TESTIMONY OF LAYNE G. CARLSON

CORPORATE SECRETARY & TREASURER

MINNEAPOLIS GRAIN EXCHANGE

PUBLIC HEARING ON PREPARATION FOR REAUTHORIZATION OF THE COMMODITY
FUTURES TRADING COMMISSION

U.S. HOUSE OF REPRESENTATIVES

COMMITTEE ON AGRICULTURE

SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND RISK MANAGEMENT

Good morning, my name is Layne G. Carlson and I am an officer of the
Minneapolis Grain Exchange (MGEX). It is a great pleasure to be here
before the Subcommittee on General Farm Commodities and Risk Management,
and speak on matters important to us.

The Minneapolis Grain Exchange is both a Designated Contract Market
(DCM) for trading futures and a Derivatives Clearing Organization (DCO)
which means we clear all trades executed on our market and assume the
counterparty risk that the buyers and sellers will make payment for the
contracts traded. As a DCM and DCO, the MGEX is subject to CFTC
oversight of our trading markets and clearing operations.

The Minneapolis Grain Exchange was first established in 1881, and is the
only futures and options market for Hard Red Spring Wheat, and five
Index contracts based on wheat, corn and soybeans. Clearly, our current
focus is on agriculture based contracts. Being located in the Midwest
these past 126 years, we are part of the bread basket of America.
However, traders from around the world trade our contracts and that
trend is expected to continue. Trade volume and open interest records
are becoming routine at the MGEX. In short, the MGEX provides a
demonstrated and valuable service to the public for price discovery and
risk control that goes beyond just the agriculture, merchandising, and
food product sectors.

While the MGEX is not the size of the better known contract markets in
Chicago and New York, we can be and are affected by global events,
domestic and international policies, federal laws, and CFTC rules and
regulations. Events and rules that may affect large markets nominally
may be significant to the MGEX, our clearing members, market
participants and membership. Consequently, what is put into or left out
of any bill reauthorizing the CFTC can be positive or detrimental to the
MGEX' future as a viable market.

One item that is debated from time to time, is folding the CFTC into the
Securities and Exchange Commission (SEC). From the viewpoint of the
MGEX, we believe that would be detrimental. While the CFTC and SEC share
some common goals, such as protecting the marketplace from fraud, each
also have unique and competing purposes. No more so was this in evidence
than with the recent events surrounding Sentinel Management Group, Inc.
(Sentinel). Sentinel was a specialized firm investing funds on behalf of
other firms, many of whom were small clearing members investing customer
funds. Some of these firms were clearing members and futures commission
merchants (FCMs) at the MGEX. When Sentinel froze the release of
customer funds, it put a severe strain on them and had the potential to
materially affect the MGEX. The CFTC recognized the risks to the futures
industry and worked with the exchanges and clearing houses on behalf of
FCMs to get some of the funds released so that certain FCMs could remain
a going concern. The SEC, on the other hand, initially tried to prevent
the release of the funds. The point being, a federal regulator that is
more closely attuned to the needs of those it is regulating is
preferable to a regulator that is monitoring multiple industries.

As mentioned earlier, the MGEX is not the size of the larger contract
markets. As such, when laws and rules focus on addressing issues deemed
important to them or the futures industry, it can have a material and
unintended spillover effect to the MGEX. In other words, a one size fits
all approach to regulatory laws and rules may be easier to draft and
implement, but it often creates unnecessary costs for the MGEX which is
forced to address compliance issues not present in our size market. A
perfect example was the perceived conflicts of interest within the large
for profit entities. At no time did the allegations of problems within
the governance or regulatory structures extend to the mutual or not for
profit entities such as the MGEX. Nonetheless, the MGEX was required to
meet the new regulations mandating a minimum percentage of narrowly
defined public directors be placed on our board and the establishment of
a Regulatory Oversight Committee (ROC). The CFTC requirement that the
MGEX create a ROC consisting of at least three public directors to
monitor the MGEX regulatory department consisting of three staff
employees is entirely puzzling. Further, finding qualified individuals
to serve in that capacity is not easy and will likely require funding.
In short, the MGEX gets penalized for something perceived happening
elsewhere in the industry.

An annual budget topic that won't go away is the transaction fee for
each commodities trade executed. While a source of revenue for the
government, it essentially is another layer of taxation to the futures
industry. The industry in which we operate is extremely price
competitive. Worldwide, the focus is on reducing costs and fees to
remain competitive. The MGEX is no different; we have to look at our
trading and clearing costs as well. A federal transaction fee can only
hinder the ability to be competitive on cost. Further, the regulatory
burden should not be placed on just market participants since all
taxpayers benefit from government oversight.

The MGEX was supportive of and thankful for the regulatory changes
Congress was able to initiate by passing the Commodity Futures
Modernization Act of 2000. The MGEX viewed the Act as a welcome
potential to reduce the regulatory burden experienced by traditional
domestic contract markets compared to foreign markets. The MGEX believes
there has been an improvement in that area. The MGEX expresses its
thanks to the CFTC as well for moving from a very prescriptive
regulatory policy to a more flexible approach with the introduction of
core principles. However, the MGEX would like to see Congress' original
intention for a flexible regulatory environment extended further to
specifically account for small contract markets or not for profit
entities. The MGEX looks forward to working with CFTC Acting Chairman
Lukken and the other Commissioners in applying that flexibility.

The Act also opened up the domestic market to non-traditional trading
markets such as DTEFs and ECMs. These new markets were, for the most
part, excluded or exempt from much of the regulatory burdens still
imposed on the traditional contract markets such as the MGEX. While the
new markets provide many beneficial trading products, the traditional
small markets remain under a regulatory oversight that even with the
changes noted earlier has not moved far enough from its pre-Act days to
account for small contract markets. The MGEX is simply looking for that
level playing field so that we can compete in areas such as new trade
products.

The MGEX again thanks the Subcommittee for this opportunity to express
our views. That concludes my testimony.