[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

                               __________

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


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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

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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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