[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





          THE COMMODITY FUTURES TRADING COMMISSION 2012 AGENDA

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

                                HEARING

                               BEFORE THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 29, 2012

                               __________

                           Serial No. 112-29









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




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                        COMMITTEE ON AGRICULTURE

                   FRANK D. LUCAS, Oklahoma, Chairman

BOB GOODLATTE, Virginia,             COLLIN C. PETERSON, Minnesota, 
    Vice Chairman                    Ranking Minority Member
TIMOTHY V. JOHNSON, Illinois         TIM HOLDEN, Pennsylvania
STEVE KING, Iowa                     MIKE McINTYRE, North Carolina
RANDY NEUGEBAUER, Texas              LEONARD L. BOSWELL, Iowa
K. MICHAEL CONAWAY, Texas            JOE BACA, California
JEFF FORTENBERRY, Nebraska           DENNIS A. CARDOZA, California
JEAN SCHMIDT, Ohio                   DAVID SCOTT, Georgia
GLENN THOMPSON, Pennsylvania         HENRY CUELLAR, Texas
THOMAS J. ROONEY, Florida            JIM COSTA, California
MARLIN A. STUTZMAN, Indiana          TIMOTHY J. WALZ, Minnesota
BOB GIBBS, Ohio                      KURT SCHRADER, Oregon
AUSTIN SCOTT, Georgia                LARRY KISSELL, North Carolina
SCOTT R. TIPTON, Colorado            WILLIAM L. OWENS, New York
STEVE SOUTHERLAND II, Florida        CHELLIE PINGREE, Maine
ERIC A. ``RICK'' CRAWFORD, Arkansas  JOE COURTNEY, Connecticut
MARTHA ROBY, Alabama                 PETER WELCH, Vermont
TIM HUELSKAMP, Kansas                MARCIA L. FUDGE, Ohio
SCOTT DesJARLAIS, Tennessee          GREGORIO KILILI CAMACHO SABLAN, 
RENEE L. ELLMERS, North Carolina     Northern Mariana Islands
CHRISTOPHER P. GIBSON, New York      TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois             JAMES P. McGOVERN, Massachusetts
VICKY HARTZLER, Missouri
ROBERT T. SCHILLING, Illinois
REID J. RIBBLE, Wisconsin
KRISTI L. NOEM, South Dakota

                                 ______

                           Professional Staff

                      Nicole Scott, Staff Director

                     Kevin J. Kramp, Chief Counsel

                 Tamara Hinton, Communications Director

                Robert L. Larew, Minority Staff Director

                                  (ii)














                             C O N T E N T S

                              ----------                              
                                                                   Page
Baca, Hon. Joe, a Representative in Congress from California, 
  prepared statement.............................................     6
Conaway, Hon. K. Michael, a Representative in Congress from 
  Texas, prepared statement......................................     5
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, 
  opening statement..............................................     1
    Prepared statement...........................................     3
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................     4
    Prepared statement...........................................     4
Welch, Hon. Peter, a Representative in Congress from Vermont, 
  submitted letter...............................................    49

                                Witness

Gensler, Hon. Gary, Chairman, Commodity Futures Trading 
  Commission, Washington, D.C.; accompanied by Hon. Jill E. 
  Sommers, Commissioner, Commodity Futures Trading Commission....     7
    Prepared statement...........................................     9
    Submitted questions..........................................    50

 
          THE COMMODITY FUTURES TRADING COMMISSION 2012 AGENDA

                              ----------                              


                      WEDNESDAY, FEBRUARY 29, 2012

                          House of Representatives,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 10:02 a.m., in Room 
1300 of the Longworth House Office Building, Hon. Frank D. 
Lucas [Chairman of the Committee] presiding.
    Members present: Representatives Lucas, King, Neugebauer, 
Conaway, Fortenberry, Schmidt, Thompson, Stutzman, Tipton, 
Crawford, Huelskamp, DesJarlais, Gibson, Hultgren, Schilling, 
Peterson, Holden, McIntyre, Boswell, Baca, David Scott of 
Georgia, Cuellar, Costa, Schrader, Kissell, Owens, Pingree, 
Courtney, Welch, Fudge, Sablan, Sewell, and McGovern.
    Staff present: Tamara Hinton, Kevin Kramp, Josh Mathis, 
Ryan McKee, John Porter, Matt Schertz, Heather Vaughan, Suzanne 
Watson, Liz Friedlander, C. Clark Ogilvie, John Konya, Jamie 
Mitchell, and Caleb Crosswhite.

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

    The Chairman. This hearing of the Committee on Agriculture 
to review the Commodity Futures Trading Commission 2012 agenda 
will come to order.
    Good morning, and I would like to thank all of you for 
being here. Today's hearing will focus on the Commodity Futures 
Trading Commission, the CFTC agenda for the coming year. And I 
would like to thank Chairman Gensler for joining us to share 
his perspective.
    This is a timely hearing as the CFTC is facing a number of 
issues of concern to our constituents. First and foremost, the 
CFTC's agenda for the coming year must be its investigation 
into the collapse of MF Global and its missing customer funds. 
Thousands of customers have yet to receive nearly 30 percent of 
the funds that MF Global should have held in segregated 
accounts.
    While I commend the Trustee for working quickly to trace 
the thousands of complex transactions that occurred during MF 
Global's final days, the fact remains that many customers have 
yet to be made whole. Farmers and ranchers across the country 
continue to face hardships because of their missing funds and 
have lost confidence in the futures system. This raises several 
key questions about customer protections in place and the 
CFTC's role in futures markets. Although the CFTC has gained 
new authority over the swaps market under the Dodd-Frank Act, 
the MF Global collapse demonstrates the importance of CFTC's 
oversight responsibilities in futures market.
    In addition to our concerns about MF Global customer funds, 
we also must address the Dodd-Frank rulemaking process. As the 
CFTC nears the halfway mark in completing the dozens of 
regulations required by Dodd-Frank, I remain concerned about 
the breadth of those proposals. Instead of focusing resources 
on the entities and activities that pose the most significant 
risk to our financial systems, the CFTC is casting a wide net 
that could needlessly catch end-users.
    For example, for months we have been assured by Chairman 
Gensler that the swap dealer definition would not result in 
unnecessary registration of on end-users, which Congress never 
intended to fall within the swap dealer category. However, as 
the Commission neared completion of the rule last week, end-
users were frantically seeking clarification that their hedging 
activities would not be classified as swap dealing. Now, this 
doesn't make sense because Congress never intended for hedging 
to be considered swap dealing.
    Additionally, the CFTC has yet to propose a rule that would 
clarify the scope of its new regulations for activities that 
occur outside our borders, what we refer to as 
extraterritoriality. There is a long-standing precedent by both 
the CFTC and the Prudential Regulators to defer to foreign 
regulatory authorities in matters concerning foreign entities 
and transactions. Expanding the reach of the Dodd-Frank into 
activities outside our borders not only ignores the principles 
of international law, but it spreads our agencies and resources 
too thin. It also threatens the international cooperation 
required for global financial reforms as envisioned by the G20.
    Additionally, the lack of clarification on the territorial 
scope of regulations has made it incredibly difficult for 
market participants to prepare for compliance. The confusion 
over the swap dealer definition and the foreign scope of those 
regulations are just two examples of many issues which the CFTC 
has failed to deliver concrete answers or policy solutions. Our 
constituents need more than empty reassurances.
    Most of these concerns are rooted in an issue that we have 
discussed for more than a year now, the need for strong and 
robust economic analysis. The Economist magazine recently 
highlighted the Obama Administration's tendency to overstate 
the benefits of regulation while underestimating the cost. That 
has certainly been apparent in the Dodd-Frank rulemaking.
    At a public meeting recently, CFTC staffers admitted they 
simply had not calculated the cost and benefits of a rule 
governing internal business conduct standards. They could not 
provide substantial substantive analysis for the conclusions 
they drew about how the rule would impact our economy and that 
is unacceptable.
    Even if the CFTC was attempting to conduct economic 
analyses of Dodd-Frank regulations, it would be difficult given 
the lack of clarity about which organizations will be affected 
by each rule. Making policy without regard to the economic 
consequences is a luxury we cannot afford even in the strongest 
of economies, and we certainly cannot afford it right now.
    I look forward to hearing Chairman Gensler's agenda for 
2012. More than that, I look forward to a time when we can 
guarantee our constituents that they will not be overburdened 
by regulations that were not intended for them.
    [The prepared statement of Mr. Lucas follows:]

Prepared Statement of Hon. Frank D. Lucas, a Representative in Congress 
                             from Oklahoma
    Good morning, and thank you all for being here. Today's hearing 
will focus on the Commodity Futures Trading Commission (CFTC) agenda 
for the upcoming year.
    I'd like to thank Chairman Gensler for joining us to share his 
perspective.
    This is a timely hearing, as the CFTC is facing a number of issues 
of concern to our constituents.
    First and foremost on the CFTC's agenda for the coming year must be 
its investigation into the collapse of MF Global and its missing 
customer funds. Thousands of customers have yet to receive nearly 30 
percent of the funds that MF Global should have held in segregated 
accounts.
    While I commend the Trustee for working quickly to trace the 
thousands of complex transactions that occurred during MF Global's 
final days, the fact remains that many customers have not yet been made 
whole.
    Farmers and ranchers across the country continue to face hardships 
because of their missing funds, and have lost confidence in the futures 
system.
    This raises several key questions about customer protections in 
place, and the CFTC's role in futures markets.
    Although the CFTC has gained new authorities over the swaps market 
under the Dodd-Frank Act, the MF Global collapse demonstrates the 
importance of CFTC's oversight responsibilities in futures markets.
    In addition to our concerns about MF Global customer funds, we also 
must address the Dodd-Frank rulemaking process. As the CFTC nears the 
half-way mark in completing the dozens of regulations required by Dodd-
Frank, I remain concerned about the breadth of the proposals. Instead 
of focusing resources on the entities and activities that pose the most 
significant risks to our financial system, the CFTC is casting a wide 
net that could needlessly catch end-users.
    For example, for months we have been assured by Chairman Gensler 
that the swap dealer definition would not result in unnecessary 
registration of end-users, which Congress never intended to fall within 
the swap dealer category.
    However, as the Commission neared consideration of the rule last 
week, end-users were frantically seeking clarification that their 
hedging activities would not be classified as swap dealing.
    This doesn't make sense, because Congress never intended for 
hedging to be considered swap dealing.
    Additionally, the CFTC has yet to propose a rule that will clarify 
the scope of its new regulations for activities that occur outside our 
borders--what we refer to as extra-territoriality.
    There is a long-standing precedent by both the CFTC and the 
Prudential Regulators to defer to foreign regulatory authorities in 
matters concerning foreign entities and transactions.
    Expanding the reach of Dodd-Frank into activities conducted outside 
our borders not only ignores principles of international law, but it 
spreads our agencies and resources too thin. It also threatens the 
international coordination required for global financial reform as 
envisioned by the G20.
    Additionally, the lack of clarification on the territorial scope of 
regulations has made it incredibly difficult for market participants to 
prepare for compliance.
    The confusion over the swap dealer definition and the foreign scope 
of regulations are just two examples of the many issues on which the 
CFTC has failed to deliver concrete answers or policy solutions. Our 
constituents need more than empty reassurances.
    Most of these concerns are rooted in an issue that we have 
discussed for more than a year now--the need for strong and robust 
economic analysis.
    The Economist recently highlighted the Obama Administration's 
tendency to overstate the benefits of regulation while underestimating 
the costs. That has certainly been apparent in the Dodd-Frank 
rulemaking.
    At a public meeting recently, CFTC staffers admitted they simply 
had not calculated the costs and benefits of a rule governing internal 
business conduct standards. They could not provide substantive analysis 
for the conclusions they drew about how that rule would impact our 
economy. That's unacceptable.
    Even if the CFTC was attempting to conduct economic analyses of 
Dodd-Frank regulations, it would be difficult given the lack of clarity 
about which organizations will be affected by each rule.
    Making policy without regard for the economic consequences is a 
luxury we cannot afford even in the strongest economy. We certainly 
cannot afford it now.
    I look forward to hearing Chairman Gensler's agenda for 2012, but 
more than that, I look forward to a time when we can guarantee our 
constituents that they will not be overburdened by regulations that 
were not intended for them.

    The Chairman. And with that, I would like to recognize the 
Ranking Member for any opening comments he might have.

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

    Mr. Peterson. Thank you, Mr. Chairman, and welcome, 
Chairman Gensler, back to the Committee for today's hearing.
    In addition to passing a farm bill, oversight of the CFTC 
has been a top priority of this Committee. It is important for 
Chairman Gensler to provide an update on the agenda of the CFTC 
for the year, along with the Commission's progress on 
implementing the financial reforms passed in 2010. Looking at 
the Dodd-Frank rules that have already been finalized by the 
CFTC, I believe it is safe to say that so far the CFTC has done 
a pretty good job. And in my conversations with Chairman 
Gensler, it seems to me that they are on the right track, going 
forward.
    For example, during a legislative hearing last year, we 
heard concerns about business conduct standards and the 
potential impact that they could have on pension plans' ability 
to use swaps to hedge risk. In January, the Commission approved 
a bipartisan final rule establishing business conduct 
standards, and the general feeling I get from the pension plans 
is that the CFTC got the final rule right.
    As the CFTC continues finalizing more rules, I suspect that 
they will continue to get it right and address the concerns 
that we have heard at various hearings. I know that some of you 
have expressed frustration with the CFTC's process for 
implementing these reforms. While it has not been a perfect 
process, we cannot lose sight of the importance of their taking 
the time so that they can, in the end, get the right outcome.
    But the CFTC has more on its plate than just Dodd-Frank. It 
is still in the process of investigating what happened at MF 
Global and monitoring our futures market as we watch energy 
prices continue to climb. The Commission does these things and 
much more, all while being grossly under-funded.
    Today's hearing will provide Members with an opportunity to 
ask about these and many other issues currently before the 
CFTC, so I look forward to hearing Chairman Gensler's testimony 
and I thank the chair for holding today's hearing.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota
    Thank you, Chairman Lucas, and welcome Chairman Gensler to today's 
hearing.
    In addition to passing a farm bill, oversight of the CFTC has been 
a top priority for this Committee and I think it's important for 
Chairman Gensler to provide an update on the CFTC agenda for the year 
along with the Commission's progress of implementing the financial 
reforms Congress passed in 2010.
    Looking at the Dodd-Frank rules that have already been finalized by 
the CFTC, I believe it is safe to say that, so far, the CFTC has done a 
pretty good job. And, in my conversations with Chairman Gensler, it 
seems to me that they are on the right track.
    For example, during a legislative hearing last year, we heard 
concerns about business conduct standards and the potential impact they 
could have on pension plans' ability to use swaps to hedge risk. In 
January, the Commission approved a bipartisan final rule establishing 
business conduct standards.
    The general feeling I get from the pension plans is that the CFTC 
got the final rule right. As the CFTC continues finalizing more rules, 
I suspect they will continue to get it right and address the concerns 
we have heard at our various hearings.
    I know that some have expressed frustration with the CFTC's process 
for implementing these reforms. While it has not been a perfect 
process, we cannot lose sight of the importance of taking the time to 
do this right.
    But the CFTC has more on its plate than just Dodd-Frank. It is 
still in the process of investigating what happened at MF Global and 
monitoring our futures markets as we watch energy prices continue to 
climb. The Commission does these things and much more, all while 
grossly under-funded. Today's hearing will provide Members with the 
opportunity to ask about these, and many other issues, currently before 
the CFTC.
    I am looking forward to hearing Chairman Gensler's testimony and I 
thank the chair for holding today's hearing.

    The Chairman. The chair appreciates the gentleman's opening 
comments. And the chair would request that other Members submit 
their opening statements for the record so the witness may 
begin his testimony and to ensure that there is ample time for 
questions.
    [The prepared statements of Mr. Conaway and Mr. Baca 
follow:]

  Prepared Statement of Hon. K. Michael Conaway, a Representative in 
                          Congress from Texas
    Mr. Chairman, thank you for convening this hearing today. I look 
forward to the opportunity to hear from Chairman Gensler about the 
course the CFTC is charting over the coming year. In particular, I am 
interested in hearing more about the schedule for rolling out the final 
rules we are waiting on and the Commission's plans to bolster the cost-
benefit analysis that it conducts on those rules still pending.
    For the past year, I have pushed, cajoled, admonished, and begged 
the CFTC to do a better job in estimating the costs and benefits of the 
rules it proposes. For too long, the Commission has hidden behind the 
letter of the law which says the Commission must only ``consider'' the 
costs and benefits of a proposed rule. Often, it is left to the 
commenters to provide the relevant data and perform an analysis of the 
proposed rule. Unfortunately, this misses the point. The analysis is 
supposed to inform drafters of the proposal. The regulators ought to do 
their homework before they make proposed regulations, not after.
    What is worse, this process is complicated by the continuing issue 
with the sequence of the rules. For many potential regulated entities, 
they simply do not know if a particular rule will apply to them or not, 
because we have not yet defined the very basic participants and 
components of the market.
    I am certain the concerns I raise today are a surprise to no one. 
However, I continue to bring them up and I continue to push on them, 
because the work the CFTC is doing over this coming year holds the 
potential to make or break the financial markets that so many of my 
constituents depend on to manage their businesses and their financial 
affairs.
    To that end, I was would like to highlight three statements by 
three of the CFTC Commissioners given at the most recent public meeting 
and enter them into the record. I believe together, these three 
statements ought to continue to guide the Commission as it completes 
its work over the coming year. They are the reasons why I demand the 
CFTC do its due diligence.
    Commissioner Chilton noted correctly, that ``we must, as we go 
forward, be extremely cognizant that all of these swaps rules are an 
interdependent set. It is a grave error to look at each rule as free-
standing--they are not.''
    Although this idea should surprise no one, the Commission's failure 
to adequately consider the effects and scope of the rules proposed 
under Dodd-Frank have lead to contradictory mandates, duplicative 
filings, and sowed needless confusion among stakeholders in the 
derivatives and futures community. Unfortunately, this confusion is 
wholly self-induced. Better sequencing and a stronger commitment to 
analysis could have avoided much of the uncertainty that has plagued 
this process since the beginning.
    Commissioner Sommers issued what I believe will be a prescient 
statement when she said, ``I do not believe that these rules have a 
chance of withstanding the test of time, and instead believe that this 
Commission will be consumed over the next few years using our valuable 
resources to rewrite rules that we knew or should have known would not 
work when we issued them.''
    It is my fear that when we get to the end of the rulemaking 
process, we are going to find the new institutions and systems we have 
erected are not very good. Should that pass, blame will certainly rest 
with the drafters of the financial reform bill. But, our regulators 
will not have helped the process if they did not strive to understand 
every facet of every rule, before they were finalized.
    Finally, Commissioner O'Malia's statement reached straight to the 
heart of the matter when he said: ``Our inability to develop a 
quantitative analysis, or to develop a reasonable comparative analysis 
of legitimate options, hurts the credibility of this Commission and 
undermines the quality of our rules.''
    The Commission's failure to articulate economically defensible 
reasons behind its rules damage its reputation as a regulator and 
strain its relationships with the entities it oversees. Rules that are 
perceived to be arbitrary or pointlessly burdensome are rules that will 
be avoided or worse, actively circumvented. Bad regulation leads to 
loopholes, shortcuts, and will necessitate constant regulatory 
intervention to tweak and patch the rules for every new eventuality. If 
this happens, the rules laid down under Dodd-Frank will bring more risk 
and more uncertainty to the market.
    Before I close, I want to commend Chairman Gensler on his openness 
and attentiveness, both with Members of Congress and market 
participants. He has engaged the Commission in an extraordinary 
campaign of meetings and public hearings as they have undertaken the 
staggering array of new rules required by Dodd-Frank.
    However, he has consistently left idle the most important tool at 
his disposal--cost-benefit analysis. I fear that all his efforts in 
openness will not result in a better final product, because the 
Commission has not bothered with a sustained effort to quantify its 
proposals or any of their alternatives.
    This analysis is not about making things easier for the bankers of 
Wall Street, it is about creating a regulatory framework in which all 
market actors can participate. I do not worry about the big banks or 
the big financial firms; they all have armies of lawyers prepared to 
help them sort through the end result of this process.
    I do fear for the farmer whose local bank will not give him a loan, 
because he can no longer hedge his crop. I worry about the small 
manufacturer that wants to export products, but finds executing an 
interest rate swap is too expensive. And, I agonize over the jobs that 
will be lost because businesses are no longer able to effectively 
manage their risks.
    Whether they know it or not, my constituents--the farmers, 
ranchers, manufactures, and small businesses spread across the 11th 
District--and all Americans are counting on the CFTC. Their ability to 
manage their financial lives will be impacted by the rules the 
Commission finalizes. To that end, I will continue to insist the CFTC 
utilizes every tool at its disposal to get them right.
                                 ______
                                 
Prepared Statement of Hon. Joe Baca, a Representative in Congress from 
                               California
    Chairman Lucas and Ranking Member Peterson:

    I am pleased to be here today to discuss the ongoing implementation 
of Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, and discuss the 2012 agenda for the Commodity Futures 
Trading Commission.
    I thank the Chairman and Ranking Member for convening this hearing. 
I also want to thank our witness, and recognize the Chairman of the 
Commodity Futures Trading Commission, Mr. Gary Gensler.
    Chairman Gensler, thank you for your efforts--I know you have been 
working very hard to properly implement the regulatory requirements of 
Dodd-Frank.
    Everyone in this room understands the important balance we need to 
reach as we look at establishing a regulatory framework for the complex 
area of derivatives and exotic futures trading.
    We want to make sure our agricultural producers, business 
communities, and end-users have the flexibility to effectively trade 
commodities; BUT we also must protect the American public from 
predatory financial risks.
    We all saw what happened the last time our regulators fell asleep 
at the wheel--financial institutions across the nation collapsed and 
our economy fell victim to a foreclosure crisis that is still 
paralyzing many segments of the country.
    As the CFTC moves forward in finalizing the definitions of swaps 
and swap dealers--I hope it will keep in mind the predicament that many 
energy providers in my home State of California face.
    Moving forward--I hope that any transaction an energy provider 
makes in order to comply with state regulations--is excluded from the 
process used to determine whether an entity is a swap dealer.
    We all must remember the importance of the mission the Dodd-Frank 
Wall Street Reform Act laid out.
    The American people must have OVERSIGHT and the ACCOUNTABILITY to 
ensure that all derivative trading occurs in light of day, and is above 
the board.
    Again, I want to thank the Chairman and Ranking Member for their 
leadership on this critical issue.
    I look forward to this opportunity to hear about the progress of 
the implementation of Title VII provisions of the Dodd-Frank bill; and 
to make sure the CFTC is properly following the legislation's 
Congressional intent.
    Thank you.

    The Chairman. With that, I would like to welcome to our 
witness to the table, Hon. Gary Gensler, Chairman of the 
Commodity Futures Trading Commission, Washington, D.C. Mr. 
Chairman, please begin whenever you are ready, sir.

           STATEMENT OF HON. GARY GENSLER, CHAIRMAN,
             COMMODITY FUTURES TRADING COMMISSION,
    WASHINGTON, D.C.; ACCOMPANIED BY HON. JILL E. SOMMERS, 
       COMMISSIONER, COMMODITY FUTURES TRADING COMMISSION

    Mr. Gensler. Good morning, Chairman Lucas, Ranking Member 
Peterson, and Members of the Committee. I am pleased to be here 
also with my fellow Commissioner Jill Sommers as well. Today, I 
am told it is my 39th time testifying before Congress in this 
job. Apparently, I have been in the job 109 days but I will 
tell you this is the first time I have testified on February 
29.
    After a full year in 2011, the CFTC has significant work in 
front of us for 2012. Derivatives markets are critical for 
farmers, ranchers, producers, and other end-users in the real 
economy. And as this Committee has noted to me, but I would 
give the statistic: the non-financial side of our economy 
provides 94 percent of private sector jobs. That is what the 
derivatives markets helps: futures and swaps, allow these 
companies to manage risk and focus on what they do best, that 
is, servicing customers, producing products, farming, milling, 
and investing in our economy.
    My written testimony is more complete, but in short, our 
agenda includes completion of the swaps markets rules; clearing 
mandate determinations, which is a big piece of what Congress 
gave us; implementation of swaps reforms, working with members 
of the public on that; enhanced customer protections; and 
adapting oversight to changing market structure.
    Last summer, we turned the corner from our proposal phase 
to starting finalizing rules. We have completed 28 rules to 
date and we have just over 20 to go. While the statute 
generally called for us to complete this within 1 year, it has 
taken us longer. And we are completing rules in a thoughtful, 
balanced way to get them right, not against the clock. And with 
28,000 public comments and 1,300 meetings with the public to 
date, there is a lot to consider. We are close to finalizing 
rules with the SEC to further define the term swap dealer. I 
believe we will be responsive to comments from farm credit 
institutions that have been the subject of some of your 
discussions here in bills, agriculture cooperatives, and yes, 
the commercial end-users and the issue the Chairman raised 
about hedging. The product definition rules should follow later 
during the spring. But again, we are not trying to rush these. 
We are trying to get them right and listen to the commenters 
and this Committee.
    We also are looking to soon finalize the Commercial End-
User Exemption. Our proposal took Congress' intent to heart. 
Non-financial companies using swaps to hedge or mitigate 
commercial risk are out of the requirement for central 
clearing. The Commission's proposed rule on margin for swap 
dealers likewise provides that such non-financial companies 
will not be required by Commission rules to post margin for 
uncleared swaps.
    I also want to mention that we are taking the legislative 
proposals of this Committee into consideration as we complete 
our rules. I view them as pretty serious comments in our 
comment file. The Commission, for example, has already provided 
for certain exceptions for inter-affiliate swaps from real-time 
reporting and the external business conduct rules that the 
Ranking Member mentioned. We also look forward to seeking 
public comment on inter-affiliate clearing for financial 
companies.
    As we finalize reforms, we also have reached out broadly on 
how to best implement them, including last year's roundtables, 
public comment periods, and many meetings. And I thank you, 
Congressman Conaway, because we worked a lot with you, in 
thinking this through. In response to this public input, we 
have included phased implementation in many of our rules. We 
are also working internally to implement the swaps reforms. The 
Commission published a new strategic plan last year; we have 
restructured some divisions; in particular, standing up the new 
data and technology division. And given our increasing 
oversights needs, we are investing in updated market 
technology.
    Before I close, I will mention resources. At about 700 
people, we are only about ten percent greater than we were in 
the 1990s, and since then of course you have asked us to also 
cover the swaps market, which is nearly eight times the size of 
the futures market. The CFTC is not a price-setting agency. 
Nevertheless, rising prices for basic commodities--agriculture 
and energy--just remind us once again of the importance of 
having effective market oversight that ensures the integrity 
and transparency of these markets.
    I will conclude just by saying that the derivatives 
reforms, once implemented, will benefit all Americans in the 
real economy. They will benefit the end-users of derivatives, 
which are responsible for most of the job creation in the 
economy. It will do this through the transparency and 
competition it brings to the marketplace. I think also it will 
benefit the public by lowering risk that Wall Street poses to 
the rest of us.
    I thank you and I look forward to your questions.
    [The prepared statement of Mr. Gensler follows:]

 Prepared Statement of Hon. Gary Gensler, Chairman, Commodity Futures 
                  Trading Commission, Washington, D.C.
    Good morning, Chairman Lucas, Ranking Member Peterson, and Members 
of the Committee. I thank you for inviting me to today's hearing on the 
Commodity Futures Trading Commission's (CFTC) 2012 agenda. I also thank 
my fellow Commissioners and CFTC staff for their hard work and 
commitment to protecting the public and promoting transparent and 
efficient markets. I'm pleased to be here with CFTC Commissioner Jill 
Sommers.
CFTC Mission
    At its core, the CFTC's mission is to ensure the integrity and 
transparency of derivatives markets--both the futures and swaps 
markets. Each part of our economy relies on a well-functioning 
derivatives marketplace. These markets are critical for farmers, 
producers, ranchers and other end-users in the real economy--the non-
financial side of the economy that provides 94 percent of private 
sector jobs. End-users can lock in a price or rate and manage their 
risk through these markets. The futures and swaps markets allow 
companies to focus on what they do best--servicing their customers, 
producing products, innovating, and investing in our economy. These 
markets are also critical for pension funds, mutual funds, community 
banks and insurance companies, and the Americans who rely upon these 
entities for their savings and financial needs.
    The CFTC has historically been charged with overseeing the 
commodity futures markets. In 2010, Congress expanded the CFTC's 
mission to also oversee the previously unregulated swaps marketplace. 
At approximately $300 trillion, the domestic swaps market is nearly 
eight times the size of the futures market.
    Combined these markets help their users hedge or transfer $22 of 
risk for every dollar of goods and services produced in the U.S. 
economy. Futures and swaps markets touch nearly every aspect of our 
economy from the food we eat, to the price at the pump, to our 
mortgages and credit cards, and to our retirement savings. Thus, it is 
essential that these markets are transparent and efficient and work for 
the benefit of the American public. And when markets are open and 
transparent, they are safer and sounder, and costs are lower for 
companies and their customers.
CFTC 2012 Agenda
    After a very full year in 2011, the CFTC has a significant agenda 
this year to further enhance the futures and swaps markets to better 
protect the public. To start, I'll review what is ahead with regard to 
swaps a market reforms. I then will discuss further initiatives for 
enhancing customer protection and touch on some steps we are looking at 
to address changing market structure. I will close by discussing the 
CFTC's request for additional resources to best accomplish these goals.
Completion of Dodd-Frank Wall Street Reform and Consumer Protection Act 
        (Dodd-Frank Act) Rules
    The CFTC has made significant progress in completing the reforms 
that will bring transparency to the swaps market and lower its risk to 
the rest of the economy. But there is much work yet to be done.
    During the rule-writing process, we have benefitted from 
significant public input. CFTC Commissioners and staff have met over 
1,300 times with the public, and we have held 16 public roundtables on 
important issues, including a 2 day roundtable beginning today on 
further protections for customer money.
    We substantially finished our proposal phase last spring, and then 
largely reopened the mosaic of rules for additional public comments. We 
have accepted further public comment after the formal comment periods 
closed. The agency received 3,000 comment letters before we proposed 
rules and 28,000 comment letters in response to proposals.
    Last summer, we turned the corner and started finalizing rules. To 
date, we've completed 28 rules with just over 20 more to go. Attached 
to this testimony is a more complete list of rules we've finished, as 
well as proposed rules. It's my anticipation that we will finish most 
of the rule-writing work by this summer; however, it's possible that a 
handful won't be finished until later this year. While the statute 
generally called for completion of the rules in 1 year, for most of 
them, it has taken us longer. We are completing rules in a thoughtful, 
balanced way--not against a clock.
    To promote transparent and competitive markets, we've been able to 
complete seven key reforms. Among these reforms, the Commission already 
has begun to receive position information for large traders in the 
swaps markets for agricultural, energy and metal products. Based on 
completed registration rules, three swap data repositories have already 
filed with the CFTC. In December, we finalized rules for the reporting 
of swaps transactions both to the public and to regulators, which will 
begin to take effect as early as July of this year. For the first time, 
the public and regulators will have specific information on the swaps 
markets, in aggregate and transaction-by-transaction. By contrast, none 
of this information was available leading up the 2008 crisis.
    Looking forward, we hope to complete rules with regard to 
designated contract markets (DCMs), followed later this spring by rules 
for swap execution facilities (SEFs). These rules will be critical to 
bringing transparency and the benefits of competition to both buyers 
and sellers in the swaps market before they transact.
    Last week, the Commission proposed a new block trading rule with a 
revised methodology for determining block sizes that benefitted from 
public input and a review of market data. As we have discussed in this 
Committee during previous hearings, the Commission is mindful that 
there are times when a reproposal of a rule is necessary to help ensure 
the Commission gets it right.
    The CFTC also has made significant progress on rules to bring swaps 
into central clearing. We completed rules establishing robust risk 
management requirements for derivatives clearing organizations. We 
finished a rule on the process for clearinghouses to submit swaps that 
may be mandated for central clearing. In addition, the Commission 
adopted an important customer protection enhancement, the so-called 
``LSOC rule'' (legal segregation with operational commingling) for 
swaps. It prevents clearing organizations from using the cleared swap 
collateral of non-defaulting, innocent customers to protect themselves 
and their clearing members.
    To further facilitate broad access to these markets and promote 
competition, the Commission hopes in the near term to consider final 
rules on client clearing documentation, risk management, and so-called 
straight-through processing, or sending transactions immediately to the 
clearinghouse upon execution.
    We also are looking to soon finalize the end-user exception. 
Consistent with Congressional intent, our proposal would ensure non-
financial companies using swaps to hedge or mitigate commercial risk 
will not be required to bring swaps into central clearing. The 
Commission's proposed rule on margin for swap dealers likewise provides 
that such non-financial companies will not have to post margin for 
uncleared swaps.
    The Commission has received substantial public input on the 
treatment of swaps among affiliates of the same business entity. The 
CFTC's final rules on real-time reporting and external business conduct 
standards include exceptions for such swaps. To address commenters' 
questions about a possible clearing requirement between affiliates of 
financial entities, I expect the Commission to consider a proposal and 
take public comments later this year.
    The CFTC has begun to finalize rules to regulate swap dealers and 
lower their risk to the rest of the economy. First, we finished rules 
requiring registration of swap dealers with the National Futures 
Association (NFA). Second, we completed rules establishing and 
enforcing robust sales practices in the swaps markets. And third, a 
rule finalized this month requires swap dealers and major swap 
participants to establish policies to manage risk, as well as to put in 
place firewalls to prevent conflicts of interest between trading and 
research and trading and clearing units.
    Later this year, we will consider final rules on capital and margin 
rules, which will have the benefit of close consultation with other 
regulators, both domestic and international. I also anticipate the 
Commission will explicitly seek public input on the extraterritorial 
application of Title VII of the Dodd-Frank Act.
    The Dodd-Frank Act was clear on the meaning of swap and swap 
dealer, but the law called on the CFTC and the Securities and Exchange 
Commission (SEC) to act jointly in further defining these terms. We 
have benefitted from significant public input on the rule relating to 
entity definitions, and we are looking to finish it in the near term. 
We are taking into account all public comments, including those from 
farm credit institutions and agricultural cooperatives. The product 
definitions rule will follow in the spring.
    Furthermore, the CFTC is working with participants in the 
electricity markets on possible exemptive orders for rural electric 
cooperatives, municipal public power providers and regional 
transmission organizations.
    The Commission also is working with the banking regulators and the 
SEC on the Volcker rule. In adopting the Volcker rule, Congress 
prohibited banking entities from proprietary trading, an activity that 
may put taxpayers at risk. At the same time, Congress permitted banking 
entities to engage in market making, among other activities. One of the 
challenges in finalizing a rule is achieving these dual objectives. It 
will be critical to hear from the public on how to best achieve 
Congress' mandate. The CFTC's comment period closes April 16, and I 
very much look forward to the substantial public input I anticipate we 
will receive on this rule.
    The global nature of the swaps markets makes it imperative that the 
United States actively consults and coordinates with foreign 
authorities. The Commission is working with our foreign counterparts to 
promote robust and consistent standards and avoid conflicting 
requirements in the global marketplace. CFTC staff is sharing many of 
our comment summaries and drafts of final rules with international 
regulators. We have ongoing dialogues with regulators in the European 
Union (EU), Japan, Hong Kong, Singapore and Canada. Last week, I met 
with EU Commissioner Michel Barnier during his visit to Washington. 
Next week, I will be in Basel to meet with the Financial Stability 
Board to discuss timely implementation of swaps reforms in each of the 
major market jurisdictions. I then travel to Brussels to meet with key 
European officials and industry leaders.
Clearing Mandate
    Congress gave the CFTC an important role to play in determining 
which swaps must be mandatorily cleared. The clearing of standardized 
swaps will lower risk and make markets more competitive. Under the 
Congressionally mandated process, the Commission will have 90 days to 
review a clearinghouse's submission and determine whether the swap or 
group of swaps is required to be cleared. Last year, the CFTC finalized 
a rule on the process for review of swaps for mandatory clearing. 
Earlier this month, we asked each registered clearinghouse to submit 
for the agency's review all the swaps that it was clearing as of 
February 1, 2012, including all pre-enactment swaps. Staff is now 
reviewing these submissions and preparing recommendations for the 
Commission regarding which swaps or groups of swaps should be required 
to be cleared. During the Commission's review period, there will be a 
30 day period for the public to provide comments. Though much of the 
timing depends on the clearinghouses, I anticipate that this comment 
period may begin this spring.
Implementation
    As we move on from the rule-writing process, a critical part of our 
agenda is working with market participants on phased implementation of 
these reforms. We have reached out broadly on this topic to get public 
input. Last spring, we published a concepts document as a guide for 
commenters, held a 2 day, public roundtable with the SEC, and received 
nearly 300 comments. Last year, the Commission proposed two rules on 
implementation phasing relating to the swap clearing and trading 
mandates and the swap trading documentation and margin requirements for 
uncleared swaps. We have received very constructive public feedback and 
hope to finalize the proposed compliance schedules in the next few 
months.
    In addition to these proposals, the Commission has included phased 
compliance schedules in many of our rules. For example, both the data 
and real-time reporting rules, which were finalized this past December, 
include phased compliance. The first required reporting is as early as 
July for interest rate and currency swaps. Other commodities have until 
October. Additional time delays for reporting were permitted depending 
upon asset class, contract participant and in the early phases of 
implementation.
    The CFTC will continue looking at appropriate timing for 
compliance, which balances the desire to protect the public while 
providing adequate time for industry to comply with reforms. 
Furthermore, to ensure a smooth transition for market participants, we 
have given them exemptive relief from the effective dates of certain 
rules until July 16, 2012.
    As swaps market reforms are implemented, market participants will 
continue to seek guidance, and in some cases petition for exemptions. 
The CFTC wants to be as responsive as possible to these inquiries, and 
this is an important part of our 2012 agenda. In the case of the large 
trader reporting requirements for the physical commodity swaps market, 
Commission staff worked with market participants and delayed 
requirements for 2 months to accommodate technical requirements. CFTC 
staff also engaged with market participants to ease the process of 
compliance. In addition to regular dialogue, our staff developed a 
guidebook of data standards, which can be found on our website. Just as 
we did with large trader reporting, staff is reaching out to market 
participants regarding the data rule we completed in December, and we 
will continue this type of engagement in other areas.
    Another significant agenda item for this year will be the 
registration of new market participants. This process has already begun 
for SDRs and foreign boards of trade (FBOTs). Since the FBOT rule was 
finalized in December, three have requested to be registered. We expect 
other FBOTs that are currently operating under staff no-action letters 
to shortly request to be registered. We also are working with two new 
entities seeking to register with the CFTC as designated clearing 
organizations. In January, we finalized the registration rule for swap 
dealers and major swap participants, and we will be working, along with 
the National Futures Association, on these entities' registration and 
related questions. In addition, Commission staff estimates that 20-30 
entities will seek to become SEFs, and I anticipate they would begin to 
register later this year.
    The agency also has a lot of work to do internally this year to 
further prepare for the implementation of reforms. A year ago, the 
Commission published a new strategic plan for Fiscal Years 2011-2015 
that incorporates the agency's expanded responsibilities to oversee 
both the futures and swaps markets. Importantly, the strategic plan 
also includes a new and tougher approach to agency performance measures 
to more accurately evaluate our progress. In addition, the CFTC's new 
responsibilities necessitated an agency restructuring to ensure the 
Commission uses its resources as efficiently as possible. The 
Commission created the Division of Swap Dealer and Intermediary 
Oversight and the Office of Data and Technology. The reorganization was 
put in place last October.
    Our new Office of Data and Technology has a number of critical 
objectives to achieve in support of both swaps and futures oversight. 
The office will establish connections with SDRs so that the CFTC can 
collect and analyze swaps data for surveillance and enforcement 
purposes. It is taking on the challenge of how we aggregate data across 
SDRs, as well as how we aggregate it with futures market data. The 
office also will be working with the Treasury Department and 
international regulators on legal entity identifiers. Given our 
increasing oversight needs and the events of May 6, 2010, we will begin 
collecting daily order books from trading platforms for surveillance 
and market oversight purposes. The technology office also will continue 
to update and improve automated surveillance, including greater use of 
alerts.
    Building on newly available data to the Commission, the CFTC plans 
to begin publishing aggregated swaps trader data. The public has 
benefited for years from the futures market data we have published in 
our Commitment of Traders reports. Our goal is to provide similar 
transparency to the public for the swaps market.
    In October, the Commission adopted a final rule to establish 
position limits for physical commodity derivatives. The limits will 
come into effect once the joint rule further defining the term ``swap'' 
is completed and the Commission has received a year's worth of data on 
the relevant swap markets.
Customer Protection
    Segregation of customer funds is a core foundation of customer 
protection in both the futures and swaps markets. The CFTC already has 
taken a number of steps in this area. The completed amendments to rule 
1.25 regarding the investment of funds bring customers back to 
protections they had prior to exemptions the Commission granted between 
2000 and 2005. Importantly, this prevents use of customer funds for in-
house lending through repurchase agreements. In addition, 
clearinghouses will have to collect margin on a gross basis and futures 
commission merchants (FCMs) will no longer be able to offset one 
customer's collateral against another and then send only the net to the 
clearinghouse. And the LSOC rule for swaps ensures customer money must 
be protected individually all the way to the clearinghouse.
    We will continue looking at options to further protect customers. 
Today and tomorrow Commission staff are hosting public roundtable 
sessions to examine additional enhancements. Also participating are 
other regulators, including the SEC and NFA. Panel topics include 
protections for the collateral of futures customers, consistent with 
the already-approved LSOC rule for cleared swaps. Additional discussion 
topics are alternative custodial arrangements for segregated funds, 
enhancing the controls over the disbursement of customer funds, and 
increasing transparency to customers and to the CFTC regarding the 
location and investment of customer funds. Also on the agenda are 
revisions to the bankruptcy rules for FCMs, protection of customer 
funds at FCMs to be traded on foreign futures markets, issues 
associated with entities dually registered with the CFTC as FCMs and 
the SEC as broker-dealers, and enhancing the self-regulatory structure. 
CFTC staff is actively seeking public input on these topics, and 
members of the public can submit comments through our website.
Changing Market Structure
    This year, the Commission also will continue working to adapt our 
oversight to changing market structure, including emerging trends 
related to electronic trading. Instead of being traded in the pits, 
nearly 90 percent of futures and options on futures are traded 
electronically. While market participants used to be personally 
involved in each of their trades, they now often rely on algorithms to 
execute their trades. Humans are much more frequently depending on the 
judgment programmed into machines to execute their trading strategies. 
The makeup of the market also has changed. In contrast with the early 
days of the CFTC, swap dealers, managed money accounts and other non-
commercial reportable traders make up a significant majority of many of 
the futures markets. Most of the trading volume in key futures 
markets--up to 80 percent in many markets--is day trading or trading in 
calendar spreads.
    I expect the Commission will consider putting out for comment a 
concept release concerning the testing and supervision of automated 
market participants. These concepts will be designed to address 
potential market disruptions that high frequency traders and others who 
have automated market access can cause. Furthermore, the Commission's 
Technology Advisory Committee has established a subcommittee to 
specifically examine automated and high frequency trading.
    In addition, the CFTC will continue working with the markets and 
the SEC on recommendations from the Joint-SEC-CFTC Advisory Committee 
on Emerging Regulatory Issues with regard to cross-market circuit 
breakers, pre-trade risk safeguards, effective testing of risk 
management controls and supervisory requirements regarding algorithmic 
trading.
    The Commission staff also is developing proposed rules on the 
reporting of ownership and control information for trading accounts. 
These rules would enhance the Commission's surveillance abilities and 
increase market transparency.
Resources
    The CFTC is a good investment for the American public. But the 
agency needs sufficient resources to do its job. The CFTC's budget 
request strikes a balance between important investments in technology 
and human capital, both of which are essential to carrying out the 
agency's mandate under the Commodity Exchange Act and the Dodd-Frank 
Act.
    As we move into FY 2013, the CFTC will need additional resources 
consistent with the agency's expanded mission and scope. At our current 
size of about 700 people, we are but ten percent larger than our peak 
in the 1990s. Since then, though, the futures market has grown 
fivefold, and Congress added oversight of the swaps market, which is 
far more complex and nearly eight times the size of the futures market 
the agency currently oversees.
    The budget request estimates the need for an appropriation of $308 
million and 1,015 staff-years for the agency. This request is a 
significant increase over the $205 million FY 2012 enacted 
appropriations level, but it is much needed given the dramatic growth 
of the markets we oversee.
    The CFTC will continue working hard to effectively oversee the 
futures market and implement reforms for the unregulated swaps market. 
Without sufficient funding, however, the nation cannot be assured that 
this agency can oversee the futures and swaps markets, that customers 
are protected, and that the public gets the benefit of transparent 
markets and lower risk.
Conclusion
    The financial crisis brought our economy to a standstill. While 
there are signs of recovery, Americans continue to face a challenging 
economy and are seeing budgets squeezed because of increasing prices at 
the pump. Thus, it is essential that the futures and swaps markets are 
transparent, competitive and work for the benefit of the America 
public.
    The financial crisis exposed that swaps helped concentrate risk in 
the financial system that spilled over into the real economy, affecting 
businesses and consumers across the country. The derivatives reforms in 
the Dodd-Frank Act, once implemented, will lead to significant benefits 
for the real economy and all the Americans who depend on pension funds, 
mutual funds, community banks and insurance companies. They will 
benefit from lowering the risk of the swaps market and increasing 
transparency.
    Some have raised cost considerations about these reforms. But there 
are far greater costs--the eight million jobs lost, millions forced out 
of their homes, shuttered businesses and the uncertainty throughout the 
economy that came from risk, which spilled over from Wall Street.
    Thank you for inviting me today, and I'd be happy to take 
questions.
                               Attachment
CFTC Dodd-Frank Update
Final Rules & Guidance
   Agricultural Commodity Definition

   Agricultural Swaps

   Anti-manipulation

   Business Affiliate Marketing and Disposal of Consumer 
        Information

   Commodity Pool Operators and Commodity Trading Advisors: 
        Amendments to Compliance Obligations

   Derivatives Clearing Organization--General Provisions and 
        Core Principles

   External Business Conduct Standards

   Foreign Boards of Trade--Registration

   Internal Business Conduct Standards (Duties, Recordkeeping, 
        & CCOs)

   Investment Advisor Reporting on Form PF (Jt. with SEC)

   Investment of Customer Funds (Regulation 1.25)

   Large Trader Reporting for Physical Commodity Swaps

   Position Limits for Futures and Swaps

   Privacy of Consumer Financial Information

   Process for Review of Swaps for Mandatory Clearing

   Process for Rule Certifications for Registered Entities 
        (Part 40)

   Real Time Reporting for Swaps

   Removal of References to or Reliance on Credit Ratings

   Reporting Certain Post-Enactment Swap Transactions (IFR)

   Reporting Pre-Enactment Swap Transactions (IFR)

   Retail Commodity Transactions--Interpretive Guidance on 
        ``Actual Delivery''

   Retail Foreign Exchange Intermediaries--Regulations & 
        Registration

   Retail Foreign Exchange Transactions--Conforming Amendments

   Segregation for Cleared Swaps

   Swap Data Recordkeeping and Reporting Requirements

   Swap Data Repositories--Core Principles, Duties & 
        Registration

   Swap Dealers and Major Swap Participants--Registration

   Whistleblowers
Proposed Rules & Guidance
   Block Rule

   Capital for Swap Dealers & Major Swap Participants

   Client Clearing Documentation, Straight Through Processing, 
        Clearing Member Risk Management

   Commodity Options

   Conforming Rules

   Designated Contract Markets--Core Principles

   Disruptive Trade Practices

   End-User Exception

   Entity Definitions (Jt. with SEC)

   Governance and Conflict of Interest (DCM, DCO, & SEF)

   Harmonization of CPO/CTA Reporting

   Identify Theft (Jt. with SEC)

   Implementation Phasing for Clearing & Trading Mandates

   Internal Business Conduct (Documentation, Confirmation, & 
        Portfolio Reconciliation)

   Margin for Uncleared Swaps

   Process for ``Made Available to Trade'' Determinations

   Product Definitions (Jt. with SEC)

   Reporting of Historical Swaps

   Segregation for Uncleared Swaps

   Swap Execution Facilities--Core Principles & Registration

   Volcker Rule
Final Orders
   Delegation to National Futures Association (NFA)--Certain 
        exemptions for Commodity Pool Operators

   Delegation to NFA--Foreign Exchange Intermediary 
        Registration function

   Delegation to NFA--Swap Dealer & MSP Registration function

   Exemptive orders--Effective Date for Swaps Regulation

   Treatment of Grandfather Relief Petitions--Exempt Boards of 
        Trade & Exempt Commercial Markets

   Treatment of Grandfather Relief Petitions--Transactions done 
        in Reliance on 2(h)
Studies
   Feasibility of Requiring Use of Standardized Algorithmic 
        Descriptions for Financial Derivatives (Jt. with SEC)

   International Swap Regulation (Jt. with SEC)

   Study on Oversight of Carbon Markets (Jt. with various other 
        Agencies)

    The Chairman. Thank you, Mr. Chairman.
    The chair would like to remind Members that they will be 
recognized for questioning in the order of seniority for 
Members who were here at the start of the hearing. After that, 
Members will be recognized in order of arrival. And I, as 
always, do appreciate the Members' understanding of that.
    And I now recognize myself for 5 minutes.
    Mr. Chairman, you have recused yourself from the 
investigation of MF Global, correct?
    Mr. Gensler. That is correct that I am not participating in 
that matter, sir.
    The Chairman. And you have not been involved or privy to 
information regarding new developments in the investigation and 
relevant enforcement proceedings, correct?
    Mr. Gensler. That is correct, sir.
    The Chairman. But Chairman, do you plan on being involved 
in any policy response that the Commission makes based on the 
lessons learned from MF Global. For example, the Customer 
Protection Roundtable scheduled for the next 2 days, you will 
be involved in those?
    Mr. Gensler. I have, for a long time, sir, focused along 
with my fellow Commissioners and customer protection was 
involved last summer and last fall when we tightened up the 
investment of customer funds protections in December when we, 
through the clearinghouse rules, ensured that margins should be 
posted on a gross basis. And as consensus develops to the 
extent consensus is developed I would anticipate being involved 
in some of these matters of general rules.
    The Chairman. So as I understand it, it is your intention 
that the Commission moves forward on proposals potentially as 
early as this spring. So I guess my question would be, 
Chairman, how can you be in a position to lead the Commission 
in the policy response when it should clearly be supported by 
lessons learned during the investigation if you are not a part 
of the investigation?
    Mr. Gensler. Well, you are right, sir, that I am not part 
of that investigation, but as I mentioned, there are a number 
of things that the Commission laid out even before the matters 
of the fall, like tightening up the investment of customer 
funds. To the extent that a consensus forms through these 2 
days of roundtables, through a lot of market input and market 
feedback, I would be involved in that as one of the five 
members of the Commission. And I do believe that there would be 
significant public input on anything in reaching any changes in 
the rules to really help the public and enhance what, as you 
said, is the core foundation of the futures and swaps market, 
that customer money is protected.
    The Chairman. But you would acknowledge not being involved 
in the day-to-day investigation going on now that the lessons 
that hopefully will clearly come from that process will make it 
more challenging for you to be part of the solution?
    Mr. Gensler. Well, I think of this, if I might, somewhat as 
incremental. I think what we did in December was very critical 
to tighten up some of the loosening that we had frankly done in 
the early years to the investment of customer funds. I think 
what we have done in the clearinghouse rules are very critical 
as well. But again, as the consensus forms--and I don't know 
what will come out of these 2 days of public roundtables--but 
we have asked the public to weigh in. The public is also not 
participating in the investigation, nor am I.
    The Chairman. Chairman Gensler, over the next several 
months, you have reassured this Committee that the definition 
of swap dealer will not result in end-users unnecessarily 
having to register as swap dealers, yet last week, it was your 
intention to propose the final rule related to swap dealers and 
the end-user community was frantically working to have an 
explicit exemption for hedging included in the rule. Chairman 
Gensler, it was of course never Congress' intent for the 
Commission to consider hedging activities to be swap dealing. 
In fact, Congress made every effort to ensure end-users were 
exempt from clearing and margin, which are only 2 of the many 
regulations associated with being a swap dealer. If you 
intended to make improvements to the rule as you have reassured 
Members of the Committee, and for that matter myself, then why 
were end-users forced to make last-minute appeals to 
Commissioners for help on something as fundamental as the 
classification that hedging is not swap dealing?
    Mr. Gensler. I think we have done a good job throughout 
these rulemakings to take into consideration public comment, 
but I will say that normally speaking, in the last 2 to 3 weeks 
before we vote on something, we hear from people reminding us 
of their comment letters, even sometimes when we have taken 
already and adjusted the base text of the rule because these 
documents are not put out again under the Administrative 
Procedures Act.
    With regard to the actual rule itself, let me speak to the 
substance. One of the key things in the rule if I might say is 
market-making. There are three or four prongs that Congress 
laid out. If you are ``regularly engaged in swap dealing'' is 
one of them; but another one is if you are ``market-making.'' 
And we received a lot of comments to narrow that, to address 
that, and I think that we will address that, particularly with 
regard to the word hedging.
    The Chairman. I guess the question, Chairman Gensler, is 
based on your assurances in the past and the near panic that 
was set off over this definition issue, how can the Committee 
be assured that assurances given today won't lead to near panic 
on other rules as the process goes along?
    Mr. Gensler. Well, I think just as the Ranking Member 
mentioned on the pension fund concerns about external business 
conduct rule, I remember some pension funds being in our 
building 2 and 3 days before the Commission vote on our rule. I 
mean we are running a very open process and I welcome the 
commenters coming in. I am saying that there are a number of 
issues on the definition that you and I fully agree on and one 
is that the end-user community banks are not swap dealers. 
There are some parties that have chosen to deal, that make 
markets on a routine basis. In the energy swap area they 
actually list themselves as primary members of the 
International Swap and Derivatives Association, which says you 
can only be a primary member if you make markets, not for 
hedging. And that is really the approach. I think there is not 
a difference between you and I, sir, on this issue.
    The Chairman. With the indulgence of my colleagues, one 
last question.
    Chairman Gensler, would you say that you are coordinating 
with your international counterparts as required by Dodd-Frank 
in Section 754?
    Mr. Gensler. Yes, very much so. We share our draft 
documents with them before we consider proposals and finals, 
but more than that, we meet with them extensively, Commission 
Sommers and myself both. She was just recently in Japan. I will 
be over in Basel and Brussels next week.
    The Chairman. Chairman Gensler, I understand that the 
European Commissioner for the EEU on this subject matter, 
Michel Barnier, just last week would have said in regards to 
the U.S. and its efforts of coordination, ``it is not 
acceptable that U.S. rules have such a wide effect on other 
nations and foreign capital markets without any international 
coordination. A unilateral approach is a path to fragmentation 
and inefficiency. We need more international cooperation in all 
of these areas. This is the message I would bring to all of my 
U.S. counterparts. Think internationally.''
    How do you respond to that?
    Mr. Gensler. Michel Barnier and I had a very good meeting 
last week. His letter was I think specifically about the 
Volcker rule, which he and I had a lively discussion on that. 
It is a very difficult rule and challenging because Congress 
gave us two pieces--prohibit one thing, proprietary trading; 
permit another thing, market-making. But we have had an ongoing 
dialogue with Michel Barnier and his people, at one point 
weekly. We looked at gaps and overlaps. And as I say, I am 
going to meet with him again on Tuesday. So it has been a very 
constructive coordination, a partnership with----
    The Chairman. But Chairman Gensler, my understanding of 
Commissioner Barnier's comments were not limited to the Volcker 
rule. In fact, they were much broader than that. And if leaders 
of one of our primary partners in the global regulatory reform, 
the EEU is concerned that we are taking a unilateral approach 
to reform, yet you are telling us you are working closely 
together. There is clearly a lack of coordination here and 
apparent inconsistencies with what you have told the Committee. 
International cooperation and coordination is a key to making 
global reform effective and to ensure that we are not 
unnecessarily building inconsistencies or duplications in the 
regime that will hamper competition growth. I just urge you to 
more carefully consider the feedback from our global partners.
    And with that, Mr. Chairman, I thank you and I yield to the 
Ranking Member for 5 minutes.
    Mr. Peterson. Thank you, Mr. Chairman.
    You know, I think everybody should understand that hundreds 
of millions of dollars have been spent over the last year or 2 
by these folks trying to get around these rules. I think some 
of the concerns are legitimate and some of them aren't. But, 
from what I can tell kind of where you are heading with the 
Commission is that if you are actually hedging, you are an 
actual end-user, that is not going to trigger this swap dealer 
designation. But there are firms in the electricity area and in 
the energy gas and oil area that are actually dealers like you 
say. For myself, as one of the sponsors of this bill, those 
folks, the dealer part of their business should be regulated. 
So that is what I think. I guess you guys are sorting through 
that.
    But, when it looks to me like some of the end-users are 
trying to convince Members that we are somehow or another 
trying to do something to them on their end-user status to get 
out of the other part of it where they are clearly dealers. I 
hope that we get more of this out into the public so people can 
understand what is going on. There has been a lot of noise made 
over all this stuff--and on the issue--it looks like a 
combination of this extraterritorial and Volcker rule that some 
of these folks are using the old saw that they are going to 
move their business overseas and so forth, we have heard that. 
That is part of why we didn't regulate people in the first 
place.
    I just hope people understand that a lot of what is going 
on here is that people still don't want to be regulated. They 
still want to do whatever they want, which is what got us in 
trouble in the first place. I for one hope that you look 
carefully at this. From what I understand, the end-users that 
are actually hedging for commercial purposes are probably not 
going to be swept up in this, is that----
    Mr. Gensler. I agree with that and we can address that 
because Congress laid out one of the prongs to be a swap dealer 
is market-making. And so we can modify the final rule to 
clearly address--that it is really about routinely 
accommodating people knocking on your door to hedge their risk, 
not your risk----
    Mr. Peterson. Yes, they are----
    Mr. Gensler.--somebody else coming with you.
    Mr. Peterson.--actually competing in the same market as 
these big--Goldman Sachs and J.P. Morgan and so forth, right? I 
mean they are in the same market.
    Mr. Gensler. There is a small handful. For the tens of 
thousands----
    Mr. Peterson. Yes, I mean----
    Mr. Gensler.--of end-users are not going to be caught up in 
this----
    Mr. Peterson. Right.
    Mr. Gensler.--but there are some who have chosen actively 
to deal. The largest integrated oil companies, some of them 
have a dealing desk that they do because that is a business 
they choose to be in and provide liquidity to others. But it is 
set up as a regular business.
    Mr. Peterson. Yes.
    Mr. Gensler. And that was another prong that if they set it 
up as sort of a regular business to provide that liquidity and 
risk management again to others.
    Mr. Peterson. And it wouldn't be fair to the people that 
are being regulated to have their competitors not be regulated. 
I mean that just seems to be----
    Mr. Gensler. Well, I----
    Mr. Peterson.--they are actually in the business.
    Mr. Gensler. I think it is that or we could look back to 
2012 and then we would call it the BP loophole instead of the 
Enron loophole. There are very real bylaws of the International 
Swap and Derivatives Association that say you can only be a 
primary member if you make markets and not for hedging.
    Mr. Peterson. Right.
    Mr. Gensler. There are six or eight companies that 
voluntarily choose to do that. Now, maybe they will stop 
choosing to do that. It is really to make sure, as you say, 
that the tens of thousands of end-users, I agree with the 
Chairman, are not swap dealers. If they are entering into a 
swap--foremost to hedge, if they are not routinely, making 
markets, or accommodating demands of somebody else, they are 
not a swap dealer. If they are entering into swap, really the 
purpose is to hedge the energy that they are producing or the 
oil they have in the refinery. That is not accommodating 
somebody else's business.
    Mr. Peterson. One other thing, Mr. Chairman, if I could.
    We have heard various reports from folks that have met with 
you and other Commissioners. These rumors are circulating 
constantly. One of these rumors is that there is some interest 
in the Commission of exempting high-frequency traders from the 
definition of swap dealer. Until 3 years ago, very few people 
outside of Wall Street had even heard of high-frequency trading 
and there are some indications that it may have contributed to 
the flash crash of May 2010. So I would have concerns about 
such a blanket exemption. So is this under serious 
consideration at the Commission, and if it is, is it wise?
    Mr. Gensler. It is something that some high-frequency 
traders have come in to talk about. They actually sometimes 
tout that they make markets. They don't yet make markets in 
swaps, but if they were to develop to make markets over the 
next several years, I think it is consistent with Congressional 
intent that if you are making markets, actively accommodating 
demand in the markets, that you would register. So I think it 
would be unwise to somehow just leave them out.
    Now, they wouldn't be necessarily coming under let's say 
the sales practice regimes or external business conduct rules 
because in January we made sure that those rules don't cover 
people anonymously trading on a market. But you are correct. 
Some of them have been making the rounds. One came in this week 
and said they look forward to registering. They are registered 
in other jurisdictions. So actually it is even amongst that 
community there is a split.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from Iowa for 5 
minutes, Mr. King.
    Mr. King. Thank you, Mr. Chairman.
    Chairman Gensler, thank you for your testimony and repeated 
testimony here on the Hill. I understand that you have recused 
yourself from MF Global and I don't want to press anything on 
that. I just want to ask just a very standard question I think 
that could be reviewed from just reading the papers, but if 
they had not been switching between accounts to keep themselves 
liquid for the day, is it a safe conclusion that they would 
have gone bankrupt earlier, and if so, how much earlier would 
you guess?
    Mr. Gensler. I don't know. I think this might be when I 
turn to Commissioner Sommers.
    Ms. Sommers. Congressman, I am not familiar with the press 
reports that you are referring to, but I guess I would say that 
our current investigation is doing just what you indicated. We 
are tracing those transactions out of the customer segregated 
accounts to find out where they would have gone.
    Mr. King. If I could just----
    Ms. Sommers. I don't know at this point whether they would 
have gone bankrupt earlier. That----
    Mr. King. May I just say that from where I sit--and I will 
just make this comment then and you can decide whether you 
would like to answer or not--from where I sit, if they hadn't 
been using segregated accounts to meet their daily call, then 
my position would be that they would have collapsed earlier and 
gone into bankruptcy earlier. That is an observation from what 
happens when you run into a cash flow problem. I thought that 
was a simple, basic question. So that is my comment on it. If 
you choose to disagree, that is fine. But I don't want to put 
you on that spot.
    I would like to instead move on a little bit and direct to 
the Chairman, I have information in front of me that says that 
of derivatives--well, first, maybe I better ask this broader 
question. Do we know the value of derivatives and the value of 
swaps, total notional value of each?
    Mr. Gensler. We have approximations. The size futures 
market runs in the U.S. between $35 and $40 trillion a year 
depending upon the month and the time of year. The total 
worldwide size of the swap market is reported that it is a 
little over $700 trillion and it is estimated a little less 
than \1/2\ is in the U.S. So I usually use an estimate of $300 
trillion. But it is just that, an estimate.
    Mr. King. Okay. Well, thank you. That gives us a sense of 
the scope of this. And I have data in front of me that shows 
that 96 percent of the value of the derivatives in this country 
are in the hands of the five largest banks or in control of the 
five largest banks, and then if you go to the top 25 banks, you 
are at 99.86 percent of the notional value of the derivatives. 
And we have a little over 1,000 small institutions that are 
trading there in that .14 percent. And I would just like to 
know is it your intent to regulate those small banks in the 
same method as the larger banks?
    Mr. Gensler. No.
    Mr. King. Are you concerned--good. What would be your 
intent?
    Mr. Gensler. Congress gave us a flexibility to set a de 
minimis in the swap dealer definition. And we put out to 
comment a de minimis that many commenters came in and said was 
too low. And so it is under consideration between the 
Securities and Exchange Commission and us. But I think we have 
taken those comments to heart.
    Worldwide there is between 35 and 40 large banking 
enterprises that are currently clearing at a London 
clearinghouse, the big interest rate clearinghouse. Most of 
those have indicated they will probably register. But then when 
you get beyond that group, depending again where we end up, we 
will add a couple of key definitions, the de minimis and also 
something I would like to be asked about, about swap dealing in 
connection with originating loans. I think that those thousands 
of small banks will not be touched at all.
    Mr. King. Would you have an estimate on how many banks 
would be of the--I went to 25. That number, it sounds to me 
like it will grow, but do you have an estimate on how many 
banks would be covered?
    Mr. Gensler. I don't sitting here, but the 35 to 40 
international banks, some of which aren't in the U.S. that are 
registered with that clearinghouse are the types of banks that 
are likely to register.
    Mr. King. So the small institutions have breathed a sigh 
here I think. But I would like to go to----
    Mr. Gensler. That is our goal, sir.
    Mr. King. Yes. Then I would like to go to Dodd-Frank. And 
if this Congress did the sweeping thing and perhaps not this 
year, perhaps in the next Congress and repealed 100 percent of 
Dodd-Frank, what would be the impact from your perspective?
    Mr. Gensler. I think the public would lose the benefits of 
transparency and competition in this market, this $300 trillion 
or so notional market. I think end-users would--they may not 
feel it immediately--but the next time Wall Street spills out 
risk, they would look back and say that wasn't such a good 
thing to repeal, Title XII. I am just speaking about what this 
Committee came together to do. I really think the public would 
be more at risk. Let's not forget eight million jobs were lost 
largely because of the financial community's risk spilling out 
to the economy in 2008.
    Mr. King. If I could just conclude with this, Mr. Chairman, 
and that is that sometime back in 2007 or perhaps in the late 
fall of 2006 when we were first looking at these shifts that 
were taking place financially that brought about this downward 
spiral that we are reacting to now, I remember a conversation 
with an investment banker who said then what you do when you 
are in this business is pretty much what everyone else does. 
That way if they are making money, you are making money, and if 
things fall apart and there is a bailout, you will be bailed 
out with the rest of them. I make that statement because I 
wrote that down that day. I remember it clearly, and I think it 
was a precursor to what actually happened. I think our 
investors in this country, many of the large institutions were 
counting on a bailout. I think they knew they were running on 
the edge and taking those risks and the bailout came. That 
prediction came true.
    So I just incorporate that into the process. There are two 
ways to do this. One is let the investors take the risk and 
evaluate the collateral. The other one is to do the regulatory 
and the expensive thing that has not been proven by the Obama 
Administration.
    I appreciate your testimony and the response of the 
Commissioner as well. And I would yield back the balance of my 
time.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from Pennsylvania 
for 5 minutes.
    Mr. Holden. Thank you, Mr. Chairman.
    And Chairman Gensler, thank you for being here. I agree 
with the Ranking Member's opening statement that so far in the 
rulemaking process, the CFTC has been really attentive to 
concerns that have been raised. I just have one question about 
farm credit, though. Last month, this Committee passed in a 
very bipartisan manner H.R. 3336, Small Business Credit 
Availability Act. Among its provisions, this bill reaffirms 
Congress' original intent that farm credit institutions qualify 
for the statutory exemption we provided in Section 1(a) of 
Dodd-Frank, which states, ``in no event shall an insured 
depository institution be considered to be a swap dealer to the 
extent it offers to enter into a swap with a customer in 
connection with originating a loan with that customer.'' At a 
previous hearing, you raised a question as to the Commission's 
ability to ensure that farm credit institutions would be able 
to get this same exemption granted to insure depository 
institutions. Do you still have those doubts? And do you 
believe the Commission has the authority to grant farm credit 
banks this same exemption?
    Mr. Gensler. I do believe that we have the authority. The 
hearing was helpful. I don't remember how many months ago and 
there was a Member over here that asked it but I can't remember 
whom.
    Mr. Holden. Yes.
    Mr. Gensler. And we went back and researched it. I think we 
do have the authority. And though the American Bankers 
Association recently sent us a letter and pointed out they 
thought otherwise. So there are comments on both sides of this 
but----
    Mr. Holden. Okay. Thanks, Mr. Chairman. I yield back.
    The Chairman. The gentleman yields back. The chair now 
recognizes the gentleman from Texas, Mr. Conaway, for 5 
minutes.
    Mr. Conaway. Thank you, Mr. Chairman.
    And Mr. Gensler, welcome to the Committee. I am going to 
return to a topic that is near and dear to my heart and yours 
as well I suspect. I feel a lot like Sisyphus pushing this rock 
up a hill and it rolls back down, push it back up, and that is 
the cost-benefit analysis that the Commission in my view needs 
to do on each of its rules. As you know, we have passed a bill 
here that would strengthen Section 15a of the Commodity 
Exchange Act prospectively. We are going to have to go back and 
redo it for these. But recently, two of your Commissioners have 
been pretty critical of the cost-benefit analyses that have 
been done, particularly with respect to the business conduct 
rules, examples of 1 year retention on audio conversations that 
need to be taped whether the technology may or may not be 
available, a 15 year retention on documents with respect to 
swaps, a duplicative requirement on retention of documents that 
swap data repositories in accordance with your rules would be 
required to maintain as well, overlapping requirements. Can you 
talk to us about why that is cost-effective and/or necessary 
that these duplicative costs need to be put in place under the 
business conduct rules?
    Mr. Gensler. Congress said that records have to be kept, 
including voice recordings. That is statute. We received a lot 
of comments on that and we actually moderated it. We rolled 
back in the final and said the voice recordings no longer have 
to be digitized or put on an electronic file. And in fact with 
Commissioner O'Malia's help right there on the dais, we even 
rolled back a little bit more and we assured people all you 
have to do is keep it and make sure that if the enforcement 
folks request something that you can search it. And there is a 
lot of software to search it by keywords. And so I think we 
clarified that.
    To the second question about keeping books and records. 
Books and records are important whether it is in the futures, 
securities, or now swaps area so that a company can manage its 
risk and even report to its public shareholders and to have a 
check actually on the clearinghouse or somebody else. So, we 
did come out that they have to keep internal books and records 
and don't, so to speak, outsource that to somebody else.
    Mr. Conaway. So part of your analysis will be, then, to 
check records against records----
    Mr. Gensler. No, not that we----
    Mr. Conaway.--against the internal documents? We are going 
to run into that?
    Mr. Gensler. It is just that they have to keep books and 
records on their transaction and trading so that they can 
manage their credit risk, manage their interest rate----
    Mr. Conaway. I understand.
    Mr. Gensler. Okay.
    Mr. Conaway. That is all done while the trade is active. I 
got that. They are going to do that anyway. Fifteen years when 
most other retaining requirements are 10? Why the 15 year 
retention in this area?
    Mr. Gensler. I would like to get back to you just on that 
if I might----
    Mr. Conaway. Okay.
    Mr. Gensler.--because I don't remember the retention 
period.
    Mr. Conaway. Let me ask you something else. And this came 
to our attention just within the last day or so. Single family 
offices where they are doing a lot of things for really wealthy 
families have enjoyed an exemption under the rule. SEC has 
recently given them an exemption from certain rules. Are you 
willing to work with that community to make sure that they are 
treated the way they have been previously with respect to Rule 
413(a)(3) to make sure that they can do their business without 
unnecessary regulations and new layers of cost to these 
families?
    Mr. Gensler. Yes, but even further than that, I think there 
are four exemptive letters that we have given over the last 10 
or 15 years, and we said affirmatively that those would apply, 
as a general matter. But there is always----
    Mr. Conaway. Okay.
    Mr. Gensler.--things that are different. So yes----
    Mr. Conaway. My concern, though, is under the Commodity 
Pool Operator rules that that exemption that previously was 
there was not included. It may be an oversight but you are 
willing to work with that community?
    Mr. Gensler. Oh, absolutely. The four letters--you see, 
they were actually letters; they weren't in our rule.
    Mr. Conaway. Okay.
    Mr. Gensler. So those letters, then, can be relied on by 
other people in----
    Mr. Conaway. Okay.
    Mr. Gensler.--similar circumstance. It is more a question 
whether it is a little bit different circumstance----
    Mr. Conaway. All right.
    Mr. Gensler.--and that is where we would like to work with 
that community.
    Mr. Conaway. All right. Well, Mr. Chairman, I continue to 
be concerned that the cost-benefit analysis that is either 
there or not there is not representative and there may be other 
ways to get at some of these regulations and get the industry 
reactions and their responses to these things, that the cost 
outweighs the benefits associated with what we are doing make 
sense. So with that, Mr. Chairman, I yield back.
    The Chairman. The gentleman yields back.
    The chair now recognizes the gentleman from Connecticut for 
5 minutes.
    Mr. Courtney. Thank you, Mr. Chairman. And thank you for 
holding these hearings and, Chairman Gensler, for your 
endurance. These are really important issues. And coming from 
Connecticut where my local gas station hit $4 a gallon last 
week, again, the importance of the work your Commission does is 
in people's faces every single day. I mean the data that we are 
seeing that is widely reported in the media, that supplies are 
higher than they were 3 years ago when gas was $1.90, that 
demand is down from where it was a year ago. Yet, we are seeing 
this spike happening in February of all times of the year at a 
moment when our recovery is finally getting some traction, 
again, to me just underlines the need for the Commission to 
move forward on what the Dodd-Frank bill mandated.
    I have been reading the pleadings in the court challenge 
that somehow suggest that you exceeded your discretion by 
imposing these position limits last October. That is ludicrous. 
The law is crystal clear that this is something that the 
Commission was required to do. And not just to do it but to do 
it expeditiously.
    I mean frankly there are a lot of folks in my state who are 
upset with the fact that it took so long for the Commission to 
extract the rule. And again I am not pointing the finger at 
you. I realized you had a juggling act in terms of trying to 
line up three votes on that Commission and you did it and I 
salute you for it. But obviously, we are 5 months out since 
that vote occurred and yet there are still no rules in place 
again with all of the negative trends that we are seeing 
reemerge again, the very issue which the Dodd-Frank legislation 
was intended to address. So, number one, I mean if you could 
give us an update because people are anxiously looking to you 
for relief here in terms of where we stand as far as the 
implementation of the October rule.
    Mr. Gensler. I think you refer to the position limit rule 
and that rule would go into effect after two important things. 
First, that we finalize jointly with the SEC the further 
definition of the term swap, the product definition rule. We 
have made good progress, but as you have seen on the entity 
definition, we have scheduled that once and rescheduled it a 
couple times so I would think the product definition rule is 
this spring to give you a realistic time frame. Second, that we 
collect 1 year of data. We started collecting that data last 
fall and I think the year runs through this August if I am not 
mistaken. It needed 1 year of data to collect and then apply 
the formulas. And then, of course, as you noted, there is this 
court challenge on the core question that, of course, I think 
you and I agree. I think if there is ever a clearer 
Congressional intent, this was--I mean people talk about intent 
on end-users and intent on the Farm Credit Bureau, but if there 
was ever an intent, I think the position limits this Committee 
had spoken of a number of times from 2008 on.
    Mr. Courtney. Well, I know Commissioner Chilton issued a 
statement a couple of days ago again acknowledging the fact 
that you were able to muster the votes to get that measure 
through last October, but frankly, time is the enemy here in 
terms of trying to get a market that is transparent, that has 
some connection to supply and demand. I would urge you to--and 
I wrote to you a few days ago on this specific point--to get 
those position limits to follow the law, which is what the 
Congress enacted. You know, this Committee tried to trip up 
that law with H.R. 1573. Luckily, it has not moved forward, the 
2 year stay on the Dodd-Frank legislation. But, the impact in 
terms of small businesses, individuals, consumers, the payroll 
tax cut extension which we just passed a few days ago, it is 
just going to go up in smoke literally at the gas pump. And it 
is just critical that we get these rules in place. I don't know 
if you wanted to----
    Mr. Gensler. I was just going to say I think some of what 
we have done has been very significant. We will have brought 
greater transparency to these markets by this summer when 
reporting has to begin in these markets, energy swap markets 
included. We have passed very strong rules unanimously, I 
recall, on anti-manipulation to give us new authorities to 
chase after folks that are manipulating markets. So I think we 
have done some very good and constructive final rules that are 
in effect, it will take some time to implement, but you are 
correct; the position limit rule takes a little longer.
    Mr. Courtney. And last, the impact in terms of government 
spending as far as these price increases in terms of our 
military dwarf whatever your budget request is that came in. 
And again I hope that this Congress will recognize that you 
have hard work to do and that you need the staff to do it to 
protect our economy.
    I yield back, Mr. Chairman.
    The Chairman. The gentleman yields back. The chair now 
recognizes the gentleman from Arkansas, Mr. Crawford, for 5 
minutes.
    Mr. Crawford. Thank you, Mr. Chairman.
    And thank you, Mr. Chairman, for your appearance today. I 
just want to ask you in your decision-making process, why have 
you chosen not to convene an Ag Advisory Committee since the 
grain, hog, and beef industries have been so severely impacted 
by the MF Global meltdown?
    Mr. Gensler. We consult with members of the Ag Advisory 
Committee pretty regularly. Some of them are even participating 
in this 2 day roundtable that was referred to. The actual 
formal meeting of the Committee, the last number of years, I 
think 6 years, has been once a year. We are only in February 
but we are certainly going to bring that together as a formal 
group and have a public meeting. We did have Commissioner Dunn, 
who had so successfully chaired it for years, retire, and so we 
also have to find a way to move forward but we are absolutely 
committed. And we use Members of the Committee as much as we 
can and seek their advice.
    Mr. Crawford. Do you have a timeline on that, when you 
might convene that just yet?
    Mr. Gensler. I don't because, it involves a little bit of 
working with the General Services Administration because 
charters have 2 year clocks and things like that. But we would 
be glad to work with your office and get you more details.
    Mr. Crawford. Okay. Thank you. Of course you know ag co-
ops, for example, provide swaps to their members and then enter 
into another swap to offset that risk. This is critical to 
their ability to continue to provide hedging tools to members 
of their co-ops. In that scenario, would the offsetting swap 
make an entity eligible for the end-user clearing exemption?
    Mr. Gensler. Well, I think that--and I hope as we finalize 
this we have spent a lot of time with the agriculture 
cooperatives around the dealer definition again and if it is an 
agriculture cooperative that is Capper-Volstead and dealing 
with another co-op or one of its members. It is almost like an 
inter-affiliate transaction. I think we have worked through an 
approach subject to Commissioners of two Commissions voting on 
it that they are not going to get caught up in the dealer 
definition. To your question, then, if they are not a dealer, 
they are an end-user. I mean they are just then by definition 
an end-user.
    Mr. Crawford. Okay. Would the offsetting swap meet the 
definition of a hedge of commercial risk?
    Mr. Gensler. Well, I think they would be an end-user if 
they are not a dealer so any of their swaps, they would have a 
choice whether to come to a clearinghouse. And under our end-
user exception that I think is what you are referring to, the 
proposal I believe would be a yes to that if that--I am trying 
to follow the question but I think what you are referencing is 
would they be exempt from clearing if they choose to be? And I 
think the answer is yes.
    Mr. Crawford. Right, okay. Let me switch gears to small 
banks real quick. Out in the country it is important for me, 
farmers, and ranchers that they be hedged against commodity 
price risk in order to qualify for loans from their local 
banks, the relationship between commodity hedging and 
borrowing. It is exactly what Congress intended to preserve in 
the swaps in connection with loans exemption from the swap 
dealer definition. Will community and mid-sized banks that 
provide commodity swaps to their loan customers be eligible for 
this exemption under the final swap dealer rule?
    Mr. Gensler. We have received comments; we are still 
looking at it. Again I think, as I mentioned to other Members, 
because of how we are addressing ourselves to the market-making 
definitions and de minimis definitions, those community banks 
to which you refer, I am not aware of any that will probably be 
above some of these numbers. But I am not suggesting there 
might not be one or two.
    Mr. Crawford. Okay. And finally, in the little time that I 
have left, if the commodities swaps that small and mid-sized 
banks provide to loan customers are not covered under the swap 
dealers definition in connection with loans exemption, 
continuing to provide those swaps will make them swap dealers 
and subsequently subject to Section 716 push-out provisions. So 
my question is has the CFTC examined the impact within the 
context of the swap dealer rule?
    Mr. Gensler. We are aware of it. It is part of our 
discussions. Again I think, you refer to community banks, 
particularly because there is an interplay between a de 
minimis, how high to make that, the definition of market-
making, in essence how tight to make that. That, as I said 
earlier, I think the community banks--I mean if there is one 
that you specifically know of and your staff wants to share 
with us, it would be helpful to understand the issue better.
    Mr. Crawford. All right, thank you. I yield back.
    The Chairman. The gentleman yields back. The chair now 
recognizes the gentleman from Vermont for 5 minutes, Mr. Welch.
    Mr. Welch. Thank you very much, Mr. Chairman.
    Thank you, Chairman Gensler, for being here. I want to talk 
a little bit about gas prices in speculation premium. I have an 
article from Forbes that basically goes through a Goldman Sachs 
analysis that says that there is likely a $23.39 speculation 
premium in the price of a barrel of oil if oil is at $108 a 
barrel, which when this study was done it was at. What it talks 
about is that the positions on NYMEX for future contracts is 
the equivalent to 233 million barrels of oil, which is the 
equivalent of 1 year's crude supply from Iran to Western 
European nations like France, Belgium, Greece, Italy, and 
Spain. And it goes on to do an analysis in the careful Goldman 
way to state that if there is a $23 a barrel speculation 
premium, that translates into about 56 cents per gallon of gas. 
And obviously, that has a brutal impact on our consumers and it 
has a brutal impact on many of our manufacturers that depend on 
petroleum products.
    Also, this is happening at a time when our production is 
high, our demand is relatively low, and the United States is 
actually exporting gasoline. Do you have the resources that you 
need to address the speculation premium that is now injected 
into the price of gasoline at the pump and that is doing so 
much harm to our economy and so much damage to the pocketbook 
of everyday consumers?
    Mr. Gensler. I will take a broader question. Do we have the 
resources we need? No, because Congress just gave us a large 
task. I hope that once we have finalized these rules, which I 
anticipate most will be done by this summer--there will be a 
handful that will take longer--that we can move on and work 
with this Committee, work with the appropriators and get the 
resources to move the agency close to a 1,000 person agency 
from 700 person agency. I do think that rising energy prices is 
a reminder as to why this is a good investment to the American 
public.
    Mr. Welch. The point of our legislation I think was to 
acknowledge that the futures market is absolutely essential for 
end-users, but that to the extent it is manipulated by Wall 
Street speculators, it is for their benefit at the expense of 
consumers in the productive economy. Is that a fair statement?
    Mr. Gensler. Absolutely. We are a good investment for the 
real economy. The real economy is 94 percent of the jobs in 
this country and I sometimes feel that people are trying to tip 
the scales back to Wall Street.
    Mr. Welch. Do you have any reason to dispute the analysis 
by Goldman Sachs as to how much of a price is being imposed 
through speculation as opposed to supply and demand?
    Mr. Gensler. I know it has been quoted by many. There are 
other analyses that say other things but I don't have things to 
either support it or deny it.
    Mr. Welch. All right.
    Mr. Gensler. To support or deny Goldman Sachs' analysis I 
just don't know.
    Mr. Welch. All right. Now, many of us who have supported 
legislation that would provide a steady and stable funding 
source for you--not you so much as your agency to do the work 
that needs to be done on behalf of consumers in the productive 
economy, much like the SEC, a small fee on transactions. Is 
this something that would be helpful to make certain that your 
agency had the resources that it needed to act on behalf of 
consumers and the productive economy?
    Mr. Gensler. The President referenced this in his recently 
sent budget to the Hill. I think prior Presidents of both 
parties have raised it. I would support whatever this Committee 
and Congress thought would help ensure that we have the 
adequate resources, whether it is out of the general Treasury 
or if these--I am supportive either way. And if this Committee 
would like to work on it, I would work with you on it.
    Mr. Welch. Well, I thank you, Mr. Gensler.
    And Mr. Chairman, this seems like an area of common 
interest because all of us represent consumers who are getting 
hammered. We represent Democrats in Republican districts and we 
represent Republicans in Democratic districts and every one of 
us has been hearing from families where they are just wondering 
why, if the demand is going down, the price is going up and how 
in the world they are going to pay for this. And it is hurting 
our manufacturers as well. So if there is any way, Mr. 
Chairman, that we can find our way clear to help get the price 
down, I think we ought to do it.
    I yield back.
    The Chairman. The gentleman's point is appreciated. The 
gentleman yields back.
    The chair now recognizes the gentleman from Illinois, Mr. 
Hultgren, for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman.
    And thank you, Chairman Gensler, for being here today. I 
apologize. I had another Committee so I just stepped out for a 
few minutes, so if any of this is repetitive, I apologize, but 
they are important questions for my constituents that I wanted 
just to ask and see if we could get some answers for.
    One is I am just concerned about the continued delays in 
rulemaking process that are creating regulatory uncertainty and 
affecting the ability of especially rural electric and farm co-
ops to plan for the future, especially with regard to the 
pending definition of swap dealer. After several apparent 
delayed votes on that rule, I am wondering if you could give my 
constituents any idea of what to expect, when to expect it, 
specifically wondering on what your prediction is for the de 
minimis exception and where that will be set.
    Mr. Gensler. All right. I would like to not get out ahead 
of not just my Commission, but the SEC as well, so it is ten 
Commissioners' deliberation. You are right; we had hoped to 
vote on this and then there was more collaboration over at the 
SEC to go on. But in terms of the de minimis, higher than where 
we were without pinning myself down because it is ten 
Commissioners weighing in. And that with regard to the 
agricultural co-ops, as we have said, we have worked a lot with 
the community with this Capper-Volstead community offering risk 
management through swaps to their members. We are going to do 
our best to try to treat that like it is an affiliate 
situation.
    And then on the rural electric cooperatives and municipal 
power authorities, we have been working on this, I think it is 
now for 6 or 8 months. We are hoping that they will come in and 
file a petition. We have been working actively with them. And 
then we will put it out to public comment and get what is 
called a 4(c) exemption, but we have to vote on it, put it out 
to public comment, and then finalize it. We are doing something 
similar with the regional transmission organizations. I hope we 
are close to them filing the actual petition but we are not 
there yet.
    Mr. Hultgren. So the delay is their filing or is the delay 
from your office?
    Mr. Gensler. Well, on the rural electric cooperatives I 
just want to say we have been working very cooperatively, but 
yes, I mean because that community is so diverse, in fairness 
to them to put this petition in front of us does take some 
coordination between a lot of actors in their community. But I 
can't speak for other Commissioners but I am personally 
supportive of it.
    Mr. Hultgren. What is your best guess? You know, is it 30 
days? Is it 90 days? Is it 120 days for that specifically? And 
then also you had talked about dealing with the ten members, 
waiting for them to respond.
    Mr. Gensler. With regard to the finalizing the definitions, 
the entity definitions, it is my hope that it will be through 
this coming month, March. With regard to the cooperatives, the 
rural electric cooperatives, if we could get back to you but I 
was hopeful that we were going to have a petition in February 
but I don't want to speak for them. If the petition came in, 
then we would put it out to public comment. So I would say it 
is probably well into the spring by the time we start to get 
the public comment. And I that, I believe, takes 30 days as 
well.
    Mr. Hultgren. Well, okay. Again, I wasn't here for all of 
the debate on Dodd-Frank, but I am wondering just a little bit. 
You know, getting back to this de minimis exception, the $100 
million level to start with, was that ever realistic? It just 
seems like such a low number and opens it up to so many 
questions out there, again, for my constituents and just 
wondering again if there is a recognition of what I see as just 
an unrealistic number and hopefully a realization that----
    Mr. Gensler. We have gotten a lot of comments--you are 
absolutely right on this--from whether it is community banks, 
end-users, and we are taking them very seriously.
    Mr. Hultgren. Okay. And maybe again you have already 
discussed this a little bit but we have been hearing a lot of 
questions about this as well. With commercial hedging, they are 
wondering if that will expressly be excluded from the 
activities that constitute swap dealing under the rule?
    Mr. Gensler. Congress laid out a number of important 
prongs. Market-making is one of them and regular business is 
another one if I might say. And so a lot of commenters came in 
and said, well, what is market-making? Can you be more specific 
about that? And in my mind--I am just speaking off the top of 
my mind. It is really about routinely making yourself available 
to others who need to hedge, not about your hedging. So it is 
not about some energy company that the purpose of what they are 
doing is hedging the oil in the refinery.
    In terms of regular business we received a lot of comments 
about that. Can we be a little bit more specific and explicit 
about that? And again I don't want to speak for other 
Commissioners but in my mind I think there are things we can do 
there to help people out and of course address through the de 
minimis. Sometimes that is just an easy way to help folks.
    Mr. Hultgren. Well, hopefully it can be both, because I 
think both create that uncertainty and continue that. So my 
hope is that it can be well defined and what I am hearing from 
you is you are pretty much saying you don't have control of it. 
We would probably argue you have a little bit more control----
    Mr. Gensler. No, no, I----
    Mr. Hultgren.--than you are letting on, but, we want to 
make sure that we are getting that assurance that again there 
is going to be some express exclusion of commercial hedging. 
People who aren't in the business of that are in the business 
of trying to serve their customers, to run a business and 
knowing the uncertainties of agriculture and the commodities 
markets.
    Mr. Gensler. I think that we will sufficiently address the 
issue of hedging in the context of a producer or merchant. That 
is your point----
    Mr. Hultgren. Well, I look forward to seeing that. So thank 
you very much.
    I yield back.
    The Chairman. The gentleman's time has expired. The chair 
now recognizes the gentlelady from Ohio for 5 minutes, Ms. 
Fudge.
    Ms. Fudge. Thank you so much, Mr. Chairman.
    And thank you, Chairman Gensler, for being here. I just 
have two brief questions.
    You may well know that Congressman Steve Stivers and I 
introduced H.R. 2779, which is a bill that would exempt certain 
inter-affiliate transactions from swap dealers from meeting 
margin and clearing requirements. This would ensure that 
transactions are not classified as separate transactions. If 
these contracts are classified as separate transactions, there 
is a concern that it will increase the cost for customers of 
the products and it will impede the ability of businesses to 
manage their risk.
    I have two questions. The first is that you talked about 
it, as well as in your testimony, you state that the final 
rules will include exceptions for inter-affiliate swaps. Is 
that going to be in that group that is coming in the summer or 
when is that?
    Mr. Gensler. Well, some of them have already been 
completed. For instance, in December we completed the reporting 
rule and I know in your bill I think you addressed reporting as 
well.
    Ms. Fudge. Right.
    Mr. Gensler. This is the public reporting or real-time 
reporting. So we addressed affiliate swaps there that are not 
really arm's length transactions and so forth. We addressed in 
January in the sales practice or external business conduct 
where again these affiliate transactions that aren't at arm's 
length. So we shouldn't have to protect the sales practices in 
that regard.
    In most affiliate transactions, if one party is an end-
user, there will not be any clearing requirement. But what we 
think we need to do is probably publish for notice and 
comment--and we believe we have the authority to do it--but 
publish for notice and comment between a financial company and 
its financial affiliate where both are financial companies. 
That is the one area. So for the end-user community, I truly 
don't believe that this is an issue but it is just within an 
insurance company between two of its affiliates, for instance.
    Ms. Fudge. What do you think that time frame is, I mean, to 
be----
    Mr. Gensler. I need to put out a proposal on this. Given 
our calendar it is going to be likely in the spring and then we 
have to put it out. Maybe we will decide only to put it out to 
30 days comment instead of 60 because sometimes where there is 
more consensus we might go a little shorter. And in this whole 
area we have about 20 or so more rules. Adding an inter-
affiliate, adding others maybe there will be 25. As I say, we 
will be working through the summer and fall possibly on some of 
these.
    Ms. Fudge. Okay. Thank you. And the second part of my 
question is I understand that the SEC has suggested that they 
will treat these transactions differently than you may. Can you 
discuss how you plan to address the concerns of market 
participants when they may have to comply with two different 
sets of rules on the same product?
    Mr. Gensler. We spent a lot of time with the SEC in trying 
to harmonize and sometimes advocate for our point of view. On 
the trades between affiliates I have not been brought--it is 
just not brought to my attention but if your office could help 
me, if there is something that you think the SEC is not doing 
that I should know about, I would like to help you on that.
    Ms. Fudge. We will certainly be in touch. Thank you.
    I yield back.
    The Chairman. The gentlelady yields back. The chair now 
recognizes the gentleman from Nebraska for 5 minutes.
    Mr. Fortenberry. Thank you, Mr. Chairman, for holding this 
important hearing.
    Chairman Gensler, welcome. What is causing the rise of the 
price of gasoline?
    Mr. Gensler. You know, I am spending so much time thinking 
about enhancing customer funds and working on these rules, but 
what we are, we are not a price-setting agency. It is not what 
Congress asked us to do. We are an agency that oversees the 
markets to ensure that they are transparent, competitive, and 
free of fraud and manipulation. And so that is what we can best 
do to ensure that these energy markets work and that whatever 
price, high or low, in the energy markets and the agriculture 
markets reflect buyers and sellers, both hedgers and 
speculators meeting in that market.
    Mr. Fortenberry. Here is what is at issue: if you look at 
demand for gasoline, in fact you see lower demand currently. 
Supply disruptions, perhaps volatility in the Middle East are a 
factor but not significant enough to probably correlate 
directly to this spike that we are seeing currently. Back to 
Mr. Welch's question earlier, it has been suggested by your own 
Commissioner in a recent article, Bart Chilton, that there is a 
speculative premium built into the price of gasoline that may 
be as much as 56 cents per gallon. Do you agree with that 
assessment?
    Mr. Gensler. I agree that we need to make sure that our 
markets have a strong oversight, that we have a strong anti-
manipulation regime, that we have transparency, and yes, that 
we complete position limits. That is where Commission Chilton 
and I are----
    Mr. Fortenberry. Do you think these----
    Mr. Gensler.--aligned.
    Mr. Fortenberry.--current speculative position limits would 
adequately address the problem?
    Mr. Gensler. I think that the whole regime--I must say I 
think that the limits are one part to ensure integrity of a 
market but I think that it is critical that we complete the 
other rules with regard to transparency. That we actually give 
the public the benefit of this whole work that this Congress 
did and that we are now about a year late on.
    Mr. Fortenberry. What would you surmise the correlation to 
be between the Federal Reserve's loose monetary policy is 
driving down the value of our currency therefore increasing 
commodity prices, particularly oil, which tends to lead the 
other prices. What is the correlation there? In other words, 
our debt and the way in which we are printing money to solve it 
is lending itself to higher commodity prices, that is a major 
factor in this uptick of retail gasoline prices.
    Mr. Gensler. I have not seen a study on----
    Mr. Fortenberry. I haven't either. That is why I am asking 
you but we are trying to examine all of factors here that are 
involved----
    Mr. Gensler. Right.
    Mr. Fortenberry.--I mean something is doing it.
    Mr. Gensler. You are absolutely correct but if I might 
return. I think our role as a Commission, as an agency is not 
to set a price or even that a price is low or high. It is----
    Mr. Fortenberry. No, I understand.
    Mr. Gensler.--really that the markets are transparent and 
work for the American public.
    Mr. Fortenberry. I understand. You are just an expert in 
the dynamics of these markets so it would be helpful to hear 
your opinion as to all the factors that are driving up the 
price in this regard.
    Mr. Gensler. Though at any one time there are many factors, 
I am not aware of a study--and if there is one, I would 
certainly read it and so forth--but on the specific point that 
you mentioned about the monetary policy and so forth----
    Mr. Fortenberry. It could be a factor?
    Mr. Gensler. Well, there are many factors that come into 
markets. These markets, to just give you a sense of the oil 
market today, the oil market today--and we publish these 
figures every Friday--has producers and merchants and that 
makes up between I think 13 to 15 percent of the open futures 
market. And then there are swap dealers that make up a big 
group. And then the managed money, that is the hedge funds, and 
then other financials. So somewhere between 80 and 85 percent 
of the futures market are swap dealers and what we call managed 
money or hedge funds and other financials and 13 or 15 percent 
of the futures markets--this is on NYMEX and so forth--are the 
producers and merchants.
    Mr. Fortenberry. How has that ratio shifted through the 
years? It used to be inverted is my understanding.
    Mr. Gensler. We have only been breaking out this into four 
categories. We started doing that about 2 years ago and we have 
published I think 5 prior years. So over those 7 years it has 
shifted a little less than you said, but yes, it has shifted.
    Mr. Fortenberry. Significantly?
    Mr. Gensler. A little bit more towards financial----
    Mr. Fortenberry. I am about to run out of time. I am sorry 
to interrupt you. I think the broader point here is we are 
deeply concerned that a system originally designed to mitigate 
risk is actually creating risk now.
    Mr. Gensler. Well, I think that that is just a keen 
reminder as to why we have to continue to get our oversight 
right and also that we need to be a fully resourced and funded 
agency.
    Mr. Fortenberry. Thank you.
    I yield back.
    The Chairman. The gentleman's time has expired. The chair 
now recognizes the gentleman from Georgia, Mr. Scott, for 5 
minutes.
    Mr. David Scott of Georgia. Thank you, Mr. Chairman.
    Welcome, Chairman Gensler. Chairman Gensler, let me ask 
you. The whole core of what we are trying to do rests on 
funding. We can write all kinds of laws; we can put out all 
kinds of regulations. Dodd-Frank is a tremendous, tremendous 
law, very complex and it puts a tremendous responsibility on 
your agency as the regulator. So I need to know and I think the 
Committee needs to know and the American people need to know 
your real serious thoughts on the funding of it. And I 
specifically want to ask you if you do not have sufficient 
funding, could we see delays in reviewing, for example, 
applications for new swap execution facilities, designated 
clearing organizations, and swap data repositories?
    Mr. Gensler. I thank you for that question. The answer is 
yes, we could see delays. We are about a 700 person agency, and 
with the help of this Committee and Congress, we have $205 
million of funding. That is only about ten percent more staff 
than we had in the 1990s. And now, I deeply respect you all 
have a very hard job with the appropriators. We are asking, 
along with the President, for funding to move up to $308 
million, a little over 1,000 people, 300 more people because we 
are taking on a market eight times the size. We do not right 
now have what I would consider a plan that is adequate to 
address all the registrations that will come in. We expect 
between 20 and 30 swap execution facilities, a handful of data 
repositories, two or three more clearinghouses. We are going to 
rely on the NFA to register dealers. We are probably going to 
borrow some of our enforcement staff and move some enforcement 
staff for 6 months or so to try to deal with some of these 
registrations. But that is a backup plan at best. It is the 
plan we have but it is not a plan that I think is the best for 
the American public.
    Mr. David Scott of Georgia. And this would also apply to 
delays in reviewing swaps to see if the clearing mandate should 
apply, requests for exemptions to the law's provisions as well.
    Mr. Gensler. Hopefully, the clearinghouses will start the 
review of mandatory clearing this spring but you are absolutely 
correct that when people knock on our doors for interpreter 
letters, no-action letters, exemption petitions, this is a 
human exercise and we do need more technology; but the 
computers can't just take an exemptive request and put it one 
end of the computer and it prints out at the other end.
    Mr. David Scott of Georgia. I think that is very important. 
And I think that we owe it to your agency if we are drafting 
these major pieces of legislation which are needed, certain 
tweaks certainly need to be made here and there. But there are 
forces at work that don't like Dodd-Frank. There are forces at 
work to find creative ways of trying to do away with Dodd-Frank 
and there is no more clearer way of accomplishing this than 
starving the very agencies and the regulatory people we assign 
to do the job. It is sort of like cutting the legs out from 
under somebody and then condemning them for being crippled.
    Mr. Gensler. Well, I would have to say to you, Congressman, 
I believe working with my fellow Commissioners and an excellent 
staff, we will get the rules finished and then the industry 
will want people there. But you are right; we will not have the 
people even to examine the clearinghouses on an annual basis, 
on a regular basis.
    Mr. David Scott of Georgia. Let me ask--and I have 1 minute 
to go--and our Ranking Member brought up an interesting subject 
of extraterritoriality. I hope I pronounced that long word 
right. And it is also an issue that you and I have discussed in 
my other committee, Financial Services. It is my understanding 
that the SEC Chairman Schapiro has announced that the SEC will 
issue a formal rulemaking related to the extraterritorial 
application of the Dodd-Frank law. Can we expect the CFTC to 
also issue a formal rulemaking on the extraterritorial scope of 
the Dodd-Frank as the SEC has announced?
    Mr. Gensler. Though our statutory situation is a little 
different, we will seek public comment on what is called 722(d) 
or it might be called 2(I) of the Commodity Exchange Act. They 
don't have that provision but that is basically the core to 
this question. In addition, I am hoping to get public comment 
through that release on swap dealer--where we defer to foreign 
regulators. We have a long history of deferring to foreign 
regulators. I am hoping that we can continue to do that but 
that will be also--and hopefully get public comment on it.
    Mr. David Scott of Georgia. All right. Thank you very much, 
Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    For the benefit of the Members, it is worth noting we will 
next go with Mr. Schilling, followed by Mr. Boswell, followed 
by Mr. Huelskamp, followed by Mr. Thompson, and finally Mr. 
Tipton.
    With that, Mr. Schilling is recognized for 5 minutes.
    Mr. Schilling. Thank you, Mr. Chairman.
    Good to see you again, Mr. Gensler. As you know, Congress 
provided an exemption for captive finance affiliates from both 
the definition of major swap participant as well as the 
definition of financial entity for the purpose of end-user 
clearing exception. The statutory language, however, leaves 
room for interpretation by the Commission and the operational 
realities of the financing provided by captive finance 
companies require additional clarification from the CFTC with 
regard to how they intend to interpret the calculation of the 
90/90 rule. For example, take a tractor made by John Deere in 
Moline, Illinois. The tractor may have an implement that is not 
made by John Deere. Are they allowed to finance this 
transaction?
    Mr. Gensler. Though I am very familiar with the provision 
and we will carry out the intent of this Committee and Congress 
on the captive finance provision, I would like to sort of work 
with staff and get back to you on the specific question of 
the--I think if I follow the question is if John Deere sells a 
tractor but there is an implement that they sell with it----
    Mr. Schilling. Right. Like let's say they sell a tractor 
and then they have an auger that goes with it----
    Mr. Gensler. Right. Right.
    Mr. Schilling.--are they going to be able to do that 
basically?
    Mr. Gensler. Well, I know they will be able to sell it but 
your question about because the provision says that 90 percent 
of what they are financing has to be what they are 
manufacturing if I remember?
    Mr. Schilling. Right.
    Mr. Gensler. And so it is a question of whether the auger, 
because it is not something they manufactured, would be counted 
against the 90 percent?
    Mr. Schilling. Exactly.
    Mr. Gensler. I think that our proposal didn't speak 
negative or positive to it, but I know this question has come 
up and I don't know how we would address it other than in a 
facts and circumstances. But certainly if I can talk to staff 
afterwards and get back to you.
    Mr. Schilling. Yes, that would be great because as I 
understand many of these companies are already hearing from the 
other folks that they do business with and they will demand 
assurances that these captives qualify for the exemption before 
they will trade with them. So it is just another piece of--
certainly I think that the John Deeres to Caterpillars and 
other companies out there just really need to have some good 
solid clarification to where it is not going to be second-
guessing by you guys, so, very good.
    With that I yield back my time. Thank you, sir.
    The Chairman. The gentleman yields back.
    The chair now recognizes the gentleman from Iowa, Mr. 
Boswell, for 5 minutes.
    Mr. Boswell. Well, thank you, Mr. Chairman.
    And thank you, Chairman Gensler, for your work. It seems to 
me like if we just give you the tools and get out of your way 
you will get on with it, you have lots to do and it is just 
kind of holding you up.
    But we keep discussing it and this is not a criticism, Mr. 
Chairman. This is just a discussion. It seems like half of our 
hearings have been about this subject, full Committee and 
probably as much on the Subcommittee. And I am sure you will 
have something to say. But I will yield to you momentarily.
    I understand and I support the need for Congressional 
oversight but I believe we must get to other business, too, and 
I am concerned about the farm bill. Many of us have experienced 
the hands-on, you and me, and we know the plan. We have to have 
a little information to plan ahead. And you probably know 
things I don't know about this farm bill so I just hope we get 
to it. I think it is important and I know you do, too. So you 
might comment on that.
    Another issue, Mr. Welch touched on it, and this Forbes 
report about speculation in the cost per barrel. Now, I have 
spent a lot of my life in Texas and a lot of my life in 
Oklahoma and I know what those arms going up and down mean. I 
see them all over the place, even I believe where the State 
Capitol grounds, in Oklahoma, used to be. So I understand that. 
I am not quarreling about that. But I just feel like that this 
gasoline price impact on our producers, economy, everything 
about it, we owe it to our people that we support that they 
have other options as well as they go about planning their 
business and not relying on OPEC and Wall Street. So could you 
comment on some of that for my ratification and my 
clarification or whatever?
    The Chairman. And the gentleman yields and I appreciate 
that yield. To the fine gentleman from Iowa I would note as far 
as the farm bill goes, this is one of those issues where as the 
pieces come together we will move as aggressively together as 
we possibly can. Whether it was last fall in the hurry-up 
effort for the Super Committee where the chair and the Ranking 
Member worked very diligently with the chair and Ranking Member 
of the other body to try in a time frame that was very tight to 
craft policy. Unfortunately, the rest of Congress and the Super 
Committee didn't match the efforts of the House and Senate 
Agriculture Committees. Whether it was that scenario or the 
situation we are in this summer, we are going to do everything 
within our power working with every Member of this Committee in 
regular order to craft that good farm policy and move us 
forward.
    As far as the number of hearings that this Committee has 
dealt with that relate to Dodd-Frank and the Commodity Futures 
Trading Commission, I just simply observe that the very 
aggressive rulemakings process that the Commission has gone on 
mandated by Dodd-Frank has the potential for tremendous effect 
on the economy, not just agriculture but the entire national 
and international economies. And doing our responsibilities of 
oversight, looking over the Chairman's shoulder on a regular 
basis, asking the Chairman lots of pointed questions on a 
regular basis is a part of our responsibility and I believe 
that helps him and his fellow Commissioners do a better job in 
their important role. And we will continue to work that.
    I won't deny to you for a moment that when all of this is 
done and all the rules are in place and hopefully everyone 
agrees on the same interpretation, if we never have another 
CFTC hearing as long as I live, it will be too soon. But that 
said, until we reach that magic point, we are going to do our 
job. And I would also note to my good colleague from Iowa that 
very soon we will announce a series of hearings in the field 
addressing farm bill issues. I suspect after that there will be 
a few more hearings here in this very Committee chamber 
addressing farm bill issues and we are going to load our 
quiver, we are going to sharpen our blades, and we are going to 
get after that farm bill, sir.
    Mr. Boswell. All right.
    The Chairman. Thank you for those questions.
    Mr. Boswell. Well, thank you for the reassurance.
    And thank you, Mr. Gensler, for your work. I know we gave 
you a lot of responsibility and a whole volume of rules to come 
up with and so on but I appreciate your work and the time that 
you have had to spend answering questions from me and so on, 
thank you for that. And I wish you continued success.
    And Mr. Chairman, thanks for your remarks, but speculation 
is going on. I don't know to what degree out there but I think 
we probably do and I do think we do agree that we have 
responsibility to do everything we can. I know we agree to do 
everything we can to let our producers out there know what they 
have to deal with.
    Thank you for your efforts, I appreciate it. I yield back.
    The Chairman. And the only comment I would add is just let 
it rain in Oklahoma. With that I thank the gentleman and he 
yields back.
    And I now turn to the gentleman from Kansas, Mr. Huelskamp, 
for 5 minutes.
    Mr. Heulskamp. Thank you, Mr. Chairman.
    And I appreciate the opportunity to visit with you, Mr. 
Chairman, as well. And I know in one of your previous answers 
you said that your main priority, a top priority was enhancing 
customer funds and I wanted to follow up with a few more 
questions. I know you were unable to make our hearing in 
November on MF Global and I understand. And these questions 
will be directed--before you recused yourself from the 
investigation, I would like your comments that given that 99 
percent of MF Global's accounts were commodity accounts 
regulated by the Commission, do you think it was appropriate 
the bankruptcy was structured as a SIPA bankruptcy, thereby 
stripping customers of their priority status?
    Mr. Gensler. If I might just try to answer it in a general 
question about when futures commission merchants under our 
jurisdiction and regulation are also broker-dealers under the 
Securities and Exchange, there is the bankruptcy protection of 
SIPA, the Securities Investor Protection Act, and there is the 
bankruptcy protection which is in the Bankruptcy Code and so 
forth and they interact. But as I understand it from my 
knowledge of this from staff is that once it is a joint broker-
dealer futures commission merchant and there are securities 
customers at risk the way the law interacts is that the 
Securities Commission and SIPA can put it into a SIPA Trustee. 
The good news though from what I understand is everything that 
is in the Bankruptcy Code to protect the futures customers, 
Subpart 4 I think it is called, or our code rules 190, they 
have to use those same provisions.
    Mr. Heulskamp. Customers with segregated funds that were 
lost, they did lose their priority status, is that correct, 
with this approach in bankruptcy?
    Mr. Gensler. I might have to turn to Commissioner Sommers 
because it is about this specific matter, but I don't know. I 
mean I am able to sort of----
    Mr. Heulskamp. I have a couple other questions as well. And 
Ms. Sommers, if you would answer that question, I would 
appreciate that.
    Ms. Sommers. Of course. Thank you, Congressman. In the SIPC 
proceeding for MF Global, commodity customers have an exclusive 
right to the customer property that were in the segregated 
accounts. They did not lose their priority status in that 
particular bankruptcy case.
    Mr. Heulskamp. Okay. Thank you. Second question would be, 
Mr. Chairman, I guess given it was obvious on October 31--and I 
know you weren't able to make our November hearing I guess on 
this issue--it was obvious by then from the details that we 
have seen that customer funds were missing and likely 
commingled. Why didn't the Commission move immediately to 
freeze the assets of MFGI and MFGH with that knowledge in hand 
on October 31?
    Mr. Gensler. I will try to answer just that what I know 
about from that weekend. I think that is before I recused 
myself. But just from what I know about that weekend, MF Global 
had filed that they were in compliance each day and that 
weekend, most of that Sunday the company, not us, were working 
to move the customer positions to another company, Interactive 
Brokers. And so there were a series of conference calls on that 
Sunday to help facilitate the movement of the positions. And as 
it has been widely reported, somewhere around 2:30 in the 
morning that I was woken up and told, no, that is not the case. 
And then a few hours later this SIPA--I mean the protections of 
SIPA and the bankruptcy court were put in place.
    Mr. Heulskamp. Put in place on what day?
    Mr. Gensler. The same----
    Mr. Heulskamp. At 2:30 in the morning? The same day?
    Mr. Gensler. Well, no, they weren't put in place until 
whatever--I don't know if it was 6 or 8 hours later.
    Mr. Heulskamp. Okay. So you had no knowledge or no one at 
the Commission had knowledge before that that there was a 
commingling of funds occurring?
    Mr. Gensler. I can only speak to what I know of.
    Mr. Heulskamp. Well, yes. That is why I am asking you the 
questions. I don't want to ask anybody else because you are the 
head of the Commission. This is 10 days before you recused----
    Mr. Gensler. I was woken up around 2:30 in the a.m. on the 
31st of October.
    Mr. Heulskamp. And did they tell you funds were commingled 
at that time?
    Mr. Gensler. To be more precise I was told that there was--
that the account was--I don't actually remember the words but 
the word that you used was not used. It was just that the----
    Mr. Heulskamp. Well, tell me what word they used, please, 
if you would if you can remember. What, we are talking about 
billions of dollars. I know we are talking about 2:30 in the 
morning for you but these are billions of dollars for farmers 
and ranchers that have just been lost----
    Mr. Gensler. Absolutely. I recall being woken up and 
saying--being informed with a lot of people on a phone call--
international regulators, the SEC and so forth--that the 
customer funds account was not--that the deal with Interactive 
was off and the customer funds account was not whole.
    Mr. Heulskamp. So there were customer funds missing. That 
is what you were told?
    Mr. Gensler. I don't recall the exact words, sir.
    Mr. Heulskamp. Okay. And, Mr. Chairman, if I might just for 
30 seconds, if I can just figure out--then could you provide 
for the Committee what you were told at that time at a later 
moment? And again this is 10 days before your recusal or 
whatever you are, a nonparticipant----
    Mr. Gensler. I want to work with this Committee but also 
not prejudice an ongoing investigation of the career staff and 
so forth. So----
    Mr. Heulskamp. So you won't tell us what you were told 
then, Mr. Commissioner?
    Mr. Gensler. No, I want to work with this Committee and--
but it is also what was told to any representative of the CFTC 
over that----
    Mr. Heulskamp. Okay.
    Mr. Gensler.--weekend, and I was a representative of the 
CFTC is also a matter of an investigation as well so----
    Mr. Heulskamp. So are you personally being investigated?
    Mr. Gensler. No.
    Mr. Heulskamp. Is that why----
    Mr. Gensler. No, it just is a fact----
    Mr. Heulskamp. So I want to ask you as a Member of the 
Committee that you will tell us in writing if necessary what 
exactly you were told at that time of the night.
    Mr. Gensler. And we are just working with the Committee and 
the Division of Enforcement.
    Mr. Heulskamp. Well, I don't care about the Division of 
Enforcement. This is a request from myself as a Member of this 
Committee and I am not asking about the division and I would 
just like to know what you and apparently dozens of other folks 
were told.
    So thank you, Mr. Chairman.
    The Chairman. The gentleman yields back.
    The chair now recognizes the gentleman from California for 
5 minutes.
    Mr. Costa. Thank you very much, Mr. Chairman. Good hearing 
this morning and I have several questions.
    One, and California is specifically related. Last hearing 
on the markup of H.R. 3527 you may or your staff may have 
informed you that there was a California-specific issue that 
Congressman Baca and I raised at the time to the chair and the 
Ranking Member on California's ability for our energy providers 
to comply with our unique regulatory system. That under the 
changes it might designate California's energy companies as 
swap dealers. The utility companies have submitted comments to 
the CFTC. There has been extensive discussions with your staff. 
We have seen no positive--at least I have been told that there 
has been no positive movement on the issue. Later today, I am 
going to be sending you a letter to more thoroughly outline my 
concerns and hoping you might be able to speak to whether or 
not you believe actions that have been undertaken to comply 
with state or local laws or regulations should be specifically 
included in terms of what is determined as to whether or not an 
entity is a swap dealer or not.
    Mr. Gensler. I am trying to recall the hearing to which you 
are referring. Is this related to the municipal power 
authorities in Los Angeles and elsewhere?
    Mr. Costa. It is related to the major utility companies in 
California, PG&E, Southern California Edison, San Diego Gas & 
Electric. We have a deregulated environment under which they 
purchase and under the H.R. 3527 they may be viewed as a swap 
dealer and they don't believe they are swap dealers. But 
obviously this issue has not come to your attention.
    Mr. Gensler. Well, there were two California issues because 
the Municipal Power Authority of Los Angeles----
    Mr. Costa. This is not Municipal Power Authority's----
    Mr. Gensler. I just wanted to----
    Mr. Costa. It is needed to ensure that these companies and 
ultimately California ratepayers are not charged the additional 
fee on this issue.
    Mr. Gensler. So I believe that we will successfully address 
through the entity definition rule that, as Congress said, if 
somebody is making markets, it is only if they are 
accommodating others on a routine basis and I am not familiar 
enough with PG&E's----
    Mr. Costa. Well, please----
    Mr. Gensler.--business----
    Mr. Costa.--get familiar with it and get back to us. I was 
going to send you the letter this afternoon. We don't want--
because these California companies are complying with state 
law--to be penalized by the Federal regulators that ultimately 
could impact the ratepayers in California.
    Mr. Gensler. I think they will benefit by this law because 
it will bring transparency and I believe it will----
    Mr. Costa. No, that is----
    Mr. Gensler.--address your----
    Mr. Costa.--the largest issue but there is a problem. Get 
this? There is a problem with complying with state law, Federal 
law and we need to work through that problem.
    Mr. Gensler. I look forward to reading your letter.
    Mr. Costa. Okay. Thank you very much.
    On the broader set of issues and it has been talked about 
before in terms of the impacts on gas prices and the volatility 
and the potential speculation, while they are talking about the 
potential to reach $4 a gallon, they have exceeded $4 a gallon 
in California. I was at the pump on Saturday and it was in 
excess of $4.18 a gallon as I saw my fill-up reach almost $70. 
So we are aware of the BP fire in Washington State at the 
refinery, but other places in the West are being similarly 
impacted. We know from the data at the Energy Information 
Administration that the supply, as has been already stated here 
this morning, of oil and gas is higher today than it was 3 
years ago when the national gasoline was below $2 a gallon.
    We know it is a worldwide market, of course, but right now 
the demand for oil in the U.S. is the lowest since 1997. I am 
not satisfied with the response you have made earlier this 
morning as to whether or not you agree that something else more 
basic than supply and demand is driving these prices.
    Mr. Gensler. These markets are made up of hedgers and 
speculators and at any given time both are part of a market. As 
I mentioned earlier, in fact, the futures market, over 80 
percent of the market is swap dealers, hedge funds, managed 
money, other financial----
    Mr. Costa. So you would say essentially----
    Mr. Gensler.--is less than 20 percent----
    Mr. Costa.--speculation as having some impact; you just 
can't quantify it?
    Mr. Gensler. On any given day financial actors, as you are 
referring to them as speculators, are part of the pricing of 
energy and agricultural products. Our role is to make sure and 
ensure that that market is free of manipulation, it is 
transparent, and it reflects supply and demand.
    Mr. Costa. Well, my time has expired but, Chairman Gensler, 
the fact is is that for American farmers and all of the benefit 
from the products that we produce, the CFTC is undertaking with 
other authorities to address the extensive energy speculation 
that is destroying--I don't know if you care to comment any 
further as to what specific efforts you are taking under the 
new Dodd-Frank rule.
    Mr. Gensler. Well, just that there are broad rules, it is 
new anti-manipulation authority, it is transparency 
authorities, it is trying to complete once the data is in, 
position limits authority, so I think it is really the 
collection that this Committee asked us to address the markets 
with.
    Mr. Costa. Mr. Chairman, I wasn't here earlier but is it 
the desire of the Committee to have the Commissioner to come 
back and report when they have made their findings or to 
provide it in some informative fashion?
    The Chairman. I believe that is certainly possible and that 
can be addressed as one of the questions submitted to him, and 
a response to that would be the report.
    I thank the gentleman from California. His time has 
expired.
    Mr. Costa. Thank you.
    The Chairman. I now recognize the gentleman from 
Pennsylvania for 5 minutes, Mr. Thompson.
    Mr. Thompson. Chairman Lucas, thank you.
    Chairman Gensler, thanks for coming once again. You had 
mentioned in your testimony the time constraints for completion 
of the rules and that the CFTC is ``completing rules in a 
thoughtful, balanced way, not against the clock.'' Well, how 
specifically is CFTC allowing for flexibility with rulemaking?
    Mr. Gensler. Well, foremost, Congress gave us 1 year to 
complete which was last July, and of course, here we are 8 or 
10 months later. We put out exemptive order last July to say 
the whole market could rest at ease until December and then 
again we came back in October and November and said rest at 
ease again until this coming July. In addition, in each of the 
rules we have phased in implementation and in some cases it 
goes out years; some cases it is just months. It depends on 
what comments we have heard from the markets. I would be 
hopeful that we would complete most of our rules by this 
summer, but as I have said in my written testimony, some might 
take longer. We want to get these things right.
    Mr. Thompson. One of the things I see just burdening our 
economy is on certainty from many different aspects, and so 
what is your agency doing to help relieve some of the 
uncertainty that many of our banks and financial institutions 
are experiencing as these rulemaking processes continue?
    Mr. Gensler. You raise a good point because it is balancing 
lowering that regulatory uncertainty with not trying to rush 
things. And I think this Committee wants us to do both but I 
have taken the Chairman to heart not to rush things. But as we 
complete each rule, I think we do help lower that uncertainty. 
Beyond that what we have tried to do is really reach out and 
have a lot of work with market participants before and after a 
rule is done through roundtables and then, as we have done in 
some of these data rules, to actually have weekly calls with 
market participants to sort through some of their questions. In 
one case, we put out an over 100 page topic area on large 
trader reporting to help describe how to get the data in.
    Mr. Thompson. You mentioned in your testimony that a motive 
for the current expansion of regulations that you believe 
failure to regulate swaps and future markets led to the 2008 
financial crisis. Could you please describe a specific 
regulation that you have added since the 2008 financial crisis 
that significantly reduces the risk of future financial crises?
    Mr. Gensler. I think in a number of places. I do think 
swaps were not the only cause of the crisis but it was part of 
it. I think the overall regime of clearing and central clearing 
lowers the interconnectedness and I think we will get this 
right. This Committee and Congress want end-users out but the 
other part of the markets to be in clearing. I think 
transparency, even what we completed in December. Starting this 
summer in July of this year, regulators and market participants 
for the first time will actually see the pricing of these 
transactions. It will be delayed to protect the anonymity, to 
protect the market, but people for the first time will start to 
see what the pricing of these transactions are.
    Mr. Thompson. One of the critical pieces of the mosaic of 
regulations that you describe in your testimony is the 
definition of a swap. Could you please share with us your 
preliminary definition and indicate areas in which you think 
changes are likely?
    Mr. Gensler. In the definition, did you say swap or----
    Mr. Thompson. Swap, please.
    Mr. Gensler. We have gotten a lot of questions and 
comments, which I think were very helpful just drilling in on 
where forwards would not be considered to be swaps. And I think 
it was the intent of this Committee--I know there was an 
important colloquy with then-Chairman Peterson on this matter 
that forwards aren't treated as futures and they are not 
treated as swaps. My hope would be we give greater clarity on 
that whole topic. There are similar topics that people have 
raised, concerns about when insurance is not a swap, when 
regular commercial transactions are not a swap. So I think the 
final rule will benefit from those comments and clarity.
    Mr. Thompson. Okay, thank you.
    Mr. Chairman, I yield back.
    The Chairman. The gentleman yields back.
    The chair now turns to the gentleman from Colorado, Mr. 
Tipton, for 5 minutes.
    Mr. Tipton. Thank you, Chairman Lucas. And thank you, 
Chairman Gensler for being here.
    Chairman, we are very aware of the importance for 
agricultural producers to be able to gain access to credit, and 
quite often an important component of their ability to gain 
that access to credit is to ensure that they are hedged against 
the risks they face, commodity prices, be it interest rates or 
currency rates. In recognition of this, Dodd-Frank provided an 
exemption for banks to provide swaps in connection with loans 
from designation of swap dealers to ensure the important 
relationship between risk management and flow of credit that it 
can continue between small- and mid-sized banks and businesses. 
This link I believe is well described in a letter by one of the 
banking regulators from the OCC that they sent to you last year 
expressing their concerns. With a narrow approach to the swaps 
in connection with loans, the exemption is proposed by the CFTC 
and the impact that this may actually have on our banks.
    The OCC--and I will read this--stated specifically in their 
letter, ``the statutory language does not limit the loan 
exclusion with swaps that are connected to the financial terms 
of a loan, nor does it require that the swap be entered into 
contemporaneously with a loan origination. CFTC's proposed 
implementation of the loan exclusion effectively prevents 
community and mid-sized banks from offering commodity-based 
swaps to loan customers. We are concerned that this interferes 
with the bank's risk management and believe that it was 
precisely this type of risk management that Congress intended 
to preserve through the loan exclusion. Loan underwriting 
criteria for the community and mid-sized banks that offer loans 
to commercial customers engaged in commodity-driven business 
may require as a condition of the loan that the borrower be 
hedged against commodity price risk incidental to its business. 
This hedging activity reduces the bank's credit risk on the 
loan since the borrower is situated to withstand potentially 
volatile commodity price fluctuations.''
    It did continue on in regards to the restrictions on the 
timing of the swaps relative to the origination of the loan. In 
their letter they stated, ``the loan exclusion should also be 
implemented in a manner that recognizes practical reality of 
bank and end-user risk management practices.'' To that end, the 
loan exclusion should be tailored to allow for ongoing hedging 
throughout the life of a loan, providing such hedging is 
connected to the origination of a loan, as discussed above. 
Eliminating the exclusion to swaps that are contemporaneous to 
loan origination or close thereto, as is contemplated in the 
proposed rule, would preclude ongoing risk management connected 
to bank lending and increased credit risk for bonds.''
    So I am familiar with that. And Mr. Gensler, in light of 
the fact that one of our primary banking regulators expressed 
concern that precluding commodity swaps from the exemption or 
by placing arbitrary timing restrictions on swaps in connection 
with loans will actually raise credit risk at our banks. Can we 
expect these restrictions to be omitted from the final rule?
    Mr. Gensler. I am familiar with the comment letter and 
other comment letters about lending in connection with 
originating a loan. We are taking them all into consideration. 
We actually asked questions of the public on a number of these 
issues. Let me just focus on one. The second that you raised is 
to what does it mean, in connection? Is it contemporaneous? Is 
it a week before? Is it a month before? Et cetera. Is it 
throughout the life of the loan? We received a lot of 
different--there was a range of feedback on that and we will be 
addressing all of the issues I think in that Comptroller's 
letter. Some of them would add clarity but again subject to 
other Commissioners and to Commissions.
    I would say the other piece of this is----
    Mr. Tipton. I am not sure--not to interrupt but I am going 
to run out of time. I am not sure I am hearing an answer to the 
question. Can we expect that to be omitted from the final rule 
because the primary purpose of Dodd-Frank was to be able to 
lower that risk.
    Mr. Gensler. I am answering as best I can that in a pack of 
rulemaking that we will take into consideration and I am very 
familiar with the Comptroller's letter and his other letters on 
other topics. John and I sometimes talk about these letters as 
well, and I believe the community banks also will ultimately 
understand that as we address ourselves to the de minimis 
standard as well. But I am not able at this stage to say that 
we are accepting the Comptroller's letter completely.
    Mr. Tipton. Okay. You aren't willing to accept that but you 
said you were reaching out to the market participants and they 
are directly saying with the backup of the OCC that this is 
going to raise that risk?
    Mr. Gensler. Again, sir, it is the banks who offer swaps in 
connection with originating loans have raised questions about 
when can they give that. We are going to address that as best 
we can, those comments and the comments of the Comptroller and 
address the comments separate from that letter about the de 
minimis.
    Mr. Tipton. Mr. Chairman, if I can just have about 30 more 
seconds here?
    The Chairman. Thirty more seconds.
    Mr. Tipton. I appreciate that. I would really applaud and 
stand behind Mr. Costa in terms of his regard to be able to 
bring these back to Committee because I think the legislative 
intent is incredibly important. As you are developing these 
rules and I would join myself and associate myself with Mr. 
Huelskamp's remarks as well in regards to actually having a 
response back to his request. So thank you.
    The Chairman. The gentleman's time has expired.
    The chair will now turn to the gentleman for final 
questions from the Republic of Texas for 5 minutes, Mr. 
Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Chairman Gensler, good to have you here today.
    Mr. Gensler. Good to be with you, sir.
    Mr. Neugebauer. You had mentioned that Commissioner O'Malia 
last week strongly criticized the final swap dealer business 
conduct rule saying that he felt like the Commission had failed 
to really do a comprehensive cost-benefit analysis of that 
rule. I think in fact in some of the discussions with some of 
the CFTC lawyers, they really couldn't produce any substantial 
numbers to indicate that really any kind of cost-benefit 
analysis had been done. And I believe Mr. O'Malia asked the OMB 
for independent review of that process and to see whether those 
rules comply with the Obama Administration's Executive Order. 
In fact I think he used the word that you all had committed 
regulatory malpractice. That is a pretty strong statement from 
one of your Commission members.
    And I think one of the things that many of us are concerned 
about is we have been tracking the compliance side of Dodd-
Frank. So it has about 400 different rulemaking requirements. I 
think we reached a milestone the other day--I think we are at 
140. I think you said you had done about 25 or 26; you had 20 
more. So that means we are \1/3\ of the way through this 
process and the current number is that it takes about 21 
million man hours to comply with the first 140 rules. Now, I 
want to put that in perspective for you. It means that it only 
took 20 million man hours to do the Panama Canal. And so 
basically what somebody said earlier this week is for 21 
million man hours what we have done rather than connecting two 
oceans and creating a huge economic engine, the only thing we 
have united here is lawyers and billable hours.
    And so I think the importance of these cost-benefit 
analyses can't be overemphasized. And you must comply with the 
law because we are giving the American people a lot of 
regulations and we are not, one, sure it is going to fix all of 
the issues that many thought that were a part of the crisis in 
2008. But the other issue is the huge burden that it is going 
to put on the economy and the financial systems in total.
    And so what is your response to ``that you committed 
regulatory malpractice?''
    Mr. Gensler. I am very proud of the agency's work, the 
Commission's work and I think that we have fully complied with 
the Commodities and Exchange Act and the Administrative 
Procedures Act on cost-benefit considerations. We take them 
into consideration on each of our rules. The Chief Economist's 
Office has to sign off on any rule that comes before us, and in 
many of our internal deliberations it is really very helpful 
what commenters have come in and said to us about this.
    Mr. Neugebauer. What is your response though that your own 
lawyers admitted they had not crunched the numbers when 
analyzing the impact or any of the alternatives to that----
    Mr. Gensler. I was at the same hearing and that, with all 
respect, what they said was to a very specific question about, 
as I recall, specific numbers on the ability to search voice 
records, one question. Congress mandated that voice records be 
kept and in our proposal we said that it had to be put in 
electronic form. A lot of people didn't like that so we then 
said, okay, you do not have to put it in electronic form. We 
rolled back. We dialed back because of the cost of that but we 
said you still just need to be able to search it to find a key 
term. You know, if there is an enforcement case later, then 
somebody has got to be able to search it. And there are readily 
available search tools to just to be able to search and find a 
key term.
    Mr. Neugebauer. So you have a definitive document that says 
cost-benefit analysis for this rule and it has quantitative 
data in it?
    Mr. Gensler. Well, it is actually called cost-benefit 
considerations because that is what the statute----
    Mr. Neugebauer. So there is----
    Mr. Gensler. Yes. Oh, yes. That is in each of our rules, 
absolutely.
    Mr. Neugebauer. Can you furnish me with a copy of that?
    Mr. Gensler. We will do that.
    Mr. Neugebauer. Do you understand the importance of why 
this cost-benefit analysis is important? Because it is not just 
what you are doing at this Commission but it is what is going 
on across the whole spectrum. And what we are already hearing 
is in many cases there is duplication, there are conflicts of 
what rules that are being put out by you and other regulators. 
And so it doesn't appear we are moving in a direction that is 
necessarily positive.
    Mr. Gensler. I not only understand it; I have found it 
very, very helpful, not just commenters' views on costs and 
benefits but our own deliberations when somebody in our Chief 
Economist's Office says, well, how do you justify this? Now, it 
is only within the discretion we have, but like this example of 
voice recordings that we said, no, do not put them in 
electronic form----
    Mr. Neugebauer. And is the cost-benefit analysis that you 
do, is that done prior to releasing the rule or before the rule 
is final?
    Mr. Gensler. There is a cost-benefit consideration section 
that is in a proposal. We ask commenters to comment. We 
particularly ask them if they can send us quantifications. A 
lot of times we don't get quantities and numbers. And so it may 
not be as much quantification as any of us would think about in 
keeping our own bank account or something. But, yes, we get 
comments through our roundtables, through our meetings, and 
then we include that in the final rule as well.
    Mr. Neugebauer. The feedback I get is that basically the 
quantification comes from the people commenting that your 
documents, the rules themselves don't really have very much of 
a concrete quantification or justification of the cost-benefit 
analysis and that you ask for additional information on that 
aspect. The problem with that is then that you take that into 
consideration; then you go out and put out the rule. I would 
submit to you that if you don't have the data, you are asking 
for the data, that when you get that information back, that you 
should resubmit the rule with an updated version of the cost-
benefit analysis so that then there could be comment on that. 
But if you are mining a lot of data from the people on comment, 
not everybody has the eyes to get to see that prior to when you 
finally--or if you don't resubmit the rule, then it comes in 
after the fact.
    Mr. Gensler. The good piece of the process of every agency, 
and ours as well, is everybody gets to see everybody else's 
comments. So we actually get comments on comments, and we have 
used our discretion to allow people to put in late comments. 
And often it is on cost and benefits and they have been very 
helpful.
    The Chairman. The gentleman's time has expired. All time 
has expired. Any closing comments from the Ranking Member?
    Seeing none, the chair simply notes once again we 
appreciate the opportunity to look over Chairman Gensler's 
shoulder. We will continue to do that as we work together to 
make sure the good policy is corrected in this process.
    Mr. Gensler. Could I say, Mr. Chairman, I would hope that 
even when we do finish the rules that we would keep coming in 
front of this Committee, but if you were trying to give us the 
motivation to slow it down more so that it can always have a 
reason to come in front of you----
    The Chairman. Chairman Gensler, you are almost like a 
member of my family we have spent so much time together. And 
like all family members, you will always be welcome----
    Mr. Gensler. Thank you. Thank you.
    The Chairman.--to finish this process.
    Mr. Gensler. All right.
    The Chairman. With that, under the rules of the Committee, 
the record for today's hearing will remain open for 10 calendar 
days to receive additional material and supplemental written 
responses from the witnesses to any question posed by a Member.
    This hearing of the Committee on Agriculture is adjourned.
    [Whereupon, at 12:00 p.m., the Committee was adjourned.]
    [Material submitted for inclusion in the record follows:]
      
Submitted Letter by Hon. Peter Welch, a Representative in Congress from 
                                Vermont
Commodity Markets Oversight Coalition--An Alliance of Commodity 
        Derivatives End-Users and Consumers
February 29, 2012

 Hon. Harold Rogers,                  Hon. Norman D. Dicks,
Chairman,                            Ranking Minority Member,
House Committee on Appropriations,   House Committee on Appropriations,
Washington, D.C.;                    Washington, D.C.;Hon. Daniel K. Inouye,               Hon. Thad Cochran,
Chairman,                            Ranking Minority Member,
Senate Committee on Appropriations,  Senate Committee on Appropriations,
Washington, D.C.;                    Washington, D.C.

    Dear Chairmen Rogers and Inouye, and Ranking Members Dicks and 
Cochran:

    The undersigned members of the Commodity Markets Oversight 
Coalition write to endorse the Administration's Fiscal Year 2013 budget 
request of $308 million for the Commodity Futures Trading Commission. 
We believe this funding level is necessary to ensure the oversight, 
transparency and stability necessary for the proper functioning of our 
nation's commodity markets and to ensure adequate protections for 
commodity hedgers and commercial end-users.
    The CMOC is an independent, non-partisan and nonprofit alliance of 
organizations that represents commodity-dependent industries, 
businesses and end-users that rely on functional, transparent and 
competitive commodity derivatives markets as a hedging and price 
discovery tool. The coalition advocates in favor of government policies 
that promote stability and confidence in the commodities markets, that 
seek to prevent fraud, manipulation and excessive speculation, and that 
preserve the interests of bona fide hedgers and consumers.
    While we acknowledge the deficit crisis our country faces and 
commend Congressional leaders for their calls to rein in Federal 
spending, the Commission must be funded sufficiently to exercise its 
statutory responsibilities. For more than a decade, the CFTC has been 
under-funded, understaffed, and under-resourced. All the while it has 
faced complex new market trends and technologies, a vast expansion of 
authority over unregulated over-the-counter swaps markets, and 
challenges to market stability and security, including the recent 
bankruptcy of commodity brokerage firm MF Global. The collapse of MF 
Global illustrates the importance of rigorous market surveillance, 
accountability and consumer protections.
    By CFTC Chairman Gary Gensler's own admission, the current funding 
level of $205 million is wholly insufficient to meet these challenges. 
Furthermore, failing to provide this important financial regulator with 
needed funds could further jeopardize security, stability and 
confidence in the commodity markets and adequate consumer protections.
    As businesses that depend on competitive, transparent and 
functional commodity derivatives markets, we urge Congressional 
appropriators to provide the Commission with the amount of $308 million 
as requested by the Administration for Fiscal Year 2013.
    Thank you in advance for your thoughtful consideration.
            Sincerely,

Airlines for America;
American Feed Industry Association;
American Public Gas Association;
American Trucking Associations;
Colorado Petroleum Marketers Association;
Consumer Federation of America;
Florida Petroleum Marketers Association;
Fuel Merchants Association of New Jersey;
Gasoline & Automotive Service Dealers of America;
Independent Connecticut Petroleum Association;
Institute for Agriculture and Trade Policy;
Louisiana Oil Marketers & Convenience Store Association;
Maine Energy Marketers Association;
Massachusetts Oilheat Council;
Montana Petroleum Marketers & Convenience Store Association;
National Association of Oil & Energy Service Professionals;
National Association of Truck Stop Operators;
National Family Farm Coalition;
National Farmers Union;
New England Fuel Institute;
New Jersey Citizen Action Oil Group;
New Mexico Petroleum Marketers Association;
New York Oil Heating Association;
Oil Heat Council of New Hampshire;
Oil Heat Institute of Long Island;
Oil Heat Institute of Rhode Island;
Organization for Competitive Markets;
Petroleum Marketers & Convenience Store Association of Kansas;
Petroleum Marketers & Convenience Stores of Iowa;
Petroleum Marketers Association of America;
Public Citizen;
Ranchers-Cattlemen Action Legal Fund (R-CALF) USA;
Society of Independent Gasoline Marketers of America;
Vermont Fuel Dealers Association;
West Virginia Oil Marketers and Grocers Association;
Wyoming Petroleum Marketers Association.

CC:

Chairman Gary Gensler, Commodity Futures Trading Commission;
Commissioner Jill Sommers, Commodity Futures Trading Commission;
Commissioner Bart Chilton, Commodity Futures Trading Commission;
Commissioner Scott O'Malia, Commodity Futures Trading Commission;
Commissioner Bart Chilton, Commodity Futures Trading Commission;
Rep. Jack Kingston, Chairman, House Appropriations Subcommittee on 
    Agriculture;
Rep. Sam Farr, Ranking Member, House Appropriations Subcommittee on 
    Agriculture;
Rep. Frank D. Lucas, Chairman, House Committee on Agriculture;
Rep. Collin C. Peterson, Ranking Member, House Committee on 
    Agriculture;
Rep. Fred Upton, Chairman, House Committee on Energy & Commerce;
Rep. Henry A. Waxman, Ranking Member, Committee on Energy & Commerce;
Sen. Richard Durbin, Chairman, Senate Appropriations Subcommittee on 
    Financial Services and General Government;
Sen. Jerry Moran, Ranking Member, Senate Appropriations Subcommittee on 
    Financial Services and General Government;
Sen. Debbie Stabenow, Chairwoman, Senate Committee on Agriculture, 
    Nutrition & Forestry;
Sen. Pat Roberts, Ranking Member, Senate Committee on Agriculture, 
    Nutrition & Forestry;
Sen. Jeff Bingaman, Chairman, Senate Committee on Energy & Natural 
    Resources;
Sen. Lisa Murkowski, Ranking Member, Senate Committee on Energy & 
    Natural Resources.
                                 ______
                                 
                          Submitted Questions
Response from Commodity Futures Trading Commission
Questions Submitted by Hon. Frank D. Lucas, a Representative in 
        Congress from Oklahoma
MF Global
    Question 1. Please tell us why and what led to your decision as 
Chairman of the CFTC to recuse yourself from the largest failure of a 
CFTC registrant and arguably the largest investigation the Commission 
has ever had. What are the parameters of your recusal? Do you 
participate in any Commission deliberations or review any reports of 
the investigation?

    Question 2. Why does your ``Statement of Non-Participation'' 
regarding matters involving MF Global extend to J.C. Flowers & Co.?

    Question 3. Please describe the nature of your relationship with 
J.C. Flowers and any and all communications you have had with him while 
serving as Chairman of the CFTC.
    Answer 1-3. For the convenience of the Committee, I include two 
documents which address Questions 1, 2, and 3. The first is the text of 
my statement of non-participation. The second is a Memorandum which 
includes information detailing my activities prior to my withdrawal 
from participation in the matter. (See attachments 1-2).

    Question 4. You directed the agency's Division of Swap Dealer and 
intermediary Oversight to find ways to bolster agency regulations for 
how it oversees and what it requires from self-regulatory organizations 
and futures commission merchants in direct response to MF Global. What 
recommendations did you receive?
    Answer. Commission staff members are reviewing the customer funds 
protection provisions of the Commodity Exchange Act and Commission 
regulations to identify enhancements to the protection of customer 
funds. As part of this process, Commission staff held a 2 day public 
Roundtable on February 29 and March 1, 2012 to solicit input and to 
identify enhancements to FCM internal controls surrounding the handling 
of customer funds. Panelist at the Roundtable represented a cross-
section of the futures industry including academics, consumer groups, 
agricultural and energy interests, managed funds and pension plans, 
FCMs, derivatives clearing organizations, self-regulatory 
organizations, securities regulators and securities self-regulatory 
organizations, and industry trade associations.
    The Roundtable provided a forum for Commission staff to obtain 
information and views on a range of customer protection issues. Day one 
of the Roundtable focused on customer funds segregation models; FCM 
controls over the disbursement of customer funds deposited for trading 
on U.S. futures markets; increasing transparency surrounding an FCM's 
holding and investment of customer funds; and lessons learned from 
commodity brokerage bankruptcy proceedings. Day two of the Roundtable 
focused primarily on the protection of customer funds deposited with 
FCMs for trading on foreign futures markets; particular issues 
associated with entities dually registered with the CFTC as FCMs and 
the U.S. Securities and Exchange Commission as broker-dealers; and 
enhancing the self-regulatory structure.
    Commission staff also has held discussions with representatives of 
the Futures Industry Association (``FIA'') and the two primary futures 
markets self-regulatory organizations, the National Futures Association 
(``NFA'') and the Chicago Mercantile Exchange (``CME''), regarding 
enhancing customer protections. Staff is taking into consideration the 
recommendations that FIA issued in its document titled, Initial 
Recommendations for Customer Funds Protection, and in its publication 
of frequently asked questions regarding the protection of customer 
funds.
    The Commission recently approved an NFA proposal that stemmed from 
a coordinated effort by the CFTC, the SROs, and market participants
    The three key areas of reform included in the NFA rules are:

   First, FCMs must hold sufficient funds in Part 30 secured 
        accounts (funds held for foreign futures and options customers 
        trading on foreign contract markets) to meet their total 
        obligations to customers trading on foreign markets computed 
        under the net liquidating equity method. FCMs will no longer be 
        allowed to use the alternative method, which had allowed them 
        to hold a lower amount of funds representing the margin on 
        their foreign futures;

   Second, FCMs must maintain written policies and procedures 
        governing the maintenance of excess funds in customer 
        segregated and Part 30 secured accounts. Withdrawals of 25 
        percent or more of excess funds in these accounts (that are not 
        for the benefit of customers) must be pre-approved in writing 
        by senior management and reported to the NFA; and

   Third, FCMs must make additional reports available to the 
        NFA, including daily computations of segregated and Part 30 
        secured amounts, as well as twice monthly detailed information 
        regarding the cash deposits and investments of customer funds.

    Additional staff recommendations include:

   Incorporating the NFA rules approved recently into the 
        Commission's regulations;

   Ensuring that SROs and the CFTC have direct electronic 
        access to FCMs' bank and custodial accounts for customer funds, 
        without asking the FCMs' permission. Further, require that 
        acknowledgement letters (letters acknowledging that accounts 
        contain segregated customer funds) and confirmation letters 
        come directly to regulators from banks and custodians;

   Providing that futures customers, if they so elect, to have 
        access to information about how their assets are held and with 
        whom, similar to that which is available to mutual fund and 
        securities customers.

    Question 5. The CFTC recently concluded an industry-wide spot check 
of major futures brokerages and did not find any material breaches of 
customer fund protections. The CFTC's spot check concluded there were 
no material breaches of customer fund protections. Isn't that what CME 
found both in the annual audit of MF Global that ended August 4th of 
last year and again in October, just days before the bankruptcy? Did 
the CFTC use any knowledge it has gained from the MF Global bankruptcy 
to sharpen its spot check?
    Answer. The CME did not report MF Global being in violation of 
Commission segregation requirements as a result of its 2011 examination 
of MF Global, or during its review in late October 2011.
    Commission staff, in coordination with the CME and NFA, conducted 
limited reviews of all FCMs that carry customer funds to assess their 
compliance with requirements to segregate such funds pursuant to 
Section 4d of the Act, and to set aside in secured accounts funds 
deposited for trading on foreign boards of trade under Section 4(b) of 
the Act and Part 30 of the Commission's regulations. The principal goal 
of the limited reviews was to obtain an appropriate level of assurance 
that FCMs holding customer funds were not in violation of the 
segregation and Part 30 secured amount requirements as of the review 
date.
    DSIO staff conducted the reviews by obtaining from each FCM a 
detailed listing of assets held in segregated and Part 30 secured 
accounts as reflected in the firm's books and records. The listing of 
assets was compared to independent third-party source documents and 
reconciliations maintained at the FCM's offices supporting the asset 
balances. Staff also reviewed the third-party account documentation to 
determine that the funds were maintained in properly titled segregated 
or secured accounts, as appropriate. In addition, staff reviewed each 
FCM's reported segregation and Part 30 secured amount liabilities and 
reviewed underlying firm records to ensure that the records reflected 
such liabilities. The staffs of the CME and NFA performed comparable 
review procedures. Each FCM was determined to be in compliance with the 
segregation and secured amount requirements as of the respective review 
date.
    Commission staff is using its experience with the MF Global 
bankruptcy to develop proposed enhancements to the customer protection 
regime, including strengthening FCMs' internal controls surrounding the 
handling of customer funds.

    Question 6. Has there been a drop in trading volume since the MF 
Global bankruptcy? If so, how much of the drop can be attributed to the 
collapse of the firm? What more could have CFTC done to prevent this 
disaster?
    Answer. During the first quarter of 2012, aggregate trading volume 
across all contract markets decreased 5.9 percent relative to 2011. 
While aggregate trading volume decreased over this period, aggregate 
open interest in futures and options combined increased 5.4 percent.
    Commission staff is reviewing the facts and circumstances that led 
to the shortfall of customer funds at MF Global and conducting an 
enforcement investigation. Staff will use this information in assisting 
with the development of proposed enhancements to the protection of 
customer funds.
Dodd-Frank Implementation
Process
    Question 7. For nearly 18 months, the CFTC has been in the process 
of writing rules to govern the swaps market--and you've finalized 
nearly 30 rules. But, the very cornerstone of the entire new regime--
the definition of a swap--is still not final. Why is the definition of 
swap coming late in the game, when it should have been the first rule 
finalized?
    Answer. The Commission recently finalized the swap definition rule, 
acting jointly with the Securities and Exchange Commission. The 
Commissions benefitted from substantial public comment, deliberate 
consideration of those comments, and frequent and substantial contact 
between staff of the two agencies.

    Question 8. You mentioned in your testimony that there may be times 
when a re-proposal is necessary. Are there particular rules that you 
believe may require a re-proposal? Should we expect a re-proposal on 
the swap dealer definition in light of your assurances that significant 
changes have been made to improve the rule?
    Answer. On April 27, 2012 the CFTC and the Securities and Exchange 
Commission adopted joint rules and interpretive guidance on the further 
definition of ``swap dealer,'' ``security based swap dealer,'' ``major 
swap participant,'' and ``major security based swap participant.''

    Question 9. What steps has the CFTC taken to minimize differences 
with the SEC's proposals on similar provisions related to security-
based swaps?
    Answer. The CFTC and SEC consult and coordinate extensively to 
harmonize Dodd-Frank rules. This close coordination will continue and 
always benefits the rulemaking process. The two agencies recently 
adopted joint final rules further defining the terms ``swap'' and 
``security-based swap.''

    Question 10. Recently, the CFTC finalized a rule requiring market 
participants to register as swap dealers with the Commission. However, 
many of the rules governing swap dealers have not been finalized. How 
can entities know whether they will register if they cannot evaluate 
the costs associated with the registration because of the various 
unknown regulatory requirements?
    Answer. The Dodd-Frank Act provides the Commission with ample 
flexibility to phase in implementation of requirements. The Commission 
has utilized this flexibility where appropriate to allow for phased 
compliance with specific regulatory requirements.

    Question 11. We have stressed to you in numerous hearings the 
importance of logical sequencing of proposed and final rules. Both to 
support useful public comment, and to minimize disruptions in the 
markets. In the FY 2012 Agriculture Appropriations bill, you were 
directed to develop and publish, with a 60 day comment period, a 
schedule of implementation and sequencing of Dodd-Frank rules. Can you 
update us on your compliance with this, and when we can expect the 
implementation plan?
    Answer. The Commission has taken a number of actions to facilitate 
implementation of Dodd-Frank regulations in keeping with the 
instructions with the report language in the FY 2012 House Agriculture 
Appropriations bill. These include:

    March 16, 2011--Implementing the Dodd-Frank Act, FIA's Annual 
    International Futures Industry Conference, Boca Raton, Florida. 
    Remarks of Chairman Gary Gensler (as posted on CFTC website and 
    including listing of order in which rules might be considered).

    April 12, 2011-June 10, 2011--Comment period open (292 written 
    comments filed); Concepts document published as a guide for 
    commenters.

    May 2, 2011 and May 3, 2011--CFTC-SEC Staff-led Roundtable 
    Discussion on Dodd-Frank Implementation.

    May 4, 2011--Notice published in Federal Register re-opening and 
    extending comment periods (through June 30) in order to ``provide 
    interested parties with an additional opportunity to participate 
    in'' Dodd-Frank Rulemakings. Also requesting comment on the order 
    in which the Commission should consider final rulemakings.

    June 17, 2011--Commission seeks public comment on proposed order to 
    grant exemptive relief from the application of Dodd-Frank Act 
    effective dates.

    July 14, 2011--Commission publishes final order providing exemptive 
    relief from effective dates of Dodd-Frank Act provisions in order 
    to facilitate a smooth transition for market participants (expiring 
    on December 30, 2011; extended on Dec. 23, 2011).

    September 8, 2011--Outline published of Dodd-Frank Title VII Rules 
    the CFTC May Consider in 2011 and the First Quarter of 2012

    September 8, 2011--The Commission sought public comment on proposed 
    rules specifically to establish schedules to phase in compliance 
    with the swap clearing and trade execution requirement provisions 
    of the Dodd-Frank Act. At that meeting, the Commission also 
    approved a proposed rule to phase in compliance with previously 
    proposed requirements, including the swap trading relationship 
    documentation requirement and the margin requirements for uncleared 
    swaps.

    December 23, 2011--Commission publishes amendment to July 14 order 
    extending effectivedate relief through July 16, 2012.

    January 11, 2012--Update of order of consideration of final rules 
    posted on Commission website.

    July 3, 2012--Commission approves amendment to July 14 order 
    extending effective daterelief through December 31, 2012. 
    Individual proposed rules specifically request public comment 
    regarding implementation and sequencing. Examples of such rules 
    include: Reporting, record-keeping and Trading Records requirements 
    ; Real-Time Public Reporting of Swap Transaction Data; Registration 
    of Swap Dealers and Major Swap Participants; and Protection of 
    Collateral of Counterparties to Uncleared Swaps

    Commission staff--along with staff from the SEC and other 
implementing agencies--have conducted a number of roundtables 
(transcripts available on CFTC.gov):

    August 20, 2010--Conflicts of interest in the clearing and listing 
    of swaps.

    September 14, 2010--Swap Data and Swap Data Repositories

    September 15, 2010--Swap Execution Facilities

    October 22, 2010--Credit Default Swaps

    October 22, 2010--Customer Collateral Protection

    December 2, 2010--Disruptive Trading Practices

    December 12, 2010--Capital and Margin

    June 3, 2011--Protection of Cleared Swaps Customer Collateral

    June 8, 2011--Swap Data record-keeping and Reporting

    June 16, 2011--Definition of Swap Dealer and Major Swap Participant

    July 6, 2011--Changes related to Commodity Pool Operators and 
    Commodity Trading Advisors

    August 1, 2011--International issues

    January 30, 2012--``Available to Trade'' Provision for SEFs and 
    DCMs

    Feb 29 and March 1, 2012--Roundtables to discuss additional 
    customer collateral protection

    May 31, 2012--The Volcker Rule

    June 5, 2012--Core Principle 9 for Designated Contract Markets
Cost-Benefit Analysis
    Question 12. How has the CFTC been able to conduct cost-benefit 
analysis on any of its final rules pertaining to swap dealers or major 
swap participants if the rule defining these terms has not been 
finalized? How would they know the number, type or size of the entities 
affected by the regulations and how certain costs may impact them?
    Answer. The Commission relies on information provided by industry 
participants, the general public, and currently available data to 
conduct cost-benefit considerations for all its rulemakings. For entity 
definitions, the Commission used a conservative estimate reported by 
the National Futures Association that the number of swap dealers and 
major swap participants is anticipated to be 125. Given the lack of 
transparency in the swap markets, it is difficult to accurately predict 
this number.
    The entity definition rules have been finalized with an interim de 
minimis threshold of $8 billion notional swaps exposure (as opposed to 
$100 million in the proposed rules). Once the rules have been 
implemented, the CFTC and SEC will collate information from the swap 
markets and conduct additional studies regarding the threshold for swap 
dealers and major swap participants.

    Question 13. Has the CFTC undertaken any analysis regarding the 
cumulative impact its rules will have--on particular sectors of the 
economy or the economy as a whole?
    Answer. Two principles are guiding the agency throughout the rule-
writing process. First is the statute itself. We intend to comply fully 
with the statute's provisions and Congressional intent to lower risk 
and bring transparency to these markets.
    Second, we are consulting heavily with both other regulators and 
the broader public. We are working very closely with the SEC, the 
Federal Reserve, the Federal Deposit Insurance Corporation, the Office 
of the Comptroller of the Currency and other prudential regulators, 
which includes sharing many of our memos, term sheets and draft work 
products. We also are working closely with the Treasury Department and 
the new Office of Financial Research. CFTC staff have held 600 meetings 
with other regulators on implementation of the Act.
    The Commission is bound by the requirements of the Administrative 
Procedure Act, carefully reviews and addresses the thousands of 
comments received, and strives to arrive at a balanced result.

    Question 14. How does the Commission ensure its cost-benefit 
analysis meets the standards set forth in Executive Order 13563--
President Obama's Order ``Improving Regulation and Regulatory Review''?
    Answer. The Commission's guidance on costs and benefit 
considerations incorporates principles from OMB circular A-4 and 
Executive Orders 12688 and 13563.

    Question 15. You mentioned in testimony that derivative markets 
help their participant's hedge or transfer $22 of risk for every dollar 
of goods and services produced in the U.S. economy. You also mentioned 
that these markets touch nearly every aspect of our economy from the 
food we eat, to the price at the pump, to our mortgages and credit 
cards, even our retirement savings.
    If market participants--those who use these tools to mitigate 
risk--are subject to unnecessarily higher costs associated with new 
rules, would your analysis then also support the fact that the costs 
will be borne by the customers who use end-users products, such as 
electricity, fuel at the pump, or food at the grocery store?
    Answer. I believe implementation of the Dodd-Frank Act will lower 
the risk of the swaps marketplace by directly regulating dealers for 
their swaps activities and by moving standardized swaps into central 
clearing. The Act also brings transparency to the swaps marketplace. 
The more transparent a marketplace is the more liquid it is, the more 
competitive it is and the lower costs will be for hedgers, borrowers 
and their customers.
    In addition, the Commission finalized the end-user exception to the 
clearing requirement for swaps. Congress provided that non-financial 
entities, such as farmers, ranchers, manufacturers and other end-users, 
should be able to choose whether or not to clear those swaps that hedge 
or mitigate commercial risks. The Commission's final rule implements 
this exception for non-financial entities, establishing criteria for 
hedging or mitigating commercial risk and imposing minimal reporting 
requirements for those swaps that come under the end-user exception.
Entity Definitions/Registration Requirements
    Question 16. We have heard from many end-users that the breadth of 
the swap dealer definition may miscategorize the swaps they enter into 
for hedging purposes as swap dealing. Will the definition of ``swap 
dealer'' resolve this issue by providing an explicit exemption for 
hedging?

    Question 16a. How will you define ``hedging''? Will it be 
consistent with the definition proposed in the Major Swap Participant 
definition and end-user exemption?
    Answer 16-16a. The statutory definition of ``swap dealer'' does not 
specifically address hedging activity. However, the CFTC believes it is 
appropriate to provide, in an interim final rule, that swaps a person 
enters into for the purpose of hedging price risks related to physical 
positions are excluded from the swap dealer determination. The interim 
final rule draws upon principles in the Commission's long standing 
interpretation of bona fide hedging. It excludes swap activity for the 
purpose of portfolio hedging and anticipatory hedging. If a swap is not 
entered into for the specific hedging purposes identified in the rule, 
then all relevant facts and circumstances about the swap would be 
considered in determining if the person is a swap dealer. The CFTC is 
looking forward to receiving comment on whether the interim final rule 
appropriately excludes swaps for hedging.

    Question 17. If the Commission adopts a definition of ``hedging'' 
that is specific to the swap dealer definition, the Commission will, in 
three separate rulemakings, have three definitions of hedging: one in 
the MSP rule; another in the position limits rule; and finally another 
in the swap dealer definition rule. Hedging is a generally understood 
and accepted term. Why would the Commission have three different 
definitions for the same activity across regulations that affect the 
same companies and firms?
    Answer. CFTC rules define how instruments used for hedging are 
treated for various purposes. For example, where one definition is 
tailored to give full meaning to the end-user exception from clearing, 
another is crafted in the context of the Volcker Rule with its 
limitation on proprietary trading. (See attachment 3).

    Question 18. Why is the end-user exemption provided for on a 
transactional basis as contemplated by the Commission's proposal? 
Wouldn't this be unduly burdensome and costly for end-users? Instead, 
why not allow end-users to make an annual declaration to the CFTC that 
they will transact as an end-user, with an obligation to report to the 
CFTC should their situation change?
    Answer. Under the Commission's final rule, when reporting a swap in 
compliance with the statutory requirements, the end-user must provide, 
or cause the swap dealer to provide, notice that the exception is being 
elected. The end-user has the option of providing additional required 
information in an annual filing or on a swap-by-swap basis.

    Question 19. Will the CFTC distinguish between trading and dealing 
activities in the swap dealer definition? How? Will such a distinction 
appear in the Rule itself, or in the preamble?
    Answer. The dealer-trader distinction is discussed in the preamble 
to the CFTC and the SEC joint final rules and interpretive guidance on 
the further definitions of ``swap dealer,'' ``security based swap 
dealer,'' ``major swap participant,'' and ``major security based swap 
participant.'' The CFTC anticipates that the dealer-trader distinction 
will be useful as one consideration, particularly in light of the 
degree to which it overlaps with many of the other characteristics 
identified in the release that are indicative of dealing activity.

    Question 20. As you know, agricultural co-ops, for example, provide 
swaps to their members, and then enter into another swap to offset the 
risk. This is critical to their ability to continue to provide hedging 
tools to members of the co-op. In that scenario, would the offsetting 
swap make an entity ineligible for the end-user clearing exception? 
Would the offsetting swap meet the definition of a hedge of commercial 
risk?
    Answer. Under the final rule, the exception is available with 
respect to a swap involving a non-financial entity, where the swap is 
hedging or mitigating the person's business risks.

    Question 21. The Commission recently voted to propose the ``Volcker 
rule,'' and it included a definition of what constitutes ``market 
making.'' Will the final rule defining swap dealer also define what 
constitutes ``market making'' since it is one of the key criteria 
established under Dodd-Frank?
    Answer. True to Congressional intent, end-users other than those 
genuinely making markets in swaps won't be required to register as swap 
dealers. The swap dealer definition benefited from the many comments 
from end-users who use swaps to hedge their risk. The final rule 
defining ``swap dealer'' includes the provision from the proposed rule 
which incorporates the statutory requirement that this term include a 
person that ``makes a market in swaps.'' The preamble to the final rule 
includes an extensive discussion of what constitutes market making.

    Question 22. Before Dodd-Frank, non-financial forward commodity 
contracts and commercial options were excluded from CFTC regulation. 
This allowed commercial commodity transactions to proceed without 
financial markets regulation. As you know, Dodd-Frank repealed these 
exclusions. Further, in a proposed rule, the CFTC deleted the 
regulatory exemption for commercial options, and has proposed other 
rules that imply physical forward commodity contracts will now be 
regulated as ``swaps.'' In one of our previous hearings, you have 
stated that the Rural Electric Cooperatives are not dealing in swaps, 
but ``forwards'' or ``forwards with embedded options.'' Should there be 
express exclusions from the definition of ``swap'' for commercial 
commodity contracts that utilities use every day--such as forward 
contracts for physical power, natural gas, coal and other fuels, and 
for commercial options, such as capacity contracts, reserve sharing 
agreements, and all-requirements contracts?
    Answer. The Commission recently adopted a final rule to repeal and 
replace previously existing regulations concerning commodity options. 
The Commission also issued an interim final rule (with a request for 
additional comment) that incorporates a trade option exemption into the 
final rules for commodity options. The interim final rule provides a 
trade option exemption from the general swaps rules, subject to certain 
conditions, for certain physical delivery commodity options. The 
interim final rule was adopted in response to commenters that requested 
relief from Dodd-Frank swaps regulations for commodity options used by 
commercial entities to deliver and/or receive physical commodities in 
connection with their business. The trade option exemption conditions 
include position limits, large trader reporting, appropriate record-
keeping and reporting requirements, anti-fraud and anti-manipulation 
rules, and the retention of certain swap requirements for swap dealers 
and major swap participants that engage in trade options. The 
Commission seeks public comment on the interim final rule.
Small Banks
    Question 23. Out in the countryside, it is important for many 
farmers and ranchers that they be hedged against commodity price risk 
in order to qualify for loans from their local banks. This relationship 
between commodity hedging and borrowing is exactly what Congress 
intended to preserve in the ``swaps in connection with loans'' 
exemption from the swap dealer definition. Will community and mid-size 
banks that provide commodity swaps to their loan customers be eligible 
for this exemption under the final swap dealer rule?
    Answer. The final ``swap dealer'' definition rule fulfills 
Congress's mandate that a swap entered into by an insured depository 
institution in connection with originating a loan is not to be 
considered dealing activity.

    Question 24. According to recent data, 96% of the notional value of 
all derivatives within the U.S. banking system is held by only five of 
the largest banks. Among the largest 25 banks, that percentage 
increases to 99.86% of the total notional value. That means that the 
remaining .14% of the total notional value is spread among 1,046 small 
and community banks. Is it your view that the .14% of notional value 
spread among 1,046 small financial institutions is a threat to the 
stability of the financial system?

    Question 24a. Can we expect that in the final rule ``End-User 
Exception to Mandatory Clearing'', the CFTC will use its authority to 
exempt smaller financial institutions, farm credit banks and credit 
unions from the definition of financial entity so that they are not 
subject to unnecessary costs--in recognition that they pose no systemic 
risk?
    Answer 24-24a. The final rule exempts banks, savings associations, 
farm credit system institutions, and credit unions with total assets of 
$10 billion or less from the definition of ``financial entity,'' making 
such institutions eligible for the end-user exception.
Extraterritoriality/International Coordination
    Question 25. Will the CFTC issue a proposed rule related to the 
extraterritorial application of Dodd-Frank, as Chairwoman Schapiro has 
indicated the SEC will do, or is it your intent for the Commission to 
simply issue guidance? How can you ensure two different processes will 
produce consistent results? Will market participants be afforded the 
same opportunity to comment on the CFTC's guidance as they will on the 
SEC's rule proposal?

    Question 26. When should market participants expect the CFTC to 
provide clarification on extraterritorial application?

    Question 26a. If you intend to issue guidance, as opposed to a 
formal rule, will the Commission be obligated to perform cost benefit 
analysis?
    Answer 25-26a. Section 722(d) of the Dodd-Frank Act states that 
swaps reforms shall not apply to activities outside the United States 
unless those activities have ``a direct and significant connection with 
activities in, or effect on, commerce of the United States.'' Congress 
included this provision (722(d)) for swaps, but included a different 
provision with regard to the SEC's oversight of the security-based 
swaps market. In response to many requests, the Commission issued 
proposed guidance interpreting section 722(d) of the Dodd-Frank Act. 
The Commission is seeking public comment on the guidance and looks 
forward to the public's input.

    Question 27. Chairman Gensler, you have reassured us that you are 
well coordinated with international regulators. I'm growing concerned 
that the international community does not agree.
    In a recent article in the Economic Times, the U.S. role in 
international financial reform was described as this--

          The United States is coming to be seen as a global threat, 
        acting unilaterally with aggressive new market rules that 
        critics say will hurt U.S. firms, foreign banks, and 
        international markets in one swoop.
          Despite its talk of a global level playing field, the United 
        States is being portrayed as a rogue country . . .

    Please respond to this.

    Question 28. What regulatory coordination initiatives are you 
undertaking with your international counterparts with regard to Dodd-
Frank and G20 regulatory goals? What initiatives are you undertaking 
with regard to mutual recognition or mutual accommodation schemes?

    Question 29. In your testimony, you discuss your ongoing dialogues 
with Japan. In April of last year, the Financial Services Agency of 
Japan sent you a letter expressing concerns with the reach of Dodd-
Frank. In fact, the letter states that ``if (Japanese financial 
institutions) were also to be regulated under U.S. DFA framework, this 
will create an undesirable and redundant effect on these Japanese 
institutions.''
    Based on your ongoing discussions with Japanese regulators, will 
you take action to respond to the concern they've raised about the 
redundancy extraterritorial application of Dodd-Frank creates?
    Answer 27-29. As we do with domestic regulators, the CFTC shares 
many of our Dodd-Frank Act rulemaking memos, term sheets and draft work 
product with international regulators. We have been consulting directly 
and sharing documentation with the European Commission, the European 
Central Bank, the UK Financial Services Authority, the European 
Securities and Markets Authority, the Japanese Financial Services 
Agency, and regulators in Canada, France, Germany, Singapore, and 
Switzerland.
    Both the CFTC and European Union are moving forward to address the 
four key objectives set forth by the G20 in September 2009, namely 
clearing through central counterparties; trading on exchanges or 
electronic trading platforms; record-keeping, reporting; and higher 
capital requirements for noncleared swaps.
    Section 722(d) of the Dodd-Frank Act states that the provisions of 
the Act relating to swaps shall not apply to activities outside the 
United States unless those activities have ``a direct and significant 
connection with activities in, or effect on, commerce'' of the United 
States.
Volcker Rule
    Question 30. As you know, the markets for Treasury securities and 
Treasury futures and options are intertwined. Yet, the proposed Volcker 
rule excludes treasuries, but not futures and options on Treasuries. Is 
this purposeful? Will you commit to clarifying in the final rule that 
market making-related activities in exchange-traded futures and options 
are among the permitted activities in which a covered banking entity 
may engage, or in the alternative, use your exemptive authority to add 
Treasury futures and options on Treasury futures to the list of 
permissible proprietary trading activities for covered banking 
entities?
    Answer. The Commission has solicited public comment with respect to 
the proposed Volcker rule and looks forward to reviewing submitted 
comments. The Commission will review, analyze and consider all public 
comments submitted in connection with this rulemaking before proceeding 
to issue a final rule.
CFTC FY 2013 Budget Request
    Question 31. The FY 2013 Budget and Performance Plan details the 
redeployment of resources to process the surge of Dodd-Frank 
registrations and reviews during FY 2012. It states that staff will be 
reassigned from examinations and enforcement as necessary to support 
registration and reviews. The plan also states that the Commission 
acknowledges that this realignment creates risks in its critical 
oversight roles. Please describe which critical oversight roles will be 
at risk. How has Dodd-Frank impacted your ability to effectively 
oversee the futures markets?
    Answer. The CFTC has been directed by Congress to oversee the swaps 
market as well as the futures market that it has traditionally 
regulated. The CFTC needs additional resources in order to oversee the 
swaps market, which is eight times larger than the futures market we 
have traditionally overseen. The National Football League would not 
significantly expand the number of games in a weekend without, at the 
same time, expanding the number of referees to protect the players, 
ensure fair competition, enforce the rules and protect the integrity of 
the game.

    Question 31a. Chairman Gensler, since the bankruptcy of MF Global, 
has your agency refocused its oversight goals? Should it?
    Answer. The Commission has been actively working to improve 
protections for customer funds. This includes:

   The completed amendments to rule 1.25 regarding the 
        investment of funds bring customers back to protections they 
        had prior to exemptions the Commission granted between 2000 and 
        2005. Importantly, this prevents use of customer funds for in-
        house lending through repurchase agreements;

   Clearinghouses will have to collect margin on a gross basis 
        and futures commission merchants (FCMs) will no longer be able 
        to offset one customer's collateral against another and then 
        send only the net to the clearinghouse;

   The so-called ``LSOC rule'' (legal segregation with 
        operational commingling) for swaps ensures customer money is 
        protected individually all the way to the clearinghouse; and

   The Commission included customer protection enhancements in 
        final rules for DCMs. These provisions codify into rules staff 
        guidance on minimum requirements for self-regulatory 
        organization (SROs) regarding their financial surveillance of 
        FCMs.

    In addition, the Commission approved an NFA proposal that stemmed 
from a coordinated effort by the CFTC, the SROs, and market 
participants, including from the CFTC's 2 day roundtable earlier this 
year on customer protection.

    Question 31b. Please describe the priorities you have set for the 
CFTC. Has the writing of new rules taken higher priority over 
examinations and enforcement of the futures and commodities markets?
    Answer. The Commission has been directed to promulgate and 
implement regulations to implement the derivatives reforms of Title VII 
of the Dodd-Frank Act. That direction is in addition to the 
Commission's traditional mandate: oversight of the futures market. The 
Commission is dedicated to carrying out its entire mission.

    Question 32a. If yes--has this priority shift affected the 
Commission's core mission?

    Question 33. Your testimony states that the Commission is 
completing rules in a thoughtful, balanced way--not against a clock. 
Have you mirrored this approach when instituting resources and manpower 
under the new authority and rule writing responsibilities in the Dodd-
Frank Act?
    Answer. The Commission has carefully developed a strategic plan 
which has led to the development and execution of a reorganization of 
the agency's staff.

    Question 33a. What steps have you taken to become more efficient 
and effective with the resources your agency has in developing rules 
mandated by the Dodd-Frank Act?
    Answer. The CFTC is dedicated to using taxpayer dollars 
efficiently--nearly a fourth of our overall budget request is for the 
development of Information Technology.
    But it still takes human beings to watch for market manipulation 
and abuses that affect hedgers--farmers, ranchers, producers, 
commercial companies and the public buying gas at the pump.
    For example, the Dodd-Frank swaps market transparency rules mean a 
major increase in the amount of incoming data for the CFTC to aggregate 
and analyze. The agency is taking on the challenge of establishing 
connections with SDRs and aggregating the newly available swaps data 
with futures market data. This requires high performance hardware and 
software and the development of analytical alerts. But it also requires 
the corresponding personnel to manage this technology effectively for 
surveillance and enforcement.
Position Limits
    Question 34. When was the last time the CFTC calculation of 
deliverable supply was done to help set position limits?
    Answer. The CFTC does not routinely calculate deliverable supplies 
for physical commodities. CFTC staff, as part of its due diligence 
reviews, evaluates related exchange filings. Staff conducts interviews 
with participants in the cash markets for the commodity underlying the 
contract to understand the production, consumption, and distribution of 
the underlying commodity and underlying deliverable supply. The cash 
market analysis and deliverable supply estimate are used together to 
assess the contracts' susceptibility to manipulation and to verify that 
the position limit is consistent with the Commodity Exchange Act and 
CFTC regulations and policy. CFTC staff last estimated a commodity's 
deliverable supply in 2009 when staff estimated deliverable supplies 
for crude oil, natural gas, RBOB gasoline, and heating oil. Staff 
concluded that deliverable supplies were adequate. Under the new rules 
recently adopted by the CFTC establishing position limits in 28 
physical commodity markets, the exchanges and the CFTC would reevaluate 
deliverable supplies on a regular 2 year basis.
Other Issues
    Question 35. This question is related to the efficient use of CFTC 
resources and judicial review of agency actions. When the SEC adopts a 
rule, a person affected by that rule may file a petition for review 
directly in a U.S. Court of Appeals challenging the SEC's rule under 
the Administrative Procedures Act. That has been true for decades. 
Direct appeals allow for expeditious and efficient review by the courts 
of agency action. The Commodity Exchange Act does not have a similar 
provision. When the CFTC adopts a rule, I understand the CFTC's 
position to be that a person affected by that rule must file a 
complaint in federal district court, not in the court of appeals. That 
means the CFTC and the plaintiff must go through two proceedings to 
challenge a CFTC rule--one in district court and one in appellate 
court--while a challenge to the SEC involves only a one step process 
with the court of appeals. In this instance, the SEC process is more 
direct and less costly for the agency. Do you support an amendment to 
the CEA that would allow direct appeals from CFTC rules to the courts 
of appeals?

    Question 35a. If yes, would you favor enactment of such an 
amendment expeditiously so that it could take effect this year? Would 
that help to preserve CFTC resources? If no, why not?
    Answer 35-35a. The Commission has not taken a position with regard 
to this matter.
Questions Submitted by Hon. Collin C. Peterson, a Representative in 
        Congress from Minnesota
    Question 1. Earlier this year, the CFTC published its final rule 
for real-time public reporting of swap transaction data included the 
term ``publicly reportable swap transaction'' as defining the types of 
swaps that would be subject to public dissemination. The rule excluded 
``internal swaps'' or some swaps between affiliates, because such swaps 
were not arms-length transactions and disclosure would not enhance 
price discovery. In a footnote, the Commission does say that ``covered 
transactions between affiliates as described in Sections 23A and 23B of 
the Federal Reserve Act'' would be publicly reportable swaps 
transactions. Can you explain more about the nature of these specific 
covered transactions mentioned in the Federal Reserve Act and why the 
Commission unanimously voted to require their public dissemination 
despite being between affiliates? Did the Federal Reserve have any 
input regarding this subject?
    Answer. Sections 23A and 23B of the Federal Reserve Act refer to 
transactions between a bank and its affiliate. Section 23A relates to 
all derivatives transactions of the bank that create credit exposure to 
the affiliate. Section 23B sets the ``arm's-length requirement'' for 
that section. The Commission determined that it would be appropriate to 
include certain covered transactions as publicly reportable and 
reflective of the market. The Commission did have the benefit of 
consultation with the Federal Reserve Board regarding this provision.

    Question 2. Last month this Committee marked-up H.R. 1840, 
legislation which would amend the CFTC's legal standard for cost-
benefit analysis. You and your staff may already be familiar with its 
contents, but generally the bill matches the directives included in 
President Obama's Executive Order ``Improving Regulation and Regulatory 
Review.'' Do you believe there is a significant difference between the 
cost-benefit analysis conducted currently at the CFTC and the level of 
analysis that would be required by H.R. 1840/the President's Executive 
Order?
    Answer. Section 15(a) of the Commodity Exchange Act (CEA) currently 
requires the CFTC, before it promulgates a regulation, to ``consider 
the costs and benefits of the action.'' H.R. 1840 would amend section 
15(a) to require that such determinations be done through the 
Commission's Office of the Chief Economist. It would require that the 
Commission consider qualitative and quantitative costs and benefits, 
and specify that the Commission could propose or adopt a regulation on 
a reasoned determination that the benefits of the intended regulation 
justify the costs of the intended regulation.

    Question 2a. How difficult is it for the Commission to conduct 
quantitative and qualitative analysis on its proposed regulations?
    Answer. The Commission takes very seriously the consideration of 
costs and benefits of the rules it considers under the Dodd-Frank Act 
as required under section 15(a) of the Commodity Exchange Act. The 
economic costs and benefits associated with regulations, especially as 
they pertain to commenters' concerns, are of utmost importance in the 
Commission's deliberation and determination of final rules.
    As noted in the guidance for cost-benefit considerations for final 
rules memorandum to rulemaking teams from the Chief Economist and 
General Counsel dated May 13, 2011, rulemakings involve consideration 
of quantified costs and benefits to the extent it is reasonably 
feasible and appropriate. For rules that do not have quantifiable 
costs, the Commission seeks to explain why such costs are not 
quantifiable and to explain the reasoning and supportive explanation of 
its predictive judgments using qualitative measures.

    Question 2b. How dependent is the Commission on factual data 
submitted from market participants on the costs associated with their 
market activity in conducting quantitative and qualitative analysis; 
can the Commission require market participants to submit information so 
you can have better data to guide your analysis?
    Answer. The Commission recognizes the significance of meaningful 
issues raised by commenters regarding costs or benefits and takes those 
comments seriously as it is working on final rules. The Commission does 
not require that commenters provide data with regard to their 
operational costs. For those comments which persuade the Commission to 
modify its proposed rule, the Commission seeks to explain why the 
proposed alternative more effectively furthers the goals of the statute 
in light of the section 15(a) factors, not only in the cost-benefit 
section but throughout the rule's preamble. In contrast, for those 
comments which do not persuade the Commission to modify its proposed 
rule, the Commission seeks to explain its adoption of the proposed rule 
as the most effective means to further the goals of the statute in 
light of section 15(a). The Commission seriously considers commenters' 
concerns regarding costs or benefits and evaluates the alternatives 
presented.

    Question 2c. Would enactment of H.R. 1840 significantly slow down 
the Commission's efforts to implement Dodd-Frank?
    Answer. The bill does include provisions that generally would 
require additional steps in the Commission's regulatory process.

    Question 3. One of your fellow Commissioners recently sent a letter 
to OMB asking them to review some of the CFTC's cost-benefit analysis 
to see if it complied with various Executive Orders and OMB guidance. 
But it is my understanding that these Orders and guidance do not apply 
to the CFTC and that the Commodity Exchange Act's statutory cost-
benefit requirements set the cost-benefit standard that the Commission 
is required to meet. Is my understanding correct? Can the OMB direct 
how the Commission conducts its cost-benefit analysis?
    Answer. The Commission is bound by section 15(a) of the Commodity 
Exchange Act in its rulemaking. The statute includes particularized 
factors to inform cost-benefit analyses that are specific to the 
markets regulated by the CFTC. The Commission's practices are largely 
consistent with the executive order principles.

    Question 4. Last month this Committee passed by a bipartisan vote 
H.R. 2682, legislation to ensure that end-users are not subject to 
margin requirements for their swap transactions. The need for this 
legislation arose from the Prudential Regulators proposing rules that 
would require end-users to post margin. During many of our hearings, 
much attention has been focused on regulatory harmonization between 
agencies. This is an area which could benefit from some harmonization, 
particularly if was in the direction of the CFTC's position of not 
subjecting end-users to margin requirements. Have you been in contact 
with the Prudential Regulators to make the case for the CFTC's 
position? Do you detect any flexibility in their position on this 
issue?
    Answer. The CFTC has been working with the Federal Reserve, the 
other U.S. banking regulators, the SEC, and international regulators 
and policymakers to align margin requirements for uncleared swaps. It 
is essential that we align these requirements globally, particularly 
between the major market jurisdictions. The international approach to 
margin requirements in the consultative paper (sponsored by the Basel 
Committee on Banking Supervision and the International Organization of 
Securities Commissions) released this month is consistent with the 
approach the CFTC laid out in its margin proposal last year. It would 
lower the risk of financial entities, promote clearing and help avoid 
regulatory arbitrage. Consistent with the CFTC's proposal, it also 
excludes non-financial end-users from margin requirements for uncleared 
swaps.
    The CFTC reopened the comment period on our margin proposal so that 
we can hear further from market participants and the public in light of 
the work being done to internationally harmonize margin rules. As we 
work with international regulators on this coordinated approach, I 
would anticipate that the Commission would only take up the final 
margin rules toward the end of this year.

    Question 5. Last month this Committee passed by a bipartisan vote 
H.R. 3527, legislation to clarify the definition of ``swap dealer.'' 
During debate on that bill in the Committee, Members raised questions 
about language in the amended bill which would directed the Commission 
to adopt standards distinguishing the ``dealing'' activities versus 
``entering into swaps for a person's own account for the purpose of 
achieving one's own trading objectives.'' This was an attempt to 
establish some dealer/trader distinction similar to what the SEC has in 
place. I know you are not a lawyer, but to you what does ``achieving 
one's own trading objectives'' mean?

    Question 5a. While the goal of this language was to create a 
dealer/trader distinction, do you believe the language could be read in 
other ways inconsistent with that intent?

    Question 5b. Can you again describe the differences between the 
CFTC and SEC proposed rules regarding the dealer/trader distinction in 
your respective definitions of swap dealer and security-based swap 
dealer? Do you believe such differences are reconcilable?
    Answer 5-5b. The dealer-trader distinction is discussed in the 
preamble to the CFTC and the Securities and Exchange Commission joint 
final rules and interpretive guidance on the further definitions of 
``swap dealer,'' ``security based swap dealer,'' ``major swap 
participant,'' and ``major security based swap participant''. The 
dealer-trader distinction will be useful as one consideration, 
particularly in light of the degree to which it overlaps with many of 
the other characteristics identified in the release that are indicative 
of dealing activity.

    Question 6. There have been several press reports for several 
months now about the CFTC and other federal and foreign financial 
regulators investigating a group of banks for using swaps to manipulate 
the price of the London interbank offered rate (LIBOR). While we know 
you cannot answer questions about the investigation specifically, we 
would like you to answer these more general questions. For the record, 
can you explain the LIBOR, how it affects Americans and the serious 
implications of this potential manipulation?

    Question 6a. Do you have sufficient staff and other resources to 
conduct this investigation?

    Question 6b. A recent Financial Times article (Feb 17, 2012) 
highlighted the role of voice brokers in the LIBOR ``interdealer'' 
market in this investigation. Do you believe there are market 
structures or barriers in place that make it easier for such 
manipulation to occur or harder for regulators to spot it?
    Answer 6-6b. LIBOR and Euribor are indices at the center of the 
capital markets for both borrowings and derivatives contracts. LIBOR is 
the reference index for the largest open interest contracts in both the 
U.S. futures markets and swaps markets. As of the end of June, the 3 
month Eurodollar futures contracts that settle to U.S. Dollar LIBOR 
make up about 70 percent of the notional value of all futures contracts 
traded on the CME Group exchanges. U.S. Dollar LIBOR's traded volume in 
2011 on the CME had a notional value exceeding $564 trillion. According 
to the British Bankers Association, swaps with a total notional value 
of approximately $350 trillion and loans amounting to $10 trillion are 
indexed to LIBOR.
    The CFTC initiated in April of 2008 a review of LIBOR after media 
reports raised questions about the integrity of the index. Thereafter, 
we began coordinating with the United Kingdom's Financial Services 
Authority (FSA), which helped us facilitate information requests. The 
FSA and the U.S. Department of Justice subsequently joined the CFTC 
with regard to the Barclays matter, and it has been a collaborative 
effort throughout.
    To conduct such a complicated case, the CFTC enforcement staff had 
to sift through a voluminous number of documents and audio recordings 
that spanned many years.
    The CFTC's Order found that Barclays traders and employees 
responsible for determining the bank's LIBOR and Euribor submissions 
attempted to manipulate and made false reports concerning both 
benchmark interest rates to benefit the bank's derivatives trading 
positions. The conduct occurred regularly and was pervasive. Barclays' 
traders located at least in New York, London and Tokyo asked Barclays' 
submitters to submit particular rates to benefit their derivatives 
trading positions. In addition, certain Barclays Euro swap traders 
coordinated with and aided and abetted traders at other banks in each 
other's attempts to manipulate Euribor.
    The Order also found that throughout the financial crisis, as a 
result of instructions from Barclays' senior management, the bank 
routinely made artificially low LIBOR submissions. Submitters were told 
not to submit at levels where Barclays was ``sticking its head above 
the parapet.'' The senior management directive was intended to fend off 
negative public perception about Barclays' financial condition.
    The CFTC's Order required Barclays to pay a $200 million civil 
monetary penalty for attempted manipulation of and false reporting 
concerning LIBOR and Euribor. In addition, Barclays is required to 
implement measures to ensure its future submissions are honest.
    Among other things, these requirements include:

   Making submissions based on a transaction-focused 
        methodology;

   Implementing firewalls to prevent improper communications, 
        including between traders and submitters;

   Preparing and retaining documents concerning submissions and 
        certain relevant communications; and

   Implementing auditing, monitoring and training measures 
        concerning submissions and related processes, including making 
        regular reports to the CFTC.

    The CFTC has and will continue vigorously to use our enforcement 
and regulatory authorities to protect the public, promote market 
integrity, and ensure that these benchmarks and other indices are free 
of manipulative conduct and false information. The Commodity Exchange 
Act (CEA) is clear in its prohibitions against attempted and actual 
manipulation of futures, swaps and commodity prices. Further, the CEA's 
Section 9(a)(2) prohibits knowingly making false reports of market 
information that affects or tends to affect the price of a commodity.
Questions Submitted by Hon. Tim Huelskamp, a Representative in Congress 
        from Kansas
    Question 1. During the hearing, you stated that you could not 
exactly recall what you were told during the phone call that occurred 
at 2:30 a.m. the morning of October 31. Were you given any information 
at all about the possibility of misused, misappropriated, commingled, 
or missing funds from segregated customer accounts? What information 
were you given during this phone call?

    Question 1a. If it was not during the 2:30 a.m. phone call, when 
did you learn that money was missing from customers' segregated 
accounts?

    Question 1b. Who else was a part of that conference call in the 
middle of the night? Were there any MF creditors on that call?
    Answer 1-1b. During the phone call, staff of MF Global informed 
regulators that there was a significant shortfall in segregated funds. 
The other participants on the call were staff of the SEC [and possibly 
UK FSA--I have no current recollection]. Other participants on the call 
were the consultants MF Global had retained to support sale of the 
assets of the company. I am not aware of any knowledge that creditors 
of MF Global were on the call.

    Question 2. Once you learned that segregated funds were missing, 
why did you not immediately freeze all MF accounts (including those of 
MF Holdings), to ensure that those funds could be returned to the 
customers?
    Answer. As an initial matter, CFTC has no authority to immediately 
freeze accounts without a court order. While the CFTC did have the 
authority to seek a court order freezing accounts of, or otherwise seek 
a receivership for MF Global, Inc., the FCM/BD, the Securities Investor 
Protection Act provides that after a SIPA filing the court is to stay 
any pending related action. Given that a SIPA proceeding for MF Global, 
Inc. was to be brought, it did not seem in the public interest to bring 
a competing equity receivership proceeding. Moreover, any freeze of MF 
Global, Inc.'s accounts could not, of itself, recover funds that had 
already been transferred out of MF Global, Inc.

    Question 3. In your oral testimony, you said that when the SEC has 
any regulatory authority over a company, then that company can undergo 
a SIPA bankruptcy. Is it mandatory that the bankruptcy be processed 
according to SIPA standards? Why was it decided that the bankruptcy of 
MF Global undergo a SIPA bankruptcy, rather than a Commodities Exchange 
Act bankruptcy?

    Question 4. Who at the CFTC was involved in making the decision 
regarding the type of bankruptcy that should be used in this particular 
situation? Who outside the CFTC was a part of that decision-making 
process? Did anyone at CFTC discuss the structuring of the bankruptcy 
with individuals at MF Global, the SEC, SIPC and/or the DOJ, and/or 
MF's creditors such as JP Morgan or Goldman Sachs? If so, who, when and 
with whom?
    Answer 3-4. Futures Commission Merchants (``FCMs'') are the 
financial intermediaries for futures market transactions. An FCM or 
``commodity broker'' bankruptcy must proceed as a liquidation under 
Chapter 7 of the Bankruptcy Code, rather than a reorganization under 
Chapter 11, and the trustee has specified duties. Chief among those 
duties is to endeavor to transfer the positions of customers of the FCM 
to a solvent FCM. The financial intermediaries for securities are known 
as broker dealers (``BDs''), and the insolvency of a BD proceeds under 
SIPA. The insolvency of an entity that is both a commodity broker and a 
BD (a ``BD/FCM'') will, so long as there is at least one securities 
customer, proceed under SIPA.

    Question 5. FCM's are required to file a monthly report with the 
CFTC detailing the status of segregated customer assets. Did MF Global 
submit their data for September 2011 within the required timeframe?

    Question 5a. When did the CFTC publish this information and/or post 
it to the CFTC website?

    Question 5b. Who is responsible for reviewing this information to 
ensure that segregated funds remain intact?
    Answer 5-5b. Commission regulations require an FCM to file an 
unaudited monthly financial statement with the Commission and with the 
firm's DSRO within 17 business days of the end of the month. MF Global 
submitted its September 30, 2011 financial statements to the Commission 
within the 17 business days required by the regulations.
    FCMs file monthly financial statements with the Commission in an 
electronic format. The CFTC uses an automated program to promptly 
review each FCM financial statement received. The review program 
immediately alerts an assigned Commission staff member if the financial 
statements indicate certain regulatory violations, including a 
violation of segregation or capital requirements.
    MF Global's September 30, 2011 financial statements showed the firm 
to be in compliance with the customer funds segregation and capital 
requirements. Regional examination staff conducts further analysis of 
FCM financial statements after the documents are filed with the 
Commission.
    The CFTC publishes monthly FCM financial data on its website 
shortly after it receives all filings. October 26, 2011 was the 17th 
business day during the month of October 2011. Commission staff was in 
the process of compiling the September 30, 2011 financial data when MF 
Global filed for bankruptcy on Monday, October 31, 2011. Staff did not 
publish MF Global's September 30 financial data as the firm had 
declared bankruptcy prior to the publication of the information, and 
questions existed regarding the accuracy of the firm's books and 
records.

    Question 6. Did you speak with or have any other communication with 
Jon Corzine or any other MF Global executives during the period October 
24-November 5?
    Answer. During some calls with regulators on October 29-30 and into 
the morning of October 31, 2011, MFG representatives and 
representatives of a firm considering facilitating the transfer of MFG 
customer positions also participated. My involvement was in furtherance 
of the CFTC's effort to ensure to the maximum extent possible the 
protection of customer property that had been entrusted to MFG. Though 
it was not always apparent which representatives from MFG were present 
on these calls, to the best of my knowledge and recollection, Mr. 
Corzine was on the line for at least part of one of these calls, and 
discussed matters regarding MFG's European bond positions.

    Question 7. After the CFTC was given an investigative role in the 
bankruptcy of MF Global, it took you a week before you made an 
announcement that you were to be a ``non-participant'' in the 
investigation. What is a ``non-participant'' and how does that differ 
from actually recusing yourself from the investigation? What 
investigatory activities did you participate in or lead before you 
removed yourself from the investigation?

    Question 8. Prior to your becoming a ``non-participant'', what sort 
of responsibilities did you personally have in the oversight of MF 
Global? Were you required to sign off on any reports? Did you write 
reports or conduct any audits or investigations regarding anything at 
MF Global?
    Answer 7-8. For the convenience of the Committee, I include two 
documents which address Questions 7 and 8. The first is the text of my 
statement of non-participation. The second is a Memorandum which 
includes information detailing my activities prior to my withdrawal 
from participation in the matter. (See attachments 1-2).

    Question 9. The Commission recently finalized a rule setting forth 
requirements for margin segregation for cleared swaps, correct?

    Question 9a. And wasn't failure to properly segregate funds for 
futures customers the problem with MF Global?

    Question 9b. Why did you move forward with a segregation rule for 
swaps, without fully understanding what went wrong with the segregation 
regime for futures customers at MF Global? Couldn't the rule have 
benefited from more time to take account of what we're beginning to 
learn about MF Global? Won't you just have to revisit this rule if new 
facts come to light so that you can properly protect swaps customers--
in addition to futures customers?
    Answer 9-9b. The Commission's adoption of final rules for the 
segregation of customer funds for cleared swaps carries out the Dodd-
Frank Act mandate that futures commission merchants (FCMs) and 
derivatives clearing organizations (DCOs) segregate customer collateral 
supporting cleared swaps. FCMs and DCOs must hold customer collateral 
in a separate account from that belonging to the FCM or DCO. It 
prohibits clearing organizations from using the collateral of non-
defaulting, innocent customers to protect themselves and their clearing 
members. For the first time, customer money must be protected 
individually all the way to the clearinghouse.
    We received a tremendous amount of public input on this rule, 
including through two roundtables, as well as through comments on an 
advanced notice of proposed rulemaking and a proposal. This rule builds 
on customer protections included in the clearinghouse core principles 
rule finalized in October requiring DCOs to collect initial margin on a 
gross basis for their clearing members' customer accounts.
    In addition, in February, the Commission held a public roundtable 
on customer protection. Among the topics discussed were protections for 
the collateral of futures customers, consistent with the already-
approved LSOC rule for cleared swaps.

    Question 10. In light of what has happened with MF Global, does the 
Commission intend to recommend changes to the Bankruptcy Code?
    Answer. The Commission has not recommended changes to the 
bankruptcy code. It has adopted important customer protection 
enhancements and continues to review further improvements. The 
completed amendments to rule 1.25 regarding the investment of funds 
bring customers back to protections they had prior to exemptions the 
Commission granted between 2000 and 2005. Importantly, this prevents 
use of customer funds for in-house lending through repurchase 
agreements. Clearinghouses also will have to collect margin on a gross 
basis and futures commission merchants will no longer be able to offset 
one customer's collateral against another and then send only the net to 
the clearinghouse. And the so-called ``LSOC rule'' (legal segregation 
with operational commingling) for swaps ensures customer money is 
protected individually all the way to the clearinghouse.

    Question 11. Segregated funds have been the hallmark of customer 
fund protection. How do you believe customer funds should be treated in 
a bankruptcy scenario and how do you perceive the SIPC trustee is 
handling the funds of futures customers? If this was a CFTC led 
process, would the funds of futures customers be treated differently?
    Answer. Commodity customers in a SIPA proceeding do not suffer any 
disadvantage relative to commodity customers in a subchapter IV, 
Chapter 7 bankruptcy proceeding.
Questions Submitted by Hon. Randy Hultgren, a Representative in 
        Congress from Illinois
    Question 1. The CFTC recently approved the final rule regarding 
registration requirements for market participants. However, since the 
joint rule on entity definitions and a determination of what a ``swap'' 
contract will be, many market participants are still unclear if they 
will have to register with the CFTC. Will additional time be provided 
by the CFTC for participants to comply with new registration 
requirements? Will the CFTC wait to apply these registration 
requirements until the final entity definitions have been completed? 
When does the CFTC expect market participants to be fully capable of 
compliance?
    Answer. A swap dealer or a major swap participant is not required 
to apply for registration until 60 days after the joint final rule 
further defining the term ``swap'' is published in the Federal 
Register. Staff for the CFTC's Division of Market Oversight has already 
provided relief for some firms in the form of a ``no-action'' letter. 
That relief is intended to provide sufficient time for nonclearing 
member swap dealers to transition. The Commission is working with 
market participants and will continue to do so.

    Question 2. Please describe the challenges experienced by the CFTC 
and SEC when engaging in joint rulemaking and other coordinated 
efforts. Specifically, please explain how agency coordination, or lack 
thereof, has complicated the process of defining ``swap''.
    Answer. The CFTC and SEC consult and coordinate extensively to 
harmonize to the greatest extent possible on Dodd-Frank rules. This 
close coordination will continue and always benefits the rulemaking 
process. The two agencies recently adopted joint final rules further 
defining the terms ``swap'' and ``security-based swap.''

    Question 3. In the CFTC's efforts to understand high frequency 
trading, what stakeholder groups do you think should be consulted and 
how involved with market participants be in this process?

    Question 4. Is proprietary algorithmic trading data necessary to 
understanding the development of high frequency trading practices and 
what protections will be extended to this sensitive information when it 
is share with the CFTC?

    Question 5. When considering high frequency traders, will the 
aggregate value of trades and total volume of trades be considered?
    Answer. 3-5 In analyzing HFT activity, the Commission has consulted 
stakeholder groups with substantial knowledge of these trading 
practices. The Technology Advisory Subcommittee on High-Frequency 
Trading of the Commission was established in March of 2012, and 
includes experts from exchanges, clearing firms, sell-side firms, buy-
side (hedging) institutions, data and technology service providers, 
academia, SROs and high-frequency firms themselves. A sequence of 
public meetings have been held to present, discuss and debate the 
findings and deliberations of the highly qualified members of the 
Subcommittee and in the process, help the Commission develop a detailed 
picture of high-frequency and other automated trading styles and their 
potential impact on the market.

    Question 6. Has the CFTC considered how the indemnification 
provision of Dodd-Frank could undermine the mitigation of systematic 
risk and hamper transparency in the over-the-counter (OTC) derivatives 
market? How does the CFTC think these negative consequences could be 
avoided?
    Answer. On May 1, of this year, the Commission issued a Proposed 
Interpretative Statement regarding the confidentiality and 
indemnification provisions in the Dodd-Frank Act. The proposal 
generally exempts foreign regulators from the indemnification and 
confidentiality provision in the Dodd-Frank Act, and ensures that 
foreign regulators have access to data in Swap Data Repositories (SDR). 
This exemption only applies to data that is required to be reported and 
if the SDR is recognized by the country's law and regulation.

    Question 7. The House Agriculture Committee recently passed H.R. 
1810 that would require a comprehensive cost-benefit analysis by CFTC 
of its rules and orders. How would this legislation, if passed, change 
the cost-benefit analysis currently preformed by CFTC related to the 
Dodd-Frank Act?
    Answer. Section 15(a) of the Commodity Exchange Act (CEA) currently 
requires the CFTC, before it promulgates a regulation, to ``consider 
the costs and benefits of the action.'' H.R. 1840 would amend section 
15(a) to require that such determinations be done through the 
Commission's Office of the Chief Economist. It would require that the 
Commission consider qualitative and quantitative costs and benefits, 
and specify that the Commission could propose or adopt a regulation on 
a reasoned determination that the benefits of the intended regulation 
justify the costs of the intended regulation.

    Question 8. Of the estimated 286 rulemakings requirements with 
specified deadlines in Dodd-Frank, well over half are still 
outstanding. While the CFTC has been better than some of its sister 
regulators, statutory rulemaking deadlines have been missed or delayed. 
Is it fair to say that, as passed, Dodd-Frank set an overly ambitious 
timetable for the development and finalization of the many new rules 
included?
    Answer. The Commission has made significant progress in 
implementing Congress' direction to ensure that common-sense standards 
are established for the swaps market. To date, we've completed 36 rules 
and now have fewer than 20 to go. We are working to complete these 
rules in a thoughtful, balanced way--not against a clock.

    Question 9. Recently former CFTC Commissioner Sharon Brown-Hruska 
from NERA authored a report that estimated the cost for a non-financial 
energy firm to comply with the obligations of a Swap dealer. The report 
estimates that non-financial energy firms designated as swap dealers 
will incur more the $70 million of annual (year-one) costs to comply 
with the CFTC's proposed rules. The CFTC estimated the annual cost of 
compliance with its Swap dealer rules at roughly $2 million. Will the 
CFTC reexamine its cost-benefit analysis of the Swap Dealer definition 
to address the omissions cited in the NERA report? How will the CFTC 
ensure that the Swap Dealer definition will not impose an undue burden 
without a detailed reexamination of its cost-benefit studies?
    Answer. The CFTC strives to include well-developed considerations 
of costs and benefits in each of its proposed rulemakings. Relevant 
considerations are presented not only in the cost-benefit analysis 
section of the CFTC's rulemaking releases, but additionally are 
discussed throughout the release in compliance with the Administrative 
Procedure Act (APA). The APA requires the CFTC to set forth the legal, 
factual and policy bases for its rulemakings.
    In addition, Commissioners and staff have met extensively with 
market participants and other interested members of the public to hear, 
consider and address their concerns in each rulemaking. CFTC staff 
hosted a number of public roundtables so that rules could be proposed 
in line with industry practices and address compliance costs consistent 
with the obligations of the CFTC to promote market integrity, reduce 
risk and increase transparency as directed in Title VII of the Dodd-
Frank Act. Information from each of these meetings--including full 
transcripts of the roundtables--is available on the CFTC's website and 
has been factored into each applicable rulemaking.
    With each proposed rule, the Commission has sought public comment 
regarding costs and benefits. The Commission welcomes each comment and 
incorporates those comments--including those relating to costs--in 
development of its final rule.
Questions Submitted by Hon. William L. Owens, a Representative in 
        Congress from New York
    Question 1. In your testimony, you note that the CFTC intends to 
follow Congressional intent by ensuring that non-financial companies 
using swaps to hedge or mitigate commercial risk will not be required 
to bring swaps into central clearing. However, you also claim the 
Commission's proposed rule adheres to this structure, despite many end-
users claiming to the contrary. How do you account for this 
discrepancy?
    Answer. Congress provided that non-financial entities, such as 
farmers, ranchers, manufacturers and other end-users, should be able to 
choose whether or not to clear those swaps that hedge or mitigate 
commercial risks. The Commission's final rule implements this exception 
for non-financial entities, establishing criteria for hedging or 
mitigating commercial risk and imposing minimal reporting requirements 
for those swaps that come under the end-user exception.

    Question 2. The CFTC has approved the final rule requiring market 
participants to register with the CFTC but delayed a vote on finalizing 
definitions. Will the Commission be providing additional time for 
market participants to comply with this registration requirement so 
that this requirement is not effective until the final entity 
definitions has been completed?
    Answer. A swap dealer or a major swap participant is not required 
to apply for registration until 60 days after the joint final rule 
further defining the term ``swap'' is published in the Federal 
Register. Staff for the CFTC's Division of Market Oversight has already 
provided relief for some firms in the form of a ``no-action'' letter. 
That relief is intended to provide sufficient time for nonclearing 
member swap dealers to transition. The Commission is working with 
market participants and will continue to do so.

    Question 3. In your testimony, you note that you anticipate the 
Commission will seek public input on the extraterritorial application 
of Title VII. Can you shed some light on when the CFTC intends to 
propose a formal rulemaking process on the extraterritorial application 
of Dodd-Frank and if you believe these requirements should extend to 
transactions which are conducted outside of the United States through 
either foreign affiliates of domestic firms or by foreign entities with 
non-U.S. persons?
    Answer. On June 29, 2012, the CFTC approved proposed interpretive 
guidance on the cross-border application of the Swaps Provisions of the 
Dodd-Frank Act and the Commission's regulations. The proposed guidance 
interprets Section 722(d) of the Dodd-Frank Act, which states that the 
swaps provisions of the CEA shall not apply to activities outside the 
United States unless those activities have a direct and significant 
connection with activities in, or effect on, commerce of the United 
States. The guidance will be open for public comment for 45 days. While 
the Commission is not required to solicit public comment on 
interpretive guidance, I am particularly interested in the public's 
input and look forward to comments on the proposed guidance.

    Question 4. The House Agriculture Committee recently approved (H.R. 
2779) legislation that would exempt certain inter-affiliate 
transactions of swap dealers from meeting margin and clearing 
requirements. You note in your testimony that you expect the Commission 
to consider a proposal on this issue later this year. Do you expect the 
Commission's rules to mirror the SEC's?
    Answer. The Commission has benefitted from substantial public input 
on the treatment of swaps among affiliates of the same business entity. 
To address commenters' questions about a possible clearing requirement 
between affiliates of financial entities, I expect the Commission to 
consider a proposal and take public comments in the near future. The 
staff recommendation, which would exempt certain affiliate swaps from 
the clearing requirement, is under review by commissioners. The 
Commission will continue to consult closely with the SEC.

    Question 5. With respect to the swap dealer definition, will the 
CFTC clearly define Market Making in a manner that provides clarity to 
market participants as to what distinguishes Market Making from other 
market activity that end-users engage in, such as hedging risk? Will 
you support a specific exemption from swap dealing for commercial 
hedging in the rule?
    Answer. On April 18, 2012 the Commission adopted a joint final 
rule, required by Section 712(d)(1) of the Dodd-Frank Act with the SEC 
further defining the terms ``swaps dealer,'' and ``major swaps 
participant.'' The rulemaking incorporates an interim final rule, such 
that swaps a person enters into for the purpose of hedging price risks 
related to physical positions are inconsistent with swap dealing, and 
are excluded from the swap dealer determination. The interim final rule 
draws upon principles in the Commission's long standing interpretation 
of bona fide hedging. It excludes swap activity for the purpose of 
portfolio hedging and anticipatory hedging. However, the CFTC is not 
adopting a per se exclusion of all swaps that hedge or mitigate risk. 
If a swap is not entered into for the specific hedging purposes 
identified in the rule, then all relevant facts and circumstances about 
the swap would be considered in determining if the person is a swap 
dealer. The CFTC is looking forward to receiving comment on the interim 
final rule.

    Question 6. Will you support a clear distinction between dealing 
activity and trading activity within the finalized definitions?
    Answer. The dealer-trader distinction is discussed in the preamble 
to the CFTC and the Securities and Exchange Commission joint new final 
rules and interpretive guidance on the further definitions of ``swap 
dealer,'' ``security based swap dealer,'' ``major swap participant,'' 
and ``major security based swap participant''. The CFTC anticipates 
that the dealer-trader distinction will be useful as one consideration, 
particularly in light of the degree to which it overlaps with many of 
the other characteristics identified in the release that are indicative 
of dealing activity.
                              attachment 1
November 8, 2011
Statement of Non-Participation
    With respect to the recent matters involving MF Global, the staff 
at the CFTC is working hard to recover customers' funds and to find out 
what happened to the missing customer money and how it happened. The 
CFTC has a tremendously capable staff and I do not want my 
participation to be in any way a distraction in this important matter.
    Accordingly, I have determined that I will not participate 
personally and substantially in any enforcement matter involving 
specific parties MF Global, MF Global Holdings Ltd., MF Global Inc., 
and J.C. Flowers & Co. (the ``specific parties''), and any matter 
directly related thereto. I will advise my principal subordinates of my 
decision not to participate in these matters. I also will instruct my 
principal subordinates that all inquiries and comments involving any of 
the matters described above should be directed to Dan Berkovitz, the 
General Counsel of the CFTC who will act on my behalf, without my 
knowledge or involvement.
    In order to help ensure that I do not inadvertently participate 
personally and substantially in any particular matter that could have a 
direct or predictable effect on the specific parties with respect to 
such matters described above, I am directing Mr. Berkovitz to seek 
assistance from the alternate designated agency ethics official if he 
is ever uncertain whether or not I may participate in a matter.
    I have instructed David Stawick, the Secretary of the Commission, 
to screen all CFTC matters directed to my attention that involve 
outside entities or that require my participation, to determine if they 
involve any of the specific parties and matters listed above. If Mr. 
Stawick determines that a matter involves any of the specific parties 
and matters, he will refer it to the appropriate official to take 
action without my knowledge or involvement.



 Hon. Gary Gensler,                   Date
Chairman.
                              attachment 2
Confidential Memorandum
    To: Chairman Gensler



    From: Dan M. Berkovitz,
          General Counsel and Designated Agency Ethics Official



          John P. Dolan,
          Counsel and Alternate Designated Agency Ethics Official
    Date: December 13, 2011
    Subject: Participation in Matters Concerning MF Global, Inc.
I. Introduction and Summary
    Pursuant to 5 CFR  2635.502, the Commodity Futures Trading 
Commission (CFTC or Commission) designated agency ethics official 
(DAEO) has undertaken this review of the participation of CFTC Chairman 
Gary Gensler in certain CFTC matters regarding MF Global, Inc. (MFGI), 
a futures commission merchant (FCM) registered with the CFTC. During 
the 1980s and 1990s Chairman Gensler and the former President and Chief 
Executive Officer (CEO) of MFGI, Jon Corzine, worked together and were 
partners at Goldman Sachs (GS), an investment bank.\1\
---------------------------------------------------------------------------
    \1\ Mr. Corzine resigned as President and CEO of MFGI on Friday, 
November 4, 2011.
---------------------------------------------------------------------------
    On November 3, 2011, the General Counsel and DAEO provided Chairman 
Gensler with an oral opinion that the Chairman was not required to 
withdraw from participation in MFGI matters as a result of his prior 
relationship with Mr. Corzine. On that same date Chairman Gensler 
nonetheless elected to not participate in enforcement matters related 
to MFGI.\2\ Following this decision, the General Counsel and DAEO and 
ADAEO decided to undertake this review to determine whether Chairman 
Gensler's participation in matters involving MFGI was appropriate.
---------------------------------------------------------------------------
    \2\ On November 8, 2011, Chairman Gensler executed a ``Statement of 
Non-Participation.'' This statement explained the Chairman's decision: 
``With respect to the recent matters involving MF Global, the staff at 
the CFTC is working hard to recover customers' funds and to find out 
what happened to the missing customer money and how it happened. The 
CFTC has a tremendously capable staff and I do not want my 
participation to be in any way a distraction in this important 
matter.''
---------------------------------------------------------------------------
    Based on the facts and circumstances detailed in this memorandum, 
and based upon the standards set forth in 5 CFR  2635.502, this review 
concludes that Chairman Gensler was not required to withdraw from 
matters involving MFGI. From a legal and ethical perspective, Chairman 
Gensler's participation in Commission matters involving MFGI was not 
improper.
II. Factual Background
A. MF Global, Inc.
    Subsidiary of MF Global

    MG Global is a financial business comprising a holding company, MF 
Global Holdings Ltd., a Delaware corporation headquartered in New York 
City, and a variety of subsidiaries located in the United States and 
other countries.\3\ One of the subsidiaries is MFGI, which is an FCM 
registered with the CFTC as well as a securities broker-dealer 
registered with the SEC.\4\ According to the Annual Report (SEC Form 
10-K) filed by MF Global Holdings Ltd. in May 2011, MF Global is a 
broker in markets for commodities and listed derivatives and a broker-
dealer in markets for commodities, fixed income securities, equities, 
and foreign exchange.\5\
---------------------------------------------------------------------------
    \3\ MF Global Holdings Ltd. Form 10-K for fiscal year ended March 
31, 2011 at 1, http://www.sec.gov/Archives/edgar/data/1401106/
000119312511145663/d10k.htm (accessed November 6, 2011); see 
Disclaimer, MF Global Website, http://www.mfglobal.com/disclaimer 
(accessed November 6, 2011).
    \4\ Disclaimer, MF Global Website, http://www.mfglobal.com/
disclaimer (accessed November 6, 2011).
    \5\ MF Global Holdings Ltd. Form 10-K for fiscal year ended March 
31, 2011 at 5, http://www.sec.gov/Archives/edgar/data/1401106/
000119312511145663/d10k.htm (accessed November 6, 2011).

---------------------------------------------------------------------------
    MFGI Bankruptcy

    On October 31, 2011, the Securities Investor Protection Corporation 
(SIPC) filed an application for the entry of a protective order in the 
U.S. Bankruptcy Court placing MFGI in liquidation under the Securities 
Investor Protection Act (SIPA). On that same date, ``the Commission's 
Division of Enforcement opened an investigation into whether the 
Commodity Exchange Act (CEA) or Commission regulations were violated in 
connection with MFGI, and the Commission [] authorized the Division to 
issue subpoenas.'' \6\
---------------------------------------------------------------------------
    \6\ CFTC Press Release, PR6140-11, November 10, 2011.
---------------------------------------------------------------------------
    In a filing on November 2, the Commission informed the Bankruptcy 
Court that it ``intends to take all appropriate action, within the 
purview of the Bankruptcy Code and the [CEA], to ensure that customers 
maximize their recovery of funds and to discover the reason for the 
shortfall in segregation.'' \7\
---------------------------------------------------------------------------
    \7\ Statement of Commodity Futures Trading Commission in Support of 
the Trustee's Emergency Motion for an Order Approving the Transfer of 
Certain Segregated Customer Commodity Accounts of MF Global Inc. and 
Related Margin and Motion for Expedited Hearing, MFGI Bankruptcy Case, 
November 2, 2011.

---------------------------------------------------------------------------
    Key officials

    Jon S. Corzine was the Chairman and Chief Executive Officer of MF 
Global Holdings Ltd. until his recent resignation.\8\ According to the 
MF Global website, Mr. Corzine also is an operating partner at J.C. 
Flowers & Co. LLC.\9\ According to the MF Global website, Mr. Corzine 
joined GS as a fixed income trader in 1975 and subsequently served as 
chief financial officer and as chairman and senior partner from 1994 
through 1999.\10\
---------------------------------------------------------------------------
    \8\ Executive Officers Biography, MF Global Website, http://
www.mfglobalinvestor
relations.com/phoenix.zhtml?c=194911&p=irol-govManage (accessed 
November 6, 2011).
    \9\ Executive Officers Biography, MF Global Website, http://
www.mfglobalinvestor
relations.com/phoenix.zhtml?c=194911&p=irol-govBio&ID=198970 (accessed 
November 6, 2011).
    \10\ Id.
---------------------------------------------------------------------------
    Bradley I. Abelow is the President and Chief Operating Officer of 
MF Global Holdings Ltd.\11\ According to the MF Global website, Mr. 
Abelow previously was a partner and managing director of GS, where he 
managed the operations group.\12\ Earlier he was responsible for GS's 
operations, technology, risk, and finance functions in Asia.\13\ He 
joined GS in 1989.\14\
---------------------------------------------------------------------------
    \11\ Executive Officers Biography, MF Global Website, http://
www.mfglobalinvestor
relations.com/phoenix.zhtml?c=194911&p=irol-govManage (accessed 
November 6, 2011).
    \12\ Executive Officers Biography, MF Global Website, http://
www.mfglobalinvestor
relations.com/phoenix.zhtml?c=194911&p=irol-govBio&ID=204097 (accessed 
November 6, 2011).
    \13\ Id.
    \14\ Id.
---------------------------------------------------------------------------
    Laurie R. Ferber is the General Counsel of MF Global Holdings 
Ltd.\15\ According to the MF Global website, Ms. Ferber worked for GS 
for over 20 years beginning in 1987.\16\ She held a number of different 
positions including serving as co-general counsel of the Fixed Income, 
Currency and Commodities Division and launching and running the 
economic derivatives business.\17\
---------------------------------------------------------------------------
    \15\ Executive Officers Biography, MF Global Website, http://
www.mfglobalinvestor
relations.com/phoenix.zhtml?c=194911&p=irol-govManage (accessed 
November 6, 2011).
    \16\ Executive Officers Biography, MF Global Website, http://
www.mfglobalinvestor
relations.com/phoenix.zhtml?c=194911&p=irol-govBio&ID=186545 (accessed 
November 6, 2011).
    \17\ Id.
---------------------------------------------------------------------------
    J. Christopher Flowers is the founder and executive chairman of 
J.C. Flowers & Co. LLC, a private equity firm.\18\ According to press 
reports, J.C. Flowers & Co. owns preferred stock in MF Global that, if 
converted to common stock, would amount to 6% of the total.\19\ Also 
according to press reports, Mr. Flowers worked with Mr. Corzine at GS 
and later recommended that Mr. Corzine take over as MF Global's 
chairman and chief executive officer in March 2010.\20\
---------------------------------------------------------------------------
    \18\ J.C. Flowers & Co. LLC: Private Company Information--
Businessweek, (accessed November 6, 2011) http://
investing.businessweek.com/research/stocks/private/snapshot.asp?privcap
Id=1089967.
    \19\ J.C. Flowers Fund Said to See $47.8 Million Loss on MF 
Global--Businessweek (November 2, 2011), http://www.businessweek.com/
news/2011-11-02/jc-flowers-fund-said-to-see-47-8-million-loss-on-mf-
global.html (accessed November 6, 2011).
    \20\ Id.
---------------------------------------------------------------------------
B. Relationship Between Chairman Gensler and Mr. Corzine \21\
---------------------------------------------------------------------------
    \21\ The facts in this section are based primarily upon an 
interview with Chairman Gensler conducted on November 4, 2011.
---------------------------------------------------------------------------
    Chairman Gensler's Employment at GS

    Chairman Gensler worked at GS from September 1979 until September 
1997, when he left to serve as Assistant Secretary of Treasury for 
Financial Markets.\22\ In late 1988, when Chairman Gensler became a 
partner in the firm, there were approximately 128 partners at GS, 
including Chairman Gensler and Mr. Corzine.\23\
---------------------------------------------------------------------------
    \22\ Chairman Gensler served as Assistant Secretary for Financial 
Markets from September 1997 until April 1999, and as Under Secretary of 
Treasury for Domestic Finance from April 1999 to January 2001.
    \23\ By 1997, when Chairman Gensler left GS, there were 
approximately 190-200 partners at GS.
---------------------------------------------------------------------------
    From his arrival at GS in 1979 until late 1991 or early 1992, 
Chairman Gensler worked in the Mergers and Acquisitions (M&A) 
Department.\24\ In late 1991 or early 1992, Chairman Gensler and a few 
other junior partners at the firm were asked to transfer to other 
departments as part of their career development. The transfers were 
suggested by Mr. Robert Rubin (the co-Chairman and Co-Senior Partner of 
GS at the time) and Mr. Corzine (the co-head of the fixed income 
department (FI) at the time). Mr. Gensler was asked to transfer to FI 
and agreed.
---------------------------------------------------------------------------
    \24\ Chairman Gensler spent approximately 6-12 months during the 
1983-1984 time period on the equity trading floor as part of a 
``mobility program.''
---------------------------------------------------------------------------
    Chairman Gensler's initial assignment in FI was in the mortgage 
trading department. In this capacity, he reported to Michael Mortara, 
who reported to Mr. Corzine and the other co-head of FI, Mr. Mark 
Winkelman. Chairman Gensler, Mr. Mortara, and Mr. Corzine all worked on 
the fixed income trading floor.
    In January 1993, Mr. Corzine requested, and Chairman Gensler 
agreed, that Chairman Gensler serve as co-head of fixed income trading 
in the GS office in Tokyo, Japan. Chairman Gensler served in this 
position until late 1994. During this two-year period, Mr. Corzine and 
Mr. Winkelman were Chairman Gensler's direct supervisors.
    In the fall of 1994, Chairman Gensler was asked by Mr. Steve 
Friedman, who was then co-head of GS with Mr. Rubin, to transfer out of 
FI to be the head of the Operations, Technology, and Finance Division 
(OTF) in Asia. Chairman Gensler reported to Mr. John Thain, head of 
worldwide OTF. Shortly thereafter, Mr. Corzine became the Senior 
Partner of GS and Chairman of the Management Committee.\25\
---------------------------------------------------------------------------
    \25\ Executive functions were shared between Mr. Corzine and Mr. 
Henry Paulson, who served as Chief Operating Partner and Vice Chairman 
of the Management Committee. Mr. Thain reported to Mr. Corzine and Mr. 
Paulson.
---------------------------------------------------------------------------
    Chairman Gensler returned to New York in November 1995 to become 
co-head of Finance. In this position, Chairman Gensler continued to 
report to Mr. Thain, who continued to report to Mr. Corzine and Mr. 
Paulson. As co-head of Finance, Chairman Gensler served on various 
committees of the firm, including the Risk Committee. Mr. Corzine also 
was a member of the Risk Committee (which had approximately 10-15 
members), and sometimes he participated on other committees, too. 
Chairman Gensler served as co-head of Finance until he left GS in 1997 
for the Treasury Department. Prior to leaving GS, Chairman Gensler 
visited with Mr. Corzine at the latter's apartment to provide departing 
observations.\26\
---------------------------------------------------------------------------
    \26\ Mr. Corzine subsequently left GS in early 1999.

---------------------------------------------------------------------------
    After Chairman Gensler Left GS

    To the best of his recollection, Chairman Gensler believes he did 
not see Mr. Corzine for 3 years after Chairman Gensler left GS.\27\ 
While Chairman Gensler served at Treasury, the only time that he saw 
Mr. Corzine was in late 2000 or early 2001. Then-Senator-elect Corzine 
had come to the Treasury Department to visit with Secretary of Treasury 
Lawrence Summers, and following the meeting with Secretary Summers, Mr. 
Corzine stopped by to say hello to then-Under Secretary Gensler.
---------------------------------------------------------------------------
    \27\ Chairman Gensler believes that he may have spoken with Mr. 
Corzine once or twice by telephone while serving at Treasury, but 
cannot specifically recall any such conversations.
---------------------------------------------------------------------------
    In early 2002, Chairman Gensler volunteered to serve as an advisor 
to Senator Paul Sarbanes on legislation that eventually was enacted as 
the Sarbanes-Oxley Act. Senator Sarbanes was Chairman of the Senate 
Committee on Banking, Housing and Urban Affairs and Senator Corzine was 
a Member of the same Committee. In his role as advisor to Senator 
Sarbanes, Chairman Gensler occasionally spoke with Senator Corzine 
about the pending legislation. Chairman Gensler also spoke with Senator 
Corzine while Chairman Gensler, Senator Sarbanes, and Senator Corzine 
were on the Senate floor during the consideration of the legislation 
for final Senate passage.
    In 2003-2004, Chairman Gensler served as Treasurer of the Maryland 
State Democratic Party. During the same time, Senator Corzine became 
head of the Democratic Senatorial Campaign Committee. As a result of 
their fundraising responsibilities, Chairman Gensler saw Senator 
Corzine at several political events attended by large numbers of 
people. This included an event to support the campaign of Senator Kerry 
for President in 2004, which was attended by approximately 400 others, 
including other Members of Congress.
    In 2005, Chairman Gensler was invited to a fundraiser in 
Washington, D.C., for the New Jersey State Democratic Party. 
Approximately 100 people attended, including both Senator Corzine and 
the other Senator from New Jersey, Senator Frank R. Lautenberg. At the 
time, Senator Corzine was campaigning to be elected Governor of New 
Jersey. As a participant in the fundraiser, Chairman Gensler 
contributed $10,000 to the New Jersey State Democratic Party (as he 
similarly contributed to the State Democratic Party of several other 
States), which earned him the title of being a ``host'' of the 
fundraiser.\28\ Chairman Gensler did not see Governor Corzine for 
another 3 years.
---------------------------------------------------------------------------
    \28\ Chairman Gensler's contribution was to the New Jersey State 
Democratic Party, not directly to Senator Corzine's campaign for 
Governor.
---------------------------------------------------------------------------
    During the primary season for the 2008 Presidential campaign, 
Chairman Gensler first served as an unpaid senior advisor to the 
campaign of then-Senator Hilary Clinton. Chairman Gensler recalls 
speaking with Governor Corzine on a couple of occasions to answer 
Governor Corzine's questions about Senator Clinton's positions on 
various policy issues. Chairman Gensler recalls seeing Governor Corzine 
at a fundraising event in New Jersey in either August or September of 
2008 for then-Senator Obama.

    Chairman Gensler's Tenure at the CFTC

    Chairman Gensler began serving as Chairman of the CFTC in May 2009. 
At the time he joined the CFTC, Chairman Gensler determined not to 
participate in any CFTC matters involving GS.
    Shortly after joining MFGI in March 2010, Mr. Corzine met with 
Chairman Gensler and the Chairman's staff at CFTC headquarters. Mr. 
Corzine requested the meeting, which Chairman Gensler recalls as a 
``meet and greet'' and that Mr. Corzine did not make any specific 
requests to Chairman Gensler.
    In November 2010, Mr. Corzine asked Chairman Gensler to speak at a 
seminar at Princeton University that Mr. Corzine was conducting on 
financial institutions and regulation.\29\ Mr. Andrew Ross Sorkin also 
spoke at this seminar, and Mr. Corzine introduced both of them. 
Following the seminar, Chairman Gensler joined Mr. Corzine and 
approximately 15-20 students for dinner.\30\ Chairman Gensler and Mr. 
Corzine did not discuss any issues relating to MFGI while Chairman 
Gensler was at Princeton.
---------------------------------------------------------------------------
    \29\ A copy of Chairman's Gensler's speech can be found at: http://
www.cftc.gov/PressRoom/SpeechesTestimony/2010/index.htm. (last visited 
Nov. 6, 2011).
    \30\ Mr. Sorkin was unable to stay for the dinner.
---------------------------------------------------------------------------
    In December 2010, Mr. Corzine and Ms. Ferber met with Chairman 
Gensler and other CFTC staff. Chairman Gensler does not recall the 
subject of the meeting or the matters discussed.
    In June 2011, Chairman Gensler was the keynote speaker at lunch at 
a conference sponsored by Sandler O'Neill and Partners, an investment 
banking and broker/dealer firm.\31\ Mr. Corzine was seated at the same 
table as Chairman Gensler during the lunch. The invitation did not come 
from Mr. Corzine, and Chairman Gensler and Mr. Corzine did not discuss 
any issues relating to MFGI while Chairman Gensler was at the 
conference.
---------------------------------------------------------------------------
    \31\ The firm regularly sponsors such conferences. See, e.g., 
https://register.sandleroneill.com/conferences/ (last visited Nov. 6, 
2011).
---------------------------------------------------------------------------
    In September 2011, Chairman Gensler and Mr. Corzine were both 
wedding guests of mutual acquaintances. Chairman Gensler and Mr. 
Corzine did not discuss any issues relating to MFGI while attending the 
wedding.
    Chairman Gensler has been on two conference calls with Mr. Corzine 
during his term as Chairman of the CFTC. The first, on July 20, 2011, 
was a conference call to discuss topics relating to a rulemaking 
regarding CFTC Rules 1.25 and 30.7.\32\ Second, Chairman Gensler 
participated in a series of conference calls with other regulatory 
authorities and MFGI during the days leading up to the filing of the 
MFGI bankruptcy proceedings. Chairman Gensler is aware that Mr. Corzine 
was on the line for at least part of one of these calls, regarding the 
European bond portfolio.\33\ Since becoming Chairman of the CFTC, 
Chairman Gensler has not had any private telephone conversations with 
Mr. Corzine.\34\
---------------------------------------------------------------------------
    \32\ A record of this call can be found at http://www.cftc.gov/
LawRegulation/DoddFrankAct/ExternalMeetings/dfmeeting_072011_928 (last 
visited Nov. 7, 2011). In response to media questions as to whether a 
delay in consideration of this rulemaking showed favoritism to MFGI, 
Chairman Gensler has stated that he has ``been consistent on this rule, 
and I allowed more time for others to continue to look at it.'' See 
Silla Brush, Bloomberg, ``MF Global Didn't Get Preferential Treatment, 
CFTC's Gensler,'' Nov. 7. 2011.
    \33\ It is possible that Mr. Corzine was on the line during other 
portions of these conference calls.
    \34\ On November 8, 2011, BNA reported that Chairman Gensler and 
Mr. Corzine spoke shortly after Mr. Corzine resigned from his positions 
at MF Global. See Steven Joyce, BNA, ``Gensler Says Recusal Decision 
Made Days Before Corzine Resignation, Grassley Letter,'' Nov. 8, 2011. 
This report is not accurate; the reported conversation between Chairman 
Gensler and Mr. Corzine did not occur.

---------------------------------------------------------------------------
    Summary

    Chairman Gensler worked with Mr. Corzine during the last 6 years of 
Chairman Gensler's tenure at GS. During two of those years (1993-1994), 
Chairman Gensler reported directly to co-heads Messrs. Corzine and 
Winkelman; during the other 4 years, Mr. Corzine was his second-level 
supervisor. Their relationship during this period was solely 
professional. Chairman Gensler and Mr. Corzine did not socialize or 
spend time together apart from their mutual professional 
activities.\35\
---------------------------------------------------------------------------
    \35\ Chairman Gensler recalls one non-professional interaction that 
indirectly involved Mr. Corzine during his tenure at GS. In 1991, 
Chairman Gensler learned that Mr. Corzine had registered to run in the 
New York City Marathon that year. Chairman Gensler recalls that he 
asked Mr. Corzine's secretary whether Mr. Corzine actually was going to 
run the marathon. A few weeks later Mr. Corzine's secretary told 
Chairman Gensler that Mr. Corzine would not run in the race and would 
not use the number he had been provided. Mr. Corzine's secretary gave 
Mr. Corzine's number to Mr. Gensler, who then used Mr. Corzine's bib 
number in the race.
---------------------------------------------------------------------------
    Since the time they worked together at GS over 14 years ago, 
Chairman Gensler's contacts with Mr. Corzine have been infrequent. 
Generally, they have met when they both were present at a function 
organized by others. Similarly, Chairman Gensler has not socialized 
with Mr. Corzine after his departure from GS, nor have their families 
socialized with each other. Chairman Gensler and Mr. Corzine do not 
correspond with each other; Chairman Gensler does not recall any e-
mails or other electronic communications between himself and Mr. 
Corzine for at least as far back as 10 years. Chairman Gensler does not 
carry Mr. Corzine's personal phone number in his cell phone directory.
    Chairman Gensler and Mr. Corzine have never attended any of each 
other's major non-professional life-events during the entire time they 
have known each other. Mr. Corzine did not attend Chairman Gensler's 
wedding (which occurred while Chairman Gensler was at GS), the bat-
mitzvahs of Chairman Gensler's daughters, or the funeral of Chairman 
Gensler's wife. Similarly, Chairman Gensler did not attend Governor 
Corzine's inaugural in 2005 or his wedding in 2010.
    Chairman Gensler did not ask Mr. Corzine for support of his 
nomination as CFTC Chairman. He has never contributed directly to any 
of Mr. Corzine's electoral campaigns. He has raised money for several 
national Democratic figures, but has never solicited a campaign 
contribution for Mr. Corzine. Nor does he recall ever soliciting a 
campaign contribution from Mr. Corzine.
C. Relationship Between Chairman Gensler and Other Former GS Officials 
        Working for or on Behalf of MFGI \36\
---------------------------------------------------------------------------
    \36\ The facts in this section are based primarily upon an 
interview with Chairman Gensler conducted on November 4, 2011.
---------------------------------------------------------------------------
    Certain other current MFGI employees and officials previously 
worked at GS at the same time as Chairman Gensler. Chairman Gensler's 
relationship with these individuals is as follows:

    Brad Abelow

    Mr. Abelow became a partner at GS at around the time that Chairman 
Gensler was leaving GS. At some point, Mr. Abelow became head of OTF in 
Asia, the position Chairman Gensler had previously occupied. Chairman 
Gensler recalls that when he was in OTF he and Mr. Abelow had a 
``weekly to bi-weekly working relationship.''
    After leaving GS, Chairman Gensler did not see Mr. Abelow until 
August or September 2008, at a fundraiser for the Presidential campaign 
of then-Senator Obama. As previously noted, Governor Corzine also 
attended this event. At the time, Mr. Abelow was Governor Corzine's 
Chief of Staff. Chairman Gensler recalls speaking to Mr. Abelow for 
approximately 5 to 10 minutes at this event.
    Chairman Gensler believes it is possible that he may have spoken to 
Mr. Abelow on one or more occasions in his capacity as Governor 
Corzine's Chief of Staff to facilitate the discussions with Governor 
Corzine previously noted during the Presidential primary season prior 
to the 2008 election. After that, Chairman Gensler did not speak with 
Mr. Abelow again until one of the multi-party conference calls between 
regulators and MFGI during the weekend prior to the bankruptcy filing 
of MFGI.
    Chairman Gensler and Mr. Abelow did not have a social relationship 
apart from their professional relationship at GS.

    Christopher Flowers

    Chairman Gensler began working with Mr. Flowers in the M&A 
department at GS upon his arrival at GS in 1979. They worked together 
in M&A for approximately 12 years--until Chairman Gensler was 
transferred from M&A to FI. While Chairman Gensler was in the M&A 
department, he and Mr. Flowers frequently discussed M&A issues and 
strategies, but Chairman Gensler and Mr. Flowers specialized in 
different industries and, to the best of his recollection, did not work 
together on any specific deals.
    After Chairman Gensler left GS, Mr. Flowers visited him once at the 
Treasury Department. Chairman Gensler recalls that as part of this 
visit they may have had lunch together.
    Chairman Gensler does not recall seeing Mr. Flowers in person since 
that meeting at the Treasury Department. Mr. Flowers called Chairman 
Gensler twice at the CFTC. With respect to the first call, Chairman 
Gensler recalls that Mr. Flowers expressed condolences that his wife 
had passed away, and he provided Chairman Gensler with the name of an 
individual who was knowledgeable about financial market regulation.\37\ 
Mr. Flowers did not ask for any action by Chairman Gensler or the CFTC.
---------------------------------------------------------------------------
    \37\ Chairman Gensler did not contact that individual and does not 
recall his or her name.
---------------------------------------------------------------------------
    In connection with the MFGI matter, Mr. Flowers called Chairman 
Gensler on October 31, 2011, before Chairman Gensler arrived at the 
office. Chairman Gensler returned Mr. Flowers' call after he arrived at 
the office. Several other CFTC employees were present in Chairman 
Gensler's office for the call and several individuals were present with 
Mr. Flowers, including Mr. Goldfield, Henri Steenkamp (Chief Financial 
Officer) and another MFGI official. The MFGI officials on the call 
provided the call participants with information regarding MFGI's 
financial status.
    Chairman Gensler and Mr. Flowers did not have a social relationship 
apart from their professional relationship at GS.

    Laurie Ferber

    At the time that Chairman Gensler was in FI at GS, Ms. Ferber was a 
senior compliance officer/attorney at the firm. Chairman Gensler 
believes that he may have spoken with Ms. Ferber on one or more 
compliance matters when he was in FI, but he does not recall anything 
specific.
    After leaving GS, Chairman Gensler did not have any contact with 
Ms. Ferber until he met with the Board of Directors of the Futures 
Industry Association (FIA) in September 2010. At the time, Ms. Ferber 
represented MFGI on the FIA Board of Directors. Ms. Ferber also 
attended the meeting between Mr. Corzine and CFTC officials, including 
Chairman Gensler, in December 2010. Ms. Ferber also was on the July 20, 
2011, conference call between MFGI officials (including Mr. Corzine) 
and CFTC officials, including Chairman Gensler, concerning topics 
relating to a CFTC rulemaking regarding Rules 1.25 and 30.7. Chairman 
Gensler does not believe that he met or spoke with Ms. Ferber after 
that, until she participated in one or more multi-party conference 
calls between MFGI and regulators prior to the bankruptcy filing.
    Chairman Gensler and Ms. Ferber did not have a social relationship 
apart from their professional relationship at GS.

    Jacob Goldfield

    Chairman Gensler first met Mr. Goldfield in late 1991 or early 
1992, after Chairman Gensler began working in FI. Mr. Goldfield also 
worked in FI, trading options on the government bond desk.
    At the time that Chairman Gensler was co-head of fixed income 
trading in Tokyo, he also had co-supervisory responsibility for the 
trading of Yen currency swaps conducted in Asia. At the same time, Mr. 
Goldfield, who was located in New York, had supervisory responsibility 
for the worldwide GS swap book. Accordingly, Chairman Gensler and Mr. 
Goldfield had overlapping responsibilities with respect to the GS Yen 
swap book. Chairman Gensler recalls that he and Mr. Goldfield also 
later may have served together on the Risk Committee.
    Mr. Goldfield visited Chairman Gensler on one occasion at the CFTC. 
During the consideration of the Dodd-Frank legislation, Mr. Goldfield 
met with Chairman Gensler and at least one other member of the 
Chairman's staff. Mr. Goldfield told the Chairman that he was doing 
good work and if he ever needed anything, to give him a call. Chairman 
Gensler does not recall any other meetings with Mr. Goldfield since 
Chairman Gensler left GS.
    On October 30, 2011, Mr. Goldfield e-mailed Chairman Gensler to 
inform him that he was at MF Global ``in case there are questions.'' 
Mr. Goldfield also informed Mr. Gensler that he had ``no financial 
interest in the company and [was] not looking at it for investment.'' 
Mr. Gensler asked Mr. Goldfield whether there were ``any observations 
you wish to pass along?'' Mr. Goldfield replied, ``Not as of now, I 
want only to send along novel insights that are useful.'' Chairman 
Gensler responded, ``Novel and useful. Now those are limiting 
conditions, though I would say that most everything you have shared 
over our long knowing each other has been useful.'' Mr. Goldfield then 
stated, ``Also want to make sure that I am right before I comment.'' 
Chairman Gensler does not recall any further comments or information 
from Mr. Goldfield.
    Mr. Goldfield was present at MFGI during one of the conference 
calls between MFGI and regulators on October 30, 2011. To the best of 
his recollection, Mr. Goldfield did not speak on the call. A 
participant from another regulatory agency who was present at MFGI 
headquarters in New York and who was on the call relayed to Chairman 
Gensler during the call that Mr. Goldfield walked by and requested that 
he say ``hello to Gensler.''
    Mr. Goldfield also was present at MFGI during a conference call 
between MFGI and regulators on the morning of October 31, 2011.
    Chairman Gensler and Mr. Goldfield did not have a social 
relationship apart from their professional relationship at GS.
III. Legal Standard
    The standard for determining whether an employee may participate in 
a matter affecting the employee's financial interests, or involving 
persons with whom the employee has or has had a professional, business, 
economic, or personal relationship, is set forth in 5 CFR  2635.502.
    Specifically,  2635.502(a) provides:

          (a) Consideration of appearances by the employee. Where an 
        employee knows that a particular matter involving specific 
        parties is likely to have a direct and predictable effect on 
        the financial interest of a member of his household, or knows 
        that a person with whom he has a covered relationship is or 
        represents a party to such matter, and where the employee 
        determines that the circumstances would cause a reasonable 
        person with knowledge of the relevant facts to question his 
        impartiality in the matter, the employee should not participate 
        in the matter unless he has informed the agency designee of the 
        appearance problem and received authorization from the agency 
        designee in accordance with paragraph (d) of this section.

                  (1) In considering whether a relationship would cause 
                a reasonable person to question his impartiality, an 
                employee may seek the assistance of his supervisor, an 
                agency ethics official or the agency designee.
                  (2) An employee who is concerned that circumstances 
                other than those specifically described in this section 
                would raise a question regarding his impartiality 
                should use the process described in this section to 
                determine whether he should or should not participate 
                in a particular matter.

    With respect to a ``covered relationship,''  2635.502(b)(iv) 
provides that an employee has a ``covered relationship'' with any 
person ``for whom the employee has, within the last year, served as 
officer, director, trustee, general partner, agent, attorney, 
consultant, contractor or employee.'' (Emphasis added.) \38\
---------------------------------------------------------------------------
    \38\ Section 2635.502(b) provides in full that an employee has a 
``covered relationship'' with:

        (i) A person, other than a prospective employer described in  
2635.603(c), with whom the
    employee has or seeks a business, contractual or other financial 
relationship that involves
    other than a routine consumer transaction;
        (ii) A person who is a member of the employee's household, or 
who is a relative with
    whom the employee has a close personal relationship;
        (iii) A person for whom the employee's spouse, parent or 
dependent child is, to the em-
    ployee's knowledge, serving or seeking to serve as an officer, 
director, trustee, general part-
    ner, agent, attorney, consultant, contractor or employee;
        (iv) Any person for whom the employee has, within the last 
year, served as officer, direc-
    tor, trustee, general partner, agent, attorney, consultant, 
contractor or employee; or
        (v) An organization, other than a political party described in 
26 U.S.C. 527(e), in which
    the employee is an active participant. Participation is active if, 
for example, it involves serv-
    ice as an official of the organization or in a capacity similar to 
that of a committee or sub-
    committee chairperson or spokesperson, or participation in 
directing the activities of the or-
    ganization. In other cases, significant time devoted to promoting 
specific programs of the
    organization, including coordination of fundraising efforts, is an 
indication of active partici-
    pation. Payment of dues or the donation or solicitation of 
financial support does not, in
    itself, constitute active participation.
      
---------------------------------------------------------------------------
    When the circumstances identified in  2635.502(a) are not 
present--i.e., there is no direct and predictable effect on the 
financial interest of a member of his household, and there is no 
covered relationship-- 2635.502(a)(2) provides that the procedures 
specified in  2635.502 should still be followed if a question 
concerning the employee's impartiality may nevertheless remain.\39\
---------------------------------------------------------------------------
    \39\ Under these circumstances--where no financial interest is 
affected and no covered relationship exists--the Office of Government 
Ethics (OGE) does not consider the failure to follow these procedures 
to be ``an ethical lapse'':

        OGE has consistently maintained that, although employees are 
encouraged to use the
    process provided by section 2635.502(a)(2), `[t]he election not to 
use that process cannot ap-
    propriately be considered to be an ethical lapse.' OGE Informal 
Advisory Letter, 94 x 10(2);
    see also OGE 97 x 8 (`obligation' to follow process where covered 
relationships involved, but
    employees `encouraged' to use process in other circumstances); OGE 
95 x 5 (`not required
    by 5 CFR 2635.502 to use the process described in that section' 
where there is no covered
    relationship with person who is a party or represents a party); OGE 
94 x 10(1) (employee
    may `elect' to use process in section 2635.502(a)(2), but `election 
not to use that process
    should not be characterized, however, as an `ethical lapse').

    OGE 01 x 8, Impartiality and Romantic Relationships, August 23, 
2001. OGE has further indicated that in such circumstances, ``even if 
it were now determined, in hindsight, that a reasonable person with 
knowledge of the circumstances would question the [person's] 
impartiality, we cannot say that she violated the impartiality rule.'' 
Id.
---------------------------------------------------------------------------
    ``For example,'' the Office of Government Ethics (OGE) explains, 
``if an employee believes that a personal friendship, or a 
professional, social, political or other association not specifically 
treated as a covered relationship, may raise an appearance question, 
then the employee should use the section 2635.502 process to resolve 
the question.'' \40\
---------------------------------------------------------------------------
    \40\ OGE, Memorandum dated April 26, 1999, from Stephen D. Potts, 
Director, to Designated Agency Ethics Officials, Regarding Recusal 
Obligations and Screening Arrangements, 99 x 8. Under section 
2635.502(a)(2), an employee may determine not to participate in a 
matter due to appearance concerns even if that employee's withdrawal is 
not required. Id.
---------------------------------------------------------------------------
    In this event, under the  2635.502 process, the threshold 
determination is to ``consider whether the employee's impartiality 
would reasonably be questioned if the employee were to participate in a 
particular matter involving specific parties where persons, with 
certain personal or business relationships with the employee are 
involved.'' \41\ If it is determined that the employee's participation 
would ``raise a question in the mind of a reasonable person about his 
impartiality,'' the agency's designated ethics official may nonetheless 
authorize the employee to participate in the matter ``based on a 
determination, made in light of all relevant circumstances, that the 
interest of the Government in the employee's participation outweighs 
the concern that a reasonable person may question the integrity of the 
agency's programs and operations.'' \42\
---------------------------------------------------------------------------
    \41\ Id; 5 CFR  2635.502(c).
    \42\ 5 CFR  2635.502(d). This section provides the following 
factors that may be considered in making this determination:

        (1) The nature of the relationship involved;
        (2) The effect that resolution of the matter would have upon 
the financial interests of the
    person involved in the relationship;
        (3) The nature and importance of the employee's role in the 
matter, including the extent
    to which the employee is called upon to exercise discretion in the 
matter;
        (4) The sensitivity of the matter;
        (5) The difficulty of reassigning the matter to another 
employee; and
        (6) Adjustments that may be made in the employee's duties that 
would reduce or elimi-
    nate the likelihood that a reasonable person would question the 
employee's impartiality.
      
---------------------------------------------------------------------------
IV. Analysis
    Is there a financial interest or ``covered relationship''?

    Neither Chairman Gensler nor any member of his household has a 
financial interest in MFGI, or in any commodity or security interest 
held by MFGI. More broadly, neither Chairman Gensler nor any member of 
his household has any other financial interest that would be 
predictably or directly affected by a CFTC investigation involving MFGI 
or associated CFTC actions, including participation in the MFGI 
bankruptcy proceedings, and the recovery of customer funds. 
Accordingly, the resolution of the MFGI matter would not have a 
``direct and predictable'' effect upon the financial interests of 
Chairman Gensler or any member of his household. Chairman Gensler does 
not have a ``covered relationship'' with MFGI or any of its employees, 
officers, directors, or shareholders. Chairman Gensler's partnership 
with GS, Mr. Corzine, and other partners at GS terminated in 1997, more 
than 14 years ago. This is far beyond the 1 year ``cooling off period'' 
provided in  2635.502(b)(iv) for a person who was a general partner 
with another person to be considered to have a ``covered relationship'' 
with such other person.\43\

    \43\ 5 CFR  2635.502(b)(iv). As previously noted, OGE has stated 
that if no financial interest is involved and a covered relationship is 
not present, a determination not to follow the procedures in  
2635.502--and hence to participate in the matter--cannot be considered 
to be an ``ethical lapse.'' Nonetheless, in accordance with OGE 
recommendations, Chairman Gensler has determined to follow the  
2635.502 process.
---------------------------------------------------------------------------
    Is there a reasonable basis to question the employee 's 
impartiality?

    The sole fact that Chairman Gensler at one time was a business 
partner with Mr. Corzine, without more, does not constitute a 
reasonable basis, within the meaning of  2635.502, to question 
Chairman Gensler's impartiality with respect to matters relating to 
MFGI.
    Once the 1 year cooling-off period has passed, the fact that an 
employee previously was within a covered relationship with respect to 
another individual, without more, cannot by itself be the basis to 
reasonably question an employee's impartiality. To hold otherwise 
would, in effect, transform the 1 year cooling off period into a 
lifetime prohibition, for in every such instance the covered 
relationship within the 1 year period could be cited as the basis for 
disqualification beyond the 1 year period.\44\
---------------------------------------------------------------------------
    \44\ This conclusion is consistent with the OGE position that in 
circumstances in which no financial interest is involved and a covered 
relationship is not present, a determination not to follow the 
procedures in  2635.502 cannot be considered to be an ``ethical 
lapse.''
---------------------------------------------------------------------------
    The ethics regulations do not require such a result. To the 
contrary, the procedures in  2635.502 clearly contemplate that 
employees who at one time may have had a covered relationship with 
respect to another person or entity, but that no longer have such a 
covered relationship, may participate in a matter involving the person 
or entity that previously was within the covered relationship.
    To constitute a reasonable basis to question Chairman Gensler's 
impartiality, therefore, there must be some additional indicia of a 
relationship between Chairman Gensler and Mr. Corzine, GS, or its 
partners, beyond the factors that would establish a covered 
relationship--i.e., facts in addition to Chairman Gensler's partnership 
at GS some 14 years ago. However, the facts regarding Chairman 
Gensler's relationship with Mr. Corzine and others at GS who are now 
associated with MFGI--both during the time that Chairman Gensler worked 
at GS and afterwards--are insufficient to provide such indicia.
    The record set forth above indicates that at all times, both during 
their partnership and afterwards, the relationship between Chairman 
Gensler and Mr. Corzine was exclusively a professional relationship. 
Chairman Gensler and Mr. Corzine did not socialize or meet apart from 
their professional obligations and interests. The record indicates that 
since Chairman Gensler and Mr. Corzine left GS in the late 1990s, they 
have met only infrequently and solely on matters of mutual professional 
interest. Indeed, most of their encounters have occurred when they both 
have been invited to attend an event by others. Although both Chairman 
Gensler and Mr. Corzine have been involved in political fundraising and 
electoral campaigning, neither has done so on the other's behalf or at 
the other's request. They have not socialized, and they have not been 
involved in each other's personal lives. Their infrequent professional 
contacts, over a 14 year period following their departure from their 
partnership at GS, do not constitute a covered relationship or a 
similar type of relationship that would form a reasonable basis under 
section 2635.502 to question Chairman Gensler's impartiality with 
respect to MFGI.\45\
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    \45\ Chairman Gensler's contribution to the New Jersey State 
Democratic Party at the time Mr. Corzine was campaigning for Governor 
of New Jersey is not sufficient to warrant a different conclusion. 
During this time period, Chairman Gensler was an active fundraiser for 
and contributor to Democratic candidates for elected office in many 
states. Chairman Gensler's contribution to the New Jersey State 
Democratic Party therefore is not sufficient to establish a special 
relationship between Chairman Gensler and Mr. Corzine that would 
warrant a different conclusion.
---------------------------------------------------------------------------
    Following his departure from GS, Chairman Gensler's contacts with 
Mr. Abelow, Mr. Flowers, Ms. Ferber, and Mr. Goldfield have been more 
attenuated than his contacts with Mr. Corzine. Based on the highly 
infrequent nature of Chairman Gensler's contacts with these individuals 
since he left the GS partnership in 1997, Chairman Gensler's 
relationships with these individuals, both individually and 
collectively, are insufficient to constitute a reasonable basis under 
section 2635.502 to question Chairman Gensler's impartiality with 
respect to MFGI.
    In sum, this review determines, based on the facts and 
circumstances stated herein, that there is not a reasonable basis under 
5 CFR  2635.502 to question Chairman Gensler's impartiality with 
respect to the Commission's investigation of MFGI and involvement in 
related matters, such as the MFGI bankruptcy proceedings. Accordingly, 
5 CFR  2635.502 does not preclude Chairman Gensler's participation in 
these matters, and Chairman Gensler is not required to withdraw from 
participation. From a legal and ethical perspective, Chairman Gensler's 
participation in Commission matters involving MFGI would not be 
improper.\46\
---------------------------------------------------------------------------
    \46\ This review solely addresses matters before the Commission 
prior to and at the time of the Chairman's election not to participate 
and is based on the facts contained herein.
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                              attachment 3
    Rule 151.5(a), adopted under CEA section 4a(c)(2):

          (1) Any person that complies with the requirements of this 
        section may exceed the position limits set forth in  151.4 to 
        the extent that a transaction or position in a Referenced 
        Contract:

                  (i) Represents a substitute for transactions made or 
                to be made or positions taken or to be taken at a later 
                time in a physical marketing channel;
                  (ii) Is economically appropriate to the reduction of 
                risks in the conduct and management of a commercial 
                enterprise; and
                  (iii) Arises from the potential change in the value 
                of one or several--

                          (A) Assets that a person owns, produces, 
                        manufactures, processes, or merchandises or 
                        anticipates owning, producing, manufacturing, 
                        processing, or merchandising;
                          (B) Liabilities that a person owns or 
                        anticipates incurring; or
                          (C) Services that a person provides, 
                        purchases, or anticipates providing or 
                        purchasing; or

                  (iv) Reduces risks attendant to a position resulting 
                from a swap that--

                          (A) Was executed opposite a counterparty for 
                        which the transaction would qualify as a bona 
                        fide hedging transaction pursuant to paragraph 
                        (a)(1)(i) through (iii) of this section; or
                          (B) Meets the requirements of paragraphs 
                        (a)(1)(i) through (iii) of this section.

                  (v) Notwithstanding the foregoing, no transactions or 
                positions shall be classified as bona fide hedging for 
                purposes of  151.4 unless such transactions or 
                positions are established and liquidated in an orderly 
                manner in accordance with sound commercial practices 
                and the provisions of paragraph (a)(2) of this section 
                regarding enumerated hedging transactions and positions 
                or paragraphs (a)(3) or (4) of this section regarding 
                pass-through swaps of this section have been satisfied.

          (2) Enumerated hedging transactions and positions. Bona fide 
        hedging transactions and positions for the purposes of this 
        paragraph mean any of the following specific transactions and 
        positions:

                  (i) Sales of Referenced Contracts that do not exceed 
                in quantity:

                          (A) Ownership or fixed-price purchase of the 
                        contract's underlying cash commodity by the 
                        same person; and
                          (B) Unsold anticipated production of the same 
                        commodity, which may not exceed 1 year of 
                        production for an agricultural commodity, by 
                        the same person provided that no such position 
                        is maintained in any physical-delivery 
                        Referenced Contract during the last 5 days of 
                        trading of the Core Referenced Futures Contract 
                        in an agricultural or metal commodity or during 
                        the spot month for other physical-delivery 
                        contracts.

                  (ii) Purchases of Referenced Contracts that do not 
                exceed in quantity:

                          (A) The fixed-price sale of the contract's 
                        underlying cash commodity by the same person;
                          (B) The quantity equivalent of fixed-price 
                        sales of the cash products and by-products of 
                        such commodity by the same person; and
                          (C) Unfilled anticipated requirements of the 
                        same cash commodity, which may not exceed 1 
                        year for agricultural Referenced Contracts, for 
                        processing, manufacturing, or use by the same 
                        person, provided that no such position is 
                        maintained in any physical-delivery Referenced 
                        Contract during the last 5 days of trading of 
                        the Core Referenced Futures Contract in an 
                        agricultural or metal commodity or during the 
                        spot month for other physical-delivery 
                        contracts.

                  (iii) Offsetting sales and purchases in Referenced 
                Contracts that do not exceed in quantity that amount of 
                the same cash commodity that has been bought and sold 
                by the same person at unfixed prices basis different 
                delivery months, provided that no such position is 
                maintained in any physical-delivery Referenced Contract 
                during the last 5 days of trading of the Core 
                Referenced Futures Contract in an agricultural or metal 
                commodity or during the spot month for other physical-
                delivery contracts.
                  (iv) Purchases or sales by an agent who does not own 
                or has not contracted to sell or purchase the 
                offsetting cash commodity at a fixed price, provided 
                that the agent is responsible for the merchandising of 
                the cash positions that is being offset in Referenced 
                Contracts and the agent has a contractual arrangement 
                with the person who owns the commodity or holds the 
                cash market commitment being offset.
                  (v) Anticipated merchandising hedges. Offsetting 
                sales and purchases in Referenced Contracts that do not 
                exceed in quantity the amount of the same cash 
                commodity that is anticipated to be merchandised, 
                provided that:

                          (A) The quantity of offsetting sales and 
                        purchases is not larger than the current or 
                        anticipated unfilled storage capacity owned or 
                        leased by the same person during the period of 
                        anticipated merchandising activity, which may 
                        not exceed 1 year;

                          (B) The offsetting sales and purchases in 
                        Referenced Contracts are in different contract 
                        months, which settle in not more than 1 year; 
                        and
                          (C) No such position is maintained in any 
                        physical-delivery Referenced Contract during 
                        the last 5 days of trading of the Core 
                        Referenced Futures Contract in an agricultural 
                        or metal commodity or during the spot month for 
                        other physical-delivery contracts.

                  (vi) Anticipated royalty hedges. Sales or purchases 
                in Referenced Contracts offset by the anticipated 
                change in value of royalty rights that are owned by the 
                same person provided that:

                          (A) The royalty rights arise out of the 
                        production, manufacturing, processing, use, or 
                        transportation of the commodity underlying the 
                        Referenced Contract, which may not exceed 1 
                        year for agricultural Referenced Contracts; and
                          (B) No such position is maintained in any 
                        physical-delivery Referenced Contract during 
                        the last 5 days of trading of the Core 
                        Referenced Futures Contract in an agricultural 
                        or metal commodity or during the spot month for 
                        other physical-delivery contracts.

                  (vii) Service hedges. Sales or purchases in 
                Referenced Contracts offset by the anticipated change 
                in value of receipts or payments due or expected to be 
                due under an executed contract for services held by the 
                same person provided that:

                          (A) The contract for services arises out of 
                        the production, manufacturing, processing, use, 
                        or transportation of the commodity underlying 
                        the Referenced Contract, which may not exceed 1 
                        year for agricultural Referenced Contracts;
                          (B) The fluctuations in the value of the 
                        position in Referenced Contracts are 
                        substantially related to the fluctuations in 
                        value of receipts or payments due or expected 
                        to be due under a contract for services; and
                          (C) No such position is maintained in any 
                        physical-delivery Referenced Contract during 
                        the last 5 days of trading of the Core 
                        Referenced Futures Contract in an agricultural 
                        or metal commodity or during the spot month for 
                        other physical-delivery contracts.

                  (viii) Cross-commodity hedges. Sales or purchases in 
                Referenced Contracts described in paragraphs (a)(2)(i) 
                through (vii) of this section may also be offset other 
                than by the same quantity of the same cash commodity, 
                provided that:

                          (A) The fluctuations in value of the position 
                        in Referenced Contracts are substantially 
                        related to the fluctuations in value of the 
                        actual or anticipated cash position; and
                          (B) No such position is maintained in any 
                        physical-delivery Referenced Contract during 
                        the last 5 days of trading of the Core 
                        Referenced Futures Contract in an agricultural 
                        or metal commodity or during the spot month for 
                        other physical-delivery contracts.

          (3) Pass-through swaps. Bona fide hedging transactions and 
        positions for the purposes of this paragraph include the 
        purchase or sales of Referenced Contracts that reduce the risks 
        attendant to a position resulting from a swap that was executed 
        opposite a counterparty for whom the swap transaction would 
        qualify as a bona fide hedging transaction pursuant to 
        paragraph (a)(2) of this section (``pass-through swaps''), 
        provided that no such position is maintained in any physical-
        delivery Referenced Contract during the last 5 days of trading 
        of the Core Referenced Futures Contract in an agricultural or 
        metal commodity or during the spot month for other physical-
        delivery contracts unless such pass-through swap position 
        continues to offset the cash market commodity price risk of the 
        bona fide hedging counterparty.
          (4) Pass-through swap offsets. For swaps executed opposite a 
        counterparty for whom the swap transaction would qualify as a 
        bona fide hedging transaction pursuant to paragraph (a)(2) of 
        this section (pass-through swaps), such pass-through swaps 
        shall also be classified as a bona fide hedging transaction for 
        the counterparty for whom the swap would not otherwise qualify 
        as a bona fide hedging transaction pursuant to paragraph (a)(2) 
        of this section (``non-hedging counterparty''), provided that 
        the non-hedging counterparty purchases or sells Referenced 
        Contracts that reduce the risks attendant to such pass-through 
        swaps. Provided further, that the pass-through swap shall 
        constitute a bona fide hedging transaction only to the extent 
        the non-hedging counterparty purchases or sells Referenced 
        Contracts that reduce the risks attendant to the pass-through 
        swap.
          (5) Any person engaging in other risk-reducing practices 
        commonly used in the market which they believe may not be 
        specifically enumerated in  151.5(a)(2) may request relief 
        from Commission staff under  140.99 of this chapter or the 
        Commission under section 4a(a)(7) of the Act concerning the 
        applicability of the bona fide hedging transaction exemption.

    Rule 1.3(z), revised under CEA section 4a(c) to apply only to 
excluded commodities as defined in CEA section 1a(19):

          (1) General definition. Bona fide hedging transactions and 
        positions shall mean any agreement, contract or transaction in 
        an excluded commodity on a designated contract market or swap 
        execution facility that is a trading facility, where such 
        transactions or positions normally represent a substitute for 
        transactions to be made or positions to be taken at a later 
        time in a physical marketing channel, and where they are 
        economically appropriate to the reduction of risks in the 
        conduct and management of a commercial enterprise, and where 
        they arise from:

                  (i) The potential change in the value of assets which 
                a person owns, produces, manufactures, processes, or 
                merchandises or anticipates owning, producing, 
                manufacturing, processing, or merchandising,
                  (ii) The potential change in the value of liabilities 
                which a person owns or anticipates incurring, or
                  (iii) The potential change in the value of services 
                which a person provides, purchases, or anticipates 
                providing or purchasing.
                  (iv) Notwithstanding the foregoing, no transactions 
                or positions shall be classified as bona fide hedging 
                unless their purpose is to offset price risks 
                incidental to commercial cash or spot operations and 
                such positions are established and liquidated in an 
                orderly manner in accordance with sound commercial 
                practices and, for transactions or positions on 
                contract markets subject to trading and position limits 
                in effect pursuant to section 4a of the Act, unless the 
                provisions of paragraphs (z)(2) and (3) of this section 
                have been satisfied.

          (2) Enumerated hedging transactions. The definitions of bona 
        fide hedging transactions and positions in paragraph (z)(1) of 
        this section includes, but is not limited to, the following 
        specific transactions and positions:

                  (i) Sales of any agreement, contract, or transaction 
                in an excluded commodity on a designated contract 
                market or swap execution facility that is a trading 
                facility which do not exceed in quantity:

                          (A) Ownership or fixed-price purchase of the 
                        same cash commodity by the same person; and
                          (B) Twelve months' unsold anticipated 
                        production of the same commodity by the same 
                        person provided that no such position is 
                        maintained in any agreement, contract or 
                        transaction during the 5 last trading days.

                  (ii) Purchases of any agreement, contract or 
                transaction in an excluded commodity on a designated 
                contract market or swap execution facility that is a 
                trading facility which do not exceed in quantity:

                          (A) The fixed-price sale of the same cash 
                        commodity by the same person;
                          (B) The quantity equivalent of fixed-price 
                        sales of the cash products and by-products of 
                        such commodity by the same person; and
                          (C) Twelve months' unfilled anticipated 
                        requirements of the same cash commodity for 
                        processing, manufacturing, or feeding by the 
                        same person, provided that such transactions 
                        and positions in the 5 last trading days of any 
                        agreement, contract or transaction do not 
                        exceed the person's unfilled anticipated 
                        requirements of the same cash commodity for 
                        that month and for the next succeeding month.

                  (iii) Offsetting sales and purchases in any 
                agreement, contract or transaction in an excluded 
                commodity on a designated contract market or swap 
                execution facility that is a trading facility which do 
                not exceed in quantity that amount of the same cash 
                commodity which has been bought and sold by the same 
                person at unfixed prices basis different delivery 
                months of the contract market, provided that no such 
                position is maintained in any agreement, contract or 
                transaction during the 5 last trading days.
                  (iv) Purchases or sales by an agent who does not own 
                or has not contracted to sell or purchase the 
                offsetting cash commodity at a fixed price, provided 
                that the agent is responsible for the merchandising of 
                the cash position that is being offset, and the agent 
                has a contractual arrangement with the person who owns 
                the commodity or has the cash market commitment being 
                offset.
                  (v) Sales and purchases described in paragraphs 
                (z)(2)(i) through (iv) of this section may also be 
                offset other than by the same quantity of the same cash 
                commodity, provided that the fluctuations in value of 
                the position for in any agreement, contract or 
                transaction are substantially related to the 
                fluctuations in value of the actual or anticipated cash 
                position, and provided that the positions in any 
                agreement, contract or transaction shall not be 
                maintained during the 5 last trading days.

          (3) Non-enumerated cases. A designated contract market or 
        swap execution facility that is a trading facility may 
        recognize, consistent with the purposes of this section, 
        transactions and positions other than those enumerated in 
        paragraph (2) of this section as bona fide hedging. Prior to 
        recognizing such non-enumerated transactions and positions, the 
        designated contract market or swap execution facility that is a 
        trading facility shall submit such rules for Commission review 
        under section 5c of the Act and part 40 of this chapter.

    Rule 1.3(kkk), adopted under the definition of the term ``major 
swap participant'' in CEA section 1a(33):

          For purposes of Section 1a(33) of the Act, 7 U.S.C. 1a(33) 
        and  1.3(hhh), a swap position is held for the purpose of 
        hedging or mitigating commercial risk when:

                  (1) Such position:

                          (i) Is economically appropriate to the 
                        reduction of risks in the conduct and 
                        management of a commercial enterprise (or of a 
                        majority-owned affiliate of the enterprise), 
                        where the risks arise from:

                                  (A) The potential change in the value 
                                of assets that a person owns, produces, 
                                manufactures, processes, or 
                                merchandises or reasonably anticipates 
                                owning, producing, manufacturing, 
                                processing, or merchandising in the 
                                ordinary course of business of the 
                                enterprise;
                                  (B) The potential change in the value 
                                of liabilities that a person has 
                                incurred or reasonably anticipates 
                                incurring in the ordinary course of 
                                business of the enterprise; or
                                  (C) The potential change in the value 
                                of services that a person provides, 
                                purchases, or reasonably anticipates 
                                providing or purchasing in the ordinary 
                                course of business of the enterprise;
                                  (D) The potential change in the value 
                                of assets, services, inputs, products, 
                                or commodities that a person owns, 
                                produces, manufactures, processes, 
                                merchandises, leases, or sells, or 
                                reasonably anticipates owning, 
                                producing, manufacturing, processing, 
                                merchandising, leasing, or selling in 
                                the ordinary course of business of the 
                                enterprise;
                                  (E) Any potential change in value 
                                related to any of the foregoing arising 
                                from interest, currency, or foreign 
                                exchange rate movements associated with 
                                such assets, liabilities, services, 
                                inputs, products, or commodities; or
                                  (F) Any fluctuation in interest, 
                                currency, or foreign exchange rate 
                                exposures arising from a person's 
                                current or anticipated assets or 
                                liabilities; or

                          (ii) Qualifies as bona fide hedging for 
                        purposes of an exemption from position limits 
                        under the Act; or
                          (iii) Qualifies for hedging treatment under 
                        (A) Financial Accounting Standards Board 
                        Accounting Standards Codification Topic 815, 
                        Derivatives and Hedging (formerly known as 
                        Statement No. 133) or (B) Governmental 
                        Accounting Standards Board Statement 53, 
                        Accounting and Financial Reporting for 
                        Derivative Instruments; and

                  (2) Such position is:

                          (i) Not held for a purpose that is in the 
                        nature of speculation, investing or trading; 
                        and
                          (ii) Not held to hedge or mitigate the risk 
                        of another swap or security-based swap 
                        position, unless that other position itself is 
                        held for the purpose of hedging or mitigating 
                        commercial risk as defined by this rule or  
                        240.3a67-4 of this title.

    Proposed rule 39.6(c), adopted under the end-user exception from 
the clearing requirement in CEA section 2(h)(7):

          For purposes of section 2(a)(7)(A)(ii) of the CEA and Sec. 
        39.6(b)(4), a swap shall be deemed to be used to hedge or 
        mitigate commercial risk when:

                  (1) Such swap:

                          (i) Is economically appropriate to the 
                        reduction of risks in the conduct and 
                        management of a commercial enterprise, where 
                        the risks arise from:

                                  (A) The potential change in the value 
                                of assets that a person owns, produces, 
                                manufactures, processes, or 
                                merchandises or reasonably anticipates 
                                owning, producing, manufacturing, 
                                processing, or merchandising in the 
                                ordinary course of business of the 
                                enterprise;
                                  (B) The potential change in the value 
                                of liabilities that a person has 
                                incurred or reasonably anticipates 
                                incurring in the ordinary course of 
                                business of the enterprise; or
                                  (C) The potential change in the value 
                                of services that a person provides, 
                                purchases, or reasonably anticipates 
                                providing or purchasing in the ordinary 
                                course of business of the enterprise;
                                  (D) The potential change in the value 
                                of assets, services, inputs, products, 
                                or commodities that a person owns, 
                                produces, manufactures, processes, 
                                merchandises, leases, or sells, or 
                                reasonably anticipates owning, 
                                producing, manufacturing, processing, 
                                merchandising, leasing, or selling in 
                                the ordinary course of business of the 
                                enterprise;
                                  (E) Any potential change in value 
                                related to any of the foregoing arising 
                                from foreign exchange rate movements 
                                associated with such assets, 
                                liabilities, services, inputs, 
                                products, or commodities; or
                                  (F) Any fluctuation in interest, 
                                currency, or foreign exchange rate 
                                exposures arising from a person's 
                                current or anticipated assets or 
                                liabilities; or

                          (ii) Qualifies as bona fide hedging for 
                        purposes of an exemption from position limits 
                        under the Act; or
                          (iii) Qualifies for hedging treatment under 
                        Financial Accounting Standards Board Accounting 
                        Standards Codification Topic 815, Derivatives 
                        and Hedging (formerly known as Statement No. 
                        133); and

                  (2) Such swap is:

                          (i) Not used for a purpose that is in the 
                        nature of speculation, investing, or trading; 
                        or
                          (ii) Not used to hedge or mitigate the risk 
                        of another swap or securities-based swap, 
                        unless that other swap itself is used to hedge 
                        or mitigate commercial risk as defined by this 
                        rule or the equivalent definitional rule 
                        governing security-based swaps promulgated by 
                        the Securities and Exchange Commission under 
                        the Securities Exchange Act of 1934.

    Interim final rule 1.3(ppp)(6)(iii), adopted under the definition 
of the term ``swap dealer'' in CEA section 1a(49):

          In determining whether a person is a swap dealer, a swap that 
        the person enters into shall not be considered, if:

                  (A) The person enters into the swap for the purpose 
                of offsetting or mitigating the person's price risks 
                that arise from the potential change in the value of 
                one or several (1) assets that the person owns, 
                produces, manufactures, processes, or merchandises or 
                anticipates owning, producing, manufacturing, 
                processing, or merchandising; (2) liabilities that the 
                person owns or anticipates incurring; or (3) services 
                that the person provides, purchases, or anticipates 
                providing or purchasing;
                  (B) The swap represents a substitute for transactions 
                made or to be made or positions taken or to be taken by 
                the person at a later time in a physical marketing 
                channel;
                  (C) The swap is economically appropriate to the 
                reduction of the person's risks in the conduct and 
                management of a commercial enterprise;
                  (D) The swap is entered into in accordance with sound 
                commercial practices; and
                  (E) The person does not enter into the swap in 
                connection with activity structured to evade 
                designation as a swap dealer.

    The Commission addressed these definitions in its recent release 
adopting the rules further defining the terms swap dealer, eligible 
contract participant and major swap participant.

   Regarding interim final rule 1.3(ppp)(6)(iii), the 
        Commission stated: ``[A]lthough the CFTC is not incorporating 
        the bona fide hedging provisions of the CFTC's position limits 
        rule here, the exclusion from the swap dealer analysis draws 
        upon language in the CFTC's definition of bona fide hedging. 
        For example, the exclusion expressly includes swaps hedging 
        price risks arising from the potential change in value of 
        existing or anticipated assets, liabilities, or services, if 
        the hedger has an exposure to physical price risk. And, as in 
        the bona fide hedging rule, the exclusion utilizes the word 
        `several' to reflect that there is no requirement that swaps 
        hedge risk on a one-to-one transactional basis in order to be 
        excluded, but rather they may hedge on a portfolio basis. For 
        these reasons, swaps that qualify as enumerated hedging 
        transactions and positions are examples of the types of 
        physical commodity swaps that are excluded from the swap dealer 
        analysis if the rule's requirements are met.''

   The Commission explained that ``The definition of bona fide 
        hedging in [rule]  1.3(z), which applies for excluded 
        commodities, is not relevant here, because it does not contain 
        the requirement that the swap represents a substitute for a 
        transaction made or to be made or a position taken or to be 
        taken in a physical marketing channel, as required by [rule]  
        1.3(ggg)(6)(iii)(B). We believe that this requirement is an 
        important aspect of how principles from the bona fide hedging 
        definition are useful in identifying swaps that are entered 
        into for the purpose of hedging as opposed to other purposes.''

    The Commission addressed how the interim final rule compares to the 
definition of hedging or mitigating commercial risk in rule 1.3(kkk), 
explaining that ``the usefulness of an exclusion of all swaps that 
hedge or mitigate commercial risk for certain aspects of the major swap 
participant definition is not a reason to use the same exclusion in the 
swap dealer definition, since the swap dealer definition serves a 
different function. The definition of the term `major swap 
participant,' which applies only to persons who are not swap dealers, 
is premised on the prior identification, by the swap dealer definition, 
of persons who accommodate demand for swaps, make a market in swaps, or 
otherwise engage in swap dealing activity. The major swap participant 
definition performs the subsequent function of identifying persons that 
are not swap dealers, but hold swap positions that create an especially 
high level of risk that could significantly impact the U.S. financial 
system. Only for this subsequent function is it appropriate to apply 
the broader exclusion of swaps held for the purpose of hedging or 
mitigating commercial risk.''

                                  
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