**Testimony of**

**Terrence Duffy**

**Executive Chairman**

**Chicago Mercantile Exchange Group Inc.**

**Before the**

**House Agriculture Subcommittee on General**

**Farm Commodities and Risk Management**

**September 26, 2007**

I am Terrence Duffy, Executive Chairman of Chicago Mercantile Exchange
Group, Inc., ("CME Group" or "CME"). Thank you Chairman Etheridge and
members of the Subcommittee for this opportunity to appear here today to
present our views on some of the issues facing Congress as it continues
the reauthorization process. CME Group was formed by the merger this
year of Chicago Mercantile Exchange Holdings Inc. and CBOT Holdings Inc.
CME Group is the parent of CME Inc. and The Board of Trade of the City
of Chicago Inc. (the "CME Group Exchanges"). CME Group also owns
Swapstream Operating Services Limited, an OTC trading facility, and owns
an interest in FXMarketspace Limited, an FX trading platform that is
authorized and regulated by the Financial Services Authority. The CME
Group Exchanges serve the global risk management needs of our customers
and those who rely on the price discovery provided by the competitive
markets maintained by the Exchanges. The CME Group Exchanges offer a
comprehensive selection of benchmark products in most major asset
classes, including futures and options based on interest rates, equity
indexes, foreign exchange, agricultural commodities, energy, and
alternative investment products such as weather and real estate.
Additionally, we offer order routing, execution and clearing services to
other exchanges by means of our Globex® electronic trading platform and
our clearing house. CME Group is traded on the New York Stock Exchange
and NASDAQ under the symbol "CME."

**I. THE CFTC'S IMPLEMENTATION OF CFMA**

I am pleased to give our view of the achievements of the Commodity
Futures Trading Commission and the successes of our industry made
possible by the Commodity Futures Modernization Act of 2000 ("CFMA").
The CME Group commends Congress, and the agriculture committees, for the
foresight in 2000 to enact a principles-based regulatory regime for our
industry.

The success of the derivatives industry sharply contrasts with
developments in U.S. capital markets. Foreign exchanges have been
attracting new listings to the apparent detriment of U.S.
markets---thereby focusing negative attention on the U.S. regulatory
system for securities exchanges and issuers. There is concern that US
security markets have been hamstrung in meeting international
competition by overly-prescriptive regulation. A strong case has been
made that innovation is slowed and U.S. markets cannot attain a first
mover advantage because of the lag between idea and implementation
imposed by the regulatory regime.

We think that the marked success of the U.S. derivatives industry under
the regulatory regime created by the CFMA provides a compelling example
for the securities industry. In our view, reducing or limiting barriers
to entry in the global futures and options industry has strongly
contributed to business growth. For example, the compounded annual
growth rate of the global futures and options industry from 2000 through
2006 was 28% compared to only 4% for equity securities markets. This is
due, at least in part, to the fact that U.S. investors can directly and
electronically trade foreign futures and options contracts from the U.S.
Correspondingly, European and Asian investors can directly and
electronically trade products listed by CME and other U.S. futures and
options exchanges. Moreover, foreign boards of trade can efficiently
offer U.S. customers access to products also traded on U.S. exchanges,
thereby increasing global competition in these markets. In contrast,
under current SEC rules, U.S. investors cannot directly and
electronically trade foreign equity securities of foreign issuers that
do not comply with SEC disclosure standards or U.S. GAAP accounting
standards. The CFTC has wisely promoted global growth and competition
while recognizing that comparability in regulatory standards is superior
to insisting upon additional, but not necessarily better, regulatory
requirements.

Despite this record, we are concerned that most discussions of
regulatory shortcomings in the U.S. lump derivative and security markets
together and treat the regulatory problem as if it were caused by
separate regulation of those two sectors. We have not discovered a
single, considered explanation of why separate regulation of futures and
securities has adversely impacted securities markets.

The US futures industry kept its place as a world leader and innovator
because CFMA adopted a principles-based regulatory regime and the
Commission embraced and fostered the concept. CFMA set the stage for
innovation and international expansion of US futures markets.

Some observers argue that the occasional jurisdictional "overlap"
between the CFTC and SEC with respect to some innovative new products
demonstrates a dysfunctional system that must be changed. Those "border
disputes" certainly exist and are unfortunate, but they have no bearing
on the effective and efficient regulation of the great mass of futures
products that lie solely within CFTC's jurisdictional purview. The
proper resolution is the course that the CFTC pioneered, *i.e.,* finding
a solution that permits the new products to trade under both regimes and
permitting the "market" to choose.

The continuing call for merging the CFTC and the SEC is sometimes
justified as a means to resolve these minor conflicts. Such a merger has
no value for futures markets which already enjoy principal-based
regulation. There is no benefit to the customers, since the most likely
outcome will be the elimination of the better regulatory system. The
inadequacies of securities market regulation cited by critics need to be
resolved by reform of that regulatory regime, not by subjecting
derivative markets to a system that is not credible in a global economy.

Perhaps it is premature to comment, but there appears to be a serious
jurisdictional conflict between the CFTC and the Federal Energy
Regulatory Commission ("FERC"), arising out of FERC\'s prosecution of
Amaranth in connection with its trading of natural gas on NYMEX, a
designated contract market subject to the exclusive jurisdiction of the
CFTC. Section 2(a)(1)(A) of the CEA provides: "The Commission shall have
exclusive jurisdiction, except to the extent otherwise provided in
subparagraphs (C) and (D) of this paragraph and subsections (c) through
(i) of this section, with respect to accounts, agreements . . . and
transactions involving contracts of sale of a commodity for future
delivery, traded or executed on a contract market designated or
derivatives transaction execution facility registered pursuant to
section 7 or 7a of this title or any other board of trade, exchange, or
market . . . ." The CFTC investigated Amaranth's conduct and charged it
with an attempted manipulation under the CEA. FERC investigated the same
conduct and charged Amaranth with manipulative conduct under the
different standard applicable in its statute. FERC is taking the
position that it has jurisdiction over conduct on a futures exchange if
that conduct impacts cash markets under its jurisdiction. In effect,
FERC reads the CFTC's exclusive jurisdiction out of existence. The
prosecution of the same conduct by separate federal agencies under
differing standards creates exactly the sort of conflict that Congress
sought to avoid by limiting the reach of FERC jurisdiction.

**II. CME's RECOMMENDATIONS FOR REAUTHORIZATION**

We urge that the CFTC be reauthorized. Generally we agree that CFMA has
been a resounding success, but we also believe that reauthorization
offers a valuable opportunity to fine tune that statute based on
industry experience gained in the seven years since the CFMA's
enactment. In that regard, CME offers three recommendations for
consideration. We also wish to comment on the recurring efforts to
impose a transaction tax on exchange traded futures to fund the
Commission.

**[Off-Exchange Retail FX Futures Trading:]{.underline}**

The first area in need of fine tuning involves retail, off-exchange
trading of foreign exchange derivatives. We have lost track of the
number of CFTC and NFA enforcement actions since we first urged
elimination of the exemption that permitted off-exchange trading of
retail foreign exchange contracts. As we predicted, there have been
hundreds of enforcement actions, hundreds of millions in fraudulent
losses to small traders, and each day brings new cases and more losses.
The confluence of the massive continuing frauds committed against retail
customers by fly-by-night foreign exchange dealers, and the unfortunate
decision of the 7^th^ Circuit Court of Appeals in [CFTC v.
Zelener]{.underline}*,* compel this industry to reexamine the public
policy implications of how the CFMA addresses off-exchange retail
foreign exchange futures and the threshold definition of what
transactions should be subject to CFTC jurisdiction.

The fact that the CFTC and NFA are compelled to devote such substantial
resources to protecting retail customers from widespread fraud in the
off-exchange FX market is evidence enough that a serious problem exists
with the CFMA that cries out for reform. In the aftermath of the
[Zelener]{.underline} decision, FX dealers can structure a margined
currency contract for speculative use by retail customers and assert
that is beyond the reach of the CFTC's jurisdiction. I don't believe
that there is a single person in this room who would not agree that such
contracts are futures contracts that deserve the protection of the CFTC.
Under the [Zelener]{.underline} case, it does not matter what the dealer
actually does or what the customer actually expects---a single sentence
in the small print of the customer agreement denies the CFTC
jurisdiction.  The sharp operators and bucket shops have already figured
out that the rationale of the [Zelener]{.underline} opinion can apply to
commodities other than FX.  If we only fix the FX problem, those
operators will simply transfer their scams to orange juice, gold and
heating oil. The CFTC's jurisdiction and its retail consumer protections
will be reduced to irrelevance.

At a minimum, we need an amendment that will clarify that retail FX
derivative trading systems that do not regularly settle contracts by
delivery are subject to CFTC registration requirements, unless operated
by banks or other financial institutions. To the extent that such
systems are regulated by the CFTC, they should only be operated by
designated contract markets or well capitalized and fully regulated
FCMs. All intermediaries who serve the same function as CPOs, CTAs and
IBs and who deal with retail customers of off-exchange FX trading
systems, regardless of the identity of the operator or the platform,
must be required to register in the appropriate capacity and be subject
to comparable regulation.

**[Exempt Commodity Markets:]{.underline}**

Our perspective is based on "first principles," which means we look to
the findings and purposes adopted by Congress to guide the Commission's
exercise of its jurisdiction. Section 5(b) of the Commodity Exchange Act
charged the Commission with a duty to oversee "a system of effective
self-regulation of trading facilities, clearing systems, market
participants and market professionals" and to "to deter and prevent
price manipulation or any other disruptions to market integrity; to
ensure the financial integrity of all transactions subject to this
chapter and the avoidance of systemic risk; to protect all market
participants from fraudulent or other abusive sales practices."

There is a growing conflict between these "purposes" and the statutory
exemption for Commercial Markets found in Section 2(h)(3), which is the
basis for the Exempt Commercial Market ("ECM") category. It is clear
that all of the key purposes mandated by Congress in Section 5(b) are
jeopardized if trading facilities for contracts in exempt commodities
are permitted to coexist with regulated futures exchanges that list
those same commodities. The Exempt Commercial Markets authorized by
Section 2(h)(3), do not have any system of "effective self regulation"
of their facilities or of their market participants. Their contracts are
traded based on the prices of commodities that have limited supplies and
that have often been the subject of manipulative activity and disruptive
market behavior. There is no mechanism in place "to deter and prevent
price manipulation or any other disruptions to market integrity." The
Commission cannot track the build-up of dominant positions. The ECM has
no real power over its users. At best, the Commission has power to
punish such conduct after the fact. We find this to be a serious
problem, as explained in detail below, that is at odds with Congress's
intent behind the CFMA and which, if left unaddressed, is likely to
jeopardize the public's confidence in the CFTC's ability to do its job.

> **A. Trading standardized, cash settled, fungible commodity contracts
> on a multilateral execution facility is indistinguishable from futures
> trading.**

Bi-lateral swaps, including swaps respecting energy, metals and other
non-agricultural products, as defined at section 2(g) of the CEA, were
excluded from the exchange trading requirement of the CEA because they
had developed into an important product and a formal confirmation of
their excluded status was desirable. The Commission's Policy Statement
Concerning Swap Transactions, 54 Fed. Reg. 30,694 (July 21, 1989) was
the first step in the direction of excluding financial product swaps.
The Futures Trading Practices Act of 1992, Pub. L. No. 102-546, 106
Stat. 3590, amended the CEA and clarified the Commission's authority to
exempt certain transactions from the exchange trading requirement. The
Commission adopted such regulations in 1992, e.g., 17 C.F.R. 35. An
excluded bi-lateral swap must be "subject to individual negotiation by
the parties and not executed on a trading facility.[^1]

CEA Section 2(d)(2) excluded electronically traded contracts based on
certain financial measures that were deemed unlikely to be subject to
manipulative activity (an "excluded commodity") if the contract is
entered into on a principal-to-principal basis between eligible contract
participants. This exclusion is based on the recommendations of the
President's Working Group ("PWG"). The PWG carefully limited its
recommendation for an excluded electronic trading platform to a class of
commodities that did not include the types of commodities traded on an
ECM:

> "Accordingly, the Working Group unanimously recommends that Congress
> amend the CEA to clarify that entering into or trading excluded swap
> agreements (i.e., agreements between eligible swap participants [that
> do not involve non-financial commodities with finite
> supplies]{.underline}) through electronic trading systems with certain
> characteristics does not affect the status of the agreements traded
> through the system and does not provide a basis for regulation of the
> system. *Over-the-Counter Derivatives Markets and the Commodity
> Exchange Act*, Report of The President's Working Group on Financial
> Markets, at 18-19 (November 1999) (emphasis supplied)

CME supported and continues to support those portions of the CFMA that
exclude bi-lateral swaps in financial commodities. We also support the
electronic trading of financial derivatives on Exempt Boards of Trade as
provided in CFMA. But, the contracts traded on ECMs are not such
bi-lateral swaps. They are standardized derivatives whose terms are set
by the operator of the trading platform. Identical contracts become
fungible if the platform provides central counterparty clearing.
Consequently a buyer can offset his position by selling an equal and
opposite contract. The price of the transaction is set at the time of
the transaction but delivery is deferred. We do not consider these to be
forward cash contracts because they are not regularly settled by the
delivery of a specific cash instrument; rather they are cash settled
like many financial futures contracts.

The only significant differences between traditional DCMs and ECMs is
the "eligible contract participant" ("ECP") qualification of the ECM's
customers and the requirement that ECM customers execute transactions
without a broker or other intermediary. However, it is only those
traders that are large enough to satisfy the ECP requirements who are
likely to be involved in manipulative activity. Of course, CME Group
Exchange customers can also directly enter their orders into the GLOBEX
trading system and most customers do qualify as eligible contract
participants. That difference may justify a different set of customer
protection rules for ECMs, but it does not justify the lack of a
self-regulatory system, large trader reporting or information sharing
with other exchanges.

> **B. Coexisting regulated and unregulated markets for economically
> equivalent commodity contracts impair information flows necessary to
> prevent misconduct.**

Large trader reports are the key element of Commission and self-
regulatory organization surveillance programs to prevent disruptive
market activities. ECMs do not require large trader reports and do not
participate in the Intermarket Surveillance Group, which shares
information across exchanges. There is no logical basis for this
distinction. If the prevention of disruptive market behavior is to
remain a goal of derivatives regulation, information collection and
sharing is essential.

The intensity of concern respecting this lack of information depends on
the likelihood of manipulation or other market disruptions that may be
caused by trading particular underlying products, i.e. excluded versus
exempted commodities. Again, the 1999 PWG report is instructive. The
PWG's recommendations for eliminating the exchange trading requirement
and easing regulatory burdens on electronic trading facilities, which
host transactions involving derivatives based on excluded commodities,
were premised on its considered judgment respecting the risks of
manipulative and market distorting activity in the excluded commodities:

> "Where regulation exists, it should serve valid public policy goals.
> The justifications generally cited for regulation of the futures
> markets include the goals of protecting retail customers from unfair
> practices, protecting the price discovery function, and guarding
> against manipulation. With similar policy goals in mind, the Working
> Group has recommended limiting the proposed exclusion for swap
> agreements to eligible swap participants trading for their own account
> . . . . [It has also recommended limiting proposed exclusions to
> markets that are not readily susceptible to manipulation and that do
> not currently serve a significant price discovery
> function]{.underline}." *Over-the-Counter Derivatives Markets and the
> Commodity Exchange Act*, Report of The President's Working Group on
> Financial Markets, at 22 (November 1999) (emphasis supplied)

The PWG made it abundantly clear that trading facilities for energy and
metals products should not be exempted:

> "Due to the characteristics of markets for non-financial commodities
> with finite supplies, however, the [Working Group is unanimously
> recommending that the exclusion not be extended to agreements
> involving such commodities.]{.underline} For example, in the case of
> agricultural commodities, production is seasonal and volatile, and the
> underlying commodity is perishable, factors that make the markets for
> these products susceptible to supply and pricing distortions and to
> manipulation. There have also been several well-known efforts to
> manipulate the prices of certain metals by attempting to corner the
> cash or futures markets. Moreover, the cash market for many
> non-financial commodities is dependent on the futures market for price
> discovery." Id. at 16 (emphasis supplied)

The testimony adduced at the recent congressional hearings on the
Amaranth episode and energy trading issues confirms the validity of the
PWG's concerns about an exclusion for energy trading facilities.

> **C. The Remedy: The Section 2(h)(3) exemption for unregulated
> commercial markets should be eliminated.**

Potential disruption of regulated markets and the cash market for
certain exempted commodities justifies an increase in the flow of
current information from organized OTC markets to the Commission. One
seemingly simple solution is to change reporting requirements. Our
experience suggests that this will be a failure. In order to provide
accurate reports, a market needs an effective surveillance and
compliance system. This implies that an effective system of self
regulation must be put in place. The logical conclusion is you must
implement at least the core principles required of a Designated
Transaction Execution Facility ("DTEF") to get a useful result.

The 2(h)(3) special exemption for commercial markets trading commodity
futures contracts based on energy, metals and other non-enumerated
commodities is directly contrary to the recommendations of the
President's Working Group on which CFMA was based. The PWG expressly
found that an exemption for exchange-like trading of derivatives based
on underlying commodities that were not immune from manipulation was not
appropriate. The legislative history of the CFMA provides no explanation
for why Congress deviated from the PWG recommendations.

If Congress needs any further justification for taking action to reverse
this hole in the CEA's regulatory safety net, Intercontinental
Exchange's Jeffrey Sprecher's recent testimony before Congress
adequately confirms that there is ample need for it now. He conceded
that it is essential to the performance of the CFTC's oversight function
that there be enhancements "to the quality and quantity of information
currently available to the CFTC and, in particular, its ability to
integrate data from ICE and NYMEX."[^2] Additionally, our sense is that
the CFTC devotes an outsized proportion of its human and financial
resources to trying to stay abreast of problems in the ECM market and
dealing with other off-exchange trading. Eliminating the 2(h)(3)
category would produce significant efficiencies of administration and
more effective regulatory oversight without any adverse implications for
innovation, competition or market flexibility. Any trading facility that
is now successfully operating as an ECM can easily and inexpensively
convert to a DTEF or DCM. Beyond the market protections reflected in a
DTEF's core principles, a DTEF has an affirmative obligation to deter
market abuses and to implement systems and procedures to comply with
that obligation[^3]. The Commission has oversight powers to insure that
the obligation is met. The existing DTEF regulatory scheme would appear
to provide an effective remedy to the problems identified with ECMs
without the need to invent something new.

The Commission's published list of ECMs confirms our belief that there
appears to be no barrier for ECMs to convert to DTEFs or DCMs. There are
numerous providers to whom any servicing needs, such as clearing and/or
compliance, can be outsourced efficiently. The significant entrants,
such as ICE, ChemConnect, Inc., Chicago Climate Exchange, Inc., and
TradeSpark have affiliates that are already regulated by the Commission
and can provide such services in house. HoustonStreet seems to be a
marketplace for physical crude oil and other refined products that makes
certain NYMEX ClearPort products available in a linkage arrangement.
NetThruPut Inc. appears to be a cash crude oil trading system. It is
unclear, from its websites, what ICAP is actually doing as an ECM. Some,
such as Optionable, Inc. and Commodities Derivative Exchange, Inc., are
out of business. Others appear to be trading agricultural commodities
like pulp and salmon, which, not being exempt commodities, are not
within the purview of ECMs.

**[Security Futures Products:]{.underline}**

In my Congressional testimony of June of 2003, I characterized single
stock futures as "the CFMA's unfulfilled promise". I am sad to say what
was true then remains so even today. As evidenced by the success and
acceptance of the contract in European markets, single stock futures can
be a great product with enormous benefits to market users.  The
regulatory system that has slowly evolved between CFTC and SEC has yet
to address various key issues and several of the regulations that have
been produced thus far are overly burdensome and inflexible, frustrating
development of products that would be both useful and desirable to
market participants.

It is time to let futures exchanges trade the product as a pure futures
contract and to let securities exchanges trade it as a securities
product.  Let the relevant exchanges deal solely with their respective
regulator, the CFTC or the SEC, which is what I believe the Congress
intended in 2000 in authorizing single stock futures. We want
competitive forces to determine the outcome---not government. Fulfilling
that promise made in 2000 will advance the customers' interest
substantially. We would encourage the Subcommittee to use its oversight
jurisdiction to insist that the respective regulatory agencies eliminate
undue regulatory impediments that have been erected to frustrate the
introduction of security futures products [^4]

**[Transaction Tax:]{.underline}**

The periodic attempts to impose a transaction tax on exchange traded
futures contracts are misguided. First, the tax will fall on liquidity
providers who will simply be driven off shore to untaxed exchanges.
Second, the regulated exchanges already pay for the Commission's direct
oversight and their customers pay a fee to the National Futures
Association for the services it performs, many of which have been
offloaded from the CFTC. Finally, the CFTC's expenses and need for
additional staff is attributable to off-exchange frauds and
manipulations, not self-regulated exchange trading.

Each year we are faced with a proposal to fund the Commodity Futures
Trading Commission's budget with a "transaction tax" levied on U.S.
futures exchange trading. This tax will: (1) impair liquidity of U.S.
futures markets; (2) change the competitive balance in favor of foreign
and OTC markets; (3) unfairly burden U.S. futures exchanges with the
costs of policing OTC fraud; (4) hurt the local economies in the cities
and states where futures exchanges create great employment
opportunities; (5) lessen the value of the information provided to
farmers and the financial services industry by means of the price
discovery that takes place in liquid, transparent futures markets; (6)
adversely impact the cost of financing the national debt; and,
ironically, (7) fail to increase the taxes actually collected.
Fortunately, with the Agriculture Committee's leadership, Congress has
consistently rejected this ill-conceived tax proposal.[^5] A transaction
tax is ill-conceived and counter-productive and should be rejected for
all of the reasons listed, as explained in more detail below:

1\. Adversely Impacting Liquidity: We estimate that the transaction tax
will add significantly to the execution costs of the significant
liquidity providers on U.S. futures exchanges. These market makers whose
constant participation and rapid turn-over is the major source of market
liquidity operate on razor thin margins. Every market maker would pay an
additional tax on top of his existing federal, state and local taxes. A
transaction tax to fund the CFTC imposes millions per year in tax on
market makers in addition to the tax they already pay on any profits
they achieve. The transaction tax is imposed whether or not they
actually profit. Many of these market makers are at the margin of
profitability. This significant tax will expose them to the choice of
continuing at a profit level unjustified by the risks assumed or exiting
the business. The exit of liquidity providers means decreased efficiency
of the futures markets, more volatility and less facility for other
market participants to make effective use of futures markets. We are
also concerned that the discipline exerted on the agency's budget by the
appropriations process will evaporate under a regime where the costs are
allocated to certain market users.

2\. Upsetting the Competitive Balance: The transaction tax only applies
to domestic futures exchange trading: competing over the counter
markets, including the ECMs that are discussed above, and foreign
futures exchanges are not covered. This feature grants those venues
substantial, unearned competitive advantages over US regulated futures
exchanges. Users of U.S. futures markets can and do readily shift their
business off-exchange or overseas if U.S. futures markets are too
costly. In this era of electronic trading, market participants can
transfer their business to trading platforms that offer the most
competitive transactional pricing. It is as easy for an exchange to
claim a foreign venue and avoid costly U.S. regulation or taxes. This is
not a remote possibility, it is happening now in connection with the
major competitive battle between a U.S. and U.K. energy futures market.

3\. Taxing the Wrong Parties: Futures exchanges already pay for direct
supervision by the CFTC. Customers trading on U.S. futures exchanges pay
a fee to cover the regulation of intermediaries provided by the National
Futures Association, which has taken over many of the responsibilities
of the CFTC. A significant and increasing amount of CFTC's enforcement
and surveillance budget is dedicated to detecting and prosecuting fraud
in OTC trading (for example, OTC currency and energy trading), yet this
transaction tax proposal would have exchange traders foot the bill for
CFTC's OTC-related surveillance and enforcement activities. So too,
trading done through foreign exchange affiliates of US-based OTC
entities would similarly escape the ambit of the transaction tax even
while CFTC would be dedicating its staff resources to surveillance and
enforcement activities related to those markets.

4\. Hurting Local Economies: Harming the US futures industry will affect
both the U.S. and local economies. In Chicago, the exchange industry
provides more than 100,000 direct and indirect jobs; more than \$48
billion are on overnight deposit in Chicago and New York banks as a
result of the exchanges. The exchanges and those who depend on them for
their livelihoods are the source of millions of dollars in federal,
state and local tax revenues. New York benefits just as directly from
its three futures exchanges, with billions contributed to NYC's economy
and hundreds of millions in federal state and local taxes.

5\. Impairing Price Discovery: Futures markets provide significant
benefits to market users and to persons seeking good information on
future pricing in order to guide their decision making on investment,
planting, herd management, etc. The deeper and more liquid the market,
the better the price discovery and information provided. Any impairment
of liquidity lessens the value of the information and the functioning of
our market based economy.

6\. Increasing the Cost of Financing the National Debt: The value to the
federal government of liquid, efficient domestic futures markets far
exceeds the revenue that might be generated by the transaction tax.
Liquid futures markets save the Treasury and taxpayers millions of
dollars by allowing government securities dealers effectively to hedge
their risks and to bid more aggressively at auctions for Treasury
securities. The savings to the Treasury in interest rate payments are
worth far more than the \$127 million the transaction tax is expected to
raise. If a government-imposed transaction tax diminishes liquidity in
futures markets, thereby increasing government borrowing costs by even
one basis point, that tax would increase the federal deficit by at least
\$474,543,158.71 million per year.

7\. Securing No Real Gain in Revenues: In every instance when a
government imposed a transaction tax on futures trading, the loss of
business to foreign exchanges forced a reversal. In some cases it came
too late and the industry was lost. If the proposed transaction tax
forces the U.S. futures business overseas or to untaxed substitute
markets, the anticipated revenue will be an illusion. Diminished futures
industry business and employment will also result in reduced corporate
and personal income taxes in this country. Not only will the proposed
transaction tax fail to produce enough ongoing revenue to fund the CFTC,
but it will reduce government revenues generally.

**V. CONCLUSION:**

The CME, its members and their customers, and the nation's market based
economy have prospered under the CFMA. The CFTC should be reauthorized
and the principles of CFMA should be reaffirmed. The CME looks forward
to engaging significantly in the reauthorization process and to
achieving legislation that maintains the significant successes of the
CFMA while making discreet corrections designed to materially improves
the utility, efficiency, competitiveness and fairness of our futures
markets for our customers and all market participants.

[^1]: \(g\) Excluded swap transactions

    No provision of this chapter (other than section 7a (to the extent
    provided in section 7a(g) of this title), 7a-1, 7a-3, or 16(e)(2) of
    this title) shall apply to or govern any agreement, contract, or
    transaction in a commodity other than an agricultural commodity if
    the agreement, contract, or transaction is\--

    \(1\) entered into only between persons that are eligible contract
    participants at the time they enter into the agreement, contract, or
    transaction;

    \(2\) subject to individual negotiation by the parties; and

    \(3\) not executed or traded on a trading facility.

[^2]: Testimony of Jeffrey C. Sprecher, Chairman and Chief Executive
    Officer, Intercontinental Exchange, Inc., Before the House
    Agriculture Subcommittee on General Farm Commodities and Risk
    Management Committee on Agriculture, page 8 (July 12, 2007).

[^3]: CEA Section 5a (c)(2) provides as follows:

    > Deterrence of abuses.\-\--
    >
    > The board of trade shall establish and enforce trading and
    > participation rules that will deter abuses and has the capacity to
    > detect, investigate, and enforce those rules, including means
    > to\--\
    > (A) obtain information necessary to perform the functions required
    > under this section; or\
    > (B) use technological means to\--\
    > (i) provide market participants with impartial access to the
    > market; and\
    > (ii) capture information that may be used in establishing whether
    > rule violations have occurred.

[^4]: In their letter to Congressional leaders dated November 3, 2005,
    the PWG principals stated inter alia that: "In addition to retail
    foreign currency fraud issues, the PWG members have discussed the
    complex issues related to ...the implementation of risk-based
    portfolio margining systems for security futures products and
    security options....As part of these discussions, the PWG is
    committed to resolving the portfolio margining system and
    narrow-based index issues within the time frames set forth below.

    With regard to portfolio margining, the SEC has committed to
    approving self regulatory organization (SRO) rules that permit the
    use of risk-based portfolio margining methodology to determine
    margin requirements for portfolios that include security futures
    products and for security options by June 30, 2006. In the event
    that the SEC does not approve such SRO rules, the SEC will
    promulgate rules to permit risk-based portfolio margining for
    security options by September 30, 2006, and the SEC and CFTC will do
    so jointly for security futures products by the same date."

[^5]: In its March 1, 2007 budget recommendation letter, the bi-partisan
    leadership of the House Agriculture Committee stated: "The
    Administration has also proposed the enactment of new user fees to
    be charged by a number of different agencies under the jurisdiction
    of the Committee on Agriculture. Some of these fees have been
    proposed before, and it has been the consistent judgment of our
    Committee that the widespread benefits of the activities involved
    justify the use of the general treasury."