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HEARING TO REVIEW IMPLEMENTATION OF 

CHANGES TO THE COMMODITY EXCHANGE 

ACT CONTAINED IN THE 2008 FARM BILL

HEARING

BEFORE THE

SUBCOMMITTEE ON 

GENERAL FARM COMMODITIES 

AND RISK MANAGEMENT

OF THE

COMMITTEE ON AGRICULTURE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

SECOND SESSION

MARCH 3, 2010

Serial No. 111–42

(

Printed for the use of the Committee on Agriculture 

agriculture.house.gov 

COMMITTEE ON AGRICULTURE 

COLLIN C. PETERSON, Minnesota, Chairman 

TIM HOLDEN, Pennsylvania, 

Vice Chairman 

MIKE MCINTYRE, North Carolina 

LEONARD L. BOSWELL, Iowa 

JOE BACA, California 

DENNIS A. CARDOZA, California 

DAVID SCOTT, Georgia 

JIM MARSHALL, Georgia 

STEPHANIE HERSETH SANDLIN, South 

Dakota 

HENRY CUELLAR, Texas 

JIM COSTA, California 

BRAD ELLSWORTH, Indiana 

TIMOTHY J. WALZ, Minnesota 

STEVE KAGEN, Wisconsin 

KURT SCHRADER, Oregon 

DEBORAH L. HALVORSON, Illinois 

KATHLEEN A. DAHLKEMPER, 

Pennsylvania 

ERIC J.J. MASSA, New York 

BOBBY BRIGHT, Alabama 

BETSY MARKEY, Colorado 

FRANK KRATOVIL, JR., Maryland 

MARK H. SCHAUER, Michigan 

LARRY KISSELL, North Carolina 

JOHN A. BOCCIERI, Ohio 

SCOTT MURPHY, New York 

EARL POMEROY, North Dakota 

TRAVIS W. CHILDERS, Mississippi 

WALT MINNICK, Idaho 

FRANK D. LUCAS, Oklahoma, Ranking 

Minority Member 

BOB GOODLATTE, Virginia 

JERRY MORAN, Kansas 

TIMOTHY V. JOHNSON, Illinois 

SAM GRAVES, Missouri 

MIKE ROGERS, Alabama 

STEVE KING, Iowa 

RANDY NEUGEBAUER, Texas 

K. MICHAEL CONAWAY, Texas 

JEFF FORTENBERRY, Nebraska 

JEAN SCHMIDT, Ohio 

ADRIAN SMITH, Nebraska 

ROBERT E. LATTA, Ohio 

DAVID P. ROE, Tennessee 

BLAINE LUETKEMEYER, Missouri 

GLENN THOMPSON, Pennsylvania 

BILL CASSIDY, Louisiana 

CYNTHIA M. LUMMIS, Wyoming 

PROFESSIONAL STAFF

ROBERT L. LAREW, Chief of Staff 

ANDREW W. BAKER, Chief Counsel 

APRIL SLAYTON, Communications Director 

NICOLE SCOTT, Minority Staff Director 

SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND RISK MANAGEMENT

LEONARD L. BOSWELL, Iowa, Chairman 

JIM MARSHALL, Georgia 

BRAD ELLSWORTH, Indiana 

TIMOTHY J. WALZ, Minnesota 

KURT SCHRADER, Oregon 

STEPHANIE HERSETH SANDLIN, South 

Dakota 

BETSY MARKEY, Colorado 

LARRY KISSELL, North Carolina 

DEBORAH L. HALVORSON, Illinois 

EARL POMEROY, North Dakota 

TRAVIS W. CHILDERS, Mississippi 

JERRY MORAN, Kansas, Ranking Minority 

Member 

TIMOTHY V. JOHNSON, Illinois 

SAM GRAVES, Missouri 

STEVE KING, Iowa 

K. MICHAEL CONAWAY, Texas 

ROBERT E. LATTA, Ohio 

BLAINE LUETKEMEYER, Missouri 

ALETA BOTTS, Subcommittee Staff Director

(II) 

(III)

C O N T E N T S 

Page 

Boswell, Hon. Leonard L., a Representative in Congress from Iowa, opening 

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

Moran, Hon. Jerry, a Representative in Congress from Kansas, opening statement ...................................................................................................................... 2

WITNESS

Gensler, Hon. Gary, Chairman, U.S. Commodity Futures Trading Commission, Washington, D.C. ........................................................................................ 2

Prepared statement .......................................................................................... 4

(1)

HEARING TO REVIEW IMPLEMENTATION OF 

CHANGES TO THE COMMODITY EXCHANGE 

ACT CONTAINED IN THE 2008 FARM BILL 

WEDNESDAY, MARCH 3, 2010

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND

RISK MANAGEMENT, 

COMMITTEE ON AGRICULTURE, 

Washington, D.C. 

The Subcommittee met, pursuant to call, at 9:38 a.m., in Room 

1300 of the Longworth House Office Building, Hon. Leonard L. 

Boswell [Chairman of the Subcommittee] presiding. 

Members present: Representatives Boswell, Marshall, Herseth 

Sandlin, Kissell, Peterson (ex officio), Moran, Johnson, Conaway, 

Latta, and Luetkemeyer. 

Staff present: Aleta Botts, Claiborn Crain, John Konya, Clark 

Ogilvie, James Ryder, April Slayton, Debbie Smith, Rebekah 

Solem, Kevin Kramp, Josh Mathis, and Sangina Wright. 

OPENING STATEMENT OF HON. LEONARD L. BOSWELL, A 

REPRESENTATIVE IN CONGRESS FROM IOWA 

The CHAIRMAN. The hearing of the Subcommittee on General 

Farm Commodities and Risk Management to review implementation of changes to the Commodity Exchange Act contained in the 

2008 Farm Bill will now come to order. I would like to thank everyone for joining us here today as we take a thorough examination 

of the changes to the Commodity Exchange Act and newly proposed 

rules by the Commodity Futures Trade Commission, CFTC. I 

would like to especially thank the witness, Chairman Gensler, for 

testifying before the Committee and for offering his insight into 

current issues facing the futures markets. I very much look forward to hearing your testimony. 

In the 2008 Farm Bill, the Committee strengthened the CFTC’s 

authority over retail foreign currency for forex transactions. In January, the CFTC published a proposed rule to implement that authority. This rule put in place requirements for registration, disclosure, record-keeping, financial reporting and minimal capital 

standards for forex trading. However, this rule also would impose 

a new leverage requirement on retail foreign exchange customer accounts that many believe will just force customers to take their 

business overseas. 

Today, I am interested in hearing more from the CFTC on the 

development of this proposed rule regarding forex transactions, and 

2

if the narrow Zelener fix in the farm bill has given them enough 

authority. Also, I hope Chairman Gensler can elaborate today on 

the proposed, slightly controversial, rule to limit size of positions 

that traders can take on futures and options contracts on four energy commodities and explain how they differed from position limits to those imposed on agricultural commodities. In particular, I 

am interested in distinctions that the CFTC is making between agricultural and energy commodities with regard to the use of aggregate position limits. 

Our job in Congress, and on this Subcommittee, is to bring greater transparency and oversight to the over-the-counter derivatives 

markets and ensure that we provide necessary oversight of these 

markets without hindering legitimate consumers from operating 

within them. To the extent fraudulent activity is taking place and 

hard-working Americans are getting taken to the cleaners, we need 

to ensure that Federal regulators have the tools necessary to protect consumers. And I would like to yield to my Ranking Member, 

the gentleman from Kansas. 

OPENING STATEMENT OF HON. JERRY MORAN, A 

REPRESENTATIVE IN CONGRESS FROM KANSAS 

Mr. MORAN. Mr. Chairman, thank you very much. I thank you 

for holding this hearing. I am interested in hearing what the 

Chairman has to say. Chairman Gensler, I welcome you to our 

Subcommittee and look forward to being educated one more time 

on very complex and important issues. And with that, Mr. Chairman, I think we should begin our hearing. 

The CHAIRMAN. I think we will move on into the testimony. 

Thank you for being here. We are anxious to hear your remarks, 

Chairman Gensler. 

STATEMENT OF HON. GARY GENSLER, CHAIRMAN, U.S.

COMMODITY FUTURES TRADING COMMISSION,

WASHINGTON, D.C. 

Mr. GENSLER. Chairman Boswell, Ranking Member Moran, and 

Members of the Subcommittee, thank you for inviting me here 

today to testify on behalf of the Commodity Futures Trading Commission, and I ask that my full written testimony be entered into 

the record. In that written testimony, I review three principal 

areas. First, the CFTC’s use of existing authorities, and I go 

through eight items there. I guess I could had gone through more 

or less, but there are eight key ones. Second, the need for additional authorities, which this Committee and the House of Representatives addressed, and I want to express my deep appreciation 

for all the work this Committee did on that bill. There is a great 

deal more to do working with the Congress and hopefully reconciling and getting something to the President, for over-the-counter 

derivatives reform. Third, the testimony focuses on the still needed 

additional resources at the CFTC, which of course we will be working with the appropriators on, going forward. 

In terms of the existing authorities, if I could just quickly focus 

on and highlight three areas, and I know there will be questions 

on some others. One is our enforcement program, and, two, status 

of two things out of the farm bill. One was this foreign currency 

3

directive that we took up, and, second, the CFTC’s approach to significant price discovery contract determinations which was also in 

the farm bill. In terms of our enforcement programs, the CFTC Division of Enforcement has been very active policing the markets 

against fraud, manipulation and other abuses in the last fiscal year 

filing 50 enforcement cases, a 25 percent increase from the prior 

year, and resulting in approximately $280,000 in civil monetary 

penalties. 

Within that, there were some new provisions about policing the 

markets and FX. I think there were 15 or 16 cases that came directly out of the new authorities from the farm bill. Also, the farm 

bill included provisions on exempt commercial markets. These were 

markets that were set up out of the 2000 Commodity Futures Modernization Act, but some exempt commercial markets that had contracts that showed significant price discovery features. They were 

either linked or they were referenced by others in markets that 

these contracts should have enhanced regulation. We put out rules 

last year, and following those rules we sought public comment, 43 

contracts to ask whether they were significant price discovery contracts. 

The first was found to be a significant price discovery contract, 

the big contract on the Henry Hub traded on ICE. There are 42 additional contracts that are still out for determination, and our staff 

is reviewing them. Hopefully not too long from now, the Commission will make some determinations on them as well. The good 

news is that on that first contract, ICE is now regulating that contract in accordance with the core principles that were embedded in 

the farm bill that you all worked so hard on. In terms of the forex 

rulemaking in January, the Commission proposed rules so we are 

in a public comment period right now concerning off-exchange retail foreign exchange transactions. 

This is really to help protect the public, in accordance with the 

farm bill, through registration, disclosure, record-keeping and financial reporting, and as the Chairman said does include a feature 

on leverage ratios to protect the public. And, so we are in this rulemaking period. We look forward to hearing from the public on this 

and comply with the farm bill and to make sure that we protect 

the public. Once again, I want to thank the Committee for all your 

work on over-the-counter derivatives, and I know it is not the reason for this hearing, but I am certainly here to take any questions 

you might have. And, if I could, just before I close, mention resources. The Commission actually shrank during the 8 years before 

I started. It shrank about 22 or 23 percent in terms of head count, 

and this is in the face of a market that was growing five or sixfold during that period. It was also increasing in complexity. 

Fortunately, working with Congress, we are now back up to 

about 590 staff, maybe 600 staff, which is just a little bit more 

than we were 10 years ago, and, oddly enough, not that much different than we were in the late 1970’s, even though the markets 

are so much larger today. But with Congress’ help this year, we 

can probably bring ourselves up to the mid-600 range depending 

upon how we bring them on, maybe as many as 680 by the end of 

this year. And the President put forward a budget to move us up 

to funding that would support about 745 people. We think that that 

4

is the right complement. If over-the-counter derivatives reform 

were to go forward, the President’s budget also envisions another 

$45 million to help get a start on the funding of the technology 

needs because there will be a lot of technology needs on that in addition to the staffing needs. With that, I look forward to your questions. 

[The prepared statement of Mr. Gensler follows:]

PREPARED STATEMENT OF HON. GARY GENSLER, CHAIRMAN, U.S. COMMODITY

FUTURES TRADING COMMISSION, WASHINGTON, D.C. 

Good morning Chairman Boswell, Ranking Member Moran and Members of the 

Subcommittee. Thank you for inviting me to testify regarding the implementation 

of changes to the Commodity Exchange Act contained in the 2008 Farm Bill. I am 

please to testify on behalf of the Commodity Futures Trading Commission (CFTC). 

I will focus my testimony today on three principal issues: the CFTC’s use of existing 

authorities to fulfill our mission, the need for additional authorities to oversee the 

over-the-counter derivatives marketplace, and the need for additional resources to 

best protect the American public. 

CFTC Regulatory Regime 

Before I get to the three topic areas outlined above, I will take a moment to discuss the CFTC’s oversight of the futures markets. Futures have traded in the 

United States since the Civil War, when farmers and grain merchants came together and created a new type of marketplace. It was not until 60 years later that 

the Congress first passed legislation to regulate these markets. In 1922, Congress 

passed the Grain Futures Act that first provided a regulatory structure over futures 

and established the Federal authority that eventually became the CFTC. In the 

midst of the Great Depression, Congress passed the Commodity Exchange Act to 

strengthen that regulatory structure. 

The CFTC ensures that futures and commodity options exchanges have procedures to ensure that trading is fair and orderly and free from fraud, manipulation 

and other abuses. Exchanges are where buyers and sellers meet and enter into a 

transaction. Specifically, the CFTC oversees 14 designated contract markets (DCMs) 

and one exempt commercial market (ECM) that lists a contract that the Commission 

determined to be a significant price discovery contract (SPDC). The CFTC also oversees 13 clearinghouses, which enter the picture only after two counterparties enter 

into the transaction. After two parties agree to a trade, a derivatives clearing organization (DCO) takes on the risk that either counterparty to the trade may fail to 

meet its obligations under the contract for the duration of the contract. Centralized 

clearing has helped prevent systemic risks for decades in both calm markets and 

in the stormiest of markets, such as during the 2008 financial crisis. 

The CFTC has wide-ranging transparency programs designed to provide as much 

information about commodity futures markets and trading to the American public 

as possible under current law. The agency also has broad surveillance powers to police the markets for fraud, manipulation and other abuses. 

The CFTC currently oversees 66,187 registrants, including 51,921 salespersons, 

1,277 commodity pool operators, 2,568 commodity trading advisors, 7,114 floor brokers, 1,447 floor traders, 166 futures commission merchants and 1,694 introducing 

brokers. 

The total size of the markets we regulate, measured in notional value, was more 

than $33 trillion in 2009. The CFTC oversaw 2,051 actively traded contracts with 

a volume of nearly three billion contracts traded. 

Existing Authorities 

The Congress gave the CFTC broad authorities to oversee and police the regulated 

futures and options markets in the Commodity Exchange Act. These authorities 

were further enhanced as a result of the 2008 Farm Bill. As such, the CFTC has 

been aggressively utilizing existing authorities to oversee the futures and options 

markets. 

First, the CFTC’s Division of Enforcement has been actively policing the markets 

for fraud, manipulation and other unlawful conduct. In the last fiscal year, the 

agency has filed 50 enforcement actions, constituting a 25 percent increase in filings 

over the prior year. Commission enforcement actions resulted in more than $280 

million in civil monetary penalties, restitution and disgorgement from respondents 

and defendants in CFTC enforcement actions. Notably, 15 of the 50 cases involved 

5

fraud in connection with pooled investments, and 16 involved fraud against retail 

foreign currency customers. 

The CFTC works closely with other Federal, state criminal and civil enforcement 

authorities. During Fiscal Year 2009, nearly 90 percent of the CFTC’s civil injunctive fraud cases involved related criminal investigations and, to date, more than 45 

percent of those investigations have resulted in criminal indictment. Over the same 

time, more than 60 percent of the CFTC’s civil injunctive fraud cases involved cooperative investigations with SEC staff. 

Second, the CFTC implemented new transparency efforts to give more accurate 

depictions of the makeup of the futures markets to the public. For the first time, 

we are providing the market with information about swap dealers and managed accounts on a weekly basis, as well as breaking out index investors on a regular basis. 

For decades, the CFTC has provided the public with weekly Commitments of Traders (COT) reports consisting of aggregated large-trader position data to shed light 

on the changing composition of the markets. 

On September 4, 2009, the Commission began disaggregating its weekly COT reports to make the categories of traders more specific and accurate. Prior to September, the COT reports broke traders into two broad categories: commercial and 

noncommercial. The new disaggregated reports improved upon the previous reports 

by breaking the data into four categories of traders: Producer/Merchant/Processor/

User; Swap Dealers; Managed Money; and Other Reportables. The CFTC is releasing disaggregated data for contracts based on physical commodities and is reviewing 

how to best move forward on contracts for financial futures. 

In addition to disaggregating the CFTC’s COT reports, the agency began periodically releasing data on index investment in the commodity futures markets. In September 2008, the CFTC published a Report on Swap Dealers and Index Traders that 

was based on data received from our special call authority. The CFTC continued 

this special call and enhanced the information disseminated in the original report. 

On September 4, the agency began releasing the data on a quarterly basis. The new 

data includes both gross long and gross short positions and updates data in the previously released report to include some additional data. The Commission will soon 

begin releasing this data on a monthly basis. 

Third, the CFTC has proposed rules to set position limits in the four major energy 

futures contracts. The Commission held three hearings in late July and early August to hear from the public on whether position limits would benefit the markets. 

In January, the Commission held a public meeting to hear a staff recommendation 

to set position limits in the crude oil, natural gas, heating oil and gasoline futures 

markets. Interested persons may submit comments on the proposed rule to the Commission until April 26, 2010. 

In addition to setting position limits in the energy markets, the proposed rulemaking would adjust how exemptions from the limits are granted. The proposed 

rulemaking both addresses exemptions for bona fide hedgers and establishes a consistent framework for certain swap dealer risk management exemptions. The Commission and the exchanges currently grant relief from agriculture and energy position limits to swap dealers on a case-by-case basis via staff no-action letters or similar methods at the exchanges. The proposed rule would bring uniformity to swap 

dealer exemptions, requiring swap dealers to file an exemption application meeting 

specific requirements and to update the application annually. Exempted swap dealers also would be required to provide monthly reports of their actual risk management needs and maintain records that demonstrate their net risk management 

needs. The CFTC would publicly disclose the names of swap dealers that have filed 

for an exemption after a 6 month delay. The proposed changes to the exemptions 

process builds upon earlier work of the Commission, when, under Acting Chairman 

Dunn, it issued a concept release on risk management exemptions. In the proposed 

rulemaking, the CFTC also is soliciting comments on the new exemption framework 

and whether it should be applied to the agriculture markets. 

Further, the CFTC has announced that the agency will hold another meeting on 

March 25 and invite members of the public to testify on the broad issues related 

to the CFTC’s regulation of the metals futures markets and whether position limits 

should be set in these markets. 

Fourth, the CFTC is fulfilling its statutory obligations under the 2008 Farm Bill 

to regulate certain derivatives, including energy derivatives, traded on ECMs. If a 

contract that is traded on one of these facilities is found to perform a significant 

price discovery function, the contract and the facility are subject to heightened regulation and required to comply with key core principles that also apply to the trading 

of futures contracts. 

The Commission has so far determined that the ICE Henry Financial LD1 Fixed 

Price Contract traded on the ICE—the largest volume natural gas swap contract 

6

traded on an ECM—serves a significant price discovery function, and thus is subject 

to heightened regulation. ICE is now regulated for this contract in accordance with 

all of the core principles laid out in the farm bill. Following the statutory obligations 

of the 2008 Farm Bill, the CFTC is analyzing—and has sought public comment on—

an additional 42 energy contracts, including natural gas and electricity contracts, 

to determine whether they meet the criteria to be regulated as SPDCs. 

Fifth, as directed by the 2008 Farm Bill, the CFTC in January proposed regulations concerning off-exchange retail foreign currency transactions. Pursuant to this 

authority, the Commission released for public comment a comprehensive scheme 

that would put in place requirements for, among other things, registration, disclosure, record-keeping, financial reporting, minimum capital and other operational 

standards. Specifically, the proposed regulations would require the registration of 

counterparties offering retail foreign currency contracts as either futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs), a new category 

of registrant created by the farm bill. Persons who solicit orders, exercise discretionary trading authority and operate pools with respect to retail forex would also 

be required to register, either as introducing brokers, commodity trading advisors, 

commodity pool operators or as associated persons of such entities. 

The proposed regulations also include financial requirements designed to ensure 

the financial integrity of firms engaging in retail forex transactions and robust customer protections. All retail forex counterparties and intermediaries under CFTC jurisdiction would be required to distribute forex-specific risk disclosure statements to 

customers, and comply with comprehensive record-keeping and reporting requirements. So far, the Commission has received more than 5,600 public comment submissions related to the forex proposal. 

Further, enactment of the Farm bill enhanced the CFTC’s enforcement authority 

over retail foreign currency. Since enactment of the bill in June 2008, the CFTC’s 

Division of Enforcement has filed 19 fraud actions involving foreign currency transactions. 

Sixth, the Commission has enhanced its market surveillance capabilities by requesting more information from foreign markets that provide direct access to American traders. Last year, the agency strengthened the conditions under which ICE 

Futures Europe can list for trading cash-settled contracts that settle based upon the 

prices of contracts traded on the New York Mercantile Exchange (NYMEX). The 

new conditions include requirements to provide Commission staff with trade execution and audit trail data and access to ICE staff for on-site visits to oversee compliance with the terms imposed by the CFTC. These conditions build upon the prior 

cooperative arrangements between the Commission and the United Kingdom’s Financial Services Agency to address cross-border oversight of the U.S. and U.K. energy markets, including most notably the reporting of large trader positions in 

linked energy contracts. 

Seventh, the Commission has been very concerned about the lack of convergence 

in the Chicago Board of Trade (CBOT) Soft Red Winter Wheat contract over the 

past couple years. From July to December of 2008, the futures price was between 

$1.15 and $2.00 over the Toledo cash price. By late last year, the basis had narrowed to $0.67 per bushel and is currently approximately $0.52. 

Last October, Commissioner Dunn convened a meeting of the Agriculture Advisory Committee to discuss the convergence problem. The CBOT also was conducting 

its own reviews. From those reviews, the CBOT decided to implement a variable 

storage rate proposal that will take effect in July. The Commission will continue to 

monitor the effectiveness of variable storage rates to see if they address the convergence problem. If convergence does not improve, the Commission will consider 

whether additional measures are necessary. 

Further, in August, to ensure that position limits were consistently applied, Commission staff revoked two no-action letters that permitted two firms using certain 

index-based trading strategies to exceed position limits in the wheat futures markets. 

Eighth, the CFTC is working with the Securities and Exchange Commission 

(SEC) on an ongoing project to harmonize regulations. In October, the agencies released a joint report that contains 20 recommendations, including proposals for statutory and regulatory changes to improve protections for the American public. Eleven 

of the recommendations relating to the CFTC require legislation. 

The House included some of our recommendations in its recently-passed financial 

regulatory reform package. The bill would establish similar firewalls for commodity 

and futures dealers that currently exist for securities dealers. Securities regulations 

require the establishment of firewalls between the research, investment banking 

and trading arms of broker-dealers. Without parallel protection in the futures markets, trading desks could use information developed by research arms before that 

7

information is shared with the firm’s clients, raising serious questions about the integrity of the firm’s services to its clients and confidence in the markets. The House 

bill also includes language authorizing the CFTC to police the markets for disruptive trading practices and to ensure that the CFTC has the ability to enact regulations that it determines are necessary to implement the requirements of the Commodity Exchange Act. 

When the House passed its financial regulatory reform bill, however, staff had not 

yet finished drafting legislative language for some of the changes recommended in 

the harmonization report. As such, we will provide language to the Senate as they 

consider financial regulatory reform legislation. Chief among these recommendations are reforms to fiduciary standards for investment advisors and prohibitions on 

using misappropriated government information to trade in the futures markets.

• Any person that offers investment advice to customers should be governed by 

the same fiduciary standard, regardless of whether the underlying financial instrument is regulated by the SEC or the CFTC. Currently, broker-dealers, investment advisors and commodity trading advisors are all subject to different 

standards, depending on the particular financial instrument that is offered, 

even though they perform the same function—to deliver investment advice. We 

have recommended that there be a uniform standard that financial advice 

should be solely in the interest of the customer, without regard to the advisor’s 

own financial interests.

• We have recommended banning using misappropriated government information 

to trade in the commodity markets. In the movie ‘‘Trading Places,’’ starring 

Eddie Murphy, the Duke brothers intended to profit from trades in frozen concentrated orange juice futures contracts using an illicitly obtained and not yet 

public Department of Agriculture orange crop report. Characters played by 

Eddie Murphy and Dan Aykroyd intercept the misappropriated report and trade 

on it to profit and ruin the Duke brothers. In real life, using such misappropriated government information actually is not illegal under our statute. To protect our markets, we have recommended what we call the ‘‘Eddie Murphy’’ rule 

to ban insider trading using nonpublic information misappropriated from a government source.

Over-the-Counter Derivatives Reform 

In addition to implementing the authorities established in the Commodity Exchange Act, the CFTC also is working with Congress to bring comprehensive regulation to the over-the-counter derivatives marketplace. 

Specifically, regulatory reform should, among other things:

• Require that swap dealers and major swap participants register and come 

under comprehensive regulation, including capital standards, margin requirements, business conduct standards and record-keeping and reporting requirements;

• Require the use of transparent, regulated trading facilities for standardized 

swaps;

• Ensure that clearable swaps are submitted to and settled through central clearinghouses; and

• Provide the CFTC with authority to impose aggregate position limits across 

both futures and OTC derivatives markets. 

Resources 

Before I close, I will briefly address the CFTC’s need for additional resources. Ten 

years ago, the CFTC was near its peak staffing level at 567 employees, but shrunk 

by more than 20 percent over the subsequent 8 years before hitting a historic low 

of 437. Due to increased funding from Congress, the CFTC had more than 580 staff 

on board at the beginning of Fiscal Year 2010, which is a significant improvement. 

Still, merely raising our staffing levels to the same as a decade ago will not be 

enough to adequately fulfill the agency’s statutory mandate. In the last 10 years, 

futures trading volume increased almost five-fold. The number of actively traded futures and options contracts increased seven-fold, and many of these have become 

considerably more complex in nature. We also moved from an environment with 

open-outcry pit trading to highly sophisticated electronic markets. What was once 

a group of regional domestic markets is now a global marketplace. What was once 

a $500 billion business has grown to a $33 trillion industry. 

Despite rapid advances in technology and the increased size and number of regulated futures markets, funding for the agency has lagged behind the growth of the 

markets, and the CFTC has struggled to keep pace with the markets. While market 

8

participants have the technology to automate their trading, we’ve yet to have the 

resources to employ modern technology to automate our surveillance and oversight 

of compliance. Further, the CFTC does not have the staffing levels or the resources 

to conduct regular annual examinations of exchanges and clearinghouses. Instead, 

we can conduct those examinations only periodically and have no choice but to leave 

routine examinations of intermediaries to self-regulatory organizations. The CFTC 

needs resources to conduct yearly examinations of the registrants we regulate. 

For these reasons, it is appropriate for our staffing levels and our technology to 

be bolstered to meet the new financial realities of the day. As such, the CFTC’s 

Budget and Performance Estimate for FY 2011, for existing statutory authorities, 

would increase the agency’s funding by $47.2 million to $216 million and would augment agency staff by 95 FTE to a total of 745 FTE. 

Additional funding would allow the CFTC to make much-needed improvements to 

our surveillance and technology programs. Further, it would allow the agency to increase staff levels to better keep up with the growing futures and options markets. 

The President’s budget proposes additional appropriations for the Commission 

contingent on the enactment of financial regulatory reform legislation. Commission 

staff estimated that with enactment of H.R. 4173, the Commission would require 

an additional 238 FTE to carry out its provisions. The budget recommends $45 million, including $27 million to provide for 119 additional FTE in FY 2011 and anticipates funding in FY 2012 for an additional 119 FTE. 

Closing 

In closing, I am pleased to report that the Commission has been actively utilizing 

existing authorities to oversee the regulated futures markets. We have managed an 

active agenda, ranging from implementing provisions of the 2008 Farm Bill to improving existing regulatory schemes to working with Congress on new regulatory reforms. I look forward to continuing to work with this Subcommittee on important 

efforts to protect the American public. 

I thank you for inviting me to testify today. I will be happy to answer any questions you may have.

The CHAIRMAN. Well, thank you for your information. That was 

very informative, and your last comments, I think all us, we hear 

you. We hear you. But, I must say that we are in era, right now, 

with deficits where we have to do more with less, and so don’t be 

over encouraged that there is going to be a big bump right away. 

But your point is well taken and you justify your need, and of 

course the process will go from there. I have two or three things 

that came up. We get a lot of visitors, as you well appreciate, and 

I would like to just cover about three or four items here and then 

maybe come back in another round. But the National Futures Association rules, which have been approved with CFTC, allow customers to buy retail foreign exchange contracts with 100:1 or 25:1 

leverage. 

As you know, you have approved these rules for many years as 

consistent with the Act. Now the CFTC is proposing a leverage requirement of 10:1, so I would like you to explain the reason for the 

sudden change and what analysis was conducted to justify it. NFA 

also has a tiered structure to its leverage limits recognizing that 

different currencies have different risks. For these currencies there 

is more risk present, the exotic currencies, if you will. Customers 

have a lower leverage limit, 25:1. NFA opposes or, excuse me, the 

NFA requires 100:1 leverage limit for less risky standard currencies. Did the CFTC consider this model and why did the Commission ultimately decide to go with one size fits all? Talk to us 

about that. 

Mr. GENSLER. I thank you for the question, and those visitors 

that visit you also visit us quite regularly, as they should, and it 

is welcome. The Commission put out a proposed rule, and of course 

we are waiting to hear comments. We have already gotten 5,600 

9

comments, and expect more. It is a very important rule to protect 

the public. In terms of leverage, leverage is used to help protect the 

investing public, and there are actually a number of regimes. We 

put out this 10:1 number. We looked at what the NFA is doing. We 

also looked at what the exchanges are doing. And on the many contracts the exchanges have, and I think there are nearly 80 foreign 

exchange contracts on the various futures exchanges; leverage ratios go from 10:1 all the way to 100:1, so there is a wide range depending upon the currency and the risk in those contracts. 

Actually over in the securities world, there are also a leverage 

ratios. At FINRA, which oversees some of those, the leverage ratio 

is 4:1. So what we did in the rule is we put it out for comment. 

We want to hear from the public, see what they think. So I said, 

we have gotten a lot of comments on this. And then we will try to 

do what is best to protect the public, but we pick something really 

in the range. Maybe that is pretty wide range, 4:1 to 100:1, obviously. I would say that the narrower the range on the futures contracts, I believe, and I am looking at some notes, range from probably 20:1 to 40:1. That is probably the narrower range for many of 

the currency contracts. 

The CHAIRMAN. I appreciate that. Maybe you could comment, and 

then I will yield. Do you agree the 10:1 leverage limit that is proposed will greatly reduce the domestic forex trading business for 

futures commission merchants and retail foreign exchange dealers? 

Mr. GENSLER. Well, in putting out a proposed rule, we are trying 

to comply with the statute in the farm bill and to best protect the 

public. One of the things we are looking forward to is comments exactly on this point as to whether the investing public would still 

have access to invest in these products. However, the reason for the 

leverage is really to protect an individual against a rapidly changing market, or the volatility in the marketplace so that they have 

some cushion or margin in those contracts. 

The CHAIRMAN. Thank you very much. At this time, Mr. Moran 

is out of the room, so I will recognize Mr. Latta for any comments 

or questions he might have. 

Mr. LATTA. Thank you, Mr. Chairman. Thank you very much for 

being with us today. Kind of on those same lines right now would 

you agree or disagree with the proposition that the proposed leverage rule would drive retail FX business overseas? If that were to 

happen, do you agree that it would defeat the intent of Congress 

in passing a regulatory system for retail forex in the first place? 

Mr. GENSLER. Well, I think as we understand it, and how we put 

forward the rules, is how to best protect the investing public. There 

are actually many places here in the U.S. as well that somebody 

can invest. I think that it would be good to harmonize the leverage 

ratio rules, whether it is the FINRA rules for securities, or our 

rules that you have asked us to do, or even the bank regulators on 

foreign exchange with the banks. I think you raise a very good 

point, that these transactions can move, as you say, either internationally or domestically, and that would be good to harmonize 

rules, and so we will be looking at that very closely. We haven’t 

finalized a rule, and we are taking comments now and even this 

hearing is going to help inform us as well. 

10

Mr. LATTA. And probably to follow up on that, what is the level 

of support or opposition for the rule? Have you got an inkling? Is 

it 50/50, or where is it coming down on? 

Mr. GENSLER. Well, there are many attributes of the rule. There 

are: disclosures; registration; there is capital as Congress directed; 

there is capital for these foreign exchange dealers as well. And so 

with 5,600 comments staff is still going to need time to analyze 

them all, and there will probably be well more comments before we 

finish this open period. I think it is safe to say that the most comments, I am told, I haven’t read them, are on this leverage issue, 

but I believe there is a great deal of support on many aspects of 

the rule, but I will see how all the comments come in. I don’t want 

to pre-judge them. Then along with the four other Commissioners, 

we will sort through the comments after staff summarizes them for 

us. 

Mr. LATTA. Just to follow up on that again, when you are doing 

the analysis, with the overall analysis, have you done anything 

that would say how much business might go overseas if these are 

promulgated, these rules? Do you have any idea what the cost 

might be if they are promulgated? 

Mr. GENSLER. Well, what we are really focusing on is the cost for 

the retail public. I mean there has been significant fraud in forex. 

I think what this Committee and Congress did in the farm bill, and 

why they directed us to write rules is to fix the Zelener issue of 

these rolling foreign exchange contracts and protect the public from 

being defrauded. There has been significant cost to the public, and 

that is what we are trying to address in putting forward and promulgating rules consistent with the farm bill language. 

Mr. LATTA. Thank you. Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. Thank you. The chair recognizes Mr. Marshall. 

Mr. MARSHALL. Thank you, Mr. Chairman, and pleased to have 

you here. I would like to explore the same thing a little bit. It 

seems to me that a number of the people who do forex trading are 

just basically gambling. They think they can out guess the market. 

This is their way of going about trying to make their fortune. And, 

my take on that is it is usually foolish and you are as likely to win 

as to lose. Since you have to pay a fee, the net is going to negative 

on average. Zelener is one illustration of fraud in a sense that people are suckered into doing this thinking that this is the way they 

are going to make their fortune, and representations are made concerning either the safety or the likelihood of success that are just 

not right. They are not true, and so having the authority, NFA and 

others having the authority to go in and specifically address that 

kind of fraud is important. That was the Zelener fix. 

But I don’t know that we intended to basically kill the market. 

The reference to protect the public, it seems to me there must be 

some legitimate uses of this by individuals besides just gambling. 

Can you describe examples of people who are legitimately, in the 

sense that they have some commercial interest and they are trying 

to protect something, some legitimate interest that people—that 

would cause somebody to trade forex? 

Mr. GENSLER. Well, Congressman, I might separate out retail investing public from the commercial and importer or exporter certainly. 

11

Mr. MARSHALL. Your rules only affect retail? 

Mr. GENSLER. It is really retail. 

Mr. MARSHALL. So in the retail setting, can you think of any examples of people that with legitimate hedging needs or——

Mr. GENSLER. Let me say the Commission promulgated proposed 

rules and looks forward to public comment, but it is to further 

what Congress wants in that this business exists, that the retail 

public, some want to diversify their risk. They might take a view 

on where 100 shares of stock trades, or where the retail public can 

open a futures account and take a view and even speculate on the 

price of oil or corn or wheat. The retail public, with certain protections, would be allowed to do that. The challenge had been, for 3 

decades or more, was that foreign currency had an exemption from 

the original Act in 1974, and so in many ways these are like futures. They are almost futures, but they are being traded off-exchange, and so we are trying to bring some of the protections, 

maybe not all of them, but some of those protections to the public. 

Mr. MARSHALL. What we are concerned about, and we just hear 

from the industry, and what they are saying sounds right, in the 

modern era where individuals who want to engage in this sort of 

trading can do it from their home computer somewhere in Europe 

or anywhere in the world really. You know, if our leverage rules 

are 10:1 and the leverage rules elsewhere are 100:1, the business 

is going to move elsewhere. I don’t know that we have any mechanism to keep that from occurring, and the elsewhere place that the 

business moves to may well be a place that doesn’t have the NFAs 

of this world trying to look out for fraudsters. And so we are concerned that not only does the United States lose some business, but 

there is no net good that is done as a result of the effort. We are 

not effectively protecting the public because the public is inclined 

to have 100:1 leverage as opposed to 10:1 leverage and just goes 

elsewhere. 

In fact, it has the opposite effect because elsewhere is a place 

where the public is in more danger than the public would be here. 

So, we are a little concerned that the leveraging requirements, specifically, could be problematic. 

Mr. GENSLER. You raise a very good point. Capital and risk 

doesn’t know any geographic boundary. This is one of the issues in 

our efforts with Congress to reform the over-the-counter derivatives 

marketplace as well. But I would note that the nine leading currency futures contracts, I have this list, range from a 13:1 leverage 

to 45:1. I mean we were referencing NFA, which is also important, 

but these are currency future contracts that I am talking about: 

the Swiss franc, the British pound, the Australian dollar, Japanese 

yen, the euro. These are the major currencies on the futures exchanges. 

So I mean we want to hear from the public. We want to do exactly what you said, Congressman, to make sure the public is better protected on, particularly, these rolling spot FX, which let me 

just say the public is charged a fee every time they roll. Every 2 

days they roll, they roll, they roll, they get charged a fee. And we 

just want to bring some rules as Congress has directed us to, to 

best protect the public but still allow the public to invest if that 

is what they decide to do. 

12

Mr. MARSHALL. We have a small enough group here. I guess we 

will have a second round? 

The CHAIRMAN. Oh, yes. 

Mr. MARSHALL. Okay. Thank you. 

The CHAIRMAN. Thank you. The chair recognizes the gentleman 

from Kansas, the Ranking Member, Mr. Moran. 

Mr. MORAN. Mr. Chairman, thank you very much. Chairman 

Gensler, thank you for joining us. Just a couple of different areas 

I would like to pursue. Just in a general sense, tell me how things 

are different at the CFTC today than they were say 2 years ago 

or a year ago. Are we prepared in different ways? Are we staffed 

in different ways? Do we have a different focus? What has happened at the CFTC with you as the Chairman, as well as the 

change or the recognition that dramatic things happened in our 

economy involving some of the products that are regulated? 

Mr. GENSLER. I thank you for that question. A number of things, 

and let me say that it is not because I am there. I think a lot of 

things have changed but one is staffing. We have, as I say, about 

600 people versus 437 just a year and a half ago. So we had basically a hiring freeze for 4 or 5 years. I mean it wasn’t technically 

that, but that is kind of how it worked. Two, I think that we are 

far more engaged in our enforcement efforts policing the markets, 

and partly because of the farm bill, we have started to look at some 

markets we couldn’t before. So, what is traded down on this exempt 

commercial market, ICE is now regulated as Congress had asked 

it to do. We also went forward with the contracts in the United 

Kingdom, ICE UK, and we entered into an agreement with the regulators there that brought greater oversight and coordination on 

the oil contracts that are on that market with our markets. 

Last, if I just might say, I think we brought greater transparency. It is incremental, but through our Commitments of Trader’s report, we for the first time are putting out data weekly on 

swap dealers involvement in the markets and hedge funds involvements in the markets, and now quarterly on index investors involved in some markets, and we have brought some greater transparency as well. 

Mr. MORAN. Thank you for the answer. Let me ask about a specific issue, your position limit rule. You have issued a rule pursuant to Section 4a(a) of the CEA, and it appears to me that in order 

to issue this rule, you have to have a finding there is excessive 

speculation causing unwarranted changes in price of the commodity, or you must have the belief that that is going to happen, 

and therefore you can step in and prevent that from happening. So 

the CFTC is allowed to set position limits to prevent excessive 

speculation, but the only finding that I am aware of is the study 

that the CFTC did in 2008 that could not establish a link between 

excessive speculation and the increase in commodity prices that we 

in Congress were so concerned about. Has there been an additional 

study beyond that report? Is there something now that better ties 

so-called excessive speculation with the price of commodities? 

Mr. GENSLER. This is a case where we put out a proposed rule 

to re-establish position limits in the energy markets. They, of 

course, existed until the summer of 2001, just 9 years ago, through 

the exchanges. We asked our General Counsel last summer in 

13

hearings, do we have to have a finding that there has actually been 

excessive speculation that has caused a burden to interstate commerce or can it be prospective? And he studied it thoroughly and 

offered the opinion as General Counsel, no, it can be prospective. 

It doesn’t have to be a historical finding. 

That is really what the agency has done for decades in the agricultural space and used to do with the exchanges in the energy 

space. The concept for decades has been to ensure that there are 

a certain number of actors on the stage, that the markets are not 

too concentrated. The interpretation of a couple decades ago in the 

agricultural space was to have a certain limit that ensures that 

there is at least of number of speculators in the marketplace, and 

that is what this proposed rule actually did. It basically took the 

agricultural formula and put it out to comment for energy commodities, we are asking the public is this going to promote fair and orderly markets? We are looking forward to hearing from the public 

whether we should re-establish some form of limits consistent with 

the philosophies that have been done in the past. 

Mr. MORAN. There is no current analysis or specific study related 

to this issue that is pending or that would be available to Congress 

as a result of CFTC action. What I am looking for, is there something that contradicts the 2008 report that couldn’t find that link? 

Mr. GENSLER. No. If you are looking for a link on our website, 

no. 

Mr. MORAN. I am actually looking for a link that says that excessive speculation is causing fluctuation or increases in commodity 

prices. 

Mr. GENSLER. It is really—and I think this is what our agency 

has been tasked to do for decades—how do we best promote a market that would be fair and orderly. One of the aspects of that, 

which Congress asked us to do, and it said, ‘‘shall set position limits,’’ is to best protect the markets and bring diversity in the markets. That is what we have done in the agriculture markets. That 

is what we wanted with the exchanges help in energy, and so we 

are asking the public and really looking forward to hearing from 

the public, whether this helps promote the diversity in markets 

and avoiding concentrated positions or what one might call excessive positions. 

Mr. MORAN. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. I see that the Chairman has joined 

us, so the chair recognizes Chairman Peterson. 

Mr. PETERSON. Thank you, Mr. Chairman. Thank you and the 

Ranking Member for holding this hearing. Chairman Gensler, welcome. 

Mr. GENSLER. Good to be with you, Mr. Chairman. 

Mr. PETERSON. I am sorry I am a little late here so I don’t know 

how much of this has been covered but on this proposed change in 

leverage on the forex rule, as I understand it, the NFA or you in 

combination have increased the capital requirements to $20 million 

or something, is that correct? 

Mr. GENSLER. Yes. I think that is consistent with what was in 

the farm bill. I don’t remember the exact language but the capital 

rule was actually addressed in the farm bill. 

14

Mr. PETERSON. Yes, so we knocked a whole bunch of people out 

of this system because of that capital requirement. People that 

were in business aren’t in business anymore because they can’t 

meet that, I guess. 

Mr. GENSLER. Well, it is to ensure that the firms, these retail foreign exchange dealers, have something behind them. 

Mr. PETERSON. Yes. I don’t quite understand what you are trying 

to get at here by changing this leverage, because as I understand 

how this works, the NFA, which you guys have been working with, 

you have this 100:1 rule. The way it works if you put in a $1,000 

under a $100,000 contract the way it works in the real world is 

when you have $500 loss they close you out. So I don’t get what 

we are trying to accomplish here by lowering this to 10:1. It almost 

seems like you are putting them at more risk. More of their money 

is going to be lost before they are closed out under that rule than 

under the current rule. Who are you trying to protect here? I don’t 

quite get it. 

Mr. GENSLER. We are only trying to protect the public. It is a 

proposed rule, and, of course, as you may know, we have gotten a 

lot of comments, 5,600 comments, to date, and there are a lot of 

aspects in the rules, disclosure, registration. But, on this leverage 

piece, on the leverage piece what we put out for comment to hear 

from the public is 10:1. There is actually a range. NFA is at 100:1, 

as you said on certain currencies. 

Mr. PETERSON. Right. 

Mr. GENSLER. And then on the futures markets themselves there 

are 79 different contracts and those contracts range from 10:1 to 

100:1, but the bulk of them are in the 20:1 to 30:1. There are some 

at 40, I think the euro might be at 40:1. And so we are really looking forward to comment on this, but whether we end up at 10:1 or 

like the exchanges have other ratios, the protection, the protection 

is basically to have a cushion or some modest margin there. 

Mr. PETERSON. Well, yes, I understand that, but in the futures 

market you are at a lot more risk. You can actually lose more 

money than you put in in the futures market. 

Mr. GENSLER. Well, actually it is very similar. These spot contracts are like rolling futures, the futures market will close you out 

as well. 

Mr. PETERSON. Well, right, or you have to make your margin 

call. 

Mr. GENSLER. Right, so it is actually very similar to the futures. 

Mr. PETERSON. Yes, but I don’t think the futures market works 

that way. If half of your margin is used up, you are closed out. 

That is not what they do. They have a margin call twice a day or 

whatever it is and you have to either meet it or you close the contract out. It is a different situation. I guess I don’t understand the 

forex, where these guys are operating that way. And as I understand that market, you are not at as much exposure necessarily as 

you are if you are in the futures market. 

Mr. GENSLER. Well, one of the good things about putting out a 

proposed rule is we are getting a lot of comments, and this hearing 

is helpful as well, and it is a question of whether you have more 

protections on a futures exchange or less. Often you have more protections because of the transparency——

15

Mr. PETERSON. Well, that probably makes sense. 

Mr. GENSLER. So what we will do amongst the five Commissioners, we will wait until the comment period is over. We will hear 

all the comments. Staff will summarize them and then we will 

have to address them. So, it is not only those on leverage but any 

other comments that we have. 

Mr. PETERSON. What is the timing of this? When are you going 

to be making the decisions? 

Mr. GENSLER. Well, we are still in the open period. I have to remember—I think March 22 is when the period closes and with 

5,600 comments probably with today’s hearing we will get a couple 

thousand more, but it will take time to try to sort through and 

properly review all the comments. I think this is going to probably 

go well into the summer if I have to guess how long it takes to review all these comments and properly have a process at the Commission. 

Mr. PETERSON. All right. Well, thank you, and keep us appraised 

of what is——

Mr. GENSLER. I thank you and I thanked the whole Committee 

earlier, so I want to thank you personally in all that you have done 

on over-the-counter derivatives reform because we really need to do 

it, and the House has put forward an effort now. We are working 

with the other side and hopefully be back with you again. 

Mr. PETERSON. Well, hopefully they act like they are going to do 

something so we will keep our fingers crossed. 

Mr. GENSLER. Yes. We are doing a little bit more than that but 

yes. 

Mr. PETERSON. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Mr. Chairman, and the chair now 

recognizes the gentleman from Texas, Mr. Conaway. Pass. We 

would recognize the gentleman, I believe we are lined up here, let 

me look here, Mr. Kissell from North Carolina. 

Mr. KISSELL. Thank you, Mr. Chairman, and welcome, Chairman 

Gensler. Just a couple questions. We were talking about budgeting 

and staffing. In terms of your responsibilities for investigations and 

oversight, are you adequately staffed there to try to make sure that 

those areas are sufficiently covered? 

Mr. GENSLER. I thank you for asking that. I think we are making 

headway. We are not quite there. We have put in, and the President has supported it in his 2011 budget, I think we need probably 

200 people in our enforcement area. We are around 145, 150 right 

now. It is a great challenge. Maybe it is because of this crisis, 

maybe some of the additional responsibilities in the farm bill, but 

we have a lot of fraud cases that come in, but the manipulation 

cases take a lot of resources to pursue. Also, in terms of oversight 

I believe that we should go to annual reviews of exchanges and 

clearinghouses for what is called rule enforcement reviews. And 

they are very constructive. The exchanges benefit, the public benefit, I think we benefit. We have been pretty much putting them 

off for every 3 year reviews because of the budget problems. The 

2011 budget would support us to get them to annual. 

The last piece that we are trying to do is get 21st century computers and technology to do automatic flagging when there is some 

trade in the market that is really an illegal trade. We should flag 

16

it electronically and see it because humans can’t watch hundreds 

of thousands of trades, but those would be the three areas we are 

trying to get to. 

Mr. KISSELL. And what would be the challenge in the computer 

systems? Is it strictly money or just developing software or what 

would that be? 

Mr. GENSLER. It was over the years a number of things, but I 

think with the President’s support and the 2011 budget, we will be 

able to take this on. But it was storage capacity and computers. We 

are now where we need to be on the storage capacity. Now we have 

to write the algorithms and so forth. We have been doing that. We 

are actually working with the exchanges. They have been very 

helpful too because they have some algorithms they use. I think it 

is probably going to take a little bit more and go into 2011 before 

we get the bulk of this done. 

Mr. KISSELL. Well, that would seem to be a very important tool 

to have that constant monitoring in that way. 

Mr. GENSLER. We agree, and we think the exchanges too need to 

do it. It is not just the agency but together I think it is a very important tool. 

Mr. KISSELL. Just general thoughts about as we have pending 

legislation and financial reforms and the farm bill and just where 

we are in general, can you just offer general thoughts about, once 

again, the pending legislation’s strengths, weaknesses, areas we 

are not addressing? 

Mr. GENSLER. Well, I think that House-passed bill is very strong. 

As you probably know, I hoped to maybe have the same success on 

the other side that we covered mandating trading. That has been 

quite a flash point in the debate over on the other side as to whether to mandate it. The House mandated there would be trading. And 

then the second area that is quite a debate is this end-user exception, how wide, how narrow. I tend to be in the camp of narrow, 

that if we have it, it should be for commercial end-users. You know, 

the rural cooperatives that come in here or so forth and that are 

hedging their needs and not for big financial companies. I, quite 

frankly, don’t know why a transaction between a large bank and 

a large hedge fund would be out of this or a large bank or a large 

mortgage finance company, I think. But those seem to be the two 

points that are the greatest debate over on the Senate side. Whether there is a trading requirement, which you did include in the 

House, and just how wide or narrow an end-user exception might 

be. 

Mr. KISSELL. Thank you, Mr. Chairman. I yield back my time. 

The CHAIRMAN. Thank you. Second round. We go to Mr. Marshall. 

Mr. MARSHALL. I think you are almost off the hook here. I want 

to pick up on something that the Chairman mentioned, and that 

is that you have increased capital requirements. What that means 

are at least two things. The number of characters, potential 

fraudsters, that are out there is diminished. I mean if you are in 

this area and you don’t have the right capital then I would think, 

per se, you are guilty of something. You can be stopped or you can 

be—maybe there is a criminal penalty that could be assessed 

against you. So it limits the number of people. It also makes it less 

17

likely that they are going to commit fraud because they have a lot 

of capital involved in the game. They are probably going to be fairly careful. 

So if the leverage rules are designed to minimize fraud, I actually think your capital requirement is many giant steps in the direction of accomplishing that. And then again there is this worry 

that changing the leveraging rules is going to prompt people to go 

play in other markets that are more dangerous, and, hence, the 

public sees less protection rather than more. And I guess my instinct is to say is if there is a way for you to leave the leveraging 

alone or leave it in charge of the NFA and let them worry about 

individual contracts, then you all don’t have to worry about it. 

That might be wise in the circumstance. I absolutely agree with 

what you have done where position limits are concerned. I think 

that we are—and the exchange between you and Mr. Moran was 

kind of interesting to me. It is true that the evidence produced thus 

far, at least the analysis done this far by staff, as I understood it, 

they are just not able to identify an impact on the market as a result of the stuff that we have been concerned about, the absence 

of position limits. But I think we are in this environment where 

there has just been so much smoke, so much noise, so many people 

saying this is absolutely a problem. The consequences of it being 

a problem are so dire to so many people that the Commission is 

saying, ‘‘Okay, the burden of proof is on those who want to have 

no position limits. If you can show this is safe, fine, but in the absence of a demonstration that this is safe and it is not going to 

have these adverse impacts on the market, we are going to take action to impose position limits like we have done in other areas.’’

It seems entirely reasonable to me. Where oversight and enforcement is concerned, I am worried that you all are about to get a—

if our bill, that portion of our bill which gives you authority over 

the derivatives market becomes law, you have a massive build-up 

in front of you, I mean a huge organizational challenge. 

I am sure we are there to try to help but it is going to be on you 

to figure that one out because that is really going to be a challenge, 

it seems to me. I don’t really have a question. I just wanted to offer 

those observations. 

Mr. GENSLER. I thank you and maybe we were too modest when 

we put in for another 238 people in the House-passed bill, but that 

is what we put in. If the President signs it and it comes a few 

years from now, and I am still there and we need more, I will tell 

you or hopefully my successor will. 

Mr. PETERSON. Will the gentleman yield? 

Mr. MARSHALL. Oh, absolutely. 

Mr. PETERSON. I just wanted to follow up. Are the foreign markets—you have been talking to those guys about a lot of these different things and trying to get these regulations harmonized. Are 

they doing something similar in this forex market regarding margins? 

Mr. GENSLER. You ask a very good question, and we will look at 

that obviously as we go through this finalizing the rule and so 

forth. Most of my conversations on foreign exchange with the European regulators is that they may cover foreign exchange swaps in 

their overall derivatives rules. That is what they are looking at, 

18

and there is still a debate here whether foreign exchange swaps are 

included as the Chairman and I have talked. I think they should 

be, whether it is an interest rate swap or a currency swap. It helps 

lower the risk in the marketplace and central clearing, particularly 

central clearing has the same issues. It does look like the European 

Commission at the staff level so far, they want to cover it as well, 

but they are watching to see what we do in that regard. I know 

I talked about the institutional side rather than the retail, but I 

think we will take a look at the leverage ratios overseas. 

Mr. PETERSON. Yes, because we have been told that if people—

if we get too carried away here they are just going to go to the Bahamas. I don’t know if those folks down there that are operating 

have any—they are probably not even in this discussion, I mean 

the Europeans and so forth but I mean——

Mr. GENSLER. Right. 

Mr. PETERSON. So we need to keep an eye on that. We don’t want 

people to be trading down there and actually putting consumers at 

more risk. With the Chairman’s permission, I keep reading this—

in our bill, I keep reading that somehow or another we are going 

to let these financial types off the hook in this regulation of these 

derivatives, but in our bill all of these big guys that are doing these 

financial trades are going to be required to put up margin and collateral because they are major swap dealers or major swap participants, so they are covered. It is just that they are not covered the 

way some people want, but clearly all of those folks, those big guys 

that are doing this financial stuff are going to have to put their 

money up even with the end-user exemption. 

Mr. GENSLER. Well, Mr. Chairman, as you know, because I am 

very supportive of your efforts in this area, and I think you did a 

tremendous job, there is a possibility under the House-passed bill 

that a large financial institution that is not a swap dealer——

Mr. PETERSON. But I can’t imagine who that would be. 

Mr. GENSLER. Many major insurance companies, many major 

hedge funds, many major mortgage finance companies, leasing 

companies, and the like. So these large entities, I will just use 

Bank for International Settlements. These are worldwide statistics 

on this big $600 trillion market, but when they look at the market 

in interest rate derivatives, very common derivatives, about 34 percent is between swap dealers and swap dealers, but 57 percent is 

between swap dealers and other financial institutions, the insurance companies, the leasing companies, the hedge funds. 

It is that—whether it is 57 percent or only 40 percent but it is 

that group that I know from our private conversations you would 

like to cover. I believe you and I are in the same place. We want 

to cover it. It is a possibility in the House-passed language that 

said end-users hedging commercial operating or balance sheet risk 

that these financial firms might say we are hedging a commercial 

risk. We are an insurance company. We are hedging a commercial 

risk. We are a leasing company. And so I know from our discussions we both want to cover them, but it may be that 2 years from 

now the clever lawyering will say they are out. And that is unintended. I think it is unintended surely. The other part of the market, there may be ten percent of the market that is the electric utilities, I think you did want to give them an end-user exception. 

19

Mr. PETERSON. Well, not an exception. Just that they use a different kind of collateral. 

Mr. GENSLER. Right. Right. 

Mr. PETERSON. And that is what we are trying to get at, but I 

guess if you have some suggestions about how we could tighten up 

that language for those financial types, we would be willing to look 

at it because——

Mr. GENSLER. I would be delighted to share that with you. 

Mr. PETERSON. In conference maybe we can address that, but we 

felt like most of these folks that are actually putting risk into the 

system are going to be covered because the dealers are participants. 

Mr. GENSLER. I sense, Mr. Chairman, that you and I share the 

same goal to cover these financials, and we could work together to 

have the language to cover what I call the 57 percent, and then the 

other ten or so percent which is what I call the non-financial endusers. You know, if Congress deems them to be out for other reasons, they are out. 

Mr. PETERSON. Okay. Thank you, Mr. Chairman. 

Mr. GENSLER. Thank you very much. 

The CHAIRMAN. I think we have time for—we have a new joiner. 

Any questions? Thank you very much. We are going to come to closure. I have one last question, and if you want to jump back in, 

and I will yield to Mr. Moran here in a moment. But just last, if 

I could, Mr. Chairman, CFTC is required to evaluate contracts at 

least once a year to determine whether they serve a significant 

price discovery function. What is the Commission’s plan for this review process? How time and labor intensive is the process, if you 

would? 

Mr. GENSLER. Well, it is very time intensive, but fortunately it 

is not dozens of staff but it is time intensive for a small group. We 

put out 43 contracts to get public comment. We will sort through 

that here in the next couple months, to finish that. But then the 

additional review, what you are referring to annually, is to just 

look at the whole marketplace to see if there are additional contracts to add to that list. And I think that we have a pretty darn 

good staff and they sort of have it nailed down. But you are right. 

There is a core handful of people that are spending pretty much 

full time on this, but it is measured in the single digits right now. 

It could grow of course. 

The CHAIRMAN. I understand. Thank you. At this time, I think 

we are going to come to closure if I don’t see any signals of anybody 

wanting to ask further questions. But before we adjourn, I would 

like to invite the Ranking Member to make any comments he 

would like to make. 

Mr. MORAN. I thank the Chairman for holding the hearing and 

thank Mr. Peterson for his continued interest in this topic. I think 

it is an important one to our economy. And, Chairman Gensler, I 

look forward to working with you to see that we come up with the 

right legislative framework for you to conduct the appropriate level 

of supervision and regulation, and I thank you for your testimony 

today. Thank you, Mr. Chairman. 

Mr. GENSLER. And I thank you for those warm remarks, and the 

Chairmen for all your efforts with the CFTC. 

20

The CHAIRMAN. With you and the chair and all these chairs, we 

have lots of chairs, but in that respect I too want to join with Mr. 

Moran. Chairman Peterson, thank you for your leadership and 

your intensity to get into this. We have come out pretty good, and 

we all appreciate the hard work that you have done for a long, long 

time, and standing up and financial services and so on and so on 

and so on. I could make lots of comments. And I agree with the 

Ranking Member, Mr. Gensler. We think you are doing a good job. 

Just stay right on it and communicate with us, and we will do our 

best to work with you to be sure that we can stay viable and continue down this road that we are on. So under the rules of the 

Committee, the record of today’s hearing will remain open for 10 

calendar days to receive additional material and supplement the 

written response from the witness to any questions posed by Members. The hearing of the Subcommittee on General Farm Commodities and Risk Management is adjourned. 

[Whereupon, at 10:28 a.m., the Subcommittee was adjourned.]

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