity Research noted at a June 23 
hearing, that, ``I do not believe the current record crude oil price is 
justified by market fundamentals of supply and demand . . . I believe 
the surge in crude oil price, which more than doubled in the last 12 
months, was mainly due to excessive speculation and not due to an 
unexpected shift in market fundamentals.''
    ``Speculation has contributed to rising U.S. energy prices.'' That 
simple conclusion is stated in a June 2006 bipartisan report of the 
U.S. Senate Permanent Subcommittee on Investigations called ``The Role 
of Market Speculation in Rising Oil and Gas Prices: A Need to Put the 
Cop Back on the Beat.'' I agree with that conclusion that the cop, the 
CFTC, needs to be put back on the beat and must carefully monitor 
transactions to prevent price manipulation just as the Securities and 
Exchange Commission words to prevent stock price manipulation.
    In addition, Mr. Roger Diwan, a partner at PFC Energy, testified on 
June 23, 2008, (House Subcommittee on Oversight and Investigation of 
the Committee on Energy and Commerce) that ``these index funds . . . 
probably represent the single largest components on oil futures and 
their sizes have been calculated to be close to $280 billion.'' He 
noted how the open interest strongly correlated with the increases in 
oil prices, stating that, ``the flow of money to the futures market 
that became the key element to predict prices, with a correlation close 
to 80 percent.''
    According to a June 15 Bloomberg article, Robert Aliber is quoted 
as saying ``You've got speculation in a lot of commodities, and that 
seems to be driving up the price.'' Dr. Aliber is a professor of 
economics emeritus at the University of Chicago Graduate School of 
Business and co-author of ``Manias, Panics, and Crashes: A History of 
Financial Crises.''
    The CFTC should focus on the clear intent of Congress to protect 
market participants from ``excessive speculation'' and ``manipulation'' 
in addition to all the provisions designed to punish fraud, 
conspiracies to corner markets, misleading statements, and the like. 
Investments related to hedging one's physical position, or future 
physical position, designed to reduce risk have not been the problem. 
On the contrary, they are the very reason such exchanges were formed. 
Michael Masters noted that automatic institutional investments made 
with little, if any, consideration as to price, and not done to limit 
risk, in the hopes that the market always goes in one direction can 
distort the price discovery functions of the markets and should be 
monitored and regulated by the CFTC.
    Question. Does CFTC currently have all the tools necessary to 
respond to the speculation in commodities by hedge funds, investment 
banks and pension funds? Does Congress need to act to provide 
additional authority to the CFTC? If so, please provide specific 
recommendations for additional authority.
    Answer. The CFTC does not have all the authorities needed to 
respond to the speculation. Several bills before the Congress contain 
provisions which would help CFTC to reduce reckless and excessive 
speculation not consistent with normal rules of supply and demand for 
the underlying commodity; the ``spot price'' of that commodity.
    We would recommend law changes to allow for CFTC to better monitor, 
through greater transparency, and exercise authority over, swaps 
transactions to prevent excessive speculation in energy products. The 
CFTC should not permit foreign boards of trade (FBOT) to provide its 
members or other participants subject to CFTC jurisdiction direct 
access to electronic trading in the United States or to order matching 
systems unless the FBOT meets specified requirements related to 
transparency, information sharing and position limits; except for bona 
fide hedge trading.
    The CFTC should be able to quickly exercise oversight over any 
disturbance in a commodity market that disrupts its liquidity and price 
discovery function from accurately reflecting a commodity's supply and 
demand (``major market disturbance'') and should be able to identify 
each large over-the-counter transaction or class of such transactions 
in order to detect and prevent potential price manipulation of, or 
excessive speculation in, any contract listed for trading on a 
registered entity.
    The CFTC should have the clear authority to require recordkeeping 
by anyone either in the United States or entering trades into the trade 
matching system of a foreign BOT from the United States regarding U.S. 
traded commodities.
    Further, the CFTC should be instructed to: (1) routinely require 
detailed reporting from index traders and swap dealers in markets under 
its control; and (2) review the trading practices for index traders in 
markets to ensure that index trading is not adversely impacting the 
price discovery process.
    The CFTC should disaggregate and make public on a regular basis: 
(1) the number of positions and total value of index funds and other 
passive, long-only positions in energy markets; and (2) data on 
speculative positions relative to bona fide physical hedgers in energy 
markets
    Several bills before the Congress require the CFTC to hire 
additional enforcement personnel and we certainly support those 
efforts. The CFTC should clearly distinguish between bona fide 
legitimate hedgers and speculators and ensure that position limits 
apply to all traders who are not doing legitimate, bona fide, hedging.
    Question. Goldman Sachs and Morgan Stanley appear to be two of the 
largest energy trading financial institutions. Should CFTC regulate oil 
analysts with institutional speculators who forecast oil markets? If an 
investment bank with large positions in the commodity market makes a 
prediction that benefits the positions of the investment bank, is the 
price manipulation?
    Answer. There have been news accounts that discuss the potential 
for price manipulation by persons interested in a certain market 
outcome who then try to drive the press or the public in that direction 
for the purpose of making increased profits. As with stock prices, 
these activities can influence prices in a manner that is inconsistent 
with a true assessment of the value of the commodity or the stock. The 
CFTC should carefully monitor these activities and establish clear 
standards for proper behavior to prevent price manipulation designed to 
mislead the public for private gain. A bipartisan Senate Permanent 
Subcommittee on Investigations joint report (June 25, 2007, ``Excessive 
Speculation in the Natural Gas Market'') is instructive regarding the 
ability of a company to manipulate futures prices in the energy 
markets.
    Question. In 2007, the CFTC issued a ``no-action'' letter thereby 
declining to regulate the trading of the West Texas Intermediate (WTI) 
oil contracts on the Dubai Exchange. There appears to be a significant 
amount of trading in WTI contracts both on the Dubai Exchange and the 
Intercontinental Exchange in London. Given that, do you think CTFC has 
a responsibility to regulate WTI trading in these offshore exchanges? 
If not, why?
    Answer. Let me start my answer by bringing to your attention what 
happens when trading in energy commodities is not regulated by the 
CFTC. The perfect example is natural gas trading. An energy trading 
company called Amaranth recently took advantage of the so-called Enron 
loopholes such that the CFTC was unable to adequately regulate trading 
in energy futures leading to excessive speculation and price 
manipulation. A bipartisan Senate Permanent Subcommittee on 
Investigations joint report (June 25, 2007, ``Excessive Speculation in 
the Natural Gas Market'') noted that the ``Enron loophole, which was 
inserted into the law in 2000 at the request of Enron and others, 
exempts electronic energy exchanges such as ICE [the electronic 
Intercontinental Exchange] from CFTC oversight and regulation.'' That 
report shows the dangers of limiting CFTC ability to regulate energy 
trading by U.S. residents or those using U.S. trading terminals related 
to commodities for delivery in the United States.
    Our commodity futures markets should offer a level playing field to 
all foreign and domestic investors using U.S. terminals regarding 
commodities for delivery in the United States. The Commodity Futures 
Trading Commission (CFTC) should evenly enforce the same rules for all, 
ensure transparent pricing, and assure the availability of timely, 
reliable, and accurate information to all traders using U.S. facilities 
to trade U.S. energy futures.
                                 ______
                                 
                   Questions Submitted to Mark Cooper
               Questions Submitted by Senator Pat Roberts
    Question. Mr. Cooper, several of your fellow panelists testified 
that retaining liquidity in the market is a priority for maintaining 
efficiency, and that raising margin rates could drive liquidity to less 
transparent oversees markets. Yet, your testimony advocates for 
increases in margin requirements. I've heard a lot about the impacts 
higher prices have had on margin calls recently. Grain elevators and 
co-ops already struggle to meet existing margin calls and often times 
max out their credit limits securing enough capital to do so, or they 
discontinue offering futures contracts to producers. Can you explain to 
me how your proposal to raise their rates will put my constituents' 
minds and businesses at ease?
    Answer. Rising volatility and value of commodities has squeezed 
physical (commercial) players out of the market because they must 
finance their hedging activities. Exchanges should set lower margins 
for real physical/commercial traders.
    Question. Mr. Cooper, Mr. Duffy, Dr. Newsome and Mr. Vice, several 
countries with increasingly high energy consumption growth rates like 
China are heavily subsidizing consumer energy costs. Reuters recently 
reported that for the first time ever, China has become a net importer 
of gasoline. They continue to consume without their consumers feeling 
the pain of global price increases. What affects do non-market based 
policies like this have on the price of crude oil?
    Answer. Non-market factors have a huge influence on the price of 
crude, both policies that subsidize consumption and OPEC policies that 
manage supply. Chinese policies of under valued currency and under paid 
labor are used to subsidize under priced energy consumption. The 
Chinese know well that if they did not subsidize energy consumption, 
they would have to raise wages, which would increase the cost of 
exports. The Chinese pay for cheap oil with cheap labor because they 
use the trade surplus from manufactured exports to subsidize energy 
consumption. They export the burden of a tight energy market to nations 
that do not subsidize energy consumption.
                                 ______
                                 
             Questions Submitted by Senator Saxby Chambliss
    Question. Dr. Cooper, I hear concerns that all trades are not being 
properly reported and that the CFTC doesn't have adequate data to 
monitor participation by speculators in the market--hence the call for 
more reporting requirements and monitoring by the CFTC. However, if the 
data available is truly insufficient, then I am genuinely interested to 
know what information is being used to support the assessment that 
speculation is contributing $40 to the price of a barrel of crude oil?
    Answer. The data and information on the economic cost of production 
and market models of the supply-demand balance are adequate to make a 
reasonable projection of what the price of oil should be at economic 
equilibrium in today's market. There is general agreement among oil 
industry economists, oil industry executives and governmental energy 
modelers on the fact that the price of oil should be less than $80 per 
barrel. With oil in the range of $130 to $140 per barrel, the observed 
price is $40 to $60 higher than that calculated market equilibrium 
price.
    The data and information that is lacking deals with how trading 
practices and policies have allowed the speculative bubble to come 
about. The CFTC insisted for years that it had enough data and that 
regulatory oversight by exempt entities was adequate, until two months 
ago. Now it admits that it did not have enough data to answer the 
critical questions and that foreign regulation of exempt exchanges was 
inadequate. The CFTC has only begun to investigate the problem, but 
every day that the abuse goes on costs the American public about $1 
billion.
    Question. In your written testimony you state that the CFTC 
misclassifies large speculators, such a Goldman Sachs and Merrill 
Lynch, as commercial traders, not speculators. Is it not true that 
Goldman Sachs and Merrill Lynch often trade both on behalf of those who 
are commercial market participants, in other words those who can 
actually take delivery of crude oil, as well as speculators--and the 
CFTC recently announced that they are going to be looking at the books 
of these traders to differentiate positions held by speculators and 
commercial participants?
    Answer. The admission that it needs to look more carefully at who, 
exactly, is trading through these brokers underscores the fact that the 
CFTC's practices were to lax in the past and misrepresented the reality 
to policymakers. The actual commercial traders should be identified and 
treated differently, but the CFTC allowed huge quantities of 
speculation to be misclassified as commercial activity by treating all 
Merrill Lynch activities as commercial.
                                 ______
                                 
           Questions Submitted by Senator Charles E. Grassley
    Question. Do you believe that further oversight of commodities 
trading is needed in light of the increased pressure on margin calls 
and market volatility that has led to local elevators and major grain 
trading companies not being able to offer forward contracts to 
producers?
    Answer. Yes. By imposing prudential regulation of commodity future 
markets the CFTC will dampen excessive speculation, which will enable 
physical traders to reenter the market.
    Question. Recently CTFC announced investigations into possible 
price manipulation in oil and cotton markets. Would you support them 
opening investigations into other commodities including corn and wheat? 
Why or why not?
    Answer. The CFTC should be vigilant to prevent manipulation in all 
commodity markets. The investigation of potential manipulation in any 
commodity markets should be vigorous and continuous. However, the 
current problem of excessive speculation goes well beyond manipulation. 
The trading practices that are pumping up commodity prices across the 
board should be addressed by reform of prudential regulation, reform 
that will affect all commodities.
                                 ______
                                 
          Questions Submitted to Mark Cooper and James C. May
           Questions Submitted by Senator Charles E. Grassley
    Question. Do you think that the CFTC has acted aggressively enough 
to determine the impact of institutional investors and speculator on 
commodity markets?
    Answer. The CFTC has been slow and slovenly in its oversight over 
these markets. The CFTC insisted for years that it had enough data and 
that regulatory oversight by exempt entities was adequate, until two 
months ago. Now it admits that it did not have enough data to answer 
the critical questions and that foreign regulation of exempt exchanges 
was inadequate. The CFTC has only begun to investigate the problem, but 
every day that the abuse goes on costs the American public about $1 
billion.
    Question. Do you believe there is evidence that crude oil prices 
are being driven by speculators? If so, what do you believe is the 
CFTC's responsibility with regard to limiting the amount of 
institutional speculation?
    Answer. The CFTC's obligation is to prevent excessive speculation, 
whatever its causes. It should declare an emergency and adopt whatever 
measures it needs to burst the speculative bubble that afflicts the oil 
market. The practice of institutions engaging in long-only index 
trading is contributing to the speculative bubble and should be 
terminated.
    Question. Does CFTC currently have all the tools necessary to 
respond to the speculation in commodities by hedge funds, investment 
banks and pension funds? Does Congress need to act to provide 
additional authority to the CFTC? If so, please provide specific 
recommendations for additional authority.
    Answer. The Congress needs to enact legislation to accomplish two 
things. There were some loopholes created by the Commodity Futures 
Modernization Act that only Congress can close. Among my 
recommendations, these include closing the Enron loophole firmly, 
instituting minimum criminal penalties for market manipulation, banning 
some trading practices, etc. There are also a number of practices that 
the CFTC adopted administratively (such as the foreign board of trade 
exemption and the swaps exemption) that the Congress should close 
because the CFTC has failed to address these problems. Since the CFTC 
could have taken remedial action, but it has failed to do so, Congress 
should.
    Question. Goldman Sachs and Morgan Stanley appear to be two of the 
largest energy trading financial institutions. Should CFTC regulate oil 
analysts with institutional speculators who forecast oil markets? If an 
investment bank with large positions in the commodity market makes a 
prediction that benefits the positions of the investment bank, is the 
price manipulation?
    Answer. Whether or not these practices fit the narrow definition of 
manipulation, these practices constitute conflicts of interest and must 
be regulated. The case law and practice on manipulation at the CFTC 
ignores a wide range of trading practices that contribute to excessive 
speculation. The Congress needs to address these practices with 
legislation because, legally, existing case law makes it difficult for 
the CFTC to reach these practices and, administratively, the CFTC has 
been slow and reluctant to act to protect the public.
    Question. When testifying before the Agriculture Committee, Acting 
Chairman Lukken and Commissioner Chilton discussed several new 
initiatives to improve trade collection and dissemination efforts to 
bring more transparency in the areas of agriculture and energy markets. 
Do you think the steps taken by the CFTC in recent weeks go far enough 
to bring greater transparency and scrutiny in energy and agriculture 
trades? If not, what suggestions can you offer?
    Answer. The sudden discovery that the CFTC has inadequate 
information, that foreign boards of trade are inadequately regulated 
and that categorizing all swaps trading by large banks as commercial 
may distort the picture of the market underscores what a bad job the 
CFTC has done in preventing excessive speculation. Legally, the CFTC 
will have difficulty reforming some of the practices that are causing 
the problem because it has defined its task so narrowly and the case 
law will not easily support actions against the broader range of abuses 
that have developed. Practically, we doubt the genuineness of the 
commitment of the current Commission to vigorous action to protect the 
public. The Congress cannot rely on the Commission to protect the 
public. It must outlaw certain practices and order the commission to 
regulate others. I recommended fifteen specific policies in my 
testimony.
                                 ______
                                 
                Questions Submitted to Terrence A. Duffy
               Question Submitted by Senator Pat Roberts
    Question. Mr. Cooper, Mr. Duffy, Dr. Newsome and Mr. Vice, several 
countries with increasingly high energy consumption growth rates like 
China are heavily subsidizing consumer energy costs. Reuters recently 
reported that for the first time ever, China has become a net importer 
of gasoline. They continue to consume without their consumers feeling 
the pain of global price increases. What affects do non-market based 
policies like this have on the price of crude oil?
    Answer. CME does not operate crude oil futures markets so we do not 
possess the expertise in that particular area that NYMEX has to offer. 
That said, our experience with the markets we do operate, especially 
agricultural commodities, provides a basis for our informed judgment 
that non-market policies are having a significant impact on supply and 
demand in global commodity markets. As we explained in our written 
testimony, there are several factors that have combined to create 
volatility and increased prices in the grains and oilseeds markets, 
including weather/disease/pestilence; increasing per capita consumption 
in emerging markets; increased demand for grain and oil seeds as 
feedstock for biofuels; reactionary governmental trade policies; and 
financial market turmoil, including the weakened dollar. Of these 
factors, several are the result of governmental policies, specifically 
policies prioritizing biofuel development, protectionist trade policies 
such as those that reserve certain nations' internal agricultural 
production exclusively for domestic consumption, and international 
monetary policy that is set by the respective national banks and 
governments. Having confirmed the interplay of such governmental policy 
on the price-supply dynamics in our agricultural commodity markets, we 
would assume that similar impacts can readily be at play in crude oil 
markets which are increasingly characterized by government controlled 
production and cartelization of supply, and Congress should not be 
surprised by such policy driven adverse impacts on prices in the crude 
oil markets.
                                 ______
                                 
             Question Submitted by Senator Saxby Chambliss
    Question. There have been several issues raised with regard to 
changing how margin levels are set and whether CFTC should play a 
greater role in that process. Specifically, some have compared the 
margin levels applied to stock trading to those applied to commodity 
futures trading. While this comparison has been made in the context of 
energy futures and I recognize that you are not in the energy futures 
business, I know that you are very familiar with the differences in 
stocks and commodity futures and wonder if you could explain how 
clearing houses establish margins for commodity futures contracts and 
why this differs from margins applied to stock trading?
    Answer. The discussion of mandated margin increases during recent 
congressional hearings makes it abundantly clear that many legislators 
wrongly assume the concept of margin in futures markets is similar to 
that in equity markets. Indeed, legislative proposals to require 
mandated increases in futures margins are premised on a seriously 
flawed understanding of the role margin plays in futures markets and 
how that role differs from the concept and function of margin in equity 
markets. In the securities market, margin serves as an extension of 
credit or a down payment on the cost of a security. However, the notion 
of ``credit'' has nothing to do with the concept of margin as used in 
futures markets. In futures markets, margin is not an extension of 
credit. Rather, margin is the equivalent of a performance bond designed 
to ensure that contractual obligations are met and that clearing houses 
can fulfill their responsibilities. Margins are not intended to create 
incentives or disincentives for trading decisions. Failure to 
understand this critical difference in the notion of margin as used in 
futures trading can have highly destructive implications for U.S. 
futures markets and those who rely on them.
                                 ______
                                 
           Questions Submitted by Senator Charles E. Grassley
    Question. In a recent hearing in the Senate Commerce Committee, 
Michael Greenberger, a law professor at the University of Maryland and 
former head of the CFTC's Division of Trading & Markets, suggested that 
if the CFTC required all U.S. crude trades to be subject to CFTC 
regulation and trading limits, oil prices would drop by 25 percent 
overnight. Do you agree with his contention?
    Answer. CME group does not operate oil and gas futures markets, so 
we do not profess to have the specialized experience with those markets 
to definitively answer this question regarding crude oil prices. That 
said, from what we observe with regard to the run up in commodity 
prices in general and our agricultural commodity markets in specific, 
the primary factors contributing to that phenomenon relate to 
fundamentals of supply and demand, not the regulation of speculative 
trading by CFTC or the conduct of trading activity on markets that are 
not regulated by the CFTC. We have no reason to expect that adoption of 
Mr. Greenberger's suggestion would result in a reduction in the price 
of crude oil by 25 percent overnight.
    Question. In 2007, the CFTC issued a ``no-action'' letter thereby 
declining to regulate the trading of the West Texas Intermediate (WTI) 
oil contracts on the Dubai Exchange. There appears to be a significant 
amount of trading in WTI contracts both on the Dubai Exchange and the 
Intercontinental Exchange in London. Given that, do you think CTFC has 
a responsibility to regulate WTI trading in these offshore exchanges? 
If not, why?
    Answer. CFTC has taken steps in recent weeks to significantly 
bolster its regulatory reach under its ``no-action letter'' regime with 
regard to the ICE London exchange. These enhancements include increased 
reporting requirements to improve transparency and imposition of 
position limits and accountability standards that mirror what CFTC 
requires of NYMEX which trades competing WTI contracts in this country. 
CFTC's expansion of its regulatory regime in this regard is appropriate 
and welcome since it fairly levels the regulatory playing field among 
competitors, while enhancing the agency's understanding of the broader 
international trading activity that can affect the proper functioning 
of our own domestic futures markets. In addition, the manner in which 
CFTC negotiated these improvements in its ``no action'' requirements 
with the foreign board of trade and its London-based regulator reflects 
the need to respect the legitimate interest foreign regulators have in 
the fair treatment of their own domestic trading platforms by foreign 
regulators. CME very much understands that the United States has that 
same interest in judiciously accommodating foreign competitors and the 
legitimate reciprocal concerns of foreign regulators since U.S. 
exchanges such as CME's world-class platforms need to be able to access 
foreign markets in a non-discriminatory manner too. Any foreign 
regulator that insisted on our compliance with its regulatory regime 
that conflicted with U.S. law or imposed discriminatory burdens on us 
as a foreign competitor would present an untenable obstacle to our 
access to those foreign markets. As a result, U.S. policy must embrace 
the notion of respectful and productive accommodation of differing 
international regulatory regimes to facilitate commerce that is still 
properly and adequately regulated to attain U.S. public policy 
objectives.
                                 ______
                                 
                Questions Submitted to Dr. James Newsome
           Questions Submitted by Senator Charles E. Grassley
    Question. In 2007, the CFTC issued a ``no-action'' letter thereby 
declining to regulate the trading of the West Texas Intermediate (WTI) 
oil contracts on the Dubai Exchange. There appears to be a significant 
amount of trading in WTI contracts both on the Dubai Exchange and the 
Intercontinental Exchange in London. Given that, do you think CFTC has 
a responsibility to regulate WTI trading in these offshore exchanges? 
If not, why?
    Answer. First, the CFTC staff no-action letter to the Dubai 
Mercantile Exchange (DME) permits the DME to provide direct access to 
qualified users in the United States for the electronic trading of 
specified products. Such staff no-action letters generally are issued 
following a review of the regulation of the home-country regulator for 
the exchange and these no-action letters typically include various 
conditions that must be met in order to maintain the no-action relief. 
Second, NYMEX notes that the DME has not yet listed the WTI futures 
contract for trading and no future date has been announced for the 
listing of this contract.
    More generally, Section 4(a) of the Commodity Exchange Act requires 
futures contracts to be traded on or subject to the rules of an 
exchange that is regulated by the CFTC. However, this broad requirement 
by its terms does not apply to contracts on exchanges ``located outside 
the United States, its territories or possessions. . . .'' NYMEX 
believes that a foreign board of trade that is permitted to offer 
products by direct access to U.S. customers pursuant to CFTC staff no-
action letters and that lists futures based on commodities with U.S. 
delivery points should be subject to some level of CFTC oversight. 
These offshore exchanges should be required by the CFTC to provide the 
same level and quality of data and at the same frequency that U.S. 
exchanges provide to the CFTC. In addition, NYMEX believes that 
offshore exchanges offering contracts linked to commodities with U.S. 
delivery points should be required to impose position limits. Complete 
transparency to the CFTC should be a fundamental requirement for 
offshore exchanges offering direct access for the electronic trading of 
products linked to U.S. markets.
    Question. Do you believe that speculators could be at least playing 
some role in the higher prices of oil? If not, what do you believe are 
the causes?
    Answer. NYMEX's Research Department has conducted extensive 
analysis on the role of speculators in our markets. These evaluations 
began in 2004 and included reviewing data from 2007 through to the 
middle of 2008 for our core crude oil and natural gas futures 
contracts. We found no evidence to support harmful impacts on price or 
price volatility by non-commercial participants. Our analysis instead 
disclosed that non-commercial participants are price takers. In other 
words, they do not initiate movements in price or otherwise set prices, 
but rather follow price movements that are generated by commercials. In 
addition, our data indicate that trading by non-commercials or 
speculators has had a moderating or braking effect on price volatility 
in the products that were the subject of the study.
    Other findings also support our conclusion that speculators are not 
influencing the futures prices. First, non-commercial participants 
historically have represented a smaller percentage of the energy 
futures markets than commercial participants. Second, noncommercial 
participation consistently has been relatively balanced between longs 
(buys) and shorts (sells), so there has not been, for example a 
disproportionate push on the long side of the market, which would cause 
the price to increase. Third, non-commercials generally are not in a 
position to influence final settlement prices because they do not own 
the physical commodity and therefore, must liquidate their open futures 
positions prior to expiration of trading of the applicable expiring 
contract month.
    Lastly, with hundreds of commercial participants and instantaneous 
price dissemination, any short term ``speculative'' price impact that 
creates a discrepancy between the futures price and the price level 
that would be anticipated on the basis of market fundamentals in the 
underlying physical commodity market would be expected to be met in 
reasonably short order with an equally strong ``commercial'' reaction. 
Thus, if short-term prices in a futures market should happen to move in 
a direction inconsistent with actual market fundamentals, a vast number 
of participants, including energy producers, wholesalers and end-users 
(as well as government agencies) would respond to ensure that prices 
return rapidly to where the industry consensus believes they should be 
to reflect supply and demand fundamentals.
    NYMEX believes that market fundamentals generally explain the 
volatility and level of prices in the oil futures markets. Most 
recently, the U.S. Department of Energy's Energy Information 
Administration (EIA) and International Energy Agency (IEA) in their 
recent respective market reports have noted the uncharacteristic 
changes in the Organization for Economic Cooperation and Development 
(OECD) inventories during the second quarter this year. On the supply 
side of the equation, EIA reported an over 1 million barrel per day 
drop from the ``average build'' for OECD countries during the second 
quarter. EIA also indicated that there were changes in world 
inventories during the first half of the year--600,000 barrels per day 
decrease during the first quarter and 280,000 barrels increase during 
the second quarter. EIA and IEA data typically are revised a few times 
following the initial release, indicating the complexities in 
ascertaining the correct level of inventories and also highlighting a 
measure of uncertainty regarding core market fundamentals that have an 
impact on price levels.
    On the demand side, the strongest source of projected energy demand 
is from the less transparent developing countries such as China, India, 
and the Middle East. There is considerable difficulty in assembling 
accurate and timely information on non-OECD petroleum consumption in 
these countries. However, the EIA Short-Term Energy Outlook projects 
that world oil demand will grow by 1.2 million barrels per day in 2008, 
up a healthy 1.4 percent, with China accounting for 35 percent of this 
demand growth. We caution anyone against oversimplifying the challenge 
of accurately assessing or projecting the level of demand in these 
developing countries.
    Finally, over the long term, there has been steady upward pressure 
on petroleum demand pushed each year by the millions of people making 
the transition in less-developed countries to the beginnings of middle-
class circumstances. However, a global recession could have the effect 
of softening or suspending this upward pressure.
    Question. An estimated 30 percent of West Texas Intermediate 
trading is now done through ICE Futures Europe. NYMEX has recently 
gotten involved in the foreign exchange by partnering with the Dubai 
Mercantile Exchange. If a trade involves a WTI contract, why shouldn't 
these trades be subject to CFTC regulation?
    Answer. As a note, NYMEX has not entered into a formal partnership 
with the DME but instead does own a modest ownership share in a holding 
company that owns the DME. We agree that trading of WTI futures 
contracts offered by direct access to U.S. customers by foreign boards 
of trade generally should be fully transparent to the CFTC. It should 
also be generally subject to the same market surveillance regulatory 
regime as the linked U.S. market, such as position limits/
accountability levels, large trader reporting and emergency authority. 
Prior to the listing of the WTI crude oil contract by ICE Futures 
Europe, 100 percent of trading in that contract was under CFTC 
jurisdiction, fully transparent and regulated at the highest tier of 
regulation.
    Question. If these trades are exempt from CFTC regulatory 
supervision, what will prevent an even greater percentage of WTI 
contracts to be traded on a foreign exchange, exempt from CFTC 
oversight?
    Answer. In fact. there is nothing to prevent the shift of trading 
volume away from the NYMEX WTI crude futures contract to ICE Futures 
Europe. NYMEX staff repeatedly advised CFTC staff that this shift of 
liquidity could well occur if the regulations governing the NYMEX and 
ICE markets were not comparable to redress the unlevel playing field. 
The CFTC staff now has conditioned their no-action letter (on direct 
electronic access) to ICE Futures Europe so as to impose similar market 
surveillance requirements on ICE Futures Europe that are imposed on 
NYMEX as a designated contract market.
    Question. In a recent hearing in the Senate Commerce Committee, 
Michael Greenberger, a law professor at the University of Maryland and 
former head of the CFTC's Division of Trading & Markets, suggested that 
if the CFTC required all U.S. crude trades to be subject to CFTC 
regulation and trading limits, oil prices would drop by 25 percent 
overnight. Do you agree with this contention?
    Answer. I strongly disagree with this contention. While noting Mr. 
Greenberger's rather short stint as head of the CFTC's Division of 
Trading and Market, it should also be noted that he has no training, 
experience or expertise in the economic analysis of futures markets. 
Moreover, despite his grand and sweeping assertion, Mr. Greenberger to 
date has not been able to point to a single econometric study or other 
analysis by a legitimate economist demonstrating any such price impact 
resulting from his proposed legislative solutions. As noted above, 
futures prices are generally driven by the fundamental forces of supply 
and demand. It is frankly preposterous to think that requiring all oil 
trading to be regulated will cause a 25 percent drop in price. The 
location and manner of oil trading ultimately does not and cannot 
change the underlying market fundamentals of the global oil market.
                                 ______
                                 
               Question Submitted by Senator Pat Roberts
    Question. Several countries with increasingly high energy 
consumption growth rates like China are heavily subsidizing consumer 
energy costs. Reuters recently reported that for the first time ever, 
China has become a net importer of gasoline. They continue to consume 
without their consumers feeling the pain of global price increases. 
What affects do non-market based policies like this have on the price 
of crude oil?
    Answer. It has been widely reported that a number of countries have 
been providing significant subsidies for consumer energy costs. All 
other things being equal, the impact is a rise in the price of oil. 
Noting the market for crude oil is global in scope, such subsidies 
raise the demand for the underlying refined product which, in turn, 
raises the demand for crude oil which, in turn, raises the price of 
crude oil. From the perspective of interpretation, it means that the 
demand for the refined product as well as crude oil does not reflect 
accurately consumer interests because some consumers are being shielded 
directly from the market price for the refined product and indirectly 
from the price of crude oil. Certainly, the impact on non-subsidized 
consumers is unambiguously higher prices for crude oil and refined 
products. While consumers in non-subsidized countries generally would 
respond to increasing prices, such as by cutting back on their energy 
consumption, consumers in the subsidized countries may make no changes 
in their demand for energy regardless of the extent of price increases.
                                 ______
                                 
                 Questions Submitted to Charles A. Vice
               Question Submitted by Senator Pat Roberts
    Question. Mr. Cooper, Mr. Duffy, Dr. Newsome and Mr. Vice, several 
countries with increasingly high energy consumption growth rates like 
China are heavily subsidizing consumer energy costs. Reuters recently 
reported that for the first time ever, China has become a net importer 
of gasoline. They continue to consume without their consumers feeling 
the pain of global price increases. What affects do non-market based 
policies like this have on the price of crude oil?
    Answer. These policies have a huge effect of the price of crude 
oil. India, China and many other developing countries, to some extent, 
subsidize the gasoline purchases. Critically, these same countries are 
a large part of the new and growing demand for oil. Without the proper 
market incentives, these countries will not take steps to become more 
efficient and thus will distort demand and exacerbate crude oil prices. 
Not only is this bad for the global economy, but it is particularly 
detrimental to the subsidizing governments. In India, the cost of the 
gasoline subsidy grew to 3 percent of the countries GDP.\1\ Finally, it 
is important to note that many of these countries began to cut their 
fuel subsidies this summer, which coincided with the demand destruction 
that lead to the recent fall in crude oil prices.
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    \1\ Backlash as India puts up Fuel Price, Financial Times, July 4, 
2008. http://www.ft.com/cms/s/0/8bd96c88-3208-11dd-9b87-
0000779fd2ac.html?nclick_check=1.
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                                 ______
                                 
           Questions Submitted by Senator Charles E. Grassley
    Question. In 2007, the CFTC issued a ``no-action'' letter thereby 
declining to regulate the trading of the West Texas Intermediate (WTI) 
oil contracts on the Dubai Exchange. There appears to be a significant 
amount of trading in WTI contracts both on the Dubai Exchange and the 
Intercontinental Exchange in London. Given that, do you think CTFC has 
a responsibility to regulate WTI trading in these offshore exchanges? 
If not, why?
    An estimated 30 percent of West Texas Intermediate trading is now 
done through ICE Futures Europe. NYMEX has recently gotten involved in 
the foreign exchange by partnering with the Dubai Mercantile exchange. 
If a trade involves a WTI contract, why shouldn't these trades be 
subject to CFTC regulation?
    If these trades are exempt from CFTC regulatory supervision, what 
will prevent an even greater percentage of WTI contracts to be traded 
on a foreign exchange, exempt from CFTC oversight?
    Answer. It is important to note that pursuant to the Commodity 
Futures Trading Commission's recent amendment to ICE Futures Europe's 
no action letter, the ICE will be placing speculative limits and will 
be meeting the same reporting requirements as U.S. based exchanges on 
its contracts that settle on the price of a contract traded by a U.S. 
designated contract market. This is in addition to the stringent 
oversight provided by the Financial Services Authority.
    That said, it should also be noted that the CFTC's current ``no 
action'' regulatory regime works. As background, in 2006, the CFTC 
convened public hearings to consider the issue of the regulation of 
Foreign Boards of Trade in the United States. Consideration of the 
issue at that time was largely triggered by the launch of the ICE WTI 
Crude futures contract. An overwhelming majority of participants in 
those hearings thought that the CFTC ``no action'' regime had been very 
successful. The CFTC reaffirmed its no action regime thereafter \2\, 
recognizing the benefits of regulatory cooperation and mutual 
recognition.
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    \2\ CFTC Release: 52 52-2 issued October 31, 2006.
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    The basis of this approach is that markets, particularly oil 
markets, are global. Participants are based all over the world and 
cooperation between regulators is crucial in this context. The concept 
that each exchange be subject to the jurisdiction of one primary 
regulator has avoided duplication and conflicting regulations that 
would have made it unduly burdensome and expensive for participants to 
conduct their trading activities within the current arrangements. Other 
regulators with an interest in the activities of the exchange can 
exercise secondary oversight and jurisdiction through consents to 
jurisdiction, and through information sharing with the correspondent 
regulator.
    Question. Do you believe that speculators could be at least playing 
some role in the higher prices of oil? If not, what do you believe are 
the causes?
    Answer. At the outset, all investment is inherently speculative. 
Commercial firms speculate on the price of commodities when they invest 
in new production and when they hedge their risks from these 
investments. The real issue is whether this speculation reflects the 
underlying supply and demand. Numerous experts and industry observers 
have come to the conclusion that the recent price spike in oil was 
driven by supply and demand. For example, the International Energy 
Agency, in its Medium-Term Oil Market Report, states that global oil 
product demand is expected to grow by 1.6 percent per year on average 
over the next five years, primarily driven by growth in developing 
countries. The report notes that demand growth remains heavily 
concentrated in developing countries, where total consumption will 
nearly reach parity with mature economies by 2015. Asia, the Middle 
East and South America will account for nearly 90 percent of global 
demand growth over the next five years. On the supply side of the 
equation, oilfields worldwide are declining in production, especially 
given the underinvestment in energy infrastructure that has been caused 
by prior price collapses. Just to hold world production steady, over 
3.5 million barrels per day of new production is needed. However, this 
new production, if it is possible, will come at a steep price. Costs of 
new production today are double the cost of new production four years 
ago.
    In addition, the effect of the devaluation of the dollar cannot be 
discounted. The price of oil is highly correlated to the value of the 
dollar as shown by the recent drop in the price of oil, which has 
coincided with a rise in the valuation of the dollar. As Benn Steil 
noted in his testimony before the Senate Committee on Homeland Security 
and Governmental Affairs, that while ``the prices of oil and wheat 
measured in dollars have soared over the course of this decade, they 
have, on the other hand, been remarkably stable when measured in terms 
of gold--gold having been the foundation of the world's monetary system 
until 1971.'' \3\ Thus, the effect of the dollar has a large impact on 
the price of oil.
    Question. In a recent hearing in the Senate Commerce Committee, 
Michael Greenberger, a law professor at the University of Maryland and 
former head of the CFTC's Division of Trading & Markets, suggested that 
if the CFTC required all U.S. crude trades to be subject to CFTC 
regulation and trading limits, oil prices would drop by 25 percent 
overnight. Do you agree with his contention?
    Answer. No. As pointed out in the Joint Analysis Prepared by 
Majority and Minority Staffs of the Senate Permanent Subcommittee on 
Investigations of Michael Greenberger Testimony before Senate Committee 
on Commerce, Science and Transportation on June 3, 2008, Professor 
Greenberger's statement is untrue (``Senate PSI Response'').\4\ 
Professor Greenberger's statement refers to trading on exempt 
commercial markets (``ECMs''). As the Senate PSI Response points out, 
there is little to no trading of crude oil on ECMs. In addition, the 
Subcommittee points out that the prices for agricultural commodities 
have risen, even though these commodities do not trade on ECMs.

                         CONCLUSION OF HEARING

    Senator Durbin. I thank everybody for attending today. I 
think this was an important hearing and we will follow through. 
Thank you.
    [Whereupon, at 1:05 p.m., Tuesday, June 17, the hearing was 
concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

                                   - 

    \3\ Testimony of Dr. Benn Steil before the Senate Committee on 
Homeland Security and Governmental Affairs (May 20, 2008). http://
www.cfr.org/content/publications/attachments/
Steil_Senate%20Testimony_3%2020%2008.pdf.
    \4\ Senate PSI Response, pg. 6. http://hsgac.senate.gov/public/
_files/PSIJtSTAFFANALYSISGREENBERGERTESTIMONYONJUNE32008.pdf.
