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OVERSIGHT OF THE SWAPS AND FUTURES 

MARKETS: RECENT EVENTS AND 

IMPENDING REGULATORY REFORMS

HEARING

BEFORE THE

COMMITTEE ON AGRICULTURE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

JULY 25, 2012

Serial No. 112–34

(

Printed for the use of the Committee on Agriculture 

agriculture.house.gov 

COMMITTEE ON AGRICULTURE 

FRANK D. LUCAS, Oklahoma, Chairman 

BOB GOODLATTE, Virginia, 

Vice Chairman 

TIMOTHY V. JOHNSON, Illinois 

STEVE KING, Iowa 

RANDY NEUGEBAUER, Texas 

K. MICHAEL CONAWAY, Texas 

JEFF FORTENBERRY, Nebraska 

JEAN SCHMIDT, Ohio 

GLENN THOMPSON, Pennsylvania 

THOMAS J. ROONEY, Florida 

MARLIN A. STUTZMAN, Indiana 

BOB GIBBS, Ohio 

AUSTIN SCOTT, Georgia 

SCOTT R. TIPTON, Colorado 

STEVE SOUTHERLAND II, Florida 

ERIC A. ‘‘RICK’’ CRAWFORD, Arkansas 

MARTHA ROBY, Alabama 

TIM HUELSKAMP, Kansas 

SCOTT DESJARLAIS, Tennessee 

RENEE L. ELLMERS, North Carolina 

CHRISTOPHER P. GIBSON, New York 

RANDY HULTGREN, Illinois 

VICKY HARTZLER, Missouri 

ROBERT T. SCHILLING, Illinois 

REID J. RIBBLE, Wisconsin 

KRISTI L. NOEM, South Dakota 

COLLIN C. PETERSON, Minnesota, Ranking 

Minority Member 

TIM HOLDEN, Pennsylvania 

MIKE MCINTYRE, North Carolina 

LEONARD L. BOSWELL, Iowa 

JOE BACA, California 

DENNIS A. CARDOZA, California 

DAVID SCOTT, Georgia 

HENRY CUELLAR, Texas 

JIM COSTA, California 

TIMOTHY J. WALZ, Minnesota 

KURT SCHRADER, Oregon 

LARRY KISSELL, North Carolina 

WILLIAM L. OWENS, New York 

CHELLIE PINGREE, Maine 

JOE COURTNEY, Connecticut 

PETER WELCH, Vermont 

MARCIA L. FUDGE, Ohio 

GREGORIO KILILI CAMACHO SABLAN, 

Northern Mariana Islands 

TERRI A. SEWELL, Alabama 

JAMES P. MCGOVERN, Massachusetts 

PROFESSIONAL STAFF

NICOLE SCOTT, Staff Director 

KEVIN J. KRAMP, Chief Counsel 

TAMARA HINTON, Communications Director 

ROBERT L. LAREW, Minority Staff Director 

(II) 

(III)

C O N T E N T S 

Page 

Conaway, Hon. K. Michael, a Representative in Congress from Texas, prepared statement ................................................................................................... 5

Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, opening 

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

Prepared statement .......................................................................................... 2

Peterson, Hon. Collin C., a Representative in Congress from Minnesota, opening statement ........................................................................................................ 3

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

Southerland II, Hon. Steve, a Representative in Congress from Florida, submitted material .................................................................................................... 114

WITNESSES

Gensler, Hon. Gary, Chairman, Commodity Futures Trading Commission, 

Washington, D.C. ................................................................................................. 6

Prepared statement .......................................................................................... 8

Supplementary material .................................................................................. 105

Submitted letter and response ........................................................................ 108

Submitted questions ......................................................................................... 111

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

Inc., Chicago, IL ................................................................................................... 50

Prepared statement .......................................................................................... 52

Roth, Daniel J., President and Chief Executive Officer, National Futures 

Association, Chicago, IL ...................................................................................... 55

Prepared statement .......................................................................................... 57

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

Industry Association, Washington, D.C. ............................................................ 59

Prepared statement .......................................................................................... 61

Heck, John M., Senior Vice President, Business Development, The Scoular 

Company; Member, Executive Committee and Board of Directors, National 

Grain and Feed Association, Omaha, NE .......................................................... 67

Prepared statement .......................................................................................... 68

Conner, Hon. Charles F., President and Chief Executive Officer, National 

Council of Farmer Cooperatives, Washington, D.C. .......................................... 74

Prepared statement .......................................................................................... 76

McElroy, Paul E., Chief Financial Officer, JEA, Jacksonville, FL; on behalf 

of American Public Power Association ............................................................... 79

Prepared statement .......................................................................................... 81

(1)

OVERSIGHT OF THE SWAPS AND FUTURES 

MARKETS: RECENT EVENTS AND 

IMPENDING REGULATORY REFORMS 

WEDNESDAY, JULY 25, 2012

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON AGRICULTURE, 

Washington, D.C. 

The Committee met, pursuant to call, at 10:05 a.m., in Room 

1300 of the Longworth House Office Building, Hon. Frank D. Lucas 

[Chairman of the Committee] presiding. 

Members present: Representatives Lucas, Goodlatte, King, 

Neugebauer, Conaway, Schmidt, Thompson, Stutzman, Tipton, 

Southerland, Crawford, Huelskamp, Gibson, Hultgren, Hartzler, 

Schilling, Noem, Peterson, Holden, Boswell, Baca, David Scott of 

Georgia, Cuellar, Costa, Schrader, Kissell, Owens, Pingree, 

Courtney, Welch, Fudge, and McGovern. 

Staff present: Jason Goggins, Tamara Hinton, Kevin Kramp, 

Josh Mathis, Matt Perin, John Porter, Nicole Scott, Pete Thomson, 

Suzanne Watson, Liz Friedlander, C. Clark Ogilvie, John Konya, 

Margaret Wetherald, Jamie Mitchell, and Caleb Crosswhite. 

OPENING STATEMENT OF HON. FRANK D. LUCAS, A 

REPRESENTATIVE IN CONGRESS FROM OKLAHOMA 

The CHAIRMAN. This hearing of the Committee on Agriculture 

entitled, Oversight of the Swaps and Futures Markets: Recent 

Events and Pending Regulatory Reforms, will come to order. I now 

recognize myself for an opening statement. 

Good morning, and thank you for joining us for this important 

hearing. I would like to first thank the Ranking Member and his 

staff for their efforts today, and I would also like to thank our witnesses for their time. 

It is beyond unfortunate that for a second time in less than a 

year, this Committee is examining the circumstances of a futures 

commission merchant bankruptcy where customer funds were not 

properly segregated. Once again the very cornerstone of the futures 

markets, customer funds’ segregation, has been severely and suddenly called into question. 

For decades, futures markets have been a trusted tool for farmers, ranchers, and businesses seeking to manage risk. The bedrock 

of their trust in these markets is based on the fundamental protections provided by mandatory segregation of customer funds. Additionally, confidence in the futures and swaps markets stems from 

customers knowing that regulators are doing their job. 

2

As we all know, on July 10, the National Futures Association 

halted the operations of PFGBest and the CFTC filed a Federal 

suit against the firm and its founder alleging that the company had 

committed fraud, violated customer segregation laws, and falsified 

financial statements filed with the CFTC. Later that day, the company filed for bankruptcy. Press reports indicated that roughly 

$220 million in segregated client money is missing. 

The clients of firms like PFGBest and MF Global are our constituents. They are farmers and ranchers who until recently have 

never had cause for concern in using the futures markets. They 

have never had to worry that the tool for managing risk would one 

day turn risky and cast doubt on the integrity of the futures markets. 

In light of the bankruptcy, CFTC has adopted new rules to 

strengthen their controls over the treatment and monitoring of customer funds, and the self-regulating organizations have proposed 

several new initiatives that the Committee will examine today that 

would ensure another fraud in the futures markets cannot be carried out for years simply by opening a P.O. box. 

But the question remains: who is minding the store? There are 

some in this town who argue that we need more regulations. But 

the fact remains that new regulations mean nothing when regulators are not enforcing the existing rules on the books. What we 

need is regulators doing their job. 

And it is worth noting that CFTC gave itself high marks for direct examinations of futures brokers in a 2011 performance analysis. Yet billions of dollars in customer funds are missing today as 

the result of CFTC’s failure to perform with MF Global and now 

PFGBest. 

Today we hope to gain a comprehensive understanding of the 

facts surrounding PFGBest’s bankruptcy and the failure to miss 

such an outright fraud, in addition to an update on MF Global and 

recent Dodd-Frank rules that have been finalized by the CFTC. 

I thank everyone in attendance today. I look forward to hearing 

from our witnesses. 

[The prepared statement of Mr. Lucas follows:]

PREPARED STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN CONGRESS

FROM OKLAHOMA

Good morning. 

Thank you for joining us for this important hearing. I’d first like to thank the 

Ranking Member and his staff for their efforts today. I’d also like to thank our witnesses for their time. 

It is beyond unfortunate that for a second time in less than a year, this Committee is examining the circumstances of a futures commission merchant bankruptcy where customer funds were not properly segregated. 

Once again the very cornerstone of the futures markets, customer funds segregation, has been severely and suddenly called into question. 

For decades, futures markets have been a trusted tool for farmers, ranchers, and 

businesses seeking to manage risk. The bedrock of their trust in these markets is 

based on the fundamental protections provided by mandatory segregation of customer funds. 

Additionally, confidence in the futures and swaps markets stems from customers 

knowing that regulators are doing their job. 

As we all know, on July 10, the National Futures Association halted the operations of PFGBest and the CFTC filed a Federal suit against the firm and its founder, Mr. Russell Wasendorf, Sr., alleging that the company had committed fraud, violated customer segregation laws, and falsified financial statements filed with the 

3

CFTC. Later that day, the company filed for bankruptcy. Press reports indicate that 

roughly $220 million in segregated client money is missing. 

The clients of firms like PFGBest and MF Global are our constituents. They are 

farmers and ranchers who until recently have never had cause for concern in using 

the futures markets. They’ve never had to worry that the tool for managing risk 

would one day turn risky and cast doubt on the integrity of the futures markets. 

In light of the bankruptcy, CFTC has adopted new rules to strengthen their controls over the treatment and monitoring of customer funds. And, the self regulatory 

organizations have proposed several new initiatives that the Committee will examine today that would ensure another fraud in the futures markets cannot be carried 

out for years simply by opening a P.O. box. 

But the question remains: who is minding the store? There are some in this town 

who argue that we need more regulations. But the fact remains that new regulations mean nothing when regulators are not enforcing the existing rules on the 

books. What we need is regulators doing their job. 

It is worth noting that CFTC gave itself high marks for direct examinations of 

futures brokers in a 2011 performance analysis. Yet, billions of dollars in customer 

funds are missing today as the result of CFTC’s failure to perform with MF Global 

and now PFGBest. 

Today, we hope to gain a comprehensive understanding of the facts surrounding 

PFGBest’s bankruptcy and the failure to miss such an outright fraud, in addition 

to an update on MF Global and recent Dodd-Frank rules that have been finalized 

by the CFTC. 

Thank you. I look forward to hearing from our witnesses today.

The CHAIRMAN. I now recognize the Ranking Member for his 

opening statement. 

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A 

REPRESENTATIVE IN CONGRESS FROM MINNESOTA 

Mr. PETERSON. Thank you, Mr. Chairman, and thank you for this 

hearing. 

You know, I had an opportunity yesterday to visit with NFA trying to get an understanding. I am a CPA, as Mr. Conaway is, but 

I am not much of an auditor—I was more of a tax guy—the auditing I did do, you always sent the confirmation directly to the bank 

and the bank sent it directly back to you. I couldn’t understand 

how you could have a situation where he could intercept that and 

forge that. Somehow or another he gave them a Post Office box 

that they thought was the bank. I don’t know how that happened 

or what you can do about it. Now, they are moving toward e-audit, 

and that is what smoked this guy out and apparently precipitated 

his suicide attempt. They are going to now implement that and 

that sounds like that will fix this problem or largely fix it. 

But we are continuing to chase these problems all the time, and 

I am not sure that these regulators can ever get ahead of this. As 

with farmers, we can pass a farm bill but those guys are so far 

ahead of us that they sit on the tractor and they figure this stuff 

out before we ever decide how to work things. I think we have 

something going on like that in these markets. 

You know, these FCMs, as I understand it, no longer make their 

money by charging commissions for what they do. The way they 

have been making their money is by investing customer money and 

using the money they earn on the customer money to fund their 

business. Now, this is crazy, and especially in an interest-rate climate where we have zero percent interest and the government is 

going in and continuing zero percent interest. To some extent we 

are causing this problem because we are putting pressure on these 

4

guys to make enough money to stay in business, and then this is 

what happens. 

We have a self-regulatory situation: the CFTC doesn’t have 

enough people to go out and audit all these folks. We are trying 

to cut their budget, not raise it. I think these hearings are good to 

look at these things, but we may need to step back and take a look 

at how we got into this situation. I would like to see us go back 

and look at the CFMA in 2000, and we never have really examined 

what we did with that bill when we deregulated these markets. 

That is one thing, but the second thing we did is give legal certainty to these swaps and created this huge—at the time, I think 

there was $80 billion in these derivative markets. It went to $600 

trillion in 8 years because we gave them legal certainty. Well, this 

is the government, actually it is a regulation, us interfering in the 

marketplace to say that these things are not gambling. If we say 

it is not gambling when it actually is gambling, and if we would 

have left that alone, I don’t think we would be dealing with some 

of these things that we are dealing with now. 

So, we should go back and look at what we did and get some people to give us some kind of a sense of what our culpability in this 

whole situation is. When we did Dodd-Frank, we would not bite the 

bullet and we have these regulators forced to harmonize regulations when they have completely different cultures. There are three 

different regulators involved in the same situation, and then you 

wonder why it doesn’t work. So I don’t know. 

The regulators are doing as best as they can given the tools that 

they have. But, these folks that are in these markets have not 

learned a damn thing from anything that has happened so far and 

there are apparently a bunch of dishonest people in here and you 

are not going to catch them all, all the time. I would like to see 

us spend some time taking a look at what we have done as we are 

looking at all these government regulations. Let us look, did we—

by getting involved in this—cause problems on the other side of 

things. 

I read the other day where now these securitization people that 

were making all this money by securitizing these mortgages, and 

that business dropped up because it all blew up. Now they can’t 

even decide who should run these foreclosed houses and they are 

blaming different people and saying well, we are not in charge and 

they are in charge. Nobody is in charge and they are deteriorating, 

which is the fundamental problem with that whole deal. But now 

these guys are going out and buying these foreclosed properties. 

They are taking the rental income from the foreclosed properties 

and they are securitizing it so they can raise money to go buy more 

foreclosed property. This is another thing that is going to blow up 

if this gets to be a big deal. So we need to look at the bigger picture 

sometimes and not be chasing these problems all the time, for 

whatever it is worth. 

I yield back. 

[The prepared statement of Mr. Peterson follows:]

PREPARED STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE IN

CONGRESS FROM MINNESOTA

Good morning. Thank you, Chairman Lucas, for yielding. 

5

I appreciate that we’re meeting today to review some important issues. But frankly I’d rather be on the House floor debating the farm bill and think a majority of 

us on the Committee would agree. We still have a few days before the August recess; I hope everyone keeps the pressure on Leadership so we can wrap this up before leaving town. There’s really no good excuse not to get this done. 

I know some in Leadership question whether there are enough votes to pass the 

farm bill. Now, if they want to pass a partisan, Republican-only bill, which seems 

to be the case around here, I wish them luck because they’re going to need it. However, if they are willing to consider a bipartisan farm bill and work in the same bipartisan fashion as the Agriculture Committee, I stand ready to round up Democratic votes. When I was Chairman, I got 19 Republicans to join me when we first 

passed the farm bill in 2007. I know I can bring more Democrats than that onboard 

for the bipartisan bill passed by this Committee. Right now, I’m just waiting for 

Leadership to call. 

Until then, there is other work to do which is why we’re here today. 

CFTC oversight has long been a priority for this Committee. Recent events including the fraud at Peregrine Financial Group and the LIBOR manipulation—both of 

which were occurring during the reign of previous CFTC Chairmen—on top of the 

MF Global bankruptcy, have again raised concerns regarding financial oversight. I 

hope that both Chairman Gensler and the witnesses on the second panel will be 

able to shed some light on who knew what when, and what steps are being taken 

to ensure we don’t find ourselves discussing yet another financial scandal in the 

coming months. 

Of course, the CFTC is still in the process of finalizing many of the rules that 

will create a more open and transparent derivatives market. I’ve said repeatedly 

that we need to give them the time to get the rules right and, by and large, they 

are getting them right. We also need to give them the necessary resources to do 

their work. 

So, I look forward to hearing from our witnesses and thank the chair for holding 

today’ s hearing.

The CHAIRMAN. The Ranking Member yields back. 

The chair would request that other Members submit their opening statements for the record so the witnesses may begin their testimony, and to ensure that there is ample time for questions. 

[The prepared statement of Mr. Conaway follows:]

PREPARED STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE IN

CONGRESS FROM TEXAS

Mr. Chairman, I want to thank you for convening this hearing today. Over the 

past several months, the financial services industry has continued to garner headlines; unfortunately not often for flattering reasons. We have seen a large trade go 

public awry; another Futures Commission Merchant has failed and lost significant 

amounts of customer funds; the first of many banks has faced an enforcement order 

for fixing international benchmark financial rates; and a large international bank 

has admitted to allowing drug cartels and international terrorists launder money. 

At the same time, the CFTC has continued to work through the remaining DoddFrank rulemakings. Earlier this month, the final product definition rules were 

issued, starting a 60 day clock running for swap dealers to register. Confounding 

this process, however, is that the guidance intended to clarify the extraterritorial 

application of the CFTC’s new regulatory powers has only further confused market 

participants and raised the ire of international regulators. 

All in all, Mr. Chairman, today is a good day for a hearing to begin the process 

of sorting through some of these knotty issues. Today’s hearing is not about assigning blame or finding fault for any particular event, it is about how to make the system work better for market participants and most importantly, the end-users who 

rely on the financial system to work correctly every single day. 

The recent failures and other shortcomings of the industry show that there is 

much work to be done. Each crisis we see erodes the publics’ trust in the institutions—both private firms and the regulators alike—that are essential to our economic growth. 

Less visible to the public, but certainly no less important, are the barrage of 

rulemakings that the CFTC has been finalizing over the past year. These rules will 

be the new regulatory foundation that Americans believe will prevent another financial meltdown. The size, scope, and frequency of the failures that will inevitably 

6

occur under this new regime will determine the trust that Americans continue to 

place in regulators of high finance. 

I continue to worry about the sequencing and timing of the rules, as well as the 

refusal of the CFTC to conduct quantitative and qualitative cost-benefit analysis. In 

particular, with the Extraterritoriality guidance that was recently issued. I am troubled that by choosing to issue guidance instead of proposing a rule, the Commission 

has circumvented the need to perform any analysis of the costs or the benefits of 

its guidance to market participants or end-users. The guidance may well have consequences that the Chairman’s staff did not think of which could be detrimental to 

the ability for firms to participate in these newly regulated markets. 

I would like to close by thanking each of our panel participants for your participation today and your unfailing willingness to work with our Committee to improve 

the regulation and oversight of the futures and derivatives markets. While we may 

not always see eye to eye on every issue, I appreciate the honest and direct discussions that I have had with many of you about how to improve the financial systems 

we all care so deeply about.

The CHAIRMAN. I would like to welcome first panel witness to the 

table, the Hon. Gary Gensler, Chairman of the U.S. Commodity Futures Trading Commission, Washington, D.C. 

Mr. Chairman, please begin when you are ready. 

STATEMENT OF HON. GARY GENSLER, CHAIRMAN,

COMMODITY FUTURES TRADING COMMISSION,

WASHINGTON, D.C. 

Mr. GENSLER. Good morning, Chairman Lucas, Ranking Member 

Peterson, and Members of the Committee. 

When we were all kids growing up, we learned in courses like 

history, science, and math that we have to rely on hard facts, figures and research, and the markets rely on hard facts, figures and 

research too. So when President Roosevelt and Congress came together in the 1930s with the great reforms in that era, I think they 

really said let us give the public the hard facts, figures and research on the securities and futures market. They knew that markets work best when the broad public has access to the same facts 

and figures as sophisticated insiders have. I believe these critical 

reforms of the 1930s are at the foundation of our strong capital 

markets and many decades of economic growth thereafter. 

Swaps subsequently emerged in the 1980s, as we know, to help 

companies manage their risk. The financial crisis in 2008—revealed in part to be because the swaps market had not been regulated led to eight million Americans losing their jobs. Congress 

came together in response, similar to in the 1930s, and said the 

public should have the facts, figures and research on the swaps 

marketplace so they can have confidence in this marketplace as 

they did in the 1930s reform that preceded it. 

The Commission has made significant progress in these commonsense reforms with 36 rules completed. We are increasingly moving 

from rule writing to implementation of reform. Light will begin to 

shine on the swaps market this fall when swaps price and volume 

information will be publicly reported in real time. Regulators will 

get a fuller picture by seeing information in data repositories and 

the dealers in the marketplace will begin to come under comprehensive regulation with phasing of those requirements following 

afterwards. We have just under 20 further rules to complete, and 

reform will also mean once complete that buyers and sellers will 

meet in a transparent market and compete with each other, and 

help end-users get better prices. 

7

Standardized swaps will be centrally cleared, which will help 

lower risk in the marketplace and reform will include cross-border 

transactions that affect the U.S. economy. Time and again we find 

that crises come back to our shores from the Cayman Islands or 

London if it is an affiliate or branch of a U.S. entity. 

Let me now just turn to two recent enforcement matters, 

Barclays and Peregrine. Each of these matters reminds me of a 

saying that my grandfather, who had immigrated from Russia, 

used to say. Simply put, he said ‘‘Figures don’t lie but liars sure 

can figure.’’ I heard this so many times from my mom growing up. 

LIBOR and Euribor, which Barclays attempted to manipulate and 

falsely reported, are at the center of the capital markets for both 

borrowing and derivatives contracts. One could say it is the mother 

of all benchmarks. Hundreds of trillions of dollars of transactions 

here and abroad are based on LIBOR. For instance, at the Chicago 

Mercantile Exchange, nearly 70 percent of the notional value of 

their futures markets—we are not even talking about swaps yet—

nearly 70 percent of the notional value of their futures contracts 

somehow settled to or priced off of these benchmark rates. If my 

grandfather were alive today, he would be shaking his head but he 

wouldn’t be so surprised. LIBOR has a structural problem. It is 

supposedly based on what banks perceive to be their borrowing 

rates in the unsecured interbank market but what if facts, figures 

and research are limited? What if there is not such borrowings that 

exist? They have to put in their best estimates, I guess, but I believe it is critical for markets to have an honest transaction-based 

benchmark, whether that means changing LIBOR or moving to another rate for the markets to work off of. I am pretty sure my 

grandfather would agree with that. 

The recent events at Peregrine would have caught my grandfather’s attention even more so. Simply put, the evidence points at 

the owner, Russ Wasendorf, taking customers’ funds right out of 

the bank and lying about it for years. The National Futures Association, the self-regulatory organization responsible for frontline 

oversight of Peregrine, is required to conduct periodic audits of Peregrine’s customer funds. In addition, independent certified public 

accountants audited Peregrine’s annual financial statements. But 

just like the local police cannot prevent all bank robberies, market 

regulators cannot prevent all financial fraud. Having said that, the 

system clearly failed to protect Peregrine’s customers and I believe 

we all must do better. 

The Commission has been actively working to improve protections of customer funds and we finalized four separate rules including rules related to investing of customer funds, which you may 

have heard was rule 1.25, gross margining that will go into effect 

later this year, segregation for swaps and rules working closely 

with the CME, FIA, and NFA that the SROs have various new requirements concerning customer segregated accounts. 

The CFTC is also implementing a significant restructuring of 

how we oversee the SROs and intermediaries. We hired new leadership about 9 months ago but there is much more to do. Looking 

forward, I believe it is critical that we further update our rules giving regulators direct electronic access to all bank and custodial accounts holding customer funds. 

8

We will conduct a full review of the CFTC’s and SRO examination and audit oversight of futures commission merchants looking 

only for improvements including getting advice from the Public 

Company Accounting Oversight Board, who has graciously said 

that they will give us advice on how they look at the auditing profession and see how we can learn from the PCAOB and what they 

do. 

We must do everything within our authorities and resources to 

strengthen our oversight programs and protection of customer 

funds. We must do it for the public. I also think I want to keep 

my grandfather’s values and wise admonition in mind about figures 

and liars. Thank you. 

[The prepared statement of Mr. Gensler follows:]

PREPARED STATEMENT OF HON. GARY GENSLER, CHAIRMAN, COMMODITY FUTURES

TRADING COMMISSION, WASHINGTON, D.C. 

Good morning, Chairman Lucas, Ranking Member Peterson, and Members of the 

Committee. I thank you for inviting me to today’s hearing on oversight of the swaps 

and futures markets. I will review the Commodity Futures Trading Commission’s 

(CFTC) implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), as well as the recent events related to the London 

Interbank Offered Rate (LIBOR) and Peregrine Financial Group. 

I also thank my fellow Commissioners and CFTC staff for their hard work and 

commitment. 

The 2008 crisis—caused in part by swaps—was the worst economic crisis Americans have experienced since the Great Depression. Eight million Americans lost 

their jobs, millions of families lost their homes and thousands of businesses shuttered. 

Following the crisis, the President and the G20 leaders convened in Pittsburgh 

in September 2009 and agreed that swaps, which were basically not regulated in 

the United States, Asia or Europe, should now be brought into the light of regulation. 

In 2010, Congress and the President came together and passed the historic DoddFrank Act. 

The goal of the law’s swaps market reforms is to:

• Bring public market transparency and the benefits of competition to the swaps 

marketplace;

• Lower the risk of the interconnected financial system by bringing standardized 

swaps into centralized clearing; and

• Ensure that swap dealers and major swap participants are specifically regulated for their swaps activity.

The Commission has made significant progress in implementing Congress’ direction to ensure that common-sense standards are established for the swaps market. 

Turning Point: Implementation of Swaps Market Reforms 

Throughout the rule-writing process, we have benefitted from significant public 

input. CFTC Commissioners and staff have met nearly 1,800 times with the public, 

and we have held 18 public roundtables on important issues related to Dodd-Frank 

reform. The agency has received more than 35,000 comment letters related to DoddFrank rules. 

Last summer, we turned the corner and started finalizing rules. To date, we’ve 

completed 36 rules and now have fewer than 20 to go (see attachment). 

This month, we reached another major turning point in the swaps market reform 

process. The CFTC and the Securities and Exchange Commission (SEC) completed 

the rule to further define the terms ‘‘swap’’ and ‘‘security-based swap.’’ These further 

product definitions mean many other critical swaps market reforms already completed by the Commission will come to life. We also finalized this month the rule 

on the end-user exception to clearing. With the completion of these foundational 

rules, we are increasingly moving from the rule-writing process to the implementation of reforms that bring transparency to the swaps marketplace and lower its risks 

to the public. 

9

Swap dealers, for the first time, will register and begin to come under comprehensive regulation. This includes implementing already completed external and internal 

business conduct standards that will lower swap dealers’ risk to the economy and 

promote confidence in their integrity. 

Two months after the rule further defining the term ‘‘swap’’ is published in the 

Federal Register, light will begin to shine on the swaps market. Initially, likely by 

October, swaps price and volume information will be reported in real time to the 

public for interest rate and credit default swap (CDS) indices. Three months later, 

such real-time reporting will begin for energy and other physical commodity swaps. 

Swap data repositories (SDRs) will receive data on all swaps transactions, giving 

regulators their first full window into these markets. One SDR has already successfully registered with the Commission, and we have at least four other parties working on their applications. 

The rule further defining ‘‘swap’’ is especially meaningful for the implementation 

of position limits. For the first time, limits will apply to the aggregate spot-month 

positions, including both futures and swaps. Spot-month limits protect the markets 

against corners, squeezes and the burdens that may come from excessive speculation. 

I will now go into further detail on the Commission’s swaps market reform efforts. 

Transparency 

Transparency is critical to both lowering the risk of the financial system, as well 

as to reducing costs to end-users. The more transparent a marketplace is to the public, the more efficient it is, the more liquid it is, and the more competitive it is. 

We have completed the bulk of the Congressionally mandated transparency reforms for the swaps market. This fall real-time reporting to the public and to regulators will begin for swaps market transactions. 

Second, detailed and up-to-date reporting by large traders in the physical commodity swaps markets began last fall. This reporting allows regulators to better police for fraud, manipulation and other abuses. 

Third, the CFTC also plans to begin publishing aggregated swaps market data. 

The public has benefited for years from the Commitment of Traders futures data 

we publish. Our goal is to provide similar public transparency for the swaps market. 

Fourth, in May we completed rules, guidance and acceptable practices for designated contract markets (DCMs). DCMs will be able to list and trade swaps, helping to bring the benefit of pre-trade transparency to the swaps marketplace. 

Looking forward, we have two important transparency rules to complete related 

to block sizes and swap execution facilities (SEFs). These critical Dodd-Frank reforms will bring pre-trade transparency to the swaps market for the benefit of all 

the end-users that use swaps. 

Central Clearing 

For over a century, through good times and bad, central clearing in the futures 

market has lowered risk to the broader public. Dodd-Frank financial reform brings 

this effective model to the swaps market. Standard swaps between financial firms 

will move into central clearing, which will significantly lower the risks of the highly 

interconnected financial system. 

The CFTC has made significant progress on central clearing for the swaps market. We have completed rules establishing new derivatives clearing organization 

risk management requirements. 

Second, to further facilitate broad market access, we completed rules on client 

clearing documentation, risk management, and so-called ‘‘straight-through processing,’’ or sending transactions immediately to the clearinghouse upon execution. 

Third, we completed the rule on the end-user exception to clearing. Consistent 

with Congressional intent, this rule ensures that end-users using swaps to hedge 

or mitigate commercial risk will not be required to bring swaps into central clearing. 

Fourth, the CFTC this month also proposed a rule that would permit certain cooperatives to choose not to clear member-related swaps. Cooperatives act on behalf 

of and are an extension of their members. Thus, I believe it is appropriate that in 

certain circumstances, those cooperatives made up entirely of members that could 

individually qualify for the end-user exception should qualify as end-users. 

Fifth, yesterday the Commission adopted the final rule for phased implementation 

of compliance with the clearing requirement for various groups of financial entities. 

Sixth, the Commission also yesterday approved proposed clearing requirement determinations based upon clearinghouse submissions on swaps they already clear. 

The clearing determinations begin with standard interest rate swaps in U.S. dollars, 

Euros, British pounds and Japanese yen, as well as a number of CDS indices, including North American and European corporate names. 

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In addition, the Commission has adopted four important customer protection enhancements: the amendments to rule 1.25, the gross margin rule, the LSOC rule 

for swaps and rules on the minimum requirements for SROs regarding their financial surveillance of FCMs. 

Based upon the Dodd-Frank 90 day clock for making clearing determinations, the 

first clearing determinations may be finalized in October just before the gross margin and LSOC rules go into effect November 8. 

The CFTC also has received substantial public input on the clearing of swaps 

among affiliates of the same financial entity. The staff recommendation, which 

would exempt certain affiliate swaps from the clearing requirement, is under review 

by Commissioners. 

Swap Dealers 

Regulating banks and other firms that deal in swaps is central to financial reform. Prior to 2008, it was claimed that swap dealers did not need to be specifically 

regulated for their swaps activity, as they or their affiliates already were generally 

regulated as banks, investment banks, or insurance companies. The crisis revealed 

the inadequacy of relying on this claim. While banks were regulated for safety and 

soundness, including their lending activities, there was no comprehensive regulation 

of their swap dealing activity. Similarly, bank affiliates dealing in swaps, and subsidiaries of insurance and investment bank holding companies dealing in swaps, 

were not subject to specific regulation of their swap dealing activities. AIG, Lehman 

Brothers and other failures of 2008 demonstrate what happens with such limited 

oversight. 

The CFTC is well on the way to implementing reforms Congress mandated in 

Dodd-Frank to regulate dealers and help prevent another AIG. The Commission has 

finished sales practice rules requiring swap dealers to interact fairly with customers, provide balanced communications and disclose conflicts of interest before entering into a swap. In addition, the Commission has finalized internal business conduct rules to require swap dealers to establish policies to manage risk, as well as 

put in place firewalls between a dealer’s trading, and clearing and research operations. Staff recently provided to Commissioners recommendations on a final rule 

on swap relationship documentation, confirmations and portfolio compression. 

We completed in April a joint rule with the SEC further defining the terms ‘‘swap 

dealer’’ and ‘‘security-based swap dealer.’’ 

Based upon completed registration rules and the recently completed joint rule further defining the term ‘‘swap,’’ we anticipate dealers will begin registering with the 

National Futures Association (NFA) in the early fall. 

The CFTC has been working with the Federal Reserve, the other U.S. banking 

regulators, the SEC, and international regulators and policymakers to align margin 

requirements for uncleared swaps. It is essential that we align these requirements 

globally, particularly between the major market jurisdictions. The international approach to margin requirements in the consultative paper (sponsored by the Basel 

Committee on Banking Supervision and the International Organization of Securities 

Commissions) released this month is consistent with the approach the CFTC laid 

out in its margin proposal last year. It would lower the risk of financial entities, 

promote clearing and help avoid regulatory arbitrage. Consistent with the CFTC’s 

proposal, it also excludes non-financial end-users from margin requirements for 

uncleared swaps. 

The CFTC reopened the comment period on our margin proposal so that we can 

hear further from market participants and the public in light of the work being done 

to internationally harmonize margin rules. As we work with international regulators on this coordinated approach, I would anticipate that the Commission would 

only take up the final margin rules toward the end of this year. 

Following Congress’ mandate, the CFTC also is working with our fellow financial 

regulators to finalize the rulemaking to implement the Volcker Rule. In adopting 

the Volcker Rule, Congress prohibited banking entities from engaging in proprietary 

trading, an activity that may put taxpayers at risk. At the same time, Congress permitted banking entities to engage in certain activities, such as market making and 

risk mitigating hedging. One of the challenges in finalizing a rule is achieving these 

multiple objectives. 

Staff also has provided to Commissioners recommendations in two other areas. 

The first relates to proposed exemptions for certain transactions in the electricity 

markets. In particular, this includes possible exemptive orders for certain transactions executed on regional transmission organizations, as well as between and 

among rural electric cooperatives and municipal public power providers. Second, 

now that the Commission made significant progress on swaps market reforms, we 

will consider completing a number of conforming rules. 

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Market Integrity/Position Limits 

Financial reform also means investors, consumers, retirees and businesses in 

America will benefit from enhanced market integrity. Congress provided the Commission with new tools in Dodd-Frank to ensure the public has confidence in U.S. 

swaps markets. 

Rules the CFTC completed last summer close a significant gap in the agency’s enforcement authorities. The rules implement important Dodd-Frank provisions extending our enforcement authority to swaps and prohibiting the reckless use of manipulative or deceptive schemes. Thus, for example, the CFTC has clear anti-fraud 

and anti-manipulation authority regarding the trading of credit default swaps indices. 

Also, the CFTC now can reward whistleblowers for their help in catching market 

misconduct. 

Congress also directed the CFTC to establish aggregate position limits for both 

futures and swaps in energy, agricultural and other physical commodities. In October 2011, the Commission completed final rules to ensure no single speculator is 

able to obtain an overly concentrated aggregate position in the futures and swaps 

markets. With the recently completed joint rule further defining ‘‘swap,’’ compliance 

for all spot-month limits will go into effect in approximately 2 months. 

The Commission approved a proposed rule in May that would modify the CFTC’s 

aggregation provisions for limits on speculative positions. The proposal would permit any person with a 10 to 50 percent ownership or equity interest in an entity 

to disaggregate the owned entity’s positions, provided there are protections and firewalls in place to ensure trading decisions are made independently of one another. 

Two associations representing the financial industry are challenging the agency’s 

final rule establishing position limits in court. The Commission is vigorously defending the Congressional mandate to implement position limits in court. 

Cross-Border Application of Dodd-Frank’s Swaps Market Reforms 

The nature of modern finance is that large financial institutions set up hundreds, 

if not thousands, of ‘‘legal entities’’ around the globe. Many of these far-flung legal 

entities, however, are still highly connected back to their U.S. affiliates. 

The lessons of the 2008 crisis and earlier have demonstrated that time and again 

financial transactions executed offshore by U.S. financial institutions can send risk 

straight back to our shores. It was true with the London and Cayman Islands affiliates of AIG, Lehman Brothers, Citigroup and Bear Stearns. A decade earlier, it was 

true, as well, with the collapse of the hedge fund Long-Term Capital Management. 

During a default or crisis, the risk that builds up offshore inevitably comes crashing back onto U.S. shores. The recent events of JPMorgan Chase, where it executed 

swaps through its London branch, are a stark reminder of this reality of modern 

finance. 

Section 722(d) of the Dodd-Frank Act states that swaps reforms shall not apply 

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

Congress included this provision for swaps, but included a different provision with 

regard to the SEC’s oversight of the security-based swaps market. 

The Commission, consulting closely with the SEC, the Federal Reserve and the 

Treasury Department, recently proposed guidance interpreting this section of the 

law. The Commission also proposed in a separate release phased compliance for foreign swap dealers (including overseas affiliates of U.S. swap dealers) of certain requirements of Dodd-Frank swaps market reform. Such phased compliance would enable market participants to comply with the Dodd-Frank Act in an orderly fashion 

and allow time for the CFTC to receive public comment on the cross-border interpretive guidance. 

The proposed guidance interpreting Section 722(d) includes the following key elements: 

First, it provides the guidance that when a foreign entity transacts in more than 

a de minimis level of U.S. facing swap dealing activity, the entity would register 

under the Dodd-Frank Act swap dealer registration requirements. 

Second, it includes a tiered approach for foreign swap dealer requirements. Some 

requirements would be considered entity-level, such as for capital, chief compliance 

officer, risk management, swap data record-keeping, reporting to swap data repositories and large trader reporting. Some requirements would be considered transaction-level, such as clearing, margin, real-time public reporting, trade execution, 

trading documentation and sales practices. 

Third, entity-level requirements would apply to all registered swap dealers, but 

in certain circumstances, foreign swap dealers could meet these requirements by 

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complying with comparable and comprehensive foreign regulatory requirements, or 

what we call ‘‘substituted compliance.’’

Fourth, transaction-level requirements would apply to all U.S. facing transactions. 

For these requirements, U.S. facing transactions would include not only transactions with persons or entities operating or incorporated in the United States, but 

also transactions with their overseas branches. Likewise, this would include transactions with foreign affiliates that are guaranteed by a U.S. entity, as well as the 

foreign affiliates operating as conduits for a U.S. entity’s swap activity. Foreign 

swap dealers, as well as overseas branches of U.S. swap dealers, in certain circumstances, may rely on substituted compliance when transacting with foreign affiliates guaranteed by or operating as conduits of U.S. entities. 

Fifth, for certain transactions between a foreign swap dealer (including an overseas affiliate of a U.S. person) and foreign counterparties not guaranteed by or operating as conduits for U.S. entities, Dodd-Frank transaction-level requirements may 

not apply. For example, this would be the case for a transaction between a foreign 

swap dealer and a foreign insurance company not guaranteed by a U.S. person. 

LIBOR 

I’d like now to review the CFTC’s recent order against Barclays concerning the 

benchmarks LIBOR and Euribor. 

People taking out small business loans, credit cards and mortgages, as well as big 

companies involved in complex transactions, all depend upon the honesty of benchmark rates like LIBOR for the cost of their borrowings. Banks must not attempt 

to influence LIBOR, Euribor or other indices based upon concerns about their reputation or the profitability of their trading positions. 

LIBOR and Euribor are indices at the center of the capital markets for both borrowings and derivatives contracts. LIBOR is the reference index for the largest open 

interest of contracts in both the U.S. futures markets and swaps markets. As of the 

end of June, the 3 month Eurodollar futures contracts that settle to U.S. Dollar 

LIBOR make up about 70 percent of the notional value of all futures contracts traded on the CME Group exchanges. U.S. Dollar LIBOR’s traded volume in 2011 on 

the CME was a notional value exceeding $564 trillion. According to the British 

Bankers Association, swaps with a total notional value of approximately $350 trillion and loans amounting to $10 trillion are indexed to LIBOR. 

The CFTC initiated in April of 2008 a review of LIBOR after media reports raised 

questions about the integrity of the index. Thereafter, we began coordinating with 

the United Kingdom’s Financial Services Authority (FSA), which helped us facilitate 

information requests. The FSA and the U.S. Department of Justice subsequently 

joined the CFTC with regard to the Barclays matter, and it has been a collaborative 

effort throughout. 

To conduct such a complicated case, the CFTC enforcement staff had to sift 

through a voluminous number of documents and audio recordings that spanned 

many years. 

The CFTC’s Order found that Barclays traders and employees responsible for determining the bank’s LIBOR and Euribor submissions attempted to manipulate and 

made false reports concerning both benchmark interest rates to benefit the bank’s 

derivatives trading positions. The conduct occurred regularly and was pervasive. 

Barclays’ traders located at least in New York, London and Tokyo asked Barclays’ 

submitters to submit particular rates to benefit their derivatives trading positions. 

In addition, certain Barclays Euro swap traders coordinated with and aided and 

abetted traders at other banks in each other’s attempts to manipulate Euribor. 

The Order also found that throughout the financial crisis, as a result of instructions from Barclays’ senior management, the bank routinely made artificially low 

LIBOR submissions. Submitters were told not to submit at levels where Barclays 

was ‘‘sticking its head above the parapet.’’ The senior management directive was intended to fend off negative public perception about Barclays’ financial condition. 

The CFTC’s Order required Barclays to pay a $200 million civil monetary penalty 

for attempted manipulation of and false reporting concerning LIBOR and Euribor. 

In addition, Barclays is required to implement measures to ensure its future submissions are honest. 

Among other things, these requirements included:

• Making submissions based on a transaction-focused methodology;

• Implementing firewalls to prevent improper communications, including between 

traders and submitters;

• Preparing and retaining documents concerning submissions and certain relevant communications; and

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• Implementing auditing, monitoring and training measures concerning submissions and related processes, including making regular reports to the CFTC.

The CFTC has and will continue vigorously to use our enforcement and regulatory 

authorities to protect the public, promote market integrity, and ensure that these 

benchmarks and other indices are free of manipulative conduct and false information. The Commodity Exchange Act (CEA) is clear in its prohibitions against attempted and actual manipulation of futures, swaps and commodity prices. Further, 

the CEA’s Section 9(a)(2) prohibits knowingly making false reports of market information that affects or tends to affect the price of a commodity. 

The FSA is reviewing the LIBOR benchmark, and will be making suggestions as 

to how to improve it. Moving forward, the CFTC stands ready to assist the FSA on 

its review of LIBOR and how to best assure that LIBOR, or any alternative benchmark that might emerge, is not susceptible to attempted manipulation or false reporting. We look forward to working with regulators and market participants here 

and abroad to ensure that benchmarks for interest rates that touch borrowers and 

lenders around the globe are reliable and honest. 

If these key benchmarks are based on observable transactions, borrowers, lenders 

and derivatives users around the globe all benefit. If these key benchmarks are not 

based on observable transactions, I believe their integrity will continue to be subject 

to question. And if these key benchmarks are not based on honest submissions, we 

all lose. 

Peregrine Financial Group, Inc. 

Background 

On July 10, the CFTC filed a complaint in Federal court against Peregrine and 

its sole owner, Russell Wasendorf, Sr., alleging that they misappropriated customer 

funds from an account held at U.S. Bank. 

Criminal authorities arrested Mr. Wasendorf for lying to the CFTC, and they advised the court that they intended to file more criminal charges in the future. 

The CFTC’s complaint, along with the criminal charges, tells a story of deliberate 

dishonesty and deception. In a written statement found when he attempted suicide, 

as quoted in the criminal charges, Mr. Wasendorf said he committed fraud, manufactured phony bank documents, and forged bank signatures. In short, the charges 

against him are that he took customers’ funds right out of the bank, and lied about 

it for years. 

The System of FCM Oversight 

Peregrine is a CFTC-registered FCM. The NFA, a futures industry SRO, is responsible for the firm’s front-line oversight. The way our oversight system has been 

set up for decades, SROs are the primary regulators of FCMs, introducing brokers, 

commodity pool operators, and commodity trading advisors. In 2000, Congress affirmed the Commission’s reliance on self-regulatory organizations by amending Section 3 of the CEA to state: ‘‘It is the purpose of this Act to serve the public interests . . . through a system of effective self-regulation of trading facilities, clearing 

systems, market participants and market professionals under the oversight of the 

Commission.’’ Further, based on this system and the realities of limited CFTC resources, in the wake of Dodd-Frank, the NFA also will take on additional examination and registration duties with regard to swap dealers. 

As part of its oversight responsibility, the NFA is required to conduct periodic audits of non-clearing member FCMs’ customer funds in segregated and secured accounts. The CFTC oversees the NFA, examining them for the performance of their 

duties. We review the NFA’s work papers only on a limited number of FCMs each 

year. In addition, the CFTC also does limited-scope reviews of FCMs in a ‘‘for cause’’ 

situation that are sometimes referred to as ‘‘audits,’’ but they are not full-scale audits as accountants commonly use that term. 

Under CFTC rules, FCMs must have their annual financial statements audited 

by an independent CPA using Generally Accepted Auditing Standards. As part of 

this certified annual report, the independent accountant also must conduct appropriate reviews and tests to identify any material inadequacies in systems and controls that could violate the Commission’s segregation or secured amount requirements. Any such inadequacies are also to be reported to the SRO and the Commission. 

The Oversight of Peregrine 

The NFA last completed an audit of Peregrine in May 2011, and was in the process of conducting another periodic audit over the last several weeks. Peregrine’s financials for the year ending December 31, 2011, were reviewed and certified by its 

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independent CPA expressing a clean opinion on both the financial statements and 

internal controls report. 

In 2000, the CFTC brought an enforcement action against Peregrine, finding in 

an Order that the firm had violated net capital rules. At the time, Peregrine was 

much smaller than it was in 2012, with roughly $800,000 in net capital requirements and $23 million in customer segregation requirements. The firm was ordered 

to pay a civil penalty and to take steps to improve its financial controls, including 

retaining a second independent public accounting firm to perform reviews of certain 

financial accounts and to report its findings to the CFTC. The firm retained 

PricewaterhouseCoopers. 

The CFTC’s Order in 2000, resolving the enforcement investigation, was the culmination of a process that began with limited-scope reviews conducted by the CFTC 

examinations staff in the 1990s. During these reviews, the staff noted a number of 

problems at Peregrine regarding, among other things, net capital, infusions of capital to avoid net capital violations, internal financial controls, and records of segregated and secured customer assets and liabilities. Other issues related to accounting for receivables and payables; transactions and agreements with affiliates; differences between journal entries on the company’s books and the statements of one 

of its banks, Harris Bank; accuracy of books and records; the abilities of the firm’s 

auditor; and providing customers with timely trade confirmations and monthly 

statements. In addition, CFTC staff questioned whether Peregrine had tried to mislead them concerning some of these accounting issues. The staff also noted issues 

regarding the sufficiency of NFA audits. 

Subsequently, in 2007 and 2008, the CFTC examinations staff reviewed Peregrine’s classification and reporting of customer-owned securities and the investment of customer funds for compliance with CFTC Regulations. The limited reviews 

identified improperly titled segregation bank accounts, which were corrected during 

the examination. In addition, the staff in 2010 performed a limited, 2 day review 

of Peregrine’s anti-money laundering compliance. 

Although we do not yet know the full facts of what happened in this matter, it 

is clear that the system failed to protect the customers of Peregrine. The NFA and 

CFTC staff over the years did not detect Mr. Wasendorf’s alleged stealing of customer funds, which came to light only a few weeks ago. Though the local police cannot prevent every bank robbery and market regulators cannot prevent every financial fraud, we all must do better. We must do everything within our authorities and 

resources to strengthen oversight programs and the protection of customer funds. 

Customer Protection 

CFTC Customer Protection Reforms To Date 

The Commission has been actively working to improve protections for customer 

funds. This includes:

• The completed amendments to rule 1.25 regarding the investment of funds 

bring customers back to protections they had prior to exemptions the Commission granted between 2000 and 2005. Importantly, this prevents use of customer 

funds for in-house lending through repurchase agreements;

• Clearinghouses will have to collect margin on a gross basis and futures commission merchants (FCMs) will no longer be able to offset one customer’s collateral 

against another and then send only the net to the clearinghouse;

• The so-called ‘‘LSOC rule’’ (legal segregation with operational commingling) for 

swaps ensures customer money is protected individually all the way to the 

clearinghouse; and

• The Commission included customer protection enhancements in the final rule 

for DCMs. These provisions codify into rules staff guidance on minimum requirements for self-regulatory organization (SROs) regarding their financial surveillance of FCMs.

In addition, this month, we approved an NFA proposal that stemmed from a coordinated effort by the CFTC, the SROs, and market participants, including from 

the CFTC’s 2 day roundtable earlier this year on customer protection. 

The three key areas of reform included in the NFA rules are:

• First, FCMs must hold sufficient funds in Part 30 secured accounts (funds held 

for U.S. foreign futures and options customers trading on foreign contract markets) to meet their total obligations to customers trading on foreign markets 

computed under the net liquidating equity method. FCMs will no longer be allowed to use the alternative method, which had allowed them to hold a lower 

amount of funds representing the margin on their foreign futures;

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• Second, FCMs must maintain written policies and procedures governing the 

maintenance of excess funds in customer segregated and Part 30 secured accounts. Withdrawals of 25 percent or more of excess funds in these accounts 

(that are not for the benefit of customers) must be pre-approved in writing by 

senior management and reported to the NFA; and

• Third, FCMs must make additional reports available to the NFA, including 

daily computations of segregated and Part 30 secured amounts, as well as twice 

monthly detailed information regarding the cash deposits and investments of 

customer funds. 

CFTC Restructuring and Enforcement 

The CFTC also has implemented a significant restructuring, based on a new strategic plan, regarding our oversight of SROs and intermediaries. 

The CFTC last year established a new division dedicated solely to the oversight 

of the SROs and intermediaries. We created a branch within the division to specifically oversee examinations. We were able to attract talented individuals from the 

private sector with many years of relevant experience to lead this new division and 

branch. We have begun the process of strengthening our examination program, including adding risk and control elements. Separately, we also recently created a 

Consumer Outreach Office to help consumers get information about avoiding fraud. 

In addition, the CFTC’s enforcement arm aggressively pursues bad actors in the 

markets. In the last 2 years, the Division of Enforcement has been filing cases and 

opening investigations at the highest rate in the CFTC’s history. Roughly half of the 

cases involve fraud against customers. 

Since October 2009, the CFTC has brought 22 cases against registered FCMs, 13 

of which involved supervision failures and one of which involved a failure to maintain customer secured funds properly. In the same period, the CFTC brought two 

cases in Federal court against FCMs, one for violating segregation rules and the 

other for failing to be properly capitalized and to maintain books and records. 

The Commission in April charged JPMorgan Chase Bank, N.A. for unlawful handling of Lehman Brothers, Inc.’s customer segregated funds and imposed a $20 million civil monetary penalty. In another case against a public accounting firm and 

a CPA partner of the firm, the Commission imposed sanctions for failing to conduct 

proper audits of a registered FCM. In one of our supervision failure cases, a registered FCM was sanctioned for failing to follow its own compliance procedures regarding ‘‘know your customer’’ requirements. 

Customer Protection Reforms Ahead 

While the Commission’s enhanced customer protection rules, staff reorganization 

and enforcement efforts to date have been significant, I believe we must do more. 

I believe we need to further enhance the agency’s rules for customer protection. As 

outlined below, staff recommendations, based on substantial Commissioner and 

market participant feedback, are now drafted and in front of Commissioners. 

First, we must incorporate the NFA rules approved last week into the Commission’s regulations so that the CFTC can directly enforce these important reforms. 

Second, I believe it is critical that we bring the regulators’ view of customer accounts into the 21st century. We must give the SROs and the CFTC direct electronic 

access to FCMs’ bank and custodial accounts for customer funds, without asking the 

FCMs’ permission. Further, acknowledgement letters (letters acknowledging that accounts contain segregated customer funds) and confirmation letters must come directly to regulators from banks and custodians. 

Third, I believe we need more transparency to customers about their funds. Futures customers, if they wish, should have access to information about how their assets are held and with whom, similar to that which is available to mutual fund and 

securities customers. 

Fourth, I believe we need to consider enhanced controls at FCMs regarding how 

customer accounts are handled. 

In addition, I believe we need to carefully consider additional rules laying out the 

SROs’ requirements for conducting examinations and audits. 

Regarding the Commission’s oversight of SROs and intermediaries, though we’re 

making progress through our reorganization and new rules, the recent events at 

Peregrine highlight the necessity of looking at the decades-old system of SROs and 

the Commission’s role in overseeing SROs. 

I have directed the CFTC’s staff to do a full review of how the agency conducts 

oversight of the SROs, as well as limited scope reviews of FCMs, to determine what 

improvements can and should be made. As part of this review, we have reached out 

to the Public Company Accounting Oversight Board (PCAOB), which oversees the 

audits of public companies. The Dodd-Frank Act gave the PCAOB oversight authorVerDate 0ct 09 2002 10:19 Jan 04, 2013 Jkt 041481 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 I:\DOCS\112-34\75437.TXT BRIAN
16

ity over the audits of brokers and dealers who are registered with the SEC. The 

PCAOB has agreed to give us the benefit of its insights and expertise. 

Building on the customer protection public roundtable earlier this year, I also 

have asked CFTC staff to hold another public roundtable discussion on customer 

protection issues, including examination techniques and procedures, which will take 

place during the 2nd week of August. 

Resources 

Confidence in the futures and swaps markets is dependent upon a well-funded 

regulator. The CFTC is a good investment of taxpayer dollars. This hardworking 

staff of 710 is just ten percent more than what we had at our peak in the 1990s 

though the futures market has grown fivefold. The CFTC also will soon be responsible for the swaps market—eight times bigger than the futures market. 

The Commission’s limited resources have historically not allowed for direct oversight of FCMs. There are 46 staff members, including 35 audit staff, on the CFTC’s 

examinations team who oversee four SROs, which in turn have responsibilities for 

more than 4,341 registered persons. On top of the current lack of staff for examinations, our responsibilities are expanding to include reviews of many new market 

participants. For instance, there are currently 115 FCMs, and staff estimates a 

similar number of swap dealers will ultimately register. More frequent and in-depth 

risk-based, control-oriented examinations are necessary to assure the public that 

firms have adequate capital, as well as systems and procedures in place to protect 

customer money. Greater coverage by regulators—like having more cops on a beat—

will improve the integrity and heighten the deterrent effect of the review process. 

The President’s FY 2013 budget, following a similar request in 2012, asked for 

$308 million, investing in our technology and human resources, to better protect the 

public. 

Market participants depend on the credibility and transparency of well-regulated 

U.S. futures and swaps markets. Without sufficient funding for the CFTC, the nation cannot be assured that the agency can adequately oversee these markets. 

Conclusion 

Nearly 4 years after the financial crisis and 2 years since the passage of DoddFrank, the CFTC has made significant progress in implementing Congress’ commonsense reforms for the swaps market. 

With the foundational rules in place, it is critical that we complete the remaining 

reforms that will bring transparency and competition to the swaps market, lower 

costs for companies and their customers, and protect the public. 

It is also crucial that the CFTC, working with SROs and market participants, continues its efforts to enhance protections for the funds of both futures and swaps customers. 

Thank you and I look forward to your questions. 

ATTACHMENT

CFTC Dodd-Frank Update 

Final Rules & Guidance 

• Agricultural Commodity Definition

• Agricultural Swaps

• Anti-Manipulation

• Business Affiliate Marketing and Disposal of Consumer Information

• Client Clearing Documentation, Straight Through Processing, Clearing Member 

Risk Management

• Commodity Options

• Commodity Pool Operators and Commodity Trading Advisors: Amendments to 

Compliance Obligations

• Derivatives Clearing Organization—General Provisions and Core Principles

• Designated Contract Markets—Core Principles

• End-User Exception

• External Business Conduct Standards

• Foreign Boards of Trade—Registration

• Implementation Phasing for Clearing

• Internal Business Conduct Standards (Risk Management, record-keeping, & 

CCOs)

17

• Investment Advisor Reporting on Form PF (Jt. with SEC)

• Investment of Customer Funds (Regulation 1.25)

• Large Trader Reporting for Physical Commodity Swaps

• Position Limits for Futures and Swaps

• Privacy of Consumer Financial Information

• Process for Review of Swaps for Mandatory Clearing

• Process for Rule Certifications for Registered Entities (Part 40)

• Real-Time Reporting for Swaps

• Removal of References to or Reliance on Credit Ratings

• Reporting Certain Post-Enactment Swap Transactions (IFR)

• Reporting of Historical Swaps

• Reporting Pre-Enactment Swap Transactions (IFR)

• Retail Commodity Transactions—Interpretive Guidance on ‘‘Actual Delivery’’

• Retail Foreign Exchange Intermediaries—Regulations & Registration

• Retail Foreign Exchange Transactions—Conforming Amendments

• Segregation for Cleared Swaps

• Swap, Security-Based Swap, Security-Based Swap Agreement—Further Definitions (Jt. with SEC)

• Swap Data record-keeping and Reporting Requirements

• Swap Data Repositories—Core Principles, Duties & Registration

• Swap Dealers and Major Swap Participants—Registration

• Swap Dealers, Major Swap Participants, and Eligible Contract Participants—

Further Definitions (Jt. with SEC)

• Whistleblowers 

Proposed Rules & Guidance 

• Block Rule

• Capital for Swap Dealers & Major Swap Participants

• Clearing Exemption for Cooperatives

• Clearing Requirement Determinations

• Conforming Rules

• Cross-Border Application

• DCMs—Core Principle 9

• Disruptive Trade Practices

• Governance and Conflict of Interest (DCM, DCO, & SEF)

• Identify Theft (Jt. with SEC)

• Internal Business Conduct (Documentation, Confirmation, & Portfolio Reconciliation)

• Margin for Uncleared Swaps

• Segregation for Uncleared Swaps

• Swap Data Repository Indemnification Interpretation

• Swap Execution Facilities—Core Principles, Registration, and Process for ‘‘Made 

Available to Trade’’ Determinations

• Systemically Important Clearing Organizations—Additional Provisions

• Volcker Rule 

Yet to be Proposed Rules & Guidance 

• Inter-Affiliate Clearing for Financial Entities

• RTO/ISO Exemptive Relief

• 201(f) Exemptive Relief

• Stress Testing under Section 165

Final Orders 

• Delegation to National Futures Association (NFA)—Certain exemptions for 

Commodity Pool Operators

• Delegation to NFA—Foreign Exchange Intermediary Registration function

• Delegation to NFA—Swap Dealer & MSP Registration function

• Exemptive orders—Effective Date for Swaps Regulation

18

• Treatment of Grandfather Relief Petitions—Exempt Boards of Trade & Exempt 

Commercial Markets

• Treatment of Grandfather Relief Petitions—Transactions done in Reliance on 

2(h) 

Studies & Reports 

• Feasibility of Requiring Use of Standardized Algorithmic Descriptions for Financial Derivatives (Jt. with SEC)

• International Swap Regulation (Jt. with SEC)

• Risk Management Supervision of Designated Clearing Entities (Jt. With Board 

of Governors of the Federal Reserve System and the SEC)

• Study on Oversight of Carbon Markets (Jt. with various other Agencies)

The CHAIRMAN. The chair wishes to thank the Chairman for 

those opening comments, and recognizes himself for 5 minutes. 

Chairman Gensler, on February 10, 2011, in testimony before 

this Committee, you stated that the resource needs of the CFTC: 

‘‘Given the resource needs of the CFTC, we are working very closely with self-regulatory associations like the National Futures Association to determine the duties and roles that they can take on in 

the swap markets. Nevertheless, the CFTC has the ultimate statutory authority and responsibility for overseeing these markets,’’ 

your comments from last year. Based on this statement, is it fair 

to say that you and your agency take responsibility for some of 

what is going on in regards to customer funds at PFGBest? 

Mr. GENSLER. Yes, Mr. Chairman, I think that we have to take 

a close look at all that the CFTC did overseeing the NFA but also 

the FCMs such as Peregrine in this situation. 

The CHAIRMAN. Because I know your agency has been very busy 

on the rulemaking process, and I appreciate that. But even in the 

smallest town, the night watchman walks around and shakes the 

doorknobs to make sure they are locked, shines the flashlight 

through the front door to see that nothing is amiss. It just seems 

that perhaps in the aftermath, let us think for a moment about another one of these problems, MF Global. What should CFTC have 

done differently to ensure that customer funds were properly segregated in that failure? 

Mr. GENSLER. I think both of these cases we have learned things. 

We have worked with the NFA and the Chicago Mercantile Exchange and the other SROs to put better rules in place. We were 

already doing this in terms of closing some of the gaps in the oversight of investment of customer funds. But we absolutely need to 

do more. We are also a very thinly staffed organization. We do not 

directly audit the futures commission merchants, and as I highlighted in that testimony you highlighted, swap dealers will be 

brought in as members of the NFA and directly examined by the 

NFA, not necessarily by the CFTC. 

The CHAIRMAN. Along the topic of MF Global, did CFTC coordinate with other regulators leading up to the MF Global bankruptcy? For example, did you consult with the Financial Industry 

Regulatory Authority and SEC when they forced MF Global to 

change their capital treatment of its foreign sovereign debt position? 

Mr. GENSLER. Mr. Chairman, I can speak about what I was personally involved in, but as I am not involved in the MF Global matter, but over that weekend as it——

19

The CHAIRMAN. Speak to the point in time up until which you 

recused yourself. 

Mr. GENSLER. That is what I will do. Over that weekend, as the 

MF Global events transpired and we at the CFTC were working to 

try to move customer funds. We did work with the SEC, with 

FINRA and with the international regulators in London, the Financial Services Authority. 

The CHAIRMAN. Let us touch on LIBOR for just a moment. I 

asked the Federal Reserve Chairman, Ben Bernanke, last week 

when the Fed first heard about the possibility of LIBOR manipulation. He told me in a Financial Services hearing that he first 

learned about it in 2008 and that the Federal Reserve briefed other 

Federal agencies at that time including CFTC. Chairman Gensler, 

why is it that the LIBOR manipulation was able to continue at 

Barclays in 2009? 

Mr. GENSLER. We at the CFTC started and opened an investigation in April of 2008 based on news reports in The Wall Street 

Journal, Financial Times, and elsewhere. That investigation culminated in what you learned of a few weeks ago. 

The CHAIRMAN. But isn’t it true that Barclays also self-reported 

the derivatives manipulation and it really wasn’t the CFTC that 

discovered it, it is when they admitted it, and what does that say 

about the ability of regulators to discover wrongdoing? I suppose 

that is the bottom line, Chairman. 

Mr. GENSLER. Well, the bottom line is that CFTC worked and 

reached out to law enforcement agencies in London, the FSA, and 

the Justice Department to develop this case. It is a very pervasive 

action that Barclays was involved in involving two regs, three cities, 4 years of misconduct on the part of Barclays, and involving 

senior management. So the CFTC reached out and developed the 

evidence also over two continents and different jurisdictions. 

The CHAIRMAN. It just seems, Chairman—and my time has expired—from the country perspective, we spent a lot of time putting 

up street signs but we haven’t rattled enough doorknobs lately. 

I now recognize the Ranking Member for 5 minutes. 

Mr. PETERSON. Thank you, Mr. Chairman. 

I would like to follow up on this LIBOR situation. So you were 

investigating it. Did any of the other regulators contact you about 

this or were they working on it, or were you guys doing this by 

yourself? 

Mr. GENSLER. I am aware and we are aware that in June of 

2008, and the New York Federal Reserve has put this on their 

website, that there was a report to an interagency staff group 

about LIBOR—it is called the President’s Working Group—that 

laid out some of the general concerns that the New York Fed had 

in June. But in terms of the law enforcement action, actually pursuing infractions of the Commodity Exchange Act of false reporting 

and attempting to manipulate this rate, that is something the 

CFTC did with other law enforcement agencies and took a long 

time to develop those facts and get evidence, hard evidence to take 

to court or to get Barclays to settle. 

Mr. PETERSON. So these other folks, they didn’t have any reason 

or any business to be investigating this, the Fed? 

20

Mr. GENSLER. I can only speak to the CFTC, but we reached out 

to law enforcement agencies to the SEC and the Justice Department and the Financial Services Authority, which have law enforcement and the Financial Services Authority——

Mr. PETERSON. So you guys were all working together? 

Mr. GENSLER. Yes. The Financial Services Authority initially was 

facilitating our document requests and information requests. They 

subsequently opened a live investigation, which they publicly said 

was in 2010. 

Mr. PETERSON. There were reports in Barron’s in July of 2012 

that the CME heard complaints from traders about the LIBOR 

rate, and I guess they went as far as contacting the British Bankers Association regarding these complaints. Did the CFTC ever receive any expression of concern about possible fraud manipulation 

or problems about LIBOR from CME? 

Mr. GENSLER. I am aware that our staff knew that there were 

conversations, and it may have even been in the press at the time 

between the CME and the British Bankers Association. But in 

terms of actually developing a case with hard facts and evidence 

of manipulation or false reporting, that was done directly with law 

enforcement agencies, shaking the doorknobs, as the Chairman 

said. 

Mr. PETERSON. I understand, but I guess what I am getting at 

is that I think you guys did the right thing. You went in, following 

the law and developing the case and all that stuff, but these other 

folks that are affected by this—and this was in the press—were 

they concerned about this? Did they ask questions? Did they know 

what you were doing and were they satisfied with that? Why 

weren’t they concerned for 4 years that this potentially was a problem? That is what I don’t get. I understand what you are doing, 

but I mean, the people that are affected by this, weren’t they concerned about this? 

Mr. GENSLER. Well, those are very important questions. I can tell 

you that law enforcement agencies, once we actually brought something real and actionable with evidence to the Justice Department, 

they were terrific, the FSA when they opened their live investigation, and we were rattling those doorknobs for quite some time to 

make sure. This market is so critical to borrowers and lenders in 

this country. 

Mr. PETERSON. That is my point. So why weren’t the borrowers 

and lenders screaming about this for 4 years, or didn’t they know 

what was going on, or didn’t they care? 

Mr. GENSLER. There were academic reports, there were news reports, and I think that as I said earlier, that the market has become less and less transaction-based and more estimate-based. 

This interbank borrowing market had—as Mervin King said in the 

fall of 2008, LIBOR is the rate at which banks aren’t lending to 

each other. Our career staff, well before I got there, sir, started to 

focus on this. It takes a long time to build a case that you can take 

to court. 

Mr. PETERSON. I don’t understand enough about this to know, 

but it just seems to me that if these folks, that if everybody knew 

about this and nobody said anything, apparently it must have been 

benefiting them so they were just happy to have it continue. It is 

21

another case where these guys, the whole damn system is set up 

to benefit Wall Street and nobody else in this country. I am tired 

of this. You just wonder where these people are, and we commend 

you for what you do and working on this. We have a system that 

is so complicated that it takes you 4 years to nail it down. That 

tells you something right there. 

The CHAIRMAN. The gentleman’s time has expired. The chair now 

recognizes the gentleman from Texas, Mr. Neugebauer, for 5 minutes. 

Mr. NEUGEBAUER. Thank you, Chairman Gensler, for being here 

this morning. Prior to the April 2008 Wall Street Journal article, 

your agency didn’t have any knowledge that there were concerns 

about LIBOR? Is that your testimony? 

Mr. GENSLER. We opened an investigation in April of 2008. In 

talking to some of the career staff, I wasn’t there then, but in talking to them, they were aware of some of the academic and some 

of the news stories but it was that Wall Street Journal piece that 

they decided to open what is a live investigation into these matters. 

Mr. NEUGEBAUER. So you weren’t aware that as early as the latter part of 2007 that people at the Federal Reserve Bank in New 

York were made aware that there could be some problems with 

LIBOR? You didn’t ever have any notice from the New York Fed 

of that? 

Mr. GENSLER. Congressman, we haven’t gone back to do 

forensics, but sitting here today, I am not aware that our staff was 

made aware of anything except for the news stories and academic 

research by April. 

Mr. NEUGEBAUER. But it was the Wall Street Journal 2008 article that kind of triggered the opening of a case in your organization? 

Mr. GENSLER. That is right, and it was actually reviewed with 

Commissioners in late April. We have an every-Friday surveillance 

meeting with the surveillance team, and the enforcement folks 

talked to Commissioners in April of 2008. 

Mr. NEUGEBAUER. Chairman Bernanke was here last week, and 

one of the things I asked him is, can one bank—I think there are 

16 U.S. Dollar LIBOR banks that report to make up that index—

could one bank alone influence that rate, and his response was that 

no. I think you have in your report or in your findings alluded that 

there are other banks involved or other banks that are under investigation at this time. Is that in fact, other banks are going under 

the same investigation that you did with Barclays? 

Mr. GENSLER. I am going to try not to compromise an ongoing 

enforcement matter, but what we said in the Barclays situation 

was that in the case of Euribor, that there were four other banks 

that Barclays was aiding and abetting. That means that Barclays 

was trying to assist them but they were also asking these other 

four banks, which we called bank A, B, C and D, to assist Barclays 

in the setting of Euribor for the profits of their desk. But I might 

also add that in the Department of Justice findings and order, 

Barclays admitted—I can even give you the paragraph, 30—that in 

some occasions their manipulation of their submissions did affect 

the rate, and that is in the Barclays order with the Department of 

Justice. 

22

Mr. NEUGEBAUER. But it would be difficult for one bank to do 

that on its own. Would you agree? 

Mr. GENSLER. Though in the Department of Justice findings and 

settlement with Barclays, they did say that on some occasions it 

did affect it, because even a basis point averaged, to walk back for 

the Committee, 16 banks submit. Four low ones and four high ones 

are thrown out. The eight middle ones are averaged. Even one 

bank could possibly affect on some days. 

Mr. NEUGEBAUER. So just the bottom line, but there will be other 

findings from the CFTC on this issue. Is that your testimony? 

Mr. GENSLER. Again, not to compromise any ongoing enforcement 

matter, we are going to vigorously pursue enforcement matters 

around these benchmark rates. These rates need to be reliable but 

it is also the law. The law is, don’t false report, don’t attempt to 

manipulate or manipulate these rates. 

Mr. NEUGEBAUER. I want to go back to Peregrine for just a 

minute. I think we are reading that one person was evidently falsifying a tremendous number of documents, daily reports, financial 

statements, bank statements, bank verifications. I mean, the list 

goes on and on. And so either we have a very unsophisticated regulatory structure or this was a very sophisticated gentleman that 

could carry off for as long a period of time as he did this fraud. I 

would hope, and we are going to hear today hopefully that we are 

going to have to jack our surveillance up, that if one person—and 

I don’t believe one person could actually have pulled this off—but 

one person could defraud a fairly broad number of regulators that 

are supposed to be looking after on behalf of the customers of these 

institutions. So I am hopeful that we are going to hear some very 

positive steps but it doesn’t speak well when one person can pull 

that off for that period of time. 

Mr. GENSLER. I share our view that we have to up our auditing 

oversight both at the CFTC and the self-regulators, and I also 

would say, we don’t know all the facts yet. There is going to be a 

lot more that we learn about the facts of this situation. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman’s time has expired. The chair recognizes the gentleman from Iowa for 5 minutes, Mr. Boswell. 

Mr. BOSWELL. Thank you, Mr. Chairman. 

Thank you, Mr. Chairman Gensler, for being here to talk to us. 

Listening to what has been already said, yesterday or recently we 

also had some discussions with the NFA personnel and so on, and 

understand how they structure their toolbox to do their work, 2¢ 

per trade on both the borrower and the seller and so on. I understand that, and with that, they have managed to add about 25 percent annually to their toolbox, if you will. After the collapse of Wall 

Street, we passed Dodd-Frank, which I have always felt like would 

probably need some tweaking and I have no quarrel with that, but 

we expanded the CFTC’s responsibilities regarding oversight. Then 

we discovered the collapse of MF Global last October, made it apparent that we must provide our oversight bodies with tools. 

So I want to ask you this question. Do you think that the structure similar to the way we fund the SEC would benefit the CFTC 

based on a general growth rate? How do the investments of technology made by CFTC compare to those made by the SROs? 

23

But before you answer that, I would just say to Mr. Conaway and 

Mr. Lucas, I respect you guys very much. There is probably nobody 

in the room that has spent more time where you come from than 

I have. As a young man, I went to a place west of Odessa named 

Monahan. I was out there in an oil field—just a young farm kid 

who was willing to do hard work—and they hired me to substitute 

so everybody could take vacation on the drilling rig. I did all the 

jobs—lee tongs, backups, tower, mud mixer—I did it all. And then 

later on I spent time in mineral wells, Fort Walters, a couple trips, 

Fort Bliss, Oklahoma, I am practically an Okie. Fort Sill, I have 

been there a lot of times, and so on. I was interested in what happens out there in agriculture and realized over the years that the 

technology has changed so much for farmers because of the intensity of capital invested. They have to be able to have marketing 

tools. 

And so we went through all this. Thank you, Mr. Peterson, for 

what you said about what is going on here and what are we going 

to do? I am not sure where—and I say this very respectfully: 

maybe we need to talk about this outside the room but where are 

you leading us to deal with this? Because I am ready to follow if 

I understand it, and I know I sat over there in the chair when we—

after Dodd-Frank I was Chairman and I have now been Ranking 

Member with Mike, and I appreciate that. Maybe you can tell me, 

where are you trying to take us on this. I would like to know. Because we have a heavy responsibility. I want to help. I think we 

need tools. I guess you have combined a little wheat and you have 

certainly pulled a few calves, same as I, and so on. I could never 

go to the field even with a modern combine without a toolbox. I am 

not too sure that you have the toolbox. So I hope you can answer 

that. But I don’t know. I would yield to anybody to help me out. 

I am kind of like you, Mr. Peterson. Where are we going and how 

are we going to get on top of this? Because if we need to tweak 

Dodd-Frank, let us do it, but let us not give them responsibility to 

do what we ask them to do and then say whoops, figure out some 

way to do it on your own. 

I yield. 

The CHAIRMAN. I thank the gentleman for yielding. 

I think we are in the process now of what has been a multi-year 

effort. The Chairman regularly alludes to the fact that he is in the 

process of fulfilling all of his rulemaking responsibility under DoddFrank, has not completed that yet but is in the process. 

Mr. BOSWELL. But we still keep trying to take his resources away 

by cutting his budget. 

The CHAIRMAN. I think we have a responsibility on this Committee—we are not appropriators, we are authorizers—to provide 

oversight to make sure that the Chairman and his Commission are 

fulfilling the spirit of the law as well as the letter of law. All of 

that in addition to their mandated responsibilities under DoddFrank, they are fulfilling all the other responsibilities that are ongoing with this process. I used the country phrase about the night 

watchman shaking the doorknobs in referencing to that as well as 

putting up stop signs or street signs. I understand the Chairman 

has a difficult challenge but we also have a responsibility to provide oversight, to verify that he is following the rules, that he is 

24

doing what he needs to do. If he should deviate from the intent of 

the law, our responsibility is to guide him back to that point and 

to help move him forward. If there were indeed flaws in the law 

or flaws in the rule—I know what would surprise the Chairman to 

hear there might be a flaw in the rule somewhere—if there are 

flaws, then it is our responsibility to bring attention to that to help 

make sure changes can be made. 

Right now in the legislative environment we are working in, it 

is kind of challenging, as my good friend from Iowa knows, to get 

much of anything done. That is just the lay of the land as we face 

it. That is why we worked so hard the other night on a markup 

on a comprehensive farm bill. 

Mr. BOSWELL. You did a good job. 

The CHAIRMAN. That is what my main focus is and yours too, my 

good friend. 

Mr. BOSWELL. Absolutely. 

The CHAIRMAN. But we are going to fulfill our responsibilities. 

We are going to move this process forward and our friends are 

going to work doubly hard, I am sure, to fulfill their responsibilities. 

Mr. BOSWELL. Thank you very much. I appreciate that, and I like 

your analogy of shaking the doorknobs. I think it is kind of linked 

up with having the tools in the toolbox. Okay. I went past my time. 

I will yield back. You take all the time you want. 

The CHAIRMAN. I would say to my good friend, all of our time has 

expired, and now I turn to the gentleman from Texas, Mr. 

Conaway, for 5 minutes. 

Mr. CONAWAY. Thank you, Mr. Chairman. I appreciate the comments from Mr. Boswell. 

Chairman Gensler, thank you for the call the other day. We have 

a target-rich environment this morning for questions on the array 

of things that are in front of your Commission, but I want to talk 

about the extraterritorial guidance. I appreciate your call the other 

day and our conversation about that. I now know some more about 

it that I didn’t know then, and some questions have just come up 

to me, so I am not saving these for you, I just didn’t think about 

them at that point in time. 

This fits in the foundational kind of rules that some would argue 

require you to work with the SEC to put this rule or guidance, 

whatever we wind up calling it, in place. SEC has said they don’t 

have the authority to issue guidance the same way that the CFTC 

did. Can you walk us through how you came to conclude this and 

why this isn’t more coordinated with the SEC? Quickly, because I 

have a series of questions on this issue. 

Mr. GENSLER. First, I would say I now have come to use the 

word cross border because I can pronounce it, but on the cross-border issues, we do have a provision in Dodd-Frank that was not 

placed in the SEC’s side of it. It is section 722(d). What it says specifically is, we are not to regulate something unless it has direct 

and significant effect on the commerce or activity of the United 

States. Those words that are in Dodd-Frank are on our side, not 

the SEC’s. And we received a lot of questions from many, many 

market participants: what do those words mean, can you interpret 

those words. Congress didn’t say we shall do a rule or anything. 

25

Mr. CONAWAY. Okay. 

Mr. GENSLER. So we are trying to interpret those words and 

leave some flexibility, frankly, that it is not as rigid. 

Mr. CONAWAY. In that regard then, where does guidance fall in 

the pecking order? If I am a cross-border firm and trying to look 

at this guidance and it is open for comment for some 45 day period, 

so the guidance is not even final, I have a 60 day clock, soon to 

start running with respect to swap-dealer registration and I am 

going to make real-world decisions to spend money and to reflect 

that guidance. Are you expecting folks to comply with this as if it 

were a rule? 

Mr. GENSLER. So we have also put out at the same time for 30 

day public comment something about phased compliance or an exemption for 1 year for these foreign-based swap dealers from many 

of the rules of Dodd-Frank—the entity-based rules. They would 

have to comply with transaction-based rules that are in effect like 

real-time reporting if they are doing something with a company in 

Texas. So if a bank in France was doing a trade with somebody in 

Texas, that would still have to come——

Mr. CONAWAY. Under the transaction rule but not the entity 

itself would——

Mr. GENSLER. That is correct. 

Mr. CONAWAY. And do you expect working with your friends at 

the SEC that they will come to similar conclusions when they go 

through their actual rulemaking process on this? 

Mr. GENSLER. I think they will be similar but not identical because again Congress did something different on their side of the 

statute than ours so that——

Mr. CONAWAY. Well, that seems to be the cart driving the horse. 

In other words, what we want is regulations that work for everybody and allows them to comply. I haven’t harassed you too much 

about the end run on cost-benefit analysis that this guidance proposal appears to allow you to not do cost-benefit analysis of what 

compliance under these guidance rules might cost and what those 

benefits are. But the idea is that they ought to be parallel with the 

SEC and not rely on a flawed law that Mr. Boswell said we probably need to fix some of that kind of stuff, but the idea is, then you 

would be able to comply with this and not let the law drive a goofy 

answer. 

Mr. GENSLER. The SEC, the Treasury and the Federal Reserve 

have all given us advice and counsel for many months on this document we put out to public comment, and I believe we will be close 

whenever the SEC moves forward, but again, because they have 

different statutory framework, there will be some difference. 

Mr. CONAWAY. Let me ask in a similar vein, Barclays, which you 

guys did a good job and I was hoping you would brag more on your 

team this morning about that because I do think you did a good 

job. But the agreement that you made with Barclays Bank sets in 

place some things that they will now do with respect to their operations. Will that now become the industry standard for everybody 

else and is this another way to get at a rule without going through 

the normal rulemaking processes that we generally have put in 

place? 

26

Mr. GENSLER. Let me first brag on the team, Vince McGonagle 

and Gretchen Lowe, Anne Termine, and David Meister, I mean, 

fabulous, tough, tough case, fabulous work they have done. 

In terms, yes, we had Barclays commit that as they make these 

submissions in the future, they have to be transaction-based, focused on Barclays transactions, and if there aren’t transactions in 

this unsecured market, they have to look to their secured borrowings. They have to have firewalls and——

Mr. CONAWAY. That is fine, but I really wanted to focus on the 

impact this has on the rulemaking process. In other words, will you 

use this again in the future with legal operations to get at a backdoor rule for everybody else? 

Mr. GENSLER. I now understand your question. We were really 

focused on Barclays. I mean, Barclays had such pervasive activity 

that was not in compliance with the law, so pervasive we said no, 

you have to have these undertakings. We have undertakings in 

many of our settlements. They just don’t get as much publicity as 

this here. And I would say that just as in other cases, people 

should read those undertakings and understand them but they are 

Barclays specific. 

Mr. CONAWAY. You mentioned the PCAOB helping you with auditing standards. They set the auditing standards for public companies. I would also refer you to the AICPA, which sets auditing 

standards for private companies, and the fellow that I suspect was 

auditing Peregrine was likely not registered under the PCAOB. 

Mr. GENSLER. I think that is very good advice. I think that they 

were registered but it is still very good advice. 

Mr. CONAWAY. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman’s time has expired. The chair now 

recognizes the gentleman from North Carolina, Mr. Kissell, for 5 

minutes. 

Mr. KISSELL. Thank you, Mr. Chairman. 

Thank you, Chairman Gensler, for being here with us today. We 

had a hearing a while back on MF Global; and as Members of the 

Committee were questioning board members, Commissioners from 

the CFTC about some of the oversight things, it was pointed out, 

I believe by the Ranking Member, that MF Global had really 

transitioned from a commodities-based firm to a securities firm and 

really at that point in time when some of the bad things happened, 

it was more of an SEC responsibility than a CFTC responsibility. 

In that regard in that transition, and somewhat in follow-up to 

Mr. Conaway’s questions, as the CFTC moves forward in its definitions and its rulemakings, and as the comment time closes, and 

looking at the cross-border aspects of some things, some folks had 

come to me and talked about, they were concerned not wanting 

changes in laws and regulations, just looking for certainty, and 

they were concerned if you guys finished your work too much in advance of the SEC doing the same things. Looking at MF Global as 

an example of a company that switched, in between, are you concerned that if you get too far ahead of the SEC if there might be 

the gaps in there that might create problems in oversight, in the 

paperwork, in compliance issues if there is too much of a gap between these things being done? I just wonder what your thoughts 

are. 

27

Mr. GENSLER. I am mostly concerned that 2 years into this and 

4 years from the crisis we need to get these common-sense rules 

of the road and the traffic lights in place. The timing gap with the 

SEC, they are overseeing the securities-based swaps, which is a 

much smaller part of the market, does raise some concerns in 

clearing of credit default swaps, so that is something we have 

looked at very closely, especially the largest clearinghouse, the 

IntercontinentalExchange. I would hope that we could get portfolio 

margining, which is a very detailed issue, done, because that we 

need to do with the SEC. 

The timing gap that is probably more significant is with Europe 

and with the international regulators and this cross-border issue, 

and that in part is a significant reason why we gave this 1 year 

period to sort through some of these international issues. We have 

a proposed exemption for another year on the international side. 

Mr. KISSELL. Thank you, Mr. Chairman, once again for being 

here and I yield back my time. 

The CHAIRMAN. The gentleman yields back. The chair now recognizes the gentleman from Colorado, Mr. Tipton, for 5 minutes. 

Mr. TIPTON. Thank you, Mr. Chairman. Thank you, Chairman 

Gensler, for being here as well. 

I think that I would like to follow up a little bit on what Mr. 

Conaway and Mr. Kissell have been talking about in regards to 

some of the cost-benefit analysis of this. Our counterparts seem to 

have pretty much the same conversation, which is financial certainty in terms of what is being proposed by the CFTC. You have 

issued but not published in final form a number of rules that are 

going on. When we are talking in country, not extraterritorial, but 

in country on the proposed rules, are you expecting compliance because that seems to still be fluid, and some of the costs that are 

going to be associated from these various groups that they are 

going to have to try and comply and then change as that rulemaking process has not been finalized. 

Mr. GENSLER. To answer your question, no, and we have been 

very clear and issued exemptive language. We are hopeful to get 

our proposals finalized by the end of this year. We have granted 

relief through the end of the year, and then as we finalize those 

we would put in place compliance schedules well into 2013 for the 

rules that might be finalized later this year. But only the final 

rules that are in place are actionable and enforceable. 

Mr. TIPTON. Great. And one thing I would like you to maybe explain just a little more on, whenever there is a problem, we all 

want to make sure that the markets work well, people are held accountable, the people’s resources are sound and we can count on 

the information. You had commented that are you doing some internal examination, that you stated in your testimony the system 

failed to protect Peregrine’s customers, and that we need to take 

a close look at how the CFTC handled its oversight. Are you identifying, in lieu of new rules, where it failed internally and how to organizationally make this work better? 

Mr. GENSLER. We are doing that. We had already restructured 

this group, the examination function and oversight of the self-regulatory functions and hired a new head of examinations and also a 

new head on top of that, but that is not enough. I mean, they are 

28

terrific people but we really do look at this and say we have to do 

better. How do we, in essence, audit the auditors, how do we examine the SROs, because that front line of defense is embedded in 

statute? That is what we have had for decades. Now, how do we 

enhance that front-line defense and then the CFTC’s responsibilities? As the Chairman says, we ultimately do have that responsibility and should be held accountable to make sure we look internally how we can do this better. 

Mr. TIPTON. You know, and I think we probably agree, the majority of the players want to make sure that things are done properly 

and abiding by the law that is going on, but when it got into the 

extraterritorial rulemaking, the five Commissioners went ahead 

and moved through without the customary input for public comment. Moving on, you have now opened this up for 45 days. Do you 

think that is a prudent thing to do or would it be better maybe to 

talk to people that are actually in the business to be able to seek 

some guidance in terms of how to make sure that the rulemaking 

process moves forward for that interaction with the SEC as well? 

Mr. GENSLER. Well, Congressman, with all due respect, we had 

gotten a lot of input from market participants, and we list those 

meetings on our schedule, but I would have no doubt there were 

dozens of meetings and dozens of letters from commenters, if not 

over 100 letters from commenters, about the cross-border application, and then we put that in this interpretation and the relief, the 

1 year relief I referred to. We had input from the SEC before we 

did that and now we are going to get further public comment on 

that because it is critical to get the public comment. 

But I would say that if we followed the industry’s approach completely, they would move the jobs and the markets to London or the 

Cayman Islands or somewhere but the risk still comes crashing 

back here. AIG Financial Products, that was located in Mayfair in 

London. Citicorp’s special purpose vehicles, their off-balance-sheet 

vehicles, were originated in London and incorporated in the Caymans. I could go crisis by crisis. The risks come crashing back to 

the American public and so we think that when Congress said to 

oversee what is direct and significant that we have to find a way 

to make sure those branches and affiliates of U.S. financial parties 

have in place some common-sense transparency and risk-reducing 

rules. 

Mr. TIPTON. I see my time has expired. Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. The gentleman’s time has expired. The chair now 

recognizes the gentlelady from Maine for 5 minutes, Ms. Pingree. 

Ms. PINGREE. Thank you very much, Mr. Chairman, and thank 

you for being here with us today. 

I am going to ask a slightly different question but it is on the 

same perspective of all the work that you are doing. There was a 

lot of attention this morning to the fact that Sandy Weill was, I 

guess, on CNBC and it has been covered in The New York Times

so obviously the former chair of Citigroup, and one of his very 

thoughtful comments was that the big banks should be broken up 

into separate commercial banking and investment entities. So 

given his perspective, and obviously this is a clear change of opinion of himself and probably a lot of other people out there, how 

29

does that affect your view of the current Volcker Rule? Do you 

think maybe now we should be thinking about a more robust 

version as we are going through this process? 

Mr. GENSLER. There is a lot in that question. 

Ms. PINGREE. That is okay. I have 5 minutes. 

Mr. CHAIRMAN. And you tend to put a lot back in your answers. 

Mr. GENSLER. I think we need common-sense rules of the road 

so that if a bank fails, there is a freedom to fail, that the taxpayers 

are not standing behind banks. I think that has got to be the heart 

of what we do in the derivatives regulations and otherwise in 

Dodd-Frank. I think in terms of the Volcker Rule, the approach 

Congress took is to lower some of the risk of this proprietary trading but of course at the same time still permit very important market-making and risk-reducing hedging. It is probably one of the 

most challenging rules in front of regulators, how to prohibit proprietary trading but permit these important activities, market 

making and hedging. 

Ms. PINGREE. I know you are going to give a longer answer but 

I am going to just interject for a second because this is part of my 

follow-up question. In previous hearings, we have heard some people question whether you can make the distinction between a hedge 

or a proprietary trade, so actually I was going to ask you a little 

deeper on that and maybe you could at the same point comment 

about how you define it, have we gone far enough. If certain other 

bankers are thinking it is still too confusing, are we going far 

enough? 

Mr. GENSLER. I think it is a challenge for regulators. I think 

Congress was clear that you can hedge specific risk, whether it is 

a specific position or an aggregate position. Congress decided that. 

But I don’t think that Congress meant by that that it could just 

be, well, I am going to say this table here is a hedge. You see, I 

am just telling you this is a hedge and therefore it is hedge. It is 

hedging something. And it has to have reasonable relationship to 

the underlying positions, and I think that is the challenge. The 

JPMorgan Chase situation on credit derivatives and portfolio hedging, we have to learn from that and think about that. When is portfolio hedging really related to specific risks and when is it something that is mutating into just betting on the markets. 

Ms. PINGREE. So are you imagining that portfolio hedging will 

somehow stay in the final rule? 

Mr. GENSLER. Well, Congress already spoke to that, that it could 

be hedging aggregate risk of positions. My own experience when I 

was on Wall Street, that when you separate a hedge further and 

further from a trading desk and it has a separate profit-and-loss 

statement and separate managers, it tends to mutate into something else, but if it is actually related to aggregate positions and 

has a reasonable correlation to that, for instance, it loses monies 

when the positions make money and it makes money when the positions lose money, that probably tells you it is a real hedge. But 

otherwise it might be something else and Congress said let us 

lower that, let us prohibit that, in fact. 

Ms. PINGREE. So I am not an expert in this field, but given how 

confusing that is, and if certain bankers are already saying it is 

confusing, why doesn’t it make us want to go back and look at the 

30

Volcker Rule and say, ‘‘Well, let us just go back to keeping them 

completely separate.’’ Maybe it is not going far enough to have a 

really complex, difficult-to-enforce and difficult-to-understand rule, 

why not on the Volcker Rule do what Sandy Weill said, ‘‘After 

years of history now looking back, we ought to just break up the 

banks?’’

Mr. GENSLER. I am not familiar exactly with what he said this 

morning, but of course, that is part of what Congress debated and 

can debate in the future. We would work with you in any way on 

that. 

The CHAIRMAN. If the gentlelady would yield? 

Ms. PINGREE. Yes. 

The CHAIRMAN. I think you are referencing that traditional separation of the two that was put in place in the 1930s under GlassSteagall. There is much discussion about that, yes. I yield back. 

Ms. PINGREE. And for the record, I am in favor of Glass-Steagall 

and going back into that position, and you are right, I can’t paraphrase him or anyone else, but it seems to me given some of the 

confusion around the complex way we are trying to make them separate but not, we should reinstate Glass-Steagall. Thank you. 

Mr. GENSLER. I think the critical piece is that if any of these 

banks fail we not stand behind them. 

The CHAIRMAN. The gentlelady’s time has expired. The chair now 

recognizes the gentleman from Florida, Mr. Southerland, for 5 minutes. 

Mr. SOUTHERLAND. Thank you, Mr. Chairman, and Mr. Gensler, 

thank you for appearing before us today. 

I have a couple questions. I wanted to read a little bit of information from—this is PFGBest customer account agreement that they 

sent to all of their customers. It says ‘‘If your securities futures positions are carried in a futures account, they must be segregated 

from the brokerage firm’s own funds and cannot be borrowed or 

otherwise used for the firm’s own purposes. If the funds are deposited with another entity, (e.g., a bank, a clearing broker or a clearing organization) that entity must acknowledge that the funds belong to the customer and cannot be used to satisfy the firm’s debt,’’ 

and I would like, Mr. Chairman, to incorporate PFGBest Customer 

Account Agreement into the record. 

The CHAIRMAN. Seeing no objection, so ordered. 

[The information referred to is located on p. 110.] 

Mr. SOUTHERLAND. So my question is, obviously there is proof 

that that was violated, I am curious, how do—why didn’t CFTC 

monitor segregated funds and secured accounts held by JPMorgan 

Chase, who obviously knows that rule. There didn’t seem to be a 

paper trail to prove that those funds were held in the account as 

they were supposed to be and that a proper usage of a withdrawal 

was proven before they released those funds. 

Mr. GENSLER. If I understand the question, why wouldn’t a bank 

have done that? We are going to learn a lot more facts but there 

are a number of points of outside auditors, self-regulatory organizations like the NFA auditing and, yes, even the CFTC doing some 

limited-scope reviews. Acknowledgement letters, you referred to acknowledgement letters, may have been forged here as well so that 

it looks like from Russ Wasendorf’s own words and his note found 

31

when he attempted to kill himself was that he was using 

PowerPoint to forge bank statements as well as some of these acknowledgement letters and confirmation letters. All of the points of 

protection—outside auditors, NFA, even our limited-scope reviews—did not find this. The system let down these investors. But 

I believe acknowledgement letters, confirmation letters, bank statements and custodial statements should be directly electronically 

available to the regulatory agencies. We are working with the NFA 

and the CME to try to get that in place shortly. 

Mr. SOUTHERLAND. But it just seems to me that if JPMorgan 

Chase released these funds, they had a burden to confirm—and I 

understand what you are saying, that there were forged documents, but oftentimes many of the American people sometimes feel 

that investigators, bureaucrats, and many times regulators couldn’t 

track an elephant in the snow, and when you look at this right 

here, I think that warrants their feelings. 

I want to say I know I am running out of time but I want to ask 

you this: Unlike stocks, future trades are not covered under the Securities Investor Protection Corporation, SIPC, which protects 

against losses from unauthorized transactions up to $500,000, or 

$250,000 limit for cash. Why shouldn’t these futures be covered by 

SIPC as insurance protection for really honest investors who in 

good faith have made those investments? 

Mr. GENSLER. Well, that is a debate that has come about. Commissioner Chilton, one of my fellow Commissioners, has recommended it, and I know that you will be considering that. I would 

say there are costs and benefits, and what we need to do at the 

CFTC is not frankly wait for that but really put in place stronger 

protections around these accounts, even building on what we have 

already done because we have done a lot to put in place further 

protections as that debate goes on. 

Mr. SOUTHERLAND. Well, and I think that right now we are doing 

forensics. It would be nice—you made reference to your grandfather—my mom raised me on plenty of anecdotes too and she always said to me, an ounce of prevention is better than a pound of 

cure. I would encourage to look at how we can better protect our 

investors. 

And the last thing I would say, Mama also told me—and by the 

way, being a Member of Congress and the older I get, the more I 

realize my mom and dad were pretty smart—my mom would always say, if you wallow with the hogs, you are going to get dirty, 

and might I suggest that we monitor the hogs that Mr. Wasendorf 

wallowed with? You might find some other dirty hogs. I yield back. 

The CHAIRMAN. The gentleman’s time has expired on that 

thought. The chair now recognizes the gentleman from Vermont for 

5 minutes, Mr. Welch. 

Mr. WELCH. Thank you very much. 

Mr. Gensler, a couple of things. Number one, good job, and I do 

hope that we adequately fund you. Much is being expected, and if 

you are going to do what is required in order to maintain the credibility of the futures market—we are going to have gentlemen and 

women testifying after you who are using that market for the purposes for which it is intended—we have to give you the resources. 

So I support full funding for your efforts. 

32

I want to ask you about derivatives and a little bit about what 

happened with JPMorgan Chase. One of your predecessors, James 

Stone from Massachusetts, wrote an article recently, and he pointed out that JPMorgan had, as many banks do, a huge exposure of 

derivatives notional value contracts. In the case of JPMorgan, it is 

about $75 trillion. That is an enormous outsize risk. And the question that I asked myself and he asked as well: are there regulations 

really that we can constantly be cooking up that somehow keep up 

with the level of risk and the level of creativity in the derivatives 

markets, or is it time to make some requirement that there be 

some money on the table from the big banks when they are putting 

so much of their shareholder and depositor money at risk and 

where obviously it has implications for the economy? 

Just to go through a few of the things that he pointed out, the 

risk is disconnected, as you were saying earlier, from the actual 

trading desk. I don’t think that is true with folks who are going 

to be testifying next. There is a direct connection between what 

they are doing and how they are trying to offset that risk, and we 

support that. But where the three largest banks have 24,000 percent notional value risk compared to their assets, any deviation in 

their risk model where there may be a black swan, as they call it, 

where there may be a geopolitical event, 1⁄10 of 1 percent is going 

to have a big exposure. 

Now, rather than doing all these rules and regulations, we are 

having fights about it that get reflected in our squeezing your 

budget because we can’t come to some understanding, one of the 

things that Mr. Stone recommended is that those banks or those 

derivative players would have to put down 1⁄10 of 1 percent to offset 

that risk, and it means that the taxpayers may not be exposed. 

Seventy-five trillion dollars of notional value would be $75 billion 

in cash money that would be a factor that would reduce that 

counterparty risk, reduce the trading volumes and bring us back to 

what had been historically the purpose of the futures market and 

hedging, which is to offset. 

So rather than all this complicated regulation where I am starting to get to the view that my colleague here from Maine had that 

some of these institutions are too big to fail, they are too big to regulate as well, what would be your position about requiring that 

there be some exposure with a 1⁄10 of 1 percent just for discussion 

purposes on these derivatives contracts? 

Mr. GENSLER. I actually think that is what Congress did in the 

Dodd-Frank Act by saying that the standard derivatives have to 

come into a clearinghouse, so clearinghouses collect margin, and 

that the non-standard contracts the banks have to collect margin, 

not on the non-financials, the end-users are out of this, but for the 

90+ percent of the market that is insurance companies and banks 

and hedge funds, that they have to put up margin at the clearinghouses, put up margin. If they fail, that is money in the game, skin 

in the game that they can unwind that position and hopefully the 

taxpayers, the clearinghouse is not held to account. It is the 

JPMorgan that would lose in that circumstance. And so you did 

that actually. The question is whether, you might say, is it enough. 

Mr. WELCH. And in your view, is it? 

33

Mr. GENSLER. Well, I think that we put out very strong rules 

about the amount of margin that has to be at the clearinghouses. 

We haven’t finalized the rule on the margin for the uncleared 

swaps. We are working internationally. We don’t want to do it 

ahead of Europe. This is one where we want to time this with Europe around the end of this year or the first quarter of 2013. But 

yes, you should hold us accountable that there is enough in the 

uncleared swaps because you wouldn’t want risk to go there inadvertently. 

Mr. WELCH. Thank you. 

The CHAIRMAN. The gentleman’s time has expired. The chair now 

recognizes the gentleman from Illinois, Mr. Hultgren, for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

Thank you, Chairman Gensler, for being with us today. A couple 

questions. Yesterday, CFTC published an initial list of swaps proposed to be subject to the clearing mandate. It appears that Europe 

will not be prepared to have any such clearing mandate in effect 

until 2013. What is the expected timing in Asia for an enforceable 

mandate clearing requirement? 

Mr. GENSLER. Japan is a little ahead of us actually. They were 

targeting November of this year to have their mandate in place. 

Hong Kong and Singapore will be later, though, so Japan is a little 

ahead of us, Hong Kong and Singapore later. 

Mr. HULTGREN. What effect do you expect the timing of these 

mandates will have since they are not coordinated? 

Mr. GENSLER. Well, I think that it will lower the risk to the 

American public, and that is what we have been chatting about 

here, but it would only be a mandate on transactions that have a 

direct and significant effect on U.S. commerce or activity, so it is 

with U.S. persons. We phased in compliance. We said for 1 year, 

for instance, even if you are a large American bank and you operating out of Frankfurt and you are operating with some German 

insurance company, that mandate doesn’t apply there. It is back to 

U.S. persons and direct and significant effect back here in the 

United States. 

Mr. HULTGREN. Let me ask you briefly just about some of the 

cross-border guidance proposal that CFTC put together to inform 

market participants and end-users about the extent of overseas 

reach of U.S. derivatives regulations. I wondered why the CFTC 

chose to address this important issue via guidance rather than 

through a formal rulemaking. My concern is, by doing so, you essentially avoid cost-benefit requirements associated with a formal 

rulemaking. Did you take into account the cost of imposing and enforcing CFTC rules overseas? 

Mr. GENSLER. To your last point, the cost of not putting them in 

place is another crisis. Risk comes back to our shores and the jobs 

are overseas. I mean, let me just talk about American jobs. They 

will move to London, they will move elsewhere where somebody 

thinks the regulation is lighter. Having worked at a large investment bank with hundreds of legal entities, you just pop another 

legal entity somewhere across the globe but the risk still comes 

back here in a crisis, so we did consider that. The reason we did 

interpretation is because there are legal words in the statute that 

34

a lot of people said can you interpret them, section 722(d), and so 

we are trying to interpret them but maintain some flexibility as 

well because each legal entity is going to have different facts and 

circumstances. 

Mr. HULTGREN. Under Dodd-Frank, Congress required CFTC and 

SEC to jointly adopt foundational derivative rules such as those defining swap and swap dealer. Clearly, Congress expressed its intent 

that the rules governing the scope of the entities and products subject to Title VII should be defined by those two regulators in concert. In my view, the cross-border guidance is effectively part of 

that swap and swap dealer definitional rules. You can’t know what 

a swap or swap dealer is without clearly understanding how crossborder issues are impacted, can you? 

Mr. GENSLER. I think you can, sir, with all respect, and also as 

it relates to the SEC, there is no parallel section to 722(d) on the 

SEC side. There would be no way frankly for us to do a joint interpretation when they don’t have it in their statute and we do in the 

Commodities Exchange Act. So I think that we have coordinated 

very well with the SEC and gotten those joint rules behind us. On 

cross-border application, we are coordinating but, frankly, there is 

a different statutory framework to interpret. 

Mr. HULTGREN. Well, I disagree. I think there is still significant 

amount of misunderstanding over those definitions. There is clear 

fear over it. It is paralyzing many entities. 

Switching gears a little bit, I come from Illinois. I have large 

electric co-ops, also large electric companies there in Illinois, and 

there have been some very serious concerns on those entities of 

what the impact of the definition of swap dealer and swaps will be 

on that. Why did the Commission appropriately raise the proposed 

overall de minimis level from $100 million to $3 billion but didn’t 

raise the level for special entities such as public power companies 

and other utilities? 

Mr. GENSLER. Because we put it out to public comment. We received a lot of comments with regard to the overall level. We didn’t 

get comments—there was one small comment—comments on special entities. Just to refresh, Dodd-Frank said that if somebody was 

dealing with a municipal or a pension fund, they had to have additional sales practice and treat them as—Congress called it—special 

entities. So we had a more narrow definition there. But we have 

worked very well with the rural electric cooperatives and the municipal power companies. They have a petition in front of us. We 

have that in front of our Commissioners to hopefully in the next 

few weeks or months put that out to public comment for an exemption for the municipal power companies dealing with what is called 

201(f) rural electric cooperatives. 

Mr. HULTGREN. Just a quick follow-up on that. My question really is, my understanding with Dodd-Frank was recognition of 

threats to market really in response to the financial crisis. I would 

just ask what role power companies had in creating the financial 

crisis. 

Mr. GENSLER. We are working with the municipal power companies and the rural electric cooperatives to have an exemption for 

them, and we worked through that swap definition so that many, 

many electricity contracts that they had concerns with were adVerDate 0ct 09 2002 10:19 Jan 04, 2013 Jkt 041481 PO 00000 Frm 00038 Fmt 6633 Sfmt 6601 I:\DOCS\112-34\75437.TXT BRIAN
35

dressed. I know the Edison Electric Institute put out some comments about what we had done. They continue to come in on very 

important but narrow issues, and we are going to continue to work 

with them on that, but I don’t think that the municipals and the 

rural electric co-ops and so forth are going to become swap dealers 

and so forth. 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. HULTGREN. Thanks, Mr. Chairman. 

The CHAIRMAN. The chair now recognizes the gentlelady from 

Ohio, Ms. Fudge, for 5 minutes. 

Ms. FUDGE. Thank you very much, Mr. Chairman, and thank 

you, Chairman Gensler, for being here today. 

I just really have two questions. The first one is, in your testimony, you assert the need for increased appropriations for CFTC 

in order to allow it to better serve the American people by providing sufficient oversight. In light of the need for greater oversight 

and of course recent events as well, do you believe that the private 

regulator NFA is really up to the task or do you believe that the 

American people would be better served by having one centralized 

Federal regulator? 

Mr. GENSLER. Well, this is embedded in our oversight for decades, this system of front-line regulators and then the Federal regulator overseeing this front-line regulator. So we are taking a deep 

dive and looking very closely at how to enhance this system. 

Frankly, we don’t have the resources. I mean, this is not just decades old for other reasons but we don’t have those resources. 

Ms. FUDGE. Right. If you had the resources, my point is, does it 

work the way it is? Do you have the confidence in the private regulator that you should have? 

Mr. GENSLER. We are doing everything to enhance it. We have 

worked closely with the self-regulatory organizations that you will 

hear from in the next panel to enhance it. I think in this circumstances of Peregrine and as evidenced, it did not serve the benefit of these people. But the reality is, this has been here for decades. It is enshrined in statute. 

Ms. FUDGE. That is not my question. 

Mr. GENSLER. I know. I respect that the challenges of this selfregulatory organization or Federal regulators is going to be similar. 

My answer is, whether it is at a self-regulatory organization or at 

the Federal regulator, we need to make sure that we have windows 

directly into these accounts, that we have enough enforcement and 

a culture of enforcement between them and ourselves. I think it 

can work either way, by the way. I think it is can work either way 

but this is what has been enshrined for decades. 

Ms. FUDGE. Well, since you don’t want to give me a direct answer, we will go to the next question. 

And this has been talked about, people have touched on it today, 

but I mean, certainly we understand that the public needs some 

real protection and some certainty. And people have asked you 

about timelines. Could you please discuss the timelines for completing the rulemaking under Dodd-Frank? 

Mr. GENSLER. We have been at this about 2 years and we have 

just under 20 proposals that are out but haven’t been finalized. I 

think the bulk of them, not all of them, will be finalized by DecemVerDate 0ct 09 2002 10:19 Jan 04, 2013 Jkt 041481 PO 00000 Frm 00039 Fmt 6633 Sfmt 6601 I:\DOCS\112-34\75437.TXT BRIAN
36

ber 31st. There are some we have chosen to wait like the international margining regime to line up with other regulators. The 

timeline beyond that is, we will still continue to phase compliance 

well into 2013 in terms of bringing people in because markets need 

time to adjust and to lower the burden and let this come into place. 

Ms. FUDGE. Thank you very much, Mr. Chairman. I yield back. 

The CHAIRMAN. The gentlelady yields back the balance of her 

time. The chair now recognizes the gentleman who represents most 

of the great State of Kansas, Mr. Huelskamp, for 5 minutes. 

Mr. HUELSKAMP. Thank you, Mr. Chairman, and Chairman 

Gensler, thank you for joining us here today. I would like to direct 

some questions to the Peregrine incident. How many years was 

wrongdoing occurring there based on information you have? 

Mr. GENSLER. I am sorry. This is Peregrine? 

Mr. HUELSKAMP. Yes. 

Mr. GENSLER. We are still trying to develop the facts. His note 

that he left when he attempted to take his life said that it had 

been for quite some time, maybe up to 20 years, but we do not have 

independently verifiable data to say that. In some cases, banks and 

others only have records for 7 years. So it may well be that we 

won’t know the answer to that with certainty, but his note says 

maybe up to 20 years. 

Mr. HUELSKAMP. And during those 20 years, how many times 

was that company audited or reviewed by your entity? 

Mr. GENSLER. It would have been audited by outside folks every 

year and the NFA every 9 to 15 months. The CFTC, as I laid out 

in the written testimony, conducted a number of limited-scope reviews in the 1990s that led to an enforcement action in 2000 where 

Peregrine had to bring others in—PricewaterhouseCoopers. We also 

in 2007 and 2008 did some limited-scope reviews on matters that 

are outlined and then one more in 2010 on anti-money laundering. 

These limited-scope reviews are not audits in the full sense of the 

word but we look at papers and specific issues that have come to 

our attention. 

Mr. HUELSKAMP. Did you ever call the bank to verify the account 

balances that apparently this CEO was falsifying and submitting 

for your reviews? 

Mr. GENSLER. Though I am not aware of all the details in all of 

these reports over the years that CFTC might have done, the firstline auditors would have been the CPAs and the National Futures 

Association, but I am not aware of any calls to the bank, U.S. Bank 

or Harris Bank or the other banks, but it may have occurred. 

Mr. HUELSKAMP. And you mentioned PricewaterhouseCoopers. 

Certainly they would have verified the account balances, would 

they have not? I mean, you directed them as part of a finding to 

find some outside help for this issue. 

Mr. GENSLER. Under the rules of the CFTC, written enforceable 

rules, the yearly CPA has to use Generally Accepted Auditing 

Standards, and as I understand it, those auditing standards do require what you just said about the confirmations of assets, custodial arrangements in banks. 

Mr. HUELSKAMP. So if it was 20 years, if the suicide note was apparently the basis for your charges and been occurring for 20 years, 

37

then this outside entity that in 2000 actually should have looked 

at those records as well? 

Mr. GENSLER. Again, there are a lot of facts we are going to learn 

but I think that you are correct, sir, that outside auditors and even 

in the audit routines of the National Futures Association is to confirm key balances. 

Mr. HUELSKAMP. On January 25th, Mr. Chairman, you have a 

press release still on your website, CFTC Releases Results of Limited Reviews of Futures Commission Merchants. That review did include this firm in question? 

Mr. GENSLER. Yes, it was reviewed by the NFA as part of that 

limited-scope review. 

Mr. HUELSKAMP. And what was the role of the Commission in 

the review? 

Mr. GENSLER. We looked at the top, I want to say 10 or 12 largest futures commission merchants and then the Chicago Mercantile 

Exchange took the next group and then NFA took their direct regulated entities. 

Mr. HUELSKAMP. So the CFTC didn’t review the entity in question here, it was NFA? 

Mr. GENSLER. No. The last time we did a limited-scope review 

was on anti-money laundering. It was maybe a year and a half ago 

at Peregrine. 

Mr. HUELSKAMP. Obviously, Mr. Chairman, with the $1.6 billion 

lost through MF Global and the uncertainty out there, why would 

you put anything out to the public assuring them that—and this 

was assurance to the marketplace and that is how it was treated—

if you hadn’t done the work and again we are relying on outside 

groups to determine the effectiveness of your regulatory system? 

Mr. GENSLER. Sir, I will even go further. This was an attempt 

to deceive the regulators and the public for what may have been 

many years. The deception would have continued all the way until 

July of this year throughout this period of late last year, and I believe that we need to do more and we need to do better, but this 

was an outright fraud, forged bank statements, forged—so even 

this would have occurred in November or December when the NFA 

took their limited review at that point. 

Mr. HUELSKAMP. And I appreciate that. Thank you, Mr. Chairman. I find it troubling that we would put this type of assurance 

out, screwed up in MF Global, screwed up on this entity and then 

here we are telling the marketplace in January and then find out 

later at the various time this assurance was given that we had 

these problems still out there. I have constituents that lost funds 

in both entities through a massive failure, and so I appreciate the 

answers, Mr. Chairman. I look forward to your further research. I 

yield back. 

The CHAIRMAN. The gentleman’s time has expired. The chair now 

recognizes the gentleman from Connecticut, Mr. Courtney, for 5 

minutes. 

Mr. COURTNEY. Thank you, Mr. Chairman, and first of all, I just 

want to join my friend, Mr. Conaway, in complimenting the work 

that CFTC did in the Barclays case. Again, just for the record, the 

U.S. Treasury is collecting $160 million in fines from Barclays as 

a result of that enforcement action. Isn’t that the——

38

Mr. GENSLER. It is actually $360 million, because it would be 

$200 million in our action and $160 million in the Department of 

Justice. 

Mr. COURTNEY. Great. So again, just sort of going back to your 

point about resources and CFTC’s total budget cost to the taxpayer, 

again, the President’s submission this year was for a budget of 

about $300 million. Is that correct? 

Mr. GENSLER. That is correct. 

Mr. COURTNEY. Obviously we don’t want you to be in the position 

of, to use another metaphor today, of a police officer writing speeding tickets to pay for his budget, but the fact of the matter is, is 

that having an adequately financed CFTC will in fact result in benefit to the taxpayer through enforcement actions that in some instances collect fines but also hopefully regulate behavior that is 

going to be a benefit to consumers and small businesses. 

Mr. GENSLER. I think we are a good investment to the American 

public because markets will work better, end-users will get a better 

deal in these sophisticated markets, and you are right, occasionally 

there will be large enforcement fines but we have to knock on every 

door that the Chairman said we have to knock on. 

Mr. COURTNEY. And to follow up on Mr. Huelskamp’s questions, 

I mean, the fact is, is that the situation at Peregrine, in my opinion, really demonstrates the weaknesses that existed pre-DoddFrank in terms of your ability to detect outright cases of fraud and 

deception. One of the rules that you have just promulgated, which 

is in your testimony, is that you are actually beefing up CFTC’s 

ability to crack down on actual cases of deception by having whistleblower authority, which obviously didn’t exist years ago when 

the Peregrine situation was unfolding. We can never know whether 

or not that would have flushed it out, but the fact is, is that when 

there are these outright cases of deception, having these more robust authorities through Dodd-Frank is actually going to help detect actual cases of fraud and deceit. Isn’t that correct? 

Mr. GENSLER. I think that is correct. You have also enhanced the 

anti-manipulation rules. We now have gone to a recklessness 

standard from intent-based. It would be easier to pursue cases 

around benchmark interest rates like LIBOR, so you have enhanced a lot. 

Mr. COURTNEY. And again, one of the other metaphors that you 

heard from my friend, Mr. Southerland, was that an ounce of prevention is worth a pound of cure. I mean, in fact, that is exactly 

what CFTC is doing by again sort of creating a new regulatory 

structure which you described in your opening comments so that 

we don’t again end up in situations like 2008 or MF Global, etc. I 

mean, that is exactly what you are trying to accomplish, isn’t it, 

with the regulations? 

Mr. GENSLER. That is true, but I would say we are never going 

to repeal human nature. We bring about 100 enforcement cases a 

year. We have Ponzi cases and we will be having Ponzi cases for 

decades to come, unfortunately. This Peregrine situation while 

technically not a Ponzi case has all of the sort of indicia of a similar fraud where somebody has deceived their customer base and 

stolen. 

39

Mr. COURTNEY. Right. And last, in terms of the Dodd-Frank position limits regulations which I usually ask you about every time 

you visit us, again, we are now sort of moving towards actually a 

launch date. Isn’t that correct, in terms of the position limit rules 

going into effect? 

Mr. GENSLER. That is correct. Two months after this joint definition of the word swap is in the Federal Register, swap-month positions limits will be effective for 28 commodities for swaps and futures, so sometime in October most likely. 

Mr. COURTNEY. Well, I just want to say, Mr. Chairman, for the 

record, that there are a lot of small businesses, particularly people 

who are end-users in the energy sector, certainly in my state, who 

are looking forward to that date with great anticipation and happiness. Hopefully this measure which is moving forward in the House 

this week to freeze all regulations in its track, a chainsaw throughout the whole government, won’t move forward because even 

though the stated purpose of that bill is to protect small businesses, the fact of the matter is, it is the end-users who rely on the 

futures market for energy who would be hurt by freezing that regulation from going into effect. 

And with that, I would yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman yields back. The chair now recognizes the gentlelady from Ohio, Mrs. Schmidt, for 5 minutes. 

Mrs. SCHMIDT. Thank you. Thank you very much. 

Mr. Chairman, I believe your core mission is oversight and enforcement and yet since you have been Chairman, two of the largest failures in future brokers have occurred under your watch, and 

listening to your testimony today, I mean, you told the gentleman 

from Colorado that you should be held accountable. That was your 

words. You told the gentleman from Florida that now you are going 

to be looking at electronic transactions to make sure that what is 

said to be put in a bank should be put in a bank. And I am a little 

confused because it was under your watch that these systems failed 

and shouldn’t you have been doing that all along? I believe the 

buck stops with you. We can continue to put out more regulations 

but if you are not being the watchdog, then the systems are going 

to continue to be hurt. So I am just asking you, how did this occur 

under your watch? 

Mr. GENSLER. The CFTC is very vigilant, but as you may be 

aware, the front-line regulation, the front-line examination function 

of intermediaries in these markets is with the National Futures Association or the Chicago Mercantile Exchange or other self-regulatory organizations. That is enshrined in statute. So we oversee 

the self-regulatory organizations. We have done a great deal to enhance the investment of customer funds and protections around 

that, sometimes even criticized that we were doing things that 

weren’t in Dodd-Frank like saying we can no longer have what was 

called in-house repurchase agreements, taking customer money and 

lending it to others. 

But this situation here shows that we need to change the rules 

of how firms are audited and the direct electronic access to these 

accounts. This was deception, this was fraud, and that will occur 

from time to time, but I am agreeing with you that we need to do 

all we can do to protect the customers. 

40

Mrs. SCHMIDT. But you are relying on outside firms, the NFA, 

your last limited-scope review, you used their findings, and yet you 

look at certain things in the past that have occurred that should 

have put up red flags. If you are the watchdog, then maybe you 

should do your own internal investigation a little more diligently. 

I am looking at a lot of people who have lost money and this isn’t 

the first time that we have had this discussion in this room, and 

all I hear is, we need more regulation, more rules, more authority. 

I am not seeing you or your organization doing its core mission 

right now, which is oversight and enforcement, and I am not sure 

any more rules are going to allow you to do the job better. 

So I am asking you, doesn’t the buck stop with you and where 

is your leadership in this? I mean, are you spending so much time 

in rules and regulations that you don’t have time to look at these 

audits and see if they are true and effective at what they are stating? 

Mr. GENSLER. With all respect, we brought more enforcement actions last year than any time in the history of this agency: 99. We 

have stepped up our enforcement of segregated accounts where for 

7 years there hadn’t been a case and then under the last 3 

years——

Mrs. SCHMIDT. But you had two of the largest failures in futures 

brokers under your watch. 

Mr. GENSLER. I understand. 

Mrs. SCHMIDT. So regardless of everything else that you did, the 

big boys you didn’t look at. 

Mr. GENSLER. And we have restructured and hired new leadership in our examination and our intermediary oversight functions 

but yes, we need to do more. This Peregrine situation was direct 

deception. We have done a great deal, but I am agreeing with 

you——

Mrs. SCHMIDT. But you did limited-scope reviews. Shouldn’t you 

have done a little bit more? I mean, they had a red flag a few years 

ago. Shouldn’t you have continually watched them to make sure 

that they were being good players in this and not just using a little 

checkmark and moving on? 

Mr. GENSLER. With all due respect, with the funding we have, we 

are so limited in resources. I have been in front of this Committee 

over and over again so I am just going to say, we relied for decades 

on self-regulatory organizations as a front——

Mrs. SCHMIDT. You relied on somebody else instead of your—I 

am sorry. I yield back. 

The CHAIRMAN. The gentlelady yields back the balance of her 

time. The chair now recognizes the gentleman from California, Mr. 

Costa, for 5 minutes. 

Mr. COSTA. Thank you very much, Mr. Chairman. 

I think the conversation that we have had here today really revolves around a transition that is taking place post-Dodd-Frank. I 

am one of those that believes that as we are going through this 

transition, formulation of the rulemaking, the timelines that you 

started to explain in some of the questioning that progress has 

been made. You have been asked the question in a number of different ways. I think you just stated it in response to the last question. But do you really believe you have enough resources at this 

41

point in time to perform the role of risk assessment and risk management and enforcement that is necessary as the Commission? 

Mr. GENSLER. No, we don’t have enough to oversee the futures 

market that has grown five-fold since the 1990s and we are only 

ten percent larger than 20 years ago, and we don’t have enough to 

ensure that we can oversee the swaps marketplace that is eight 

times larger. 

Mr. COSTA. What would you anticipate you would need in terms 

of resources to address the question that was just asked by the 

Congresswoman to provide the level of scrutiny and enforcement 

necessary to avoid these kinds of frauds? 

Mr. GENSLER. With all due respect to the question, though the 

President’s budget is $308 million, which is about $100 million 

than we are currently funded at, Congress in statute in 2000 said 

we were to rely on self-regulatory organizations. If we were to be 

the front-line regulator to actually do the audits, that is not in the 

President’s budget and it is not what I am recommending here 

today. I mean, we have a self-regulatory system. What we need to 

do is ensure that the CFTC examines those self-regulatory functions better, that we do what we do and what Congress has directed us to do better in examining them and making sure that the 

system works for the American public. 

Mr. COSTA. Do you anticipate being able to coordinate resources 

with clearinghouses? You are talking about the timelines in Japan, 

the timelines in Hong Kong, and the timelines for implementation 

in Europe with those other clearinghouses to try to provide a 

worldwide regulatory framework. 

Mr. GENSLER. I think we are coordinating well but we have different politics and different cultures so there will be different 

timelines. In some countries, they might be significantly later than 

us but I am encouraged by Europe and Japan and Canada. 

Mr. COSTA. For your discussion of those timelines, could you provide the Committee, because you talked about you are almost at 

the rulemaking now, what you see the timelines out for the next 

2 years? Would that be possible? 

Mr. GENSLER. I am sorry. Did you say for the next——

Mr. COSTA. Two years. 

Mr. GENSLER. Two years? I think we can provide something to 

you in terms of the rules that are already finalized when there are 

compliance dates and then second, when we——

Mr. COSTA. Mr. Chairman, I would like that provided to the 

Committee so that we can all have a better understanding of that. 

[The information referred to is located on p. 105.] 

Mr. COSTA. I want to understand the context that you made this 

statement. I thought I heard you say earlier in response to questioning that you would support letting the banks fail. I suspect we 

are talking about including those banks that are too large to fail? 

Mr. GENSLER. I think a corner grocery store in America can fail, 

a farmer can fail. I mean, it is about risk and innovation. 

Mr. COSTA. But you don’t believe there is such concept of too 

large to fail? 

Mr. GENSLER. I think that we are better if there is a freedom to 

fail in our economy, and then——

Mr. COSTA. So what is your definition of moral hazard?

42

Mr. GENSLER. If the markets believe that an institution will be 

backed by its government and that it is able to borrow at lower 

rates, it distorts markets. 

Mr. COSTA. I have a local question, because my time is running 

out here. Do you recall the discussion we had earlier this year on 

several investor-owned utilities in California and California’s regulatory environment, concerns that I expressed and some of my colleagues that the state’s energy providers could inadvertently be 

swept up in the swap-dealer definition? We understand that you 

and the Commissioners have been working on this, with the stakeholders to provide a clarity needed to ensure that they and ultimately California ratepayers are not penalized. Can you give me a 

quick update on where you are on that? 

Mr. GENSLER. I think we did well in the swap and swap-dealer

definition. It may have also been some issues about the environmental-rights contracts that we specifically addressed in the swap

definition. The last important piece of business is that we have in 

front of us a petition from last month from the municipal electric 

co-ops and the rural electric co-ops for an exemption, and that document is in front of Commissioners and I am hoping that we will 

put it out for a short comment period in the next month or so. 

Mr. COSTA. If I might, Mr. Chairman, my time has run out, but 

pertinent to this question, there is a timeline issue, the next 60 

days, I understand, to comply with the documentation on that. Is 

there any flexibility in that 60 day timeline period? 

Mr. GENSLER. I am sorry. For——

Mr. COSTA. To comply with information requests from real swap 

dealers and major participants while they are trying to implement 

their own compliance with the changes that you have made for 

these public- and investment-owned utilities. 

Mr. GENSLER. Maybe we can follow up afterwards because I am 

not sure I—the question about the municipal co-op and so forth, we 

are going to be putting out hopefully very shortly to get public comment. They are not swap dealers, from what I understand, so I 

don’t think they are going to——

Mr. COSTA. No. Well, I don’t believe they are either, but as I understand it, in response to the earlier efforts that the Commission 

provided to work out this distinction because we don’t believe they 

are swap dealers. But you have to comply in the case of California 

with the state’s regulatory regime that they come in compliance, 

but they expressed to us that they had a concern about the 

timeline that you had provided for them. 

Mr. GENSLER. I look forward to following up with your office to 

better understand that. 

Mr. COSTA. Okay. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman’s time has expired. The chair now 

turns to the gentleman from Pennsylvania, Mr. Thompson, for 5 

minutes. 

Mr. THOMPSON. Thank you, Chairman. 

Chairman, thanks for being here and addressing these important 

issues. I have just two questions for you, pretty diverse questions, 

though, but both relate to the Dodd-Frank rulemaking but goes 

from impact on individual farmers and then also our market’s access to other markets. 

43

So let me start with the local one first with farmers. You know, 

obviously many in rural America are concerned with the CFTC’s 

requirement that telephone conversations with farmers about forward cash contracts need to be recorded and the records kept for 

5 years. It seems like regulatory overkill really, at its finest. Can 

you give us any assistance—any assurance—I am sorry—that this 

is not the Commission’s intention? 

Mr. GENSLER. It is not, but this was included in a conforming 

rule where members of contract markets needed to record their 

conversation, and we have gotten a lot of comments and we are 

looking at how to dial that back in any final rule so that it is really 

just about that member and what they are doing directly on the 

exchange and so forth. 

Mr. THOMPSON. Well, I appreciate you looking at that and I appreciate your desire to stay with the original intention and dialing 

back on that. 

And then the opposite end, more about world market access. Mr. 

Chairman, you have repeatedly assured the Committee that CFTC 

has fully coordinated with international regulators but then we 

read letters from foreign regulators threatening to ban their country’s firm from our marketing, and I have a copy of a letter from 

a Swiss regulator, the Swiss Financial Market Supervisor Authority, FINMA, and also in addition an op-ed in the Financial Times

written by your European counterpart that seems to indicate that 

anything but coordination is happening. If the CFTC was really coordinating with international regulators, one would assume that 

they would not have to resort to writing opinion editorials in the 

newspaper to get your attention. 

Now, because our financial reform was so far ahead of the rest 

of the world, how can we at this point, how can you assure this 

Committee that the markets of the United States are not going to 

suffer due to the lack of international coordination, especially since 

it appears most of the rest of the world is playing catch-up. 

Mr. GENSLER. They have made very good progress. I had a very 

good conversation with the author of the letter from Switzerland 

yesterday, and Michel Barnier, who wrote the opinion piece, and I 

have had a very good relationship and continue to even though he 

expressed his views in an opinion piece, as you say. What we are 

trying to ensure on the cross-border side is that risks booked offshore don’t come crashing back to our taxpayers here. That is really what—and that is the interpretation of direct and significant.

With regard to the Swiss situation, they have a situation and 

France has something similar about secrecy laws. You are probably 

familiar with Switzerland and the banking system and so they 

have a set of issues as to how their banks can provide risk transactions to somebody in your home state or in any state in America 

and report that information to a data repository. That is kind of 

the core issue that he and I were talking about yesterday about 

their secrecy laws. It is not an easy issue but it has to do with a 

number of countries, particularly Switzerland and France. 

Mr. THOMPSON. Thank you, Chairman. 

Mr. Chairman, I yield back. 

44

The CHAIRMAN. The gentleman yields back the balance of his 

time. The chair with great enthusiasm now recognizes the gentleman from Georgia. 

Mr. DAVID SCOTT of Georgia. Thank you, Mr. Chairman. 

Mr. Chairman, let me ask you this. I certainly appreciate your 

stated desire to increase capital efficiency through portfolio margining, particularly in the credit default swaps market, and certainly appreciate your work with Chairman Schapiro and the SEC 

on an agreement in this area. It is my understanding that some 

progress has been made but there are some significant issues that 

remain. I am particularly concerned that the lack of a regulatory 

solution will likely prevent clearing among credit default swap customers and that would occur if portfolio margining benefits were offered. 

Now, your agency and the other agency staff has worked on this 

for well over a year now. So Mr. Chairman, enough time certainly 

has been spent to understand this issue, and what I suspect is 

needed in this case for you and the other Commissioners including 

Chairwoman Schapiro of the SEC is to send a message that this 

issue needs to be resolved so that broad-based clearing of credit default swaps will go forward as Congress intended so that the taxpayers will be protected. Now, can I get your commitment that you 

will provide this leadership, Mr. Chairman? 

Mr. GENSLER. I support portfolio margining between securitiesbased swaps, which are called single-name credit default swaps, 

and broad-based credit default swap indices, and there has been a 

petition in front of us with regard to that. I am supportive. It has 

a challenge at the Securities and Exchange Commission. It takes 

two sets of agencies to come together. We have made great progress 

on other things, joint rules, defining swaps and other things. This 

one, as you have rightly noted, is not over the line yet but I am 

supportive of portfolio margining. 

Mr. DAVID SCOTT of Georgia. So you have been at it for a year 

now. I mean, the problem is that patience is wearing thin. How 

much longer do we have to wait and why can’t we—what is the 

problem here? What is the holdup? 

Mr. GENSLER. The Securities and Exchange Commission approach to this is different than the petitioner. The petitioner is 

IntercontinentalExchange in front of our two Commissions. They 

have a different approach to it, so it has to be worked through between the SEC and the ICE on these matters to see how to close 

that gap. 

Mr. DAVID SCOTT of Georgia. Can you give us an estimate of 

about how much longer this would take? 

Mr. GENSLER. I don’t know because I am sorry to say that when 

it comes to portfolio margining and the markets, the margining regimes for futures and securities are quite different, and we could 

be very supportive at the CFTC but it needs both agencies. 

Mr. DAVID SCOTT of Georgia. Let me ask you something else. I 

am struggling to understand why we continue to support this SRO 

model of regulation when we seem to have one large-scale process 

failure after another, whether it is Madoff or Stanford or MF Global or recently PFGBest, but my constituents, I tell you, back in 

Georgia are screaming for change. Our farmers are screaming for 

45

change. The people of America are sick and tired of seeing their 

livelihoods put at risk by greedy malefactors who are enabled by 

a system that seems to be little more than a good old boy network. 

We have seen it time and time again. What on Earth do you all 

say to them? What do you say to America when it is situation after 

situation after situation? 

Mr. GENSLER. Well, I say the system in 2008 revealed it as well. 

The financial system needs common-sense rules of the road and we 

need to do more on customer protection. We have done a lot. We 

have restructured. We have put in place new rules. We have 

brought significantly more enforcement actions but even this case 

at Peregrine highlights that we have to take a very close look at 

the self-regulatory organizations and the CFTC, be self-reflective 

and where we have to change, change appropriately. 

Mr. DAVID SCOTT of Georgia. Well, is there any value left in this 

self-regulatory organization model? 

Mr. GENSLER. Well, we have had it for decades and it served the 

nation in many tough market environments, so what we are focused on is how to improve it, not to uproot the whole thing but 

to change it and enhance it. 

Mr. DAVID SCOTT of Georgia. Thank you, Mr. Chairman. I yield 

back. 

The CHAIRMAN. The gentleman’s time has expired. 

The chair now recognizes the gentleman from Iowa, Mr. King, for 

5 minutes. 

Mr. KING. Thank you, Mr. Chairman. 

I thank you, Chairman Gensler, for your testimony today. I 

spend part of my time over in the Judiciary Committee where we 

get some of the Cabinet Members testifying, and they don’t come 

forward with the intent to try to inform the Committee as openly 

as you do. I know we have disagreements but I do believe your testimony has been directed at informing us with the best answers 

you can deliver in a truthful fashion. 

So I have a couple of things I would like to ask you to clarify, 

and that is, I was only half listening when one of the other Members of the Committee made a comment, and I just heard your response that this was an outright fraud, and I wasn’t clear whether 

that was Peregrine or MF Global or Corzine or Barclays, whom 

that might be. Could you clarify that for me, please? 

Mr. GENSLER. I thank you for the compliment. I think I was referencing Peregrine, but I would say on the LIBOR situation and 

Barclays, they have settled and that was false reporting under our 

Act, which some people would use the broader circumstance in 

question. It is not right to lie about such an important rate. 

Mr. KING. So I will write false reporting and lying. Is that not 

also the definition of fraud?

Mr. GENSLER. Because I am not a lawyer, I am just going to be 

careful, but what we actually settled on is attempted manipulation 

and false reporting, but for your constituents and for my mom, I 

think they would see it about the same way as lying. 

Mr. KING. I do agree with that, and again, as I listened to your 

testimony, when you said we need to change the way these firms 

are audited and have direct electronic access to these accounts, 

hasn’t history pretty much shown us that regulation once it is esVerDate 0ct 09 2002 10:19 Jan 04, 2013 Jkt 041481 PO 00000 Frm 00049 Fmt 6633 Sfmt 6601 I:\DOCS\112-34\75437.TXT BRIAN
46

tablished, the people that are intending to circumvent it, whether 

it is deception, lying or outright fraud, have found a way around 

regulation throughout history? 

Mr. GENSLER. I think human nature shows that, so we have to 

stay abreast of it, and when we enhance this in the next few 

months, there might be another fraudster in 2014 or 2017 that will 

find another way to test the system. 

Mr. KING. I would think sometimes about the history of warfare. 

When someone invents an offensive weapon, someone else invents 

a defensive weapon. The sword and the shield or the arrow and the 

shield would be an example, and now we have Star Wars to defend 

us from missiles from other continents. So I think that is an appropriate metaphor for what is going on here is that we are trying to 

regulate and build shields against the people that are engaging in 

or intending to engage in fraud in our financial markets, and I 

would like to say that is what these regulations are about. 

But I would like to turn this a little bit and take this to an understanding that we haven’t been able to write regulations that are 

successful, at least always successful, and the creative people that 

are out there will find another way around it. The free markets 

have done a pretty good job of protecting the interest if they get 

a chance to see what those assets actually are, and so would it be 

your opinion that the restraint of markets without the promise of 

government bailout is an effective shield? 

Mr. GENSLER. Well, I absolutely agree with the second part. 

There should not be government bailouts. I do think that commonsense rules of the road to bring transparency to markets help our 

economic well-being, and I think that has helped in the securities 

and futures markets, and that is what Congress said to bring to 

these swaps markets. 

Mr. KING. Do you, though, get the sense that traders in the marketplace, especially these traders that happen to be members of 

the—I can see five farmers co-ops in my neighborhood that suffered 

a loss of $47.5 million altogether to MF Global. They get a sense 

that because government is regulating, that they are protected in 

their investments. How much of a factor do you think that is in the 

confidence in the marketplace that the government is the regulator 

and the protector? 

Mr. GENSLER. Well, I think that farmers need to have confidence 

to use these markets so they can lower their risk. I mean, what is 

the price of corn going to be at harvest time and they can use a 

futures contract to lower that risk, lock in it. So that type of confidence is a good type of confidence. Is there is an effective cop on 

the beat? But I agree with you not to have the confidence that we 

are going to bail out banks or ensure against poor corporate behavior. 

Mr. KING. So what we are really after here then is balanced restraint that investors have to control their speculation judging 

upon two things, and that is, how solid are the financials of the entity they are dealing with and how effective is the financial regulation that comes from the government. That would be the two pieces 

of this that would have to be kind of married together? 

Mr. GENSLER. Right, so that investors have the facts and figures 

to make their investment choices, that they have markets that 

47

function well, that they can hedge these risk in these derivative 

contracts, and of course, that we don’t stand behind——

Mr. KING. And you would like to have direct electronic access to 

the accounts but you wouldn’t propose that to the investors to have 

that same access? 

Mr. GENSLER. I actually think investors should know in these 

markets where their money is held, so just like they do in a mutual-fund statement, I actually do think that they should know 

where their money is. 

Mr. KING. Thank you very much, Chairman, I appreciate your 

testimony, and I will submit some questions for the record. 

The CHAIRMAN. The gentleman’s time has expired. The chair now 

recognizes the gentlelady from South Dakota, Mrs. Noem, for 5 

minutes. 

Mrs. NOEM. Thank you, Mr. Chairman, and I appreciate this 

hearing. It is timely given it is the second anniversary of the DoddFrank and we need to look at these reforms and the related rules 

and see how they impact people on the ground. For example, in 

South Dakota, where I am from, some businesses and producers 

who are actively investing in the commodity market are still dealing with the failure of MF Global, so I just have a couple questions 

for you. 

Does the CFTC have the power to force a firm into bankruptcy? 

Mr. GENSLER. We might need to get back to you, but I am not 

aware of that. Even in this Peregrine situation, we went into court 

to ask for a receiver to be appointed to freeze the assets, which we 

do in Ponzi schemes as well. So I think that is the route. I believe 

the answer is no but we seek a court to appoint a receiver. 

Mrs. NOEM. Okay. That is the route that is generally followed? 

Well, if there is more information on that that you can give me 

later, I would appreciate that. That would be great. 

[The information referred to is located on p. 106.] 

Mrs. NOEM. What role does the CFTC play in initiating the 

bankruptcy of such as like MF Global? 

Mr. GENSLER. A broker dealer—I am not involved in that specific 

thing but a broker dealer goes into this proceeding under the Securities and Investor Protection Act, and that is under the securities 

law, so we don’t have a direct role. But then we do have a role in 

appearing in front of the court and appearing in front of the trustee 

to ensure that the commodities exchange laws are followed, that 

the segregated funds are for the customers. 

Mrs. NOEM. So is that more of an informational-type role that 

you fulfill with the courts. Are you summoned in a manner? 

Mr. GENSLER. Well, it is both an informational role and also to 

advocate and file motions on behalf of those segregated accounts, 

as I understand it. 

Mrs. NOEM. Excellent. Thank you. I appreciate that. 

With that, Mr. Chairman, I will yield back. 

The CHAIRMAN. The gentlelady yields back the balance of her 

time. The chair now recognizes the gentleman from Indiana, Mr. 

Stutzman. 

Mr. STUTZMAN. Thank you, Mr. Chairman. 

Thank you, Chairman Gensler, for being here. I would kind of 

like to follow up on the gentlelady’s questions regarding MF Global. 

48

At what point did you alert your fellow Commissioners of your 

recusal from the MF Global investigation? 

Mr. GENSLER. I informed the General Counsel on a Thursday, so 

it may have been that Friday. We have a weekly surveillance meeting on Friday. That goes back decades. And so the firm went into 

bankruptcy on a Monday. The first surveillance meeting was going 

to be that Friday, so I did not attend that surveillance meeting and 

informed various Commissioners. One, Commissioner Sommers, 

was on vacation but the other Commissioners——

Mr. STUTZMAN. So you did notify them? 

Mr. GENSLER. I believe it was that Friday. 

Mr. STUTZMAN. How did you notify them? By electronic——

Mr. GENSLER. If I remember, I had personal conversations with 

three of them and then General Counsel Berkovitz reached out to 

Commissioner Sommers, who was in Florida with her family. 

Mr. STUTZMAN. Okay. So your recusal, is that consistent with 

CFTC’s process in recusals? 

Mr. GENSLER. Well, the General Counsel and the ethics officers 

actually advised me that I did not under the laws need to step 

aside. I thought it was best not to participate. Jon Corzine, who 

had been the Chief Executive Officer there, had been way back 

when I was at Goldman Sachs a partner of mine and ultimately my 

boss at Goldman Sachs. So, I handed this off to the dedicated enforcement staff and other enforcement officers and the Commission, 

and not participate in this matter as it turns on an enforcement 

matter that might involve, personally, Jon Corzine. 

Mr. STUTZMAN. So help me understand, when did you first hear 

there was a loss in customer segregated accounts? 

Mr. GENSLER. About 2:30 a.m. Monday morning. 

Mr. STUTZMAN. And then did you have any conversations with 

Mr. Corzine during the final week of October? 

Mr. GENSLER. No, no personal conversations, no business conversations. There was a group conference call that Sunday when 

the CFTC, the SEC and regulators from London and the New York 

Federal Reserve were on a big conference call with the company 

and its advisors about moving the customers’ funds. At that point 

Sunday, it was about moving the customer funds to some fund 

called Interactive Brokers, and I believe Mr. Corzine spoke up in 

that call that might have had 20 or 40 people on it. 

Mr. STUTZMAN. That was on Sunday? 

Mr. GENSLER. Sunday, October 30th. 

Mr. STUTZMAN. And so you were notified at 2:30 a.m. Monday 

morning? 

Mr. GENSLER. Yes, Monday morning. I was woken up. 

Mr. STUTZMAN. So during those conversations, or during that 

conversation, was there any discussion of the customer accounts 

and segregation of funds brought up? 

Mr. GENSLER. In the regulators call, what we were focused on 

was moving those customer accounts to Interactive Brokers. We 

had laid out by that Sunday evening a number of conditions about 

that. Interactive Brokers agreed to those conditions and MF Global 

as well that they would be fully guaranteed and all the monies and 

positions would be moved to Interactive. Of course, then at 2:30 I 

was woken up. 

49

Mr. STUTZMAN. September 1, 2011, MF Global announces in a 

public filing that it would comply with FINRA’s determination and 

increase its capital. Would such a filing trigger any red flags at 

CFTC? 

Mr. GENSLER. As I am not participating, I don’t know what the 

Commissioners or the agency looked at about that September 1st 

filing. But just as a general matter, our examination staff will work 

with the self-regulatory organizations like FINRA and Chicago 

Mercantile Exchange and NFA on any filings about capital and try 

to understand what those filings are. 

Mr. STUTZMAN. So did that happen? Did your agency work with 

FINRA at all? 

Mr. GENSLER. Again, I don’t know because I haven’t gone back 

and done the forensics. I haven’t been involved since this whatever, 

November 2nd or 3rd period of time. 

Mr. STUTZMAN. Is that something you could find out and notify——

Mr. GENSLER. Our General Counsel, Dan Berkovitz, will follow 

up with you. 

[The information referred to is located on p. 107.] 

Mr. STUTZMAN. Thank you, Mr. Chairman. I will yield back. 

The CHAIRMAN. The gentleman yields back. The chair recognizes 

the gentleman from Iowa for a follow-up question. 

Mr. BOSWELL. Well, thank you. I am the temporary Ranking 

Member, I guess. 

Mr. Chairman, earlier on in questions, I didn’t give you a chance 

to answer because I got into a dialogue with Chairman Lucas, and 

I agree with his points. At the same time, we have responsibility 

that even though we are not appropriators, we have the tools or the 

doorknockers or whatever you want to call it. The idea that I threw 

out about the funding, would you have any comment you would 

want to make about that? I think you told Mr. Costa earlier that 

you did not have the resources, and so just expand on that and 

then we will be finished. 

Mr. GENSLER. We don’t have enough resources to cover the futures industry that has grown so significantly from the 1990s, or 

this new market that I would say is far more complex, this swaps 

marketplace that is eight times the size of the futures marketplace 

in notional value. It has at least twice as many actors on that 

stage. 

We would work with Congress in any way Congress would wish 

to get funding whether it is direct appropriations, whether it is also 

working on fees or transaction fees similar to what the——

Mr. BOSWELL. The point of it is that this constant evaluation of 

the appropriations or coming from the Administration or whatever 

but if you had this fee system, it would kind of go with the ebb and 

flow of your need. It seems to be working for SEC. It seems to be 

working for NFA. That is one of the points. I want to know what 

you think about it. 

Mr. GENSLER. I think that in the securities field, there has been 

a modest transaction fee to cover the cost to the SEC on an annual 

basis. I think President Obama has included that in his budget 

submissions. I believe previous Presidents, President Bush also did 

as well. So we would work with Congress. If you and the appropriVerDate 0ct 09 2002 10:19 Jan 04, 2013 Jkt 041481 PO 00000 Frm 00053 Fmt 6633 Sfmt 6601 I:\DOCS\112-34\75437.TXT BRIAN
50

ators thought that was appropriate, we would be right at it with 

you, but if there are other ways to get the funding, I am kind of 

neutral on the way to do it but I am positive that we need more 

funding. 

Mr. BOSWELL. But you clearly don’t have the resources you need? 

Mr. GENSLER. That is correct, sir. 

Mr. BOSWELL. Okay. I yield back. Thank you, Mr. Chairman. 

Mr. CONAWAY [presiding.] I thank the gentleman for yielding. 

Chairman, one real quick follow-up. Section 722(d) is the section 

you cite that gives you the authority to do the guidance on the 

extraterritorial or cross-border; 722(c), we think gives the SEC 

similar authority. What is y’all’s understanding or can you help us 

understand your interpretation of those two different sections? 

Mr. GENSLER. Section 722(c) would be in the swaps section of the 

statute. It may well that you want to follow up with——

Mr. CONAWAY. Okay, if you wouldn’t mind getting back with us 

on that because——

Mr. GENSLER. Because I understood that it is all in the first part 

of that Title VII is swaps, which is the CFTC, and then of course 

the other section later in the chapter is there but 722(c), Dan? 

Maybe we will have to——

Mr. CONAWAY. All right. We will follow up with you on that if 

you wouldn’t mind. 

[The information referred to is located on p. 108.] 

Mr. GENSLER. No, I appreciate that, and thank you. 

Mr. CONAWAY. Mr. Chairman, thank you for being here today. I 

appreciate your straightforward answers and look forward to visiting with you again soon. 

Mr. GENSLER. Thank you very much. 

Mr. CONAWAY. All right. If we can have the other panel step forward, we will get this one moving. 

All right. While everybody is settling in, I will go ahead and introduce the witnesses. We have with us today Mr. Terry Duffy, Executive Chairman and President of CME Group, Chicago, Illinois; 

Mr. Dan Roth, President and Chief Executive Officer of the National Futures Association, Chicago; the Hon. Walt Lukken, President and CEO of Futures Industry Association here in D.C.; John 

Heck, Senior VP with The Scoular Company, Omaha, Nebraska, on 

behalf of the National Grain and Feed Association; and the Hon. 

Chuck Connor, President and Chief Executive Officer of the National Council of Farmer Cooperatives, Washington, D.C., and Mr. 

Paul McElroy, CFO of the JEA, Jacksonville, Florida, on behalf of 

the American Public Power Association. 

Mr. Duffy, begin when you are ready, sir. 

STATEMENT OF HON. TERRENCE A. DUFFY, EXECUTIVE 

CHAIRMAN AND PRESIDENT, CME GROUP, INC., CHICAGO, IL 

Mr. DUFFY. Thank you, Mr. Chairman and Mr. Boswell. 

We at the CME Group are appalled by PFG’s theft of customer 

segregated funds. This fraud following MF Global has shaken the 

very core of our industry. Any breach of trust related to customer 

funds is absolutely unacceptable, whether at PFG, MFG or any 

other firm. 

51

Since the failure of MF Global, CME Group and others in our industry have committed to strengthening the protections that guard 

customer property. The industry has recently implemented new 

regulatory measures, one of which was a new electronic confirm 

tool that uncovered Mr. Wasendorf’s misreporting, forgery and 

theft, but more needs to be done. 

CME and the National Futures Association have adopted four 

measures to deter, detect and prevent misuse of customer funds. 

Three have been implemented. The fourth will be made effective in 

coordination with the NFA next month. We have been conducting 

surprise reviews of customer segregated accounts since last December. We have implemented mandatory daily reporting of segregated 

statements by all FCMs and now we require bimonthly reporting 

to ensure that segregated funds are properly invested and held at 

approved depositories. Also in mid-July, CME began using Confirmation.com, an electronic method of receiving statements directly from third-party depositories to verify investment reports. 

We also began using Confirmation.com as a tool in our regulatory 

audits and plan to require banks to confirm segregated funds using 

this tool. 

In direct response to the MF Global disaster, we will be implementing the Corzine rule on September 1st. The new rule requires 

that FCMs’ CEO or CFO sign off on any withdrawals of customer 

segregated funds that exceeds 25 percent of excess segregated 

funds. Then they must also inform CME at the same time. 

As I have said, more can be done. At the same time, CME believes that regulators and industry must be careful in weighing the 

costs and benefits of all proposals that may enhance protection for 

the segregated funds of our clients. 

Some have suggested the creation of an industry-funded insurance program covering fraud and failure losses, possibly supplemented by privately-arranged insurance. Such a fund would certainly boost confidence but needs to be balanced against known 

negatives. The negatives are the obvious: it being cost-prohibitive 

and ineffective due to the amount of funds held in U.S. segregation. 

We need to develop procedures and systems that give regulators direct real-time access to customer segregated account balances, and 

we are working with regulators to do so. And while it may be controversial and perhaps have disruptive consequences, we should explore whether customer property not required as collateral at clearinghouses should nonetheless be held by clearinghouses or other 

custodians and whether safeguards should be into place to limit the 

ability of FCMs to transfer such property except to authorized recipients. 

In addition, CME Group proposes that Congress amend the 

Bankruptcy Code to permit clearinghouses that hold sufficient collateral to support customer positions of a failed clearing member 

to transfer those positions of all non-defaulting customers with the 

supporting collateral to another stable clearing member. 

While we expect that the misconduct of MF Global and PFG will 

renew calls for the elimination of the role of exchanges and clearinghouses in auditing and enforcement of their members, we do not 

believe that a legitimate case can be made to transfer these responsibilities to a government agency. CME Group is committed to 

52

1Daily segregation reporting and bimonthly SIDRs were also recommended by the Futures Industry Association in its proposed initial recommendations made on February 29th. http://

www.futuresindustry.org/downloads/InitiallRecommendationslforlCustomerl FundslProtection.pdf.

working with the Congress, CFTC, NFA, FIA, and the market participants to reevaluate the current system to find solutions to further protect customer funds at the FCM level. We are also committed to restoring confidence in the markets that so many rely on 

for their risk management needs. 

I thank you for the opportunity to testify before the Committee 

and I look forward to answering your questions. 

[The prepared statement of Mr. Duffy follows:]

PREPARED STATEMENT OF HON. TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN AND

PRESIDENT, CME GROUP, INC., CHICAGO, IL 

Chairman Lucas, Ranking Member Peterson, Members of the Committee, thank 

you for the opportunity to testify regarding the industry’s efforts to deter, detect and 

prevent the misuse of customer funds. We, at CME Group, are appalled by the theft 

by Mr. Wasendorf of Peregrine Financial Group (‘‘PFG’’) of customer segregated 

funds. This fraud, following MF Global Inc. (‘‘MFG’’), has shaken the very core of 

our industry. 

Any breach of trust relating to customer funds is absolutely unacceptable, period—whether at PFG or MFG, or any firm. Since the failure of MFG, CME Group 

and others in our industry have been committed to strengthening the protections 

that guard customer property. The industry has recently implemented new regulatory measures, one of which was the new electronic confirm tool that uncovered 

Mr. Wasendorf’s misreporting, forgery and theft. But more needs to be done. 

In addition to the pressing issues raised by these recent deplorable actions, the 

Committee is examining at this hearing issues relating to the ongoing regulatory 

implementation of Dodd-Frank which I will also address at the end of my written 

testimony. Our concerns regarding the implementation of the statute center on ensuring that the rules do not needlessly hamper the strength, competitiveness and 

efficiency of the U.S. derivatives markets. 

Industry Proposals to Protect Customers in the wake of MFG’s Failure 

On March 12th, a special committee composed of representatives from the futures 

industry’s regulatory organizations, including CME (the ‘‘SRO Committee’’), offered 

four recommendations to strengthen current safeguards for customer segregated 

funds held at the firm level. The first three have been implemented, and the fourth 

will be made effective in coordination with the National Futures Association 

(‘‘NFA’’) in September:

• Requiring all Futures Commission Merchants (FCM) to file daily segregation reports.

• Requiring all FCMs to file bi-monthly Segregation Investment Detail Reports 

(‘‘SIDR’’), reflecting how customer segregated funds are invested and where 

those funds are held.1

• Performing more frequent periodic spot checks to monitor FCM compliance with 

segregation requirements since last December.

• In direct response to the MFG collapse, the ‘‘Corzine Rule’’ will be implemented 

on September 1st. The ‘‘Corzine Rule’’ requires the CEO or CFO of the FCM 

to pre-approve in writing any disbursement of customer segregated funds not 

made for the benefit of customers and that exceeds 25% of the firm’s excess segregated funds. The CME (or other SROs) must be immediately notified of the 

pre-approval.

In addition, to enhance intra-regulator coordination, we have established routine 

communications with FINRA for all of our common firms—the firm coordinators/relationship managers will reach out to each other to have these communications. 

The SRO Committee has also implemented, or is in the process of implementing, 

the following initiatives:

• Using Confirmation.com—an electronic method of receiving account statements 

or balances from a third party bank or depository to check information provided 

53

by FCMs to regulators. NFA’s use of Confirmation.com uncovered the initial 

statement and reporting irregularities at PFG.

The SRO Committee plans to use the Confirmation.com tool as follows:

» In regulatory audits now and going forward;

» To verify bi-monthly SIDRs (investment reports). CME started using the tool 

for this purposed in mid-July; and

» To periodically review the accuracy of daily segregation statements.

• Also, the SRO Committee agreed to develop rules to require all FCMs to provide 

them with direct online access to their bank or depository accounts to confirm 

segregated funds balances.

The Futures Industry Association’s internal controls recommendations will be presented to the FCM Advisory Committee in August. These include:

• Requiring FCMs to assure the appropriate separation of duties among individuals working at FCMs who are responsible for compliance with the rules protecting customer funds;

• Requiring FCMs to document their policies and procedures in several critical 

areas, including the valuation of securities held in segregated accounts, the selection of banks, custodians and other depositories for customer funds, and the 

maintenance and withdrawal of ‘‘residual interest,’’ which consists of the excess 

funds deposited by firms in the customer segregated accounts.

NFA’s Website Access to FCM capital ratios and investment reports (SIDRs) will 

be presented to the NFA’s Board of Directors in August. 

CME Group Initiatives 

Notwithstanding the fact that MFG’s misconduct was the cause of the shortfall 

in customer segregated funds, CME Group’s efforts in the wake of these events 

speak to the level of our commitment to ensuring our customers’ confidence in our 

markets:

• Guarantee for SIPC Trustee. We made an unprecedented guarantee of $550 million to the SIPC Trustee in order to accelerate the distribution of funds to customers.

• CME Trust Pledge. CME Trust pledged virtually all of its capital—$50 million—

to cover CME Group customer losses due to MFG’s misuse of customer funds.

• CME Group Family Farmer and Rancher Protection Fund. On April 2, 2012, 

CME Group launched the CME Group Family Farmer and Rancher Protection 

Fund to protect family farmers, family ranchers and their cooperatives against 

losses of up to $25,000 per participant in the event of shortfalls in segregated 

funds. Farming and ranching cooperatives also will be eligible for up to 

$100,000 per cooperative.

The Protection Fund is available to PFG customers that qualify under Program 

terms.

• Agreement with MFG Trustee. On June 14, 2012, the agreement between the 

SIPC Trustee for MFG and CME Group was filed in the Bankruptcy Court. It 

provides for the distribution of approximately $130 million of MFG proprietary 

assets, on which CME and its members held perfected security interests, to 

MFG customers. The agreement is currently under review by the Bankruptcy 

Court.

• Bankruptcy Code. The shortfall in customer segregated funds occurred only in 

regard to funds under MFG’s control. The customers’ funds held in segregation 

at the clearing level at CME and other U.S. clearinghouses were intact. However, the clearinghouses were not able to avoid market disruptions by immediately transferring those customer positions and any related collateral because 

of limitations under the Bankruptcy Code. We propose that Congress amend the 

Bankruptcy Code to permit clearinghouses that hold sufficient collateral to support customer positions of a failed clearing member promptly to transfer all customer positions with supporting collateral, except defaulting customer positions, 

to another stable clearing member. 

More Can Be Done 

However, CME Group believes that more can be done, especially in light of the 

recent fraud at PFG and its impact on public confidence. CME believes that the regulators and industry need to carefully weigh the costs and benefits of even the most 

54

far-reaching proposals that might enhance protection for the segregated funds of our 

customers. 

Some have suggested creating an industry-funded insurance program covering 

fraud and failure losses, possibly supplemented by privately arranged insurance. 

Such a program would certainly boost confidence but needs to be balanced against 

known negatives. It is likely to be cost prohibitive and ineffective given the size and 

scope of the accounts in our business, and may encourage the ‘‘moral hazard risk’’ 

that comes into play when customers feel they don’t need to worry about their 

choice or stability of their FCMs. 

We need to develop procedures and systems that give regulators direct, real time 

access to customer segregated account balances, and, as stated above, the SRO Committee is working to do so. 

And, while it will be controversial and perhaps have disruptive consequences, we 

should explore whether customer property not required as collateral at clearing 

houses should, nonetheless be held by clearing houses or other custodians (while returning interest earned on that money back to the FCMs) and whether safeguards 

should be put in place to limit the ability of FCMs to transfer such property except 

to authorized recipients. We believe a look at these proposals in conjunction with 

our other efforts is necessary to restore public confidence in the derivatives markets 

while preserving the operating model for the vast majority of firms who respect and 

comply with the rules. 

Finally, while we expect that the misconduct of MFG and PFG will renew calls 

to eliminate the role of exchanges and clearing houses in auditing and enforcement 

of their members, we do not believe that a legitimate case can be made to transfer 

these responsibilities to a government agency. Our regulatory systems are resilient, 

adaptive to address the challenges and efficient. The next section of my testimony 

focuses on why it is more important than ever to not only retain, but strengthen 

the self-regulatory structure. 

Current Regulatory Structure Should Not Be Abandoned 

Some critics suggest that the current regulatory framework is somehow to blame 

for MFG’s and PFG’s misconduct. As further detailed in the discussion below, ‘‘selfregulation’’ in the context of futures markets regulation is a misnomer, because the 

regulatory structure of the modern U.S. futures industry is in fact a comprehensive 

network of regulatory organizations that work together to ensure the effective regulation of all industry participants. 

The CEA establishes the Federal statutory framework that regulates the trading 

and clearing of futures and futures options in the United States, and following the 

recent passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 

its scope has been expanded to include the over-the-counter swaps market as well. 

The CEA is administered by the CFTC, which establishes regulations governing the 

conduct and responsibilities of market participants, exchanges and clearing houses. 

With respect to MF Global, CME was the designated self-regulatory organization 

(‘‘DSRO’’). As MFG’s DSRO, CME was responsible for conducting periodic audits of 

MFG’s FCM-arm and worked with the other regulatory bodies of which the firm is 

a member. Some critics have suggested that the failure of MFG demonstrates that 

the current system of front line auditing and regulation by clearing houses and exchanges is deficient because of conflicts of interest. However, there is no conflict of 

interest between the CME Group’s duties as a DRSO and its duties to its shareholders—both require that it diligently keep its markets fair and open by vigorously 

regulating all market participants. 

Federal law mandates an organizational structure that eliminates conflicts of interest. In addition, we have very compelling incentives to ensure that our regulatory 

programs operate effectively. We have established a robust set of safeguards designed to ensure these functions operate free from conflicts of interest or inappropriate influence. The CFTC conducts its own surveillance of the markets and market participants and actively enforces compliance with the CEA and Commission 

regulations. In addition to the CFTC’s oversight of the markets, exchanges separately establish and enforce rules governing the activity of all market participants 

in their markets. Further, the NFA, the registered futures association for the industry, establishes rules and has regulatory authority with respect to every firm and 

individual who conducts futures trading business with public customers. The CFTC, 

in turn, oversees the effectiveness of the exchanges, clearing houses and the NFA 

in fulfilling their respective regulatory responsibilities. 

In summary, the futures industry is a very highly-regulated industry with several 

layers of oversight. The industry’s current regulatory structure is not that of a single entity governed by its members regulating its members, but rather a structure 

in which exchanges, most of which are public companies, regulate the activity of all 

55

participants in their markets—members as well as non-members—complemented 

with further oversight by the NFA and CFTC. 

CME Group is committed to working with Congress, CFTC, NFA, FIA and market 

participants to re-evaluate the current system to find solutions to further protect 

customer funds at the FCM level, and to restoring confidence in derivatives markets. Finding solutions continues to be or highest priority. We are prepared to lead. 

Dodd-Frank 

Turning to Dodd-Frank, as the CFTC and other regulators finalize the rules implementing the statute, CME Group continues to work with the CFTC to ensure 

that these rules promote the fundamental principles of Dodd-Frank without compromising the growth and strength of the robust and globally competitive U.S. derivatives markets. For example, statutory Core Principle 9 was written by Congress to 

apply flexibly, allowing all DCMs to develop their means to achieve a ‘‘competitive, 

open and efficient market and mechanism’’ for trading. The CFTC’s current rule 

proposal to implement Core Principle 9 would impose a rigid rule that will require 

an arbitrary percentage of transactions (now set at 85%) to take place on the central 

order book of an exchange regardless of the underlying products, the market characteristics or the bona fide needs of customers. At the CFTC’s recent roundtable on 

this proposal, every market participant opposed the rule as proposed and expressed 

strong concerns about the proposal’s implications. The rule would make it impossible for U.S. futures exchanges to develop new products, force futures exchanges 

to delist hundreds of successful products, and force trading into unregulated, less 

regulated or foreign markets with less transparency. Moreover, the proposal would 

exponentially increase the trading costs, market risk and adverse regulatory and tax 

consequences for market users, which costs ultimately will be reflected in commodity prices. We urge the Commission to consider this consensus assessment, and 

avoid adopting any rule under Core Principle 9 that would have the adverse effects 

stated above. 

With respect to the reporting of cleared swaps data, the Commission should allow 

for implementation of a clearing regime that permits clearing houses to choose the 

Swap Data Repository to which it must report, including their own affiliated SDR. 

Doing this will make it possible for SDRs to be up and running for cleared swaps 

almost immediately, which would be in the greatest interest of not only the regulators seeking to implement the statute, but also the marketplace seeking the most 

efficient and cost-effective mechanism with which to comply. The CFTC-adopted regulatory reporting regime does not appropriately utilize the existing infrastructure 

available in derivatives clearing organizations (‘‘DCOs’’) as far as cleared trades are 

concerned. Any system that requires a DCO that clears a swap trade to make reports to an external non-DCO data warehouse is inefficient, costly and unnecessary. 

A much better approach is to build reporting requirements that ensure that the 

DCO that clears a swap trade houses the complete set of non-public swap information. This is the lowest cost and least burdensome method for implementing regulatory reporting requirements and it can be implemented quickly. It is also the best 

way to ensure regulators have access to the most accurate swap information including the ability to view the true positions of market participants. 

Thank you for the opportunity to testify before the Committee today and for the 

Committee’s continued strong oversight of the implementation of this seminal statute.

Mr. CONAWAY. Thank you, Mr. Duffy. 

Mr. Roth, 5 minutes. 

STATEMENT OF DANIEL J. ROTH, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, NATIONAL FUTURES ASSOCIATION, 

CHICAGO, IL 

Mr. ROTH. Thank you, Congressmen. My name is Dan Roth and 

I am the President of National Futures Association. As has been 

noted earlier, this is the second time in 9 months that we are involved with a fraud involving an FCM’s misuse of customer segregated funds. 

In the Peregrine case, it has resulted in a shortfall of customer 

segregated funds of approximately $200 million. This fraud was 

achieved through a sea of forged documents. Peregrine was required to report daily to NFA on the amount of customer funds 

56

that it was holding and where those funds were being held. Those 

reports were false and they were supported by forged daily bank 

activity statements, forged monthly statements, forged acknowledgment letters, forged deposit slips, forged cashier’s checks and 

forged bank confirmations. 

We began our most recent exam of Peregrine in mid-June. When 

we began that examination, we informed the firm that we were 

switching the way that we had done bank confirmations, that we 

were switching to what Terry referred to as the Confirmation.com.

We were switching to a web-based e-confirmation process. In the 

past, we had used a traditional bank confirmation process in which 

the firm would sign an authorization to the bank authorizing the 

bank to release information to NFA. We would then take that 

signed document from the firm and mail it directly to the bank, 

and the bank would then mail a response to NFA and then we 

would compare the bank’s numbers to the numbers that had been 

provided by the firm. 

As part of the e-confirmation process that we switched to, we told 

the firm that they would authorize the firm’s participation in that 

process. Mr. Wasendorf Sr. executed the necessary authorization on 

Sunday, July 8th, and the next day attempted suicide. We were immediately contacted by the firm, by Peregrine. They contacted both 

NFA and the CFTC, and we had conference calls immediately. As 

of the previous Friday, the firm had reported to us that it was 

holding approximately $380 million in customer segregated funds 

with a little over 1⁄2 of that being held at U.S. Bank, the Cedar 

Falls branch office of U.S. Bank. 

During the teleconferences on Monday, we had the branch manager of the bank on the phone, and he told us that the actual balance in the account as of Friday was approximately $5 million. We 

also then reviewed with him—we told him that we had signed bank 

confirmations from our two previous audits in front of us and we 

went over with him the balances for each of those two dates. We 

told him the balances that had been reflected on the dates for 

which we had written confirmations, and he confirmed for us that 

those confirmations were false. 

It is clear, after both MF Global and Peregrine, certain facts are 

abundantly clear to all of us. Number 1, customers have to know 

that their money is safe. Number two, it is up to the regulators to 

provide the highest level of assurance that we can that their money 

is safe, and that is both government regulators and self-regulators. 

Number three, NFA followed standard audit steps and audit procedures in conducting our exams of Peregrine, and number four, that 

doesn’t matter. The fact is, the Generally Accepted Audit Standards, the standard practices, weren’t good enough. They didn’t 

catch this fraud. We didn’t uncover the fraud for longer than we 

would have liked. We have to do better. 

We began the process of trying to find ways to do better immediately after MF Global. We formed two committees. We formed an 

SRO committee and we formed a special committee of our public 

directors, and both of those committees worked on a package of 

rules that Mr. Duffy referred to that were presented to our board 

of directors in May and that are described in my written testimony. 

But we also began working on the second wave of rules because we 

57

recognize that we had to make better use of technology to monitor 

our members’ compliance with the rules. So we have a rule that 

has been in development and that is going to our August board 

meeting that will require all FCMs to provide direct online access, 

view-only access to their DSRO of all customer seg bank balances. 

With that authority, we will be able to check bank confirms or basically conduct bank confirms, check those balances on our own without the firm, without the bank. We can do it for any FCM and for 

any bank account that we want to. 

But we want to go beyond that. What we are actually going to 

try to build is a system which will take the e-confirmation process 

that uncovered this fraud and basically make that a daily event. 

We intend to build a system in which all seg depositories will report on a daily basis to NFA on the funds that they are holding 

and then on an automated basis will do a comparison between that 

and what the firms are reporting to us and generate alerts for any 

suspicious discrepancies. 

Mr. Chairman, it is another obvious point, I guess, that we will 

never be able to completely eliminate fraud but we have to strive 

for that. That is what we strive for. That is what we are working 

on. That is what we have been working on all along but with renewed effort after MF Global. We will continue that process. We 

look forward to working with the Commission, the industry, the 

Congress and hopefully together we can continue to try to make 

things harder and harder so that these frauds do not occur in the 

future. 

Thank you, Mr. Chairman. I would be happy to answer any questions. 

[The prepared statement of Mr. Roth follows:]

PREPARED STATEMENT OF DANIEL J. ROTH, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, NATIONAL FUTURES ASSOCIATION, CHICAGO, IL 

Thank you, Mr. Chairman. My name is Daniel Roth and I am the President of 

National Futures Association. For years the futures industry has built an impeccable reputation for safeguarding customer funds deposited at FCMs in connection 

with futures trading. Now, for the second time in just 9 months, we are dealing with 

a shortfall in customer segregated funds at an FCM. Once again, customers have 

suffered real harm, the type of harm that all regulators attempt to prevent. 

The full facts are not yet known, but it appears that Peregrine’s customer losses 

are the result of an elaborate fraud achieved through a set of forgeries and falsities 

rooted in both the firm’s external and internal financial records. Forged external 

records included bank statements, bank confirmations, print-outs of daily online 

summary reports of bank balances, cashier’s checks, bank acknowledgement letters, 

bank deposit tickets and bank receipts all purportedly from U.S. Bank. The firm’s 

internal financial records, including daily and month-end account reconciliations, 

general ledgers and trial balances were also false to the extent they were based on 

forged U.S. Bank records. Moreover, Peregrine submitted to NFA false daily segregation reports, monthly financial statements and segregated investment detail reports, and annual certified financial statements. Even the firm’s customer statements were false to the extent the firm led customers to believe that sufficient assets were on deposit to cover customers’ liabilities. 

I would like to review for this Committee the recent chronology of events surrounding the Peregrine fraud, the fundamental changes that need to be made in the 

way we protect customer funds and monitor firms for compliance with the rules, 

how we are going to make those changes and the steps we have already taken. 

NFA began an examination of Peregrine in mid-June. During the audit, we informed Peregrine staff that NFA was changing its method for obtaining bank confirmations to a web-based e-confirmation process. We had completed the necessary 

data entry for this process by the first week in July, and told Peregrine staff that 

58

the firm must authorize its participation in the e-confirmation process. On Sunday, 

July 8, Mr. Wasendorf, the Chairman of Peregrine, provided the required authorization that was sent to him a week earlier. The next day he attempted suicide. 

As of the close of business on July 6th, the previous Friday, Peregrine had re- ported to us that the firm was holding approximately $380 million in customer segregated funds, with just over 1⁄2 of that amount on deposit at U.S. Bank. On July 

9th, Peregrine notified the CFTC and NFA of Wasendorf’s attempted suicide and we 

immediately joined in a teleconference with Peregrine staff. We directed firm personnel to go to the bank and have the bank manager join the conference call to confirm the balances as of the previous Friday. The bank manager informed us that 

the actual balance in the account was approximately $5 million. 

We then asked about the balances on the dates for which NFA had received written bank confirmations in our two most recent audits—in 2010 and 2011. Those 

bank confirmation requests had been mailed by NFA to the P.O. Box on the purported bank acknowledgment letter we had received for the customer segregated account. (In our experience, it is not at all uncommon for banks holding customer segregated funds to use P.O. Boxes to receive confirmation requests since it is a means 

for them to control the vast amount of paperwork they receive.) In this case, the 

bank manager informed us that the balances reflected on the two most recent confirmations received by NFA in 2010 and 2011 were similarly inflated. 

NFA immediately issued an emergency Member Responsibility Action, freezing 

the firm’s accounts and restricting it to trading for liquidation only. That night the 

firm’s clearing FCM issued margin calls that were not met and began liquidating 

open positions. The next day the CFTC filed its injunctive action and the firm filed 

its bankruptcy petition. By then approximately 98% of customer futures positions 

had been liquidated. 

This is certainly not the first time that NFA has taken emergency action in a 

fraud case involving forgery. We issue eight to ten Member Responsibility Actions 

per year, most after detecting some form of fraud, many of them Ponzi schemes. In 

most cases we uncover the fraud relatively quickly and close the firm before the 

losses mount too high. In a few cases, though, we have uncovered major frauds involving well over $100 million. Several of our cases, both large and small, have involved forged bank documents that were identified by our staff. What sets this case 

apart is that it involves a registered FCM, an elaborate, pervasive and convincing 

level of forgeries, and worst of all the loss of segregated customer funds. 

This most recent case is an extremely painful reminder of the lessons we learned, 

and have acted on, after MF Global. The following points are clear:

• For our markets to thrive, customers must know that their funds are safe.

• It is the job of the regulators, both government regulators and SROs, to provide 

the public with the highest level of assurance possible.

• NFA followed audit steps developed by the Joint Audit Committee that were 

consistent with CFTC Financial and Segregation Interpretation No. 4–1 in all 

of our examinations of Peregrine. But to assure ourselves of that, a committee 

of our public directors has directed the commission of an internal review of our 

audit practices and procedures, and the execution of those procedures in the 

specific instance of Peregrine.

• Notwithstanding that, and notwithstanding it was NFA’s actions that uncovered this fraud in our most recent exam, the simple fact is that Wasendorf’s forgeries fooled us, and fooled us for longer than any of us would like.

• Our audit steps alone are not good enough anymore. We are implementing better ways to monitor members for compliance, especially with regard to customer 

segregated funds, and are looking for even more ways to improve monitoring 

of firms for compliance with the rules.

Shortly after the demise of MF Global, we formed an SRO Committee with the 

CME and representatives of other exchanges, including ICE, the Kansas City Board 

of Trade and the Minneapolis Grain Exchange. As discussed below, the SRO Committee developed a number of rule proposals that have already been approved by 

our Board. Early on in its deliberations, the committee recognized that we need to 

make better use of technology to monitor firms for compliance with segregation requirements. 

The committee has developed a proposed rule that will be presented at NFA’s August Board meeting that would require FCMs to provide online, view-only access to 

bank balances for customer segregated and secured amount accounts to the firm’s 

designated SRO. We understand the CME will adopt the same rule. Under this rule, 

SROs will be able to check any customer segregated bank account balance for any 

FCM any time, without asking the firm or the bank, and compare those balances 

59

to the firm’s daily segregation report. NFA intends to expand this approach, once 

it is implemented, to receive daily reports from all depositories for customer segregated accounts, including clearing FCMs. We will develop a program to compare 

these balances with those reported by the firms in their daily segregation reports. 

While there may be reconciling items due to pending additions and withdrawals, the 

system will generate an immediate alert for any material discrepancies. 

We have also agreed with the CME to perform an immediate confirmation of all 

customer segregated bank accounts for all of our FCM Members using the e-confirmation process I referred to earlier. The completion of this work within the next 

week or so should help ensure that another Peregrine is not lurking in the industry. 

All of this is in addition to the rule changes already approved by NFA’s Board 

in May and just recently approved by the CFTC. Those changes include rules requiring that:

• All FCMs must report certain information concerning the FCM’s financial condition that will then be made available to the public on NFA’s website. This information includes the firm’s capital requirements; its excess capital; the amount 

of customer segregated funds held by the firm; the amount of excess segregated 

funds maintained by the firm; whether the firm engages in proprietary trading, 

once that term is defined in the context of the Volcker rule; and whether any 

custodial bank holding customer funds is an affiliate of the FCM.

• All FCMs must report to NFA detailed information on how customer segregated 

funds are invested, and that information will also be made available to the public through NFA’s website.

• If any FCM reduces its level of excess segregated funds by 25% in any one day 

by making disbursements that are not for the benefit of customers, a financial 

principal of the firm must approve the disbursement, must immediately notify 

the firm’s DSRO, and must certify that the firm remains in compliance with all 

segregation requirements.

All of these rule changes promote greater transparency for both customers and 

regulators and should help prevent a recurrence of the type of problems we saw at 

MF Global. These rule changes, however, are only the beginning. The MF Global 

and Peregrine customer losses are a painful reminder that we must continuously 

improve our surveillance, audit and fraud detection techniques to keep pace with 

changing technology and an ever-more-complicated financial marketplace. 

Mr. Chairman, for so long as there have been financial markets, there has been 

fraudsters who attempt to steal other people’s money, and no regulator can provide 

assurance that fraud can be completely eliminated. But this is the second time in 

9 months that customers have suffered losses due to misconduct or fraud on the 

part of an FCM, and when customers suffer those devastating losses, it is also devastating for the industry. We know that we can never completely eliminate fraud, 

but we must continue to adopt rules and surveillance techniques to try to eliminate 

the possibility that this could happen again. The steps we took at our May Board 

meeting and the proposed steps outlined above are a start in that process. We look 

forward to working with Congress, the Commission and the industry to achieve that 

goal and no ideas should be off the table in this process.

Mr. CONAWAY. Thank you, Mr. Roth. 

Mr. Lukken for 5 minutes. 

STATEMENT OF HON. WALTER L. LUKKEN, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, FUTURES INDUSTRY

ASSOCIATION, WASHINGTON, D.C. 

Mr. LUKKEN. Thank you, Chairman Conaway and Members of 

the Committee. I testify today on behalf of the Futures Industry 

Association, the leading U.S. trade association for futures, options 

and cleared derivatives in the United States. 

We now know that over $200 million in customer funds is missing from Peregrine Financial and that the fraud appears to date 

back 20 years. On the heels of the MF Global collapse, this is appalling and absolutely devastating news in our industry, and most 

of all, customers who are the victims of this egregious fraud. 

60

In the futures industry, we took considerable pride in the knowledge that the regulated futures markets had come through the financial crisis of 2008 with relatively few problems. During those 

difficult weeks, the futures markets continued to operate without 

significant incident to manage the volatile risks stemming from the 

financial crisis and to discover transparent prices when confidence 

was lost in the over-the-counter markets. 

Today we can no longer say the futures markets came through 

these times unblemished. The failures of MF Global and Peregrine 

Financial are a stark reminder that diligent efforts by regulators 

and the firms themselves are essential to prevent losses to customers from mismanagement and fraud. 

The industry and regulators have already taken a number of important steps in the wake of the MF Global collapse. In February, 

FIA released its initial recommendation for customer funds protection calling on each FCM to adopt certain recommended internal 

control policies and procedures relating to the protection of customer funds. It is my understanding that the CFTC and the SROs 

have adopted or are actively considering adopting all of these suggestions. FIA has also taken efforts to educate customers. In February, we issued FAQs for customer fund protections which is 

being used by the FCMs to provide their customers with increased 

disclosure on how customer funds are secured. 

However, the recent events involving Peregrine make it evident 

that more must be done. In this respect, I would like to discuss the 

FIA’s transparency initiative that I announced last week. First, 

FIA strongly supports providing regulators with the independent 

ability to electronically review and confirm customer segregated 

balances across every FCM at any time, period. 

Second, FIA supports the creation of an automated confirmation 

process for segregated funds that will provide regulators with the 

timely information that customer funds are secure. Technology solutions can help prevent this type of event from occurring again. 

Third, FIA supports the creation of an FCM informational portal 

that will centrally house firm-specific financial and related information regarding FCMs so customers can more readily access material information when evaluating an FCM. 

Fourth, FIA recommends that FCMs publicly certify as soon as 

practicable that they are in compliance with the initial recommendations for customer funds protections that FIA issued in 

February and that I referred to earlier. 

I was encouraged by Chairman Gensler’s remarks that the Commission will be supporting and adopting many of these sensible industry recommendations. The blocking and tackling of regulation 

depends on ensuring that firms have proper internal risk controls 

in place and that these are independently reviewed and verified. 

Those basics of smart regulation have not changed over time, and 

we look forward to working with the Commission to prioritize initiatives aimed at protecting customers. 

Turning now to Dodd-Frank, FIA has been an active participant 

in the rulemaking process undertaken by the Commission over the 

last 2 years filing over 50 comment letters during that time. Having run a derivatives clearinghouse, I understand the difficulty in 

complex system builds, and Dodd-Frank indeed is that. The key to 

61

any major project implementation is prioritization and sequencing. 

The industry would greatly benefit from the Commission 

prioritizing the critical rules that must be in place and developing 

a sequencing of those critical rules to bring certainty of planning 

to many of our firms. In fact, the SEC has done just that with the 

publishing of its Implementation Policy Statement aimed at avoiding, ‘‘the disruption and costs that could result if compliance with 

all rules where required simultaneously or haphazardly.’’

Unless the Commission acts to establish a well-designed implementation policy, a significant number of rules will come into effect 

in the next few months in a haphazard manner, imposing a substantial burden on the market participants and exposing the industry to potential market disruption. These challenging times have 

also been compounded by the Commission’s decision to move forward concurrently with significant rule proposals that are not mandated by Dodd-Frank such as Core Principal 9 on centralized trading and the redesign of the ownership and control reports at a cost 

of $18.8 million per firm in the industry. 

Of the Dodd-Frank rules that are critical, and there are many, 

one of the most important is the recent publication of proposed 

Commission guidance on the cross-border application of certain 

swap provisions. This guidance is not a rule under the APA and 

therefore does not require the Commission to conduct a cost-benefit 

analysis. It is evident, however, that its cost may be considerable, 

given the guidance’s broad interpretation of the definition of U.S. 

person and, ‘‘activities that would be deemed to have a direct and 

significant connection with commerce in the United States.’’ The result would be a complex and confusing regulatory regime that 

would expose U.S. FCMs and swap dealers to consider regulatory 

risk and would extend the CFTC’s reach to many jurisdictions 

around the world. On this theme of prioritization and sequencing, 

it would be imperative that the CFTC first clarify this guidance before the swap regulations and other Dodd-Frank requirements go 

into effect. 

These are challenging times for our industry, not only due to the 

regulatory changes described above but also due to the fundamental shift to the business model. With depressed futures volumes, historically low interest rates and ultracompetitive pricing 

models, FCMs are under tremendous strain financially. Many are 

concerned that the business is reaching a point where it cannot absorb additional costs and a seismic shift in the model may occur—

whether that is a significant consolidation of FCMs or FCMs leaving the business altogether. This would have an unfortunate effect 

of limiting customer choice and reducing the number of firms that 

backstop the clearing system, making it vulnerable to catastrophic 

losses. 

So in conclusion, as we consider these regulatory changes, it 

would be wise to carefully weigh the costs of any new regulatory 

mandates and concentrate our resources on implementing only the 

highest priority reforms ahead of all the rest. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Lukken follows:]

62

PREPARED STATEMENT OF HON. WALTER L. LUKKEN, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, FUTURES INDUSTRY ASSOCIATION, WASHINGTON, D.C. 

Chairman Lucas, Ranking Member Peterson, and Members of the Committee, FIA 

is the leading trade organization for the futures, options and over-the-counter 

cleared derivatives markets. Our membership includes the world’s largest derivatives clearing firms as well as leading derivatives exchanges and clearinghouses 

from more than 20 countries. Our core constituency consists of futures commission 

merchants (FCMs), those regulated businesses that transact and guarantee the futures trades of customers and end-users. All of our membership is working overtime 

to implement the many reforms in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Significant progress has been made in finalizing these reforms and I will address the rulemaking process later in my remarks. First, however, I would like to focus my remarks on the recent failure of Peregrine Financial 

Group (PFG). 

We now know that more than $200 million in customer funds is missing and that 

the falsification of financial records appears to go back 20 years. On the heels of 

the MF Global collapse, this is appalling and absolutely devastating news for everyone in our industry, and most of all the customers who are victims of this egregious 

fraud. PFG was not a big firm, but its demise resonates throughout the industry. 

In the futures industry, we took considerable pride in the knowledge that the regulated futures markets had come through the financial crisis of 2008 with relatively 

few problems. During those difficult weeks, the futures markets continued to operate without significant incident to manage the volatile risk stemming from the financial crisis and to discover transparent prices when confidence was lost in the 

pricing of the over-the-counter markets. The regulated futures markets, and the regulatory regime that underpins them, became the foundation of mandated swap 

clearing of Title VII of the Dodd-Frank Act. 

We can no longer say that the futures markets came through these times unblemished. The failures of MF Global and Peregrine Financial Group are a stark and unwelcome reminder that, no matter how well designed a regulatory structure may be, 

diligent and sustained efforts by regulators and the firms they regulate are essential 

to prevent losses to customers from mismanagement or fraud. 

In addition to the losses suffered by Peregrine’s customers, the most damaging 

consequence of Peregrine’s fraud is the effect on customer confidence, in particular 

in the sanctity of customer funds protections provided under the Commodity Exchange Act (Act) and the Commission’s rules. This confidence was earned over decades by the many individuals that comprise the regulated futures industry. Unfortunately, one person’s conduct has instantaneously shattered this trust and now overshadows the hard work and honorable behavior of everyone else. 

At FIA, we understand that it is going to take time to regain public trust and 

we are committed to doing whatever it takes to restore confidence in the safeguards 

for customer funds. Doing nothing is not an option. 

We also recognize that this is a collective problem, calling for collective solutions. 

Firms, exchanges, end-users and regulators must work together to identify the additional tools that are needed to protect customer funds and restore confidence and 

then implement them promptly and efficiently. 

Post-MF Global Reforms 

The industry and regulators have already taken a number of important steps in 

the wake of the MF Global collapse to strengthen the customer protection regime 

in the futures markets. In February, FIA released its Initial Recommendations for 

Customer Funds Protection. These recommendations called on each FCM to adopt 

and document—to the extent not already in place—internal control policies and procedures relating to the protection of customer funds. In particular, FIA recommended that FCMs maintain appropriate separation of duties among individuals 

responsible for compliance with customer funds protections and develop a training 

program for chief financial officers and other relevant employees to help ensure that 

the individuals responsible for the protection of customer funds are appropriately 

qualified. 

We also recommended and supported rules adopted by the Chicago Mercantile Exchange and National Futures Association that subject all FCMs to enhanced recordkeeping and reporting obligations, including: (i) transmitting daily customer segregation balances to their respective designated self-regulatory organization 

(DSRO); and (ii) requiring the chief financial officer or other appropriate senior officer to authorize in writing and promptly notify the FCM’s DSRO whenever an FCM 

seeks to withdraw more than 25 percent of its excess funds from the customer segVerDate 0ct 09 2002 10:19 Jan 04, 2013 Jkt 041481 PO 00000 Frm 00066 Fmt 6633 Sfmt 6621 I:\DOCS\112-34\75437.TXT BRIAN
63

regated account in any day. These changes have now been approved by the Commission. 

Another of our recommendations calls on the Commission to require that each 

FCM certify annually that there are no material inadequacies in its internal controls regarding maintenance and calculation of adjusted net capital and compliance 

with the rules regarding the protection of customer funds. FIA encourages the Commission to adopt this recommendation as part of its package of audit improvements. 

Clearly, these recommendations for strengthening internal controls are relevant 

to both MF Global and Peregrine Financial. We have witnessed over the years a 

number of instances where lax auditing controls or a lack of separation of duties 

related to the movement and protection of customer money have led to wrongful activity and fraud. The adoption of these basic audit and internal control recommendations will go a long way to detect and deter inappropriate behavior, going 

forward. 

FIA also has taken efforts to educate customers on the scope of the protections 

for their funds so they can make well-informed decisions when choosing where to 

do business. In February, we issued Frequently Asked Questions on Customer Funds 

Protections, which is being used by FCMs to provide their customers with increased 

disclosure on the scope of how the laws and regulations protect customers in the 

futures markets. This document continues to be updated as we gather comments 

from regulators on other areas that should be covered. In addition, we will be expanding this document to ensure that customers have material information when 

evaluating an FCM. 

FIA’s Transparency Initiative 

Even with all that has been done, the recent events involving Peregrine Financial 

make it evident that more must be done. In this respect, I would like to discuss the 

‘‘Transparency Initiative’’ that I announced last week. 

First, FIA strongly supports providing regulators with the independent ability to 

electronically review and confirm customer segregated balances across every FCM 

at any time. 

Second, FIA supports the creation of an automated confirmation process for segregated funds that will provide regulators with timely information that customer 

funds are secure. Technology solutions can help prevent this type of event from occurring again. 

Third, FIA supports the creation of an ‘‘FCM Information Portal’’ that will centrally house firm-specific financial and related information regarding FCMs so customers can more readily access material information when evaluating an FCM. 

FIA’s board is actively considering ways to construct and populate such a system. 

Fourth, FIA recommends that FCMs publicly certify as soon as practicable that 

they are in compliance with the Initial Recommendations for Customer Funds Protection that FIA issued in February, specifically that they have adopted and implemented the internal control policies and procedures related to the protection of customer funds. These controls should be subject to independent review and oversight 

by the SROs and independent auditors. 

I was encouraged by Chairman Gensler’s remarks before the Senate Agriculture 

Committee last week that the Commission will be supporting and adopting many 

of these sensible industry recommendations. The ‘‘blocking and tackling’’ fundamentals of regulation depend on ensuring that firms have proper internal risk controls 

in place and that these are independently reviewed and verified. Those basics of 

smart regulation have not changed over time, and we look forward to working with 

the Commission to prioritize initiatives aimed at protecting customers. 

Dodd-Frank Rulemaking 

Turning now to Title VII of the Dodd-Frank Act, FIA broadly supports the regulatory goals set out therein, which are designed to implement the G20 commitment 

that:

All standardised OTC derivative contracts should be traded on exchanges or 

electronic trading platforms, where appropriate, and cleared through central 

counterparties by end 2012 at the latest. OTC derivative contracts should be reported to trade repositories.

As with the regulated futures markets, centralized trading and clearing of swaps 

will reduce financial and operational risks of all market participants and bring necessary transparency to this critical segment of our financial system. 

FIA has been an active participant in the rulemaking process undertaken by the 

Commission over the past 2 years, filing more than 50 comment letters and taking 

part in several Commission staff roundtables. We have also met numerous times 

64

with the Commissioners and Commission staff on various issues, which meetings 

have been reported on the Commission’s website. 

Our comments have generally been supportive of the regulatory goals, while (i) 

seeking clarification of the obligations that would be imposed under certain provisions, (ii) noting the operational burdens in complying with others, (iii) raising costbenefit issues where appropriate, and (iv) recommending alternatives that would 

achieve the Commission’s regulatory goals more effectively and efficiently. Our aim 

is smarter regulation, not necessarily less regulation. 

I should emphasize that our concerns are not limited to swap-related 

rulemakings. Although the primary focus of Title VII is the over-the-counter swaps 

markets, the Commission’s rules also require FCMs to restructure significantly the 

way in which they have been conducting their regulated futures businesses for decades and, in the process, to undertake substantial changes to their record-keeping 

and reporting systems. Several such rules, discussed below, have posed a significant 

challenge to both FCMs and the Commission. 

Large Trader Reports. In July 2011, the Commission published rules requiring 

large trader reports for swaps and swaptions on physical commodities, which became effective on September 20, 2011. The rules raised a number of questions for 

which the industry sought guidance from the Commission staff. However, it was not 

until December 2011 that the staff was able to issue a Guidebook that provided additional guidance and detailed instructions for submitting large swaps trader reports to the Commission. In May 2012, the staff issued a revised Guidebook. Because of broad uncertainty surrounding compliance in this area, the Commission 

staff has found it necessary to issue temporary relief from the large trader reporting 

requirements five times. 

Position Limits and the Aggregation of Positions. The Commission’s rules establishing position limits for 28 exempt and physical commodities generally require 

that, unless a particular exemption applies, a person must aggregate all positions 

for which that person controls the trading decisions with all the positions for which 

that person has a ten percent or greater ownership interest in an account or position, even if the person does not control trading in the other accounts. In May, in 

response to a petition from the Working Group of Commercial Energy Firms and 

the Commercial Energy Working Group (Working Groups), the Commission proposed to amend its policy requiring the aggregation of positions. As proposed to be 

amended, the aggregation policy would permit persons with an ownership that does 

not exceed 50 percent to file for disaggregation relief, if they can demonstrate independence by meeting Commission-established criteria. 

In support of their petition, the Working Groups argued, among other things, that 

the rules would force information sharing and the coordination of trading between 

entities that would be contrary to existing best practices for antitrust compliance. 

Moreover, entities with complex corporate structure arrangements that include established information barriers to ensure compliance with other regulatory requirements would face significant costs to monitor positions on an intra-day basis, notwithstanding the current lack of control over such trading. 

FIA supported the Working Groups’ petition and is pleased that the Commission 

has proposed to amend its aggregation policy. Nonetheless, we believe the proposed 

amendment does not go far enough. The Commission should permit disaggregation 

without regard to ownership interest when entities can demonstrate separate management and control of trading and positions. 

Such a policy is consistent with section 4a of the Act, which calls for aggregation 

of positions that are subject, directly or indirectly, to common control. Section 4a 

does not require aggregation of positions arising from common ownership. Such a 

policy would also recognize commercial reality in an economy in which companies 

have passive ownership interests in scores, if not hundreds, of companies. Without 

coordinated trading, there is no increased risk of excessive speculation or manipulation. 

A decision on the proposed amendment to the Commission’s aggregation policy is 

only one of several issues on which the industry requires guidance before it can develop the systems necessary to implement the Commission’s position limit rules. 

Other critical open issues include: (i) the scope and logistics of grandfathering existing futures and swaps positions; (ii) the scope of grandfathered risk management 

positions; (iii) the scope of bona fide hedging transactions; and (iv) the unavailability 

of technology necessary to monitor for compliance with position limits intra-day. To 

date, however, the Commission has not provided a forum for working through these 

issues, leaving the industry struggling with how it is to comply with this rule. 

Legally Separate Operationally Commingled (LSOC) Rules. More recently, the industry has been meeting with representatives of the several derivatives clearing organizations (DCOs) that clear swaps to discuss the operational issues that arise in 

65

implementing the Commission’s rules for providing protection for cleared swaps customer collateral. 

On their face, these rules, commonly referred to as the LSOC rules, appear relatively straightforward and FIA has supported the adoption of this new framework. 

Each day, clearing member FCMs must provide to the DCOs at which customer positions are carried information regarding (i) the identity of the customers whose positions make up the omnibus account, (ii) the positions carried on behalf of each customer, and (iii) the value of the margin posted with the DCO that supports each 

customer’s portfolio of positions. Nonetheless, a number of very difficult operational 

questions have arisen that will take time to resolve. Until they are, there is not 

enough certainty or consensus on certain fundamental issues to permit FCMs and 

DCOs to build the systems necessary to implement the LSOC rules, which are 

scheduled to go into effect in November. 

Core Principle 9. Certain pending rules also threaten to have a significant impact 

on the conduct of regulated futures activities. One such rule is the proposed rule 

implementing Core Principle 9. This principle requires a designated contract market 

(DCM) to provide ‘‘a competitive, open, and efficient market and mechanism for executing transactions that protects the price discovery process of trading in the centralized market.’’ To implement this principle, the Commission has proposed to prohibit a DCM from continuing to list a futures contract unless at least 85 percent 

of the volume in such contract is traded through the DCM’s centralized order book. 

If a futures contract no longer met the 85 percent test, the DCM would be required 

to de-list the contract and either liquidate the open positions or transfer the positions to a swap execution facility. 

This simple renaming of the instrument from a future to a swap would have dramatic effects, including substantially increasing the amount of initial margin required by the DCO to open the position and changing the tax treatment of the contract for non-hedge positions. Consequently, as we noted in our comment letter on 

the proposed rule, adoption of the proposed rule would result in significant legal and 

regulatory uncertainty and would have the curious effect of placing the regulated 

futures markets at a competitive disadvantage to the cleared swaps markets. In particular, start-up exchanges and new product offerings would find it difficult to meet 

this litmus test, thus lessening competition and innovation in the industry. Again, 

this rulemaking was not mandated by Dodd-Frank and its primary aim is the futures markets, not the swaps market where the financial crisis largely stemmed. 

Cross-Border Guidance. More recently, the Commission has published for comment what it has termed interpretative guidance on the cross-border application of 

certain swaps provisions of the Commodity Exchange Act. The interpretative guidance is not a ‘‘rule’’ under the Administrative Procedure Act and, therefore, does not 

require the Commission to conduct a cost-benefit analysis before adopting it as final. 

Although we are still studying its terms, it is evident that the Commission has proposed to adopt a broad interpretation of the definition of a ‘‘U.S. person’’ and of the 

activities that would be deemed to have ‘‘a direct and significant connection with 

activities in, or effect on, commerce of the United States.’’ The result would be a 

complex and confusing regulatory scheme that would expose U.S. FCMs and swap 

dealers to considerable regulatory risk and would effectively extend the CFTC’s 

reach into many jurisdictions around the world. It is imperative that the CFTC clarify this guidance before the registration and other Dodd-Frank requirements go into 

effect so that firms understand and can plan for the scope of Dodd-Frank’s impact 

on their global businesses. 

Implementation Timetable. In light of this complex and legally uncertain regulatory environment, we believe it is essential that the Commission follow the lead 

of the Securities and Exchange Commission (SEC), which developed and recently 

published for comment an implementation policy statement. As Robert Cook, the Director of the SEC’s Division of Trading and Markets, explained in testimony last 

week, the policy statement sets out the order in which the SEC expects to require 

compliance by market participants with the final rules to be adopted under Title 

VII, with the goal of avoiding ‘‘the disruption and cost that could result if compliance with all rules were required simultaneously or haphazardly.’’ 

The implementation policy statement divides the final rules to be adopted by the 

SEC into five broad categories and describes the interconnectedness of the compliance dates of the final rules within each category, and where applicable, the impact 

of compliance dates of final rules within one category upon those of another category. The statement emphasizes that those subject to the new regulatory requirements arising from these rules will be given adequate, but not excessive, time to 

come into compliance with them. 

This is not a new idea. CFTC Commissioners have urged the Commission to adopt 

a similar policy statement, as have numerous market participants and trade assoVerDate 0ct 09 2002 10:19 Jan 04, 2013 Jkt 041481 PO 00000 Frm 00069 Fmt 6633 Sfmt 6621 I:\DOCS\112-34\75437.TXT BRIAN
66

ciations, including FIA. However, time is running out. Unless the Commission acts 

promptly to establish a well-designed implementation policy, a substantial number 

of substantive rules will come into effect in the next few months in a haphazard 

manner, imposing a substantial burden on the industry and exposing the industry 

to significant risk of enforcement proceedings. In this latter regard, in order to assure that market participants acting in good faith to comply with these rules are 

not unnecessarily exposed to the threat of enforcement action, it is essential that 

the Commission provide all market participants with ‘‘adequate, but not excessive, 

time to come into compliance’’ with these rules. 

I want to point out that the challenges that the industry is facing in implementing the Dodd-Frank Act have been exacerbated by the Commission’s decision 

to move forward concurrently with significant rule proposals that are unrelated to 

the Dodd-Frank Act. I have already mentioned the Core Principle 9 rulemaking, 

which was not a mandated rule by Dodd-Frank. Another such proposal is the Commission’s proposal to require DCMs and other reporting entities to file ownership 

and control reports (OCR) to the Commission on a weekly basis. As originally proposed, the OCR rules would have required FCMs to collect and report a substantial 

amount of information that either is not collected in the manner the Commission 

anticipated or is not collected at all. As a result, the proposed rules would have required a complete redesign of the procedures, processes and systems pursuant to 

which FCMs create and maintain records with respect to their customers and customer transactions. 

To prepare our comment letter on the proposed OCR rules, FIA formed an OCR 

Working Group to analyze their potential impact. We found that the median firm 

would face total costs of roughly $18.8 million and ongoing costs of $2.6 million annually. These costs, combined with the unwarranted structural change in the conduct of business among U.S. futures markets participants that the proposed rules 

would require, could force a number of FCMs to withdraw from the business and 

raise the barrier to entry for potential new registrants. 

In its comment letter, FIA presented an alternative OCR proposal that we believe 

would achieve the essential regulatory purposes of the Commission’s proposed rules. 

The cost of the alternative OCR was considerably less than the estimated cost of 

implementing the OCR rules, but they are substantial nonetheless. FIA and the 

DCMs continued talking with Commission staff following the comment period. The 

Commission recently proposed a revised OCR structure that we understand is closer 

to the alternative that the industry recommended. We look forward to analyzing the 

proposal. 

We must emphasize that the FIA alternative was not developed within the 60 day 

comment period originally proposed by the Commission. It took several months of 

detailed analysis by industry representatives who otherwise perform critical operational and risk management responsibilities in their firms. We also want to emphasize that the OCR rule exemplifies a broader problem; the firms are being overwhelmed with the volume and complexity of the record-keeping and reporting programs they are being asked to implement in a very short time frame. 

Another rulemaking not directly mandated by Dodd-Frank is the Commission’s recent adoption of rule 1.73 requiring clearing member FCMs to establish risk-based 

credit limits for all customers and implement procedures to screen all orders for 

compliance with these limits prior to execution. In particular, an FCM would be required to screen by automated means all orders received or executed by automated 

means. However, no systems currently employed by, or available to, clearing member FCMs, or the DCMs on which the trade may be executed, permit a trade to be 

screened prior to execution for its potential effect on the customer’s existing portfolio 

of positions. Risk management systems are designed to monitor a customer’s risk 

on a post-execution/post-cleared basis. Moreover, the rule appears to require significant changes in the operational and contractual relationships among clearing member FCMs, executing brokers and investment managers as well as substantial systems changes. 

FIA is requesting the Commission staff to clarify the intended scope of the rule, 

and we are hopeful that the staff will approve an interpretation of the rule that will 

be technologically practicable, while meeting the Commission’s regulatory goals. 

Conclusion. These are challenging and difficult times for our industry, not only 

due to the regulatory changes described above but also due to fundamental shifts 

in the business model that underlies the futures industry. With depressed futures 

volumes, historically low interest rates, and an ultra-competitive pricing model, 

FCMs are under tremendous strain financially. Many are concerned that the business is reaching a point where it cannot absorb additional costs without a seismic 

shift in the model—whether that is significant consolidation among FCMs or FCMs 

leaving the business altogether. This would have the unfortunate effect of limiting 

67

customer choice and reducing the number of firms that backstop the clearing system, making it more vulnerable to catastrophic losses. So as we consider regulatory 

changes, it would be wise to carefully weigh the costs of any new regulatory mandates and concentrate our resources on implementing the highest priority reforms 

ahead of all the rest. 

As discussed above, the industry is working against a short deadline while faced 

with considerable uncertainty about how the Commission plans to implement a wide 

swathe of its rules and how those rules will fit in a global regulatory structure. As 

we move forward, it is essential that the unintended consequences of any reforms 

be eliminated and the many positives that this industry has delivered to the customers of our markets be preserved. 

Thank you and I will be happy to answer any questions.

Mr. CONAWAY. Mr. Lukken, thank you. 

Mr. Heck for 5 minutes. 

STATEMENT OF JOHN M. HECK, SENIOR VICE PRESIDENT, 

BUSINESS DEVELOPMENT, THE SCOULAR COMPANY;

MEMBER, EXECUTIVE COMMITTEE AND BOARD OF

DIRECTORS, NATIONAL GRAIN AND FEED ASSOCIATION, 

OMAHA, NE 

Mr. HECK. Thank you, Mr. Chairman and Members of the Committee. I am John Heck, Senior Vice President of the Scoular Company. I appear today testifying on behalf of the National Grain and 

Feed Association. We appreciate the opportunity to appear before 

the Committee today. 

I serve as Co-Chairman of the NFGA’s MF Global Task Force, 

which was formed to develop responses and recommendations in response to the failure of MF Global. Many NGFA member firms 

have been deeply affected by the liquidation of MF Global. Customer accounts were frozen, then transferred to other FCMs in chaotic fashion and with a dearth of information to customers so they 

could possibly manage their financial exposure. These customer 

funds were required to be segregated and held safe by MF Global. 

We believed for years that segregated customer funds were completely safe but now we see that was not the case. The unprecedented loss of customer funds has led to a loss of confidence in futures markets. 

Our task force asked the question: was MF Global a one-time situation or is the level of customer risk still significant? Unfortunately, we know today that serious risk still is present. The apparent long-term fraud and misappropriation of customer funds at 

Peregrine Financial Group highlights the need for more effective 

regulatory oversight and enhanced safety for customer funds. The 

cumulative effect of MF Global and now the PFG failure, especially 

at a time when regulators were on heightened alert, has been a 

huge loss of confidence in regulators and in the rules that protect 

customers. We believe steps should be taken to help restore confidence and improve customer protection now. 

In early April, the NGFA submitted preliminary recommendations to the CFTC for enhanced reporting, transparency and accountability. Those recommendations are attached to my written 

testimony in addition to a second set of recommendations we submitted last month to leadership of the House and Senate Agriculture Committees. I would like to highlight several of these 

today. 

68

The Commodity Exchange Act, CFTC regulations and the Bankruptcy Code should be harmonized for greater clarity and to avoid 

interpretative inconsistencies. Second, strengthen the CFTC’s authority to appoint a trustee who exclusively represents the interests of commodity customers in a bankruptcy. Third, the Bankruptcy Code should state clearly that customers with segregated 

funds always are first in line for distribution of funds. Fourth, the 

Bankruptcy Code should include authority for commodity customer 

committees in an FCM liquidation. And last, safe-harbor provisions 

of the Bankruptcy Code should not limit powers of a trustee to recover customer funds. Reforming the Bankruptcy Code is a major 

undertaking. We would welcome working with other organizations 

that have similar goals so Congress can act on legislation soon. 

The NGFA also recommends establishment of a new type of voluntary account structure that fully segregates customer assets. 

Full segregation will result in additional costs so we suggest the 

use of such accounts would be on a voluntary basis at the agreement of an FCM and its customers. We believe that a pilot program could be implemented quickly and without legislation, and we 

would find a useful way to test the mechanics of this new account 

structure and begin to judge its true costs and benefits. 

Because full segregation might not be attractive to all customers, 

the NGFA also recommends that insurance coverage be extended 

to commodity futures customers in much the same way that insurance protection now exists for securities customers under the SIPC. 

I would like to close my testimony with some comments about a 

proposed rule by the CFTC that has generated serious and widespread concern among NGFA member firms and agricultural producers. It has also been mentioned by a Member of the Committee 

this morning. It would require that any member of a designated 

contract market like the Chicago Board of Trade or the Kansas 

City Board of Trade record all oral communications that could lead 

to a cash transaction and keep records for CFTC inspection for 5 

years. Many country elevators would be required to record telephone conversations with farmers about possibly entering into a 

forward cash contract to purchase the farmer’s grain, even though 

forward contracts are specifically exempted in the Commodity Exchange Act from CFTC’s jurisdiction. This proposal would require 

substantial new investment in communications technology for 

many small businesses. In addition, it would create a bifurcated 

cash marketplace in which some grain purchasers would be required to record communications and maintain records while others 

would not be covered by the rule. We are happy to hear the Commissioner’s comments this morning that he may be able to dial 

back on those requirements. 

Thank you for the opportunity to share the views of the National 

Grain and Feed Association. I would be happy to respond to any 

questions. 

[The prepared statement of Mr. Heck follows:]

69

PREPARED STATEMENT OF JOHN M. HECK, SENIOR VICE PRESIDENT, BUSINESS

DEVELOPMENT, THE SCOULAR COMPANY; MEMBER, EXECUTIVE COMMITTEE AND

BOARD OF DIRECTORS, NATIONAL GRAIN AND FEED ASSOCIATION, OMAHA, NE 

Good morning, Chairman Lucas, Ranking Member Peterson, and Members of the 

Committee. I am John Heck, Senior Vice President of The Scoular Company in 

Omaha, Nebraska. The Scoular Company, founded in 1892, manages commodity 

supply-chain risk for customers in food, feed and renewable fuel markets. From 

more than 70 locations across North America, nearly 700 Scoular employees tailor 

risk-management solutions for their customers by buying, selling, storing, and 

transporting grain and ingredients. 

This morning, I am testifying on behalf of the National Grain and Feed Association (NGFA), the national trade association representing grain elevators, feed manufacturers, processors and other commercial businesses that utilize exchange-traded 

futures contracts to hedge their risk and to assist producer in their marketing and 

risk management strategies. We appreciate the opportunity to testify before the 

Committee today. 

I serve on the NGFA’s Executive Committee and Board of Directors, and I also 

serve as Chairman of the Association’s Finance and Administration Committee. 

More recently, I was asked to co-chair the NGFA’s MF Global Task Force, formed 

to develop responses and recommendations to the failure of MF Global. Our priorities are to advocate regulatory and policy changes that will help ensure that another similar situation does not recur and to enhance protections for commodity futures customers. 

Many NGFA-member firms have been deeply affected by the MF Global Holdings 

bankruptcy and the subsequent liquidation of futures commission merchant (FCM) 

MF Global Inc. Following the bankruptcy, customers’ accounts were frozen, then 

transferred to other FCMs in chaotic fashion and with a dearth of information to 

help customers manage their financial exposure. Today, another distribution of 

funds from the MF Global trustee has begun with the goal of bringing all commodity 

customer distributions to about 80% of account value, but many firms still have received only 72% of their funds with no assurance they ever will be made whole. 

It is worth emphasizing again that these customer funds were required to be segregated and held safe by MF Global. Our industry had believed for years that segregated customer funds were completely safe, but we now see that was not the case. 

The unprecedented loss of customer funds in the MF Global debacle has led to a 

loss of confidence in futures markets and in the ability of the current system to protect customer funds. 

As our Task Force considered regulatory and policy changes in the aftermath of 

MF Global, we asked ourselves: ‘‘Was MF Global a one-time situation, or is the level 

of customer risk still significant? Did the MF Global failure and its consequences 

rise to the level that merited significant change?’’

Unfortunately, we know today that serious risk still is present. The discovery of 

apparent long-term fraud and misappropriation of customer funds at Peregrine Financial Group (PFG) highlights again the need for more effective regulatory oversight and meaningful change that will provide additional safety for customer funds 

both before a failure occurs and in the event of future FCM liquidations. 

We are still awaiting details of the situation surrounding the PFG situation. On 

its face, the PFG failure appears to have some key differences from MF Global—

namely, that customer funds were intentionally misappropriated for a variety of illegitimate purposes over a very long period of time. However, the cumulative effect 

of MF Global and PFG failures within a relatively short time—and especially the 

failure of PFG at a time when regulators presumably were on heightened alert for 

problems—has been a huge loss of confidence in regulators and in the adequacy of 

current rules to protect customer funds. We look forward to a full explanation by 

regulators of exactly what happened at PFG. In the meantime, we believe there are 

steps that should be taken to begin restoring confidence and to bolster protections 

for segregated customer funds. 

In early April, the NGFA submitted to the Commodity Futures Trading Commission (CFTC) preliminary recommendations for enhanced reporting, transparency 

and accountability. Generally, these recommendations were developed with the intent of assisting customers by providing them with more information to evaluate 

FCMs with whom they do business. In addition, several of our recommendations 

were aimed at requiring greater scrutiny by the CFTC and self-regulatory organizations of FCM practices and financial reporting, and requiring FCMs to develop and 

adhere to policies and procedures that rigorously will ensure proper safeguarding 

of customer funds. Those recommendations are attached, and I would be happy to 

discuss them in greater detail. 

70

Late last month, the NGFA submitted a second set of recommendations to leadership of both the Senate and House Agriculture Committees. These recommendations 

involve significant changes in customer account structure, reforms to the U.S. Bankruptcy Code to enhance customer rights and protections, and the potential extension 

of insurance coverage to commodity futures customers. The NGFA’s letter transmitting our latest recommendations is attached, and I would like to highlight several 

of our recommendations today: 

Reforms to the U.S. Bankruptcy Code 

• The Commodity Exchange Act, CFTC regulations and the Bankruptcy Code 

should be harmonized to provide greater clarity and avoid interpretive inconsistencies in the event of future FCM liquidations.

• The CFTC’s authority to appoint a trustee to represent exclusively the interests 

of commodity customers should be strengthened. In a situation like MF Global, 

where over 95% of assets and accounts affected were those of commodities customers, we believe the CFTC should play a larger role and that a trustee with 

commodities expertise should be involved.

• The Bankruptcy Code should state clearly that customers always are first in 

line for distribution of funds, ahead of creditors, and that all proprietary assets 

of affiliates should go to reimburse segregated customer accounts first.

• The Bankruptcy Code clearly should state authority for establishment of commodity customer committees to represent their interests in an FCM liquidation.

• Regardless of the intent behind transfer of customer funds, ‘‘safe harbor’’ provisions of the Bankruptcy Code should not limit powers of a trustee to recover 

customer funds.

We understand that significant reforms to the U.S. Bankruptcy Code are a major 

undertaking. For that reason, the NGFA would welcome working together with 

other organizations that have similar goals in order that legislation can be moved 

expeditiously by Congress. 

Fully Segregated Customer Accounts 

Current legal authority provides for pro rata distribution by the trustee of customer property that was held by a failed FCM. That means that all customers must 

share equally in losses in the event of a shortfall of funds. The NGFA recommends 

establishment of a new type of account structure for use by FCM customers on a 

voluntary basis that provides for full segregation of customer assets, not commingled with FCM funds or other customer funds. It will be important in establishing 

a new fully-segregated structure that customer funds not fall under the ‘‘customer 

funds’’ definition in the Bankruptcy Code, thereby exposing them to pro rata distributions and loss-sharing. Creation and maintenance of fully-segregated accounts 

necessarily will result in some additional costs that likely will be borne by customers. For that reason, we prefer that use of such accounts would be on a voluntary basis, at the agreement of an FCM and its customers. 

We believe that a pilot program would be a useful way to test the mechanics of 

this new account structure and to begin to judge its true costs. The NGFA will look 

to work with commodity customers, FCMs, lenders and regulators to identify potential participants. We believe a pilot program leading to fully-segregated accounts 

can be implemented relatively quickly without the need for legislation. 

Insurance for Commodity Futures Customer Accounts 

Because a fully-segregated account structure may not prove to be a practical alternative for all customers, the NGFA also has recommended that insurance coverage 

be extended to commodity customers, in much the same way that insurance protection currently exists for securities customers under the Securities Investor Protection Corporation (SIPC). Details involving the appropriate level of coverage and 

funding will need to be determined, but we believe the added protection for customers will be perceived as significant and meaningful in today’s environment. 

Dodd-Frank Implementation 

Finally, I would like to share with the Committee the NGFA’s views on the ongoing implementation by CFTC of the Dodd-Frank law. We believed from the beginning that agriculture, and the use of agricultural risk management tools, had nothing to do with the financial crisis that served as the catalyst for passage of DoddFrank. Responding to the barrage of proposals from the CFTC to implement DoddFrank has required much time and effort by agriculture and agribusiness firms. 

While some uncertainties still exist in how the law will be implemented by the 

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71

siveness to agriculture and agribusiness concerns. However, I would like to close my 

testimony with some comments about one proposal that has generated serious and 

widespread concern among NGFA-member firms and the agricultural producers 

with whom they work so closely. 

Briefly, the proposal would require that any member of a designated contract 

market (DCM)—like the Chicago Board of Trade, Kansas City Board of Trade or 

Minneapolis Grain Exchange—record all oral communications that could lead to a 

cash transaction. In addition, records would need to be kept for CFTC inspection 

for up to 5 years, identifiable by counterparty and transaction. There are several 

problems with the proposal as currently written:

• The proposal would require, for example, a country elevator operated by a company that is a member of a commodity futures exchange to record telephone 

conversations with farmers about a forward cash contract—contracts that specifically are exempted in the Commodity Exchange Act from CFTC’s jurisdiction. Taken even farther, a country elevator manager’s conversation behind the 

stands at the high school football game on Friday night with a farmer in the 

community about buying cash grain the next day would be required to be recorded. Clearly, this would constitute a huge expansion of CFTC’s authority in 

the cash marketplace.

• Country elevators are not equipped with the technology to record conversations 

and maintain a record of them. The proposal would require a huge new investment in communications technology for many small businesses.

• The proposal would create a bifurcated cash marketplace in which some grain 

purchasers would be required to record communications and maintain records, 

while others not operated by a member of a DCM would not be covered by the 

rule. Will a farmer call the elevator where all conversations must be recorded 

and records kept for CFTC inspection, or the elevator down the road where no 

such requirement exists? Serious competitive issues are involved.

The NGFA respectfully suggests that the enforcement goals of the Commission 

can be effectively accomplished and better served without this huge new intrusion 

into the cash grain marketplace. 

Thank you for the opportunity to share the views of the National Grain and Feed 

Association. I would be happy to respond to any questions. 

ATTACHMENT 1

April 2, 2012

Hon. GARY GENSLER,

Chairman, 

Commodity Futures Trading Commission, 

Washington, D.C.

Dear Chairman Gensler:

The demise of MF Global has shaken the confidence of many futures market participants with regard to the safety of segregated customer funds. Many NGFA-member companies continue to struggle to recover their funds and property. 

The NGFA respectfully submits the following preliminary recommendations as 

first steps to begin re-establishing confidence among futures market participants 

and to help safeguard customer funds. However, it is extremely important that 

these types of changes—designed to enhance reporting, transparency and accountability, with recommendations we believe should be relatively easily implemented—

are not the end of efforts to ensure that another MF Global-type situation never recurs. 

The NGFA’s MF Global Task Force continues its work to examine various models 

for segregating and safeguarding customer funds; to explore the viability and costs 

of extending insurance coverage to commodities accounts; and to analyze potential 

changes to the U.S. Bankruptcy Code to provide customers with needed protection, 

especially to protect customer segregated funds from being swept into liquidation 

proceedings and to ensure that ‘‘safe harbor’’ rules under the Bankruptcy Code 

aren’t used to preclude retrieving customer funds. We expect to issue additional recommendations in these areas soon. In all these efforts, our bedrock principle will 

be: 

‘‘Customers Come First’’

The preliminary recommendations of the NGFA are as follows:

72

• The CFTC should require daily reporting of segregated fund positions by FCMs 

to both their Self-Regulatory Organization (SRO) and to the CFTC.

• The CFTC should require daily reporting of segregated fund investments by 

FCMs, detailed by maturity and quality, to both their SRO and to the CFTC.

• The CFTC should conduct a formal review of FCM investment options for customer funds, with a view to whether the Commission should further limit allowable investments only to very safe instruments.

• The CFTC should require reporting by FCMs to their SRO and to the CFTC 

of significant changes in investment policies or holdings.

• FCMs should be required to provide greater transparency to customers of where 

customer funds are invested, potentially achieved through means such as posting on the CFTC website, FCM websites and/or publication in a customer ‘‘prospectus.’’

• The CFTC and SROs should enhance monitoring of FCM reporting. Both regulators should conduct more detailed and more frequent audits, and unannounced spot checks of FCMs.

• To assign accountability and to aid in establishing that fraudulent activity has 

occurred in the event customer funds are misappropriated, CFTC should require 

the signature of two authorized principals of an FCM (e.g., CEO, CFO or other 

senior officers) to move funds out of segregated customer fund accounts to noncustomer accounts.

• FCMs should be required to provide immediate notice to their SRO and to the 

CFTC if the firm moves more than some percentage, to be determined by the 

CFTC, of excess segregated funds to non-customer accounts.

• FCMs should be required by their SRO to periodically certify policies and procedures to ensure the safeguarding of customer segregated accounts and compliance with applicable laws and regulations regarding such accounts. As part of 

all examinations by SROs, principals of FCMs must certify that policies and 

procedures are adequate, effective and being observed by the FCM. At least annually, SROs should be required by CFTC to review policies and procedures to 

determine adequacy and compliance.

• A rigorous review by the CFTC of capital requirements for FCMs and brokerdealers needs to be conducted, with a view to scrutinizing the current practice 

of allowing double-counting of required capital when a firm operates as both an 

FCM and a broker-dealer.

We appreciate the opportunity to share these recommendations with you, and we 

look forward to working with you to ensure that customer funds truly are segregated and safe from future misappropriation. 

Sincerely,

MATT BRUNS, JOHN HECK, 

Chair, Chair, 

Risk Management Committee; Finance and Administration Committee. 

ATTACHMENT 2

June 29, 2012

Hon. FRANK D. LUCAS, Hon. COLLIN C. PETERSON, 

Chairman, Ranking Minority Member, 

House Committee on Agriculture, House Committee on Agriculture, 

Washington, D.C.; Washington, D.C. 

Dear Chairman Lucas and Ranking Member Peterson:

As you are well aware, companies and individuals that were customers of MF 

Global Inc.’s futures business continue to deal with the aftermath of parent company MF Global Holdings’ bankruptcy and the subsequent liquidation of the futures 

commission merchant (FCM). Most customers so far have received distributions 

from the trustee of about 72% of their funds—funds that were supposed to have 

been segregated and protected—with no assurance of being made whole. 


11234001.eps
73

* Editor’s note: the document referred to is the preceding attached letter dated April 2, 2012. 

Shortly following MF Global’s demise, the National Grain and Feed Association 

(NGFA) established a task force to formulate recommendations for change to help 

ensure that another MF Global-type situation does not occur. On April 2, we submitted to Congress and to the Commodity Futures Trading Commission (CFTC) a 

number of preliminary recommendations for enhanced reporting, transparency and 

accountability (attached).* We are pleased that the CFTC and the regulated exchanges have begun to implement some changes quite similar to the NGFA’s preliminary recommendations. 

This letter transmits a second set of NGFA policy recommendations. Many of 

these changes will require action by Congress and/or the CFTC, and we urge expeditious consideration to protect customers’ funds and to reinforce the principle that 

‘‘Customers Come First.’’ 

The NGFA’s recommendations are as follows: 

Reforms to U.S. Bankruptcy Code—The NGFA believes strongly that reforms 

to the U.S. Bankruptcy Code are critically important to preserving customers’ rights 

and protecting customers’ assets in the event of future FCM insolvencies. To that 

end, the NGFA recommends the following statutory changes:

• Generally, the Bankruptcy Code provides a limited description of the liquidation 

process of a commodity futures broker. The Commodity Exchange Act and bankruptcy regulations drafted by the CFTC provide much greater and more detailed guidance for the liquidation of a commodity broker or FCM. The NGFA 

recommends that Part 190 regulations of the CFTC should be incorporated into 

Subchapter IV of Chapter 7 of the Bankruptcy Code to harmonize the statutes 

and avoid interpretative inconsistencies.

• Under SIPA, the SIPC is authorized to select a trustee and to oversee the trustee’s compensation, while the CFTC has a limited role. Further, the SIPA trustee 

is obligated to protect the interests of both securities and commodities customers. In order to strengthen commodity customer protection, the NGFA recommends that CFTC should have a specifically identifiable role in the liquidation of an FCM. The CFTC should have the authority to appoint its own trustee 

to represent exclusively the interests of commodities customers. (This recommendation is not intended as a criticism of the SIPA trustee appointed to 

oversee liquidation of MF Global Inc. However, in a case where over 95% of the 

assets and accounts affected were those of commodities customers, we believe 

the CFTC should play a much larger role.)

• Currently, an FCM is required to keep customer funds segregated from the 

firm’s proprietary funds, but customer property is commingled. As a result, 

under the current statutory scheme, all customers share pro rata in the event 

of a shortfall. The NGFA recommends that the Bankruptcy Code should state 

clearly that customers always are first in line for distribution of funds, ahead 

of creditors, and that all proprietary assets including those of affiliates must go 

to customers first. Knowing that their claims could be subordinated in the event 

of a shortfall would provide incentives to the FCM and any controlling parent 

firm to ensure adequate internal controls to prevent segregation violations. Further, this provision would provide clarity to regulators and to the courts in 

terms of prioritization of claims, an area in which precedent has not been established.

• In the MF Global situation, creditor committees were established under the MF 

Global Holdings Chapter 7 proceeding, but there was no statutory provision 

under the SIPA liquidation of the MF Global Inc. FCM for establishment of customer committees. The NGFA recommends that the Bankruptcy Code expressly 

should authorize the establishment of customer committees to represent customer interests.

• Under current bankruptcy law, powers of a trustee to recover customer funds 

are limited under so-called ‘‘safe harbor’’ provisions unless actual intent to defraud customers/creditors can be shown. The NGFA strongly recommends that 

any transaction involving the misappropriation of an FCM’s customer property 

should not be protected under safe harbor provisions, regardless of the intent 

behind a fund transfer.

We are aware that other organizations also are working toward specific recommendations for changes in the Bankruptcy Code that will enhance customer protections. The NGFA would welcome the opportunity to work cooperatively with such 

groups to develop consensus reforms that can be moved by Congress expeditiously. 

74

Fully Segregated Customer Accounts—Currently, the Commodity Exchange 

Act and U.S. Bankruptcy Code provide for pro rata distribution of all customer property that was held by a failed futures commission merchant (FCM). In the case of 

MF Global, the result has been that former customers of the firm so far have received only 72% of their supposedly safe segregated funds back through distributions from the trustee, with no assurance that they ever will receive all of their 

funds. We believe strongly that a new type of account structure needs to be established for use by FCM customers on a voluntary basis that will shield customer assets from pooled losses in the event of an FCM bankruptcy. 

It will be of paramount importance in establishing this new structure that fullysegregated customer funds not fall under the ‘‘customer funds’’ definition of the 

Bankruptcy Code, thereby exposing them to pro rata distributions (as discussed 

above in recommendations for changes in the Bankruptcy Code.) 

Creation of a fully-segregated account structure necessarily will result in some additional costs that likely will be borne by customers utilizing this voluntary option. 

If that is the case, it is likely that some customers will opt for the added protections 

despite extra costs, and some customers will be unwilling or unable to bear those 

extra costs. For that reason, we propose that the full-segregation option be utilized 

on a voluntary basis at the agreement of an FCM and its individual customers. The 

NGFA will look to work with like-minded organizations to design a full-segregation 

option that responds to customer needs. 

Pilot Program for Full-Segregation Option—We suggest that a pilot program 

involving commodity futures customers, FCMs, banks and regulators could be a useful means of testing the mechanics and beginning to judge the true costs of a fullsegregation structure—and in the process, moving as quickly as possible toward a 

more generally available full-segregation option for customers. The NGFA recommends a pilot program at the earliest possible date, and commits here to working 

with its member firms, the CFTC and other parties to identify potential participants. 

SIPC-Like Insurance for Commodity Futures Customer Accounts—Because the full-segregation option discussed above may not prove to be a practical 

alternative for all market participants, the NGFA recommends that insurance coverage in the event of an FCM bankruptcy be extended to commodity futures accounts similar to that currently provided for securities customers. 

Much in the way that the Securities Investor Protection Corporation (SIPC) has 

provided insurance protection for securities accounts, the NGFA recommends creation of a similar structure for commodities. We believe that a significant fund could 

be established through very modest dedicated assessments on commodity futures 

transactions. Details concerning the appropriate size of such a fund and the appropriate level of assessment will need to be determined, but we believe the customer 

protections provided will be significant and meaningful to market participants. 

The NGFA does not recommend herein whether housing a commodity futures insurance fund within the existing structure of the SIPC is the correct solution, or 

whether a new and separate entity resembling the SIPC but dedicated to providing 

insurance protection for commodity futures accounts should be established. However, we believe strongly that insurance protection for commodity futures accounts 

should be established, action that likely will require authorizing legislation. We look 

forward to working with Congress to achieve that goal. 

We look forward to working with Congress, the CFTC and other stakeholders to 

achieve the afore-mentioned changes with the goal of protecting customer funds, 

both prior to and following a bankruptcy or an FCM insolvency. Please do not hesitate to contact the NGFA with any questions. 

Sincerely,

MATT BRUNS, JOHN HECK, 

Chair, Chair, 

Risk Management Committee; Finance and Administration Committee. 

The CHAIRMAN [presiding.] Thank you, sir. 

Mr. Conner, you are recognized for 5 minutes. 


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STATEMENT OF HON. CHARLES F. CONNER, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, NATIONAL COUNCIL OF

FARMER COOPERATIVES, WASHINGTON, D.C. 

Mr. CONNER. Chairman Lucas, Congressman Boswell, and Members of the Committee, on behalf of the nearly 3,000 farmer-owned 

cooperatives and their producer-members, thank you for the opportunity to testify today to discuss implementation of the Dodd-Frank 

Act. 

The over-the-counter markets have given cooperatives and their 

producer members important tools to manage their exposure and 

hedge their risk during the volatile commodity markets that we 

have seen over the last few years. This Committee’s oversight of 

CFTC as they have written the rules regulating the over-thecounter markets has been instrumental in ensuring that co-ops and 

farmers continue to have access to those innovative risk-management tools. I would simply like to personally thank you for your 

work and your staff’s work in this area. 

This continued oversight is important as the process now turns 

from one of rulemaking to one of compliance. This shift is something that NCFC members are now grappling with. They must 

clearly understand the provisions of the regulations while also figuring out how different regulations will fit together into a coherent 

regulatory framework. Our members are finding it very challenging 

to understand exactly what needs to be done in order to be in compliance at the end of the day, and of course, they want to be in 

compliance. 

Part of the concern also lies with CFTC’s eventual enforcement 

of new regulations. As we have throughout the process, we do urge 

the CFTC to continue to work closely with industry and take a collaborative approach to compliance. We hope the CFTC will lend a 

hand and help and educate us, not as a regulator looking to make 

an example out of honest mistakes, misunderstandings and oversights but rather as a partner determined to see us meet these requirements. 

This would be a continuation, Mr. Chairman, of the willingness 

that CFTC has shown to listen to our concerns throughout this 

rulemaking process. As an example, much of the regulatory uncertainty for farmer co-ops has recently been resolved. Most significant is the definition of swap dealer. The Commission under Chairman Gensler’s leadership took the time to understand farmer coops and made a significant improvement in the final rule. As such, 

farmer co-ops will not be regulated as swap dealers. 

Other rules that have not yet been finished continue to cause uncertainty over the new costs that will be imposed on farmers and 

their co-ops. Incremental increases in cost, whether passed on from 

a swap dealer or imposed directly on the cooperative, of course will 

trickle down and impact our producer-owners. For example, one 

CFTC proposal imposes additional record-keeping requirements in 

the cash commodity markets has been noted. We appreciate Chairman Gensler’s earlier comments stating that he has no intention 

of imposing this new requirement, and we would encourage the 

Committee to follow up on this commitment. 

Other regulatory burdens could also impact our members’ hedging activities. For instance, swap dealers who co-ops often use to 

76

lay off the risk of offering forward contracts must comply with capital and margin requirements, which has not yet been finalized by 

the agency. How these costs will be passed on to end-users remains 

to be seen and again could dramatically impact the cost-effectiveness of commercial hedging via the over-the-counter market. 

Finally, Mr. Chairman, there is still a question of whether the 

so-called Prudential Regulators will require bank swap dealers to 

collect margin from end-users. We appreciate very much this Committee’s work on this issue, and of course the House passage of the 

Business Risk Mitigation and Price Stabilization Act by an overwhelming vote. Clearly, mandatory margin would increase the cost 

again of hedging operations and ultimately discourage this very 

prudent business practice. 

Thank you again for the opportunity to testify today, Mr. Chairman, and I look forward to any questions you may have. 

[The prepared statement of Mr. Conner follows:]

PREPARED STATEMENT OF HON. CHARLES F. CONNER, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, NATIONAL COUNCIL OF FARMER COOPERATIVES, WASHINGTON, D.C. 

Chairman Lucas, Ranking Member Peterson, and Members of the Committee, 

thank you for the invitation to testify today on the implementation of the DoddFrank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). 

I am Chuck Conner, President and Chief Executive Officer of the National Council 

of Farmer Cooperatives (NCFC). NCFC represents the nearly 3,000 farmer-owned 

cooperatives across the country whose members include a majority of our nation’s 

more than two million farmers. 

Farmer cooperatives—businesses owned, governed and controlled by farmers and 

ranchers—are an important part of the success of American agriculture. They are 

a proven tool to help individual family farmers and ranchers through the ups and 

downs of weather, commodity markets, and technological change. Through their cooperatives, producers are able to improve their income from the marketplace, manage risk, and strengthen their bargaining power, allowing individual producers to 

compete globally in a way that would be impossible to replicate as individual producers. 

In particular, by providing price risk management tools to their farmer-owners, 

farmer cooperatives help mitigate commercial risk in the production, processing and 

selling of a broad range of agricultural and food products. America’s farmers and 

ranchers must continue to have access to new and innovative risk management 

products that enable them to feed, clothe and provide fuel to consumers here at 

home and around the world. The ongoing drought across much of the country, which 

is impacting so many producers so severely, once again illustrates the need for a 

multilayered risk management strategy in agriculture. 

We greatly appreciate the ongoing oversight this Committee has provided as the 

Dodd-Frank rules have been written. Your work in encouraging the Commodity Futures Trading Commission (CFTC) to ensure that the agriculture industry has affordable access to innovative risk management tools once the Act is implemented 

is commendable. With your continued leadership, agriculture will hopefully avoid 

being subject to a one size fits all type of regulation intended for Wall Street. 

Cooperatives’ Use of the OTC Market 

As processors and handlers of commodities and suppliers of farm inputs, farmer 

cooperatives are commercial end-users of the futures exchanges as well as the overthe-counter (OTC) derivatives markets. Due to market volatility in recent years, cooperatives are increasingly using OTC products to better manage their exposure by 

customizing their hedges. This practice increases the effectiveness of risk mitigation 

and reduces costs to the cooperatives and their farmer-owners. Swaps also play a 

critical role in the ability of cooperatives to provide forward contracts, especially in 

times of volatile markets. Because commodity swaps are not currently subject to the 

same margin requirements as the exchanges, cooperatives can use them to free up 

working capital. 

OTC derivatives are not just used for risk management at the cooperative level, 

however. They also give the cooperative the ability to provide customized products 

77

to farmers and ranchers to help them better manage their risk and returns. Much 

like a supply cooperative leverages the purchasing power of many individual producers, or a marketing cooperative pools the production volume of hundreds or thousands of growers, a cooperative can aggregate its owner-members’ small volume 

hedges or forward contracts. It can then offset that risk by entering into another 

customized hedge via the swap markets. 

Implementation of the Dodd-Frank Act 

NCFC supports elements of the Dodd-Frank Act that bring more transparency 

and oversight to the OTC derivatives markets. We also recognize the complexity in 

crafting rules for the implementation of Dodd-Frank that best fit cooperatives and 

have had a number of opportunities to express our concerns to the CFTC. With the 

sheer volume of rules, the challenges in clearly understanding what is contained in 

those regulations, and the complexity of how they will fit together, NCFC members 

are now turning their attention to compliance. Our members are doing their best 

to put into place policies and procedures, but they are finding it a challenge to understand what exactly needs to be done to address the complex regulations. 

Our members also have concerns regarding how CFTC will enforce the regulations. Because the regulations will be very complex, we urge CFTC to work closely 

with industry to ensure clear understanding by all parties. 

During the rule writing process, we have worked to ensure that the implementation of the Dodd-Frank Act preserves risk management tools for farmers and their 

cooperatives, and have advocated for the following:

• Treating agricultural cooperatives as end-users because they aggregate the commercial risk of individual farmer-members and are currently treated as such by 

the CFTC;

• Excluding agricultural cooperatives from the definition of a swap dealer;

• Exempting agricultural cooperatives from mandatory clearing or margining but 

allowing them to perform either at their discretion; and

• Considering aggregate costs associated with the new regulations and the impact 

on the agriculture sector.

I am pleased to report that with the recent rulemakings, some of the uncertainty 

that created concern for farmer cooperatives over the past 2 years has been resolved. Most significant is the defining of ‘‘Swap Dealer.’’ CFTC provided a definition 

in the final ‘‘entities’’ rule that will allow farmer cooperatives to provide risk management services to their members and customers without the fear of having to comply with the additional regulatory requirements intended for systemically important 

institutions. We appreciate the work of the Commission in addressing our concerns, 

which resulted in significant improvements in the final rule. 

While we now know farmer cooperatives will not be treated as swap dealers, there 

are still many unknowns as to how implementation of the rules will affect cooperatives and their farmer members. Uncertainty over ultimate costs remains an ongoing a concern. As you know, agriculture is a high-volume, low-margin industry. Incremental increases in costs, whether passed on from a swap dealer or imposed directly on a cooperative, will trickle down and impact producers. Taken one rule at 

a time, the costs may not seem unreasonable, but to those who have to absorb or 

pass on the collective costs of numerous regulations, it is clearly evident those costs 

are significant. 

For example, one ‘‘small’’ change in the proposed conforming amendments rule 

has to do with additional recording requirements. We are concerned this proposal 

would not only add swaps to the new record-keeping requirements, but also extend 

the new requirements to cash purchase and forward cash contracts entered into by 

any member of a designated contract market. One NCFC member estimates that 

installation of record-keeping systems in all of their facilities would cost over $6 million. In fact, the necessary investment to put in place and maintain such a system 

would not only greatly add to the cost of doing business, but would be an extreme 

compliance burden for the cash grain community (attached are the comments NCFC 

submitted to CFTC on this issue). We are hopeful CFTC will reconsider this requirement as it finalizes the rule in the coming months. 

It is also unclear how other costs will be forced down to end-users and impact 

their ability to hedge. For example, recent movements in grain and oilseed markets 

have caused a considerable amount of working capital to be used to cover daily margin calls. The drought affecting the U.S. has caused corn prices to increase over 50 

percent in the last month. While this creates an opportunity for farmers to price 

more of their crop, (if they haven’t been impacted by the drought), it also causes 

additional margin calls on the production that has been priced. For farmers to conVerDate 0ct 09 2002 10:19 Jan 04, 2013 Jkt 041481 PO 00000 Frm 00081 Fmt 6633 Sfmt 6621 I:\DOCS\112-34\75437.TXT BRIAN
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tinue to take advantage of selling grain forward during price rallies, cooperatives 

have to either increase borrowing or look for alternative ways to manage such risk, 

such as the OTC market. As was the case during the volatile markets in 2008, 

swaps allow cooperatives to free up working capital and continue to forward contract with farmers. 

As commercial end-users, cooperatives often use swap dealers in utilizing the OTC 

market to lay off the risk of offering those forward contracts. However, the costs associated with dealers’ compliance with capital, margin and other regulatory requirements are still unclear. We will have to wait to see how those costs are passed on 

to end-users and how cost effective the OTC market remains for hedging activities. 

Consistent with Congressional intent, NCFC supports the CFTC’s proposed rules 

clarifying that it ‘‘would not impose margin requirements on non-financial entities,’’ 

and that ‘‘parties would be free to set initial and variation margin requirements in 

their discretion and any thresholds agreed upon by the parties would be permitted.’’ 

However, we are concerned the so-called ‘‘Prudential Regulators’’ margin proposal 

requires bank swap dealers to collect margin from end-users. As end-users, cooperatives use swaps to hedge interest rates, foreign exchange, and energy in addition 

to agricultural commodities. Often, cooperatives look to their lenders to provide 

those swaps. Under the proposed rule requiring end-users to post margin, costs to 

businesses will increase as more cash is tied up to maintain those hedges. The additional capital requirements will be siphoned away from activities and investment in 

cooperatives’ primary business ventures. Furthermore, cash for margin is often borrowed from lenders through the use of credit lines. As a result, we could see a situation where a commercial end-user would have to borrow cash from its lender, and 

pay interest on it, just to give it back to the same lender to hold as margin. Congressional intent was clear on this point—end-users were not to be required to post margin. We appreciate the House of Representatives reaffirming this by passing the 

Business Risk Mitigation and Price Stabilization Act back in March. 

Thank you again for the opportunity to testify today before the Committee. We 

appreciate your role in ensuring that farmer cooperatives will continue to be able 

to effectively hedge commercial risk and support the viability of their members’ 

farms and cooperatively owned facilities. I look forward to answering any questions 

you may have. 

ATTACHMENT

August 8, 2011

DAVID A. STAWICK,

Secretary, 

Commodity Futures Trading Commission, 

Washington, D.C.

RE: Adaptation of Regulations to Incorporate Swaps; Notice of Proposed 

Rulemaking (Federal Register/Vol. 76, No. 109)

Dear Mr. Stawick:

On behalf of the more than two million farmers and ranchers who belong to farmer cooperatives, the National Council of Farmer Cooperatives (NCFC) submits the 

following comments in response to the Commodity Futures Trading Commission’s 

(the Commission) request for comments: Adaptation of Regulations to Incorporate 

Swaps; Notice of Proposed Rulemaking, to amend the Commodity Exchange Act regulations to implement regulatory requirements contained in Title VII of the DoddFrank Wall Street Reform and Consumer Protection Act. 

Since 1929, NCFC has been the voice of America’s farmer cooperatives. Our members are regional and national farmer cooperatives, which are in turn composed of 

over 2,500 local farmer cooperatives across the country. NCFC members also include 

21 state and regional councils of cooperatives. 

America’s farmer-owned cooperatives provide a comprehensive array of services 

for their members. These diverse organizations handle, process and market virtually 

every type of agricultural commodity produced. They also provide farmers with access to infrastructure necessary to manufacture, distribute and sell a variety of farm 

inputs. For example, a cooperative may consist of a closely coordinated network to 

ensure timely and cost-efficient origination, storage, transportation and marketing 

of grain and oilseeds. 

Proposed Changes to Regulation 1.35

NCFC is concerned with this proposal because it would not only add swaps to the 

new record-keeping requirements, but also would extend the new record-keeping reVerDate 0ct 09 2002 10:19 Jan 04, 2013 Jkt 041481 PO 00000 Frm 00082 Fmt 6633 Sfmt 6621 I:\DOCS\112-34\75437.TXT BRIAN
79

quirements to cash purchase and forward cash contracts entered into by any member of a designated contract market (DCM). 

This would require all farmer cooperatives that are members of DCMs (CME, 

KCBT, MGE, etc.), and by extension every one of their local facilities, to be bound 

by this regulation. For example, cooperatives that are members of DCMs have an 

integrated network of grain elevators to originate and store grain purchased from 

farmers. As such, the proposed change to 1.35(a) would require those elevators to 

record, among other things, all oral communications that lead to execution of cash 

transactions with farmers. The proposal includes (proposed additions in italics):

Included among such records shall be all orders (filled, unfilled, or canceled), 

trading cards, signature cards, street books, journals, ledgers, canceled checks, 

copies of confirmations, copies of statements of purchase and sale, and all other 

records, which have been prepared in the course of its business of dealing in 

commodity interests and cash commodities, and all oral and written communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading, and prices, that lead to the execution of transactions in a 

commodity interest or cash commodity, whether communicated by telephone, 

voicemail, facsimile, instant messaging, chat rooms, electronic mail, mobile device or other digital or electronic media. Each transaction record shall be maintained as a separate electronic file identifiable by transaction and counterparty.

Additionally, all such recorded communications would be required to be maintained for 5 years. 

A requirement to record all communication leading to a cash purchase or cash forward contract would impose huge regulatory burdens and costs on cooperatives and 

other businesses and farmers in rural America. In fact, the necessary investment 

to put in place and maintain such a system would not only greatly add to the cost 

of doing business, but would be an extreme compliance burden for the cash grain 

community. 

The Commission states these record-keeping requirements would protect customers from abusive sales practices; protect registrants from risks associated with 

transactional disputes; allow registrants to follow up more effectively on customer 

complaints; and preserve evidence that could increase the effectiveness of the Commission’s enforcement actions. We do not believe that requiring this additional information to be recorded and maintained is necessary to achieve the stated goals in 

the cash commodity markets. 

Additionally, we do not believe the intent of the Dodd-Frank Act was to subject 

cash purchases and forward cash contracts to the additional new record-keeping requirements proposed under regulation 1.35. In fact, cash and forward contracts have 

been excluded from the definition of a swap in the proposed product definitions rule. 

Commission Chairman Gary Gensler has highlighted that point on several occasions 

while testifying before Congress. We believe this proposed regulation, as written to 

apply to the cash market, is in direct contradiction to that exclusion and to the Congressional intent of the Dodd-Frank Act. 

We would be pleased to discuss with the Commission our concerns with proposed 

regulation 1.35. Thank you taking our views into account as the Commission finalizes rules in the coming months. We appreciate the opportunity to provide input 

throughout the process of implementation of Title VII of the Dodd-Frank Act. 

Sincerely,

CHARLES F. CONNER, 

President & CEO.

The CHAIRMAN. Thank you. 

Mr. McElroy, you are recognized for 5 minutes. You may proceed 

whenever you are ready. 

STATEMENT OF PAUL E. MCELROY, CHIEF FINANCIAL OFFICER, JEA, JACKSONVILLE, FL; ON BEHALF OF AMERICAN 

PUBLIC POWER ASSOCIATION 

Mr. MCELROY. Chairman Lucas, Ranking Member Boswell, and 

Committee Members, thank you for the opportunity to testify this 

morning. I am Paul McElroy, Chief Financial Officer for JEA. JEA 

proudly serves more than 400,000 electric customers in and around 


11234002.eps
80

Jacksonville, Florida. Our business is ensuring that our customers’ 

electric demands are met reliably and economically today and for 

generations to come. 

I am testifying on behalf of the American Public Power Association, APPA, the national service organization representing over 

2,000 government-owned electric utilities providing power to more 

than 46 million people. Additionally, my comments are supportive 

of the positions of the Large Public Power Council, which represents the 26 largest municipal entities in the country. 

Today I will discuss the swap-dealer rule under the Dodd-Frank 

Act. APPA supports Dodd-Frank and continues to work with the 

CFTC and others to improve its implementation. Chairman 

Gensler mentioned our involvement earlier today. However, we remain concerned that the CFTC’s swap-dealer rule, which took effect Monday, will hinder our members’ ability to hedge commercial 

price and operational risks. 

We have a long and successful history of hedging commercial risk 

for the benefit of our customers, often utilizing swaps of physical 

commodities such as natural gas, electric capacity and energy, and 

coal, all of which are needed for our commercial operations. This 

is not different than swap activity used in the operations-related 

hedging activity of any other electric utility. At issue are the de 

minimis thresholds set by the CFTC to determine whether a swap 

participant is a swap dealer. Under the rule, a swap participant 

will be considered a swap dealer if it engages in more than $3 billion in swap dealing but just $25 million if dealing with special entities. Special entities are governmental entities including government-owned utilities such as APPA’s members. The CFTC says it 

imposed the $25 million threshold in light of the protections that 

Dodd-Frank provides for special entities. However, Dodd-Frank 

never mentions forcing a non-financial participant into the swapdealer regime for entering into swaps with a special entity. 

Our concern is that non-financial entities on whom we rely for 

hedging such as natural gas producers, independent generators and 

investor-owned utility companies will stop dealing with us to avoid 

the $25 million threshold because but for those dealings with us, 

they would not be pulled into the Dodd-Frank swap-dealer regime. 

We are also concerned that large financial firms, ones which will 

be considered swap dealers in any case, will not fill this gap. Electric power is regionally diverse in both supply and demand. Because of this diversity, there are often limited counterparties for 

operations-related swaps. Large financial institutions may neither 

have the ability nor the desire to provide such highly customized, 

localized transactions. 

The loss of non-financial swap partners will put us at a disadvantage to other utilities in our ability to effectively manage 

power supply costs and operations for our customers. Each swap 

counterparty in the market brings important market liquidity and 

diversity. If non-financial parties refuse to enter into swaps with 

us, price competition will be reduced, operational risk will increase, 

and our ratepayers will be hurt. This will affect all APPA members 

and so APPA and other government-owned utility groups have petitioned the CFTC to amend the swap-dealer rule. 

81

1 CFTC Regulation 1.3(ggg)(4); see 77 Fed. Reg. 30596, at 30744. 2 7 USCA § 6s(h)(4). 

Our proposed amendment would not, and I will repeat, would not 

remove the overall swap-dealer threshold nor the sub-threshold. It 

simply asks that our operations-related swaps not count toward the 

special-entities sub-threshold. Local- and state-owned utilities have 

experience and expertise to understand the operations-related 

swaps transactions they use to manage their commercial risk and 

do not need the special protections intended by the $25 million subthreshold. In fact, and ironically, these protections will likely expose us and our customers to greater risk. 

Thank you for this opportunity again to testify. 

[The prepared statement of Mr. McElroy follows:]

PREPARED STATEMENT OF PAUL E. MCELROY, CHIEF FINANCIAL OFFICER, JEA, 

JACKSONVILLE, FL; ON BEHALF OF AMERICAN PUBLIC POWER ASSOCIATION

Mr. Chairman and Members of the Committee, I am Paul McElroy, Chief Financial Officer for JEA testifying today on behalf of the American Public Power Association (APPA). APPA is the national service organization representing the interests 

of over 2,000 municipal and other state- and locally-owned, not-for-profit electric 

utilities throughout the United States (all but Hawaii). Collectively, public power 

utilities deliver electricity to one of every seven electricity customers in the United 

States (approximately 46 million people), serving some of the nation’s largest cities. 

However, the vast majority of APPA’s members serve communities with populations 

of 10,000 people or less. 

JEA is a member of APPA. We are located in Jacksonville, Florida, and proudly 

serve an estimated 420,000 electric, 305,000 water, and 230,000 sewer customers in 

Northeast Florida. JEA was created by the City of Jacksonville to serve those who 

live there and in the surrounding communities. The sole purpose of our business is 

to ensure that the electric, water and sewer demands of our customers are met, both 

today and for generations to come. Our goal is to provide reliable services at a good 

value to our customers while ensuring that our areas’ precious natural resources are 

protected. 

Public Power Utilities and Implementation of the Dodd-Frank Act 

APPA supports the goals of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act) and has worked closely with the Commodity Futures Trading Commission (CFTC) and other interested parties hoping to improve 

its implementation, particularly related to regulations affecting ‘‘end-users’’ of energy such as JEA and other APPA members. Even today, now 2 years after enactment, the full effect of the Dodd-Frank Act on public power utilities is unclear as 

regulations implementing the statute continue to be promulgated. We strongly support the CFTC’s efforts to issue these regulations in a timely fashion while also accommodating a necessary discussion among stakeholders to fully vet these rules for 

unintended or adverse consequences. 

One such instance is the final swap-dealer rule,1 which took effect on July 23, 

2012. As written, the rule will substantially hinder public power and public gas utilities’ ability to hedge against operational risks. Just like JEA, these utilities have 

no shareholders, so the costs imposed by this regulatory decision will be borne by 

only one group: our ratepayers. 

As you know, the Dodd-Frank Act requires swap dealers and major swap participants to register with the CFTC and meet capital, margin, and reporting and 

record-keeping requirements, as well as to comply with rigorous business conduct 

and documentation standards. The Dodd-Frank Act provides additional standards 

for swap dealers or major swap participants advising or entering into swaps with 

government-owned utilities and other government entities (referred to under the 

statute as ‘‘special entities’’). For swap dealers advising or seeking to advise a special entity, the law states that it is ‘‘unlawful’’ to defraud that special entity.2 For 

swap dealers or major swap participants entering into swaps with special entities, 

the law states that these dealers and swap participants must comply with rules set 

82

3 7 USCA § 6s(h)(5). 4 7 USCA § 1a(49)(D). 5 By way of reference a single, 1 year 100 MW swap could have a roughly $25 million notional 

value. One-hundred MWs of power is enough to serve the average demand of approximately 

75,000 residential customers. 

by the CFTC requiring special entities to have an independent representative before 

trading with a swap dealer or major swap participant.3

In December 2010, the CFTC (jointly with the Securities and Exchange Commission) issued a proposed rule to define the term ‘‘swap dealer,’’ including (as required 

by the Dodd-Frank Act) 4 an exemption from the swap-dealer designation for those 

entities that engage in a de minimis quantity of swap dealing. 

In the proposed rule, CFTC proposed two separate de minimis thresholds relating 

to the dollar quantity of swaps: $100 million annually for an entity’s total swapdealing activity; and, $25 million annually for an entity’s swap-dealing activity with 

special entities, including, as noted above, public power, public gas, and Federal 

utilities (government-owned utilities). 

In February, 2011, the Not-For-Profit Electric End User Group (NFP EEU)—

which includes APPA-filed comments on the proposed swap dealer rule. The comments recommended that the CFTC substantially increase the de minimis thresholds both for total swaps and for swaps with special entities. 

A final rule was approved by the CFTC on April 18, 2012, and was published in 

the Federal Register on May 23, 2012. The final rule greatly increased the overall 

de minimis threshold from the proposed rule, raising it from $100 million to $3 billion. During an initial phase-in period, this threshold will be $8 billion. But, the 

final rule did not change the proposed rule’s $25 million sub threshold for swapdealing activities with special entities. Thus, the disparity between the two thresholds is now substantially greater. This $25 million sub-threshold is smaller still 

when you consider that it is the aggregate of a swap partner’s transactions with all

special entities during any 12 month period.5

As a result, non-financial entities (such as natural gas producers, independent 

generators, and investor-owned utility companies) that do not want to be swap dealers will severely limit their swap-dealing activities with government-owned utilities 

to avoid exceeding the $25 million threshold. 

Why Hedging Is Necessary 

Government-owned utilities depend on nonfinancial commodity transactions, trade 

options and ‘‘swaps,’’ as well as the futures markets, to hedge commercial risks that 

arise from their utility facilities, operations and public service obligations. Together, 

nonfinancial commodity markets play a central role in the ability of governmentowned utilities to secure electric energy, fuel for generation, and natural gas supplies for delivery to consumers at reasonable and stable prices. Specifically, many 

government-owned utilities purchase firm electric energy, fuel and gas supplies in 

the physical delivery markets (in the ‘‘cash’’ or ‘‘spot’’ or ‘‘forward’’ markets) at prevailing and fluctuating market prices, and enter into bilateral, financially-settled 

nonfinancial commodity swaps with customized terms to hedge the unique operational risks to which many government-owned utilities are subject. 

In hedging, mitigating or managing the commercial risks of their utility facilities’ 

operations or public service obligations, government-owned utilities are engaged in 

commercial risk management activities that are no different from the operations-related hedging of an investor-owned utility or an electric cooperative located in the 

same geographic region. 

Why Nonfinancial Counterparties Are Necessary 

Electric power touches virtually every home and business in the United States. 

This near universality gives a false appearance of homogeneity. It is important to 

remember that what is being delivered is a physical commodity, e.g., electricity, coal, 

or natural gas. Ownership of a stock can be transferred coast to coast with a click 

of a button, but electricity must be delivered to the place it is to be used. 

Each regional geographic market has a somewhat different set of demands driven 

by climate, weather, population, and the like. Each regional geographic market also 

has a somewhat different group of financial entity counterparties and nonfinancial 

entity counterparties available to meet these demands and thus able to enter into 

customized utility operations-related swaps needed for hedging price and supply 

risks. For example, a large merchant electric generation station in western Alabama 

might be available as a nonfinancial counterparty for a swap transaction to provide 

electricity to a specific site in Alabama. But that same entity would not necessarily 

83

6 A physical exchange would be structured as two separate purchase power agreements, incorporating the costs of transmission and ancillary services. 7 An electric distribution utility is one which solely distributes electricity, as distinguished 

from one which generates and distributes electricity. 

be able to offer the electricity in Oregon, and so would not be able to help an Oregon-based utility hedge its risks. 

Because there are a limited number of counterparties for any particular operations-related swap sought by a utility, each financial or nonfinancial swap 

counterparty brings important market liquidity and diversity. The greater the number of counterparties, the greater the price competition. Conversely, reduced price 

competition necessarily increases prices. 

JEA and the Special Entity Sub Threshold 

I would like to illustrate these points with examples from my JEA’s perspective. 

As discussed above, the primary mission of JEA’s electric system is to provide reliable and low cost electricity to our customers. I will say that again. While ensuring 

sufficient supply to serve our customers is primary, running a very close second is 

managing commodity fuel and purchased power costs. We accomplish this by efficiently and cost-effectively managing supply and price risks inherent in the procurement of fuel and power. 

Take, for example, a capacity and energy swap between JEA and another municipal utility. This swap is intended to diversify our electric generation capability. By 

way of background, JEA has a large commitment solid fuel, while our swap partner 

in this example has a significant commitment to natural gas. And, history has 

taught us the importance of diversification time and time again. 

This swap would be governed by Dodd-Frank: it would qualify for the end-user 

exception so would not have to be cleared, but one of the parties would have to report the transaction. However, the notional amount of the swap would exceed $25 

million, and, if it were considered ‘‘dealing’’ activity under the rules’ facts and circumstances guidelines, would invoke the sub-threshold provision. 

This leaves us with the options of (1) having one party register as a dealer, (2) 

placing a registered dealer between the parties, or (3) affecting a physical exchange 

instead of a swap.6 All of these solutions add complexity and cost, do nothing to reduce systemic financial risk, and will cause the transaction to be abandoned. That 

said, the same transaction, were it not to involve special entities, would impose 

none of the added cost and complexity. This seems neither appropriate, nor fair. 

Likewise, JEA seeks to maximize flexibility regarding terms and conditions governing supply and price in all long-term fuel and purchased power contracts. This 

gives us the flexibility to efficiently and cost-effectively manage supply and price 

risks in fuel and power procurement. However, we have been told by several nonfinancial energy suppliers who currently serve as swap partners, none of whom are 

currently dealers, that they are looking closely at the ‘‘special entity sub-threshold’’ 

to determine the terms and conditions they may be willing to extend to us in the 

future. 

When a major fuel supplier says they are ‘‘reevaluating’’ contractual terms and 

conditions, it almost certainly means that the level of flexibility we currently enjoy 

will be curtailed or eliminated and our costs and risk profile will increase. Again, 

however, this supplier can continue to extend to utilities that are not special entities 

contracts under the existing terms. And again, this seems neither appropriate, nor 

fair. 

These are just two examples of how the sub threshold will affect JEA. As noted 

above there is a great deal of heterogeneity among APPA members, including in the 

use of hedging. Some make substantial use of hedging: others do not. Likewise, of 

APPA members who do make use of hedging, a recent informal survey of members 

showed great diversity in terms of the volume of hedging and the extent to which 

members relied on non-financial entities. 

However, the rules could still affect all of our members. Members currently hedging will be affected, but so will smaller members who buy power from larger members who do. For example, while a small municipal electric distribution utility 7 in 

Oklahoma might not hedge its risks, it may buy its power from a larger public 

power provider—such as the Oklahoma Municipal Power Authority—which does. 

Also, those who do not currently hedge will be restricted in their ability to do so 

in the future. 

The CFTC has said that it retained the $25 million threshold in light of the special protections that the Dodd-Frank Act affords to special entities. However, the 

statute does not require—even mention—special protections for special entities in 

regard to the swap dealer definition. As noted above, the law imposes requirements 

84

on swap dealers and major participants advising or entering into swaps with special 

entities. Nowhere does the law mention deeming a participant to be a swap dealer 

solely because they happen to be entering into swaps with a government-owned utility. 

APPA thinks the distinction in the law is appropriate. Government-owned utilities 

understand the operations-related swap transactions they use to manage their commercial risks and do not need the special protections provided by the $25 million 

sub-threshold. In fact, and ironically, these ‘‘protections’’ are likely to limit 

the ability of these utilities to hedge operational and price risks rather 

than to protect these utilities and their customers from risk.

Government-Owned Utilities’ Petition for Rulemaking 

On July 12, 2012, APPA, the Large Public Power Council (LPPC), the American 

Public Gas Association (APGA), the Transmission Access Policy Study Group 

(TAPS), and the Bonneville Power Administration (BPA), filed with the CFTC a ‘‘Petition for Rulemaking to Amend CFTC Regulation 1.3(ggg)(4).’’ The petition (see the 

attachment to this testimony) requests that the CFTC amend its swap-dealer rule 

to exclude utility special entities’ operations-related swap transactions from counting towards the special-entity threshold. This amendment to the swap-dealer rule 

would allow producers, utility companies, and other non-financial entities to enter 

into energy swaps with government-owned utilities without danger of being required 

to register as a ‘‘swap dealer’’ solely because of their dealings with governmentowned utilities. 

Specifically, the petition asks for a narrow exclusion:

• A government-owned utility’s swaps related to utility operations would not 

count towards the special entity de minimis threshold, but would count towards 

the total de minimis threshold.

• Utility operations-related swaps are those entered into to hedge commercial 

risks intrinsically related to the utility’s electric or natural gas facilities or operations or to the utility’s supply of natural gas or electricity to other special entities. For example, these would include swap transactions related to the generation, production, purchase or sale, or the transportation of electric energy or 

natural gas, or related to fuel supply of electric generating facilities.

• Utility operations-related swaps do not include interest rate swaps. Those 

swaps would remain subject to the $25 million special entity sub-threshold.

We urge Committee Members to support this petition. 

Conclusion 

In conclusion, the protections the CFTC is trying to afford through the $25 million 

special entity sub-threshold were not contemplated by the Dodd-Frank Act and are 

not needed for government-owned utility swaps related to utility operations. Government-owned utilities are well-versed in the markets in which they are hedging their 

risks and rely on these swaps solely to manage price and operational risks. More 

importantly, the assumption that financial firms will be able to replace all the 

swaps offered currently by our nonfinancial swap partners reflects a dangerous misunderstanding of how electricity is delivered and an indifference to the price Wall 

Street will impose in the absence of adequate competition and to the risk to supply 

if that price cannot be afforded. In sum, a failure to allow the narrow exclusion 

sought in our petition will limit our members’ ability to hedge against risks and lead 

to increased risk and costs to the millions of ratepayers they serve. 

Thank you again for this opportunity to testify, and I would be more than happy 

to answer any questions you might have. 

ATTACHMENT

July 12, 2012

DAVID STAWICK, 

Office of the Secretariat, 

Commodity Futures Trading Commission, 

Washington, D.C.

Re: Petition for Rulemaking to Amend CFTC Regulation 1.3(ggg)(4)

Dear Mr. Stawick:

The American Public Power Association (‘‘APPA’’), the Large Public Power Council 

(‘‘LPPC’’), the American Public Gas Association (‘‘APGA’’), the Transmission Access 

Policy Study Group (‘‘TAPS’’) and the Bonneville Power Administration (‘‘BPA’’) (colVerDate 0ct 09 2002 10:19 Jan 04, 2013 Jkt 041481 PO 00000 Frm 00088 Fmt 6633 Sfmt 6621 I:\DOCS\112-34\75437.TXT BRIAN
85

8 77 Fed. Reg. 30596, at 30744. 9Pub. L. No. 111–203, 124 Stat. 1376 (2010). 

10 77 Fed. Reg. 30744–30745. 

lectively, the ‘‘Petitioners’’) respectfully petition the Commodity Futures Trading 

Commission (the ‘‘Commission’’ or the ‘‘CFTC’’) under CFTC Regulation 13.2 to 

amend CFTC Regulation 1.3(ggg)(4),8 which implements the de minimis exception 

to the definition of ‘‘swap dealer.’’ The Petitioners specifically request that the rule 

amendment exclude from the ‘‘special entity sub-threshold,’’ which appears in Regulation 1.3(ggg)(4)(i), ‘‘Utility Operations-Related Swaps’’ to which the Petitioners and 

other ‘‘Utility Special Entities’’ are, or may in the future be, counterparties. The 

definitions of ‘‘Utility Operations-Related Swap’’ and ‘‘Utility Special Entity’’ are included directly in the text of the proposed rule amendment, and narrowly circumscribe the scope of the proposed rule amendment. 

Such a rule amendment is permitted by Section 1a(49)(D) of the Commodity Exchange Act (‘‘CEA’’) as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the ‘‘Dodd-Frank Act’’),9 and is specifically contemplated by CFTC Regulation 1.3(ggg)(4)(v).10 The rule amendment is necessary 

in order to preserve uninterrupted and cost-effective access to the customized, nonfinancial commodity swaps that Petitioners and other Utility Special Entities use 

to hedge or mitigate commercial risks arising from their utility facilities, operations 

and public service obligations. 

The information required by CFTC Regulation 13.2 follows: 

I. The Text Of The Proposed Rule Amendment (Additional language is underlined and italicized) 

PART 1—GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE 

ACT 

* * * * * * *

Section 1.3 Definitions. 

* * * * * * *

(ggg) SWAP DEALER.

* * * * * * *

(4) DE MINIMIS EXCEPTION. (i) Except as provided in paragraph 

(ggg)(4)(vi) of this section, a person that is not currently registered as a 

swap dealer shall be deemed not to be a swap dealer as a result of its swap 

dealing activity involving counterparties, so long as the swap positions connected with those dealing activities into which the person—or any other entity controlling, controlled by or under common control with the person—

enters over the course of the immediately preceding 12 months (or following 

the effective date of final rules implementing Section 1a(47) of the Act, 7 

U.S.C. 1a(47), if that period is less than 12 months) have an aggregate 

gross notional amount of no more than $3 billion, subject to a phase in level 

of an aggregate gross notional amount of no more than $8 billion applied 

in accordance with paragraph (ggg)(4)(ii) of this section, and an aggregate 

gross notional amount of no more than $25 million (the ‘‘special entity subthreshold’’ with regard to swaps in which the counterparty is a ‘‘special entity’’ (as that term is defined in Section 4s(h)(2)(C) of the Act, 7 U.S.C. 

6s(h)(2)(C), and § 23.401(c) of this chapter); provided that such $25 million special entity sub-threshold shall not apply with regard to ‘‘utility operations related 

swaps’’ to which the counterparty is a ‘‘utility special entity.’’ For purposes of this 

paragraph, (A) a ‘‘utility special entity’’ means a government ‘‘special entity’’ (as 

described in clause (i) or (ii) of Section 4s(h)(2)(C) of the Act or in clause (1) or 

(2) of § 23.401(c) of this chapter) that owns or operates electric or natural gas facilities or electric or natural gas operations (or anticipated facilities or operations), supplies natural gas and/or electric energy to other utility special entities, has public 

service obligations (or anticipated public service obligations) under Federal, state or 

local law or regulation to deliver electric energy and/or natural gas service to utility 

customers, or is a Federal power marketing agency as defined in Section 3 of the 

Federal Power Act (16 U.S.C. 796(19)), and (B) a ‘‘utility operations-related swap’’ 

shall mean any swap that a utility special entity enters into ‘‘to hedge or mitigate 

commercial risks’’ (as such phrase is used in Section 2(h)(7)(A)(ii) of the Act) intrinsically related to the electric or natural gas facilities that the utility special entity 

owns or operates or its electric or natural gas operations (or anticipated facilities 

or operations), or to the utility special entity’s supply of natural gas and/or electric 

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11 BPA has 130 preference customers made up of electric utilities which are not subject to the 

jurisdiction of the Federal Energy Regulatory Commission (‘‘FERC’’), including Indian tribes, 

electric cooperatives, state and municipally chartered electric utilities, and other Federal agencies located in the Pacific Northwest. 

energy to other utility special entities or to its public service obligations (or anticipated public service obligations) to deliver electric energy or natural gas service to 

utility customers. For the avoidance of doubt, ‘‘intrinsically related’’ shall include all 

transactions related to (i) the generation or production, purchase or sale, and transmission or transportation of electric energy or natural gas, or the supply of natural 

gas and/or electric energy to other utility special entities, or delivery of electric energy or natural gas service to utility customers, (ii) all fuel supply for the utility special entity’s electric facilities or operations, (iii) compliance with electric system reliability obligations applicable to the utility special entity, its electric facilities or operations, (iv) compliance with energy, energy efficiency, conservation or renewable energy or environmental statutes, regulations or government orders applicable to the 

utility special entity, its facilities or operations, or (v) any other electric or natural 

gas utility operations-related swap to which the utility special entity is a party. Utility 

operations-related swaps shall not include a swap based or derived on, or referencing, commodities in the interest rates, credit, equity or currency asset classes, 

or a product type or category in the ‘‘other commodity’’ asset class that is based 

or derived on, or referencing, metals, or agricultural commodities or crude oil or gasoline commodities of any grade not used as fuel for electric generation. For purposes of this paragraph, if the stated notional amount of a swap is leveraged or enhanced by the structure of the swap, the calculation shall be 

based on the effective notional amount of the swap rather than on the stated notional amount. 

II. The Petitioners 

APPA is the national association that represents the interests of approximately 

2000 government-owned electric utilities in the United States. APPA’s member utilities are not-for-profit utility systems that were created by state or local governments 

to serve the public interest. Government-owned electric utilities provide over 15% 

of all KWh sales to retail electric customers. 

LPPC is an organization representing 26 of the largest government-owned electric 

utilities in the nation. LPPC members own and operate over 86,000 megawatts of 

generation capacity and nearly 35,000 circuit miles of high voltage transmission 

lines, representing nearly 90% of the transmission investment owned by non-Federal Government-owned electric utilities in the United States. 

TAPS is an association of transmission dependent electric utilities located in more 

than 30 states. All of TAPS member electric utilities except one are governmentowned electric utilities. 

APGA is the national association that represents government-owned natural gas 

distribution systems. There are approximately 1,000 public gas systems in 36 states 

and over 720 of these systems are APGA members. Government-owned natural gas 

distribution systems are not-for-profit entities owned by, and accountable to, the 

citizens they serve. They include municipal gas distribution systems, public utility 

districts, county districts, and other government agencies that have natural gas distribution facilities. 

Some government-owned utilities are both electric utilities and natural gas distribution utilities, and are therefore members of both APPA and APGA. The purpose 

of a government-owned electric utility or natural gas distribution system is to provide reliable, safe and affordable electric energy and/or natural gas service to the 

community it serves. 

BPA is a self-financed, nonprofit Federal agency created in 1937 by Congress that 

primarily markets electric power from 31 federally owned and operated projects, and 

supplies over 1⁄3 of the electricity used in the Pacific Northwest. BPA also owns and 

operates approximately 75 percent of the high-voltage transmission in the Pacific 

Northwest. BPA’s primary statutory responsibility is to market its Federal system 

power at cost-based rates to its ‘‘preference customers.’’ 11 BPA also funds one of the 

largest wildlife protection and restoration programs in the world. 

III. Nature of the Petitioners’ Interest 

APPA, LPPC, TAPS and APGA represent thousands of government-owned electric 

and natural gas utilities throughout the United States, all of which are ‘‘special entities’’ as that term is defined in Section 4s(h)(2)(C) of the Commodity Exchange Act, 

as amended by the Dodd-Frank Act, and § 23.401(c) of the Commission’s regulations. 

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12 According to the Energy Information Administration, there are nine Federal electric utilities 

in the United States, which are part of several agencies of the United States Government (see, 

http://www.eia.gov/cneaf/electricity/page/prim2/toc2.html): the Army Corps of Engineers; the 

Bureau of Indian Affairs and the Bureau of Reclamation in the Department of the Interior, the 

International Boundary and Water Commission in the Department of State, the Power Marketing Administrations in the Department of Energy (BPA, Western Area Power Administration, 

Southwestern Area Power Administration, and Southeastern Area Power Administration), and 

the Tennessee Valley Authority (TVA). 

In addition, three Federal agencies operate electric generating facilities: TVA, the largest Federal power producer; the U.S. Army Corps of Engineers; and the U.S. Bureau of Reclamation. 13This term has not yet been defined by the Commission to the extent required to provide 

regulatory clarity to Petitioners and others in the utility industry. The Petitioners and others 

in the utility industry await publication in the Federal Register of rules further defining ‘‘swap,’’ 

along with the Commission’s response to public comments on any further questions asked by 

the Commission in the most recent statutory interpretations relevant to the definition of ‘‘swap,’’ 

the Commission’s response to comments solicited on the nonfinancial commodity ‘‘trade option’’ 

Interim Final Rule, the CFTC/FERC jurisdictional Memoranda of Understanding called for by 

Section 720 of the Dodd-Frank Act, the ‘‘tariffed transaction exemption(s)’’ and ‘‘between FPA 

201(f) transaction exemption’’ called for in new CEA Sections 4(c)(6), and other final rules, interpretations and exemptions. See the comment letter filed by the Electric Trade Associations in 

the ‘‘Product Definitions’’ or ‘‘Definition of ‘‘Swap’’ docket at: http://comments.cftc.gov/

PublicComments/ViewComment.aspx?id=47934&SearchText=Wasson, and other comment letters, applications and petitions filed by the Petitioners and others in the utility industry. 

There is no need to wait to consider the proposed rule amendment for the effective date of 

the Commission’s final rules further defining the term ‘‘swap.’’ The proposed rule amendment, 

as drafted, will only be applicable to those utility operations-related transactions which are ultimately subject to the Commission’s jurisdiction as ‘‘swaps,’’ and would therefore be considered 

part of an entity’s ‘‘swap dealing activity,’’ and counted against either the general de minimis

threshold or the special entity sub-threshold. In this manner, the proposed rule amendment is 

similar to all the Commission’s regulations that include the term ‘‘swap,’’ including the Entity 

Definition rules themselves. None of these regulations can be fully understood or applied to Petitioners’ and other market participants’ businesses until the Commission’s final rules further defining ‘‘swap’’ and other foundational terms that include the term ‘‘swap’’ are effective for relevant asset classes and product types. 

BPA and the other Federal power agencies are ‘‘special entities’’ as well.12 The Petitioners respectfully seek the rule amendment for the benefit of all ‘‘Utility Special 

Entities’’ that currently, or may in the future, enter into Utility Operations-Related 

Swaps with counterparties that are not registered with the Commission as ‘‘swap 

dealers.’’ 

‘‘Utility Special Entities,’’ as defined in the proposed rule amendment, are a narrow category of special entities distinguishable by their electric energy and/or natural gas utility facilities, operations and public service obligations. None of the Utility Special Entities is a ‘‘financial entity;’’ all are nonfinancial entities and ‘‘commercial end-users’’ as such term is used by Congress and regulatory policy makers. 

‘‘Utility Operations-Related Swaps,’’ as defined in the proposed rule amendment, are 

a narrow category of ‘‘swaps’’ 13 in the nonfinancial or ‘‘other commodity’’ asset class. 

Such swaps are, by definition, of product types intrinsically related to the commercial risks associated with utility facilities, operations and public service obligations, 

and are used to hedge or mitigate such commercial risks. Such customized nonfinancial commodity swaps are typically not available on exchanges or electronic 

trading platforms, due to the myriad non-numeric operational conditions, requirements and permutations embedded in such swaps. 

The Petitioners commented on the Commission’s proposed rules further defining 

‘‘swap dealer’’ raising concerns that both the general de minimis threshold and the 

‘‘special entity sub-threshold’’ needed to be raised significantly. See comments filed 

by NFP Electric End User Coalition, including APPA and LPPC with assistance 

from TAPS, in the Commission’s ‘‘Entity Definitions’’ docket, a link to which appears 

at: http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=27917&

SearchText=rural at 18–19, supporting the comments filed by the Edison Electric Institute and the Electric Power Supply Association in the same docket requesting significantly higher thresholds for both the general de minimis threshold and the special entity sub-threshold than were proposed by the Commission, a link to which 

appears at: http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=

27918&SearchText=. The Commission acknowledges the Petitioners’ comments in numerous places in 

the Adopting Release for the Entity Definitions rules (the ‘‘Adopting Release’’). See,

for example, 77 Fed. Reg. 30627 and 30707. In the final rules, however, the Commission raised the general de minimis threshold by a factor of 80 during the phase in period (and by a factor of 30 thereafter)—from $100 million to $8 billion during the 

phase in period (and $3 billion thereafter). In contrast, the Commission left the special entity sub-threshold unchanged at $25 million. The Petitioners’ concern about 

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14The word ‘‘markets’’ is used in quotations in this context, as Utility Operations-Related 

Swaps do not occur with anywhere near the frequency or uniformity that financial ‘‘swaps’’ 

occur, or that agricultural, metals, global oil or other product types of ‘‘swaps’’ in the ‘‘other commodity’’ asset class occur. Utility Operations-Related Swaps are, in some cases, negotiated over 

a period of days, weeks or months. Some may be documented based on a master agreement template, with many pages of specialized operational, credit and other risk management provisions 

included by the bilateral counterparties as schedules. Transacting under standardized master 

agreement templates (with bilaterally negotiated schedules and transaction documents) should 

not be confused with a conclusion or an assumption that there is a trading ‘‘market’’ for Utility 

Operations-Related Swaps having, standardized or ‘‘market’’ terms. 15 Utility Special Entities may also be called upon from time to time by other utilities located 

in the same geographic region, by or in coordination with electric reliability organizations, to 

act as counterparties in Utility Operations-Related Swaps for electric system reliability purposes. Such swaps should not be considered ‘‘swap dealing activity’’ by the utility counterparty 

or counterparties to such swaps. Otherwise, the Utility Special Entities may not be able to participate in such swaps for reliability purposes without causing the counterparty to exceed the 

Special Entity Sub-Threshold, which may compromise the reliability of the interconnected electric system. 

the competitive disadvantage represented by the discrepancy between the two 

thresholds in the final rules is the reason for this Petition. 

A. Utility Special Entities Require Customized Utility Operations-Related Swaps. 

Utility Special Entities depend on nonfinancial commodity transactions, trade options and ‘‘swaps,’’ as well as the futures markets, to hedge commercial risks that 

arise from their utility facilities, operations and public service obligations. Together, 

these nonfinancial commodity markets play a central role in government-owned utilities securing electric energy, fuel for generation and natural gas supplies for delivery to consumers at reasonable and stable prices. Specifically, many governmentowned utilities purchase firm electric energy, fuel and gas supplies in the physical 

delivery markets (in the ‘‘cash’’ or ‘‘spot’’ or ‘‘forward’’ markets) at prevailing and 

fluctuating market prices, and enter into bilateral, financially-settled nonfinancial 

commodity swaps with customized terms to hedge the unique operational risks to 

which each Utility Special Entity is subject. 

The Utility Special Entities use Utility Operations-Related Swaps to ensure reliability of utility service and to reduce utility customers’ exposure to future commodity price fluctuations and to stabilize utility rates. In hedging, mitigating or 

managing the commercial risks of its utility facilities operations or public service 

obligations, the Utility Special Entity are engaged in commercial risk management 

activities that are no different from the operations-related hedging of an investorowned utility or an electric cooperative located in the same geographic region. 

B. The ‘‘Market’’ for Each Particular Utility Operations-Related Swap is Illiquid. 

Utility Special Entities enter into these bilateral customized swaps in illiquid regional or local ‘‘markets.’’ 14 Some counterparties available to transact with Utility 

Special Entities will be major financial institutions or other financial entities, such 

as hedge funds, that may or may not transact in other swap asset classes or product 

types. Other available counterparties will be nonfinancial counterparties, those 

which are not ‘‘financial entities’’ as such term is defined in CEA Section 2(h)(7)(C). 

Each Utility Special Entity actively seeks out available swap counterparties in 

order to hedge its unique, ongoing and dynamically-changing commercial risks.15

Commercial risk management policies in the energy industry typically require diversification of suppliers and swap counterparties, limited concentration of supplier/

vendor/counterparty credit risk, and other commercial risk management metrics to 

prudently manage the commercial risks of bilateral contracting processes. 

Each regional geographic market has a somewhat different group of financial entity and nonfinancial counterparties available to enter into customized Utility Operations-Related Swaps. An available counterparty may own or operate commercial 

businesses related to the particular nonfinancial commodity that underlies the Utility Operations-Related Swap. It may be a neighboring utility or electric cooperative, 

the owner of a merchant electric generation facility located in the area, or a natural 

gas or coal company with production assets in the region. 

For example, a large natural gas utility or the owner of a large merchant electric 

generation station in western Alabama might be available as a nonfinancial 

counterparty for swaps referencing an Alabama delivery point. But that same entity 

would not necessarily offer the type of customized Utility Operations-Related Swap 

required by a Utility Special Entity located in Oregon. Or, a natural gas producer 

or coal producer with production assets in Wyoming might offer Utility OperationsRelated Swaps required by a California-based or Oregon-based Utility Special Entity. But the same counterparty would not necessarily enter into a similar Utility OpVerDate 0ct 09 2002 10:19 Jan 04, 2013 Jkt 041481 PO 00000 Frm 00092 Fmt 6633 Sfmt 6621 I:\DOCS\112-34\75437.TXT BRIAN
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16 In the Adopting Release, the Commission cites comments made by Petitioners’ representatives and other energy industry market participants at the Commission Roundtable and meetings on these important points. See 77 Fed. Reg. at 30707–30708. Although a Utility Special 

Entity may be able to seek out a CFTC-registered Wall Street ‘‘swap dealer’’ or another financial 

entity, such as a hedge fund, to provide such a customized Utility Operations-Related Swap, if 

the ‘‘swap dealer’’ does not have assets in the region or is not otherwise active in the particular 

regional nonfinancial commodity swap market, the pricing and customization of the Utility Operations-Related Swap it offers are unlikely to be competitive. 17The nonfinancial counterparty may itself be entering into a Utility Operations-Related 

Swap ‘‘for the purpose of hedging physical positions,’’ as that phrase appears in CFTC Regulation 1.3(ggg)(6)(iii) and about which the Commission is seeking further comment in the Adopting 

Release. That regulation is identified as an ‘‘interim final rule,’’ and therefore presumably is still 

subject to further Commission rulemaking before the rules defining ‘‘swap dealer’’ are, indeed, 

final. See 77 Fed. Reg. 30612. See also footnote 6 with reference to the Commission’s anticipated 

further rulemakings on the definition of ‘‘swap’’ and nonfinancial commodity ‘‘trade options.’’ 18We have discussed the Special Entity Sub-Threshold issue with energy trade associations 

and with large nonfinancial entities that currently act as regular counterparties to Utility Special Entities in these types of swaps. A number of these entities have indicated to Petitioners 

that they share our concern about the sub-threshold, and that they are prepared to file comments in support of this Petition. See footnote 16. 19These examples are based on available quotes for 100 MWs of 7x24 electric energy for calendar year 2013 at Mid-C, PJM West and SP–15 for ‘‘Firm LD’’ power, and on Henry Hub calendar strip prices for natural gas. Each of these examples is for a relatively liquid delivery 

Continued

erations-Related Swap referencing a nonfinancial commodity delivered in the Southeast. Nor would it necessarily offer a Utility Operations-Related Swap referencing 

electric energy in any regional market. 

C. Utility Special Entities Need All Available Utility Operations-Related Swap 

Counterparties. 

Due to the limited number of counterparties for any particular Utility OperationsRelated Swap in any particular region, each available financial or nonfinancial swap 

counterparty, whether or not a registered ‘‘swap dealer,’’ brings important market 

liquidity or supplier/counterparty diversity for a Utility Special Entity. Multiple 

available counterparties create price competition for the customized swaps that a 

Utility Special Entity requires to cost-effectively hedge or mitigate unique commercial risks.16

Based on an informal survey of some of the larger Utility Special Entities, a substantial percentage of the counterparties that are currently available to enter into 

Utility Operations-Related Swaps with such Utility Special Entities are nonfinancial 

entities engaged in the electric, natural gas, coal or another aspect of the energy 

industry in the same geographic area as the specific Utility Special Entity. 

Wall Street financial institutions and other financial entities tend to offer such 

swaps only where there is standardization of transaction terms and liquid trading 

markets: at trading hubs where the financial entity’s swaps can be promptly and 

effectively hedged to maintain a ‘‘balanced book.’’ Nonfinancial entities with assets 

or operations located in the geographic region may, as a result, face parallel commercial risks and can use the Utility Operations-Related Swap to manage some portion or aspect of the commercial risks inherent in its own physical assets, liabilities 

and commercial obligations.17

Because the Utility Special Entity is hedging a commercial risk, its focus is to 

align the Utility Operations-Related Swap as closely as possible with the underlying 

and unique commercial risk being hedged, rather than to settle for a more standardized, shorter-term, and therefore less ‘‘perfect’’ (and consequently less cost-effective) 

hedge for such commercial risk.18

D. Utility Operations-Related Swaps Often Have Large Notional Amounts. 

Many Utility Operations-Related Swaps have longer terms than may be typical 

in other swap asset classes or product types, as a result of the long-term commercial 

risks being hedged—risks arising from long-term utility service obligations, construction projects, generation outage or availability projections, or long term fuel 

needs. Consequently, the notional amount of such swaps can be quite large. In addition, due to the volatile nature of the market prices of these nonfinancial commodities, the notional amounts can fluctuate dramatically over the term of a Utility Operations-Related Swap. The prices of electric energy, fuel and natural gas are among 

the most volatile of traded commodities, especially prices for illiquid delivery points, 

subject to regional supply and demand factors such as weather, and with customized 

operational conditions and terms. 

A single 1 year 100 MW swap or a single 3 year 10,000 mmBtu/day swap may have a notional value of $25 million.19 A nonfinancial entity would, therefore, be 

90

point, and for swaps that are not customized as are many Utility Operations-Related Swaps. 

To put these examples (and the $25 million Sub-Threshold) in context, the Los Angeles Department of Water and Power owns or operates 6,000 MWs of electric generation, and the New York 

Power Authority owns or operates 7,400 MWs of electric generation. JEA, formerly the Jacksonville Electric Authority, hedges approximately 13.8 million mmBtus of natural gas in an average 

year as part of its fuel procurement process for electric operations, based on the past 5 years 

actual hedging activity. If each of these Utility Special Entities was limited to one $25 million 

hedge per year with each non-‘‘swap dealer’’ counterparty, it would dramatically limit the ability 

of these Utility Special Entities to hedge or mitigate commercial risks arising from everyday 

utility operations. 20 An unintended consequence of the $25 million Special Entity Sub-Threshold applied to Utility Operations-Related Swaps will be to limit the Utility Special Entities’ available 

counterparties and force Utility Special Entities to engage in Utility Operations-Related Swaps 

with financial institutions and other entities that are registered with the CFTC. This would concentrate, not disperse, risk to the United States financial system. For financial institutions, such 

activity may or may not be an activity in which such financial institutions or their ‘‘banking 

entity’’ affiliates are permitted to engage once the regulations implementing the Volcker Rule 

and other provisions of the Dodd-Frank Act rulemakings are finalized. Such Utility OperationsRelated Swaps with ‘‘swap dealer’’ counterparties may also require the posting of margin by 

Utility Special Entities (depending on the applicable regulators’ final rules on capital and margin). 

available to enter into only one such swap with Utility Special Entity counterparties 

in any rolling twelve-month period. Otherwise, the nonfinancial entity risks exceeding the special entity sub-threshold, and would be required to register with the 

Commission as a ‘‘swap dealer.’’

E. Utility Special Entities are At a Competitive Disadvantage to Similarly-Situated 

Market Participants due to the Special Entity Sub-Threshold. 

If the Commission denies the proposed rule amendment, Utility Special Entities 

could still look to CFTC-registered swap dealers for these types of swaps, or could 

use less customized, more expensive commercial risk management solutions that 

might be available on an exchange. Or Utility Special Entities could simply forego 

using nonfinancial commodity swaps for commercial risk management purposes entirely. At the same time, the available counterparties for Utility Operations-Related 

Swaps could enter into up to $8 Billion notional in swaps, or even $8 Billion in Utility Operations-Related Swaps, with counterparties other than Utility Special Entities, including neighboring investor-owned utilities and electric cooperatives. As a 

direct result of the Special Entity Sub-Threshold, Utility Special Entities are denied 

a level playing field in the competition for available counterparties for these commercial risk hedging swaps. Utility Special Entities are denied comparable, cost-effective access to such commercial risk management tools that will instead be offered 

to neighboring investor-owned utilities and electric cooperatives by otherwise available market participants.20

In today’s regional markets, a Utility Special Entity is equally as likely as an investor-owned utility in the same region to be an attractive counterparty for an entity that chooses to ‘‘deal’’ in Utility Operations-Related Swaps, whether the entity 

is a nonfinancial company hedging its own commercial risks (or ‘‘hedging a physical 

position’’ as such phrase is more narrowly defined in the CFTC’s definition of ‘‘swap 

dealer’’), trading for profit (speculating), or engaging in a regular business of dealing 

in such swaps. The ‘‘playing field’’ between the Utility Special Entity and the investor-owned utility, electric cooperative or any other counterparty is currently ‘‘level.’’

Moreover, in today’s regional markets, if a market participant (such as the Alabama merchant generator or the Wyoming natural gas or coal producer referenced 

above) is considering establishing a new entrant ‘‘swap dealing’’ business in specific 

regional product types of Utility Operations-Related Swaps, it will similarly consider 

the Utility Special Entity as a potential counterparty with the same ability to transact as any other potential counterparty. The Utility Special Entity benefits from any 

new or additional price competition. 

Once the CFTC’s Entity Definition rules are effective, as a result of the significant 

disparity between the general de minimis threshold and the special entity subthreshold, the Alabama-based merchant generator or the Wyoming-based natural 

gas or coal producer, or any other market participant not intending to register as 

a ‘‘swap dealer,’’ will substantially limit its swap dealing activity in Utility Operations-Related Swaps with Utility Special Entities. Indeed, in regions like California 

and the Southeast United States, where there are geographic concentrations of Utility Special Entities, a non-‘‘swap dealer’’ counterparty may only be able to execute 

one such Utility Operations-Related Swap with one such Utility Special entity in a 

12 month period without the risk of exceeding the $25 million sub-threshold. The 

entity will set up its swap dealing activity business, its business processes, its docuVerDate 0ct 09 2002 10:19 Jan 04, 2013 Jkt 041481 PO 00000 Frm 00094 Fmt 6633 Sfmt 6621 I:\DOCS\112-34\75437.TXT BRIAN
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21The Adopting Release notes that the statute’s de minimis exception intended to increase

competition within markets for swaps by encouraging new entrants, thereby decreasing costs 

for commercial end-users and decreasing systemic risks by lessening concentration of dealing activity among a few major financial market participants. See 77 Fed. Reg. 30629. Ironically the 

special entity sub-threshold acts directly contrary to this stated statutory and regulatory objective. For Utility Special Entities hedging commercial risks, the sub-threshold will serve to discourage new entrants and concentrate the Utility Special Entity’s counterparty credit risk. The 

proposed rule amendment would restore this competitive, and less risky, market structure. 22See 156 CONG. REC. H5238 (the ‘‘Dodd-Lincoln letter’’). 

mentation and its compliance programs to transact with counterparties other than

the Utility Special Entities, including neighboring investor-owned utilities and electric cooperatives.21 The unworkably low, and comparatively disadvantageous, Special Entity Sub-Threshold threatens the Utility Special Entities’ uninterrupted access to these important and cost-effective commercial risk management tools. 

IV. Supporting Arguments 

For the following reasons, the Commission should approve the proposed rule 

amendment as soon as possible: 

A. The Commission has the Authority to Approve the Rule Amendment. 

Section 1a(49)(D) of the Commodity Exchange Act (‘‘CEA’’) as amended by the 

Dodd-Frank Act, and new CFTC Regulation 1.3(ggg)(4)(v) authorize the Commission 

to change or modify the requirements of the de minimis exception to the ‘‘swap dealer’’ definition by rule or regulation, without engaging in further joint rulemaking or 

joint interpretative guidance with the Securities and Exchange Commission. The 

Adopting Release acknowledges this. See footnote 464 at 77 Fed. Reg. 30634, and 

related text. 

Section 1a(49)(D) provides as follows:

‘‘. . . (D) DE MINIMIS EXCEPTION.—The Commission shall exempt from designation as a swap dealer an entity that engages in a de minimis quantity of swap 

dealing in connection with transactions with or on behalf of its customers. The 

Commission shall promulgate regulations to establish factors with respect to 

making of this determination to exempt.’’

As the Commission notes on page 30702 of the Adopting Release, ‘‘. . . CEA Section 1a(49)(D) directs the CFTC to promulgate regulations to establish factors with 

respect to the making of the determination to apply the de minimis exceptions to 

the definition of the term ‘swap dealer.’ ’’

New CFTC Regulation 1.3(ggg)(4)(v) provides as follows:

‘‘. . . (v) FUTURE ADJUSTMENTS TO SCOPE OF THE DE MINIMUM EXCEPTION. The 

Commission may by rule or regulation change the requirements of the de minimis exception described in paragraphs (ggg)(4)(i) through (iv) of this section.’’

Clearly the Commission has the authority to approve the proposed rule amendment. 

B. The Factors Set Forth the Proposed Rule Amendment are Distinctly and Uniquely 

Applicable to Utility Operations-Related Swaps and to Utility Special Entities. 

The proposed rule amendment will have no affect on the de minimis exception to 

the ‘‘security-based swap dealer’’ definition. Nor will the proposed rule amendment 

have any affect on the de minimis exception to the Commission’s ‘‘swap dealer’’ definition as it applies in general to special entities (including Utility Special Entities) 

engaging in financial swaps or nonfinancial ‘‘other commodity’’ swaps, other than 

those product types critical to hedging or mitigating commercial risks in the utility 

industry. 

The factors set forth in the proposed rule amendment are not applicable to security-based swap dealers or to their counterparties. Counterparties to security-based 

swaps do not need such security-based swaps to ‘‘hedge or mitigate commercial 

risks’’, as is the case with commercial end-users’ need for nonfinancial commodity 

swaps to hedge or mitigate commercial risks. Congress specifically recognized the 

importance of protecting ‘‘commercial end-users’’ access to nonfinancial commodity 

swaps when it emphasized that the Dodd-Frank Act’s focus on financial market stability and price and market transparency should not be achieved without also preserving commercial end-users’ access to swaps used to hedge or mitigate commercial 

risks.22

The factors that argue in favor of the Commission approving the proposed rule 

amendment are also inapplicable to entities involved in agricultural or metal commodities transactions and swaps. Such entities are simply not subject to public servVerDate 0ct 09 2002 10:19 Jan 04, 2013 Jkt 041481 PO 00000 Frm 00095 Fmt 6633 Sfmt 6621 I:\DOCS\112-34\75437.TXT BRIAN
92

ice obligation comparable to those that apply to utilities that require Utility Operations-Related Swaps to hedge commercial risks associated with utility facilities, operations and public service obligations. Utilities (including Utility Special Entities) 

have public service obligations under Federal, state and local laws and regulations, 

and utility reliability obligations, that other industries simply do not share. Congress recognized these important obligations throughout the Dodd-Frank Act as deserving of the Commission’s regulatory deference. See Section 720 of the DoddFrank Act calling for FERC/CFTC Memoranda of Understanding, new CEA Section 

2(a)(1)(I) regarding jurisdiction of the various energy regulatory agencies, and new 

CEA Section 4(c)(6) directing the Commission to consider public interest waivers of 

its jurisdiction. 

The Commission clearly has the authority to approve the proposed rule amendment. The factors that argue in favor of the proposed rule amendment, and limit 

its affect, reflect the unique and the different characteristics of these types of 

‘‘swaps’’ and these market participants, and recognize the differing applicable laws 

and regulations, and statutory and regulatory policies The Commission should approve the proposed rule amendment and do so as soon as possible. 

C. Nothing in the Dodd-Frank Act or the CEA Requires the Special Entity SubThreshold. 

The proposed rule amendment is narrowly tailored to achieve both the statutory 

goals and Congressional intent underlying the Dodd-Frank Act, and to leave in 

place the supplemental investor protection objectives of the Commission in including 

the Special Entity Sub-Threshold in the ‘‘swap dealer’’ definition. 

In the Dodd-Frank Act, Congress imposed on registered ‘‘swap dealers’’ heightened business conduct standards when advising, offering or entering into swaps 

with ‘‘special entities.’’ Nothing in the Dodd-Frank Act imposes or requires the Commission to impose business conduct standards on entities that are not required to 

register as ‘‘swap dealers.’’ Nothing in the Dodd-Frank Act requires the Commission 

to impose an exponentially smaller de minimis sub-threshold for counterparties that 

are not registered ‘‘swap dealers’’ and that enter into swaps to which ‘‘special entities’’ are counterparties. The Adopting Release acknowledges as much, characterizing the lower threshold as ‘‘consistent with the fact that Title VII’s requirements 

applicable to swap dealers . . . provide heightened protection to these types of entities.’’ 77 Fed. Reg. at 30630 (emphasis added). 

The Adopting Release cites the Dodd-Frank Act provisions that impose on registered swap dealers and major swap participants (those market professionals whose 

activities are directly regulated by the Commission) heightened business conduct 

standards and documentation requirements for interacting with ‘‘special entities.’’ 

The Adopting Release then extrapolates without explanation as to why it is consistent for the Commission to extend its regulatory reach beyond the market professionals registered as ‘‘swap dealers,’’ whose conduct the statute intends it to regulate, to impose restrictions on the activities of entities that are not swap dealers, 

and whose de minimis ‘‘swap dealing activities’’ do not require such registration. 

The Special Entity Sub-Threshold is a clear regulatory overreach by the Commission, and should be modified where such regulatory overreach negatively affects the 

ability of yet another group of entities that are not ‘‘swap dealing’’—the ‘‘Utility Special Entities’’—to hedge or mitigate the commercial risks of their nonfinancial, public service enterprises. 

The Adopting Release gives examples of situations where the special entity 

‘‘lacked the requisite sophistication and experience to independently evaluate the 

risks of the investment and exposed the [special entity] to a heightened risk of catastrophic loss ultimately led to a complete loss of their investments.’’ See footnote 425 

and text accompanying at 77 Fed. Reg. 30630 (emphasis added). In the examples, 

the special entities were acting outside the scope of their core operations as investors in financial derivatives, interacting with financial institution or ‘‘financial entity’’ market professionals, using cash reserves or other cash assets of the special entity to invest (for profit or loss) in financial derivatives instruments. By contrast, the 

Utility Special Entities use Utility Operations-Related Swaps to hedge the commercial risks of their core utility operations, not to invest for profit. 

D. The Proposed Rule Amendment is Consistent with Both Congressional Intent of 

the Dodd-Frank Act and Will have No Affect on the Commission’s Investor Protection Policy Objectives. 

The investor protection objectives of the Dodd-Frank Act, and the Commission’s 

own ‘‘consistent’’ and supplemental investor protection objectives as expressed in the 

Adopting Release, would not be affected or compromised by the proposed rule 

amendment. As is clear from the proposed definition of ‘‘Utility Operations-Related 

93

23 A number of the nonfinancial entities with whom the Petitioners (or the trade association 

Petitioners’ members) transact in Utility Operations-Related Swaps have told us that they are 

currently evaluating their nonfinancial commodity ‘‘swap’’ activities in light of the final Entity 

Definitions rules, the Interim Final Rule in Section 1.3(ggg)(6)(iii), and the statutory guidance 

provided in the Adopting Release and elsewhere in the CFTC’s regulations, interpretations and 

precedents. Such nonfinancial entities are also awaiting the CFTC’s final rules defining the term 

‘‘swap,’’ which is the foundational rulemaking which will enable the energy industry to understand the scope of the CFTC’s jurisdiction over our industry’s transactions. As of July 10, 2012, 

for the electric and natural gas utility industry, the challenges are compounded by the continuing uncertainty as to what is and isn’t a ‘‘swap,’’ a ‘‘nonfinancial commodity forward’’ transaction, a nonfinancial commodity forward with embedded optionality, or a ‘‘trade option.’’ See 

footnote 6 above. Once the rules defining ‘‘swap’’ are final with respect to our industry’s transactions, each nonfinancial entity will then (and can only then) analyze which of its activities 

will fall within the definition of ‘‘swap,’’ and therefore would or could be ‘‘swap dealing,’’ which 

of its activities will be excluded as ‘‘hedging a physical position’’ (depending on the outcome of 

that final rulemaking), or fit within other safe harbors under the interpretive guidance provided 

by the Commission. Then and only then can the nonfinancial entity decide, as a business matter, whether to continue all or any of its swap dealing activities, and whether to register as a 

‘‘swap dealer’’ or to register for a limited designation as a ‘‘swap dealer’’ for certain asset classes 

and product types (that may or may not include particular Utility Operations-Related Swaps). 

Continued

Swap,’’ the Utility Special Entity enters into such a nonfinancial commodity swap 

to hedge commercial risks that arise from its utility facilities, operations and public 

service obligations. 

The proposed rule amendment is drafted narrowly to respect the Commission’s investor protection policies but to achieve the distinct, but equally important, Congressional intent of the Dodd-Frank Act: to preserve cost-effective (and comparative, 

competitively equal) access to nonfinancial commodity swaps that Utility Special 

Entities use ‘‘to hedge or mitigate commercial risks.’’ 

The proposed rule amendment does not amend either the general de minimis

threshold for swap dealing activity. The general de minimis threshold would continue to apply to Utility Operations-Related Swaps to which Utility Special Entities 

are counterparties. Nor does the proposed rule amendment change the ‘‘special entity sub-threshold’’ for swaps in asset classes or product types other than Utility Operations-Related Swaps to which Utility Special Entities are counterparties. 

In defining the term ‘‘Special Entity’’ in Section 4s(h)(2)(C) of the Dodd-Frank Act 

and establishing the heightened business conduct standards for registered ‘‘swap 

dealers,’’ Congress did not intend for the Commission expand its regulatory oversight beyond oversight of regulated ‘‘swap dealers’’ to place restrictions on entities 

that are not required to register as ‘‘swap dealers.’’ In establishing the Special Entity Sub-Threshold and then not substantially raising it when it raised the general 

de minimis threshold, the Commission restricted Utility Special Entities’ competitive abilities, and severely restricted Utility Special Entities’ access to the nonfinancial commodity swaps needed to cost-effectively hedge or mitigate commercial 

risks. 

V. Process and Timeline for Petition 

The Petitioners respectfully request the Commission to act as soon as possible on 

the proposed rule amendment—to remove continuing regulatory uncertainty for the 

Utility Special Entities and counterparties that would, but for the Special Entity 

Sub-Threshold, be available to enter into Utility Operations-Related Transactions 

with Utility Special Entities. As the Commission’s new ‘‘swap’’ regulations are proposed, become final and implementation begins, market participants are evaluating 

whether and how to participate in the new market structure for ‘‘swaps.’’ At the 

same time, Utility Special Entities have continuing utility public service obligations 

to provide affordable, reliable utility service to their customers, and consequently 

have both short-term and long-term commercial risks to hedge. 

As the effective dates and compliance dates approach for the new ‘‘swap’’ regulatory regime, market participants are beginning to turn their attention away from 

current activities in nonfinancial commodities and commodity swaps in general. The 

challenges of the new regulatory requirements applicable to ‘‘swaps,’’ including challenges for systems, staffing, compliance, documentation and reporting are overwhelming, even for the largest financial institutions and financial markets professionals, especially given the tight and interrelated compliance timelines. 

The added challenge of determining whether to register as a ‘‘swap dealer’’ for one 

or more asset classes or product types of ‘‘swaps’’ are even more daunting for a nonfinancial entity, whose primary and ongoing business is not trading or investing or 

dealing in the financial markets, but drilling for natural gas, mining coal, or generating, transmitting and/or delivering electric energy or natural gas to consumers.23

94

Alternatively, only then can such a nonfinancial entity alternatively decide to wind down any 

swap activities which the Commission might consider to be ‘‘swap dealing activities.’’ Nothing 

requires a nonfinancial entity (whose primary business is not to engage in financial markets 

transactions like ‘‘swaps’’) to continue its past or current business strategies. If a particular nonfinancial entity decides to continue some level of swap dealing activity, it may decide not to continue such activity as a registered ‘‘swap dealer.’’ At last decision point, once the new DoddFrank Act rules are effective and as compliance dates approach, these entities will restrict their 

swap dealing activity to stay well below the two very different de minimis exception thresholds 

in the CFTC’s swap dealer definition. 24The proposed rule amendment relieves a competitive restriction on Utility Special Entities, 

and modifies the special entity sub-threshold to the de minimis exception to the definition of 

‘‘swap dealer.’’ The Commission and interested persons in the electric and natural gas industry 

have been on notice of the Utility Special Entities’ concerns since early May 2012. As a result, 

the proposed rule amendment is entitled to the earlier effective date permitted by CFTC Regulation 13.6. 

If a market participant decides to continue some amount of ‘‘swap dealing activity’’ in Utility Operations-Related Swaps, it will carefully evaluate and then establish compliance procedures to monitor the two de minimis thresholds. In doing so, 

it will certainly hesitate or delay incurring the expense of setting up specially calibrated systems, compliance processes and staff training in order to engage in one 

or two such swaps with Utility Special Entities within a 12 month period. A nonfinancial counterparty that does not choose to register as a ‘‘swap dealer’’ will instead understandably focus on modifying its business processes and documents to 

engage in swaps with counterparties other than Utility Special Entities, under the 

general de minimis exception threshold. 

We request that the Commission promptly publish the proposed rule amendment 

for comment in the Federal Register, without waiting for the effective date of the 

Entity Definitions rules. We recommend a public comment period of no longer than 

20 days, and respectfully request publication of the Commission’s final approval or 

grounds for denying the rule amendment within 10 days thereafter.24 The Petitioners request that the amended rule be retroactive and prospective for all Utility 

Operations-Related Swaps to which a Utility Special Entity is a counterparty entered into after the effective date of the Entity Definition rules. 

VI. Conclusion 

The Petitioners respectfully petition the Commission under CFTC Regulation 13.2 to amend CFTC Regulation 1(ggg)(4), which implements the de 

minimis exception to the definition of ‘‘swap dealer,’’ as described above. 

Signature Page—Special Entity Sub-Threshold Petition 

Please contact any of the individuals below or Patricia Dondanville, Reed Smith 

LLP, 10 South Wacker Drive, 40th Floor, Chicago Illinois 60606, telephone (312) 

207–3911, or e-mail pdondanville@reedsmith.com, if you have questions regarding 

this Petition. 

Respectfully submitted,

American Public Power Association Large Public Power Council

Susan Kelly Noreen Roche-Carter

SUSAN KELLY NOREEN ROCHE-CARTER

Senior Vice President of Policy Analysis 

and General Counsel 

Chair, Tax and Finance Task Force 

c/o Sacramento Municipal Utility District 

1875 Connecticut Avenue, N.W. 6201 S Street 

Suite 1200 Sacramento, CA 95817–1899 

Washington, D.C. 20009–5715

Tel: (202) 467–2933 Tel: (916) 732–6509

E-mail: skelly@publicpower.org E-mail: nrochec@smud.org

Transmission Access Policy Study 

Group 

American Public Gas Association

John Twitty David Schryver

JOHN TWITTY DAVID SCHRYVER

Executive Director Executive Vice President 

4203 East Woodland Street 201 Massachusetts Avenue, NE 

Suite C–4

Springfield, MO 65809 Washington, DC 20002

95

Tel: (414) 838–8576 Tel: (202) 464–0835

E-mail: 835consulting@gmail.com E-mail: dschryver@apga.org

Bonneville Power Administration

Virginia Schaeffer

VIRGINIA K. SCHAEFFER

Attorney 

Office of the General Counsel—LC–7

P.O. Box 3621

Portland, Oregon 98208–3621

Tel: (503)230–4030

E-mail: vkschaeffer@bpa.gov

CC:

Honorable GARY GENSLER, Chairman

Honorable BART CHILTON, Commissioner

Honorable JILL E. SOMMERS, Commissioner

Honorable SCOTT O’MALIA, Commissioner

Honorable MARK WETJEN, Commissioner

Office of the CFTC General Counsel

The CHAIRMAN. Thank you for your testimony, and I would note 

to my colleagues on the Committee that at approximately 1:05, 

maybe 1:15, we will begin a series of votes, so we will endeavor to 

conclude all of our business in a timely fashion. I recognize myself 

for 5 minutes. 

Mr. Duffy, does the CME’s recent designation by the FSOC and 

the regulatory requirements associated with it put CME in a better 

position to hold customer segregated funds instead of a third-party 

custodian? 

Mr. DUFFY. Well, I don’t know if the designation has anything 

to do with CME or a third party holding the funds. You know, this 

is something that we had put out there just to—we don’t have all 

the details worked out yet. We still believe that the FCMs are very 

capable of holding the customer funds, but at the same time, we 

know there needs to be confidence in the marketplace so if in fact 

the customers felt safer with CME Group or a third-party depository, we would be prepared to move forward with that. 

The CHAIRMAN. Very good point. 

Mr. Roth, your testimony states that you began an examination 

of PFGBest in mid-June. Was it a scheduled audit or inspired by 

some anomaly? 

Mr. ROTH. The audit that we began in mid-June was part of our 

regular cycle of audits for FCMs where we try to see each FCM 

each year. I don’t want to suggest that that is the only time we 

ever examined PFG. We had a number of limited-scope audits involving sales practice-type issues and their supervision of IBs but 

the June audit was part of the regular cycle. 

The CHAIRMAN. For the regular audits that you conducted of 

PFGBest, was Mr. Wasendorf, Sr. ever personally involved in those 

audits? 

Mr. ROTH. When we would ask questions of staff, I am sure there 

were certain questions that we posed to staff that were answered 

by Mr. Wasendorf, Sr. I can’t say specifically which questions were 

directed to him and which were to the chief compliance officer or 

the chief financial officer. It would not surprise me if we had posed 

certain questions directly to Mr. Wasendorf. 

96

The CHAIRMAN. Based on NFA’s internal investigations of 

PFGBest, was this a Ponzi scheme in the classic sense? 

Mr. ROTH. It is a distinction that no one but a regulator would 

care about. It is not a Ponzi scheme in the sense that they were 

reporting false profits to customers and paying old customers off 

with new customer money. It was really just more of an outright 

theft of customer funds. 

The CHAIRMAN. Thinking about the description both in your written testimony and your oral, do you believe that more than one 

person would be required to be involved in such a defrauding of 

customers and regulators alike. I mean, getting both the customers 

and the regulators is a pretty impressive accomplishment. 

Mr. ROTH. You know, obviously there is an ongoing investigation 

conducted by the Justice Department. I don’t have any firsthand 

facts. I can just tell you that the volume, the sheer volume of 

forged documents produced on a daily basis was fairly staggering, 

and again had to be produced on a daily basis, and Mr. Wasendorf 

obviously traveled occasionally and wasn’t in the office, but I really 

don’t have any firsthand knowledge. I hope that the investigation 

will ultimately uncover that. 

The CHAIRMAN. Thank you. 

Mr. Lukken, the CFTC and the SEC have different approaches 

to writing and disseminating rules as required by Dodd-Frank. 

CFTC has formalized the rules basically one at a time, in some 

cases involving an effective date until 60 days after issuing the 

final rules on the entity or the product definitions. The SEC, on the 

other hand, is holding rules basically until all of the rules are completed. It will then issue a sequencing document, as I understand 

it, and solicit public comment. Which agency approach is right? 

You have a little bit of insight here. And why? 

Mr. LUKKEN. Well, as I mentioned, the Dodd-Frank implementation, although conceptually most people are in agreement with 

what came out of the G20 commitment in Pittsburgh after the financial crisis, but the implementation of that has been very tricky 

and complex within the industry. As I mentioned in my testimony, 

the SEC has actually put forward a good way to try to give certainty to the industry of how they are going to implement this 

rather than devote resources, time and energy potentially wasted 

if you are either in and it turns out that you are out and you may 

devote resources unnecessarily, or the opposite where you are 

caught, where you think you are not in, but you turn out to be in. 

The SEC seems to have taken a logical approach, a measured approach, and I would encourage the CFTC to do the same. 

The CHAIRMAN. Mr. Heck and Mr. Conner, I believe we all heard 

together here today the CFTC Chairman indicate that he would address the issues pertaining to the recording of farmers’ conversation as it comes to contracts. Do you find that to be a reassuring 

public, stressing public, statement by the Chairman in that regard? 

Mr. CONNER. Mr. Chairman, I do, and we have worked very 

closely with Chairman Gensler throughout the rulemaking process 

and he has been good to his word, and he was pretty clear today. 

We look forward to seeing the follow-through on that on what we 

think is really a pretty absurd concept, when you really get down 

to putting it in place out there on the ground. 

97

Mr. HECK. I believe, Mr. Chairman, at the NGFA, we would 

agree with Mr. Conner’s comments. I think the CFTC is open to 

dialogue on this point and we will certainly take advantage of that. 

The CHAIRMAN. Mr. McElroy, with my colleagues indulging me 

for one last question on the final swap rule, you mentioned the 

public power and public gas utilities and the new costs and how 

that will be moved on down to the ratepayers, because ultimately 

that is who pays the bills in regards to utilities. One last question, 

and it is more rhetorical and you can answer if you care to. What 

did the customers of public power and gas companies have to do 

with the financial crisis to deserve this? 

Mr. MCELROY. That is a question we have asked over and over 

again, and we don’t have a good answer for that. 

The CHAIRMAN. My time has expired. I turn to the fine gentleman from Iowa for his 5 minutes. 

Mr. BOSWELL. Well, thank you, Mr. Chairman, and I just—again, 

our earlier dialogue, you got it right what you were trying to do 

as far as the authorization committee but the appropriations side 

of it is a concern of mine, and I kind of want to talk about that 

just a little bit. 

First off, I guess I will go to Mr. Roth. Mr. Wasendorf had been 

a member of the NFA advisory committee and the chief compliance 

officer of this had been a senior compliance officer at NFA as well. 

It indicates to me in looking at the magnitude of this whole thing, 

there must be quite a few, or could be quite a few others implicated. What is your thought about that, and if you think there 

could be others, what are we doing to find out? 

Mr. ROTH. Well, let me first state with respect to the chief compliance officer, she had been a former employee of NFA but she left 

NFA 15 years ago, so that is a pretty long departure. I don’t think 

any of the people that were involved in our audits had overlapped 

with her at NFA. 

Mr. BOSWELL. So her information having been on the inside 

wouldn’t necessarily be applicable to how she would try to defraud 

us now? 

Mr. ROTH. Well, obviously, the procedures that we follow now 

aren’t the procedures that we followed 15 years ago, but I would 

also point out, I think there were reports trying to portray her as 

having been a high-level executive at NFA, and she wasn’t. She 

was a member of the compliance department but she didn’t have 

any sort of senior management position at all. 

You mentioned Mr. Wasendorf’s position on our FCM advisory 

committee. The FCM advisory committee is a committee that does 

just that. It has no authority to take any action. It advises the 

board on any such rulemaking issues that are coming before the 

board. Mr. Wasendorf was one of the nine or ten members on that 

committee. 

Mr. BOSWELL. Okay. I am satisfied with that answer. 

Again, the magnitude, it seems to me like there has to be a lot 

of people involved in this day-to-day operation of the fraud that 

took place. 

Mr. ROTH. Congressman, one point, when we talk about preventing this type of fraud in the future, and I have tried to describe 

the steps we are taking to really make the surveillance of customer 

98

segregated funds as tight as we possibly can, but let me just mention an obvious point, I guess. One way to prevent fraud is to deter 

fraud through vigorous prosecutions of the laws that are on the 

books now, and everybody would agree with that and I would certainly hope that the ongoing investigation conducted by the Justice 

Department will uncover all the evidence and ultimately make that 

judgment as to whether other people were involved or not. 

Mr. BOSWELL. Well, I also in our conversation understand that 

because of your funding system, you are actually expanding the 

size of your operation, personnel, equipment and so on. To what extent are you expanding and where do you intend to go? 

Mr. ROTH. I would say that over the last 5 to 6 years, we have 

had a 33 percent increase in the size of our compliance department 

just because of increased demands. Our budget this year that was 

just approved by the board calls for a 27 percent increase in administrative spending. That is in anticipation of the increased responsibilities under Dodd-Frank. We frankly anticipate we will——

Mr. BOSWELL. Thank you. I understand it well. 

And then I guess it picks up, Mr. Chairman, my point is, how 

does CFTC do their job, and I continue to be concerned about that. 

Mr. Conner, I haven’t seen you for a while. You know my respect 

and appreciation for co-ops and farmers and ranchers and what it 

means to us, and I would guess that we have a lot of people out 

there that were involved in this recent thing that have really been 

whacked pretty hard. Would you agree to that? 

Mr. CONNER. Well, we certainly know we have members and 

farmer-owners, Congressman, who were caught up in the MF Global circumstance. I think it is a little too early to say in the other 

Sioux City circumstance exactly the impact but certainly you can 

expect some. 

Mr. BOSWELL. You heard Mr. Roth—thank you, Mr. Roth, for 

your straightforwardness about how you intend to expand and how 

you are doing it and so on. Are the rest of you, are you doing the 

same thing? And also today’s electronics, are you actually looking 

at what the bank is doing as you look at the reports you are getting 

back? Are you doing that now? Maybe you might comment on that, 

any and all. 

Mr. DUFFY. Well, Mr. Boswell, at the CME, we are working in 

conjunction with the NFA and the CFTC to have that ability to go 

ahead and look straight through into the bank records. 

Mr. BOSWELL. You are looking at it, but are you doing it? 

Mr. DUFFY. We have the ability today to call the FCM and say 

we want to have a look at the bank statement to make sure the 

monies are there. Now, it will go on a more real-time basis but at 

the moment right now we can today as of recently go ahead and 

deploy this technology. 

Mr. BOSWELL. My time is running out, but any of the rest of you 

doing it any different than what we just have heard? 

Mr. LUKKEN. I wouldn’t say differently but the FCMs, the problem needs to be solved at all levels, at the Federal regulatory level, 

and Chairman Gensler testified this morning that he is looking at 

this, at the self-regulatory level, but the firms themselves who our 

trade association represent. They are implementing internal controls, making sure there is separation of duties between CFOs and 

99

compliance people, making sure that all the controls are in place 

and disclosures are happening so that this can be ferreted out earlier so that this doesn’t occur over a 20 year period of time. 

Mr. BOSWELL. Mr. Chairman, my time is up. Could we indulge 

the rest of them to see if they want to comment on that particular 

question? 

The CHAIRMAN. The panel is most welcome to address any 

thoughts to the Member’s question they care to. 

It looks like the gentleman’s time has expired. 

Mr. BOSWELL. Thank you. 

The CHAIRMAN. The chair now recognizes the gentleman from 

Florida for 5 minutes. 

Mr. SOUTHERLAND. Thank you, Mr. Chairman. 

I have to take a deep breath because you guys have some major 

problems, and it would be very convenient to blame the lack of regulation. You know, I have been a state regulator or appointed to 

serve as Chairman of regulatory boards. Mr. Lukken, you mentioned educating customers. Well, that is great. That is great. You 

mentioned that with depressed futures volumes, historically low interest rates and an ultracompetitive pricing model, FCMs are 

under tremendous strain financially. Well, bless your heart. My 

heart bleeds for you. I am being a little facetious there because it 

doesn’t. My heart bleeds for the thousands of hardworking men and 

women that have been damaged permanently because of your inaction. You know, it is not a sin of commission that you are guilty 

of. It is a sin of omission. 

My family business is in an industry that we helped self-regulate, and as the Chairman of boards in the State of Florida, I have 

handed down death sentences to businesses who have violated the 

public trust. Now, your challenges are not depressed futures volumes. Your challenges are not historically low interest rates. Your 

challenges are not ultracompetitive pricing models or the tremendous strain financially. Gentlemen, you represent an industry that 

has an integrity crisis, an integrity crisis, and you can’t build a 

marriage, a family, a small business, a state, a country, you can 

build nothing of value that can withstand the long haul apart from 

integrity. 

I am led to believe here that for 20 years this company fooled 

you. You are the front line. You are it to whom much is given, 

much is expected. I have little pity for you. I have anger for what 

I have heard here today. 

You know, we talk about studying. Well, that is great. Studying? 

Do something. We talked about—one of the things that I hear—we 

talk about the insurance, the Securities Investor Protection Corporation, how it needs to be spread to protect the customers. We 

have talked about that. Well, by God, do it. Make it happen. Restore public trust. You have an integrity problem, and we as Members of Congress, we can’t solve your problems. We can sit here and 

express anger from those that we represent that have been harmed 

by the inaction of this industry. 

I shiver to think what else is out there. It terrifies me. And Mr. 

Chairman, I have to tell you, my blood is boiling because you have 

not earned the right—you shared here, Mr. Duffy, you talked about 

you caution us to move authority to the government and away from 

100

the industry. What have you done to deserve self-regulation? Your 

inaction is destroying lives, and it angers me, and I know that 

down here on the other end, APPA, I know that Mr. McElroy, you 

talk about the great things in Dodd-Frank. Well, let me tell you 

some unintended consequences as a small business owner. I will 

tell you, Mr. Conner, the small businesses that you represent, we 

can’t get capital from our community banks because of Dodd-Frank. 

There are unintended consequences of that regulation, and so when 

you sit here and you talk about you support it, well, that is wonderful, but to the small businesses that represent the American 

economy, Dodd-Frank is killing our community banks, and you 

have now created the legitimacy of regulation, and it will have unintended consequences on good, hardworking men and women that 

are doing everything right, and my family is one of those. I have 

a brother that got up this morning at 3:30 to go to the log woods 

to haul timber to mills. More regulation? He can’t work any harder. 

To whom much is given, much is expected. I am terribly disappointed. 

And Mr. Chairman, I know I have gone over my time, but there 

are some things that I think need to be said. 

The CHAIRMAN. The gentleman’s time has expired. The chair now 

turns to the gentleman from California for 5 minutes, Mr. Baca. 

Mr. BACA. Well, thank you very much, and I want to thank the 

witnesses, and I am on the other side and I appreciate the DoddFrank legislation because it is important that we do have accountability and we have those kind of regulations that are important 

for us and that we have the transparency. We also have the oversight, and if we didn’t have this, that is why the abuse would be 

there. And so it is very important when we talk about it, it is easy 

to talk about not having the regulations. That is what led us to the 

problems that we have. We didn’t have a lot of the regulations in 

the banking industry and Wall Street, and then we used to have 

a gentleman that says trust me, we are making the right kind of 

decisions. We didn’t make the right kind of decisions. That is why 

we have come up with the Dodd-Frank. We have to allow it to grow 

and develop and hold those accountabilities to allow community 

banks and others to do the right thing for the American people, 

and unless we do that and we have those regulations in place, it 

is not going to happen. I just wanted to state that because my good 

friend from Florida indicated different. I just wanted to make sure 

that I presented my side that is a little bit different than him because he comes from an area that he would like to do whatever he 

wants. I don’t believe that is the way we should be and we should 

have regulations in place. So thank you very much. 

With that, I would like to ask a question of Mr. Roth in terms 

of how does—in lay terms, how does the e-confirmation process of 

customer segregated bank accounts work for the FCM members? 

And this is for Mr. Roth. 

Mr. ROTH. The e-confirmation process that we began using after 

the first of the year basically makes the confirmation process much 

less paper-intensive, more efficient and really is no additional cost 

to the FCM at all. There is a cost that is paid by NFA to the vendor of this service. But it has really improved both efficiency and 

in this particular case helped uncover a fraud. 

101

Mr. BACA. Thank you, and that is why the regulations are important and that is the reason the Dodd-Frank is there, and if we 

didn’t have it, we wouldn’t be able to detect that. And do you think 

that online confirmation will be an effective oversight and fraudprevention tool? Why or why not? 

Mr. ROTH. I think it is a good step but I don’t think it is enough. 

That is why we are going to our board and asking for this direct 

view-only online access and then moreover building a system in 

which we will get daily reports from all depositories for customer 

segregated funds. So the e-confirm process has been a huge help, 

and it is a step along the way, but there are certainly bolder steps 

that we are taking and starting at our August board meeting and 

moving on from there to build the system I described in my testimony. 

Mr. BACA. Thank you. Let me ask just a general question because it is a topic that we were discussing and my good friend from 

Florida was saying that we didn’t need the regulations. Do you believe that we should have regulations and regulations should be in 

place whether it is the Dodd-Frank legislation or any others? Do 

you believe that regulations are good for us? And I open it to all 

of you. Or should we just allow everybody to say trust me, I am 

going to do the right thing? And I open it up for all of you? 

Mr. ROTH. Could I go first? 

Mr. BACA. Yes. 

Mr. ROTH. I have been a regulator for 29 years so I may bring 

a little bias to this question, but obviously the whole point of regulation is based on the recognition that these markets are vital to 

our economy. For the markets to thrive, there has to be public confidence in the integrity of the markets, and the regulatory process 

is designed to ensure that integrity and foster that public confidence—so regulation is essential. The question is, how to do it 

right, how to do it smart and how to do it in a way that the bad 

guys can’t win? 

Mr. BACA. That is the only way that we can also restore that 

public trust that the gentleman from Florida said that we needed 

to do, but thank you. 

I will open it up for the rest, any one of you that would like to 

address it. 

Mr. LUKKEN. I will quickly address it. I am a former regulator 

so I am supportive, as Dan mentioned, smart regulation, making 

sure that it makes sense for the marketplace, that it stops this type 

of behavior but also proper enforcement of that regulation. I think 

that is where we need to concentrate. There are lots of rules to the 

road. Let us make sure that those are being properly enforced, and 

certainly some of the things that have been mentioned today, the 

e-confirm system, giving access to regulators, those are all great 

tools that will allow them to enforce these rules and make sure this 

is ferreted out quickly. 

Mr. BACA. Thank you. 

Anyone else? 

Mr. MCELROY. I think we are generally supportive but if it goes 

so far and we do have unintended consequences, we have to be 

careful of that. From our industry standpoint, looking at some of 

the regulations that appear to potentially affect, adversely affect 

102

our customers in public power and small businesses is a little bit 

of a challenge given the cost-benefit, and it is an unintended consequence. On a broad scheme in terms of the regulatory regimes 

and issues, I couldn’t agree more, couldn’t agree more, but when 

it gets down to such a low level and unintended consequences, 

there needs to be a way to address that and ensure that those 

small folks, small businesses on Main Street don’t get hurt. 

Mr. BACA. Right, and those are areas that we need to work on 

and try to define to allow that public trust and allow that entity 

to grow, so all of us can agree on that. 

Anybody else? If not, I know my time has expired. If not, I would 

like to thank the Chairman for allowing me to ask a few questions. 

Thank you very much. 

The CHAIRMAN. The gentleman’s time has expired, and the 

Chairman will just note that his good friends on the West Coast 

and East Coast always have very sincere discussions about philosophy and policy. 

And with that, the gentleman from Illinois is recognized for the 

final set of questions for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman, and I do thank you 

all for being here. These are tough times. This is difficult. You 

know, it is not new that we have corrupt people who break the law, 

but we have to do everything we can to go after them and to be 

working together to make sure that this doesn’t happen, that we 

keep the integrity in a system that is so important to the viability 

of our nation, of our future. 

I want to just follow up on a couple questions I had for Chairman 

Gensler just to see if you have any thoughts on this. I had mentioned about yesterday the CFTC publishing the initial list of 

swaps proposed to be subject to the clearing mandate, talked about 

that Europe will not be prepared to have any such clearing mandate in effect until at least 2013. The Chairman talked a little bit 

about Asia and where they are coming in, also a different timing. 

So it sounds like again there are going to be different timings that 

these mandates will come in. I wanted to ask you what impact you 

expect the timing of these mandates to have since they are not coordinated. 

Mr. DUFFY. I will just quickly answer. I think that any time you 

don’t have universal coordination on markets that are global in nature, it could always be an issue. So obviously we are a bit concerned about the United States always being the leader in regulation and nobody else following because sometimes business will go 

along with it. I know the financial services industry has not exactly 

been the shining star in the room over the last several years, but 

I assure you, it is one of the most important things that the United 

States of America has going for it is the United States financial 

system. I would hate to see us get overregulated to a point or have 

rules put upon us that put us in a very—a place that is very anticompetitive, so that is really my biggest concern, sir. 

Mr. HULTGREN. I am concerned of that as well. Any other 

thoughts that anyone has? Otherwise I have a couple other questions. 

LIBOR has been a big issue obviously through this process, and 

given the impact that LIBOR has had on lending for mortgages 

103

and credit cards and now suspicion cast on the integrity of that 

rate. I wonder if there are any other benchmarks that are out there 

that may be more reliable from your perspective? 

Mr. DUFFY. There are several benchmarks out there, sir, but you have to realize that there is $377 trillion benchmarked to LIBOR 

with an additional $10 trillion in loans. This is probably the largest 

amount of money benchmarked to any particular one asset class, 

and there are other rates such as Fed funds that could maybe potentially substitute. I think that many people believe that with the 

now-discovery of what CFTC has done with Barclays that the 

LIBOR process as it goes forward may become the most reliable 

index, not the most vaulted index. 

Mr. HULTGREN. Let me stick with you, Mr. Duffy, if that is all 

right, just a couple more questions. I know that you testified about 

hundreds of millions of dollars that the CME has dedicated to SIPC 

trustee and you talked about the CME trust pledge. I wonder if the 

trustee had taken advantage of the CME guarantee. Why, if so, or 

why not? 

Mr. DUFFY. Congressman, as everybody knows, CME Group 

pledged $550 million to the clients of MF Global to the trustee in 

order to get money back as quickly as possible. The trustee, I believe, is up to 82¢ on the dollar and working its way north of that. 

I don’t believe the trustee has taken advantage of CME Group in 

any which way. I think the trustee has had the ability to move fast 

because of what CME did, so I don’t believe it was taken advantage 

of. I think it was the right thing for us to do and the right thing 

for the clients to get. 

Mr. HULTGREN. Again, Mr. Duffy, Mr. Roth, maybe if you could 

comment on this, and this is just a fundamental question of who 

has more interest in the integrity of the futures market? The exchanges or the government? I would like to hear your point of view 

of how important integrity is. 

Mr. DUFFY. I have a real philosophical view on this since I spent 

my first 22 years never getting a paycheck in my life and the only 

way I made a paycheck is by trading. I believe that the fundamental core of the futures market is the credibility of it, and that 

is where I sit today as Chairman and President of the company. 

That is the philosophy, is the credibility, contrary to what Mr. 

Southerland said, and the core of this business, and we will do 

whatever it takes. So whether we are now a for-profit public company, if we don’t have a credible business line, we don’t have a 

credible for-profit public company, and that is the way we put it 

in order. 

Mr. ROTH. From my point of view, Congressman, the suggestion 

that the fraud at Peregrine would have been uncovered more quickly if the examiners had been on the government’s payroll instead 

of our payroll is something that I just don’t think has a rational 

basis in fact. I think to me, the key question is less who is doing 

the looking than it is how are they doing the looking. That is why 

we immediately after MF Global started trying to incorporate as 

much technology as we can in this process and why we are taking 

the steps that I outlined in my testimony. 

Mr. HULTGREN. Well, my time has expired. I appreciate again 

you being here. These are again very difficult times. All of us are 

104

committed to the integrity of our financial system, so I ask just to 

continue to work together. I know you are passionately committed 

to that as well as we are to make sure that that confidence is there 

but also to make sure that our constituents aren’t hurt, our farmers, ranchers, people who are engaged in these markets aren’t hurt. 

We want to do that. 

So thanks for being here. We are going to need to continue to 

work together again to make sure that we solidify that integrity of 

the markets and continue to protect our constituents. With that, I 

yield back. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman’s time has expired. The gentleman yields back. With that, all time has expired. 

I wish to thank our panel as we dismiss them for your insights 

and your answers to our questions, and to note before we adjourn, 

I invite my acting Ranking Member, any closing comments, Mr. 

Acting Ranking Member? 

Mr. BOSWELL. I just appreciate that we have had this today. 

Thank you for your work, and I am taking it from here that you 

are going to go out there and work harder and increase your resources to get it done. 

Thank you very much, and with that, I yield back. 

The CHAIRMAN. The gentleman yields back. 

Under the rules of the Committee, the record of today’s hearing 

will remain open for 10 calendar days to receive additional material and supplemental written responses from the witnesses to any 

questions posed by a Member. 

This hearing of the Committee on Agriculture is adjourned. 

[Whereupon, at 11:18 a.m., the Committee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

105

SUPPLEMENTARY MATERIAL SUBMITTED BY HON. GARY GENSLER, CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION

During the July 25, 2012 hearing entitled, Oversight of the Swaps and Futures 

Markets: Recent Events and Impending Regulatory Reforms, requests for information 

were made to Mr. Gensler. The following are his information submissions for the 

record. 

Insert 1

Mr. COSTA. Do you anticipate being able to coordinate resources with clearinghouses? You are talking about the timelines in Japan, the timelines in Hong 

Kong, and the timelines for implementation in Europe with those other clearinghouses to try to provide a worldwide regulatory framework. 

Mr. GENSLER. I think we are coordinating well but we have different politics 

and different cultures so there will be different timelines. In some countries, 

they might be significantly later than us but I am encouraged by Europe and 

Japan and Canada. 

Mr. COSTA. For your discussion of those timelines, could you provide the Committee, because you talked about you are almost at the rulemaking now, what 

you see the timelines out for the next 2 years? Would that be possible? 

Mr. GENSLER. I am sorry. Did you say for the next——

Mr. COSTA. Two years. 

Mr. GENSLER. Two years? I think we can provide something to you in terms 

of the rules that are already finalized when there are compliance dates and 

then second, when we——

Mr. COSTA. Mr. Chairman, I would like that provided to the Committee so 

that we can all have a better understanding of that.

A core provision of title VII of the Dodd-Frank Act is the requirement that standardized swaps be centrally cleared. The Act includes an exception for non-financial 

end-users, with the requirement only applying to a transaction where both 

counterparties are subject to it. 

For swaps submitted to the Commission for mandatory clearing, the Commission 

will review the submission and determine whether the swap, or group, category, 

type, or class of swaps described in the submission is required to be cleared. The 

Commission, generally, is to make its determination within 90 days after a complete 

submission. The Commission recently finalized a mandatory clearing requirement 

that covers specified classes of interest rate and credit default swaps. 

Commission rules regarding the clearing requirement include phased compliance 

for different categories of market participants. Transactions involving only swap 

dealers will be subject to earlier compliance than those between swap-dealers and 

non-swap dealers. Additional time is provided before compliance is required with respect to a transaction that does not have a swap dealer as a counterparty. 

U.S. timing regarding the clearing requirement broadly aligns with both Japan 

and Europe. 

The legislature in Japan adopted legislation in May 2010 which mandates clearing of certain swaps. Japanese regulators recently published the requirement that 

certain index-based CDS and certain yen-denominated interest swaps to be subject 

to mandatory clearing. In addition, the Japanese Financial Services Agency is considering expanding its mandatory clearing coverage to include U.S. dollar- and eurodenominated interest rate swaps, as well as yen-denominated interest rate swaps 

referencing TIBOR. 

The European Securities and Markets Authority has published its technical 

standards for clearing, reporting and certain risk mitigation rules for adoption by 

the European Commission. 

The Commission continues to consult closely with fellow regulators in Australia, 

Hong Kong Singapore, and other jurisdictions. 

In June, the Commission—consulting closely with domestic and foreign regulators—proposed guidance interpreting the cross-border application of the swaps 

market reforms of the Dodd-Frank Act. In a separate release, the Commission proposed phased compliance for foreign swap dealers (including overseas affiliates of 

U.S. swap dealers) regarding certain requirements of Dodd-Frank swaps market reform. 

Such phased compliance would enable market participants to comply with the 

Dodd-Frank Act in an orderly fashion. It would allow time for the CFTC, international regulators and market participants to continue coordinating on regulation 

of cross-border swaps activity. And it would allow for appropriate implementation 

of substituted compliance, or allowing market participants to comply with DoddFrank through comparable and comprehensive foreign regulatory requirements. 

106

1See generally, Commodity Exchange Act (‘‘CEA’’) §§ 1a(28), 4d, 7 U.S.C. §§ 1a(28), 6d. 2See Bankruptcy Code (hereinafter ‘‘Code’’) § 101(6), 11 U.S.C. § 101(6). 3See Code § 109(d), §§ 761 et. seq. 4See 17 CFR § 190.02(e)(1). 5Section 5 of SIPA is codified at 15 U.S.C. § 78eee. 

The CFTC has a consistent record of relying on comparable home country regulation where appropriate. We are very much committed to recognition regimes for 

swaps market reforms as well, where there are comparable and comprehensive requirements. 

The CFTC also has had a long history of working with international regulators 

to coordinate oversight of cross-border entities. We have done so with regard to 

clearinghouses, futures commission merchants and foreign boards of trade. 

Insert 2

Mrs. NOEM. Thank you, Mr. Chairman, and I appreciate this hearing. It is 

timely given it is the second anniversary of the Dodd-Frank and we need to look 

at these reforms and the related rules and see how they impact people on the 

ground. For example, in South Dakota, where I am from, some businesses and 

producers who are actively investing in the commodity market are still dealing 

with the failure of MF Global, so I just have a couple questions for you. 

Does the CFTC have the power to force a firm into bankruptcy? 

Mr. GENSLER. We might need to get back to you, but I am not aware of that. 

Even in this Peregrine situation, we went into court to ask for a receiver to be 

appointed to freeze the assets, which we do in Ponzi schemes as well. So I think 

that is the route. I believe the answer is no but we seek a court to appoint a 

receiver. 

Mrs. NOEM. Okay. That is the route that is generally followed? Well, if there 

is more information on that that you can give me later, I would appreciate that. 

That would be great.

The attached CFTC staff memorandum discusses the applicable laws that affect 

the insolvency of a futures commission merchant that is also a broker dealer. 

ATTACHMENT

Memorandum 

From: Robert B. Wasserman, Chief Counsel, Division of Clearing and Risk 

Re: SIPA Proceedings for insolvent FCMs 

Date: April 1, 2012

Introduction 

The following is an analysis of the circumstances where the insolvency of a Futures Commission Merchant that is also a Broker Dealer would proceed under the 

Securities Investors Protection Act, 15 U.S.C. § 78aaa, et. seq. (SIPA) rather than 

as a commodity broker bankruptcy under Subchapter IV of Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 761, et. seq. (Subchapter IV). 

As discussed further below, jurisdiction under SIPA is based on the existence of 

at least one securities customer whose claims may be satisfied by SIPC, rather than 

on the predominance of securities customers versus commodity customers. However, 

as also discussed further below, the interests of commodity customers are not ignored under SIPA. 

Discussion 

Futures Commission Merchants (‘‘FCMs’’) are the financial intermediaries for futures market transactions.1 A bankrupt FCM which has a ‘‘customer,’’ as that term 

is defined in the Bankruptcy Code, is known as a ‘‘commodity broker.’’ 2 A commodity broker bankruptcy must proceed as a liquidation under Chapter 7 of the 

Bankruptcy Code, rather than a reorganization under Chapter 11, and the trustee 

has duties specified in Subchapter IV of Chapter 7.3 Chief among those duties is 

the duty to endeavor to transfer the positions of customers of the FCM to a solvent 

FCM.4 The financial intermediaries for securities are known as broker dealers 

(‘‘BDs’’), and the insolvency of a BD proceeds under SIPA. For the reasons that follow, the insolvency of an entity that is both a commodity broker and a BD (a ‘‘BD/

FCM’’) will, so long as there is at least one securities customer, proceed under SIPA. 

Section 5(a)(1) of SIPA 5 provides that ‘‘[i]f the [SEC] is aware of facts which lead 

it to believe that any broker or dealer subject to its regulation is in or is approaching financial difficulty, it shall immediately notify SIPC.’’

Section 5(a)(3)(A)(A) provides that SIPC may file an application for a protective 

decree with respect to a member with any (securities) customers if it determines 

107

6SIPA § 5(a)(3)(A) provides that no application shall be filed by SIPC with respect to a member, the only customers of which are persons whose claims could not be satisfied by SIPC advances pursuant to Section 9 of SIPA. MFG did not fall within this exception. 7 Code § 701(a)(1). 8 15 U.S.C. 78fff–1(b).

that the member ‘‘has failed or is in danger of failing to meet its obligations to customers’’ and one of the conditions specified in § 5(b)(1) of SIPA exists.6 Those latter 

conditions include (a) that the debtor is insolvent, or (b) that a proceeding is pending before any court or agency of the United States in which a receiver, trustee, or 

liquidator for such debtor has been appointed, or (c) that the debtor is not in compliance with the rules of the SEC or an SRO with respect to financial responsibility 

or hypothecation of customer securities, or (d) that the debtor is unable to make 

such computations as may be necessary to establish compliance with such financial 

responsibility or hypothecation rules. 

There is no means for the CFTC to effect the placement of a BD/FCM into a 

Chapter 7, Subchapter IV proceeding that avoids SIPA. If the BD/FCM were to file 

for relief under Chapter 7 of the Bankruptcy Code, the U.S. Trustee would appoint 

a trustee from among the panel of persons established by the U.S. Trustee for that 

jurisdiction.7 If the CFTC were to take action to appoint a receiver for an FCM with 

the intention that the receiver file for bankruptcy, that would, by assumption, involve the appointment of a receiver. In either case, the condition in (b) above would 

be established. Moreover, pursuant to § 5(a)(3)(B) of SIPA, ‘‘[n]o member of SIPC 

that has a customer may enter into an insolvency, receivership, or bankruptcy proceeding, under Federal or State law, without the specific consent of SIPC, except 

as provided in title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.’’

Accordingly, so long as there is at least one securities customer, the CFTC has 

no way to prevent SIPC from initiating a SIPA proceeding, and SIPA prevents the 

initiation of a Chapter 7, Subchapter IV proceeding without SIPC’s specific consent. 

Additionally, once SIPC initiates a SIPA proceeding, the district court is, pursuant 

to Section 5(b)(2)(B)(i) of SIPA, obligated to ‘‘stay any pending bankruptcy, mortgage 

foreclosure, equity receivership, or other proceeding to reorganize, conserve, or liquidate the debtor or its property and any other suit against any receiver, conservator, or trustee of the debtor or its property, and shall continue such stay upon 

appointment of a [SIPC] trustee.’’ Thus, any Subchapter IV proceeding must be 

stayed by the district court in a SIPA proceeding. 

Thus, the only effect that FCM or CFTC action to cause the initiation of a Subchapter IV proceeding with respect to a BD/FCM can have is to confuse and complicate the insolvency of the BD/FCM. Moreover, the succession of trustees and confusion with respect to jurisdiction is likely to delay the circumstances in which the 

commodity customer positions and any available associated collateral are transferred from the insolvent FCM to other FCMs. 

This does not mean that the interests of commodity customers are ignored in a 

SIPA proceeding. Specifically, SIPA § 7(b) 8 provides that 

‘‘To the extent consistent with the provisions of this chapter or as otherwise ordered by the court, a trustee shall be subject to the same duties as a trustee in 

a case under chapter 7 of Title 11, including, if the debtor is a commodity 

broker, as defined under section 101 of such title, the duties specified in subchapter IV of such chapter 7, except that a trustee may, but shall have no duty 

to, reduce to money any securities constituting customer property or in the general estate of the debtor.’’

Thus, commodity customers in a SIPA proceeding do not, pursuant to SIPA, suffer 

any disadvantage relative to commodity customers in a Subchapter IV proceeding. 

Insert 3

Mr. STUTZMAN. September 1, 2011, MF Global announces in a public filing 

that it would comply with FINRA’s determination and increase its capital. 

Would such a filing trigger any red flags at CFTC? 

Mr. GENSLER. As I am not participating, I don’t know what the Commissioners or the agency looked at about that September 1st filing. But just as a 

general matter, our examination staff will work with the self-regulatory organizations like FINRA and Chicago Mercantile Exchange and NFA on any filings 

about capital and try to understand what those filings are. 

Mr. STUTZMAN. So did that happen? Did your agency work with FINRA at all? 

108

Mr. GENSLER. Again, I don’t know because I haven’t gone back and done the 

forensics. I haven’t been involved since this whatever, November 2nd or 3rd period of time. 

Mr. STUTZMAN. Is that something you could find out and notify——

Mr. GENSLER. Our General Counsel, Dan Berkovitz, will follow up with you.

At the end of August 2011, SEC staff contacted CFTC staff regarding MF Global’s 

repo to maturity transactions. 

On September 19, 2011, CFTC staff held a teleconference with FINRA staff to obtain further information regarding the repo to maturity transactions. 

On October 25, 2011, CFTC staff spoke with FINRA staff regarding MF Global. 

During this call, FINRA discussed certain additional steps it had taken to monitor 

MF Global. 

On October 27, 2011, staff in the CFTC New York Regional office was contacted 

by SEC staff. CFTC staff ultimately joined the SEC staff in a meeting at MF Global 

that was the initiation of an SEC examination of the firm. 

On October 28, 2011, CFTC staff spoke with FINRA staff regarding the status of 

MF Global. 

On October 30, 2011, CFTC and SEC staff participated in a conference call with 

MF Global regarding MF Global’s financial status and the production of documents 

related to that status. 

Insert 4

Mr. CONAWAY . . . Chairman, one real quick follow-up. Section 722(d) is the 

section you cite that gives you the authority to do the guidance on the 

extraterritorial or cross-border; 722(c), we think gives the SEC similar authority. What is y’all’s understanding or can you help us understand your interpretation of those two different sections? 

Mr. GENSLER. Section 722(c) would be in the swaps section of the statute. It 

may well that you want to follow up with——

Mr. CONAWAY. Okay, if you wouldn’t mind getting back with us on that because——

Mr. GENSLER. Because I understood that it is all in the first part of that Title 

VII is swaps, which is the CFTC, and then of course the other section later in 

the chapter is there but 722(c), Dan? Maybe we will have to——

Mr. CONAWAY. All right. We will follow up with you on that if you wouldn’t 

mind.

Section 722(d) of the Dodd-Frank Act relates to the CFTC’s extraterritorial jurisdiction over swaps. Subtitle B of Title VI, sections 761 through 744, applies to securities-based swaps under the jurisdiction of the Securities and Exchange Commission. 

SUBMITTED LETTER TO HON. GARY GENSLER, CHAIRMAN, COMMODITY FUTURES

TRADING COMMISSION FROM HON. K. MICHAEL CONAWAY, A REPRESENTATIVE IN

CONGRESS FROM TEXAS AND RESPONSE

August 21, 2012

Hon. GARY GENSLER,

Chairman,

Commodity Futures Trading Commission, 

Washington, D.C.

Dear Chairman Gensler:

Thank you for your recent testimony before the House Committee on Agriculture 

hearing entitled, Oversight of the Swaps and Futures Markets: Recent Events and 

Impending Regulatory Reforms. This letter serves as a follow-up to my questions inquiring about the coordination between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) with respect to the 

extraterritorial application of Title VII of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (P.L. 111–203). As you will recall, I asked you during the 

hearing to clarify why the statutory language found in Section 722(d) of Title VII 

of the Dodd-Frank Act serves as the legal rationale for the CFTC’s inability to issue 

a joint rule with the SEC on cross-border jurisdiction. 

As a follow-up, could you please explain why Section 722(d), which governs swaps 

under the CFTC’s jurisdiction, and Section 772(c), which governs security-based 

swaps under the SEC’s jurisdiction, prevents the two Commissions from coordinating on a single joint rulemaking? 

109

As you know, Section 722(d) of Dodd-Frank provides that Title VII ‘‘shall not 

apply to activities outside the United States’’ unless those activities ‘‘have a direct 

and significant connection with activities in, or effect on, commerce of the United 

States’’ or ‘‘contravene such rules or regulations as the Commission may prescribe 

or promulgate as are necessary or appropriate to prevent the evasion of any provision of this Act that was enacted by [Title VII].’’ Similarly, Section 772(c) of DoddFrank provides that ‘‘[n]o provision of [Title VII] shall apply to any person insofar 

as such person transacts a business in security-based swaps without the jurisdiction 

of the United States, unless such person transacts such business in contravention 

of [SEC rules].’’

My plain-language reading of Sections 722(d) and 772(c) appears to be a limitation on the extraterritorial reach of both agencies, not a mandate that prohibits the 

CFTC from engaging with the SEC on a joint rulemaking. In fact, Sections 712(a)(1) 

and 712(a)(2) of Dodd-Frank both require that the CFTC and SEC ‘‘consult and coordinate . . . for the purposes of assuring regulatory consistency and comparability, 

to the extent possible.’’

Section 712(a)(7)(A) further reinforces this point by stating that the CFTC and 

SEC ‘‘shall treat functionally or economically similar products or entities . . . in a 

similar manner.’’ As you well understand, no joint rulemaking between the CFTC 

and SEC on the extraterritorial regulation of swaps and security-based swaps would 

require that both types of contracts be treated identically by the two agencies. Rationales to provide different regulatory treatment for very specific types of contracts 

would certainly exist within a jointly-written rule. Indeed, Dodd-Frank Section 

712(a)(7)(B) expressly provides the CFTC and SEC with the flexibility that economically similar products need not be treated in an identical manner. Read together, 

all of the Dodd-Frank sections referenced above seem to logically point to a thorough 

joint rulemaking on cross-border regulation from the CFTC and SEC. 

However, I am concerned that the CFTC’s proposed cross-border guidance released on June 29, 2012, is the first action which will ultimately result in swaps 

and security-based swaps being governed by two very different regulatory regimes. 

From a regulatory compliance standpoint, the most-restrictive guidance or rulemaking will likely become the de facto standard for the entire swaps and securitybased swaps marketplace. Nevertheless, we must avoid the illogical creation of a 

disparate regulatory environment that would result in the same market participant 

being a ‘‘U.S. person’’ for trading in swaps while simultaneously considering them 

a ‘‘non-U.S. person’’ for trading in security-based swaps. 

Finally, Section 752(a) of the Dodd-Frank Act requires the CFTC and SEC to seek 

harmonization on an international level by consulting and coordinating ‘‘with foreign regulatory authorities on the establishment of consistent international standards’’ for swaps regulation. Absent consistent regulatory standards proposed by our 

own domestic regulators, effective coordination between U.S. and foreign regulators 

would seem virtually impossible. How does the CFTC plan to coordinate with international regulators if swaps and security-based swaps are governed by two different 

extraterritorial regulatory regimes? 

Thank you again for answering the questions above related to the creation of a 

consistent regulatory regime for the swaps and security-based swaps marketplace. 

I look forward to receiving your written response by Friday, September 7, 2012, so 

it can be included in the official Committee hearing record. 

Sincerely,

Hon. K. MICHAEL CONAWAY,

Chairman, 

Subcommittee on General Farm Commodities and Risk Management.

October 10, 2012

Hon. K. MICHAEL CONAWAY, 

Chairman,

Subcommittee on General Farm Commodities and Risk Management, 

House Committee on Agriculture, 

Washington, D.C.

Dear Chairman Conaway:

Thank you for your letter of August 21, 2012, following up on our discussion during the Committee on Agriculture’s hearing of July 25, 2012. 


11234028.eps
110

The Commodity Exchange Act (CEA)—as amended by the Dodd-Frank Wall Street 

Reform and Consumer Protection Act—directs the Commodity Futures Trading 

Commission (CFTC) to implement swaps market reforms, to coordinate closely with 

other domestic regulatory agencies, and to coordinate as well with regulators in foreign jurisdictions. In addition, in particular instances, Congress has directed the 

CFTC to conduct rulemakings jointly with the Securities and Exchange Commission 

(SEC). The two Commissions worked well and closely together to complete this year 

final joint rules that further define important terms. 

In addition to cooperating on joint rules, the CFTC and the SEC are coordinating 

closely in writing other rules to implement the derivatives provisions of the DoddFrank Act. We coordinate and consult on each rulemaking, including sharing many 

of our memos, term sheets and draft work product. This close working relationship 

has benefited the rulemaking process, and will continue throughout completion of 

rulemaking and implementation. Staffs of the SEC and CFTC have jointly held a 

number of roundtable discussions to obtain the public’s views. 

This process of consultation and coordination has been followed with regard to 

considerations of the cross-border application of Dodd-Frank. On August 1, 2011, 

staffs of the two Commissions hosted a roundtable discussion on international issues 

relating to the implementation of title VII of the Dodd-Frank Act. This meeting as 

well as public comments and other meetings have facilitated the agencies’ understanding of related issues as well as helped us to share a common understanding 

with regard to the important matters to be addressed by both Commissions in our 

joint and separate rulemakings. 

Section 722(d) of the Dodd-Frank Act states that swaps market reforms under the 

CEA shall not apply to activities outside the United States unless those activities 

have ‘‘a direct and significant connection with activities in, or effect on, commerce 

of the United States.’’ The Commission has received requests from market participants seeking the agency’s interpretation of swap market reforms in light of that 

provision. 

In June, the Commission—consulting closely with domestic and foreign regulators—proposed guidance interpreting the cross-border application of the DoddFrank Act. In a separate release, the Commission proposed phased compliance for 

foreign swap dealers (including overseas affiliates of U.S. swap dealers) regarding 

certain requirements of Dodd-Frank swaps market reform. 

Such phased compliance would enable market participants to comply with the 

Dodd-Frank Act in an orderly fashion. It would allow time for the CFTC, international regulators and market participants to continue coordinating on regulation 

of cross-border swaps activity. And it would allow for appropriate implementation 

of substituted compliance, or allowing market participants to comply with DoddFrank through comparable and comprehensive foreign regulatory requirements. 

The CFTC has a consistent record of relying on comparable home country regulation where appropriate. We are very much committed to recognition regimes for 

swaps market reforms as well, where there are comparable and comprehensive requirements. 

The CFTC also has had a long history of working with international regulators 

to coordinate oversight of cross-border entities. We have done so with regard to 

clearinghouses, futures commission merchants and foreign boards of trade. The 

Commission has sought public comment regarding these releases and the Commission staff is closely reviewing that input in preparation for final action. 

As the process of swaps market reform implementation proceeds, the Commission 

will continue to work closely with the SEC and other domestic regulators. The Commission is also working closely with regulators in foreign jurisdictions—often sharing memos, term sheets and draft work product as we do with other domestic agencies. These efforts are designed to assure regulatory consistency and comparability 

to the extent possible, taking into consideration differences in markets and in the 

applicable statutory requirements. 

Thank you for your letter and for your support of the work of the CFTC. If I can 

be of further assistance, please do not hesitate to let me know. 

Sincerely,

Hon. GARY GENSLER,

Chairman,

Commodity Futures Trading Commission. 


11234029.eps
111

SUBMITTED QUESTIONS

Response from Hon. Gary Gensler, Chairman, Commodity Futures Trading 

Commission 

Questions Submitted by Hon. Frank D. Lucas, a Representative in Congress from 

Oklahoma 

Question 1. Chairman Gensler, I received the following questions on August 2, 

2012, in a letter from the following members of the Florida Congressional delegation: Representatives Stearns, Posey, Mica, Nugent, Ross, West, Rivera, Buchanan, 

Ros-Lehtinen, Young, and Miller: 

How has the [LIBOR] manipulation affected the housing market in Florida?

Question 2. With such a large population of older Americans in Florida, have our 

constituents’ retirement savings been disproportionately affected compared to the 

rest of the country?

Question 3. How has the LIBOR manipulation affected private student loan interest rates, which according to the Consumer Financial Protection Bureau, has surpassed credit card debt as the biggest source of unsecured debt for U.S. consumers? 

Answer 1–3. The Commission does not have data on the on the Florida housing 

market or on private student loans, nor did the Commission’s order find the effect 

of Barclays actions on LIBOR. The Commission’s order stated that Barclays repeatedly attempted to manipulate and made false, misleading or knowingly inaccurate 

submissions concerning LIBOR.

Question 4. What work is the CFTC doing to aid the Department of Justice in 

civilly and criminally charging those involved? 

Answer. The Commission’s Division of Enforcement referred the Barclays matter 

to the Department of Justice. That referral culminated in an agreement with the 

Fraud Section of the U.S. Justice Department’s Criminal Division, in which 

Barclays agreed to pay a $160 million penalty and to continue to cooperate with the 

Department.

Question 5. How does the CFTC plan to help state governments assess the impact 

the LIBOR fraud has had on them as individual states? 

Answer. In appropriate circumstances and with appropriate confidentiality agreements in place, we can and often do share information with state law enforcement 

authorities. In fact, the Commission’s Office of Cooperative Enforcement, a unit of 

the Division of Enforcement, has the goal of ensuring that enforcement of the commodity futures laws is addressed through civil, criminal, or administrative actions 

by state and Federal agencies or branches of government whenever possible. 

Question Submitted by Hon. K. Michael Conaway, a Representative in Congress from 

Texas 

Question. Chairman Gensler, do you have any reason to believe the CFTC would 

have uncovered this fraud sooner had it been tasked with the audit of Peregrine instead of the NFA? If the CFTC had the sole authority to audit market participants, 

what would you and your staff have done differently? 

Answer. The regulatory system did not adequately protect Peregrine’s customers. 

More needs to be done to protect customers. The Commission is proceeding to consider staff recommended proposed rules that incorporate three key reforms recently 

adopted by the NFA and would require:

• FCMs to hold sufficient funds in Part 30 secured accounts (funds held for U.S. 

foreign futures and options customers trading on foreign contract markets) to 

meet their total obligations to customers trading on foreign markets computed 

under the net liquidating equity method. FCMs would no longer be allowed to 

use the alternative method, which had allowed them to hold a lower amount 

of funds representing the margin on their foreign futures;

• FCMs to maintain written policies and procedures governing the maintenance 

of excess funds in customer segregated and Part 30 secured accounts. Withdrawals of 25 percent or more would necessitate pre-approval in writing by senior management and must be reported to the designated SRO and the CFTC; 

and

• FCMs to make additional reports available to the SRO and the CFTC, including 

daily computations of segregated and Part 30 secured amounts.

Additional reforms in the staff recommendations include requiring that SROs and 

the CFTC have direct electronic access to FCMs’ bank and custodial accounts for 

customer funds, that acknowledgement letters and confirmation letters come directly to regulators from banks and custodians, enhanced risk disclosures to cusVerDate 0ct 09 2002 10:19 Jan 04, 2013 Jkt 041481 PO 00000 Frm 00115 Fmt 6621 Sfmt 6621 I:\DOCS\112-34\75437.TXT BRIAN
112

tomers, setting standards for the SROs’ examinations and the annual certified financial statement audits, including raising minimum standards for independent 

public accountants who audit FCMs and implementing a more effective early warning system for the Commission and the SROs that alert them to material events. 

If the Commission approves the staff recommendations, further public comment 

will be of great value to the agency in devising final rules that best ensure the protection of customer funds. 

Regarding the Commission’s oversight of SROs and intermediaries, though we’re 

making progress through our reorganization at the CFTC and new rules, the recent 

events at Peregrine highlight the necessity of looking at the decades-old system of 

SROs and the Commission’s role in overseeing SROs. 

I have directed the CFTC’s staff to do a full review of how the agency conducts 

oversight of the SROs, as well as limited scope reviews of FCMs, to determine what 

improvements can and should be made. As part of this review, we have reached out 

to the Public Company Accounting Oversight Board (PCAOB), which oversees the 

audits of public companies. The Dodd-Frank Act gave the PCAOB oversight authority over the audits of brokers and dealers who are registered with the Securities Exchange Commission. The PCAOB has agreed to give us the benefit of its insights 

and expertise. 

Questions Submitted by Hon. Scott R. Tipton, a Representative in Congress from Colorado 

Question 1. The FCS is a government sponsored enterprise (GSE) that is made 

up of 4 Federal Farm Credit Banks and approximately 80 lending associations. All 

System entities are jointly and severally liable for the actions of each other component of the System—in other words, the actions of one FCS lender ultimately will 

impact the entire System. Congress designed it that way. With this system of interlocking liability in mind, the FCS could be considered a $231 Billion financial services institution. Did the Chairman consider this fact when he issued the ‘‘Clearing 

Exemption for Certain Swaps Entered into by Cooperatives’’?

Question 2. The central idea advanced by the CFTC in the recently proposed 

‘‘Clearing Exemption for Certain Swaps Entered into by Cooperatives’’ is that the 

FCS banks lend to the FCS associations, which lend to farmers, and farmers own 

the FCS associations, which own the FCS banks—principally that the Farm Credit 

System is a cooperative. CFTC then proposes that ‘‘cooperatives meeting certain 

conditions are the class of persons that should be exempted from the clearing requirement for certain types of swaps. cooperatives act on behalf of their members 

in certain financial matters. The proposed rule provides for passing through the end 

user exemption available to such cooperative’s members.’’ I find your logic lacking 

here. Why does who owns an entity make any difference in the regulation of the 

derivatives market?

Question 3. You observe in the proposed rule: ‘‘cooperatives have a member ownership structure in which the cooperatives exist to serve their member owners and not 

act for their own profit. In a real sense the cooperative is not separable from its 

member owners.’’ What is unique about the ownership structure of cooperatives that 

would prevent a large financial institution like the Farm Credit System from making stupid, imprudent, wrong, or costly mistakes? Haven’t you have been charged 

to regulate the derivatives market to protect the financial system from stupid, imprudent, wrong and costly mistakes? Doesn’t exempting a financial cooperative with 

assets of more than $230 billion from certain derivatives activities expose the entire 

financial system to unintelligent, imprudent, wrong or costly mistakes? 

Answer 1–3. The comment period for the CFTC’s proposed rule on a ‘‘Clearing Exemption for Certain Swaps Entered into by Cooperatives’’ ended on August 16, 2012. 

In response to this proposal, the CFTC received comment letters from market participants and interested members of the public. The Commission is reviewing these 

letters and evaluating the various issues raised by commenters. The CFTC will consider the issues surrounding the proposed exemption for certain cooperative swaps 

and cooperative structure. 

Question Submitted by Hon. Mike McIntyre, a Representative in Congress from 

North Carolina 

Question. Chairman Gensler, in the proposed rule on Product Definitions you 

asked a number of questions of the electric industry, and I understand that the electric utilities responded and answered the staff’s questions. As you know, the Products Definitions final rule subjected the capacity and transmission contract language 

to further comment. It is my understanding that these transactions—capacity contracts, transmission contracts and tolling agreements—are forwards or forwards 

with embedded options, and not swaps. I believe it was not the intent of Congress 

113

to consider such transactions swaps under the Dodd-Frank Act. Would you please 

clarify the CFTC’s need for further comment on capacity and transmission contracts 

(used to ensure delivery of electric power to utilities and their consumers) in the 

Products Definition final rule? 

Answer. Under the Commission’s final Product Definition rule, depending on the 

relevant facts and circumstances involved, capacity contracts, transmission contracts, and tolling agreements may qualify as forwards. The Commission issued interpretive guidance in this regard for market participants. 

The Commission also believed that it would benefit from further input about that 

guidance and requested public comment by Oct. 12, 2012. Once this comment period 

has closed, the Commission will analyze the issues raised by the commenters.

114

SUBMITTED MATERIAL BY HON. STEVE SOUTHERLAND II, A REPRESENTATIVE IN

CONGRESS FROM FLORIDA


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124


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---

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s. DU'OSlRD CASH AND PWOf'EIITT 

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125


11234014.eps

_D""" ._ 

BECAUSIlot'THE vov.nLE NATtJIWOFTHEcrlMMOIlIT1ES 

MARKETS. T NE PlIRCHASI! AND GRAHTIIOG OF aJM/oIOI).. 

'r'Y OI'I'IONS INVOLVEA HIGH (lI;(IREEOI' RISK. COIdIolODITY 0I'110t< TlVo.NSACTlONS ""Il/tOT SlIITAIl/..Il-. MANY 

MEMIWlS OF THE PlJBUC SUO! TlVo.~1ONS SIIOUW 

BE a;TERED INTO ONLY IIY f't'.RSOI<S WHO NAYE READ 

AND UND£RSI'OOD THIS DlSCl.OSlIRI! STATEMENT AND 

WHO UNuetSTAND THE NATlIRI! AND I!XTENT OF THEIR 

R1GKTS AND OfIl..IG.O.TIONS AND OFTI!€ RlSI<$ INVOLYED 

IN T1!60PTl0N TRANMCTIONS COVEllEl> IIY THIS JlISCt.O. 

SURE STATEIoIENT. 

IIOTH THB PlJIlCHASal ANDTHEGRAHTOR SHOlJW KIOGW 

WHI!I"HEII. THIII'ART\CUUR OPTION IN WHICH T H6Y CON· 

T£MIVITE TlVo.DlNO IS AN OPTIJN WIIIOL IF I;)(UOSI!!). 

RESULTS IN THB IlSTAIIUS!1MENl" OF A F1JT1JIlES CON· 

TRACI" (AN "OPTION ON A RITIIRilS COtml.ACr) OR R!l-

$lJU"S IN THE MAKINO 0It TAKING OI'DliUYEMY OF THB 

A(.TI)A.L o:lMMODITY lINDBRI.YING THI! 0PrI0N (AN '"Of'. 

noN ON A PIIYSICAl. alMMODITY'~ !10TH THII PlJRCHAS· 

ER AHDTHBORAH1l.lR.OF AHOPTIONOr< A rHVSlCALCOId· 

MOVrrV SHOUUl B.I! AWARE THAT. IN CERl"AlN CASES. THI! 

D&.IVUY OPTHE AC.TUALCOIdMODlTY UNDF.JI.LYINO THE 

OI'I'ION MAY NOT lIlI R6QUlRED AND TIlAT.lf THB OPTION 

IS IlXERCJSED. THB OBUOATIOtIS OF THB l'IIROtASQt AND 

GRANTOR WllJ.. BE SEt"TlB) IN CASH. 

MEeI" ADI)J11OtIAL CAUS -. MARGIN WHEN THE MAR· 

Kf!f MOVES AGAINST inS 0It H~ I'OSITION AND. IN SUCH 

CIRCUMSTANCES. TO SImAIN A vERY URlJB RNANCIAL 

~ 

A I'eI:SON WHO I'UlOIASIlS AN 0f'I1Cl< SI.IJ!IOCf TO Sf(I(X. 

STYLEMAR(lIMNOstJJUlDBIlAWARIlTllAT.INORDIORTORIlAUZIlANY VAUlEPllDNTlIEOPnlN, ITww.. BIlNllC!iSSAKY 

EITlIEIt TO OFI'SI!T T1IE 0I'!"J(fi ~ OR ID EXElICSE 

THI! 0P11(Jl\I. (lPTI(lN$ SIJBlB:T TO RJI1.1RE:S.S["Y LE MAR(IINING ARE MARnDID MAAKlIl". AHDo.o.JNS AND LOSSeS AIUl 

I'AlDANDauB::TmlWLI'.IFAI<OPT1ONl'UltCHAialDOll5 

I«)T UNDERSTAND HOWIDOFI'SI!TOR EXERCSI!AN OPTKlN. 

TIlE I'IIlIIOIASfJI; SHDIJU) IJlQU£:ST AN E)Ci'LANATlON FlIOtot 

THE I0oI OR II!. ~ SHDIJU) BIl AWARE THAT IN A 

0IVIdJIElI OFCIRCIIMSTANCES. !lOMI5 OF WItICIl WllJ.. BI! ~ 

SClUBS> INTHIS IlISCl..OSI.JIU STAn:NENT. IT!IOAY BI! Dlmcuu- OR 1MP()$')I8U!TOOfl'SEf AN f?XISI1NG 0PT10N l'()SITlONON AI< EXCHA~ 

T1fI! GRANTOR OF AI< OI'TION SHDIJU) BIl A'/I:ARI! THAT. IN 

MOST CASB. A CXlMMODITY OPTION !IOAY Bl!1!XEROSED AT 

ANY TIME FlIOtot THE TIM!! IT IS GIlANTID l/NT1L. IT I!XI'lRI!S. 

THI! I'IJIlOtASI:lt OF AN OI'TJON SHDIJU) &Ii AWARE THAT 

~OI'TION <XItffRACI"$ MAY I'ROVtDE!ONLY A UIdfTS) 

ratJODOFTlMi! -. £IUllClSEOPTHI!OP11(Jl\I. 

THE I'URCHASI'.R OF A I'UT 0It CALL SUBlSCT TO SfOC1I:. 

~:;:~~~~~!\~~~= ~6,'*~~~~':~ TEMIVIT6 TRADIHO IS SUBJB:I" TO A "STUCK·STYLI!" TION_TlIAT IS. T1fI! PIlEMIUM Ot.AR(JRJ -. TlII! 0I'n0N 

OR -FtTT1JRFS-STYLI!" SYSTEM OP MARGINING. UNDEIt A f'l.ll'iAU.."TIlANMCIlGNalSTS. 

STOCX-sTYl..B MAR(ltNINO SYSTEM. A PlJRCHAS£R IS R!lQlIlReDT'OPAY THEl'ULLPlJRCIlASEPIUCI!OFTHEOPTJON THE <XIMloIIXITY fUTURES TRADING IXlMMISSION R£-

AT THB INITIATION OF Till! TlVo.NSACnOH. THE PVIICHAS· Q\j11JlS TlIAT AU.. CIJ$TOfoIEIlS IlIlCJlIVf AND /ICIl.NOWl.-

FJt HAS NO I'UlITHfJl OtiUGATION ON THIl OI'TJON 1'C5I. EDGfROClllI'TOFACOFY OFTHlSDISCI..OSUIUlSTAT&reNT 

TlDN. UNDER A fVTURIlS.sTYU! MAII:GINlNIO SYSTIiM. Till! BIIT D06S NOT INrE1<D nos STATlMDIT AS A RIlXlMMElI· 

PURCHASER DI>PU5ITS INITIAL MAIIm!< AND MAY BE Jl.B. DATU< OR I'J<DORSI!MENl OF IilID\AN()g.TRADIlD COM· 

QUlRI!D TO DEI'()SIT ADDITIDNA.I. MA ROIN IF TKIlIoIARKIlT I«lOITY DI'11OI<S. 

MOV6!l AGAtNST TIll! OPTKlN POSITION. TKEPlJItCHAS.BR""S 

TOTAL SI:!fTI.EMIlNT VARIATION MAROIN OfIUOATlON 

OVER THE UJ'Ii OF T He. OI'TJON. IIOW1NER. WlLt.NOT E)C_ 

~ TH60RlG1 ..... LOI'TION f'IlEMIUM. AU"IIOUOH SON!! 

INDIVIOIJAL PAYMaiT OfIUOATlOtIS AN[)I()It RISK MAR. 

GIN RIIQlIIIlENB'fTS MAY AT TtMi'.S llXCIlilD TIll! ORJ()1NAl. 

()I"Il(IN PREMlUM. tFTHI! PUR!;HASa OR GRANTOlI.IXES 

NOT UNDERSTAND HOW OPTIONS ARE MAR(ltNED UNDEIt 

A STOCJ(·STYU!OIt t'UTl/RfS·STYLE MAIlGININO SYSTEM. 

HEOit SHE SHOUWItB;jUmT AN IiXI'U. ..... T1ON FlION T1fI! 

FUTUIJlS <DMMlSSIOl\IIoIERCIIANT ("100(") OR INTII:ODl.C 

1110 BROKER ("III"). 

A PE:RSOf< SHOUUJ NOT PlJIlCItASI! AI<T COIdNOtIITY 0PTION UNL..I!SS III! OR SHE IS ABU! TO SlJSTAtN A TOTAL 

"\DSS Df'THI! PREMIUM AND TlVo.NSACTION O)STS OF PUll· 

O!AstNG THB 0I'Il0tI. A I'D.SON SHOUlD /tOT GRANT 

ANY COMM!JaTY OPTION UNU;SS HI! OR SHB IS ABU! TO 

tt l _ OFTlIII_ OFDf'TION TJIADWG. 

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126


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_D" 

no. _ <f • pol opIioo """ _ "'" _ • ilion poo;.ioo .. 

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127


11234016.eps

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