S. Hrg. 112–313 

EXCESSIVE SPECULATION AND COMPLIANCE WITH 

THE DODD-FRANK ACT 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

NOVEMBER 3, 2011 

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

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EXCESSIVE SPECULATION AND COMPLIANCE WITH THE DODD-FRANK ACT 

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72–487 PDF 2012

S. Hrg. 112–313 

EXCESSIVE SPECULATION AND COMPLIANCE WITH 

THE DODD-FRANK ACT 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

NOVEMBER 3, 2011 

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

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 

(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

MARK BEGICH, Alaska 

SUSAN M. COLLINS, Maine 

TOM COBURN, Oklahoma 

SCOTT P. BROWN, Massachusetts 

JOHN MCCAIN, Arizona 

RON JOHNSON, Wisconsin 

JOHN ENSIGN, Nevada 

ROB PORTMAN, Ohio 

RAND PAUL, Kentucky 

MICHAEL L. ALEXANDER, Staff Director 

NICHOLAS A. ROSSI, Minority Staff Director 

TRINA DRIESSNACK TYRER, Chief Clerk 

PATRICIA R. HOGAN, Publications Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

CARL LEVIN, Michigan, Chairman 

THOMAS R. CARPER, Delaware 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

MARK BEGICH, Alaska 

TOM COBURN, Oklahoma 

SUSAN M. COLLINS, Maine 

SCOTT P. BROWN, Massachusetts 

JOHN MCCAIN, Arizona 

RAND PAUL, Kentucky 

ELISE J. BEAN, Staff Director and Chief Counsel 

DAVID H. KATZ, Counsel 

CHRISTOPHER BARKLEY, Staff Director to the Minority 

ANTHONY G. COTTO, Counsel to the Minority 

MARY D. ROBERTSON, Chief Clerk 

(III) 

C O N T E N T S 

Opening statements: Page 

Senator Levin .................................................................................................... 1 

Senator Coburn ................................................................................................. 6 

Prepared statements: 

Senator Levin .................................................................................................... 51 

Senator Coburn ................................................................................................. 57 

WITNESSES 

THURSDAY, NOVEMBER 3, 2011 

Paul N. Cicio, President, Industrial Energy Consumers of America ................... 8 

Tyson T. Slocum, Director, Energy Program, Public Citizen ............................... 10 

Wallace C. Turbeville, Derivatives Specialist, Better Markets, Inc. ................... 12 

Hon. Gary Gensler, Chairman, Commodity Futures Trading Commission ........ 29 

ALPHABETICAL LIST OF WITNESSES

Cicio, Paul N.: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 59 

Gensler, Hon. Gary: 

Testimony .......................................................................................................... 29 

Prepared statement .......................................................................................... 98 

Slocum, Tyson T.: 

Testimony .......................................................................................................... 10 

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

Turbeville, Wallace C.: 

Testimony .......................................................................................................... 12 

Prepared statement with attachments ........................................................... 77 

EXHIBIT LIST 

1. a. Commodity Index Participation in U.S. Commodity Futures and 

Swaps, 2007–2011, chart prepared by the Permanent Subcommittee 

on Investigations .......................................................................................... 110 

b. Increase in Commodity Related Exchange Traded Products, 2004–2011, 

chart prepared by the Permanent Subcommittee on Investigations ....... 111 

c. Increase in Commodity Related Mutual Funds, 2008–2011, chart prepared by the Permanent Subcommittee on Investigations ....................... 112 

d. WTI Price and World Supply and Consumption, chart prepared by 

the U. S. Energy Information Administration .......................................... 113 

2. a. CFTC Summary of Final Regulations on Position Limits for Futures 

and Swaps .................................................................................................... 114 

b. CFTC Q&A—Position Limits for Futures and Swaps .............................. 116 

3. Position Limits and the Hedge Exemption, A Brief Legislative History, 

testimony of Dan M. Berkovitz, CFTC General Counsel, July 28, 2009 ...... 119 

4. Executive Summary and Findings and Recommendations from the June 

25, 2007 Staff Report of the Senate Permanent Subcommittee on Investigations entitled, ‘‘Excessive Speculation in the Natural Gas Market.’’ ..... 146 

Page

IV 

5. Executive Summary and Findings & Recommendations from the June 

24, 2009 Staff Report of the Senate Permanent Subcommittee on Investigations entitled, ‘‘Excessive Speculation in the Wheat Market.’’ ............... 156 

6. Commodity Related Exchange Traded Products: 

a. List of Selected Commodity Related Exchanged Traded Products .......... 176 

b. Information related to: 

—ETFS Physical Palladium Shares—PALL ............................................. 179 

—ProShares Ultra DJ-UBS Commodity ................................................... 181 

—United States Oil Fund LP ..................................................................... 183 

7. Commodity Related Mutual Funds: 

a. List of Selected Commodity Related Mutual Funds ................................. 185 

b. Information related to: 

—Direxion Commodity Trends Strategy Fund ......................................... 186 

—Highbridge Dynamic Commodities Strategy Fund ............................... 190 

—MutualHedge Frontier Legends Fund ................................................... 192 

—Oppenheimer Commodity Strategy Total Return Fund ....................... 206 

—PIMCO CommodityRealReturn Strategy Fund .................................... 212 

—PIMCO CommoditiesPLUS Strategy Fund ........................................... 212 

—Rydex/SGI Long Short Commodities Strategy Fund ............................ 217 

—Rydex/SGI Managed Futures Strategy Fund ........................................ 219 

—Van Eck CM Commodity Index Fund .................................................... 221 

c. National Futures Association correspondence to CFTC, dated August 

18, 2010, to amend CFTC Regulation 4.5 which provides an exclusion 

from the definition of the term ‘‘commodity pool operator.’’ ..................... 223 

d. 72 IRS Private Letters Authorizing Commodity Investments by Mutual 

Funds, 2006–2011, chart prepared by the Permanent Subcommittee 

on Investigations ......................................................................................... 235 

8. Analysis: High-frequency trade fires up commodities, Reuters, June 17, 

2011 .................................................................................................................... 241 

9. Letter from 450 economists to the G20 Finance Ministers regarding impact of speculation on food prices, October 11, 2011 ..................................... 244 

10. Statement for the Record of Gerry Ramm, Inland Oil Company, Ephrata, 

Washington, on behalf of the Petroleum Marketers Association of America 

and the New England Fuel Institute (NEFI) ................................................. 266 

11. Letter from the Consumer Federation of America forwarding October 

2011 study, Excessive Speculation and Oil Price Shock Recessions, A 

Case of Wall Street ‘‘De ́ja` Vu All Over Again.’’ ............................................... 273 

12. Response for the record provided by Gary Gensler, Chairman, Commodity 

Futures Trading Commission, to question posed at the hearing by Senator Levin regarding mutual fund participation in commodity markets ..... 308 

13. Responses to supplemental questions for the record submitted by Senator 

Coburn to Gary Gensler, Chairman, Commodity Futures Trading Commission ............................................................................................................... 309 

14. Responses to supplemental questions for the record submitted by Senator 

Tom Coburn to Paul N. Cicio, President, Industrial Energy Consumers 

of America ......................................................................................................... 313 

15. Responses to supplemental questions for the record submitted by Senator 

Tom Coburn to Wallace C. Turbeville, Derivatives Specialist, Better Markets, Inc. ............................................................................................................ 317 

(1) 

EXCESSIVE SPECULATION AND COMPLIANCE 

WITH THE DODD-FRANK ACT 

THURSDAY, NOVEMBER 3, 2011 

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

OF THE COMMITTEE ON HOMELAND SECURITY AND

GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:07 a.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. 

Present: Senators Levin and Coburn. 

Staff Present: Elise J. Bean, Staff Director and Chief Counsel; 

Mary D. Robertson, Chief Clerk; David H. Katz, Counsel; Michael 

Wolf, Law Clerk; Lauren Roberts, Law Clerk; Christopher Barkley, 

Staff Director to the Minority; Anthony G. Cotto, Counsel to the 

Minority; William Wright, Kristin Boutchyard, Brian Murphy, Steven Hutchinson, and William Wright (Senator Brown). 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Good morning, everybody. Over the past 9 years, 

this Subcommittee has held a series of hearings on the problem of 

excessive speculation in the commodity markets. For years now, 

commodity markets have taken the American people on an expensive and damaging roller coaster ride with rapidly changing prices 

for crude oil, gasoline, natural gas, heating oil, airline fuel, wheat, 

copper, and many other commodities. Commodity prices have whipsawed American families, farms, and businesses, run roughshod 

over supply and demand factors, and made our economic recovery 

that much harder and more chaotic. 

Unstable commodity prices are a key reason why Congress enacted, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, new statutory requirements to put a lid on 

excessive speculation and price manipulation. Congress enacted the 

new law not only to protect consumers and businesses from unreasonable prices—prices disconnected from the usual supply and demand discipline of the marketplace—but also to protect the commodity markets themselves from losing investor confidence and 

looking more like a casino or rigged game than a marketplace 

where supply and demand determine prices. 

Commodities markets are not stock markets. Stock markets are 

intended to attract investors to provide new capital for U.S. businesses to invest and to grow. 

2 

1See Exhibit No. 1a which appears in the Appendix on page 110. 

Commodity markets are supposed to serve a different function. 

Their purpose is not to attract investors, but to enable producers 

and users of physical commodities to arrive at market-driven prices 

for those goods and to hedge their price risks over time. Prices are 

intended to reflect supply and demand for the actual commodities 

being traded. Speculators, who by definition do not plan to use the 

commodities that they trade but profit from the changing prices, 

are needed only insofar as they supply the liquidity needed for producers and users to hedge their risks. 

Another big difference between stock and commodity markets involves trading limits. Stock markets do not have them, but U.S. 

commodity markets have been using trading limits to varying degrees for over 70 years to combat excessive speculation and price 

manipulation. 

Federal law has long authorized the Commodity Futures Trading 

Commission (CFTC), and U.S. commodity exchanges to impose socalled position limits to prevent individual traders from holding 

more than a specified number of futures contracts at a specified 

time, such as during the close of the so-called spot month when a 

futures contract expires, and buyers and sellers have to settle up 

financially or through the physical delivery of commodities. Position limits help ensure commodity traders cannot exercise undue 

market power, such as by cornering the market. 

The primary problem afflicting U.S. commodity markets today is 

an explosion of speculators who, instead of facilitating, have now 

come to dominate commodity trading, overriding normal supply 

and demand factors, distorting prices, and increasing price volatility. 

That explosion began in large part less than 10 years ago, with 

the rise of commodity index funds that enable participants to bet 

on the rise or fall in commodity prices. Commodity index funds are 

operated by swap dealers that enter into swap contracts with clients seeking to make speculative bets on commodity prices. Those 

clients typically bet that prices will go up and take the long side 

of the swap. The swap dealers usually take the short side of the 

swap and, to offset the financial risk, typically purchase long futures contracts. Within a few years, as the funds grew, commodity 

index swap dealers became regular purchasers of massive numbers 

of futures contracts for crude oil, natural gas, wheat, and other 

commodities. According to CFTC data, as shown in this chart 

which we are putting up, Chart 1a in our book,1 commodity index 

investors and swap dealers have spent about $300 billion in 2011 

alone, mostly on long futures and swap contracts. 

Sometimes referred to as ‘‘massive passives,’’ commodity index 

funds have created a massive, ongoing demand for futures contracts unconnected to normal supply and demand for the underlying commodities. Their steady purchases have created an artificial demand for futures contracts. In addition, the more index 

funds and their swap dealers push to buy long future contracts and 

outnumber the speculators seeking to buy shorts, the more their 

buying pressure, by the very nature of supply and demand, will 

drive up the price of the long contracts. The resulting higher fuVerDate Nov 24 2008 10:56 Mar 28, 2012 Jkt 072487 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 P:\DOCS\72487.TXT SAFFAIRS PsN: PAT
3 

1See Exhibit No. 6 which appears in the Appendix on page 176. 

2See Exhibit No. 1b which appears in the Appendix on page 111. 

3See Exhibit No. 7a which appears in the Appendix on page 185. 

4See Exhibit No. 1c which appears in the Appendix on page 112. 

5See Exhibit No. 7b which appears in the Appendix on page 186. 

6See Exhibit No. 7d which appears in the Appendix on page 235. 

tures prices then translate all too often into higher prices for the 

underlying commodities, in part because so many of commodity 

contracts for the underlying commodities use futures prices as the 

commodity’s selling prices. In those cases, higher futures prices 

translate directly into higher costs for consumers of the commodities. That is why so many American consumers and businesses 

continue to condemn the speculative money that commodity index 

funds bring to the commodity markets. 

Commodity-related exchange traded products (ETPs), have added 

further fuel to the speculative fire. Exhibit 6 lists some of the many 

ETPs which offer securities that track the value of a designated 

commodity or basket of commodities, but trade like stocks on an exchange.1 ETPs are marketed to investors looking to make money 

off commodity price changes without actually buying any futures. 

The financial firms running the ETPs often support the value of 

the fund by purchasing commodity futures or using futures to offset risks. The result, as shown in this chart, which is Exhibit 1b,2

is that in 2011 alone, these ETPs have poured over $120 billion of 

speculative money into U.S. commodity markets. 

Now, that is not all. A third wave of commodity speculation has come from the $11 trillion mutual fund industry which, since 2006, 

has turned its attention to U.S. commodities in a big way. Hearing 

Exhibit 7a 3 identifies more than 40 commodity-related mutual 

funds that, by 2011, as shown in this chart, which is Exhibit 1c,4

have accumulated assets of over $50 billion. That chart shows the 

growth of the mutual fund purchases of these commodity futures. 

The sales materials from some of those mutual funds, which are included in Exhibit 7b,5 show that they are marketing themselves to 

average investors as commodity funds and delving into every kind 

of commodity investment out there, from swaps to futures, putting 

additional speculative pressures on commodity prices. 

Now, by law, mutual funds are supposed to derive 90 percent of 

their income from investments in securities and not more than 10 

percent from alternatives like commodities. But the 40 commodityrelated mutual funds that we have identified have found ways 

around that law by, among other steps, setting up offshore shell 

companies that do nothing but trade commodities. 

Those offshore shell companies are typically organized as Cayman Island subsidiaries with no offices or employees of their own 

and with their commodity portfolios run from the mutual fund’s 

U.S. offices. This blatant end-run around the 90/10 restriction has 

nevertheless been blessed by the IRS which has issued dozens of 

private letter rulings, which are listed in Exhibit 7d,6 which deem 

the offshore arrangements to be investments in securities rather 

than commodities, since the parent mutual funds hold all of the 

stock in those offshore subsidiaries. The IRS has recently put a 

moratorium on these private letter rulings while it studies the 

issues. In addition, the offshore shell corporations are currently exempt from CFTC registration requirements, despite operating as 

4 

1See Exhibit No. 7c which appears in the Appendix on page 223. 

2See Exhibit No. 1d which appears in the Appendix on page 113. 

commodity pools, a situation the CFTC is reviewing as a result of 

a petition filed by the National Futures Association, as indicated 

in Exhibit 7c.1

Now, I am glad the IRS and the CFTC are studying these offshore arrangements as well as the broader issue of mutual fund investment in commodities. If the mutual fund industry were to step 

up its commodities investments to even just 10 percent of its overall assets, it would unleash another tidal wave of speculative 

money into the commodities markets. 

There is more. Over the last few years, high-frequency traders 

have also invaded the commodities markets, seeking to profit from 

the increasing price volatility. Those high-frequency traders have 

revved up commodity trading with day-trading strategies that further contribute to constantly changing prices. 

Put together the swap dealers, hedge funds, ETPs, mutual funds, 

and high-frequency traders, and the result is a tsunami of speculative money pouring into commodity markets at unprecedented levels. Today, speculators make up the bulk of the outstanding contracts in most commodity markets, providing typically more than 

70 percent of the market. Producers and users of commodities now 

hold as little as 20 or 30 percent of the outstanding contracts in 

some markets. So it is no surprise that commodity prices have become increasingly volatile, with exaggerated swings that have little 

to do with hedging, little to do with supply and demand for the underlying commodities, and everything to do with folks betting and 

speculating on price changes. 

Take the U.S. crude oil market as an example. In 2007, a barrel 

of crude oil started out the year costing $50, but by the end of the 

year had nearly doubled in price. In 2008, oil prices shot up in July 

to over $145 per barrel and then, by the end of the year, crashed 

to $35 a barrel. In the beginning of 2011, oil prices took off again, 

climbing to over $110 per barrel in May. Then they fell to a low 

of $77 per barrel in early October, a drop of more than 30 percent 

in 4 months. Three weeks later, they are back up to $92 per barrel, 

a 15-percent increase. This price volatility has taken place at the 

same time that world inventories were plentiful and basically 

matched world demand, as shown in this chart prepared for the 

Subcommittee by the Energy Information Agency, which is Exhibit 

1d.2 In other words, the price changes in West Texas Intermediate, 

the benchmark crude oil contract for the United States, cannot be 

explained simply as a function of supply and demand for oil. 

During the same period crude oil prices went haywire, speculators have become the dominant players in the crude oil market. 

CFTC data indicates that speculators—traders who do not produce 

oil or use oil in their business—now hold over 80 percent of the 

outstanding contracts in the oil futures market. While speculation 

is not necessarily the primary factor setting oil prices, the facts indicate that speculation is a major contributor. 

It is not just the numbers telling this story. Major players in the 

oil industry also point to the role of speculation in crude oil prices. 

For example, in May 2011, ExxonMobil CEO Rex Tillerson agreed 

5 

1See Exhibit No. 9 which appears in the Appendix on page 244. 

that speculation was contributing to oil prices, estimating that the 

price of a barrel would be $60 to $70, instead of $110, if governed 

exclusively by supply and demand. 

The same complaint is heard with respect to other commodities. 

Recently, 450 economists from around the world stated in a joint 

letter to the G–20 leaders, which we include in the hearing record 

as Exhibit 9:2 ‘‘Excessive financial speculation is contributing to increasing volatility and record high food prices exacerbating global 

hunger and poverty.’’ And the CEO of Starbucks, Howard Schultz, 

who tracks coffee prices, had the following to say: 

‘‘[W]hy are coffee prices going up? [A]nd in addition to that, why 

is every commodity price going up at the same time? I think what’s 

going on is financial engineering; that financial speculators have 

come into the commodity markets and drove these prices up to historic levels and as a result of that the consumer is suffering.’’ 

Excessive speculation is not new. In fact, much of the law related 

to commodity markets can be understood as an effort to prevent excessive speculation and market manipulation from distorting 

prices. 

Over the years, one of the most powerful weapons developed to 

combat the twin threats of excessive speculation and price manipulation has been the imposition of position limits on traders. But 

over the years, Federal position limits have lost much of their 

punch due to a growing raft of loopholes, gaps, and exemptions. For 

example, prior to the Dodd-Frank Act, position limits didn’t apply 

to some key futures contracts; they often applied only in the spot 

month instead of other times; and multiple market participants 

were given exemptions. In addition, until recently, the entire commodity swaps market had no position limits at all. 

The combination of increased speculation and weakened position 

limits has clobbered American consumers and businesses with unpredictable and inflated commodity prices. That is why, when Congress enacted the Dodd-Frank Act last year, Section 737 directed 

the CFTC to establish position limits on all types of commodity-related instruments, including futures, options, and swaps. The 

Dodd-Frank Act also directed the CFTC to issue a rule establishing 

the new position limits by January 2011, one of the earliest implementation dates in the entire law. 

The CFTC missed that deadline but 2 weeks ago, after reviewing 

over 15,000 public comments, at long last issued a final rule. The 

good news is that the agency complied with the law’s requirements 

to establish position limits to ‘‘diminish, eliminate, or prevent’’ excessive speculation, and rejected unfounded claims that excessive 

speculation had to be proven for each commodity before a limit 

could be established to prevent damage to consumers and the economy. That has never been the law, and it has no basis in the DoddFrank Act which is aimed at preventing problems, not waiting for 

them to occur and cleaning up afterwards. 

Also good news is that the CFTC rule applies position limits to 

28 key agricultural, metal, and energy commodities; applies those 

limits to futures, options, and swaps; and covers all types of speculators. 

6 

The bad news, from my perspective, is that while the limits appear designed to prevent any one trader from amassing a huge position that could lead to price manipulation in a particular month, 

the limits do not appear to be designed to combat the type of excessive speculation caused by large numbers of speculative investment 

funds. In addition, exempting multi-commodity index swaps from 

any position limits, failing to apply effective position limits to commodity index swap dealers, and delaying implementation of the 

swap position limits for another year are troubling. 

Roller coaster commodity prices and the growing flood of speculative dollars continue, while it will be another year before the full 

range of position limits in the new CFTC rule take effect. In the 

meantime, we are talking about ongoing gyrations in gasoline 

prices, heating and electricity costs, and food prices that affect 

every American family. We are talking about unstable prices for 

copper, aluminum, and other materials essential to industry. At 

stake are energy, metal, and food costs key to inflation, business 

costs, and family budgets nationwide. 

Until effective position limits are actually in place, the American 

economy will remain vulnerable to chaotic price swings that benefit 

speculators at the expense of American consumers and businesses. 

Today’s hearing is intended to shine a spotlight on the ongoing 

role of speculation in U.S. commodity markets and how the new position limits can combat excessive speculation. We will hear today 

from a panel of experts representing business, consumers, and academia, as well as from CFTC Chairman Gary Gensler. 

Now let me invite our Ranking Member, Dr. Coburn, to share his 

views with us. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. Thank you, Mr. Chairman. 

I want to thank Senator Levin for holding this hearing today. He 

has been a leader for years in Congress on efforts to better understand and monitor commodity markets, which should make us 

more capable of holding market regulators accountable in their efforts to ensure American exchanges remain the most dynamic, 

transparent, and desirable places to do business. 

Commodity markets and pricing have profound effects on the 

people in my home State of Oklahoma, who are invested in virtually all of the commodities covered by the rules we will discuss 

today. Whether it is oil, natural gas, wheat, or any of the other 28 

commodities, market participants all the way from the producer to 

the end user will be affected by recent and upcoming regulatory 

changes. 

It is our obligation in Congress to make sure regulators act in 

the public interest, based on facts and data, rather than reflexively 

placing restrictions on unpopular market participants. While today’s hearing will focus on the concept of ‘‘excessive’’ speculation, 

it is imperative that we remember one fundamental truth: That futures markets cannot function without speculators who make markets, provide liquidity for hedgers, aid in price discovery, and take 

risks. 

Two weeks ago, the CFTC issued its long-awaited position limits, 

imposing limits on the number of futures contracts individuals or 

7 

institutions can hold. The most recent version of the rule was 

rushed through the Commission and applied across the board to 28 

separate commodities. Much of this seems to have been done in response to intense pressure, and the unfortunate result is likely to 

be challenged in court. 

In addressing commodities, the Dodd-Frank Act said the CFTC 

‘‘shall by rule, regulation, or order establish limits on the amount 

of positions, as appropriate.’’ In at least two Commissioners’ views, 

those tests have not been met. Yet now every participant in the 

commodities market must comply with a final rule that is over 300 

pages long. 

Commissioner Scott O’Malia indicated in his dissenting opinion 

that the Commission voted ‘‘without the benefit of performing an 

objective factual analysis based on the necessary data to determine 

whether these particular limits and limit formulas will effectively 

prevent or deter excessive speculation.’’ There is no question we 

want to limit excessive speculation, but it needs to be based on 

data and facts, not feelings. 

Commissioner Jill Sommers also worried that the CFTC ‘‘is setting itself up for an enormous failure’’ by issuing a position limits 

rule that ‘‘ironically, can result in increased costs to consumers.’’ 

Position limits can be a very effective regulatory tool, but must 

be used in the right way. For example, we have limits on cotton— 

they are in place—yet the cotton No. 2 futures contract has hit 16 

record-setting prices since December 1, 2010. Why is that? Because 

of crop failures around the rest of the world, and because of a 

drought in the United States. 

Position limits must be set at the proper level for each individual 

commodity. Unfortunately, the CFTC chose to use the blunt weapon of across-the-board limits for nearly every commodity. 

While today’s hearing will be a good opportunity to discuss the 

effects of that excessive speculation—and in that I agree with my 

Chairman—we need to be careful not to accuse investors of wrongdoing where none has occurred. Commodity index funds, exchange 

traded funds, and mutual funds are not diabolical schemes. They 

are simply financial instruments that some investors use as tools 

to hedge or gain exposure to commodity markets, thus protecting 

against inflation and other risks in their portfolios. 

Last, I would like to address my strong concerns with the DoddFrank Act in general, which itself was rushed through Congress 

last year. The law that was supposed to help fix our financial system has instead wreaked regulatory havoc, increasing uncertainty 

and compliance costs, doing nothing to address unemployment, and 

it did nothing to effect the initiation of the problems that we are 

presently faced with, basically Fannie Mae and Freddie Mac. The 

act required over 300 new regulations and studies and has overwhelmed our regulatory agencies while causing widespread confusion in the marketplace. 

As we move forward, we in Congress must improve our understanding of the markets being regulated, as well as the internal 

and external challenges facing our regulators. Continuous oversight 

and transparency through hearings like this are essential to ensure 

our regulators do not overreach their mandates and that U.S. markets remain the envy of the world. 

8 

1The prepared statement of Mr. Cicio appears in the Appendix on page 59. 

One of my greatest concerns is every trader in the world is one 

click away from trading somewhere else, and there are tremendous 

markets in this country that are going to be put at risk through 

this new rule. 

The last thing we want to do is suffocate those markets and 

chase interested participants to other exchanges and trading 

venues abroad, many of whom would like nothing more than to 

take away America’s business. 

Despite my concerns about the Dodd-Frank Act, it must be implemented in a thoughtful, responsible manner by our regulators. 

I look forward to a healthy discussion during this hearing, Mr. 

Chairman. I thank our witnesses for attending, and I look forward 

to hearing your views and recommendations today. Thank you. 

Senator LEVIN. Thank you very much, Dr. Coburn. 

We are now going to call our first panel of witnesses for this 

morning’s hearing: Paul Cicio is President of the Industrial Energy 

Consumers of America. Tyson Slocum is Public Citizen’s Emergency Program Director. Wallace Turbeville is a Derivatives Specialist with the nonprofit Better Markets, Incorporated. 

Now, the Subcommittee invited and we had hoped to have with 

us Dr. Craig Pirrong, who is professor of finance at the Bauer College of Business at the University of Houston. He was able to make 

our originally scheduled hearing, but was unable to make this 

hearing, which we regret that he could not be with us today to give 

us his views. But what we will do is invite him to provide his views 

in a written statement. 

We do appreciate each of the witnesses who were able to join us 

this morning. We look forward to your testimony. Pursuant to Rule 

VI, all witnesses who testify before the Subcommittee are required 

to be sworn. At this time I would ask our first panel to please 

stand and raise your right hand. Do you swear that the testimony 

you will give before this Subcommittee is the truth, the whole 

truth, and nothing but the truth, so help you, God? 

Mr. CICIO. I do. 

Mr. SLOCUM. I do. 

Mr. TURBEVILLE. I do. 

Senator LEVIN. Now, we are going to use the timing system 

today. About 1 minute before the red light comes on, you will see 

the lights change from green to yellow, which will give you an opportunity to conclude your remarks. Your written testimony will be 

printed in the record in its entirety. We would ask that you limit 

your oral testimony to no more than 7 minutes. 

Mr. Cicio, we are going to have you go first, followed by Mr. Slocum, followed by Mr. Turbeville. After we have heard all the testimony, we will then turn to questions. 

So, Mr. Cicio, please proceed. 

TESTIMONY OF PAUL N. CICIO,1 PRESIDENT, INDUSTRIAL 

ENERGY CONSUMERS OF AMERICA 

Mr. CICIO. Chairman Levin, Ranking Member Coburn, and Subcommittee Members, thank you for the opportunity to testify before 

9 

you today. My name is Paul Cicio, and I am the President of the 

Industrial Energy Consumers of America (IECA). 

IECA has been a long-time supporter of setting responsible speculative position limits. Since all of our companies use substantial 

quantities of natural gas, we will use natural gas illustrations to 

address the Subcommittee questions. 

Speculative trading volumes have been explosive in growth, even 

though natural gas consumption in the country has only increased 

moderately. For example, natural gas open interest increased by 

590 percent since 1995, even though U.S. consumption has increased only 6.5 percent. Almost all of the open interest is from 

noncommercial trades. 

Large speculative volumes can be a problem because they can 

move market price and they do increase volatility. Charts 1 and 2 

of our written testimony uses CFTC data to show that, in late 

2008, four trades controlled about 50 percent of the open interest 

in natural gas. Eight traders controlled 60 percent of the open interest. That means that only a handful of trading companies can 

have an incredibly important impact on the price of natural gas. 

High volatility will increase the cost of hedging to manufacturers 

because there is a direct relationship between volatility and, for example, the option price premium. Higher volatility also increases 

the bid-ask spread in the forward market. 

To illustrate the point, using the closing Henry Hub Index price of natural gas, just last Friday, at $4.04 per million Btu, a call option for 100,000 MM Btus with a 6-month expiration at the money 

would cost a manufacturer approximately $36,500. If we increased 

the implied volatility of only 5 percent, the premium cost goes up 

15 percent. If we increased the implied volatility 10 percent, the 

premium cost rises 31 percent. And if we increase the implied volatility 20 percent, it increases the option premium a whopping 61 

percent. 

IECA supports the imposition of speculative position limits, but 

setting the limit at 25 percent of the estimates deliverable supply 

is too large and will do little to reduce excessive speculation. 

Let us put in perspective what setting speculative position limits 

at 25 percent means by looking again at natural gas. If only 100 

traders trade at the spec limit, they would control 25 times the 

U.S. monthly demand. There are approximately 250 to 350 traders 

that report to the large trader report at the CFTC from time to 

time. If only 100 trade, they would control 25 times the entire consumption. 

Regarding commodity index funds and ETFs, we believe that 

passive speculators should be banned from the futures market. At 

minimum, they should be subjected to individual speculative position limits. 

The next best alternative is to set spec position limits on all commodity-related ETFs and index funds. Swap dealers and ETF managers should be subject to speculative position limits except for 

hedges associated with transactions with producers and consumers 

of the underlying commodity. 

There are several reasons that passive index funds should be 

banned. First, passive index funds put upward pressure on price. 

CFTC index investment data for natural gas between December 

10 

1The prepared statement of Mr. Slocum appears in the Appendix on page 68. 

2007 and September 2011 show that index funds held a long position 86.2 percent of the time and only held short positions 17.4 percent of the time. And index funds continue explosive growth. CFTC 

data indicates that index open interest contracts increased by 294 

percent just since December 2007. 

Second, passive index speculators also reduce liquidity by buying 

and then holding larger and larger quantities of futures contracts. 

This is inconsistent with the functioning of the futures market that 

serves consumable commodities that have a prompt month that expires. 

And last, they also buy without regard to price, supply, or demand, which, of course, impacts price discovery. Thank you. 

Senator LEVIN. Thank you, Mr. Cicio. Mr. Slocum. 

TESTIMONY OF TYSON T. SLOCUM,1 DIRECTOR, ENERGY 

PROGRAM, PUBLIC CITIZEN 

Mr. SLOCUM. Chairman Levin and Ranking Member Coburn, 

thank you very much for the opportunity to allow me to testify 

today. I am Tyson Slocum, and I direct Public Citizen’s Energy Program. We are one of America’s largest consumer advocacy groups, 

and we are proud to be celebrating our 40th anniversary this year. 

We work on a range of issues, and I head up our energy work. 

I am tasked at Public Citizen with promoting those policies that 

are going to produce affordable, reliable, and clean energy, and it 

is clear from my personal work on this issue over a decade that 

current energy markets are driven not by the supply-demand fundamentals but by speculation. 

There has been a lot of great work, Mr. Chairman, by this Committee over the years, as you mentioned in your opening statement, 

that has helped make that case. But it is not just this Committee, 

it is not just industrial consumers, and it is not just household consumers, but members of industry as well. You mentioned in your 

opening statement that the chairman and CEO of ExxonMobil 

noted the role that speculation plays in the current price of a barrel of oil, and even the investment bank Goldman Sachs earlier 

this year revealed that they believe the speculation price is around 

$27 a barrel for 2011. And Dr. Mark Cooper, a colleague at the 

Consumer Federation of America, estimated that around $30-a-barrel-oil of a speculation tax equates to about $600 in increased gasoline costs for the average family and about $200 billion across the 

economy. 

So when I am taking a look at these markets, it is clear that 

around a $30 speculation tax, which translates to about $600 costs 

to the average family over the course of a year is indeed excessive 

levels of speculation, and it is the duty of Congress and regulators 

to help protect household consumers and businesses from these excessive costs. 

Does the Dodd-Frank Act and the way that it has been implemented by the CFTC effectively address that? And Public Citizen’s 

analysis is that the proposed position limit rulemaking does not go 

far enough. As my colleague, Mr. Cicio, pointed out, the speculation 

limit of 25 percent and then 10 percent and then 2.5 percent, deVerDate Nov 24 2008 10:56 Mar 28, 2012 Jkt 072487 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 P:\DOCS\72487.TXT SAFFAIRS PsN: PAT
11 

pending on the contracts, allows for too great of holdings. There 

was some recently leaked data by a U.S. Senator to the media that 

detailed the positions of individual traders, and this clearly showed 

that the largest five operators in the WTI market—Goldman Sachs, 

Vital, Morgan Stanley, Deutsche Bank, and Barclays—had positions that were between 5.3 and 8.7 percent. And that is why Public Citizen believes that speculation limit needs to be more in line 

with proposed legislation that has sponsorship in both the Senate 

and the House, S. 1598 and H.R. 3006, that would establish a statutory position limit of 5 percent that would get at the concentrations that the leaked data clearly shows. 

It is not just banks that are involved in these markets and making profits. Again, a leaked document that Chevron inadvertently 

leaked to the public this summer showed that the company earned 

$360 million over the first 6 months of this year not from doing 

what it is supposed to do, which is providing the American public 

with oil that it works hard and spends a lot of money to get out 

of the ground in the United States and elsewhere and refine into 

useful products, but in speculating, that Chevron was speculating 

far and above their hedging needs and using the commodity markets to make money the same way that investment banks do. And 

when the Wall Street Journal reported this, they noted that Chevron, like other major proprietary traders that also feature control 

or ownership over energy infrastructure assets, utilized those energy infrastructure assets to have a sneak peek at the market and 

give them a massive competitive advantage. 

Mr. Chairman, like you said, they do not like to gamble. They 

want to have more certainty, and having a large control over the 

market in terms of their positions and having access to energy infrastructure assets provides them that advantage. We have seen 

Goldman Sachs through its control over Kinder Morgan now is 

going to have control over about 67,000 miles of petroleum product 

and natural gas pipelines throughout the United States. They have 

ownership interests now in two refineries in the United States. 

Morgan Stanley spends hundreds of millions of dollars a year on 

acquiring control over storage capacity. None of this is adequately 

regulated, and another issue that Public Citizen promotes is having 

firm rules limiting the communications between energy infrastructure affiliates and trading affiliates. 

In addition, Public Citizen shares the concerns of this Subcommittee and the research that was presented to us in your opening statement that the rise of index funds is highly disruptive, and 

like my colleague, Mr. Cicio, I believe that index funds do not have 

a legitimate role in these markets. And I applaud the efforts of the 

Subcommittee to examine problems of mutual funds getting involved in these markets as well. 

Thank you very much for your time, and I look forward to your 

questions. 

Senator LEVIN. Thank you, Mr. Slocum. Mr. Turbeville. 

12 

1The prepared statement of Mr. Turbeville with attachments appears in the Appendix on page 

77. 

TESTIMONY OF WALLACE C. TURBEVILLE,1 DERIVATIVES 

SPECIALIST, BETTER MARKETS, INC. 

Mr. TURBEVILLE. Good morning, Chairman Levin and Ranking 

Member Coburn. Thank you for the opportunity to speak today. My 

name is Wallace Turbeville, and I am a derivatives specialist at 

Better Markets, Inc. Better Markets is a nonprofit, nonpartisan organization whose mission is to promote the public interest in the 

domestic and global capital and commodity markets. 

Personally, I have worked in the securities industry for 31 years 

as a practicing attorney first, as an investment banker at a Wall 

Street firm, and managing companies as a principal. 

In the 10 years since deregulation, commodities markets have 

changed dramatically, and the public has been plagued by boomand-bust price cycles. Prior to that time, physical hedgers consistently represented about 70 percent of the futures markets. Now the 

ratio of participants has reversed. Speculators now account for 

about 70 percent or more of the open interest in many markets, 

while physical hedgers have fallen to only about 30 percent. This 

increased speculation is in large part driven by commodity index 

funds, which are predominantly sponsored by large dealer banks. 

These are vehicles reminiscent of residential mortgage structures 

designed to synthetically convert barrels of oil and bushels of corn 

into investment asset classes. These changes have profoundly affected prices and price discovery. 

Now, the CFTC adopted position limits in response to the congressional mandate to address the issues in energy, agriculture, 

and metals just recently. This rule establishes some very important 

principles, but much remains to be done to improve limits on speculators, in particular commodity index traders. 

Since 2004, highly structured commodity index investment vehicles have become dominant forces in the futures markets with dramatic impacts in the physical markets as well. Not surprisingly, we 

are now in a period of boom-and-bust commodity prices as a result. 

These investments have been marketed to large institutional investors as a new asset class for diversifying investment portfolios, and 

they have responded quite well for the marketers. 

Index investors have injected amounts which have been esti- mated to be between $200 and $300 billion into the market, fundamentally changing the way the futures markets work. 

Analysis of commodity speculation is now in the hands of academics, self-interested market participants, and the CFTC. Each 

seeks the answer to a single question: Are the boom-bust price cycles in basic commodities related to the explosion of speculative 

and highly structured trading activities? Or is it just merely a coincidence that these happened at the same time? 

Now, commodity index investments were created to synthetically 

mimic ownership of market baskets of physical commodities and 

are valued using indices. It is kind of an interesting thing. I am 

not aware that anybody considered the possibility that if you synthetically created a huge ownership interest in barrels of oil and 

bushels of wheat and corn, whether that synthetic ownership interVerDate Nov 24 2008 10:56 Mar 28, 2012 Jkt 072487 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 P:\DOCS\72487.TXT SAFFAIRS PsN: PAT
13 

est in large size would actually affect the market because the market would interpret that as hoarding activity when these vehicles 

were first created. But the consequences, as it has turned out, are 

very serious. 

Unlike a business with shares that trade, the value of a barrel 

of oil or bushel of corn derives from its consumption, at which point 

that value ends. If it can never be consumed, it has no value. However, commodity index funds are, in theory, perpetual. It is a synthetic ownership interest that goes on forever. 

To synthesize perpetual ownership and make it look more like a 

share of stock, the commodity index fund bank sponsors take large 

futures and physical commodity positions and roll them over continuously in massive amounts at specified times. So everyone in the 

whole market knows that at specified times during each month this 

large rollover of futures contracts occurs. 

Like the Phoenix, the index hedges, all of them, and repeatedly, 

are destroyed and re-created with longer maturities at each roll in 

order to create synthetic perpetual ownership. These repeated 

events are so important to the market that many trades focus a 

bulk of their activities on the commodity index rolls. 

The concern is that the rolls affect the price curves. Price curves 

are very important. The price curve is how the market tells the 

world what prices are likely to be this month and in the month to 

come. When it slopes upward—that is to say, November prices are 

higher than October—the futures market is telling producers and 

consumers that prices are likely to rise. When it is flat or downward sloping, the message is that the prices will be stable or fall. 

This is tremendously important because businesses organize themselves along these lines. 

The shape of the price curve has changed. Historically, it was flat 

to downward sloping most of the time. Since 2004, it has been upward sloping almost all of the time. The message is that prices are 

rising, and it is a constant message that is repeated over and over. 

Better Markets recently released a study of price curve dynamics 

in the roll. We isolated the predominant roll periods for each trading month over the last 27 years and compared them to determine 

whether there was a tendency for prices to rise—sorry, for the price 

curve to rise at the time of the roll. We found that starting in 2004, 

when index trading expanded, the correlation between the roll period and its bias was pronounced. In fact, the price bias in the 

crude oil futures markets was correlated at 99 percent level with 

the roll. For every other 5-day period in every other month over 

that 27 years, there was no correlation between upward or downward prices for these periods. So we concluded that the forces 

which were signaling increased prices were specific to the roll period and were caused by commodity index roll trading. 

The market as a whole reacted to the signal, and a price bubble 

emerged. Eventually, supply-and-demand forces must overcome the 

trading-driven sentiment, and the bubble bursts. 

Thank you for the opportunity to discuss these crucial questions. 

I am pleased to answer any questions you may have now or in the 

future. 

14 

Senator LEVIN. Thank you very much, Mr. Turbeville, and each 

one of you. We will try an 8-minute first round. I expect we will 

have a number of rounds for each panel. 

Mr. Cicio, first, tell us again very directly how businesses are 

harmed when oil futures prices are subject to roller coaster prices 

like the ones that are pushed up to artificial levels and then plummet down and then climb back up. 

Mr. CICIO. The example that we have provided in our testimony 

is very clear. When there is increased volatility, it increases the 

cost of hedging. Manufacturers are consumers. They are only going 

to hedge as much as they are going to consume, or they may hedge 

less than they will consume. The example that we have provided 

is an option on natural gas and it illustrates that increased implied 

volatility has a substantial cost increase on the premium of that 

option. The 5-percent increase in implied volatility increases the 

premium cost of that option 15 percent. Fifteen percent all by itself 

is a large amount for a company to lay out. Anything they lay out 

above that existing on-the-money option is cash that they have to 

put up. That is working capital that could be used for other things. 

Senator LEVIN. Is that usually passed down to consumers? 

Mr. CICIO. Manufacturers compete in a very globally competitive 

environment. If it is possible for us to pass that through to our customers, we would. But in most cases, costs of this nature cannot 

be passed through because of global competition. 

Senator LEVIN. And the hedging that they want to do is to provide themselves with a stable economic environment so that they 

can know what the costs of oil or any other commodity is. Is that 

correct? 

Mr. CICIO. Yes, that is correct. Think of it this way: One of the 

first things we do is buy basic raw materials like natural gas or 

crude oil that is used to produce our products. The time frame from 

producing the product to making a widget, a manufactured product, and then getting it out to the customer, is a long time. We 

price our product out a long time. If we price the product out and 

in the interim the price of the raw materials continues to escalate, 

then we have a price with rising costs that reduce our margins. 

Senator LEVIN. Now, according to the Consumer Federation of 

America—and this I will address to you, Mr. Slocum—excessive 

speculation has added about $30 per barrel to the cost of crude oil 

in 2011, and as you pointed out, that added $600 to the average 

household expenditure for gasoline in 2011. The total drain on the 

economy in 2011 from speculation-driven excessive cost is more 

than $200 billion, and the report concludes, ‘‘Transferring that 

much purchasing power from consumers on Main Street to speculators on Wall Street puts a severe drag on the economy’’ and has 

‘‘already dampened economic growth.’’ 

What do you think of those findings? 

Mr. SLOCUM. I agree with it. And like I said, it is also in line 

with what Goldman Sachs itself said in a research note to its investors. So the estimate provided by Dr. Mark Cooper that you just 

cited is absolutely in line with what one of the largest speculators 

in the country, Goldman Sachs, also estimated. And just like Mr. 

Cicio’s members are hit hard by these increasing prices and the 

volatility, so are working families across the country. And people 

15 

1See Exhibit 1a which appears in the Appendix on page 110. 

are beginning to understand the role that Wall Street plays in this. 

We see citizens of all walks of life participating in activities around 

the country directed at frustrations with Wall Street profits while 

families are really struggling to make ends meet. 

Senator LEVIN. Mr. Turbeville, speculators, according to your testimony, are now overwhelming the commodity markets and dwarfing the participation by commercial hedgers. They now account, I 

believe your testimony was, for 70 percent or more of the outstanding contracts in many commodity markets while actual hedgers have fallen to only 20 or 30 percent participation, and even 

lower in some markets. 

You have, I think, indicated that this is a historically new shift. 

Is that correct? 

Mr. TURBEVILLE. That is correct. 

Senator LEVIN. In other words, a few years ago it was very different, perhaps the opposite, but at least very different from what 

it is now. Are there any barriers to speculators making up 90 percent of the commodity market, or even 99 percent? 

Mr. TURBEVILLE. No. In fact, the new position limit rules go to 

the percentage of open interest that an individual speculator might 

have, so that the aggregate amount of speculation in a market, in 

fact, is not limited. And that is a real concern. It is not just the 

size of speculation. It is also the structure of speculation and how 

speculation has created this—has been created in sort of an ecosystem around the big bank traders that are trading these roll period contracts that I described. 

So it is both the size, absolute size, and the actual structure of 

the speculation that is very much a concern. 

Senator LEVIN. The most important question is the relationship 

between the amount of speculation in commodities and the prices 

of those commodities. We had a chart we put up there which shows 

that most of the speculative interest is on the long side, but there 

is obviously a short for every long.1 But, nonetheless, when the 

speculative interest is on the long side and is pushing prices upward, sooner or later there may be a short side to make to be on 

the other side of the deal, but that has an upward price pressure 

on futures contracts. Like any market, if there is a greater demand 

for the paper, it is going to push the price of the paper up, if there 

is a great demand for the long side of that paper. 

Now, how does that get translated into the price of the commodity? I think that is what we really need to drive home, that 

these futures contracts and the demand for futures contracts and 

the demand for the long side on futures contracts, which will be 

met by somebody willing to go short, but, nonetheless, as the demand goes up for that long side—or the bet that the price is going 

to go up—will not just affect the price of the futures contract but 

that huge demand will be translated somehow into a demand for 

the underlying commodity. 

In my opening statement, I tried to describe how that is done in 

a very simple way, but could each of you now take a try at that 

issue. Let us start with you, Mr. Cicio. 

16 

Mr. CICIO. One just needs to look at the index fund data that we 

cited earlier that shows that 86-plus percent of all of the positions 

are long. 

Senator LEVIN. This is for the index fund people. 

Mr. CICIO. For the index funds, that is correct. 

Senator LEVIN. OK. 

Mr. CICIO. And when that happens, there is mounting pressure 

month after month because they roll their volumes forward. When 

it comes to speculation and what impact it has on price really depends upon the specific commodity. Like in the case of natural gas 

today, you saw the numbers. We have a lot more speculators open 

interest than hedgers and producers. Because there is a lot more 

of physical natural gas—there is more supply today than there is 

demand for natural gas—the speculators are having a very difficult 

time creating that speculation because the physical product is so 

overwhelming that it is keeping the trading within a narrow range. 

So in that situation, having tight speculative position limits is not 

all that important. The reverse is what we are really worried 

about. If you have a market, a physical market that is basically in 

supply and demand, or there is more demand than there is supply, 

is when you need spec limits. That is when it is crucial that those 

be in place because speculators have a herding effect. They make 

money on the changes in price. They love speculation. They thrive 

on it. That is when their profitability increases. And they go to specific commodities when they sense that supply and demand of the 

physical commodity is in their favor to create speculation. So these 

things all tie together to impact the price, but it is on a commodity 

basis. 

Senator LEVIN. It depends on the supply-and-demand situation 

for the underlying physical commodity in your judgment. 

Mr. CICIO. Yes, sir. 

Senator LEVIN. Mr. Slocum, do you want to try to address my 

question? How does the speculation get translated into impact on 

price? 

Mr. SLOCUM. I would be happy to. I think what you see—and you 

kind of alluded to this—is this manufactured demand of these entities buying and selling these contracts and controlling such a big 

chunk of it, and particularly the disruptive influence that the index 

funds play, particularly as the contract month comes to expiration, 

where it is crowding out the folks that are looking to legitimately 

hedge. And so it is increasing prices for the market as a whole, and 

a lot of this has to do with the fact that we do not have adequate 

limits on the size of the positions that the banks can take. 

You also see a lot of other effects go on. Markets are based on 

fundamentals. They are based on opportunities. They are also psychological. Everyone knows that a Goldman Sachs is a major presence and player in the market, so when their analysts produce a 

report that say oil is going to hit $90 a barrel or go up to $100, 

it has a phenomenon of saying, well, that is where Goldman is 

headed and that is where we need to head because they are driving 

the market. And so I think that is an issue that also needs be examined. 

Senator LEVIN. OK. Mr. Turbeville. 

17 

Mr. TURBEVILLE. When the rollover occurs, you see firms like 

Goldman Sachs and JPMorgan and all the very sophisticated firms 

selling the November contract and then buying the December contract at a higher price because they are insensitive to the actual 

prices they get on the contracts, that all gets passed through to the 

investors. So they are really doing this rollover on behalf of the investors and passing the prices through. 

So what happens is that the message goes through to the market 

that sophisticated folks believe that prices are on the rise, prices 

will rise, and it really changes the information that the market has 

about supply and demand. The assumption is that those sophisticated folks must have some really good supply-and-demand information. That message is very important, and it passes through to 

prices. 

Mechanically, buying the December contract means that for 

many of the markets the physical delivery of product is indexed 

usually to the next maturing contract. So if the price curve is sloping upward, upward, upward, and pushed up, up, up, then what 

gets translated through is next month’s future contract is higher; 

therefore, that gets indexed to the actual delivery contracts for 

physicals so—— 

Senator LEVIN. I want to end my questions, but I want you to 

just drive that point home. 

Mr. TURBEVILLE. Yes. 

Senator LEVIN. Because this to me is where there is a link, a direct link—— 

Mr. TURBEVILLE. Absolutely. 

Senator LEVIN. A direct link between a futures contract going up 

in price because of that last month, and that is used by the people 

who are actually buying and selling the commodity. 

Mr. TURBEVILLE. That is right. 

Senator LEVIN. So that there is a direct link between the futures 

contract price going up and the commodity price going up because 

people buying and selling the actual commodity use that next 

month’s futures price as the basis for their price in the actual commodity purchase and sale. Is that correct? 

Mr. TURBEVILLE. That is absolutely the truth. The first thing you 

would look to, not only is it in the contracts, not only is it in the 

procedures for Platts and others that create indices like in the oil 

markets, it actually makes common sense. The first price that you 

would look to is the price that occurs—that is indicated for the next 

month. That will tell you whether you should hold onto your commodity or sell it now, which means that the next price is absolutely 

feeding into by contract, by indices, and by common sense the price 

for delivery of product in the current month. 

Senator LEVIN. Real product. 

Mr. TURBEVILLE. Real product. 

Senator LEVIN. In the real current time. 

Mr. TURBEVILLE. That is right. 

Senator LEVIN. Thank you. Dr. Coburn. 

Senator COBURN. Let me just follow up on that for a minute. 

What you are saying is this is divorced from supply and demand, 

real supply and real demand. 

18 

Mr. TURBEVILLE. Actually, what I am saying is that real supply 

and real demand, there is not a chart that producers and consumers go look up supply and demand, here is the price. 

Senator COBURN. No, but take the example—that is not happening on natural gas contracts right now. 

Mr. TURBEVILLE. That is correct. 

Senator COBURN. And the reason is because there is an absolute 

excess supply of domestic natural gas in this country. Correct? 

Mr. TURBEVILLE. I think there are two reasons. One is that 

prices are low because of excess supply. The other reason is that 

natural gas is structure—we have looked at this actually in our research, that natural gas is structurally different from products like 

oil and wheat. Natural gas comes through pipelines and is largely 

unstorable, so that the best predictor of price during a delivery 

month is actually the price in the nearest maturing futures contract, not the next one. And that is how people actually contract 

for natural gas. 

Senator COBURN. Except it is storable because I can show you all 

the wellheads that are turned off in Oklahoma because there is so 

much gas and there is no place to put it, so they are leaving it in 

the ground. 

Mr. TURBEVILLE. You are absolutely right. It is relatively less 

storable—— 

Senator COBURN. Let me go to each of you. One of our problems 

is volatility, which the Chairman has talked about, which we are 

seeing, and the connection of volatility to excess speculation. So 

would each of you give me what your definition of ‘‘excessive speculation’’ is? 

Mr. CICIO. Let me give you a reference point. Prior to 2000, prior 

to deregulation of this market, producers and consumers of natural 

gas were about 70 percent of the market, and speculators were 30 

percent. And I will tell you, from the energy managers that are a 

part of our organization, the market worked very well. The prices 

that we hedged reflected the underlying supply and demand of the 

market all the time. Now, these same people would say that the 

underlying price of the commodity does not always do that, and it 

is because of the influx of a lot of speculators who want to do a 

deal—but because the producer and the consumer have already 

taken care of their hedging, speculators will speculate with speculators. They are looking for deals to turn, and, again, the only way 

the speculators can turn a profit thru relative volatility. 

And so when you have large traders like the kind I talked about 

earlier, five traders or eight traders controlling 60 percent of the 

natural gas market in 2008, these are companies with large 

amounts of cash, and they can move markets. 

Senator COBURN. All right. But let me go back to my question. 

What is ‘‘excessive speculation’’? Because that is our whole problem. And as you answer this, think about this one thing. Can we 

change the rules here, in our country can we change the rules on 

our exchanges and solve this problem? Because unless they are 

doing it in London, unless they are doing it in the rest of the trading centers around the world, my fear is, no matter what we do or 

how we do it and whether we are right or we are wrong, what we 

are going to do is the same behavior is going to take place unless 

19 

all the exchanges throughout the world—because we will just trade 

somewhere different. We are just one click away. 

So you agree we have to have some speculators in the market to 

make a market. 

Mr. CICIO. Yes, sir, absolutely. 

Senator COBURN. So what is your definition of ‘‘excessive’’? 

Mr. CICIO. The only reference point—and this is not a good one. 

But the only reference point would be the one I mentioned earlier. 

Prior to deregulation, with 30 percent speculators—— 

Senator COBURN. So compared to what it was then. 

Mr. CICIO. We had deals getting done, producers, consumers, and 

speculators, and so I would say—this is not an organization statement, but anything more than 30 percent. 

Senator COBURN. All right. And I would just say that discounts 

the change from 2000 to 2011 in terms of the globalization of all 

this trading, right? I mean, we have a lot of participants in our 

market that are not Americans. 

Mr. CICIO. But, Senator, this market is all about a commodity, 

a physical commodity, and the players, the number of players and 

the physical product in this case, natural gas, has hardly changed 

at all. It has only increased 6.5 percent since 1995, but the volume 

of trades has increased 600 percent. 

Senator COBURN. So it has not had any effect on price. 

Mr. CICIO. Today, that is correct because of the oversupply. But 

just go back a few years ago, and, yes, sir, we did have high volatility and erratic pricing and prices higher than what we should 

have had. 

Senator COBURN. Yes, OK. Mr. Slocum, thank you. 

Mr. SLOCUM. Yes, I would like to just build on Mr. Cicio’s comment, but it is clear that the data indicate a rise in the level of 

speculators, and to specifically answer your question, I think it is 

when those that do not have physical delivery or production contacts to the underlying commodity have a dominating presence in 

the market. Those that have delivery commitments or want to 

hedge—or if they are suppliers and want to hedge their exposure, 

when they are vastly outnumbered, and particularly with the rise 

of the index funds, where there is no interest in the physical delivery or supply of the underlying commodity, I think that the markets have become skewed. And transparency and disclosure I think 

is essential because the more transparent the marketplace is, the 

better functioning it is going to be for all participants, and we still 

do not see enough transparency. And I really think we need to see 

trader- specific-level data, not instantaneous because that would 

violate some proprietary issues, but for too long the banks have enjoyed their relative obscurity in not being publicly identified. 

I remember I was at a hearing at the CFTC, and I was making 

comments critical of some of the large investment banks for their 

speculative activities. And there was a gentleman from a hedge 

fund who sounded a lot like me, and I had to talk to this guy and 

figure out why a hedge fund guy was sounding a lot like the Energy Program director at Public Citizen. And it was because he was 

complaining that the banks control the market, that it is too secret. 

This is a large hedge fund, one of the largest in the country, and 

he felt that he was at a massive disadvantage to Goldman Sachs. 

20 

So imagine if you are one of those smaller independent gas producers in Oklahoma or a manufacturer trying to compete in a global economy. The deck is stacked against them as long as the banks 

are able to operate in secret and do not have adequate controls 

over the size of their positions. 

Senator COBURN. So it is your assumption that it is all the banks 

that are creating the excessive speculation? 

Mr. SLOCUM. I think the data indicates, and especially the leaked 

data that finally named some individual names, that the banks 

clearly are at the top of the list in terms of their positions. But it 

is also clear that there are major, especially vertically integrated 

players in the petroleum sector that are also big. Chevron inadvertently disclosed that it—— 

Senator COBURN. Yes, that is a repeat. Mr. Turbeville. 

Mr. TURBEVILLE. I think you start with what excessive speculation is. There is actually some fairly good knowledge on what the 

required amount of speculation is, and that tends to be somewhere 

about a third of the whole market. Two-thirds hedging/one-third 

speculation makes the market work. 

Speculation in excess of that really ties into the very purpose of 

the market, which, interestingly, sort of reflects the language of the 

Commodities Exchange Act. When they originally talked about 

back in the old days excessive speculation, they described it as ‘‘unwarranted and inappropriate higher prices in volatility.’’ I think 

that ties into the purpose of the market. To the extent that speculation is not required but is in excess of what is required, it is excessive, meaning it is bad, if it damages the price discovery function so that suppliers and consumers can know what the forward 

price is—in other words, it damages the forward price curve that 

I was talking about before—or it inhibits in anyway hedgers actually hedging their positions in the market—the two real functions 

of the market, hedging and price discovery, which are related. 

So if volatility causes it to be very expensive to hedge, that is a 

bad thing, and if excessive speculation causes that, it should be 

ended. If the price discovery function is damaged, meaning I do not 

know where prices are going because of things that are being done 

in the speculative market, that is a bad thing. 

So speculation is excessive if it damages price discovery or the 

ability to hedge well. 

Senator COBURN. Excessive speculation leads to markedly increased volatility, what you should expect some market force on 

real supply and demand to have some influence on. 

Mr. TURBEVILLE. You would. 

Senator COBURN. In up movements you should see exaggerated 

up movements. In down movements you should see exaggerated 

down movements. And from the testimony I hear, I am not hearing 

that there is an excessive down movement. Explain that to me on 

speculation, when there is a marked excess supply, why we do not 

see an excessive down movement. 

Mr. TURBEVILLE. That is really an interesting point, and it goes 

to the issue—you would expect to see it. We have all grown up in 

the Chicago School of Economics that markets work perfectly and 

are very efficient, which I think sometimes makes it hard for some 

of the academics to understand what is going on in the commodVerDate Nov 24 2008 10:56 Mar 28, 2012 Jkt 072487 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 P:\DOCS\72487.TXT SAFFAIRS PsN: PAT
21 

ities markets right now. I am not an academic, so maybe that is 

easier for me somehow. 

Senator COBURN. So maybe you can understand it. 

Mr. TURBEVILLE. Exactly. [Laughter.] 

I think the reason is the market is actually imperfect. If you 

have a huge sector of the market that is long only and is insensitive to price and trades on specific days that everybody knows 

about, what you have is this force, this bias, if you will, towards 

upward prices. So I think what you see in sort of the boom-bust 

cycle, what is suggestive, as our research suggested, is that, in fact, 

what is happening, this constant trading without regard to what 

the price is, I do not care what price—— 

Senator COBURN. I know if that is the case, that means the investors in those instruments are price insensitive as well. 

Mr. TURBEVILLE. That is correct. 

Senator COBURN. And why are they? 

Mr. TURBEVILLE. Because they actually are investing to create a 

portfolio effect in a larger—— 

Senator COBURN. Then why is not everybody doing that? Why 

isn’t all the money moved there? If it is a sure deal, if it is a sure 

bet and that price is on the come and it is going to rise, why isn’t 

everybody doing it? You cannot have it both ways. 

Mr. TURBEVILLE. Right. 

Senator COBURN. If they are price insensitive, if they do not care 

what the price is because they are sure they are going to make 

money on the next month as they roll it over, why isn’t everybody 

doing that? 

Mr. TURBEVILLE. Well, OK. There are two questions. If you 

would, indulge me here. The investors are not in it to make money 

like you would make money on a stock. They are in it because they 

want to have part of their portfolio that moves just like commodities move. 

The other side of the coin, which is a really interesting one, 

which is our premise is that because of the trading activity, the 

curve moves up, right? Why don’t the arbitragers squeeze that out 

instantaneously? That is a really good question, and efficient markets theorists would say that would happen. Our data suggests 

that it actually does not happen, so you sort of ask yourself the 

question why. 

I personally believe that the reason why is that the market as 

a whole—remember, the trading is done by Goldman Sachs and 

JPMorgan, those folks. As they see those traders pricing those contracts, their interpretation is, well, they must know something that 

we do not. And it is not random trading activity. But it is not trading activity based on the rationale of profit and loss. 

Senator COBURN. Of a transparent market. 

Mr. TURBEVILLE. Right. So it confuses the world about what the 

supply and demand is. I actually think that is what is going on, 

is that the prices are distorted. So going back to excessive speculation, if the price discovery function is being injured, that is a problem, and I would consider that excessive speculation and speculation that should be corrected. 

Senator COBURN. Thank you very much. 

Mr. SLOCUM. Dr. Coburn, may I quickly add something? 

22 

Senator COBURN. Sure. 

Mr. SLOCUM. As part of my written testimony, I took a look at 

the Goldman Sachs Commodity Index (GSCI), and so your question 

is, if these index funds are such a good deal, why isn’t everyone 

moving into them? According to SEC filings by GSCI, in January 

2009 there were 135 shareholders or entities that were investors in 

GSCI. Two years later, in January 2011, there were 49,120. Now, 

they do not provide any explanation of whether or not there was 

some sort of plausible explanation of this or whether or not Goldman’s sales reps are doing a heck of a job selling to institutional 

investors and high-net-worth individuals. But those numbers are 

staggering, and it is clear that Goldman is promoting this as an investment vehicle for certain key audiences. 

Senator LEVIN. All right. Let us try another round. I want to 

move to high-frequency trading. Are you aware, each of you, of an 

increased presence of high-frequency traders in the commodity 

markets? And if so, are those high-frequency traders exacerbating 

volatility and price distortion? Let us start with you, Mr. Cicio. 

Mr. CICIO. Well, yes, high-frequency trading is putting a lot of 

pressure on volatility. As stated earlier, traders make their profits 

on price movements. It does not matter whether it is up or down. 

And so the high-frequency trades is having a direct impact on moving the market, and that is not good for price discovery when we 

are looking at a consumer for a price that reflects the supply and 

demand rather than reflecting high-frequency, computer-driven, 

technical trading, speculator-driven type of decisionmaking. 

Senator LEVIN. Mr. Slocum, do you agree with that? 

Mr. SLOCUM. Absolutely. Mr. Chairman, I testified before a panel 

that the CFTC put together a year or so ago, and after our research at Public Citizen, we deemed that high-frequency traders do 

not serve a legitimate function in these markets. 

With all due respect to the hard-working career staff at the 

CFTC, which are doing a heck of a lot with relatively little resources—— 

Senator LEVIN. And they are looking right at you as you testify. 

Mr. SLOCUM. Right. They cannot compete with the types of strategies, computers, and resources. It is overwhelming for enforcement staff to keep up with the activities and the volume and the 

constantly evolving strategies of these high-frequency traders. And 

as long as our hard-working regulators are unable to get a handle 

on how these high-frequency traders are operating, it is clear that 

they are not serving a legitimate market function. It is clearly 

disadvantaging those that are seeking to enter the market for legitimate hedging purposes. 

Senator LEVIN. OK. Mr. Turbeville. 

Mr. TURBEVILLE. I agree with the other panelists in what they 

have said. The high-frequency trading is to gain advantage based 

on a different level of knowledge that others in the market have. 

That is the whole point of it. And in the commodities markets, that 

is a very dangerous thing. It is different from the stock markets 

and bond markets which are really—there is no such thing, for instance, as excessive speculation in the stock market. So that kind 

of activity in the commodities market can be more damaging to the 

23 

1See Exhibit No. 1b which appears in the Appendix on page 111. 

2See Exhibit No. 6 which appears in the Appendix on page 176. 

market itself because of the functions that we described, hedging 

and price discovery being the main ones. 

I am also concerned about this: I am concerned that as the markets evolve into markets with swap execution facilities so that everything is electronic but that there are multiple venues in which 

transactions can be matched, that the ability of high-frequency 

trading to actually move around from venue to venue to venue to 

take advantage of things like payment for volume—in other words, 

a swap execution facility could well pay for volume because they 

get value from the other side of the trade—that you might see the 

kind of activity from high-frequency traders that is actually gaming 

the system that is actually created to maximize full disclosure of 

what is going on. So the full disclosure is really good, but without 

some kind of a control to make sure that HFT types do not move 

transactions around, that could actually allow those folks to game 

the system to the detriment of others and make it an unfair system. 

Senator LEVIN. Let me ask you about Exhibit 1b,1 which is a 

chart which shows total assets invested in commodity-related exchange traded products. These totaled over $100 billion last year, 

these commodity-related ETPs, as they are called. And we have 

listed a lot of those in Exhibit 6 2 in our book. ETPs offer securities 

now that track the value of a commodity—or a basket of commodities, but they trade like stocks on an exchange. 

Are ETPs adding to speculative pressures on the commodity markets? Let us start with you, Mr. Turbeville. 

Mr. TURBEVILLE. There is no question. If you look at it from a 

more cosmic level, the 30,000-foot level, one of the things happening is you are creating a huge amount of synthetic ownership 

of commodities as if they were hoarded, and the market is actually 

interpreting that at some level the commodities are being hoarded, 

therefore, the prices move up until something happens and the 

bubble bursts and everybody say, oh, yes, I remember now, those 

were just synthetically hoarded. So it is absolutely a similar kind 

of thing. 

To be honest with you, there is one question that the world 

should ask itself. This desire to own commodities, if you own a basket of commodities for 125 years, should we all live that long? You 

will have made something like the inflation rate on that market 

basket. That is all. 

The world should ask itself: Why is this such a popular thing to 

do? Is it because it is a good thing to sell by the sales folks? Or 

are people actually making sensible investment decisions by actually putting their money into commodities if, in fact, what I said 

is true, is after 100 years you have just got inflation after all? 

Senator LEVIN. Just very quickly, because I have some other 

questions, Mr. Slocum, would you agree with that, that ETPs are 

adding to speculative pressures on the commodity market? 

Mr. SLOCUM. I would, absolutely, and I really applaud the efforts 

of this Subcommittee to address some of the issues of this, particularly what you outlined in your opening statement about mutual 

24 

1See Exhibit No. 7a which appears in the Appendix on page 185. 

funds using their investments in this to kind of get around some 

existing regulations. That is clearly problematic. 

Senator LEVIN. OK. Mr. Cicio. 

Mr. CICIO. Most certainly. 

Senator LEVIN. And now let us go to the mutual funds question. 

As I mentioned, we have an exhibit, Exhibit 7a,1 that identifies 40 

mutual funds that primarily trade in commodities. The commodityrelated mutual funds over the last several years have gotten into 

the game big time. We have come across one mutual fund that has 

over $25 billion in assets with one of its primary purposes to trade 

in commodities. 

Are mutual funds that trade in commodities also contributing to 

commodity price speculation? And do you believe that we ought to 

keep the 90-percent rule that investment revenues accrued by mutual funds must be realized from investments in securities and no 

more than 10 percent should be realizable from alternative investments, including commodities? Can you give me a yes, no, or 

maybe? Mr. Cicio. 

Mr. CICIO. We think that mutual funds should not be participating in commodities period because, again, it has nothing to do 

with supply and demand and price discovery. 

Senator LEVIN. We currently have a 10-percent rule, so you at 

least would want us to hold to that. 

Mr. CICIO. Yes, sir. 

Senator LEVIN. Mr. Slocum. 

Mr. SLOCUM. I agree, absolutely, yes. 

Senator LEVIN. OK. Mr. Turbeville. 

Mr. TURBEVILLE. The numbers are just staggering. Any percentage of mutual funds added compared to an open interest in commodities, in physical commodities of around $900 billion would just 

swamp it, yes. 

Senator LEVIN. And there is no stopping it now if they are allowed to continue to have these offshore deals that they wholly own 

and if they are allowed to in other ways circumvent the 10-percent 

rule? 

Mr. TURBEVILLE. There is no stopping it, and the sales forces 

must be very effective, as I pointed out before. 

Senator LEVIN. By the way, we did actually stop it in the Senate. 

We had a House bill which would have eliminated that limit of 90 

percent and said you can have as many speculative investments as 

you want in commodities. It came over from the House with the 

abolition of the 10 percent. We were able to strike it here. And the 

Senate sent it back to the House without that. There were some 

other things, mutual funds requested, but it did not get that one. 

And I think there has been very little attention paid to this issue, 

and I would hope that one of the things this hearing will do is to 

focus on this question really for the first time as to whether we 

ought to have this circumvention, through the offshore—these corporations which are shell corporations, and who is going to regulate 

them, and that is a big issue which we will also get into with Mr. 

Gensler. 

I think I am over my time on the second round. Dr. Coburn. 

25 

Senator COBURN. Thank you. Let us go back to what we have 

kind of created. It is very interesting. I am trying to get a balance 

on where this bubble, if we do not do something about what is 

going on, is going to end, because it is not going to go up forever. 

In other words, there is going to be a point in time where somebody 

says, well, these guys are trading this next month. They are saying, ‘‘How do I make money off that?’’ And then there is going to 

be the opposite of that. 

So, we are always going to have to have speculators to make a 

market. We really cannot make a market without some speculation 

in it. If we could, we would not be where we are today. If we go 

too far or if we do not go far enough, we are going to have price 

exaggerations, either below or above, and I think everybody would 

agree with that. And we are always going to have some price exaggeration based on world events, whether it be Libya causing oil to 

cost $15 to $17—maybe that was exaggerated based on what we 

are seeing today, but the fact is there was a world event that put 

world oil supplies at risk and that should have some effect on commodity prices. The same thing on cotton, as I mentioned before. 

You had crop failures. You had $4 cotton in this country, which nobody had ever seen. 

Was that an exaggeration because of this? Was it made worse? 

So I would like your comment on how you tie in true supply-demand effects and what we are seeing. How are those true supplydemand effects that enter the market, that are fundamental differences in available supply or excess supply or marked increase in 

demand for some reason or another, how do those interact with 

what we are seeing going on in the market? 

Mr. SLOCUM. I think that there is no question that the supplydemand fundamentals play a role in these markets. It is why you 

have seen this big disconnect with natural gas and crude oil. It is 

because natural gas is not globally priced, and we do have enormous supply. That will definitely change if we start switching more 

and more of our coal plants to gas or if T. Boone gets his way and 

we have got more trucks on the road using natural gas. And as Mr. 

Cicio noted, it was in the very recent past that we saw significant 

price increases and volatility. Natural gas has a long history of 

that kind of volatility. 

But it shows that with massive amounts of supply-demand evidence that is dominating the market, supply-demand can play a 

role, but in a globally priced commodity like crude oil, where you 

have speculators playing a significant role, I think that what we 

see is the volume being driven by these speculators and by the 

index. 

Senator COBURN. With the marked excess in supply of natural 

gas, why isn’t it significantly lower than it is today if these guys 

are playing? Why isn’t it $2 instead of $3.60 or $3.90? 

Mr. SLOCUM. Right. 

Senator COBURN. Why isn’t it $2? 

Mr. CICIO. That is what manufacturers are asking. 

Senator COBURN. But I am asking it on the basis if we have excess speculation based on market forces or intended market forces, 

why aren’t we seeing an exaggeration on decreased price? That is 

my whole problem with what we are being presented with here 

26 

today. Everything seems to be rigged for an upward bias, but when 

there is fundamental market indices that say there is absolute two 

to three times as much natural gas as this country can consume 

available right now, why aren’t you seeing the other side of this? 

Where is the market failure in that? 

Mr. CICIO. Well, actually, Senator, as consumers, given the increased supply of physical natural gas, we think that prices probably should be lower than they are. But because of the ETFs and 

the ongoing long positions that I talked about, remember, 86 percent of all of the index positions historically have been long. There 

is this growing amount in volume of long positions that keeps encouraging the upward pricing pressures versus a reflection of the 

oversupply of the marketplace. 

But interesting about natural gas is that if you look at the Chicago Mercantile Exchange, which I did last week, and look out 5 

years to see what the price of natural gas is, given our vast supply 

of natural gas, one would think that there would be a downward 

price curve, much like what was talked about earlier, which is historically what commodities had. They had a downward pricing 

curve. Natural gas prices 5 years out show a 52-percent increase. 

Senator COBURN. Yes, but that is readily explainable. We are 

building LNG terminals. We are going to ship it to the Chinese and 

Europe. The other factor is we are going to see massive inflation 

in this country in 2 or 3 years, and people are anticipating that. 

So maybe that is the reason that there is not the downward side 

to it. But I still have problems. Mr. Turbeville. 

Mr. TURBEVILLE. One of the things that occurs to me about natural gas is something you mentioned, which is that natural gas 

gets stored in the ground as opposed to next to its use. So there 

is a limit on how low natural gas can go because no matter how 

much the supply is, the constraint is actually the transmission associated with it. But the fact is that one way to approach all of this 

is to try to decide how much—or what really is the effect of trading 

as opposed to supply and demand, is to look at elements that are 

unrelated to supply and demand—I am sort of promoting what we 

did, but that is specifically why we did it. 

We looked at the 5-day roll periods—over 27 years, which has 

nothing to do with supply and demand, and looked at the bias associated with that. The law of supply and demand has not been repealed. Nobody should think that is true. However, it is fairly certain that this inefficiency does occur on the margin, and how much 

is it? It is hard to say. The St. Louis Fed has said it is something 

like 17 percent of the price. It probably changes over time. But it 

also is biased towards upward levels, and it is because of this huge 

price-insensitive long that is in the market. I believe that is true, 

too. 

Senator COBURN. All right. Thank you. 

Senator LEVIN. The rule that came from the CFTC makes a distinction between commodity swaps that reference a single commodity, like oil, and those that reference a basket of different kinds 

of commodities, like oil, gold, and wheat. The rule applies position 

limits to single commodity swaps but no limits at all to multiple 

commodity swaps. 

27 

Can you give us your opinion as to the basis for that distinction? 

And how does it affect the effort to combat excessive speculation? 

Let us start with you, Mr. Slocum. 

Mr. SLOCUM. Well, in terms of why the CFTC has taken this approach, I think Mr. Gensler is following us, and I think he is a lot 

more qualified to—— 

Senator LEVIN. We will ask him, too, but do you—— 

Mr. SLOCUM. Yes, I do not know why they have done that. I am 

concerned that differing treatment is problematic and will encourage levels of speculation because of that loophole that are going to 

be problematic for consumers. 

Senator LEVIN. OK. Mr. Turbeville. 

Mr. TURBEVILLE. I guess we are mostly interested in the result, 

right? Do commodity index funds get effectively regulated and limited? They have taken this approach of saying a multiple index 

swap is not disaggregated into its component parts. It is just a 

swap that exists out there and is not subject to—— 

Senator LEVIN. Does that trouble you? Are you OK with it? 

Mr. TURBEVILLE. I am OK with it as long as the actual limits 

themselves—because what happens is, of course, the bankers then 

have to go do swaps and futures on the other side of that. If those 

swaps and futures really got effectively regulated, it would not be 

a problem. My concern is that there are too many ways to use the 

single entity limits in such a way and to manipulate them so that 

the bankers never will get regulated. So the better result would 

have been to say a multiple swap is regulated and limited. 

Senator LEVIN. What happens if a basket is 99 percent oil and 

1 percent something else? Doesn’t that kind of make the position 

limits ineffective? 

Mr. TURBEVILLE. Yes. 

Senator LEVIN. I know you are worried about that. We are just 

warming up for Mr. Gensler. [Laughter.] 

Mr. TURBEVILLE. I understand. Yes, I would have been personally, and as an organization, more comfortable to go ahead and address the issue straight on and say let us talk about the swaps 

themselves rather than indirectly trying to get—you are right. 

What happens is it becomes a metaphysical concept. 

There is by analogy in other rules, agricultural rules, that more 

than 50 percent will constitute that swap, an oil swap, but it does 

not actually apply to oil. 

Senator LEVIN. OK. Mr. Cicio, do you have a thought on that? 

Mr. CICIO. Well, just briefly. We were troubled by the differing 

treatment as well, and we would rather have the spec position limits apply to all, so undifferentiated. 

Senator LEVIN. OK. Just one last question about a netting rule 

in the final rule of the CFTC which allows a swap dealer who sponsors a single commodity index fund to net any short position created by the sale of a commodity swap to a client with a long future 

involving the same type of commodity. So the netting rule means 

that to the extent the swap dealer is hedging its financial risk by 

buying long futures to offset its client’s speculative bet, the swap 

dealer can claim his position is flat and not subject to any position 

limits. 

28 

So the swap dealer then could sell $1 billion in swaps to a lot 

of clients and then offset that risk by buying $1 billion in futures, 

affect the price of those futures it is buying, but still not be subject 

to any position limit. Does that netting rule open up a loophole for 

swap dealers who will be able to sell and offset as many single 

commodity swaps as they want even if that activity floods the commodity markets with speculative money? Is there a loophole created by that rule, Mr. Turbeville? 

Mr. TURBEVILLE. That was a change to the proposed rule that 

was in the final rule. The concern there is that what the rule suggests is that the swaps market and the futures markets are all one 

market and should be viewed as such. We think that is not appropriate. We think that the futures market is a very specific market 

that creates a very important—it has a very important role in price 

formation and price discovery. And so the netting across those two 

clearly should not be allowed, although it is. 

Senator LEVIN. OK. Mr. Slocum, do you want to comment on 

that? 

Mr. SLOCUM. I definitely share your concern. I think you articulated a potential abuse, and I think it underlies the fallacy of creating this potential for loopholes. 

Senator LEVIN. OK. Mr. Cicio. 

Mr. CICIO. And we agree with you, sir. 

Senator LEVIN. I said that was my last question, but I do have 

one other comment I want to make, and that has to do with a comment of the CEO of the Intercontinental Exchange (ICE). It is 

headquartered in Atlanta, and Jeffrey Sprecher was quoted in a 

September investment bank research report as saying that the energy markets may work better with position limits in place. It is 

a very important comment because it is coming from the CEO of 

ICE, but it has not been, I think, widely quoted yet, and I hope this 

may help a little bit if I quote it: 

‘‘It is not necessarily a bad thing for exchanges to prevent one 

large player from having concentration. ICE imposed its own 

version of position limits in its markets. The volume had actually 

increased. There was a healthier market with more and smaller 

players as a result.’’ 

And here is what he then said: ‘‘A lot of people do not like the 

thought of being limited in any way, but the reality is, and the evidence so far at ICE is, that we have grown very well during a position limit regime.’’ 

I am just wondering whether each of you would welcome that 

kind of a comment from a person in that position. Mr. Cicio. 

Mr. CICIO. Clearly, yes, sir. 

Senator LEVIN. OK. Mr. Slocum. 

Mr. SLOCUM. Yes, I think it underlies how much of the debate 

on this issue, and sometimes others, where you have some powerful 

interests where their status quo is threatened and they will claim 

that the sky is falling is very basic regulatory oversight is applied 

to their sprawling complex operations. And every once in a while 

you get a moment of truth in that, like apparently the CEO of ICE. 

So I am glad that you are quoting him on that. 

Senator LEVIN. Mr. Turbeville. 

29 

1The prepared statement of Mr. Ramm, Petroleum Marketers Association of America and the 

New England Fuel Institute which appears in the Appendix as Exhibit No. 10 on page 266. 2The prepared statement of Mr. Gensler appears in the Appendix on page 98. 

Mr. TURBEVILLE. I not only welcome it, I agree with everything 

he said. 

Senator LEVIN. Thank you all. We are going to make all the 

statements part of the record, and there is an additional request 

for a statement to be made part of the record by the Petroleum 

Marketers Association of America and the New England Fuel Institute, and we will make that testimony part of the record. We will 

leave the record open for other organizations that might wish to 

file statements.1

We will thank this panel. It has been very useful and helpful testimony. Thank you all. 

[Pause.] 

Mr. Gensler, we welcome you. We appreciate your not just coming here to testify but taking some extra time to listen to our other 

witnesses. We very much appreciate that. We look forward to your 

testimony. 

I think as you know, all the witnesses who testify before our 

Subcommittee are required by our rules to be sworn, so I would ask 

you to please stand and raise your right hand. Do you swear that 

the testimony you are about to give will be the truth, the whole 

truth, and nothing but the truth, so help you, God? 

Mr. GENSLER. I do. 

Senator LEVIN. The light will go on from green to yellow about 

a minute before the 10-minute period is up, so we would ask you 

to try to limit your oral testimony to no more than 10 minutes. 

There will be whatever time we need, obviously, to get your entire 

testimony in one way or another. So we again thank you for being 

here and please proceed. 

TESTIMONY OF THE HON. GARY GENSLER,2 CHAIRMAN, 

COMMODITY FUTURES TRADING COMMISSION 

Mr. GENSLER. Good morning, Chairman Levin and Ranking 

Member Coburn. 

Senator LEVIN. We expect he will be able to return. He had another important mission here this morning. 

Mr. GENSLER. Well, if Ranking Member Coburn is listening 

somewhere, I thank him as well. 

I thank you for inviting me here today to talk about the changing 

nature of the derivatives markets and on position limit rules. 

The derivatives markets have changed significantly since the 

CFTC opened its doors back in 1975, and you have noted in some 

of your excellent charts these changes. But, first, there is the 

swaps market as well. This emerged in the 1980s, and it is now 

seven times the size of the futures market. 

Second, instead of being traded just in the trading pits in Chicago and New York and elsewhere around the globe, much of the 

market, over 80 percent, is traded electronically, a click of a button. 

Third, while the futures market has always been where hedgers 

and speculators meet in a marketplace, a significant majority of the 

market is made up of now swap dealers, hedge funds, and other financial traders. 

30 

Fourth, the vast majority of trading is now day trading or trading in what is called calendar spreads, between 1 month and a 

later month, but not necessarily to go outright long or outright 

short. And I would add, as your charts suggest also, a fifth point 

is that a significant portion of the market is now in these index investments, more on the long side than on the short side. 

Now, the CFTC is focused on ensuring our regulations are responsive to today’s markets. We are an agency that is not set up 

to be a price-setting agency, but it is an agency to promote transparency in markets, to police against fraud, manipulation, and 

other abuses, and to ensure that there is integrity in markets and 

the price discovery in the market has integrity for all the hedgers 

in this market. 

This summer, of course, with the Dodd-Frank Act’s passage, we 

turned a corner and began finalizing many rules with regard to the 

swaps market but also updating some of the market rules on the 

futures market, and to date, we have completed 18 final rules and 

have a busy schedule throughout the rest of the year and into next 

year. 

We have completed rules giving the CFTC enhanced anti-manipulation and anti-fraud authority, and it extended the Commission’s 

reach to include reckless use of fraud-based manipulative schemes. 

And I know we have chatted about this in the past as a very important extension of our authority to fill a gap in our enforcement 

tools. 

The CFTC also approved a final rule on large trader reporting 

for physical commodity swaps. For the first time, the clearinghouses and the dealers, the swap dealers themselves, must report 

to the Commission information about swaps activity on the large 

trades, and that rule actually went effective last month—well, now 

2 months ago, September. 

The CFTC also completed the rules that are the center of this 

hearing, the aggregate position limits rules for physical commodities. A position limit regime is a critical component of comprehensive regulatory reform of the derivatives markets. Position limits 

have served since the Commodities Exchange Act passed in 1936 

as a tool to curb or prevent excessive speculation that may burden 

interstate commerce, and the emphasis might be on prevent, as the 

Chairman mentioned earlier, and it has been used since, I think, 

we first put in place our predecessor’s position limits in 1938 using 

that initial authority. I think it was then in bushels. It might have 

been 2 million bushels of a certain grain. 

And though, as I mentioned, the CFTC is not a price-setting 

agency, at the core of our obligations is to promote market integrity, which the agency has historically interpreted to include ensuring markets do not become too concentrated. You mentioned that 

quote of an exchange leader—but I think that was really at the 

core of what Mr. Sprecher’s quote was—about concentration of 

markets and making sure that there is no one who has an outsize 

position. 

In the Dodd-Frank Act, Congress mandated the CFTC to set aggregate positions for physical commodity derivatives, and this 

would include for the first time and historically position limits on 

swaps as well as futures, which I mentioned are seven times the 

31 

size of the market, and even certain linked contracts on foreign 

boards of trade that might be trading overseas but linked to these 

contracts. And the final rule achieved that. 

The Dodd-Frank Act also tightened the definition of bona fide 

hedging. Since the 1930s, the concept was this was a limit on speculators not hedgers, but over time there had been some creeping 

and widening of that by the CFTC, various rules and interpretations and sometimes no-action letters. Congress addressed that and 

said it should be narrowed such that the exemption only be for 

transactions and positions that served to mitigate risk in the cash 

market for a physical commodity, and I believe the final rule 

achieved that as well. 

The Dodd-Frank Act also mandated that we set position limits 

for energy, metals, and agriculture for the spot month and something called individual month and all months combined, and I believe the final rule achieved this on the 28 physical commodities. 

I would mention that the rule re-establishes position limits for all 

months combined and individual months for energy and metals, 

which had existed actually, but had been taken off in 2001 in energy and in the late 1990s in the metals markets. 

Before I close, I would like to briefly mention the events this 

week of MF Global, if I might. Earlier this week the CFTC and 

SEC determined that the Securities Investor Protection Corporation-led bankruptcy proceeding would be the safest and most prudent course of action to protect customers of this failing financial 

institution. The most troubling aspect about MF Global’s situation 

is the shortfall of customer money in the firm. Segregation of customer funds is at the core, and it is really a foundation of customer 

protection in the commodity futures and swaps markets. Segregation must be maintained at all times. Simply put, that is at every 

moment of every day down to the nanosecond. 

The Commission intends to take all appropriate action within the 

purview of the Commodities Exchange Act and the Bankruptcy 

Code to ensure that customers maximize the recovery of funds and, 

I say, to discover the reason for the shortfall in the segregated customer money. The CFTC and SEC and other regulators will continue to closely coordination actions, and I thank you. I would be 

happy to take any questions. 

Senator LEVIN. Well, thank you very much, Mr. Gensler. Since 

you made reference to the MF Global, let me just start with that. 

Is there any risk of a taxpayer bailout in this case? 

Mr. GENSLER. No, I think this was an example, actually, of a financial institution having the freedom to fail. 

Senator LEVIN. So there is no risk of a taxpayer bailout. 

Mr. GENSLER. I think that is right. I think when the Chairman 

of the SEC and I were on these middle-of-the-night conference calls 

from 2:30 a.m. to about 7 a.m. on Monday and we not only informed that there was not somebody to take the customer positions 

over but that there was the shortfall in the customer accounts, we 

really saw no alternative but to protect the customers, put it into 

bankruptcy, and it is in liquidation. But, Chairman, I do not think 

that there is any taxpayer money behind this. 

Senator LEVIN. Or at risk. 

Mr. GENSLER. Or at risk. 

32 

Senator LEVIN. Now, you made reference to what the CFTC is 

going to do or continue to do, I think was your word. Can you tell 

us just briefly what you have done and what actions you can take 

or will take to protect their clients? 

Mr. GENSLER. Well, throughout this week we have worked very 

closely with the court-appointed trustee who is now in place over 

this company, and we have worked very closely with the various 

clearing organizations and other clearing firms to try to move the 

positions. We were successful yesterday that the bankruptcy court 

did an order to allow customer positions to move. But the monies 

themselves may have to wait a bit because the trustee and the 

bankruptcy court have to really do a full accounting. We are in 

there as well. We have had people at MF Global since last Thursday really trying to assess this, but, of course, events changed dramatically on Monday with the shortfall. 

Senator LEVIN. OK. Now, getting back to the subject of the hearing today, let me start by asking you about the Dodd-Frank Act requirement that you have attempted to implement in your rule and 

trying to curb excessive speculation and manipulation in the commodity markets by imposing position limits on commodity traders. 

I am just wondering whether you feel, as the Dodd-Frank Act believes and reflects, that it is critical to put this rule in place for 

jobs, for economic recovery, to help ensure that prices for vital commodities like crude oil will reflect supply and demand rather than 

speculative pressures. 

Mr. GENSLER. I do think it was critical to put this in place and 

to fully implement it. I think it is critical that these markets have 

only—that they not have outsize concentration by one party or another, and particularly as Congress intended for us to do to place 

these limits on speculators. I think that markets work best when 

they have a diversity of points of view and a diversity of speculative interest. They are really primarily, as I think you and others 

have said, for hedgers to hedge. It was originally somebody growing 

corn or wheat to lock in the price at harvest time, and then, yes, 

there was a speculator on the other side who locked in that price 

and in a sense was taking a bet on where corn or wheat would 

trade. 

Senator LEVIN. But the speculation has now gone way beyond 

providing the needed liquidity for that kind of hedging, so now 

speculation is a greater part of the market than the actual trading 

that is needed if you are going to hedge. Would you agree with 

that? 

Mr. GENSLER. Yes. I remember discussing this with you about 3 

years ago when we were in your office, when I was just a nominee 

for this job. But I think I share that view. 

Senator LEVIN. And do you believe that the price swings in oil 

futures in 2008 and 2001 were caused in part by speculation and 

that became disconnected to the fundamentals of supply and demand, that these broad price swings in oil obviously have an actual 

market connection to the real fundamentals of supply and demand, 

but that there is a significant part of these price swings in oil futures that are the result of speculation. 

Mr. GENSLER. We are not a price-setting agency, but when the 

markets are made up of—I will use oil—approximately 12 or 13 

33 

percent of the long positions of producers and merchants, and if I 

recall, maybe 18 percent of the shorts. And we publish these figures every Friday. They are public. So that means 80 to 87 percent 

of the market are financial participants, swap dealers, hedge funds, 

and other financials. 

Senator LEVIN. Those are the speculators we are talking about. 

Mr. GENSLER. People generally use that word. 

Senator LEVIN. Right. 

Mr. GENSLER. But I think it is both hedgers and speculators, and 

financials have an influence on price, so on any given day it is hard 

to determine whether it is up or down, but I think it is 

uncontroversial that speculators, when they are 80-plus percent of 

the oil market, and some of the agricultural markets at 60 percent, 

have a role to play, as has been known since the 1930s, and then 

we police for fraud and manipulation. We promote transparency, 

and then we use position limit regimes to ensure against any concentrated position and also to police against manipulation. 

Senator LEVIN. So there is a legitimate role that is played by 

people who obviously have to fund people who want to hedge. That 

is a legitimate role. 

Mr. GENSLER. That is correct. 

Senator LEVIN. In terms of the excessive amount of speculation, 

you do not consider that to be legitimate? If it is excessive, it is not 

legitimate. 

Do you agree that excessive speculation, however it is defined, is 

not legitimate? By definition do you agree? 

Mr. GENSLER. Well, I think Congress made a finding, and what 

we were asked to do is then to set position limits, which we have 

done not only just 2 weeks ago but since the 1930s, to ensure 

against the burdens that may come. The burdens can be just that 

a large position wants to sell at an inappropriate time for everybody else. It is their right to sell, but it could distort prices in the 

midst of a crisis or even in clear times. Or the burden could come 

from either direction because it is an outsize position that pushes 

the price down or up. So we have used it to sort of ensure against 

the concentration of positions in the marketplace. 

Senator LEVIN. And are price distortions and large price swings 

a problem? 

Mr. GENSLER. Well, these markets—and again, we are not a pricing agency—will have volatility, just like securities markets will 

have volatility. But what producers and merchants want to do is 

lock in a price so that they can do what they are really good at. 

What they are really good at is either tilling the field or merchandising product to consumers. And so it is important that they have 

confidence in the markets and can ensure that the markets have 

supply and demand at their core of the price discovery. 

Senator LEVIN. And is it important that supply and demand be 

at the core of price discovery? 

Mr. GENSLER. Yes. 

Senator LEVIN. And is that frustrated when there is a large 

amount of speculators, as we have defined it here, in the market 

where that dominates? 

Mr. GENSLER. It is an excellent question, is there, in essence, a 

percent, as was asked earlier. 

34 

Senator LEVIN. I am not asking you what the percent is. Is that 

legitimate function for hedging frustrated when there are large 

amounts of speculation as we have defined it? 

Mr. GENSLER. I think at our core is to ensure that the markets 

are free of manipulation and fraud—I am thankful that you and 

others helped us get better manipulation authority—and then to 

use these position limits to ensure that no one is greater than a 

certain percent. For instance, at the core of our rule is that no one 

is greater than approximately 2.5 percent of these markets for the 

all-months combined. I mean, if they are a smaller market, there 

is another percent. And so that means there in essence would have 

to be a diverse number of speculators, not one that necessarily has 

an outsize position. 

Senator LEVIN. Do you believe that the purpose of our congressional enactment is to prevent excessive speculation? The word 

‘‘prevent,’’ which is in the law, do you believe that is the congressional intent? 

Mr. GENSLER. I am well advised by counsel that once worked 

with you who tells me it is to prevent the burdens that may come 

from excessive speculation. So it is preventative and forward-looking, and that is how we have used it in the past, and I think Congress understood that, and it is the clear intent of the statute, 

Dodd-Frank Act, that we set these aggregate positions. 

Senator LEVIN. Let me read Section 737 of the Dodd-Frank Act 

to you: The CFTC ‘‘shall set limits . . . to the maximum extent 

practicable . . . to diminish, eliminate, or prevent excessive speculation . . . ’’ So is that one of the purposes of the Dodd-Frank Act, 

to prevent excessive speculation? 

Mr. GENSLER. I do not have the actual words. I always thought 

it was ‘‘the burdens that come from,’’ but I trust—— 

Senator LEVIN. Is the word ‘‘burdens’’ in there? 

Mr. GENSLER. I thought, but if not—but I trust whatever the 

Chairman’s reading. 

Oh, I see. I am thinking of 4(a)(1), and there is—— 

Senator LEVIN. I am reading Section 737. In that section, would 

you agree I read it correctly? 

Mr. GENSLER. Yes. 

Senator LEVIN. That is good. Did you hear me when I quoted the 

head of ICE, Mr. Sprecher? 

Mr. GENSLER. Yes. 

Senator LEVIN. Were you familiar with that comment before 

that? 

Mr. GENSLER. I was familiar with his thinking, though maybe 

not the exact quote, but he had shared that thinking with us, yes. 

Senator LEVIN. And do you agree with him about the potential 

benefits of position limits creating healthier commodity markets? 

Mr. GENSLER. I do. I voted for the rule. I did because I think 

Congress mandated that we do it, but I also believe that it helps 

promote the integrity of markets. 

Senator LEVIN. Much of the new speculation comes from the commodity index fund investors and swap dealers who sponsor those 

funds, hedge their risk on their client’s speculative bets by purchasing long futures contracts. Do you know approximately what 

percentage of the demand for long futures contracts across the 

35 

futures markets is attributable to commodity index funds, approximately? 

Mr. GENSLER. The figures that we put out monthly show—and 

I think they were summarized in the charts—approximately this 

$250 or $260 billion equivalent in futures because some of that is 

swaps investment. The marketplace in the commodities, the most 

recent figures, is about $1 trillion in notional amount of futures. So 

it is a little bit of apples-to-oranges, but you can think of it roughly 

as about 25 percent of the longs and, because the shorts are about 

$70 billion, about 7 or 8 percent of the shorts, though I would note 

there is a little apples and oranges there. 

Senator LEVIN. OK. When you testified before the Subcommittee 

before regarding excessive speculation in the wheat market in 

2009, I asked if the CFTC as part of its work would look at the 

question of whether or not commodity index trading constitutes excessive speculation in the wheat market, and you told us that the 

CFTC would be looking at it not only for index investors but also 

for the broader class of speculators in financial markets. I am wondering if you have conducted that review. 

Mr. GENSLER. Well, I think since then—and I apologize, I do not 

remember the exact date of that hearing—we had three public 

hearings in the oil markets and one in the metals markets, and 

then we have had two public meetings on this rule itself and conducted a great deal of inquiry, including 8,000 comments on the 

initial rule and 15,000 on the latter and hundreds of meetings. So 

collectively, yes, we have also looked at over 50 studies that were 

referenced in the comment file on position limits and reviews those 

and had our Office of the Chief Economist review those studies. 

Senator LEVIN. We have talked this morning about the commodity-related exchange rate traded products (ETPs), which are set 

up as securities but are designed to enable speculators to bet on 

changes in commodity prices without buying the underlying commodities. These are hybrids that combined securities and commodities. They can directly affect commodities futures prices. They are 

currently responsible for about $120 billion in commodity investments. Do you believe that exchange traded products that offer investors the chance to invest in baskets of commodities have added 

to the speculative money in the commodity markets and that they 

have contributed to speculative pressures on commodity prices? 

Mr. GENSLER. Well, they are a group of financial investors that 

are speculating. Again, as hedgers and speculators meet in markets, this is a new vehicle for the retail public for the person to invest rather than maybe buying a bar of gold or—when I was growing up, my dad used to have a couple of gold coins, I remember he 

would show them to me every once in a while. He thought it was 

good always to have a little gold. This is a new vehicle to have 

that. 

Senator LEVIN. My dentist, by the way, is telling me the same 

thing. It is good to have a little gold. 

Mr. GENSLER. I see. 

Senator LEVIN. Anyway, I interrupted you. 

Mr. GENSLER. No. 

Senator LEVIN. The Dodd-Frank Act acknowledged the existence 

of these mixed swaps as hybrid instruments that warrant oversight 

36 

from the SEC and the CFTC, and I am wondering if ETPs are not 

the same, essentially, set up as securities but intended to function 

as commodity investments. Would you agree? 

Mr. GENSLER. Yes. One of our staff calls it a ‘‘securitized warehouse receipt.’’ In a warehouse somewhere there is gold or silver, 

but it is traded in the securities market. Not all of these are that, 

but the majority of them are. 

Senator LEVIN. And, therefore, does it require oversight from either or both the SEC and the CFTC? 

Mr. GENSLER. Well, the SEC does have oversight. We have coordinated with them for the last 6 or 7 years when this market 

started on that. But most directly it is the SEC’s oversight, though 

they have done it in a cooperative way with us. 

Senator LEVIN. Are the commodity-related issues looked at by 

the SEC? Their function is not to look at the issues involved in 

commodities trades, so I want to know who is looking at the commodity-related issues in these instruments. 

Mr. GENSLER. On these instruments, if they were used with regard to a manipulative scheme in the commodity futures markets 

or shortly in the commodity swaps markets, we would. But if it 

were just the trading of these and they did not come into a manipulative scheme, then it would be separate. But it would also, if 

I might say, be somewhat like if somebody was just trading gold 

but it was not part of a manipulative scheme, we would not necessarily be looking at that either. 

Senator LEVIN. And are you taking steps to prevent them from 

being used as manipulative schemes, or are you waiting for something to happen? In other words, are you doing the oversight of 

these securities and the way they are used as commodity trades? 

Is that something you are trying to prevent manipulative schemes 

from being used, or you are just saying, well, the SEC is looking 

at the trades and we are going to wait until there is some evidence 

that accumulates somewhere? 

Mr. GENSLER. I think, frankly, this would have to be a little bit 

more evidence-based, if we saw something in our futures markets 

we oversee or a whistleblower or somebody comes to us. Frankly, 

with the 700 people that we have, the resources are not such—nor 

do we necessarily just go to see if somebody is doing something 

with gold. But if it comes into our markets, comes into the futures 

markets that we oversee or shortly the swaps market and becomes 

part of a manipulative scheme or device, we have in the past and 

will in the future do so. 

Senator LEVIN. So the oversight of these particular types of products is different from the futures. 

Mr. GENSLER. That is correct, sir. 

Senator LEVIN. And isn’t that a problem? 

Mr. GENSLER. It may be. I do believe that if it came to our attention it was being used as part of a manipulative scheme, we would 

certainly use everything that we have in our resources, but I think 

you have the accurate picture. 

Senator LEVIN. Thank you. Senator Coburn. 

Senator COBURN. Welcome. Sorry I was not here to hear your 

oral testimony. 

How does the CFTC define ‘‘excessive speculation’’? 

37 

Mr. GENSLER. Congress actually had a finding in the 1930s, and 

we first put position limits in in 1938 based on that finding. And 

though some of the language has changed over the years, it is really that we were to use position limits to help curb or prevent some 

of the burdens that may come from excessive speculation. And so 

what we did then and have over the decades is really looked to ensure two things: In the spot month, when somebody is actually delivering the natural gas down in a certain spot in Louisiana or delivering the oil in Cushing, Michigan, which you know well, that 

there is not a corner or a squeeze or a manipulation in that delivery period; and then, second, that over all of the contracts, which 

we call all-months combined, that there is not a concentration or 

an outsize position. It used to be labeled in numbers of bushels of 

grain, the first position limits were that way, and then subsequently, by the 1970s and 1980s, we turned to a percentage of the 

market. This most recent rule really used a formula that we put 

in place through notice and public hearings in the late 1980s and 

early 1990s, so it is about 20 years ago, and it is roughly 2.5 percent of the speculators. The speculators could not each have more 

than 2.5 percent. 

Senator COBURN. So is excessive speculation happening now? We 

did not really get to a definition. So whatever it is, is it happening 

now? 

Mr. GENSLER. The markets are made up of hedgers and speculators coming together, and one of the increasing features of the 

market is more and more financial parties. In the oil or natural gas 

markets, about 13 to 18 percent of the market are producers and 

merchants, and the other 80-plus percent are hedge funds and 

swap dealers and other financial actors. What we do is we use our 

authorities to police against fraud and manipulation and ensure 

transparency, that people see that price function, and then also to 

have positions to help prevent against manipulation, corners and 

squeezes, as I mentioned, help ensure the integrity of the market 

with regard to the all-months combined, that no one speculator has 

an outsize position. 

Senator COBURN. So I will go back to my question. Is excessive 

speculation happening now? 

Mr. GENSLER. Well, we know that the speculative group in the 

market can be anywhere from 50 or 60 percent in the grain markets to 80 to 88 percent or so in the energy market. Congress made 

the finding not only in the 1930s but also in the Dodd-Frank Act, 

once again came back to it, added more words that the Chairman 

and I just were—he was good enough to remind me of the additional words—and asked us, really mandated for us to put in place 

these regimes to help as a preventative matter moving forward. 

Senator COBURN. So you do not know whether excessive speculation is happening now? Or you do know and do not want to define 

it? Or you are just responding to Congress and the assumption that 

there is? 

Mr. GENSLER. Well, I think that we have been responding to 

Congress for 70-plus years on this, and it has been reaffirmed by 

Congress just last year that to ensure for the integrity of markets 

that we have a per se limit, that it is a specific limit that we set 

38 

in place. So we use these well-worn formulas that have worked. We 

had limits in the energy and metals markets before. 

Senator COBURN. I am not debating that. Is the assumption by 

the CFTC there is excess speculation now so, therefore, you wrote 

new position limits? 

Mr. GENSLER. No, I think that what we took was Congress’ clear 

mandate to do this, and with the regime that we have used in the 

past—— 

Senator COBURN. The language says ‘‘as necessary,’’ so how do 

you decide whether it is necessary unless you assume there is excess speculation? 

Mr. GENSLER. Well, we took this up and had many comments, 

some on both sides of this very issue that you just raised, Senator. 

It is the Commission’s belief in finalizing this rule that Congress 

mandated that we move forward and that it is not necessary to find 

that there had been a burden, that these are also preventative, 

these are forward-looking, so ensure that there is not manipulative 

schemes, corners, and squeezes. 

Senator COBURN. So the new regulation is not based on the fact 

that there is an assumption that there was excessive speculation. 

It is to prevent any future excessive speculation. Is that what you 

are telling me? 

Mr. GENSLER. That is what the statute actually says, and the 

Commission’s finding on this is that. But in addition, we had over 

50 studies referenced in the file, and about half of them are on one 

side and about half of them are on the other. I do not want to say 

a percentage, but they are mixed, the economic studies. 

Senator COBURN. So for clarity for the American people, either 

there is or there is not excessive speculation, and we have put forward regulations to prevent the potential for that in the future. 

Mr. GENSLER. To prevent the burdens that may come from excessive speculation. 

Senator COBURN. Well, position limits are designed to stop excessive speculation, correct? 

Mr. GENSLER. I believe that the statute has in 4(a)(1) the words 

to curb or prevent the burdens that may come to interstate commerce from excessive speculation, and then in 4(a)(2), as the Chairman pointed out, there were added four factors, and so it was also 

about manipulation, it was about promoting liquidity in the markets, and promoting the price discovery—— 

Senator COBURN. So you could have written a rule that would 

have allowed for excessive speculation but would not have had a 

burden. 

Mr. GENSLER. I am not sure I am following that. 

Senator COBURN. Well, you just said the statute is to prevent the 

burden in terms of the price to the markets and to the country. So 

you could have had a rule that allowed for excessive speculation as 

long as the excessive speculation did not affect the price. 

I will not go any further on it. The point is the factual basis of 

determining excessive speculation needs to be based on something 

that is concrete, not an aftereffect but something that is concrete. 

And my worry is you are going to get tied up in a lawsuit that is 

going to—the well-intentioned thought of eliminating excessive 

speculation and decreasing volatility so that people are not paying 

39 

too high of a price for something that the market truly is not saying—that speculation caused it to be higher, more speculation than 

necessary to then create the market. What my worry is is two 

things: One is that you are going to get tied up and spend a lot 

of your budget defending it; and two is what we have written here 

is a click away from not having any effect at all because they are 

going to go to some other market. 

What do you think will happen in the rest of the commodity exchanges around the world on the basis of the new rule that you all 

have put out? 

Mr. GENSLER. I think we have made very good progress. In September, working along with international regulators in something 

called—I do not know that you are familiar with it, but it is the 

International Organization of Securities (IOSCO) regulators—put 

forward a joint report, and then that was moved up actually to the 

G–20, the 20 countries that form the Financial Stability Board, to 

put in place regimes that have anti-manipulation rules similar to 

what we have that could go after attempted manipulation, have 

more transparency. We actually have some of the best transparency here. And, also, it included—they called it ‘‘position management regimes,’’ a little bit different word. We would be glad to 

brief your staff on that. 

So I think we have made good progress, but you are absolutely 

right, capital and risk knows no geographic boundary. So Congress 

also included that if there was a foreign exchange that linked their 

contract to contracts here, for instance, if somebody in London 

linked the contract to something in your State, Oklahoma—it is 

called West Texas, the WTI contract. If it were linked, that has to 

come under the position limits, and we finalized a rule that said 

if anywhere around the globe a foreign board of trade links it to 

one of the contracts here, then it has to be in that same regime. 

Senator COBURN. Yes, but none of that is implemented anywhere 

yet, correct? Those are proposals to be implemented. 

Mr. GENSLER. That is right. 

Senator COBURN. We have a rule that is going to be in effect, 

questions about it, lots of learning curve on it. What is going to 

happen in the meantime? Let me just assume for a minute, since 

Europe is functioning so well—they are functioning just about as 

poorly as we are as a legislative body. What happens if those do 

not get put in effect given ours goes into effect? What do you foresee—what is the downside for American jobs, American price discovery, American valuation for products and commodities that are 

made here, what is the downside for our country if that does not 

happen in the rest of the trading centers around the world? What 

is the downside? 

Mr. GENSLER. I think we saw some of the downside of weak regulation in 2008. I think our financial system failed in part because 

our regulatory system failed in 2008, and 8 million Americans are 

out of work today because of that, not because of position limits but 

because of our weak regulatory system. 

Senator COBURN. Well, let us talk about what I asked you. What 

is the downside if they do not do it and we have? 

Mr. GENSLER. But I think that Congress mandated us to do this 

and a lot of other pieces of—— 

40 

Senator COBURN. I understand. What is the downside? 

Mr. GENSLER. I think the downside is if we do not protect our 

markets, the price discovery and the integrity of these markets are 

weakened. So I think what Congress recognized and what the Commission recognized is that we have to promote the integrity of the 

markets and the price discovery function here. Congress also did 

ask—and we will do this—1 year after these rules go into effect, 

we have to report back to Congress, and one of the specific things 

Congress asked us to report on is exactly that which you raise, 

about the overseas effect, where are we at that point in time and 

report back, whether it is—I do not remember the exact words, but 

any effects of where we are overseas versus here. And I think that 

was very appropriate. 

Senator COBURN. So I take it from your answer you are not extremely concerned that disconnecting from WTI, disconnecting from 

the Chicago Board, disconnecting from all these others, that people 

decide that they will speculate somewhere else, and given that we 

are in a global economy, we cannot regulate the global economy by 

only regulating us, and the very things that we are trying to limit, 

excessive speculation, whatever that is—since nobody will define 

that for me except Mr. Turbeville—excessive speculation is going to 

occur somewhere else outside, and we are still going to have the 

same price swings in our market. Is that not the downside? 

Mr. GENSLER. I think that we are working very closely with 

international regulators, and I share your view that we should harmonize as much as we can. But we do have, as you mentioned, different political systems, different cultures, and it is possible, it is 

even likely that we will end up with some differences in not only 

position limits but anti-manipulation, the oversight of swap dealers, and the like. 

Senator COBURN. How many people are employed in commodity 

trading in this country? 

Mr. GENSLER. I know the figures for the whole financial industry 

is into the hundreds of thousands. I do not know the specific number to your question, but we could try to get back to you on that. 

Senator COBURN. Well, we have got it. The point I am saying is 

we have a problem, the Chairman has identified a problem. We 

know we want real price discovery. We know we want real transparency in our markets. We know we have to have speculators to 

create a market. We know we do not want excessive speculation. 

We know we want the CFTC when they are cornering markets or 

abnormal. Is the regulatory framework that you put up, without 

that being put up around the rest of the world, going to be effective 

in accomplishing what—even if Congress told you to do it or whether it was apparent as necessary you should do it, is it going to accomplish its goal? 

Mr. GENSLER. I think that it is important that we promote the 

price discovery and the integrity of the markets that we can oversee here. You are absolutely right. We do not oversee all the markets around the globe. If it is linked back to these markets, we do. 

We have that hook. But you are right—— 

Senator COBURN. Yes, but all they will do is delink it. I mean, 

think oil. Where is the vast majority of the oil produced? Not here. 

So if, in fact, we have trading limits here and the rest of the world 

41 

does not put them in, the oil is not going to be traded here. It is 

going to be traded in London, or it is going to be traded in Singapore. It is going to be traded somewhere else besides here, and we 

will not have accomplished the purpose. And what needs to happen 

is the effective implementation of transparency and price stability 

in all the markets, not here. Because what my worry is is we are 

one click away—my computer, one additional click, I can go to London and trade. 

Mr. GENSLER. No, that is my worry about the European crisis 

right now. We are one click away the other direction. So we are 

working pretty hard to finish our rules to make sure our financial 

institutions are less at risk, less interconnected through the swaps 

market, and that the more transparency in the markets that we 

can oversee actually have greater transparency and greater integrity. 

Senator COBURN. Let me go to one other area if I might for a moment. 

Senator LEVIN. Sure. 

Senator COBURN. Have you all created a true definition of what 

a swap is? 

Mr. GENSLER. I think that Congress had a very good definition. 

We were asked by Congress to further define the word ‘‘swap,’’ 

working along with the Securities and Exchange Commission. We 

had a lot of public input through what is called an Advanced Notice 

of Proposal, and we are working to finalize that in the next several 

months. 

Senator COBURN. So you cannot regulate it until we define it, 

correct? You are going to have trouble applying a position limit on 

a swap until you have a definition of what a swap is. 

Mr. GENSLER. We have actually envisioned exactly that these 

rules go into effect for certain futures products in the spot month, 

but to the extent that they relate to swaps, because Congress asked 

us to ‘‘further define’’ it with the SEC, we need to finalize that role. 

As I say, we are envisioning—— 

Senator COBURN. When does that have to be done by? 

Mr. GENSLER. Well, Congress asked us to finish it by this past 

July, but we are not working against a clock. We are working to 

get this in a balanced way. 

Senator COBURN. And when do the regulations on swap position 

limits take effect? 

Mr. GENSLER. The spot month limits that are on certain futures 

will take effect, but the ones that relate to swaps we need to finalize that further definition, as the Senator says, and that is probably several months away. 

Senator COBURN. Yes, it is not going to take effect—there are no 

limits on a swap until you have defined a ‘‘swap.’’ Is that what you 

are telling me? 

Mr. GENSLER. That is generally correct. There are some exceptions because in a law passed in 2008 around significant price discovery contracts, there are some in natural gas, but—we do have 

some. 

Senator COBURN. So there is not going to be any position limits 

enforced by the CFTC until the definition of what a swap is is out, 

with the exception of what you described in—— 

42 

Mr. GENSLER. That is generally correct. 

Senator COBURN. All right. You already have position limits for 

legacy contracts, correct? 

Mr. GENSLER. That is correct. 

Senator COBURN. And is cotton No. 2 one of those? 

Mr. GENSLER. Yes, sir. 

Senator COBURN. And yet cotton hit 16 record-setting prices in 

the last 12 months, did it not? 

Mr. GENSLER. If that is the number you have, sir, I trust the 

number. 

Senator COBURN. Did the position limits in place prevent wheat, 

corn, and soybean volatility in 2007 and 2008? 

Mr. GENSLER. We are not a price-setting agency. I think that position limits are to help ensure the integrity of markets, that no 

one party has an outsized or concentrated position in the markets. 

Senator COBURN. I know, but the reason I ask the question is the 

panel before you, based on these new methods of trading, outside 

of true commodity users and people who are hedging, the implication was that the price is on the way up regardless of supply-demand, essentially, unless extreme supply-demand differences. And 

yet in wheat, corn, and soybeans, from 2007 to 2008, we saw tremendous price increases, yet we had position limits on them. We 

saw a tremendous increase in volatility. And I agree with you, you 

are not in the position to control price. You are in the position to 

create transparent and stable markets. 

Mr. GENSLER. We agree on that. 

Senator COBURN. So the point I am making is we had position 

limits on those commodities, yet we saw tremendous swings, tremendous increased speculation, and tremendous increased volatility. So my point is we are not necessarily going to change pricing, which was our testimony of the first panel, that the bias is for 

an increased price, that there are no real market forces in the long 

term to drive price the other way on the other side of the trading 

with position limits. The whole goal for position limits is to make 

sure not anybody is manipulating the market, correct? 

Mr. GENSLER. I think that it is—in my own words, we are not 

a price-setting agency. It is to ensure that the price discovery function has integrity, and that is integrity against manipulation, but 

also, as the agency has for decades, that there is not concentrated 

parties that can distort on the way down or distort on the way up, 

just that there is a diversity of actors. There are more actors on 

a stage, there is more competition in the market, less likely that 

one party distorts the market. 

Senator COBURN. But you would agree that the prices on corn, 

soybeans, and wheat had good price integrity during this period of 

increased volatility, increased speculation? I mean, corn is still at 

$6.40 a bushel. Three years ago it was at $3. There is nothing 

wrong with that pricing mechanism, is there? It worked. 

Mr. GENSLER. Well, in some of these there are issues about the 

pricing mechanism with regard to convergence, which was an earlier hearing, in the wheat markets. 

Senator COBURN. Right. 

Mr. GENSLER. And there is still very much focus—— 

Senator COBURN. You mean in terms of the close-out month. 

43 

Mr. GENSLER. The close-out month, and there are very serious 

issues still in a couple of contracts that we watch on a very regular 

basis. We also look in closed-door sessions at surveillance and look 

at issues of enforcement matters. I do not want to ever say that 

there are not things that we look at on a very regular, intensive 

way. 

Senator COBURN. I appreciate that. 

Mr. GENSLER. But I think I share your view that position limits 

are about—I believe our whole regime, position limits, anti-manipulation, transparency, and the other rules we have, is to ensure for 

the integrity of markets and the price discovery. It is not about 

whether prices should be higher or lower. 

Senator COBURN. Right. 

Mr. GENSLER. It is to allow the markets to come together and 

these hedgers and speculators to meet in this market. 

Senator COBURN. Yes. I want to thank you for your testimony, 

also for your service. I will have some additional questions for the 

record, if you would not mind responding to those. 

Mr. GENSLER. I would look forward to it and meeting with you 

at any time. 

Senator COBURN. And I would just re-emphasize my worry, Mr. 

Chairman. If this is not a global regulatory scheme on commodity 

pricing, what you have done will have no significant effect. This is 

a global market. We live in a global world in terms of commerce, 

and what we will do in our attempt to do something good, we will 

actually hurt our country, hurt a lot of jobs that are employed in 

the commodities exchanges and trading in this country, and what 

we are going to do is shift it, like we have the medical device industry, to Europe or to Singapore. 

Senator LEVIN. Would you agree, Mr. Gensler, that the goal of 

making our markets more transparent and greater integrity is an 

attraction to investors? 

Mr. GENSLER. I do. 

Senator LEVIN. And so even if other markets do not have integrity that we do, do not have transparency that we do, do not follow 

rules that help a market have integrity, that those markets are not 

necessarily going to be attracting investors; they may be, as a matter of fact, putting investors off that want markets that have integrity. Would you agree with that? 

Mr. GENSLER. I do. Market participants want to come to deep 

pools of liquidity where a lot of other actors are, where no one 

party can control the market—and in that regard I think position 

limits help—and where there is market integrity and when there 

is a cop on the beat. 

Senator LEVIN. And removing a cop on the beat is what we tried 

before, and we saw the result of it with the 2008 problem that we 

had. Would you agree with that? 

Mr. GENSLER. I think that was certainly part of it. There are a 

lot of other reasons as well, of course. 

Senator LEVIN. There are good reasons to have a global regime. 

I happen to agree with that. But we want to have markets that 

have integrity, investor confidence, even if markets in other places 

do not, and rather than money flowing out, we are going to have 

money flowing into a market that has integrity if it is competing 

44 

1See Exhibit No. 7 which appears in the Appendix on page 185. 

with markets that do not have integrity, do not have the kind of 

transparency, do not have the kind of anti-manipulation regulators 

in place. 

Mr. GENSLER. I agree with that, but if I might add, I also think 

that market integrity helps protect the taxpayers against some of 

the bailouts that so unfortunately our public had to face in 2008 

and unfortunately then Europe is struggling with now. 

Senator LEVIN. I think we all would agree with that. There are 

a lot of reasons for assuring market integrity. 

Would you agree with me, without having to go back and read 

the Dodd-Frank Act, that the CFTC is allowed to prohibit foreign 

countries from installing trading terminals here in the United 

States unless they have similar position limits? 

Mr. GENSLER. Yes. 

Senator LEVIN. So you can use that authority to level the playing 

field. Is that correct? 

Mr. GENSLER. Yes. 

Senator LEVIN. On the question of mutual funds, we have an existing law which says that for certain tax benefits, mutual funds 

can invest no more than 10 percent in alternative investments, including in commodities. Alternative investments meaning alternatives to investments in securities. Mutual funds are getting 

around this 10-percent limit in one of two ways, both of which have 

been so far approved by the IRS but which the IRS is now reviewing. One, they are investing in commodity-related ETPs which 

qualify as securities; and, two, some mutual funds have established 

offshore entities that they use to invest in commodities, doing indirectly what they cannot do directly by creating shell corporations 

offshore which they control. 

Now, we have identified in Exhibit 7,1 40 mutual funds whose 

primary focus is to invest in commodities, adding tens of billions 

of dollars of additional speculative pressures on commodity prices. 

What is your understanding of the extent to which mutual funds 

are active in commodity markets now, either directly through ETPs 

or indirectly through offshore shell entities? 

Mr. GENSLER. Well, I think this is an excellent exhibit for the 

public and for us as well. But this is part of that other number, 

the $250 billion or so that is in our monthly reports on commodity 

index investment. So this is a piece of that larger pie. 

Senator LEVIN. My staff is saying that they are not a subset; 

they are an overlap here. 

Mr. GENSLER. It is not a perfect subset; that is correct. There is 

some overlap because the way that we collect that data is not this 

entire universe. We collect that data through swap dealers and 

some large index investors. So there is an overlap, which I think 

it would take a bit of research to see what the extent of the overlap 

is. When I meant ‘‘part of this,’’ it might make it 280 or 290, but 

it is part of the same overall investment piece. 

We did propose something earlier this year—it could have been 

late in December of last year—which we have yet to finalize, which 

is with regard to certain exemptions that were granted, I think in 

2003, for commodity pool operators and whether they file with us 

45 

as a commodity pool operator that also relates to some of these exemptions that you are referring to in the mutual fund area. And 

we actually proposed revising and in some cases repealing them— 

this is Section 4.5—that would, if we were to finalize it, I think 

give us greater transparency as an agency. It just means they are 

filing their financials. But it still is a helpful piece to have them 

file as a commodity pool operator, some that had been getting exemptions for their offshore pieces. 

Senator LEVIN. All right. So you are looking at eliminating that 

exemption. 

Mr. GENSLER. We have actually proposed that exemption from 

2003 with regard to certain Section 4.5, so to speak, entities. 

Senator LEVIN. All right. So as I understand it, these offshore affiliates of mutual funds that do not now have to register as commodity pool operators with you, even if they market themselves to 

investors as commodity funds and actually operate a commodity 

pool. This is allowed because of Rule 4.5, which is a regulation exempting them from the registration requirement on the ground 

that they are subsidiaries of mutual funds which are regulated by 

the SEC. And so the question that you are addressing, as I understand your testimony, is given their exclusive or primary activity 

in the commodity markets, they are going to have to register? Is 

that correct? 

Mr. GENSLER. Well, we have not yet finalized the rule, and we 

have a lot of comments. We have had mutual funds come in and 

remind us, ‘‘Well, we do not have to file right now.’’ I would say 

they did not remind me. I did not quite know that we had somehow 

missed this in 2003. But they were exempted in 2003. We proposed 

revising and repealing in certain parts that, and we are looking at 

how to finalize it. The mutual fund companies have a point of view, 

and they have expressed it in their comment letters. 

Senator LEVIN. Is there a proposed rule change then that you 

have published? 

Mr. GENSLER. Yes. I am sorry, in the Federal Register, I think, 

last December or January. 

Senator LEVIN. So when is that due to be finalized? 

Mr. GENSLER. I would think in the first quarter. 

Senator LEVIN. All right. Getting back to Dr. Coburn’s important 

question about a definition of ‘‘swap,’’ his point is you are going to 

have to define ‘‘swap’’ before the new rule affecting swaps comes 

into place. And I could not agree with him more. 

My understanding is that your definition is due to be published 

fairly soon. Is that not true? 

Mr. GENSLER. That is true. It is a joint rule with the SEC, and 

we are sorting through a lot of things. We also had the events of 

MF Global this week, as the news reports, that we were doing 

some other things, Chairman Mary Schapiro and I. 

Senator LEVIN. But is it fair to say that we could expect that definition this month or no later than the end of this year? Is that 

fair? 

Mr. GENSLER. It would be every bit my hope, but I would say 

this to be transparent: The next joint role with the SEC that is in 

our docket is the joint swap dealer definition, and these are the two 

definitional things. So we are looking at trying to finalize the 

46 

1See Exhibit No. 13 which appears in the Appendix on page 309. 

‘‘swap dealer’’ definition first, and we are very close on that, and 

then the ‘‘swap’’ and ‘‘security-based swap’’ thereafter. So I would 

say in the next several months, but I would not say in the next 

month. 

Senator LEVIN. But it is clear that it has to be defined before the 

rule takes effect using the word which needs to be defined. 

Mr. GENSLER. Yes, though it was—— 

Senator LEVIN. I think that is what Dr. Coburn—— 

Mr. GENSLER. No, I am agreeing with both of you. 

Senator LEVIN. I think that is what his point was. It is obvious, 

isn’t it? 

Mr. GENSLER. It is interesting. Congress actually defined the 

word ‘‘swap’’ and then said we were supposed to ‘‘further define’’ 

it. So it is all in this, what does it mean, ‘‘further define.’’ 

Senator LEVIN. Well, that is what regulators do. We adopt laws 

and you guys implement it, and in your discretion you further define things. Isn’t that your function to do that? We have a law, in 

the Dodd-Frank Act, which says you are supposed to ‘‘set limits to 

the maximum extent practicable’’ in your discretion—the limits 

would be in your discretion—to ‘‘prevent excessive speculation.’’ 

That is what we say, ‘‘prevent excessive speculation.’’ But what is 

the maximum extent practicable? You have got discretion to determine that; isn’t that just your ordinary function? 

Mr. GENSLER. Right. So we will finalize—one of the reasons I say 

that, I think most people know what 2-year interest rate swap is. 

Senator LEVIN. All right. My time is up. Dr. Coburn. 

Senator COBURN. I am going to send you some questions on MF 

Global just simply because here we now have a regulatory scheme. 

If, in fact, it is true investor money was used inappropriately, that 

is a regulatory concern for me. I am very interested in how in the 

world did that get past you all, how it got past the SEC. Here we 

now have a new regulatory scheme. We have done a lot of changing 

since what happened in 2007 and 2008, and it is concerning that 

we have another company that has just potentially blatantly violated the rules. So I will send you some letters on that.1

Again, I thank you for your service. You do not have an easy job. 

You have a tough budget. I understand that. It is not going to get 

any better, the budget. The job is probably not going to get any better either, but I appreciate the work of you and your staff, and I 

am concerned about the challenge to this rule. I hope you do not 

end up spending a lot of time in court defending it because of some 

of the lack of definition. 

Mr. GENSLER. I appreciate your advice, your questions, and it is 

an honor to be in this job. It truly is. And I think it is about protecting the taxpayers and promoting these markets, and as relates 

to MF Global, and all companies, protecting customers. I said—and 

I will repeat it because you were not in the room at the time—that 

I think at the core of our regime is customer money, the sanctity 

of it. It is supposed to be segregated. It is sort of like you do not 

put your hand in the cash register. You just do not. It is the customer’s money, and it is supposed to be there every nanosecond of 

the day, segregated. 

47 

Senator COBURN. Thank you. Thank you, Mr. Chairman. 

Senator LEVIN. I think we all agree on that, by the way. Thank 

you, Dr. Coburn. There may be some disagreements on some subjects, but when it comes to protecting the taxpayer, we are going 

to take steps to do that, and that is going to require regulators 

being put back on the beat. We are going to protect the taxpayers 

from companies that are too big to fail. We are going to try to make 

sure we take steps that we do not see the taxpayers bailing out 

companies again. The issue, as I understand it, with the fund that 

went bankrupt is that the customers may have gotten injured by 

improper activity, or they may have gotten injured by taking risks. 

But to me, it is your function to help protect customers of that 

hedge fund, but it is doubly important that we understand that 

there is no taxpayer liability here that you know of. 

Mr. GENSLER. This is an example of freedom to fail, and I was 

part of that decision set of putting it into bankruptcy, and no taxpayer money is behind this at all. 

Senator LEVIN. If there was improper activity here that impacted 

their customers and their clients, that needs to be taken up as 

well. 

Mr. GENSLER. We are going to fully pursue this. 

Senator LEVIN. We are, but it is a very different issue from the 

battles which we have been waging here to try to protect taxpayers 

and the Treasury from companies that are too big to fail, either 

getting bailed out or going under and there being some kind of a 

governmental obligation. That is not the case here, thank God, but 

what may be the case here is something which should not be allowed to happen either because we do not want customers to be either defrauded or to be improperly dealt with. We do not know that 

is the case here, but we have cops on the beat to help prevent that 

as well, and you folks are into it. 

On the high-frequency trader, we have CFTC data showing that 

up to 80 percent of trading in key futures markets is day trades 

or trading around the expiration of contracts. The day trading is 

conducted in part by high-frequency traders that use computers to 

engage in rapid-fire trades, usually profiting from slight price increases over a brief period of time. Do you believe that this daytrading activity is adding to the volatility in the commodity markets? 

Mr. GENSLER. I think that there are a number of things that 

have changed in our marketplace, and you have addressed one important one. What was once day trading in a sense on the floor of 

the futures market or even the floor of the securities markets is 

now in a computer group, and it is called high-frequency trading. 

I think that while in calm markets they can—and there are studies 

that have shown they can—even narrow the difference between the 

bids and the offers and, so to speak—narrow the big-offer spread, 

that in times that are not so calm, like a year and a half ago on 

May 6, 2010, they can sometimes step away from a marketplace, 

and the liquidity—sometimes people confuse volume in a market 

for liquidity. And they have added greatly to the volume in the 

market. It is not clear that at all times they are adding to liquidity 

in the market. 

48 

So we have come forward with proposals. These are not final 

rules, but we have proposed that exchanges and clearinghouses 

have to have new pre-trade risk filters and pre-trade risk controls 

with regard to protecting the markets and the integrity of the markets better in these circumstances. 

Senator LEVIN. There has been some discussion here this morning about position limits not applying to the multicommodity 

swaps. You have made that distinction. These are extremely common in the commodities markets. Some of our earlier witnesses did 

not know why you made that distinction. Why did you? 

Mr. GENSLER. I would say a number of reasons. One, if I might 

say because you mentioned it, the Goldman Sachs Commodity 

Index, there is actually a futures commodity, that index, on CME, 

and they do have a position limit, a hard 10,000-contract limit. So 

we addressed ourselves to that is not the only reason, but that is 

one reason. But what we addressed ourselves to is these 28 individual commodities and trying to reimpose or bring back in the energy and metals markets where there had not been for all months 

combined, and trying to sort through a really significant docket 

with regard to what Congress mandated to do. 

The commodity index is not really about the corner and squeeze 

issue in the same way because it is an index across many products 

and you cannot deliver oil or wheat or corn into the commodity 

index. It is an index. It is not—has the same delivery function. So 

I think given the full docket of trying to take on the 28, given that 

the exchange actually right now does have this limit on this one 

contract, and that it is less about the spot month and the delivery 

period, these are some of the factors that influenced us. It is also 

something we can still take up. I mean, it is not that we cannot 

take it up. 

Senator LEVIN. Do you expect you will take that up? 

Mr. GENSLER. I do not know, sir, just given the full docket of 

what we are doing, and also we are supposed to report back to Congress in a year as to how the current regime is working. 

Senator LEVIN. Would it be useful for you to take that up? 

Mr. GENSLER. Well, I think there are a number of questions, that 

plus there are these questions that were raised on the earlier panel 

and that you have raised about limits across a certain sector and 

so forth that I think are additional issues that—whether it be in 

the study that we report back to Congress or otherwise, are things 

that many people will continue to review. 

Senator LEVIN. You made reference to the mutual fund industry’s 

effort to eliminate the 10-percent restriction on alternative investments, in particular because they want to increase the percentage 

of their portfolio investments in commodities. They did not succeed 

in that bill. I am glad for that and had something to do with that, 

but in any event, they are trying to apparently continue their efforts to remove that restriction. 

What would be the impact in your estimation as to the amount 

of speculation in commodity markets if that 10-percent restriction 

on mutual funds’ alternative investments was removed? 

Mr. GENSLER. I do not have a developed view. 

Senator LEVIN. Do you have a hunch as to whether it would increase speculation? 

49 

1See Exhibit No. 12 which appears in the Appendix on page 308. 

Mr. GENSLER. I frankly—— 

Senator LEVIN. That is why they want to get it removed, so 

would you think that if that is their motive in getting it removed 

that it would have the effect they seek, which is that they would 

be able to speculate more than 10 percent of their funds in the 

commodities markets? 

Mr. GENSLER. Well, it would open up a broader class of investors 

in the marketplace or broader class of speculators, but I just will 

pause there and say I am just not familiar enough with the provision that they were seeking to pull—— 

Senator LEVIN. Are you familiar with the 10-percent limit on alternative investments that mutual funds have? 

Mr. GENSLER. I mean, just generally, but I am not familiar with 

what they are trying to change. 

Senator LEVIN. They are trying to get rid of it. 

Mr. GENSLER. They are trying to get rid of it, so it would broaden 

the class of potential speculators. 

Senator LEVIN. A hundred percent of $11 trillion could go into 

speculation in commodities if they so chose. 

Mr. GENSLER. So some of these ratios that we had earlier could 

go up. There would be more financial actors. 

Senator LEVIN. Do you have an opinion as to whether or not if 

they got rid of that limit and there is now a possibility of $11 trillion getting into speculation in commodities, whether or not, in 

fact, there would be a significant increase in mutual funds’ purchase of those investments or betting on commodities? Do you 

think there would be an increase? You do not have an opinion on 

it? 

Mr. GENSLER. I just have not developed a view. I mean, this is 

the first discussion I have had on it. I am glad to look at it and 

come back and meet with you or at the least—— 

Senator LEVIN. No, you do not have to do that. I would just ask 

you that question for the record so you can discuss that with your 

staff as to whether the elimination of that 10-percent limit on mutual fund purchases and investments so that they could invest 

more than 10 percent of their funds in commodity speculation, 

whether or not that would have an increase—whether there would 

be an increase in speculation in commodities. That is my question. 

You can take that for the record.1

Mr. GENSLER. It certainly would expand the pool of parties that 

could invest. 

Senator LEVIN. How about the amount of money that would be 

or could be invested? 

Mr. GENSLER. It would expand the pool of money. 

Senator LEVIN. But you do not have an opinion as to whether it 

would lead to that? 

Mr. GENSLER. I have not talked to any mutual funds. I am not 

familiar with the—— 

Senator LEVIN. Could you get yourself familiar with us and let 

us know? 

Mr. GENSLER. Sure. I will try my best. 

50 

Senator LEVIN. For the record—I assume if you try your best 

that we can count on you to give us an answer for the record to 

that question.1

Mr. GENSLER. Yes, of course. 

Senator LEVIN. Well, we thank you. It has been a long morning. 

You have a huge amount on your plate, and you are doing the very 

best that you can to follow the congressional wishes and intent, 

which are the wishes of our people, to get a cop back on the beat, 

and Wall Street needs it big time. And you are one of the folks that 

can bring it back. We hope you do it with gusto, and we will stand 

adjourned. 

Mr. GENSLER. Thank you. 

[Whereupon, at 12:08 p.m., the Subcommittee was adjourned.] 

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Æ 


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