    [Senate Hearing 114-150]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 114-150

                          REGULATORY ISSUES IMPACTING
                         END-USERS AND MARKET LIQUIDITY

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

                                    HEARING

                                   before the

                           COMMITTEE ON AGRICULTURE,
                            NUTRITION, AND FORESTRY

                              UNITED STATES SENATE

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  MAY 14, 2015

                                   __________

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               COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

                         PAT ROBERTS, Kansas, Chairman

    THAD COCHRAN, Mississippi            DEBBIE STABENOW, Michigan
    MITCH McCONNELL, Kentucky            PATRICK J. LEAHY, Vermont
    JOHN BOOZMAN, Arkansas               SHERROD BROWN, Ohio
    JOHN HOEVEN, North Dakota            AMY KLOBUCHAR, Minnesota
    DAVID PERDUE, Georgia                MICHAEL BENNET, Colorado
    JONI ERNST, Iowa                     KIRSTEN GILLIBRAND, New York
    THOM TILLIS, North Carolina          JOE DONNELLY, Indiana
    BEN SASSE, Nebraska                  HEIDI HEITKAMP, North Dakota
    CHARLES GRASSLEY, Iowa               ROBERT P. CASEY, Jr., Pennsylvania
    JOHN THUNE, South Dakota

                   Joel T. Leftwich, Majority Staff Director
                    Anne C. Hazlett, Majority Chief Counsel
                        Jessica L. Williams, Chief Clerk
                 Christopher J. Adamo, Minority Staff Director
                  Jonathan J. Cordone, Minority Chief Counsel

                                      (ii)

                                C O N T E N T S

                                  ----------
                                                                       Page

    Hearing(s):

    Regulatory Issues Impacting End-Users and Market Liquidity.......     1

                                  ----------

                             Thursday, May 14, 2015
                        STATEMENTS PRESENTED BY SENATORS

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

                                    Panel I

    Massad, Hon. Timothy, Chairman, Commodity Futures Trading
      Commission (CFTC), Washington, DC..............................     4

                                    Panel II

    Duffy, Terrence A., Executive Chairman & President, CME Group,
      Chicago, IL....................................................    23
    Barber, Bruce, General Manager, Oilseed Risk Management, Archer
      Daniels Midland Co., (ADM), Forsyth, IL, Testifying on behalf
      of the Commodity Markets Council (CMC).........................    24
    Walker, Jeffrey L., Senior Vice President & Chief Risk Officer,
      Alliance for Cooperative Energy Services (ACES), Carmel, IN....    26
    Bopp, Michael, Partner, Gibson, Dunn & Crutcher, LLP, Washington,
      DC, Testifying on behalf of the Coalition for Derivatives End-
      Users..........................................................    27
    Cota, Sean O., Co-Founder, Commodity Markets Oversight Coalition,
      Bellows Falls, VT..............................................    29
                                  ----------

                                    APPENDIX

    Prepared Statements:
        Barber, Bruce................................................    40
        Bopp, Michael................................................    53
        Cota, Sean O.................................................    58
        Duffy, Terrence A............................................    67
        Massad, Hon. Timothy.........................................    74
        Walker, Jeffrey L............................................    95
    Document(s) Submitted for the Record:
    Roberts, Hon. Pat:
        The Growth Consequences of Dodd-Frank........................   106
    Bopp, Michael:
        Centralized Treasury Units (CTUs)............................   110
    Cota, Sean O.:
        Commodity Markets Oversight Coalition an Alliance of
          Commodity Derivatives End-Users and Consumers..............   111
    Question and Answer:
    Barber, Bruce:
        Written response to questions from Hon. John Thune...........   114
    Cota, Sean O.:
        Written response to questions from Hon. John Thune...........   115
    Duffy, Terrence A.:
        Written response to questions from Hon. John Thune...........   117
    Massad, Hon. Timothy:
        Written response to questions from Hon. Pat Roberts..........   119
        Written response to questions from Hon. Debbie Stabenow......   122
        Written response to questions from Hon. Charles Grassley.....   125
        Written response to questions from Hon. Heidi Heitkamp.......   128
        Written response to questions from Hon. Amy Klobuchar........   130
        Written response to questions from Hon. Ben Sasse............   131
        Written response to questions from Hon. John Thune...........   132

                          REGULATORY ISSUES IMPACTING
                         END-USERS AND MARKET LIQUIDITY

                                  ----------

                             Thursday, May 14, 2015

                                  United States Senate,
             Committee on Agriculture, Nutrition, and Forestry,
                                                         Washington, DC
        The committee met, pursuant to notice, at 10:05 a.m., in
    room 106, Dirksen Senate Office Building, Hon. Pat Roberts,
    Chairman of the committee, presiding. Present or submitting a
    statement: Senators Roberts, Boozman, Hoeven, Perdue, Grassley,
    Thune, Stabenow, Brown, Klobuchar, Bennet, Heitkamp, and Casey.

     STATEMENT OF HON. PAT ROBERTS, U.S. SENATOR FROM THE STATE OF
    KANSAS, CHAIRMAN, U.S. COMMITTEE ON AGRICULTURE, NUTRITION, AND
                                FORESTRY

        Chairman Roberts. Good morning. I call this meeting of the
    Senate Committee on Agriculture, Nutrition, and Forestry to
    order.
        Welcome to our first hearing related to the Commodity
    Futures Trading Commission, the CFTC.
        July marks the five-year anniversary of passage of the
    Dodd-Frank Act. Not too long after, this committee began
    reviewing its impact on farmers and ranchers and end-users. We
    have had several hearings with numerous on-the-ground
    witnesses, and to nobody's surprise, have discovered that Dodd-
    Frank in its implementation placed many burdens on our end-
    users, our farmers and our ranchers, and yet the Congress has
    not sufficiently acted to address these hardships.
        As a refresher for us all, the term ``end-user'' refers to
    those participants who use derivatives to hedge the commercial
    risks associated with their normal operations, such as a grain
    company buying a farmer's wheat, or an electric cooperative
    providing power to rural homes. End-users offset their normal
    operational risk by engaging in derivatives transactions.
        They did not cause the 2008 financial crisis, nor were they
    ever blamed for contributing to it. Because of this, Congress
    did not intend for them to be subject to Title VII of Dodd-
    Frank. However, these end-users have been captured by many
    rules and regulations stemming from the regulatory
    implementation of Dodd-Frank.
        So, today, we will continue our focus on regulatory issues
    impacting end-users and market liquidity. We will discuss the
    concerns of and increased regulatory burdens on the end-user
    community over the last five years. This hearing will help
    build the record for what Congress should address in
    legislation and what are overdue in accomplishing, that is,
    reauthorizing the CFTC, which is our main goal as of this
    morning.
        CFTC reauthorization is a priority. I intend to work with
    Senator Stabenow and the members of this committee to come up
    with a bill that addresses our end-user-related concerns and
    fulfills our responsibility of reauthorizing the Commission. We
    need end-users and those who provide the platform for them to
    manage their risk to help us craft an appropriate pathway
    forward that protects the market from manipulation while not
    stifling commerce. I intend to keep working on legislation that
    eases the burdens on those who provide the crucial services our
    farmers and ranchers need to effectively operate in our fast-
    moving economy.
        In that spirit, I, along with Senators Perdue and Cochran,
    have introduced a bill that eases the regulatory requirements
    of certain transactions executed by centralized treasury units
    that manage the risk of end-users and its affiliates. This bill
    is based on bipartisan legislation offered in previous sessions
    and we hope it will be part of a bipartisan reauthorization
    package. The committee's reauthorization process is the
    appropriate vehicle to address the regulatory concerns of our
    end-users, again, our farmers and ranchers.
        Another pertinent topic under review today is the fear of
    losing U.S. market liquidity. Many participants are concerned
    with the current and future state of market liquidity and what
    that means for U.S. competitiveness compared to foreign
    markets. For example, increased costs of clearing, lack of on-
    exchange swaps participation, future commission merchant
    consolidation or concentration, lack of mutual regulatory
    recognition by foreign governments--I could read that three
    times--and more liquidity moving to foreign jurisdictions are
    all causes of concern. We must find solutions so that our U.S.
    markets remain transparent, remain competitive, and remain
    resilient.
        I truly appreciate our witness being here today. CFTC
    Chairman Massad will testify on our first panel. Mr. Chairman,
    thank you so much for taking time out of your valuable schedule
    to come and be with us.
        Since becoming Chairman, he has been busy addressing many
    end-user-related concerns. I encourage the Chairman to continue
    his positive efforts and to keep up the good work and to make
    sure that our U.S. markets remain the most competitive in the
    world.
        I also look forward to hearing from all of our witnesses on
    our second panel. The committee appreciates you giving us your
    perspective on current regulatory issues and market liquidity.
        I now turn to my colleague, Ranking Member Stabenow, for
    any opening remarks that she may have.

    STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE
                              OF MICHIGAN

        Senator Stabenow. Well, thank you, Mr. Chairman, for
    holding this very important hearing. We both share a desire to
    support end-users and to allow the system to be able to work in
    managing risk.
        Thank you Chairman Massad and the end-user representatives
    that are going to be testifying today. We look forward--as
    representatives of our nation's growers and manufacturers and
    producers, it is very important that we hear what is working
    and what is not working.
        A little history. The Commodity Futures Trading Commission
    was established in October of 1974 when a great Michigan
    statesman, President Gerald Ford, signed the Commodity Futures
    Trade Commission Act into law. As the Commission celebrates its
    40th anniversary this year, it is important to remember how we
    got where we are in the regulation of futures trading and
    consider what must be done to ensure the safety and soundness
    of this important market moving forward.
        In 1922, the USDA established an internal department, the
    Grain Futures Administration, to administer the Grain Futures
    Act. It is important that the committee reflect on this fact, I
    think, because the CFTC traces its history to a small agency
    within the Department of Agriculture, and for good reason.
    Before then, regulated futures were very much controlled by
    farmers and producers who used futures contracts to protect
    their harvest against unexpected price fluctuations and weather
    conditions. But, we are far removed from those simpler days of
    agricultural futures, and that fact is evident when we look at
    the group of end-users with us today.
        Every member of the Agriculture Committee takes great pride
    in supporting our nation's farmers and ranchers, pride in
    getting a farm bill done together, and having a committee that
    works together in a bipartisan way. This responsibility and
    priority will never be in doubt.
        It is also important, I believe, that it is time that this
    committee think beyond the CFTC's roots in the agency that
    President Ford helped create in 1974 to replace what he
    believed was an inadequate regulatory system for the futures
    market.
        The CFTC has become the premier global regulator, and it is
    important that we acknowledge this reality by providing the
    agency with the tools and the resources it needs to carry out
    very important responsibilities. As our country and economy
    continues to recover from the 2008 financial crisis, we must be
    committed to policies that protect taxpayers from risky
    financial practices that got us into the crisis in the first
    place. Rather than trying to keep pace with the evolving
    markets, I believe we must strive to be ahead of them. There is
    too much at stake. We cannot afford another crisis that costs
    the loss of even one job, let alone eight million.
        Recent CFTC enforcement actions demonstrate this need. Both
    domestically and internationally, the CFTC is the cop on the
    beat. The enforcement cases show that bad actors do still exist
    and will, as they have for many years, and they seek regulatory
    gaps that allow for the manipulation of market prices that
    affect everything from the bread on our shelves to the gasoline
    in our cars. So, we need the CFTC. We need the CFTC to be
    adequately supported and funded and have the tools it needs,
    and we need to make sure it is focused in the right direction
    on where the risk is.
        As we move forward toward reauthorization, I look forward
    to working with Chairman Roberts and members on the committee,
    as we always do, in a bipartisan way, to ensure the CFTC is
    equipped with the tools it needs to foster open, transparent,
    and competitive markets that our end-users feel confident that
    they can use, and that is going to allow our end-users to
    manage their commercial risk in a safe, reliable way.
        I look forward to the hearing. Thank you, Mr. Chairman.
        Chairman Roberts. Thank you, Senator.
        Welcome to our first panelist before the committee this
    morning, the Honorable Tim Massad, Chairman of the Commodity
    Futures Trading Commission. The Chairman was sworn in on June
    5, 2014, after being confirmed by the United States Senate, as
    both Chairman and Commissioner of the CFTC. Previously, Mr.
    Massad was nominated by President Obama and confirmed as the
    Assistant Secretary for Financial Stability at the U.S.
    Department of the Treasury. I am looking forward to learning
    about the CFTC's progress on regulatory issues impacting end-
    users and market liquidity.
        Welcome, Mr. Chairman. Please proceed.

      STATEMENT OF HONORABLE TIMOTHY MASSAD, CHAIRMAN, COMMODITY
               FUTURES TRADING COMMISSION, WASHINGTON, DC

        Mr. Massad. Thank you, Chairman Roberts, Ranking Member
    Stabenow, and members of the committee. I appreciate the
    opportunity to testify today regarding the work of the CFTC and
    I am pleased to be here on behalf of the Commission.
        Let me begin by thanking our staff for their hard work and
    dedication, and I also want to thank my fellow Commissioners
    for their efforts.
        You have invited me to discuss the impact of the CFTC's
    work on end-users and market liquidity. The topic goes to the
    core of our mission. The derivatives markets the CFTC oversees
    are profoundly important to our economy. These markets shape
    the prices we all pay for food, energy, and other basic needs.
    They enable businesses of all kinds to manage risk, whether it
    is a farmer locking in the price for his crops, a utility
    managing its fuel cost, or an exporter hedging foreign currency
    risk. As the primary regulator of these markets, we should
    constantly ask ourselves, how well are these markets serving
    the needs of the many businesses that depend on them?
        We also saw in the global financial crisis that the over-
    the-counter swaps market could generate excessive risks, risks
    that were not seen nor well understood and that helped to bring
    our financial system to the brink of collapse. Mr. Chairman, as
    you noted, commercial end-users were not responsible for those
    risks, but they and the American people generally paid a heavy
    price as a consequence of that crisis, and Congress, therefore,
    expanded our responsibility in order to bring oversight and
    transparency to the swaps market.
        So, our job today is to fulfill those new responsibilities
    while still making sure that these markets serve the needs of
    commercial end users. In carrying out that work, we must also
    recognize how the traditional markets we have overseen have
    grown dramatically in size, complexity, and technological
    sophistication. The CFTC oversees markets in over 40 physical
    commodities in addition to a wide range of financial futures
    and options products based on interest rates, equities, and
    currencies. There are over 4,000 actively traded futures and
    options contracts and thousands more subject to our oversight
    when all tenders and associated options are included.
        The number of actively traded contracts has doubled since
    Dodd-Frank was enacted and increased six times over the last
    ten years. The amount of customer funds that must be protected
    has increased nearly 50 percent since 2010. Today, not only is
    almost all trading electronic, but in many products, a majority
    of trading is conducted through highly sophisticated automated
    programs. This is true not just for financial futures, but also
    for agricultural and energy commodities. The changes in our
    marketplace do not alter our mission, but they make the task of
    fulfilling that mission more challenging.
        I believe all four of us on the Commission today are
    committed to making sure these markets serve commercial end
    users effectively and efficiently. To that end, we have sought
    to make sure that our rules do not impose undue burdens or
    unintended consequences for these participants. We have taken
    several actions over the last year, including the following.
        We have addressed industry concerns regarding contracts
    with embedded volumetric optionality. We recently proposed
    amending our rules regarding trade options to eliminate
    unnecessary reporting requirements. We made sure that
    commercial firms can take advantage of the statutory exemptions
    to the requirements for mandatory clearing and trading of swaps
    when they book transactions through Treasury affiliates. We
    made it clear that new rules on margin for uncleared swaps
    would not apply to commercial end-users.
        We have addressed end-user concerns in a variety of other
    areas, as well, such as reporting and recordkeeping
    obligations, the posting of collateral with clearing members,
    the ability of local energy companies to access the energy
    swaps market, and the ability of firms to hedge in highly
    illiquid markets. We will continue to engage with market
    participants to make sure our regulatory framework is working
    for end-users and protecting the public.
        We are also working in many other areas so that these
    markets have sufficient liquidity and work well for commercial
    firms. In the interest of time, I will just briefly note them
    here, but I would be happy to discuss them with you.
        Just last week, I returned from Brussels, where I met with
    many European officials on cross-border issues. We are working
    to harmonize our rules with those of other countries as much as
    possible and seeking to make sure American firms are not
    disadvantaged in the global marketplace.
        We are making changes to the swap trading rules to enhance
    trading of swaps and to attract participation and liquidity.
        We are working to make sure clearinghouses are resilient,
    and we are focused on the costs of clearing and trading,
    especially for smaller participants.
        We are focused on cybersecurity, perhaps the number one
    risk to financial stability today.
        We are engaged in robust enforcement and surveillance
    efforts so that we do all we can to deter fraud and
    manipulation and promote integrity in our markets. Since 2012,
    the Commission has imposed over $4 billion in penalties against
    13 large banks and brokers due to manipulation of key global
    benchmarks. Already in fiscal year 2015, the agency has imposed
    $2.5 billion in sanctions, an amount ten times our current
    budget. These fines and penalties go directly to the U.S.
    Treasury and are not available to fund our budget.
        The United States has the best derivatives markets in the
    world and we are determined to do all we can so that they
    continue to thrive and serve the needs of the businesses that
    depend on them. I look forward to working with you toward that
    goal.
        Thank you again for inviting me and I look forward to your
    questions.
        [The prepared statement of Mr. Massad can be found on page
    74 in the appendix.]
        Chairman Roberts. Well, thank you, Mr. Chairman. We
    appreciate your testimony and, again, for taking the time to
    join us today.
        I know that you have spent a lot of time addressing end-
    user issues since becoming Chairman. I thank you for that.
    However, end-users are not, at least with the contact with many
    members on this committee, are not entirely happy with the
    CFTC's proposed changes to the decades' old bona fide hedging
    definition. If the final definition of a bona fide hedge is too
    restrictive, how will end-users be able to appropriately manage
    their risk if they cannot get an exemption from position
    limits? Anticipatory hedging, as you know, sir, is crucial to
    managing an end-user's risk. We encourage the CFTC to treat
    anticipatory hedging consistently with the original intent of
    Congress. Would you care to comment?
        Mr. Massad. Certainly, Senator. Thank you for the question.
    We are very committed to making sure that a final position
    limits rule provides for adequate bona fide hedging. That is
    critical, and it is also Congress' direction to us. We have
    spent a lot of time looking at this issue and talking with
    industry participants and getting a lot of comment. I have done
    this as Chair of the Agricultural Advisory Committee, where we
    committed a special session of it. We have done it through our
    Energy and Environmental Markets Committee. We have had a
    special roundtable on it. We have gotten many, many comment
    letters that we are reviewing, and we are taking our time to
    really digest all that input so that we get this rule right.
        It is a very complicated rule. Anticipatory hedging is part
    of that. The process for how you get exceptions, even insofar
    as we will have specific exceptions in the rule, or specific
    provisions in the rule for bona fide hedging, there is also a
    process called non-enumerated exemptions and we are looking at
    that, trying to make sure that will be an efficient process.
        So, I am very committed to making sure that we end up in a
    place where market participants can engage in bona fide
    hedging. It is critical.
        Chairman Roberts. Do you have a time frame?
        Mr. Massad. Not precisely, Mr. Chairman. I want to make
    sure that we get this right and we are going to take our time
    to do that.
        Chairman Roberts. Well, we want you to get it right, and if
    you will please work with us, we would appreciate that very
    much.
        For decades, the Commodity Exchange Act and the CFTC
    regulations have required that customer margin posted for
    cleared derivatives must remain segregated from the bank-
    affiliated clearing member's own funds and that such margins
    should be treated as belonging to the customer. My question is,
    why do you believe the banking regulators are now assuming that
    this segregated customer margin can be used by the bank as
    leverage, which seems to contradict CFTC requirements? Did the
    banking regulators consult with the CFTC prior to finalizing
    these regulations? Can you give the committee a status update
    on your latest interactions with the banking regulators?
        Mr. Massad. Thank you for the question, Mr. Chairman. I am
    very concerned about the issues you have raised and I have
    expressed that concern both to the bank regulators, the heads
    of all the agencies, as well as publicly. We have got to get
    this right.
        I understand their objective, which is to have a leverage
    ratio as a backstop to risk weighting that, basically, does not
    have exceptions to it. But, nevertheless, as you point out,
    customer margin, cash margin, is segregated. I think we need to
    take that into account, particularly because we have made it a
    policy to encourage clearing here. So, we must make sure we do
    not have a rule that is cutting against that.
        We are engaged in dialogue with the regulators on this. I
    cannot say for sure where that will go, but we are very focused
    on this and believe we need to make sure we balance these
    objectives.
        Chairman Roberts. I appreciate that. Please keep in touch.
        Turning now to international regulatory harmonization, can
    you please elaborate on recent efforts to ensure our markets
    remain competitive and liquid. You have just come back from a
    trip discussing that. Furthermore, how has Dodd-Frank impeded
    data sharing among the various jurisdictions? Is there a way
    for Congress to revisit the Act and address this issue?
        Mr. Massad. Well, thank you for the question, Mr. Chairman.
    Let me address all those parts of it.
        First of all, I did just come back from Brussels, where I
    was focused on discussions with European officials on
    clearinghouse recognition. They still have not recognized our
    clearinghouses, which means that unless and until they do that,
    there is a possibility that European firms would not be able to
    transact business.
        There have been a couple of issues in that discussion. One
    was they asked us to look at our framework insofar as there are
    certain instances where our rules apply to their clearinghouses
    and they asked us to develop a framework of substituted
    compliance, which we agreed to do. We have basically agreed on
    that and we are prepared to offer that, assuming we settle the
    other issues.
        However, they have also raised concerns with our margin--
    what we call our margin methodologies, the process of how we
    collect--how we determine how much margin to collect from
    customers. Now, they did that because they focused on one
    particular aspect of the rules instead of looking at the whole
    rule set, and we actually have done a lot of analysis, which I
    have explained to them when I was over there, and there is
    actually my speech and a lot of diagrams about this posted on
    our website, that explain that, actually, our system is
    stronger than theirs. We actually have a much better system, in
    our minds, and I believe our methodology here and our systems
    overall for risk mitigation are the gold standard in the world.
        So, I think we have made some progress in educating them
    about those issues and we have agreed on a path forward in
    terms of analyzing this, because they wanted us to, basically,
    collect more margin from customers, which would have hurt
    American competitiveness, hurt liquidity, hurt smaller
    participants in particular, and not really contributed to the
    overall stability of the system. So, that is where we are on
    that.
        There is a lot of other work going on in other areas across
    border harmonization. You asked about the reporting issue. We
    are working on that. There is quite a bit of work going on
    there to harmonize standards, and I think we are making very
    good progress there.
        In other areas, in trading, for example, in the trading
    rules, it is difficult there because Congress mandated us to do
    a rule. The agency was required to do it within a year. The
    agency published those rules on trading, but no other
    jurisdictions really have. So, when you have a global market
    and one jurisdiction creates trading rules but no one else
    does, it is kind of like the sound of one hand clapping. I
    mean, there is nothing for us to harmonize to yet. So, we are
    looking at what we think they are going to do and we are
    prepared to try to work to make sure we harmonize those rules,
    as well.
        So, there is a lot going on in cross-border. Another thing
    that is going on is on the rule for margin for uncleared swaps,
    not what we clear, but what is uncleared. I have been very
    committed to trying to get those rules as similar as possible
    from the get-go, so our staff has been working with staff in
    Europe and Japan on that.
        I hope I answered all the parts of your question.
        Chairman Roberts. Senator Stabenow.
        Senator Stabenow. Thank you, Mr. Chairman, and thank you
    again, Chairman Massad, for all of your work, and you and I
    have talked about the issues you just raised and I appreciate
    your focus on that.
        Since you were sworn in last June, you prioritized end-user
    relief, and I appreciate that very much. You mentioned some of
    the issues in your statement. In your opinion, have the
    affected end-user groups been satisfied with what the
    Commission has done to this point, and I am wondering if you
    are still hearing from them on the actions that you have
    already put in place in terms of rules or----
        Mr. Massad. Thank you for the question----
        Senator Stabenow. --think you have resolved some of those
    issues.
        Mr. Massad. Yes. I think we have, Senator. I think they
    have been very pleased by a number of the actions we have
    taken. I am sure there are still some areas where they would
    like to see us take further action and we are happy to engage
    with them on those things.
        Markets change. Markets evolve. That is why I think it is
    important for us to always be listening to market participants,
    but also to have the flexibility to try to respond quickly as
    we identify concerns. So, I think we have made tremendous
    progress here, but I am very committed to continuing to engage
    with industry on it.
        Senator Stabenow. One of the other issues that has come up
    is how quickly can things change. So, you have done a number of
    things that are very important. We appreciate the focus and the
    actions that you have taken, but can those be easily changed or
    can end-users count on the rules that have been put in place?
        Mr. Massad. Oh, absolutely. I mean, most of what we have
    done has been through the rulemaking process, and to change
    that, you must go through the rulemaking process.
        Senator Stabenow. That is not a short process.
        Mr. Massad. No, it is not a short process, and it involves
    notice and comment and there is opportunity for public input.
        Senator Stabenow. Thank you.
        I would like to talk for a minute about the current civil
    penalty authority that you have as we move forward with
    reauthorization. Does the current authority produce enough of a
    deterrent for bad actors, in your judgment, or given the stakes
    involved, is the current penalty structure really just viewed
    as the price of doing business? Secondly, that leads to should
    we be increasing penalties for first-time violators or repeat
    offenders as we look at reauthorization?
        Mr. Massad. Very good questions, Senator. Yes, I think we
    should. The current penalty structure for most things is
    $140,000 for a violation. Now, for certain types of things--
    manipulation--it is higher. But, $140,000 is just not
    appropriate, given the size, scale, complexity of these
    markets. We need to have a penalty regime that serves as an
    adequate deterrent. You can look at increasing those numbers.
    You can look at basing them on the loss that is caused by the
    violation, or the gain. You can also do formulas based on
    triple the gain or triple the loss, that sort of thing. But, I
    think we need to modernize those penalties, given the growth in
    complexity of these markets.
        Senator Stabenow. Thank you.
        You and I spoke several times in the past year about
    clearinghouses----
        Mr. Massad. Yes.
        Senator Stabenow. --both from a risk standpoint as well as
    a regulatory standpoint, and back to your trip to Brussels last
    week, trying to find a solution with our European counterparts
    on clearinghouse recognition, can you speak to some of the
    other outstanding issues that are yet to be resolved and when
    you expect an agreement, and let me just add further that from
    the risk angle, Dodd-Frank resulted in the concentration of
    significant amount of clearinghouse risk and I am looking
    forward to working with you around this, but as much as
    clearinghouses have brought a great deal of safety and
    transparency to what was a shadow market, it is also important
    that Congress and regulators make sure we are not creating a
    new risk environment that would lead to another financial
    crisis as a result of concentration. So, could you speak a
    little bit more to those issues.
        Mr. Massad. Sure. So, the focus of the conversation is
    about these margin methodology issues, the methodologies we use
    to determine how much margin is collected from customers as
    well as from the clearing members themselves and then posted to
    the clearinghouse versus how they do it. There are differences
    in how each regime works. But, as I say, we went through some
    analysis, because they felt at first their system was stronger
    than ours, and we actually did a lot of analysis to show that
    our system was collecting--on the customer side, was collecting
    and posting to the clearinghouse more. It was not costing the
    customers more, but it was, effectively, because we do what is
    called gross posting, you were making sure the clearinghouse
    was better protected.
        So, there are still a lot of little issues in that we are
    looking at, but hopefully, we have limited it to that set of
    issues, how margin is collected by the house members, meaning
    the clearing members themselves, how much they have to post,
    and how you treat, for example, house affiliates. So, these are
    pretty technical issues and the issue really goes to how much
    can we minimize differences in our two regimes to avoid any
    issue of regulatory arbitrage.
        Senator Stabenow. Thank you, Mr. Chairman.
        Chairman Roberts. Senator Perdue.
        Senator Perdue. Thank you, Mr. Chairman, and thank you, Mr.
    Massad.
        First of all, I have to tell you, I am one of your biggest
    fans. I really appreciate what you are trying to do right now.
    You know, in my state, we have got a lot of end-users and they
    have been telling me over the last two years some of the
    draconian overreaches of the last few years of the CFTC. I
    realize what you are trying to do is find a balance, and I
    welcome that. I look forward to working with you to take care
    of some of these regulatory excesses.
        But, I have to put in perspective my question. I have a
    question on end-user here I want to get to, but it seems to me
    that we have had a series of situations in the United States
    history, in the last 50 years, especially, where we have an
    economy and people, players in the economy, and we get a
    situation that causes a crisis, and then we have a draconian
    overreach in Washington. We saw it with Sarbanes-Oxley. We see
    it with Dodd-Frank. Now, we are trying to pull back and find a
    balance again in your area, and I applaud that.
        I am a little troubled that the measures of success are the
    amount of fines--I have to say that personally--but I hope that
    we will also get to a point where we talk about we get normal
    end-users back to a normal life of doing business that were no
    part of the draconian things that happened in 2008 and 2009.
        I have a question about the end-user definition. If you
    look up in Dodd-Frank, the Act itself, you will not find any
    definition. The closest you find is the end-user clearing
    exception, I believe. The CFTC's regulations refer to the end-
    user clearing exception provision in Dodd-Frank to identify
    end-users.
        The problem with that is, it does not include everybody. It
    excludes dozens, maybe hundreds of end-user entities that use
    CTUs. You have provided a ``no action'' relief to end-users,
    and that is welcome. That is very much appreciated, and that is
    why I am speaking to that. It seems to me that you are trying
    to find a balance here to take care of the bad actors, but also
    not wrap up the bona fide people who are trying to use it
    properly. That is very much appreciated.
        But, does ``no action'' relief really fix the underlying
    problem? Do we need to do something more statutorily? What
    really should be done to fix this thing permanently, in your
    opinion?
        Mr. Massad. I think ``no action'' relief is a very
    important tool in our tool kit and I think we have used it
    appropriately. But, we are also looking at this issue in other
    ways. For example, Senator, with respect to the rules on margin
    for uncleared swaps, we are making sure that does not--that
    requirement is not imposed on commercial end-user firms, which
    is Congress's intent. We work with the bank regulators, because
    we are supposed to harmonize our rules with theirs, to make
    sure that was the case. We are looking at the consequences to
    end-users on some of our reporting requirements and lessening
    reporting requirements in certain areas, and again, doing that
    through rulemaking.
        So, I would be happy to visit with you further on
    particular concerns, but I think we are very focused on this
    issue and we are very focused on making sure that the regime we
    are trying to put in place here, which I think is a very good
    one in terms of bringing transparency and oversight to the
    swaps market, should, at the end of the day, make this market
    better for end-users. It should not burden them with
    inappropriate burdens and costs.
        Senator Perdue. So, for future Chairmen of the CFTC, you
    think the current language is adequate to protect those end-
    users?
        Mr. Massad. Well, I would be happy to visit. If you are
    talking about particular provisions, I am not quite sure which
    provisions you are talking about, so I would be happy to visit
    with you on that.
        Senator Perdue. That would be great.
        Thank you, Mr. Chairman. Thank you.
        Chairman Roberts. Senator Heitkamp.
        Senator Heitkamp. Thank you, Mr. Chairman, and thank you,
    Ranking Member Stabenow, for the chance to have a few questions
    about an issue that a lot of people would not think the small
    state of North Dakota would be concerned about end-users. But
    my rural electric co-ops and my farmers every day use this as a
    risk management tool, and having appropriate end-user
    provisions is absolutely critical to that tool that is
    essential to the success of their organizations. I just want to
    applaud you for listening. I think that we have done some good
    work in educating who end-users are and what they need to do.
        But, I think there are also some outstanding issues
    relative to end-users that I just--it may be in the weeds a
    little bit, but these are the issues that, Mr. Chairman, we
    hear about. I want to discuss for a minute the 1.35
    recordkeeping rule. You know, I have heard from folks back home
    that the requirement for maintaining records for all pre-trade
    communications, including iMessages and instant messages, can
    be burdensome for the brokers and may lead to end-users not
    being able to communicate easily with their brokers, even in
    immaterial communications.
        I know the Commission is in the process of finalizing some
    relief on this requirement for end-users. Can you discuss what
    you plan to include in the rule and what communications
    industry will be required to keep.
        Mr. Massad. Certainly, Senator. Thank you for the question.
    What I tried to do shortly after taking office was the
    Commission had issued some relief here through no action and I
    said, we need to formalize that. Let us make it a rule.
    Basically, we had proposed a rule that was consistent with the
    ``no action'' relief, but then we invited comment on that rule.
    The proposal exempts people from keeping, like, these text
    messages and it reduces the burden on how records should be
    kept. But, we also invited comments on other aspects of the
    rule and we did get a lot of comments and we are thinking about
    that.
        I am particularly concerned about the issues you have
    raised with respect to small participants in this market. We
    need to make sure small participants in this market who do not
    necessarily have the systems in place all the time to easily
    keep a lot of records, we need to make sure they are not overly
    burdened. So, we are thinking about all those issues. Again,
    this is one of those where I want to take the time to make sure
    we get it right.
        Senator Heitkamp. Right. I could not agree with you more,
    but to appreciate and understand that that communication is a
    critical part of truly understanding the transaction and we
    cannot in any way create a system where we would limit the
    ability to have communication.
        With that said, I think one of the great concerns that the
    American public has with the whole system of what happened in
    2008 and what has happened in the past is that all of the bad
    actors who went to the market who do things that they ought not
    to be doing do not ever seem to be prosecuted, do not ever seem
    to find their way into a criminal court. We see civil fines,
    but we do not see a lot of criminal activity.
        I recognize that the recordkeeping is essential to those
    prosecutions, and so I am wondering if you could discuss how
    the regulation has or has not been helpful in terms of creating
    cases and moving towards prosecution of bad actors.
        Mr. Massad. Well, certainly in just about any enforcement
    case, there is an extensive process of looking at records of
    transactions and records leading to transactions, which is why
    the rule is written the way it is. I think we have been very
    determined in our efforts not just to bring the civil actions
    that we can bring, but also to work with the criminal
    authorities. On any matter where we think there is a basis for
    criminal prosecution, we work very closely with Justice as well
    as with state prosecutors.
        Senator Heitkamp. Just a quick question there. As you are
    working with the U.S. Attorneys' offices and with the
    Department of Justice, this is an incredibly complicated area.
    Do you think a lot of times that the reaction may be, this is
    way too complicated for us, much less a jury, and how do we
    overcome that?
        Mr. Massad. Sure, there is sometimes that issue. These are
    complicated markets and complicated transactions, and a lot of
    these investigations, particularly today with the automation in
    our markets, require huge efforts to analyze data--millions, if
    not billions, of records, sometimes, of data and reconstructing
    that. That is a challenge.
        Frankly, there again, it is an issue of our own resources.
    If we can more easily look into these things and do more of the
    legwork and thereby assist the criminal authorities, then it is
    much easier for them to step in.
        Senator Heitkamp. Thank you, Mr. Chairman.
        Chairman Roberts. Senator Boozman.
        Senator Boozman. Thank you.
        Mr. Chairman, we had the opportunity to visit before you
    went on your European trip and you expressed the importance of
    that. Can you--you alluded to it earlier, and you alluded to
    the margin methodology problems that we are having, recognizing
    clearinghouses, all these things which are so important. Can
    you characterize, were you happy with the trip? Then, also, is
    there anything that we can do as a committee, either through
    this committee or Financial Services, whatever, is there
    anything we can do to help you sort the problems out?
        Mr. Massad. Thank you for the question. Yes, I was pleased
    that we are making progress. I think there was a lack of
    information, a lack of understanding in a lot of these areas,
    and I testified before a committee of the European Parliament
    and met with individual members of the European Parliament as
    well as with the European Commission and really went over a lot
    of these matters in detail to explain why their assumption that
    differences in our two systems somehow meant that ours was
    riskier was dead wrong. In fact, if anything, I think ours is
    superior. But, the issue is just getting to equivalence.
        So, I think we narrowed the issues. I think we came up with
    an understanding on what we are going to do next. Let me see
    how that goes and then I would be happy to get back to you on
    whether Congress needs to do something. But, I really
    appreciate the support of this committee in making sure that we
    can achieve some of these cross-border issues, harmonization
    issues, in a way that still ensures American firms are
    competitive and customers are protected.
        Senator Boozman. As a member of the Financial Stability
    Oversight Council, can you talk a little bit about what you are
    trying to do to ensure that any new regulatory proposals take
    into account the potential impact of new regulations on
    liquidity in the marketplace?
        Mr. Massad. Sure. Well, I think the Chairman raised the
    issue on the supplemental leverage ratio. That is not a--well,
    it is a relatively new regulation, but that is one where, I
    think, the FSOC is helpful because it establishes the
    relationships among the regulators. Right now, I am--we are
    discussing that issue with the OCC, the FDIC, and the Fed,
    again, because they have very legitimate goals that they are
    trying to achieve through the SLR. I appreciate and support
    those goals. But, we also have to make sure that when it comes
    to this cash margin, for example, that we are appropriately
    dealing with that so that we also achieve the goal of
    encouraging clearing. So, that is an example, I think.
        Senator Boozman. Very good.
        Since Dodd-Frank, we have seen significant consolidation of
    futures commission merchants, and today, we have about half the
    number of FCMs serving farmers, ranchers, and other end-users
    as compared to just a few years ago. What is the impact of
    fewer FCMs on liquidity in the marketplace for end-users, and
    do you believe that the consolidation that we have seen since
    Dodd-Frank has contributed to less liquidity in the marketplace
    for end-users?
        Mr. Massad. Thank you for the question, Senator. I am very
    concerned about this and actually asked my staff fairly
    recently to really do a deep dive and look at this. The
    downward trend in number of FCMs actually began well before
    Dodd-Frank. You can see it very clearly from 2005 on. But, at
    the same time, what was curious was the volume in our markets
    increased, and even the amount of customer funds was
    increasing. So, we had the number of FCMs going down, but the
    volume going up. So, we looked at that and realized that a lot
    of the decline in the number of firms was firms who were not
    even taking customer money.
        Now, there is still an issue here, I think, that we need to
    look at. We need to make sure that we are not ending up with
    too few firms. The concentration level of firms was high back
    then, meaning the number of firms that hold most of the
    customer margin. It was pretty high before. It is pretty high
    now. That has not really changed all that dramatically. But, we
    are still looking at this. I want to make sure, for example,
    that, again, smaller customers are still able to access these
    markets, it is not just the larger users.
        So, I think we need to do more work on it to really
    understand this. I think it is not just, though--I mean, there
    are a number of factors that affect this. The low interest rate
    environment affects this, you know. It affects the
    profitability of being in this business. So, there are a number
    of factors, but I would be happy to come back and visit with
    you after we have done some more study.
        Senator Boozman. Good. Thank you, Mr. Chairman.
        Chairman Roberts. Senator Brown.
        Senator Brown. Thank you, Mr. Chairman.
        Chairman Massad, nice to see you. Thank you for being here.
    As we have discussed, my interest in banks' involvement and
    physical commodities, I would like to say a couple of things
    about that then ask you a question about something else.
        In March, Mr. McGonagle sent a letter to the London Metals
    Exchange, as scrutinizing its application as a foreign board of
    trade in the operation of the aluminum warehouses. This is a
    positive development in your agency's oversight of the physical
    market. I appreciate your responsiveness and I hope that it
    continues, so thank you for that.
        I want to talk about something that you had discussed
    earlier. Your testimony set out the CFTC's work to address the
    needs of commercial end-users. Using both new rules and
    administrative actions, it seems the CFTC has been able to
    respond where necessary and in a targeted way. Discuss the
    importance of letting CFTC address the more detailed regulatory
    issues, if you would.
        Mr. Massad. It is extremely important, Senator. I think it
    would be a mistake to try to legislate a lot of these things,
    to get into this level of detail, and the risks are the
    following. First of all, markets change. Markets evolve. Market
    conditions change and needs change. If you try to codify
    certain things into the law, then markets will react to that
    and they will change. You will not have the flexibility to
    respond quickly.
        The second thing is, typically, when you try to codify some
    of these things, you do not do it with quite the same nuance
    that we might be able to do in a rule, and so you can very
    easily create unintended consequences and unintended loopholes.
        So, I think, in most of these areas, it is much better to
    let us try to address it through the rulemaking process or
    through other forms of administrative action. I welcome the
    input of this committee in terms of concerns that you want us
    to look at, but I would hope that we could continue to do it
    through the regulatory process.
        Senator Brown. Thank you for that. You know, it has become
    a talking point every time there is any significant problem,
    whether it is a safety issue on a train or whether it is an
    economic implosion or almost an implosion of our economy, half
    a decade ago. The talking point is, we had an economic disaster
    and government overreached in a dramatic or heavy-handed way.
    That is sort of the talking point always. Problem here, the
    government overreached, we have got to find a way back.
        I think you have answered that question well, that you
    need--you obviously need nuance, you need to take steps that
    are prudent as you move on these things. Congress, particularly
    this Congress, would like to take some of these rules with a
    meat axe and write legislation to go in directions we probably
    do not want to go in, particularly with no nuance to it at all.
        Mr. Cota, who is testifying later, mentioned in his written
    testimony--in the next panel--the risks of creating new
    legislative loopholes or regulatory exclusions. Do you--talk--I
    know the answer is yes, so I will not make it that easy a
    question, do you agree with that. But, give us a couple of
    examples and be a little more precise, if you can--
        Mr. Massad. Sure.
        Senator Brown. --on how that can be too far.
        Mr. Massad. I would be happy to. Well, let us take looking
    at, for example, the balance between the reporting that we
    would like to have on the swaps market and participants'
    ability to hedge. One of the things we did administratively was
    we provided an exception to some of the reporting requirements
    in the case of a very illiquid market where a participant in
    that market came to us and said, if I have to report
    immediately, that will identify who I am in this market and
    make it harder for us to hedge. We looked at the facts, we
    looked at that particular market--it was a very, very narrow
    market, one kind of, I mean, particular tenor in terms of the
    time period that they were seeking to hedge, and we agreed with
    the concern and we addressed it.
        Now, if, for example, you say, well, you should have a rule
    on illiquid markets--you should define what an illiquid market
    is and you should define what the exception should be--that is
    just not a very pragmatic way to go, because the definition of
    what is illiquid is going to vary across the board in all these
    markets. It is going to change over time. You know, if more
    market participants start to come into a market for various
    reasons, well, it becomes less illiquid, and so then you do not
    need the exception. But, if you try to legislate something like
    that, you are going to create all sorts of issues and
    inconsistencies.
        Senator Brown. Thank you, Mr. Chairman, and Mr. Chairman,
    thank you.
        Chairman Roberts. The Chair is delighted to recognize the
    Senator from South Dakota, Senator Thune, but only remind him
    that he has an hour before his high noon.
        [Laughter.]
        Senator Thune. Thank you, Mr. Chairman. I am delighted to
    be recognized by the Chairman, and I want to thank you for
    holding this hearing on regulatory issues impacting end-users.
        I think it is fair to say in agriculture today that the
    margins are slim to nonexistent, and that is not true just for
    farmers and ranchers, that is true for elevator operators and
    suppliers, and a critical component of any agricultural
    operation is risk management. But, we have got an awful lot of
    burdensome reporting requirements, unnecessary over-regulation,
    particularly in certain areas of Dodd-Frank implementation, and
    so there are folks who spend way too much time focusing on
    regulatory requirements and recordkeeping and not enough time
    on effective risk management. I hope that as we work through
    reauthorization this year, that we focus and get answers to
    questions about CFTC rulemaking over regulation and restrictive
    measures to end-users and, again, focus specifically on Dodd-
    Frank.
        Mr. Massad, throughout the development of Dodd-Frank, there
    were a number of Senators on this committee who expressed
    concern about global regulatory confusion ensuing if
    regulations were not well coordinated, and I think due to the
    number of regulations, the number of regulators around the
    world necessary to put into effect national implementation of
    these complex derivative provisions, these warnings now seem to
    be realized. In spite of assurances that global regulators were
    united, it has become obvious that these regulatory
    relationships are strained.
        CFTC was a first mover in many of these--many of their
    regulations, and in particular with regard to cross-border
    application of your regulations, the CFTC issued guidance
    rather than formal rulemaking. Why is that?
        Mr. Massad. Well, I was not at the Commission at the time,
    Senator, so----
        Senator Thune. I know you were not.
        Mr. Massad. --I do not know that I can go to how people
    made that decision. What I can tell you is that we are very
    focused on harmonizing the rules. I would note, also, that
    Congress did mandate that the rules be done in a year,
    basically, which did put the agency under tremendous pressure,
    and I think it is a credit to the staff of the agency that they
    worked hard to get the rules done.
        The issue of cross-border harmonization, I think, we need
    to put in perspective. Each--while the G-20 nations agreed to
    the basic principles they wanted to implement, it still falls
    to individual nations to do it. None of us--none of those
    nations are willing, for example, to delegate their authority.
    I am sure this Congress is not willing to delegate its
    authority, or our authority, to the Financial Stability Board
    or anyone else. It is our job to do it for our country. It is
    the European Parliament and the European Commission's job to do
    it for Europe. Japan has to do it for Japan, and so on and so
    forth.
        Having said that, there has been tremendous progress, and I
    am happy to go through each of the areas where there has been
    progress, and a lot of it--most of it has come from us. We have
    made, for example, substituted compliance determinations in a
    whole host of areas for several jurisdictions. Now, other
    jurisdictions have not because they have not gotten their rules
    done, in many cases.
        We are working very hard on this issue of clearinghouse
    recognition. It has been difficult. I could have agreed to it a
    year ago had I been willing to have our clearinghouses impose
    higher costs on the very people you are concerned about. So,
    that is why it has taken time. It has taken time to work
    through some of these issues. We did not want to impose higher
    margin costs on our participants----
        Senator Thune. Well, the--I am sorry. The SEC took a
    different approach, though, and has now twice proposed formal
    rules to address the global reach of their derivatives
    regulations. So, has the CFTC's move to address cross-border
    matters through more expedient guidance really, in your
    judgment, resulted in advancing the goals of more transparency
    and better risk management, or has it created more of a
    regulatory impasse?
        Mr. Massad. Well, again, the guidance was done a while
    back. I can tell you what we are doing today. We are doing it
    through rules. For example, in the case of margin for uncleared
    swaps, we put out for public comment a proposal, and we are
    going to have a roundtable about this this afternoon and
    inviting public participation on this, as to what our approach
    should be in terms of the cross-border application of the rule
    on margin for uncleared swaps. We noted, for example, that
    there is an approach based on the guidance, but that may not
    necessarily be the right approach. So----
        Senator Thune. Did you--will your agency consider, though,
    or contemplate formal rulemaking to better----
        Mr. Massad. We are doing it.
        Senator Thune. --global coordination?
        Mr. Massad. We are doing it already. We are doing it in the
    area of margins. We are doing it in the area of reporting. So,
    we are doing it in a number of areas, and we are aware of what
    the SEC is doing. We are looking at what they are doing and
    working with them.
        Senator Thune. All right. My time has expired. Thank you,
    Mr. Chairman.
        Chairman Roberts. Senator Casey.
        Senator Casey. Thanks very much, Mr. Chairman. We are
    grateful you are here and thanks for your service. Difficult
    subject matter and a difficult time to serve.
        I wanted to ask you about these affiliates of the so-called
    centralized treasury units in terms--really, a two-part
    question, and that is really all I have for today. The relief
    that has been granted, can you walk through how that process
    works? That is kind of question number one. Then, number two,
    is it having the intended effect, or can you assess the effect
    it is having?
        Mr. Massad. Thank you, Senator. I think it is. What we did
    was we made it clear that, for example, commercial end-users
    are entitled to exemptions from the clearing mandate, from the
    trading mandate, but a lot of companies, especially large
    companies, will do their financial transactions, including
    their swaps, through what we refer to as a treasury affiliate.
    It is essentially a special purpose subsidiary that only
    engages in financial transactions. Because it only engages in
    financial transactions, there was a risk that it could be
    viewed as a financial entity rather than as part of an end-
    user. So, we made that clear.
        We are continuing to look at this issue. There was an issue
    that came up that one of the auto companies asked us about for
    clarification on a related point. We issued that clarification
    about a week or two ago. We are looking at the issue, also, in
    terms of the rule on margin for uncleared swaps, which exempts
    commercial end-users, and we will, again, make sure that works
    from the standpoint of how large companies today organize their
    operations.
        So, I think we are very focused on this. There is often a
    lot of nuance and detail to it, and that is why, again, I think
    it is best to do it through the regulatory process.
        Senator Casey. So, I guess the assessment you--I do not
    want to put words in your mouth, but these are challenging, but
    you have been able to manage----
        Mr. Massad. Absolutely. Yes, sir.
        Senator Casey. Thank you very much.
        Mr. Chairman, I am giving back two minutes and 49 seconds.
        [Laughter.]
        Chairman Roberts. We will bank that for you, Senator Casey.
        Senator Stabenow. We will bank that, yes.
        Chairman Roberts. Senator Klobuchar.
        Senator Klobuchar. Thank you, Mr. Chairman. I thought
    Senator Casey was giving it to me, but that is okay.
        [Laughter.]
        Senator Klobuchar. Thank you so much, Mr. Chairman, for
    being here, and thank you to our Chairman and Ranking Member
    for holding this hearing.
        As Chairman Massad, for a long time, years before you had
    this job, I have worked with the CFTC on the issue of position
    limits, on oil speculations, and I look forward to continuing
    that work. I also have been focused on the issue which I know
    the Chairman asked about of the end-users and this
    differentiation between people who are in the financial sector
    and then people who actually are end-users, like farmers and
    rural energy co-ops, manufacturers, and people who are doing
    things like buying oil at a certain price, or farmers who are
    buying other products at a certain price. So, those have been
    my major focuses and I am glad we were able to get this end-
    user issue resolved at the end of the year.
        I think my first question would be about how in your
    testimony you stress the importance of all the actions that
    have been taken to make the market safer since 2008, you have
    greater ability now at the CFTC to regulate swaps in the
    derivatives market. From your perspective, 11 months on the
    job, what are the biggest challenges you face?
        Mr. Massad. Well, the biggest challenge is resources. There
    is a lot more we should be doing. There is a lot more areas
    where we simply cannot get to because of the resources. We
    cannot respond to market participants as quickly as we would
    like. We cannot address a lot of their concerns. We cannot
    engage in the oversight of some of the large clearinghouses. We
    cannot do examinations as frequently. We do not have enough
    resources to look at cybersecurity, which is perhaps the
    biggest single challenge for us today.
        Senator Klobuchar. Have any of my colleagues asked you
    about the cybersecurity issue.
        Mr. Massad. No.
        Senator Klobuchar. Okay. Well, when we talk about those
    resources, and I am sure you are concerned about budget
    proposals that would erode your resources even more----
        Mr. Massad. Mm-hmm.
        Senator Klobuchar. --okay, and is the budget that has been
    proposed in the Senate, does that make cuts to the CFTC?
        Mr. Massad. I do not know that I have seen a number yet for
    us.
        Senator Klobuchar. Okay. All right. Well, we should look at
    that.
        On the cybersecurity side, it has, unfortunately, as we
    know, been routine to see companies victims of cybersecurity,
    and thus their customers, whether it is Sony, whether it is
    Home Depot, whether it is what we saw in Minnesota with Target,
    do you think that the exchanges and clearinghouses are putting
    enough emphasis on data security as part of their business
    plans, or are they just waiting for something to happen, and
    what are the disclosure requirements for the exchanges and
    clearinghouses in the event of a cyber-attack? What I am really
    getting at is how and when will people know when there has been
    a breach?
        Mr. Massad. Well, I guess I would answer it this way. I
    would say, first of all, the exchanges and the clearinghouses
    are taking this very seriously. I know you are going to have
    Terry Duffy shortly, and he and I have had a number of
    conversations about this. But, this is a huge concern for
    everyone today, not just financial companies, but all sorts of
    companies. There is a lot of work going on.
        But, we are looking at, is that enough, how can we add
    value here to this process, and one of the things we are
    looking at, for example, is we do not have the resources to do
    testing ourselves, but we want to make sure that clearinghouses
    and exchanges are doing enough testing on their own, whether it
    is what we call control testing, vulnerability testing, or
    penetration testing, where you really have someone who tries to
    hack your system and you push it until the point where you
    succeed in hacking so you can figure out where the
    vulnerabilities are.
        So, that is one of the things we are looking at, whether we
    can contribute by maybe setting standards of best practices
    that firms should follow when they do their testing.
        Senator Klobuchar. Yes.
        Mr. Massad. We are also working with other governmental
    agencies here. This is obviously not something that we can do
    on our own. We work with DHS and the FBI and the other
    financial regulators on that.
        Senator Klobuchar. Okay. Could I just ask you one more
    question about something I raised at the beginning, and that is
    speculative trading's effect on the commodities market, notably
    gas, oil, wheat in the past. Last time we were here, we talked
    about how Parnon Energy and Arcadia manipulated the crude oil
    market and now the CFTC has just filed an enforcement action
    against Kraft and its parent company for manipulation of the
    cash wheat and wheat futures market. I am also concerned that
    end-users like our small farmers and rural energy co-ops might
    not be able to conduct their business because of some of the
    rules which are well intended, of course.
        So, what is happening with all of that? I know you have
    looked extensively at the speculation issue and how can these
    rules best work for everyone.
        Mr. Massad. Well, thank you for the question. Obviously, I
    do not want to comment on particular enforcement proceedings,
    but let me just comment generally.
        You know, I think, again, this comes back to resources,
    quite frankly, because these markets have changed. They have
    become far more electronic, far more automated. The days when
    we could watch trading pits and see if someone pulled an
    earlobe or something to determine whether there was
    manipulation are long gone. Now, today, we have to look at
    reams and reams of records--I mean, we are talking about
    billions of records here for a particular case, sometimes--to
    reconstruct trading patterns and to determine if there is a
    problem. We work, again, very closely with the exchanges. They
    are the front line of defense on these things. They have
    increased their resources in terms of monitoring trading
    behavior. So, we work very closely with them, also.
        But, what is needed here more than anything else is the
    resources so that we can invest in the information technology
    systems. Senator Stabenow referred to we cannot even keep up
    with the markets, much less get ahead.
        Senator Klobuchar. Thank you very much. I appreciate it.
        Thank you, Mr. Chairman.
        [Pause.]
        Chairman Roberts. I would like to yield at this point and
    recognize Senator Boozman for one additional question.
        Senator Boozman. I was just curious, Mr. Chairman, you
    mentioned that you had fined $2.5 billion or whatever. How much
    do we actually collect of that?
        Mr. Massad. I can check on that. I think we collected 2.3
    of that.
        Senator Boozman. Okay. So, the collection rate----
        Mr. Massad. On that.
        Senator Boozman. --under your regime is----
        Mr. Massad. Yes. Now----
        Senator Boozman. --is pretty robust, or----
        Mr. Massad. Well, to be perfectly thorough on this, when
    you have settlements and fines against institutions, larger
    institutions, you typically collect more, or you collect it. We
    have a lot of cases--we have a lot of small cases, Ponzi
    schemes, precious metal frauds. A lot of these operators go out
    of business before we can catch them sometimes, or before we
    can reach the judgment or the settlement. It is much harder
    there to collect.
        Senator Boozman. I guess if we are going to use that as a
    measure of success, then we do need to go further and actually
    talk about that perhaps a little bit more.
        Thank you, Mr. Chairman.
        Mr. Massad. I am happy to give you all those statistics.
        Chairman Roberts. Thank you, Senator.
        Mr. Chairman, before you go, we are tasked with
    reauthorizing the CFTC--that is why we are holding this
    hearing--as is the House of Representatives. We want to work
    with you in a very bipartisan way and with the Commission's
    help. So, my question is, will you commit to working with us,
    along with your staff and other Commissioners, in a productive
    fashion?
        Mr. Massad. Absolutely, Senator.
        Chairman Roberts. Great. Thank you so much.
        Mr. Massad. Whatever you need.
        Chairman Roberts. The distinguished Senator from Iowa has
    arrived and I would be happy to recognize him at this point.
    Senator Grassley.
        Senator Grassley. You know, oversight is a big part of my
    work and I wanted to say that Senator Johnson and I have raised
    concerns about CFTC's decision to charge the Inspector
    General's Office $331,000 to cover overhead. I question whether
    the CFTC Chairman may determine if and to what extent funds may
    be removed from the IG's appropriation for any purpose that
    would amount to nearly 13 percent of their budget, funds that
    could otherwise pay for additional staff salary.
        During an April 17, 2015 phone call between our offices and
    the CFTC staff, we requested documents to help us better
    understand overhead charges for that office and specifically
    requested the amounts of overhead charged the IG in the past,
    the CFTC OIG budget request for fiscal year 2015, and the
    request submitted to OMB for fiscal year 2015 in the amount of
    overhead charges per office. We have not yet received those
    documents, so I would like your assistance that this
    information will be made available to Senator Johnson and me
    within a week. Is that possible?
        Mr. Massad. I see no reason why we cannot do that, Senator.
        Senator Grassley. Thank you, Mr. Chairman.
        Mr. Massad. Can I just----
        Senator Grassley. Yes.
        Mr. Massad. --if I may, though, just say a word or two
    about it.
        Senator Grassley. Of course, you can.
        Mr. Massad. My understanding of what we do here is that the
    IG gives us a budget and we then add an amount for overhead and
    then that sum is what we submit as the budget request. In fact,
    the IG was given even more than the sum of what the IG
    requested and what that overhead charge is.
        I would also point out that the overhead charge is a very
    simple calculation. It does not even--it is not even fully
    loaded. All it is, is a percentage, a fraction, if you will, of
    our leasing and certain other kind of overhead charges that is
    based on number of FTEs. But, we do not charge the--we do not
    even charge the IG for information technology or any of our--a
    lot of our other services.
        Senator Grassley. Well, I appreciate your explanation, and
    if you give us these documents, then we will be able to satisfy
    ourselves.
        Mr. Massad. Certainly.
        Senator Grassley. Thank you very much.
        Thank you, Mr. Chairman.
        Chairman Roberts. Okay, and thank you, Mr. Chairman.
        I would like to welcome our second panel of witnesses
    before the committee.
        First, we have Mr. Terry Duffy, Executive Chairman and
    President of the CME Group. Mr. Duffy joins us from Chicago,
    where he is the Executive Chairman and President of the CME
    Group. Mr. Duffy has served in his role as President since 2012
    and has been the Executive Chairman since 2006, when he became
    an officer of the company. Terry, thank you for being here
    today and I look forward to your testimony.
        Mr. Bruce Barber is the General Manager of Oilseed Risk
    Management, Archer Daniels Midland Company in Forsyth,
    Illinois, testifying on behalf of the Commodity Markets
    Council, CMC. Mr. Barber also comes from Illinois, is the
    General Manager of Oilseed Risk Management for the Archer
    Daniels Midland Company. He has been in the grain business for
    many years and is here today on behalf of the Commodity Markets
    Council. This is Mr. Barber's last official act, as he will be
    wrapping up a 33-year career with ADM at the end of this month.
    Bruce grew up on an Iowa farm. He graduated from Iowa State.
    Nothing wrong with that.
        [Laughter.]
        Chairman Roberts. I am just remembering all those last-
    minute basketball games where they defeated K-State, but at any
    rate----
        [Laughter.]
        Chairman Roberts. He grew up on an Iowa farm, graduated
    from Iowa State, and has traded wheat, corn, soybeans, soybean
    meal, soybean oil from locations all over the Midwest. He has
    spent the last two years trading for ADM in Geneva,
    Switzerland. Bruce Barber, congratulations and welcome home.
        Mr. Barber. Thank you, Mr. Chairman. It is good to be home.
        Chairman Roberts. We have Mr. Jeff Walker, Senior Vice
    President and Chief Risk Officer, Alliance for Cooperative
    Energy Services from Carmel, Indiana. Mr. Walker is joining us
    from Carmel, where he serves as Senior Vice President and Chief
    Risk Officer for the Alliance for Cooperative Energy Services.
    Mr. Walker leads ACES's Energy Risk Services, including
    trading, control, credit, contract administration, and
    regulatory and corporate development. Thank you for making the
    trip, sir. We look forward to hearing your testimony.
        Mr. Michael Bopp, Partner at Gibson, Dunn and Crutcher,
    LLP, Washington, DC, testifying on behalf of the Coalition for
    Derivatives End-Users. Mr. Bopp is a partner at Gibson, Dunn
    and Crutcher here in Washington. He represents the Coalition
    for Derivatives End-Users. The Coalition represents the views
    of more than 270 end-user companies that employ derivatives
    primarily to manage risk associated with their businesses.
    Thank you, sir, for being here today, and we look forward to
    your participation.
        We have Mr. Sean Cota, the co-founder of Commodity Markets
    Oversight Coalition, Bellows Falls in Vermont. Mr. Cota is the
    co-founder of the Commodity Markets Oversight Coalition, which
    represents the commodity-dependent businesses in the
    transportation, energy, and agriculture sectors. He has nearly
    four decades of experience in the downstream petroleum
    industry, including more than 17 years as president of his
    family's successful heat, oil, propane, and motor fuels company
    in Vermont, and we look forward to your testimony.
        We will start it off with Mr. Duffy.

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

        Mr. Duffy. Chairman Roberts, Ranking Member Stabenow, thank
    you for having me today. As the Chairman said, I am Terry
    Duffy, the Executive Chairman and President of the CME Group,
    and I appreciate the opportunity to offer our views on the CFTC
    reauthorization.
        It is critically important to structure regulation to
    protect the integrity of our markets. They need to be available
    to meet the hedging and risk transferring needs of end-users.
    These include producers and consumers of agriculture and energy
    products, as well as businesses facing interest rate, equity,
    and currency risks.
        The CFTC, under the leadership of Chairman Massad, has
    appropriately reformed several regulations that needlessly
    limited end-user risk management on regulated markets. We
    applaud these recent actions. They will reduce the burdens
    associated with excessive residual interest charges that we
    have discussed before at this committee and redundant trade
    reporting and recordkeeping. This is a good start, but other
    problematic proposals offered after Dodd-Frank need to be
    reexamined.
        For example, we endorse the end-users' call for more
    flexible hedging treatment, especially, as the Chairman
    mentioned earlier, anticipatory needs of hedging. We also urge
    the CFTC to continue the practice of permitting exchanges to
    administer hedge exemptions consistent with the needs of end-
    users.
        We also support setting limits based on current deliverable
    supply data. The use of current data will ensure an accurate
    depiction of what the actual deliverable supply is. It also
    eliminates the basis for unfounded claims that financially
    settled look-alike contracts should be given five times higher
    limits than underlying physically settled contracts. Different
    limits for equivalent contracts distort transaction flow and
    the settlement process.
        Another topic that will impact the end-users is that
    European regulators refuse to recognize that U.S. regulation is
    equivalent to that of the European Union regime. Under European
    law, U.S. clearinghouses and exchanges like CME must be
    recognized by the European regulators. This recognition can
    only happen if the European Commission first determines that
    the regulations in the United States are equivalent to European
    Union regulations. Without recognition, European clearing firms
    and market participants will be subject to prohibitive costs if
    they clear or trade in the U.S., or they may be denied access
    to U.S. clearinghouses and exchanges altogether.
        Chairman Massad has been a strong leader in his
    negotiations with his European counterparts. He testified, as
    he said earlier, effectively before the European Parliament
    just last week. I hope he will be successful in reaching an
    agreement that will allow U.S. markets to be recognized by the
    European Union the way they participate in ours without
    compromising the robust risk protections of the United States
    regulatory regime.
        Another concern that will add additional harm to end-users
    is the supplemental leverage ratio rule imposed under the Basel
    III by European central bankers and by our own U.S. Federal
    Reserve. This rule will permit bank regulators to impose
    punitive capital charges on clearing firms that support
    activities of end-users. This rule imposes unwarranted capital
    charges that do not recognize the netting and bankruptcy
    remoteness offered by clearing. It will make it difficult or
    impossible for small end-users to find a clearing member firm
    so they can continue to facilitate their risk management needs.
        I want to thank you, Mr. Chairman, Ranking Member Stabenow,
    for the opportunity, and I look forward to answering your
    questions.
        [The prepared statement of Mr. Duffy can be found on page
    67 in the appendix.]
        Chairman Roberts. We thank you.
        Mr. Barber.

       STATEMENT OF BRUCE BARBER, GENERAL MANAGER, OILSEED RISK
     MANAGEMENT, ARCHER DANIELS MIDLAND CO., FORSYTH, ILLINOIS, ON
                BEHALF OF THE COMMODITY MARKETS COUNCIL

        Mr. Barber. Chairman Roberts, Ranking Member Stabenow, and
    members of the committee, thank you for the opportunity to
    testify on behalf of the Commodity Markets Council to discuss
    the regulatory burdens impacting end-users and market liquidity
    as they relate to reauthorization of the CFTC.
        I am Bruce Barber of Archer Daniels Midland. For more than
    a century, the people of ADM have transformed crops into
    products that serve the vital needs of a growing world. Today,
    we are one of the world's largest agricultural processors and
    food ingredient providers, with more than 33,000 employees
    serving customers in more than 140 countries.
        As Congress seeks to once again reauthorize the CFTC,
    hedgers of agricultural commodities and energy products are
    being asked if we are better off in today's regulatory
    environment compared to the days before Dodd-Frank. The direct
    answer is no. I would point out that during the financial
    crisis, no exchange, DCM, clearinghouse, or commodity end-user
    of derivatives was bailed out with taxpayer money.
        Despite our best efforts, what I can tell you is that our
    compliance costs are up substantially. The compliance
    expenditures for ADM Investor Services, ADM's FCM, have doubled
    in the past five years.
        Chairman Massad has an understanding of our concerns and
    CMC is appreciative of the Commission's improved and
    appropriate emphasis on end-user issues during his tenure. This
    recognition indicates that some of these rules have not been
    well crafted and have the potential to do harm, particularly to
    end-users. Many CMC members would describe this situation as an
    example of process failure. During this reauthorization
    process, we would ask this committee to focus its efforts on
    the contrast between the Congressional intent of Dodd-Frank's
    Title VII versus today's reality of how it is being implemented
    in an effort to address this process failure.
        A multitude of new CFTC rules have burdened end-users and
    commercial participants with additional regulatory costs. These
    will ultimately be passed on to producers and consumers as they
    work their way through the supply chain. There will also be an
    impact on market liquidity, which will further raise the cost
    of risk management and, ultimately, the cost of finished
    agriculture and energy goods. In other words, if Dodd-Frank is
    not implemented as Congress intended, this law will hurt the
    people that it was intended to help.
        Since President Obama signed Dodd-Frank, the Commission has
    issued 274 ``no action'' letters, 20 interpretative letters,
    and 64 exemptive letters, all providing different levels of
    regulatory relief to CFTC rules. This compares to 201 ``no
    action'' letters during the decade prior to Dodd-Frank.
        As Congress moves to reauthorize the CFTC, the CMC urges
    this committee to address the concerns of end-users, which are
    more fully described in my written testimony. In brief, the
    five key issues are: Reporting requirements set out in Rule
    1.35; updating deliverable supply estimates that will serve as
    the baseline for position limits determinations; getting the
    bona fide hedging definition right so that it recognizes all
    the myriad types of risk that end-users must hedge; the
    automatic drop in swap deal de minimis threshold; resolution of
    international regulatory issues, including U.S.-E.U.
    equivalence and the Basel III supplemental leverage ratio.
        To conclude, the swaps market reforms in Dodd-Frank were
    not required because of problems in physical commodity markets.
    Commercial end-users of agriculture and energy futures had no
    role in creating the financial crisis. Today, agriculture and
    energy end-users are faced with thousands of pages of new CFTC
    rules, followed by a multitude of letters issued by the
    Commission to clarify rule language, extend compliance dates,
    and provide temporary ``no action'' relief.
        The problem is not just that complexity and regulatory
    uncertainty adds unnecessary costs, it is that uncertainty via
    additional regulation of the risk management tools that
    commodity market participants utilize actually creates risk
    where it did not previously exist. CMC members mitigate risks
    by hedging. The fact that future regulation may determine that
    the risk management methods we have cited here today may no
    longer be considered hedging is of enormous concern and is an
    example of where risk could be created.
        When regulatory initiatives lack clarity or evolve to be at
    cross-purposes with the core principles on which the Commission
    was founded, CMC members are compelled to reach out to this
    committee for help.
        Thank you for this opportunity to testify. We look forward
    to continuing to work with the committee to strike the right
    balance. I look forward to your questions.
        [The prepared statement of Mr. Barber can be found on page
    40 in the appendix.]
        Chairman Roberts. Mr. Barber, thank you very much for an
    excellent statement.
        Mr. Walker.

    STATEMENT OF JEFFREY L. WALKER, SENIOR VICE PRESIDENT AND CHIEF
    RISK OFFICER, ALLIANCE FOR COOPERATIVE ENERGY SERVICES, CARMEL,
                                INDIANA

        Mr. Walker. Chairman Roberts, Ranking Member Stabenow,
    thank you for inviting me to testify today on the regulatory
    burdens impacting end-users and market liquidity. I am Jeff
    Walker, the Chief Risk Officer for Alliance for Cooperative
    Energy Services, or ACES for short.
        ACES is owned by 21 not-for-profit electric cooperative
    power supply members who use ACES' commodity service to
    participate in the wholesale energy markets. Not only are ACES'
    member-owners commercial end-users, but they are also
    ultimately owned by the retail electric consumers they serve in
    27 states, including Arkansas, Colorado, Georgia, Indiana,
    Iowa, Kansas, Kentucky, Minnesota, Mississippi, North Carolina,
    and Ohio. ACES is headquartered in Carmel, Indiana, and has
    office operations in Minnesota, North Carolina, and Arizona.
        U.S. consumers expect some volatility in the price of
    gasoline they pay at their local gas pumps from week to week,
    but when consumers get their monthly electric bill, they have
    always expected more price stability. Sometimes we can use
    physical transactions to lock in energy prices. However,
    financial transactions must also be used, when appropriate, to
    lock in prices to manage the volatility of the commodities our
    members use to produce and serve electricity to consumers.
        Since 2010, the Dodd-Frank Wall Street Reform Act and
    dozens of new CFTC regulations and interpretations have
    impacted our energy commodity transactions by adding
    significant regulatory burden on energy market end-users doing
    business on Main Street, not Wall Street. I will take a moment
    to highlight some of the challenges our electric cooperatives
    have faced under Dodd-Frank.
        In 2010, CFTC stated in a rulemaking that it would not
    provide a bright line test for compliance with its Dodd-Frank
    regulations because of concerns that doing so would provide a
    road map for evasion to market participants. However, this same
    approach has resulted in regulations that are vague and
    ambiguous, making understanding such regulations costly and
    compliance by end-users confusing, time consuming, challenging,
    and very expensive.
        Second, in 2012, CFTC imposed an entirely new set of
    obligations requiring end-users to keep records of pre-trade
    written communications. Prior to Dodd-Frank, only fiduciaries
    serving market customers and holding customer funds were
    burdened this way. Today, end-users subject to Regulation 1.35
    get saddled with much more onerous and non-standard record
    retention periods, not only for pre-trade communications and
    financial derivative records, but also for all of their related
    physical commodity commercial activity. Even worse, this
    onerous burden may be overlaid on the entire business dealings
    of an end-user's jurisdictional activities, even aside from the
    direct access trading venue that caused them to be subject to
    Regulation 1.35.
        Third, Dodd-Frank has brought about an overlap of dual
    regulation by two federal agencies, the Federal Energy
    Regulatory Commission and the CFTC, of certain physical
    commodity transactions, namely options that, when exercised,
    are fulfilled by one party delivering a physical commodity to
    the other party. Furthermore, it is commonplace in the energy
    markets to have transactions that combine both jurisdictional
    and non-jurisdictional attributes together. For example, fixed
    volume forward contracts will often include a layer of volume
    flexibility called embedded optionality in order to enable an
    end-user to balance non-storable supply with variable demand in
    real time.
        In 2012, CFTC adopted a complex set of interpretations to
    determine whether or not hybrid transactions are jurisdictional
    swaps, in the form of a seven-part test. So, if you can thread
    all seven needles with a single strand, your hybrid transaction
    is not a swap, but that seventh needle can be a show stopper.
        Finally, CFTC's 2013 proposed rule for speculative position
    limits places more unnecessary burdens on end-users of physical
    energy commodities and related swaps. Very narrow bona fide
    hedge exemptions to position limits are proposed by CFTC. End-
    users were told they can only hedge their commercial risk using
    hedges that are also bona fide for traders. They are also
    viewed as potential market speculators and having to monitor
    their positions on a daily and intra-day basis, provide precise
    plans and ten-day notices before hedge exemptions can be
    deployed, and submit reports to CFTC daily and monthly when
    they are deployed.
        Moving forward, we would like Congress and the CFTC to
    address the challenges discussed in this testimony, whether
    legislatively or administratively, to ensure that end-users are
    not treated like they were the cause of the 2008 financial
    crisis. We look forward to providing any information that would
    be helpful to the committee as it addresses CFTC
    reauthorization. We are supportive of reauthorization, but must
    respectfully request that the CFTC narrow the scope of its
    rules to remove the significant and unnecessary burdens on end-
    users.
        Thank you for the opportunity to testify. I would be happy
    to answer any questions you may have.
        [The prepared statement of Mr. Walker can be found on page
    95 in the appendix.]
        Chairman Roberts. Thank you, Mr. Walker.
        Mr. Bopp.

        STATEMENT OF MICHAEL D. BOPP, PARTNER, GIBSON, DUNN AND
     CRUTCHER, LLP, WASHINGTON, DC, ON BEHALF OF THE COALITION FOR
                         DERIVATIVES END-USERS

        Mr. Bopp. Chairman Roberts, Ranking Member Stabenow, other
    members of the committee, I am Michael Bopp, a partner at the
    law firm Gibson, Dunn and Crutcher, and counsel to the
    Coalition for Derivatives End-Users. I want to thank you for
    inviting the Coalition to be a part of this hearing.
        We represent hundreds of end-users from across the economy
    that employ derivatives to manage everyday business risks and
    we support regulation that promotes economic stability and
    transparency without imposing undue burdens. We believe that
    imposing unnecessary regulation on derivatives end-users who
    did not contribute to the financial crisis restricts job growth
    and hampers U.S. competitiveness.
        End-users applaud Congress's passage earlier this year of
    legislation providing them relief from mandatory initial and
    variation margin requirements and we are grateful to the 17
    members of this committee who opposed an amendment that would
    have stripped the end-user margin bill from the Terrorism Risk
    Insurance Act legislation to which it was attached.
        The Coalition also appreciates and supports the Chairman's
    introduction of the centralized treasury unit, or CTU, bill, S.
    876, which would prevent end-user companies from being denied
    use of the end-user clearing exception in Dodd-Frank drafted
    specifically for them. We thank Senators Collins and Klobuchar
    for introducing the same bill last Congress.
        Today, the Coalition would like to focus on three areas
    where we believe Congressional attention would help address
    inefficiencies and unnecessary expense.
        One issue is capital and liquidity requirements. Excessive
    capital requirements, including the net stable funding ratio
    and other outstanding Basel capital reforms, threaten to
    eviscerate the benefits of the margin legislation that was
    passed in January. As the cost of those capital requirements is
    passed on from banks to end-users, end-users are faced with a
    decision of whether to forego risk mitigation altogether, to
    enter into an imperfect hedge, or to pay substantially
    increased hedging costs. With every choice, the end-user faces
    the possibility of being competitively disadvantaged against
    foreign competitors.
        Another issue is cross-border market fragmentation.
    International harmonization is of great and growing importance
    and is particularly relevant for derivatives end-users. For the
    many that have affiliates located around the world and subject
    to multiple regulatory regimes, inconsistencies lead to
    increased costs, confusion, duplication, and decreased
    liquidity. A good example of this is a lack of consistent data
    and reporting standards across jurisdictions. In your oversight
    of the implementation of the Dodd-Frank Act, we urge you to
    encourage U.S. regulators to work with foreign regulatory
    regimes to recognize equivalence between jurisdictions using an
    outcomes-based analysis and with the interests of end-users in
    mind.
        A third and perhaps most important issue involves our use
    of centralized treasury units. Many non-financial end-users
    employ centralized treasury units to reduce risk by having a
    single entity centralize and net the hedging needs of all of
    its affiliates. In fact, nearly half of the respondents to a
    Coalition survey indicated they use CTUs to execute over-the-
    counter derivatives. Let me take a moment to explain.
        Everyone should have a slide titled ``Centralized Treasury
    Units,'' which I will refer to for illustration. In the
    hypothetical, ABC Corporation has two affiliates that have
    hedging needs. Instead of each affiliate going to the market
    independently to hedge its risk, they trade through ABC
    Corporation's CTU. The advantages here are many, but I will
    mention two.
        First, reduced market exposure. Because the ABC Corporation
    affiliates both need to hedge interest rate risk, the CTU is
    able to net those exposures and make only one trade with a bank
    counterparty. The alternative would have been for each
    affiliate to enter its own trade with a bank, thus doubling ABC
    Corporation's overall exposure to the bank.
        Second, economies of scale. ABC Corporation can centralize
    its derivatives expertise in the CTU instead of spreading it
    among its affiliates and can enter into just one legal, or
    ISDA, agreement with the bank counterparty instead of each
    affiliate entering into its own contract. In our example, there
    are only two affiliates that have need of reducing risk through
    hedging, but imagine a company with 200 such affiliates, which
    is not uncommon. The economies and savings become very
    substantial.
        Why does this matter? Because CTUs are financial entities
    and the end-user clearing exception only applies to non-
    financial entities. You might ask, why does Dodd-Frank not look
    through the CTU to the affiliate to determine whether the
    clearing exception applies? That is an excellent question.
    Unfortunately, the answer is, it does not for the type of CTUs
    end-users tend to employ.
        S. 876 simply looks through the CTU to the affiliate whose
    risk is being hedged, and if the affiliate could hedge its risk
    and qualify for the end-user clearing exception, then the
    company will not be denied the exception simply because it uses
    a CTU. It is a simple, narrowly tailored solution that we urge
    this committee to approve.
        Thank you, and I am happy to answer any questions you may
    have.
        [The prepared statement of Mr. Bopp can be found on page 53
    in the appendix.]
        Chairman Roberts. Well, thank you, Mr. Bopp. I am sorry the
    Chairman left.
        Mr. Cota.

       STATEMENT OF SEAN O. COTA, CO-FOUNDER, COMMODITY MARKETS
              OVERSIGHT COALITION, BELLOWS FALLS, VERMONT

        Mr. Cota. Chairman Roberts, Ranking Member Stabenow,
    members of the committee, the Commodity Markets Oversight
    Coalition appreciates the opportunity to provide input as you
    begin work on CFTC reauthorization.
        The CMOC is a nonpartisan alliance of thousands of
    businesses, commodity-dependent businesses that rely on secure,
    transparent, and accountable futures. Options and swaps markets
    as a hedging and pricing discovery tool are critical to that. A
    list of organizations that endorse my testimony can be found in
    my written statement. I would like to ask that the Owner-
    Operator Independent Drivers Association and the Industrial
    Energy Consumers of America be added to that list.
        Chairman Roberts. Without objection.
        Mr. Cota. I have worked decades and 17 years as the
    president of my family company, which markets home heating oil,
    motor fuels, and most importantly, biofuels, in greater
    Vermont. Hedging is a part of that business, of which I was the
    manager of that hedging and gave me experience over the decades
    that I participated in that. It is critical in our business, as
    a cyclical business that has large variance because of
    temperature, in how to hedge the various risks that come in
    with futures contracts.
        We encourage the committee to use the reauthorization to
    strengthen the protection that hedgers have and build upon
    these key reforms that are in Dodd-Frank. These reforms
    relative to the volatile conditions and opaque markets that
    existed prior to Dodd-Frank have increased the confidence in
    these markets in the commodity dependent businesses that we
    have.
        Over the last five years, volatility has declined
    considerably for many of the commodities by 40 percent or more.
    There are three top things that Congress can do to ensure that
    the CFTC continues to serve and protect small hedgers and
    commodity dependent businesses.
        First and foremost, you should fully fund the CFTC at the
    $322 million level requested for fiscal year 2016. We have seen
    in recent years these markets affect the lives of every
    American. The CFTC has done its best to oversee these markets,
    given its historically inadequate resources. As you have heard
    from Chairman Massad, the CFTC's collection of civil penalties
    has increased over twenty-fold over the last five years. This
    is many multiples of what their budget is. Going forward,
    additional funding will be necessary for the CFTC to continue
    to police and prosecute manipulation, to monitor constantly
    evolving and ever changing markets. Trading practices change.
    Technologies change. Threats like cyber-terrorism and cyber-
    espionage are critical and they need the funding to do that.
        Second, Congress should increase the cap on penalties for
    fraud and manipulation. Individual penalties have become
    insignificant. They are just a cost of doing business. They
    need to be, in our opinion, multiples of what the impact of
    that manipulation was, and that should be introduced.
        Third, lawmakers should have the right to reinforce
    Congressional intent that the end-users not be captured by
    regulations meant for financial institutions and systematically
    significant market participants. Our Coalition believes that
    the CFTC has the authority to address most of those concerns of
    the commercial end-users and they can do that within the
    agency. If not, the committee should address those issues in
    reauthorization. However, a great care should be taken not to
    inadvertently create new loopholes through additional
    legislation. Every definition seems to change once it gets into
    rulemaking. Large institutions and other large market
    participants are weakening exemptions meant only for bona fide
    hedgers, and allowing them to trade overseas without oversight
    is not in our interest.
        One final issue that is certain to come up today is the
    issue of position limits. Congress required the CFTC to impose
    speculative position limits on all markets in futures and swaps
    to help minimize swings in the price in commodities, and it is
    important to prevent manipulation. The CFTC is negotiating the
    final rule. This is now the fourth stab at it. While some bona
    fide hedgers have concerns about how to structure these
    exemptions, nearly all of them are supporters of meaningful
    limits in these markets. We hope that their ongoing concerns
    can be adequately addressed and the CFTC can move forward with
    that final rule. The conditional spot month is a critical issue
    in pricing and that concern needs to be addressed in that
    process.
        Thank you again for the opportunity to present before this
    committee.
        [The prepared statement of Mr. Cota can be found on page 58
    in the appendix.]
        Chairman Roberts. Well, thank you, Mr. Cota.
        Mr. Walker, elaborate on what you refer to in your written
    testimony as a, quote, ``recordkeeping briar patch''--I will
    add in the needles, if you wish--that a party may enter into by
    simply making one transaction. What are some of the costs and
    burdens associated with the new recordkeeping rules? Mr.
    Barber, please feel free to chime in here, as well, on this
    issue that you have highlighted in your testimony. Mr. Walker,
    Mr. Barber.
        Mr. Walker. Yes. If I can go first, one of the issues we
    have is much longer retention periods for recordkeeping. The
    worst case prior to Dodd-Frank was for Federal Energy
    Regulatory Commission purposes we would keep records five years
    from record creation. Under Dodd-Frank, physical records would
    have to be kept for the life of the transaction plus five
    years. Our physical transactions with optionality that are
    swaps can be five, ten, 20 years long, so you are talking about
    life of that transaction plus five years can be ten, 25 years
    long, quite a long time.
        Also, both derivatives and physical transactions are
    subject to these retention periods. Pre-trade written
    communications must be kept not only on the derivative
    transactions, but also the physical transactions that are
    related to those. We, on behalf of our clients, are avoiding
    nodal exchange because of the impact of 1.35. That means that
    we are not hedging. We are more exposed. It also reduces market
    liquidity on nodal exchange because of that requirement.
        This rule was really intended for market fiduciaries, who
    have a fiduciary responsibility to customers and might be
    holding customer funds and prior to Dodd-Frank was never
    required of other commercial end-users.
        Mr. Barber. Thank you for the question, Mr. Chairman. This
    is certainly a contentious issue for my company and for
    agricultural companies in general. The amount of material that
    appears to be required is well beyond anything that has ever
    been handled before. Capturing commercial conversations as a
    pre-trade communication, when you consider the number of
    merchandisers and farmers and elevators in just the State of
    Kansas, we do not always know what is a pre-trade communication
    or what is just a conversation between a broker and a farmer or
    a feedlot operator. To try and capture all that and think that
    that is germane to the oversight seems way beyond the pale of
    what is necessary.
        Chairman Roberts. What do you do with this? I mean, you are
    talking about keeping it for five years or whatever it was on
    top of whatever the transaction was. I mean, do you--I am
    wondering who inspects it. I mean, where is it? I mean, do you
    keep it on site or what?
        Mr. Barber. I would have to say I am not sure. The IT group
    in all companies have a tremendous struggle with it, and I
    think that is an echo of one of our questions, what will they
    do with it? Is there--more material there than anyone can
    possibly decipher or make sense of. What is its real purpose?
    It just feels like a burden with no real solution to anything
    that is a problem.
        Chairman Roberts. See if you can provide us with a real
    world, on-the-ground impacts that will come if the CFTC does
    not correctly define what it views to be a bona fide hedge to
    adequately provide the exemptions that hedgers, but not
    speculators, need, and any others on the panel are welcome to
    comment.
        Mr. Barber. Thank you for that. Certainly, again, harvest
    is not that far away for wheat, and coming----
        Chairman Roberts. Such as it is, yes. Go ahead.
        Mr. Barber. --coming into a nice, beautiful harvest weekend
    and the local elevator knows that he is going to acquire
    probably a substantial amount of grain over that weekend and he
    is going to be exposed by putting out a bid to his local
    producers that, without clear direction that an anticipatory
    position is a hedge, he will probably be willing to pay much
    less to that producer because it increases his risk in the
    handling and the ownership of that grain than what he would if
    there was clarity that he would be within the appropriate
    regulation as a hedger, crystal clear, simple, that that is a
    direct impact.
        Chairman Roberts. I appreciate that.
        I am going to ask Senator Stabenow, but I just have a
    couple other questions, as well. Go ahead.
        Senator Stabenow. Well, thank you very much, and thank you
    to all of you for your input.
        Let me start with Mr. Cota. In your experience as president
    of your family's energy company in Vermont, and as someone
    representing small end-users, I think it is really important
    that we hear your input as it relates to smaller user companies
    managing risk in the derivative markets, and I wonder if you
    might speak a little bit more from that perspective, and what
    changes, if any, do you believe the committee should focus on
    to ensure open, fair, and transparent markets for small
    participants.
        Mr. Cota. Thank you for the opportunity. As a small
    business, it is very difficult to do these hedges. The heating
    end of the industry that I represent requires a higher level of
    sophistication than most others because of its seasonality and
    how you have to blend contracts together in order to get it
    done. So, the changes that have been made have enabled people
    to actually be able to give consumers their energy costs fixed
    for the year or capped, which is even better, for a period of
    time, and blend those contracts together. A lot of that has
    been done with the changes from futures markets into option
    contracts and some derivative programs along with that. It is
    much easier to do that now in smaller units where they would
    not be able to do it. So, the consumer benefits through that
    reduced cost and the companies' costs have gone down. So, that
    has been a positive benefit.
        Stability in these markets are critical. The option prices
    are a measurement of, really, what the volatility is, and the
    consumer is the one that ends up paying that. It does not
    matter what the market is. So, that has been a positive thing.
        For changes that need to be done, one is that of the
    customer monies that are set aside is a critical issue. In most
    of our industries, the commodity costs are such a significant
    portion of the total business that if in a derivative that is
    not cleared and you do not have access to those funds, then
    that company is out of business. You may be held financially
    whole later, but it does not matter. You are out of business.
    So, that is an important element to the rule.
        Penalties are really critical. Having somebody monitor the
    activities. You know, the CFTC needs funding. People miss the
    scope of things. The derivative markets is $700 trillion
    worldwide. The total world stock market is, like, what, $60
    trillion. The SEC is in charge of the stock markets. The U.S.
    portion of these is, like, half, high leverage, still 35 times
    leverage. Energy, it is much higher. Some, for example, it is
    even greater still. So, these markets are so huge, and, so,
    having the CFTC have the funding just to get things done is
    critical. You need to know what the new rules are.
        Senator Stabenow. Following up on that, you talked about
    the fact that, from a stability standpoint, small end-users, in
    particular, are counting on the CFTC to do their end of it,
    right, and clear, consistent rules that are fair and not overly
    burdensome, or hopefully not burdensome at all, but certainly
    not overly burdensome.
        But, then, you also talked about the fact that there are
    large CFTC enforcement actions going on much, much larger,
    that, in fact, their enforcement budget, and you are
    recommending that we should increase the penalty authority as
    we look at reauthorization. I wonder if you might talk more
    about that, because there really is a concern that I have that
    if these penalties are too low, you just make it a cost of
    business and keep on going and it is not really protecting you
    or other end-users, people that are counting on this system to
    have integrity and accountability in it.
        Mr. Cota. If it is not--if it is just a part of the cost of
    doing business, it has no prophylactic effect. There are lots
    of Ponzi schemes. If you take a look at the CFTC violations,
    there are tons and tons of violations. Many of them are very
    small Ponzi schemes relative to, say, the LIBOR scandal or
    something like that. But, they need to be proportional to what
    that profit was made in that transaction. Otherwise, it is not
    going to have any prophylactic effect.
        If it is capped at a certain amount and the benefit turns
    out to be billions of dollars to that entity, then they are
    going to do that all day long. There is no reason for them not
    to. If it means that they have to hire more attorneys, well,
    guess what. More attorneys make more money. But, they are going
    to keep doing that transaction.
        So, I think it needs to be some multiple of what the
    benefit was or what the damage was in order for it to have any
    impact. If it does not have an impact, the federal government
    has more money to spend.
        Senator Stabenow. Thank you, and Mr. Chairman, I have more
    questions, but I know my time is up, so thank you.
        Chairman Roberts. Senator Hoeven.
        Senator Hoeven. Thank you, Mr. Chairman.
        We have to reauthorize the Commodity Exchange Act, and so I
    guess what I would like to hear from each of you are what are
    the most important issues we need to deal with in
    reauthorization and the solutions. What is the top one or
    several issues you think we have to deal with in
    reauthorization and what you think we should do, starting with
    Mr. Duffy.
        Mr. Duffy. I am a big believer that the reauthorization
    process could probably be somewhere in the one-liner, with the
    exceptions that we have been discussing today, which is the
    end-user exemptions that need to be clarified. We have to take
    out the people that were not the causation of the 2008, 2009
    crisis and let them go ahead and continue to do their business.
    So, I think that is critically important to do.
        Also, which has been raised earlier, is the concern of the
    concentration of some of the smaller FCMs. You have to realize
    that the people that put food on the table in the United States
    of America, the producers of our country, from food to other
    products, they need a place to participate to do their trades,
    and more and more of these firms are getting--the smaller firms
    are getting onerous costs to do business today, so we are
    getting a concentration--we talked about it earlier--losing
    more firms.
        Senator Hoeven. Yes.
        Mr. Duffy. That is a big issue that we need to figure out
    with the firms and how we are going to expand this so the
    participants or the end-users can continue to do their business
    to benefit the rest of us in this country.
        Senator Hoeven. Mr. Barber.
        Mr. Barber. Thank you, Senator. I would certainly concur
    with Mr. Duffy's assessment. As an end-user, as a significant
    user and trader of these products, we would hope the committee
    would, as I said, look at what the intent of Dodd-Frank was and
    look at the gap that was created in how it has actually been
    implemented. What we have experienced is a serious overrun of
    regulatory reach way beyond what was intended. So, a return to
    that--and, certainly, if that requires more legislative action,
    we would commend you for doing that, to put the parameters back
    around that effort such that it regulates the swap market and
    the OTC markets that were the genesis of the problem that we
    had and not affect the market structures that, by and large,
    worked effectively for ag and energy producers and consumers
    prior to Dodd-Frank.
        Senator Hoeven. Mr. Walker.
        Mr. Walker. Thank you, Senator. The statute provides broad
    exemptive relief in the area of position limits for classes of
    market participants or classes of transactions today, and the
    CFTC should use that exemptive authority to more fully exempt
    commercial end-users from position limits. We believe that
    physical transactions should not be swaps, regardless of the
    fact of whether they have optionality in them or not, and we
    believe it is important not to treat commercial end-users as
    though they are a customer fiduciary or somebody that caused
    the financial crisis of 2008 by subjecting them to Regulation
    1.35.
        Senator Hoeven. Mr. Bopp.
        Mr. Bopp. Thank you, Senator. Number one, adopt the
    Chairman's legislation, S. 876, which would prevent non-
    financial end-users from being denied the very clearing
    exemption that is embedded in Dodd-Frank simply because they
    use a best practice, they use these centralized treasury units.
    This is a bill, by the way, that passed the House last Congress
    by voice vote.
        Number two, provide additional guidance. I think that our
    regulators are doing what they can to try to harmonize rules
    across borders. What we would appreciate as end-users is
    additional guidance to our regulators that they should take
    into account the views of end-users and the interests of end-
    users in trying to harmonize rules across borders.
        Senator Hoeven. Mr. Cota.
        Mr. Cota. I would agree with Terry Duffy, and in addition
    increase penalties, as I said before, and full funding.
    Whenever you are having new rules, you need to get it done
    quickly. If there is not enough money to get the process done,
    then everyone is waiting for what the new game is. So, they
    need full funding for that.
        Senator Hoeven. Do you all agree that the Roberts
    legislation would address the end-user issue, starting with Mr.
    Duffy.
        Mr. Duffy. I do.
        Mr. Barber. Certainly, it is a significant improvement.
        Senator Hoeven. Mr. Walker, I guess you have already said.
        Mr. Bopp.
        Mr. Bopp. I do.
        Senator Hoeven. Mr. Cota.
        Mr. Cota. We do not have a position on this legislation.
        Senator Hoeven. Last question. I do not know if it was Mr.
    Duffy or Mr. Barber, but one of you--so, we have talked about
    end-user. With the exception of Mr. Cota, you all feel that
    that would address the end-user issue, and I am disappointed I
    did not get to talk to the Chairman on that issue in terms of
    their flexibility.
        But, the other question I have is for small companies,
    small providers. I do not know if it was Mr. Duffy or Mr.
    Barber who said that the regulatory burden is hurting the
    ability of the smaller companies to stay in the business. Of
    course, that means less competition, less service, not as good
    pricing for the customer. It also means concentration of risk.
    That is an important point. How do we address that? Is there
    legislation out there to do that? Does CFTC have the
    flexibility to do it without legislation? Two questions.
        Mr. Duffy. Real quick----
        Senator Hoeven. I would ask for some indulgence from the
    Chair, or I can come back if you would like me to do this in
    the second round, but can they answer that?
        Chairman Roberts. Certainly, they can. We have a vote. It
    is ongoing.
        Senator Hoeven. I will be particularly tough on Mr. Cota
    for you, if you want----
        [Laughter.]
        Chairman Roberts. Well, he is really talking about the
    Klobuchar initiative as of last year. I wondered if that would
    help you change your mind, instead of me.
        Chairman Roberts. I do not mean to put you on the spot. Why
    do we not just forget that. But----
        Senator Hoeven. I will wrap up, Mr. Chairman. The----
        Chairman Roberts. Go ahead.
        Senator Hoeven. Does the CFTC have the flexibility to
    provide that regulatory relief now? If not, is there
    legislation out there that would accomplish that we could maybe
    incorporate in reauthorization?
        Mr. Duffy. I will try to answer very quickly, sir. Real
    quick, there is a business model problem embedded in the FCMs
    today. We talked about interest rates being where they are at
    today. A lot of the firms in the FCM world made money off of
    other people's money. Interest rates went to zero. In the
    meantime, trading exploded, but the cost of doing business went
    way down. Everybody benefited, except for one thing happened.
    Interest rates went down, so the business model for the FCMs
    went away. The big participants could always survive that. The
    smaller participants cannot.
        What is critically important is we cannot have burdensome
    rules that apply to the banks that apply to small FCMs in the
    same way, because these small FCMs do not have the deep pockets
    that the banks have today and over 50 percent of the activity
    being done today in regulated futures market is done by smaller
    participants.
        Senator Hoeven. Is the flexibility there for the regulators
    to give them the relief? Is legislation needed? Which?
        Mr. Duffy. I do not believe--I do not know if they can
    create legislation on how to run a business. I do not know if
    that is appropriate or not----
        Senator Hoeven. Regulatory relief.
        Mr. Duffy. Regulatory relief is a different issue and I
    think we have to look at all the different rules that apply to
    banks and smaller FCMs, and I think that is, again, what this
    hearing is about, is to exempt some of the end-users who
    participate in these smaller firms, not in the bank firms.
        Senator Hoeven. Mr. Barber.
        Mr. Barber. Yes. I mean, I think that was covered well by
    Mr. Duffy and in his comments. Certainly, the CFTC has a lot of
    places that they could relieve some regulatory pressure on
    smaller entities.
        Senator Hoeven. Does anyone else have something they want
    to add on that issue?
        [No response.]
        Senator Hoeven. Okay. Thank you.
        Chairman Roberts. This will conclude our hearing. I want to
    thank all witnesses.
        I ask unanimous consent that the report by former CBO
    Director Douglas Holtz-Eakin be entered in the record at this
    point. So ordered.
        [The following information can be found on page 106 in the
    appendix.]
        Chairman Roberts. Mr. Barber, as a conclusion, that report
    said that the cost of Dodd-Frank compliance could reduce GDP by
    $895 billion from 2016 to 2025, and you mentioned in your
    testimony that the compliance cost for ADM's FCMs have doubled
    in the past five years. Simple question: Do you find you are
    now spending more and more time and money complying with rules
    and regulations which create distractions from the crucial risk
    mitigation services that you provide our farmers and ranchers?
        Mr. Barber. Thank you for the question, Chairman, and the
    ability to conclude. Absolutely. In a market that essentially
    functioned well for us previously, we are spending substantial
    amounts of resources dealing with a regulatory scheme that was
    not in place prior to Dodd-Frank and that has not helped our
    markets function any better or created a safer marketplace.
        Chairman Roberts. I appreciate that. I appreciate the
    panel.
        This concludes the hearing.
        [Whereupon, at 12:08 p.m., the committee was adjourned.]

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