[Senate Hearing 116-176]
[From the U.S. Government Publishing Office]
S. Hrg. 116-176
THE STATE OF THE DERIVATIVES MARKET AND
PERSPECTIVES FOR CFTC REAUTHORIZATION
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HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
JUNE 25, 2019
__________
Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.govinfo.gov/
__________
U.S. GOVERNMENT PUBLISHING OFFICE
38-313 PDF WASHINGTON : 2020
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COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
PAT ROBERTS, Kansas, Chairman
MITCH McCONNELL, Kentucky DEBBIE STABENOW, Michigan
JOHN BOOZMAN, Arkansas PATRICK J. LEAHY, Vermont
JOHN HOEVEN, North Dakota SHERROD BROWN, Ohio
JONI ERNST, Iowa AMY KLOBUCHAR, Minnesota
CINDY HYDE-SMITH, Mississippi MICHAEL BENNET, Colorado
MIKE BRAUN, Indiana KIRSTEN GILLIBRAND, New York
DAVID PERDUE, Georgia ROBERT P. CASEY, Jr., Pennsylvania
CHARLES GRASSLEY, Iowa TINA SMITH, Minnesota
JOHN THUNE, South Dakota RICHARD DURBIN, Illinois
DEB FISCHER, Nebraska
James A. Glueck, Jr., Majority Staff Director
DaNita M. Murray, Majority Chief Counsel
Jessica L. Williams, Chief Clerk
Joseph A. Shultz, Minority Staff Director
Mary Beth Schultz, Minority Chief Counsel
C O N T E N T S
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Tuesday, June 25, 2019
Page
Hearing:
The State of the Derivatives Market and Perspectives for CFTC
Reauthorization................................................ 1
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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... 3
WITNESSES
Sexton, Thomas W., President and Chief Executive Officer,
National Futures Association, Chicago, Illinois................ 5
Lukken, Hon. Walter L., President and Chief Executive Officer,
Futures Industry Association, Washington, D.C.................. 7
Barker, Joe, Director of Brokerage Services, CHS Hedging, St.
Paul, Minnesota................................................ 8
Kelleher, Dennis M., President and Chief Executive Officer,
Better Markets, Washington, D.C................................ 10
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APPENDIX
Prepared Statements:
Sexton, Thomas W............................................. 30
Lukken, Hon. Walter L........................................ 37
Barker, Joe.................................................. 43
Kelleher, Dennis M........................................... 47
Document(s) Submitted for the Record:
Roberts, Hon. Pat:
International Swaps and Derivatives Association.............. 76
Managed Funds Association.................................... 89
Church Alliance.............................................. 101
Question and Answer:
Barker, Joe:
Written response to questions from Hon. Amy Klobuchar........ 106
Lukken, Hon. Walter L.:
Written response to questions from Hon. Pat Roberts.......... 107
Written response to questions from Hon. Amy Klobuchar........ 107
Sexton, Thomas W.:
Written response to questions from Hon. Pat Roberts.......... 109
CERTAINTY IN GLOBAL MARKETS FOR THE U.S. AGRICULTURE SECTOR
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TUESDAY, JUNE 25, 2019
U.S. Senate,
Committee on Agriculture, Nutrition, and Forestry,
Washington, DC.
The committee met, pursuant to notice, at 9:49 a.m., in
room 328A, Russell Senate Office Building, Hon. Pat Roberts,
Chairman of the Committee, presiding.
Present or submitting a statement: Senators Roberts,
Boozman, Hoeven, Ernst, Braun, Grassley, Thune, Fischer,
Stabenow, Brown, Bennet, Casey, Smith and Durbin.
Chairman Roberts. I call this hearing of the Senate
Agriculture, Nutrition, and Forestry Committee to order. Before
delivering my opening statement I ask unanimous consent that
written testimony from a large number of coalition groups and
trade associations be submitted for the record. Without
objection, so ordered.
[The following information can be found on pages 76-104 in
the appendix.]
STATEMENT OF HON. PAT ROBERTS, U.S. SENATOR FROM THE STATE OF
KANSAS, CHAIRMAN, U.S. COMMITTEE ON AGRICULTURE, NUTRITION, AND
FORESTRY
Chairman Roberts. The Senate Agriculture Committee has the
responsibility of reauthorizing programs administered by
multiple Federal agencies and commissions, notably the numerous
programs of the U.S. Department of Agriculture. I would note,
yet again, that as the Committee we authorized hundreds of
programs worth billions of dollars last year, in the farm bill,
and in doing so fulfilled its role by providing certainty and
predictability to many stakeholders. I say thanks to the
Committee, but more especially to our distinguished Ranking
Member.
This Committee also has distinct jurisdiction over the
Commodity Futures Trading Commission and its role in
implementing the law governing worldwide derivative markets as
authorized in the Commodity Exchange Act. While the CFTC has
continued to receive funding as it works to ensure that U.S.
derivative markets function properly and in an open, safe, and
transparent manner, it has done so without authorization since
October 2013. That is almost six years ago.
I think it is fair to say a lot has changed since the last
time CFTC was reauthorized, alongside the 2008 Farm Bill. We
have seen a rollout and adoption of a number of regulations as
required under the Dodd-Frank Act.
I am pausing if anybody wants to cough at that particular
moment.
They have created greater transparency in the over-the-
counter derivative markets while still ensuring non-financial
end users are provided flexibility in the way they utilize
derivatives to hedge their commercial risk.
Recently we have seen legislative efforts in the European
Union, which will have the unfortunate effect of undoing the
agreed-upon mutual recognition of foreign-based clearinghouses,
likely creating uncertainty, to say the least, for some of our
most important global financial stakeholders.
We have seen incredible advances in technology, including
the emergence of blockchain technology. In addition to
supporting the emergence of Bitcoin and other cryptocurrencies,
it has the potential to revolutionize the way companies do
business, including speeding up the time it takes to verify and
execute international commodity trades.
We have worked together in a bipartisan manner to confirm
nominees and to ensure that the Commission is fully
functioning. I think that is a star in the Committee's crown.
As we move forward with reauthorization, it is important
that Congress provide CFTC with certainty. We should do our job
and not just for some of the Committee agencies and
stakeholders but for all of those impacted by the laws within
our purview.
Within this process it is important we listen to
stakeholders to better understand what is or is not currently
working. We must explore what provisions may need a legislative
update to reflect current and future market dynamics and what
the CFTC already has the authority to accomplish through
rulemakings.
This hearing is designed to provide us with that
opportunity. Our panel of distinguished witnesses today covers
a broad spectrum of industry stakeholders and perspective. We
will hear from the derivatives industry's self-regulatory
organization with an update on safety and soundness of U.S.
derivative markets and insight on legislative recommendations
for further strengthening consumer protections.
We will hear from a leading global trade association
representing exchanges, clearing firms, swap dealers, asset
managers, and other financial stakeholders about current market
trends. We will hear testimony from one of our Nation's leading
agriculture cooperatives about the vital role that derivatives
play for stakeholders hedging their commercial risks in the
production and marketing of our Nation's ag commodities. A
tough job at this current time.
Last we will hear from a consumer advocacy organization,
formed after the 2008 financial crisis, about any additional
reforms it believes may be necessary.
I thank you all again for joining us. I look forward to our
conversation today about the state of global derivatives
markets and CFTC reauthorization, and now I will turn to my
distinguished colleague, Ranking Member Stabenow, for her
opening remarks.
STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE
OF MICHIGAN
Senator Stabenow. Thank you, Mr. Chairman, and welcome to
our witnesses today for this very important discussion. It is
good to have the opportunity, since it has been over a decade
since Congress reauthorized the CFTC, for this discussion about
reauthorization. I am pleased we are working together on a
bipartisan basis, as we always do in this Committee, to be able
to get this done.
The CFTC plays a critical role in providing certainty in
our futures and swaps markets for Main Street businesses,
consumers, and farmers.
As we know, a lot has happened since the CFTC was last
reauthorized in 2008. We witnessed firsthand the disastrous
consequences of financial deregulation. The global financial
system broke down. Housing markets collapsed nationwide.
Millions of families lost their homes and their financial
security. Over 8 million jobs disappeared, while farmers and
small businesses faced financial ruin.
The American people lost faith in the ability of banks to
do what is right, and worse--the American people lost faith in
the ability of our government to protect our economy.
Next month will mark the 9-year anniversary of the Dodd-
Frank Act. Thanks to that legislation, we have a financial
system that is stronger and more resilient. As we consider the
reauthorization of the CFTC, we must not roll back the
important reforms that have been implemented since the
financial crisis.
CFTC reauthorization also gives us a chance to be forward
looking. It is critical that we consider the opportunities as
well as the challenges of tomorrow.
Cybersecurity is arguably the greatest systemic risk that
our financial system faces today. Top executives in the global
financial sector agree, and are devoting unprecedented
resources to protect against cyberattacks. We cannot allow the
American economy to be endangered by any shortcomings in the
security of our financial system. Our financial system must
take the necessary steps to protect against cyberattacks.
The CFTC also must protect its own information systems,
especially against cyberattacks by foreign adversaries and
other bad actors. In 2016, the SEC was attacked by Ukrainians
and Russians attempting to gain access to confidential earnings
reports. More recently, the CFTC reported an increase in
phishing attempts aimed at stealing sensitive agency
information. It is critical that the American people and market
participants have confidence that the CFTC's systems are
secured at all times.
As we look forward to CFTC reauthorization, we must
prioritize certain key issues. Our futures and swaps markets
help create American jobs and support economic stability for
our farmers, manufacturers, and consumers. We need to do
everything we can to ensure that the CFTC keeps our markets
strong and free of fraud, manipulation, and disruptive
practices.
Customer protection needs to continue as a top priority.
We must ensure that the CFTC has the enforcement tools it
needs to bring wrongdoers to justice.
Finally, I have long been an advocate for providing the
CFTC with the resources it needs to fulfill its critical
responsibilities. Yet the CFTC continues to be underfunded,
which leaves our financial system at risk. It is our
responsibility to solve this problem, and, Mr. Chairman, I look
forward, as always, to working with you on this issue.
Chairman Roberts. I thank the distinguished Ranking Member.
I would like to welcome our panel of witnesses this morning.
Our first witness is Thomas W. Sexton, who serves as
President and Chief Executive Officer of the National Futures
Association. Mr. Sexton joined the NFA in July 1991, and has
held several positions, including serving as NFA's general
counsel and secretary from September 2001 through February
2017. In his role as general counsel, Mr. Sexton oversaw major
regulatory initiatives affecting NFA's member firms and various
enforcement matters.
He holds a bachelor of arts degree in government from Notre
Dame, an MBA degree from Loyola University Chicago, and a law
degree from the University of Notre Dame Law School.
Welcome, Mr. Secretary.
[Laughter.]
Mr. Sexton. That is Okay.
Chairman Roberts. Just do not tell Sonny I said that, all
right? I look forward to your testimony.
Next we have the honorable Walt Lukken, who is President
and Chief Executive Officer of the Futures Industry
Association. Prior to joining the FIA, Mr. Lukken was the CEO
of New York Portfolio Clearing. Before joining the private
sector in 2009, he served as a CFTC commissioner beginning in
2002, and then as acting Chairman of the Commission for 18
months, a period that included the financial crisis of 2008.
Tough waters back then.
Mr. Lukken also spent time on Capitol Hill where he served
five years as counsel on the staff of U.S. Senate Agriculture
Committee under then--Chairman Dick Lugar, who is smiling right
at you today.
He received his bachelor of science degree with honors from
the Kelley School of Business at Indiana University and his law
degree from the Lewis & Clark School in Portland, Oregon.
Thank you for being here today, Mr. Lukken, and I look
forward to your testimony.
Next we have Mr. Joe Barker, the Director of Brokerage
Services for CHS Hedging, which is the commodity trading
subsidiary of CHS, Inc. Mr. Barker has spent the last 19 years
providing risk management services for agriculture clients. He
started as a commodity broker in the Indianapolis office of CHS
Hedging in 2000. From 2007 through 2014, he was the branch
manager of the Kansas city office.
Today, Mr. Barker works in Inver Grove Heights, Minnesota
headquarters office where, in addition to directing the
brokerage services is also the Chairman at CHS Hedging's senior
management team.
He grew up on a farm east of Noblesville, Indiana, and
completed his bachelor's degree at Kansas State University,
where he majored in animal science with a business option. He
also earned an MBA from Indiana Wesleyan University. He began
his career in agriculture in live hog production for Seaboard
Farms in Kansas.
Welcome, and thank you for being here today.
Our final witness today is Mr. Dennis Kelleher. Mr.
Kelleher is President, Chief Executive Officer, and Co-Founder
of Better Markets. Prior to Better Markets, Mr. Kelleher held
senior staff positions in the U.S. Senate, including General
Counsel and Deputy Staff Director on the Health Committee, and
Chief Counsel and Senior Leadership Advisor to the Chairman of
the Senate Democratic Policy Committee.
Mr. Kelleher has been a partner with the international law
firm of Skadden, Arps, where he had a practice specializing in
crisis management and complex corporate matters that focused on
governance and securities and financial markets.
Notably, Mr. Kelleher served four years of active duty,
enlisted in the Air Force as a crash rescue firefighter medic.
We thank you for your service, sir. He graduated from Brandeis
University and from Harvard Law School.
Welcome, Mr. Kelleher, and thank you for your service to
our country, again. Mr. Sexton, why don't you kick things off.
STATEMENT OF THOMAS W. SEXTON, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NATIONAL FUTURES ASSOCIATION, CHICAGO, ILLINOIS
Mr. Sexton. Thank you, Mr. Chairman. Chairman Roberts,
Ranking Member Stabenow, members of the Committee, thank you
for the invitation to testify at this important hearing. I am
President of the National Futures Association, which is the
industry-wide self-regulatory organization for the derivatives
industry.
Our responsibilities include registering all firms and
industry professionals on behalf of the CFTC, passing rules to
ensure fair dealing with customers, monitoring our members for
compliance with those rules, and taking enforcement actions
against those members that violate those rules.
The CFTC oversees every single aspect of our regulatory
authority, and as the industry SRO for the derivatives market,
we have one overriding objective, to help the CFTC. We and the
CFTC act as strong partners in regulating the derivatives
industry, and as partners I want to, at this time, take the
opportunity to thank Chairman Giancarlo for his strong support
of self-regulation during his time there, and we certainly look
forward to working with Dr. Tarbert when he becomes chair of
the CFTC in a few weeks.
Reauthorization is always an important process for the
industry as a whole, and for NFA in particular. NFA firmly
believes that customer protection issues should be front and
center with regard to reauthorization, and we certainly
encourage this Committee to work to reauthorize the CFTC.
The last few reauthorization bills voted out of this
Committee and the House Agriculture Committee have included a
key customer protection provision relating to FCM bankruptcies,
which we continue to strongly support and believe any future
reauthorization bill should contain. Over 30 years ago, the
CFTC adopted rules regarding FCM bankruptcies. Among other
things, those rules provided that if there was a shortfall in
customer-segregated funds, the term ``customer funds'' would
include all assets of the FCM until customers were made whole.
Several years ago, a district court decision, the Griffin
Trading Decision, cast doubt on the validity of the CFTC's
rule. Although that decision was subsequently vacated, a cloud
of doubt continues to linger over this issue. Congress should
remove that doubt and ensure that customers have priority if
there is a shortfall in customer funds, and can do so, we
believe, by amending Section 20 of the Commodity Exchange Act,
which gives the CFTC authority to adopt regulations regarding
commodity brokers that are debtors in Chapter 7 of Title 11 of
the United States Code.
Our request is simple: please amend Section 20 to clarify
that the CFTC has the authority to adopt the rule that it did.
We believe there is a broad base of industry support for this
approach, and we would be happy to work with Congress on
specific proposed language.
Other areas that I wanted to highlight, covered in our
written testimony, the first is with regard to our swap
dealers. I certainly want to thank Congress and this Committee
for having confidence in the CFTC and NFA to regulate swap
dealers. Our written testimony details, specifically, how, in
light of Dodd-Frank, our responsibilities have increased
significantly throughout the last few years.
With regard to swap dealers, in partnership with the CFTC
we have developed a regulatory oversight program that reviewed,
in detail, their policies and procedures upon registration,
performed regular examinations of U.S. and non-U.S. swap
dealers, collected certain risk information from these firms,
and approved and monitored these firms' initial margin models
for uncleared swaps.
We will continue to evaluate our program and enhance this
program with the CFTC, as necessary, in the future.
I appreciate Senator Stabenow's mention of cybersecurity.
It is an issue that is of critical importance to all of us. I
can assure you that NFA makes every effort possible to secure
our data and the CFTC data that we hold. Our technology staff
and budget have grown significantly throughout the past few
years. We adopt best practice frameworks and standards, engage
independent parties to conduct security testing, and
continually assess the data that we hold and whether or not it
is critical for our mission, and if it is not, we no longer
collect that data.
We have imposed specific cybersecurity requirements on our
NFA members, requiring them to have written information systems
security programs and to do a risk assessment of their
particular cybersecurity risk. During our examinations we
review these risks and work with our members to understand
these requirements so that they can comply.
Our testimony also highlights customer protection issues
that we have partnered with the CFTC to resolve in the last few
years. Detecting and combating fraud is central to our mission.
These issues involve the oversight of firms and individuals,
safeguarding of customer funds, swaps proficiency requirements,
which we hope to launch in early 2020, virtual currencies, and
coordination between the CFTC, SEC, and NFA, particularly with
regard to commodity pools that are duly registered.
In conclusion, we look forward to working with this
Committee to reauthorize the CFTC, and will continue to work
with the CFTC and Congress to tackle regulatory challenges
posed by an industry that is constantly changing.
I would be happy to answer any questions at the appropriate
time.
[The prepared statement of Mr. Sexton can be found on page
30 in the appendix.]
Chairman Roberts. We thank you for your testimony. Mr.
Lukken.
STATEMENT OF THE HONORABLE WALTER L. LUKKEN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER, FUTURES INDUSTRY ASSOCIATION,
WASHINGTON, D.C.
Mr. Lukken. Thank you, Chairman Roberts, Ranking Member
Stabenow, and members of the Committee. Thank you for the
opportunity to testify on CFTC reauthorization and the state of
the derivatives markets.
I am the president of FIA, the leading trade association
for the regulated futures options and centrally cleared
derivatives markets. I have had the privilege of being
significantly involved in the last two CFTC reauthorizations.
In 2008, I was serving as Acting Chairman of the CFTC, and I
worked with this Committee to ensure the agency had the proper
regulatory and enforcement tools to oversee these markets. In
2000, as mentioned, as part of the Commodity Futures
Modernization Act, I worked as a staff member of this Committee
under the leadership of the late Chairman Richard Lugar, to
help modernize and reauthorize the CFTC.
This experience has provided me a first-hand appreciation
of the importance of the CFTC reauthorization process, because
it provides an important congressional stamp of approval on
this agency's mission and legal authority.
Today I want to highlight certain market trends and
recommendations to aid in your deliberations.
To begin with, our markets have grown significantly in the
decade since the last reauthorization. Global volume on futures
and options transactions has increased 70 percent over that
period of time. In 2018, our industry traded over 30 billion
contracts for the first time in its history. There are more
products and more participants in more locations, using these
markets to hedge and manage risk than ever before.
Second, post-crisis reforms have made the derivatives
markets safer. With the implementation of Dodd-Frank, a large
percentage of the over-the-counter derivatives are now
submitted to central counterparties for clearing. According to
CFTC data, 90 percent of interest rate swaps and 62 percent of
credit derivatives are now cleared. This reduces the amount of
risk in the financial system and provides greater transparency
for both regulators and market participants alike.
Third, our markets have become much more global. Today, all
major global exchanges have anywhere from one-third to 90
percent of their volume coming from outside their home
location. Importantly, these transactions from foreign
participants add vital liquidity to domestic markets that keeps
costs affordable for customers hedging risk.
Last, like most economic sectors, this industry has been
transformed by technology, whether it is the way market
participants trade futures, whether it is the way that trades
are processed and cleared, or the way that regulators surveil
the markets. Technology has provided our industry with greater
efficiencies that enable more people to access these products
globally, at significantly lower costs.
To keep pace with these changing market dynamics,
regulators must have flexible tools and authority. FIA supports
the CFTC's principles-based approach to regulation, which has
served the agency well for the past 20 years. The core
principles of the CEA provide the CFTC with outcomes-based
tools that can be tailored to the ever-changing global
marketplace. I encourage the Committee to preserve this
flexibility.
Ensuring the protection of customers and their funds must
also remain a priority for our industry. FIA joins the National
Futures Association, as Tom, in his comments, mentioned, in
recommending to this Committee clarifications around the
definition of customer property, which was made uncertain by
the Griffin Trading bankruptcy decision.
Protecting customer data is another important priority
worthy of this Committee's consideration. In June, the CFTC's
Inspector General published a report that the agency has
numerous weaknesses in the way that it stores data used to
regulate the markets. FIA supports providing the CFTC with the
resources, authority, and direction to enhance their data
collection methods, given the sensitivity of the data collected
from market participants.
Last, it is imperative that the regulatory framework for
this industry accommodates its global nature. FIA supports a
deference approach to cross-border regulation that allows
authorities to recognize and defer to foreign supervision when
their rules are deemed comparable and comprehensive. Both the
EU and the CFTC are considering proposals that will impact
cross-border regulation of clearinghouses, and we encourage
both authorities to recognize the home nation's oversight that
avoids needless duplication of supervision and regulation.
In closing, I hope these high-level trends and
recommendations will help this Committee as it begins its
reauthorization process, and I look forward to your questions.
[The prepared statement of Mr. Lukken can be found on page
37 in the appendix.]
Chairman Roberts. We thank you for your testimony. Mr.
Barker.
STATEMENT OF JOE BARKER, DIRECTOR OF BROKERAGE SERVICES, CHS
HEDGING, ST. PAUL, MINNESOTA
Mr. Barker. Chairman Roberts, Ranking Member Stabenow, and
members of the Committee, thank you for holding this hearing as
you work on reauthorization of the Commodity Futures Trading
Commission. In particular, I appreciate the opportunity to
discuss the role of derivative markets in helping farmers and
agribusiness manage commodity price risk.
Currently, our agriculture markets are extremely volatile.
This is being fueled by ongoing uncertainty in international
markets and an extremely wet spring that has caused the slowest
corn and soybean planting progress on record.
Trade issues have led to dramatic price swings for grain,
livestock, and dairy. In my written testimony, I gave an
example of the volatility in the dairy market over the last
year. To further highlight this point, I would like to draw
your attention to the soybean market, where, from March 2, 2018
to July 16, 2018, the price of soybeans at the Chicago
Mercantile Exchange dropped from $10.71 to $8.10 per bushel.
This is a price drop of over 24 percent of the notional value
of the U.S. crop in less than five months.
That is only the futures component of the price that a
farmer receives. The dramatic drop in exports this past winter
caused basic levels in the Midwest to new record lows. At one
point this winter, the price of soybeans being bid to farmers
in parts of North Dakota was under $7 per bushel. The extreme
swings in price have meant the difference between producing
their crop at a profit or a loss.
Given the volatility, the agriculture industry must rely on
exchange traded and over-the-counter derivatives to manage
their price risk exposure. More producers are looking to their
co-ops to provide tools to manage price risks at the farm level
and assist in locking in margins. In fact, some NCFC members
are seeing record levels of risk management usage among their
producers. This includes structured contracts that give
producers the pricing tools that meet their marketing
objectives.
Agriculture must have access to sound, well-functioning
commodity derivatives markets. The CFTC ensures the integrity
of those markets. The Commission's responsibility in that
regard has expanded dramatically over the past decade. Yet
until recently, adequate funding had not kept up. While not in
the scope of this Committee, we encourage Congress to provide
sufficient funding for the CFTC's important functions.
In doing this, we caution against the imposition of any
user fee on the industry to fund the CFTC. Agriculture is a
high-volume, low-margin industry. Incremental costs, whether
passed on or imposed directly upon market participants, trickle
down to farmers. We fear a further increase in the cost would
have an unintended consequence of discouraging prudent hedging
practices. To be clear, a user fee would result in increased
risk being absorbed by agriculture.
Additionally, we would like to caution Congress from
setting up a situation where the CFTC would see its budget
directly impacted by the volume of trading in the products it
is tasked with regulating.
NCFC has supported elements of the Dodd-Frank Act that
bring more transparency and oversight to markets. However,
throughout its implementation, NCFC noted that the ag industry
does not fit in a one-size-fits-all regulatory regime meant for
Wall Street. We appreciate the work of the Commission in
addressing our many concerns with the Dodd-Frank rules.
This Committee's oversight of CFTC, as they have written
those rules, has been instrumental in protecting farmers' and
end users' access to needed risk management tools, and I would
like to thank you for your work in this area.
While most of Dodd-Frank has been implemented, the position
limits rule is not yet finalized. Any Federal speculative
position limit rule should not unduly burden the commercial end
user of these markets. Specifically, we have continued to
advocate that CFTC recognize common hedging practices such as
anticipatory hedging and cross hedging as bona fide hedge
activity. Given the nature of the various commodity markets,
there should not be a one-size-fits-all approach to determining
position limits.
We understand that the Commission has committed to Congress
to finalize that rule, and we will provide additional input
when available, for comment. While we are confident the
Commission will consider hedgers' concerns, I would like to
encourage the Committee to continue to monitor this rulemaking.
Thank you again for the opportunity to testify today before
this Committee. We appreciate your role in ensuring our
industry has the risk management tools needed to support our
businesses and those of our farmer members.
I look forward to answering any questions you may have.
[The prepared statement of Mr. Barker can be found on page
43 in the appendix.]
Chairman Roberts. Thank you, Mr. Barker. Mr. Kelleher.
STATEMENT OF DENNIS M. KELLEHER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, BETTER MARKETS, WASHINGTON, D.C.
Mr. Kelleher. Good morning, Chairman Roberts, Ranking
Member Stabenow, members of the Committee. Thank you for the
invitation to testify today. It is an honor to testify in the
Senate and before this Committee.
I am going to take a different approach to talking about
these issues at somewhat of a macro level. I believe the best
way to think about the CFTC, its reauthorization, its funding,
and derivatives regulation more broadly is by thinking about
what has become a dirty four-letter word--TARP.
Those of you who were here in the Senate, or in the House
at the time, had to take one of the most searing and
consequential votes of your careers, with no time and little
information. You had to decide to vote for or against sending
700 billion taxpayer dollars to bail out the largest financial
institutions in this country, including every one of the
largest derivative dealers.
I was on the Senate floor during those days of debates and
votes in September and October 2008, with Senator Grassley and
Senator Thune and Senator Casey, and actually most of you here,
and I well remember the agony and anger of members being forced
to make momentous decisions in a time of extremely limited
information, where the facts were changing daily, sometimes
hourly, on an hourly basis, and where the gravity of the
situation grew more ominous by the moment.
The entire financial system was going to collapse, you were
told. The payment system was going to stop. Your constituents
were not going to be able to cash their paychecks. Indeed, the
country was likely to fall into an economic abyss that was so
bad there was going to be a second Great Depression, you were
told.
Those were truly dark, dangerous, and downright scary days
and weeks, as one unimaginable event after another happened.
Financial giants were collapsing. Others were teetering on the
brink of collapse, the stock market plummeting.
This ignited the worst panic since 1929. That was because
the markets, the financial giants that ruled the markets and
their products, had been largely deregulated. As a result, no
one--not market participants, not regulators, not policymakers,
and not elected officials--knew what was happening, or worse,
what was going to happen next.
In the middle of all that, with events happening quickly,
little information, widespread fear, you were asked to send 700
billion taxpayer dollars, your constituents' money, to bail out
the largest financial institutions in this country and prevent
an economic catastrophe.
Seventy-four U.S. Senators voted for TARP, and days later,
125 billion of taxpayer dollars went out the door into the
accounts of just nine of the largest financial institutions,
including all the big derivatives dealers. That was just the
tip of the bailout iceberg. Trillions more--with a T--trillions
more were spent, lent, pledged, guaranteed, or otherwise used
by the government to prop up and bail out the financial system.
Most of that was done by the Federal Reserve, and it was kept
secret from the public, including you, the elected officials,
for many years.
Those were not the only bailout costs. There were also
widespread economic and human costs. Better Markets did a study
showing that the cost of the crisis is going to exceed $20
trillion in lost GDP, and counting.
Now as you know, derivatives are at the core of causing and
spreading the disaster, requiring the TARP vote and inflicting
so much pain and misery. In fact, the central role derivatives
played in that crisis is why I have suggested that derivatives
should be thought of as a conveyor belt, distributing, as
Warren Buffett said, the financial weapons of mass destruction
throughout the U.S. and global financial systems.
Without unregulated, nontransparent, over-the-counter
derivatives, and the enormous risk they spread and amplified,
the 2008 crash would have been very, very different, and almost
assuredly would have been much less severe. That is why the
Dodd-Frank Financial Reform Act spent so much time on
regulating derivatives, ensuring transparency, trading,
competition, oversight, accountability.
While other agencies have roles to play, the primary agency
standing between that derivatives nightmare from happening
again is the CFTC. The primary people ensuring that the CFTC
has the authority and resources to prevent that derivatives
nightmare from happening again is you and your colleagues in
the Senate and in the House.
So in closing, when thinking about that, I would urge you
to look at page 20 of our testimony--and I apologize, it is
page 20 and not page 4 or 5--of my written testimony. There is
a list of the 42 financial institutions that received more
taxpayer money from TARP than the CFTC's entire budget in 2019.
That is why reauthorization and properly funding the CFTC today
are as important as your TARP vote in 2008, because only
getting that right will reduce the likelihood of future votes
where you again send taxpayer money to bail out Wall Street's
derivatives dealers, and that should be uppermost in your mind.
That is why we need authorization. That is why we need a CFTC
with funding and resources and authority.
Thank you. I look forward to your questions.
[The prepared statement of Mr. Kelleher can be found on
page 47 in the appendix.]
Chairman Roberts. Thank you, Mr. Kelleher. That was unique
testimony with 20/20 hindsight and a rear-view mirror. I voted
no, just for the record. How did you vote? Oh, I am sorry. I
should not----
[Laughter.]
Senator Stabenow. I also voted no.
Chairman Roberts. She also voted no, so we had a very clear
insight. I remember talking with her about it on the floor.
Okay.
I am going to start the questions and I beg the indulgence
of my colleagues. I am going to try to go pretty quickly.
Chairman Grassley, do you have any advice for us before we
start the questions? Good morning to you.
Senator Grassley. I hope I get to ask questions before
10:45.
[Laughter.]
Chairman Roberts. We will try to make that happen. Thank
you, sir.
Mr. Barker, since the beginning of my chairmanship I have
made it clear that the needs of end users are a priority for
myself and this Committee. As you interact with those end users
in the countryside do they have efficient, effective, and fair
access to our futures markets? I would specifically like to
hear about the effect that any fees have on this access, as
well as another issue affecting access, that being position
limits, including having a clear definition of a bona fide
hedge.
Is the issue of position limits a priority for end users?
How important is that for our rural communities and ag
producers? It is extremely important they have efficient,
effective, and fair access. So my response would be it is very
important. I think that is probably what you ought to say, but
go ahead.
Mr. Barker. Thank you for the question, Senator. I actually
believe today we have access to efficient and well-functioning
markets. I believe the markets are quite good today. The
concern about access fees or user fees is that eventually this
trickles down to the American farmer.
I was recently at a CME event where they were discussing
the volume of trading in different commodities, and I was
struck by the fact we trade our corn crop 36 times. The funny
thing is, if you enact a fee on every transaction, 36 times
that fee will trickle down to the American farmer, because that
is how this works. The farmer is the price taker.
So eventually somewhere along the food chain someone might
say, ``I am going to step out of this transaction,'' and
liquidity might reduce, and that is the fear. Because with
markets this volatile, our individual farmers who are running
their own businesses and making independent decisions need the
ability to properly manage their risk when they choose to, to
manage their business. The reduction in volatility could impact
the ability of our markets to function efficiently and have the
liquidity needed in all of our different commodities. So that
is why we are against user fees.
Chairman Roberts. I thank you for your answer. I am sorry.
Did I interrupt you?
Mr. Barker. Well, you asked about position limits, and if
it is important, and it is important. When you operate an
agribusiness and your job is to buy grain by the truckload,
move it by the trainload, and sell it by the shipload, you are
not always trading something that is perfectly hedgeable.
I like the example of durum wheat. There is no futures
market for durum wheat. We have spring wheat in Minneapolis, we
have hard red winter wheat in Kansas City, and we have soft
wheat in Chicago. If I need to hedge the risk of durum wheat as
I am going to load a shipload of wheat and ship it to Italy or
anywhere else, I have to cross-hedge. I have to use some other
futures market to do that, and we would like that to be defined
as a bona fide hedge.
Chairman Roberts. Final question. Are the Wildcats going to
win six games?
[Laughter.]
Mr. Barker. I do believe we will be in a bowl game this
year.
Chairman Roberts. Thank you.
Mr. Lukken, in your testimony you talk about what is going
on with EMIR 2.2. As you may know, Senator Stabenow and I wrote
Chairman Giancarlo last year raising serious concerns about the
European Union's legislation to regulate our U.S.
clearinghouses. Unfortunately, it has come to our attention in
the past couple of months that this legislation is in the final
stages, and as written, has not changed, but would still impose
overly burdensome, subjective criteria on U.S.-based
clearinghouses wishing to operate in the EU. This is, of
course, in direct conflict with the equivalence agreement
reached by the CFTC and the EU, the European Commission, in
2016.
As the Ranking Member and I alluded to in our letter, is
there anything within the context of reauthorization that
should be done to address these concerns?
Mr. Lukken. Certainly, we support the EU coming out with
the full deference approach within the EMIR 2.2 regulation.
They do have the authority to defer to the CFTC and its
regulation of clearinghouses. As you mentioned, CFTC regulation
is, of course, equivalent. The clearinghouse regulation in the
United States is very strong. That was recognized two years ago
in this agreement between the EU and the CFTC.
So we think it certainly should be ESMA's duty to find a
United States equivalent and defer to U.S. regulation in this
area. Congress can play an important role in encouraging ESMA
to find that, and if not, there could be consequences, as you
mentioned. We are pretty confident and we are hopeful that the
EU would do the right thing and defer to U.S. regulation here.
Chairman Roberts. I appreciate that response.
Chairman Grassley, I am looking at several questions I may
just submit for the record so we can get to your 10:45 deadline
here.
Hang on.
For the entire panel, when you answer that just remember
Chairman Grassley's situation here.
With the recent announcement that Facebook has plans to
offer its own cryptocurrency sometime in the near future, and
Bitcoin's re-emergence as a valuable commodity, worth over
$10,000 per coin, virtual currencies and the underlying
technology of blockchain are once again grabbing headlines. As
blockchain technology and its transformative potential
continues to emerge, what role should regulators play,
particularly in the realm of virtual currency. Mr. Sexton?
Mr. Sexton. Mr. Chairman, thank you. The role that I
believe regulators should play is to allow for innovation, but
cautiously allow for innovation in this particular area. Over
the past year, we have tackled some virtual currency issues
with the CFTC, and mandated particular disclosures with regard
to customer protection, which we are always very concerned
about.
We are focused on the derivatives markets, obviously, and
the futures trading with regard to Bitcoin, but also focused on
the fact that our members may be engaged in other types of
underlying virtual currency transactions, and we know that is a
relatively unregulated environment today.
There has been talk about an SRO also, with regard to
virtual currencies, and with regard to that, if Congress is
going to look at that I think it is very important that that be
done in legislation, that there be government oversight,
mandatory membership, and strong enforcement powers. So thank
you.
Chairman Roberts. Mr. Lukken.
Mr. Lukken. The CFTC has authority over any commodity and
any derivative, so those cryptocurrencies that are considered
commodities, the CFTC has adequate authority to regulate those
derivatives and to make sure, and they have broad manipulation
and enforcement authority over those products as well.
I think the unique thing about cryptocurrencies is unlike
agriculture or energy, which have regulators at the cash level,
cryptocurrencies right now really have no regulatory structure
at the cash level. New York has a bit license that you can
apply for, but I think the CFTC, as it regulates these
entities, has difficulty ensuring that these things cannot be
manipulated at the cash level, which is something I think this
committee should think about as it goes forward.
Chairman Roberts. Thank you. Mr. Barker.
Mr. Barker. Since I am in FCM the focus is on agriculture
risk management. We have not allowed our customers to trade
Bitcoin so I am not an expert in this, but I do agree with both
Mr. Sexton and Mr. Lukken that it is important that this be
regulated and it is inside the CFTC's scope.
Chairman Roberts. Mr. Kelleher.
Mr. Kelleher. I would first like to recognize that Chairman
Giancarlo and Chairman Clayton have done a very good job of
getting out in front on investor protection in this area, both
on the enforcement side and on the policy pronouncement side,
and they should be recognized for that and they should be
encouraged to do more. In addition to that, they need resources
to do more. They cannot possibly keep up with what is a
technology arms race here, where we have private actors moving
into the monetary space and the financial space across the
board.
So, yes, innovation, but there has to be a role for
government. You look at what Facebook announces--28
corporations, on a board, governing their new currency, and it
is going to be run out of Switzerland and based out of
Switzerland. We have money-laundering problems, tax evasion
problems, terrorist financing problems, rogue state problems.
These cannot be addressed by private-sector actors who are
seeking to profit maximize. There is a role for the government
and this committee needs to make sure that the CFTC continues
to do its job on the customer protect side, but more
importantly has the resources to comprehensively address the
risks and realities that are going to be visited upon all of
our neighbors and families and businesses in the not too
distant future.
You are either going to be responding to crises later on
and overbudgeting to kind of address what did not happen or you
are going to get in front of it now. It is not a matter of if
you are going to address these, it is when, and the time is
now.
Chairman Roberts. Thank you all for your responses. I am
going to recognize Chairman Grassley, our distinguished
President Pro Tempore out of order. Chuck, why don't you
proceed.
Senator Grassley. Whoever I am offending by going ahead,
get mad at the Chairman.
Senator Stabenow. You are welcome, Senator Grassley.
[Laughter.]
Chairman Roberts. It is what it is. A Chairman has to do
what he has got to do, Chuck.
Senator Grassley. Okay. First of all, Mr. Barker, and then
a short question for all the panel.
You mentioned that current events like trade negotiations
and wet spring have caused volatility of our markets and the
need to rely on derivatives. The reason this hearing is in the
Agriculture Committee rather than Banking is because the long
history of derivatives being important tool of managing prices
for agriculture. The role of the CFTC has grown over time to
include many financial derivatives, and most recently because
of Dodd-Frank.
I note your comments that the one-size-fits-all regulatory
regime that treats agriculture the same as Wall Street does not
work, and you cited a couple of specific issues. Could you
speak more about whether there are specific changes that need
to be considered in the next CFTC reauthorization to make sure
that the CFTC has the appropriate flexibility to fairly
regulate transactions by everything from small farmers to Wall
Street?
Mr. Barker. Thank you, Senator. Like we talked about, the
position limits rule and the definition of a bona fide hedge
are key going forward. Hedgers get an exemption to manage the
risk of the commodities of which they trade, so I will go back
to durum wheat. If we are able to get a true definition that
cross-hedging is a bona fide hedge, then we can work around the
position limits rules that would allow a large trader of durum
wheat, like I said, that may be exporting shiploads of it, can
adequately manage its risk. So that is very important and that
would trickle its way all the way down to the individual farmer
and the acre of land in which they are harvesting. Because if
the company they are selling their grain to cannot manage the
risk, it becomes difficult for them to offer the proper tools
for the farmer to market their crop.
Now you talked about trade and wet spring, and, of course,
I am not here to talk to you about trade policy. The impact of
the trade policy has had a dramatic impact on our markets. I
talked both about the dairy markets, and that goes to the USMCA
mostly, and the soybean market, which goes quite a bit to the
China situation, and how that impacts the individual grower.
When we lose that liquidity in the marketplace, or when the
farmer has to choose between raising their crop at a profit or
a loss, we need to have the tools available, and so that is why
we are in favor of reauthorizing the CFTC formally, in
legislation.
Senator Grassley. Thank you. Then to all the panelists, how
has the speed and frequency of automatic trading affected the
ag commodity markets? Does the CFTC need any additional tools
to address the increasing use of automated trading by
algorithms rather than real people?
This was first brought to my attention two or three years
ago by cattle feeders in Iowa, who felt that so much trading in
the last half hour or few minutes of a day really impacted the
market negatively to those people, the producer.
Mr. Sexton. Senator Grassley, thank you for the question. I
could tell you, from NFA's perspective, with our members who
engage in automatic order-routing trading and also with regard
to algorithms, we have the tools in place, we believe right
now, if there was an issue with regard to what our members were
doing in that area.
As far as the CFTC, I know that Chairman Tarbert has, at
least at his confirmation hearing, indicated that he may look
at some form of reg, what they call Reg AT again, and NFA is
looking forward to working with the Commission if that is one
of his initiatives that he wants to undertake.
Senator Grassley. Mr. Lukken?
Mr. Lukken. Yes. Automated trading actually has provided a
lot of liquidity in the markets which has lowered costs in
general, but specifically there are times when they can abuse
the markets, as you mentioned, especially at the time when
price is being set in the last half hour. The CFTC does have
adequate tools to enforce that. You gave them the authority in
Dodd-Frank on spoofing and banging the close and a variety of
different ways that people can manipulate the markets.
The CFTC certainly should be looking out for that
manipulative behavior at the end, for those automated traders.
In general, I think automated trading has actually provided
liquidity to the markets that have helped farmers.
Senator Grassley. Mr. Barker.
Mr. Barker. Well, as a former member of the Kansas City
Board of Trade who used to trade open outcry I do miss those
days. High-frequency trading has brought better liquidity. I do
agree with Mr. Lukken on that. The hedger relies on the CFTC to
play the referee and keep the playing field level and fair, and
that is why it is so important that they have the resources
they need, that we can trust that they are doing their role.
Senator Grassley. Mr. Kelleher?
Mr. Kelleher. Senator Grassley, you put your finger on
another issue, not unlike cryptocurrency and other issues,
where the technology is so far ahead of our regulators and
their budget and their resource and their technological
capacity. Everybody says, ``oh, this is great.'' The FTC has
got the authority and the CFTC should do this, and they should
do this. You would think they had a limited budget and they
were full of technologists and enforcement lawyers.
So, yes, I agree. They should do all of that and they
cannot do any of that, and they are being set up for failure.
The HFT, yes, it provides liquidity. It often provides
liquidity during a flood, and nothing during a drought. Get
liquidity when you do not need to more often. You also get all
sorts of abusive and manipulative behavior. I agree with Walt,
some of which is provided for specifically within the Dodd-
Frank. Our position is it is also amply covered under the anti-
manipulation authority that could be used. On the other hand,
the technology is moving very fast, and the CFTC needs greater
authority and, more importantly, additional resources so they
can keep up with it, because high-frequency trading is, just as
we have seen in the securities markets, and that is the future
of the commodity and derivatives markets.
You are going to see the high-frequency trading-ization of
these markets, where they are going to take over the vast
majority of the trading, and we are all going to be watching as
the machines run over people, and run over our markets, and run
over our farmers, and run over our physical purchases and
producers, while they are cashing out and they are leaving a
bunch of destruction in their way, and we are going to say,
what happened?
Well, what happened is we did not have the resources, we
did not have the authority, and we were not able to keep up.
That is our fault, and we need to get in front of that too.
Senator Grassley. Thank you. Thank you, Mr. Chairman.
Chairman Roberts. Senator Stabenow.
Senator Stabenow. Thank you very much, Mr. Chairman. This
is a very important discussion and thank you all for your
testimony.
Let me start with Mr. Sexton. As I mentioned, in my opening
statement, the frequency and sophistication of cyberattacks
really is staggering. I am deeply concerned that we are just
not prepared for the catastrophic effects those attacks could
have on our financial markets.
Your organization is taking steps in securing your own
systems, and I wonder if you could talk a little bit more about
that, and about the fact that you are ensuring that swap
dealers and other CFTC registrants have strong cyber
protections. You indicated that you are devoting more resources
to cybersecurity, but I am very concerned that we are not
providing the resources that are needed. I think that is
something that we really need to look at in reauthorization.
Could you speak to what you are doing and what you think
should be happening?
Mr. Sexton. Thank you, Senator Stabenow. You are correct.
Our testimony covered quite a bit of what we are doing in this
area, and we view it similar to you, as an extremely high-risk
area. When you think about it, one employee clicking on the
wrong thing can essentially let a bad actor in that can steal
data and do all kinds of nefarious things to your systems.
Over the last few years--I am very fortunate to work for an
organization who has a board that strongly supports our
cybersecurity efforts and our technology efforts. Over the last
few years, our head count in technology itself has gone up 90
percent. Our budget in technology has gone up 140 percent. Just
next year, we are adding five or six additional people just for
security, because the patching is so critically important
today, to patch your systems, and we have a very aggressive
patching schedule to do so.
We follow several types of national standards, various NIST
standards and others, with regard to our security. As I
indicated, we have independent third parties come in and test
our systems annually. Last year we went through a SOC 2 audit
and obtained an unqualified opinion with regard to
certification there. We recognize the importance of data
protection, for our own data and for the CFTC data that we
hold.
With regard to our members, we, several years ago, adopted
guidelines with regard to our members, requiring them to have
policies and procedures in place with what we call an
information system security program. They have to do an
assessment of the risks. They have to look at what tools they
should have, protective measures, in light of those risks, do
annual training with regard to their employees. Our
examinations obviously have focused on that area. We largely
took an approach, in the past few years, of educating our
members about that risk.
Our notice, I should note, covers the largest financial
institutions but also the introducing brokers located in the
Midwest, and so we want to make sure that they are aware of
that risk and have tailored their particular protections
according to their particular risks. So we are continuing to
work with our members.
Just recently we reviewed our cybersecurity requirements
and put in place a requirement that member firms, if they have
a breach with regard to their commodity interest business, have
to notify NFA. We followup then and we see what kind of
protective steps they are going to take.
Senator Stabenow. Wonderful. Well, thank you very much. I
noted with interest you were saying that you had increased your
budget in this area by 140 percent--that is, NFA's budget for
this, 140 percent.
Which leads me to Mr. Kelleher and the question of CFTC
funding, because CFTC funding certainly has not gone up 140
percent as it relates to enforcement in these areas. We are
lucky to stay even.
All of these responsibilities--digital currency markets
that are largely unregulated, as well as the other
responsibilities--are so critical for the CFTC. Could you just
take a moment to talk about the resources again? What should we
be doing to improve the situation?
Mr. Kelleher. Well, you know, we applaud the NFA and others
who have the ability and had the wisdom to increase their
resources dramatically and increase their capabilities
dramatically, but they, too, are leaving the government and the
public servants in the dust. They do not have the resources,
and we know that. They are not even keeping up with inflation.
If you look at--and we put this in our testimony, in my
written testimony--if you look at the budget, the increases to
the CFTC, they are barely above inflation, and yet if you
compare them to the additional responsibilities, and quite
grave responsibilities have been thrust upon the CFTC, in Dodd-
Frank, and as a direct result of the financial crash, and
unregulated out-of-control derivatives market that they are now
responsible for making sure that does not happen again. Both
they are ensuring transparency, competition, enforcing the
rules, the rules of the road that benefit everybody.
Every NFA member benefits tremendously by the CFTC being on
the job, doing their job effectively and consistent with all
their requirements. That is why we advocate not just increasing
their resources, we advocate for a user fee. That is the only
financial regulator that is not funded by the industry, and it
should be.
I understand Mr. Barker's concerns, and I think that the
assumption that a user fee is going to destroy markets and
injure all sorts of market participants, I think, it has been
historically proven to be false every time it has been raised.
That does not mean it is not relevant. I agree it is relevant
and it should be foremost in everybody's mind. A user fee that
adequately funds the CFTC to do its job, like the SEC--which
has been doing this since its creation in 1934, in the Exchange
Act, when it was passed.
I do not know if you have noticed but those markets are
doing, you know, pretty okay, and if they are not doing okay it
is not because of this de minimis user fee. Better Markets
provided an analysis in 2013, when you were considering
reauthorization then, that showed how de minimis a user fee
would actually be to adequately fund the CFTC.
So we would encourage you, in any reauthorization, to
provide the resources, and we would suggest that you provide
them according to a user fee. If not, then provide them
directly. Because if you think about it, as I said in my
opening statement, it is like paying for an insurance policy
today. You pay for an insurance policy on your house. Your
house is worth $300,000. You pay a couple hundred dollars for
insurance. As we show on page 20, 42 financial institutions in
this country received more TARP money in 2008 than the entire
budget of the CFTC in 2019. I mean, that just goes to show the
disparity in finding and the need.
Senator Stabenow. Thank you. Mr. Chairman, I want to ask
one other question for the record, to Mr. Lukken--he can
respond in writing, but I would like to just ask the question.
Mr. Lukken, I wanted to talk to you about customer
protection. The CFTC recently announced that it plans to
consider new rule amendments related to cross-border issues,
including the treatment of clearinghouses located outside the
United States. I find it very troubling that these rules may be
pushed through before the CFTC's new Chairman takes office--
even though the current Chairman's term has already expired,
and the Senate already confirmed the new Chairman with a
strong, bipartisan vote of 84-9, earlier this month.
I am deeply concerned about the policy implications of
changes that may come in terms of consumer protection and other
markets. I will be watching very closely to see who benefits
from any last-minute rules changes, and I would appreciate it,
in writing, if you would respond regarding the three proposals
that the outgoing Chairman is potentially taking action on next
month. Thank you.
Chairman Roberts. I thank the Senator, and Senator Boozman.
Senator Boozman. Thank you, Mr. Chairman. This is really an
important hearing in regard to the benefit of our farmers, as
we all know, so thank you all for being here.
Mr. Kelleher, I do not understand your analogy in regard to
the entities receiving TARP money. Did they pay it back?
Mr. Kelleher. I believe most of TARP was paid back,
although I would say that the analysis, in my view, and the
point of view should be at the time of the vote, when you
actually did not know whether it was going to work, whether it
was going to be paid back, how much was going to be paid back.
So we now know that with the benefit of hindsight.
Similarly, we sit here today facing unseen risks that are
not addressed because of lack of resources. So you are kind of
in the same position. You will not know until 20 years from now
whether or not inadequate funding caused the problems that
people are concerned about.
Senator Boozman. No, and I am not really arguing about
that. I think when the law was passed, the safeguards were put
in place, the interest rate, the whole bit.
I used to be chair of the Financial Services and had
jurisdiction over CFTC. I do not remember them ever giving
anything back. That is not to say that they are not underfunded
and work very, very hard and have a huge job, which is growing
on a daily basis.
Mr. Lukken, in your testimony you note that a number of
firms providing clearing services has dropped considerably in
the past few years. What is your take on why the consolidation
is happening, and how should the Committee address this during
the reauthorization process?
Mr. Lukken. Well, my guess is it is several factors playing
into why FCMs have been shrinking over time. I think in my
testimony it is 84, I think, in 2008, and we are down to 55
FCMs now.
The critical issue to understand with that is that FCMs
play a critical role in the safety net of clearing. The first
absorption of losses are the FCMs, when a member defaults. So
the fewer of them--it is just like insurance. If there are
fewer people in the insurance pool, the insurance is not
socializing that risk.
So we have concerns that it is due to technology, to costs.
It is becoming, as Joe mentioned, a low-margin business. Part
of it is capital. Right now a lot of the banks that do the
clearing are facing capital charges that hold capital against
clearing. Our view, the G20 came out with two pillars of
reform. One is to put more things in the clearing and one is to
raise bank capital. Both are admirable goals. However, in one
instance they are working against each other, where clearing
actually is being--banks are being forced to hold capital
against initial margin.
The Basel Committee, last week, in fact, came out with a
recommendation to have an offset of initial margin against that
capital, and we are hopeful that prudential regulators
implement that in the current proposal that is before them now.
Senator Boozman. So again, we hear a lot from constituents
about how harmonizing rules would lessen the paperwork and
burden that firms face. Again, this is something that seems to
be something that would be very doable.
Mr. Sexton, I had a question about cybersecurity and I
think it was asked and was answered well. In your testimony,
though, you said that not holding unnecessary data in the first
place is the best mitigation of risk, and I would agree with
that totally.
We have gone through a period--I think it has backed off a
little bit, but there for a while there just seemed to be an
insatiable gathering everything we could gather, and in asking
what we were going to do with that data and this and that, not
only with CFTC but with so many other agencies. There really
were not any answers, just that we need to gather it. Can you
comment about that?
Mr. Sexton. Thank you, Senator, and as we indicated in our
testimony that perhaps the best risk mitigation is not
collecting data that we simply do not need. We certainly
commend Commissioner Stump's efforts at the CFTC, recent
efforts to look at the data that the CFTC is collecting and
kind of undergo this process. We, ourselves, undergo this
process. As I said, if we do not need the data we should not be
collecting it. It has to serve the regulatory purpose that is
smart.
Senator Boozman. Thank you, Mr. Chairman.
Chairman Roberts. Senator Smith.
Senator Smith. Thank you, Chair Roberts, and also Ranking
Member Stabenow for holding this hearing today, and thanks to
all of you for being here. I appreciate. I would like to extend
a special greeting to Mr. Barker, my fellow Minnesotan. I
appreciate you being here.
So we have experienced significant economic growth since
the 2008 financial crisis. Many Minnesotans have felt this, yet
many Minnesotans are still continuing to suffer from the
consequences of that crisis. Better Markets, I think it is
notable, has estimated that that crisis cost the economy $20
trillion in economic productivity.
I think, believe, and think the evidence is there, that the
crisis was caused, in large part, by the fact that there was
effectively no regulatory regime in place to oversee the swaps
market, with hundreds of trillions of dollars of notional
value.
So in 2008 and 2010, this Committee authorized legislation
to resolve this issue by finally giving the CFTC authority to
oversee the swaps market. There are still lots of unanswered
questions about what will happen in the inevitable future
downturn.
So Mr. Kelleher, let me ask you first. Do you think that
the CFTC has the resources to effectively oversee this market
and the tasks that we, Congress, have given it?
Mr. Kelleher. I think any comparison of the duties and
responsibilities, just narrowly speaking, the statutory duties
and responsibilities from the CEA, as it has been amended
through Dodd-Frank, that they are grossly, grossly underfunded
and cannot possibly do it. I agree with Senator Boozman and Mr.
Sexton about you do not want to collect any data that you do
not need.
One of the things that was needed desperately was data and
information that regulators would have. I can tell you, I
remember when Walt was acting Chairman during the crisis and
came up to the U.S. Senate to brief members, and I think
Senator Durbin will remember this. The CFTC and its leadership
team, their answers were mostly, ``Well, we do not have that
information. We do not have that information. We do not know
what is happening. We do not have the information.''
Senator Smith. Mm-hmm.
Mr. Kelleher. The good news is you change the law. The law
requires the gathering of that information, and its protection
and its analysis and its use, so you can have data-driven
rulemaking and decisionmaking, and yet you underfund the CFTC
to be able to deal with the information and have the analysis
and the technology to do it.
So, I am sorry, it is a long answer, but the short answer--
--
Senator Smith. We have the data----
Mr. Kelleher [continuing]. is they just do not have the
resources.
Senator Smith [continuing]. so you are saying we have the
data but we do not really have the resources to use that data.
Mr. Kelleher. A lot of the data is flowing in, and I think
you will agree the data is flowing in but it is not being
optimized anywhere near, from an analytic point of view and
from a decisionmaking point of view, that we all had hoped it
would and that it should.
Senator Smith. So--and this is the line of questioning that
Senator Stabenow was on, but, you know, I am struck as I think
about how this market works. You know, there is important self-
regulation, and then there is also the role of the public, the
taxpayers, the consumers, that is expressed through the role of
government, the government's role here.
So I would be interested in just hearing whether you think
that balance--do we have the right balance? Is the balance out
of whack? What should it look like?
Mr. Kelleher. Well, you are absolutely right. There should
be a balance between self-regulatory organizations that are
authorized and overseen by government entities that,
importantly, are controlled by you, elected officials. The
self-regulatory agencies are not, and they are profit-
maximizing private entities. God bless them. That is what they
should do. That is what we want them to do.
Senator Smith. That is the point, right.
Mr. Kelleher. We want them to do it in agriculture. We want
them to do it elsewhere. Those priorities are not necessarily
the priorities of the government, and they may not be the
priorities of elected officials overseeing the government.
So it is important to get the balance right, and we do not
have it right.
Senator Smith. Is that primarily because of the resource
imbalance or is it authority imbalances also, in your view?
Mr. Kelleher. I would say it is both, but it is primarily
driven by resource imbalance. You know, it is great that the
NFA is increasing, as I said earlier, increasing its budget and
its personnel, and, you know, even the trade groups, they are
all increasing their budgets, their personnel, and
technological savvy. Yet we are choking the CFTC.
I want to say--just take a minute and say, you know, God
bless the men and women working at the CFTC, not just today but
over the years, all the way back through Walt's term and
others, through the financial crisis and since, through Dodd-
Frank, doing rulemaking after rulemaking. Whether you agree or
disagree with them, they have done an unbelievable job. They
are public servants of the highest order and have done a
terrific job, under circumstances that should not exist. They
should get the support, the money and the authority they need
to do the job that you have statutorily required them to do.
Senator Smith. I have just a second or two left, but I just
want to see if anybody else would like to have a comment on
that overall question of what is the appropriate balance
between self-regulation and the role of the public sector here.
Mr. Sexton. Thank you, and as a self-regulator on the panel
I think that the role of self-regulation is essential for these
markets.
Senator Smith. As do I.
Mr. Sexton. We do not maximize profits. We are not a
maximizing-profit entity. As I said, along with self-
regulation, I think what is also critically important is strong
oversight of self-regulators, which we have in the CFTC.
So I described our relationship as a partnership, Senator.
It truly is a partnership, looking at all the various issues
that we have tackled in the last six years, since Dodd-Frank,
and we look forward to working with the Commission and this
Committee in the future in doing so.
Senator Smith. Thank you.
Chair Roberts, I know I am out of time. I have a followup
question on position limits which I will submit for the record.
Chairman Roberts. Without objection.
The distinguished Senator from Illinois.
Senator Durbin. Mr. Chairman, I am trying to get use to
where I am sitting here. I feel like I am part of a panel.
[Laughter.]
Senator Smith. I cannot get use to sitting on this side of
you, Senator.
Mr. Kelleher. I defer to let Senator Durbin answer for me.
[Laughter.]
Senator Durbin. I do not mean to block you.
I would like to ask the panel, originally, the Commodity
Futures Trading Commission focused on commodities. What
percentage of the business in this industry now relates to
agricultural commodities?
Mr. Lukken. We collect that data. It is actually in my
testimony. I think it is around seven to eight percent, around
that area.
Senator Durbin. Interesting that we are in the Ag Committee
discussing the Commodity Futures Training Commission, where 92
percent of their business does not have anything to do with
agriculture commodities.
So a few years ago, when I was in a position to do so, as
the Chairman of the FSGG Subcommittee of Appropriations, I
called my friend, Herb Kohl, and said, ``You have, in the Ag
Subcommittee, the CFTC. I have the SEC. Would you mind if I had
the CFTC too?'' He said, ``Be my guest.'' So now, from the
appropriations viewpoint, they are married, in terms of where
they are headed.
To Mr. Kelleher's earlier point, when it came to funding it
was a totally different story. There was plenty of money in the
SEC, in fact, a surplus of money at some point, more money
being collected than they were actually spending for inspection
and regulation purposes.
I found, as you have alluded in your testimony, there was
resistance to funding the CFTC. I think that is a mistake. If
we want to maintain the integrity of our Commodity Futures
Trading Commission and the industry that it regulates, we
certainly want enough cops on the beat to be credible, and I do
not think we are keeping up with that demand.
So we can argue about the source of it, but I certainly
think the bottom line is CFTC needs more resources in order to
deal with the volume of work that they are undertaking, 92
percent of which has nothing to do with agriculture.
I would like to ask question, and I do not know who would
be the right person, so I will just give it to the panel, about
Brexit. As this Brexit dynamic continues and as the remaining
EU member states look to draw business away from the UK,
creating new regulatory regimes for trading and clearing
derivatives, that move away from the 2016 CFTC EU equivalence
agreement, the U.S. exchanges and clearinghouses that have done
business in the EU countries for decades could be harmed if an
agreement to avoid disruption is not reached. The Chicago
Mercantile Exchange estimates it could stand to lose up to 30
percent of its current business without this agreement.
So maybe Mr. Lukken, since you appear to be knowledgeable
on this topic, what is under consideration to ensure the
contours of an equivalence deal are maintained.
Mr. Lukken. Let me start by saying that this mutual
recognition regulatory approach has been around a long time,
and you probably remember, many years back, the Foreign Board
of Trade Regime, which Congress gave the CFTC the ability to
recognize foreign boards of trade to allow people and consumers
in the United States to access foreign boards of trade where
they might need to hedge or participate in those markets.
So this has been an approach that has been largely accepted
as an international standard, and the EU and the United States
had entered into an equivalence agreement, as you mentioned,
two years ago. As they are developing their regulatory
structure in the EU, Brexit occurs, so now the financial center
of Europe will be located outside of the EU's economy, and they
do not want that to happen. So they are looking for ways to
maintain control over that.
Unfortunately, the United States is also located outside of
the EU, and we are going to be subject to this same criteria
that they are putting on the UK and their clearinghouses there.
So we think there is a pragmatic approach here, that they
should recognize the equivalence agreement that was agreed to
in 2016. They have the authority, in the law, EMIR 2.2, to do
so, and we have been encouraging the EU to do that.
Now we do not know for certain whether they are going to do
that. They have the tools and it is out for comment right now.
Certainly the industry, the CME, ICE, and others are lobbying
them very hard to make sure--and there is a House hearing
tomorrow on this--to make sure that EU does the right thing.
Senator Durbin. Give me, if you can, kind of snapshot. When
it comes to futures derivatives and such, what percentage is
actually flowing through the United States and what percentage
in other parts of the world?
Mr. Lukken. You know, it is a tough one to measure, but I
would say two-thirds, one-third of the derivatives markets
somehow touched the United States in some capacity, and it is
significant.
Senator Durbin. So if the UK--I am trying to sort this out
in my mind--if the UK does withdraw from EU, Brexit, and at
that point whatever trading took place in the UK, EU would like
to have at home, in the EU countries, give me a snapshot of
what that looks like.
Mr. Lukken. Well, first off it is going to hurt the EU. I
mean, that is the ironic part, is that their customers are
going to lose access to global markets, and it is going to hurt
EU businesses. So we have encouraged them to adopt this
approach that allows EU customers to have access to the UK, the
United States markets, through this recognition approach, which
has largely been the standard for 20, 30 years.
So, ironically, though the EU is trying to get business to
come into the EU, they are hurting their own selves by doing
so.
Senator Durbin. Thank you.
Chairman Roberts. I thank the Senator for a most pertinent
observation.
Senator Hoeven--well, as I speak, Senator Hoeven, you are
recognized.
Senator Hoeven. Mr. Chairman and Ranking Member, thanks, as
always, for calling this hearing.
I would just start out by asking the panel, and maybe each
of you can respond, do you foresee improvement in crop prices,
based on what is going on in the market, and if so, do you see
a reaction in the futures market?
Please be specific. You can round to the nearest dime.
[Laughter.]
Mr. Barker. We have seen extreme volatility in agriculture
markets. We have already seen the price of corn rally close to
$1. Soybeans are up more than $1 from the lows this spring,
based on the really slow planting progress, really across the
Grain Belt, I mean, South Dakota, Iowa, Missouri, Illinois,
Indiana, and Ohio.
Just two weeks ago I drove from St. Louis to Detroit, of
all things, visiting clients out in the country, as we say, and
there are some areas, specifically in northeast Indiana,
northwest Ohio, that are looking quite rough, where the corn in
that area, what did get planted, which, in some cases, is less
than 25 percent of intentions, is less than four inches tall.
There is an old saying, we would like our corn knee-high by the
Fourth of July. It is unlikely we will actually get there.
Depending on what happens with trade and some other
factors, I can see a situation where the price of grain may go
higher if the crop failure does come to fruition. Our markets
are forward-looking, but our markets also like to see data as
we go along. So most recently, in the last USDA report, when
the USDA decreased the acres of corn and also do you see a
reaction in the futures market?
So to answer your question as best I can, not to the
nearest dime, but there is potential for our ag markets to go
higher in the grains. Then livestock, the hog market is quite
focused on the disease situation in China and how that may
impact the price of pork. The dairy markets could use some help
from the USMCA, and we have seen dairy prices come up in the
last couple of months, if that helps.
Senator Hoeven. Both Mr. Sexton and Mr. Lukken are in the
futures market, so you guys should have it diced. What is your
forecast? The preventive plant program is going to have an
impact too, is it not, in terms of supply and demand, or price,
right?
Mr. Sexton. Senator, as a regulator I learned a long time
ago not to forecast crop prices, so I think I am going to take
a pass on this particular question.
Senator Hoeven. All right. Mr. Lukken?
Mr. Lukken. I was just going to say, I think for us we are
sort of agnostic to prices, but we want to make sure the
markets are reflecting the proper supply and demand that are
occurring in the marketplace, and certainly we are hopeful that
farmers are getting high prices. Our main job is to make sure
the markets are free of manipulation and that they are properly
reflecting supply and demand.
Senator Hoeven. Yes, I get that, but, you know, we have
been in a tough cycle for quite a while on commodity prices,
and I am just wondering if any of you see some improvement. Are
you seeing some signs, some indications that we may get some
strengthening in these markets?
Thank you, Mr. Barker. You did a good job on it, and I hope
you are right, but just any other thoughts? Mr. Kelleher?
Mr. Kelleher. The only thing I would say is I think Mr.
Barker has referred a number of times to the volatility in the
markets, and there are a lot of factors going into the
volatility and there are a lot of factors going into price,
none of which am I an expert on.
One thing we do know, there is excess speculation in these
markets, and we need a strong, robust, effective position limit
rule so that we can try and get these markets back to serving
the constituency they were created for, which is the actual
physical purchasers and producers of commodities. We have a
financialization of these markets where there is excess
speculation across the board.
Better Markets did a study a couple of years ago that
showed that if you go back a couple of decades, speculative
interest in the markets were roughly 30 percent, and physical
traders were roughly 70 percent. That has now flipped.
Speculation is now--oh, this is a rule of thumb, roughly. If
you look at different markets it is different, obviously. Rule
of thumb, roughly 70 percent spec interest, 30 percent actual
physical producers and purchasers in these markets.
Any reasonable look at these and you can see there is
excess speculation. That is affecting prices. That is harming
the ability to hedge. That is driving up the cost to hedge, and
it causing the loss of credibility and faith in some of these
markets. I think the CFTC needs to get the position limit rule
done, done right, and done robustly so that we can get these
markets back to serving the people that they were created for,
were intended to serve. Those are Mr. Barker's constituents.
Senator Hoeven. Are the futures markets working well for
our ag producers right now, or not?
Mr. Barker. I believe they are functioning efficiently, and
when the farmers make their independent decisions to market
their crop I believe the markets are there for them today. The
farmers do rely on the CFTC to be that referee, to make sure
that our markets are fair and adequate. So we do encourage
additional resources for the CFTC to ensure these markets are
there and fair.
Senator Hoeven. Are there changes that should be made that
would improve it?
Mr. Barker. Well, I would like a little bit of time to
research that, specific changes that could be made to improve
it. I do think resources are certainly needed, and I will just
stop there.
Senator Hoeven. Same question, Mr. Lukken?
Mr. Lukken. We certainly support a well-funded CFTC, and I
think that has been talked about quite a bit here. So that is
something I think will help the agency oversee the marketplace.
I do not think there is a need for specific changes to the
law itself. As I mentioned in my opening statement, the CFTC
has adequate authority. It has a principles-based regime that
allows it to change its rules over time. So I do not think
there are any specific changes the CFTC needs in order to make
sure these markets are healthy and efficient.
Senator Hoeven. Mr. Sexton or Mr. Kelleher?
Mr. Sexton. I will go back to my written testimony, and one
FCM bankruptcy is too many. Customers should be protected in
FCM bankruptcies and we are strong supporters of the fix that
is described with regard to the Griffin Trading matter, with
regard to customer protection, and that is the change that I
think is necessary to protect farmers and ranchers and other
customers.
Senator Hoeven. Say that again--specifically?
Mr. Sexton. The Griffin Trading case. It is in our
testimony, sir.
Senator Hoeven. Yes, Okay. Mr. Kelleher?
Mr. Kelleher. Well, I certainly agree. You know, I think
people can argue whether or not the current authorities are
adequate for customer protection. We think they are. We think
the court case was an outlier, but we certainly agree with
making it clear that that is the case.
The one thing I would say is, you know, I think there is
unanimity that the CFTC needs resources and some authorities,
but certainly resources. What I would like to see is as much
lobbying effort go into getting the CFTC the resources they
need as they go into other aspects of the lobbying, from
entities who are over at the CFTC looking to get them to do
what they should do and do their job well and on time. Their
ability to do that goes down day by day.
So I would encourage everybody to put funding at the top of
the list so that many of the things we all hope to happen here,
we all agree on, happen.
Senator Hoeven. Thank you. Thank you, Mr. Chairman, and
again to the Ranking Member for the hearing today. I appreciate
it.
Chairman Roberts. Well, thank you, Senator Hoeven.
I am going to hold the thought that I had in mind with
regards to funding, and just leave it out there for people to
wonder what the heck I was going to say.
[Laughter.]
Chairman Roberts. So with that, that will conclude our
hearing today. To our panel of witnesses, thank you for sharing
your views on an important topic. You all gave very pertinent
testimony. Thank you. You have given this Committee much to
think about as we continue to work toward CFTC reauthorization.
For those in the audience and all of our stakeholders whose
opinions we value, if you want to provide additional views on
reauthorization we have set up an address on the Senate
Agriculture Committee's website to collect your input. Please
go to ag.senate.gov and click on the CFTC Reauthorization
Hearing box on the left-hand side of the screen. I wonder why
it is not on the right-hand side, but never mind.
Please note that link will be open for five business days
following today's hearing. To my fellow members, we would ask
that any additional questions you may have for the record be
submitted to the Committee clerk five business days from today,
or by 5 p.m. next Tuesday, July 2nd.
The Committee is adjourned.
[Whereupon, at 11:16 a.m., the Committee was adjourned.]
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