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[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]

 
                    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
                            
                            
                            
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                            

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

                                __________
                                
                          U.S. GOVERNMENT PUBLISHING OFFICE
93-960 PDF                     WASHINGTON : 2015                          

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                        COMMITTEE ON AGRICULTURE

                  K. MICHAEL CONAWAY, Texas, Chairman

RANDY NEUGEBAUER, Texas,             COLLIN C. PETERSON, Minnesota, 
    Vice Chairman                    Ranking Minority Member
BOB GOODLATTE, Virginia              DAVID SCOTT, Georgia
FRANK D. LUCAS, Oklahoma             JIM COSTA, California
STEVE KING, Iowa                     TIMOTHY J. WALZ, Minnesota
MIKE ROGERS, Alabama                 MARCIA L. FUDGE, Ohio
GLENN THOMPSON, Pennsylvania         JAMES P. McGOVERN, Massachusetts
BOB GIBBS, Ohio                      SUZAN K. DelBENE, Washington
AUSTIN SCOTT, Georgia                FILEMON VELA, Texas
ERIC A. ``RICK'' CRAWFORD, Arkansas  MICHELLE LUJAN GRISHAM, New Mexico
SCOTT DesJARLAIS, Tennessee          ANN M. KUSTER, New Hampshire
CHRISTOPHER P. GIBSON, New York      RICHARD M. NOLAN, Minnesota
VICKY HARTZLER, Missouri             CHERI BUSTOS, Illinois
DAN BENISHEK, Michigan               SEAN PATRICK MALONEY, New York
JEFF DENHAM, California              ANN KIRKPATRICK, Arizona
DOUG LaMALFA, California             PETE AGUILAR, California
RODNEY DAVIS, Illinois               STACEY E. PLASKETT, Virgin Islands
TED S. YOHO, Florida                 ALMA S. ADAMS, North Carolina
JACKIE WALORSKI, Indiana             GWEN GRAHAM, Florida
RICK W. ALLEN, Georgia               BRAD ASHFORD, Nebraska
MIKE BOST, Illinois
DAVID ROUZER, North Carolina
RALPH LEE ABRAHAM, Louisiana
TOM EMMER, Minnesota
JOHN R. MOOLENAAR, Michigan
DAN NEWHOUSE, Washington

                                 ______

                    Scott C. Graves, Staff Director

                Robert L. Larew, Minority Staff Director

                                  (ii)
                             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

  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.
    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 
2\1/2\ 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 2\1/2\ 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 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 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 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.
    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 Chicago. 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 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.
    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 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 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.
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 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.
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 non-territorial 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.
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 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 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. 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 Safeguards 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 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. 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 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 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?
    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 
end-user. 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 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 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 arrangements 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 non-U.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 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.
    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.
    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----
    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 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.
    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.
    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.
    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----
    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.
    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, 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.
    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 examination 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?
    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 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.
    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.
    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.
    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 access 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 Dodd-Frank?
    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 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 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----
    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.
    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.
    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 buy-side 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?
    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:]
                          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 fine-tuning 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. Recognizing 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 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 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?
    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?
    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 non-deliverable 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.

                                  [all]
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