```

[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]

 
            THE FUTURE OF THE CFTC: COMMISSION PERSPECTIVES

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                        GENERAL FARM COMMODITIES

                          AND RISK MANAGEMENT

                                 OF THE

                        COMMITTEE ON AGRICULTURE

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 23, 2013

                               __________

                            Serial No. 113-6

          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov

                  U.S. GOVERNMENT PRINTING OFFICE
82-368                    WASHINGTON : 2013
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                        COMMITTEE ON AGRICULTURE

                   FRANK D. LUCAS, Oklahoma, Chairman

BOB GOODLATTE, Virginia,             COLLIN C. PETERSON, Minnesota, 
    Vice Chairman                    Ranking Minority Member
STEVE KING, Iowa                     MIKE McINTYRE, North Carolina
RANDY NEUGEBAUER, Texas              DAVID SCOTT, Georgia
MIKE ROGERS, Alabama                 JIM COSTA, California
K. MICHAEL CONAWAY, Texas            TIMOTHY J. WALZ, Minnesota
GLENN THOMPSON, Pennsylvania         KURT SCHRADER, Oregon
BOB GIBBS, Ohio                      MARCIA L. FUDGE, Ohio
AUSTIN SCOTT, Georgia                JAMES P. McGOVERN, Massachusetts
SCOTT R. TIPTON, Colorado            SUZAN K. DelBENE, Washington
ERIC A. ``RICK'' CRAWFORD, Arkansas  GLORIA NEGRETE McLEOD, California
MARTHA ROBY, Alabama                 FILEMON VELA, Texas
SCOTT DesJARLAIS, Tennessee          MICHELLE LUJAN GRISHAM, New Mexico
CHRISTOPHER P. GIBSON, New York      ANN M. KUSTER, New Hampshire
VICKY HARTZLER, Missouri             RICHARD M. NOLAN, Minnesota
REID J. RIBBLE, Wisconsin            PETE P. GALLEGO, Texas
KRISTI L. NOEM, South Dakota         WILLIAM L. ENYART, Illinois
DAN BENISHEK, Michigan               JUAN VARGAS, California
JEFF DENHAM, California              CHERI BUSTOS, Illinois
STEPHEN LEE FINCHER, Tennessee       SEAN PATRICK MALONEY, New York
DOUG LaMALFA, California             JOE COURTNEY, Connecticut
RICHARD HUDSON, North Carolina       JOHN GARAMENDI, California
RODNEY DAVIS, Illinois
CHRIS COLLINS, New York
TED S. YOHO, Florida

                                 ______

                      Nicole Scott, Staff Director

                     Kevin J. Kramp, Chief Counsel

                 Tamara Hinton, Communications Director

                Robert L. Larew, Minority Staff Director

                                 ______

      Subcommittee on General Farm Commodities and Risk Management

                  K. MICHAEL CONAWAY, Texas, Chairman

RANDY NEUGEBAUER, Texas              DAVID SCOTT, Georgia, Ranking 
MIKE ROGERS, Alabama                 Minority Member
BOB GIBBS, Ohio                      FILEMON VELA, Texas
AUSTIN SCOTT, Georgia                PETE P. GALLEGO, Texas
ERIC A. ``RICK'' CRAWFORD, Arkansas  WILLIAM L. ENYART, Illinois
MARTHA ROBY, Alabama                 JUAN VARGAS, California
CHRISTOPHER P. GIBSON, New York      CHERI BUSTOS, Illinois
VICKY HARTZLER, Missouri             SEAN PATRICK MALONEY, New York
KRISTI L. NOEM, South Dakota         TIMOTHY J. WALZ, Minnesota
DAN BENISHEK, Michigan               GLORIA NEGRETE McLEOD, California
DOUG LaMALFA, California             JIM COSTA, California
RICHARD HUDSON, North Carolina       JOHN GARAMENDI, California
RODNEY DAVIS, Illinois               ----
CHRIS COLLINS, New York

                                  (ii)

                             C O N T E N T S

                              ----------                              
                                                                   Page
Conaway, Hon. K. Michael, a Representative in Congress from 
  Texas, opening statement.......................................     1
    Prepared statement...........................................     2
Scott, Hon. David, a Representative in Congress from Georgia, 
  opening statement..............................................     3

                               Witnesses

O'Malia, Hon. Scott D., Commissioner, U.S. Commodity Futures 
  Trading Commission, Washington, D.C............................     4
    Prepared statement...........................................     6
    Submitted questions..........................................    51
Wetjen, Hon. Mark P., Commissioner, U.S. Commodity Futures 
  Trading Commission, Washington, D.C............................    20
    Prepared statement...........................................    22
    Submitted questions..........................................    62

            THE FUTURE OF THE CFTC: COMMISSION PERSPECTIVES

                              ----------                              

                         TUESDAY, JULY 23, 2013

                  House of Representatives,
         Subcommittee on General Farm Commodities and Risk 
                                                Management,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:01 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. K. 
Michael Conaway [Chairman of the Subcommittee] presiding.
    Members present: Representatives Conaway, Neugebauer, 
Austin Scott of Georgia, Hartzler, Noem, LaMalfa, Hudson, 
Collins, Lucas (ex officio), David Scott of Georgia, Vela, 
Gallego, Vargas, Maloney, Walz, Negrete McLeod, and Costa.
    Staff present: Debbie Smith, Jason Goggins, Josh Mathis, 
Suzanne Watson, Tamara Hinton, Caleb Crosswhite, John Konya, C. 
Clark Ogilvie, Liz Friedlander, and Riley Pagett.

OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE 
                     IN CONGRESS FROM TEXAS

    The Chairman. All right. It is 10 o'clock. We are going to 
go ahead and start. This hearing of the Subcommittee on General 
Farm Commodities and Risk Management entitled, The Future of 
the CFTC: Commission Perspectives, will come to order.
    Good morning. I would like to welcome all of you to the 
second in a series of Agriculture Committee hearings on the 
future of the CFTC. Today's hearing builds on the perspectives 
shared at the full Committee hearing in May.
    I am pleased to welcome Commissioners Scott O'Malia and 
Mark Wetjen to share their perspectives on what works at the 
Commission and what doesn't, assuming there is anything that 
doesn't work over there. But thank you both for being with us 
this morning. I look forward to your perspectives.
    About 5 years ago, American's watched in horror as the 
financial services industry imploded, draining trillions of 
dollars from their investment portfolios and retirement plans. 
In response, Congress passed the Dodd-Frank Act requiring 
financial regulators to look deeper into the markets that they 
oversee. In many ways, Dodd-Frank fundamentally changed the 
regulators as much as it sought to remake the financial markets 
themselves.
    Congress mandated a staggering amount of work for the CFTC 
to get done, and it has transformed the Commission, conferring 
vast new registration, reporting and oversight powers to it. 
The Commission has spent the past 3 years on this Herculean 
task, but today, it is still frustratingly behind schedule on 
some of those. Rulemakings that were supposed to be completed 
in a year have slipped into the third year.
    But perhaps more concerning has been the pattern of 11th-
hour delays of unworkable rules or guidance. The confusion and 
delay stemming from the Commission's actions are adding up to 
real costs for market participants. Many companies are in 
limbo, unsure of how to plan for the impact of the rules that 
might change.
    Every hearing, I remark that getting Dodd-Frank done 
correctly is more important than getting it done quickly, but 
the Commission seems to be failing at both, unable to complete 
its work correctly or expeditiously. A good example of a rule 
that I am concerned about and one that we will get into further 
in the weeks to come is the customer protection rule that the 
Commission has recently proposed.
    The proposed rule requires futures commission merchants to 
hold additional margin and capital to cover all potential 
shortfalls by customers. This proposal would be expensive to 
implement and could harm the very customers it seeks to help by 
raising costs and reducing market competition. Proposed last 
November, this rule is not ready and has caused needless 
concern amongst smaller market participants who would bear the 
greatest burdens in complying with this rule.
    The Commission must do a better job seeking and considering 
objective data at the front end of rulemaking, which is why 
Ranking Member Scott and I have introduced legislation to 
require the CFTC to conduct an actual analysis of costs and 
benefits when it proposes new rules. I hope that Commissioners 
O'Malia and Wetjen can testify about additional ways they 
believe the internal processes and culture at the Commission 
can be improved. I look forward to a fruitful discussion on how 
to make sure the rulemaking process at the CFTC is coherent and 
transparent and how to ensure the Commission's future actions 
are timelier and better prepared.
    Finally, as we look at options for how to improve the CFTC, 
we cannot forget to look closely at Congressional mandates for 
reports, actions, offices, and other requirements on the 
Commission that may be outdated or redundant because of newer 
requirements. I firmly believe that repealing outdated sections 
of law is just as important as implementing new ones.
    With that, I would like to again thank both Commissioners 
O'Malia and Wetjen. It is critical that the Committee have your 
perspectives on what is working at the Commission and what is 
not. Your time appearing today and the time you spent preparing 
over the past several weeks is much appreciated by David and 
myself.
    [The prepared statement of Mr. Conaway follows:]

  Prepared Statement of Hon. K. Michael Conaway, a Representative in 
                          Congress from Texas
    Good morning. I'd like to welcome you all to the second in a series 
of Agriculture Committee hearings on the future of the CFTC. Today's 
hearing builds on the perspectives shared at the full Committee hearing 
in May.
    I am pleased to welcome Commissioners Scott O'Malia and Mark Wetjen 
to share their perspectives on what works at the CFTC and what doesn't. 
Thank you both for being with us this morning.
    Almost 5 years ago, Americans watched with horror as the financial 
services industry imploded, draining trillions of dollars from their 
investment portfolios and retirement plans. In response, Congress 
passed the Dodd-Frank Act, requiring financial regulators to look 
deeper into the markets they oversee.
    In many ways, Dodd-Frank fundamentally changed the regulators as 
much as it sought to remake the financial markets. Congress mandated a 
staggering amount of work for the CFTC and it has transformed the 
Commission, conferring vast new registration, reporting, and oversight 
powers to it.
    The Commission has spent the past 3 years on this Herculean task, 
but today, it is frustratingly behind schedule. Rulemakings that were 
supposed to be completed in a year have slipped into their third year. 
But, perhaps more concerning has been the pattern of eleventh hour 
delays of unworkable rules or guidance.
    The confusion and delay stemming from the Commission's actions are 
adding up to real costs for market participants. Many companies are in 
limbo, unsure of how to plan for the impact of rules that might still 
change. Every hearing, I remark that getting Dodd-Frank done right is 
more important than getting it done quickly, but the Commission seems 
to be failing at both, unable to complete its work correctly or 
expeditiously.
    A good example of a rule that I am concerned about, and one that we 
will get into further in the weeks to come, is the customer protection 
rule the Commission has proposed. The proposed rule would require 
futures commission merchants to hold additional margin and capital to 
cover all potential shortfalls by customers. This proposal would be 
expensive to implement and could harm the very customers it seeks to 
help by raising costs and reducing market competition. Proposed last 
November, this rule is not ready and has caused needless concern among 
smaller market participants who would bear the greatest burdens in 
complying.
    The Commission must do a better job seeking and considering 
objective data at the front end of rulemakings, which is why Ranking 
Member Scott and I have introduced legislation to require the CFTC to 
conduct an actual analysis of costs and benefits when it proposes its 
rules.
    I hope that Commissioner O'Malia and Commissioner Wetjen can 
testify about additional ways they believe the internal processes and 
culture at the Commission can be improved. I look forward to a fruitful 
discussion on how to make sure the rulemaking process at the CFTC is 
coherent and transparent and how to ensure the Commission's future 
actions are timelier and better prepared.
    Finally, as we look at options for how to improve the CFTC, we 
cannot forget to look closely at Congressional mandates for reports, 
actions, offices, or other requirements on the Commission that may be 
outdated or redundant because of newer requirements. I firmly believe 
that repealing outdated sections of law is just as important as 
implementing new ones.
    With that, I'd like to again thank both Commissioner O'Malia and 
Commissioner Wetjen. It is critical that the Committee have your 
perspectives on what is working at the Commission--and what is not. 
Your time appearing today and the time you've spent preparing over the 
past several weeks is appreciated by us all.
    I'd like to now turn to my able partner on this Subcommittee, 
Ranking Member Scott, for his opening remarks.

    The Chairman. I would now like to turn to my able partner 
on the Subcommittee, Ranking Member David Scott, for his 
opening remarks.

  OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN 
                     CONGRESS FROM GEORGIA

    Mr. David Scott of Georgia. Thank you very much, Mr. 
Chairman, and certainly to you, Mr. Wetjen and Mr. O'Malia. We 
certainly appreciate your coming here.
    Today's hearing is an especially important one but it is 
not only important just to hear about the workings of the CFTC 
but about you as an agency, about your budget, about your 
appropriations, about your needs. Your last appropriations was 
5 years ago. So much has been thrown at you over the last 5 
years. We have had the financial crisis, meltdown of Wall 
Street. We have had to come up with answers to that, and we 
have had the birth and the implementation 3 years ago of Dodd-
Frank. You have had to come up with that. We have had an ever-
growing derivatives market now that is valued at $637 trillion, 
a piece of the world economy. You have had to have rules for 
that.
    So you have had a lot thrown at you. You have done a very 
good job. And it is important, Mr. Chairman, that as we look at 
this 3 year anniversary of Dodd-Frank, it is important to note 
that the CFTC has gone from what was once sort of an obscure 
parochial regulatory body to now one of the most powerful 
governmental agencies in the world. And the task that we in 
Congress gave them was not an easy one, but they have done so 
and have done an extraordinary job and yeoman's work. And not 
just this Commission but their staff. I know, and it has to be, 
that the workload of this staff has probably quadrupled what we 
have had.
    So it is very important that we hear from you to make sure 
that you, as your budget is about to expire in the next 9 weeks 
or so, that we hear from you to know exactly what your needs 
are because we, this Subcommittee, certainly wants to make sure 
that you have the funding that you have needed, the technology 
that you have needed. We can sit here and make these laws of 
cross-border and push out and having all of these derivatives, 
but we have to depend upon you to tell us, ``Congress, you want 
us to do this job, you want us to do it right. Here is what we 
need to do it and here is why.'' I think that is very important 
to get across in this hearing today.
    So, Mr. Chairman, with that I will yield back the balance 
of my time.
    The Chairman. Thank you, David. I appreciate that. It is my 
honor to welcome the panel of witnesses to the table today. We 
have Mr. Scott O'Malia, Commissioner, U.S. Commodity Futures 
Trading Commission, Washington, D.C.; and the Honorable Mark 
Wetjen, Commissioner, U.S. Commodity Futures Trading Commission 
out of Washington, D.C. So, Mr. O'Malia, we have both of your 
written statements for the record but please visit with us 
about the things that you think are the most important out of 
your written testimony, sir. With that, Scott, you have the 
floor.

    STATEMENT OF HON. SCOTT D. O'MALIA, COMMISSIONER, U.S. 
             COMMODITY FUTURES TRADING COMMISSION,
                        WASHINGTON, D.C.

    Mr. O'Malia. Chairman Conaway, Ranking Member Scott, and 
Members of the Subcommittee, I am pleased to be invited here 
today to discuss the CFTC's implementation of Dodd-Frank. I am 
also pleased to be able to participate in this hearing and 
joined by my fellow Commissioner and colleague, Commissioner 
Mark Wetjen.
    In summarizing my testimony, I will focus on three main 
topics. First, I would like to discuss the challenges that end-
users face as a result of the Commission's approach to the 
implementation of Dodd-Frank. Second, I will discuss the 
serious concerns I have with the Commission's rulemaking 
process. And finally, I will discuss the challenges in the 
Commission's data utilization efforts and the importance of 
technology in meeting the Commission's expanded mission.
    Even a brief review of the legislative history of the Dodd-
Frank Act demonstrated that it was Congress' intent to protect 
commercial end-users from Dodd-Frank's expansive regulatory 
reach. The swap dealer rule is a good example of the 
Commission's failure to accurately interpret Dodd-Frank. The 
rules make it unnecessarily difficult to determine whether an 
entity is a swap dealer or an end-user. It broadly applies the 
swap dealer definition to all market participants and ignores 
the statutory mandate to exclude end-users.
    Rather than providing a bright-line test or expressly 
excluding end-users, the swap dealer rule lists numerous 
factors that should be considered in determining whether an 
end-user's commercial activity might be swap dealing. As a 
result, end-users have shied away from the ambiguous facts and 
circumstances test and instead have relied on provisions that 
excuse a dealer from registration with the Commission if its 
aggregate dealing activity is below an $8 billion de minimis 
threshold, which is an arbitrary amount that is not based on 
data. I would encourage Congress to exclude end-users from the 
swap dealer definition. In the alternative, Congress should 
also consider allowing commercial entities not to count their 
cleared swaps as part of their $8 billion de minimis 
calculation.
    Another area that deserves Congressional attention is 
customer protection in bankruptcy. The importance of these 
issues is emphasized by the recent cases involving the blatant 
misuse of customer funds by FCMs. In 2010, MF Global 
misappropriated over $900 million to cover its own proprietary 
losses. One year later, Peregrine Financial and its founder 
Russell Wassendorf stole over $200 million in customer funds. 
Both the industry and the Commission have taken steps to 
increase the level of protections to prevent something like 
this from happening again. It is inexcusable that these FCMs 
failed to protect customer funds. Although these violations 
were not because of a lack of regulation, I believe there is 
room for improvement.
    As I explain in more detail in my written testimony, I 
believe that Congress should consider improving customer 
protections in bankruptcy. First, I believe customers will 
benefit from increased CFTC authority in insolvency proceedings 
by appointing a CFTC trustee to look out for futures and swaps 
customers.
    Second, Congress must ensure that customers are always 
first in line in any distribution of assets of an estate in 
bankruptcy.
    Third, the Congress should revisit the pro-rata 
distribution rules, including creating the possibility of 
third-party segregation accounts that will not be comingled in 
bankruptcy.
     Another area that needs improvement is the Commission's 
own rulemaking procedures. I think that everyone would agree 
that it is virtually impossible to achieve good policy outcomes 
without establishing sound processes for reaching these 
outcomes. The CFTC staff has issued an unprecedented number of 
no-action letters. So far, the staff has issued over 100 
letters, including 24 letters that provide indefinite relief 
from hastily drafted rules. No-action letters are not voted on 
by the Commission. They are not published in the Federal 
Register and do not include notice-and-comment periods. Thus, 
no-action letters should be used on a very limited basis.
    I have always advocated that all Commission rulemaking must 
include a thorough cost-benefit analysis, both qualitative and 
quantitative, to ensure that our rules do not impose 
unreasonable costs. However, the cost-benefit provisions in the 
CEA do not currently require quantitative analysis. Thus, I am 
pleased that the House has passed the cost-benefit reform bill 
requiring the Commission to conduct quantitative analysis to 
justify the cost of its rules relative to their benefits.
    In considering the Commission's reauthorization, it is 
entirely appropriate for Congress to review the Commission's 
internal procedures for compliance with the APA and insist on 
reforms to the Commission's cost-benefit analysis. It is also 
imperative for the Commission to better utilize technology 
given the Commission's expanded oversight responsibilities.
    Since the beginning of 2013, certain market participants 
have been required to report their data to an SDR. 
Unfortunately, the Commission has struggled with analyzing this 
information. Earlier this spring, our surveillance staff 
admitted that they could not spot the London Whale trades in 
the current CFTC data. Solving our data dilemma must be the 
Commission's top priority. As the Chairman of the Commission's 
Technology Advisory Committee, I have formed a working group 
comprised of CFTC staff and various market participants, 
including the SDRs, to resolve this problem as soon as 
possible.
    The Commission has been given the momentous task of 
creating a regulatory environment that increases transparency 
and improves stability in our financial markets. Therefore, the 
Commission must faithfully implement the statute in a 
consistent, clear, and cost-effective manner. This Committee 
has every right and responsibility to make the necessary and 
immediate changes it deems fit. I am happy to continue to work 
with this Committee to ensure that the Commission is operating 
as authorized and mandated under the CEA.
    I am happy to answer any questions you have following our 
testimony. Thank you.
    [The prepared statement of Mr. O'Malia follows:]

    Prepared Statement of Hon. Scott D. O'Malia, Commissioner, U.S. 
         Commodity Futures Trading Commission, Washington, D.C.
    Chairman Conaway, Ranking Member Scott, and Members of the 
Subcommittee, I am pleased to be invited here today to discuss the 
Commodity Futures Trading Commission (``CFTC'' or ``Commission'')'s 
implementation of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (``Dodd-Frank Act''),\1\ as well as the 
Commission's oversight of the derivatives markets.
---------------------------------------------------------------------------
    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. 
L. 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------
    I'd like to first recognize the tremendous efforts by CFTC staff to 
implement the sweeping reforms of the Dodd-Frank Act, including the 
Commission's new authority to oversee the over $600 trillion swaps 
market. They have put in many hours of hard work over the past 3 years 
to carry out the CFTC's mission, and should be commended for their 
achievements.
    The Dodd-Frank Act was enacted to implement the four principles 
agreed to by the G20 nations who finalized the Pittsburgh Communique on 
September 25, 2009.\2\ These four principles are (1) reporting of all 
trades to a trade repository, (2) requiring that ``all standardized OTC 
derivatives should be traded on exchanges or electronic trading 
platform, where appropriate,'' (3) ``clearing through central 
counterparties,'' and (4) higher collateral charges for all uncleared 
over-the-counter (``OTC'') derivatives contracts.
---------------------------------------------------------------------------
    \2\ http://www.treasury.gov/resource-center/international/g7-g20/
Documents/pittsburgh_summit_leaders_statement_250909.pdf at 9.
---------------------------------------------------------------------------
    The CFTC was charged with the mandate to reduce risk, increase 
transparency, and promote market integrity under the reforms set forth 
in Title VII of the Dodd-Frank Act. Unfortunately, the Commission's 
implementation of Dodd-Frank has made it difficult for commercial end-
users to comply with CFTC regulations and made hedging more complicated 
and expensive.
    My testimony today will focus on three main topics. First, I will 
discuss challenges presented by the Commission's policy approach to the 
implementation of Dodd-Frank and its negative impact on commercial end-
users. I will include suggestions to improve CFTC regulations so that 
end-users receive fair treatment. I will also discuss several policy 
initiatives related to customer protection.
    Second, I will discuss serious concerns that I have with the 
Commission's rulemaking process, including the abuse of no-action 
relief and the lack of strict adherence to the provisions of the 
Administrative Procedure Act (``APA''). It is my hope that Congress 
will be able to assist the Commission with imposing discipline on its 
internal policies and procedures, including amendments to the Commodity 
Exchange Act (``CEA'').
    Finally, I will discuss challenges in CFTC data utilization and the 
importance of technology in meeting the Commission's greatly expanded 
surveillance and oversight responsibilities under the sweeping reforms 
enacted by the Dodd-Frank Act.
I. Improving CFTC Regulations Under the Dodd-Frank Act
Protecting Commercial End-Users in Hedging and Mitigating Risk
    Even a brief review of the legislative history of the Dodd-Frank 
Act demonstrates that it was Congress' intent to protect commercial 
end-users from Dodd-Frank's expansive regulatory reach. Many end-users 
assumed that CFTC regulations would not affect them and supported 
aspects of reform, without realizing the policy approach that the 
Commission would take in implementing the Dodd-Frank Act.
Excluding End-Users from the Swap Dealer Definition
    The swap dealer rule is a good example of how the Commission failed 
to accurately interpret Dodd-Frank by broadly applying the swap dealer 
definition to all market participants and ignoring the express 
statutory mandate to exclude end-users from its reach.\3\ Instead, the 
swap dealer rule makes it unnecessarily difficult to determine whether 
an entity is a swap dealer or an end-user. For example, rather than 
providing for a clear bright-line test, the swap dealer rule lists 
numerous factors that should be considered.
---------------------------------------------------------------------------
    \3\ Further Definition of ``Swap Dealer,'' ``Security-Based Swap 
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap 
Participant'' and ``Eligible Contract Participant,'' 77 FR 30595 at 
30744 (May 23, 2012).
---------------------------------------------------------------------------
    Further, as I noted in my dissent to the swap dealer rule,\4\ the 
rule exclusively implements the swap dealer definition provided by the 
Dodd-Frank Act in section 1a(49)(A) of the CEA,\5\ and fails to 
implement the exclusion for persons that are not engaged in swaps 
trading as part of ``a regular business'' in section 1a(49)(C).\6\ Not 
only that, but the Commission also failed to interpret section 
1a(49)(B) of the CEA, which provides express authority for the 
Commission to exclude specific entities from the dealing definition for 
``types, classes or categories of swaps,'' such as physical 
commodities.\7\
---------------------------------------------------------------------------
    \4\ Statement of Dissent, Commissioner Scott D. O'Malia (April 18, 
2012), available at 
http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement041812b.
    \5\ 7 U.S.C.  1a(49)(A).
    \6\ 7 U.S.C.  1a(49)(C).
    \7\ 7 U.S.C.  1a(49)(B).
---------------------------------------------------------------------------
    As a result, because the rule's swap dealer definition focuses on 
characteristics of entities rather than their activities and ignores 
two important exclusions, it captures commercial end-users even though 
their activities involve hedging and risk mitigation and have nothing 
to do with swap dealing activities. As a result, end-users have to seek 
numerous exemptions from various CFTC regulations. This inefficient 
regulatory process creates uncertainty for end-users and increases the 
costs of hedging and mitigating risk.
    This concerns me even more because Members of Congress who drafted 
the Dodd-Frank Act repeatedly attempted to make it clear to the 
Commission that commercial end-users should be exempted from Dodd-
Frank's swap provisions. In June 2010, Senate Banking Committee 
Chairman Chris Dodd and Senate Agriculture Committee Chairman Blanche 
Lincoln circulated a joint letter stating, ``Congress does not intend 
to regulate end-users as Major Swap Participants or Swap Dealers just 
because they use swaps to hedge or manage commercial risks associated 
with their business.'' \8\ And in March 2012, Senate Agriculture 
Committee Chairman Debbie Stabenow and House Agriculture Committee 
Chairman Frank Lucas also sent a joint letter to the Commission to 
reiterate these points:
---------------------------------------------------------------------------
    \8\ Letter from Senators Christopher Dodd and Blanche Lincoln to 
Congressmen Barney Frank and Collin Peterson (June 30, 2010).

          ``[I]t is important for the Commission to finalize the swap 
        dealer definition in a manner that is not overly broad, and 
        that will not impose significant new regulations on entities 
        that Congress did not intend to be regulated as swap dealers. 
        The Commission's final rulemaking further defining `swap 
        dealing' should clearly distinguish swap activities that end-
        users engage in to hedge or mitigate the commercial risk 
        associated with their businesses, including swaps entered into 
        by end-users to hedge physical commodity price risk, from 
        dealing . . . .'' \9\
---------------------------------------------------------------------------
    \9\ Letter from Senator Debbie Stabenow and Congressman Frank Lucas 
to CFTC Chairman Gary Gensler (March 29, 2012).

    Unfortunately, the Commission failed to listen to these 
Congressional directives in its implementation of the swap dealer rule.
Solutions that Remove End-Users from the Swap Dealer Definition
    Given the policy challenges that the Commission faces regarding the 
fair treatment of end-users, I would encourage Congress to expressly 
exclude end-users from the swap dealer definition. In the alternative, 
Congress may want to consider other approaches that would both 
encourage risk-mitigating behavior by end-users and also remove the 
costly burden imposed by the swap dealer definition. For example, 
Congress should consider permitting commercial entities to not count 
any of their swap trades that are cleared toward their de minimis swap 
dealing calculation, and consider applying a consistent definition of 
hedging activity that allows end-users to mitigate both physical and 
financial commercial risk.
Fixing Hedging and Clearing
    I am concerned that the swap dealer rule does not provide any legal 
or factual justification for the threshold amounts used in aggregation 
of swap dealing activity. Under CFTC regulations, a swap dealer does 
not need to register with the Commission if its aggregate swap dealing 
activity on a yearly basis is below the arbitrary $8 billion 
threshold.\10\ The threshold is then reduced to $3 billion after a 5 
year phase-in period.\11\ The Commission has failed to support this 
decision with a fact-based rationale and has made the reduction of the 
threshold amount non-discretionary, instead of allowing a future 
Commission to determine the appropriate de minimis levels based on 
market conditions at that time.
---------------------------------------------------------------------------
    \10\ See Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap 
Participant'' and ``Eligible Contract Participant,'' 77 FR 30595 at 
30634 (May 23, 2012).
    \11\ Id. at 30744.
---------------------------------------------------------------------------
    In calculating the de minimis threshold, market participants are 
permitted to exclude trades that are executed to hedge physical 
positions.\12\ But for some reason, the Commission's definition of 
``hedging activity'' is different from the definition used in other 
rules.\13\ For purposes of both simplicity and consistency, the 
Commission should adopt one uniform definition of hedging for all CFTC 
regulations, and the same definition of hedging should be applied to 
both swap dealers (``SDs'') and major swap participants (``MSPs''). I 
would welcome Congressional action to clarify the scope and level of 
permissible hedging activity, which is the foundation of the swaps and 
futures markets.
---------------------------------------------------------------------------
    \12\ 17 CFR  1.3(ggg)(6)(iii) (excluding swap transaction entered 
into to hedge physical positions from the de minimis swap dealer 
calculation).
    \13\ See  1.3(z) and 151.5 (defining bona fide hedge transactions 
in the context of position limits),  1.3(kkk) (defining hedging or 
mitigating commercial risk in the context of the major swap participant 
de minimis calculation),  50.50 (defining hedging or mitigating 
commercial risk in the context of clearing exceptions).
---------------------------------------------------------------------------
    Swaps used to hedge risk are not the only category of transactions 
that should be removed from the $8 billion de minimis threshold amount. 
Swap transactions that are cleared through a derivatives clearing 
organization (``DCO'') mitigate risk and ensure that both parties deal 
at arm's length. Accordingly, these cleared swaps should also be 
excluded from the de minimis calculation either by the Commission or by 
Congressional action.
Defining ``Financial Entity'' in the CEA
    Another major issue that Congress needs to address is the 
definition of ``financial entity'' in section 2(h) of the CEA, which 
addresses mandatory clearing.\14\ This provision includes the 
definition of a financial entity as a person ``predominantly engaged'' 
in either activities that are within ``the business of banking'' or 
``activities that are financial in nature'' as defined in the Bank 
Holding Company Act (``BHCA'').\15\ The term ``financial entity'' has 
material significance throughout Title VII and affects not only these 
entities' domestic operations, but also has global impact due to the 
recent cross-border swaps guidance.
---------------------------------------------------------------------------
    \14\ 7 U.S.C.  2(h)(7)(C)(i)(VIII).
    \15\ Id.
---------------------------------------------------------------------------
    Unfortunately, using the BHCA as the source of this part of the 
definition of financial entity actually hurts end-users because certain 
technical aspects of end-users' physical commodities transactions would 
fall under the banking regulators' interpretation of ``activities that 
are financial in nature.'' Using the definition of ``financial in 
nature'' under the banking laws applies unnecessary restrictions to 
these end-users and interferes with their business operations. The 
definition also interferes with the Commission's mandate to ensure that 
the commodity markets are liquid and promote hedging and price 
discovery. It would be helpful if Congress could clarify the definition 
of ``financial entity'' under the CEA.
    As an alternative solution, section 102(a)(6) of the Dodd-Frank Act 
sets forth a predominance test to determine whether or not a firm is a 
``nonbank financial company.'' The statute applies an 85% standard for 
gross revenue from financial activity to determine if a company is 
predominantly engaged in financial activities, and ultimately, a 
nonbank financial company. One could assume from this standard that a 
de minimis amount is, therefore, less than 15% of gross revenue from 
non-financial activity. Accordingly, I wonder whether the Commission 
should apply a similar 85/15 standard as part of our de minimis 
exception in order to provide a bright-line test for end-users (both 
commercial and non-bank financial) to demarcate themselves from swap 
dealers.
Excluding Forward Contracts with Volumetric Optionality from Swap 
        Definition
    Another example where CFTC regulations have unnecessarily 
complicated common commercial transactions, and confounded end-users 
who want to both comply with the law and use volumetric options in 
their regular business, is the treatment of volumetric options in the 
swap definition.
    The definition of swap is fundamental to CFTC regulations that 
oversee the derivatives markets and mitigate systemic risk. Determining 
whether a contract is a swap affects the determination of swap dealer 
registration, position limits calculations, the scope of the bona fide 
hedge exemption, and clearing and reporting requirements. Equally 
important to the definition of swap is ensuring that it does not 
capture the legitimate business activity of end-users.
    Dodd-Frank explicitly excludes forward contracts from the 
definition of ``swap.'' \16\ As you know, flexibility of the terms of 
commodity forward contracts is essential for commercial end-users. The 
parties cannot always accurately predict the required needs of certain 
commodities at some point in the future to meet their business needs.
---------------------------------------------------------------------------
    \16\ 7 U.S.C.  1a(47)(B)(ii).
---------------------------------------------------------------------------
    Unfortunately, the Commission has created a lot of confusion as to 
whether and under what conditions forward contracts containing terms 
that provide for some form of flexibility in delivered volumes (i.e., 
contracts with ``embedded volumetric optionality'') fall within the 
forward exclusion.
    The swap definition rule suggests that an agreement with embedded 
optionality falls within the forward exclusion when seven criteria are 
met. The seventh criterion, however, caused a lot of anxiety among end-
users. In essence, the Commission interpreted this criterion as 
requiring market participants to determine whether their exercise or 
non-exercise of volumetric optionality is based on factors outside 
their control and not on the economics of the option itself.\17\ This 
interpretation makes no commercial sense and does not achieve any 
objectives of Dodd-Frank.
---------------------------------------------------------------------------
    \17\ The seventh criterion states that the exclusion applies only 
when ``[t]he exercise or non-exercise of the embedded volumetric 
optionality is based primarily on physical factors, or regulatory 
requirements, that are outside the control of the parties and 
influencing demand for, or supply of the nonfinancial commodity.'' 77 
FR 48208 at 48238 n. 341 (Aug. 13, 2012).
---------------------------------------------------------------------------
    Needless to say, the Commission's ambiguous interpretation of the 
seventh criterion has made it very difficult for end-users to utilize 
volumetric optionality without the fear of being dragged into the swaps 
world. A number of end-users requested that the Commission provide 
clarity on this issue.\18\ So far, the Commission has ignored their 
requests. Given the importance of these contracts, I believe that the 
forward-contract exclusion in section 1a(47)(B)(ii) of the CEA should 
be amended to exclude these types of forward contracts from the swap 
definition.
---------------------------------------------------------------------------
    \18\ See, e.g., National Gas Supply Association Comment Letter 
(Oct. 12, 2012), American Petroleum Institute Comment Letter (Oct. 11, 
2012), Edison Electric Institute Comment Letter (Oct. 12, 2012).
---------------------------------------------------------------------------
Raising the De Minimis Threshold for Special Entities
    Another group that deserves to be reevaluated for fair treatment is 
state, city, and county municipalities that fall within the swap dealer 
rule as ``Special Entities.'' As currently drafted, the rule 
discourages market participants from trading with Special Entities. 
When trading with municipal energy companies, the $8 billion de minimis 
threshold drops to only $25 million.\19\ The reasoning behind this 
distinction was that Special Entities need even more protection because 
any loss incurred by a Special Entity would result in the public being 
left holding the bag.\20\ While this rule was written with the best of 
intentions, by reducing the de minimis threshold to $25 million, the 
end result has been a reduction in the number of market participants 
that are willing to do business with Special Entities. Many 
counterparties that would fall well below the $8 billion de minimis 
threshold are not willing to trade with Special Entities for fear of 
exceeding the $25 million cap and then having to register with the 
Commission as swap dealers.
---------------------------------------------------------------------------
    \19\ 77 FR 48208 at 30642, 30744.
    \20\ Id. at 30628 (referring to documented cases of municipalities 
losing millions of dollars on swaps transactions because they did not 
fully understand the underlying risks of the instrument).
---------------------------------------------------------------------------
    In a quick fix to repeated requests from various Special Entities, 
the Commission issued no-action relief allowing the de minimis 
threshold to be increased to $800 million for utility commodity 
swaps.\21\ In trying to protect Special Entities from the perils of 
trading in the swaps market, we have forced them to trade with large 
Wall Street banks since no other entity is willing to trade with them 
for fear of becoming a swap dealer. Instead of providing them with 
greater protection, the Commission has limited the pool of 
counterparties with which Special Entities can trade, concentrating 
risk in fewer market participants. This plainly goes against the goal 
of reducing systemic risk.
---------------------------------------------------------------------------
    \21\ Staff No-Action Relief: Temporary Relief from the De Minimis 
Threshold for Certain Swaps with Special Entities, October 12, 2012.
---------------------------------------------------------------------------
Exempting Cooperatives from Clearing Certain Swaps
    On a more positive note, I am pleased that the Commission has 
provided cooperatives representing smaller financial institutions, such 
as credit unions or farm credit organizations, an exemption for 
clearing certain swaps. The smaller institutions themselves have 
already been exempted, but after receiving requests from the 
cooperatives that represent groups of such organizations, the 
Commission has exempted them as well. Cooperatives act on behalf of 
their members, the end-users, when they transact in the financial 
markets. Therefore, the same clearing exemption should be available to 
these groups.
    Incidentally, at least in the energy markets, traders have moved to 
the futures market to avoid the onerous swap dealer definition. Trading 
futures doesn't contribute to any swap dealer de minimis levels and all 
futures trades are cleared, thus mitigating counter party risk. This 
brings me to my next area of discussion--futurization.
Futurization of Swaps
    As a good example of the effect of the complexity and regulatory 
uncertainty created by CFTC regulations implementing the Dodd-Frank 
Act, commercial end-users moved the lion's share of swaps trading to 
the futures markets. Last year, on October 15, 2012, which is the day 
that the swap dealer and swap definition rules took effect, the 
IntercontinentalExchange (``ICE'') converted all of its energy swaps 
into futures as requested by their customers. The exact same products 
that were swaps the day before were traded seamlessly as futures on a 
designated contract market (``DCM'').
    There are three main drivers behind futurization: (1) vague and 
over-inclusive swap dealer definition rules as I mentioned earlier, (2) 
the Commission's differential regulatory treatment of futures vis a vis 
swaps with respect to the margining requirements and (3) margin 
requirements for swaps.
    With respect to margining, futures are margined assuming a 1 or 2 
day liquidation period.\22\ However, swaps (except for energy and 
agricultural swaps) require a minimum liquidation period of 5 days for 
calculating initial margin.\23\ The margin is set based on a 
liquidation period in order to cover potential losses on a defaulted 
position before that position can be liquidated by the clearinghouse. 
This substantially higher margin for swaps results in a significant 
economic disadvantage to swaps contracts compared to futures contracts 
that have similar economic characteristics. Such differential treatment 
of economically equivalent contracts, simply because one is called a 
``swap'' and the other is called a ``future,'' makes no sense from a 
risk management standpoint. Instead, the liquidation period should 
depend on the economic characteristics of a particular contract 
(regardless of whether it is a swap or future) and the level of 
liquidity of that contract. All of these conditions should the same for 
two economically equivalent contracts.
---------------------------------------------------------------------------
    \22\ 17 CFR  39.13(g)(2)(ii)(A).
    \23\ 17 CFR  39.13(g)(2)(ii)(C).
---------------------------------------------------------------------------
    Historically, the Commission has allowed DCOs to set the minimum 
liquidation time horizons and the Commission has relied entirely on the 
expertise of clearing houses to set all margin levels. Allowing the 
clearinghouse to set the risk, rather than the Commission's prescribing 
rules with arbitrary time periods, is more appropriate because of the 
risk management functions of clearinghouses. There is also no incentive 
for a DCO to lower margin levels because the DCO ultimately bears the 
loss for any of its members' default.
Harmonizing Capital and Margin Requirements for OTC Swaps
    Another rule that is yet to be finalized that impacts end-users' 
activities is the capital and margin requirements for OTC swaps. In 
their letter, Senators Dodd and Lincoln point out that ``Congress 
clearly stated that the margin and capital requirements are not to be 
imposed on end-users.'' \24\
---------------------------------------------------------------------------
    \24\ Letter from Senators Christopher Dodd and Blanche Lincoln to 
Congressmen Barney Frank and Collin Peterson (June 30, 2010).
---------------------------------------------------------------------------
    On April 13, 2011, the Commission proposed rules regarding capital 
and margin requirements for uncleared swaps.\25\ I supported the 
proposal and the exemptive relief that rule would provide to end-users. 
Under the proposal, when swap dealers trade with end-users, the swap 
dealer is not required to pay or collect initial or variation margin. 
This is consistent with Congressional intent.
---------------------------------------------------------------------------
    \25\ 76 FR 23732 (April 13, 2011).
---------------------------------------------------------------------------
    While the margin rules, as proposed, would provide some relief to 
end-users, I believe end-users will be required to take a capital 
charge. The final result is that end-users will ultimately pay more for 
these transactions than they did before. It is imperative that the 
Commission's regulations not divert working capital into margin 
accounts in a way that would discourage hedging by end-users or impair 
economic growth. Whether swaps are used by an airline hedging its fuel 
costs or a manufacturing company hedging its interest rates, 
derivatives are an important tool that companies use to manage costs 
and market volatility. I agree with Sean Owens, an economist with 
Woodbine Associates, who stated that under the Dodd-Frank rules, ``end-
users face a tradeoff between efficient, cost-effective risk transfer 
and the need for hedge customization. The costs implicit in this 
tradeoff include: regulatory capital, funding initial margin, market 
liquidity and structural factors.'' \26\
---------------------------------------------------------------------------
    \26\ See Sean Owens, Optimizing the Cost of Customization, Review 
of Futures Market (Jul. 2012).
---------------------------------------------------------------------------
Swap Execution Facilities
    Another rule that could potentially impact end-users is the 
Commission's swap execution facility (``SEF'') rulemaking that was 
finalized by the Commission in June.\27\ I am pleased that in some 
ways, the SEF rules have made great strides to allow for a smooth 
transition to this new trading environment. The rules provide a 
streamlined registration process and allow for flexible methods of 
execution, but it remains to be seen whether the Commission will be 
able to deliver on the requirements to approve temporary SEF 
registration on an expedited basis. Now, it is incumbent upon the 
Commission to move quickly, consistently, and transparently to approve 
SEF applications and provide market participants adequate time to test 
the new trading facilities, before mandatory trading requirements are 
effective.
---------------------------------------------------------------------------
    \27\ 78 FR 3347 (June 6, 2013).
---------------------------------------------------------------------------
    In many ways, the final rule is consistent with the goals of the 
SEF clarification bill as it acknowledges the ``any means of interstate 
commerce'' clause contained in the SEF definition and provides for a 
role of voice and other means of execution. I am aware that the final 
rules may have created an uneven playing field for those SEFs that are 
trading products that are not required to be traded on a SEF. The rule 
requires all multilateral facilities to register as a SEF and comply 
with all the regulatory requirements if they trade these products, 
while platforms that have one-to-many facilities are not required to 
register with the Commission and are allowed to offer these products 
for trading. I believe the Commission should address this regulatory 
arbitrage as soon as possible to establish a level playing field for 
the new swap execution platforms.
Protecting Customers in FCM Bankruptcy Proceedings
    I have now identified several areas where the Commission's policy 
approach and rule implementation have failed to appropriately exclude 
commercial end-users from the more onerous aspects of the Dodd-Frank 
Act that address systemic risk, and offered suggestions to solve these 
challenges. But in the important area of customer protection, there are 
a couple issues where the Commission could use help from Congress.
Lessons Learned from MF Global and Peregrine
    The importance of customer protection is emphasized by the recent 
cases involving the blatant misuse of customer funds by futures 
commission merchants (``FCMs''). In 2010, MF Global misappropriated 
over $900 million in customer funds in order to cover losses incurred 
by the FCM in its own proprietary trading accounts. This was made worse 
by the $700 million in funds that were held in MF Global's UK affiliate 
that remained out of reach of U.S. customers that were entitled to 
these funds. It goes without saying that this was a devastating loss to 
the customers of MF Global.
    One year later, Peregrine Financial Group and its founder and chief 
executive Russell Wassendorf were found to have misappropriated over 
$200 million in customer funds. In light of these sizable and high 
profile cases of FCM misconduct, both the industry and Commission have 
taken steps to increase the level of protection afforded to customer 
assets to prevent something like this from happening again.
    It is inexcusable that these FCMs failed to protect customer funds. 
These violations were not because of a lack of regulation, but were due 
to the failure of these FCMs to comply with rules under the CEA. In 
both cases, the Commission used its enforcement authority to prosecute 
those responsible at these FCMs. In the case of MF Global, the 
Commission recently filed a law suit against Jon Corzine and Edith 
O'Brien that has not yet gone to trial.\28\ But importantly, customers 
have fared better in recovering their funds that were misused. Today, 
customers are expected to recover approximately 96 percent of their 
funds,\29\ albeit 3 years after wrongdoing was discovered. In the case 
of Peregrine Financial, Russell Wassendorf was convicted of mail fraud, 
embezzlement, and making false statements to the CFTC and the National 
Futures Association. Regrettably, however, customers of Peregrine 
continue to seek repayment of the more than $200 million in customer 
funds that were stolen by Mr. Wassendorf.
---------------------------------------------------------------------------
    \28\ http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/
documents/legalpleading/enfmfglobalcomplaint062713.pdf.
    \29\ While futures customers of MF Global are expected to receive 
96% of their assets, MF Global customers that had foreign investments 
are expected to recover between 84-91% of their assets.
---------------------------------------------------------------------------
    As I noted earlier, the Commission did have regulations in place to 
make these actions by the respective CEOs unlawful.\30\ Even so, I 
believe there are opportunities to make improvements in Commission 
oversight of customer funds. As I mention in more detail below, I 
believe Congress should carefully consider improving customer 
protections in the event of FCM insolvency.
---------------------------------------------------------------------------
    \30\ See 7 U.S.C.  13c(b).
---------------------------------------------------------------------------
Creating a Bankruptcy Trustee for Futures and Swaps Customers
    Let me first address post-bankruptcy reforms. Since over 90% of 
customer assets that are held in FCMs are held by jointly registered 
and regulated broker-dealers/FCMs, I would support increasing the 
authority of the CFTC in the insolvency proceedings for these jointly-
regulated entities. For example, in the case of MF Global, the 
Securities Investor Protection Corporation (``SIPC'') placed the firm 
into bankruptcy, with SIPC as its trustee and the exclusive mandate to 
protect securities customers. Since the interests of futures customers 
may not align with securities investors, it makes sense for the 
Commission to have the power to appoint its own trustee who is familiar 
with the CEA.
Ensuring that Customers Come First: ``Super Lien'' Reforms
    Further, I believe Congress should pursue granting new authority to 
the Commission in the U.S. Bankruptcy Code to ensure that customers are 
always first in order of priority in any distribution of assets of the 
estate by the bankruptcy trustee. Claiming customers are first in line 
only within the FCM is not enough, especially if they are deemed a 
general creditor amongst the other claimants against the holding 
company. The reality is--and this was the case in MF Global--that the 
decision of the CEO of the controlling parent company can directly 
impact the operation of the FCM and, therefore, its customers. By 
making customers first in line for the proprietary assets of the FCM 
and its controlling parent, the company has every incentive to 
strengthen its internal controls to protect customer funds. And 
creditors, knowing their claims would be subordinate to customers in 
the event of a shortfall in the bankruptcy accounting, would also be 
incentivized to ensure good internal controls are in place.
Reconsidering Pro Rata Distribution for Customers
    Next, I believe Congress should carefully consider the pro-rata 
distribution rules in bankruptcy proceedings, including creating the 
opportunity for certain entities (that are willing to purchase such 
protection) the ability to establish third-party segregation accounts 
that will not be commingled in bankruptcy. Currently, if there is a 
shortfall in segregation, customers share the loss proportionally.\31\ 
This is the law whether or not customer funds are held in one account 
(commingled) or in a separate individual account. The Commission has 
explored various options, but has been unable to change the pro-rata 
requirements without statutory amendments.
---------------------------------------------------------------------------
    \31\ See 11 U.S.C.  766(h).
---------------------------------------------------------------------------
Rulemaking on FCM Residual Interest
    The Commission has also proposed a new customer protection rule 
seeking to improve the Commission's FCM oversight.\32\ The comment 
period is closed and the draft final rule is nearing completion. One 
element of this rule that has drawn significant attention is the rule 
changing the Commission's interpretation of residual interest. The 
practical effect of this rule would require FCMs to maintain a level of 
excess margin so that one customer's excess margin does not fund the 
margin shortfall of another customer 100 percent of the time. While the 
clearing house will view the FCM's omnibus account as being properly 
funded,\33\ one customer's assets are being used to fund another's 
shortfall, which is a direct violation of the CEA.\34\
---------------------------------------------------------------------------
    \32\ See Enhancing Protections Afforded Customers and Customer 
Funds Held by Futures Commission Merchants and Derivatives Clearing 
Organizations; Proposed Rule, 77 FR 67866 at 67934 (Nov. 14, 2012).
    \33\ This is better illustrated by means of an example: FCM A has 
customers B and C. Customer B has a long futures position that requires 
$110 in margin. Customer C has a short futures position that requires 
only $100 in margin. FCM A then reports these positions to the clearing 
house within its single customer account without identifying the 
individual customer positions. Since the clearing house views this as 
one single account, it views FCM A as having a $10 surplus. In the 
event Customer C's position reduces in value to the point that 
additional margin is required, FCM A should collect that amount 
directly from Customer C. If the loss in C's position only requires an 
additional margin contribution of $10 or less however, FCM A could use 
the $10 excess in Customer B's account to fund Customer C's deficiency 
until it collects that additional margin requirement from Customer C at 
a later date.
    \34\ ``It shall be unlawful for any person to be a futures 
commission merchant unless . . . such person shall . . . treat and deal 
with all money . . . received by such person to margin . . . the trades 
. . . of any customer of such person . . . as belonging to such 
customer.'' 7 U.S.C.  6d(a)(2).
---------------------------------------------------------------------------
    We have heard significant concerns from small FCMs in the Midwest 
who serve farmers and ranchers in agriculture markets. The small FCMs 
are less likely to be able to cover the additional funds, unlike larger 
firms. This could result in less competition and higher concentration 
of risk and counterparty exposure among FCMs.
II. Improving CFTC Policies and Procedures
    I have now identified several examples where the Commission's 
policy approach has resulted in negatively impacting commercial end-
users in a way that I do not believe Congress intended, and outlined 
solutions to get us back on track with our mission to protect market 
participants and ensure open, competitive markets that efficiently 
hedge risk and foster price discovery. But, it is virtually impossible 
to achieve good policy outcomes without establishing a sound process 
for reaching those outcomes. Unfortunately, the Commission has failed 
to do so in our implementation of the Dodd-Frank Act.
    I have serious concerns that the Commission has sidestepped many 
requirements that all administrative agencies must follow under the 
APA.\35\ I believe that strong Congressional oversight of our internal 
policies and procedures and strong Commission oversight of CFTC staff 
action will help us to improve our process, ensure that public 
participation is a core component in our deliberations, and that 
decisions that significantly impact market participants happen in an 
open and transparent manner.
---------------------------------------------------------------------------
    \35\ 5 U.S.C.  551 et seq.
---------------------------------------------------------------------------
Administrative Procedure Act
    For example, the Commission's position limits rule was struck down 
last year by the United States District Court for the District of 
Columbia. The court held that before setting position limits, the 
Commission is required by statute to determine whether position limits 
were ``necessary and appropriate'' to prevent excessive speculation in 
the commodity markets. Unfortunately, the Commission ignored the 
district court order to undertake the required analysis and is gearing 
up to defend the position limits rule in the United States Court of 
Appeals for the District of Columbia Circuit. Concurrently with its 
appeal, the Commission is drafting a new rule all over again, instead 
of simply evaluating the necessity for position limits as it should 
have done in the first place. I believe that the district court sent a 
strong message to the Commission in its decision to vacate the position 
limits rule, namely, that the Commission must carefully follow the 
letter of the law in its rulemaking and that shortcuts will not be 
tolerated. Instead of heeding the warning of the district court and 
recent DC Circuit opinions vacating SEC rules for violating the APA, 
the Commission has chosen to skirt the requirements of the APA.
Abusing No-Action Relief
    To date, the Commission has promulgated 45 final rules, three 
interim final rules, and four interpretive statements in its 
implementation of the Dodd-Frank Act.\36\ However, in its haste, the 
Commission has finalized some rules that are either unworkable or 
simply make no sense. As a result, the Commission has also had to adopt 
seven exemptive orders related to Dodd-Frank requirements.\37\
---------------------------------------------------------------------------
    \36\ http://www.cftc.gov/LawRegulation/DoddFrankAct/Dodd-
FrankFinalRules/index.htm.
    \37\ Id.
---------------------------------------------------------------------------
    Not only that, but instead of undertaking Commission action to 
amend problematic rules, CFTC staff has issued an unprecedented number 
of no-action letters, some of which are indefinite and have no 
expiration. So far, CFTC staff has issued over 100 no-action letters 
granting relief from its new regulations under Dodd-Frank, and I won't 
be surprised if this number continues to grow.\38\ No-action letters 
are not voted on by the Commission and are not published in the Federal 
Register. They do not include comment periods and many impose 
conditions on affected parties. This process is at odds with basic 
principles of the APA, like public participation and the opportunity to 
be heard. It also goes against President Obama's Executive Orders Nos. 
13563 and 13579, mandating that administrative agencies ``create an 
unprecedented level of openness in Government'' and ``establish a 
system of transparency, public participation, and collaboration.'' \39\
---------------------------------------------------------------------------
    \38\ http://www.cftc.gov/LawRegulation/CFTCStaffLetters/No-
ActionLetters/index.htm.
    \39\ Executive Order 13563, ``Improving Regulation and Regulatory 
Overview,'' (Jan. 18, 2011); Executive Order 13579, ``Regulation and 
Independent Regulatory Agencies,'' (Jul. 14, 2011).
---------------------------------------------------------------------------
    I believe that the use of the no-action relief process by CFTC 
staff is inappropriate for changes in Commission policy. A no-action 
letter is issued by a division of the CFTC and states that, for the 
reasons and under the conditions described therein, the staff will not 
recommend that the Commission commence an enforcement action against an 
entity or group of entities for failure to comply with obligations 
imposed by CFTC regulations. Although the relief is not available to 
all entities, usually because of some complicated precondition, those 
market participants that may benefit from the relief are subject to 
numerous other conditions, needless restrictions, and arbitrary 
compliance timelines.
    A stark example of the inappropriateness of no-action letters to 
grant relief is demonstrated by the recent CFTC staff no-action letter 
allowing substituted compliance for certain foreign jurisdictions from 
the Commission's cross-border swaps guidance.\40\ I am concerned that a 
staff letter issued by a single division, with no input or vote from 
the Commission, would be used as the vehicle for addressing such a 
major issue. This no-action letter is outside the scope of a 
forthcoming Commission decision regarding the comparability of European 
rules. Further, because the relief is not time-limited, it creates an 
effect similar to a rulemaking but does not go through notice-and-
comment procedures. As a result, this indefinite exemption not only 
preemptively overrides a Commission decision, but also seems to 
conflict with provisions in the cross-border swaps guidance that call 
for a re-evaluation of all substituted compliance determinations within 
4 years of the initial determination.
---------------------------------------------------------------------------
    \40\ No-Action Relief for Registered Swap Dealers and Major Swap 
Participants from Certain Requirements under Subpart I of Part 23 of 
CFTC regulations in Connection with Uncleared Swaps Subject to Risk 
Mitigation Techniques under EMIR, CFTC Letter No. 13-45 (July 11, 
2013).
---------------------------------------------------------------------------
    Unfortunately, this is not the first time that CFTC staff no-action 
letters have been used to set forth Commission policy under Dodd-Frank. 
Staff no-action letters are inappropriate because they are not voted on 
by the Commission and are not formal Commission action. They are not 
binding on the Commission, but affected parties comply with their 
conditions despite the lack of legal certainty due to practical 
business considerations, even though the Commission may later decide to 
pursue enforcement or other prejudicial action. I believe that the 
prolific use of no-action relief relating to Dodd-Frank provisions 
reflects the ad-hoc and last-minute policy approach that has been far 
too prevalent lately at the Commission. The Commission must stop this 
approach and get back to issuing policy in a more formal, open and 
transparent manner.
    The Commission cannot continue with its reactive regulatory 
oversight. It must re-visit the rules that have proved to be 
unworkable, incorporate indefinite permanent relief into amended rules, 
make necessary adjustments, and consistently and fairly apply such 
amended rules to all regulated entities.
Violating Notice-and-Comment Requirements
    Another serious concern I have with the Commission's rulemaking 
process is the lack of notice-and-comment procedures. For example, and 
also in connection with its cross-border swaps guidance, the Commission 
recently issued an exemptive order that excludes certain foreign 
entities from the definition of ``U.S. person'' and, therefore, from 
compliance with the CFTC swap regulations. Even though this exemptive 
order goes into effect immediately, the Commission has included a post-
hoc 30 day comment period. I am concerned that this final exemptive 
order should have complied with notice-and-comment requirements under 
the APA that allow parties to be heard before binding rules go into 
effect. I am also concerned that the Commission may be inappropriately 
using a good-cause exception to the APA to get around notice-and-
comment requirements that are supposed to ensure careful and well-
reasoned decision-making.\41\
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    \41\ Section 553(b)(B) of the APA provides for a good-cause 
exception to notice-and-comment requirements: ``Except when notice and 
hearing is required by statute, this subsection does not apply . . . 
(B) when the agency for good cause finds (and incorporates the finding 
and a brief statement of reasons therefore in the rules issued) that 
notice and public procedure thereon are impracticable, unnecessary, or 
contrary to the public interest.'' 5 U.S.C.  553(b)(B) (emphasis 
added). However, section 4(c) of the CEA clearly provides that the 
Commission may grant exemptive relief only by ``rule, regulation, or 
order after notice and opportunity for hearing'' (emphasis added). 7 
U.S.C.  6(c). The APA further provides under section 559 that it does 
not ``limit or repeal additional requirements imposed by statute or 
otherwise recognized by law.'' 5 U.S.C.  559. The CEA also grants 
emergency powers to the Commission under exigent circumstances. See, 
e.g., 7 U.S.C.  12a(9). In addition, courts have narrowly construed 
the good-cause exception and placed the burden of proof on the agency. 
See, Tenn. Gas Pipeline Co. v. Fed. Energy Regulatory Comm'n, 969 F.2d 
1141 (D.C. Cir. 1992); Guardian Fed. Sav. & Loan Ass'n v. Fed. Sav. & 
Loan Ins. Corp., 589 F.2d 658, 663 (D.C. Cir. 1978).
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Issuing Interpretive Guidance Versus Rulemaking
    I believe that the recent cross-border swaps guidance is also an 
example of yet another way the Commission's recent approach to 
implementing its policy has minimized public participation, open 
engagement, and the deliberative process from our rulemakings. By 
issuing interpretive guidance, and then having staff issue no-action 
relief that exempts a large class of persons and imposes conditions 
without a Commission vote, the Commission evades both APA requirements 
and cost-benefit analysis.
    I believe that putting the label of ``guidance'' on this document 
did not change its content or consequences. The courts have held that 
when agency action has the practical effect of binding parties within 
its scope, it has the force and effect of law, regardless of the name 
it is given.\42\ Legally binding regulations that impose new 
obligations on affected parties--``legislative rules''--must conform to 
the APA.\43\ As a threshold matter, the cross-border swaps guidance 
rests on thin statutory authority, because Congress limited the 
extraterritorial application of U.S. swap regulations, and therefore 
the CFTC's jurisdiction, to foreign activities that have a ``direct and 
significant'' impact on the U.S. economy. Despite the statutory 
limitation, the cross-border swaps guidance sets out standards that it 
applies to virtually all cross-border activities in the swaps markets, 
in a broad manner similar to the application of the swap dealer 
definition to market participants. For practical reasons, market 
participants cannot afford to ignore detailed regulations imposed upon 
their activities that may result in enforcement or other penalizing 
action.\44\ Accordingly, I believe that the cross-border swaps guidance 
has a practical binding effect on market participants and it should 
have been promulgated as a legislative rule under the APA. Similarly, I 
cannot support any future interpretive guidance that would be more 
properly issued as a notice-and-comment rulemaking.
---------------------------------------------------------------------------
    \42\ See Gen. Elec. Co. v. Envtl. Prot. Agency, 290 F.3d 377, 380 
(D.C. Cir. 2002) (finding that a guidance document is final agency 
action); Appalachian Power Co. v. Envt. Prot. Agency, 208 F.3d 1015, 
1020-21 (D.C. Cir. 2000).
    \43\ See Chrysler Corp. v. Brown, 441 U.S. 281, 302-03 (1979) 
(agency rulemaking with the force and effect of law must be promulgated 
pursuant to the procedural requirements of the APA).
    \44\ ``A document will have practical binding effect before it is 
actually applied if the affected private parties are reasonably led to 
believe that failure to conform will bring adverse consequences . . . 
.'' Gen. Elec., 290 F.3d at 383 (quoting Anthony, Robert A., 
Interpretive Rules, Policy Statements, Guidances, Manuals, and the 
Like--Should Federal Agencies Use Them to Bind the Public?, 41 Duke L. 
J. 1311 (1992)) (vacating an agency's guidance document that the court 
found to have practical binding effect and where procedures under the 
APA were not followed).
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Avoiding Cost-Benefit Analysis
    Further, by issuing interpretive guidance instead of rulemaking, 
the Commission has also avoided analyzing the costs and benefits of its 
actions pursuant to section 15(a) of the CEA,\45\ because the CEA 
requires the Commission to consider costs and benefits only in 
connection with its promulgation of regulations and orders. Compliance 
with the Commission's swaps regulations entails significant costs for 
market participants. Avoiding cost-benefit analysis by labeling the 
document as guidance is unacceptable.
---------------------------------------------------------------------------
    \45\ 7 U.S.C.  19(a).
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    I have always advocated that the Commission's rulemaking must 
include a thorough cost-benefit analysis, both qualitative and 
quantitative, to ensure that new rules do not impose unreasonable costs 
on the public. Frankly, the Commission's cost-benefit provision in the 
CEA does not require the Commission to undertake any quantitative 
analyses of its proposed rules. Last year, the CFTC Inspector General 
found that the Commission used inadequate cost-benefit methodology for 
the adoption of regulations implementing the derivatives provisions of 
Dodd-Frank. The study found that the CFTC General Counsel played a 
dominant role in the cost-benefit analysis to the derogation of the 
CFTC Chief Economist, which has been detrimental to other agency 
rulemakings.
    Rigorous cost-benefit analysis is simply a common sense tool 
designed to ensure that the benefits of any regulation exceed its costs 
and that regulators adopt the least burdensome approach to achieve the 
desired regulatory outcome. I am pleased to see that the House has 
passed a cost-benefit analysis bill amending the CEA and requiring the 
Commission to conduct quantitative economic analysis on its rules. In 
essence, the United States Court of Appeals for the District of 
Columbia Circuit found that the Commission's cost-benefit determination 
in connection with its recent commodity pool operator/commodity trading 
advisor (``CPO/CTA'') rules, which lacked quantitative analysis, was in 
compliance with section 15(a) of the CEA because the statute imposes 
few requirements to quantify or estimate the cost of Commission rule 
proposals in favor of very high level, theoretical impacts.\46\
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    \46\ Inv. Co. Inst. v. Commodity Futures Trading Comm'n, No. 12-
5413, Slip. Op at 14 (D.C. Cir. June 25, 2013) (stating that ``[t]he 
statute only requires the Commission to address costs and benefits'' 
and that the Commission does not ``need [to] count costs'' because the 
statute does not ``mandate'' it).
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    Even though the Commission has nearly completed its rulemaking to 
implement the Dodd-Frank Act, I believe it makes sense for Congress to 
draft and pass new, more specific cost-benefit analysis requirements 
for the Commission to ensure that future regulations undergo a 
quantitative and qualitative analysis that is consistent with the cost-
benefit standards applied by other Federal Government agencies in their 
rulemaking. I support Chairman Conaway's bill H.R. 1003 as it would 
require the Commission to conduct a higher standard of analysis than 
has been previously utilized.
Internal Policies and Procedures
    One area of concern that I would like to draw to your attention is 
the importance of a strong Commission that faithfully adheres to our 
principles of democratic government. Each of the five Commissioners is 
appointed by the President, with the advice and consent of the Senate, 
to carry out the mission of the CFTC to supervise the commodity 
markets. I am concerned that we have strayed from faithfully executing 
this directive as a Commission that is fully accountable to Congress 
and the public.
    When I first arrived at the Commission in 2009, fellow Commissioner 
Mike Dunn, a distinguished public servant for many years, impressed 
upon me the importance of consistency and transparency in order to 
achieve good government and policy outcomes. I believe that we have 
lost sight of these guiding principles in our rush to implement the 
Dodd-Frank Act.
Stronger Commission Oversight of CFTC Staff Action
    CFTC regulations ensure that the Commission is made accountable for 
all enforcement matters by requiring a Commission order to initiate 
investigations by the Division of Enforcement. Just recently, I 
dissented on an enforcement matter that involved a radical procedural 
shift in the authorization of investigations for potential violations 
of the CEA. What I found troubling is that the Division of Enforcement 
sought to circumvent the powers of the Commission by proposing to bring 
investigations on a summary basis through the use of an ``absent 
objection'' process. I was surprised to be advised by the Commission's 
Office of General Counsel that the Commission cannot block a staff-
initiated absent objection circulation because this process is not a 
Commission ``vote.''
    To ensure fairness in terms of true separation of functions, 
Congress gave power to the members of the Commission to reconsider CFTC 
staff recommendations by independently assessing facts and legal 
justifications for initiating various actions. In other words, Congress 
intended that any decision to bring an investigation by the CFTC is 
reflective of a shared opinion of the majority of the Commissioners, 
rather than a unilateral assessment by the Division of Enforcement's 
staff. The new absent objection process described by the Office of 
General Counsel is a clear abrogation of the Commission's powers and a 
violation of Commission rules relating to investigations.\47\
---------------------------------------------------------------------------
    \47\ 17 CFR  11.4 (stating that the Commission is authorized to 
issue a subpoena) (emphasis added).
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    While I support the Division of Enforcement's efforts to 
expeditiously investigate possible fraudulent activity, I also 
recognize that the Commission possesses certain responsibilities to 
execute its law-enforcement powers and that these responsibilities 
should not be brushed off to achieve an ``efficient'' investigative 
process.
Stronger Congressional Oversight of Commission Action
    Congressional oversight will help to instill discipline in our 
internal policies and procedures. I believe the following is necessary: 
(1) Congress should demand a full review of the Commission's policies 
and procedures for Commission action and interpretation of the CEA and 
(2) the Commission should adopt policies and procedures that are 
identified to ensure that no-action relief is not abused, restore a 
strong Commission with appropriate accountability to the public, 
require the basic application of APA notice-and-comment procedures, and 
undertake rigorous cost-benefit analysis review. If Congress is 
dissatisfied with the Commission's past practices and procedures, I 
believe that Congress should enact reforms to the CEA to impose 
discipline on the Commission so that it complies with the APA and other 
laws.
III. Improving CFTC Utilization of Data and Technology
    A critically important component to any solution for the 
Commission's approach to its greatly expanded mission is the use of 
technology in order to accept, sort, aggregate, and analyze the new 
sources of market information provided for under the Dodd-Frank Act. 
I'd like to highlight two major challenges in data and technology: (1) 
problems faced by market participants in the swap data reporting rules 
and (2) problems faced by the Commission in understanding the massive 
data flows as a result of our enhanced oversight of the swaps and 
futures markets.
Challenges in Swap Data Reporting Rules
    I would like to bring the Commission's approach to swap data 
reporting to your attention as an illustrative example of the 
Commission's rulemaking getting in the way of our mission to oversee 
trading activity and mitigate systemic risk. CFTC rules have seriously 
impaired the Commission's ability to effectively and immediately 
monitor the markets and conduct its expanded oversight 
responsibilities.
    Under the Dodd-Frank Act, swaps data must be reported in two forms. 
First, basic data on swap transactions such as time, price, and 
notional size must be reported to a swap data repository (``SDR'') and 
must be available to the general public. Second, more detailed and non-
public information on uncleared swap transactions must be sent to SDRs 
under Part 45.\48\ This particular swap data would include information 
on the counterparties to the swap and other detail that is 
significantly greater than what the public would need to know.
---------------------------------------------------------------------------
    \48\  727, 729 of the Dodd-Frank Act.
---------------------------------------------------------------------------
    Unfortunately, the Commission failed to follow Dodd-Frank's 
directives when it implemented its reporting rules. Instead, the 
Commission required that market participants report all swaps, both 
cleared and uncleared, to SDRs in order to comply with the Commission's 
regulations.\49\ The Commission complicated matters further by failing 
to definitively state who--the counterparties to the swap, the SEF or 
DCM on which the swap was traded, or the clearinghouse through which 
the swap was cleared--had the authority to decide which SDR would 
receive the data.\50\
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    \49\ See Part 45 of the Commission's regulations.
    \50\ See  45.3 and 45.8 of the Commission's regulations that 
provide seemingly contradictory instructions on which market 
participants and registered entities have the responsibility for 
reporting swap transactions.
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    The lack of clarity in our regulations, just as in the other 
examples I previously discussed, has led to both confusion and 
litigation. This past spring, the Commission was called upon to decide 
who had the authority to determine which SDR would receive the swap 
data. CME filed a request for a rule approval that would give them the 
authority to send swap data to the SDR of their choice. After 
considering the issue for close to 3 months, the Commission approved 
CME's new rule.\51\ DTCC, a competing SDR, filed suit soon after and 
claimed the Commission's approval was inconsistent with the 
Commission's reporting requirements under its swap data reporting 
rule.\52\
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    \51\ http://www.cftc.gov/ucm/groups/public/@newsroom/documents/
file/statementofthecommission.pdf.
    \52\ http://www.dtcc.com/dtcc.v.cftc.pdf.
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    Although correcting the inconsistencies in the Commission's 
rulemaking is something the Commission must address as soon as 
possible, there still remains an unresolved issue with respect to 
cleared swaps. The Dodd-Frank Act did not specifically address 
regulatory reporting of cleared swap data. I believe Congress should 
now re-examine the issue and decide if the Commission's current 
regulations meet both the letter and the spirit of Dodd-Frank.
Repeal of Swap Data Repository Indemnification Requirement
    While on the subject of data reporting, I would like to bring up 
one more important issue. The Dodd-Frank Act requires foreign 
governments to provide an SDR with an indemnification agreement in 
order to have direct access to the swap transaction data for 
counterparties that are within the foreign government's 
jurisdiction.\53\ Needless to say, foreign governments are either 
prohibited or unlikely to provide an SDR with an indemnification 
agreement. The Commission cannot require unfettered access to foreign 
trade repositories until the law is changed and this imbalance is 
corrected. I am pleased to see that the House has passed the bill 
addressing the indemnification provision.
---------------------------------------------------------------------------
    \53\ See  728 of the Dodd-Frank Act.
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Challenges in CFTC Data Utilization
    However, even if the Commission fixes its swap data reporting 
rules, the Commission still lacks the ability to utilize and analyze 
the regulatory reporting data it receives from SDRs.
    Since the beginning of 2013, certain market participants have been 
required to report their interest-rate and credit index swap trades to 
a SDR. Unfortunately, the Commission has made very little progress in 
analyzing and utilizing the data. With the Commission's current 
technology, things are not going well.
    For example, the data submitted to SDRs and, in turn, to the 
Commission, is not usable in its reported format. Earlier this spring, 
the Surveillance staff admitted that they couldn't spot the London 
Whale trades in the Commission's current data files.
    This problem is caused by the Commission's failure in its swap data 
reporting rules to specify the data format that reporting parties must 
use when sending their swaps to SDRs. In other words, the Commission 
told the industry what information to report, but didn't specify which 
language or format to use. As it turned out, reporting parties have 
their own internal nomenclature that is used to compile swap data. 
Without a Commission regulation identifying a specific nomenclature 
that must be used, reporting parties are free to use their own.
    The end result is that even when market participants submit the 
correct data to SDRs, the language received from each reporting party 
is different. In addition, data is being recorded inconsistently from 
one dealer to another. Now multiply that number by the number of 
different fields the rules require market participants to report. 
Further, the abused no-action process has allowed unidentified gaps to 
appear in the data without explanation.
    Aside from the need to receive more uniform data, the Commission 
must significantly improve its own IT capability. The Commission has 
failed to make technology investment a top priority. Our ability to 
adapt our existing systems to our new data requirements is a major 
challenge. Consequently, we don't have the capacity to undertake review 
of order book data, which is critical to spotting manipulative trading 
schemes.
    Solving our data dilemma must be the Commission's top priority. We 
must focus our attention to both better protecting the data we have 
collected and developing a strategy to understand it. Until such time, 
nobody should be under the illusion that promulgation of reporting 
rules has enhanced the Commission's surveillance capabilities. As 
Chairman of the Commission's Technology Advisory Committee (``TAC''), I 
have formed a working group comprised of various market participants, 
including SDRs and DCOs, to leverage the expertise of this group to 
resolve this problem as soon as possible.
Challenges in Data Privacy
    As I mentioned before, the ability of the Commission to access and 
analyze transaction data is paramount to the agency's regulatory 
oversight responsibilities. Access to data is crucial to developing new 
strategies and surveillance tools, but it comes with an enormous burden 
of responsibility to protect section 8 data (disclosure of information 
by the Commission).\54\ In our cooperation with foreign regulators to 
achieve the G20 objectives, the Commission must address access issues 
and privacy concerns.
---------------------------------------------------------------------------
    \54\ 7 U.S.C. 12(e).
---------------------------------------------------------------------------
    Currently the Commission's Inspector General is investigating 
whether or not market data was properly controlled by the Office of the 
Chief Economist when visiting scholars/contractors were assisting the 
Office of the Chief Economist in research efforts. While I support 
collaborative study programs that bring in new and innovative thinking, 
it is vital that the Commission has policies and procedures in place to 
protect against the illegal release of market data. It would not be 
unreasonable for the Subcommittee to request a thorough review of the 
Commission's data privacy policies and procedures and a subsequent 
briefing by the Inspector General when his investigation is complete. 
Ensuring that the Commission can fulfill its responsibilities under the 
Dodd-Frank Act constitutes appropriate Congressional oversight. It is 
also imperative for foreign regulators to have confidence that U.S. 
policy will protect the data of their citizens, just as we have every 
right to expect that for U.S. citizens.
Technology Plan: A Solution to Challenges in Data Reporting and 
        Utilization
    Given the Commission's expanded regulatory responsibilities, it is 
imperative for the Commission to develop a technology plan that can 
assist the Commission with meeting its regulatory objective. I believe 
the Commission must develop a 5 year strategic plan that is focused on 
technology, with annual milestones and budgets. To keep up to speed 
with the challenges of enhanced regulatory oversight, this technology 
plan would require each CFTC division to develop a technology budget 
that reflects the regulatory needs and responsibilities of that 
particular division.
    As part of developing the CFTC strategic plan, Commission staff is 
working with goal teams and divisions to highlight the major technology 
initiatives by specific goal. These initiatives will form the basis for 
the IT strategic plan. While I am encouraged by the process, I will 
wait to review the recommendations before I can say with confidence 
that the Commission understands both its own shortcomings and immediate 
priorities, and how it intends to oversee the swaps and futures markets 
over the next decade.
    Like the review of the no-action relief process, this Committee has 
every right to expect that the Commission develops and explains its 
strategy for deploying technology. The Commission needs to leave behind 
its 20th century regulatory ways in order to oversee this modern 21st 
century marketplace.
Electronic Monitoring of Customer Fund Balances: Industry Solution 
        Powered by Technology
    I'd like to close my testimony by focusing on a success story: the 
Commission's pursuit of enhancements to its oversight ability by 
leveraging industry resources. In response to the egregious lack of 
regulatory compliance exposed by the failures of MF Global and 
Peregrine, there was a positive and immediate industry response that 
solved a gaping hole in FCM oversight. Following the Peregrine failure, 
which exposed the absence of electronic monitoring of customer fund 
balances held by the FCM and custodian banks, I called an emergency 
meeting of the TAC. At this meeting, I tasked the National Futures 
Association (``NFA'') and CME, which are the Self-Regulatory 
Organizations (``SROs'') of the FCMs, to develop a technology solution 
to monitor and reconcile the balances held by the FCMs and custodian 
banks. I am proud to say that NFA and CME delivered the technology 
solution. Since January 2013, an automated system linking FCMs and 
custodian banks has been in place to monitor changes in expected 
balances to within less than one percent deviation in customer 
accounts. The system is being expanded to carrying brokers and 
clearinghouses as well. This new technology capability was not mandated 
by CFTC regulations and was not paid for by taxpayers. This is a prime 
example of having industry solutions that protect customers and augment 
the Commission's oversight ability.
Conclusion
    The Commission has been given the momentous task of creating a 
regulatory environment that increases transparency and improves 
stability in the financial markets. The Commission, in implementing 
such broad and ambitious goals, was tasked with transforming Dodd-Frank 
objectives into a workable regulatory framework. Given the intrinsic 
complexities of the financial markets, the Commission must come up with 
clear and consistent rules that take into account the global nature of 
derivatives trading. Although it is difficult to achieve these goals 
without making mistakes along the way, when flaws are uncovered, it is 
imperative for the Commission to work with market participants to come 
up with better solutions to implementing Dodd-Frank objectives. If the 
Commission does not faithfully implement the statute or make the 
necessary conforming updates to its rules, this Committee has every 
right and responsibility to make the necessary and immediate changes it 
sees fit. I am happy to continue to work together to provide any 
information the Subcommittee requires to ensure the Commission is 
operating as authorized and as mandated by the Dodd-Frank Act.
    I appreciate the opportunity to testify today and am happy to 
answer any of your questions.
    Thank you.

    The Chairman. Thank you, Scott. Mark?

STATEMENT OF HON. MARK P. WETJEN, COMMISSIONER, U.S. COMMODITY 
                  FUTURES TRADING COMMISSION,
                        WASHINGTON, D.C.

    Mr. Wetjen. Good morning, Chairman Conaway, Ranking Member 
Scott, and Members of the Subcommittee. Thank you for inviting 
me to testify this morning and share some of my perspectives on 
the future of the Commodity Futures Trading Commission. It is a 
pleasure to be here.
    I want to personally thank Chairman Conaway for his keen 
interest in our agency and his open dialogue with me since I 
joined the Commission. I have found our discussions to be 
useful and hopefully mutually beneficial.
    I also want to acknowledge my friend, Commissioner O'Malia, 
who is beside me today. I have admired his skills in analyzing 
and bringing attention to important issues raised by our rules 
or other market developments. I hope you would agree that we 
have developed a good working partnership at the agency.
    For a host of reasons, now is a very good time for not only 
this Subcommittee but all stakeholders in the CFTC to reflect 
on what the future might bring for this agency. Allow me to 
mention a few.
    First, and most obviously, Congress must address the 
expiring authorization for the agency, which is the primary 
reason for the hearing today and of course will require a 
Congressional response. I appreciate the Subcommittee's efforts 
to work toward making that response an informed one that seeks 
to solve any inadequacies or other problems related to the 
Commodity Exchange Act or the work of the Commission.
    It is my hope and belief that many of the issues raised by 
the CFTC rulemakings in the past 3 years that eventually became 
the subject of Congressional legislation have been resolved or 
adequately addressed in our final rules or through other relief 
granted by the agency. With or without additional direction 
from Congress through CFTC reauthorization, it is important 
that the agency and its staff continue to find ways to address 
problems that are still in need of a solution.
    Second, the Commission's implementation of Title VII of 
Dodd-Frank is for the most part finished. We have almost 80 
swap dealers now registered with the CFTC, clearing mandates in 
place for a broad swath of the swap market, and new reporting 
obligations for market participants. The Commission also just 
completed its cross-border guidance informing market 
participants and other regulators how the Commission's rules 
will be applied to activities and entities overseas.
    Looking ahead through the lens of what already has been 
done, the Commission and all stakeholders will need to closely 
monitor and, if appropriate, address the inevitable challenges 
that will come with implementing the new regulatory framework 
under Dodd-Frank.
    Third, while most of the Commission's work to implement 
Dodd-Frank is complete, there remain important rulemakings and 
administrative matters in the months ahead. Perhaps most 
importantly, the Commission, along with the Federal Reserve, 
the OCC, the FDIC, and the SEC, must finalize its rulemaking on 
the so-called Volcker Rule.
    The agency also must undertake substituted compliance 
determinations under the recently finalized cross-border 
guidance. This will involve a review of swap-regulatory regimes 
in other nations to determine whether they are comparable and 
comprehensive or essentially identical to U.S. law.
    The Commission also must finalize its rulemaking on capital 
and margin requirements for uncleared swaps and there are two 
very important rulemakings related to the international 
harmonization of risk management requirements on 
clearinghouses, which dovetails with the substituted compliance 
determinations.
    Another critical rulemaking, albeit not directly related to 
Dodd-Frank, is the Commission's customer protection rule that 
seeks to improve risk management practices at futures 
commission merchants.
    Finally, given that the U.S. has nearly delivered on its 
G20 commitments to derivatives reform and the European Union is 
close behind, all of us can spend more time focusing on the 
developing market structure for swaps on a more global scale. 
The Commission already has authorized new trading platforms for 
swaps and Europe is about to do the same. We anticipate that 
with these developments, many swaps will be executed on 
regulated and transparent marketplaces located both here and 
abroad, facilitating global liquidity formation and risk 
management.
    Consistent with this result, I believe the Commission's 
cross-border guidance reversed a developing trend toward market 
and risk management fragmentation that would have been 
counterproductive to the goals of Dodd-Frank, as well as the 
G20 commitments.
    But we all must wait and see to a greater degree what 
developments will take shape outside of the U.S. and Europe. 
Other jurisdictions that host a substantial market for swap 
activity are still working on their reforms and certainly will 
be informed by our work. All of us will need to monitor those 
developments closely with an eye toward how they could separate 
those jurisdictions from the fabric we, along with our European 
partners, stitched together in last week's accord.
    In other words, the Commission must remain vigilant in 
monitoring, identifying, and addressing risk, and continually 
prioritize so we are focused on the greatest threats. Indeed, 
another threat identified by the Treasury Secretary 2 weeks ago 
must be part of this global monitoring: the cybersecurity 
threat. As marketplaces and systems continue to rely more and 
more on technology, the need to better understand and protect 
against cybersecurity threats increases. There are multiple 
task forces and coalitions formed of domestic and international 
partners that the Commission will need to work with to ensure 
success on this front.
    Thank you again for inviting me today. I would be happy to 
answer any questions.
    [The prepared statement of Mr. Wetjen follows:]

Prepared Statement of Hon. Mark P. Wetjen, Commissioner, U.S. Commodity 
              Futures Trading Commission, Washington, D.C.
    Good morning, Chairman Conaway, Ranking Member Scott, and Members 
of the Subcommittee. Thank you for inviting me to testify this morning 
and share some of my perspectives on the future of the Commodity 
Futures Trading Commission. It is a pleasure to be here.
    I want to personally thank Chairman Conaway for his open dialogue 
with me since I joined the Commission. I have found our discussions to 
be useful and hopefully mutually beneficial.
    I also want to acknowledge my friend, Commissioner O'Malia, who is 
beside me today. I have admired his skills in analyzing and bringing 
attention to important issues raised by our rules or other market 
developments. I hope he would agree that we have developed a good 
working partnership at the agency.
    For a host of reasons, now is a very good time for not only this 
Subcommittee, but all stakeholders in the CFTC, to reflect on what the 
future might bring for this agency. Allow me to mention a few.
    First, and most obviously, Congress must address the expiring 
authorization for the agency, which is the primary reason for the 
hearing today and of course will require a Congressional response. I 
appreciate this Subcommittee's efforts to work toward making that 
response an informed one that seeks to solve any inadequacies or other 
problems related to the Commodity Exchange Act or the work of the 
Commission.
    It is my hope and belief that many of the issues raised by CFTC 
rulemakings in the past 3 years that eventually became the subject of 
Congressional legislation have been resolved or adequately addressed in 
our final rules or through other relief granted by the agency. With or 
without additional direction from Congress through CFTC re-
authorization, it is important that the agency and its staff continue 
to find ways to address problems that are still in need of a solution.
    Second, the Commission's implementation of Title VII of Dodd-Frank 
is for the most part finished. We have almost 80 swap dealers now 
registered with the CFTC, clearing mandates in place for a broad swath 
of the swap market, and new reporting obligations for market 
participants. The Commission also just completed its cross-border 
guidance, informing market participants and other regulators how the 
Commission's rules will be applied to activities and entities overseas.
    Looking ahead through the lens of what already has been done, the 
Commission and all stakeholders will need to closely monitor and, if 
appropriate, address the inevitable challenges that that will come with 
implementing the new regulatory framework under Dodd-Frank.
    Third, while most of the Commission's work to implement Dodd-Frank 
is complete, there remain important rulemakings and administrative 
matters in the months ahead. Perhaps most importantly, the Commission, 
along with the Federal Reserve, the OCC, the FDIC, and the SEC, must 
finalize its rulemaking on the so-called ``Volcker Rule.''
    The agency also must undertake ``substituted compliance'' 
determinations under the recently finalized cross-border guidance. This 
will involve a review of swap-regulatory regimes in other nations to 
determine whether they are ``comparable and comprehensive'' or 
``essentially identical'' to U.S. law.
    The Commission also must finalize its rulemaking on capital-and-
margin requirements for un-cleared swaps. And there are two very 
important rulemakings related to the international harmonization of 
risk-management requirements on clearing houses, which dovetails with 
the substituted-compliance determinations.
    Another critical rulemaking, albeit not directly related to Dodd-
Frank, is the Commission's customer-protection rule that seeks to 
improve risk-management practices at futures commission merchants.
    Finally, given that the U.S. has nearly delivered on its G20 
commitments to derivatives reform, and the European Union is close 
behind, all of us can spend more time focusing on the developing market 
structure for swaps on a more global scale. The Commission already has 
authorized new trading platforms for swaps, and Europe is about to do 
the same. We anticipate that with these developments many swaps will be 
executed on regulated and transparent marketplaces located both here 
and abroad, facilitating global liquidity formation and risk 
management. Consistent with this result, I believe the Commission's 
cross-border guidance reversed a developing trend toward market and 
risk-management fragmentation that would have been counterproductive to 
the goals of Dodd-Frank as well as the G20 commitments.
    But we all must wait and see to a greater degree what developments 
will take shape outside of the U.S. and Europe. Other jurisdictions 
that host a substantial market for swap activity are still working on 
their reforms, and certainly will be informed by our work. All of us 
will need to monitor those developments closely, with an eye toward how 
they could separate those jurisdictions from the fabric we--along with 
our European partners--stitched together in last week's accord.
    In other words, the Commission must remain vigilant in monitoring, 
identifying, and addressing risk, and continually prioritize so we are 
focused on the greatest threats. Indeed, another threat identified by 
the Treasury Secretary last week must be part of this global 
monitoring: the cyber-security threat. As marketplaces and systems 
continue to rely more and more on technology, the need to better 
understand and protect against cyber-security threats to the markets 
the Commission regulates increases. There are multiple task forces and 
coalitions formed of domestic and international partners that the 
Commission will need to work with to ensure success on this front.
    Thank you again for inviting me today. I would be happy to answer 
any questions from the panel.

    The Chairman. Thanks, Mark. I appreciate that.
    The chair would remind Members that they will be recognized 
for questioning in order of seniority for Members who were here 
at the start of the hearing. After that, Members will be 
recognized in order of arrival, and I appreciate Members' 
understanding.
    And with that, I would like to recognize the Chairman of 
the full Committee, Mr. Lucas, for 5 minutes.
    Mr. Lucas. Thank you, Mr. Chairman. I appreciate that, and 
I appreciate the efforts of yourself and the Ranking Member as 
we proceed through this process. And I want to thank both of 
the Commissioners for testifying today.
    The topic of CFTC reauthorization is a very important one, 
and this is the Committee's second hearing on the issue. 
Tomorrow, we will continue the process and hear directly from 
end-users. I expect the Committee to move forward with CFTC 
reauthorization as the farm bill also progresses.
    Now, a couple of issues confronting us; in light of the 
confusion surrounding the exemptive order and final guidance 
that has been circulated to regulate cross-border transactions, 
how can institutions be sure they are correctly interpreting 
these policies? And can either of you comment on whether the 
Commission will give some degree of deference to American firms 
as they implement the hundreds of pages of new guidelines, 
gentlemen?
    Mr. O'Malia. Thank you for the question, a very good 
question, and it is a challenge. So the guidance has been out 
less than a week and people are beginning to digest it and I am 
trying to understand and make sense of it and understand where 
their activities fall. It is complicated depending on your 
organizational structure, et cetera. I think we have to give 
the appropriate deference to people trying to comply with the 
rules. And this is not dissimilar from any of the other complex 
rulemakings, including the swap dealer definition. And so we 
have always had to have some latitude to provide people the 
cooperation and convenience to comply with the rules, and we 
have to respond to their questions as quickly as possible.
    Mr. Wetjen. Thank you, Mr. Chairman, for the question. I 
agree with Commissioner O'Malia. I think what you might be 
referring to is a provision that was in the exemptive order 
that expired, that was not retained in the new exemptive order, 
and it had to do with basically a statement of fact as I see 
it, and that was that we expect good-faith compliance at the 
agency during this unusual time of implementation of our rules 
and initial compliance with our rules.
    And so while the new exemptive order did not retain that 
provision, as I said, I believe it is a statement of fact. So 
we are going to have to continue working with all market 
participants. I am sure a number of questions will come up, 
some have already materialized in the last week or so and I am 
sure others will come up as well. And so we will just have to 
keep working with market participants in sorting out some of 
these issues.
    Mr. Lucas. Commissioner O'Malia, I was pretty troubled 
reading your testimony that the Commission staff may now be 
initiating enforcement actions outside of the Commission vote 
process. Is this a new change in policy or has it been done 
before?
    Mr. O'Malia. Thank you for the question. It is a relatively 
new change. The issue that I raised is that the Commission, 
under Dodd-Frank, has issued a number of broad omnibus orders 
to initiate oversight or undertake subpoena authority. Now, 
these broad authorities don't identify specific practices but 
they are seeking approval from the Commission to issue 
subpoenas over a scope of law that they believe they have 
concerns about.
    Now, we have provided these omnibus orders in the past and 
they are generally time-limited, and I have had some concerns 
about that because the Commission's authority to approve the 
rule and to approve the initiation of an omnibus order and 
subpoena is a fundamental part of the Commission's 
responsibility. It is not something that should be delegated to 
staff, and in fact, Commission Regulation 11.4 requires 
Commission action to issue these orders.
    Now, the recent activity, there are two things that have 
occurred. One, they have asked for absent objection by the 
Commission, meaning that it is a staff action. When I asked our 
General Counsel if the Commission could overrule an absent 
objection circulation, he said no, it is not a Commission 
action. Therefore, it does not fall within our authority under 
11.4 for the Commission to initiate these type of 
investigations.
    So I believe this is kind of a slippery slope we are headed 
down and it is a concern of mine that we not delegate too much 
authority to staff, especially with the new authority under 
Dodd-Frank. I think there are a lot of areas here that are not 
explored. Think about the new manipulation authority. We have a 
new recklessness standard. We need to be thinking about these 
and how they will be interpreted by the market.
    Mr. Lucas. I absolutely agree and I suggest that whatever 
we have to do to preserve the check-and-balance system that 
Congress envisioned when it created the five-member Commission 
is absolutely necessary. The requirement for a vote on key 
actions should not be disregarded under some guise of efficient 
government, which is a paradox if I have ever heard of one.
    I thank you, Mr. Chairman, and I yield back my seconds.
    The Chairman. The gentleman yields back 2 seconds. Mr. 
Scott, 5 minutes.
    Mr. David Scott of Georgia. Thank you, Mr. Chairman.
    Let me start with you, Commissioner Wetjen. Do you have 
sufficient staff to accomplish the task that you all have been 
given?
    Mr. Wetjen. Thank you, Congressman Scott, for that 
question. I believe the answer is no. As we all know and as we 
discussed in our opening statements, the responsibilities of 
our agency have increased dramatically in the past 3 years. We 
are overseeing a market that we had very, very little oversight 
over before. It is a massive market. There are, as I said in my 
opening statement, close to 80 registrants now registered as 
swap dealers. So there is no doubt our responsibilities have 
been magnified and we need the resources to do the job and to 
mete out these new responsibilities.
    And here is a main reason for it. And it is especially true 
now that we are mostly finished with finalizing the rules but 
we are at the beginning stage of the implementation process. 
And the reason why we need resources, probably the most 
important reason in my mind is during this new phase of 
implementation--and we have already seen it; we have already 
talked about it this morning--a number of questions are going 
to continue to come up. Market participants are going to have 
multiple interpretive questions. They are going to need 
additional guidance from staff, in some cases additional 
guidance from the Commission as a whole, and we need staff to 
be able to provide that.
    And the reason we need to do that is because, again, we 
have been in this process now 3 years. The markets need and 
deserve certainty, and the way that we provide certainty is by 
having the staff in our building that can get answers to market 
participants as quickly as possible.
    Mr. David Scott of Georgia. And so how much funding do you 
need? Your appropriations authorization runs out, as I said, in 
about 9 weeks on September the 30th, so this is very important 
that we move expeditiously to get you the funding that you 
need. Would you tell us how much that is?
    Mr. Wetjen. Well, the budget request was a pretty 
significant increase over our current budget, as you know, Mr. 
Scott. I think the request was around $305 million.
    Mr. David Scott of Georgia. And that would be about a 52 
percent increase, is that correct?
    Mr. Wetjen. I think that sounds right, yes. And here is how 
we came up with that number. You know, the Chairman obviously 
manages this process, but in terms of the rest of us who have 
to decide whether or not to support a big budget request, the 
division heads within the agency, they all make their case to 
us as to what they believe they need, and after going through 
that process and listening directly from them what their 
justification was for the request, I feel comfortable 
supporting the request. I thought it was justified.
    Mr. David Scott of Georgia. Very good. Just before I get to 
Mr. O'Malia, I would like to just make mention for the 
Committee that back in February, Chairman Gensler said, budget 
cuts have caused the CFTC to shelve some potential enforcement 
actions. This means cases that should have been investigated 
and/or prosecuted were passed over due to a lack of funds.
    I think it is very important, Mr. Chairman, that we make 
sure the record is clear that this agency needs the funding 
that we are asking them to do a job, their workload has been 
overloaded, they have had burnout at staff, they have done a 
commendable job with the intelligence and the precision and the 
commitment and dedication. I think it is very important that we 
honor their request, going forward, for this 52 percent 
increase, and I for one, I think you will agree, will know that 
that is very important. I think I have one more minute here.
    Commissioner O'Malia, could I get your opinion on, we just 
passed House Resolution 1256. And the two major parts of that 
were harmonization between you all and the SEC. I would like to 
ask you to comment very briefly on where that is, how that is 
coming along. And then the second part, the making sure that 
those nine major economies that we have to deal with have 
regimes that are equal to ours for enforcement.
    Mr. O'Malia. Well, that is a very important and timely 
question. The harmonization effort, we have struggled with, 
frankly. Our agency has put forward cross-border definitions 
that is not consistent with the SEC definition. We are on a 
different timeline and we have used a different process. They 
have used a regulation. We have relied on guidance. And I have 
some very serious concerns about relying on guidance in and of 
itself, and when I asked our General Counsel how do we bring 
enforcement under guidance, he said it does not have the force 
of law provided under regulation.
    So I am frustrated with the lack of coordination between 
the SEC and the CFTC. I think it is almost comical that we 
would have two agencies coming up with a different definition 
of a U.S. person. So that is problematic in and of itself.
    The question about how we were going to find substituted 
compliance with regard to the other nine regulatory regimes is 
really what is important and what is the focus of the 
Commission's efforts right now. We passed an exemptive order 
that provides until end of December, right before Christmas, 
relief that will expire and we will be back in the same 
situation of being up against an artificial deadline. But in 
that time, between now and then, we have to determine and do an 
evaluation of all of these different jurisdictions for 
comparability and do they match with our regulatory regime. And 
that will be a tough situation and it is not easy because there 
are a lot of details we are going to have to go through. Our 
guidance does say we will consider it on an outcomes basis, but 
I am skeptical that that will really be applied in actuality 
when the staff goes through and does its evaluation. 
Harmonization is vital if we are going to make this work 
effectively, and we cannot unilaterally dictate our rules to 
the rest of the world.
    Mr. David Scott of Georgia. Thank you. And thank you, Mr. 
Chairman, for that extra minute.
    The Chairman. All right. I recognize myself for 5 minutes.
    Commissioner O'Malia, you mentioned in your testimony the 
cost-benefit issue and the ongoing controversy that we have had 
with the Commission during most of the Dodd-Frank era in terms 
of my dissatisfaction with the level of attention that was paid 
to that issue. Can you talk to us a little bit about with the 
bill that we have passed through the House, if you implemented 
it--and Mark, I would like you to weigh in on this, too--if we 
implemented that bill itself, would that put the Commission on 
a proper footing with respect to how it would have to analyze 
the impact that potential regulations had on those who are 
regulated and the compliance with that?
    Mr. O'Malia. I think that bill would be a vast improvement 
over the current standards we have under the CEA in 15(a). I 
think in the recent ICI case, the District Court found that the 
Commission, where defendants complained that our standard 
wasn't very high and the judge affirmed it, it was not a very 
high standard, and we do not have to do a quantitative and 
qualitative analysis necessity to justify the costs and the 
benefits. I think implementation and passage of the cost-
benefit bill that you have sponsored in the House as passed 
would be a vast improvement for our Commission and would 
require us to do a much more rigorous evaluation of the rules.
    The Chairman. Commissioner Wetjen, thoughts?
    Mr. Wetjen. Thanks, Mr. Chairman. I just wanted to point 
out that Commissioner O'Malia has been a real leader at our 
agency on this topic. He has been very effective at keeping the 
agency and the agency staff focused on this provision.
    In our statute--of course, I am referring to Section 15(a), 
which is current requirement that we take into account the 
costs and benefits of our provisions in a rulemaking. And I 
have to say since I have been at the Commission, it is almost 2 
years now, I have seen a real commitment to 15(a) and to making 
sure that it is being implemented appropriately.
    And Scott mentioned the ICI litigation. That is one view to 
take of the litigation, but what was more important to me from 
the litigation is the fact that both the District Court and 
Appellate Court found that we are again abiding by the current 
requirements of the Commodity Exchange Act with respect to 
Section 15(a). I am always happy to explore ways to improve. 
Mr. Chairman, you and I have had some initial discussions about 
that. I happy to continue those, but for now, it is important 
to point out that, at least in the time that I have been at the 
Commission, we have done, in my judgment, a satisfactory job on 
this front.
    The Chairman. Well, I appreciate the perspective. I need to 
correct the record. The bill was only passed out of Committee 
with a voice vote. We still have yet to get across the Floor.
    I guess one of the things that we are asking industry is to 
look at the effectiveness of the cost-benefit analysis that was 
done on many of the Dodd-Frank rules now that they have some 
perspective in actually having to implement and how much it is 
actually costing them versus what the Commission on the front 
end said it would. And so we will hopefully have a bit of 
empirical evidence to show that whatever was done--again, this 
is a prospective change; we are not going to go back and redo 
anything--but whatever impact the costs had on the regulation 
that that was chosen by the Commission in order to be put in 
place; were those costs rational at the time you were making 
your decision? And all of us make better decisions with better 
information, so we will hopefully have some empirical evidence 
on what the Commission thought it would cost to implement many 
of these regulations when you were doing it versus what the 
industry and the folks who are having to comply with those have 
actually had to invest in making that happen.
    And I don't want to run over, but can you talk to us a bit 
about the pervasive use of no-action letters and just kind of 
walk us through mechanically how that happens? Is there a way 
to improve the process so either you need fewer of them or you 
can issue them in a more timely basis, and what impact does 
that actually have?
    Mr. O'Malia. I think no-action is an important tool for the 
Commission to provide a very selective, narrowly crafted relief 
to either a particular entity or for a certain activity. And we 
have relied on it heavily in the past. We have relied on it in 
the past to provide these narrow execeptions. Now, what we have 
done in moving our rules forward, we relied on it more heavily 
in order to provide relief from general time frames and 
timelines that are unachievable by the industry.
    I think the poster child for the no-action relief was for 
the special entity relief for utility special entities. We 
called it temporary relief until the Commission reevaluates the 
rules. Well, in October it will be a full year. We have no 
intention of really going back to revisit that rule, which is 
the swap dealer definition. So I suspect we will not reopen 
that, so we have offered what fundamentally becomes indefinite 
relief. That in fact is a rulemaking. If you are changing the 
Commission's policies indefinitely, that turns out to be a 
rulemaking, and it did not have the benefit of APA notice and 
comment and cost-benefit analysis.
    In that instance we really need to go back and really look 
at how we are going to use this no-action process. And in my 
testimony, I suggest this is an area for the Committee to 
really evaluate to understand what our policies and procedures 
are and how we are going to be using it.
    The Chairman. Okay. Thank you, Scott. Mr. Vargas for 5 
minutes.
    Mr. Vargas. Thank you, Mr. Chairman, for the opportunity to 
speak. And I also want to thank the witnesses here today. You 
have already testified a little bit about this and that is the 
budget request, and my understanding is that it is in fact a 
15.25 percent increase above the current year. I would like to 
comment more specifically about the IT factor of this, and it 
doesn't matter who goes first, but I think that is an important 
factor. Mr. O'Malia, you are chomping at the bit. Why don't you 
go first?
    Mr. O'Malia. Well, I am because technology and the IT 
sector is really a passion of mine and I am very interested. 
And since arriving at the Commission I have really put a lot of 
focus and attention on it. And my frustration with it is that 
it is always kind of a second-tier issue for us. And despite 
the kind of promise of investing in technology and making IT a 
priority, consistently we underfund it, and for the past 2 or 3 
years, we have always taken $10 million out of the technology 
budget and shifted it over to staffing needs.
    And granted, there is a balancing act here but we are 
policing a 21st century market with 20th century surveillance 
tools. We need to do much more to invest in technology to 
really leverage our staffing needs. We could rely on less 
staffing if we are able to automate our surveillance tools.
    And under Dodd-Frank we have an enormous task ahead of us. 
We have required that everybody report all of their trades and 
their data into a swap data repository. Our ability to look 
into that and evaluate and do the analysis on it is critically 
important if we are going to be an effective regulator. And 
then we have to link it back to the futures market. There are 
no shortcuts with this. This is not eyeshades and Excel 
spreadsheets. This is serious data crunching that we are going 
to need automation for it.
    So I am very frustrated that we have not invested to our 
greatest capacity. One of the areas where we need to focus is 
actually developing a budget that selects good priorities, and 
one area that I have advocated for is a division-by-division 
analysis of what our needs for the next 5 years are for 
technology. This is something the Committee should ask for. 
Where do you want to be in 5 years as part of your 
reauthorization? Technology is a critical element, so how are 
we going to get there and what tools are we going to need to 
get there? After you have that evaluation, then you and I can 
make real serious decisions about funding levels and budget 
priorities. And until we develop that budget spend plan for 
you, we are in the dark.
    Mr. Vargas. Mr. Wetjen, would you care to comment on that 
or do you generally agree?
    Mr. Wetjen. I do generally agree. This is another area 
where Commissioner O'Malia has been very vocal in his advocacy 
for additional resources to be targeted at IT investments at 
the agency. It is a very noncontroversial position for him to 
take. As I said in my opening statement, participation in our 
markets are basically driven by technology and through 
technology, and so in order to keep up surveillance it is also 
going to have to rely heavily on it. There is always going to 
be an important component of human interface with the 
technology that is being deployed and used, but without a doubt 
I agree it is an area of improvement that we need to focus on 
at the agency.
    Mr. Vargas. I would like to ask one last question and I 
only have a minute and 40 seconds. My question would be this, 
and that is the issue that a lot of people ask. Is there 
overspeculation in the commodities derivatives market in the 
sense that you see these radical price swings and market 
uncertainty especially with issues of energy, gasoline. And I 
would like to know if this is market forces or you said you 
need serious data crunching, this technology. If we had this 
ability, do you think we could tell the American people that 
what you see in the cost of gasoline is in fact market prices 
and not some sort of speculation that is inappropriate? Because 
that is what Dodd-Frank and all of this is supposed to do. Does 
someone care to take a shot?
    Mr. Wetjen. Thank you, Congressman. I think that certainly 
monitoring the markets we oversee for speculative activity is 
important. It is part of what we do now. I would like to point 
out that the Commission has a weekly surveillance meeting every 
Friday where we review and have the staff present any sorts of 
odd activity in the marketplace, any sorts of irregularities 
that they might be seeing. And it doesn't focus solely on 
energy commodities. It runs the whole range of asset classes.
    First and foremost, that is what we need to do. We need to 
continue being very, very vigilant in regard to our 
surveillance activities. And Scott alluded to this. I just 
spoke about it as well. Additional technology investments 
should help on that score. But we have done a pretty decent job 
of trying to keep tabs on true irregularities and----
    Mr. Vargas. Thank you. My time has concluded here but I 
appreciate it. Thank you, Mr. Chairman.
    The Chairman. Thank you. The other Mr. Scott from Georgia, 
5 minutes.
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
    Commissioner Wetjen, Commissioner O'Malia spoke of the need 
to have better coordination with the SEC on just some basic 
definitions. Do you agree with him on that?
    Mr. Wetjen. I appreciate the question, Mr. Congressman. 
There is a provision in Dodd-Frank in Title VII that requires 
us to coordinate. Even absent a specific mandate to do a joint 
rule, we still have this obligation under the statute to 
coordinate as best we can. I think Scott would agree that he 
and I don't always see everything that is going on at the 
agency because we are just one of five Commissioners, actually 
four at the moment. But I do think it is fair to say that there 
is a lot more going on behind the scenes than people realize. I 
think there are a lot of staff discussions taking place between 
the SEC and the CFTC. I think we could probably always do more.
    But the one last thing I would add, Congressman, is that in 
the weeks leading up to the finalization of the guidance, I can 
assure you I was having multiple conversations with SEC 
Commissioners, high-level SEC officials. I was having multiple 
conversations with members of the European Commission, 
conversations with other agencies within the Federal Government 
that had an interest in what we were doing with the guidance. 
So I felt pretty good about the level of engagement I was able 
to get with my counterparts at these different regulatory 
bodies.
    Mr. Austin Scott of Georgia. That kind of answered my next 
question as well, which was do you believe that the SEC shares 
that desire to have uniform definitions? And certainly, that 
makes it easier from a compliance standpoint for those that are 
being regulated, as well as from a regulatory standpoint. If we 
can't even get to the agreement on what the definition of a 
U.S. person is, then how do we get to the definition of what a 
direct and significant impact on U.S. consumers is?
    And so that would lead to my next question, which is the 
Act says it shall not apply to swap activities that do not have 
a direct and significant connection with activities in, or 
effect on, commerce in the United States. The definition of 
direct and significant, can you give us that?
    Mr. Wetjen. So the question was what I think the definition 
of a direct and significant impact on U.S. commerce is? Well, 
the words obviously are somewhat plain and in many ways speak 
for themselves, but I will tell you how I interpret it. To me, 
what it meant was when we designed our cross-border policy, we 
needed to ensure that the U.S. taxpayer was protected and the 
U.S. financial system was protected. The mandate was not to go 
too far in that effort, but at a minimum, we needed to be sure 
that those two objectives were accomplished. Through the other 
provisions of the policy we adopted through the guidance, that 
will be the effect of our policy once it is implemented and 
once market participants comply with it.
    Mr. Austin Scott of Georgia. Well, I know there was some 
discussion of latitude to comply with the new rules, but again, 
if we don't have a definition of what direct and significant 
is, then how can somebody who is being regulated comply with 
that rule? And I would hope that direct and significant is 
another term that you are able to get a uniform agreement with 
the SEC on because, I mean, look, simpler is better from the 
regulator standpoint and it is certainly better from the person 
who is trying to comply with the rules just to keep up with one 
definition instead of multiple.
    But you do not have a feel for at what point the 
transactions are de minimis so that they would not be subject 
it to the new regulations?
    Mr. Wetjen. I guess the first way I would answer that 
question is under our guidance, if there is an entity, even if 
it is offshore but it has the benefit of parental guarantee or 
if it is a foreign branch of a U.S. bank, in which case 
obviously it would be offshore as well, the guidance provides 
that those entities, if they do the requisite level of 
specified swap dealing activity, they would need to register as 
swap dealers. And the policy behind that is again by virtue of 
the parental guarantee or in the case of a foreign branch the 
legal structure of the bank, the risk will come back to the 
United States to the parent or to the home bank. And for that 
reason the Commission decided that it was appropriate to ensure 
or to require registration so long as the requisite amount of 
activity was actually taking place.
    Commissioner O'Malia referred to it earlier. We have this 
de minimis threshold and for now you have to deal more than $8 
billion of swap dealing activity. In that event, you have to 
register but----
    Mr. Austin Scott of Georgia. Sorry to interrupt. I am down 
to about 5 seconds. I do hope that you will continue to get the 
uniform definitions with the SEC and our overseas regulators as 
well. It would just make it easier to regulate and for those 
other entities to comply with regulations. With that, I yield 
back.
    The Chairman. The gentleman's time has expired. Mr. Maloney 
for 5 minutes.
    Mr. Maloney. Well, thank you very much. And I apologize for 
being absent for a moment. Thank you both for your service. 
Thank you for all the hard work that you have done. I think it 
is often overlooked just how much has been going on in the CFTC 
and I want to commend you both for that. And thank you for your 
appearance here today. My question to either of you, I would be 
interested to hear your views, what happens on December 21, 
with respect to the interpretive guidance and the exemptive 
order if the Europeans aren't ready? Do you expect the 
Europeans to be ready and, if not, what happens?
    Mr. O'Malia. Thank you for that question. I think it is a 
very important question because we faced an artificial deadline 
of July 12, 2 weeks ago, and we have created another artificial 
deadline. And this one is again backed up right against the 
holidays. Of course, everybody will be intently focused on 
fixing it, but at the same time, we don't give ourselves much 
leeway in terms of being able to resolve it if it goes over. We 
were forced into an artificial deadline that created some 
flawed policy. We took shortcuts with the Administrative 
Procedure Act--which shouldn't be done--with notice and 
comment. And I am very concerned that we will not have a 
process in place that will give careful evaluation to the 
substituted compliance regimes and make that determination and 
put in place a new regime to follow on to that.
    At our open meeting 2 weeks ago, I asked the staff what is 
the process for the substituted compliance determination? When 
will we make it? What information will we have about different 
regimes and what are the recommendations of staff? The Chairman 
actually directed staff at that meeting to provide within 2 
weeks, which will be this Friday, a process for the Commission 
to evaluate. I think this needs to be fully exposed to 
transparency, open meetings, allow for foreign entities to come 
defend their applications and talk to us, directly to the 
Commissioners, not through a staff no-action, not through 
sending e-mails or discussions that are not privy to all four 
of us, to have this open discussion and figure out where we 
have comparable rules and where we do not have comparable rules 
and then how are we going to solve for the differences. So I 
look forward to having the process unveiled to us by the staff 
and how they are going to make this determination so we can 
better figure out if we have enough time so we don't put 
ourselves in a situation like we had with July 12.
    Mr. Maloney. Mr. Wetjen.
    Mr. Wetjen. Thank you, Congressman Maloney. I think the 
answer is that, in an ideal world by December 21 the CFTC staff 
will have made recommendations to the full Commission regarding 
those jurisdictions that have submitted applications for 
substituted compliance determinations; that is Canada, the 
European Union, Japan, Hong Kong, Australia, and Switzerland. 
And as Commissioner O'Malia has said, we will be making full 
Commission determinations as to whether substituted compliance 
should be allowed.
    I can see that is a fairly abbreviated time frame but it is 
one that was based on judgments made about how to make sure the 
process would be undertaken expeditiously. The date was also 
informed by input from these other foreign jurisdictions. And 
in some cases they suggest dates in order to keep their own 
countries on task and focused on their own finacial reform 
efforts. And so that is the reason behind the date. It could 
turn out to be that it is overly aggressive but we will have to 
wait and see. But it is not a totally irrational date in other 
words.
    Mr. Maloney. Let me ask you with my remaining time just an 
open-ended question to both of you. I am very curious if you 
just pull the lens back with all that is going on with the 
reauthorization still out there and these other issues, what is 
the thing that keeps you up at night? What is your biggest 
risk?
    Mr. O'Malia. Some of our biggest risks are the lack of 
certainty in our rules. I think that is the biggest 
complicating factor. And while it keeps me up, I am quite 
certain it keeps every commercial end-user, financial entity 
out there that are trying to comply with our rules on a regular 
basis, trying to do their jobs and to meet the obligations of 
these rules. What is frustrating about a swap dealer rule is 
you have to look towards position limits rules potentially and 
clearing determinations and made available for trade 
determinations and figure out where you sit in the queue and 
all your responsibilities. It is extraordinarily complex, which 
means it makes it extraordinarily expensive to do your job.
    We have four or five different hedging definitions 
depending on if you are trading as a swap dealer or you are not 
trading as a swap dealer, if you are trading on position limits 
or you are trading on a different entity. Four rules for 
hedging determinations is insane. What is wrong with one? Why 
can't we treat it consistently? And that is something that I 
would encourage you to consider because this is the basic 
premise of what is hedging. And I think that is a very 
important thing for the Commission and the Committee to look 
at.
    Mr. Wetjen. I was going to respond by saying my 3 year old 
is what keeps me up most nights.
    Mr. Maloney. It doesn't change when they are 12, believe 
me.
    Mr. Wetjen. Is that true? Well, I am sorry to learn that. I 
think the thing that I worry most about is another incident 
where, because of gaps or failures in oversight, there is a 
failed firm and customer funds are lost. I think we have done a 
very good job in many ways responding to that. We have a 
proposed rulemaking that we hope to finalize very, very soon. 
But there is always this fear that I have that we don't know 
what we don't know. And so while the reforms that have been 
recommended are going to be very, very good ones, it would be 
best to feel like you are going to eliminate all risk as it 
relates to the loss of customer funds. And so if there is any 
one thing I would identify, it is that.
    The other thing is what I mentioned in my statement, Mr. 
Congressman, there is this looming cybersecurity threat that 
people are trying to get their minds around more in recent 
years, and that is something that we are going to have to focus 
on more because there is pretty significant vulnerability for 
our markets to these threats. And then the other thing is how 
the patchwork of global regulatory reforms takes shape and 
whether there are any gaps there. Our agency has found that the 
European regime is essentially identical, so that is a terrific 
first step and that covers most of the swap activity around the 
globe. But there are some other jurisdictions where there is 
significant activity as well. It is not clear what is going to 
happen there.
    The Chairman. The gentleman's time has expired.
    Mr. Maloney. Thank you, Mr. Chairman.
    The Chairman. Mr. LaMalfa, 5 minutes.
    Mr. LaMalfa. Thank you, Mr. Chairman.
    For Commissioner O'Malia, first of all, thank you, 
gentlemen, for being here today. I had a little mini chuckle 
with Mr. Maloney's question asking what happens December 21 and 
if this was a year ago, we would be worried about the Mayan 
calendar. This year I hope it is a lot less of a worry. Anyway, 
we have been very attentive to the swap dealer situation and we 
wanted to cover again CFTC has had a $25 million special entity 
subthreshold which needs to be fixed as it relates to public 
power utilities. Even though also the CFTC has provided a no-
action letter increasing the subthreshold for certain 
transactions to $800 million, but the effect has been still to 
limit the pool of counterparties with which public power 
utilities can enter operations-related swaps, in turn, 
concentrating the risk to fewer market participants, so fewer 
participants. Because of these concerns, as also expressed by 
public utilities in my own district and throughout the whole 
country, myself and three of my colleagues, Mr. Denham, Mr. 
Costa, and Mr. Garamendi, as well as many other cosponsors, we 
introduced H.R. 1038, the Public Power Risk Management Act. 
Also Mr. Luetkemeyer, who sits on the House Banking Committee, 
was an original cosponsor as well.
    The bill's purpose is to put public power utilities back on 
an even playing field with the other utilities in hedging their 
risks, this by exempting the operation and related swaps from 
their $25 million low subthreshold but giving them the same 
power to the general $8 billion threshold. So our Act, our bill 
was approved by this Committee unanimously--thanking the 
Members--as well as passed on the House Floor by 423 to 0 on 
June 12.
    First, Mr. O'Malia, do you think this is the right approach 
that we have taken so far since this is maybe the first chance 
to talk to you about it? And second, is this an approach the 
CFTC would like to emulate itself and would it take place 
anytime soon? Or does the Congress need to move forward full 
speed ahead with this bill that we have already moved out of 
the House?
    Mr. O'Malia. That is a great question and a great issue. I 
fully support your legislation so thank you for that. And I 
hope the Senate will pass it so we can achieve the reform that 
I think is appropriate. I think this issue in and of itself--
and here is the staff no-action letter right here. It says, 
``temporary relief.'' Temporary is only based on the fact that 
it promises that the Commission is going to review this and 
make changes. I don't see that happening anytime soon, if at 
all. So----
    Mr. LaMalfa. Aspirin provides temporary relief. We need 
something more certain.
    Mr. O'Malia. I would agree with that. And it really goes 
into saying that the reason we provided the relief is because 
these entities, and the utilities are more sophisticated than 
the general special entity for one, and second, that there is a 
concern that at the $25 million, which is the same concern we 
have at the $800 million, that we have provided the relief to 
because you do not have counterparties for these energy 
companies that are trading in regional markets. And we lay out 
in our first justification for providing the relief that there 
are not adequate counterparties and therefore they are left to 
and still hostage to Wall Street banks.
    Mr. LaMalfa. Let me jump to the second line here on this 
question here. So have any entities registered with CFTC as a 
swap dealer for having exceeded the $25 million subthreshold? 
Has anybody even taken part in that?
    Mr. O'Malia. Not that I am aware of.
    Mr. LaMalfa. Yes. Yes.
    Mr. O'Malia. Nor at the $800 million that I am aware of.
    Mr. LaMalfa. So do you think anymore will be coming into 
play under this $25 million rather than the $8 billion 
threshold?
    Mr. O'Malia. I don't know. I would go back to the staff and 
try to provide you some information----
    Mr. LaMalfa. Well, if you had to prognosticate how things 
have been going on that and what do you think would happen?
    Mr. O'Malia. I doubt it. I think they are fleeing this 
market to avoid this very issue of becoming registered as a 
swap dealer for trading with a special entity.
    Mr. LaMalfa. So the effects are on public power then that 
means less options for people that are public power users?
    Mr. O'Malia. That is correct.
    Mr. LaMalfa. All right. Quickly, I will try to get to a 
final line here. We were talking about technology a little bit 
ago, too. Does CFTC currently have the necessary technology to 
monitor massive amounts? It sounded like no but at the 
beginning of the year, press reports indicated that an academic 
data sharing program run by the former Chief Economist may have 
resulted in proprietary data being disclosed in published 
academic papers. So with all this going on with NSA and other 
issues out there, we have very grave concerns of how are 
people's data being treated and what is the security of that? 
Please answer briefly on that.
    Mr. O'Malia. We have an IG investigation ongoing right now 
to uncover what happened and what went missing, but it is 
critical that we have policies and procedures, especially with 
regard to our markets as well as the international coordination 
to make sure that we protect all market data.
    Mr. LaMalfa. Perhaps maybe too much data is being retrieved 
that can't possibly be managed. I will yield back. Thank you, 
Mr. Chairman.
    The Chairman. The gentleman yields back. Mrs. Negrete 
McLeod, 5 minutes. No questions? Mr. Neugebauer, you are it. No 
questions? Mrs. Noem for 5 minutes.
    Mrs. Noem. Thank you, Mr. Chairman. I want to thank both 
the Commissioners for coming today. I wanted to thank you for 
your clarification on the hedging definitions because that has 
been a burr under our saddle for a while. And I am curious, 
that is what I understand to be under the Commission's 
authority to come up with the uniformity in those definitions. 
Are you taking action in that manner?
    Mr. O'Malia. Not in the manner and process that I am 
satisfied with.
    Mrs. Noem. Okay. Well, if we on this Committee can be 
helpful on that, that would certainly be a priority for me.
    Do you have a secure method that you both believe in on 
protecting integrity of consumer and customer funds?
    Mr. O'Malia. One of the important things that we were made 
aware of following the bankruptcy of both Peregrine and MF 
Global was there was not a technology solution in place that 
would surveil on a daily basis what the status of customer 
funds was where they were and how they were being treated. We 
used the Technology Advisory Committee to respond immediately 
to that and we actually tasked the industry to come up with an 
industry-led and industry-funded solution. It didn't require a 
rulemaking. No taxpayer dollars had been expended for this.
    But the industry quickly responded, and as of January this 
year, they have integrated a technology solution to double-
check the accounts held at an FCM and double-check them against 
the custodian bank. And they have automated thresholds so that 
any deviation from that specific threshold will send a red 
flag.
    So we will know when and if customer funds are being moved 
unexpectedly or illegally, and then we will be able to respond 
to that more quickly. That was not in place. It is in place 
today and we are continuing to build that out to include not 
only the FCM and the custodian bank but also carrying brokers 
and CCPs, the clearinghouses. So we will have an electronic net 
that can really identify when and if customer funds are moving.
    We have also made some changes in our rules that we call 
the Corzine rule, for example, that requires the CEO to sign 
off on any time they move a certain amount of money, which is a 
very important reform. And we will be addressing the proposed 
customer protection reforms coming up regarding FCM management. 
And we haven't seen that final rule yet so we will wait on 
that.
    Mrs. Noem. Okay. Commissioner Wetjen, did you have anything 
to add to that? Do you think it is an adequate safety net out 
there and available technology-wise?
    Mr. Wetjen. Well, I appreciate the question. As 
Commissioner O'Malia has said, a lot of changes have been made 
already on the part of the industry, and some of those new 
practices are going to be reflected in our customer protection 
rule once it is finalized. The system and the safeguards have 
improved even without our finalization of the customer 
protection rule.
    The one other thing we did right after I joined the 
Commission was a rulemaking that limited the types of risky 
investments that FCMs could invest in or could invest customer 
funds in. And so I thought that was an appropriate reform at 
the time. We do have one rule that has actually been finalized 
in response to some of the shortcomings in our previous 
regulatory structure. We need to get the rest of the way by 
finalizing the customer protections rule. As I said earlier in 
response to Congressman Maloney's question, once we finalize 
the rule, we will be in pretty good shape, but I would continue 
to worry that we don't know what we don't know, and so we will 
just have to continue monitoring the practices of the FCMs. 
That is going to be much easier to do with some of the new 
requirements under the final rulemaking, first and foremost, 
the daily reporting of balances to the SRO and to the 
Commission. I think that will be very important.
    Mrs. Noem. On another topic, is an insurance product a 
viable option for customers of futures trading?
    Mr. Wetjen. That is a proposal that has been recommended by 
some. I think it is certainly worthy of consideration and 
exploration. One of the things we have heard from some is that 
the folks need to get a handle on what the expense of providing 
the insurance would be. One of the trade associations has 
undertaken a study on that front and so it would be important 
to understand what the costs would be. And it would be 
important because what we don't want to do is somehow saddle 
the FCMs with additional cost in a way that makes it more 
difficult for those who actually need to use our markets to 
hedge. We don't want to make it prohibitively expensive for 
them. So that would be counterproductive. That would be the 
issue to watch for when examining whether an insurance program 
has any viability.
    Mr. O'Malia. We want to make sure that we instill the right 
corporate culture in the management of not only the FCM but 
sometimes the larger entity, the family parent, and making sure 
that the CEO and the financial officers all have customer 
interests first and foremost in mind. And I know one of the 
concerns with the insurance fund is that, don't worry about it; 
it is insured. We want corporate cultures to make sure that 
they protect customers, not rely on an insurance fund as a 
backup strategy. So I look forward to reviewing the study on 
the customer protection issue.
    I also want to pursue, and I put in my testimony, different 
bankruptcy reforms that would really improve the customer's 
chances of being fully refunded if there is ever a bankruptcy 
or a hole in the funds, to take that all the way up through the 
corporate structure and really make management totally 
accountable for customer protection.
    Mrs. Noem. I appreciate that. Thank you. With that, Mr. 
Chairman, I yield back.
    The Chairman. The gentlelady yields back. Mr. Hudson for 5 
minutes.
    Mr. Hudson. Thank you, Mr. Chairman.
    Commissioner O'Malia, I am trying to understand the CFTC's 
final rulemaking on the de minimis level of swap dealing. Am I 
correct in reading that the level is set to automatically drop 
over 60 percent in 5 years without any public notice or 
comment?
    Mr. O'Malia. Correct.
    Mr. Hudson. Would you agree that such a drastic change 
should warrant some time for public comment?
    Mr. O'Malia. That is a frustration. We have provided for a 
number of automatic changes. Block rules, for example, required 
for swaps automatically rises from 50 percent to 67 percent. I 
proposed an amendment that, at the least, the Commission should 
evaluate and look at the data before we make any decision. My 
frustration lies with the de minimis rule as well. Making these 
automatic changes totally devoid of any data makes no sense to 
me.
    Mr. Hudson. Well, how exactly does the CFTC plan to 
evaluate what the de minimis level ought to be in 5 years? I 
mean what is the process there?
    Mr. O'Malia. Well, there is no requirement obviously. The 
swap dealer rule is an automatic change. Mind you, the SEC, 
even though we are supposed to do a joint rulemaking, they did 
not have an automatic reduction in their standard.
    You know, we are going to benefit from having all of the 
reported swap data repository. It is really incumbent upon the 
Commission to aggregate, understand, and analyze that data, 
make its findings, and then make decisions based on that. To 
skip that step doesn't make sense to me.
    Mr. Hudson. Well, and my understanding is based on notional 
value, but that may work for interest rate swaps, but my 
concern is the commodities markets, the rising energy prices 
could push entities over the threshold without a needed change 
in their trading. In fact, the entities might be forced to 
limit trading when faced with rising prices, reducing liquidity 
at exactly the wrong time. And is the Commission even taking 
that into consideration?
    Mr. O'Malia. Not under this rule it hasn't. Those are very 
important questions and concerns you raise. One of the real 
frustrations with the swap dealer rule is the four-part test 
that provides for what is swap dealing, in that the Commission 
did not define it, and we use the facts and circumstances test. 
So there is a lot of uncertainty as to whether end-users fall 
within the dealing definition.
    Congress gave us the tools in section 1a(49)(C) of the Act 
to provide for an exemption for people who are not doing swap 
dealing as a part of their regular business. We completely 
ignored that and did not provide that coverage to end-users. So 
they are left with this de minimis solution as their only 
protection against being a swap dealer, and that is 
unfortunate, especially in light of the fact that the number 
drops from $8 billion to $3 billion and all of a sudden what 
was acceptable the day before could be found to be dealing the 
next day and many people have to register. So we have some 
time, obviously, before that so I hope the Commission will 
revisit it. It ought to revisit the special entity threshold. 
So there are a couple of reasons why we ought to reopen the 
swap dealer definition.
    Mr. Hudson. I thank you for that. And I guess building on 
what my colleague Mr. LaMalfa was talking about assuming the 
$800 million de minimis threshold actually reduced the number 
of parties the special entity may deal with, I mean, what 
regulatory benefit is gained by this limitation on a special 
entity's ability to offset risk? And I will open it up to both 
of you, Mr. O'Malia, if you want to start.
    Mr. O'Malia. Well, the promise we made in offering the 
exemptive relief or the staff no-action was because at $25 
million they weren't going to have enough counterparties. We 
raised it to $800 million, or the staff raised it to $800 
million, they are still in the same problem. So we just 
provided a solution that doesn't solve the problem. So either 
that number has to go up and I don't know why we would want to 
treat them any differently than any other end-user for the 
purposes of a de minimis or Congress ought to step in and 
change it.
    Mr. Hudson. Mr. Wetjen, if you would like to respond, I 
have a minute left.
    Mr. Wetjen. Sure, Congressman. Thanks for the question. I 
think that experience has shown us that with regard to the 
special entity de minimis, the level was set too low. The level 
that it is currently set at through the no-action letter, $800 
million, as you alluded to, was the number suggested by market 
participants. I think it is informed by the petition that was 
submitted by one of the trade groups that is seeking to change 
the definition. And the no-action letter does hinge on 
Commission action on that petition, so in the meanwhile the no-
action is effective.
    I am not aware of any particular reason why the no-action 
letter has not done the job in terms of providing the relief 
sought. There obviously is a difference between no-action 
relief and a full Commission exemptive order or a Commission 
rulemaking. I certainly can see that point. But I am not aware 
that there is something peculiar about the fact that the relief 
has come through a no-action letter, that it hasn't provided 
the relief sought. And so I would have to learn more from the 
market participants who sought the relief to understand that 
better.
    But as far as where the level is set, again, as informed by 
those impacted by the de minimis threshold in the first place, 
so if it needs to be a different number, we need to be open to 
that. It was set based on information that was provided to us.
    And I agree with Commissioner O'Malia. Whenever we can, we 
should always take Commission action. And again, in this 
instance, no-action relief was provided because it was somewhat 
targeted in the sense that it was specific to a subset of these 
special entity groups. But I agree. If it can have the effect 
long-term of effectuating an entirely different policy than 
what was in the swap dealer rule, that is something the 
Commission should reexamine.
    Mr. Hudson. Well, our time has expired. I appreciate it. 
Mr. Chairman, we definitely need to provide more certainty than 
a no-action letter, and so I hope this Committee will work 
towards that working with the Commission. And I yield back.
    The Chairman. The gentleman's time expired previously but 
he yields back anyway. Mrs. Hartzler for 5 minutes.
    Mrs. Hartzler. Thank you, Mr. Chairman, and thank you, 
gentlemen.
    I am hearing a lot about an issue that directly impacts the 
folks back home with some of the rules that are being proposed. 
We have heard from farmers and ranchers and small- to medium-
sized futures commission merchants strongly opposing the CFTC's 
proposed rules that were supposedly designed to improve 
customer protections. Instead, many of them say the new 
proposals would profoundly increase their costs and potentially 
threaten their existence. If the proposed rules are implemented 
as currently drafted, FCMs must hold enough of their own funds 
to cover all customer positions at all times of the day, in 
addition to the farmers and ranchers now having to meet just a 
1 day margin call. So if this happens, what will happen to the 
agriculture segment of the futures markets both from the FCM 
and from the customer standpoint?
    Mr. Wetjen. Congresswoman, I appreciate the question. You 
are referring to the residual interest provision in our 
customer protection rulemaking that has not been finalized, and 
it is true that the proposal would have had an effect 
consistent with what you said. The staff is preparing a draft 
and will recommend a different approach on this particular 
issue as I understand it, based on our internal dialogues.
    I think, again, we have to find a balance. You know, the 
statute does require that customer seg funds should be 
protected at all times and shouldn't be covered by some other 
customer's funds. And so that is an important principle we need 
to have reflected in our rulemakings. But by the same token, 
what was originally proposed is such a dramatic change from the 
current practice. We started to hear the same concern that you 
just raised, which was that many FCMs wouldn't be able to 
handle that additional expense and might very well go out of 
business, and these tend to be the ones that provide services 
to the hedgers back in places like Iowa where I am from and 
back in your district. So I am eager to take a look at what the 
staff recommends and to ensure that it finds the right balance.
    Mr. O'Malia. I share your concerns. I think I share the 
same concerns that Commissioner Wetjen does. It is a balance 
and we have to be very careful as we do not want to put these 
FCMs in a position that they can't serve their customers and 
the customers can't afford to hedge their risk. So I haven't 
received the same staff briefing and with the commitment that 
they are coming up with a different approach, so I will 
carefully evaluate it when it comes before the Commission. But 
this is a top priority for that rule so thank you for the 
question.
    Mrs. Hartzler. You bet. I am from Missouri in a mainly 
rural district and so this is important to us so I am just 
curious about the draft. Now, was it dealing with the FCM's 
requirements or was it dealing with the farmers' 1-day margin 
or both?
    Mr. O'Malia. Well, the rule changes the way FCMs hold the 
money and therefore the commitments--it changes the 
interpretation of what we had historically been relying on in 
the past and that would change how much farmers and ranchers 
would have to put up to meet that demand and it reduces the 
FCM's flexibility to extend the credit to their customers.
    Mr. Wetjen. Yes, I would agree with that and say it just a 
little bit differently. You know, where we land will have to be 
informed by how quickly the FCM can actually collect additional 
margin from a customer and how quickly margin is provided by 
some users is different from how much time it takes with 
others. And again, we will have to make sure the balance is 
struck in the final rule.
    Mrs. Hartzler. I am encouraged to hear that you are 
listening and trying to wait because the average farmer relies 
on their local FCM, and I would hate to see the rule so onerous 
that it puts them out of business or makes it too difficult for 
the local farmer to be able to hedge their risk because that is 
a very big part of their marketing plan. So thank you for your 
response and I yield back.
    The Chairman. The gentlelady yields back. I will recognize 
myself. We will have a second round since we have a little bit 
of time left to do that.
    Playing off of what we were just talking about, the 
Agricultural Advisory Committee meets tomorrow for the first 
time in 2\1/2\ years, a pretty tumultuous time during the 
Commission's existence, and I am concerned that the ag 
community not having had access to the Commission directly, 
during that time frame, has missed an opportunity to hear some 
of these concerns that Vicki and I hear from the folks.
    So what is your expectation as to what the Agricultural 
Advisory Committee can do with respect to advising the 
Commission on the impact that the proposed rulemaking will 
have? Mark, do you want to start off?
    Mr. Wetjen. Mr. Chairman, oftentimes, we might hear more 
often from certain segments of the marketplace than others, and 
so the main importance of this Agriculture Advisory Committee 
is to make sure that the Commission is being informed by the 
perspective of that community when we adopt policies at the 
agency. I think through our rulemakings under Dodd-Frank, for 
example, we have received literally tens of thousands of 
comment letters, and a lot of those have come from groups 
representing the ag interests. So I do feel like we have 
received a lot of input, valuable input from that community, 
but this would be a good forum to make sure that we are 
especially focused on their interests.
    Mr. O'Malia. Obviously, the Advisory Committee has the 
potential to be a very useful tool for the Commission to 
discuss issues that are not immediately before it and think 
about different issues affecting that industry, so I remain 
optimistic. We have used the Technology Advisory Committee 
quite effectively to talk about customer protection, talk about 
high-frequency trading, talk about risk mitigation tools. So 
they are important tools. I just hope that this is as effective 
as that.
    The Chairman. Speaking of that advice, it seems to me that 
the self-regulatory agencies who drove the daily bank 
confirmation process really got to the heart of the customer 
protection issue. Will that effort be reflected in the final 
rulemaking with respect to customer protection? Because if in 
fact your new rule drives greater customer balances at the FCM, 
aren't you exposing them to greater risks for loss of those 
dollars? How much is enough? I am hopeful that you will be able 
to fold all that in.
    You both have spoken about how data collection plays a 
great role in the regulatory scheme and how that should be able 
to ferret out all kinds of stuff. Can you talk to us about why 
that didn't work in the J.P. Morgan ``London Whale'' deal from 
last summer and why we have not been able to ferret that out at 
this point? Why did the data collection oversight potential not 
work?
    Mr. O'Malia. Data requires very rigorous and disciplined 
rules and kinds of policies. We have to be very prescriptive 
with requiring what data to be reported and when, and we 
weren't adequately prescriptive. Ironically, I am talking about 
how the Commission failed to be prescriptive, which is 
generally not the case with most of its rules. But in terms of 
data, it is a very granular requirement. You have to be very 
specific about how people report. Right now, we are not getting 
the consistency and uniformity that allows us to do the 
essential aggregation. If you can't line up the columns and you 
are not looking at the same data from the same people 
consistently, you won't get the right answers.
    The Chairman. Well, doesn't that strike to the heart of 
most of what we are trying to do? Isn't that why we want all of 
this data collected through swap data repositories throughout 
the system; in order to be able to ``see'' where the bad actor 
is, and where the potential systemic risks to the financial 
system would lie? Are we no closer to making that happen?
    Mr. O'Malia. Well, we are making marginal progress but we 
are making steady progress, and we have convened a working 
group to really address this. And we are going back to first-
order fundamentals to make sure that we work with the SDRs to 
identify this.
    The other thing that is causing some problems with the data 
is actually the no-action process. When there is a gap in the 
data when somebody doesn't have to report for an entity or an 
activity that we have exempted, we won't be able to see that in 
the data.
    The Chairman. Scott, with a relook at data collection 
requirements, will you have the potential to shed certain data 
you have been collecting in the past? Is it useful as you look 
at what you should be collecting in order to monitor the 
market?
    Mr. O'Malia. Well, we have taken a more prioritized 
approach. I still think we have a ``we want it all, we want it 
now'' attitude. But we are beginning to figure out that in 
order to swallow this issue, we are going to have to take it in 
bites. And we are starting to focus on getting elements right 
and building from there. But it is going to take a very long 
time--
    The Chairman. Right.
    Mr. O'Malia.--to get this completely correct.
    The Chairman. Mr. Scott, for an additional 5 minutes?
    Mr. David Scott of Georgia. Yes, thank you very much, Mr. 
Chairman.
    Let me go back to my line of questioning because, after 
all, one of the major purposes of this hearing is for the 
reauthorization and your budget and appropriations. I want to 
follow up on the House Appropriations Committee reported an 
appropriation bill that reduces your funding for the CFTC by 
more than $10 million, below what we talked about earlier that 
you needed. Chairman Gensler was at that meeting and he 
testified. Mr. O'Malia, you were there as well, that even at 
current spending levels, that sequestration, that the CFTC 
would likely face furloughs, would very likely face reductions. 
And all that we talked about here at this meeting shows this 
increased load. So do you believe that this cut by the 
Appropriations Committee is justified, and if so, which areas 
of the CFTC would you assign for furloughs?
    Mr. O'Malia. That is a very good question and it is a 
difficult one obviously because it strikes at the heart of kind 
of how we function. But the House level is where we are today 
and so while it is off of the 2013 appropriated level, it is at 
our current operating level of the sequestration. Now, we had 
the opportunity to use carryover balances. The Appropriations 
Committee was kind to give us 2 year money, which is essential, 
because that gives us some flexibility to husband resources as 
necessary to take and work through some of the difficult times. 
We were able to use a $6 million carryover balance this year 
alone to make sure that we did not have furloughs or layoffs at 
all. So we have yet been unaffected, but as time goes by, we 
may not have those carryover balances. We need to be very 
prudent with the management of our funds to make sure and 
protect our staff resources that we have today and not get into 
a position that we have furloughs in the future.
    I had to dissent against a spend plan recently that would 
set that out, and in that document it did say that there is a 
chance that we would have some furloughs as a result of the 
budget.
    Mr. David Scott of Georgia. Going forward, in Europe in 
which you will be playing a far more intricate role, over in 
Europe there is talk about what they refer to as transaction 
taxes you may be familiar with. And some here in the United 
States, in view of these budget shortfalls, if you are not able 
to get the money that you need, have called for some kind of 
user fee or transaction fee to help finance the Commission's 
activities. What are your thoughts on that proposal and would 
they be any different at all from what Europe is offering? And 
quite honestly, should we go that way? I mean we are the leader 
here of the world. I value that. I think it is very important 
for us to sustain that. So I am concerned very much about your 
funding capacity. What would it mean if you are forced to have 
to go the way that these Europeans are talking about when it 
comes to transaction fees if we here in Congress don't give you 
the level of money you need?
    Mr. O'Malia. I think that is a great question. I think it 
is a very contested issue in Europe right now, as you correctly 
point out. It is very controversial. This year in the 
President's budget, OMB proposed a fee to be collected but it 
had no specifics as to how the fee would be assessed on our 
industry to recover these costs. I believe it says it is a full 
recovery of cost but I know OMB has not provided it to you in 
terms of requesting authorization to impose a fee. So they 
proposed a budget. It did not assume it in its baseline but it 
did talk about their desire to have one. You should receive 
that information. I have not seen information. I don't know how 
they were going to propose to collect this information or the 
funds. I don't know who it is going to be assessed on, and I 
would want to make sure that we understand what the 
ramifications of this are before we implement it and I don't 
have a position on it because I don't know what the proposal 
says.
    Mr. David Scott of Georgia. Yes.
    Mr. O'Malia. We do rely to some extent, a very small 
amount, on the National Futures Association. They recover cost 
through their member registrations that are under our 
jurisdiction and they provide a very valuable resource to the 
Commission. Their challenge has been to take taxing a futures 
trade versus a swaps trade but they handle that at 2 per side. 
It amounts to roughly 20 percent of the futures trades due to 
several exemptions in there, and then swap dealers are assessed 
a membership fee and the largest members pay $1 million, the 
smallest members pay as low as $150,000. So there is a range 
and we are using that. And members actually receive direct 
benefit from that. They receive the recovery of those costs in 
those services.
    Mr. David Scott of Georgia. Thank you very much, Mr. 
Chairman.
    The Chairman. Mr. Costa, 5 minutes.
    Mr. Costa. Thank you very much, Mr. Chairman.
    This hearing today of which I missed the earlier part of 
it, but it is the continuation of other hearings that we have 
had, and the overall descriptive for me is that this continues 
to be a work in progress as we deal with the implementation of 
the efforts that are assigned under your responsibility.
    Tell me, as you look down the road here over the next 5 
years, what your expectations are in terms of the 
implementation and the regulatory process under the most 
optimistic scenario and what are your greatest fears under a 
most difficult 5 year journey in terms of what you wake up in 
the middle the night wondering, under what set of scenarios, 
i.e., a repeat of the 2008 crash and how you might respond?
    Mr. Wetjen. Congressman, I appreciate the question. First, 
I would answer by saying we do have a little bit of work left 
to do, as you know.
    Mr. Costa. That is my description, a work in progress.
    Mr. Wetjen. I think one of the key areas of focus for the 
agency will be on these substituted compliance determinations 
where we take a look at regulatory regimes in other nations and 
determine whether they are comparable and comprehensive or 
essentially identical.
    Mr. Costa. To that end, are you working with our European 
allies?
    Mr. Wetjen. Yes, in fact, certain determinations have 
effectively been made with regard to Europe. There was an 
agreement struck 2 weeks ago reflecting that. But the key will 
be looking at some of these other jurisdictions like Australia, 
Switzerland, Hong Kong, Japan. And then some of the other 
jurisdictions where----
    Mr. Costa. Do you believe the transparency is there with 
those other countries?
    Mr. Wetjen. I am sorry?
    Mr. Costa. Do you believe the transparency is there with 
those other countries?
    Mr. Wetjen. Well, the ones I mentioned, those are the ones 
that we expect to find to be closest.
    Mr. Costa. All right.
    Mr. Wetjen. But again, there is swap activity taking place 
outside of those jurisdictions as well.
    Mr. Costa. Clearly.
    Mr. Wetjen. And so we have taken an approach in our 
guidance to deal with those other jurisdictions, but we need to 
make sure that we are collecting data and understanding what is 
happening in those jurisdictions as well. So that is probably 
the one area of focus for the Commission over the next 3 to 5 
years in addition to just finishing the other remaining 
rulemakings under Title VII.
    Mr. O'Malia. I think the way Commissioner Wetjen answered, 
over the next 5 years, that will be the substituted compliance 
determinations, and coordination internationally will be 
paramount, and we are going to spend a lot more time dealing 
internationally to make sure that we have good rules that 
harmonize our rules and don't create a competitive imbalance. 
And one of the areas we need to be very focused on is in the 
transaction space. Our requirements for rules----
    Mr. Costa. And the transaction space, is that where you 
think you have to monitor in a way to not create a competitive 
disadvantage?
    Mr. O'Malia. Well, I don't know at this point. I think that 
is where we have probably the greatest differences in 
regulatory structures internationally. That is an area where 
trades can move easiest internationally. They can move trades 
to different platforms----
    Mr. Costa. Obviously the clearinghouses in Europe----
    Mr. O'Malia. I think we have very close comparability in 
terms of clearinghouses and recognizing the European 
clearinghouses, Asian clearinghouses, we are much closer in 
those regard. We have done a lot of work through IOSCO, and the 
international regulatory and Prudential Regulators have ensured 
that we do have systemically relevant entities that are going 
to be closely harmonized. The transaction space is going to be 
a little more Wild West and there is going to be a variety of 
different trading venues, platforms, and requirements, and that 
is going to be something that we need to focus on.
    Mr. Costa. With that thought in mind, I am going to give 
you the proverbial softball down the middle of the plate. So 
what do you think is the appropriate role for oversight for the 
Congress as you are trying to do your job?
    Mr. O'Malia. I would encourage careful and immediate 
oversight actually and really bring closer evaluation to how 
our rules are being implemented. I think you can start with 
some of the definitional rules, certainly entity rules like the 
swap dealer definition. We have had a lot of discussion about 
how our end-users are faring under this. There are some real 
examples of how this is making a lot of entities' life a 
challenge, hedging definitions, et cetera, that I raised 
earlier.
    And I also think that Congress should really focus on 
expanding and changing some of the bankruptcy rules to really 
help in terms of protecting customer funds.
    Mr. Costa. Thank you. My time has expired.
    The Chairman. The gentleman yields back. Mr. LaMalfa for 5 
minutes.
    Mr. LaMalfa. Thank you again, Mr. Chairman.
    I wanted to come back to the no-action letters and some of 
the frustration among market participants about how they come 
about and their timing, et cetera, as we talked about earlier a 
little bit. We can come at the 11th hour while people are 
tracking maybe two entirely different tracks anticipating 
scenarios with or without one. Could you explain, please, how 
the Commission standards work for issuing a no-action letter 
and who determines what entity or activity might receive such 
relief and whether or not the Commission itself is the one that 
votes on approving its issuance?
    Mr. O'Malia. Well, the no-action process, since I have been 
here has been an evolving one. I think historically the 
Commission has had a greater say and there has been some sort 
of--they would circulate the no-action relief, which is 
really--generally, an entity petitions the Commission and says 
we have a unique situation. We would like some very narrow 
relief. And we have used that over the years to provide that 
narrow relief to specific entities. And the staff will evaluate 
it and make its recommendation and then provide the no-action 
letter, circulate it to the Commission for review, but as we 
now know, that is not a Commission action and it is a staff 
action. So the Commission does not have a vote on that.
    And therefore, it is a challenge because if you use it 
broadly--and we have used it and abused it frankly in kind of 
covering some of our faults in Dodd-Frank rulemaking, and if 
you use it indefinitely, it becomes a de facto rulemaking, 
which is certainly the purview of the Commission, and they are 
now substituting staff decisions for Commission decisions 
without the benefit of notice and comment, without having it be 
put in the Federal Register for everybody to review. It is a 
letter sent and it just generally appears on our website. And 
it is not added to the Code of Federal Regulations that we have 
so you can't go to one spot to figure out if you are in 
compliance or not because you have to check our website to see 
if there is any no-action relief on it.
    Mr. LaMalfa. How many no-action letters do you think over 
the last year have been issued, do you think?
    Mr. O'Malia. I think in relation to Dodd-Frank, I tried 
counting them and we are a little over 100, and 24 of those, it 
is my understanding, we have provided indefinite relief meaning 
unlimited or permanent.
    Mr. LaMalfa. And so you mentioned, too, it is kind of de 
facto for Commission rulemaking. What would be a better system 
for replacing that so that the Commission actually is doing the 
rulemaking instead of this gray zone we have, this really 
unpredictable situation you have, especially 11th hour 
decisions? How can we make that better?
    Mr. O'Malia. Well, and certainly no-action relief is a 
vital tool for us to provide that targeted relief, and we 
should use it for specific entities and on a limited basis. 
When we have an issue where we are considering permanent 
indefinite relief or something like that, then the Commission 
should revisit the rule. We should open up the rule and say we 
have an issue here that needs to be corrected, go through the 
proper process to make those rule changes. And we are beginning 
to rack up a few proposals where it is now appropriate to come 
back and reevaluate the rule. If I had a nickel for every time 
we have said at an open meeting we are going to come back and 
fix these rules if they are broken, I would be a rich man 
because we have always committed to that, yet we have never 
done it. And that is my frustration----
    Mr. LaMalfa. You are probably starting to build a pattern 
of very often requests for a particular type of relief, right? 
So this would be a rule that you might put at the top of the 
list to come back on?
    Mr. O'Malia. The issue is that special entity issue. The 
headline of that no-action relief is temporary relief. What is 
temporary about it? It says the Commission is reviewing the 
petition. Nothing is happening at the Commission to review that 
petition. I don't see any action happening to fix the rule to 
fix this problem. And the no-action solution has turned into a 
no-fix of the problem, and that doesn't make sense to me 
either.
    Mr. LaMalfa. Does Congress need to have a greater role, 
kind of dovetailing what Mr. Costa was asking, in oversight or 
even legislatively?
    Mr. O'Malia. You have the exact same role you did when 
Dodd-Frank was formed. You don't need any additional authority 
but I would suggest to you if we are not going to fix it, you 
should.
    Mr. LaMalfa. Yes. Thank you. I yield back.
    The Chairman. The gentleman yields back.
    I brought up the issue a while ago of self-regulatory 
organizations. Is there a way for the Commission to offload 
some of its responsibility? Given the budgetary concerns that 
my colleagues have talked about, could some of that regulation 
be delegated to the SROs with the Commission then maintaining a 
role of supervising that or making sure the SROs did it 
correctly?
    Mr. O'Malia. This goes directly to Mr. Scott's concerns 
about budgeting. We do have a useful tool, as we talked about. 
The NFA, for example, charges its participants. Its budget is 
$74 million in 2014, so it is viable to do a lot of the 
registration responsibilities. They are going to play a vital 
role in our self-regulation. These are the swap execution 
facilities, these transactions. They are testing, reviewing the 
order book, and looking at all of the SEFs for compliance to 
make sure that they do their market surveillance tool, great 
opportunity to leverage our resources with that. And they have 
been a great resource for us in the past.
    The swap dealer rule in and of itself--so far the NFA has 
received 168,000 pages of swap dealer submissions. It makes no 
sense to me for them to go through all of the swap dealer rules 
and all of these 168,000 pages of submissions and then have the 
Commission do the exact same review. We need to work together. 
We need to do a sampling. We need to figure out what their 
responsibilities and our responsibilities are because we 
certainly can't afford to do both.
    The Chairman. You could see an opportunity for the SRO to 
do it first and then you come back in and pick the ones that 
present the most risks, or some sort of random deal and go 
through that. Depending on what you discover there, go with 
what the SRO did or go further, rather than a duplicative 
effort, isn't that a better way to go?
    Mr. O'Malia. I fully support that concept and we really 
need to figure out how we are going to leverage that as a tool, 
not duplicate it.
    The Chairman. Yes. I do think there is a role there. The 
SROs are more nimble, as you have seen with their really 
elegant fix on customer funds protection by going right to the 
banks and having that happen. That went a lot quicker than I 
suspect the Commission could have done it, and it is actually 
very effective, and to me, may be effective enough that you can 
look at your proposed fixes on customer protection and maybe 
leverage that one better.
    On the path forward what the CFTC and the European 
Commission agreed to, you say we are going to agree to agree, 
yet you didn't agree on margins for exchange-traded 
derivatives. If at the end of the day you decide U.S. has one 
margin level, and the EU has a different margin level, what 
impact does that have on customers?
    Mr. Wetjen. Thanks for the question, Mr. Chairman. I do 
think that at the end of the day even though you are right in 
the document that was released the document addressed this 
issue that effectively punted on it, I expect that the 
Europeans will find our clearing regime comparable to theirs. I 
would imagine that we will do the same although we do have most 
of the European clearinghouses either registered with us or in 
the process of registering with us. So that solves a lot of the 
problem there. Once comparability is determined, then we have 
to leave it up to the market participants to decide even if it 
means that in one clearinghouse there is larger, more 
additional margin requirements vis-a-vis another.
    What we have to keep an eye out for is why we want 
participants to have choice in that way, or we want to make 
sure that there aren't the sorts of arbitrage taking place that 
would invite risk to our system, because in this case we 
actually have a smaller margin requirement. So we would want to 
keep an eye out for that, but based on initial dialogues 
between ESMA and Europe and the staff at the CFTC, it feels to 
me like we are trending towards a conclusion where equivalency 
or substituted compliance is going to be found.
    The Chairman. All right. Anyone else have another question? 
Mr. Vargas, 5 minutes.
    Mr. Vargas. Thank you very much, Mr. Chairman. I appreciate 
it. I appreciate again the witnesses being here. You know, the 
question was asked by Mr. Maloney what keeps you up at night? 
And you said your 3 year old. If your 3 year old is keeping you 
up, you are doing something wrong, but only by 1 year, and then 
after that, they shouldn't be keeping you up. I have two girls; 
I can tell you.
    But anyway, Mr. Costa said what worries you in the middle 
of the night and I guess I thought about that. And from my 
district it is an interesting district because about \2/3\ of 
the district is a very urban area in San Diego and the other 
part of my district is a very rural farming community. And for 
them it is the issue of manipulation of some commodities like 
gasoline. In California back in the early 2000s we had 
manipulation of the electrical system there, and our prices 
spiked two, three times what they were regularly and I went 
back and took a look at the price of gasoline here. And this is 
the weekly U.S. conventional gasoline retail prices since 2000. 
In 2000 both premium and regular was under $1.50, and today, 
they are $3.82 and $3.50 for premium/regular.
    That is one of the things that worries people in my 
district. You know, what has happened to the price of gas? And 
there are economists and academics that are saying it is 
manipulation and speculative manipulation, very similar to 
that. I don't know that that is true. Now, you said that there 
is this process that you go through but how would you find 
that? When you are having these meetings, how would you 
determine that there is manipulation through speculation? 
Because really that is what Dodd-Frank ultimately is supposed 
to do. It is where the rubber hits the road is where the 
regular American is saying, ``Wait a minute, I am getting 
ripped off here. I am paying way too much and this is not 
market forces. This is manipulation. This is speculation. This 
is something that is wrong and fraudulent.'' How in fact do you 
find it there because I know that that is an issue that comes 
up in California, the price of gas and these radical increases 
that we have seen?
    Mr. O'Malia. This is an issue that we are very attuned to 
based on the California energy crisis and obviously in 2007 a 
lot of commodities saw their prices spike and fall in 2007. And 
they have remained more moderate but we have to be vigilant, 
absolutely have to be vigilant on this point. We have to work 
with our surveillance teams, which are really growing in 
capacity, and I am very impressed. One area that I think we are 
really improving in is our ability to analyze the data. It is 
not so much the new data but it is that we are really expanding 
our capacity. And I give a lot of credit to our new office 
surveillance director, Matt Hunter, for his efforts to retool 
our teams to really become more data-intensive and to do a lot 
more modeling. We are making huge improvements there.
    We also work with EIA, the Energy Information Agency, which 
really looks at physical stores and making sure we understand 
how the physical markets are behaving, storage issues, supply 
and demand, and those are vital issues to make sure that when 
we look at something, are we looking at a supply-and-demand 
issue or are we looking at a manipulation issue?
    And then some of the other things we work on with the FTC, 
Federal Trade Commission, things like gasoline prices, they 
have investigated gasoline issues over the years on and off and 
tried to figure out why the price of gasoline, why does it go 
up faster than it comes down, for example. So we work with all 
of these entities, including FERC, by the way, in electricity 
issues as well.
    So we put that together. Our mandate is to make sure that 
we don't have fraud or manipulation in our markets and we 
figure out if there is somebody doing that, how do we go about 
it? In Dodd-Frank, we have new manipulation authority that 
really makes our job easier in terms of pursuing a suspected 
manipulation case. In pursuing a case, Congress gave us the 
recklessness standard which effectively lowers the bar for us 
in terms of proving manipulation.
    Recently, we have also had new disruptive trade practices 
authority and we recently prosecuted the other day, or at least 
came to a settlement with, a high-frequency trader who is using 
spoofing. That was the first time we ever used our spoofing 
authority that was given to us under Dodd-Frank. In addition to 
the farm bill in 2009, I believe, we also raised the penalty 
for manipulation to $1 million per violation.
    So we have a number of tools in our toolbox today. Congress 
has given us easier authority to prosecute these things. And 
then the other big issue is going to be data. We are now going 
to have the ability eventually to look at the swaps data so we 
can work with our physical partners to look at physical market 
data, EIA, supply-and-demand data. We are going to have swaps 
data. So that market is no longer going to be dark to the 
Commission. We need to make sure that we understand how the 
physical market trades and the interaction between financial 
markets.
    Mr. Vargas. Thank you. Thank you, Mr. Chairman.
    The Chairman. The gentleman yields back. Mr. Scott for a 
closing statement.
    Mr. David Scott of Georgia. Well, this has been a very 
informative session, and you both handled your testimony in a 
very intelligent, knowledgeable way. It has provided us with 
tremendous insight. You do an extraordinary job. You have taken 
on an extraordinary situation. And, as I mentioned before, it 
is important to note a great commendation to your staff who has 
had to work overtime, as I said. You have not had a 
reauthorization since before Dodd-Frank, since before the 
financial crisis. A lot has been thrown at you. It is very 
important that you have the staffing, as I have reiterated in 
my line of questioning. Thank you for your testimony, and thank 
you for the great service that you are providing to our nation.
    The Chairman. Thank you, Mr. Scott. And I would echo those 
compliments. Thank you both for being here. In the boxing 
world, it doesn't appear we laid a glove on either one of you 
in this morning's exchanges. Thank you very much for what you 
do. Thank you for your staff and their hard work and we berate 
you when something goes wrong; we don't brag on you enough when 
you get it right. I appreciate both of you, and your very open 
attitudes toward exchanging ideas. I hope we were as adept at 
listening to you as well.
    Under the rules of the Committee, the record of today's 
hearing will remain open for 10 calendar days to receive 
additional material, and supplementary written responses from 
the witnesses to any question posed by a Member.
    This hearing on the Subcommittee on General Farm 
Commodities and Risk Management is adjourned.
    [Whereupon, at 11:52 a.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
                          Submitted Questions
Response from Hon. Scott D. O'Malia, Commissioner, U.S. Commodity 
        Futures Trading Commission
Questions Submitted By Hon. K. Michael Conaway, a Representative in 
        Congress from Texas
General Commission Operations
    Question 1. Are there any programs or divisions of the Commission 
that should be cut or consolidated?
    Answer. First, in order to determine whether certain programs or 
divisions of the Commission should be cut or consolidated, the 
Commission must do a better job at identifying its mission and budget 
priorities, particularly in light of the fiscal challenges facing the 
nation. For example, the Commission has failed to establish a clear 
business plan by division that incorporates the specific technology 
requirements each division will need over the next 5 years. Without 
such a strategy, ambitious goals to integrate technology into the 
mission of each division are easily forgotten--especially when there 
are no specific goals or timetables for deploying technology to 
modernize the Commission into a 21st century regulator.
    Second, the Commission must clarify how to coordinate new 
registration oversight and compliance responsibilities with the Self-
Regulatory Organizations (SROs) so that limited resources are maximized 
and efficiently used. For example, it doesn't make sense for the 
Commission to duplicate the role of the National Futures Association 
(NFA) by reviewing each and every swap dealer submission and 168,000 
pages of swap dealer documentation for registration compliance. It is 
unclear how the 50% funding increase for the Division of Swap Dealer 
and Intermediary Oversight (DSIO) that is in the Commission's fiscal 
year 2014 budget request will be utilized, and how the Commission will 
rely on the NFA to execute this mission.
    Finally, it must be a priority of the Commission to develop a 
cross-divisional team of staff to focus on resolving the challenges 
surrounding our data reporting and data utilization efforts because the 
Commission's efficient operation is dependent on the effective use of 
data. This will allow staff, especially the Division of Enforcement 
(DOE) and the Division of Market Oversight (DMO), to conduct 
surveillance of the markets and fulfill their mission in a reliable and 
expedient manner. The Commission is struggling to accept, interpret, 
and aggregate data from the three temporarily-registered swap data 
repositories (SDRs), and this problem will be compounded with the 
additional data received from international sources. I believe that 
only through a dedicated effort can the Commission address our most 
pressing market oversight challenge--data. I am committed to working 
with the members of the Technology Advisory Committee (TAC), which I 
chair, to support the standardization of data.

    Question 2. Can you please explain what ``absent objection'' 
currently means in the context of the issuance of a CFTC staff ``no 
action'' letter, or other Commission action, and how it is used?
    Answer. It is important to recognize that the ``absent objection'' 
process is not defined in the Commodity Exchange Act (CEA) or in 
Commission regulations. The lack of official procedure has led to 
confusion and misunderstanding regarding the exact role of the 
Commission with respect to staff action, and whether absent objection 
circulation by the staff to the Commission constitutes a Commission 
vote. While the Office of the General Counsel (OGC) has provided some 
context for the absent objection process, none of the procedures 
described below by OGC are included in Commission regulations.
    As a practical matter, the current absent objection process is to 
put into circulation a matter (such as a staff no-action letter to 
provide relief from Commission rules) and notify the office of each 
Commissioner that ``absent objection by the majority of the 
Commission,'' the staff action will proceed and any referenced 
document(s) will be released. Notably, the Secretariat always contacts 
each Commissioner's Office to see if there is any objection to staff 
action.
    Due to the lack of formal procedure, I received two conflicting 
views about the role of the Commissioners' vote (i.e., whether or not 
to object) in the absent objection process. Initially, I was informed 
by the Secretariat that three votes are required to stop staff action 
from going forward, although this standard has never been applied. But 
later on, I was informed by the General Counsel in an e-mail dated July 
12, 2013, that the Commission cannot block staff action because an 
absent objection circulation is not a vote.
    Now, in connection with these Supplemental Questions for the 
Record, I have received the following advice from OGC regarding absent 
objection:

          In order to explain the ``absent objection'' process at the 
        Commission, it is helpful to understand how business is 
        conducted generally at the Commission. As is the case with 
        other independent agencies in the federal government, the 
        operations of the Commission and its staff are governed by 
        Congressional mandate. The Commodity Exchange Act (``CEA'') 
        distinguishes among actions taken by the Chairman, Commission 
        action, and staff action.
          Under CEA  2(a)(6)(A), the executive and administrative 
        functions of the Commission are exercised solely by the 
        Chairman. In carrying out these functions, the Chairman is 
        governed by general policies, plans, priorities, and budgets 
        approved by the Commission, and by such regulatory decisions, 
        findings, and determinations as the Commission has made. See 
        CEA  2(a)(6)(B).
          Staff action occurs under the authority of Section 2(a)(6) 
        and under authority specifically delegated by the Commission. 
        See, e.g., 17 CFR  140.14, 140.20, 140.72-140.97 (2013). The 
        staff's issuance of no-action letters, interpretive letters, 
        and exemptive letters is authorized by Rule 140.99, 17 CFR  
        140.99 (2013).
          Commission action is accomplished by a majority vote of the 
        Commissioners. See FTC v. Flotill Prods., Inc., 389 U.S. 179, 
        183-84 (1967) (absent a specific statutory requirement, federal 
        agencies follow the common law `majority of a quorum' rule). 
        Such action occurs in two ways: through votes held at formal 
        meetings, or through seriatim consideration under Rule 140.12. 
        See 17 CFR  140.12.
          With that background, the term, absent objection, can arise 
        in two contexts. It usually refers to an informational 
        circulation to the Commission to describe action to be taken by 
        Commission staff. Although conducted through the Office of the 
        Secretariat, the process does not call for a Commission vote. 
        It is intended to keep the Commissioners apprised of the 
        staff's activities that are taking place under the Chairman's 
        supervision.
          In addition, business may proceed on an ``absent objection'' 
        basis at Commission meetings. If a Commissioner objects, the 
        matter is decided by majority vote.
          As indicated above, the Commission also conducts business 
        through seriatim votes without holding a formal meeting. If a 
        Commissioner objects to seriatim consideration, the matter is 
        withdrawn from seriatim consideration, and is scheduled for 
        disposition at a Commission meeting. See 17 CFR  140.12(b).

    It is still unclear from the advice provided by OGC what is the 
appropriate use of the absent objection process, and whether a majority 
of the Commission or a single Commissioner may object to staff action 
and request reconsideration of a matter before it is released.
    In light of the recently expanded universe of matters that now 
proceed by absent objection circulation and their far-reaching 
consequences, such as the extension of subpoena authority under omnibus 
orders of investigation and the issuance of indefinite relief from 
Commission rules via staff no-action letters, the Commission or 
Congress should define the appropriate use of the absent objection 
process. Historically, absent objection circulation was utilized for 
matters like NFA rule amendments or limited no-action relief for a 
single entity, not a broad class of persons or products.
    Finally, I would draw the Committee's attention to the advice 
provided by OGC regarding the Chairman's authority under CEA  
2(a)(6)(A), which limits the Chairman's executive authority to 
executive and administrative functions. This authority does not appear 
to give the Chairman unilateral power over policy decisions of the 
Commission or changes to Commission rules or regulations. In 
particular, I am seriously concerned that, at the Chairman's direction, 
the staff has been issuing indefinite no-action relief from existing 
rules--which, in essence, amounts to de facto rulemaking--without a 
Commission vote. At the very least, there must be an opportunity for 
one Commissioner to object to the proposed staff action and have the 
matter considered further.

    Question 3. Is there an official legal procedure for utilizing an 
``absent objection'' motion at the CFTC? Has there been a change in the 
legal interpretation of what ``absent objection'' means between past 
and current usage of this procedural motion for Commission business?
    Answer. There are currently no Commission regulations that govern 
the ``absent objection'' process. I would welcome a review of the 
Commission's policies and procedures and recommendations to establish 
clear process for staff action and Commission action.
    I received the following advice from OGC on procedure and its legal 
interpretation of past and current usage of ``absent objection'':

          As explained above, Commission action may be taken on a 
        matter during formal meetings of the Commission by majority 
        vote or by an ``absent objection'' process. Regardless of which 
        way it is proceeding, each matter is considered by the 
        Commission pursuant to a motion made by one of the 
        Commissioners. Each matter typically includes a staff 
        memorandum to the Commission explaining the proposal under 
        consideration. If objection is heard to a matter presented by 
        an ``absent objection'' motion, the matter becomes subject to 
        disposition by majority vote.
          With respect to staff business that proceeds on an ``absent 
        objection'' basis, as described in response to Question 2 
        above, the procedure is to circulate informational memoranda so 
        that the Commissioners may be informed of a staff action and 
        the Chairman may be informed of any Commissioner's objection to 
        the planned staff action. If there are such objections, the 
        Chairman may choose to withhold such staff action.
          The CFTC and its Office of the General Counsel have 
        consistently interpreted these terms in this way.

    Now, based on OGC's current opinion, the Chairman has the 
discretion to withhold an absent objection circulation if one 
Commissioner objects. It appears that, yet again, OGC is revisiting its 
interpretation of this process.
    Moreover, as I noted in my response to Question 2, the Secretariat 
is operating on a completely different basis: the ``absent objection'' 
process means ``absent objection by a majority of the Commission'' 
(emphasis added).
    The Secretariat's practice blurs the line between staff action and 
Commission action. By requiring a majority to object in order to stop 
staff action from going forward, the process seems to call for a 
Commission vote. Such a vote would make an ``absent objection'' 
circulation not opposed by a majority of the Commission more similar to 
ratification by the Commission of staff action. This reinterpretation 
of ``absent objection'' appears to have no foundation in the common 
law, parliamentary procedure, or past practice at the CFTC and other 
agencies.
    I question whether this reinterpretation of the ``absent 
objection'' process means (1) that staff action, absent the objection 
of a majority of the Commission, becomes ratified agency action that is 
reviewable by the courts under the APA, and (2) to the extent that 
staff action is deemed ratified by the Commission and has a practical 
binding effect on the rights and obligations of parties, or a binding 
legal effect, then it is a rulemaking done without notice and comment 
as required by the APA.

    Question 4. Procedurally, I understand that a 2-2 Commission vote 
prevents an order from being issued, yet a 3-1 vote is required to stop 
an ``absent objection'' motion? Why?
    Answer. As you will see from the advice provided by OGC below, 
there is no explanation why a 3-1 vote is required to stop an ``absent 
objection'' circulation. Because it is more difficult to obtain a 3-1 
vote than a 2-2 vote, I believe that a 3-1 vote makes it more difficult 
to stop staff action from going forward, than a 2-2 vote which is not 
enough to pass a Commission order. This produces a nonsensical result.
    I received this advice from OGC on the number of votes required to 
stop an ``absent objection'' circulation:

          With respect to an ``absent objection'' motion at a formal 
        meeting, if an objection is heard, the matter becomes subject 
        to disposition by majority vote.
          With respect to staff action circulated ``absent objection,'' 
        unless a statute or prior Commission order requires otherwise, 
        the Chairman's prerogative as staff director controls, and he 
        may, in his discretion, direct a different course preferred by 
        fellow Commissioners.
          As mentioned above, Commission action is accomplished by a 
        majority vote of the Commissioners. See FTC v. Flotill Prods., 
        Inc., 389 U.S. 179, 183-84 (1967). A 2-2 vote is sufficient to 
        stop such action.

    Question 5. Do you think it is appropriate for CFTC staff to be 
given the power to unilaterally initiate investigations, without the 
opportunity for the CFTC Commissioners to provide a check on that 
power?
    Answer. It is appropriate for DOE to initiate informal 
investigations with voluntary compliance by subject parties, which was 
delegated to DOE under Rule 11.2 in Commission regulations. However, 
Rule 11.4 explicitly reserves the authority to initiate formal 
investigations to the Commission. Formal investigations permit the use 
of subpoena authority to compel compliance by subject parties. Only an 
order by the Commission can authorize the issuance of a subpoena.
    For some reason, as evidenced below, OGC does not distinguish 
between these two types of enforcement actions, even though subpoena 
power drastically affects the rights of subject parties.
    With respect to the Commission's subpoena authority, it is not 
appropriate for the Commission to delegate subpoena power to DOE for an 
extended period of time without the opportunity for a Commission vote. 
This subpoena power must reside with the Commission, pursuant to Rule 
11.4.
    Recently, the Commission approved two omnibus orders of 
investigation that authorize DOE to extend the duration of subpoena 
power without a Commission vote because the language in these omnibus 
orders would allow their continuous renewal, ``absent objection by the 
Commission.'' Since OGC has determined that the absent objection 
process does not constitute a Commission vote, it is not appropriate 
for the Commission to use this process to extend the delegation of the 
Commission's subpoena authority.
    Below is the advice that I received from OGC on investigations:

          Yes, I believe that the Commission's current procedure and 
        practice for investigations promotes the efficient and 
        effective use of Commission resources, while including measures 
        to safeguard the Commission's oversight responsibility.
          The Commission's authority to conduct investigations is 
        broad. The Supreme Court has held that administrative agencies 
        have the authority to ``[i]nvestigate merely on suspicion that 
        the law is being violated, or even just because it wants 
        assurance that it is not.'' United States v. Morton Salt Co., 
        338 U.S. 632, 642-43 (1950); see CFTC v. McGraw-Hill Cos., 390 
        F. Supp. 2d 27, 33 (D.D.C. 2005) (same).
          In 1976 the Commission delegated to the Director of its 
        Division of Enforcement, and to the Directors of the 
        Commission's other operating divisions, the authority to 
        conduct investigations and make recommendations to the 
        Commission therefrom. CFTC Rules Relating to Investigations, 41 
        Fed. Reg. 29798 (July 19, 1976) (adopting Part 11 to the 
        Commission's Rules, including Rule 11.2 (Authority to conduct 
        investigations)). The purpose of an enforcement investigation 
        is to discover the facts so that the Commission may determine 
        whether it is necessary or appropriate to institute an 
        enforcement action or take other preventive, remedial or 
        punitive action. Id.
          Over the past 4 fiscal years, the Commission's Division of 
        Enforcement has opened more than 1,500 investigations of 
        potential violations of the Commodity Exchange Act or 
        Commission Regulations. Requiring Commission review and 
        approval for each investigation would reverse a nearly 40-year-
        old Commission delegation that has worked well, cause an undue 
        burden on the Commission's resources and stifle the 
        effectiveness of its enforcement program.
          The Division of Enforcement provides the Commissioners with 
        regular briefings regarding the status of significant 
        investigations. Further, Commissioners regularly request and 
        receive updates from the Division of Enforcement regarding the 
        status of investigations of particular interest. In the course 
        of an investigation, the Division of Enforcement may seek 
        authorization from the Commission to compel production of 
        records and or testimony through Commission order authorizing 
        issuance of subpoenas.
          Also, while the Division of Enforcement may make a 
        recommendation based upon its investigation, the Commission has 
        the sole authority to make the determination as to whether or 
        not to file an enforcement action.

    Question 6. Per Commission regulations, what is an ``omnibus 
order''? What is the permissible scope of an ``omnibus order'' granting 
subpoena power to CFTC staff, and how long should such an order be 
effective? If the order has an indefinite duration, would it be binding 
on a future Commission?
    Answer. Commission regulations relating to investigative powers of 
the Commission do not reference omnibus orders. Further, Commission 
regulations do not define an omnibus order, nor do Commission 
regulations describe the permissible scope and duration of an omnibus 
order. I find this troubling, because the process by which the 
Commission initiates and issues subpoenas is the foundation of any 
enforcement action.
    Because omnibus orders are not in Commission regulations, I have to 
rely on existing rules related to the issuance of an individual 
subpoena by the Commission under Rule 11.4 and on informal OGC advice 
to determine whether a particular omnibus order meets the necessary 
legal requirements--not a clear standard set forth in Commission 
regulations.
    For example, I received this advice from OGC regarding omnibus 
orders of investigation:

          Authorization to issue subpoenas directed at a particular 
        subject area is commonly referred to as an omnibus formal 
        order.

    OGC further explained that the content of a subpoena should, among 
other things:

          [The subpoena should] provide a general description of the 
        scope of the investigation, the authority under which the 
        investigation is being conducted, and designate the individuals 
        authorized to issue subpoenas. The scope of the investigation 
        subject to such an order may be directed at compelling 
        information and testimony concerning a particular entity's 
        course of conduct or to a particular subject matter area.

(emphasis added).
    Unfortunately, a handful of requests that landed on my desk from 
DOE for issuance of an omnibus order of investigation fall short of 
these minimum standards. The orders simply mention categories of 
registrants, not a specific entity or entities, and refer to potential 
violations of the CEA that may be committed at some point in the future 
by these categories of registrants. The lack of any specific 
information or particularity in these omnibus orders allows DOE to 
issue subpoenas without having the Commission review and vote on each 
subpoena based on the facts and circumstances of each investigation.
    OGC also advised me that omnibus orders are essential for 
conducting effective enforcement programs. OGC states:

          At times, CFTC investigations require quick enforcement 
        action to freeze assets belonging to customers, preserve books 
        and records and, sometimes, coordinate the expedited filing of 
        related actions in cooperation with other civil or criminal 
        authorities.

    It is not clear to me how a broad omnibus order, which does not 
even mention a specific entity that is subject to an investigation, can 
help DOE freeze assets and preserve books and records of a specific 
company on an expedited basis.
    Such ``quick enforcement action'' can only be achieved when DOE, 
after obtaining the necessary authorization from the Commission, files 
a complaint and a motion for preliminary injunction in a federal 
district court requesting that the court issue a restraining order 
allowing the Commission to freeze assets and ordering the defendants to 
preserve books and records.
    Regarding the duration of omnibus orders, I believe that omnibus 
orders should be confined to a limited time period. I also believe that 
the Commission must retain the power to grant an extension of omnibus 
orders through Commission action (i.e., a vote by the Commission). 
Congress intended that a decision to bring or extend an investigation 
is reflective of a shared opinion of the majority of the Commissioners, 
rather than a unilateral ruling of DOE staff.
    As I stated before, I support the robust use of the Commission's 
enforcement authority to thwart fraud, manipulation, and abuse in CFTC-
regulated markets. Accordingly, I support the use of omnibus orders, 
but only if the scope, duration, and permissible use of such orders is 
clearly defined in Commission regulations. I welcome Congressional 
action to amend the CEA to define the appropriate use of omnibus orders 
as well.

    Question 7. What is the legal justification for the Commission 
issuing a final ``exemptive order'' without prior notice-and-comment 
periods? Does this place Commission actions on questionable legal 
ground from a compliance standpoint with the Administrative Procedures 
Act?
    Answer. I received the following advice from OGC:

          The APA empowers an agency to proceed without notice and 
        comment for good cause. See 5 U.S.C.  553. The Commission has 
        interpreted CEA Section 4(c), which authorizes the Commission 
        to grant exemptive relief, to incorporate the APA's 
        requirements, including the good cause exception. The 
        Commission's view is that Congress did not intend that the 
        Commission can impose requirements on market participants 
        without notice and comment when there is good cause, but may 
        not exempt market participants when the public interest 
        dictates, or other good cause exists, without first allowing a 
        comment period.

    Recently, the Commission issued an Exemptive Order from the cross-
border swaps guidance without prior notice and comment by utilizing the 
good-cause exception in the APA. It is my understanding that courts 
have narrowly construed the good-cause exception from notice-and-
comment and placed the burden of proof on the agency to demonstrate 
exigent circumstances. See Tenn. Gas Pipeline Co. v. Fed. Energy 
Regulatory Comm'n, 969 F.2d 1141 (D.C. Cir. 1992); Guardian Fed. Sav. & 
Loan Ass'n v. Fed. Sav. & Loan Ins. Corp., 589 F.2d 658, 663 (D.C. Cir. 
1978).
    I find it troubling that, notwithstanding the case law, the recent 
Exemptive Order stated the deadline of July 12, 2013 (which was 
arbitrarily set by the Commission) as the basis for an ``emergency'' 
necessitating the abrogation of the public's right to participate in 
rulemaking. Further, the Exemptive Order's inclusion of a post-hoc 
comment period does not, in and of itself, satisfy APA notice-and-
comment requirements because the public must have the opportunity to 
comment before any rulemaking becomes final.

    Question 8. After the ``post hoc'' comment period has closed for 
some exemptive orders, will the Commission allow revisions to be made 
based on issues raised by the public comments?
    Answer. I received this advice from OGC:

          In its informed discretion, the Commission may vote to allow 
        such revisions.

    Notably, only the Chairman can schedule a meeting to consider 
amending exemptive orders or other rulemaking.

    Question 9. Are there written rules or policy guidelines on how the 
CFTC is to use the ``no action'' letter process? If not, does the 
Administrative Procedures Act govern the use or issuance of staff ``no 
action'' letters?
    Answer. Section 140.99 of Commission regulations sets forth 
procedures for requesting no-action relief. In addition, Section 140.99 
plainly states that a no-action letter does not bind the Commission, it 
does not bind other Commission staff besides the issuing Division, and 
it cannot be relied upon by the public to govern their market 
activities.
    I strongly believe that the Commission misused no-action relief by 
setting forth significant Commission policy that affects large swaths 
of market participants and engaging in rulemaking that implements the 
Dodd-Frank Act.
    This is starkly illustrated by the fact that of the over 100 no-
action letters granted to date under our new rules and regulations 
implementing Dodd-Frank, at least 23 no-action letters have no 
expiration date. This ad hoc process of issuing no-action relief is 
confusing and inconsistent, and in the case of indefinite relief, a de 
facto rule change.
    Again, I am concerned that a no-action letter that is effective for 
an indefinite period of time essentially amounts to a rulemaking, but 
does not adhere to APA safeguards that ensure public participation and 
transparency.
    As is consistent with historical practice and other agencies' 
practice, no-action relief should be used sparingly, for specific 
entities based on a particular set of facts and circumstances, and on a 
time-limited basis. Any shortcomings in a final rule issued by the 
Commission must be resolved through rulemaking under the APA to 
properly amend the rule.
    I welcome Congressional oversight of the Commission's use of no-
action relief to determine whether the Commission is in compliance with 
the APA.
    Regarding the current procedure for no-action relief, I received 
the following advice from OGC:

          CFTC Rule 140.99 sets forth the parameters. It states that a 
        CFTC staff no-action letter is ``a written statement by the 
        staff of a Division of the Commission or of the Office of the 
        General Counsel that it will not recommend enforcement action 
        to the Commission for failure to comply with a specific 
        provision of the [CEA] or of a Commission rule, regulation or 
        order if a proposed transaction is completed or a proposed 
        activity is conducted by'' the beneficiary of the letter. The 
        Rule states that the no-action letter represents the views of 
        the Division that issued it or the Office of General Counsel 
        and does not bind the Commission--it binds only the issuing 
        staff and not the Commission or other Commission staff. It 
        states that only the beneficiary may rely on the letter. See 17 
        CFR 140.99(a)(2).
          The Rule also sets forth a host of requirements, including 
        that the letter will be issued in response to proposed 
        transactions only, and not completed transactions unless there 
        are extraordinary circumstances. Id.  140.99(b)(3). Staff also 
        will not respond to no-action requests posing hypothetical 
        questions. Id. The proposed beneficiary must be identified, id. 
         140.99(b)(4), and additional specified information must be 
        provided, id.  140.99(c). For the complete set of 
        requirements, see 17 CFR  140.99(c)-(d); see also id.  
        140.99(e) (concerning the form of a staff response).
Customer Protection
    Question 10. Is the Commission's ability to perform adequate market 
surveillance critical to protecting futures and swaps customers? Should 
the CFTC's ``Customer Protection'' fund be utilized to make needed 
improvements to the Commission's technological capabilities? Why or why 
not?
    Answer. Yes, the Commission's ability to perform adequate market 
surveillance is critical to protecting futures and swaps customers, and 
the effective use of technology is an essential element of adequate 
market surveillance. I do not believe that the Commission has made the 
necessary investments in technology to keep up with our expanded 
oversight mission under the Dodd-Frank Act. The need for investments in 
technology is especially highlighted by Dodd-Frank because its 
provisions bring the swaps market under surveillance and regulation for 
the first time.
    Regarding the Customer Protection Fund, under the Dodd-Frank Act, 
Congress authorized the Commission to utilize the $100 million balance 
in the Customer Protection Fund for two purposes: (1) to pay 
whistleblowers and (2) to educate customers. To date, we have not paid 
any whistleblowers and we have spent just 1% of the fund, annually, on 
customer education. Of that amount, the bulk has been spent on salary 
and benefits for the Whistleblower Office and the Office of Consumer 
Outreach. The next largest line item for the fund is a consultant to 
identify customers that require education and training, followed by an 
audit of the fund's financial statements.
    Customer protection has been neglected and this area is ripe for 
additional investment. I suspect that Congress had a better vision for 
the Commission's customer protection efforts than what has been done 
thus far.
    It is clear that the Commission's capacity to use technology to 
perform improved market surveillance, monitor risk, and implement tools 
to enhance customer protections could be enhanced. One of the most 
critical aspects of the CFTC's mission is to protect market 
participants and the public from fraud, manipulation, abusive practices 
and systemic risk. In order to fulfill its mission, the Commission must 
have the ability to effectively conduct surveillance of the swaps and 
futures markets.
    The Commission is projected to return over $1.2 billion in civil 
monetary penalties to the U.S. Treasury to offset the deficit since the 
inception of the Fund. That $1.2 billion would have otherwise been 
eligible for transfer into the Customer Protection Fund, and could have 
been spent on technology investments to improve our market 
surveillance.
    I would encourage Congress to carefully consider if there are other 
purposes for these funds that will help the Commission in its mission 
to protect market users, while still maintaining adequate resources to 
compensate whistleblowers.

    Question 11. In light of the automated account verification system 
recently implemented by NFA and CME, does the CFTC still need read-only 
access to all Futures Commission Merchant customer fund accounts?
    Answer. There are serious concerns in providing the Commission with 
access to all FCM customer fund accounts. It is also important to keep 
in mind that NFA and the Chicago Mercantile Exchange (CME) have 
implemented an automated account verification system that checks the 
balances in customer accounts daily, thus eliminating the need for the 
Commission to duplicate this function.
    The draft customer protection rule contained a proposed requirement 
that all banks holding customer funds (``custodian banks'') provide the 
Commission with direct access to customer account information. This 
direct, read-only access to every customer account used by FCMs would 
involve the sharing of all relevant account information and passwords 
for each account, and new passwords every time an account password is 
changed.
    I have serious concerns with this requirement for two practical 
reasons. First, we don't have the staffing necessary to perform the 
manual checks needed to make this system an effective deterrent. 
Instead, both the Commission and customers would be better served by 
relying on the current, automated system implemented by NFA and CME 
that provides daily verification of segregated balances at the FCM and 
custodian bank.
    Second, creating direct access to these accounts poses a higher 
cybersecurity threat relative to ``push'' technologies currently being 
utilized. This concern was raised at a TAC meeting. Moreover, 
maintaining and securing all the variable passwords and account 
information for every bank, FCM, and customer account would be a 
daunting task.
    A better approach would be to utilize the current automated system 
implemented by NFA and CME and amend our regulations to require all 
FCMs to only use custodian banks that agree to immediately provide 
customer account information to the Commission upon request. By using 
this two-pronged approach of daily automated account verification, 
combined with the ability of the Commission to contact custodian banks 
directly and obtain account information in an emergency, the Commission 
will be able to protect customer funds in an efficient and expedient 
manner.

    Question 12. Is reliance on the automated verification system 
utilized by CME and NFA a more secure method of accomplishing the same 
ultimate goal of protecting the integrity of customer funds?
    Answer. I believe the automated system established and paid for by 
the market participants is a cost-effective early warning system that 
can identify unexpected changes in customer account balances. If 
account values change beyond a specific threshold from one day to 
another, the SROs and the Commission will be alerted and will be able 
to take immediate action to investigate.

    Question 13. Do you think an exemption or some other form of 
protection should be made for small to medium-sized futures commission 
merchants pertaining to the level of excess margin required to be held 
under the CFTC's proposed customer protection rule?
    Answer. The residual interest proposal in the rule has caused 
widespread concern within the industry. The practical effect of this 
rule would require FCMs to maintain a level of excess margin so that 
one customer's excess margin is never used to fund the margin shortfall 
of another customer. This increased capital contribution by the FCM 
will most likely be passed on to customers. Large institutional clients 
are not significantly burdened by this pass-through of costs. However, 
this pass-through of costs would impose serious financial constraints 
on the business operations of farmers and other end-users.
    The Commission needs to reconsider the residual interest proposal 
to identify a process that adheres to the requirements of the CEA, yet 
places the least financial burden on end-users and the smaller FCMs 
that service them. It is imperative that we follow Congress' mandate 
and impose the least regulatory burden on end-users as we implement the 
Dodd-Frank Act.

    Question 14. I find it fascinating that with all of the publicity 
over the cross-border rules and Chairman Gensler's warnings about how a 
failure to regulate entities in other countries would ``blow a hole in 
Title VII''--that the accounts of the small farmer, farm cooperatives, 
and the public municipalities were not protected. Why did any guidance 
on cross-border regulation not include a solution related to how 
customer accounts should be treated when a multi-national FCM, like MF 
Global Inc., goes bankrupt? Or do you need a legislative solution?
    Answer. I would welcome a Congressional solution to ensure that 
customer accounts are protected when a multinational FCM goes bankrupt. 
Without a doubt, customer protection--especially in bankruptcy--is a 
major factor in cross-border regulation. Both the still-ongoing Lehman 
Brothers' bankruptcy proceedings and the MF Global bankruptcy 
proceedings have taken years to resolve, delaying the recovery of U.S. 
customer funds. While the Dodd-Frank Act and financial reforms in other 
countries were intended to reduce the likelihood of future bailouts or 
failures, little has changed in the area of bankruptcy law.
    Since over 90% of customer assets that are held in FCMs are held by 
jointly registered and regulated broker-dealers/FCMs, I would support 
increasing the authority of the CFTC in the bankruptcy proceedings for 
these jointly-regulated entities. For example, in the case of MF 
Global, the Securities Investor Protection Corporation (SIPC) placed 
the firm into bankruptcy, with SIPC as its trustee and with the 
exclusive mandate to protect securities customers. Since the interests 
of futures customers may not align with securities investors, it makes 
sense for the Commission to have the power to appoint its own trustee 
who is familiar with the CEA.
    Also, I believe Congress should pursue granting new authority to 
the Commission in the U.S. Bankruptcy Code to ensure that customers are 
first in order of priority in any distribution of assets of the estate 
by the bankruptcy trustee--a ``super-lien'' so customers are always 
first in line.
    Finally, I believe Congress should carefully consider the pro-rata 
distribution rules in bankruptcy proceedings, including creating the 
opportunity for market participants to have the ability to establish 
third-party segregation accounts that will not be comingled in 
bankruptcy proceedings, as long as those market participants are 
willing to pay for the costs of third-party segregation. Currently, if 
there is a shortfall in segregation, customers share the loss 
proportionally. This is the law, whether customer funds are held in one 
account (comingled), or in a separate individual account. The 
Commission has explored various options, but has been unable to change 
the pro-rata requirements without statutory amendments.
End-User Issues
    Question 15. In passing the Dodd-Frank Act, Congress made clear its 
intent to exempt end-users from bearing the additional financial and 
regulatory burdens brought on by the legislation. Keeping that intent 
in mind, why has the CFTC used such a low swap dealing threshold for 
Special Entities?
    Answer. As I described in my testimony, I believe the Commission 
failed to provide certainty to end-users because it did not faithfully 
interpret both the letter and the spirit of the law to carry out 
Congress' intent to exclude end-users from the swap provisions of the 
Dodd-Frank Act. The Commission implemented vague rules that 
inadvertently brought end-users under the swap dealer definition, which 
creates uncertainty for end-users in their risk mitigation practices.
    For example, it is not clear to me why only $25 million was set as 
the de minimis threshold for swap dealing with Special Entities. This 
low threshold has resulted in few counterparties that are willing to 
trade with municipal utilities because of the concern that the 
counterparties will exceed the $25 million amount and thus be forced to 
register as swap dealers. Fewer potential counterparties means less 
competition for business, which in turn would mean widened bid-ask 
spreads. These widened spreads consequently mean greater costs for 
energy end-users.
    The end result would be that these increased costs are passed on to 
the final energy consumers-the general public.

    Question 16. Why do you think the Commission failed to completely 
exclude commercial end-users from regulation even after Congress made 
clear its intentions were not to regulate end-users who use swaps to 
hedge or mitigate risks from their business?
    Answer. As I mentioned above, the main reason why the Commission 
has not excluded end-users from regulation is that it has ignored 
express Congressional directives to do so. The Commission has 
promulgated rules under the Dodd-Frank Act that are so broad and far-
reaching that they require end-users to comply with virtually all of 
the new regulations.
    In response to the outcry by end-users and Members of Congress, the 
Commission has issued a series of no-action letters and exemptive 
relief to alleviate some of the enormous regulatory burdens that now 
face end-users. However, this patchwork of regulatory relief is 
insufficient and fails to provide end-users and the market generally 
with clear guidance on their regulatory obligations and the current 
state of the law.
    Because the Commission has failed to address this issue properly, 
Congress must now correct the Commission's error and specifically 
exclude end-users from the numerous regulatory burdens now imposed on 
them as a result of the Commission's implementation of Dodd-Frank.

    Question 17. Do you agree that forward contracts containing terms 
providing some form of flexibility in delivered commodity volumes--
otherwise known as ``volumetric optionality''--should fall underneath 
the scope of the forward-contract exclusion? Why or why not?
    Answer. Forward contracts with volumetric optionality should be 
included in the forward-contract exclusion. If the Commission fails to 
do so, then Congress should amend the CEA to specifically include 
volumetric options in the forward-contract exclusion from the swap 
definition.
    In the final swap definition rule, the Commission left open the 
question whether contracts for the delivery of commodities with 
variability in the delivery amount fall within the definition of a 
forward contract. To determine whether a contract would qualify for the 
forward-contract exclusion, the Commission set forth a complicated 
seven-part test in the final rule that would call on market 
participants to establish each of the seven factors in order for their 
volumetric contracts to be classified as forwards.
    However, the seventh factor caused a lot of anxiety among end-
users. The Commission interpreted this factor as requiring market 
participants to determine whether their exercise or non-exercise of 
volumetric optionality is based on factors outside their control--not 
on the economics of the option itself. Quite often, one counterparty 
will enter into multiple volumetric option contracts in the hopes of 
securing both supply of needed resources and the best possible price. 
By prohibiting counterparties from exercising these options because 
they offer the best price, the Commission limits their ability to 
operate their business efficiently and restrains competition in the 
market place.
    The Commission should amend the swap definition rule to include 
volumetric options within the forward exclusion if the first six parts 
of the test are met. Satisfaction of the seventh factor is not 
necessary and should not be a requirement for classification as a 
forward contract.

    Question 18. The definition of ``financial entity'' in the 
Commodity Exchange Act cross-references the banking laws and depends on 
whether someone is engaged in activity that is ``financial in nature.'' 
In short, this definition has the potential to treat many end-users 
like hedge funds in certain circumstances. Has the CFTC provided any 
guidance for how the banking definition of activities that are 
``financial in nature'' applies in the context of Title VII for end-
users? Is this something that Congress should address legislatively?
    Answer. The Commission has addressed the conflict between the 
definition of ``financial in nature'' under the banking laws and risk 
management practices common to end-users in the futures and swaps 
markets, such as the use of treasury affiliates, by issuing indefinite 
no-action relief from the clearing requirement for swaps. This 
indefinite relief, which is essentially a clearing exemption, applies 
to swaps entered into solely by entities that meet the definition of 
``financial in nature'' under the banking laws. The relief from the 
clearing requirement has no expiration date.
    This is a prime example of a final rule with unforeseen 
consequences that adversely impacts end-users, but has been addressed 
through indefinite no-action relief--de facto rulemaking--instead of 
properly engaging in notice-and-comment rulemaking under the APA to 
amend the rule.
    I would encourage Congress to clarify the definition of ``financial 
entity'' under the CEA and avoid any further shortcuts taken by the 
Commission. Using the definition of ``financial in nature'' under the 
banking laws applies unnecessary restrictions to certain end-users and 
interferes with their business operations. The definition also 
interferes with the Commission's mandate to ensure that the commodity 
markets are liquid and promote hedging and price discovery.
    As an alternative solution, section 102(a)(6) of the Dodd-Frank Act 
sets forth a predominance test to determine whether or not a firm is a 
``nonbank financial company.'' Title I of Dodd-Frank applies an 85% 
standard for gross revenue from financial activity to determine if a 
company is predominantly engaged in financial activities, and 
ultimately, is a nonbank financial company. One could assume from this 
test that a de minimis amount is, therefore, less than 15% of gross 
revenue from non-financial activity.
    Accordingly, I wonder whether the Commission should apply a similar 
85/15 test as part of our de minimis exception in order to provide a 
bright-line test for end-users (both commercial and non-bank financial) 
to demarcate themselves from swap dealers.

    Question 19. Non-deliverable forwards (NDFs) were not included when 
the Treasury exempted foreign exchange swaps and forwards, under its 
authority under the Dodd-Frank Act, resulting in unnecessary and costly 
regulation. Do you believe the CFTC has the authority to address this 
unintended consequence by issuing an exemption providing that NDFs be 
treated the same as foreign exchange swaps and forwards? Should 
Congress clarify its intent to include NDFs in the definition of 
``foreign exchange forward''?
    Answer. Due to the specific characteristics of NDFs, they remain 
characterized as swaps despite their similarity to foreign exchange 
forward contracts. Since the publication of the CFTC's and SEC's final 
rule defining swap contracts, I have heard from numerous market 
participants about the need for exemptive relief for NDF contracts. 
NDFs are used by market participants as a means of mitigating 
commercial and financial risk in operating in emerging markets. The 
classification of NDFs as swaps creates numerous regulatory obligations 
such as centralized trading, clearing, and reporting. All this adds to 
the costs associated with trading contracts that are necessary for risk 
mitigation purposes. At present, there are no plans by the Commission 
to provide any relief for NDFs from compliance with the CEA and 
Commission regulations. In light of the Commission's inaction, Congress 
may be the only source of relief for market participants.

    Question 20. The CFTC requirement to record phone conversations at 
grain elevators that occasionally take orders from farmers who want to 
hedge in the futures market has been an issue of concerned raised by 
numerous commercial end-users. Based on your understanding, was this 
requirement called for by the Dodd-Frank Act? If not, why did the CFTC 
propose such a measure? What level of data should be collected at grain 
elevators, if any? How could this data collection be required in a 
manner that is not overly burdensome and costly to this sector of the 
marketplace?
    Answer. The Dodd-Frank Act does not require FCMs to record 
telephone conversations with customers. Even though Congress did not 
direct the Commission to implement such a requirement, the Commission 
promulgated it at the request of DOE in order to aid in the prosecution 
of future enforcement actions.
    As a result of these changes, a grain elevator that also acts as an 
FCM to assist its customers in risk mitigation must now integrate new 
systems that will record telephone conversations with customers that 
lead to the execution of a futures transaction. This requirement is 
applicable, regardless of the amount of futures business conducted by 
the grain elevator, and is extremely burdensome and expensive for a 
small grain elevator with a very limited futures trading operation.
    Unfortunately, this is another example of the Commission's failure 
to heed Congress' directive to exclude end-users from the new 
regulatory requirements of Dodd-Frank.
Swap Dealer Definition
    Question 21. Would excluding SEF-executed trades from the de 
minimis calculation help achieve Dodd-Frank's goals of encouraging 
trading on SEF's and requiring clearing?
    Answer. As I discussed in my testimony, excluding SEF-executed and 
cleared trades from the de minimis calculation will help end-users by 
providing regulatory certainty regarding the swap dealer definition and 
mitigates counterparty risk.
Position Limits
    Question 22. As you know, a properly functioning positions limit 
regime is not only dependent on a clear understanding of deliverable 
supply for a particular commodity, but also on a workable hedge 
exemption process. In a stark change from historical practice, the 
CFTC's approach in its since-vacated position limits rule was to limit 
the availability of the bona fide hedge exemption to only a few 
specific types of transactions. The result was a hedge exemption that 
was nearly unworkable. Why did the Commission deviate from the 
Commission's well-functioning historical approach, and does the 
Commission plan on providing a more flexible hedge exemption in its 
forthcoming proposed rule?
    Answer. I believe that any hedge exemption must be flexible and do 
a better job of understanding and acknowledging hedging activities in 
today's markets. Hedging is the foundation of the swaps and futures 
markets and a cornerstone of the way commercial firms run their 
businesses. Because of its importance, any action the Commission takes 
or considers taking must avoid hindering the hedging activities of 
commercial firms.
    The vacated position limits rule failed to take such risk 
mitigation practices into account because its definition of hedging was 
too narrow and not workable. Under the vacated rule, many commonly 
understood and historically accepted hedging practices would not 
qualify for the rule's hedge exemption. In order to comply with the 
position limits set forth in the rule, commercial firms would have had 
to potentially curtail risk-reducing transactions that are necessary 
for them to run their businesses effectively. I do not believe that 
this was Congress' intent.
    My belief is underscored by the fact that the Commission's position 
limits rule was struck down last year by the United States District 
Court for the District of Columbia. The court held that before setting 
position limits, the Commission is required by statute to determine 
whether position limits are ``necessary and appropriate'' to prevent 
excessive speculation in the commodity markets. Unfortunately, the 
Commission ignored the district court order to undertake the required 
analysis and is defending the position limits rule in the United States 
Court of Appeals for the District of Columbia Circuit. Concurrently 
with its appeal, the Commission is drafting a new rule all over again, 
instead of simply evaluating the necessity for position limits, which 
it should have done in the first place.

    Question 23. Should Congress be more explicit in defining what 
exactly constitutes a ``bona fide hedge''?
    Answer. I would welcome Congressional action to clarify the 
definition of a ``bona fide hedge,'' including the scope and level of 
permissible hedging activity. For purposes of both simplicity and 
consistency, the Commission must adopt one uniform definition of 
hedging activity, and the same definition should be applied to both 
swap dealers and major swap participants. Instead of providing a 
bright-line test for market participants, different Commission 
regulations include different definitions that apply depending on the 
circumstances.
    I believe Congressional action is necessary if the Commission's 
upcoming position limit proposal fails again in providing a flexible 
hedge exemption that allows end-users to continue to use the futures 
and swaps markets to mitigate risk and effectively manage their 
operations.
Question Submitted By Hon. Doug LaMalfa, a Representative in Congress 
        from California
    Question. Some have suggested that the way to ``fix'' the special 
entity sub-threshold is for the CFTC to lower the de minimis 
registration threshold for the entire energy swaps marketplace to $25 
million. What damage would be done to end-users, consumers, and the 
marketplace by lowering the registration threshold for all energy swaps 
to $25 million?
    Answer. I believe that lowering the de minimis threshold for all 
energy swaps to $25 million would negate the explicit Congressional 
directive to exclude end-users from the new regulatory requirements of 
the Dodd-Frank Act. Lowering the threshold for all energy swaps could 
create additional costs and regulatory burdens for end-users.
    For example, as we have seen with utility special entities, fewer 
counterparties may be willing to trade energy swaps out of concern that 
they will surpass the $25 million amount and be forced to register as 
swap dealers. Due to the reduction of available counterparties, end-
users that trade energy swaps might pay more in bid-ask spreads and 
pass the costs on to the general public.
Response from Hon. Mark P. Wetjen, Commissioner, U.S. Commodity Futures 
        Trading Commission
Questions Submitted By Hon. K. Michael Conaway, a Representative in 
        Congress from Texas
General Commission Operations
    Question 1. Are there any programs or divisions of the Commission 
that should be cut or consolidated?
    Answer. Given the long-term fiscal challenges our country faces, it 
is important that every agency of the U.S. Government, including the 
U.S. Commodity Futures Trading Commission (``CFTC'' or ``Commission''), 
consider ways to streamline or otherwise eliminate unnecessary costs to 
the U.S. taxpayer. Although there will always be differences in opinion 
based on priorities and other considerations, I believe that the 
President's Budget and Performance Plan for the CFTC appropriately 
takes into account our nation's fiscal challenges while seeking the 
appropriate amount of resources--as well as their allocation within the 
agency--for the CFTC to pursue the mission given to it by Congress.
    Please see the attached ``Commodity Futures Trading Commission, 
President's Budget and Performance Plan for Fiscal Year 2014,'' * 
submitted to the Appropriations Committees in the U.S. House of 
Representatives and U.S. Senate in April 2013. Note that the attached 
Budget and Performance Plan highlights the CFTC's budgetary priorities 
and recommended allocations of staff and resources for the upcoming 
fiscal year.
---------------------------------------------------------------------------
    * The document referred to is retained in Committee file, and can 
be accessed on the CFTC's website at: http://www.cftc.gov/ssLINK/
cftcbudget2014.

    Question 2. Can you please explain what ``absent objection'' 
currently means in the context of the issuance of a CFTC staff ``no 
action'' letter, or other Commission action, and how it is used?
    Answer. Please see the following description of the ``absent 
objection'' process prepared by the CFTC's Office of General Counsel:

          In order to explain the ``absent objection'' process at the 
        Commission, it is helpful to understand how business is 
        conducted generally at the Commission. As is the case with 
        other independent agencies in the federal government, the 
        operations of the Commission and its staff are governed by 
        Congressional mandate. The Commodity Exchange Act (``CEA'') 
        distinguishes among actions taken by the Chairman, Commission 
        action, and staff action.
          Under CEA  2(a)(6)(A), the executive and administrative 
        functions of the Commission are exercised solely by the 
        Chairman. In carrying out these functions, the Chairman is 
        governed by general policies, plans, priorities, and budgets 
        approved by the Commission, and by such regulatory decisions, 
        findings, and determinations as the Commission has made. See 
        CEA  2(a)(6)(B).
          Staff action occurs under the authority of Section 2(a)(6) 
        and under authority specifically delegated by the Commission. 
        See, e.g., 17 CFR  140.14, 140.20, 140.72-140.97 (2013). The 
        staff's issuance of no-action letters, interpretive letters, 
        and exemptive letters is authorized by Rule 140.99, 17 CFR  
        140.99 (2013).
          Commission action is accomplished by a majority vote of the 
        Commissioners. See FTC v. Flotill Prods., Inc., 389 U.S. 179, 
        183-84 (1967) (absent a specific statutory requirement, federal 
        agencies follow the common law `majority of a quorum' rule). 
        Such action occurs in two ways: through votes held at formal 
        meetings, or through seriatim consideration under Rule 140.12. 
        See 17 CFR  140.12.
          With that background, the term, absent objection, can arise 
        in two contexts. It usually refers to an informational 
        circulation to the Commission to describe action to be taken by 
        Commission staff. Although conducted through the Office of the 
        Secretariat, the process does not call for a Commission vote. 
        It is intended to keep the Commissioners apprised of the 
        staff's activities that are taking place under the Chairman's 
        supervision.
          In addition, business may proceed on an ``absent objection'' 
        basis at Commission meetings. If a Commissioner objects, the 
        matter is decided by majority vote.
          As indicated above, the Commission also conducts business 
        through seriatim votes without holding a formal meeting. If a 
        Commissioner objects to seriatim consideration, the matter is 
        withdrawn from seriatim consideration, and is scheduled for 
        disposition at a Commission meeting. See 17 CFR  140.12(b).

    Question 3. Is there an official legal procedure for utilizing an 
``absent objection'' motion at the CFTC? Has there been a change in the 
legal interpretation of what ``absent objection'' means between past 
and current usage of this procedural motion for Commission business?
    Answer. Please see the following description of the ``absent 
objection'' process prepared by the CFTC's Office of General Counsel:

          As explained above, Commission action may be taken on a 
        matter during formal meetings of the Commission by majority 
        vote or by an ``absent objection'' process. Regardless of which 
        way it is proceeding, each matter is considered by the 
        Commission pursuant to a motion made by one of the 
        Commissioners. Each matter typically includes a staff 
        memorandum to the Commission explaining the proposal under 
        consideration. If objection is heard to a matter presented by 
        an ``absent objection'' motion, the matter becomes subject to 
        disposition by majority vote.
          With respect to staff business that proceeds on an ``absent 
        objection'' basis, as described in response to Question 2 
        above, the procedure is to circulate informational memoranda so 
        that the Commissioners may be informed of a staff action and 
        the Chairman may be informed of any Commissioner's objection to 
        the planned staff action. If there are such objections, the 
        Chairman may choose to withhold such staff action.
          The CFTC and its Office of the General Counsel have 
        consistently interpreted these terms in this way.

    Question 4. Procedurally, I understand that a 2-2 Commission vote 
prevents an order from being issued, yet a 3-1 vote is required to stop 
an ``absent objection'' motion? Why?
    Answer. Please see the following description of the ``absent 
objection'' process prepared by the CFTC's Office of General Counsel:

          With respect to an ``absent objection'' motion at a formal 
        meeting, if an objection is heard, the matter becomes subject 
        to disposition by majority vote.
          With respect to staff action circulated ``absent objection,'' 
        unless a statute or prior Commission order requires otherwise, 
        the Chairman's prerogative as staff director controls, and he 
        may, in his discretion, direct a different course preferred by 
        fellow Commissioners.
          As mentioned above, Commission action is accomplished by a 
        majority vote of the Commissioners. See FTC v. Flotill Prods., 
        Inc., 389 U.S. 179, 183-84 (1967). A 2-2 vote is sufficient to 
        stop such action.

    Question 5. Do you think it is appropriate for CFTC staff to be 
given the power to unilaterally initiate investigations, without the 
opportunity for the CFTC Commissioners to provide a check on that 
power?
    Answer. In answering this question, it is important to distinguish 
between (1) the power of CFTC staff to initiate investigations and (2) 
the power of CFTC staff to compel testimony or the production of 
documents as part of an investigation. The CFTC's Division of 
Enforcement has broad, delegated authority to initiate investigations 
and obtain certain evidence through voluntary statements and 
submissions. See CFTC Rule 11.2(a). However, CFTC Rules 11.2(a) and 
11.4(a) require that any exercise of delegated subpoena power by the 
CFTC's staff be granted by a formal order of the Commission. Given the 
importance of the CFTC's enforcement mission to protect the public, 
this longstanding investigatory authority delegated to staff is 
appropriate so long as the checks on that authority remain in place.
    For additional information, please see the following description of 
the CFTC's investigative authority prepared by the CFTC's Office of 
General Counsel in consultation with the CFTC's Division of 
Enforcement:

          [T]he Commission's current procedure and practice for 
        investigations promotes the efficient and effective use of 
        Commission resources, while including measures to safeguard the 
        Commission's oversight responsibility.
          The Commission's authority to conduct investigations is 
        broad. The Supreme Court has held that administrative agencies 
        have the authority to ``[i]nvestigate merely on suspicion that 
        the law is being violated, or even just because it wants 
        assurance that it is not.'' United States v. Morton Salt Co., 
        338 U.S. 632, 642-43 (1950); see CFTC v. McGraw-Hill Cos., 390 
        F.Supp.2d 27, 33 (D.D.C. 2005)(same).
          In 1976 the Commission delegated to the Director of its 
        Division of Enforcement, and to the Directors of the 
        Commission's other operating divisions, the authority to 
        conduct investigations and make recommendations to the 
        Commission therefrom. CFTC Rules Relating to Investigations, 41 
        Fed. Reg. 29798 (July 19, 1976) (adopting Part 11 to the 
        Commission's Rules, including Rule 11.2 (Authority to conduct 
        investigations)). The purpose of an enforcement investigation 
        is to discover the facts so that the Commission may determine 
        whether it is necessary or appropriate to institute an 
        enforcement action or take other preventive, remedial or 
        punitive action. Id.
          Over the past 4 fiscal years, the Commission's Division of 
        Enforcement has opened more than 1,500 investigations of 
        potential violations of the Commodity Exchange Act or 
        Commission Regulations. Requiring Commission review and 
        approval for each investigation would reverse a nearly 40-year-
        old Commission delegation that has worked well, cause an undue 
        burden on the Commission's resources and stifle the 
        effectiveness of its enforcement program.
          The Division of Enforcement provides the Commissioners with 
        regular briefings regarding the status of significant 
        investigations. Further, Commissioners regularly request and 
        receive updates from the Division of Enforcement regarding the 
        status of investigations of particular interest. In the course 
        of an investigation, the Division of Enforcement may seek 
        authorization from the Commission to compel production of 
        records and or testimony through Commission order authorizing 
        issuance of subpoenas.
          Also, while the Division of Enforcement may make a 
        recommendation based upon its investigation, the Commission has 
        the sole authority to make the determination as to whether or 
        not to file an enforcement action.

    Question 6. Per Commission regulations, what is an ``omnibus 
order''? What is the permissible scope of an ``omnibus order'' granting 
subpoena power to CFTC staff, and how long should such an order be 
effective? If the order has an indefinite duration, would it be binding 
on a future Commission?
    Answer. The authorization to issue subpoenas directed at a number 
of persons within a particular subject matter area, as opposed to a 
particular person, is commonly referred to as an ``omnibus'' order. The 
primary difference between an ``ordinary'' investigative order and an 
omnibus order is that the latter is not limited in scope to a 
particular person; it is, however, normally time-limited (although some 
have been re-extended). CFTC Rule 11.4(b) requires any CFTC order 
authorizing staff to issue subpoenas in the course of a particular 
investigation to include (1) a general description of the scope of the 
investigation; (2) the authority under which the investigation is being 
conducted; and (3) a designation of the members of the Commission or of 
its staff authorized by the Commission to issue subpoenas.
    The CFTC has issued omnibus orders to investigate the proliferation 
of fraud in particular areas for over a decade. For example, on 
December 13, 1999, the CFTC issued an omnibus order to investigate 
certain entities suspected of engaging in the fraudulent marketing and 
promotion of Internet-based commodity trading advisory systems and 
services. Similarly, on January 21, 2001, the CFTC approved an omnibus 
order to investigate suspected fraud in retail foreign currency 
exchange (``forex'') transactions following enactment of the Commodity 
Futures Modernization Act of 2000, which expanded the CFTC's 
jurisdiction over the forex market. Following these two orders, the 
CFTC issued an omnibus order on September 22, 2008 as part of its 
National Crude Oil investigation.
    The CFTC's Division of Enforcement continues to rely upon targeted 
and time-limited omnibus orders in appropriate cases, and these orders 
are generally consistent with prior CFTC practice. For example, in 
January 2009, the CFTC issued an omnibus order to investigate a number 
of suspected Ponzi-schemes and other types of fraud relating to pooled 
and managed investment vehicles. That order was initially approved for 
a 3 month period, and the CFTC subsequently re-issued it for several 
additional 6 month periods of time.
    Following enactment of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (``Dodd-Frank Act''), the CFTC unanimously 
approved a 6 month omnibus order on November 15, 2011 covering unlawful 
retail commodity transactions in response to a proliferation of 
precious metals-related schemes. The CFTC has periodically and 
unanimously re-issued that order for 6 month periods of time. In 
response to patterns of illegal activity in certain areas, the CFTC 
also has approved time-limited omnibus orders to investigate, among 
other things, deceptive advertising related to forex accounts, customer 
segregation and minimum net capital requirements, and exchanges-for-
related-positions.
    Since I joined the CFTC in October 2011, the CFTC has approved five 
omnibus orders through ten individual votes to either initially issue 
or re-issue existing omnibus orders. Of those votes, only one did not 
enjoy bipartisan support, and only two were not unanimous votes of the 
Commission. During that same timeframe, dozens of formal orders of 
investigation have been approved in response to requests by the CFTC's 
Division of Enforcement.
    The policy rationale for authorizing omnibus orders in limited 
circumstances is the need for the CFTC's staff to respond rapidly to 
suspected fraud and market abuses. In certain circumstances, for 
example in cases involving fraud on retail customers, evidence might be 
particularly prone to disappear quickly. Moreover, as noted in the 
excerpted response below, omnibus orders often permit the CFTC's 
Division of Enforcement to freeze assets belonging to customers, 
preserve books and records, or coordinate the expedited filing of 
related actions in cooperation with other civil or criminal 
authorities.
    But there remain important limits on the authority provided by an 
omnibus order. The CFTC's orders authorizing the issuance of subpoenas 
can be used only during the course of the subject investigation. The 
CFTC's staff may issue subpoenas in a matter ``covered'' by an approved 
CFTC order until the Division of Enforcement concludes the 
investigation, and the CFTC may amend or withdraw an omnibus order at 
any time prior to the approved expiration of the order.
    Please also see the following description of the CFTC's 
investigative authority prepared by the CFTC's Office of General 
Counsel in consultation with the CFTC's Division of Enforcement:

          The Commission's Division of Enforcement has the delegated 
        authority to conduct investigations of suspected or alleged 
        violations of the Commodity Exchange Act and Commission 
        Regulations. The Division of Enforcement has broad powers to 
        conduct such investigations. These investigative powers include 
        obtaining evidence through voluntary statements and 
        submissions, and inspections of boards of trade, reporting 
        traders, and persons required by law to register with the 
        Commission. If enforcement staff believes that it is necessary 
        to compel testimony or the production of documents, it may 
        request, pursuant to Commission regulation 11.4, that the 
        Commission issue an order authorizing issuance of subpoenas, 
        which provides staff with the authority to issue administrative 
        subpoenas to compel production of records and/or testimony. 
        These Commission orders are generally referred to as formal 
        orders of investigation.
          Commission orders authorizing issuance of subpoenas provide a 
        general description of the scope of the investigation, the 
        authority under which the investigation is being conducted, and 
        designates the individuals authorized to issue subpoenas. The 
        scope of the investigation subject to such an order may be 
        directed at compelling information and testimony concerning a 
        particular entity's course of conduct or to a particular 
        subject matter area.
          Authorization to issue subpoenas directed at a particular 
        subject area is commonly referred to as an omnibus formal 
        order. For example, the Commission has issued omnibus orders in 
        response to the number of swindles targeting the retail public 
        through the use of Ponzi schemes. At times, CFTC investigations 
        require quick enforcement action to freeze assets belonging to 
        customers, preserve books and records and, sometimes, 
        coordinate the expedited filing of related actions in 
        cooperation with other civil or criminal authorities. The 
        Commission's omnibus formal orders have been instrumental in 
        meeting these compressed timelines, particularly in cases 
        involving ongoing fraud. Similarly, in other cases, access to 
        omnibus subpoena authority has allowed the Division to 
        expeditiously proceed with investigations and conserve 
        resources by eliminating the need to draft and submit for 
        Commission approval separate formal orders for each entity 
        subject to investigation of the same subject matter. The 
        omnibus order will be attached to new matters (``covered 
        matters'') that involve the same subject matter or violation.
          With respect to permissible time periods, Commission orders 
        authorizing issuance of subpoenas can be used during the course 
        of the subject investigation. What this means is that once an 
        order is approved by the Commission, including so-called 
        omnibus orders, staff may issue subpoenas in the covered matter 
        until the Division concludes the investigation, unless 
        otherwise ordered by the Commission. Separately, in certain 
        omnibus orders the Commission has specified a time period 
        during which the Division of Enforcement can attach new covered 
        matters. Those omnibus orders have also required that the 
        Division of identify and report to the Commission with 
        specificity all of the covered matters attached to the omnibus 
        order.
          In comparison to the Commission's approach of using targeted 
        and time-limited omnibus formal orders, several other agencies 
        have made complete, unencumbered delegations of subpoena 
        authority to their staff. Such delegations of authority have 
        been made by the: U.S. Securities and Exchange Commission; 
        Civil Divisions of the Department of Justice and U.S. Attorneys 
        offices; Federal Trade Commission; and United States Department 
        of Agriculture, Packers and Stockyards Division.

    Question 7. What is the legal justification for the Commission 
issuing a final ``exemptive order'' without prior notice-and-comment 
periods? Does this place Commission actions on questionable legal 
ground from a compliance standpoint with the Administrative Procedures 
Act?
    Answer. The legal justification for issuing a final exemptive order 
without prior notice and comment provided by the CFTC's Office of 
General Counsel is as follows:

          The APA empowers an agency to proceed without notice and 
        comment for good cause. See 5 U.S.C.  553. The Commission has 
        interpreted CEA Section 4(c), which authorizes the Commission 
        to grant exemptive relief, to incorporate the APA's 
        requirements, including the good cause exception. The 
        Commission's view is that Congress did not intend that the 
        Commission can impose requirements on market participants 
        without notice and comment when there is good cause, but may 
        not exempt market participants when the public interest 
        dictates, or other good cause exists, without first allowing a 
        comment period.

    In addition, the preambles of CFTC rules and orders provide the 
legal rationale for the CFTC's regulatory actions and, where 
appropriate, how those actions comply with the APA. For example, since 
joining the CFTC, I have supported two CFTC actions that became 
effective prior to the completion of the notice-and-comment periods set 
forth in the interim final rule and order, respectively. In both cases, 
the CFTC provided a legal rationale and sought to address exigent 
circumstances that it believed presented considerable challenges for 
certain market participants seeking to comply with applicable law. The 
CFTC was advised in each case that it was acting consistent with 
statutory requirements under the CEA and APA.
    For these reasons, and because relief was being provided through 
the CFTC action (rather than new or additional compliance burdens), I 
voted in favor of these interim actions.

    Question 8. After the ``post hoc'' comment period has closed for 
some exemptive orders, will the Commission allow revisions to be made 
based on issues raised by the public comments?
    Answer. The CFTC is carefully considering public comments and 
remains open to revisions, as appropriate. The CFTC's Office of General 
Counsel advises that ``[i]n its informed discretion, the Commission may 
vote to allow such revisions.''

    Question 9. Are there written rules or policy guidelines on how the 
CFTC is to use the ``no action'' letter process? If not, does the 
Administrative Procedures Act govern the use or issuance of staff ``no 
action'' letters?
    Answer. Please see the following response prepared by the CFTC's 
Office of General Counsel:

          CFTC Rule 140.99 sets forth the parameters. It states that a 
        CFTC staff no-action letter is ``a written statement by the 
        staff of a Division of the Commission or of the Office of the 
        General Counsel that it will not recommend enforcement action 
        to the Commission for failure to comply with a specific 
        provision of the [CEA] or of a Commission rule, regulation or 
        order if a proposed transaction is completed or a proposed 
        activity is conducted by'' the beneficiary of the letter. The 
        Rule states that the no-action letter represents the views of 
        the Division that issued it or the Office of General Counsel 
        and does not bind the Commission--it binds only the issuing 
        staff and not the Commission or other Commission staff. It 
        states that only the beneficiary may rely on the letter. See 17 
        CFR 140.99(a)(2).
          The Rule also sets forth a host of requirements, including 
        that the letter will be issued in response to proposed 
        transactions only, and not completed transactions unless there 
        are extraordinary circumstances. Id.  140.99(b)(3). Staff also 
        will not respond to no-action requests posing hypothetical 
        questions. Id. The proposed beneficiary must be identified, id. 
         140.99(b)(4), and additional specified information must be 
        provided, id.  140.99(c). For the complete set of 
        requirements, see 17 CFR  140.99(c)-(d); see also id.  
        140.99(e) (concerning the form of a staff response).
Customer Protection
    Question 10a. Is the Commission's ability to perform adequate 
market surveillance critical to protecting futures and swaps customers?
    Answer. Yes. The primary mission of the CFTC is to protect market 
users, consumers and the public at large from (1) fraud, manipulation, 
and other abusive practices, and (2) systemic risk, related derivatives 
that are subject to the Commodity Exchange Act, as well as foster open, 
transparent, competitive, and financially sound markets. Congress 
established the CFTC for these purposes, among others, in 1974. The 
CFTC's market-surveillance program is crucial to accomplishing that 
mission.
    For additional information, please see the attached ``Commodity 
Futures Trading Commission, President's Budget and Performance Plan for 
Fiscal Year 2014,'' * submitted to the Appropriations Committees in the 
U.S. House of Representatives and U.S. Senate in April 2013 for a 
further description of the CFTC's surveillance program and resource 
allocations.
---------------------------------------------------------------------------
    * The document referred to is retained in Committee file, and can 
be accessed on the CFTC's website at: http://www.cftc.gov/ssLINK/
cftcbudget2014.

    Question 10b. Should the CFTC's ``Customer Protection'' fund be 
utilized to make needed improvements to the Commission's technological 
capabilities? Why or why not?
    Answer. The CFTC continues to evaluate the funds necessary to 
support the whistleblower and investor education programs based upon, 
among other things, the actual number of tips received and resulting 
investigations. The CFTC anticipates a number of claims will be paid to 
eligible whistleblowers in the upcoming fiscal year, providing a basis 
for estimating future spending on such programs.
    Please see a recent balance of the CFTC's Customer Protection Fund, 
below:

------------------------------------------------------------------------
                      FY 2013
                 Projected  Actual  FY 2014  Estimate  FY 2015  Estimate
                        $000               $000               $000
------------------------------------------------------------------------
Budget                     100,040            100,000            100,000
 Authority--Pri
 or Year
Budget                       1,210             12,250             13,750
 Authority--New
 Year
                --------------------------------------------------------
  Total Budget             101,250            112,250            113,750
   Authority
                --------------------------------------------------------
Whistleblower                  750                750                750
 Program
Whistleblower                   --             10,000             10,000
 Awards
Customer                       500              1,500              3,000
 Education
 Program
                --------------------------------------------------------
  Total Planned              1,250             12,250             13,750
   Expenditures
                ========================================================
    Unobligated            100,000            100,000            100,000
     Balance
------------------------------------------------------------------------

    Although the present unobligated balance in the CFTC Customer 
Protection Fund could be sufficient to cover anticipated whistleblower 
complaints and investor outreach efforts, the present statutory and 
regulatory obligations relating to whistleblower compensation 
potentially could require the CFTC to seek to transfer or re-program 
monies to cover any shortfalls resulting from reallocation of such 
funds to technology spending.
    For additional information, please see the attached ``Commodity 
Futures Trading Commission, President's Budget and Performance Plan for 
Fiscal Year 2014,'' * submitted to the Appropriations Committees in the 
U.S. House of Representatives and U.S. Senate in April 2013.

    Question 11. In light of the automated account verification system 
recently implemented by NFA and CME, does the CFTC still need read-only 
access to all Futures Commission Merchant customer fund accounts?
    Answer. The CFTC continues to consider whether read-only access is 
necessary in light of recent NFA and CME customer-protection 
initiatives and the CFTC's recent proposed rulemaking. See 77 Fed. Reg. 
67866, Enhancing Protections Afforded Customers and Customer Funds Held 
by Futures Commission Merchants and Derivatives Clearing Organizations; 
Proposed Rule (Nov. 14, 2012) (seeking comment on the following 
questions concerning read-only access: What technology issues are 
raised by the Commission's proposal? How can the Commission adequately 
address such technology issues? What account information can 
depositories currently provide to the Commission and to DSROs via the 
Internet on a read-only basis? Do all depositories (e.g., banks, trust 
companies, derivatives clearing organizations, or other FCMs) have the 
capability of using the Internet to provide account access to the 
Commission and DSROs? Are there other options for depositories to 
provide read-only access to FCM accounts other than the Internet? How 
should the Commission implement this requirement? What timeframe would 
be appropriate to make the requirement effective?). The CFTC is 
carefully considering public comments on read-only access to FCM 
accounts and remains open to revising the customer protection proposal, 
as appropriate.

    Question 12. Is reliance on the automated verification system 
utilized by CME and NFA a more secure method of accomplishing the same 
ultimate goal of protecting the integrity of customer funds?
    Answer. The automated verification system utilized by CME and NFA 
is operated and maintained by a third-party with whom the CFTC does not 
have a contractual relationship. The CFTC is carefully considering 
public comments on read-only access to FCM accounts, as noted above, 
and remains open to revising its customer protection proposal, as 
appropriate. Depending on revisions to the final rules, the automated 
verification system could be a complementary or alternative means of 
protecting customers and ensuring compliance with applicable customer 
funds regulations.

    Question 13. Do you think an exemption or some other form of 
protection should be made for small to medium-sized futures commission 
merchants pertaining to the level of excess margin required to be held 
under the CFTC's proposed customer protection rule?
    Answer. The CFTC is carefully considering public comments on its 
excess margin requirements and remains open to revisions to its 
customer protection proposal, as appropriate. Any determination related 
to futures commission merchant margin requirements should take into 
account the competing interests of providing the appropriate 
protections for FCM customers and maintaining cost-effective access to 
the markets for those customers.

    Question 14. I find it fascinating that with all of the publicity 
over the cross-border rules and Chairman Gensler's warnings about how a 
failure to regulate entities in other countries would ``blow a hole in 
Title VII''--that the accounts of the small farmer, farm cooperatives, 
and the public municipalities were not protected. Why did any guidance 
on cross-border regulation not include a solution related to how 
customer accounts should be treated when a multi-national FCM, like MF 
Global Inc., goes bankrupt? Or do you need a legislative solution?
    Answer. The CFTC's proposed customer protection rule is intended to 
provide greater protection to customers who trade on foreign markets 
through FCMs. First, the proposal would require an FCM to hold 
sufficient funds in segregated accounts to repay the full account 
balances of every customer trading on foreign markets (this would 
provide the customers with comparable protections to customers trading 
on CFTC designated contract markets). Second, the proposal would limit 
the amount of customer funds that an FCM may deposit with foreign 
depositories for trading on foreign markets to the amount of margin 
required on such foreign positions plus a 20 percent cushion. The 20 
percent cushion is intended to provide a margin buffer to better ensure 
that an FCM has sufficient funds to meet daily margin obligations at 
foreign brokers and clearing organizations and acknowledges the time-
zone differences that would prevent an FCM from doing real-time funding 
of foreign trading.
    The CFTC is carefully considering public comments on its customer 
protections proposal and remains open to revisions, as appropriate.
End-User Issues
    Question 15. In passing the Dodd-Frank Act, Congress made clear its 
intent to exempt end-users from bearing the additional financial and 
regulatory burdens brought on by the legislation. Keeping that intent 
in mind, why has the CFTC used such a low swap dealing threshold for 
Special Entities?
    Answer. The CFTC sought to address Congressional concerns that 
pension plans, governmental investors, and charitable endowments were 
provided insufficient disclosures with respect to certain swaps and 
security-based swaps entered into with more sophisticated market 
participants. See Senate Congressional Record on July 15, 2010 at 
S5903-04. The Dodd-Frank Act, in fact, provided certain ``special 
entities,'' defined in the Act, with additional protections from market 
practices that were viewed by some in Congress as increasing the risks 
faced by these entities in using swaps to manage financial risks. 
Accordingly, under the CFTC's final rules, persons dealing swaps to 
``special entities'' must register as swap dealers if their dealing 
activities individually exceed a sub-threshold of $25 million of 
aggregate gross notional value in a particular 1 year period.
    Currently, the Commission is considering a petition from certain 
electric public utility providers seeking to be excluded from the 
special entity de minimis threshold based upon liquidity and other 
concerns. In the interim, the CFTC's staff has issued no-action relief 
increasing the registration threshold for entities dealing to utility 
special entities, subject to certain conditions. However, please note 
that the term ``special entity'' is defined in Section 4s(h)(2)(C) of 
the Commodity Exchange Act as a Federal agency; a State, State agency, 
city, county, municipality, or other political subdivision of a State; 
an employee benefit plan; a governmental plan; or an endowment, 
including an endowment. See 77 Fed. Reg. 30708 (May 23, 2012).

    Question 16. Why do you think the Commission failed to completely 
exclude commercial end-users from regulation even after Congress made 
clear its intentions were not to regulate end-users who use swaps to 
hedge or mitigate risks from their business?
    Answer. It is clear that in the Dodd-Frank Act, Congress intended 
to protect the risk-management activities of commercial firms. Since I 
joined the CFTC, the CFTC has proposed or finalized rules that, among 
other things, exempt agricultural and other end-users from the Dodd-
Frank Act's clearing mandate, prevent certain inter-affiliate swaps 
from having to be cleared, and exclude non-financial end-users from 
having to post margin on uncleared swaps. See, e.g., End-User Exception 
to the Clearing Requirement for Swaps, 77 Fed. Reg. 42559 (July 19, 
2012); Clearing Exemption for Swaps Between Certain Affiliated 
Entities, 78 Fed. Reg. 21749 (Apr. 11, 2013); Margin Requirements for 
Uncleared Swaps for Swap Dealers and Major Swap Participants: Proposed 
Rule, 76 Fed. Reg. 23732 (Apr. 28, 2011). In addition, the entities 
definitions rule in appropriate cases excludes hedging from those 
activities that could trigger registration, and the product definitions 
rule excludes from the term ``swap'' a number of instruments used and 
relied upon by the end-user community to manage risk. See Further 
Definition of ``Swap Dealer,'' ``Security-Based Swap Dealer,'' ``Major 
Swap Participant,'' ``Major Security-Based Swap Participant,'' and 
``Eligible Contract Participant,'' 77 Fed. Reg. 30596 (May 23, 2012); 
see also Further Definition of ``Swap,'' ``Security-Based Swap,'' and 
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap 
Agreement record-keeping, 77 Fed. Reg. 48207 (August 13, 2012).
    Rulemaking, like legislating, requires balancing competing 
interests. On occasion, there is tension between the regulatory 
interests embodied in the Dodd-Frank Act itself, such as when steps to 
reduce the overall risk in the financial system may decrease liquidity 
and thus make it more difficult for some commercial end-users to manage 
their risks. Other times, the legitimate interests of different types 
of market participants are in conflict.
    It is incumbent upon the CFTC to consider thoughtfully the 
interests affected by, and the consequences of, the policies that we 
adopt. Since I joined the commission, I believe the CFTC's rules have 
been informed by an ongoing dialogue with members of the end-user 
community, some of whom have issues that are relatively new to the CFTC 
and its staff. As a result, the CFTC must, and I intend to, continue to 
constructively engage with end-users to gain a sufficient understanding 
of how their trading activities are impacted by the CFTC's rules.

    Question 17. Do you agree that forward contracts containing terms 
providing some form of flexibility in delivered commodity volumes--
otherwise known as ``volumetric optionality''--should fall underneath 
the scope of the forward-contract exclusion? Why or why not?
    Answer. Forward contracts with embedded volumetric optionality 
serve an important risk-management function for commercial end-users. 
On July 10, 2012, the CFTC adopted an interim-final rule defining 
``swap'' that provided further guidance concerning forwards with 
embedded volumetric optionality. Under the CFTC's interpretation, 
volumetric options meeting a seven-part test may qualify for the 
forward contract exclusion from the term ``swap.''
    During consideration of this rule, I expressed concerns that the 
seven-factor test could unnecessarily complicate commercial practices 
that Congress did not intend to bring under the umbrella of the Dodd-
Frank Act. In response to my concerns, the interim-final rule sought 
additional public comment on the seven-part-test. The CFTC is presently 
considering public comments and assessing whether changes to the CFTC's 
guidance should be proposed in the near future.

    Question 18. The definition of ``financial entity'' in the 
Commodity Exchange Act cross-references the banking laws and depends on 
whether someone is engaged in activity that is ``financial in nature.'' 
In short, this definition has the potential to treat many end-users 
like hedge funds in certain circumstances. Has the CFTC provided any 
guidance for how the banking definition of activities that are 
``financial in nature'' applies in the context of Title VII for end-
users? Is this something that Congress should address legislatively?
    Answer. Congress defined ``financial entity'' in CEA section 
2(h)(7)(C) in part by referring to two provisions that appear in the 
banking laws. Specifically, the definition refers to ``a person 
predominantly engaged in activities that are in the business of 
banking,'' a term of art found in the National Bank Act that is within 
the jurisdiction of the Office of the Comptroller of the Currency 
(``OCC''), ``or in activities that are financial in nature, as defined 
in Section 4(k) of the Bank Holding Company Act of 1956,'' which is 
within the jurisdiction of the Board of Governors of the Federal 
Reserve System (``Federal Reserve'').
    As noted in the CFTC's final rule regarding the End-User Exception 
to the Clearing Requirement for Swaps, 77 Fed. Reg. 42559 (July 19, 
2012), these provisions are subject to interpretation by the OCC and 
the Federal Reserve, respectively. Indeed, the CFTC referred to such an 
interpretation in footnote 12 of CFTC Letter No. 13-22 dated June 4, 
2013, stating that for the purpose of such letter, market participants 
may look to the Federal Reserve's final rule defining ``Predominantly 
Engaged In Financial Activities,'' 78 Fed. Reg. 20756 (Apr. 5, 2013), 
in determining whether they are ``predominantly engaged in financial 
activities.'' As with any request from the public for guidance, the 
CFTC should thoughtfully consider and respond where appropriate to any 
request from a market participant who seeks guidance on whether they 
fall under the definition of ``financial entity.''

    Question 19. Non-deliverable forwards (NDFs) were not included when 
the Treasury exempted foreign exchange swaps and forwards, under its 
authority under the Dodd-Frank Act, resulting in unnecessary and costly 
regulation. Do you believe the CFTC has the authority to address this 
unintended consequence by issuing an exemption providing that NDFs be 
treated the same as foreign exchange swaps and forwards? Should 
Congress clarify its intent to include NDFs in the definition of 
``foreign exchange forward''?
    Answer. The CEA, as amended by Title VII of the Dodd-Frank Act, 
authorizes the Secretary of the U.S. Department of the Treasury to 
issue a written determination that foreign exchange swaps, foreign 
exchange forwards, or both, should not be regulated as ``swaps'' under 
the CEA. Pursuant to that authority, the Secretary issued a final 
determination that exempts both foreign exchange swaps and foreign 
exchange forwards from certain regulations applicable to ``swaps.'' See 
Determination of Foreign Exchange Swaps and Foreign Exchange Forwards 
Under the Commodity Exchange Act, Final Determination, 77 Fed. Reg. 224 
(Nov. 20, 2012). The Secretary's final determination acknowledged that 
this authority was constrained by the CEA's definition of foreign 
exchange swaps and forwards, which by statute must involve the 
``exchange of 2 different currencies.''
    In addition, on August 13, 2012, the CFTC published the final rule 
providing guidance on the scope of and further defining the term 
``swap.'' See Further Definition of ``Swap,'' ``Security-Based Swap,'' 
and ``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap 
Agreement record-keeping, 77 Fed. Reg. 48207 (Aug. 13, 2012). In that 
release, the CFTC stated the following:

          NDFs are not expressly enumerated in the swap definition, but 
        . . . they satisfy clause (A)(iii) of the swap definition 
        because they provide for a future (executory) payment based on 
        an exchange rate, which is an ``interest or other rate[]'' 
        within the meaning of clause (A)(iii). Each party to an NDF 
        transfers to its counterparty the risk of the exchange rate 
        moving against the counterparty, thus satisfying the 
        requirement that there be a transfer of financial risk 
        associated with a future change in rate. This financial risk 
        transfer in the context of an NDF is not accompanied by a 
        transfer of an ownership interest in any asset or liability. 
        Thus, an NDF is a swap under clause (A)(iii) of the swap 
        definition.

Id at 48254-55. The CFTC also noted that ``at least some market 
participants view NDFs as swaps today, and thus NDFs also may fall 
within clause (A)(iv) of the swap definition as `an agreement, 
contract, or transaction that is, or in the future becomes, commonly 
known to the trade as a swap.'' Id. See also CEA section 1a(47)(A)(iv) 
of the CEA, 7 U.S.C. 1a(47)(A)(iv).
    The CFTC has not to date, however, subjected NDFs to a mandatory 
clearing determination. As such, market participants that utilize NDFs 
are not subject to certain regulatory obligations that otherwise would 
accompany a mandatory clearing determination.
    In its final rulemaking, the CFTC also noted that one ``commenter's 
request that the CFTC exempt NDFs from the swap definition using its 
exemptive authority under section 4(c) of the CEA, 7 U.S.C. 6(c) . . . 
with respect to NDFs, is beyond the scope of this rulemaking.'' Id. at 
48256. Based on CEA section 4(c), which provides the CFTC with 
exemptive authority, it is unclear whether the CFTC has the authority 
to issue an exemption providing that NDFs be treated the same as 
foreign exchange swaps and forwards.

    Question 20. The CFTC requirement to record phone conversations at 
grain elevators that occasionally take orders from farmers who want to 
hedge in the futures market has been an issue of concerned raised by 
numerous commercial end-users. Based on your understanding, was this 
requirement called for by the Dodd-Frank Act? If not, why did the CFTC 
propose such a measure? What level of data should be collected at grain 
elevators, if any? How could this data collection be required in a 
manner that is not overly burdensome and costly to this sector of the 
marketplace?
    Answer. There is no specific CFTC requirement for telephone 
conversations to be recorded at grain elevators that occasionally take 
orders from farmers who want to hedge in the futures market. CFTC Rule 
1.35(a), as proposed, would have required members of a designated 
contract market (``DCM'') or swap execution facility (``SEF'') to 
record all oral communications that lead to the execution of a 
transaction in a cash commodity. The CFTC received numerous comments 
about the effect of such a requirement on members of the agricultural 
community that trade in cash commodities and are not required to be 
registered with the CFTC other than, in some cases, as floor traders. 
In response to those comments, the CFTC adopted modifications designed 
to preserve the rule's purpose without adversely affecting the 
agricultural community.
    Accordingly, only those oral communications that lead to a 
transaction in a commodity interest (i.e., a commodity futures 
contract, commodity option contract, foreign exchange contract, or 
swap) will have to be recorded. Furthermore, only futures commission 
merchants, certain introducing brokers, retail foreign exchange 
dealers, and those members of a DCM or SEF who are registered or 
required to be registered with the CFTC (except for floor traders, 
commodity pool operators, swap dealers, major swap participants, and 
floor brokers who trade for themselves) will have to record oral 
communications. To the extent a grain elevator is required to record 
its oral communications, that requirement only arises because of its 
registration status and the type of transactions it is entering into, 
namely commodity-interest transactions. CFTC Rule 1.35(a) was amended 
in this way to conform it to the record-keeping requirements for swap 
dealers and major swap participants that were required under new 
Section 4s of the Commodity Exchange Act and Part 23 of the 
Commission's Regulations.
Swap Dealer Definition
    Question 21. Would excluding SEF-executed trades from the de 
minimis calculation help achieve Dodd-Frank's goals of encouraging 
trading on SEF's and requiring clearing?
    Answer. Excluding SEF-executed trades from the de minimis 
calculation would seem to incentivize market participants to trade on 
SEFs, absent other countervailing market or commercial considerations. 
However, in its rulemaking defining ``swap dealers,'' the CFTC 
determined that exempting all such trading activity would be 
potentially inconsistent with Congress' intent in requiring 
registration and regulation of persons engaging more than a de minimis 
amount of swap dealing activity. The inclusion of a particular trade in 
the de minimis calculation for purposes of determining whether a person 
must register as a ``swap dealer'' depends not on the venue in which 
the transaction occurs but on the nature of the activity. Trading, 
speculative, and hedging activities in many cases do not count towards 
the de minimis calculation whether or not they are conducted on a 
regulated platform.
Position Limits
    Question 22. As you know, a properly functioning positions limit 
regime is not only dependent on a clear understanding of deliverable 
supply for a particular commodity, but also on a workable hedge 
exemption process. In a stark change from historical practice, the 
CFTC's approach in its since-vacated position limits rule was to limit 
the availability of the bona fide hedge exemption to only a few 
specific types of transactions. The result was a hedge exemption that 
was nearly unworkable. Why did the Commission deviate from the 
Commission's well-functioning historical approach, and does the 
Commission plan on providing a more flexible hedge exemption in its 
forthcoming proposed rule?
    Answer. The referenced CFTC final rule and interim final rule for 
``Position Limits on Futures and Swaps,'' 76 Fed. Reg. 71626 (Nov. 18, 
2011), was adopted by the CFTC prior to my confirmation. The CFTC is 
presently considering a re-proposal of that final rule and is seeking 
comment on all aspects of the re-proposal, including the scope and 
availability of enumerated and non-enumerated hedge exemptions.
    The CFTC will carefully consider public comments on this aspect of 
the re-proposal with the goal of adopting a workable position limits 
regime that protects legitimate hedging activities and prevents 
excessive speculation in subject commodities.

    Question 23. Should Congress be more explicit in defining what 
exactly constitutes a ``bona fide hedge''?
    Answer. Definitions of ``hedging'' and ``bona fide hedging'' must 
be tailored to their particular regulatory purposes. A single statutory 
definition of ``hedging'' or ``bona fide'' hedging could be over-
inclusive for certain purposes and under-inclusive for others. In the 
context of the end-user exception, for example, the CFTC gave effect to 
Congressional intent by merely requiring that swaps be ``economically 
appropriate'' to the reduction of commercial risk, which is broadly 
defined as including the risk of the potential change in value of 
assets, liabilities, or services, including change resulting from a 
change in interest rates, currency or FX movements, and including 
anticipated assets and liabilities. ``Hedging or mitigating commercial 
risk'' therefore broadly includes ``bona fide hedging'' and any 
position that counts as a hedge for accounting purposes, for example.
    However, in the position limits context, this conceptualization and 
broad definition of ``hedging'' could actually undermine Congressional 
objectives to curb excessive speculation in energy markets. The CFTC 
has previously stated its view that Congress intended the use of the 
term ``bona fide hedging'' in this context to set forth a relatively 
narrow exclusion from ``speculative'' positions that generally 
contemplates a substitute for transactions or positions (interpreted as 
physical positions) taken or intended to be taken in the future.
Question Submitted By Hon. Doug LaMalfa, a Representative in Congress 
        from California
    Question. Some have suggested that the way to ``fix'' the special 
entity sub-threshold is for the CFTC to lower the de minimis 
registration threshold for the entire energy swaps marketplace to $25 
million. What damage would be done to end-users, consumers, and the 
marketplace by lowering the registration threshold for all energy swaps 
to $25 million?
    Answer. As discussed in response to Question 15, above, the CFTC 
sought to address Congressional concerns that pension plans, 
governmental investors, and charitable endowments were provided 
insufficient disclosures with respect to certain swaps and security-
based swaps entered into with more sophisticated market participants. 
See Senate Congressional Record on July 15, 2010 at S5903-04. The Dodd-
Frank Act, in fact, provided certain ``special entities,'' defined in 
the Act, with additional protections from market practices that were 
viewed by some in Congress as increasing the risks faced by these 
entities in using swaps to manage financial risks. Accordingly, under 
the CFTC's final rules, persons dealing swaps to ``special entities'' 
must register as swap dealers if their dealing activities individually 
exceed a sub-threshold of $25 million of aggregate gross notional value 
in a particular 1 year period.
    These regulatory interests, and the Congressional intent behind 
creation of the ``special entities'' category, may not be applicable to 
other types of entities operating in or relying upon the swaps market. 
However, in determining the appropriate de minimis threshold for all 
dealing entities, and in setting forth guidance on the types of trading 
activities that constitute dealing activities in the first instance, 
the CFTC balanced the needs of commercial end-users and energy firms 
against the regulatory objectives achieved through registration and 
regulation of dealing entities.

                                  

```