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S. HRG. 110–731 

ROLE, RESPONSIBILITIES, AND RESOURCE NEEDS 

OF THE COMMODITY FUTURES TRADING COMMISSION FOR OVERSIGHT OF ENERGY MARKET 

AND OIL FUTURES CONTRACTS 

JOINT HEARING 

BEFORE THE

COMMITTEE ON AGRICULTURE, 

NUTRITION, AND FORESTRY 

AND THE

SUBCOMMITTEE ON FINANCIAL SERVICES AND 

GENERAL GOVERNMENT 

OF THE

COMMITTEE ON APPROPRIATIONS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

SPECIAL HEARING 

JUNE 17, 2008—WASHINGTON, DC 

Printed for the use of the Committee on Appropriations 

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html 
(II) 

COMMITTEE ON APPROPRIATIONS 

ROBERT C. BYRD, West Virginia, Chairman 

DANIEL K. INOUYE, Hawaii 

PATRICK J. LEAHY, Vermont 

TOM HARKIN, Iowa 

BARBARA A. MIKULSKI, Maryland 

HERB KOHL, Wisconsin 

PATTY MURRAY, Washington 

BYRON L. DORGAN, North Dakota 

DIANNE FEINSTEIN, California 

RICHARD J. DURBIN, Illinois 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

JACK REED, Rhode Island 

FRANK R. LAUTENBERG, New Jersey 

BEN NELSON, Nebraska 

THAD COCHRAN, Mississippi 

TED STEVENS, Alaska 

ARLEN SPECTER, Pennsylvania 

PETE V. DOMENICI, New Mexico 

CHRISTOPHER S. BOND, Missouri 

MITCH MCCONNELL, Kentucky 

RICHARD C. SHELBY, Alabama 

JUDD GREGG, New Hampshire 

ROBERT F. BENNETT, Utah 

LARRY CRAIG, Idaho 

KAY BAILEY HUTCHISON, Texas 

SAM BROWNBACK, Kansas 

WAYNE ALLARD, Colorado 

LAMAR ALEXANDER, Tennessee 

CHARLES KIEFFER, Staff Director 

BRUCE EVANS, Minority Staff Director 

SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT

RICHARD J. DURBIN, Illinois, Chairman 

PATTY MURRAY, Washington 

MARY L. LANDRIEU, Louisiana 

FRANK R. LAUTENBERG, New Jersey 

BEN NELSON, Nebraska 

ROBERT C. BYRD, West Virginia (ex officio) 

SAM BROWNBACK, Kansas 

CHRISTOPHER S. BOND, Missouri 

RICHARD C. SHELBY, Alabama 

WAYNE ALLARD, Colorado 

THAD COCHRAN, Mississippi (ex officio) 

Professional Staff 

MARIANNE UPTON

DIANA GOURLAY HAMILTON

MARY DIETRICH (Minority) 

RACHEL JONES (Minority) 

LASHAWNDA SMITH (Minority) 

Administrative Support 

ROBERT RICH
(III) 

COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY 

TOM HARKIN, Iowa, Chairman 

PATRICK J. LEAHY, Vermont 

KENT CONRAD, North Dakota 

MAX BAUCUS, Montana 

BLANCHE L. LINCOLN, Arkansas 

DEBBIE A. STABENOW, Michigan 

E. BENJAMIN NELSON, Nebraska 

KEN SALAZAR, Colorado 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, JR., Pennsylvania 

AMY KLOBUCHAR, Minnesota 

SAXBY CHAMBLISS, Georgia 

RICHARD G. LUGAR, Indiana 

THAD COCHRAN, Mississippi 

MITCH MCCONNELL, Kentucky 

PAT ROBERTS, Kansas 

LINDSEY GRAHAM, South Carolina 

NORM COLEMAN, Minnesota 

MICHAEL D. CRAPO, Idaho 

JOHN THUNE, South Dakota 

CHARLES E. GRASSLEY, Iowa 

MARK HALVERSON, Majority Staff Director 

JESSICA L. WILLIAMS, Chief Clerk 

MARTHA SCOTT POINDEXTER, Minority Staff Director 

VERNIE HUBERT, Minority Chief Counsel 

(V) 

C O N T E N T S 

Page 

Opening Statement of Senator Richard J. Durbin ................................................ 1 

Prepared Statement of Senator Thad Cochran ..................................................... 4 

Statement of Senator Tom Harkin ......................................................................... 4 

Statement of Senator Sam Brownback .................................................................. 6 

Statement of Senator Saxby Chambliss ................................................................. 7 

Statement of Walter Lukken, Acting Chairman, Commodity Futures Trading 

Commission ........................................................................................................... 10 

Prepared Statement of ..................................................................................... 14 

Enhancing Information and Transparency ............................................................ 14 

Ensuring Proper Market Controls .......................................................................... 15 

Continuing Aggressive Enforcement Efforts ......................................................... 16 

Improving Oversight Coordination ......................................................................... 16 

Seeking Increased Funding ..................................................................................... 16 

Statement of Dr. Mark Cooper, Director of Research, Consumer Federation 

of America ............................................................................................................. 44 

Prepared Statement of ..................................................................................... 46 

Irresponsible Deregulation is the Primary Cause of the Speculative Bubble .... 47 

The Problem of Hyper-speculation Afflicts a Wide Range of Markets ................ 49 

Regulatory Reform is the Way to Solve the Problem ........................................... 58 

Statement of Terrence A. Duffy, Executive Chairman, CME Group, Inc ........... 59 

Prepared Statement of ..................................................................................... 61 

Speculation is Essential to Efficient, Liquid Markets .......................................... 62 

Raising Margin Above Prudential Levels is Counterproductive .......................... 64 

The CFTC’s Exclusive Jurisdiction Over Trading on CFTC Regulated Markets 

Must be Preserved ............................................................................................... 67 

Position Limits on Foreign Boards of Trade Listing Clones of U.S. DCM 

Listed Contracts ................................................................................................... 67 

The Exemption for Commercial Markets in Energy Products, Even as Limited 

by the Recent Amendment of the CEA, is Unnecessary and Creates Information Gaps ......................................................................................................... 68 

Statement of James C. May, President and Chief Executive Officer, Air 

Transport Association .......................................................................................... 69 

Prepared Statement of ..................................................................................... 70 

Statement of Dr. James Newsome, President and CEO, New York Mercantile 

Exchange ............................................................................................................... 72 

Prepared Statement of ..................................................................................... 73 

Market Oversight and Transparency ..................................................................... 74 

Recent CFTC Announcement .................................................................................. 75 

Foreign Boards of Trade .......................................................................................... 76 

Market Analysis of the CFTC-regulated Energy Exchange ................................. 76 

Demand .................................................................................................................... 77 

Supply ....................................................................................................................... 78 

Analysis of Participation in NYMEX’s Crude Oil Futures Contract ................... 78 

Margins ..................................................................................................................... 79

Statement of Charles A. Vice, President and Chief Operating Officer, Intercontinental Exchange ........................................................................................... 80 

Prepared Statement of ..................................................................................... 82 

ICE Futures Europe ................................................................................................ 82 

Regulation of ICE Futures Europe ......................................................................... 83 

ICE Futures Europe’s Role in the Global Oil Markets ......................................... 83 

CFTC’s Mutual Recognition System ...................................................................... 84 

The Price of Oil ........................................................................................................ 85 

Solutions ................................................................................................................... 86

Additional Committee Questions ............................................................................ 88 
Page

VI 

Questions Submitted to Walter Lukken ................................................................ 89 

Question Submitted by Senator Charles E. Grassley ........................................... 89 

Questions Submitted by Senator Ben Nelson ....................................................... 89 

Questions Submitted by Senator Pat Roberts ....................................................... 95 

Questions Submitted to James C. May .................................................................. 95 

Question Submitted by Senator Saxby Chambliss ............................................... 95 

Questions Submitted by Senator Charles E. Grassley ......................................... 96 

Questions Submitted to Mark Cooper .................................................................... 98 

Questions Submitted by Senator Pat Roberts ....................................................... 98 

Questions Submitted by Senator Saxby Chambliss .............................................. 99 

Questions Submitted by Senator Charles E. Grassley ......................................... 99 

Questions Submitted to Mark Cooper and James C. May ................................... 100 

Questions Submitted by Senator Charles E. Grassley ......................................... 100 

Questions Submitted to Terrence A. Duffy ............................................................ 101 

Question Submitted by Senator Pat Roberts ........................................................ 101 

Question Submitted by Senator Saxby Chambliss ............................................... 101 

Questions Submitted by Senator Charles E. Grassley ......................................... 101 

Questions Submitted to Dr. James Newsome ....................................................... 102 

Questions Submitted by Senator Charles E. Grassley ......................................... 102 

Question Submitted by Senator Pat Roberts ........................................................ 104 

Questions Submitted to Charles A. Vice ................................................................ 105 

Question Submitted by Senator Pat Roberts ........................................................ 105 

Questions Submitted by Senator Charles E. Grassley ......................................... 105 
(1) 

ROLE, RESPONSIBILITIES, AND RESOURCE 

NEEDS OF THE COMMODITY FUTURES 

TRADING COMMISSION FOR OVERSIGHT OF 

ENERGY MARKET AND OIL FUTURES CONTRACTS 

TUESDAY, JUNE 17, 2008 

U.S. SENATE, COMMITTEE ON APPROPRIATIONS, SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL

GOVERNMENT AND THE COMMITTEE ON AGRICULTURE, 

NUTRITION, AND FORESTRY, 

Washington, DC. 

The subcommittees met at 10:30 a.m., in room SD–192, Dirksen 

Senate Office Building, Hon. Richard J. Durbin (chairman) presiding. 

Present: Senators Durbin, Murray, Ben Nelson, Brownback, Harkin, Dorgan, Lincoln, Salazar, Brown, Klobuchar, Chambliss, 

Lugar, Roberts, Crapo, and Thune. 

OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

Senator DURBIN. I am pleased to welcome you to this joint hearing of the Senate Financial Services and General Government Appropriations Subcommittee and the Senate Committee on Agriculture, Nutrition, and Forestry. I am pleased to share the leadership task today with my colleague and friend, Senator Tom Harkin, 

chairman of the Agriculture Committee, which has authorizing jurisdiction over the Commodity Futures Trading Commission 

(CFTC). I want to also welcome the ranking members, Senator 

Brownback from the appropriations side, Senator Chambliss from 

the authorizing side. 

Together we want to examine the role and responsibilities of the 

Commodity Futures Trading Commission, looking at your oversight 

of energy markets and oil futures and consider whether the agency 

has the resources it needs to fulfill its mission. 

I welcome my colleagues who have joined me on the dais from 

both committees in this rare, maybe unprecedented joint meeting. 

I am pleased to welcome Acting Chairman Walter Lukken of the 

CFTC. I also want to note that CFTC Commissioners Mike Dunn, 

Bart Chilton, and Jill Sommers are in attendance. I thank them 

all. 

Our second panel will include Dr. Mark Rogers of the Consumer 

Federation of America, Terry Duffy of the CME Group in Chicago 

(CME), Dr. Jim Newsome of NYMEX, Charles Vice of ICE, the 
2 

Intercontinental Exchange, and Jim May of the Air Transport Association. 

Just a moment of prefatory remarks. Senator Harkin and I—our 

hearts are back home, even though we are here today with this important topic, because of the suffering which is taking place in the 

Midwest with flood waters. As Tom and I were just noting, the disaster which hit Iowa is now headed downstream and many of us 

are going to be facing similar challenges, and our hearts and prayers go to all those who are suffering, being separated from their 

homes and businesses and communities. Our American family 

comes together when there are such natural disasters to help in 

these situations, and I am sure that the President and Congress 

will do no less because of this devastation in the middle west. 

Less than 2 weeks ago, the price of a barrel of oil on the futures market reached $139. In 2 days—2 days—the price rose $16, more 

than 10 percent. Did I miss some war in the Middle East? Was 

there an oil supply disruption that occurred in that period of time? 

The answer is no. 

Something is going on in the oil futures markets beyond the fundamentals of supply and demand. And with the economy in a tailspin and the average price for a gallon of gas over $4, it is absolutely critical that we meet and take a look at it. 

But here is one thing. No one knows for sure what is going on 

here. That is why we are conducting this hearing. The regulator of 

the oil futures markets is the CFTC. Chairman Lukken, who we 

will hear from shortly, has stated on several occasions that the 

CFTC does not believe there is market manipulation. Well, that 

may be true, but maybe it is not. I honestly do not know if the 

CFTC has the resources or the data to be able to make any definitive judgment about this market. And if it is true that the market 

is not being manipulated, I think that there still could be excessive 

speculation that is driving up the price of oil beyond pure supply 

and demand. 

Manipulating the price of a future is clearly illegal. Simply speculating on whether the price of a future is going up or down is normal. That is what traders do. But excessive speculation in which 

large positions are taken that divorce the overall price of the commodity from its natural price is problematic for consumers and 

businesses and is really threatening our economy. 

In the case of oil, every American family and business is hurting 

from the rampant rise in prices in recent months. Is excessive speculation taking place? Why is the price of oil futures rising so quickly? There are too many questions to even answer in this joint hearing. 

Is the fact that stock markets are not an appealing place to invest driving people into the energy futures markets? 

Is it that investors are worried about inflation, using oil to hedge 

against the risk like they used to use gold? 

Is it the hugely deflated dollar exchange rate that is behind this 

or new investment vehicles such as commodity index funds driving 

up futures prices or investment bank analysts issuing reports predicting huge increases in oil prices in part because the same banks 

will profit if that happens or regulatory differences between the 

CFTC, which oversees American trading, and the Financial Serv-
3 

ices Authority (FSA), which oversees British trading, allowing traders to hide manipulative crude oil positions from the CFTC? 

Is it the lack of true oversight of these markets that has encouraged institutional traders to take speculative positions through 

overseas markets or over-the-counter (OTC) trades, positions they 

cannot take in other markets? 

You know, the list of questions goes on and on. The answers are 

scarce. 

Given the importance of the price of energy to families and businesses in Illinois and across the Nation, I think this is the reason 

why we are coming together and why we need to take this very seriously. 

I have introduced a bill with 15 co-sponsors entitled ‘‘Increasing 

Transparency and Accountability in Oil Prices’’. This bill would 

provide more people and better technology to the CFTC to help 

them understand the situation. It would also give them far greater 

visibility to the traders and the transactions that are involved. 

Specifically, it authorizes the CFTC to hire an additional 100 employees, FTEs, and expresses the sense of the Senate for the need 

of an emergency supplemental request from the President for this 

funding. 

Second, it closes the London loophole by treating oil traders located in London as if they were trading in the United States for 

regulatory purposes. So the CFTC would have access to oil trades 

on all exchanges rather than just the trades that take place physically in our country. 

Third, it requires more detailed reporting to the CFTC for index 

funds and swap dealers who typically take long positions that 

might drive up the price of oil. 

Fourth, it moves the CFTC Inspector General out of the CFTC 

Chairman’s Office to ensure objectivity. 

And fifth, it calls for a Government Accountability Office study 

of the existing international regulatory regime that should be preventing excessive speculation and manipulation. 

Many of these ideas are not new. Senators, our colleagues, have 

joined us in this inquiry before, and some will be here today. Senators Levin, Feinstein, Cantwell, and Dorgan have been very active, and of course, Chairman Bingaman and Chairman Harkin 

have been leaders on these issues as well. 

The CFTC needs more cops on the beat. It needs more information. It needs more authority. If the run-up in crude oil prices is 

being driven by large trader banks, pension banks, and hedge 

funds, then speculators have more to do with high gasoline prices 

than Saudi sheikhs. 

And I have to ask, how can we possibly believe the CFTC is policing market manipulation in the energy markets and consistently 

ignores some of the massive trades that are going on in overseas 

markets and on OTC markets? I mean, that clearly is part of the 

responsibility of making sure that these are honest, transparent 

markets and that we actually know what is happening. 

There has been a lot of speculation about speculation and what 

impact it has on the price of oil. The honest answer is today, Chairman Lukken, you do not have enough information. Some of that information is not coming your way because you and your prede-
4 

cessors consciously said we do not want to know. It is a separate 

market that we are not going to regulate. I think the time has 

come for that information to be available to you and to the American people so that we can avoid any possibility of market manipulation. 

PREPARED STATEMENT OF SENATOR THAD COCHRAN

Before you begin, Senator Harkin, the subcommittee has received 

a statement from Senator Thad Cochran that he would like to have 

included in the record. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR THAD COCHRAN

Mr. Chairman, I would like to begin by thanking Senator Durbin and Senator 

Harkin for holding this joint hearing of the committees of jurisdiction over the Commodity Futures Trading Commission. 

The Commodity Futures Trading Commission has the important role of ensuring 

that commodity markets function in an efficient manner, consistent with applicable 

laws and regulations. It is important for Congress to understand that it is not the 

role of the Commission to implement regulations to force the price of commodities 

up or down. In addition, Congress must carefully review any additional regulations 

which may do economic harm by forcing investors to abandon regulated markets. 

Regulations should not eliminate the price discovery functions of the market or prevent individuals from lawfully hedging against market risk. 

I am pleased that the Commodity Futures Trading Commission has announced 

new initiatives to address the concerns which have been raised by agriculture industries. I applaud Acting Commissioner Lukken’s leadership for recently hosting a 

roundtable discussion with agriculture leaders from around the country to discuss 

the problems within the futures market and consider suggestions that would provide 

stability without altering an individual’s ability to hedge against market risk. 

It is important that Congress be fully informed about the resource needs of the 

Commodity Futures Trading Commission. As the volume of futures trading increases, it is understandable that the current resources of the Commission could be 

strained. I hope the administration will advise Congress if additional funding is required and submit a request for appropriations that are clearly required to carry 

out its responsibilities. 

I thank the panelists for appearing before the committees today and I look forward to their testimony. 

Senator DURBIN. Chairman Harkin. 

STATEMENT OF SENATOR TOM HARKIN

Senator HARKIN. Thank you very much, Mr. Chairman. I am 

pleased to help co-chair this hearing with the Subcommittee on Financial Services and General Government, along with Senator 

Brownback and Senator Chambliss. 

Again, just to repeat what you said, we are holding this hearing 

to address both the mission and the funding of the Commodity Futures Trading Commission. The CFTC has critical regulatory responsibility to protect the integrity, fairness, and transparency of 

our Nation’s futures, options, and derivatives markets. A lot of 

times people wonder what these markets are all about. Well, they 

affect the life of every single American in this country on a daily 

basis. The prices that consumers pay for everything from gasoline 

to a loaf of bread are directly affected by the prices that are discovered on these markets. That is why it is so critical that these markets function without manipulation and without excessive speculation. 
5 

The CFTC must have the authority, the resources, and the resolve to ensure that the prices discovered by the commodity futures 

markets reflect the fundamentals of supply and demand. The 

CFTC has a critical responsibility to protect customers, market integrity, and the public while also promoting efficient and internationally competitive futures and derivatives markets. 

With good reason, there has been a great deal of interest in restoring fuller CFTC authority to monitor and take appropriate regulatory action in the derivatives market in energy. The farm bill 

that was enacted last month includes important additional authority to monitor exempt commercial market trading of oil, natural 

gas, and other commodities for contracts that perform significant 

price discovery functions. So they have just gotten that, and I am 

going to be curious to find out how they are going to implement it. 

In the last few weeks, the CFTC announced energy market initiatives to expand international surveillance of crude oil trading 

and agricultural market initiatives, to review the role of index 

trading and speculators in the agricultural commodities, to improve 

market transparency, and to take steps to ensure that farmers 

have the tools they need to manage the risk in these times of volatile markets. Now, again, these were just announced by the CFTC 

in the last couple of weeks. 

Today we will hear from witnesses who will provide their insight 

and recommendations as to what further steps we need to take. 

And given the dramatic increases in prices that Senator Durbin 

just talked about, we cannot tarry much longer. The American 

Automobile Association (AAA) reports that gasoline prices have 

risen 30 percent in the last year. At the end of May, corn prices 

rose 54 percent from May of last year, and they are continuing to 

rise this month because of all the flooding and everything. It is essential that we determine what we can do to ensure that these 

markets function properly. 

I have often said that when you come to oil and corn, demand 

is pretty inelastic. There is not much substitute out there. Well, I 

guess there is a substitute for oil and that is not to use so much 

of it. But when it comes to corn that you feed the hogs and cattle 

and poultry and everything else, there is really not much of a substitute there. 

So we also have to ensure that the CFTC has the resources it 

needs. The volume of futures exchanges has grown exponentially. 

Staffing is down. Futures are traded every hour of every day, 7 

days a week, in both the regulated exchanges and over-the-counter 

transactions. The CFTC must have the human and technological 

resources to stay abreast of the market activity. 

You will remember I asked this question at the confirmation 

hearings about staffing and staffing requirements and resources 

that are needed. It just does not seem to me that with the huge 

growth that we have had, that you can do the same job as you did 

20 years ago, 30 years. How long have I been here? Since 1975 

when we started this outfit. With all of the exponential growth in 

all these markets worldwide, we did not have this 30 years ago. 

Yet, we have got less people working there now. Now, I know technology has helped a lot. You can do a lot more with technology 

than perhaps with personnel. I understand that. But I still have 
6 

a nagging feeling that we do not have the resources at the Commodity Futures Trading Commission to really get a handle on this 

appropriately. 

So, again, I thank you, Mr. Chairman, for calling this hearing. 

I know sometimes it gets esoteric, but having followed the CFTC 

all these years, I will say this. There is no entity right now in 

America more important to the consumers of this country and the 

essentials of what they need—and that is food and fuel—than the 

CFTC. Thank you very much, Mr. Chairman. 

Senator DURBIN. Senator Brownback. 

STATEMENT OF SENATOR SAM BROWNBACK

Senator BROWNBACK. Thank you very much, Mr. Chairman. I appreciate that you are holding this hearing, along with Chairman 

Harkin. I am pleased to be here. I am glad the acting chairman is 

here as well. 

I would like to note at the outset that my colleague, Pat Roberts, 

is here on the dais with us. We have disasters going on in our 

State as well, as did Manhattan, Kansas and Chapman. We have 

had several tornadoes this past year and our thoughts and prayers 

go out to those communities. 

Mr. Chairman, oil prices are too high. Gasoline prices are too 

high. America is far too dependent on foreign oil. We know all of 

that. We know we are too reliant on foreign oil, especially from unstable parts of the world. There is no question that Americans are 

suffering and family budgets are being squeezed tighter and tighter 

by rising gasoline and food prices. 

Today, in conjunction with the Committee on Agriculture, our 

subcommittee will examine one aspect of this issue, namely the 

role of futures markets in generating higher and higher energy 

prices. I want to reiterate that this is only one aspect of this issue. 

I think it is a very important one. It is one I have spent quite a 

bit of time thinking about what all is taking place here and what 

we can do to have a positive impact on price reduction because it 

sure looks like to me there is a lot of speculation in these prices. 

I get this from just looking around, but also from a number of 

knowledgeable people saying that the fundamentals do not support 

these prices. Most of this speculation is expressed through the 

CFTC and actions and positions that people take. 

There has been much written regarding the role that speculators 

and index funds have played in driving the price of petroleum products higher and higher. 

I am pleased that we have witnesses from both the CME and 

NYMEX testifying before us today, along with the Acting Chairman of the Commodity Futures Trading Commission. I hope you 

can offer us your front-line assessment of what is happening in the 

futures market, what problems need to be addressed, and what we 

in Congress should be doing globally. This is a global issue and 

must be handled in a global context. 

I have had a number of knowledgeable individuals suggest the 

commodity index funds have played a significant role in driving up 

energy prices specifically and all commodities generally. 

On the other hand, I heard from economists who suggest we may 

be experiencing a bubble in commodity prices. They point out that 
7 

unlike the stock market, futures markets are zero sum games. For 

every dollar a futures market participant makes, another market 

participant loses a dollar. 

I noted at the outset of this hearing that commodity prices are 

one of the key aspects of the current problem, and that is why I 

am appreciative that we are holding this hearing today. We have 

got a good set of panels but before we move ahead I want to put 

a few other thoughts forward. 

One is a bipartisan bill that a number of us are soon to introduce 

called the Open Fuels Standard Act that allows and would require 

that one-half of our new cars would be flex fuel by 2012 so that 

we are not held hostage to oil and so that we may have other options, whether it be ethanol or methanol. I believe we will have 

strong bipartisan effort so we can get off of the oil addiction and 

have some other options. 

Another issue I think we must face is that we cannot continue 

to limit domestic development and exploration. We have done that. 

That has happened for years. It cannot be allowed to continue. It 

makes us more dependent upon foreign sources. These are supply 

and demand issues, and I think we have got to get at that. 

And what I would hope, Mr. Chairman, in your position as the 

number two person in the United States Senate, that we would put 

these items together and we would look at those or maybe a couple 

of others and let us move something forward. There is nothing 

more important that faces the American public right now. I think 

these are key pieces of it that we could develop and work on together, but we cannot drop any of them off. They need to all be 

here so that we can drive these energy prices down so the American family can have a little bit of money left over after the month 

instead of pumping it all into their gas tank. 

I appreciate your holding the hearing. 

Senator DURBIN. Senator Chambliss. 

STATEMENT OF SENATOR SAXBY CHAMBLISS

Senator CHAMBLISS. Thank you very much, Chairman Durbin. I 

commend both you and Chairman Harkin for holding this hearing 

this morning. 

Let me just say that all Americans have you folks in Illinois, 

Iowa, and throughout the Midwest in our thoughts and prayers. 

We all have had some difficult issues this year with the tornadoes 

and whatnot through the Southeast, and we are certainly thinking 

about all of your folks. 

There has been far too much discussion about the matters that 

we are going to be talking about outside the committees of jurisdiction, and I am happy that we are now turning our attention to 

hearing from these witnesses so that the Agriculture Committee 

can take the lead in coordinating any necessary oversight or legislative action. 

While I recognize that the resources of the Commodity Futures 

Trading Commission are insufficient when compared to the increased workload they are experiencing and I am pleased that we 

will be taking a thorough look at that issue today, I would like to 

focus my comments on the particular issues that do fall within the 

jurisdiction of the Agriculture Committee. 
8 

Several pieces of legislation, which have been introduced, address 

speculation in the energy markets and several hearings have been 

held in many different Senate committees on the topic. I have 

heard several Senators speak on the Senate floor about this matter, 

and I would like to take this opportunity to sort of set the record 

straight based upon the facts that we have seen from an Agriculture Committee perspective. 

First, I think it is very irrational that some in Congress have 

gone so far as to blame the Acting Chairman of the Commodity Futures Trading Commission for $4 gasoline when, in fact, the Acting 

Chairman of CFTC, Walt Lukken, who will be testifying before us 

today, has probably done more than anyone to try and shed some 

light on what is actually occurring in the markets. 

Last year he launched an investigation into practices surrounding trading of crude oil and related derivative contracts. 

He recently developed an interagency task force with the Federal 

Reserve, the Department of the Treasury, the Securities and Exchange Commission (SEC), the Department of Energy, and the Department of Agriculture (USDA) to study the role of speculators 

and index traders in energy markets. 

The Acting Chairman also created and convened the Energy 

Markets Advisory Committee to look into energy market transparency, including the impact that trading on foreign boards of 

trade is having on such markets. 

Further, Acting Chairman Lukken led efforts to develop an 

agreement with a key foreign board of trade to ensure that the 

CFTC has access to the trading data they need to monitor activity 

in the global oil market. 

And in the past month, he has begun requiring traders to provide monthly reports of their index trading; information that 

should help the Commission determine the impact of index trading 

on the market. Certainly, Acting Chairman Lukken, you have 

made great strides in trying to create more and better transparency, and we should all be grateful for that. 

These recent efforts, again, all initiated by Acting Chairman 

Lukken, will provide the data necessary to make an informed and 

rational decision of how speculation is affecting the price of oil. I 

believe we should not rush to legislate an uninformed solution, particularly when we might create more problems by driving speculators into markets for which the CFTC receives no trading data 

and has no ability to monitor. 

And I agree with you, Senator Durbin, in your quote as I wrote 

it down, ‘‘too many questions to be answered in this hearing’’. And 

I think you are exactly right. That is why I am pleased we are 

starting here, and I look forward to working with you, as well as 

Chairman Harkin, on additional hearings. 

In addition, simply assigning blame will not yield real results, 

particularly when the main problem is supply and demand. In this 

case, the data that I have seen so far does not show that blaming 

speculators will yield the result that we are all looking for, and 

that is lower gas prices. 

Here is a chart. This shows who is holding large positions, those 

over 350 contracts, in west Texas intermediate (WTI) crude oil contracts on the New York Mercantile Exchange where approximately 
9 

70 percent of trading for the WTI occurs. The data shows that 

while there may have been an increase in market participation 

overall, the proportion of positions held by commercial participants, 

those who can physically deliver crude oil or accept delivery of 

crude oil, and noncommercial positions, those held by speculators, 

has not changed over the past 2 years. Speculation in this contract 

by noncommercial participants seems to have held steady at about 

20 percent. 

So if we are to fault market speculators for current gas prices, 

we cannot blame it on their increased market participation when 

we compare their level of participation to that of commercial participants. Rather, we need to allow the CFTC to implement those 

initiatives that they have just recently announced and complete 

their ongoing investigation. With this critical information, we can 

then make a real assessment of any role speculators are playing. 

Some of our colleagues also like to claim that excessive speculation is occurring on unregulated foreign exchanges. Well, let us be 

clear. Any exchange in any country can list the west Texas intermediate crude contract for trading without any approval from 

CFTC. Just because west Texas intermediate crude is physically 

delivered in the United States does not mean that the United 

States can prevent other foreign boards of trade from listing and 

allowing traders to trade the contract on their platforms. 

However, if these foreign boards of trade want to make their 

trading screens available to U.S. traders, then they must seek approval from the CFTC. Often this is done through what is known 

as a no action letter. The no action letter, which is obtained from 

the Division of Market Oversight at the CFTC, very simply absolves these boards of trade located outside the United States from 

the requirement to become a designated contract market so long as 

the regulatory regime in their country has determined to sufficiently regulate their activities in order to protect U.S. customers. 

These letters are granted only after the CFTC determines that the 

regulatory body in the country in which the foreign board of trade 

is located will supply the CFTC with regular market surveillance 

information, as well as meet other conditions required by the 

CFTC. 

In the absence of such a letter, there would be no required coordination or information sharing between the U.S. regulatory authority, the CFTC, and the foreign based regulatory authority. Yet, 

the contracts would still be allowed to be traded on these foreign 

boards. Now, that seems to be truly a dark market and not one 

that I am interested in encouraging. 

The no action letter process, whereby foreign boards of trade 

seek to accommodate the CFTC’s demands prior to being allowed 

to offer contracts in the United States actually helps the CFTC ensure that they receive adequate data to monitor the activities of 

these foreign exchanges. 

The example most often used by several of my colleagues is the 

trading of the west Texas intermediate crude contract on the London-based exchange, ICE Futures Europe. Yes, the CFTC, through 

no action relief, allows ICE to offer this contract to U.S. traders. 

In exchange, ICE Futures Europe has agreed to notify the CFTC 
10 

when traders exceed position accountability levels established by 

U.S. exchanges for the WTI crude oil contract. 

Additionally, the United Kingdom’s regulatory authority, the Financial Services Authority, has been supplying the CFTC with requested surveillance data for several years. 

And just last month, the CFTC worked with the United Kingdom 

regulators so that they will now provide the CFTC with daily large 

trader positions, as well as more detailed identification of market 

end users. The CFTC will review this data and determine if there 

is any manipulation occurring. That is their job, and we should insist that they get this information and properly review it before we 

request that they revoke no action letters and really force traders 

into the dark where CFTC has no ability to monitor what is occurring. 

While I am discussing foreign boards of trade and ICE in particular, here is a chart that actually shows the volume of shares 

and open interest in the west Texas intermediate crude oil contract 

since it was listed on ICE in June 2006. The green line also shows 

the settlement price of this particular crude oil contract. You can 

see that beginning in August 2007, when the price began to rise 

sharply, the open interest on ICE and the share of market volume 

traded on ICE was actually falling. 

Again, we need to be cautious that we get our facts straight before we start pointing fingers at what some Senators have called 

excessive speculation on a foreign board of trade. The American 

people are interested in real solutions. Simply blaming foreign 

boards of trade or the regulatory agency for not overseeing these 

foreign boards of trade properly for the problems we are facing is 

irresponsible, particularly when the data does not support the accusation. 

I am happy to work with my colleagues on efforts to find solutions to high gas prices but only after we have all the facts. So 

Chairman Durbin, Chairman Harkin, I again appreciate your holding this opportunity to let us begin gathering those facts. 

Senator DURBIN. Thank you, Senator Chambliss. 

Chairman Lukken, the floor is yours. 

STATEMENT OF WALTER LUKKEN, ACTING CHAIRMAN, COMMODITY 

FUTURES TRADING COMMISSION 

Mr. LUKKEN. Chairman Durbin, Chairman Harkin, members of 

the committees, I appreciate being invited here to talk about the 

CFTC’s role, responsibilities, and resources at the agency. 

During the last few years, the futures markets have changed 

dramatically in size and complexity, experiencing 500 percent 

growth in both volume and products listed. Once member-owned 

and dominated by open-outcry trading, today exchanges are technology-driven corporations that primarily trade electronically, 24 

hours a day, all around the globe. Approximately $5 trillion of notional transactions flow through these U.S. exchanges and clearing 

houses every day. This description alone would make the oversight 

of these markets a challenge for regulators, but add to it the 

subprime crisis, record energy and agricultural prices, the influx of 

financial funds into futures, and historic low staffing levels at the 
11 

CFTC, and it is clear that these are challenging times for this 

agency. 

Recent substantial increases in the price of crude oil and other 

commodities have had a major impact on American consumers and 

put a considerable strain on U.S. households. These issues are a 

matter of intense focus at the Commission due to the key role that 

the futures markets play in the price discovery process. 

The CFTC recognizes that these markets and their participants 

have evolved significantly in the last several years. Concerns have 

been raised recently regarding the role of speculators and index 

traders in the commodity markets. As prices have escalated, the 

CFTC has pursued an active agenda to ensure that the commodity 

futures markets are operating free of distortion. The Commission 

has undertaken several initiatives directed to enhancing the oversight of the energy and agricultural markets. These initiatives fall 

into five broad categories: one, increasing information and transparency; two, ensuring proper market controls; three, continuing 

aggressive enforcement efforts; four, improving oversight coordination; and five, seeking increased funding. 

The proper oversight of markets requires transparency. Market 

regulators must receive the necessary information to conduct surveillance of market activity, study long-term financial trends, and 

evaluate policy changes as circumstances evolve. The backbone of 

the CFTC’s market surveillance program is the large trader reporting program. All large traders must file daily with the CFTC their 

futures and options positions in the markets. This information enables the CFTC’s surveillance economists to oversee all traders of 

size to ensure that no one is attempting to manipulate the futures 

markets. 

As markets have become electronic and global, the CFTC has 

been working to expand and enhance its technology and trade data 

collection to accommodate these trends. Last spring, the CFTC announced a major technology purchase that will modernize our trade 

practice surveillance system, allowing the CFTC to more effectively 

sort through the millions of pieces of information generated by 

these electronic markets daily. 

The CFTC is also working to increase the amount and quality of 

trader data we receive from the markets. Two weeks ago, the 

CFTC announced an agreement with the U.K. FSA to expand on 

the trader data already received from ICE Futures Europe on its 

linked crude oil contract that settles off the NYMEX crude oil 

benchmark. This agreement includes providing large trader data 

for the linked crude oil contract daily, extending trader information-sharing to all months traded, improving the identification of 

market end users to be completed in 2 months, and improving the 

formatting so trading information can be seamlessly integrated into 

the CFTC’s surveillance system. This cross-border information 

sharing is unprecedented among global regulators. 

The CFTC has also taken action to improve the transparency of 

index traders and swap dealers in the energy markets. There is 

public concern about the amount of index money flowing into the 

futures markets. Two weeks ago, the CFTC announced that it 

would use its special call authorities to gather more detailed data 

from swap dealers on the amount of index trading in the markets 
12 

and to examine whether index traders are properly classified for 

regulatory and reporting purposes. These information requests 

have been sent and the CFTC expects in the coming weeks to begin 

receiving more detailed information on index funds and other 

transactions that are being conducted through swap dealers. After 

analyzing this data, the CFTC will provide a report to Congress by 

September 15 regarding the scope of the commodity index trading 

in the futures markets and recommendations for improved practices and controls, should they be required. 

The Commission must also ensure proper controls in the marketplace. Last fall, the Commission announced its intention to address 

the mounting regulatory concerns surrounding exempt commercial 

markets that trade OTC energy products. The Commission held a 

public hearing and worked with Congress to enact legislation as 

part of the farm bill to oversee exempt commercial markets that 

trade these linked energy contracts and to provide the CFTC with 

large trader reports and impose position limits and accountability 

limits on such products. Congress and this agency believed that 

these authorities were necessary for the regulated energy marketplace. 

As noted earlier, linkages between contracts are not purely a domestic occurrence, but also happen internationally across borders. 

Most energy and agricultural commodities are global commodities 

operating in a global marketplace, and the U.S. futures markets 

have been facing the challenges of cross-border trading and regulation for many years. 

For more than a decade, the CFTC has worked to develop international regulatory networks to increase international cooperation 

and, most importantly, to maintain and improve U.S. futures markets oversight in the face of increasing globalization. Over the 

years, the CFTC has developed a mutual recognition process that 

strikes the balance between the need for U.S. regulators to maintain confidence in the functioning and integrity of the markets and 

the acknowledgement that increased globalization of commodity 

markets requires international coordination and cooperation. 

With this balance in mind, today the CFTC is announcing modifications to its foreign board of trade process. After consultation 

with the British FSA, the CFTC is announcing that ICE Futures 

Europe has agreed to begin the process of implementing position 

and accountability limits on its linked crude oil contracts. The 

CFTC has revised ICE Futures Europe’s no action letter to reflect 

this change. The CFTC will also require other foreign exchanges 

that seek such direct access to provide the CFTC with comparable 

large trader reports and to impose comparable position and accountability limits for any products linked with a U.S. futures contract. This combination of enhanced information sharing and additional market controls will help the CFTC in its surveillance of its 

regulated domestic exchanges while preserving the benefits of its 

mutual recognition program. 

During these turbulent market conditions for crude oil, the environment is ripe for those wanting to illegally manipulate the markets, and as a result, the Commission has stepped up its already 

aggressive enforcement efforts. Two weeks ago, the Commission 

took the extraordinary step of disclosing that in December 2007, its 
13 

Division of Enforcement launched a nationwide crude oil investigation into practices surrounding the purchase, transportation, storage, and trading of crude oil and related derivatives contracts. 

Strong enforcement is imperative during this time. 

Given the CFTC’s size and the enormity of the global marketplace, the CFTC must also engage others in Government as we 

seek to find important information about these markets. Last week, 

the CFTC announced the formation of an interagency task force to 

evaluate developments in the commodity markets, which includes 

staff from the CFTC, the Federal Reserve, the Department of the 

Treasury, the SEC, the Department of Energy, and the USDA. It 

is intended to bring together the best and brightest minds in Government to aid public and regulatory understanding of the forces 

that are affecting the functioning of these markets. 

If the CFTC sounds busy, it is, especially given the agency’s 

staffing levels are near record low numbers. Since the CFTC 

opened its doors 33 years ago, the volume on futures exchanges has 

grown 8,000 percent, while the CFTC staffing numbers have fallen 

12 percent. The agency’s lack of funding over the course of many 

years has had a negative impact on our staffing situation, rendering it unsustainable for the long run. The CFTC is a small 

agency doing an extraordinary job under difficult circumstances. 

The dedicated and skilled individuals at the CFTC are working 

tirelessly to ensure the integrity of these markets. The recent fiscal 

year budget allowed for moderate hiring and additional technology 

investments, and we deeply appreciate your support, Mr. Chairman, for this funding. 

However, as the agency embarks on new authorities and initiatives in order to respond to changing market conditions, it is imperative that the CFTC receive additional resources. The CFTC is in 

the midst of implementing its new farm bill authorities which require many programmatic changes and plain old hard work for a 

staff that is already under significant strain. Additionally, the 

agency’s staff is racing to implement the many recent agency initiatives I outlined earlier in my testimony. Recall as well that our employees are also full-time regulators charged with overseeing these 

markets each and every day, upholding the agency’s mission to 

safeguard the futures markets. Given our staffing numbers, the 

agency is working beyond its steady state capacity and is unable 

to sustain the current situation for much longer without being 

forced to make tough decisions about which critical projects should 

be completed and which ones should be delayed. 

Given these new authorities and the unprecedented market conditions of the day, the Commission requested an additional $27 

million beyond the President’s $130 million budget number of fiscal 

year 2009, which would allow the agency to hire approximately 100 

additional staff. In making the request, the Commission is mindful 

of the need to maintain fiscal restraint in appropriations and the 

competing needs of other parts of the Federal Government. However, we believe that this proposed funding level is the appropriate 

level of resources required to fulfill our immediate and growing responsibilities. 

In summary, I want to thank these committees for the support 

they have shown this agency over the years. Under Chairman Har-
14 

kin’s leadership, last month the Senate Agriculture Committee successfully reauthorized this agency with important modifications to 

our authority. I also appreciate the legislation that Chairman Durbin introduced last week that requests additional funding for the 

CFTC and incorporates some of the initiatives I have outlined 

today. 

As I stated in my earlier testimony—and it bears repeating, 

given the challenges of the last several weeks—I am deeply proud 

of our highly skilled and productive staff. This small agency is 

working hard to protect the public from manipulation, fraud, and 

abuse in order to ensure that the futures markets are working 

properly. 

Thank you very much for allowing me to testify this morning, 

and I welcome any questions you may have. 

[The statement follows:] 

PREPARED STATEMENT OF WALTER LUKKEN

Chairman Durbin and Chairman Harkin and other distinguished members, thank 

you for inviting me to testify before these Committees on the role, responsibilities 

and resources of the Commodity Futures Trading Commission (Commission or 

CFTC). 

During the last few years, the futures markets have changed dramatically in size 

and complexity, experiencing 500 percent growth in both volume and products listed. Once member-owned and dominated by open-outcry trading, today exchanges 

are technology-driven corporations that primarily trade electronically, 24 hours a 

day, all around the globe. Approximately $5 trillion of notional transactions flow 

through these U.S. exchanges and clearing houses daily. This description alone 

would make the oversight of these markets a challenge for regulators. But add to 

it the sub-prime crisis, record energy and agricultural commodity prices, the influx 

of financial funds in futures, and historic low staffing levels at the CFTC and it is 

clear that these are challenging times for this agency. 

Recent substantial increases in the price of crude oil and other commodities have 

had a significant impact on American consumers and have put considerable strain 

on U.S. households. These issues are a matter of intense focus at the Commission 

due to the key role that futures markets play in the price discovery process. We 

share the concerns of Americans and Congress, and the CFTC is committed to ensuring that our nation’s futures markets operate fairly and efficiently, and that commodity prices are determined by the fundamental forces of supply and demand, 

rather than abusive or manipulative practices. 

The CFTC recognizes that these markets and their participants have evolved significantly in the last several years. Concerns have been raised recently regarding 

the role of speculators and index traders in the commodity markets. As prices have 

escalated, the CFTC has pursued an active agenda to ensure that the commodity 

futures markets are operating free of distortion as the agency looks to better understand the implications of these structural market developments. The Commission 

has undertaken several initiatives directed to enhancing the oversight of the energy 

and agricultural markets. These initiatives fall into five broad categories: (1) Increasing Information and Transparency; (2) Ensuring Proper Market Controls; (3) 

Continuing Aggressive Enforcement Efforts; (4) Improving Oversight Coordination; 

and (5) Seeking Increased Funding. 

ENHANCING INFORMATION AND TRANSPARENCY

The proper oversight of markets requires transparency. Market regulators must 

receive the necessary information to conduct surveillance of market activity, study 

long-term financial trends and evaluate policy changes as circumstances evolve. The 

backbone of the CFTC’s market surveillance program is the large trader reporting 

system. All large traders must file daily with the CFTC their futures and options 

positions in the markets. This information enables the CFTC’s surveillance economists to oversee all traders of size to ensure that no one is attempting to manipulate 

the futures markets. This amount and detail of trade data collected and analyzed 

at the CFTC is unprecedented among regulatory financial agencies. 

As markets have become electronic and global, the CFTC has been working to expand and enhance its technology and trade data collection to accommodate these 
15 

trends. Last spring, the CFTC announced a major technology purchase that will 

modernize our trade practice surveillance system to enhance basic trade surveillance and permit nearly real-time analyses of all trading activity. Investments in 

technology are critical for the CFTC to sort through the millions of pieces of information generated by these electronic markets daily. 

The CFTC is also working to increase the amount and quality of the trader data 

we receive from the markets. Two weeks ago, the CFTC announced an agreement 

with the U.K. Financial Services Authority (FSA) to expand the trader data received 

from ICE Futures Europe on its cash-settled light sweet crude oil contract that settles off the NYMEX benchmark crude oil contract. When first listed in 2006, this 

linkage between the two contracts caused the Commission and its surveillance staff 

to be concerned that regulators would not be able to observe the entirety of a trader’s position in both markets. Once the surveillance issue was identified, the CFTC 

worked with its foreign counterpart, the FSA, to share large trader data for these 

linked contracts to ensure that traders were not gaming one market to influence the 

other. At that time, the CFTC’s agreement with the FSA provided the CFTC with 

weekly trader information, and daily information in the final trading week, to facilitate the ability of the CFTC and FSA to oversee trading in these related contracts. 

Building on these efforts, the CFTC and FSA two weeks ago announced an expanded information-sharing arrangement, including: (1) providing daily large trader 

positions in the linked ICE Futures Europe crude oil contract; (2) extending trader 

information sharing to all contract months; (3) a near-term commitment to improve 

the identification of market end users to be completed within 2 months; (4) improved formatting so trading information can be seamlessly integrated into the 

CFTC’s surveillance system; and (5) CFTC notification when traders exceed NYMEX 

position accountability levels. This cross-border information sharing is unprecedented among global regulators. 

The CFTC also has taken action to improve the transparency of index traders and 

swap dealers in the energy markets. There is public concern about the amount of 

index money flowing into the futures markets. Pensions, endowments and other 

long-term investors increasingly are investing a portion of their portfolios in a broad 

mix of commodities in order to diversify their holdings and reduce volatility and 

risk. Unlike traditional speculative trading by hedge funds and other managed 

money, index investors are typically non-leveraged entities utilizing a long-term buy 

and hold strategy. Most of this type of investment comes through major Wall Street 

swap dealers that sell their clients broad exposure to the commodity markets 

through an over-the-counter commodity index contract. Swap dealers then are exposed to commodity price risk as a result of aggregating these transactions and 

must utilize the futures markets to manage their own remaining residual risk. This 

‘‘netting out’’ of risk by swap dealers before coming to the futures markets makes 

it difficult for regulators to determine the total amount of index trading occurring 

in the energy markets. 

Two weeks ago, the CFTC announced that it would use its special call authorities 

to gather more detailed data from swap dealers on the amount of index trading in 

the markets and to examine whether index traders are properly classified for regulatory and reporting purposes. These information requests have been sent and the 

CFTC expects in the coming weeks to begin receiving more detailed information on 

index funds and other transactions that are being conducted through swap dealers. 

After analyzing this data, the CFTC will provide a report to Congress by September 

15 regarding the scope of commodity index trading in the futures markets and recommendations for improved practices and controls should they be required. 

ENSURING PROPER MARKET CONTROLS

Last fall, the Commission announced its intention to address the mounting regulatory concerns surrounding exempt commercial markets that trade over-the-counter 

energy products. The Commission held a public hearing and worked with Congress 

to enact legislation as part of the Farm Bill requiring exempt commercial markets 

that trade contracts linked to regulated U.S. futures contracts to provide the CFTC 

with large trader reports and impose position and accountability limits on such 

products. Congress and this agency believed that these authorities were necessary 

to protect the regulated energy marketplace. 

As noted earlier, linkages between contracts are not purely a domestic occurrence 

but also happen across international borders. Most energy and agricultural commodities are global commodities operating in a global marketplace, and the U.S. futures 

markets have been facing the challenges of cross-border trading and regulation for 

many years. 
16 

For more than a decade, the CFTC has worked to develop international regulatory 

networks, to increase international cooperation, and—most importantly—to maintain and improve oversight of U.S. futures markets in the face of increasing 

globalization. Over the years, the CFTC has developed a mutual recognition process 

that strikes the balance between the need for U.S. regulators to maintain confidence 

in the functioning and integrity of our markets, and the acknowledgement that the 

increased globalization of commodity markets requires international cooperation and 

coordination. 

With this balance in mind, today the CFTC is announcing modifications to its Foreign Board of Trade process. After consultation with the British FSA, the CFTC is 

announcing that ICE Futures Europe has agreed to begin the process of implementing position and accountability limits on its linked crude oil contract. The 

CFTC is currently revising its access letter to reflect this change. The CFTC will 

also require other foreign exchanges that seek such direct access to provide the 

CFTC with comparable large trader reports and to impose comparable position and 

accountability limits for any products linked with U.S. regulated futures contracts. 

This combination of enhanced information data and additional market controls will 

help the CFTC in its surveillance of its regulated domestic exchanges while preserving the benefits of its mutual recognition program that has enabled proper global oversight over the last decade. 

CONTINUING AGGRESSIVE ENFORCEMENT EFFORTS

During these turbulent market conditions for crude oil, the environment is ripe 

for those wanting to illegally manipulate the markets and as a result, the Commission has stepped up its already aggressive enforcement presence. Two weeks ago, 

the Commission took the extraordinary step of disclosing that in December 2007, 

its Division of Enforcement launched a nationwide crude oil investigation into practices surrounding the purchase, transportation, storage, and trading of crude oil and 

related derivatives contracts. Although the Commission conducts its enforcement investigations in full confidentiality, today’s unprecedented market conditions and the 

desire to maintain public confidence justified disclosing the existence of this investigation. 

Since December 2002 to the present time, the Commission has filed a total of 39 

enforcement actions charging a total of 64 defendants with violations involving the 

energy markets. The agency has assessed almost half a billion dollars in civil monetary penalties in settlement of these enforcement actions. The Commission also has 

achieved great success in this area by working cooperatively with the Department 

of Justice on over 35 criminal actions concerning energy market misconduct. Strong 

enforcement is imperative during this time. 

IMPROVING OVERSIGHT COORDINATION

Given the CFTC’s size and the enormity of the global marketplace, the CFTC 

must engage others in Government as we seek to meet our important mission. Last 

week, the CFTC announced the formation of a CFTC-led interagency task force to 

evaluate developments in the commodity markets. The task force—which includes 

staff representatives from the CFTC, Federal Reserve, Department of the Treasury, 

Securities and Exchange Commission, Department of Energy, and Department of 

Agriculture—is examining investor practices, fundamental supply and demand factors, and the role of speculators and index traders in the commodity markets. It is 

intended to bring together the best and brightest minds in Government to aid public 

and regulatory understanding of the forces that are affecting the functioning of 

these markets. We convened the first meeting last week and will strive to complete 

this work quickly and make public the results. 

The CFTC also recently hosted its second international enforcement conference— 

a 2-day event focusing on global trading in the energy markets with senior enforcement officials from 10 countries. Our goal was to enhance the ability of the CFTC 

and its fellow regulators to detect and deter misconduct affecting commodity prices 

in the energy sector, and I am confident that it was a success that will bear the 

fruit of coordinated international enforcement for manipulation. 

SEEKING INCREASED FUNDING

If the CFTC sounds busy, it is—especially given that the agency’s staffing levels 

are near record low numbers. Since the CFTC opened its doors 33 years ago, the 

volume on futures exchanges has grown 8,000 percent while the CFTC’s staffing 

numbers have fallen 12 percent. The following chart shows the exponential growth 

in contract volume, compared to CFTC staff numbers. 
17 

The CFTC’s resources simply have not kept pace with the growth of the markets 

and the growth of similar financial regulators. As you can see, the CFTC lags other 

comparable agencies in funding levels by substantial margins. This agency’s lack of 

funding over the course of many years has had a negative impact on our staffing 

situation, rendering it unsustainable for the long run. 
18 

The CFTC is a small agency doing an extraordinary job under difficult circumstances. The dedicated and skilled individuals at the CFTC are working tirelessly to ensure the integrity of the markets. The recent fiscal year budget allowed 

for moderate hiring and additional technology investments. We deeply appreciate 

your support to secure increased funding and have acted quickly to bring on additional staff to handle the agency’s increasing workload. 

However, as the agency embarks on new authorities and initiatives in order to 

respond to changing market conditions, it is imperative that the CFTC receive additional funding. The CFTC is in the midst of implementing its new Farm Bill authorities, which require many programmatic changes and plain old hard work from 

a staff that is already under significant strain. Additionally, the agency’s staff is 

racing to implement the many recent agency initiatives I outlined earlier in my testimony. Recall as well that our employees are also full-time regulators, charged with 

overseeing these markets each and every day, upholding the agency mission to safeguard the futures markets. Given our staffing numbers, the agency is working beyond its steady state capacity and is unable to sustain the current situation for 

much longer without being forced to make Hobson’s choices about which critical 

projects should be completed and which ones will be delayed. And while we welcome 

discussions of any appropriate and necessary legislative or agency changes, our 

agency is clearly unable to accommodate additional tasks at our current resource 

and personnel level. 

As you are aware, the administration has proposed for the Commission a budget 

of $130,000,000 for fiscal year 2009. The Commission is very appreciative of the 

budget proposal—which reinforces the reversal of an almost two-decade-long downward trend in real funding. The $130,000,000 is greatly needed to continue the implementation of the long-delayed information technology modernization initiative 

first begun in fiscal year 2008, and enables us to take the first steps to address our 

staffing shortage. 

Given these new authorities and the unprecedented market conditions of the 

day—conditions that could not have been anticipated when the fiscal year 2009 

budget was first formulated last summer—we welcome this hearing at a critical and 

opportune time. After reviewing the impact of recent initiatives and the projections 

associated with legislative changes, the Commission is requesting an additional 

$27,000,000 for a total of $157,000,000 and 596 FTEs. The additional $27,000,000 

is comprised of $21,000,000 to continue existing efforts to ensure the integrity of the 

futures and options markets and $6,000,000 to undertake new responsibilities as 

mandated in the Farm Bill of 2008. 
19 

In making this request, the Commission is mindful of the need to maintain fiscal 

restraint in appropriations and the competing needs of other parts of the Federal 

Government. However, we believe that the proposed funding level of $157,000,000 

is the appropriate level of resources required to fulfill our immediate responsibilities. The increase will restore staffing to a level last sustained almost two decades 

ago when market volume, innovation, and complexity were significantly less than 

today and when the agency did not yet have to face the expanded workload brought 

on by globalization of the marketplace and the emergence and widespread use of 

derivatives and hedge funds. This of course means the Commission is now doing 

much more with less and continues to deliver a good return on investment for the 

American taxpayer. The Commission’s ratio of workload to resources has always 

been lean compared to other financial regulators. But we have reached our limit and 

cannot uphold our mission without immediate additional resources. 

In summary, I want to thank these Committees for the support they have shown 

this agency over the years. Under Chairman Harkin’s leadership, last month the 

Senate Agriculture Committee successfully reauthorized this agency with important 

modifications to our authority. I also appreciate the legislation that Chairman Durbin introduced last week that requests additional funding for the CFTC and incorporates some of the initiatives I have outlined today. As I stated in my earlier testimony, and it bears repeating given the challenges of the last several weeks, I am 

deeply proud of our highly skilled and productive staff. This small Federal agency 

is working hard to protect the public and the market users from manipulation, 

fraud, and abusive practices in order to ensure that the futures markets are working properly. 

Thank you for the opportunity to appear before you today on behalf of the CFTC. 

I would be happy to answer any questions you may have. 

Senator DURBIN. Thanks, Chairman Lukken. 

The CFTC’s mission, as stated in the law, is to protect market 

users and the public from fraud, manipulation, and abuse of practices related to the sale of commodity and financial futures and options, to foster an open, competitive and financially sound futures 

and options market. 

Back a few years ago there was a request from Enron relative 

to OTC trades in energy futures, and there was included in the bill 

passed in the waning hours of the 106th Congress a provision 

which exempted these OTC electronic exchanges from CFTC oversight. 

Then at a later period, in January 2006, your agency decided 

that ICE futures related to energy would not be subject to the same 

reporting requirements, large trader reporting requirements, as 

trades, for example, at NYMEX here in the United States. 

So my question to you is twofold because of this announcement 

that you made today. When you take a look at the volume of trading in energy futures, combining what we know that you regulate 

here in the United States, ICE’s transactions, and OTC transactions, what percentage are you currently regulating before the 

issuance of this new order? In other words, what percentage of the 

market is being watched closely to see if there is fraud, abuse, and 

manipulation? 

Mr. LUKKEN. I think what is of greatest concern for the CFTC 

is the price discovery markets which I would say are the ICE markets in London, as well as the NYMEX markets. So that is where 

we focus our attention. As mentioned, in our mission, price discovery is an important part of that element. 

Senator DURBIN. I am going into a specific question. What percentage of this price discovery are you currently regulating? In 

other words, what percentage of the market do you feel is reporting 

to you the large trader reports so that we can see if there is any 

manipulation? Is it one-third, one-half, three-fourths? 
20 

Mr. LUKKEN. I am not sure I can give you exact percentages. I 

am not sure of the OTC trades. Since that is not reported. 

Senator DURBIN. Precisely. Precisely. And that is one of the reasons we are here. You do not know. You cannot answer that question because there is no regulation of OTC markets. 

Now, let me ask you about what you have announced today. Is 

this going to lead to comparable regulation and disclosure by the 

ICE exchange on energy futures as those who are involved at 

NYMEX? 

Mr. LUKKEN. Absolutely. 

Senator DURBIN. Exactly comparable. By what statutory authority can you do this? 

Mr. LUKKEN. Through our no action letter, we are going to receive large trader reports that are exactly the same as we will be 

receiving from NYMEX. ICE is implementing position limits, as 

well as accountability limits that are—— 

Senator DURBIN. So the regulation is identical. 

Mr. LUKKEN. For those provisions. And this will also come into 

our commitment of trader reports as well so that we are able to 

show the public what is happening not only on our markets but 

also what is happening in London as well. So people will get to see 

the entirety, the transparency that I think people have been looking for. 

Senator DURBIN. Will this only relate to trading based in America? 

Mr. LUKKEN. No. We receive the entirety of all the trading that 

is going on in London for this product. 

Senator DURBIN. So for west Texas intermediate, if someone in 

France is buying a contract through ICE in the future, they will 

have to make the same disclosures to CFTC as an American trading through NYMEX today for the same WTI. 

Mr. LUKKEN. Yes. And that is the beneficial thing of this program, is we get to see non-U.S. participants in the market. And 

that is why our recognition program has been so useful, seeing the 

rest of the world that is trading these products. 

Senator DURBIN. And if there is a Dubai exchange opened, which 

is going to trade in WTI in the future, what will be the position 

of the CFTC? 

Mr. LUKKEN. The exact same position. 

Senator DURBIN. The same requirement of large trader reports. 

Mr. LUKKEN. And accountability and position limits. 

Senator DURBIN. Now, what are you going to do about OTC, overthe-counter trades, these look-alike trades? 

Mr. LUKKEN. Well, this was our announcement 2 weeks ago. We 

have asked for additional information from swap dealers to find out 

what types of transactions they are bringing onto the futures markets. So this will give us a look through into what types of transactions that may include. Index traders, which a lot of people have 

concern about, other types of swaps—— 

Senator DURBIN. So will require the same reports then from the 

OTC markets that are going to be required of NYMEX and ICE 

and the future Dubai exchange? 

Mr. LUKKEN. Well, we are going to have to look at the data before we can make any determination. 
21 

Senator DURBIN. Do you have the authority to ask for large trader reports for OTC trades? 

Mr. LUKKEN. For OTC, if it is linked to the futures markets, we 

will have to determine whether we can get that information. 

Senator DURBIN. What I understand is the law that we passed 

in 2006, if I am not mistaken—pardon me—in the year 2000, the 

Modernization Act, here took away that authority for the CFTC for 

OTC trades. You say you have the authority or you do not? 

Mr. LUKKEN. Well, right now the farm bill closed this perceived 

gap for OTC swaps that are traded electronically—once they start 

to link to the regulated marketplace, we can get this data. 

Senator DURBIN. So you will have the same authority, large trader reports in the same detail for all of the energy futures markets 

that we know of. 

Mr. LUKKEN. Right, for those traded on an electronic exchange. 

Senator DURBIN. I did not dwell much on the appropriations side 

of this, but let me just say at the outset, I think you are right. 

Those who wanted to get Government off our back ended up taking 

the cops off the beat, and so we saw a dramatic increase in the 

transactions taking place here, and I am afraid it has been to the 

detriment of our economy. I think it is important that you have the 

qualified professionals and computer technology to keep up with 

this expanding market. 

Chairman Harkin. 

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

Just about the time I think I have a good handle on some of the 

different trading that is going on in commodities, something new 

comes up and I ask where did this come from. And what I would 

like you to go into a little bit more is this netting out of the position of the index traders that are coming into the market and how 

that works. What is the extenet of this activity? You put out a special call on this—right—to get more information. 

Mr. LUKKEN. Correct. 

Senator HARKIN. Could you just elaborate a little bit more how 

this netting out is affecting our futures markets? 

Mr. LUKKEN. Well, we typically have not looked through the futures markets to get data from index traders. Swap dealers are 

Wall Street firms that aggregate lots of their clients’ businesses together. These clients may have different exposures that they want 

to manage risk on. It may be different airlines around the world 

that are trying to get risk management exposure through these 

Wall Street firms. There may be others that want broad index exposures, pension funds and endowments. Some may be long the 

market, some may be short the market. Swap dealers provide a tailored service to bring all those together, sell them products. They 

figure out what the residual risk might be left over for the firm 

itself, and then they turn around in the futures markets to manage 

that. 

So typically we have not looked past what the futures markets 

positions have been. It is unprecedented for us to do this. And it 

will be complex. We are going through the billion dollar portfolios 

of large Wall Street firms to figure this out and trying to convert 

this into the equivalence of futures contracts. So it is going to be 

a difficult proposition, a complex proposition, but something we 
22 

have to do to bring transparency to these markets so we have a 

better understanding of what is going on. 

Senator HARKIN. Tell me more about the danger of this netting 

out. What could it lead to? If you do not get a handle on it, you 

do not understand it, what could it lead to? 

Mr. LUKKEN. Well, I think there are concerns that people, 

through swap dealers, might be trying to evade position limits. 

Speculators that might go directly to the market are going through 

swap dealers in order to avoid those limits. So that is something 

we will be looking for. 

But the futures markets are helpful for these firms. We do not 

want these firms to not manage the risk of their exposures. We do 

not want a systemic event where they melt down and they have not 

been able to manage risk in the futures markets. So we are going 

to have to find a balance, finding the right controls, the right transparency for these, but it is complex. Like I said, hopefully by September 15, hopefully sooner, we are going to try to get recommendations to Congress on this. 

Senator HARKIN. By September 15? 

Mr. LUKKEN. Yes, sir. 

Senator HARKIN. By then you will know the magnitude of it? 

Mr. LUKKEN. Yes, sir. 

Senator HARKIN. Will you also be making it more transparent for 

the public to understand this, for us to understand it? 

Mr. LUKKEN. That is our hope, is that we can start putting into 

a lot of our public data some of these transactions. 

Senator HARKIN. Now, mostly we are talking about energy here, 

but is some of the same thing taking place in agricultural markets, 

agricultural commodities? 

Mr. LUKKEN. Yes, and we put out a commitment of trader report 

weekly that does break out index trading for agricultural markets. 

The reason we are able to do that is the swap dealers are almost 

one for one selling index products to clients and turning around 

and managing that entire risk in the futures markets. So we know 

for certain that swap dealers’ books are index trading in the agricultural futures. 

It is not the case for energy. That is why it is a more difficult 

proposition, why it has been harder for us to get at this data, but 

it is imperative we do get the data. And that is why we, 2 weeks 

ago, announced that we are going to put out special calls to get it. 

Senator HARKIN. So to sum up, would you say this relatively new 

facet where all these index traders are coming in now and these 

large firms are trying to net it out to cover their exposure—has this 

really grown substantially? How much has this grown in the last 

couple years? 

Mr. LUKKEN. It certainly has grown. We are trying to figure out 

how much it has grown. I think the estimates range anywhere from 

$150 billion to $250 billion on the high end. But it is difficult to 

tell, and that is something we are trying to figure out. 

And then also what is its impact? We have anecdotal evidence. 

Obviously, when you see an influx and a rise in prices, that raises 

concerns, but we also have evidence where in cash and cattle, 

which have a very high percentage of index trading—I’m sorry—of 

hogs and cattle, a very high percentage of index trading they are 
23 

down negative for the year. So, yes, we are trying to find the smoking gun, and that is what this data will help us to find out. 

Senator HARKIN. Thank you, Mr. Chairman. 

Senator DURBIN. Senator Brownback. 

Senator BROWNBACK. Thank you, Mr. Chairman. 

Chairman Lukken, who are the swap dealers? Who are the major 

swap dealers? 

Mr. LUKKEN. Wall Street firms such as Goldman Sachs, Morgan 

Stanley, J.P. Morgan, those sorts. 

Senator BROWNBACK. Are there a lot of them or is this a small 

universe of very large players? 

Mr. LUKKEN. Anywhere in the range of 5 to 10 Wall Street firms. 

Senator BROWNBACK. That are doing this $150 billion to $250 billion investing in the commodities? 

Mr. LUKKEN. That is correct. 

Senator BROWNBACK. I am curious just on a couple of things. Because of the high volatility of futures markets in commodities, 

should Congress look at whether these are suitable investments for 

pension funds altogether? These are very volatile markets, and yet 

you apparently have a lot of pension fund monies going into them. 

Mr. LUKKEN. Correct. Well, that is something that we are trying 

to get better information on. As I mentioned, this special call that 

went out will get us the data to try to find out exactly how much 

is going in, what its impact might be, and then whether there are 

controls we can put onto these types of investments to make a recommendation for Congress. 

We also have convened this interagency task force. This is not 

just a micro participant level question for the CFTC, but also we 

are trying to get the people who see the macro fundamentals of 

these markets, such as the USDA, Department of Energy, the Federal Reserve, to bring in their expertise and their economists to 

look at this data as well. Hopefully this collective group, along with 

our information requests, can help bring more understanding to 

these markets. 

Senator BROWNBACK. Well, I raise a real question whether or not 

these are suitable investment vehicles for pension funds. I mean, 

we are going through a subprime housing market meltdown because there was a new investment vehicle of sorts that was really 

ramped up in a major way, and now we are suffering the consequences. Are we going to see that if there is a bust in this futures 

market bubble in a number of these pension funds? So I think that 

is well worth looking at. 

One of the things I want to ask you is, would increasing margins 

have any practical impact on the activities of pension funds and 

index funds in the commodity markets? 

Mr. LUKKEN. Margins in the futures markets are different than 

the securities markets. Margins in a securities market are a down 

payment on buying stock. A margin—or they call it a performance 

bond in the futures market—is trying to cover a 1-day price move 

of the commodity because in the futures markets, you are not buying the underlying commodity. You are buying the change in price 

when you buy it and sell it. And so a margin has been used to 

cover those price moves and ensure and protect the clearing house 

from default, and this has worked incredibly well over the 150 
24 

years of the futures markets. Raising margin to try to limit participation and drive down prices—— 

Senator BROWNBACK. Let me be tighter on my question. Raising 

margins on speculators or those noncommercial interests or those 

entering into the swap market that are noncommercial players. 

Mr. LUKKEN. Right. I think if you raise margin—I would assume 

that people want to try to drive speculators and drive prices down. 

I am not sure that would be the ultimate effect. Certainly, it would 

probably drive these markets elsewhere where there are competitive choices—overseas or OTC. So that is a concern. I think there 

are more direct ways to try to get at this activity through transparency and spec limits that we currently have in place. 

Senator BROWNBACK. Well, I appreciate what you are announcing 

on London today because I think that is a major step, getting them 

to comply to the same standards as are taking place here. And I 

think we are going to have to do this in other markets as well. But 

I would think we would need to look at the same thing on speculative or noncommercial players in the swap market as well. 

I had people suggest to me to apply higher margins on long positions than on short positions. Now, that seems that would be a manipulative move by the Government, but a number of people are 

getting to their wit’s end on what these markets are doing in driving up prices that seems to be far and above what the fundamentals support. 

Do you have a thought on making a different margin position on 

long versus shorts? 

Mr. LUKKEN. Again, I think if you take it away from what it was 

intended to do, protect the clearing house, and trying to manage 

prices using margin I think is a dangerous precedent. 

Senator BROWNBACK. Well, I think we need to get at the question 

of these volatile markets on pension funds. Pension funds drive 

them up. But if we are in a speculative bubble, they could see huge 

losses on a near-term basis because bubbles are—by their very nature—things that pop, and then you have a big problem on the 

other end, as we have experienced. 

Thank you, Mr. Chairman. 

Senator DURBIN. Senator Chambliss. 

Senator CHAMBLISS. Thank you, Mr. Chairman. 

Mr. Lukken, we have heard some call for revocation of the no action letter process. I am somewhat concerned about that because 

I think it adds to the transparency. Can you describe for us the 

process whereby the Division of Market Oversight at CFTC issues 

those letters and what would happen if they were halted? 

Mr. LUKKEN. The no action process was begun in 1996 at the 

agency trying to deal with some of the global considerations of futures trading markets existing around the world. Rather than require all U.S. participants—or foreign markets to come and register 

everywhere around the world, a system of mutual recognition was 

developed. And this allows the home regulator to be the primary 

regulator, but the CFTC has to go through an analysis to ensure 

that the home regulator is comparable to the CFTC’s regulatory objectives. And so that is what we do, what we go through when 

somebody comes in from a foreign board of trade. We look at their 
25 

regulatory status and their systems, and we make sure that it has 

comparable regulatory objectives. 

But we can also condition these no action letters, and this is 

where we gain our leverage with these entities. As you mentioned, 

anybody can list these contracts without our approval, but when 

they want U.S. participant access, we can condition it to get the information, as we announced today, to impose position limits and 

accountability limits. And the benefit is not only do we get to see 

the U.S. participants on those markets, but we also get to see the 

foreign participants. It would be completely opaque to us had we 

not issued these no action letters. 

So I think it has been helpful for us as a recognition program to 

recognize the global marketplace we live in, but also ensure proper 

controls are in place and that we are getting the proper surveillance information from these markets. 

Senator CHAMBLISS. Let me go back to I think what you were 

getting to with Senator Brownback’s first line of questioning there. 

Some Senators have suggested that CFTC should increase the margin requirements for crude oil trading, and that seems to be confusing what the margins in the futures markets are truly designed 

to ensure, which is they are a performance bond against potential 

loss on an open futures contract and are not to be used to restrict 

market volume volatility or price. 

Can you explain a little bit about how individual clearing houses 

and not the CFTC develop margin formulas or, more accurately, 

performance bond formulas? 

Mr. LUKKEN. Well, they look historically at volatility in price 

changes in the markets. They want to make sure that every day 

the winners are able to be paid by the losers and that there is not 

a chance or a high degree of default of one of their customers. If 

there is a default, a lot of bad things happen. Potentially, if people 

walk away from trades, that could lead to a systemic event in the 

clearing system and it could ripple through our economy. So this 

is why margin is such an imperative and first point of protection 

for the CFTC and it is why we hold it sacred in protecting the 

clearing house. 

The clearing house every day, using a computer program called 

SPAN, looks at volatility in the prices in the markets. They run the 

formulas to make sure that they are covering these 1-day price 

moves, and they do it with excess capacity in mind, knowing that 

it could go beyond a traditional 1-day move. And when we look at 

this, we see that they are covering about 99-point-something percent of the moves in a typical year. That is very good. They are 

doing exactly what they need to be doing to protect the clearing 

house. 

Using it for other purposes, again, gets into dangerous territory. 

Hopefully, we would never use it when prices are low trying to 

bring up prices or prices are too high, to try to bring them down. 

I just think it is dangerous precedent to set when we have other, 

more specific tailored controls in place. 

Senator CHAMBLISS. As Acting Chairman, you have done a great 

deal to ensure that we have more transparency in the futures market on energy, and I believe transparency is the key to gathering 

the necessary information we need to determine if speculators are 
26 

playing a role in oil prices. Could you briefly describe the efforts 

that you have initiated? 

Mr. LUKKEN. Well, certainly beginning with the exempt commercial markets, the so-called ‘‘Enron loophole,’’ we wanted to make 

sure that those markets were giving us the proper data, the proper 

transparency. And this was a topic of conversation, obviously, in 

the Congress and something that was raised at the CFTC when I 

first took over. We held a hearing on that, reported to Congress the 

need to give us the information for these exempt commercial markets. Congress thankfully passed that as part of the farm bill. So 

that is bringing additional transparency to us. 

On the foreign markets, we have turned to and worked with the 

FSA to get the proper data. We are now receiving virtually identical large trader reports from ICE Futures Europe on these trades 

so we can seamlessly put these into our systems. That is extremely 

helpful. 

Swap dealers and the ‘‘swaps loophole,’’ as it is called—that is 

what we are trying to get information on. We are going to try to 

find more information with swap dealers, with index traders to try 

to bring additional transparency and sunshine to what is going on. 

It is difficult. It is complex. But it is going to help us to make informed decisions at the agency. 

Senator CHAMBLISS. Thank you, Mr. Chairman. 

Senator DURBIN. Thank you very much. 

We are going to use the so-called early bird rule, and on the 

Democratic side, I note the following Senators as they arrived: Senators Brown, Salazar, Murray, Dorgan, Klobuchar, and Lincoln. On 

the Republican side: Senators Roberts, Lugar, Crapo, and Thune. 

And I will now call on Senator Salazar. 

Senator SALAZAR. Thank you very much, Chairman Durbin and 

Chairman Harkin and others, for holding this hearing. 

I have a question relating to the so-called elimination of the 

funny money and margin requirements and the capital reserve requirements. I know for all of us, whenever we are back in our 

States, we get asked what can we do about the high cost of gas, 

with the high cost of food, and there is a lot of pain all across 

America. But it seems like many people are saying that it is speculation that is really driving a lot of these high costs, especially in 

the area of gas and diesel. 

I have a letter from a person that I know well who runs one of 

the largest oil and gas exploration companies in Colorado, a person 

I have known for a long time. And he says to me, Dear Ken, I 

share your concerns that the prices of oil and natural gas, not to 

mention basic foodstuffs, are escalating too rapidly. I believe the 

strongest short-term influence on price is the world’s extraordinary 

speculation in these commodities, fostered by light and overly generous regulation. And he goes on. 

But the central question is why should the United States Congress not order the increase in commodity contract margins from 

5 percent to perhaps 40 percent. So some of the recommendations 

that we have heard from many people are what we ought to be able 

to do is to get a handle on this speculation by increasing margin 

requirements and reserve requirements so that we do not have 
27 

anyone walking up these large supplies of oil with very little 

money. 

What is your response to that kind of reform, Mr. Lukken? 

Mr. LUKKEN. Well, certainly we have taken steps to try to address the concerns about speculation starting with aggressive enforcement, but also beyond that trying to increase transparency, as 

I have laid out, to ensure that everybody sees what is going on in 

the markets. I think there is lots of fear that there are speculators 

not currently being made a part of our reporting mechanism. And 

so that is something we have to ensure that they are doing. 

Senator SALAZAR. Let me be more specific. I know you are trying 

to increase transparency so the world knows what is going on, but 

should we as a Congress in our ability to pass legislation to enhance regulation through the CFTC require margin requirements 

and reserve requirements to try to take speculation out of the market? Is that a good idea? Is it a bad idea? 

Mr. LUKKEN. Right. As I mentioned, using margin, I think is a 

very blunt tool and may potentially drive these markets overseas. 

Although we are very glad that NYMEX is the benchmark of crude 

oil contracts, I would hate if that shifted somewhere else around 

the world or if a lot of this trading went underground where we 

could not see it. So I think margin would be a very blunt instrument and could potentially move these businesses overseas. 

Senator SALAZAR. How about capital reserve requirements? 

Mr. LUKKEN. We typically follow the Basel rules on capital, and 

we are not a part of the Basel Committee—that is mainly run out 

of the Fed and through the bank regulators and the SEC. But it 

is certainly something that we try to consult with them on. 

Senator SALAZAR. There is some notion also that there are good 

traders and there are bad traders out there, and that one of the 

things that we ought to do is to have a much more aggressive oversight of the traders that are participating in these markets. Would 

you as the Acting Chairman of the CFTC propose or think it is a 

good idea that we have registration and certification of traders in 

these markets? 

Mr. LUKKEN. Well, we certainly get all the data from the traders. 

Typically, our registrants—we have to register pool operators. We 

have to register those who advise people about commodity investments. We have to register futures commission merchants, which 

is our equivalent of broker-dealers in the securities markets. So we 

have lots of registration. Not all traders are registered, but we certainly do get to see every trader position and we have strong enforcement efforts to go after those individuals, should they try to 

manipulate the markets. 

Senator SALAZAR. But if you do not have the traders now registered, how do you know whether or not there is that kind of manipulation going on by those traders? 

Mr. LUKKEN. Well, we see those traders’ positions. They may not 

go through an official registration with the agency, but we see who 

they are, what they are doing, and if they are in any way manipulating the markets, we can take strong action against them. 

Senator SALAZAR. The broader question here, in terms of—people 

are saying speculation accounts for 30–40 percent of the high price 

that we are seeing. Do you agree with that conclusion or not? 
28 

Mr. LUKKEN. Well, we try to look at this from the data that we 

have. We are trying to figure out—our chief economist has testified 

that we are trying to see if speculators are systematically driving 

the prices. We have not seen evidence from our data. It is difficult 

to prove a negative. And we certainly encourage those that are saying this, you know, where the prices should be and that speculators 

are doing this, to provide the data to us so that we can look at it 

and make an informed decision. But currently now, we have not 

found a smoking gun. 

Nevertheless, we are not sitting. We are definitely taking constructive steps to make sure the markets are working correctly, 

that there is not excessive speculation driving the markets. And 

those are the steps I outlined today in my testimony. 

Senator SALAZAR. Thank you, Mr. Chairman. 

Senator DURBIN. Thank you very much, Senator Salazar. 

Senator Roberts has deferred to Senator Lugar, whom I will now 

recognize. 

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

I think that a constructive action that the Senate can take would 

be to confirm the three nominees for the CFTC Board. Here we are 

discussing today a monumental problem, and we are stressing the 

need for more budget, and I would agree with the chairman that 

is certainly imperative if they are to have staff and if they are to 

meet this objective. I would just say that the American people anticipate action on the part of us, in addition to the CFTC, and our 

part of it, it seems to me, ought to be to confirm three out of the 

five nominees so that in fact there is a structure to do the job. 

Now, beyond that, I am just simply impressed by the fact that 

the speculation side, at least as I have read about it—and you 

would know more, Chairman Lukken—that is maybe 30 to 40 percent in the energy business, and that maybe true for corn likewise 

or for beans, which you have not got into today, but which is also 

a part of your purview. 

A very large portion of that appears to be, if not the pension 

funds, some group of people who are supporting at least that idea 

that they are going to make money for people that they are trying 

to represent by going long on oil. They get into the market and 

they do not leave. So they are not coming and going, there is not 

an influence daily or monthly or what have you on the price. 

I think Milton Friedman, in his thesis on speculation in 1953, 

said, in fact, if the speculators are right, if these are fairly bright 

people—and they try to be because their living depends upon it, as 

well as their clients’—then they smooth out the pricing situation. 

They create a situation in which the rest of the market is informed. 

Now, in the current predicament with oil, OPEC to a large extent 

controls supply. Demand is only controlled ultimately by price. 

That is the hurt that we all feel. The fact is, as prices have risen, 

we rebel against that. We wish this was not the case. We have not 

taken steps as a Nation really to increase our supply of oil particularly, and yet at the same time, we are very unhappy the price is 

higher. But it does affect ultimately what occurs. 

Now, Friedman also pointed out if the speculators as a group are 

absolutely stupid and dull, so then we have trouble—because at 

that point, they are going to lose money and there will be a crater 
29 

of the markets. So there is always going to be an argument on the 

philosophy of speculation on the basis that the majority of people 

who are making these investments, passive as they may be, are 

probably right, that there is a shortage of whatever it is and therefore, they will make money over a long period of time, some of 

them, months and years. 

Now, what I just simply wanted to use the rest of my time to say 

is I believe that the actions that you have taken are very positive 

actions. In fact, amazing that you have reached that agreement 

with ICE in Great Britain so rapidly. It must mean that a number 

of people in Great Britain and in world markets sense precisely 

what we are talking about today, and that is the imperative need 

for transparency in a worldwide sense, these screens that you describe that we can all look at. To the extent that you can get all 

the screens up with these so-called no action letters, more power 

to you because then it does make the information available. We 

may not like the information. We may wish the price was coming 

down on oil, not up, but at least we are informed and then can take 

actions as individual consumers, as a Government, or as people to 

mount this. 

So I have no questions of you. I just am pleased to have these 

5 minutes to comment because I believe the progress of the Commission, even with three of five unconfirmed, has been exemplary, 

and I hope that you will have more progress. 

Thank you, Mr. Chairman. 

Senator DURBIN. Thank you, Senator Lugar. 

Senator Murray. 

Senator MURRAY. Thank you very much, Mr. Chairman, both 

chairmen’s ranking members. I really appreciate you having this 

hearing today. I think it is very timely and very important. 

I was home this weekend. I went to the gas station on Sunday, and I paid $4.45 a gallon. So people who are paying $25 or $30 just 

a few years ago are paying $50 or $60. This has a huge impact on 

families’ pocketbooks. It is affecting absolutely everyone from small 

businesses to our school districts, to our transit agencies, and obviously to families. Farmers in our State are really being hurt right 

now. Some of our State’s farmers are saying they are spending up 

to $500 per day. That is about 60 percent up from last year on diesel costs alone. So we are just getting into the harvest season right 

now. These costs are going up on top of record fertilizer prices. I 

mean, this is really impacting everyone in our economy. The rising 

cost of food, health care—I mean, I do not have to say it. This is 

real and it is big. 

So I wanted to ask you whether you think there are any shortterm things we can do to reduce the speculative premium on fuel 

prices and bring some relief to these families. 

Mr. LUKKEN. Well, certainly the steps that we tried to outline 

today about trying to ensure that there is equivalent position and 

accountability limits at all points of entry for the crude oil markets—we addressed the London exchanges to ensure that there are 

proper speculative and accountability limits there. That is useful. 

The farm bill that was just implemented—we are also putting position and accountability limits and large trader reporting on those 

entities, those swap dealing markets that are electronically traded. 
30 

Senator MURRAY. Do you think we will see some relief in the 

short term from those steps? 

Mr. LUKKEN. It is difficult to say. I am not sure short-term relief 

is going to be a result of some of these measures, but certainly we 

are going to get greater transparency in these markets so that we 

are assured that these markets are not being manipulated. I guess 

the concern is that these markets are acting irrationally, but I am 

not sure I can lay that at any one participant’s doorstep. But certainly we need the proper controls in place for speculative behavior 

to ensure that they are not artificially driving the markets. 

Senator MURRAY. Well, as you know, in my home State of Washington back in 2001, the west coast saw this western energy crisis, 

and for years the industry regulators and representatives testified 

before us time and time again that market forces were the source 

of skyrocketing electricity costs. It was not until we actually saw 

the tapes of those traders that we realized there were manipulative 

schemes going on at Enron. So you understand I come from my 

perspective a little bit skeptical of some of the people who are saying that this is different. 

I think we do have a lot of important lessons that we did learn 

from that Enron scandal, the potential for moral hazard when industry is left unchecked. It reminded us of the importance of market transparency that you have talked about, strong Government 

oversight. 

Now, I know the fundamentals of the oil prices are different and 

unique, but I am very concerned about the rhetoric that I am hearing that just dismisses the possibility that market manipulation is 

occurring. 

Can you tell me is the CFTC able to rule out market manipulation as a factor affecting these skyrocketing fuel prices? 

Mr. LUKKEN. Well, market manipulation is different, I think, 

than what we have been discussing, sort of this upward pressure 

that speculators may or may not be having on prices. Manipulation 

is an illegal act of somebody individually or cooperatively with others trying to game the system for a profit without risk. And so that 

is what we look for. In December, we announced we have a national crude oil investigation that is looking into storage practices, 

how these things are purchased in the cash markets, as well as the 

derivatives markets, pipelines, shipping, all these things that factor 

into the price of crude oil. We are moving forward with that investigation and hope to have results in the coming time period. 

Senator MURRAY. When will we know what you have found? 

Mr. LUKKEN. Well, these cases have to be developed, and these 

are complex legal cases. But hopefully, soon. 

Senator MURRAY. Is there any question in your mind that we 

should be looking for or are you finding solid evidence that you 

think does not lead to market manipulation? 

Mr. LUKKEN. We have seen cases in the past where people attempt to manipulate the markets by holding one leg of their position on the futures markets where they can benefit, but then doing 

something outside of our view. So these transparency measures we 

mentioned are helpful. We are able, under current law, to go after 

OTC positions when we see problematic trading on the futures 

markets, and we do that quite frequently. 
31 

Manipulation is typically a very short-term move of the market 

for profit. It should not be confused with sort of this upward pressure we are discussing. 

Senator MURRAY. But right now we cannot rule it out. 

Mr. LUKKEN. No. We always are looking for manipulation. In 

fact, we settled our record manipulation case last fall with BP for 

manipulating the propane markets. So it happens all the time, and 

we go after it aggressively. 

Senator MURRAY. And your budget request gives you enough resources to be able to go after that. 

Mr. LUKKEN. The request we made today for an extra $27 million 

certainly would give us the enforcement tools to go after this, yes. 

Senator MURRAY. Because I do think we need to know the answers to those questions, Mr. Chairman. Thank you very much. 

Senator DURBIN. Thanks, Senator Murray. 

Senator Roberts. 

Senator ROBERTS. Thank you, Mr. Chairman. And I want to associate myself with your remarks and that of my colleague from Kansas in regards to your very timely statement with our concern and 

our prayers for people who are suffering from the weather damage, 

floods. We just went through another round of tornadoes in Kansas. I do not know what we did to Mother Nature, but she sure is 

responding in a way that we do not like. And it was due to the tornadoes that we experienced—and Sam and I were out in Chapman 

that lost about 70 percent of the town and in Manhattan, home of 

the ever-optimistic and fighting Wild Cats of Kansas State, but the 

tornado did not do that much damage to the university but did to 

the community. 

And then a little small town called Soldier. At the south edge of 

the town of Soldier, there is John Growell and Larry Holiday, two 

farm families, two cattle operations. And both couples were in the 

basement when the storm hit and then awoke to find no house, 

nothing, no operation. But both farms were swarming with people 

to help pick up and burn up and haul off the rubble. In a shorter 

time period than we think, I think both John and Larry will be 

back in business. 

Now, I am standing there talking to a guy who has lost his 

home. I am standing there talking to a person where a tornado 

completely just wiped him out, he and his neighbor across the highway. Does he talk about the tornado? He just stands there and 

said, look at all the friends that I have got. But he said, Senator, 

what I really want to talk to you about are these high fuel prices. 

And that is amazing. I mean, that shows you the real concern on 

the part of people. Senator Murray was talking about the same 

thing. 

Chairman Lukken, thank you for quickly responding to my questions from your nomination hearing nearly 2 weeks ago. 

Let me say that basically I am just going to cut to the chase. 

Your challenge is that before you can implement all the changes 

that we gave you in the farm bill, many are calling for greater authorities. I do not know if we are pushing the rope or not. One suggestion is to increase the margin requirements. Senator Salazar 

talked about that. We are going to hear testimony on the second 

panel on both sides of this issue. Currently the exchanges, obvi-
32 

ously, set their own margin rates to protect themselves and to 

cover their liabilities. 

Based on comments and responses to the CFTC’s agricultural 

market roundtable back in April, what effect would increased margin rates have on agricultural producers and, in particular, the 

grain elevators? They are going through a very tough time, as you 

know. There are people that say what is good for energy is good 

for agriculture. I am not sure that is the case. Now, you answered 

that in part with Senator Salazar, but tell me what the CFTC’s agricultural market roundtable in April would say or did say about 

the increased margin rates on the producer, more especially the elevator. 

Mr. LUKKEN. Well, margin rates, as you mentioned, have been 

going up. They are going up because of higher prices. And the 

clearing house is making sure that people are able to cover losses, 

potential losses, in case of default. This has had a tremendous impact on agricultural producers and merchandisers, especially we 

saw in the cotton markets where a couple-day price run-up caused 

cotton merchandisers having to go to their banks to find hundreds 

of millions of dollars of lines of credit at a time when credit was 

shrinking in the markets. This was a terrible situation. And so 

what we have tried to do in the futures markets is to work with 

the exchanges to develop good practices for setting margins, but we 

have also had to reach out to people outside of our normal responsibilities, which are the banks, the agricultural lending authorities 

that oversee a lot of these agricultural loans. 

And so we had the Farm Credit Administration, we had the Kansas City Fed at our recent agricultural forum. We have been talking to the Chicago Fed, the Farm Credit Administration, and all 

these folks together to try to collectively think through these situations so that farmers can meet these margins, so that they are not 

exposed to risk when prices move. It has been difficult. I mean, 

corn, above $7. It is a difficult situation right now for all people in 

agriculture, and we are trying to facilitate a discussion with lenders on the margin issue. 

Senator ROBERTS. Senator Chambliss informed me corn just went 

to $9. Oh, no. I am sorry. He says no, no, that is not the case. Well, 

he certainly got my attention at any rate. 

Mr. LUKKEN. It got my attention too. 

Senator ROBERTS. No. Let us not have any heart attacks. 

I want thank you for your statement. I have a feeling here, Mr. 

Chairman, that everybody in America and their dog is aware of the 

fact that fuel prices have gone up dramatically. We talk about supply and demand. I do not think there is an instant answer here. 

And we talk about speculation, whether that is 20 to 30 percent. 

But when I was talking to those two gentlemen who lost their 

houses and their operations in Kansas, I said, well, you know the 

CFTC is conducting an investigation on this. And they said, who? 

I said, the CFTC. I had to say the Commodity Futures Trading 

Commission. Here are two cattlemen that basically were somewhat 

aware of what you do but not really, and I think there are a lot 

of folks in agriculture and a lot of folks around the country that 

are just really not aware that you exist and that there are $5 tril-
33 

lion of notional transactions that now flow through the U.S. exchanges and the clearing houses daily. 

I commend you. I am trying to find your statement here. Two 

weeks ago the Commission took the extraordinary step of disclosing 

that in December 2007, its Division of Enforcement launched a nationwide crude oil investigation into practices surrounding the purchase, transportation, storage, and trading of crude oil and related 

derivatives contracts. And you are going to make a report to us on 

September 15. I am not sure the American public knows that. I 

sure hope they know it now that you are doing your job and you 

are doing that. 

And then you have this unique task force which includes staff 

representatives of CFTC, obviously, the Federal Reserve, the Department of the Treasury, the Securities and Exchange Commission, the Department of Energy, the Department of Agriculture, all 

examining investor practices, fundamental supply and demand factors and the role of speculators and index traders in the commodity 

markets. So I commend you for doing that. And I do not think a 

lot of people doing a lot of the finger pointing are really aware of 

that. 

I think we should not tarry, as the chairman has said. We do not 

even have you out of the Agriculture Committee yet in terms of not 

being active, let alone on the floor. So I think you ought to be confirmed, along with the new commissioners. 

And we need to see if this new authority works before we add 

more authority on, I would hope. Maybe there is something there 

with the new authority that we could add in. 

And we need to get the funding, Mr. Chairman. I back you all the way on this funding. We ought to have the $157 million or billion or whatever it is. You can pick. 

But at any rate, on the funding issue—I see I am over at least 

2:25. That was the price of corn back in 19—whenever it was. So 

I better quit at that point. 

But we need to quit tarrying on our part as well in regard to the 

funding issue and getting you confirmed and waiting on your report. And thank you for a very good statement. 

Senator DURBIN. I have remaining on the list Senators Dorgan, 

Klobuchar, and Lincoln. Senator Dorgan. 

Senator DORGAN. Mr. Chairman, thank you very much. Thank 

you for allowing me to sit in on this subcommittee. I serve, of 

course, on five other subcommittees. 

Mr. Lukken, I was looking at the statements that you have 

made, and it seems to me you have already made a judgment about 

whether there is excess speculation or whether there is manipulation in the markets. I would say to my colleague from Kansas, I 

do not mind pointing fingers. If there is excess speculation that is 

driving up the cost of energy, I say let us point some fingers and 

find a way to get that excess speculation wrung out of the system. 

But, Mr. Lukken, on May 7, you said, we can say with a high 

degree of confidence that people are not manipulating the energy 

markets. That was May 2008. And I believe you just told the chairman that you do not know what quantity of contracts you regulate 

or do not regulate. How can you, on May 7, say that you can say 

anything with a high degree of confidence? 
34 

Mr. LUKKEN. We talked about this a bit earlier, but manipulation 

is different than I think what people are concerned about—an asset 

bubble in commodities. Manipulation under our law is somebody 

intentionally individually or with a group of individuals trying to 

push up prices illegally. It can occur and we have not seen the entire marketplace collaborating together to manipulate. 

But having said that, we are taking significant steps to ensure 

the latter, which is ensuring that there is not an artificial price due 

to these structural changes in the markets, which are index traders, swap dealers, we are trying to get more information about 

these new market participants, what they are bringing to the market, and how that is impacting prices. That is something we have 

announced today, that we are, by September 15, going to provide 

to Congress some recommendations on practices for those types of 

participants. 

Senator DORGAN. So you’re saying that what you said in May 

does not apply to the issue of speculation. It applies to manipulation, which you say is distinct from speculation. 

But you have indicated in July last year, January this year, and 

February this year, that the markets are functioning well. The exchanges are functioning well. The underlying fundamentals of the 

markets have been reflecting price. That would suggest to me that 

you do not pay much attention to this issue or do not give much 

credence to the issue of whether there is excess speculation. 

Again, I would ask the question, if, in response to Senator Durbin, you do not have the foggiest idea what percent of the contracts 

you are seeing or regulating, how would you have a conclusion 

about whether there is excess speculation in these markets? 

Mr. LUKKEN. Well, we certainly see all the contracts that are discovering prices, and that is our main focus, those contracts that 

people are referencing every day. How do you know that the price 

of oil is $130-plus a day? Well, it is traded on the NYMEX, and 

that is the price discovery mechanism. We work very hard to protect that entity, and that is why we are going to ask for additional 

information from exempt commercial markets which also service 

price discovery, from the London markets that also service price 

discovery, and the NYMEX, the regulated markets. So that is 

where we focus our attention. 

If we see problems in the over-the-counter markets, we have the 

authority to reach out and get that information on a need to know 

basis, and that has been very helpful. 

Senator DORGAN. But, Mr. Lukken, you do not have a classification of what is speculative. My understanding is you are classifying 

as commercial accounts that which could be pure speculation. I 

guess I am trying to understand where your mind is on this. There 

are a lot of folks who have said—and I think with some credibility—that there is a substantial amount of speculation in these 

markets, excess speculation. This is not new. We have seen speculation in markets before. We understand the result of it. We understand the consequences of it, and it is what requires regulators to 

be aggressive and active in trying to deal with it. 

Now, let me go to these no action letters. The staff of the foreign 

board of trade no action letters—did they contemplate that exchanges that may be owned in part or in whole by American inter-
35 

ests would escape the CFTC regulation on U.S. exchanges even 

when they trade on U.S. exchanges? 

Mr. LUKKEN. This was the International Petroleum Exchange, a 

British exchange started in the 1980s. It was, as you mentioned, 

bought by ICE here in the United States, but it has been regulated 

by the Financial Services Authority for 20-plus years. Its compliance department is there. Its board is there. And up until 2006, 

they did not list any contracts dealing with the United States. 

When they did, we held a hearing. We did a rulemaking, and we 

changed our policy to get additional information from these markets. And that has provided a great transparency to the markets. 

We recently announced that we are getting additional information that is comparable to our regulated marketplace, and today we 

announced we are getting position and accountability limits for 

those markets. So we have taken constructive steps to ensure that 

these markets are properly—— 

Senator DORGAN. I see what you are announcing in the last few 

weeks when there is a great deal of pressure, but I must say that 

you approved a foreign entity, partially owned or substantially 

owned by U.S. interests, to put computer terminals in a U.S. city 

and trade in a circumstance that should have represented in my 

judgment regulated trading here in this country. 

I am out of time, so let me ask this question. Do you think, based 

on what you know now, that what has happened to the price oil 

and therefore gasoline in the last 15–17 months is simply the fundamentals? Because you have said that several times. As you 

know, 4 of the last 5 months, we have seen increased crude oil supplies in this country. In 4 of the last 5 months, demand is going 

down. If supply was going up, demand is going down, and price is 

going up like a Roman candle, and you are sitting there saying, it 

is just the fundamentals, do you still think that it is the fundamentals and there is no significant speculation problem here? 

Mr. LUKKEN. Well, obviously, there are powerful fundamentals in 

play in these markets. The Dollar, when we look at it, could potentially have as much as a 25 percent impact on commodity prices. 

But regardless of that, our job is to ensure excessive speculation 

is not artificially driving prices, and that is what we have done 

with our constructive steps over the last 9 months. Again, we are 

full-time regulators even beyond the initiatives we have announced 

today, the farm bill legislation that we are implementing, the reports that we are going to provide to Congress. So it is a strain on 

an agency that is low on staff. 

Senator DORGAN. I just observe that your constructive steps over 

the last 9 months are at odds with your statements in recent 

months. I mean, you have already made the statement that this is 

just the fundamentals at work, which is a way of saying you all 

that are finger pointing on excess speculation—— 

Mr. LUKKEN. I would look at the actions that the CFTC has 

taken over the last year, and I think it is pretty powerful. 

Senator DORGAN. Well, I am just looking at what you have said 

and what you have told the American people and what you have 

told the Congress. I believe it is at odds with aggressive action to 

try to respond to this. It seems to me you have already made a decision about your position on this issue. 
36 

Senator DURBIN. Thank you, Senator Dorgan. 

Senator Harkin had to leave but wanted me to add for the 

record, because this has been raised by a couple Senators, on the 

nominations to the Commodity Futures Trading Commission, that 

the Agriculture Committee received answers to written questions 

from the nominees on Friday, June 13, and that he will be moving 

on this information very soon. 

We have Senator Thune. 

Senator THUNE. Thank you, Mr. Chairman. 

Mr. Lukken, what percentage of—maybe this question has been 

asked. If it has, then I apologize. But what percentage of long energy contracts are held by noncommercial investors would you say? 

Mr. LUKKEN. By noncommercials? I am not sure I have those— 

I think it is near 30 percent. I have my staff here, but I think it 

is around—— 

Senator THUNE. Do you have any idea how that percentage has 

changed over the past 10 years? 

Mr. LUKKEN. I think it has been roughly the same percentagewise, maybe slightly increased. 

Senator THUNE. Has that had any impact on market price? Has 

the amount of those who are taking those types of positions—if 

that has, in fact, impacted price? 

Mr. LUKKEN. I think that is something we are studying. We have 

not seen direct evidence of that, but we are taking steps to try to 

ensure that it is not. 

Senator THUNE. And the CFTC does have the authority and/or 

the resources to track that sort of information. 

Mr. LUKKEN. Well, we are asking for additional transparency 

into certain activities, such as swap dealers and index trading, and 

we are also asking for more funding for technology and other resources and people in order to go after this type of activity. 

Senator THUNE. You said in your testimony the backbone of the 

CFTC’s market surveillance program is the large trader reporting 

system. All large traders must file daily with the CFTC their futures and options positions in the market. This information enables 

CFTC’s surveillance economists to oversee all traders of size to ensure that no one is attempting to manipulate the futures markets. 

That is your quote. 

Just how well is that large trader reporting system working 

today in your estimation? 

Mr. LUKKEN. Well, as far as the technology, that is something we 

definitely need to modernize. We are taking steps to do that over 

time. I think it has worked as a control on the market very well. 

I mean, our concern typically in the futures markets is as these 

prices expire, that somebody—similar to the Hunt silver crisis in 

the 1980s—could hold a large futures position, at the same time 

holding the underlying cash market, owning silver, for example. 

That causes manipulation. That causes severe distortions in the 

prices. We have controls in place to ensure that no one is holding 

a large enough of a futures position to try to distort the markets. 

And we can ask for information and jawbone them and ask them 

for economic justification, and ultimately ask them to get out of 

their positions. So this has worked very well over the years to try 

to prevent this. 
37 

But even if manipulation occurs, we have aggressively gone after 

manipulation over the last—especially since the California energy 

crisis, assessing nearly $500 million worth of penalties against 

these people trying to manipulate the markets. 

Senator THUNE. Basically you have alluded to in your statement 

today the manpower and resource constraints that the commission 

is dealing with. Can you assure the committee today that no one 

is attempting to manipulate either the energy or any other commodity futures markets? 

Mr. LUKKEN. No, I cannot. But we are looking for it and we are 

policing it aggressively if we find it. Policemen cannot always prevent crime, but crime happens and you go after it as aggressively 

as you can. And it is the same for the markets. You cannot stop 

all bad actors. We have systems in place to try to stop it, if we can, 

and if we cannot, we go after it on the enforcement side. 

Senator THUNE. Do you believe then that there are problems due 

to lack of transparency? It has been, again, also mentioned earlier 

today with energy commodities with U.S. delivery points that are 

traded on exempt commercial markets, foreign boards of trade, 

such as the ICE. 

Mr. LUKKEN. Well, certainly transparency is helpful for regulators, and that is what we have tried to improve on over the 2 

years that this contract has been listed. We immediately started 

getting information from that contract in 2006. A month ago, we 

reached an agreement with FSA to get almost exactly the same information that we are getting from NYMEX now that can be 

seamlessly put into our systems. That is helpful. 

Today we announced additional controls on those markets. So I 

think we feel very comfortable that we are seeing these markets 

and trying to ensure that manipulation is not happening on those 

markets as well. 

Senator THUNE. Specifically, what issues do you think are created by a lack of transparency in these markets? If you do not have 

that kind of information. 

Mr. LUKKEN. Well, seeing more of these transactions ensures 

that we can prevent manipulation when it occurs. It also allows us 

to understand sort of the intent behind some of these traders. 

Right now, we are asking for additional information for swap dealers and index traders. There is a lack of clarity in our data about 

how much is coming into our markets. We are going to start receiving that soon and hopefully can make informed decisions about 

that information in a report to Congress. 

Senator THUNE. I would encourage you in all these steps that 

you are taking that I think are great. We look forward to the September 15 deadline. There is a widely held view, I think as you 

know, across this country that this is contributing to these volatile 

swings, and the more information, the better. Transparency in a lot 

of ways has got to be a part of the solution. 

And if there are tools that you lack today or things that you need 

legislative authority or direction to accomplish, we would certainly 

appreciate and welcome those suggestions because we want—at 

least I do—to see the steps that we take actually correct the problems that exist out there, not create additional problems. So it is 

going to be very important that as you pursue some of these initia-
38 

tives that you have undertaken, that you share your findings with 

us. There is a clear mood out there, I think, in the public that 

something needs to be done. Thank you. 

Thanks, Mr. Chairman. 

Senator DURBIN. Thank you, Senator Thune. 

Senator Klobuchar. 

Senator KLOBUCHAR. Thank you, Mr. Chairman. Thanks for 

holding this hearing. 

Mr. Chairman, I was listening to the other Senators thinking 

what I saw at home, people waiting in line at a Costco station, 

going around the block in their minivans because they are just trying to save a few bucks. Or people I talked to in rural Minnesota 

can only afford to fill up one-half their tank, just because they do 

not have the pocket change to fill it. 

And I was listening to what you were saying to Senator Thune 

about the criminal analogy. I am a former prosecutor. That was my 

old job, and we would always say you can have all the laws you 

want on the books, but you need people to enforce them. 

And you should know I was just out with 50 Minnesota high 

school students who remembered my old job. As I walked into the 

hearing, they said, Amy, is that a murder prosecution going on in 

there? And you should be happy to know I said, no, that it was not. 

But I wanted to ask you about this. We always say follow the 

money, and you find the bad guys. But you need the tools to do 

that. 

And we had an interesting Commerce hearing maybe you heard 

about a few weeks ago with Senators Dorgan and Cantwell and 

others. And one of the witnesses talked about how the rule used 

to be before this Enron loophole got in the middle of the night in 

the year 2000, I think, that the burden shifted with that loophole 

and that still really has not been fixed. The burden, which we always cared about as prosecutors, used to be on the traders to show 

that something should not be regulated, and now it has shifted to 

you, to the CFTC, to say that something should be regulated. 

Would you like that burden to be shifted back? Because, as far 

as I understand, the Enron loophole closure that we did in the 

farm bill did not fix that. 

Mr. LUKKEN. Well, I think what we fixed in the farm bill was the 

most important aspect, which is the price discovery mechanism 

that has occurred in over-the-counter markets for electronic exchanges. And so that was something that we were able to get additional information, put position limits and accountability on those 

types of transactions. That has been truly helpful. 

I think what has been referred to—I am not sure if Mr. 

Greenberger’s testimony—— 

Senator KLOBUCHAR. I think that was him, yes. 

Mr. LUKKEN. Yes, in regard to 2(g), another exclusion for swaps 

in our act. 

And the main concern is that we do not have manipulation authority as a result of this. Our enforcement staff has been going 

after people manipulating these markets for many years since 

then, since 2000. We have never lost on this issue that we do not 

have manipulation authority. 
39 

Senator KLOBUCHAR. So you do not care about having—for us, as 

prosecutors, it was a big deal who had the burden. 

Mr. LUKKEN. Again, we have not lost a case on this matter. So 

it has not affected us. 

But the more important thing is what we did in the farm bill, 

which is ensuring that as these price discovery markets develop, 

that we have the proper information and proper controls in place. 

Senator KLOBUCHAR. Exactly, and that was helpful, but from 

what I have heard, in addition to this burden issue, there is also 

the issue of foreign exchanges. I know you have gotten ICE to 

make some agreements and that you are going to get more data, 

but you can have all the information you want, and if you do not 

have the authority to prosecute, the authority to regulate, we are 

not going to get the results. 

And you know, the oil companies testified before Congress saying 

that oil should be trading at $55 a barrel instead of where it is. 

And Senator Dorgan was asking about the fundamentals of the 

market. It seems that something is going on here. 

And to me, the more enforcement actions that you do, whether 

it means more cops on the beat through more funding or more tools 

in your hands, that you would want to set those examples. And 

what I just find frustrating is that—I understand you are taking 

some measures here, but I would think you would want an even 

stronger law. And what I am asking you is what other things can 

we do to strengthen your hand. 

Mr. LUKKEN. Okay, thank you. 

Senator KLOBUCHAR. No. I am asking you right now. 

Mr. LUKKEN. Well, certainly funding is something we cannot do 

on our own and something that we have talked about in my testimony. But we are taking the initiatives to try to get better information and after we look at the swap dealers and the index traders 

and the amount of monies and whether controls are necessary, if 

there are legislative fixes coming from that, we will certainly make 

sure that Congress knows about it. 

Senator KLOBUCHAR. But even when you have reached this 

agreement and ICE is going to give you more data and do some 

things differently, does that really give you the authority to go 

after some of these foreign exchanges? I guess we will be hearing 

that from the next panel. 

Mr. LUKKEN. Well, we certainly have the ability to go after U.S. 

participants that are trying to game London versus the United 

States. We can sue them under our manipulation authority. 

The no action letter is the biggest tool we have against these exchanges. We can just pull it if they are not enforcing their laws or 

not enforcing limits, they are not overseeing the markets as we 

think they should. So that is a very powerful tool as well. 

Senator KLOBUCHAR. Okay, but what is the difference between 

how you can regulate one of our exchanges versus what you can do 

with ICE? I mean, there still must be differences between your 

powers. 

Mr. LUKKEN. Well, certainly there are differences, but we also 

have to recognize that we are in a global economy. 
40 

Senator KLOBUCHAR. But what are the differences? Just so I can 

tell those people in line at Costco. It is not going to make them feel 

good to say the Dubai exchange is regulating them. 

Mr. LUKKEN. As far as the oversight of the markets, they are almost the same. We have self-policing authorities both on regulated 

exchanges, compliance departments, to make sure that people are 

not manipulating the markets. The London exchange requires the 

same. They require their exchanges to police these markets effectively. 

What we have added on top of everything else—the 6,000-page 

rule book that FSA has for their registrants—is information that 

we need to surveil the markets, which is getting this 25 percent of 

the market share that they hold. We are going to get all those traders, and not just U.S. participants, but foreign participants we 

would not normally see. We are getting additional insights into 

these markets that we would not have but for this recognition—— 

Senator KLOBUCHAR. And I understand that. I have run out of 

time here. 

You do not want a burden shift. Is this correct? You do not want 

to get back what you had before 2000? 

Mr. LUKKEN. I am not sure of the burden shift, the legal argument. I have to admit I have not—— 

Senator KLOBUCHAR. Well, maybe we could write it down and 

then you guys can write back to us. 

Mr. LUKKEN. Okay. We can try to answer your—— 

Senator KLOBUCHAR. Okay, thank you. 

Senator DURBIN. Thank you, Senator Klobuchar. 

We have one more panel, and I know Senator Lincoln and Senator Nelson have waited patiently. We have been told that one of 

the panelists has to leave by 1 o’clock, so we are going to ask people to stick as close as they can to the 5-minute rule. Senator Lincoln. No pressure. 

Senator LINCOLN. Thanks. Well, it has all been said, but not everybody has said it. Is that how it goes? 

A special thanks to the chairman and the ranking from both the 

committees for having the hearing today. 

You know, I think we have all come to the conclusion that high 

energy and commodity prices have a tremendous impact on our 

constituents, and I think we have all shared stories. I visited with 

a director of a senior feeding program in my home State where not 

only were the high prices becoming a problem for food, but the fuel 

prices were phenomenal, to the extent that they were freezing 

meals instead of delivering them every day and delivering meals 

five and six at a time. And I asked her what impact that had made, 

and she said, well, one of our longstanding constituents passed 

away because nobody came to see him over 6 days because he had 

6 days of meals’ worth in his freezer. It has a real impact on the 

working people across this country. 

I think at least most of us realize that there are multiple issues 

driving higher commodities and energy prices, whether it is the 

weak dollar, strong demand from emerging world economies, geopolitical tensions in some of these oil-producing regions, weatherrelated supply shortfalls. We have had wheat crops under water. 

We know our neighbors to the north in Iowa and Indiana with 
41 

flood waters, increased production of ethanol. All of these things 

have a direct impact. 

I think we all remain unclear about what the size of the impact 

that this huge influx of investment in commodities futures markets, particularly from institutional investors, is having. And so we 

are looking to you to be helpful to us in terms of what percentage 

of this is a part of this problem that we are seeing. We know there 

are long-term solutions to oil prices in terms of renewable fuels, 

but what is our best avenue to make an immediate and greater impact on the real lives of people that we represent in our States? 

A couple of the questions that I had and a lot of people have already asked—but I think it was Senator Brownback that asked you 

about the swaps basically. I guess you were listing some of the 

firms that deal in swaps, Goldman and J.P. Morgan, and others. 

What percentage of those firms’ dealings do you think are in swaps 

and in that tool? 

Mr. LUKKEN. I think a large portion of their book is swap transactions. Again, they internally net out the risk before they come to 

the futures markets, but those pressures—it would be helpful to 

understand what is underlying those futures markets positions, 

and that is what we are attempting to find out. As I mentioned before, it is very complex to unwind the book of a multibillion-dollar 

firm, but it is something we are attempting to do over the next few 

weeks and hopefully report back to Congress some more transparency in this area. 

Senator LINCOLN. But I think your average person would probably think that it is a small percentage of what they do, and yet, 

I do not think it is from what I am seeing and hearing. It is going 

to be a large percentage of what these financial houses are involved 

with. 

Mr. LUKKEN. And interestingly enough on crude oil, I looked at 

the most recent stats for swap dealers. Their positions are roughly 

as much long as they are short. So they are only about a few hundred thousand contracts long, which may sound like a lot, but they 

are almost flat in their book, meaning that they are offering risk 

management products not only to people who are looking for the 

prices to increase, but also people who are trying to hedge transactions, commercial businesses on the short side that are looking 

for risk management products. So this is helpful. Swap dealers do 

provide a service of allowing people to manage risk in the markets, 

and that is helpful. And that is something we want to preserve. 

Senator LINCOLN. Very real people like pensions and other 

groups too, which is a large portion of their operations as well. So 

I think that is important. 

The last thing I just wanted to—I want to make sure I am clear. 

We keep questioning you about the OTC, the over the counter. You 

cannot do anything about that until it has happened. Right? 

Mr. LUKKEN. Well, if we see an ongoing manipulation in the futures markets, we can reach into the OTC markets to see what 

their positions are and hopefully try to prevent things from happening. But typically we—— 

Senator LINCOLN. But that is not something you do on a regular 

basis. There is nothing that triggers you to do that. 
42 

Mr. LUKKEN. And the difficulty of the OTC markets is that they 

are not standardized, transparent. A lot of these are very individualized, negotiated transactions. It would be difficult. And the 

enormity of the task of getting all this information in, making some 

sense of it, what might be influencing prices, what is not—it would 

be very difficult, very expensive for the agency to do. What we do 

is try to concentrate on the price discovery markets to ensure that 

they are not being manipulated or artificially driven with the ability to reach into the OTC markets on a need-to-know basis. 

Senator LINCOLN. Just one quick thing. As you are undertaking 

this transparency initiative regarding the swaps, do you anticipate 

any policy changes in the information that you are gathering? 

Mr. LUKKEN. I do not want to prejudge the issue, but certainly 

we are open to looking at all options. 

Senator LINCOLN. Great. 

Thank you, Mr. Chairman. 

Senator DURBIN. Thank you, Senator Lincoln. 

Senator Nelson. 

Senator NELSON. Thank you, Mr. Chairman. 

When did you first become aware that there was at least a perceived problem in excessive speculation, at least that some people 

believed that there was excessive speculation? When did you first 

become aware of that concern? 

Mr. LUKKEN. Well, certainly during the price run-up, people 

started to talk about this, and we wanted to make sure that our 

controls in place were proper. So certainly over the period of time 

that people have been concerned, over the last 6 to 9 months. 

Senator NELSON. At what point in the run-up? Where was the 

flash point from your standpoint? Obviously, from the standpoint 

of others, it was probably sooner than it was for you, but where did 

you first decide there could be a problem here? 

Mr. LUKKEN. No. We certainly started taking steps in regards to 

some of these actions as much as 1 year ago. 

Senator NELSON. $50, $60? What I am trying to get to is what 

number or numbers caused you more concern than not? 

Mr. LUKKEN. I am not sure I can put a certain number on it, but 

we have been working actively over the last—— 

Senator NELSON. 6 months? 

Mr. LUKKEN [continuing]. 9 to 12 months on all these initiatives. 

Senator NELSON. Well, but then why are we waiting until September to have a report back? You know, the sense of urgency on 

the street seems to be different than the sense of urgency in the 

bureaucracy. And we have to match that sense of urgency. It does 

not seem to be matched, as far as I am concerned, if we are waiting 

until September. 

And then in terms of the tools, you do have certain tools. Have 

you chosen to exercise some of those tools to dip into the market 

to spot check, to audit to find out what is going on? 

Mr. LUKKEN. Well, that is what we are doing now with the swap 

markets. We are reaching into those markets in an unprecedented 

way. We have never reached beyond the futures markets to see 

what an underlying customer’s book might be. 

Senator NELSON. Well, why did we not do that back 9, 10 months 

ago when you began to see things moving faster than they had 
43 

moved previously? I think you would agree that the run-up was unprecedented in terms of the size and perhaps even in terms of the 

timing. Is that accurate? 

Mr. LUKKEN. Well, we are certainly, given our resources and 

staffing levels, doing as much as we can as fast as we can, probably 

beyond capacity right now. So we are doing it as quickly as we can. 

Senator NELSON. We have had emergency legislation. If that 

were the case, then why were we not made aware to be able to 

move more quickly on appropriations instead of in this process 

right now? 

You know, I do not recall any other potential legislation outside 

of the farm bill. Is there other potential legislation that was offered 

or suggested by your agency to us? 

Mr. LUKKEN. Beyond the farm bill? No. We have tried to provide 

technical assistance to the Agriculture Committee on different proposals that they had. 

Senator NELSON. But any other suggestions as to what we might 

have done in that bill or in other legislation to help deal with this 

issue? 

Mr. LUKKEN. Well, certainly if we feel that we need more legislative authority coming out of this request for information from swap 

dealers and index traders, we will ask for it. 

Senator NELSON. Okay. 

Well, you know, we talk about silver and what happens and why 

we try to protect those markets in terms of outside acquisition, 

such as the Chrysler Building. Silver is optional. The Chrysler 

Building, sort of optional. But commodities, in terms of food and 

fuel, are not optional items. 

Can you tell us? Is the next target going to be a commodity market for healthcare costs? That certainly would have a great deal of 

impact on people if somebody, aside from insurance, but in the 

market start protecting. Is that happening today? Do you know, is 

somebody trying to do that? 

Mr. LUKKEN. I am not aware of anything—— 

Senator NELSON. If they were, would you be interested in it and 

concerned about, and would you think that you had the adequate 

tools to deal with something like that today? 

Mr. LUKKEN. If there was a contract listed for healthcare issues? 

Senator NELSON. Forward contracts of not insurance policies but 

for forward contracts of healthcare providers, not the insurers. 

Mr. LUKKEN. It was a futures contract, it would certainly be 

under our jurisdiction. 

Senator NELSON. Well, I know it would, but would that be different than worrying about silver? 

Mr. LUKKEN. Absolutely not. We treat every commodity the 

same. 

Senator NELSON. Maybe that is part of the problem. Maybe that 

is part of the problem. We do not recognize, we do not define the 

differences between silver/healthcare, silver/fuel, silver/food. It 

seems to me that there is a need to prioritize, and if your agency 

cannot prioritize, if you do not have the authority to do it, maybe 

that is something that we ought to establish so that we get beyond 

what Will Rogers was reportedly to have said about commodities. 
44 

Somebody buying something that they do not expect to get from 

somebody who does not have it. 

And if you cannot see that there is a tie between speculation 

today, between those who are buying the forward contracts for 

their own future needs and those who are putting them in hedge 

funds or putting them in pension plans, and it is all treated the 

same, we are not going to get out of this mess no matter what you 

report to us on September 15. 

Thank you, Mr. Chairman. 

Senator DURBIN. Thank you, Senator Nelson. 

Chairman Lukken, thank you for your testimony today. 

I ask the second panel to take the chairs at the table here and 

apologize that this has gone on a little longer than expected, but 

it is because of the intense interest. Fifteen Senators came to this 

room today. That is a pretty substantial turnout in the United 

States Senate, and I think it is an indication of how important this 

issue is. I thank Senator Harkin for this joint hearing. I thank all 

my colleagues who have been part of this. 

Again, Chairman Lukken, thank you for coming. I appreciate 

that very much. And all the commissioners. If you would like to 

stay, you are welcome to do so. 

So on the second panel, Mark Cooper is here, Director of Research, Consumer Federation of America; Terrence Duffy, Executive Chairman of the CME Group from Chicago; Jim May, President and Chief Executive Officer of the Air Transport Association; 

Dr. James Newsome, CEO and President of the New York Mercantile Exchange; and Charles Vice, President and Chief Operating 

Officer of the Intercontinental Exchange. 

Your statements will be made part of the record. Again, I apologize that the hearing has gone on a little longer than we expected, 

but it is a good thing. It is an indication of the level of interest. 

So if you would give us your best executive summary for the 

record, we may have time to ask a few questions here, though we 

are a little bit pressed. 

Mr. Cooper, would you like to start? 

STATEMENT OF DR. MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER FEDERATION OF AMERICA 

Dr. COOPER. Thank you, Mr. Chairman, members of the committee. 

The story has been told many times, but the lessons have still 

not been learned. The lack of effective prudential regulation of financial and commodity markets leads to excessive speculation that 

disrupts the economy and costs consumers hundreds of billions of 

dollars. 

Two years ago, the Senate Permanent Subcommittee on Inves- tigations estimated the speculative premium on oil at $20 to $30 

a barrel when the price was $77. Today the premium is over $40 

a barrel, $1 a gallon. Oil executives have testified in Congress that it costs $50 to find 

and deliver a barrel of oil to a refinery. OPEC says it is defending 

$80 a barrel, but the speculators have driven the price to over $130 

a barrel and the declining dollar does not account for more than 

one-quarter of that. 
45 

Over the past 2 years, the speculative premium has cost the typical American household $1,500, if we include natural gas, and the 

economy over $500 billion. $500 billion down the drain 3 years 

after granting the exemption, and the CFTC discovers it does not 

have enough information, that the foreign boards of trade do not 

set adequate position limits and accountability limits, that there 

might be a problem with OTC and swap trades. Frankly, they have 

waited far too long. 

In March 2006, I wrote a report for four Midwest attorneys general that concluded that something was wrong in the natural gas 

market. We came to Washington and we shared it with the CFTC, 

and they assured us that they had their finger on the pulse of that 

market. You may recall that March 2006 was the month when Amaranth was running its corner and the CFTC did not have a clue. 

You are perfectly right to be skeptical about the program and assurances that have been offered to you today. The 2 years’ worth 

of assurances since we and the permanent subcommittee first 

sounded the alarm were full of hot air. The CFTC now admits that 

they really did not know. 

Congress must enact broad reforms that close the loopholes, remove the discretion that was given to the CFTC, and compel it to 

do its job. No more discretion for administrators to decide that this 

foreign board of trade can go under these terms. This is your job 

to protect the American public. 

There are five areas in which we believe action is necessary. 

One, we have to chase the bad guys out. All traders must register and be certified. All trading must be reported across all transactions. 

Two, eliminate the funny money. Reserve margin requirements 

must be increased and capital reserve requirements must be increased as well. It is too easy to leverage in this market and trade 

on thin air by asset-light corporations like Enron who do not have 

the backing to withstand serious problems. 

Three, reduce the ability to push up prices. Lower position limits 

and tie position limits and margin requirements to the needs of 

physical traders. That is who this market is supposed to serve, not 

speculators and investors. We must ban conflicts of interest so that 

people who issue loud reports and then profit from them have to 

stop. That is what got us into trouble with the tech bubble. 

Four, restore the proper function of commodity markets and their 

regulators. Close all the loopholes. Enforce meaningful speculation 

limits. Do honest analysis by classifying traders correctly. The 

numbers we have seen here and heard about here today about who 

the speculators are include big banks as commercials. They do not 

belong there. Make sure you find out who they are counting when 

they tell you that the positions have not changed. And remember, 

a few hundred thousand contracts is actually a huge quantity of oil, 

equal to 1 month’s supply that that handful of companies is holding. So understand how big they are and what they can do. 

Finally, we must redirect investment to productive long-term 

uses. It is too easy. We reward too much flipping stuff in our economy. We need a short-term capital gains tax. We used to have one. 

And that will restore the balance between long-term investments 
46 

1Senate Permanent Subcommittee on Investigations, Committee on Homeland Security, The 

Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the 

Beat (June 27, 2006). 2 Akira Yanagisawa, Decomposition Analysis of the Soaring Crude Oil Prices: Analyzing the 

Effects of Fundamentals and Premium (Institute of Energy Economics, March 2008; Robert J. 

Shapiro and Nam D. Pham, An Analysis of Spot and Futures Prices for Natural Gas: The Roles 

of Economic Fundamental, Market. 3Mark Cooper, The Role of Supply, Demand and Financial Commodity Markets in the Natural 

Gas Price Spiral, A report Prepared for the Midwest Attorney General Natural Gas Working 

Group (Illinois, Iowa, Missouri, and Wisconsin (March, 2006) Structure, Speculation and Manipulation (August, 2006). 4Statement of Dr. Mark Cooper, ‘‘Consumer Effects of Retail Gas Prices,’’ Judiciary Committee Antitrust Task Force, United States House of Representative, May 7, 2008. 

and short-term investments. We should move the pension funds out 

of this. We should move the institutional index funds out of it. 

Now, the speculators will say this will squeeze liquidity out of 

the market, but in fact, these markets suffer from excess liquidity. 

And the malfunctioning markets and abusive practices that afflict 

commodity trading today were illegal and largely unheard of just 

a decade ago. The unregulated markets and exotic financial instruments that were allowed by the irrational exuberance for deregulation in the Commodity Futures Modernization Act over the past 

decade have done vastly more harm than good. We were better off 

without them. 

If the Congress restores order, I guarantee you the foreign 

boards of trade will, in fact, comply. They need to trade in legal 

American documents, and the individual traders, frankly, will comply too. They do not want to have to go to places like Bangladesh 

and Zimbabwe which do not have extradition treaties, and they certainly do not want to live in Leavenworth if they do not obey the 

law. 

Be firm. Re-establish order. We can regulate American commodities and America markets. Thank you. 

Senator DURBIN. Thank you, Mr. Cooper. 

[The statement follows:] 

PREPARED STATEMENT OF DR. MARK COOPER

Mr. Chairman and Members of the Committee, My name is Dr. Mark Cooper. I 

am Director of Research at the Consumer Federation of America. I greatly appreciate the opportunity to testify today on the immense burden that the speculative 

bubble in commodities is placing on American households. 

The story has been told many times, but the lessons have still not been learned. 

The lack of effective prudential regulation of financial and commodity markets leads 

to excessive speculation, bubbles and bursts that disrupt the economy and cost consumers hundreds of billions of dollars. 

Congressional studies, like that prepared by the Senate Permanent Subcommittee 

on Investigations, Committee on Homeland Security and Governmental Affairs 1 and 

industry analyses 2 have become convinced that speculation is contributing to skyrocketing energy prices—by adding as much as $40 per barrel or more. Natural gas 

prices have been afflicted by a speculative premium of a similar order of magnitude.3 Since the Senate Permanent Subcommittee on Investigations first flagged 

this problem 2 years ago, the speculative bubble in the energy complex has cost the 

economy more than $500 billion—i.e. half a trillion dollars. Expenditures for household energy have more than doubled in the past 6 years and speculation has played 

a significant part in that run up.4 In the past 2 years, the speculative bubble has 

cost consumers over $1,500. Speculation in food commodities is adding billions to 

the burden. 

While this speculative bubble imposes this cost on consumers and the Nation, the 

Commodity Futures Trading Commission (CFTC) did nothing to slow the speculative rampage. On the contrary, it insisted that the markets were functioning properly, that the problem was entirely caused by fundamentals, and that excessive 
47 

speculation was not a problem. It went so far as to distort its own data to hide the 

problem, while it continued to irresponsibly deregulate trading. 

While market fundamentals have pushed prices up, the evidence is now overwhelming that speculation has made matters much worse. In an analysis of natural 

gas markets I prepared for four Midwest attorneys general a few months before the 

Permanent Subcommittee on Investigations issued its first report on speculation, I 

showed that there is a powerful interaction between physical market problems and 

financial market problems that creates a vicious, anti-consumer price spiral (see Exhibit 1). There is not doubt that speculation has been a major contributor to recent 

price increases and consumers are now paying a huge speculative premium. 

IRRESPONSIBLE DEREGULATION IS THE PRIMARY CAUSE OF THE SPECULATIVE BUBBLE

The speculators will say we cannot live without these trading practices, but the 

malfunctioning markets and abusive practices that afflict commodity trading today 

were illegal and largely unheard of just a decade ago. The unregulated markets and 

exotic financial instruments that were allowed by irrational exuberance for deregulation over the past decade have done vastly more harm than good. We were better 

off without them. 
48 

If the Congress subjects these markets and practices to effective regulatory oversight, it will restore commodity markets to their proper and useful function in society. More importantly, subjecting these markets to sound prudential regulation is 

the only way to bring down gasoline and food prices in the short term because it 

will burst the speculative bubble that has taken hold of commodity trading. 

Speculative bubbles have diverse origins and are difficult to analyze and predict, 

but there is widespread agreement that the underlying cause of the bubble in recent 

years is a massive influx of money into the commodity markets. ‘‘Disappointing’’ returns on stocks and other investments are frequently cited as a reason that the 

money has rushed into commodities, but there is also no doubt that lax oversight 

and easy terms have made these markets magnets for money. 

The Commodity Futures Modernization Act of 2000 (CFMA), which was slipped 

into an omnibus bill with no hearings or debate at the eleventh hour of a lame duck 

session of Congress, created what is known as the ‘‘Enron loophole,’’ allowing a huge 

trade in energy commodities and other financial instruments, that is beyond regu-
49 

latory oversight. The CFTC has added insult to injury by issuing ‘‘no action letters’’ 

allowing contracts designated in U.S. commodities to be traded without exercising 

oversight over those contracts. It has allowed foreign exchanges to trade in U.S. 

commodities on U.S. soil, subject to foreign, not U.S. regulatory review. 

Where commodities are traded on exchanges that are subject to U.S. regulatory 

authority, the rules are far too lax. Traders in stocks are required to meet margin 

requirements of 50 percent. Traders who buy an energy commodity on an exchange 

only have to meet a margin requirement of 5–7 percent. This low margin requirement allows people to leverage their assets multiply their trading volume. Capital 

reserves for traders are far too low—creating ‘‘asset-lite’’ companies (like Enron) 

who do not have adequate equity to ensure soundness. Simply put, low margin and 

reserve requirements artificially inflate the amount of trading that takes place. The 

exchanges also set limits on positions that are far too high, allowing single entities 

to control large quantities of supply, and, in the case of natural gas, have a very 

short settlement window, which means a small number of trades set the closing 

price. 

Institutional investors and new trading instruments like index funds have poured 

hundreds of billions of dollars into commodity markets at such a rate that speculation overwhelms the markets, accounting for the vast majority of trading. The markets no longer provide their proper role to assist commercial traders, buyers and 

sellers who actually use the physical commodities, to hedge and smooth their physical production and consumption of the commodities. Instead, the contracts have become assets, traded hundreds of times without ever being physically delivered. The 

volatility and speculation driving price increases have forced smaller commercial 

traders out of the market. The exchanges have allowed this to happen by failing to 

impose effective speculation limits or position limits. The CFTC has obscured by 

problem by misclassifying large speculators (banks like Goldman Sachs and Merrill 

Lynch) as commercial traders. 

THE PROBLEM OF HYPER-SPECULATION AFFLICTS A WIDE RANGE OF MARKETS

Natural Gas 

In March of 2006 I published a report for the Attorneys General of Illinois, Iowa, 

Missouri, and Wisconsin that concluded that all was not right in natural gas financial markets. The report showed a close correlation between the escalation of prices 

and changes in trading policies and practices (see Exhibit 2). The report combined 

that empirical observation with a detailed explanation of the cause of the problem, 

which is excerpted below. 
50 

5 Cooper, Mark Cooper, The Role of Supply, Demand and Financial Commodity Markets in the 

Natural Gas Price Spiral, p. 88. 

—Thus, while there is a spiral of upward pressure on prices radiating from the 

physical market and filtered through regulation, this analysis shows that the 

financial commodity markets may be dramatically accentuating the problem of 

high and volatile prices. 

—Defenders of the financial markets want to blame the whole problem on the 

physical markets and even claim that traders will help solve the problem. But 

the evidence suggests that the financial commodity market bears at least some 

of the blame for pushing prices up. Today, the evidence that the financial commodity markets are significantly accelerating price increases in natural gas 

markets is circumstantial, but quite strong. 

—The overall pattern of prices supports the proposition that they have run up beyond anything that is justified by the problems in the physical market. 

—We have a commodity that is vulnerable to abuse, in a new market that has 

been under-regulated from its birth. 

—Public policy adopted in 2000 further reduced regulation and opened the door 

to counterproductive, if not outright manipulative, behaviors and pushed 

prices higher. 

—We have a clear theory about how consumers could be hurt in this market. 

—The problem is that both the structure of the market and the behaviors of 

market players are biased in favor of higher prices and against consumers. 

—We have evidence at the micro levels of a pervasive pattern of past abuses 

and rumors about suspicious behavior in the current market.5

—There are several ways in which financial markets may be magnifying the 

upwardly volatile spiral of prices and contribute to the ratchet: 
51 

6 Cooper, Mark Cooper, The Role of Supply, Demand and Financial Commodity Markets in the 

Natural Gas Price Spiral, p. 9. 7 Cooper, Mark Cooper, The Role of Supply, Demand and Financial Commodity Markets in the 

Natural Gas Price Spiral, p. 89. 8 A point-by-point response to the FERC’s misguided comments on the report was provided 

to but never acknowledged by the Commission (Letter Appendix to Cooper, The Role of Supply, 

Demand and Financial). 

—Financial markets thrive on volatility and volume, but volatility and volume 

have costs. Producers of gas demand to be paid a higher premium to bring 

their gas to market sooner rather than later. Traders demand to be rewarded 

for the risks they incur, risks that are increased by the trading process itself. 

—The influx of traders fuels volatility and raises concerns about abusive or manipulative trading practices. 

—Econometric analyses of the natural gas markets in recent years raise important questions as to how well the natural gas markets work. Given the uncertainty about the functioning of these markets, the claim that the market price 

is always right because it’s the market price should be questioned: 

—The economic analysis does not support the claim that these markets operate 

efficiently to establish prices. 

—Risk premiums, which raise the price substantially (10–20 percent), are high 

and rising. 

—Prices are well above the underlying costs of production. 

—The operation of financial markets is no accident. Trading reflects the rules that 

are established—by law and through self-organization. The most troubling part 

about natural gas trading is that policy makers really have no clue about what 

goes on: 

—The majority of transactions take place in markets that are largely unregulated. 

—These over-the-counter markets, reported in unaudited, unregulated indices, 

are a major factor in setting the price of natural gas. And these unaudited, 

unregulated markets have behaved very poorly in recent years, with numerous instances of misreporting of prices. 

—Even where there is light-handed regulation, the rules are inadequate to protect 

the public: 

—Players in the natural gas markets can hold very large positions without having to disclose the size of their positions to any regulatory authority, and a 

small number of large players can influence the price that consumers pay in 

a very short period of time and under circumstances that place the consumer 

at risk. 

—Index prices are often based on a small number of self-reported transactions 

and there are no mechanisms for determining if such transactions represent 

an accurate sampling of the natural gas market. When even the hint of accountability was imposed by merely being asked to certify the veracity of reported transactions, traders stopped reporting.6

—There has been a failure of public policy at every level to build a system that 

protects the public. The structure of the physical markets induces conduct 

that has created and is sustaining a tight market. The structure of the financial commodities markets induces conduct that magnifies upward pressures 

on prices...

—The financial markets are not only largely unregulated, they are structured 

in such a way that there are a large number of small buyers who have weakened incentives and limited ability to resist price increases facing a small 

number of large sellers who have a strong incentive and a much greater ability to hold out for higher prices. Holding out on the supply side may simply 

mean buying and holding assets in the ground or positions in the futures 

market and waiting for buyers who need the commodity to blink. 

—Most troubling is the fact that many of the impacts of many of the legislative 

and regulatory policies that have worked to the detriment of consumers were 

predictable and preventable, given the nature of the commodity and the type 

of market that Congress and the regulatory agencies in Washington created.7

When the Federal Energy Regulatory Commission got wind of the report, without 

ever talking to us about it, they ridiculed it at an open meeting of the Commission. 

The Chairman of the FERC, reflecting the party line of the administration, insisted 

that all the price gyrations were the result of market fundamentals. He was absolutely certain that the FERC had its finger on the pulse of the commodity markets. 

He was absolutely wrong.8 At the very moment he was rejecting our analysis, unbe-
52 

9Federal Energy Regulatory Commission, Order No. 670, Prohibition of Energy Market Manipulation, Docket No. RM06–3–000, January 19, 2006; Memorandum of Understanding Between The Federal Energy Regulatory Commission and the Commodity Futures Trading in 

Commission Regarding Information Sharing and Treatment of Proprietary Trading and Other 

Information, October 12, 2005. 10 Cooper, Mark Cooper, The Role of Supply, Demand and Financial Commodity Markets in 

the Natural Gas Price Spiral, p. 93 11 Cooper, Mark Cooper, The Role of Supply, Demand and Financial Commodity Markets in 

the Natural Gas Price Spiral, p. 68. 12Federal Trade Commission, Prohibition on Market Manipulation and False Information in 

Subtitle B of the Energy Independence and Security Act of 2007, 16 CFR 317. 

knownst to him, the Amaranth corner was taking place. Neither the FERC nor the 

CFTC had a clue about what was going on. 

Missing a massive manipulation is embarrassing, but the real damage came when 

the blind ignorance of the FERC led it to waste the chance to use its newly minted 

powers under the Energy Policy Act of 2005 to follow our recommendations to adopt 

a broad view of abusive behaviors that afflict energy commodity markets.9 As I 

wrote in the natural gas report: 

—The FERC has also issued rules implementing the Energy Policy Act of 2005 

that change its market monitoring procedures and implement new powers 

granted in the Act. It has entered into a vague memorandum of understanding 

about sharing information. The foregoing analysis demonstrates that a lot more 

than manipulation is at issue in the natural gas price spiral and suggests that 

much more needs to be done. Both the FERC and the CFTC are looking for a 

very narrow range of manipulative behaviors with a very narrow telescope. Unlike other physical commodities, a vast amount of trading of natural gas goes 

on in the over-the-counter markets that are hidden from the view and beyond 

the authority of these agencies. The indices that are based on this unregulated 

market activity have been unreliable and remain subject to doubt. 

—In the case of regulated activities the changes at the FERC replicate the weaknesses of the CFTC approach by adopting its definitions and case law. It may 

be illegal to contrive to manipulate markets and there are new fines if you are 

caught doing so, but the FERC is going to have great difficulty proving manipulation, when prices are ‘‘moved.’’ It is precisely for this reason that the CFTC 

and the exchanges subject to its jurisdiction do more than rely on narrowly defined manipulation statutes to prevent abuse.10

The FERC and the CFTC have failed to adopt a broad view of abuses in financial 

markets. They cannot see the abuse because they are not looking for it. My earlier 

analysis of natural gas markets identified the numerous ways that prices can be 

moved by actions that are well below the radar of the FERC and the CFTC. 

—There are strands in this literature that identify potential and actual abusive 

practices... —manipulation facilitated by large positions, 

—lack of transparency, 

—structural advantages enjoyed by large traders or the exercise of market power, 

—insider trading and self-dealing, 

—trading practices that accelerate market trends, perhaps causing them to overshoot.11

Instead of taking a hard look at the broad pattern of abuse, the FERC adopted 

a very narrow view of manipulation, taking on the existing CFTC case law and definitions. Instead of providing new and vigorous oversight over the natural gas market, we have a second cop walking the same beat with it eyes half shut. 

Unfortunately, the Federal Trade Commission has started down the same useless 

path. The lengthy discussion of intension (scienter) in the advanced notice of proposed rule making points the FTC down the same dead end path that the FERC 

took. The FTC needs to break out of the narrow ‘‘scienter’’ manipulation view to 

identify and attack the broad range of practices and structural conditions that can 

and have been moving prices in the markets.12

Policymakers must recognize that certain commodities are fundamentally different. Energy is at the top of the list of commodities that have special 

vulnerabilities, but energy commodities are not alone. The transformation of commodity markets into speculative engines is hurting food commodities as well. The 

description I wrote of natural gas applies to greater or lesser degree to the entire 

energy complex and many food commodities. 

—Because natural gas is a physical commodity that is actually consumed (unlike 

a pure financial instrument), difficult to store, and expensive to transport, natural gas markets are challenging... The key elements identified are the supply-side difficulties of production, transportation and storage, and the demand- 
53 

13 Cooper, Mark Cooper, The Role of Supply, Demand and Financial Commodity Markets in 

the Natural Gas Price Spiral, pp. 28–29 

side challenges of providing for a continuous flow of energy to meet inflexible 

demand, which is subject to seasonal consumption patterns. ‘‘[T]he deliverables 

in money markets consist of a ‘‘piece of paper’’ or its electronic equivalent, 

which are easily stored and transferred and are insensitive to weather conditions. Energy markets paint a more complicated picture. Energies respond to 

the dynamic interplay between producing and using; transferring and storing; 

buying and selling—and ultimately ‘‘burning’’ actual physical products. Issues 

of storage, transport, weather and technological advances play a major role 

here. In energy markets, the supply side concerns not only the storage and 

transfer of the actual commodity, but also how to get the actual commodity out 

of the ground. The end user truly consumes the asset. Residential users need 

energy for heating in the winter and cooling in the summer, and industrial 

users’ own products continually depend on energy to keep the plants running 

and to avoid the high cost of stopping and restarting them. Each of these energy 

participants—be they producers or end users—deals with a different set of fundamental drivers, which in turn affect the behavior of energy markets... —What makes energies so different is the excessive number of fundamental price 

drivers, which cause extremely complex price behavior.’’ 

—Complexity of physical characteristics translates into a highly vulnerable product in this commodity market. 

—‘‘Although the formal analysis examines transportation costs as the source of 

friction, the consumption distortion results suggest that any friction that makes 

it costly to return a commodity to its original owners (such as storage costs or 

search costs) may facilitate manipulation. 

—The extent of market power depends on supply and demand conditions, seasonal 

factors, and transport costs. These transport cost related frictions are likely to 

be important in many markets, including grains, non-precious metals, and petroleum products. 

—Transportation costs are an example of an economic friction that isolates geographically dispersed consumers. The results therefore suggest that any form 

of transactions cost that impedes the transfer of a commodity among consumers 

can make manipulation possible.13

These characteristics demand much more vigorous oversight of energy and food 

commodity markets than other commodities, especially financial instruments and 

precious metals that have few physical uses. Unfortunately, for about a decade we 

have had much less oversight of energy markets. More broadly, the transformation 

of commodity markets generally has created problems for physical markets. When 

commodity markets lose touch with the underlying physical market fundamentals, 

they do more harm than good. 

Physical traders get frozen out. I found this in my study of the natural gas market. The utilities that actually sell the gas to the consumer could not play in the 

hyper-inflated commodity markets. They simply tied their purchases to the indexes, 

hoped for the best and let the consumer suffer the consequences. 

—There is a general consensus that utilities are not in the markets as hedgers, 

although a small number are. Moreover, there is a belief that hedging has declined, as volatility and large financial players have moved into the market. 

—‘‘Most utilities have stopped hedging and instead rely on the fuel-adjustment 

clause that allows them to pass on to consumers... Many utilities exited 

trading, Duke being the last one. The point is they are not really in the game 

except for Constellation, Sempra, Dominion, and a few others. That more customers are exposed to price risk because they are passing on the higher costs 

to customers.’’ 

—Cooper said many utilities probably have stopped hedging in such a risky environment because they have to eat their losses if they miscalculate. ‘‘Utilities are 

not in the business of predicting prices,’’ he said. ‘‘They don’t care what the 

price it. They pass it on to customers.’’ 

—While the institutional context in which utilities function certainly restricts 

their inclination to play in the financial market, as volatility and prices mount, 

it becomes more burdensome for all users. The cost of hedging becomes higher 

and higher. —But with gas above $10/mmBtu and futures market direction unpredictable, 

even hedging and other risk management tools are becoming more and more expensive—raising the question of whether the benefit is worth the cost...

—For example, Invista uses financial derivatives, collars and similar tools to hedge against current market conditions. But gas at $10/mmbut or higher and 
54 

14 Cooper, Mark Cooper, The Role of Supply, Demand and Financial Commodity Markets in 

the Natural Gas Price Spiral, p. 83. 

unprecedented volatility ‘‘makes all of these actions a little more costly,’’ Poole 

noted. ‘‘It raises the question: is the elimination of price volatility worth the 

cost?’’ 

—And while Invista has the money and in-house expertise to handle risk management activities internally rather than farming them out to marketers or energy 

service companies, ‘‘unfortunately, for smaller-volume companies that may not 

be a feasible option.’’ 

—Tying prices to indices is the ultimate short-term strategy. This institutional 

view raises concerns because the capital-intensive infrastructure of the industry 

has historically been financed by long-term contracts. The deregulation and 

unbundling of the industry inevitably shortened the time horizon of the participant. Flexibility and choice loosens commitments and makes ‘‘bypass’’ possible. 

Pipelines cannot count on shippers as much as in the past. Utilities cannot 

count on load as much as in the past. Merchants demand faster recovery of 

costs. 

—In fact, a major impetus for restructuring of the natural gas industry was the 

high social cost associated with rigid long-term contractual arrangements...

—With the natural-gas sector restructuring... trading arrangements have become much more short term and flexible in both price and in terms and conditions. We have observed this phenomenon throughout the natural-gas sector, 

from gas procurement, gas storage, and retail transactions, to capacity contracting for pipeline services. 

—Long-term commitments to transportation and storage facilities, exposes the 

contracting parties to greater risk in this environment, especially where longterm commitments to supply cannot be secured. The mismatch between the incentive structure and the necessary time horizon results in missed opportunities. For example, Jack Flautt, Managing Director of March & McLean, suggested there is an anomaly in the storage investment area. It is strange, in his 

view, that investors are not trampling one another to participate in the storage 

development market. ‘‘The value of storage today is greater than at any time 

in my lifetime,’’ but Flautt reported he gets only blank stares from bankers at 

the suggestion. 

—The hesitance of public utility commissions to push utilities to jump back in to 

long-term commitments is understandable and the task of realigning risks is 

challenging.14

Petroleum 

The problems that have afflicted natural gas have afflicted other energy commodities as I explained in my natural gas analysis...

—Natural gas markets share this pattern of abuse with other energy markets. 

Unilateral actions by any of a number of individuals in any of a number of circumstances provide a landscape in which upward price movements are probable. ‘‘There are regular squeezes in the Brent [oil] market... The whole 

trick is to collect more money in CFDs [contract for differences] than you lose 

on the physical squeeze... People seem to do it in turn. It depends on who’s 

smart enough to move in a way nobody notices until it happens.’’ 

—In a case brought by a private party in late 2001, the practical reality was revealed. 

—Tosco won a settlement claiming that Arcadia Petroleum (a British subsidiary 

of the Japanese firm Mitsui) engineered an elaborate scheme to manipulate oil 

prices in September of 2001 through the use of OTC derivatives and a large 

cash market position to corner the market in Brent crude oil. As a result, the 

price of Brent crude soared between August 21st and September 5th and 

pushed its price to a premium over West Texas Intermediate crude oil 

(WTI)...

—Dated Brent, which acts as a price marker for many international grades, is 

physical crude traded on an informal market, rather than a regulated futures 

exchange. This lack of regulation poses problems for oil producers and consumers seeking a fair price . . . A typical Brent squeeze involves a company 

quietly building a strong position in short-term swaps called contracts for difference, or CFD’s, for a differential not reflected in current prices. The company 

then buys enough cargoes in the dated Brent market to drive the physical price 

higher, which boosts the CFD differential...
55 

15 Cooper, Mark Cooper, The Role of Supply, Demand and Financial Commodity Markets in 

the Natural Gas Price Spiral, p. 64. 16 Jad Mouawad & Heather Timmons, Trading Frenzy Adds to Jump in Price of Oil, N.Y. 

TIMES, Apr. 29, 2006, at A–1. 17 Id. 18 Id. 

—The Company may lose money on the physical side, but it’s more than compensated for by profits on its offsetting paper position in the short-term swaps 

market.’’ 15

The problem in oil markets has continued to mount, as I explained in a law review article written in 2007. 

—On April 29, 2006, the New York Times ran a front-page article under the headline ‘‘Trading Frenzy Adds to Jump in Price of Oil.’’ 16 The Times article opens 

with a brief paragraph on the conditions in the physical market but then devotes about 36 column inches to the proposition that financial markets are adding to the price increase. 

—‘‘A global economic boom, sharply higher demand, extraordinarily tight supplies 

and domestic instability in many of the world’s top oil-producing countries—in 

that environment higher oil prices were inevitable. 

—But crude oil is not merely a physical commodity . . . It has also become a valuable financial asset, bought and sold in electronic exchanges by traders around 

the world. And they, too, have helped push prices higher . . . 

—‘‘Gold prices do not go up because jewelers need more gold, they go up because 

gold is an investment,’’ said Roger Diwan, a partner with PFC Energy, a Washington-based consultant. ‘‘The same has happened to oil . . .’’ 

—‘‘It is the case,’’ complained BP’s chief executive, Lord Browne, ‘‘that the price 

of oil has gone up while nothing has changed physically.’’ 17

—Three key factors serve to drive the price spiral higher: volume, volatility, and 

risk . . .

—The structure and availability of markets plays a role in allowing the volumes 

to increase. 

—Changes in the way oil is traded have contributed their part as well. On 

Nymex, oil contracts held mostly by hedge funds—essentially private investment vehicles for the wealthy and institutions, run by traders who share risk 

and reward with their partners—rose above 1 billion barrels this month, twice 

the amount held 5 years ago. 

—Beyond that, trading has also increased outside official exchanges, including 

swaps or over-the-counter trades conducted directly between, say, a bank and 

an airline . . . 

—Such trading is a 24-hour business. And more sophisticated electronic technology allows more money to pour into oil, quicker than ever before, from anywhere in the world. 

—The influx of new money is sustained by movements of different institutions 

and individuals into the market. ‘‘Everybody is jumping into commodities and 

there is a log of cash chasing oil,’’ said Philip K. Verleger Jr., a consultant and 

former senior advisor on energy policy at the Treasury Department.’’ 

—This fundamental observation had been offered a couple of years earlier in a 

front page Wall Street Journal article entitled, ‘‘Oil Brings Surge in Speculators 

Betting on Prices: Large Investors Playing Ongoing Rise is Increasing Demand 

and Price Itself.’’ 

—Oil has become a speculator’s paradise. Surging energy prices have attracted a 

horde of investors—and their feverish betting on rising prices has itself contributed to the climb. 

—These investors have driven up volume on commodities’ exchanges and prompted a large push among Wall Street banks and brokerage firms . . . to beef up 

energy-trading capabilities. As the action has picked up in the past year, those 

profiting include large, well-known hedge funds, an emerging group of high-rollers, as well as descendants of once-highflying energy-trading shops such as 

Enron Corp.18

A recent paper from the Japanese Ministry of Economy Trade and Industry 

(METI) has echoed my conclusion and the conclusion of the Senate Permanent Subcommittee on Investigations. 

—According to the METI paper, during the second half of 2007, when the physical 

price of Wet Texas Intermediate crude averaged $US90 a barrel, market speculation, geopolitical risk and currency factors were responsible for $US30–$US40 

of the price. 
56 

19Peter Alford, ‘‘Japan Blames Speculators for Oil Hike,’’ May 28, 2008. 20 Akira Yanagisawa, Decomposition Analysis of the Soaring Crude Oil Prices: Analyzing the 

Effects of Fundamentals and Premium (Institute of Energy Economics, March 2008), p. 5. 

—The average WTI ‘‘fundamental price,’’ consistent with the underlying supply/ 

demand situation, was around $US60/barrel during the December half-year, according to the paper, citing research for the Institute of Energy Economics in 

Japan. 

—Last week the benchmark WTI futures contract touched $US135/bbl, more than 

double the level of a year previously. 

—‘‘We cannot say exactly what the fundamental price is at the moment,’’ a METI 

official said yesterday. ‘‘But we believe the increases this year in the market 

price have much to do with the influx of speculative money.19

The study from the Institute on Energy Economics mentioned above draws a direct link between the growth in speculation and the rising price. 

—In the futures market, oil-futures trading at New York Mercantile Exchange 

(NYMEX) are expanding faster than actual spots. While the futures markets 

are designed to hedge price fluctuations risks, oil is becoming a commodity, 

making the futures market something like an alternative investment target. As 

a result, long position by speculators (‘‘non-commercial’’ and ‘‘non-reportable’’) 

conspicuously leads to a rise in the oil prices in more cases.20

Exhibit 3 presents an updated version of the analysis that linked prices to 

changes in trading policy and practices base on spot prices for both natural gas and 

oil. It shows the close correlation of price movements and major institutional/structural changes in trading. The sharp increase in spot prices for West Texas Intermediate crude since early 2007 stands out. This actually links directly to one of the 

key policy issues that we have identified. 

The Intercontinental Exchange, located in Atlanta, was granted a ‘‘no action letter’’ to trade contracts for West Texas Intermediate crude, exempt from U.S., regulation. There has been a rapid increase in trading Exhibit 4 shows this by contrasting 

the growth of open positions in West Texas Intermediate and Brent crude, another 

major marker crude. Starting in 2006 and accelerating in 2007 and 2008, the open 

positions in West Texas Intermediate left Brent crude behind. The extraordinary increase in the volume of trading puts upward pre 
57 

21T. Randall Fortenbery and Hwanil Park, The Effect of Ethanol Production on the U.S. National Corn Price, University of Wisconsin-Madison, Department of Agricultural Economics, 

Staff Paper 523, April 2008, p. 16. 

Food 

The plague of the ‘‘influx of speculative money’’ has now spread to food commodities. For instance, the evidence is mounting that speculation is contributing to the 

run up in food commodity prices that we have experienced over the past year. Speculation can be seen as contributing to price increases and volatility, as a study from 

the University of Wisconsin recently noted. 

—One unique aspect of the market the last year has been the size of the noncommercial position in the futures market for corn. Speculative traders have 

significantly increased their net long position over the last year, while non-commercial traders have tended to be net short. Note that corn prices have been 

highly correlated with the net positions of non-commercial traders since the 

first quarter of 2006/2007, and the speculators have had large net long positions 

most of the year. It is important to note that this does not imply causality, only 

correlation. However, there does appear to be reason to study more carefully the 

impact of speculative activity on both price levels and volatility.21

The disutility of hyper-inflated commodity markets was recently underscored by 

a study of food commodities conducted by Texas A&M University. 

—The increased activity in futures markets has had the unexpected consequence 

of reducing producer’s ability to manage price risk using futures markets. The 

large influx of money into the markets, typically long positions, has pushed 

commodities to extremely high levels. But, these funds also quickly move large 

amounts of money in and out of positions. This has generated much more price 

volatility in the futures markets. In response, the exchanges have increased the 

daily move limits for most of the agricultural commodities over the past 6 

months...

—The up and down volatility in the market and expanded trading price limits 

mean that more margin calls occur. Small elevators and even large grain companies and cotton merchants, who are trading even larger volumes, not to mention farmers doing their own price risk management, have been unable to make 

the margin calls. 
58 

22David P Anderson, et al. The Effects of Ethanol on Texas Food and Feed, Agricultural and 

Food Policy Center, Texas A&M University, April 10, 2008, p. 32. 

—Producers, elevators, and companies use bank financing to finance their businesses and the price risk management. As the margin calls have increased, they 

have exhausted their ability to finance their normal hedging activities and have 

therefore been forced out of the market.22

Simply put, commercial entities that need the physical commodities to run their 

enterprises are priced out of the market. If you do not have deep pockets, are tied 

to the physical schedule of production and consumption, and live in the real world 

of bank finance, hyper-inflated commodity markets are a big part of the problem, 

not the solution. 

REGULATORY REFORM IS THE WAY TO SOLVE THE PROBLEM

It would be reassuring if we could blame the current speculative bubble on the 

arrogance, ignorance and ineptitude of the regulatory agencies with oversight responsibilities. If that were the case, we could just fire the commissioners and secretaries and clean up the problem. Unfortunately, there is a more fundamental problem that must be addressed. Federal authorities must look broadly at the conditions 

in modern financial markets that feed volatility, amp up volume, and increase risk 

and policymakers must impose new structural oversight on these markets to return 

them to their proper role, as institutions that help smooth the functioning of physical markets. They have become centers of idle speculation that do vastly more harm 

than good. 

With the commodities markets finally overwhelmed by speculation and the Congress empowering other agencies to do the job that the CFTC has failed to do, the 

CFTC has belatedly admitted that it did not have sufficient information to perform 

its primary function of preventing excessive speculation. The administration has 

formed a task force to look into the problem. The CFTC has finally asked that the 

foreign regulators to whom it abdicated its responsibility, to impose some order. 

Begging foreign exchanges for data and foreign regulators to act responsibly is not 

only embarrassing; it is absurd when the CFTC has not put its own house in order. 

These proposals are too little too late. The CFTC must be forced to assert regulatory 

authority over trading within the Untied States and trading in financial instruments designated in U.S. commodities. 

Too much money chasing too few goods in the commodity markets has created the 

upward spiral, amping up volume, increasing volatility and adding to risk. We must 

turn down the volume in commodity markets. Sound prudential regulation is the 

key to restoring order. 

The failure of the CFTC to act responsibly and in the past and the weak-kneed 

reaction to the dire crisis in commodity markets in the present ensure that Americans will continue to the victims of excessive speculation. Congress must enact 

broad reforms that close the loopholes, remove the discretion that was given to the 

CFTC and compel it to do its job. There are five areas in which reform is necessary, 

with a variety of policy making institutions needing to take action. It is a big job, 

but a $500 billion hit on the economy and household budgets that are being devastated by rising prices of basic necessities demand the effort. 

Chase out the bad guys 

All traders must register and be certified (for honesty and competence, like bankers and brokers). All trading must be reported across all transactions. 

The CFMA created a market in over the counter trading that is beyond regulatory 

scrutiny. These dark markets have played a prominent role in major manipulations. 

Without comprehensive registration and reporting, there will always be room for 

mischief that is out of sight to the regulator. Large traders should be required to 

register and report their entire positions in those commodities across all markets. 

Registration and reporting should trigger scrutiny to ensure the good character, integrity and competence of traders. 

Eliminate the funny money 

Raise margin requirements. Increase capital reserve requirements. 

We need to restore the balance between speculation and productive investment. 

Margin requirements on organized exchanges are a fraction of the margin requirements on stocks. If it is cheaper to put your money into speculation, why bother 

with real investment. The margin requirement for commodity trading among noncommercial traders should be 50 percent higher than the margin requirement for 

investment in stocks, but more lenient terms should apply to physical traders. Cap-
59 

ital requirements should be increased to further reduce the amount of leverage in 

these markets and dampen excessive risk taking. 

Reduce the ability to push prices up 

Lower position limits and tie position limits and margin policies to needs of physical traders. Lengthen settlement windows. Ban conflicts of interest (analyst’s reports that enrich analyst’s portfolios). 

Large position limits and short settlement periods invite efforts to influence 

prices. They should be reformed to reduce the risk. The practice of hyping prices 

by firms that stand to profit from the predictions should be should be banned. 

Restore the proper functioning of commodity markets and their regulators 

Enforce meaningful speculative limits. Do honest analysis (classify traders correctly). Close the loopholes (foreign boards of Trade exemptions, the Enron and 

swaps loopholes). Create minimum criminal penalties for violation of commodity 

laws 

Public policy must return the futures markets to their function of supporting the 

operation of physical markets. Speculation should not be allowed to dominate these 

markets, and limits should ensure that genuine commercial traders are a substantial majority of the market by imposing strict speculative limits. Traders must be 

properly classified to ensure this outcome. 

We must not only close the Enron-loophole, which allowed vast swathes of trading 

to take place with no oversight, but also ensure vigorous enforcement of registration 

and reporting requirements. We must take back the authority we have given to foreign exchanges and stop abandoning authority to private actors. 

Failure to comply should result in mandatory jail terms. Fines are not enough to 

dissuade abuse in these commodity markets because there is just too much money 

to be made. 

Redirect investment to productive long-term uses 

Put a tax on short-term capital gains. Move pension funds out of speculation. Ban 

institutional index funds. 

We must level the playing field between long-term productive investment and 

short-term speculative gains, with a tax on short-term capital gains between 33 and 

50 percent to make holding productive investments for long periods as attractive as 

flipping short-term financial paper. 

Speculators will insist that they will just go abroad, but the Congress need not 

fear such an outcome. If the United States is determined to assert jurisdiction over 

trading in the United States and for U.S. commodities, foreign exchanges will comply. To survive they desperately need to have access to legal instruments for U.S.- 

traded commodities. Individuals may chose to become expatriates and move to countries that chose not to comply, or they may break the law, but vigorous enforcement 

will put a stop to it. I suspect that the vast majority of traders do not want to live 

in places like Zimbabwe or Leavenworth, Bangladesh or Sing Sing. 

If we do not do more than the half hearted approaches that are on the table, we 

will continue to lurch from crisis to crisis. American consumers are suffering needlessly from this speculative bubble in vital necessities. It is time for thorough reform 

and re-regulation of the financial commodity markets. 

Senator DURBIN. Mr. Duffy. 

STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN, CME 

GROUP, INC. 

Mr. DUFFY. Thank you, Mr. Chairman. I am Terry Duffy, the Executive Chairman of CME Group, and I want to thank you, Chairman Durbin and Chairman Harkin and Ranking Members Brownback and Chambliss, for this opportunity to present our views. 

CME Group was formed by the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade Holdings. CME 

Group is the parent of CME, Inc. and the Board of Trade of the 

city of Chicago. CME Group also owns Swapstream Operating 

Services, an OTC trading facility, and owns an interest in 

FXMarketspace Limited, an FX trading platform that is authorized 

and regulated by the Financial Services Authority. 
60 

CME Group offers a neutral marketplace. We serve the global 

risk management needs of our customers. Our agricultural markets 

also provide important price discovery that producers and processors rely on to make economic decisions. We do not profit from 

higher food or energy prices. Our congressionally mandated role is 

to operate fair markets that foster price discovery and the hedging 

of economic risks in a transparent, self-regulated environment, 

overseen by the CFTC. 

CME Group provides a comprehensive selection of benchmark 

products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, agricultural commodities, ethanol, and alternative investments such 

as weather and real estate. We also offer order routing, execution 

and clearing services to other exchanges. 

We unequivocally support your efforts to materially improve the 

enforcement capabilities of the CFTC and to do so in a manner that 

does not increase the costs of trading on fully regulated U.S. contract markets. We are enthusiastic supporters of broadly expanding 

the mandatory reporting of energy trading and position information 

to the Commission. We believe that disclosure of trading and position information to the regulator, with sufficient resources to analyze and act on unusual or suspicious activities, will deter most potential manipulators and assure punishment for those foolish 

enough to attempt a manipulation when all of their actions are 

visible to the regulator. This is the philosophy upon which our internal regulation has been based and why it has been so successful. 

We also clearly understand that the recent surge in many of the 

prices of commodities, particularly energy, has inspired Congress to 

look for assurance that the only price drivers are legitimate supply 

and demand factors. 

As Senator Durbin noted, we have all witnessed the flooding crisis in Iowa and other Midwestern towns. We offer our sympathy to 

the victims and their families who are being displaced by these extreme weather conditions. Obviously, weather and other fundamentals are at play and pressuring the prices of agricultural commodities. 

Some, however, who claim expertise or special knowledge have 

asserted that price inflation is caused by speculators and/or passive 

index funds that have invested billions in commodity markets. The 

more cautious critics have suggested that there may be a froth of 

inflation caused by speculation. Our careful, up-to-date evaluation 

of market participants and trading patterns in the commodities 

traded at CME Group are to the contrary. I have explained our 

findings and conclusions in my written testimony. We also will be 

placing relevant information on our website, which will permit others to review our findings to date respecting the impact of speculation in our markets. 

Our economists make convincing arguments that neither speculators nor index funds are distorting commodity prices. As you can 

see from the slide attached, corn prices have increased more than 

158 percent during the last 2 years, while index fund participation 

has declined slightly from 15 percent of the open interest to 12 percent of the open interest. 
61 

In the second slide, which shows corn prices and the positions of 

noncommercials since the beginning of the year, the percentage of 

open interest held by noncommercials has declined as corn prices 

have continued to rise. 

Previous studies have concluded that speculation has not been 

responsible for any significant, persistent volatility in futures markets. Nonetheless, we are strong proponents of securing all of the 

relevant information from all sources and fairly testing the hypothesis and reconfirming previous academic studies. 

While we expect that the evidence respecting the impact of speculation and index trading in energy markets will parallel the results we have found in our own markets, we agree that there is no 

reason to rely entirely on economic theory when the data is or can 

be made available. We support the CFTC’s and Congress’ efforts to 

secure this data and to assure that a thorough analysis informs 

any subsequent legislation or administrative efforts to deal with 

any uneconomic price inflation. 

I want to thank you for your time and attention this afternoon, 

and I look forward to answering any of your questions. 

Senator DURBIN. Thank you, Mr. Duffy. 

[The statement follows:] 

PREPARED STATEMENT OF TERRENCE A. DUFFY

I am Terrence Duffy, Executive Chairman of Chicago Mercantile Exchange Group 

Inc. (‘‘CME Group’’ or ‘‘CME’’) Thank you Chairmen Durbin and Harkin and Ranking Members Brownback and Chambliss for this opportunity to present our views. 

CME Group was formed by the 2007 merger of Chicago Mercantile Exchange 

Holdings Inc. and CBOT Holdings Inc. CME Group is the parent of CME Inc. and 

The Board of Trade of the City of Chicago Inc. (the ‘‘CME Group Exchanges’’). CME 

Group also owns Swapstream Operating Services Limited, an OTC trading facility, 

and owns an interest in FXMarketspace Limited, an FX trading platform that is authorized and regulated by the Financial Services Authority. The CME Group Exchanges are neutral market places. They serve the global risk management needs 

of our customers and producers and processors who rely on price discovery provided 

by our competitive markets to make important economic decisions. We do not profit 

from higher food or energy prices. Our congressionally mandated role is to operate 

fair markets that foster price discovery and the hedging of economic risks in a 

transparent, self-regulated environment, overseen by the CFTC. 

The CME Group Exchanges offer a comprehensive selection of benchmark products across all major asset classes, including futures and options based on interest 

rates, equity indexes, foreign exchange, agricultural commodities, energy, and alternative investment products such as weather and real estate. We also offer order 

routing, execution and clearing services to other exchanges. 

We unequivocally support your efforts to materially improve the enforcement capabilities and machinery of the CFTC and to do so in a manner that does not increase the costs of trading on fully regulated U.S. contract markets. We also are enthusiastic supporters of broadly expanding the mandatory reporting of energy trading and position information to the Commission. We share the view of regulators 

and legislators most famously expressed by Justice Louis Brandeis: 

‘‘Publicity is justly commended as a remedy for social and industrial diseases. 

Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.’’—Justice Louis Brandeis, Other People’s Money, and How the Bankers Use 

It, 1933 

We believe that disclosure of trading and position information to a regulator with 

sufficient resources to analyze and act on unusual or suspicious activities will deter 

most potential manipulators and assure punishment of those foolish enough to attempt a manipulation when all of their actions are visible to the regulator. This is 

the philosophy upon which our internal market regulation has been based and why 

it has been so successful. 

We also clearly understand that the recent surge in the prices of many commodities, particularly energy, has inspired Congress to look for assurance that the only 
62 

1 Bubble Isn’t Big Factor in Inflation, By Phil Izzo (May 9, 2008; Page A2). 

price drivers are legitimate supply and demand factors. Some who claim expertise 

or special knowledge have asserted that the entire price inflation can be laid at the 

door of speculators and/or passive index funds that have invested billions in commodity contracts. The more cautious critics have suggested that there may be a 

froth of inflation caused by speculation. Our careful, up-to-date evaluation of market 

participants and trading patterns in the commodities traded at CME and CBOT are 

to the contrary as I will explain below. We will be placing relevant information on 

our website, which will permit others to review our findings to date respecting the 

impact of speculation on our markets. 

Our economists make convincing arguments that neither speculators nor index 

funds are distorting commodity prices. Previous studies have concluded that speculation has not been responsible for any significant, persistent volatility in futures 

markets. Nonetheless, we are strong proponents of securing all of the relevant information from all sources and fairly testing the hypothesis and reconfirming previous 

academic studies. While we expect that the evidence respecting the impact of speculation and index trading in energy markets will parallel the results we have found 

in our own markets, we agree that there is no reason to rely entirely on economic 

theory when the data is or can be made available. We support the CFTC’s and 

Congress’s efforts to secure this data and to assure that a thorough analysis informs 

any subsequent legislative or administrative efforts to deal with uneconomic price 

inflation. 

SPECULATION IS ESSENTIAL TO EFFICIENT, LIQUID MARKETS

Current fuel and food prices are shocking and painful to consumers and the economy. Unfortunately, the pressure to reverse rising prices has led some to look for 

a simple, causal agent that can be neutralized with the stroke of a pen. The favored 

culprit is the traditional villain—speculators. But speculators sell when they think 

prices are too high and buy when they think prices are too low. They are not a unified voting block and are on both sides of every market. Speculative selling and buying send signals to producers and processors that help keep our economy on an even 

keel. High futures prices for corn induced farmers to bring new acreage to market. 

High forward energy prices encourage exploration and new technology to exploit existing untapped reserves and conservation and other behavioral changes to adjust 

demand. 

Futures markets perform two essential functions—they create a venue for price 

discovery and they permit low cost hedging of risk. Futures markets depend on 

short and long term speculators to make markets and provide liquidity for hedgers. 

Futures markets could not operate effectively without speculators and speculators 

will not use futures markets if artificial barriers or tolls impede their access. Blaming speculators for high prices diverts attention from the real causes of rising prices 

and does not contribute to a solution. 

The weight of the evidence and informed opinion confirms that the high prices are 

a consequence of normal supply and demand factors. The Wall Street Journal surveyed a significant cross section of economists who agreed that: ‘‘The global surge 

in food and energy prices is being driven primarily by fundamental market conditions, rather than an investment bubble . . .’’ 1

The traditional production/consumption cycle that has governed prices in commodity markets is stressed by the confluence of a number of factors. David Hightower, author of the Hightower report summed up the supply/demand situation in 

corn last year as follows: ‘‘We have experienced three consecutive years of record 

corn production... and three consecutive years of declining ending reserves. Supply has put its best team on the field and demand keeps winning.’’ 

We have identified six significant factors that are influencing the supply and demand for grains and oilseeds; each is important. 

—Weather/Disease/Pestilence; 

—Increasing per capita consumption in the emerging markets; 

—The dramatic impact of the demand for grain and oil seeds as feed stock for 

biofuel; 

—Reactionary governmental trade policies; and 

—Financial Market turmoil, including a weakened dollar. 

These factors combine to create volatile markets and increased prices. 

Weather/Disease/Pestilence.—This is of course a traditional factor in the grain 

markets. Wheat recently attained all-time record prices, coincident with 60-year 

lows in world stockpiles. In the past 2 years there have been production shortfalls 

in Australia, Argentina, Europe, North America, and the Ukraine due to a combina-
63 

2http://www.cftc.gov/opa/press05/opa5074-05.htm. 

tion of drought in some places, untimely rains in others, and even infestation by 

the Eurygaster beetle. 

Per Capita Consumption in Emerging Markets.—While some projections imply a 

slowing population growth in this century, global population is still growing and 

from an ever increasing base. In the short-run, GNP and personal income levels in 

the large emerging market countries such as India, China, Russia, and Brazil are 

creating unprecedented per capita demand growth for animal protein. As is common 

in human history, as a society grows richer, its diet expands to include additional 

animal protein in the form of meat and dairy. According to a report on 

Bloomberg.com, worldwide meat consumption is forecast to increase by more than 

half by 2020; most of the new demand will come from China. The implications for 

grain demand will be staggering. Already in just the past 12 years, China has gone 

from a net exporter of soybeans to the world’s largest importer of soybeans with soybean imports projected to easily exceed 30 million tons in 2007. Never before in history have we witnessed the impact of 2 billion people asking for a higher standard 

of living at the same time. 

Growth in Biofuels.—The mandate to produce biofuels created additional market 

stress. The expectation is for continued growth in biofuel use/demand; politics rather 

than logic is at work—resulting in continued demand growth for feed grains and 

vegetable oils. To illustrate this point; The 2005 energy bill in the United States 

spurred the rush to plant approximately 93 million acres of corn in 2007, the highest level since World War II. The USDA recently reported that corn based ethanol 

production will continue to rise placing additional demands on the crop: ‘‘driven by 

continued expansion in ethanol production capacity, corn use for ethanol is projected 

at 4.1 billion bushels 2008–09, up 28 percent from the current year projection. Ethanol corn will now account for 31 percent of total corn use, up from a projected 25 

percent for 2007–08.’’ The amount of corn used in ethanol production just 5 years 

ago was approximately 10 percent. In addition to the U.S. initiative, the EU enacted 

legislation that will require significantly increased use of biofuel fuel by 2010. The 

problem is that there simply is not enough land to set aside in all of the EU to meet 

these ambitious requirements; they will need to import significantly higher levels 

of either finished product or higher levels of oilseeds in order to produce the needed 

biofuel. 

Reactionary Government Trade Policies.—During the last 3 months, there has 

been an ever expanding pattern of increasing export tariffs and decreasing import 

tariffs on grains and oilseeds by foreign governments. Russia extended a grain export tariff from April 30 to July 1. In addition, they have placed an export ban upon 

their grain to the four CIS (Commonwealth of Independent States) members designed to prevent re-export of Russian grain to third countries. Argentina extended 

their wheat export closure to April 8, and announced a new, higher soy export tax 

that will rise by 7–9 percentage points based upon current prices. India increased 

its grain export tariffs while lowering import tariffs on edible oils. China has announced a further increase in edible oil imports in 2007–08 with projections currently up an additional 14 percent. South Korea announced the emergency lifting 

of import tariffs on 70 price sensitive products, including wheat and corn in an effort 

to confront rising inflation. The pattern we are witnessing is one of keeping domestic production off the global market while lowering barriers for the acquisition of 

grains and oils from the global market resulting in increased demand for U.S. grain 

and Oil Seed products. 

Financial Market Turmoil.—The events that began in the sub-prime sector of the 

financial markets are now spreading out with very serious and negative consequences throughout the Nation’s banking sector. Restrictive lending policies are 

having deleterious effects within our market place. High volatility leads to higher 

margins, large directional price moves require significant continuing variation deposits and all of this comes at a time when money is difficult to obtain. 

In addition to concerns expressed about speculators in general, there have been 

more specific suggestions that money managers and hedge funds that operate under 

defined strategies may have impaired the price discovery process. The CFTC’s staff 

responded to question implying that managed money traders, particularly hedge 

funds, ‘‘may exert undue collective influence on markets and thus move prices in 

ways that hinder the market’s price discovery role, reduce the effectiveness of 

hedges constructed with contracts from those markets and raise trading costs.’’ 

CFTC’s professional staff conducted an analysis in 2005 which came to the following 

conclusions: 2
64 

3During his appearance before the Senate Appropriations Committee on May 7, 2008, CFTC’s 

Acting Chairman Walt Lukken stated that the CFTC’s recent revisitation of the 2005 study 

using more current data for energy market trading affirmed the conclusions reached in the 2005 

study. This conclusion mirrors the views of the majority of 53 economists surveyed by the Wall 

Street Journal in May 2008 which indicated that the global surge in food and energy prices is 

being driven primarily by fundamental market conditions, rather than an investment bubble. 

Wall Street Journal, May 9, 2008, page A–2. Similarly, the U.S. Department of Energy’s Energy 

Information Agency’s most recent ‘‘Short Term Energy Outlook’’ published in May 6, 2008 evidenced the tightness in world oil markets, with growth in world oil consumption outstripping 

growth in production in non-OPEC nations by over 1 million bbls/day, and dramatically increased demand coming from China, India, and other parts of the developing world. 4See, for example, Antoshin and Samiei’s analysis of the IMF research on the direction of the 

‘‘causal arrow’’ between speculation and commodity prices in ‘‘Has Speculation Contributed to 

Higher Commodity Prices?’’ in World Economic Outlook (September 2006): 

‘‘On the other hand, the simultaneous increase in prices and in investor interest, especially 

by speculators and index traders, in commodity futures markets in recent years can potentially 

magnify the impact of supply-demand imbalances on prices. Some have argued that high investor activity has increased price volatility and pushed prices above levels justified by fundamentals, thus increasing the potential for instability in the commodity and energy markets. 

What does the empirical evidence suggest? A formal assessment is hampered by data and 

methodological problems, including the difficulty of identifying speculative and hedging-related 

trades. Despite such problems, however, a number of recent studies seem to suggest that speculation has not systematically contributed to higher commodity prices or increased price volatility. For example, recent IMF staff analysis (September 2006 World Economic Outlook, Box 

5.1) shows that speculative activity tends to respond to price movements (rather than the other 

way around), suggesting that the causality runs from prices to changes in speculative positions. 

In addition, the Commodity Futures trading Commission has argued that speculation may have 

reduced price volatility by increasing market liquidity, which allowed market participants to adjust their portfolios, thereby encouraging entry by new participants.’’ 

‘‘Using a unique set of data from the Commodity Futures Trading Commission 

(CFTC), the staff studied the relationship between futures prices and the positions 

of managed money traders (MMTs), commonly known as hedge funds, for the natural gas and crude oil futures markets. The staff also examined the relationship between the positions of MMTs and positions of other categories of traders (e.g., floor 

traders, merchants, manufacturers, commercial banks, dealers) for the same markets. 

The results suggest that on average, MMT participants do not change their positions as frequently as other participants, primarily those who are hedgers. The staff 

found that there is a significant correlation (negative) between MMT positions and 

other participant’s positions (including the largest hedgers), and results suggest that 

it is the MMT traders who are providing liquidity to the large hedgers and not the 

other way around. 

The staff also found that most of the MMT position changes in the very short run 

are triggered by hedging participants changing their positions. That is, the price 

changes that prompt large hedgers to alter their positions in the very short run 

eventually ripple through to MMT participants who will change their positions in 

response. The staff also found no evidence of a link between price changes and MMT 

positions (conditional on other participants trading) in the natural gas market, and 

find a significantly negative relationship between MMT position changes and price 

changes (conditional on other participants trading) in the crude oil market.’’ 

In recent congressional testimony the CFTC has reaffirmed the validity of this 

2005 analysis.3 It is instructive that CFTC’s analysis parallels the conclusions of 

many other economists who have also studied the issue of causation in the context 

of speculators and commodity futures prices.4

RAISING MARGIN ABOVE PRUDENTIAL LEVELS IS COUNTERPRODUCTIVE

Neither the CFTC’s study nor careful marshalling of the supply/demand factors 

driving the market has calmed the critics who demand an easy solution to high 

prices, which they claim can be mandated without cost or consequence. This vocal 

group insists that driving speculators from the markets will bring prices back to the 

correct level. Worse still, they argue for driving speculators from the market by Government-mandated increases in margins. 

Legislation has been proposed to mandate increases in margin, by which is meant 

the performance bond required of futures traders to guarantee performance of their 

contractual obligations to the clearing house. The theory behind the legislation is 

that speculators who have long positions and whose participation in the futures 

markets is assumed to have caused price escalation, will be driven from the market 

and prices will retrench to a more comfortable level. This idea is flawed. 
65 

First, it assumes that speculators are all on the long side of the market and that 

this herd approach to trading has driven prices above their legitimate equilibrium 

level. All of our internal studies and all of the academic work supports the opposite 

view, namely that speculators are about equally divided on both sides of the market. 

Second, increasing margin to artificially high levels is most likely to cause a price 

spike rather than to systematically lessen commodity prices. We strongly believe 

that efforts to mandate price by direct price control or by indirect actions distort 

future production and cause costly misallocation of resources of production. 

Performance bond is generally set at a level to cover, with a high degree of confidence, any change in the underlying value of a futures contract during a single 

day of trading. It has nothing to do with the notional or face amount of the contract. 

For example, performance bond on a $36,700 CBOT corn contract is currently set 

at $2,025 while performance bond on a $100,000 30-year bond contract is set at 

$3,510. In each case, the holder of the contract must make good on his losses and 

conversely gets credit for his gains on a daily basis. Our clearing system continuously holds 100 percent collateral for a near worst case loss scenario. The cost of 

depositing collateral or cash with the clearing house is considered a cost of trading. 

The imposition of artificially high performance bonds is a tax on trading as it 

raises a trader’s cost. It has been repeatedly demonstrated, and ever more so as 

markets have become electronic and available from anywhere on the globe, that excess performance bond levels will drive users away from transparent, regulated U.S. 

futures markets and into opaque, unregulated OTC markets with less liquidity, less 

price transparency and no public accounting for traders’ positions. This is a net loss 

to the congressionally defined purpose of creating fair, efficient and well-functioning 

energy and commodity markets. 

Our extensive market regulation experience and our experience with previous efforts to control commodity prices by means of adjusting the level of performance 

bond has established that artificially increasing margins is not effective. Raising 

margins to drive speculators on the long side of the market out of the market in 

a time of upward trending prices does not work. The speculators who have been long 

have been collecting the profits on their positions and are in an especially strong 

position to meet any additional margin call. Moreover, they are well aware that the 

short side of the market has been losing money and probably has been forced to borrow to support their short hedges. 

A North Dakota farmer who sold corn futures at a new high of $5 a bushel and 

locked in a $2 per bushel profit needs to be able to carry his hedge until his crop 

is harvested. A single contract is 5,000 bushels and margin is now set at $1,000 per 

contract. Assume the farmer had sold 100 contracts. Corn was $7 this morning and 

the farmer has been forced to go to his bank to borrow $2×5,000×100=$1,000,000 

to continue to carry the position. What should the long speculator expect when margins are raised and the farmer is forced to borrow $3 million or more to continue 

to hold his position? The cost to hedgers can be expected to be even more severe 

when the country is in the midst of a severe credit crunch. 

Moreover, there is no evidence that artificially increasing performance bonds will 

drive well-capitalized index funds or other passive long-only investors to sell or that 

the impact of any such selling would be beneficial or positive for hedgers and commercial users of futures markets. Generally, these investors are not leveraged and 

are in the best position to margin up to 100 percent. Long index traders will not 

be driven from the market because they already have a fully collateralized account 

that is held on behalf of their clients. By increasing the amount of those funds that 

are required to be posted for margin, the index trader just transfers treasury bills 

from one account to an account accessible to the clearing house. There is no cost 

to this class of trader. 

Performance bonds are designed to ensure that contractual obligations are met 

and that clearing houses can fulfill their responsibilities; they are not intended to 

create incentives or disincentives for trading decisions. Based on our strong track 

record of zero credit defaults in the 100-plus year history of CME Clearing, we believe our current system for calculating margin is the most prudent and sound approach to margining. Mandating arbitrary margin levels would not improve the 

functioning of energy and commodity futures markets and would interfere with the 

prudential risk management practices of central counterparty clearing houses. 

Others have suggested excluding pension funds and index funds from participating in commodity futures markets. These funds are using commodity exposure 

to decrease volatility in their portfolios. Barring them from regulated U.S. futures 

markets will only push them offshore or into over-the-counter trading. These funds 

will continue to need commodities as an asset class and will need to find ways to 

invest on behalf of their clients. We believe it would be prudent to ensure this in-
66 

5http://www.cftc.gov/stellent/groups/public/@newsroom/documents/speechandtestimony/ 

opalukken-32.pdf. 

vestment occurs on a regulated market instead of driving this capital into opaque 

markets. 

CME Group has conducted a thorough review of the impact of index trading and 

speculative trading on its primary agricultural markets. We have found a negative 

correlation between price increases and index fund buying. 

While we favor a broader study of the impact of index fund trading, we do not 

think it is appropriate to cast those funds as a villain in price inflation until the 

study is completed. Especially since in theory it is not likely that the index funds 

are having a detrimental impact. Index funds buy and hold. They may have some 

small impact on days when new money enters the market and they create additional 

net long positions, but those changes are transitory. The important statistic in this 

regard is new net positions not overall positions. 

After the flow of new money into the market from the index funds, the price will, 

in the absence of other factors, revert to the equilibrium dictated by current supply 

and demand factors because the index traders simply sit and hold the positions 

until they roll to the next delivery month. Traders making informed trades should 

be expected to drive the market to equilibrium. 

All price changes take place at the margin as those traders with information, 

meaning that they are hedging or expressing an opinion based on knowledge, buy 

and sell. Even if 30 percent of the open interest in a particular contract month of 

a commodity is held by index funds, buying and selling by a few traders based on 

need and knowledge drive the market to its fair equilibrium price. The open positions of the index traders have no impact on prices driven by informed trading activity. 

Regulated futures markets and the CFTC have the means and the will to limit 

speculation that might distort prices or distort the movement of commodities in 

interstate commerce. Acting Chairman Lukken’s recent testimony before the Subcommittee on Oversight and Investigations of the Committee on Energy and Commerce United States House of Representatives (December 12, 2007) 5 offers a clear 

description of these powers and how they are used. 

CEA Section 5(d)(5) requires that an exchange, ‘‘[t]o reduce the potential threat 

of market manipulation or congestion, especially during trading in the delivery 

month... shall adopt position limitations or position accountability for speculators, where necessary and appropriate.’’ 

All agricultural and natural resource futures and options contracts are subject to 

either Commission or exchange spot month speculative position limits—and many 

financial futures and options are as well. With respect to such exchange spot month 

speculative position limits, the Commission’s guidance specifies that DCMs should 

adopt a spot month limit of no more than one-fourth of the estimated spot month 

deliverable supply, calculated separately for each contract month. For cash settled 

contracts, the spot month limit should be no greater than necessary to minimize the 

potential for manipulation or distortion of the contract’s or underlying commodity’s 

price. For the primary agricultural contracts (corn, wheat, oats, soybeans, soybean 

meal, and soybean oil), speculative limits are established in the Commodity Exchange Act and changes must be approved via a petition and public rulemaking 

process. 

With respect to trading outside the spot month, the Commission typically does not 

require speculative position limits. Under the Commission’s guidance, an exchange 

may replace position limits with position accountability for contracts on financial instruments, intangible commodities, or certain tangible commodities. If a market has 

accountability rules, a trader—whether speculating or hedging—is not subject to a 

specific limit. Once a trader reaches a preset accountability level, however, the trader must provide information about his position upon request by the exchange. In addition, position accountability rules provide an exchange with authority to restrict 

a trader from increasing his or her position. 

Finally, in order to achieve the purposes of the speculative position limits, the 

Commission and the DCMs treat multiple positions held on a DCM’s market that 

are subject to common ownership or control as if they were held by a single trader. 

Accounts are considered to be under common ownership if there is a 10 percent or 

greater financial interest. The rules are applied in a manner calculated to aggregate 

related accounts. 

Violations of exchange-set or Commission-set limits are subject to disciplinary action, and the Commission, or a DCM, may institute enforcement action against violations of exchange speculative limit rules that have been approved by the Commis-
67 

sion. To this end, the Commission approves all position limit rules, including those 

for contracts that have been self-certified by a DCM. 

It is clear that speculation is an important component of the futures markets, but 

there is a point when excessive speculation can be damaging to the markets. As a 

result, the CFTC closely monitors the markets and the large players in the markets, 

in addition to position and accountability limits, to detect potentially damaging excessive speculation and potential manipulative behavior. 

THE CFTC’S EXCLUSIVE JURISDICTION OVER TRADING ON CFTC REGULATED MARKETS

MUST BE PRESERVED

CME Group plans to join with other leading participants in the financial services 

industry to respond to the FTC’s request for comments respecting its proposed rule 

respecting false reporting and manipulative activities in the wholesale oil market. 

We are concerned that the FTC’s jurisdictional reach could come into conflict with 

the CFTC’s exclusive jurisdiction respecting futures trading. While the statute very 

clearly limits the FTC’s jurisdiction to conduct in connection with ‘‘the purchase or 

sale of crude oil, gasoline or petroleum distillates at wholesale,’’ FERC, which has 

similar authority, has read ‘‘in connection with’’ to give it authority over conduct 

that took place entirely on a futures exchange. 

In 1974, Congress recognized the overriding importance of entrusting to the expertise of the CFTC the exclusive regulatory authority over the Nation’s futures 

markets. Congress preempted other Federal and State rules that would either assert 

parallel jurisdiction over the futures markets or produce conflicts with the CFTC 

regulatory regime. This system has produced the best regulated, most innovative 

and efficient futures market in the world. 

As markets evolve and become more interrelated such agency ‘‘boundary disputes’’ 

can be expected and for the most part the agencies usually take pains to accommodate one another to allow each to accomplish the mission Congress mandated for 

them. We are concerned by the Federal Energy Regulatory Commission’s (FERC) 

claim of jurisdiction in the Amaranth case, where the only manipulative trading alleged took place on a futures exchange. FERC has refused to recognize and yield 

to the CFTC’s exclusive jurisdiction. The result is that participants in the natural 

gas futures markets no longer have legal certainty as to the legal standard governing their transactions. 

The recently enacted farm bill demonstrates the continued vitality of the CFTC’s 

exclusive jurisdiction. Congress reauthorized the CFTC for another 5 years and 

granted the CFTC new authority to regulate certain exempt commercial markets 

that are active enough to constitute price discovery markets. 

POSITION LIMITS ON FOREIGN BOARDS OF TRADE LISTING CLONES OF U.S. DCM LISTED

CONTRACTS

Position limits are a device to promote liquidation and orderly delivery in physical 

contracts. If two markets share the same physical delivery contract it is consistent 

to apply a single limit across both markets. However, we are not aware of a foreign 

board of trade that lists a physically deliverable futures contract that is a clone of 

a U.S. DCM’s listed contract. 

The ICE U.K. market lists a WTI crude oil contract that is traded and settled 

based on the settlement prices of the NYMEX WTI contract. The ordinary reasons 

for imposing position limits on futures markets do not apply in such a case. It is 

possible to imagine a trader who is long a limit position at NYMEX and double that 

position at ICE U.K. That trader might expect to profit, if not caught, by driving 

up the settlement price on the final day of trading on NYMEX by standing for delivery, even though he would be required to store and then sell the oil back at a loss, 

in the hope to profit from the settlement on ICE. Of course, such behavior will be 

obvious to the regulators and the markets and the manipulator would neither enjoy 

the profits nor much additional freedom. Moreover, the impact on the price of oil 

would be transitory. 

Our theoretical understanding aside, we support a temporary imposition of position limits on the ICE Futures U.K. WTI contract until the CFTC is able to secure 

and analyze a more complete data set respecting the impact of speculation and/or 

indexed commodity trading on price inflation. We do not imagine that any harm will 

be done and this action will allay concerns. 
68 

THE EXEMPTION FOR COMMERCIAL MARKETS IN ENERGY PRODUCTS, EVEN AS LIMITED

BY THE RECENT AMENDMENT OF THE CEA, IS UNNECESSARY AND CREATES INFORMATION GAPS

Section 5(b) of the Commodity Exchange Act charges the Commission with a duty 

to oversee ‘‘a system of effective self-regulation of trading facilities, clearing systems, 

market participants and market professionals’’ and to ‘‘to deter and prevent price 

manipulation or any other disruptions to market integrity; to ensure the financial 

integrity of all transactions subject to this chapter and the avoidance of systemic 

risk; to protect all market participants from fraudulent or other abusive sales practices.’’ 

These ‘‘purposes’’ and the statutory exemption for Commercial Markets found in 

Section 2(h)(3) are in conflict. The key purposes mandated by Congress in Section 

5(b) are jeopardized if trading facilities for contracts in exempt commodities are permitted to coexist with regulated futures exchanges that list those same commodities. 

ECMs do not have any system of ‘‘effective self regulation’’ of their facilities or of 

their market participants. Their contracts are traded based on the prices of commodities that have limited supplies and that have often been the subject of manipulative activity and disruptive market behavior. There is no mechanism in place ‘‘to 

deter and prevent price manipulation or any other disruptions to market integrity.’’ 

The Commission cannot track the build up of dominant positions. At best the Commission has power to punish such conduct after the fact. We find this to be a serious 

problem that is at odds with Congress’s intent behind the CFMA, which, if left 

unaddressed, jeopardizes the public’s confidence in the CFTC’s ability to do its job. 

The Section 2(h)(3) exemption for unregulated commercial markets should be 

eliminated. You can’t fix the problem by merely changing reporting requirements. 

In order to secure accurate reports a market needs an effective surveillance and 

compliance system. This requires that an effective system of self regulation must 

be put in place. The logical conclusion is you must implement at least the core principles required of a DTEF to get a useful result. 

In the aftermath of the Amaranth controversy, Congress provided CFTC new authorities in the farm bill to regulate ‘‘significant price discovery contracts’’ on platforms like ICE by requiring those platforms to meet certain core principles drawn 

from the longer list applicable to fully regulated exchanges. What is clear is that 

when Congress wants to insure fair dealing and regulatory propriety it uses as its 

comparative yardstick the regulatory regime imposed on America’s fully regulated 

exchanges. 

Trading that is conducted on fully regulated exchanges is an open book to which 

you already have complete access and accountability. Indeed, CFTC monitors that 

exchange trading daily and has repeatedly opined that speculation on those fully 

regulated exchanges does not raise regulatory concerns. But that is not the case 

with the other forms of energy commodity trading, which lie outside the reach of 

CFTC regulation and are far larger in size in terms of trading volume. 

CONCLUSION

CFTC regulated futures markets have demonstrated their importance to the economy, the Nation’s competitive strength and America’s international financial leadership. Imposing arbitrary increases in margins in these markets, as has been suggested as a way to control prices, will result in the exportation of these markets 

to overseas competitors and to unregulated and non-transparent over-the-counter 

markets. We have the means and the power to protect markets against speculative 

excesses on our markets and are committed to doing so. 

Similarly, James Burkhard, managing director of Cambrindge Energy Research 

Associates testified to the Senate Energy Committee on April 3, 2008 that: ‘‘In a 

sufficiently liquid market, the number and value of trades is too large for speculators to unilaterally create and sustain a price trend, either up or down. The growing role of non-commercial investors can accentuate a given price trend, but the primary reasons for rising oil prices in recent years are rooted in the fundamentals 

of demand and supply, geopolitical risks, and rising industry costs. The decline in 

the value of the dollar has also played a role, particularly since the credit crisis first 

erupted last summer, when energy and other commodities became caught up in the 

upheaval in the global economy. To be sure, the balance between oil demand and 

supply is integral to oil price formation and will remain so. But ‘new fundamentals’—new cost structures and global financial dynamics—are behind the momentum 

that pushed oil prices to record highs around $110 a barrel, ahead of the previous 

inflation-adjusted high of $103.59 set in April 1980.’’ 
69 

Senator DURBIN. Jim May is the President and Chief Executive 

Officer, Air Transport Association (ATA). Mr. May, thank you. 

STATEMENT OF JAMES C. MAY, PRESIDENT AND CHIEF EXECUTIVE 

OFFICER, AIR TRANSPORT ASSOCIATION 

Mr. MAY. Thank you, Mr. Chairman. In the interest of your time, 

let me abbreviate my written remarks and concentrate on a couple 

or three key issues. 

First of all, it is my disturbing duty today to report to you that 

ATA has just changed its forecast for 2008, and we now project 

that this industry domestically is going to lose somewhere between 

$7 billion and $13 billion. That is a $10 billion midpoint, and if 

that is the case, it will be on par with the worst year in the history 

of this business. 

Those numbers are due exclusively to the cost of fuel. We are going to spend $62 billion this year on fuel. By way of comparison, 

that is greater than the total of the 4 years in the first 4 years of 

this decade. We are going to spend $20 billion more than last year. 

So we have, as you might imagine, a rooting interest in what is 

going on here. 

That is a worse shock than 9/11. It means that we are going to 

have some 14,000 to 15,000 employees who are going to have lost 

their jobs by the end of this year. 

It means that as many as 200 United States communities will 

lose all air service. I counted up quickly this morning some 30 communities represented by members of this committee. 

We are laying down older planes. We are eliminating orders for 

new aircraft. And it is a matter that impacts this industry dramatically. 

Our average one-way fare—average across the country—is about $191 right now. Take out $25–$30 for taxes and fees, and we are 

spending $138 on fuel alone per passenger today. That leaves us 

with about $27 per passenger to cover every other expense in the 

business. 

If Congress does not turn things around soon, the impact on the 

overall economy will be dramatic. This industry contributes well 

over $600 billion to the U.S. economy. That is 10 million jobs. And 

if we begin to cut back service to these small communities, especially small rural communities, across this country, it is going to 

have a devastating effect. 

So I am sitting here listening to this testimony this morning. You 

have some stark fundamental choices. The first choice is status 

quo. We can continue to blame high oil prices on China and India 

and the weak dollar. Or you can look a little beyond that. You can 

study the problem and report back in 6 months or 6 weeks. 

I note that the CFTC is going to report back sometime in September of this year. Well, I would suggest to you if status quo becomes the course of the day, we will not be here to see the results 

of it. There are already nine carriers that have declared bankruptcy. There will be others if the prices of oil continue at $135. 

Anything north of $100, they are going to continue. 

Now, I do not come here as an expert in trading. You have got 

people on this panel who are experts and regulators. I can suggest 

to you that the president of Shell Oil is suggesting that the funda-
70 

mental proper price for oil is somewhere between $35 and $65 a 

barrel. One of his colleagues said $90 a barrel. I can suggest to you 

that John Kilduff, who I think is a well recognized name in the 

business, M.F. Global Energy Risk, thinks that there is $20 to $30 

a barrel that is a premium, if you will, for speculation. Goldman 

Sachs has expressed some concerns. 

And I take you to something that you are familiar with, as I 

close it out, and it is the Senate Permanent Subcommittee on Investigations that all members and the staff are very well aware of. 

It has been around for years and years and always done great 

work. They say the following. Foreign exchanges such as ICE are 

allowed to accept energy trades from persons in the United States 

and elsewhere to ‘‘operate with no regulatory oversight, no obligation to ensure its products are traded in a fair and orderly manner, 

and no obligation to prevent excessive speculation.’’ That is this 

Senate’s Permanent Subcommittee on Investigations. 

They go on and I will close with this because you have a very 

critical job in front of you. What do we do about these high oil 

prices? We know that there are many supply side solutions, conservation, others that are longer term, but immediate term, if there 

is an issue, what do you do? And I think that is not an easy task. 

I would leave you with the findings of the permanent subcommittee. Congress needs to level the regulatory playing field between the NYMEX and ICE exchanges, increase energy price transparency, and strengthen the ability of the CFTC to analyze market 

transactions and police U.S. energy commodity markets. 

Two, it is essential that CFTC have access to daily reports of 

large trades for energy commodities. 

And three, surveillance tools have not matched the subsequent 

growth in commodity trading, electronic trading, speculative trading, et cetera. 

Mr. Chairman, you have introduced legislation. I think at the 

last count, 37 of your colleagues in the Senate have introduced one 

form of legislation or another. We do not have as an industry time 

for status quo. We do not have time as an industry to wait. It is 

going to impact not just airlines, but the entire U.S. economy. Anything we can do to help you in your deliberations, we are happy 

to volunteer. 

Senator DURBIN. Thank you, Mr. May. That was sobering testimony, but I am glad it is part of the record. And I hope all my colleagues will read it very closely. 

[The statement follows:] 

PREPARED STATEMENT OF JAMES C. MAY

Chairman Harkin, Chairman Durbin, and members of the committees, I welcome 

your leadership—in particular, Senator Durbin’s—in examining the catastrophic impact of high fuel prices on the airline industry and the Nation’s economy. I hope 

that the unusual nature of this combined Agriculture Committee and Appropriations Subcommittee hearing is an indication that Congress will move swiftly to find 

a solution. 

My task today is to deliver what I consider to be an extremely disturbing report 

on the state of the Nation’s airline industry. Today, we are revising our forecast: 

this country’s airlines expect to lose in the range of $10 billion this year—a loss 

equal to or greater than the worst year in this industry’s history. High fuel prices 

are the sole reason. This year, we will spend more than $60 billion on fuel, at least 

$20 billion more than last year and slightly more than our combined fuel bill for 

the first 4 years of this decade. 
71 

Sadly, 2008 could turn out to be the worst year in the industry’s history. Unlike 

the temporary revenue hits from SARS, 9/11, and other one-time demand shocks, 

the airlines now are facing a massive structural increase—with no end in sight— 

in a virtually uncontrollable cost. Moreover, there is little low-hanging fruit left to 

harvest. Unfortunately, not even Chapter 11 can lower the price of fuel. To many members of Congress, $10 billion is not a lot of money. Let me try to 

add some context. More than 14,000 airline jobs have been cut so far this year, and 

that is just the tip of the iceberg. It is not unrealistic to think that by cutting capacity, more than 200 communities could lose all commercial air service by early next 

year. Orders for new planes have been slashed and hundreds of older, less efficient 

planes have been taken out of service. We are burning through cash at unprecedented rates, barely surviving from month to month. The Nation’s airlines will not 

ever fully recover from this economic blow, and more airlines—in addition to the 

eight that have already filed for bankruptcy or stopped operating—may simply shut 

down. That means even more job losses and untold harm to families and the economy. 

I assure you that airlines are not gouging passengers with higher fares. As of 

June 1, analysts [Boyd Group] estimate the average gross fare, including all fees 

and taxes and all recent fare hikes, is $191. Eliminating fees and taxes brings it 

to $166. At current jet fuel prices, the cost of fuel per passenger is $138.80. That 

leaves only $27.37 to pay for every other cost—labor, airport fees, insurance, and 

facilities, to name but a few. 

Committee members and Congress, for that matter, may ask why the country 

should care that its airlines are on the brink of financial disaster and—some would 

say—about to implode. The answer is simple: this Nation’s economy is inextricably 

linked to the viability of its air transportation system. If the airlines continue to 

spiral downward, so will the economy. Aviation contributes $690 billion to the U.S. 

GDP—that’s equal to heating oil costs for 376 million households for one winter, 24 

million new cars, and 10 million new jobs. 

If Congress does not turn things around very soon, the impact on the country’s 

economy will be even worse. Analysts are predicting that a 20 percent reduction in 

capacity may not be enough to save the industry. If 200-plus communities lose all 

service, airline hubs will be decimated, tens of thousands more jobs will be eliminated, and tourist destinations will be devastated by huge cuts in the number of 

flights. Realistically, rural areas will be hit the hardest by the cuts, leaving thousands of square miles without air service. 

This is not what we want to happen in this country. Ask any local chamber of 

commerce and they will tell you that convenient air service is absolutely critical to 

economic growth. Without it, businesses are isolated, communities fade away because they never recover from staggering job losses. 

Mr. Chairmen, Congress has a choice: stay with the status quo or make the hard 

decisions. The status quo means continuing to blame high oil prices on the weak 

dollar and growing demand from China and India. Status quo means forming yet 

another commission or task force to study the problem and report back in 6 months. 

The airlines won’t be around much longer if the status quo wins the day. 

I am not an expert in the trading of energy commodity futures. In addition to the 

supply-side solutions where relief is on the long-term horizon, leading commodities 

experts believe that crude oil prices today are unnecessarily high due, in large part, 

to excessive market manipulation for which there are short-term solutions. As these 

experts tell us: 

—The proper range for oil prices should be ‘‘somewhere between $35 and $65 a 

barrel.’’—John Hofmeister, President of Shell Oil Co. 

—There may now be upwards of $25 to $30 of speculation in the price of crude, 

which continues to soar despite soaring stockpiles in the United States.—MF 

Global Energy Risk Management Group 

—The increasing prevalence of futures contracts has transformed the nature of oil 

markets. It is no longer only about the value of oil as an energy commodity, 

but also... oil as a financial asset.—Goldman Sachs 

—If the crude oil market is not physically tight now, there is at least a belief on 

the part of a bullish speculator that it will become so later. What has driven 

the market so far, so far, in our view, is that such a high percentage of the speculative trade has become aligned in one direction.—Tim Evans, Citi Futures 

Perspective 

—It also seems hard to dispute that the growth in the size of futures and options 

trade has something to do with the price movement... [W]e believe that 

growth in NYMEX trade has certainly made it more dominant relative to the 

physical market in setting prices than in the past.—Tim Evans, Citi Futures 

Perspective 
72 

Mr. Chairmen, this country does not need another Enron scandal. Enron destroyed its pensions, its investors and its employees. One of the most disturbing aspects of the current energy market is that studies have shown that the airline and 

other transportation industries such as trucking have been victimized by loopholes 

in the law. We have to restore CFTC’s authority to prevent improper and excess 

speculation in the energy sector. Foreign exchanges, such as ICE are allowed to accept energy trades from persons in the United States, and elsewhere, and ‘‘to operate with no regulatory oversight, no obligation to ensure its products are traded in 

a fair and orderly manner, and no obligation to prevent excessive speculation.’’ Mr. 

Chairman, that quote is from the Senate Permanent Subcommittee on Investigations. Some aspects of problems caused by the Enron loophole were addressed in the 

farm bill—and those reforms are a good step forward—but more legislative changes 

are needed. 

Mr. Chairmen, all we are seeking are common-sense measures to ensure transparency and an even footing between traders and speculators. I defer to your insight 

on ways to increase transparency and fairness in the energy commodity futures 

market—to reel back the overwhelming odds now favoring speculators and institutional investors, particularly those trading on foreign exchanges. 

We need action, not more studies or expert commissions. Many have suggested 

a way forward: totally close the loopholes that permit large institutional traders to 

avoid any real oversight or financial requirements; curtail extremely risky investments by pension funds that jeopardize savings for employees across the country; 

eliminate trading advantages for the huge speculative traders over those who plan 

to use the products they buy rather than trading them over and over again for unbelievable profits; and make the commodity market true to supply-and-demand fundamentals. 

As the Permanent Subcommittee on Investigations of the Senate Homeland Security and Government Affairs Committee found: 

—Congress needs to ‘‘level the regulatory playing field between the NYMEX and 

the ICE exchanges, increase energy price transparency, and strengthen the ability of CFTC to analyze market transactions and police U.S. energy commodity 

markets.’’ 

—It is ‘‘essential’’ that CFTC have ‘‘access to daily reports of large trades of energy commodities . . . to deter and detect price manipulation.’’ 

—CFTC ‘‘surveillance tools have not matched the subsequent growth in commodity trading, electronic trading and speculative trading, especially for energy 

products.’’ ‘‘The energy futures market is really about whether families will be 

able to afford to heat their homes and fill up at the pump.’’ ‘‘More and more 

trading occurs on electronic markets without oversight.’’ 

Mr. Chairmen and committee members, your leadership and insight are greatly 

appreciated. 

As I said at the beginning of my remarks, if Congress does not act soon, this country will not have a viable airline industry. Thank you. 

Senator DURBIN. Dr. James Newsome is CEO and President of 

the New York Mercantile Exchange. Dr. Newsome. 

STATEMENT OF DR. JAMES NEWSOME, PRESIDENT AND CEO, NEW 

YORK MERCANTILE EXCHANGE 

Dr. NEWSOME. Thank you, Mr. Chairman, Senator Lugar. On behalf of the New York Mercantile Exchange, thanks for the opportunity to appear before this joint committee to address what we believe are the most important issues facing the global and domestic 

economies, as well as those of U.S. customers. 

The Senate Agriculture Committee was primarily responsible for 

the drafting and passage of the Commodity Futures Modernization 

Act of 2000, still recognized as the gold standard for U.S. financial 

policy. I would like to share partial ownership as chair of the CFTC 

who was responsible for implementing that act in 2000. 99 percent 

of this act holds true today as outstanding policy. However, we did 

not have a crystal ball and it was impossible to determine how 

some markets would develop. And on at least two occasions, markets have developed differently than anyone anticipated. 
73 

First, the development of the over-the-counter natural gas market after the collapse of Enron which became much more exchangelike and actually started contributing to price discovery. This scenario was investigated by Senator Levin’s office after the implosion 

of Amaranth and was addressed with the passage of this latest 

farm bill. 

Second, the listing of U.S.-delivered energy contracts by foreign 

boards of trade under their no action authority without the transparency and position limits provided by U.S. exchanges to the 

CFTC. NYMEX began raising this issue 2 years ago and today it 

must be addressed. 

We believe there are two important policy components. 

One, transparency. Complete transparency is fundamental for 

competitive markets. The same large trader reporting for all U.S. 

and foreign boards of trade trading U.S. products is critical for the 

CFTC to determine whether there is either manipulation or substantive speculative activity. Further delineation of large trader reports to include customer positions behind swap dealers and the 

banks we think is imperative to addressing overall transparency. 

Second, position limits. If a foreign board of trade decides that 

it wants to list U.S.-delivered contracts, which it has the right to 

do, then they must abide by U.S. position limits to control speculative activity just as U.S. exchanges currently do. 

Finally, with regard to the CFTC resources, we believe that the 

CFTC has long been on a downward spiral regarding real resources 

and personnel. This has to be addressed. You are addressing it, and 

it is supported fully by the New York Mercantile Exchange. 

Thank you, Mr. Chairman. 

Senator DURBIN. Thank you very much. 

[The statement follows:] 

PREPARED STATEMENT OF DR. JAMES NEWSOME

Mr. Chairman and participants in this joint hearing, my name is Jim Newsome 

and I am the President and Chief Executive Officer of the New York Mercantile Exchange, Inc. (NYMEX or Exchange). NYMEX is the world’s largest forum for trading 

and clearing physical-commodity based futures contracts, including energy and metals products, and has been in the business for more than 135 years. NYMEX is a 

federally chartered marketplace, fully regulated by the Commodity Futures Trading 

Commission (CFTC or Commission) both as a ‘‘derivatives clearing organization’’ 

(DCO) and as a ‘‘designated contract market’’ (DCM), which is the highest and most 

comprehensive level of regulatory oversight to which a derivatives trading facility 

may be subject under current law and regulation. 

On behalf of the Exchange, its Board of Directors and shareholders, I want to express our appreciation to the committees for holding today’s hearing on the role, responsibilities and resource needs of the CFTC, with particular focus on the oversight 

of energy markets and oil futures contracts. In the last several years, trading volume on regulated markets has expanded dramatically, yet, according to published 

reports, the CFTC’s current staffing levels fall even below the levels in place when 

the agency commenced operations over 30 years ago. Like most industry participants, we believe that the Commission is doing a fine job in the face of severe budget, staffing and technology constraints. 

We also believe that a compelling case can be made for immediate increases in 

the size of the CFTC’s operating budget. My own views on the need for remedying 

this mismatch between duties and resources stem in part from my service as Chairman of the CFTC from 2002–2004 during the period when we were continuing to 

implement the provisions of the landmark Commodity Futures Modernization Act 

of 2000 (CFMA). As anticipated, that law brought new competition and enhanced 

innovation in derivatives markets, which contributed to the explosion in trading volume. It is imperative that the CFTC have all of the tools that it needs to carry out 

fully its obligation to maintain the integrity of U.S. futures markets. 
74 

BACKGROUND

NYMEX energy futures markets are highly liquid and transparent, representing 

the views and expectations of a wide variety of participants from every sector of the 

energy marketplace. Customers from jurisdictions around the globe can submit orders for execution on Globex. The price agreed upon for sale of any futures contract 

trade is immediately transmitted to the Exchange’s electronic price reporting system 

and to the news wires and information vendors who inform the world of accurate 

futures prices. 

Price signals are the most efficient transmitters of economic information, telling 

us when supplies are short or in surplus, when demand is robust or wanting, or 

when we should take notice of longer-term trends. NYMEX futures markets are the 

messengers carrying this information from the energy industry to the public. The 

wide dissemination of futures prices generates competition in the establishment of 

current cash values for commodities. 

Analysis of the actual market data from the regulated exchange, which is the best 

evidence available to date, indicates that prices in our markets continue to be determined by fundamental market forces. Specifically, uncertainty about the availability 

of supply due to political and security factors, uncertainty about the actual levels 

of continuing growth of demand in developing parts of the world, and uncertainty 

about currency fluctuations materially weigh into the fundamental analysis. 

In addition, the available data indicate that commercials continue to provide the 

majority of open interest in crude oil futures. Moreover, the extent of non-commercial participation in crude oil as a percent of open interest on NYMEX has actually 

declined over the last year. There is no evidence to date either that the trading by 

non-commercials has impaired the price discovery function of our markets. 

NYMEX is the benchmark for energy prices around the world. Trading on 

NYMEX is transparent, open and competitive and highly regulated. NYMEX does 

not trade in the market or otherwise hold any market positions in any of its listed 

contracts, and, being price neutral, does not influence price movement or set prices 

for commodities trading on the exchange. Instead, NYMEX provides trading forums 

that are structured as pure auction markets for traders to come together and to execute trades at competitively determined prices that best reflect what market participants think prices will be in the future, given today’s information. 

The public benefits of commodity markets, including increased market efficiencies, 

price discovery and risk management, are enjoyed by the full range of entities operating in the U.S. economy, whether or not they trade directly in the futures markets. Everyone in our economy is a public beneficiary of vibrant, efficient commodity 

markets, from the U.S. Treasury, which saves substantially on its debt financing 

costs, to every food processor or farmer, every consumer and company that uses energy products for their daily transportation, heating and manufacturing needs, and 

anyone who relies on publicly available futures prices as an accurate benchmark. 

Legislative proposals intended to decrease overall liquidity and/or speculative participation, such as substantially increasing margin levels, would greatly harm the 

regulated market and damage the all important hedging and price discovery functions that provide important benefits to consumers and to the economy as a whole. 

MARKET OVERSIGHT AND TRANSPARENCY

NYMEX has a strong historic and ongoing commitment to its self-regulatory organization responsibilities. The NYMEX regulatory program has a current annual 

budget of approximately $6.2 million, which reflects a significant commitment to 

both staff and technology. Generally NYMEX must comply with a number of broad, 

performance-based Core Principles applicable to DCMs that are fully subject to the 

CFTC’s regulation and oversight. Of particular note is the series of Core Principles 

that pertain to markets and to market surveillance. A DCM must monitor trading 

to prevent manipulation, price distortion and disruptions of the delivery or cash-settlement process. Furthermore, to reduce the potential threat of market manipulation or congestion, the DCM must adopt position limits or position accountability for 

a listed contract, where necessary or appropriate. 

NYMEX has numerous surveillance tools that are used routinely to ensure fair 

and orderly trading on our markets. The principal tool that is used by DCMs to 

monitor trading for purposes of market integrity is the large trader reporting system. For energy contracts, the reportable position levels are distinct for each contract listed by the Exchange for trading. The levels are set by NYMEX and are specified by rule amendments that are submitted to the CFTC, following consultation 

and coordination with the CFTC staff. The reportable level for the NYMEX physically delivered crude oil contract is 350. The NYMEX Market Surveillance staff routinely reviews price activity in both futures and cash markets, focusing on whether 
75 

the futures markets prices are converging with the spot physical market as the 

NYMEX contract nears expiration. 

Large trader data are reviewed daily to monitor reportable positions in the market. On a daily basis, NYMEX collects the identities of all participants who maintain open positions that exceed set reporting levels as of the close of business the 

prior day. These data are used to identify position concentrations requiring further 

review and focus by Exchange staff. 

By rule, NYMEX also maintains and enforces limits on the size of positions that 

any one market participant may hold in a listed contract. These limits are set at 

a level that restricts the ability of speculators to carry large positions on NYMEX 

and also restricts the opportunity to engage in possible manipulative activity on 

NYMEX. Futures markets traditionally list futures and options contracts as a series 

of calendar contract months. For an expiring contract month in which trading is terminating, NYMEX uses a hard expiration position limit. The hard position limit for 

the NYMEX physically settled crude oil contract (CL futures) is 3,000 contracts. 

Breaching the position limit can result in disciplinary action being taken by the Exchange. 

NYMEX also maintains a program that allows for certain market participants to 

apply for targeted exemptions from the position limits in place on expiring contracts. 

Such hedge exemptions are granted on a case-by-case basis following adequate demonstration of bona fide hedging activity involving the underlying physical cash commodity or involving related swap agreements. 

For back months of the CL futures contract, NYMEX currently maintains an anyone-month/accountability level of 10,000 contracts and an all-months-combined position accountability level of 20,000 contracts. When position accountability levels are 

exceeded, Exchange staff conducts heightened review and possible inquiry into the 

nature of the position which ultimately may result in NYMEX staff directing the 

market participant to reduce its positions. 

RECENT CFTC ANNOUNCEMENT

The CFTC recently announced several new initiatives to increase the transparency of energy futures markets. NYMEX has advocated for greater transparency 

of futures activity linked to U.S. exchanges occurring on markets regulated by foreign regulators. We support the initiatives put forward by the Commission, which 

can only enhance the CFTC’s regulatory mission. 

One initiative is intended to expand information-sharing received from the U.K. 

Financial Services Authority for surveillance of energy commodity contracts with 

U.S. delivery points, including West Texas Intermediate crude oil futures contracts. 

The agreement includes implementing expanded information-sharing to provide the 

CFTC with daily large trader positions in the U.K. WTI crude oil contracts. NYMEX 

believes that including large trader reporting is an important market surveillance 

tool that provides important transparency to the market and to regulators. 

NYMEX has advocated similar requirements for certain contracts traded on exempt commercial markets (ECM) and for foreign boards of trade (FBOT) that offer 

energy commodities with U.S. delivery points, such as the ICE Futures WTI contract. Position accountability levels and large trader reporting requirements, among 

others, were recently adopted into law for certain contracts traded on ECMs as an 

amendment to the farm bill. We believe that this new law will address the significant regulatory gap identified in the context of the Amaranth collapse. 

NYMEX continues to believe that the same requirements should be imposed on 

FBOTs for contracts that directly affect U.S. consumers and the economy as a 

whole, such as the ICE WTI futures contract. Two years ago, the CFTC had authority over and could directly see 100 percent of the futures trading activity in the WTI 

futures contract. Today they regulate and can only directly see approximately 70 

percent of that market. Thus, NYMEX believes that the ‘‘no-action’’ letter under 

which ICE Futures lists the WTI contract should be conditioned to require: (1) position accountability levels and/or position limits, as appropriate; and (2) large trader 

reporting. These requirements should mirror the requirements imposed on U.S. designated contract markets. 

As noted above, another fundamental market surveillance and integrity tool is the 

use of position accountability levels and position limits. We believe strongly requiring FBOTs offering contracts with U.S. delivery points to impose position limits and/ 

or accountability levels would be enormously positive and would strengthen the 

overall integrity of energy futures markets. This is particularly true when the contract trading on the FBOT has a U.S. delivery point and has a price that is linked 

to the settlement price of a U.S. regulated contract, such as the ICE WTI futures 

contract. 
76 

Moreover, the CFTC announced its intent to develop a proposal that would routinely require more detailed information from index traders and swaps dealers in 

the futures markets, and to review whether classification of these types of traders 

can be improved for regulatory and reporting purposes. Some commentators have 

recently made sweeping assertions regarding the impact of index traders on the 

basis of distorted and patently erroneous information. Consequently, the Exchange 

believes that it will be useful to the development of thoughtful public policy for the 

CFTC to obtain more precise data so as to better assess the amount and impact of 

this type of trading in the markets. We look forward to the implementation of this 

proposal. 

Finally, in response to the CFTC’s extraordinary step of publicly acknowledging 

an ongoing investigation into crude oil practices generally, we have reaffirmed our 

long-standing commitment to provide full assistance to the CFTC on enforcement 

matters in order to ensure the integrity of U.S. markets. 

FOREIGN BOARDS OF TRADE

While much of the focus on Capitol Hill has been on domestically based ECMs, 

similar issues potentially could arise with regard to U.S.-based products that are 

listed for trading on FBOT. As a note, NYMEX has long been a champion of vigorous competition and of greater globalization of services and products. As a rapidly 

growing global market presence, we have offices in London and Singapore. 

We also note that there have been substantial advances in technology since the 

former era of closed end proprietary trading systems. New exchanges have emerged 

that operate on a solely electronic basis, and products have now been listed under 

the CFTC staff no-action process that are parallel (if not identical) to other products 

listed by existing U.S. exchanges that are subject to full CFTC regulation. 

NYMEX believes that it would be prudent from time to time for the Commission 

or Commission staff to conduct a thorough review of foreign markets operating in 

the U.S. under existing staff no-action letters. A primary goal should be a ‘‘regulatory gap’’ analysis that can identify significant regulatory differences in the foreign board of trade’s program that may raise significant market oversight and transparency concerns for U.S. regulators. The Commission should adopt a measured approach that will protect the regulatory and public policy objectives that have been 

tried and proven over the years, and that will further enhance the strong relationships developed with other international regulators. 

In our recent experience, ‘‘regulatory arbitrage’’ is not a hypothetical concern but 

is actually already underway for certain of our listed products. This process could 

actually harm markets because of the distortion of market efficiency occurring when 

customers make choices among the same or similar products on the basis of differences in regulatory treatment among providers rather than on the basis of intrinsic distinctions in the products themselves or in related services. In addition, regulatory arbitrage potentially diminishes the breadth and depth of the CFTC’s regulatory authority and, consequently, reduces much needed market transparency. 

MARKET ANALYSIS OF THE CFTC-REGULATED ENERGY EXCHANGE

NYMEX staff monitors the supply and demand fundamentals in the underlying 

cash market to ensure that NYMEX futures prices generally are consistent with ongoing, cash market price movements and that there are no price distortions. In a 

highly transparent, regulated and competitive market, prices are affected primarily 

by fundamental market forces. Currently, uncertainty in the global crude market regarding geopolitical issues, refinery shutdowns and increasing global usage, as well 

as devaluation of the U.S. Dollar, are clearly having an impact on the assessment 

of market fundamentals. One may view such factors as contributing an uncertainty 

or risk premium to the usual analysis of supply and demand data. Indeed, such factors now may fairly be viewed as part of the new fundamentals of these commodities. 

Before turning to analysis of specific market factors, we note an article that appeared last month in the Wall Street Journal (WSJ). The WSJ conducted a survey 

from May 2–6, 2008 of 53 economists. According to that survey, the majority of 

economists have concluded that ‘‘the global surge in food and energy prices is being 

driven primarily by fundamental market conditions, rather than an investment bubble.’’ ‘‘Bubble is not Big Factor in Inflation,’’ May 9, 2008, page A–2. Fifty-one percent of those respondents said that demand from India and China was the prime 

factor in soaring energy prices, and 41 percent said that demand was the chief contributor to rising food costs. Constraint in supply was cited second most often; 20 

percent blamed supply problems for higher food prices, and 15 percent for increasing 
77 

energy prices. One economist noted that it was a combination of demand and supply 

issues. 

The demand and supply fundamentals in the oil markets continue to be the driving factors in high oil prices. In a recent Energy Information Administration (EIA) 

Short-Term Energy Outlook, published on May 6, 2008, the demand and supply situation is summarized as follows: 

‘‘The oil supply system continues to operate at near capacity and remains vulnerable to both actual and perceived supply disruptions. The supply and demand balance for the remainder of the year is tighter than in last month’s Outlook. World 

oil markets are particularly tight during the first half of 2008, with year-over-year 

growth in world oil consumption outstripping growth in non-Organization of the Petroleum Exporting Countries (OPEC) production by over 1 million barrels per day. 

The combination of rising global demand, fairly normal seasonal inventory patterns, 

slow gains in non-OPEC supply, and low levels of available surplus production capacity is providing firm support for prices.’’ 

I wish to highlight this finding: growth in consumption has outstripped growth 

in non-OPEC production by over 1 million barrels per day. That is substantially 

tighter than a snug fit. Indeed, that may be said to be more akin to a chokehold. 

Conventional wisdom, borne out by substantial experience from over seas as well 

as here in North America, is that the short-run worldwide demand for petroleum 

products such as gasoline—especially retail demand—is highly inelastic: consumption does not decrease by much in the face of significant price rises. With projected 

demand exceeding supply by 1 million barrels per day, the only way a market with 

highly inelastic demand will equilibrate is through a substantive rise in price. The 

upward pressure has been there and, according to these projections, will continue 

to be there. 

DEMAND

At NYMEX, we understand the difficulty of assembling accurate and timely information on non-OECD petroleum consumption and the corresponding challenge in 

projecting non-OECD consumption. However, the latest EIA Short-Term Energy 

Outlook projections provide important insight into the current state of global demand. EIA projects that world oil demand will grow by 1.2 million barrels per day 

in 2008, up a healthy 1.4 percent, with China accounting for 35 percent of this demand growth. The EIA predicts China’s oil consumption will rise by 0.4 million barrels per day in 2008, up 5.6 percent from its record-high levels achieved in 2007. 

Almost all of the oil growth in 2008 is projected to come from the non-OECD countries, led by China, India, Middle Eastern countries, and Russia. U.S. oil demand 

is actually projected to decline slightly by 0.9 percent in 2008. 

As a practical consideration, the most accurate data on energy consumption applies to the United States, followed by the OECD. However, the strongest source of 

projected energy demand is from the far-less visible reaches of developing countries 

such as China, India and the Middle East. While we respect EIA’s efforts to project 

these numbers, we would caution anyone on oversimplifying the challenge of accurately assessing the demand in these countries, much less projecting it. The only 

thing we can be certain of is the relentless increase in petroleum demand pushed 

each year by the millions of people making the transition from less-developed circumstances to the beginnings of middle-class circumstances. 

Currently, China is putting more than 8 million new cars on the road each year. 

Does anyone doubt that the average driver is increasing his/her amount of driving 

each year? India, the Middle East and Russia are experiencing similar transitions. 

We believe the sheer uncertainty around consumption in these economies, in combination with the extremely tight world market conditions, is a strong influence on 

price volatility in the world oil market. In concert with the tight market conditions 

and inelastic demand for petroleum products we highlighted above, that volatility 

is oscillating around ever increasing prices. 

It is key to realize that the market tightness and the market’s struggle to discern 

actual demand in growing and developing economies are both fundamental influences in the world oil market. The most visible signs of these conditions are the 

transparent market mechanisms that reside in the world today, such as NYMEX’s 

futures and options markets, where prices are discovered and risk is managed. 

These mechanisms operate immediately. Compare that to fundamental market information, such as the consumption data referred to above. Consumption data, even 

for the most advanced economies that have been collecting these data and refining 

the process for collecting these data for decades (by the International Energy Agency), are provided on a preliminary basis 6 weeks after the fact. The data are then 
78 

further refined 4 weeks later and again four weeks after that; all of this for a 

monthly statistic, which at the time of the final revision is 14 weeks after the 

month. 

When you add onto that process the fact that the most dynamic component of consumption emanates not from those economies but from others where data collection 

is materially less advanced and the quality of the data much less certain, then the 

importance of immediate price discovery and transparency becomes even more evident. In a tightly supplied market where demand is highly inelastic, the only check 

on rising prices is competition and the price transparency and market liquidity that 

provide the support for it. Anything that reduces price transparency and liquidity 

under these market conditions will result in shifting price discovery to the collection 

of uncoordinated, opaque and, at times, esoteric mechanisms that comprise the cash 

market that provides limited transparency; a market not informed by the immediate 

discovery of value but by the relatively untimely release of fundamental information 

that is of uncertain quality and that provides limited transparency. 

SUPPLY

On the supply side, global production of crude oil was relatively flat in 2007, despite rising demand and rising prices. It is important to note that this rising demand did not provoke a significant supply response. The EIA Short-Term Energy 

Outlook points to the slow growth in non-OPEC oil supplies, along with the OPEC 

quota constraints, which have given ‘‘firm support for prices.’’ 

Further, the geopolitical risks provide added uncertainty to the oil supply outlook. 

Moreover, various state-owned oil companies have not been investing adequately in 

oil production. Venezuela nationalized assets owned by U.S. oil companies and has 

generally proved to be an unreliable partner. Mexico’s major oil field has been depleted, and Mexico will not allow United States companies to engage in deep water 

drilling. Colombian rebels have been blowing up pipelines with some frequency, and 

are being financially backed by the Venezuelan Government. Nigerian rebel forces 

routinely shut down oil fields—either through strikes, terrorism or sabotage. Russia 

has suffered a decline in production. Finally, U.S. production has declined dramatically in the past 20 years, and promising new drilling areas are generally not being 

opened up in this country due to environmental considerations. 

In addition, the price for crude in Euros has risen, but much more modestly. For 

instance, the last time the Dollar and Euro were exchanged at par was during December 2002 when the spot price of oil was about $27 per barrel. By the end of April 

2008, the price of oil in Dollars had risen 340 percent while the price in Euros had 

risen 180 percent, a substantial difference. Attached is a chart showing the price 

of oil in Dollars and Euros since 2000. So, while supply and demand fundamentals 

are the major determinants of price, at the margin, as the value of the dollar goes 

down, it may be providing some upward pressure on the price of oil in dollars so 

that it stays constant in value with the value of crude in Euros. 

In the face of these market factors, NYMEX provides a level of economic stability 

to the market by offering a reliable and well-regulated price discovery and risk management mechanism. Our highly transparent, open and competitive market continues to work according to design. 

ANALYSIS OF PARTICIPATION IN NYMEX’S CRUDE OIL FUTURES CONTRACT

Data analysis conducted by our Research Department indicates that the percentage of open interest in NYMEX Crude Oil futures held by non-commercial participants relative to commercial participants actually decreased over the last year even 

at the same time that prices were increasing. NYMEX staff reviewed the percentage 

of open interest in the NYMEX Crude Oil futures contract held by non-commercial 

longs and shorts relative to that held by commercial longs and shorts. The review 

period commenced at the beginning of 2006 and continues through to the present. 

During the last year, commercial longs and shorts consistently have comprised between 60 and 70 percent of all open interest. 

On the other hand, non-commercial longs and shorts consistently have been in the 

range of 25–30 percent of the open interest Thus, non-commercials holding long or 

buy positions have not been participating in the market to the extent that they 

could have a significant impact on market price. Moreover, as noted, the extent of 

non-commercial participation in the crude oil energy futures contract has actually 

declined since the levels observed last summer. It should also be noted that the percentage of non-commercial longs (as a percentage of all long or buy open positions) 

is generally within just a few percentage points of the percentage of non-commercial 

shorts (as a percentage of all short or sell positions). In other words, non-commercial 

participants are not providing disproportionate pressure on the long or buy side of 
79 

the crude oil futures market. Instead, non-commercials are relatively balanced between buy and sell open positions for NYMEX crude oil futures. In addition, ‘‘hedge 

funds’’ identified in analysis conducted by NYMEX staff only accounted for approximately 5 percent of the total volume in the NYMEX Light Sweet Crude Oil contract 

in 2007. 

MARGINS

In futures markets, margins function as financial performance bonds and are employed to manage financial risk and to ensure financial integrity. A futures margin 

deposit has the economic function of ensuring the smooth and efficient functioning 

of futures markets and the financial integrity of transactions cleared by a futures 

clearinghouse. Margin levels are routinely adjusted in response to market volatility. 

At NYMEX, margin generally is collected to cover a 99 percent probability of a likely 1-day price move, based on an analysis of historical and implied data. 

Some have suggested that the answer to higher crude oil prices is to impose substantially greater margins on energy futures markets regulated by the CFTC. We 

believe that this approach is misguided. As previously noted, in a highly transparent, regulated and competitive market, prices are affected primarily by fundamental market forces and imposing more onerous margin levels will not affect price 

levels. Currently, uncertainty in the global crude market regarding geopolitical 

issues, refinery shutdowns and increasing global usage, as well as devaluation of the 

U.S. Dollar, are now market fundamentals. Adjusting margin levels significantly upward will not change the underlying market fundamentals. Furthermore, given the 

reality of global competition in energy derivatives, increasing crude oil margins on 

futures markets regulated by the CFTC inevitably will force trading volume away 

from regulated and transparent U.S. exchanges into the unlit corners of unregulated 

venues and onto less regulated and more opaque overseas markets. 

Finally, Exchange staff has examined trends in margin levels at the Exchange 

going back to early 2000. The data clearly indicate that higher margin levels lead 

rather than follow increases in the price of crude oil futures products. In other 

words, when Exchange staff, in exercising their independent and neutral business 

judgment, determined to increase margin levels in response to changes in crude oil 

volatility levels, the higher margin levels were followed not by lower prices but instead by yet higher crude prices. 

CONCLUSION

At all times during periods of volatility in the market, NYMEX has been the 

source for transparent prices in the energy markets as well as the principal vehicle 

by which market participants achieve stability. Futures markets provide the means 

by which to achieve price certainty and lock-in prices. Our price reporting systems, 

which provide information to the world’s vendors, have worked flawlessly and without delay. The NYMEX marketplace continues to perform its responsibility to provide regulated forums that ensure open, competitive and transparent energy pricing. 

The market uncertainty and mayhem and further devastation to consumers that 

would unfold is clear if NYMEX were unable to perform its duty and prices were 

determined behind closed doors. Policies that would inevitably result in reducing 

transparency and liquidity would only succeed in conferring market power unto 

those who would benefit from price increases in the crude oil market, a market that 

is so prominently characterized by the inflexible demand of its end-users. Transparency and liquidity are the foundation that supports competition in the oil market. 

Over the last several years, NYMEX has worked closely with congressional leaders providing information and other assistance on legislative initiatives that would 

add greater transparency to unregulated derivatives venues. We believe that these 

measures reflect a consensus regarding the need for greater transparency and oversight for certain specified products now trading in unregulated over-the-counter 

electronic trading markets. 

We also hope that Congress does not misinterpret the lessons of the recent past 

by moving to impose new arbitrary and onerous burdens on futures exchanges, 

which are the most highly regulated and transparent segment of U.S. derivatives 

markets. Such steps would shift trading from regulated and transparent markets 

to unregulated and nontransparent markets and, thus, would constitute a significant step backward in transparency and market integrity. As markets continue to 

evolve, there is a regulatory and public interest rationale for increasing transparency in other venues in order to ensure that the CFTC has the data it needs 

to properly carry out its statutory duties. 
80 

I thank you for the opportunity to share the viewpoint of the New York Mercantile Exchange with you today. I will be happy to answer any questions that any 

members of the committees may have. 

Senator DURBIN. Mr. Vice is President and Chief Operating Officer of the Intercontinental Exchange. Thank you for joining us. 

STATEMENT OF CHARLES A. VICE, PRESIDENT AND CHIEF OPERATING OFFICER, INTERCONTINENTAL EXCHANGE 

Mr. VICE. Thank you, Chairman Durbin. 

ICE operates several global futures marketplaces and OTC derivatives markets across a variety of product classes, including agricultural and energy commodities, foreign exchange and equity indexes. Headquartered in Atlanta, ICE has large offices in New 

York and London and smaller presences in several other cities 

around the world. 

ICE owns and hosts four separate markets on its trading and 

clearing platforms, three regulated futures exchanges that were 

separately acquired over the last 7 years and one over-the-counter 

market. 

My brief remarks today will focus on our energy futures exchange, ICE Futures Europe, acquired by ICE in 2001. Founded in 

London 27 years ago as the International Petroleum Exchange, this 

market is a recognized investment exchange, or RIE, under the supervision of the U.K. Financial Services Authority. Though a subsidiary of ICE, ICE Futures Europe has its own majority independent board and separate regulatory and operational staff. This 

degree of separateness from the parent group is mandated by the 

FSA in order for the exchange to maintain its status as a recognized body and self-regulatory organization. 

As the home of the Brent crude and gas oil futures contracts, 

ICE Futures Europe has, since its inception, been the leading energy futures exchange in Europe. To complement its Brent crude 

contract, the exchange in 2006 added a future that settles on the 

next-to-last day settlement price as set somebody the NYMEX west 

Texas intermediate crude oil contract. Since the launch of electronic trading by NYMEX on CME’s trading system, most of the 

growth in trading of WTI crude oil has been on the NYMEX rather 

than the ICE market. Nevertheless, the ICE WTI contract is an important contract for ICE Futures Europe as it is used by commercial participants to hedge exposure to small differences in WTI and 

Brent prices. Notably, NYMEX similarly offers a cash-settled Brent 

crude oil future settling on ICE Futures Europe’s final settlement 

price for precisely the same reason. 

Today ICE has a relatively small 15 percent share of total WTI 

futures equivalent open interest while NYMEX retains the remaining 85 percent. 

ICE Futures Europe provides access to traders in the United 

States as a foreign board of trade operating under a CFTC no action letter issued in 1999 and amended several times. In granting 

a no action letter, the CFTC examines our trading status, our exchange’s status in our home jurisdiction, and our rules and enforcement. Since Congress created this framework, the CFTC has granted no action relief to at least 20 foreign boards of trade. 

Other countries have reciprocal policies in place upon which U.S. 

exchanges like the CME, NYMEX, and ICE Futures U.S. rely to 
81 

offer access to their markets in more than 50 jurisdictions around 

the world. Disregard for this mutual recognition system would impair the competitiveness of U.S. exchanges abroad and represent a 

major step back for global cooperation and information sharing. 

Consistent with this framework, ICE Futures Europe shares WTI 

trader positions with the CFTC through the agency’s memorandum 

of understanding with the FSA. We require daily large trader reporting for members of all contract positions in nearby months that 

are over a given threshold, which for WTI is 100 lots. Where such 

positions are not held for members on account, members are responsible for reporting the name of their customer who holds the 

position. This information is collected on a daily basis and shared 

with the FSA and for our WTI contract, the CFTC. 

ICE Futures Europe recently agreed to enhance this reporting to 

including WTI positions for all contract months and to notify the 

CFTC if a trader exceeds position accountability levels similar to 

those on U.S. exchanges. I would note as of today with the modified 

no action letter by the CFTC, this goes even further to actually 

place position limits and accountability limits that we administer 

on that WTI contract. 

Much like the CFTC, the FSA is a principles-based regulator. As 

such ICE Futures Europe must comply with core principles that 

are similar to those imposed on CFTC-regulated exchanges. As an 

REI, ICE Futures Europe maintains a robust market monitoring 

program and has rules to prohibit and penalize misconduct. Market 

surveillance staff monitor trading on a real-time basis and review 

activity to identify any unusual trading patterns that warrant further investigation. Our systems maintain a detailed audit trail of 

every order and trade. For all contracts, ICE Futures Europe has 

the authority to take disciplinary action against its members and 

to order a member to reduce the size of a position that it considers 

to be too large. This is principally of concern in physically delivered 

contracts. 

In concluding, ICE remains a strong proponent of open and competitive markets and of appropriate regulatory oversight of those 

markets. We recognize the severe impact of high crude oil prices 

on the U.S. economy and understand the congressional desire to 

leave no stone unturned. However, with a mere 15 percent share 

of global WTI open interest on a futures equivalent basis, we feel 

it is highly unlikely that the ICE Futures WTI market is the primary driver of WTI prices. 

Furthermore, we note that prices for virtually all agricultural 

and natural resource futures contracts, not to mention nonexchange traded commodities, have surged at rates similar to crude 

oil and in some cases even more sharply and with greater volatility. Since none of these other commodities are known to feature 

a foreign board of trade offering a futures settling on a U.S. contract, it seems highly unlikely that the small differences in United 

States and United Kingdom regulation account for much, if any, of 

the dramatic rise in the price of WTI crude oil. 

Despite our view that additional restrictions on ICE Futures Europe are unlikely to lower oil prices, we nonetheless look forward 

to working with Congress and the CFTC to ensure that their concerns with regard to our WTI contract are fully addressed while re-
82 

maining fully compliant with obligations to our home regulator, the 

FSA. 

Thank you. 

[The statement follows:] 

PREPARED STATEMENT OF CHARLES A. VICE

Chairman Durbin and Chairman Harkin, Ranking Members Chambliss and 

Brownback, I am Chuck Vice, President and Chief Operating Officer of the 

IntercontinentalExchange, Inc., or ICE. We very much appreciate the opportunity 

to appear before you today to give our views on energy markets. 

ICE operates a leading global marketplace in futures and OTC derivatives across 

a variety of product classes, including agricultural and energy commodities, foreign 

exchange, and equity indexes. Commercial hedgers use our products to manage risk 

and investors provide necessary liquidity to the markets. Headquartered in Atlanta, 

ICE has offices in New York, Chicago, Houston, London, Singapore, Winnipeg, and 

Calgary. 

ICE owns and hosts four separate markets on its electronic trading platform— 

three regulated futures exchange subsidiaries which were individually acquired over 

the last 7 years and one over the counter energy market, which operates under the 

Commodity Exchange Act (CEA) as an ‘‘exempt commercial market,’’ or ECM. ICE’s 

regulated futures exchanges include ICE Futures Europe, formerly known as the 

International Petroleum Exchange, which is a Recognized Investment Exchange, or 

RIE, headquartered in London and under the supervision of the U.K. Financial 

Services Authority (FSA); ICE Futures U.S., formerly known as The Board of Trade 

of the City of New York (NYBOT), which is a CFTC-regulated Designated Contract 

Market (DCM) headquartered in New York; and ICE Futures Canada, formerly 

known as the Winnipeg Commodity Exchange, which is regulated by the Manitoba 

Securities Commission and headquartered in Winnipeg, Manitoba. 

ICE has always been and continues to be a strong proponent of open and competitive markets in energy commodities and related derivatives, and of appropriate regulatory oversight of those markets. As an operator of global futures and OTC markets and as a publicly-held company, we strive to maintain the utmost confidence 

in the integrity of our markets and in the soundness of our business model. To that 

end, we have continuously worked with the CFTC, the FERC, and regulatory agencies abroad in order to ensure that they have access to all relevant information 

available to ICE regarding trading activity on our markets and we will continue to 

work with all relevant agencies in the future. 

ICE FUTURES EUROPE

I would like to take the opportunity today to discuss ICE’s U.K. exchange subsidiary, ICE Futures Europe. ICE Futures Europe, formerly known as the International Petroleum Exchange (IPE), was formed in 1981 and acquired by ICE in 

2001. Since its formation, ICE Futures Europe has operated as a self regulatory organization, and since 1986, has operated as an RIE under the supervision of the 

FSA. In this regard, ICE Futures Europe is the U.K. equivalent of what is known 

as a designated contract market, or DCM, in the United States, and is regulated 

by the equivalent of the Commodity Futures Trading Commission, or CFTC. 

As the home of the Brent Crude Futures contract and the Gas Oil Futures Contract, ICE Futures Europe is, and has been since its inception, the leading energy 

futures exchange in Europe. Though a subsidiary of ICE, ICE Futures Europe has 

its own majority independent board and separate regulatory and operational staff. 

This degree of separateness from the parent group is mandated by the FSA in order 

for the exchange to maintain its status as a recognized body and self regulatory organization. 

It is important to note that ICE Futures Europe, like the leading U.S. exchanges, 

is a global exchange. It is authorized to provide trading access in 51 jurisdictions 

around the world. ICE Futures Europe’s customer base includes the largest energy 

companies and investment banks in the world, and its flagship contract, the Brent 

Crude Oil futures contract, is a global benchmark for the price of crude oil. In addition to its energy contracts, ICE Futures Europe partners with and hosts the European Climate Exchange, the largest pan-European exchange for carbon emissions 

trading. 
83 

REGULATION OF ICE FUTURES EUROPE

ICE Futures Europe is a RIE, subject to the regulation of the FSA. Much like the 

CFTC, the FSA is a principles-based regulator. As such, ICE Futures Europe must 

comply with core principles, which are similar to those imposed on CFTC regulated 

designated contract markets. Further, as part of its regulatory structure FSA incorporates the European Union’s Markets in Financial Instruments Directive’s (MiFID) 

principles. MiFID serves as regulatory backbone for the 30 member states of the European Economic Area. The FSA has been recognized globally for its leadership in 

global derivatives market regulation. 

As a recognized investment exchange supervised by the FSA, ICE Futures Europe 

has a robust market-monitoring program. Like U.S.-based exchanges, ICE Futures 

Europe has detailed exchange rules to prohibit misconduct, with which members 

must comply, as well as enforcement authority that penalizes misconduct. 

ICE Futures Europe monitors trading on its markets on a real-time basis. Trained 

staff supervise our markets every hour of the day. They use a variety of marketsupervision tools and are responsible for ensuring that there is a ‘‘fair and orderly’’ 

market at all times. Our staff reviews trading activity each day to identify any unusual trading patterns that warrant further investigation. Our systems maintain a 

detailed audit trail of every order entered and every trade executed and allow compliance experts to drill into trading activity in great detail. 

We conduct large trader reporting which obliges members to report to the exchange on a daily basis contract positions over a given threshold that is currently 

100 lots for WTI. Where such positions are not held for a member’s own account, 

members are responsible for reporting the name of their customer who holds the position. This information is collected on a daily basis and shared with the FSA, and— 

for our WTI contract—with the CFTC. 

For all contracts ICE Futures Europe has the authority to order a member to reduce the size of a position that it considers to be too large. This is principally of 

concern in physically-delivered contracts where it appears that a member might 

have the ability to ‘squeeze’ the market by controlling a large amount of the contracts to be delivered. In practice it is rare for the exchange to need to mandate 

the reduction of positions as members wish to avoid disputes with the exchange and 

will take steps to reduce positions following enquiries from the exchange. 

ICE Futures Europe also has the authority to take disciplinary action against its 

own members. Where necessary it can also notify the FSA, the CFTC or other regulators where it would be more appropriate for them to take action. 

ICE FUTURES EUROPE’S ROLE IN THE GLOBAL OIL MARKETS

Since its inception, ICE Futures Europe has been a leader in the European crude 

oil markets. The exchange is the home of the Brent crude oil contract, which has 

traded in London for 25 years. Brent Crude Oil and West Texas Intermediate (WTI) 

crude oil grades (and to a lesser extent the OPEC Basket and the Dubai Crude Oil) 

set the global price of oil. The Brent Crude Oil contract is a light, sweet grade of 

oil and thus is highly correlated with the light, sweet WTI, which is slightly lighter. 

As one would expect in a global market, the two contracts usually settle within a 

few dollars of each other. This has been true since long before ICE purchased the 

IPE. 

ICE Futures Europe introduced its cash settled WTI futures contract in 2006 to 

compliment its Brent crude oil contract. The ICE Futures Europe WTI contract is 

cash settled at expiry against the penultimate trading day settlement price established by the NYMEX WTI physically delivered futures contract. Our contract had 

been launched by ICE several years prior as an OTC swap used primarily by dealers 

to hedge their customer business. At that time, the NYMEX WTI futures contract 

was available for trading only on the NYMEX floor. Volume in our OTC WTI swap 

grew as users found that an electronically traded instrument offered far superior 

price transparency and execution compared to the NYMEX floor. In response to 

these growing volumes, we converted our WTI OTC swap to a cash-settled WTI future at ICE Futures Europe to complement our existing Brent crude oil contract. 

NYMEX subsequently responded to market demands for electronic trading and has 

recaptured some of the open interest that initially came to ICE Futures Europe. Following NYMEX’ introduction of electronic trading, most of the growth in trading of 

WTI crude oil has been on the NYMEX, as demonstrated by the NYMEX’s rising 

market share and faster growth rate relative to the ICE WTI contract. Nevertheless, 

the ICE WTI contract is an important contract for ICE Futures Europe, as it is used 

by commercial market participants to create spread positions with the Brent Crude 

Oil Contract to hedge exposure to locational differences in the price of global crude 

oil. Notably, NYMEX offers a cash settled Brent crude oil future for precisely the 
84 

same reason. Today, ICE has a relatively small 15 percent share of total WTI futures equivalent open interest, while NYMEX retains the remaining 85 percent. 

Nevertheless, it is clearly important that the CFTC, along with other regulators, 

have visibility into the entire WTI market given its oversight responsibility with respect to NYMEX. Thus, after introducing the WTI contract in 2006, ICE Futures 

Europe began sharing information with the CFTC through the CFTC’s memorandum of understanding with the FSA. In the original information sharing agreement, ICE Futures Europe provides trader position data for the prompt 2 months 

in the WTI contract on a weekly basis. As the contract reaches expiration, this reporting frequency is increased to a daily basis each month. Recently, again working 

with the CFTC and FSA, ICE Futures Europe agreed to an enhanced information 

sharing arrangement. This arrangement allows the CFTC to receive daily position 

data, for all contract months at the client level. In addition, ICE Futures Europe 

has agreed to notify the CFTC if a trader exceeds position accountability levels similar to those on U.S. DCMs. To our knowledge, the level of information provided 

through the enhanced information sharing agreement represents a first of its kind 

in cross-border information sharing between regulators. 

CFTC’S MUTUAL RECOGNITION SYSTEM

ICE Futures Europe operates in the United States as a foreign board of trade. 

As background, in the Futures Trading Act of 1982, Congress exempted foreign 

boards of trade from having to register as a DCM. This became the cornerstone of 

the CFTC’s mutual recognition system. In 1996, the Commission issued a no-action 

letter allowing a German exchange, Eurex, to offer direct electronic access to U.S. 

customers. The basis of the Commission’s ruling was the recognition that Eurex’s 

regulator and regulatory scheme is comparable to that of the CFTC. In 1999, the 

Commission gave the International Petroleum Exchange no-action relief to enable 

U.S. based customers to access its electronic market. In 2006, pursuant the no-action letter granted to the IPE, ICE Futures Europe offered the WTI crude oil contract to U.S. based customers. 

Through the market evolutions of the past 25 years, including increased 

globalization, the no-action process has proven highly effective tool for providing information to the U.S. regulator on foreign markets. The CFTC examines several key 

factors prior to granting relief. These include: 

—the automated trading system (including the order-matching system, the audit 

trail, response time, reliability, security, and, of particular importance, adherence to the International Organization of Securities Commission principles for 

screen-based trading); the terms and conditions of contracts proposed to be listed; 

—settlement and clearing (including financial requirements and default procedures); the regulatory regime governing the foreign board of trade in its home 

jurisdiction; 

—the foreign board of trade’s status in its home jurisdiction and its rules and enforcement thereof (including market surveillance and trade practice surveillance); and 

—existing information sharing agreements with the foreign board of trade, and 

the foreign board of trade’s regulatory authority. 

Since adopting this policy, the CFTC has granted no-action relief to at least 20 

foreign boards of trade. In 2006, the CFTC re-examined the no-action process and 

after a hearing, determined that the no-action policy was an effective tool for both 

regulatory cooperation and competition. 

This mutual recognition system is now a backbone in the global regulatory network. As Benn Steil, Director of International Economics at the Council of Foreign 

Relations noted, ‘‘the U.S. activities of one beneficiary alone [of the no-action process], Eurex have had a tremendous effect in accelerating the move to more efficient 

electronic trading, in motivating exchanges to demutualize, . . . in reducing trading fees, and in stimulating new product development.’’ This is in turn has lead to 

futures transactions that are faster and less susceptible to manipulation or other 

bad acts than they were a decade ago, which has greatly reduced the price of risk 

management and transactional costs to participants in the commodity markets. 

It is important to recognize that there is no single agency today that can police 

all global markets, thus we must rely on foreign regulators if the United States is 

to remain part of the international marketplace. Other countries have similar policies in place, upon which U.S. exchanges rely. The Chicago Mercantile Exchange, 

NYMEX, and ICE Futures U.S. all rely on mutual recognition by foreign regulators 

to offer global access in those jurisdictions. Failure of the mutual recognition system 

would greatly impair the competitiveness of U.S. exchanges abroad and represent 
85 

a major step back for U.S. markets. It is also important to note that the CFTC only 

can get information on foreign traders trading foreign contracts through information 

sharing agreements with foreign regulators. 

THE PRICE OF OIL

ICE recognizes that the rising price of oil has many adverse effects on the U.S. 

economy and is painful for U.S. citizens. It is tempting to place blame for higher 

prices on the futures markets, but futures markets serve as the messenger not the 

fundamental driver of prices. The prices for almost all commodities, including 

wheat, corn, soybeans, precious and base metals have surged at the rates similar 

to crude oil and in some cases even more sharply and with greater volatility. It 

should be noted that in virtually all of these other commodity products, there are 

no foreign boards of trade offering a contract settling on a U.S. exchange contract 

to blame. It is also important to note that the price of many non-exchange traded 

commodities have increased, in some cases even more dramatically, than those traded on an exchange indicating that properly regulated markets, whether domestic or 

foreign, should not be the scapegoat for rising prices. 

The crude oil market, more than most other commodity markets, is global. The 

United States imports approximately 58 percent of its crude oil from outside the 

United States. Because crude oil is a global market, regulating the trading of crude 

oil futures requires international regulatory cooperation, and it is misguided to assume that any one regulator can obtain the entire market picture without the cooperation of regulators in other countries trading other grades of crude oil. 

In addition, attempts to artificially influence market prices through government 

action have historically failed, often with unintended consequences that have been 

damaging and difficult to repair. One such attempt suggests altering the margining 

requirements for futures contracts to approximate margining in the securities markets. This concept is misguided due to the economic and contractual differences between the purchase of a security and of a futures contract. When a stock is purchased, margin signifies a partial payment on an ownership stake in a company 

with the balance loaned by the customer’s broker. It represents a financing arrangement between the broker and the customer. The stock is immediately delivered to 

the buyer and the transaction is complete from an exchange and clearinghouse perspective. In contrast, margining in futures markets, far from representing a financing arrangement, is the means by which the clearinghouse ensures that there are 

no losses suffered if and when a member defaults. As a result, futures margin rates 

are set based on complex mathematical models of contract price history and represent the largest 1 or 2 day price move at an extremely high confidence level. When 

a futures contract is traded, the buyer and seller take on obligations to take and 

make, respectively, delivery of the commodity at some later date. Margin represents 

a performance bond to ensure ultimate delivery or payment. Margins on futures contracts are central to the counterparty risk management systems for clearinghouses. 

Legislative interference with a basic market mechanism such as margin levels could 

lead to a number of unintended consequences. Dramatically higher margin rates for 

futures trading in the United States could shift significant exchange-traded volume 

back into the OTC market where firms would be exposed to the same counterparty 

risks roiling credit default swap and other markets today. Significantly higher margin rates would likely damage liquidity which would widen the bid-offer spread and 

increase execution costs for all. Furthermore, failure to adjust margins on a global 

basis could simply drive trading to overseas markets. Finally, and most tellingly, 

margin rates for ICE Futures Europe’s crude oil contracts have already been raised 

300 percent in the last year due to increased volatility, with no real effect on either 

the composition of the market or the price of oil. 

Attempts to drive ‘‘speculation’’ from the market should also be avoided. It is important to note that speculation does not equal manipulation. Exchanges around the 

world are required to prevent, detect, and punish manipulation or attempts to manipulate markets. Speculation has always been an essential component of all markets whether prices are falling or rising. There is a common misconception that 

speculators only bet on prices rising—this assumption has no basis in fact, and often 

speculators have a net short bias. Ultimately, futures markets involve contracts in 

which one side of the market is attempting to predict where the price of a commodity will go in the future, and the other side of the market is attempting to sell 

or hedge its price risk with respect what the price of a commodity will be in the 

future. Importantly, neither of these market participants knows what the future will 

bring. Speculators are simply participants with a view about the future price of a 

commodity who are willing to put capital to work in assuming the price risk transferred from commercial participants. Speculators are a necessary component of the 
86 

futures markets, providing liquidity and important pricing information to markets. 

Without speculators, futures markets would be established solely by commercial 

participants, in essence, pricing by cartel. 

SOLUTIONS

Again, the utility function of futures markets is to send important price signals 

about the future price of commodities as determined by market forces. That said, 

Congress must insure that markets remain open, transparent and competitive. 

Global market participants must have regulatory certainty in order to transact confidently in the U.S. markets or they will seek other solutions. We agree with many 

of you here that the CFTC is under-funded and that Congress should increase the 

CFTC’s budget. ICE strongly supports the budget increase as outlined in Chairman 

Durbin’s bill. Second, the crude oil market is a global market, with many grades 

of crude substitutable for one another under traded contracts. Regulation of such 

a market requires global regulatory cooperation, and ICE strongly supports a study 

of the international regulation of energy markets. Finally, ICE supports the cooperative efforts that presently exist between the CFTC, the FSA, and other regulators 

around the world, and urges Congress not to disturb these relationships through 

over-reaching legislation. It is impossible to regulate a global market from a single 

jurisdiction, and no country can legitimately contend that it has the sole right to 

be the jurisdiction in which vibrant commodity markets exist to serve the needs of 

both domestic and foreign market participants. Over-reaching legislation could also 

trigger regulatory retaliation from other jurisdictions, impacting the ability of domestic exchanges to operate in other jurisdictions. 

CONCLUSION

ICE has always been and continues to be a strong proponent of open and competitive markets in energy commodities and derivatives, and of appropriate regulatory 

oversight of those markets. As an operator of regulated futures exchanges in the 

United States, the U.K., and Canada, and as a publicly held company, ICE recognizes the importance of upholding the utmost confidence in its markets. However, 

with a mere 15 percent market share of global WTI, on a futures equivalent basis, 

we feel it is highly unlikely that the ICE Futures Europe’s WTI market is the primary driver of WTI prices. Therefore, any expectation that WTI crude oil prices will 

fall as a result of increased restrictions on this relatively small portion of that market are likely to go unmet. Nonetheless, we recognize the severe impact of high 

crude oil prices on the U.S. economy and understand the congressional desire to 

‘‘leave no stone unturned.’’ As a result, we look forward to working with Congress 

and the CFTC to ensure that their concerns with regard to the ICE Futures Europe 

WTI contract are fully addressed while remaining fully compliant with obligations 

to the primary regulator, the FSA, and U.K. law. 

Mr. Chairman, thank you for the opportunity to share our views and facts about 

our market operation with you. I would be happy to answer any questions you may 

have. 

Senator DURBIN. Thanks, Mr. Vice. 

And let me say to the panel, thank you for your patience in waiting and I am sorry that we are running short on time here. I see 

Senator Lugar is leaving, so I will just have maybe one or two 

questions. 

Mr. Vice, this announcement today by the Commodity Futures 

Trading Commission about this new no action letter, which apparently has become at least a partial action letter—did you negotiate 

with the CFTC leading up to the announcement of this new regulation? 

Mr. VICE. We did not negotiate with them. They made us aware 

of what they were planning because we do have obligations to our 

home regulator, the FSA. And pursuant to the information sharing 

and cooperation agreement with the FSA, as you might imagine, 

we and they have an interest in making sure that both regulators 

get what they need out of this. 
87 

Senator DURBIN. And is it your understanding that as a result 

of this, that you will be subject to the same type of disclosure, 

transparency, and regulation as those who trade on NYMEX today? 

Mr. VICE. We are essentially subject to that already via the FSA, 

and beyond that, we do have—— 

Senator DURBIN. But that is the British authority. This is for the 

American authority. 

Mr. VICE. Right. And via the information-sharing agreement, 

many of the core principles with regard to information the CFTC 

collects from NYMEX and U.S. exchanges, we are providing today 

via the FSA. We recently agreed to increase that reporting and extend it to all contract months and then, to answer your question, 

with the memorandum of understanding today, we will actually be 

applying and enforcing position limits, accountability limits on the 

WTI contracts. 

Senator DURBIN. A level playing field. 

Mr. VICE. Yes. 

Senator DURBIN. Mr. Newsome, I do not know if this question 

goes to you or Mr. Duffy. If there is a Dubai exchange, will it be 

subject to the same standards of disclosure, transparency, and accountability to the CFTC? 

Dr. NEWSOME. Two comments, Mr. Chairman. One there are currently two Dubai exchanges in existence, one of which NYMEX is 

a primary partner in. They do not list the WTI contract. If at some 

point in the future they do, they will absolutely provide the position limits and same large trader reporting that is subject to U.S.- 

regulated exchanges. 

The other Dubai entity we are not a component of. They do not 

have a no action letter from the CFTC. They do list a WTI contract 

and are not providing anything to the CFTC. 

Senator DURBIN. So this Dubai exchange that NYMEX and CME 

are interested in does not list WTI. 

Dr. NEWSOME. Correct. 

Senator DURBIN. A separate Dubai exchange does. 

Dr. NEWSOME. Correct. 

Senator DURBIN. I want to make sure it is clear. You do not 

know whether or not they will be covered by this CFTC standard? 

Dr. NEWSOME. To my knowledge, they have not applied for a no 

action letter from the CFTC to date and therefore are not supplying any of the information that we supply or that ICE intends 

to supply. 

Senator DURBIN. Mr. Cooper, the Enron loophole. There has been 

suggestion here that the new farm bill is going to close the loophole. Is that your impression? 

Dr. COOPER. It closes it to a significant extent, but the key questions that Senator Klobuchar asked I think are really important. 

Prior to 2000, all these instruments were regulated, and the question is whether or not the presumption should be for regulation of 

these instruments and then let the CFTC make exceptions so that 

the trader bears the burden of proof, which we think is the right 

way. The way it is structured now the presumption is against regulation and then the CFTC bears the burden of proving it needs regulation. 

Senator DURBIN. Does the farm bill change that? 
88 

Dr. COOPER. No, the farm bill does not change the presumption. 

And so you have now got this problem of having the CFTC to go 

through all of these contracts traded on all of these exchanges and 

prove that it needs to regulate. That is backwards from our point 

of view. 

Senator DURBIN. Mr. Duffy, the whole concept of more disclosure 

and transparency and accountability to the CFTC—is that consistent with your vision? I know that you have a transaction with 

NYMEX that has been approved now. Is that consistent with your 

vision of how these markets should work? 

Mr. DUFFY. Yes, and we are very encouraged by Chairman 

Lukken’s comments and announcements from this morning as it relates to energy and metals. We have been on the record for many 

years now, Senator, stating that we believe that the energy and 

other exempt commercial markets should be under the same regulation as what the CME Group provides today. So, yes, we are very 

much in agreement. 

Senator DURBIN. Mr. May, I met with your board recently, and 

it was a gloomy meeting. I am glad your testimony today is part 

of the record. I am sorry that you had to give it. 

As you listen to these overall hearings and the speculation about 

speculation, you are a businessman. You do not come to this as 

some bleeding heart liberal. How do you view it? 

Mr. MAY. Mr. Chairman, I think that a number of suggestions 

have been put on the table this morning. Some of them apparently 

have been addressed by recent activities of the CFTC. But there 

are some very clear loopholes that need to be addressed. There are 

some real issues with who is permitted to invest in these commodities in terms of pension funds. We really need to make sure that 

there is transparency and fairness in the market. I think this committee is interested in assuring that is the case. My absolute bottom line is that this needs to happen sooner rather than later. 

Senator DURBIN. We met maybe 2 or 3 weeks ago in your office 

here in Washington. I will have to tell you. I do not know if this 

CFTC announcement was meant to coincide with this hearing. If 

it did, then maybe this hearing was worth the effort that we put 

into it. 

But we are not going to stop. There is more that needs to be done 

in terms of this disclosure and transparency. I cannot answer the 

question about whether there is market manipulation, and honestly Mr. Lukken has a lot of markets he cannot even see at this 

point. He has no authority to look into, but he believes he will have 

more authority. And we are going to hold him to that standard. 

ADDITIONAL COMMITTEE QUESTIONS

I can make this promise to you as chairman of this appropriations subcommittee, Mr. Lukken is going to have more soldiers to 

march into battle. There will be more people involved in market 

oversight and surveillance. We are going to give him additional resources for computer technology. There will be more cops on the 

beat, but as Senator Klobuchar alluded to in her questioning, the 

person at the top has to decide to use those tools to make sure that 

people know that we are not going to brook this kind speculation 

that might go overboard. 
89 

[The following questions were not asked at the hearing, but were 

submitted to the witnesses for response subsequent to the hearing:] 

QUESTIONS SUBMITTED TO WALTER LUKKEN

QUESTION SUBMITTED BY SENATOR CHARLES E. GRASSLEY

Question. In 2007, the CFTC issued a ‘‘no-action’’ letter thereby declining to regulate the trading of the West Texas Intermediate (WTI) oil contracts on the Dubai 

Exchange. There appears to be a significant amount of trading in WTI contracts 

both on the Dubai Exchange and the Intercontinental Exchange in London. Given 

that, do you think CTFC has a responsibility to regulate WTI trading in these offshore exchanges? If not, why? 

Answer. The CFTC should assert jurisdiction over all contracts designated in U.S. 

commodities and traded within the United States. The Dubai exchange fits that description and should be regulated. 

QUESTIONS SUBMITTED BY SENATOR BEN NELSON

Question. The term ‘‘speculator’’ has certainly become a pejorative of late and I 

wanted to further explore the concepts of speculation and manipulation. I understand that some speculation in commodities can be a good thing for the market, providing liquidity and even providing some checks on prices in a functioning market. 

I also understand that market ‘‘speculation’’ isn’t the same as market ‘‘manipulation.’’ However, what we are seeing now with index speculation in such large sums 

entering the market in recent years and the steep rise in prices during the same 

time period raises serious concerns about this new form of speculation and what it 

means to the markets and those that rely upon them, as well as consumers and the 

economy as a whole. So my questions are these: 

Where do you draw the line between speculation and manipulation—or the line 

between good speculation and bad speculation? 

Answer. Speculation is trading to profit from anticipated price changes. Manipulation is intentionally acting to cause artificial price changes and to profit from those 

changes. Speculation in the futures markets aids the markets in their proper hedging and price discovery functions. If any type of trading, including speculation, distorts prices on, and disrupts the proper functioning of, futures markets, that is detrimental to efficient functioning of the markets. 

Question. At what point is there too much speculation, or when does speculation 

become too out-of-balance or too removed from market fundamentals to be good for 

the market, inflating prices beyond where the fundamentals would put them? For 

example, if hundreds of billions of dollars have entered the market through index 

funds or other similar vehicles all falling under the category of ‘‘speculation,’’ and 

the bulk of it is taking a long position in the market, doesn’t that have a dramatic 

affect on the market by driving up prices and possibly inflating them beyond fundamental levels? 

Answer. Section 4a of the Commodity Exchange Act (‘‘CEA’’) states that 

‘‘[e]xcessive speculation in any commodity under contracts of sale of such commodity 

for future delivery made on or subject to the rules of contract markets or derivatives 

transaction execution facilities causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary 

burden on interstate commerce . . .’’ Accordingly, speculation is excessive when it 

causes sudden or unreasonable fluctuations or unwarranted changes in prices. In accord with the directives in Section 4a, as well as the statutory Core Principle with 

respect to position limits for futures exchanges in Section 5(d)(5) of the CEA, the 

Commodity Futures Trading Commission (‘‘Commission’’ or ‘‘CFTC’’) has set speculative limits on the positions of individual traders for many agricultural futures contracts and requires the exchanges to set position limits or accountability levels for 

other futures contracts. 

Today, however, the concern is not that some individual traders are exceeding 

speculative limits, rather it’s whether the total level or balance of speculation is actually causing price increases above that warranted by market fundamentals. Ultimately, the function of the market is to process various opinions to form a price at 

which a balance is reached in terms of those participants that believe prices will 

rise and those that believe they will fall. In a free market, if too many participants 

with a particular view of market fundamentals enter the market and push prices 

in a certain direction, participants with contrary views would be expected to enter 
90 

the market on the opposite side to move prices back to where they believe they 

should be. 

To better understand the dynamics of trading activity in the current markets, the 

Commission is engaged in a study of the futures markets. The Commission is looking at the effect of the influx of index funds into the futures markets, either directly 

or indirectly as the result of hedging by swaps dealers, as part of the study. The 

results of this study are expected on or before September 15, 2008. 

In addition, in order to better understand the effects of speculative trading on 

commodity prices, the Commission has formed an interagency task force, enlisting 

the assistance of staff from the Departments of Agriculture, Energy and Treasury, 

the Board of Governors of the Federal Reserve, Federal Trade Commission, and the 

Securities and Exchange Commission. The Commission has also consulted a number 

of academic researchers. The Interagency Task Force released an interim report on 

the crude oil markets on July 22, 2008 and continues its work. 

Question. What exactly is CFTC’s definition of market manipulation? 

Answer. Section 9(a)(2) of the CEA provides that it is unlawful for ‘‘[a]ny person 

to manipulate or attempt to manipulate the price of any commodity in interstate 

commerce, or for future delivery on or subject to the rules of any registered entity, 

or to corner or attempt to corner any such commodity . . .’’ Sections 6(c) and 6(d) 

of the CEA contain similar language. The CEA does not include a definition of manipulation, but courts and the Commission have developed case law on the subject. 

Sustaining a charge of manipulation requires establishing four elements by a preponderance of the evidence: (1) the party had the ability to influence market prices; 

(2) the party specifically intended to influence market prices; (3) an artificial price 

existed; and (4) the party caused the artificial price. In re Cox, [1986–1987 Transfer 

Binder] Comm. Fut. L. Rep. (CCH) ¶ 23,786 at 34,061 (CFTC July 15, 1987). To 

prove the intent element of manipulation or attempted manipulation, it must be 

shown that the party ‘‘acted (or failed to act) with the purpose or conscious object 

of causing or effecting a price or price trend in the market that did not reflect the 

legitimate forces of supply and demand.’’ In re Indiana Farm Bureau Cooperative 

Association, [1982–1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,796 at 

27,281 (CFTC Dec. 17, 1982). 

Question. Does this technical definition of manipulation miss fail to address the 

realities of what is going on in the markets now? There may well be serious damage 

to the markets, consumers and the economy from large scale index speculation even 

though it does not fit the traditional definition of market manipulation because it 

lacks certain fundamental elements—not the least of which is an intent to manipulate. 

Answer. As indicated above, intent has been held to be a key element of a manipulation violation under the CEA. Nevertheless, in addition to the Commission’s role 

in policing the markets to ensure they are free from manipulators, the Commission 

also conducts active surveillance of the markets and their participants. The Commission’s surveillance program is intended to detect and deter manipulation and 

market abuses, but it goes beyond preventing manipulation to preventing disruptions of the markets and other problems where the markets are not functioning 

properly. In connection with its ongoing surveillance efforts, the Commission is 

studying index trading and is prepared to act, if necessary. 

Question. Does CFTC have the authority and capability to address the larger, systemic problems from this form of index speculation that may be driving price inflation across the board as opposed to the authority and capability for going after individuals who purposefully trying to manipulate prices? If so, what is CFTC doing to 

address these problems? If not, what authority does CFTC need? 

Answer. The Commission has both the authority to police the markets for manipulation and the required tools to find and to manage ‘‘excessive speculation’’ as described in Section 4a of the CEA. The Commission’s strong enforcement program is 

constantly obtaining and reviewing data and materials to make sure manipulators 

are brought to justice. Additionally, the Commission’s surveillance program regularly reviews all reported data. 

Specifically, the Commission has been actively gathering information about the 

role of index funds in the markets. In late May, the CFTC utilized its special call 

authorities to gather more detailed data from swap dealers on the amount of offexchange index trading in the markets and to examine whether index traders are 

properly classified for regulatory and reporting purposes. Information requests have 

been issued, and the CFTC has begun receiving the first round of more detailed information on index funds and other transactions that are being conducted through 

swap dealers. With this data, the CFTC will provide findings to Congress as soon 

as practicable—and no later than September 15th—regarding the scope of com-
91 

modity index trading in the futures markets and recommendations for improved 

practices and controls, should the Commission conclude that they are required. 

Question. If this new form of index speculation is not a kind of market manipulation, how does CFTC classify it and does CFTC nevertheless consider it a significantly problematic aspect of the market and a component of current price run-ups 

such that it may need to be addressed? 

Answer. At this time, nothing about the increased speculation in the commodities 

futures markets indicates that it has the same effect as a market manipulation. Our 

economic analysis to date indicates that supply and demand factors are the best explanation for the recent increase in crude oil prices, for example. However, the 

CFTC is aware of the concerns about the influx of index trading into the futures 

markets and is also aware of the current high prices of many commodities. As indicated above, the Commission is currently seeking additional data concerning speculative trading and is gathering more detailed data from swap dealers. After the data 

is received, the CFTC will review the data and determine if changes are necessary 

to the current way information is processed and reported. 

Question. Why are index speculators such as Goldman Sachs classified as commercial traders when other speculators are classified as non-commercial? What impact has that had on the markets and prices as compared to benefits from traditional forms of speculation? 

Answer. Some index traders do, in fact, hold positions directly in the futures markets and those positions are considered speculative positions and are subject to existing position limits and position accountability levels. Most index traders, however, do not participate directly in the futures markets. Rather, they participate indirectly as customers of swaps dealers. A swaps dealer, usually a bank, sells a contract to one of its clients, perhaps a pension fund, such that the swaps dealer will 

pay its client an investment return amount based on an index of several commodity 

futures prices. The swaps dealer then has a commercial risk that the prices of those 

commodities in the index will increase. Therefore, the swaps dealer now has a commodity price exposure to hedge, and swaps dealers often come to the futures markets to do that. 

Since 1991, the Commission has viewed the positions of swaps dealers in the futures markets taken to offset their commodity price risks to their customers as bona 

fide hedging positions. This is consistent with congressional directives concerning 

modernization of both the criteria for hedge exemptions and the process for considering exemption requests. Specifically, during the CFTC reauthorization process in 

1986, Congress directed the Commission to apply modern portfolio-based risk management concepts to its hedge exemption process, which allowed greater flexibility 

to the exemption and enabled financial institutions to have greater access to the 

regulated exchange-traded derivatives markets. See House Committee on Agriculture, Futures Trading Act of 1986, H.R. Rep. No. 624, 99th Cong., 2d Sess. 44– 

46 (1986) (‘‘strongly urg[ing] the [CFTC] to undertake a review of its hedging 

definition... and to consider giving certain concepts, uses, and strategies ‘nonspeculative’ treatment’’ including risk management by portfolio managers, and other 

trading strategies involving the use of financial futures including, but not limited 

to, asset allocation); Senate Committee on Agriculture, Nutrition and Forestry, Futures Trading Act of 1986, S. Rep. No. 291, 99th Cong., 2d Sess. at 21–22 (1986) 

(CFTC must consider ‘‘whether the concept of prudent risk management [should] be 

incorporated in the general definition of hedging as an alternative to this risk reduction standard’’). 

Question. In your testimony you state that trading by index investors is not like 

‘‘traditional speculative trading by hedge funds and other managed money.’’ You go 

on to state that most of ‘‘this type of investment comes through major Wall Street 

swap dealers that sell their clients broad exposure to the commodity markets 

through an over-the-counter commodity index contract.’’ Can you please explain this 

further? In particular, if there are hundreds of billions of dollars affecting the commodities markets through ‘‘swaps’’ and ‘‘over-the-counter’’ trades, how does this not 

raise serious concerns for the commercials utilizing the markets for hedging purposes and to consumers purchasing end products? If index investor trading is not 

like traditional speculative trading then doesn’t that require CFTC to figure out 

what it is, what it is doing to the markets and how best to deal with it? What has 

CFTC done in that regard? 

Answer. As explained above, many of the index traders are offering their clients 

broad exposure to commodities markets as a way to diversify the risk of their portfolio against other asset classes such as equities or real estate. The Commission has 

been actively gathering information about the role of index funds in the markets. 

In late May, the CFTC utilized its special call authorities to gather more detailed 

data from swaps dealers on the amount of off-exchange index trading in the markets 
92 

and to examine whether index traders are properly classified for regulatory and reporting purposes. Information requests have been issued, and the CFTC has begun 

receiving the first round of more detailed information on index funds and other 

transactions that are being conducted through swaps dealers. With this data, the 

CFTC will provide findings to Congress as soon as practicable—and no later than 

September 15th—regarding the scope of commodity index trading in the futures 

markets and recommendations for improved practices and controls, should the Commission conclude that they are required. 

Question. What is the purpose to the commodities market of ‘‘swaps’’ and ‘‘overthe-counter’’ trades between large entities or investment vehicles that are not hedging and will never have any physical connection to the commodities themselves? 

How does this improve liquidity or the functioning of the commodities markets? 

Answer. The commodity futures markets provide a means of hedging risks taken 

on by swaps dealers in the course of their swaps business. Some of the business engaged in by swaps dealers is with large commercial participants who seek to use 

individually tailored swaps to more precisely hedge their market exposures or to 

transact in quantities that might be disruptive if executed directly on a futures market. For example, some airlines use swaps contracts rather than futures contracts 

to hedge their jet fuel purchases because a jet fuel futures contract does not exist. 

Other users of swaps contracts enter into them for speculative reasons. Like all 

speculators, entities that are not hedging a physical position or risk, are doing so 

for investment and profit purposes. All speculators provide market liquidity for 

hedgers using the same markets. Therefore, the buying of futures contracts by 

swaps dealers to hedge over-the-counter positions or the buying by a speculator in 

the market, provides short hedgers (like agricultural producers) with increased liquidity for trade execution. 

Question. Commodity price increases in the past year have been extraordinary 

and some fear that a bubble has developed in the Commodities markets. Many point 

to the arrival of large numbers of new investors and a myriad of new investment 

vehicles, many of them involving derivative instruments that are traded outside the 

confines of regulated markets as significant contributors to these increases. I have 

read competing estimates for the amount of money coming into the commodities 

markets through these new investors and vehicles and welcome your estimate as 

well. However, there seems to be strong agreement that a lot of money has moved 

into these markets in the last few years. I have been hearing from many farmers 

and grain elevators regarding their concerns and their inability to utilize the futures 

markets for hedging and risk management purposes and, of course, I have heard 

from many drivers about the price of gas. I have also heard concerns about the cash 

market being below the futures markets, which some believe signal something other 

than market fundamentals behind the price increases. 

It is my understanding that the CFTC has not found anything inappropriate in 

this situation to date, is that a correct understanding? 

Answer. The CFTC has not found that the large increase in commodity prices over 

the past year is the result of systematic manipulation or other violations of the 

Commodity Exchange Act. That is not to say that violations have not occurred or 

been investigated. In fact, the Commission just recently announced the filing of a 

complaint against Optiver for alleged manipulation of the heating oil, crude oil and 

gasoline futures contracts traded on the NYMEX. This is in addition to the numerous manipulation, attempted manipulation and false reporting cases the Commission has brought in recent years and I have no doubt there will be more. The Commission has a strong enforcement program with a proven track record. In energy 

alone, the agency’s Division of Enforcement has brought 42 cases against 72 respondents/defendants and assessed fines of more than $400 million since 2002. 

In addition to our enforcement effort, our surveillance efforts are focused on detecting and deterring potential manipulation or abusive trading practices. The current situation of high prices and limited deliverable supplies makes our surveillance 

efforts all the more important. The Commission also recently announced several agriculture and energy initiatives targeted to ensure that the futures markets are operating efficiently. 

Question. What specifically is CFTC looking for under this broad concept of ‘‘inappropriate’’ conduct, actions or market behavior; does it extend beyond simple market 

manipulation to other actions that can damage the markets, market participants 

and the national economy such as inflated prices or a bubble? If not, is CFTC able 

and prepared to expand its oversight and regulatory actions to address these broader issues? 

Answer. Broadly speaking, the Commission seeks to protect market users and the 

public from fraud, manipulation, and abusive trading practices and to foster open, 

competitive, and financially sound markets. The Commission seeks to protect the 
93 

price discovery and hedging functions of the futures markets. If the markets are not 

performing their price discovery function, then behavior that causes that failure is 

inappropriate. The Commission is studying whether the increased level of futures 

market activity is impacting the price discovery function in the markets. The Commission’s mission is not to prevent traders from speculating or to administer prices, 

but it is to prevent traders from disrupting markets. 

Question. In other words, what is your answer to the proverbial ‘‘missing the forest for the trees’’ problem—is it possible that CFTC is missing anything in its analysis? 

Answer. While the CFTC’s focus has been on deterring, detecting and penalizing 

those who violate the Commodity Exchange Act, new entrants in the markets like 

index funds require a broader view to determine whether there is a possible negative effect. Accordingly, the Commission has spent considerable time and resources 

looking at broad issues, including: the roles of new market entrants like hedge and 

index funds; structural changes and convergence in agricultural markets; 

globalization and foreign boards of trade; technology; and financial integrity. The 

Commission is working on these matters and, as I stated above, has enlisted the 

assistance of others as well. In addition to working with other Federal agencies, the 

CFTC has three advisory committees in the areas of energy, agriculture and global 

markets and meets with them regularly. 

Question. In your testimony you discuss the Commission’s lack of adequate resources and staff for the additional authority granted by the Farm Bill and for the 

unprecedented nature of today’s markets. But this influx of index money and speculation didn’t just begin in 2008, or 2007 for that matter. 

How far behind is CFTC and why has it been allowed to fall behind? 

Answer. For the fiscal year, 2009 the CFTC estimates that a budget of 

$157,000,000, supporting approximately 596 FTE, would provide the appropriate 

level of resources needed to perform our mission. 

The $157,000,000 is based on the Commission’s fiscal year 2009 OMB budget estimate (of $151,000,000 and 567 FTEs) which was formulated last summer and submitted to the OMB and the Congress in September 2007. Since that submission, 

Congress enacted the Farm Bill in May 2008, which conferred additional responsibilities to the Commission. Shortly after the bill became law, the Commission informed the OMB and the Congress that implementation of the new authorities in 

the Bill would require an estimated additional $6,000,000 and 29 FTEs for a total 

of $157,000,000 and 596 FTEs. 

Every September, the Commission submits an OMB budget estimate to the OMB 

and the Congress. The OMB budget estimate is a detailed justification of the dollar 

and staff resources required for the budget year. The level of resources requested 

by the CFTC has generally been higher than the level provided for in the President’s budget and the level eventually appropriated by the Congress. Congressional 

appropriations are the Commission’s sole source of funding. 

Question. When did this shortfall in funding and staff first become evident and 

what was done about it then? 

Answer. The Commission has been under-staffed and under-funded for many 

years. The table below summarizes, for the twelve-year period 1997–2007, the 

CFTC’s estimate of budgetary resources required as submitted to the OMB and the 

Congress. The table also includes the amount requested by the OMB and ultimately 

funded by the Congress. 

[Dollars in millions] 

Fiscal Year 

CFTC Budget Estimate to OMB The President’s Budget Final Appropriation 

Amount FTE Amount FTE Amount FTE 

1997 ........................................... $63.4 640 $56.5 600 $55.1 553 

1998 ........................................... 63.8 640 60.1 600 58.1 560 

1999 ........................................... 64.6 621 63.4 600 61.3 567 

2000 ........................................... 67.7 621 67.7 621 62.8 567 

2001 ........................................... 74.4 650 72.0 621 68.1 546 

2002 ........................................... 81.0 600 70.4 510 1 87.5 509 

2003 ........................................... 92.5 574 82.8 537 85.4 521 

2004 ........................................... 110.5 574 88.4 489 89.9 517 

2005 ........................................... 110.6 583 95.3 505 93.6 487 

2006 ........................................... 112.1 572 99.4 491 97.4 493 

2007 ........................................... 130.1 540 127.4 540 98.0 437 

2008 ........................................... 143.7 557 116.0 475 111.3 465 

1 Provided for post 9/11/01 Emergency Supplemental of $17 million. 
94 

Question. If large portions of the trading are now being done off-exchange either 

via ‘‘swaps’’ or ‘‘over-the-counter’’ trades, then what good will adding more regulators do for the markets if so much of the trading that affects the markets is being 

done outside the regulated markets? 

Answer. Additional staff would be employed by the Commission to fortify the enforcement and surveillance missions of the agency and to support those functions, 

including the Commission’s anti-manipulation authority over cash and off-exchange 

transactions (which it has used aggressively). As indicated above, the Commission 

is seeking more information from swaps dealers concerning their trading and, after 

analyzing the information we receive, we may make changes to the way the Commission collects and analyzes data. 

But it also should be noted that, separate from swaps and over-the-counter trades, 

trading volume on the regulated futures exchanges has grown tremendously during 

the past several years. Since 2000, volume on U.S. exchanges has grown six-fold as 

traders increasingly seek the price certainty and clearing benefits of the futures 

markets regulated by the CFTC. Approximately $5 trillion of notional transactions 

flow through these U.S. exchanges and clearinghouses daily. We have no doubt that 

additional resources are necessary for the Commission to continue to effectively 

monitor and police these markets. 

Question. Finally, I want to return to the issue of index speculation by looking 

at a commodity that is near and dear to the state of Nebraska and at the center 

of a few controversies right now—corn. Friday’s Commitment of Traders report indicated that the ‘‘traditional’’ funds were long 115,000 contracts of corn with the index 

funds long 427,000 contracts of corn. These combined fund longs are estimated to 

equal well over 2 billion bushels of corn (542,000 contracts). The index funds represent 78.8 percent or 1.6 billion bushels of this, while it is estimated that index 

funds today represent about 30 percent of the total open interest in corn and they 

are always long. By comparison, ethanol usage of corn is expected to be about 3 billion bushels or 23 percent of total corn usage, according to USDA. Also as of last 

Friday, index fund long was more than 167,000 contracts of soybeans, over 70,000 

contracts of soybean oil and 188,000 contracts of Chicago wheat. We’ve seen corn 

prices almost double in the last year and certainly some of that is due to fundamental supply and demand concerns, which we are able to track and understand. 

What we don’t seem to have any knowledge or understanding of, however, is how 

much of this price is due to speculative demand—especially index speculation. 

Question. Is it safe to say that if an estimated 3 billion bushels of corn demand 

from ethanol has an upward pressure on prices, that a potential 1.6 billion bushels 

of long index speculation would have an upward pressure on prices as well? Has 

anyone at CFTC estimated just what impact this is having on commodities prices 

and what have you found? 

Answer. There are some critical differences in the demand for corn represented 

by the use of corn for ethanol and that represented by the purchase of futures contracts to buy corn. In the physical market corn is actually consumed. In the futures 

market, the long trader rarely takes delivery but, instead, usually offsets its long 

contract before delivery. The terms of index contracts require the dealer to roll out 

of the spot markets and into a deferred month by selling the spot month contract 

and simultaneously buying the next month’s contract, thus maintaining a position 

and never taking delivery. No corn is ever actually consumed through index trading. 

The second important difference is that there is a finite amount of corn. Every 

bushel taken off the market and fed to livestock or used to produce ethanol leaves 

one less bushel available for sale. With decreased supply, if demand continues 

unabated, the price will rise. On the other hand, if a trader buys futures contracts, 

the number of contracts is unlimited as long as others are willing to sell. 

This is not to say the financial markets for futures contracts are entirely divorced 

from the cash markets for physical grain. The two are linked by the ability to deliver on the futures contract, there is arbitrage between the two markets, and the 

cash markets use the futures markets as an important source of information about 

anticipated prices. Due to all of these factors, the issue you raise requires careful 

review. As discussed above the Commission staff has been studying various aspects 

of the effect of speculation on prices carefully and will report on the results. 

Question. Does it make sense to consider this index speculation another category 

of ‘‘demand’’ for corn and other commodities and how would that affect the markets 

and CFTC’s role and responsibilities? 

Answer. The role of index traders in today’s futures markets is of great interest 

to the public. The Commission is endeavoring to learn more about this group of 

traders. In addition, to provide additional transparency, the Commission has been 

able to publish information on the position of index traders in agricultural futures 

as a supplemental to the Commitments of Traders report. Publication of index trad-
95 

ers’ positions in the energy futures is a more difficult task but methods to provide 

that information are being considered. 

QUESTIONS SUBMITTED BY SENATOR PAT ROBERTS

Question. Chairman Lukken, there has been a lot of negative talk about speculation in the marketplace. I agree, that if manipulation in the market exists, or if true 

prices are not reflected, then regulators must utilize the tools and authorities Congress has provided to go after those bad actors. However, as always, I’m concerned 

about the law of unintended consequences. What value does speculation bring to the 

futures markets? What are the potential impacts on both energy and agriculture futures markets if speculators were prevented from participating? 

Answer. Futures markets require both speculators and hedgers. Speculators provide the market liquidity to allow hedgers to manage various commercial risks. 

Placing limitations on the amount of speculation in a futures market, whether by 

an individual trader or all traders, necessarily limits the amount of liquidity in the 

marketplace. Such limitations may restrict the ability of hedgers to manage risks, 

and may limit information flow into the marketplace, which could in turn negatively 

affect the price discovery process and the hedging function of the marketplace. As 

agricultural and energy producers are often short hedgers and as commercials generally tend to be short, a limitation on speculation tends to be a restriction on buyers. Ultimately, if long speculation is artificially driven from the market, the potential short-term advantage of lower prices could lead to production shortages, higher 

demand, and even higher prices for both energy and agricultural commodities. 

Question. Several countries with increasingly high energy consumption growth 

rates like China are heavily subsidizing consumer energy costs. Reuters recently reported that for the first time ever, China has become a net importer of gasoline. 

They continue to consume without their consumers feeling the pain of global price 

increases. What affects do non-market based policies like this have on the price of 

crude oil? 

Answer. Usually, when demand increases and supply remains constant, prices increases. This is the general situation today in the world market for crude oil. When 

commodity prices are subsidized, it has the effect of increasing demand for the commodity. In a worldwide market like that for crude oil, increases in consumption in 

one part of the world due to increased demand have the effect of raising prices to 

some degree everywhere else. 

QUESTIONS SUBMITTED TO JAMES C. MAY

QUESTION SUBMITTED BY SENATOR SAXBY CHAMBLISS

Question. I am very sympathetic to the struggles our airline and other transportation industries are facing, which is why I really want to get into the detail of what 

the contributing factors truly are. In particular, I would like to know what specific 

information do you believe ICE Futures is not providing to the CFTC or their regulatory agency, the Financial Services Authority, to prevent manipulation? 

Answer. The ATA believes ICE Futures and the British Financial Services Authority should be required to make information available to the CFTC on a daily 

basis, without separate requests from the CFTC, so that the CFTC can continuously 

monitor transactions made by persons in the United States regarding transactions, 

or based on transactions, relating to U.S. futures contracts, or transactions priced 

off U.S. futures contracts, for commodities for delivery in the United States. 

ICE Futures, the Dubai Exchange, or ICE Futures London may comply, if they 

so choose, with specific requests from CFTC for information. However, such information would likely not be current and would likely focus on a particular time period 

or a particular trading entity and thus would not present the CFTC with an opportunity to comprehensively and routinely, monitor transactions affecting, or relating 

to, commodities with delivery points in the United States entered into by U.S. citizens or residents, or through U.S. based trading terminals. 

The thorough, bipartisan Senate Permanent Subcommittee on Investigations joint 

report (June 25, 2007, ‘‘Excessive Speculation in the Natural Gas Market’’) said that 

the Enron and swaps loopholes allowed ICE to accept energy trades from persons 

in the United States, and elsewhere, and ‘‘operates with no regulatory oversight, no 

obligation to ensure its products are traded in a fair and orderly manner, and no 

obligation to prevent excessive speculation.’’ Page 119, Senate Investigations Report. 

That subcommittee report noted that the ‘‘Enron loophole, which was inserted into 
96 

the law in 2000 at the request of Enron and others, exempts electronic energy exchanges such as ICE from CFTC oversight and regulation.’’ 

In addition, that report noted that trading in the unregulated swaps market affects the regulated futures market because traders can replace futures contracts on 

NYMEX with swaps contracts on ICE. Page 120, Senate Investigations Report. 

They concluded that ‘‘[e]liminating these loopholes would level the regulatory 

playing field between the NYMEX and ICE exchanges, increase energy price transparency, and strengthen the ability of the CFTC to analyze market transactions and 

police U.S. energy commodity markets.’’ They further noted that it is ‘‘essential’’ 

that CFTC have ‘‘access to daily reports of large trades of energy 

commodities . . . to deter and detect price manipulation.’’ Page 120, Senate 

Investigations Report. 

Clearly, more recent agreements with officials in Dubai and at the Financial Services Authority will result in more reporting as long as those agreements continue 

in effect. Nonetheless, there are significant benefits to be gained by statutory 

changes to lock-in and assure strong and continuing CFTC oversight over, or at the 

least comparable reporting, position, and transparency requirements for, those foreign exchanges regarding transactions on behalf of U.S. residents, or made through 

U.S. terminals or other facilities, and involving U.S. contracts or commodities for 

delivery in the United States. 

QUESTIONS SUBMITTED BY SENATOR CHARLES E. GRASSLEY

Question. Do you think that the CFTC has acted aggressively enough to determine 

the impact of institutional investors and speculators on commodity markets? 

Answer. No, I do not. The CFTC has statutory authorities that it has only recently begun to utilize to monitor and regulate commodities markets. That said, the 

copious recordkeeping and reporting exceptions contained in the Commodity Exchange Act make it difficult for the CFTC to receive the ongoing, continuous flow 

of information about transactions affecting, related to, or based on, the U.S. futures 

markets. Thus, while more could have been done to date, the law limits the CFTC’s 

ability to be aggressive in some cases. A bipartisan Senate Permanent Subcommittee on Investigations joint report (June 25, 2007, ‘‘Excessive Speculation in 

the Natural Gas Market’’) noted that the ‘‘Enron loophole, which was inserted into 

the law in 2000 at the request of Enron and others, exempts electronic energy exchanges such as ICE [the electronic Intercontinental Exchange] from CFTC oversight and regulation.’’ 

There have been many recent reports and testimony about the significant upward 

price pressure that passive, institutional investors bring to bear on the markets because they buy long, regardless of price signals, and keep ‘‘rolling over’’ their long 

positions. Assets allocated to commodity index trading is up $13 billion since the 

end of 2003, as prices went up 183 percent according to testimony of Michael Masters, Masters Capital Management/May 20, 2008, before the Committee on Homeland Security and Governmental Affairs. Citi Futures Perspective, May 12, 2008, 

noted regarding crude oil that there has been a 425 percent increase in open interest in the last five years which greatly exceeded the corresponding growth in the 

physical oil market. 

This is happening not just in the oil sector. On April 22, 2008, American Farm 

Bureau Federation testimony noted ‘‘the role of speculative and commodity indexrelated trading in agriculture futures markets, while growing for some time, has 

reached historic levels and added to the uncertainty in these markets.’’ Speculators 

‘‘are now playing an exponentially greater role than ever before.... Market analysts report a continued, massive inflow of capital into the grain pits, much of it 

by long-only, passively managed index funds that buy futures and roll them forward 

according to a set schedule.’’ 

Mr. Fadel Gheit, managing director and senior oil analyst at Oppenheimer Equity 

Research noted at a June 23, 2008, hearing (House Subcommittee on Oversight and 

Investigation of the Committee on Energy and Commerce) that, ‘‘ I do not believe 

the current record crude oil price is justified by market fundamentals of supply and 

demand . . . I believe the surge in crude oil price, which more than doubled in the 

last 12 months, was mainly due to excessive speculation and not due to an unexpected shift in market fundamentals.’’ 

Testimony of Michael Masters, Masters Capital Management, noted that the vast 

majority of index speculators do not trade based on the underlying supply and demand fundamentals of the individual physical commodities but simply buy on a continuing basis, ‘‘rolling over’’ positions as needed. 
97 

Question. Do you believe there is evidence that crude oil prices are being driven 

by speculators? If so, what do you believe is the CFTC’s responsibility with regard 

to limiting the amount of institutional speculation? 

Answer. Yes, I do think evidence exists showing the recent upward pressure 

caused by excessive speculation regarding on oil prices. As I mentioned in my earlier 

answer, Mr. Fadel Gheit, managing director and senior oil analyst at Oppenheimer 

Equity Research noted at a June 23 hearing, that, ‘‘I do not believe the current 

record crude oil price is justified by market fundamentals of supply and 

demand . . . I believe the surge in crude oil price, which more than doubled in the 

last 12 months, was mainly due to excessive speculation and not due to an unexpected shift in market fundamentals.’’ 

‘‘Speculation has contributed to rising U.S. energy prices.’’ That simple conclusion 

is stated in a June 2006 bipartisan report of the U.S. Senate Permanent Subcommittee on Investigations called ‘‘The Role of Market Speculation in Rising Oil 

and Gas Prices: A Need to Put the Cop Back on the Beat.’’ I agree with that conclusion that the cop, the CFTC, needs to be put back on the beat and must carefully 

monitor transactions to prevent price manipulation just as the Securities and Exchange Commission words to prevent stock price manipulation. 

In addition, Mr. Roger Diwan, a partner at PFC Energy, testified on June 23, 

2008, (House Subcommittee on Oversight and Investigation of the Committee on Energy and Commerce) that ‘‘these index funds... probably represent the single 

largest components on oil futures and their sizes have been calculated to be close 

to $280 billion.’’ He noted how the open interest strongly correlated with the increases in oil prices, stating that, ‘‘the flow of money to the futures market that became the key element to predict prices, with a correlation close to 80 percent.’’ 

According to a June 15 Bloomberg article, Robert Aliber is quoted as saying 

‘‘You’ve got speculation in a lot of commodities, and that seems to be driving up the 

price.’’ Dr. Aliber is a professor of economics emeritus at the University of Chicago 

Graduate School of Business and co-author of ‘‘Manias, Panics, and Crashes: A History of Financial Crises.’’ 

The CFTC should focus on the clear intent of Congress to protect market participants from ‘‘excessive speculation’’ and ‘‘manipulation’’ in addition to all the provisions designed to punish fraud, conspiracies to corner markets, misleading statements, and the like. Investments related to hedging one’s physical position, or future physical position, designed to reduce risk have not been the problem. On the 

contrary, they are the very reason such exchanges were formed. Michael Masters 

noted that automatic institutional investments made with little, if any, consideration as to price, and not done to limit risk, in the hopes that the market always 

goes in one direction can distort the price discovery functions of the markets and 

should be monitored and regulated by the CFTC. 

Question. Does CFTC currently have all the tools necessary to respond to the 

speculation in commodities by hedge funds, investment banks and pension funds? 

Does Congress need to act to provide additional authority to the CFTC? If so, please 

provide specific recommendations for additional authority. 

Answer. The CFTC does not have all the authorities needed to respond to the 

speculation. Several bills before the Congress contain provisions which would help 

CFTC to reduce reckless and excessive speculation not consistent with normal rules 

of supply and demand for the underlying commodity; the ‘‘spot price’’ of that commodity. 

We would recommend law changes to allow for CFTC to better monitor, through 

greater transparency, and exercise authority over, swaps transactions to prevent excessive speculation in energy products. The CFTC should not permit foreign boards 

of trade (FBOT) to provide its members or other participants subject to CFTC jurisdiction direct access to electronic trading in the United States or to order matching 

systems unless the FBOT meets specified requirements related to transparency, information sharing and position limits; except for bona fide hedge trading. 

The CFTC should be able to quickly exercise oversight over any disturbance in 

a commodity market that disrupts its liquidity and price discovery function from accurately reflecting a commodity’s supply and demand (‘‘major market disturbance’’) 

and should be able to identify each large over-the-counter transaction or class of 

such transactions in order to detect and prevent potential price manipulation of, or 

excessive speculation in, any contract listed for trading on a registered entity. 

The CFTC should have the clear authority to require recordkeeping by anyone either in the United States or entering trades into the trade matching system of a 

foreign BOT from the United States regarding U.S. traded commodities. 

Further, the CFTC should be instructed to: (1) routinely require detailed reporting 

from index traders and swap dealers in markets under its control; and (2) review 
98 

the trading practices for index traders in markets to ensure that index trading is 

not adversely impacting the price discovery process. 

The CFTC should disaggregate and make public on a regular basis: (1) the number of positions and total value of index funds and other passive, long-only positions 

in energy markets; and (2) data on speculative positions relative to bona fide physical hedgers in energy markets 

Several bills before the Congress require the CFTC to hire additional enforcement 

personnel and we certainly support those efforts. The CFTC should clearly distinguish between bona fide legitimate hedgers and speculators and ensure that position 

limits apply to all traders who are not doing legitimate, bona fide, hedging. 

Question. Goldman Sachs and Morgan Stanley appear to be two of the largest energy trading financial institutions. Should CFTC regulate oil analysts with institutional speculators who forecast oil markets? If an investment bank with large positions in the commodity market makes a prediction that benefits the positions of the 

investment bank, is the price manipulation? 

Answer. There have been news accounts that discuss the potential for price manipulation by persons interested in a certain market outcome who then try to drive 

the press or the public in that direction for the purpose of making increased profits. 

As with stock prices, these activities can influence prices in a manner that is inconsistent with a true assessment of the value of the commodity or the stock. The 

CFTC should carefully monitor these activities and establish clear standards for 

proper behavior to prevent price manipulation designed to mislead the public for 

private gain. A bipartisan Senate Permanent Subcommittee on Investigations joint 

report (June 25, 2007, ‘‘Excessive Speculation in the Natural Gas Market’’) is instructive regarding the ability of a company to manipulate futures prices in the energy markets. 

Question. In 2007, the CFTC issued a ‘‘no-action’’ letter thereby declining to regulate the trading of the West Texas Intermediate (WTI) oil contracts on the Dubai 

Exchange. There appears to be a significant amount of trading in WTI contracts 

both on the Dubai Exchange and the Intercontinental Exchange in London. Given 

that, do you think CTFC has a responsibility to regulate WTI trading in these offshore exchanges? If not, why? 

Answer. Let me start my answer by bringing to your attention what happens 

when trading in energy commodities is not regulated by the CFTC. The perfect example is natural gas trading. An energy trading company called Amaranth recently 

took advantage of the so-called Enron loopholes such that the CFTC was unable to 

adequately regulate trading in energy futures leading to excessive speculation and 

price manipulation. A bipartisan Senate Permanent Subcommittee on Investigations 

joint report (June 25, 2007, ‘‘Excessive Speculation in the Natural Gas Market’’) 

noted that the ‘‘Enron loophole, which was inserted into the law in 2000 at the request of Enron and others, exempts electronic energy exchanges such as ICE [the 

electronic Intercontinental Exchange] from CFTC oversight and regulation.’’ That 

report shows the dangers of limiting CFTC ability to regulate energy trading by 

U.S. residents or those using U.S. trading terminals related to commodities for delivery in the United States. 

Our commodity futures markets should offer a level playing field to all foreign 

and domestic investors using U.S. terminals regarding commodities for delivery in 

the United States. The Commodity Futures Trading Commission (CFTC) should 

evenly enforce the same rules for all, ensure transparent pricing, and assure the 

availability of timely, reliable, and accurate information to all traders using U.S. facilities to trade U.S. energy futures. 

QUESTIONS SUBMITTED TO MARK COOPER

QUESTIONS SUBMITTED BY SENATOR PAT ROBERTS

Question. Mr. Cooper, several of your fellow panelists testified that retaining liquidity in the market is a priority for maintaining efficiency, and that raising margin rates could drive liquidity to less transparent oversees markets. Yet, your testimony advocates for increases in margin requirements. I’ve heard a lot about the impacts higher prices have had on margin calls recently. Grain elevators and co-ops 

already struggle to meet existing margin calls and often times max out their credit 

limits securing enough capital to do so, or they discontinue offering futures contracts to producers. Can you explain to me how your proposal to raise their rates 

will put my constituents’ minds and businesses at ease? 
99 

Answer. Rising volatility and value of commodities has squeezed physical (commercial) players out of the market because they must finance their hedging activities. Exchanges should set lower margins for real physical/commercial traders. 

Question. Mr. Cooper, Mr. Duffy, Dr. Newsome and Mr. Vice, several countries 

with increasingly high energy consumption growth rates like China are heavily subsidizing consumer energy costs. Reuters recently reported that for the first time 

ever, China has become a net importer of gasoline. They continue to consume without their consumers feeling the pain of global price increases. What affects do nonmarket based policies like this have on the price of crude oil? 

Answer. Non-market factors have a huge influence on the price of crude, both 

policies that subsidize consumption and OPEC policies that manage supply. Chinese 

policies of under valued currency and under paid labor are used to subsidize under 

priced energy consumption. The Chinese know well that if they did not subsidize 

energy consumption, they would have to raise wages, which would increase the cost 

of exports. The Chinese pay for cheap oil with cheap labor because they use the 

trade surplus from manufactured exports to subsidize energy consumption. They export the burden of a tight energy market to nations that do not subsidize energy 

consumption. 

QUESTIONS SUBMITTED BY SENATOR SAXBY CHAMBLISS

Question. Dr. Cooper, I hear concerns that all trades are not being properly reported and that the CFTC doesn’t have adequate data to monitor participation by 

speculators in the market—hence the call for more reporting requirements and monitoring by the CFTC. However, if the data available is truly insufficient, then I am 

genuinely interested to know what information is being used to support the assessment that speculation is contributing $40 to the price of a barrel of crude oil? 

Answer. The data and information on the economic cost of production and market 

models of the supply-demand balance are adequate to make a reasonable projection 

of what the price of oil should be at economic equilibrium in today’s market. There 

is general agreement among oil industry economists, oil industry executives and 

governmental energy modelers on the fact that the price of oil should be less than 

$80 per barrel. With oil in the range of $130 to $140 per barrel, the observed price 

is $40 to $60 higher than that calculated market equilibrium price. 

The data and information that is lacking deals with how trading practices and 

policies have allowed the speculative bubble to come about. The CFTC insisted for 

years that it had enough data and that regulatory oversight by exempt entities was 

adequate, until two months ago. Now it admits that it did not have enough data 

to answer the critical questions and that foreign regulation of exempt exchanges 

was inadequate. The CFTC has only begun to investigate the problem, but every 

day that the abuse goes on costs the American public about $1 billion. 

Question. In your written testimony you state that the CFTC misclassifies large 

speculators, such a Goldman Sachs and Merrill Lynch, as commercial traders, not 

speculators. Is it not true that Goldman Sachs and Merrill Lynch often trade both 

on behalf of those who are commercial market participants, in other words those 

who can actually take delivery of crude oil, as well as speculators—and the CFTC 

recently announced that they are going to be looking at the books of these traders 

to differentiate positions held by speculators and commercial participants? 

Answer. The admission that it needs to look more carefully at who, exactly, is 

trading through these brokers underscores the fact that the CFTC’s practices were 

to lax in the past and misrepresented the reality to policymakers. The actual commercial traders should be identified and treated differently, but the CFTC allowed 

huge quantities of speculation to be misclassified as commercial activity by treating 

all Merrill Lynch activities as commercial. 

QUESTIONS SUBMITTED BY SENATOR CHARLES E. GRASSLEY

Question. Do you believe that further oversight of commodities trading is needed 

in light of the increased pressure on margin calls and market volatility that has led 

to local elevators and major grain trading companies not being able to offer forward 

contracts to producers? 

Answer. Yes. By imposing prudential regulation of commodity future markets the 

CFTC will dampen excessive speculation, which will enable physical traders to reenter the market. 

Question. Recently CTFC announced investigations into possible price manipulation in oil and cotton markets. Would you support them opening investigations into 

other commodities including corn and wheat? Why or why not? 
100 

Answer. The CFTC should be vigilant to prevent manipulation in all commodity 

markets. The investigation of potential manipulation in any commodity markets 

should be vigorous and continuous. However, the current problem of excessive speculation goes well beyond manipulation. The trading practices that are pumping up 

commodity prices across the board should be addressed by reform of prudential regulation, reform that will affect all commodities. 

QUESTIONS SUBMITTED TO MARK COOPER AND JAMES C. MAY

QUESTIONS SUBMITTED BY SENATOR CHARLES E. GRASSLEY

Question. Do you think that the CFTC has acted aggressively enough to determine 

the impact of institutional investors and speculator on commodity markets? 

Answer. The CFTC has been slow and slovenly in its oversight over these markets. The CFTC insisted for years that it had enough data and that regulatory oversight by exempt entities was adequate, until two months ago. Now it admits that 

it did not have enough data to answer the critical questions and that foreign regulation of exempt exchanges was inadequate. The CFTC has only begun to investigate 

the problem, but every day that the abuse goes on costs the American public about 

$1 billion. 

Question. Do you believe there is evidence that crude oil prices are being driven 

by speculators? If so, what do you believe is the CFTC’s responsibility with regard 

to limiting the amount of institutional speculation? 

Answer. The CFTC’s obligation is to prevent excessive speculation, whatever its 

causes. It should declare an emergency and adopt whatever measures it needs to 

burst the speculative bubble that afflicts the oil market. The practice of institutions 

engaging in long-only index trading is contributing to the speculative bubble and 

should be terminated. 

Question. Does CFTC currently have all the tools necessary to respond to the 

speculation in commodities by hedge funds, investment banks and pension funds? 

Does Congress need to act to provide additional authority to the CFTC? If so, please 

provide specific recommendations for additional authority. 

Answer. The Congress needs to enact legislation to accomplish two things. There 

were some loopholes created by the Commodity Futures Modernization Act that only 

Congress can close. Among my recommendations, these include closing the Enron 

loophole firmly, instituting minimum criminal penalties for market manipulation, 

banning some trading practices, etc. There are also a number of practices that the 

CFTC adopted administratively (such as the foreign board of trade exemption and 

the swaps exemption) that the Congress should close because the CFTC has failed 

to address these problems. Since the CFTC could have taken remedial action, but 

it has failed to do so, Congress should. 

Question. Goldman Sachs and Morgan Stanley appear to be two of the largest energy trading financial institutions. Should CFTC regulate oil analysts with institutional speculators who forecast oil markets? If an investment bank with large positions in the commodity market makes a prediction that benefits the positions of the 

investment bank, is the price manipulation? 

Answer. Whether or not these practices fit the narrow definition of manipulation, 

these practices constitute conflicts of interest and must be regulated. The case law 

and practice on manipulation at the CFTC ignores a wide range of trading practices 

that contribute to excessive speculation. The Congress needs to address these practices with legislation because, legally, existing case law makes it difficult for the 

CFTC to reach these practices and, administratively, the CFTC has been slow and 

reluctant to act to protect the public. 

Question. When testifying before the Agriculture Committee, Acting Chairman 

Lukken and Commissioner Chilton discussed several new initiatives to improve 

trade collection and dissemination efforts to bring more transparency in the areas 

of agriculture and energy markets. Do you think the steps taken by the CFTC in 

recent weeks go far enough to bring greater transparency and scrutiny in energy 

and agriculture trades? If not, what suggestions can you offer? 

Answer. The sudden discovery that the CFTC has inadequate information, that 

foreign boards of trade are inadequately regulated and that categorizing all swaps 

trading by large banks as commercial may distort the picture of the market underscores what a bad job the CFTC has done in preventing excessive speculation. Legally, the CFTC will have difficulty reforming some of the practices that are causing 

the problem because it has defined its task so narrowly and the case law will not 

easily support actions against the broader range of abuses that have developed. 

Practically, we doubt the genuineness of the commitment of the current Commission 
101 

to vigorous action to protect the public. The Congress cannot rely on the Commission to protect the public. It must outlaw certain practices and order the commission 

to regulate others. I recommended fifteen specific policies in my testimony. 

QUESTIONS SUBMITTED TO TERRENCE A. DUFFY

QUESTION SUBMITTED BY SENATOR PAT ROBERTS

Question. Mr. Cooper, Mr. Duffy, Dr. Newsome and Mr. Vice, several countries 

with increasingly high energy consumption growth rates like China are heavily subsidizing consumer energy costs. Reuters recently reported that for the first time 

ever, China has become a net importer of gasoline. They continue to consume without their consumers feeling the pain of global price increases. What affects do nonmarket based policies like this have on the price of crude oil? 

Answer. CME does not operate crude oil futures markets so we do not possess the 

expertise in that particular area that NYMEX has to offer. That said, our experience 

with the markets we do operate, especially agricultural commodities, provides a 

basis for our informed judgment that non-market policies are having a significant 

impact on supply and demand in global commodity markets. As we explained in our 

written testimony, there are several factors that have combined to create volatility 

and increased prices in the grains and oilseeds markets, including weather/disease/ 

pestilence; increasing per capita consumption in emerging markets; increased demand for grain and oil seeds as feedstock for biofuels; reactionary governmental 

trade policies; and financial market turmoil, including the weakened dollar. Of these 

factors, several are the result of governmental policies, specifically policies 

prioritizing biofuel development, protectionist trade policies such as those that reserve certain nations’ internal agricultural production exclusively for domestic consumption, and international monetary policy that is set by the respective national 

banks and governments. Having confirmed the interplay of such governmental policy on the price-supply dynamics in our agricultural commodity markets, we would 

assume that similar impacts can readily be at play in crude oil markets which are 

increasingly characterized by government controlled production and cartelization of 

supply, and Congress should not be surprised by such policy driven adverse impacts 

on prices in the crude oil markets. 

QUESTION SUBMITTED BY SENATOR SAXBY CHAMBLISS

Question. There have been several issues raised with regard to changing how margin levels are set and whether CFTC should play a greater role in that process. Specifically, some have compared the margin levels applied to stock trading to those 

applied to commodity futures trading. While this comparison has been made in the 

context of energy futures and I recognize that you are not in the energy futures 

business, I know that you are very familiar with the differences in stocks and commodity futures and wonder if you could explain how clearing houses establish margins for commodity futures contracts and why this differs from margins applied to 

stock trading? 

Answer. The discussion of mandated margin increases during recent congressional 

hearings makes it abundantly clear that many legislators wrongly assume the concept of margin in futures markets is similar to that in equity markets. Indeed, legislative proposals to require mandated increases in futures margins are premised on 

a seriously flawed understanding of the role margin plays in futures markets and 

how that role differs from the concept and function of margin in equity markets. 

In the securities market, margin serves as an extension of credit or a down payment 

on the cost of a security. However, the notion of ‘‘credit’’ has nothing to do with the 

concept of margin as used in futures markets. In futures markets, margin is not an 

extension of credit. Rather, margin is the equivalent of a performance bond designed 

to ensure that contractual obligations are met and that clearing houses can fulfill 

their responsibilities. Margins are not intended to create incentives or disincentives 

for trading decisions. Failure to understand this critical difference in the notion of 

margin as used in futures trading can have highly destructive implications for U.S. 

futures markets and those who rely on them. 

QUESTIONS SUBMITTED BY SENATOR CHARLES E. GRASSLEY

Question. In a recent hearing in the Senate Commerce Committee, Michael 

Greenberger, a law professor at the University of Maryland and former head of the 
102 

CFTC’s Division of Trading & Markets, suggested that if the CFTC required all U.S. 

crude trades to be subject to CFTC regulation and trading limits, oil prices would 

drop by 25 percent overnight. Do you agree with his contention? 

Answer. CME group does not operate oil and gas futures markets, so we do not 

profess to have the specialized experience with those markets to definitively answer 

this question regarding crude oil prices. That said, from what we observe with regard to the run up in commodity prices in general and our agricultural commodity 

markets in specific, the primary factors contributing to that phenomenon relate to 

fundamentals of supply and demand, not the regulation of speculative trading by 

CFTC or the conduct of trading activity on markets that are not regulated by the 

CFTC. We have no reason to expect that adoption of Mr. Greenberger’s suggestion 

would result in a reduction in the price of crude oil by 25 percent overnight. 

Question. In 2007, the CFTC issued a ‘‘no-action’’ letter thereby declining to regulate the trading of the West Texas Intermediate (WTI) oil contracts on the Dubai 

Exchange. There appears to be a significant amount of trading in WTI contracts 

both on the Dubai Exchange and the Intercontinental Exchange in London. Given 

that, do you think CTFC has a responsibility to regulate WTI trading in these offshore exchanges? If not, why? 

Answer. CFTC has taken steps in recent weeks to significantly bolster its regulatory reach under its ‘‘no-action letter’’ regime with regard to the ICE London exchange. These enhancements include increased reporting requirements to improve 

transparency and imposition of position limits and accountability standards that 

mirror what CFTC requires of NYMEX which trades competing WTI contracts in 

this country. CFTC’s expansion of its regulatory regime in this regard is appropriate 

and welcome since it fairly levels the regulatory playing field among competitors, 

while enhancing the agency’s understanding of the broader international trading activity that can affect the proper functioning of our own domestic futures markets. 

In addition, the manner in which CFTC negotiated these improvements in its ‘‘no 

action’’ requirements with the foreign board of trade and its London-based regulator 

reflects the need to respect the legitimate interest foreign regulators have in the fair 

treatment of their own domestic trading platforms by foreign regulators. CME very 

much understands that the United States has that same interest in judiciously accommodating foreign competitors and the legitimate reciprocal concerns of foreign 

regulators since U.S. exchanges such as CME’s world-class platforms need to be able 

to access foreign markets in a non-discriminatory manner too. Any foreign regulator 

that insisted on our compliance with its regulatory regime that conflicted with U.S. 

law or imposed discriminatory burdens on us as a foreign competitor would present 

an untenable obstacle to our access to those foreign markets. As a result, U.S. policy 

must embrace the notion of respectful and productive accommodation of differing 

international regulatory regimes to facilitate commerce that is still properly and 

adequately regulated to attain U.S. public policy objectives. 

QUESTIONS SUBMITTED TO DR. JAMES NEWSOME

QUESTIONS SUBMITTED BY SENATOR CHARLES E. GRASSLEY

Question. In 2007, the CFTC issued a ‘‘no-action’’ letter thereby declining to regulate the trading of the West Texas Intermediate (WTI) oil contracts on the Dubai 

Exchange. There appears to be a significant amount of trading in WTI contracts 

both on the Dubai Exchange and the Intercontinental Exchange in London. Given 

that, do you think CFTC has a responsibility to regulate WTI trading in these offshore exchanges? If not, why? 

Answer. First, the CFTC staff no-action letter to the Dubai Mercantile Exchange 

(DME) permits the DME to provide direct access to qualified users in the United 

States for the electronic trading of specified products. Such staff no-action letters 

generally are issued following a review of the regulation of the home-country regulator for the exchange and these no-action letters typically include various conditions that must be met in order to maintain the no-action relief. Second, NYMEX 

notes that the DME has not yet listed the WTI futures contract for trading and no 

future date has been announced for the listing of this contract. 

More generally, Section 4(a) of the Commodity Exchange Act requires futures contracts to be traded on or subject to the rules of an exchange that is regulated by 

the CFTC. However, this broad requirement by its terms does not apply to contracts 

on exchanges ‘‘located outside the United States, its territories or possessions. . . .’’ 

NYMEX believes that a foreign board of trade that is permitted to offer products 

by direct access to U.S. customers pursuant to CFTC staff no-action letters and that 

lists futures based on commodities with U.S. delivery points should be subject to 
103 

some level of CFTC oversight. These offshore exchanges should be required by the 

CFTC to provide the same level and quality of data and at the same frequency that 

U.S. exchanges provide to the CFTC. In addition, NYMEX believes that offshore exchanges offering contracts linked to commodities with U.S. delivery points should 

be required to impose position limits. Complete transparency to the CFTC should 

be a fundamental requirement for offshore exchanges offering direct access for the 

electronic trading of products linked to U.S. markets. 

Question. Do you believe that speculators could be at least playing some role in 

the higher prices of oil? If not, what do you believe are the causes? 

Answer. NYMEX’s Research Department has conducted extensive analysis on the 

role of speculators in our markets. These evaluations began in 2004 and included 

reviewing data from 2007 through to the middle of 2008 for our core crude oil and 

natural gas futures contracts. We found no evidence to support harmful impacts on 

price or price volatility by non-commercial participants. Our analysis instead disclosed that non-commercial participants are price takers. In other words, they do 

not initiate movements in price or otherwise set prices, but rather follow price movements that are generated by commercials. In addition, our data indicate that trading by non-commercials or speculators has had a moderating or braking effect on 

price volatility in the products that were the subject of the study. 

Other findings also support our conclusion that speculators are not influencing 

the futures prices. First, non-commercial participants historically have represented 

a smaller percentage of the energy futures markets than commercial participants. 

Second, noncommercial participation consistently has been relatively balanced between longs (buys) and shorts (sells), so there has not been, for example a disproportionate push on the long side of the market, which would cause the price to increase. 

Third, non-commercials generally are not in a position to influence final settlement 

prices because they do not own the physical commodity and therefore, must liquidate their open futures positions prior to expiration of trading of the applicable 

expiring contract month. 

Lastly, with hundreds of commercial participants and instantaneous price dissemination, any short term ‘‘speculative’’ price impact that creates a discrepancy between the futures price and the price level that would be anticipated on the basis 

of market fundamentals in the underlying physical commodity market would be expected to be met in reasonably short order with an equally strong ‘‘commercial’’ reaction. Thus, if short-term prices in a futures market should happen to move in a 

direction inconsistent with actual market fundamentals, a vast number of participants, including energy producers, wholesalers and end-users (as well as government agencies) would respond to ensure that prices return rapidly to where the industry consensus believes they should be to reflect supply and demand fundamentals. 

NYMEX believes that market fundamentals generally explain the volatility and 

level of prices in the oil futures markets. Most recently, the U.S. Department of Energy’s Energy Information Administration (EIA) and International Energy Agency 

(IEA) in their recent respective market reports have noted the uncharacteristic 

changes in the Organization for Economic Cooperation and Development (OECD) inventories during the second quarter this year. On the supply side of the equation, 

EIA reported an over 1 million barrel per day drop from the ‘‘average build’’ for 

OECD countries during the second quarter. EIA also indicated that there were 

changes in world inventories during the first half of the year—600,000 barrels per 

day decrease during the first quarter and 280,000 barrels increase during the second quarter. EIA and IEA data typically are revised a few times following the initial 

release, indicating the complexities in ascertaining the correct level of inventories 

and also highlighting a measure of uncertainty regarding core market fundamentals 

that have an impact on price levels. 

On the demand side, the strongest source of projected energy demand is from the 

less transparent developing countries such as China, India, and the Middle East. 

There is considerable difficulty in assembling accurate and timely information on 

non-OECD petroleum consumption in these countries. However, the EIA Short-Term 

Energy Outlook projects that world oil demand will grow by 1.2 million barrels per 

day in 2008, up a healthy 1.4 percent, with China accounting for 35 percent of this 

demand growth. We caution anyone against oversimplifying the challenge of accurately assessing or projecting the level of demand in these developing countries. 

Finally, over the long term, there has been steady upward pressure on petroleum 

demand pushed each year by the millions of people making the transition in lessdeveloped countries to the beginnings of middle-class circumstances. However, a 

global recession could have the effect of softening or suspending this upward pressure. 
104 

Question. An estimated 30 percent of West Texas Intermediate trading is now 

done through ICE Futures Europe. NYMEX has recently gotten involved in the foreign exchange by partnering with the Dubai Mercantile Exchange. If a trade involves a WTI contract, why shouldn’t these trades be subject to CFTC regulation? 

Answer. As a note, NYMEX has not entered into a formal partnership with the 

DME but instead does own a modest ownership share in a holding company that 

owns the DME. We agree that trading of WTI futures contracts offered by direct 

access to U.S. customers by foreign boards of trade generally should be fully transparent to the CFTC. It should also be generally subject to the same market surveillance regulatory regime as the linked U.S. market, such as position limits/accountability levels, large trader reporting and emergency authority. Prior to the listing 

of the WTI crude oil contract by ICE Futures Europe, 100 percent of trading in that 

contract was under CFTC jurisdiction, fully transparent and regulated at the highest tier of regulation. 

Question. If these trades are exempt from CFTC regulatory supervision, what will 

prevent an even greater percentage of WTI contracts to be traded on a foreign exchange, exempt from CFTC oversight? 

Answer. In fact. there is nothing to prevent the shift of trading volume away from 

the NYMEX WTI crude futures contract to ICE Futures Europe. NYMEX staff repeatedly advised CFTC staff that this shift of liquidity could well occur if the regulations governing the NYMEX and ICE markets were not comparable to redress the 

unlevel playing field. The CFTC staff now has conditioned their no-action letter (on 

direct electronic access) to ICE Futures Europe so as to impose similar market surveillance requirements on ICE Futures Europe that are imposed on NYMEX as a 

designated contract market. 

Question. In a recent hearing in the Senate Commerce Committee, Michael 

Greenberger, a law professor at the University of Maryland and former head of the 

CFTC’s Division of Trading & Markets, suggested that if the CFTC required all U.S. 

crude trades to be subject to CFTC regulation and trading limits, oil prices would 

drop by 25 percent overnight. Do you agree with this contention? 

Answer. I strongly disagree with this contention. While noting Mr. Greenberger’s 

rather short stint as head of the CFTC’s Division of Trading and Market, it should 

also be noted that he has no training, experience or expertise in the economic analysis of futures markets. Moreover, despite his grand and sweeping assertion, Mr. 

Greenberger to date has not been able to point to a single econometric study or 

other analysis by a legitimate economist demonstrating any such price impact resulting from his proposed legislative solutions. As noted above, futures prices are 

generally driven by the fundamental forces of supply and demand. It is frankly preposterous to think that requiring all oil trading to be regulated will cause a 25 percent drop in price. The location and manner of oil trading ultimately does not and 

cannot change the underlying market fundamentals of the global oil market. 

QUESTION SUBMITTED BY SENATOR PAT ROBERTS

Question. Several countries with increasingly high energy consumption growth 

rates like China are heavily subsidizing consumer energy costs. Reuters recently reported that for the first time ever, China has become a net importer of gasoline. 

They continue to consume without their consumers feeling the pain of global price 

increases. What affects do non-market based policies like this have on the price of 

crude oil? 

Answer. It has been widely reported that a number of countries have been providing significant subsidies for consumer energy costs. All other things being equal, 

the impact is a rise in the price of oil. Noting the market for crude oil is global in 

scope, such subsidies raise the demand for the underlying refined product which, in 

turn, raises the demand for crude oil which, in turn, raises the price of crude oil. 

From the perspective of interpretation, it means that the demand for the refined 

product as well as crude oil does not reflect accurately consumer interests because 

some consumers are being shielded directly from the market price for the refined 

product and indirectly from the price of crude oil. Certainly, the impact on non-subsidized consumers is unambiguously higher prices for crude oil and refined products. 

While consumers in non-subsidized countries generally would respond to increasing 

prices, such as by cutting back on their energy consumption, consumers in the subsidized countries may make no changes in their demand for energy regardless of the 

extent of price increases. 
105 

1 Backlash as India puts up Fuel Price, Financial Times, July 4, 2008. http://www.ft.com/cms/ 

s/0/8bd96c88-3208-11dd-9b87-0000779fd2ac.html?nclicklcheck=1. 2 CFTC Release: 52 52–2 issued October 31, 2006. 

QUESTIONS SUBMITTED TO CHARLES A. VICE

QUESTION SUBMITTED BY SENATOR PAT ROBERTS

Question. Mr. Cooper, Mr. Duffy, Dr. Newsome and Mr. Vice, several countries 

with increasingly high energy consumption growth rates like China are heavily subsidizing consumer energy costs. Reuters recently reported that for the first time 

ever, China has become a net importer of gasoline. They continue to consume without their consumers feeling the pain of global price increases. What affects do nonmarket based policies like this have on the price of crude oil? 

Answer. These policies have a huge effect of the price of crude oil. India, China 

and many other developing countries, to some extent, subsidize the gasoline purchases. Critically, these same countries are a large part of the new and growing demand for oil. Without the proper market incentives, these countries will not take 

steps to become more efficient and thus will distort demand and exacerbate crude 

oil prices. Not only is this bad for the global economy, but it is particularly detrimental to the subsidizing governments. In India, the cost of the gasoline subsidy 

grew to 3 percent of the countries GDP.1 Finally, it is important to note that many 

of these countries began to cut their fuel subsidies this summer, which coincided 

with the demand destruction that lead to the recent fall in crude oil prices. 

QUESTIONS SUBMITTED BY SENATOR CHARLES E. GRASSLEY

Question. In 2007, the CFTC issued a ‘‘no-action’’ letter thereby declining to regulate the trading of the West Texas Intermediate (WTI) oil contracts on the Dubai 

Exchange. There appears to be a significant amount of trading in WTI contracts 

both on the Dubai Exchange and the Intercontinental Exchange in London. Given 

that, do you think CTFC has a responsibility to regulate WTI trading in these offshore exchanges? If not, why? 

An estimated 30 percent of West Texas Intermediate trading is now done through 

ICE Futures Europe. NYMEX has recently gotten involved in the foreign exchange 

by partnering with the Dubai Mercantile exchange. If a trade involves a WTI contract, why shouldn’t these trades be subject to CFTC regulation? 

If these trades are exempt from CFTC regulatory supervision, what will prevent 

an even greater percentage of WTI contracts to be traded on a foreign exchange, 

exempt from CFTC oversight? 

Answer. It is important to note that pursuant to the Commodity Futures Trading 

Commission’s recent amendment to ICE Futures Europe’s no action letter, the ICE 

will be placing speculative limits and will be meeting the same reporting requirements as U.S. based exchanges on its contracts that settle on the price of a contract 

traded by a U.S. designated contract market. This is in addition to the stringent 

oversight provided by the Financial Services Authority. 

That said, it should also be noted that the CFTC’s current ‘‘no action’’ regulatory 

regime works. As background, in 2006, the CFTC convened public hearings to consider the issue of the regulation of Foreign Boards of Trade in the United States. 

Consideration of the issue at that time was largely triggered by the launch of the 

ICE WTI Crude futures contract. An overwhelming majority of participants in those 

hearings thought that the CFTC ‘‘no action’’ regime had been very successful. The 

CFTC reaffirmed its no action regime thereafter 2, recognizing the benefits of regulatory cooperation and mutual recognition. 

The basis of this approach is that markets, particularly oil markets, are global. 

Participants are based all over the world and cooperation between regulators is crucial in this context. The concept that each exchange be subject to the jurisdiction 

of one primary regulator has avoided duplication and conflicting regulations that 

would have made it unduly burdensome and expensive for participants to conduct 

their trading activities within the current arrangements. Other regulators with an 

interest in the activities of the exchange can exercise secondary oversight and jurisdiction through consents to jurisdiction, and through information sharing with the 

correspondent regulator. 

Question. Do you believe that speculators could be at least playing some role in 

the higher prices of oil? If not, what do you believe are the causes? 

Answer. At the outset, all investment is inherently speculative. Commercial firms 

speculate on the price of commodities when they invest in new production and when 

they hedge their risks from these investments. The real issue is whether this specu-
106 

3Testimony of Dr. Benn Steil before the Senate Committee on Homeland Security and Governmental Affairs (May 20, 2008). http://www.cfr.org/content/publications/attachments/ 

SteillSenate%20Testimonyl3%2020%2008.pdf. 4Senate PSI Response, pg. 6. http://hsgac.senate.gov/public/lfiles/ 

PSIJtSTAFFANALYSISGREENBERGERTESTIMONYONJUNE32008.pdf. 

lation reflects the underlying supply and demand. Numerous experts and industry 

observers have come to the conclusion that the recent price spike in oil was driven 

by supply and demand. For example, the International Energy Agency, in its Medium-Term Oil Market Report, states that global oil product demand is expected to 

grow by 1.6 percent per year on average over the next five years, primarily driven 

by growth in developing countries. The report notes that demand growth remains 

heavily concentrated in developing countries, where total consumption will nearly 

reach parity with mature economies by 2015. Asia, the Middle East and South 

America will account for nearly 90 percent of global demand growth over the next 

five years. On the supply side of the equation, oilfields worldwide are declining in 

production, especially given the underinvestment in energy infrastructure that has 

been caused by prior price collapses. Just to hold world production steady, over 3.5 

million barrels per day of new production is needed. However, this new production, 

if it is possible, will come at a steep price. Costs of new production today are double 

the cost of new production four years ago. 

In addition, the effect of the devaluation of the dollar cannot be discounted. The 

price of oil is highly correlated to the value of the dollar as shown by the recent 

drop in the price of oil, which has coincided with a rise in the valuation of the dollar. As Benn Steil noted in his testimony before the Senate Committee on Homeland 

Security and Governmental Affairs, that while ‘‘the prices of oil and wheat measured in dollars have soared over the course of this decade, they have, on the other 

hand, been remarkably stable when measured in terms of gold—gold having been 

the foundation of the world’s monetary system until 1971.’’ 3 Thus, the effect of the 

dollar has a large impact on the price of oil. 

Question. In a recent hearing in the Senate Commerce Committee, Michael 

Greenberger, a law professor at the University of Maryland and former head of the 

CFTC’s Division of Trading & Markets, suggested that if the CFTC required all U.S. 

crude trades to be subject to CFTC regulation and trading limits, oil prices would 

drop by 25 percent overnight. Do you agree with his contention? 

Answer. No. As pointed out in the Joint Analysis Prepared by Majority and Minority Staffs of the Senate Permanent Subcommittee on Investigations of Michael 

Greenberger Testimony before Senate Committee on Commerce, Science and Transportation on June 3, 2008, Professor Greenberger’s statement is untrue (‘‘Senate PSI 

Response’’).4 Professor Greenberger’s statement refers to trading on exempt commercial markets (‘‘ECMs’’). As the Senate PSI Response points out, there is little to no 

trading of crude oil on ECMs. In addition, the Subcommittee points out that the 

prices for agricultural commodities have risen, even though these commodities do 

not trade on ECMs. 

CONCLUSION OF HEARING

Senator DURBIN. I thank everybody for attending today. I think 

this was an important hearing and we will follow through. Thank 

you. 

[Whereupon, at 1:05 p.m., Tuesday, June 17, the hearing was 

concluded, and the subcommittee was recessed, to reconvene subject to the call of the Chair.] 

Æ