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[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]

 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

                                 ______

                  U.S. GOVERNMENT PRINTING OFFICE
55-459 PDF                WASHINGTON : 2010
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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania,            FRANK D. LUCAS, Oklahoma, Ranking 
    Vice Chairman                    Minority Member
MIKE McINTYRE, North Carolina        BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California        SAM GRAVES, Missouri
DAVID SCOTT, Georgia                 MIKE ROGERS, Alabama
JIM MARSHALL, Georgia                STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN, South     RANDY NEUGEBAUER, Texas
Dakota                               K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas                 JEFF FORTENBERRY, Nebraska
JIM COSTA, California                JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana              ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota           ROBERT E. LATTA, Ohio
STEVE KAGEN, Wisconsin               DAVID P. ROE, Tennessee
KURT SCHRADER, Oregon                BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois       GLENN THOMPSON, Pennsylvania
KATHLEEN A. DAHLKEMPER,              BILL CASSIDY, Louisiana
Pennsylvania                         CYNTHIA M. LUMMIS, Wyoming
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

                                 ______

                           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                JERRY MORAN, Kansas, Ranking 
BRAD ELLSWORTH, Indiana              Minority Member
TIMOTHY J. WALZ, Minnesota           TIMOTHY V. JOHNSON, Illinois
KURT SCHRADER, Oregon                SAM GRAVES, Missouri
STEPHANIE HERSETH SANDLIN, South     STEVE KING, Iowa
Dakota                               K. MICHAEL CONAWAY, Texas
BETSY MARKEY, Colorado               ROBERT E. LATTA, Ohio
LARRY KISSELL, North Carolina        BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi

                Aleta Botts, Subcommittee Staff Director

                                  (ii)

                             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

 
 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 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 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 six-
fold 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 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 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 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 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 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 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.
    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.
    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.
    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 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.
    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----
    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 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 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, 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.
    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 end-users. 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.
    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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