[Senate Hearing 113-248]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-248
 
                         REAUTHORIZATION OF THE 
                           COMMODITY FUTURES 
                           TRADING COMMISSION 

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

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                         NUTRITION AND FORESTRY

                          UNITED STATES SENATE


                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION


                               __________

                             JULY 17, 2013

                               __________

                       Printed for the use of the
            Committee on Agriculture, Nutrition and Forestry
        Available via the World Wide Web: http://www.fdsys.gov/

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            COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY



                 DEBBIE STABENOW, Michigan, Chairwoman

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

             Christopher J. Adamo, Majority Staff Director

              Jonathan W. Coppess, Majority Chief Counsel

                    Jessica L. Williams, Chief Clerk

              Thomas Allen Hawks, Minority Staff Director

       Anne C. Hazlett, Minority Chief Counsel and Senior Advisor

                                  (ii)



                            C O N T E N T S

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                                                                   Page

Hearing(s):

Reauthorization of the Commodity Futures Trading Commission......     1

                              ----------                              

                        Wednesday, July 17, 2013
                    STATEMENTS PRESENTED BY SENATORS

Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan, 
  Chairwoman, Committee on Agriculture, Nutrition and Forestry...     1
Cochran, Hon. Thad, U.S. Senator from the State of Mississippi...     3

                                Panel I

Bentsen, Hon. Kenneth E., Jr., President, Securities Industry and 
  Financial Markets Association, Washington, DC..................     4
Duffy, Terrence A., Executive Chairman and President, CME Group, 
  Chicago, Illinois..............................................     6
Cooper, Adam (on behalf of Managed Funds Association), Senior 
  Managing Director & Chief Legal Officer, Citadel LLC, Chicago, 
  IL.............................................................     7
Kelleher, Dennis, President & Chief Executive Officer, Better 
  Markets, Washington, DC........................................     9
Roth, Daniel J., President & Chief Executive Officer, National 
  Futures Association, Chicago, IL...............................    11

                                Panel II

Lukken, Hon. Walter L., President and Chief Executive Officer, 
  Futures Industry Association, Washington, DC...................    31
Guilford, Gene A. (on behalf of the Commodity Markets Oversight 
  Council), National & Regional Policy Counsel, Connecticut 
  Energy Marketers Association, Cromwell, CT.....................    33
Heck, John M. (on behalf of the National Grain & Feed 
  Association), Vice President, The Scoular Company, Omaha, NE...    35
Russak, Donald A. (on behalf of the American Public Power 
  Association), Executive Vice President and Chief Financial 
  Officer, New York Power Authority, White Plains, NY............    36
Colby, Jim, Assistant Treasurer, Honeywell International, 
  Morristown, NJ.................................................    38
                              ----------                              

                                APPENDIX

Prepared Statements:
    Chambliss, Hon. Saxby........................................    50
    Cochran, Hon. Thad...........................................    53
    Bentsen, Hon. Kenneth E., Jr.................................    54
    Colby, Jim...................................................    65
    Cooper, Adam.................................................    68
    Duffy, Terrence A............................................    81
    Guilford, Gene A.............................................    89
    Heck, John M.................................................   121
    Kelleher, Dennis.............................................   126
    Lukken, Hon. Walter L........................................   150
    Roth, Daniel J...............................................   157
    Russak, Donald A.............................................   161
Document(s) Submitted for the Record:
Stabenow, Hon. Debbie:
    American Bankers Association, prepared statement.............   172
    American Cotton Shippers Association.........................   175
    American Petroleum Institute, prepared statement.............   179
    American Public Power Association............................   185
    Americans for Financial Reform, prepared statement...........   192
    Better Markets, prepared statement...........................   204
    CME Group, prepared statement................................   218
    Commodity Customer Coalition, prepared statement.............   223
    Commodity Markets Council, prepared statement................   234
    Commodity Markets Oversight Coalition, prepared statement....   241
    Consumer Federation of America, prepared statement...........   249
    Council of Institutional Investors, prepared statement.......   253
    Futures Industry Association, prepared statement.............   256
    Institute for Agriculture and Trade Policy, prepared 
      statement..................................................   260
    Institute of International Bankers, prepared statement.......   267
    IntercontinentalExchange (ICE), prepared statement...........   271
    INTL FCStone, prepared statement.............................   273
    Los Angeles Department of Water and Power (LADWP), prepared 
      statement..................................................   279
    Managed Funds Association, ``Reauthorization of the Commodity 
      Futures Trading Commission'', April 30, 2013...............   282
    Michigan Municipal Electric Association, prepared statement..   295
    National Association of Manufactures, prepared statement.....   298
    National Cattlemen's Beef Association, prepared statement....   301
    National Council of Farmer Cooperatives, prepared statement..   302
    National Farmers Union, prepared statement...................   305
    National Futures Association, prepared statement.............   308
    National Grain and Feed Association, prepared statement......   312
    National Introducing Broker's Association, prepared statement   316
    National Rural Electric Cooperative Association, prepared 
      statement..................................................   319
    Nextera Energy Resources, ``Top Legislative Items for CEA 
      Reauthorization'', prepared statement......................   321
    Northeast Public Power Association, prepared statement.......   331
    Premier Metal Services, LLC, prepared statement..............   334
    RJO'Brien, prepared statement................................   353
    Securities Industry and Financial Markets Association 
      (SIFMA), prepared statement................................   386
    Southwest Airlines Co., prepared statement...................   396
    Sutherland, prepared statement...............................   400
    The Business Council for Sustainable Energy, prepared 
      statement..................................................   406
    The Depository Trust & Clearing Corporation (DTCC), prepared 
      statement..................................................   408
    The Farm Credit Council......................................   417
    U.S. Commodity Futures Trading Commission, prepared statement   428
    United States Cattleman's Association, prepared statement....   430
    Washington Public Utility Districts Association, prepared 
      statement..................................................   435
Cooper, Adam:
    Managed Funds Association, ``Recommendations for FSOC 
      Members-Regulators on the Protection of Non-public, 
      Sensitive and Proprietary Information'', May 2013..........   438
Duffy, Terrence A.:
    CME Group, ``Considerations Regarding the Equivalence 
      Decision and Recognition as a Third Country CCP under 
      Articles 25 EMIR''.........................................   454
Roth, Daniel J.:
    Customer Protection Initiatives..............................   472
Question(s) and Answer(s):
Stabenow, Hon. Debbie:
    Written questions to Dennis Kelleher.........................   476
    Written questions to Daniel J. Roth..........................   476
    Written questions to Terrence A. Duffy.......................   477
    Written questions to Hon. Walter L. Lukken...................   477
    Written questions to Gene A. Guilford........................   477
    Written questions to John M. Heck............................   477
Cochran, Hon. Thad:
    Written questions to Terrence A. Duffy.......................   478
    Written questions to Daniel J. Roth..........................   478
    Written questions to Adam Cooper.............................   479
    Written questions to Hon. Walter L. Lukken...................   479
    Written questions to John M. Heck............................   479
Gillibrand, Hon. Kirsten:
    Written questions to Daniel J. Roth..........................   481
Heitkamp, Hon. Heidi:
    Written questions to Terrence A. Duffy.......................   482
    Written questions to Daniel J. Roth..........................   482
    Written questions to John M. Heck............................   483
    Written questions to Hon. Walter L. Lukken...................   483
Duffy, Terrence A.:
    Written response to questions from Hon. Debbie Stabenow......   485
    Written response to questions from Hon. Thad Cochran.........   486
    Written response to questions from Hon. Heidi Heitkamp.......   490
Guilford, Gene A.:
    Written response to questions from Hon. Debbie Stabenow......   492
Kelleher, Dennis:
    Written response to questions from Hon. Debbie Stabenow......   499
Lukken, Hon. Walter L.:
    Written response to questions from Hon. Debbie Stabenow......   507
    Written response to questions from Hon. Thad Cochran.........   507
    Written response to questions from Hon. Heidi Heitkamp.......   509
Roth, Daniel J.:
    Written response to questions from Hon. Debbie Stabenow......   510
    Written response to questions from Hon. Thad Cochran.........   512
    Written response to questions from Hon. Kirsten Gillibrand...   513
    Written response to questions from Hon. Heidi Heitkamp.......   514



                         REAUTHORIZATION OF THE
                           COMMODITY FUTURES
                           TRADING COMMISSION

                              ----------                              

                        Wednesday, July 17, 2013

                              United States Senate,
          Committee on Agriculture, Nutrition and Forestry,
                                                     Washington, DC
    The Committee met, pursuant to notice, at 2:37 p.m., in 
room 216, Hart Senate Office Building, Hon. Debbie Stabenow, 
Chairwoman of the Committee, presiding.
    Present: Senators Stabenow, Brown, Klobuchar, Gillibrand, 
Heitkamp, Donnelly, Cochran, Roberts, Chambliss, Boozman, 
Johanns, Grassley, and Thune.

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

    Chairwoman Stabenow. Well, good afternoon. The Committee on 
Agriculture, Nutrition, and Forestry will come to order. We 
appreciate all of our witnesses today. We do have two very 
important panels with a lot of witnesses to hear from, and we 
are looking forward to doing that today in a timely manner as 
well as follow-up discussions.
    I should also note for members that we may very well be 
interrupted on votes. We are hoping that they will hold off on 
that, but we may be. If we are, we will apologize in advance, 
but I know that most of you know how this works in terms of 
going down to the votes. And so we will manage it if it comes.
    We do have some business, a housekeeping matter that we 
need to attend to as we begin our hearing, and that is, Senator 
Casey is coming--I see that he is not here at the moment, but 
he is now coming back to our Committee. Senator Cowan was on 
the Committee during his time in the Senate. Senator Casey was 
gracious enough to step aside to other committees so that 
Senator Cowan could serve on the Agriculture Committee. He will 
now be assuming Senator Cowan's Subcommittee assignments, and 
we have the good fortune of having them be identical to the 
assignments that Senator Casey had when he left us. So we know 
that he will come back as Chairman of the Subcommittee on 
Nutrition, Specialty Crops, Food, and Agricultural Research. So 
we have no official items at this point other than to welcome 
him back to the Committee, and we will do that when he arrives.
    In the more than 150 years that we have had futures markets 
in this country, there have been cases that test the stability 
of the system. In the 1950s, a pair of traders in Chicago were 
able to corner the market on onions. They bought shorts on 
onions and flooded the market, driving the price down to 
pennies. Farmers in the Midwest were devastated and many had to 
file bankruptcy.
    As devastating as the onion scandal was to those farmers in 
Michigan and Indiana, and Illinois, it was nothing compared to 
the near collapse of the global financial markets in 2008. We 
cannot forget that 8 million hardworking men and women lost 
their jobs. Pensions and retirement savings went up in smoke. A 
record wave of home foreclosures swept across the countries, 
leaving devastated communities in the wake. There was no 
question that we needed serious market reform.
    As this Committee begins the process of reauthorizing the 
Commodity Futures Trading Commission, we need to examine the 
lessons from the past and consider ongoing challenges in the 
system. We want to make sure the agencies responsible for 
protecting these markets have the authority, the staff, and 
modern technology that they need to do the job.
    This Committee has been closely monitoring the MF Global 
case where customers' funds, money that rightly belonged for 
farmers and businesses and individuals all across the country, 
went missing. We continue to focus on three goals: getting 
customers their money back--and certainly there has been 
terrific progress there; holding anyone engaged in wrongdoing 
accountable; and ensuring that proper customer protections are 
in place so that something like this does not happen again.
    I appreciate the important steps the Trustees, market 
participants, and the Commission have already taken toward that 
objective, but we all know there is more work to do.
    As several witnesses will testify today, there are lessons 
to be learned not just from MF Global's failure but also that 
of Peregrine Financial Group. The cause of their failures may 
be different, but the resulting effect on customer confidence 
is the same.
    These markets have also been tested by the LIBOR scandal, 
data security breaches, occasionally unexplained price 
volatilities, and technology challenges that raise serious 
concerns about the ability of our markets to protect consumers.
    I am eager to hear from market participants testifying 
today about their suggestions and concerns for improving the 
CFTC and how these markets are supervised and protected.
    As we begin the reauthorization process, let me say again, 
as we all know in our Committee, that we will work together 
like we did on the farm bill. It will be collaborative, it will 
be bipartisan, it will be consensus driven, and it will lead to 
success because we work together. We intend to use that model 
as we look at reauthorizing the CFTC.
    In the coming weeks, we will announce additional hearings 
as well as staff briefings that more closely examine the issues 
presented to us today, and I look forward to working with my 
distinguished Ranking Member, Senator Cochran, and all of the 
very experienced and distinguished members of the Committee as 
we write and pass very important legislation to reauthorize the 
CFTC.
    I would now turn to Senator Cochran.

STATEMENT OF HON. THAD COCHRAN, U.S. SENATOR FROM THE STATE OF 
                          MISSISSIPPI

    Senator Cochran. Madam Chair, it is a pleasure to join you 
and the other members of the Committee in reviewing the 
statements of the witnesses who are here to testify before our 
Committee today. The Commodity Futures Trading Commission 
reauthorization is before the Committee for review as we 
evaluate recommendations for modifications or improvements, and 
that is what I hope the witnesses can share with us today in 
terms of their views and their ideas for any changes in the law 
that need to be considered by the Committee.
    We have others who are here today to hear from the 
witnesses, and the witnesses themselves, so I am pleased to 
join you in welcoming all of them, and thank them for their 
cooperation with our Committee.
    Chairwoman Stabenow. Thank you very much, and welcome 
again. We have two excellent panels, and we appreciate your 
time today.
    Senator Chambliss. Madam Chair?
    Chairwoman Stabenow. Yes, Senator Chambliss.
    Senator Chambliss. Could I ask unanimous consent that a 
very brief statement I have be inserted in the record?
    Chairwoman Stabenow. Absolutely. Without objection, and 
that reminds me to also indicate that we are happy to accept 
opening statements from any of the members of the Committee. In 
the interest of time, because we have two large panels, we will 
move forward, but we certainly want to receive any statements 
from members.
    [The prepared statement of Hon. Saxby Chambliss can be 
found on page 50 in the appendix.]
    Chairwoman Stabenow. And, of course, as you all know, we 
will ask for 5 minutes in testimony, but, of course, we want 
whatever you would like to give us in terms of written 
testimony. So let me introduce the full panel, and then we will 
ask for 5 minutes in opening statements.
    First we have the Honorable Ken Bentsen, president of the 
Securities Industry and Financial Markets Association. From 
1995 to 2003, he served as a Member of the U.S. House of 
Representatives from Texas. Several of us served with you. It 
is wonderful to see you again. He sat on the House Financial 
Services Committee, and was an active participant in the 
drafting of the Commodity Futures Modernization Act.
    Our second witness is also no stranger to this Committee or 
the markets: Mr. Terry Duffy, executive Chairman and president 
of the CME Group. Mr. Duffy has been a member of CME since 
1981. Also, in 2003, he was appointed by President Bush as a 
member of the Federal Retirement Thrift Investment Board. 
Welcome.
    Next is Mr. Adam Cooper, someone who we have also 
appreciated coming before the Committee before, senior managing 
director and chief legal officer at Citadel LLC in Chicago, 
where he is responsible for Citadel's legal compliance and 
regulatory affairs functions. He is here today on behalf of the 
Managed Funds Association, an organization he knows well, 
having served two terms as chairman, and I also have to always 
say he is a proud graduate of the University of Michigan. So we 
know you know what you are talking about.
    Our fourth witness is Mr. Dennis Kelleher, who also knows 
the Senate well, as a distinguished staffer for many, many 
years. He is President and CEO of Better Markets. Previously 
Mr. Kelleher served as a litigation partner with Skadden Arps 
specializing in securities and financial markets, and it is 
great to see you.
    Mr. Roth, it is wonderful to have you back as well. Dan 
Roth is the president and CEO of the National Futures 
Association, where he has been since 1983. Prior to joining 
NFA, Mr. Roth was an attorney focused on general litigation and 
an assistant attorney general in Cook County, Illinois.
    Thank you very much for joining us, and we will start with 
Congressman Bentsen.

 STATEMENT OF THE HONORABLE KENNETH E. BENTSEN JR., PRESIDENT, 
    SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION, 
                         WASHINGTON, DC

    Mr. Bentsen. Thank you, Chairwoman Stabenow, Ranking Member 
Cochran, and members of the Committee. I appreciate the 
opportunity to testify on behalf of the Securities Industry and 
Financial Markets Association on the reauthorization of the 
CFTC.
    Title VII, as you know, of the Dodd-Frank Act created a 
broad new regulatory regime for derivative products and seeks 
to reduce systemic risk by mandating central clearing, capital 
requirements, collection of margin for uncleared swaps; to 
protect customers through enhanced collateral safeguards and 
external business conduct requirements; and to promote 
transparency through reporting requirements, new business 
conduct rules, and required trading of swaps on exchanges or 
swap execution facilities.
    SIFMA supports many of the goals of Dodd-Frank's Title VII. 
However, we remain concerned that regulators, especially the 
CFTC, are interpreting and implementing many of these 
provisions--or how they are interpreting and implementing many 
of these provisions. I would like to highlight several issues 
that we would like to see addressed in the CEA reauthorization 
which we think will have a profound effect on the success of 
Title VII and the marketplace.
    With respect to cross-border treatment of swaps, Section 
722 of Dodd-Frank limits the CFTC's jurisdiction over swap 
transactions outside the United States to those that ``have a 
direct and significant connection with activities in, or effect 
on, commerce of the United States'' or are meant to evade Dodd-
Frank. In seeking to clarify its jurisdiction, on July 12th, 
the CFTC voted to approve final cross-border guidance, as well 
as a phase-in exemptive order.
    First and foremost, we believe it to be imperative that the 
CFTC, SEC, and global regulators coordinate their work on 
implementing OTC derivatives regulatory reform in furtherance 
of the G-20 commitments. We believe that the international 
nature of the swaps market makes such global coordination, in 
addition to domestic coordination, critical in order to achieve 
an appropriate level of oversight of swaps activities and 
further help to avoid unnecessary market disruption.
    While it is a little too early to get a full read of the 
guidance and exemptive order that were put out, because they 
just--actually we are in the third round of the exemptive order 
and still going through the guidance that was put out 
yesterday. We believe and we hope that it moves towards better 
coordination, but we believe that the Committee in the CEA 
should take a look at how we can streamline and enhance that 
coordination particularly among the CFTC and the SEC.
    In addition, I would like to talk about the Swap Push-Out 
Rule, Section 716 of Dodd-Frank. This is a provision that was 
added in this body but not really debated in the normal process 
through the other body and something that the prudential 
regulators in particular that the then-Chairman of the FDIC, 
Sheila Bair, and the current Chair of the Federal Reserve 
Board, Ben Bernanke, argued against, believing that it would 
affect their ability to prudentially regulate banks where swaps 
activities take place. And we would encourage the Committee to 
consider inclusion of bicameral legislation that has been 
introduced by Senators Johanns, Hagan, Toomey, and Warner, S. 
474, that would amend this provision. I would note that the 
regulators have already forestalled its implementation, and so 
clearly they are struggling with this provision as well.
    Likewise, with respect to swap execution facilities, this 
is a situation where the CFTC and the SEC have gone in 
different directions. The CFTC, in their rule that was 
finalized earlier this year, came out with a rule that we think 
does not fit with where the marketplace is, and particularly 
from our asset manager members who are very concerned about the 
minimum mandatory Request for Quote model that is imposed by 
the CFTC's final rule, and our view from our asset manager 
standpoint is that this rule will actual be counterproductive 
and end up costing asset managers clients who utilize the swaps 
markets for the benefit of their investors, their fund holders, 
and the like. And this is an area where, like the House has 
adopted on a couple of occasions, that the Committee should 
look at going back and making further clarification on how SEFs 
are treated.
    Finally, I would raise with the Committee a provision in 
the Basel III company standards which were recently adopted by 
the Federal Reserve Board and interimly adopted by the FDIC. 
And, in particular, it has to do with the credit valuation 
adjustment. This is a provision that addresses capital put 
against by the dealer on swaps with non-financial 
counterparties. In Europe, under the European Union, they have 
taken a different approach because of problems in how CBA was 
developed by the Basel Committee, and this results, in our 
view, in a fragmentation between the U.S. and the EU, and it is 
something that we think that the Committee and perhaps the FSOC 
should take a look at. So we would encourage the Committee to 
take a look at that.
    With that, I will yield back the balance of my time.
    [The prepared statement of Mr. Bentsen can be found on page 
54 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    I would ask other witnesses to take notice, a former 
Congressman made it within 2 seconds of 5 minutes. That was 
very good.
    Mr. Duffy, welcome back.

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

    Mr. Duffy. Thank you. Good afternoon, Chairwoman Stabenow, 
Ranking Member Cochran, and Committee members. I want to thank 
you for the opportunity to testify today regarding the 
reauthorization of the CFTC.
    Dodd-Frank subjected the unregulated, opaque OTC swaps 
market to a new regulatory regime based largely on the 
successful model for futures exchanges and clearinghouses. The 
CFTC was granted power to adopt regulations to implement this 
new model.
    While the Commission and the staff are to be commended for 
their efforts to fix the swaps market, the Commission rules 
have often gone far beyond Congress' intent. In some instances, 
the Commission has implemented Dodd-Frank by uncoordinated and 
inflexible rules that would have brought the industry to a 
standstill absent several last-minute no-action relief letters.
    The Commission used its swap mandate as a pretext to impose 
needless rules on the robustly regulated futures market. 
Congress did not intend to rewrite the rules of this well-
functioning, highly regulated marketplace.
    As the CFTC contemplates its remaining rules to implement 
Dodd-Frank, we encourage the Committee to ensure that these 
rules remain within the congressional mandate and do not 
undermine the ability of business in the United States and 
worldwide to continue to manage risk.
    The agency's initial proposal to impose its rules across 
international borders without regard to local rules or 
regulations had threatened to expose the industry to 
conflicting duties and set the stage for retaliation from 
foreign regulators. We welcome last week's agreement between 
the CFTC and the European Commission on a ``Common Path 
Forward.'' We are hopeful that this positive development will 
lead to the U.S. and EU regulators achieving workable mutual 
recognition of derivatives trading and clearing regulation.
    Customer protection was noted in many responses the 
Committee received on reauthorization. Customer protection and 
market confidence are the cornerstones of CME's business. Since 
the failure of MF Global and Peregrine, CME and others have 
implemented numerous rules to strengthen and protect the 
customer protection of futures commission merchants. For 
example, daily access to aggregated customer balances of banks 
facilitates our risk-based reviews of FCMs.
    The CFTC has proposed rules that codify these initiatives, 
which we support. However, we urge the CFTC to reject other 
proposed requirements such as the residual interest proposal. 
That would likely drive out smaller FCMs that serve the 
agricultural community out of business in this country.
    It is also essential for customer protection and healthy 
U.S. derivatives markets that the agency which oversees us be 
adequately funded. But we strongly oppose the administration's 
proposal to fund any of the proposed $315 million of the CFTC's 
budget with a transaction tax. Such a tax will substantially 
increase the cost of market making, an essential source of 
market liquidity, as well as business costs for all customers, 
even those the administration wants to exempt. It will reduce 
liquidity, increase volatility, and impair efficiency-raising 
hedging costs for farmers, ranchers, and other commercials 
which will be passed on to consumers in the form of higher 
prices for food and other goods.
    Unexpected funding may be collected when volumes drop 
because market participants are driven out of U.S. markets. 
Last week, regulators in India saw derivatives volume drop by 
more than a third immediately following implementation of a 1-
percent transaction tax.
    These are just a few of the many issues that have been 
submitted to the Committee in connection with your 
consideration of CFTC reauthorization. We stand ready to be a 
resource to the Committee on these and other critical issues to 
the futures and derivatives marketplace.
    I want to thank you for your time and attention, and I look 
forward to answering any questions you may have.
    [The prepared statement of Mr. Duffy can be found on page 
81 in the appendix.]
    Chairwoman Stabenow. Thank you very much. Mr. Cooper, 
welcome.

 STATEMENT OF ADAM COOPER, SENIOR MANAGING DIRECTOR AND CHIEF 
  LEGAL OFFICER, CITADEL LLC, CHICAGO, ILLINOIS, ON BEHALF OF 
                   MANAGED FUNDS ASSOCIATION

    Mr. Cooper. Thank you very much, Chairwoman Stabenow, 
Ranking Member Cochran, members of the Committee. My name is 
Adam Cooper. I am senior managing director and chief legal 
officer of Citadel LLC. Citadel is a financial institution that 
engages in a wide range of asset management and capital markets 
activities on a global basis. I am here today on behalf of 
Managed Funds Association and its members, and I am pleased to 
provide testimony at today's hearing on reauthorization of the 
CFTC.
    MFA represents the majority of the world's largest hedge 
funds and is the primary advocate for sound business practices 
for the alternative investment industry. As fiduciaries to our 
investors and as customers ourselves, we share with members of 
this Committee a keen interest in ensuring that applicable 
rules provide a strong framework for the market and its 
participants. Though we have made progress since the financial 
crisis, there is much still to be done. I would like to 
highlight a few points in this regard.
    First, protection of customer collateral. MFA has been a 
vocal and consistent advocate for central clearance of 
derivatives transactions. Getting clearing right entails many 
complex, legal, and operational issues. One important element 
is the framework for protecting the property of customers who 
clear swaps through FCMs. Here the CFTC has chosen LSOC, a 
model which provides an additional level of customer protection 
over other models. We believe, however, that Congress could 
enhance the customer protections that LSOC and other models 
would provide.
    Specifically, amendments to Chapter 7 of the Bankruptcy 
Code could ensure that, upon an FCM's insolvency, customer 
assets posted as collateral on cleared swaps would not be 
subject to pro rata distribution.
    Moving on to CPO registration, the Dodd-Frank Act and CFTC 
rulemakings have broadened the regulatory framework to include 
many entities that were not formerly subject to CFTC 
regulation. MFA has been consistent in supporting elimination 
of gaps in regulation. However, the repeal of CFTC Regulation 
4.13(a)(4) extends the regulatory umbrella more broadly than is 
necessary. This creates a very real risk of scarce resources 
being spread too thin at a time when we need our regulators to 
focus on the mission at hand. We urge the Committee to examine 
this issue in detail.
    Turning next to CFTC and SEC coordination, the CFTC and the 
SEC have stepped up their cooperation in recent years, and all 
market participants have been the better for it. But much work 
remains to be done.
    For example, last week, the SEC adopted rules under the 
JOBS Act to eliminate the ban on general solicitation for 
certain private placements. The CFTC's regulations were drafted 
a number of years ago to be consistent with the SEC's rules on 
private placements. We believe it is now time for the CFTC to 
adopt complementary rules to effect Congress' intent under the 
JOBS Act.
    The many systemic risk filing requirements required under 
Dodd-Frank represent further examples where greater 
coordination is needed. Currently an entity that is registered 
with both the CFTC and the SEC face up to three different 
filing requirements, that is, with the SEC, the CFTC, and the 
NFA. We recognize and support that regulators must have the 
information that they need, but steps must be taken to reduce 
unnecessary and costly burdens resulting from duplicative 
requirements.
    Moving on to confidentiality, MFA has supported 
congressional and regulatory efforts to increase the flow of 
information to regulators. We appreciate the need for 
regulators to be well informed. Yet it is of paramount 
importance that our laws require regulators to take all steps 
necessary to preserve the confidentiality of that information 
and, further, that robust protections exist with respect to the 
sensitive and proprietary intellectual capital of asset 
managers. Today a fund manager filing a document with the SEC 
has greater legal certainty of the confidentiality than if that 
manager filed the very same document with the CFTC. We believe 
the CEA should be amended to provide the same protections to 
CFTC registrants as the Advisers Act provides to investment 
advisers.
    Finally, international cooperation. MFA members engage in 
financial transactions in virtually every market around the 
globe. We are supportive of thoughtful regulations to ensure 
market integrity and to provide a dependable legal 
infrastructure in which to trade. But ensuring a well-
functioning global market depends on coordination among 
regulators. It is simply unworkable to operate in an 
environment in which different jurisdictions have conflicting 
or overlapping rules. Market participants need to know which 
rules apply and under what circumstances, and those rules 
should make sense and reflect the economic realities of the 
transactions.
    MFA believes the recent efforts of the CFTC and the 
European Commission to address cross-border issues is a 
positive step, and we are hopeful that these efforts will lead 
to a workable framework. We urge this Committee to continue to 
exercise its leadership in oversight of these types of 
international agreements as they occur in the future.
    My written statement outlines these points as well as 
others in greater detail. I appreciate the opportunity for you 
to consider my views and am available to answer questions. 
Thank you.
    [The prepared statement of Mr. Cooper can be found on page 
68 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Mr. Kelleher.

STATEMENT OF DENNIS M. KELLEHER, PRESIDENT AND CHIEF EXECUTIVE 
         OFFICER, BETTER MARKETS, INC., WASHINGTON, DC

    Mr. Kelleher. Good afternoon, Chairman Stabenow, Ranking 
Member Cochran, and members of the Committee. Thank you for the 
invitation to Better Markets to testify today.
    Better Markets is an independent, nonprofit, nonpartisan 
organization that promotes the public interest in the domestic 
and global financial markets. I have detailed what Better 
Markets does in my written testimony. It is also available on 
our website, bettermarkets.com, and I will not repeat that 
here.
    I would like to say it is a privilege and honor to return 
to the Senate to testify after having been a staffer for three 
different Senators over the years and having worked with many 
of you during that time.
    I would like to make a few very quick points.
    First, the financial crash and its cost. Everyone likes to 
talk about the 3-year anniversary of the Dodd-Frank financial 
reform law, but too few even mention that just 5 years ago, the 
U.S. suffered the worst financial crash since 1929, which 
inflicted the worst economy on the United States since the 
Great Depression. Only massive taxpayer and Government bailouts 
prevented the total collapse of the financial system and a 
second Great Depression. As the Chairwoman noted at the 
beginning, the American people paid and are still paying a very 
high price for that, including slow to no growth, persistently 
high unemployment, tens of millions of homes underwater, 
massive deficits, unprecedented Fed policies like zero interest 
rates and trillions in bond purchases, among so much more 
economic wreckage across our country. Ultimately that is going 
to cost the United States more than $12.8 trillion, as you all 
know, from many of the damages inflicted on your constituents.
    As is well known, unregulated, non-transparent over-the-
counter derivatives markets were at the heart of causing and 
spreading those financial and economic crises and costs, and 
that is why derivatives regulation is vital to effective 
financial reform as well as the protection of the American 
people, taxpayers, our Treasury, and our financial system.
    Second, the Committee should avoid becoming another 
battleground in the war over financial reform and should not 
relitigate Dodd-Frank. The responsibility for the CFTC was 
dramatically expanded from the $37 trillion notional futures 
market to include the $340 trillion notional U.S. swaps market. 
That was a monumental, transformative change for the agency and 
the markets where there are trillions of dollars at stake.
    It was inevitable and no one should be surprised that 
whatever the CFTC did, it was going to be highly controversial 
and hotly contested and, unfortunately, recontested. Yet the 
least funded, smallest financial regulatory agency, the CFTC, 
has taken the new laws and mandates seriously and done an 
outstanding job of translating the financial reform law into a 
reality. They have not done a perfect job, and we have not 
agreed with all that they have done. No one has. But that does 
not mean the new law should be changed on a piecemeal basis, 
especially given that they are now just finalizing most of 
their rules and few have even been implemented.
    The complaints being raised are almost entirely speculative 
and from special interests seeking to advance their narrow 
self-interest. That is their right. But it is no basis to start 
changing laws and public policy prematurely.
    Given the historic changes being put in place, the CFTC 
should be allowed time to implement the rules, see how they 
work, determine if changes should be made, and given the 
opportunity to make them. That would be the appropriate time 
for considering whether statutory changes are necessary or 
appropriate. Now is not the time and reauthorization is not the 
place. I urge you not to let this Committee become the latest 
battle front in the war over financial reform.
    Third, the CFTC is woefully underfunded and simply cannot 
do the job Congress asked it to do and the job that the markets 
and investors desperately need it to do. I have detailed in my 
testimony those details and will only say that an agency with 
$200 or even $300 million in annual budget cannot properly 
regulate or oversee the futures and swaps markets with almost 
$400 trillion in notional trading. The CFTC has to have the 
authority to impose fees and be self-funded in whole or in 
substantial part. If not, it is being set up for failure. It is 
being asked to do so much that is so important without the 
resources it needs to get the job done. That will be a gross 
disservice not just to investors but to market participants 
themselves.
    Fourth, and last, the industry claims for so-called 
innocent-sounding cost/benefit analysis is, in fact, little 
more than industry-cost-only analysis, and it must be seen for 
what they are most of the time: a back-door attempt to kill or 
gut financial reform. The proposals will impose onerous, costly 
requirements. Calls for cost/benefit analysis sound good in 
theory, but they are often catastrophic in reality for the 
public interest. The CFTC has done economic analysis for 
decades as required by the CEA. Tellingly, there have been few, 
if any, complaints about their work until it began implementing 
financial reform. That tells everybody what is really going on 
here.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Kelleher can be found on 
page 121 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, Senator. As this Committee begins the 
reauthorization process, it is entirely appropriate that your 
attention and all of our attention is focused on customer 
protection issues.
    For the longest time, the futures industry had a very well 
deserved impeccable reputation for safeguarding the integrity 
of customer funds. But twice in the last 18 months, first at MF 
Global and then at Peregrine, that reputation took a serious 
hit as customers suffered very painful losses, and losses that, 
frankly, we as regulators are supposed to prevent.
    Clearly some dramatic improvements were required, and over 
the last 18 months we have worked very, very closely with the 
CFTC and with the CME and other SROs to bring about those 
changes, and I have detailed those in my written testimony, but 
I would like to highlight a couple of them in my oral remarks.
    First, the heart of the matter really is the protection of 
customer segregated funds. And for years and years, we have 
required FCMs to file daily statements with NFA regarding the 
amount of customer funds that they are holding, and we analyze 
those statements and look for trends. But we confirmed those 
balances to outside sources in the past only as part of our 
annual examination. When we would go out and do an examination 
of an FCM, we would then confirm those balances to outside 
sources such as the banks actually holding the customer funds. 
And when we did that, we did it through a paper confirmation 
process where we would mail a confirmation request to the bank 
and then the bank responded directly to NFA, again, in writing.
    In 2012, we switched to an electronic confirmation process, 
and it was that e-confirmation process that uncovered the fraud 
at Peregrine. But even then it was still just part of the 
annual examination, and we felt we needed to do a much better 
job, and that is what we have done. Together with the CME, we 
have built a system now where we have daily confirmation of all 
seg bank balances so that we still receive reports daily from 
the FCMs regarding the amount of funds they are holding, but 
now for over 2,000 bank accounts that are holding customer 
segregated funds, we also receive a confirmation from the bank. 
We then perform an automated comparison between what the firm 
is saying and what the bank is saying to identify any 
suspicious discrepancies. This is a huge improvement from where 
we were just a year ago. And although it is a big improvement, 
it is certainly not the only one that we have done.
    Again, as I have detailed in my testimony, we have 
increased dramatically FCM financial transparency. We have 
created a situation in which customers can come to the NFA 
website and there they can find financial data on all FCMs, key 
financial data both current and historical, so that they can do 
their due diligence, and that information includes information 
on how the FCM is investing customer funds.
    We have set stringent requirements for FCMs regarding 
minimum internal controls. We have adopted additional 
safeguards to prevent the misuse of customer segregated funds. 
We have had a top-to-bottom outside examination of all of our 
examination and audit practices, and we are adopting the 
improvements that were suggested.
    I would like to stress that on each one of those items, 
each one of those improvements, we worked very closely with the 
CFTC, and we were very gratified when the CFTC came out with 
its rule proposals that so much of the CFTC's proposal was 
really adopting the changes that we had already made.
    So a lot has been done, but there is always more to do, and 
two items in particular that I would like to mention. One, I 
think both the Peregrine and the MF Global situations 
highlighted certain issues regarding FCM insolvencies and 
bankruptcies. And those are very complicated issues. We are 
working with every facet of the industry to try to find common 
ground on proposals that everyone can agree to. But I can tell 
you, our primary focus is to ensure that an FCM insolvency, if 
there is a shortfall in customer segregated funds, then 
customers receive the top priority. That, in our view, is the 
right result. That is the result that is called for under CFTC 
rules, and that is the result we want to ensure is always 
achieved in a bankruptcy.
    With respect to customer account insurance, both MF Global 
and Peregrine have renewed questions about whether we should 
have customer account insurance. That is a very serious 
question. It deserves a serious debate, and there are a lot of 
public policy issues involved. But you cannot have any rational 
debate on that issue, I do not think, until you first know what 
kind of insurance would we be buying and what are we going to 
pay for it. That may not be the endpoint of the discussion, but 
it is an essential starting point. And you cannot answer that 
question, frankly, unless you have cold, hard data and a lot of 
it, because you have got to go to the insurance companies and 
provide them with detailed, granular information so they can 
perform an actuarial analysis and determine their risk.
    We are working on that study with the FIA, with CME, and 
with the Institute for Financial Markets. That is well in 
progress, and we hope to have it completed in the next few 
weeks, hopefully by mid-September.
    I am sorry I went over my limit by 15 second at this point, 
but we look forward to working with Congress and the industry, 
and I would be happy to answer any of your questions.
    [The prepared statement of Mr. Roth can be found on page 
157 in the appendix.]
    Chairwoman Stabenow. Thank you very much, Mr. Roth. And 
that is all right. We had some time that others gave up on your 
behalf here.
    Thank you to each of you. Obviously we have a lot of 
questions. There are a lot of things we could cover, and in the 
limited time in each of us asking 5 minutes of questions, I 
would ask just that you be as concise as you can, because we 
have got a lot of ground to cover.
    When we look overall at so many different issues, the 
challenge for the CFTC really does relate them having the 
resources, the staff, the ability to do all that needs to be 
done in terms of accountability. There is a whole range of 
things that need to happen. But I want to start with the issue 
around resources because it is fundamental. It is not something 
that is just a side issue in terms of their being able to 
function.
    Mr. Duffy, you talked about the importance of adequate 
funding for the CFTC. At the same time, I know that you are 
opposed to user fees. And so what other options would you 
suggest for us as an alternative means of funding the agency. 
The SEC, other regulatory agencies have funding streams. CFTC 
does not. That is a serious impediment as we go forward and 
hold them accountable for decisions they make and the oversight 
that they have. So what would you suggest?
    Mr. Duffy. Well, it is difficult for me to come up with a 
suggestion for the Government, but I will say a couple 
different things.
    When we talk about liquidity and what the costs could be to 
the American consumer if a small fee or transaction tax was 
imposed on the market maker liquidity pools, even though the 
pool--some of it has been exempt, it could be extraordinary. I 
gave you a quick example of what happened in India when a third 
of their market makers went away. When the market makers go 
away, Senator, the bid-offer goes wider. When a bid-offer goes 
wider, the cost of business goes up. When the cost of business 
goes up, it gets passed on to the consumers.
    If you want to find a quick way to make $315 million with a 
transaction tax, it will cost you $1.5 billion to do it. So 
that is not a smart thing to do.
    Chairwoman Stabenow. So the question is, What? I mean, I 
appreciate--I have heard that concern that----
    Mr. Duffy. It is hard to say what is the concern, but I 
think we have to make sure--no disrespect to Mr. Kelleher, and 
I am not going to, but when we talk about $400 trillion of 
over-the-counter derivatives that the CFTC is going to be 
regulating, you have to realize that those $400 trillion is 
about 2,000 transactions. We do not weigh the money. You know, 
we do not have to say, it can cost a lot more to do this. It 
does not matter what the notional value is. It is about the 
transaction volume that is associated with it. Our world today 
does 20 million transactions a day.
    Chairwoman Stabenow. No, I appreciate that. I guess what I 
am asking----
    Mr. Duffy. So there is a big difference----
    Chairwoman Stabenow. We have a seriously underfunded agency 
that has seen about----
    Mr. Duffy. You know, it is hard for me to stand up here----
    Chairwoman Stabenow. --a significant increase in their 
responsibilities.
    Mr. Duffy. --and say that, you know, it benefits the 
taxpayer by paying the $305 million. But the reality is, ma'am, 
it benefits the taxpayer by paying the $305 million to fund the 
CFTC, because in return the risk management that is associated 
with it goes from farmers to reinsurers to small bankers is a 
cost that is immeasurable.
    Chairwoman Stabenow. So you are saying basically taxpayer 
funded.
    Mr. Duffy. That is the way it has been funded for years, 
yes, ma'am.
    Chairwoman Stabenow. Mr. Roth, the National Futures 
Association is self-funded with members' fees, dues, 
assessments. Have those fees been prohibitive in terms of 
expense to the industry? Have they impacted the markets 
negatively?
    Mr. Roth. Let me make a couple of points on that, Senator.
    First of all, we have a number of different regulatory 
spheres. We have futures compliance, now swaps compliance. We 
also have a market surveillance function we perform for certain 
contract markets and soon SEFs. And we oversee retail foreign 
exchange transactions that are off exchange. We try to make 
sure that each regulatory sector pays its own freight, that 
they carry their own weight. Most of it, for most of those 
sectors, that is done through membership dues.
    With respect to the futures activity, we do have an 
assessment fee that is imposed on trades and collected by FCMs, 
but I should point out that at the very outset when they were 
forming NFA, they were very careful and worried about taxing 
liquidity out of the market. So our fee has a very particular 
structure to it, so that our assessment fee does not apply to 
any trade that is conducted by a member of the contract market 
where the transaction is executed. So, really, we only assess--
about, oh, 22, 23, 24 percent of the overall trading volume is 
subject to our assessment fee, and it was structured that way 
specifically to avoid taxing liquidity out of the market.
    Chairwoman Stabenow. Thank you very much.
    Mr. Cooper, you talked about the need for consequences for 
breach of data security, a very serious issue, and I am 
wondering what sort of consequences would be appropriate. There 
is a proposal, broadly supported an indemnification provision 
from the Dodd-Frank Act. Would removing the provision harm data 
security? Or are there other ways to protect confidential data?
    Mr. Cooper. I do not think removing that provision would 
harm or risk confidentiality. That actually would enhance the 
flow of information to necessary parties.
    The consequence is accountability. We need to make sure 
that there are robust requirements imposed on the various 
regulators for this huge volume of information that is now 
flowing into them. We need to make sure that there are no 
asymmetries between the confidential protections afforded to a 
market participant giving information to one regulatory agency 
versus another. We need to synthesize and harmonize, in other 
words, the protections available between the CFTC and the SEC.
    Chairwoman Stabenow. Thanks very much. I have many more 
questions, and we will be following up with all of you, but I 
am going to turn now to my Ranking Member, Senator Cochran.
    Senator Cochran. Thank you, Madam Chair, and we appreciate 
all of the witnesses being here today to help us understand 
what the options are and what the appropriate action could be 
in helping to protect those who use the services of the markets 
to hedge and to protect themselves from marketing disasters as 
well as weather-related disasters that can make it very 
difficult in our economy.
    I wonder, for example, though, if some of the things that 
you end up hearing as suggestions for change or improvements or 
modernization might do more harm than good. You might just 
glance through some of the suggestions that we have already 
received and tell us, ``It is okay to consider this but please 
do not do it because it is going to be creating a problem that 
is bigger than the one that we already have.'' That may be a 
negative way to ask a question, but, Mr. Duffy, I would just 
ask you, could you take a shot at that and warn us against 
doing something that we might be talked into doing that really 
has a negative effect on the situation?
    Mr. Duffy. You know, Senator, I am a fairly firm believer 
that a one-line reauthorization is exactly what the industry 
needs right now. We do not need any additional burdens or 
changes. I think the industry has come light years in the last 
10 years. Mr. Roth just gave you an example what we did in the 
last year alone. I think the industry has benefited immensely 
because of the things that we have done internally, and I would 
hope very much that Congress would take that into consideration 
and just go ahead and do a one-line reauthorization and not 
make too many changes.
    I think there are some menus or exemptions that I am sure 
some of my colleagues would like to see on behalf of their 
clients, and I would not be opposed to that. But I think 
overall less is better.
    Senator Cochran. Thank you.
    Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you very much.
    Senator Brown.
    Senator Brown. Thank you. Mr. Duffy, I am intrigued, 
actually by your assertion perhaps of a one-line bill, what 
that might mean for the ability of--or taking away the ability 
of certain interest groups to make mischief in this derivatives 
market.
    Thank you, Mr. Kelleher, for your comments and reminder of 
what this hearing is all about, what reauthorization is all 
about, what this agency is all about, and your discussion of 
costs and benefits. There are costs to industry in much of this 
throughout the regulatory apparatus, but we know what the cost 
to society was, the cost to society was because we did not do 
some things we should have done 5 years ago, 10 years ago.
    Congressman Bentsen, nice to see you. I appreciated your 
comments about Dodd-Frank's Push-Out Rule, which requires banks 
with access to deposit insurance and the Fed's discount window 
to move derivatives trades to separately capitalize affiliates.
    My first question is for Mr. Kelleher. Despite the lessons 
learned from the financial crisis, the markets experienced, as 
we know, several significant disturbances, most recently last 
year's $6 billion London Whale trading losses. Such incidents 
should serve as a reminder that the rules are there to make 
banking--supposedly to make banking safer, not riskier. Give us 
your thoughts on the push-out provision, whether it is making 
our system safer or riskier. What are your concerns about 
proposed legislation to roll back this provision?
    Mr. Kelleher. Thank you, Senator. It seems to me that at 
the level of the purpose of the swap push-out provision, nobody 
can really disagree, which is that the entities, large entities 
engaged in high-risk and non-hedging trading put those 
activities in a separately capitalized subsidiary, which will 
not otherwise have access to taxpayer bailouts or the Fed 
window. That seems to me that everybody would agree on.
    Then the question becomes--and it came up during the--as 
many of you know, not just during the consideration but during 
the conference, and indeed, some of the statements made about 
the objections to the swaps push-out provision were actually 
made in April and May of 2010, prior to the conference, prior 
to the fix to this provision, which allowed commercial banks to 
engage in a variety of traditional activities, including, 
importantly, allowing hedging. So it was changed in conference.
    So some of the testimony that has been provided to you in 
writing actually cites objections to that provision that are 
inapplicable since it was put into law.
    So the swaps push-out provision is very important so that 
the non-hedging, non-traditional commercial banking activities 
in the derivatives market are in a separate subsidiary, 
separately capitalized, so that it does not take down the bank 
itself and does not end up with more taxpayer bailouts and 
access to the Fed window.
    Senator Brown. Thank you. Let me shift, Mr. Kelleher, to a 
different issue. I am concerned about the risks associated with 
banks' expanded business operations into physical commodity, 
energy, commercial business operations, warehousing, 
transportation, leasing, distributing commodities, one notable 
one in Chairwoman Stabenow's State.
    In a Reuters story, a trader said, and I want to quote: 
``The truth of it is that having access to the physical markets 
is about optimization and knowledge. It gives the trader the 
visibility of the market to make far more successful 
proprietary trading decisions in both physical and financial 
markets. It is trading with material non-public information.'' 
He then goes on to say, ``The difference compared with equity 
markets is that it is perfectly legal.''
    Mr. Kelleher, talk, if you would, about the potential or 
existing conflicts in market risks that arise from banks 
engaging in commodity and energy and commercial business 
operations, what it means for consumers, what it means for 
businesses that use those commodities.
    Mr. Kelleher. Well, I think it is clear that consumers and 
end users are getting squeezed in paying the price for the 
biggest banks in the country, moving into, in massive amounts, 
physical commodity storage and trading activities while at the 
same time they are engaging in the futures market and in the 
swaps market, and they have direct or indirect, partial or 
significant ownership in some of the exchanges.
    Now, the LME in London has changed that in the last 2 
years, but what we have seen lately--and there has been some 
reporting in the last several days about the warehousing of 
aluminum and how companies from Coca-Cola to Coors to beer 
companies to, you know, auto manufacturers are getting squeezed 
and paying a fortune because there are bottlenecks that appear 
to be created for the purpose of generating cash for the banks 
at the expense of the end users and other market participants.
    So the conflicts of interest should be looked at really 
closely. We do not even have the data on it, and one of the 
things we suggest that the Committee does in reauthorization is 
get the CFTC authority to get this data so they can see what is 
happening in the physical markets by these banks, at the same 
time they can see what they are doing in the futures and swap 
markets. And then we will have a much better picture of the 
conflicts of interest.
    Senator Brown. Thank you.
    Thank you, Madam Chair.
    Chairwoman Stabenow. Thank you very much.
    Senator Roberts.
    Senator Roberts. Thank you, Chairwoman Stabenow and Ranking 
Member Cochran, for organizing this hearing and beginning the 
important process of reauthorization.
    This Committee's oversight of the CFTC is not taken lightly 
by any member, especially in light of the failures of MF Global 
and Peregrine. We are limited on time, and that is always the 
case here. I wish we had more time with the expert panelists, 
especially covering a range of topics. So I would like to ask 
at least some of the panelists answer in a yes or no fashion. I 
know that is difficult--these are very difficult for yes or no 
answers--and that it is not fair. But life is not fair.
    Representative Bentsen, good to see you, sir. As the CFTC 
works to implement the Dodd-Frank Act, there have been more 
than a few bumps in the road resulting in numerous no-action 
letters, exemptive relief, and enforcement delays. I am worried 
about certainty.
    Before proposing rulemaking or guidance, does the CFTC 
routinely conduct enough quantitative analysis regarding the 
costs and benefits of their regulations, in your opinion?
    Mr. Bentsen. No, Senator.
    Senator Roberts. For the cross-border application of 
derivatives regulation, should the CFTC have used a formal 
rulemaking process, including a cost/benefit analysis, instead 
of issuing the regulations through ``an interpretive guidance 
and policy statement''? Which, by the way, is over 300 pages 
long?
    Mr. Bentsen. Yes.
    Senator Roberts. Mr. Duffy, when Chairman Gensler was in 
front of this Committee in February, he was surprised by the 
pushback against their proposed rules on margin requirements. 
Has the CFTC taken the correct approach for customer protection 
by requiring a futures commission merchant, FCM, to have their 
customers meet margin deficiency at all times?
    Mr. Duffy. Has the Commission made sure that they meet it 
at all times?
    Senator Roberts. That is correct.
    Mr. Duffy. The exchanges do set the margins, and----
    Senator Roberts. Just do not worry about it. Just say, 
``No.''
    [Laughter.]
    Mr. Duffy. Yes, sir. No.
    Senator Roberts. If left unchanged, will this requirement 
have a significant and negative impact on the agricultural 
sector of the market?
    Mr. Duffy. It could, yes.
    Senator Roberts. Has the CFTC relied too often on no-action 
letters, exemptive relief during the implementation of Dodd-
Frank, creating confusion and uncertainty in the marketplace?
    Mr. Duffy. Without question, yes.
    Senator Roberts. Mr. Cooper, internationally--and I 
emphasize ``internationally''--the CFTC is working to implement 
final guidance on cross-border swaps and released their latest 
action late as of last week, notwithstanding the progress--and 
I give every credit in that regard--with the CFTC. I do have a 
lot of concerns with the CFTC trying to enforce regulations 
worldwide let alone imposing their regulations on all of our 
trading partners.
    For the scope and framework of international derivative 
regulations, are you concerned that there could be a patchwork 
of different regulations if the CFTC does not do a better job 
of harmonizing, not dictating, their efforts with their foreign 
partners? So, put another way, is it more important to get our 
regulations correct or, even better, in line with our 
counterparts across the world?
    Mr. Cooper. We certainly need certainty, we need 
consistency and harmonization, and certainty was provided in 
certain important respects by the CFTC's action with respect to 
the definition of ``U.S. person.''
    Senator Roberts. So your answer is yes. Is that correct?
    Mr. Cooper. Yes.
    Senator Roberts. Thank you. For once in my time on the 
Committee, House or Senate, I am yielding back a minute and 2 
seconds.
    Chairwoman Stabenow. I think we should make a special note 
of this in the record. It is the first time for Senator 
Roberts.
    Senator Gillibrand is next. I do not see her at the moment, 
so, Senator Heitkamp.
    Senator Heitkamp. Thank you so much, Chairwoman and Ranking 
Member, for pulling together this very important panel and 
these experts.
    I want to focus, I think, on just a couple issues, but not 
to belabor the point, but if you think that MF Global had 
impact globally and across the country, I can tell you that 
people in North Dakota were shocked, absolutely shocked, 
because it moved off the agricultural pages into the front 
page, talking about the risk that now our farmers and our 
producers thought was completely impossible to have incurred 
the loss. And most of them have recovered about 89 percent of 
their money. They are still waiting for the other 11 percent. 
And they wonder why people do not go to jail, and they wonder 
why this and how this could possibly happen in America when we 
have, in their opinion, one of the most regulated industries 
and regulated environments in the world.
    I am not here to point fingers or to assess blame. I am 
looking for solutions, and I am looking for a path forward. 
And, Mr. Duffy, I notice in your testimony, although not 
covered in your comments, is a discussion about insurance. And 
this has been a topic of many of the people who have come to 
visit me recently about potential expansions of products that 
could, in fact, mitigate risk.
    You mentioned that there is pending a Futures Industry 
Association study. Can you tell me when that study is going to 
be done? And can you give me any kind of preliminary insight on 
whether you personally, given your experience, believe that an 
insurance market could be created that would be helpful to 
mitigate risk?
    Mr. Duffy. Sure. Thank you, Senator. I think Mr. Roth also 
is involved in that study, and we are looking to have 
completion on that sometime in mid-September. So, you know, we 
have put a lot into the study, so we are both looking forward 
to the outcome of that information.
    Secondly, on the MF Global clients, this has been a very 
horrific incident in our industry, and people are wondering if 
somebody is going to go to jail. There is no question about it 
has been on the front pages. You know, you could put a cop on 
every street, as they say, and someone is still going to try to 
commit a murder.
    With respect to the monies, there is 99 cents on the dollar 
returned to all the 4d clients of MF Global. 4d clients are 
U.S. participants trading on regulated exchanges. They have 99 
cents on the dollar. And then for 30.7 clients of MF Global, 
they have 97 cents on the dollar. Those are U.S. participants 
trading on a foreign exchange. So most of the people, the good 
people of North Dakota, should have 99 cents on the dollar back 
of their money. The people that had their money in a broker-
dealer is a different story. That is an unregulated business, 
so that is maybe the number that you are referencing, ma'am.
    On the insurance itself, I have not been really a big 
proponent of insurance, but I do believe that if the 
participants want it, we should offer it. And I have no problem 
with that. We have a fund at the CME Group, as you may or may 
not know, that is called the ``Family Farmer and Rancher 
Fund.'' It is a self-insured, $100 million fund that we use to 
make sure if there is fraud or something like that, we will pay 
up to $100 million to these participants in total.
    I could not insure that fund without any major insurance 
company around the world. We have $158 billion of segregated 
funds in our world today. I do not know what the cost of that 
would be to insure. I think if people want to pay the premium 
for that insurance, they should have every right to do so. That 
is my personal viewpoint. I do not believe it should be 
legislated. I think this business will be crushed overnight if 
you legislate that type of insurance into the marketplace.
    So I think the optionality should certainly be there, and 
the FCMs should offer it up, and the exchanges and the other 
SROs should help the FCMs in facilitating that procedure.
    Senator Heitkamp. And not to belabor the point, but I think 
it is going to be extraordinarily difficult to see a product 
like that develop that is useful in the private sector. There 
is a reason why we have flood insurance; there is a reason why 
we have crop insurance. There is a reason why there is often a 
backstop that the taxpayers assume some of the risk going 
forward.
    I want to just spend a little bit of time talking about 
bankruptcy, because one of the issues obviously is a failure, 
even though it seems clear to me that when you have customer 
accounts that they ought to be the first ones out in a 
bankruptcy, I am a lawyer, I do not know why a lawyer would see 
it any differently than what I did, but obviously we have 
concerns about bankruptcy.
    Seeing that it might be exceedingly difficult to amend the 
Bankruptcy Code to deal with this, I want to proposed something 
and get anyone's reaction to this. If the law were to require 
that contracts in the CFTC-regulated markets included a 
subordination agreement that confirmed in writing that customer 
accounts were to be the first ones paid, would that have any 
undesired consequences, and would that help us solve the 
problem with a bankruptcy court that does not appreciate the 
fiduciary obligations?
    Mr. Duffy. I know Dan has got this in his testimony, but I 
will make one comment on that. I think that it makes sense, and 
it is hard to say that the consumer should not come first. But 
when you are looking at some of the smaller FCMs or if you just 
come out, the emergents that are in our world today that--you 
got to remember, banks will not clear your constituents, ma'am. 
They do not do that. They only clear the big participants. So 
the smaller brokerage firms need to clear the other 
participants. If, in fact, you made them subordinate to the 
clients, they may not be able to get funding to keep those 
smaller FCMs in business. That is just an unintended 
consequence. I am not saying it could happen, but that is one 
of the things, as a consumer, it is really hard for me to say 
that the customer should not be paid first.
    Chairwoman Stabenow. Thank you. Thank you very much, 
Senator.
    Senator Chambliss.
    Senator Chambliss. Thanks, Madam Chair.
    Mr. Cooper, testimony submitted by Better Markets refers to 
academic evidence suggesting that the aggregate level of 
speculation in the market adversely influences the behavior of 
prices and that more speculation does not always mean more 
efficient prices. The Commodity Markets Oversight Coalition on 
the second panel today has submitted an attachment to their 
testimony referencing a number of articles that purport to show 
that speculation degrades market quality or that high-frequency 
trading causes harm to the market.
    Now, we all know that every market needs both speculators 
and hedgers in order to function properly. I understand from 
your testimony that MFA supports a data-driven approach to 
position limits.
    Now, have you reviewed the testimony of Better Markets and 
the Commodity Markets Oversight Coalition? Are you familiar 
with the academic research? And could you just in general shed 
some light on this issue, please?
    Mr. Cooper. Thank you, Senator. What I would say is that 
there are a numerous academic and Government studies from the 
CFTC, GAO, OECD, plus international agencies all consistently 
commenting on the role of speculators in the market. Those 
studies--study after study--have concluded consistently that, 
first, they have not found excessive speculation to be the 
cause of market volatility in recent years; and, secondly, they 
show that policies restricting investors' access to derivatives 
markets would impair the ability of commercial participants in 
the markets to manage their risk. We are in favor of a data-
driven approach, a very careful assessment of what the facts 
are with respect to position limits or other restrictions on 
the ability of traders generally to access the markets.
    Senator Chambliss. Mr. Duffy, with respect to high-
frequency trading, some of the panel have raised concerns about 
the role of high-frequency traders in the marketplace. Some 
have suggested that this trading activity is responsible for 
market disruptions such as the mini-flash crashes in recent 
years or sudden price spikes. Can you give us your perspective 
on the role of high-frequency traders? And is this a term that 
has been actually defined by regulators?
    Mr. Duffy. Thank you, Senator. I think that high-frequency 
trading is getting a very clouded name at best right now. When 
it comes to mini-flash crashes or not, that basically does what 
market structure because of the fragmentation that we have in 
the securities world today where you do not have the vertical 
silos that pulls the liquidity in one central place.
    I think what is critically important for the American 
public to understand about high-frequency traders, trading is 
going fast. Technology is going to continue to go fast, and you 
are not going to put technology back in a bottle. So it is up 
to exchanges like CME Group, groups like NFA and others, to 
come up with ways to show the public how we are policing these 
participants, and that is exactly what we do. We spend over $40 
million a year policing our marketplace, a lot of that 
dedicated toward high-frequency trading.
    We can say it all we want, that these are good liquidity 
providers, but we have to show the American public that we are 
making certain that nobody is front-running an order or 
anything else that they are being accused of doing.
    Senator Chambliss. Mr. Duffy, I had significant 
conversations with Chairman Gensler leading up to the ultimate 
draft and passage of Dodd-Frank relative to the way we are 
going to treat swaps and derivatives, which all of us knew some 
changes needed to be made, but I felt like that the direction 
we were heading in and where we wound up was pretty excessive, 
particularly with the regulations that we knew were going to be 
forthcoming from CFTC, and they have not even been completed 
yet. We still do not know what they all are. And the issue that 
I kept raising with Chairman Gensler was, What is this going to 
do to American markets versus European markets and Asian 
markets? And the standard answer I got was they will follow us.
    Well, I see where the--and, interestingly enough, I was in 
Europe on a couple of occasions after those conversations, and 
I related that conversation to some of the folks in Europe, and 
they just got this wry smile on their face.
    Can you give us the benefit of where we are with respect to 
competitive advantages or disadvantages as a result of Dodd-
Frank today?
    Mr. Duffy. Well, I hear what Chairman Gensler is saying, 
that they will follow us, but I am still perplexed on seeing 
what laws that have been passed today in Europe or anything 
that has even been proposed or passed throughout Asia. There 
are things proposed in Europe but that have not yet passed. So 
we have already gone with the passage of Dodd-Frank. I just 
returned from a European trip, meeting with clients all 
throughout Europe, and when you make that reference to them, 
they are not just sitting around being beholden to the United 
States of America anymore. There are very sophisticated trading 
operations all throughout Europe, and they are garnering more 
and more market share each and every day, and this is something 
they feel quite excited about.
    So I think they are looking at it as an opportunity. We are 
all big believers in regulation, Senator, but I think we need 
less regulation with more teeth into it. We cannot keep writing 
a bunch of rules that everybody can just circumvent. Let us 
have rules that have teeth in them, and I think that is what 
the American public would want, and I think it is hard for the 
European counterparts or Asian counterparts to refute that type 
of activity. But we are not doing that. We are writing rules on 
listed derivatives markets today or listed futures markets that 
Congress did not have anything to do with in Title VII. It was 
about over-the-counter swaps.
    So hopefully we can get back to what we are supposed to be 
doing here, but I will tell you that folks, especially in 
Europe, are smiling quite nicely right now.
    Chairwoman Stabenow. Thank you very much.
    I will indicate to members that we have begun what will be 
two votes. I will continue for another 10 minutes. We will try 
to have another two members be able to ask questions. We will 
recess and then come back afterwards. So please come back at 
us.
    Senator Donnelly? I want to just say we are so glad to have 
Senator Donnelly chairing our Subcommittee on Commodities, 
Markets, Trade, and Risk Management, and his Subcommittee will 
be engaged in these issues, and we will turn to him.
    Senator Donnelly. Thank you, Madam Chairwoman. Thank you 
all for being here.
    I do not have an academic study in front of me, and I do 
not have a Government study in front of me. But I am going to 
tell you what has happened in my home State of Indiana in the 
last couple months.
    Gasoline was $3.40 one week. A week and a half later, 2 
weeks later, $4.25. Any demand increase? None. Any supply 
reduction? None.
    I called to the refiners. I said, ``Are you making any less 
gas right now?'' Our two largest suppliers to the State. 
``Absolutely not,'' both of them. Some refineries were down. It 
is a regular thing that has happened. You know, they were 
changing blends, regular thing that happens. But from $3.40 to 
$4.25. So I talked to everybody I could. Three weeks later, 
$3.13. That has nothing to do with supply and demand. But I 
will tell you what it did do. There are people in my State who 
were not able to buy food that particular week or had to cut 
down significantly on their groceries because of it, because 
all of a sudden their gas bill has gone from $40 to $60, and 
that extra $20 was the pair of pants for their kids or the 
groceries for their family.
    There is a widespread belief that the markets are broken, 
that supply and demand have nothing to do with the price 
anymore, and that the game is rigged.
    I called in to refineries to find out, and when they say, 
you know, ``We are producing at the same amount.'' Demand is 
down, and the price has gone from $3.40 to $4.25. And I go home 
every weekend. Here in D.C. it was $3.62 when it was $3.40 at 
home, and it was $3.62 when it was $4.25 at home. And you look 
for answers, and you say this is a rigged game, is what people 
think.
    Back in 2011--and nothing affects families more, it seems, 
in terms of this whole global world of finance that we see, 
this moving, that moving, that every week people are trying to 
make ends meet, have to fill up their tank. And it is what I 
hear almost more than anything.
    In 2011, Goldman Sachs analysts said for every million 
barrels on spec, 8 to 10 cents price increase. And, Mr. Cooper, 
I would ask, do you agree with that assessment?
    Mr. Cooper. I cannot comment on the Goldman Sachs report. 
What I would say, though, is if we cannot rely on academic 
studies, if we cannot rely on real-world examples, if we cannot 
embrace and acknowledge that a data-driven approach is the only 
way to really understand what the issues are here, then I am 
not sure what we are left with. We cannot have policies that 
would disincentivize participants from actively participating 
in the markets so as to provide the energy manufacturer and the 
farmer the ability to effectively manage their risks--so that 
there is liquidity.
    Senator Donnelly. Well, let me ask you this: Do you think 
if, instead of 421 million barrels on a speculative oil market 
today, there were 100 million barrels on a speculative oil 
market today, do you think that if it was 421 or 100 that the 
price would be the same for a barrel of oil?
    Mr. Cooper. I cannot comment on that, Senator. I am sorry.
    Senator Donnelly. Mr. Kelleher, do you have an opinion on 
that?
    Mr. Kelleher. Well, we have provided the data on plenty of 
studies that have shown, as have CMOC, that there is excessive 
speculation, and speculation is causing a tremendous amount of 
volatility. And, by the way, a lot of it is coming from this 
new great innovation from Wall Street called ``commodity index 
funds'' that nobody wants to talk about that pour somewhere 
between $300 and $400 billion a month into the markets every 
month, in the futures market over and over and over again.
    One of the things we also do not have, Senator, is data. 
The CFTC needs access to data because--and this is another 
place where the physical trading of these big banks comes into 
play. When you look at it, they are all reporting record 
profits. Look at the FICC number, the fixed income, currency, 
and commodities. They are making billions and billions and 
billions, which just happened to correspond with the volatility 
and the increase in price.
    I am not an academic. I do not have a Ph.D. either. But, 
you know, you do not need a Ph.D. for some of these things.
    Senator Donnelly. And I am not criticizing academic or 
Government studies. I am just saying you get a pretty good 
study on I-94 on your way home from O'Hare Airport as well.
    Mr. Duffy, my neighbor from Chicago, you indicated you 
wanted to say something?
    Mr. Duffy. Just a quick comment on that, and I think what 
is important to note is when you look at the markets, you 
cannot really say they are broke, because I also have a concern 
that you have. When you cite a $3.40 to $4.25, then back to 
$3.13 after you make a call in gasoline in a week's time, I 
will tell you that the futures markets have been between $90 
and $110 a barrel for 3 years. It has not moved. So to say that 
the futures market or the markets are impacting the price of 
that, what you just talked about, that fluctuation, you have 
the wrong panel up here asking that question.
    Senator Donnelly. Well, no, I think I have the right panel 
here, and I will ask the next panel, and I will ask other 
panels, too.
    Mr. Duffy. But with all due respect, the markets are not 
broke. If there is something going on that is nefarious in the 
marketplace by refiners or somebody else, that is who is making 
the markets go up and down. Markets in general have not moved, 
though. We are sitting at high prices in commodities overall, 
but that is due to a whole host of reasons from other 
countries, exporting our food products and everything else. We 
import the energy products, obviously. We cannot export oil in 
the United States. It is against the law. But the point is the 
futures market I oil has been in a very narrow range for a long 
period of time.
    Senator Donnelly. Right. I try to keep an eye on that, too. 
Oh, I am sorry.
    Chairwoman Stabenow. I apologize. I am going to take you 
back, given the time here.
    Senator Donnelly. Thank you.
    Chairwoman Stabenow. Given the time here on the votes.
    I want to turn to Senator Klobuchar.
    Senator Klobuchar. Thank you very much, Madam Chairwoman. 
And, Senator Donnelly, we had the same thing happen in 
Minnesota on the gas prices and same experience. I have long 
believed there are speculation issues. There also was a 
refinery-closing issue, and I have a bill that actually Senator 
Hoeven is on to require the refineries to tell the Department 
of Energy when they are going to close down so we can better 
stagger the closures. But I would agree with you on the 
speculation, so you should look at the bill.
    Mr. Roth, you are sitting there by yourself and not many 
people have asked you questions, and you are on my end, so I am 
going to start with you.
    I know you spoke a bit about some of these customer issues, 
and the failure of MF Global resulted in an unacceptable 
outcome for customers who had posted collateral with the firm, 
unacceptable because the Commodity Exchange Act specifically 
prohibits the use of customer funds for the firm's own needs.
    The CFTC has now charged the company and its top executives 
with unlawful misuse of customer funds, and we must ensure that 
the improved protocols put in place will help better police the 
system. So we have a problem of dealing with the company, but 
we also have the problem going forward.
    As we consider legislative changes relative to this matter, 
changes to customer funds segregation and potential reforms 
under the Bankruptcy Code, we need to make sure reforms are 
carried out to protect customers and also allow for a well-
functioning futures markets.
    Do you have any thoughts on this?
    Mr. Roth. Senator, I agree wholeheartedly with everything 
that you said, and that certainly, from a regulatory point of 
view, from the regulators' side, we have to constantly be--not 
just fight the last war, but try to anticipate the next war and 
try to always be trying to make the smartest use of technology 
and all of our resources to monitor member firms for seg 
compliance. That is why I think this daily confirmation process 
that we instituted with the CME is a huge step forward. I also 
think the rules that we passed regarding FCM transparency and 
financial data is a huge step so that customers do not have to 
root through Footnote 42 of an eight-page financial statement 
to find information about the FCM they are doing business with.
    I also think the restrictions we put on firms' ability to 
draw out their own funds that are in the excess seg pool is a 
huge step forward.
    But you are never done with this. It is a constant 
struggle. And until we figure out how to change human nature 
and eliminate fraud--and that is a ways off. I am working on 
that, but we just constantly have to try to strive to minimize 
the likelihood that anybody can ever get away with this, and if 
you can make it clear that there are criminal sanctions for 
this kind of wrongdoing, hopefully deter that conduct in the 
future.
    Senator Klobuchar. Very good. Thank you.
    Mr. Kelleher, Dodd-Frank gave the CFTC the ability to 
establish position limits for swaps and futures held by ``any 
one party.'' However, questions have been raised by regulators 
and others that ``any one party'' is difficult to define, 
especially as the CFTC moves forward with rewriting the 
position limits rule.
    As they work to rewrite the rule, how can the CFTC help 
prevent market distortions so that no single entity has too 
large of a position in the market?
    Mr. Kelleher. Thank you, Senator. That is a good question 
because ``any one person'' also should include a class, as we 
have said both in the regulatory process and in our testimony 
here. Just because you are acting what appears to be a loan, 
but you are acting essentially identically to other market 
participants doing the same thing at the same time, for 
example, commodity index funds, among other actors working 
together, our view is that the CFTC has the authority to 
regular them and treat them as one under a class--the provision 
in the Dodd-Frank Act that allowed them treating a class as a 
trader. And it is very important to do that.
    I would say it is pretty clear on position limits that the 
CFTC has done a lot of work. We did not agree with everything 
that they did, but I want to be--when the district court 
actually vacated the position limit rule, it did not, as has 
been stated in written testimony submitted to this Committee 
today, it did not overrule, second-guess, or question what the 
SEC did on the merits, period, the end. It was not a merits 
decision. It was as procedural decision on whether or not they 
interpreted a particular word that the court found was 
ambiguous. That is what is on appeal. So the position limit 
rule itself is not substantively questioned by the Federal 
courts. It is before the courts now, but on a procedural 
matter. And it is important that they get back to the business 
of regulating these markets. It used to be the case that these 
markets had about 70 percent actual commercial users, 30 
percent speculators. It is now reversed. It is about 70 percent 
or more speculators.
    Senator Klobuchar. Right. I know.
    Mr. Kelleher. That has got to change.
    Senator Klobuchar. Very good.
    Mr. Cooper, one last question. The CFTC is working with the 
Federal Reserve, the SEC, and its international counterparts to 
reach a final set of standards on margin requirements for 
uncleared swaps. You indicated that you have been advocating 
for an internationally uniform set of margin requirements in 
the uncleared derivatives market.
    Why is it important that there is a balanced approach that 
harmonizes U.S.-based rules with the margin requirements at the 
international level?
    Mr. Cooper. I think in the absence of a unified regime, it 
would make it incredibly difficult, costly, and burdensome for 
participants to manage their portfolios, manage their margin 
requirements, and transact freely across marketplaces.
    Senator Klobuchar. Okay. Very good. And I am not going to 
be back for the second panel, Madam Chair, but I wanted to say 
a special greeting to Honeywell who is going to be present, a 
company with a major presence in my State, and obviously you 
and I have discussed about the issue of the non-financial end 
users, something we care a lot about, and we look forward to 
submitting some questions on the record.
    Thank you very much.
    Chairwoman Stabenow. Thank you very much. We will recess. 
We do have at least one member who would like to ask questions 
of our first panel, so rather than dismiss you, I would ask for 
your patience for a few moments. We are at the end of the first 
vote. There will be a second vote, and I understand that at 
least one member would like to ask a question.
    So at this point, we will recess and come back momentarily. 
Thank you.
    [Recess.]
    Chairwoman Stabenow. Senator Grassley has returned. I am 
going to ask, as I leave, with the full trust and confidence of 
Senator Grassley, I am going to leave him in charge of the 
Committee to ask his questions. I do believe that we have 
another member that may be returning, and I think what I will 
do at this point is, if they come back before I am back, we 
will let other members ask questions as well. Other than that, 
Senator Grassley, I would then just ask you to put us back into 
recess when you are done. Thank you.
    Senator Grassley. [Presiding.] Thank you very much for not 
taking your recess.
    The Chairwoman started out with her first question--I have 
a follow-up for Mr. Duffy--in regard to fees, user fees. I 
guess this would be about a $315 million transaction tax. Would 
you have any estimate whatsoever of what that might break down 
to on a per transaction level?
    Mr. Duffy. So on a contract level, sir, we would have to 
charge per contract to get the $315 million. It would be 
roughly about 4.5 cents at a static volume in today's 
marketplace. So we charge on average roughly about 7.5 cents to 
our largest liquidity providers. So we are looking close to 
anywhere between a 70-to 80-percent increase in every 
transaction they do.
    Senator Grassley. Okay. I appreciate that. I have a 
question for any of the panelists on high-frequency trading. It 
has developed and become increasingly sophisticated. I believe 
it is fair to say that there are some who appreciate it and 
some who do not. The question I have pertains to the margin 
requirements. I am sure there are multitude of strategies 
regarding high-frequency trading, but, in general, how would it 
be affected by some of the new margin proposals such as 
prefunding?
    Mr. Duffy. I can take a shot at that, Senator. Most high-
frequency traders go home flat every night are not subject to 
the margin requirements because they do not have positions on 
an overnight basis. Very few have positions on--so I do not see 
how that would impact them to any great extent on that part of 
their business.
    Mr. Kelleher. I agree with that. They go home flat so it is 
not going to impact them. What I did want to say, Senator, is 
to congratulate you for being, if you will allow me to say, a 
bulldog on these issues. In your recent letter to the Survey 
Research Center to get to the bottom of what is going on and 
find out some basic information about preferential treatment, 
privileged access, and potentially unfair and abusive trading 
that relates to it. And it gets to an issue before us here in 
the reauthorization, which is that basically even now we still 
have remarkably dark markets where the CFTC and the public has 
very little information about what is happening, and HFT is a 
poster child for that. And this Committee, as has been talked 
about by the Committee in the past and you have focused on in 
the past, this Committee should authorize and mandate the CFTC 
to start requiring registration and getting data and 
information from the market players who are engaged in HFT, now 
to some reports 60, 70, 80 percent of the volume. And once the 
new derivatives market infrastructure gets in place, you can be 
sure that is what is going to happen. And we saw only a taste 
of that recently when the Wall Street Journal reported on high-
speed traders exploit loopholes on May 1, 2013, and what they 
are doing or not doing at the CME.
    Now, I do not know if what is in the article is accurate or 
not. I just know that it is a precursor to the future where HFT 
is going to move into this new market infrastructure in a big 
way and have the same disruptive aspects to it. And the CFTC 
needs the data and information from registration and authority 
now so that this Committee and that agency can get in front of 
the issues.
    Senator Grassley. Yes. That----
    Mr. Cooper. Mr. Senator, could I just----
    Senator Grassley. Yes, please do.
    Mr. Cooper. I do not think registration would accomplish 
anything. There are volumes of data available right now that 
can be used to assess the impact of high-frequency trading on 
the markets, and we think there is a positive impact, and it is 
not the impact you think. In fact, the U.K. Government-
sponsored Foresight Commission as well as the SEC itself has 
conducted studies that show the beneficial impact. I think it 
is important to recognize registration of any individual 
category of trader is not going to enhance the information flow 
available to the regulators.
    Senator Grassley. Okay. If that is all you have to say on 
the subject, that takes care of my questions.
    I would suggest, like she said, I should adjourn, but just 
in case somebody was going to come back here, if you would be 
polite enough, if somebody comes back, to let them take over, 
because I was fortunate enough, I was running back here, and 
she came back and reconvened for me. I appreciate that very 
much. Thank you all.
    [Pause.]
    Senator Grassley. I guess there is more red tape to this 
than I thought. We are in recess.
    [Recess.]
    Chairwoman Stabenow. [Presiding.] The Committee will come 
to order. I apologize for the delay, but we are happy to be 
back. I know that Senator Thune has some questions.
    Senator Thune. Thank you, Madam Chair and Senator Cochran, 
for calling this important hearing, and I want to thank our 
panelists here for hanging around and giving us the opportunity 
to continue to ask questions.
    Just as we talk about reauthorization of the CFTC, I think 
it is important to remember that we have got to do this in an 
intelligent way, make sure that as we increase customer 
protection and build confidence in the financial system, that 
is something that is going to encourage producers and firms to 
better manage their risk and provide the necessary liquidity 
that the market needs to function freely. But we also have to 
remember that we are operating in an international global 
economy, and the decisions that we make do not happen in a 
vacuum, and that any additional regulatory burden we place on 
firms here in the United States are going to impact the 
competitiveness of these firms in the global marketplace. So I 
hope we can strike a balance between managing risk, inspiring 
confidence, and allowing the market to function without overly 
burdensome regulations. And so I appreciate those of you who 
are here today giving us some insights about how best to do 
that.
    I wanted to ask a question of Mr. Cooper. In the last 
Congress, I sponsored legislation which modified and updated 
securities regulations to help promote greater capital 
formation and improved transparency in the marketplace. I was 
pleased that the language was included in the bipartisan JOBS 
Act, which was signed into law by President Obama.
    In your testimony, you have suggested that some of the 
provisions in the JOBS Act which directed the Securities and 
Exchange Commission to amend securities regulations governing 
private placements should be extended to cover commodity pool 
operators as well. And I am wondering if you can explain why 
this is needed and what the implications are if the CFTC does 
not amend its rules to be consistent with the JOBS Act or the 
SEC regulations.
    Mr. Cooper. Thank you, Senator Thune. I want to thank you 
for your leadership as well on the JOBS Act, a tremendous piece 
of legislation designed to, in fact, and hopefully will, result 
in greater capital formation opportunities.
    We have talked a lot about consistency and harmonization 
today in the cross-border context. This is a perfect example 
where we need consistency and harmonization that is between the 
CFTC and the SEC on this particular provision.
    If the CFTC were not to amend its rules to make 
complementary changes to permit private placements essentially, 
it would thwart the very purposes in our industry that the 
provisions that were part of the JOBS Act were intended to 
promote, because, in fact, many of our members, the vast 
majority, are now dually registered. So not being able to 
participate in the broader general solicitation of private 
placements would, in fact, undermine the very purposes that the 
JOBS Act was intended to address.
    Senator Thune. Thank you. I want to take just a moment to 
take advantage that we have got a wide range of expertise and 
diversity of opinions on today's panel. Mr. Kelleher, you 
advocated user fee funding for expanded regulation by the CFTC 
on almost all fronts: high-frequency trading, physical 
commodity holdings, not to mention to help cover the costs of 
staffing and technology. Whereas, others have made the case 
that additional fees would increase the cost of hedging. An 
increase in the cost of hedging will then ultimately increase 
the costs of goods for consumers. And I am just kind of curious 
to know what your response is to that assertion or that 
criticism.
    Mr. Kelleher. Thank you, Senator. I would not say we are 
advocating fees across all boards for all--across all products, 
all markets, for all things. I think you have to find out that 
which fees are appropriate to be assessed on given the 
essential mandate and the funding needs of the CFTC. It is to 
the advantage of all the member participants in the markets, 
the investors, and the system that the CFTC have adequate 
funding on the technology side and the personnel side.
    So when we look at it, we say, well, if you look at it, you 
have got--and I cannot remember what the numbers are exactly. I 
do not think Terry and I are going to agree on this. We are not 
talking about 1 percent. We are talking about probably 
fractions of a penny per contract. But, you know, if you took 
25 CBO wheat contracts and you had half a cent per contract, 
you are talking about a 12-cent addition. If you took a larger 
size lot of 25,000 contracts, which would be a big trade, about 
$70 million worth of corn, you are talking about $125 on $70 
million worth of contracts if it was half a cent. And if you 
actually look at the numbers and then you apply it to the 
numbers--now, everybody can disagree or have different views of 
what gets carved out for liquidity purposes and otherwise--you 
are talking about probably a very small fraction of a penny per 
contract. It would be so de minimis actually to end users and 
market participants that it is unlikely to have any effect at 
all. But where it has the most effect is we have a CFTC with a 
huge vital mandate that gets funded at a level that can service 
the market participants who have to register. You have SDRs, 
you look at the information flowing in that cannot be handled 
now. That is in the interest of everybody, including everybody 
at this table.
    So I am not trying to get a huge fee. I am not trying to 
get more than a penny that is necessary. I think any fee should 
be as low as humanly possible and done in a targeted, sensible 
way so it does not impact liquidity and reduces the impact on 
all market participants, but generates enough revenue for the 
CFTC to get its vital job done, which everybody needs to have 
done.
    Senator Thune. Mr. Duffy?
    Mr. Duffy. Senator Thune, I think what is important when we 
are doing mathematics here, in order to get to the $315 million 
to fund the agency, you need to charge 5 cents per contract at 
the CME Group. That is a 100-percent increase on our liquidity 
providers. There is no question anybody that has a 100-percent 
increase in doing their business that they have to change the 
way they are going to do their business. And the way they are 
going to change it is they are going to do less activity and 
widen the spread, which will cause the consumers and the 
taxpayers and the Government more, especially when you are 
trying to auction off U.S. Government debt, and the only place 
they have to go to do the layoff is at the Chicago Board of 
Trade, which we own, and because our markets are so deep and 
liquid, the Government can auction off debt all day long to our 
participants, and they hedge it in the futures market. That 
bid-offer goes up, the cost to the taxpayer will go up right 
along with it. It will cost billions of dollars, sir. Billions.
    Mr. Kelleher. With all due respect, I think--and correct me 
if I am wrong, Terry, but you are only talking about the 
futures market. The jurisdiction of the CFTC will now include 
the swaps market. So if you take the total market, whatever the 
notional amount is, whatever you want to argue, you are looking 
at a market that is 6 times the size, or more, of the futures 
market.
    Mr. Duffy. But there are only 2,000 transactions a day, 
Senator Thune, that happen today in the over-the-counter opaque 
futures market--not in the futures, in the over-the-counter 
market. So even though it is 400 trillion notional, there are 
only 2,000 transactions a day. There are 20 million in the 
listed derivatives markets today.
    Senator Thune. Okay. Madam Chair, thank you. That was a 
good discussion. And I know you have a second panel you are 
waiting to get up here, so thank you very much for your 
indulgence, and I will yield back my time. Thanks.
    Chairwoman Stabenow. Thank you very much. That was a good 
discussion. Thank you again for your patience in waiting. I 
appreciate all of your input, and we are looking forward to 
continuing to work with you. So thank you very much.
    We will ask our second panel to come forward. You have been 
very patient as well, and we will proceed as soon as everyone 
is seated.
    [Pause.]
    Chairwoman Stabenow. Well, good afternoon. It is wonderful 
to have you with us, and we very much appreciate your 
perspectives and testimony this afternoon. Let me introduce our 
panel.
    First on the panel is the Honorable Walter Lukken, 
president and CEO of the Futures Industry Association. Good to 
see you. Before moving to the private sector in 2009, Mr. 
Lukken served as Acting Chairman of the Commodity Futures 
Trading Commission for 18 months after having been a CFTC 
Commissioner since 2002. Also, he knows this Committee well, 
having worked under my former colleague, our former colleague, 
Senator Lugar. So it is good to have you back.
    Second, we have Mr. Guilford. Mr. Gene Guilford is the 
national and regional policy counsel for the Connecticut Energy 
Marketers Association and is here today on behalf of the 
Commodity Markets Oversight Coalition. After working for a 
short time in the Reagan administration, Mr. Guilford returned 
to his home State of Maine to serve as president of the Maine 
Oil Dealers before moving to the Connecticut Petroleum 
Association. Welcome.
    Mr. John Heck is senior vide president of The Scoular 
Company, and he joins us today from Omaha, Nebraska, on behalf 
of the National Grain and Feed Association. Mr. Heck sits on 
the Board of Directors of NGFA. Mr. Heck has been with The 
Scoular Company since 1981 when he first joined as a grain 
merchandiser, so it is great to have you with us as well.
    Next we have Mr. Donald Russak, executive vice president 
and CFO for the New York Power Authority, and he is here today 
on behalf of the American Public Power Association. Mr. Russak 
has served in numerous positions with the New York Power 
Authority throughout his 33-year career, so we are glad to have 
you.
    Finally, Mr. Colby. We have Mr. Jim Colby, who is the 
assistant treasurer at Honeywell International. He has also 
worked at Bear Stearns, UBS, and General Motors. Thank you for 
joining us this afternoon as well, Mr. Colby.
    So we will now turn to you, Mr. Lukken, for your testimony.

  STATEMENT OF THE HON. WALTER L. LUKKEN, PRESIDENT AND CHIEF 
 EXECUTIVE OFFICER, FUTURE INDUSTRY ASSOCIATION, WASHINGTON, DC

    Mr. Lukken. Well, thank you, Chairman Stabenow and Ranking 
Member Cochran. As you turn your attention to CFTC 
reauthorization, the Futures Industry Association stands ready 
to assist. FIA is the leading trade organization for the 
cleared derivatives markets.
    As you know, clearing ensures that the financial integrity 
of the market is protected from the failure of one of its 
market participants. Futures commission merchants, or FCMs, 
play a critical role in facilitating the clearing process by 
guaranteeing the transactions of customers and serving as the 
front-line gatekeepers of market risk through the collection of 
customer margin.
    FIA's mission since its inception has been to protect the 
public interest through the adherence to high standards of 
professional conduct and financial integrity. In carrying out 
this mission, FIA responded to the unacceptable consequences 
brought about by the failures of MF Global and Peregrine 
Financial Group. FIA formed a Customer Protection Task Force in 
the aftermath of these insolvencies and recommended a number of 
changes that have already been adopted, which include the 
enhancement of FCM recordkeeping, reporting, and early warning 
indicators, including: the filing of daily segregation balances 
with regulators, the creation of an automated daily 
verification system for customer segregated balances directly 
with banks and other depository institutions, and the 
collection and posting of additional FCM financial information 
onto an online system to help customers monitor and assess the 
health of their FCMs.
    Much has been accomplished through these efforts over the 
last year and a half, and we continue to evaluate additional 
ideas such as the idea of customer protection insurance. The 
FIA, CME, NFA, and the Institute for Financial Markets have 
partnered to fund a study on the costs and benefits of this 
idea. We look forward to sharing these findings with the 
Committee in the coming weeks.
    In addition to these measures already implemented, the CFTC 
has proposed a set of comprehensive regulations to further 
enhance customer protection, and we support much of what has 
been suggested, including the codification of many of FIA's 
recommendations. However, with regard to how and when customer 
margin is determined and collected, the proposal drastically 
reinterprets the longstanding application of the statute, even 
though this provision in the Commodity Exchange Act has not 
been changed since 1936.
    It is estimated that this reinterpretation to a firm's 
excess margin or residual interest amount could add $100 
billion in additional required contributions into customer 
funds accounts. This will result in either customers prefunding 
their margin or paying to use the capital of their FCM.
    Many commodity customers have expressed strong concerns 
with this proposal, which will increase the cost of hedging, 
cause consolidation among small and mid-sized FCMs, and limit 
execution choices for customers. The FIA supports many of the 
customer protection measures that the CFTC has proposed. We 
simply believe this one in particular has not been justified.
    I would be remiss if I did not mention the implementation 
of the clearing mandate of swaps in the Dodd-Frank Act. 
Congress looked to the reliability and stability of the futures 
clearing system when it determined to extend clearing to swaps. 
Unfortunately, the rules being written to facilitate the 
clearing of swaps are in some case reinventing an already 
proven clearing process for futures.
    For example, the global futures markets have long benefited 
from regulators around the world working collaboratively to 
properly regulate the trading and clearing of futures while 
relying upon each other's comparable regulatory regimes to 
ensure effective oversight.
    In contrast to this mutual recognition approach, the lead-
up to last week's compromise on cross-border application of 
cleared swaps under the Dodd-Frank Act caused significant 
uncertainty and confusion among the global regulatory and 
financial communities. While this last-minute guidance provides 
some clarity, there remains significant complexity and open 
questions on how global firms will get into compliance.
    We now face an all too familiar path of having to request 
CFTC no-action relief to provide our members with the legal 
certainty to trade in the global markets. This may have been 
avoided through a formal APA rulemaking process instead of mere 
guidance.
    Even in the case where Congress granted specific 
recognition authority under the Dodd-Frank Act to exempt 
comparably regulated non-U.S. clearinghouses, there has been no 
guidance as to how this exemption, specifically allowed by 
statute, may be achieved. This compares to the futures markets 
that have functioned across borders without major incidents for 
many years under a recognition system.
    In closing, our members stand ready and willing to 
facilitate the clearing of swaps, just as we have for futures. 
But it is important as we implement these important changes in 
the market structure for swaps that we not harm the futures 
markets that have served our industry well over time.
    Thank you, and I welcome any questions you may have.
    [The prepared statement of Mr. Lukken can be found on page 
150 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Mr. Guilford.

   STATEMENT OF GENE GUILFORD, NATIONAL AND REGIONAL POLICY 
 COUNSEL, CONNECTICUT ENERGY MARKETERS ASSOCIATION, CROMWELL, 
   CONNECTICUT, ON BEHALF OF THE COMMODITY MARKETS OVERSIGHT 
                           COALITION

    Mr. Guilford. Thank you. Honorable Chairwoman Stabenow and 
Ranking Member Cochran and distinguished members of the 
Committee, on behalf of the Commodity Market Oversight 
Coalition--CMOC--we wish to thank you for the opportunity to 
appear before you here today on the matter of the 
reauthorization of the Commodity Futures Trading Commission and 
associated issues with regard to CFTC's authorities regulating 
the activities in the commodity markets.
    Just very briefly, let me tell you that, since 2007, the 
Commodity Markets Oversight Coalition is a nonpartisan alliance 
of organizations that represent commodity-dependent American 
industries, businesses, end users, and consumers. We are the 
farmers, truckers, mom-and-pop gas station operators, airlines, 
and others who rely on transparent, functional, and stable 
commodity markets in which to hedge our operations for the 
mutual benefit of those who deliver tangible goods to markets 
and from whom we receive tangible goods from those markets, for 
the benefit of the millions of consumers that we serve. Our 
members rely on functional, transparent, and competitive 
commodity derivatives markets as a hedging and price discovery 
tool and as an essential part of our business operations. As a 
coalition, we favor Government policies that promote stability 
and confidence in the commodities markets; seek to prevent 
fraud, manipulation, and excessive speculation; and preserve 
the interests of bona fide hedgers and American consumers.
    When accepting the John F. Kennedy Profiles in Courage 
Award in 2009, former CFTC Chair Brooksley Born stated, 
``Special interests in the financial services industry are 
beginning to advocate a return to `business as usual' and to 
argue against the need for any serious reform. We have to 
muster the political will to overcome these special interests. 
If we fail now to take the remedial steps to close the 
regulatory gap, we will be haunted by our failure for years to 
come.''
    That was not the first time she issued a warning with 
regard to the necessity of appropriate transparency, 
accountability, and oversight of the derivatives markets.
    Now, there are several issues that we would recommend to 
the Committee that the Committee undertake, and we would look 
forward to working with the Committee as we go forward with 
this reauthorization process.
    The first on our list is manipulation and excessive 
speculation, and the Committee should examine the efficacy of 
the October 18, 2011, position limits rule as well as the 
underlying statutory authorities of the CFTC in preventing 
manipulation and the harmful effects of excessive speculation.
    The previous panel questioned whether or not you had the 
right panel in order to address these questions. I would like 
to take a moment, if I could, to suggest to you, with all due 
respect, you have the right panel. In the last 2 weeks, the 
NYMEX RBOB contract has increased 43 cents a gallon. In the 
last 2 weeks, crude has increased $10 a barrel.
    Let me put into context what 43 cents on the RBOB contract 
means: 43 cents is $155 million a day in higher gasoline costs 
on the American people; it will cost a billion dollars a week. 
And why would that be the case? Why would that be necessary?
    We have circumstances that I would like to get into in 
question and answer hopefully about what happened before the 
financial crisis and where we are as of 2012. We have had 
enormous demand destruction in gasoline demand in the United 
States for the first time since World War II, a substantial 
decrease in demand for gasoline. For the first time since 1960, 
we are net exporter of gasoline. For the first time since Harry 
Truman was President, in 2011 we became a net exporter of 
distillate fuel.
    We are importing less crude oil than at any time since 
President Clinton's first term. Last year, we had the greatest 
single increase in daily production of crude oil in the United 
States history since 1859. And yet through all of that, before 
the financial crisis and after, we have gone from 72 barrels on 
crude--$72 a barrel on crude to $94. And it was not a straight 
line. It is up and down constantly, daily, with enormous 
volatility. And we have added just another 10 this last week. 
On gasoline, we have gone from $2.80 to $3.68.
    At a period of time when the American people have used less 
gasoline, not more, we have a surplus of gasoline that we can 
sell into world markets. With all due respect, the 
accountability and transparency and oversight of these markets 
is exactly the reason why the Commodity Futures Trading 
Commission needs the authorities that you have given it so that 
we can determine what is going on in these markets, what is 
motivating them and what is moving them.
    We have a number of suggestions, and we would like to work 
with the Committee as we go forward in this process, especially 
with regard to resources. An agency that collects $2 billion in 
fines for the Federal Government may not necessarily need a 
tax, but it certainly needs more resources.
    Thank you very much for your time.
    [The prepared statement of Mr. Guilford can be found on 
page 89 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Mr. Heck.

 STATEMENT OF JOHN M. HECK, SENIOR VICE PRESIDENT, THE SCOULAR 
 COMPANY, OMAHA, NEBRASKA, ON BEHALF OF THE NATIONAL GRAIN AND 
                        FEED ASSOCIATION

    Mr. Heck. Thank you, Chairwoman Stabenow, Ranking Member 
Cochran, and members of the Committee. I am John M. Heck, 
senior vice president of The Scoular Company in Omaha, 
Nebraska. Scoular manages commodity supply chain risk for 
customers in food, feed, and renewable fuel markets, and we 
assist farmers in tailoring their risk management solutions 
utilizing 61 grain-handling facilities across the country.
    Today I am representing the National Grain and Feed 
Association. Today I would like to focus primarily on a rule 
proposed by the CFTC last November that would radically change 
the way business is done in the futures industry, and we 
believe strongly, despite CFTC's goal of enhancing customer 
protection, that two provisions of the rule would actually 
cause a dramatic increase in customer risk.
    The first position would decrease the time in which 
customers' margin calls must arrive at their futures commission 
merchant, or FCM, from the current 3 days to just 1 day. 
Otherwise, the FCM would have to take a capital charge for that 
undermargined amount. Even in today's environment of money 
moving electronically, 1 day is not sufficient for all 
customers to maintain the current 3-day timeline. Otherwise, we 
fear some FCMs would require customers to pre-margin their 
hedge accounts, potentially putting more customer funds at risk 
in the event of another FCM insolvency.
    The second provision of concern, maybe more troubling than 
the first, would change the timing of FCMs' calculation of 
residual interest. Those are the funds that the FCM contributes 
from its own money to ``top up'' customer accounts until margin 
calls are received. For decades, this provision of the CEA has 
been interpreted by the Commission as allowing some period of 
time for FCMs to do this. The CFTC proposal would change that 
consistent historical interpretation to require that every 
customer be fully margined on a 24/7 basis. Now, that may sound 
like a good idea, but in the real world it causes major 
problems, especially among the smaller and mid-sized FCMs that 
serve production agriculture and agribusiness. This would 
severely stress FCMs' liquidity, leading us to fear, again, 
that pre-margining would be required of customers. An 
unintended consequence would be consolidation in the FCM world 
as smaller firms cannot compete with larger firms who could 
afford to top up customer accounts.
    If I could bring this down to a real-world example, think 
about a typical country elevator in Nebraska. This elevator 
handles 5 million bushels of grain per year. Before harvest, 
the elevator might have 40 percent of its annual grain volume 
purchased from farmer customers and then hedged through forward 
futures contracts. Assuming a typical crop mix of corn, wheat, 
and soybeans, for corn the elevator has to post $648,000 with 
its FCM to establish its up-front futures position; soybeans, 
another $594,000; wheat, another $129,000. That is a total of 
more than $1.3 million the country elevator has sent to the FCM 
just to establish its futures positions.
    Now let us look at the additional financial requirements if 
the CFTC proposal was put into effect. We will assume that the 
elevator's FCM would require pre-margining by the customer to 
cover a 1-day limit up move, a reasonable precaution by the 
FCM. The country elevator would have to send 1 million more to 
the FCM for the possibility of a limit up move that may never 
come. If MF Global had required pre-margining of this fashion, 
the country elevator would have had almost twice as much of its 
capital exposed to misuse and loss, about $2.3 million instead 
of $1.2 million.
    We continue to be mystified about why the meaning of the 
Commodity Exchange Act has changed after decades of consistent 
interpretation. We would prefer to work this out with the CFTC, 
but there may be a need for legislative action to clarify the 
interpretation the futures industry has relied on for so long.
    One final item of regulatory concern is the CFTC rule 
concerning recordkeeping by companies that are members of a 
commodity exchange. In the form prescribed by CFTC, we are not 
aware of any technology that currently exists that will capture 
the information required by the Commission. We are working with 
the Commission on clarification of this problem.
    In conclusion, I have detailed the NGFA's other 
reauthorization priorities in my written testimony. We believe 
that the U.S. Bankruptcy Code needs to be harmonized with the 
CEA and CFTC regulations to clarify and ensure that customers 
come first in FCM insolvencies. We also believe that the 
futures customers should have access to some form of insurance 
as securities customers do. As you have heard from many other 
comments today, we are also awaiting a study from the FIA 
before recommending any particular structure.
    Thank you for the opportunity to testify, and I look 
forward to any questions.
    [The prepared statement of Mr. Heck can be found on page 
121 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Mr. Russak.

  STATEMENT OF DONALD A. RUSSAK, EXECUTIVE VICE PRESIDENT AND 
   CHIEF FINANCIAL OFFICER, NEW YORK POWER AUTHORITY, WHITE 
   PLAINS, NEW YORK, ON BEHALF OF THE AMERICAN PUBLIC POWER 
                          ASSOCIATION

    Mr. Russak. Chairwoman Stabenow, Ranking Member Cochran, 
and members of the Committee, I am testifying today on behalf 
of the New York Power Authority--or as it is known, NYPA--the 
State of New York, as well as the American Public Power 
Association. Thank you for the opportunity to testify on an 
issue of great importance to public power utilities in 
considering the reauthorization of CFTC.
    NYPA is the largest State-owned public power organization, 
serving business customers, governmental customers, municipal 
electric utilities, and rural cooperatives throughout New York 
State. The electric energy used to serve these customers is 
subject to the forces of the volatile markets, and yesterday 
was a perfect example of this volatility. With temperatures 
approaching 100 degrees in many parts of New York State, the 
spot market price for electricity ran up into the hundreds of 
dollars per megawatt hour, as much as $500 a megawatt hour in 
New York City alone, up from $60 the prior week. This exposes 
NYPA's financial position and its customers to price risk and 
uncertainty.
    NYPA uses certain hedging transactions to reduce its market 
risk, to stabilize revenue, and most importantly, to provide 
rate stability to our customers. Because of the transparency 
and certainty that will be provided in the swap markets, we 
continue to support the Dodd-Frank Act and the full funding 
sought for the CFTC in the President's fiscal year 2014 budget.
    However, CFTC regulations implementing swap dealer rules of 
the Dodd-Frank Act have damaged our ability to protect our 
customers and ourselves from this market volatility. Under 
these regulations, a counterparty can engage in just $25 
million of swap dealing activities with public power utilities 
before having to be required to register as a swap dealer. For 
all but the smallest of transactions, the number might as well 
be zero.
    The threshold amount is also unfair to public power 
entities. The de minimis threshold for swap dealing activities 
with investor-owned utilities, entities against whom we 
compete, is $8 billion, or 300 times the amount. As a result of 
the $25 million threshold, a number of non-financial entities 
have refused to enter into financial transactions with NYPA, 
which naturally leads to increased costs to us and to our 
customers. This is imperiling jobs across the State as well as 
increasing taxes.
    The problem is not unique to the power authority but 
affects public power utilities throughout the country. APPA 
members commonly report that counterparties are refusing to 
enter into swap transactions with them, and the numbers have 
fallen off by half or more. In fact, Grant County Public 
Utility District in Washington State went from 28 
counterparties down to 2. The October 2012 no-action letter 
raises the special entity de minimis threshold from $25 million 
to $800 million for certain power-related transactions. 
However, additional restrictions on these have meant that 
counterparties are still not participating in the market with 
us.
    Even CFTC's Scott O'Malia, in a keynote address this May, 
noted the irony that the CFTC, in trying to protect public 
power utilities from the perils of the swaps markets, has 
instead forced us to trade only with Wall Street banks. He and 
other CFTC Commissioners have recommended further action, if 
not through regulation then through legislation.
    On March 11, 2013, the Public Power Risk Management Act was 
introduced. This legislation provides very narrow and targeted 
relief for operations-related swaps for public power utilities. 
Specifically, the legislation would provide that the CFTC treat 
utility operations-related swaps with a utility special entity 
in the same manner such swaps are treated with other utilities, 
that is, made subject to the overall $8 billion threshold. This 
would put public power utilities on the same footing as 
investor-owned utilities.
    The Public Power Risk Management Act was approved by the 
House Committee on Agriculture with a unanimous voice vote on 
March 20 and was approved in the House by a 423-0 vote on June 
12. The legislation has since been sent to the Senate and 
referred to this Committee. It has been endorsed by the U.S. 
Chamber of Commerce, the Consumer Federation of America, and 
the Commodity Markets Oversight Coalition. We would very much 
encourage this Committee to take up and approve H.R. 1038 or, 
as it considers CFTC reauthorization, to provide similar 
legislative relief.
    Public power utilities are well versed in the markets in 
which we hedge price and operational risks. Forcing us to enter 
into transactions with only Wall Street firms provides no 
substantive benefit and, moreover, reduces the number of market 
participants with whom public power utilities can hedge their 
risk. Ultimately, this increases operational risk and hurts our 
customers.
    Thank you again for the opportunity to testify, and I will 
be happy to answer any questions.
    [The prepared statement of Mr. Russak can be found on page 
161 in the appendix.]
    Chairwoman Stabenow. Thank you very much.
    Mr. Colby.

    STATEMENT OF JIM COLBY, ASSISTANT TREASURER, HONEYWELL 
           INTERNATIONAL INC., MORRISTOWN, NEW JERSEY

    Mr. Colby. Chairwoman Stabenow, Ranking Member Cochran, and 
other members of the Committee, thank you for inviting me to 
testify. I am an assistant treasurer at Honeywell 
International, and today I speak on behalf of Honeywell, the 
Coalition for Derivatives End Users, and other commercial end 
users who are asking Congress to take quick action on S. 888 to 
provide non-financial end users hedging commercial risk with an 
exception from margin requirements in keeping with the original 
intent of the Dodd-Frank Act.
    Honeywell is a diversified technology and manufacturing 
leader, serving customers worldwide with aerospace products and 
services; control technologies for buildings, homes, and 
industry; turbochargers; and performance materials. The 
company's more than 132,000 employees include 20,000 scientists 
and engineers who are focused on developing innovative products 
and solutions.
    Honeywell is truly a global company, with more than 50 
percent of our sales outside of the United States and therefore 
exposed to market risks from changes in interest rates, foreign 
exchange rates, and commodity prices. When appropriate, we 
hedge exposures through the use of derivative contracts to 
eliminate risks that we cannot control. We do not use 
derivatives for speculative purposes.
    With a compliance deadline looming, end users ask the 
Senate to take quick action on S. 888 Without swift action on 
this legislation, which passed the House with an overwhelming 
bipartisan vote in June, non-financial end users will be forced 
to divert capital away from job-creating investments, 
sidelining billions of dollars in margin accounts. According to 
a Coalition for Derivatives End Users survey, a 3-percent 
initial margin requirement could reduce capital spending by as 
much as $5.1 to $6.7 billion among S&P 500 companies alone and 
cost 100,000 to 130,000 jobs.
    To demonstrate how non-financial end users use derivatives 
to manage risk, I will provide an example of how Honeywell uses 
derivatives. We sell satellite and launch vehicle inertial 
measurement units manufactured in Florida to customers in 
Germany. Europe is a key growth market for commercial space 
products and, in order to qualify for consideration on certain 
opportunities, we may be required to enter into contracts 
denominated in euros even though all costs of production are 
incurred in U.S. dollars. The period for this type of contract 
can span multiple years, during which changes in the value of 
the euro versus the U.S. dollar can significantly impact the 
economics of the project. To mitigate this risk, we may enter 
into a forward contract to sell an amount of euros equal to our 
net exposure to lock in the market rate.
    To shed some light on Honeywell's potential exposure to 
margin requirements, we had approximately $2 billion of hedging 
contracts outstanding at year-end that would be defined as a 
swap under Dodd-Frank. Applying 3-percent initial margin and 
10-percent variation margin implies a potential margin 
requirement of $260 million. Cash deposited in a margin account 
cannot be more productively deployed in our businesses and as a 
result limits our ability to promote economic growth and 
protect American jobs.
    In approving the Dodd-Frank Act, Congress made clear that 
end users were not supposed to be subject to margin 
requirements. Nonetheless, regulations proposed by the 
prudential banking regulators would require end users to post 
margin. This stems from what they view to be a legal obligation 
under Title VII, not because they view it as necessary for the 
safety and soundness of the financial system.
    Dialogues between Senator Mike Crapo and Federal Reserve 
Chairman Ben Bernanke and between Senator Tester and Governor 
Daniel Tarullo during Senate testimony underscore why passage 
of the margin bill is necessary and why the Senate should have 
confidence in taking quick action. As Governor Tarullo made 
clear last week, passage of this bill would simply remove what 
they believe to be the requirement under Dodd-Frank to impose 
margin requirements while leaving intact the ``ability to use 
[the] full panoply of supervisory tools.'' He further stated 
that the Fed does not need any additional authority to promote 
safety and soundness in the financial system and good risk 
management practices among regulated entities. Passage of S. 
888 would not remove the ability of banks to set margin 
requirements on end users as part of their credit risk 
management process.
    The legislation in no way begins to dismantle Dodd-Frank. 
It would simply ensure that the final act and rules function as 
Congress intended and that commercial end users do not face the 
same regulatory burden as those who speculate and create 
systemic risk.
    In conclusion, we need the Senate to quickly enact S. 888 
so that end users like Honeywell will continue to have the 
ability to manage risk without having mandatory and unnecessary 
margin requirements imposed. Mandatory requirements would 
divert cash from investment and job creation. Regulators have 
made clear that they are not necessary for the safety and 
soundness of our financial system.
    Thank you for inviting me to testify today. I look forward 
to answering any questions that you might have.
    [The prepared statement of Mr. Colby can be found on page 
65 in the appendix.]
    Chairwoman Stabenow. Well, thank you very much to each and 
every one of you. Mr. Colby, let me just indicate that, first 
of all, I was very involved in the effort on the language on 
end users in Dodd-Frank, and I think Congress has been very 
clear about the fact that we want to maintain the ability for 
market participant to use markets and to safely hedge, and so I 
share your concerns on this issue. This is something we have 
actively been involved in on this Committee and with the CFTC, 
and I realize the broader issues with the Fed and so on right 
now. But could you just take a moment to talk just a little bit 
more about what it would mean if you had to post margin as it 
relates to reducing your hedging activities?
    Mr. Colby. Well, what it would do is--I mentioned the $260 
million figure. That is cash that we could be investing in the 
operations of the company, creating capital expenditures, 
creating jobs, and promoting economic growth. But instead, if 
we put it into a margin account, it is going to sit idle, and 
we cannot spend it. We cannot spend the same dollar twice. If 
it is sitting in a margin account, it means we cannot invest it 
in the business.
    Chairwoman Stabenow. Thank you very much.
    Mr. Heck, a priority for all of us is that the markets are 
safe and work well for commercial hedgers. Given all the 
changes in the last year as we look at rules, as we look at 
other changes with NFA that we heard about today, and CME and 
so on, those proposed by the CFTC, do your members feel safer 
using the futures and the swaps markets today?
    Mr. Heck. Senator, I think they do feel--I do think they 
feel safer today. I applaud the NFA for the self-regulatory 
changes they have made. A lot of those mirror recommendations 
made by the NGFA's task force shortly after the MF Global 
bankruptcy.
    I also think the CME has made significant progress in 
making our funds safer due to the changes they have made at the 
clearinghouse level.
    We do believe that there are other avenues to explore. We 
are not seeking a legislation solution. I think we would be 
interested in and have told the CFTC we would like to work on a 
pilot program with them that would involve a fully segregate 
customer account, and that kind of account exists in parts of 
the swaps industry right now. We would like to do that. And as 
I said, we would also like to see the results of this insurance 
study to see if that is a feasible alternative for our members.
    Chairwoman Stabenow. So from your perspective, your members 
would be willing to pay for full segregation at this point?
    Mr. Heck. I think that depending on the size of one of our 
members, segregation, full segregation of the cost of that 
would be something they would be interested in. But, again, we 
would really like to see that be optional between the FCM and 
their customer.
    Chairwoman Stabenow. Mr. Lukken, let us talk a little bit 
more about that from your perspective. If there were changes 
made to the bankruptcy laws that made full physical segregation 
feasible, would your member futures commission merchants offer 
that to customers? Is the Bankruptcy Code the only issue that 
is standing in the way? And do you see a demand at this point 
in the marketplace for full physical segregation?
    Mr. Lukken. Well, we would support an optional full 
segregation approach. I think we are dealing with this issue in 
Europe currently where EMIR requires not only omnibus accounts 
but also optional individually segregated accounts. The 
question is cost, whether people are willing to pay the cost to 
have that extra set of protection.
    If you are losing the fellow customer risk, that shared 
insurance level, it is going to cost because that risk is going 
somewhere, like squeezing a balloon. So somebody is going to 
have to pay for that risk, so that is the reason the costs are 
going to have to go up.
    Chairwoman Stabenow. Thank you.
    Mr. Guilford, I see Senator Donnelly here, so I am going to 
let him talk to you about gas prices. I know he wants to talk 
to you about gas prices, so I will let him have those 
questions, although I am also equally interested. But since you 
represent a company that would be, in effect, regulated by the 
CFTC, why are you supportive of increasing its funding and 
growing the agency? Why is that important for your members?
    Mr. Guilford. If I might, I would like to take you back to 
2008----
    Chairwoman Stabenow. We need you to push the button.
    Mr. Guilford. Thank you. I will take you back to 2008, but 
I will make it really brief and not as long as 2008.
    Chairwoman Stabenow. Good.
    Mr. Guilford. In 2008, we had crude oil at about $70 a 
barrel in March. I testified before House Energy and Commerce 
about a month before it reached its peak in July of that year 
of $147, and by November it had fallen back to $32.
    Now, during that span of time, we had major Wall Street 
investment banks claiming that crude was going to go to $200 a 
barrel that year. That resulted in the customers of our heating 
oil retailers rushing to their heating oil retailer saying, 
``Lock us in, protect us from this Armageddon that is coming.'' 
So a lot of these consumers, hundreds of thousands of these 
consumers, with thousands of heating oil retailers, went into 
these markets and locked in prices of between $4.50 and $5 a 
gallon for their winter heating fuel supply.
    Unfortunately, by the time we got to November and that 
market price fell to $32 a barrel, we had market price heating 
oil, physical heating oil, at $2 a gallon. Well, imagine that 
you are a consumer and you laid out $4.50 a gallon for 900 
gallons of heating oil for your winter supply, and the actual 
market price at the time had fallen to $2.
    So we had a lot of angry consumers, and we had a lot of 
very unfortunate heating oil retailers because they are decent 
business people and they have done business for three and four 
generations, wanted to make sure they took good care of their 
customers, who let a lot of those customers out of those 
contracts in order to be able to keep them as customers, but 
not without a tremendous cost.
    It was clear to us then that these markets are 
dysfunctional. They do not operate for the purpose in which 
they were intended. And what we heard all through that period 
of time--and appreciate, if you will, Madam Chairwoman, that we 
were told at the time that this was all because of supply and 
demand. Now, the previous panel discussed that you do not need 
to be a Ph.D. to understand some statistics. Tell me, if you 
would, please, because it has not been answered for us in 5 
years, why we had a situation where there was a supply and 
demand dynamic that drove it from $70 to $147 in 4 months. 
Where was the extraordinary interruption in crude oil supply or 
the extraordinary increase in demand within 4 months that more 
than doubled the price of crude? And then, right after the 4th 
of July, after we celebrated Independence Day, it begins to 
fall in another 4 months from $147 to $32.
    So whatever circumstances attributable to supply and demand 
that occurred in the first 4 months apparently evaporated and 
turned 180 degrees in the second 4 months.
    Madam Chairwoman, in answer to your question, we need to 
have absolutely transparent, accountable, and adequately 
overseen financial markets, because we rely on these markets to 
be able to do one very simple thing for our customers. Our 
customers come to us and ask us to be protected--protected from 
the vicissitudes of the economy and the marketplace, and that 
is what we like to be able to do. And we like to be able to do 
it in a way that protects them, protects us. We can earn a 
decent living and manage to take care of consumers. We could 
not do that in 2008.
    Chairwoman Stabenow. Okay. Thank you very much.
    I am going to turn now to Senator Cochran.
    Senator Cochran. Following up on the last comments, what 
would we do if we wanted to introduce legislation and identify 
changes in current law that would lead to the result you just 
wished for?
    Mr. Guilford. Well, it is important, I think, Senator, to 
take this on several different levels. First of all, we started 
working on something as simple as closing the Enron loophole. 
You will recall that. We worked on that with you and others in 
the Senate back in 2008. Now, there was a clear example of an 
instance in which a lack of transparency in the markets 
resulted in the citizens of California going from paying $7 
billion for electricity to $27 billion for electricity. There 
is no doubt about the fact that there was manipulation. 
Nineteen people went to jail. A 20th would have had Mr. Lay not 
passed away. An enormous amount of manipulation in one market 
by one company. And what we attempted to do at the time was to 
close the loophole by taking over-the-counter and electronic 
trading out of the dark markets, to shine a light on it, to 
make it transparent, to require things to go through mandatory 
clearing--all of the things that we eventually managed to be 
able to do to a greater extent in Title VII but did not 
entirely succeed in perfectly, certainly. But we certainly did 
not do it when we passed the farm bill in 2008.
    Well, transparency in these markets, knowing what is going 
on, to be able to see all of the market participants and 
knowing what they are doing is critical.
    We would take you in a couple of other directions. One of 
the things we would like to see the authority of the CFTC to 
have is not necessarily to be able to in the first instance 
regulate index funds, but to be able to have the authority to 
be able to look and make sure they understand what they are 
doing. Understand that the concern that we have, and to follow 
up on the comments of Mr. Kelleher on the previous panel, is to 
address the issue of how there is such an imbalance today of 70 
percent financial market participation in these energy 
commodity markets and 30 percent actual market participants, 
people and airlines and farmers and truckers who want to hedge 
their products.
    We would like to be able to make sure that these markets 
are functioning for the purpose in which they were intended, 
and I think that we have forgotten why that was the case.
    For over 100 years, we had enormous stability in this 
country in energy prices, and it was not until the 1970s that 
they became unstable. That is when we created the CFTC, gave it 
its original set of authorities. We wanted to create a world 
marketplace in order to be able to wrest control of energy 
markets away from OPEC. And for about 25 years, it worked 
brilliantly, absolutely brilliantly, but in the last decade not 
as well. And I think that a lot of that was attributed to the 
fact that, unfortunately, a mistake was made both in 1999 and 
in 2000 in deregulating these markets and closing them off so 
that we did not see what they were doing.
    So in the first instance, let us make sure we understand 
exactly what is going on in these markets. Let us make sure we 
have an agency that is paying attention to what is going on in 
these markets, because when what we have seen going on in the 
last week, Senator, 43 cents on gasoline in 2 weeks, $1 billion 
a week it will cost the American people in higher gasoline 
costs, we better have a really good answer to be able to give 
people about why that is occurring. And we do not have a very 
good answer today, and it starts at the CFTC at least with what 
is going on in the commodity markets because that is where the 
activity is occurring that is driving these prices.
    Senator Cochran. And we are out of gas. That is the other 
part.
    In terms of production, what is the level of production 
compared with the way it was 5 years ago, 10 years ago? Is it 
going down or is it going----
    Mr. Guilford. Great question. Thank you very much. Before 
the financial crisis, America was consuming about 20 million 
barrels a day of crude oil, before the financial crisis in 
2007. In 2012, it was 18.5 million barrels. We had a million 
and a half barrel a day decrease in crude oil consumption, an 
enormous--cataclysmic in the energy business that we would have 
that much demand destruction. At the very same time, during the 
same period, America has produced an additional 1.5 million 
barrels a day in domestic production, another cataclysmic 
event. The biggest single increase in daily production of crude 
oil in the history of the United States since 1859 when we 
began commercially producing crude oil. Extraordinary.
    Combine those two issues, it is a 3 million barrel a day 
swing in just crude. And yet what happened between those two 
dates? We went from $72 on crude to $94. And, again, not a 
straight line. So a 3 million barrel a day swing in crude in 
the world's largest economy and largest consumer of petroleum 
products, and yet we had a $22 a barrel increase in crude and 
another $10 last week. Another $10.
    Now, on gasoline, gasoline during the same period of time, 
we went from, in 2007, 9.3 million barrels a day consumption of 
gasoline to 8.7 in 2012. The first time since World War II that 
Americans consumed that much less gasoline, almost 600,000 
barrels a day.
    Now, for the economy, just as a statement of fact, in 2007 
we had a 4.6-percent unemployment rate; in 2012, it was 7.6. 
And yet we hear out of Wall Street most recently, with the June 
jobs report, that we needed to tack on another $3 or $4 barrel 
on crude because we had a robust jobs report. The robust jobs 
report was up 360,000 on part-time, down 240,000 on full-time, 
and U-6 went from 13.8 to 14.3. I do not think you need to be a 
Republican or a Democrat to understand that does not meet the 
test of robust. And yet out of Wall Street, we needed to have 
an increase in the price of a barrel of crude.
    I do not find that justified. I do not.
    So we have had enormous changes in the energy markets in 
this country in the majority for a tremendously good reason, 
but I do not necessarily think those have always been reflected 
in the prices that Americans pay.
    Senator Cochran. Well, that is one of the reasons why we 
are having these hearings.
    Chairwoman Stabenow. It is.
    Senator Cochran. It's to get some answers and find out what 
the heck is going on. And if there is responsibility here in 
Washington, in the United States Senate specifically, we want 
to hear some suggestions about what we should consider.
    Thank you very much for being here and helping us in this 
effort.
    Chairwoman Stabenow. Thank you very much.
    Senator Donnelly.
    Senator Donnelly. Thank you, Madam Chairman. I would just 
like to note to Mr. Lukken, a graduate of Indiana University, 
we are very proud of you, and I know you worked on the 
Agriculture Committee under Senator Lugar, who was my 
predecessor, and it is filling awful big shoes following him, 
and I want to appreciate all your service that you gave not 
only to him but to the country. Thank you very much.
    To Mr. Russak, I will sponsor the Public Power Risk 
Management Act. I have talked to Indiana's municipal power 
agencies, and they are looking for help on this. And we have 
seen that the CFTC recently released a no-action letter 
temporarily raising the special entity threshold for utility-
related swaps. Has that helped? And obviously we need a 
permanent solution to this. We are working hard on this. Has 
the temporary helped at all?
    Mr. Russak. Well, Senator, unfortunately, not very much 
because of the temporal nature of this. The counterparties, the 
non-financial counterparties, have not been willing to step up 
to the plate and offer up their services to us. So it really 
did not help the public power entities. We have the same issues 
in New York State as well with the New York municipal electric 
utilities, and the Power Authority itself having seen 20 
percent of its counterparties going away.
    Senator Donnelly. Well, I want you to know we will work as 
fast as we can to get a companion bill on this side and get 
that put in place. We want to get some certainty for the 
municipal power agencies all over the country.
    Mr. Russak. Very much appreciate that, Senator.
    Senator Donnelly. Mr. Guilford, let me ask you, do you 
think that not having position limits in place for non-end 
users increases the per barrel price?
    Mr. Guilford. Yes.
    Senator Donnelly. And, you know, as I indicated earlier, 
Goldman Sachs analysts around 2011 estimated around 8 to 10 
cents per million barrels--or per barrel. What you are looking 
at with 421 million barrels--what is your estimate of 
approximately what you think it affects per barrel cost? Any 
ball park.
    Mr. Guilford. I would like to put this in the context of 
what we said when we testified in the other body at Energy and 
Commerce and following the president of the world's largest 
energy company where he indicated that he thought it should be 
between $60 and $70 a barrel. I mean, in a classic economic 
sense, the cost of a barrel, it is the marginal cost of 
production of the next barrel, and that was his opinion. That 
was his opinion at that time. That remains my opinion today. 
And if I would, I think putting it in the context of what the 
position limits rule meant, if I could just for a moment?
    Senator Donnelly. Yes.
    Mr. Guilford. I would like to make sure that I quote it 
accurately. Spot month was 25 percent of estimated deliverable 
supply for one trader, 25 percent of estimate deliverable 
supply. I do not know about you, Senator, but that does not 
strike me as a huge burden, 25 percent of estimated deliverable 
supply. The not spot month, 10 percent of the first 25,000 
contracts, 2.5 percent thereafter.
    Senator Donnelly. Well, I would like to see----
    Mr. Guilford. Not much of a limit.
    Senator Donnelly. Right. I would like to see a market that 
for end users, as you indicated, airlines, transportation, 
shipping, ag, if they are using a product, we want them to be 
able to lock in prices that they can live with, to have some 
certainty, to avoid risk. But it does not seem to me that the 
purpose of this market has been to speculate on the future of 
oil, the future of what happens to our families and going from 
$3 to $4 to $3 to $4.25, that it causes extraordinary hardship 
not only for families but for your companies that you represent 
as well to try to have some certainty in a market where supply 
continues to go up, demand continues to be steady or fall down, 
and the price of crude through position limits I think has 
really been affected.
    Mr. Guilford. Absolutely, and just to follow up on that, if 
I might----
    Senator Donnelly. Or lack of position limits, I should say, 
has been affected.
    Mr. Guilford. When we were there late last winter or early 
last spring, those of us who live in the Northeast remembered 
that we had the warmest winter on record in the history of 
recordkeeping. Outdoor sporting events were occurring all year 
round. I know they do in your State all year round, Senator 
Cochran. I assure you they do not in Connecticut. We usually 
close up sometime around Thanksgiving until, you know, just 
before Memorial Day. But golf courses were open all winter 
long. Our members lost 35 or 40 percent of their sales volume 
because it was so warm. The price of heating oil went up. The 
market price of heating oil went up. It did not go down. It 
should have collapsed, but it did not.
    So, again, that is why we feel as though we need to make 
sure we have a CFTC that is adequately funded, adequately 
staffed, has the technology in place with which it can do its 
job, and to be able to tell us what is going on, because a lot 
of it does not seem to make a great deal of sense.
    Senator Donnelly. Well, I would like to thank the panel 
and, again, Mr. Lukken, we are proud to have you as a graduate 
of the Hurryin' Hoosiers.
    Chairwoman Stabenow. Thank you very much.
    Senator Roberts.
    Senator Roberts. If we had only had the CFTC when Jimmy 
Carter put that embargo on the Russian sales. I remember at the 
Dodge City co-op--I cannot remember what the price was. I am 
guessing it was around $2.90, something like that, maybe 3 
bucks. It went to hell in a hand basket, driven, of course, by 
speculators. That was the President of the United States. I am 
not sure the CFTC could have done that job, and I am just being 
sort of pesky with you.
    Mr. Heck, we have heard from quite a few panelists or some 
of the panelists that the role of the commodity prices or 
markets have changed due to speculation, i.e., the speculators. 
For your members, are they looking at the speculator driving 
price swings, or are they looking to reduce their risks from 
these swings?
    Mr. Heck. Senator, I think our members generally as the 
panelists commented before see a role for the speculators in 
our markets to bring liquidity, particularly in deferred 
periods where I have bought grain from a farmer for delivery in 
March of 2014, and I need to hedge that. If a speculator is out 
there wanting to take the other side of that trade, that is a 
good thing for us. So I think there is a role for that kind of 
liquidity in our markets.
    I think that between our industry and the CFTC and the 
exchanges we have worked pretty well together to establish the 
right kind of position limits in our industry. I think they 
function pretty well. Occasionally we have had some issues 
with, you know, perhaps long index funds being in our market 
and causing a divergence between the futures price and the cash 
price. Again, through collaboration, we have made some changes 
to that contract that have made that a non-issue.
    So I would say today in our industry our members are trying 
to work with each other and with farmers to minimize the risk 
inherent in price swings through prudent risk management 
tactics.
    Senator Roberts. In your comments--well, I would just add 
that I know that we all want stability, we all want 
transparency to the degree that is possible. But I am not sure 
the CFTC issuing regulations allegedly to achieve that--not 
allegedly. They are actually trying to achieve it. But they are 
issuing interpretive guidelines. That is like sub-regulatory 
guidance. That is like a lot of things that are happening in 
Washington in a lot of different agencies and a lot of 
regulations. Three hundred pages' worth, I am not sure that is 
going to--we need transparency on the 300 pages.
    In your comments you mentioned that the National Grain and 
Feed folks are concerned that the proposal for customer 
protection could end up significantly increasing the futures 
customers' risk in the event of future failures. In the real 
world, i.e., the countryside of Kansas, and Vermont, what are 
the challenges--and everywhere else, Mississippi, Michigan. In 
the real world, what are the challenges for shortening the 
amount that customers can make margin calls to 1 day instead of 
3?
    Mr. Heck. I do not think that from an industry perspective 
we have been able to determine why the 1-day rule would benefit 
anybody, frankly. And I think we need to continue to work with 
the CFTC to understand that. They have perhaps intimated that 
their hands are tied by the regulation, but the interpretation 
they have made is contrary to what has happened over decades.
    Senator Roberts. Okay. Real quick, and my time is expiring. 
If the proposed rule on residual interest goes forward 
unchanged, will it dramatically impact farmers and ranchers 
using the market to hedge their costs?
    Mr. Heck. Yes.
    Senator Roberts. Thank you.
    Mr. Lukken, thank you to the Futures Industry Association 
and other groups for being very proactive and paying with your 
own dollars, not the taxpayer dollars, to evaluate the costs 
and benefits of the many proposals to provide additional 
insurance for customer accounts in case of another futures 
failure. There is not a question. I just wanted to thank you.
    It looks like I am out of time, and my wife tells me that I 
am already 20 minutes late, so, Madam Chairwoman, distinguished 
Ranking Member, the Hoosier from Indiana, Mr. Lukken, thank you 
for your service up here, adios.
    Chairwoman Stabenow. Thank you. Thank you, Senator.
    Thank you again. This has been a very important panel, very 
helpful, and your written testimony as well. We look forward to 
working with all of you.
    Let me just indicate that any additional questions for the 
record should be submitted to the Committee clerk 5 business 
days from today. That is 5:00 p.m. on Wednesday, July 24th. 
Without objection, the compilation of letters received by the 
Committee with respect to reauthorization will be added to the 
record of the hearing.
    [The following information can be found on pages 172-435:]
    Chairwoman Stabenow. Seeing nothing further, the meeting is 
adjourned. Thank you very much.
    [Whereupon, at 5:40 p.m., the Committee was adjourned.]
      
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