[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]






   RISING RISKS: MANAGING VOLATILITY IN GLOBAL COMMODITY DERIVATIVES 
                                MARKETS

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

                                HEARING

                               BEFORE THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 9, 2023

                               __________

                            Serial No. 118-3



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]





          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov





                             _________
                              
                 U.S. GOVERNMENT PUBLISHING OFFICE
                 
52-557 PDF               WASHINGTON : 2023

















                        COMMITTEE ON AGRICULTURE

                 GLENN THOMPSON, Pennsylvania, Chairman

FRANK D. LUCAS, Oklahoma             DAVID SCOTT, Georgia, Ranking 
AUSTIN SCOTT, Georgia, Vice          Minority Member
Chairman                             JIM COSTA, California
ERIC A. ``RICK'' CRAWFORD, Arkansas  JAMES P. McGOVERN, Massachusetts
SCOTT DesJARLAIS, Tennessee          ALMA S. ADAMS, North Carolina
DOUG LaMALFA, California             ABIGAIL DAVIS SPANBERGER, Virginia
DAVID ROUZER, North Carolina         JAHANA HAYES, Connecticut
TRENT KELLY, Mississippi             SHONTEL M. BROWN, Ohio
DON BACON, Nebraska                  SHARICE DAVIDS, Kansas
MIKE BOST, Illinois                  ELISSA SLOTKIN, Michigan
DUSTY JOHNSON, South Dakota          YADIRA CARAVEO, Colorado
JAMES R. BAIRD, Indiana              ANDREA SALINAS, Oregon
TRACEY MANN, Kansas                  MARIE GLUESENKAMP PEREZ, 
RANDY FEENSTRA, Iowa                 Washington
MARY E. MILLER, Illinois             DONALD G. DAVIS, North Carolina
BARRY MOORE, Alabama                 JILL N. TOKUDA, Hawaii
KAT CAMMACK, Florida                 NIKKI BUDZINSKI, Illinois
BRAD FINSTAD, Minnesota              ERIC SORENSEN, Illinois
JOHN W. ROSE, Tennessee              GABE VASQUEZ, New Mexico
RONNY JACKSON, Texas                 JASMINE CROCKETT, Texas
MARCUS J. MOLINARO, New York         JONATHAN L. JACKSON, Illinois
MONICA De La CRUZ, Texas             GREG CASAR, Texas
NICHOLAS A. LANGWORTHY, New York     CHELLIE PINGREE, Maine
JOHN S. DUARTE, California           SALUD O. CARBAJAL, California
ZACHARY NUNN, Iowa                   ANGIE CRAIG, Minnesota
MARK ALFORD, Missouri                DARREN SOTO, Florida
DERRICK VAN ORDEN, Wisconsin         SANFORD D. BISHOP, Jr., Georgia
LORI CHAVEZ-DeREMER, Oregon
MAX L. MILLER, Ohio

                                 ______

                     Parish Braden, Staff Director

                 Anne Simmons, Minority Staff Director

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                             C O N T E N T S

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                                                                   Page
Bost, Hon. Mike, a Representative in Congress from Illinois, 
  submitted letter...............................................    81
Scott, Hon. David, a Representative in Congress from Georgia, 
  opening statement..............................................     3
Thompson, Hon. Glenn, a Representative in Congress from 
  Pennsylvania, opening statement................................     1
    Prepared statement...........................................     2

                               Witnesses

Gelchie, Michael ``Mike'', Group Chief Executive Officer, Louis 
  Dreyfus Company, Wilton, CT....................................     4
    Prepared statement...........................................     6
    Submitted material...........................................    82
Sammann, Derek, Senior Managing Director, Global Head of 
  Commodities, Options, and International Markets, CME Group 
  Inc., Chicago, IL..............................................     7
    Prepared statement...........................................     9
    Submitted material...........................................    82
Crighton, Alicia, Chair, Board of Directors, Futures Industry 
  Association, New York, NY......................................    11
    Prepared statement...........................................    13
    Submitted material...........................................    83
Edmonds, Christopher S., Chief Development Officer, 
  Intercontinental Exchange, Inc., Atlanta, GA...................    16
    Prepared statement...........................................    18
    Submitted material...........................................    84
Berkovitz, Hon. Dan M., former Commissioner, Commodity Futures 
  Trading Commission, Bethesda, MD...............................    21
    Prepared statement...........................................    22
    Submitted material...........................................    85
    Submitted question...........................................    86

 
   RISING RISKS: MANAGING VOLATILITY IN GLOBAL COMMODITY DERIVATIVES 
                                MARKETS

                              ----------                              


                        THURSDAY, MARCH 9, 2023

                          House of Representatives,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Committee met, pursuant to other business, at 10:14 
a.m., in Room 1300 of the Longworth House Office Building, Hon. 
Glenn Thompson [Chairman of the Committee] presiding.
    Members present: Thompson, Lucas, Austin Scott of Georgia, 
Crawford, DesJarlais, LaMalfa, Rouzer, Bacon, Bost, Johnson, 
Baird, Mann, Feenstra, Miller of Illinois, Moore, Finstad, 
Rose, Jackson of Texas, Molinaro, De La Cruz, Langworthy, 
Duarte, Nunn, Alford, Van Orden, Chavez-DeRemer, Miller of 
Ohio, David Scott of Georgia, Costa, McGovern, Adams, Hayes, 
Brown, Davids of Kansas, Slotkin, Caraveo, Salinas, Perez, 
Davis of North Carolina, Tokuda, Budzinski, Vasquez, Crockett, 
Jackson of Illinois, Casar, Carbajal, Craig, Soto, and Bishop.
    Staff present: Paul Balzano, Caleb Crosswhite, Kevin Webb, 
Erin Wilson, John Konya, Emily German, Josh Lobert, Amar Nair, 
Ashley Smith, and Dana Sandman.

 OPENING STATEMENT OF HON. GLENN THOMPSON, A REPRESENTATIVE IN 
                   CONGRESS FROM PENNSYLVANIA

    The Chairman. With the consideration of our budget views 
and estimates letter complete, the Committee will now proceed 
to our hearing today entitled, Rising Risks: Managing 
Volatility in Global Commodity Derivatives Markets. After brief 
opening remarks, Members will receive testimony from our 
witnesses today, and then the hearing will be open to 
questions.
    So with that, I call this hearing to order on behalf of the 
House Committee on Agriculture.
    Over the past several years, we have seen unexpected events 
that have shocked global commodity markets. The COVID-19-
related shutdowns and Russia's invasion of Ukraine have each 
caused significant global disruptions to the supply and demand 
of commodities. We are fortunate our derivatives markets showed 
resiliency throughout these events. There is perhaps no greater 
testament to the importance of well-regulated, professional, 
and liquid derivatives markets than their continued operation 
during times of significant market stress.
    Yet, the strength of our derivatives markets should not be 
taken for granted. Building deep, liquid, and safe derivative 
markets is the result of informed trade-offs and negotiated 
compromises between the needs of different market participants. 
It takes constant work to uncover, understand, and manage the 
risks that can develop.
    Widespread clearing is one reason for the success of our 
derivatives markets despite the recent turmoil. Clearing 
provides access to essential risk management tools for hedgers 
and creates a safe financial system for all Americans. Our 
cleared markets perform so well due to the public servants and 
the professionals who work every day to understand and manage 
market risks, both at the Commodity Futures Trading Commission 
and across the derivatives industry, including our five 
witnesses here today.
    Clearing manages risk by spreading it through multiple 
layers of market participants, recalibrating risk levels daily, 
and putting money aside in the form of initial margin and the 
default fund. This system is well-understood and has proven 
resilient time and time again. But after all that work, 
residual risks remain. One risk is the timely cash margin 
payments demanded by the clearing system will not be made on 
time or in full. This risk is remote but also expected. There 
is no way to completely eliminate risk from derivatives 
markets, only ways to better manage it. As clearing continues 
to grow in size and importance, the needs for this Committee to 
better understand its value and its mechanics, especially under 
times of extreme stress, grows, too.
    And I want to thank our witnesses for joining us today. 
Each of them is an expert in cleared markets, and I am looking 
forward to hearing the discussion today.
    [The prepared statement of Mr. Thompson follows:]

Prepared Statement of Hon. Glenn Thompson, a Representative in Congress 
                           from Pennsylvania
    Over the past several years, we've seen several unexpected events 
that have shocked global commodity markets. The COVID-19 related 
shutdowns and Russia's invasion of Ukraine have each caused significant 
global disruptions in the supply and demand of commodities.
    We are fortunate our derivatives markets showed resiliency 
throughout these events. There is perhaps no greater testament to the 
importance of well-regulated, professional, and liquid derivatives 
markets than their continued operation during times of significant 
market stress.
    Yet, the strength of our derivatives markets should not be taken 
for granted. Building deep, liquid, and safe derivatives markets is the 
result of informed trade-offs and negotiated compromises between the 
needs of different market participants. It takes constant work to 
uncover, understand, and manage the risks that can develop.
    Widespread clearing is one reason for the success of our 
derivatives markets, despite the recent turmoil. Clearing provides 
access to essential risk management tools for hedgers and creates a 
safer financial system for all Americans.
    Our cleared markets perform so well due to the public servants and 
professionals who work every day to understand and manage market risks, 
both at the Commodity Futures Trading Commission and across the 
derivatives industry, including our five witnesses.
    Clearing manages risk by spreading it through multiple layers of 
market participants, recalibrating risk levels daily, and putting money 
aside in the form of initial margin and the default fund. This system 
is well understood and has proven resilient time and time again.
    But, after all that work, residual risks remain. One risk is the 
timely cash margin payments demanded by the clearing system will not be 
made on time and in full. This risk is remote, but also expected. There 
is no way to completely eliminate risk from derivatives markets, only 
ways to better manage it.
    As clearing continues to grow in size and importance, the need for 
this Committee to better understand its value and its mechanics, 
especially under times of extreme stress, grows, too.
    I want to thank our witnesses for joining us today. Each of them is 
an expert in cleared markets and I am looking forward to hearing the 
discussion today.

    The Chairman. And with that, I would like to once again 
welcome the distinguished Ranking Member, the gentleman from 
Georgia, Mr. Scott, for any opening remarks he would like to 
give.

  OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN 
                     CONGRESS FROM GEORGIA

    Mr. David Scott of Georgia. Yes, thank you, Chairman 
Thompson, for convening this very important and timely hearing 
today, Rising Risks: Managing Volatility in Global Commodity 
Derivatives Markets, very important. We are dealing with an 
$800 trillion piece of the world's economy here.
    Global commodities markets help consumers and producers 
manage price risk and protect them from exposure to global 
events, such as a time as this. The past several years have 
been rife with uncertainty and volatility that has tested the 
strength and resiliency of our derivatives markets. This 
uncertainty and volatility has been driven by unexpected global 
challenges such as the devastating and ungodly Russian war in 
Ukraine and the COVID-19 pandemic. These events have disrupted 
global trade and the transportation of food, fuel, and 
fertilizer, creating supply shortages and price fluctuations. 
This is arena in which we have to deal now with derivatives.
    Now, as we examine the reactions of our global commodity 
derivatives markets to these major events, it is very important 
that we also take the time to focus on other sources of 
volatility and uncertainty that have emerged in recent years 
and will continue in the years ahead such as an increase in the 
occurrence of extreme weather events, cybersecurity concerns, 
and the growth of fintech, and the preeminent impact of Russia 
producing nearly 66 percent of the ammonium nitrate that we 
need to produce our own fertilizer. This is a very critical 
issue, to have this kind of power over fertilizer concentration 
in the hands of Russia. And we are moving expeditiously with 
our own agriculture system to put in encouragements and support 
funding so we can produce our own fertilizer and not have to 
depend on Russia or anybody else.
    These concerns and challenges have presented a new test for 
our agriculture markets, from historically low water levels 
that have cut river traffic in the Mississippi River Basin, to 
reduced access to critical crop inputs and energy as a result 
of global trade restrictions and interruptions. For example, 
wheat prices have experienced historic swings due to the 
disruption caused by Russia's invasion of Ukraine and fears of 
a global wheat shortage. And that is the other reason, because 
when you put Russia and Ukraine together, they produce a 
gigantic amount of the world's wheat. Ensuring the orderly 
operation of our derivatives markets and preserving their role 
as a tool for price discovery and crisis management is most 
important, now more than ever.
    And finally, I want to note that this year marks 10 years 
since the expiration of the Commodity Futures Trading 
Commission's reauthorization. I chaired this Committee, this 
subcommittee. And time after time, I have tried to put through 
legislation to reauthorize. And when we had the threat from the 
European Union of wanting to take over from the CFTC, their 
authority, to operate in Europe as the source because Congress 
has failed to reauthorize the CFTC. Let's get it done this 
time.
    I work closely with our Republican colleagues to pass 
reauthorization, and I appreciate that it is a bipartisan 
effort to get this done. And I know that Chairman Thompson 
agrees with me, and we need to reauthorize the CFTC, and that 
is one of my major priorities.
    The testimony of each of you, our distinguished witnesses 
here today, will be very critical for our Committee to 
guarantee that the CFTC has all the necessary and appropriate 
tools to ensure the integrity, the resilience, and the vibrancy 
of the U.S. derivatives market. And I look forward to hearing 
from this distinguished panel. I met several of them and had a 
brief conversation with them before we started, and they are 
here to share their expertise, their knowledge of the state of 
our commodity derivatives markets and the effectiveness of our 
existing tools for risk management.
    I yield back, and deeply apologize for my cold.
    The Chairman. No need to apologize for what we can't 
control. And I thank the gentleman, and I share your 
commitment. In addition to obviously an on-time, good, 
bipartisan farm bill, we need to get the CFTC reauthorized. I 
share that priority with you.
    The chair would request that other Members submit their 
opening statements for the record so that the witnesses may 
begin your testimony and to ensure that there is ample time for 
questions.
    Our first witness today is Mr. Michael Gelchie, the Group 
Chief Executive Officer of the Louis Dreyfus Company. Our next 
witness then will be Mr. Derek Sammann, Senior Managing 
Director, Global Head of Commodities, Options, and 
International Markets for the CME Group. Our third witness 
today will be Ms. Alicia Crighton, the Chair of the Board of 
the Futures Industry Association. Our fourth witness today will 
be Mr. Christopher Edmonds, the Chief Development Officer of 
the Intercontinental Exchange. And our fifth and final witness 
today is Hon. Dan Berkovitz, who is a former Commissioner of 
the Commodity Futures Trading Commission.
    Thank you to all of our impressive witnesses for joining us 
today. We are now going to proceed your testimony. You will 
each have 5 minutes. The timer in front of you will count down 
to 0, at which time I may give a little bit of a tap and 
reminder to wrap up whatever thought that you are on so that we 
have lots of time for questions. I assure you, your written 
testimony has been circulated. All Members of the Committee 
have that in front of them. And your efforts at that were 
greatly appreciated.
    So with that, Mr. Gelchie, please begin when you are ready.

 STATEMENT OF MICHAEL ``MIKE'' GELCHIE, GROUP CHIEF EXECUTIVE 
           OFFICER, LOUIS DREYFUS COMPANY, WILTON, CT

    Mr. Gelchie. Chairman Thompson, Ranking Member Scott, and 
Members of the Committee, thank you for holding this hearing on 
topics relevant to global market risks for agricultural 
commodities. I am honored to have the opportunity to contribute 
my testimony and appreciate your attention to these acutely 
important matters in the context of the extreme market 
volatility we have seen in recent years.
    My name is Mike Gelchie. I serve as Group Chief Executive 
Officer for Louis Dreyfus Company. We are a 172 year old 
agribusiness active in over 100 countries with approximately 
17,000 employees worldwide, including more than 1,000 right 
here in the United States. Our North American headquarters is 
in Wilton, Connecticut.
    LDC is a leading merchant and processor of agricultural 
goods. We absorb and manage risks on our customers' collective 
behalf, provide liquidity to all value chain participants, and 
execute logistics services to deliver essential commodities 
domestically and globally in a safe, timely, and reliable 
manner. We are proud to fulfill these roles, the effective 
execution of which acts as a shock absorber by both buyers and 
sellers along the food and agricultural value chain, ultimately 
contributing to competitive agriculture in the United States, 
which is particularly important in today's volatile and 
challenging markets.
    With regards to global market volatility, I feel compelled 
to give a broad response that recognizes the significant 
macroeconomic and geopolitical factors that have, in our 
opinion, been the primary contributors to contemporary market 
volatility. I will do my best to summarize our observations.
    Since 2018, agriculture in the United States has ridden a 
roller coaster of macroeconomic and geopolitical market impacts 
and challenges. These started with trade tensions between the 
United States and China, followed by acute and unprecedented 
supply chain disruptions as a result of the COVID-19 pandemic. 
Today, global stagflation and resulting currency crises around 
the world are negatively impacting the availability of U.S. 
dollar currency reserves required to execute contractual 
obligations that govern agricultural trade. Additionally, over 
ten percent of the world's calories are held in uncertain 
availability due to the Russian-Ukraine crisis.
    Each of these topics individually warrants the attention of 
this Committee, and while I have mentioned them expeditiously, 
I hope that each Member and guests here today will consider the 
depth and magnitude of their influence on all aspects of global 
agri-commodity markets.
    Like many other participants in the agricultural sector, 
LDC relies on derivatives markets to hedge risk of the 
underlying cash commodity. It is important to acknowledge the 
value that speculative traders provide by injecting liquidity 
into derivatives markets. Many are also quick to blame 
speculative traders in times of volatility. However, we feel 
strongly that the recent volatility in agri-commodity markets 
is primarily due to the various risks and uncertainties facing 
the agricultural sector, some of which I have already 
mentioned.
    I would also be remiss not to take this opportunity to 
applaud this Committee's collective work and oversight of the 
Commodity Futures Trading Commission. The hierarchy of 
jurisdiction from your Committee to the Commission to the self-
policing efforts of commodity exchanges and the National 
Futures Association brings a level of market certainty that we 
depend upon to accurately hedge our significant risks and 
continue to serve both producers and consumers of agricultural 
products.
    The system has shown remarkable resilience in the face of 
extraordinary pressure and has created the gold standard for 
risk management around the world. Your leadership and that of 
the CFTC is critical to maintaining these benchmarks in the 
United States, where users like us benefit from clear rules and 
proper market oversight without stifling innovation and 
development. Maintaining liquid, agile, and well-functioning 
markets will allow the U.S. to continue leading in risk 
management.
    Mr. Chairman, I have intentionally kept these comments at a 
high altitude to provide an overview of the matters addressed 
by this hearing, and I look forward to responding to your 
questions, and I am prepared to give more granular analysis 
during our dialogue. Thank you.
    [The prepared statement of Mr. Gelchie follows:]

 Prepared Statement of Michael ``Mike'' Gelchie, Group Chief Executive 
               Officer, Louis Dreyfus Company, Wilton, CT
Regarding Global Market Volatility and Its Impact on Commercial End-
        User Risk Management
    Chairman Thompson, Ranking Member Scott, and Members of the 
Committee, thank you for holding this hearing on topics relevant to 
global market risks for agricultural commodities. I am honored to have 
the opportunity to contribute my testimony and appreciate your 
attention to these acutely important matters, in the context of the 
extreme market volatility we have seen in recent years.
    My name is Mike Gelchie. I serve as the Group Chief Executive 
Officer for Louis Dreyfus Company, or LDC, which is a 172 year old 
agribusiness, active in over 100 countries, with approximately 17,000 
employees worldwide, including more than 1,000 in the United States. 
Our North American headquarters are in Wilton, Connecticut.
    LDC is a leading merchant and processor of agricultural goods. We 
absorb and manage risks on our customers' collective behalf, provide 
liquidity to all value chain participants, and execute logistics 
services to deliver essential commodities domestically and globally in 
a safe, timely and reliable manner. We are proud to fulfil these roles, 
the effective execution of which acts as a shock absorber for both 
buyers and sellers along the food and agricultural value chain, 
ultimately contributing to competitive agriculture in the United 
States, which is particularly important in today's volatile and 
challenging markets.
    With regard to global market volatility, I feel compelled to give a 
broad response that recognizes the significant macroeconomic and 
geopolitical factors that have, in our opinion, been the primary 
contributors to contemporary market volatility. I will do my best to 
summarize our observations.
    Since 2018, agriculture in the United States has ridden a roller 
coaster of macroeconomic and geopolitical market impacts and 
challenges. These started with trade tensions between the United States 
and China, followed by acute and unprecedented supply chain disruptions 
as a result of the COVID-19 pandemic. Today, global stagflation and 
resulting currency crises around the world are negatively impacting the 
availability of U.S. dollar currency exchange required to execute 
contractual obligations that govern agricultural trade. Additionally, 
over 10% of the world's calories are held in uncertain availability due 
to the Russia-Ukraine crisis.
    Each of these topics individually warrants the attention of this 
Committee, and while I have mentioned them expeditiously, I hope that 
each Member and guest here today will consider the depth and magnitude 
of their influence on all aspects of global agri-commodity markets.
    Like many other participants in the agricultural sector, LDC relies 
on derivative markets to hedge risk of the underlying cash commodity. 
It is important to acknowledge the value that speculative traders 
provide by injecting liquidity into derivatives markets. Many are also 
quick to blame speculative traders in times of volatility, however we 
feel strongly that the recent volatility in agri-commodity markets is 
primarily due the various risks and uncertainties facing the 
agricultural sector, some of which I have already mentioned.
    I would be remiss not to take this opportunity to applaud this 
Committee's collective work and oversight of the Commodity Futures 
Trading Commission (or CFTC). The hierarchy of jurisdiction--from your 
Committee to the Commission, to the self-policing efforts of commodity 
exchanges and the National Futures Association--brings a level of 
market certainty that we depend upon to accurately hedge our 
significant risks and continue to serve both producers and consumers of 
agricultural products.
    The system has shown remarkable resilience in the face of 
extraordinary pressure and has created the gold-standard for risk 
management around the world. Your leadership and that of the CFTC is 
critical to maintaining these benchmarks in the United States, where 
users like us benefit from clear rules and proper market oversight, 
without stifling innovation and development. Maintaining liquid, agile 
and well-functioning markets will allow the U.S. to continue leading in 
risk management.
    Mr. Chairman, thank you for this opportunity to offer my testimony 
and I look forward to addressing your questions.

    The Chairman. Thank you, Mr. Gelchie. That is much 
appreciated.
    Mr. Sammann, please begin when you are ready with 5 
minutes.

          STATEMENT OF DEREK SAMMANN, SENIOR MANAGING 
      DIRECTOR, GLOBAL HEAD OF COMMODITIES, OPTIONS, AND 
       INTERNATIONAL MARKETS, CME GROUP INC., CHICAGO, IL

    Mr. Sammann. Chairman Thompson, Ranking Member Scott, and 
Members of the Committee, I am Derek Sammann, Senior Managing 
Director and Global Head of Commodities, Options, and 
International Markets for CME Group, the world's leading and 
most diverse derivatives marketplace. Thank you for the 
opportunity to testify today.
    Commodity derivatives markets are essential to both 
consumers and producers to help manage price risk and hedge 
exposures to rising input costs. America's agricultural and 
energy producers and end-users compete on a global level and 
are affected by trade policy, geopolitics, and weather events 
that can cause demand shocks and supply disruptions. These 
events directly impact prices for commodities, which are linked 
to real economies in the U.S. and worldwide, therefore 
impacting main street consumers.
    To combat these global uncertainties, commodities market 
participants need tools to deal with instability that creates 
unwanted price risk. U.S. derivatives markets provide market 
participants with a robust and well-regulated venue to 
efficiently hedge price risk, effectively discover prices, and 
powerfully mitigate unwanted counterparty risk. Derivatives 
exchanges like those at CME Group allow both commodity 
producers and end-users to lock in future prices, providing 
predictability of both input and output costs.
    Over the last 3 years, we have seen significant disruptions 
to global commodities markets. While the war in Ukraine created 
supply shocks in markets like wheat and crude oil, the global 
pandemic similarly created significant demand shifts in energy 
markets, all of which created record levels of volatility 
across commodities.
    Thanks to the well-functioning and well-regulated 
derivatives markets that this Committee oversees, U.S. and 
global market participants were able to accurately determine 
prices of core commodities and manage risk with minimal 
disruptions during these unprecedented events. Let me provide 
three examples of how these markets and the risk controls and 
financial safeguards functioned effectively over the past year, 
focusing on markets for wheat, energy, and metals.
    Before the war, Russia and Ukraine contributed roughly 25 
percent of total global wheat exports. Following Russia's 
invasion of Ukraine, wheat prices increased 70 percent from 
their January 2022 levels. CME Group's clearinghouse followed 
transparent margin practices, which helped our markets to 
operate smoothly during this volatile period. The ability to 
adapt margin requirements is an important risk management tool 
that helps our clearinghouse assess overall risk portfolio risk 
to protect market participants.
    In March 2022, we saw the largest daily price move in wheat 
triggering a price limit in our wheat futures, one of the pre-
trade risk controls used by CME Group to maintain an orderly 
market. We promptly worked with the CFTC to get expedited 
approval to increase price limits and later to implement a 
dynamic price limit mechanism in the wheat market that allows 
the price limit to adjust with volatility and restore trading 
more quickly. These actions respectively allowed market 
participants to effectively manage risk and discover prices as 
markets normalized and will prepare the market for future 
events.
    Turning to the crude oil market, the story is largely the 
same. Trade in energy spiked as the war in Ukraine broke out. 
As with wheat, prices in our West Texas Intermediate, or WTI, 
crude oil contract, a global benchmark for the price of oil, 
increased over 60 percent. This is the largest upside move in 
over 10 years. But thanks to our market risk controls and the 
clear, predictable margin practices employed by CME Group's 
clearinghouse, market participants were able to effectively 
hedge, and our markets accurately reflected the price of this 
core commodity.
    Last, the invasion of Ukraine constrained Russia's ability 
to trade, which was felt by players across the metals supply 
chain in markets like aluminum and nickel. In addition, China, 
the world's largest consumer of many industrial metals, 
continued a zero-COVID policy that led to fears of significant 
demand destruction. By early March of 2022, new all-time highs 
were observed in the nickel market, contributing to an 
unprecedented disruption in the trade of nickel at one of the 
world's largest metals exchanges in London. Independent reviews 
of that disruption have specifically noted the absence of 
market oversight and risk management procedures such as those 
routinely deployed by CME Group's exchange and clearinghouse, 
including, for example, position limits, assessing 
concentration risk, liquidity-based margin add-ons, and daily 
price bands.
    CME Group's clearinghouse provides sophisticated financial 
safeguards and risk management and has a long history of 
successfully handling extreme market events. CME clearing was 
well-prepared for the commodities market events that began last 
March, making multiple proactive margin increases leading up to 
Russia's invasion in Ukraine so that customers would be 
prepared for market changes as volatility grew.
    In conclusion, as CME Group's CEO Terry Duffy recently 
wrote in a Financial Times \1\ op-ed piece, ``With near 
constant market challenges ahead, effective risk management 
will be crucial. To navigate this new age of uncertainty . . . 
.'' U.S. derivatives markets, as regulated by the CFTC and 
overseen by this Committee, are essential to ensure that global 
market participants can continue to manage those risks 
confidently and securely.
---------------------------------------------------------------------------
    \1\ Editor's note: the Financial Times article entitled, Risk 
management is the alpha for a time of uncertainty, dated February 28 
2023, is retained in Committee file and is available at: https://
www.ft.com/content/a3459cb1-b98c-457a-8e4a-e99860709b88.
---------------------------------------------------------------------------
    Thank you for inviting me today, and I look forward to 
taking any questions you may have.
    [The prepared statement of Mr. Sammann follows:]

 Prepared Statement of Derek Sammann, Senior Managing Director, Global 
  Head of Commodities, Options, and International Markets, CME Group 
                           Inc., Chicago, IL
    Chairman Thompson, Ranking Member Scott, and Members of the 
Committee, I am Derek Sammann, Senior Managing Director and Global Head 
of Commodities, Options, and International Markets for CME Group. As 
the world's leading and most diverse derivatives marketplace, CME Group 
offers the widest range of global benchmark products across all major 
asset classes and provides clearing services for our customers around 
the globe through our clearinghouse, CME Clearing. Thank you for the 
opportunity to testify today regarding global commodity markets, 
volatility, and the importance of robust, secure, well-regulated and 
deeply liquid derivatives markets.
Commodity Derivatives Markets in Times of Volatility
    Commodities derivatives markets are essential to both consumers and 
producers to help manage price risk and hedge exposures to rising input 
costs. Given the importance of U.S. agricultural production and the 
magnitude of U.S. exports of agricultural products to global consumers, 
America's agricultural producers and global end-users are not strangers 
to market volatility. They compete on a global level and are affected 
by trade policy, geopolitics and weather events half-a-world away.
    Similarly, energy products like crude oil and natural gas, as well 
as metals products like silver, copper and aluminum, are also affected 
by global demand shocks and supply disruptions. These events directly 
impact prices for those commodities as well as agricultural products, 
which are directly linked to the real economies in the U.S. and 
worldwide--therefore impacting Main Street consumers.
    To combat these global uncertainties, commodities market 
participants need robust tools to deal with instability that creates 
unwanted price risk. U.S. derivatives markets provide market 
participants all over the world with a robust and well-regulated venue 
to efficiently hedge price risk, effectively discover prices and 
powerfully mitigate unwanted counterparty risk. Derivatives exchanges 
like those at CME Group offer futures and options contracts that allow 
both commodity producers and end-users to lock in future prices, 
providing predictability on both input and output costs.
    As regulated derivatives markets enable open and transparent price 
discovery, they also help to support price stability. In turn, market 
participants and end-users benefit from these markets, even those that 
do not directly buy or sell futures contracts.
Recent Commodity Markets Volatility
    Over the last 3 years, we have seen significant disruptions to 
global commodities markets. While the war in Ukraine created supply 
shocks in markets like wheat, crude oil and natural gas, the global 
pandemic similarly created significant demand shifts in energy markets, 
all of which created record levels of volatility across commodities. 
Thanks to the well-functioning and well-regulated listed futures and 
options markets that this Committee oversees, U.S. and global market 
participants were able to accurately determine prices of core 
commodities and manage risk with limited disruptions during these 
unprecedented events. Let me provide three examples of how these 
markets and their risk controls and financial safeguards functioned 
effectively over the past year, focusing on the markets for wheat, 
energy, and metals.
    Before the war, Russia and Ukraine contributed roughly 25% of total 
global wheat exports. Following Russia's invasion of Ukraine, wheat 
market prices increased 70% from their January 2022 levels. During this 
time, CME Group's clearinghouse followed transparent margining 
practices, notifying market participants of incremental margin 
increases 24 to 48 hours in advance, which helped our markets to 
operate smoothly during this volatile period. Initial margin deposits 
(also called ``performance bonds'') by clearing members vary according 
to product and market volatility and ensure that a clearing member can 
cover potential losses and meet its obligations to customers and the 
clearinghouse. The ability to adapt margin requirements is an important 
risk management tool that helps our clearinghouse assess overall 
portfolio risk to protect market participants and the market as a 
whole.
    In March 2022, we saw the largest daily price move in wheat--with 
an implied price up 26% vs. a 7.1% hard limit that day--triggering a 
price limit on wheat futures. Price limits are one of the pre-trade 
risk controls used by CME Group exchanges to maintain an orderly 
market. Price limits cause trading to temporarily stop, preventing a 
market from moving too far too fast and helping to recover market 
equilibrium. We promptly worked with the CFTC to get expedited approval 
to increase price limits and later to implement a ``dynamic'' price 
limit mechanism in wheat that allowed the price limit to adjust with 
volatility and restore trading more quickly following limit events. The 
first action allowed market participants to effectively manage risk and 
discover prices as they returned to normal, while the second will 
prepare the market for future events.
    Turning to oil markets, the story is largely the same. Trading 
volumes in energy spiked as the war in Ukraine broke out. As with 
wheat, prices that February in our West Texas Intermediate (or WTI) 
crude contract, a global benchmark for the price of oil, increased over 
60% from their January levels. Both wheat and oil had the same high 
spikes and implied volatility. These were the largest upside price 
risks that we have seen in over 10 years. Thanks to our market risk 
controls and the clear, predictable margin practices employed by our 
clearinghouse, market participants were able to effectively hedge, and 
our markets accurately reflected the prices of this core commodity.
    Finally, the invasion of Ukraine constrained Russia's ability to 
trade, which was felt by players across the metals supply chain and 
their end customers in markets like aluminum and nickel. In addition to 
the geopolitical constraint, China--the world's largest consumer of 
many metals--continued a [COVID]-zero policy that severely restricted 
economic activity and led to fears of demand destruction for many 
industrial metals. By early March of 2022, new all-time highs were 
observed in palladium and nickel markets. These dynamics contributed to 
an unprecedented disruption in the trading of nickel at one of the 
world's largest metals exchanges in London. Independent reviews \1\ of 
this disruption have specifically noted the absence of market oversight 
and risk management procedures such as those routinely deployed by CME 
Group's exchanges and clearinghouse. These tools include assessing 
concentration risk, margin add-ons, liquidity-based margin add-ons, 
daily price bands, daily variation margin calls, setting price limits 
guided by volatility dynamics, and utilizing mechanisms such as dynamic 
circuit breakers and velocity logic to manage market moves.
---------------------------------------------------------------------------
    \1\ https://www.lme.com/-/media/Files/Trading/New-initiatives/
Nickel-independent-review/Independent-Review-of-Events-in-the-Nickel-
Market-in-March-2022---Final-Report.pdf; https://
www.bankofengland.co.uk/news/2023/march/boe-announces-supervisory-
action-on-lme-clear; https://www.fca.org.uk/news/statements/update-our-
public-statement-london-metal-exchange.
---------------------------------------------------------------------------
Central Clearing in Extreme Market Conditions
    During times of extreme market volatility, central clearing, which 
is required for all listed futures contracts, is a critical component 
of a secure derivatives marketplace. Clearing helps to ensure that each 
party to a futures contract lives up to its financial obligations, 
thereby mitigating counterparty risk. CME Group's clearinghouse 
provides sophisticated financial safeguards and risk management and has 
a long history of successfully handling extreme market events.
    CME Clearing takes extensive steps to ensure markets run smoothly, 
including during times of exceptionally high market volatility as we 
have seen recently. In addition to responsible margining practices, the 
clearinghouse provides risk monitoring 24 hours a day, 6 days a week, 
daily mark-to-market monitoring of clearing members' and customers' 
exposures, margin review and maintenance, trend analysis of clearing 
members, stress testing, back testing, risk reviews, and default 
management--to name just a few.
    CME Clearing was well prepared for the commodities market events 
that began last March. We were in regular contact with the CFTC 
throughout these periods of heightened volatility, while following our 
standard practice when dealing with event risk. We made multiple, 
proactive margin increases leading up to Russia's invasion of Ukraine, 
so that customers would be prepared for market changes as volatility 
grew.
Importance of Market Liquidity
    While risk controls and central clearing are essential components 
of the safety and security of derivatives trading, there would be no 
market, no risk mitigation, and no price discovery without adequate 
market liquidity. It is liquidity that enables the kind of trading 
volumes that normally accompany markets in times of stress. Market 
participants must have absolute confidence that when they are ready to 
either establish a position to lock in a price or close out their 
position, a counterparty will be there to take the other side of their 
trade. Without this liquidity, markets would not exist.
    A record of over 23 million contracts were traded on CME Group 
every day, on average, in 2022. These deeply liquid markets are 
possible because buyers and sellers trust in the investor protections 
and safeguards that CME Group, in partnership with the CFTC as our 
regulator, and the critical intermediaries like our clearing firms, 
offers market participants. CME Group markets provide exemplary risk 
management standards and create tailored products that meet the 
market's risk hedging and price discovery needs.
Conclusion
    As we move forward in an ever more uncertain world, commodity risk 
management will continue to be a focus in 2023 and beyond. Due to the 
integrated nature of commodity markets, all global events will 
reverberate through America's markets. U.S. derivatives markets, as 
regulated by the CFTC, and overseen by this Committee, are essential to 
ensure that global market participants can continue to manage those 
risks confidently and securely.
    Thank you for inviting me to testify today and I look forward to 
taking any questions you may have.

    The Chairman. Mr. Sammann, thank you so much for your 
testimony.
    Now, I am pleased to recognize Ms. Crighton. Please begin 
your testimony whenever you are ready.

         STATEMENT OF ALICIA CRIGHTON, CHAIR, BOARD OF 
     DIRECTORS, FUTURES INDUSTRY ASSOCIATION, NEW YORK, NY

    Ms. Crighton. Chairman Thompson, Ranking Member Scott, and 
Members of the Committee, thank you for the opportunity to 
testify. It is an honor to be here.
    My name is Alicia Crighton. I am head of the clearing and 
co-head of the futures businesses for Goldman Sachs. I am 
testifying today as Chair of the Futures Industry Association, 
the FIA, which is the leading global trade organization for the 
futures, options, and centrally cleared derivatives markets.
    During periods of increased market volatility, including 
the pandemic and the Russian invasion of Ukraine, futures 
markets take on additional importance as a critical risk 
management tool for agriculture and energy end-users. Markets 
function well, but our experience also underscored ways in 
which we can strengthen the resilience of the cleared 
derivatives markets. Today, I will explain the role of clearing 
members in helping end-users manage risk. Then, I will discuss 
margin as a foundational component of clearinghouse risk 
management, also commonly referred to as CCPs. Last, I will 
briefly touch on diversity and inclusion in the industry, an 
issue that is personally important.
    Through connectivity to exchanges and CCPs around the 
world, clearing members provide end-users access to global 
markets to manage risk. We are intermediaries and stand between 
an end-user and the CCP and act as the first and last line of 
defense for the cleared ecosystem.
    As the first line of defense, we underwrite the risk of a 
client's portfolio before it ever reaches the CCP and monitor 
it on an ongoing basis. This includes determining suitability 
of leveraged products, monitoring clients for money laundering, 
and other risks to market integrity, collecting and 
safeguarding customer margin, and guaranteeing the performance 
of clients to CCPs.
    Perhaps less known is that clearing members are also the 
last line of defense. We contribute substantially all of the 
financial resources that backstop the CCP in the event of a 
major market disruption or default. For CFTC-regulated 
clearinghouses alone, clearing members contribute close to $50 
billion in default funds. The volume of transactions flowing 
through clearinghouses globally has increased significantly in 
the last decade in large part due to post-financial crisis 
clearing mandates. While this has a positive and risk-reducing 
effect for markets, it also increases the systemic relevance of 
central clearinghouses and the market's exposure to them.
    Clearing members, end-users, and investors must rely on the 
strength of a clearinghouse's risk management, and ensuring the 
regulatory and risk management framework for CCPs is keeping 
pace with their role in the market is essential. For example, 
margin is the primary tool available to clearinghouses to 
manage credit risk and the first layer of resources that they 
can access in the event of a default. Following the market 
volatility that stemmed from the Russian invasion of Ukraine, 
we saw dramatic margin increases by CCPs across futures 
contracts globally. To meet margin calls, end-users need high-
quality liquid assets, driving up demand and at the same time 
scarcity of those assets. This can intensify market turmoil, 
cause a spill-over into other markets, and potentially create 
systemic risk.
    European energy companies sought liquidity support from 
central banks and governments to ensure they could maintain 
their hedges and meet their margin calls. While margin 
requirements for listed futures contracts should increase 
during volatile periods and decrease when markets normalize, 
the magnitude of the increases signal that margin levels had 
fallen too low. Improving the transparency of CCP margin models 
and the opportunity for market participants to provide input to 
the clearinghouse will help clearing members and end-users be 
better prepared for periods of volatility.
    The CFTC proposed enhanced clearinghouse governance rules 
last year and outcome of market participants and clearinghouses 
working together through the Market Risk Advisory Committee. In 
addition, margin floor is designed to ensure baseline levels 
remain appropriately calibrated and more stable through time 
will help to dampen these extreme swings in margin.
    Clearing members provides substantially all of the 
resources available to a CCP to manage a default, but there is 
a layer of capital contributed by the CCP itself. The skin in 
the game is essential to align the incentives between a 
clearinghouse and its members for effective risk management, 
including the adequacy of margin requirements. Some progress is 
being made globally, and the FIA looks forward to continuing to 
work with regulators and clearinghouses to advance these 
discussions.
    As the first female Chair of the Board in FIA's 68 year 
history, I can attest that we are making progress in enhancing 
diversity in our industry. The face of our industry is 
changing, and we don't have to look any further than the CFTC 
and the historic confirmation of four female Commissioners last 
year. There is clearly more we need to do, and I am happy to 
discuss this further.
    Again, it is an honor to be with you today and to work with 
this Committee as you consider these important issues. Thank 
you.
    [The prepared statement of Ms. Crighton follows:]

   Prepared Statement of Alicia Crighton, Chair, Board of Directors, 
               Futures Industry Association, New York, NY
    Chairman Thompson, Ranking Member Scott, and Members of the 
Committee, thank you for the opportunity to testify.
    I am the head of the clearing businesses for Goldman Sachs and the 
co-head of its Global Futures business. I am testifying as Chair of the 
Futures Industry Association (FIA), the leading global trade 
organization for the futures, options and centrally cleared derivatives 
markets.
    During periods of economic stress and increased market volatility, 
futures markets take on additional importance because they serve as a 
critical risk management tool for agricultural and energy end-users. 
Through the market volatility related to the pandemic in March 2020, 
and the Russian invasion of Ukraine in 2022, futures markets continued 
to function amid tremendous stress in the financial system.
    However, these experiences have also driven the industry to 
consider what can be done to put cleared derivatives markets, and the 
end-users that rely on them, on even stronger footing through future 
cycles of volatility.
    Today, I'll start by explaining the role of clearing members \1\ in 
helping end-users manage risk and supporting market resilience. Then 
I'll highlight issues that warrant additional attention from 
policymakers. And lastly, I'll talk about diversity and inclusion in 
the futures industry, an issue that is personally important to me.
---------------------------------------------------------------------------
    \1\ For this testimony, the use of ``clearing members'' is intended 
to include futures commission merchants (FCMs).
---------------------------------------------------------------------------
The Role of Clearing Members
    Through connectivity to exchanges and clearinghouses around the 
world, clearing members provide customers, including agricultural and 
energy end-users, with access to global markets to manage the risks of 
their operations. For example, many FIA members participate in 
clearinghouses across dozens of jurisdictions to ensure their clients 
have the ability to transact in any region in which they do business.
    Clearing members are intermediaries, which means we stand between 
an end-user and the clearinghouse, and we act as the first and the last 
line of defense in fostering stability in cleared derivatives markets.
    We act as a first line of defense by underwriting the risk of a 
client's portfolio before it ever reaches the clearinghouse and 
monitoring that risk on an ongoing basis. This includes determining the 
appropriateness and suitability of leveraged products, monitoring 
clients for money laundering and other risks to market integrity, 
collecting and safeguarding customer margin and guaranteeing the 
performance of clients to the clearinghouse.
    Perhaps less known is that clearing members contribute 
substantially all the financial resources that backstop the 
clearinghouse in the event of a major market disruption or default by a 
market participant. Looking at just the ten clearinghouses regulated by 
the CFTC, clearing members contribute $47.6 \2\ billion in default 
funds.
---------------------------------------------------------------------------
    \2\ The clearinghouses included are: CME, Eurex, Ice Clear Credit, 
Ice Clear Europe, Ice Clear U.S., LCH LTD, LCH SA, MGEX Clearing, Nodal 
Clearing, OCC. Clearinghouse financial data is sourced from the Q3 
public quantitative disclosures, published at year end. These 
calculations do not include the default insurance policy taken out by 
ICE as an additional layer of defense, to complement its ``Skin-in-the-
Game.''
---------------------------------------------------------------------------
    Clearing members also hold a significant amount of regulatory 
capital, which serves as an additional layer of protection to the 
system that helps ensure clearing members themselves can withstand a 
severe market disruption. The total amount of capital held by the 
clearing members regulated by the CFTC was $175 billion as of December 
last year.\3\
---------------------------------------------------------------------------
    \3\ Source: The CFTC's Financial Information for FCMs report for 
December 2022. Total capital is the aggregate amount of ``adjusted net 
capital'' reported by the 63 FCMs registered with the CFTC as of that 
date.
---------------------------------------------------------------------------
    Together, these financial resources reduce the risk that a major 
market event or default creates wider market contagion.
The Importance of Robust Exchange Risk Controls
    Volatility control mechanisms including exchange risk controls 
provide important protections against extreme price volatility that can 
disrupt markets and create systemic risk. A recent example of this: 
over the course of 3 days in March last year, the price of nickel 
increased by over 270% on the London Metals Exchange (LME). As a result 
of the volatility and market disruption, LME took the extraordinary 
step of halting trading for 5 days but also canceled potentially 
billions of dollars of trade notional that had taken place during the 
twelve hours prior to the halt.
    It's important to note that CFTC regulated exchanges have a long 
history of supporting robust volatility control mechanisms, especially 
in the agricultural markets. This brings confidence to our markets and 
supports the needs of commodity end-users. FIA is working in 
partnership with exchanges to develop global best practices for 
exchange risk controls.
Clearinghouse Resilience
    The volume of transactions flowing through clearinghouses around 
the world has increased significantly in the last decade, in large part 
due to post-financial crisis clearing mandates. While this has had a 
positive and risk reducing effect for derivatives markets, it has also 
increased the systemic importance of clearinghouses.
    Around the world, regulators continue to make progress in enhancing 
the regulatory standards applicable to clearinghouses, and there are 
international standards in place to foster consistency among 
jurisdictions. But recent market events underscore that more can be 
done to strengthen the resilience of clearinghouses, and by extension, 
cleared derivatives markets.
    In addition, over the last twenty years, the number of clearing 
firms in the U.S. futures industry has decreased significantly. Using 
data from the CFTC, we estimate that the total number of clearing firms 
that clear futures for their customers has decreased by half, while the 
amount of customer margin held by these clearing firms has increased by 
almost six times, from $60 billion in March of 2002 to $347 billion 
this past December.
    Clearing members, end-users and investors have to rely on the 
strength of a clearinghouse's risk management, particularly as many 
products by regulation require clearing. A core feature of a 
clearinghouse is its ability to spread losses incurred from a default 
across non-defaulting clearing members, known as ``loss 
mutualization.'' This makes it essential that the risk management 
standards and regulatory frameworks governing a clearinghouse are 
sufficiently robust to safeguard their role as a critical market 
infrastructure, including membership criteria, the risk profile of new 
products it clears and, as I'll discuss more later, margin practices. 
FIA supports greater strengthening and standardization of these 
requirements globally.
Transparency and Adequacy of Margin
    Margin is the first layer of resources available to a clearinghouse 
if a participant defaults, and it is foundational to the risk 
management of the clearinghouse. In recent periods of volatility, such 
as the onset of the pandemic or the Russian invasion of Ukraine, we saw 
significant margin increases across futures contracts globally.
    In October 2020, FIA released a white paper \4\ that examined the 
increase in margin requirements at derivatives clearinghouses during 
the first quarter of 2020 due to increased market volatility related to 
the pandemic. Although the clearing system performed well, the increase 
in margin requirements created a large and sudden demand for liquid 
assets that added stress in markets.
---------------------------------------------------------------------------
    \4\ https://www.fia.org/sites/default/files/2020-10/
FIA_WP_Procyclicality_CCP%20Margin
%20Requirements_1.pdf.
---------------------------------------------------------------------------
    To highlight key findings:

   Initial margin requirements for certain benchmark contracts 
        in the U.S., Europe and Japan jumped by more than 100% between 
        the beginning and the end of the first quarter of 2020 with 
        most of the increase happening during the month of March

   Initial margin held by the ten major derivatives 
        clearinghouses in those jurisdictions rose from $563.6 billion 
        at the end of 2019 to $833.9 billion at the end of the first 
        quarter of 2020, an increase of $270.3 billion or 48%

    More recently, we experienced a very sharp increase in margin 
requirements in the European power and gas and oil markets in 2022 
after the Russian invasion of Ukraine. Several large European energy 
companies that use these markets to hedge their risks faced extremely 
large margin calls, and in some cases they had to turn to their 
governments for financial support.\5\ This experience demonstrated how 
margin calls can drive up demand for high quality liquid assets and 
intensify market turmoil. While margin requirements for listed futures 
contracts certainly should increase during volatile periods and 
decrease when markets are under normalized conditions, the magnitude of 
the increases that we saw in the European power and gas markets were a 
sign that margin levels had fallen too low.
---------------------------------------------------------------------------
    \5\ For examples, see: https://www.bankofengland.co.uk/markets/
energy-markets-financing-scheme; https://www.bmwk.de/Redaktion/EN/
Pressemitteilungen/2022/06/20220617-new-hedging-instrument-margining-
launched-by-the-german-federal-government-to-protect-companies-
affected-by-war.html; https://www.ft.com/content/4ea1dab0-d1a8-4324-
97e2-22caed5ed55c.
---------------------------------------------------------------------------
    There are a few ways in which this can be addressed. First, 
improving the transparency of clearinghouse margin models, as well as 
the opportunity for market participants to provide input to the 
clearinghouse, will help clearing members and end-users be better 
prepared for periods of volatility. The Commodity Futures Trading 
Commission (CFTC) issued a proposal last year to enhance clearinghouse 
governance that was the outcome of market participants and 
clearinghouses working together towards a solution through its Market 
Risk Advisory Committee \6\ (MRAC).
---------------------------------------------------------------------------
    \6\ https://www.cftc.gov/media/6201/MRAC_CCPRGS_RCCOG022321/
download.
---------------------------------------------------------------------------
    Second, implementing margin floors that are designed to ensure 
baseline levels remain appropriately calibrated and more stable through 
time will help to dampen extreme swings in margin.
    In our October 2020 white paper, FIA identified several additional 
recommendations for regulators to improve the transparency and adequacy 
of clearinghouse margin models to drive this outcome in the future. 
Additionally, in February 2021, the MRAC approved several consensus 
recommendations \7\ for the CFTC to consider related to clearinghouse 
margin methodologies. Recommendations include:
---------------------------------------------------------------------------
    \7\ https://www.cftc.gov/media/5706/MRAC_CRGSubcommittee-
DiscussionPaperOnBestPrac
ticesinCCPMarginMethodologies022321/download.

   Clearinghouse margin methodologies should be sufficiently 
        transparent to market participants so they can understand how 
        models react to certain market conditions for liquidity 
---------------------------------------------------------------------------
        planning and risk management purposes

   The CFTC should enhance its flexible approach to supervising 
        how CCPs manage procyclical margin requirements that 
        prioritizes the desired outcome of reducing procyclicality, not 
        the specific means of reducing it

    Third, the role of incentives in driving prudent margin practices 
by clearinghouses has been an important topic for the industry and 
regulators for many years.\8\ This is because nearly all of the capital 
that would be used to manage a default comes from the clearing members 
\9\ and not the clearinghouses. In other jurisdictions, regulators are 
in the process of developing new policy \10\ to require clearinghouses 
to put more of their own capital at risk \11\ to better align their 
incentives for strong risk management practices, including strong 
margin models.
---------------------------------------------------------------------------
    \8\ https://www.bis.org/publ/work866.pdf.
    \9\ While the rate of contributions varies among CFTC-regulated 
clearinghouses, on average, clearinghouses contribute less than 5% of 
their own capital to their default funds. The clearinghouses included 
in this analysis are: CME, Eurex, Ice Clear Credit, Ice Clear Europe, 
Ice Clear U.S., LCH LTD, LCH SA, MGEX Clearing, Nodal Clearing, OCC. 
Clearinghouse financial data is sourced from the Q3 public quantitative 
disclosures, published at year end. These calculations do not include 
the default insurance policy taken out by ICE as an additional layer of 
defense, to complement its ``Skin-in-the-Game.''
    \10\ https://www.risk.net/regulation/7955130/boe-official-signals-
tough-stance-on-ccp-skin-in-the-game.
    \11\ Last year, European authorities took steps to require European 
CCPs to hold an additional amount of pre-funded dedicated own resources 
and noted ``This additional layer of capital, or `second skin-in-the 
game', exposes the CCP's capital before relying on further 
contributions from clearing members and is meant as an incentive for 
proper risk management.'' https://www.esma.europa.eu/sites/default/
files/library/esma91-372-1706_fr_rts_ssitg_art_915.pdf.
---------------------------------------------------------------------------
Bank Capital
    Capital levels for banks have significantly increased since the 
financial crisis due to the adoption of Dodd-Frank, Basel III and other 
reforms. These reforms have made the banking system more resilient to 
volatility and extreme shocks.
    The U.S. banking agencies are in the process of developing a 
proposal to revise the capital regime for banks that has the potential 
to further increase the cost of capital.
    It will be important that the forthcoming proposal be calibrated 
correctly so that it does not increase the cost for banks to provide 
commodity derivatives to end-users to meet their hedging needs.
Diversity & Inclusion
    As the first female Chair of the Board in FIA's 68 year history, I 
can attest that we are making progress in enhancing diversity in our 
industry. There are many signs that the face of our industry is 
changing. We don't have to look any further than the CFTC and the 
historic confirmation of four female Commissioners last year. I do 
think there's a lot more we need to do, and I have some practical ideas 
drawn from my own career that I would be very happy to discuss further 
with any Members or staff on the Committee.
Conclusion
    FIA greatly appreciates the Committee's interest in these topics 
that affect global derivatives markets and the end-users who rely on 
derivatives products to hedge their risks.
    It is an honor to be with you today and to work with this Committee 
as you consider these important issues.

    The Chairman. Ms. Crighton, thank you, and thanks so much 
for your testimony.
    I am now pleased to recognize Mr. Edmonds. Please begin 
when you are ready.

          STATEMENT OF CHRISTOPHER S. EDMONDS, CHIEF 
DEVELOPMENT OFFICER, INTERCONTINENTAL EXCHANGE, INC., ATLANTA, 
                               GA

    Mr. Edmonds. Chairman Thompson, Ranking Member Scott, 
Members of the Committee, I am Chris Edmonds, Chief Development 
Officer for Intercontinental Exchange, or ICE. I appreciate the 
opportunity to be here before you today as this Committee looks 
at the global commodity market volatility and the impacts on 
central clearing and margin.
    Clearinghouses play a critical role in the financial 
markets that serves the needs of participants around the globe. 
Policymakers across the world, including this Committee, have 
an interest in safe and efficient markets, and commercial 
market participants rely on ICE's exchanges and clearing 
services to assess price risk, find market opportunities, and 
transact with confidence.
    ICE has a successful and innovative history of clearing 
exchange-traded and OTC derivatives across a spectrum of asset 
classes, including energy, agriculture, and financial products. 
Today, ICE owns and operates six geographically diverse 
clearinghouses that serve markets and customers across North 
America, Europe, and Asia.
    The risk-reducing benefits of central clearing have long 
been recognized by users of exchange-traded derivatives, you 
know as futures, and the performance of the clearing model 
throughout the even most challenging financial situations made 
it the foundation of financial reforms. As part of the 
increased use of clearing, clearinghouses and market 
participants have worked to make the clearing process robust 
and resilient, supported by suitable financial risk management 
and operational resources.
    The combination of market events in 2022 have been unique. 
The uneven and unpredictable reopening of global economies 
following the COVID-19 pandemic, the Russian invasion of 
Ukraine significantly reconfigured global energy supply, rising 
inflation, and subsequent central bank tightening of monetary 
policy, and increasing political and investor pressure around 
energy markets, energy security, affordability, and 
sustainability. These events have impacted the financial and 
commodity markets and have combined to create significant 
uncertainty, high levels of volatility, and high energy prices 
at a time where the cost of capital has also increased. Despite 
the challenges related to these events, derivative markets have 
again proven to be resilient, liquid, and well-functioning and 
continue to provide transparent price discovery.
    As a result of market events, volatility increased and 
market participants faced increased liquidity demands, 
including risk-based initial and variation margin calls. Market 
participants made these margin calls--or paid their bill--or 
received margin payments--or were paid what they were owed. The 
fact these parties paid their margin calls is further evidence 
the markets operated as expected and market participants 
confidently relied on ICE's markets to manage the risk.
    ICE recognizes the volatile situation occurring in the 
energy markets and its subsequent impact on consumers. We also 
acknowledge the responsibility governments have to combat 
inflationary natural gas prices and supply concerns for their 
citizens. ICE, however, does not support the recent imposition 
of a market correction mechanism in the European Union and 
believes it will fail to achieve its primary objective of 
lowering energy prices and could distort the trading of EU 
natural gas derivatives. The market correction mechanism 
incentivizes market participants to use less transparent over-
the-counter hedging tools or refrain from hedging, which could 
have a detrimental impact on liquidity and market confidence, 
resulting in long-term damage to the functioning and 
competitiveness of the global natural gas market.
    Clearinghouses collect and manage billions of dollars in 
customer funds pledged as collateral against derivative 
positions, including margin posted by commercial hedgers and 
farmers. The amount of collateral posted to clearinghouses has 
substantially increased due to the recent market volatility. 
Accordingly, expanding clearinghouse access to central bank 
deposit accounts for client margin is an important systemic 
risk mitigation tool and a means to protect client funds held 
by clearinghouses and ensure liquidity of these funds during 
stressed market conditions.
    For this reason, ICE, along with other non-systemically 
designated central counterparties, support legislation 
providing central counterparties registered with the CFTC and 
the SEC access to deposit accounts offered by the Federal 
Reserve, as it is the safest and most liquid place to hold U.S. 
dollar client funds and ask this Committee to assist in 
advancing such legislation as you have in the past.
    We look forward to continuing to work closely with 
governments and regulators at home and abroad to address 
evolving challenges and to expand the use of demonstrably 
beneficial clearing services, underpinning the best and safest 
marketplace as possible.
    Mr. Chairman, Members of the Committee, thank you for the 
opportunity to share our views. I would be happy to answer any 
questions you and the Members may have.
    [The prepared statement of Mr. Edmonds follows:]

    Prepared Statement of Christopher S. Edmonds, Chief Development 
         Officer, Intercontinental Exchange, Inc., Atlanta, GA
Introduction
    Chairman Thompson, Ranking Member Scott, I am Chris Edmonds, Chief 
Development Officer for Intercontinental Exchange, or ICE. I appreciate 
the opportunity to appear before you today, as this Committee looks at 
the global commodity market volatility and the impacts on central 
clearing and margin.
    Clearing houses play a critical role in the financial markets that 
serve the needs of participants around the globe. Policy makers across 
the world, including this Committee, have an interest in safe and 
efficient markets. To further the common interest of well-functioning 
markets and well-regulated clearing houses, we appreciate the 
opportunity to participate in this hearing.
Background
    Since launching an electronic over-the-counter (OTC) energy 
marketplace in 2000 in Atlanta, Georgia, ICE has expanded both in the 
U.S. and internationally. Over the past seventeen years, we have 
acquired or founded derivatives exchanges and clearing houses in the 
U.S., Europe, Singapore and Canada. In 2013, ICE acquired the New York 
Stock Exchange, which added equity and equity options exchanges to our 
business.
    ICE has a successful and innovative history of clearing exchange-
traded and OTC derivatives across a spectrum of asset classes, 
including energy, agriculture and financial products. Today, ICE owns 
and operates six geographically diverse clearing houses that serve 
markets and customers across North America, Europe and Asia. Each of 
these clearing houses is subject to direct oversight by local national 
regulators, often in close coordination and communication with other 
regulatory authorities with important interests, and subject to 
regulations reflective of the G20 reforms and IOSCO principles.

   ICE acquired its first clearing house, ICE Clear U.S., as a 
        part of the 2007 purchase of the New York Board of Trade. ICE 
        Clear U.S. clears a variety of agricultural and financial 
        derivatives and is primarily regulated by the Commodity Futures 
        Trading Commission (CFTC) and is recognized by the European 
        Securities and Markets Authority (ESMA).

   In 2008, ICE launched ICE Clear Europe, the first new 
        clearing house in the UK in over a century. ICE Clear Europe 
        clears derivatives in several asset classes, including energy, 
        interest rates, equity and credit derivatives, and is primarily 
        supervised by the Bank of England, in close cooperation with 
        the CFTC, the Securities and Exchange Commission (SEC) and 
        ESMA.

   ICE Clear Credit was established as a trust company in 2009 
        under the supervision of the Federal Reserve Board and the New 
        York State Banking Department and converted to a derivatives 
        clearing organization (DCO) following implementation of the 
        Dodd-Frank Wall Street Reform and Consumer Protection Act 
        (Dodd-Frank Act). ICE Clear Credit clears a global set of 
        credit default swaps on indices, single names and sovereigns, 
        and is primarily regulated by the CFTC and SEC and is also 
        recognized by ESMA. ICE Clear Credit has been designated as 
        ``systemically important'' by the Financial Stability Oversight 
        Council (FSOC).

   In 2017, ICE acquired ICE NGX. ICE NGX operates a non-
        intermediated model for clearing of North American energy 
        products and is regulated by the Alberta Securities Commission 
        and the CFTC.

   ICE also operates ICE Clear Netherlands under the regulatory 
        supervision of De Nederlandsche Bank, Autoriteit Financiele 
        Markten and ESMA, and ICE Clear Singapore which is overseen by 
        the Monetary Authority of Singapore.
Clearing Houses Vital Role in the Derivatives Market
    Clearing has consistently proven to be a fundamentally safe and 
sound process for managing systemic risk. The risk-reducing benefits of 
central clearing have long been recognized by users of exchange-traded 
derivatives (futures), and the performance of the clearing model 
throughout even the most challenging financial situations made it the 
foundation of financial reforms. Observers frequently point to non-
cleared derivative contracts as a significant factor in the broad reach 
and complexity of the 2008 financial crisis, while noting the relative 
stability of cleared markets.
    The disciplined and transparent risk management practices of 
regulated clearing houses serve to reduce systemic risk. A clearing 
house, by acting as a central counterparty, to clearing members' 
transactions, eliminates the bilateral counterparty credit risk and 
imposes on clearing members a transparent set of rules and prudent risk 
management practices, such as margin requirements, to minimize risks 
managed by the clearing house. Clearing house risk management practices 
have been repeatedly tested and proven in resolving defaults including 
large bankruptcy proceedings, such as Lehman Brothers and MF Global, 
and during extreme market events such as the COVID-19 pandemic and the 
Russian invasion of Ukraine.
    As part of the increased use of clearing, clearing houses and 
market participants have worked to make the clearing process robust and 
resilient, supported by suitable financial, risk management, and 
operational resources. The Principles for Market Infrastructure (PFMI) 
represent the internationally agreed-to framework for achieving these 
goals and are designed to ensure that fundamental protections apply 
internationally. National regulators in G20 jurisdictions have reduced 
the risk of regulatory arbitrage by implementing the key aspects of the 
PFMIs into their regulatory frameworks. This process has set an 
appropriate standard across numerous jurisdictions for the regulation 
of a clearing house.
The Purpose of Liquid Markets
    This past year is a reminder that well-hedged utility and energy 
firms serve a wider public good by increasing resilience of the energy 
supply chain and serving the interests of many stakeholders. In periods 
of heightened uncertainty and volatility, risk transfer mechanisms are 
most needed as the risks in the underlying commodity markets are most 
acute. The primary objective of market operators and policymakers 
should be to keep markets open and available to all market 
participants, especially during times of increased stress.
    Commercial market participants rely on ICE's exchanges and clearing 
services to assess price risks, find market opportunities and transact 
with confidence. Futures markets allow market participants to manage 
their risk of adverse price moves by securing the price for future 
consumption or delivery of a commodity. By managing price risk, market 
participants can make business decisions with more confidence, creating 
an environment that is conducive to infrastructure investments that 
reinforce the security of supply or that facilitate the energy 
transition. ICE is proud to operate the liquid markets that contribute 
to energy security, which in turn promotes national security and allows 
policy makers to make informed decisions.
    In addition, futures markets provide commercial market participants 
with tools for effective hedging and price certainty, which reduces the 
cost of capital and, in turn, reduces costs to consumers. ICE's global 
exchanges offer commodity derivative contracts such as power, gas and 
oil which enable commercial market participants including utility and 
energy firms to optimize cash flows associated with underlying physical 
deals through buying and selling futures and options.
Market Performance and Central Clearing
    The combination of market events in 2022 has been unique--the 
uneven and unpredictable reopening of global economies following the 
COVID-19 pandemic, the Russian invasion of Ukraine significantly 
reconfiguring global energy supply, rising inflation and subsequent 
central banks tightening of monetary policy and increasing political 
and investor pressure around energy markets and energy security, 
affordability and sustainability. These events have impacted the 
financial and commodity markets and have combined to create significant 
uncertainty, high levels of volatility and high energy prices at a time 
where the cost of capital has also increased.
    Despite the challenges related to these events, derivative markets 
have again proven to be resilient, liquid and well-functioning and 
continue to facilitate price discovery through liquid and fair markets. 
As a result of market events, volatility increased and market 
participants faced liquidity demand increases including initial and 
variation margin calls. Margin levels were near record highs, as 
clearing houses' margin requirements responded as designed to protect 
against rapidly shifting prices. Clearing house margin requirements are 
risk-based and respond on a dynamic basis to changing market 
conditions. These margin models are designed by risk experts, vetted 
with clearing members, approved by regulators, and regularly back-
tested in compliance with international standards and regulatory 
requirements.
    Market participants made variation margin calls (paid their bill) 
or received variation margin payments (were paid what they were owed). 
The fact that these parties paid their margin calls is further evidence 
that the markets operated as expected and that market participants 
confidently relied on ICE's markets to manage their risks. Global 
regulators and market operators have also observed and acknowledged 
that the derivative markets operated efficiently and effectively as 
intended.\1\
---------------------------------------------------------------------------
    \1\ Please refer to the testimony of Chairman Benham at the 2022 
U.S. Treasury Market Conference where he discussed the resiliency and 
well-functioning of markets during recent market volatility. https://
www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam27.
---------------------------------------------------------------------------
European Price Caps
    ICE recognizes the volatile situation occurring in energy markets 
and its subsequent impact on consumers. We also acknowledge the merits 
of governments exploring solutions to address high natural gas prices 
and supply concerns. ICE however does not support the recent imposition 
of a market correction mechanism in the European Union (``EU'') and 
believes it will not achieve its primary objective of lowering energy 
prices and could distort the trading of EU natural gas derivatives.
    The implementation of the market correction mechanism undermines 
the ability of the market to perform vital risk transfer mechanisms 
resulting in commercial market participants being unable to manage 
their risk. Gas derivatives, such as the ICE TTF futures contract, are 
a crucial tool for producers and consumers to hedge against the risk of 
changes in future gas spot prices. If a change to future supply or 
demand occurs, market participants need the ability to react to these 
changes in order to remain properly hedged. Imposing a price limit on 
exchange-traded products subjects market participants to greater risk 
exposure and uncertainty. The market correction mechanism incentivizes 
market participants to use less transparent over-the-counter hedging 
tools or refrain from hedging, which could have a detrimental impact on 
liquidity and market confidence and result in long-term damage to the 
functioning and competitiveness of the European gas market.
    Furthermore, a critical feature of central clearing is the ability 
to manage the default of market participants and to prevent systemic 
risk by unwinding the positions of a defaulting clearing member and 
returning the market to a balanced book. The introduction of a price 
cap on a contract prevents the clearing house from performing this 
function, increasing risks to the clearing house and systemic risks to 
the broader market. A price cap undermines financial stability with no 
remedy. It is critical that the U.S. not jeopardize robust and well-
functioning markets through government intervention.
Central Counterparties Access to Central Bank Accounts
    Clearing houses collect and manage billions of dollars in customer 
funds pledged as collateral against derivatives positions including 
margin posted by commercial hedgers and farmers. The amount of 
collateral posted to clearing houses has substantially increased due to 
recent market volatility. Accordingly, expanding clearing house access 
to central bank deposit accounts for client margin is an important 
systemic risk mitigation tool and a means to protect client funds held 
by clearing houses and ensure liquidity of these funds during stressed 
market conditions.
    Clearing houses without access to central bank deposit accounts 
rely on alternatives for cash management of client funds, such as money 
market funds, repurchase agreements, and deposits at commercial banks. 
Jurisdictions including the United Kingdom and EU allow clearing houses 
access to central bank deposit accounts under certain circumstances. In 
the U.S., under Title VIII of the Dodd-Frank Act, the Federal Reserve 
was authorized to provide deposit account access only to financial 
market utilities deemed systemically important by the FSOC. During 
times of stress and increased market volatility, access to a Federal 
Reserve deposit account for all clearing houses will improve liquidity 
across the cleared derivatives ecosystem and reduce the systemic risk 
created by the interconnectedness of clearing houses and banks. It will 
also protect customers and end-users using the derivatives markets to 
hedge risk.
    ICE supports legislation providing all central counterparties 
registered with the CFTC and SEC access to deposit accounts offered by 
the Federal Reserve as it is the safest and most liquid place to hold 
U.S. dollar client funds and asks the Committee to assist in advancing 
such legislation.
Conclusion
    ICE has always been, and remains, a strong proponent of open and 
competitive markets with appropriate regulatory oversight. As an 
operator of global futures and derivatives markets, ICE understands the 
importance of confidence in its markets, and we take seriously our 
obligations to mitigate systemic risk. ICE has observed its markets 
operating efficiently and effectively especially in times of market 
stress. To that end, we have worked closely with regulatory authorities 
in the U.S. and abroad to ensure they have access to all relevant 
information available to ICE regarding trade execution and clearing 
activity on our markets. We look forward to continuing to work closely 
with governments and regulators at home and abroad to address evolving 
challenges and to expand the use of demonstrably beneficial clearing 
services that underpin the best and safest marketplaces possible.
    Mr. Chairman, thank you for the opportunity to share our views with 
you. I would be happy to answer any questions you and Members of the 
Committee may have.

    The Chairman. Mr. Edmonds, thank you so much for your 
testimony, much appreciated.
    And now I am pleased to recognize the former Commissioner, 
Mr. Berkovitz. Please begin when you are ready.

          STATEMENT OF HON. DAN M. BERKOVITZ, FORMER 
            COMMISSIONER, COMMODITY FUTURES TRADING 
                    COMMISSION, BETHESDA, MD

    Mr. Berkovitz. Chairman Thompson, Ranking Member Scott, and 
Members of the Committee, thank you for the invitation to 
appear before you today. I offer you my perspective on the 
recent volatility in the commodity derivative markets after 
having spent the past 20+ years in various regulatory, 
oversight, and private-sector capacities related to these 
markets. My appearance before you today is in my own personal 
capacity. I am not representing or speaking on behalf of any 
other person, governmental agency, or private-sector entity.
    I am particularly pleased to be appearing again before this 
Committee. The Agriculture Committee's oversight of, guidance 
to, and support for the Commodity Futures Trading Commission 
has been critical to the CFTC's ability to fulfill its mission 
to ensure that commodity derivative markets operate in a fair 
and secure manner to discover prices and manage commodity price 
risks.
    Commodity markets and the associated commodity derivative 
markets have experienced extraordinary volatility in recent 
years. Increasing demands for commodities as the U.S. and other 
economies recover from the shutdowns caused by the COVID-19 
pandemic, the Russian invasion of Ukraine, monetary tightening 
by central banks, China COVID policies, and extreme weather all 
have contributed to this volatility. This price volatility has 
caused financial hardships across many sectors of the economy, 
including the agricultural sector, as well as for the American 
families and households who will ultimately pay the bill for 
higher commodity prices.
    In addition to the carefully constructed derivatives 
contracts that are traded on commodity derivatives exchanges, 
these exchanges have a variety of tools to help ensure market 
prices and volatility reflect the true forces of supply and 
demand and that market activity does not present systemic 
risks. Margin levels, speculative position limits, daily price 
limits, and trading halts can help ensure that prices are not 
caused by artificial means such as manipulation, fraud, or 
other disruptive trading practices, that market participants 
have a sufficient opportunity to respond to changing market 
conditions, and that counterparties will not default.
    None of these tools, however, can insulate market 
participants from price changes due to the basic forces of 
supply and demand, and each must be carefully calibrated so 
that they accomplish their intended purpose of limiting 
excessive speculation, ensuring orderly trading, and avoiding 
systemic risks, while also not unnecessarily impairing the 
basic price discovery or risk management functions of the 
markets, as prices change rapidly to reflect changes in supply 
and demand.
    The mission of the CFTC is to ensure the integrity of the 
commodity derivative markets, prevent manipulation, avoid 
systemic risks, protect market participants from fraud and 
other abuses, and promote innovation and fair competition among 
market participants and markets. CFTC regulations established 
the basic requirements for margin position limits and orderly 
trading.
    The CFTC conducts market surveillance to ensure that 
trading is fair, orderly, and not subject to manipulation or 
other artificial disruptions and brings enforcement actions for 
violations of its regulations in the Commodity Exchange Act. 
The CFTC must vigorously pursue its surveillance and 
enforcement responsibilities to ensure the integrity of these 
markets and maintain public confidence in the markets it 
regulates.
    Generally, the types of risks affecting commodity prices in 
recent years are not unique. Political disputes, general 
economic fluctuations, disease, war, transportation 
disruptions, and extreme weather have affected commodity 
markets and indeed mankind throughout history. However, severe 
weather events are increasing in unprecedented intensity and 
frequency. There is substantial evidence that climate-related 
risks now pose a recurring existential threat to many 
households, businesses, and communities and threaten the 
stability of financial markets.
    It is prudent, therefore, that we improve our tools to 
manage such risks in the commodity derivative markets. This 
work includes the development and use of new risk management 
products and markets, increased disclosures regarding climate-
related risks, and vigorous oversight of these products and 
markets by the CFTC to ensure the integrity of new markets and 
products. The CFTC has begun this important work with the 
assistance of public input, and I look forward to the progress 
of the agency and market participants in this area.
    Thank you again, Mr. Chairman, and Ranking Member, and I 
look forward to any questions you might have.
    [The prepared statement of Mr. Berkovitz follows:]

   Prepared Statement of Hon. Dan M. Berkovitz, Former Commissioner, 
           Commodity Futures Trading Commission, Bethesda, MD
    Chairman Thompson, Ranking Member Scott, and Members of the 
Committee, thank you for the invitation to appear before you today to 
discuss managing the risks arising from the recent volatility in the 
global commodity derivatives markets. I offer you my perspective on the 
current market volatility after having spent the past twenty-plus years 
in various regulatory, oversight, and private sector advisory 
capacities related to the commodity derivative markets. My appearance 
before you today is in my own personal capacity; I am not representing 
or speaking on behalf of any other person, governmental agency or 
private sector entity.
    I am particularly pleased to be appearing again before this 
Committee. The Agriculture Committee's oversight of, guidance to, and 
support for the Commodity Futures Trading Commission (CFTC) has been 
critical to the CFTC's ability to fulfill its mission to ensure the 
commodity derivative markets operate in a fair and secure manner to 
discover prices and manage commodity price risks. This Committee's 
jurisdiction over these markets is not only a reminder of the 
historical origins of the futures markets in the agricultural markets 
of the 19th and early 20th centuries, but also reflects and emphasizes 
the continued importance of those agricultural derivative markets--and 
the people who produce the commodities underlying these markets--to our 
national well-being and economy.
    In my testimony today I will discuss the factors contributing to 
the recent spike in volatility in the commodity markets, describe the 
regulatory and market-based tools for managing volatility and price 
risks in the derivative markets, and offer some suggestions on how some 
of those market-based tools could be improved.
Summary
    Commodity markets and the associated commodity derivative markets 
have experienced extraordinary price volatility in recent years. In the 
past year, factors contributing to this price volatility have included 
increasing demands for commodities as the U.S. and other economies 
recover from the shutdowns caused by the [COVID]-19 pandemic, the 
Russian invasion of Ukraine, monetary tightening by central banks, 
China [COVID] policies, and extreme weather. This price volatility has 
caused financial hardships across many sectors of the economy, 
including the agricultural sector, as well as for the American families 
and households who ultimately pay the bill for higher commodity prices.
    In addition to the derivatives contracts themselves that are traded 
on commodity derivative exchanges, these exchanges have a variety of 
tools to help ensure market prices and volatility reflect the true 
forces of supply and demand. Margin levels, speculative position 
limits, daily price limits and trading halts can help ensure that 
prices are not caused by artificial means, such as manipulation, fraud, 
disruptive trading practices, and that market participants have a 
sufficient opportunity to respond to changing market conditions. None 
of these tools, however, can insulate market participants from price 
changes due to the basic forces of supply and demand, and each must be 
carefully calibrated so that they accomplish their intended purpose of 
limiting excessive speculation, ensuring orderly trading, and avoiding 
systemic risks, while also not unnecessarily impairing the basic price 
discovery or risk management functions of the markets.
    The mission of the CFTC is to ensure the integrity of the commodity 
derivative markets, prevent manipulation, avoid systemic risks, protect 
market participants from fraud and other abuses, and promote innovation 
and fair competition among market participants and markets. CFTC 
regulations establish the basic requirements for margin, position 
limits, and orderly trading. The CFTC also is responsible for 
conducting market surveillance to ensure that trading is fair, orderly, 
and not subject to manipulation or other artificial disruptions, and 
for bringing enforcement actions for violations of its regulations and 
the Commodity Exchange Act (CEA).
    Generally, the types of risks affecting commodity prices in recent 
years are not unique. Political disputes, general economic 
fluctuations, war, transportation disruptions, and extreme weather have 
affected commodity markets throughout history. However, severe weather 
events are increasing in unprecedented intensity and frequency. There 
is substantial evidence that climate-related risks now pose a recurring 
existential threat to many households, businesses, and communities, and 
threaten the stability of financial markets. It is prudent, therefore, 
that we improve our tools to manage such risks in the commodity 
derivative markets. This work includes the development and use of new 
risk-management products and markets, increased disclosures regarding 
climate-related risks, and vigorous oversight of these products and 
markets by the CFTC to ensure the integrity of new markets and 
products. The CFTC has begun this important work with the assistance of 
public input, and I look forward to the progress of the agency and 
market participants in this area.
Recent Commodity Market Volatility
    Several factors have contributed to commodity market volatility in 
2022 and continuing into 2023. These include:
    Post-pandemic economic recovery. As consumer spending increased and 
the U.S. and other economies recovered from the shutdowns caused by the 
[COVID]-19 pandemic, supply-chain bottlenecks contributed to supply 
shortages, increased storage and transportation costs, increased 
counterparty risks, and therefore, ultimately, increases in prices.\1\
---------------------------------------------------------------------------
    \1\ See, e.g., Oya Celasun, Niels-Jakob Hansen, Aiko Mineshima, 
Mariano Spector, and Jing Zhou, International Monetary Fund, Supply 
Bottlenecks: Where, Why, How Much, and What Next?, Working Paper, Feb. 
2022, available at: https://www.imf.org/-/media/Files/Publications/WP/
2022/English/wpiea2022031-print-pdf.ashx.
---------------------------------------------------------------------------
    Russian invasion of Ukraine. The Russian invasion of Ukraine in 
late February 2022 and the resulting U.S. and European Union economic 
sanctions led to significant increases in prices and volatility in a 
variety of key commodities, including oil, wheat, and corn. As the 
notional value of these commodities increased, due both to inflation 
and the Russian invasion, margin levels increased as well.\2\
---------------------------------------------------------------------------
    \2\ CME, Commodity Market Performance, Presentation to the CFTC 
Global Markets Advisory Committee, Feb. 13, 2023, available at: https:/
/www.cftc.gov/PressRoom/Events/opaeventgmac021323.
---------------------------------------------------------------------------
    Monetary tightening. Beginning in March 2022, the Federal Reserve 
began to raise short-term interest rates by increasing its Federal 
funds target interest rate. Overall, in the past year the Federal 
Reserve has increased short-term interest rates by 4.25%. One effect of 
the increase in these rates has been the strengthening of the dollar 
against other major currencies. Over the long term the increased rates 
and the resulting increase in the cost of credit are anticipated to 
reduce investment and consumption, thereby lowering inflation and 
prices.\3\
---------------------------------------------------------------------------
    \3\ See, e.g., Juan M. Sanchez and Olivia Wilkinson, Federal 
Reserve Bank of St. Louis, Tightening Monetary Policy and Patterns of 
Consumption, Feb. 9, 2023, available at: https://www.stlouisfed.org/
publications/regional-economist/2023/feb/tightening-monetary-policy-
patterns-consumption.
---------------------------------------------------------------------------
    China [COVID] policies. The reopening of the Chinese economy after 
several years of [COVID]-related restrictions has contributed to 
commodity price volatility. As the world's second-largest economy, and 
largest consumer of a variety of commodities, including soybeans and 
copper, changes in China's demand for industrial, energy, and 
agricultural commodities can significantly affect global supply chains 
and prices.\4\
---------------------------------------------------------------------------
    \4\ See, e.g., Ann Cooban, CNN, China's reopening isn't all good 
news. Inflation could get a second wind, Jan. 27, 2023 (``The revival 
of the world's second largest economy--and its biggest consumer of 
commodities--threatens to push up global prices for fuel, industrial 
metals and food this year.''), available at: https://www.cnn.com/2023/
01/27/business/china-commodities-energy-inflation/index.html; Carl 
Surran, Seeking Alpha, Commodities surge as China cools COVID 
restrictions, Nov. 11, 2022 (``Commodity prices are popping Friday 
after China took significant steps to ease COVID-19 lockdowns and 
optimism from lighter-than-expected U.S. inflation data that sparked 
yesterday's huge stock market rally and sent the dollar sharply lower 
overnight.'', available at: https://seekingalpha.com/news/3906371-
commodities-surge-as-china-cools-covid-restrictions.
---------------------------------------------------------------------------
    Severe weather. As the National Oceanic and Atmospheric 
Administration (NOAA) reports, ``[r]ecord drought gripped much of the 
U.S. in 2022,'' ``the nation [was] struck with $18 billion disasters,'' 
and ``[t]he year was also marked by numerous severe weather events, 
devastating hurricanes and deadly flooding across parts of the 
country.'' \5\ The extreme drought conditions in the west, high plains, 
and several southern states led to the smallest hard red winter wheat 
crop since 1963, lowest corn yields since possibly 2012, and the 
smallest U.S. cotton crop in 12 years.\6\ The drought led to 
historically low levels of the Mississippi River, disrupting barge 
traffic and increasing transportation and storage costs for 
agricultural commodities normally transported downriver. Flows along 
the Colorado River in the western U.S., as well as water levels at the 
Glen Canyon and Hoover dams also have been significantly reduced, 
[threatening] the supply of water and power for communities, 
industries, and ranching and farming in the Colorado River basin.
---------------------------------------------------------------------------
    \5\ NOAA, Record drought tripped much of the U.S. in 2022, Jan. 10, 
2023, available at: https://www.noaa.gov/news/record-drought-gripped-
much-of-us-in-2022. According to NOAA, Hurricane Ian was the single 
most costly event of 2022, with a cost of $113 billion. Severe weather 
events have been recurring in recent years. Over the past 7 years, 
``122 separate billion-dollar disasters have killed at least 5,000 
people, with a total cost of more than $1 trillion in damages.'' Id.
    \6\ Source: CFTC.
---------------------------------------------------------------------------
    Severe weather struck globally in 2022. Extreme heat, drought, and 
wildfires plagued Europe, reducing electricity generation and affecting 
agricultural production, leading to increased imports of corn.\7\ 
``Relentless drought'' in Brazil is expected to limit soybean 
production; in previous years the drought also affected coffee and 
orange juice supplies.\8\ Devastating floods in Pakistan that submerged 
\1/3\ of the country, killed thousands of people and displaced 
millions, damaged or destroyed over 8 million acres of agricultural 
lands, affecting cotton, rice, and wheat production and exports.\9\ A 
record heatwave in India ``is threatening to damage grains and dent the 
country's wheat production for the second straight year.'' \10\ China 
experienced a record heat wave.
---------------------------------------------------------------------------
    \7\ World Meteorological Organization, Climate and weather extremes 
in 2022 show need for more action, Dec. 23, 2022, available at: https:/
/public.wmo.int/en/media/news/climate-and-weather-extremes-2022-show-
need-more-action; Marianne Lehnis, 2022 Was A Year Of Record-Breaking 
Extreme Weather Events, Forbes, Dec. 29, 2022, available at: https://
www.forbes.com/sites/mariannelehnis/2022/12/29/2022-was-a-year-of-
record-breaking-extreme-weather-events/?sh=66128a65736b.
    \8\ Nayara Figueiredo, Reuters, Brazil drought threatening national 
output potential, southern farmers say, Feb. 14, 2023; available at: 
https://www.reuters.com/world/americas/brazil-drought-threatening-
national-output-potential-southern-farmers-say-2023-02-14/; CFTC.
    \9\ jaz Nabi, Brookings, Responding to Pakistan floods, Feb. 10, 
2023, available at: https://www.brookings.edu/blog/future-development/
2023/02/10/pakistan-floods/; CFTC.
    \10\ Rajendra Jahav, India's wheat output dented by heatwave, could 
limit government stock building, Reuters, March 3, 2023, available at: 
https://www.reuters.com/world/india/indias-wheat-output-dented-by-
heatwave-could-limit-government-stock-building-2023-03-03/.
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Risk Management in Derivative Markets
    Commodity derivative markets enable market participants--such as 
farmers, ranchers, producers, manufacturers, processors, marketers, and 
consumers--to discover prices and manage commodity price risks. For 
example, by selling contracts for future delivery on a futures exchange 
(a ``designated contract market'' or ``DCM'') a farmer can, in effect, 
lock in a sales price for a commodity such as wheat to be delivered at 
a future time, thereby hedging against price changes (decreases or 
increases) between the time of sale and the time of actual delivery of 
the commodity. Similarly, a buyer of a futures contract on the 
exchange, such as a food processor, can lock in a purchase price for 
wheat to be delivered at a specific time in the future, thereby hedging 
against any price increases (or decreases) between the time of the 
purchase of the futures contract and the delivery of the wheat. Because 
in a commodity market there often is not an exact balance between 
purchasers and sellers, speculators play an important role in providing 
liquidity and assuming price risks that physical market participants 
may be unwilling or unable to assume.
    Indeed, futures markets in the United States developed in the mid-
18th century--including the use of standardized contracts for future 
delivery, the development of quality standards and inspections, and the 
establishment of the Chicago Board of Trade--in order to enable buyers 
and sellers of agricultural commodities to manage the very same type of 
price risks prevalent in today's markets. For example, just as these 
new types of contracts were being developed to manage prices risks from 
storage and transportation, the Civil War broke out, leading to 
substantial volatility, price increases, and trading, including 
speculative trading, for key agricultural commodities, particularly 
oats (which the Union army needed to feed its horses), corn, and 
wheat.\11\ By 1875, ``trading rules were fairly complete, there was a 
substantial volume of trading, and merchants used futures to hedge 
inventories to earn carrying charges . . . .'' \12\
---------------------------------------------------------------------------
    \11\ William G. Ferris, The Grain Traders, The Story of the Chicago 
Board of Trade (Michigan State University Press, 1988), at pp. 21-26. 
See also, G. Wright Hoffman, Future Trading Upon Organized Commodity 
Markets in the United States (University of Pennsylvania Press, 1932).
    \12\ Thomas A. Hieronymus, Economics of Futures Trading For 
Commercial and Personal Profit (Commodity Research Bureau, 1971), at p. 
74.
---------------------------------------------------------------------------
    One of the leading authorities on the futures markets described the 
beginnings of the futures markets as follows:

          [F]utures trading evolved out of risk financing, inventory, 
        and pricing problems of handlers and processors of cash 
        commodities . . . . The first fifty years of the history of 
        futures trading in the U.S. is the history of feverish 
        speculative activity, of contests among giants, and of attempts 
        to manipulate prices. These contests resulted in the evolution 
        of a set of competitive rules.\13\
---------------------------------------------------------------------------
    \13\ Id. at pp. 81-2.

    Congress has recognized the price discovery and risk management 
purposes of the commodity derivative markets, and it has charged the 
CFTC with the regulation and oversight of those markets. Section 3(a) 
of the Commodity Exchange Act (CEA) declares: ``The transactions 
subject to this Act are entered into regularly in interstate and 
international commerce and are affected with a national public interest 
by providing a means for managing and assuming price risks, discovering 
prices, or disseminating pricing information through trading in liquid, 
fair and financially secure trading facilities.'' \14\ Section 3(b) 
states that the purpose of the CEA is to serve this national interest 
``through a system of effective self-regulation of trading facilities, 
clearing systems, market participants and market professionals under 
the oversight of the [CFTC].'' Section 3(b) states the further purpose 
of the CEA ``to deter and prevent price manipulation or any other 
disruptions to market integrity,'' to ``ensure the financial integrity 
of transactions . . . and avoidance of systemic risk,'' to protect 
market participants from fraud and abusive practices, and to ``promote 
responsible innovation and fair competition amongst boards of trade, 
other markets, and market participants.'' \15\
---------------------------------------------------------------------------
    \14\ 7 U.S.C. Sec. 5(a).
    \15\ 7 U.S.C. Sec. 5(b).
---------------------------------------------------------------------------
    The CFTC and the designated contract markets (i.e., exchanges 
licensed to trade contracts for future delivery, referred to 
hereinafter as ``exchanges'') have established a number of requirements 
for and parameters around the trading of futures contracts to ensure 
the futures markets continue to perform their intended function of 
facilitating price discovery and risk management.\16\ These include 
margin requirements, speculative position limits, price limits and 
``circuit breakers'' or trading halts. Both the CFTC and the exchanges 
also conduct market surveillance, potentially followed-up with 
enforcement activity or, in the case of the exchanges, disciplinary 
action, to detect, deter, and prevent fraud, manipulation, and other 
disruptive trading activity.
---------------------------------------------------------------------------
    \16\ Similar requirements and parameters apply in the swaps 
markets; for ease of reference, I only refer to the futures markets 
here.
---------------------------------------------------------------------------
    Margin requirements. The purpose of margin requirements in the 
commodity derivative markets is to help ensure that a market 
participant with a long position (i.e., buyer of a contract for future 
delivery) or short position (i.e., seller of a contract for future 
delivery) in a commodity has posted sufficient funds to the 
clearinghouse so that the participant will not default upon an adverse 
price movement. CFTC regulations establish minimum margin requirements 
for futures contracts traded on an exchange; the clearinghouses have 
flexibility to adopt higher margin requirements, but they cannot 
establish lower margin requirements.
    Futures commission merchants (``FCMs'') are critically important 
intermediaries that execute trades on an exchange on behalf of their 
customers, post the requisite amount of margin to the clearinghouse, 
and collect the margin for those trades from their customers. FCMs also 
guarantee the performance of their customers to the clearinghouse, 
providing another level of protection to exchange participants if a 
participant defaults. FCMs also may be called upon to contribute funds 
in the event of a default of another FCM. FCMs also perform a variety 
of other critical functions to and for market participants. They 
provide information, analyses, and advice to their customers, safeguard 
customer funds, and they are responsible for ``know-your-customer'' 
requirements and preventing money-laundering.
    In times of significant increases in prices and volatility, margin 
levels generally will increase. Increases in margin requirements as 
prices are increasing can place significant financial burdens on market 
participants at a time when they can least afford it, as well as 
potentially create systemic risks as many market participants may be 
seeking additional funding for margin requirements at the same time. 
Increases in margin levels also can place stresses on FCMs, who must 
carry larger amounts of funding and capital to temporarily cover the 
increases in margin requirements for their customers.
    One way to potentially avoid sharp increases in margin requirements 
would be to raise margin requirements generally, so that the increases 
would not be so sharp when prices and volatility increase. However, 
this would raise costs generally for end-users in the futures markets, 
as well as increase costs for many of the FCMs that serve these end-
users, at a time when these end-users and intermediaries already are 
under financial stresses. Margin levels therefore require careful 
calibration to ensuring that margin requirements continue to mitigate 
counterparty risk, help prevent systemic risks, yet do not unduly 
impair market liquidity or the availability of intermediaries to serve 
end-users.
    Speculative position limits. Limits on the amount of speculative 
positions a person may hold or control on an exchange are intended to 
ensure that prices on the exchange reflect the forces of supply and 
demand rather than distortions due to excessive speculation in the 
price of the commodity. Speculative position limits also help prevent 
price manipulation, particularly squeezes and corners as futures 
contracts near expiration. In conformance with the requirements of the 
Dodd-Frank Act, in January 2021, the Commission finalized the most 
recent revisions to its speculative position limit rules. As provided 
by the CEA and the Dodd-Frank Act, positions that constitute bona fide 
hedging are exempt from the speculative position limits. Although the 
CFTC establishes the overall requirements for position limits, the 
exchanges are responsible for implementing those limits.
    Price limits and circuit breakers. Daily price limits (i.e., limits 
on how much the price of a contract can increase or decrease in a 
single day) and circuit breakers (i.e., pauses in trading for limited 
periods of time following extreme price moves) serve to pause trading 
during extraordinarily large price movements or periods of extreme 
volatility, to help ensure the price movements accurately reflect the 
forces of supply and demand rather than speculative excesses or panic 
buying and selling, or ``fat-finger'' or other types of errors in trade 
execution.\17\ These pauses in trading and price movements enable 
exchanges and the CFTC to review such movements and respond as may be 
appropriate, provide market participants with a ``cooling-off period'' 
to analyze the recent changes in price, adjust their positions 
accordingly, and meet any additional margin requirements resulting from 
such movements. As with margin levels, price limits and trading halts 
must be calibrated so that such limits or halts accomplish their 
purpose in a manner that does not unduly interfere with the price 
discovery or risk management functions of the market.
---------------------------------------------------------------------------
    \17\ See IOSCO, Principles for the Regulation and Supervision of 
Commodity Derivatives Markets, Final Report (Jan. 31, 2023), at p. 51, 
available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD726.pdf.
---------------------------------------------------------------------------
    Market surveillance. Both the exchanges and the CFTC have a 
responsibility to conduct market surveillance to detect fraud, 
manipulation, or other artificial disruptions to the legitimate forces 
of supply and demand as expressed through prices on the exchange. The 
CFTC's market surveillance program monitors trading activity, large 
trader positions, and deliverable supplies as physical commodity 
contracts near expiration to ensure the integrity of settlement prices 
as contracts near expiration, the relationships between cash markets 
and futures markets generally, and, working in conjunction with the 
Securities and Exchange Commission, monitors the arbitrage between the 
equities markets and the exchanges that trade indexes based on those 
equities.\18\
---------------------------------------------------------------------------
    \18\ CFTC, CFTC Market Surveillance Program, available at: https://
www.cftc.gov/IndustryOversight/MarketSurveillance/
CFTCMarketSurveillanceProgram/index.htm.
---------------------------------------------------------------------------
    The CFTC's market surveillance program also is responsible for 
monitoring compliance with CFTC or exchange-set position limits. 
Although positions that constitute bona fide hedging are exempt from 
the speculative position limits, the CFTC also monitors hedgers' 
compliance with their exemption levels.\19\
---------------------------------------------------------------------------
    \19\ Id.
---------------------------------------------------------------------------
    During times of unusual market activity or extraordinary price 
movements, the Commission may conduct detailed investigations or 
examinations to traders' positions and market activity to determine 
whether there has been any artificial disruption to or interference 
with the normal forces of supply and demand. In addition to detecting 
potential wrongdoing, these investigations and examinations may reveal 
issues in contract or market design that can cause disruptions under 
certain market stresses or conditions, and that can be remedied to 
improve market operation. Vigorous surveillance of the derivative 
markets, including detailed examination or investigation of unusual or 
extreme market conditions, is necessary not just to detecting 
wrongdoing and improving market design, but also to maintaining public 
confidence--and thereby liquidity--in these markets.
    Enforcement actions. Investigations of market disruptions and 
enforcement actions for violations of the CEA and Commission 
regulations is critical to preserving market integrity. Punishing 
violators deters future violations and provides market participants 
with confidence that the derivative markets reflect legitimate forces 
of supply and demand and are not determined by manipulation, fraud, or 
other disruptive activity. Traders that engage is disruptive, 
fraudulent, or manipulative behavior on an exchange may also be subject 
to disciplinary action by the exchange, which has the front-line 
responsibility to monitor trading on the exchange to ensure it is 
conducted in accordance with the rules of the exchange.
Need for Improvements in Risk Management for Climate-Related Events
    Although the particular way in which the particular risks leading 
to price increases and volatility over the past several years have 
become manifest may have been idiosyncratic, the general nature of 
these risks is new or unique. War, bad weather, disease, political 
strife, and economic ups and downs have been prevalent for as long as 
civilization has existed. Over the past century and a half our 
derivative markets and the regulatory system overseeing those markets 
have developed a variety of tools, as described above, to enable 
producers, marketers and consumers of commodities to manage these 
risks. Further, as described above, these tools need continuous 
oversight and calibration to ensure that they continue to serve their 
intended function.
    Of these general risks, however, there is one significant 
qualitative and quantitative difference: the severity and frequency of 
weather-related disruptions has increased significantly in recent years 
and is anticipated by many to continue to increase in severity and 
frequency in the future. There are a number of ways existing risk 
management tools potentially could be improved to enable market 
participants to better to manage these increasingly severe weather or 
climate-related risks. These include the development of new products 
and markets to manage climate-related risks, and improved disclosures 
of climate-related risk data. In light of the potential magnitude of 
the threat posed by these climate-related risks to individual 
businesses and overall financial stability, it is critical that work 
continue towards these improvements in our risk management 
capabilities.
    There is substantial evidence that climate change poses significant 
risks to communities across the United States, including ``growing 
challenges to human health and safety, quality of life, and the rate of 
economic growth.'' \20\ With respect to agriculture, in 2019 the Fourth 
National Climate Assessment reported, ``Rising temperatures, extreme 
heat, drought, wildfire on rangelands, and heavy downpours are expected 
to increasingly disrupt agricultural productivity in the United States. 
Expected increases in challenges to livestock health, declines in crop 
yields and quality, and changes in extreme events in the United States 
and abroad threaten rural livelihoods sustainable food security, and 
price stability.'' \21\
---------------------------------------------------------------------------
    \20\ U.S. Global Change Research Program, Fourth National Climate 
Assessment (June 2019), at p. 25; available at: https://
nca2018.globalchange.gov/downloads/.
    \21\ Id., at p. 29.
---------------------------------------------------------------------------
    In September 2021, the CFTC's Market Risk Advisory Committee (MRAC) 
issued a Report titled ``Managing Climate Risk in the U.S. Financial 
System,'' which concluded that ``Climate change poses a major risk to 
the stability of the U.S. financial system and to its ability to 
sustain the American economy.'' \22\ The MRAC noted that derivative 
markets ``can be part of the solution,'' and suggested new derivative 
contracts could be developed to manage these new climate-related risks. 
The MRAC also recommended that ``[f]inancial regulators, in 
coordination with the private sector, should support the availability 
of consistent, comparable, and reliable climate risk data and analysis 
to advance the effective measurement and management of climate risk.'' 
\23\
---------------------------------------------------------------------------
    \22\ Market Risk Advisory Committee, CFTC, Managing Climate Risk in 
the U.S. Financial System (Sept. 2021), at p. 1; available at: https://
www.cftc.gov/sites/default/files/2020-09/9-9-
20%20Report%20of%20the%20Subcommittee%20on%20Climate-
Related%20Market%20Risk%20-
%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20fo
r%20
posting.pdf.
    \23\ Id., at p. 70.
---------------------------------------------------------------------------
    In October 2021, the Financial Stability Oversight Council (FSOC) 
identified climate-related financial risks as an emerging threat to the 
financial stability of the United States.\24\ The FSOC assessed the 
actions-to-date of the council members to incorporate climate-related 
financial risk into their regulatory or supervisory activities, and 
recommended a variety of additional measures for the council members to 
take, either individually or in coordination with other members, to 
improve the identification, consideration and management of these 
risks. Public disclosure of climate-related financial risks was one of 
the key measures identified by the FSOC as integral to sound risk 
management practices for climate-related risks. The FSOC stated:
---------------------------------------------------------------------------
    \24\ FSOC, Report on Climate-Related Financial Risk (2021), at pp. 
1-2; available at: https://home.treasury.gov/system/files/261/FSOC-
Climate-Report.pdf.

          The resiliency of the financial system is, in part, dependent 
        upon the resiliency of the firms that comprise it. In general, 
        an individual firm is more resilient when it has sound 
        processes for assessing risks and applies appropriate risk 
        management practices. The disclosure of risks, and plans for 
        managing them, can help foster the resilience of the financial 
        system by allowing investors and market participants to factor 
        that risk into their decision-making. This, in turn, 
        facilitates better pricing of that risk information into 
        financial markets. This pricing of climate-related risk can 
        help reduce the likelihood of a financial shock associated with 
        a sudden repricing of assets exposed to climate-related 
        risks.\25\
---------------------------------------------------------------------------
    \25\ Id., at p. 68. See also, The Task Force on Climate Related 
Financial Disclosures, Final Report, Recommendations of the Task Force 
on Climate-related Financial Disclosures (June 2017).

    During my tenure as a Commissioner of the CFTC, I had the privilege 
of sponsoring the Energy and Environmental Markets Advisory Committee 
(EEMAC). In 2021, during my sponsorship, the EEMAC held several 
meetings to explore how new derivative products and new derivative 
markets can help manage climate-related financial risks. At the time, I 
recommended three principal ways for the CFTC to improve the management 
of climate-related risks. First, the Commission must ensure the 
integrity of the markets it regulates, including any markets associated 
with climate-related derivatives. Second, the CFTC should work with 
exchanges and market participants in the development of new products 
that will help companies manage climate-related risks. And third, the 
CFTC should ``ensure appropriate management and disclosure of climate-
related risks.'' \26\
---------------------------------------------------------------------------
    \26\ Opening Statement of Commissioner Dan M. Berkovitz before the 
Energy and Environmental Markets Advisory Committee, June 3, 2021, 
available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/
berkovitzstatement060321.
---------------------------------------------------------------------------
    I am pleased that the Commission is continuing to make progress in 
these areas. In June 2022, the CFTC issued a Request for Information 
(RFI) to better inform the agency's understanding and oversight of 
climate-related financial risk related to the commodity derivatives 
markets. The Commission stated the responses to the RFI will help to 
inform the Commission's next steps in this area and its response to the 
FSOC's recommendations. The RFI asked questions and sought information 
in a variety of areas, including with respect to risk management 
regulations and industry practices as they relate to climate-related 
financial risks, disclosure requirements regarding climate-related 
financial risks, and risk management product innovation. I understand 
that the Commission staff is currently reviewing the public responses 
to the RFI, and I look forward to the Commission's next steps in this 
area. It is imperative for our commodity derivative markets and our 
financial system in general that we continue to make progress in the 
development of these mechanisms for managing climate-related financial 
risks.
    Thank you again for providing me with the opportunity to appear 
before the House Agriculture Committee.

    The Chairman. Well, Mr. Berkovitz, thank you so much for 
your testimony. And thank you to all of you for your testimony 
today.
    At this time, Members will be recognized for questions in 
order of seniority, alternating between Majority, Minority 
Members and in order of arrival for those who joined us after 
the hearing convened. You will be recognized for 5 minutes each 
in order to allow us to get to as many questions as possible. 
And so given what so far--since we started the 118th Congress--
has been outstanding participation, and I want to continue to 
encourage that on both sides of the aisle. I will try to be 
prompt with letting you know when the 5 minutes are done.
    So with that, I am going to recognize myself for 5 minutes. 
Let me start by thanking our witnesses again, and we really 
appreciate you all being here. I know you all have busy 
schedules, but what an impressive panel that we have gathered 
today.
    We have a lot of new Members this year, and I recognize 
that this is a very complex topic, so I am going to use my time 
to try to level set a bit before we dive deeper into the 
substance of the hearing with additional questions from the 
Members.
    Mr. Gelchie, in your testimony, you mentioned the hierarchy 
of oversight in the derivatives market, and I can't reiterate 
it enough that this concept is so important for market 
integrity. The layers of responsibilities, risk management, 
incentives, and oversight are essential to understanding how 
this industry protects the market and participants within the 
market.
    So my question is--and it will be for each of you. 
Hopefully, we can get some comments from each. Could each of 
you briefly describe your role in the marketplace and, 
importantly, how you interact with each other from market 
participant, the FCM, to the exchange, to clearinghouse, to 
regulators? And, Mr. Gelchie, we will start with you.
    Mr. Gelchie. Sure. Thank you, Mr. Chairman, Louis Dreyfus' 
role in the market is essentially a commodity merchant. We 
essentially buy from the farmer, sell to the end-user. Through 
that, we use financial derivatives to hedge those risks. We 
trade in a multitude of commodities across the agricultural 
spectrum. And from that perspective, we use what I would say 
the financial derivatives both on the long, short side, as well 
as down the curve, if you will, most agricultural futures 
markets have long dated futures positions. And in effect, we 
act as that intermediary or shock absorber, as I had mentioned 
earlier on, where a producer may be looking to sell a given 
commodity at a specific period in time, perhaps much further 
out in time, and a user or a consumer may be looking to buy a 
specific commodity at a different point in time. So we 
essentially bridge that gap. To that extent, we will, as I 
mentioned, use commodity futures. Those ultimately get cleared 
by the FCM that we ultimately give the derivatives up to, and 
essentially, that is what we do in brief.
    The Chairman. Very good. Mr. Sammann?
    Mr. Sammann. So as a vertically integrated model, that 
owner of a clearinghouse, as well as our four underlying 
exchanges, we provide, as I mentioned in my written and oral 
testimony, platforms and products for customers to trade. Now, 
we service all customers, the entire ecosystem from producers, 
end-users, farmers, ranchers, all the way through to financial 
intermediaries like Louis Dreyfus, like large E&P folks in the 
energy space, all the way through to financial players that are 
looking to gain access to different asset classes, whether it 
is hedge funds, asset managers, pension funds, long-only funds, 
et cetera, all the way through to retail. So our mission and 
purpose is to provide price transparency and price discovery 
mechanisms in lit electronic markets 23\1/2\ hours a day so 
that as global risk travels, risk mitigation travels with 
customers as well.
    We also engage with folks across the table here at multiple 
levels. FIA is an industry body that brings all interested 
participants together. We don't always agree on everything, but 
it is a forum to work out those disagreements, and that is 
okay. We have constant client communication. We are constantly 
engaged via our sales force to understand what is driving them 
and what they need. We have a number of client advisory forums 
where we bring customers in to hear what is challenging them, 
what has been difficult to them.
    And finally, as it relates to Mr. Berkovitz's previous role 
as a Commissioner in the CFTC, we participate in all of the 
CFTC's advisory committees that also brings together 
stakeholders across the industry, so lots of ways in which we 
engage, serve, and understand the needs of different 
constituents in our market.
    The Chairman. Very good. I don't have much time left, but, 
Ms. Crighton, I would love to have you respond.
    Ms. Crighton. Sure. Just briefly, I guess the best way to 
describe the role of the FCM is we stand in between firms like 
Louis Dreyfus and Mr. Gelchie, his peers, other types of 
financial institutions, we stand in between them, exchanges, 
and clearinghouses. We do that not only for CFTC-regulated 
clearinghouses, but for clearinghouses and exchanges globally.
    The Chairman. Very good. Thank you very much. My time has 
expired. I am pleased to recognize our Ranking Member for 5 
minutes.
    Mr. David Scott of Georgia. Thank you. Thank you, Mr. 
Chairman.
    Mr. Berkovitz, let me start with you. In your testimony, 
you mentioned severe weather events occurring with 
unprecedented intensity and frequency, and the need to update 
the tools of the CFTC to manage such risk. Last June, the CFTC 
issued a request for information, an RFI to solicit public 
input on climate-related financial risk. So Mr. Berkovitz, as a 
previous sponsor of the CFTC's Energy and Environmental Markets 
Advisory Committee, during your tenure as Commissioner, are 
there any specific actions, updates to risk management tools, 
or market surveillance that you would like to see come out of 
this process?
    Mr. Berkovitz. Thank you. Thank you, Ranking Member Scott, 
for the question. Yes, as you mentioned, during my service, my 
term at the CFTC, I had the privilege of sponsoring the Energy 
and Environmental Markets Advisory Committee, and in 2021, just 
a couple years ago, indeed, we had an advisory committee 
meeting that the other witnesses at this table have mentioned 
that--the CFTC has advisory committees, which are composed of a 
wide diversity of market participants, academics, and other 
persons familiar with the commodity markets, examining the 
topic, as you mentioned, new products and markets to deal with 
climate-related risks. And we heard some testimony of that--or 
some presentations. It wasn't testimony. It was presentations 
by the advisory committee members. I think Mr. Sammann 
participated in that by the exchanges, a variety of exchanges 
and markets as to the products they are developing. So that was 
a very encouraging development. New products don't always take 
on immediately. Sometimes they take a while for the market to 
see the wisdom of the products or the need for the products. 
But I was very encouraged that there is active engagement by 
the exchanges and by market participants to develop these 
products and market, so I find that encouraging. And I am 
looking forward to the CFTC's analysis of the request for 
information in terms of what market participants are suggesting 
and offering.
    And I would say the other thing I think is very important 
is the increased disclosures of risk so that people are aware 
of where the impacts of weather-related events might be and 
things like that so they can take proper--so that these tools 
that are developed, they can use, or the existing tools as 
well.
    Mr. David Scott of Georgia. And to the rest of the panel, 
as I noted earlier, this year is 10 years since the expiration 
of the last CFTC reauthorization legislation. Can each of you 
discuss the impacts that you have seen or experienced as a 
result of Congress' inability to get together and pass the 
reauthorization legislation specifically as it relates to the 
effectiveness of the industry's risk and management tools? And 
as I mentioned to you, the European Union used this as a weapon 
to take away the authority of the CFTC in our cross-border 
negotiations. And with the help and the combined help of our 
Republican Chairman at that time, Mike Conaway, and Collin 
Peterson, my good friend Austin Scott, and Chairman Thompson, 
we stopped it. But they are still using it. What is the impact 
of our failure here in Congress to reauthorize the CFTC? 
Please, any of you.
    Mr. Berkovitz. I will take a shot at that, Ranking Member 
Scott, and I will tell you a story about you. I had the 
opportunity to oversee six clearinghouses and not all of them 
are in the U.S., and one of the other regulators once pulled me 
aside across the pond and said we don't have a Congressman 
David Scott who is willing to stand up and say what he did 
about what others maybe see as opportunistic opportunity to 
impact legislation and the certainty that provides.
    I think the short way to answer your question is the lack 
of certainty. And we all deal in a level of certainty, whether 
it is Mr. Gelchie wants to know exactly what it is going to 
cost him to put a hedge on my competitor, and Mr. Sammann 
wanting to make sure he knows what we are doing under the 
regulation so he can compete, and I do the same thing. Our 
members, represented by Ms. Crighton, we all look for 
certainty. That is what is expected of us. And if you can't 
provide it within the regulatory means that we have, it becomes 
more difficult to explain exactly the behavior you are going to 
receive or observe at exactly the highest moment of stress in 
the marketplace.
    Mr. David Scott of Georgia. Thank you very much. My time 
has expired. But as Chairman Thompson said, we are working 
together here. We have to get this done. It is an international 
issue now and an international embarrassment for us here in 
Congress. And I appreciate working with you on this subject.
    The Chairman. Absolutely. Thanks. I thank the gentleman. 
The Ranking Member asked an incredibly important question, and 
your input on making sure we have the continuity, the 
reauthorization of CFTC, your thoughts and inputs on that, I 
think we would really welcome that. And I would just ask, the 
witnesses that didn't get an opportunity to respond, if you 
would do that in writing for us because this is a task that we 
need to complete. And having your input would be very helpful.
    Now we recognize another former Chairman and the gentleman 
from Oklahoma, Mr. Lucas, for 5 minutes.
    Mr. Lucas. Thank you, Chairman Thompson, for holding this 
hearing. And thank you to our witnesses for appearing before 
the Committee.
    The U.S. banking regulators are in the initial phases of 
proposed changes to bank capital requirements. And as I raised 
to the Federal Reserve Chairman Powell yesterday during his 
testimony before the Financial Services Committee, I am 
concerned that this could increase the cost of hedging to end-
users. Ms. Crighton, could you discuss potential adverse 
consequences to reducing access to these products, particularly 
during periods of financial uncertainty? If we make it harder 
to hedge, what is going to happen when things get tough?
    Ms. Crighton. Yes, thank you very much for the question. I 
think it is a topic we think about certainly within the firm 
and across the membership of FIA and I think really across the 
panelists sitting at this table.
    When we think about the impact of bank capital on clearing 
members, one of the first topics that comes to mind is the 
amount of capacity that we are able to provide in the system. 
When we engage with clients, when we work with clients and we 
think about providing access to global markets, there are a few 
lenses that we think about and analyze their portfolio. The 
first is from an exchange margin perspective, the second is 
from a risk perspective, and the third is from a bank capital 
perspective. One of those three will ultimately define the 
amount of capacity that we give. The more punitive bank capital 
becomes, the harder it is for us to be willing to stand in and 
continue to provide that capacity. So we do urge policymakers, 
going forward, as capital rules are considered and reconsidered 
to not continue to increase bank capital because it will 
further impact banks in providing the amount of capacity that 
they do.
    Mr. Lucas. Thinking about my colleague's comments, as we 
have seen over the past several years, it is essential for U.S. 
customers to be able to hedge risk on a global basis. Again, 
Ms. Crighton, could you discuss the importance of cross-border 
access for U.S. customers, particularly as it relates to non-
U.S. swap markets?
    Ms. Crighton. Sure, and thank you again, for that question. 
I think, as I mentioned in my opening statements as well, part 
of what we do as a clearing member and other clearing members 
that are members of FIA, is provide access to clients globally. 
And when we think about the importance of U.S. clients, CFTC, 
and U.S. regulated markets, our role is to facilitate access to 
those markets and access from U.S. clients to global markets. 
In addition, we also sit in the role of providing access to 
global clients into U.S. markets, so it is very interconnected, 
and it is also critically important to be able to facilitate 
clients trading across the globe to facilitate what their risk 
management needs are.
    Mr. Lucas. The swaps market faces a tremendous technical 
challenge as we transition away from LIBOR. Mr. Sammann, could 
you broadly discuss CME's conversion plan for LIBOR swaps? How 
big of an undertaking is this going to be?
    Mr. Sammann. Yes, we thank you for that question, 
Congressman. This has been a huge undertaking for CME Group. As 
you know, the LIBOR that has underpinned the short-term U.S. 
dollar market in U.S. dollars on our market had been around for 
over 40 years. Now that has had to move to a secured overnight 
funding rate, or SOFR (Secured Overnight Financing Rate), 
market. We have been working with the industry since 2015. We 
have been a member of the Fed's ARRC, the Alternative Rate 
Reference Committee, since 2015 with all the stakeholders in 
determining where and at what point does this mechanism need to 
move away from LIBOR-based into SOFR-based. We have been a 
member of the CFTC's MRAC interest rate subcommittee since 
2018. It has been a massive undertaking. We have had to work 
with all stakeholders, central banks, and all participants from 
vendors, clearing firms, all the way through to other 
exchanges.
    To the extent that this was a heavy lift that we have 
undertaken over the last 5 years, we have actually almost 
completely converted everything in our short-term interest rate 
complex from LIBOR-based over to SOFR-based over the last 8 
months. We are almost complete with the balance of our Euro 
dollar that hasn't yet already converted to SOFR, and our 
market will convert on April 1, and the balance of the swaps 
that haven't converted will be converted over on April 15th as 
well. This is not something that has happened in the last 6 to 
12 months. This has been a 7 to 8 year process of working with 
all industry participants. I am happy to say that our term SOFR 
licenses now total over 2,200 firms in 88 countries, and our 
licensing term SOFR there is over 6,000 loans with a face value 
of $3.5 trillion tied to CME SOFR. That is according to 
Refinitiv deal screen data. And if you look at the amount of 
open interest that has transitioned inside of our exchanging 
clearinghouse, almost 90 percent of that is now complete. So 
job converted, and certainly the final transition phase we are 
in right now. So relatively smooth, thanks to those in FIA and 
the CFTC to help us get that done.
    Mr. Lucas. Thank you for those insights. And I yield back, 
Mr. Chairman.
    The Chairman. I thank the gentleman.
    I am now pleased to recognize the gentlelady from Ohio, 
Congresswoman Brown, for 5 minutes.
    Ms. Brown. Thank you, Mr. Chairman. And thank you, Ranking 
Member Scott, for holding this hearing today. And thank you to 
our panel of witnesses for being here.
    The financial markets in our country have been turbulent 
and unpredictable in recent years. From the COVID-19 pandemic 
to Putin's war on Ukraine, commodity markets have taken a hit. 
As of late, it appears that the only predictable thing about 
our markets is that they will be unpredictable.
    So I would love to hear from anyone on the panel because 
yesterday I met with the Ohio Farm Bureau, and they expressed 
concerns about mandatory climate incentives tied to crop 
insurance. So while we may face restrictions in predicting 
global pandemics or certain natural disasters, to what extent 
can markets prepare for those events to improve resilience?
    Mr. Sammann. So maybe I will take the first crack at that. 
Since agriculture is a huge part of what we do, it is also the 
history of CME Group going back 170 years now. We have the 
physical agricultural markets in our blood. It is the lifeblood 
of what we do. The focal point is that rancher, farmer family 
that has exposure to crop risk. We have been in the business of 
effectively providing deep, liquid, globally traded derivatives 
markets in markets like corn, wheat, and beans. The U.S. under 
CFTC jurisdiction runs the world's largest grains markets on 
CME Group exchanges. Those are providing critical access to 
end-users or co-ops to manage their risk. As Ranking Member 
Scott mentioned before, we saw moves in wheat this year alone, 
not to mention soybeans have been extreme both up and back 
down. So our goal is to continue to create as much liquid deep 
market access to all consumers, and firms like Louis Dreyfus 
and others in that space are critical intermediaries for 
providing the tools to manage that risk and exposure.
    That is important for everybody, whether you are in the 
wholesale futures markets or not. Customers that find 
themselves able to access these markets are able to manage that 
price risk, and that gets handed down to the eventual end 
consumer. This hits main street America 100 percent, so our 
goal is to continue to provide as much access in our liquid 
grains markets and ag markets, whether it is cheese, livestock, 
dairy products, or grains and oilseeds to create as much access 
to price certainty through derivatives. And that is our core 
mission for end-users.
    Ms. Brown. All right. Thank you for that. Dodd-Frank was 
passed over 10 years ago, and we have had time to understand 
what worked well and what could use improvement to make our 
financial systems stronger and more resilient. Ms. Crighton--is 
it Crighton or Crighton? I want to make sure I am saying it 
correctly.
    Ms. Crighton. Crighton.
    Ms. Brown. Okay. Ms. Crighton, looking ahead, what should 
we be thinking about over the next 10 years to make our system 
more durable?
    Ms. Crighton. Thank you for the question. We do think some 
of the benefits of Dodd-Frank have certainly been reduced risk 
in the markets and greater transparency. We also think the 
systemic importance of clearinghouses has dramatically 
increased given the amount of products that have moved to 
clearing and the amount that are continuing to be contemplated 
to be moved to clearing.
    So we think there are a couple of things that we can focus 
on as the markets continue to evolve. One is continued 
transparency from a clearinghouse perspective on margin models, 
and we think better calibration of margin, particularly focused 
on commodities markets. If we look at what has happened over 
the course of the last few years, we can go back as far as 
Brexit or certainly through the pandemic and the Russian 
invasion of Ukraine, we continue to see significant increases 
in margin. When we get into a period of extreme volatility or a 
shock to the system, margin levels increase dramatically. As we 
get back into calm markets, they slowly drift down into what we 
think are at times artificially low levels.
    So our goal here is to encourage stability and resilience 
of the cleared markets. We think that has a direct benefit and 
impact to end-user clients, and we think further transparency 
and potentially the introduction of margin floors and other 
mechanisms that we have talked about through the CFTC's MRAC 
would really be an added benefit as we think about how to 
evolve further and deal with sustained shocks.
    Ms. Brown. Thank you very much. And finally, Ms. Crighton, 
I see you are the only woman on the panel today. And I know 
from your testimony that you are the first female Chair of the 
FIA board in almost a 70 year history. So first of all, 
congratulations on your accomplishment.
    Ms. Crighton. Thank you.
    Ms. Brown. But can you tell me why is having more women and 
people from underrepresented groups in the industry important, 
and what can be done to address the opportunity and equity 
gaps?
    Ms. Crighton. Thank you so much for the question. I feel 
like it is certainly an important question, particularly during 
Women's History Month, as we acknowledged, International 
Women's Day yesterday, so it is pretty historic to be here. I 
think it is, as I mentioned before, a topic incredibly 
important to the firm, to Goldman Sachs, to FIA, and certainly 
to me, as I think about my two daughters and opportunities that 
they may have, going forward.
    I will speak primarily about FIA. When I first joined the 
board, I was one of two and then quickly the only woman in the 
room. And when I sat with FIA leadership, we quickly recognized 
that were probably pretty representative of the industry and 
that more needed to be done to be able to think about ways to 
begin to address that. As a trade organization, it is difficult 
to think of the role that we play and how do we actually drive 
the way maybe the clearinghouses think about it or clearing 
members think about it.
    And when I looked at my own sort of almost 25 year career 
at Goldman, I thought of a few key things that were so 
critical. Really, it is information, access, mentorship, and 
opportunity. So the programs that we have designed in launching 
the FIA's Diversity Committee are really geared towards that. 
We don't think we can solve this alone. It really takes 
everyone around the table. We have partnered with a lot of 
groups where we have offered mentorship. We know some of you in 
this room, on this panel, have participated with us in that, so 
thank you. And we have offered mentorship opportunities, 
internships that have been converted to full-time offers. We 
are so excited about what we can do on the forward. It does 
take a lot of people to be able to participate in that, and we 
think FIA is uniquely positioned to help drive that going 
forward.
    Ms. Brown. I see my time has expired. Thank you so much. 
And with that, Mr. Chairman, I yield back.
    The Chairman. I thank the gentlelady. I now recognize the 
gentleman from Georgia, Mr. Scott, for 5 minutes.
    Mr. Austin Scott of Georgia. Thank you.
    Madam Chairman, Ms. Crighton, I am coming right back to you 
because Mr. Edmonds spoke directly to my question. And I will 
tell you just briefly, my degree is risk management from the 
University of Georgia. And aside from being the best football 
team in the country, they have one of the best risk management 
schools there. And I will tell you that my good friend, David 
Scott, went to Wharton, so I would put my University of Georgia 
education not quite up to yours.
    But anyway, enough of that. Just the risk levels throughout 
the world are higher today than I recall them being in many 
years. And they seem to be coming faster, right? I mean, COVID 
happened and the war in Ukraine. And if you go back prior to 
that, we didn't have really a major occurrence other than the 
2008; but, they seem to be coming faster and with much more 
risk and volatility.
    So clearinghouses, they hold billions of dollars in 
customer funds. They are pledged against derivative positions. 
And under title VIII of the Dodd Frank Act, the Federal Reserve 
was authorized to provide deposit accounts to some of the 
clearinghouses that hold U.S. customer funds but not all of 
them. Would access to Federal Reserve deposit accounts for all 
clearinghouses improve liquidity during times of incredible 
volatility across the cleared derivative ecosystem? Is there 
any safer place in the world for deposits than the Federal 
Reserve?
    Ms. Crighton. I think the answer is we fully support access 
by all clearinghouses or U.S.-regulated clearinghouses to have 
access to the Fed deposit window. We agree with your sentiments 
that there is no safer place in the world, particularly during 
times of stress, that will increase market stability and 
resilience, so we fully support that.
    Mr. Austin Scott of Georgia. Because it would protect 
customer funds, and that should be one of our goals as a 
Committee.
    Ms. Crighton. That is right.
    Mr. Austin Scott of Georgia. Mr. Edmonds, you hit on the 
issue directly. Do you have anything else to say about it?
    Mr. Edmonds. Well, look, we want to mandate more products 
if we don't provide that opportunity. I mean, I have one 
clearinghouse that is systemically important, Derek and his 
organization, they are systemically important. But if we don't 
make it all, you are creating a bifurcation there, and the 
level of protection is different. And there is not really a 
great reason for it. So you can't explain it, so then why is it 
there?
    Mr. Austin Scott of Georgia. Mr. Gelchie, we talked in New 
York about Vladimir Putin's invasion of Ukraine and the 
disruption. You mentioned that ten percent of the calories in 
the world come out of the Ukraine. That whole Black Sea region 
is extremely important to the global food system. Could you 
speak to how the war in that part of the world has created 
market disruptions not just in the United States but abroad? 
And last year, there was actually some reprieve that allowed 
some of the grain to move out of the ports in Ukraine. Could 
you speak to the shipping issues and whether or not people are 
actually willing to send ships back into the Ukraine to load?
    Mr. Gelchie. Thank you for the question, Congressman. Look, 
let's start perhaps with the second question here. As you may 
know, the export corridor is scheduled to close on March 20, 
right, or the agreement that both sides have is scheduled to 
stop on that day. So there have no doubt been discussions as to 
whether or not that export corridor will remain open. The delay 
time from the standpoint of putting a vessel into the export 
corridor has tended to be anywhere from 10 to 12 days from the 
time that it goes into inspect to ultimately the time that it 
begins to load grains. That delay has resulted in an increase 
in freight costs out of Ukraine that has been to the detriment 
of the farmer and also impacts bases in international markets. 
So the prospect of that closure can have very extreme volatile 
effects on futures markets, going forward.
    Mr. Austin Scott of Georgia. My time is expiring. I would 
just tell you that the issue of shipping through there is an 
extremely important part of the cost to the end-user.
    Mr. Gelchie. Yes.
    Mr. Austin Scott of Georgia. My concern is that you are not 
going to be able to get the ships insured, even to go into the 
Black Sea in the future. And that disruption in transportation 
even if the crop is grown is going to create very serious 
problems for the world. I appreciate all of you being here. 
Thank you.
    The Chairman. All right. I thank the gentleman.
    I now recognize the gentlelady from Oregon, Congresswoman 
Salinas, for 5 minutes.
    Ms. Salinas. Thank you, Mr. Chairman. Thank you to all the 
panelists. As a new Member, this has been quite an education 
this morning.
    These questions are for both Mr. Edmonds and Mr. Berkovitz. 
We have discussed the role of volatility a lot here this 
morning from whether it is energy or commodity markets, and 
particularly unpredictable volatility poses the risk of 
affecting prices and stability. And we have heard again in the 
conversation this morning that large events such as the war in 
Ukraine and the COVID pandemic, those are events that really 
could not have been predicted. So to what extent can the 
markets prepare for events such as these and the volatility 
that they could bring?
    Mr. Edmonds. I think the most important thing that our 
clients--and when I say our clients, we have members 
represented by Ms. Crighton. We have clients of a firm like Mr. 
Gelchie there. They need to have certainty, and they need to 
understand how the model is going to react, how we are going to 
call them for more margin.
    If we looked at some of the prudential requirements placed 
on the members, that sometimes is not as clear as it can be. In 
the time of stress, typically, the most blunt instrument is 
more is better. I can't really tell you why more or how much 
more, it is just more. I get to sleep a little bit better at 
night.
    Statistically, the way the models work, we go out there, we 
provide offsets, so we got to correlate a position where you 
have a long here and a short there, and different products that 
are highly correlated, you get a benefit of that on the capital 
side. So we end up in a healthy tension. And I like to think 
that if you would walk away from here with one thing, it is 
probably right for Mr. Sammann and I if Ms. Crighton and Mr. 
Gelchie are both equally unhappy, okay? That is a healthy 
tension in the ecosystem that we work in where they would like 
for us to charge more because they have a prudential 
requirement on the other side, and Mr. Gelchie would like to be 
less because he has more business that he needs to facilitate 
along the way. Sometimes that is possible, sometimes it is not, 
and we find ourselves in that vise, typically on a daily basis, 
especially those days that are stressed.
    Ms. Salinas. Thank you.
    Mr. Berkovitz. Thank you. Let me provide the perspective of 
a former regulator what the agency would do in the situation. 
So at least when I was on the Commission--and I believe they 
have continued it, although I am not sure--we would have 
regular, once a week, every Friday, a briefing by our Market 
Intelligence Bureau on current events in the markets. And that 
is a function of that division within the CFTC, market 
intelligence. A number of economists and other market analysts 
try to look ahead both for the staff level and provide the 
Commission with a look ahead at what is happening in the 
markets. Market Intelligence staff gets their information. They 
read the press, they follow current events, but they also talk 
to the exchanges. They talk to market participants, ``What are 
you seeing, what is on the radar screen, what might be coming 
up,'' events such as--we even talked about closures in the 
Black Sea, other possible events, and they are particularly 
focused on contract settlements.
    When these futures contracts go to settlement and people 
actually have to deliver the physical commodity in the case of 
physically delivered commodities or financial contracts that 
are priced off of certain physical events, those times, the 
prices at those times are very critical, so our staff or the 
CFTC staff works very closely with the exchange staff to see 
what is going on in the market, whether there is--maybe even 
call a market participant. If you have a large position, why do 
you have such a large position at this point in time? And maybe 
you should think of gradually reducing it or gradually change 
the position. So your particular trading does not unduly impact 
market volatility.
    So from the regulator's perspective, that is what--I will 
use the we, although it is not me anymore, but that is what we 
would do. We would work with the markets, work with the 
exchanges, work with the clearinghouses, follow the data, and 
try to have a look ahead to avoid disruptions to trading. 
Obviously, things occur that are not always anticipated, and 
then the Commission will do retrospective analyses and try to 
figure out what happened. Potentially, if there is wrongdoing 
involved, that will be a matter for the investigation staff, 
but otherwise, it would be the economists and the market 
surveillance folks who would examine those events.
    Ms. Salinas. Thank you both. I yield back.
    The Chairman. I thank the gentlelady.
    I now recognize the gentleman from North Carolina, Mr. 
Rouzer, for 5 minutes.
    Mr. Rouzer. Thank you, Mr. Chairman. I appreciate all of 
our panelists for being here.
    Mr. Berkovitz, quick question for you, and I will open this 
up to the others on the panel, too. A lot of my constituents 
back home are quite concerned about the increase in interest 
rates. I personally anticipate those rates will continue to go 
up. What type of impact is this going to have on the commodity 
markets, on the financial markets in general, but the 
derivative markets specifically do you think?
    Mr. Berkovitz. Well, if the interest rates go up, the costs 
for consumers and producers all along the value chain 
ultimately will go up. And at the end of the day, it is going 
to be the American consumer who is going to pay higher prices 
for commodities when there are higher interest rates.
    Mr. Rouzer. Anybody else want to comment on that real 
quick?
    Mr. Sammann. Yes, I think it is worth noting, I know we are 
here to talk about commodities markets, but CME runs the 
world's largest fixed income market as well, and derivatives 
risk covers any unexpected or potentially expected risk that 
you would want to manage. So no one can control for those level 
of rates, but our job as a market provider, as we talked about 
earlier, is to provide a full suite of products and tools for 
customers, end-users to be able to hedge as best as possible 
and eliminate whatever--it could be price risk in corn, it 
could be price risk in gold, it could be price risk in rates 
going up or down. So I think it is a proof point for the 
validity and the need and the power of derivatives markets and 
the effect it can have on mitigating the significant swings in 
underlying balance sheets of a home, a corporation, a farm, or 
otherwise.
    So I think it is important to note that this Committee 
oversees the regulatory body that oversees the world's largest 
U.S. interest rate market in both the short and the long end of 
the curve, and those markets had an extraordinary year in 
volume and open interest last year for that very reason, that 
rates are back on the move right now.
    Mr. Rouzer. So, Mr. Gelchie, in your testimony, you discuss 
the importance of speculators in the market. Most of my 
constituents back home, they don't like speculators. They think 
they manipulate the market. Talk about that a little bit. This 
is a big topic for a lot of people.
    Mr. Gelchie. Sure. Thank you, Congressman. Look, the role 
of speculators are essentially to provide liquidity in the 
market, right? And in order to have deep, robust markets, 
speculators have a role. There are times--typically what we 
tend to see, speculators engage during more volatile times than 
not, but the effect of that tends to enable consumers as well 
as producers to hedge their price risks in an effective manner. 
In a rising market, if you will, many of the farmers if you 
will are on the other side of that speculative purchasing. And 
conversely, on the sell side, there are many consumers that 
take the other side of speculative activity. So we see 
speculators as just providing an essential role from a 
liquidity standpoint and are often on the other side of many of 
our hedges in the derivatives market.
    Mr. Rouzer. So would that be fair to say that they are not 
the ones causing the wild swings in the market?
    Mr. Gelchie. I wouldn't attribute wild swings in the market 
to speculators. I would attribute the wild swings in the market 
to many of the factors that I had addressed previously, 
geopolitics, weather, COVID-19, supply chain disruptions. They 
are to me the underlying reasons as to why the volatility 
exists.
    Mr. Sammann. And, Congressman, I think it is worth noting 
that the importance of--if you talk about speculators and you 
talk about the regulatory infrastructure that manages their 
ability to impact markets, whether it is--in our markets, for 
example, we have position limits, so the maximum amount of 
positions that anyone can hold in markets. We have smaller 
position limits for speculators than hedgers, hedgers that have 
underlying physical exposures, whether it is wheat, whether it 
is corn, gold, or otherwise. They can show that underlying 
physical exposure, they can carry larger positions. So I think 
unregulated, unmanaged speculation is very different than the 
critical role that risk transfer agents that is served by 
speculators is important, with the caveat of appropriate 
regulatory controls around how they actively participate in 
markets.
    Mr. Rouzer. Yes. Anybody else want to comment on that?
    Mr. Edmonds. I would just say, simply put, without the 
speculators in the market, your price disparity is going to be 
much wider, and you are going to be paying much, much larger 
prices on an everyday basis. The shock absorber analogy Mr. 
Gelchie uses is correct.
    Mr. Rouzer. Anybody else? With that, my time has expired, 
Mr. Chairman. I yield back.
    The Chairman. Well, I thank the gentleman. And keeping with 
the North Carolina theme, I am pleased to recognize the other 
gentleman from North Carolina, Mr. Davis, for 5 minutes.
    Mr. Davis of North Carolina. Thank you so much, Mr. 
Chairman, and to the Ranking Member.
    As we come together today, I want to thank the witnesses, 
too, and have a question I would like to direct towards Mr. 
Edmonds, Ms. Crighton, and Mr. Sammann. Soybeans are a top 
three crop in my district in North Carolina's First 
Congressional District. Unfortunately, soybean farmers had to 
cope with the fallout of the U.S.-China trade war that 
commenced in 2017. From where you sit, are tariffs on 
agricultural imports, including soybeans, a threat to stability 
and commodity derivatives markets, or are they a necessary tool 
that our government can selectively utilized to combat unstable 
regimes like the PRC, who pose a threat to market fundamentals?
    Mr. Edmonds. Well, I am going to defer soybeans directly to 
Mr. Sammann because I know that is where they trade, but let me 
just make a point on tariffs in general. Anytime that there is 
an additional market price impacting activity, it is going to 
be passed through to the end consumer. That could be a higher 
price. That could be a lack of supply, which typically leads to 
higher prices along the way. Typically, you will find tariffs 
in that arena that causes that stress on the marketplace that 
have to be taken into consideration, and those who are 
ultimately making the trading price decision factor that into 
the price they are willing to pay or which they are willing to 
sell.
    Ms. Crighton. Thanks. I guess I will comment on it from the 
perspective of volatility. And I think similar to comments Mr. 
Edmonds made earlier, we prepare for various types of 
volatility in the markets. It is how we partner with clients. 
It is how we think about our own risk management tools, whether 
that is driven by terrorists or other types of factors, we are 
constantly thinking about and evaluating what are the different 
ways that we can be prepared and appropriately prepare our 
clients for different shocks that may impact the market, and 
how does it impact them, and how does that impact us in our 
role as a clearing member to be able to facilitate the capacity 
they need to continue to execute and maintain the hedges that 
are so critical to their price management?
    So I think some of the points that we talked about, and I 
know you mentioned earlier the healthy tension, and I would 
agree, there is a healthy tension. There is a lot of robust 
discussion about the different ways that we think about this. 
From a cost perspective, one of the things that we think we can 
do is really stabilize the costs for end-users. Part of the way 
that we stabilize the cost is having more predictable margin 
levels, more transparency in that, and then that ultimately 
leads to more capacity that clearing members can provide.
    I will hand it to you for soybeans.
    Mr. Sammann. Yes, so thank you. Yes, we run the world's 
largest market for soybeans. And just to level set in 2022 I 
believe Secretary Dan Glickman just penned a piece on this last 
week confirming that there was a record of $36.4 billion of 
agricultural exports to China last year, biggest ever. I think 
that follows up on maybe 2020 as the new number one year. There 
were significant disruptions to market.
    I would echo what Mr. Edmonds said earlier about any 
impacts that interfere with price discovery and artificial 
impacts to trade are extremely difficult to manage. And what we 
certainly support is open, free access to markets, and where 
that can be enabled, we see that as the best outcome. Layers of 
impacts, be they taxes or tariffs otherwise that disrupt 
market, creates that very regulatory uncertainty the markets 
dislike. Our customers and market participants are used to 
price uncertainty, rates uncertainty, regulatory uncertainty, 
which is why the CFTC is so critical as a leader in this space. 
That is what market participants need. With the regulatory 
uncertainty in a jurisdiction, customers know that they have 
access to risk mitigation tools, whatever come.
    So I am not sure that fully answers your question, but we 
can certainly say that the export markets to China just 
reflective of the dollars exported this past year, absolutely 
crucial, and both ends of that hedging takes place on our 
markets.
    Mr. Davis of North Carolina. Yes, thank you.
    And, Mr. Edmonds, real quick, energy markets are still 
reeling as a result of Russian-Ukraine war that is taking place 
and remains a protracted stalemate, and the economic 
aftershocks following the pandemic continue to reverberate. Mr. 
Edmonds, do you think an 83 percent annualized volatility rate 
for natural gas is sustainable? I am hearing from folks back 
home that instability in the energy markets is putting the 
squeeze on fertilizer production and resulting in high prices. 
Farmers can't break-even if their input costs continue to 
outpace price points for their products. And what stabilizing 
factors exist in the energy markets that can help give our 
producers some assurance of price stability?
    Mr. Edmonds. Well, I will be very quick because I know your 
time has expired, but I would tell you at the end of the day, 
it is not 100 percent because of what is happening. The face of 
it right now is the Russian invasion of Ukraine and where that 
is going. There are also a number of regulatory challenges here 
in this country that we need to address in order to provide 
clarity for those willing to make the investment and do that. 
We haven't seen that yet. Last year, we were looking at $7.50 
natural gas, everyone thought it was going to $10. This year, 
we have people going is it going to less than $1? So while the 
volatility is great, the price has been reduced here. We have a 
lot of it. What are we going to do with it?
    Mr. Davis of North Carolina. Thank you so much. I yield 
back, Mr. Chairman.
    Mr. Crawford [presiding.] Thank you. I recognize myself for 
5 minutes.
    And I got here a little bit late, so if I am repeating 
myself, forgive me. But I got in on the tail end of Mr. 
Rouzer's questions. Mr. Edmonds, you said that spec trading 
actually increased or improved liquidity? Is that right?
    Mr. Edmonds. It does improve liquidity from our vantage 
point because what it does is reduces the level that you see 
because you have people willing to stand in and take a price 
that if you are purely a commercial player, are you going to 
share your very best price all the time? Is it going to be as 
transparent? Typically, it is not, and that is the role the 
speculator provides to frame that up.
    Mr. Crawford. Got you. Let me ask you this. So we use this 
term liquidity, but liquidity does not necessarily equate to 
stability, correct?
    Mr. Edmonds. Well, I will say without liquidity, you are 
not going to get stability.
    Mr. Crawford. Correct. But they are not one in the same? 
They are not----
    Mr. Edmonds. They are not one in the same, no.
    Mr. Crawford. So here is my concern. And obviously, we need 
spec traders to take the other side of the trade in either 
case, but my concern with volatility is the lack of actuals in 
the marketplace. Does that create a volatile climate? And what 
do we need to do to incent more actuals? And where I am going 
with this if you can follow me is farmers, for example, they 
don't hedge on the scale, on the level that they should, and so 
that means the actuals, they are long actuals but they are not 
short in the market.
    Mr. Edmonds. And I am trying to make sure I understand your 
question correctly. When you say actuals, are you talking about 
the end-user on the production side.
    Mr. Crawford. The underlying crops.
    Mr. Edmonds. The underlying crops.
    Okay. So I think at the end of the day the value that 
speculators like Mr. Gelchie's firm provides is they don't have 
to operate there because he has given them a price, and they 
can make the decision to go out at their own. He has a lot of 
sophisticated tools available to him and a lot more access that 
maybe one single farm can't really afford to put into place. So 
they have a choice to make. They are now educated. They know 
what is there through this process. They know what they can do 
on their own. They can make a rational decision when they get 
to that point.
    Now, in the purest form, if the end-user, instead of me 
going to the grocery store, I can buy directly from the farm, I 
understand that transaction. I go to the farmers' market. I can 
do that on a daily basis. I understand. Do I know exactly what 
they paid for fertilizer, how much they watered the plant, 
whatever? No, I want an ear of corn, I get an ear of corn, I 
put it on the grill and have a good time with it, a party. But 
at the end of the day, in mass bulk, it is very difficult to do 
it. As the cost of that infrastructure continues to increase, 
the number of parties able to do that effectively and engage 
with the right risk limits when they go through a membership 
review and things of that nature becomes incredibly difficult. 
And that is just the term that we have built over a long time. 
But the price transparency that the exchange groups and the 
clearing mechanisms provide is the benchmark they go to look at 
in order to evaluate whether that offer from Mr. Gelchie's firm 
versus doing it on their own is appropriate.
    Mr. Crawford. So I guess my concern is how integral a role 
do farmers actually play in price discovery today? So, I mean, 
if basically these transactions are taking place with hedge 
funds on either side of the trade, I know you are looking at 
fundamentals, I know you are looking at technicals, and you are 
making evaluations, and so on. But at the turn row level, a lot 
of times farmers are--their risk management strategy consists 
of a basis contract that is local. However, that is pegged to 
the board, right? So there is still an element of that 
connectivity there, but I am just wondering, what is the direct 
role that farmers have in price discovery today?
    Mr. Edmonds. I would just take this and I will turn it over 
to Mr. Sammann. If they don't deliver the crop, it doesn't 
matter what the price is. It all falls apart. They have to 
deliver the crop. And that is why they are so critical, and 
that is why we have to do all that we can to make sure that 
they have a path to participate in a way that works for their 
size operation.
    Mr. Sammann. So I think this ties back a little bit to your 
question on speculation as well. When we think about what a 
healthy market looks like, it has to be a full healthy 
ecosystem of all participants. You need market makers, you need 
market takers, those that have the risk, whether they are E&P 
energy firms on the production side or farmers or miners or 
whether it is a mortgage servicer for that matter, or you need 
somebody on the other side to take that price. I am looking to 
get exposure to a particular asset class. So we think about how 
to build that healthy, diversified ecosystem of participants so 
that price transparency can take place so farmers know the 
price of soybeans for this particular product and it is worth 
X. And I think that price transparency piece is critical so 
that they are informed about what the value of their product 
is. Whether they can directly impact those markets or not is a 
question of their intermediary access to these markets.
    Mr. Crawford. What would you estimate the percentage of 
participants in the market today are bona fide hedgers?
    Mr. Sammann. So I would probably say--it is going to vary 
by product--probably 20+ percent of end-users. And you can see 
some of that from the CFTC's Commitment of Traders Report. It 
will vary by product. It will be higher in commodities markets. 
It will be lower in financial markets, between 20 and 40 
percent, but I would rather come back to you with a more 
specific answer.\2\ But if I were to spitball, that is where I 
would put it.
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    \2\ Editor's note: the information referred to is located on p. 82.
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    Mr. Crawford. Thank you. I appreciate it. Thank you all.
    Ms. Budzinski, you are recognized for 5 minutes.
    Ms. Budzinski. Thank you, Mr. Chairman. And thank you, 
Ranking Member, for putting together this very informative 
hearing today. I appreciate that.
    We have spent a lot of time obviously talking about market 
volatility and the different factors. We know obviously a war 
in Ukraine is contributing, also a public health emergency. The 
energy markets, though, are no stranger as well to volatility. 
And my colleague, Congressman Davis, also touched a little bit 
on that related to natural gas. My district, the 13th District 
of Illinois, is really a hub for innovations in our energy 
markets, specifically around biofuels and other sustainable 
fuels. And that can help increase what I would hope is 
certainty and security in these markets. And so maybe I could 
start by directing this question to Mr. Berkovitz but then open 
it up to the rest of the panel on your thoughts on the impacts 
of biofuels and how they relate to the commodity markets as 
well.
    Mr. Berkovitz. Thank you, Congresswoman. So biofuels are 
incredibly important as part of the energy mixture and part of 
the input into fuel, people driving their cars and other 
vehicles. So as another input, it affects a number of other 
commodities, too. It is related to the price of corn, increases 
demand. The price of corn and other biofuels people plant for 
biofuels in addition to agricultural demand, it affects the 
price of gasoline. It is another component there and reduces 
the demand for oil to a certain extent, so it affects that 
commodity. So it is an absolutely critical component. And I 
know, like other folks on the panel who are actually from the 
exchanges can explain, well, the actual interaction the 
exchange and the suite of fuels and the interactions between 
these various commodities, but it is well-studied economically 
how increases or decreases in demand for biofuels affect the 
demand for gasoline. But it is an integral part the energy risk 
management sector, as well as the agricultural sector.
    Mr. Sammann. Yes, I think it is a great question. It speaks 
to the broader question of energy transition and what is this 
market going to look like in 20, 30 years? There are very 
different opinions on the timeline of that and the shape and 
the scope and the scale and the speed with which we will get 
there.
    Specifically to your point, soybean oil is a critical 
feedstock for products like renewable diesel. It is also in and 
of itself hugely important to the ag market. Our bean complex 
is effectively three products. It is soybeans, it is crush, and 
its meal, and those are used for very different reasons. And 
increasingly, kind of the differences between what used to be 
an energy market and an ag market are now blurring because of 
markets like biofuels and ethanol. Is ethanol a corn product or 
is it actually a fuel product that should be run inside an 
energy business, for example? Ethanol feedstock for gasoline--
and this is a global product. There is a European ethanol 
market. There is a U.S. ethanol market, and those are being 
derived from U.S. stocks here as well. Methanol, biofuel 
feedstock used in bunker fuel, for example, so there are a 
number of products out there that I think are also, well, these 
are still relatively small, probably soybean oil is the biggest 
of these, are rising in importance. And at various points in 
time we have had discussions, food versus fuel, where is that 
efficient frontier, and what is the best outcome for use of 
these products? So it is a changing time for the environmental 
products market. We partner with our customers, end-users, and 
intermediaries to develop those products that reflect the risks 
that they are trying to manage through an uncertain speed and 
shape of what will be an energy transition story.
    Ms. Budzinski. Thank you. I don't know if any other 
panelists would like to add, and if not, I have one other 
question maybe for Ms. Crighton.
    It is very clear in the global derivatives markets that 
practices abroad can have a domino effect across the sector. In 
the same light, inconsistency among risk management methods can 
stifle securities and the derivatives market's ability to 
withstand volatility. Can you speak to the work that is being 
done across the globe that can add to protections for our 
participants here at home?
    Ms. Crighton. Sure, thank you. It is a great question. I 
guess I will use a couple of examples. One is--and I think Mr. 
Sammann referred to it in his testimony--the events that we saw 
on the London Metal Exchange in March of last year. We have 
been asked many times as an industry, I think as individuals, 
does that have the ability--can that happen here? Can that 
happen in U.S. markets? I think first thing we would point to 
is the volatility control mechanisms that many of us refer to. 
Whether it is risk controls, price controls, position limits, 
we think they are all critically important to helping resilient 
and stable markets.
    We think the U.S.-regulated, CFTC-regulated exchanges and 
clearinghouses do a terrific job in that regard, and we think 
they do--and FIA is doing a lot of work to kind of create that 
as a set of global standards to be able to share with that 
global community. When we think about how we provide global 
access, that really becomes critically important of having a 
set of standards, right? We operate a portfolio of providing 
access to exchanges and clearinghouses globally. For many of 
us, that is north of 60 and dozens of jurisdictions around the 
world. You want to know that you have the same set of 
principles that govern how we think about risk, how we think 
about the volatility control mechanisms. All of those are 
consistent really around the globe.
    I think the other good example to highlight when we debate 
skin in the game, for example, it has been a longtime 
discussion in the U.S. We think that will continue to evolve. 
If we look at regulation that is happening across Europe from a 
European perspective, the EU has passed regulation where they 
are actually mandating clearinghouses to have more skin in the 
game. The UK is actually looking at similar regulation as well. 
We think that is an important step forward, and we look forward 
to continuing the discussion here.
    Ms. Budzinski. Thank you so much. I will go ahead and yield 
back my time. Thank you.
    Mr. Crawford. Thank you.
    Mr. Bost, you are recognized.
    Mr. Bost. Thank you, Mr. Chairman. And I would like to put 
on the record and thank Chairman Thompson for allowing me to be 
back on this vitally important Committee to my district. I 
spent 6 years on the Committee right after being elected, and 
then I have spent 2 years and 2 months off and begging the 
whole time to get back, so I am really feeling great about 
being back on the Committee. And reason being is my district in 
southern Illinois is one of the most diverse agricultural 
districts in the country. And I am happy to provide them a 
voice here on this Committee.
    Now, one of the things that I hear about often from the 
producers back in the district is the importance of liquidity 
and access to capital. Mr. Sammann, in your written testimony, 
you referred to an independent review of what happened in the 
London nickel market in March 2022 as an example of the need 
for strong oversight and risk management. Did that study 
provide any more details about what we can learn from the 
distribution in that market, and also, as input prices go up 
like what my constituents are seeing with fertilizer prices 
and--how does that work and what the CFTC is doing to mitigate 
some of the effects on the producer?
    Mr. Sammann. So that is great question, Congressman. Thank 
you for that. I think the importance of what we saw happen in 
London in the nickel market, really, as I mention in my 
testimony, written specifically is to highlight the incredible 
importance of the risk mitigation tools both at the exchange 
level and at the clearinghouse level to ensure orderly markets. 
I will give you a quick rundown of a couple of things, your 
position limits, number one. There were not necessarily a 
position limits regime on that market, in that market. This is 
something that is part and parcel of CFTC regulation. We have 
different size limits for speculators and hedgers, as I 
mentioned before. That is critically important. If you are 
carrying a large amount of physical underlying, then you should 
have access to an appropriately off-size position as long as 
you can show market reg departments that here is my risk, here 
is my offset, and that is why I am carrying that. Speculators 
have smaller positions. We have position limits that differ by 
spot month versus deferred month across all contract months. 
That is important to make sure that there is not an outsized 
impact of any position holder in the market. Things like daily 
price limits, and we have those in enumerated commodities like 
eggs where we have hard limits where, as you know, Congressman, 
wheat, corn, beans, there is only a set amount that market can 
move on a daily basis. And then we have very clear, transparent 
rules for if we lock limit up consecutive days, how that opens 
the following day.
    Determination and a deterministic market behavior is what 
market providers need and users need. They did not have that in 
the case of the London market. Other areas, circuit breakers, 
things like Velocity Logic in our market that slow market moves 
that if a market moves beyond a specified amount in a specified 
time period, we implement market halts. So at the exchange 
level, we are slowing markets before they start to run away 
where we don't have hard limits in certain markets.
    We have talked a lot about margin today, talked about 
initial margin. Variation margin is critical. Variation margin 
is what flows every day to top up accounts that have lost money 
on that day and credits for those customers that have seen 
gains in their positions every day. CME Group runs twice daily 
variation margin runs to ensure that no excess loss is built up 
in the system anywhere, also something that was missing at that 
other particular exchange.
    Market reg oversight to ensure not just appropriate 
activity for users in our market but positions that they are 
holding as well, and they have the power to go investigate what 
those customers claim they have. Proactive margin management, 
liquidity-based margin add-ons, concentration-based add-ons, 
all of the ways in which we ensure that our markets are safe, 
secure, deterministic for users and people know what the rules 
are going to be and how markets will react when you have market 
stress. Mr. Edmonds mentioned that before. That is what users 
flock to. That is what the CFTC has helped us provide. That is 
why we are in this regulatory framework the benchmark globally 
of derivatives markets.
    Mr. Bost. I appreciate that. Thank you. I also have heard 
from my constituents obviously with serious concerns about the 
recent action taken by Mexico in banning GMO corn. This is 
serious concern of mine, and I have joined with several of my 
colleagues in writing a letter to the Administration calling 
for action from the USMCA.\3\ What effects has the CME seen on 
the global--I am not sure what my tongue is doing--derivative 
markets so far based on Mexico's action, and if no substantive 
effects have occurred, can the CFTC help absorb any changes in 
the market?
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    \3\ Editor's note: the letter referred to is located on p. 81.
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    Mr. Sammann. Great question. I think relative to how we 
answered the question earlier on tariffs and kind of market 
disruptions, we see disruptions to free trade flow and price 
setting as problematic for all users and that just increases 
instability. It increases the eventual price that gets--cost 
passed on to the end consumer is not good for anybody. We have 
not seen a direct impact on our corn market, which is we run 
the largest corn market in the world. We haven't seen that yet. 
That said, we are in constant conversation with both the 
farmers, producers, end-users, folks like Louis Dreyfus and how 
that impacts them, and the agency. And I would probably defer 
to Mr. Berkovitz for his thoughts on how to answer a CFTC 
perspective on that.
    Mr. Crawford. We will have to defer that.
    Mr. Bost. I think we will have to wait on that because I am 
out of time.
    Mr. Crawford. We have run out of time. Thank you, Mr. Bost.
    Ms. Adams, you are recognized.
    Ms. Adams. Thank you, Mr. Chairman and Ranking Member. Let 
me also thank all of our witnesses today. And I want to address 
my questions to Mr. Berkovitz first.
    In your testimony, sir, you noted the need for improvements 
to our risk management tools in order to adequately and 
accurately respond to severe weather or climate-related risks. 
So would you elaborate on what updates are necessary and the 
extent to which the CFTC has the authority to implement such 
changes?
    Mr. Berkovitz. Thank you, Congresswoman. So the three areas 
that I outlined in my testimony are, one is the development of 
new products and markets to provide better risk management 
tools to address severe weather-related events. The CFTC 
doesn't have authority to mandate new products or new markets, 
but it can encourage it and facilitate it. And that is what the 
advisory committee process is for. And the CFTC has put out a 
request for information, asking the very questions that you 
just identified, what can the CFTC do? What is the CFTC's role? 
But this is really a market-based solution that--the products 
in the markets and the markets themselves to develop.
    So my suggestion or my encouragement is for the CFTC to 
work closely with market participants and try to facilitate the 
development. To the extent that there are regulatory issues or 
obstacles to the development of any of these products or it 
needs expedited approval, the CFTC can certainly expedite the 
approval.
    Ms. Adams. So let me ask you, where should the focus of 
Congress be to ensure the effectiveness of commodity markets 
and derivatives products as tools for risk management and price 
discovery?
    Mr. Berkovitz. So I think continued support of the 
Committee, which this Committee has always been very, very 
supportive of the efforts of the CFTC and providing direction 
to the CFTC in the areas that the Committee believes the 
Commission should focus on. So if the Committee were to believe 
that this is an area that the Commission should focus on and 
work with the private-sector to develop these new products and 
to develop these new markets and to oversee these new markets, 
that would be of great assistance to the Commission in 
conducting those activities.
    Ms. Adams. Thank you, sir. Let me move quickly to Mr. 
Sammann. I appreciate your focus on the importance of the U.S. 
agricultural production to global economy, commodity markets, 
and their vulnerability to trade policy. It speaks to the 
importance of the work that this Committee and our nation's 
farmers do. Farmers are long-experienced with the risk posed by 
weather events, and as a result, the Agriculture Committee and 
USDA have focused on improving our commodity safety net through 
investment in title I commodity programs.
    Last summer, CFTC issued a request for information 
soliciting public input on climate-related financial risks, 
including physical and transitional risks. To what extent has 
CME participated in conversations on climate risk with the 
CFTC, and what has been your primary focus? And what role if 
any can Congress play in providing guidance to CFTC?
    Mr. Sammann. So terrific question. Thank you for that. As 
actually Mr. Berkovitz indicated, I represent CME Group on his 
old committee, the Energy and Environmental Markets Advisory 
Committee that is chaired by Commissioner Mersinger now. And 
the point of that is to actually address some of these issues 
head on. So we are very deeply involved with the CFTC both at 
the committee level, but also bilaterally in terms of issues 
that we see, whether that is on the product development side. 
And products that we are hearing from our customers, we have 
been asked to develop transition fuels, things like battery 
metals and how those markets evolve. It is critical for us that 
we not only go through that due diligence process for 
validating an idea, we then go to the CFTC, as this Committee 
knows, and have to approve that these markets are ready for a 
derivative contract, that they are deep and liquid, satisfy all 
the core principles of the CFTC. So from product development 
and a solutions point of view, that is a direct dialogue.
    At the committee level and at the enterprise level, CME 
Group is very actively involved in not only managing and 
reporting on our own client, or say, risks around environmental 
change but those in the industry as well. And I think the 
industry is communicating on these issues. There are a number 
of regulatory bodies bringing this discussion together so that 
we understand what the impacts are in industry as a whole and 
how we each individually contribute to that.
    Ms. Adams. Thank you, sir. And thank you both. And, Mr. 
Chairman, and I am out of time. I yield back.
    Mr. Crawford. Thank you.
    Mr. LaMalfa, you are recognized.
    Mr. LaMalfa. Thank you, Mr. Chairman. Apologies for missing 
much of this hearing, as there are always multiple committees 
going on. So I do have a couple of questions we prepared on the 
topic, so let me go to Mr. Gelchie.
    With the Russian invasion of Ukraine, we have ripple 
effects through many aspects of our economy and our industries, 
but agriculture has been hit hard, as well as energy. What 
policies can Congress implement to better reduce the volatility 
in our food and fiber markets? What should we be doing to have 
more integrity and fewer ups and downs?
    Mr. Gelchie. Thank you, Congressman. I think, really, some 
of the factors that they perhaps have related to Russia-Ukraine 
clearly impacts the consumers here in the United States, as you 
mentioned. But what I think is important to also note is that 
the wheat, the corn markets are global markets, right? And so 
while the U.S. farmers are essentially also--and the U.S. users 
are also participants in these, the volatility that you 
mentioned is just a function of these markets in order to 
attempt to find what its proper price should be, given those 
circumstances insomuch as the geopolitics does create 
uncertainty of supply out of Russia, out of Ukraine. At the 
same time, as I had mentioned earlier, the notion of the 
prospect of closing the export corridor can have further 
impacts on not only supply coming out of Ukraine, but then it 
shifts the focus in terms of where the demand base needs to 
originate from such as Central America, South America, and in 
the U.S.
    And so, really, I think in terms of factors that can reduce 
that volatility, we had mentioned the various inputs from the 
exchanges, in terms of position limits for speculative 
purposes. But ultimately, I think the market will set the price 
of what those commodities need to be.
    Mr. LaMalfa. Certainly, all right. Well, as a farmer, I 
certainly understand the aspect that on the farming side, at 
least we are price takers, not price makers, applies more 
widely to.
    Ms. Crighton, what can end-users do to better prepare for 
the next period of volatility? The end-users, what can they do?
    Ms. Crighton. Yes. Thank you. It is a great question. We do 
spend a lot of time with our clients, end-users included, to 
think about how to prepare for the next round of volatility. 
Really where we focus is predominantly around margin. What is 
the sufficiency of margin that the clearinghouses are charging 
on the portfolios? What do we think are potential shocks? What 
are the sizes of those shocks? And how much may that increase 
exchange margin? We work with end-users to think about what 
their liquidity needs and to appropriately forecast what those 
are. We think that is the best way for end-users and clients to 
prepare for periods of volatility, being prepared from a 
liquidity and funding standpoint to withstand that.
    Mr. LaMalfa. Excellent, thank you. Thank you.
    Mr. Edmonds, derivative markets are evolving faster than 
the regulations can keep up with, so what would you propose for 
us at the Federal level and the state regulators as well to 
follow and ensure that developments are being kept up with at 
least in a somewhat timely fashion?
    Mr. Edmonds. I think you are seeking certainty at the end 
of the day. And when proposed regulation comes before you and 
you haven't a chance to opine on that, asking the question, why 
is this helping the question of certainty? And if you can get a 
very good answer you have confidence in, it is probably 
worthwhile. And if you get an answer that you walk away from 
very confused, it is probably not worthwhile at the end of the 
day. The healthy tension we talked about, there are all agendas 
that are represented here, and we see things in a very 
different lens that sometimes has an impact on the regulatory 
process. Sometimes that is captured correctly, and sometimes 
that is captured incorrectly, and that is where we spend lots 
of our time debating that issue. But ask the question why and 
make sure for certainty.
    Mr. LaMalfa. I appreciate that. I just came up the hall 
from the Natural Resources Committee where I am constantly 
confused at some of the environmental regulations and how they 
have been reinterpreted over 50 years and come out of there a 
little confused as what their goal is there.
    So, Mr. Chairman, I appreciate it. Thank you, and thank you 
to our panelists. I yield back.
    Mr. Crawford. The gentleman yields back.
    Ms. Crockett, I have to apologize. I should have recognized 
you the last time. I hope you will forgive me, but you are 
recognized for 5 minutes.
    Ms. Crockett. Do not apologize. I will always defer to Ms. 
Alma. Good morning, and thank you so much to all of you being 
here, and thank you, Mr. Chairman.
    We have heard a lot today about the benefits farmers get 
from using futures contracts because it creates stability. I 
have heard so many farmers and ranchers concerned about 
changing global conditions. In fact, our first hearing was on 
the uncertainty facing American agriculture. So it seems to me 
that all farmers would stand to benefit from being able to 
hedge against this uncertainty, which is what these products 
that we have been talking about, what they do. Do I have that 
right, Ms. Crighton?
    Ms. Crighton. You do, yes.
    Ms. Crockett. Thank you. But I do have some concerns. As I 
was reviewing the USDA report from October of 2020, it states 
that less than three percent of farmers are using these 
options. Does that sound about right to you?
    Ms. Crighton. I don't actually have that information, but 
we would be happy to look into it and follow up with you.
    [The information referred to is located on p. 83.]
    Ms. Crockett. What is concerning if this is accurate is 
that for decades, small farmers have lost their farms because 
they can't compete with larger, better-resourced competitors. 
In human terms, these farms, they represent someone's hopes and 
dreams. In the case of new farmers, they don't have the same 
opportunities. And so I am concerned that our small and/or 
underserved farmers aren't using these tools because we know 
that, sadly enough, the lender of last resort, the USDA, has a 
troubled history when it comes to serving minority farmers 
specifically.
    So I must ask, Ms. Crighton, what is your firm doing and 
what can this Committee do to increase utilization of these 
financial products for beginning and underserved farmers?
    Ms. Crighton. Sure. I will provide perspective from the 
FIA's standpoint, and I will answer that really in two ways. 
One, the FIA--and I think there are resources across the 
exchanges and clearinghouses that provide information and 
educational resources about how to effectively use these 
markets for risk management purposes. Part of the challenge we 
find at times is the amount of information that persists 
throughout the system of what is available and how to access 
the capacity that is available.
    The other perspective that I will answer it from is, what 
we think about really is providing access and how do we ensure 
that we and other clearing members can continue to stand in and 
provide capacity, and a lot of that really comes down to the 
risk management topics that we are discussing today.
    I think in terms of some more specifics to your question, 
again, I think there are others within FIA and the firm that 
can help provide information on follow up, and we are happy to 
do that.
    Ms. Crockett. I appreciate that. It just feels sometimes--
and not just in this space, I want to be clear--that there are 
multiple financial services, right? Like there is one for the 
largest growers, which we are hearing a lot about today, and 
then there are ones for the hundreds of millions of small 
farmers who face the same hardships with fewer resources at 
their disposal.
    Mr. Chairman, I hope that this Committee can work on these 
issues to set our farmers up for success for generations to 
come. And with that, I will yield back. Thank you so much.
    Mr. Johnson [presiding.] Thank you very much, Ms. Crockett.
    I will recognize myself for 5 minutes. Mr. Jackson, you are 
on deck.
    Ms. Crighton, you talked about the importance of analyzing 
the sufficiency of margin and that that requires obviously 
analyzing the potential shocks. I mean, give us some sense, 
what types of events are assessed to create the most shocks? I 
mean, not black swan events because I guess you guys are 
thinking about them and talking about them, but what gray swan 
events are most concerning to the system?
    Ms. Crighton. Yes, thank you for the question. It is 
something that we spend a lot of time thinking about, again, 
really across our members and certainly internally. When we 
look at what has happened over the course of the last few 
years, I think as we have discussed over time, the number of 
shocks, the number of 1-in-100-year events seem to happen more 
and more frequently. So how do we prepare for those?
    Again, the exchanges run their margin models. In addition, 
clearing members typically run their own margin models, and we 
compare and contrast those, right? We think there are a number 
of different ways to be informed on better ways and more 
efficient ways to risk manage, and we do take into account a 
number of macroeconomic factors as we think about what are the 
shocks to apply to a particular portfolio.
    Mr. Johnson. But is there a particular type of event that 
shocks the system in a particularly egregious way?
    Ms. Crighton. I think we are finding there are multiple 
types of events that can shock the system in an egregious way. 
And we try and take into account what has history informed us 
of the types of shocks, the magnitude of those shocks, and what 
do we need to be prepared for on the forward? I don't think we 
focus on any particular type of event, just the fact that they 
can occur, they seem to occur more frequently, and ensuring 
that margin models can predict or help users predict what their 
margin requirements may move to.
    Mr. Johnson. And you talked about the LME situation with 
nickel in your testimony. On its surface it seems like the 
cause is pretty obvious. People were concerned about the 
availability of Russian nickel. Is there more to it, more 
nuances to the causation that we should keep in mind?
    Ms. Crighton. Yes, I think it goes back to a number of 
items that we are discussing today. In terms of the volatility 
control mechanisms that we have talked about the benefits of 
from price banding, price controls, circuit breakers, position 
limits, all of those are a crucial layer of controls that exist 
at the exchanges themselves. We think U.S.- and CFTC-regulated 
exchanges do a particularly good job in that regard. We think 
in that vein they continue to be informed by market events and 
refine those controls and improve them on the forward. That was 
largely unavailable on the LME.
    In addition, we looked at the size of the margin that was 
being charged on the contracts themselves. We view that to be 
insufficient. And then if we think about the skin in the game 
layer that was available, and this is all publicly reported, 
LME had $25 million as their capital at risk. Clearing members, 
there was roughly 40 at the time, had $1 billion at risk. At 
the end of the month, that was March of 2022. At the end of the 
month margin levels had increased. Some circuit breakers were 
put in place. The CCP capital at risk stayed the same at $25 
million. Member contributions were doubled to $2 billion, 
right? So it highlights the importance----
    Mr. Johnson. So there were some impacts and some 
improvements, lessons learned if you will?
    Ms. Crighton. I think it highlighted some of the 
deficiencies and the reactions to those deficiencies. And that 
is what we are trying to really highlight here in our 
conversations, ensuring that can't happen anywhere else.
    Mr. Johnson. I mean, I am a lay person, but when I look at 
$4 billion worth of trades canceled, that seems to me to be a 
critical failure. But that is like the last place you want to 
get to.
    Ms. Crighton. We would agree.
    Mr. Johnson. I can't imagine that happens very often with 
American-based exchanges.
    Ms. Crighton. We don't think it does, and we wouldn't 
expect it to happen here.
    Mr. Johnson. Yes.
    Ms. Crighton. Again, the importance of each of those layers 
of controls working in coordination with each other are 
critically important. It is about aligning incentives from a 
risk perspective, but each of those layers is foundational to 
ensuring that that doesn't happen here.
    Mr. Johnson. So we had some good back-and-forth with I 
think Mr. Bost, Mr. Sammann about some of the differences. But, 
Mr. Edmonds, let's talk about ICE. Could something like that 
happen on ICE?
    Mr. Edmonds. Just to be clear, your question is could 
something like LME happened at ICE?
    Mr. Johnson. Right.
    Mr. Edmonds. We have all the same controls that have been 
referenced by Mr. Sammann and Ms. Crighton here. I have said 
this a couple of times today. It is about certainty. It is 
about certainty of how we are going to behave. It is about 
certainty that we, the clearinghouse or the exchange, are going 
to execute our rulebook because that is what all of the members 
and the customers expect us to do at the moment in time. And in 
the case of LME, I think it is pretty clear in what is being 
publicly reported that that did not happen.
    Mr. Johnson. Last question, Ms. Crighton. We talked about 
some of the reforms LME has made to learn lessons from that 
shock to the system. What percentage of the way are they to 
completely have integrating these lessons learned?
    Ms. Crighton. We think they have made a number of 
improvements. They still have a number of things to do. There 
have been studies that have been conducted by independent 
consultants that we are continuing to wait for data from the 
market to inform additional steps that they need to take. The 
Bank of England has also been doing a review and recommending 
actions that they need to take as well. So we think they are 
part of the way through. They are not all the way through.
    Mr. Johnson. Thanks very much. I am over time. Mr. Jackson 
and then Mr. Mann is on deck.
    Mr. Jackson of Illinois. Thank you very much. Thank you, 
Mr. Chairman. Thank you, Ranking Member Scott.
    I have the great opportunity to be a runner at the Chicago 
Board of Trade, a runner at the New York Stock Exchange, and 
now that world has gone away because of technology and 
electronics. And so let us say that evolution is natural and 
risk is not a bad four-letter word, that it is something that 
we have to live with. We are going to have risk in energy, risk 
in weather. Risk is here to stay.
    Mr. Gelchie, I would like to first direct a question to you 
and your testimony. You reference the self-policing effort of 
the commodities exchanges. I would like to get further 
information on why you would say that we can look forward to 
self-policing as a good thing. We have seen in our lifetime the 
long-term capital, we've seen Morgan Stanley, we have seen 
Lehman Brothers, we have seen risk that was supposed to have 
been contained because of self-interest and some economic 
theories. How can we ensure that self-policing is the best 
mechanism to have an orderly market?
    Mr. Gelchie. Sure. Thank you, Congressman. I think when I 
refer to self-policing and the gold standard of risk 
management, I think many of the comments today, by the 
panelists here I think reflect the notion of position limits 
that the oversight here of this Committee, to the CFTC, the 
interrelationship that they have with the various exchanges, 
the compliance, individuals within the exchanges and their 
interaction with the various members. So to me, it is that 
regard of being as close to the trading itself that ensures a 
robust discussion should volatility come up that reflects the 
need to elevate and escalate. I think we have the appropriate 
mechanisms in place within the U.S. markets here to address 
that. And thus, my point being the self-policing methodology is 
best-in-class.
    Mr. Jackson of Illinois. Okay. Thank you.
    Ms. Crighton, we have seen a concentration now, the 
clearinghouses after market shocks and after market challenges. 
Is this a good trend or is it a bad trend in your opinion?
    Ms. Crighton. Yes, thank you for the question. It is 
definitely something we worry about. The area specifically that 
we focus on is the concentration or the reduced number of 
clearing members that are providing capacity to the system. If 
we look at the last 20 years, the number of clearing members 
providing capacity has reduced by about half while the margin 
in the system has increased by about 600 percent. Just by that 
magnitude alone, you can see that there are some capacity 
considerations. There are really high barriers to entry. There 
are high barriers to continuing to wanting to provide capacity. 
But it is something that we do worry about, and it is a 
concerning trend.
    Mr. Jackson of Illinois. Thank you.
    Mr. Sammann, thank you for your leadership at the CME.
    That is a shameless plug for the Chicagoans that are in the 
Agriculture Committee. But I am proud to be on the Agriculture 
Committee from the First District of Illinois in the City of 
Chicago. And Chicago still has the leadership for the nation 
and the world in this market in these derivative products. 
Anything on the horizon that you can see that would be a 
challenge or what we can do as regulators to make sure that we 
keep this great financial piece of architecture in the City of 
Chicago, more importantly, in the United States, that we 
continue to have the edge, if you will, on this open market 
with securitization and transparency and liquidity?
    Mr. Sammann. Yes, we absolutely support the engagement we 
have with the CFTC. As we have talked about tangentially, but I 
just want to say directly, coming through Dodd-Frank, speaking 
from an exchange point of view, we were concerned that coming 
out of the financial crisis of 2008 and 2009 that with the U.S. 
regulatory jurisdiction going first and what looked like a 
significant lift and change to how margin practices and how 
businesses are run, we thought that there was a real danger 
that that would push markets out into less well-regulated 
jurisdictions and outside of the U.S.
    In the reality how it worked out is Dodd-Frank was the 
first to be minted to the point that you have heard from all of 
us today and in our testimony, market participants need 
determinism. They need to know the governance of the clearing 
firms and the clearinghouses and the exchanges on which they 
operate. So when something happens, they know the rulebook says 
it is going to do this. That is, coming back to the standing 
Chairman's point, did not exist in the LME, kind of made up 
rules on the fly.
    So I think to answer your question directly, the most 
important thing we can do to maintain leadership in the global 
derivatives industry to make sure that markets trade on CFTC-
regulated markets that are represented across this panel here 
today, well-regulated markets continue to partner with the 
industry and with the providers through FIA, through the 
exchanges, through the clearinghouses and the Commission 
through commitments, to make sure that we are listening to 
customers, we are being innovative in how we develop and 
advance our markets in light of what is certainly not a 
decreased amount of risk in the world. Energy transition is 
tangential to what we talked about today, but it impacts 
everything. So we think that is an important part to get in 
front of. So thank you for your support, and hopefully, that 
answered your question.
    Mr. Jackson of Illinois. Thank you for your participation 
and all of the witnesses that gave testimony today. I think 
someone is knocking on the door.
    Mr. Johnson. Thank you, Mr. Jackson.
    Mr. Mann will be followed by Mr. Casar.
    Mr. Mann. Thank you, Chairman Johnson. Thank you all for 
being here this morning. I represent the First District of 
Kansas, which is about \2/3\ of our state, one of the biggest 
ag-producing districts in the country. My district is about the 
same size as Illinois, which is large for some, small compared 
to Dusty Johnson's district of South Dakota.
    But, we grow a lot of beef, number one wheat producer in 
the country, number one sorghum producer in the country. I am 
constantly viewing all these issues through the eyes of our ag 
producers, making sure that these markets function for the 
folks that are growing these crops.
    First question would be for you, Mr. Gelchie. I understand 
when you started off with your company, you came to Kansas and 
were auditing the grain levels in some of our elevators. How 
would you say what you do today impacts producers in Kansas and 
throughout this country? And explain the important role that 
your company plays in these markets and everyone's interest in 
making sure all these markets are functioning effectively?
    Mr. Gelchie. Sure. Thank you, Congressman. Again, what I 
would say is Louis Dreyfus harmonizes the very different needs 
of its customers. I had mentioned earlier as to the fact that 
we have buyers, sellers that we transact with on a variety of 
different agricultural products on a minute-by-minute basis, 
right, whether that is at our production facility in Claypool 
or at our ethanol facility in Grand Junction, for example. But 
also from a global standpoint, as these markets are global, we 
have producers from Brazil that may be hedging through and 
selling us cash contracts that we in turn hedge into the 
futures markets.
    So what I think our role, if you will, is to provide them 
with the services, understanding of what is happening in our 
view in terms of the underlying markets that are most 
interesting to them to give them the information they need to 
hedge and price effectively. And then at the same time, we 
warehouse much of that risk in our book as a hedger. And so we 
are perpetually getting in and out of these derivatives markets 
as a result of the transactions that our group is involved in.
    Mr. Mann. And then if you could speak to speculation a 
little bit, in your testimony you discussed the importance of 
speculators in the market. Can you elaborate on why you believe 
speculators are important to a healthy market and how that 
impacts our ag producers all over the country?
    Mr. Gelchie. Yes, thank you. Again, it is our view that in 
order to encourage deep and robust markets that speculation is 
a required element of the market. As a hedger, we often rely 
also on that speculative activity to provide enough volume for 
us to hedge into those markets. So in our view, the necessity 
of the speculator, provided that they are managed appropriately 
by the exchanges, vis-a-vis position limits, is a crucial part 
to market participation.
    Mr. Mann. Yes, I agree. And I think it is an important 
thing that we have to keep bringing up and making sure that 
everyone involved understands their important role.
    Next question would be for you, Ms. Crighton. In your 
testimony, you mentioned forthcoming revisions to the bank 
capital standards. Can you elaborate more on the interaction 
between capital standards and access to clearing services and 
what you kind of see happening here moving forward?
    Ms. Crighton. Sure. We think bank capital standards have a 
direct impact on the amount of clearing capacity that clearing 
members can provide. The more punitive those capital standards 
are, the less ability clearing members have to potentially 
provide much needed capacity to end-users and other investors.
    As we think forward, and we know there are new phases of 
the Basel rules coming, we would encourage policymakers and 
regulators to ensure that bank capital rules don't become even 
more punitive to banks. Otherwise, that will impact their 
ability to provide capacity.
    Mr. Mann. Great, thank you.
    One last quick question for you, Mr. Edmonds. How can we 
best anticipate and manage the emerging risks to cleared 
markets? What is the best way in your view that we look ahead? 
It is easy to look back. How do we anticipate what is coming 
down and how we manage that risk?
    Mr. Edmonds. Well, we look around every corner, right? I 
mean, ultimately, at the end of the day, that is our job to 
make sure that we are prepared for as many things defined, as 
Mr. Johnson was asking earlier about, what are we looking for, 
it can be anything that impacts the price. It can be 
regulation, it can be the lack of regulation, it can be 
disruption in shipping lines, it could be cyber, as we have 
learned as an industry over the past month or so. All of those 
things have an impact that we have to be prepared for, and we 
are never going to know everything, but we have to let people 
know how we are going to behave when something unknown is 
staring us in the face.
    Mr. Mann. Great. Thank you. With that, Mr. Chairman, I 
yield back.
    The Chairman [presiding.] I thank the gentleman. I am now 
pleased to recognize the gentleman, Mr. Casar, for 5 minutes.
    Mr. Casar. Thank you, Mr. Chairman. I am still getting used 
to this microphone.
    So egg prices, as we know, have doubled for consumers in 
the course of about a year, going from $1.78 in December of 
2021 to $4.25 in 2022 for a dozen eggs. And the production and 
distribution of eggs, as we know, is dominated by just a 
handful of companies. The Big Four meatpacking corporations 
control, as we heard in recent testimony, about 85 percent of 
the beef market. Beef prices are up by double digits, and these 
company's net profits have increased considerably, potentially 
by over 300 percent through the course of the pandemic. In my 
view, it is up to us to help working families and to set up an 
economy that works for small businesses and agriculture, not 
just the big guys.
    So, Mr. Berkovitz, my question is for you, sir. Thanks so 
much for your service and for your testimony. We have heard a 
lot and talked a lot about in this Committee and others about 
Russia's war on Ukraine and its contribution to inflation, 
supply chains, the pandemic, but haven't heard as much about 
how anticompetitive practices and market consolidation also 
contribute to the volatilities that we have seen for consumers 
and in commodities markets. So in your view, to what extent 
does market consolidation contribute to those price increases 
and to market volatility?
    Mr. Berkovitz. Thank you, Congressman. I can't really 
separate out that component in terms of all the factors that 
you have mentioned in terms of the risks and whether indeed--I 
wouldn't be the appropriate person to say exactly what that 
impact would have been, particularly in light of all the other 
factors that have contributed to the price.
    But each one of these components itself contributes to a 
certain degree, and that is why the markets exist. To say, 
well, there is a whole world of risk out there. I am a small 
business, I am a small farmer, I might not have all these 
tools, but if I can access a market and I can go on a futures 
market and get certainty as to what price I am going to get for 
my product, then I am going to go on the market and lock in 
that price.
    Mr. Casar. Understood. And I appreciate that is part of the 
mission of the CFTC, as you so perfectly put in your testimony, 
that the mission is the integrity of those commodity markets, 
to prevent manipulation, and promote fair competition amongst 
market participants. I saw in your testimony--good work--and 
conversation about regulating rampant speculation, regulating 
against fraud. But in your view, does the CFTC have a mandate 
to think about competition when they are trying to achieve that 
mission of making sure there is fairness amongst market 
participants? So do you think that there is a mandate to better 
regulate competition in those markets?
    Mr. Berkovitz. Competition in terms of the services we are 
talking about in terms of access to the market and getting 
access to the market and clearing--there are multiple 
clearinghouses, there are multiple exchanges, there are 
multiple futures commission merchants, there are different 
people competing within the derivatives markets in the futures 
industry for customer business to provide services. The CFTC's 
mission and charge in the statute is to provide fair 
competition in the provision of those services. We are not a 
fair competition in terms of the Federal Trade Commission in 
terms of generalized economic competition in the economy.
    Mr. Casar. But when the underlying economic conditions have 
had such consolidation, do you not think that within the CFTC's 
mandate that should be something that you are ultimately----
    Mr. Berkovitz. Well, one of the things I was particularly 
concerned about is something that has been mentioned by other 
panelists here, consolidation in the futures commission 
merchant sector in terms of the availability of multiple 
futures commission merchants, particularly for farmers and the 
smaller traders. We have seen a large shrinkage in the number 
of FCMs over the past decade or so. The number continues to 
decrease. It hasn't been a particularly profitable business, so 
that is the type of competition that the CFTC should be focused 
on.
    In terms of whether there is too much consolidation in an 
industry like an airline industry or some other types of 
industries, that is not really the CFTC's mandate.
    Mr. Casar. Well, and I think there is a storied history to 
all of these agencies. There is a lot in the authorizing bills, 
and so it is something we would like to continue to dig in on 
the issues you have raised but some of those underlying issues 
where might we have the ability to stand up for some of these 
smaller businesses, smaller market participants to have a fair 
shake. Thank you. And I yield back my time. Made it right at 5.
    The Chairman. There you go, perfect. The gentleman yields 
back.
    Now, I am pleased to recognize the gentleman from Iowa, Mr. 
Feenstra for 5 minutes.
    Mr. Feenstra. Thank you, Chairman Thompson and Ranking 
Member Scott. And I want to thank our witnesses for being here 
today and discussing these important issues. They are very 
critical.
    In my district, the global commodity markets play a 
critical role in mitigating risk and providing certainty for 
our farmers, our producers, and obviously, our small 
businesses. And during periods of extreme volatility derivative 
markets provide predictability and allow our rural communities 
to prosper. It all goes together.
    So my question, Ms. Crighton, following the market 
disruptions we saw during the early days of the pandemic and 
Russia's invasion of Ukraine, end-users saw clearinghouse 
initial margin requirements rise significantly. Both events 
caused liquidity demands totaling over $100 billion for market 
participants. In order to hopefully lessen the severity for 
future liquidity crunches, do you think it makes sense for 
clearinghouse margins to be enhanced so that there are more 
robust and stable market cycles, both in the good times and the 
bad times?
    Ms. Crighton. Yes, thank you very much for the question. As 
I mentioned before, margin generally is something we spend a 
lot of time thinking about and discussing and as FIA working 
with the clearinghouses and suggesting different ways to 
improve the margin regimes.
    I think I will credit the CFTC's MRAC committee. Through 
that committee, originally under the sponsorship of then-
Commissioner Behnam, now under the sponsorship of Commissioner 
Johnson, we convened a group of clearinghouses, end-users, and 
FCMs to discuss topics under the guise of CCP risk and 
governance. One of the most critical topics we discussed in our 
view was margin, and we produced a paper that is in front of 
the CFTC now. We are hoping that we will have further 
consideration as we get through the governance proposals that 
they have moved forward.
    To your point specifically on the large and dramatic 
increases in margin, it is something that we do worry about. We 
think it increases costs to end-users. We think it creates a 
destabilizing effect, ultimately having the potential for 
systemic risk, right? In times of low volatility, we think 
margin levels decrease, and they ultimately end up too low. In 
times of high volatility, margin rates ultimately end up 
needing to chase the risk, becoming incredibly high, increasing 
short-term funding demands on clients. As you have multiple 
end-users and clients looking to source those same short-term 
liquidity, it increases costs for end-users across the board.
    So what we want to do is we are encouraging for the 
introduction of floors, the constant reevaluation for the CCPs 
that do have them in place so margin levels can't go too low in 
times of low volatility. It sort of mutes the impact when the 
margin increases need to chase that risk up and we think 
creates a more stable funding environment for end-users.
    Mr. Feenstra. So for the CFTC, I mean, what do you think--
your paper that was sent to them, when do you think we will 
hear from them? Have they given you any information that or----
    Ms. Crighton. We are hoping for the second half of this 
year. We had provided some recommendations from a governance 
standpoint, that, and we had also provided rule text in that 
regard. That is being considered by the CFTC for vote on those 
rule proposals shortly. We hope once that moves through, then 
we can focus as a group on the margin recommendations that were 
made. So we are hoping for the second half of this year.
    Mr. Feenstra. Thank you, Ms. Crighton.
    Ms. Crighton. Thank you.
    Mr. Feenstra. Very valuable. I have a quick question for 
Mr. Gelchie. In your testimony, you discussed the limited 
availability of the dollar currency exchange. Can you quickly 
expand on that point and how it impacts your ability to manage 
your business?
    Mr. Gelchie. Sure, thank you, Congressman.
    It strengthened the U.S. dollar, but relative to interest 
rates here have actually created a void of dollars overseas 
with respect to end-users. So from that standpoint, it has made 
it a bit challenging for some users overseas of the U.S. 
products in terms of opening up letters of credit, for example. 
So that in and of itself has been one of the challenges that we 
have faced as a result of perhaps an accelerated interest rate 
increase. That is right, yes.
    Mr. Feenstra. Thank you.
    Ms. Crighton, just one more question. I have 40 seconds 
left. A recent survey by the Committee on Payments and Market 
Infrastructures indicated that only around 20 percent of the 
clearinghouse provides tools for end-users to estimate how 
their margin requirements could change during periods of market 
volatility. I am going back to this. Can you speak more about 
the possible solution clearinghouses could make to enhance the 
transparency of margin requirements to help farmers and 
ranchers and other users better prepare for these future stress 
events? Ms. Crighton?
    Ms. Crighton. Apologies. I wasn't sure if that was for Mr. 
Edmonds. Yes, we do think tools from clearinghouses would be 
helpful, web-based tools, information that is provided to the 
clearing members to be able to then share with their end-users 
and clients. We think there are a number of different ways that 
that information can be disseminated through the system. We 
think the education needs to happen. The transparency needs to 
happen up-front rather than through disclosures that happen 
multiple months or quarters behind.
    Mr. Feenstra. That is right. Thank you so much, Ms. 
Crighton.
    Ms. Crighton. Thank you.
    Mr. Sammann. Can I just add one thing to that very quickly?
    Mr. Feenstra. Sure.
    Mr. Sammann. I know the question came how can you sort of 
get an assessment for that margin requirement, just to be 
clear, at least on the CME Group side, we have a tool to allow 
customers to upload a portfolio that will calculate the margin. 
This is a pre-trade tool because margin has become an important 
part in cost of capital, as you talked about today.
    Mr. Feenstra. Right.
    Mr. Sammann. It is making everything more expensive. So 
from a transparency point of view, enable customers to upload 
portfolios that they might trade and say this is what the 
margin requirement would be.
    Now, in terms of forward-looking how that might change, 
that is less clear, but in terms of the ability to have an 
assessment, this is the margin that would be required to carry 
this sort of position. Those tools exist. And that is an 
important pre-trade risk decision that customers have access 
to.
    Mr. Feenstra. Significant. Glad to hear that. Thank you, 
and I yield back.
    The Chairman. I thank the gentleman.
    Now, I am pleased to recognize the gentleman from 
California, Mr. Carbajal, for 5 minutes.
    Mr. Carbajal. Thank you, Mr. Chairman. And thank you to all 
the witnesses being here today.
    Mr. Berkovitz, you mentioned that some of the events 
leading to market volatility could not have been predicted like 
COVID and Russia's war in Ukraine. Could you speak to what 
extent you have seen the volatility in agricultural commodity 
markets impact farmers' and producers' ability to use the 
derivatives market for price risk management?
    Mr. Berkovitz. Thank you, Congressman. I think one of the 
items that has been mentioned by a number of panelists is the 
margin requirements, the certainty of margin requirements, but 
also the level of margin requirements as volatility goes up and 
prices go up. These margin requirements, which is how much 
money you have to put up when you place a trade, increases and 
therefore makes the cost of hedging more expensive. So the time 
you need the hedging the most, the price increases, which makes 
it even more difficult to use these risk management tools. So I 
think that is the primary concern that I have heard regarding 
margin and prices.
    Now, generally, it is also talked about, it is a fairly 
sophisticated market. These tools, it takes a fair degree of 
sophistication to use them, so there needs to be, also has been 
discussed, an educational effort to make sure that the market 
participants and farmers know what the advantages of the tools 
are and know how the tools can benefit them.
    Mr. Carbajal. And how do you think we could expand that 
education?
    Mr. Berkovitz. Well, I think market participants have a 
function in that, and CFTC has a component. If you look at the 
CFTC's website, it has educational materials on the markets. So 
I think it is a combined effort to make CFTC transparency and 
benefits but also the industry and I know the exchanges and the 
brokers, the futures commission merchants also have a program 
to do that as well.
    Mr. Carbajal. Thank you. In your testimony, you spoke to 
systemic risks and the tools we have in place to avoid them. 
Could you elaborate further on the nature of these systemic 
risks and the barriers to their mitigation?
    Mr. Berkovitz. Well, there are a number of risks, and one 
of the critical functions of the markets and the other 
witnesses at the table is the system that we have of clearing. 
So when you put on a trade, the clearinghouse, your trade 
actually of the counterparties is assumed by the clearinghouse. 
So it is basically guaranteed. And we have a system of futures 
commission merchants that if you are a farmer and you want to 
trade and you want to hedge your crop on the exchange, you go 
to a futures commission merchant, the futures commission 
merchant will trade on the exchange, the futures commission 
merchant will post margin and then collect the margin from you, 
the farmer. So at the clearinghouse is all the funds deposited 
by the futures commission merchants and ultimately, the 
customers, and it is guaranteed by the futures commission 
merchants, and that has been discussed also. So all the trades 
on the clearinghouse are guaranteed.
    Now, in extreme market events when people are stressed and 
there is a lot of stress in the system and possibly there might 
be adverse price movements that somebody might default on, that 
places stress on other members. And in times of extreme stress 
when many people are stressed, then other people have to put up 
money for the defaulted trades, and that creates systemic risks 
because it is the system. Somebody has got to pay for it, and 
if it is a very large market participant that fails, then other 
people have to put up a large amount of money for it.
    So those types of systemic risks and these extreme events 
where a lot of people are losing money and other people might 
have to cover the trades, those are the types of systemic risks 
that the regulatory system is concerned about and has all sorts 
of mechanisms to prevent those buildups and all sorts of 
mechanisms to ensure that there is trade on the performance 
because the last thing you want is a domino effect where 
failure of one person means another person fails and their 
failure means another person, and that is a systemic failure.
    So we have built up a system that was strengthened by the 
Dodd-Frank Act to prevent those types of consecutive or 
multiple failures. But nonetheless, we are always looking at it 
and always looking for ways because each time there has been a 
failure, each time there has been a systemic risk, it hasn't 
been anticipated before. So we are trying to anticipate the 
unanticipated and build robustness in the system and always 
have to look and see whether it can be improved.
    Mr. Carbajal. Thank you, Mr. Chairman. I yield back a whole 
6 seconds.
    Mr. Baird [presiding.] Thank you for your testimony, and I 
appreciate all the witnesses being here. Mr. Moore, I think you 
are up next.
    Mr. Moore. Thank you, Mr. Chairman.
    Mr. Sammann, energy prices are important to families and 
businesses in my district. How have the disruptions from COVID 
and the Russian invasion impacted American energy policies? 
That is pretty broad.
    Mr. Sammann. I am sorry. Can you repeat the question?
    Mr. Moore. Yes. That is pretty broad. So how has the war in 
Russia and COVID-19 impacted American energy prices? You can 
talk about policy as well, but I would like to hear your take.
    Mr. Sammann. Yes. So I will take a stab at that. Chris, you 
can take a stab at that. We talk to customers every day about 
what rising prices, what rising interest rates, what change in 
value of the dollar means for our customers. There are so many 
ways in which the U.S. economy and users and, frankly, the 
infrastructure is impacted by this, number one. And certainly, 
Mr. Edmonds can talk about this. With Russian crude oil and gas 
coming off the global market due to sanctions, that 
fundamentally has shifted the physical flows of crude oil. Now 
the U.S. exported, I believe, a record for 4.1 million barrels 
a day of U.S.-sourced WTI out of the U.S. just last month. 
Natural gas sourced here in the U.S. is being exported at 
record capacity right now only limited by the LNG facilities to 
liquefy and ship that gas out to Europe and Asia as that market 
has lost its ability to import piped gas from Russia. So you 
have some structural shifts in the global energy market. You 
have crude oil coming out of the Gulf and Saudi Arabia, which 
that takes on a very vastly different important impact, given 
the fact that oil can't go from Russia into so many other 
sanctioned countries right now.
    So you have a structural shift in energy markets, you have 
had a significant impact, which initially drove energy prices 
up, well, energy is an input cost to almost everything. We 
talked about the impact of fertilizer, the impact of farmers 
running diesel in your tractors, what we pay at the pump, what 
we pay at the store for bread. It has impacted almost 
everything. It is integrated into the risk that we engage in 
our lives. So that war has impacted, taken 25 percent of the 
global wheat off the market. You have sunflower oil and 
rapeseed oil not coming out of the Black Sea. So it impacts us 
in so many ways.
    The one thing that I would say is the biggest impact is the 
structural change in global flows of energy, particularly crude 
oil and natural gas. And as I think Mr. Edmonds mentioned 
before, there are some decisions around infrastructure here in 
the U.S. that will impact those decisions and what that looks 
like over time.
    Mr. Moore. Yes, input costs in the data--and my cousin is 
trying to start. He is a young farmer. And he told me, I asked 
him, I said, how is it going, Garrett? And he said, well, he 
said I budgeted for $3.31 a gallon diesel fuel when I was 
starting, and he said that certainly--he is missing a number. I 
had a great crop but no profit at the bottom end.
    Mr. Edmonds, do you want to touch on any input that we 
missed on----
    Mr. Edmonds. The input is the point that we have made. I 
mean, the margin, all of what Mr. Sammann just said creates 
volatility, margins go up. It is not just the clearinghouses 
that were represented here that are the margin. It is also the 
clearing members. The clearing members also from time to time, 
based on their risk profile, maybe of your cousin, maybe of 
other participants that are out there make their own credit 
decision, and they add on top of that. So as margins increase 
because of the general market volatility, so does the review 
the clearing members put on there. So there are constraints on 
that, but we have to react to what is out there because what 
you don't want is us sitting in front of you explaining why we 
didn't execute our rulebook and there has been a large systemic 
issue that Mr. Berkovitz just explained in the previous 
question.
    Mr. Moore. Mr. Edmonds, to follow up, I had a question I 
wanted to address to you. How can we best anticipate and manage 
emerging risks in cleared markets?
    Mr. Edmonds. Well, we have to learn from our history, A. We 
have to make sure that our models take into consideration 
things that we have observed in the history. We also have to 
make sure that we are doing an appropriate level of discounting 
of some of those events that, because of regulatory changes, 
are unlikely to happen again. It is not zero, but instead of it 
happening every day and impacting the price and margin every 
single day, we might discount that because we learn from the 
past. We put that into the go forward look at it, as Ms. 
Crighton referenced earlier.
    So we are not going to anticipate everything, but what we 
can do is be crystal clear of when something like that happens, 
how we are going to respond to it. And I think that becomes the 
most critical point of it, of how we respond to the unknown 
that is now coming and staring us in the face.
    Mr. Moore. Thank you. Mr. Sammann, do you want to follow 
up?
    Mr. Sammann. I will just add one more thing. We have talked 
a lot about margin here today, and I think what we haven't 
differentiated is initial margin, which is the amount of 
collateral you put up to carry against taking on a derivative 
position, and variation margin. And to be very, very clear, if 
you look at the variation margin that flows, the variation 
margin is the value that is exchanged between winning positions 
and losing positions every day. That is a daily mark-to-market. 
Now in the CME Group exchanges, it is twice a day mark-to-
market.
    So when we talk about margin going up, a portion of that, 
yes, is initial margin where, as volatility goes up, you expect 
as a Prudential Regulator or the Committee that oversees our 
Prudential Regulator, that we would require more collateral in 
the system, which is still a low percentage of face value of 
the overall contract value. But it is critical that we 
understand that variation margin, i.e., mark-to-market twice a 
day every single position, eliminates and pulls that systemic 
risk out of the system so enormous losses are not allowed to 
accrue. That is the danger of bilateral transactions, so we 
want to be very clear about initial margin. That is a 
conversation that we are going to have, but the variation 
margin is that daily mark-to-market. You want us to be doing 
that every single day to make winners whole and make losers 
pony up more funds to make sure they are making whole on the 
other side.
    Mr. Moore. Thank you. I am out of time. I appreciate the 
panel being here. You all are one of the best I have heard in a 
while. Thank you. I yield back, Mr. Chairman.
    Mr. Baird. Thank you. And the gentlelady from Connecticut, 
Representative Hayes, is up next.
    Mrs. Hayes. Thank you, Mr. Chairman. And I know that 
Chairman Thompson left, but I do want to note that I 
appreciated the way that he used his time in today's hearing. 
It was very helpful for me. Thank you, Ranking Member Scott, 
for holding this very important hearing and to all the 
witnesses who are testifying today.
    A 2020 study by USDA's Economic Research Services found 
that small farms with less than $350,000 in gross cash farm 
income are less likely to use futures or option contracts in 
their businesses. Small farms account for 89 percent of the 
farms in the United States and 93 percent of the farms in my 
district in Connecticut. My district's small farms and dairies 
are particularly susceptible to market volatility and rely on 
robust and well-regulated commodity markets to keep their 
businesses afloat. But unfortunately, the Commodity Futures 
Trading Commission, the agency tasked with overseeing this 
activity, has not been fully authorized in over 10 years.
    Ms. Crighton, in your testimony, you pointed to 
international events which contributed to market volatility 
like the Russian invasion of Ukraine and the volatility of 
nickel on the London Metals Exchange. You went on to mention 
several instances where CFTC led the way to risk controls and 
market transparency. In 2013, when the last long-term 
authorization of the CFTC lapsed, the Futures Industry 
Association submitted a letter to the Senate Agriculture 
Committee making recommendations for the reauthorization. In 
your view, has the CFTC had the necessary tools to be an 
effective global leader? And is a full reauthorization 
necessary to update their authority? And before you start your 
answer, just congratulations on being the lone woman on that 
panel.
    Ms. Crighton. Thank you very much, and I appreciate the 
question. I will answer it in two parts, one for the topics 
that we have talked about today. We actually think the CFTC is 
fully authorized to interact all the topics and the issues that 
we raised. Consistent with the letter that FIA filed in 2013, 
FIA fully supports the reauthorization of the CFTC. But thank 
you again for the question and the congratulations.
    Mrs. Hayes. Thank you. Mr. Gelchie, what impact does global 
commodity volatility have on smaller producers that may not 
directly interact with futures or options contracts? And do you 
agree that properly updated practices protect everyone in the 
agricultural sector?
    Mr. Gelchie. Congresswoman, thank you for the question. I 
think first, to your point in terms of small farmers' access to 
futures markets, that also is perhaps a service that Louis 
Dreyfus has provided to those farmers. To that point, I mean, I 
think some of the inputs that we get from small farmers is that 
hedging and/or having positions with FCMs is expensive and it 
does require cash management. And from our standpoint, we feel 
that we have been essentially that shock absorber to that 
community.
    Mrs. Hayes. Thank you. And I think that is why I noted my 
appreciation for Chairman Thompson's comments. Much of what we 
are talking about is very high level, but somebody has to 
advocate for the little guy. And we have to make sure that the 
work that we are doing goes all the way down and reaches those 
93 percent of farmers in my district.
    It looks like you want to--go ahead.
    Mr. Sammann. I just want to add a quick point. So this has 
been raised two or three times. I have been remiss in not 
saying this before, but you make a really, really good point.
    Mrs. Hayes. Well, thank you.
    Mr. Sammann. There are a number of small ranchers and 
farmers out there that don't have access to the wholesale 
market. So one of the things we do, we try to meet the needs of 
all of our customers, especially farmers, ranchers, small 
family farmers. We have partnered with land-grant universities, 
agricultural trade associations, regional introducing brokers, 
those intermediaries, co-ops to get education, training, 
understanding. We send our agricultural sales team out to 4-H 
club and every state fair to get the word out. It is such a 
dispersed group of users, so we have to go through not just our 
own channels but sort of those institutional sales channels and 
access points to make sure that there is an understanding for 
these tools being available and how do we connect those end-
users.
    So it is a great point that I am sorry I hadn't said it 
before, but I just didn't want to miss that opportunity to talk 
about the ways that we are using our own sales efforts that 
connect with those folks to connect them with the markets.
    Mrs. Hayes. You just said 4-H clubs. You are speaking my 
love language. But I really do appreciate that because it is 
one of my priorities as we go into the next farm bill to make 
sure that farmers at every level of the sector, all markets get 
the benefit of the work that we do here and that we are 
intentional in the way that we legislate to make sure that the 
impact is felt across the whole agricultural sector.
    I have another question. I have 3 seconds. I want to be a 
good student, so I am going to submit it for the record and 
look forward to hearing a response to that. Thank you Mr. 
Chairman. I yield back.
    Mr. Baird. Thank you, Madam Hayes, and I appreciate you 
being here with us today.
    Next up is Mr. Rose, Representative John Rose from 
Tennessee.
    Mr. Rose. Thank you very much, Mr. Chairman. Thanks, 
Chairman Thompson and Ranking Member Scott, for holding this 
important hearing, and thanks to our witnesses for your 
valuable time today.
    Mr. Berkovitz, the U.S. is unique in that we have separate 
securities and derivatives regulators. Do you think that having 
separate regulators promotes market efficiencies?
    Mr. Berkovitz. Historically, the reason we have separate 
markets is because the commodity futures markets started in 
agriculture with agricultural commodities and then securities 
market developed differently. I think the system we have here 
actually is very beneficial to our capital markets and promotes 
both our securities and our commodity markets. I have worked at 
both agencies. Both agencies are excellent agencies. Maybe if 
we were starting out historically, had a clean slate, you might 
put them both in the same agency, it would make sense from an 
academic point of view, but I think as things have developed 
and as things as they are now, I think the system is working 
very well. I think each agency is doing its mission, and I 
think that having a separate CFTC gives the prominence and 
attention to the derivative markets that it deserves and the 
farm communities and the importance of these markets to the 
farmers and ranchers and agricultural sector is reflected in 
that there is an agency, the Commodity Futures Trading 
Commission, whose mission is to ensure that their interests and 
the markets are fair and working for them. I think if you 
combined both agencies and had one big agency, that mission may 
not be as important as it is in the CFTC's mission right now.
    I think the proof is also in the pudding is we have the 
strongest and most liquid and safest capital formation 
requirements globally, and we have the strongest, most liquid, 
most efficient price discovery and risk management markets in 
the world. This country and our markets are the leader globally 
both on the derivatives side, on the securities side, and it is 
due both to the market participants, but it is also to the 
strength of the regulatory system. So I think our regulatory 
system is actually very effective and enabled this country to 
be a leader in all those markets.
    Mr. Rose. Thank you. And I am curious about the opinions of 
the other witnesses on the panel. So if you might just go from 
my left, your right across, combined or separate, one word 
answer.
    Mr. Gelchie. I would agree with his statement.
    Mr. Sammann. Remain separate.
    Ms. Crighton. I would defer to Congress on that.
    Mr. Edmonds. I will go with separate.
    Mr. Rose. All right. Thank you very much. One of the major 
themes of this hearing are the risks of black swan events to 
the global derivatives markets. I would like to ask each of 
you, are there any unlikely but plausible black swan events 
that could pose a systemic risk to the global financial system 
that any of you are worried about but that have not yet been 
raised in this hearing today? And again, we will start on the 
left, and you can go across with the limited time we have.
    Mr. Gelchie. I would just say continued and increased 
geopolitical tensions.
    Mr. Sammann. Yes, I am not in the habit of being good about 
figuring out the unknown unknowns. However, I would say 
something that we haven't really talked about today is cyber 
risk, and that is something that I know that we all are 
cognizant of, and it is an industry body issue. It is an 
individual firm issue. Every one of us faces that at a personal 
level and on a corporate level, so that is one that it is a 
known unknown, and I think that is something that is 
systemically important to us. And I think we have working 
groups across our industry, as well as with the government as 
well to do the best we can to prepare for if and when that 
happens.
    Ms. Crighton. Two items I will touch on, one is clearly 
cyber. I think Mr. Sammann said it well. The other is really 
the systemic risk that we think a large default or other market 
destabilizing event at a clearinghouse would have on the 
ecosystem at large. I referenced Mr. Berkovitz's comments as 
well in that regard. I think that is something that is worthy 
of more exploration and discussion.
    Mr. Edmonds. We are all going to say cyber, but I am going 
to tell you that because of the global nature of our markets 
and the interconnectedness of the players in these markets that 
we have today, inconsistent regulation that is out of scope is 
a big unknown that you don't know how other regulators are 
going to react in a moment of stress.
    Mr. Rose. I have other questions, but in view of the time 
remaining, I might just end by saying I know by definition I am 
asking you to think about the unknown unknowns, but I would 
just ask you all to go back and contemplate that and share with 
us anything that we might be missing that comes to mind.\4\
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    \4\ Editor's note: the responses to the information referred to are 
located: for Mr. Gelchie, on p. 82; Mr. Sammann, on p. 83; Ms. 
Crighton, on p. 84; Mr. Edmonds, on p. 84; and Mr. Berovitz, on p. 85.
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    Thank you, and I yield back.
    Mr. Baird. Thank you. The gentleman yields back.
    And next up, we have the gentleman from Georgia, 
Representative Bishop.
    Mr. Bishop. Thank you very much, Mr. Chairman. I apologize 
for my tardiness in getting to the hearing. I want to, again, 
welcome the witnesses and thank you for your contribution to 
this very important discussion.
    Market volatility obviously is something that affects all 
of agricultural production and products, and I would just like 
to--as you talk about the risk management that accrues to all 
of our producers across the world but particularly here in 
America, and as we lean into our preparation for the next farm 
bill, I would like to ask each of you from your perspectives, 
and you, of course, at the high level, but as we focus on the 
farm bill and the safety net for American farmers and how the 
farm bill will ultimately impact the global market in 
agriculture, if you could just reflect quickly on what we need 
to really focus on in the farm bill in terms of the ag 
marketing services, its management, Farm Credit in order to 
have the safety net built into our farm bill and our 
preparations going forward. What do you think we need to make 
sure that we take into account from your perspective, each of 
you, if you would?
    Mr. Gelchie. Thank you, Congressman. I would say, first, 
support prices and stability in terms of, again, understanding 
what the rules look like in that farm bill, right? That, to me, 
is the most important thing that you can communicate in the 
farm bill.
    Mr. Sammann. I will specifically talk about some of the 
pieces around the strengthening of the USDA. There are a number 
of reports and ways in which our grain markets, our livestock 
markets, and our dairy markets rely on reporting functions 
inside the USDA, so it is important that continues to be robust 
and is funded, to make sure that our markets that use those as 
inputs into settlement prices and the daily price element are 
continuing to be funded and supported.
    Ms. Crighton. Thank you for the question. I think for us 
from a clearing member perspective, given the importance of 
cleared derivatives markets in risk management, price 
discovery, certainty of access to those risk management 
functions is critical, so ensuring capacity is available to 
farmers, end-users, and ensuring the resilience and stability 
of exchanges and cleared markets.
    Mr. Edmonds. I would say education, making sure that there 
is a component within there that is educating the potential 
users of the product and those who use the product today. We 
all do what we can individually, but understanding how that 
goes within the policy objectives contained in the bill will be 
massively important.
    Mr. Berkovitz. Thank you, Congressman. And from my 
perspective as someone who has worked with the CFTC and the 
Agriculture Committee for many years, I am just very encouraged 
by the statements today by Committee Members about the 
importance of CFTC reauthorization. The CFTC can legally 
operate without it, but it is so important that it get its 
direction from Congress and any fine tuning. But when I was at 
the Commission, we sent up a number of legislative proposals to 
fine tune the Commodity Exchange Act. I leave it to the current 
CFTC as to whether they have any of those that they are going 
to propose, but to the extent they believe those would be 
helpful, that would be really helpful as well.
    Mr. Bishop. Thank you. I am not going to belabor the point, 
but I was interested to know from your perspectives what you 
thought we needed to do so that, through the farm bill, we 
could help to reduce the market volatility of which we have 
been discussing all day. So thank you very much.
    I yield back, Mr. Chairman.
    Mr. Baird. Thank you. The gentleman yields back.
    And next up we have the gentleman from New York, 
Representative Langworthy.
    Mr. Langworthy. Thank you, Mr. Chairman. And thank you very 
much for all of our witnesses for your testimony here today and 
taking the time to be with us.
    Global commodity markets play an important role in risk 
management on the farm, and whether it is producers using 
hedging or other risk management strategies directly or through 
their co-op or other input suppliers or buyers of the 
commodities that they produce, being able to mitigate the price 
risk for their inputs and what they produce is critically 
important, given the tight margins in the volatile markets.
    Commodity price risk management is also important for our 
food processors and our manufacturers, and commodity markets 
are really the underpinning for these activities, so it is 
important that they are reliable and they are transparent.
    While beyond the scope of today's hearings, I really hope 
that what we have heard today will inform us as we move forward 
in our work on the farm bill for the next 5 years. It is, we 
think, in the future direction of the programs that can help 
producers mitigate the prices in the production risk.
    And with that, Mr. Sammann, one insurance product that 
provides price protection for some dairy farmers in my district 
is the Dairy Revenue Protection product, which is linked to the 
futures price of the dairy products traded on the CME. Given 
that dairy doesn't have the history that grains and oilseeds 
have on the futures market or the volume traded, what is your 
long-term view of dairy products on the CME, and what can be 
done to ensure that it is a stable, reliable market to ensure 
that they can continue to play a part in risk management for 
dairy producers and dairy processors?
    Mr. Sammann. Yes, no, terrific question, Congressman. Thank 
you for that. Dairy is an important part of our business. It is 
not the biggest part of our business. It is smaller than 
livestock, a lot smaller than grains and oilseeds, but it is 
still an important part of the service we provide.
    We continue to evolve the transparency, access, and price 
provision in dairy markets, whether it is in the cheese market 
or in the other parts of dairy, milk, for example. We have 
actually migrated that price provision platform from what used 
to be a PIP-traded platform now to a platform-based on what is 
called Elysian technology within CME Group. So that is an 
auction process, so there is clear, open, transparent mechanism 
for setting that price, seeing that price.
    As I mentioned before to the question about what the farm 
bill could do, reauthorizing the USDA, making sure that is 
robust so it connects our dairy market, which have struggled 
setting the price of--85 percent of the price of cheese in the 
U.S. is based on our settlement price. So to the extent that it 
is an important part of our market, we continue to innovate and 
make it as transparent as possible, it is never going to be a 
market the size of even livestock, not to mention grains, 
oilseeds, or treasury bonds. But it is a critical component of 
price setting for the vast majority of cheese and dairy 
products that are sold in the U.S.
    So I am happy to go deeper with you and the groups that are 
looking for better understanding for how that auction process 
works, but we continue to evolve that, and we know electrifying 
that process, bringing more people into that price provision 
process and disseminating those prices as quickly as possible 
creates that very transparency and I think market trust that is 
critical to enable dairy producers to operate profitably.
    Mr. Langworthy. Thank you. Thank you. And in speaking with 
you, Mr. Sammann, how does crude oil in natural gases and input 
price play a direct and indirect role as it relates to 
agriculture production?
    Mr. Sammann. It is probably one of the bigger--other than 
fertilizer, it is one of the biggest changes and impacts to the 
cost base of every farmer, every consumer in America, frankly. 
This has been a wild ride. Natural gas, I believe Mr. Edmonds 
mentioned before, 8 months ago, we were knocking on the door of 
$9 an MMBtu here in U.S. natural gas, and now we are around to 
$2, $2.50 with some downward pricing pressure now. That was 
thanks largely to a very mild winter and well-supplied going 
into what was a scary moment of losing Russian flows into 
Europe. But I think the increase and now decrease as a tail 
effect that has whipped some folks, and that is hard.
    So markets can't mitigate all your risk, but market 
providers like CME Group and ICE can provide tools to help end-
users that are reliant on volatile pricing cost inputs to their 
business to at least mitigate price certainty around those 
things. And it has just been hard for everybody, and it has 
impacted the farmers themselves very drastically.
    Mr. Langworthy. Well, having had the opportunity to spend 
time in the district traveling to our farms in western New York 
and the southern tier counties along the Pennsylvania line, 
they are feeling those high prices, whether it be from rubber 
or fuel prices or transporting feed, operating farms. I mean, 
these things can't be any higher, and we have to do everything 
we can to get things under control.
    But I really thank you very much for your testimony, and, 
Mr. Chairman, I yield back.
    Mr. Baird. Thank you. The gentleman yields back.
    And the next individual we have is Representative Nunn from 
Iowa.
    Mr. Nunn. Thank you very much, Mr. Chairman. I appreciate 
it.
    Thank you very much for providing your testimony today and 
spending some time with the Agriculture Committee. This is 
going to be an exciting year for the farm bill. This is a 
bipartisan effort to really drive home where we can find 
relation the farm bill and ideally move forward a farm bill 
that will help all of our producers across the country.
    I represent Iowa's Third Congressional District, and we are 
proud to be the home of one of the leading producers of corn, 
soybean, egg, pork and I am a sheep-farming family, so a little 
bit of that as well.
    With respect to corn specifically in 2022, Iowa produced 
roughly 2.4 billion bushels, and this is seen as the nation's 
most valuable crop going forward. As each of you know, our 
farmers have faced several years of skyrocketing input costs, 
both to the grower, to the producer, and ultimately to families 
like mine with five girls and one 13 year old boy that really 
make things expensive. The global market volatility, the lack 
of competition, the consolidation, supply chain disruptions, 
and ongoing war in Eastern Europe, and the continued placement 
of increased strains on our producers that feed and fuel the 
world has taken a toll.
    You have mentioned this before, and so, Mr. Sammann, I 
would like to begin with you. As we move deeper into our farm 
bill discussions this year, what can Congress do to ensure that 
farmers have access to the tools that best protect them from a 
volatile commodities market and price risks? And further, how 
might our producers best access and utilize future markets for 
the purpose to manage these risks?
    Mr. Sammann. So great question. I think we have touched on 
this a little bit in different pieces. And this is why it is 
important that, as an industry, we come before you because we 
represent kind of the full ecosystem here, clearinghouses, 
exchanges, industry bodies, end-users. And I think that, 
relative to the farm bill piece, I mentioned some of the 
specifics, very granular on the USDA side. There are so many 
ways in which we are dependent on a fully functioning farm bill 
to make sure that our processes work and create price 
transparency and hedging tools available to all producers and 
end-users.
    I think Mr. Edmonds made a really good point, and I touched 
on this before. Education and access: CME Group has 3,600 
employees globally. We don't have enough to canvass every 
single co-op across the U.S., so we rely on intermediaries, 
regional co-ops in introducing brokers. As I mentioned, I am 
not kidding, we canvass state fairs and 4-H clubs and we hand 
out ribbons for prized heifers and things like that----
    Mr. Nunn. That is right.
    Mr. Sammann.--to make sure that people understand there is 
a connection between family farms and setting the wholesale 
price of that particular commodity, whether it is livestock, 
whether it is dairy, whether it is grain. So, we can't do that 
alone. We are simply not big enough, so we have worked through 
partnerships of intermediaries introducing brokers that are 
themselves not clearing members. They themselves use clearing 
members to get access to our markets, so it is a long chain of 
access and education.
    So I just, again, come back to the point that Mr. Edmonds 
said. It is very much down to educating people on both the 
benefits of hedging. And I think this is a case study of the 
last 2 years of why hedging can help manage some of these 
costs. Number two, how you access these markets, what it means 
to you. Even if you are not a direct consumer of trading 
futures and options on derivatives changes, how you can benefit 
from the transparency of standardized pricing so you know what 
your crop is worth because you have some basis of differential 
to a standardized crop. All of those pieces matter. And I think 
education, access is things that we work at but we can't do 
alone.
    So anyway, we would welcome a discussion where we could use 
that farm bill reauthorization and get that through to say we 
need troops of folks to go out there and educate and train and 
create more access. We would love to be a part of that 
conversation.
    Mr. Nunn. Thank you so much. I appreciate that.
    And, Ms. Crighton, for you, according to a recent survey by 
the Committee on Payments and Market Infrastructure, roughly 20 
percent of our clearinghouses provide tools for end-users to 
estimate how their margin requirements might change during a 
period of market volatility. So staying on the same theme, can 
you walk us through the possible solutions clearinghouses can 
take to enhance transparency of margins required for farmers, 
ranchers, and others to better help us prepare for future 
stress events?
    Ms. Crighton. Sure, thank you. Great question. Again, I 
think we talked a bit about this before, but I think to add a 
few points to the overall discussion, we think there are tools 
that certain exchanges and CCPs have that they provide to end-
users and customers to be able to model their margin. We think 
part of the benefit of what we can do on the forward is to be 
able to provide tools and more transparency about what happens 
during extremely volatile markets, right? How do margins move 
in order to be able to help them project what their funding 
needs are? That is what we think about when we risk manage our 
clients directly. We spend a lot of time educating them on what 
our risk models do, how they react during certain stresses so 
they can appropriately understand what are the guardrails and 
what is the funding that they need on hand to be able to 
adequately prepare for that. So I think web-based tools, 
interaction, and preparing clearing members and providing us 
with access to that information so we can then further educate 
clients, will be an important way to leverage the ecosystem and 
to be able to provide that education back.
    Mr. Nunn. That is wonderful. Thank you very much for being 
here today. I hope your farming season goes well.
    With that, Mr. Chairman, I yield back my time.
    The Chairman [presiding.] All right. The Ranking Member has 
an urgent conflict here, so I am going to ask him--we are kind 
of kind of jumping ahead, and then we will come back to 
Members. I recognize the Ranking Member for a closing 
statement.
    Mr. David Scott of Georgia. Yes. And first, thank you, Mr. 
Chairman, for giving me this opportunity. We have a group of 
veterans' organizations waiting on me, and we are putting 
together a great event to help our veterans who need help 
getting food and shelter. And so this is very important. Thank 
you so much, Mr. Chairman.
    I did not want to leave without saying thank you and let 
you know just how important your testimony has been. And I 
thank you, Mr. Chairman, for pulling this group together. They 
are very knowledgeable. Your insights have been brilliant, and 
you have opened many of our eyes because we have newer Members 
on board. Two aspects of derivatives are cross-border, and this 
burgeoning area, as I say to people, remind them, we are 
dealing with $810 trillion of the world's economy in our hands 
when we are dealing with derivatives and our swaps and using 
this as very much needed balancing act for risk management 
within a world that is full of surprise elements every day, 
every moment. Who would have thought that Putin and Russia 
would invade Ukraine? And who would have thought--and we are so 
grateful that Ukraine has had the willingness and determination 
to stand and fight back. But it has caused tremendous risk and 
tremendous challenges for our agriculture industry and the 
important role that derivatives and swaps played in it.
    So I want to thank you. And please know that, as we move 
forward with this farm bill, there may be some things that you 
can help us with. We want to receive that help because you all 
have a wealth of experience. And this is a very technical area. 
It is not one that is often plainly seen, so we need experts 
like you. I have worked with several of you for 20 years, the 
CFTC Chairman and others and ICE. And we also have Mr. Michael 
Gelchie, Group Chief Executive Officer of the Louis Dreyfus 
Company.
    Mr. Derek Sammann, Senior Manager, Director, Global Head of 
Commodities, Options, and International Markets, the CME Group. 
And make sure you tell your chief executive, Mr. Duffy, I said 
hello. He is the good man, Terrence Duffy, longtime friend.
    Ms. Alicia Crighton, let me join with the others. And it is 
very important that all of our women Members pointed out this 
historic moment. But let me also bring that congratulations to 
you from deep in my heart because for you to be the first woman 
on this burgeoning committee is very, very important.
    Mr. Christopher Edmonds, Chief Development Officer of ICE, 
another good partner. We have been together for over 21 years 
working with different things.
    And to you, Mr. Dan Berkovitz, former Commissioner, 
Commodity Futures Trading Commission, you heard this Committee 
say, and the Chairman, we are going to finally reauthorize the 
CFTC. And both sides of the aisle here are committed to getting 
that done, and we are going to do it. Thank you for your 
participation. God bless each and every one of you. And again, 
as I said, we have an open heart, an open mind, and open arms 
to receive your help with these challenges and the technical 
scientific progress we are dealing with in agriculture.
    Thank you.
    The Chairman. Well, I thank the Ranking Member and his 
partnership.
    I am now pleased to recognize the gentleman from Indiana, 
Mr. Baird, for 5 minutes.
    Mr. Baird. Thank you, Mr. Chairman. And, I really 
appreciate you and the Ranking Member putting together this 
Committee and this hearing. And I also appreciate, I am always 
impressed with the knowledge and the expertise that you as 
witnesses bring to this Committee and how important that is, 
and so I just want to say thank you for that.
    And then I only have--since I am getting toward the end of 
the questioning period, I only a couple of questions that may 
be a little different, so I will try to be brief because I am 
sure you are getting tired of answering questions.
    So my first one goes to Mr. Gelchie, and it deals with in a 
little different area. You mentioned the limited availability 
of U.S. dollar currency exchanges. Can you expand on that point 
just a little and tell us----
    Mr. Gelchie. Sure, Congressman, thank you. But, referring 
to the continued rate increase in the United States, we have 
continued to see currency fluctuations globally. Many of our 
customers in countries overseas have had difficulties opening 
up letters of credit recently. And as a result of having lack 
of access to dollars as a function of their own currencies, 
devaluing against the U.S. dollar, and that has created a bit 
of a concern relative to our ability to supply our customers 
but also for their ability to buy the grains that ultimately 
they need to feed their people.
    Mr. Baird. Thank you. Mr. Sammann, you mentioned a number 
of tools that are used by the exchange to maintain orderly 
markets, which I think is very important, including margin add-
ons, price limits, circuit breakers, and Velocity Logic. Would 
you care to elaborate on that? Because they are relatively new 
terms to me.
    Mr. Sammann. Yes, I will just touch on a couple of those. 
Position limits we talked about a little bit earlier, really 
important that we talk about the need to make sure that if you 
are an underlying hedger and you have a core exposure to an 
asset, whether it is a treasury bond or a kilo gold bar or a 
bushel of corn, end-users and those folks have larger position 
limits when they can prove that they have offsetting physical 
exposures. We have smaller position limits for speculators for 
the obvious reasons that we don't want them to have the 
outsized proportion. So that is an important kind of mechanism 
we use to make sure concentration risk on our margin is 
appropriate.
    Daily price limits in enumerated commodities, and those are 
primarily the ag products here, they have hard position limits. 
So as you know, wheat, corn, and beans can only move so much 
until they freeze on a day. They can go limit up multiple days, 
and we have mechanisms in place when they reopen. They reopen 
safely and everyone knows deterministically how they will 
reopen. That is important you have heard again and again here.
    We have mechanisms in markets that don't have hard position 
limits. We utilize a mechanism called Velocity Logic, which, as 
I said earlier, inhibits markets from moving too far, too fast. 
For every market, there is a specific amount that a market can 
move in a specified time period. And if it exceeds that, our 
markets freeze for a specified time period. If it happens 
again, it freezes again for, again, a predetermined specified 
time period so people know how to expect markets react if they 
start to run as it were.
    The other things we talked about, the twice daily variation 
margin runs circuit breakers are really a version of Velocity 
Logic. And you have heard a lot of talk around margin levels 
and proactively managing those as more instability comes into 
the market. You would expect clearinghouses and in some cases, 
to the point that was made earlier, top-ups by the clearing 
firms themselves on top of exchange minimums. It is just the 
way that the market is able to try to anticipate the volatility 
and making sure there is enough collateral in the system to do 
exactly what mutualized risk does, and that is ensure that 
nobody loses money in a mutualized risk model. So hopefully, 
that gives you some flavor for what I talked about.
    Mr. Baird. Very good. And thank you. And I have about 35 
seconds left. So, Ms. Crighton, I know we have talked a lot 
about margins and the fluctuation in margins and so on, so 
could you share your concern about how these large and 
fluctuating margin calls may be driving some commodity firms 
away from doing hedging, which is important to ranchers and 
farmers?
    Ms. Crighton. Yes, we think these large fluctuations can 
create a destabilizing effect. When these large swings in 
margin happen, as Mr. Sammann mentioned, we would expect that 
margin rates rise when volatility increases. But we think the 
starting-off point for margin levels tends to be too low, 
particularly in times of low volatility. So the natural course, 
we expect margin levels to rise and increase. The problem is 
when we see such pronounced swings, we think that is 
destabilizing. It drives a number of members and a number of 
end-users and clients to have to seek short-term, highly liquid 
assets to be able to post to their clearing members, for them 
to post onwards to the clearinghouse. We think the cost of 
doing that can rise significantly, particularly in times of 
high stress, which is when we least want to see those types of 
stresses add to the burdens of risk management.
    Mr. Baird. Thank you. And I am out of time, except that I 
would like to say that, Mr. Edmonds and Mr. Berkovitz, I am 
sorry I didn't have a chance to ask you questions. So thank 
you. I yield back, Mr. Chairman.
    The Chairman. I appreciate the gentlemen. And gentleman 
yields back now.
    I am now pleased to recognize the gentleman from New York, 
Mr. Molinaro, for 5 minutes.
    Mr. Molinaro. Thank you, Mr. Chairman. Mr. Edmonds and Mr. 
Berkovitz, I don't have questions for you either, so I feel 
badly, but I also feel a little bit out of sorts going after 
the Ranking Member's closing comments.
    Ms. Crighton, could you just explain a little bit more, 
maybe go a little bit further down--you speak about increasing 
the margin floors to ease some of those volatilities. Can you 
just explain that, let's say, to the average American, as to 
how that will help reduce risk?
    Ms. Crighton. Sure. So I guess we think about it in a 
couple of different ways, and I guess one of the examples that 
I will use is when we think about the size of initial margin 
and drawing the distinction that Mr. Sammann drew earlier of 
initial margin and variation margin. When we think about the 
size of initial margin, what we are really trying to do is 
ensure that it is adequate to cover the risks in the market. In 
futures markets in the U.S., that means that it sides to a one-
day--it is intended to cover a one-day price move, right? When 
we see that we have large P&L swings, large mark-to-market, 
that typically is then followed by a large increase in initial 
margin. So what we are trying to say is, rather than allowing 
margin levels to go so low, that when shocks do happen, they 
have to increase so much to substantially cover for that risk, 
which creates stress on clients and end-users and, in certain 
parts, clearing members as well, that we want to kind of 
increase that floor so margin levels can't go as low as we have 
seen them go in times of low volatility.
    We think it actually artificially masks costs to clients 
and end-users. They think they can fund here, but where they 
actually need to be funding is for the eventuality of needing 
to post margin at these levels. And that difference can create 
a lot of stress.
    So we are not saying that we want to--sorry to add one more 
point.
    Mr. Molinaro. No, go ahead.
    Ms. Crighton. We don't want to just unilaterally increase 
margin. We are not trying to cover all risk. But we think there 
is a better balance than what we have been seeing, and that 
stability and predictability is better for all end-users and 
clients here.
    Mr. Molinaro. That was something even I can understand, so 
I appreciate that very much.
    Mr. Chairman, I wanted to return to my colleague, Mr. 
Nunn's question. You spoke a little bit about the need for 
greater education access. Could you point to some of the more 
effective tools at--listen, I am very appreciative of being at 
the county or state fair and handing out ribbons, but why don't 
you speak to some of the more effective education tools and how 
we might embed that in the farm bill?
    Mr. Sammann. Sure. Great question. So, as I mentioned 
before, we work with a lot of land-grant universities. We work 
with various schools that actually have agricultural 
departments. We run a global trading challenge for 
universities, not just in the U.S. but globally, where we 
actually create a trading challenge and allow customers and 
students that are trying to understand these markets and how 
they operate to compete to sort of a fictitious set of market 
circumstances. They can interact with these markets and 
understand the power, the tools, the capabilities of what 
derivatives markets make available to them. So we would love to 
partner with someone on the farm bill to extend our reach out 
into via co-ops and introducing brokers in these rural 
communities are so important. There is just not enough of them. 
So those are folks that are connecting the individual farms to 
co-ops and co-ops to wholesale markets to at least get access 
to the price so they know what their crop is worth, and at best 
be able to have access, via those intermediaries into some sort 
of hedging tool of some sort. So I would love to be a part of 
that discussion. If that is part of the farm bill, I think that 
would go a long way to addressing a lot of the questions we 
heard about today that single farms or small farms are getting 
crowded out of that space.
    I do want to come back just a moment on the margin piece. 
And I think as we talked about elevating margins, we should be 
clear, our contracts right now have a four margin level. We 
could debate whether that is too high or too low, but just to 
be clear, there is a floor under which margins don't drop. And 
I think the other piece is there is certainly a danger--and I 
think Ms. Crighton has pointed out--danger being margins too 
low. I think there is absolutely a danger in the worst-case 
scenario margins being too high. And I spoke at a BIS symposium 
on Tuesday morning with global central banks on this very 
topic, where there were three of the world's largest energy 
producers represented. And they said margins went so high and 
margin top-ups by clearing firms were multiples of the current 
exchange minimums that it forced them into the OTC market. That 
is the other ditch you want to avoid.
    So I just want to make sure that we are talking about a 
balanced view here that no one would disagree that too low 
margins is not good, but there is a real danger that the worst-
case scenario is the margins that are too high end up pushing 
people into unregulated bilateral markets. Now, you have 
opacity in the market that was once transparent. So I just want 
to be clear that there is a risk at both ends of that.
    Mr. Molinaro. I appreciate that. And I would say, from the 
education perspective, even reaching to K-12, Future Farmers, 
really investing early on to create that understanding as 
certainly smaller farms, family farms transition.
    Mr. Chairman, I very much wanted to ask Mr. Gelchie a 
question, but I have run out of time, and so I will just save 
it for another----
    The Chairman. Well, the gentleman is yielded some more 
time. Go ahead.
    Mr. Molinaro. Thank you, Mr. Chairman. The last hearing you 
did take a whole minute away from us, so I appreciate that, Mr. 
Chairman.
    Mr. Gelchie, I just wanted to give you an opportunity 
really to speak more broadly and briefly to what you foresee 
from your perspective the biggest risks and opportunities for 
American agriculture in the immediacy. As we develop this farm 
bill, what would you point to is the thing we need to pay 
attention to, to sustain American agriculture?
    Mr. Gelchie. Sure, no, thank you. I think as we had 
mentioned earlier, consistency, clarity in terms of what 
support prices might look like for the farmer? That is 
extremely important. We talked about the inputs and the rising 
costs for fertilizer, land, and so these are criteria that I 
would pay particular attention to in relation to the upcoming 
farm bill.
    Mr. Molinaro. Thank you. And thanks for the courtesy, Mr. 
Chairman. I yield back.
    The Chairman. Well, I thank the gentleman for reminding me 
I cut his time last time. And now great job, well done.
    I want to thank all our witnesses, as we close here, just 
to say thank you for bringing your expertise to the table. We 
have five talented individuals who have tremendous experience 
and insight, and we benefited from that today.
    I want to thank our Members, all of our Members for the 
participation and, quite frankly, the insightful questions that 
were generated. And I would be remiss if I didn't say a great 
big thank you to all of our--if I didn't recognize Mr. Duarte 
for--well, let me do my last thank you and then I will come 
back and finish my closing when we actually close, and that is 
to the staff, the staff, all of our staff that work so hard, 
the staff and the personnel officers, certainly the staff on 
our committees that staff us. We absolutely could not do our 
jobs without them.
    And so I am pleased to recognize the gentleman from 
California, Mr. Duarte, for 5 minutes.
    Mr. Duarte. You are a tolerant and thoughtful leader, G.T. 
Thank you. Thank you to the chair. Sorry, lunch awaits you.
    I am from California. I am from a farming district in 
California that goes from Modesto down to Fresno. And there is 
a large--not a large one, but there is a budding movement in 
California to consolidate water rights down to the delta. And 
then there are some who think that monetizing and securitizing 
water rights and putting them on perhaps one of the boards of 
trade that you govern or participate in would be a good idea. I 
don't think it is a good idea. I think that commodities are 
commodities. They move around the globe and they fill voids and 
shortages through a free market system that you folks help 
facilitate. But water is not a commodity. Water is local. Water 
is constrained within its basins, and it does not have global 
movement, and we cannot always make more of it when the market 
demands that we might want to.
    Could you please, any of you, comment on how you see the 
limitations of water trading or how you see the opportunities 
of water trading and what we should be concerned about or open 
to in terms of opportunities when it comes to such?
    Mr. Sammann. So I will comment because we list the 
contract--it is not ours, but we list a contract that is a 
NASDAQ contract that is a cash-settled water index. I think it 
is basically the Veles index, as I recall, that listed probably 
2+ years ago. It is an index cash-settled for--the idea that 
NASDAQ believed--and we are just a listing agent for them so it 
can trade on our exchange. And I believe their thought was that 
there would be an interest for folks looking to get some sort 
of economic exposure. You are absolutely right. Water is not a 
physical product. It is uneconomical to transport the way you 
can crude oil or natural gas or corn or gold for that matter. 
So it has had a high degree of intellectual interest. It is had 
very little traction economically in terms of very little 
pickup on that, and I think there is a broadening discussion 
around how that should be treated.
    Mr. Duarte. Good.
    Mr. Sammann. So I would probably point you to reach out to 
NASDAQ on that contract since we are just the listing agent. 
But I just want to make sure that the Committee knew that there 
was a product, so I would point you to NASDAQ to have a further 
conversation on that product.
    Mr. Duarte. Thank you. Any other comments? Please, Mr. 
Berkovitz.
    Mr. Berkovitz. I would just comment that from the 
perspective of the CFTC--I am not speaking for the CFTC in this 
capacity, but from the derivatives markets in terms of a 
derivatives contract, should anybody want to list them? Until 
about the year 2000, the Commodity Futures Modernization Act, 
the CFTC would look at what is the hedging utility, what is the 
utility of these contracts, but since 2000, the change in the 
law, the CFTC just looks at the integrity of the contract and 
doesn't pass upon the value, so to speak, of the economic use. 
It is basically up to the market to decide. So the CFTC, were 
they asked to approve a contract, would pass upon certainly the 
integrity of the contract, is it susceptible to manipulation, 
but would not look at is this a good thing or a bad thing?
    Mr. Duarte. Thank you. That is one of my concerns is the 
manipulation. Somebody from far away outside our base and 
outside our community, outside our state, outside our country 
could play the water market through political or environmental 
manipulations, create scarcity, and increase the value of their 
securitized water interests, and that, I feel, is a huge 
vulnerability this would bring to my district and to many, many 
urban and rural water users.
    Mr. Berkovitz. And if an exchange were to list one of those 
contracts, that by law the contract would be required to be not 
susceptible to manipulation. The exchange would have to have 
mechanisms in place, and the CFTC would review those before the 
contract could be approved.
    Mr. Sammann. Just so you know, you may not be aware or may 
be aware, in Australia, there is a water contract, and I 
believe it is physical. I think that is probably set up within 
5 or 8 years ago, and there have been some challenges with 
that. So there is a case study as somebody trying to do it as a 
deliverable contract, and it got into the questions that you 
would wonder where is their financial interest? Where is the 
end-user consumer interest? And are those in balance with one 
another? So not passing judgment good or bad, but it is a case 
study, and I think if you wanted to talk to your constituents 
about that, that is probably a good place to start.
    Mr. Duarte. Thank you. I have 53 seconds left. Any of you 
wise folks have any more wisdom for me?
    Thank you very much. Thank you, Mr. Chairman. I will get 
out of the way of lunch.
    The Chairman. I thank the gentleman. Lunch is over, though? 
We are well beyond that.
    Just, once again, all the thanks that I have offered 
already. It really is helpful to understand how market 
participants, intermediaries, and regulators work together to 
ensure the markets operate efficiently and effectively. 
Sustaining deep and vibrant derivatives markets often requires 
compromises between the views of different actors. I appreciate 
having heard more about those points of view today. This 
hearing provided insight on how the industry works to reconcile 
the different points of views that you all have, what 
processes, formal or informal, are in place to help industry 
participants, and regulators alike work through those ideas. 
What we heard today, I believe, will better prepare us to 
perform our oversight duties for the derivatives market.
    And so, with that, under the Rules of the Committee, the 
record of today's hearing will remain open for 10 calendar days 
to receive additional materials and supplementary written 
responses from witnesses to any questions posed by a Member.
    This hearing of the Committee on Agriculture is adjourned.
    [Whereupon, at 1:40 p.m., the Committee was adjourned.]
    [Material submitted for inclusion in the record follows:]
 Submitted Letter by Hon. Mike Bost, a Representative in Congress from 
                                Illinois
March 1, 2023

 
 
 
Hon. Katherine Tai,                  Hon. Doug McKalip,
Ambassador,                          Chief Agricultural Negotiator,
United States Trade Representative,  United States Trade Representative,
Washington, D.C.;                    Washington, D.C.
 

    Dear Ambassador Tai and Chief Negotiator McKalip:

    We write today to thank you for your continued work in holding 
Mexico accountable regarding their pending ban on imports of 
genetically modified (GM) corn from the United States. While 
substantial progress has been made, we remain concerned that Mexico's 
unscientific approach to GM corn would severely impact our local 
farmers and set a harmful precedent. Mexico's failure to live up to its 
transnational commitments would negatively impact the Illinois Corn 
industry and we urge you to take every step necessary to resolve this 
situation amicably. We request a full update on the ongoing 
negotiations with Mexico on this subject, and given this decision is 
clearly inconsistent with the United States-Mexico-Canada Agreement 
(USMCA), we ask all enforcement mechanisms remain on the table.
    As you know, Illinois farmers are the second-largest producer of 
corn in the United States, with a large majority of such corn grown 
with GM seeds. These scientific enhancements have helped our farmers 
grow more with less, reduce their impact on the environment, and 
conserve the use of water and pesticides, contributing to food security 
at home and across the globe. According to the United States Department 
of Agriculture, between 2020 and 2021, Mexico remained the number one 
ranked importer of U.S. Corn. Mexico's plan to impose an import ban can 
have long-term detrimental effects to local economies, family farmers 
and the corn industry here in Illinois. Furthermore, the choice to ban 
uses of GM corn but not other uses of biotechnology underscores the 
lack of scientific basis for the action. On the heels of the public 
health emergency and a war across the globe that has contributed to 
higher energy costs as well as disrupted supply chains, our farmers 
cannot afford additional challenges.
    We've heard from family farmers across our districts and we want to 
ensure that they will be protected and maintain certainty over the 
future. We are grateful for your strong and swift response to Mexico's 
unsubstantiated actions, and we urge you to use your full authority and 
USMCA's enforcement mechanisms to come to an agreement as soon as 
possible. Inability to do so will cause grave concern among our 
constituents. We thank you for your attention to this matter and we 
look forward to partnering with you to support Illinoisan and American 
farmers to ensure their continued export of important commodities.
            Sincerely,

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
            

 
 
 
Hon. Nikki Budzinski,                Hon. Mike Bost,
Member of Congress                   Member of Congress
 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                                     

 
 
 
Hon. Bill Foster,                    Hon. Darin LaHood,
Member of Congress                   Member of Congress
 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                                     

 
 
 
Hon. Mary E. Miller,
Member of Congress
 

  Supplementary Material Submitted by Michael ``Mike'' Gelchie, Group 
             Chief Executive Officer, Louis Dreyfus Company
Insert
          Mr. Rose. . . . One of the major themes of this hearing are 
        the risks of black swan events to the global derivatives 
        markets. I would like to ask each of you, are there any 
        unlikely but plausible black swan events that could pose a 
        systemic risk to the global financial system that any of you 
        are worried about but that have not yet been raised in this 
        hearing today? And again, we will start on the left, and you 
        can go across with the limited time we have.
          * * * * *
          Mr. Rose. I have other questions, but in view of the time 
        remaining, I might just end by saying I know by definition I am 
        asking you to think about the unknown unknowns, but I would 
        just ask you all to go back and contemplate that and share with 
        us anything that we might be missing that comes to mind.

    These global tensions are not new but seem to be as relevant as 
ever in terms of market impact, with a tendency at times to overwhelm 
market fundamentals. Markets are sensitive and there is plenty of 
global unrest, so these risks are real.
    Rapid technology advancements over the past decade have created 
efficiencies in the markets, but also challenges in protection against 
bad actors and market disruption. Cybersecurity is something all 
responsible corporate organizations are allocating capital to guard--
against attack and to minimize vulnerabilities. We recently witnessed a 
cyber-attack on a service provider in the futures markets, which 
created challenges in market function for days.
    Derivatives clearinghouses are critical to the functioning of our 
commodity markets, and in our opinion, have operated successfully 
through stressful events over many years. Should a key clearinghouse be 
unable to function, the derivatives markets would be completely frozen, 
and cash markets would see immediate and tangible ripple effects. We 
believe the probability of such an event is low given the positive 
track record of clearinghouse operations and the significant regulatory 
focus on these functions.
                                 ______
                                 
  Supplementary Material Submitted by Derek Sammann, Senior Managing 
Director, Global Head of Commodities, Options & International Markets, 
                             CME Group Inc.
Insert 1
          Mr. Crawford. What would you estimate the percentage of 
        participants in the market today are bona fide hedgers?
          Mr. Sammann. So I would probably say--it is going to vary by 
        product--probably 20+ percent of end-users. And you can see 
        some of that from the CFTC's Commitment of Traders Report. It 
        will vary by product. It will be higher in commodities markets. 
        It will be lower in financial markets, between 20 and 40 
        percent, but I would rather come back to you with a more 
        specific answer. But if I were to spitball, that is where I 
        would put it.

    The best source of public information about the types of 
participants in each market is the CFTC's Commitment of Traders 
Report.\1\ * As you may know, this report is published weekly and is 
based on futures and options position information provided to the CFTC 
and exchanges by firms that exceed reportable position levels. The 
report does not capture precisely the reason for each firm's position. 
It will not, for example, depict whether a position of a producer or 
[processor] was a hedge or speculative position. Nevertheless, it is an 
informative report for purposes of understanding the types of 
participants holding positions in each market. The data contained in 
the report demonstrates how the market composition can change over time 
and varies among different agricultural products.
---------------------------------------------------------------------------
    \1\ cftc.gov/dea/options/ag_lof.htm.
    * Editor's note: the report referenced is retained in Committee 
file.
---------------------------------------------------------------------------
    For instance, the April 11, 2023 Commitment of Traders Report 
provides the following data on the Chicago Board of Trade's Wheat--SRW 
futures and options contracts:

   Producer/Merchant/Processor/User--67,505 (long) and 63,537 
        (short);

   Swap Dealers--68,634 (long), 5,001 (short), and 17,084 
        (spreading);

   Managed Money--56,306 (long), 160,553 (short), 72,858 
        (spreading);

   Other Reportables 39,232 (long), 8,197 (short), and 101,738 
        (spreading).

    Naturally, as depicted in the Commitment of Traders reports, 
markets are comprised of both natural hedgers (commercials/producers/
processors and swap dealers) and natural speculators. Both are 
essential to an efficient market that enables the transfer of risk 
between participants. Efficient markets depend on active participation 
of both hedgers and speculators.
Insert 2
          Mr. Rose. . . . One of the major themes of this hearing are 
        the risks of black swan events to the global derivatives 
        markets. I would like to ask each of you, are there any 
        unlikely but plausible black swan events that could pose a 
        systemic risk to the global financial system that any of you 
        are worried about but that have not yet been raised in this 
        hearing today? And again, we will start on the left, and you 
        can go across with the limited time we have.
          * * * * *
          Mr. Rose. I have other questions, but in view of the time 
        remaining, I might just end by saying I know by definition I am 
        asking you to think about the unknown unknowns, but I would 
        just ask you all to go back and contemplate that and share with 
        us anything that we might be missing that comes to mind.

    CME Group is in the business of risk management. Consequently, we 
spend significant time and resources attempting to foresee and plan for 
any plausible black swan events, even those that are very remote. We 
have a risk management team, dedicated to monitoring CME's risks and 
evaluating the likelihood of their occurrence. In addition, all of our 
business lines are responsible for updating our risk profile, notifying 
the risk team if risk increases, and refining our response plans.
    One clear category of risk that went unmentioned in the hearing but 
bears strong consideration is future pandemics. The COVID-19 pandemic 
heightened volatility, put markets under stress, and increased the need 
for risk management. While the pandemic's market turmoil was 
significant, CME's risk management model was able to compensate for the 
disruption. Trading and clearing functioned as intended and without 
interruption. Future pandemics, however, may place supply chains, spot 
commodity markets, and producers under even greater stress. Although 
CME is confident that it has planned for and can address even extreme 
market conditions, a hypothetical near-total shutdown of commodity 
markets would have much further-reaching ramifications. It is CME's 
hope that global policy makers will work with all market participants, 
with a special focus at the producer and supply chain level to ensure 
that the global marketplace is adaptable and equipped for dealing with 
future, and possibly even more significant, pandemics.
                                 ______
                                 
 Supplementary Material Submitted by Alicia Crighton, Chair, Board of 
                Directors, Futures Industry Association
Insert 1
          Ms. Crockett. Thank you. But I do have some concerns. As I 
        was reviewing the USDA report from October of 2020, it states 
        that less than three percent of farmers are using these 
        options. Does that sound about right to you?
          Ms. Crighton. I don't actually have that information, but we 
        would be happy to look into it and follow up with you.

    FIA has reviewed the 2020 USDA report \1\ * titled `Farm Use of 
Futures, Options, and Marketing Contracts,' which used data from the 
2016 Agricultural Resource Management Survey to describe the use of 
futures, options, and marketing contracts by producers, with a primary 
focus on corn and soybeans. FIA agrees that farm producers must contend 
with forces beyond their control and that risk management tools and 
strategies, including the use of derivatives to hedge and protect 
against price risk, are critical for end-users. While FIA cannot verify 
the underlying data referenced in the report, we support efforts to 
expand educational resources about the opportunities and risks of risk 
management tools like derivatives to small- and mid-size farmers, 
producers and end-users. Below are some examples of FIA's commitment to 
education.
---------------------------------------------------------------------------
    \1\ https://www.ers.usda.gov/webdocs/publications/99518/eib-
219.pdf?v=1241.2.
    * Editor's note: the report referenced is retained in Committee 
file.
---------------------------------------------------------------------------
    FIA would also welcome the opportunity to partner with the House 
Committee on Agriculture to consider whether there are opportunities--
perhaps through the farm bill, CFTC reauthorization, or another 
vehicle--to expand educational resources to farmers, the CFTC, or other 
entities, about risk management tools like futures and derivatives.
    Additionally, the CFTC Agricultural Advisory Committee (AAC), which 
was created in 1985 to advise the Commission on issues involving the 
trading of agricultural commodity futures and options and facilitate 
communications between the CFTC, the agricultural community, and 
agriculture-related organizations, could be a great vehicle for a 
discussion about engagement with small- and mid-size farms. FIA would 
be happy to flag this as a suggested discussion topic for a future 
meeting.
FIA's Commitment to Education
Futures Fundamentals
    Futures Fundamentals is a collective, industry-wide effort to 
develop and promote free education about derivatives markets and risk 
management tools. Futures Fundamentals is made possible by a number of 
contributing organizations across the futures industry, including FIA. 
Through this partnership, the industry's leading tools, knowledge, and 
resources have been made available to the public in order to further 
educational empowerment across the globe. For more information, visit 
here: https://www.futuresfundamentals.org/.
The Institute for Financial Markets
    Established in 1989, the Institute for Financial Markets (IFM) is a 
nonpartisan, nonprofit educational foundation and independent affiliate 
of FIA. The IFM seeks to increase public awareness and understanding of 
the importance of derivatives markets and the financial service 
industry to the global economy and to improve the technical competence 
of those in the industry who deal with the public. In advancement of 
such purpose, the IFM engages in activities such as research, 
publications dissemination, e-learning, courses and conferences. For 
more information, visit here: https://www.theifm.org/.
Insert 2
          Mr. Rose. . . . One of the major themes of this hearing are 
        the risks of black swan events to the global derivatives 
        markets. I would like to ask each of you, are there any 
        unlikely but plausible black swan events that could pose a 
        systemic risk to the global financial system that any of you 
        are worried about but that have not yet been raised in this 
        hearing today? And again, we will start on the left, and you 
        can go across with the limited time we have.
          * * * * *
          Mr. Rose. I have other questions, but in view of the time 
        remaining, I might just end by saying I know by definition I am 
        asking you to think about the unknown unknowns, but I would 
        just ask you all to go back and contemplate that and share with 
        us anything that we might be missing that comes to mind.

    In my capacity as Chair of the FIA Board, I don't have anything 
further to add to my comments in the hearing.
                                 ______
                                 
   Supplementary Material Submitted by Christopher S. Edmonds, Chief 
          Development Officer, Intercontinental Exchange, Inc.
Insert
          Mr. Rose. . . . One of the major themes of this hearing are 
        the risks of black swan events to the global derivatives 
        markets. I would like to ask each of you, are there any 
        unlikely but plausible black swan events that could pose a 
        systemic risk to the global financial system that any of you 
        are worried about but that have not yet been raised in this 
        hearing today? And again, we will start on the left, and you 
        can go across with the limited time we have.
          * * * * *
          Mr. Rose. I have other questions, but in view of the time 
        remaining, I might just end by saying I know by definition I am 
        asking you to think about the unknown unknowns, but I would 
        just ask you all to go back and contemplate that and share with 
        us anything that we might be missing that comes to mind.

    For the past few years, derivatives clearing has been chiefly 
handled by a small number of clearing members at CCPs globally. 
Consolidation within the clearing industry has also left derivatives 
contracts concentrated among a smaller subset of clearing members and 
could be a potential source of systemic risk. To that end, the 
concentration of bank-affiliated clearing members has become a barrier 
to access for smaller, directional clients. With a limited and 
shrinking number of global non-bank affiliated clearing members, some 
market participants may find themselves without access to clearing 
services and the ability to hedge their risks. The lack of access to 
the derivatives markets could increase volatility, increase consumer 
prices and impact the stability of financial and commodity markets. Due 
to restrictive prudential capital requirements, only bank-affiliated 
clearing members can provide more comprehensive services. In the case 
of non-bank affiliated clearing members, there are limited and punitive 
paths available for additional capitalization. This creates a divergent 
framework for clearing member requirements and disincentivizes non-bank 
affiliated clearing members from offering expanded services. If one of 
the non-bank affiliated clearing firms fail, there are very limited 
options remaining for their clients. Many clients will be unable to 
procure additional clearing services. It is extremely difficult to 
determine such an impact on the macro economy other than an extremely 
negative outcome.
                                 ______
                                 
   Supplementary Material Submitted by Hon. Dan M. Berkovitz, Former 
           Commissioner, Commodity Futures Trading Commission
Insert 1
          Mr. Bost. I appreciate that. Thank you. I also have heard 
        from my constituents obviously with serious concerns about the 
        recent action taken by Mexico in banning GMO corn. This is 
        serious concern of mine, and I have joined with several of my 
        colleagues in writing a letter to the Administration calling 
        for action from the USMCA.\1\ What effects has the CME seen on 
        the global--I am not sure what my tongue is doing--derivative 
        markets so far based on Mexico's action, and if no substantive 
        effects have occurred, can the CFTC help absorb any changes in 
        the market?
---------------------------------------------------------------------------
    \1\ Editor's note: the letter referred to is located on p. 81.
---------------------------------------------------------------------------
          Mr. Sammann. Great question. I think relative to how we 
        answered the question earlier on tariffs and kind of market 
        disruptions, we see disruptions to free trade flow and price 
        setting as problematic for all users and that just increases 
        instability. It increases the eventual price that gets--cost 
        passed on to the end consumer is not good for anybody. We have 
        not seen a direct impact on our corn market, which is we run 
        the largest corn market in the world. We haven't seen that yet. 
        That said, we are in constant conversation with both the 
        farmers, producers, end-users, folks like Louis Dreyfus and how 
        that impacts them, and the agency. And I would probably defer 
        to Mr. Berkovitz for his thoughts on how to answer a CFTC 
        perspective on that.

    The CFTC's market surveillance program monitors global political 
and economic trends and developments that may affect the physical and 
financial commodity derivative markets to ensure those markets continue 
to operate in a fair and orderly manner, perform their price discovery 
and risk management functions, and do not present systemic risks. The 
CFTC staff is in regular contact with market participants, exchanges, 
and other Federal agencies regarding events and actions that may affect 
these markets. Although I do not have any specific information 
regarding the CFTC's consideration of how Mexico's banning GMO corn may 
have affected the U.S. derivative markets, the CFTC's market 
surveillance program typically monitors its markets for market-related 
issues that may arise from these types of developments.
Insert 2
          Mr. Rose. . . . One of the major themes of this hearing are 
        the risks of black swan events to the global derivatives 
        markets. I would like to ask each of you, are there any 
        unlikely but plausible black swan events that could pose a 
        systemic risk to the global financial system that any of you 
        are worried about but that have not yet been raised in this 
        hearing today? And again, we will start on the left, and you 
        can go across with the limited time we have.
          * * * * *
          Mr. Rose. I have other questions, but in view of the time 
        remaining, I might just end by saying I know by definition I am 
        asking you to think about the unknown unknowns, but I would 
        just ask you all to go back and contemplate that and share with 
        us anything that we might be missing that comes to mind.

    As a regulator, and now as a former regulator, I have been very 
concerned about black swan events. By their nature, black swan events 
are neither foreseeable nor predictable. The history of financial 
markets demonstrates the fallacy of the belief that we can foresee or 
anticipate all the types of events that may cause systemic risks. We 
must protect against both foreseeable and unforeseeable events. Since 
the passage of the Dodd-Frank Act we have made significant progress in 
building protections into the financial system to mitigate systemic 
risks that may arise from both foreseeable and unforeseeable events. We 
must remain vigilant, however, as the nature and origin of these types 
of events is continually changing. In addition to the risks mentioned 
during the hearing, another specific emerging risk that I believe 
deserves heightened attention and potential action stems from the 
recent advances in artificial intelligence technology. This new 
technology may present novel risks regarding fraud, manipulation, 
market integrity, and as a result novel systemic risks.
                                 ______
                                 
                           Submitted Question
Question Submitted by Hon. Jahana Hayes, a Representative in Congress 
        from Connecticut
Response from Hon. Dan M. Berkovitz, former Commissioner, Commodity 
        Futures Trading Commission
    Question. In your view, does the CFTC have the proper authority to 
respond to present-day market conditions? How could a long-term 
reauthorization improve the CFTC's ability to lead on these issues?
    Answer. Typically, during the legislative reauthorization process 
the CFTC submits to Congress proposals for amendments to the Commodity 
Exchange Act to clarify or supplement this existing authority. Members 
of Congress also may identify beneficial amendments during the 
reauthorization process. The authorization process can therefore lead 
to improvements to the CFTC's authority and ability to regulate these 
markets.
    Generally speaking, the CFTC has sufficient authority to respond to 
present-day conditions in the derivative markets it regulates. As 
described above, the reauthorization process could be used to fine-tune 
this authority. Currently, however, the CFTC does not have regulatory 
authority over spot commodity markets. The CFTC can bring actions for 
fraud or manipulation that has occurred in the spot commodity markets, 
but it does not have authority to regulate the trading of spot 
commodities (unless such trading is on a leveraged or margin basis) to 
help prevent such fraud or manipulation prior to its occurrence. At 
present there is a significant amount of fraud and manipulation in the 
spot market for cryptocurrencies or digital assets. It would improve 
the CFTC's ability to protect the public from fraud and manipulation in 
these markets--and the integrity of these markets--if the CFTC also had 
regulatory authority over the trading in the spot market of 
cryptocurrencies or digital assets commodities that are not securities. 
Expanding the CFTC's jurisdiction to include regulatory authority over 
the trading of non-security spot cryptocurrencies or digital assets 
would significantly increase the CFTC's workload. To ensure that this 
additional responsibility would not detract from the CFTC's mission 
with respect to the derivatives markets, any such expansion of CFTC's 
jurisdiction should be accompanied by a dedicated funding source to 
cover the costs of regulation and oversight of these spot markets.

                                  [all]