[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
HEARING TO REVIEW IMPLEMENTATION OF CHANGES TO THE COMMODITY EXCHANGE
ACT CONTAINED IN THE 2008 FARM BILL
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
GENERAL FARM COMMODITIES
AND RISK MANAGEMENT
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
MARCH 3, 2010
__________
Serial No. 111-42
Printed for the use of the Committee on Agriculture
agriculture.house.gov
______
U.S. GOVERNMENT PRINTING OFFICE
55-459 PDF WASHINGTON : 2010
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COMMITTEE ON AGRICULTURE
COLLIN C. PETERSON, Minnesota, Chairman
TIM HOLDEN, Pennsylvania, FRANK D. LUCAS, Oklahoma, Ranking
Vice Chairman Minority Member
MIKE McINTYRE, North Carolina BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa JERRY MORAN, Kansas
JOE BACA, California TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California SAM GRAVES, Missouri
DAVID SCOTT, Georgia MIKE ROGERS, Alabama
JIM MARSHALL, Georgia STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN, South RANDY NEUGEBAUER, Texas
Dakota K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas JEFF FORTENBERRY, Nebraska
JIM COSTA, California JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota ROBERT E. LATTA, Ohio
STEVE KAGEN, Wisconsin DAVID P. ROE, Tennessee
KURT SCHRADER, Oregon BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois GLENN THOMPSON, Pennsylvania
KATHLEEN A. DAHLKEMPER, BILL CASSIDY, Louisiana
Pennsylvania CYNTHIA M. LUMMIS, Wyoming
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
BETSY MARKEY, Colorado
FRANK KRATOVIL, Jr., Maryland
MARK H. SCHAUER, Michigan
LARRY KISSELL, North Carolina
JOHN A. BOCCIERI, Ohio
SCOTT MURPHY, New York
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho
______
Professional Staff
Robert L. Larew, Chief of Staff
Andrew W. Baker, Chief Counsel
April Slayton, Communications Director
Nicole Scott, Minority Staff Director
______
Subcommittee on General Farm Commodities and Risk Management
LEONARD L. BOSWELL, Iowa, Chairman
JIM MARSHALL, Georgia JERRY MORAN, Kansas, Ranking
BRAD ELLSWORTH, Indiana Minority Member
TIMOTHY J. WALZ, Minnesota TIMOTHY V. JOHNSON, Illinois
KURT SCHRADER, Oregon SAM GRAVES, Missouri
STEPHANIE HERSETH SANDLIN, South STEVE KING, Iowa
Dakota K. MICHAEL CONAWAY, Texas
BETSY MARKEY, Colorado ROBERT E. LATTA, Ohio
LARRY KISSELL, North Carolina BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
Aleta Botts, Subcommittee Staff Director
(ii)
C O N T E N T S
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Page
Boswell, Hon. Leonard L., a Representative in Congress from Iowa,
opening statement.............................................. 1
Moran, Hon. Jerry, a Representative in Congress from Kansas,
opening statement.............................................. 2
Witness
Gensler, Hon. Gary, Chairman, U.S. Commodity Futures Trading
Commission, Washington, D.C.................................... 2
Prepared statement........................................... 4
HEARING TO REVIEW IMPLEMENTATION OF CHANGES TO THE COMMODITY EXCHANGE
ACT CONTAINED IN THE 2008 FARM BILL
----------
WEDNESDAY, MARCH 3, 2010
House of Representatives,
Subcommittee on General Farm Commodities and Risk
Management,
Committee on Agriculture,
Washington, D.C.
The Subcommittee met, pursuant to call, at 9:38 a.m., in
Room 1300 of the Longworth House Office Building, Hon. Leonard
L. Boswell [Chairman of the Subcommittee] presiding.
Members present: Representatives Boswell, Marshall, Herseth
Sandlin, Kissell, Peterson (ex officio), Moran, Johnson,
Conaway, Latta, and Luetkemeyer.
Staff present: Aleta Botts, Claiborn Crain, John Konya,
Clark Ogilvie, James Ryder, April Slayton, Debbie Smith,
Rebekah Solem, Kevin Kramp, Josh Mathis, and Sangina Wright.
OPENING STATEMENT OF HON. LEONARD L. BOSWELL, A REPRESENTATIVE
IN CONGRESS FROM IOWA
The Chairman. The hearing of the Subcommittee on General
Farm Commodities and Risk Management to review implementation
of changes to the Commodity Exchange Act contained in the 2008
Farm Bill will now come to order. I would like to thank
everyone for joining us here today as we take a thorough
examination of the changes to the Commodity Exchange Act and
newly proposed rules by the Commodity Futures Trade Commission,
CFTC. I would like to especially thank the witness, Chairman
Gensler, for testifying before the Committee and for offering
his insight into current issues facing the futures markets. I
very much look forward to hearing your testimony.
In the 2008 Farm Bill, the Committee strengthened the
CFTC's authority over retail foreign currency for forex
transactions. In January, the CFTC published a proposed rule to
implement that authority. This rule put in place requirements
for registration, disclosure, record-keeping, financial
reporting and minimal capital standards for forex trading.
However, this rule also would impose a new leverage requirement
on retail foreign exchange customer accounts that many believe
will just force customers to take their business overseas.
Today, I am interested in hearing more from the CFTC on the
development of this proposed rule regarding forex transactions,
and if the narrow Zelener fix in the farm bill has given them
enough authority. Also, I hope Chairman Gensler can elaborate
today on the proposed, slightly controversial, rule to limit
size of positions that traders can take on futures and options
contracts on four energy commodities and explain how they
differed from position limits to those imposed on agricultural
commodities. In particular, I am interested in distinctions
that the CFTC is making between agricultural and energy
commodities with regard to the use of aggregate position
limits.
Our job in Congress, and on this Subcommittee, is to bring
greater transparency and oversight to the over-the-counter
derivatives markets and ensure that we provide necessary
oversight of these markets without hindering legitimate
consumers from operating within them. To the extent fraudulent
activity is taking place and hard-working Americans are getting
taken to the cleaners, we need to ensure that Federal
regulators have the tools necessary to protect consumers. And I
would like to yield to my Ranking Member, the gentleman from
Kansas.
OPENING STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN
CONGRESS FROM KANSAS
Mr. Moran. Mr. Chairman, thank you very much. I thank you
for holding this hearing. I am interested in hearing what the
Chairman has to say. Chairman Gensler, I welcome you to our
Subcommittee and look forward to being educated one more time
on very complex and important issues. And with that, Mr.
Chairman, I think we should begin our hearing.
The Chairman. I think we will move on into the testimony.
Thank you for being here. We are anxious to hear your remarks,
Chairman Gensler.
STATEMENT OF HON. GARY GENSLER, CHAIRMAN, U.S.
COMMODITY FUTURES TRADING COMMISSION,
WASHINGTON, D.C.
Mr. Gensler. Chairman Boswell, Ranking Member Moran, and
Members of the Subcommittee, thank you for inviting me here
today to testify on behalf of the Commodity Futures Trading
Commission, and I ask that my full written testimony be entered
into the record. In that written testimony, I review three
principal areas. First, the CFTC's use of existing authorities,
and I go through eight items there. I guess I could had gone
through more or less, but there are eight key ones. Second, the
need for additional authorities, which this Committee and the
House of Representatives addressed, and I want to express my
deep appreciation for all the work this Committee did on that
bill. There is a great deal more to do working with the
Congress and hopefully reconciling and getting something to the
President, for over-the-counter derivatives reform. Third, the
testimony focuses on the still needed additional resources at
the CFTC, which of course we will be working with the
appropriators on, going forward.
In terms of the existing authorities, if I could just
quickly focus on and highlight three areas, and I know there
will be questions on some others. One is our enforcement
program, and, two, status of two things out of the farm bill.
One was this foreign currency directive that we took up, and,
second, the CFTC's approach to significant price discovery
contract determinations which was also in the farm bill. In
terms of our enforcement programs, the CFTC Division of
Enforcement has been very active policing the markets against
fraud, manipulation and other abuses in the last fiscal year
filing 50 enforcement cases, a 25 percent increase from the
prior year, and resulting in approximately $280,000 in civil
monetary penalties.
Within that, there were some new provisions about policing
the markets and FX. I think there were 15 or 16 cases that came
directly out of the new authorities from the farm bill. Also,
the farm bill included provisions on exempt commercial markets.
These were markets that were set up out of the 2000 Commodity
Futures Modernization Act, but some exempt commercial markets
that had contracts that showed significant price discovery
features. They were either linked or they were referenced by
others in markets that these contracts should have enhanced
regulation. We put out rules last year, and following those
rules we sought public comment, 43 contracts to ask whether
they were significant price discovery contracts.
The first was found to be a significant price discovery
contract, the big contract on the Henry Hub traded on ICE.
There are 42 additional contracts that are still out for
determination, and our staff is reviewing them. Hopefully not
too long from now, the Commission will make some determinations
on them as well. The good news is that on that first contract,
ICE is now regulating that contract in accordance with the core
principles that were embedded in the farm bill that you all
worked so hard on. In terms of the forex rulemaking in January,
the Commission proposed rules so we are in a public comment
period right now concerning off-exchange retail foreign
exchange transactions.
This is really to help protect the public, in accordance
with the farm bill, through registration, disclosure, record-
keeping and financial reporting, and as the Chairman said does
include a feature on leverage ratios to protect the public.
And, so we are in this rulemaking period. We look forward to
hearing from the public on this and comply with the farm bill
and to make sure that we protect the public. Once again, I want
to thank the Committee for all your work on over-the-counter
derivatives, and I know it is not the reason for this hearing,
but I am certainly here to take any questions you might have.
And, if I could, just before I close, mention resources. The
Commission actually shrank during the 8 years before I started.
It shrank about 22 or 23 percent in terms of head count, and
this is in the face of a market that was growing five or six-
fold during that period. It was also increasing in complexity.
Fortunately, working with Congress, we are now back up to
about 590 staff, maybe 600 staff, which is just a little bit
more than we were 10 years ago, and, oddly enough, not that
much different than we were in the late 1970's, even though the
markets are so much larger today. But with Congress' help this
year, we can probably bring ourselves up to the mid-600 range
depending upon how we bring them on, maybe as many as 680 by
the end of this year. And the President put forward a budget to
move us up to funding that would support about 745 people. We
think that that is the right complement. If over-the-counter
derivatives reform were to go forward, the President's budget
also envisions another $45 million to help get a start on the
funding of the technology needs because there will be a lot of
technology needs on that in addition to the staffing needs.
With that, I look forward to your questions.
[The prepared statement of Mr. Gensler follows:]
Prepared Statement of Hon. Gary Gensler, Chairman, U.S. Commodity
Futures Trading Commission, Washington, D.C.
Good morning Chairman Boswell, Ranking Member Moran and Members of
the Subcommittee. Thank you for inviting me to testify regarding the
implementation of changes to the Commodity Exchange Act contained in
the 2008 Farm Bill. I am please to testify on behalf of the Commodity
Futures Trading Commission (CFTC). I will focus my testimony today on
three principal issues: the CFTC's use of existing authorities to
fulfill our mission, the need for additional authorities to oversee the
over-the-counter derivatives marketplace, and the need for additional
resources to best protect the American public.
CFTC Regulatory Regime
Before I get to the three topic areas outlined above, I will take a
moment to discuss the CFTC's oversight of the futures markets. Futures
have traded in the United States since the Civil War, when farmers and
grain merchants came together and created a new type of marketplace. It
was not until 60 years later that the Congress first passed legislation
to regulate these markets. In 1922, Congress passed the Grain Futures
Act that first provided a regulatory structure over futures and
established the Federal authority that eventually became the CFTC. In
the midst of the Great Depression, Congress passed the Commodity
Exchange Act to strengthen that regulatory structure.
The CFTC ensures that futures and commodity options exchanges have
procedures to ensure that trading is fair and orderly and free from
fraud, manipulation and other abuses. Exchanges are where buyers and
sellers meet and enter into a transaction. Specifically, the CFTC
oversees 14 designated contract markets (DCMs) and one exempt
commercial market (ECM) that lists a contract that the Commission
determined to be a significant price discovery contract (SPDC). The
CFTC also oversees 13 clearinghouses, which enter the picture only
after two counterparties enter into the transaction. After two parties
agree to a trade, a derivatives clearing organization (DCO) takes on
the risk that either counterparty to the trade may fail to meet its
obligations under the contract for the duration of the contract.
Centralized clearing has helped prevent systemic risks for decades in
both calm markets and in the stormiest of markets, such as during the
2008 financial crisis.
The CFTC has wide-ranging transparency programs designed to provide
as much information about commodity futures markets and trading to the
American public as possible under current law. The agency also has
broad surveillance powers to police the markets for fraud, manipulation
and other abuses.
The CFTC currently oversees 66,187 registrants, including 51,921
salespersons, 1,277 commodity pool operators, 2,568 commodity trading
advisors, 7,114 floor brokers, 1,447 floor traders, 166 futures
commission merchants and 1,694 introducing brokers.
The total size of the markets we regulate, measured in notional
value, was more than $33 trillion in 2009. The CFTC oversaw 2,051
actively traded contracts with a volume of nearly three billion
contracts traded.
Existing Authorities
The Congress gave the CFTC broad authorities to oversee and police
the regulated futures and options markets in the Commodity Exchange
Act. These authorities were further enhanced as a result of the 2008
Farm Bill. As such, the CFTC has been aggressively utilizing existing
authorities to oversee the futures and options markets.
First, the CFTC's Division of Enforcement has been actively
policing the markets for fraud, manipulation and other unlawful
conduct. In the last fiscal year, the agency has filed 50 enforcement
actions, constituting a 25 percent increase in filings over the prior
year. Commission enforcement actions resulted in more than $280 million
in civil monetary penalties, restitution and disgorgement from
respondents and defendants in CFTC enforcement actions. Notably, 15 of
the 50 cases involved fraud in connection with pooled investments, and
16 involved fraud against retail foreign currency customers.
The CFTC works closely with other Federal, state criminal and civil
enforcement authorities. During Fiscal Year 2009, nearly 90 percent of
the CFTC's civil injunctive fraud cases involved related criminal
investigations and, to date, more than 45 percent of those
investigations have resulted in criminal indictment. Over the same
time, more than 60 percent of the CFTC's civil injunctive fraud cases
involved cooperative investigations with SEC staff.
Second, the CFTC implemented new transparency efforts to give more
accurate depictions of the makeup of the futures markets to the public.
For the first time, we are providing the market with information about
swap dealers and managed accounts on a weekly basis, as well as
breaking out index investors on a regular basis. For decades, the CFTC
has provided the public with weekly Commitments of Traders (COT)
reports consisting of aggregated large-trader position data to shed
light on the changing composition of the markets.
On September 4, 2009, the Commission began disaggregating its
weekly COT reports to make the categories of traders more specific and
accurate. Prior to September, the COT reports broke traders into two
broad categories: commercial and noncommercial. The new disaggregated
reports improved upon the previous reports by breaking the data into
four categories of traders: Producer/Merchant/Processor/User; Swap
Dealers; Managed Money; and Other Reportables. The CFTC is releasing
disaggregated data for contracts based on physical commodities and is
reviewing how to best move forward on contracts for financial futures.
In addition to disaggregating the CFTC's COT reports, the agency
began periodically releasing data on index investment in the commodity
futures markets. In September 2008, the CFTC published a Report on Swap
Dealers and Index Traders that was based on data received from our
special call authority. The CFTC continued this special call and
enhanced the information disseminated in the original report. On
September 4, the agency began releasing the data on a quarterly basis.
The new data includes both gross long and gross short positions and
updates data in the previously released report to include some
additional data. The Commission will soon begin releasing this data on
a monthly basis.
Third, the CFTC has proposed rules to set position limits in the
four major energy futures contracts. The Commission held three hearings
in late July and early August to hear from the public on whether
position limits would benefit the markets. In January, the Commission
held a public meeting to hear a staff recommendation to set position
limits in the crude oil, natural gas, heating oil and gasoline futures
markets. Interested persons may submit comments on the proposed rule to
the Commission until April 26, 2010.
In addition to setting position limits in the energy markets, the
proposed rulemaking would adjust how exemptions from the limits are
granted. The proposed rulemaking both addresses exemptions for bona
fide hedgers and establishes a consistent framework for certain swap
dealer risk management exemptions. The Commission and the exchanges
currently grant relief from agriculture and energy position limits to
swap dealers on a case-by-case basis via staff no-action letters or
similar methods at the exchanges. The proposed rule would bring
uniformity to swap dealer exemptions, requiring swap dealers to file an
exemption application meeting specific requirements and to update the
application annually. Exempted swap dealers also would be required to
provide monthly reports of their actual risk management needs and
maintain records that demonstrate their net risk management needs. The
CFTC would publicly disclose the names of swap dealers that have filed
for an exemption after a 6 month delay. The proposed changes to the
exemptions process builds upon earlier work of the Commission, when,
under Acting Chairman Dunn, it issued a concept release on risk
management exemptions. In the proposed rulemaking, the CFTC also is
soliciting comments on the new exemption framework and whether it
should be applied to the agriculture markets.
Further, the CFTC has announced that the agency will hold another
meeting on March 25 and invite members of the public to testify on the
broad issues related to the CFTC's regulation of the metals futures
markets and whether position limits should be set in these markets.
Fourth, the CFTC is fulfilling its statutory obligations under the
2008 Farm Bill to regulate certain derivatives, including energy
derivatives, traded on ECMs. If a contract that is traded on one of
these facilities is found to perform a significant price discovery
function, the contract and the facility are subject to heightened
regulation and required to comply with key core principles that also
apply to the trading of futures contracts.
The Commission has so far determined that the ICE Henry Financial
LD1 Fixed Price Contract traded on the ICE--the largest volume natural
gas swap contract traded on an ECM--serves a significant price
discovery function, and thus is subject to heightened regulation. ICE
is now regulated for this contract in accordance with all of the core
principles laid out in the farm bill. Following the statutory
obligations of the 2008 Farm Bill, the CFTC is analyzing--and has
sought public comment on--an additional 42 energy contracts, including
natural gas and electricity contracts, to determine whether they meet
the criteria to be regulated as SPDCs.
Fifth, as directed by the 2008 Farm Bill, the CFTC in January
proposed regulations concerning off-exchange retail foreign currency
transactions. Pursuant to this authority, the Commission released for
public comment a comprehensive scheme that would put in place
requirements for, among other things, registration, disclosure, record-
keeping, financial reporting, minimum capital and other operational
standards. Specifically, the proposed regulations would require the
registration of counterparties offering retail foreign currency
contracts as either futures commission merchants (FCMs) or retail
foreign exchange dealers (RFEDs), a new category of registrant created
by the farm bill. Persons who solicit orders, exercise discretionary
trading authority and operate pools with respect to retail forex would
also be required to register, either as introducing brokers, commodity
trading advisors, commodity pool operators or as associated persons of
such entities.
The proposed regulations also include financial requirements
designed to ensure the financial integrity of firms engaging in retail
forex transactions and robust customer protections. All retail forex
counterparties and intermediaries under CFTC jurisdiction would be
required to distribute forex-specific risk disclosure statements to
customers, and comply with comprehensive record-keeping and reporting
requirements. So far, the Commission has received more than 5,600
public comment submissions related to the forex proposal.
Further, enactment of the Farm bill enhanced the CFTC's enforcement
authority over retail foreign currency. Since enactment of the bill in
June 2008, the CFTC's Division of Enforcement has filed 19 fraud
actions involving foreign currency transactions.
Sixth, the Commission has enhanced its market surveillance
capabilities by requesting more information from foreign markets that
provide direct access to American traders. Last year, the agency
strengthened the conditions under which ICE Futures Europe can list for
trading cash-settled contracts that settle based upon the prices of
contracts traded on the New York Mercantile Exchange (NYMEX). The new
conditions include requirements to provide Commission staff with trade
execution and audit trail data and access to ICE staff for on-site
visits to oversee compliance with the terms imposed by the CFTC. These
conditions build upon the prior cooperative arrangements between the
Commission and the United Kingdom's Financial Services Agency to
address cross-border oversight of the U.S. and U.K. energy markets,
including most notably the reporting of large trader positions in
linked energy contracts.
Seventh, the Commission has been very concerned about the lack of
convergence in the Chicago Board of Trade (CBOT) Soft Red Winter Wheat
contract over the past couple years. From July to December of 2008, the
futures price was between $1.15 and $2.00 over the Toledo cash price.
By late last year, the basis had narrowed to $0.67 per bushel and is
currently approximately $0.52.
Last October, Commissioner Dunn convened a meeting of the
Agriculture Advisory Committee to discuss the convergence problem. The
CBOT also was conducting its own reviews. From those reviews, the CBOT
decided to implement a variable storage rate proposal that will take
effect in July. The Commission will continue to monitor the
effectiveness of variable storage rates to see if they address the
convergence problem. If convergence does not improve, the Commission
will consider whether additional measures are necessary.
Further, in August, to ensure that position limits were
consistently applied, Commission staff revoked two no-action letters
that permitted two firms using certain index-based trading strategies
to exceed position limits in the wheat futures markets.
Eighth, the CFTC is working with the Securities and Exchange
Commission (SEC) on an ongoing project to harmonize regulations. In
October, the agencies released a joint report that contains 20
recommendations, including proposals for statutory and regulatory
changes to improve protections for the American public. Eleven of the
recommendations relating to the CFTC require legislation.
The House included some of our recommendations in its recently-
passed financial regulatory reform package. The bill would establish
similar firewalls for commodity and futures dealers that currently
exist for securities dealers. Securities regulations require the
establishment of firewalls between the research, investment banking and
trading arms of broker-dealers. Without parallel protection in the
futures markets, trading desks could use information developed by
research arms before that information is shared with the firm's
clients, raising serious questions about the integrity of the firm's
services to its clients and confidence in the markets. The House bill
also includes language authorizing the CFTC to police the markets for
disruptive trading practices and to ensure that the CFTC has the
ability to enact regulations that it determines are necessary to
implement the requirements of the Commodity Exchange Act.
When the House passed its financial regulatory reform bill,
however, staff had not yet finished drafting legislative language for
some of the changes recommended in the harmonization report. As such,
we will provide language to the Senate as they consider financial
regulatory reform legislation. Chief among these recommendations are
reforms to fiduciary standards for investment advisors and prohibitions
on using misappropriated government information to trade in the futures
markets.
Any person that offers investment advice to customers should
be governed by the same fiduciary standard, regardless of
whether the underlying financial instrument is regulated by the
SEC or the CFTC. Currently, broker-dealers, investment advisors
and commodity trading advisors are all subject to different
standards, depending on the particular financial instrument
that is offered, even though they perform the same function--to
deliver investment advice. We have recommended that there be a
uniform standard that financial advice should be solely in the
interest of the customer, without regard to the advisor's own
financial interests.
We have recommended banning using misappropriated government
information to trade in the commodity markets. In the movie
``Trading Places,'' starring Eddie Murphy, the Duke brothers
intended to profit from trades in frozen concentrated orange
juice futures contracts using an illicitly obtained and not yet
public Department of Agriculture orange crop report. Characters
played by Eddie Murphy and Dan Aykroyd intercept the
misappropriated report and trade on it to profit and ruin the
Duke brothers. In real life, using such misappropriated
government information actually is not illegal under our
statute. To protect our markets, we have recommended what we
call the ``Eddie Murphy'' rule to ban insider trading using
nonpublic information misappropriated from a government source.
Over-the-Counter Derivatives Reform
In addition to implementing the authorities established in the
Commodity Exchange Act, the CFTC also is working with Congress to bring
comprehensive regulation to the over-the-counter derivatives
marketplace.
Specifically, regulatory reform should, among other things:
Require that swap dealers and major swap participants
register and come under comprehensive regulation, including
capital standards, margin requirements, business conduct
standards and record-keeping and reporting requirements;
Require the use of transparent, regulated trading facilities
for standardized swaps;
Ensure that clearable swaps are submitted to and settled
through central clearinghouses; and
Provide the CFTC with authority to impose aggregate position
limits across both futures and OTC derivatives markets.
Resources
Before I close, I will briefly address the CFTC's need for
additional resources. Ten years ago, the CFTC was near its peak
staffing level at 567 employees, but shrunk by more than 20 percent
over the subsequent 8 years before hitting a historic low of 437. Due
to increased funding from Congress, the CFTC had more than 580 staff on
board at the beginning of Fiscal Year 2010, which is a significant
improvement. Still, merely raising our staffing levels to the same as a
decade ago will not be enough to adequately fulfill the agency's
statutory mandate. In the last 10 years, futures trading volume
increased almost five-fold. The number of actively traded futures and
options contracts increased seven-fold, and many of these have become
considerably more complex in nature. We also moved from an environment
with open-outcry pit trading to highly sophisticated electronic
markets. What was once a group of regional domestic markets is now a
global marketplace. What was once a $500 billion business has grown to
a $33 trillion industry.
Despite rapid advances in technology and the increased size and
number of regulated futures markets, funding for the agency has lagged
behind the growth of the markets, and the CFTC has struggled to keep
pace with the markets. While market participants have the technology to
automate their trading, we've yet to have the resources to employ
modern technology to automate our surveillance and oversight of
compliance. Further, the CFTC does not have the staffing levels or the
resources to conduct regular annual examinations of exchanges and
clearinghouses. Instead, we can conduct those examinations only
periodically and have no choice but to leave routine examinations of
intermediaries to self-regulatory organizations. The CFTC needs
resources to conduct yearly examinations of the registrants we
regulate.
For these reasons, it is appropriate for our staffing levels and
our technology to be bolstered to meet the new financial realities of
the day. As such, the CFTC's Budget and Performance Estimate for FY
2011, for existing statutory authorities, would increase the agency's
funding by $47.2 million to $216 million and would augment agency staff
by 95 FTE to a total of 745 FTE.
Additional funding would allow the CFTC to make much-needed
improvements to our surveillance and technology programs. Further, it
would allow the agency to increase staff levels to better keep up with
the growing futures and options markets.
The President's budget proposes additional appropriations for the
Commission contingent on the enactment of financial regulatory reform
legislation. Commission staff estimated that with enactment of H.R.
4173, the Commission would require an additional 238 FTE to carry out
its provisions. The budget recommends $45 million, including $27
million to provide for 119 additional FTE in FY 2011 and anticipates
funding in FY 2012 for an additional 119 FTE.
Closing
In closing, I am pleased to report that the Commission has been
actively utilizing existing authorities to oversee the regulated
futures markets. We have managed an active agenda, ranging from
implementing provisions of the 2008 Farm Bill to improving existing
regulatory schemes to working with Congress on new regulatory reforms.
I look forward to continuing to work with this Subcommittee on
important efforts to protect the American public.
I thank you for inviting me to testify today. I will be happy to
answer any questions you may have.
The Chairman. Well, thank you for your information. That
was very informative, and your last comments, I think all us,
we hear you. We hear you. But, I must say that we are in era,
right now, with deficits where we have to do more with less,
and so don't be over encouraged that there is going to be a big
bump right away. But your point is well taken and you justify
your need, and of course the process will go from there. I have
two or three things that came up. We get a lot of visitors, as
you well appreciate, and I would like to just cover about three
or four items here and then maybe come back in another round.
But the National Futures Association rules, which have been
approved with CFTC, allow customers to buy retail foreign
exchange contracts with 100:1 or 25:1 leverage.
As you know, you have approved these rules for many years
as consistent with the Act. Now the CFTC is proposing a
leverage requirement of 10:1, so I would like you to explain
the reason for the sudden change and what analysis was
conducted to justify it. NFA also has a tiered structure to its
leverage limits recognizing that different currencies have
different risks. For these currencies there is more risk
present, the exotic currencies, if you will. Customers have a
lower leverage limit, 25:1. NFA opposes or, excuse me, the NFA
requires 100:1 leverage limit for less risky standard
currencies. Did the CFTC consider this model and why did the
Commission ultimately decide to go with one size fits all? Talk
to us about that.
Mr. Gensler. I thank you for the question, and those
visitors that visit you also visit us quite regularly, as they
should, and it is welcome. The Commission put out a proposed
rule, and of course we are waiting to hear comments. We have
already gotten 5,600 comments, and expect more. It is a very
important rule to protect the public. In terms of leverage,
leverage is used to help protect the investing public, and
there are actually a number of regimes. We put out this 10:1
number. We looked at what the NFA is doing. We also looked at
what the exchanges are doing. And on the many contracts the
exchanges have, and I think there are nearly 80 foreign
exchange contracts on the various futures exchanges; leverage
ratios go from 10:1 all the way to 100:1, so there is a wide
range depending upon the currency and the risk in those
contracts.
Actually over in the securities world, there are also a
leverage ratios. At FINRA, which oversees some of those, the
leverage ratio is 4:1. So what we did in the rule is we put it
out for comment. We want to hear from the public, see what they
think. So I said, we have gotten a lot of comments on this. And
then we will try to do what is best to protect the public, but
we pick something really in the range. Maybe that is pretty
wide range, 4:1 to 100:1, obviously. I would say that the
narrower the range on the futures contracts, I believe, and I
am looking at some notes, range from probably 20:1 to 40:1.
That is probably the narrower range for many of the currency
contracts.
The Chairman. I appreciate that. Maybe you could comment,
and then I will yield. Do you agree the 10:1 leverage limit
that is proposed will greatly reduce the domestic forex trading
business for futures commission merchants and retail foreign
exchange dealers?
Mr. Gensler. Well, in putting out a proposed rule, we are
trying to comply with the statute in the farm bill and to best
protect the public. One of the things we are looking forward to
is comments exactly on this point as to whether the investing
public would still have access to invest in these products.
However, the reason for the leverage is really to protect an
individual against a rapidly changing market, or the volatility
in the marketplace so that they have some cushion or margin in
those contracts.
The Chairman. Thank you very much. At this time, Mr. Moran
is out of the room, so I will recognize Mr. Latta for any
comments or questions he might have.
Mr. Latta. Thank you, Mr. Chairman. Thank you very much for
being with us today. Kind of on those same lines right now
would you agree or disagree with the proposition that the
proposed leverage rule would drive retail FX business overseas?
If that were to happen, do you agree that it would defeat the
intent of Congress in passing a regulatory system for retail
forex in the first place?
Mr. Gensler. Well, I think as we understand it, and how we
put forward the rules, is how to best protect the investing
public. There are actually many places here in the U.S. as well
that somebody can invest. I think that it would be good to
harmonize the leverage ratio rules, whether it is the FINRA
rules for securities, or our rules that you have asked us to
do, or even the bank regulators on foreign exchange with the
banks. I think you raise a very good point, that these
transactions can move, as you say, either internationally or
domestically, and that would be good to harmonize rules, and so
we will be looking at that very closely. We haven't finalized a
rule, and we are taking comments now and even this hearing is
going to help inform us as well.
Mr. Latta. And probably to follow up on that, what is the
level of support or opposition for the rule? Have you got an
inkling? Is it 50/50, or where is it coming down on?
Mr. Gensler. Well, there are many attributes of the rule.
There are: disclosures; registration; there is capital as
Congress directed; there is capital for these foreign exchange
dealers as well. And so with 5,600 comments staff is still
going to need time to analyze them all, and there will probably
be well more comments before we finish this open period. I
think it is safe to say that the most comments, I am told, I
haven't read them, are on this leverage issue, but I believe
there is a great deal of support on many aspects of the rule,
but I will see how all the comments come in. I don't want to
pre-judge them. Then along with the four other Commissioners,
we will sort through the comments after staff summarizes them
for us.
Mr. Latta. Just to follow up on that again, when you are
doing the analysis, with the overall analysis, have you done
anything that would say how much business might go overseas if
these are promulgated, these rules? Do you have any idea what
the cost might be if they are promulgated?
Mr. Gensler. Well, what we are really focusing on is the
cost for the retail public. I mean there has been significant
fraud in forex. I think what this Committee and Congress did in
the farm bill, and why they directed us to write rules is to
fix the Zelener issue of these rolling foreign exchange
contracts and protect the public from being defrauded. There
has been significant cost to the public, and that is what we
are trying to address in putting forward and promulgating rules
consistent with the farm bill language.
Mr. Latta. Thank you. Thank you, Mr. Chairman. I yield
back.
The Chairman. Thank you. The chair recognizes Mr. Marshall.
Mr. Marshall. Thank you, Mr. Chairman, and pleased to have
you here. I would like to explore the same thing a little bit.
It seems to me that a number of the people who do forex trading
are just basically gambling. They think they can out guess the
market. This is their way of going about trying to make their
fortune. And, my take on that is it is usually foolish and you
are as likely to win as to lose. Since you have to pay a fee,
the net is going to negative on average. Zelener is one
illustration of fraud in a sense that people are suckered into
doing this thinking that this is the way they are going to make
their fortune, and representations are made concerning either
the safety or the likelihood of success that are just not
right. They are not true, and so having the authority, NFA and
others having the authority to go in and specifically address
that kind of fraud is important. That was the Zelener fix.
But I don't know that we intended to basically kill the
market. The reference to protect the public, it seems to me
there must be some legitimate uses of this by individuals
besides just gambling. Can you describe examples of people who
are legitimately, in the sense that they have some commercial
interest and they are trying to protect something, some
legitimate interest that people--that would cause somebody to
trade forex?
Mr. Gensler. Well, Congressman, I might separate out retail
investing public from the commercial and importer or exporter
certainly.
Mr. Marshall. Your rules only affect retail?
Mr. Gensler. It is really retail.
Mr. Marshall. So in the retail setting, can you think of
any examples of people that with legitimate hedging needs or--
--
Mr. Gensler. Let me say the Commission promulgated proposed
rules and looks forward to public comment, but it is to further
what Congress wants in that this business exists, that the
retail public, some want to diversify their risk. They might
take a view on where 100 shares of stock trades, or where the
retail public can open a futures account and take a view and
even speculate on the price of oil or corn or wheat. The retail
public, with certain protections, would be allowed to do that.
The challenge had been, for 3 decades or more, was that foreign
currency had an exemption from the original Act in 1974, and so
in many ways these are like futures. They are almost futures,
but they are being traded off-exchange, and so we are trying to
bring some of the protections, maybe not all of them, but some
of those protections to the public.
Mr. Marshall. What we are concerned about, and we just hear
from the industry, and what they are saying sounds right, in
the modern era where individuals who want to engage in this
sort of trading can do it from their home computer somewhere in
Europe or anywhere in the world really. You know, if our
leverage rules are 10:1 and the leverage rules elsewhere are
100:1, the business is going to move elsewhere. I don't know
that we have any mechanism to keep that from occurring, and the
elsewhere place that the business moves to may well be a place
that doesn't have the NFAs of this world trying to look out for
fraudsters. And so we are concerned that not only does the
United States lose some business, but there is no net good that
is done as a result of the effort. We are not effectively
protecting the public because the public is inclined to have
100:1 leverage as opposed to 10:1 leverage and just goes
elsewhere.
In fact, it has the opposite effect because elsewhere is a
place where the public is in more danger than the public would
be here. So, we are a little concerned that the leveraging
requirements, specifically, could be problematic.
Mr. Gensler. You raise a very good point. Capital and risk
doesn't know any geographic boundary. This is one of the issues
in our efforts with Congress to reform the over-the-counter
derivatives marketplace as well. But I would note that the nine
leading currency futures contracts, I have this list, range
from a 13:1 leverage to 45:1. I mean we were referencing NFA,
which is also important, but these are currency future
contracts that I am talking about: the Swiss franc, the British
pound, the Australian dollar, Japanese yen, the euro. These are
the major currencies on the futures exchanges.
So I mean we want to hear from the public. We want to do
exactly what you said, Congressman, to make sure the public is
better protected on, particularly, these rolling spot FX, which
let me just say the public is charged a fee every time they
roll. Every 2 days they roll, they roll, they roll, they get
charged a fee. And we just want to bring some rules as Congress
has directed us to, to best protect the public but still allow
the public to invest if that is what they decide to do.
Mr. Marshall. We have a small enough group here. I guess we
will have a second round?
The Chairman. Oh, yes.
Mr. Marshall. Okay. Thank you.
The Chairman. Thank you. The chair recognizes the gentleman
from Kansas, the Ranking Member, Mr. Moran.
Mr. Moran. Mr. Chairman, thank you very much. Chairman
Gensler, thank you for joining us. Just a couple of different
areas I would like to pursue. Just in a general sense, tell me
how things are different at the CFTC today than they were say 2
years ago or a year ago. Are we prepared in different ways? Are
we staffed in different ways? Do we have a different focus?
What has happened at the CFTC with you as the Chairman, as well
as the change or the recognition that dramatic things happened
in our economy involving some of the products that are
regulated?
Mr. Gensler. I thank you for that question. A number of
things, and let me say that it is not because I am there. I
think a lot of things have changed but one is staffing. We
have, as I say, about 600 people versus 437 just a year and a
half ago. So we had basically a hiring freeze for 4 or 5 years.
I mean it wasn't technically that, but that is kind of how it
worked. Two, I think that we are far more engaged in our
enforcement efforts policing the markets, and partly because of
the farm bill, we have started to look at some markets we
couldn't before. So, what is traded down on this exempt
commercial market, ICE is now regulated as Congress had asked
it to do. We also went forward with the contracts in the United
Kingdom, ICE UK, and we entered into an agreement with the
regulators there that brought greater oversight and
coordination on the oil contracts that are on that market with
our markets.
Last, if I just might say, I think we brought greater
transparency. It is incremental, but through our Commitments of
Trader's report, we for the first time are putting out data
weekly on swap dealers involvement in the markets and hedge
funds involvements in the markets, and now quarterly on index
investors involved in some markets, and we have brought some
greater transparency as well.
Mr. Moran. Thank you for the answer. Let me ask about a
specific issue, your position limit rule. You have issued a
rule pursuant to Section 4a(a) of the CEA, and it appears to me
that in order to issue this rule, you have to have a finding
there is excessive speculation causing unwarranted changes in
price of the commodity, or you must have the belief that that
is going to happen, and therefore you can step in and prevent
that from happening. So the CFTC is allowed to set position
limits to prevent excessive speculation, but the only finding
that I am aware of is the study that the CFTC did in 2008 that
could not establish a link between excessive speculation and
the increase in commodity prices that we in Congress were so
concerned about. Has there been an additional study beyond that
report? Is there something now that better ties so-called
excessive speculation with the price of commodities?
Mr. Gensler. This is a case where we put out a proposed
rule to re-establish position limits in the energy markets.
They, of course, existed until the summer of 2001, just 9 years
ago, through the exchanges. We asked our General Counsel last
summer in hearings, do we have to have a finding that there has
actually been excessive speculation that has caused a burden to
interstate commerce or can it be prospective? And he studied it
thoroughly and offered the opinion as General Counsel, no, it
can be prospective. It doesn't have to be a historical finding.
That is really what the agency has done for decades in the
agricultural space and used to do with the exchanges in the
energy space. The concept for decades has been to ensure that
there are a certain number of actors on the stage, that the
markets are not too concentrated. The interpretation of a
couple decades ago in the agricultural space was to have a
certain limit that ensures that there is at least of number of
speculators in the marketplace, and that is what this proposed
rule actually did. It basically took the agricultural formula
and put it out to comment for energy commodities, we are asking
the public is this going to promote fair and orderly markets?
We are looking forward to hearing from the public whether we
should re-establish some form of limits consistent with the
philosophies that have been done in the past.
Mr. Moran. There is no current analysis or specific study
related to this issue that is pending or that would be
available to Congress as a result of CFTC action. What I am
looking for, is there something that contradicts the 2008
report that couldn't find that link?
Mr. Gensler. No. If you are looking for a link on our
website, no.
Mr. Moran. I am actually looking for a link that says that
excessive speculation is causing fluctuation or increases in
commodity prices.
Mr. Gensler. It is really--and I think this is what our
agency has been tasked to do for decades--how do we best
promote a market that would be fair and orderly. One of the
aspects of that, which Congress asked us to do, and it said,
``shall set position limits,'' is to best protect the markets
and bring diversity in the markets. That is what we have done
in the agriculture markets. That is what we wanted with the
exchanges help in energy, and so we are asking the public and
really looking forward to hearing from the public, whether this
helps promote the diversity in markets and avoiding
concentrated positions or what one might call excessive
positions.
Mr. Moran. Thank you, Mr. Chairman.
The Chairman. Thank you. I see that the Chairman has joined
us, so the chair recognizes Chairman Peterson.
Mr. Peterson. Thank you, Mr. Chairman. Thank you and the
Ranking Member for holding this hearing. Chairman Gensler,
welcome.
Mr. Gensler. Good to be with you, Mr. Chairman.
Mr. Peterson. I am sorry I am a little late here so I don't
know how much of this has been covered but on this proposed
change in leverage on the forex rule, as I understand it, the
NFA or you in combination have increased the capital
requirements to $20 million or something, is that correct?
Mr. Gensler. Yes. I think that is consistent with what was
in the farm bill. I don't remember the exact language but the
capital rule was actually addressed in the farm bill.
Mr. Peterson. Yes, so we knocked a whole bunch of people
out of this system because of that capital requirement. People
that were in business aren't in business anymore because they
can't meet that, I guess.
Mr. Gensler. Well, it is to ensure that the firms, these
retail foreign exchange dealers, have something behind them.
Mr. Peterson. Yes. I don't quite understand what you are
trying to get at here by changing this leverage, because as I
understand how this works, the NFA, which you guys have been
working with, you have this 100:1 rule. The way it works if you
put in a $1,000 under a $100,000 contract the way it works in
the real world is when you have $500 loss they close you out.
So I don't get what we are trying to accomplish here by
lowering this to 10:1. It almost seems like you are putting
them at more risk. More of their money is going to be lost
before they are closed out under that rule than under the
current rule. Who are you trying to protect here? I don't quite
get it.
Mr. Gensler. We are only trying to protect the public. It
is a proposed rule, and, of course, as you may know, we have
gotten a lot of comments, 5,600 comments, to date, and there
are a lot of aspects in the rules, disclosure, registration.
But, on this leverage piece, on the leverage piece what we put
out for comment to hear from the public is 10:1. There is
actually a range. NFA is at 100:1, as you said on certain
currencies.
Mr. Peterson. Right.
Mr. Gensler. And then on the futures markets themselves
there are 79 different contracts and those contracts range from
10:1 to 100:1, but the bulk of them are in the 20:1 to 30:1.
There are some at 40, I think the euro might be at 40:1. And so
we are really looking forward to comment on this, but whether
we end up at 10:1 or like the exchanges have other ratios, the
protection, the protection is basically to have a cushion or
some modest margin there.
Mr. Peterson. Well, yes, I understand that, but in the
futures market you are at a lot more risk. You can actually
lose more money than you put in in the futures market.
Mr. Gensler. Well, actually it is very similar. These spot
contracts are like rolling futures, the futures market will
close you out as well.
Mr. Peterson. Well, right, or you have to make your margin
call.
Mr. Gensler. Right, so it is actually very similar to the
futures.
Mr. Peterson. Yes, but I don't think the futures market
works that way. If half of your margin is used up, you are
closed out. That is not what they do. They have a margin call
twice a day or whatever it is and you have to either meet it or
you close the contract out. It is a different situation. I
guess I don't understand the forex, where these guys are
operating that way. And as I understand that market, you are
not at as much exposure necessarily as you are if you are in
the futures market.
Mr. Gensler. Well, one of the good things about putting out
a proposed rule is we are getting a lot of comments, and this
hearing is helpful as well, and it is a question of whether you
have more protections on a futures exchange or less. Often you
have more protections because of the transparency----
Mr. Peterson. Well, that probably makes sense.
Mr. Gensler. So what we will do amongst the five
Commissioners, we will wait until the comment period is over.
We will hear all the comments. Staff will summarize them and
then we will have to address them. So, it is not only those on
leverage but any other comments that we have.
Mr. Peterson. What is the timing of this? When are you
going to be making the decisions?
Mr. Gensler. Well, we are still in the open period. I have
to remember--I think March 22 is when the period closes and
with 5,600 comments probably with today's hearing we will get a
couple thousand more, but it will take time to try to sort
through and properly review all the comments. I think this is
going to probably go well into the summer if I have to guess
how long it takes to review all these comments and properly
have a process at the Commission.
Mr. Peterson. All right. Well, thank you, and keep us
appraised of what is----
Mr. Gensler. I thank you and I thanked the whole Committee
earlier, so I want to thank you personally in all that you have
done on over-the-counter derivatives reform because we really
need to do it, and the House has put forward an effort now. We
are working with the other side and hopefully be back with you
again.
Mr. Peterson. Well, hopefully they act like they are going
to do something so we will keep our fingers crossed.
Mr. Gensler. Yes. We are doing a little bit more than that
but yes.
Mr. Peterson. Thank you. Thank you, Mr. Chairman.
The Chairman. Thank you, Mr. Chairman, and the chair now
recognizes the gentleman from Texas, Mr. Conaway. Pass. We
would recognize the gentleman, I believe we are lined up here,
let me look here, Mr. Kissell from North Carolina.
Mr. Kissell. Thank you, Mr. Chairman, and welcome, Chairman
Gensler. Just a couple questions. We were talking about
budgeting and staffing. In terms of your responsibilities for
investigations and oversight, are you adequately staffed there
to try to make sure that those areas are sufficiently covered?
Mr. Gensler. I thank you for asking that. I think we are
making headway. We are not quite there. We have put in, and the
President has supported it in his 2011 budget, I think we need
probably 200 people in our enforcement area. We are around 145,
150 right now. It is a great challenge. Maybe it is because of
this crisis, maybe some of the additional responsibilities in
the farm bill, but we have a lot of fraud cases that come in,
but the manipulation cases take a lot of resources to pursue.
Also, in terms of oversight I believe that we should go to
annual reviews of exchanges and clearinghouses for what is
called rule enforcement reviews. And they are very
constructive. The exchanges benefit, the public benefit, I
think we benefit. We have been pretty much putting them off for
every 3 year reviews because of the budget problems. The 2011
budget would support us to get them to annual.
The last piece that we are trying to do is get 21st century
computers and technology to do automatic flagging when there is
some trade in the market that is really an illegal trade. We
should flag it electronically and see it because humans can't
watch hundreds of thousands of trades, but those would be the
three areas we are trying to get to.
Mr. Kissell. And what would be the challenge in the
computer systems? Is it strictly money or just developing
software or what would that be?
Mr. Gensler. It was over the years a number of things, but
I think with the President's support and the 2011 budget, we
will be able to take this on. But it was storage capacity and
computers. We are now where we need to be on the storage
capacity. Now we have to write the algorithms and so forth. We
have been doing that. We are actually working with the
exchanges. They have been very helpful too because they have
some algorithms they use. I think it is probably going to take
a little bit more and go into 2011 before we get the bulk of
this done.
Mr. Kissell. Well, that would seem to be a very important
tool to have that constant monitoring in that way.
Mr. Gensler. We agree, and we think the exchanges too need
to do it. It is not just the agency but together I think it is
a very important tool.
Mr. Kissell. Just general thoughts about as we have pending
legislation and financial reforms and the farm bill and just
where we are in general, can you just offer general thoughts
about, once again, the pending legislation's strengths,
weaknesses, areas we are not addressing?
Mr. Gensler. Well, I think that House-passed bill is very
strong. As you probably know, I hoped to maybe have the same
success on the other side that we covered mandating trading.
That has been quite a flash point in the debate over on the
other side as to whether to mandate it. The House mandated
there would be trading. And then the second area that is quite
a debate is this end-user exception, how wide, how narrow. I
tend to be in the camp of narrow, that if we have it, it should
be for commercial end-users. You know, the rural cooperatives
that come in here or so forth and that are hedging their needs
and not for big financial companies. I, quite frankly, don't
know why a transaction between a large bank and a large hedge
fund would be out of this or a large bank or a large mortgage
finance company, I think. But those seem to be the two points
that are the greatest debate over on the Senate side. Whether
there is a trading requirement, which you did include in the
House, and just how wide or narrow an end-user exception might
be.
Mr. Kissell. Thank you, Mr. Chairman. I yield back my time.
The Chairman. Thank you. Second round. We go to Mr.
Marshall.
Mr. Marshall. I think you are almost off the hook here. I
want to pick up on something that the Chairman mentioned, and
that is that you have increased capital requirements. What that
means are at least two things. The number of characters,
potential fraudsters, that are out there is diminished. I mean
if you are in this area and you don't have the right capital
then I would think, per se, you are guilty of something. You
can be stopped or you can be--maybe there is a criminal penalty
that could be assessed against you. So it limits the number of
people. It also makes it less likely that they are going to
commit fraud because they have a lot of capital involved in the
game. They are probably going to be fairly careful.
So if the leverage rules are designed to minimize fraud, I
actually think your capital requirement is many giant steps in
the direction of accomplishing that. And then again there is
this worry that changing the leveraging rules is going to
prompt people to go play in other markets that are more
dangerous, and, hence, the public sees less protection rather
than more. And I guess my instinct is to say is if there is a
way for you to leave the leveraging alone or leave it in charge
of the NFA and let them worry about individual contracts, then
you all don't have to worry about it.
That might be wise in the circumstance. I absolutely agree
with what you have done where position limits are concerned. I
think that we are--and the exchange between you and Mr. Moran
was kind of interesting to me. It is true that the evidence
produced thus far, at least the analysis done this far by
staff, as I understood it, they are just not able to identify
an impact on the market as a result of the stuff that we have
been concerned about, the absence of position limits. But I
think we are in this environment where there has just been so
much smoke, so much noise, so many people saying this is
absolutely a problem. The consequences of it being a problem
are so dire to so many people that the Commission is saying,
``Okay, the burden of proof is on those who want to have no
position limits. If you can show this is safe, fine, but in the
absence of a demonstration that this is safe and it is not
going to have these adverse impacts on the market, we are going
to take action to impose position limits like we have done in
other areas.''
It seems entirely reasonable to me. Where oversight and
enforcement is concerned, I am worried that you all are about
to get a--if our bill, that portion of our bill which gives you
authority over the derivatives market becomes law, you have a
massive build-up in front of you, I mean a huge organizational
challenge.
I am sure we are there to try to help but it is going to be
on you to figure that one out because that is really going to
be a challenge, it seems to me. I don't really have a question.
I just wanted to offer those observations.
Mr. Gensler. I thank you and maybe we were too modest when
we put in for another 238 people in the House-passed bill, but
that is what we put in. If the President signs it and it comes
a few years from now, and I am still there and we need more, I
will tell you or hopefully my successor will.
Mr. Peterson. Will the gentleman yield?
Mr. Marshall. Oh, absolutely.
Mr. Peterson. I just wanted to follow up. Are the foreign
markets--you have been talking to those guys about a lot of
these different things and trying to get these regulations
harmonized. Are they doing something similar in this forex
market regarding margins?
Mr. Gensler. You ask a very good question, and we will look
at that obviously as we go through this finalizing the rule and
so forth. Most of my conversations on foreign exchange with the
European regulators is that they may cover foreign exchange
swaps in their overall derivatives rules. That is what they are
looking at, and there is still a debate here whether foreign
exchange swaps are included as the Chairman and I have talked.
I think they should be, whether it is an interest rate swap or
a currency swap. It helps lower the risk in the marketplace and
central clearing, particularly central clearing has the same
issues. It does look like the European Commission at the staff
level so far, they want to cover it as well, but they are
watching to see what we do in that regard. I know I talked
about the institutional side rather than the retail, but I
think we will take a look at the leverage ratios overseas.
Mr. Peterson. Yes, because we have been told that if
people--if we get too carried away here they are just going to
go to the Bahamas. I don't know if those folks down there that
are operating have any--they are probably not even in this
discussion, I mean the Europeans and so forth but I mean----
Mr. Gensler. Right.
Mr. Peterson. So we need to keep an eye on that. We don't
want people to be trading down there and actually putting
consumers at more risk. With the Chairman's permission, I keep
reading this--in our bill, I keep reading that somehow or
another we are going to let these financial types off the hook
in this regulation of these derivatives, but in our bill all of
these big guys that are doing these financial trades are going
to be required to put up margin and collateral because they are
major swap dealers or major swap participants, so they are
covered. It is just that they are not covered the way some
people want, but clearly all of those folks, those big guys
that are doing this financial stuff are going to have to put
their money up even with the end-user exemption.
Mr. Gensler. Well, Mr. Chairman, as you know, because I am
very supportive of your efforts in this area, and I think you
did a tremendous job, there is a possibility under the House-
passed bill that a large financial institution that is not a
swap dealer----
Mr. Peterson. But I can't imagine who that would be.
Mr. Gensler. Many major insurance companies, many major
hedge funds, many major mortgage finance companies, leasing
companies, and the like. So these large entities, I will just
use Bank for International Settlements. These are worldwide
statistics on this big $600 trillion market, but when they look
at the market in interest rate derivatives, very common
derivatives, about 34 percent is between swap dealers and swap
dealers, but 57 percent is between swap dealers and other
financial institutions, the insurance companies, the leasing
companies, the hedge funds.
It is that--whether it is 57 percent or only 40 percent but
it is that group that I know from our private conversations you
would like to cover. I believe you and I are in the same place.
We want to cover it. It is a possibility in the House-passed
language that said end-users hedging commercial operating or
balance sheet risk that these financial firms might say we are
hedging a commercial risk. We are an insurance company. We are
hedging a commercial risk. We are a leasing company. And so I
know from our discussions we both want to cover them, but it
may be that 2 years from now the clever lawyering will say they
are out. And that is unintended. I think it is unintended
surely. The other part of the market, there may be ten percent
of the market that is the electric utilities, I think you did
want to give them an end-user exception.
Mr. Peterson. Well, not an exception. Just that they use a
different kind of collateral.
Mr. Gensler. Right. Right.
Mr. Peterson. And that is what we are trying to get at, but
I guess if you have some suggestions about how we could tighten
up that language for those financial types, we would be willing
to look at it because----
Mr. Gensler. I would be delighted to share that with you.
Mr. Peterson. In conference maybe we can address that, but
we felt like most of these folks that are actually putting risk
into the system are going to be covered because the dealers are
participants.
Mr. Gensler. I sense, Mr. Chairman, that you and I share
the same goal to cover these financials, and we could work
together to have the language to cover what I call the 57
percent, and then the other ten or so percent which is what I
call the non-financial end-users. You know, if Congress deems
them to be out for other reasons, they are out.
Mr. Peterson. Okay. Thank you, Mr. Chairman.
Mr. Gensler. Thank you very much.
The Chairman. I think we have time for--we have a new
joiner. Any questions? Thank you very much. We are going to
come to closure. I have one last question, and if you want to
jump back in, and I will yield to Mr. Moran here in a moment.
But just last, if I could, Mr. Chairman, CFTC is required to
evaluate contracts at least once a year to determine whether
they serve a significant price discovery function. What is the
Commission's plan for this review process? How time and labor
intensive is the process, if you would?
Mr. Gensler. Well, it is very time intensive, but
fortunately it is not dozens of staff but it is time intensive
for a small group. We put out 43 contracts to get public
comment. We will sort through that here in the next couple
months, to finish that. But then the additional review, what
you are referring to annually, is to just look at the whole
marketplace to see if there are additional contracts to add to
that list. And I think that we have a pretty darn good staff
and they sort of have it nailed down. But you are right. There
is a core handful of people that are spending pretty much full
time on this, but it is measured in the single digits right
now. It could grow of course.
The Chairman. I understand. Thank you. At this time, I
think we are going to come to closure if I don't see any
signals of anybody wanting to ask further questions. But before
we adjourn, I would like to invite the Ranking Member to make
any comments he would like to make.
Mr. Moran. I thank the Chairman for holding the hearing and
thank Mr. Peterson for his continued interest in this topic. I
think it is an important one to our economy. And, Chairman
Gensler, I look forward to working with you to see that we come
up with the right legislative framework for you to conduct the
appropriate level of supervision and regulation, and I thank
you for your testimony today. Thank you, Mr. Chairman.
Mr. Gensler. And I thank you for those warm remarks, and
the Chairmen for all your efforts with the CFTC.
The Chairman. With you and the chair and all these chairs,
we have lots of chairs, but in that respect I too want to join
with Mr. Moran. Chairman Peterson, thank you for your
leadership and your intensity to get into this. We have come
out pretty good, and we all appreciate the hard work that you
have done for a long, long time, and standing up and financial
services and so on and so on and so on. I could make lots of
comments. And I agree with the Ranking Member, Mr. Gensler. We
think you are doing a good job. Just stay right on it and
communicate with us, and we will do our best to work with you
to be sure that we can stay viable and continue down this road
that we are on. So under the rules of the Committee, the record
of today's hearing will remain open for 10 calendar days to
receive additional material and supplement the written response
from the witness to any questions posed by Members. The hearing
of the Subcommittee on General Farm Commodities and Risk
Management is adjourned.
[Whereupon, at 10:28 a.m., the Subcommittee was adjourned.]