[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
 HEARING TO REVIEW IMPLEMENTATION OF PROVISIONS OF THE DODD-FRANK WALL
                       STREET REFORM AND CONSUMER
                  PROTECTION ACT RELATING TO POSITION
                                 LIMITS

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

                                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

                               __________

                           DECEMBER 15, 2010

                               __________

                           Serial No. 111-60


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



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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania,            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           DAVID P. ROE, Tennessee
STEVE KAGEN, Wisconsin               BLAINE LUETKEMEYER, Missouri
KURT SCHRADER, Oregon                GLENN THOMPSON, Pennsylvania
DEBORAH L. HALVORSON, Illinois       BILL CASSIDY, Louisiana
KATHLEEN A. DAHLKEMPER,              CYNTHIA M. LUMMIS, Wyoming
Pennsylvania                         THOMAS J. ROONEY, Florida
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
WILLIAM L. OWENS, 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

                Liz Friedlander, 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               BLAINE LUETKEMEYER, Missouri
LARRY KISSELL, North Carolina        THOMAS J. ROONEY, Florida
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

                              ----------                              
                                                                   Page
Boswell, Hon. Leonard L., a Representative in Congress from Iowa, 
  opening statement..............................................     1
    Prepared statement...........................................     3
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, 
  opening statement..............................................     8
Moran, Hon. Jerry, a Representative in Congress from Kansas, 
  opening statement..............................................     4
    Prepared statement...........................................     6
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................     7
    Prepared statement...........................................     8

                               Witnesses

Gensler, Hon. Gary, Chairman, Commodity Futures Trading 
  Commission, Washington, D.C....................................     9
    Prepared statement...........................................    11
Chilton, Hon. Bart, Commissioner, Commodity Futures Trading 
  Commission, Washington, D.C....................................    14
    Prepared statement...........................................    16
Collura, James M., Vice President for Government Affairs, New 
  England Fuel Institute; Founding Member and Spokesman, 
  Commodity Markets Oversight Coalition, Washington, D.C.........    35
    Prepared statement...........................................    37
Duffy, Terrance A., Executive Chairman, CME Group Inc., Chicago, 
  IL.............................................................    42
    Prepared statement...........................................    43
Newman, Joel G., President and CEO, American Feed Industry 
  Association, Arlington, VA.....................................    47
    Prepared statement...........................................    49
Sprecher, Jeffrey C., Chairman and CEO, IntercontinentalExchange, 
  Inc., Atlanta, GA..............................................    53
    Prepared statement...........................................    54
Jones, Robert, Senior Vice President, ABN AMRO Clearing Chicago 
  LLC; Member, Risk Management Committee, National Grain and Feed 
  Association, Chicago, IL.......................................    56
    Prepared statement...........................................    57


 HEARING TO REVIEW IMPLEMENTATION OF PROVISIONS OF THE DODD-FRANK WALL
                       STREET REFORM AND CONSUMER
                  PROTECTION ACT RELATING TO POSITION
                                 LIMITS

                              ----------                              


                      WEDNESDAY, DECEMBER 15, 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 10:00 a.m., in 
Room 1300, Longworth House Office Building, Hon. Leonard L. 
Boswell [Chairman of the Subcommittee] presiding.
    Members present: Representatives Boswell, Schrader, 
Kissell, Peterson (ex officio), Marshall, Murphy, Moran, 
Johnson, Conaway, Luetkemeyer, Lucas (ex officio), and 
Neugebauer.
    Staff present: Aleta Botts, Liz Friedlander, John Konya, 
Clark Ogilvie, Rebekah Solem, Tamara Hinton, Kevin Kramp, Josh 
Mathis, Jamie Mitchell, 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 provisions of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act relating to position limits will come to order.
    I would like to thank everybody for joining us today as we 
review where we are at on the implementation provisions of the 
Dodd-Frank regulatory reform law relating to position limits.
    This hearing is very timely, as just recently the CEO of 
Sanderson Farms said it was delaying forward purchase of feed 
until the CFTC had issued position limit rules, and that he 
doesn't like to buy grain when ``index funds own 25-30 percent 
of the crop.'' So I wouldn't say that is why we are here today. 
I would like to review where we are at on this.
    I see that Chairman Peterson has joined us and I would like 
to take a moment, if I could, and divert from the hearing and 
recognize the outstanding work and dedication of Chairman 
Collin Peterson for leading this Committee through some of the 
most challenging times that the agriculture community has faced 
since the farm crisis of the 1980s. Specifically, he has 
championed the bringing of oversight and transparency to the 
derivatives market to protect end-users. And if everyone will 
indulge me, I would like to take a moment and thank Chairman 
Peterson. Thank you, Collin Peterson.
    We have Members who will be leaving us for different 
reasons, and we are going to give them a sad farewell as we 
work through this process today. And I am sure I will have an 
opportunity to recognize Mr. Moran, as he is going on to his 
new endeavors, and all the rest to their new endeavors.
    I might just at this moment add that my very special 
assistant, Alexis Taylor, from east Iowa, is going to be 
leaving our office and going over to the Senate. She is going 
to be the legislative assistant for Senator Baucus. So we 
congratulate her on her, I guess we could say, promotion. She 
will be very involved there for the next farm bill and that is 
good. We wish her well.
    Congress required the establishment of enforcement of 
position limits to ensure that no single entity holds too much 
power over the marketplace. Position limits are essential to 
the function of effective and efficient markets, and to inject 
confidence in the markets by providing reliable and transparent 
price signals.
    Some will argue that the very existence of position limits 
operates contrary to the principles underlying a free market; 
however, limits ensure that speculative positions are not in 
control of a contract, enhance a market, and make price signals 
a more accurate representation of the true market price.
    There is a strong need to ensure that the market is not 
being manipulated by a few players, and we are closely watching 
the pace of rulemaking on the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, especially the rule relating to 
position limits.
    I think that all of us on the Subcommittee would agree that 
the Commission must take the time to get this right. However 
the Commission also must move quickly to ensure the individuals 
that use the markets for bona fide hedging purposes have the 
confidence that these markets are fair markets. Confidence by 
hedgers in these markets is critical, to say nothing of the 
importance of the confidence by the Congress in the 
Commission's ability to implement all the regulations required 
by the Act.
    Back in March, this Subcommittee held a hearing on 
rulemaking pertaining to the implementation of Commodity 
Exchange Act provisions contained in the 2008 Farm Bill. At the 
time, the rule on provision limits was pending for several 
energy contracts. That rule was withdrawn after the Dodd-Frank 
Act made further changes. I understand this issue is on tap for 
discussion at tomorrow's Commission meeting. So I hope that our 
hearing today will provide some valuable input into the forum 
along with a chance to review what the Commission's plans are 
on this topic.
    I am looking forward to hearing today from Chairman Gensler 
who has used his leadership on the Commission to be a powerful 
advocate for limits, and to ensure the Commission is on a 
speedy though challenging path towards full implementation of 
the law.
    I am also pleased to welcome Commissioner Chilton to the 
Committee. Mr. Chilton has expressed concerns about the pace of 
the regulatory process, and we look forward to discussing these 
concerns in more detail.
    Additional reactions from the witnesses on the second panel 
on the pace of the rulemaking and the content of regulations on 
position limits will be important to assessing the needs to 
move this issue along in the Commission's priority list.
    Before I turn to my good friend and future Senator from 
Kansas, Jerry Moran, for an opening statement, Jerry, I just 
want to thank you for the knowledge and support in working 
together. You have been a good colleague on this, and I 
appreciate the service you have given to us here on the House 
Agriculture Committee and we look forward to having a friend 
over there in the Senate. We wish you Godspeed in your work 
over there and much success.
    [The prepared statement of Mr. Boswell follows:]

  Prepared Statement of Hon. Leonard L. Boswell, a Representative in 
                           Congress from Iowa

    I would like to thank everyone for joining us here today as we 
review the state of the implementation provisions of the Dodd-Frank 
regulatory reform law relating to position limits. This hearing is very 
timely as just yesterday, the CEO of Sanderson Farms said it was 
delaying forward purchases of feed until the CFTC had issued position 
limit rules and that he doesn't like to buy grain when ``index funds 
own 25-30% of the crop.''
    I would especially like to thank our witnesses. The Committee looks 
forward to hearing your valuable insight.
    I would like to take a moment and divert from the hearing and 
recognize the outstanding work and dedication of Chairman Colin 
Peterson for leading the Agriculture Committee through some of the most 
challenging times the agriculture community has faced since the farm 
crisis of the 1980's. Specifically he has championed bringing oversight 
and transparency to the derivatives markets to protect end-users. If 
everyone would indulge me to please take a moment and thank Chairman 
Peterson.
    Thank you for that indulgence. Congress required the establishment 
and enforcement of position limits to ensure that no single entity 
holds too much power over the marketplace. Position limits are 
essential to the function of effective and efficient markets and to 
inject confidence in the markets by providing reliable and transparent 
price signals. Some argue that the very existence of position limits 
operates contrary to the principles underlying a free market. However, 
limits that ensure that speculative positions are not in control of a 
contract enhance the market and make price signals a more accurate 
representation of the true market price.
    There is a strong need to ensure that a market is not being 
manipulated by a few players, and I am closely watching the pace of 
rulemaking on the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, especially the rules relating to position limits. I think that all 
of us on this Subcommittee would agree that the Commission must take 
the time to get this right. However, the Commission also must move 
quickly to ensure that individuals that use these markets for bona fide 
hedging purposes have the confidence that these markets are fair 
markets. Confidence by hedgers in these markets is critical, to say 
nothing of the importance of the confidence by the Congress in the 
Commission's ability to implement all of the regulations required by 
the Act.
    Back in March, this Subcommittee held a hearing on rulemaking 
pertaining to the implementation of Commodity Exchange Act provisions 
contained in the 2008 Farm Bill. At the time a rule on position limits 
was pending for several energy contracts. That rule was withdrawn after 
the Dodd-Frank Act made further changes.
    I understand that this issue is on tap for discussion at tomorrow's 
Commission meeting, so I hope that our hearing today will provide 
valuable input into that forum along with a chance to preview what the 
Commission's plans are on this topic.
    I am looking forward to hearing today from Chairman Gensler, who 
has used his leadership of the Commission to be a powerful advocate for 
limits and to ensure that the Commission is on a speedy, though 
challenging, path toward full implementation of the law. I am also 
pleased to welcome Commissioner Chilton to the Subcommittee. Mr. 
Chilton has expressed concerns about the pace of the regulatory 
process, and I look forward to discussing these concerns in more 
detail. Additionally, reactions from the witnesses on the second panel 
on the pace of the rulemaking and the content of the regulations on 
position limits will be important to assessing the need to move this 
issue along in the Commission's priority list.
    Before I turn to my good friend and future Senator from Kansas, 
Jerry Moran for an opening statement I would like to thank him for his 
knowledge and constant support of agriculture in the House.

    The Chairman. And at this time, I would like to recognize 
Mr. Moran for whatever you would like to say.

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

    Mr. Moran. Mr. Chairman, thank you very much. I appreciate 
the friendship that you and I have encountered now for a long 
time in the House of Representatives, and I appreciate the 
leadership that you provide on this Subcommittee and our full 
House Agriculture Committee. The House Agriculture Committee 
has really been my home during my time as a Member of the House 
of Representatives, and this is a significant part of what I 
enjoy the most about serving in Congress.
    In regard to today's hearing, Mr. Chairman, I certainly 
believe that Congressional oversight is a good thing. And while 
I will not be here in the new year to chair this Subcommittee, 
I believe that my successor, and the incoming full Committee 
Chairman, Mr. Lucas, will readily exercise the House 
Agriculture Committee's oversight authority over the Commodity 
Futures Trading Commission.
    In regard to the topic of position limits under the Dodd-
Frank Act, however, I believe it is premature to hold an 
oversight hearing, because the CFTC has yet to release a 
proposed rule. Thus we are left to hold a hearing based on 
hearsay, a few exchanges between CFTC's Commissioners during a 
hearing on another issue, and a speech and an opinion editorial 
released to the press by Commissioner Chilton. Having said 
that, I am concerned about where the Commission's position on 
position limits discussion is going.
    First, I would like to note that early on in the 
legislative process, both I as Ranking Member, and the Ranking 
Member, Mr. Lucas, of the full Committee, and other Members of 
the House Agriculture Committee, introduced amendments to place 
limits on the authority of the CFTC to impose position limits. 
During that debate, we were clear that the commodity futures 
market needed greater transparency, and we were in favor of 
creating mandatory reporting requirements. We were hesitant, 
however, to give the CFTC broader powers to impose position 
limits until we had adequate information about the over-the-
counter markets. We felt that Congress needed to know who was 
trading on the OTC market, the size of the OTC market, and 
whether the OTC market was or was not having an adverse effect 
on exchange-traded markets before bestowing greater position 
limit authority on the Commission.
    Unfortunately, those amendments did not pass, and we now 
have a situation where a regulator may be contemplating 
imposing position limits without having access to the 
information necessary to determine the appropriate position 
limits, or to enforce such position limits once they are set.
    Despite what some believe is a mandate for the Commission 
to set position limits within a definite period of time, the 
Dodd-Frank legislation actually qualifies CFTC's position limit 
authority. Section 737 of the Dodd-Frank Act amends the 
Commodity Exchange Act so that section 4a(a)(2)(A) states: 
``The Commission shall by rule . . . establish limits on the 
amount of positions as appro-
priate . . . .''
    The Act then states in subparagraph (B) for exempt 
commodities, the limit required under subparagraph (A) shall be 
established within 180 days after the date of enactment of this 
paragraph.
    When subparagraphs (A) and (B) are read in conjunction, the 
Act states that when position limits are required under 
subparagraph (A), the Commission shall set elements within 180 
days under paragraph (B). Subparagraph (A) says the position 
limit rule should be only prescribed when appropriate. 
Therefore, the 180 day timetable is only triggered if position 
limits are appropriate.
    In regard to the word appropriate, the Commission has three 
distinct problems. First, the Commission has never made an 
affirmative finding that position limits are appropriate to 
curtail excessive speculation. In fact, to date the only 
reports issued by the Commission or its staff failed to 
identify a connection between market trends and excessive 
speculation. This is not to say that there is no connection, 
but it does say the Commission does not have enough information 
to draw an affirmative conclusion.
    The second and third issues related to the appropriateness 
of position limits are related to adequacy of information about 
OTC markets. On December 8, 2010, the Commission published a 
proposed rule on Swap data record-keeping and reporting 
requirements. This proposed rule is open for comment until 
February 7, 2011, and the rule is not expected to be final and 
effective until summer at the earliest.
    Furthermore, the Commission has yet to issue a proposed 
rulemaking about Swap data repositories. Until a Swap data 
repository is set up and running, it is difficult to see how it 
would be appropriate for the Commission to set position limits. 
Without additional information about trades in the OTC market, 
the Commission could neither have enough information to 
adequately determine the appropriate position limits, or have 
the information necessary to enforce position limits, assuming 
the appropriate formula could be determined without full access 
to OTC market information.
    In conclusion, I would again caution that my remarks are 
based on hearsay and not on an actual proposed rule. It is hard 
to be critical of something that does not yet exist. I hope 
that Chairman Gensler in his testimony today will inform the 
Subcommittee that the Commission is aware of the challenges 
surrounding the current imposition of position limits, and that 
the Commission hearing tomorrow will not consider enacting 
position limits before adequate information is obtained.
    I would also caution the Chairman and the other 
Commissioners, however, that if the Commission moves forward 
with a proposed position limit rule before information from the 
OTC markets are made available, they should be prepared for 
more hearings on this topic next year.
    Mr. Chairman, that is a longer opening statement than my 
usual, which suggests I am leaving the House of Representatives 
for someplace else. But I am grateful for the opportunity to 
express my opinion today. I am delighted to be with you, and I 
thank you, Mr. Chairman, for recognizing me, and I look forward 
to our continued close working relationship.
    [The prepared statement of Mr. Moran follows:]

 Prepared Statement of Hon. Jerry Moran, a Representative in Congress 
                              from Kansas

    Thank you, Mr. Chairman. I believe Congressional oversight is a 
good thing. While I will not be here to chair this Subcommittee next 
year, I believe my successor, and the incoming full Committee Chairman, 
Mr. Lucas, will readily exercise the House Agriculture Committee's 
oversight authority over the Commodity Futures Trading Commission 
(CFTC).
    In regard to the topic of position limits under the Dodd-Frank Act, 
however, I believe it is premature to hold an oversight hearing because 
the CFTC has yet to release a proposed rule. Thus, we are left to hold 
a hearing based on hearsay, a few exchanges between CFTC Commissioners 
during a hearing on another issue, and a speech and opinion editorial 
released to the press by Commissioner Chilton. Having said that, I am 
concerned about where the Commission's position limit discussion is 
going.
    First, I would note that early on in the legislative process, both 
myself, Ranking Member Lucas, and other Members of the Agriculture 
Committee introduced amendments to place limits on the authority of the 
CFTC to impose position limits. During that debate, we were clear that 
the commodity futures markets needed greater transparency and we were 
in favor of creating mandatory reporting requirements. We were 
hesitant, however, to give CFTC broader powers to impose position 
limits until we had adequate information about the over-the-counter 
(OTC) markets. We felt the Congress needed to know who was trading in 
the OTC market, the size of the OTC market, and whether the OTC market 
was or was not having an adverse affect on exchange-traded markets 
before bestowing greater position limit authority on the Commission. 
Unfortunately, those amendments did not pass, and we now have a 
situation where a regulator may be contemplating imposing position 
limits without having access to the information necessary to determine 
the appropriate position limits or to enforce such position limits once 
they are set.
    Despite what some believe is a mandate for the Commission to set 
position limits within a definite time period, the Dodd-Frank 
legislation actually qualifies CFTC's position limit authority. Section 
737 of the Dodd-Frank Act amends the Commodity Exchange Act (CEA) so 
that Section 4a(a)(2)(A) states: ``the Commission shall by rule . . . 
establish limits on the amount of positions, as appropriate . . . .'' 
The Act then states in subparagraph (B): ``For exempt commodities, the 
limits required under subparagraph (A) shall be established within 180 
days after the date of the enactment of this paragraph.'' When 
subparagraphs (A) and (B) are read in conjunction, the Act states that 
when position limits are required under subparagraph (A), the 
Commission shall set the limits within 180 days under subparagraph (B). 
Subparagraph (A) says position limit rules should only be prescribed 
when ``appropriate.'' Therefore, the 180-day timetable is only 
triggered if position limits are appropriate.
    In regard to the word ``appropriate,'' the Commission has three 
distinct problems. First, the Commission has never made an affirmative 
finding that position limits are appropriate to curtail excessive 
speculation. In fact, to date, the only reports issued by the 
Commission or its staff fail to identify a connection between market 
trends and excessive speculation. This is not to say that there is no 
connection, but it does say the Commission does not have enough 
information to draw an affirmative conclusion.
    The second and third issues related to the appropriateness of 
position limits are related to adequacy of information about the OTC 
markets. On December 8, 2010, the Commission published a proposed rule 
on ``Swap Data Recordkeeping and Reporting Requirements.'' This 
proposed rule is open for comment until February 7, 2011, and the rule 
is not expected to be final and effective until this coming summer at 
the earliest. Furthermore, the Commission has yet to issue a proposed 
rulemaking about swap data repositories. Until a swap data repository 
is up and running, it is difficult to see how it would be appropriate 
for the Commission to set position limits. Without additional 
information about trades in the OTC market, the Commission could 
neither have enough information to adequately determine the 
appropriation position limit or have the information necessary to 
enforce position limits, assuming an appropriate formula could be 
determined without full access to OTC market information.
    To conclude, I would again caution that my remarks are based on 
hearsay and not an actual proposed rule. It is hard to be critical of 
something that does not yet exist. I hope that Chairman Gensler, in his 
testimony today, will inform the Subcommittee that the Commission is 
aware of the challenges surrounding the current imposition of position 
limits and at the Commission's hearing tomorrow, he will not consider 
enacting position limits before adequate information is known. I would 
caution the Chairman and other Commissioners, however, that if the 
Commission moves forward with a proposed position limit rule before 
information from the OTC markets are made available, they should be 
prepared for more hearings on this topic next year.
    Again, thank you for recognizing me Mr. Chairman and I look forward 
to the testimony of today's witnesses.

    The Chairman. Well, thank you very much. I appreciate that, 
and we do wish you well and we are happy to have you with us 
today.
    At this time, I would like to recognize Mr. Peterson for 
any comments he might like to make.

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

    Mr. Peterson. Thank you, Mr. Chairman, Ranking Member, and 
good morning everybody. Thank you, for holding this hearing 
today. The Subcommittee and this Committee started looking into 
excessive speculation in the derivatives market more than 2 
years ago before the evidence of the financial crisis actually 
started to appear.
    We passed bipartisan legislation to bring greater 
transparency and accountability to the derivatives market, and 
many of the Committee-passed provisions were included in the 
Wall Street Reform and Consumer Protection Act which was signed 
into law this past summer.
    There are many important provisions within this law, but 
the one we are addressing today is the speculative position 
limits. The law sets a deadline of January 17, 2011, for the 
CFTC to announce the proposed rule for this provision, but 
recently many have expressed concerns about the CFTC meeting 
this deadline.
    While the CFTC has held seven open meetings to write rules 
for the law's many provisions, most recently on December 9th, 
speculative position limits have not yet been addressed, and 
this leaves little time for the Commission to address this 
issue. It is important that the CFTC remain on track and 
implement the Wall Street Reform and Consumer Protection Act in 
a timely manner and as Congress intended.
    I understand that there is another meeting being held 
tomorrow and that the position limits will be addressed at this 
time. I think that is good news. But I question whether this 
could have happened earlier.
    I want to welcome Chairman Gensler and Commissioner Chilton 
to the Committee today. We appreciate the good working 
relationship that we have had and look forward to working with 
you as we go forward. As I say, we have worked closely together 
and hope that we could help you in implementing this law. So I 
look forward to hearing your testimony, along with the rest of 
today's witnesses, and again thank the chair for his leadership 
on this issue.
    [The prepared statement of Mr. Peterson follows:]

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

    Good morning, and thank you Mr. Boswell for holding today's hearing 
of the Subcommittee on General Farm Commodities and Risk Management.
    This Committee started looking into excessive speculation in the 
derivatives market more than 2 years ago, before evidence of the 
financial crisis started to appear. We passed bipartisan legislation to 
bring greater transparency and accountability to the derivatives market 
and many of the Committee-passed provisions were included in the Wall 
Street Reform and Consumer Protection Act which was signed into law 
this past summer.
    There are many important provisions within this law, but the one we 
are addressing today is speculative position limits. The law sets a 
deadline of January 17, 2011 for the CFTC to announce the proposed rule 
for this provision, but recently many have expressed concerns about the 
CFTC meeting this deadline.
    While the CFTC has held seven open meetings to write rules for the 
law's many provisions, most recently on December 9, speculative 
position limits have not yet been addressed. This leaves little time 
for the Commission to address this issue.
    It is important that the CFTC remain on track and implement the 
Wall Street Reform and Consumer Protection Act in a timely manner and 
as Congress intended. I understand there is another meeting being held 
tomorrow and that speculative position limits will be addressed at this 
time. This is good news, but I question whether this could have 
happened earlier.
    I want to welcome Chairman Gensler and Commissioner Chilton to the 
Committee today. We have worked closely over the last few years and I 
look forward to continuing this relationship as you move ahead with 
implementing this law. I look forward to hearing your testimony, along 
with the rest of today's witnesses and again thank the Chair for 
holding this hearing.

    The Chairman. Thank you, Mr. Peterson.
    I would like to recognize Mr. Lucas for any comments he 
would like to make.

 OPENING STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN 
                     CONGRESS FROM OKLAHOMA

    Mr. Lucas. Thank you, Mr. Chairman, for calling this 
hearing today. I am not sure that I should call this the last 
in a long series of hearings this Committee has had on the 
regulation of derivatives in this Congress, or, perhaps better 
described, as the first in a long series of intensive oversight 
hearings I promise this Committee will engage in through the 
next several months. One thing I am sure of, and I have to echo 
the comments of my colleague, our good friend from Kansas, who 
is going to the other side of the building--I didn't say to the 
other side of the world--he will be missed indeed in this body.
    I can't use that other phrase, Jerry, I am sorry, I just 
can't say that word that some people now describe you within 
the public in the future, but your efforts on behalf of Kansas 
agriculture and this Committee have been and are much 
appreciated.
    One of the many legislative battles that you and I fought 
was the integrity of our domestic futures markets. We have long 
been focused on making sure the markets provide our farmers, 
ranchers, and commercial end-users the ability to manage their 
risk and discover market-driven prices. Those efforts and the 
efforts of everyone on this Committee resulted in legislation 
that ultimately became Title VII of the Dodd-Frank Act.
    Although there are so many issues and authorities contained 
in Title VII, the imposition of position limits probably 
received the most attention by this Committee. The imposition 
of position limits in various forms and fashions played huge 
parts in my and Mr. Peterson's legislative initiatives, and Mr. 
Goodlatte's before that. We have always known the balance 
between liquid vibrant markets and transparent price discovery 
markets were, and are, imperative.
    In the end, the position limits regime in the Dodd-Frank 
isn't what I would have written, but it is a cautious approach 
that provides the Commission with the appropriate discretion to 
address what I believe is a political problem and not 
necessarily a problem driven by artificial volatility or 
distorted supply and demand.
    The Dodd-Frank Act committed a new level of authority and 
discretion to use that authority to the Commodity Futures 
Trading Commission. I have heard from several of the regulated 
community, and have seen myself, how consumed the Commission 
and the staff is with implementation.
    I do not envy you in the least. It is a huge task, perhaps 
too big to be done in the timelines provided. As this fragile 
economy attempts to get back on its feet, we ought not to be 
throwing regulatory hurdles in its way, costing even more jobs 
and higher prices. I fear that is what will happen if the most 
sweeping reform of the nation's derivative markets is done 
hastily and without all due deliberation. I am not pressing for 
a perfect rule, but we have to have a good rule. I stand 
willing to consider easing of statutory deadlines to ensure 
rules don't end up further distorting markets and costing 
American jobs.
    I certainly look forward to hearing from our witnesses 
today, and I am prepared for that informed decision as they 
work their way through the implementation of position limits. 
And I would note, if the Chairman indulges me for one moment, 
this may well be the last hearing where my first Agriculture 
Committee Chairman continues to look down over our shoulder, 
Mr. de la Garza, in the way pictures are handled. I look 
forward to having Mr. Goodlatte looking over my shoulder, and 
having what will inevitably be the awesome portrait of Mr. 
Peterson to admire at the other end of the room. Such is the 
nature of the way these bodies move forward.
    Again, Mr. Chairman, thank you for calling this hearing.
    The Chairman. Thank you very much.
    The Chairman. We would like to request that the other 
Members submit their opening statements for the record so the 
witnesses may begin their testimony and ensure there is ample 
time for questions.
    I would like to welcome our first panel which, of course, 
is the Honorable Gary Gensler, Chairman of the Commodity 
Futures Trading Commission and the Honorable Bart Chilton, 
Commissioner of the Commodity Futures Trading Commission.
    Chairman Gensler, welcome. Please begin when you are ready.

           STATEMENT OF HON. GARY GENSLER, CHAIRMAN,
             COMMODITY FUTURES TRADING COMMISSION,
                        WASHINGTON, D.C.

    Mr. Gensler. Good afternoon. Thank you, Chairman Boswell, 
Chairman Peterson, Ranking Member Moran, Ranking Member of the 
full Committee, Congressman Lucas. I thank you for inviting me 
here to testify on behalf of the CFTC and I am pleased to be 
testifying along with Commissioner Chilton. Commissioner 
Chilton has been a real advocate that the markets that CFTC 
oversees work for all Americans, and he has been a leader in 
ensuring that we reestablish position limits in the energy and 
metals market and that they be extended to the swaps markets.
    Before I mention things on position limits, just let me 
update you on our work on implementing Dodd-Frank. We have been 
consulting extensively with fellow regulators and the public. I 
think the CFTC staff and I have met now--we keep a running 
count internally--over 300 times with fellow regulators. That 
would be 60 times a month with the SEC, the Federal Reserve and 
other regulators. We also are soliciting broad public input. We 
have had 7 days of public roundtables, usually with the SEC 
joining us. Additionally, many individuals of course want to 
come in and see us. We post these on our website to have 
transparency, and as of Monday there have been 460 such 
meetings from the public coming in to talk to us about these 
things.
    Thus far the Commission has moved forward with 30 
proposals, and including some final rules and interim final 
rules and advance notices, the total count is 37 that we have 
published.
    We look forward to comments from the public. No doubt we 
will get tens of thousands of comments as we sort through this 
and we look forward to that.
    We have our eighth public meeting tomorrow where we plan to 
have two additional meetings in January in other key areas.
    With regard to position limits, the Dodd-Frank Act did 
expand the scope of the Commission's mandate to set position 
limits to include swaps, and I anticipate that we will consider 
staff recommendations tomorrow. These will include 
recommendations to include agricultural, energy and metals 
commodities.
    I also anticipate the staff's recommendation will be for 
position limits both for the spot month--this is when contracts 
are moving into delivery--as well as single months and all-
months-combined. That is what Congress had asked us to look at, 
all three. We have asked staff to try to do this within one 
rule.
    The spot month limits are currently set are set in markets 
for energy, metals, and agriculture. We will be taking a look 
at 28 individual contracts. I think there are currently set in 
26 of these contracts.
    In terms of the single month and all-months-combined 
limits, we currently have contract limits for most agriculture, 
and the staff will have some recommendations with regard to 
energy and metals as well.
    It is only with the implementation and passage of the Dodd-
Frank Act, though, that the Commission has broad authority to 
collect information on the swaps market, as many Members have 
indicated. To this date we have really had very limited 
authority to collect data on the swaps market.
    We approved a rule in October on position reporting for 
physical commodity swaps that would allow us for the first time 
to collect data, more detailed data, on the swaps market. The 
comment period for that closed early December. Staff is 
currently looking through all those comments before we can 
finalize a rule on swaps data collection. This is different 
than the swaps data repository we actually put out. You might 
be--sometimes people call it large trader reporting, but we did 
put that rule out, as I say.
    Before I close, I just want to thank everybody here for 
your support on resources. I know that the House of 
Representatives did pass a continuing resolution. The Senate 
still is going to be taking up resources. The President's 
request of $261 million of resources for this fiscal year is 
very important. We think an estimate will be 300 to 400 new 
applicants, swap dealers, swap execution facilities, data 
repositories and the like that will be knocking on our doors, 
probably come next summer, for us to move forward. We estimate 
overall we will probably need about 400 more people. We are 
currently at about 680 people.
    With that, I look forward to your questions. I also look 
forward to your oversight. I think it is a very important part 
of our American system. It is also a good way that we can get 
these rules done and look forward to your advice and counsel.
    [The prepared statement of Mr. Gensler follows:]

 Prepared Statement of Hon. Gary Gensler, Chairman, Commodity Futures 
                  Trading Commission, Washington, D.C.
    Good afternoon, Chairman Boswell, Ranking Member Moran and Members 
of the Subcommittee. I thank you for inviting me to today's hearing on 
behalf of the Commodity Futures Trading Commission (CFTC).\1\ I am 
pleased to testify alongside my fellow Commissioner, Bart Chilton.
---------------------------------------------------------------------------
    \1\ Commissioner Bart Chilton did not participate in the approval 
of this testimony.
---------------------------------------------------------------------------
Implementing the Dodd-Frank Act
    Before I discuss the CFTC's rule-writing process with regard to 
position limits, I will update the Subcommittee on the CFTC's 
implementation of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. The Dodd-Frank Act is very detailed, addressing all of 
the key policy issues regarding regulation of the swaps marketplace. 
This Subcommittee's work on the Act should be commended. The Act 
reduces risk while promoting transparency in the swaps markets.
    To implement the Dodd-Frank Act, we have organized our effort 
around 31 teams who have been actively at work. Two principles are 
guiding us throughout the rule-writing process. First is the statute 
itself. We intend to comply with the statute's provisions and 
Congressional intent to lower risk and bring transparency to these 
markets.
    Second, we are consulting extensively with both other regulators 
and the broader public. We are working very closely with the SEC, the 
Federal Reserve, other prudential regulators and international 
regulators. To date, we have had more than 304 meetings with other 
regulators at the staff or Chairman's level.
    We also are soliciting broad public input into the rules. This 
began the day the President signed the Dodd-Frank Act when we listed 
the rule-writing teams and set up mailboxes for the public to submit 
their views directly.
    We also have organized seven public roundtables to hear on 
particular subjects. Last week we held a joint roundtable with the SEC 
and prudential regulators on issues related to capital and margin 
requirements for swaps. Additionally, many individuals have asked for 
meetings with the CFTC to discuss swaps regulation. As of Monday 
morning, we have had more than 466 such meetings. Just as Congress 
brought transparency to the swaps markets, the CFTC has added 
additional transparency to our rule-writing efforts. We are now posting 
on our website a list of all of our meetings, as well as the 
participants, issues discussed and all materials given to us.
    We are in the process of publishing proposed rules, using open 
Commission meetings for this purpose. So far, we have had seven public 
meetings. We have another meeting scheduled tomorrow during which the 
Commission will consider rules related to position limits, swap 
execution facilities, derivatives clearing organizations and business 
conduct standards.
    Thus far the Commission has approved 30 proposed rules, one final 
rule, two interim final rules and four advanced notices of proposed 
rulemaking. That does not include the four proposed rulemakings that 
the Commission will consider tomorrow.
    The Dodd-Frank Act requires the CFTC and the SEC to write rules 
generally within 360 days after the date of enactment. This means we 
have 213 days left for the majority of the rulemakings. In the case of 
position limit mandates, Congress had directed a more ambitious 
schedule.
Position Limits Rulemaking
Legislative and Regulatory History
    Since 1936, the Commodity Exchange Act has prescribed position 
limits to protect against the burdens of excessive speculation, 
including those caused by large concentrated positions. Between the 
CFTC and the futures exchanges, there are currently position limits in 
the spot month on physical delivery contracts in the agricultural, 
energy and metals markets. There also are position limits in a number 
of financial contracts. In addition to these spot month limits, between 
federally-set position limits and those set by exchanges, there also 
are a number of agricultural contracts that have single-month and all-
months-combined position limits. The exchanges had set all-months-
combined limits in energy markets until 2001 and in metals markets 
earlier, after which the limits were replaced with position 
accountability regimes.
    The debate on the position limits provisions included in the Dodd-
Frank Act began with actions taken by the House Agriculture Committee 
in the summer of 2008. According to the Committee report, the 
Agriculture Committee and this Subcommittee held six hearings with 44 
witnesses on issues related to position limits. The House later passed 
H.R. 6604 in September 2008.
    The CFTC itself held three public meetings in the summer of July 
2009 to gather further input from the public and Members of Congress 
regarding position limits for energy markets. In January 2010, the 
Commission published a proposed rule to set position limits on four 
energy contracts. In response to the proposal, the CFTC received more 
than 8,200 comments from the public. The CFTC announced the withdrawal 
of that proposal in August with plans to re-propose pursuant to the 
Dodd-Frank requirements. To be properly informed during the current 
rule-writing process, the Commission and staff are reviewing the 
comments received in response to the January rulemaking. The CFTC is 
scheduled to consider a new position limits rulemaking tomorrow.
    In March 2010, the Commission held an additional public meeting to 
consider the appropriateness of position limits in the metals markets. 
The public's views from that meeting and the comments that were later 
submitted also will be helpful as the Commission considers a proposed 
rulemaking on position limits in the metals markets.
    The CFTC does not set or regulate prices. Rather, the Commission is 
directed to ensure that commodity markets are fair and orderly. The 
January position limits proposal was intended to meet Congress's 
mandate and to promote market integrity. The CFTC is directed by 
statute to act in this regard to protect the American public.
    When the CFTC set position limits in the past, the agency sought to 
ensure that the markets were made up of a broad group of market 
participants with a diversity of views. At the core of our obligations 
is promoting market integrity, which the agency has historically 
interpreted to include ensuring markets do not become too concentrated.
    Position limits help to protect the markets both in times of clear 
skies and when there is a storm on the horizon. In 1981, the Commission 
said that ``the capacity of any contract market to absorb the 
establishment and liquidation of large speculative positions in an 
orderly manner is related to the relative size of such positions, i.e., 
the capacity of the market is not unlimited.''
Dodd-Frank Requirements
    The Dodd-Frank Act requires the CFTC to set position limits for the 
following classes of contracts:

   futures;

   options on futures; and

   swaps that are economically equivalent to such futures or 
        options.

    The Dodd-Frank Act also directs the Commission to set aggregate 
position limits for the following:

   contracts listed for trading on designated contract markets,

   contracts traded on a foreign board of trade providing 
        persons in the U.S. with direct access that settle against the 
        price of one or more contracts traded on a futures exchange or 
        swap execution facility; and

   any other swap contracts that perform or affect a 
        significant price discovery function with respect to regulated 
        entities.

    The Act requires that the CFTC set the first set of position limits 
within 180 days of enactment for exempt commodities and within 270 days 
for agricultural commodities. The Commission has some additional 
flexibility with respect to the timing of the rulemaking for the 
aggregate limits.
    The Commodity Exchange Act exempts positions that are held as bona 
fide hedges from position limits. The Dodd-Frank Act provided further 
detail on the types of positions that fall in that category. End users 
and other persons with physical holdings in the energy and metals 
markets will not be limited in the amount or size of their positions 
that are entered into to hedge their physical purchases, holdings or 
sales.
    In establishing the limits for energy and agricultural commodities, 
the CFTC is required to set spot-month, single month and all-months-
combined position limits to achieve the following goals:

    1. diminish, eliminate or prevent excessive speculation;

    2. deter and prevent market manipulation, squeezes and corners;

    3. ensure sufficient market liquidity for bona fide hedgers; and

    4. ensure that the price discovery function of the underlying 
        market is not disrupted.
Data Requirements
    The Commission is working to meet each of the deadlines included in 
the Dodd-Frank Act. Setting position limits in the swaps markets poses 
a unique challenge because of the market's opacity. Prior to the Dodd-
Frank Act, the Commission had only limited authority to obtain data 
regarding the swaps market. The Dodd-Frank Act includes essential 
provisions to bring transparency in the markets to both regulators and 
the public. At this point, however, the Commission does not have the 
same comprehensive data for the swaps markets, including economically 
equivalent swaps, as it has for the futures markets. The Commission 
also currently has limited access to data on linked contracts traded on 
FBOTs through direct access by U.S. participants. The Commission has 
collected some data from swaps dealers since 2008, using special call 
authority to do so. However, additional data is required on the swaps 
markets to determine the size of the overall market in particular 
commodities, as well as the nature of the positions in this market. In 
particular, the Commission lacks data that would identify the extent to 
which positions are held for hedging or speculative purposes.
    On October 19, the Commission approved a proposed rulemaking on 
large trader reporting for physical commodity swaps. The proposal would 
require position reports on economically equivalent swaps from clearing 
organizations, their members and swap dealers. This would enable the 
CFTC to receive such data until swap data repositories are in operation 
and capable of fulfilling the Commission's need for this information. 
The comment period on the proposed rulemaking closed on December 2.
    In addition, large trader reporting will allow the Commission to 
gather data that could be used to determine appropriate position 
limits. The rule builds on the Commission's ongoing special call for 
data from swap dealers.
Options for Position Limits Rulemakings
    CFTC staff is considering options to phase in implementation of the 
position limits rules as the agency obtains the necessary data 
regarding the swaps market. Staff is examining whether certain elements 
of the rule for which the Commission has substantial data can proceed 
on a more expedited timeframe, while leaving those aspects of the rule 
that depend upon additional data for later implementation. Staff is 
considering whether it would be possible to implement spot month limits 
sooner than the single-month or all-months-combined limits.
    The Commission could consider proposing single-month and all-
months-combined position limits based on the open interest for futures, 
options and economically equivalent swaps. This is similar to the 
approach taken in the rulemaking that the Commission proposed in 
January. Open interest is currently used to establish position limits 
in the futures markets. Staff is reviewing an option that use data 
regarding open interest in the swaps markets to set hard aggregate 
limits. This approach would allow the Commission to hear from the 
public on the appropriate methodology for setting position limits while 
also allowing the Commission to collect additional swaps data through 
the large trader reporting regime. The actual hard limits would be 
applied when sufficient data becomes available.
    Currently, spot month limits for physically-settled futures 
contracts are generally set as some percentage of deliverable supply to 
prevent someone with a large position from cornering or squeezing the 
market as contracts move to expiration. In contrast, single-month and 
all-months-combined position limits have historically been set as a 
function of the overall size of the markets to guard against the 
burdens of excessive speculation.
Resources
    Before I close, I will briefly address the resource needs of the 
CFTC. The futures marketplace that the CFTC oversees is approximately 
$40 trillion in notional amount. The swaps market that the Dodd-Frank 
Act tasks the CFTC with regulating has a far larger notional amount as 
well as more complexity. Based upon figures compiled by the Office of 
the Comptroller of the Currency, the largest 25 bank holding companies 
currently have $277 trillion notional amount of swaps.
    The CFTC's current funding is far less than what is required to 
properly fulfill our significantly expanded role. The CFTC requires 
additional resources to enhance its surveillance program, prevent 
market disruptions similar to those experienced on May 6 and implement 
the Dodd-Frank Act.
    The President requested $261 million for the CFTC in his Fiscal 
Year 2011 budget. This included $216 million and 745 full-time 
employees for pre-Dodd-Frank authorities and $45 million to provide \1/
2\ of the staff estimated at that time needed to implement Dodd-Frank. 
The House of Representatives matched the President's request in the 
continuing resolution it passed last week. We are currently operating 
under a continuing resolution that provides funding at an annualized 
level of $169 million. To fully implement the Dodd-Frank reforms, the 
Commission will require approximately 400 additional staff over the 
level needed to fulfill our pre-Dodd-Frank mission.
    I again thank you for inviting me to testify today. I look forward 
to your questions.

    The Chairman. Thank you very much.
    We will go ahead and hear the comments from Commissioner 
Chilton, and then we will have questions.

         STATEMENT OF HON. BART CHILTON, COMMISSIONER,
             COMMODITY FUTURES TRADING COMMISSION,
                        WASHINGTON, D.C.

    Mr. Chilton. Thanks, Mr. Chairman and thanks also to----
    The Chairman. Let me interrupt you just for a second. A 
little oversight. We have Mr. Neugebauer with us today. He is 
very welcome, but I am supposed to get unanimous consent that 
it is okay for him to be here. The chair thinks it is okay for 
him to be here. No objections?
    Thank you for coming.
    Mr. Chilton. Thank you, Mr. Chairman. I can say I just want 
to thank and congratulate Senator-elect Moran. It has been a 
pleasure working with you over the years, sir, and I look 
forward to continuing that. I look forward to the scrutiny we 
will get from Chairman Lucas in the future.
    I did want to say a special thanks to Chairman Peterson. 
You guys passed back in 2008 legislation dealing with 
speculation. You may have passed it twice in a bipartisan way. 
I know you brought it up on the floor twice in 2008. So I 
appreciate your foresight and your oversight of this agency 
over the years.
    I also want to thank my friend, Chairman Gensler, for being 
so helpful. His expertise of the markets and of finance has 
really helped us. The other Commissioners are pretty much folks 
that came from here, came from the Hill and we have ag 
backgrounds and we have some other backgrounds, too, but having 
Chairman Gensler there has made us better Commissioners and a 
better Commission. So I thank him.
    If you look back at just the last 10 years, the futures 
industry around the world has increased three-fold. Yet in the 
U.S. it increased five-fold.
    So a lot was going on. Between 2005 and 2008, we saw 
roughly $200 billion of speculative money, index money, hedge 
funds, pension funds; $200 billion came into these markets. 
Now, that happened to coincide with this commodity bubble. 
Wheat is around $7\1/2\-$8 now. It was at $24 then. Gasoline 
is--crude is like $87, $90 now. It went up to $147.27 in June 
2008. As we all know and your constituents told you, they had 
concerns because gasoline was over $4.
    Whether or not that increase in the speculative interest, 
that $200 billion, caused that bubble is a point that obviously 
can be debated. Some people say, move along folks, nothing 
here. Some people say it drove the prices. I come out sort of 
in the middle and say that--agree with MIT and Oxford and Rice 
and Princeton and even Lincoln University in Missouri. They all 
say that it had some impact. So, how much you can debate.
    The increase in speculative limits since that time, if it 
was a concern in 2008 with the amount of speculation in the 
market, if it was a concern when Congress passed the law in 
July, it is even more of a concern now.
    Now, before I give you some new statistics, don't get me 
wrong: We don't have speculators, we don't have a market. They 
are critical. Full stop. We have to have them. But if you look 
at what is going on between June of 2008 and where we are today 
or where we were in October, we see more speculative positions 
in the futures markets than at any time in history, $149 
billion. That is an increase in the energy complex of 47 
percent since 2008, an increase in the metals complex of 20 
percent, and an increase in the agriculture complex by 18 
percent. So there has been this large influx.
    Now, the Chairman talked about all the rules and a number 
of Members have talked about the rules. There has been a flurry 
of activity. We have been going gangbusters. And the staff at 
the CFTC has been real inspirational. We all sort of talk about 
it every time we meet.
    At the same time, by and large, while these rules have been 
sort of trains that are on time, position limits have sort of 
derailed. And the reason is exactly what Congressman Moran 
alluded to, whether or not we have this data on swaps in order 
to meet the deadline of January. And there are a couple of 
points; first, I am not sure we do have the authority to delay.
    And this as appropriate language, Congressman Moran, I 
appreciate your point but to say that as appropriate is 
expansive enough of a definition to render the provision moot 
and meaningless, I think begs the question a little bit. I 
think we are required to implement it. I see no authority for 
us to delay, no legal authority. I asked the attorneys why we 
would delay.
    Second, I think it is needed now more than ever, because of 
those statistics I just cited to you. And third, there are ways 
that we can do this. There are things that we can do as 
Chairman-elect Lucas said in a deliberate fashion, not ad hoc 
and not hasty, sir, that we can do to start doing what Congress 
set as our goals in January. It may not be the full Committee 
but there are things that we can do now. I agree we don't want 
something hasty. We don't want to mess up markets. There are 
ways to go about this.
    So far what we have been talking about is how we just go 
ahead and wait, and we are talking about a delay, we are 
talking about not getting this data until next September or 
October. So I am just trying to do what Congress told us to do. 
You can have different interpretations. I have mine, and I am 
trying to do the best, I don't think we are--as I said, we are 
going to have a meeting tomorrow, we are not quite back on the 
track, but we can get there. Thank you Mr. Chairman.
    [The prepared statement of Mr. Chilton follows:]

   Prepared Statement of Hon. Bart Chilton, Commissioner, Commodity 
              Futures Trading Commission, Washington, D.C.

    Mr. Chairman, Ranking Member Moran, Members of the Subcommittee, 
thank you for the opportunity to be with you today.
    In the last decade, we saw the U.S. futures industry grow five-fold 
when the rest of the world grew three-fold. In several years we saw 
over $200 billion come into regulated U.S. futures markets. This new 
money was primarily from speculators, much of which was held by 
speculators I call ``massive passives,'' those with a known, fairly 
price-insensitive trading strategy. Then, in 2008, we saw a huge 
commodity bubble. Wheat was at $24. Today it is around $8. Crude oil 
spiked to $147.27 and gas was at $4 per gallon. Then the economy and 
commodity prices all fell off a cliff. Did the new speculators, 
including the massive passives, contribute to that price volatility-
volatility that had farmers and ranchers, small and large 
agribusinesses and other businesses alike all paying higher prices than 
they should?
    Researchers at Oxford, MIT, Princeton and Rice all say speculative 
interests had an impact on prices. Some have said the speculators drove 
prices. In fairness, some on the other side of the issue say there was 
no impact whatsoever. My take is somewhere in the middle. Speculators 
didn't drive prices, but they tagged along and helped to push them to 
levels, high and then low, that we would not have seen without them.
    Futures prices should, by and large, be based upon the fundamentals 
of supply and demand. We saw delinked commodity prices in 2008, and 
some of us are concerned that we see that taking place this year.
    Congress passed the Wall Street Reform and Consumer Protection Act 
in July. With more than 40 rules to be promulgated by our agency, 
Congress gave us expedited implementation dates for only nine 
regulations. For example, speculative position limits for energy and 
metals are to be implemented within 180 days and for the agricultural 
complex within 270 days.
    As someone who has been calling for these limits, and who 
appreciates the work of the Committee in this regard since 2008, the 
early implementation deadline is important. Large and small 
agribusinesses and other commercial businesses rely upon these markets 
to hedge their risks. They are having an increasingly difficult time 
doing so, in part I believe, because of large position concentrations 
of speculators. Don't get me wrong, without speculators there isn't a 
market. We need them. We want them. Too much concentration, however, 
can be problematic and has the possibility of contorting markets.
    Now today, we see even larger speculative positions than in 2008. 
In total, there is $149 billion in speculative money in these markets, 
representing an increase since June of 2008 of 47% in the energy 
complex, where we have seen a single trader with positions as high as 
20%. In the metals markets, we've witnessed an increase in speculative 
contracts of 20% and one silver trader with roughly 40% of the market 
earlier this year. In the agricultural complex, speculative interests 
grew by 18% since June of 2008. All of this makes the implementation of 
position limits as Congress mandated important.
    Some have suggested, however, that we not implement the limits on 
time because we don't have all the swaps data we need. There is a point 
there. Congress didn't require that we promulgate the swaps data rule 
until next July, so how do we come up with a reasonable limit, 
particularly an aggregate limit, without that data? While this is a 
worthy point, there are ways to address it. I'd be pleased to explain 
several options.
    Some, however, inside and outside the agency have suggested we 
simply find a way around the law's implementation deadline. They 
suggest, for example, that we ``implement'' the position limit rule, 
but not make it ``effective'' until sometime much later. First, we have 
no such legal authority to do so. Second, that is exactly the type of 
dancing on the head of a legal pin Washington-speak that folks in the 
country are all too tired of--and they should be.
    We shouldn't be about getting around the law. We should be about 
working to do what we were instructed to do, to protect markets and 
help consumers. Congress passed the new law. We must implement it in a 
thoughtful manner. End of story in my book.
    Thank you for the opportunity to be with you. I'd be pleased to try 
to answer any questions.

    The Chairman. Well thank you.
    I thank both of you. I think the main purpose of what we 
are doing here today is to get daylight on what the process is, 
how it is going, and for us to understand better as we talk to 
our constituents who are out there and trying to fulfill our 
obligation.
    A couple of questions and we will right go right down the 
line. But first, Mr. Peterson, do you have any questions?
    Mr. Lucas?
    Mr. Gensler, what impact, since we are talking what you 
just said, would a delay in the January energy and metals 
position limit rule have on the agricultural commodities rule 
expected in April?
    Mr. Gensler. Mr. Chairman, I anticipate staff will make a 
recommendation tomorrow on all agricultural energy and metals 
position limits and anticipate that it would be both for the 
spot month, and for--if I can just call it the all-months-
combined limits. And I am hopeful that we will have the support 
tomorrow to publish that rule, get comments, and then, consider 
those comments under the Administrative Procedures Act and put 
out a final rule as soon as we can sort through all these 
comments.
    I note we received 8,200 comments on the proposal for 
energy limits--reestablishing energy position limits in January 
of this year. We put that proposed rule out for a 90 day public 
comment period at that time. I think staff tomorrow will be 
recommending a 60 day public comment period. But with 8,000 
comments that came in on that topic earlier, this is a very 
important topic and the public is going to weigh in. And we 
look forward to that.
    The Chairman. I understand. So are you saying that you kind 
of expect to be on schedule for the agricultural commodities in 
April?
    Mr. Gensler. We are going to do everything we can. It is 
certainly our goal. But I am being open here about the 
arithmetic. I think that there are parts of this, the spot 
limit proposal, that we will be able to implement earlier, but 
on the ``all-months-combined'' limit proposal that there is a 
very real data issue with it.
    In January of this year, the proposal that we put out was a 
formula, and if we finalized, would have been applied to data 
in January 2011. And while we won't be proposing exactly the 
same thing tomorrow, it was staff's recommendation earlier this 
year, it will be staff's recommendation tomorrow, that any 
formula ultimately be applied to the overall size of the 
market. This is an important component. And as I said earlier, 
we have just closed the comment period on a rule on collecting 
data. We look to move expeditiously to finalize that data 
collection rule, but data is an important component to this.
    The Chairman. Thank you. Commissioner Chilton do you have 
any comment?
    Mr. Chilton. No. Other than the Chairman is right. If you 
do the math under sort of what the thinking is, I can't talk 
about the specific proposals yet, but none of them allay my 
concern that we are going to do this, as instructed by 
Congress. It may be the best we can get a certain number of 
votes for the Commission. But again, Mr. Chairman, there are 
things we can do today like implement some things in January 
that won't cause any consternation-- that may not be, let's 
say, the full Kahuna--that won't have problems like Congressman 
Moran suggested. I think we should do that.
    I mean if Congress is concerned about excessive 
speculation, there are certainly ways that we could set a price 
point; that is, a level at which we have heightened regulatory 
oversight and do what we call a special call. Where we go out 
and ask for swaps data and then we see where the positions are 
netted. And if they are, if these traders are actually above 
the certain position point, and if they are, use all of our 
authorities, our emergency authorities, our trading 
authorities, and work with the exchanges, ICE, and CME to get 
them down. I am not saying necessarily get them off those 
exchanges; I am saying to get their net position down that may 
be in swaps, may be in options, may be in futures.
    I think there are things we can do and we can do them on 
time. It may not be as expansive as we would like, but I hope 
we move forward on that.
    The Chairman. Thank you very much. The chair recognizes Mr. 
Moran.
    Mr. Moran. Mr. Chairman, thank you.
    Chairman Gensler, do you agree with Commissioner Chilton in 
regard to the lack of flexibility in these time constraints 
that he indicates are imposed by Congress? My understanding was 
that your General Counsel at a hearing, Commission hearing in 
October, indicated that you do have flexibility in regard to 
that 180 day limitation.
    Mr. Gensler. I think that you observe correctly that I had 
asked the General Counsel, Dan Berkovitz, as to the phased 
implementation schedule in essence with regard to position 
limits. Subsequently, he told me that the Administrative 
Procedures Act and case law specifically allow an agency 
reasonable leeway.
    The Commodities Exchange Act clearly permits the Commission 
to adopt position limits in phases, such as proposing a formula 
now--and I note that is what we did this past January as well--
a formula now and impose the actual numerical limits once we 
have more data. This would be on the all-months-combined. What 
he was asked specifically, because I asked him the question, 
was could we do that? Could we propose a formula and finalize 
that formula but then have the formula apply to data as it 
comes in, maybe a number of months later?
    Mr. Moran. A number of months later. Mr. Chairman, do you 
anticipate at what point in time you would have sufficient data 
to reach the conclusions that you are perhaps being asked to 
reach now?
    Mr. Gensler. Well, it is also dependent upon the good work 
of the staff and this Commission, the CFTC, in finalizing a 
rule on data collection which, fortunately, we already have out 
there. I think if we finalize that rule and are able to collect 
data, it is somewhere in the time frame that Commissioner 
Chilton talked about. We don't have any difference on that time 
frame.
    Mr. Moran. Has there yet been a--one of the conversations 
we have had in this Committee for a long time is about the 
connection between excessive speculation and price 
fluctuations. Is there--there is--make sure I understand this 
to be true--I'll ask it this way: Has the CFTC or its staff 
completed a report that found excessive speculation caused an 
unwarranted or unreasonable price fluctuation in commodity 
markets?
    Mr. Gensler. If I can broaden the question a little bit.
    Mr. Moran. You may. I have broadened questions for number 
two and three as well.
    Mr. Gensler. I am sure. I don't think that the Commodity 
Exchange Act or Congress has said that the CFTC is an agency to 
regulate prices. What we have as our mission is to ensure fair 
and orderly markets, that the price discovery function is 
transparent, and that there is an integrity of the markets, and 
that the position limit regime that has been in place since the 
1930s is to ensure that there is a diversity of points of view. 
It doesn't limit hedgers, it limits the number of contracts a 
speculator can hold, and speculators and hedgers, importantly, 
must meet in a marketplace, but that there may be burdens that 
come from excessive speculation.
    I will use an extreme case: If somebody had half a market, 
for instance, and then they were to liquidate that position it 
would be a burden on the market. Maybe if it is only ten 
percent of the market, to liquidate that market, it would be a 
burden. So, over the decades what we did is we put in place 
limits in the agricultural markets. There were limits through 
the exchanges in the metals and energy markets in the 1980s and 
1990s. In fact energy markets had limits all the way through 
the summer of 2001, for these all-months-combined. And it was 
to prevent, prospectively as much as anything, the burdens that 
may come from large positions and the concentration of those 
positions in a marketplace.
    Mr. Moran. Let me broaden my question by asking a similar 
question but with a different conclusion. Has the CFTC or its 
staff completed a report that found excessive speculation 
positions in commodity futures markets were leading to market 
manipulation? Which I think is the direction you were telling 
me is more important; that you are there to regulate market 
manipulation.
    Mr. Gensler. There are two components in the Act. There is 
manipulation, or if I can broaden that a little bit, corners 
and squeezes. But, Congress also said, not only in the 1930s 
but I think also in the Dodd-Frank Act, has reconfirmed that we 
shall set position limits to do something that is not just 
limited to protect against manipulation; it is also to diminish 
or prevent any burdens that may come from excessive 
speculation.
    So they are not identical. And any burdens that may come 
from excessive speculation may be actually far before somebody 
corners or squeezes or manipulates a market. Manipulation also 
includes intent. So I am just trying to highlight. And it is 
part of our challenge that they overlap, but they are somewhat 
distinct.
    Mr. Moran. I have run out of time, but my question was: 
Have you found, has the CFTC or its staff found evidence of 
either of these things happening?
    Mr. Gensler. There are certainly cases that we have brought 
on manipulation. We bring an active caseload of manipulation. 
So I could have answered your question yes, but I was trying to 
distinguish it because I was trying to be more fair to your 
question.
    Mr. Moran. I appreciate your fairness. And Commissioner 
Chilton, I had questions for you. I have run out of time. I do 
appreciate the way you testify. I understand what you are 
telling me. And I am very grateful for the words that you use. 
Thank you.
    The Chairman. Thank you. Mr. Marshall.
    Mr. Marshall. Thank you, Mr. Chairman.
    I want to associate myself with the remarks of Mr. Moran to 
open the hearing. I found myself, largely, completely in 
agreement with him. And to me at least, the answer to the 
questions that Mr. Moran just posed, has staff concluded based 
upon what evidence staff has been able to gather that these, as 
Mr. Chilton refers to them, massive passives have skewed the 
market? I think the answer is no, staff has not done that. 
Certainly staff has not issued a report saying that massive 
passives have skewed the market.
    All of our efforts thus far, for years now, for 2 or 3 
years now, have been focused on these massive passives, the 
influence of index funds, and whether or not these index funds 
are skewing prices too high.
    I think that from your testimony, Mr. Chairman, that it is 
quite clear the CFTC has gone the extra yard in so many 
different respects to try to comply with these deadlines. My 
conclusion is that the deadlines are simply too aggressive, 
that we simply weren't reasonable in trying to pick these 
periods of time. You all don't have daily reports of large 
traders in the swaps market. There is all kinds of information 
that you would like to have to further the analysis of the 
impact of the massive passives, since that seems to be a focus 
here on the market. Nobody wants to screw up these markets by 
prematurely taking positions or literally imposing position 
limits across the market and causing problems in any number of 
respects, diminishing liquidity, enhancing the problems, if 
there are such problems, caused by the massive passives, 
driving people overseas. I understand the Financial Services 
Authority hasn't indicated at all it is going to move forward 
with position limits that mirror ours. There are just lots of 
different things.
    And I completely agree with Mr. Moran's observation that 
the as appropriate qualification that we intentionally stuck in 
there gives you the discretion to go ahead and wait until it is 
appropriate. It seems to me you wait until you are convinced 
that there is a problem, and then you have come up with a 
solution to that particular problem that isn't going to 
unnecessarily burden the rest of the market.
    Mr. Chilton, with regard to massive passives, Dodd-Frank, 
after we wrestled with this an awful lot, gave additional 
discretion to the Commission to distinguish among classes of 
traders in imposing position limits, and also gave additional 
discretion to the Commission with regard to exemptions.
    I kind of understand that you all are thinking about we are 
going to distinguish bona fide hedgers and then call everybody 
else speculators. But within that everybody else class of 
speculators, there are the massive passives and then there are 
a bunch of other people. There are traditional large market 
traders that take both sides. There are market makers, folks 
like that.
    Have you given any thought, Mr. Chilton, to using your new 
authority to distinguish among classes of traders within that 
class of speculators to distinguish these different groups of 
traders and impose different position limits or exemptions from 
position limits on those different classes of traders?
    Mr. Gensler. You raise a very good point. And Congress did 
give us authority to distinguish between non-bona fide hedgers. 
I think what staff will be recommending tomorrow is a more 
general approach that doesn't point, necessarily, at 
distinguishing between bona fide hedgers.
    Mr. Moran. Mr. Chairman, I apologize for interrupting. We 
have 5 minutes here. Maybe there will be an extra round of 
questions. Again, if you all are going to start issuing 
additional proposals, one, I don't think you ought to be 
attempting to stick by these timelines when you don't have all 
the information you would like to have in order to give really, 
really good, narrowly focused solutions to or at least 
determine first whether there is a real problem here, and then 
the narrowly focused solution. I don't see how you can just 
generalize this and lump everybody in----
    Mr. Gensler. I was just--I am agreeing with you on 
timelines. I think that what we are contemplating, what I 
believe staff will be recommending is some formula to apply to 
data, as has been earlier discussed. I took your question as to 
be whether we would be proposing a specific lower limit or 
something on one class of party. So, when I said ``more 
general,'' I meant there is not a lower limit on one group.
    Mr. Marshall. Have you given some consideration to that?
    Mr. Gensler. I would say there has been a lot of 
discussion, and we look forward to public comment on whatever 
we put out, and also with regard to this question and other 
questions. I don't know if, Commissioner Chilton, you want to--
--
    Mr. Chilton. There shouldn't be any exemptions from 
commercial. People that have an underlying interest in the 
physical commodity, whether or not it is a Swift or Cargill or 
just a normal farmer or independent petroleum producer, they 
should have exemptions. Other than that, there shouldn't be 
exemptions. Whether or not there should be different levels, 
you might be right, sir. It may be more appropriate to have a 
little more granular view of it, because--and we can address 
this if you look at what their net position is. It is one thing 
if people have a large position, but the added benefit of what 
we are going to be doing in the future is we are going to be 
looking at this swaps data to find out where they really are.
    So we can't just base things on whether or not they have a 
percentage on ICE or a percentage on CME, you have to look at 
where they are net, and we will be able to do that with this 
new rule, I think.
    Mr. Marshall. I will wait until the second round to 
continue.
    The Chairman. Thank you. Mr. Johnson, please. You are on.
    Mr. Johnson. Back in the heartland, a lot of people 
believe, rightly or wrongly, that prices don't always reflect 
supply and demand. I think you have expressed that too.
    I have a question and then kind of an unrelated comment.
    In your judgment, either witness's judgment, do you think 
the level of prices that ag commodities are at today is a 
result of the supply and demand factors and/or speculation? And 
how would you allot each in terms of what impact you think 
those respective forces are having in our market prices?
    Mr. Chilton. Congressman, by and large they are a factor of 
the fundamentals, but I couldn't--and I am not an economist. 
Neil Cavuto tried to get me to say, well, how much is 
speculators and how much is price demand, and I wasn't going 
there. I am not an economist and it would be irresponsible.
    But to go to this thing about we need to document, we need 
to do this before we impose. The purpose of the Commodity 
Exchange Act says that we are to prevent and deter fraud, 
abuse, and manipulation. So all of a sudden we have been given, 
for people who don't want the regulation, this new hurdle to 
say, well, you have to prove beyond a shadow of a doubt that 
this equals that. These are very complicated markets, and it is 
not always easy to put things together like that.
    So to protect consumers, to ensure the folks in your 
districts are using these vehicles, like they want to, for 
adequate risk mitigation, that is why these limits are 
important to put in place thoughtfully.
    I get letters every day, Congressman. I have one right here 
from Dunkin' Donuts we received last night. They are concerned 
about speculation. Swift says they are thinking about getting 
out of the market in part because of speculation. Delta 
Airlines wrote the other day. These are real concerns about 
people, the hedgers who are in these markets that are concerned 
they can't use them.
    Look, nobody is talking about going crazy on this. We just 
want to--I just want to do what Congress intended and try to do 
it in a reasonable fashion; doesn't make anything crazy, just 
do what we are told.
    Mr. Johnson. I guess my comment would be this. As we all 
know--and I'll try to say that knowledge is power, terminology 
in some ways is power. And I would only surmise that certainly 
the average Member of Congress, and probably the average Member 
of this Committee--I can only speak for myself--has maybe a 
general understanding but only a general understanding about 
first, terminology; and second, the mechanism by which all this 
works.
    I think your being here today, Chairman, calling this 
hearing is important. But I also think it is important to have 
a mechanism, have a mechanism by which the public and the 
Members of Congress frankly can understand very, very complex 
and very difficult concepts. I don't have the answer. But, it 
is a legitimate question, and it is something that I think is 
real important.
    I deal with constituents back home, and I am probably 
speaking for everybody in this room, we have constituents who 
come to us every day; almost all of us represent rural areas. 
``Speculators are doing this, and the Commission is 
inadequate,'' if they even know the Commission exists, and I 
think having an ability for those people to understand, the 
public to understand and us to understand is really important.
    The Chairman. Thank you very much. Mr. Schrader.
    Mr. Schrader. Thank you Mr. Chairman. Following up on the 
line of questions so far, it seems like we are getting hung up 
on terminology, terminology that has a pejorative context to it 
like speculation. I would assume that in the 20th century the 
Commission's primary rule is to root out actual fraud, 
fraudulent actors that were doing things on purpose.
    I guess I have to ask the question given the 21st century 
where you have these hyper-computer trades and massive 
investments and things flowing unbeknownst, with no mal-
intention necessarily intended but mal--bad results coming out 
of it. I think no one could, while we may disagree about 
whether or not they are actually speculators causing this 
problem in 2008, everybody agrees there was a huge distortion 
in the market. I guess the question for both of you from me 
would be: Is it the CFTC's responsibility to protect American 
consumers, American farmers, American industries, by dealing 
with any distortion of the market, regardless of whether it was 
intentional or not?
    Mr. Gensler. I think the answer is yes. Speculators and 
hedgers meet in the marketplace, and farmers and ranchers and 
producers need those speculators in the marketplace so that you 
can have an assured price at the end of the harvest, for 
instance. But at the same time, this Commission was set up and 
its predecessors were set up to make sure that everybody can 
see the market, that is what is called transparency, and that 
it is free of fraud and abuses. The Commission has to ensure 
that the market is orderly and everybody has equal access, for 
instance, in a place that everybody can see it, everybody can 
access it, and it is free of manipulation and these other 
things.
    Mr. Schrader. Mr. Chilton.
    Mr. Chilton. Thanks Congressman. That is a great question. 
It is insightful.
    First of all, I want to say what I said in my testimony. 
Speculators aren't bad. You need them. You don't have markets 
without them. The concern that some of us had is just the 
concentration of them, so much that they can influence prices 
one way or the other, and you don't get to what Mr. Johnson 
talked about: adequate price discovery. But on these fast 
trading--they call them high frequency traders--they played a 
role in the flash crash. They didn't instigate it, but they 
played a role because they were arbitraging between the futures 
market and the securities markets for a while.
    These trades are--talk about being complicated, 
Congressman, these trades go on, they trade thousands of 
contracts in a nanosecond. And their whole idea, different from 
how these markets have been set up sort of when they were in 
the open pits, they are trying to scoop up market dollars, 
these little pennies, in nanoseconds. They are trying to skim 
off the top.
    Now, they do provide some liquidity to the markets, but 
that liquidity may be liquidity with other traders. And I am 
just concerned that we don't want this to become a gambling 
venue. You want it for the original purpose of the markets, for 
these commercial ags and other businesses to be able to hedge 
their risks.
    So I am very concerned about it, these high-frequency 
traders, Congressman. I think we should be doing some sort of 
due diligence, maybe putting their programs, their algorithmic 
programs, into one of the exchange's testing environments, make 
sure they are not going to go haywire.
    I think we should also as part of disruptive trading 
practice authority, the Chairman and I worked on a lot, have 
some responsibility. If they help to cause another flash crash, 
they should be held accountable.
    If you look at the law right now, we don't have enough 
teeth in it. We are doing that as a result of the Dodd-Frank 
law, and we are going to put some more meat on the bones, and 
that is one area that I think we need to do.
    Mr. Schrader. Thank you. I guess last is just a request. I 
would appreciate information, for me and maybe the Committee, 
regarding areas in the swap arena that you do feel you have 
adequate data for and rulemaking timelines as well as the 
timeline for rulemaking with--that you may want to phase in, 
given the lack of data that you have referred to, in some of 
the other areas.
    Mr. Chilton. The Chairman probably wants to comment 
further, and I know you only have a little bit of time. While 
everybody says we to need to get all this data that Mr. 
Marshall and people talked about, ``Let's get it all, let's not 
make a haphazard decision,'' I agree. The spot month we could 
do right now even in the swaps area. This is the currently 
unregulated area. This is the one that you have given us the 
authority to look at.
    And the reason we can set that limit now is because you 
base the limit on the deliverable supply of whatever the 
commodity is. So you don't need to see all-months. You don't 
need to see the aggregate. We could do the spot month right 
now, which would in part get us to where Congress instructed us 
to go. The Chairman wanted to add?
    Mr. Gensler. I concur. I think we have more flexibility. We 
have asked staff to make a recommendation where we could phase 
in and do something in what is called the spot month. Again, we 
have these limits--this is just when somebody is about to 
deliver the corn or wheat or oil into a contract. We have these 
limits in energy, metals and agriculture. I shouldn't say we. 
The exchanges and we have them. I think those could be phased 
in sooner than the all-months limit.
    The Chairman. Thank you. Mr. Conaway.
    Mr. Conaway. Thank you, Mr. Chairman. Gentlemen, thanks for 
being here.
    Not beating the lack of data dead horse to even further 
pulverize it, but if you go ahead and move forward without the 
data, as may be the indication that is here, how quickly will 
you know you have gotten it wrong? Are there things that you 
will watch for to say that we have driven speculators off that 
side of the deal and that burdens on hedgers have increased?
    I am assuming by burdens, Mr. Gensler, that you mean 
increased costs of transactions and other things, that you 
might expound on a burden a little bit. But how quickly will 
you know that you have done some harm, rather than just trying 
to ease into this thing without disrupting it and creating--
going crazy, as Mr. Chilton said? What are your matrix or your 
benchmarks to say this one was too far?
    Mr. Gensler. Well, it is my hope and, again, we haven't had 
the Commission meeting that we will have tomorrow yet, but it 
is my hope that we will propose something and hear from the 
public that would allow us some time to get the data on these 
all-months-combined. So I may be disclosing my bias here, but 
it is a challenge. There is a 180 day and 270 day statutory 
date. Commissioner Chilton and I read that the same way.
    Mr. Conaway. Excuse me. With respect to that, do you feel 
you have any responsibility, due to your fiduciary job, to tell 
Congress that those dates aren't good, that those were set 
arbitrarily and capriciously by Congress, and that once we 
looked at the level of work and the number of lawyers and the 
level of commitment, that the five of you have actually to read 
it and go through it and understand what you are doing to the 
markets? Do you have any kind of responsibility to say those 
dates aren't good?
    Mr. Gensler. Well, I think I am saying here today--and I 
thank the Chairman for having this oversight hearing--is that 
we are going to take up a rule tomorrow. It is a staff 
recommendation. We will see where my fellow Commissioners are. 
I don't want to prejudge that.
    But if we were to propose something tomorrow, it would have 
a healthy comment period from the public and that will, by its 
very nature, pass the January date. So I am telling Congress 
that, no, we will not finalize this by that statutory date.
    Mr. Conaway. This may be a broader body of work. You have 
the full Dodd-Frank piece of legislation, not just these limits 
and what we were talking about this morning, but you have a 
broader body of work. Have you looked at that and laid out the 
timelines and just say, yes, we can get all this done 
responsibly in that time frame?
    Mr. Gensler. I think we have the goal to get it done and we 
can get it done. And I will say, I think that Congress laid out 
the 360 days. So by completing our work by July 15 of next year 
it will help lower regulatory uncertainty, and that is a very 
important thing. And, of course, we also had a crisis in 2008. 
And that was a very real crisis.
    Mr. Conaway. Speaking of the crisis, I have a short amount 
of time. I take that that you are fine with these dates. Mr. 
Chilton, you mentioned that some time frame in the run-up to 
the bubble in 2008 that there was $200 billion in new money in 
the system. How much of that money has fled the system? What 
are the levels today versus then?
    Mr. Chilton. I can't give you that, sir.
    Mr. Conaway. My question, I guess the idea would be that if 
that money stayed in the market, as I suspect it did, and 
prices have fluctuated, we are way off the $147 on oil, as an 
example. And so I guess I am hard-pressed to see that that 
was--that money did have somebody on other side, and if there 
wasn't anybody on the other side, it raised the price to get 
somebody else in on the other side. I get that. But I want to 
make sure that we are not fighting the last war, and that is 
necessary because there are other comments that you have not--
staff has not documented where all these bad things have 
happened, except on some isolated instances. But if you could 
get that number to us at some point in time.
    Mr. Chilton. It is actually--we know that a lot of money 
went out. And it went--I mean, look, as the Chairman said, we 
are not price setters. We are supposed to be commodity blind, 
although I have a little bit of penchant for the ags, and price 
neutral. We are not price setters. And I also get concerned 
when oil is $150 but----
    Mr. Conaway. It hadn't been $150 except for about an hour 
and a half.
    Mr. Chilton. About 1.727 days, but it stayed high for a lot 
of people, Congressman, in the countryside, a lot of businesses 
went out. So we lost a lot of that speculative money, though. 
You are absolutely correct. Some it left the market and prices 
went all the way down, I believe in December, to like $35 a 
barrel. So this can go up, up, and down.
    To answer, by the way, one of your earlier questions, I 
continue to say we need to err on the high side at first so 
that we don't do any damage. Because I agree with you; we don't 
want to make any issues here that contort markets or do 
something bad. Some things are working well.
    Mr. Conaway. Do you have triggers or matrixes that you will 
watch.
    Mr. Chilton. We are very good at watching these markets, at 
watching liquidity. We don't want to drive speculation away. We 
don't want to drive it until we get to regulate the OTC market. 
We don't went to send it there. We don't want to send it 
overseas. So we have to do this in a responsible fashion, and 
we can do it, sir.
    Mr. Conaway. I yield back.
    The Chairman. Thank you.
    Mr. Kissell.
    Mr. Kissell. Thank you, Mr. Chairman, and I welcome our 
witnesses today.
    If you would allow me a moment of reflection here, this 
is--I am finishing up my first term in Congress, and the first 
hearing that I came to in Agriculture was about derivatives and 
speculation, and the witnesses we had that day were split. Some 
of them pretty much making the case that nothing went wrong, 
that the market worked because investors didn't lose any money 
and there was no, figuratively, train wreck at the end of the 
process like we saw with the banking system, financial system 
there.
    And when I finally got a chance to ask the question--it was 
more of a statement than a question. And I pointed out to them 
that while investors may have not lost money per se, that the 
effects upon the American public were quite substantive in 
terms of how we had to deal with individuals and businesses and 
farmers, ranchers, everybody, how we had to deal with to 
whatever degree speculation caused these increases in prices.
    So I don't so much today have a question as I just want to 
remind the witnesses and appreciate their responsibility here 
of the very intricate task of trying to make sure this process 
which is so important moves forward, but also a reminder that, 
as Mr. Schrader said, that the American public in general so 
largely depends upon this process working without creating the 
speculation and artificial price increases, so forth and so on.
    With that said, I am going to yield my time, Mr. Chairman, 
to Mr. Marshall.
    Mr. Marshall. Thank you, Mr. Kissell.
    Just sort of following up where I was when I stopped, you 
clearly have the statutory authority not to move forward unless 
it is appropriate to do so. That is why that language was stuck 
in there. And that if you move forward without understanding 
precisely what the problem is, then it seems to me that you are 
not moving forward appropriately. And if your staff hasn't 
identified what the problem is, then how do you actually come 
up with a regulation to solve that problem. You don't even know 
what it is. It is sort of too broad a brush.
    But back to this classes of traders. We intentionally stuck 
that language in there to give you the discretion to 
distinguish among the speculators and, if you chose to do so, I 
don't know whether there is a massive passive problem here. I 
just don't have the expertise. And there are, as Mr. Kissell 
points out, people on both sides of that.
    So I leave it to you and your staff and your economists and 
whatnot to figure it out. But if it is massive passive that is 
the problem, then the solution should focus specifically on 
that, and one-size-fits-all position limits don't do that. And 
you just use ratios.
    Assume you have 20 traders in the market, five of them are 
passive. You put a position limit in that is designed to 
maintain their percentage at no more than 25 percent. And then 
let us say a whole bunch of additional passives show up. Let us 
say 20 additional passives show up. Now I have 40 traders in 
the market and 60 percent of it is passive money.
    So you really do need to at least consider distinguishing 
among the classes of traders if you conclude that that is a 
problem.
    I associate myself with the questioning of Mr. Conaway in 
many different respects, and he has observed there is a 
fiduciary duty here.
    And I guess a final question. Let us assume that you impose 
position limits and that there is a large market demand out 
there that is now sort of stymied. It doesn't have an 
opportunity to just come into these markets because you are 
aggregate. You are across all of the markets. Where does that 
money go? How do people who want to take a position in 
commodities to do whatever, hedge or because they want that in 
their portfolio or whatnot and they can't do it in these 
vehicles, where do they go? Do they go to Europe? Do they start 
hoarding commodities? I mean, what do they do?
    Mr. Gensler. If I can address the last point, because this 
has been raised with us.
    If somebody wants to come into the market and hedge, if 
they are a bona fide hedger these limits won't affect them. If 
they are coming into the market, they are not a hedger, and 
they are of normal size in these markets, these numbers won't 
affect them either. The numbers that we currently have in the 
markets or even that we proposed in January, would have only 
touched a handful of traders in the energy markets, the largest 
speculators.
    So it is truly just a very small group of people who are 
very large in the marketplace.
    To answer your question, traditionally, they went to the 
over-the-counter market, but Congress has said bring that in. 
But potentially that could move on to contracts that were 
similar but not identical, or they would possibly move 
overseas. And we are very conscious of that, and we are looking 
at that.
    Mr. Marshall. If they go elsewhere using those two 
devices--they go overseas or they go into contracts that are 
similar but not identical--doesn't both of those things have 
the same effect on the market as far as pricing is concerned?
    Mr. Gensler. It may. It may.
    So that is part of why this, whatever we put out, is going 
to be a proposal. We really want the public comment to weigh 
in. I think that is a good process and a constructive process. 
Congress has directed us certainly to look at this and expand 
what we currently have in agriculture products to the over-the-
counter markets, and we are contemplating to also do it in the 
energy and metals.
    Mr. Marshall. Thank you, Mr. Chairman.
    The Chairman. Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    It was interesting, Mr. Chilton. I appreciated your 
remarks. You said that MIT and Princeton and even Lincoln 
University of Missouri were involved in discussing some of the 
pros and cons of this. And I happen to be an alumnus of Lincoln 
University. So it is nice to see my little alma mater in the 
same stature as MIT and Princeton and those guys. So I 
appreciate your comment.
    I noticed yesterday in The Wall Street Journal an article 
with regards to our discussion this morning with regards to how 
we are proceeding and the speed we need to be proceeding at 
with regards to coming up with rules, and I think that is 
basically what this hearing is about today.
    And one of the comments that was made in there is that 
there is enough data already accumulated, that you can go ahead 
and make some of these rulings and not have to continue to 
research or come up with more data or more surveying. And this 
morning it seems like the comments have been coming from both 
of you gentlemen with regards to we need more data, we need 
more time. Can you allay that concern of this article here? Are 
they out in left field? Or where are we at in this?
    Mr. Gensler. I think there are many roles that Congress has 
asked us to do, but position limits is a particular challenge 
because it really is related to the size of the market. If you 
are going to limit something, if Congress is saying to limit 
something, you can pick whatever the percent is, it relates to 
the size of the market.
    Most of the other rules are about reporting, about how a 
trading facility will work, how transparency works. I think 
that we have enough knowledge to go forward to lower the risk 
of clearinghouses.
    Many of the rules don't have this same challenge. I think 
the position limit rule, to be quite direct with you, has a 
unique set of challenges because it is about the size of the 
market, the size of the crowd, and the interaction between 
hedgers and speculators.
    Mr. Luetkemeyer. So what you are saying is you have a lot 
of data on most of the things you need to be working on, but 
some of the issues, especially with regards to position limits, 
you need some more results yet to be able to come up with 
anything.
    Mr. Gensler. I think that is true to part of the position 
limits. I agree with Commissioner Chilton. I think on the spot 
month limits related to deliverable supply and how we have 
traditionally done that and the exchanges have, we could 
possibly move in a more timely way.
    Mr. Luetkemeyer. What is the impact with the lack of a 
rule? If we keep putting this off or we delay, what is the 
impact on the markets? What is the impact that we can expect 
for our farmers and our commodity folks?
    Mr. Chilton. Even those who say that speculators aren't 
having an impact would like to have the rule in place to some 
extent because then it would take the argument away that they 
are having an impact, if you get me.
    Mr. Luetkemeyer. Certainty is always nice, and that is the 
key to any kind of market. In today's world, they are debating 
the extension of tax law right now, and a certain uncertainty 
is a big part of that rule.
    I'm sorry. Go ahead.
    Mr. Chilton. Congressman, we have seen in the crude market 
and the natural gas marketplace 20 percent. We have seen 
concentration by one trader. We have seen what I consider 
excessive speculation. This would be on the short side in the 
silver market. There are issues that I think, as the Chairman 
said, are the largest of the large that we need to be concerned 
about. We can do that right now through this thing that I 
talked about earlier looking at a certain level which we say 
that deserves escalated scrutiny that we can do this thing 
called a special call.
    That is, we say, Chairman Boswell, you are over, say, ten 
percent of ICE or NYMEX. And then I say I want to know your 
other positions. You provide them to me, your swaps positions 
that we don't have the aggregate data on yet. Once we get that 
information, I see if you are above that level still. Because 
even though you might be above this position point, your swaps 
may show that you are below. But you also could say your swaps 
say you are way high. And then we would use our authority, work 
with the exchange, ICE, or CME to get down to an appropriate 
level.
    That would deal with the largest of the large traders, the 
folks that people, your constituents, write you about and the 
folks that we look at every week in our surveillance meetings 
and say these are a concern for us. We can do that today. We 
don't need additional data. It wouldn't be hasty. And, as the 
Chairman and I agree, we could do the spot month right now.
    Mr. Luetkemeyer. I see as my time runs out here I just want 
to make one comment. And, Mr. Chilton, you made this earlier, 
that the intent is to protect the markets for their original 
purpose. And I sincerely hope that you continue to use that as 
your guiding thought in all of your deliberations. Because, to 
me, that is why we are here today, is to protect these markets 
for the original intent of the farmers and original commodity 
folks to be able to use these things, to use them to enhance 
their businesses and their ability to do business. It is not a 
speculative forum that we are worried about here. It is the 
original folks who use these things to manage their businesses.
    So that would be my only comment and my only concern and my 
wish to you.
    Thank you. And, Mr. Chairman, I yield back.
    Mr. Gensler. If I might say, that does guide us. I really 
do think that does guide us.
    The Chairman. Mr. Murphy has joined us. He is not a Member 
of the Subcommittee but, by unanimous consent, we will 
recognize him at this time.
    Mr. Murphy. No questions.
    The Chairman. Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman. Thank you for 
holding this hearing.
    I think that the part of the Dodd-Frank that called for a 
finding--the question is the Exchange really--you all really 
haven't done anything in the sense of coming up with a specific 
finding. And so when you send the rule out, you are going to 
send a rule out that says we just think there needs to be 
limits out there. We don't have any finding that those limits 
are needed.
    Am I understanding that correctly?
    Mr. Chilton. Certainly Congress told us to put the limits 
in. We had the authority actually before this, but we didn't 
have support to do this. So we were instructed in the Dodd-
Frank bill to put limits in.
    And the original purpose in the Commodity Exchange Act 
doesn't say that you have to jump some hurdle that proves 
beyond a shadow of a doubt in a court of law that speculators 
moved gas prices ten percent. The law says that we are to 
prevent and deter fraud, abuse, and manipulation; and so that 
is sort of the guiding onus that I look at, sir.
    Mr. Neugebauer. That is one of the things that we may have 
a disagreement on. I don't necessarily know whether Congress 
told you to impose limits.
    Mr. Chilton. Section 737.
    Mr. Neugebauer. If you look at it, it says, as the 
Commission finds as necessary to diminish, eliminate, or 
prevent such burden. In other words, in what you have told this 
Committee today you don't have data that says that there are 
abuses or excessive speculation going on. I think the intent of 
Dodd-Frank was, if you find it, address it certainly. I agree 
with the gentleman from Missouri. The job for government is 
transparency and integrity.
    But what we haven't heard today--and several of the people 
on the panel have asked this question. We haven't heard you say 
we have identified where there is excessive speculation going 
on that could manipulate the pricing in the marketplace.
    Mr. Chilton. Congressman, perhaps Congress should have put 
a finding in before we did it, but they didn't.
    Mr. Neugebauer. I know the story, and I agree with that. 
But since we didn't, we kicked the ball to you and we said you 
should go out and address that issue and conduct an economic 
analysis and to look at that and make sure. And if you find 
that, then you should take action. And we would want you to 
take action.
    I think what you hear today is everybody agrees that we 
want integrity and transparency in the marketplace. What we 
also don't want is you all setting prices. I have heard you 
say, Mr. Chilton, it wasn't your job to set prices, but I will 
tell you by manipulating or by changing some of these limits, 
you could be in fact affecting prices. You may have the 
undesired result.
    The question is, what is oil worth? I don't know. It may be 
worth $300 a barrel. It may be worth $50 a barrel. But we need 
to let the markets decide that.
    I want to go back to the spot month, because there is so 
much to cover here. Since price discovery, most people would 
agree, happens either in the cash months or the spot month, 
then what would be the need, then, for having position limits 
in the outer months.
    Mr. Chilton. Well, in the spot month, there already are 
position limits. But the outer months, it was the question that 
Mr. Marshall actually alluded to when he talked about the 
massive passives. They have a different trading strategy, 
Congressman, these massive passives. And what they do is they 
are not--they don't really care what the price of oil or wheat 
is in the next day or so--I mean, they care, but they are not 
in it for a day or week. They are in it for the long term. They 
are saying, for example, crude oil is going to be worth more in 
2 years.
    What happens when you get these large massive passives who 
have a trading strategy, it is markedly different than what 
they have been in these markets traditionally. They are fairly 
price insensitive because they've got a long view of it. So 
they just roll their positions when the contract expiration 
comes up, and every other trader knows they are going to do it. 
And these massive passives can have 30, 40, 50 percent of the 
market. I think Congressman Marshall's question about whether 
or not you should have a limit there is a great question. I 
haven't figured out how you do it, quite frankly, sir, but it 
is an important area to look at.
    Mr. Neugebauer. Last question here. So--Mr. Gensler, so 
if--one of the things in the bill it says that you can do as 
appropriate. I think that was, again, Congress trying to make 
sure that we weren't being too prescriptive.
    So in many positions--I mean, could the finding--if we 
finally went out there and looked into and analyzed what was 
going on, could one of the findings be that or the appropriate 
limit is zero or unlimited? What is appropriate?
    Mr. Gensler. I supported proposing position limits in 
January of this year, and I will be supporting what I believe 
staff will be recommending tomorrow. I still have to see it. It 
is changing a little this afternoon.
    Because I do think in all-months-combined, as we have done 
in the agricultural markets for decades, as we did with the 
exchanges in the energy and metal markets in the 1980s and 
1990s, that it ensures that there is a diversity of speculators 
in the market. One can debate how many, and I think that is a 
very important debate. But, I think that the integrity of the 
market and the price, how people come together, you need to 
have a diversity of points of view in the marketplace, not one 
or two or three large traders on the speculators' side 
dominating the marketplace.
    I wanted to try to answer both of your questions together.
    The Chairman. Thank you.
    Mr. Peterson.
    Mr. Peterson. Thank you, Mr. Chairman. I waited until the 
end here because I want to head in a little bit different 
direction and ask you a couple of questions you may not want to 
answer.
    This story that was in the New York Times on Sunday, I 
assume you have read that?
    Mr. Gensler. Yes.
    Mr. Peterson. And this has been brought up to me by a 
number of Members. That has created a fair amount of interest 
on the Hill here. So I want to know what your view is on a 
couple of things.
    This issue of the--trying to put these on the electronic 
market and thereby reducing the spreads. I think that is some 
of what you are trying to do through this whole process, that 
the more we can get this information out, the better the market 
will work and the end-users will have a more fair place in the 
marketplace. I think that is kind of where you are at.
    Mr. Gensler. I think it is where Congress was. I think 
transparency helps tens of thousands of end-users. Some of it 
is through real-time reporting after the transaction, but some 
of it also comes on the smaller trades, not the big blocks, 
even before the transactions.
    Mr. Peterson. So this issue about the Citadel that is 
trying to set up this electronic trading that would give you 
real time or before the transaction reporting, if that was 
implemented, would reduce the spreads.
    Mr. Gensler. I think it brings greater competition, and the 
American system works best when there is more competition.
    Mr. Peterson. So that gets to the issue of what actually 
went on here. Apparently getting to the governance of these 
clearinghouses, which became an issue somewhat in the 
conference committee and with the Lynch amendment and so forth.
    So it appears to me that these big guys are trying to keep 
this very profitable part of their business to themselves. Am I 
wrong about that?
    Mr. Gensler. I think it is also part of the American way to 
try to maximize profits. And they have shareholders, and so, I 
respect that.
    Mr. Peterson. And so you don't disagree with some of the 
characterizations in this article--that night we made the deal 
the last night on the derivatives, that set off a flurry of 
lobbying that went on from like midnight to 5 o'clock in the 
morning trying to undo what we had done. So I mean, generally, 
you can figure out what is going on by following the money. 
Obviously, we hit a nerve because we created--there must have 
been 250 bank lobbyists running around there trying to undo 
things.
    Mr. Gensler. They are still visiting us.
    Mr. Peterson. So this is something you are looking into, I 
assume, in the process of this whole implementation of the 
Dodd-Frank Act?
    Mr. Gensler. We anticipate tomorrow taking up four proposed 
rules including this position limit rule. But there are two 
others that are very important.
    With regard to clearing--again, these are proposals. But 
with regard to clearing, it will be our last set and that will 
include something called participant eligibility and ensuring 
that futures commission merchants could get in. That New York 
Times article highlighted that, currently, the clearinghouses 
are closed clubs. They are very exclusive, not inclusive. And 
they say it is because it is risk management.
    We are also taking up these electronic facilities or, 
technically, they are called swap execution facilities.
    Mr. Peterson. Is there a significant difference between 
making this available in real time or right before the trade as 
opposed to making it available 30 seconds after the trade?
    Mr. Gensler. Here is what is so important. If a party wants 
to make a bid or an offer--this is absolutely bipartisan--if 
somebody wants to make a bid or an offer, they should be 
allowed to do it. And, right now, that is very difficult in 
this marketplace. You have to be invited in, basically.
    I think what Congress said was swap execution facilities. 
The words you used was ``multiple participants have to have the 
ability to execute or trade with multiple participants.'' And 
to do that then somebody should have the ability to make a bid 
and broadcast it. And that is a very important part of being a 
swap execution facility. That anybody who wants to make a bid 
on the market can make a make a bid on the market. Obviously, 
they have to have the resources to stand behind their trades.
    Mr. Peterson. So where is that in the--when will the final 
decision be made on that? Do you know? When will you actually 
get that finalized?
    Mr. Gensler. We are taking up that proposal tomorrow.
    I think what Congress did was historic. It is very 
important. It will bring transparency and competition to the 
market so that end-users will benefit. I think it will narrow 
spreads over time. And then we will put that proposal out, if 
the Commission supports it tomorrow, usually, for 60 day 
comment.
    Mr. Peterson. And then it will go to final rule?
    Mr. Gensler. Based upon public comment, by next July and 
have certain implementation dates as well. Give us some time 
for implementation.
    Mr. Peterson. So it should happen this year sometime yet?
    Mr. Gensler. You are referring to the year just about to 
begin?
    Mr. Peterson. I mean next year.
    Mr. Gensler. Yes.
    Mr. Peterson. And that will get at some of the criticisms 
that were in this article if we get this done.
    Mr. Gensler. I think there were three main criticisms in 
that article, all interlaced: Governance. We have published the 
governance rule on October 1. It was put out for public 
comment. We received 150 good, solid comments. We are trying to 
finalize that early next year. It goes to clearinghouses and 
the eligibility for all valid futures commission merchants to 
be part of those clearinghouses. We are going to try to propose 
something on that tomorrow. And, I think, the article went to 
the openness and competition in trading venues; and we are 
going to try to do that proposal tomorrow.
    I think that end-users and agricultural interests and 
energy interests will benefit greatly if more competition and 
more transparency are brought onto these markets. And I believe 
that markets work best when you have competition and 
transparency, and I think that is what Congress told us to do.
    Mr. Peterson. There is no question that is what most of us 
wanted.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    That completes our first round. I know that Mr. Marshall 
has another question. Anybody else have further questions?
    Mr. Marshall.
    Mr. Marshall. Mr. Chilton, you mentioned that one reason to 
go ahead and impose position limits now is that it would remove 
pressure, the silver lining in this cloud that is hanging over 
the industry. It is hard for me to believe that it relieves 
pressure if you impose position limits that just don't do 
anything, or do too much, and somehow screw the markets up. So, 
the pressure remains, particularly if all of this phenomena is 
being driven by underlying market forces.
    Congress for a reason did not make findings that there must 
be position limits in all of these different contracts. It is 
because we intentionally wanted the CFTC to have the discretion 
to make that decision. It seems to me you all have not made 
that decision except in sort of a broad sense, and to suggest 
that you need to move forward and actually impose position 
limits because Congress has mandated that ignores the as 
appropriate language, the as necessary language and ignores 
what we actually intended.
    We didn't know what to do. We don't have the expertise. We 
deferred to you to make the decision ultimately what sort of 
position limits should be imposed.
    And a final thing just to clarify what I said about ratios. 
When I gave those numbers earlier I was talking about assuming 
that all of the bona fide hedgers as now defined are in there 
and in the market. If you just look at the balance of the 
speculators, the ratio between the speculators winds up being 
fairly critical if you have concluded that massive passive 
money is a problem. I don't know whether it is. It may be good, 
for all I know.
    But if you conclude that, you are going to have to set 
different position limits; and that is why we stuck that 
language in the statute, to give you the discretion to do that 
within that class of speculators.
    Thank you, Mr. Chairman, for your indulgence.
    The Chairman. Anybody else have any further questions?
    Seeing none, thank you very much for your time and sharing 
with us and put a little daylight on the process. We appreciate 
it.
    Mr. Gensler. Thank you. And happy holidays if I don't see 
you until after the first of the year.
    The Chairman. Thank you and the same to you.
    The first panel will be excused, and we will call the 
second panel to the table as soon as possible.
    We would like to welcome our second panel to the table. 
Thank you for your patience for waiting, and we are happy to 
have you here.
    We have with us today Mr. Jim Collura, Vice President for 
Government Affairs of the New England Fuel Institute; Mr. 
Terrence Duffy, Executive Chairman of the CME Group of Chicago; 
Mr. Joel Newman, President and Chief Executive Officer, 
American Feed Industry Association; Mr. Jeffrey Sprecher, 
Chairman and Chief Executive Officer of 
IntercontinentalExchange out of Atlanta; and Mr. Robert Jones, 
Senior Vice President, ANB AMRO Clearing Chicago LLC, on behalf 
of the National Grain and Feed Association.
    Mr. Collura, please begin when you are ready.

 STATEMENT OF JAMES M. COLLURA, VICE PRESIDENT FOR GOVERNMENT 
   AFFAIRS, NEW ENGLAND FUEL INSTITUTE; FOUNDING MEMBER AND 
                      SPOKESMAN, COMMODITY
         MARKETS OVERSIGHT COALITION, WASHINGTON, D.C.

    Mr. Collura. Chairman Boswell, Ranking Member Moran, and 
Members of the Committee, thank you for the opportunity to 
testify on the importance of speculative limits for commodity 
dependent businesses and consumers.
    I currently serve as the Vice President of the New England 
Fuel Institute, which represents more than 1,200 mostly small, 
family owned and operated home heating companies.
    In 2007, in response to what was perceived as unpredictable 
and volatile commodities futures markets, and out of concern 
over possible excessive speculation in these markets, we 
partnered with the Petroleum Marketers Association of America 
and other business and consumer groups to form the Commodity 
Markets Oversight Coalition, or CMOC. I am delivering testimony 
today on behalf of this coalition, and I have submitted a list 
of supporting groups for the record.
    CMOC is comprised of an array of commodity dependent 
bushiness and industries, as well as faith-based organizations 
and groups representing average American consumers. We favor 
policies that promote stability and confidence in the commodity 
markets and that preserve the interests of bona fide hedgers 
and consumers. Our coalition endorsed title VII of the Dodd-
Frank Act, which includes the most substantial reforms of the 
derivative markets in more than a decade.
    Members of this Committee, under the leadership of Chairmen 
Peterson and Boswell, and Ranking Members Lucas and Moran are 
to be commended for their years of hard work that resulted in 
the passage and enactment of this monumental piece of 
legislation.
    The Dodd-Frank Act includes various regulatory initiatives 
necessary for market transparency and to prevent fraud and 
manipulation and excessive speculation, including a requirement 
the CFTC establish speculative position limits for regulated 
and currently unregulated markets. The law requires that the 
CFTC establish position limits for energy commodities by 
January 17, 2011. However, we are disappointed that the 
Commission has recently come under pressure to delay the 
imposition of these limits by the deadline as required by law. 
Our coalition opposes any such delay.
    Some argue that the CFTC has not had enough time to 
thoroughly vet and consider the potential effects of such 
limits. However, the Committee should note that the Dodd-Frank 
Act does not provide the CFTC with the authority to establish 
limits. It actually expands existing authority.
    The Commodity Exchange Act of 1936 requires the CFTC to set 
position limits in order to prevent a single market participant 
from controlling price movements. The law sought to prevent 
undue burdens on interstate commerce resulting from excessive 
speculation and, as a consequence, cause sudden or unreasonable 
price fluctuations or unwarranted changes in the prices of 
commodities.
    However, the U.S. exchanges have abandoned hard energy 
speculation limits in favor of softer accountability limits. 
Under the leadership of Chairman Gensler, the CFTC in 2009 
acknowledged that accountability limits were insufficient to 
prevent traders from taking controlling positions. Many traders 
were violating them with little or no action by the exchange.
    The CFTC held a round of hearings in the summer of 2009 and 
introduced a proposal in January. In the 4 months between 
January and April of 2010, the CFTC received well over 8,000 
comments on the proposed rule, the vast majority urging strong 
and meaningful limits in speculation. During that time, some 
argued against the CFTC's proposed action out of fear that it 
would drive market activity from regulated exchanges under so-
called dark markets; those that reported little or no data or 
were subject to little or no oversight. The CFTC should not 
act, they argued, until it was granted authority over the OTC 
and foreign markets and could implement limits across the 
board.
    The CFTC under the Dodd-Frank Act enjoys this authority. 
Once fully implemented, the Act will bring dark OTC markets to 
light by requiring exchange trading or clearing. It requires 
that foreign boards of trade that seek U.S. access first prove 
that they are subject to comparable oversight and regulation, 
including the imposition of position limits.
    In addition, many overseas regulators are drawing up their 
own plans to impose speculation limits. If the CFTC were to 
delay implementation of these limits here in the United States, 
the impetus for regulatory reform in other jurisdictions 
overseas could be jeopardized.
    The CFTC must act. Excessive speculation is real and it 
hurts. When prices surge to unjustifiable levels, consumers are 
left with higher food, gasoline, and home heating costs. Vital 
U.S. businesses, including manufacturers, airlines, truckers, 
and other transporters are hurt as well. Even still, some 
continue to believe that speculation can never be a bad thing. 
Despite ample evidence that excessive speculation has been 
destructive to commodity markets, some continue to doubt, 
question, or outright deny that speculation was ever or could 
ever be excessive.
    Make no mistake, we believe in open, transparent, and 
competitive markets and that new regulation must not 
excessively burden market participants or unnecessarily impede 
market liquidity. Speculators provide the market with this 
liquidity. But excessive speculation drives commodity prices to 
levels unjustified by market forces and results in price 
bubbles that harm commodity hedgers and users in the broader 
economy, as we saw in dramatic fashion with the commodity 
bubbles in 2007 and 2008.
    Establishing and imposing timely and meaningful limits will 
send a signal of confidence and stability, and help create more 
transparent, orderly, and functional commodities markets.
    Thank you again for the opportunity to testify. I look 
forward to any questions you might have.
    [The prepared statement of Mr. Collura follows:]

 Prepared Statement of James M. Collura, Vice President for Government 
  Affairs, New England Fuel Institute; Founding Member and Spokesman, 
        Commodity Markets Oversight Coalition, Washington, D.C.

    Honorable Chairman Boswell, Ranking Member Moran and Members of the 
Committee; thank you for the opportunity to testify before you today on 
the importance of position limits for commodity dependent businesses 
and consumers, and the broader economy and market stability.
    I currently serve as Vice President of New England Fuel Institute 
(or ``NEFI''), a not-for-profit home energy trade association that 
represents more than 1,200 mostly small, family owned- and operated-
businesses. In 2007, in response to what was perceived as increasingly 
unpredictable and volatile commodities futures markets, and out of 
concern over possible excessive speculation in these markets, NEFI 
partnered with the Petroleum Marketers Association of America (or 
``PMAA'') to form the Commodity Markets Oversight Coalition.\1\ I am 
delivering testimony today as a spokesman for this coalition.
---------------------------------------------------------------------------
    \1\ The Petroleum Marketers Association of America is a national 
federation of 47 state and regional trade associations representing 
over 8,000 independent petroleum marketing companies, including 
convenience store/gas stations, gasoline and diesel fuel retailers and 
suppliers, and home heating oil dealers.
---------------------------------------------------------------------------
    The Commodity Markets Oversight Coalition (or ``CMOC'') is an 
informal coalition whose participating members represent an array of 
business interests, including commodity producers, processors, 
distributors, retailers, commercial and industrial end-users, as well 
as groups representing average American consumers. The CMOC advocates 
in favor of government policies that promote stability and confidence 
in the commodity markets and that preserve the interests of bona fide 
hedgers, consumers and the broader economy.\2\
---------------------------------------------------------------------------
    \2\ The coalition, when formed in August of 2007, was referred to 
as the ``Energy Markets Oversight Coalition,'' but was changed to the 
``Commodity Markets Oversight Coalition'' to reflect its members' 
interests in reforming derivative trading in a broad range of 
commodities, including agricultural and energy commodities.
---------------------------------------------------------------------------
    On July 21, 2010, President Barack Obama signed into law the Dodd-
Frank Wall Street Reform and Consumer Protection Act.\3\ Title VII of 
the Dodd-Frank Act, which was endorsed by members of the CMOC, included 
the most substantial new regulations of the U.S. derivatives markets in 
more than a decade. Members of this Committee, under the leadership of 
Chairman Peterson, Chairman Boswell and Ranking Members Lucas and 
Moran, are to be commended for their years of hard work that resulted 
in the passage and enactment of this monumental piece of legislation.
---------------------------------------------------------------------------
    \3\ Pub. L. 111-203.
---------------------------------------------------------------------------
    Obtaining the consensus necessary to assemble and retain support 
for Title VII of the Dodd-Frank Act was certainly no easy task. Many 
proposed reforms of the U.S. derivatives markets were met with great 
skepticism, if not outright opposition, from various special interests. 
Many market participants and stakeholders, from small businesses, 
farmers and energy end-users to massive Wall Street banks and trading 
houses, got involved in the debate.
    Despite efforts by opponents to misrepresent or create doubt about 
many of the derivatives reforms in the bill, Congress included various 
regulatory initiatives necessary for market transparency and 
accountability and to prevent fraud, manipulation and excessive 
speculation. But rather than taking a detailed and proscriptive 
approach to the most controversial provisions, the Congress ceded much 
discretion to financial regulators such as the Commodity Futures 
Trading Commission (or ``CFTC''). One clear example of this delegation 
of Congressional authority is the law's directive to CFTC to establish 
speculative position limits for regulated and currently unregulated 
markets such as over-the-counter swaps markets.\4\
---------------------------------------------------------------------------
    \4\ Ibid,  737.
---------------------------------------------------------------------------
    The Dodd-Frank Act requires that these limits be established ``in 
the spot month, in each other month, and in the aggregate across all 
months'' and provides the CFTC with discretion in defining exemptions 
for bona fide hedgers. The new law requires that the CFTC establish 
speculative position limits for what are defined by statute as 
currently ``exempt commodities,'' such as energy and metals, within 180 
days of enactment, and for agricultural commodities within 270 days of 
enactment.\5\
---------------------------------------------------------------------------
    \5\ The Commodity Futures Modernization Act of 2000 (Pub. L. 106-
554) created a new classification for commodities to be exempt from 
many trading rules under the Commodity Exchange Act, called ``exempt 
commodities,'' which includes any commodity other than an excluded or 
agricultural commodity.
---------------------------------------------------------------------------
    We commend CFTC Commissioner Gary Gensler and his fellow 
Commissioners for their commitment to timely enactment and enforcement 
of new regulatory initiatives under this Act and for engaging 
stakeholders in a thoughtful and transparent rulemaking process. 
Tomorrow, the CFTC will hold the eighth in a series of public meetings 
on the implementation of the Dodd-Frank Act. Tomorrow's meeting will 
include discussion and review of proposed rulemakings for position 
limits. Despite this transparent and inclusive process, the Commission 
has recently come under pressure to delay the formulation and 
imposition of position limits by the deadline required by law. Our 
coalition opposes any such delay.
1. Imposition of Position Limits Is Not a New Idea
    The Dodd-Frank Act does not provide the CFTC with the authority to 
establish speculative position limits; it actually expands existing 
authority under the Commodity Exchange Act of 1936. Section 4(a) of 
that Act required the CFTC to set limits on market positions that 
traders can take in any commodity in order to prevent a single market 
participant from controlling price movements. The goal was to prevent 
an ``undue burden on interstate commerce'' that would result from 
excessive speculation and, as a consequence, cause ``sudden or 
unreasonable fluctuations or unwarranted changes in the price'' of 
commodities.
    Like the Dodd-Frank Act, the 1936 statue was enacted following a 
time of crisis for the economy, a catastrophic upheaval in U.S. 
financial markets, volatility and uncertainty in commodity futures 
markets and a debate over prudent regulation to remedy these problems 
and their causes. Farmers, arguing that speculation can indeed become 
excessive and manipulative, and therefore distort fundamentals and the 
price discovery function of futures markets, fought hard for position 
limits authority and won the day.
    In 1936, Federal regulators acted quickly to impose position limits 
on agricultural markets that resulted in sixty years of relatively 
reliable and orderly commodities futures markets for agricultural, and 
eventually, energy commodities. However, in the 1990s the commodity 
markets began to change dramatically as a result of digitalization, 
globalization and the Internet. Traditional open-outcry exchanges on 
LaSalle Street in Chicago and Wall Street in New York found themselves 
in competition with new electronic and off-shore trading platforms. In 
an effort to remain competitive in energy commodity futures, options 
and swaps, many exchanges abandoned hard speculation limits in favor of 
softer ``accountability limits.''
    Shortly after his confirmation as CFTC Chairman, Gary Gensler 
acknowledged that accountability limits have time and time again proved 
insufficient in preventing traders from taking large positions in 
violation of these limits and with relative inaction by the exchange. 
In fact, the CFTC found that in the 12 months between July 2008 and 
June 2009, individual month accountability limits were exceeded for 
crude oil, gasoline, heating oil and natural gas by 69 different 
traders. Some traders even exceeded limits every day during the trading 
period.\6\
---------------------------------------------------------------------------
    \6\ Statement by CFTC Chairman Gary Gensler, Public Meeting on 
Establishing Position Limits, CFTC Headquarters, Washington, D.C., 
January 14, 2010.
---------------------------------------------------------------------------
    There are well documented cases in which individual traders 
violated accountability limits and their actions had major consequences 
for market hedgers and consumers. This includes the $6 billion collapse 
of Amaranth Advisors in 2006, one of the largest hedge fund collapses 
in U.S. history. A Senate Permanent Subcommittee on Investigations 
report in June 2007 found that ``Amaranth controlled 40 percent of all 
outstanding contracts on NYMEX for natural gas in the winter season 
(October 2006 through March 2007), including as much as 75 percent of 
the outstanding contracts to deliver natural gas in November, 2006.'' 
\7\
---------------------------------------------------------------------------
    \7\ Excessive Speculation in the Natural Gas Market, Senate 
Permanent Subcommittee for Investigations Staff Report, June 25, 2007.
---------------------------------------------------------------------------
    Amaranth occasionally held five or more times the ``accountability 
limit'' for natural gas, and according to the report, the NYMEX failed 
to take immediate action and in many instances where traders violated 
limits, never took any action. When the NYMEX finally ordered Amaranth 
to draw down its position, they simply moved their holdings onto an 
off-shore exchange where the CFTC and the U.S. exchanges had access to 
little or no data. But the size of the Amaranth position relative to 
the market eventually came back to haunt it, when in September, 2006 
its position collapsed.
    The record surge in natural gas prices at the height of the 
Amaranth position and the subsequent collapse demonstrated that without 
hard position limits one trader alone can move these markets. This 
event led many industries to recognize the problems associated with 
exempting energy commodities from position limits and catalyzed the 
establishment of our coalition in August of 2007. It also proved that 
``too big to fail'' exists in the commodities derivative markets and 
that commodity speculation can be at times excessive. It also exposed 
in dramatic fashion the inadequacies of so-called ``accountability 
limits'' and lack of oversight and transparency in the commodity 
markets. More frightening still was evidence that a growing majority of 
trading was now occurring on so-called ``dark markets,'' or markets 
that reported little or no data and were subject to little or no 
oversight and regulation.
    As policy makers deliberated on appropriate reforms, the market 
continued to deteriorate for end-users. The following year, energy 
prices surged to unjustified levels. In the summer of 2008, and despite 
declining demand and historically high inventories, crude oil topped 
$147 per barrel. Consumers faced unprecedented gasoline and home 
heating costs. Food prices similarly surged to record levels. As food 
became unaffordable and aide declined, riots broke out in at least 30 
food important dependent countries. Manufactures, airlines, truckers 
and other transporters saw fuel prices surge, which caused inflation in 
the cost of goods and services for every American. But like almost 
every speculative bubble, this one eventually burst, leaving many 
farmers, manufacturers and other end-users stuck with unaffordable 
commodity pricing contracts.
    Shortly after his confirmation as CFTC Chairman last year, Gary 
Gensler acknowledged the need for immediate action to restore 
confidence and stability. The Commission began drafting proposed rules 
to address trading loopholes and exemptions, and to establish position 
limits for energy and metals. The Commission held a round of hearings 
in the summer of 2009 to solicit input from commodity hedgers, 
speculators, consumers and academics. Several members of this coalition 
delivered testimony before the Commission at this time.\8\
---------------------------------------------------------------------------
    \8\ Held on July 28 and 29, and August 5, 2010. (www.cftc.gov/
PressRoom/Events/Events2009/index.htm)
---------------------------------------------------------------------------
    In January 2010, the CFTC proposed a rule for the establishment of 
speculative position limits for energy contracts, modeled largely after 
existing position limits that existed for agricultural commodities.\9\ 
During the comment period ending April 26, 2010, the CFTC received an 
unprecedented number of submissions, well more than 8,000 in all, the 
vast majority of which indicated support for strong and meaningful 
limits on speculation. Several CMOC member groups were among those 
comments, and many expressed reservations at the relatively ``high 
bar'' formul# recommended by the Commission.
---------------------------------------------------------------------------
    \9\ Notice of Proposed Rulemaking for Federal Speculative Position 
Limits for Referenced Energy Contracts and Associated Regulations, 
Commodity Futures Trading Commission, 75 FR 4143, Washington, D.C., 
January 26, 2010.
---------------------------------------------------------------------------
    Understandably, several Commissioners expressed reservations about 
establishing limits that could be considered too aggressive in light of 
the Commissions lack of authority over certain trading environments. At 
least two Commissioners feared in April that position limits would 
drive trade to ``dark'' over-the-counter and off-shore environments. 
The CFTC repeatedly called on Congress to give it authority over these 
markets, so that broad and uniform limits could be placed on all 
speculative positions and in all markets. On July 21, 2010, the agency 
got its wish when the Dodd-Frank Act became law.
    The CFTC has enjoyed 75 years of authority to establish speculation 
limits in commodity markets. After nearly 2 years of debate and passage 
of the most sweeping reforms in the history of the U.S. derivative 
markets, they now have the authority to establish said limits across 
the board to all traders and in all markets. We see little merit to the 
argument that the CFTC has not sufficiently considered the imposition 
of such limits. We are discouraged that, despite ample evidence of 
excessive speculation in commodities markets that some continue to 
doubt, question or outright deny that speculation was ever and could 
ever be excessive.
2. Hard Speculation Limits Will Not Disrupt Markets
    Many CMOC participating groups represent vital commodity-dependent 
industries that have a steadfast belief in open, transparent and 
competitive markets. We believe that any new rules and regulations must 
be well reasoned, justified and not excessively burden market 
participants, or unnecessarily impede market liquidity. Speculators 
provide the market with this liquidity, but excessive speculation 
drives commodity prices to levels not justified by the market forces of 
supply and demand, results in pricing bubbles that harm commodity 
hedgers, end-users and the broader economy.
    We also believe that the commodity derivatives markets, when they 
were first established more than 150 years ago, did not have as their 
primary constituents Wall Street speculators and investors looking to 
make a fast buck, nor was the CFTC established by Congress to serve 
such constituents to the detriment of hedgers and consumers.
    Commodity exchanges were established to provide legitimate 
commercial businesses and end-users with a means to hedge risks 
associated with commodity prices. When unrestrained speculation is 
allowed to dominate markets and their hedging and price discovery 
functions, as we have clearly seen, it violates the Commodity Exchange 
Act's prohibitions on such activity. The CMOC rejects the contention of 
some in the financial services industry that limits to prohibit 
excessive speculation could be more disruptive to our markets more than 
excessive speculation itself.
    Last week, the IntercontinentalExchange (ICE), the Chicago 
Mercantile Exchange (CME) and the New York Mercantile Exchange (NYMEX) 
denied that timely imposition of limits would disrupt markets. Reuters 
reported on December 8th that the ``top U.S. futures exchanges 
expressed confidence that a revised plan to clamp down on commodities 
market speculation will not unduly burden the market'' if it uses the 
previous (January, 2010) proposed rule as a starting point.\10\ We 
believe the earlier proposed rule was insufficient to address ``the 
burdens of excessive speculation'' due to its very high limits. 
However, it is a starting point and because the CFTC now has authority 
to apply limits to previously exempt markets and participants, our 
coalition would be supportive of lower limits.
---------------------------------------------------------------------------
    \10\ Wallace, John and Steve Orlofsky, ``ICE, CME More Optimistic 
on CFTC Position Limits,'' Reuters News Service, December 8, 2010.
---------------------------------------------------------------------------
    Some argue that establishing limits expeditiously in order to meet 
what they consider to be negotiable or arbitrary deadlines under the 
Dodd-Frank Act will drive market activity off-shore to trading 
environments that are free from such limits (as we saw earlier with the 
Amaranth case). This argument is a red herring, as the Dodd-Frank Act 
anticipates this response and establishes new registration requirements 
for foreign boards of trade (FBOTs) that seek to allow access from 
within the U.S., provided they meet a list of comparable regulatory 
criteria, including the imposition of speculative position limits.\11\ 
The stated intent of the Congress was to prevent limits imposed by the 
CFTC to ``cause price discovery in the commodity to shift to trading on 
the foreign board of trade.''
---------------------------------------------------------------------------
    \11\ Pub. L. 111-203,  738 and  737(a)(4).
---------------------------------------------------------------------------
    In addition, regulators in Europe and elsewhere are currently in 
the process of drawing up their own plans to impose speculative 
position limits in addition to the many other transparency requirements 
and other regulatory initiatives prescribed by the Dodd-Frank Act. If 
the CFTC were to fail to apply aggregate position limits to implement 
the Dodd-Frank Act, the impetus for regulatory reform in other 
jurisdictions could be jeopardized. As we learn of the extraordinary 
measures that he Federal Reserve Bank took to provide European banks 
with hundreds of billions of dollars of loans on extremely favorable 
terms,\12\ we are reminded of the high cost of relying completely on 
financial industry self-regulation. Weak position limits or a return to 
position accountability would provide industry with de facto self-
regulation.
---------------------------------------------------------------------------
    \12\ Harding, Robin with Tom Braithwaite and Francesco Guerrera, 
``Europe's banks tapped Fed,'' Financial Times, December 2, 2010.
---------------------------------------------------------------------------
    On November 1, 2010, our coalition submitted preliminary comments 
regarding the implementation of various regulatory initiatives under 
the Dodd-Frank Act. We announced then our opposition to any delay in 
the formulation and imposition of speculative position limits. We also 
suggested that additional stability and restraint on speculation could 
be achieved were the CFTC to develop limits specifically for index 
funds and to distinguish them as separate and distinct from more 
traditional speculators.\13\ These so-called ``passive investors'' and 
their rolling contracts in energy and food commodities places 
commodities in a perpetual state of contango, where out-month futures 
prices are perpetually higher than spot prices. Such an investment 
strategy ignores market fundamentals and distorts the price discovery 
nature of the markets. These large funds have transformed commodities 
markets from a means to hedge fluctuating prices into a new asset class 
for pure financial accumulation.
---------------------------------------------------------------------------
    \13\ General Comments to the CFTC on the Implementation of Title 
VII of the Dodd-Frank Act, Commodity Markets Oversight Coalition, 
November 1, 2010, p. 6.
---------------------------------------------------------------------------
    We also agree with a recent suggestion by CFTC Commissioner Bart 
Chilton that separate limits might also be considered for high-
frequency trading (HFT) or so-called ``computer algorithm-based 
trading'' or ``algo-trading'' in commodity markets. Today, HFT accounts 
for \1/3\ of all trading activity in U.S. futures markets and it is 
growing fast. Futures regulators and the Congress need to address this 
trend, especially in light of the ``flash crashes'' that have been 
witnessed in the securities markets, for which HFT has been considered 
at least partly responsible (including the 1000 point plunge in the Dow 
on May 6, 2010). Such ``flash crashes'' in the commodity trading 
markets could have devastating consequences for U.S. businesses and 
consumers.
3. Limits Will Restore Confidence in Commodity Markets
    Establishing and imposing timely and meaningful speculative 
position limits as required by the Dodd-Frank Act will send a signal of 
confidence and stability to all market participants that end-users will 
again be able to rely on transparent, orderly and functional commodity 
markets. Continued inaction is not an option. Our coalition and the 
businesses and consumers we represent rely upon the CFTC to do their 
best to protect against fraud, manipulation and excessive speculation 
and to ensure a fair, transparent and accountable marketplace. Decisive 
action will be a strong and long overdue step in the protection of 
market integrity and the stability of the broader economy.
    As the 111th Congress comes to a close, we commend it--and 
especially the Chairs and Members of the Agriculture, Banking and 
Financial Services Committees--for the hard work, political courage and 
leadership that made derivatives reform possible. Generations of 
Americans will be forever grateful for what you've done. But now this 
legislative legacy is in the hands of regulators. We trust that they 
will implement and enforce new authority, and that the new Congress 
will continue to provide them with the political support and financial 
resources necessary to do so.
    Thank you again for the opportunity to testify. We would be pleased 
to answer any questions that you might have.

                               Attachment

Groups Supporting Testimony
    ActionAid USA
    Air Transport Association
    California Black Farmers and Agriculturalists Association
    Colorado/Wyoming Petroleum Marketers Association
    Columban Center for Advocacy & Outreach
    Consumer Federation of America
    Consumer Watchdog
    Florida Petroleum Marketers Association
    Food & Water Watch
    Fuel Merchants Association of New Jersey
    Gasoline & Automotive Service Dealers of America Inc.
    Illinois Petroleum Marketers & Convenience Store Association
    Independent Connecticut Petroleum Association
    Louisiana Oil Marketers & Convenience Store Association
    Massachusetts Oilheat Council
    Maine Energy Marketers Association
    Maryknoll Office for Global Concerns
    Michigan Petroleum Association/Michigan Association of Convenience 
Stores
    Montana Petroleum Marketers & Convenience Store Association
    National Association of Oilheating Service Managers
    National Association of Truckstop Operators
    National Farmers Union
    Nebraska Petroleum Marketers & Convenience Store Association
    New England Fuel Institute
    New Mexico Petroleum Marketers Association
    New Rules for Global Finance
    New York Oil Heating Association
    North Dakota Petroleum Marketers Association
    Oil Heat Institute of Long Island
    Oil Heat Council of New Hampshire
    Oil Heat Institute of Rhode Island
    The Organization for Competitive Markets
    Petroleum Marketers Association of America
    Petroleum Marketers & Convenience Store Association Kansas
    Petroleum Marketers & Convenience Stores of Iowa
    Propane Gas Association of New England
    Public Citizen
    R-CALF--USA
    South Dakota Petroleum & Propane Marketers Association
    United Egg Producers
    Utah Petroleum Marketers & Retailers Association
    Vermont Fuel Dealers Association
    West Virginia Oil Marketers and Grocers Association
    Western Peanut Growers
    Western Petroleum Marketers Association

    The Chairman. Thank you.
    Mr. Duffy.

 STATEMENT OF TERRANCE A. DUFFY, EXECUTIVE CHAIRMAN, CME GROUP 
                       INC., CHICAGO, IL

    Mr. Duffy. Chairman Boswell, Ranking Member Moran, and 
Members of the Subcommittee, thank you for inviting us to 
testify regarding the implementation of Dodd-Frank's provisions 
relating to position limits.
    I am going to focus on the requirements of Dodd-Frank and 
then briefly discuss this theory that speculators are 
distorting futures markets.
    Dodd-Frank requires the Commission to make a finding that 
position limits are necessary to diminish, eliminate, or 
prevent burdensome excessive speculation before imposing such 
limits. The CFTC is not permitted to act on the basis of 
assumptions or political demands. Core principle 5, section 5 
of the CEA also demonstrates that position limits are not 
required in every case since it permits exchanges to adopt 
accountability levels as an alternative to rigid position 
limits.
    Dodd-Frank also requires that CFTC wait to impose limits on 
futures exchanges until it can simultaneously impose limits on 
economically equivalent swaps. The purpose of this provision is 
to prevent a flight of trading from regulated exchanges with no 
limits to unregulated markets with limits.
    Given these requirements, it is clear that the CFTC lacks 
sufficient data to impose limits on swaps and therefore may not 
act against futures. The Commodity Exchange Act allows limits 
to be imposed only on excessive speculation, not speculation 
generally. This is a clear recognition that futures markets 
cannot operate without the participation of speculators.
    Arbitrary position limits distort markets, increase cost to 
hedgers, and increase cost to consumers. Position limits are 
unnecessary unless burdensome excessive speculation is present 
or is likely.
    Academic literature and all the studies produced by the 
CFTC's economists demonstrate that position limits in futures 
trading are not the means to deal with real supply-demand 
issues.
    It is my firm belief that efforts to focus on position 
limits rather than the underlying issues are certain to divert 
attention from the real problems and do more harm than good. 
Worse yet, position limits in derivatives markets that preclude 
investors from seeking economic exposure to particular asset 
classes drive those investors to speculate in physical 
commodities. This, in turn, has a significant and often 
detrimental impact on the flow of commodities in commercial 
channels.
    We have already seen the beginnings of such distortions in 
the metals and energy markets in anticipation of the imposition 
of limits on derivatives. This is not a development that any of 
us should favor but one that is an unfortunate result of 
position limits based on bad economics.
    CME Group is not opposed to position limits and other 
similar measures if used correctly. For example, we employ 
limits on most of our physically delivered contracts. However, 
we use limits and accountability levels, as permitted by the 
Core Principles, to mitigate potential congestion during 
delivery periods and to help us respond in advance to any 
effort to manipulate our markets.
    CME Group believes that the core purpose that should govern 
Federal and exchange-set position limits, to the extent such 
limits are necessary and appropriate, should be to reduce the 
threat of price manipulation and other disruptions to the 
integrity of prices. Such activity destroys public confidence 
in the integrity of our markets and harms the acknowledged 
public interest in legitimate price discovery.
    CME Group appreciates the opportunity to offer the 
foregoing comments regarding the implementation of Dodd-Frank 
provisions for position limits on certain contracts involving 
exempt and agricultural commodities. We hope that the views 
expressed today are helpful, and we look forward to answering 
any questions the Committee will have.
    [The prepared statement of Mr. Duffy follows:]

Prepared Statement of Terrance A. Duffy, Executive Chairman, CME Group 
                           Inc., Chicago, IL

    I am Terrence A. Duffy, executive Chairman of CME Group Inc. Thank 
you, Chairman Boswell, and Ranking Member Moran for inviting us to 
testify today. You asked us to discuss the implementation of provisions 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
relating to position limits.
    CME Group is the world's largest and most diverse derivatives 
marketplace. We are the parent of four separate regulated exchanges, 
including Chicago Mercantile Exchange Inc. (``CME''), the Board of 
Trade of the City of Chicago, Inc. (``CBOT''), the New York Mercantile 
Exchange, Inc. (``NYMEX'') and the Commodity Exchange, Inc. (``COMEX'') 
(collectively, the ``CME Group Exchanges''). The CME Group Exchanges 
offer the widest range of benchmark products available across all major 
asset classes, including futures and options on futures based on 
interest rates, equity indexes, foreign exchange, energy, metals, 
agricultural commodities, and alternative investment products.
    CME Clearing, a division of CME, is one of the largest central 
counterparty clearing services in the world, which provides clearing 
and settlement services for exchange-traded contracts, as well as for 
over-the-counter derivatives contracts through CME 
ClearPort'. Using the CME ClearPort' service, 
eligible participants can execute an OTC swap transaction, which is 
transformed into a futures or options contract that is subject to the 
full range of Commodity Futures Trading Commission (the ``Commission'' 
or ``CFTC'') and exchange-based regulation and reporting. The CME 
ClearPort' service mitigates counterparty credit risks, 
provides transparency to OTC transactions and enables the use of the 
exchange's market surveillance monitoring tools.
    The CME Group Exchanges serve the hedging, risk management and 
trading needs of our global customer base by facilitating transactions 
through the CME Globex' electronic trading platform, our 
open outcry trading facilities in New York and Chicago, as well as 
through privately negotiated CME ClearPort' transactions.
    The theory that speculators in futures markets cause unwarranted 
price volatility and excessively high and/or low prices is not new; 
Congress has dealt with that notion since the late 1800s. The Commodity 
Exchange Act (``CEA''), however, does not limit speculation, but only 
``excessive speculation.'' This is an implicit recognition that futures 
markets cannot operate without the participation of speculators.
    The so-called ``speculators,'' such as index funds and swap 
dealers, who are the focus of recent intense criticism, are not engaged 
in traditional speculative activity, i.e., trying to beat the market. 
Rather, swap dealers use futures markets to facilitate the hedging of 
more complex and specific risks accepted in connection with swap 
transactions with commercial customers and others. Denying or limiting 
their access to the futures markets will simply impede hedging activity 
by commercial market participants. Index funds aggregate the buying and 
selling decisions of many thousands of investors, most of whom are 
doing what they have been taught for decades to do: diversifying their 
investment portfolios and hedging inflation risks to their investment 
returns in order to maximize their retirement savings and their 
individual wealth.
    Position limits are not a costless palliative. Position limits, 
when improperly calibrated and administered, can easily distort 
markets, increase the costs to hedgers and effectively increase costs 
to consumers. Unfortunately, many demands for speculative limitations 
assume that severe limits on speculation will bring prices to some 
favored level. On the contrary, position limits on futures contracts 
will not and do not control cash market prices. There is a complete 
disconnect between the implied promise to drive prices down or up, 
whichever the most vocal constituency desires, and the ability of 
position limits to deliver on that promise.
Introduction
    We disagree with those who contend, in contravention of the clear 
academic evidence and of the clear intent of Congress, as expressed in 
Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-
203, July 21,2010) (``DFA'' or ``Dodd-Frank''), that speculative 
positions must be limited in order to eliminate price volatility and/or 
high prices or low prices for essential commodities.
    Some of the proponents for limits are well intentioned, but have no 
credible evidence to support their claims. Some contend for example 
that strict limits on silver futures will allow the price of silver to 
go up to levels that they think is appropriate. Other proponents of 
strict position limits contend that limits on oil positions will cause 
the price of gasoline to fall to levels that are ``better'' for the 
economy or their constituents. The Wall Street Journal reported on 
December 8, 2010, that:

        ``[T]he latest data also show an increase in speculation 
        doesn't necessarily bring with it an increase in prices. 
        Natural gas, for example, is down 21% this year despite a surge 
        in speculative bets. In opposite circumstances with sugar, 
        prices rallied despite a withdrawal of speculative bets.'' The 
        Wall Street Journal--Investors Pile Into Commodities, Carolyn 
        Cui and Susan Pulliam.

    All of the serious academic literature, including all of the 
studies produced by the CFTC's economists demonstrate that position 
limits in futures trading are not the means to deal with real supply 
and demand issues that are prevalent in markets for many physical 
commodities. It is my firm belief that efforts to focus on position 
limits rather than the underlying economic issues are certain to divert 
attention from the real supply and demand dynamics and do more harm 
than good. Worse yet, position limits in derivative markets that 
preclude investors from seeking economic exposure to particular asset 
classes drives those investors to speculate in physical commodities, 
which has a significant and often detrimental impact on the flow of 
commodities in commercial channels. We have already seen the beginnings 
of such distortions in metals and energy markets in anticipation of the 
imposition of limits on derivatives. This is not a development that 
anyone should favor, but one that is the logical result of even the 
threat of position limits based on bad economics.
    CME group is not opposed to position limits and other similar 
measures in all circumstances; we employ limits in most of our 
physically delivered contracts. However, we use limits and 
accountability levels, as contemplated by the Congressionally-approved 
Core Principles for Designated Contract Markets, to mitigate potential 
congestion during delivery periods and to help us identify and respond 
in advance to any threat to manipulate our markets. CME Group believes 
that the core purpose that should govern Federal and exchange-set 
position limits, to the extent such limits are necessary and 
appropriate, should be to reduce the threat of price manipulation and 
other disruptions to the integrity of prices. Such activity destroys 
public confidence in the integrity of our markets and harms the 
acknowledged public interest in legitimate price discovery.
    CME Group is therefore vigilant in seeking to deter and prevent 
price manipulation or other illegitimate distortions of market prices. 
Speculation, however, is not manipulation, nor is it an abusive 
practice. As CME Group observed in its response to the Commission's 
January 2010 energy position limits proposal, speculation is essential 
to the orderly functioning of futures markets--it provides market 
liquidity which promotes more effective commodity price discovery and 
allows for the efficient transfer of price risk. See CME Group 
Comments, 10-002 Comment CL-02714, at 2 (Apr. 26, 2010) (``CME 
Comments''). The Commission's responsibility and challenge is not to 
restrict speculation per se, but to act when necessary to prevent 
``excessive speculation'' from burdening interstate commerce through 
what the Commodity Exchange Act (``CEA'') calls ``unreasonable'' and 
``unwarranted'' fluctuations in the price of a commodity. To this end, 
Congress has granted to the Commission the authority to impose 
speculative position limits under Section 4a of the CEA, as amended by 
DFA.
    CME Group understands the extensive demands being made on the 
Commission's limited resources. However, the Commission must gather 
critical data regarding swap markets and individual traders' swap 
positions. Without a thorough understanding of such data, the 
Commission runs the risk of inappropriately setting position limits. 
CME Group appreciates the great challenge this presents to the 
Commission.

I. Statutorily Required Basis for Imposing Position Limits
    Section 4a(a)(1) provides in pertinent part:

        ``For the purpose of diminishing, eliminating, or preventing 
        such burden [of unwarranted or unreasonable price fluctuations 
        resulting from excessive speculation], the Commission shall . . 
        . fix such limits on the amount of trading which may be done or 
        positions which may be held . . . as the Commission finds are 
        necessary to diminish, eliminate, or prevent such burden.'' 
        (emphasis added)

    By its terms, DFA requires the Commission to make a finding that 
position limits ``are necessary to diminish, eliminate, or prevent'' 
burdensome excessive speculation before imposing such limits. Dan 
Berkovitz, CFTC General Counsel, confirmed that Section 4a(a)(1) sets 
forth a conditional mandate during the CFTC's July 2009 hearings on 
energy position limits. In response to Chairman Gensler's question, 
``What does the word `shall' mean in 4a?,'' Berkovitz replied, ``If the 
Commission finds that position limits are necessary to prevent, 
diminish, or eliminate such burdens, then there is a directive that it 
shall establish position limits.'' Transcript of July 28, 2009 CFTC 
Hearing on Energy Position Limits at 35-36 (emphasis added). The above 
quoted language from Section 4a(a)(1) was not deleted or in any way 
altered by DFA. New CEA subsection (a)(2) (``Establishment of 
Limitations'') even reaffirms that any position limits must be 
established ``[i]n accordance with the standards set forth in paragraph 
1 of this subsection,'' which include the requisite ``necessary'' 
finding. Core Principle 5, Section 5(d)(2)(5) of the CEA as amended by 
DFA, also recognizes that ``accountability levels'' are an alternative 
to rigid position limits:

        (5) Position limitations or accountability.--

                (A) In general.--To reduce the potential threat of 
                market manipulation or congestion (especially during 
                trading in the delivery month), the board of trade 
                shall adopt for each contract of the board of trade, as 
                is necessary and appropriate, position limitations or 
                position accountability for speculators. (emphasis 
                supplied)

    Moreover, the Commission must publish the statutorily required 
finding and the information in support thereof in any notice of 
proposed rulemaking to comply with the Administrative Procedure Act 
(``APA''). The APA requires that the notice of a proposed rule include 
``sufficient detail on its content and basis in law and evidence to 
allow for meaningful and informed comment.'' See, e.g., Am. Med. Ass'n 
v. Reno, 57 F.3d 1129, 1132 (D.C. Cir. 1995). Absent a finding with 
supporting evidence that position limits are ``necessary,'' this APA 
requirement cannot be met because the public will not know the 
Commission's specific reasoning for the essential finding that triggers 
its proposed rulemaking.
    DFA indicates that such limits would be ``unnecessary'' where 
burdensome excessive speculation does not exist or is unlikely to occur 
in the future. CME Group's comment letter on the Commission's energy 
position limits proposal discussed at length the absence of any 
credible empirical evidence of the existence of burdensome excessive 
speculation or its likely future occurrence. See CME Comments at 17-24. 
The weight of empirically sound analysis and research demonstrates that 
movements in commodity prices are attributable to fundamental market 
conditions rather than speculative trading. CFTC studies, for example, 
have found that supply and demand factors were largely responsible for 
the 2008 rise in oil prices and that, far from harming the market, 
speculators serve as an important source of liquidity for other 
participants. See, e.g., CFTC Interagency Task Force on Commodity 
Markets, Interim Report on Crude Oil at 3-4 (July 22, 2008); Michael 
Haigh et al., Market Growth, Trader Participation and Pricing in Energy 
Futures Markets (Feb. 7, 2007), available at http://web.uvic.ca/econ/
research/seminars/robe.pdf. Like CFTC staff, the Government 
Accountability Office (``GAO'') has not identified a causal 
relationship between speculation in the futures market and changes in 
commodity prices. See GAO, GAO-09-285R, Issues Involving the Use of the 
Futures Markets to Invest in Commodity Indexes at 5 (Jan. 30, 2009). 
The conclusions of these governmental studies and reports are 
consistent with those of academic and private sector economists. See, 
e.g., Paul Krugman, The Oil Nonbubble, N.Y. Times, May 12, 2008, http:/
/www.nytimes.com/2008/05/12/opinion/12krugman.html (``[T]he rise in oil 
prices isn't the result of runaway speculation; it's the result of . . 
. the growing difficulty of finding oil and the rapid growth of 
emerging economies like China.'').
    To the extent there are any legitimate concerns with the potential 
for excessive speculation to cause unwarranted or unreasonable price 
fluctuations, CME Group believes that futures exchanges effectively 
address such concerns through their existing market surveillance 
programs. CME Group provided a detailed account of the futures 
exchanges' capabilities in its April 26, 2010 comments filed with the 
CFTC. See CME Comments at 8-12. Briefly stated, the exchanges 
independently have the ability to establish position limits as 
warranted by the characteristics of their traded contracts, and to 
employ position accountability provisions as appropriate given 
particular market constructs and market conditions. This flexible 
regulation is a much more appropriate and effective means of addressing 
potentially manipulative or disruptive positions than are blunt 
position limits that fail to account for variability in specific 
contract months, market conditions, and market participation. Insofar 
as the existing exchange programs are and have been proven to be 
effective, CME Group believes the Commission would lack the statutory 
basis for establishing new Federal position limits on certain contracts 
involving exempt and agricultural commodities.

II. Mechanics of Imposing Position Limits
    Assuming the Commission is able to find that position limits ``are 
necessary to diminish, eliminate, or prevent'' burdensome excessive 
speculation, CME Group offers the following views on how to impose 
those limits:

A. The Imposition of Limits Should be Deferred Until the Commission Can 
        Properly Determine and Ensure Compliance with Appropriate 
        Limits
    Dodd-Frank sets forth several seemingly inconsistent timing 
requirements for the exercise of the Commission's position limit 
authority. New CEA  4a(a)(2)(B) directs the Commission to impose 
limits for certain contracts, within 180 days for exempt commodities 
and within 270 days for agricultural commodities, respectively, of 
Dodd-Frank's enactment. Meanwhile, new CEA  4a(5)(A) requires that 
limits for swaps that are economically equivalent to futures and 
options be established simultaneously with the limits under Section 
4a(a)(2)(B). The statute, however, also vests the Commission with 
discretion to establish limits ``as appropriate,'' thereby indicating 
that the Commission is not bound by the aforementioned dates. CME Group 
believes that DFA requires the Commission to defer imposing limits 
until doing so would be ``appropriate''--that is, when it has the data 
needed to accurately set and enforce those limits and when it is in a 
position to impose limits simultaneously on futures (and options on 
futures) and swaps.

B. Position Limits Should Be Set with Due Regard for Legislative 
        Objectives and Considerations
    Under Dodd-Frank, the Commission is required to take into account 
several factors when setting position limits. New CEA  4a(a)(3) 
provides that, to the maximum extent practicable, the Commission should 
use its discretion to establish limits to: (i) diminish, eliminate, or 
prevent ``excessive speculation''; (ii) deter and prevent market 
manipulation, squeezes, and corners; (iii) ensure sufficient market 
liquidity for bona fide hedgers; and (iv) ensure that the price 
discovery function of the underlying market is not disrupted. 
Additionally, new CEA  4a(a)(2)(C) states that the Commission must act 
to avoid shifting the price discovery function to FBOTs in establishing 
limits. In mandating these considerations, Congress recognized that 
limiting trading positions has the potential to reduce liquidity and 
adversely affect the hedging and price discovery functions of U.S. 
commodity markets. The Commission is obliged to give due weight to each 
consideration in setting any position limits and may not focus solely 
on imposing limits to diminish, eliminate, or prevent ``excessive 
speculation.''

C. The Commission's Exemptive Authority Should Be Interpreted Broadly 
        To Accommodate All Non-Speculative Positions
    New CEA  4a(a)(7) gives the Commission authority to exempt from 
any position limit rule, with or without conditions, ``any person or 
class of persons, any swap or class of swaps, any contract of sale for 
future delivery or class of such contracts, any option or class of 
options, or any transaction or class of transactions.'' Under this 
provision, the Commission's statutory power to exempt any person or 
class of person from position limits is greater than it has ever been 
before.
    CME Group believes that DFA authorizes the Commission to use its 
broad new exemption authority under  4a(a)(7) to grant exemptions to 
market participants who use futures, options, or swaps when 
economically appropriate to the reduction of the risks they face in 
their enterprises. Although it is impossible to enumerate the breadth 
of exemptions that should be permitted in order to ensure that entities 
are able to effectively manage exposure that is highly correlated to 
fluctuations in the price of exempt and agricultural commodities, an 
application for exemption should be judged on its merits in terms of 
the specific risks to be hedged, the relevant price relationships, the 
proposed position sizes, and the operational procedures for 
establishing and lifting the hedge.
    If the Commission were to narrowly construe its  4a(a)(7) 
exemptive authority to exclude non-speculative trading activity, then 
market participants could be forced to either actually speculate on 
those price risks (i.e., not establish any positions to mitigate the 
risk), and potentially increase costs to consumers, or hedge their 
risks through transactions that lie outside the CFTC's position limit 
authority. Either strategy would undermine the Commission's mission to 
promote liquidity and protect the price discovery function of its 
regulated markets. The Commission should thus broadly interpret its 
exemptive powers and grant exemptions to market participants who are 
not seeking to establish positions in the futures market for 
speculative purposes but rather to serve their legitimate commercial 
and financial hedging needs.

III. Conclusion
    CME Group appreciates the opportunity to offer the foregoing 
comments respecting the implementation of DFA's provisions respecting 
position limits on certain contracts involving exempt and agricultural 
commodities. We hope that the views expressed herein prove to be 
helpful and we are available to answer any questions the Committee may 
have.

    The Chairman. Thank you.
    Mr. Newman.

 STATEMENT OF JOEL G. NEWMAN, PRESIDENT AND CEO, AMERICAN FEED 
              INDUSTRY ASSOCIATION, ARLINGTON, VA

    Mr. Newman. Chairman Boswell, Ranking Member Moran, and 
Members, thank you for the opportunity to testify before you 
today.
    The American Feed Industry Association is the largest 
organization devoted exclusively to represent the business, 
legislative, and regulatory interests of the U.S. animal feed 
industry and its suppliers. AFIA applauds this Subcommittee, 
its Members, and the full Committee for calling today's 
hearing.
    AFIA members manufacture more than 70 percent of the animal 
feed in the United States, which amounts to over 160 million 
tons annually. Feed also represents roughly 70 percent of the 
cost of producing meat, milk, and eggs. With the majority of 
our industry input supplies priced directly on, or in reference 
to, regulated commodity markets, we depend significantly on an 
efficient and well-functioning futures market for both price 
discovery and also risk management.
    Agricultural commodity markets were established to provide 
an efficient price discovery mechanism and a hedging risk 
management tool for producers and end-users. While this system 
encourages and requires speculative participants to provide 
liquidity, the significant increase of financial investors, as 
well as the special exemptions from speculative position limits 
that have been granted over time to Wall Street banks and 
others who are not end-users, has distorted the function of 
these markets.
    The agriculture commodity markets functioned effectively 
for over 60 years after the 1936 Commodity Exchange Act first 
implemented speculative position limits. However, this changed 
in 2000 when Congress codified earlier CFTC regulatory actions 
granting Wall Street banks and other financial institutions an 
exemption from speculative position limits for hedging over-
the-counter swaps and index transactions. While there are 
several factors that have led to increased volatility and price 
swings in agricultural commodities, excess speculation by index 
funds is certainly one of these factors.
    As you are aware, the size and influence of these large 
financial players was never contemplated during the development 
of the original Commodity Exchange Act. Most of the index 
speculators tend to hold their positions rather than sell. This 
allows them to create artificial demands through their long-
only positions and in essence really are bets on higher prices.
    The magnitude of this scenario is clear in the numbers. In 
2003, index speculator investment in 25 physical commodities 
was $13 billion. In 2008, these investments jumped to $260 
billion, an 1,800 percent increase in 5 years. In 2010, these 
investments remain at $265 billion, with three index funds 
representing 94 percent of that amount and one fund 
representing 52 percent of those investments.
    Earlier this year, we applauded the work by Congress to 
include provisions in the Act that would authorize CFTC to set 
reportable position limits on commodity contracts, as well as 
for aggregate and exchange-specific position limits.
    Within this process, AFIA members support the following 
items: First, speculative position limits that enhance market 
performance and the appropriate narrowing of cash and futures 
market values as they near contract delivery period; the 
retention and equal application of the existing speculative 
position limits for agricultural commodities; retaining the 
current bona fide hedge definition which is in place; the 
removal of speculative position limit exemptions for financial 
institutions and other nontraditional participants in 
agricultural commodity markets.
    While CFTC now has this authority, without removing these 
exemptions the speculative position limits will have a much 
more limited effect when they are put in place.
    Given the strong relationship between crude oil and corn 
futures markets brought on by the dramatic and rapid expansion 
of the ethanol industry, establishing and enforcing energy 
speculative position limits is also important to secure the 
reliability of the entire agricultural commodity complex.
    We support effective speculative position limits that work 
for both the bona fide hedger and the speculator. However, 
there is rarely a perfect solution to complex issues and 
waiting for a perfect solution before setting speculative 
position limits or taking other actions will only delay that 
much-needed transparency and controls required in these 
commodity markets. Therefore, we support implementation of 
interim limits where data is available and which can also be 
adjusted by CFTC with further data to confirm and support those 
changes.
    I would be remiss if I didn't express AFIA's appreciation 
to Chairman Gensler, Commissioner Chilton, and the other CFTC 
Commissioners for their extensive outreach during this entire 
process.
    Thank you for inviting me to participate in today's 
hearing. AFIA and its members stand ready to assist you in 
these efforts. I look forward to any questions.
    [The prepared statement of Mr. Newman follows:]

Prepared Statement of Joel G. Newman, President and CEO, American Feed 
                  Industry Association, Arlington, VA

    Chairman Boswell, Ranking Member Moran and Members, thank you for 
the opportunity to testify before General Farm Commodities and Risk 
Management Subcommittee as you review implementation of provisions of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
relating to speculation limits.
    I am Joel Newman, President and Chief Executive Officer of the 
American Feed Industry Association (AFIA), based in Arlington, 
Virginia. AFIA is the world's largest organization devoted exclusively 
to representing the business, legislative and regulatory interests of 
the U.S. animal feed industry and its suppliers.
    Founded in 1909, AFIA is also the recognized leader on 
international industry developments with more than 500 domestic and 
international members, as well as nearly 40 state, regional and 
national association members. Our members are livestock feed and pet 
food manufacturers, integrators, pharmaceutical companies, ingredient 
suppliers, equipment manufacturers and companies that provide support 
services to the industry.
    AFIA members manufacture more than 70% of the animal feed in the 
U.S., which amounts to over 160 million tons annually. Because feed 
represents roughly 70% of the cost of producing meat, milk and eggs, 
AFIA members are major contributors to food safety, nutrition and the 
environment, playing a critical role in the production of healthy, 
wholesome meat, poultry, milk, fish, eggs and pets.
    AFIA is a member of the Commodity Markets Oversight Coalition, 
which was formed in 2007, and is a broad coalition of organizations 
committed to protecting the interests of bona fide hedgers and 
derivatives end-users. We thank the Subcommittee for including Jim 
Collura in this hearing to speak on behalf of CMOC. His leadership has 
been invaluable to the Coalition.
    Your review of implementation of the Dodd-Frank Act by the 
Commodity Futures Trading Commission (CFTC) is both timely and 
appreciated by the men and women of the feed industry. As I have 
stated, feed represents approximately 70% of the on-farm cost of 
raising livestock and poultry. With the majority of our industry's 
input supplies priced directly on or in reference to regulated 
commodity markets, we depend significantly on an efficient and well-
functioning futures market for both price discovery and risk 
management.
    Agriculture commodity markets were established to provide an 
efficient price discovery mechanism and a hedging/risk management tool 
for producers and end-users. While this system encourages and requires 
speculative participants to provide liquidity, the significant increase 
of financial investors, permitted by special exemption from speculative 
position limits, has distorted the function of these markets.
    Speculators are an important part of the commodity markets--without 
them there is no market. The agriculture commodity markets functioned 
effectively for 64 years after the 1936 Commodity Exchange Act first 
implemented speculative position limits. With these limits in place, 
the process of physical commodity customers using the futures markets 
as a price discovery and risk mitigation tool were able to rely on 
traditional speculator participation to provide a clear buyer/seller 
relationship and market liquidity.
    However, this changed in 2000, when Congress codified earlier CFTC 
regulatory actions granting Wall Street banks an exemption from 
speculative position limits for hedging over-the-counter swaps and 
index transactions. While there are several factors that have lead to 
increased volatility and price swings of agriculture commodities, 
excessive speculation by index funds is certainly one of these factors. 
As CFTC has recognized, speculator participation in these markets 
without position limits does have an impact on prices.
    These banks, which represent institutional investors, used the 
guise of ``hedging'' their invested capital to take advantage of the 
exemption. But in fact, their initial investments were speculative and 
were not hedging future needs or commitments for the underlying 
commodities. AFIA strongly supported ending this exemption, and we were 
very pleased when Congress took steps to address our concerns.
    Over the past few years, as the volatility and instability in the 
stock and financial markets exploded, speculative activity in the 
agricultural commodity futures markets grew substantially. In some crop 
contracts, there were times when the daily speculator trading volume 
was nearly equal to, or in the case of wheat, was more than the entire 
U.S. annual production volume of these same crops. This not only added 
to extreme price volatility as bona fide hedgers scrambled to mitigate 
their risks, but in many cases it pushed end-users out of the market. 
In at least one situation, this speculator activity pushed an 
organization into bankruptcy when the impact of margin calls caused by 
the extreme price run-ups drained the company's liquidity to 
unsustainable levels.
    As you are aware, from the Committee's analysis, when considering 
reforms for the futures markets and products, the size and influence of 
these very large financial players was never contemplated during 
development of the original Commodity Exchange Act (CEA). The recent 
dramatic increases in nearly all physical commodities values actually 
increased speculator demand, with the net result of commodity prices 
reaching unrealistic levels relative to true demand. Most of the index 
speculators tended to hold their positions rather than sell, which 
exacerbated the situation by producing artificially high demand 
accompanied by higher prices that negatively impacted nearly all end-
users of the physical commodities.
    The magnitude of this scenario is clear in the numbers: In 2003, 
index speculator investment in 25 physical commodities was $13 billion; 
in 2008, these investments jumped to $260 billion--an 1,800% increase. 
In 2010, these investments remain at $180 billion, with three index 
funds representing 92% of these investments and one fund representing 
61% of these investments. (Illustration 2)
    As a result, the feed industry was forced to pay higher prices for 
grains and other inputs, which were passed along to livestock, dairy 
and poultry producers and feed costs soared. Farmers, although 
receiving substantially higher prices for their commodities, were also 
hit by soaring costs for fertilizer and fuel, as similar speculator 
activities artificially further drove up oil prices.
    Simply put, agriculture, from farm to retail, had to deal with 
extreme price volatility on a number of fronts without the effective 
support of our primary risk mitigation tool--the futures markets--
because those markets were severely compromised by Wall Street banks 
ability to avoid speculative position limits and invest substantial 
levels of monies in the physical commodity markets. This not only 
allowed them to avoid the volatility of the dust storm on Wall Street, 
it provided them a significant return on those speculative ``hedges'' 
because of their ability to influence the escalation of market prices 
by creating artificial demand.
    Earlier this year, we applauded the work by Congress to include 
provisions in the Act that would authorize the CFTC to set position 
limits on commodity contracts, as well as for aggregate and exchange 
specific position limits. Also, when commenting on CFTC's proposed 
position limits for energy contracts in March of this year, AFIA 
encouraged the Commission to consider such actions for other hard 
commodities to similarly protect agricultural commodities from the very 
large financial speculators that were masquerading as hedgers, parking 
their resources in physical commodity markets to ride out the extreme 
volatility then present in the stock and financial markets.
    By including clear authority for the CFTC to set a variety of 
reportable position limits, Congress took a solid and welcomed step 
toward our mutual goal of ensuring these commodity markets and products 
effectively serve their primary role of providing bona fide commercial 
hedgers reliable tools to manage their economic risks.
    With the expanded authority in place relative to speculation 
limits, AFIA is anxiously waiting for the CFTC to finalize its 
regulations and to put speculative limits into effect. We know this 
will take time and are hopeful the combination of the various 
categories of speculation position limits, combined with full 
implementation of the Act's other provisions, such as enhanced 
transparency and expanded regulation of nearly all derivatives, will 
assure bona fide hedgers of the viability of their futures-based risk 
management strategies.
    I would be remiss if I did not extend AFIA's appreciation to 
Chairman Gary Gensler and his fellow CFTC Commissioners for their 
openness and diligence in addressing our concerns, particularly during 
the time Congress was developing its package of reforms. Through 
frequent meetings, they provided frank and candid overviews of their 
established authorities. When Congress was deliberating its reform 
legislation, the CFTC team also provided regular updates on progress 
toward the reform goals we and others were supporting. Just as 
important, they helped us understand how certain provisions in the Act 
addressed our concerns while approaching them in a different manner 
than we had proposed. Importantly, the CFTC has been aggressive in its 
outreach over the past few months as it works to implement the Act.
    Like most supporters of reform in the futures industry, 
particularly as it relates to the topic of this hearing, AFIA would 
very much like to have speculation position limits set and in place 
today, as well the additional regulatory and transparency provisions. 
But we need the CFTC to ensure that when it sets limits, they also are 
ready to monitor and report trading activity, and ready to ensure 
compliance with and enforcement of the new law. It is critical for all 
bona fide end-users to know we are on a level playing field with 
speculators and each other.
    Modern production agriculture is complex. The linkages between 
producers, end-users and uses of physical commodities are constantly 
evolving. The feed industry, for example, is still adjusting to the 
dramatic and rapid expansion of ethanol and other bioenergy industries. 
The intersection of corn, soybeans and other oilseeds for feed, food 
and energy--not mention other industrial uses for these crops--is our 
new reality, one that poses additional competition and risk management 
challenges for each of our respective industry sectors. This has also 
had the effect of linking corn futures to crude oil futures, adding 
further volatility to the entire commodity complex.
    We are confident the CFTC is prudently moving as efficiently as it 
can to implement the speculative limits and other provisions of the 
Dodd-Frank Act under its existing and new authorities while making sure 
it clearly and fully understands the complexities of the derivatives 
markets. While being patient with the rulemaking process does produce 
certain levels of stress, we remain confident in and appreciative of 
the CFTC's efforts to date, and hope to remain so.
    This brings me back to the beginning of my testimony. AFIA again 
applauds the Subcommittee, its Members and the full Committee for 
calling today's hearing to check in on the CFTC's progress on 
speculation limits. Your individual and collective interest in making 
sure progress toward implementation is both steady and correct does a 
great deal to reduce stress levels among AFIA's members.
    I urge you to consider additional hearings on the Commission's 
progress toward implementing all provisions of the Act. Thank you for 
inviting me to participate in today's hearing. AFIA and its members 
stand ready to assist you in these efforts. I look forward to answering 
any questions you may have.
                               Attachment


    Marshall [presiding.] Thank you, Mr. Newman.Mr. Sprecher.

          STATEMENT OF JEFFREY C. SPRECHER, CHAIRMAN AND CEO, 
              IntercontinentalExchange, INC., ATLANTA, GA

    Mr. Sprecher. Thank you, Chairman Boswell, Chairman Peterson, 
Ranking Member Moran.
    I am Jeff Sprecher. I am the Chairman and Chief Executive Officer 
of IntercontinentalExchange, which is known in our industry as ICE; and 
I am grateful for the opportunity to provide comments on the position 
limit rulemaking that is pending before the Commodity Futures Trading 
Commission.
    ICE has supported setting aggregate position limits across trading 
venues if administered in a fair and nondiscriminatory manner.
    In summary, ICE's position on this subject has been very clear. We 
believe that the CFTC should set aggregate position limits in 
economically equivalent markets; to avoid negatively impacting 
liquidity that is relied upon by commercial end-users to hedge their 
risk, aggregate position limits should be set at levels taking into 
account the volumes of both the existing futures markets and the 
broader over-the-counter markets; and financially and physically 
settled contracts should be treated differently at their expiration in 
a revised position limit regime.
    There have been exhaustive hearings by Congress and the Commission 
over the last several years, and they have concluded that economically 
equivalent contracts traded on separate exchanges operate as an 
aggregate market. Therefore, ICE agrees with Congress and believes that 
the Commission is the appropriate neutral authority to set and 
administer aggregate position limits for U.S. energy futures and for 
significant price discovery contracts. Only the Commission is in a 
position to view a market participant's positions across all venues and 
to administer aggregate position limits in an objective manner.
    However, we also believe that the position limit rulemaking should 
focus on implementing the core requirements of Dodd-Frank, and that is 
namely setting aggregate position limits across markets, and they 
should avoid the consideration of experimental rules, such as rules 
that would set concentration limits for each and every exchange and 
every swap execution facility.
    In setting aggregate limits, the Commission should take into 
account trading data from both futures markets and the broader over-
the-counter swaps market. Failing to take into account accurate data 
from each of these markets risks setting aggregate position limits at 
levels that could negatively impact liquidity that is actually relied 
upon by the commercial users to effectively hedge their price risk. 
This would certainly be an unintended consequence, and it would be 
inconsistent with the goals of Dodd-Frank.
    Finally, in setting position limits in the expiration or the spot 
month, the Commission should treat financially and physically settled 
contracts differently as market participants use financial and physical 
contracts differently for different purposes. The Commission already 
recognizes there is a distinction between financial and physically 
settled contracts. These rules promote contract convergence and they 
eliminate the need for significant numbers of hedge exemptions that 
exist in the energy futures markets today.
    In conclusion, we are a strong proponent of open, competitive 
derivatives markets and of appropriate regulatory oversight; and, to 
that end, we are pleased to work with Congress to find solutions that 
promote the best marketplaces possible.
    Mr. Chairman, I would like to thank you for the opportunity to 
share our views with you here today.
    [The prepared statement of Mr. Sprecher follows:]

     Prepared Statement of Jeffrey C. Sprecher, Chairman and CEO, 
              IntercontinentalExchange, Inc., Atlanta, GA

Introduction
    Chairman Boswell, Ranking Member Moran, I am Jeffrey C. Sprecher, 
Chairman and Chief Executive Officer of IntercontinentalExchange, Inc., 
or ``ICE.'' We are grateful for the opportunity to provide comments on 
the position limit rulemaking pending before the Commodity Futures 
Trading Commission (Commission).
    As background, ICE was established in 2000 as an over-the-counter 
(OTC) marketplace with the goal of providing transparency and a level 
playing field for the previously opaque, fragmented energy market. 
Since that time, ICE has grown significantly through organic growth 
fostered by product, technology and clearing innovation, and by 
acquisition of futures exchanges that have broadened its product 
offerings and risk management services. Today, ICE operates a leading 
global marketplace for futures and OTC derivatives across a variety of 
product classes, including agricultural and energy commodities, foreign 
exchange and equity indexes. Commercial market participants rely on our 
products to hedge and manage risk and investors in these markets 
provide necessary liquidity.
    ICE believes proper regulation is essential for ensuring that 
market participants--as well as the broader public--have confidence in 
the price formation process that takes place in our markets. This 
assurance of integrity lies at the heart of the futures exchange model. 
The U.S. energy futures markets, governed by the Commission's 
comprehensive-but-flexible regulatory structure, have permitted 
commercial and professional market users to hedge future price risk in 
an efficient and cost-effective manner.
Position Limits
    The Dodd-Frank Wall Street Reform and Consumer Protection Act gives 
the Commission new authority to set aggregate position limits on both 
energy futures and swaps and to have those position limits apply across 
competing exchanges and trading venues. This authority was granted by 
Congress because economically equivalent contracts may vary only where 
they are listed for trading, or in how they are settled, and have 
repeatedly been shown to trade as a single market up until the final 
days of trading.\1\
---------------------------------------------------------------------------
    \1\ Excessive Speculation in the Natural Gas Markets, Staff Report, 
Senate Permanent Subcommittee on Investigations (June 2007), pgs. 36-
38. http://hsgac.senate.gov/public/_files/
REPORTExcessiveSpeculationintheNaturalGasMarket.pdf.
---------------------------------------------------------------------------
    ICE supports aggregate position limits across trading venues if 
administered by the Commission in a fair, non-discriminatory manner. In 
summary, ICE's position on this subject is clear:

    (1) Different sized position limits for different exchanges, or so-
        called ``concentration limits'', were considered and rejected 
        by Congress, and should not form a part of the Commission's 
        proposed rules because they are conceptually inconsistent with 
        the ``single market'' theory and anti-competitively favor 
        larger exchanges; and

    (2) To avoid negatively impacting liquidity that is relied upon by 
        commercial end-users to hedge their risk, aggregate position 
        limits should be set at levels taking into account both 
        existing futures volumes and the broader OTC markets.

    The Dodd-Frank Act gives the Commission 180 days to implement the 
position limit provisions for energy. ICE believes that the position 
limit rulemaking would be easier and less costly to implement if the 
Commission focused its rulemaking on implementing the core requirements 
of Dodd-Frank, namely aggregate position limits across markets--and 
avoids consideration of experimental rules and such as single-exchange 
concentration limits that have already been rejected by Congress.
Concentration Limits for Single Exchanges Were Rejected by Congress and 
        Are Redundant and Anti-Competitive
    In the Commission's previous position limit rulemaking, which was 
withdrawn in anticipation of the passage of Dodd-Frank, the Commission 
proposed an aggregate position limit regime across markets, but with 
separate ``concentration limits'' for individual exchanges and trading 
venues. The concentration limit would be set at 30% of the given 
exchange or venue's open interest for all months, and 20% of open 
interest in any single month, with each percentage based on the 
exchange's open interest in the previous year. The Commission's 
rationale for the concentration limit was to prevent concentrated 
positions from causing abrupt price movements and distortions in a 
market, and to ``fragment'' the market to allow multiple traders to 
step in where a smaller number of traders may have existed previously. 
The theory rested upon the unproven assumption that large traders are 
crowding out smaller participants.
    ICE disagrees with setting exchange specific concentration limits 
in any new rulemaking as they ignore the premise that economically 
equivalent contracts operate as a single aggregate market, were 
expressly rejected by Congress in drafting Dodd-Frank; and may have 
significant anti-competitive implications.\2\ Exhaustive hearings by 
Congress and the Commission over the last several years have concluded 
that economically equivalent contracts traded on two separate exchanges 
operate as a single aggregate market. In testimony before this 
Subcommittee in September 2007, Dr. James Newsome, former Commission 
Chairman and then President of NYMEX, stated ``the two competing 
trading venues [ICE and NYMEX] are now tightly linked and highly 
interactive and in essence are simply two components of a broader 
derivatives market.'' \3\ This is because participants arbitrage 
between economically equivalent markets, causing prices to converge. As 
this Subcommittee is well aware, the one market concept was the impetus 
for provisions in the farm bill which mandate regulation of swaps 
determined to be Significant Price Discovery Contracts in an equivalent 
manner as futures. Thus, the idea of imposing concentration limits on 
an ``individual exchange'' basis is unnecessary given the aggregate 
limit, which will serve the same purpose.
---------------------------------------------------------------------------
    \2\ H.R. 4173, Section 3155.
    \3\ Testimony of Dr. James Newsome, Chief Executive Officer, New 
York Mercantile Exchange, before the Subcommittee on General Farm 
Commodities and Risk Management, United States House of Representatives 
(September 26, 2007).
---------------------------------------------------------------------------
    Importantly, Congress expressly rejected a concentration limit in 
Dodd-Frank when it dropped language in the Section 738 of the Act in 
the House version of the legislation \4\ requiring foreign boards of 
trade to set position limits based upon ``relative'' market size. In 
addition, having market specific concentration limits appears 
inconsistent with other parts of Dodd-Frank, which contemplates 
multiple competing Swap Execution Facilities with open access to 
central clearing houses where swap positions would be traded into on 
one SEF and out of on another SEF.\5\ It is not apparent how this could 
be accomplished with SEF-specific concentration limits based upon open 
interest at an open-access clearinghouse used by multiple platforms.
---------------------------------------------------------------------------
    \4\ See, supra note 1.
    \5\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Section 723(3).
---------------------------------------------------------------------------
    Finally, a single exchange concentration limit is anti-competitive. 
The Commodity Exchange Act mandates that the Commission ``regulate the 
futures markets by the least anti-competitive means available.'' By 
design, a concentration position limit will impose smaller, or 
stricter, concentration limits in smaller markets. A smaller market 
with fewer market participants has its open interest concentrated in 
these market participants. Thus, applying a concentration limit for an 
individual exchange will inhibit competition by impeding liquidity, 
given that smaller markets are concentrated. This would effectively 
lock in the market share of existing exchanges. A nascent exchange with 
such restrictions would likely face insurmountable odds in establishing 
a market and competing with incumbents. In addition, large market 
participants will effectively be prevented from leaving one market for 
another that offers a competitive advantage due to its inability to 
carry a similar sized position on the second market due to the 
``concentration limit.'' This would substantially curtail innovation 
and the choice that exists in today's markets. Slowly, over time, the 
dominant market will continue to gain market share, as liquidity 
attracts liquidity. In the end, concentration limits may create the 
opposite of what the Commission intends: a diverse, highly competitive 
market for execution of derivatives.
Position Limits Across Futures and OTC Markets Should Be Set to Avoid 
        Negatively Impacting Liquidity Available to Commercial Users of 
        the Markets and Should Be Based Upon Data of Each Market
    In setting aggregate position limits across futures and OTC 
markets, the Commission should act only after taking into account 
trading data from both the futures markets and the broader OTC swaps 
markets. Failing to take into account accurate data from each market 
risks setting aggregate position limits at artificially low levels that 
could negatively impact the liquidity relied upon by commercial users 
to efficiently hedge their price risk. Dodd-Frank requires the 
Commission for the first time to regulate previously un-regulated OTC 
markets that have themselves been used by segments of the commercial 
market to hedge risk. Should the Commission not take into account the 
size of this market in setting speculative position limits in the now-
combined market, liquidity could be adversely impacted with commercial 
end-users paying wider spreads to hedge their price risk. This would 
certainly be an unintended consequence and inconsistent with Dodd-
Frank's broader goals.
Conclusion
    ICE is a strong proponent of open and competitive derivatives 
markets, and of appropriate regulatory oversight of those markets. As 
an operator of global futures and OTC markets, and as a publicly-held 
company, we understand the essential role of trust and confidence in 
our markets. To that end, we are pleased to work with Congress to 
address the challenges presented by derivatives markets, and we will 
continue to work cooperatively for solutions that promote the best 
marketplace possible.
    Mr. Chairman, thank you for the opportunity to share our views with 
you. I am happy to answer any questions you may have.

    The Chairman [presiding.] We thank you.
    Mr. Jones.

  STATEMENT OF ROBERT JONES, SENIOR VICE PRESIDENT, ABN AMRO 
               CLEARING CHICAGO LLC; MEMBER, RISK
         MANAGEMENT COMMITTEE, NATIONAL GRAIN AND FEED
                    ASSOCIATION, CHICAGO, IL

    Mr. Jones. Good morning, Mr. Chairman, Members of the 
Subcommittee. I am Robert Jones, Senior Vice President of ABN 
AMRO Clearing in Chicago, a futures commission merchant. I 
serve on the Risk Management Committee of the National Grain 
and Feed Association, and I am here today to represent the 
views of the National Grain and Feed Association. We appreciate 
the opportunity to discuss position limits for enumerated 
agricultural commodities. Federal position limits are already 
in place for those commodities, and we believe they are at 
appropriate levels.
    Generally, we have found that the Commission understands 
the impacts of its actions on commercial businesses and is 
responsive to our concerns. However, the deadlines that have 
been set in the law are very challenging.
    For our industry, the price discovery occurs primarily in 
the futures market, so it's extremely important that we get 
these rules right. Given the choice, we would prefer to go a 
little slower and make sure we get it right, rather than rush 
rules through to meet a deadline and find out later about 
unforeseen consequences.
    To provide some context for this, I would like you to think 
back to 2008. Agricultural futures prices escalated rapidly, 
resulting in a disconnect of cash and futures values, otherwise 
known as convergence. Basis levels for producers, essentially 
the difference between the cash and the futures, widened 
dramatically. The situation increased risk for grain purchasers 
and hedgers and caused extreme financial stress due to massive 
margining requirements.
    At the same time, marketing opportunities for producers 
were limited. We believe that the expanded participation by 
nontraditional participants like index funds and pension funds 
played a role in the 2008 spike--not the only factor but a 
factor.
    Today, conditions exist that could lead to a repeat of that 
situation. If another investment-fueled futures spike occurs, 
grain buyers may be forced to limit their purchases from U.S. 
agricultural producers as occurred in 2008. Certainly buyers 
would be forced to consider tighter limits on forward contract 
purchases, and at the very time many producers would like to 
take advantage of those favorable prices.
    The NGFA believes that it would be imprudent for the CFTC 
to change current speculative position limits for the 
enumerated agricultural commodities.
    In particular, we have a strong reservation about an 
approach that would create a combined position limit for over-
the-counter instruments and futures based on open interest 
levels.
    The majority of the risk management activity for the 
enumerated ag commodities involves futures traded on exchanges. 
The practical impact of a combined OTC and futures position 
limit likely would mean limits ratcheting steeply upward for 
futures. We fear the result would be a sort of perpetual motion 
machine leading to investment in enumerated ag commodities in 
ever-greater amounts and even wider basis swings occurring.
    In addition, the commodity exchanges, notably the Chicago 
Board of Trade and the Kansas City Board of Trade, have worked 
diligently to reestablish convergence in their wheat contracts. 
Getting it wrong on position limits could undo progress that 
the exchanges are making toward enhancing the performance of 
their contracts.
    Proper functioning of futures markets for traditional 
commercial users and producers should be the CFTC's overriding 
consideration in establishing position limits. A reliable 
relationship between cash and futures must be maintained.
    Convergence matters, not just sometimes, but consistently 
and predictably. The National Grain and Feed Association does 
not favor excluding investment capital from agricultural 
futures markets, as we believe it does provide liquidity to our 
markets. However, we believe that the CFTC must establish 
reasonable limits on an investment in the enumerated ag 
commodities so these relatively small markets are not 
overwhelmed by investment demand.
    Ignoring the unique characteristics of these markets could 
have highly undesirable consequences for agricultural producers 
and their traditional hedgers who use these markets for price 
discovery and risk management.
    Thank you, Mr. Chairman, for the opportunity to present 
NGFA's views today. And we will be happy to respond to any 
questions.
    [The prepared statement of Mr. Jones follows:]

  Prepared Statement of Robert Jones, Senior Vice President, ABN AMRO 
Clearing Chicago LLC; Member, Risk Management Committee, National Grain 
                   and Feed Association, Chicago, IL

    Good morning, Mr. Chairman and Members of the Subcommittee. I am 
Robert Jones, Senior Vice President of ABN AMRO Clearing Chicago LLC, a 
futures commission brokerage in Chicago. I serve on the Risk Management 
Committee of the National Grain and Feed Association (NGFA) and I am 
here today to represent the views of the NGFA.
    The National Grain and Feed Association is the national nonprofit 
trade association that represents more than 1,000 companies that 
operate an estimated 7,000 facilities nationwide in the grain, feed and 
processing industry. Member firms range from quite small to very large, 
both privately owned and cooperative, and handle or process in excess 
of 70% of all U.S. grains and oilseeds annually. Companies include 
grain elevators, feed mills, flour mills, oilseed processors, biofuels 
producers/co-product merchandisers, futures commission merchants and 
brokers, and related commercial businesses.
    A common thread for NGFA-member firms is that they rely heavily on 
efficient futures markets to provide price discovery and risk 
management for their commercial businesses. In particular, consistent 
and predictable convergence of cash and futures values is of primary 
importance to the NGFA. Establishing appropriate speculative position 
limits for the futures contracts utilized by these traditional 
commercial hedgers is critically important to maintaining the viability 
of futures contracts for risk management purposes. It also is essential 
in enabling our member companies to make forward contracting and other 
risk management tools available to farmer-customers.
    We are especially glad for the opportunity this morning to discuss 
position limits for the enumerated agricultural commodities--that is, 
wheat, corn, soybeans, livestock and cotton. As you know, Federal 
position limits already are in place for those commodities. We believe 
those limits are at appropriate levels and that the process for 
establishing those limits has worked well. However, the Dodd-Frank Act 
requires that the CFTC now establish speculative position limits for 
all commodities, including agricultural commodities.
    In the past, the NGFA generally had been supportive of occasional 
requests by futures exchanges to increase speculative position limits. 
However, futures price volatility in recent years and vastly increased 
participation by nontraditional participants has altered the situation 
and, at times, threatened the viability of exchange-traded futures for 
commercial grain hedgers. The rapid escalation of agricultural futures 
prices during 2008, and a resulting disconnect of cash and futures 
values, dramatically increased risks for grain purchasers/hedgers and 
caused extreme financial stress due to massive margining requirements. 
We believe that dramatically expanded participation in agricultural 
futures by nontraditional participants like index funds and pension 
funds played a role in the 2008 spike--not the only factor, but a 
significant one.
    Today, conditions exist that could lead to a repeat of those 
conditions. With investment capital now seeking enhanced returns and 
many advisers recommending commodities as an investment vehicle, it 
appears the stage could be set for another investment-fueled spike in 
futures prices--an increase we fear will be largely unrelated to market 
fundamentals and could again result in extreme financial stress. If 
this happens, grain buyers may be forced to limit their purchases from 
U.S. agricultural producers, as occurred in 2008. Certainly, buyers 
would be forced to consider tighter limits on forward contract 
purchases, at the very time that many producers would like to take 
advantage of favorable prices.
    Many Members of Congress have heard from producers about wider 
basis levels in recent years--that is, the difference between cash bids 
and futures values on-exchange. We believe strongly that artificially 
inflated futures values, due in part to participation of nontraditional 
investors, have led to a disconnect between cash and futures. The 
commodity exchanges, notably the Chicago Board of Trade and the Kansas 
City Board of Trade, have worked diligently to address the disconnect 
and to re-establish convergence in their wheat contracts. Getting it 
wrong on position limits could undo progress the exchanges are making 
toward enhancing performance of their contracts.
    For these reasons, the NGFA believes it would be imprudent for the 
CFTC to change current speculative position limits for the enumerated 
agricultural commodities. In particular, we have strong reservations 
about an approach that would create a combined position limit for over-
the-counter instruments and futures based on open interest levels. The 
logic for not linking speculative position limits to open interest 
levels is as follows.
    The majority of risk management activity involving the enumerated 
ag commodities utilizes futures traded on-exchange. The practical 
impact of a combined OTC and futures position limit likely would mean 
limits effectively ratcheting steeply upward for futures--attracting 
greater investment and boosting open interest levels--which would 
trigger increased position limits--leading to yet greater participation 
levels and increased open interest--and triggering even higher position 
limits--and so on. We fear the result would be a sort of perpetual 
motion machine leading speculative investment capital to invest in 
enumerated ag commodities in ever-greater amounts, exacerbating 
artificially inflated futures values and leading us back to even wider 
basis swings.
    Instead, the NGFA strongly urges the CFTC to use proper functioning 
of futures markets for traditional commercial users and producers as 
the overriding consideration in establishing position limits. That 
means that a reliable relationship between cash and futures must be 
maintained. Convergence Matters! Not just sometimes, but consistently 
and predictably.
    We also urge the CFTC to be vigilant in reviewing corporate linkage 
issues through which investment firms or other nontraditional 
participants may technically comply with position limits through 
separate entities, while coordinating positions that would circumvent 
the intent of the rule. This would seem to us consistent with the 
Commission's intentions to monitor account ownership and control to 
help ensure compliance.
    Mr. Chairman, all these points lead back to one very important 
message: enumerated agricultural futures contracts must function 
effectively for traditional commercial hedgers and their farmer-
customers. The NGFA does not favor excluding investment capital from 
agricultural futures markets. In fact, we believe that a desire to 
invest in our industry is a good thing. It forecasts growth and 
economic opportunity for U.S. agriculture and agribusiness.
    However, we believe Congress and the CFTC must act prudently to 
establish reasonable limits on investment in the enumerated ag 
commodities and help ensure that those relatively small markets are not 
overwhelmed by investment demand. Ignoring the unique characteristics 
of the enumerated agricultural commodities when setting position limits 
could have highly undesirable consequences for U.S. agricultural 
producers and the traditional hedgers who use these markets for price 
discovery and risk management.
    Thank you, Mr. Chairman, for the opportunity to present the NGFA's 
views. I would be happy to respond to any questions.

    The Chairman. Thank you.
    I thank the whole panel. We have votes coming up in about 
15 or so minutes, we are told. We are not going to limit the 
discussion to take place here, let's, just to expedite a little 
bit, I will go right to Mr. Johnson.
    Mr. Johnson. Thank you, Mr. Chairman. Just a quick 
question. I'm obviously particularly proud to have two of my 
fellow Illinoisans here, Mr. Jones and Mr. Duffy. I would ask 
you, it seems as though at least the Commission is of a mind 
that if we hurry to regulate our domestic exchanges, our 
European counterparts will follow.
    It is my judgment, and I may be wrong and I am inquiring as 
to you specifically, as to whether you think that is the 
correct process; or whether you think, in fact, that that 
course would put our markets, CME and otherwise, at a 
competitive disadvantage. And do you think if we do put the 
cart before the horse, in my judgment, that the Europeans will 
impose similar position limits, or do you think they will 
simply lag back and take advantage of our premature action?
    Mr. Duffy. Well, I thank Congressman Johnson for the 
question because it is very interesting. I met with the 
gentleman from France. His name escapes me, but he is the head 
of the European Commission on this. And I asked him, when he 
told me along with Chairman Gensler when he came to visit us at 
the exchange, that they were in lockstep with the United 
States. I asked him when they passed Dodd-Frank in the U.K., 
and they said they did not pass Dodd-Frank. I asked them when 
they had other provisions put in place such as in the United 
States, and they had no such provisions, not even anything on 
the table.
    They are making a lot of rhetoric, in my opinion. As it 
relates to regulatory reforming with the U.S., I do not see 
that to be the reality. The U.K., especially in London, is very 
dominated by the financial services industry. I think they will 
say many things to get a competitive advantage over the United 
States, and it would be a shame if that was allowed to happen. 
I am not talking my own book here, I am talking the United 
States' book here. We want to keep this business in the U.S. We 
want to be the central place to discover price. And I assure 
you that our friends over in Europe would love to have the 
business that the United States has today.
    So I personally don't believe that they are going to follow 
suit with the United States in laws. They may do certain 
things, but not to the extent that we have done in this 
country.
    Mr. Johnson. I appreciate it. To my fellow Members that 
remain on the panel and everybody here, Merry Christmas and 
Happy Holidays to all of you.
    Mr. Duffy. Merry Christmas, sir.
    The Chairman. Thank you. Mr. Peterson.
    Mr. Peterson. Thank you, Mr. Chairman.
    Mr. Duffy, this article that I referenced earlier, as I 
understand it, I guess you didn't respond, or I don't know if 
they called you or not about this article.
    Mr. Duffy. No, they did not.
    Mr. Peterson. But you were offering the Citadel service. 
And is it true that you couldn't get--they couldn't get people 
to sign up?
    Mr. Duffy. We had an offering with Citadel Investment 
Company roughly a year, year and a half ago, to bring to the 
market trading of credit default swaps initiative, and we did 
not receive any traction on that initiative with Citadel 
Investment firm for a whole host of reasons. We have had a lot 
of businesses that we invest in and we try, some work some 
don't, no different from our products. We test products, 
hundreds of them, and maybe one can be successful out of 
hundreds or thousands, so this is another venture that did not 
succeed.
    Mr. Peterson. You agree with the characterization that the 
reason it didn't is that these so-called secret committee of 
nine bankers froze it out?
    Mr. Duffy. I don't know of any facts to support that, sir, 
to be honest with you. I would not know that. But I would 
suggest that the clearinghouse at the CME Group is an open 
clearinghouse. I think Chairman Gensler referred to some of the 
barriers to entry to the clearinghouses in the United States. 
We don't have the barriers to entry into our clearinghouse that 
he was referring to. So there is not a multi-billion-dollar 
commitment into clearing at CME Group's products today. So 
there are risk-management issues in these OTC products. I am 
not saying that is not important. But in today's business that 
CME Group does, we don't have the barriers to entry that 
Chairman Gensler might have characterized incorrectly.
    Mr. Peterson. Did the risk committee change? Do you have a 
risk committee?
    Mr. Duffy. We do have a risk committee, sir.
    Mr. Peterson. Has the makeup of that changed?
    Mr. Duffy. The makeup of our risk committee can change 
throughout time. Obviously, we have certain members that come 
and go, but we have a composition of people that have interest 
in the marketplace that is reflective of the marketplace, and 
we think that is the best thing for all the users.
    Mr. Peterson. You would not agree that this risk committee 
is dominated by these so-called secret committee----
    Mr. Duffy. I didn't give that much credit, to be honest 
with you, sir. I don't believe that. I think the markets are 
much bigger than that. I don't think there is any collusion 
going along. Risk committees, there is way to much at stake for 
that to be going on, whether it is not a CME Group or any other 
institution.
    Mr. Peterson. Mr. Sprecher, you have a risk committee, too. 
Is it made up of big guys or more broad than that?
    Mr. Sprecher. Yes. We own five regulated clearinghouses, 
but one of them is specific for credit default swaps. The 
members of that clearinghouse are the 14 largest global banks. 
And each of those banks has a representative on the risk 
committee. That risk committee is overseen by an independent 
Chairman, and the issues that are discussed in our committee 
are risk issues, so I can't speak to these. What the article 
suggested were Wednesday meetings downtown or other things.
    Mr. Peterson. You are not aware of those?
    Mr. Sprecher. I am not aware of those.
    Mr. Peterson. Thank you. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Mr. Conaway.
    Mr. Conaway. Thank you Mr. Chairman. Gentlemen, welcome.
    Given that the state of play is at the CFTC, and not in 
Congress right now, what are you coming to Congress here to ask 
us? Are you coming to ask us to do anything with respect to the 
rulemaking that is going on, that the Congress actually needs 
to act, or are you wanting us to continue to watch what is 
happening at the CFTC? Anybody ask you to do something 
specific?
    Mr. Newman. I think as we identified in the positions for 
the American Feed Industry Association, we appreciate your 
continued oversight and watching the process, and ensuring that 
it does go forward and gets the results that everyone intended.
    Right now we see our role as working more directly with 
CFTC in the comment process to make sure that our interests and 
so forth are taken into account in that process.
    Mr. Conaway. Speaking of that question, have all of your 
organizations and your individual members had the appropriate 
level of access to the rulemaking process?
    Mr. Sprecher. Yes, we have.
    Mr. Newman. We have had very good cooperation and outreach 
to not only clarify what is being considered, but also to be 
able to have the input into the process.
    Mr. Conaway. Mr. Collura, are you guys being considered?
    Mr. Collura. Yes. We have had adequate access to the 
Commission, the rulemaking process; and actually as a 
coalition, we submitted comments, preliminary comments to CFTC 
on November 1.
    Some of those suggestions we have made regarding the 
position of its rulemaking were actually kind of thrown around 
a little bit in discussion in a previous panel. One of those 
points made, Congressman Marshall, was very well taken about 
the importance for a lot of energy and agricultural groups in 
our coalition that are concerned about index speculation. I 
think that, I hope that tomorrow the proposed rulemaking will 
attempt to address that situation and, maybe like Commissioner 
Chilton said, find a way to somewhat segregate the various 
forms of speculation that occurred in the markets and address 
them as appropriate. And if not, we will be certain to----
    Mr. Conaway. Help me with that. What type of various forms 
of speculation? You said various forms of speculation. What--
help me understand what a form of speculation is.
    Mr. Collura. I am speaking of traditional speculation such 
as hedges and futures investors----
    Mr. Conaway. So it is not the form of speculating----
    Mr. Collura. Right, versus the index funds which have a 
different investment strategy when it comes to commodity 
investments.
    Mr. Conaway. You used a phrase which I thought was 
interesting. You said that basically the speculation--and you 
said it as a pejorative--are bets on higher prices. Is there a 
different reason to speculate than higher prices?
    Is that the side of the deal that is buy low, sell high?
    Mr. Collura. I am sorry, I am not sure I understand the 
question.
    Mr. Conaway. You used a phrase as a pejorative that the 
speculators were betting on higher prices. And I was struck by 
that as to--I am not aware of a speculator----
    Mr. Collura. My comment was in respect to the earlier 
comments that Congressman Marshall had raised about index 
speculation. These folks take passive rolling positions in 
commodities and can create almost a perpetual situation of 
entangling a market, where outside of spot months----
    Mr. Conaway. Are there speculators that you would agree 
should be in the market?
    Mr. Collura. I agree speculators, in general, should be in 
the market. Speculation, in general, is a good and healthy 
thing. It provides liquidity and provides risk management and, 
as was being discussed, risk management and risk mitigation.
    Mr. Conaway. The comments about, you, your members, are 
they willing to accept higher prices for transaction costs as a 
result of limiting the number of speculators in a market? Is 
that a--does that have any--I will ask Mr. Duffy and Mr. 
Sprecher. You both mentioned higher transaction costs.
    Are those--is that one of the burdens that we talk about if 
we mess this market up? And can you measure those higher 
transaction costs?
    Mr. Duffy. I think you can, sir. Prior to going into 
management at CME in 2002, I spent 25 years of my career 
actually trading these products and providing liquidity for all 
different types of products. And I know when there are fewer 
participants in a marketplace the bid offer widens 
significantly. And I don't care if you are trading government 
securities or you are trading pork bellies. It will widen 
significantly with less participants.
    So the answer to your question is absolutely yes, and I 
have seen it for many, many years, firsthand, whether it is 
electronically or in the pit form.
    And if I could just clarify one other point, sir, while I 
have the microphone, on these index funds. These index funds, 
just so we are all clear on this, they do not come to 
expiration of the market. We have all decided, or we have had a 
lot of discussion, that the price discovery function happens 
during delivery period of the marketplace. Index funds have 
long gone from the delivery period of any marketplace and have 
gone to the next month. So they are not affecting the price 
discovery of any one particular product.
    And also when you look at who takes or makes delivery of 
these products, there are less than several hundred contracts 
on a delivery period every cycle when millions of contracts are 
being traded. So it is a very small percentage of delivery that 
is being done, and the index funds have long moved out of the 
marketplace.
    I apologize for answering two questions at once.
    Mr. Conaway. That is okay. I yield back, Mr. Chairman.
    The Chairman. Mr. Marshall.
    Mr. Marshall. Thank you, Mr. Chairman. I guess it is the 
influx of the index fund money that some say would push prices 
higher, and then that you would reach some sort of stable state 
where they are getting out and they are not affecting price the 
way you describe.
    Mr. Duffy?
    Mr. Duffy. They would actually be selling the nearby 
contract, sir. So they would be putting pressure on the price 
discovery contract month, if they are index funds that are 
long. There are also index funds that are short, too.
    Mr. Marshall. Right; once you get to that stable state.
    Mr. Duffy. Correct.
    Mr. Marshall. And it may, again, I don't know, I just don't 
think that we here in this Committee or in Congress are 
competent to judge this. That is why we defer to the CFTC and 
specifically told the CFTC, ``Don't do it if it is not 
appropriate to do it. Figure out whether or not you have a 
problem and then tailor the solution to that specific 
problem.''
    But we did hear this testimony that maybe the influx of 
commodities money into the market could pull--force prices to 
go up for a period of time and then there would be a stable 
state that you have described where they are just rolling and 
they are not really affecting price.
    Mr. Duffy. I assure you, anytime there is an influx of 
money into any particular product, whether it is a security of 
IBM stock, CME stock, or ICE stock, or a barrel of crude oil, 
you could have a short-term impact on price all the time. You 
can do that at the grocery store, you can do it at the gas 
pump, you can do it anywhere. But normally the market will come 
back into fundamentals right away.
    Our point is these people are not affecting the price when 
it comes into what is the delivery period.
    Mr. Marshall. The CFTC used its special call authority to 
gather large trader data, and it has been gathering large 
trader data, since late 2007; first, quarterly, and now it is 
doing it more frequently, maybe monthly. Eventually the 
objective here is to get it daily, and I guess that is going to 
occur late in 2011.
    Are any of you aware of any studies--we have already talked 
about the CFTC itself looking at the large trader data to 
determine whether or not it has had an impact upon price--
whether or not the trading by these massive passive index 
funds, what have you, whether they have had an impact on price? 
Are any of you aware of a study done by anybody--Lincoln, 
Princeton, you name it, doesn't matter who it is--taking that 
data, which is probably the best thing to be looking at, trying 
to figure out whether or not index fund trading has had an 
inappropriate impact? Anybody looking at that data who has come 
up with, yes, here is the problem and specifically here is what 
happened? Anybody?
    Mr. Duffy. We have looked at the data and we have seen no 
evidence to support that index funds are doing what you 
suggested. So we have looked at all the academic data and 
others coming out, and even CFTC's economist, and their data, 
their reports, and have seen nothing to support that 
speculators are influencing the price of products.
    Mr. Collura. I believe that we might have some data and 
some information, which I can't cite offhand but I can 
certainly get the Committee in the future.
    Mr. Marshall. That would be great, and share it with the 
CFTC as well. If the Committee has heard one message here, and 
it is fairly consistent on both sides of the aisle, is that we 
don't think the CFTC needs to move forward. They are not 
mandated to move forward by Congress to impose position limits 
if they don't know there is a problem.
    So if you can help them identify the problem, because 
internally they are really struggling with this. You have some 
Commissioners who say, ``Oh, yes, there is a problem.'' But 
they are not able to describe it. And the staff is saying, ``We 
can't figure out what that problem is so we don't know what 
solution to suggest.''
    Mr. Jones, you said that your group was really troubled by 
imposing position limits across all markets, so not just in the 
exchanges but in the OTC market swaps world generally. And 
because it was good, and I have your language here: The 
practical impact of a combined OTC and futures position limit 
likely would mean limits effectively ratcheting steeply upward 
for futures.
    When you say the limits would ratchet up, what you mean by 
that is your members would have position limits that were 
gradually pushed down so that they really weren't able to take 
as much advantage of the exchange as in the past?
    Mr. Jones. I would say all or at least most of our members 
would fall into the qualified hedger category. What we are 
referring to there is, as I said early on, the majority of and 
particularly in the enumerated commodities of corn, soybeans, 
wheat, the majority of the trading that goes on, the price 
discovery occurs on the exchange and most of it is hedged. And 
so, unlike the energy markets, which I am no expert in, but 
there is a much larger OTC portion of that that occurs. So if 
we were combined with the OTC, it actually would create a much 
larger position limit that specs could have if they combined 
the two than what exists right now, if it were to flow into the 
futures market.
    Mr. Marshall. The trouble I am having is seeing what effect 
that has on your ability to actually hedge.
    Mr. Jones. Well, then that would follow what we said before 
if you were to get into this investment-fueled higher-price 
scenario, like we had in 2008, because you had this excessive 
amount of investment money that had come into the market.
    Mr. Marshall. You are suggesting that the imposition of 
aggregate position limits would encourage additional investment 
market----
    Mr. Jones. I would say would allow it, not encourage it.
    Mr. Marshall. It is currently allowed without limit.
    Mr. Jones. Not in the enumerated ags like corn, soybeans, 
our markets.
    Mr. Marshall. You don't have an OTC, comparable contracts 
OTC with regard to those?
    Mr. Jones. The exchange just recently--and I refer to Mr. 
Duffy from the CME--but it is not as mature, not the developed 
market that the futures, at this point in time----
    Mr. Marshall. So you are worried that doing this would 
encourage that kind of phenomena?
    Mr. Jones. At this point in time. We are not saying it 
shouldn't happen. We are just saying we shouldn't rush to do 
that without the CFTC. We have had ongoing discussion with CFTC 
and found them responsive to our needs. But we just don't think 
that they have to rush to make those things in our contract at 
this time.
    Mr. Marshall. Thank you for your indulgence, Mr. Chairman.
    I appreciate all of your testimony.
    The Chairman. Thank you.
    Mr. Murphy.
    Mr. Murphy. I wanted to return to something the Chairman 
was asking about, and ask Mr. Duffy and Mr. Sprecher if they 
would comment a little more. When we went through the Dodd-
Frank process, we were very worried about making sure we found 
the right balance, that our clearinghouses were out there 
allowing things to be cleared that could be, but that we didn't 
put regulatory pressure on you to take products that you 
couldn't price and therefore we would create additional risk.
    This New York Times article was a little troubling because 
it was talking about secrets in a way that I think is a little 
theatrical, but there is a fundamental underlying issue that I 
am curious about how you guys approach this? You need people 
that are clearinghouse members to be solid enough that if there 
is a problem they can help solve that with capital calls and 
other things; but at the same time, it seems like there is a 
possibility that people could set those limits so high that 
only a handful of people can participate, and you do create an 
anti-competitive marketplace, how do you guys approach finding 
that balance?
    Mr. Duffy, you talked about being open, but I don't know 
what that means. And that balance seems like it is a critical 
one to find, that we get the competition we are looking for 
without creating additional risk.
    Mr. Duffy. I am happy to refer to Mr. Sprecher to begin 
with, since he was mentioned in the article and we weren't. So 
I am happy to----
    Mr. Murphy. It is an issue for both of you.
    Mr. Sprecher. Let me steal the microphone away from Mr. 
Duffy.
    I think specifically with credit default swaps, as you may 
know, we stepped forward at a moment in time when the market 
had collapsed and people were calling to remove the toxic 
assets off the books of the banks and built a clearinghouse to 
do that. And that is why we have 14 large bank members. And the 
only solution that we could come up with on how to deal with a 
failed bank is to force the other 13 members to accept a forced 
allocation of the failed positions amongst them that my company 
would administer.
    We want to open that clearinghouse up, but we have to 
recognize that, particularly in the case of some of these 
complicated derivatives, the new members coming in have to be 
in a position to be able to accept an allocation of these 
derivatives, and then they have to be able to do something with 
them in a marketplace. And we do intend to open that up and we 
are working on regimes to get there. And certainly Dodd-Frank 
is an impetus to speed up that implementation.
    I think the New York Times article was unfair in that it 
took the construction of that clearinghouse out of the context 
in which it was built.
    Mr. Murphy. Do you have the same kind of issues with the 
other regulated clearinghouses?
    Mr. Sprecher. Not necessarily. As the products get more 
liquid and more transparent and more exchange traded, it is 
much easier for a member to come in and accept the defaulting 
position and then liquidate it in a transparent market.
    As you specifically know because of your expertise, the 
credit default swap market is an incredibly illiquid and 
complicated market, and there aren't many people that have the 
domain knowledge to do that right now.
    Mr. Duffy. If I could just support what Mr. Sprecher said, 
on our list of products, obviously we don't have the 
requirements that we would potentially have if we were to go in 
and do the OTC clearing because it is a different product. It 
is not illiquid, but it doesn't have the liquidity in 
participation of a list of derivatives market has today.
    So in order to risk manage that properly so we don't have 
the system implode, you need to have capital requirements that 
make sense. You need to set margin requirements that are 
different than listed traditional futures. So we have to do 
different types of risk management as it relates to over-the-
counter swaps-type clearing. So I would concur with my 
colleague, Mr. Sprecher.
    Mr. Murphy. Let me just comment. I think from my 
discussions with our colleagues, there was wide support for 
trying to open up these markets to the degree possible. What 
you are hearing from us, and you will continue to hear from us 
over the years, is that desire for you to, in a prudent 
fashion, because clearinghouses obviously need to be prudent, 
but to continue to try to make them open and accessible so we 
have more competition and more transparency. I think that is 
really a big underlying piece of what we were all working on 
through the course of Dodd-Frank, and so I will leave you with 
that as something to keep in mind.
    The Chairman. Gentlemen, thank you very much for your 
spending this time with us. We appreciate it. And in 
recognition of the fact, we are looking forward for his good 
work, Mr. Conaway will be calling the next meeting of this 
Subcommittee, whenever that is going to be, so I would like to 
offer him any closing remarks he would like to make.
    Mr. Conaway. Thank you, Mr. Chairman. I hope it is not 
speculating on something that has not actually happened yet. 
Chairman-elect Lucas will make that final decision. I hope to 
be, I have expressed an interest in chairing this Subcommittee.
    I was heartened today when we had all five of you at least 
nod your heads that the CFTC's processes are open to you, that 
you get input into them as you are trying to on both sides of 
the issue, get your positions in front of the Commission. And 
if the baseball analogy works, if the umpire is getting 
screamed at by both benches, then there must be something okay 
going on behind home plate.
    So I was heartened that you both said that CFTC's processes 
are working, that you have access to as they move along in 
that. So with that, Mr. Chairman, I yield back.
    The Chairman. Thank you very much. And we do appreciate 
your coming. Our purpose today was to try to shed a little 
daylight on what is going on at this moment, the importance it 
is to our economy and all that goes on in the different 
markets.
    I think it has been a good day. We have learned and got the 
insight of the Chairman and all the Commissioners and some of 
the needs that you have. And we want to invite you to continue 
to be in contact with us, and I am sure you will. So with that, 
I thank you again. I wish you a great holiday and we look 
forward to seeing you, if not before, at least next year. Thank 
you so much.
    Under the rules of the Committee, the record of today's 
hearing will remain open for 10 calendar days to receive 
additional materials and supplementary written response from a 
witness to any questions posed by a Member.
    The hearing of the Subcommittee on General Farm Commodities 
and Risk Management is adjourned.
    [Whereupon, at 12:20 p.m., the Subcommittee was adjourned.]

                                  
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