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22–644 PDF 2005

S. HRG. 109–332

TO CONSIDER THE NOMINATION OF MR. REUBEN

JEFFERY III AND THE RENOMINATION OF MR.

WALTER LUKKEN TO BE COMMISIONERS OF

THE COMMODITY FUTURES TRADING

HEARING

BEFORE THE

COMMITTEE ON AGRICULTURE, 

NUTRITION, AND FORESTRY

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 9, 2005

Printed for the use of the 

Committee on Agriculture, Nutrition, and Forestry

(

Available via the World Wide Web:http://www.agriculture.senate.gov 

COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

SAXBY CHAMBLISS, Georgia, Chairman 

RICHARD G. LUGAR, Indiana 

THAD COCHRAN, Mississippi 

MITCH MCCONNELL, Kentucky 

PAT ROBERTS, Kansas 

JAMES M. TALENT, Missouri 

CRAIG THOMAS, Wyoming 

RICK SANTORUM, Pennsylvania 

NORM COLEMAN, Minnesota 

MICHEAL D. CRAPO, Idaho 

CHARLES E. GRASSLEY, Iowa 

TOM HARKIN, Iowa 

PATRICK J. LEAHY, Vermont 

KENT CONRAD, North Dakota 

MAX BAUCUS, Montana 

BLANCHE L. LINCOLN, Arkansas 

DEBBIE A. STABENOW, Michigan 

E. BENJAMIN NELSON, Nebraska 

MARK DAYTON, Minnesota 

KEN SALAZAR, Colorado

MARTHA SCOTT POINDEXTER, Majority Staff Director 

DAVID L. JOHNSON, Majority Chief Counsel 

STEVEN MEEKS, Majority Legislative Director 

ROBERT E. STURM, Chief Clerk 

MARK HALVERSON, Minority Staff Director 

(II) 

(III)

C O N T E N T S 

Page

HEARING(S):

To Consider the Nomination of Mr. Reuben Jeffery III and the renomination 

of Mr. Walter Lukken to be Commissioners of the Commodity Futures 

Trading .................................................................................................................. 01

Thursday, June 9, 2005

STATEMENTS PRESENTED BY SENATORS 

Chambliss, Hon. Saxby, a U.S. Senator from Georgia, Chairman, Committee 

on Agriculture, Nutrition, and Forestry ............................................................. 01

Lugar, Hon. Richard G., a U.S. Senator from Indiana ......................................... 02

Salazar, Hon. Ken, a U.S. Senator from Colorado ................................................ 03

WITNESSES 

Jeffery, Reuben, III, Special Assistant to the President, National Security 

Council, Washington, DC .................................................................................... 06

Lukken, Walter, L., Commissioner, Commodity Futures Trading Commission, 

Washington, DC ................................................................................................... 04

APPENDIX 

PREPARED STATEMENTS: 

Cochran, Hon. Thad ......................................................................................... 18

Crapo, Hon. Mike ............................................................................................. 20

Jeffery, Reuben III ........................................................................................... 21

Lukken, Walter L ............................................................................................. 23

DOCUMENT(S) SUBMITTED FOR THE RECORD: 

Jeffery, Reuben III (biography) ....................................................................... 45

Lukken, Walter L. (biography) ........................................................................ 28

QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD: 

Harkin, Hon. Tom ............................................................................................ 84

Crapo, Hon. Mike ............................................................................................. 85

(1)

TO CONSIDER THE NOMINATION OF MR. REUBEN JEFFERY III AND THE RENOMINATION 

OF MR. WALTER LUKKEN TO BE COMMISSIONERS OF THE COMMODITY FUTURES 

TRADING 

THURSDAY, JUNE 9, 2005

U.S. SENATE

COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

Washington, DC 

The committee met, pursuant to notice, at 2:05 p.m., in room 

SR–332, Russell Senate Office Building, Hon. Saxby Chambliss, 

chairman of the committee, presiding. 

Present or submitting a statement: Senators Chambliss, Lugar, 

Harkin, and Salazar. 

STATEMENT OF HON. SAXBY CHAMBLISS, A U.S. SENATOR 

FROM GEORGIA, CHAIRMAN, COMMITTEE ON AGRICULTURE, 

NUTRITION, AND FORESTRY 

The CHAIRMAN. This hearing will come to order, and let me start 

by apologizing for keeping everybody from starting at 2 o’clock. We 

had a little delay regarding the presiding officer in the chamber, 

as Senator Lugar can appreciate. Thank you for your patience. 

Good afternoon. We are pleased to be here today to consider the 

nomination of Mr. Reuben Jeffery III and the renomination of Mr. 

Walter Lukken to be Commissioners of the Commodity Futures 

Trading Commission. In addition to being nominated as a Commissioner, Mr. Jeffery has also been nominated to serve as Chairman 

of the CFTC. The qualifications of both of these nominees to serve 

on the Commission speak for themselves. Mr. Lukken has served 

as a Commissioner at the CFTC since 2002 and has done a great 

job during his tenure. Previously, Mr. Lukken was a staff member 

of this committee, handling futures and agricultural banking issues 

for Chairman Lugar. Mr. Jeffery has most recently served as Special Assistant to the President and Senior Director for International Economic Affairs at the National Security Council. Previously, he held the post of DC Representative of the Coalition Provisional Authority at the Pentagon. Before joining the Government, 

Mr. Jeffery spent 18 years working in the financial sector for Goldman Sachs & Company. 

It is a pleasure to have both of you here today before this committee, and I commend the President for his selection of such qualified individuals. We look forward to hearing from you as we move 

your nominations forward. 

2

Senator Harkin was on the floor as I left, and when he gets here, 

if he does decide to come over here, we will give him an opportunity for any opening statement. First of all, before we turn to 

Senator Lugar, gentlemen, would both of you stand and raise your 

right hands? Do you swear that the testimony you are about to 

present is the truth, the whole truth, and nothing but the truth, 

so help you God? 

Mr. LUKKEN. I do. 

Mr. JEFFERY. I do. 

The CHAIRMAN. Individually, do you agree that, if confirmed, you 

will appear before any duly qualified and constituted committee of 

Congress if so asked? 

Mr. LUKKEN. I do. 

Mr. JEFFERY. I do. 

The CHAIRMAN. All right. Thank you very much. 

I will now turn to my good friend and former chairman of this 

committee, now chairman of the Foreign Relations Committee, for 

any statement he would wish to make. Senator Lugar? 

STATEMENT OF HON. RICHARD LUGAR, A U.S. SENATOR FROM 

INDIANA 

Senator LUGAR. Thank you very much, Mr. Chairman. This is a 

privilege to introduce, first of all, my friend Walt Lukken. He is a 

native of Richmond, Indiana, with good Hoosier roots, has a bachelor of science degree with honors from the Kelly School of Business at IU University, went on for further work at Lewis and Clark 

Law School in Portland, Oregon, with a juris doctorate degree from 

that institution; married Dana, and they have a son, William. His 

life has been exciting as a family man in addition. 

He came as an intern to our office in 1990, and we discovered 

immediately that he had running ability. And that, Mr. Chairman, 

is important because we field a team each year in this Capitol challenge business. That drew attention to Walt immediately. 

It led to his further employment in 1993 as a regular staff member. 

[Laughter.] 

Senator LUGAR. A very distinguished tenure for 5 years in that 

capacity until, as you pointed out, Mr. Chairman, he came to this 

committee as a member who worked on the CFTC issues and other 

things related to that during the time of my chairmanship. He was 

instrumental in this extraordinarily important act, the Commodity 

Futures Modernization Act of 2000, which took quite a long time 

for us to pass. Everybody in the industry and those witnessing the 

hearing today will recall those struggles. It made an enormous difference in both the foundations of the exchanges, our relations with 

this committee and the Banking Committee, for example, and other 

committees who have had jurisdiction with financial affairs. 

As you visit the exchanges now—and I have had that privilege—

they commend the Act as one that has made a large difference in 

terms of the quality of service they are able to give to the American 

people and the transparency to the world. Walt was instrumental 

all the way through in carrying the burden of that. It was not surprising that he attracted the attention of the President for his first 

nomination to a seat on the CFTC, and I am especially pleased the 

3

President has shown this confidence in him by bringing him back 

to the attention of our committee today. 

I would like also, while I have the floor, Mr. Chairman, to mention our pleasure at Reuben Jeffery III who is here as the President’s nominee to chair the CFTC as well as to have membership 

on the Commission. He brings, as you pointed out, Mr. Chairman, 

extensive experience from the world of investment banking, most 

recently with Goldman, Sachs & Company, which he left in the 

aftermath of September 11, 2001, to serve as a Special Adviser to 

our President for Lower Manhattan development. He joined, very 

courageously, the staff of Jerry Bremer over in Baghdad as a senior 

adviser working on a variety of economic development initiatives. 

A member of our Foreign Relations staff, Patrick Garvey, knew Mr. 

Jeffery well and has testified to his remarkable abilities and his 

achievements during his tenure in Iraq, and we salute him for 

that. 

He continued work on the Iraq mission as Executive Director of 

the Coalition Provisional Authority’s office in the Pentagon and 

most recently has been Special Assistant to the President and Senior Director for International Economic Affairs at the National Security Council. He has a remarkable background of public service 

as well as private expertise, and I am excited the President has 

nominated him for this position. 

The CHAIRMAN. Thank you very much, Senator. I think it goes 

without saying that since the Ag Committee has jurisdiction over 

CFTC, Mr. Lukken is now an official member of the Ag Committee 

running team. 

[Laughter.] 

The CHAIRMAN. That may have to be a condition of this confirmation now, Walt. 

Thank you very much, Senator Lugar, and, gentlemen, I think it 

goes without saying that a recommendation coming from one of the 

deans of the Senate and one of the true gentlemen of the Senate, 

one of the men that I have the most respect for, not just in this 

body but any body in the country. That says an awful lot for you, 

and we appreciate those comments Senator Lugar. 

Senator Salazar, would you like to offer any opening comments? 

STATEMENT OF HON. KEN SALAZAR, A U.S. SENATOR FROM 

COLORADO 

Senator SALAZAR. Thank you very much, Mr. Chairman and Senator Lugar. I want to thank you, Mr. Chairman, for holding this 

hearing, and, Mr. Jeffery, for your nomination, and, Mr. Lukken, 

for your nomination as well. I congratulate both of you for your 

past service as well as your future service, along with your families 

who are here, because I know that all of us cannot do what we do 

in our life if it were not for the wonderful support that we have 

from our families. 

I welcome both of you and your families, and I look forward to 

working with both of you in regard to your respective capacities at 

the CFTC. In your testimonies you both speak of maintaining the 

integrity of the CFTC by ensuring that the Commission works in 

a fair and transparent manner. I completely agree with you on that 

goal. I strongly believe in government accountability and oversight, 

4

and I look forward to working with the Commission to ensure that 

they have the tools in place to prohibit any sort of market manipulation or fraud. 

I congratulate the Commission on their good work. I am sure 

that with both of you we will continue to move the Commission forward in the same positive manner as it has over the last several 

years. 

I congratulate you. I think you are going to be among the many 

nominees that receive overwhelming bipartisan support. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Gentlemen, we again welcome you here. I understand that per the understanding of the two of you, Mr. Lukken, 

you are going to go first with your presentation, followed by Mr. 

Jeffery. Welcome, and we look forward to hearing from you. 

STATEMENT OF WALTER L. LUKKEN, COMMISSIONER, COMMODITY FUTURES TRADING COMMISSION, WASHINGTON, DC 

Mr. LUKKEN. The protocol, by the way, of starting today was decided by the flip of a coin. I just want to note that for the record. 

Mr. Chairman, Senator Lugar, Senator Salazar, I’m honored to 

address this committee regarding my nomination to the Commodity 

Futures Trading Commission. I appreciate the kind introduction by 

my former boss, who still serves as my role model on good decisionmaking. 

I would note for him that we have started our own running team 

down at the CFTC, and we have poached a couple members of the 

Ag Committee. Eric Juzenas and Dave Stawick are now running 

for us at the CFTC, so be careful. 

[Laughter.] 

Mr. LUKKEN. I would like to recognize my wife, Dana, as well as 

my sister-in-law, Diana, in the audience, as well as several supportive friends and Commission colleagues in the audience today, 

including my hard-working staff who are sitting behind me, as well 

as Commission colleagues, including Commissioner Hatfield, who is 

sitting over to my right, and Commissioner Dunn, who is straight 

behind me—all familiar faces to those in the Senate and this committee. 

Last, I am honored to join Reuben Jeffery, my fellow nominee, 

and I hope this hearing is only the first of many times that we can 

collaborate on interests of the Commission. 

It has been almost 3 years since my first nomination hearing 

here at the committee, and that short expanse of time has brought 

significant change within the industry. In this period, the annual 

volume traded on U.S. futures exchanges surpassed one billion contracts for the first time and, incredibly, it is on pace to double that 

amount by year’s end. Also worth noting is the common clearing 

platform by the Chicago Board of Trade and the Chicago Mercantile Exchange, which is expected to bring almost a billion and 

half dollars’ worth of capital efficiencies to the market. The CME 

also became the first publicly traded U.S. exchange in either the 

equities or derivatives field during this time, and investors in this 

pioneering effort have been rewarded with a 430–percent increase 

in its share price. My tenure has also coincided with the arrival of 

new futures exchanges and products, including the launch of Eurex 

5

US and the listing of security futures products that happened as 

a result of the CFMA’s passage. It is hard to believe that all this 

progress has occurred in such a short period of time that I have 

been down at the Commission. One can only imagine what this industry will look like in 2010, when the next term for which I am 

being considered expires. 

As regulators, we cannot stem the uncertainties of change but 

must adapt our models to fulfill the public mission entrusted to us. 

Thankfully, Congress—and, in particular, members of this committee—had the foresight to provide this agency with the flexible 

tools needed to oversee the marketplace with the passage of the 

Commodity Futures Modernization Act of 2000. 

The nature of these markets is to innovate, to compete, and to 

arbitrage at lightning speed. In crafting the CFMA, policymakers 

recognized that a regulatory structure should leverage these market characteristics to the advantage of the public interest and allow 

the agency to better anticipate problems. 

Much has been made in hearings of the flexibility provided businesses by the CFMA, but the adoption of a core principles model 

equally enhanced the Commission’s ability to get in front of developing regulatory problem at a time of limited resources. 

The CFMA may have instructed our agency to walk softly in tailoring our regulations, but it also gave us the directive to carry a 

big stick when the law is broken. Since the passage of the CFMA, 

our agency has been aggressive in its enforcement efforts—whether 

shutting down boiler rooms who are defrauding the public, working 

with States and Federal authorities to lock up criminals, or pursuing corporate malfeasance as part of the President’s Corporate 

Fraud Task Force. As a result of our investigation of manipulation 

in the energy markets, the Commission has settled with 27 companies and 20 individuals for nearly $300 million in fines. Such robust law enforcement authority serves as a powerful deterrent to 

wrongful activity and represents an important component of our 

overall regulatory program. 

Mr. Chairman, I am confident that the Commission is well positioned to meet approaching challenges, but would like to briefly 

mention some developing trends that will test this proposition. Unlike even 5 years ago, competitive forces are leading market participants to utilize alternative legal means to protect their interests, 

including the use of intellectual property rights and antitrust law—

both matters of first impression for our agency that will require 

clarification of our responsibilities. 

Another challenge facing our agency is the globalization of our 

markets and the regulatory structures that underlie them. Whether opening markets to U.S. businesses or tracking down criminals 

that hide their ill-gotten gains overseas, the CFTC must work in 

close tandem with its foreign counterparts to ensure that the global 

community abides by the highest regulatory principles. As Chair of 

the CFTC’s Global Markets Advisory Committee, I am committed 

to this end and will work with industry members and foreign regulators to guarantee a more harmonious global regulatory structure. 

In conclusion, Mr. Chairman, I am so proud to play a small role 

in this important and growing segment of our economy and to work 

side by side with the talented staff of the CFTC. With these changVerDate 0ct 09 2002 14:14 Mar 31, 2006 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 C:\DOCS\22644.TXT TOSHD PsN: LAVERN
6

ing markets, work remains for policymakers, and I am eager to be 

given the opportunity to roll up my sleeves and lend a hand in that 

effort, if confirmed by this body. 

Thank you for allowing me to testify, and I look forward to answering any of your questions. 

[The prepared statement of Mr. Lukken can be found in the appendix on page 23] 

[The biographical information of Mr. Lukken can be found in the 

appendix on page 28] 

The CHAIRMAN. Thank you very much, Commissioner Lukken. I 

am just wondering if you are going to have time to serve if you are 

going to be running for me, for Lugar, as well as the CFTC. 

[Laughter.] 

The CHAIRMAN. Thank you. 

Mr. Jeffery? 

STATEMENT OF REUBEN JEFFERY III, SPECIAL ASSISTANT TO 

THE PRESIDENT, NATIONAL SECURITY COUNCIL, WASHINGTON, DC 

Mr. JEFFERY. Mr. Chairman, Senator Lugar, Senator Salazar, 

thank you for the privilege of appearing before you today as nominee for Commissioner and Chairman of the Commodity Futures 

Trading Commission. 

Thank you, Senator Lugar, for that very kind introduction. I appreciate it. I would also like to thank the President for affording 

me this opportunity to be considered by your committee. Thanks 

also to your professional staff, which has been very responsive in 

helping me through the relevant preparations. Finally, I’d like to 

thank each of the Commissioners and the Commission staff, who 

have been generous with their time and patient in helping me prepare. In particular, the Acting Chairman has been especially gracious and forthcoming with information and encouragement. She 

couldn’t be here with us today, but I thank her very much. 

I am proud to have with me today my wife, Robin, and our children, Jocelyn, Ben, and Bob, as well as various other friends and 

colleagues. I thank them all for taking the time to be here this 

afternoon. 

It is a great honor to be considered for the leadership of the 

CFTC in an era of ever increasing globalization, competition, and 

innovation across the broad sweep of the capital and commodities 

markets, and in particular, those within the ambit of the jurisdiction of the Commission. 

Prior to joining the administration, I spent 20 years in the financial world. During most of that period, I specialized in the financial 

sector, working with banks and insurance companies and other financial service entities, both in the United States and overseas. 

Through that work, I developed an appreciation of the importance 

of properly functioning markets in price discovery, risk management, competition, and innovation. I also observed that these markets are only effective when participants, both direct and indirect, 

have great confidence in the integrity and fairness of their operation. 

Whether the market is for an option on an interest rate or for 

a future on an agricultural commodity, the key elements of market 

7

efficiency and integrity are the same—willing buyers and sellers; 

the free flow of information; the financial soundness of the parties; 

and the perception on the part of both market participants and 

those otherwise affected by market activity that pricing and transactional information is derived in a fair and transparent manner. 

The Commission plays an absolutely crucial role in creating the 

conditions whereby those involved in commodity futures and options markets can have confidence in those markets. They know 

that there is a referee, and they know that fouls will be called. If 

confirmed as Commissioner and Chairman, I can assure you that 

I would work diligently with fellow Commissioners and Commission staff to fulfill the Commission’s mandate to maintain the integrity of these markets. 

For the past 3 years, I have had the great privilege of working 

at both the White House and the Pentagon on a variety of national 

security and domestic and international economic policy issues. I 

have had the opportunity to work shoulder to shoulder with public 

servants from many departments and agencies, with men and 

women in uniform, and with appointed and elected officials. It will 

come as no surprise to each of you, Mr. Chairman and Senator 

Lugar, who have devoted the better part of your entire lives to public service, how impressive and dedicated are these individuals who 

have given their careers to working for the U.S. Government and 

the American public. I know that the men and women of the CFTC, 

like so many public servants, embody this ethic of service and commitment to mission. If confirmed, I would assume leadership of the 

Commission with a great sense of responsibility and tremendous 

pride in the organization. 

If confirmed, I would look to my fellow Commissioners, this committee, and various market participants for guidance as to issue 

identification and priorities. However, amongst my highest priorities would be the following three: 

First, to proceed expeditiously in working with this committee as 

you reauthorize the Commodity Exchange Act. This, of course, follows the Commodity Futures Modernization Act of 2000, which, by 

any measure, was a path-breaking and in some senses revolutionary piece of legislation of which this committee should be very 

proud. 

Second, to vigorously execute the CFTC’s legislative mandate to 

protect market participants through aggressive enforcement and 

maintain market integrity through appropriately calibrated market 

oversight and supervision. To this end, if confirmed, I would continue the efforts of the Commission to work closely with other departments and agencies in areas of common interest. 

Finally, I would work in the tradition of prior Chairmen to set 

a high bar of professional excellence within the Commission and 

buildupon a culture of teamwork and productivity, while maintaining the highest ethical standards. 

In closing, I would add that among many lessons learned during 

the past 3 years, I have developed a keen appreciation for the need 

for close working relationships with Congress and other departments and agencies on areas of mutual concern. If confirmed, I look 

forward to working closely with my fellow Commissioners, this 

committee, Congress, and other members of the President’s WorkVerDate 0ct 09 2002 14:14 Mar 31, 2006 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 C:\DOCS\22644.TXT TOSHD PsN: LAVERN
8

ing Group on Financial Markets, on fulfilling the important mandate of the CFTC. 

Thank you very much, Mr. Chairman, Senator Lugar. 

[The prepared statement of Mr. Jeffery can be found in the appendix on page 21] 

[The biographical information of Mr. Jeffery can be found in the 

appendix on page 45] 

The CHAIRMAN. Thank you very much, Mr. Jeffery, and we appreciate those kinds words coming from you. Over the last 4 years, 

you have not only been a great public servant yourself, but what 

a fascinating 4 years you have had. Thank you particularly for your 

service to freedom and democracy relative to the very important 

work you did at the Pentagon working for the reestablishment of 

freedom in Iraq. 

Senator Lugar, I will be happy to defer my questions to you for 

any that you might have. 

Senator LUGAR. Well, thank you, Mr. Chairman. 

Let me just note that in your testimony, Mr. Lukken, you point 

out that the Commission, quite properly, has been careful not to rewrite the law or to expand excessively by interpretation what is involved, and yet at the same time you have been rigorous in enforcement of the law. The numbers of prosecutions, investigations that 

have led really to malefactors being excised out of the system has 

been impressive throughout this period. 

One area that we have explored in committee hearings over some 

time—and this precedes the law of 2000–-is the work of the Commission in the energy area. I would like to hear really from both 

of you what you feel the future of the CFTC is in this area. I bring 

this up specifically because in previous iterations of CFTC legislation, energy was often specifically exempted or excepted from the 

whole business. This was, in fact, because of debate within this 

committee or with members of the Banking Committee or with others who were involved in the Congress who said grain is one thing 

and you might expand this to currencies, that is another, but get 

out of the energy field, don’t touch electric power, don’t get involved 

with coal or oil or what have you. 

Now, when the Enron problems arose, many people began to ask 

in public fora: Where were the regulators? Who should have been 

responsible or prescient with regard to all this? Granted, it was extremely complex, and people are still reading books like ‘‘The 

Smartest Guys in the Room,’’ or what have you, trying to figure out 

how all of this manipulation occurred. The fact is huge changes occurred in our economy. Various States were afflicted with all sorts 

of difficulties. Even now it is not really clear exactly what anybody 

would do about all this. 

Now, you are not supposed to rewrite the law. That happens over 

here on the congressional side. You have been, however, active in 

the energy field to some extent. What I would like to know from 

both of you, first of all, is: How has the energy regulation business 

changed since 2000, in this intervening period of 5 years or so? 

What recommendations do you have as to how it ought to change 

for the benefit of the American people, not for the Commission or 

for this committee, but really who ought to be in charge? 

9

Mr. LUKKEN. Thank you, Senator. I read ‘‘The Smartest Guys in 

the Room,’’ or the book that you referred to, on your recommendation. The Enron crisis was obviously mind-boggling. Energy, as you 

note, is an important part of our economy, something that affects 

producers in particular quite a bit. It is something that we spend 

a lot of time on at the Commission. 

In regards to what our role might be in that area, obviously you 

mentioned the enforcement role. When I first came down to the 

Commission in 2002, some of this was a case of first impression. 

We hadn’t done much in this area up until then. Part of it was that 

the Act had just been enacted, the 2000 Act, and we were still 

fleshing out what that meant. Really, the investigations in regards 

to the energy crisis had really just started to roll. Since then, obviously, we have collected quite a bit of money. We went after Enron 

and received a $35 million penalty against them for manipulating 

our markets. We have collected nearly $300 million in fines against 

energy companies. It is not only this post-crisis stuff we are talking 

about. We also have significant pre-crisis things that we do at the 

Commission as well. 

About 2 years ago, we did a rulemaking in the 2(h)(3) area, 

which you referred to as exempt markets. This is the area in which 

the CFTC has some limited authority. This was meant to try to 

target regulatory authority in this area. I think we have put some 

flesh on the bone here. We have required that if these markets 

start to become price discovery markets, we are allowed to ask for 

certain information from these marketplaces. We have special call 

authority, subpoena authority. Our fraud and manipulation authorities apply to these markets. You know, I think the CFTC has 

made progress in this area. 

We do, as you note, have certain recommendations in this area. 

Last year, in regards to the energy bill, we did make some recommendations to the Energy Committees in fixing our 4b authority, which would allow us to go after what they term principal-toprincipal trades in this area. It also clarified our manipulation authority in regards to this area. I think these are good recommendations, and we stand firm behind them. Having been down there a 

couple years, I feel that our surveillance of these markets has improved. 

Mr. JEFFERY. Senator, thank you. This is obviously an important 

area to the national economy and consumers around the country. 

It is one in which, if confirmed, I as Commissioner and Chairman 

would want to dive deeply into it to make sure I understood the 

relevant policy and regulatory considerations. 

I think it is worth underscoring what Senator Lugar said, and 

that is the vigor of the enforcement efforts of the CFTC to date 

when they have come across anything that looked like manipulative market behavior in the energy markets. Separately, the Commission has what is known as its Large Trader Reporting System. 

For a lot of these energy commodities, the reference pricing is determined on the NYMEX and other exchanges. The CFTC staff 

monitor closely trading patterns. A staff of trained economists studies those patterns, matches them up against known supply demand 

characteristics in the underlying industries and other factors with 

10

a view to looking for any inconsistencies and anticipating potential 

problems. 

Certainly, if confirmed, these are areas of endeavor for the Commission on which I would place a high priority. 

Senator LUGAR. Well, thank you very much for those responses. 

I had the privilege of visiting the NYMEX exchange earlier this 

year, and it is impressive, the work that they are doing and giving 

pretty good intelligence to our entire economic system of the worldwide economic patterns in the best traditions of the futures markets. At the same time, they at least have the impression that you 

are watching them closely, that this is a short-leash situation because of the pressures that have come really from adverse publicity 

on energy markets. Thank you very much for those answers. 

Thank you, Mr. Chairman, for allowing me to ask these questions. 

The CHAIRMAN. Thank you. 

Senator Harkin has now joined us, and Tom, I will turn to you 

for any comments or questions you wish to make. 

Senator HARKIN. Thank you very much, Mr. Chairman, and my 

apologies for being a little bit late here this afternoon, but I wanted 

to be here to join you in welcoming Commissioner Lukken—someone who is not unknown to us, who has been around for a long 

time in a great capacity, right, Senator Lugar—and Mr. Jeffery, 

our nominee for being the new chairman. If these nominees are 

confirmed, the full complement of five commissioners will be in 

place on the CFTC, and I believe that the Commission can best 

conduct its regulatory and oversight responsibilities with all five 

commissioners, so I hope we can move this expeditiously. 

As I said, Commissioner Lukken is well known by this committee 

from his years of service here with Senator Lugar. He has ably 

served as commissioner since August of 2002. Walt has been at the 

center of complex issues of globalization and future markets. His 

experience will be invaluable, and I am pleased that the President 

nominated Mr. Lukken for an additional term. 

Though I do not know Mr. Jeffery personally, I have looked at 

your record and you have an accomplished record in the private 

sector, more recently in Government service, and I believe that 

your experience in the international capital markets and corporate 

finance give you the knowledge of those issues that will be most 

helpful for the Commodity Futures Trading Commission. 

Mr. Chairman, thank you for calling this hearing. I look forward 

to helping do whatever I can to get these nominees through as expeditiously as possible. 

The only question I might have for Mr. Jeffery, since you came 

from the private financial markets, this is a softball question. 

[Laughter.] 

Senator HARKIN. Real softball. Will we keep our futures markets 

here in America or will they go overseas? 

Mr. JEFFERY. Sir, thank you very much for that question. One of 

the great benefits and challenges of the markets in which we operate today is globalization. It’s with us in the futures markets and 

the options markets and the commodities markets, in just about everything we do. 

11

As commissioner, if confirmed, this is an area where the commissioners to date have spent a lot of time. We as commissioners going 

forward would continue to spend time in this area working to accomplish a number of things. Most importantly, to make sure, as 

markets globalize, if you will, that U.S. investors, U.S. market participants—exchanges, individuals, people who rely on those markets—enjoy the protections that this committee has enacted 

through the provisions of the Commodity Exchange Act. 

It’s something, your question is something that touches on an 

area which is very broad, very important, and one that will continue to evolve in the months and the years to come and over 

which you can be sure that I as a commissioner, joining the other 

commissioners, will give our best efforts to try to understand, anticipate and manage. 

Senator HARKIN. I appreciate that. I read your statement about 

the global market. We know that, and we have seen that happen 

in futures, options, derivatives, everything, but as you pointed out 

in your statement—I will not read it—that there have to be rules 

to the game. 

Mr. JEFFERY. Correct. 

Senator HARKIN. There have to be, as you say, many willing people in there, buyers and sellers. I have always felt one of the most 

important things is transparency. If you have transparency, and if 

you have many willing buyers and sellers, then you are OK as long 

as you have some rules to abide by. I just hope that as these markets are globalized that the rules that we have had, people invest, 

people do use our markets because of that. As long as we maintain 

that and set that as our standard for other markets to associate 

with us, then I have no fear that we will keep our futures industry 

here in the United States. 

I am just saying as you proceed as commissioner and with the 

Commission, just insist upon the open market, the transparency 

that people have come to rely upon here in our futures industry in 

this country. I thank you very much, Mr. Jeffery, look forward to 

working with you in the future. 

Walter, congratulations. 

Mr. LUKKEN. Thank you, Senator Harkin. 

The CHAIRMAN. Gentlemen, I want to pick up on something Senator Lugar was talking about, and that is this manipulation issue. 

During our hearings on the reauthorization of CFTC, we had a 

number of witnesses who talked about this issue. Mr. Lukken, we 

talked about the way the CFTC does this, and frankly, I was pretty 

impressed with the fact that on a regular basis you pick out trades 

at the height of a spike or the bottoming out after a spike, to try 

to figure out whether or not there is any manipulation there. That 

was some pretty impressive testimony that came out of the CFTC, 

as well as the study that has been done by the NYMEX, which essentially did the same thing. 

Mr. Jeffery, when you get there, I urge you to take a look at that 

if you have not had a chance to already because it is fascinating, 

first of all, and it is pretty interesting information that is contained 

in that study. I think it gives us a good picture of when somebody 

might try to manipulate the market, and if they do, here is how 

they do it. The conclusion by both CFTC, obviously, and NYMEX 

12

was that there was no manipulation of the market, that it was basically supply and demand. Certainly we hope that is the case hereafter, but without your oversight, we will not know that. 

I will tell you, Mr. Lukken, that the committee as a whole was 

impressed by that activity. 

I would be remiss if we did not compliment the service of Interim 

Chairman Ms. Brown-Hruska. She has testified before this committee, been very available to us, and I am sorry Sharon is not 

here today. Please pass on to her our appreciation to her for the 

great service as the interim chairman. 

Mr. Jeffery, let me start with a couple of questions for you. You 

have an impressive resume in the financial markets, and Senator 

Harkin just asked you a little bit about this. Generally, how would 

you see your past work experience as being a benefit to you at 

CFTC? 

Mr. JEFFERY. Thank you, Mr. Chairman. We commented a few 

moments ago in the context of attempting to address Senator Harkin’s question on some experience in international capital markets. 

I think in my opening remarks I talked a little bit about knowledge 

I like to think I have acquired over the years about markets in general, albeit the markets in which I’m most knowledgeable tend to 

be markets in financial products, foreign currencies, interest rates, 

bonds, et cetera. The underlying principles of transparency, of the 

free and open exchange of information, are common to those markets, to agricultural markets, to metals markets, and other markets. 

Finally, my primary area of expertise over the years was in the 

area of financial institutions, banking institutions, insurance companies, and other financial institutions. They are among both the 

largest originators and users of many of the futures and options 

products and instruments that trade on the markets that are within the purview of the Commission’s jurisdiction. I think it’s that 

sort of combination of experiences that will help me do a better job 

if confirmed as commissioner and chairman in evaluating these 

markets, anticipating challenges, and dealing with problems as 

they arise. 

The CHAIRMAN. Regarding the promotion of cross-border competition, Phase II of the Global Clearing Link between the Clearing 

Corporation and Eurex Clearing has been pending at the Commission since March. The comment period has closed, but the Agency 

has not yet promulgated its ruling on this issue. Once you take up 

your duties as chairman, will you ensure the committee that consideration of this pending ruling will be a priority? 

Mr. JEFFERY. Mr. Chairman, yes. It’s an issue with which I am 

generally familiar; but not specifically familiar, but to the extent it 

remains live and on the docket for the Commission, I will certainly 

make it a high priority. 

The CHAIRMAN. One issue which has been brought to the committee’s attention is the need for definitions added in the Commodity 

Exchange Act for futures contracts on broad-based security indexes. 

Do you feel the addition of these definitions is necessary? If so, 

why? 

Mr. JEFFERY. Mr. Chairman, this is an issue with which I do not 

have even general familiarity. The whole subject matter of security 

13

futures products, which were essentially made legal, or no longer 

illegal, by the Commodity Futures Modernization Act of 4 years 

ago, remains in need of further definition and discussion. 

Were I confirmed as chairman and commissioner, I would look 

forward to working with my fellow commissioners, Commission 

staff, independent market participants, the other agencies in fine 

tuning or establishing the rules of the road, be it the definition of 

broad-based index or otherwise by which these products can trade 

with appropriate market participant protections. 

The CHAIRMAN. In 2000 Congress made substantial changes to 

the Commodity Exchange Act with the passage of the Commodity 

Futures Modernization Act. The CFMA provided legal certainty for 

the over-the-counter swaps market and streamlined the regulatory 

process for exchange traded futures markets. The CFMA also shifted CFTC away from a prescriptive one-size-fits-all rules-based regulatory approach to a more flexible approach that provides for 

varying levels of regulation depending on whether the market 

users are commercially sophisticated, and also whether the underlying commodity is more likely to be susceptible to manipulation. 

Do you feel the CFMA’s approach to regulating futures markets 

is an appropriate regulatory model? Second, do you feel there are 

any additional changes that should have been made in 2000 with 

the passage of the CFMA? Last, do you feel that any further 

changes to the CEA are needed in this reauthorization of CFTC? 

Mr. JEFFERY. Thank you, Mr. Chairman. There are a number of 

parts to that question. The first part, is it an appropriate model? 

I think the experience to date and the facts speak for themselves. 

The CEA, as amended by the Commodities Futures Modernization 

Act of 2000, is generally regarded as a hallmark of legislative and 

regulatory success. The markets have grown substantially far beyond most people’s expectations at the time of the amendments and 

without major market disruptions, challenges or issues having developed over that period. 

In terms of changes, I am aware of some of the changes that 

have been discussed and continue to be discussed with respect to 

the reauthorization of the Act. I would look forward again to working with my fellow commissioners, this committee, committee staff, 

Commission staff, and industry participants, to further develop a 

legislative proposal for this committee so you could advance the reauthorization with all deliberate speed. 

As far as other changes, other than the ones that have been 

talked about already in the context of discussions that have taken 

place, I’m not aware of any, but that doesn’t mean that I might not 

become aware of some as I get deeper into the specifics of the factual context of these markets and the policy issues involved, which 

I would hope to do if confirmed as a commissioner. 

The CHAIRMAN. Let me prompt you on one of those. A case decided in the U.S. Court of Appeals for the Seventh Circuit, CFTC 

v. Zelener, has sparked some controversy among the futures industry. Many industry participants feel that a legislative change is 

needed to correct the problem they believe exists with cases like 

Zelener. What is your opinion on the necessity of a legislative 

change to address the Zelener case, and what do you feel, if not a 

legislative change, would be the best way to address that issue? 

14

Mr. JEFFERY. Mr. Chairman, I’m not equipped to comment or answer that question specifically at this stage. I would say, coming 

back to basic principles, a core mission of the Commission is to 

make sure that we preserve the integrity of these markets, the 

markets over which the Commission has jurisdiction. To the extent 

there are loopholes or exceptions that are broadly acknowledged to 

be out there, that violate the letter and the spirit of the law, certainly those are areas which are deserving of Commission attention. Whether a legislative fix is required or not, I would defer 

judgment. 

The CHAIRMAN. Mr. Lukken, you chair the Global Markets Advisory Committee, whose goal is to obtain input on international 

market issues that affect the integrity and competitiveness of U.S. 

markets and U.S. firms engaged in global business. Through this 

time of globalization, what are some of the issues that CFTC faces 

in this area? 

Mr. LUKKEN. Thank you, Mr. Chairman. I think the principal 

one that we’re seeing over and over again is opening markets to 

U.S. businesses, and making sure that the highest standards of 

regulation appear across any of the markets that U.S. businesses 

might be participating in. We work closely with the International 

Organization of Security Commissions, (IOSCO) overseas to set 

these principles, to get people to sign multilateral MOUs so that 

their laws meet the standards that U.S. participants are used to. 

This is a common theme. We work on bilateral agreements, multilateral agreements with different countries in order to make sure 

that those who are entering into transactions that may cross borders are protected under the laws that we are used to in the 

United States. 

I think the second issue that seems to be a common theme, especially in the commodities markets, is China. Certainly China is 

going to be a large demand market for U.S. agricultural commodities. One thing that we’re looking at is providing the Chinese with 

expertise on how they might develop their derivatives markets. I’ve 

been working with those at the Treasury Department to make 

sure, as they’re in discussions with the Chinese on opening up the 

foreign exchange markets to go from a fixed rate to a flexible rate, 

to make the case that derivatives markets might help in that transition, and as they go forward, that derivatives markets might give 

participants in those markets the ability to manage risk. 

This might allow the Chinese to be a little more forthcoming in 

going toward a flexible derivatives markets. We had Ambassador 

Speltz, who was our emissary in China, come and talk to our Global Markets Advisory Committee, as well as Randy Quarles, Assistant Secretary of International Affairs at Treasury. I would say that 

both opening markets and China seem to be subject martters that 

everybody is talking about. I know FIA and the industry is holding 

a conference in China in August, and so I’m looking forward to 

working with foreign regulators as well as the industry on resolving some of these issues. 

The CHAIRMAN. Mr. Lukken, in your article, ‘‘Reauthorization: 

Let the Debate Begin,’’ published in the September 2004, Volume 

of the Futures and Derivatives Law Report, you wrote that the 

Congress should consider clarifying CFTC’s fraud authority over reVerDate 0ct 09 2002 14:14 Mar 31, 2006 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 C:\DOCS\22644.TXT TOSHD PsN: LAVERN
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tail, foreign currency futures transactions in legislation reauthorizing the CFTC. The article leaves the impression that this is an 

issue that is limited to foreign exchange transactions. However, on 

October 20, 2004, as you know, subsequent to the publication of 

your article, the Court of Appeals for the Seventh Circuit denied 

CFTC’s petition to rehear the June 30, 2004 decision in CFTC v. 

Zelener. This now finalized the Court’s decision in CFTC v. 

Zelener. Have your views on this issue changed in light of the 

Zelener decision? If so, how and why? 

Mr. LUKKEN. Thank you, Senator. I published that article before 

the Zelener decision came out. We’ve had some fine tuning issues 

on the fraud issue in the Forex area, solicitors who were unregistered and able to fraudulenlty offer Forex contracts outside of our 

jurisdiction. There is some tightening that needs to go on in that 

area that has been recommended, and I think these suggestions 

are consensus items among the industry and regulators. 

The Zelener issue is a different subject matter. That court narrowed the definition of futures contracts, and that is the basis of 

our jurisdiction, as you know, and this has the potential to cause 

a great deal of difficulty as we bring fraud cases in this area. 

The House Agriculture Committee, in consultation with this committee, asked the Commission to provide language in this area. We 

did, as a Commission. Acting Chair Brown-Hruska sent forward a 

letter that said that we needed to fix the Zelener decision at a minimum in the Forex area. This is something I support, that we 

should go forward with. Since the CFMA’s passage, we’ve seen 74 

cases in Forex, quite a bit of fraud. We see recidivists in this area. 

They keep popping up over and over and over again. This is a problem at the Agency, something we need to address, and as the language said to you, at a minimum this is what we should do in this 

fraud area. 

The CHAIRMAN. Could there be negative unintended consequences of a broader than foreign exchange legislative fix for the 

problems created by Zelener. If so, what do you think they are, and 

how could we best avoid those? 

Mr. LUKKEN. Well, the issue over what is the CFTC’s jurisdiction 

was a hotly debated one in 2000, and this was dealing more on the 

regulatory side than the fraud side. There were quite a bit of discussions. It was a bipartisan discussion with the Clinton administration’s Treasury Department involved. Lee Sachs, a Dennison 

University graduate who Senator Lugar is quite familiar with was 

leading the efforts on behalf of the Clinton administration. Congress was involved in that discussion. We came to the conclusion 

there were certain areas that did not need our regulatory authority 

in—over-the-counter derivatives—and that was the deal that was 

struck in 2000. 

Obviously, the Zelener decision cuts at some of that. I think the 

area that is of most concern to us is the fraud area. I don’t think 

broadening our regulatory efforts would be helpful. This is, you 

know, the problem with trying to define what a futures contract 

is—you may be either over inclusive or under inclusive, which 

could be problematic either direction we head. I think there are 

ways to tailor our legislative fix to really go after the problem that 

16

we are perceiving or I’m perceiving down at the Commission, which 

is fraud. 

The CHAIRMAN. Well, as both of you know—Mr. Jeffery, we 

talked about this a little bit in our private conversation and Walt, 

you know from the testimony that has been before this committee 

on the reauthorization of CFTC, there is a little bit of difference 

in the community relative to just how far we ought to go relative 

to this Zelener fix. Should it be narrow, or should we broaden it 

out to some other potential areas, because if we do not, where are 

you going to be? How are you going to enforce something outside 

of the Forex measures? I would encourage you, Mr. Jeffery, with 

all due haste, to give this issue priority, and get back to this committee because Senator Harkin and I want to make sure that we 

move the CFTC reauthorization as soon as possible, and we expect 

to do that this summer. We want to do it hand in hand with you. 

There are some people who think we can do it with one sentence, 

and there are others who think we ought to go to a much greater 

length. We want to make sure we do the right thing when we do 

it. 

I wish you would give that priority and get back to us as soon 

as possible about that. 

Anything else, gentlemen? 

[No response.] 

The CHAIRMAN. Great. Well, again, thank you very much. We are 

going to leave the record open for any additional information till 

the close of business on Friday, June 10th. We hope to move these 

nominations out of committee next week, and get them to the floor. 

If anyone or their staff wishes to submit additional information, let 

us get it done by the end of Friday. 

Thank you very much. This hearing is concluded. 

[Whereupon, at 2:58 p.m., the committee was adjourned.] 

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