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HEARING TO REVIEW THE 2015 AGENDA FOR 

THE COMMODITY FUTURES TRADING 

COMMISSION 

HEARING 

BEFORE THE

COMMITTEE ON AGRICULTURE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

FEBRUARY 12, 2015 

Serial No. 114–2 

( 

Printed for the use of the Committee on Agriculture 

agriculture.house.gov 

COMMITTEE ON AGRICULTURE 

K. MICHAEL CONAWAY, Texas, Chairman 

RANDY NEUGEBAUER, Texas, 

Vice Chairman 

BOB GOODLATTE, Virginia 

FRANK D. LUCAS, Oklahoma 

STEVE KING, Iowa 

MIKE ROGERS, Alabama 

GLENN THOMPSON, Pennsylvania 

BOB GIBBS, Ohio 

AUSTIN SCOTT, Georgia 

ERIC A. ‘‘RICK’’ CRAWFORD, Arkansas 

SCOTT DESJARLAIS, Tennessee 

CHRISTOPHER P. GIBSON, New York 

VICKY HARTZLER, Missouri 

DAN BENISHEK, Michigan 

JEFF DENHAM, California 

DOUG LAMALFA, California 

RODNEY DAVIS, Illinois 

TED S. YOHO, Florida 

JACKIE WALORSKI, Indiana 

RICK W. ALLEN, Georgia 

MIKE BOST, Illinois 

DAVID ROUZER, North Carolina 

RALPH LEE ABRAHAM, Louisiana 

TOM EMMER, Minnesota 

JOHN R. MOOLENAAR, Michigan 

DAN NEWHOUSE, Washington 

COLLIN C. PETERSON, Minnesota, Ranking 

Minority Member 

DAVID SCOTT, Georgia 

JIM COSTA, California 

TIMOTHY J. WALZ, Minnesota 

MARCIA L. FUDGE, Ohio 

JAMES P. MCGOVERN, Massachusetts 

SUZAN K. DELBENE, Washington 

FILEMON VELA, Texas 

MICHELLE LUJAN GRISHAM, New Mexico 

ANN M. KUSTER, New Hampshire 

RICHARD M. NOLAN, Minnesota 

CHERI BUSTOS, Illinois 

SEAN PATRICK MALONEY, New York 

ANN KIRKPATRICK, Arizona 

PETE AGUILAR, California 

STACEY E. PLASKETT, Virgin Islands 

ALMA S. ADAMS, North Carolina 

GWEN GRAHAM, Florida 

BRAD ASHFORD, Nebraska 

SCOTT C. GRAVES, Staff Director 

ROBERT L. LAREW, Minority Staff Director 

(II) 

(III) 

C O N T E N T S 

Page 

Conaway, Hon. K. Michael, a Representative in Congress from Texas, opening 

statement .............................................................................................................. 1 

Prepared statement .......................................................................................... 3 

Peterson, Hon. Collin C., a Representative in Congress from Minnesota, opening statement ........................................................................................................ 4 

Scott, Hon. Austin, a Representative in Congress from Georgia, prepared 

statement .............................................................................................................. 5 

WITNESS

Massad, Hon. Timothy G., Chairman, Commodity Futures Trading Commission, Washington, D.C. ........................................................................................ 5 

Prepared statement .......................................................................................... 7 

Submitted questions ......................................................................................... 53 

(1) 

HEARING TO REVIEW THE 2015 AGENDA FOR 

THE COMMODITY FUTURES TRADING 

COMMISSION 

THURSDAY, FEBRUARY 12, 2015 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON AGRICULTURE, 

Washington, D.C. 

The Committee met, pursuant to call, at 10 a.m., in Room 1300 

of the Longworth House Office Building, Hon. K. Michael Conaway 

[Chairman of the Committee] presiding. 

Members present: Representatives Conaway, Neugebauer, Goodlatte, Lucas, Rogers, Thompson, Gibbs, Austin Scott of Georgia, 

Crawford, DesJarlais, Hartzler, Denham, LaMalfa, Davis, Yoho, 

Allen, Rouzer, Abraham, Emmer, Moolenaar, Newhouse, Peterson, 

David Scott of Georgia, Costa, McGovern, DelBene, Vela, Lujan 

Grisham, Kuster, Nolan, Bustos, Maloney, Kirkpatrick, Aguilar, 

Plaskett, Adams, Graham, and Ashford. 

Staff present: Caleb Crosswhite, Haley Graves, Jackie Barber, 

Jessica Carter, Paul Balzano, Scott Graves, Andy Baker, Matthew 

MacKenzie, and Nicole Scott. 

OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A 

REPRESENTATIVE IN CONGRESS FROM TEXAS 

The CHAIRMAN. This meeting of the House Agriculture Committee will come to order. 

Parson Scott, will you start us with a prayer? 

Mr. AUSTIN SCOTT of Georgia. Yes, sir, Mr. Chairman. Bow with 

me. 

Lord, we love you and we know you love us. You have given us 

such a great country and such a privilege to serve. And we would 

just pray that you would give us the courage to do the things that 

would be right for driving this country in the right direction that 

would be pleasing you, and we just ask that you bless every Member of this Committee and those who are here with us as we go forward and do our work. In Christ’s name I pray. Amen. 

The CHAIRMAN. Thank you. Again, the Committee will come to 

order, and we are here today to review the 2015 agenda for the 

Commodity Futures Trading Commission. And, Chairman Massad, 

thank you very much for coming and joining us today. We appreciate that. 

Today’s hearing is the first of what I hope will be many productive engagements between you, your staff, your fellow Commissioners, and Members of this Committee. 

2 

I would like to take a point of personal privilege. We spent part 

of Friday afternoon in Chicago with your team there, led by Rosemary Hollinger, and had a really terrific productive 21⁄2 hours of 

exchange. And I want to also brag on Phyllis Dietz and Matt 

Hunter for helping out with that, and Cory Claussen, of course, 

and Ann Wright, and all the folks who helped us there in Chicago. 

It was a great 21⁄2 hours, and thank you for dedicating that time 

to us. We really appreciate that. 

In 2015, the CFTC’s response to the financial crisis is entering 

a new phase, shifting from the breakneck race to draft rules to a 

more deliberative implementation of those rules. It is inevitable 

that Congress and the Commission made mistakes along the way, 

and now is the time for us to step back and recognize improvements that can be made. 

Mr. Chairman, I am pleased that you have reexamined some of 

the prior rulemakings to ensure that end-users are not unduly burdened by these new rules. Your proposal on volumetric optionality 

exemptions, record-keeping requirements, and the residual interest 

deadlines are much appreciated. While we may not see eye-to-eye 

on all of these details, the proposals meaningfully move the needle 

in the right direction. 

While continuing our longstanding focus on protecting end-users, 

this Committee will examine several broader issues this year. Specifically, we will look at the swaps market under the new regulations, the position limit rulemaking and the bona fide hedge exemption, with the resolution of many cross-border jurisdictional 

issues that have come up, and the collection and usage of the tremendous volume of new data that is flowing into the Commission. 

Commissioner Giancarlo recently authored a comprehensive 

white paper on the swap space and the SEF rules—excuse me, I 

just asked you earlier not to use acronyms. The swap execution facility rules, in particular. As someone with significant experience in 

that area, I appreciate his insight into these markets. Building new 

swaps exchanges and mandating centralized clearing and margining when feasible is at the heart of the reforms of Title VII of 

Dodd-Frank. But it is important that changes to swaps markets 

recognize the gradual growth of these financial instruments. 

In a similar vein, as the Commission contemplates its position 

limits rule, it is not enough to regulate simply because the Commission has the power. The law directs the Commission to set new 

position limits as appropriate, and as the Commission finds are 

necessary to curtail excessive speculation. 

As the Commission moves forward, its proposed rule must first 

explain whether or not price movements in commodities are based 

on reasonable market forces and can be justified by facts, and then 

explain how position limits will diminish, eliminate, or prevent 

market disruptions. Big price swings, even those we have seen in 

the oil markets over the past decade, are not prima facie evidence 

for the appropriateness of, or need for, position limits. 

The Commodity Exchange Act also includes an expansive definition of bona fide hedging which specifically includes anticipatory 

hedging needs. It is important that this exemption remain broad 

enough that legitimate commercial hedging activity can be shelVerDate Mar 15 2010 08:31 Jun 03, 2015 Jkt 041481 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 P:\DOCS\114-02\93960.TXT BRIAN
3 

tered from any limits the Commission may demonstrate are appropriate. 

On cross-border issues, it appears that there has been some tentative progress in reducing the ongoing tension with foreign regulators over how we apply national rules across international borders. Trust and mutual respect is a first step towards solving these 

difficult issues, so this is very welcome news. However, it is important the CFTC and international regulators finish this important 

work and rebuild the fractured swaps markets. 

Finally, over the past few years, numerous witnesses have testified to the Commission’s difficulty in collecting and using the tremendous volume of new data required under Dodd-Frank. This 

issue is critical to the functioning of swaps markets. Data reporting 

rules impose a burden on market participants and those burdens 

cannot, and must not, be in vain. I know that the Commission is 

working to address this issue and I look forward to your comments 

on this progress. 

In my view, these four issues present the biggest challenges in 

implementing Title VII with the least amount of additional disruption as possible. In the coming months, we will be taking up the 

reauthorization of the CFTC and the Committee will look for broad 

input about how we can tailor and refine the law to ensure that 

the marketplace works for all participants. As we do so, Mr. Chairman, your perspective will be invaluable to our legislative process. 

And while, again, we won’t agree on everything, we will work with 

you and your team to find common ground on improving the Commodities Exchange Act. 

Mr. Chairman, I look forward to working with you during the 

time we are privileged to serve together. Again, thank you for appearing here today at this Committee to share your views. We appreciate your time. 

[The prepared statement of Mr. Conaway appears at the conclusion of the hearing:] 

PREPARED STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE IN

CONGRESS FROM TEXAS

Chairman Massad, thank you for joining us today. Today’s hearing is the first of 

what I hope will be many productive engagements between you, your staff, your fellow Commissioners, and the Members of this Committee. 

In 2015, the CFTC’s response to the financial crisis is entering a new phase— 

shifting from the breakneck race to draft rules to the more deliberative implementation of the rules. It is inevitable that Congress and the Commission made mistakes 

along the way, and now it is time for us to step back and recognize improvements 

that can be made. 

Mr. Chairman, I am pleased that you have reexamined some of the prior 

rulemakings to ensure that end-users are not unduly burdened by these new rules. 

Your proposal on volumetric optionality exemptions, record keeping requirements, 

and the residual interest deadline are appreciated. While we may not see eye-to-eye 

on all of the details, the proposals meaningfully move the needle in the right direction. 

While continuing our longstanding focus on protecting end-users, this Committee 

will examine several broader issues this year. Specifically, we will look at the swaps 

market under the new regulations, the position limits rulemaking and the bona fide 

hedge exemption, the resolution of the many cross-border jurisdictional issues that 

have come up, and the collection and usage of the tremendous volume of new data 

flowing into the Commission. 

Commissioner Giancarlo recently authored a comprehensive white paper on the 

swap space and the SEF rules, in particular. As someone with significant experience 

4 

in that area, I appreciate his insight into these markets. Building new swaps exchanges and mandating centralized clearing and margining when feasible is at the 

heart of the reforms in Title VII of Dodd-Frank. But, it is important that changes 

to swaps markets recognize the gradual growth of these financial instruments. 

In a similar vein, as the Commission contemplates its position limits rule, it is 

not enough to regulate simply because the Commission has the power. The law directs the Commission to set new position limits ‘‘as appropriate’’ and ‘‘as the Commission finds are necessary’’ to curtail ‘‘excessive speculation.’’ 

As the Commission moves forward, its proposed rule must first explain whether 

or not price movements in commodities are based on reasonable market forces and 

can be justified by facts, and then explain how position limits will diminish, eliminate, or prevent market disruptions. Big price swings—even those we’ve seen in the 

oil markets over the past decade—are not prima facie evidence for the appropriateness of and need for position limits. 

The Commodity Exchange Act also includes an expansive definition of bona fide 

hedging which specifically includes anticipatory hedging needs. It is important that 

this exemption remain broad enough that legitimate commercial hedging activity 

can be sheltered from any limits the Commission may demonstrate are appropriate. 

On cross-border issues, it appears that there has been some tentative progress in 

reducing the ongoing tension with foreign regulators over how we apply national 

rules across international borders. Trust and mutual respect is a first step towards 

solving these difficult issues, so this is welcome news. However, it is important the 

CFTC and international regulators finish this important work and rebuild the fractured swaps markets. 

Finally, over the past few years, numerous witnesses have testified to the Commission’s difficulty in collecting and using the tremendous volume of new data required by Dodd-Frank. This issue is critical to the functioning of swaps markets. 

Data reporting rules impose a burden on market participants and those burdens 

cannot be in vain. I know that the Commission is working to address this issue and 

I look forward to an update on this progress. 

These four issues, while not exhaustive, are each necessary to get right in order 

to continue having the most dynamic risk-manage tools in the world. In the coming 

months, we’ll be taking up the reauthorization of the CFTC where this Committee 

will look for input about how we can tailor and refine the law, to ensure the marketplace works for all market participants. As we do so, Mr. Chairman, your perspective will be invaluable to our legislative process. While we won’t agree on everything, we will work with you and your team to find common ground on improvements to the CEA. 

Mr. Chairman, I look forward to working with you during the time we are privileged to serve together. Again, thank you for appearing before this Committee to 

share your views with us. We appreciate your time today. 

The CHAIRMAN. And I now recognize the Ranking Member for his 

opening statement. 

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A 

REPRESENTATIVE IN CONGRESS FROM MINNESOTA 

Mr. PETERSON. Well, thank you, Mr. Chairman. And good morning everybody, and welcome Chairman Massad to the Agriculture 

Committee. This is the Chairman’s first appearance before the 

Committee, but I have had an opportunity to meet with him, and 

have been impressed by his commitment to implementing the new 

regulations called for under Dodd-Frank and being inclusive of all 

points of view throughout that process. The rulemaking process has 

maybe taken longer than some would like, but given the limited resources they have had to get these rules in place, I think the CFTC 

has done a good job. 

I look forward to an update on the Commission’s continued rulemaking as they go forward, and I believe about 80 percent of the 

rules have been completed, but I would also be interested in hearing from the Chairman on some of the market issues that have recently made headlines. 

5 

It has been mentioned before, one of the Agriculture Committee’s 

top priorities for this year is to again pass legislation to reauthorize 

the CFTC. Last year we passed a good bipartisan bill that would 

protect farmers and ranchers who use the futures market to hedge 

against their risk. I hope that we can build on that legislation and 

get something signed into law this year. 

So with that, I thank the chair, and look forward to the Chairman’s testimony. I yield back. 

The CHAIRMAN. I thank the Ranking Member. The chair will request that other Members submit their opening statements for the 

record so the witness may begin his testimony, and to ensure there 

is ample time for questions. 

[The prepared statement of Mr. Austin Scott follows:] 

PREPARED STATEMENT OF HON. AUSTIN SCOTT, A REPRESENTATIVE IN CONGRESS

FROM GEORGIA

Mr. Chairman, thank you for convening this hearing. Chairman Massad, thank 

you for being here today before the House Committee on Agriculture as we review 

the 2015 agenda for the Commodity Futures Trading Commission. 

In the coming months, this Committee will look to build upon work done in the 

last Congress to reauthorize the Commodity Futures Trading Commission. As 

Chairman of the Subcommittee on Commodity Exchanges, Energy, and Credit, I 

look forward to working with Chairman Massad and the Commission to ensure that 

our regulatory framework protects the integrity of our markets, but also does not 

limit the ability of end-users to use these tools to conduct their business. 

As we have heard many times in testimony before this Committee, end-users, who 

were not the cause of the financial crisis, are the collateral damage of Dodd-Frank’s 

reforms. Farmers, ranchers, and other end-users depend on markets to manage risk 

and, thereby, keep consumer costs low. Unfortunately, despite Congressional attempts to shelter them from the Dodd-Frank regulatory regime, too often they have 

been wrongly swept up into it. Providing relief to the end-user community through 

much-needed clarifications of the law will continue to be my focus on this Committee. 

In that vein, an issue to which I’ll be paying particular interest is the CFTC’s definition of a bona fide hedge transaction. The statutory definition states that the reduction of risk inherent to a commercial enterprise is a component in determining 

what qualifies as a bona fide hedging transaction. Despite clear Congressional intent, the CFTC’s proposed position limits rule has limited the definition of a bona 

fide hedge to a limited set of transactions. 

Unquestionably, this narrow approach to the bona fide hedge exemption will harm 

end-users and pre-empt business risk management decision-making in favor of bureaucratic edict. It is neither desirable nor practicable for the Federal Government 

to insert itself in the risk management decisions of American businesses and farmers. I look forward to continuing the conversation on this and other issues throughout the reauthorization process. 

Chairman Massad, thank you again for your presence here today. I look forward 

to hearing more about your priorities for the upcoming CEA reauthorization and 

working with you on the process moving forward. 

I would like to welcome to the witness table the Honorable Timothy Massad, Chairman of the Commodity Futures Trading Commission of Washington, D.C. Chairman Massad, the floor is yours. 

STATEMENT OF HON. TIMOTHY G. MASSAD, CHAIRMAN, 

COMMODITY FUTURES TRADING COMMISSION, 

WASHINGTON, D.C. 

Mr. MASSAD. Thank you, Chairman Conaway, Ranking Member 

Peterson, and Members of the Committee. It is a privilege to testify 

today regarding the work of the Commodity Futures Trading Commission, and I am pleased to be here on behalf of the Commission. 

I also want to say that we were happy to host many of you in ChiVerDate Mar 15 2010 08:31 Jun 03, 2015 Jkt 041481 PO 00000 Frm 00009 Fmt 6633 Sfmt 6601 P:\DOCS\114-02\93960.TXT BRIAN
6 

cago. I am glad it was a productive visit, and we would be just as 

happy to do that in any of our other offices, including here in 

Washington, where we would be delighted if you wished to come 

over and we can make some of the presentations or go into other 

areas. 

Eight months ago, two of the other Commissioners and I took office, and today I would just like to briefly review what the Commission has accomplished in that time, and discuss some of our priorities, going forward. 

I first just want to thank our staff for their hard work and dedication, I am pleased that some of you had a chance to meet some 

of them, and I also want to thank each of my fellow Commissioners 

for their efforts. We are all working together in good faith to do the 

best job we can. 

The futures options and swaps markets are critical to our economy. They enable businesses of all types to manage commercial 

risk, whether it is a farmer locking in a price for his crops, a utility 

hedging the cost of fuel, or a manufacturer managing foreign currency risk. Our regulatory framework must make sure these markets work well for the businesses that need them. We must do all 

we can to prevent fraud and manipulation, and to promote integrity and transparency. And our regulation must promote competition and innovation so these markets continue to thrive. Our agenda is focused on these goals. Let me highlight a few areas. 

The first is fine-tuning our rules so that commercial end-users 

can continue to use these markets effectively and efficiently. Since 

last summer, we have made it a priority to listen to the concerns 

of end-users, review our rules, and make adjustments where appropriate. We have taken a number of steps including actions regarding margin and the posting of collateral, reporting and recordkeeping, and forward contracts, among others. There is more that 

we wish to do in this area, and we will continue to engage with 

market participants to make sure our regulatory framework is 

working for end-users and protecting the public. 

The second priority is to continue implementation of the reforms 

to bring the swaps market out of the shadows. We have made good 

progress. Today, for example, in the markets we oversee, approximately 75 percent of swap transactions are being centrally cleared. 

That helps to manage risk and mitigate the adverse impact should 

a default occur. But clearinghouses do not eliminate risk, so we 

must continue to ensure that clearinghouses have the resources 

and all the necessary safeguards to operate in a fair, transparent, 

and efficient manner. We are also looking at how our rules on 

swaps trading can be improved to enhance further trading on swap 

execution facilities, and to bring needed transparency to this market. And we will continue to work on a few of the Dodd-Frank rules 

that remain to be finalized, including the rule on margin for 

uncleared swaps where we have exempted end-users, and the position limits rule where we must make sure end-users can continue 

to engage in bona fide hedging. 

The third priority has been enforcement. Nothing is more important to maintaining the integrity of our markets and public confidence. Our cases cover a wide variety of market abuses and bad 

behavior, ranging from traditional Ponzi schemes and precious 

7 

metal scams that target retirees, to complex manipulation schemes 

driven by sophisticated high frequency trading strategies, as well 

as price fixing or benchmark manipulation through collusion 

among some of the world’s largest banks. 

From 2009 through 2014, the fines and penalties collected from 

CFTC enforcement matters were approximately twice our cumulative budgets. And already in this fiscal year, the fines and penalties collected are over six times our budget. These fines and penalties go directly to the U.S. Treasury. They are not available to 

fund our budget. 

A fourth priority is working with our international counterparts 

to harmonize rules as much as possible. I am personally committed 

to this effort. I have made many trips to Europe; I just came back 

from a trip to Asia, and we are making progress in many areas. 

And finally, we are focused on new challenges and risks. Cyber 

attacks are an increasingly significant risk to financial stability, 

and we must do all we can to enhance readiness, particularly when 

it comes to clearinghouses and exchanges which are so critical to 

our financial system. We are also very focused on the increased use 

of automated trading strategies and their impacts on these market. 

In all these areas, there is more we should be doing, but we are 

limited by our resources. Our budget simply has not kept up with 

the growth of the markets and our responsibilities. We cannot be 

as responsive as we wish to be. The United States has the best financial markets in the world; the most dynamic, innovative, competitive and transparent. They have been an engine of our economic growth and prosperity. I look forward to working with you 

to ensure that this continues. 

Thank you again for inviting me today, and I look forward to 

your questions. 

[The prepared statement of Mr. Massad follows:] 

PREPARED STATEMENT OF HON. TIMOTHY G. MASSAD, CHAIRMAN, COMMODITY

FUTURES TRADING COMMISSION, WASHINGTON, D.C. 

Thank you, Chairman Conaway, Ranking Member Peterson, and Members of the 

Committee. It is a privilege to appear before you for the first time as Chairman of 

the Commodity Futures Trading Commission (CFTC). I am pleased to testify today 

on behalf of the Commission. 

I appreciate the opportunities I have had to meet with many of you, and value 

your input on the issues facing the Commission. I look forward to working with the 

Committee, going forward. 

The CFTC oversees the futures, options, and swaps markets. While most Americans do not participate directly in these markets, they are very important to the 

daily lives of all Americans, because they shape the prices we all pay for food, energy and many other goods and services. They enable farmers to lock in a price for 

their crops, utilities to manage their fuel cost, and manufacturers to hedge the price 

of industrial metals. They enable exporters to hedge foreign exchange risk and businesses of all types to lock in borrowing costs. In short, the derivatives markets enable businesses of all types to manage risk. 

For these markets to work well, good regulation is essential. That is why the 

Commission’s job is so important and we must do all we can to prevent fraud and 

manipulation in these markets. And we must create a regulatory framework that 

promotes efficiency, competition, and innovation so that these markets can thrive. 

I am committed to working with this Committee and Congress to make sure these 

markets continue to be strong, dynamic, and an engine for economic growth. 

Today, I would like to review what we have accomplished since last summer when 

I, as well as two of the other three Commissioners, took office. I would also like to 

discuss some key priorities, going forward. 

8 

It has been a busy and productive time for us. We have worked to make sure that 

commercial end-users can continue to use the derivatives markets effectively and efficiently. We are continuing the work to bring the over-the-counter swaps market 

out of the shadows and implement the regulatory reforms mandated by Congress. 

We have also been busy carrying out our traditional responsibilities of surveillance, 

compliance, and enforcement. And we have been addressing new developments and 

challenges in our markets, particularly those created by technological development. 

I know I speak for all the Commissioners in first thanking our staff for their hard 

work. The progress we have made is a credit to their commitment and their tireless 

efforts. 

I also want to thank each of my fellow Commissioners for their dedication. Each 

brings good experience and judgment, and I appreciate our candid, robust dialogue 

on the wide range of issues we face. I commend my fellow Commissioners in particular for their efforts to reach out and make sure we are all well informed by a 

diversity of views, and for their willingness to collaborate and work constructively 

together. While we will not always agree, I believe we are working together in good 

faith to do the best job we can in implementing the law and carrying out the Commission’s responsibilities. 

Over the last several months, the Commission has been actively listening to market participants, getting important feedback on what is working well and what parts 

of our regulatory framework may need adjusting. We have held two open meetings, 

and we will hold more open meetings in the future. The CFTC’s advisory committees have also provided a good venue for dialogue. 

In December, we had a productive meeting of our Agricultural Advisory Committee, of which I am the sponsor. We were honored to have Secretary Vilsack as 

our special guest. It was an excellent opportunity to gather input directly from 

farmers, ranchers, and others who rely on these markets day in and day out. 

Commissioner Wetjen held a very informative meeting of our Global Markets Advisory Committee (GMAC) in October of last year, a Committee which focuses on 

matters that affect the integrity and competitiveness of U.S. markets and U.S. firms 

engaged in global business. He will also be convening another GMAC meeting, as 

well as a meeting of our Technology Advisory Committee, in the coming months. 

Commissioner Bowen is sponsoring our new Market Risk Advisory Committee. She 

has been working to organize it and define its agenda. This committee will help the 

Commission identify and understand the impact of evolving market structures and 

movement of risk across clearinghouses, exchanges, intermediaries, market makers, 

and end-users. And Commissioner Giancarlo has been working to build up our Energy and Environmental Markets Advisory Committee, which advises the Commission on matters of concern to exchanges, firms, end-users, energy producers, and 

regulators regarding energy and environmental markets and their regulation by the 

Commission. He will be holding their first meeting shortly. 

Let me turn now to the progress we have made in each of the general areas I 

noted. 

Making Sure the Markets Work for Commercial End-Users 

For the derivative markets to contribute to the broader economy, they must work 

well for commercial end-users—the many manufacturers, farmers, ranchers, and 

other businesses that rely on these markets to hedge commercial risks. Since last 

summer, we have made it a priority to address concerns of these participants. We 

have sought to make sure that our rules do not impose undue burdens or create 

unintended consequences for these participants, and that we are creating better, 

more transparent markets for them. Let me review some of the actions we have already taken. 

• Margin for Uncleared Swaps. We have made sure that our proposed rule on 

margin for uncleared swaps exempts commercial end-users from this requirement. We have also worked with the domestic bank regulators, who are also responsible for issuing rules on this subject, to maintain a comparable approach 

for commercial end-users. 

• Local Utility Companies. In September, the Commission amended its rules so 

that local, publicly-owned utility companies could continue to effectively hedge 

their risks in the energy swaps market. These companies, which keep the lights 

on in many homes across the country, must access these markets efficiently in 

order to provide reliable, cost-effective service to their customers. The Commission unanimously approved a change to the swap dealer registration threshold 

for transactions with special entities which will make that possible. 

• Customer Protection/Margin Collection. In November, the Commission proposed 

to modify one of our customer-protection related rules to address a concern of 

9 

many in the agricultural community and many smaller customers regarding the 

posting of collateral. These rules had been unanimously adopted in the wake 

of MF Global’s insolvency and were designed to prevent a similar failure from 

recurring and to protect customers in the event of such a failure. Market participants asked that we modify one aspect of the rules regarding the deadline 

for futures commission merchants to post ‘‘residual interest,’’ which, in turn, can 

affect when customers must post collateral. The change was that the deadline 

would not move to earlier than 6 p.m. the day of settlement without an affirmative Commission action and an opportunity for public comment. I hope to finalize this rule change in the very near future. 

• Reporting Requirements. We have proposed to exempt end-users and commodity 

trading advisors from certain recordkeeping requirements related to text messages and phone calls. This proposal is designed to make sure we do not impose 

undue reporting requirements on commercial end-users. The proposal also clarifies, in response to public feedback, that oral and written communications that 

lead to the execution of a transaction need not be linked to records identifying 

that transaction. 

• Volumetric Optionality. We have proposed to clarify our interpretation of when 

an agreement, contract, or transaction that contains embedded volumetric 

optionality falls within the forward exclusion from being considered a swap. 

‘‘Embedded volumetric optionality’’ refers to the contractual right of a 

counterparty to receive more or less of a commodity at the negotiated contract 

price. Contracts with this feature are important to, and widely used by, a variety of end-users, including electric and natural gas utilities. The proposed interpretation would clarify when forward contracts with embedded volumetric 

optionality may be excluded from being considered swaps. In this way, the proposed interpretation is intended to make sure commercial companies can continue to conduct their daily operations efficiently. 

• Treasury Affiliates of End-Users. The Commission staff took action to make sure 

that end-users can use the Congressional exemption given to them regarding 

clearing and swap trading if they enter into swaps through a treasury affiliate. 

It is common for a large corporation with significant non-financial operations 

to have a separate affiliate enter into swaps and financing transactions on behalf of the larger corporation and its subsidiaries. CFTC staff have taken action 

to clarify how our rules will be applied to make sure that such companies can 

utilize the end-user exception. 

• Interaffiliate Transactions. We have also worked to harmonize the phasing in 

of certain rules regarding clearing with the requirements in other jurisdictions. 

The Commission previously adopted a final rule providing an exemption from 

required clearing for swaps between certain affiliated entities, subject to specific 

requirements and conditions. One condition, designed to prevent evasion of the 

clearing requirement, is that any related swap executed with an unaffiliated 

counterparty must be cleared in accordance with Commission rules or comparable rules of a foreign jurisdiction. Because other jurisdictions had not yet 

adopted a mandatory clearing framework, the final rule provided a temporary 

alternative compliance mechanism. We took action because other jurisdictions 

need more time. While progress continues to be made with regard to the implementation of mandatory clearing regimes in foreign jurisdictions, many do not 

yet have a clearing mandate in place. For this reason, the Commission staff recently extended the rule’s alternative compliance approach until December 31, 

2015. 

• Reporting Requirements for Contracts in Illiquid Markets. CFTC staff recently 

granted relief from the real-time reporting requirements for certain less liquid, 

long-dated swap contracts that are not subject to mandatory clearing and do not 

yet trade on a regulated platform. This relief was provided in part because 

while Dodd-Frank requires real-time reporting for swaps, it also requires that 

such reporting obligations should not lead to identifying market participants, as 

that could result in competitive harm. We therefore agreed to permit slightly 

delayed reporting for these swaps. 

• Aluminum Market. Another issue of concern to end-users that we are focused 

on pertains to the long queues for delivery of aluminum at warehouses in this 

country licensed by the London Metal Exchange (LME), the relationship of 

those queues to the pricing and delivery of aluminum, and how those issues impact market integrity and market participants. We do not have direct regulatory authority over those warehouses, and the LME’s principal regulator is 

the Financial Conduct Authority (FCA) in the UK. However, we are looking at 

10 

these issues closely and speaking with aluminum users, the LME, the HKEx 

Group, which owns the LME, and the FCA on a regular basis. 

• Harmonization with SEC Rules. We continue to work closely with our colleagues at the SEC. For example, in connection with the SEC’s efforts to implement the Jumpstart Our Business Startups Act (‘‘JOBS Act’’), we took action 

to harmonize our rules with the new requirements. Specifically, we revised requirements applicable to commodity pool operators that are also registered with 

the SEC. 

In sum, we have been very focused on fine-tuning the rules to make sure they 

work for commercial end-users, and we will continue to do so. 

Continuing Implementation of the New Regulatory Framework for Swaps 

Let me turn now to our efforts to implement reforms to the swap market as part 

of the overall effort on financial regulatory reform. The financial crisis that began 

over 6 years ago stands as the worst since the Great Depression: millions of jobs 

lost and homes foreclosed, countless retirements and educations deferred, and businesses shuttered. It was during the financial crisis that most Americans first heard 

about derivatives. That was because over-the-counter (OTC) swaps accelerated and 

intensified the crisis. In the absence of regulatory oversight, a global market had 

developed that allowed participants to take on excessive risk—risk that they did not 

always understand, and that was opaque to regulators. The interconnectedness 

among large institutions meant that trouble at one firm could easily cascade 

through the system—often across national borders. We faced the possibility of systemic collapse. 

The Dodd-Frank Act was a comprehensive response to the market excesses and 

regulatory gaps that contributed to the crisis. Title VII embodied the four basic commitments that were agreed to by leaders of the G20 nations to reform the OTC 

swaps market: require central clearing of standardized swaps through regulated 

clearinghouses; require regulatory oversight of the largest market participants; require regular reporting so that regulators and the public can have a view of what 

is happening in the market; and require transparent trading of swaps on regulated 

platforms. 

We have made substantial progress in implementing these reforms. We are focused today on completing that work in a manner that ensures these markets continue to thrive and work well for all participants. 

Clearing of Standardized Swap Transactions 

A primary commitment of Dodd-Frank was to require clearing of standardized 

swaps transactions through clearinghouses. The use of clearinghouses in financial 

markets is commonplace and has been around for over one hundred years. The idea 

is simple: if many participants are trading standardized products on a regular basis, 

the tangled, hidden web created by thousands of private bilateral trades can be replaced with a more transparent and orderly structure, like the hub and spokes of 

a wheel, with the clearinghouse at the center. The clearinghouse can then monitor 

the overall risk and positions of each participant. 

Clearing through central counterparties is now required in our markets for most 

interest rate and credit default swaps. Recent data show our progress. The percentage of transactions that are centrally cleared in the markets we oversee has gone 

from about 15% in December 2007 to about 75% today. 

In accordance with Congressional direction, the CFTC acted expeditiously to implement clearing mandates. The United States was among the first of the G20 nations to do so. Also as directed by Congress, the CFTC specifically exempted from 

those mandates commercial end-users, including manufacturers or farmers who use 

the swaps markets to hedge. The CFTC also has exempted agricultural and electrical cooperatives, as well as banks with assets totaling less than $10 billion. 

Of course, central clearing is not a panacea. Clearing does not eliminate the risk 

that a counterparty to a trade will default—instead it provides us with powerful 

tools to monitor that risk, manage it, and mitigate adverse effects should a default 

occur. For central clearing to work well, active, ongoing oversight is critical. And 

given the increasingly important role of clearinghouses in the global financial system, this is a top priority. We must do all we can to ensure that clearinghouses have 

the financial, operational and managerial resources, and all the necessary systems 

and safeguards, to operate in a fair, transparent, and efficient manner. We must 

make sure that contingency plans for clearinghouse recovery and resolution are sufficient. Therefore, we are very focused on all of these issues in our compliance activities and examinations of clearinghouses, as well as in thinking about our regulatory 

framework. 

11 

Increased Oversight of Major Market Participants 

Since Congress passed Dodd-Frank, we have increased oversight of major market 

players through the registration and regulation of major swap participants and 

swap dealers. More than 100 are now provisionally registered. This list includes 

many of the largest banks in the world. We have adopted rules requiring these registrants to observe strong risk management practices, and they will be subject to 

regular examinations to assess risk and compliance with rules designed to mitigate 

excessive risk. 

The new framework requires registered swap dealers and major swap participants 

to comply with standard business practices, such as documentation and confirmation of transactions, as well as dispute resolution processes. They are also required 

to make sure their counterparties are eligible to enter into swaps, and to make appropriate disclosures to those counterparties about risks and conflicts of interest. 

Regular Reporting for Increased Market Transparency 

Congress recognized that having rules that require oversight, clearing and transparent trading is not enough. We must have an accurate, ongoing picture of what 

is taking place in the market to achieve greater transparency and to address the 

potential risks. A key commitment in Dodd-Frank is ongoing reporting of swap activity. In 2008, regulators and Congress knew very little about the size and risks 

in this market. Today, under our rules, all swap transactions, whether cleared or 

uncleared, must be reported to registered swap data repositories (SDRs), a new type 

of entity responsible for collecting and maintaining this vital information. 

This reporting will enable regulatory authorities to engage in meaningful oversight. Robust surveillance and enforcement, so critical to maintaining market integrity, depends on the availability of accurate market data. And increased transparency helps market participants by increasing competition, facilitating the price 

discovery process, and enhancing confidence in the integrity of the market. You can 

now go to public websites and see the price and volume for individual swap transactions. And the CFTC publishes the Weekly Swaps Report that gives the public a 

snapshot of the swaps market. 

While we have made good progress, we have a considerable amount of work still 

to do to collect and use derivatives market data effectively. There are now four data 

repositories in the U.S., and more than 20 others internationally, plus thousands 

of participants who must report data. 

We are engaged in three general areas of activity. First, we must have data reporting rules and standards that are specific and clear, and that are harmonized 

as much as possible across jurisdictions, and we are leading an international effort 

in this regard. Only in this way will it be possible to track the market and be in 

a position to address emerging issues. We must also make sure the SDRs collect, 

maintain, and publicly disseminate data in a manner that supports effective market 

oversight and transparency. This means a common set of guidelines and coordination among registered SDRs. Standardizing the collection and analysis of swaps 

market data requires intensely collaborative and technical work by industry and the 

agency’s staff. We have been actively meeting with the SDRs on these issues, getting input from other industry participants and looking at areas where we may clarify our own rules. 

Finally, market participants must live up to their reporting obligations. Ultimately, they bear the responsibility to make sure that the data is accurate and reported promptly. We have already brought cases to enforce these rules and will continue to do so as needed. 

Transparent Trading of Swaps Transactions on Regulated Platforms 

With regard to swaps trading, there is also progress as well as work to be done. 

Congress mandated that certain swaps must be traded on a swap execution facility 

(SEF) or other regulated exchange. Transparent trading of swaps on swap execution 

facilities (SEFs) can facilitate a more open, transparent, and competitive marketplace, which will benefit all participants. 

Today, there are 22 SEFs temporarily registered, and two applications are pending. Each is required to operate in accordance with certain statutory core principles. 

These core principles provide a framework that includes obligations to establish and 

enforce rules, as well as policies and procedures that enable transparent and efficient trading. SEFs must make trading information publicly available, put into 

place system safeguards, and maintain financial, operational and managerial resources necessary to discharge their responsibilities. 

Trading on SEFs is still relatively new. It began in October of 2013, and the trading mandate for certain interest rate swaps and credit default swaps took effect 

about 1 year ago. Through last year, notional value executed on SEFs was generally 

12 

in excess of $1.5 trillion weekly. Publicly available data show trading volumes are 

trending higher. In addition, the number of market participants using SEFs is increasing. One SEF recently confirmed that participation had exceeded 700 firms. 

But, there is more to do. Our rules are new, and as we gain experience with their 

application in the marketplace, we will see what works well and what doesn’t, and 

we will make changes as appropriate. The SEFs themselves are developing best 

practices and testing different approaches. The new technologies that are being used 

are likewise changing and being refined. In addition, as other jurisdictions develop 

their rules on trading, we will look to try to harmonize the rules as much as possible 

so as to minimize the risk of market fragmentation. 

As I said to the SEF industry last fall, our goal should be to create a regulatory 

framework that not only achieves the Congressional mandate of bringing this market out of the shadows, but which also creates the foundation for the market to 

thrive. To do so, our rules must ensure transparency, integrity and oversight, while 

at the same time permit innovation, freedom and competition. 

Finalizing the Remaining Rules 

We have also been working on the few Dodd-Frank rules that remain to be finalized. In September, we reproposed our rule on margin for uncleared swaps. While 

we have made great progress in the proportion of swap transactions which are centrally cleared, we must recognize that uncleared transactions will continue to be an 

important part of the market. Sometimes, commercial risks cannot be hedged sufficiently through swap contracts that are available for clearing. For example, certain 

products may lack sufficient liquidity to be centrally risk managed and cleared. This 

may be true even for products that have been in existence for some time. And there 

will and always should be innovation in the market, which will lead to new products. 

That is why the rule on margin for uncleared swaps is important. Margin will 

continue to be a significant tool to mitigate the risk of default and, therefore, the 

potential risk to the financial system as a whole. 

Consistent with Congressional intent, our proposal exempts commercial end-users 

from the margin requirements applicable to swap dealers and major swap participants. Our approach seeks to provide a significant safeguard without imposing unnecessary costs on participants whose activities do not create the same level of systemic risk. We will also make the minor changes necessary in our final rule to ensure conformity with the amendment to the Commodity Exchange Act (CEA) adopted by Congress in December as part of the Terrorism Risk Insurance Act (TRIA). 

In formulating our approach, we coordinated closely with the relevant bank regulators, because Congress mandated that margin requirements be set by different 

regulatory agencies for the respective entities under their jurisdiction. Under the 

Dodd-Frank Act, each swap dealer and major swap participant for which there is 

a prudential regulator must comply with margin rules established by that prudential regulator. All other swap dealers and major swap participants must comply with 

margin rules established by the CFTC. I am pleased to say that our rules and those 

of the bank regulators are substantially similar. 

We have also been working with our international counterparts to harmonize our 

proposed margin rule for uncleared swaps with corresponding rules in other jurisdictions. Europe, Japan and the United States have each proposed rules which are 

largely consistent, and which reflect a set of standards agreed to by a broader international consensus. 

While there were some differences in the proposals, we are working closely with 

our counterparts in Europe and Japan, as well as the U.S. banking regulators, to 

try to further harmonize these rules. I am encouraged by the progress we are making and I hope that we can finalize these rules in the near future. 

We are also working on two other rules regarding capital and position limits. Congress mandated that we implement position limits to address the risk of excessive 

speculation. In doing so, we must make sure that the market works for commercial 

end-users seeking to hedge routine risk through bona fide hedging. 

We have received substantial public input on the position limits rule which the 

staff is reviewing. Most recently, we received valuable input from participants at the 

December Agriculture Advisory Committee meeting. It is important that we consider 

these comments carefully as we develop a rule. Commission staff will also be considering next steps on the capital rule as we move forward on finalizing the proposed 

rule on margin for uncleared swaps. 

13 

Cross-Border Issues: The Challenge of Building a Global Regulatory Framework 

Another key priority is working with our international counterparts to build a 

strong global regulatory framework. To achieve the goals set out in the 2009 G20 

commitments and embodied in the Dodd-Frank Act, global regulators must work together to harmonize their rules and supervision to the greatest extent possible. 

Since I joined the CFTC, I have made it a priority to work with our international 

counterparts on these issues. 

The challenge of harmonizing rules across borders is best understood by remembering the unique historical situation we are in. The swaps market grew to a global 

scale without any meaningful regulation. So today, we must regulate what is already a global market, and the new framework can only be implemented through 

the actions of individual jurisdictions, each of which has its own legal traditions, 

regulatory philosophy, political process, and market concerns. While the G20 nations agreed to basic reform principles, there will inevitably be differences in specific 

rules and requirements. The challenge is to achieve as consistent a framework as 

possible while recognizing that our responsibility as national regulators is first and 

foremost to faithfully implement and enforce our own nation’s laws. We also must 

remember that in many areas of financial regulation, laws vary among nations. The 

fact is that, in the case of swaps, we have made great progress in harmonization, 

and will continue to do so, but it will take time. 

Let me note a few of the things that are going on in our effort to work with our 

international counterparts. First, I have been personally committed to this effort. To 

that end, since I took office last June, I have made a few trips to Europe and met 

several times with European and other international officials here in the U.S. Last 

month, I visited Asia, where I met with government officials in Beijing, Hong Kong, 

Singapore, and Tokyo as well as with key market participants. These visits provide 

an opportunity to listen to others’ views, identify issues of common concern, and 

work together to advance our shared goal of bringing the over-the-counter swaps 

market out of the shadows. I have also met with my counterparts from all over the 

world at board meetings of the International Organization of Securities Commissions in Europe and South America as well as the OTC Derivatives Regulators 

Group. 

Clearinghouse Recognition and Regulation 

One of the most important cross-border issues before the Commission over the 

last several months is clearinghouse recognition and regulation. The fact is that a 

small number of clearinghouses are becoming increasingly important single points 

of risk in the global financial system. This is an issue that transcends swaps. It is 

of equal concern to participants in the futures and options markets because the 

same clearinghouses handle clearing for many products. 

We are continuing in dialogue with the Europeans to facilitate their recognition 

of our clearinghouses as equivalent. We have had productive discussions regarding 

the rules governing clearinghouses that are located in Europe, but are also registered with the CFTC. There are presently three such clearinghouses. 

Our system of dual registration came about originally because we took a very nonterritorial view as to where clearing must occur. The U.S. did not mandate that 

clearing of futures traded on U.S. exchanges must take place in the U.S.; we simply 

required that it take place through clearinghouses that are registered with us and 

that meet certain standards. These standards are designed to ensure customer protection and financial stability, and include provisions related to our bankruptcy 

laws. 

Dual registration and cooperative supervision have worked. The model has 

worked to protect customers, it worked during the crisis, and it is a model on which 

the market has grown to be global. Fourteen clearinghouses are currently registered 

with the CFTC to clear either swaps, futures, or both. Five of those are organized 

outside of the United States, including three in Europe. One such clearinghouse now 

handles approximately 85% of swaps clearing and has been registered with us since 

2001. In addition, the CFTC is now reviewing five registration applications from 

clearinghouses, including three located outside the United States. 

The Europeans have agreed that the framework of dual registration and cooperative supervision should not be dismantled. We are working on the details of substituted compliance for European clearinghouses that are dually registered with the 

CFTC as well as cooperative supervision, and we are making good progress. We will 

also seek to coordinate with them on future swaps clearing mandates. 

14 

Oversight of Swap Dealers and Margin for Uncleared Swaps 

Another important topic is oversight of swap dealers. A key aspect of this is margin for uncleared swaps, which I noted earlier. We have been active in the development of international standards in this area. The CFTC, along with the U.S. bank 

regulators, has proposed rules which reflect those standards. Europe and Japan 

have proposed rules as well. This is an important example of working internationally so that the rules are as similar as possible from the beginning. While there are 

still some differences in the various proposals, we are working hard to try to minimize those differences. I am hopeful that we can issue final rules in the near future 

that are largely consistent with the rules of other jurisdictions. As for general harmonization of rules that pertain to oversight of swap dealers much has already been 

accomplished. We issued substituted compliance determinations in late 2013 with 

respect to the rules of six other jurisdictions—the European Union, Japan, Australia, Hong Kong, Switzerland, and Canada. We will continue to look at other jurisdictions’ rules as those are finalized. 

Reporting 

As I noted earlier, there is a lot of cross-border work going on in the area of reporting. The number of data repositories across various jurisdictions—four in the 

U.S. plus more than 20 others internationally—as well as all of the participants 

around the world who must report make moving forward in this area more important than ever. We and the European Central Bank currently co-chair a global task 

force that is seeking to standardize data standards internationally. We are working 

to achieve consistent technical standards and identifiers for data in trade repositories. While much of this work is highly technical, it is vitally important to international cooperation and transparency. 

Trading Rules and Foreign Boards of Trade 

While we have issued our swap trading rules, other jurisdictions generally have 

not done so. As I indicated earlier, as other jurisdictions develop their rules, we are 

open to trying to harmonize rules as much as possible consistent with our statutory 

responsibilities. 

Although it pertains to the futures and options markets more than swaps, another 

key element of our cross-border effort is to recognize foreign exchanges in order to 

enhance opportunities for the trading of futures globally. We have recently taken 

some important actions in this area. 

The CFTC does not generally regulate the trading of futures by U.S. persons on 

offshore exchanges. If a foreign futures exchange wishes to provide direct electronic 

access to people located in the U.S., we have in the past required the exchange to 

apply for relief from our registration requirements. We have formalized that process 

and now foreign exchanges, which we refer to as foreign boards of trade or FBOTs, 

can be officially registered with us. 

I am pleased to report that, under this new process, last month the CFTC approved FBOT registration applications for the Tokyo Commodities Exchange 

(TOCOM), Bursa Malaysia, and Singapore Exchange (SGX). These approvals recognize the increasing interconnectedness of the global derivatives markets and the importance of Asia in that development. More generally, the FBOT registration approval also demonstrates our commitment to a coordinated regulatory approach that 

relies on foreign supervisory authorities and ongoing cooperation. We look forward 

to granting additional approvals in the coming months. 

Benchmarks 

Another cross-border issue that we have been focused on is the potential regulation of financial benchmarks and indices by the European Union (EU). In our markets, thousands of contracts reference these benchmarks and indices, such as 

LIBOR, S&P 500 and Brent Crude. The integrity of benchmarks and indices is vital 

to our financial system. That is why we have focused on this issue in our enforcement efforts, as evidenced by our orders against banks that have tried to manipulate interest rate benchmarks like LIBOR and foreign exchange benchmarks. We 

have also worked cooperatively with foreign regulators in these enforcement actions, 

which I will return to in a moment. 

We believe there should be standards for benchmarks designed to ensure good administration and transparency and minimize the risk of manipulation. That being 

said, the EU has proposed legislation that would have adverse market consequences. In particular, benchmarks created by administrators located in countries 

outside the EU could not be used by European supervised entities, such as banks 

and asset managers, unless the European Commission determines that any non-EU 

administrator is authorized and equivalently supervised in the non-EU country. As 

15 

you know, the United States does not have such a government-sponsored supervisory regime for benchmarks. Accordingly, in light of the EU’s equivalence standards, the new proposed benchmark regulation could prohibit EU institutions from 

hedging using thousands of products traded on U.S. futures exchanges and swap 

execution facilities. 

I have expressed these concerns to European officials. I have encouraged them to 

consider the work of the International Organization of Securities Commissions 

(IOSCO) in this area, which the CFTC helped lead. IOSCO’s Principles for Oil Price 

Reporting Agencies (PRA Principles) and Principles for Financial Benchmarks provide a framework for price reporting agencies and financial benchmark administrators to address methodology, governance, conflicts of interest, and disclosure. Many 

price reporting agencies and financial benchmark administrators have already 

begun voluntarily complying with these standards. 

I hope that we can continue to work with our international counterparts to ensure 

benchmark integrity in a way that recognizes that most benchmarks are not administered by, or regulated by, a government agency. 

Continuing to Fulfill our Traditional Responsibilities 

In addition to our new responsibilities to oversee the swaps market, we are equally focused on the markets that have been traditionally our responsibility, the futures and options markets. And on a day to day basis, a lot of what we do is to 

focus on surveillance and enforcement to prevent fraud and manipulation or other 

market abuses. Our compliance, examinations and registration work also makes 

sure that customers are protected, participants comply with their obligations and 

the markets operate with integrity and transparency. Let me highlight some key 

elements of these efforts. 

Enforcement and Compliance 

A robust compliance and enforcement program is crucial to maintaining the integrity of our markets, as well as public confidence. As a nominee, I committed to 

maintaining our focus in this area. And we have. 

In particular, our priority has been to make sure that the markets we oversee operate fairly for all market participants regardless of size or sophistication. Fraud, 

manipulation, and abuse should have no place in our financial markets. 

We took action against some of the largest banks in the world for attempted manipulation of foreign exchange rate benchmarks. Our investigation revealed that 

they attempted to manipulate one of the largest markets in the world. We ordered 

the banks to pay almost $1.5 billion in penalties and to agree to implement reforms 

designed to prevent the recurrence of this behavior. 

This is an important case that was the product of close cooperation with foreign 

regulators. Benchmarks such as these are extremely important to our futures and 

swaps markets and to the financial system generally. And the system only works 

if market participants have confidence that benchmarks are not being manipulated. 

Our action in these cases exemplifies the CFTC’s commitment to the robust enforcement necessary to safeguard the integrity of our markets. 

So does our successful litigation against Parnon Energy and Arcadia, two energy 

companies that systematically manipulated crude oil markets to realize illicit profits. Through the outstanding work of CFTC enforcement staff, the CFTC sends the 

message that the protection of customers and the integrity of the markets are paramount. 

We are also actively pursuing actions against those who try to perpetrate frauds 

against seniors and other retail investors. The use of our anti-manipulation enforcement authority to address fraud in the precious metals space is one example. These 

schemes, which often target seniors concerned that they may outlive their retirement assets, purport to offer consumers the ability to buy precious metals like gold 

using pre-arranged financing. These transactions are typically not conducted on an 

exchange. They are typically structured so that, taking account of fees and interest, 

the precious metals would have to double in value year after year in order for the 

investor to make any money. Even worse, in many cases, the transactions are entirely fraudulent: no precious metals are ever bought. In 2014, the Commission tried 

and won a case against Hunter-Wise, a Florida company that was a trailblazer in 

the use of this scheme. In addition to Hunter Wise, we have also taken action to 

shut down a host of boiler room operations used to identify and recruit potential 

victims. Our work is ongoing. Just last month, we announced a settlement resulting 

in restitution and civil monetary penalty of more than $9.6 million against Gold 

Coast Bullion, Inc. and its principal. 

Dodd-Frank provided the Commission with a number of new statutory tools to 

combat manipulation and practices that can distort the markets, and we are using 

16 

them. We have new authority, for example, to attack ‘‘spoofing,’’ where a party enters a bid or offer without the intent to consummate a transaction; unscrupulous 

speculators do this to create the false impression of liquidity in a particular product 

or to move the market price. We brought a civil action using this new authority 

against a firm and its principal for spoofing in 2013, one of the first such cases, and 

last October, the U.S. Attorney for Illinois indicted the principal for spoofing, based 

on a referral from us. 

We have also directed self-regulatory organizations to strengthen their efforts to 

combat spoofing. The CFTC recently recommended, for example, that CME develop 

strategies to identify instances of spoofing and, as appropriate, pursue actions 

against perpetrators. The CFTC also recommended that CME maintain sufficient 

enforcement staff to promptly prosecute possible rule violations. The company 

should take measures to ensure internal deliberations do not delay disciplinary action. 

In all of our efforts, we will also seek to hold not just firms, but also individuals, 

accountable. We are mindful that there is no stronger deterrent against future misconduct than the possibility of criminal sanctions, including prison. We do not have 

the authority to bring criminal actions, so in cases involving willful violations of the 

CEA, we work closely with the Department of Justice and other criminal authorities. The perpetrators who threaten the financial well-being of innocent participants 

in our markets need to understand that the loss of their own liberty is at stake. 

We are equally focused on using our authority to ensure compliance with our 

rules, such as our reporting rules. Earlier this year, for example, we imposed penalties against a major bank for failing to abide by our reporting requirements. 

Although our effectiveness is best measured by the quality, breadth and effect of 

the actions pursued, quantitative metrics give a picture of the activity. Overall, the 

CFTC filed 67 new enforcement actions during Fiscal Year 2014. We opened more 

than 240 new investigations. The agency obtained $3.27 billion in sanctions, including $1.8 billion in civil monetary penalties and more than $1.4 billion in restitution 

and disgorgement. This amount of civil monetary penalties is more than eight times 

our current annual budget. 

As a complement to these efforts, we have also taken steps to encourage individuals to help us detect fraud and other misconduct. The agency’s whistleblower program, created by the Dodd-Frank Act is one example. The program provides payments—up to 30 percent of any sanction obtained—to eligible whistleblowers. This 

is a relatively new program so we are still growing it. Already though, we are receiving relevant tips, complaints, and referrals. We believe the program will be an 

important tool going forward in identifying, investigating, and prosecuting violations 

of the law. 

We are also working to help consumers be smarter investors and detect fraudulent schemes on their own. At the end of last year, we launched the CFTC 

SmartCheck campaign. This campaign is designed to help investors identify and recognize the most common schemes and the top signs of a fraudulent investment. The 

campaign includes tools, such as an interactive website, to help investors stay ahead 

of the fraud perpetrators. For example, investors can use the website to check the 

background of financial professionals and confirm whether any potential advisors 

have had past violations. 

Going forward, market participants should understand that we will use all the 

tools at our disposal to ensure compliance with the law. 

Responding to Market Developments 

Another example of the importance of the CFTC’s role is what happened last 

month when the Swiss government removed the cap on the exchange rate between 

the Swiss franc and the Euro. The resulting 23% increase in the value of the Swiss 

franc roiled the foreign exchange markets. The CFTC closely monitored the markets 

and several firms in particular that were facing significant losses. 

For cleared products affected by this development, CFTC staff immediately started conducting stress tests of open positions, and staff contacted registered clearinghouses as well as clearing members with large exposures. Despite the extreme price 

moves, all clearing members met their obligations to clearinghouses. 

For uncleared products, after the CFTC learned that one firm, FXCM, had a significant capital deficiency, CFTC staff were on site at the firm and also worked 

closely with staff from the National Futures Association (NFA). Although it is not 

the agency’s responsibility to help a troubled firm secure capital, the CFTC was in 

touch with FXCM continuously through the night and the next day concerning what 

actions the firm might take to stabilize its situation and meet CFTC capital requirements. The CFTC monitored the firm’s efforts to obtain capital to insure that any 

capital proposed would meet CFTC requirements and cover customer obligations. 

17 

The CFTC and the NFA also made sure the firm did not make any disbursements 

to the detriment of customers during this time. The CFTC also prepared for the necessary legal actions to protect customers to the fullest extent possible in the event 

the firm was unable to secure additional capital. The firm was able to obtain a capital infusion that satisfied CFTC requirements and thereby stay in business. 

Addressing New Challenges and Risks 

Finally, I wish to discuss our work in addressing some new challenges and risks 

in our markets. 

Cybersecurity, Information Security, and Business Continuity 

Cybersecurity is perhaps the single most important new risk to market integrity 

and financial stability. The need to protect our financial markets against 

cyberattacks is clear. These attacks threaten privacy, information security, and 

business continuity, all vital elements of a well-working market. We are focusing on 

this issue in our examinations of clearinghouses and exchanges in particular to 

make sure they are doing all they can to address this risk. We are also focusing 

on business continuity and disaster recovery plans, as a well-executed disaster recovery plan will aid in the recovery from a cybersecurity event. 

The risk is apparent. The examples from within and outside the financial sector 

are all too frequent and familiar: the latest include JP Morgan, Sony, Home Depot, 

and Target. Some of our nation’s exchanges have also been targeted or suffered 

technological problems that caused outages or serious concerns. And again, because 

of the interconnectedness of financial institutions and market participants, an attack at one institution can have significant repercussions throughout the system. In 

the Target attack, the intruder gained access to the Target systems by stealing credentials from a vendor used by Target. The perpetrator was able to locate information about Target’s customers and steal their credit card information. A similar type 

of attack—known as phishing—is reported to have been used in the recent breach 

at Sony. This type of attack launched at an exchange or clearinghouse has the potential to have a significant impact on the operation of the venue and those entities 

that use its services. 

We at the CFTC have responded in a number of ways: 

• First, our Core Principles have been modernized in recent years to address 

cyber and information security concerns. We have adopted regulations to implement the system safeguards core principles for exchanges, clearinghouses, and 

SEFs, and we are looking at ways to further strengthen and enhance the requirements for information security. 

• We require exchanges, clearinghouses, and SEFs to maintain system safeguards 

and a risk management program, to notify the Commission promptly of incidents, and to have recovery procedures in place. Systemically important clearinghouses, for example, must have plans that enable them to recover and resume daily processing, clearing and settlement activities no later than 2 hours 

following a disruption. They must also maintain geographic dispersal of personnel resources to aid in recovery efforts following a disruption. 

• We conduct system safeguards examinations, using industry best practices, to 

determine compliance with these requirements, and we monitor remediation efforts if any issues are identified during the examination process. 

There is much more we would like to do in this area. However, our capacity to 

carry out more frequent examinations and to address cybersecurity more broadly is 

significantly constrained by our current budget. Some of our major financial institutions are reportedly spending more on cybersecurity each year than our agency’s entire budget. 

High Frequency and Automated Trading 

Markets are dynamic, and the agency must keep pace to oversee the markets effectively. Technology in particular is an important driver, and we have witnessed 

over the last several years a dramatic increase in automated trading. Keeping up 

with these developments has meant investing in the appropriate resources, a challenge given the agency’s budget constraints. It has also meant reviewing our rules 

based on changes in market technology. For example, in April 2012, the Commission 

adopted rules that require certain registrants to automatically screen orders for 

compliance with risk limits if they are automatically executed. The Commission also 

adopted rules to ensure that trading programs, such as algorithms, are regularly 

tested. 

In addition to its current rules, the Commission is currently considering comments received in response to its Concept Release on Risk Controls and System SafeVerDate Mar 15 2010 08:31 Jun 03, 2015 Jkt 041481 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 P:\DOCS\114-02\93960.TXT BRIAN
18 

guards for Automated Trading Environments. The Concept Release addresses the 

evolution from human-centered to automated trading environments. It seeks input 

on a range of protections, including additional pre-trade risk controls; post-trade reports; design, testing, and supervision standards for automated trading systems that 

generate orders for entry into automated markets; market structure initiatives; and 

other measures designed to reduce risk or improve the functioning of automated 

markets. We are still working through comments and will make a determination on 

what additional measures, if any, might be necessary to address automated trading. 

Virtual Currencies 

We also continue to respond to market developments such as new products. Virtual currencies, such as bitcoin, are an example. Virtual currencies may raise issues 

for a number of governmental agencies. The CFTC’s jurisdiction with respect to virtual currencies will depend on the facts and circumstances pertaining to any particular activity in question. While the CFTC does not have policies and procedures 

specific to virtual currencies like bitcoin, the agency’s authority extends to futures 

and swaps contracts in any commodity. The CEA defines the term commodity very 

broadly so that in addition to traditional agricultural commodities, metals, and energy, the CFTC has oversight of derivatives contracts related to Treasury securities, 

interest rate indices, stock market indices, currencies, electricity, and heating degree days, to name just a few underlying products. 

Innovation is a vital part of our markets, and it is something that our regulatory 

framework is designed to encourage. At the same time, our regulatory framework 

is intended to prevent manipulation and fraud, and to make sure our markets operate with transparency and integrity. Derivative contracts based on a virtual currency represent one area within our responsibility. Recently, for example, a SEF 

and a designated contract market listed contracts based on bitcoins. It is important 

to emphasize that the existence of a contract does not mean the CFTC endorses use 

of the commodity on which the contract is based and, as with all new developments, 

we must remain vigilant to ensure market integrity by closely evaluating new contracts and related market practices, over time. We will also continue to coordinate 

with other regulatory authorities regarding the issues raised by virtual currencies 

as appropriate. 

Retrospective Regulatory Review 

Concurrent with our other work, we are engaged in a retrospective regulatory review. In response to Executive Order 13563, the CFTC developed a two-step program of retrospective review, which was announced in the Federal Register on June 

30, 2011. First, as part of its implementation of financial reform under Dodd-Frank, 

the Commission reviewed many of its regulations to determine the extent to which 

these regulations needed to be modified to conform to the Dodd-Frank Act. This review resulted in modifications to a number of existing rules, both to implement regulatory changes mandated by the Dodd-Frank Act and more generally to update and 

modernize those rules. For example, the CFTC made a number of changes to reflect 

market developments and to codify standard or commonly-accepted industry practices. 

We have now begun step two of our review during which we will consider the remainder of CFTC regulations. As part of this process, the Commission will solicit 

public comment to determine which rules may need to be modified or rescinded. Following this review, we will follow up with rulemaking proposals as necessary. 

Resources and Budget 

Advancing the goals I have outlined and fully implementing the new regulatory 

framework depends on having resources that are proportionate to our responsibilities. The CFTC did receive a budget increase for FY 2015 for which we are very 

grateful. It will be put to good use. But in my view, the CFTC’s current budget still 

falls short. The CFTC does not have the resources to fulfill our new responsibilities 

as well as all the responsibilities it had—and still has—prior to the passage of 

Dodd-Frank in a way that most Americans would expect. Our staff, for example, is 

no larger than it was when Dodd-Frank was enacted in 2010. 

We are fortunate to have a talented and dedicated professional staff, and we keep 

Teddy Roosevelt’s adage in mind—to do all we can, with what we have, where we 

are. But the limits of our current budget are evident. 

Specifically, in the absence of additional resources, the CFTC will be limited in 

its ability to: 

• Review and approve in a timely manner the many new registration applications 

we face from over 100 swap dealers and over 20 swap execution facilities, as 

19 

well as from derivatives clearing organizations, designated contract markets, 

foreign boards of trade, and other market participants. 

• Perform thorough examinations of critical infrastructure such as clearinghouses 

and exchanges, which are so important to our financial system and to financial 

stability. 

• Engage proactively on emerging risks like cybersecurity. The CFTC needs resources to conduct compliance examinations of cybersecurity programs of regulated entities, help develop best practices, and respond when attacks occur. 

• Respond in a timely and thorough manner to requests from registered entities 

and other market participants for clarification or interpretation of the CEA and 

CFTC regulations or requests for exemption or no-action relief; rule and product 

submissions filed by exchanges, clearinghouses, and other registered entities; 

and submissions for clearing and trading mandates. Delays can have an adverse 

effect on efficiency, customer protection, and financial stability, as well as liquidity and innovation. 

• Maintain and improve information technology systems and resources that are 

vital to its mission, including in particular our ability to receive, store and analyze vast new quantities of data related to the swaps market. Handling massive 

amounts of swaps data and effective market oversight both depend on the agency having up-to-date technology resources, and the staff—including analysts and 

economists, as well as IT and data management professionals. Today’s financial 

markets are driven by sophisticated use of technology, and the CFTC cannot effectively oversee these markets unless we can keep up. 

• Engage in the necessary level of market surveillance and oversight to detect excessive risk, fraud, manipulation or other abusive practices, which requires increasingly sophisticated tools and the ability to analyze massive amounts of 

data given the technological advances in the markets. 

• Engage in the necessary level of risk surveillance and oversight to ensure the 

financial integrity of the clearing and settlement process and to protect customers in the event of a clearinghouse or clearing member default. 

• Engage in robust enforcement efforts with respect to fraud, manipulation, abusive or disruptive practices, or other threats to market integrity and customer 

protection. 

Simply stated, without additional resources, our markets cannot be as well supervised; participants and their customers cannot be as well protected; market transparency and efficiency cannot be as fully achieved. 

Conclusion 

We have made substantial progress in recovering from the worst financial crisis 

since the Great Depression, but there is much work yet to accomplish. 

The United States has the best financial markets in the world. They are the 

strongest, most dynamic, most innovative, and most competitive—in large part because they have the integrity and transparency that attracts participants. They 

have been a significant engine of our economic growth and prosperity. The CFTC 

is committed to doing all we can to strengthen our markets and enhance those 

qualities. 

Thank you again for inviting me today. I look forward to your questions. 

The CHAIRMAN. Thank you, Mr. Chairman. Thank you for being 

here. 

I would like to start with a topic that has been in the news. 

The—one of the top regulators at the Bank of England yesterday 

confirmed that global swaps markets are fragmented. In your view, 

is fragmentation a problem and a liquidity problem in the swaps 

market? 

Mr. MASSAD. Thank you for the question, Congressman. 

I think it is important to remember what a unique situation we 

have here. We have a swaps market which grew to be a global market before anyone regulated it. That is really unlike just about any 

other product I can think of. 

The G20 nations then came along and said, ‘‘Well, we need to 

bring this market out of the shadows.’’ We agreed on how to do it, 

but of course, the laws get implemented by individual nations. 

20 

There are going to be differences, and those differences are going 

to lead to some fragmentation, at least in the short run. For example, the G20 nations all agreed to regulate trading, to require that 

trading move to regulated platforms. We were the first ones to do 

that. Nobody else has done it. To the extent that people can then 

trade outside of that, they are going to do so, but the point is that 

we are making very good progress in harmonizing these rules. 

Right now, we are very focused on issues such as clearinghouse 

regulation, where it is very important that we have cooperative supervision. I think we are making progress there. We are working 

on harmonizing the rules on margin for uncleared swaps. That is 

a very important rule. We have mandated clearing of standardized 

products, but a lot of swaps won’t be cleared. They will continue 

to be bilateral transactions. So margin, meaning taking collateral 

from the counterparty, is very important to mitigating risk. Therefore, it is very important that we try to get the rules in the U.S., 

Europe, Asia, as similar as we can, and we are making good 

progress there. 

So my answer is, we want to try to harmonize as much as possible, but people have to recognize this is a very unusual situation, 

it is going to take some time, and there are going to be some differences. 

The CHAIRMAN. You either misquoted or quoted saying that with 

respect to this, that you needed some tweaking or fine-tuning. Is 

the issue broader than that, or is that to minimize how much harmonization needs to get done? 

Mr. MASSAD. I am not sure—in which—are you referring to—— 

The CHAIRMAN. I am talking about fragmentation. You were 

quoted as saying—— 

Mr. MASSAD. Yes. 

The CHAIRMAN.—fragmentation, that the rules related are—need 

tweaking and fine-tuning. 

Mr. MASSAD. Well—— 

The CHAIRMAN. That is a bit of a—— 

Mr. MASSAD. Yes. There is certainly some fine-tuning and tweaking that we want to do. Again, it sort of depends—I think you have 

to look at it in different areas. In the case of clearinghouse regulation, for example, what we are really focused on is working out arrangements so that we have cooperative supervision. Meaning that, 

I didn’t think the answer there was to say if the clearinghouse is 

in some other country, but they do a lot of U.S. business, let the 

other country regulate it and we will just wait to hear from them. 

We felt that, no, we have had a standard in this country where 

clearinghouses that do that kind of U.S. business have to register 

with us, have to meet our standards as well. We then try to work 

out arrangements so that our standards are harmonized with the 

foreign country’s standards. That has worked very successfully. 

The swaps market actually has grown to be a global market on 

that framework of dual registration, so I want to keep that in place 

and I want to work out cooperative supervision. 

On something like trading, the solution may be a little bit different. So it really depends on what area we are talking about. In 

margin for uncleared swaps, for example, we are trying to get the 

21 

rules the same from the get-go. And again, we are going to make 

a lot of headway on that. 

The CHAIRMAN. In the time left, talk to us about this, what appears to me to be a significant data fire hose coming at you with 

respect to the swaps and everything, and the comments made that 

the London Whale issue at JP Morgan that you—looking backwards at it, you couldn’t find that whale within the data. I mean 

how will the Commission use all of that significant data coming at 

you to get a fact—— 

Mr. MASSAD. Yes. 

The CHAIRMAN.—in order to, excuse me, warrant the cost of collecting? 

Mr. MASSAD. Right. Very good question, Mr. Chairman. 

First of all, we are in a much better position than we were in 

2008 already. Right? In 2008, we had no visibility into this market. 

When AIG was teetering and the U.S. Government ended up having to commit $182 billion to prevent its collapse, we knew very little about its swap activities that were taking place out from its 

London office, and regulators had to rush over the weekend to even 

understand what they were. We are a long way from that, okay? 

We now have good information to the extent we are clearing swaps, 

we get daily reports on the positions of the intermediaries. We are 

building this—really it is like an infrastructure project, is the way 

to think about it. This is a massive effort to collect data on a market for which we previously had no data. It is a worldwide market. 

When you measure it by notional amount worldwide, it is $600 trillion, $700 trillion, I mean these are huge numbers. So there is a 

lot of input there, and we need to have the technological resources 

to do that. That is why we are asking for them in our budget. 

There are a couple of things that have to happen. We have to 

harmonize standards. We are working very hard on that, both domestically and internationally. We are working to improve our 

rules where we can to make sure we are giving clear guidance and 

making clear what we want. If we don’t get good data to begin 

with, we can’t analyze it. And we are working to make sure market 

participants give us good data. But the key thing is really to have 

the resources to take this data in and then analyze it. 

The CHAIRMAN. Okay, thank you, Mr. Chairman. 

I now recognize the Ranking Member for 5 minutes. 

Mr. PETERSON. Thank you, Mr. Chairman. 

When we did Dodd-Frank, our part of the bill, one of the main 

things we did was set up the clearing situation. And I read now, 

in different places, Financial Times and so forth, people worrying 

about that we are concentrating the risk in these clearinghouses. 

And is that true and how are we—what are we doing to keep an 

eye on that so we don’t just shift where the problem is—— 

Mr. MASSAD. Right. 

Mr. PETERSON.—to another place? 

Mr. MASSAD. It is an excellent question, Congressman. The way 

I think about it is this. It was a good decision to mandate clearing 

of standardized products because that does give us a much better 

way to monitor this risk, to mitigate the consequences of the default, to understand where that risk is. But it is not a panacea. It 

22 

doesn’t eliminate the risk, so we have to be very vigilant in our 

oversight of clearinghouses. 

Now, we have had a framework in place for years that I think 

is an excellent framework. Today, there is a lot of talk about, well, 

how exactly are we making sure clearinghouses are healthy and 

stable, and that is a very good public discussion to have. It is important to remember that these aren’t banks. They are not the 

same model as banks. They are sort of institutions that neutralize 

the risk, and one of the keys is looking at the margin models to 

begin with as to what risk you take on. 

Another key is the surveillance we do. We do daily surveillance 

of what is going on in these clearinghouses, looking at what the 

clearing members, what their exposures are, looking at the clearinghouse health. We receive a lot of financial information on a constant basis. And then there are issues pertaining to what we call 

the waterfall, making sure they have the resources necessary in 

the event there is a problem. 

Another big concern today is cyber, and this is an area where I 

really want to step up our efforts. I mean the risk of a cyberattack 

to one of our clearinghouses, that is a very serious problem and we 

want to make sure they are ready. 

So you are right, we need to be very focused on this. I think we 

have a good framework in place, but we need to continue to be very 

proactive. 

Mr. PETERSON. I agree. Thank you. 

The other question I have is, we have talked about this, you and 

I, one of the things that my constituents are upset about is that, 

in all the stuff that has gone on, nobody has gone to jail. And now, 

it has become almost like we fine—it isn’t you—but somebody fines 

one of these big banks $9 billion, and it is just the cost of doing 

business. And I know that you don’t have the, I will call it criminal 

authority, I guess the SEC doesn’t either, so you guys have to send 

this stuff to the Justice Department, and either it is too complicated, they don’t understand it, or they have other things to do, 

I am not sure what. But, people say, there is probably some case 

for giving you more money, but frankly, my view is if we don’t start 

sending some of these people to jail—this commodity outfit in Iowa, 

whatever their name was, that went belly-up—my constituents, 

they are just looking at the big picture. They think we haven’t done 

anything about this, they are making so much money that they can 

just take these fines, these big, huge fines, billions of dollars, and 

just keep on going. I don’t know what we do about this, but—— 

Mr. MASSAD. Congressman, I couldn’t agree with you more, and 

we take criminal enforcement of the law very, very seriously. I appointed a former prosecutor as head of our enforcement division for 

precisely that reason, a guy who was involved with the—participated in—with Justice in the Oklahoma City bombing trials and 

other trials. 

We don’t have the criminal authority ourselves. We have to work 

with our partners at the Justice Department as well as state law 

authorities. We are on the phone with them constantly on this 

issue. 

Mr. PETERSON. Do you guys want the criminal authority? 

23 

Mr. MASSAD. Well, I am happy to talk about that. That would be 

quite a change in our regulatory model in the U.S., and I have a 

lot of respect for our law enforcement authorities, and they are trying to do the best job they can, but our folks know that in each 

and every case they should consider whether there are potential 

criminal violations because holding individuals accountable, putting people in jail, is one of the most important ways we can send 

a deterrent message. 

We have had—in the last fiscal year alone, we have had 12 cases 

that have resulted in Federal criminal proceedings that grew out 

of our actions. There was a guy sentenced to 20 years for a commodity pool fraud. We had another guy sentenced to 16 years for 

a Ponzi scheme. We just had someone indicted for spoofing. So we 

are—— 

Mr. PETERSON. That stuff never seems to get into the media 

though, and what gets in is a $9 billion fine on JP Morgan and 

whatever else that they do, and—— 

Mr. MASSAD. Right. 

Mr. PETERSON.—it frustrates people. Thank you. My time has expired. Thank you very much. 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. Neugebauer for 5 minutes. 

Mr. NEUGEBAUER. Thanks, Mr. Chairman. And, Chairman 

Massad, thank you for being here today. 

I was happy to hear yesterday that the Commission announced 

it will make changes to the margin rule after my TRIA bill was reauthorized and provision was put in there to help clarify the enduser. So thank you for that. 

I think one of the things that you probably have been hearing 

from this Committee, and from Members of Congress, is that we 

want to make sure we protect these end-users and bona fide hedgers. These are people that are helping create jobs in the country. 

Along those same lines, one of the other issues is the position 

limits, and recently the Commission closed comments on a proposed rule on the position limits, further limiting the number of 

contracts that traders can hold. 

I have heard from some of my agricultural folks that the—particularly from the cotton industry that—and which is vitally important to my district, by the way—that the Commission’s proposed 

rules do not adequately define what is bona fide hedging and what 

does it consider commercial market practices. And as a result of 

that, they think there is going to be some confusion about, and 

some of these commercial entities that are working with producers 

that they could be limiting the ability of them to help manage 

those risks. Can you kind of discuss what the Commission is doing 

to make sure that we make that world big enough where our producers can use these marketing entities to help market their products? 

Mr. MASSAD. Certainly, Congressman. It is an excellent question. 

As you know, we have had position limits in place for agricultural 

commodities for many years. They work very well to limit excessive 

speculation, so they are an important tool in our toolkit, and Congress has mandated that we extend those to other commodities, but 

we must do that in a way that still allows commercial participants 

24 

to engage in bona fide hedging. Now, that does get complicated as 

to exactly how you define that. We have taken a lot of input on this 

issue, had a lot of comments. I want to make sure we listen to market participants on this. Trading strategies are often very complex. 

At the same time, we need to write a rule that works here. 

So we are taking our time to try to get this right, and the staff 

is spending a lot of time sort of thinking about how we can craft 

these rules so that they work to meet the goal of Congress, which 

is to limit excessive speculation, at the same time as allow for bona 

fide hedging. 

Mr. NEUGEBAUER. In general, just on the position limits, certainly, we want to have a situation where the bona fide hedgers 

have the ability to do that, but the other thing about position limits 

is we want to make sure that we provide enough liquidity in the 

market so that there is space on both sides of that trade. 

Mr. MASSAD. Certainly. We are not trying to eliminate speculators. Speculators are part of the market. What we are trying to 

do is limit excessive speculation, so it is important that we get the 

levels right. 

Mr. NEUGEBAUER. I was glad to hear you talk about cyber, and 

as the Chair of Financial Institutions and Consumer Credit Subcommittee of the Financial Services Committee, that is kind of one 

of our priorities, beginning to look into that, for two reasons. One, 

as you mentioned, to protect the overall infrastructure and the 

damage that can happen if we have an attack on some of these 

major entities that help clear all of our financial transactions on a 

daily basis, but also another piece of that is data security of the 

individuals, the amount of data that—personal information and so 

forth, and proprietary information that many of these entities hold. 

Can you elaborate on things that your agency thinks that maybe 

needs to be happening, both from a government standpoint, but 

more importantly, it needs to also have a major private market 

participation in that as well. 

Mr. MASSAD. Absolutely, Congressman. And you are absolutely 

right, it requires the private sector really to do a lot of the heavy 

lifting here. 

As an agency, we have taken a lot of steps. We have written in 

these kinds of issues into our core principles that Congress brought 

enough authority into the core principles to focus on cyber. We are 

focusing on this issue in our examinations, trying to make sure 

that the Board of Directors of these institutions is taking this issue 

seriously, that they have policies in place, that they are following 

those policies, that they are responding adequately when there is 

an issue on identification of a weakness, but we don’t do independent testing. We don’t have the budget for that. I mean there 

are firms—I had a group of banks that I met with the other day 

and I asked them how much they were spending on cyber relative 

to our budget, told them what our budget was, and all of them said 

we are spending more than that just on cyber alone. One of them 

said, ‘‘We have a cyber operations budget and we have a cyber 

change budget, and both of them are multiples of your budget.’’ 

That is the scale of the challenge here. One of the things we 

would like to do with more resources is have the ability to increase 

our exams to make sure they are doing enough. One of the things 

25 

I want to look at is simply standards that make sure the private 

sector is engaging in adequate testing on their own. We are not 

going to do the testing, but show me that you have done the testing. Whether it is through a third party or your own folks, and 

show me that you then responded to the test. That is the proper 

role for an agency like ours in this kind of situation. 

Mr. NEUGEBAUER. Thank you. 

The CHAIRMAN. Mr. Scott for 5 minutes. 

Mr. DAVID SCOTT of Georgia. Yes, thank you very much, Mr. 

Chairman. 

Before I get to my questions, there are two points I really want 

to emphasize. The first one is that I agree wholeheartedly with 

Ranking Member Peterson, and I would hope that the CFTC, we 

are your Committee of jurisdiction, that you could report back to 

us with suggestions and recommendations of how we can strengthen your hand the best way so that we can put some of these crooks 

in jail. That is the most foremost way we can restore the confidence 

of the American people if they see them paying, otherwise they look 

at this as the cost of doing business. It is almost like the Mob. They 

go murder somebody, they look at that as the cost of doing business. I am not equating you with the Mob, I am just simply saying 

that this is where we are. But we have to gain the confidence of 

the people back. 

Now, the other point I want to mention outside of that is your 

budget, and I just want to make an appeal to the Agriculture Committee. We are your Committee of jurisdiction, and I would hope 

that we would be your champions. You need that full $322 million 

that is in that budget. This Committee, I have served on this Committee for 13 years. I have been on this Subcommittee for 13 years 

under this jurisdiction. I also serve on Financial Services. I helped 

write the Dodd-Frank bill, and especially that Title VII in which 

you are coming under. Your workload is tremendous. The technology is changing. You have had burnout from your staff. Not giving you that $322 million is like putting you on the battlefield with 

your hands tied behind your back, or cutting your legs out from 

under you and then criticizing you for being crippled. And this we 

do not need to do, so I hope that this Committee will be a champion in this budget to give you that $322 million. 

Now, let me ask you this question first of all, if I may. You are 

right now engaged in the very important negotiations between the 

United States and Europe on the regulatory harmonization. I wonder if you could give us an update real quick on that, because I 

have a couple of other questions, and how these agreements on 

these rules may be enforced once you do get the agreement. 

Mr. MASSAD. Happy to do that, Congressman. 

I think it helpful maybe just to take it area by area. With clearinghouse regulation, I talked a little bit about that earlier, what we 

are working on is just really formalizing arrangements that we 

have kind of followed on a practical basis for many years, meaning 

that with European clearinghouses, the bigger ones that do a lot 

of U.S. business, they have been registered with us, and we have 

worked with regulators in Europe on cooperative supervision arrangements, and we are working that out as part of the arrangeVerDate Mar 15 2010 08:31 Jun 03, 2015 Jkt 041481 PO 00000 Frm 00029 Fmt 6633 Sfmt 6601 P:\DOCS\114-02\93960.TXT BRIAN
26 

ments whereby Europe, under their new rules, have a new standard whereby they have to recognize our clearinghouses. 

Mr. DAVID SCOTT of Georgia. Yes. 

Mr. MASSAD. So we are looking at just formalizing some of the 

harmonization of our requirements. That is kind of what is going 

on in clearing regulation. 

In trading, as I mentioned, we implemented our rules. Most 

other jurisdictions haven’t implemented rules yet. Europe’s won’t 

come on until 2017—— 

Mr. DAVID SCOTT of Georgia. Yes. 

Mr. MASSAD.—so that piece is maybe on a slightly longer track, 

but in the meantime, we are going to be looking at our rules to see 

what we can do to enhance trading on SEFs. 

Mr. DAVID SCOTT of Georgia. Okay, Mr. Chairman—— 

Mr. MASSAD. Yes. 

Mr. DAVID SCOTT of Georgia.—I appreciate that. The Chairman 

told me I have to be quick here, so—— 

Mr. MASSAD. Okay. 

Mr. DAVID SCOTT of Georgia.—this other question is on cross-border. 

Mr. MASSAD. Yes. 

Mr. DAVID SCOTT of Georgia. Now, the CFTC has extended its no 

action relief until September 30 for non-U.S. swap dealers for certain transaction level requirements, and specifically, where a nonU.S. swap dealer that is located in the United States arranges or 

negotiates or executes a transaction. As a result of that, many 

questions have been raised on where the CFTC should draw the 

line, and determining which of its market participation will be subject to the cross-border oversight of the CFTC. Now, this no action 

relief, to me, is a good thing. It gives you time, you get information, 

you get informed to do the job, but my point is does the Commission anticipate formally revisiting this cross-border regime. And, 

here is the kicker, does the CFTC’s extraterritorial approach create 

incentives for our United States businesses to move these jobs outside the United States in order to avoid this regulatory burden? 

Mr. MASSAD. Congressman, we obviously don’t want to cause 

businesses to go outside of our country, but ultimately what is 

needed here is the construction of this global framework for regulation and harmonization of that global framework, and it is going 

to take some time. As I noted, a lot of the European rules, and particularly in Asia, those rules aren’t even online yet. 

In the meantime though, we are trying to look at these issues 

and trying to think about the best way to address them. To give 

you an example, in the area of the margin for uncleared swaps 

rule, we said—we didn’t take a position yet on how that rule will 

apply cross-border. Instead, we laid out a couple of alternatives and 

we invited comments on that from the public, and we are evaluating those comments now because we could do something similar 

to what the bank regulators are proposing, we could do something 

similar to our past guidance, or even a third variation. So we are 

giving it a lot of thought. These are complex issues. 

I will say just one thing that I have said previously, I do think 

that when people are active in our country, when they are doing 

27 

things in our country, that has been a traditional basis of jurisdiction. 

Mr. DAVID SCOTT of Georgia. Yes. 

Mr. MASSAD. Then you have to think about, well, what does that 

jurisdiction then—what should it lead to? That is one issue. Second 

issue is Congress has told us that we need to think about the risk 

if that off-shore activity is imported into the U.S. and causes a 

problem. We saw that with AIG. All that activity was in London 

and came back to really harm this country. 

Mr. DAVID SCOTT of Georgia. Well, I think—— 

Mr. MASSAD. So—— 

Mr. DAVID SCOTT of Georgia. Okay. And my time is well over. 

Thank you, Mr. Chairman. I appreciate that. 

Mr. MASSAD. Thank you. 

Mr. DAVID SCOTT of Georgia. And I will ask about confidentiality 

and indemnification—— 

Mr. MASSAD. Okay. 

Mr. DAVID SCOTT of Georgia.—on the side. Thank you, Mr. 

Chairman, for your generosity. 

The CHAIRMAN. The gentleman’s time has expired. 

The former Chairman of the Agriculture Committee, Mr. Lucas, 

for 5 minutes. 

Mr. LUCAS. Thank you, Mr. Chairman. 

And, Chairman Massad, to follow up on Chairman Conaway’s 

points and Mr. Scott’s points, the issues dealing with harmonizing 

rules across borders, the letters dealing with the lack of action, all 

those things are really challenges to the industry, trying to make 

sure that we have an effective process, and it is causing issues, as 

I understand it, in how business is conducted, in fragmentation, 

loss of equity. But you mentioned to both of my colleagues that the 

Commission was looking at these issues as they unfold in Europe, 

and as you address those. Tell me about the process when we go 

from simply the letters over to real regulatory framework. Are we 

going to use a formalized process, will there be public notice, will 

there be input opportunities? 

Mr. MASSAD. Congressman, I am very committed to the rulemaking process. I believe that the public comment is very helpful 

to us. As I said, we have that process going on right now with the 

margin for uncleared swaps were, again, we laid out options on 

how that rule could apply cross-border, and we invited comments. 

Mr. LUCAS. Can you give us more of a timeline as to where, 

based on your observations of the Europeans, the action within the 

Commission, a timeline, a feel for what we can expect in the way 

of this being resolved? 

Mr. MASSAD. It is going to take some time, is what I would say. 

This is a very complicated area. There are a lot of aspects to it. A 

lot of the other jurisdictions haven’t even developed their rules yet. 

So this is not going to all get settled overnight, but we are making 

progress and the markets are continuing to operate. We are doing 

the best we can with the resources we have and with the situation, 

but—— 

Mr. LUCAS. But you would agree—— 

Mr. MASSAD. Yes. 

28 

Mr. LUCAS.—the fragmentation issues, the loss of liquidity, those 

are real issues out there. 

Mr. MASSAD. Well, we certainly want to try to minimize fragmentation and loss of liquidity. At the same time, we have to implement our laws, they have to implement their laws. As I said before, nations are going to have differences in their laws. This is not 

unusual. Look at any other area of financial regulation. There are 

big differences in the laws. There are big differences as to how you 

sell securities in this country versus how you do it in other countries. 

Now, people have learned how to operate with that, part of this 

is we are starting from this very unusual situation in which there 

is a global market that was never regulated. So people have a presumption that, well, all the rules should automatically be the same. 

Well, unless you want to invest—give the G20 the power to write 

its own laws, that is not going to happen overnight. I mean, again, 

we are trying to harmonize, but it will take time. 

Mr. LUCAS. One last question, Mr. Chairman. I understand 

Chairman Conaway and Ranking Member Peterson sent you a letter recently noting that the Prudential Regulators are requiring 

supplemental leverage ratio and an inclusion of margin held by an 

FCM in the ratio on leverable funds. In the letter, they caution regulators requiring financial institutions to hold additional capital to 

cover these nonexistent leverage might drive up the cost of providing services through such an affiliate. Do you share what I believe to be legitimate concerns of the senior Members of the Committee? 

Mr. MASSAD. I do share those concerns, Congressman. Thank you 

for the question. I am very concerned that this could have a significant negative effect on clearing, and we have mandated clearing as 

a way to reduce and monitor and mitigate risk, and that was a 

good decision. I have spoken recently with Comptroller Curry and 

Chairman Gruenberg at the FDIC, as well as the Fed, about this 

issue. We have agreed that our staffs would get together and discuss it further. 

I appreciate what they are trying to do with this rule. They are 

trying to create a leverage ratio—they are creating a leverage ratio 

that isn’t risk-based, if you will, that doesn’t turn on making risk 

measurements of particular activities, but when it comes to margin 

that is legally segregated, that is not available to a bank for any 

other purpose that should be treated differently in my view. So we 

will talk with him about it. 

Mr. LUCAS. Thank you, Mr. Chairman. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman yields back. 

The gentleman from Massachusetts, 5 minutes. That gentleman 

from Massachusetts. 

Mr. MCGOVERN. Okay, yes. I am the only one. 

The CHAIRMAN. I know. 

Mr. MCGOVERN. Yes. 

The CHAIRMAN. Five minutes. 

Mr. MCGOVERN. Thank you, Mr. Chairman. And thank you, 

Chairman Massad, for being here. 

29 

And let me begin by saying I agree with Mr. Scott and with Mr. 

Peterson when I repeat what they said, that someone ought to go 

to jail. I think people are puzzled why that hasn’t been the case. 

And I also agree with Mr. Scott in supporting the Administration’s 

budget request. Your agency is charged with policing the nation’s 

financial sector, and trying to prevent another economic crisis, and 

it is a big job, and the challenges of oversight get more and more 

complicated with every passing year, and the responsibilities that 

your agency has are enormous. We have to give you the funds so 

that you can do your job and your agency can do your job. 

Having said that, Mr. Chairman, I would like to ask you about 

CFTC reauthorization efforts. I think we should be careful as we 

work on this legislation, taking into account the work CFTC has 

been doing since we last considered a reauthorization bill in this 

Committee last spring. For example, as was mentioned before, I 

know the Commission has been working diligently on the cross-border issue, and we wouldn’t want to hamstring its efforts and potentially delay critical progress. I also appreciate that CFTC has taken 

into account and acted on many of the end-user-related provisions 

that were included in the Committee’s reauthorization bill. 

So as this Committee looks toward CFTC reauthorization, we 

would appreciate any advice that you might want to provide us. 

Mr. MASSAD. Thank you, Congressman, for the question, and 

thank you for your support of our budget and also your comments 

on enforcement. I obviously agree with those. 

I think you made the point well that, as I understand it, there 

have been a lot of changes since the legislation was adopted by the 

House last year. I think in that legislation there were a number 

of provisions related to commercial end-users. We have acted on a 

lot of those things, and I was sympathetic to the goals of some of 

those provisions in the legislation, but we felt it was better to address those things through regulation, so we have done so. 

I have some concerns on some of the other things that were 

raised in terms of process changes and process of the Commission. 

I think some of those things could, frankly, make it a lot harder 

for us to do our job. So I am certainly happy to work with the Committee on this and consider any approaches people have, but generally, I guess, to me, the real issue is for us to do our job, we need 

the resources. It always comes back to the resources, not so much 

changes in the law. 

Mr. MCGOVERN. No, I appreciate that, and I don’t want to take 

up any more time here but I would, again, urge all my colleagues 

to understand that, given the enormity of what you are being asked 

to do and your agency is being asked to do, that we need to make 

sure that the funding is there. And sometimes it is easier to criticize what you haven’t done, but there needs to be an understanding 

that in order to do all the stuff, you need the resources and the 

staff in order to do the kind of job we all expect. 

So I thank you very much, and I yield back my time. 

The CHAIRMAN. The gentleman yields back his time. 

Mr. Thompson for 5 minutes. 

Mr. THOMPSON. Chairman, thank you so much for being here, 

and thanks for the wealth of information and the wealth of hospitality that your staff—— 

30 

Mr. MASSAD. Right. 

Mr. THOMPSON.—showed Members of this Committee in our visit 

last week in Chicago. 

I want to follow up on what Mr. McGovern was speaking about 

in terms of resources. One of the things that Congress can do to 

help free up resources and agencies is reduce the mandates or responsibilities that, quite frankly, are maybe no longer necessary or 

productive. And can you think of any obligations, reports, responsibilities, or others, that Congress has mandated over the years at 

your agency that have outlived their usefulness in terms of helping 

you fulfill your mission that we should consider eliminating during 

our reauthorization process? 

Mr. MASSAD. Thank you for the question, Congressman. I certainly share the concern. 

Let me come back to you on that. Let me take a look. You know, 

we are conducting a regulatory review to see if there are regulations on our books that have outlived their usefulness. It will take 

us some time to do that, but I certainly support, if we identify 

those things, moving to amend them or eliminate them. So if you 

would allow me to do so, let me kind of give that a little bit more 

thought and—— 

Mr. THOMPSON. Absolutely. 

Mr. MASSAD.—come back to you. 

Mr. THOMPSON. I am sure that everyone on this Committee 

would welcome, as you complete your process and as we prepare, 

if we can have that information, obviously, to do the best possible 

job in reauthorization—— 

Mr. MASSAD. Yes. 

Mr. THOMPSON.—to equip you, going forward. 

The reporting rules were the first set of rules to be finalized, and 

much has been made of the Commission’s difficulty consolidating 

and analyzing trade data. Now last summer, the Commission solicited comment on potential improvements to the reporting rules, 

and I assume that many of the comments identified problems and 

suggested solutions. What does the Commission plan to do with the 

information received through this process, and when will a plan be 

implemented? 

Mr. MASSAD. Thank you for the question. We are thinking about 

that, and I am hopeful that we will be taking some steps, going forward. We are already taking some steps as a practical matter in 

terms of focusing on harmonizing the standards. We are working 

very hard, both domestically and internationally, to do that. We realize that is really a key—and we are taking a leadership role in 

that effort internationally, but we are looking at whether there are 

changes to our own rules that might be needed here. We are still 

completing that work. 

One of the things I have also asked our folks to do is simply look 

at all the data we are taking in, and making sure that we have our 

arms around that and understand all the data we are taking in, 

how is it coming into us, how are we using it, are different divisions getting data that may be requested in one area but might be 

useful in another? 

Once again, this comes back to resources. We get 300 million 

records of data each day. The types of data we are getting have 

31 

dramatically increased about six-fold. Our data storage needs are 

growing by about 35 percent a year. A lot of this is records of trading now that there is more and more electronic trading, it is very 

sophisticated stuff. That is why we are asking in our budget for a 

huge IT investment because we need to grow our capabilities. 

Mr. THOMPSON. And I recognize, based on some questions from 

my colleagues, grow those IT technologies with higher cyber concerns as well. 

Mr. MASSAD. Yes. 

Mr. THOMPSON. We had an economist in here last year and there 

was a question posed, and I wanted to kind of pose the question 

to you. In your opinion, is an insurance product for futures customers a viable option? Why or why not? 

Mr. MASSAD. Sorry, I am not quite—an insurance product? 

Mr. THOMPSON. Product for futures customers. 

Mr. MASSAD. I guess I would need to know a little bit more. Are 

you talking about an insurance fund? 

Mr. THOMPSON. Some of a risk—— 

Mr. MASSAD. Are you talking about like a SIPC-type arrangement? 

Mr. THOMPSON. Commissioner Chilton had previously weighed in 

on this. 

Mr. MASSAD. Yes, I think—— 

Mr. THOMPSON. Kind of a risk management tool, yes. 

Mr. MASSAD. I think the reference is to something similar to 

what we have in the securities world. SIPC, the Securities Investment Protection Corporation. And actually, one of our Commissioners is former chair of that. It is something I would be happy 

to look at. I don’t have a view at this time, but I would be happy 

to get back to you on that. 

Mr. THOMPSON. Okay, thank you, Chairman. 

The CHAIRMAN. The gentleman’s time has expired. 

Ms. Plaskett for 5 minutes. 

Ms. PLASKETT. Yes, thank you, Mr. Chairman, and Ranking 

Member. 

Thank you so much for coming and speaking before us. And surprisingly, in the Virgin Islands we have quite a number of hedge 

funds that are there, as well as asset managers, so we are really, 

as a territory, we are very happy for Dodd-Frank as well as the 

work that you do that regulates a lot of these because we don’t 

want bad actors in our jurisdiction. I echo the refrain of so many 

of my colleagues here that we do believe that sufficient appropriation is necessary for you to be able to continue doing the work that 

you are doing. But because we have so many of these hedge funds, 

I wanted to ask you about consolidation, and the consolidation and 

the growth of the hedge fund and asset managers in this area, and 

what are you doing, or have you thought about ways to incentivize 

others to come into this market as well? These are really dominant 

players in a lot of ways, and are you concerned about them as opposed to more regulated entities being involved in this area, and 

how are you trying to bring greater participation in the markets for 

these—for other groups? 

Mr. MASSAD. Congresswoman, thank you for the question. I 

think there are a number of aspects to that. 

32 

Let me mention one, though, that we have been thinking about. 

There are a lot of funds today, hedge funds and otherwise, that are 

engaged in a lot of trading in our markets. It is electronic trading. 

It is often high frequency trading. They are doing it for themselves, 

not for customers, so they are actually not—they don’t really fall 

into a category in terms of someone that we would normally say, 

well, you have to register—— 

Ms. PLASKETT. Yes. 

Mr. MASSAD.—with us. And yet, these firms, they are very active 

in the treasuries market, in the equities market. Again, this is high 

frequency trading, a lot of messages all the time. 

I think one of the things we need to think about is, well, what 

about those firms, what about these proprietary trading firms. I 

have even had one or two tell me you guys really probably should 

be regulating us more because they kind of want a framework too. 

So, to your question, that is an example of something that we are 

thinking—— 

Ms. PLASKETT. And does that come along with your potential 

rulemaking that you think you may be coming out with? 

Mr. MASSAD. Well, again, this is kind of on the list of priorities, 

I have to tell you, frankly, this isn’t, we have so many things on 

our plate—— 

Ms. PLASKETT. Yes. 

Mr. MASSAD.—that you have reminded me of some conversations 

I have had but we are not really—this is probably—well, it is not 

something we are going to be acting on any time soon. 

Ms. PLASKETT. Yes. 

Mr. MASSAD. I think it is—though it is a question. It really goes 

to how our markets have changed. 

Ms. PLASKETT. Yes. 

Mr. MASSAD. CME closed the trading pits the other day but, the 

trading pits are no longer really relevant. But more and more of 

the activity is electronic. There is more high frequency trading. 

Again, that is why we have to have very sophisticated technologies 

to keep up with it. But it really goes to the fact that as regulators, 

we have to work hard to keep up with how these markets are 

changing. 

Ms. PLASKETT. So my colleague reminded me, and I wanted to 

know if this was at all a priority or concern of yours. It had also 

been a discussion in oversight regarding cyber threats. 

Mr. MASSAD. Yes. 

Ms. PLASKETT. Is that something that is—— 

Mr. MASSAD. That is—— 

Ms. PLASKETT.—has a priority or is it—— 

Mr. MASSAD. Yes. 

Ms. PLASKETT.—high, low? 

Mr. MASSAD. That is certainly a priority for us. We are very focused on that issue. We are highlighting it in our examinations, 

particularly of critical infrastructure like clearinghouses. We want 

to make sure that these institutions are taking this as seriously as 

they need to be, all the way up to the top. 

Ms. PLASKETT. And should that be a concern of ours and appropriations—— 

Mr. MASSAD. Absolutely. 

33 

Ms. PLASKETT.—for how much—— 

Mr. MASSAD. Absolutely, it should be. 

Ms. PLASKETT.—money you are receiving to be able to—— 

Mr. MASSAD. This is—— 

Ms. PLASKETT.—do with that? 

Mr. MASSAD. This is one of the biggest threats to financial stability today, so it very much should be. 

Ms. PLASKETT. Okay, thank you. 

Mr. MASSAD. Thank you. 

Ms. PLASKETT. I yield the balance of my time. 

The CHAIRMAN. The gentlelady yields back. 

Austin Scott, who is the Subcommittee Chairman on the relevant 

Subcommittee for today’s hearing, Mr. Scott, 5 minutes. 

Mr. AUSTIN SCOTT of Georgia. Thank you, Mr. Chairman. Thank 

you, Mr. Chairman. And, Mr. Chairman, I have an opening statement for the record that I would like to submit. 

[The prepared statement of Mr. Austin Scott of Georgia is located 

on p. 5.] 

Mr. AUSTIN SCOTT of Georgia. And thank the Commissioner for 

being here, and I would like to follow up a little bit on what my 

colleague, Mr. Neugebauer, discussed with you on the bona fide exemptions and the various rules with regard to position limits. And 

it seems to me that the bona fide exemptions rule that was in place 

was working, and the CFTC has put forward different proposals to 

change that. Where does the desire to change that come from if the 

prior rule was working? 

Mr. MASSAD. Congressman, we are just trying to implement the 

Congressional mandate here that we now have Commission-adopted position limits in a number of categories, which also provide for 

bona fide hedging, and again, we are trying to write a rule that 

does reflect what Congress has directed us to do in that language. 

This is a—it is a complex area—— 

Mr. AUSTIN SCOTT of Georgia. Yes. 

Mr. MASSAD.—that is why we are taking our time to try to get 

it right. 

Mr. AUSTIN SCOTT of Georgia. Certainly our goal is to balance access with integrity, and what we don’t want to do is to create restrictions to those who truly are hedging their risk in the markets. 

And so as you revisit this, certainly, we will be happy to work with 

you further on that, and if you feel that there is something that 

is Congressionally mandated that maybe we could phrase better, 

we could certainly do that as we go through the reauthorization, 

and look forward to working with you on that. 

One other—just kind of a quick question because of uncertainty 

in the date. The de minimis level for swap dealers, the drop from 

$8 billion to $3 billion, there is some confusion with regard to the 

date that that would actually happen. Do you know the date that 

would happen and whether there would—— 

Mr. MASSAD. Yes, sir. Yes, it is—under the rule, it would change 

in 2017. 

Mr. AUSTIN SCOTT of Georgia. Calendar year 2017? 

Mr. MASSAD. Yes. 

34 

Mr. AUSTIN SCOTT of Georgia. Okay, and do you expect public 

comment before that happens? Is it something that you think needs 

to be addressed in the reauthorization as we go forward? 

Mr. MASSAD. I don’t know that it needs to be addressed in the 

reauthorization. What I would say is this. I think, as with any 

issue under our jurisdiction, it is important that our rules and any 

decisions we make about the rules be based on good data, and be 

based on good analysis. And we are required to do a study of this 

issue. We are going to do that study. I know all the Commissioners 

will want to look at that and think about that as they think about 

this issue. So I can assure you that any action we take will be 

based on good analysis and data. 

Mr. AUSTIN SCOTT of Georgia. Mr. Commissioner, let me just say 

this. I look forward to working with you and your staff and the 

other Members of the Committee on the reauthorization over the 

next few weeks. It probably will be moved sooner rather than later, 

the way the House calendar seems to shake out. And as I said, our 

goal is to find that balance with access and integrity in the markets, and I certainly look forward to having you as a partner as we 

push forward with that. 

Mr. MASSAD. Well, thank you, Congressman. I look forward to 

working with you also. 

Mr. AUSTIN SCOTT of Georgia. Thank you. 

Mr. Chairman, I yield back the remainder of my time. 

The CHAIRMAN. The gentleman yields back. 

Ms. DelBene for 5 minutes. 

Ms. DELBENE. Thank you, Mr. Chairman. And thank you for 

being here today and for your testimony. 

I offered an amendment which passed unanimously in the—in 

last year’s House-passed CFTC reauthorization bill, and it said 

that a court should uphold the CFTC’s assessment of a cost-benefit 

analysis for a rule, barring some sort of abuse of discretion. And 

I wanted to know if you could speak about the usefulness of this 

language in conjunction with including a cost-benefit analysis in a 

reauthorization bill as we look at that, going forward. 

Mr. MASSAD. Thank you, Congresswoman. That is the general 

standard that applies to our actions, so it is entirely appropriate 

that that be the standard in the cost-benefit area also. We have a 

requirement today that we do cost-benefit analyses in connection 

with any rulemaking. I think we do very robust analyses. We look 

at a variety of factors, and it is important to not try to get too specific or be careful about how you craft the language in this area because you can easily create unintended consequences that, frankly, 

make it harder—much harder for us to do our job even in terms 

of fine-tuning a rule. 

Ms. DELBENE. Yes. 

Mr. MASSAD. So—— 

Ms. DELBENE. Okay, thank you. We talked a lot about funding 

and the importance of funding, and you have talked about some of 

your priorities like cyber, et cetera. How helpful would it be to the 

agency’s mission, to the rulemaking process, if we had authorization levels that were also included in a reauthorization bill? Does 

that help you out or not? 

Mr. MASSAD. I am sorry. Authorization levels in—— 

35 

Ms. DELBENE. Right, for a particular—— 

Mr. MASSAD.—terms of our funding? 

Ms. DELBENE.—for particular areas. 

Mr. MASSAD. You mean sort of subcategories within our budget? 

Ms. DELBENE. Yes. 

Mr. MASSAD. I guess I would rather that—I mean if I understand 

it—maybe I need to talk with you further about it to make sure 

I understand. I would like to see our budget grow. And, we have 

tried to lay out how we would spend that. We have laid it out very 

carefully, in terms of our commitment to things like surveillance 

and enforcement, and improving our data and technology capabilities. So I guess I would want to understand how the authorization 

levels would play into that and how they would help us meet those 

objectives—— 

Ms. DELBENE. Yes. 

Mr. MASSAD.—but my main concern is to try to get that budget 

up. 

Ms. DELBENE. Yes. Right. Thank you very much for your time 

today again. 

And, Mr. Chairman, I yield back. 

The CHAIRMAN. The gentlelady yields back. 

The gentleman from California, Mr. LaMalfa, for 5 minutes. 

Mr. LAMALFA. Thank you, Mr. Chairman. 

Chairman Massad, welcome. Good to see you, and I appreciate 

your good work in your tenure so far. 

As you know, with Dodd-Frank’s passage, publicly-owned utilities 

had a negative impact from that as an unintended consequence, 

which put onerous and expensive reporting requirements on these 

utilities and the counterparties which they were engaged in their 

purchase of futures and swaps. So these requirements were so costly that many swap and futures sellers simply stopped working with 

publicly-owned utilities, putting them at a disadvantage to privately-owned and people that have no choice in their utilities were 

seeing that their access to energy futures were likely to have a lot 

of choices taken away from them, ultimately with less choices, 

higher cost to the ratepayers. So beginning of the 113th, I sponsored a bill, H.R. 1038, to place public utilities under the same 

rules as private utilities, which did pass in the House unanimously. 

CFTC initially released a no-action letter to address the issue. The 

no-action letter failed to reassure the market and, therefore, the 

CFTC then followed up with a revised rule similar to the bill H.R. 

1038. So in the months since that rule was issued, I wonder how 

have you viewed—have you seen that the swap and futures sellers 

have returned to the public utility market? 

Mr. MASSAD. Thank you for the question, Congressman. Yes, we 

did amend our rules to address this problem. I would have to check 

with our staff in terms of what we are hearing these days. I am 

not hearing any loud complaints so I am thinking that the rule— 

the rule change is helping and addressing the need, but I would be 

happy to get back to you. 

Mr. LAMALFA. Yes, from your perspective. The information that 

we are receiving from our source is that it has helped tremendously—— 

Mr. MASSAD. Right. 

36 

Mr. LAMALFA.—to get them back in the market. Do you think 

the rule change has increased the systemic risk or allowed the 

large swap dealers intended to be regulated by the act to avoid 

oversight? Do you think—have you seen any negative effect of that? 

Mr. MASSAD. Well, we crafted a rule change that appropriately 

balances our obligation to try to minimize systemic risk and bring 

the swaps market out of the shadows, but at the same time making 

sure that the companies that need to have access to these markets, 

to hedge risk, can do so and can do so efficiently. I think our rule 

change properly balances those issues. 

Mr. LAMALFA. I believe so too because we haven’t seen that anybody has been abusing the process or avoiding the oversight that 

we all believe is necessary and right. So do you believe that going 

ahead and codifying this legislatively would be a useful step to ensure into the distant future that the rules cannot be changed again 

in a later regime perhaps? Do you think that would be a useful 

step? 

Mr. MASSAD. Well, Congressman, markets change frequently, all 

the time, in fact, and as a general matter, that is why we have regulatory agencies and a legal framework given to those regulatory 

agencies, and then the regulatory agencies implement rules and revise those rules as needed. We may find a need that we need to 

go back and fine tune that rule or another rule, and I wouldn’t 

want to see us try to codify what really should be done in regulations into law because then it might make it that much harder for 

us to be responsive to the market. 

Mr. LAMALFA. I certainly understand that. Sometimes people on 

this side of the dais get a little spooked by the rulemaking that 

goes on in some areas of Federal Government, so we have to rein 

that in sometimes, but so far, we are pretty happy with the direction you have been taking things, so—— 

Mr. MASSAD. Thank you. 

Mr. LAMALFA.—thank you for that, and I look forward to working with you. 

Mr. Chairman, I yield back. 

The CHAIRMAN. The gentleman yields back. 

Mr. Ashford for 5 minutes. 

Mr. ASHFORD. Well, thank you. I don’t really have any questions. 

I just want to, if I could, just make a brief comment. I am new, 

you probably didn’t know that, but I am new, I am from Nebraska 

and we are all, most of us, farmers or came from farms. And I grew 

up in a place where you would trade these commodities in a very 

different way than they are being traded now. 

I just want to comment that this is a—an amazing volume of 

work that has been done, and I—and the work by the Committee 

and the Congress and your Commission is absolutely incredible. 

And the fact that—— 

Mr. MASSAD. Thank you. 

Mr. ASHFORD.—we are talking about tweaking or making things 

better on a baseline is really very productive. And obviously, 

cybersecurity is very important. The trade could be—and I guess 

that is my question. If we had an attack of some kind on an exchange or on one of these sort of places that make these trades, 

37 

how do you see—I mean in a general sense—what sort of risks to 

a farmer in Nebraska would that potentially have? 

Mr. MASSAD. Well, Congressman, thank you for the question. I 

think we are trying to minimize those risks and, obviously, the industry participants are trying to minimize those risks. You know, 

we all simply need to open a newspaper to see what kinds of consequences these attacks can have. We have seen it with the loss 

of protection for confidential information, for personal information, 

but, when it comes to critical infrastructure, what you want to 

avoid is any kind of outage or stoppage. There have been technological glitches that weren’t cyberattacks that have sometimes 

caused an interruption in trading. We want to avoid those too. 

Mr. ASHFORD. Which could, in fact, have an impact on the individual—— 

Mr. MASSAD. Absolutely. 

Mr. ASHFORD.—farmer. 

Mr. MASSAD. If someone can’t trade when they want to trade, 

that could hurt their ability to manage their own commercial risk. 

Mr. ASHFORD. Right. 

Mr. MASSAD. So again, that is why these issues are so important. 

Mr. ASHFORD. And I look forward to talking more with you and 

learning more about it, but I just—I will go back and tell my 

friends in Nebraska that we are well served from—— 

Mr. MASSAD. Well, thank you. 

Mr. ASHFORD.—what I can tell in these matters. 

Mr. MASSAD. Thank you very much. 

Mr. ASHFORD. I think you pretty much have it right. 

The CHAIRMAN. The gentleman—— 

Mr. ASHFORD. I yield back. 

The CHAIRMAN. The gentleman yields back. 

Mr. Crawford for 5 minutes. 

Mr. CRAWFORD. Thank you, Mr. Chairman. And, Mr. Chairman, 

thank you for being here. 

I understand the confidentiality and indemnification requirements in Section 728 and 763 of Dodd-Frank were incorporated 

into the bill during the conference committee without any formal 

hearings on the topic, and little time to fully get the language or 

consider the unintended consequences. Can you walk us through 

how those provisions have impacted the CFTC’s working relationships with foreign regulators, and how those provisions might be 

negatively impacting regulators’ ability to work together to identify 

and mitigate systemic risk on a global basis? 

Mr. MASSAD. Thank you, Congressman. It is an excellent question. 

The provision you are referring to do provide that, as a general 

matter, certain types of data can’t be shared with foreign regulators unless there is an indemnity that runs to us, as well as in 

some cases the swap data repository that is collecting the information. And the limitation that causes is we are, again, trying to 

build a global regulatory structure here where regulators can work 

together to monitor the risks in this market. It is something that 

people have suggested we should change, and that would be beneficial. 

38 

Having said that, we are still very busy in—there is still plenty 

for us to do in terms of building this regulatory framework. Some 

other jurisdictions have their own issues in terms of privacy and 

their ability to share, which need to be addressed because sometimes they face restraints also on their ability to share data. So we 

are working through this. I am happy to talk to you further about 

it though. 

Mr. CRAWFORD. Great. And I have one more question. The Swap 

Data Repository and Clearinghouse Indemnification Correction Act 

passed the House last Congress and had 420 votes. If this legislation becomes law, how would regulators’ ability to monitor, detect 

and mitigate global system risk be improved? 

Mr. MASSAD. Congressman, if you would, I want to maybe just 

make sure I am thinking of the right legislation, but let me just 

answer it more generally. If the legislation did remove this provision, this indemnification requirement, then it would facilitate the 

sharing of information—— 

Mr. CRAWFORD. Right. Right. 

Mr. MASSAD.—across borders. Again, that would just make it 

easier for regulators to work together. 

Swap activity is, as we all know, global. Risks abroad can come 

back and hurt our country, and that is why working with our fellow regulators is very important, that is why we are putting a premium on doing that. 

Mr. CRAWFORD. Excellent. Thank you. 

I yield back. 

The CHAIRMAN. The gentleman yields back. 

Ms. Lujan Grisham for 5 minutes. 

Ms. LUJAN GRISHAM. Thank you, Mr. Chairman. And thank you, 

Chairman Massad, for being here today. 

The State of New Mexico receives about $2 billion in direct revenue each year from energy taxes and royalties, and the oil and gas 

revenue accounts for approximately 30 percent of New Mexico’s 

general fund. And this allows us to invest, of course, in infrastructure, public schools, and in other—particularly important to the 

state, but in my district as well, public welfare programs. And I am 

concerned with the oil prices which have dropped more than 50 

percent since last June, and they are jeopardizing our ability to invest in education and any of our economic development programs. 

A dollar reduction in the price of oil reduces New Mexico’s state revenue from this direct source by $7.5 million, and in fact, as I 

understand it, our new revenue projections for this year have been 

cut by over 70 percent since the summer, from $286 million to $83 

million. So it is clear that the price drop has been influenced, to 

me at least, by much more than supply and demand, given that 

drastic a range. And just this Monday, the Bank for International 

Settlements, an international financial organization, published an 

initial report that found that the falling price of oil could have been 

caused by the energy sector’s high debt levels, and swap dealers’ 

reluctance to offer hedges to oil producers during periods of high 

volatility. 

Now, I am aware that the CFTC is currently looking at issuing 

new rules to limit speculation for certain markets such as energy, 

grain and metals. Can you talk to me a little bit about the examVerDate Mar 15 2010 08:31 Jun 03, 2015 Jkt 041481 PO 00000 Frm 00042 Fmt 6633 Sfmt 6601 P:\DOCS\114-02\93960.TXT BRIAN
39 

ination of this, and what you have conducted regarding the recent—what kind of investigation during the recent oil drop? 

Mr. MASSAD. Certainly, Congresswoman. It is an excellent question. 

The fall in oil prices has been dramatic, as you have noted, and 

so in the ordinary course of our surveillance, we are looking at this 

very closely, we have done a lot of work on it, and I would be 

happy to maybe have our staff come up and talk to you more about 

kind of what we have seen in the market. We are very focused on 

looking at whether we see manipulative behavior. 

I would just say that the factors affecting supply and demand, 

of course, have been very dramatic. The shale revolution, as you 

know, the fact that we in this country now produce 9.2 million barrels of oil a day, more than our net imports—the fact that oil stocks 

are higher than they have ever been. I was in Asia a couple of 

weeks ago and people were pointing out to the harbor all the tankers that were just sitting there filled with oil because that is how 

people are storing it. And the OPEC decisions, all these things I 

know you are very well aware of. But we will continue to look at 

this, and again, I am happy to have our surveillance folks come up 

and explain what we do and what we are seeing in the market. 

Ms. LUJAN GRISHAM. I would really appreciate that, and while I 

agree with you that, given the current climate and given our production, there are tangible—there is tangible evidence that we 

could point to that gives us the fluctuation and certainly the drop 

in the prices per barrel of oil, but I am also aware that there are 

other factors and don’t want to have—don’t want to be in a situation where there they are completely mitigated by not evaluating 

them—— 

Mr. MASSAD. Yes. 

Ms. LUJAN GRISHAM.—because we have tangible evidence on the 

other side. 

Mr. MASSAD. Yes. 

Ms. LUJAN GRISHAM. And I am also wondering whether or not 

that is affecting your analysis on commodity markets just in general in the context of your examination of that rulemaking. 

Mr. MASSAD. I am sorry, if what is affecting our—if—I didn’t 

quite follow. 

Ms. LUJAN GRISHAM. Your examination of not only just the tangible evidence of our oil production—— 

Mr. MASSAD. Yes. 

Ms. LUJAN GRISHAM.—so supply and demand—— 

Mr. MASSAD. Yes. 

Ms. LUJAN GRISHAM.—but also that we have—I mean I am hearing—there is some evidence that would suggest that the hedges 

and speculation have some effect to what—and I want to understand exactly—— 

Mr. MASSAD. Yes. 

Ms. LUJAN GRISHAM.—to what degree—— 

Mr. MASSAD. Right. 

Ms. LUJAN GRISHAM.—when you look at that, are you looking at 

those supply and demand issues as well as the investment issues 

related to commodities in general? 

40 

Mr. MASSAD. We have some pretty sophisticated surveillance 

techniques and data. We get a huge amount of data in every day, 

and we have computerized a lot of this analysis so we can look at 

what participants are in the market, what their positions are, 

whether they are changing, whether they are long or short, the 

character of their trading, so we will continue to do that. We will 

continue to be very active in this area. We recognize the importance of the oil market and the fact that this has been a very dramatic change. And it certainly will influence our thinking about 

policies and rules generally. 

Ms. LUJAN GRISHAM. The Chairman is always very patient with 

me. I am always over time, and I am going to take you up on your 

offer to come meet with me. 

The CHAIRMAN. All right. The gentlelady’s—— 

Ms. LUJAN GRISHAM. And thank you once again for—— 

The CHAIRMAN.—time has expired. 

Mr. Davis for 5 minutes. 

Mr. DAVIS. Thank you, Mr. Chairman. And thank you, Mr. 

Chairman. I am over here behind Mr. Rouzer. Thank you to my colleague from North Carolina for giving me vision. I really appreciate 

that. Chairman, thank you for being here. 

You may recall last Congress, I sent you a letter requesting that 

CFTC address the real-time reporting rule on illiquid markets and 

those who rely upon them to mitigate commercial risk. And recently, the Commission offered no action relief to Southwest Airlines for its hedges in these illiquid markets. So I wanted to actually start out by thanking you and the Commission for recognizing 

that a commercial end-user was being impacted unintentionally by 

Dodd-Frank and the CFTC’s rules. So thank you for that. 

Do you know of any other market participants who face these 

same challenges that Southwest faced? 

Mr. MASSAD. Thank you for the question, Congressman. At the 

time that we issued that letter, Southwest was the only one to 

come to us. I would have to check with the staff as to whether anyone else has, but, the letter that we issued simply reflected the fact 

that the goal of transparency here is not to make it harder for companies to engage in the legitimate hedging that they need to do. 

We are trying to balance the goal of transparency with, in some 

cases, in an illiquid market, real-time reporting. 

Mr. DAVIS. Right. 

Mr. MASSAD. And we will continue to be mindful of that as we 

go forward, if there are problems in other areas. 

Mr. DAVIS. Well, I appreciate your willingness, and I appreciate 

the Commission’s willingness to do so, and I look forward to working with you if we are contacted by others impacted similarly to 

Southwest. 

I have concerns about the position limits rule, and particularly 

about the so-called conditional limit proposal. This could really 

have a substantial negative impact on the physically-delivered 

market by means of lost liquidity and even higher volatility. I am 

concerned about giving preference to some within the markets that 

could then hedge up to five times more, have more than five times 

the opportunity in the spot month limit, having that position that 

could impact seriously my farmers in the Midwest and those who 

41 

rely upon the marketplace to get their products, or physically delivered products out into the global marketplace. And can you explain 

the rationale that the CFTC is proposing, this—why the CFTC is 

proposing this policy, and why it could have such negative consequences for our markets, and specifically the district I represent, 

how it could impact our agricultural and agribusiness end-users 

who rely upon hedging? 

Mr. MASSAD. Well, Congressman, the conditional limits aspect of 

the rule is one of many, many aspects of the rule on which we have 

invited comment. There are conditional limits today, as you know, 

in certain energy futures, they have existed for some time, but this 

is a very complicated area. What you do affects different market 

participants differently. So again, we are inviting public comment 

on this, and taking in that comment, and we haven’t made a decision. 

Mr. DAVIS. Okay. I appreciate your willingness to do so, and I 

look forward to working with you on that issue and making sure 

that my constituents’ voices are heard. 

And one last question. I would like to ask you about the CFTC 

SmartCheck program. For those of—— 

Mr. MASSAD. Yes. 

Mr. DAVIS.—my colleagues who aren’t aware of it, it is a new national campaign intended to help investors identify and protect 

themselves against financial fraud. What is the estimated cost of 

SmartCheck? 

Mr. MASSAD. I would have to get back to you on that. It is a few 

million dollars, I believe, but that campaign grew out of, in particular, the fact that we were seeing a lot of precious metal 

scams—— 

Mr. DAVIS. Right. 

Mr. MASSAD.—against retirees where—— 

Mr. DAVIS. It is a minimal investment and protecting those who 

are most vulnerable to these schemes. 

Mr. MASSAD. Yes, absolutely. And, these are schemes where people are kind of enticed into investing in what they think is going 

to be this metal that is going to appreciate in value, but the fees 

and the arrangements end up in them losing their entire investment. 

Mr. DAVIS. Well, you are right, and I am sorry to reclaim my 

time, I am almost out—— 

Mr. MASSAD. Yes. 

Mr. DAVIS.—but I just want to let you know I am willing to work 

with you on ensuring that our seniors and those who may be victims of these schemes actually have access other than just the 

website. Let me work with you—— 

Mr. MASSAD. Great. 

Mr. DAVIS.—to try to find other ways—— 

Mr. MASSAD. Excellent. 

Mr. DAVIS.—to put the message out that the CFTC is taking this 

on with us. So thank you and I—— 

Mr. MASSAD. We would love to do that, Congressman. Thank 

you. 

Mr. DAVIS. Thank you. My time has expired. 

The CHAIRMAN. The gentleman’s time has expired. 

42 

Mr. Costa for 5 minutes. 

Mr. COSTA. Thank you very much, Mr. Chairman. 

Per the last question, I don’t know if those are actually legitimate schemes or if they are scams, but that is an editorial commentary. 

Mr. Chairman, I too, with our Members, want to get to your digs 

and get a chance to spend greater time and length. And I apologize, 

I have been in and out, if some of the questions I pose to you 

maybe have already been asked. I was checking, I believe your 

term goes until April 2017. 

Mr. MASSAD. Correct. 

Mr. COSTA. Let me ask you a threshold question. You have said 

time and time again, when I have been here this morning, that this 

is complex. We get it is complex, that the changes are difficult, we 

get that. We understand the burden you are under with regards to 

resources. Let me ask, what do you want to try to get done between 

now and April 2017? 

Mr. MASSAD. Thank you for the question, Congressman. It is on 

several fronts. One is simply improving the resources of this agency 

so it can carry out its mission. That, to me, is one of the—— 

Mr. COSTA. I mean do you have a short list in terms of the rule, 

in terms of the clearinghouse? 

Mr. MASSAD. I guess I would have some general areas, but—— 

Mr. COSTA. Could you—— 

Mr. MASSAD.—one is—— 

Mr. COSTA. Could you—— 

Mr. MASSAD.—one is improving the resources of this agency. A 

second is making sure we continue to have very robust surveillance 

and enforcement because that is one of our most important jobs. 

Mr. COSTA. I think the public—— 

Mr. MASSAD. Third—— 

Mr. COSTA.—assumes that that is—— 

Mr. MASSAD. Yes. 

Mr. COSTA.—I mean—— 

Mr. MASSAD. But—— 

Mr. COSTA.—you are the cop on the street. 

Mr. MASSAD. Absolutely, but you have to go in every day and do 

it, and look at how you are doing it and see what you need to enhance it. You can’t just—it is not just—— 

Mr. COSTA. And—— 

Mr. MASSAD.—on autopilot. 

Mr. COSTA. And it is ever-changing. 

Mr. MASSAD. It is ever-changing, and again, the electronic nature 

of the markets changes it dramatically, and the need for high-speed 

computing and greater resources on technology is critical to that 

surveillance and enforcement. 

Mr. COSTA. Do you believe you are going to have the resources—— 

Mr. MASSAD. Today, we do not. 

Mr. COSTA.—if we approve the budget? 

Mr. MASSAD. Yes, if we had the resources, that would bring us 

a lot closer. Now, the market is going to continue to evolve, we will 

have to see where it goes, but if we got this budget approved, we 

would be in a much better position. 

43 

Mr. COSTA. How concerned are you that the data that you spoke 

of, and that we are all concerned about, is being protected? 

Mr. MASSAD. The data within the Commission? Is that what you 

are referring to? 

Mr. COSTA. I am talking about the privacy in terms of potential 

attacks that are taking place—— 

Mr. MASSAD. Right. 

Mr. COSTA.—daily. 

Mr. MASSAD. Right. Well, I guess what I would say is we have 

a very good set of systems and policies to protect information at the 

Commission. I am very concerned though about general 

cyberattack readiness. We have to make sure our own systems stay 

up-to-date. 

Mr. COSTA. And does that cause you to lose sleep at night? 

Mr. MASSAD. Well, I try not to lose sleep over anything, but it 

is certainly at the top of one of my concerns, is the cyberattack risk 

generally. 

Mr. COSTA. I talked about your timeline between now and 2017 

in April, and you are talking about the Europeans who I have some 

interaction with, and their timelines on the implementation of 

theirs, which is 2017. Are we going to be ahead of them or be behind them as—— 

Mr. MASSAD. Well—— 

Mr. COSTA.—it goes forward? 

Mr. MASSAD. Yes. It is a good question. We generally get our rule 

framework done before just about any other jurisdiction, but there 

are a lot of things that even in the next 2 years I can work out 

hopefully with the Europeans on trying to harmonize some of these 

things. As I said before, we are very focused on clearinghouse regulation, we are very focused on the margin for uncleared swaps. You 

work with the hand that you are dealt. I mean, the fact that other 

jurisdictions haven’t gotten their rules done does pose some challenges, but we can still make a lot of progress. 

Mr. COSTA. Well, as it relates to our efforts with the Europeans, 

and you talked a great deal this morning about your efforts on harmonization, I am wondering, when we look at the efforts in Frankfurt and other places, do you think there is going to be the level 

of harmonization between our European trading partners and ourselves as it relates to the operations of the clearinghouses? 

Mr. MASSAD. Yes, we can get there. As I said, on clearinghouses, 

we have had a framework in place that has worked very well, and 

what I am trying to do is enhance that and work out arrangements 

with the Europeans on that. We have had very good—we have 

made very good progress in this regard. 

Mr. COSTA. All right, my time is just about out, but I would like 

to continue the conversation and I—— 

Mr. MASSAD. Be happy to. 

Mr. COSTA.—come over to your digs and we will get a chance to 

get a better understanding. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. Allen, 5 minutes. 

Mr. ALLEN. Well, thank you, Mr. Chairman, for joining us today. 

44 

And going back to the cost-benefit analysis with regard to the Inspector General’s report, balancing the legal and economic issue, I 

would like your thoughts on the findings of the Inspector General 

and how your staff is conducting a thorough cost-benefit analysis 

with regard to balancing the legal and economic regulatory environment. 

Mr. MASSAD. Thank you, Congressman. We take cost-benefit 

analysis very seriously. We are required to do it for any rulemaking. We are required to consider a number of factors. I think 

we engage in very robust analysis, and you have a Commission 

today that wants to see that analysis done thoroughly, and wants 

to consider that in connection with any actions we take. I think we 

are doing an excellent job there, and we will continue to make it 

a top priority. 

Mr. ALLEN. The Commission’s proposed rule on position limits 

contains an attempt to redefine the meaning of bona fide hedging. 

Now, the puzzle appears to exclude many routine hedging transactions that have been used for decades by agriculture and agribusiness hedgers to manage their business risks, and have not 

been recognized by the CFTC as bona fide. If adopted, this proposal 

will increase hedging costs, resulting in lower bids to our farmers 

and ranchers, and higher consumer costs. Will you commit to ensuring that our agriculture and agribusiness hedgers can keep the 

risk management tools that they have used for years? 

Mr. MASSAD. Well, thank you for the question, Congressman. We 

are very committed to getting to a place with the rule that implements the Congressional direction we have been given, which is to 

implement position limits to curb excessive speculation, but at the 

same time to allow for bona fide hedging. There are complex issues 

in this area. That is why we are listening very carefully to market 

participants. Reasonable people can disagree sometimes on these 

issues, but we will do the best job we can to end up with a rule 

that balances those considerations. 

Mr. ALLEN. Well, thank you. Several commodity companies have 

expressed concern they will be forced out of business at offering 

swaps to their consumers if the de minimis level lowers to $3 billion. If these companies stop offering swaps, wouldn’t that just further consolidate the swap business in a handful of Wall Street 

banks? Do you think that was intended by Dodd-Frank? 

Mr. MASSAD. Well, Dodd-Frank gave us the direction to create a 

rule framework that regulates swap dealers. And we have done 

that. We have set a level. It is, under the rule, scheduled to drop 

in 2017. But we are also committed to looking at that issue, doing 

a study of that issue, looking at what the effects would be. And all 

the Commissioners will be very focused on taking in that data, and 

any decision we make will be informed by that analysis. 

Mr. ALLEN. Well, obviously, we appreciate your work, and hopefully continue to work to make sure that our farmers and our 

ranchers get the pricing they need, along with the folks to get a 

chance to compete in this—— 

Mr. MASSAD. Absolutely. 

Mr. ALLEN.—business that you are regulating. And I agree with 

my colleague, Mr. Scott, on the—we are really concerned about acVerDate Mar 15 2010 08:31 Jun 03, 2015 Jkt 041481 PO 00000 Frm 00048 Fmt 6633 Sfmt 6601 P:\DOCS\114-02\93960.TXT BRIAN
45 

cess and integrity, and thank you for your work in that area. I appreciate your time. It is a pleasure to meet you. 

Mr. MASSAD. Thank you. It is a pleasure to meet you. 

Mr. ALLEN. Thank you for coming by and saying hello to me—— 

Mr. MASSAD. Thank you. 

Mr. ALLEN.—this morning. 

Mr. Chairman, I yield back the rest of my time. 

The CHAIRMAN. The gentleman yields back. 

Ms. Adams for 5 minutes. 

Ms. ADAMS. Thank you, Mr. Chairman. Chairman Massad, thank 

you for being here. 

The CFTC has a very important role in regulating derivatives as 

part of Dodd-Frank. I represent the 12th District in North Carolina; Charlotte being one of my major cities. I wanted to bring up 

just a few issues related to derivatives held by banks in my district. 

One of the biggest challenges with regulating derivatives is requiring that trading companies hold more cash on hand should the 

derivative lose value. My question is, how do we bring down the 

operational cost of trading derivatives through a clearinghouse in 

order to ensure that traders and financial firms comply with DoddFrank? 

Mr. MASSAD. If I understood the question in terms of how do we 

bring down the operating cost of being a swap dealer or a clearing? 

I wasn’t quite sure. 

Ms. ADAMS. Clearing. 

Mr. MASSAD. Of clearing. We have mandated clearing of standardized products, which I think is a very good way to address risk. 

It helps us monitor the risk. We are trying to do all we can to make 

sure those clearinghouses then function in a manner that creates 

efficiency. We also do a lot of surveillance to look at how that is 

all operating. The cost of that to the members is driven by a number of factors. Today, for example, for the clearing members, if you 

talk to them, what you will hear a lot is their costs are very affected by the low interest rate environment because they hold customer funds and low interest rates affect what they earn from that. 

But we are certainly conscious of looking at our rule-set to make 

sure that we balance the regulatory goals of creating oversight for 

this market, creating transparency for this market, with the costs 

that that is creating. 

Ms. ADAMS. Okay. What kind of market data is CFTC analyzing 

when considering its options in moving forward with its position 

limits rulemaking? 

Mr. MASSAD. Thank you for the question. We first of all invite 

any industry—anyone who is commenting to give us data. We welcome data from market participants and other members of the public. So anything we get in a comment letter we are looking at. We 

have a staff of economists that also looks at this in our different 

markets, and we try to get further input from industry participants. So again, we try to make it as data-driven as possible. 

Ms. ADAMS. Can you tell us when you expect the Commission 

will act on a rule for position limits? 

Mr. MASSAD. Well, we are working very hard on it. We don’t 

have a specific timetable. It is something that I will work out in 

46 

consultation with my fellow Commissioners, but we certainly recognize the importance of it. And again, we have a lot of things on our 

plate, but we are working very hard on this one. 

Ms. ADAMS. Thank you. And finally, and you have alluded to 

some of this, what concerns do you have with position limit rulemaking? How do you anticipate addressing these issues as we move 

forward? 

Mr. MASSAD. Well, it is a very important area. It is also a complex area. We have to balance the need to—and the Congressional 

mandate—to set position limits so as to curb excessive speculation, 

with the fact that we also want to make sure commercial companies can engage in bona fide hedging. There are a lot of issues 

within that that we are looking at, and we have gotten a lot of good 

public comments on that. So that is why we are taking our time 

to make sure we do the best job we can to try to get this right. 

Ms. ADAMS. Thank you, Chairman Massad. 

Mr. MASSAD. Thank you. 

Ms. ADAMS. Mr. Chairman, I yield back. 

The CHAIRMAN. The gentlelady yields back. 

Mr. David Rouzer for 5 minutes. 

Mr. ROUZER. Thank you, Mr. Chairman. And, Mr. Chairman, 

great to have you here before the Committee. 

Mr. MASSAD. Thank you. 

Mr. ROUZER. I too have concern about the proposed position limits rule, but you have answered that probably ad nauseam at this 

point, so I am going to skip that one and go to another concern. 

I want to get your comments regarding the impact of the regulatory requirements on market participants in markets for 

securitizations and certain exchange traded products under the 

Volcker Rule, and how these firms will determine the covered fund 

status of products for which their firms are market makers. I understand there is concern that they may be forced to stop making 

markets and wide swaths of products due to technical issues and 

trying to comply with the documentation requirements. And I understand that the financial industry has submitted a reasonable 

and limited proposal to the Prudential Regulators related to how 

they could comply with the Volcker Rule, but the Prudential Regulators have not responded to date. 

Now, in light of the upcoming July deadline, market makers will 

need answers in the very near future so they can prepare to comply. Do you have a view on how the Prudential Regulators will respond or when this response will come? 

Mr. MASSAD. Thank you for the question. With respect to Volcker 

matters, we are working with our fellow regulators because, as you 

know, this is a rule that is administered by five different regulatory agencies. And it is obviously critical that we all try to work 

together. And, the rules themselves are essentially the same, and 

it is important that with any kind of issue that arises under the 

rules, we work together. 

So I would have to get back to you on exactly where we are on 

that request, but I can certainly say that we will continue to work 

with the other regulators on it. 

Mr. ROUZER. Well, I can certainly understand why many in the 

financial community would be a little nervous about this. You 

47 

know, certainty is important, and timeliness is important in this 

endeavor as well, so I appreciate your attention to it. 

Mr. MASSAD. Sure. 

Mr. ROUZER. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman yields back. 

Mr. Emmer for 5 minutes. 

Mr. EMMER. Thank you, Mr. Chairman. Thank you, Mr. Chairman, for being here. 

I just have a couple of basic questions about the budget, but beforehand, I want to go back to the cross-border issue. I hope I ask 

it right. By the way, thanks to your staff for their hospitality last 

week, and I am still processing a lot of information. But there was 

something that came up about the cross-border mutual recognition 

issue that you inherited involving our U.S. clearinghouses, exchanges and reporting facilities versus the European Union. You 

have been talking about 2017 is when the EU will have their rules 

done, but I heard a date last week of June of this year is crucial, 

and I am just wondering if you can first—maybe I misunderstood. 

Mr. MASSAD. Yes. No. Two different things, okay, and I appreciate the question because it is an important clarification. The 2017 

date refers to their rules on trading of swaps on regulated platforms. We have already done a set of rules in that regard. They 

haven’t. They are developing theirs, but theirs are due to be implemented in 2017. The June date refers to the clearinghouse regulation issues. And they had previously said that they would impose 

a higher capital charge on European firms who did business on 

clearinghouses abroad that they hadn’t yet recognized. The first 

date was June of last year. They extended it to December. Then 

they extended December to June of this year. And that is where 

we are working out arrangements that we hope will lead to their 

recognition of our clearinghouses as equivalent. Our clearinghouses 

meet international standards and we believe they should recognize 

us. But as part of that discussion, that is where we have been discussing these issues of how to harmonize our rules a little bit more. 

If we were not to get that done by June, then they would—under 

the current law, they would impose a higher capital charge on their 

own firms doing business in the U.S. 

Now, there have been statements by some people on their staff 

that said, ‘‘Well, we could always extend again.’’ I am hopeful that 

we can resolve this. I think we are making good progress, and we 

will continue to work at it. 

Mr. EMMER. Well, thank you. That was the clarification that I 

was looking for. Maybe it was an assumption based on certain 

things that were said, but all we heard was very high praise from 

people in the industry about your leadership and your efforts in not 

only this area but others. 

Mr. MASSAD. Well, thank you. 

Mr. EMMER. And it is interesting that you have been here for 7 

months or 8 months, whatever it is, the number you gave us. I—— 

Mr. MASSAD. About 8 months I guess, yes. 

Mr. EMMER. And the extensions have taken place during that 

time. So—— 

Mr. MASSAD. Well, let me—— 

Mr. EMMER.—you are hopeful that—— 

48 

Mr. MASSAD. I am hopeful, and the European side of this is led 

by a fellow named Lord Hill who was just recently appointed to 

that job, and I have a lot of respect for him. We have had good conversations. Our staffs have had good conversations. I think everybody is working in good faith to try to resolve this. There is a lot 

of technical nitty-gritty to it, but we are working hard at it. 

Mr. EMMER. Good. I just have a few seconds left. And you have 

been here for a long time, but there is a term that I was reading 

preparing for this related to the money that you have requested in 

your budget for data and technology. You had $45 million would be 

allocated towards particular functional activities, and then $63 million would go to data and technology support. 

Can you just expand—— 

Mr. MASSAD. Sure. 

Mr. EMMER.—briefly—— 

Mr. MASSAD. Yes. 

Mr. EMMER.—on what particular functional activities—— 

Mr. MASSAD. Yes, absolutely. All that means is that that amount 

is allocated to activities like surveillance and enforcement and examinations, whereas the $63 million represents more sort of general tech infrastructure and—— 

Mr. EMMER. Right. 

Mr. MASSAD.—and support and employees that we just don’t specifically allocate to another function. 

Mr. EMMER. And I am out of time, but in other words, you do 

your internal categorization. 

Mr. MASSAD. Yes, that is all it is. 

Mr. EMMER. Thank you very much, Mr. Chairman. 

Mr. MASSAD. Thank you. 

The CHAIRMAN. The gentleman yields back. 

Mr. Aguilar for 5 minutes. 

Mr. AGUILAR. Thank you, Mr. Chairman. Chairman Massad, nice 

to see you. 

Another budget question related to my colleague. You received in 

the CR-omnibus $250 million, which was a bump from the prior 

year but still below what the President had asked. The President, 

in his new budget, has asked for $322 million for your agency. 

What are some of the key areas to fulfill your mission that that 

increased funding will go to? What is your prioritization level when 

it comes to that funding level? 

Mr. MASSAD. Thank you for the question, Congressman. 

A couple of things; surveillance, enforcement, general data and 

technology expenditures, and examinations. Let me talk about each 

one just a little bit, if I can. 

Surveillance: It is just so critical today, and it is just so much 

different than it was several years ago when you might be able to 

watch the physical trading pits and see if someone pulls their earlobe or something to know whether there is some kind of collusion 

going on. But today, we are taking in reams of data. In E-mini, the 

S&P 500 E-mini contract, which is one of the most traded contracts 

on CME, there are probably 700,000 trades a day. But on top of 

those trades, there are lots of order messages; messages that are 

bids, orders, a lot of those are canceled. 

49 

Now, multiply that by the fact that we have 40 physical commodities, we have interest rate futures, we have equity futures, we 

have currency futures, each of those markets is different, and you 

can start to appreciate the volume of data we have to take in and 

analyze in order to understand what is going on in these markets. 

So a lot of our budget is focused on enhancing those surveillance 

operations, enhancing our overall data and technology. 

The enforcement area is another key priority. There is nothing 

more important than robust enforcement in terms of maintaining 

the integrity of these markets, and we are looking at activity that 

ranges from the types of Ponzi schemes that people are traditionally familiar with that, unfortunately, there are a lot of them that 

still go on. We had a case that led to someone being put away for 

about 16 years recently for a Ponzi scheme. Also, from collusion 

among some of the world’s largest banks to fix foreign exchange 

rates; to spoofing, which can use high speed trading. We really 

need to up our enforcement activity. 

We need to increase our examinations of—simply with respect to 

cyber risk alone. We need to be able to make sure we can examine 

this critical infrastructure of clearinghouses and exchanges. And a 

lot of that is just making sure that they are doing what they need 

to do to be ready for a possible cyber incident. 

So those are some of the main areas. 

Mr. AGUILAR. I appreciate it. You have three offices; Kansas City, 

New York, Chicago. 

Mr. MASSAD. That is correct. 

Mr. AGUILAR. Do you think you need to—in order to meet that— 

those priorities, do you need to expand your geographic footprint? 

Mr. MASSAD. No. No, I wouldn’t do that. I would just stick with 

what we have and it works very well. Our Chicago office, obviously, 

is very useful in terms of some of the big clearinghouses and exchanges being there. But our setup works well from that standpoint. 

Mr. AGUILAR. Okay. I appreciate it. 

With respect—shifting gears a little bit to trade, given your extensive knowledge and experience in the Asian markets, have you 

been involved in the negotiations related to TPP? 

Mr. MASSAD. No, I have not. That is really outside of my area, 

sir. 

Mr. AGUILAR. Okay. Do you anticipate that TPP could assist in 

your efforts on cross-border issues? 

Mr. MASSAD. Well, the regulation of derivatives has really been 

outside of TPP, so I don’t know that it would have any direct impact. 

I was over in Asia recently though, very focused on our set of 

issues, and I had a lot of good meetings with our Asian counterparts over there. I think we are making good progress. The Asian 

jurisdictions, in many ways, in some cases, are kind of waiting to 

see what we do and what Europe does on some of these issues. On 

other issues, they are moving forward. But we are building good relationships, and we will be able to work together well. 

Mr. AGUILAR. I appreciate the answer. 

Mr. Chairman, I will yield back. 

The CHAIRMAN. The gentleman yields back. 

50 

Chairman Massad, I had one follow-up question. Your colleague, 

Commissioner Giancarlo, recently issued a white paper. He pointed 

out something that, when the rules were being put in place with 

respect to swap execution facilities that we had no shortage of conversations with your predecessor—Dodd-Frank law specifically says 

that with respect to swap execution facilities, they can trade—or 

trades are permitted through any means of interstate commerce. It 

appeared to be a pretty broad definition, and yet the rule really 

only allows two methods of execution in trading, and we have buyside folks and sell-side folks that are all complaining about the prescriptive nature of that. Any plans to revisit that rule? 

Mr. MASSAD. Well, thank you, Mr. Chairman, for the question. 

I welcomed Commissioner Giancarlo’s white paper. I think it was 

very thoughtful. I appreciate the time he spent on it, and he and 

I have had good conversations about a lot of these issues, as I have 

started to have with some of my other fellow Commissioners also. 

I would say I am not in favor of throwing out the rules and starting all over, but I am open to looking at how we can fine-tune and 

improve the rules to enhance trading. I think it is important to remember what our goals are in this. We are trying to bring this 

trading out of the shadows. We are trying in particular to create 

pre-trade price transparency, and that should inform our judgment 

when we think about what is an appropriate method of execution. 

I think the other thing to remember is this is all new, we are 

all learning, but swap volumes are growing on these platforms, and 

people are building the technology to improve that. We are working 

with industry participants as we all learn. I mean we have done 

some adjustments, for example, on package transactions, to make 

it easier to do package transactions where you have something that 

is maybe traded on the SEF, something that is not, but they are 

linked. And we will continue to do that. 

The CHAIRMAN. All right. But I guess this is a dynamic arena. 

Is it—— 

Mr. MASSAD. I am sorry? 

The CHAIRMAN. A dynamic arena in general. Dynamic. And that 

a rule that was put in place that looked like the right—and this 

would apply to any of the rules out there—but as we gain experience with any of them, what I have been encouraged by is the fact 

that you have already started the process of, if a rule doesn’t work, 

that you are open to suggestions of how to either decrease the 

prescriptiveness necessarily of the existing rule in this particular 

area or the others. Anything else in the white paper that jumped 

out at you that would trigger something that you want— 

Mr. MASSAD. I think there are a few things that we are looking 

at and thinking about. I think there are some pretty complex 

workflows that you look at in terms of what happens once something is executed, how does it then get affirmed, how does it then 

get cleared, what happens if there is an error, should we be more 

flexible on errors? He made a very interesting suggestion about licensing people who trade swaps. I think there are a number of 

issues, and I look forward to continuing to talk about those with 

him. 

The CHAIRMAN. All right. Does the Ranking Member had a closing statement? 

51 

Well, Mr. Chairman, congratulations on your first time here. You 

wore everybody out, apparently. I—— 

Mr. MASSAD. Thank you. 

The CHAIRMAN. I would like to acknowledge that you set the bar 

pretty high for concise answers which, unlike others who like to filibuster their answers, it exposes you to a lot more questions from 

the individual Members by not taking up the five minutes with 

your answer. So I hope that more folks take your example, and 

that you don’t go the other way and filibuster your answers because—— 

Mr. MASSAD. Well, thank you, Mr. Chairman. I appreciate that. 

The CHAIRMAN.—with the conciseness of your answers. 

Under the rules, the Committee of today’s hearing—that is my 

closing statement. Thank you again for being here. I thank your 

team for last Friday afternoon, and several of the Members will be 

taking you up on your offer to—— 

Mr. MASSAD. Great. 

The CHAIRMAN.—come—because the more we know about each 

other—— 

Mr. MASSAD. Absolutely. 

The CHAIRMAN.—the better we are. So whatever those differences are, we don’t let them grow out of proportion of what they 

really should be, if we are trusting each other because we have a 

basis of a relationship. 

Mr. MASSAD. Yes. 

The CHAIRMAN. Again, thanks. 

Under the rules, the record of today’s hearing will remain open 

for 10 calendar days to receive additional material, supplemental 

written responses from the witness to any question posed by a 

Member. 

This hearing of the Committee on Agriculture is now adjourned. 

Mr. MASSAD. Thank you. 

[Whereupon, at 11:55 a.m., the Committee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

53 

SUBMITTED QUESTIONS

Response from Hon. Timothy G. Massad, Chairman, Commodity Futures 

Trading Commission 

Questions Submitted by Hon. K. Michael Conaway, a Representative in Congress 

from Texas 

Question 1. Chairman Massad, the de minimis threshold to register as a ‘‘swap 

dealer’’ is based on a fixed notional value, which means as commodity prices rise, 

entities which hedge commodities may be pushed over the threshold without any 

material change in trading activities. These entities may be forced to limit their 

trading at the exact time they most need the ability to manage risks. Does the Commission view this as a problem? If so, does it have a plan for how it will be addressed? 

Answer. A swap entered into to hedge a commercial risk does not count toward 

an entity’s de minimis threshold. Only swaps entered into in a ‘‘dealing’’ capacity 

count toward an entity’s de minimis threshold. 

Question 2. The Swap Dealer definition de minimis limit is set to automatically decline from $8 billion to $3 billion in October of 2017, and possibly sooner. How 

was this reduced level calculated? In your opinion, was this a reasonable approach? 

Answer. The Swap Dealer Definition Rulemaking (77 FR 30596 at 30632–33) 

adopted in May, 2012, laid out the rationale for setting the de minimis level. The 

rule was adopted jointly by the CFTC and the SEC. The Commissions stated that 

the de minimis level should be set so as to balance the benefits to the marketplace 

of regulation versus the burdens and potential impacts in terms of competition, capital formation and efficiency, among others. The Commissions originally proposed a 

three part test in which notional amount of dealing activity was one factor, with 

a level of $100 million. In the final rule, the Commissions, after considering commenters’ views and the limited swap dealer information available at the time, set 

the de minimis level for an entity’s dealing activity involving swaps at $3 billion 

over 12 months with an initial phase-in period of five years during which time the 

de minimis would be $8 billion. The Commissions noted that while notional amount 

does not directly measure exposure or risk associated with swap activity, it does reflect relative amounts of activity. The Commissions noted that commenters who suggested a fixed notional standard proposed that the standard be set at a level between $200 million and $3.5 billion in notional amount over a period of twelve 

months. The Commissions stated that: 

‘‘In considering these comments, we are mindful of the variety of uses of 

swaps in various markets and therefore it is understandable that various commenters would reach different conclusions regarding the appropriate standard. 

At the same time, we see value in setting a single standard for all swaps so 

that there is a ‘level playing field’ for all market participants and so that the 

standard can be implemented easily without the need to categorize swaps.’’ Considering the written input of the commenters as well as the discussions of the 

de minimis standard at the Commissions’ joint roundtable and numerous meetings with market participants, and the benefits of the regulation of swap dealers (i.e., protection of customers and counterparties, and promotion of the effective operation and transparency of the swap markets), we believe a notional 

standard at a level of $3 billion appropriately balances the relevant regulatory 

goals.’’ 

The Commission further explained how several commenters suggested that the 

standard be set at an amount equal to 0.001 percent of the overall domestic market 

for swaps. The Commissions noted that although ‘‘comprehensive information regarding the total size of the domestic swap market is incomplete,’’ the available (imperfect) data suggests that a $3 billion notional standard is generally consistent 

with the commenters’ suggestion of basing the standard on a percentage of the overall domestic market for swaps.’’ 

Given the consideration of the comments received on the proposed rule and limited data available at the time the de minimis rule was adopted, I believe the approach used by the CFTC and the SEC in setting the de minimis level was reasonable. Staff also advises me that the date the level would fall, absent other action, 

is December 2017. 

Question 3. In assessing the SEF marketplace a year after its implementation, 

what aspects of the CFTC’s swap trading rules is the Commission considering finetuning and what is the Commission’s timing for that process? 

Answer. The Commission is focused on ongoing evaluation of the effectiveness and 

evolution of transparent trading of swaps transactions on regulated platforms. RecVerDate Mar 15 2010 08:31 Jun 03, 2015 Jkt 041481 PO 00000 Frm 00057 Fmt 6621 Sfmt 6621 P:\DOCS\114-02\93960.TXT BRIAN
54 

ognizing that swap trading on registered designated contract markets and swap execution facilities, and that the clearing and reporting of these transactions are still 

relatively new, the Commission is considering where regulatory revisions are needed. While the Commission cannot provide a definitive timeline at present, it can 

commit that it will move forward with the implementation of regulatory changes as 

soon as policy determinations are made and resources permit. 

Question 4. Mr. Chairman, is the Commission undertaking any efforts to modernize the regulation of CTAs and CPOs, such as the registration and record-keeping requirements? If there are such efforts, what’s your sense of timing for this effort? 

Answer. The Commission continues to undertake significant efforts to review and 

update its regulation of CTAs and CPOs. For example, on August 22, 2013, the 

Commission published a final rule harmonizing the compliance obligations of CPOs 

with registered investment companies and Commission staff continues to explore 

with the SEC additional harmonization measures. As another example, on October 

15, 2014, the Division of Swap Dealer and Intermediary Oversight issued a no-action letter providing registration relief to CPOs (many of them modern business 

forms not previously registered as CPOs) that have delegated certain CPO obligations to registered CPOs. Commission staff will continue to review and assess further areas for modernization and, as appropriate, will issue staff no-action letters 

or rule proposals. 

Regarding record-keeping specifically, on November 4, 2014, the Commission proposed amendments to regulation 1.35 that would simplify and modernize certain 

recordkeeping requirements for CTAs, CPOs and other registrants in connection 

with commodity interest and related cash or forward transactions. Commission staff 

is currently reviewing the public comments received on the proposal and preparing 

a final rule for consideration by the Commission likely within the next few months. 

Question 5. Last Congress, the Committee heard from a witness who expressed 

concerns that under the CFTC’s proposed rules, a bank-affiliated swap dealer would 

be required to hold $10 million in regulatory capital whereas a non-bank dealer 

would have to set aside up to $1 billion. Why are the capital requirements so vastly 

different for bank versus non-bank swap dealers? 

Answer. The Dodd-Frank Act requires each swap dealer for which there is a prudential regulator, such as the Federal Reserve, the Office of the Comptroller and 

the Federal Deposit Insurance Corporation to meet the capital requirements established by the applicable prudential regulator and each swap dealer for which there 

is no prudential regulator, including non-bank subsidiaries of bank holding companies, to meet capital requirements adopted by the Commission. The Commission’s 

proposed capital requirements for swap dealers, to a great extent, draw upon existing Commission and bank capital requirements. The proposed capital regulations 

are risk-sensitive, meaning that a swap dealer’s minimum capital requirement 

would increase or decrease corresponding with the level of market and credit risk 

associated with its swaps transactions. 

Since the impact of the Commission’s capital requirements on a swap dealer 

would depend on the circumstances particular to the swap dealer, such as the specifics of its trading book, it would be difficult to address the witness’ concerns without knowing the specific fact pattern applicable to a swap dealer. However, to the 

extent that the witness’ comment concerns the inability of certain swap dealers to 

use internal models to compute the market and credit risk charges under the Commission’s proposal, the Commission is aware of the issue, as the issue has been 

raised by commenters during the comment period. The Commission is currently considering this issue. 

Question 6. Mr. Chairman, what role does the Commission foresee risk reduction 

services playing in the market, going forward? Does the CFTC anticipate any challenges—statutory or otherwise—to integrating new or novel risk reduction services 

into the market? 

Answer. Current CFTC rules contain several provisions that facilitate risk reduction services such as portfolio compression. For example, see CFTC Regulation 

23.503 for swap dealers and Regulation 39.13(h)(4) for derivatives clearing organizations. The CFTC, however, would have to carefully consider any novel proposal that 

would necessitate the CFTC exempting new swaps from the clearing and trading 

requirements. 

As mentioned above, Regulation 23.503 currently requires registered swap dealers 

to engage in certain portfolio compression exercises defined in Regulation 23.500. 

The CFTC currently has authority under Section 8a(5) of the CEA to issue regulations to address this issue, and it would be appropriate to approach this issue 

55 

through the rulemaking process because it is in the public interest to obtain public 

comment on standards for a novel risk reduction service. 

Question 7. How soon does the CFTC expect to reach agreement with EU authorities around recognition of U.S. derivatives clearinghouses? What other steps is the 

CFTC taking to ensure that cross-border trading of cleared swaps can continue to 

occur between U.S. and EU market participants? 

Answer. The CFTC staff has been actively engaged with European counterparts 

to obtain an equivalence decision for the CFTC’s regulatory regime and to facilitate 

recognition of our registered derivatives clearing organizations (DCOs). It is our understanding that European law (EMIR) requires a finding that (i) CFTC-registered 

DCOs must comply with legally binding requirements that are equivalent to EMIR; 

(ii) the legal and supervisory arrangements of the United States provide for effective 

supervision and enforcement of DCOs on an ongoing basis; and (iii) the legal and 

supervisory arrangements of the U.S. include an effective equivalent system for recognition of European clearinghouses. While we believe that the U.S. legal regime 

and our practices have always met those tests, the European Commission advised 

the Commission last summer that it did not take that view. In particular, it said 

the United States did not meet the third element. It believed that in order to meet 

that standard, the U.S. should exempt European clearinghouses that wished to clear 

swaps for U.S. customers from having to register with the CFTC. 

U.S. law and CFTC regulations do not generally apply to European clearinghouses and exchanges. However, if a European clearinghouse wishes to clear a futures contract traded on a U.S. exchange, or clear a swap for a U.S. customer other 

than a clearing member or their affiliate, then the clearinghouse is required to register with the CFTC. A European clearinghouse seeking to clear swaps only for a 

U.S. clearing member and its affiliates is eligible for an exemption from registration. 

The Commodity Exchange Act already authorizes the CFTC to grant exemptions in 

such circumstances. 

Three European clearinghouses are registered pursuant to these requirements, including two that clear the vast majority of cleared swaps globally. We advised the 

European Commission that we saw no reason to change this longstanding framework of ‘‘dually registered’’ clearinghouses, which has worked well. In particular, we 

noted that the swaps market has grown to be a global market on the basis of this 

framework. We also noted that given the increasingly important role that large 

multi-jurisdictional clearinghouses now play in the global financial system and the 

potential implications for global financial stability, it made sense for regulators to 

continue to engage in cooperative oversight. However, we agreed to work with the 

European Commission (i) to make clear that our requirements apply only with respect to the clearing activities for which the dual registrants maintain CFTC registration, rather than to all the clearinghouse’s activities and (ii) to harmonize 

CFTC requirements with those under EMIR where possible. Following several 

months of discussion, we have reached substantial agreement on a substituted compliance regime for clearinghouses that are dually registered in the United Stated 

and Europe. 

The European Commission has advised us that they have not yet reached a conclusion concerning the first element of the test. Although we believe our legal and 

supervisory framework meets the equivalence requirement. This decision must be 

made by the European authorities and therefore we cannot say when an equivalence 

decision will be issued. 

In the meantime, the CFTC continues to process two DCO registration applications for European-based clearinghouses, one of which is currently authorized to 

clear swaps pursuant to no-action relief granted by the CFTC Division of Clearing 

and Risk. 

We have taken a number of actions in other areas to facilitate cross-border trading of swaps, including substituted compliance determinations with respect to many 

aspects of our requirements for swap dealers, and with respect to a procedure for 

recognition of European swap trading facilities. We have also permitted several European exchanges (referred to as foreign boards of trade) to offer direct electronic 

access to persons located in the United States, under no-action relief, and we continue to review applications by exchanges seeking to be registered with the CFTC 

as foreign boards of trade. 

The European Commission has not made any substituted compliance determinations nor recognized any U.S. trading platform. 

Question 8. Please explain the Commission’s standards for issuing no-action letters including, who determines what entity or activity will receive relief, and whether or not the Commission must vote to approve the issuance. Are there written rules 

56 

or policy guidelines on how the CFTC us to use the no-action process? If not, does 

the Administrative Procedures Act govern the use or issuance of ‘‘no action’’ letters? 

Answer. The standards and guidelines with respect to requests for and issuance 

of no-action relief are prescribed by Commission regulation 140.99. That rule defines 

three types of relief-exemptive, no-action and interpretative-that may be granted by 

the staff of a division of the Commission and also, in the case of no action and interpretative letters, by the Office of the General Counsel. No-action and interpretative 

letters (‘‘Letters’’) bind only the issuing Division or the Office of the General Counsel, not the Commission or other Commission staff. Exemptive letters are predicated 

on a delegation of the Commission’s exemptive authority to a Division. 

Regulation 140.99 specifies the standards for submitting requests for relief: in addition to imposing informational, factual and filing requirements, the rule requires 

that submissions identify and discuss all legal, factual and public policy issues supporting issuance of a Letter. A decision to grant relief pursuant to a Letter is premised on staff’s analysis of all legal, policy and factual issues. Commission staff generally will not issue a Letter based on activities that have been completed prior to 

the date on which the request for relief is filed with the Commission. 

The Commission does not vote to approve the issuance of Letters. In recent years, 

Commission staff have circulated Letters to the Commission on an informational 

basis prior to issuance. Because they are staff documents and do not represent agency action, the issuance of Letters is not governed by the Administrative Procedure 

Act. 

Question 9. The increasing use of no-action letters—nine in 2011, 79 in 2012, 88 

in 2013, and 158 in 2014—is troubling. It appears as though the Commission has 

been issuing rushed rulemakings that are not well developed and then relying on 

no action letters to provide relief from requirements that are impossible to comply 

with. Mr. Chairman, do you think that poorly developed rules are forcing the Commission staff to provide relief from unworkable mandates? Do you see roughly a 

hundred no action letters a year as the ‘‘new normal’’ for how the agency does business? 

Answer. The number and types of no-action letters issued by the Commission over 

the last few years is a reflection of the extraordinary responsibility placed on the 

Commission by Congress under the Dodd-Frank Act. The law required the Commission to enact a significant number of new rules to bring comprehensive reform to 

the over-the counter swaps market. The Act further specified time frames for implementation of these rules, which were in [almost all cases] one year from passage 

of the law. The Commission worked extraordinarily hard to meet this responsibility. 

With any rulemaking involving complex or novel issues, Commission staff typically 

receives requests from industry for specific relief or additional time to come into 

compliance. The number of no-action letters issued in the last few years is primarily 

a reflection of the unusually large number and complexity of the new rule-makings 

the Commission was required to implement. Many of the letters simply extend time 

for compliance Some letters address the fact that although all G20 nations committed to implement similar reforms of the swap market, most lag behind the U.S. 

in most areas, which created a need to make adjustments through no action letters. 

Some letters relate to specific fact patterns or new market developments that were 

not addressed or otherwise anticipated in the subject rulemaking. In this way, consistent with its past practices, Commission staff has been able to use the no-action 

letter process to be responsive to industry requests and concerns and thereby to 

minimize potential disruptions to the marketplace. Needless to say, given the sheer 

scale of the Dodd-Frank undertaking, there has been a correspondingly greater need 

for staff no-action letters. 

The Commission is committed to making every effort to fine tune and refine Commission regulations to address unintended consequences and, where feasible, to do 

so through rulemakings. Moreover, the Commission has taken steps to codify no action relief through rule-makings. Examples of this include a final rule excluding certain swaps entered into with ‘‘utility special entities’’ in determining whether the 

swap dealer registration threshold is met and a proposed rulemaking that would exclude end-users from certain recordkeeping requirements. 

Question 10. Dodd-Frank expanded the CFTC’s jurisdiction into the multi-trillion 

dollar swaps markets, meaning that important cases of first impression—cases that 

may influence precedent for decades to come—will be decided by temporary Administrative Law Judges with no particular experience or expertise in the relevant law. 

From what agencies has CFTC been borrowing ALJs and what drawbacks do you 

see in using ALJs without commodities markets expertise? Can you explain why the 

ALJ was eliminated in the first place? 

57 

Answer. The Commission decided over three years ago, in 2011, to eliminate its 

two ALJ positions. It is my understanding that this was done because the ALJs’ 

workload had substantially declined. The number of cases brought to an ALJ by the 

Division of Enforcement (other than in routine actions to disqualify certain registered persons) had declined nearly to zero annually years before the decision to 

eliminate the program through a reduction in force (‘‘RIF’’) was made), and elimination of the positions could achieve cost savings of approximately $800,000 per 

year. (The cost savings reflect the salaries of the ALJs as well as their staffs.) The 

utilization of scarce agency resources was and remains an important consideration 

in light of the Commission’s greatly expanded duties under the Dodd-Frank Act and 

concomitant budget constraints. 

Since the RIF, the Commission has brought a total of two matters before an ALJ 

borrowed from another agency, neither of which involved novel or complex questions 

of law under the Commodity Exchange Act (‘‘CEA’’) nor any provisions enacted by 

Congress in Dodd-Frank. Both pertained to the same party, and each resulted in 

an order of default-one for failure to produce required records, and the other for failure to respond to a filing by the Commission. The ALJ was the Chief Administrative 

Law Judge for the United States Coast Guard, obtained through an inter-agency 

agreement under the Office of Personnel Management’s (‘‘OPM’’) Administrative 

Law Judge Program. 

Recently, the new Director of the CFTC’s Division of Enforcement announced the 

intent to bring a limited number of enforcement cases in front of ALJs. Insofar as 

these matters involve more complex or novel provisions of the CEA, including those 

added in Dodd-Frank, if available, the CFTC will use ALJs who have familiarity 

with related markets and laws. 

Question 11. Your agency issued a proposed rule on September 23, 2014 regarding 

margin requirements for uncleared swaps which identified nonprofit entities, including entities which already qualify for the cooperative exemption from the clearing 

requirements, as a financial end-user who would thus be subject to margin requirements of Dodd-Frank. When Congress passed the Terrorism Risk Insurance Act reauthorization it included the Business Risk Mitigation and Price Stabilization Act 

which makes clear that such an entity will not be subject to the margin requirements. When can we expect you to make this change in the proposed rule to clarify 

this? 

Answer. The CFTC staff is working with the staff of the Prudential Regulators 

(the Federal Reserve, the OCC, the FDIC, the FHFA, and the FCA) to implement 

these provisions in our respective rules. Staff expects to present recommendations 

to the Commission by early summer. 

Questions Submitted by Hon. Collin C. Peterson, a Representative in Congress from 

Minnesota 

Question 1. We appreciate the Commission’s stated desire to encourage trading of 

swaps on Swap Execution Facilities (SEFs). How would providing anonymity for 

cleared swaps executed via a SEF’s Central Limit Order Book (CLOB) encourage 

greater trading participation? How would the Commission require anonymity? How 

would a requirement of anonymity affect existing market structure and participants? 

Answer. Commission staff has been told by some market participants that the 

practice of disclosing the identities of counterparties to swaps executed anonymously 

on SEF CLOBs can constrain access to markets by market participants, promote informational asymmetries, and dissuade potential customers from participating in 

anonymous order book trading. We have been informed by some parties, for example, that many buy-side traders will avoid SEFs which adhere to such trader identification practices for fear that if they trade on such SEFs, their names will be given 

up to dealers and such dealers will retaliate by withholding liquidity from such 

traders when they seek to be customers of those dealers. Some participants contend, 

however, that the practice is an important aspect of how dealers allocate credit, and 

that prohibiting name give up could have adverse consequences on liquidity. Commission staff is currently evaluating these issues and determining whether to take 

action in this area. 

Question 2. In November of 2012, the Treasury Department determined that Foreign Exchange Swaps and Foreign Exchange Forwards would not be subject to the 

clearing and trading mandates in Title VII of the Dodd-Frank Act. However, to date, 

the CFTC has not made a similar determination with regard to Foreign Exchange 

Non-Deliverable Forwards. What is the current status of CFTC’s decision making 

process on whether to subject Foreign Exchange Non-Deliverable Forwards to trading and clearing? 

58 

Answer. In November 2012, when the Treasury Department determined that foreign exchange swaps (FX Swaps) and foreign exchange forwards (FX Forwards) 

would not be subject to CFTC clearing and trading requirements, the Department 

acknowledged a provision of CFTC’s swap definition rule (Regulation 1.3(xxx) distinguishing FX NDFs from FX Forwards. Consequently, the Department’s 2012 determination does not prohibit the CFTC from applying the swap clearing and trading 

requirements to FX NDFs. 

The Commission held an advisory committee meeting last fall at which time the 

issue of whether to propose a swap clearing requirement for foreign exchange nondeliverable forwards (FX NDFs) was discussed. There were many diverse views on 

whether such a requirement was desirable at this time. Many participants felt the 

market was not ready for such a mandate. The Commission has also been in contact 

with European regulators regarding possible coordination of any such requirement. 

The European Union decided to delay such a swap clearing requirement for the time 

being. A trading requirement for NDFs could not take effect until a related swap 

clearing requirement first took effect (Section 2(h) of the Commodity Exchange Act). 

Questions Submitted by Hon. Austin Scott, a Representative in Congress from Georgia 

Question 1. For a few years, there has been an issue of long waits for aluminum 

in U.S. warehouses that are part of the London Metals Exchange (LME) aluminum 

contract. Mr. Chairman, what can the CFTC do to help to remedy these delays? Do 

you need additional authority in the Commodity Exchange Act in order to help in 

resolving this issue? 

Answer. I share your concerns on this issue and assure you that the CFTC has 

been examining the matter of long queues for delivery of aluminum at LME warehouses. CFTC staff has been in contact with LME and its regulator, the UK Financial Conduct Authority (FCA), on a regular and ongoing basis to discuss LME’s 

plans to reduce the lengthy queues, particularly those at Metro warehouses in Detroit. I have been an active participant in these dialogues. As part of this effort, we 

have discussed with LME, among other topics, how LME-licensed warehouses operate, the relationship between LME and the warehouse operators, how storage policies and prices are determined, how effective the load-out rate is, and the basis for 

incentives charged by warehouse operators. CFTC staff has also discussed with 

LME and the FCA the market consultations, discussion papers, additional information barrier policies, and other reforms that LME has advanced or proposed to address the warehouse issues, including the linked load-in load-out rule that LME announced on October 8, 2014 and implemented on February 1, 2015, and the package 

of reforms that LME announced on March 2, 2015. I have conveyed our concerns 

directly to LME leadership in both London and Hong Kong, and on March 24, the 

agency’s Division of Market Oversight sent a letter to the LME sharing its concerns 

about the aluminum warehouse issues, and notifying the LME that it would be deferring review of the LME’s status as a Foreign Board of Trade (FBOT) until more 

progress is made to address warehouse concerns. As such, we will continue to monitor the LME warehouse conditions and maintain a dialogue with LME and the 

FCA. While I do not believe any legislative changes are needed at this time, we will 

continue to consider this issue and advise you if we see such a need. 

Question 2. Chairman Massad, at our hearing I asked you to clarify when the 

swap dealer de minimis level will drop from the current $8 billion down to $3 billion. You replied ‘‘2017,’’ but would you mind clarifying on which day in 2017 the 

level will drop? 

Answer. The de minimis level would fall as of December 31, 2017 unless the Commission takes other action. 

Question 3. Chairman Massad, at our hearing, I asked whether you expected public comment before the de minimis level drops, and you replied ‘‘any decision we 

make will be based on good data. We are required to do a study.’’ Will you provide 

a way for the public to provide input and comment on that study? 

Answer. Yes, we will afford the public an opportunity to comment on the Commission’s report regarding the swap dealer de minimis level. The regulation requires 

the study be published for public comment. 

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