S. Hrg. 113–248 

REAUTHORIZATION OF THE 

COMMODITY FUTURES 

TRADING COMMISSION 

HEARING 

øBEFORE THE¿ 

COMMITTEE ON AGRICULTURE, 

NUTRITION AND FORESTRY 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

JULY 17, 2014 

Printed for the use of the 

Committee on Agriculture, Nutrition and Forestry 

( 

REAUTHORIZATION OF THE COMMODITY FUTURES TRADING COMMISSION 

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87–566 PDF 2014

S. HRG. 113–248 

REAUTHORIZATION OF THE 

COMMODITY FUTURES 

TRADING COMMISSION 

HEARING 

BEFORE THE

COMMITTEE ON AGRICULTURE, 

NUTRITION AND FORESTRY 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

JULY 17, 2013 

Printed for the use of the 

Committee on Agriculture, Nutrition and Forestry 

( 

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

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY 

DEBBIE STABENOW, Michigan, Chairwoman 

PATRICK J. LEAHY, Vermont 

TOM HARKIN, Iowa 

MAX BAUCUS, Montana 

SHERROD BROWN, Ohio 

AMY KLOBUCHAR, Minnesota 

MICHAEL BENNET, Colorado 

KIRSTEN GILLIBRAND, New York 

JOE DONNELLY, Indiana 

HEIDI HEITKAMP, North Dakota 

ROBERT P. CASEY, Jr., Pennsylvania 

THAD COCHRAN, Mississippi 

MITCH MCCONNELL, Kentucky 

PAT ROBERTS, Kansas 

SAXBY CHAMBLISS, Georgia 

JOHN BOOZMAN, Arkansas 

JOHN HOEVEN, North Dakota 

MIKE JOHANNS, Nebraska 

CHARLES E. GRASSLEY, Iowa 

JOHN THUNE, South Dakota 

CHRISTOPHER J. ADAMO, Majority Staff Director 

JONATHAN W. COPPESS, Majority Chief Counsel 

JESSICA L. WILLIAMS, Chief Clerk 

THOMAS ALLEN HAWKS, Minority Staff Director 

ANNE C. HAZLETT, Minority Chief Counsel and Senior Advisor 

(II) 

(III) 

C O N T E N T S 

Page 

HEARING(S): 

Reauthorization of the Commodity Futures Trading Commission ...................... 1 

Wednesday, July 17, 2013 

STATEMENTS PRESENTED BY SENATORS 

Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan, Chairwoman, Committee on Agriculture, Nutrition and Forestry ............................ 1 

Cochran, Hon. Thad, U.S. Senator from the State of Mississippi ....................... 3 

Panel I 

Bentsen, Hon. Kenneth E., Jr., President, Securities Industry and Financial 

Markets Association, Washington, DC ............................................................... 4 

Duffy, Terrence A., Executive Chairman and President, CME Group, Chicago, 

Illinois ................................................................................................................... 6 

Cooper, Adam (on behalf of Managed Funds Association), Senior Managing 

Director & Chief Legal Officer, Citadel LLC, Chicago, IL ................................ 7 

Kelleher, Dennis, President & Chief Executive Officer, Better Markets, Washington, DC ............................................................................................................. 9 

Roth, Daniel J., President & Chief Executive Officer, National Futures Association, Chicago, IL .............................................................................................. 11 

Panel II 

Lukken, Hon. Walter L., President and Chief Executive Officer, Futures 

Industry Association, Washington, DC .............................................................. 31 

Guilford, Gene A. (on behalf of the Commodity Markets Oversight Council), 

National & Regional Policy Counsel, Connecticut Energy Marketers Association, Cromwell, CT .......................................................................................... 33 

Heck, John M. (on behalf of the National Grain & Feed Association), Vice 

President, The Scoular Company, Omaha, NE ................................................. 35 

Russak, Donald A. (on behalf of the American Public Power Association), 

Executive Vice President and Chief Financial Officer, New York Power 

Authority, White Plains, NY ............................................................................... 36 

Colby, Jim, Assistant Treasurer, Honeywell International, Morristown, NJ ..... 38 

APPENDIX 

PREPARED STATEMENTS: 

Chambliss, Hon. Saxby .................................................................................... 50 

Cochran, Hon. Thad ......................................................................................... 53 

Bentsen, Hon. Kenneth E., Jr. ........................................................................ 54 

Colby, Jim ......................................................................................................... 65 

Cooper, Adam .................................................................................................... 68 

Duffy, Terrence A. ............................................................................................ 81 

Guilford, Gene A. .............................................................................................. 89 

Heck, John M. ................................................................................................... 121 

Kelleher, Dennis ............................................................................................... 126 

Lukken, Hon. Walter L. ................................................................................... 150 

Roth, Daniel J. .................................................................................................. 157 

Page

IV 

PREPARED STATEMENTS—Continued 

Russak, Donald A. ............................................................................................ 161 

DOCUMENT(S) SUBMITTED FOR THE RECORD: 

Stabenow, Hon. Debbie: 

American Bankers Association, prepared statement ..................................... 172 

American Cotton Shippers Association ........................................................... 175 

American Petroleum Institute, prepared statement ...................................... 179 

American Public Power Association ................................................................ 185 

Americans for Financial Reform, prepared statement .................................. 192 

Better Markets, prepared statement .............................................................. 204 

CME Group, prepared statement .................................................................... 218 

Commodity Customer Coalition, prepared statement ................................... 223 

Commodity Markets Council, prepared statement ........................................ 234 

Commodity Markets Oversight Coalition, prepared statement .................... 241 

Consumer Federation of America, prepared statement ................................ 249 

Council of Institutional Investors, prepared statement ................................ 253 

Futures Industry Association, prepared statement ....................................... 256 

Institute for Agriculture and Trade Policy, prepared statement .................. 260 

Institute of International Bankers, prepared statement ............................... 267 

IntercontinentalExchange (ICE), prepared statement .................................. 271 

INTL FCStone, prepared statement ............................................................... 273 

Los Angeles Department of Water and Power (LADWP), prepared statement ............................................................................................................... 279 

Managed Funds Association, ‘‘Reauthorization of the Commodity Futures 

Trading Commission’’, April 30, 2013 ......................................................... 282 

Michigan Municipal Electric Association, prepared statement .................... 295 

National Association of Manufactures, prepared statement ......................... 298 

National Cattlemen’s Beef Association, prepared statement ........................ 301 

National Council of Farmer Cooperatives, prepared statement ................... 302 

National Farmers Union, prepared statement ............................................... 305 

National Futures Association, prepared statement ....................................... 308 

National Grain and Feed Association, prepared statement .......................... 312 

National Introducing Broker’s Association, prepared statement ................. 316 

National Rural Electric Cooperative Association, prepared statement ....... 319 

Nextera Energy Resources, ‘‘Top Legislative Items for CEA Reauthorization’’, prepared statement ............................................................................. 321 

Northeast Public Power Association, prepared statement ............................ 331 

Premier Metal Services, LLC, prepared statement ....................................... 334 

RJO’Brien, prepared statement ....................................................................... 353 

Securities Industry and Financial Markets Association (SIFMA), prepared 

statement ....................................................................................................... 386 

Southwest Airlines Co., prepared statement .................................................. 396 

Sutherland, prepared statement ..................................................................... 400 

The Business Council for Sustainable Energy, prepared statement ............ 406 

The Depository Trust & Clearing Corporation (DTCC), prepared statement ............................................................................................................... 408 

The Farm Credit Council ................................................................................. 417 

U.S. Commodity Futures Trading Commission, prepared statement .......... 428 

United States Cattleman’s Association, prepared statement ....................... 430 

Washington Public Utility Districts Association, prepared statement ........ 435 

Cooper, Adam: 

Managed Funds Association, ‘‘Recommendations for FSOC Members-Regulators on the Protection of Non-public, Sensitive and Proprietary Information’’, May 2013 ................................................................................... 438 

Duffy, Terrence A.: 

CME Group, ‘‘Considerations Regarding the Equivalence Decision and 

Recognition as a Third Country CCP under Articles 25 EMIR’’ ............... 454 

Roth, Daniel J.: 

Customer Protection Initiatives ...................................................................... 472 

QUESTION(S) AND ANSWER(S): 

Stabenow, Hon. Debbie: 

Written questions to Dennis Kelleher ............................................................ 476 

Written questions to Daniel J. Roth ............................................................... 476 

Written questions to Terrence A. Duffy .......................................................... 477 

Written questions to Hon. Walter L. Lukken ................................................ 477 

Written questions to Gene A. Guilford ........................................................... 477 

Written questions to John M. Heck ................................................................ 477 

Page

V 

Cochran, Hon. Thad: 

Written questions to Terrence A. Duffy .......................................................... 478 

Written questions to Daniel J. Roth ............................................................... 478 

Written questions to Adam Cooper ................................................................. 479 

Written questions to Hon. Walter L. Lukken ................................................ 479 

Written questions to John M. Heck ................................................................ 479 

Gillibrand, Hon. Kirsten: 

Written questions to Daniel J. Roth ............................................................... 481 

Heitkamp, Hon. Heidi: 

Written questions to Terrence A. Duffy .......................................................... 482 

Written questions to Daniel J. Roth ............................................................... 482 

Written questions to John M. Heck ................................................................ 483 

Written questions to Hon. Walter L. Lukken ................................................ 483 

Duffy, Terrence A.: 

Written response to questions from Hon. Debbie Stabenow ......................... 485 

Written response to questions from Hon. Thad Cochran .............................. 486 

Written response to questions from Hon. Heidi Heitkamp ........................... 490 

Guilford, Gene A.: 

Written response to questions from Hon. Debbie Stabenow ......................... 492 

Kelleher, Dennis: 

Written response to questions from Hon. Debbie Stabenow ......................... 499 

Lukken, Hon. Walter L.: 

Written response to questions from Hon. Debbie Stabenow ......................... 507 

Written response to questions from Hon. Thad Cochran .............................. 507 

Written response to questions from Hon. Heidi Heitkamp ........................... 509 

Roth, Daniel J.: 

Written response to questions from Hon. Debbie Stabenow ......................... 510 

Written response to questions from Hon. Thad Cochran .............................. 512 

Written response to questions from Hon. Kirsten Gillibrand ....................... 513 

Written response to questions from Hon. Heidi Heitkamp ........................... 514 

(1) 

REAUTHORIZATION OF THE 

COMMODITY FUTURES 

TRADING COMMISSION 

Wednesday, July 17, 2013 

UNITED STATES SENATE, 

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY, 

Washington, DC 

The Committee met, pursuant to notice, at 2:37 p.m., in room 

216, Hart Senate Office Building, Hon. Debbie Stabenow, Chairwoman of the Committee, presiding. 

Present: Senators Stabenow, Brown, Klobuchar, Gillibrand, 

Heitkamp, Donnelly, Cochran, Roberts, Chambliss, Boozman, 

Johanns, Grassley, and Thune. 

STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR 

FROM THE STATE OF MICHIGAN, CHAIRWOMAN, COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY 

Chairwoman STABENOW. Well, good afternoon. The Committee on 

Agriculture, Nutrition, and Forestry will come to order. We appreciate all of our witnesses today. We do have two very important 

panels with a lot of witnesses to hear from, and we are looking forward to doing that today in a timely manner as well as follow-up 

discussions. 

I should also note for members that we may very well be interrupted on votes. We are hoping that they will hold off on that, but 

we may be. If we are, we will apologize in advance, but I know that 

most of you know how this works in terms of going down to the 

votes. And so we will manage it if it comes. 

We do have some business, a housekeeping matter that we need 

to attend to as we begin our hearing, and that is, Senator Casey 

is coming—I see that he is not here at the moment, but he is now 

coming back to our Committee. Senator Cowan was on the Committee during his time in the Senate. Senator Casey was gracious 

enough to step aside to other committees so that Senator Cowan 

could serve on the Agriculture Committee. He will now be assuming Senator Cowan’s Subcommittee assignments, and we have the 

good fortune of having them be identical to the assignments that 

Senator Casey had when he left us. So we know that he will come 

back as Chairman of the Subcommittee on Nutrition, Specialty 

Crops, Food, and Agricultural Research. So we have no official 

items at this point other than to welcome him back to the Committee, and we will do that when he arrives. 

2 

In the more than 150 years that we have had futures markets 

in this country, there have been cases that test the stability of the 

system. In the 1950s, a pair of traders in Chicago were able to corner the market on onions. They bought shorts on onions and flooded the market, driving the price down to pennies. Farmers in the 

Midwest were devastated and many had to file bankruptcy. 

As devastating as the onion scandal was to those farmers in 

Michigan and Indiana, and Illinois, it was nothing compared to the 

near collapse of the global financial markets in 2008. We cannot 

forget that 8 million hardworking men and women lost their jobs. 

Pensions and retirement savings went up in smoke. A record wave 

of home foreclosures swept across the countries, leaving devastated 

communities in the wake. There was no question that we needed 

serious market reform. 

As this Committee begins the process of reauthorizing the Commodity Futures Trading Commission, we need to examine the lessons from the past and consider ongoing challenges in the system. 

We want to make sure the agencies responsible for protecting these 

markets have the authority, the staff, and modern technology that 

they need to do the job. 

This Committee has been closely monitoring the MF Global case 

where customers’ funds, money that rightly belonged for farmers 

and businesses and individuals all across the country, went missing. We continue to focus on three goals: getting customers their 

money back—and certainly there has been terrific progress there; 

holding anyone engaged in wrongdoing accountable; and ensuring 

that proper customer protections are in place so that something 

like this does not happen again. 

I appreciate the important steps the Trustees, market participants, and the Commission have already taken toward that objective, but we all know there is more work to do. 

As several witnesses will testify today, there are lessons to be 

learned not just from MF Global’s failure but also that of Peregrine 

Financial Group. The cause of their failures may be different, but 

the resulting effect on customer confidence is the same. 

These markets have also been tested by the LIBOR scandal, data 

security breaches, occasionally unexplained price volatilities, and 

technology challenges that raise serious concerns about the ability 

of our markets to protect consumers. 

I am eager to hear from market participants testifying today 

about their suggestions and concerns for improving the CFTC and 

how these markets are supervised and protected. 

As we begin the reauthorization process, let me say again, as we 

all know in our Committee, that we will work together like we did 

on the farm bill. It will be collaborative, it will be bipartisan, it will 

be consensus driven, and it will lead to success because we work 

together. We intend to use that model as we look at reauthorizing 

the CFTC. 

In the coming weeks, we will announce additional hearings as 

well as staff briefings that more closely examine the issues presented to us today, and I look forward to working with my distinguished Ranking Member, Senator Cochran, and all of the very experienced and distinguished members of the Committee as we 

write and pass very important legislation to reauthorize the CFTC. 

3 

I would now turn to Senator Cochran. 

STATEMENT OF HON. THAD COCHRAN, U.S. SENATOR FROM 

THE STATE OF MISSISSIPPI 

Senator COCHRAN. Madam Chair, it is a pleasure to join you and 

the other members of the Committee in reviewing the statements 

of the witnesses who are here to testify before our Committee 

today. The Commodity Futures Trading Commission reauthorization is before the Committee for review as we evaluate recommendations for modifications or improvements, and that is what 

I hope the witnesses can share with us today in terms of their 

views and their ideas for any changes in the law that need to be 

considered by the Committee. 

We have others who are here today to hear from the witnesses, 

and the witnesses themselves, so I am pleased to join you in welcoming all of them, and thank them for their cooperation with our 

Committee. 

Chairwoman STABENOW. Thank you very much, and welcome 

again. We have two excellent panels, and we appreciate your time 

today. 

Senator CHAMBLISS. Madam Chair? 

Chairwoman STABENOW. Yes, Senator Chambliss. 

Senator CHAMBLISS. Could I ask unanimous consent that a very 

brief statement I have be inserted in the record? 

Chairwoman STABENOW. Absolutely. Without objection, and that 

reminds me to also indicate that we are happy to accept opening 

statements from any of the members of the Committee. In the interest of time, because we have two large panels, we will move forward, but we certainly want to receive any statements from members. 

[The prepared statement of Hon. Saxby Chambliss can be found 

on page 50 in the appendix.] 

Chairwoman STABENOW. And, of course, as you all know, we will 

ask for 5 minutes in testimony, but, of course, we want whatever 

you would like to give us in terms of written testimony. So let me 

introduce the full panel, and then we will ask for 5 minutes in 

opening statements. 

First we have the Honorable Ken Bentsen, president of the Securities Industry and Financial Markets Association. From 1995 to 

2003, he served as a Member of the U.S. House of Representatives 

from Texas. Several of us served with you. It is wonderful to see 

you again. He sat on the House Financial Services Committee, and 

was an active participant in the drafting of the Commodity Futures 

Modernization Act. 

Our second witness is also no stranger to this Committee or the 

markets: Mr. Terry Duffy, executive Chairman and president of the 

CME Group. Mr. Duffy has been a member of CME since 1981. 

Also, in 2003, he was appointed by President Bush as a member 

of the Federal Retirement Thrift Investment Board. Welcome. 

Next is Mr. Adam Cooper, someone who we have also appreciated coming before the Committee before, senior managing director and chief legal officer at Citadel LLC in Chicago, where he is 

responsible for Citadel’s legal compliance and regulatory affairs 

functions. He is here today on behalf of the Managed Funds AssoVerDate Nov 24 2008 08:41 Sep 15, 2014 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 C:\USERS\MW42035\DESKTOP\DOCS\87566.TXT MICAH
4 

ciation, an organization he knows well, having served two terms as 

chairman, and I also have to always say he is a proud graduate of 

the University of Michigan. So we know you know what you are 

talking about. 

Our fourth witness is Mr. Dennis Kelleher, who also knows the 

Senate well, as a distinguished staffer for many, many years. He 

is President and CEO of Better Markets. Previously Mr. Kelleher 

served as a litigation partner with Skadden Arps specializing in securities and financial markets, and it is great to see you. 

Mr. Roth, it is wonderful to have you back as well. Dan Roth is 

the president and CEO of the National Futures Association, where 

he has been since 1983. Prior to joining NFA, Mr. Roth was an attorney focused on general litigation and an assistant attorney general in Cook County, Illinois. 

Thank you very much for joining us, and we will start with Congressman Bentsen. 

STATEMENT OF THE HONORABLE KENNETH E. BENTSEN JR., 

PRESIDENT, SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION, WASHINGTON, DC 

Mr. BENTSEN. Thank you, Chairwoman Stabenow, Ranking 

Member Cochran, and members of the Committee. I appreciate the 

opportunity to testify on behalf of the Securities Industry and Financial Markets Association on the reauthorization of the CFTC. 

Title VII, as you know, of the Dodd-Frank Act created a broad 

new regulatory regime for derivative products and seeks to reduce 

systemic risk by mandating central clearing, capital requirements, 

collection of margin for uncleared swaps; to protect customers 

through enhanced collateral safeguards and external business conduct requirements; and to promote transparency through reporting 

requirements, new business conduct rules, and required trading of 

swaps on exchanges or swap execution facilities. 

SIFMA supports many of the goals of Dodd-Frank’s Title VII. 

However, we remain concerned that regulators, especially the 

CFTC, are interpreting and implementing many of these provisions—or how they are interpreting and implementing many of 

these provisions. I would like to highlight several issues that we 

would like to see addressed in the CEA reauthorization which we 

think will have a profound effect on the success of Title VII and 

the marketplace. 

With respect to cross-border treatment of swaps, Section 722 of 

Dodd-Frank limits the CFTC’s jurisdiction over swap transactions 

outside the United States to those that ‘‘have a direct and significant connection with activities in, or effect on, commerce of the 

United States’’ or are meant to evade Dodd-Frank. In seeking to 

clarify its jurisdiction, on July 12th, the CFTC voted to approve 

final cross-border guidance, as well as a phase-in exemptive order. 

First and foremost, we believe it to be imperative that the CFTC, 

SEC, and global regulators coordinate their work on implementing 

OTC derivatives regulatory reform in furtherance of the G–20 commitments. We believe that the international nature of the swaps 

market makes such global coordination, in addition to domestic coordination, critical in order to achieve an appropriate level of overVerDate Nov 24 2008 08:41 Sep 15, 2014 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 C:\USERS\MW42035\DESKTOP\DOCS\87566.TXT MICAH
5 

sight of swaps activities and further help to avoid unnecessary 

market disruption. 

While it is a little too early to get a full read of the guidance and 

exemptive order that were put out, because they just—actually we 

are in the third round of the exemptive order and still going 

through the guidance that was put out yesterday. We believe and 

we hope that it moves towards better coordination, but we believe 

that the Committee in the CEA should take a look at how we can 

streamline and enhance that coordination particularly among the 

CFTC and the SEC. 

In addition, I would like to talk about the Swap Push-Out Rule, 

Section 716 of Dodd-Frank. This is a provision that was added in 

this body but not really debated in the normal process through the 

other body and something that the prudential regulators in particular that the then-Chairman of the FDIC, Sheila Bair, and the 

current Chair of the Federal Reserve Board, Ben Bernanke, argued 

against, believing that it would affect their ability to prudentially 

regulate banks where swaps activities take place. And we would 

encourage the Committee to consider inclusion of bicameral legislation that has been introduced by Senators Johanns, Hagan, 

Toomey, and Warner, S. 474, that would amend this provision. I 

would note that the regulators have already forestalled its implementation, and so clearly they are struggling with this provision as 

well. 

Likewise, with respect to swap execution facilities, this is a situation where the CFTC and the SEC have gone in different directions. The CFTC, in their rule that was finalized earlier this year, 

came out with a rule that we think does not fit with where the 

marketplace is, and particularly from our asset manager members 

who are very concerned about the minimum mandatory Request for 

Quote model that is imposed by the CFTC’s final rule, and our view 

from our asset manager standpoint is that this rule will actual be 

counterproductive and end up costing asset managers clients who 

utilize the swaps markets for the benefit of their investors, their 

fund holders, and the like. And this is an area where, like the 

House has adopted on a couple of occasions, that the Committee 

should look at going back and making further clarification on how 

SEFs are treated. 

Finally, I would raise with the Committee a provision in the 

Basel III company standards which were recently adopted by the 

Federal Reserve Board and interimly adopted by the FDIC. And, 

in particular, it has to do with the credit valuation adjustment. 

This is a provision that addresses capital put against by the dealer 

on swaps with non-financial counterparties. In Europe, under the 

European Union, they have taken a different approach because of 

problems in how CBA was developed by the Basel Committee, and 

this results, in our view, in a fragmentation between the U.S. and 

the EU, and it is something that we think that the Committee and 

perhaps the FSOC should take a look at. So we would encourage 

the Committee to take a look at that. 

With that, I will yield back the balance of my time. 

[The prepared statement of Mr. Bentsen can be found on page 54 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

6 

I would ask other witnesses to take notice, a former Congressman made it within 2 seconds of 5 minutes. That was very good. 

Mr. Duffy, welcome back. 

STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN 

AND PRESIDENT, CME GROUP INC., CHICAGO, ILLINOIS 

Mr. DUFFY. Thank you. Good afternoon, Chairwoman Stabenow, 

Ranking Member Cochran, and Committee members. I want to 

thank you for the opportunity to testify today regarding the reauthorization of the CFTC. 

Dodd-Frank subjected the unregulated, opaque OTC swaps market to a new regulatory regime based largely on the successful 

model for futures exchanges and clearinghouses. The CFTC was 

granted power to adopt regulations to implement this new model. 

While the Commission and the staff are to be commended for 

their efforts to fix the swaps market, the Commission rules have 

often gone far beyond Congress’ intent. In some instances, the 

Commission has implemented Dodd-Frank by uncoordinated and 

inflexible rules that would have brought the industry to a standstill 

absent several last-minute no-action relief letters. 

The Commission used its swap mandate as a pretext to impose 

needless rules on the robustly regulated futures market. Congress 

did not intend to rewrite the rules of this well-functioning, highly 

regulated marketplace. 

As the CFTC contemplates its remaining rules to implement 

Dodd-Frank, we encourage the Committee to ensure that these 

rules remain within the congressional mandate and do not undermine the ability of business in the United States and worldwide to 

continue to manage risk. 

The agency’s initial proposal to impose its rules across international borders without regard to local rules or regulations had 

threatened to expose the industry to conflicting duties and set the 

stage for retaliation from foreign regulators. We welcome last 

week’s agreement between the CFTC and the European Commission on a ‘‘Common Path Forward.’’ We are hopeful that this positive development will lead to the U.S. and EU regulators achieving 

workable mutual recognition of derivatives trading and clearing 

regulation. 

Customer protection was noted in many responses the Committee received on reauthorization. Customer protection and market confidence are the cornerstones of CME’s business. Since the 

failure of MF Global and Peregrine, CME and others have implemented numerous rules to strengthen and protect the customer 

protection of futures commission merchants. For example, daily access to aggregated customer balances of banks facilitates our riskbased reviews of FCMs. 

The CFTC has proposed rules that codify these initiatives, which 

we support. However, we urge the CFTC to reject other proposed 

requirements such as the residual interest proposal. That would 

likely drive out smaller FCMs that serve the agricultural community out of business in this country. 

It is also essential for customer protection and healthy U.S. derivatives markets that the agency which oversees us be adequately 

funded. But we strongly oppose the administration’s proposal to 

7 

fund any of the proposed $315 million of the CFTC’s budget with 

a transaction tax. Such a tax will substantially increase the cost of 

market making, an essential source of market liquidity, as well as 

business costs for all customers, even those the administration 

wants to exempt. It will reduce liquidity, increase volatility, and 

impair efficiency-raising hedging costs for farmers, ranchers, and 

other commercials which will be passed on to consumers in the 

form of higher prices for food and other goods. 

Unexpected funding may be collected when volumes drop because 

market participants are driven out of U.S. markets. Last week, regulators in India saw derivatives volume drop by more than a third 

immediately following implementation of a 1-percent transaction 

tax. 

These are just a few of the many issues that have been submitted to the Committee in connection with your consideration of 

CFTC reauthorization. We stand ready to be a resource to the 

Committee on these and other critical issues to the futures and derivatives marketplace. 

I want to thank you for your time and attention, and I look forward to answering any questions you may have. 

[The prepared statement of Mr. Duffy can be found on page 81 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. Mr. Cooper, welcome. 

STATEMENT OF ADAM COOPER, SENIOR MANAGING DIRECTOR AND CHIEF LEGAL OFFICER, CITADEL LLC, CHICAGO, 

ILLINOIS, ON BEHALF OF MANAGED FUNDS ASSOCIATION 

Mr. COOPER. Thank you very much, Chairwoman Stabenow, 

Ranking Member Cochran, members of the Committee. My name 

is Adam Cooper. I am senior managing director and chief legal officer of Citadel LLC. Citadel is a financial institution that engages 

in a wide range of asset management and capital markets activities 

on a global basis. I am here today on behalf of Managed Funds Association and its members, and I am pleased to provide testimony 

at today’s hearing on reauthorization of the CFTC. 

MFA represents the majority of the world’s largest hedge funds 

and is the primary advocate for sound business practices for the alternative investment industry. As fiduciaries to our investors and 

as customers ourselves, we share with members of this Committee 

a keen interest in ensuring that applicable rules provide a strong 

framework for the market and its participants. Though we have 

made progress since the financial crisis, there is much still to be 

done. I would like to highlight a few points in this regard. 

First, protection of customer collateral. MFA has been a vocal 

and consistent advocate for central clearance of derivatives transactions. Getting clearing right entails many complex, legal, and 

operational issues. One important element is the framework for 

protecting the property of customers who clear swaps through 

FCMs. Here the CFTC has chosen LSOC, a model which provides 

an additional level of customer protection over other models. We 

believe, however, that Congress could enhance the customer protections that LSOC and other models would provide. 

8 

Specifically, amendments to Chapter 7 of the Bankruptcy Code 

could ensure that, upon an FCM’s insolvency, customer assets posted as collateral on cleared swaps would not be subject to pro rata 

distribution. 

Moving on to CPO registration, the Dodd-Frank Act and CFTC 

rulemakings have broadened the regulatory framework to include 

many entities that were not formerly subject to CFTC regulation. 

MFA has been consistent in supporting elimination of gaps in regulation. However, the repeal of CFTC Regulation 4.13(a)(4) extends 

the regulatory umbrella more broadly than is necessary. This creates a very real risk of scarce resources being spread too thin at 

a time when we need our regulators to focus on the mission at 

hand. We urge the Committee to examine this issue in detail. 

Turning next to CFTC and SEC coordination, the CFTC and the 

SEC have stepped up their cooperation in recent years, and all 

market participants have been the better for it. But much work remains to be done. 

For example, last week, the SEC adopted rules under the JOBS 

Act to eliminate the ban on general solicitation for certain private 

placements. The CFTC’s regulations were drafted a number of 

years ago to be consistent with the SEC’s rules on private placements. We believe it is now time for the CFTC to adopt complementary rules to effect Congress’ intent under the JOBS Act. 

The many systemic risk filing requirements required under 

Dodd-Frank represent further examples where greater coordination 

is needed. Currently an entity that is registered with both the 

CFTC and the SEC face up to three different filing requirements, 

that is, with the SEC, the CFTC, and the NFA. We recognize and 

support that regulators must have the information that they need, 

but steps must be taken to reduce unnecessary and costly burdens 

resulting from duplicative requirements. 

Moving on to confidentiality, MFA has supported congressional 

and regulatory efforts to increase the flow of information to regulators. We appreciate the need for regulators to be well informed. 

Yet it is of paramount importance that our laws require regulators 

to take all steps necessary to preserve the confidentiality of that information and, further, that robust protections exist with respect to 

the sensitive and proprietary intellectual capital of asset managers. 

Today a fund manager filing a document with the SEC has greater 

legal certainty of the confidentiality than if that manager filed the 

very same document with the CFTC. We believe the CEA should 

be amended to provide the same protections to CFTC registrants 

as the Advisers Act provides to investment advisers. 

Finally, international cooperation. MFA members engage in financial transactions in virtually every market around the globe. 

We are supportive of thoughtful regulations to ensure market integrity and to provide a dependable legal infrastructure in which 

to trade. But ensuring a well-functioning global market depends on 

coordination among regulators. It is simply unworkable to operate 

in an environment in which different jurisdictions have conflicting 

or overlapping rules. Market participants need to know which rules 

apply and under what circumstances, and those rules should make 

sense and reflect the economic realities of the transactions. 

9 

MFA believes the recent efforts of the CFTC and the European 

Commission to address cross-border issues is a positive step, and 

we are hopeful that these efforts will lead to a workable framework. We urge this Committee to continue to exercise its leadership in oversight of these types of international agreements as they 

occur in the future. 

My written statement outlines these points as well as others in 

greater detail. I appreciate the opportunity for you to consider my 

views and am available to answer questions. Thank you. 

[The prepared statement of Mr. Cooper can be found on page 68 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. Kelleher. 

STATEMENT OF DENNIS M. KELLEHER, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, BETTER MARKETS, INC., WASHINGTON, DC 

Mr. KELLEHER. Good afternoon, Chairman Stabenow, Ranking 

Member Cochran, and members of the Committee. Thank you for 

the invitation to Better Markets to testify today. 

Better Markets is an independent, nonprofit, nonpartisan organization that promotes the public interest in the domestic and global 

financial markets. I have detailed what Better Markets does in my 

written testimony. It is also available on our website, 

bettermarkets.com, and I will not repeat that here. 

I would like to say it is a privilege and honor to return to the 

Senate to testify after having been a staffer for three different Senators over the years and having worked with many of you during 

that time. 

I would like to make a few very quick points. 

First, the financial crash and its cost. Everyone likes to talk 

about the 3-year anniversary of the Dodd-Frank financial reform 

law, but too few even mention that just 5 years ago, the U.S. suffered the worst financial crash since 1929, which inflicted the worst 

economy on the United States since the Great Depression. Only 

massive taxpayer and Government bailouts prevented the total collapse of the financial system and a second Great Depression. As 

the Chairwoman noted at the beginning, the American people paid 

and are still paying a very high price for that, including slow to no 

growth, persistently high unemployment, tens of millions of homes 

underwater, massive deficits, unprecedented Fed policies like zero 

interest rates and trillions in bond purchases, among so much more 

economic wreckage across our country. Ultimately that is going to 

cost the United States more than $12.8 trillion, as you all know, 

from many of the damages inflicted on your constituents. 

As is well known, unregulated, non-transparent over-the-counter 

derivatives markets were at the heart of causing and spreading 

those financial and economic crises and costs, and that is why derivatives regulation is vital to effective financial reform as well as 

the protection of the American people, taxpayers, our Treasury, 

and our financial system. 

Second, the Committee should avoid becoming another battleground in the war over financial reform and should not relitigate 

Dodd-Frank. The responsibility for the CFTC was dramatically exVerDate Nov 24 2008 08:41 Sep 15, 2014 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 C:\USERS\MW42035\DESKTOP\DOCS\87566.TXT MICAH
10 

panded from the $37 trillion notional futures market to include the 

$340 trillion notional U.S. swaps market. That was a monumental, 

transformative change for the agency and the markets where there 

are trillions of dollars at stake. 

It was inevitable and no one should be surprised that whatever 

the CFTC did, it was going to be highly controversial and hotly 

contested and, unfortunately, recontested. Yet the least funded, 

smallest financial regulatory agency, the CFTC, has taken the new 

laws and mandates seriously and done an outstanding job of translating the financial reform law into a reality. They have not done 

a perfect job, and we have not agreed with all that they have done. 

No one has. But that does not mean the new law should be 

changed on a piecemeal basis, especially given that they are now 

just finalizing most of their rules and few have even been implemented. 

The complaints being raised are almost entirely speculative and 

from special interests seeking to advance their narrow self-interest. 

That is their right. But it is no basis to start changing laws and 

public policy prematurely. 

Given the historic changes being put in place, the CFTC should 

be allowed time to implement the rules, see how they work, determine if changes should be made, and given the opportunity to 

make them. That would be the appropriate time for considering 

whether statutory changes are necessary or appropriate. Now is 

not the time and reauthorization is not the place. I urge you not 

to let this Committee become the latest battle front in the war over 

financial reform. 

Third, the CFTC is woefully underfunded and simply cannot do 

the job Congress asked it to do and the job that the markets and 

investors desperately need it to do. I have detailed in my testimony 

those details and will only say that an agency with $200 or even 

$300 million in annual budget cannot properly regulate or oversee 

the futures and swaps markets with almost $400 trillion in notional trading. The CFTC has to have the authority to impose fees 

and be self-funded in whole or in substantial part. If not, it is being 

set up for failure. It is being asked to do so much that is so important without the resources it needs to get the job done. That will 

be a gross disservice not just to investors but to market participants themselves. 

Fourth, and last, the industry claims for so-called innocentsounding cost/benefit analysis is, in fact, little more than industrycost-only analysis, and it must be seen for what they are most of 

the time: a back-door attempt to kill or gut financial reform. The 

proposals will impose onerous, costly requirements. Calls for cost/ 

benefit analysis sound good in theory, but they are often catastrophic in reality for the public interest. The CFTC has done economic analysis for decades as required by the CEA. Tellingly, there 

have been few, if any, complaints about their work until it began 

implementing financial reform. That tells everybody what is really 

going on here. 

Thank you, and I look forward to your questions. 

[The prepared statement of Mr. Kelleher can be found on page 

121 in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

11 

Mr. Roth. 

STATEMENT OF DANIEL J. ROTH, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL FUTURES ASSOCIATION, CHICAGO, ILLINOIS 

Mr. ROTH. Thank you, Senator. As this Committee begins the reauthorization process, it is entirely appropriate that your attention 

and all of our attention is focused on customer protection issues. 

For the longest time, the futures industry had a very well deserved impeccable reputation for safeguarding the integrity of customer funds. But twice in the last 18 months, first at MF Global 

and then at Peregrine, that reputation took a serious hit as customers suffered very painful losses, and losses that, frankly, we as 

regulators are supposed to prevent. 

Clearly some dramatic improvements were required, and over 

the last 18 months we have worked very, very closely with the 

CFTC and with the CME and other SROs to bring about those 

changes, and I have detailed those in my written testimony, but I 

would like to highlight a couple of them in my oral remarks. 

First, the heart of the matter really is the protection of customer 

segregated funds. And for years and years, we have required FCMs 

to file daily statements with NFA regarding the amount of customer funds that they are holding, and we analyze those statements and look for trends. But we confirmed those balances to outside sources in the past only as part of our annual examination. 

When we would go out and do an examination of an FCM, we 

would then confirm those balances to outside sources such as the 

banks actually holding the customer funds. And when we did that, 

we did it through a paper confirmation process where we would 

mail a confirmation request to the bank and then the bank responded directly to NFA, again, in writing. 

In 2012, we switched to an electronic confirmation process, and 

it was that e-confirmation process that uncovered the fraud at Peregrine. But even then it was still just part of the annual examination, and we felt we needed to do a much better job, and that is 

what we have done. Together with the CME, we have built a system now where we have daily confirmation of all seg bank balances 

so that we still receive reports daily from the FCMs regarding the 

amount of funds they are holding, but now for over 2,000 bank accounts that are holding customer segregated funds, we also receive 

a confirmation from the bank. We then perform an automated comparison between what the firm is saying and what the bank is saying to identify any suspicious discrepancies. This is a huge improvement from where we were just a year ago. And although it 

is a big improvement, it is certainly not the only one that we have 

done. 

Again, as I have detailed in my testimony, we have increased 

dramatically FCM financial transparency. We have created a situation in which customers can come to the NFA website and there 

they can find financial data on all FCMs, key financial data both 

current and historical, so that they can do their due diligence, and 

that information includes information on how the FCM is investing 

customer funds. 

12 

We have set stringent requirements for FCMs regarding minimum internal controls. We have adopted additional safeguards to 

prevent the misuse of customer segregated funds. We have had a 

top-to-bottom outside examination of all of our examination and 

audit practices, and we are adopting the improvements that were 

suggested. 

I would like to stress that on each one of those items, each one 

of those improvements, we worked very closely with the CFTC, and 

we were very gratified when the CFTC came out with its rule proposals that so much of the CFTC’s proposal was really adopting the 

changes that we had already made. 

So a lot has been done, but there is always more to do, and two 

items in particular that I would like to mention. One, I think both 

the Peregrine and the MF Global situations highlighted certain 

issues regarding FCM insolvencies and bankruptcies. And those 

are very complicated issues. We are working with every facet of the 

industry to try to find common ground on proposals that everyone 

can agree to. But I can tell you, our primary focus is to ensure that 

an FCM insolvency, if there is a shortfall in customer segregated 

funds, then customers receive the top priority. That, in our view, 

is the right result. That is the result that is called for under CFTC 

rules, and that is the result we want to ensure is always achieved 

in a bankruptcy. 

With respect to customer account insurance, both MF Global and 

Peregrine have renewed questions about whether we should have 

customer account insurance. That is a very serious question. It deserves a serious debate, and there are a lot of public policy issues 

involved. But you cannot have any rational debate on that issue, 

I do not think, until you first know what kind of insurance would 

we be buying and what are we going to pay for it. That may not 

be the endpoint of the discussion, but it is an essential starting 

point. And you cannot answer that question, frankly, unless you 

have cold, hard data and a lot of it, because you have got to go to 

the insurance companies and provide them with detailed, granular 

information so they can perform an actuarial analysis and determine their risk. 

We are working on that study with the FIA, with CME, and with 

the Institute for Financial Markets. That is well in progress, and 

we hope to have it completed in the next few weeks, hopefully by 

mid-September. 

I am sorry I went over my limit by 15 second at this point, but 

we look forward to working with Congress and the industry, and 

I would be happy to answer any of your questions. 

[The prepared statement of Mr. Roth can be found on page 157 

in the appendix.] 

Chairwoman STABENOW. Thank you very much, Mr. Roth. And 

that is all right. We had some time that others gave up on your 

behalf here. 

Thank you to each of you. Obviously we have a lot of questions. 

There are a lot of things we could cover, and in the limited time 

in each of us asking 5 minutes of questions, I would ask just that 

you be as concise as you can, because we have got a lot of ground 

to cover. 

13 

When we look overall at so many different issues, the challenge 

for the CFTC really does relate them having the resources, the 

staff, the ability to do all that needs to be done in terms of accountability. There is a whole range of things that need to happen. But 

I want to start with the issue around resources because it is fundamental. It is not something that is just a side issue in terms of 

their being able to function. 

Mr. Duffy, you talked about the importance of adequate funding 

for the CFTC. At the same time, I know that you are opposed to 

user fees. And so what other options would you suggest for us as 

an alternative means of funding the agency. The SEC, other regulatory agencies have funding streams. CFTC does not. That is a serious impediment as we go forward and hold them accountable for 

decisions they make and the oversight that they have. So what 

would you suggest? 

Mr. DUFFY. Well, it is difficult for me to come up with a suggestion for the Government, but I will say a couple different things. 

When we talk about liquidity and what the costs could be to the 

American consumer if a small fee or transaction tax was imposed 

on the market maker liquidity pools, even though the pool—some 

of it has been exempt, it could be extraordinary. I gave you a quick 

example of what happened in India when a third of their market 

makers went away. When the market makers go away, Senator, 

the bid-offer goes wider. When a bid-offer goes wider, the cost of 

business goes up. When the cost of business goes up, it gets passed 

on to the consumers. 

If you want to find a quick way to make $315 million with a 

transaction tax, it will cost you $1.5 billion to do it. So that is not 

a smart thing to do. 

Chairwoman STABENOW. So the question is, What? I mean, I appreciate—I have heard that concern that—— 

Mr. DUFFY. It is hard to say what is the concern, but I think we 

have to make sure—no disrespect to Mr. Kelleher, and I am not 

going to, but when we talk about $400 trillion of over-the-counter 

derivatives that the CFTC is going to be regulating, you have to 

realize that those $400 trillion is about 2,000 transactions. We do 

not weigh the money. You know, we do not have to say, it can cost 

a lot more to do this. It does not matter what the notional value 

is. It is about the transaction volume that is associated with it. Our 

world today does 20 million transactions a day. 

Chairwoman STABENOW. No, I appreciate that. I guess what I am 

asking—— 

Mr. DUFFY. So there is a big difference—— 

Chairwoman STABENOW. We have a seriously underfunded agency that has seen about—— 

Mr. DUFFY. You know, it is hard for me to stand up here—— 

Chairwoman STABENOW. —a significant increase in their responsibilities. 

Mr. DUFFY. —and say that, you know, it benefits the taxpayer 

by paying the $305 million. But the reality is, ma’am, it benefits 

the taxpayer by paying the $305 million to fund the CFTC, because 

in return the risk management that is associated with it goes from 

farmers to reinsurers to small bankers is a cost that is immeasurable. 

14 

Chairwoman STABENOW. So you are saying basically taxpayer 

funded. 

Mr. DUFFY. That is the way it has been funded for years, yes, 

ma’am. 

Chairwoman STABENOW. Mr. Roth, the National Futures Association is self-funded with members’ fees, dues, assessments. Have 

those fees been prohibitive in terms of expense to the industry? 

Have they impacted the markets negatively? 

Mr. ROTH. Let me make a couple of points on that, Senator. 

First of all, we have a number of different regulatory spheres. 

We have futures compliance, now swaps compliance. We also have 

a market surveillance function we perform for certain contract 

markets and soon SEFs. And we oversee retail foreign exchange 

transactions that are off exchange. We try to make sure that each 

regulatory sector pays its own freight, that they carry their own 

weight. Most of it, for most of those sectors, that is done through 

membership dues. 

With respect to the futures activity, we do have an assessment 

fee that is imposed on trades and collected by FCMs, but I should 

point out that at the very outset when they were forming NFA, 

they were very careful and worried about taxing liquidity out of the 

market. So our fee has a very particular structure to it, so that our 

assessment fee does not apply to any trade that is conducted by a 

member of the contract market where the transaction is executed. 

So, really, we only assess—about, oh, 22, 23, 24 percent of the overall trading volume is subject to our assessment fee, and it was 

structured that way specifically to avoid taxing liquidity out of the 

market. 

Chairwoman STABENOW. Thank you very much. 

Mr. Cooper, you talked about the need for consequences for 

breach of data security, a very serious issue, and I am wondering 

what sort of consequences would be appropriate. There is a proposal, broadly supported an indemnification provision from the 

Dodd-Frank Act. Would removing the provision harm data security? Or are there other ways to protect confidential data? 

Mr. COOPER. I do not think removing that provision would harm 

or risk confidentiality. That actually would enhance the flow of information to necessary parties. 

The consequence is accountability. We need to make sure that 

there are robust requirements imposed on the various regulators 

for this huge volume of information that is now flowing into them. 

We need to make sure that there are no asymmetries between the 

confidential protections afforded to a market participant giving information to one regulatory agency versus another. We need to synthesize and harmonize, in other words, the protections available between the CFTC and the SEC. 

Chairwoman STABENOW. Thanks very much. I have many more 

questions, and we will be following up with all of you, but I am 

going to turn now to my Ranking Member, Senator Cochran. 

Senator COCHRAN. Thank you, Madam Chair, and we appreciate 

all of the witnesses being here today to help us understand what 

the options are and what the appropriate action could be in helping 

to protect those who use the services of the markets to hedge and 

15 

to protect themselves from marketing disasters as well as weatherrelated disasters that can make it very difficult in our economy. 

I wonder, for example, though, if some of the things that you end 

up hearing as suggestions for change or improvements or modernization might do more harm than good. You might just glance 

through some of the suggestions that we have already received and 

tell us, ‘‘It is okay to consider this but please do not do it because 

it is going to be creating a problem that is bigger than the one that 

we already have.’’ That may be a negative way to ask a question, 

but, Mr. Duffy, I would just ask you, could you take a shot at that 

and warn us against doing something that we might be talked into 

doing that really has a negative effect on the situation? 

Mr. DUFFY. You know, Senator, I am a fairly firm believer that 

a one-line reauthorization is exactly what the industry needs right 

now. We do not need any additional burdens or changes. I think 

the industry has come light years in the last 10 years. Mr. Roth 

just gave you an example what we did in the last year alone. I 

think the industry has benefited immensely because of the things 

that we have done internally, and I would hope very much that 

Congress would take that into consideration and just go ahead and 

do a one-line reauthorization and not make too many changes. 

I think there are some menus or exemptions that I am sure some 

of my colleagues would like to see on behalf of their clients, and 

I would not be opposed to that. But I think overall less is better. 

Senator COCHRAN. Thank you. 

Thank you, Madam Chair. 

Chairwoman STABENOW. Thank you very much. 

Senator Brown. 

Senator BROWN. Thank you. Mr. Duffy, I am intrigued, actually 

by your assertion perhaps of a one-line bill, what that might mean 

for the ability of—or taking away the ability of certain interest 

groups to make mischief in this derivatives market. 

Thank you, Mr. Kelleher, for your comments and reminder of 

what this hearing is all about, what reauthorization is all about, 

what this agency is all about, and your discussion of costs and benefits. There are costs to industry in much of this throughout the 

regulatory apparatus, but we know what the cost to society was, 

the cost to society was because we did not do some things we 

should have done 5 years ago, 10 years ago. 

Congressman Bentsen, nice to see you. I appreciated your comments about Dodd-Frank’s Push-Out Rule, which requires banks 

with access to deposit insurance and the Fed’s discount window to 

move derivatives trades to separately capitalize affiliates. 

My first question is for Mr. Kelleher. Despite the lessons learned 

from the financial crisis, the markets experienced, as we know, several significant disturbances, most recently last year’s $6 billion 

London Whale trading losses. Such incidents should serve as a reminder that the rules are there to make banking—supposedly to 

make banking safer, not riskier. Give us your thoughts on the 

push-out provision, whether it is making our system safer or 

riskier. What are your concerns about proposed legislation to roll 

back this provision? 

Mr. KELLEHER. Thank you, Senator. It seems to me that at the 

level of the purpose of the swap push-out provision, nobody can 

16 

really disagree, which is that the entities, large entities engaged in 

high-risk and non-hedging trading put those activities in a separately capitalized subsidiary, which will not otherwise have access 

to taxpayer bailouts or the Fed window. That seems to me that everybody would agree on. 

Then the question becomes—and it came up during the—as 

many of you know, not just during the consideration but during the 

conference, and indeed, some of the statements made about the objections to the swaps push-out provision were actually made in 

April and May of 2010, prior to the conference, prior to the fix to 

this provision, which allowed commercial banks to engage in a variety of traditional activities, including, importantly, allowing hedging. So it was changed in conference. 

So some of the testimony that has been provided to you in writing actually cites objections to that provision that are inapplicable 

since it was put into law. 

So the swaps push-out provision is very important so that the 

non-hedging, non-traditional commercial banking activities in the 

derivatives market are in a separate subsidiary, separately capitalized, so that it does not take down the bank itself and does not end 

up with more taxpayer bailouts and access to the Fed window. 

Senator BROWN. Thank you. Let me shift, Mr. Kelleher, to a different issue. I am concerned about the risks associated with banks’ 

expanded business operations into physical commodity, energy, 

commercial business operations, warehousing, transportation, leasing, distributing commodities, one notable one in Chairwoman 

Stabenow’s State. 

In a Reuters story, a trader said, and I want to quote: ‘‘The truth 

of it is that having access to the physical markets is about optimization and knowledge. It gives the trader the visibility of the market to make far more successful proprietary trading decisions in 

both physical and financial markets. It is trading with material 

non-public information.’’ He then goes on to say, ‘‘The difference 

compared with equity markets is that it is perfectly legal.’’ 

Mr. Kelleher, talk, if you would, about the potential or existing 

conflicts in market risks that arise from banks engaging in commodity and energy and commercial business operations, what it 

means for consumers, what it means for businesses that use those 

commodities. 

Mr. KELLEHER. Well, I think it is clear that consumers and end 

users are getting squeezed in paying the price for the biggest banks 

in the country, moving into, in massive amounts, physical commodity storage and trading activities while at the same time they 

are engaging in the futures market and in the swaps market, and 

they have direct or indirect, partial or significant ownership in 

some of the exchanges. 

Now, the LME in London has changed that in the last 2 years, 

but what we have seen lately—and there has been some reporting 

in the last several days about the warehousing of aluminum and 

how companies from Coca-Cola to Coors to beer companies to, you 

know, auto manufacturers are getting squeezed and paying a fortune because there are bottlenecks that appear to be created for 

the purpose of generating cash for the banks at the expense of the 

end users and other market participants. 

17 

So the conflicts of interest should be looked at really closely. We 

do not even have the data on it, and one of the things we suggest 

that the Committee does in reauthorization is get the CFTC authority to get this data so they can see what is happening in the 

physical markets by these banks, at the same time they can see 

what they are doing in the futures and swap markets. And then 

we will have a much better picture of the conflicts of interest. 

Senator BROWN. Thank you. 

Thank you, Madam Chair. 

Chairwoman STABENOW. Thank you very much. 

Senator Roberts. 

Senator ROBERTS. Thank you, Chairwoman Stabenow and Ranking Member Cochran, for organizing this hearing and beginning the 

important process of reauthorization. 

This Committee’s oversight of the CFTC is not taken lightly by 

any member, especially in light of the failures of MF Global and 

Peregrine. We are limited on time, and that is always the case 

here. I wish we had more time with the expert panelists, especially 

covering a range of topics. So I would like to ask at least some of 

the panelists answer in a yes or no fashion. I know that is difficult—these are very difficult for yes or no answers—and that it 

is not fair. But life is not fair. 

Representative Bentsen, good to see you, sir. As the CFTC works 

to implement the Dodd-Frank Act, there have been more than a 

few bumps in the road resulting in numerous no-action letters, exemptive relief, and enforcement delays. I am worried about certainty. 

Before proposing rulemaking or guidance, does the CFTC routinely conduct enough quantitative analysis regarding the costs 

and benefits of their regulations, in your opinion? 

Mr. BENTSEN. No, Senator. 

Senator ROBERTS. For the cross-border application of derivatives 

regulation, should the CFTC have used a formal rulemaking process, including a cost/benefit analysis, instead of issuing the regulations through ‘‘an interpretive guidance and policy statement’’? 

Which, by the way, is over 300 pages long? 

Mr. BENTSEN. Yes. 

Senator ROBERTS. Mr. Duffy, when Chairman Gensler was in 

front of this Committee in February, he was surprised by the 

pushback against their proposed rules on margin requirements. 

Has the CFTC taken the correct approach for customer protection 

by requiring a futures commission merchant, FCM, to have their 

customers meet margin deficiency at all times? 

Mr. DUFFY. Has the Commission made sure that they meet it at 

all times? 

Senator ROBERTS. That is correct. 

Mr. DUFFY. The exchanges do set the margins, and—— 

Senator ROBERTS. Just do not worry about it. Just say, ‘‘No.’’ 

[Laughter.] 

Mr. DUFFY. Yes, sir. No. 

Senator ROBERTS. If left unchanged, will this requirement have 

a significant and negative impact on the agricultural sector of the 

market? 

Mr. DUFFY. It could, yes. 

18 

Senator ROBERTS. Has the CFTC relied too often on no-action letters, exemptive relief during the implementation of Dodd-Frank, 

creating confusion and uncertainty in the marketplace? 

Mr. DUFFY. Without question, yes. 

Senator ROBERTS. Mr. Cooper, internationally—and I emphasize 

‘‘internationally’’—the CFTC is working to implement final guidance on cross-border swaps and released their latest action late as 

of last week, notwithstanding the progress—and I give every credit 

in that regard—with the CFTC. I do have a lot of concerns with 

the CFTC trying to enforce regulations worldwide let alone imposing their regulations on all of our trading partners. 

For the scope and framework of international derivative regulations, are you concerned that there could be a patchwork of different regulations if the CFTC does not do a better job of harmonizing, not dictating, their efforts with their foreign partners? So, 

put another way, is it more important to get our regulations correct 

or, even better, in line with our counterparts across the world? 

Mr. COOPER. We certainly need certainty, we need consistency 

and harmonization, and certainty was provided in certain important respects by the CFTC’s action with respect to the definition of 

‘‘U.S. person.’’ 

Senator ROBERTS. So your answer is yes. Is that correct? 

Mr. COOPER. Yes. 

Senator ROBERTS. Thank you. For once in my time on the Committee, House or Senate, I am yielding back a minute and 2 seconds. 

Chairwoman STABENOW. I think we should make a special note 

of this in the record. It is the first time for Senator Roberts. 

Senator Gillibrand is next. I do not see her at the moment, so, 

Senator Heitkamp. 

Senator HEITKAMP. Thank you so much, Chairwoman and Ranking Member, for pulling together this very important panel and 

these experts. 

I want to focus, I think, on just a couple issues, but not to belabor the point, but if you think that MF Global had impact globally and across the country, I can tell you that people in North Dakota were shocked, absolutely shocked, because it moved off the agricultural pages into the front page, talking about the risk that 

now our farmers and our producers thought was completely impossible to have incurred the loss. And most of them have recovered 

about 89 percent of their money. They are still waiting for the 

other 11 percent. And they wonder why people do not go to jail, 

and they wonder why this and how this could possibly happen in 

America when we have, in their opinion, one of the most regulated 

industries and regulated environments in the world. 

I am not here to point fingers or to assess blame. I am looking 

for solutions, and I am looking for a path forward. And, Mr. Duffy, 

I notice in your testimony, although not covered in your comments, 

is a discussion about insurance. And this has been a topic of many 

of the people who have come to visit me recently about potential 

expansions of products that could, in fact, mitigate risk. 

You mentioned that there is pending a Futures Industry Association study. Can you tell me when that study is going to be done? 

And can you give me any kind of preliminary insight on whether 

19 

you personally, given your experience, believe that an insurance 

market could be created that would be helpful to mitigate risk? 

Mr. DUFFY. Sure. Thank you, Senator. I think Mr. Roth also is 

involved in that study, and we are looking to have completion on 

that sometime in mid-September. So, you know, we have put a lot 

into the study, so we are both looking forward to the outcome of 

that information. 

Secondly, on the MF Global clients, this has been a very horrific 

incident in our industry, and people are wondering if somebody is 

going to go to jail. There is no question about it has been on the 

front pages. You know, you could put a cop on every street, as they 

say, and someone is still going to try to commit a murder. 

With respect to the monies, there is 99 cents on the dollar returned to all the 4d clients of MF Global. 4d clients are U.S. participants trading on regulated exchanges. They have 99 cents on 

the dollar. And then for 30.7 clients of MF Global, they have 97 

cents on the dollar. Those are U.S. participants trading on a foreign exchange. So most of the people, the good people of North Dakota, should have 99 cents on the dollar back of their money. The 

people that had their money in a broker-dealer is a different story. 

That is an unregulated business, so that is maybe the number that 

you are referencing, ma’am. 

On the insurance itself, I have not been really a big proponent 

of insurance, but I do believe that if the participants want it, we 

should offer it. And I have no problem with that. We have a fund 

at the CME Group, as you may or may not know, that is called the 

‘‘Family Farmer and Rancher Fund.’’ It is a self-insured, $100 million fund that we use to make sure if there is fraud or something 

like that, we will pay up to $100 million to these participants in 

total. 

I could not insure that fund without any major insurance company around the world. We have $158 billion of segregated funds 

in our world today. I do not know what the cost of that would be 

to insure. I think if people want to pay the premium for that insurance, they should have every right to do so. That is my personal 

viewpoint. I do not believe it should be legislated. I think this business will be crushed overnight if you legislate that type of insurance into the marketplace. 

So I think the optionality should certainly be there, and the 

FCMs should offer it up, and the exchanges and the other SROs 

should help the FCMs in facilitating that procedure. 

Senator HEITKAMP. And not to belabor the point, but I think it 

is going to be extraordinarily difficult to see a product like that develop that is useful in the private sector. There is a reason why we 

have flood insurance; there is a reason why we have crop insurance. There is a reason why there is often a backstop that the taxpayers assume some of the risk going forward. 

I want to just spend a little bit of time talking about bankruptcy, 

because one of the issues obviously is a failure, even though it 

seems clear to me that when you have customer accounts that they 

ought to be the first ones out in a bankruptcy, I am a lawyer, I 

do not know why a lawyer would see it any differently than what 

I did, but obviously we have concerns about bankruptcy. 

20 

Seeing that it might be exceedingly difficult to amend the Bankruptcy Code to deal with this, I want to proposed something and 

get anyone’s reaction to this. If the law were to require that contracts in the CFTC-regulated markets included a subordination 

agreement that confirmed in writing that customer accounts were 

to be the first ones paid, would that have any undesired consequences, and would that help us solve the problem with a bankruptcy court that does not appreciate the fiduciary obligations? 

Mr. DUFFY. I know Dan has got this in his testimony, but I will 

make one comment on that. I think that it makes sense, and it is 

hard to say that the consumer should not come first. But when you 

are looking at some of the smaller FCMs or if you just come out, 

the emergents that are in our world today that—you got to remember, banks will not clear your constituents, ma’am. They do not do 

that. They only clear the big participants. So the smaller brokerage 

firms need to clear the other participants. If, in fact, you made 

them subordinate to the clients, they may not be able to get funding to keep those smaller FCMs in business. That is just an unintended consequence. I am not saying it could happen, but that is 

one of the things, as a consumer, it is really hard for me to say 

that the customer should not be paid first. 

Chairwoman STABENOW. Thank you. Thank you very much, Senator. 

Senator Chambliss. 

Senator CHAMBLISS. Thanks, Madam Chair. 

Mr. Cooper, testimony submitted by Better Markets refers to 

academic evidence suggesting that the aggregate level of speculation in the market adversely influences the behavior of prices and 

that more speculation does not always mean more efficient prices. 

The Commodity Markets Oversight Coalition on the second panel 

today has submitted an attachment to their testimony referencing 

a number of articles that purport to show that speculation degrades market quality or that high-frequency trading causes harm 

to the market. 

Now, we all know that every market needs both speculators and 

hedgers in order to function properly. I understand from your testimony that MFA supports a data-driven approach to position limits. 

Now, have you reviewed the testimony of Better Markets and the 

Commodity Markets Oversight Coalition? Are you familiar with the 

academic research? And could you just in general shed some light 

on this issue, please? 

Mr. COOPER. Thank you, Senator. What I would say is that there 

are a numerous academic and Government studies from the CFTC, 

GAO, OECD, plus international agencies all consistently commenting on the role of speculators in the market. Those studies— 

study after study—have concluded consistently that, first, they 

have not found excessive speculation to be the cause of market volatility in recent years; and, secondly, they show that policies restricting investors’ access to derivatives markets would impair the 

ability of commercial participants in the markets to manage their 

risk. We are in favor of a data-driven approach, a very careful assessment of what the facts are with respect to position limits or 

other restrictions on the ability of traders generally to access the 

markets. 

21 

Senator CHAMBLISS. Mr. Duffy, with respect to high-frequency 

trading, some of the panel have raised concerns about the role of 

high-frequency traders in the marketplace. Some have suggested 

that this trading activity is responsible for market disruptions such 

as the mini-flash crashes in recent years or sudden price spikes. 

Can you give us your perspective on the role of high-frequency 

traders? And is this a term that has been actually defined by regulators? 

Mr. DUFFY. Thank you, Senator. I think that high-frequency 

trading is getting a very clouded name at best right now. When it 

comes to mini-flash crashes or not, that basically does what market 

structure because of the fragmentation that we have in the securities world today where you do not have the vertical silos that pulls 

the liquidity in one central place. 

I think what is critically important for the American public to 

understand about high-frequency traders, trading is going fast. 

Technology is going to continue to go fast, and you are not going 

to put technology back in a bottle. So it is up to exchanges like 

CME Group, groups like NFA and others, to come up with ways 

to show the public how we are policing these participants, and that 

is exactly what we do. We spend over $40 million a year policing 

our marketplace, a lot of that dedicated toward high-frequency 

trading. 

We can say it all we want, that these are good liquidity providers, but we have to show the American public that we are making certain that nobody is front-running an order or anything else 

that they are being accused of doing. 

Senator CHAMBLISS. Mr. Duffy, I had significant conversations 

with Chairman Gensler leading up to the ultimate draft and passage of Dodd-Frank relative to the way we are going to treat swaps 

and derivatives, which all of us knew some changes needed to be 

made, but I felt like that the direction we were heading in and 

where we wound up was pretty excessive, particularly with the regulations that we knew were going to be forthcoming from CFTC, 

and they have not even been completed yet. We still do not know 

what they all are. And the issue that I kept raising with Chairman 

Gensler was, What is this going to do to American markets versus 

European markets and Asian markets? And the standard answer 

I got was they will follow us. 

Well, I see where the—and, interestingly enough, I was in Europe on a couple of occasions after those conversations, and I related that conversation to some of the folks in Europe, and they 

just got this wry smile on their face. 

Can you give us the benefit of where we are with respect to competitive advantages or disadvantages as a result of Dodd-Frank 

today? 

Mr. DUFFY. Well, I hear what Chairman Gensler is saying, that 

they will follow us, but I am still perplexed on seeing what laws 

that have been passed today in Europe or anything that has even 

been proposed or passed throughout Asia. There are things proposed in Europe but that have not yet passed. So we have already 

gone with the passage of Dodd-Frank. I just returned from a European trip, meeting with clients all throughout Europe, and when 

you make that reference to them, they are not just sitting around 

22 

being beholden to the United States of America anymore. There are 

very sophisticated trading operations all throughout Europe, and 

they are garnering more and more market share each and every 

day, and this is something they feel quite excited about. 

So I think they are looking at it as an opportunity. We are all 

big believers in regulation, Senator, but I think we need less regulation with more teeth into it. We cannot keep writing a bunch of 

rules that everybody can just circumvent. Let us have rules that 

have teeth in them, and I think that is what the American public 

would want, and I think it is hard for the European counterparts 

or Asian counterparts to refute that type of activity. But we are not 

doing that. We are writing rules on listed derivatives markets 

today or listed futures markets that Congress did not have anything to do with in Title VII. It was about over-the-counter swaps. 

So hopefully we can get back to what we are supposed to be 

doing here, but I will tell you that folks, especially in Europe, are 

smiling quite nicely right now. 

Chairwoman STABENOW. Thank you very much. 

I will indicate to members that we have begun what will be two 

votes. I will continue for another 10 minutes. We will try to have 

another two members be able to ask questions. We will recess and 

then come back afterwards. So please come back at us. 

Senator Donnelly? I want to just say we are so glad to have Senator Donnelly chairing our Subcommittee on Commodities, Markets, Trade, and Risk Management, and his Subcommittee will be 

engaged in these issues, and we will turn to him. 

Senator DONNELLY. Thank you, Madam Chairwoman. Thank you 

all for being here. 

I do not have an academic study in front of me, and I do not have 

a Government study in front of me. But I am going to tell you what 

has happened in my home State of Indiana in the last couple 

months. 

Gasoline was $3.40 one week. A week and a half later, 2 weeks 

later, $4.25. Any demand increase? None. Any supply reduction? 

None. 

I called to the refiners. I said, ‘‘Are you making any less gas right 

now?’’ Our two largest suppliers to the State. ‘‘Absolutely not,’’ both 

of them. Some refineries were down. It is a regular thing that has 

happened. You know, they were changing blends, regular thing 

that happens. But from $3.40 to $4.25. So I talked to everybody I 

could. Three weeks later, $3.13. That has nothing to do with supply 

and demand. But I will tell you what it did do. There are people 

in my State who were not able to buy food that particular week or 

had to cut down significantly on their groceries because of it, because all of a sudden their gas bill has gone from $40 to $60, and 

that extra $20 was the pair of pants for their kids or the groceries 

for their family. 

There is a widespread belief that the markets are broken, that 

supply and demand have nothing to do with the price anymore, 

and that the game is rigged. 

I called in to refineries to find out, and when they say, you know, 

‘‘We are producing at the same amount.’’ Demand is down, and the 

price has gone from $3.40 to $4.25. And I go home every weekend. 

Here in D.C. it was $3.62 when it was $3.40 at home, and it was 

23 

$3.62 when it was $4.25 at home. And you look for answers, and 

you say this is a rigged game, is what people think. 

Back in 2011—and nothing affects families more, it seems, in 

terms of this whole global world of finance that we see, this moving, that moving, that every week people are trying to make ends 

meet, have to fill up their tank. And it is what I hear almost more 

than anything. 

In 2011, Goldman Sachs analysts said for every million barrels 

on spec, 8 to 10 cents price increase. And, Mr. Cooper, I would ask, 

do you agree with that assessment? 

Mr. COOPER. I cannot comment on the Goldman Sachs report. 

What I would say, though, is if we cannot rely on academic studies, 

if we cannot rely on real-world examples, if we cannot embrace and 

acknowledge that a data-driven approach is the only way to really 

understand what the issues are here, then I am not sure what we 

are left with. We cannot have policies that would disincentivize 

participants from actively participating in the markets so as to provide the energy manufacturer and the farmer the ability to effectively manage their risks—so that there is liquidity. 

Senator DONNELLY. Well, let me ask you this: Do you think if, 

instead of 421 million barrels on a speculative oil market today, 

there were 100 million barrels on a speculative oil market today, 

do you think that if it was 421 or 100 that the price would be the 

same for a barrel of oil? 

Mr. COOPER. I cannot comment on that, Senator. I am sorry. 

Senator DONNELLY. Mr. Kelleher, do you have an opinion on 

that? 

Mr. KELLEHER. Well, we have provided the data on plenty of 

studies that have shown, as have CMOC, that there is excessive 

speculation, and speculation is causing a tremendous amount of 

volatility. And, by the way, a lot of it is coming from this new great 

innovation from Wall Street called ‘‘commodity index funds’’ that 

nobody wants to talk about that pour somewhere between $300 and 

$400 billion a month into the markets every month, in the futures 

market over and over and over again. 

One of the things we also do not have, Senator, is data. The 

CFTC needs access to data because—and this is another place 

where the physical trading of these big banks comes into play. 

When you look at it, they are all reporting record profits. Look at 

the FICC number, the fixed income, currency, and commodities. 

They are making billions and billions and billions, which just happened to correspond with the volatility and the increase in price. 

I am not an academic. I do not have a Ph.D. either. But, you 

know, you do not need a Ph.D. for some of these things. 

Senator DONNELLY. And I am not criticizing academic or Government studies. I am just saying you get a pretty good study on I– 

94 on your way home from O’Hare Airport as well. 

Mr. Duffy, my neighbor from Chicago, you indicated you wanted 

to say something? 

Mr. DUFFY. Just a quick comment on that, and I think what is 

important to note is when you look at the markets, you cannot 

really say they are broke, because I also have a concern that you 

have. When you cite a $3.40 to $4.25, then back to $3.13 after you 

make a call in gasoline in a week’s time, I will tell you that the 

24 

futures markets have been between $90 and $110 a barrel for 3 

years. It has not moved. So to say that the futures market or the 

markets are impacting the price of that, what you just talked 

about, that fluctuation, you have the wrong panel up here asking 

that question. 

Senator DONNELLY. Well, no, I think I have the right panel here, 

and I will ask the next panel, and I will ask other panels, too. 

Mr. DUFFY. But with all due respect, the markets are not broke. 

If there is something going on that is nefarious in the marketplace 

by refiners or somebody else, that is who is making the markets 

go up and down. Markets in general have not moved, though. We 

are sitting at high prices in commodities overall, but that is due 

to a whole host of reasons from other countries, exporting our food 

products and everything else. We import the energy products, obviously. We cannot export oil in the United States. It is against the 

law. But the point is the futures market I oil has been in a very 

narrow range for a long period of time. 

Senator DONNELLY. Right. I try to keep an eye on that, too. Oh, 

I am sorry. 

Chairwoman STABENOW. I apologize. I am going to take you 

back, given the time here. 

Senator DONNELLY. Thank you. 

Chairwoman STABENOW. Given the time here on the votes. 

I want to turn to Senator Klobuchar. 

Senator KLOBUCHAR. Thank you very much, Madam Chairwoman. And, Senator Donnelly, we had the same thing happen in 

Minnesota on the gas prices and same experience. I have long believed there are speculation issues. There also was a refinery-closing issue, and I have a bill that actually Senator Hoeven is on to 

require the refineries to tell the Department of Energy when they 

are going to close down so we can better stagger the closures. But 

I would agree with you on the speculation, so you should look at 

the bill. 

Mr. Roth, you are sitting there by yourself and not many people 

have asked you questions, and you are on my end, so I am going 

to start with you. 

I know you spoke a bit about some of these customer issues, and 

the failure of MF Global resulted in an unacceptable outcome for 

customers who had posted collateral with the firm, unacceptable 

because the Commodity Exchange Act specifically prohibits the use 

of customer funds for the firm’s own needs. 

The CFTC has now charged the company and its top executives 

with unlawful misuse of customer funds, and we must ensure that 

the improved protocols put in place will help better police the system. So we have a problem of dealing with the company, but we 

also have the problem going forward. 

As we consider legislative changes relative to this matter, 

changes to customer funds segregation and potential reforms under 

the Bankruptcy Code, we need to make sure reforms are carried 

out to protect customers and also allow for a well-functioning futures markets. 

Do you have any thoughts on this? 

Mr. ROTH. Senator, I agree wholeheartedly with everything that 

you said, and that certainly, from a regulatory point of view, from 

25 

the regulators’ side, we have to constantly be—not just fight the 

last war, but try to anticipate the next war and try to always be 

trying to make the smartest use of technology and all of our resources to monitor member firms for seg compliance. That is why 

I think this daily confirmation process that we instituted with the 

CME is a huge step forward. I also think the rules that we passed 

regarding FCM transparency and financial data is a huge step so 

that customers do not have to root through Footnote 42 of an eightpage financial statement to find information about the FCM they 

are doing business with. 

I also think the restrictions we put on firms’ ability to draw out 

their own funds that are in the excess seg pool is a huge step forward. 

But you are never done with this. It is a constant struggle. And 

until we figure out how to change human nature and eliminate 

fraud—and that is a ways off. I am working on that, but we just 

constantly have to try to strive to minimize the likelihood that anybody can ever get away with this, and if you can make it clear that 

there are criminal sanctions for this kind of wrongdoing, hopefully 

deter that conduct in the future. 

Senator KLOBUCHAR. Very good. Thank you. 

Mr. Kelleher, Dodd-Frank gave the CFTC the ability to establish 

position limits for swaps and futures held by ‘‘any one party.’’ However, questions have been raised by regulators and others that ‘‘any 

one party’’ is difficult to define, especially as the CFTC moves forward with rewriting the position limits rule. 

As they work to rewrite the rule, how can the CFTC help prevent 

market distortions so that no single entity has too large of a position in the market? 

Mr. KELLEHER. Thank you, Senator. That is a good question because ‘‘any one person’’ also should include a class, as we have said 

both in the regulatory process and in our testimony here. Just because you are acting what appears to be a loan, but you are acting 

essentially identically to other market participants doing the same 

thing at the same time, for example, commodity index funds, 

among other actors working together, our view is that the CFTC 

has the authority to regular them and treat them as one under a 

class—the provision in the Dodd-Frank Act that allowed them 

treating a class as a trader. And it is very important to do that. 

I would say it is pretty clear on position limits that the CFTC 

has done a lot of work. We did not agree with everything that they 

did, but I want to be—when the district court actually vacated the 

position limit rule, it did not, as has been stated in written testimony submitted to this Committee today, it did not overrule, second-guess, or question what the SEC did on the merits, period, the 

end. It was not a merits decision. It was as procedural decision on 

whether or not they interpreted a particular word that the court 

found was ambiguous. That is what is on appeal. So the position 

limit rule itself is not substantively questioned by the Federal 

courts. It is before the courts now, but on a procedural matter. And 

it is important that they get back to the business of regulating 

these markets. It used to be the case that these markets had about 

70 percent actual commercial users, 30 percent speculators. It is 

now reversed. It is about 70 percent or more speculators. 

26 

Senator KLOBUCHAR. Right. I know. 

Mr. KELLEHER. That has got to change. 

Senator KLOBUCHAR. Very good. 

Mr. Cooper, one last question. The CFTC is working with the 

Federal Reserve, the SEC, and its international counterparts to 

reach a final set of standards on margin requirements for 

uncleared swaps. You indicated that you have been advocating for 

an internationally uniform set of margin requirements in the 

uncleared derivatives market. 

Why is it important that there is a balanced approach that harmonizes U.S.-based rules with the margin requirements at the 

international level? 

Mr. COOPER. I think in the absence of a unified regime, it would 

make it incredibly difficult, costly, and burdensome for participants 

to manage their portfolios, manage their margin requirements, and 

transact freely across marketplaces. 

Senator KLOBUCHAR. Okay. Very good. And I am not going to be 

back for the second panel, Madam Chair, but I wanted to say a 

special greeting to Honeywell who is going to be present, a company with a major presence in my State, and obviously you and I 

have discussed about the issue of the non-financial end users, 

something we care a lot about, and we look forward to submitting 

some questions on the record. 

Thank you very much. 

Chairwoman STABENOW. Thank you very much. We will recess. 

We do have at least one member who would like to ask questions 

of our first panel, so rather than dismiss you, I would ask for your 

patience for a few moments. We are at the end of the first vote. 

There will be a second vote, and I understand that at least one 

member would like to ask a question. 

So at this point, we will recess and come back momentarily. 

Thank you. 

[Recess.] 

Chairwoman STABENOW. Senator Grassley has returned. I am 

going to ask, as I leave, with the full trust and confidence of Senator Grassley, I am going to leave him in charge of the Committee 

to ask his questions. I do believe that we have another member 

that may be returning, and I think what I will do at this point is, 

if they come back before I am back, we will let other members ask 

questions as well. Other than that, Senator Grassley, I would then 

just ask you to put us back into recess when you are done. Thank 

you. 

Senator GRASSLEY. [Presiding.] Thank you very much for not taking your recess. 

The Chairwoman started out with her first question—I have a 

follow-up for Mr. Duffy—in regard to fees, user fees. I guess this 

would be about a $315 million transaction tax. Would you have any 

estimate whatsoever of what that might break down to on a per 

transaction level? 

Mr. DUFFY. So on a contract level, sir, we would have to charge 

per contract to get the $315 million. It would be roughly about 4.5 

cents at a static volume in today’s marketplace. So we charge on 

average roughly about 7.5 cents to our largest liquidity providers. 

27 

So we are looking close to anywhere between a 70-to 80-percent increase in every transaction they do. 

Senator GRASSLEY. Okay. I appreciate that. I have a question for 

any of the panelists on high-frequency trading. It has developed 

and become increasingly sophisticated. I believe it is fair to say 

that there are some who appreciate it and some who do not. The 

question I have pertains to the margin requirements. I am sure 

there are multitude of strategies regarding high-frequency trading, 

but, in general, how would it be affected by some of the new margin proposals such as prefunding? 

Mr. DUFFY. I can take a shot at that, Senator. Most high-frequency traders go home flat every night are not subject to the margin requirements because they do not have positions on an overnight basis. Very few have positions on—so I do not see how that 

would impact them to any great extent on that part of their business. 

Mr. KELLEHER. I agree with that. They go home flat so it is not 

going to impact them. What I did want to say, Senator, is to congratulate you for being, if you will allow me to say, a bulldog on 

these issues. In your recent letter to the Survey Research Center 

to get to the bottom of what is going on and find out some basic 

information about preferential treatment, privileged access, and potentially unfair and abusive trading that relates to it. And it gets 

to an issue before us here in the reauthorization, which is that basically even now we still have remarkably dark markets where the 

CFTC and the public has very little information about what is happening, and HFT is a poster child for that. And this Committee, as 

has been talked about by the Committee in the past and you have 

focused on in the past, this Committee should authorize and mandate the CFTC to start requiring registration and getting data and 

information from the market players who are engaged in HFT, now 

to some reports 60, 70, 80 percent of the volume. And once the new 

derivatives market infrastructure gets in place, you can be sure 

that is what is going to happen. And we saw only a taste of that 

recently when the Wall Street Journal reported on high-speed traders exploit loopholes on May 1, 2013, and what they are doing or 

not doing at the CME. 

Now, I do not know if what is in the article is accurate or not. 

I just know that it is a precursor to the future where HFT is going 

to move into this new market infrastructure in a big way and have 

the same disruptive aspects to it. And the CFTC needs the data 

and information from registration and authority now so that this 

Committee and that agency can get in front of the issues. 

Senator GRASSLEY. Yes. That—— 

Mr. COOPER. Mr. Senator, could I just—— 

Senator GRASSLEY. Yes, please do. 

Mr. COOPER. I do not think registration would accomplish anything. There are volumes of data available right now that can be 

used to assess the impact of high-frequency trading on the markets, and we think there is a positive impact, and it is not the impact you think. In fact, the U.K. Government-sponsored Foresight 

Commission as well as the SEC itself has conducted studies that 

show the beneficial impact. I think it is important to recognize regVerDate Nov 24 2008 08:41 Sep 15, 2014 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 C:\USERS\MW42035\DESKTOP\DOCS\87566.TXT MICAH
28 

istration of any individual category of trader is not going to enhance the information flow available to the regulators. 

Senator GRASSLEY. Okay. If that is all you have to say on the 

subject, that takes care of my questions. 

I would suggest, like she said, I should adjourn, but just in case 

somebody was going to come back here, if you would be polite 

enough, if somebody comes back, to let them take over, because I 

was fortunate enough, I was running back here, and she came back 

and reconvened for me. I appreciate that very much. Thank you all. 

[Pause.] 

Senator GRASSLEY. I guess there is more red tape to this than 

I thought. We are in recess. 

[Recess.] 

Chairwoman STABENOW. [Presiding.] The Committee will come to 

order. I apologize for the delay, but we are happy to be back. I 

know that Senator Thune has some questions. 

Senator THUNE. Thank you, Madam Chair and Senator Cochran, 

for calling this important hearing, and I want to thank our panelists here for hanging around and giving us the opportunity to continue to ask questions. 

Just as we talk about reauthorization of the CFTC, I think it is 

important to remember that we have got to do this in an intelligent 

way, make sure that as we increase customer protection and build 

confidence in the financial system, that is something that is going 

to encourage producers and firms to better manage their risk and 

provide the necessary liquidity that the market needs to function 

freely. But we also have to remember that we are operating in an 

international global economy, and the decisions that we make do 

not happen in a vacuum, and that any additional regulatory burden we place on firms here in the United States are going to impact the competitiveness of these firms in the global marketplace. 

So I hope we can strike a balance between managing risk, inspiring 

confidence, and allowing the market to function without overly burdensome regulations. And so I appreciate those of you who are here 

today giving us some insights about how best to do that. 

I wanted to ask a question of Mr. Cooper. In the last Congress, 

I sponsored legislation which modified and updated securities regulations to help promote greater capital formation and improved 

transparency in the marketplace. I was pleased that the language 

was included in the bipartisan JOBS Act, which was signed into 

law by President Obama. 

In your testimony, you have suggested that some of the provisions in the JOBS Act which directed the Securities and Exchange 

Commission to amend securities regulations governing private 

placements should be extended to cover commodity pool operators 

as well. And I am wondering if you can explain why this is needed 

and what the implications are if the CFTC does not amend its 

rules to be consistent with the JOBS Act or the SEC regulations. 

Mr. COOPER. Thank you, Senator Thune. I want to thank you for 

your leadership as well on the JOBS Act, a tremendous piece of 

legislation designed to, in fact, and hopefully will, result in greater 

capital formation opportunities. 

We have talked a lot about consistency and harmonization today 

in the cross-border context. This is a perfect example where we 

29 

need consistency and harmonization that is between the CFTC and 

the SEC on this particular provision. 

If the CFTC were not to amend its rules to make complementary 

changes to permit private placements essentially, it would thwart 

the very purposes in our industry that the provisions that were 

part of the JOBS Act were intended to promote, because, in fact, 

many of our members, the vast majority, are now dually registered. 

So not being able to participate in the broader general solicitation 

of private placements would, in fact, undermine the very purposes 

that the JOBS Act was intended to address. 

Senator THUNE. Thank you. I want to take just a moment to take 

advantage that we have got a wide range of expertise and diversity 

of opinions on today’s panel. Mr. Kelleher, you advocated user fee 

funding for expanded regulation by the CFTC on almost all fronts: 

high-frequency trading, physical commodity holdings, not to mention to help cover the costs of staffing and technology. Whereas, 

others have made the case that additional fees would increase the 

cost of hedging. An increase in the cost of hedging will then ultimately increase the costs of goods for consumers. And I am just 

kind of curious to know what your response is to that assertion or 

that criticism. 

Mr. KELLEHER. Thank you, Senator. I would not say we are advocating fees across all boards for all—across all products, all markets, for all things. I think you have to find out that which fees 

are appropriate to be assessed on given the essential mandate and 

the funding needs of the CFTC. It is to the advantage of all the 

member participants in the markets, the investors, and the system 

that the CFTC have adequate funding on the technology side and 

the personnel side. 

So when we look at it, we say, well, if you look at it, you have 

got—and I cannot remember what the numbers are exactly. I do 

not think Terry and I are going to agree on this. We are not talking 

about 1 percent. We are talking about probably fractions of a penny 

per contract. But, you know, if you took 25 CBO wheat contracts 

and you had half a cent per contract, you are talking about a 12- 

cent addition. If you took a larger size lot of 25,000 contracts, 

which would be a big trade, about $70 million worth of corn, you 

are talking about $125 on $70 million worth of contracts if it was 

half a cent. And if you actually look at the numbers and then you 

apply it to the numbers—now, everybody can disagree or have different views of what gets carved out for liquidity purposes and otherwise—you are talking about probably a very small fraction of a 

penny per contract. It would be so de minimis actually to end users 

and market participants that it is unlikely to have any effect at all. 

But where it has the most effect is we have a CFTC with a huge 

vital mandate that gets funded at a level that can service the market participants who have to register. You have SDRs, you look at 

the information flowing in that cannot be handled now. That is in 

the interest of everybody, including everybody at this table. 

So I am not trying to get a huge fee. I am not trying to get more 

than a penny that is necessary. I think any fee should be as low 

as humanly possible and done in a targeted, sensible way so it does 

not impact liquidity and reduces the impact on all market particiVerDate Nov 24 2008 08:41 Sep 15, 2014 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 C:\USERS\MW42035\DESKTOP\DOCS\87566.TXT MICAH
30 

pants, but generates enough revenue for the CFTC to get its vital 

job done, which everybody needs to have done. 

Senator THUNE. Mr. Duffy? 

Mr. DUFFY. Senator Thune, I think what is important when we 

are doing mathematics here, in order to get to the $315 million to 

fund the agency, you need to charge 5 cents per contract at the 

CME Group. That is a 100-percent increase on our liquidity providers. There is no question anybody that has a 100-percent increase in doing their business that they have to change the way 

they are going to do their business. And the way they are going to 

change it is they are going to do less activity and widen the spread, 

which will cause the consumers and the taxpayers and the Government more, especially when you are trying to auction off U.S. Government debt, and the only place they have to go to do the layoff 

is at the Chicago Board of Trade, which we own, and because our 

markets are so deep and liquid, the Government can auction off 

debt all day long to our participants, and they hedge it in the futures market. That bid-offer goes up, the cost to the taxpayer will 

go up right along with it. It will cost billions of dollars, sir. Billions. 

Mr. KELLEHER. With all due respect, I think—and correct me if 

I am wrong, Terry, but you are only talking about the futures market. The jurisdiction of the CFTC will now include the swaps market. So if you take the total market, whatever the notional amount 

is, whatever you want to argue, you are looking at a market that 

is 6 times the size, or more, of the futures market. 

Mr. DUFFY. But there are only 2,000 transactions a day, Senator 

Thune, that happen today in the over-the-counter opaque futures 

market—not in the futures, in the over-the-counter market. So 

even though it is 400 trillion notional, there are only 2,000 transactions a day. There are 20 million in the listed derivatives markets today. 

Senator THUNE. Okay. Madam Chair, thank you. That was a 

good discussion. And I know you have a second panel you are waiting to get up here, so thank you very much for your indulgence, 

and I will yield back my time. Thanks. 

Chairwoman STABENOW. Thank you very much. That was a good 

discussion. Thank you again for your patience in waiting. I appreciate all of your input, and we are looking forward to continuing 

to work with you. So thank you very much. 

We will ask our second panel to come forward. You have been 

very patient as well, and we will proceed as soon as everyone is 

seated. 

[Pause.] 

Chairwoman STABENOW. Well, good afternoon. It is wonderful to 

have you with us, and we very much appreciate your perspectives 

and testimony this afternoon. Let me introduce our panel. 

First on the panel is the Honorable Walter Lukken, president 

and CEO of the Futures Industry Association. Good to see you. Before moving to the private sector in 2009, Mr. Lukken served as 

Acting Chairman of the Commodity Futures Trading Commission 

for 18 months after having been a CFTC Commissioner since 2002. 

Also, he knows this Committee well, having worked under my 

former colleague, our former colleague, Senator Lugar. So it is good 

to have you back. 

31 

Second, we have Mr. Guilford. Mr. Gene Guilford is the national 

and regional policy counsel for the Connecticut Energy Marketers 

Association and is here today on behalf of the Commodity Markets 

Oversight Coalition. After working for a short time in the Reagan 

administration, Mr. Guilford returned to his home State of Maine 

to serve as president of the Maine Oil Dealers before moving to the 

Connecticut Petroleum Association. Welcome. 

Mr. John Heck is senior vide president of The Scoular Company, 

and he joins us today from Omaha, Nebraska, on behalf of the National Grain and Feed Association. Mr. Heck sits on the Board of 

Directors of NGFA. Mr. Heck has been with The Scoular Company 

since 1981 when he first joined as a grain merchandiser, so it is 

great to have you with us as well. 

Next we have Mr. Donald Russak, executive vice president and 

CFO for the New York Power Authority, and he is here today on 

behalf of the American Public Power Association. Mr. Russak has 

served in numerous positions with the New York Power Authority 

throughout his 33-year career, so we are glad to have you. 

Finally, Mr. Colby. We have Mr. Jim Colby, who is the assistant 

treasurer at Honeywell International. He has also worked at Bear 

Stearns, UBS, and General Motors. Thank you for joining us this 

afternoon as well, Mr. Colby. 

So we will now turn to you, Mr. Lukken, for your testimony. 

STATEMENT OF THE HON. WALTER L. LUKKEN, PRESIDENT 

AND CHIEF EXECUTIVE OFFICER, FUTURE INDUSTRY ASSOCIATION, WASHINGTON, DC 

Mr. LUKKEN. Well, thank you, Chairman Stabenow and Ranking 

Member Cochran. As you turn your attention to CFTC reauthorization, the Futures Industry Association stands ready to assist. FIA 

is the leading trade organization for the cleared derivatives markets. 

As you know, clearing ensures that the financial integrity of the 

market is protected from the failure of one of its market participants. Futures commission merchants, or FCMs, play a critical role 

in facilitating the clearing process by guaranteeing the transactions 

of customers and serving as the front-line gatekeepers of market 

risk through the collection of customer margin. 

FIA’s mission since its inception has been to protect the public 

interest through the adherence to high standards of professional 

conduct and financial integrity. In carrying out this mission, FIA 

responded to the unacceptable consequences brought about by the 

failures of MF Global and Peregrine Financial Group. FIA formed 

a Customer Protection Task Force in the aftermath of these insolvencies and recommended a number of changes that have already 

been adopted, which include the enhancement of FCM recordkeeping, reporting, and early warning indicators, including: the filing of daily segregation balances with regulators, the creation of an 

automated daily verification system for customer segregated balances directly with banks and other depository institutions, and the 

collection and posting of additional FCM financial information onto 

an online system to help customers monitor and assess the health 

of their FCMs. 

32 

Much has been accomplished through these efforts over the last 

year and a half, and we continue to evaluate additional ideas such 

as the idea of customer protection insurance. The FIA, CME, NFA, 

and the Institute for Financial Markets have partnered to fund a 

study on the costs and benefits of this idea. We look forward to 

sharing these findings with the Committee in the coming weeks. 

In addition to these measures already implemented, the CFTC 

has proposed a set of comprehensive regulations to further enhance 

customer protection, and we support much of what has been suggested, including the codification of many of FIA’s recommendations. However, with regard to how and when customer margin is 

determined and collected, the proposal drastically reinterprets the 

longstanding application of the statute, even though this provision 

in the Commodity Exchange Act has not been changed since 1936. 

It is estimated that this reinterpretation to a firm’s excess margin or residual interest amount could add $100 billion in additional 

required contributions into customer funds accounts. This will result in either customers prefunding their margin or paying to use 

the capital of their FCM. 

Many commodity customers have expressed strong concerns with 

this proposal, which will increase the cost of hedging, cause consolidation among small and mid-sized FCMs, and limit execution 

choices for customers. The FIA supports many of the customer protection measures that the CFTC has proposed. We simply believe 

this one in particular has not been justified. 

I would be remiss if I did not mention the implementation of the 

clearing mandate of swaps in the Dodd-Frank Act. Congress looked 

to the reliability and stability of the futures clearing system when 

it determined to extend clearing to swaps. Unfortunately, the rules 

being written to facilitate the clearing of swaps are in some case 

reinventing an already proven clearing process for futures. 

For example, the global futures markets have long benefited from 

regulators around the world working collaboratively to properly 

regulate the trading and clearing of futures while relying upon 

each other’s comparable regulatory regimes to ensure effective 

oversight. 

In contrast to this mutual recognition approach, the lead-up to 

last week’s compromise on cross-border application of cleared 

swaps under the Dodd-Frank Act caused significant uncertainty 

and confusion among the global regulatory and financial communities. While this last-minute guidance provides some clarity, there 

remains significant complexity and open questions on how global 

firms will get into compliance. 

We now face an all too familiar path of having to request CFTC 

no-action relief to provide our members with the legal certainty to 

trade in the global markets. This may have been avoided through 

a formal APA rulemaking process instead of mere guidance. 

Even in the case where Congress granted specific recognition authority under the Dodd-Frank Act to exempt comparably regulated 

non-U.S. clearinghouses, there has been no guidance as to how this 

exemption, specifically allowed by statute, may be achieved. This 

compares to the futures markets that have functioned across borders without major incidents for many years under a recognition 

system. 

33 

In closing, our members stand ready and willing to facilitate the 

clearing of swaps, just as we have for futures. But it is important 

as we implement these important changes in the market structure 

for swaps that we not harm the futures markets that have served 

our industry well over time. 

Thank you, and I welcome any questions you may have. 

[The prepared statement of Mr. Lukken can be found on page 

150 in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. Guilford. 

STATEMENT OF GENE GUILFORD, NATIONAL AND REGIONAL 

POLICY COUNSEL, CONNECTICUT ENERGY MARKETERS ASSOCIATION, CROMWELL, CONNECTICUT, ON BEHALF OF THE 

COMMODITY MARKETS OVERSIGHT COALITION 

Mr. GUILFORD. Thank you. Honorable Chairwoman Stabenow 

and Ranking Member Cochran and distinguished members of the 

Committee, on behalf of the Commodity Market Oversight Coalition—CMOC—we wish to thank you for the opportunity to appear 

before you here today on the matter of the reauthorization of the 

Commodity Futures Trading Commission and associated issues 

with regard to CFTC’s authorities regulating the activities in the 

commodity markets. 

Just very briefly, let me tell you that, since 2007, the Commodity 

Markets Oversight Coalition is a nonpartisan alliance of organizations that represent commodity-dependent American industries, 

businesses, end users, and consumers. We are the farmers, truckers, mom-and-pop gas station operators, airlines, and others who 

rely on transparent, functional, and stable commodity markets in 

which to hedge our operations for the mutual benefit of those who 

deliver tangible goods to markets and from whom we receive tangible goods from those markets, for the benefit of the millions of 

consumers that we serve. Our members rely on functional, transparent, and competitive commodity derivatives markets as a hedging and price discovery tool and as an essential part of our business operations. As a coalition, we favor Government policies that 

promote stability and confidence in the commodities markets; seek 

to prevent fraud, manipulation, and excessive speculation; and preserve the interests of bona fide hedgers and American consumers. 

When accepting the John F. Kennedy Profiles in Courage Award 

in 2009, former CFTC Chair Brooksley Born stated, ‘‘Special interests in the financial services industry are beginning to advocate a 

return to ‘business as usual’ and to argue against the need for any 

serious reform. We have to muster the political will to overcome 

these special interests. If we fail now to take the remedial steps to 

close the regulatory gap, we will be haunted by our failure for 

years to come.’’ 

That was not the first time she issued a warning with regard to 

the necessity of appropriate transparency, accountability, and oversight of the derivatives markets. 

Now, there are several issues that we would recommend to the 

Committee that the Committee undertake, and we would look forward to working with the Committee as we go forward with this 

reauthorization process. 

34 

The first on our list is manipulation and excessive speculation, 

and the Committee should examine the efficacy of the October 18, 

2011, position limits rule as well as the underlying statutory authorities of the CFTC in preventing manipulation and the harmful 

effects of excessive speculation. 

The previous panel questioned whether or not you had the right 

panel in order to address these questions. I would like to take a 

moment, if I could, to suggest to you, with all due respect, you have 

the right panel. In the last 2 weeks, the NYMEX RBOB contract 

has increased 43 cents a gallon. In the last 2 weeks, crude has increased $10 a barrel. 

Let me put into context what 43 cents on the RBOB contract 

means: 43 cents is $155 million a day in higher gasoline costs on 

the American people; it will cost a billion dollars a week. And why 

would that be the case? Why would that be necessary? 

We have circumstances that I would like to get into in question 

and answer hopefully about what happened before the financial crisis and where we are as of 2012. We have had enormous demand 

destruction in gasoline demand in the United States for the first 

time since World War II, a substantial decrease in demand for gasoline. For the first time since 1960, we are net exporter of gasoline. 

For the first time since Harry Truman was President, in 2011 we 

became a net exporter of distillate fuel. 

We are importing less crude oil than at any time since President 

Clinton’s first term. Last year, we had the greatest single increase 

in daily production of crude oil in the United States history since 

1859. And yet through all of that, before the financial crisis and 

after, we have gone from 72 barrels on crude—$72 a barrel on 

crude to $94. And it was not a straight line. It is up and down constantly, daily, with enormous volatility. And we have added just 

another 10 this last week. On gasoline, we have gone from $2.80 

to $3.68. 

At a period of time when the American people have used less 

gasoline, not more, we have a surplus of gasoline that we can sell 

into world markets. With all due respect, the accountability and 

transparency and oversight of these markets is exactly the reason 

why the Commodity Futures Trading Commission needs the authorities that you have given it so that we can determine what is 

going on in these markets, what is motivating them and what is 

moving them. 

We have a number of suggestions, and we would like to work 

with the Committee as we go forward in this process, especially 

with regard to resources. An agency that collects $2 billion in fines 

for the Federal Government may not necessarily need a tax, but it 

certainly needs more resources. 

Thank you very much for your time. 

[The prepared statement of Mr. Guilford can be found on page 

89 in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. HECK. 

35 

STATEMENT OF JOHN M. HECK, SENIOR VICE PRESIDENT, 

THE SCOULAR COMPANY, OMAHA, NEBRASKA, ON BEHALF 

OF THE NATIONAL GRAIN AND FEED ASSOCIATION 

Mr. HECK. Thank you, Chairwoman Stabenow, Ranking Member 

Cochran, and members of the Committee. I am John M. Heck, senior vice president of The Scoular Company in Omaha, Nebraska. 

Scoular manages commodity supply chain risk for customers in 

food, feed, and renewable fuel markets, and we assist farmers in 

tailoring their risk management solutions utilizing 61 grain-handling facilities across the country. 

Today I am representing the National Grain and Feed Association. Today I would like to focus primarily on a rule proposed by 

the CFTC last November that would radically change the way business is done in the futures industry, and we believe strongly, despite CFTC’s goal of enhancing customer protection, that two provisions of the rule would actually cause a dramatic increase in customer risk. 

The first position would decrease the time in which customers’ 

margin calls must arrive at their futures commission merchant, or 

FCM, from the current 3 days to just 1 day. Otherwise, the FCM 

would have to take a capital charge for that undermargined 

amount. Even in today’s environment of money moving electronically, 1 day is not sufficient for all customers to maintain the current 3-day timeline. Otherwise, we fear some FCMs would require 

customers to pre-margin their hedge accounts, potentially putting 

more customer funds at risk in the event of another FCM insolvency. 

The second provision of concern, maybe more troubling than the 

first, would change the timing of FCMs’ calculation of residual interest. Those are the funds that the FCM contributes from its own 

money to ‘‘top up’’ customer accounts until margin calls are received. For decades, this provision of the CEA has been interpreted 

by the Commission as allowing some period of time for FCMs to do 

this. The CFTC proposal would change that consistent historical interpretation to require that every customer be fully margined on a 

24/7 basis. Now, that may sound like a good idea, but in the real 

world it causes major problems, especially among the smaller and 

mid-sized FCMs that serve production agriculture and agribusiness. This would severely stress FCMs’ liquidity, leading us to 

fear, again, that pre-margining would be required of customers. An 

unintended consequence would be consolidation in the FCM world 

as smaller firms cannot compete with larger firms who could afford 

to top up customer accounts. 

If I could bring this down to a real-world example, think about 

a typical country elevator in Nebraska. This elevator handles 5 million bushels of grain per year. Before harvest, the elevator might 

have 40 percent of its annual grain volume purchased from farmer 

customers and then hedged through forward futures contracts. Assuming a typical crop mix of corn, wheat, and soybeans, for corn 

the elevator has to post $648,000 with its FCM to establish its upfront futures position; soybeans, another $594,000; wheat, another 

$129,000. That is a total of more than $1.3 million the country elevator has sent to the FCM just to establish its futures positions. 

36 

Now let us look at the additional financial requirements if the 

CFTC proposal was put into effect. We will assume that the elevator’s FCM would require pre-margining by the customer to cover 

a 1-day limit up move, a reasonable precaution by the FCM. The 

country elevator would have to send 1 million more to the FCM for 

the possibility of a limit up move that may never come. If MF Global had required pre-margining of this fashion, the country elevator 

would have had almost twice as much of its capital exposed to misuse and loss, about $2.3 million instead of $1.2 million. 

We continue to be mystified about why the meaning of the Commodity Exchange Act has changed after decades of consistent interpretation. We would prefer to work this out with the CFTC, but 

there may be a need for legislative action to clarify the interpretation the futures industry has relied on for so long. 

One final item of regulatory concern is the CFTC rule concerning 

recordkeeping by companies that are members of a commodity exchange. In the form prescribed by CFTC, we are not aware of any 

technology that currently exists that will capture the information 

required by the Commission. We are working with the Commission 

on clarification of this problem. 

In conclusion, I have detailed the NGFA’s other reauthorization 

priorities in my written testimony. We believe that the U.S. Bankruptcy Code needs to be harmonized with the CEA and CFTC regulations to clarify and ensure that customers come first in FCM insolvencies. We also believe that the futures customers should have 

access to some form of insurance as securities customers do. As you 

have heard from many other comments today, we are also awaiting 

a study from the FIA before recommending any particular structure. 

Thank you for the opportunity to testify, and I look forward to 

any questions. 

[The prepared statement of Mr. Heck can be found on page 121 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. Russak. 

STATEMENT OF DONALD A. RUSSAK, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, NEW YORK POWER 

AUTHORITY, WHITE PLAINS, NEW YORK, ON BEHALF OF THE 

AMERICAN PUBLIC POWER ASSOCIATION 

Mr. RUSSAK. Chairwoman Stabenow, Ranking Member Cochran, 

and members of the Committee, I am testifying today on behalf of 

the New York Power Authority—or as it is known, NYPA—the 

State of New York, as well as the American Public Power Association. Thank you for the opportunity to testify on an issue of great 

importance to public power utilities in considering the reauthorization of CFTC. 

NYPA is the largest State-owned public power organization, serving business customers, governmental customers, municipal electric 

utilities, and rural cooperatives throughout New York State. The 

electric energy used to serve these customers is subject to the 

forces of the volatile markets, and yesterday was a perfect example 

of this volatility. With temperatures approaching 100 degrees in 

many parts of New York State, the spot market price for electricity 

37 

ran up into the hundreds of dollars per megawatt hour, as much 

as $500 a megawatt hour in New York City alone, up from $60 the 

prior week. This exposes NYPA’s financial position and its customers to price risk and uncertainty. 

NYPA uses certain hedging transactions to reduce its market 

risk, to stabilize revenue, and most importantly, to provide rate 

stability to our customers. Because of the transparency and certainty that will be provided in the swap markets, we continue to 

support the Dodd-Frank Act and the full funding sought for the 

CFTC in the President’s fiscal year 2014 budget. 

However, CFTC regulations implementing swap dealer rules of 

the Dodd-Frank Act have damaged our ability to protect our customers and ourselves from this market volatility. Under these regulations, a counterparty can engage in just $25 million of swap 

dealing activities with public power utilities before having to be required to register as a swap dealer. For all but the smallest of 

transactions, the number might as well be zero. 

The threshold amount is also unfair to public power entities. The 

de minimis threshold for swap dealing activities with investorowned utilities, entities against whom we compete, is $8 billion, or 

300 times the amount. As a result of the $25 million threshold, a 

number of non-financial entities have refused to enter into financial transactions with NYPA, which naturally leads to increased 

costs to us and to our customers. This is imperiling jobs across the 

State as well as increasing taxes. 

The problem is not unique to the power authority but affects 

public power utilities throughout the country. APPA members commonly report that counterparties are refusing to enter into swap 

transactions with them, and the numbers have fallen off by half or 

more. In fact, Grant County Public Utility District in Washington 

State went from 28 counterparties down to 2. The October 2012 noaction letter raises the special entity de minimis threshold from 

$25 million to $800 million for certain power-related transactions. 

However, additional restrictions on these have meant that counterparties are still not participating in the market with us. 

Even CFTC’s Scott O’Malia, in a keynote address this May, noted 

the irony that the CFTC, in trying to protect public power utilities 

from the perils of the swaps markets, has instead forced us to trade 

only with Wall Street banks. He and other CFTC Commissioners 

have recommended further action, if not through regulation then 

through legislation. 

On March 11, 2013, the Public Power Risk Management Act was 

introduced. This legislation provides very narrow and targeted relief for operations-related swaps for public power utilities. Specifically, the legislation would provide that the CFTC treat utility operations-related swaps with a utility special entity in the same 

manner such swaps are treated with other utilities, that is, made 

subject to the overall $8 billion threshold. This would put public 

power utilities on the same footing as investor-owned utilities. 

The Public Power Risk Management Act was approved by the 

House Committee on Agriculture with a unanimous voice vote on 

March 20 and was approved in the House by a 423–0 vote on June 

12. The legislation has since been sent to the Senate and referred 

to this Committee. It has been endorsed by the U.S. Chamber of 

38 

Commerce, the Consumer Federation of America, and the Commodity Markets Oversight Coalition. We would very much encourage this Committee to take up and approve H.R. 1038 or, as it considers CFTC reauthorization, to provide similar legislative relief. 

Public power utilities are well versed in the markets in which we 

hedge price and operational risks. Forcing us to enter into transactions with only Wall Street firms provides no substantive benefit 

and, moreover, reduces the number of market participants with 

whom public power utilities can hedge their risk. Ultimately, this 

increases operational risk and hurts our customers. 

Thank you again for the opportunity to testify, and I will be 

happy to answer any questions. 

[The prepared statement of Mr. Russak can be found on page 161 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. Colby. 

STATEMENT OF JIM COLBY, ASSISTANT TREASURER, HONEYWELL INTERNATIONAL INC., MORRISTOWN, NEW JERSEY 

Mr. COLBY. Chairwoman Stabenow, Ranking Member Cochran, 

and other members of the Committee, thank you for inviting me to 

testify. I am an assistant treasurer at Honeywell International, and 

today I speak on behalf of Honeywell, the Coalition for Derivatives 

End Users, and other commercial end users who are asking Congress to take quick action on S. 888 to provide non-financial end 

users hedging commercial risk with an exception from margin requirements in keeping with the original intent of the Dodd-Frank 

Act. 

Honeywell is a diversified technology and manufacturing leader, 

serving customers worldwide with aerospace products and services; 

control technologies for buildings, homes, and industry; 

turbochargers; and performance materials. The company’s more 

than 132,000 employees include 20,000 scientists and engineers 

who are focused on developing innovative products and solutions. 

Honeywell is truly a global company, with more than 50 percent 

of our sales outside of the United States and therefore exposed to 

market risks from changes in interest rates, foreign exchange 

rates, and commodity prices. When appropriate, we hedge exposures through the use of derivative contracts to eliminate risks that 

we cannot control. We do not use derivatives for speculative purposes. 

With a compliance deadline looming, end users ask the Senate to 

take quick action on S. 888 Without swift action on this legislation, 

which passed the House with an overwhelming bipartisan vote in 

June, non-financial end users will be forced to divert capital away 

from job-creating investments, sidelining billions of dollars in margin accounts. According to a Coalition for Derivatives End Users 

survey, a 3-percent initial margin requirement could reduce capital 

spending by as much as $5.1 to $6.7 billion among S&P 500 companies alone and cost 100,000 to 130,000 jobs. 

To demonstrate how non-financial end users use derivatives to 

manage risk, I will provide an example of how Honeywell uses derivatives. We sell satellite and launch vehicle inertial measurement 

units manufactured in Florida to customers in Germany. Europe is 

39 

a key growth market for commercial space products and, in order 

to qualify for consideration on certain opportunities, we may be required to enter into contracts denominated in euros even though all 

costs of production are incurred in U.S. dollars. The period for this 

type of contract can span multiple years, during which changes in 

the value of the euro versus the U.S. dollar can significantly impact 

the economics of the project. To mitigate this risk, we may enter 

into a forward contract to sell an amount of euros equal to our net 

exposure to lock in the market rate. 

To shed some light on Honeywell’s potential exposure to margin 

requirements, we had approximately $2 billion of hedging contracts 

outstanding at year-end that would be defined as a swap under 

Dodd-Frank. Applying 3-percent initial margin and 10-percent variation margin implies a potential margin requirement of $260 million. Cash deposited in a margin account cannot be more productively deployed in our businesses and as a result limits our ability 

to promote economic growth and protect American jobs. 

In approving the Dodd-Frank Act, Congress made clear that end 

users were not supposed to be subject to margin requirements. 

Nonetheless, regulations proposed by the prudential banking regulators would require end users to post margin. This stems from 

what they view to be a legal obligation under Title VII, not because 

they view it as necessary for the safety and soundness of the financial system. 

Dialogues between Senator Mike Crapo and Federal Reserve 

Chairman Ben Bernanke and between Senator Tester and Governor Daniel Tarullo during Senate testimony underscore why passage of the margin bill is necessary and why the Senate should 

have confidence in taking quick action. As Governor Tarullo made 

clear last week, passage of this bill would simply remove what they 

believe to be the requirement under Dodd-Frank to impose margin 

requirements while leaving intact the ‘‘ability to use [the] full panoply of supervisory tools.’’ He further stated that the Fed does not 

need any additional authority to promote safety and soundness in 

the financial system and good risk management practices among 

regulated entities. Passage of S. 888 would not remove the ability 

of banks to set margin requirements on end users as part of their 

credit risk management process. 

The legislation in no way begins to dismantle Dodd-Frank. It 

would simply ensure that the final act and rules function as Congress intended and that commercial end users do not face the same 

regulatory burden as those who speculate and create systemic risk. 

In conclusion, we need the Senate to quickly enact S. 888 so that 

end users like Honeywell will continue to have the ability to manage risk without having mandatory and unnecessary margin requirements imposed. Mandatory requirements would divert cash 

from investment and job creation. Regulators have made clear that 

they are not necessary for the safety and soundness of our financial 

system. 

Thank you for inviting me to testify today. I look forward to answering any questions that you might have. 

[The prepared statement of Mr. Colby can be found on page 65 

in the appendix.] 

40 

Chairwoman STABENOW. Well, thank you very much to each and 

every one of you. Mr. Colby, let me just indicate that, first of all, 

I was very involved in the effort on the language on end users in 

Dodd-Frank, and I think Congress has been very clear about the 

fact that we want to maintain the ability for market participant to 

use markets and to safely hedge, and so I share your concerns on 

this issue. This is something we have actively been involved in on 

this Committee and with the CFTC, and I realize the broader 

issues with the Fed and so on right now. But could you just take 

a moment to talk just a little bit more about what it would mean 

if you had to post margin as it relates to reducing your hedging activities? 

Mr. COLBY. Well, what it would do is—I mentioned the $260 million figure. That is cash that we could be investing in the operations of the company, creating capital expenditures, creating jobs, 

and promoting economic growth. But instead, if we put it into a 

margin account, it is going to sit idle, and we cannot spend it. We 

cannot spend the same dollar twice. If it is sitting in a margin account, it means we cannot invest it in the business. 

Chairwoman STABENOW. Thank you very much. 

Mr. Heck, a priority for all of us is that the markets are safe and 

work well for commercial hedgers. Given all the changes in the last 

year as we look at rules, as we look at other changes with NFA 

that we heard about today, and CME and so on, those proposed by 

the CFTC, do your members feel safer using the futures and the 

swaps markets today? 

Mr. HECK. Senator, I think they do feel—I do think they feel 

safer today. I applaud the NFA for the self-regulatory changes they 

have made. A lot of those mirror recommendations made by the 

NGFA’s task force shortly after the MF Global bankruptcy. 

I also think the CME has made significant progress in making 

our funds safer due to the changes they have made at the clearinghouse level. 

We do believe that there are other avenues to explore. We are 

not seeking a legislation solution. I think we would be interested 

in and have told the CFTC we would like to work on a pilot program with them that would involve a fully segregate customer account, and that kind of account exists in parts of the swaps industry right now. We would like to do that. And as I said, we would 

also like to see the results of this insurance study to see if that is 

a feasible alternative for our members. 

Chairwoman STABENOW. So from your perspective, your members 

would be willing to pay for full segregation at this point? 

Mr. HECK. I think that depending on the size of one of our members, segregation, full segregation of the cost of that would be 

something they would be interested in. But, again, we would really 

like to see that be optional between the FCM and their customer. 

Chairwoman STABENOW. Mr. Lukken, let us talk a little bit more 

about that from your perspective. If there were changes made to 

the bankruptcy laws that made full physical segregation feasible, 

would your member futures commission merchants offer that to 

customers? Is the Bankruptcy Code the only issue that is standing 

in the way? And do you see a demand at this point in the marketplace for full physical segregation? 

41 

Mr. LUKKEN. Well, we would support an optional full segregation 

approach. I think we are dealing with this issue in Europe currently where EMIR requires not only omnibus accounts but also optional individually segregated accounts. The question is cost, 

whether people are willing to pay the cost to have that extra set 

of protection. 

If you are losing the fellow customer risk, that shared insurance 

level, it is going to cost because that risk is going somewhere, like 

squeezing a balloon. So somebody is going to have to pay for that 

risk, so that is the reason the costs are going to have to go up. 

Chairwoman STABENOW. Thank you. 

Mr. Guilford, I see Senator Donnelly here, so I am going to let 

him talk to you about gas prices. I know he wants to talk to you 

about gas prices, so I will let him have those questions, although 

I am also equally interested. But since you represent a company 

that would be, in effect, regulated by the CFTC, why are you supportive of increasing its funding and growing the agency? Why is 

that important for your members? 

Mr. GUILFORD. If I might, I would like to take you back to 

2008—— 

Chairwoman STABENOW. We need you to push the button. 

Mr. GUILFORD. Thank you. I will take you back to 2008, but I 

will make it really brief and not as long as 2008. 

Chairwoman STABENOW. Good. 

Mr. GUILFORD. In 2008, we had crude oil at about $70 a barrel 

in March. I testified before House Energy and Commerce about a 

month before it reached its peak in July of that year of $147, and 

by November it had fallen back to $32. 

Now, during that span of time, we had major Wall Street investment banks claiming that crude was going to go to $200 a barrel 

that year. That resulted in the customers of our heating oil retailers rushing to their heating oil retailer saying, ‘‘Lock us in, protect 

us from this Armageddon that is coming.’’ So a lot of these consumers, hundreds of thousands of these consumers, with thousands 

of heating oil retailers, went into these markets and locked in 

prices of between $4.50 and $5 a gallon for their winter heating 

fuel supply. 

Unfortunately, by the time we got to November and that market 

price fell to $32 a barrel, we had market price heating oil, physical 

heating oil, at $2 a gallon. Well, imagine that you are a consumer 

and you laid out $4.50 a gallon for 900 gallons of heating oil for 

your winter supply, and the actual market price at the time had 

fallen to $2. 

So we had a lot of angry consumers, and we had a lot of very 

unfortunate heating oil retailers because they are decent business 

people and they have done business for three and four generations, 

wanted to make sure they took good care of their customers, who 

let a lot of those customers out of those contracts in order to be 

able to keep them as customers, but not without a tremendous cost. 

It was clear to us then that these markets are dysfunctional. 

They do not operate for the purpose in which they were intended. 

And what we heard all through that period of time—and appreciate, if you will, Madam Chairwoman, that we were told at the 

time that this was all because of supply and demand. Now, the preVerDate Nov 24 2008 08:41 Sep 15, 2014 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 C:\USERS\MW42035\DESKTOP\DOCS\87566.TXT MICAH
42 

vious panel discussed that you do not need to be a Ph.D. to understand some statistics. Tell me, if you would, please, because it has 

not been answered for us in 5 years, why we had a situation where 

there was a supply and demand dynamic that drove it from $70 to 

$147 in 4 months. Where was the extraordinary interruption in 

crude oil supply or the extraordinary increase in demand within 4 

months that more than doubled the price of crude? And then, right 

after the 4th of July, after we celebrated Independence Day, it begins to fall in another 4 months from $147 to $32. 

So whatever circumstances attributable to supply and demand 

that occurred in the first 4 months apparently evaporated and 

turned 180 degrees in the second 4 months. 

Madam Chairwoman, in answer to your question, we need to 

have absolutely transparent, accountable, and adequately overseen 

financial markets, because we rely on these markets to be able to 

do one very simple thing for our customers. Our customers come 

to us and ask us to be protected—protected from the vicissitudes 

of the economy and the marketplace, and that is what we like to 

be able to do. And we like to be able to do it in a way that protects 

them, protects us. We can earn a decent living and manage to take 

care of consumers. We could not do that in 2008. 

Chairwoman STABENOW. Okay. Thank you very much. 

I am going to turn now to Senator Cochran. 

Senator COCHRAN. Following up on the last comments, what 

would we do if we wanted to introduce legislation and identify 

changes in current law that would lead to the result you just 

wished for? 

Mr. GUILFORD. Well, it is important, I think, Senator, to take 

this on several different levels. First of all, we started working on 

something as simple as closing the Enron loophole. You will recall 

that. We worked on that with you and others in the Senate back 

in 2008. Now, there was a clear example of an instance in which 

a lack of transparency in the markets resulted in the citizens of 

California going from paying $7 billion for electricity to $27 billion 

for electricity. There is no doubt about the fact that there was manipulation. Nineteen people went to jail. A 20th would have had 

Mr. Lay not passed away. An enormous amount of manipulation in 

one market by one company. And what we attempted to do at the 

time was to close the loophole by taking over-the-counter and electronic trading out of the dark markets, to shine a light on it, to 

make it transparent, to require things to go through mandatory 

clearing—all of the things that we eventually managed to be able 

to do to a greater extent in Title VII but did not entirely succeed 

in perfectly, certainly. But we certainly did not do it when we 

passed the farm bill in 2008. 

Well, transparency in these markets, knowing what is going on, 

to be able to see all of the market participants and knowing what 

they are doing is critical. 

We would take you in a couple of other directions. One of the 

things we would like to see the authority of the CFTC to have is 

not necessarily to be able to in the first instance regulate index 

funds, but to be able to have the authority to be able to look and 

make sure they understand what they are doing. Understand that 

the concern that we have, and to follow up on the comments of Mr. 

43 

Kelleher on the previous panel, is to address the issue of how there 

is such an imbalance today of 70 percent financial market participation in these energy commodity markets and 30 percent actual 

market participants, people and airlines and farmers and truckers 

who want to hedge their products. 

We would like to be able to make sure that these markets are 

functioning for the purpose in which they were intended, and I 

think that we have forgotten why that was the case. 

For over 100 years, we had enormous stability in this country in 

energy prices, and it was not until the 1970s that they became unstable. That is when we created the CFTC, gave it its original set 

of authorities. We wanted to create a world marketplace in order 

to be able to wrest control of energy markets away from OPEC. 

And for about 25 years, it worked brilliantly, absolutely brilliantly, 

but in the last decade not as well. And I think that a lot of that 

was attributed to the fact that, unfortunately, a mistake was made 

both in 1999 and in 2000 in deregulating these markets and closing 

them off so that we did not see what they were doing. 

So in the first instance, let us make sure we understand exactly 

what is going on in these markets. Let us make sure we have an 

agency that is paying attention to what is going on in these markets, because when what we have seen going on in the last week, 

Senator, 43 cents on gasoline in 2 weeks, $1 billion a week it will 

cost the American people in higher gasoline costs, we better have 

a really good answer to be able to give people about why that is 

occurring. And we do not have a very good answer today, and it 

starts at the CFTC at least with what is going on in the commodity 

markets because that is where the activity is occurring that is driving these prices. 

Senator COCHRAN. And we are out of gas. That is the other part. 

In terms of production, what is the level of production compared 

with the way it was 5 years ago, 10 years ago? Is it going down 

or is it going—— 

Mr. GUILFORD. Great question. Thank you very much. Before the 

financial crisis, America was consuming about 20 million barrels a 

day of crude oil, before the financial crisis in 2007. In 2012, it was 

18.5 million barrels. We had a million and a half barrel a day decrease in crude oil consumption, an enormous—cataclysmic in the 

energy business that we would have that much demand destruction. At the very same time, during the same period, America has 

produced an additional 1.5 million barrels a day in domestic production, another cataclysmic event. The biggest single increase in 

daily production of crude oil in the history of the United States 

since 1859 when we began commercially producing crude oil. Extraordinary. 

Combine those two issues, it is a 3 million barrel a day swing 

in just crude. And yet what happened between those two dates? We 

went from $72 on crude to $94. And, again, not a straight line. So 

a 3 million barrel a day swing in crude in the world’s largest economy and largest consumer of petroleum products, and yet we had 

a $22 a barrel increase in crude and another $10 last week. Another $10. 

Now, on gasoline, gasoline during the same period of time, we 

went from, in 2007, 9.3 million barrels a day consumption of gasoVerDate Nov 24 2008 08:41 Sep 15, 2014 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 C:\USERS\MW42035\DESKTOP\DOCS\87566.TXT MICAH
44 

line to 8.7 in 2012. The first time since World War II that Americans consumed that much less gasoline, almost 600,000 barrels a 

day. 

Now, for the economy, just as a statement of fact, in 2007 we had 

a 4.6-percent unemployment rate; in 2012, it was 7.6. And yet we 

hear out of Wall Street most recently, with the June jobs report, 

that we needed to tack on another $3 or $4 barrel on crude because 

we had a robust jobs report. The robust jobs report was up 360,000 

on part-time, down 240,000 on full-time, and U–6 went from 13.8 

to 14.3. I do not think you need to be a Republican or a Democrat 

to understand that does not meet the test of robust. And yet out 

of Wall Street, we needed to have an increase in the price of a barrel of crude. 

I do not find that justified. I do not. 

So we have had enormous changes in the energy markets in this 

country in the majority for a tremendously good reason, but I do 

not necessarily think those have always been reflected in the prices 

that Americans pay. 

Senator COCHRAN. Well, that is one of the reasons why we are 

having these hearings. 

Chairwoman STABENOW. It is. 

Senator COCHRAN. It’s to get some answers and find out what the 

heck is going on. And if there is responsibility here in Washington, 

in the United States Senate specifically, we want to hear some suggestions about what we should consider. 

Thank you very much for being here and helping us in this effort. 

Chairwoman STABENOW. Thank you very much. 

Senator Donnelly. 

Senator DONNELLY. Thank you, Madam Chairman. I would just 

like to note to Mr. Lukken, a graduate of Indiana University, we 

are very proud of you, and I know you worked on the Agriculture 

Committee under Senator Lugar, who was my predecessor, and it 

is filling awful big shoes following him, and I want to appreciate 

all your service that you gave not only to him but to the country. 

Thank you very much. 

To Mr. Russak, I will sponsor the Public Power Risk Management Act. I have talked to Indiana’s municipal power agencies, and 

they are looking for help on this. And we have seen that the CFTC 

recently released a no-action letter temporarily raising the special 

entity threshold for utility-related swaps. Has that helped? And obviously we need a permanent solution to this. We are working hard 

on this. Has the temporary helped at all? 

Mr. RUSSAK. Well, Senator, unfortunately, not very much because of the temporal nature of this. The counterparties, the nonfinancial counterparties, have not been willing to step up to the 

plate and offer up their services to us. So it really did not help the 

public power entities. We have the same issues in New York State 

as well with the New York municipal electric utilities, and the 

Power Authority itself having seen 20 percent of its counterparties 

going away. 

Senator DONNELLY. Well, I want you to know we will work as 

fast as we can to get a companion bill on this side and get that put 

45 

in place. We want to get some certainty for the municipal power 

agencies all over the country. 

Mr. RUSSAK. Very much appreciate that, Senator. 

Senator DONNELLY. Mr. Guilford, let me ask you, do you think 

that not having position limits in place for non-end users increases 

the per barrel price? 

Mr. GUILFORD. Yes. 

Senator DONNELLY. And, you know, as I indicated earlier, Goldman Sachs analysts around 2011 estimated around 8 to 10 cents 

per million barrels—or per barrel. What you are looking at with 

421 million barrels—what is your estimate of approximately what 

you think it affects per barrel cost? Any ball park. 

Mr. GUILFORD. I would like to put this in the context of what we 

said when we testified in the other body at Energy and Commerce 

and following the president of the world’s largest energy company 

where he indicated that he thought it should be between $60 and 

$70 a barrel. I mean, in a classic economic sense, the cost of a barrel, it is the marginal cost of production of the next barrel, and that 

was his opinion. That was his opinion at that time. That remains 

my opinion today. And if I would, I think putting it in the context 

of what the position limits rule meant, if I could just for a moment? 

Senator DONNELLY. Yes. 

Mr. GUILFORD. I would like to make sure that I quote it accurately. Spot month was 25 percent of estimated deliverable supply 

for one trader, 25 percent of estimate deliverable supply. I do not 

know about you, Senator, but that does not strike me as a huge 

burden, 25 percent of estimated deliverable supply. The not spot 

month, 10 percent of the first 25,000 contracts, 2.5 percent thereafter. 

Senator DONNELLY. Well, I would like to see—— 

Mr. GUILFORD. Not much of a limit. 

Senator DONNELLY. Right. I would like to see a market that for 

end users, as you indicated, airlines, transportation, shipping, ag, 

if they are using a product, we want them to be able to lock in 

prices that they can live with, to have some certainty, to avoid risk. 

But it does not seem to me that the purpose of this market has 

been to speculate on the future of oil, the future of what happens 

to our families and going from $3 to $4 to $3 to $4.25, that it 

causes extraordinary hardship not only for families but for your 

companies that you represent as well to try to have some certainty 

in a market where supply continues to go up, demand continues to 

be steady or fall down, and the price of crude through position limits I think has really been affected. 

Mr. GUILFORD. Absolutely, and just to follow up on that, if I 

might—— 

Senator DONNELLY. Or lack of position limits, I should say, has 

been affected. 

Mr. GUILFORD. When we were there late last winter or early last 

spring, those of us who live in the Northeast remembered that we 

had the warmest winter on record in the history of recordkeeping. 

Outdoor sporting events were occurring all year round. I know they 

do in your State all year round, Senator Cochran. I assure you they 

do not in Connecticut. We usually close up sometime around 

Thanksgiving until, you know, just before Memorial Day. But golf 

46 

courses were open all winter long. Our members lost 35 or 40 percent of their sales volume because it was so warm. The price of 

heating oil went up. The market price of heating oil went up. It did 

not go down. It should have collapsed, but it did not. 

So, again, that is why we feel as though we need to make sure 

we have a CFTC that is adequately funded, adequately staffed, has 

the technology in place with which it can do its job, and to be able 

to tell us what is going on, because a lot of it does not seem to 

make a great deal of sense. 

Senator DONNELLY. Well, I would like to thank the panel and, 

again, Mr. Lukken, we are proud to have you as a graduate of the 

Hurryin’ Hoosiers. 

Chairwoman STABENOW. Thank you very much. 

Senator Roberts. 

Senator ROBERTS. If we had only had the CFTC when Jimmy 

Carter put that embargo on the Russian sales. I remember at the 

Dodge City co-op—I cannot remember what the price was. I am 

guessing it was around $2.90, something like that, maybe 3 bucks. 

It went to hell in a hand basket, driven, of course, by speculators. 

That was the President of the United States. I am not sure the 

CFTC could have done that job, and I am just being sort of pesky 

with you. 

Mr. Heck, we have heard from quite a few panelists or some of 

the panelists that the role of the commodity prices or markets have 

changed due to speculation, i.e., the speculators. For your members, are they looking at the speculator driving price swings, or are 

they looking to reduce their risks from these swings? 

Mr. HECK. Senator, I think our members generally as the panelists commented before see a role for the speculators in our markets 

to bring liquidity, particularly in deferred periods where I have 

bought grain from a farmer for delivery in March of 2014, and I 

need to hedge that. If a speculator is out there wanting to take the 

other side of that trade, that is a good thing for us. So I think there 

is a role for that kind of liquidity in our markets. 

I think that between our industry and the CFTC and the exchanges we have worked pretty well together to establish the right 

kind of position limits in our industry. I think they function pretty 

well. Occasionally we have had some issues with, you know, perhaps long index funds being in our market and causing a divergence between the futures price and the cash price. Again, through 

collaboration, we have made some changes to that contract that 

have made that a non-issue. 

So I would say today in our industry our members are trying to 

work with each other and with farmers to minimize the risk inherent in price swings through prudent risk management tactics. 

Senator ROBERTS. In your comments—well, I would just add that 

I know that we all want stability, we all want transparency to the 

degree that is possible. But I am not sure the CFTC issuing regulations allegedly to achieve that—not allegedly. They are actually 

trying to achieve it. But they are issuing interpretive guidelines. 

That is like sub-regulatory guidance. That is like a lot of things 

that are happening in Washington in a lot of different agencies and 

a lot of regulations. Three hundred pages’ worth, I am not sure 

that is going to—we need transparency on the 300 pages. 

47 

In your comments you mentioned that the National Grain and 

Feed folks are concerned that the proposal for customer protection 

could end up significantly increasing the futures customers’ risk in 

the event of future failures. In the real world, i.e., the countryside 

of Kansas, and Vermont, what are the challenges—and everywhere 

else, Mississippi, Michigan. In the real world, what are the challenges for shortening the amount that customers can make margin 

calls to 1 day instead of 3? 

Mr. HECK. I do not think that from an industry perspective we 

have been able to determine why the 1-day rule would benefit anybody, frankly. And I think we need to continue to work with the 

CFTC to understand that. They have perhaps intimated that their 

hands are tied by the regulation, but the interpretation they have 

made is contrary to what has happened over decades. 

Senator ROBERTS. Okay. Real quick, and my time is expiring. If 

the proposed rule on residual interest goes forward unchanged, will 

it dramatically impact farmers and ranchers using the market to 

hedge their costs? 

Mr. HECK. Yes. 

Senator ROBERTS. Thank you. 

Mr. Lukken, thank you to the Futures Industry Association and 

other groups for being very proactive and paying with your own 

dollars, not the taxpayer dollars, to evaluate the costs and benefits 

of the many proposals to provide additional insurance for customer 

accounts in case of another futures failure. There is not a question. 

I just wanted to thank you. 

It looks like I am out of time, and my wife tells me that I am 

already 20 minutes late, so, Madam Chairwoman, distinguished 

Ranking Member, the Hoosier from Indiana, Mr. Lukken, thank 

you for your service up here, adios. 

Chairwoman STABENOW. Thank you. Thank you, Senator. 

Thank you again. This has been a very important panel, very 

helpful, and your written testimony as well. We look forward to 

working with all of you. 

Let me just indicate that any additional questions for the record 

should be submitted to the Committee clerk 5 business days from 

today. That is 5:00 p.m. on Wednesday, July 24th. Without objection, the compilation of letters received by the Committee with respect to reauthorization will be added to the record of the hearing. 

[The following information can be found on pages 172-435:] 

Chairwoman STABENOW. Seeing nothing further, the meeting is 

adjourned. Thank you very much. 

[Whereupon, at 5:40 p.m., the Committee was adjourned.] 

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234 


87566.274
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273 


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87566.317
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276 


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278 


87566.321
279 


87566.296
280 


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281 


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282 


87566.322
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285 


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286 


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305 


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340 


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342 


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344 


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345 


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346 


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347 


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348 


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349 


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350 


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351 


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353 


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355 


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356 


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361 


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365 


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366 


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367 


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371 


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380 


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381 


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382 


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383 


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384 


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386 


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388 


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389 


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390 


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391 


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395 


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396 


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397 


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398 


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399 


87566.440
400 


87566.252
401 


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402 


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403 


87566.255
404 


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405 


87566.257
406 


87566.441
407 


87566.442
408 


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409 


87566.444
410 


87566.445
411 


87566.446
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413 


87566.448
414 


87566.449
415 


87566.450
416 


87566.451
417 


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418 


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419 


87566.454
420 


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421 


87566.456
422 


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423 


87566.458
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87566.459
425 


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426 


87566.461
427 


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428 


87566.463
429 


87566.464
430 


87566.269
431 


87566.270
432 


87566.271
433 


87566.272
434 


87566.273
435 


87566.198
436 


87566.199
437 


87566.200
438 


87566.182
439 


87566.183
440 


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441 


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442 


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443 


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444 


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445 


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446 


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447 


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448 


87566.192
449 


87566.193
450 


87566.194
451 


87566.195
452 


87566.196
453 


87566.197
454 


87566.162
455 


87566.163
456 


87566.164
457 


87566.165
458 


87566.166
459 


87566.167
460 


87566.168
461 


87566.169
462 


87566.170
463 


87566.171
464 


87566.172
465 


87566.173
466 


87566.174
467 


87566.175
468 


87566.176
469 


87566.177
470 


87566.178
471 


87566.179
472 


87566.180
473 


87566.181
(475) 

QUESTIONS AND ANSWERS 

JULY 17, 2013 

476 


87566.005
477 


87566.006
478 


87566.007
479 


87566.008
480 


87566.009
481 


87566.010
482 


87566.011
483 


87566.012
484 


87566.013
485 


87566.014
486 


87566.015
487 


87566.016
488 


87566.017
489 


87566.018
490 


87566.019
491 


87566.020
492 


87566.021
493 


87566.022
494 


87566.023
495 


87566.024
496 


87566.025
497 


87566.026
498 


87566.027
499 


87566.028
500 


87566.029
501 


87566.030
502 


87566.031
503 


87566.032
504 


87566.033
505 


87566.034
506 


87566.035
507 


87566.036
508 


87566.037
509 


87566.038
510 


87566.039
511 


87566.040
512 


87566.041
513 


87566.042
514 


87566.043
515 


87566.044
516 


87566.045

 O