[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.
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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.
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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\
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\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.
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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\
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\6\ Statement by CFTC Chairman Gary Gensler, Public Meeting on
Establishing Position Limits, CFTC Headquarters, Washington, D.C.,
January 14, 2010.
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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\
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\7\ Excessive Speculation in the Natural Gas Market, Senate
Permanent Subcommittee for Investigations Staff Report, June 25, 2007.
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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\
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\8\ Held on July 28 and 29, and August 5, 2010. (www.cftc.gov/
PressRoom/Events/Events2009/index.htm)
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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.
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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.''
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\11\ Pub. L. 111-203, 738 and 737(a)(4).
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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.
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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.
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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.]