[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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