HOUSE COMMITTEE ON AGRICULTURE\
SUBCOMMITTEE ON GENERAL FARM COMMODITIES\
AND RISK MANAGEMENT

REAUTHORIZATION OF THE COMMODITY FUTURES TRADING COMMISSION

STATEMENT OF JOHN M. DAMGARD, PRESIDENT\
FUTURES INDUSTRY ASSOCIATION

SEPTEMBER 26, 2007

Chairman Etheridge, Ranking Member Moran, members of the Subcommittee, I
am John Damgard, president of the Futures Industry Association (FIA). On
behalf of FIA, I want to thank you for the opportunity to appear before
you today. FIA is a principal spokesman for the commodity futures and
options industry. Our regular membership is comprised of 35 of the
largest futures commission merchants (FCMs) in the United States. Among
our associate members are representatives from virtually all other
segments of the futures industry, both national and international.
Reflecting the scope and diversity of its membership, FIA estimates that
its members serve as brokers for more than ninety percent of all
customer transactions executed on United States contract markets.

As these statistics indicate, the clearing firms are the backbone of
FIA's membership. Not surprisingly, the clearing firms are also the
backbone of the futures industry. These firms underwrite the financial
performance of their customers and provide the billions of dollars in
capital that makes the U.S. futures clearing system widely respected as
the world-wide hallmark of financial integrity. The U.S. futures
exchanges are remarkably successful and profitable enterprises, as the
price of their stock reflects. The futures clearing firms are a big part
of that success story, a part often overlooked and sometimes
underappreciated.

In 2000, Congress passed and President Clinton signed into law the
Commodity Futures Modernization Act (CFMA). With the goal of promoting
"responsible innovation and fair competition among boards of trade,
other markets and market participants," the CFMA amended the Commodity
Exchange Act to:

-   Authorize the Commission to develop a regulatory program for markets
    that would be "tailored to match the degree and manner of regulation
    to the varying nature of the products traded thereon, and to the
    sophistication of the customer;"

-   Remove the 20-year prohibition on futures on individual securities
    and narrow-based securities index contracts and, in another radical
    departure, provide for the joint regulation of these products by the
    Commission and the Securities and Exchange Commission; and

-   Assure legal certainty for over-the-counter derivatives.

The CFMA signaled a dramatic, new approach to the regulation of the
derivatives markets and, as such, placed enormous demands on the
Commission and its staff as they developed the regulations necessary to
implement its myriad provisions. The CFTC has done, and continues to do,
an admirable job administering the provisions of the CFMA and the
Commodity Exchange Act as a whole, adapting its regulatory authority to
the dynamics of an ever-changing and ever-challenging market place.

FIA wholeheartedly endorses the reauthorization of the CFTC. While FIA
and the CFTC do not see eye to eye on every issue, we believe the CFTC
is an excellent federal agency that discharges its statutory obligations
in an efficient and effective manner. The CFTC's past and present
leadership is to be commended for this record. The CFTC deserves to be
reauthorized.

Recently, a controversy has arisen concerning the scope of the
Commission's exclusive jurisdiction. There should be no controversy.
Exclusive jurisdiction was created in the House Agriculture Committee in
1974 to make sure that only the CFTC would regulate futures trading
activity and conduct by futures exchanges, futures professionals and
futures market participants. Congress made crystal clear in 1974 that
the CFTC's jurisdiction, where applicable, supersedes the authority of
other federal agencies.

Congress actually anticipated the seeds of the current controversy when
it enacted exclusive jurisdiction. The Federal Energy Regulatory
Commission claims its cash transaction anti-manipulation authority
allows it to police the futures markets themselves because futures
prices are used in entering into cash transactions. But Congress knew
that one purpose of futures trading is to provide pricing information
that non-futures market participants can rely upon in their commercial
dealings. To this day, futures price dissemination is one of the
Congressionally-recognized public interests served by futures markets. 7
U.S.C. § 5(a). Given that economic reality, Congress knew that if cash
market regulators, like FERC, could stretch their policing arm into the
futures markets, futures exchanges, professionals and market
participants would be subjected to regulation from multiple federal
regulators, including the Securities and Exchange Commission, Bureau of
Mines, the Department of Agriculture, the Department of the Treasury,
the Board of Governors of the Federal Reserve System as well as FERC.

Congress made a choice. In our view, the right choice. It said CFTC
jurisdiction over futures was exclusive. The dictionary defines
exclusive as "not shared with others." Congress adopted CFTC exclusive
jurisdiction because it wanted the CFTC's jurisdiction not to be shared
with others in order to prevent U.S. futures markets, professionals and
market participants from bearing the cost of "duplicative or
conflicting" regulation. And it wanted to entrust the nationally
important economic activity in futures markets to the oversight of one
expert regulator, the CFTC.

For over thirty years, CFTC exclusive jurisdiction has achieved
Congress' objective because courts have uniformly accepted that Congress
used the word "exclusive" so that the CFTC's jurisdiction would not be
shared with other agencies. For over thirty years, these exclusive
jurisdiction cases have arisen in two contexts: 1) where a federal or
state regulator sought to punish alleged misconduct arising out of
transactions within the CFTC's jurisdiction or 2) where a federal
agency, like the SEC, had approved options or futures products under its
regulatory regime that were really subject to the CFTC's authority.

The FERC's recent attempt to change the meaning of "exclusive" to
"non-exclusive" falls into the first category. No court has ever
accepted the position advanced by FERC. And no court should. Exclusive
jurisdiction is vitally important to the proper functioning of the
futures markets. It must be preserved.

FERC's latest assertion is that there is a regulatory gap in policing
futures market manipulation. Nothing could be further from the truth.
The CFTC has comprehensive, time-tested futures price anti-manipulation
authority. It vigorously enforces the law. FERC and the CFTC should work
together. Each has enormous and important responsibilities. By
double-teaming futures trading, however, FERC is actually diverting
resources from those duties. Exclusive means just what it says. It was
sound policy in 1974 and remains sound policy today.

In terms of specific areas for reform of the existing regulatory
structure, FIA is considering a few proposed areas of technical
improvement. Rather than discuss them in detail at this time, FIA would
prefer to focus on bigger picture issues and continue its dialogue with
the Commission and others in the futures industry on the areas where
modest reform would be helpful. Perhaps, in some areas, an
administrative solution can be found and no statutory amendments will be
necessary. In light of the Subcommittee's interest in moving a
reauthorization bill, FIA will expedite this process so that the
Subcommittee may give timely consideration to any amendments the
Commission might recommend.

At this stage of the process, we want to let you know the views of our
members in four areas: a) SRO Reform; b) Competition; c) Energy and d)
Retail FX Transactions.

SRO Governance and Rule Approvals.

FIA supports the important role that the exchanges, clearing
organizations and the National Futures Association (NFA) perform as
self-regulatory organizations (SROs). Given their expert market
knowledge and close proximity to the trading markets, they provide the
best vantage point for addressing many of the futures markets' oversight
functions. However, to be fully effective, there must be an increased
degree of public confidence in the integrity and objectivity of SROs.

The Commission, to its great credit, has conducted a comprehensive study
of SROs in the futures industry, resulting in the promulgation last
February of rules designed to reform SRO governance in many respects.
FIA strongly supported the CFTC's efforts to get ahead of the curve on
this issue and devoted considerable time and resources to answering the
Commission's many inquiries on this subject over the years.

The Commission's newly adopted "best practices" are a balanced and
sensible work product that resulted from its careful study. In the
context of a safe harbor for compliance with applicable core principles
for Designated Contract Markets, the Commission has identified sound and
constructive "best practice" guidelines for DCM Board composition, the
development of independent Regulatory Oversight Committees and
improvements in the DCM disciplinary process. Most significantly, the
safe harbor would be available to any DCM with a board of directors
comprised of at least 35% public (independent, non-industry) board
members.

FIA believes the Commission's best practices constitute a major step
toward addressing the conflicts of interest inherent in for-profit
self-regulatory bodies. SROs that serve both the public interest and
private interests necessarily serve masters that at least sometimes
conflict. Adding public directors to the board of these SROs brings
balance to the resolution of those conflicts, and avoids the public
perception that DCMs will sacrifice public interest responsibilities for
the commercial interests of their shareholder and members.

The Commission published its final rules in this area in February and
then proposed clarifying and technical amendments to the "public
director" definition of its safe harbor. FIA strongly encourages the
Commission to act as soon as possible on its proposed amendments and
then implement fully its SRO reforms. FIA is confident these measures
will increase public confidence in the self-regulatory protections
afforded by DCMs under the CFTC's enlightened oversight.

The Commission's SRO study and safe harbor do not directly address one
other area where FIA has expressed concerns \-- self-certification of
DCM rules. As the Subcommittee no doubt appreciates, DCM rules impose
important and sometimes costly mandates on intermediaries and market
participants alike. Often they can be as important as Commission rules
which are adopted after full compliance with the Administrative
Procedure Act with its notice and comment requirements.

DCMs do not operate under any restrictions even approaching the APA.
Their rule making procedures are often opaque to market participants and
the public at large. Yet the CEA now allows SROs, primarily DCMs, to
self-certify virtually all rule changes and make them effective
immediately. (The only exception is for changes to terms and conditions
of agricultural commodity futures contracts with open interest.)
Commission prior approval of DCM rule changes is limited to those
situations where a DCM affirmatively requests Commission approval.

FIA generally does not quarrel with the decision to grant DCMs
self-certification powers. We do have considerable concern, however,
that in some cases virtually industry-wide trading rules and other
important mandates, including fee changes, are being imposed on market
participants and intermediaries, including clearing firms, without any
Commission prior review and certainly without any form of APA notice and
public comment. We would urge the Commission, when it is requested, or
decides, to review any rule submission from any registered entity to
publish the rule submission for notice and comment under the APA. The
law is clear that Commission action on registered entity rules is agency
action under the APA. FIA believes the CFTC must therefore follow the
APA's requirements when it considers both new registered entity rules
and changes to existing rules. Adding this level of transparency to the
Commission's review process will further enhance public confidence in
our markets.

In some cases, the power to self-certify a rule change may be misread to
override other powers and policies under the Act, especially when
changes are made that affect trading in contracts with considerable open
interest. Those changes have real financial consequences and should be
subject to prior Commission approval. For years, the Commission has
reviewed DCM emergency orders \-- applied by definition to trading in
contracts with open interest \-- for many public policy reasons.
Allowing the DCM's self-certification powers to circumvent these
emergency procedures would seem to be counter-productive. This is
another area we wish to discuss with the new leadership at the
Commission and the DCMs themselves to see if we can reach agreement on a
workable resolution.

Competition

Promoting fair competition should be the goal of any sound regulatory
program. Our strong support for the CFMA in 2000 was based in
substantial part on our belief that competition, rather than a
prescriptive regulatory structure that established high barriers to
entry, would be the best regulator. We fully anticipated that the CFMA's
regulatory reforms would encourage new entrants to apply for designation
with the Commission as contract markets or clearing organizations. These
new SROs would compete among themselves and with the existing exchanges
for customer business based on products, quality of execution and cost.

The CFMA has sparked innovation and more new exchange applicants. But,
except in the energy area, the direct product competition the CFMA had
envisioned has not materialized. This is disappointing. Robust
competition facilitates the ability of U.S. futures markets to serve the
public interest. Competition leads to reduced costs, higher volumes,
narrower spreads and greater innovation. Competition also is the best
system yet devised for serving the interests of our customers. That
should be the touchstone of our competitive goals.

Promoting competition and innovation are the twin reasons FIA urges this
Subcommittee to reject calls to eliminate the Exempt Commercial Market
category in Section 2(h) of the CEA. The ECM category has stimulated
most of the innovation in trading and clearing under the CFMA. ECMs are
electronic trading markets for principal-to-principal trading in
non-agricultural, non-financial commodities. While some ECM trades are
cleared, they are not intermediated (brokered) in the traditional sense.
My member firms are largely in the intermediation business and their
bottom line is not necessarily well-served by non-intermediated trading.
Nonetheless, FIA still supports retention of the ECM category because it
serves as an incubator for the successful trading platforms of tomorrow.
Entrepreneurs and other challengers of established exchanges should be
able to choose how they want to begin their business and what level of
regulation is compatible short term and long term with their business
objectives. If you cut ECMs out of the CFMA, you cut out the
competitive, innovative heart of the CFMA.

With the merger of the Chicago Mercantile Exchange and Chicago Board of
Trade, some might argue that the futures industry has moved more toward
concentration than competition. If that is true, FIA believes it would
be very unfortunate. We know the new CME Group believes it faces real
competition every day and we trust their apparent domination today will
not stop them from innovating tomorrow.

FIA is still hopeful that the CFMA formula of low regulatory barriers to
entry through principles-based oversight will stimulate new trading
platforms to compete with the traditional exchanges. Technological
advances and globalization may inspire competition in areas we can't
even predict today. After all, in 2000 who would have predicted that the
"winner takes all" natural monopoly model for futures trading would be
so discredited in the energy area today where the New York Mercantile
Exchange and IntercontinentalExchange leadership match wits daily to try
to gain a market advantage. Perhaps eight years from now or less, this
form of vigorous direct competition will expand to other commodity areas
beyond energy.

If not, it may be appropriate to reconsider various market structure
issues. Other competitive models exist in other financial trading
markets, like the securities options world, which might have elements
that could be adapted to the futures markets. For example, I have been
asked by my members why the Options Clearing Corporation has been able
to reduce its clearing fees in light of extraordinary trading volume,
while the futures clearing fees have not experienced a similar reduction
despite record futures volume. Is this difference because of
administrative efficiencies, technology, ownership structure, governance
or some other factor? At this point, I have to admit, I don't know the
answer.

What I do know is that competition and market structure are critical
issues for customer service. We would urge this Subcommittee to ask the
CFTC to study the state of competition among centralized trading
platforms and clearing entities for derivatives products with an eye
toward making sure the existing futures market structure is the best for
serving our customers.

Energy

Everyone agrees that the price of energy is a critical element of our
national economy. For decades, energy futures have served our national
interest by providing a means for efficiently managing and reliably
discovering energy prices. The Commission should take pride in its
effective oversight and stewardship of these markets.

In recent years, energy markets have experienced considerable innovation
and increasing competition, largely as a result of the CFMA. The CFMA
has made it possible for new markets to compete with established
exchanges. That competition has caused traditional exchanges to
modernize through electronic trading or at least increase their pace of
modernization. The CFMA has also encouraged innovative thinking by
established exchanges and new trading platforms. The result is that
those trying to manage energy price risks and those willing to assume
those risks now have more choices than ever before. Indeed, one of the
most popular recent innovations in energy \-- the ability to submit
certain private bi-lateral energy transactions to regulated clearing
entities \-- flowed directly from the CFMA's provisions. The importance
of this innovation cannot be overstated. Those bi-lateral, but cleared,
transactions on the New York Mercantile Exchange's ClearPort facility
now comprise approximately 20-25% of that exchange's monthly volume.

In our view, the CFMA has sparked these positive developments without
compromising the public interest, including the vital interest in
preventing price manipulation. The Commission continues to deploy a
wealth of market surveillance techniques and an arsenal of enforcement
weapons in its pursuit of what Chairman Lukken has labeled the agency's
zero tolerance of price manipulation. These Commission tools include
large trader reports, special calls, position limits, price manipulation
enforcement actions and even sweeping, perhaps unprecedented market
emergency powers. Clearly, the Commodity Exchange Act and the
Commission's regulatory apparatus continue to target price manipulation
as public enemy #1.

FIA agrees with this emphasis. Price manipulation should be prevented
whenever possible and never tolerated. The best defense against price
manipulation is effective CFTC market surveillance based on all relevant
large trader information. The Commission's recent proposal to confirm
under its special call authority that large traders must maintain books
and records for related non-reportable transactions is fully consistent
with this philosophy. The Commission's proposal would even include
trades on foreign boards of trade within this special call authority so
that the Commission could obtain access to surveillance data from a
large futures trader on both a U.S. exchange and a foreign exchange in
the same commodity. The Commission's proposal illustrates that the
agency's existing authority is substantial and adaptable to current
market needs and conditions.

Some have questioned how well the existing anti-manipulation defenses
work when more than one energy derivative market exists. In FIA's view,
multiple trading facilities, like NYMEX and the IntercontinentalExchange
today in energy, only enhance the need for vigorous CFTC oversight. When
two markets are largely competing directly, it is most important that
CFTC market surveillance have ready access to all relevant large trader
information.

If we are to have same commodity competition among trading facilities,
as the CFMA contemplated and FIA has espoused, then the Commission must
conduct this kind of multiple market surveillance. This is perfectly
consistent with the statute. In the CFMA itself, Congress signaled that
promoting multiple trading platforms in energy derivatives did not mean
that price manipulation prevention should be short-changed. Instead,
Congress made clear in the statute that for any energy or other "exempt
commodity" transactions conducted on a "many to many" trading facility
\-- whether that facility was a DCM, DTEF, or ECM \-- the Commission was
empowered to enforce the statute's prohibition against price
manipulation.

In contrast, Congress did not extend manipulation protections to
bi-lateral, non-trading facility transactions in excluded or exempt
commodities. FIA agrees with that congressional judgment, embodied in
sections 2(d) and 2(g) of the CEA. Price manipulation is of little
concern in one-off, non-standardized transactions between two eligible
contract participants where the price affects the individual
transaction, not a wider market. But where the pricing of trades would
affect the interests of other market participants, or even others that
base commercial transactions on futures market prices, the CFTC has an
interest in preventing futures price manipulation. In those
circumstances, the CFTC must be the cop on the beat.

The Commission's traditional role as the exclusive regulator of futures
transactions and markets actually compels this kind of comprehensive and
vigilant multi-market surveillance approach. Multiple markets combined
with multiple regulators would be a recipe for disaster. The slow growth
of single stock futures in the U.S., relative to other countries,
indicates that shared jurisdiction regimes may at least inhibit the
development of viable trading markets.

The Commission has in the past made its preeminence in U.S. futures
market surveillance known to its sister regulatory agencies overseas. If
a DCM and a foreign board of trade list for trading essentially the same
contract, the Commission understandably coordinates its surveillance
activities with foreign regulators. The Commission's experience with the
Financial Services Authority and ICE Futures Europe illustrates how well
this kind of cooperative information sharing approach can work in
practice. The Commission is to be commended for establishing the
necessary arrangements without overburdening market participants or
sacrificing its legitimate surveillance needs.

FIA recognizes that Congress is not clairvoyant and that market
conditions change, especially in a world driven by changes in technology
that come at us faster every day. We know the Commission will take
whatever steps it determines to be appropriate to update its regulatory
approaches consistent with its statutory authority. FIA understands it
is possible that the Commission may decide that it lacks some needed
authority in some areas and may therefore want to recommend to this
Subcommittee some changes in those areas. Perhaps, as one major ECM has
observed in a congressional hearing, limited changes might be called for
in the ECM area for some commodities in some circumstances where
multiple markets exist. But the tests for any of these changes should
be: are they essential for the performance of the CFTC's market
surveillance function and are they the least intrusive means for
achieving the required outcome?

FIA does not believe that any statutory change should be a basis for
leveling the so-called competitive playing field in energy or any other
area. Congress has appropriately allocated regulatory oversight in the
CEA based on differences in market participants, commodities traded,
means of trading, intermediation and even impact on cash markets. FIA
would not support any fundamental change to that regulatory alignment.

Retail OTC Foreign Currency Transactions.

As the Subcommittee will recall, the CFMA amended the so-called Treasury
Amendment based on a two-fold recommendation of the President's Working
Group on Financial Markets. First, the CFTC would continue to have no
jurisdiction over OTC foreign currency futures and options transactions
effected between eligible contract participants, as defined in the Act
(large, financially-sophisticated, well-capitalized, or otherwise
regulated market participants). Second, retail customers could effect
OTC foreign currency futures and options transactions only if the
customer's counterparty for those transactions was among a group of
otherwise regulated entities, including banks, broker-dealers and
futures commission merchants. Although not expressly stated in the
amendments, OTC futures and options transactions effected between retail
customers and counterparties that were not among the group of otherwise
regulated entities would be subject to the exchange-traded requirements
of section 4(a) of the Act and, therefore, illegal. In order to enforce
that ban, the CFTC would have to prove in court that the offending
transactions were futures or options.

It is important to stop here to emphasize that the CFMA provided the
CFTC with these enforcement powers solely with respect to transactions
that are futures or options on foreign currency. The amendments did not
purport to grant the Commission jurisdiction over cash and forward
contracts. Under the CFMA, the active cash and forward markets in
foreign currency would continue to fall outside of the Commission's
jurisdiction. (Historically, of course, cash and forward transactions on
all commodities have been excluded from the Commission's jurisdiction.)

In the past seven years, many unregistered and unregulated entities have
engaged in widespread sales practice and financial fraud in connection
with off-exchange foreign currency transactions with retail customers.
Some of these entities have attempted to avoid CFTC prosecution by
claiming not to be offering futures on foreign currency. To the
contrary, the agreements between these entities and their customers
stated that these transactions would be conducted on the spot market.
Nonetheless, applying a multi-factor approach first blessed by the 9th
Circuit in *CFTC v. Co-Petro Marketing Group, Inc.*, the Commission has
taken the position that these transactions are futures transactions and,
therefore, illegal.

Some years ago the 7th Circuit's decision in *CFTC v. Zelener*
concerning the legal tests for proving that a transaction is a futures
contract called into question the Commission's jurisdiction. In that
case, the court rejected the multi-factor futures definitional approach
and, focusing solely on the terms of the customer agreement, held that
the so-called "rolling spot" contracts offered by the defendants were,
in fact, spot contracts and not futures contracts. Some claim this
decision has created enforcement problems for the Commission.

As FIA told this Subcommittee in 2005, we agree the CFMA's approach to
granting the Commission enforcement jurisdiction over retail fraud in
foreign currency (FX) transactions was imperfect. That is why we were
pleased when the PWG came forwarded with a targeted solution to this
problem in 2005, and we endorsed the PWG's proposal. While we have some
technical suggestions for that legislative proposal, FIA continues to
support the PWG's approach. It would expand the CFTC's enforcement
powers to apply its antifraud authority to the offer and sale of
Zelener-like FX contracts. And it would require those that solicit
customer business in the retail FX area to be registered.

FIA does not believe that further regulatory authority is needed at this
time, but we understand that National Futures Association may offer some
further refinements to shore up the PWG's language in some respects. We
look forward to reviewing the NFA proposals in the retail FX area.

Conclusion.

Our last point is a familiar one and a critical one. Price manipulation
is public enemy #1 because it affects both market participants and the
public at large. Price manipulation can have a serious ripple effect in
our economy and can hurt many innocent bystanders. That is why continued
CFTC vigilance is so important.

It is also why Commission regulation benefits not just market
participants, but just as profoundly non-market participants. For that
reason, FIA continues to be vehemently opposed to funding the CFTC
through a transaction ta. xIn our view, all taxpayers benefit from CFTC
market oversight. Therefore all taxpayers should pay for it. If the CFTC
needs additional resources, the Administration should request and
Congress should appropriate the necessary funds. But imposing an
arbitrary and egregious tax that would be borne most by those that
provide the liquidity that allows futures markets to serve so many
public interests is a bad idea whose time should never come.

Thank you for holding this hearing and for considering our views. I
would be happy to answer any questions you might have.