[Senate Hearing 113-640]
[From the U.S. Government Publishing Office]
S. Hrg. 113-640
THE COMMODITY FUTURES
TRADING COMMISSION:
EFFECTIVE ENFORCEMENT
AND THE FUTURE OF
DERIVATIVES REGULATION
=======================================================================
HEARING
before the
COMMITTEE ON AGRICULTURE,
NUTRITION AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
DECEMBER 10, 2014
__________
Printed for the use of the
Committee on Agriculture, Nutrition and Forestry
Available via the World Wide Web: http://www.fdsys.gov/
______
U.S. GOVERNMENT PUBLISHING OFFICE
94-366 PDF WASHINGTON : 2015
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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
SHERROD BROWN, OHIO PAT ROBERTS, Kansas
AMY KLOBUCHAR, MINNESOTA SAXBY CHAMBLISS, Georgia
MICHAEL BENNET, COLORADO JOHN BOOZMAN, Arkansas
KIRSTEN GILLIBRAND, NEW YORK JOHN HOEVEN, North Dakota
JOE DONNELLY, INDIANA MIKE JOHANNS, Nebraska
HEIDI HEITKAMP, NORTH DAKOTA CHARLES E. GRASSLEY, Iowa
ROBERT P. CASEY, Jr., PENNSYLVANIA JOHN THUNE, South Dakota
JOHN WALSH, MONTANA
Christopher J. Adamo, Majority Staff Director
Jonathan J. Cordone, 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):
The Commodity Futures Trading Commission: Effective Enforcement
and the Future of Derivatives Regulation....................... 1
----------
Wednesday December 10, 2014
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
Grassley, Hon. Charles, U.S. Senator from the State of Iowa...... 3
Hoeven, Hon. John, U.S. Senator from the State of North Dakota... 4
Witness
Massad, Hon. Timothy G., Chairman, Commodity Futures Trading
Commission, Washington, DC..................................... 6
----------
APPENDIX
Prepared Statements:
Boozman, Hon. John........................................... 32
Cochran, Hon. Thad........................................... 35
Massad, Hon. Timothy G....................................... 36
Question and Answer:
Massad, Hon. Timothy G.:
Written response to questions from Hon. Debbie Stabenow...... 62
Written response to questions from Hon. Heidi Heitkamp....... 66
Written response to questions from Hon. Thad Cochran......... 67
Written response to questions from Hon. Charles Grassley..... 77
THE COMMODITY FUTURES
TRADING COMMISSION:
EFFECTIVE ENFORCEMENT
AND THE FUTURE OF
DERIVATIVES REGULATION
----------
Wednesday, December 10, 2014
United States Senate,
Committee on Agriculture, Nutrition and Forestry,
Washington, DC
The Committee met, pursuant to notice, at 10:06 a.m., in
room 328A, Russell Senate Office Building, Hon. Debbie
Stabenow, Chairwoman of the Committee, presiding.
Present: Senators Stabenow, Brown, Klobuchar, Bennet,
Gillibrand, Donnelly, Casey, Walsh, Cochran, Roberts,
Chambliss, Boozman, Hoeven, 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 morning. I will call to
order the Committee on Agriculture, Nutrition and Forestry, and
we have several things we need to do today.
First, happy birthday to Senator Boozman. We want to
celebrate. As you can see, we have a package of goodies for
everyone, and I want to thank my staff and thank Jessie and
everybody who put this together from the team as we honor four
members that will be leaving us. When we look in this room, we
are reminded every day of two--multiple Chairmen but certainly
two, Senator Harkin and Senator Chambliss, whose portraits are
here in front of us every day. We are losing both of them,
which will be a real loss to the Committee, along with Senator
Johanns and Senator Walsh, who are four distinguished members.
In their honor today, we did reach out to do something as a
snack from each State, so we do have popcorn from Iowa, and
Nebraska, caramel corn in honor of Senator Johanns, and we have
beef jerky from Montana, and we also have some Georgia pecan
pralines in honor of Senator Chambliss.
So I just want to take a moment in all seriousness to say
that it has been a wonderful honor to chair this Committee, and
with all of you, again, even though it may feel like old news
talking about the farm bill, it certainly is an accomplishment
that we were able to do together. That was something that was
not only difficult but not replicated in many places, and it is
something that we should, I think, together all feel very proud
of.
As we are having the change of the guard, I want to also
thank Senator Cochran for his leadership as Ranking Member and
Senator Roberts, who will be assuming the Chair. I was
fortunate to have the opportunity to work with two
distinguished Ranking Members in order to be able to get the
farm bill passed twice--not once but twice. It reflects a lot
of work of people around this table, and I want to start with
just mentioning Senator Harkin, who is overseas for a day
honoring a gentleman. He will be coming back and joining us
tomorrow, but I do want to recognize Senator Harkin first as
the--in order of seniority, Senator Harkin not only has chaired
the Committee but really is the ``Father of Modern
Conservation,'' as he has been called. He has been in both the
House and Senate Agriculture Committees for 40 years and
chaired the farm bill in 2002 and wrote the Conservation
Stewardship Program and strengthened the farm safety net, he
really was a driving force around bioenergy and nutrition. The
Fresh Fruit and Vegetable Program we have in our schools today
would not be there without Senator Harkin, and so we are very,
very grateful to him and cannot imagine this Committee without
his service.
We equally cannot imagine, I cannot imagine this Committee
without Senator Chambliss both as Chair, former Chair, and as
someone who as Chair and Ranking Member, you have played an
integral role, in fact, in passing this bill, all the way
through to the conference committee. I appreciate your advice.
I appreciate your involvement both publicly and behind the
scenes to be able to help us move forward in a balanced way to
be able to get this done. You played a critical role, as you
always do, and will be greatly missed.
I appreciate your personal interest in hunger issues and
promoting nutrition and healthy lifestyles for young people as
well. We share a common interest in that as well. You have made
it clear that you are fighting for Georgia always, but
understanding the differences in agriculture and working to
have something that is an important piece of policy that works
for all parts of agriculture. You will be missed, and we are
very, very grateful for your leadership.
Let me also mention--I feel like I should say ``Secretary
Johanns,'' our only member who is a former Secretary of
Agriculture and actually began talking about conservation and
ways to modernize and reform it before we ever did a farm bill
back when you were Secretary. We took a lot of your ideas and
put them into what we did, which I am very proud that we have a
Conservation Title that is reformed and streamlined, and I
appreciate your efforts. I very much appreciate all of your
advocacy around conservation, Sodsaver, and, again, working for
a balanced approach but moving us in reform, which I know is
very, very important for you as well. Risk management, both
your time as Secretary and on the Committee, you have been a
big advocate of letting the market and risk management and so
on. So we are going to miss you. You have been a very, very
important part. I hope you will continue in some way, I hope
all of our members leaving will continue in some way to be a
part of helping us move forward to support and strengthen
agriculture.
Let me finally just mention our newest member, Senator
Walsh, who is no stranger to public service, and we thank you
first for your incredible service in the Army National Guard
and your service in Montana and your passion. One of the things
I am proudest of in the farm bill is we actually have a new
position and help for veterans who want to go back into
farming, and we appreciate your fighting for Montana from day
one, Montana agriculture, as well as all of the other issues
you have been involved with. But you made it clear to me from
the beginning what your focus was in terms of this Committee
for Montana, and we are sorry to see you go. We appreciate all
four of you.
So I will be happy to turn to Senator Cochran, if he would
like to make any comments, but we did not want to let this last
official meeting of the Agriculture Committee come and go
without saluting tremendous leaders who have made a permanent
impact in our country. So in a moment, I will call on Senator
Grassley. I do not know if Senator Cochran would want to make a
comment, but I certainly would welcome it.
STATEMENT OF HON. THAD COCHRAN, U.S. SENATOR FROM THE STATE OF
MISSISSIPPI
Senator Cochran. Madam Chairman, I appreciate your
continued leadership of our Committee. I want to join you in
welcoming the Chairman of the Commodity Futures Trading
Commission to this hearing. After being confirmed, I am sure he
is off to a good start over there, organizing and pepping up
the Commission so that we can be assured of the integrity of
the process and the marketplace. We are happy to be able to
have this opportunity to thank him for his service.
Chairwoman Stabenow. Thank you.
Senator Grassley?
STATEMENT OF HON. CHARLES GRASSLEY, U.S. SENATOR FROM THE STATE
OF IOWA
Senator Grassley. I appreciate the opportunity to say
something about our retiring members. I have enjoyed working
with them, and what I would like to do now is take an
opportunity to say to each of them--I know Senator Harkin is
not here, but Senator Harkin would believe I would say this
anyway, and the other people that--and I hope I have said this
to most every member I have served with when they have left. At
least in recent years, I have tried to make a point of saying
that to almost everybody. These colleagues after they leave the
Senate, as long as I am in the Senate, they are always welcomed
in my office, and I hope that they will call on us, whatever
their life is after the Senate. I wish them well and have
enjoyed serving with them.
Chairwoman Stabenow. Thank you very much.
Well, again, we appreciate it. One of the hallmarks of the
Committee is our working together, and the four members that I
mentioned--Senator Harkin, Senator Chambliss, Senator Johanns,
and Senator Walsh--have been very, very important in that
process.
Yes, Senator Hoeven?
STATEMENT OF HON. JOHN HOEVEN, U.S. SENATOR FROM THE STATE OF
NORTH DAKOTA
Senator Hoeven. Madam Chair, I would like to echo the
comments of Senator Grassley and point out that to get a farm
bill, we needed the North, we needed the South, and we needed
the big ``I'' States, and these four represent the North, the
South, and the big ``I'' States, and so obviously we could not
have done a farm bill without them, and we are going to miss
them a lot.
Thank you.
Chairwoman Stabenow. Thank you very much.
Any other comments? We will let everybody munch on their
goodies and are counting on all of you coming back and being a
part in some way of helping us as we move forward here. I do
not want to think about the next farm bill because we are still
implementing this one, but we have got a lot of work to do
moving forward on implementation.
So let us now turn to the business before the Committee
today, and we welcome Chairman Massad being back with us.
More than 6 years ago, our country was hit with the largest
financial crisis since the Great Depression. Trillions of
dollars of wealth evaporated almost overnight, devastating
millions of families, leaving them unemployed, underwater, and
unable to keep a roof over their head or food on the table.
This crisis also caused Americans to seriously doubt our
Government's ability to properly oversee all of the players in
the increasingly complex global financial system.
Thankfully, we have come a long way since those dark days.
We have had 59 straight months of job creation, and we are now
creating jobs at a rate that we have not seen since the 1990s.
But we still have a lot to do if people are going to have a
real opportunity to get back to work and have the American
Dream. There is more that needs to be done to ensure our
financial markets are safe, transparent, and accountable.
In the wake of the crisis, the CFTC was given important new
authority to more effectively oversee and regulate our
derivatives markets. Unfortunately, this new authority did not
come with new resources. For the past 4 years as Chair of the
Committee, I have repeatedly stopped efforts to unwind
protections for families and farmers and businesses.
I have made it also my priority to protect the integrity of
financial reform and to secure the resources necessary for the
Commission to enforce the law we passed in 2010.
Unfortunately, the omnibus released last night does
neither. Because of that fact, I do not support the policy
rider in the appropriations bill. This policy rider is masked
by a meager increase in the CFTC's budget.
But that increase comes with conditions--handcuffs on the
agency that Congress tasked with enforcing the law that
Congress passed--in such a way that it represents what looks to
me actually as a very serious cut.
Given that the funding levels are well below the
President's budget request, this should serve as a bucket of
very cold water to those of us who want reform in our financial
markets.
Let me be clear: Dodd-Frank Wall Street reform is being
undermined every day we underfund the agencies responsible for
enforcing the law. That is clearly what is happening in the
omnibus bill announced in the House yesterday. Failing to
properly fund the Commission leaves our families, our farmers,
and our businesses vulnerable to bad actors.
We all remember the mass fraud committed by Peregrine
Financial and MF Global in 2011 and 2012. Billions of dollars
in customers' funds went missing at just those two firms. How
can we expect Americans to trust in our markets when all of
this money in U.S. accounts simply disappears overnight?
Everyone benefits when our markets are safe and reliable.
Financial institutions and end users benefit when our Nation's
markets are recognized around the globe as being ultimately the
most trusted in the world.
Since the Dodd-Frank Act was signed into law in 2010, the
CFTC has been a leader among our financial regulators,
completing almost all of its new Wall Street reform rules.
The Commission continues to show flexibility and improve on
its earlier work to ensure that our commercial end users,
energy firms, and agriculture producers are able to safely use
derivatives markets to manage risk without undue burdens.
In just the past 3 months, the Commission has undertaken to
resolve several end-user concerns--we appreciate that--
including margin and recordkeeping requirements and relief for
local, publicly owned utility companies.
Some of the most critical work lies ahead on rules that
have serious consequences on all market participants. The
Commission continues to work on the position limits rule, which
I know has been a focus of the Chairman and the CFTC
Commissioners. Whether it is paying for gas at the pump or
providing food to feed our families, when these markets do not
work, consumers feel the pain.
The CFTC's Enforcement Division, despite limited resources,
also continues to work hard to keep our derivatives markets
safe from fraud and abuse. Their numbers continue to prove it.
In the past fiscal year, the CFTC collected over $3 billion
in monetary penalties against companies across the country.
The Commission also took a hard stance on the manipulation
of foreign currency benchmarks, issuing orders that cost
unlawful companies over a billion dollars. This is a success
given the difficulty and the resources needed to successfully
investigate and close a case of this scale.
Despite the recent successes, the Commission has much work
to do in 2015 and beyond.
While we discuss the need to give CFTC resources to
effectively enforce its responsibilities here at home, we must
also be considering resources needed to take on cybersecurity
attacks and global threats.
The Commission must have the resources needed to
effectively examine clearinghouses and exchanges to keep U.S.
markets from being at risk to broader threats.
We look forward to the Chairman's report on yesterday's
meeting of the CFTC's Agricultural Advisory Committee, a
Committee obviously very important to all the members of this
Committee. I was pleased to see Secretary Vilsack in attendance
to address the state of the agriculture economy.
These are considerations that the Commission must focus on
as the markets continue to grow and change and market
participants continue to get comfortable with the new model of
derivatives regulation.
With the right enforcement and resources, I am confident
the CFTC will create stronger, more transparent markets.
I would turn to my Ranking Member, Senator Cochran, if he
would like to add anything.
Senator Cochran. Madam Chair, only to ask unanimous consent
that my full statement welcoming our distinguished witness and
challenging our Committee to do its job of oversight, as you
are leading us, and I thank you for that. I am happy to yield
to others--we have a big crowd here--to get their questions in,
so I will withhold any questions until later
[The prepared statement of Senator Cochran can be found on
page 35 in the appendix.]
Chairwoman Stabenow. Thank you very much, and we will now
turn to our first and only witness this morning, Chairman
Timothy Massad, who we all know. The Committee held a
nomination hearing in March of this year, followed by
confirmation in early June. We very much appreciate your coming
back before the Committee. We, of course, welcome your public
statements, anything for the record as well, and then we will
open it for questions. Thank you.
STATEMENT OF THE HONORABLE TIMOTHY G. MASSAD, CHAIRMAN,
COMMODITY FUTURES TRADING COMMISSION, WASHINGTON, DC
Mr. Massad. Thank you, Chairwoman Stabenow, Ranking Member
Cochran, and members of the Committee. I am pleased to testify
before you today on behalf of the Commission. I appreciate the
opportunities I have had to meet with many of you, and I look
forward to this Committee's continued input.
Let me also add my thanks and recognition to the retiring
members--Senators Harkin, Chambliss, Johanns, and Walsh. It has
been a pleasure working with you.
I also want to thank you, Chairwoman Stabenow, for your
leadership of this Committee and your advice and counsel. I
look forward to continuing to work with you, and, of course, I
look forward to working with Senator Roberts as the new Chair.
In June of this year, two of the other Commissioners and I
took office, and the last 6 months have been a busy and
productive time for us. I want to thank my fellow
Commissioners, all of whom are extremely dedicated and bring
good experience and judgment to the table.
Chairwoman Stabenow, I think you really said it best in
terms of the importance of the additional responsibilities we
were given in light of the crisis, which was the worst
financial crisis this country has experienced. In my written
testimony, I discuss our work in implementing those new
responsibilities to regulate the swaps market.
We have been just as focused on our traditional areas of
responsibility: the futures and options markets. These markets
cover many diverse products today, and as they had their
origins in agricultural products, and those remain very
important to our work. Just yesterday, we did have a very
productive meeting of our Agricultural Advisory Committee, of
which I am the sponsor.
We were honored to have Secretary Vilsack join us to
discuss the state of the agricultural economy. It was an
excellent opportunity to gather input directly from farmers,
ranchers, and others who rely on these markets day in and day
out.
As the Committee knows, Title VII of the Dodd-Frank Act was
a response to the part swaps played in the worst financial
crisis since the Great Depression. The CFTC was given primary
regulatory responsibility for bringing this market out of the
shadows. Thanks to the agency's hard-working professional
staff, we have made substantial progress in implementing these
reforms.
Today swaps transactions are being cleared and reported. We
have increased oversight of key market participants. Trading of
swaps on regulated platforms is increasing, and transparency
and strong risk management are being achieved.
But in all of these areas, there is more work to do. For
the last 6 months, we have made it a priority to review our
roles, particularly to address some of the concerns of
commercial end users.
To that end, the Commission has taken a number of actions
designed to make sure that our markets work well for the
manufacturers, farmers, ranchers, and other businesses that
rely on these markets to hedge commercial risk.
This includes matters related to margin and the posting of
collateral, reporting and recordkeeping, forward contracts, and
other areas. We have been listening carefully to market
participants and working with them to make sure the rules work.
We are also working on the few Dodd-Frank rules that remain
to be finalized, including the position limits rule and a
margin rule for un-cleared swaps that, consistent with
congressional intent, exempts end users.
In all this, a priority is working with our international
counterparts to build a strong global regulatory framework. We
are currently working with our international colleagues in
particular on clearinghouse recognition and regulation, an
issue that concerns the futures and options market just as much
as the swaps market.
We are also very focused on data collection and analysis
and swaps trading issues, and cybersecurity, which is perhaps
the single most important new risk to financial stability, is
also a priority.
We are also monitoring developing issues, including the
increasing use of automated trading strategies and virtual
currencies like bitcoin.
We continue to maintain a strong compliance and enforcement
program. Robust enforcement is crucial to the integrity of our
markets. Most recently, we ordered five of the world's largest
banks to pay $1.5 billion in fines and take remedial actions
because they attempted to manipulate foreign exchange rate
benchmarks.
In all of these areas, there is much more we could and
should be doing, but we simply are not able to do so, to do as
much as I believe the American public deserves because of
resource constraints. We are fortunate to have a dedicated
professional staff, and we will do all we can with what we
have. But our current budget significantly limits our ability
to respond.
We are grateful that the omnibus currently being considered
would provide an increase, but I am convinced the need is far
greater than that.
Although this would start to address some of the very dire
needs we have, without additional resources our markets cannot
be as well supervised, customers cannot be as well protected,
our technology cannot keep up, and market transparency cannot
be as fully achieved.
The United States has the best financial markets in the
world, the most dynamic, innovative, competitive, and
transparent. They have been an engine of our economic growth
and prosperity. Good regulation is necessary to keep them that
way, regulation that ensures integrity and transparency and
creates the foundation for the markets to thrive.
Thank you again for inviting me today, and I look forward
to your questions.
[The prepared statement of Mr. Massad can be found on page
36 in the appendix.]
Chairwoman Stabenow. Thank you very much.
First let me ask a follow-on as it concerns resources. One
of the most frustrating challenges that market participants
face is regulatory uncertainty, and a common complaint I hear
relates to registration and compliance delays. Given the CFTC's
new responsibilities regulating the swaps market and
considering the growth of the futures and options markets, does
the Commission have the needed resources to provide regulatory
certainty to meet deadlines?
Mr. Massad. Thank you, Chairwoman Stabenow, for the
question. It is very, very difficult. We are stretched in so
many areas. We have over 100 applications from swap dealers
that are simply provisionally registered that we need to get
through.
We have 22 applications for swap execution facilities that,
again, are just temporarily registered. We have a variety of
other applications pending.
We are stretched in all these areas. We cannot respond in
the timely and thorough manner that we need to do our job well,
and that includes not just registrations and applications. But,
of course, whenever industry has an issue with how our rules
are working, we would like to be able to be very responsive, to
look into it quickly, but it is simply very, very challenging
with the resources we have.
Chairwoman Stabenow. Thank you. On a different note, 2
weeks ago my colleague from Michigan and friend, Senator Levin,
held a 2-day investigative hearing regarding the relationship
between banks and commodity ownership, and a significant part
of that focused on aluminum prices in the London Metal
Exchange. I asked the CFTC over a year ago to report on its
authority to regulate the LME, and in December of 2013, you
responded, confirming that the CFTC has authority and stated
that the LME's foreign board of trade registration was pending.
Can you provide an update on LME's registration status and
what the Commission is currently doing to resolve this aluminum
issue with its current authority?
Mr. Massad. Certainly, Senator. Thank you for the question,
and I share your concern about this situation. I have also
visited with Senator Levin about it. It is an issue that we are
paying a lot of attention to.
Let me just say I have personally met with the Aluminum
Users Group, I have met with the LME and their regulator in the
U.K., and we are watching this very, very closely. The LME has
proposed some reforms. We are looking at how those work as they
implement them, and we are looking at whether more is needed.
With respect to our authority, we have indirect authority,
given their FBOT application, but their primary regulator is in
the U.K., and the contract is one regulated by the U.K. We do
not have direct jurisdiction over the warehouses which are at
issue here. But I can assure you that we will continue to
follow this situation very closely and engage with the LME, the
U.K. authorities, and the aluminum users and work toward
resolving this problem.
Chairwoman Stabenow. So you are speaking about indirect
authority.
Mr. Massad. Yes.
Chairwoman Stabenow. But from the American interest
standpoint, do you think at this point that you have enough
authority to prevent fraud and manipulation of commodity
prices?
Mr. Massad. Well, we always have the authority to go after
fraud and manipulation in the markets, and so we are very
mindful of that, and we will use that authority anywhere we
can. As I say, in this case, what is going on in part is the
LME is looking at trying to reform some of its warehouse
arrangements. We are hopeful that can help address this
problem, but we will continue to look at whether additional
actions are needed if those reforms do not work.
Chairwoman Stabenow. Back to talking about resources, the
Commission has recently been very successful, as you said, in
closing benchmark manipulation enforcement cases, including
benchmarks like foreign exchange and LIBOR which have affected
everything from home mortgages to student loans. Can you
discuss just a little bit more about the amount of resources
and technology that is needed to bring these types of cases?
Mr. Massad. It is very challenging. You know, in the
foreign exchange benchmark case, we were negotiating with a
number of banks. We issued orders with respect to five. We had
to have separate teams working on each of those. These are very
intensive investigations to look at all the e-mails and all the
documents and look at the market practices here. So, again, we
are very stretched.
Now, we are also at the same time pursuing all sorts of
other matters in our Enforcement Division, whether it is
traditional Ponzi schemes or commodity pool fraud, precious
metal scams that we have seen a lot of against retirees,
spoofing, and other sorts of more sophisticated types of fraud
that we are seeing now that our markets are becoming
increasingly electronic.
But it is essentially a triage operation. We simply do not
have the resources to go after all the things that we should be
going after and that would enhance the integrity and strength
of our markets. That is why I think additional resources are
such a good investment for our economy and for the American
people.
Chairwoman Stabenow. Thank you. I could not agree more.
Senator Cochran?
Senator Cochran. Let me ask you in reference to the last
comments you made, what is your impression of what a fair level
of appropriation would be to maintain the staffing and the
quality of the staff that is necessary to restore morale at the
Commission?
Mr. Massad. Well, the President's most recent budget
request was for $280 million. I think that was entirely
justified, and we are looking with respect to fiscal year 2016
as well.
Again, we are just stretched in all areas. Our markets, our
responsibilities were so greatly increased by Dodd-Frank. The
swaps market, it depends on how you measure it, but people will
say it's a $600 trillion market, in many ways much bigger than
the futures market. The complexity of these markets is great.
The technology that drives these markets is so important.
Things like cybersecurity is such a big risk to our markets. We
simply do not have the resources to be examining critical
infrastructure such as our clearinghouses and exchanges
frequently enough on issues like cybersecurity. So it is just a
real challenge for us.
Senator Cochran. Well, thank you very much.
Chairwoman Stabenow. Thank you.
Senator Brown is next on the list, but I do not--at this
point, unless he appears in 2 seconds, we shall move on.
Let me also say it is wonderful to see so many colleagues
here, and we will ask everyone to be mindful of the 5-minute
rule. So at this point, Senator Walsh--and Senator Walsh is
also not here, so we move on to Senator Bennet.
Senator Bennet. Thank you, Madam Chair. It is nice to be
recognized no matter how hard you try to get somebody else to
talk.
[Laughter.]
Senator Bennet. Chairman Massad, it is great to see you
again. I want the Committee to know that I appreciate very much
your help a number of years ago drafting what became the ``Pay
It Back Act'' that made sure that the money that came back from
TARP was actually used for deficit, not spent again, and I want
to thank you for your help with that.
I was pleased to see in your written testimony that 70
percent of the transactions you regulate are being cleared
today compared to 15 percent in 2007. When we worked on Dodd-
Frank, we wanted to ensure that the clearinghouses themselves
did not become a source of systemic risk.
Could you share with the Committee your sense of just how
concentrated the clearing process has become? Are the majority
of these transactions occurring through many clearinghouses or
just a few? How many clearinghouses are there? I will submit my
other questions for the record and yield to my friend, or
however you want to do it.
Chairwoman Stabenow. Well, go right ahead, and we will just
go back and forth.
Senator Bennet. All right, Mr. Chairman. So that is the
question. We did not want the clearinghouses to become a
systemic risk. How are things going?
Mr. Massad. Senator, that is an excellent question, and I
share your concern about clearinghouse risk. It is something
that we need to be paying a lot of attention to; we are paying
a lot of attention to it. You know, the mandate that we clear a
lot of these transactions I think was a very, very good policy
decision. It does allow us, clearinghouses do allow us to
monitor and mitigate the risk of these bilateral transactions
much better, but they do not eliminate the risk. We have to be
very vigilant with respect to CCP risk, and we are focusing on
that quite a bit in terms of looking at financial resources
that they have, managerial/operational resources. There are
systems for margining and measuring the risk, cybersecurity, as
I alluded to before.
You asked about the concentration. Most swaps are cleared
in just a couple of clearinghouses, and this also goes to our
cross-border issues where I have worked very hard with the
Europeans on working out a good arrangement on clearinghouse
supervision because some of the main clearinghouses are in
Europe, and a lot of our transactions are cleared over there.
Senator Bennet. So how would you evaluate the systemic
risk?
Mr. Massad. Well, again, I think it was the right thing to
do to mandate clearing, but we have got to be constantly
vigilant on the issue of clearinghouse strength and stability.
Senator Bennet. Is there any evidence--you mentioned your
discussions with your European markets. Is there any evidence
to indicate that the swap transactions are migrating to less
regulated markets than our own?
Mr. Massad. Well, in terms of the clearing, a lot of it is
happening in a couple of clearinghouses, one in particular in
Europe. We are working very closely with the Europeans to make
sure we have a good system of regulation, and I think we will
land in a good place there.
The other thing I would say about the overall risk is I am
working very closely with the Federal Reserve on these
questions, too, since we have designated a couple of the
clearinghouses as systemically important. That means the Fed
does have certain interests here as well. Governor Powell and I
in particular maintain a constant dialogue on these issues.
Senator Bennet. Okay. Thank you, Madam Chair.
Chairwoman Stabenow. Thank you very much.
Senator Roberts? Then we will come back to Senator Brown.
Senator Roberts. I would be more than happy, Madam
Chairman, to yield to my good friend.
Senator Brown. I have got no more important schedule than
the rest of you.
[Laughter.]
Senator Brown. That is really kind of you. You are going to
be the Chairman.
Senator Roberts. Well, you are going to have more time
since you got off the Ethics Committee, which I bitterly
oppose.
[Laughter.]
Senator Brown. The word is out.
Senator Roberts. The word is out. I am sorry. That is all
classified. But everything else in the world is not classified
now, so it does not make any difference.
Chairwoman Stabenow. All right. Now that you have used your
time, we will move on----
[Laughter.]
Chairwoman Stabenow. We will start the clock again. Senator
Roberts?
Senator Roberts. Madam Chair, I want to thank you for your
hard work, your dedication, and your passion for agriculture.
If there is a synonym for ``perseverance,'' it has to be
``Debbie Stabenow,'' and I truly want to thank you for that and
am looking forward to working with you and also the CFTC. Mr.
Chairman, thank you for coming.
I have got quite a bit of commentary here about Dodd-Frank-
Bennet--what happened----
Chairwoman Stabenow. He is leaving.
Senator Roberts. He just left. I would, too. At any rate,
on the regulatory framework that the Commission has created
after Dodd-Frank, we made some progress. I call that ``low-
hanging fruit,'' so I have some others a little higher up on
the branches, but I want to get right to the questions.
Are you worried about the significant number of small and
medium-sized future commission merchants--those are the folks
that help the farmers and ranchers, the FCMs--which primarily
serve agricultural producers that are closing and
consolidating? I would point out that 10 years ago, in 2003-04,
we had 102; now we have 69. That is a 30-percent reduction. Any
comments?
Mr. Massad. Thank you for the question, Senator. I share
your concern about this. We want to make sure we have a very
strong and diverse futures commission merchants sector so that
the smaller players can continue to operate effectively and
serve their customers.
We have seen concentration. I think it is driven by a
number of things. One of them is a very low interest rate
environment since a lot of these firms make some of their money
on the interest on the funds that they hold.
In terms of our regulation, we have certainly been mindful
of this. Recently we proposed amendments to one of our rules
that I think will help some of the smaller FCMs in terms of the
residual interest issue, and I would be happy to work with you
on this because we are----
Senator Roberts. Well, I appreciate that. I do not mean to
interrupt here, but we are going to be on a time schedule here,
and I apologize for doing that.
Mr. Massad. Sure.
Senator Roberts. Thank you for taking a second look at
several of the consumer protection rules. I want to point out
that Senator Heitkamp and I introduced legislation so farmers
and ranchers would be certain that this would not occur at any
point in the future.
I am talking about basically the automatic change in how
future commission merchants collect residual interest. But you
are studying it after, I think, we have solved it. You are
studying it. I would just as soon use that very scarce money
for something else if, in fact, we fixed it.
Basically, I wanted to ask you about 140 staff-issued no-
action letters that delayed or replaced rulemakings by the
Commission. These were issued with little or no oversight and
zero transparency. Come to think of it, Madam Chair, I think
this is a discussion that we probably ought to have, that this
is going to take a little while, I think, in regards to time.
But I am very concerned about the no-action letters. Sometimes
they work to our favor; sometimes they do not. Many of them
just are not--I do not think the members of the Commission are
aware of them.
Are you also worried that foreign businesses are choosing
to relocate their businesses and capital away from the United
States markets?
Mr. Massad. Senator, I am very mindful of the cross-border
issues, but I think we are working on them, and we are making
good progress. I think it is important to remember that we
started with a market that was entirely unregulated and that
was global.
It is also a highly mobile market. This Congress made the
policy decisions--I think they were good ones--that we bring
this market out of the shadows, and that was consistent with
the commitments of the G-20 nations. But all of these nations
are moving at different paces. They all have their own
political process and regulatory traditions.
We were first in a lot of ways, which is a good thing, in
terms of implementing these rules, and we are working with
other jurisdictions to harmonize things, and I think we will
get there.
So I think we are addressing the concern, but we are very
mindful of it.
Senator Roberts. Chairperson Stabenow mentioned the budget.
I just want to point out that the CFTC's budget has already
seen a 27-percent increase since fiscal year 2010. That is up
from $169 million to 215. The new omnibus will add another 16
percent to $250 million.
That is about a 50 percent increase to 2010. I know the
CFTC is faced with many new issues, many new challenges. Almost
any regulatory agency that we have is in the same boat. But
that is a 50-percent increase. Somehow or other we are going to
have to learn to live within our means. We are going to try to
be as helpful as we possibly can. But I simply wanted to point
that out.
For the first time in a long time, I am yielding back with
20--no, I am not. I am 24 seconds in the red. I apologize.
Chairwoman Stabenow. Thank you very much.
Senator Brown?
Senator Brown. Thank you. Thank you, Madam Chair, and thank
you, Senator Roberts. Thanks for the work you have done on this
Committee, especially with CFTC and financial rules and
enforcing and oversight.
I think a number of us are not happy with how the
appropriations process this year is, particularly with
potential repeal of the 716 provision, a provision written in
this Committee by one of your predecessors, the Chairwoman from
Arkansas, on financial regulations and derivatives.
Clearly doing that through the appropriations process
rather than this Committee undermines this Committee and also
undoubtedly puts taxpayers at risk, something that I would
think we would have learned that lesson, so that is
unfortunate.
Let me follow up on something that the Chairwoman
mentioned, the discussion, Mr. Chairman, of the banks'
involvement in physical commodities, particularly aluminum.
Your predecessor told me that CFTC ``has clear authority to
address fraud, manipulation, and other abuses in the aluminum
market.'' Another Senator from Michigan has had a number of
hearings in his oversight committee. I have had a couple of
hearings in the Banking Committee on this issue of manipulation
in aluminum and oil tankers and electricity generation and
other things.
Chairman Gensler specifically cited CFTC's authority over
foreign boards of trade, but in an October letter and today's
testimony, you say that your authority there is limited.
My first question is: Who is right--Chairman Gensler or
you?
Mr. Massad. I agree with Chairman Gensler's statements. I
do not think mine are inconsistent, Senator. We do have
authority over fraud and manipulation. We also have authority
with respect to their FBOT status, but that is a different
status than our own, than for direct registrants. My comments
earlier were simply meant to underscore that we take this issue
very, very seriously. We are looking at it in a number of ways,
and we will continue to do so and continue to work on it. I
know it is a concern. I know it is a concern of yours with
respect to the queues that we are seeing in these aluminum
warehouses.
As to the issue of banks' ownership, also, as I have said
before, I think the issue of whether banks should even be in
some of these businesses is an important one for us to
consider. It is not under our jurisdiction, but I have always
said I would be happy to help the banking regulators--
Senator Brown. Good. Whatever is in your jurisdiction, time
really is of the essence here. The Levin report recently said
that Goldman's activity in aluminum--this is just narrowly
aluminum--``raises troubling issues involving conflicts of
interest, market distortions, and the potential to gain unfair
trading advantages.''
You can see that if there is a huge oil spill with billions
of dollars of liability, what that can do to the stability of
the financial markets if owned by one of the large banks. You
can see that even though they say there is a wall between the
trading desks and the information gleaned from their ownership
of energy markets, part of the energy markets, there may be a
wall, but somewhere at the top of that firm somebody knows
something--knows everything about both sides of that wall.
So the trading desk may be walled off from the ownership
decisions, but in the end they are not, and that causes a
clearly unfair market--clearly causes unfair market advantages
for a bank versus others in the real economy.
So I hope you will be as aggressive as you can be there.
Let me ask one more question, Madam Chair, if I could.
Chairwoman Stabenow. Sure.
Senator Brown. The need for CFTC's cross-border swaps
rules, clearly you were speaking to Senator Roberts at it a
minute ago, from Long Term Capital Management in 1998 to AIG to
JPMorgan's London whale just a couple years ago. Five of my
colleagues in 2013 joined me in warning that banks would ``de-
guarantee affiliates in order to opt out of CFTC rules.'' To no
one's surprise, they did just that. In September, you said you
were consulting with bank regulators on the risks that de-
guaranteeing would pose to our whole financial system.
Tell me what specifically you are doing to protect the U.S.
financial system and taxpayers from risks in the foreign
offices of U.S. banks. Will you make the results of this review
public?
Mr. Massad. Thank you for the question, Senator. We are
very concerned about this. Shortly after I got into office, I
asked our staff to look into this, examine it, ask the banks a
number of questions.
We got some answers from that. We have shared those with
the banking regulators, and I am happy to talk about that.
Basically a number of these banks have de-guaranteed a lot of
their swaps. I think the question, though, is: Is there still a
risk posed when you have an unguaranteed offshore affiliate
engaging in these transactions?
Now, it may comply with our rules, but because it is still
part of that overall banking enterprise, the bank holding
company, I think it is a question for us, for the prudential
regulators to think about. That is why I took the action of
sharing what we are doing with the banking regulators, and we
are engaging with them on that.
Senator Brown. Thank you.
Chairwoman Stabenow. Thank you very much.
Now we will move to Senator Boozman. Again, happy birthday.
Oh, excuse me. I had Senator--did you wish to defer?
Senator Boozman. Well, I think he was here first.
Senator Johanns. I think we walked in together.
Chairwoman Stabenow. Well, if you would like to defer to
Senator Johanns, that--this is the day of people deferring to
other people to speak. I apologize. On the list here, Senator
Boozman----
Senator Johanns. That is all right.
Chairwoman Stabenow. Senator Johanns.
Senator Johanns. I think it was a tie, actually.
Let me start off, Madam Chair, and offer a couple of
things. One is my appreciation for the way you have handled
this Committee.
I have seen you work the floor, if you will, and I could
observe my opinion was as valued as the opinion of anybody on
your side of the aisle. I think we all knew that, and we all
appreciated that immensely.
The second thing I would say is this is, I think, one of
those committees here in the Senate where you just leave your
party registration at the door. We worked to solve problems and
pass farm bills, do a lot of good things for the country, and
that is what has made this Committee so enjoyable.
I am going to miss it, and it is somehow appropriate that
my last Committee hearing as a United States Senator is in
Agriculture. I have always said that for me working on
agriculture, any day is a good day. So it is great to be here.
Mr. Chairman, I will offer an observation on capital, but I
really want to talk to you about position limits. The cross-
border issues, as you know, are real. I have been talking about
the cross-border issues since the idea of Dodd-Frank first came
about in my role as a member of the Banking Committee and my
role here.
My observation over the years is that capital tends to flow
to the areas of least resistance from a regulatory standpoint.
You know, I remember as a mayor when we were in competition
with the city across the State line, we would offer to fast-
track permits and do a whole bunch of things. That regulatory
atmosphere had a huge impact on the decision making. The same
way when I was Secretary of Agriculture, same way when I was
Governor of Nebraska.
So I just offer to you we cannot pass laws that bind
Singapore or London. We can ask for their cooperation. We can
plead for their cooperation. We can do other things. But at the
end of the day, I think in an atmosphere of overregulation, we
are always going to lose. That is just the unfortunate reality
we are dealing with. So I think it is incumbent upon you to
tell us when we are overdoing it, when we have gone too far.
Now, if I do not jump into position limits, we are not
going to get there, because we could have a huge conversation,
and I would welcome that, but maybe not in this Committee here.
Mr. Massad. I would be happy to try to address it briefly,
Senator. I share your concern that we have to look at this as a
global market, that capital is highly mobile. We also have our
responsibilities under the law to implement the reforms, and
Congress has made it very clear. They gave us deadlines to do
that, and that I think has created a situation where we moved
faster than other jurisdictions.
But I am very committed to trying to work this out, and I
think we are getting there. I view it as a glass half full. It
will take time. It is not going to happen overnight, but I
think we are making good progress. We have a new Commissioner
in Europe, Lord Hill, who has taken over. He and I are off to a
good start. I have had a lot of meetings.
I have been overseas three times on a number of these
issues and met with my international counterparts here. There
is work going on a lot of fronts to try to harmonize rules.
Senator Johanns. Let me shift to position limits before I
run out of time here. I appreciate the fact that you have the
Agricultural Advisory Committee up and running. Thank you for
that. I think that is important, very, very important.
One of the issues--and I think it was yesterday that you
had the group together. One of the issues raised probably by a
lot of industries, but I will focus specifically on the cattle
industry, is the whole issue of position limits. They need
liquidity in the marketplace. They need to be able to manage
their risk. They worry that the proposed rules are going to
damage their ability in the arena of managing risk. You have
heard all of this, I am sure.
Explain to us, if you would, where are they right and where
do you think they are missing the point? I have heard from both
Nebraska cattlemen and national cattlemen on this, and like I
said, I suspect you have, too. In fact, I have had copies of
the letters sent to your attention. Where are they right and
where are they wrong?
Mr. Massad. Thank you for the question, Senator. I think we
are very mindful of their comments, and as to where they are
right and where they are wrong, I guess I would answer in the
following way: Position limits are a very important tool in the
toolkit to address excessive speculation, but at the same time,
we have to make sure we allow bona fide hedging.
The question is: How do you draw the bright lines that
distinguish between true bona fide hedging by commercial
players versus what speculators might do? We do not have the
resources, we will never have the resources to look at facts
and circumstances of every transaction, to look at intent.
So the challenge for us is trying to write bright-line
rules in an area that is very complicated so that we allow what
is really legitimate hedging versus excessive speculation.
Senator Johanns. Madam Chair, thank you. I am out of time.
Chairwoman Stabenow. Thank you very much.
Senator Boozman? Oh, excuse me. You know what? Actually, I
was so intent on getting you back in order that I am missing my
side of the table, so I am going to retract that. I was trying
to get back to you, and I apologize because it is actually
Senator Casey's turn.
Senator Casey. Madam Chair, thanks very much, and I first
want to commend your work leading this Committee and your
efforts on an ongoing basis, as Senator Johanns noted, to be
collaborative on both sides of the aisle. We are grateful for
that and your team who made that possible. We are looking
forward to a new session of Congress under new leadership, but
we are certainly going to miss your leadership. We appreciate
that.
Mr. Chairman, I wanted to walk through maybe one
fundamental issue, but before that, I do want to touch on the
issue of resources. When I was the auditor general of my State,
my main job was to audit hundreds and hundreds of State
agencies, and we would often conduct financial audits which
were kind of routine, but it was a way to discharge the
responsibility to be a watchdog. We also did a lot of
performance audits where we looked at results and
effectiveness.
I was very critical of agencies across the board when they
misspent money, when they were not getting the job done, so I
think I have pretty good credentials on the ``spend taxpayer
dollars wisely'' concerns that people have. I do think, though,
that you need more resources. We were told this morning--and I
know this is by way of repetition, maybe--that the omnibus we
are considering now would fund CFTC at $250 million, we are
told, which would be $30 million below the President's request.
I am troubled, more than troubled by that. I am concerned about
that, especially in the context of what happened, the prelude
of the foundation of the Great Recession and what you and your
agency can do to prevent the next Great Recession, God forbid.
I believe resources are part of it, so I will be one of many
people arguing for the next number of months and years to give
you the resources you need.
One of the reasons you need resources is because of
enforcement. It is not something new but something that I know
has been a priority for you. I am told that in fiscal year 2014
CFTC imposed $3.3 billion in monetary sanctions, almost double
the previous record total from fiscal year 2013 of $1.7
billion. I just want to ask you, let us set aside the resource
question for now, important though it is: What are the factors
driving that increase in the monetary sanctions?
Mr. Massad. Well, it is really, Senator, a question or an
issue of the fact that there are a lot of things that we are
going after. Unfortunately, there is still a lot of fraud out
there. You know, a big part of it was the foreign exchange
benchmark case. We are continuing to see attempted manipulation
with respect to benchmarks, and it is so important that we
continue to address that. We addressed it previously with
respect to LIBOR. But this will be ongoing.
At the same time, it is compromised, that number is
compromised of a lot of smaller actions. We had a number of
cases with respect to precious metal frauds. We had a number
of--each year we have a number of Ponzi schemes that we go
after.
Again, the challenge for us is we simply do not have the
resources to go after all the things that we would like to go
after, and you are constantly making choices about whether you
even investigate something or how far you carry that
investigation.
Senator Casey. Well, I would hope that more of us would
be--even as we are advocates for greater resources in the
context of law enforcement, for police and other law
enforcement across the country, in the world of the markets, in
the world of making sure that folks do the right thing in that
context, we hope we can continue to provide the resources so
that you can be the cop on the beat in this world that we hope
you could be.
Lastly, I will just make a comment, and if you want to
follow up, you could, and you can do it more extensively in
writing. The efforts you have undertaken--I know you still have
a ways to go, but the efforts you have undertaken to focus on
some regulatory relief for end users, in our State, like a lot
of States here, that becomes important to folks in a whole
range of different industries, steel being one, often any
manufacturing-based industries. So we appreciate that effort.
I know it is difficult to manage when you have new
legislation, new regulations to be able to calibrate that, but
we are grateful for your efforts.
Mr. Massad. Yes, well, thank you, Senator, for that. I am
very committed to that. My focus is very much the following:
Our task is not simply to implement this regulatory framework
and bring the swaps market out of the shadows, continue to
oversee the futures and options markets, but to do so in a way
that allows these markets to thrive. That means making sure
that these markets continue to work effectively and efficiently
for end users. That is why we have tried to be very responsive
to their concerns.
Again, it does come back to resources. You know, we want to
be able to respond as quickly as possible and look into these
things and study them and then take the appropriate action. So
we are hopeful that we can do all we can in this area.
Senator Casey. Thank you. I appreciate it.
Thank you, Madam Chair.
Chairwoman Stabenow. Thank you very much.
Finally, Senator Boozman.
Senator Boozman. Thank you Madam Chair, and I want to echo
the comments of the rest of the Committee about enjoying
working with you and how you have always been very, very open,
always willing to listen, and really do your best to solve the
problems that we have. Also your staff, they have done a
tremendous job likewise working with our staff, working with
myself. So thank you very much.
Mr. Chairman, I also have concerns about the commercial end
users, and I know that you have had several questions in that
regard. In regard to agriculture, can you talk a little bit
about the Agricultural Advisory Committee, if that is going to
be a help in that regard of trying to sort some of these things
out?
Mr. Massad. Absolutely, Senator. Thank you for the
question. You know, I am sponsoring that committee because I
recognize the importance of the agricultural products in our
markets, and I think the committee is a very, very helpful way
for us to get input. All of our advisory committees are, and
let me just say that the other Commissioners I think are
equally committed to using the advisory committees to get good
input from market participants.
We had an excellent meeting yesterday. Not only did
Secretary Vilsack come and share his thoughts, but we had a
good discussion of some of the issues related to position
limits, to residual interest, and we will continue to do that
and continue to get input, not just through the committee but
separately in other meetings. I have made it very clear that my
door is open. I will try to meet with people as much as I can
to hear their concerns. We have acted on things. We acted on
the residual interest issue. We have acted on some reporting
and recordkeeping issues that I know were of concern to
agricultural interests. The margin rule exempts end users. We
will continue to take these sorts of actions.
Senator Boozman. Good. Very good.
In regard to the morale issue, I know that you feel like a
situation of maybe not getting the funding that you need. What
other areas are out there? What can the Committee help you with
in regard to that particular area?
Mr. Massad. I am sorry. To the funding?
Senator Boozman. To the morale issue. Funding is one thing,
but it goes beyond that. Again, what can we do to help?
Mr. Massad. I appreciate the concern. Let me say on the
morale issue I think there are probably a number of historical
reasons that have affected that. We recently had some feedback
on that was done from a survey done in April.
My view of it is the following: that we start from there,
we are going to address it. I think a lot of it is just making
sure that people understand the mission, they understand how
their work is connected to the mission, and they have
sufficient opportunity for input.
Obviously the funding issue has been a big one. The
sequestration and furloughs were important. But we will address
this. I am already seeing some changes.
I appreciate your offer in terms of the Committee's help.
Let me give that some thought, but certainly the fact that this
Committee does act, as a number of members have said, in a
bipartisan fashion and has shown great interest and support for
our issues, and obviously your support and increasing our
funding, all those things will help.
Senator Boozman. I was going to ask you about your
priorities, but you mentioned that right at the very top is the
cybersecurity issue.
Mr. Massad. Yes, absolutely.
Senator Boozman. That is such an important issue not only
for you but the rest of Government. I am almost thinking out
loud in asking the question, but do we do that independently?
Does your agency do that as an agency and somebody else in a
similar situation do that? How do we address this? Talking
about funding, there is a finite amount of money to go around.
How can we be efficient in solving this huge task that really
is the problem of the day?
Mr. Massad. That is an excellent question, Senator. I think
there is actually a lot of coordination going on among
Government agencies. I attended earlier this week a meeting
that Treasury Deputy Secretary Raskin holds periodically of a
number of the financial regulators to talk about cybersecurity.
There is a number of vehicles that have been set up to share
information, share ideas, coordinate action.
I am actively coordinating with the Federal Reserve on
this, given their interest. Governor Powell and I have met, and
our teams have met. Their staff has participated in some of our
reviews.
So I think we will continue to coordinate this, and I could
not agree with you more as to the importance of this issue. It
is clearly an issue that we have to be devoting a lot of
attention to.
Senator Boozman. Good. Thank you, Madam Chair.
Chairwoman Stabenow. Thank you very much.
Senator Donnelly?
Senator Donnelly. Thank you, Madam Chair. I also want to
say thank you for your leadership on the Committee, how
privileged I felt to be a part of this, how devoted you have
been to the ag community in my State and to the whole country,
and your staff as well. Thank you very, very much.
Mr. Chairman, good to see you again, sir. As you know, I
have had concerns about excessive speculation and its effect on
increasing prices for working families for various products.
The last time you were here, I asked about finalizing a good
position limits rule in a timely manner.
We recently extended the comment period, and I understand
that. I understand the need to get this right. But what I am
trying to understand is, Are we still committed to finalizing a
good position limits rule in a timely manner?
Mr. Massad. Absolutely, Senator. Thank you for the
question.
What we did on the comment period was simply the following:
We had the Agricultural Advisory Committee meeting. As we
talked to members about what they wanted to talk about, the
issue of deliverable supply came up, and so we decided that we
would have some conversation about that.
Simply as a matter of good Government practice--we were not
required to do this, but we felt that if that is going to be
discussed at the Agricultural Advisory Committee, then it is
only fair to open up the comment period on that part of the
rule, just on those issues. That will not slow us down. There
is a lot of other work----
Senator Donnelly. So we are making progress.
Mr. Massad. Absolutely. There is a lot of other work. This
is a very complicated rule. There are a lot of issues. We have
received a lot of input. But we are proceeding on multiple
tracks here.
Senator Donnelly. One other thing I wanted to mention is I
wanted to thank you for the CFTC's work to create a level
playing field between public and investor-owned utilities. The
efforts that have been made to make sure that we have a rule
that levels the playing field have been extraordinary helpful.
We will continue to work on the legislative side, but our
municipal utilities are now less likely to be exposed to
greater risks, less likely to be exposed to increased prices
which are passed on to our families. I just wanted to thank you
for your hard work on that.
Mr. Massad. Certainly.
Senator Donnelly. Thank you, Madam Chair.
Chairwoman Stabenow. Thank you very much.
Senator Thune?
Senator Thune. Thank you, Madam Chair, and thank you for
your leadership of this fine Committee and the hard work that
we have accomplished here in the last couple years. Hopefully
there will be some more to come, and we can get something done
on this next year.
But thank you for your leadership, and thank you and
Senator Cochran for having the hearing today as we kind of wrap
up this year's Congress and look at next year's priorities. I
think the Commodities Exchange Act reauthorization will be one
of many pieces of legislation that we are going to have to
consider.
I want to mention one area of concern which we have
discussed before on this Committee, and that has to do with
staff guidance letters that are not subject to the
Administrative Procedures Act and its mandatory cost-benefit
analysis requirements.
The letters have the same regulatory effect as rulemaking.
I also want to mention no-action letters, which has been
referred to earlier, which are used to amend or withdraw new
rules, and I would encourage you, Mr. Chairman, to take a more
measured and conventional approach to issuing regulatory
guidance.
Commodity futures trading continues to become increasingly
important to the agricultural community, especially in States
like my home State of South Dakota, with agriculture as its
number one industry, and because of currently lower commodity
prices, managing risk is even more important to our farmers and
ranchers, grain elevators, cooperatives, and suppliers who
utilize the trading tools under the jurisdiction of the CFTC to
better manage their risk.
I appreciate you being here today and hope you will
continue to put that appropriate focus on agriculture.
I wanted to mention your proposed rule excluding certain
legitimate hedging activities used by agricultural businesses
from qualifying as bona fide hedging. What is the CFTC doing to
ensure that those legitimately hedging their risk will qualify
for the exemption afforded to bona fide hedgers?
Mr. Massad. Well, thank you for the question, Senator. It
is a very important area. We have received a lot of comment on
the proposed rule, and particularly on the subject of bona fide
hedging, and we are taking that very seriously. We had a very
good roundtable earlier this summer with a number of industry
participants where we talked about this, and we recognize
hedging strategies are often very complex.
The challenge for us is, again, to try to write bright-line
rules that work, that distinguish between the bona fide
hedging, which we want to allow, and the preventing the
excessive speculation.
We are in a situation where we cannot look at people's
intent, we cannot look at particular transactions, so we have
to come up with that bright-line rule. We have asked industry
for suggestions in that regard so that we make sure the rule
does work to allow people to hedge commercial risk. It has to.
These markets are so fundamental. We recognize the importance
of that. I think all the Commissioners recognize the importance
of that.
Senator Thune. The CFTC and banking regulators recently
proposed margin rules that would take effect in December of
next year. I understand the deadline was set by a group of
international regulators sometime ago under the assumption that
the rules would be completed by now. I also understand that
these changes would force the industry and their end-user
clients to implement massive system changes which could take
years to develop.
Do you think this timing is realistic given that the rules
have not yet been finalized?
Mr. Massad. Well, thank you for the question. I think that,
first of all, the margin for uncleared swaps rule is extremely
important because, although we have mandated clearing of some
products, there will always be uncleared swaps, and that is why
we need a margin rule. I think it is important that we
implement it in a way that works. We do not want to disrupt the
market.
But I would say that most financial firms are already
taking margin for these uncleared swaps. We are now 5, 6 years
after the crisis, and a lot of them were taking margin even
before that. Many of them obviously have increased that.
We want, though, to come up with a good implementation
timetable. It has delayed implementation as it is written. It
generally does not apply to end users, commercial end users.
Our rules and the prudential regulators' rules exempt end
users. We want to do it in a way where we are coordinating
internationally because we do not want a situation of
regulatory arbitrage.
I hear the concern. We are working on it. But I think we
should try to get this rule in place as quickly as we can.
Senator Thune. Are any of your international counterparts
talking about perhaps a longer implementation period?
Mr. Massad. There is discussion currently that we are also
part of, and people are balancing, well would this really be
needed or not. We have received some comments from industry
saying a delay is needed. We will certainly look at that. I
think sometimes we have to look at these proposals for delay
with a good amount of skepticism. That is part of our job. But
we will certainly try to come up with a reasonable approach
here.
Senator Thune. Okay. Yesterday the first Agricultural
Advisory Committee meeting took place, and I am wondering if
you can share with the Committee what you see as the role of
that committee in making future regulatory decisions. Is it
going to be a committee that is created simply for symbolism
purposes or will you really look in a substantive way to that
committee for advice when it comes to making some of these
decisions, particularly with regard to agricultural
commodities?
Mr. Massad. Well, thank you for the question. I think it is
extremely important. It is a very good vehicle for us to get
input. We have about 40 members representing a number of
interests in the agricultural sector, whether it is producers
or the co-ops or financiers or others. We had a very good
meeting yesterday. I am committed to having a couple of
meetings a year.
We are also consulting with the members about the things
that they want to talk about and want to share with us.
So I think it will be extremely important to our efforts
together, but I think generally you have a Commission today,
four Commissioners who all are very pragmatic, who are all
listening to market participants' concerns as well as to this
Committee, and who are very committed to working together to
try to do the right thing.
Senator Thune. All right. Thank you, Mr. Chairman.
Thank you, Madam Chair.
Chairwoman Stabenow. Thank you very much.
Senator Gillibrand?
Senator Gillibrand. First, I want to thank you, Madam
Chairwoman, for your excellent chairmanship. You have done a
great job. It has been a privilege to serve on this Committee
with you, and I am grateful for all the hard work you did in
wielding the gavel, and I really enjoyed it.
Mr. Massad, I want to talk a little bit about two issues:
first, cyber; and, second, high-frequency trading.
So on cyber, nearly every week we learn of a data or
systems breach by cyber criminals. From Nasdaq to JPMorgan, it
is clear that our Nation's financial institutions are prime
targets for data and intellectual property theft.
One significant concern for the options market is that the
Commodity Futures Trading Commission's budget is so limited
that you cannot effectively test the cyber defenses of the
entities you oversee. While yesterday we saw that the CFTC
could get a 16-percent funding increase, I still believe this
is inadequate, and I understand that there may be restrictions
on this money.
Considering your budget crunch, how is the CFTC working
with market participants, both big and small, to address the
growing threat? What are the limits on your systems' safeguards
procedures of the entities you regulate? Second, are you seeing
the same obstacles in the financial sector with regards to
cyber incidents that other sectors are facing, whether the need
for capital improvements, better information sharing in the
industry, and with appropriate regulators or better training?
Mr. Massad. Well, thank you for the excellent question,
Senator. We are very focused on this issue. Resources are a
challenge. Let me try to address all of your concerns.
First of all, you have highlighted the need very well. This
is just a huge concern. We are seeing cyber risks obviously
posed by a number of different types of actors, whether it is
theft, whether it is cyber crimes committed in order to profit,
whether it is espionage, or whether it is disruption. They are
coming from a variety of types of players. So there is a need
to be extremely vigilant and active on this.
We, as you say, do not have the money to do independent
testing. We cannot possibly do that. You know, some of the big
banks are spending more on cybersecurity than our entire
budget. So what we are trying to do is do examinations that
look at is the institution sufficiently focused on this. We
look at things like: Is the board paying enough attention?
Is this rising to the board's attention, and is it rising
to the risk committee's attention?
What are the policies? But also are the policies actually
enforced? You know, a lot of times institutions have good
policies on the books, but they do not really enforce them.
Then when an incident does happen, is the institution
responding in a way that not only looks at the incident but at
potentially taking a broader look at whether the incident
suggests a need to shore up practices more generally?
That is sort of how we are going about it. We are
coordinating with other arms of the Federal Government on this.
As I mentioned earlier, there is a lot of coordination going on
cyber. But the resource challenge is a big one, and it worries
me.
Senator Gillibrand. Have you guys considered different
funding mechanisms like a user fee based on size of actor,
making sure it does not sap liquidity but given we have a
market that is 450 million trillions, I think there is capacity
there. Have you guys thought through that? Would you ever
recommend that to Congress?
Mr. Massad. It is a very good question. I would be happy to
work with you or members of this Committee on this issue. We, I
think, are one of the very few financial regulators that does
not have a separate fee. Presidents ever since, and including
Ronald Reagan, have suggested that fees be used. I think they
can be done in a way that works. Obviously we have to be
mindful of impact on market liquidity, but I think it is
possible. But it is a decision for the Congress. My desire,
quite frankly, is to increase the budget however we can.
Senator Gillibrand. Okay. So high-frequency trading poses a
dual risk: one, by creating a mechanism for bad actors to
manipulate the markets through disruptive practices such as
spoofing; and, two, by creating propensity to negatively affect
market stability. These risks are not confined to the U.S. As a
result, risks develop in foreign jurisdictions that have direct
impacts on our markets.
What role is the CFTC playing in conjunction with domestic
and international regulators in examining the
institutionalizing of best practices with the goal of avoiding
regulatory arbitrage? Two, as the CFTC works with these
different regulators, what are some of the obstacles you are
facing as it seeks to avoid the race to the bottom?
Mr. Massad. Thank you, Senator. We are looking at automated
trading and high-frequency trading both from a policy and
regulatory standpoint as well as from an enforcement
standpoint. On the enforcement side, just to note that quickly
we brought some actions with respect to spoofing and obtained
some penalties and remedial actions as a result. In fact, one
of our recent cases led to one of the first indictments of an
individual for spoofing.
On the regulatory and policy side, we are very focused on
this. We had a concept release where we asked for a lot of
input on a number of issues to look at market practice. It is
important to note that our markets are different than the cash
equity markets. We do not have the multiplicity of trading
platforms that the cash equity markets have, which is in many
people's minds one of the reasons that we have seen some of
these high-frequency trading issues.
But, nevertheless, automated trading is increasing in our
markets. It is a significant part of our markets, and so we are
looking at whether our institutions, the exchanges under our
supervision, have adequate policies in place. We recently had a
rule enforcement action against one of our exchanges on the
fact that we did not feel they were looking enough at their own
rules on spoofing and enforcing those rules. But we are also
looking at additional rule changes that we might propose to
address this issue.
So we will continue to be very focused on this and happy to
meet with you further on it and get your ideas.
Senator Gillibrand. Thank you, Mr. Chairman.
Chairwoman Stabenow. Thank you very much.
Senator Hoeven?
Senator Hoeven. Thanks, Madam Chairman. Thanks for your
leadership of this Committee and for your hard work and, of
course, all your work on the farm bill. It was greatly
appreciated. Also to our Ranking Member, Senator Cochran, thank
you as well. I have appreciated working very much with both of
you. Thank you.
Chairman, my first question is: You have proposed a new
margin rule that would take effect in December of next year.
The industry is saying that the changes called for in this new
margin rule could take years to implement, so talk about it. I
mean, are they going to be able to meet that implementation
requirement?
Mr. Massad. Thank you, Senator, for the question. We are
aware that some industry participants have said that, and we
will certainly evaluate those comments and work with other
regulators on the timetable here. The timetable as it is
written, as it is proposed, is phased in over 4 years.
Currently most large financial institutions are already
collecting variation margin, and so while some have said that
they cannot do this, we want to look at, well, why is that if
they are already doing it in part.
But we are certainly mindful of the need to implement a
rule in a way that does not unnecessarily disrupt the market,
and we are mindful of doing it in a way where we are
coordinating with other regulators. So I can assure you that we
will keep those concerns foremost in mind and try to work on a
good solution.
Senator Hoeven. On an interactive process to make it work.
Mr. Massad. Sure.
Senator Hoeven. So then how does the rule mitigate risk,
both systemic risk and product risk, and increase transparency?
Then at what cost to the end user?
Mr. Massad. Sure. A very good question, Senator. The way
the rule does that is the following: While we have mandated
clearing for some swaps that are standardized or clearable,
there will always be a lot of swaps that are not subject to
centralized clearing, that remain bilateral. That is what we
had in the crisis. We had this whole opaque network of
bilateral transactions, and what happened was when one
participant then had trouble, that risk could easily cascade
through the system because of the interconnections among
participants.
By mandating clearing, we have dealt with some of that. But
there will always be swaps that will not be cleared because
there is not enough liquidity in that particular product or
they might be new or for other reasons. For those swaps, what
this rule does is say you have to evaluate the mark-to-market
risk and take margin for that.
Now, a lot of big institutions will tell you they are
already doing that. They did not wait around for this rule in
many ways. The rule, though, formalizes the practice. We are
working with international regulators.
There is a set of international standards that we are all
trying to basically use to make sure the rules are the same.
One of those standards is that we exempt end users, commercial
end users, which is what we have done, and which is what the
prudential regulators have done as well.
Senator Hoeven. So by exempting those end users, you feel
that they are not picking up substantial costs for
implementation of the new rule.
Mr. Massad. That is correct.
Senator Hoeven. Do you feel that with this new rule you can
truly assess both systemic risk and product risk that is out
there at any given time. So you can monitor how it is working
in terms of the industry, the positions they are taking, the
products they are offering. So that if one of them goes down,
one, you can reasonably anticipate that, but it does not create
any kind of domino effect or you have some kind of firewall to
prevent that.
Mr. Massad. I guess what I would say, Senator, is this
particular rule requires the individual financial institutions
to take measures so that they are monitoring their risk. What
we are trying to do from a system wide standpoint, I would say
we are doing through our overall surveillance and our data
collection to try to look at systemic risk and where that might
be----
Senator Hoeven. Well, I should have said you in conjunction
with the other regulators because that was the problem before,
not truly understanding the ramifications of the new hybrid
products and the systemic risk created when one institution
went down because they did not have the proper protections in
place. So is all that being brought together in a way that I
guess is transparent so that you and the other regulators can
actually assess what is going on and communicate that to our
Committee and other elected officials to make sure that we do
not have a similar problem in the future?
Mr. Massad. Sure. A very good question. I think we are
making good progress on that. It is kind of like a big
infrastructure bill.
You do not get it done overnight. But a key piece of it is
really the collection of data on this market. We had no data on
this market at the time of the crisis, and now we are
collecting a lot of data on this market. But our ability to
collect that, to make sure it is standardized, to make sure
that we can analyze it and manipulate it is resource-driven in
part.
It is a challenge for us under the resources. It also
requires a lot of harmonization efforts. We are working very
hard to harmonize data collection standards. It also requires
making sure industry participants abide by their obligations to
give us good data in the first place.
So I would say the data challenge is in particular where we
are focused on that. We are working with other regulators on
that, and I think, again, we are making very good progress.
Senator Hoeven. Thank you.
Chairwoman Stabenow. Thank you very much.
Senator Klobuchar?
Senator Klobuchar. Thank you very much, Madam Chairman.
Thank you for these baskets, which I am sure you like. Have you
ever had a Committee hearing where you got a basket with beef
jerky?
Mr. Massad. I have not.
[Laughter.]
Senator Klobuchar. All right. Well, feel very welcome. You
can report back----
Mr. Massad. I hope it continues under Chairman Roberts.
[Laughter.]
Chairwoman Stabenow. That is a real question.
Senator Klobuchar. All right. So I was going to ask you
about cybersecurity, but I know my colleagues have--you have
gone into that in depth, obviously a serious concern, so I
thought I would switch over to a few things.
One you have just talked about, and that is the incredibly
important work the CFTC is doing, but also the careful way you
have to look at end users. I think our economy has a wide range
of businesses in Minnesota that are affected by actions of the
CFTC. We have farmers--and, by the way, many of them that were
hurt by some of the bad things that were happening with some of
the abuse of processes.
But then we also have energy producers, financial
institutions, and commercial end users like farmers and rural
energy co-ops use commodity markets as a form of insurance
against price fluctuations. I want to make sure that the CFTC
also takes into account how these commercial end users use
hedges and derivatives in their day-to-day business, which you
have acknowledged that you are doing.
At your nomination hearing, you committed to work with
them, and I am glad that you are doing that to ease that
burden, and I hope that as you review the rule on position
limits and bona fide hedges, you consider all the ways
commercial end users hedge real commercial risk and incorporate
that into the final rule.
First of all, my first question would be: Do you think that
the list of bona fide hedges should include the types of
transactions that are common in agriculture?
Mr. Massad. Thank you for the question, Senator. We
certainly want to end up with a rule that allows people to
engage in legitimate, bona fide hedging, and we have gotten a
number of comments about this. The challenge for us is writing
the bright-line rules because we cannot look at facts and
circumstances, we cannot look at the individual intent behind
particular transactions. We have to write rules that are
general.
So the challenge is to write that rule in a way that works
in an industry or multiple industries where hedging strategies
can often be very complex. Sometimes it is hard to distinguish
between what is really a bona fide hedge and what is maybe a
cover for excessive speculation.
Senator Klobuchar. Exactly.
Mr. Massad. But we are working on it.
Senator Klobuchar. I hope you will continue to work with
those that trade physical commodities as well----
Mr. Massad. Absolutely.
Senator Klobuchar. --to ensure that the exemption to the
position limit rule allows for their normal practices.
Mr. Massad. Absolutely.
Senator Klobuchar. I appreciate that.
The second area that I have talked with you about before is
speculation, and I have been concerned in the group of Senators
that see this as an issue most notably in the gas and oil
markets in the past.
Recently you noted in your testimony with Arcadia and
Parnon Energy that they had manipulated the crude oil market,
and I am concerned that end users who have a stake in the
underlying commodity, such as wheat growers, are not able to
conduct their business because of the rules put in place to
curb the abuses by speculators and financial institutions.
What steps can the CFTC take to ensure that the end users
are able to conduct their business and the market best reflect
the forces of supply and demand?
Mr. Massad. Right. Thank you for the question, Senator. You
know, one of the most important things we do is simply that the
surveillance that we do on the markets. It is great to have
rules such as the position limits rule, but one of our most
important jobs is to engage in ongoing surveillance.
Now, we have multiple markets to look at. In the futures
market alone, with respect to physical commodities alone, as
you know, there are lots of agricultural markets, lots of
energy and metals markets. Each of those is different.
Then we have the financial futures and options, and then we
have the swaps. So trying to engage in surveillance over all of
that is a real challenge, and we simply do not have the
resources to do that today. That should really be something
that this country funds adequately because it is such a good
investment in our markets; it is such a good investment in
making sure that end users not only can use these markets but
have confidence in their integrity. So that is a real challenge
for us today.
Senator Klobuchar. Okay. One last thing. It is the
Renewable Fuel Standard. You and I have talked about this in
the past. You understand in the Midwest and really all over the
country, generating $5 billion in economic output, it is 12,000
jobs in my State alone. We think it is good to have a mix of
fuel, and along with the Chairwoman, a number of us have been
advocating against some of the changes that have been suggested
last year by the administration. That is all now on hold.
But in the course of that, the Renewable Fuel Standard RINs
market, as you know, was extremely volatile, and then the
questions were raised about the impact of excessive speculation
in the market. Given the CFTC's experience with the commodities
market, what improvements could the CFTC recommend to improve
the price discovery transparency and liquidity in the RINs
market?
Mr. Massad. Well, Senator, we are happy to continue to
engage with you and others on this. I think we have a very good
relationship with EPA on these issues. Obviously they have the
primary responsibility on some of these matters. But we will
certainly be very mindful in terms of looking for fraud and
manipulation in these markets and taking action if we see----
Senator Klobuchar. Well, and if you have any
recommendations about how to minimize the volatility and the
manipulation that we saw in 2013 that we believe led to some of
what we will call sort of an overreaction to what happened--and
we believe outside forces may have caused that speculation, and
if you have any recommendations how to minimize it, we would
really appreciate it.
Mr. Massad. Okay.
Senator Klobuchar. Thank you.
Chairwoman Stabenow. Thank you very much, and I would echo
what Senator Klobuchar has said. It is very, very important.
This has been a very important hearing. We appreciate your
ongoing efforts. I could not agree more with you when we look
at the fact that, to be effective, to make sure that we have
safety and reliability in the U.S. markets, there has to be the
resources to provide the accountability and to make sure things
are functioning well for those who need actions from the
Commission.
So it is certainly something we will continue to focus on.
We encourage you to continue to move forward all of the issues
that you have to address, and we appreciate your steps, and
thank you for joining us.
Any additional questions for the record should be submitted
to the Committee clerk 5 business days from today, which is
5:00 p.m. on Wednesday, December 17th.
The meeting is adjourned.
Mr. Massad. Thank you.
[Whereupon, at 11:40 a.m., the Committee was adjourned.]
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A P P E N D I X
DECEMBER 10, 2014
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QUESTIONS AND ANSWERS
DECEMBER 10, 2014
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