[Senate Hearing 112-696]
[From the U.S. Government Publishing Office]



 
                                                        S. Hrg. 112-696

                     EXAMINING THE FUTURES MARKETS:
                       RESPONDING TO THE FAILURES
                       OF MF GLOBAL AND PEREGRINE
                            FINANCIAL GROUP
=======================================================================

                                HEARING

                               BEFORE THE 

                       COMMITTEE ON AGRICULTURE,
                         NUTRITION AND FORESTRY

                          UNITED STATES SENATE


                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             AUGUST 1, 2012

                               __________

                       Printed for the use of the
            Committee on Agriculture, Nutrition and Forestry



[GRAPHIC NOT AVAILABL IN TIFF FORMAT]




        Available via the World Wide Web: http://www.fdsys.gov/

                              ___________

                    U.S. GOVERNMENT PRINTING OFFICE
78-277 PDF                    WASHINGTON : 2013
________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). E-mail, [email protected].  








            COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY



                 DEBBIE STABENOW, Michigan, Chairwoman

PATRICK J. LEAHY, Vermont            PAT ROBERTS, Kansas
TOM HARKIN, Iowa                     RICHARD G. LUGAR, Indiana
KENT CONRAD, North Dakota            THAD COCHRAN, Mississippi
MAX BAUCUS, Montana                  MITCH McCONNELL, Kentucky
E. BENJAMIN NELSON, Nebraska         SAXBY CHAMBLISS, Georgia
SHERROD BROWN, Ohio                  MIKE JOHANNS, Nebraska
ROBERT P. CASEY, Jr., Pennsylvania   JOHN BOOZMAN, Arkansas
AMY KLOBUCHAR, Minnesota             CHARLES E. GRASSLEY, Iowa
MICHAEL BENNET, Colorado             JOHN THUNE, South Dakota
KIRSTEN GILLIBRAND, New York         JOHN HOEVEN, North Dakota

             Christopher J. Adamo, Majority Staff Director

              Jonathan W. Coppess, Majority Chief Counsel

                    Jessica L. Williams, Chief Clerk

              Michael J. Seyfert, Minority Staff Director

                Anne C. Hazlett, Minority Chief Counsel

                                  (ii)

  
                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing(s):

Examining the Futures Markets: Responding to the Failures of MF 
  Global and Peregrine Financial Group...........................     1

                              ----------                              

                       Wednesday, August 1, 2012
                    STATEMENTS PRESENTED BY SENATORS

Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan, 
  Chairwoman, Committee on Agriculture, Nutrition and Forestry...     1
Roberts, Hon. Pat, U.S. Senator from the State of Kansas.........     2

                                Panel I

Gensler, Hon. Gary, Chairman, Commodity Futures Trading 
  Commission, Washington, DC.....................................     4
Sommers, Hon. Jill, Commissioner, Commodity Futures Trading 
  Commission, Washington, DC.....................................     6
Giddens, James, Trustee for the Securities Investment Protection 
  Act Liquidation of MF Global, Inc., Hughes Hubbard & Reed, New 
  York, NY.......................................................     7
Bodenstein, Ira, Chapter 7 Trustee for Peregrine Financial Group, 
  Inc., Shaw Gussis, Chicago, IL.................................     9

                                Panel II

Lukken, Hon. Walter, President and Chief Executive Officer, 
  Futures Industry Association, Washington, DC...................    31
Duffy, Terrence, President and Executive Chairman, CME Group, 
  Chicago, IL....................................................    33
Roth, Dan, President and Chief Executive Officer, National 
  Futures Association, Chicago, IL...............................    34
Klemme, Diana, Vice President and Director-Grain Division, Grain 
  Service Corporation, Atlanta, GA on behalf of the National 
  Grain and Feed Association.....................................    36
Roe, John, Co-Founder, Commodity Customer Coalition, Chicago, IL.    38
                              ----------                              

                                APPENDIX

Prepared Statements:
    Bodenstein, Ira..............................................    50
    Duffy, Terrence..............................................    64
    Freeh, Hon. Louis............................................    69
    Gensler, Hon. Gary...........................................    75
    Giddens, James...............................................    86
    Klemme, Diana................................................    91
    Lukken, Hon. Walter..........................................    96
    Roe, John....................................................    10
    Roth, Dan....................................................   105
    Sommers, Hon. Jill...........................................   109
Document(s) Submitted for the Record:
Baucus, Hon. Max:
    Atlas Ratings FCM, 2012 report...............................   116
Freeh, Hon. Louis:
    Letter to Hon. Debbie Stabenow...............................   122
    First Report of Louis J. Freeh, Chapter 11 Trustee of MF 
      Global Holdings LTD., et al., for the period October 31, 
      2011 through June 4, 2012..................................   123
Klemme, Diana
    National Grain and Feed Association, prepared statement......   242
Lukken, Hon. Walter:
    Futures Industry Association, prepared statement.............   244
Question and Answer:
Roberts, Hon. Pat:
    Written questions to Hon. Gary Gensler.......................   252
    Written questions to Hon. Jill Sommers.......................   258
    Written questions to James Giddens...........................   257
Gillibrand, Hon. Kirsten:
    Written questions to Hon. Gary Gensler.......................   254
    Written questions to Dan Roth................................   259
Grassley, Hon. Charles:
    Written questions to Dan Roth................................   264
Gensler, Hon. Gary:
    Written response to questions from Hon. Pat Roberts..........   252
    Written response to questions from Hon. Kirsten Gillibrand...   254
Giddens, James:
    Written response to questions from Hon. Pat Roberts..........   257
Roth, Dan:
    Written response to questions from Hon. Kirsten Gillibrand...   259
    Written response to questions from Hon. Charles Grassley.....   264
Sommers, Hon. Jill:
    Written response to questions from Hon. Pat Roberts..........   258



                     EXAMINING THE FUTURES MARKETS:



                       RESPONDING TO THE FAILURES



                       OF MF GLOBAL AND PEREGRINE



                            FINANCIAL GROUP

                       Wednesday, August 1, 2012

                              United States Senate,
          Committee on Agriculture, Nutrition and Forestry,
                                                     Washington, DC
    The Committee met, pursuant to notice, at 9:07 a.m., in 
room 328A, Russell Senate Office Building, Hon. Debbie 
Stabenow, Chairwoman of the Committee, presiding.
    Present: Senators Stabenow, Harkin, Baucus, Klobuchar, 
Gillibrand, Roberts, Lugar, Johanns, Boozman, Grassley, Thune, 
and Hoeven.

STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE 
 OF MICHIGAN, CHAIRWOMAN, COMMITTEE ON AGRICULTURE, NUTRITION 
                          AND FORESTRY

    Chairwoman Stabenow. Well, good morning. The Committee on 
Agriculture, Nutrition and Forestry will be called to order. We 
appreciate very much our witnesses this morning on a very, very 
important topic and appreciate members' attendance this 
morning.
    About 8 months ago, farmers and ranchers all across America 
woke up to some shocking news: MF Global, one of the Nation's 
largest futures commission merchants, had filed for bankruptcy, 
and at minimum, hundreds of millions of dollars of customer 
money had gone missing.
    A loss of customer money of this magnitude had never 
happened before. It was something that should not have been 
able to happen. It has been an article of faith since the early 
days of the futures markets that customer money is to be kept 
separate and safe. But on October 31, 2011, that faith was 
broken.
    Questions were raised about how these segregated funds were 
being used or if the system worked. Questions were raised about 
how repeated audits and reviews had missed problems that 
contributed to the failure. We were assured that MF Global was 
an outlier.
    Then, on July 10, 2012, it happened again. The 
circumstances were certainly different and in some ways more 
dramatic. For the second time in 8 months, customers were left 
holding the bag when their segregated money was misused. Our 
farmers and ranchers and other businesses need these markets to 
work. They need to have faith that they can use these markets 
to manage their risk.
    We have certainly seen this year that their risks are many, 
but one of those risks should not be that their futures broker 
firm will go out of business and their money will disappear.
    We have heard from farmers and businesses who, after MF 
Global collapsed, opened accounts at Peregrine. For these 
folks, lightning really does strike twice, and they rightfully 
want to know why. I want to know why. The members of this 
Committee want to know why. And millions of farmers, ranchers, 
and business owners across the country who need these markets 
to function properly are demanding to know why.
    I have three goals for this hearing, the same goals that we 
had last December when we brought the MF Global executives 
before the Committee. First of all, our charge is to make sure 
customers get their money back. It is critical for the 
integrity of these markets that customers are first in line to 
get their money. We also want to make sure that individuals who 
engage in wrongdoing are held accountable. And we want to 
determine what change need to be made to prevent something like 
this from happening again.
    What that change will look like is a question that we need 
to resolve. I have asked for recommendations after MF Global. 
The Ranking Member and I have asked for input, and the 
Committee today will hear from some of those who have given us 
their input.
    We also asked where the investigations were after MF 
Global, and all these months later, they are still ongoing. I 
am eager to hear an update on where things stand with the 
investigations now. We need to know answers and hold people 
accountable. If customers do not have faith in the markets, the 
markets fail. It is as simple as that.
    I hope today's hearing can start to rebuild that faith for 
the millions of people that need these markets to work.
    I would now turn to my friend and Ranking Member, Senator 
Roberts.

 STATEMENT OF HON. PAT ROBERTS, U.S. SENATOR FROM THE STATE OF 
                             KANSAS

    Senator Roberts. Well, thank you, Madam Chairwoman, for 
that excellent statement, and thank you for scheduling this 
hearing on an important issue regarding our oversight 
responsibilities for the CFTC.
    While today's hearing is certainly of concern to our 
constituents, we must also work with you and the rest of our 
colleagues to consider how we can help farmers and ranchers who 
are suffering from the most serious drought in memory, but we 
cannot ignore our responsibilities to oversee an equally 
important part of the American economy. That is the commodity 
futures and derivatives industry.
    So today we have a two-part hearing. First, we will hear 
from the CFTC and the bankruptcy trustees who continue to 
investigate the details of the MF Global situation and now 
Peregrine's collapse and bankruptcy. Second, we will hear from 
industry groups with regard to their recommendations to 
strengthen and secure the futures and derivatives industry.
    MF Global and Peregrine are no ordinary bankruptcies. For 
the first time in history, last fall the customers of a futures 
commission merchant's segregated funds were absconded. Then 
what was unthinkable actually happened again with the news from 
Iowa regarding the Peregrine Financial Group.
    I would like to hear in as much detail as possible from the 
trustees of both of these bankruptcies about the efforts to 
return all of the segregated account funds to the customers of 
these two firms. I appreciate the MF Global Inc. trustee and 
the new Peregrine trustee being here today to update us on 
their efforts. The trustee for MF Global Holdings, Judge Louis 
Freeh, could not be here today, but I thank him for his 
submitted testimony.
    I am also looking forward to hearing from key stakeholders 
and the futures industry on our second panel here today. You 
have put a tremendous amount of thought and effort into your 
recommendations to make the system stronger. I am eager to hear 
those recommendations.
    This input is critically important to this Committee as we 
consider the fundamental question of whether the self-
regulatory structure that has existed for decades is capable of 
regulating the industry or whether it has outgrown its time and 
needs to be replaced by a massive transfer of authority--and 
money, for that matter--to Washington and the CFTC. It should 
be noted that while Chairman Gensler does not advocate this 
approach, why, some do.
    I also thank Commissioner Sommers, who is leading the 
investigation of the MF Global failure, for being here this 
morning.
    Now, today's topics are serious matters. I know there are 
folks out there that believe the CFTC is moving too slowly. 
They are asking why are not certain people in Federal court 
already. I understand those frustrations.
    I also know that investigations are ongoing, and we must be 
sensitive of how much information is actually disclosed. We 
want to allow law enforcement to do their job so that we do not 
jeopardize an arrest or a conviction.
    Hopefully today we will learn as much as possible about 
what took place during the final chaotic days at MF Global. I 
also look forward to hearing the recommendations put forward in 
today's second panel, again, to see if we could work with the 
futures industry to prevent anything like this from happening 
again.
    Our futures markets are an absolutely critical part of what 
allows this Nation to provide its citizens with the least 
expensive and most reliable food supply in the world. For 
decades, our regulatory model has assured us that our futures 
markets have functioned properly, but in light of recent 
events, it certainly can and should be improved.
    Madam Chairwoman, I look forward to hearing the 
recommendations being brought forward this morning regarding 
any possible improvements, and thank you again for holding this 
hearing.
    Chairwoman Stabenow. Thank you very much, and certainly we 
want--any member that would like to submit an opening statement 
for the record, we would welcome that.
    We will turn to our panelists now. We have an excellent 
group of panelists. We appreciate your joining us today. One of 
our witnesses today, Judge Louis Freeh, who is serving as the 
bankruptcy trustee for the parent company, MF Global Holdings, 
was unable to attend. Judge Freeh has submitted written 
testimony and will be responding to members' questions for the 
official record.
    [The prepared statement of Mr. Freeh can be found on page 
69 in the appendix.]
    Chairwoman Stabenow. I am pleased to introduce our first 
panelist, Chairman Gary Gensler, certainly no stranger to the 
Committee, and we welcome you back. Prior to his service on the 
CFTC, Chairman Gensler served in several positions in the 
Treasury Department and before that had a very successful 
career in the private sector. So we appreciate your being here.
    Our second panelist is Jill Sommers, who is a member of the 
Commodity Futures Trading Commission, as well no stranger to 
the Committee, and has been selected by her colleagues to serve 
as the senior Commissioner in charge of MF Global-related 
matters. She previously served as head of Government Affairs 
for the International Swaps and Derivatives Association and 
worked in governmental affairs for the Chicago Mercantile 
Exchange. We welcome you back and look forward to hearing about 
the progress of your efforts.
    Certainly, James Giddens, again, we welcome you back to the 
Committee. We appreciate your efforts serving as the trustee 
for the Securities Investor Protection Act Liquidation of MF 
Global. In that role, Mr. Giddens is charged in part with the 
task of retrieving lost funds for customers, and we know Mr. 
Giddens as well is a partner at the law firm of Hughes, Hubbard 
& Reed, and a nationally recognized leading expert on brokerage 
firm liquidation. So welcome back to the Committee.
    Our final panelist is Ira Bodenstein. Mr. Bodenstein is 
serving as the Chapter 7 trustee for Peregrine Financial Group. 
We welcome you to the Committee and to your position. Mr. 
Bodenstein is also a member of the law firm of Shaw Gussis, 
based in Chicago, and previously U.S. Attorney General Janet 
Reno selected Mr. Bodenstein to serve as the United States 
trustee for the Northern District of Illinois and the State of 
Wisconsin. So we appreciate you joining us on short notice, and 
we look forward to working with you.
    We will now turn and ask Chairman Gensler for his opening 
remarks, and I know that you all understand we are asking for 5 
minutes of verbal testimony. We certainly welcome any written 
testimony as well, and then we will open it to questions.
    Chairman Gensler?

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

    Mr. Gensler. Good morning, Chairwoman Stabenow, Ranking 
Member Roberts, and members of the Committee. I am pleased to 
be with you. I am particularly honored to be here with 
Commissioner Sommers on these important matters.
    The Commission and I take very seriously the losses of 
customer funds that should have been segregated at all times. 
Customers should have been able to rely on a system of 
protection that protects them at all times, and it is not just 
about the customers that lost money. It is about farmers and 
ranchers and other end users that need to have confidence in 
these markets. It is these critical markets--futures markets 
and ultimately in the swaps market as well--that customers need 
to be able to hedge their risk, lock in the price of corn or 
wheat or an interest rate and hedge their risk so as to focus 
on what they do best--producing food and fiber and other 
essential products.
    Now, the recent events at Peregrine remind me of a saying 
my grandfather had, and it was handed down in my family and 
repeated quite often. This immigrant from Russia used to say, 
``Figures do not lie, but liars sure can figure.'' And simply 
put, the evidence points to the owner, Russ Wasendorf, taking 
the funds of customers right out of the bank and lying about it 
for years.
    The National Futures Association, the self-regulatory 
organization responsible for front-line oversight of Peregrine, 
is required to conduct periodic audits of Peregrine's customer 
funds and, in addition, an independent CPA audited Peregrine's 
annual financial statements, including all the way to December 
31, 2011.
    Just like the local police cannot prevent against all bank 
robberies, market regulators cannot prevent against all 
financial fraud. But having said that, I believe the system 
failed to protect Peregrine's customers here and that we all 
must do better, including the CFTC.
    The Commission has been actively working to improve 
protections of customer funds. We have finalized four separate 
rules strengthening protections for investment of customer 
funds, something called gross margining; segregation of 
customer funds in the new world of swaps; and also working that 
the self-regulatory organizations have specific requirements 
for their financial surveillance.
    We have also worked very closely with the Futures Industry 
Association, the NFA, the CME, and others on new rules 
finalized just last month concerning new controls over customer 
segregated accounts, and I think that those working 
relationships served well, but they will be tested further as 
we think through changes post-Peregrine.
    The CFTC also has implemented a significant restructuring 
of our oversight of SROs and intermediaries, actually hiring 
new leadership over the last 9 months, both a full partner of 
an accounting firm and a full partner from a law firm, to help 
us guide this effort.
    Looking forward, though, I do believe it is critical that 
we further update our rules, giving regulators direct 
electronic access to all bank and custodial accounts holding 
customer funds.
    In addition, I believe we should incorporate the NFA rules, 
those that were just finalized, put them in our rule book. I 
think there is a consensus to do that. But also I think that we 
should give futures customers access to information about how 
their assets are held. Where is their money held? I think we 
have to enhance internal controls of these futures commission 
merchants regarding how customers' accounts are handled, and I 
also think we need to carefully consider additional rules 
laying out how SROs' requirements for conducting their exams 
and audits, and as the Ranking Member said, I think it has been 
embedded in our system for decades. There is self-regulation, 
and then we examine the examiners, but I think we need to look 
at how we examine the examiners and set those rules in place.
    We will conduct a full rule of the CFTC and SRO examination 
and audit oversight, looking openly for improvements including 
getting advice from the Public Company Accounting Oversight 
Board that has been gracious enough to tell us how do they do 
what they do and how can we learn from what they do, and based 
on those conducts and oversight.
    I think we must do everything within our authorities and 
resources to strengthen our oversight programs and the 
protection of customer funds, and as I think back to my 
grandfather's saying, keep his values and wise admonition in 
mind.
    I thank you.
    [The prepared statement of Mr. Gensler can be found on page 
75 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Commissioner Sommers.

  STATEMENT OF HON. JILL E. SOMMERS, COMMISSIONER, COMMODITY 
           FUTURES TRADING COMMISSION, WASHINGTON, DC

    Ms. Sommers. Good morning, Chairwoman Stabenow, Ranking 
Member Roberts, and members of the Committee. Thank you for 
inviting me here today to testify about MF Global.
    Over the past 9 months, the Commodity Futures Trading 
Commission has conducted a thorough analysis of the books and 
records of MF Global and continues to work closely with Mr. 
Giddens in the SIPA bankruptcy proceeding to recover customer 
funds. We are also engaging in a comprehensive and ongoing 
enforcement investigation. It is imperative that the 
Commission, the industry, and the Congress identify and assess 
the causes for the shortfall in customer funds and take 
corrective action where possible. At Chairman Gensler's 
request, Commission staff has developed recommendations for 
enhancing Commission and designated self-regulatory 
organization programs related to the protection of customer 
funds, which includes changes to Commission rules governing 
futures commission merchants, enhanced Commission oversight of 
DSROs, and possible statutory changes, among other things. We 
must do everything in our power to restore confidence in the 
futures markets so that producers, processors, and other end 
users of commodities can once again hedge their price risks 
without fear of their funds being frozen or lost.
    On November 9, 2011, the Commission voted to make me the 
Senior Commissioner with respect to MF Global Matters. This 
authorizes me to exercise the executive and administrative 
functions of the Commission solely with respect to the pending 
enforcement investigation, the bankruptcy proceedings, and 
other actions to locate or recover customer funds or determine 
the reasons for the shortfall. While I am unable to discuss the 
specifics of our ongoing enforcement investigation, I will 
provide a brief overview.
    Our Division of Enforcement is actively engaged in the 
investigation concerning the shortfall of customer funds. We 
have a dedicated team working every day on this case. They are 
interviewing witnesses and reviewing documents as well as other 
information and are proceeding as expeditiously as we can.
    As the Committee will understand, I cannot disclose any 
specific details of the investigation because they are 
nonpublic and because I do not want to prejudice any potential 
enforcement action. In general, however, depending on the 
specific facts and circumstances, a shortfall in customer 
segregated funds could amount to a violation of the CEA and 
Commission regulations including those that govern segregated 
funds, prevent theft of customer money, require our registrants 
to properly supervise accounts, prevent making false 
statements, and prohibit deceptive schemes. Depending on the 
specific facts and circumstances, the Commission could file an 
enforcement action against corporate entities and/or 
individuals who have violated the CEA or regulations. In 
addition, depending on the specific facts and circumstances, 
individuals could also be liable if they are control persons of 
a company that has violated the law. A control person generally 
refers to management. Depending on the specific facts and 
circumstances, an enforcement action could be filed against 
individuals who aid and abet violations by companies. Finally, 
Commission regulations impose obligations on accountants who 
audit FCMs and on the banks that hold customer segregated 
funds.
    Generally, the Commission has the authority to, among other 
things, seek and impose civil monetary penalties, require a 
defendant to disgorge ill-gotten gains, obtain restitution for 
customers, and obtain other injunctive relief. In terms of 
civil monetary penalties, the Commission can seek the greater 
of three times the defendant's gain or a set amount, which is 
currently at $140,000 per violation. Civil monetary penalties 
are, of course, paid to the U.S. Treasury while restitution 
would be paid to the victims who suffered losses.
    The Commission is a civil enforcement agency, so we cannot 
seek imprisonment as a sanction in an enforcement action. 
However, a willful violation of the CEA or our regulations is a 
Federal crime, which can be prosecuted by a U.S. Attorney. We 
do not have any say in whether or not the criminal authorities 
prosecute, and I understand that they have a higher burden of 
proof.
    There is no doubt that MF Global's bankruptcy has caused 
severe hardship for thousands of customers who trusted the 
system and trusted their FCM. I believe the Commission can make 
improvements to our regulatory oversight of FCMs and DSROs to 
help restore confidence in the futures markets, and I will work 
with the Commission and Congress to implement the rules 
necessary to enhance our ability to protect market users.
    Thank you.
    [The prepared statement of Hon. Jill Sommers can be found 
on page 109 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Trustee Giddens, welcome.

STATEMENT OF JAMES W. GIDDENS, TRUSTEE FOR SECURITIES INVESTOR 
PROTECTION ACT LIQUIDATION OF MF GLOBAL, INC., HUGHES HUBBARD & 
                    REED, NEW YORK, NEW YORK

    Mr. Giddens. Thank you. Chairwoman Stabenow, Ranking Member 
Roberts, and Committee members----
    Chairwoman Stabenow. I think you need to push a button 
there.
    Mr. Giddens. Yes.
    Chairwoman Stabenow. All right.
    Mr. Giddens. Thank you. Chairwoman Stabenow, Ranking Member 
Roberts, and Committee members, it has been 9 months since the 
bankruptcy of MF Global where irresponsible actions of company 
management caused an unprecedented invasion of customer funds. 
I know this has been a long, frustrating period for former 
customers waiting for the return of property rightfully 
belonging to them. However, significant progress has been made 
for the benefit of customers, including returning 80 percent of 
customer property to commodities customers who traded on U.S. 
exchanges, completing an extensive investigation and issuing a 
public report on its findings, and identifying and pursuing 
recoveries of additional assets for customers, I, and more 
importantly the customers, have appreciated this Committee's 
support for these efforts.
    My consistent goal remains to return as much customer 
property as possible, as quickly as possible, in a fair, lawful 
manner, and that is what I have done.
    It is important to understand that I have no role in the 
bankruptcy of MF Global Holdings, which was the holding company 
of the broker-dealer and is now represented by a separate 
trustee. As a liquidation trustee, I do not have law 
enforcement or regulatory authority, though I continue to 
cooperate with and have shared my report and its findings with 
all the relevant agencies.
    Currently my office is completing a fourth distribution to 
former commodities customers, bringing total distributions to 
$4.7 billion, 80 percent of their property for the U.S. 
exchange trades and 5 percent for foreign exchange trades. For 
securities customers, substantially all non-affiliate accounts 
were transferred and approximately 80 percent received nearly 
all of their account balances because of the Securities 
Investor Protection Corporation advances.
    I have also conducted a claims process that involves more 
than 34,000 claims. Determinations for virtually all 
commodities claims have been made, and most have been agreed to 
by the claimants. We are working hard to resolve claims 
disputes absent litigation.
    The approximately $1.6 billion shortfall in segregated 
property available for the return to customers remains. I am 
urgently working to eliminate the shortfall by determining the 
size of customer claim pools and recovering funds through 
negotiation and litigation, if necessary. I may also request 
the bankruptcy court approval for the allocation of non-
segregated property to customers.
    Significant agreements have been reached pending court 
approvals with the CME Group and with MF Global Canada, which 
will also support my ability to distribute additional funds to 
customers.
    There are very substantial disputed claims from MF Global 
affiliates, including the holding company, which require me 
under law to hold appropriate reserves until those disputes are 
resolved. And until those disputes are resolved by the 
bankruptcy court, they stand as a very significant impediment 
to further distributions to customers.
    In the United Kingdom, litigation continues to resolve my 
claim against the U.K. Joint Special Administrators for $700 
million in customer property. Our extensive and thorough 
investigation into the failure of MF Global led to my 
conclusion that there may be valid claims against directors and 
officers, including Jon Corzine. I am prosecuting these claims 
with plaintiffs in pending lawsuits against those parties.
    Active discussions continue with JPMorgan Chase concerning 
transfers that I believe may be voidable or otherwise 
recoverable.
    I have made recommendations about how to avert a similar 
future catastrophe and protect customers, and I support reforms 
recently approved by regulators.
    Thank you very much for the opportunity to testify here 
today.
    [The prepared statement of Mr. Giddens can be found on page 
86 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Mr. Bodenstein, welcome.

 STATEMENT OF IRA BODENSTEIN, CHAPTER 7 TRUSTEE FOR PEREGRINE 
     FINANCIAL GROUP, INC., SHAW GUSSIS, CHICAGO, ILLINOIS

    Mr. Bodenstein. Thank you. Good morning, Chairwoman 
Stabenow, Ranking Member Roberts, and members of the Committee. 
Thank you for this opportunity to appear before you today. I 
have submitted my full written testimony. My name is Ira 
Bodenstein, and I am the appointed interim Chapter 7 trustee of 
Peregrine Financial Group, Inc. I was appointed as the 
successor trustee by the Office of the United States Trustee, 
which is a component of the Department of Justice, on July 11, 
2012. My appointment was preceded by the filing of a complaint 
by the U.S. Commodity Futures Trading Commission which sought 
injunctive relief against Peregrine and Russell R. Wasendorf, 
Sr., on July 10, 2012, and the filing of a voluntary Chapter 7 
bankruptcy petition by Peregrine within hours after the entry 
of a temporary restraining order and the appointment of a 
receiver in the CFTC proceeding.
    Since the date of my appointment as the Peregrine trustee, 
I have been working diligently to comply with my fiduciary 
duties under the Bankruptcy Code. To that end, I have taken 
steps to secure Peregrine's assets and to protect customer 
accounts and information. To prevent the loss of institutional 
knowledge and to assist in the taking control of the assets and 
information, I have obtained a bankruptcy court order allowing 
me to operate the business of Peregrine on a limited basis 
through September 13, 2012. That authority includes the 
retention of certain key employees at Peregrine. I have also 
selected a group of professionals which I feel are necessary to 
assist me in this liquidation effort.
    I have been working cooperatively with the CFTC, the NFA, 
the FBI, and the U.S. Attorney's Office in coordinating the 
liquidation of Peregrine and providing access to all 
information under my control for use in the pending civil and 
criminal investigations. On the other hand, I have been getting 
cooperation from the other side in getting information that 
they already have control of and allowing me to see that 
information.
    I have also been working cooperatively with the receiver 
who was appointed in the CFTC action. Initially there was some 
concern over competing orders and who had jurisdiction over 
what. That has been straightened out in the receivership 
matter, and an amended receivership order and an amended 
statutory restraining order have been entered, making it clear 
that all assets of Peregrine are under the control of the 
bankruptcy trusteeship.
    In conclusion, with the assistance of the team I have put 
in place, I intend to confirm the validity of the information 
on the books and records at Peregrine and disseminate such 
information to account holders with all deliberate speed. Once 
customer balances are calculated, I intend to seek court 
authority to make an initial distribution to the customers as 
soon as I can.
    I thank you for the opportunity to appear before this 
Committee.
    [The prepared statement of Mr. Bodenstein can be found on 
page 50 in the appendix.]
    Chairwoman Stabenow. Well, thank you very much, and we 
realize you are new to the position you are in, and we 
appreciate your willingness to come before the Committee as you 
begin this very, very important process.
    For the Committee members, we will do two rounds of 5-
minute questions this morning, and let me start with Chairman 
Gensler. How quickly can the CFTC move to improve the 
protection of customer accounts? You have talked about various 
things you are looking at. How quickly can you do that? Do you 
need more legal authority to protect futures markets, or do you 
feel you have the authority right now that you need to be able 
to move?
    Mr. Gensler. I think that we have strong legal authority, 
though I keep an open mind to work with this Committee and 
others if there are suggestions for changes, whether it is 
about the civil money penalties that we can impose on people or 
maybe possibly with regard to the Bankruptcy Code itself. But 
in terms of our legal authority, it is quite strong.
    In terms of timing, we have moved I think very effectively 
with the National Futures Association and the industry on those 
changes. We would like to incorporate those into our rule book 
as well. But I would be hopeful that with what is in front of 
Commissioners now in draft form--and it is only in draft form--
that we could try to get it out to public comment in the month 
of September, is my hope. But, again, a lot of feedback will 
come.
    We have a public roundtable as well, I think towards the 
end of next week. We are going to hear more from the public on 
these matters.
    Chairwoman Stabenow. Okay. Thank you. Well, obviously the 
public is watching here, and, again, certainly from my 
perspective, I am asked way too many times now whether or not 
people should be investing and using the futures markets, and 
that is not a good thing. So we do need to make the right 
decisions, but we do need to move.
    Let me ask you, Commissioner Sommers, how much time on 
average has the CFTC needed to bring charges in a case like 
this? I know you cannot speak of this particular case, but when 
we look at the kinds of cases that the CFTC has brought, what 
would be, given the size and complexity, the normal time frame?
    Ms. Sommers. Well, I think in my time at the CFTC the past 
5 years, we have not had a case like this. This is 
unprecedented for the Commission to have a case of this 
complexity, of this size, 38,000 commodity customers, and with 
customer money missing, which is in a bankruptcy case. This has 
never happened before, this is unprecedented for us, and I want 
to assure the Committee that we are moving as expeditiously as 
we can.
    Chairwoman Stabenow. Do you believe you have the resources 
to be able to do this in the quickest way possible?
    Ms. Sommers. We have a dedicated team on MF Global with a 
number of different people from our Division of Enforcement in 
our New York office as well as assistants from Chicago and here 
in Washington working on this.
    Chairwoman Stabenow. Is that a yes?
    Ms. Sommers. Yes.
    Chairwoman Stabenow. Okay. Thank you. Will any funds 
collected as a result of successful cases that you would bring 
go directly to make customers whole?
    Ms. Sommers. Seeking restitution would allow us to give 
that money back to customers. Civil monetary penalties would, 
of course, go back to the U.S. Treasury.
    Chairwoman Stabenow. Okay. Thank you very much.
    Trustee Giddens, we have heard from Judge Freeh in his 
written testimony that he believes there is enough money to 
make customers whole and there should be ``significant excess 
funds''--his words--for creditors. How would you respond to 
that?
    Mr. Giddens. Based on our claims analysis, we estimate that 
U.S. customers have valid claims for approximately $6 billion 
and the 4d estate has approximately $5.2 billion in assets. 
Customers who traded on foreign exchanges, the so-called 30.7 
funds, have pending claims of approximately $1 billion. The 
30.7 estate at present has assets of $90 million. That is a 
shortfall.
    As I indicated, we very much would like to pay every 
customer 100 percent; however, it will be a time-consuming, 
difficult, and uphill battle to be successful in marshaling 
substantial additional assets needed to pay commodities 
customers 100 percent. We appreciate Mr. Freeh's apparent 
support and confidence in our ability to collect and allocate 
additional substantial assets, and certainly that remains our 
singular focus. But, for example, $700 million of what should 
have been segregated funds are at issue in litigation in the 
United Kingdom. We are very hopeful about our success in that 
litigation, but by no means is that assured. That is a matter 
that will be decided by English courts under English law.
    Chairwoman Stabenow. Well, obviously a top priority for our 
Committee--and I believe I can speak for everyone--is to make 
sure that people are made whole, and we appreciate your 
aggressiveness in doing that and support you in doing whatever 
is necessary to do that.
    Given that my time has expired, I would now turn to our 
Ranking Member, the distinguished Senator from Kansas, Senator 
Roberts.
    Senator Roberts. Well, thank you, Madam Chairwoman.
    Mr. Giddens, you report indicates that MF Global Assistant 
Treasurer Edith O'Brien knew on October 26th that the firm was 
out of seg or compliance on October 26th, yet on October 28th, 
she was still wiring out another $175 million to the United 
Kingdom per Mr. Corzine's instructions. Is this correct?
    Mr. Giddens. Yes, sir.
    Senator Roberts. Well, the obvious question: Didn't MF 
Global have internal controls regarding how and where money 
could be moved that would prevent this from happening?
    Mr. Giddens. They purportedly had such internal controls, 
but they were obviously ineffective or ignored.
    Senator Roberts. So is Mr. Corzine simply overruling the 
internal controls? Was this sheer incompetence? Or did someone 
somewhere within MF Global know exactly what they were doing 
and, if so, willfully moved the money out of the segregated 
accounts?
    Mr. Giddens. I believe our report, which deals with these 
subjects in the 275 pages, makes clear our conclusion that 
there was knowledge that segregated customer funds were being 
improperly moved.
    Senator Roberts. Did the CFTC changes after the fact to its 
Rule 1.25 regarding the international rule or 30.7 investments 
really matter in terms of what MF Global was doing with its 
customer segregated funds?
    Mr. Giddens. The subsequent change in terms of how much 
should be segregated we think would have been--had the rule 
been changed--would have been very important. I think we 
indicated it is something like $1 billion that would have been 
required to be segregated for the 30.7 customers was not 
segregated. So that certainly would have been material.
    Senator Roberts. At the end of the day, what is your best 
estimate of the percentage of customers' money they will 
finally get back out of this bankruptcy?
    Mr. Giddens. Again, certainly it is my goal that they 
recover 100 percent. We are up to 80 percent on the 4d; we are 
up to only 5 percent on the 30.7. We have had other collections 
of non-segregated funds as to which we have to go to the 
bankruptcy court and have the bankruptcy court finally 
allocate.
    It will be our position that a substantial part of those 
funds should be allocated to customers, and with the amount of 
funds that we have under control and if we are successful in 
pending litigations, I think we are comfortable saying that 
additional distributions should certainly be in the 90-percent 
range. It is going to be an uphill fight, as I indicated, to 
get to 100 percent.
    Senator Roberts. I appreciate your dedication.
    Chairman Gensler, welcome back. Today right now can the 
CFTC tell if an FCM is shuffling its customers' money intraday 
in and out of a segregated account?
    Mr. Gensler. I think that we would be hard pressed to be 
able to do that. I think that our rules forbid it, that 
somebody even intraday has to be fully segregated, but we do 
not have online access and we are not in those accounts. But it 
is absolutely against our rules to take money intraday even. It 
has to be in segregation all day long.
    Senator Roberts. Well, following that, have you done 
anything to more quickly resolve a situation where somebody is 
out of seg or compliance at the end of the day? If we cannot do 
it intraday, can we do it at the end of the day?
    Mr. Gensler. Yes, and I think even these recent rules that 
were adopted by the NFA that I am sure Dan Roth will mention 
more about----
    Senator Roberts. Right.
    Mr. Gensler. --were a very positive step, as you say, for 
each day. And then if management wants to tap into what is 
called the excess funds--sometimes they put their own funds, 
the company's funds in. They cannot take that out more than a 
limited amount, 25 percent, without having senior management 
signing it, notifying the regulators as well. We are 
recommending that also regulators get direct view only online 
access to see the bank accounts and custodial accounts, but 
that will take some further rule changes and technology 
changes.
    Senator Roberts. So if the rating agency had not downgraded 
MF Global, how much longer would this intraday use of customer 
funds have gone on by MF Global before any regulator would have 
caught it?
    Mr. Gensler. As to the specifics of this one institution, I 
might leave it to those who know more about the company now 
than I do, but I think that the obligation of the self-
regulatory organizations and the CFTC is to ensure that all 
institutions comply with the law, even if there are not ratings 
downgrades.
    Senator Roberts. I appreciate that, and I will have further 
questions in the second round, Madam Chairwoman. Thank you.
    Chairwoman Stabenow. Thank you very much.
    Senator Harkin?
    Senator Harkin. Thank you, Madam Chair.
    Mr. Gensler, according to information I received from the 
National Futures Association, the NFA has taken five 
enforcement actions against Peregrine: in 1996, 2004, 2008, 
2012, and again on July 9, 2012. In fact, in 2004, according to 
a story that was in the New York Times, a Peregrine client sent 
a letter to the National Futures Association and the CFTC 
asking it to intervene to prevent the firm from misusing its 
customers' money. A copy of the letter was obtained by the New 
York Times. Five years later, in 2009, again a tipster wrote to 
the NFA asking it to review Peregrine's bank account 
information for accuracy.
    In 1996, the action involved two separate incidents in 
which Peregrine failed to maintain adequate significant funds. 
Again, in 2011, in the course of an audit, NFA was informed 
that Peregrine was undersegregated by over $200 million. There 
were two letters--one on Friday, one on Monday--that sort of 
changed those figures.
    My questions are: Was CFTC aware of the 2011 incident, the 
one in which there were two letters--one on Friday and one on 
Monday? If so, what did you do? And if not, should the CFTC 
have been made aware of it?
    Mr. Gensler. To the best of my knowledge, we were not, but 
we are going to learn more facts even in looking at our own 
files at the CFTC. But the audit work papers of the NFA may 
have that, but we do not necessarily review NFA's audits. There 
is an outside auditor and then the self-regulatory 
organization. What we have moved to in the last 2-1/2 years is 
we quarterly now look at NFA and CME's reviews but just on a 
sample basis. We sample some, and it happens to be Peregrine 
was not part of our small sample in these last 2 years.
    Senator Harkin. Is it typical for a firm like Peregrine to 
have that many enforcement actions taken against it during a 
similar time period? That is one, two, three, four, five, six 
going back to 1996. Is that typical?
    Mr. Gensler. I would have to get back to you because there 
are, especially in large financial institutions--and this was 
smaller--often disciplinary actions or sales practice issues. 
But I would say in looking back at the record and even looking 
at a 2000 action that the CFTC brought--and there was a 
settlement in 2000 that the CFTC had about accounting records 
at Peregrine. I think that the system failed to protect the 
public on this when you look at the various incidents over the 
years. Now, that was 12 years ago at the CFTC, but----
    Senator Harkin. Well, I guess I just basically--my question 
is that one red flag ought to be enough, but if you get two red 
flags, then three red flags, pretty soon somebody ought to 
start paying attention.
    Mr. Gensler. Right. And that is why we are looking very 
closely at how we can enhance the standards of the audit 
itself. That is why we have reached out, and the Public Company 
Accounting Oversight Board does something similar. It is not 
identical, but they look at auditors, and we have this 
responsibility to sort of look at how the auditors at NFA and 
CME do their job. We want to learn from that and see how we can 
be better examiners of the examiners embedded in this self-
regulatory function.
    Senator Harkin. Well, then that raises the question. Does 
the CFTC have enough power and authority and personnel to 
ensure that industry self-regulatory organizations fulfill 
their responsibilities?
    Mr. Gensler. We will continue to look at the statute, but 
my initial thought is we probably do have the authorities. I 
think we do need to upgrade some of our rules and how they have 
to comply with generally accepted auditing standards, what 
outside auditors have to do, the direct electronic 
confirmation, direct electronic access.
    On funding, no, I have said before in front of this 
Committee I think we are underfunded to oversee the futures 
industry that has grown five-fold since the 1990s, and then we 
have the swaps industry as well.
    Senator Harkin. It is my understanding that a futures 
commission merchant does not have to carry a bond or insurance 
to protect its customers against losses such as from fraud or 
malfeasance. Again, I question whether or not there should not 
be. There has been some who have suggested there should be an 
insurance fund. There is for securities, there is for Federal 
deposit insurance, but there is not for futures commission 
merchants. Do you have anything thoughts on that?
    Mr. Gensler. The Commission is currently focused on doing 
everything we can under current law to protect customers, and I 
think there is more that we need to do. I certainly have an 
open mind as to this dialogue, and I think it is really a 
weighing of costs and benefits. And it is an age-old issue of 
insurance does take a cost. I think we need to focus in on our 
rules and ensure customers do better and the self-regulatory 
function works better.
    Senator Harkin. My time is up. I would just say that you do 
it for securities, you do it for deposits, but not for futures. 
I just wonder if we should not be looking at something like 
that.
    Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you very much.
    Senator Lugar?
    Senator Lugar. Thank you, Madam Chairman.
    Let me follow up Senator Harkin's line of questioning. 
Chairman Gensler, in your last testimony you mentioned the 
struggle of getting to the rulemaking. You were through 30-some 
rules and heading toward 50. And you mentioned in September 
there may be more adequate hearings with other parties, other 
businesses, and what have you. I am just curious in terms of 
the dynamics of the CFTC, your own members of the Commission, 
quite apart from the testimony of those you are regulating. Is 
there such tension with the private community or within the 
board that brings about this delay? It will be about 2 years 
from the time the Dodd-Frank bill was passed, and earlier on I 
know you gave more optimistic predictions about the rulemaking. 
What delays the rulemaking? What is the dilemma you have there?
    Mr. Gensler. Thank you for saying that. I think the 
complexity of the topic and the task that Congress gave us; two 
is we want to get this right and balanced. This is a true 
paradigm shift to this swaps market. We are in a sense now in 
the back half or the back nine, if I can use--I am not a 
golfer, but we have completed 36 final rules with all the 
foundational rules. I think the Commission serves the public 
well. Commissioner Sommers can speak to it. We have largely 
done this with consensus, but occasionally we break ranks, but 
we really do want to find consensus where we can amongst the 
five of us to get this done. I think it is more sustainable for 
the public if we do. And then, as you rightly say, we have 
35,000 comment letters, so we have to deal with every one of 
those and do cost/benefit analyses and the like.
    Senator Lugar. Well, what sort of comment letters come in? 
How would you characterize the 35,000? Who are writing all 
these letters?
    Mr. Gensler. Market participants. I mean, they are weighted 
towards the financial community. I think we have adequately and 
appropriately addressed many of the end-user issues around what 
is the definition of a swap dealer and the like and the end-
user exception. But we are going to continue to get comments 
from end users who do not want to get caught up in this, and we 
are going to try to work with that.
    Senator Lugar. Is there a sense with the industry involved 
of the degree of crisis in terms of public understanding of 
this? We have had these two incidents, but there may be lurking 
out there somewhere some more. This is not quite parallel to 
the cybersecurity thing we are debating on the floor right now, 
but the thought here is that we may have sort of a 9/11 
situation at some point where our telephone system, our market 
system, and everything else is shut down.
    Now, that may not be as dire with regard to what we are 
talking about today, but, nevertheless, the lack of confidence 
in the markets. But the resistance obviously by private 
companies, investors, and others to do their thing in their 
way, I am just curious about this tension and what our role 
ought to be legislatively quite apart from this oversight.
    Mr. Gensler. Well, I think we have made tremendous 
progress, but 4 years since the crisis and 8 million people 
losing their jobs, I do think we need to get on and try to 
complete the swaps market reform.
    As it relates more directly to the customer protection 
issues, there has been, I think, tremendous interaction and 
support from the futures industry and thee self-regulatory 
organization to enhance the system, because the system did fail 
to protect the public in these matters in these last 9 months.
    Senator Lugar. Have you made any recommendations for 
legislative reform, amendments that we ought to be offering 
here as legislators that would be helpful to you?
    Mr. Gensler. We have not but remain open to it. I do think 
that, whether it is in the area of civil money penalties and 
maybe some possible issues in the Bankruptcy Code, we have 
pretty strong legislative authorities to enhance our rules for 
this customer protection area and enhance our rules for the 
auditing of futures commission merchants.
    Senator Lugar. Thank you very much.
    Thank you, Madam Chairman.
    Chairwoman Stabenow. Thank you very much.
    Senator Klobuchar is next.
    Senator Klobuchar. Thank you very much, Madam Chair. Thank 
you to our witnesses and thanks for holding this hearing. I 
know when it was originally scheduled, it was to focus on MF 
Global and the steps that have been taken since then. Yet today 
we find ourselves here trying to understand how something like 
this happened again, this time with Peregrine Financial Group, 
where something went undetected for many years.
    I actually have one farmer who had invested in MF Global, 
then the disaster happened, puts his money in Peregrine, and 
loses out twice. So clearly the system has not protected the 
people that it should, and there have been people left holding 
the bag that should not be holding the bag.
    I would like to give credit for the important steps that 
have been taken so far to strengthen consumer protections, but 
as we all know, rules are only as good to the extent that they 
are enforced. That is something I certainly used as a 
prosecutor. You can have all the books with all the laws in 
them, but if you do not enforce them, sometimes it is worse 
than not having them at all.
    So I wanted to first ask about some of the major 
revelations in the report released by Trustee Giddens, Chairman 
Gensler, and that was that there was this incredible mismatch 
between the increasingly complex liquidity needs of MF Global 
and the treasury unit that managed the company's cash flows and 
compliance with account segregation. The report found that in 
an electronic age MF Global was still managing its liquidity 
using manual entries on spread sheets and oral reports.
    I guess, first, to you, Chairman Gensler, is this finding 
as concerning to you as it is to me? And going forward, what is 
being done to ensure that firms not only have adequate capital 
but also the systems, procedures, and technology is in place to 
monitor their risk?
    Mr. Gensler. I am concerned about the internal controls of 
futures commission merchants and ultimately of swap dealers as 
well, and we are looking at and have in draft form in front of 
our Commissioners rules to ensure that these futures commission 
merchants have policies and procedures for better internal 
controls. And staff has built those recommendations on the full 
public record, including Trustee Giddens' report.
    Senator Klobuchar. Okay. Then how about the staffing and 
expertise of the NFA. You stated in your testimony that as part 
of your oversight you review their training. You went on to say 
that recent examinations of the NFA included recommendations 
for enhanced training and supervisory review procedures. How do 
you think that is going? And what is the experience level of 
front-line audit staff and what should change?
    Mr. Gensler. I think it still needs to be enhanced. I think 
that there is a great deal not just out of the Peregrine 
situation but just in the growth of the futures model and these 
two circumstances in the last 9 months, and I know that they 
are committed to doing that. But we are also looking to put in 
some rules about how they follow generally accepted auditing 
standards, how the joint audit program works be the SROs, which 
I think inevitably will raise some of the standards of the 
self-regulatory organizations.
    Senator Klobuchar. One of the things that struck me--I know 
Senator Harkin asked about this, but according to a Wall Street 
Journal article, one NFA employee actually called and found out 
that the bank showed that the account was dramatically 
underfunded, and then even though they had that information 
over the phone, then believed a fax that said everything was 
fine.
    My question is: Why wasn't verbal contact taken more 
seriously? And is that something that should be considered as 
you go forward in your process?
    Mr. Gensler. I think it is very concerning, and I share the 
public's view and Senator Harkin's and your view that that 
should have been looked at and pursued with a phone call to the 
bank directly or other matters. I think that is what a risk-
based auditor would do.
    Senator Klobuchar. Okay. Trustee Giddens, I will just end 
with this. What has been the greatest frustration in your 
efforts to recover customer funds? I know some of my colleagues 
asked about the money, but what was your greatest frustration 
in getting the money from MF Global? And what is the one lesson 
you think should be taken from your investigation in terms of 
how we move forward with a better system?
    Mr. Giddens. Among the recommendations that we made on the 
basis of our experience for a study was really--which would 
have been very beneficial and eliminated a lot of the problems 
there, would be the study of an insurance fund for commodities 
customers that was comparable to the protection provided to 
securities customers by SIPC and also by the FDIC for bank 
depositors. Most of the accounts in MF Global, and as I 
understand in many other futures commission merchants, are 
really under $100,000, so they are small farmers, ranchers, and 
others, so that the amount of protection to provide $100,000 if 
there were a deficiency in an account, if something like that 
had existed, that would have permitted us to have paid, I 
think--and I am talking off the top of my head--something like 
78 percent of all the claimants almost immediately. That would 
have been sufficient to cover costs. And how feasible that 
would be, how it would be funded by the industry, is a subject 
for study. But that limited amount of coverage, as I say, in 
our case would have permitted us to quickly move and cover 
substansial deficiencies in the case.
    We were able to do that with the securities customers 
because of the existence of SIPA and the SIPA protections. In 
terms of the collection of assets, even though monies were at 
banks and other depositories throughout the world, it is not an 
automatic process of simply saying I assert that these are 
segregated funds, because these institutions in many cases all 
were reluctant to release funds and in some cases said, well, 
we have counterclaims and setoffs and so it is a cumbersome 
process even to try to collect funds that I think demonstrably 
belong to customers because they are held at third parties.
    There were some exceptions to that, and some of the 
institutions showed some concern for the public interest and 
also for the concerns of customers. But nothing works quite as 
it is prescribed when you are actually in a bankruptcy.
    Chairwoman Stabenow. Thank you very much.
    Senator Klobuchar. Thank you very much.
    Chairwoman Stabenow. Senator Johanns.
    Senator Johanns. Thank you, Madam Chair.
    Mr. Giddens, if I could start with you, as you were looking 
through the facts surrounding MF Global, I would like to know 
if the facts illustrate that Mr. Corzine knew that segregated 
funds were being moved.
    Mr. Giddens. I think we deal with that very important 
$64,000 question in the report with the nuances and the like, 
and as I say, I think that issue is also being looked at by 
those who have regulatory and legal enforcement.
    My own view is I think the preponderance of the evidence 
indicates that management, senior management at MF Global, was 
aware of the liquidity crisis and was aware that customer funds 
toward the end were being utilized to cover other costs in the 
firm. As I say, the principal purpose of my report under SIPA 
is to explain why the firm failed with the point of view of 
coming up with causes of action that we can pursue to try to 
bring in additional assets.
    Senator Johanns. And I appreciate that, but you must also 
appreciate that we have constituents who are not only 
interested in getting the money back that they lost, but they 
are interested in making sure that if something was done wrong, 
those who did it are brought to account in some form or 
fashion.
    Mr. Giddens. We agree with that totally. There have been 
lawsuits already instituted against, in particular, Mr. Corzine 
and against other of the senior officers. We are plaintiffs' 
counsel, and we are working together. All those cases are 
consolidated before Federal District Judge Marrero in the 
Southern District of New York. Those are civil actions. The 
amounts that are sought are in the hundreds of millions, and 
those are part of the efforts we are making and the plaintiffs' 
lawyers are making in concert to hold those people that we 
think were responsible for some of the losses accountable.
    Senator Johanns. Now, when you refer to--when you answered 
my question, you referred to senior management, and I guess it 
cannot get more senior than being the top guy. So I am taking 
your answer to mean you are also referencing Mr. Corzine.
    Mr. Giddens. Yes, sir. Yes, sir.
    Senator Johanns. Again, going back to your report, do the 
facts indicate that Mr. Corzine, in fact, authorized the 
movement of customer segregated funds?
    Mr. Giddens. I cannot say that the total analysis of that 
proves that point unequivocally.
    Senator Johanns. Is part of your responsibility, does it 
also involve cooperation with the U.S. Attorney's Office?
    Mr. Giddens. Yes.
    Senator Johanns. And that investigation is ongoing?
    Mr. Giddens. Yes, sir, as well as the CFTC regulatory 
investigation.
    Senator Johanns. Okay. Commissioner Sommers or Chairman 
Gensler, either one of you can attempt to address this. Let me 
express a concern I have, and I would like your reaction to it. 
I am becoming even more of a skeptic than I was at the time of 
the passage of Dodd-Frank that, we fill books with rules and 
regulations and statutes and on and on, but the reality of the 
world is that you can write and write and write and write and 
pass laws, but at the end of the day there are two things very 
difficult to protect yourself from: number one, stupidity, and 
we see plenty of that in the financial crisis amongst some very 
powerful people; and, number two, thievery. And I just worry 
that what we have ended up with here is a very hugely complex 
system. It is hammering the little guy out there. We struggle 
to even tell them whether they are going to be caught up in 
end-user rules or not. And at the end of the day, the big get 
bigger because they have the capital and the wherewithal to 
hire the accountants and the lawyers and everything else that 
is required these days. And I think we are just hurting the 
system.
    Commissioner Sommers, I would like your reaction to that, 
and you get--I am out of time already, so if you could just 
answer very briefly.
    Ms. Sommers. Senator, I would say that I wholeheartedly 
agree with your assessment. I think that as we write these new 
rules implementing Dodd-Frank, we need to keep the goals of 
that legislation in mind and to make sure that it works for 
market participants.
    Senator Johanns. Thank you.
    Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you very much.
    Yes, Senator Baucus.
    Senator Baucus. Thank you, Madam Chairman.
    I have two questions, basically, for the CFTC. First, 
Chairman Gensler and Commissioner Sommers, are you familiar 
with a private firm called Atlas Ratings?
    Mr. Gensler. No, I do not believe so.
    Senator Baucus. Well, Atlas Ratings is a company that puts 
together information with respect to FCMs subsequent to the MF 
Global collapse, and they take the information that the CFTC 
requires and others require, they take it all, then they 
compile it. And they put together a composite score of various 
FCMs. And this is a copy of it here, and they go through all--
the top score is 83, then they go all the way down through all 
the others, and they rate according to all kinds of data: 
transparency, net clearing or non-clearing FCMs, net capital 
ratios, capital trend, customer flow, funds flow, market 
valuation, lots of factors. And they concluded in May of this 
year that Peregrine is third or fourth from the bottom, one of 
the worst scores. It was right here. It is--well, it is fourth 
from the bottom. They have not counted all the FCMs, but there 
is a bunch of them.
    My question is: If this outfit can get all this data and 
reach a conclusion that Peregrine is in real rough shape here, 
why can't the CFTC, why can't your agency know that this 
company, Peregrine, is doing so poorly and ready to probably 
collapse based upon the data at least this one company put 
together? Do either of you know about Atlas? I do not know what 
other system, what other outfits are that give information with 
respect to the status, financial status, of the FCMs. But here 
is one outfit, in May, down the bottom, and nobody--your agency 
did nothing about it, as far as I can tell.
    Mr. Gensler. There may be others at the agency, but I think 
we hugely benefit from the public input, and whether it is 
analysts, as this is, this research, I would like to know who 
the other three or four at the bottom are, but----
    Senator Baucus. I will tell you who they are right now. 
Maybe it will give you a little----
    Mr. Gensler. But I think we need to----
    Senator Baucus. --protect some account holders. I will tell 
you if they are. Down at the bottom, the very bottom, is 
Pioneer Futures. Second from the bottom is Rosenthal Collins 
Group. Third from the bottom is Crossland. And the fourth from 
the bottom is Peregrine. And there is a bunch here, I would say 
70, 80, 90 different FCMs.
    Mr. Gensler. I think that we need to move the self-
regulatory organizations and the CFTC a bit more to risk-based 
approach and not just what auditors might call ticking and 
flicking, just, checking the boxes off the page, whether it is 
the risk of getting a fax on a Friday that is different than 
the fax on a Monday or the risk that this Atlas group that you 
have mentioned have looked at. So I think it is part of why 
Congress ultimately also put a whistleblower piece into our 
statute that now even whistleblowers can come forward, and if 
there have been penalties paid, they can get part of that. I 
think we are helped out by that because we are ultimately 
reliant on the public, the self-regulatory organizations and 
the like, as well as our own work.
    Senator Baucus. Well, anyway, I ask, Madam Chairman, that 
this be included in the record, this report.
    Chairwoman Stabenow. Without objection.
    Senator Baucus. It is just disturbing data. Here is a 
report which ranks Peregrine down at the bottom, near the 
bottom, fourth from the bottom, and that is the first 
information that seems to be public, and your agency, which is 
supposed to be the regulator, did not do much about it. There 
is something wrong here.
    [The report can be found on page 116 in the appendix.]
    Senator Baucus. Second, and a little disturbing, this 
question I think has been touched on, basically I met you, Ms. 
Sommers, and asked the degree to which, subsequent to the MF 
Global collapse, you are following up and looking to other FCMs 
and to make sure we do not have another MF Global, you said, 
``We are doing that, we are doing that, we are doing that.'' 
But it seems to me that the Commission's information about 
Peregrine is just based upon this self-certification, and 
Peregrine just asked, ``How are you doing?'' ``Oh, we are doing 
fine,'' and without an audit, without digging in behind the 
veil, finding out exactly what is the status of some of these 
outfits. I am just concerned you are just asking, ``Oh, we are 
doing fine.'' And, of course, that is insufficient. You have 
got to get down deeper and find out whether or not that is 
true, and it just seems to me that your follow-up subsequent to 
my request, verbal plus written, is pretty superficial, not 
very direct, I mean not deep. My impression is you just do not 
dig deep enough to find out what is happening because you are 
just--you allow self-certification. Is that correct or 
incorrect? And why not?
    Ms. Sommers. The follow-up, Senator, that I believe that 
you are referring to is the spot seg audits that we did after 
MF Global, and you are correct that those were not full, 
complete audits of the FCMs. Those were done by not only the 
CFTC for the top 10 or 12 firms, but they were also done by the 
CME for the clearing firms and the NFA for the remainder of the 
FCMs, and those were just spot seg audits.
    Senator Baucus. Well, my time is up. You are the 
responsible agency. You have got to find a solution. And if you 
do not have the power, you have got to ask for the power. You 
are the cop on the beat. You have got to do your job. I do not 
think you have been.
    Thank you.
    Chairwoman Stabenow. Thank you very much.
    Senator Grassley.
    Senator Grassley. Thank you.
    Mr. Gensler, it has been reported that the CFTC conducted 
examinations of Peregrine in 2006 and 2007. Did the CFTC 
actually conduct these examinations? And if so, why didn't CFTC 
examiners figure out that bank statements were not matching up 
with what was actually in the bank account? And did the 
examiners independently verify account balances with 
Peregrine's bank?
    Mr. Gensler. Senator, we have looked back. We had done a 
number of reviews, some in the late 1990s and the two that you 
mentioned in the past decade as well. These are not audits. We 
rely on the front-line regulators, the NFA, and also the 
outside CPA. So it is correct that we did not verify bank 
statements.
    What we are looking at, sometimes we look at anti-money-
laundering things, like in 2010 there was another review. 
Sometimes we end with an enforcement action, like in 2000. We 
actually ended up with an enforcement action against Peregrine 
that was settled back then 12 years ago.
    Looking back now at some of those work papers, I do wonder 
about the red flags of what we might better have caught in 1999 
and 2000 and so forth. So I have the same question that you 
have about our own work, and we are looking to see how we can 
do better as well.
    Senator Grassley. Okay. Another question for you. The 
National Futures Association is an organization that serves as 
these front-line regulators, and that would apply to Peregrine. 
It has been reported in the Wall Street Journal that the CEO of 
NFA, Mr. Roth, expressed his opinion at a congressional staff 
briefing that ``auditors are not looking for fraud'' when 
conducting their regular audits of firms like Peregrine.
    Would you agree with Mr. Roth that our auditors who are 
auditing these brokerage firms are supposed to be looking for 
signs of fraud or not?
    Mr. Gensler. Though I am not myself an auditor, I have 
heard there is something--there is a distinction between a 
fraud audit and a financial audit, and it may be that that Mr. 
Roth was referring to. They do not do full-scale fraud audits.
    Having said that, the records are supposed to be confirmed, 
the balance is validated with the banks and custodials, and Mr. 
Wasendorf has admitted in a statement left when he tried to 
take his life that he had been falsifying these. I mean, this 
was somebody that for year was dishonest to a broad group of 
people, his outside auditors, including the NFA.
    Senator Grassley. Okay. I do not know whether a statement 
that Senator Klobuchar made about a phone call was made would 
fall into the whistleblower category, but you know my interest 
in protecting whistleblowers, so I have this question for you, 
Chairman Gensler. Since the collapse of MF Global and now 
Peregrine, there is a lingering question on a lot of people's 
minds that is something like this: Are there any other firms 
out there that are going to go bust? The Dodd-Frank legislation 
required the Commodity Futures Trading Commission to establish 
a whistleblower office, and I understand that this office was 
officially put in place last January.
    So my question: Since the opening of the whistleblowers 
office at CFTC, have complaints been made about inappropriate 
activity going on at any futures firms? If so, how many active 
cases does the whistleblower office have that are looking into 
claims of impropriety? And do you think that the CFTC has done 
enough to raise awareness in the futures industry that the 
whistleblower office exists and what the function of the office 
is supposed to be to encourage people to come forth?
    Mr. Gensler. I thank you for your support because it is an 
important office. It has been set up. There is a fund set aside 
with money. In fact, with this settlement in this LIBOR case 
with Barclays, the fund will be up to the full maximum Congress 
made of $100 million.
    I think that we could do more to educate the public. We do 
have a consumer office that is now set up, but it is, I think, 
just two people because, realistically, we are a small agency. 
And, yes, we have had whistleblowers come forward. If you 
wanted a fuller report, I would have to work to get you the 
details of how many. I cannot remember the inventory of claims, 
but there are a number of whistleblowers that have come forward 
in general matters. I do not know if they have been about 
customer funds, though.
    Senator Grassley. In the 11 seconds I have left--because I 
have to go Madam Chairwoman--I wanted to raise an issue that I 
was going to raise with Mr. Roth, and it will take 30 seconds 
to read this, and then he can answer for the record. And it is 
similar to what Senator Harkin asked of Mr. Gensler.
    One of the things that continues to trouble me are reports 
of the red flags that were raised about Peregrine Financial, 
and those red flags were ignored. For instance, it has been 
reported that in March 2011, a confirmation form was faxed 
directly from US Bank to the National Futures Association 
showing that there was about $7 million in the bank account 
designated for segregated customer money. Then shortly 
thereafter, either that day or the following business day after 
finding out US Bank had send the confirmation, Mr. Wasendorf, 
Sr., sent another confirmation showing that there was 
approximately $220 million in the account for customers.
    Question: Is this factual account accurate? Did US Bank 
send a confirmation showing only $7 million of customer money? 
And then what did the NFA do in following up on the contrasting 
confirmation reports? And did anyone from NFA call the US Bank 
to verify how much was in the account? And if not, why not?
    Thank you.
    Chairwoman Stabenow. Senator Grassley, that is a question 
for the record, I understand?
    Senator Grassley. Yes.
    Chairwoman Stabenow. Yes. Thank you very much.
    [The following information can be found on page 264 in the 
appendix.]
    Chairwoman Stabenow. Senator Boozman, No? Senator Hoeven.
    Senator Hoeven. Thank you, Madam Chairman.
    Chairman Gensler, In the simplest, most straightforward 
way, if you would explain to me, how do you ensure that funds 
from customer segregated accounts are not used by commodity 
firms? Just lay it out. Given what has happened, given 
Peregrine failing after MF Global, how do you protect 
customers?
    Mr. Gensler. I think that we will never protect that there 
will not be somebody trying to steal or lie or cheat, as my 
grandfather sort of laid out. But I do think that getting rules 
in place that the regulators can directly on a daily basis see 
the account balances, now with technology's help, is a big 
plus.
    I think also filling the hole that Trustee Giddens and the 
industry and we have all focused on these foreign accountable--
I mean, it was a gap in our regulations that, just listening to 
the numbers, is nearly $1 billion--or maybe I misunderstood the 
numbers that he said from the public record.
    So I think that there are always going to be folks--most 
people are good people, but some people are going to be bad, 
and we have to close out the avenues where they can defraud the 
public. But we bring 100 enforcement actions a year, and, 
unfortunately, there are going to be some folks that are trying 
to defraud the public.
    Senator Hoeven. So you feel you have a better track of the 
segregated accounts. Do you agree with Trustee Giddens that 
there should be some type of insurance fund like FDI insurance 
for depositors and banks for smaller customers? If so, at what 
threshold? And how should it be funded?
    Mr. Gensler. I am certainly open to it, but I think it is 
an issue of costs and benefits, and I think that certainly I 
stand ready at the Commission to hear more from the public, 
from farmers and ranchers and others that use these products, 
as to how to move forward on that, and it certainly would be 
Congress to take up. But I think we have to focus on everything 
within the laws, within the rules that we have now, to ensure 
that they best protect the public and not necessarily sort of 
just rely or wait for that very important policy debate.
    Senator Hoeven. Commissioner Sommers, your response to the 
same two questions--protecting customer segregated accounts, 
and then should there be some type of fund to protect small 
customers?
    Ms. Sommers. Senator, I believe that there have been a 
number of enhancements that have been identified, not only by 
the NFA but by industry, by the CFTC staff, by the trustee, and 
we are moving forward to implement all of those enhancements.
    With regard to the insurance fund, I think that the issue--
as we always say the devil is in the details. Who is going to 
be paying these premiums? Is this going to be the FCM? Is it 
going to be the farmer and rancher? I have had a number of 
conversations with producers with regard to whether they would 
be willing to pay additional costs for premiums if they knew 
that their accounts were protected. Some are, and some are 
skeptical. So it is something that we need to continue to 
review and study to understand whether it is something the 
industry would want.
    Senator Hoeven. Trustee Giddens, customers are concerned 
about how much they are going to get paid back of their 
segregated funds, their account, and when; also, as Senator 
Johanns said, that the senior executives who did wrong are held 
to account. Give me your timeline on both. So with customers, 
how much are they going to get back, in what time frame, your 
best guesstimate, simple terms? And why haven't charges been 
fully brought in MF Global given that that occurred longer ago 
than the Peregrine case?
    Mr. Giddens. To take the second question first, the timing 
on when any criminal or enforcement actions will come is really 
up to the U.S. Attorney and to the CFTC enforcement actions. As 
I say, we have, as indicated, already commenced working with 
the plaintiffs' counsel to bring litigation action against 
senior management of MF Global in order to collect additional 
funds for customers if we are successful in those litigations. 
So we are moving ahead on that.
    The second question is we are and I am determined to return 
money to customers as quickly as I can. I cannot now return 
money until disputes over large claims are resolved by the 
bankruptcy court. We are moving quickly to resolve those 
disputes. As soon as those disputes are resolved, that frees up 
additional money for distributions.
    How long that process may take, it may take 3 months, it 
may take 6 months, or it may take longer, depending on the 
complexities of the claims.
    The holding company itself has filed claims against us of 
$2.2 billion in which it asserts--some of them they assert are 
securities claims, some of them they assert are commodities 
claims. And those kind of issues have to be resolved, and I 
have to keep reserves so that I do not discriminate if it turns 
out those claims are allowed we have sufficient money to do 
that. So that is the biggest problem at present.
    As we collect additional funds from segregated funds or 
whatever, we move as quickly as we can with the court. We will 
be distributing additional funds we have collected from the 
CME, and we will make those distributions as quickly as we can.
    So I see this as going on as a sort of serial process. The 
litigation with the U.K. administrator is over $700 million. 
That case is being pushed before the courts. They have put in 
their initial position on that. The U.K.'s administrator's 
position is that these funds are not segregated under U.K. law, 
and they are going to be unsecured general assets for his 
administration. My position is these were 30.7 funds that the 
firm, the U.K.--part of the firm agreed and said should be 
segregated. Our position on--our responding position on that 
case will be filed in September. There will be discovery 
depositions, and the case should go to trial early in 2013. But 
that is an issue involving $700 million, which, literally I 
cannot control the timetable. The U.K. courts do.
    But, again, all I am trying to point out is we are doing 
everything we can as quickly as possible to get funds back to 
customers.
    Chairwoman Stabenow. Thank you very much.
    Mr. Giddens. Thank you.
    Chairwoman Stabenow. Senator Thune.
    Senator Thune. Thank you, Madam Chair.
    Let me just say, to try to kind of personalize this to the 
people that I represent, I think the biggest question that we 
are faced with is: What needs to be done to ensure that 
farmers, ranchers, and investors and others who utilize 
commodities and futures can be protected from losing their 
money through misuse of customer funds, as has occurred with MF 
Global and now with Peregrine Financial Group, even though 
there are laws and regulations that have been in place to 
prevent these types of losses from occurring? I think anytime 
that we talk about making changes to any regulatory structure, 
we as lawmakers need to ensure that we emerge from these 
bankruptcies with what we have learned and able to provide 
adequate legislative and regulatory modifications to ensure 
that those types of scenarios do not occur again. And we also 
need to make certain that what we do does not create overly 
cumbersome compliance requirements and overtake normal 
oversight operations.
    So, that said, the Peregrine Financial Group bankruptcy and 
the misuse of customer funds that occurred there, given the 
fact that MF Global occurred just 9 months earlier, is really 
troubling. And the CFTC has made some changes since that time, 
including implementing some reforms, Rule 1.25, which is known 
as the ``MF Global Rule,'' but it is not clear that these rules 
have enabled the CFTC to more effectively oversee their self-
regulatory system of the futures industry.
    That point aside, and I would ask this question I guess to 
Chairman Gensler and to Commissioner Sommers, would you agree 
that the self-regulatory structure of the futures industry 
along with some proposed reforms that various self-regulatory 
agencies have been discussing is capable of regulating the 
modern futures industry?
    Mr. Gensler. I think that the system can work. I think it 
does need some enhancements, and I do think given that we are 
also going to ask the NFA to register swap dealers--we actually 
had our first swap dealer register with them last Friday. But 
as they start to take on those examination functions, they will 
have to step up their resources, which they plan to do, but 
they will be challenged. And firms will fail in the future. 
Firms should be allowed to fail in our system, I believe in our 
system, and not have taxpayers back it either. But when they 
fail, the customer money has to be fully protected, and that is 
what we--as you say, lessons learned from here in this system. 
But I think it can work with enhancements.
    Senator Thune. Commissioner Sommers.
    Ms. Sommers. Senator, I agree. I think the self-regulatory 
system has worked for the history of the futures industry, and 
with the enhancements that have been identified, unfortunately, 
Peregrine happened before we were able at the Commission to 
implement any further enhancements to our own rules. But we 
plan to do that, and I am hopeful that we will get to that as 
soon as we can.
    Senator Thune. Let me ask, since the passage of Dodd-Frank, 
do you think the CFTC is spending so much time writing new 
rules and regulations that it has not had time to adequately 
enforce the existing ones like the segregation of customer 
accounts?
    Mr. Gensler. I think that we are stretched, but we are very 
much focused on the futures market, and we have restructured 
our group that oversees intermediaries. We were working on, you 
referred to, Rule 1.25 well before some of the swaps rules, and 
even this LIBOR case is an example. I think hopefully I can 
speak for both of us, so proud of the Division of Enforcement 
to bring this case that they started working on in April of 
2008 on something that is 70 percent of the futures industry is 
related to LIBOR. So we are very much focused on the futures 
market and farmers and ranchers, but we are stretched thin 
because the futures market has grown so much and now we have 
these new obligations in the swaps market as well.
    Senator Thune. Commissioner Sommers, what do you think? 
Spending too much time on Dodd-Frank to keep up with the stuff 
you have to do already?
    Ms. Sommers. Well, I do believe that we identified many of 
the enhancements that we could have made to the futures 
industry 6 months ago, so the changes that are before us now 
are changes that we could have implemented months ago.
    Senator Thune. Thank you. Let me ask you, Trustee, Giddens, 
in your testimony you provided recommendations for legislative, 
regulatory, and other reforms that might help avert similar 
liquidations in the future, and I guess the question is: What 
would you say is the single most important and effective 
legislative change that should take place based upon your 
experience with MF Global?
    Mr. Giddens. I think the one that would have had the most 
material effect would have been the consideration of the 
creation of a modest investor protection fund. As I say, the 
number of customers we discovered, unlike securities customers, 
the average account here was less than $100,000. So it is a 
modest amount of money, up to $100,000 would have--and the 
shortfalls might have been $20,000 per account or something, 
would have permitted sort of seamless restitution to these 
customers early on. Now, whether the cost of that is practical 
and so on, but I think that recommendation or something like 
that would be the most important.
    Senator Thune. Okay. Thank you. I see my time has expired, 
Madam Chairman. Thanks.
    Chairwoman Stabenow. Thank you very much.
    Chairman Gensler, you mentioned a saying that your 
grandfather used, and I am reminded of another Russian saying 
used by President Reagan: ``Trust, but verify.'' How often are 
filings by FCMs received but not verified?
    Mr. Gensler. Well, in fact, they make a filing every month, 
and under the new rules, they will make filings every day. But 
the verifications to outside third parties have historically 
been done by paper and only done annually by the outside 
auditors or the NFA every 9 to 15 months. We want to change our 
rules to say daily that you can see those account balances 
directly from the bank. And if you see it directly from the 
bank electronically, I think that is a form of verification 
that will significantly enhance this audit function.
    Chairwoman Stabenow. Thank you.
    We have heard from many on the buy side who would like to 
see the option of being able to fully segregate their assets 
for both futures and swaps. Would you or the Commission support 
customers' having the option of complete segregation? What are 
the costs and benefits to that approach from your perspective?
    Mr. Gensler. We adopted earlier this year for swaps 
something that walked in that direction, something called 
``legal segregation but operation commingling.'' Some pension 
funds have asked to move a step further. We had roundtables on 
it. I think there is something very interesting to pursue, but 
as I understand it, it might need some changes to the 
bankruptcy law as well to fully facilitate what some of these 
accounts would like to do. But we can encourage the dialogue 
because I think it is very helpful dialogue.
    Chairwoman Stabenow. Well, speaking of the Bankruptcy Code, 
Trustee Bodenstein, the Code and other relevant laws have 
different views on the priority of commodity customers over 
creditors. Would you agree that customers should have a special 
status in these proceedings ahead of general creditors?
    Mr. Bodenstein. Madam Senator, I believe that one of the 
provisions of----
    Chairwoman Stabenow. If you might speak a little bit more 
in the mic, I am not sure you have the----
    Mr. Bodenstein. I am sorry. I believe that under the 
special provisions for commodity broker liquidations in the 
Bankruptcy Code, there is a separate customer property pool 
that would have priority over the pool of general creditors.
    Chairwoman Stabenow. And would you support clarifying that, 
making it very clear that customers go ahead of general 
creditors?
    Mr. Bodenstein. Excuse me?
    Chairwoman Stabenow. Right now bankruptcy law conflicts 
with other laws as to who comes first----
    Mr. Bodenstein. Well, my understanding----
    Chairwoman Stabenow. --and so as we look at----
    Mr. Bodenstein. I am sorry. My understanding of the 
Bankruptcy Code--and we will see how these special provisions 
for commodity broker liquidations play out in this case. My 
understanding at present is that, in fact, the customers do 
have a priority over the claims of the general creditors.
    Chairwoman Stabenow. That is correct. There are other laws 
like the bankruptcy provisions in the Commodity Exchange Act 
that have a different view, so that is I guess what I was 
asking. You support having the status in proceedings for 
general creditors. So we will leave it at that. Let me ask 
you----
    Mr. Bodenstein. Well, I guess the answer is--I am not an 
advocate for any one particular group as the trustee, but I 
will study the different provisions and ensure that I apply 
them with the consent of the court on all the actions as 
appropriately as possible.
    Chairwoman Stabenow. Sure. Let me ask you, when will 
Peregrine customers start to get their money back? Do you 
estimate a timeline?
    Mr. Bodenstein. I do not have an estimate at this point in 
time. We are working diligently right now to verify customer 
balances and customer segregated funds so that that sort of 
calculation and determination can be made in the near future.
    Chairwoman Stabenow. And along that line, Trustee Giddens, 
how many MF Global accounts were transferred to Peregrine 
Financial?
    Mr. Giddens. Of 27,000 accounts, approximately 590 accounts 
and something like $197 million of associated cash collateral 
was transferred. It was not transferred to PFGBest directly, 
but it was transferred within CME and other exchanges.
    Chairwoman Stabenow. Okay.
    Mr. Bodenstein. I have a slightly different take on that.
    Chairwoman Stabenow. Yes, Mr. Bodenstein?
    Mr. Bodenstein. I believe that approximately 627 accounts 
were transferred and approximately $197 million. But of that 
amount, only $3.7 million stayed at Peregrine Financial, and 
the account value now of those accounts is slightly in excess 
of the $3.7 million. So, by and large, within days or months 
after the accounts were transferred from MF Global to 
Peregrine, those customers removed the funds, transferred their 
accounts out of Peregrine.
    Chairwoman Stabenow. Okay. Just to be clear then for the 
record, Mr. Bodenstein, could you give the number again of 
accounts that you believe--600? What was the number?
    Mr. Bodenstein. Based on the preliminary information I 
requested from the employees at MF Global--at Peregrine, they 
tell me that approximately 627 accounts were transferred.
    Chairwoman Stabenow. Trustee Giddens, you were giving some 
different numbers here. Could you repeat those?
    Mr. Giddens. The number we had from our records is not 
significantly different. We said 590 accounts. And I do not 
know what the accounts did when they were transferred, but I am 
pleased to hear that large numbers of them transferred to 
another firm. But we agree on the figure. I had 590 and 
approximately $197 million of assets that were transferred, and 
as I say, I think we are glad to hear that a significant number 
of those moved on, and as I understand it, only claims in 
excess of $3 million remain at Peregrine.
    Chairwoman Stabenow. Okay. Thank you very much.
    Senator Roberts.
    Senator Roberts. Well, Madam Chairman, I do not want to 
beat up on a horse that is already out of the barn and in 
another pasture. But there is a lot of angst, a lot of 
frustration, and a lot of anger in farm country about this. And 
when I asked Mr. Giddens this question, did someone somewhere 
within MF Global know exactly what they were doing and, if so, 
willfully move the money out of these segregated accounts, the 
answer was yes. A later question by one of the other Senators 
indicated that that also obviously involved a person at the 
top, i.e., Mr. Corzine.
    Senator Johanns followed up and indicated, does that mean 
that he is guilty of that willful movement of the money, you 
were hesitant to say that. I understand that. But certainly I 
do not want to parse words, but it seems to me that he was at 
least complicit and culpable, which leads me to the question of 
Ms. Sommers. I know that you cannot answer the question that 
farmers and ranchers are asking me--and probably asking you as 
well--why isn't he in court? But my question to you is: Is the 
Department of Justice working with you on this investigation to 
your satisfaction to bring forward criminal charges against 
those who should be held accountable?
    Ms. Sommers. Senator, we have been working with other 
authorities since the beginning, and just to point out again 
that a willful violation of the Commodity Exchange Act is a 
Federal crime. So if there is evidence to indicate that, that 
would be something that a U.S. Attorney would be able to 
pursue.
    From our side of this investigation, I think we would never 
want to risk a successful outcome until we are able to review 
all of the facts and circumstances of this case to be able to 
bring a possible case against an entity or a person who may 
have violated the Commodity Exchange Act.
    Senator Roberts. But are you satisfied with the cooperation 
to date with the Department of Justice?
    Ms. Sommers. Yes, sir.
    Senator Roberts. Well, there is one instance.
    Mr. Bodenstein, can you explain the difference between SIPC 
bankruptcy in the case of MF Global and your Peregrine Chapter 
7 bankruptcy?
    Mr. Bodenstein. Senator, I am not an expert on SIPC 
bankruptcy. I would certainly defer to Mr. Giddens with respect 
to that.
    With respect to the Bankruptcy Code as it exists, my duties 
are set forth in Section 704 as a general trustee, and now we 
have this overlay of the commodity broker liquidation 
provisions beginning in Section 761 through 767. And I have not 
had previous experience working with those particular 
provisions, and very few people have had that honor or that 
daunting task of deciphering the meaning of those provisions of 
the Bankruptcy Code, but I look forward to that challenge, and 
I will faithfully--I expect to learn quite a bit and form 
opinions about how those provisions work in tandem with the 
other provisions of the Bankruptcy Code and what 
recommendations I might have as we go through this liquidation 
of Peregrine on how those can be improved. On future dates, I 
am sure I will be happy to share my thoughts on that with you.
    Senator Roberts. A final question for everybody. What do 
you think of CME's new proposal regarding where segregated 
funds should be held? We can start with the Chairman.
    Mr. Gensler. We have had very fruitful discussions with the 
CME, with Terry Duffy, who I think might be on your next panel. 
I do think that it, as I understand it, might raise some issues 
back to the Bankruptcy Code again if the funds are not 
specifically at the futures commission merchant, just how it 
goes into these various provisions that Trustee Bodenstein 
referred to.
    Senator Roberts. Ms. Sommers?
    Ms. Sommers. Senator, I think I would applaud all of the 
market participants' efforts through the last 9 months and the 
different options that are on the table, and we need to 
continue to review all of these because I think that they could 
offer some good alternatives to what we currently have.
    Senator Roberts. Trustee Giddens?
    Mr. Giddens. I think it is a promising proposal.
    Senator Roberts. Thank you for your brevity.
    Mr. Bodenstein?
    Mr. Bodenstein. I am not familiar with that proposal, 
Senator.
    Senator Roberts. Well, get familiar. I appreciate that very 
much. My time is up.
    Chairwoman Stabenow. Well, thank you very much. And let me 
just say as we dismiss you that there really are three goals 
that we have, as I said in the beginning: Making sure people 
get their money back in the unfortunate 500 or 600 accounts 
which have been hit twice, certainly I do not blame them for 
being very angry and very concerned about the system, as well 
as everybody else. We also want to make sure that people are 
held accountable for wrongdoing. And we want to make sure that 
the system improves, because the first time we heard it was an 
outlier, and it happened again, and I can assure you, if this 
is happening again, people are going to be extremely upset if 
we are not able to make changes. And we certainly support you 
doing that.
    So you represent all three of those goals sitting before 
us, and we look forward to working with you, and we want to be 
able to answer the question yes when somebody asks us whether 
or not they can trust the futures markets and participate and 
not put their money under their mattress.
    So thank you very much, and we look forward to working with 
you.
    [Recess.]
    Chairwoman Stabenow. Well, good morning, and we welcome you 
to a very, very important second panel. We appreciate your 
participation and input today, and let me introduce each of our 
witnesses. And as you are aware, we would ask for 5 minutes of 
opening comments, and anything further for the record we 
certainly would welcome.
    I am pleased to introduce our first panelist: Walt Lukken. 
Mr. Lukken is currently the president and CEO of the Futures 
Industry Association. Mr. Lukken formerly served as a 
Commissioner and Acting Chairman of the CFTC but, more 
importantly, Mr. Lukken is also an alumnus of the Committee, 
having served as counsel under then-Chairman Richard Lugar. And 
we welcome you back to the Committee.
    Our next panelist is Terry Duffy, certainly no stranger to 
the Committee. Mr. Duffy is the executive chairman and 
president of CME Group. Prior to his work with CME Group, Mr. 
Duffy was president of TDA Trading. He was appointed by
    President Bush and confirmed by the U.S. Senate in 2003 as 
a member of the Federal Retirement Thrift Investment Board. 
Welcome back.
    Mr. Roth, Dan Roth, is the president and CEO of the 
National Futures Association. It is good to see you. Since 
joining NFA in 1983, Mr. Roth has served that organization as 
its chief operating officer, executive vice president, and 
assistant general counsel. Welcome.
    Our next panelist is Diana Klemme. Ms. Klemme is here on 
behalf of the National Grain and Feed Association and is vice 
president and director of the Grain Division at the Grain 
Service Corporation. Ms. Klemme leads a staff that develops 
merchandising and risk management programs and is a well-known 
author of a number of articles on agricultural risk management, 
and we look forward to hearing your perspective this morning.
    Our final panelist is John Roe. Welcome. Mr. Roe is the co-
founder of the Commodity Customer Coalition, serves as its vide 
president, also president of Roe Capital Management. In 
addition to these roles, Mr. Roe is a principal and co-founder 
of BTR Trading Group, and prior to that ran the division of MF 
Global, which they left in June of 2010. We welcome you as well 
this morning.
    Let us start first with Mr. Lukken.

 STATEMENT OF HON. WALT LUKKEN, PRESIDENT AND CHIEF EXECUTIVE 
     OFFICER, FUTURES INDUSTRY ASSOCIATION, WASHINGTON, DC

    Mr. Lukken. Good morning. Chairwoman Stabenow, Ranking 
Member Roberts, FIA is the leading U.S. trade organization for 
the futures industry. While we are not a regulatory authority 
like the NFA or the CFTC, FIA's mission since its inception has 
been to protect the public interest through adherence to high 
standards of professional conduct and financial integrity. With 
that in mind, I would like to address the recent failures of MF 
Global and Peregrine Financial Group.
    Three weeks ago, we learned that more than $200 million in 
customer funds was missing from Peregrine and that the fraud 
appears to date back 20 years. This is appalling and absolutely 
devastating news, especially for our customers, many of them 
farmers and ranchers. Members of the futures industry remain 
outraged, and we strongly encourage the PFG trustee as well as 
the MF Global trustee to quickly return as much money as 
possible to customers.
    The futures industry took considerable pride that the 
regulated futures markets had come through the financial crisis 
with relatively few problems. Tragically, we can no longer make 
that claim. These events are a stark reminder that we must 
never lose sight of the most fundamental and basic purpose of 
our regulatory system: protecting customer funds.
    FIA is pleased that the regulators have adopted and 
implemented many of our MF Global recommendations. Post-MF 
Global, FIA formed a special expert committee to evaluate 
necessary changes to the customer protection framework.
    In February, we released our initial report, which called 
on FCMs to ensure that they meet the highest industry standards 
for protecting customer funds. For example, we recommended that 
FCMs: one, report daily customer segregated balances and twice-
monthly how customer funds are invested under permitted CFTC 
rules; two, annually certify that there are no material 
weaknesses in their internal controls and policies; three, that 
they maintain appropriate separations of duties among 
individuals responsible for customer funds protections; and, 
four, that we develop a certified training program for chief 
financial officers and other relevant employees.
    In addition to our support of the NFA and CME's recent 
changes to improve customer protections, the FIA also generally 
supports the MF Global trustee's recommendations, which are 
consistent with many of these industry proposals and include 
studying the feasibility of a targeted insurance fund. Even 
with all that has been done, more is needed, and FIA is 
actively working on such improvements.
    First, FIA strongly supports immediately authorizing 
regulators with the ability to independently review and confirm 
customer segregated balances electronically across every FCM at 
any time.
    Second, FIA supports the creation of an automated 
confirmation system for customer segregated funds that will 
provide regulators with timely information that customer funds 
are secure. FIA participated in last week's CFTC Technology 
Advisory Committee meeting that discussed such technology 
solutions, and there are several viable technology systems 
worthy of near-term consideration.
    Third, FIA supports the creation of an FCM Information 
Portal that will centrally house firm-specific financial 
information regarding FCMs so customers can more readily access 
material information when evaluating FCMs.
    Fourth, FIA recommends that FCMs publicly certify as soon 
as practicable that they are in compliance with FIA's initial 
recommendations and that these controls are independently 
reviewed and audited.
    I was also encouraged by Chairman Gensler's remarks that 
the Commission is adopting many of these sensible industry 
recommendations that I have discussed today. The basic blocking 
and tackling of regulation depends on ensuring that firms have 
proper risk controls and systems in place with independent 
auditing and verification by regulators. At a time of great 
regulatory change, we cannot lose sight of these oversight 
fundamentals.
    In conclusion, the embezzlement at Peregrine Financial 
appears to have been missed by a generation of regulators at 
both the Federal and self-regulatory levels. This, along with 
MF Global, is unacceptable by any measure. There is no easy 
solution, no magic bullet that will bring back the lost trust 
from these incidents. Instead, it is going to take time and 
hard work across the industry to implement these improvements 
to earn back the public's trust. Customers deserve better, and 
FIA is wholly committed to winning back their confidence by 
ensuring they have the highest degrees of protections going 
forward.
    Thank you, Madam Chairman.
    [The prepared statement of Mr. Lukken can be found on page 
96 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Mr. Duffy.

    STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN AND 
         PRESIDENT, CME GROUP, INC., CHICAGO, ILLINOIS

    Mr. Duffy. Chairwoman Stabenow, Ranking Member Roberts, we 
at CME Group are appalled by PFG's theft of customer segregated 
funds. This fraud, following MF Global, has shaken the very 
core of our industry. Any breach of trust relating to customer 
funds is absolutely unacceptable--whether at PFG, MFG, or any 
other firm.
    Since the failure of MF Global, CME Group and others in our 
industry have been committed to strengthening the protections 
that guard customer property. The industry has recently 
implemented new regulatory measures, one of which was the new 
electronic confirm tool that uncovered Mr. Wasendorf's 
misreporting, forgery, and theft. But more needs to be done.
    CME and the National Futures Association have adopted four 
measures to deter, detect, and prevent misuse of customer 
funds. Three have been implemented, and the fourth will be made 
effective in coordination with the NFA next month. We have been 
conducting surprise reviews of customer segregated accounts 
since last December. We have implemented mandatory daily 
reporting of segregation statements by all FCMs. And we now 
require bimonthly reporting to ensure that segregated funds are 
properly invested and held at the approved depositories.
    Also, in mid-July CME began using Confirmation.com, an 
electronic method of receiving statements directly from third-
party depositories to verify investment reports. We also began 
using Confirmation.com as a tool in our regulatory audits and 
plan to require banks to confirm segregated funds using this 
tool.
    In direct response to the MF Global disaster, we will be 
implementing the Corzine Rule on September 1st. The rule 
requires that the FCM's CEO or CFO sign off on any withdrawal 
of consumer segregated funds that exceeds 25 percent of the 
excess segregated funds. They must also inform the CME at the 
same time.
    As I said, more can be done. At the same time, CME believes 
that the regulators and industry must be careful in weighing 
the costs and benefits of all proposals that may enhance 
protections for the segregated funds of our clients.
    Some have suggested the creation of an industry-funded 
insurance program covering fraud and failure losses, possibly 
supplemented by private-arranged insurance. Such a fund would 
certainly boost confidence, but needs to be balanced against 
known negatives. The negatives are the obvious: it being cost-
prohibitive and ineffective due to the amount held in U.S. 
segregation over $150 billion.
    We need to develop rules, procedures, and systems that give 
regulators direct, real-time access to customer segregated 
account balances, and we are working with regulators to do so. 
In the meantime, today while conducting regular surprise 
audits, we have the ability to call upon our clearing members 
to access online account balances for our on-site review. And 
while it will be controversial and perhaps have disruptive 
consequences, we should explore whether customer property not 
required as collateral at clearinghouses should, nonetheless, 
be held by clearinghouses or other custodians and whether 
safeguards should be put in place to limit the ability of FCMs 
to transfer such property except to the authorized recipients.
    In addition, CME Group proposes that Congress amend the 
Bankruptcy Code to permit clearinghouses that hold sufficient 
collateral to support customer positions of a failed clearing 
member transfer those positions of all non-defaulting customers 
with the supporting collateral to another stable clearing 
member.
    While we expect that the misconduct of MF Global and PFG 
will renew calls to eliminate the role of exchanges and 
clearinghouses in auditing and enforcement of their members, we 
do not believe that a legitimate case can be made to transfer 
these responsibilities to a Government agency.
    CME Group is committed to working with the Congress, the 
CFTC, NFA, FIA, and market participants to re-evaluate the 
current system to find solutions to further protect customer 
funds at the FCM level. We are also committed to restoring 
confidence in the markets that so many rely on for their risk 
management needs.
    I thank you for the opportunity to testify before you 
today, and I look forward to any questions you may have.
    [The prepared statement of Mr. Duffy can be found on page 
64 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Mr. Roth.

  STATEMENT OF DANIEL J. ROTH, PRESIDENT AND CHIEF EXECUTIVE 
    OFFICER, NATIONAL FUTURES ASSOCIATION, CHICAGO, ILLINOIS

    Mr. Roth. Thank you, Madam Chair. As you noted in your 
opening comments, this is the second time in just 8 months that 
we are here discussing a misuse of customer seg funds, a theft 
of customer seg funds by an FCM.
    This time involving Peregrine, there is a shortfall of 
approximately $200 million. This fraud was perpetrated through 
a sea of forged bank documents. Peregrine was required to 
report on a daily basis to NFA the amount of customer funds it 
was holding and where those funds were being held. Those 
reports were false, and they were supported by forged daily 
bank activity statements, forged monthly statements, forged 
acknowledgement letters, forged deposit slips, forged certified 
checks, and forged bank confirmation notices.
    We began our most recent exam of Peregrine in mid-June, and 
as part of that process, we very early on in the examination 
informed the firm that we were switching our bank confirmation 
process, that in the past we had used a traditional bank 
confirmation process. In which Peregrine would sign a document 
authorizing its banks, all of its banks, to release certain 
information to NFA. We would then take those documents, mail 
them to the bank; the bank would mail the response directly to 
NFA; and we would compare what the bank was telling us with 
what the firm was telling us.
    We told Peregrine that we were switching from that to this 
e-confirmation process that we began using in January. It is a 
Web-based e-confirmation process. We told the firm that the 
firm would have to authorize its participation in that e-
confirmation process. Mr. Wasendorf, Sr., executed that 
authorization on Sunday, July 8th, and the following day he 
attempted suicide, leaving a note describing the bank 
forgeries. As soon as we were notified of that event, there was 
an immediate phone call, a teleconference between the CFTC, 
NFA, and Peregrine personnel.
    As of the previous Friday, Peregrine had reported to us 
that they were holding approximately $380 million in customer 
funds with over half of that, about $200 million, being held at 
US Bank, the office in Cedar Falls. During the teleconference 
on that Monday morning, we immediately instructed the firm 
personnel to go to the bank and get the bank manager on the 
phone, and when we had him on the phone, he told us that the 
actual balance in the account as of the previous Friday was 
approximately $5 million.
    We then told him that we had written confirmations from the 
bank from our two previous audits and would he please confirm 
balances for those dates, the audit dates for those two 
previous years, 2011 and 2010. For each of those two dates, he 
again told us that the confirmations that we had were false and 
that they had been similarly inflated.
    What we draw from all of this are the same painful lessons 
that we learned in MF Global. The facts that are undeniable are 
that, number one, customers have to know that their funds are 
safe.
    Number two, it is up to the regulators, both at a 
governmental level and a self-regulatory level, to provide the 
highest level of assurance of that that we can.
    Number three, we followed standard audit procedures in our 
examinations of Peregrine, including the bank confirmation 
process, and those standard audit procedures just were not good 
enough. He beat us. He fooled us. He fooled us for too long. We 
have to do better. We have to find a better way of monitoring 
members for compliance with all the requirements, but 
especially customer segregated funds.
    We began that process immediately after MF Global. We 
formed both a special committee of our public directors at NFA 
and a committee of self-regulatory organizations with the CME, 
and we began developing sets of rules--Mr. Duffy described some 
of them, Mr. Gensler described some of them--that have already 
gone to our board of directors. But we also began working on 
rules to make better use of technology to monitor seg 
compliance. And at our August board meeting, our board will 
consider a rule that will require all FCMs to provide the 
regulators with direct, view-only, online access to all 
customer seg bank accounts so that we can go in and check a 
balance at the bank anytime we want, for any bank we want, for 
any FCM we want, without contacting either the firm or the 
bank.
    Beyond that, we hope to build a system, we will build a 
system that takes the e-confirmation process that uncovered 
this fraud and essentially turn it into a daily event. We need 
to get reports on a daily basis from all the depositories 
holding customer segregated funds--banks, FCMs, money market 
funds. Whatever the permissible investments are, wherever those 
depositories are, they have to file daily reports with 
regulators which the regulators can then on an automated basis 
compare with the reports we receive from the firms to generate 
alerts regarding any suspicious discrepancies.
    We look forward to working with Congress, with the 
Commission, with the industry, and with all the stakeholders to 
ensure that we tighten these systems. We know we cannot 
eliminate fraud, but we will continue to strive to do that.
    Senator, if I could ask your indulgence for one second, on 
the first panel Senator Grassley raised a question about a 
comment, a quote, a story in the Wall Street Journal that said 
that I had said that it was not NFA's role to detect fraud. 
Senator, I have been at NFA for 29 years, and I will guarantee 
you that I have not only never said that, I have never thought 
that. Detection of fraud, combating fraud in the futures 
industry, has been central to our mission for the last 30 
years, and it remains so today.
    Secondly, with respect to the red flags that Senator Harkin 
and others have asked, if it would be helpful, I could just 
submit a written statement outlining our responses to each of 
the instances that were noted in the press or here today.
    Chairwoman Stabenow. That would be helpful. We would 
appreciate that.
    Mr. Roth. Thank you. And I apologize for going over my 
time.
    [The prepared statement of Mr. Roth can be found on page 
105 in the appendix.]
    Chairwoman Stabenow. That would be helpful. Any information 
or responses that you would like to share would be helpful.
    [The following information can be found on page 264 in the 
appendix.]
    Chairwoman Stabenow. Ms. Klemme, welcome.

 STATEMENT OF DIANA KLEMME, VICE PRESIDENT AND DIRECTOR, GRAIN 
   DIVISION, GRAIN SERVICE CORPORATION, ATLANTA, GEORGIA, ON 
       BEHALF OF THE NATIONAL GRAND AND FEED ASSOCIATION

    Ms. Klemme. Good morning, Chairwoman Stabenow, Ranking 
Member Roberts, other members of the Committee. As you 
mentioned, I am Diana Klemme. We are an introducing Broker 
based in Atlanta, Georgia. We provide brokerage and advisory 
services to country grain elevators, farmers, and end users of 
commodities, and I am testifying on behalf of the National 
Grain and Feed Association.
    Many NGFA member firms have been deeply touched by the 
failure of MF Global, including the firm that I work for. We 
cleared MF Global. I have seen it firsthand. These were the 
toughest 9 months of my career. It is as if a bank failed and 
the customers discovered that the contents of their safety 
deposit boxes had been raided and taken in the bankruptcy.
    The unprecedented loss of customer funds in the MF Global 
debacle has led obviously to a loss of customer confidence in 
the futures markets and in the system itself. I hear this all 
the time from our own customers. And so as NGFA has considered 
what changes might be workable in the aftermath of MF Global, 
we asked whether these failures justify systemic change. Then 
with the discovery of long-term fraud and misappropriation in 
the PFG debacle, it does drive home the need not just for 
regulatory oversight and change, but rapid change to fully 
protect customer funds. In the meantime, the customers are 
still waiting.
    Two such failures in 9 months, especially the failure of 
PFG when regulators presumably were on heightened alert, is 
just incomprehensible and unconscionable to customers. I get 
these questions all the time.
    Let me illustrate why by taking one customer from my own 
client base. This is a typical grain elevator. I will not even 
tell you the State. It does not matter.
    Country elevators buy grain from farmers and provide a 
vital service to agriculture. They buy when farmers want to 
sell. They sell grain to end users when a buyer needs a 
commodity. Elevators also provide the service of buying from 
farmers who may want to sell a future crop, which then gives 
the farmer confidence to go out and buy land or rent land or 
buy inputs.
    But this elevator then has to hold and maintain short 
futures hedges for a year or more and be financially able to 
meet any margin calls that might occur. And with the drought 
this year, we know what that is involving.
    This one particular customer that I am speaking of 
currently was holding 4.2 million bushels worth of short 
futures across corn, beans, and wheat on July 20th. The 
combined margin requirements for those positions on that day 
were $9.4 million that this fairly small business had to send 
to Chicago. They have met every margin call immediately, which 
is a huge act of faith given they just went through MF Global 
and they are still waiting for 20 percent of their funds. And, 
importantly, all hedgers--my customers and others--rely on 
lenders to provide much of the financing for these margin 
calls. So this is not just about farmers, ranchers, elevators, 
et cetera. It is about the ag lenders at the backbone of this.
    This is just one example. It is not even a large company, 
just a typical elevator. Multiply it by the aggregate size of 
U.S. agriculture, and you can envision the scope of the 
financial demands and exposure that these businesses are 
participating in right now on faith.
    The CFTC's own Commitment of Traders Report from last 
Friday showed that the hedger/producer/merchant category is 
holding combined long and short futures in just corn, beans, 
and wheat of 9.7 billion bushels that is having to be margined 
every day with lenders providing these funds. Hedgers have to 
know these funds are safe. Lenders have to know these funds are 
safe. And brokers want to know those funds are safe.
    You might ask why lenders are continuing to fund this 
system. Well, partly because we have all assured customers, 
NGFA members, and lenders that, after MF Global, change is 
coming. I have been assuring people of that. But they keep 
asking when. Filing reports is not the answer. It is not 
enough. Audits are an important part of the process, but they 
are backward-looking, and they do not restore confidence. An 
audit is a piece of paper. It is going to take real change with 
protection of funds in one way or another, much like protecting 
safety deposit box contents. And to get this done, not after 
endless regulatory debate, finger pointing and meetings, we 
have to get it done quickly, especially in the face of the 
markets that we face right now.
    Our full recommendations are outlined in my written 
testimony, which includes a pilot program to test a full 
segregation system with customer funds held separately and 
includes a number of changes to the way bankruptcy laws and the 
Bankruptcy Code handles failures. We recognize that a full 
segregation structure would include additional costs, may not 
be workable or preferable for all customers, but neither is 
losing their money. For that reason, NGFA also recommends 
insurance protection for customers. Such a fund does not need 
to be large enough, certainly in the beginning, to fund the 
entire futures industry. If that ever occurs, we have bigger 
issues to worry about. But we do need something that is large 
enough to protect customers caught in the occasional failure 
while perhaps longer-term systems are being evaluated and 
implemented.
    I thank you for the opportunity to share the views and 
policies of the National Grain and Feed Association.
    [The prepared statement of Ms. Klemme can be found on page 
91 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Mr. Roe.

   STATEMENT OF JOHN L. ROE, CO-FOUNDER, COMMODITY CUSTOMER 
                  COALITION, CHICAGO, ILLINOIS

    Mr. Roe. Good morning, Chairwoman Stabenow, Ranking Member 
Roberts. Thank you for the invitation to appear before you 
today to discuss the Commodity Customer Coalition's 
recommendations for the policy response to the MF Global and 
PFGBest insolvencies.
    It seems it has become a very risky proposition to tender 
your property to a commodity broker. An industry which just a 
year ago prided itself that no customer had ever lost a penny 
as the result of a clearing member default now hopes that 
losses due to broker insolvencies will be limited to hundreds 
of millions of dollars, instead of billions of dollars.
    The system of commodity regulation is clearly broken. In 
fact, part of that system is so broken that the regulator in 
charge of auditing PFGBest's financials could not tell that the 
fines they levied against PFGBest were being paid to them with 
money that belonged to customers--$700,000 this year alone.
    Before this Committee, Chairman Gensler of the CFTC 
testified that just as it is unreasonable to expect police to 
stop all bank robbers, it is unreasonable to expect commodity 
regulators to stop all fraud. Yet bank customers do not live in 
fear that their deposits will be robbed by the bank. Moreover, 
in the event that a bank theft is so large that it causes the 
bank to become insolvent, those customers have insurance to 
protect those deposits. If Chairman Gensler's robbers were to 
rob a securities broker, they, too, have customer account 
insurance. Commodity customers are only protected by the 
regulators.
    There is no mechanism in place outside of the bankruptcy 
process to deal with shortfalls in customer property. Once 
customer accounts are attached to an FCM bankruptcy, the losses 
to customers have only just begun. In addition to whatever 
assets with which the broker has absconded, customers face 
losses stemming from their inability to manage frozen trading 
positions and collateral. Customers then endure an arduous 
bankruptcy process with fees far in excess of the market price 
for comparable legal services. These bankruptcies will drag on 
for years, and the administrative fees, which may be paid from 
customer property, will run into the hundreds of millions of 
dollars.
    Participants in American financial markets deserve better. 
They deserve the strongest, most efficient legal protections 
available. They deserve a safety net when the regulators fail. 
We have to stop expecting the regulators to do their jobs and 
start offering customers protections when they do not. If Mr. 
Gensler's robbers cannot be stopped, then at a minimum they 
must be insured against.
    Among the policy recommendations that we tendered to this 
Committee, the most important is an account insurance 
mechanism. We propose that Congress authorize an industry-
funded liquidity facility, which focuses on providing liquidity 
to plug shortfalls in customer property and ensure customer 
accounts are quickly transferred to new brokers with their 
positions intact. This fund would then step into the shoes of 
customers who would have been in the bankruptcy. It would 
pursue recoveries for the fund's distributions and reserve 
property against claims made against customer property.
    This liquidity facility would not be Government funded or 
managed. Assets for the fund could be raised transactionally as 
well as through member firm assessments.
    There is a working model of this type of fund known as the 
Canadian Investment Protection Fund in Canada. At MF Global's 
Canadian subsidiary, some 7,800 customer accounts were 
transferred with 100 percent of their property to a new broker 
within 2 weeks. In fact, the only reason that it took 2 weeks 
is accidentally the SIPA trustee moved Canadian property that 
belongs to Canadian customers inadvertently and it had to be 
moved back to be transferred. They were able to make customers 
whole with the facilitation of a guarantee from that protection 
fund covering a 20-percent shortfall in assets. As a result, 
Canada's customers can now say, as we used to, that no 
customers ever lost a penny as a result of a clearing member 
default.
    Like all types of insurance, any such insurance would have 
to have coverage limits. But if the FDIC can ensure $4.3 
trillion in bank deposits, surely we can ensure $190 billion in 
customer segregations cost effectively.
    Congress must also consider enacting new criminal penalties 
for the misuse of commodity customer property. While the 
PFGBest case will likely result in criminal convictions, the 
probability for a criminal conviction in the MF Global case is 
less certain. The lesson of MF Global should not be that there 
are no criminal consequences for swiping customer funds.
    Congress must consider measures to counteract the risks to 
customers resulting from the combination of broker-dealers and 
FCMs in a single corporate entity. Over 80 percent of customer 
segregated property in the United States resides in just 10 of 
these firms. Broker-dealers and FCMs and single entities have 
exposed over $35 billion in commodity customer property to 
insolvency since the financial crisis. We urge Congress to 
consider forcing broker-dealer FCMs to split their operations 
into separate legal entities. At a minimum, the unencumbered 
collateral of commodity customers with accounts at those firms 
should have SIPC insurance coverage.
    Lastly, Congress must consider making reforms to the 
Bankruptcy Code, and I know that that is outside the purview of 
this Committee, but it is an important part of an appropriate 
and complete policy response. A complete overview of our 
recommendations for bankruptcy reform can be found in the 
recommendations that we tendered to the Committee.
    Some in the industry will argue that substantive changes 
have already been made to commodity regulations. They will 
argue that these changes are sufficient to diminish the 
likelihood of future shortfalls. They will say that we just 
need to enforce what is on the books. However, this logic 
assumes that thieves lack ingenuity. It assumes that the same 
technological advances adopted by the regulators will not also 
aid the thieves themselves. History demonstrates that 
regulators are the last to adopt new technologies. No more 
poignant evidence of this is that, in 2012, regulators were 
still relying on paper statements requested from a P.O. box in 
Cedar Rapids, Iowa. If we are to protect ourselves from 
Chairman Gensler's thieves, we are going to have to do a little 
bit better than that.
    We urge Congress to act to protect commodity customers when 
and where the industry does not.
    [The prepared statement of Mr. Roe can be found on page 101 
in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Mr. Lukken, first of all, we have all heard from Peregrine 
customers, and I have heard from one person who is facing the 
possibility of losing his life savings and literally said he 
would rather put his money under a pillow at the moment rather 
than invest in the futures markets. I am sure that is shared by 
many people.
    Should futures commission merchants be allowed to hold 
customer money, or do we need to serious look at an alternative 
custodial arrangement? And would you support the CME's recent 
call for funds to be held outside of firms but to have any 
interest earned returned to the firm?
    Mr. Lukken. Well, we are certainly looking at all ideas to 
help restore customer confidence in this area. As you note, in 
the futures model, customers give money to their FCM, their 
brokerage; but along with that, there is also a guarantee. The 
FCM is guaranteeing those customers, and so the FCM has skin in 
the game as well to make sure that the customers' funds are 
properly invested and that there is due diligence there as 
well.
    So if we take the FCM and move the customer money up to the 
clearinghouse and do not allow the FCMs to do their own risk 
management, because of this guarantee they simply become 
insurance companies, passing that money through.
    I think if you look at the totality of the system, where we 
are strengthening FCMs and the segregation, the internal 
controls that we have recommended, the things that have been 
recommended and implemented by the CFTC, the NFA, and the CME, 
those are all strengthening things that are going to help the 
system.
    I do think we have to look at more things. We have to look 
at this idea of a targeted insurance fund, as we mentioned----
    Chairwoman Stabenow. Could you speak more about that? 
Because Mr. Roe talked about having an insurance-type 
mechanism. How do you feel about that?
    Mr. Lukken. Well, this is something I think we are actively 
considering. Mr. Giddens in his report said, that a $100,000 
insurance fund may have covered 78 percent of MF Global's 
customers. So that is, I think, something that we have to look 
at. But as has been noted, there are serious costs that may go 
with these insurance programs that we have to consider: 
coverage, actuarial soundness, and also potentially a lot of 
these insurance programs have a Government guarantee behind 
them, such as SIPC. So at a time when people are nervous about 
too big to fail, putting in Government guarantees is something 
we have to seriously consider.
    So certainly we are going to be looking in the coming weeks 
at insurance options. We think it may be something we can look 
at, but we will come back to this Committee with our findings.
    Chairwoman Stabenow. Thank you very much.
    Mr. Duffy, on the same note, when you were before us in 
December, you testified that the costs of an insurance fund 
would be cost-prohibitive, but then you, in fact, have put I 
place something on a limited basis for farmers and ranchers and 
co-ops. So do you believe that this kind of fund is feasible on 
a larger scale? Wouldn't this sort of an expanded fund help 
restore the faith in the systems?
    Mr. Duffy. As I said to you, Madam Chairwoman, when I 
testified right after MF Global to your Committee, if our 
family farmer/rancher fund was in place during MF Global, all 
of the people who put food on the tables of the people in 
America would have been made whole. That $100 million fund 
would have paid $33 million out to those farmers. That is 
exactly what they would have been out, and we backed out the 
accounts of pure bona fide hedgers--not speculators, not people 
doing other things, just people that are processing and growing 
food.
    As far as an insurance fund goes, I think it is really 
important to note in order to get to a billion dollars of 
insurance, you need to charge 5 cents a side a trade for 3 
years to get to $1 billion. We are charging clients 7 to 10 
cents to trade a day, so now we are going to double their cost 
to add to this fund. When you look at something like the 
Securities--everybody wants to refer to SIPC, how it is a great 
bailout. Well, ask the folks that were invested with Mr. Madoff 
when he took $50 billion and SIPC gave him $2.5 billion in 
return. They were basically getting nothing in return.
    Also, in SIPC, the clients do not pay for that insurance. 
The dealers pay for that insurance. Why? Because there is a 
payment for order flow in the securities world, a completely 
different structural model. We do not have a payment for order 
flow model in the futures industry. We have a central limit, 
open, transparent book for all to see. And I think that is a 
completely big, huge difference when you talk about who is 
going to fund these types of insurance programs.
    I am not opposed to insurance. I am all for if people want 
to pay for it, they should have the ability to do it, and we 
will be happy to try to facilitate some forms of them to do so. 
But I think you need to understand there are huge differences 
when people are trying to draw the line between SIPC and what 
happens in our industry today. Completely different models, who 
pays for it and why they pay for it.
    Chairwoman Stabenow. Okay. Thank you very much. And I 
think, Senator Roberts, with the two of us here, I am going to 
take an extra question on the time and let you do the same.
    Mr. Roth, I want to ask you, with MF Global and Peregrine, 
there were certainly red flags. And with Peregrine there was a 
long history of violations and enforcement actions. Were they 
receiving additional scrutiny compared to other firms because 
of the violations?
    Mr. Roth. Senator, Peregrine's customer base was 
overwhelmingly retail speculator type customers, and they did 
receive a good deal of regulatory scrutiny, and there were a 
number of enforcement actions. But, frankly, firms that do 
retail speculator type business tend to encounter more 
regulatory problems, particularly in the area of sales 
practices, promotional material, the way they trade customer 
accounts in some cases. So Peregrine was subject, I think in 
both the CFTC and NFA, to more regular examinations and 
repeated enforcement actions. None of those examinations and 
none of those enforcement actions, however, involved 
allegations of fraud regarding customer segregated funds. There 
was not an indication of that.
    Chairwoman Stabenow. Well, but reportedly Mr. Wasendorf, 
Sr., was the sole person in the company officially receiving 
the bank statements, and other individuals in the company, 
including the chief compliance officer, took his word for the 
fact that the documents were real, at least according to 
reports. So when we look at this, would this consolidation of 
functions have violated any standard of internal controls that 
would have been identified in audits or other reviews, or 
should they have?
    Mr. Roth. Our examinations certainly would have covered 
internal controls, as would the examinations by the outside 
CPA. We tried to make sure that there was a segregation of 
duties and that the people preparing the segregation 
computations on a daily basis had the expertise to do that 
function.
    So, obviously, there was a failure of internal controls in 
this case, and I am not suggesting otherwise, and I think we do 
need to develop more stringent standards for internal controls. 
But there was--during our examinations we covered that, and we 
looked to make sure that there was--that the people preparing 
the segregation computations that were reported to us had the 
ability to do so.
    Chairwoman Stabenow. You talked about the e-confirmation 
process that you are now using. Do you think that is enough? 
One of the concerns, of course, is that, on the one hand, we 
can say you can never totally stop fraud if someone wants to 
have an elaborate scheme. On the other hand, that is not much 
confidence to people who want to use the futures markets. And 
so going forward, again, the trust, but verify position in 
terms of from a customer's standpoint. What is the 
verification, what is the independent verification beyond 
having e-confirmation?
    Mr. Roth. And, clearly, the e-confirmation process was very 
helpful in this case, but it is equally clearly not enough. And 
that is why we are taking a two-step process on this. At our 
August board meeting, we will require all FCMs to give their 
regulators view-only online access to customers' segregated 
bank accounts so that the regulators can go in and check a 
balance anytime we want, any day we want, for any bank we want, 
without the involvement of the firm or the bank. But even that 
is not enough. As I mentioned in my testimony, we need to 
develop--we need to change the e-confirmation process 
essentially and make it a daily event so that we get daily 
reports from all the depositories of customer segregated funds, 
not just banks but FCMs and money market funds. Wherever those 
funds are invested, we need to get daily reports from all those 
seg depositories and then be able to compare those daily 
reports on an automated basis with the reports we are receiving 
from the firm. So we want to take the e-confirmation process 
and basically make it a daily event.
    Chairwoman Stabenow. Thank you.
    Senator Roberts.
    Senator Roberts. Well, thank you, Madam Chair. This has 
been an excellent panel. I wish the other members had stayed.
    Mr. Roth, it looks like our standard audit practices 
obviously need to be updated in order to catch somebody like 
Mr. Wasendorf at Peregrine. And you indicate that you have, 
like Moses sort of coming down with a tablet, recommendations 
that you will give to the Committee. Are you sharing those with 
the rest of the panel here?
    Mr. Roth. Well, actually, our testimony I think was shared 
with the other panel, so I hope so.
    Senator Roberts. Right.
    Mr. Roth. If not, we can certainly provide it. The 
recommendations that we are talking about were developed in 
large part through an SRO committee in which the CME is an 
active participant. And we have also conferred very closely 
with FIA in developing all of the proposals, including----
    Senator Roberts. Well, I am just asking a stovepipe 
question with the exception of Mr. Roe, who is a sheriff of a 
new posse.
    Mr. Roth. Right.
    Senator Roberts. And riding point, pretty hard. But at any 
rate, know, do you all ever get together and talk this over? 
Because it seems to me that you all have some very good 
suggestions, either with some kind of insurance electronic 
transparency, et cetera, et cetera. Maybe that is the wrong 
question to ask you, but at any rate, Mr. Lukken, once your 
recommendations or any of the recommendations are in place, 
could an MF Global or a Peregrine-type event still occur?
    Mr. Lukken. I think anybody who is bent on fraud or 
misappropriation of funds can, try to confound the most 
sophisticated compliance systems. However, I think what we have 
recommended is going to make that significantly more difficult 
after the MF Global situation, including separation of duties, 
as I mentioned. This idea of going to risk-based audits I think 
is an important one, this modernizing of how we audit away from 
a check-the-box system to more of an automated daily 
confirmation directly from the banks, that is independently 
verified. Those are really important steps, and the good news 
is it will also free up auditors to ask the more difficult 
questions, to see the red flags, to go forward with their 
audits in a more risk-based fashion than check the box.
    So these are important improvements, and I will mention--
you talk about discussion between the groups. We independently 
huddled with our experts, and we all came to roughly the same 
improvements, including the idea of studying an insurance fund, 
which some on the panel have looked at as well. So even though 
we have independently studied this, there is significant 
alignment among the recommendations that we have put forward.
    Senator Roberts. Well, that is good news. Does the FIA 
support bankruptcy reform?
    Mr. Lukken. Certainly we are supportive of some of the 
recommendations. Obviously it is complex. I think this idea of 
making the Bankruptcy Code easier for people to port away 
positions so that customers at distressed FCMs can move their 
positions to other FCMs, is an important concept. Giving 
customers more of a voice either through the CFTC or through 
committees on their own is an important concept that may need 
to be addressed. And also, I think, when we talk about a 
broker-dealer FCM going down like MF Global. You know, there 
are differences between the SEC and the CFTC rules in this area 
that for years have not been addressed. I think it is important 
for those two organizations to sit down and make sure there is 
certainty of rules that when this happens, people know what is 
going to happen.
    Senator Roberts. That is a big issue that the Committee is 
really interested in, both the Chairwoman and myself.
    This question I asked Chairman Gensler on the first panel. 
Once you have electronic access, won't you be able to monitor 
an FCM's account for any unusual intraday activity?
    Mr. Lukken. Is that for me?
    Senator Roberts. Well, anybody on the panel. Mr. Duffy, you 
have already gone into the insurance question, which I truly 
appreciate. But I guess that would be for anybody here that 
wanted to talk about it. Mr. Roth, do you want to take that 
one?
    Mr. Roth. Sure. I believe the direct, online, view-only 
access could be helpful under those types of circumstances in 
that when a firm was under financial duress, I think we would 
be making much greater use of that tool, checking perhaps 
several times during the day to make sure that the seg deposits 
were as reported by the firm, and if there were fluctuations in 
those balances intraday, it could raise a red flag and create 
suspicions. If the funds are going down and then miraculously 
at the end of the day they pop back up, I think that would be 
something that would draw the attention of the regulator.
    Senator Roberts. Ms. Klemme, you are certainly a feisty 
advocate on behalf of your organization that I am fully 
acquainted with, and I thank you for your interest and your 
leadership. You cannot do a rain dance somewhere, can you?
    [Laughter.]
    Ms. Klemme. I wish I could.
    Senator Roberts. All right. What kind insurance would you 
like to see developed?
    Ms. Klemme. Every form of insurance that has been discussed 
so far has some costs and some drawbacks. To my own point of 
view, and I think on behalf of NGFA, the first thing is 
urgency. So we might start with something that is not the long-
run solution but the first step. Perhaps it is self-funding, 
such as Chairman Duffy said. Even if it is not a fund of a 
billion dollars but 20 percent of that, 1 cent a side, my 
customers would pay for it right now. Maybe that is not the 
long-term solution. We want to look at all the possibilities, 
including something that might be SIPC-like, could be industry 
funded, could be totally optional for each individual customer 
with perhaps CME, perhaps it is through NFA, creating the 
aggregate pool of coverage that customers can take or not take. 
A lot of people might decide not----
    Senator Roberts. And your lenders would support that? I 
know you are quoting your lenders a lot. Your lenders have told 
you something like that?
    Ms. Klemme. They are concerned about the safety of the 
money, and if there is a very small cost attached to it, I 
think we would find that a lot of lenders would step up to 
that.
    Mr. Roth. Senator, could I just make one point? With 
respect to a fee generated through NFA to cover the cost of the 
insurance, I would just point out as a technical matter that 
would require an amendment to the statute because under the 
existing law, there are very strict limits on what we can use 
our fees and assessments for. They can only be used to defray 
reasonable administrative expenses. So if we wanted to use the 
NFA fee to be a mechanism to fund an insurance program, just so 
you are aware, that would require a change to the statute.
    Senator Roberts. I thank you for that clarification.
    Mr. Roe, you are riding point on this new outfit. You are 
the co-founder of this group, the Commodity Customer Coalition, 
following the MF Global situation. Do you think the self-
regulatory model, all these folks sitting to your right, are 
still viable given these recent events?
    Mr. Roe. I think so in the sense that I do not think it 
matters whether the regulator is paid privately or paid by the 
Government. I think that what both these failures show is that 
there will be future failures. The system is human, and, 
therefore, it is going to be able to be breached by other 
humans. So to our mind, it is not to look for ways to make it 
more difficult in the sense of finding new technologies to stop 
fraud, but it is really to backstop this with insurance. It is 
the only thing that really effectively addresses what market 
participants are seeing, which is, regardless of who is in 
charge, they cannot be assured that their funds are actually 
going to be there when the music stops.
    Senator Roberts. Would you be in favor of the proposal by 
Ms. Klemme? We will call it the ``Klemme Plan.''
    [Laughter.]
    Mr. Roe. I would have to know a little bit more about it, 
but----
    Senator Roberts. Step by step. It is called ``Step by 
Step.'' Not at a full gallop.
    Mr. Roe. On the surface, absolutely. I think that Mr. Duffy 
is right that we cannot try to raise $1 billion in 3 years off 
an industry that is already hurting.
    Senator Roberts. I hope not.
    Mr. Roe. But the NFA just doubled its fee this year, and 
the world did not stop turning. So I think we can raise about 
$30 million per cent that we assess. We can look at maybe 
getting some assessments from member firms, grow it slowly, and 
if Congress will give the fund the authority to borrow funds at 
the discount window, then based on the cash flow of the fund, 
you can actually insure quite a bit more. And if the fund then 
goes into bankruptcy and pursues recoveries, it can get all its 
money back just like the Canadian Investor Protection Fund did. 
I think we can do it cost-effectively and quickly.
    Senator Roberts. I appreciate your answer. I am way over 
time. I am 4 minutes over time, which is not a record for me, 
by any means.
    [Laughter.]
    Senator Roberts. But I just want to make a point, Madam 
Chairwoman; I think with all of the questions that were by 
members, which have been good questions--and the previous panel 
has been a good panel. But these folks here I think are the 
ones that are going to actually come up with the suggestions 
that turn into policy changes that will make a difference. And 
from that standpoint, I thank you all of you, and I urge you, 
do not stovepipe this. You know, let us work together. Be nice, 
Mr. Roe. You are going to be fine.
    Thank you.
    Chairwoman Stabenow. Well, thank you, Senator Roberts, and 
I am in complete agreement. I appreciate the recommendations we 
have already received, certainly after MF Global, as we put the 
call out. We appreciate that. But clearly there is more to do. 
This is number two now, and we cannot afford number three. 
Customers cannot afford number three.
    So I think it is important. This has been very substantive. 
I appreciate all of you. As the Ranking Member indicated, this 
is a very important panel, and you have perspectives that are 
very important for us. And so as we move forward both with the 
regulators, both from the voluntary and the Government 
regulators, as well as the customers who are the most important 
in this whole process, we look forward to working with you and 
having integrity in a system that needs to work for people in 
order for them to do business.
    So thanks very much for your time.
    [Whereupon, at 11:44 a.m., the Committee was adjourned.]
      
=======================================================================


                            A P P E N D I X

                             August 1, 2012



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

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


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


                   DOCUMENTS SUBMITTED FOR THE RECORD

                             August 1, 2012



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

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


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


                         QUESTIONS AND ANSWERS

                             August 1, 2012


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

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

