UNITED STATES OF AMERICA 

 COMMODITY FUTURES TRADING COMMISSION 

 ENERGY MARKETS ADVISORY COMMITTEE MEETING 

 Washington, D.C. 

 Tuesday, June 10, 2008 

 ANDERSON COURT REPORTING 

 706 Duke Street, Suite 100 

 Alexandria, VA 22314 

 Phone (703) 519-7180 Fax (703) 519-7190 
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 1 PARTICIPANTS: 

 2 WALTER L. LUKKEN, Acting Chairman 

 3 MICHAEL V. DUNN, Commissioner 

 4 JILL SOMMERS, Commissioner 

 5 BART CHILTON, Commissioner 

 6 JOHN FENTON 

 Deputy Director for Market Surveillance 

 7 

 TERRY ARBIT 

 8 General Counsel 

 9 BOB ANDERSON 

 Committee of Chief Risk Officers 

 10 

 TERRY ARBIT, CFTC 

 11 

 LAURA CAMPBELL 

 12 Memphis Light, Gas & Water 

 13 DONALD CASTURO 

 Goldman Sachs Group, Inc. 

 14 

 PAUL CICIO 

 15 Industrial Energy Consumers of America 

 16 BO COLLINS 

 1.618 Group, LLC 

 17 

 SEAN COTA 

 18 Cota & Cota Oil, Inc. 

 19 JOHN FELMY 

 American Petroleum Institute 

 20 

 JOHN FENTON, CFTC 

 21 

 KEVIN FOX 

 22 D.E. Shaw & Company, LP 

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 1 

 2 PARTICIPANTS (CONT'D): 

 3 JOHN P. HEIMLICH 

 Air Traffic Association 

 4 

 R. SKIP HORVATH 

 5 Natural Gas Supply Association 

 6 BRIAN KELLY 

 Colonial Energy, Inc. 

 7 

 WILLIAM MCCOY 

 8 Morgan Stanley 

 9 ANTHONY MANSFIELD 

 Heller Ehrman, LLP 

 10 

 JAMES NEWSOME 

 11 NYMEX, Inc. 

 12 RON OPPENHEIMER 

 Merrill Lynch Commodities, Inc. 

 13 

 PAUL PANTANO 

 14 McDermott Will & Emery 

 15 SATU PARIKH 

 Lehman Brothers 

 16 

 ROBERT PICKEL 

 17 International Swaps and Derivatives Association 

 18 MICHAEL PROKOP 

 Amerex Brokers, LLC 

 19 

 JOHN SHELK 

 20 Electric Power Supply Association 

 21 JOHNATHAN H. SHORT 

 IntercontinentalExchange, Inc. 

 22 

 ANDERSON COURT REPORTING 

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 1 PARTICIPANTS (CONT'D): 

 2 FOSTER SMITH 

 JP Morgan Chase 

 3 

 MARK STAINTON 

 4 Citadel Investment Group, LLC 

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 1 P R O C E E D I N G S 

 2 (1:00 p..m.) 

 3 CHAIRMAN LUKKEN: Good afternoon 

 4 everyone. Welcome. I'm Walt Lukken, Acting 

 5 Chairman of the Commodity Futures Trading 

 6 Commission and on behalf of my colleagues I want 

 7 to welcome everybody to the first meeting of the 

 8 Energy Markets Advisory Committee, or as we call 

 9 it the EMAC here in the building. 

 10 Obviously, given the unprecedented 

 11 market conditions of the day, this meeting is 

 12 occurring at a critical and opportune time. 

 13 Recent substantial increases in the price of crude 

 14 oil and other commodities have put considerable 

 15 strain on American families, farmers, and 

 16 businesses. These issues are of intense focus at 

 17 the Commission due to the key role that the 

 18 futures markets place in the price discovery 

 19 process. The CFTC is committed to ensuring that 

 20 our nation's futures markets operate fairly and 

 21 efficiently and that the commodity prices are 

 22 determined the fundamental forces of supply and 

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 1 demand rather than by abusive or manipulative 

 2 forces. We share public concerns about the need 

 3 for the utmost transparency and integrity in the 

 4 energy futures markets and we are devoting all 

 5 available resources to fulfilling our mandate to 

 6 protect and ensure the integrity of the community 

 7 futures and options markets. Our dedicated staff 

 8 works tirelessly each day to pursue this important 

 9 mission and we have a history of taking strong 

 10 enforcement action to punish market manipulation 

 11 and fraud. 

 12 Such times require regulators to remain 

 13 diligent in their efforts to protect the markets 

 14 from abuse and enhance market oversight in order 

 15 to serve the greater public interest. Just last 

 16 week the CFTC announced its national crude oil 

 17 investigation and several other important energy 

 18 initiatives including an agreement with the U.K. 

 19 Financial Services Authority to expand the data 

 20 received from institutions trading crude oil 

 21 products across borders. 

 22 The CFTC also announced that it will use 

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 1 its authority to demand more detailed data from 

 2 energy market participants on the amount of index 

 3 money coming into the markets and to examine 

 4 whether these funds are properly classified for 

 5 regulatory and reporting purposes. These 

 6 initiatives are critical and we're working hard to 

 7 implement all of them expeditiously. 

 8 Today the CFTC also announced the 

 9 formation of a CFTC led intra-agency task force to 

 10 evaluate developments in commodity markets. The 

 11 task force which includes staff representatives 

 12 from the CFTC, Federal Reserve, Department of 

 13 Treasury, the SEC, Department of Energy, and the 

 14 Department of Agriculture will examine investor 

 15 practices, fundamental supply-and-demand factors, 

 16 and study the role of speculators and index 

 17 traders in the commodity markets. It is intended 

 18 to bring together the best and brightest minds in 

 19 government to aid public and regulatory 

 20 understanding of the forces that are affecting the 

 21 functioning of these markets and will strive to 

 22 complete its work quickly and make public its 

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 1 results. 

 2 Today's Energy Markets Advisory 

 3 Committee meeting grew out of a hearing the 

 4 Commission held last fall to examine the oversight 

 5 of trading on exempt commercial markets. Many of 

 6 you participated in that hearing. As a result of 

 7 that public forum, the Commission proposed 

 8 legislative changes to Congress to bring greater 

 9 transparency and oversight to these markets. 

 10 These recommendations which were largely adopted 

 11 last month as part of the Farm Bill will provide 

 12 the CFTC with important new authorities to 

 13 regulate the energy markets and we appreciate all 

 14 the hard work that went into making this the law 

 15 of the land. 

 16 Last fall a CFTC report also recommended 

 17 the Commission form an Energy Markets Advisory 

 18 Committee to facilitate public discussion 

 19 surrounding the regulation and policies of the 

 20 energy markets and I am confident that this 

 21 standing forum will better enable the Commission 

 22 to listen and learn from the insights of those 

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 1 directly participating in and impacted by the 

 2 energy markets. 

 3 As the Commission moves forward with the 

 4 implementation of its energy market initiatives, 

 5 this Committee will be critical to ensuring that 

 6 the Commission is fully informed of industry 

 7 developments and innovations so that the 

 8 Commission can rapidly respond to changing market 

 9 conditions and ensure that these markets are 

 10 functioning properly and not subject to foul play. 

 11 The Commission has selected you to become members 

 12 of this Committee because of your knowledge in 

 13 energy markets and insights that you can provide 

 14 this Commission. We hope that involving a 

 15 cross-section of the industry and public will 

 16 allow participants to learn from each other and 

 17 assist the Commission in its oversight in 

 18 understanding of the energy markets. I would like 

 19 to personally thank each of you for making the 

 20 time for this Committee's important work, and I 

 21 would especially like to thank Guy Caruso of the 

 22 Energy Information Administration of the 

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 1 Department of Energy, Kevin Kelly of FERC, 

 2 Patricia Galvan of the FTC, as well as Bill 

 3 Hederman of the Congressional Research Service for 

 4 attending today's meeting as government observers. 

 5 I look forward to an informative and energetic 

 6 meeting today. 

 7 With that I will turn it over it over to 

 8 my colleague Commissioner Mike Dunn for an opening 

 9 comment. 

 10 COMMISSIONER DUNN: Thank you, Mister 

 11 Chairman, and I commend you for leading today's 

 12 meeting, and I thank the participants who are here 

 13 today. 

 14 This is a vitally important area for us 

 15 and I look forward to hearing from the industry 

 16 participants that you have gathered here today to 

 17 speak about transparency in our energy markets and 

 18 potential best practices that can provide 

 19 consumers with confidence in our market's utility, 

 20 vitality, and security. Our goal as a Commission 

 21 is to ensure that the energy markets we regulate 

 22 function properly and are free of manipulation and 

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 1 abusive practices. As is evident by our recent 

 2 announced energy initiatives and lengthy 

 3 enforcement track record in these markets, we take 

 4 this mission very seriously. Even so, Americans 

 5 are feeling the effects of high energy prices at 

 6 the pump on the family farms and at the workplace. 

 7 They are looking to us for answers and wondering 

 8 why are they paying record prices for their energy 

 9 needs. 

 10 My hope today as we begin a dialogue 

 11 with the Committee's members is to allow us to 

 12 answer this and other questions. As you all know, 

 13 a key function of the futures markets is price 

 14 discovery and if all we are doing is discovering 

 15 the price I say to Congress and the American 

 16 people don't shoot the messenger. It is what it 

 17 is. But if there is manipulation going on and 

 18 prices are being pushed upwards for some reason or 

 19 another, then I think they have a right to shoot 

 20 us all. I look forward to hearing of the 

 21 experiences of our panelists, and once again, 

 22 Mister Chairman, I thank you for calling today's 

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 1 meeting. 

 2 CHAIRMAN LUKKEN: Thank you, 

 3 Commissioner Dunn. Commissioner Sommers? 

 4 COMMISSIONER SOMMERS: Thank you, Mister 

 5 Chairman. Good afternoon and thank you for being 

 6 here with us. 

 7 These are extraordinary times for U.S. 

 8 energy and commodity markets. Crude oil for July 

 9 delivery surged over $10 on Friday after touching 

 10 a record of $1.3901. Clearly concerns about 

 11 whether world oil production can keep up with 

 12 rising world oil demand has led to sharply higher 

 13 oil prices. The decline in the value of the 

 14 dollar and more recently the return of 

 15 geopolitical tensions which create uncertainty 

 16 about the availability of future oil supplies have 

 17 combined to push oil prices faced by American 

 18 consumers even higher. 

 19 Finally, some, including several 

 20 witnesses testifying at recent congressional 

 21 hearings believe that speculative trading in 

 22 futures market, particularly commodity index 

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 1 trading and trading taking place on foreign boards 

 2 of trade, is driving the price of oil well above 

 3 levels that can be explained by economic and 

 4 geopolitical factors. I believe that it is 

 5 prudent for this regulatory agency to enhance 

 6 market oversight for our energy markets. To that 

 7 end we have announced a number of initiatives to 

 8 increase the transparency in our energy futures 

 9 markets. Under a new agreement with the United 

 10 Kingdom Financial Services Authority and ICE 

 11 Futures U.K., our agency will receive expanded 

 12 information for surveillance of the West Texas 

 13 intermediate futures contract that trades on both 

 14 NYMEX and Ice Futures U.K. In addition, the 

 15 Commission will use its existing special call 

 16 authority to require traders in the energy markets 

 17 to provide the agency with monthly reports for 

 18 their index trading to help the Commission further 

 19 identify the amount and impact of such trading in 

 20 the markets. 

 21 The Congress recently enacted the Farm 

 22 Bill which includes legislation that reauthorizes 

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 1 the CFTC and provides the agency with increased 

 2 oversight authority over contracts traded on 

 3 exempt commercial markets. If such contracts are 

 4 determined to play a significant role in price 

 5 discovery, this new authority will bring the level 

 6 of regulation over these markets on par with 

 7 contracts traded on designated contract markets. 

 8 This new authority was the result of careful 

 9 deliberations between the CFTC, our House and 

 10 Senate Oversight Committees, as well as Senators 

 11 and Levin and Feinstein, and provides this 

 12 Commission with the important tools necessary to 

 13 monitor the integrity of the energy markets. 

 14 I'm very much looking forward to the 

 15 discussion today at the Energy Markets Advisory 

 16 Committee and believe that this will be an 

 17 important source of input to this Commission on 

 18 these issues. The Committee includes a wide range 

 19 of representatives who possess a great deal of 

 20 knowledge and about and experience with our energy 

 21 markets. I also want to welcome all of the staff 

 22 from the other regulatory agencies and 

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 1 congressional staff that are with us today, and 

 2 thank you all for taking time out of your busy 

 3 schedules. 

 4 CHAIRMAN LUKKEN: Thank you, 

 5 Commissioner Sommers. I also want to welcome 

 6 those who have come from the Hill up here to get a 

 7 better understanding of how these forces in our 

 8 markets are playing into the prices of crude oil 

 9 and other commodities. So thank you for being 

 10 here and I think we're all going to learn 

 11 something here today. 

 12 On a housekeeping note, I would just ask 

 13 everybody if they could silence their cell phones 

 14 and Blackberries. They often interfere with mikes 

 15 and it would be helpful if everybody is able to do 

 16 that. As well, I remind everybody that when they 

 17 want to speak if you can put up your placard it 

 18 makes it a little easier for me to see and I'll 

 19 try to call on you, and you'll have to push the 

 20 button on your microphone in order to speak. I 

 21 missed somebody to my left here, an important 

 22 member of our Commission. Before I say anything 

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 1 more, I'll turn it over to Commissioner Chilton, 

 2 and I apologize profusely. Commissioner Chilton? 

 3 COMMISSIONER CHILTON: I was going to 

 4 say I don't have a placard to raise up. I'll be 

 5 brief. Welcome. 

 6 The folks here tell me we're supposed to 

 7 be commodity blind and price neutral, but that's 

 8 really tough with crude oil at $140 a barrel and 

 9 people as Commissioner Dunn was talking about 

 10 making the decision between food and fuel. I know 

 11 people like this and it's tough for them. So 

 12 we've been searching for any answer we can, and 

 13 that's one of the reasons that you all are here 

 14 today. But I sort of feel like a blindfolded 

 15 boxer. I'm swinging around trying to find out 

 16 what's going on and whether or not it's the 

 17 devalued dollar which certainly has a significant 

 18 impact with the horrible economy, or the subprime 

 19 and the securitization of the derivatives 

 20 industry, or whether or not it's speculators, or 

 21 whether or not, as I've said, we need to look at 

 22 the WTI contract, the look-alike contracts, or 

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 1 whether or not it's sovereign wealth funds or a 

 2 myriad of other things. We just keep swinging and 

 3 we haven't really found any sufficient single 

 4 answer. So I'm hopeful that you can provide 

 5 something, maybe not the sufficient single answer, 

 6 but at least help provide us with something that 

 7 maybe we haven't thought of. What don't we know? 

 8 I was sort of surprised and frustrated 

 9 with Secretary Paulson yesterday to just come out 

 10 and say that speculators weren't to blame, at 

 11 least he said maybe not to any significant degree. 

 12 Fifty cents on the price of a gallon of gas is 

 13 significant to a lot of people. But maybe he has 

 14 a crystal ball that we don't have, and I'm not 

 15 saying that speculators are to blame, but I am 

 16 saying that this is something we need to look at 

 17 and the jury is still out and we're looking at 

 18 more information and I think it's a premature 

 19 determination to make and I think for us to say 

 20 that we know the answer and it's not that would be 

 21 a dereliction of our duties and that's why it's 

 22 important. What don't we know, to hear it from 

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 1 you all. 

 2 Marshall McLuhan used to say it's hard 

 3 to go forward when you're only looking in your 

 4 rear-view mirror. The people you're going to hear 

 5 from today, John Fenton, he gets up every day and 

 6 works on this stuff and he is looking in the past 

 7 to find out what we've done and where these 

 8 markets have gone, but he's doing the best he can 

 9 along with the other dedicated staff here to 

 10 figure out are there other things we need to be 

 11 looking at down that road. But that doesn't mean 

 12 we can see everything, so I'd ask you tell us 

 13 again what don't we know that might be out there. 

 14 Justice Powell of the Supreme Court was 

 15 by no means a liberal, he was really an 

 16 ultraconservative, but he used to hire these 

 17 liberal clerks because he knew what the 

 18 conservative position was. It's always 

 19 comfortable to get with your colleagues and Mike 

 20 and I are Dems and we agree on a lot of things, 

 21 we're comfortable, we both like to golf, et cetera 

 22 -- most of the time comfortable -- but the most 

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 1 comfortable thing doesn't mean that's the right 

 2 thing. What don't we know? Anyway, I look 

 3 forward to hearing your answers. Thanks. 

 4 CHAIRMAN LUKKEN: Thanks, Bart. Sorry I 

 5 skipped over you. I apologize. 

 6 Now I think it's time if we would go 

 7 around the room to introduce ourselves so that 

 8 everybody knows who is at the table and what 

 9 organization you're from. I think it's 

 10 appropriate if we start with Sean Cota here on the 

 11 corner and we'll work our way around the room. 

 12 MR. COTA: Thank you, Acting Chairman 

 13 Lukken. I'm Sean Cota from Cota & Cota Fuels, a 

 14 third-generation heating oil and propane gas 

 15 retailer in Vermont and New Hampshire. I've been 

 16 doing commodity trading for many years as it 

 17 relates directly to the end consumer. It's an odd 

 18 bit of our business that's evolved. I represent 

 19 the New England Fuel Institute, a heating oil 

 20 industry trade group and the Petroleum Markers of 

 21 America, I observe on their executive board, and 

 22 between all of these groups we represent nearly 

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 1 all the retail consumers of gasoline and nearly 

 2 all the retail consumers of heating oil. We have 

 3 many concerns which we have expressed before and 

 4 will bring whatever insight that we can. We see 

 5 the consumer every day so we have an immediate 

 6 impact in what we see. Thank you. 

 7 MR. COLLINS: I'm Bo Collins. I run my 

 8 own proprietary trading group that specializes in 

 9 energy derivatives, both natural gas and crude 

 10 oil, and formerly the President of the New York 

 11 Mercantile Exchange and trader of the natural gas 

 12 book for El Paso Energy. 

 13 MR. HORVATH: Skip Horvath of the 

 14 Natural Gas Supply Association. My members are 

 15 the large major and independent natural gas 

 16 producers. We are mostly physical traders, 

 17 however, we also market gas for ourselves, we 

 18 hedge using futures, and some of our members 

 19 conduct marketing trades for other third parties 

 20 and we help them understand the market, so we sort 

 21 of straddle both markets. 

 22 MR. CASTURO: Don Casturo from Goldman 

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 1 Sachs. I run our global investor product trading 

 2 book which includes index trading. 

 3 MR. OPPENHEIMER: I'm Ron Oppenheimer. 

 4 I'm the general counsel of Merrill Lynch's global 

 5 commodities business. Thank you for including us 

 6 in this discussion. 

 7 MR. CICIO: My name is Paul Cicio. I'm 

 8 the president of the Industrial Energy Consumers 

 9 of America. We are a trade association of the 

 10 large energy intensive manufacturing companies, 

 11 the steel companies, commodity chemicals, 

 12 plastics, fertilizer, aluminum. Our 

 13 competitiveness to a large extent is dependent 

 14 upon the cost of energy as we compete in world 

 15 markets. So we're delighted to be here, and thank 

 16 you for holding this. 

 17 MR. ANDERSON: I'm Bob Anderson. I'm 

 18 executive director of the CCRO. The CCRO is a 

 19 professional association of financial and risk 

 20 officers from energy companies of all types 

 21 ranging from utilities to ENP companies to 

 22 merchants and our association works to publish 

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 1 white papers of best practices related to all 

 2 aspects of risk management ranging from governance 

 3 and compliance to specific risk measures. Thank 

 4 you for including me in the group. 

 5 MR. FOX: My name is Kevin Fox. I work 

 6 at D.E. Shaw in New York and I manage the energy 

 7 strategy. 

 8 MS. CAMPBELL: My name is Laura 

 9 Campbell. I'm the assistant manager of energy 

 10 resources for Memphis Light, Gas and Water, and 

 11 LGW is the largest three service municipal in the 

 12 country, and I'm representing the American Public 

 13 Gas Association which represents the majority of 

 14 the public gas systems within the United States. 

 15 MR. PANTANO: Good afternoon. My name 

 16 is Paul Pantano with McDermott Will & Emery and 

 17 I'm appearing today on behalf of the Futures 

 18 Industry Association which is the trade group that 

 19 represents futures commission merchants and other 

 20 service provides to the futures industry. 

 21 MR. SHORT: Johnathan Short. I'm the 

 22 general counsel of IntercontinentalExchange. We 

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 1 are the parent company that owns ICE Futures 

 2 Europe formerly known as the International 

 3 Petroleum Exchange which is a U.K. based and U.K. 

 4 regulated futures exchange overseen by the 

 5 Financial Services Authority. It trades the 

 6 benchmark Brent crude futures contract and along 

 7 with NYMEX a WTI or west Texas intermediate crude 

 8 contract. Thank you. 

 9 MR. HEIMLICH: I'm John Heimlich, chief 

 10 economist of the Air Transport Association of 

 11 America. We represent U.S. passenger airlines and 

 12 six U.S. cargo airline who carry more than 90 

 13 percent of the passenger and cargo traffic of this 

 14 industry. And as you can imagine, we are deeply 

 15 interested in the outcome of this deliberation. 

 16 Thank you. 

 17 MR. FENTON: I'm John Fenton. I'm the 

 18 deputy Director for Market Surveillance in the 

 19 Division of Market Oversight, and my group, the 

 20 Market Surveillance Section, monitors the markets 

 21 and reports to the Commission to make sure that 

 22 the markets are fair and not being manipulated. 

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 1 MR. ARBIT: My name is Terry Arbit. I'm 

 2 the general counsel at the CFTC. 

 3 MR. NEWSOME: I'm Jim Newsome, the 

 4 president and chief executive officer of the New 

 5 York Mercantile Exchange, former commissioner and 

 6 chairman of this institution, and Mister Chairman, 

 7 I want to thank you and all the commissioners for 

 8 all the effort that goes forward to putting this 

 9 type of panel together. I think we should have an 

 10 interesting dialogue today. 

 11 MR. PICKEL: I'm Bob Pickel, the chief 

 12 executive officer of the International Swaps and 

 13 Derivatives Association, the trade association 

 14 that represents the over-the-counter or privately 

 15 negotiated derivatives business. Our members are 

 16 engaged in derivatives activity of all types, not 

 17 just related to commodities and energy, but also 

 18 credit, interest rates, and various other 

 19 underlying exposures. 

 20 MR. PARIKH: I'm Satu Parikh. I run the 

 21 global commodities business at Lehman Brothers. 

 22 Thank you for including us in the panel. 

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 1 MR. FELMY: Good afternoon. My name is 

 2 John Felmy. I am the chief economist of the 

 3 American Petroleum Institute in Washington, a 

 4 trade association representing all segments within 

 5 the oil and natural industry, and thanks for 

 6 inviting us. 

 7 MR. STAINTON: Good afternoon. My name 

 8 is Mark Stainton and I run the energy investment 

 9 portfolio at Citadel. 

 10 MR. MANSFIELD: My name is Anthony 

 11 Mansfield. I'm from the law firm Heller Ehrman. 

 12 I'm here as a representative of Shell Trading (US) 

 13 Company. And I'd also like to thank the Acting 

 14 Chairman and the Commission for allowing us to 

 15 participate in this discussion. 

 16 MR. KELLY: I'm Brian Kelly. I'm with 

 17 Colonial Energy in Fairfax, Virginia. We are 

 18 involved with the physical supply and 

 19 transportation of natural gas to markets from the 

 20 Gulf Coast through New England. 

 21 MR. MCCOY: I'm Bill McCoy. I'm 

 22 managing director at counsel at Morgan Stanley's 

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 1 legal and compliance department and I lead the 

 2 legal coverage for the futures brokerage and 

 3 commodities groups here in the U.S. 

 4 MR. PROKOP: My name is Mike Prokop. 

 5 I'm with Amerex Brokers. We are a wholly owned 

 6 subsidiary of GFI Group, one of the largest 

 7 over-the-counter energy brokers. 

 8 MR. SHELK: Good afternoon. I'm John 

 9 Shelk. I'm president of the Electric Power Supply 

 10 Association -- national trade association for 

 11 competitive electricity suppliers, both generators 

 12 and marketers, so we engage in hedging and trading 

 13 both as producers of electricity and as consumers 

 14 of all types of fuels because we use all types of 

 15 fuels to produce electricity. And again, thank 

 16 you for including me. 

 17 MR. SMITH: Good afternoon. My name is 

 18 Foster Smith. I run North American natural gas 

 19 and power trading for J.P. Morgan Chase. 

 20 CHAIRMAN LUKKEN: Thank you very much 

 21 for the introductions. We have a full agenda 

 22 ahead of us here so we won't delay any more. But 

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 1 to lay it out for folks, we're going to have John 

 2 Fenton, our head of market surveillance give an 

 3 overview of the energy markets and what we're 

 4 seeing in the markets to date. And also our 

 5 general counsel Terry Arbit will then give an 

 6 overview of the recent energy initiatives we've 

 7 announced to try to tee up some of those issues 

 8 for discussion. Then we will turn to lead 

 9 discussants throughout the day to discuss the 

 10 different issues on the agenda including index 

 11 trading, commitment of traders reports, as well as 

 12 the Foreign Board of Trade issue. So with that 

 13 we'll give it to John Fenton. 

 14 MR. FENTON: Thank you, Chairman Lukken. 

 15 I'd like to join Chairman Lukken and our 

 16 Commissioners in welcoming you today. I think 

 17 it's a great idea to have this committee and I 

 18 think we're going to benefit greatly by the 

 19 experience and the expertise that you folks have. 

 20 I think this first chart which shows 

 21 crude oil prices going back to January 2001 

 22 probably explains as well as anything why we're 

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 1 here today. Back in January 2001 prices started 

 2 the year at $27. They fell after September to as 

 3 low as $16.70 as the world economy went into a 

 4 recession and global travel fell sharply. Since 

 5 the end of 2001 we've seen prices persistently 

 6 rise with relatively minor corrections or 

 7 fallbacks, but we've seen prices rising now for 

 8 year after year. I'm not going to try to explain 

 9 why prices have risen. I don't want to prejudge 

 10 and I think people here probably have good as or 

 11 better ideas as to what's behind it. Certainly 

 12 some of the factors I can mention are the 

 13 relentless growth in world demand for oil, the 

 14 relatively difficult production conditions to add 

 15 to production of oil, the chronic shortage or 

 16 small amount of excess production capacity so 

 17 we're always sort of at the precipice when any 

 18 geopolitical event might tip us over, and then of 

 19 course geopolitical events have been a factor all 

 20 along and I think they've had a bigger impact 

 21 because we are on the razor's edge in the 

 22 supply-demand sphere, and the dollar of course has 

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 1 been part of the reason why crude oil prices have 

 2 gone up in dollar terms. But I think what would 

 3 be most useful for this group for me to talk about 

 4 is some of our data and our commitment to trader 

 5 report which is going to be the subject of the 

 6 next section, but I can commitment report and the 

 7 things that go into it and some of the changes we 

 8 made last year for the agricultural markets which 

 9 I think have been very helpful in adding 

 10 transparency with regard to index trading, and I 

 11 can explain to you why we have not as of yet been 

 12 able to do that in the energy and metal markets. 

 13 Certainly the focus in a lot of quarters 

 14 has been the role of speculators in index trading 

 15 and how much of an impact they may or may not be 

 16 having. Our data is an important part of that 

 17 discussion. I think we're the only entity in the 

 18 world that puts out this kind of market 

 19 composition data and it's useful for sure, but 

 20 it's got its limitations and people need to 

 21 understand that and we certainly are taking 

 22 initiatives to try and add clarity certainly to 

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 1 ourselves internally so that we have a better 

 2 picture of what's happening and potentially also 

 3 to the public if some of the information that we 

 4 get under initiatives we're taking we deem that 

 5 it's in the public interest to publish some of 

 6 that data. 

 7 This is an example of a commitment of 

 8 traders report that was released last Friday as of 

 9 a week ago. It's the report that we've been 

 10 putting out for markets since 1962. When we 

 11 started, little did we know the significance that 

 12 it would have in the markets. I was not around at 

 13 the time, but I presume there were about four or 

 14 five markets that it covered so it was a 

 15 relatively task. We're now doing it for over 100 

 16 markets. It was also easier back in those days 

 17 because there was a relatively clear dichotomy 

 18 between uses of the market, you were either a 

 19 speculator or you were a hedger. In fact, we used 

 20 to call the categories speculators and hedgers. 

 21 We changed the terms to noncommercial and 

 22 commercial for technical reasons, but it's been a 

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 1 dichotomy that you're a speculator, you have a 

 2 view of price, you may be a short term scalper or 

 3 a much longer term speculator, you may be a 

 4 spreader, you may be basing it on technical 

 5 analysis or fundamental analysis, but you have a 

 6 view of price. The commercials were people who 

 7 had a physical exposure in the underlying physical 

 8 market and they use the futures markets to hedge 

 9 that price risk. 

 10 So there were two important ingredients 

 11 in the price discovery process. The speculator 

 12 presumably had some expertise in understanding 

 13 market factors and provided liquidity, but they 

 14 also improved price discovery if they were 

 15 informed speculators. And since the commercials' 

 16 trading was based on activity in the underlying 

 17 physical markets that sent signals to the 

 18 marketplace about activity in the physical market 

 19 and that was certainly information in the price 

 20 discovery process. 

 21 Just looking at this report, we 

 22 categorize traders into noncommercial and 

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 1 commercial, then the total of the reportable, and 

 2 then the nonreportable. The reporting level in 

 3 crude oil is 350 contract. That sounds like a 

 4 high number but in fact we get 97 percent of the 

 5 long and short open interest so we have virtually 

 6 every position in the market and certainly every 

 7 important position in the market. In the 

 8 noncommercial category are as I said speculators. 

 9 It would also include index traders who are 

 10 trading directly in the futures market. So if an 

 11 index fund was trading directly in the futures 

 12 market, they would be in the noncommercial 

 13 category. If a pension fund was doing index type 

 14 trading directly in the futures market, they would 

 15 be in the noncommercial category. 

 16 The commercial category is as I 

 17 mentioned before physical commercials, merchants 

 18 and dealers in the underlying physical market, but 

 19 increasingly it includes swap dealers who are 

 20 engaged in OTC activity, in marketing swaps, and 

 21 in many cases index swaps, and taking futures 

 22 positions to hedge the price risk as a result of 

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 1 that OTC activity. When this trading first began 

 2 we had a choice of putting them in the 

 3 noncommercial or the commercial category. They 

 4 are commercially engaged in activity, they use the 

 5 futures markets to hedge, so it seemed the more 

 6 appropriate choice to put them in the commercial 

 7 category. It certainly has become controversial. 

 8 We looked at this issue around this time 2 years 

 9 ago and we did modify and put out a supplemental 

 10 report in the agricultural markets that I think 

 11 has broken out this trading in a way that I think 

 12 is useful, and I'll explain a bit later, but in a 

 13 two choice world it seemed the best place was in 

 14 the commercial category. 

 15 Going back to the noncommercials for a 

 16 second, I want to point out that in crude oil, and 

 17 in fact in many of the energy markets, a very high 

 18 percentage of the noncommercial trading is spread 

 19 trading. It can be calendar spread trading 

 20 between months in futures, or to a great extent 

 21 it's spread trading between options and futures, 

 22 and this is actually an options and futures 

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 1 combined report. So if you're short options and 

 2 long futures or the other way around, you'd be in 

 3 the spread category. You can see 914,000 

 4 contracts of long and short open interest are held 

 5 by spread traders, by the far the biggest activity 

 6 of the noncommercial traders. 

 7 Then you take the long and the short and 

 8 often times people look at the net of those two to 

 9 see the net speculative opinion in the market and 

 10 potentially the net speculative impact in the 

 11 market and currently that's around 95,000 

 12 contracts. To put that in a little bit of 

 13 context, that's the equivalent of 95 million 

 14 barrels of oil, sounds like a lot, but it's about 

 15 one day of world oil consumption, and we produce 

 16 and consumer around 87 million barrels a day and 

 17 so it's just a little above one day's production 

 18 and consumption. 

 19 Looking at a breakout between these 

 20 categories of noncommercial and commercial going 

 21 back around 2 years, this is the graph. The green 

 22 line here are the noncommercials, the red line are 

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 1 the commercials, and you can see that they're 

 2 pretty close to mirror images of each other, and 

 3 in a way they have to be because we're getting 

 4 close to 100 percent of the open interest, 

 5 therefore the net exposure of noncommercials 

 6 almost necessarily has to be mirror of the next 

 7 exposure of the commercials. But looking at these 

 8 traders and especially over the course of about 

 9 the last year if you go back to around here where 

 10 it peaked at around I think 170,000 contracts, 

 11 it's pretty steadily traded in a range of 100,000 

 12 contracts to 150,000. I think a lot of people 

 13 probably have the impression that based on the 

 14 sense that the market is being moved by 

 15 speculation that this number would be going up and 

 16 it really hasn't been. It's been going sideways. 

 17 In fact, most recently it's been going down. As I 

 18 mentioned, the most recent number is 95,000 and it 

 19 had been as high as 170,000. Certainly we have to 

 20 point out the potential weakness of the numbers 

 21 that we publish in that the commercial category 

 22 does as I mentioned include swap dealers and swap 

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 1 dealers as I'll show in a couple minutes are very 

 2 much involved in index trading. So the commercial 

 3 category does include index trading and they're 

 4 the other category of trading that a lot of people 

 5 are focusing on. This is data that we don't 

 6 normally publish but it looks at the swap dealer 

 7 portion of the commercial open interest and it's 

 8 the net position. If you looked at the gross 

 9 position, swap dealers have over a million 

 10 contracts long and over a million contracts short, 

 11 but to look at the net exposure of the swap 

 12 dealers as a trading community they have been as 

 13 high as just under 100,000 back in it looks like 

 14 about March 2007 and that number has also been 

 15 going down and it's actually been negative 

 16 recently and currently I think it's around 13,000 

 17 contracts long. 

 18 Obviously swap dealers if they're doing 

 19 index trading would have long positions and in the 

 20 near months the predominant positions of swap 

 21 dealers are long and that no doubt does represent 

 22 index trading, but they're also doing other things 

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 1 in their book that would put them short and that's 

 2 in fact the main reason which I'll probably talk 

 3 more about, but that's really the reason why we 

 4 couldn't put out clear, accurate numbers 

 5 representing index trading, about 85 percent of 

 6 index trading comes through swap dealers into the 

 7 futures market. The swap dealers' book is a mix 

 8 of many different things including internalizing 

 9 part of their book that doesn't even need to come 

 10 to the futures market so there was no real way 

 11 based on the data we were getting to publish 

 12 reliable numbers and I think the numbers we would 

 13 have published would have been misleading and 

 14 wouldn't have been helpful in the way the numbers 

 15 we published in the ag markets I think have been 

 16 very helpful. 

 17 This is a schematic of where index money 

 18 originates and how it can come into the futures 

 19 market. The left most block here is the ultimate 

 20 customer, the entity who wants to have a position 

 21 in commodity exposure. I'm sure everyone knows 

 22 here that pension funds, endowments, people who 

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 1 have portfolios of assets including stocks, bonds, 

 2 real estate and other things that in recent years 

 3 have wanted to diversify into commodities and I 

 4 think there are both theoretical and empirical 

 5 research that for a given level of risk, 

 6 performance is enhanced, and for a given level of 

 7 performance, risk is reduced by having commodities 

 8 in a portfolio, so that's the trend that people 

 9 have gotten into. 

 10 This is the group, institutional 

 11 investors, individual investors, who want to have 

 12 exposure to commodities and they can do it in a 

 13 number of ways. The predominant way, and 

 14 certainly the way pension funds predominantly do 

 15 it, is they go to a financial intermediary, an 

 16 investment bank who is operating as a swap dealer, 

 17 and do an OTC swap or other derivative contract 

 18 that's linked to one of the indices. Then the 

 19 swap dealer has an exposure to the commodities 

 20 that are in the index and have to take positions 

 21 predominantly the futures market, they could hedge 

 22 it a different way, but typically they would take 

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 1 an offsetting position in the futures market. So 

 2 they're short the swap and then they go long the 

 3 individual futures components of the swap and 

 4 that's this arrow here going into both designated 

 5 contract markets which are the markets that we 

 6 regulate, could go into an OTC market, could go 

 7 into a foreign market. In fact obviously a number 

 8 of the commodities that are part of indices are 

 9 not based in the United States, LME for the metals 

 10 and hedging of crude oil can be done on ICE 

 11 Futures Europe both in the Brent contract and in 

 12 the WTI contract. So this path going through here 

 13 is as I mentioned before what ends up in our 

 14 commitments data as commercial activity. 

 15 The other paths could be that people 

 16 could give money to a commodity trading adviser 

 17 who is a fund that mimics one of indices and that 

 18 would be this path and if this path were followed, 

 19 that is if the trader in the futures market was an 

 20 index fund, that would end up in our noncommercial 

 21 category. 

 22 The final path is traders, you would 

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 1 have to be big, but pension funds can do it, 

 2 trading directly in the futures markets to 

 3 recreate the index. So they have positions in all 

 4 of the underlying futures in the proper ratios to 

 5 recreate the index and that would be this bottom 

 6 half. We see some of that, and that commitments 

 7 data would shown as noncommercial positions. 

 8 I just want to run through the 

 9 commitments for wheat to show you how the new 

 10 supplementary report takes positions from the 

 11 dichotomous world to the trichotomous world that 

 12 we've created a third category. This is the 

 13 standard commitment report which we still produce 

 14 and people find it useful. It breaks out the 

 15 numbers between noncommercial and commercial just 

 16 they I've described. But we have now added this 

 17 supplemental report which creates this third 

 18 category of index trades so that we have the 

 19 noncommercial, the ones who have a view of price 

 20 and are willing to put their money at risk, we 

 21 have the commercial, and when you pull out the 

 22 swap dealer out of the commercial category it's 

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 1 the physical commercials that are left. So it's 

 2 those who have an exposure in the underlying 

 3 physical market and when they buy in the futures 

 4 markets it's passing a signal of a buying activity 

 5 in the cash market. Finally, then you have index 

 6 traders who you could say are really not sending a 

 7 specific signal into the futures market related to 

 8 wheat in this case or crude oil. They're not 

 9 trading there because they think prices are going 

 10 higher, they're certainly not trading there 

 11 because their trading is related to activity in 

 12 the physical market, so that's where those kinds 

 13 of traders end up. It's obviously predominantly 

 14 long, 215,000 in the case of wheat, and this shows 

 15 you where the numbers have come from, that the 

 16 commercial category has been reduced by 184,000 

 17 because of the movement of swap dealer positions 

 18 out of the commercial category and so that makes 

 19 up 184,000 of this 215,000, about 85 percent of 

 20 the 215,000. Coming out of the noncommercial 

 21 category, 30,000, that's index funds and pension 

 22 funds trading directly in the futures market and 

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 1 that represents around 15 percent and I think 

 2 that's pretty representative of all of the markets 

 3 that are part of the indices, that about 85 

 4 percent of the positions are coming from swap 

 5 dealers and around 15 percent are coming through 

 6 index traders trading directly in the futures 

 7 market. 

 8 This looks to be the 12 agricultural 

 9 markets we are publishing data for. The bar shows 

 10 the number of contracts held by index traders and 

 11 the square is the percent of open interest that 

 12 index trader positions represent and that's over 

 13 on the right axis. So cattle is not the biggest 

 14 in terms of contracts but the biggest in terms of 

 15 the percent of open interest at just under 45 

 16 percent with hogs around the same and then you go 

 17 down through cocoa is the smallest at around 17 

 18 percent. One thing to point out here, and we've 

 19 been looking very hard at index trading trying to 

 20 see what we could see about its potential impact. 

 21 We have not been able to find a strong correlation 

 22 between the markets in which index trading is the 

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 1 highest such as cattle and hogs and those being 

 2 the highest prices. In fact, cattle and hogs 

 3 happen to be among the weaker prices in the 

 4 commodities. So that's one of the things we've 

 5 looked at and we have not been able to confirm the 

 6 impact of index trading in this regard. I just 

 7 want to mention one thing to make sure so that I 

 8 haven't mislead you here. When we pull the 

 9 positions of swap dealers out of commercial and 

 10 into the index trading, we can't based on the data 

 11 we have differentiate between index trading and 

 12 other things they may do. The reason we felt like 

 13 we could do it in ags is because swap dealers were 

 14 not doing very much other than index trading so 

 15 that there as a very close correspondence between 

 16 their positions in the ags and their index 

 17 trading, so this number is a highly reliable 

 18 number but it will potentially include some amount 

 19 of noise that is not index trading and certainly 

 20 the short positions here are probably not related 

 21 or almost certainly not related to index trading. 

 22 This looks at the index trading. It's a 

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 1 layered graph showing each of the layers where 

 2 there's a different commodity. The bottom most 

 3 one is corn and it layers the commodities above 

 4 it. Over the past 2 years you can see that taking 

 5 the top most line here going back in June 2006, 

 6 there was about 1.3 million contracts of index 

 7 trading in these 12 markets and it's now grown 2 

 8 years later to around 1.9 million contracts. Some 

 9 people have been using these numbers as a proxy 

 10 for index trading generally and there is a certain 

 11 amount of logic to that, but there is certainly a 

 12 caveat that is necessary that you have to 

 13 correctly assume the proper weights of the various 

 14 indices, you have to assume that these positions 

 15 are in the major index, the standard index, not in 

 16 some sub-indices, and you have to assume that it 

 17 doesn't include any single commodity swaps or 

 18 other activity so that one needs to be cautious of 

 19 reverse engineering. Having said that, since 

 20 February and especially during the last 2 months 

 21 using our ag data as a basis, it doesn't look like 

 22 there's been a whole lot of new index trading 

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 1 activity in the last several months. 

 2 We would love to be able to publish 

 3 similar data for the energy markets and I think 

 4 I've explained the reasons why we can't, but the 

 5 Commission has announced several initiatives in 

 6 the energy markets. Terry is going to talk in 

 7 some more detail about it, but I'm just going to 

 8 mention that we are going to be sending special 

 9 calls to swap dealers to try and parse out their 

 10 book in a better way. It will not I don't think 

 11 directly affect how we can publish commitments 

 12 data, but it is potentially information that we 

 13 will use internally for sure and externally 

 14 probably in some manner to provide some greater 

 15 transparency and clarity about the phenomena of 

 16 index trading it not only energy markets but in 

 17 other markets as well. This is not quite carved 

 18 in stone, but the kinds of things we're going to 

 19 be asking are to report the notional value of all 

 20 outstanding OTC commodity index transactions to 

 21 break it out between the major standard indices 

 22 and any sub-index that may be part of it, to 

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 1 report the futures equivalent positions in each 

 2 commodity that is part of an index, break it out 

 3 by commodity index transactions and single 

 4 commodity swaps, so in that that actually will 

 5 help us understand even the ag market somewhat 

 6 better. Here what we mean by futures equivalence 

 7 is that even if the position doesn't result in the 

 8 need to take a futures position, that is you've 

 9 done an OTC swap, you've been able to internalize 

 10 it on your books against something else you've 

 11 done, it doesn't come to the futures market, we're 

 12 still going to ask to see the futures equivalent 

 13 of that index trade to be able to characterize how 

 14 big it is in comparison to the futures market, and 

 15 we're going to ask at some threshold level to 

 16 report the counterparties to OTC activity 

 17 involving this activity. 

 18 MR. HEIMLICH: Does that apply to any 

 19 U.S. person or entity? Who is governed by these 

 20 proposals? 

 21 MR. FENTON: We're going to be using our 

 22 1805 authority which is an authority that we can 

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 1 inspect the books and records of any trader who 

 2 holds a reportable futures position. So it will 

 3 be based on the entity who holds a position in the 

 4 futures market, so that's our hook. 

 5 MR. HEIMLICH: And irrespective of their 

 6 geography and their residence? 

 7 MR. FENTON: That's right. Finally I 

 8 just want to very quickly go through the 

 9 enhancements that we're going to be getting 

 10 through the FSA. We work by the way very closely 

 11 with the FSA, we've got a great relationship, and 

 12 they've been very helpful to us. They've been 

 13 providing information from ICE Futures Europe for 

 14 2 years now and it's going to be enhanced. We're 

 15 already getting daily reports. Prior to that we 

 16 were getting weekly reports, daily during the 

 17 final week of an expiration, but we're already 

 18 getting daily reports. It's going to cover all 

 19 futures months until now, it's covered the nearby 

 20 2 months, but it will be all months. There's 

 21 going to be an enhanced trader identification so 

 22 that we will know who the trader is without any 

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 1 ambiguity. We're very hopeful that it will come 

 2 in a way that we'll be able to integrate it 

 3 seamlessly into our surveillance system, that all 

 4 of our sophisticated surveillance capabilities 

 5 will treat this as just another futures position 

 6 that we can combine in our view of activity in 

 7 other markets. And ICE Futures Europe will notify 

 8 us in instances where a position in their market 

 9 would be above the position accountability level 

 10 at NYMEX in this case, and for example in crude 

 11 oil, the position accountability level is 20,000 

 12 contracts in any individual month or all months 

 13 combined so that this I think this will be very 

 14 helpful to us. With that I'll turn it over to 

 15 Terry. 

 16 CHAIRMAN LUKKEN: Thank you very much. 

 17 Terry Arbit, our general counsel. 

 18 MR. ARBIT: Good afternoon, Mister 

 19 Chairman, members of the Commission, and members 

 20 of the Committee. Thank you for the opportunity 

 21 to appear here today. 

 22 With the recent and dramatic increases 

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 1 in crude oil futures prices, on May 29 as many of 

 2 you know the Commission announced a series of 

 3 energy market initiatives to improve oversight of 

 4 the energy futures markets. I have been asked to 

 5 briefly identify these important Commission 

 6 initiatives focusing primarily on their 

 7 international aspects. 

 8 The first set of measures will provide 

 9 for enhanced cross-border surveillance information 

 10 sharing for crude oil trading through an agreement 

 11 that the Commission has reached with the United 

 12 Kingdom's Financial Services Authority, and the 

 13 ICE Futures Europe Exchange. John has ably 

 14 identified what many of the provisions of the 

 15 agreement will require, so let me try to help set 

 16 the table by providing some legal and historical 

 17 background on how the Commission got to where it 

 18 is today. 

 19 Section 4(a) of the Commodity and 

 20 Exchange Act generally requires that all futures 

 21 trading must be done on designated contract 

 22 markets, but it also contains an exception for 

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 1 futures contracts that elicit for trading on a 

 2 board of trade that is "located outside the United 

 3 States" so that U.S. persons under appropriate 

 4 circumstances can trade these futures contracts. 

 5 In Section 4(b) of the Act, Congress has provided 

 6 that the Commission may not adopt rules and 

 7 regulations that govern and rule, contract term, 

 8 or action of a foreign board of trade. During the 

 9 past two decades, several foreign boards of trade 

 10 have sought permission to place computer terminals 

 11 in this country to permit electronic access to the 

 12 foreign exchange by U.S. persons. The legal 

 13 question raised by such requests is whether a 

 14 particular foreign board of trade with trading 

 15 terminals in this country is located in the United 

 16 States so that it need not become a designated 

 17 contract market. 

 18 This has proved to be quite a vexing 

 19 question and has promoted extensive debate over 

 20 the years. The concern has been voiced that a 

 21 definition of an exchange's location that has cast 

 22 too broadly could obstruct the development of 

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 1 global futures trading by subjecting exchanges to 

 2 duplicative and inconsistent regulatory 

 3 requirements. Having received voluminous public 

 4 comment and held prior public forums on this 

 5 topic, the Commission has permitted foreign boards 

 6 of trade to place direct access trading screens in 

 7 the U.S. pursuant to the issuance of staff no 

 8 action letters but only, one, if Commission staff 

 9 has determined that the foreign board of trade is 

 10 a bona fide exchange and that the exchange and its 

 11 regulatory abide by comparable regulatory 

 12 objectives; and two, subject to a number of 

 13 significant conditions such as information 

 14 sharing. This process is consistent with the 

 15 Commission's historical leadership in developing 

 16 international regulatory networks, increasing 

 17 international cooperation, and promoting 

 18 responsible innovation and fair competition in the 

 19 face of increasing globalization, all the while 

 20 maintaining vigilant oversight of the U.S. futures 

 21 markets. 

 22 This process also proved to be 

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 1 consistent with the intent of Congress as was 

 2 subsequently expressed in Section 126 of the 

 3 Commodity Futures Modernization Act of 2000. 

 4 There Congress found among things that regulatory 

 5 impediments to the operation of global business 

 6 interests can compromise the competitiveness of 

 7 United States businesses. The CMFA also included 

 8 the sense of the Congress that the Commission 

 9 should encourage among other things, one, the 

 10 facilitation of cross-border transactions through 

 11 the removal or lessening of any unnecessary legal 

 12 of practical obstacles; two, the enhancement of 

 13 international supervisory cooperation; three, the 

 14 strengthening of international cooperation for 

 15 customer and market protection; and four, 

 16 improvements in the quality and timelessness of 

 17 international information sharing. 

 18 Two years ago in 2006, ICE Futures 

 19 Europe listed three cash settled energy futures 

 20 contracts that were linked to the settlement price 

 21 of competing futures contracts traded on the New 

 22 York Mercantile Exchange. Of the three, the one 

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 1 that has developed the most significant liquidity 

 2 is the West Texas intermediate crude oil contract. 

 3 Even the ICE Futures Europe/WTI contract is not 

 4 physically settled, the Commission was concerned 

 5 about the contract's possible effects on U.S. 

 6 markets. Specifically, the Commission and its 

 7 surveillance staff were concerned that we would 

 8 not able to observe the entirety of a trader's 

 9 position in both markets which would increase the 

 10 possibility of trading abuses. This concern was 

 11 heightened when ICE Futures Europe allowed U.S. 

 12 persons to directly trade this product through 

 13 terminals in this country pursuant to a previously 

 14 granted staff no action letter. Accordingly, the 

 15 Commission undertook a transparent process 

 16 including a public hearing that I think many of 

 17 you participated in to evaluate its approach to 

 18 foreign boards of trade that seek to place direct 

 19 access terminals in the U.S. As a result, the 

 20 unanimous Commission published a statement of 

 21 policy in November 2006 which affirmed its 

 22 existing process with respect to such foreign 

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 1 boards of trade but significantly also added 

 2 certain enhancements to ensure among other things 

 3 proper cross-border information sharing by 

 4 regulatory authorities necessary for the 

 5 Commission to carry out its regulatory 

 6 responsibilities. 

 7 Pursuant to that statement of policy, 

 8 the Commission shortly thereafter entered into a 

 9 memorandum of understanding with the FSA which 

 10 established a framework for the sharing of 

 11 information that each regulatory needs to detect 

 12 abusive or manipulative trading practices in these 

 13 related futures contracts. Since 2006 the FSA has 

 14 provided the Commission with weekly trading 

 15 information and daily information on the final 

 16 trading week to facilitate oversight of trading in 

 17 linked WTI contracts traded on NYMEX and ICE 

 18 Futures Europe. As was envisioned by the 

 19 memorandum of understanding, the Commission and 

 20 the FSA continually review this oversight 

 21 framework with the view to making changes where 

 22 regulatory oversight of these markets can be 

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 1 enhanced. Two weeks ago the Commission and the 

 2 FSA agreed upon expanded information sharing for 

 3 surveillance of the WTI futures contracts that 

 4 trade on both NYMEX and ICE Futures Europe. As 

 5 John noted, the agreement includes, one, immediate 

 6 implementation of expanded information sharing to 

 7 provide the Commission with daily large trader 

 8 positions in the ICE Futures Europe/WTI crude oil 

 9 contract; two, extending trader information 

 10 sharing to provide crude oil large trader 

 11 information data for all contract months in the 

 12 WTI contract, not just the nearby months; three, a 

 13 commitment to enhanced trader information to 

 14 permit more detailed identification of market end 

 15 users; four, a commitment to provide improved data 

 16 formatting so trading information can be 

 17 seamlessly integrated into the Commission's 

 18 surveillance system; and five, in addition to the 

 19 established position management program that the 

 20 FSA currently requires, ICE Futures Europe will 

 21 notify the Commission when traders exceed position 

 22 accountability levels as established by U.S. 

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 1 exchanges for WTI crude oil contracts. 

 2 But the Commission's recent energy 

 3 market initiatives do not address foreign boards 

 4 of trade alone, as they also include three steps 

 5 to increase transparency of trading in U.S. energy 

 6 markets. First, to improve transparency for 

 7 energy market index trading activity, the exchange 

 8 rate will as John mentioned use its special call 

 9 authorities to immediately begin requiring traders 

 10 in the energy markets to provide the agency with 

 11 monthly reports of their index trading; second, 

 12 the Commission will develop a proposal to 

 13 routinely require more detailed information from 

 14 index traders and swap dealers in futures markets 

 15 and review whether classification of these types 

 16 of traders can be improved for regulatory and 

 17 reporting purposes; and third, the Commission will 

 18 review the trading practices for index traders in 

 19 futures markets to ensure that this type of 

 20 trading activity is not adversely impacting the 

 21 price discovery process and to determine whether 

 22 different practices should be employed. 

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 1 It's not surprising that the creativity 

 2 and innovation in futures markets over the past 

 3 decade especially when coupled with the drive 

 4 toward globalization have raised new regulatory 

 5 challenges such as linked contracts across the 

 6 oceans and increased index trading activity. As 

 7 reflected in these important energy market 

 8 initiatives, the CFTC is committed to obtaining 

 9 the information and providing the transparency 

 10 that is necessary to ensure effective oversight 

 11 that will keep the energy futures markets 

 12 responsive to fundamental economic forces of 

 13 supply and demand and free from fraud, 

 14 manipulation, and other trading abuses. This 

 15 concludes my remarks. Thank you very much. 

 16 CHAIRMAN LUKKEN: Thank you very much, 

 17 Terry. This is the part of the program that 

 18 everyone around the table gets to earn their keep 

 19 so we're going to first kick off the first topic 

 20 that was teed up nicely by Dr. Fenton on index 

 21 trading and we've asked some of the index 

 22 providers to kick off the discussion beginning 

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 1 with Don Casturo from Goldman Sachs. Thank you, 

 2 Don. Again, as we go along, this was meant to be 

 3 an interactive discussion so please raise your 

 4 placards and jump right in if anybody has 

 5 questions. 

 6 MR. CASTURO: Thank you, Mister 

 7 Chairman, and thank all the Commissioners for 

 8 inviting me to speak here today. It's 

 9 understandable with commodity prices where they 

 10 are, it's commendable that you're looking to do a 

 11 thorough examination of all the forces at play in 

 12 these markets and I welcome the opportunity to 

 13 speak to one of those forces which is index 

 14 trading. Clearly, by some of the statements in 

 15 the press recently, there is some misunderstanding 

 16 of exactly how index investing in the commodity 

 17 space works and I'd like to address some of those 

 18 basic principles with what I'm calling the who, 

 19 what, where, why, and how of index trading. 

 20 I'll start off with the why, and that 

 21 really gets to why did this even start? Why are 

 22 there index traders in the commodity space? It 

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 1 started back in the early 1990s when the commodity 

 2 derivatives markets were just starting to open up 

 3 and there was an interest in the producing 

 4 community to place forward hedges in the oil space 

 5 and there was not an offset to that position that 

 6 naturally existed among the swap dealers. So the 

 7 GSCI was created to provide some of that liquidity 

 8 to offset our flow and interest in flow of doing 

 9 commercial hedging. Of course just creating a 

 10 product, you need to have some interest on the 

 11 other side and some rationale for the other side 

 12 to be interested in taking that and the way the 

 13 product was packaged, it represented an 

 14 opportunity for the buyers of index trading to 

 15 mitigate some of their risk as well which came 

 16 down to wanting to diversify their portfolios and 

 17 protect against inflation. 

 18 To go a little bit further into that why 

 19 market, if you'll turn to the second slide, I want 

 20 to talk about the interrelation between the spot 

 21 market and the forward market in the commodity 

 22 space both of which by the way are governed by 

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 1 economic principles. The spot market though is 

 2 the place where 100 percent of producers and 100 

 3 percent of consumers actually come to the 

 4 marketplace. There may be some incremental 

 5 difference which results in change in inventories, 

 6 but it's 100 percent participation of those two 

 7 entities in that space. In the forward market as 

 8 I addressed earlier, because producers are much 

 9 more centralized, they're more likely to want to 

 10 mitigate their risk in the forward market versus 

 11 the consumers which are decentralized and don't 

 12 have a collective interest in buying their 

 13 consumption 2 or 3 years forward; 50 percent of 

 14 U.S. consumption is individual drivers who are not 

 15 likely to be collectively trying to hedge their 

 16 forward exposure. So for that reason just for the 

 17 supply and demand balance equation and the way it 

 18 would work in the forward market, another class of 

 19 participants was required to be involved and that 

 20 really was what the index provider does in these 

 21 marketplaces. You could say that that could 

 22 result in imbalances between the forward and the 

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 1 spot market, but again a properly constructed 

 2 futures contract will bind the two and relate the 

 3 two because there should be convergence between 

 4 the forward futures market and the cash market 

 5 which should hold the relationships in an 

 6 economically explainable manner. 

 7 Turning to the next slide, I'd like to 

 8 address what is commodity index investing. The 

 9 main point I want to make here is it's largely a 

 10 well-diversified broad basket of commodities. 

 11 Again, if you go back to the interest of the 

 12 investor in index commodity products, what they're 

 13 after is to mitigate a broader inflation hedge in 

 14 the diversified portfolio so the nature of that 

 15 investing doesn't require specific single perhaps 

 16 even speculative investment in any single part of 

 17 the commodity space and it's a broader basket 

 18 which should mitigate any effects in any one 

 19 place. Equally, the other point I wanted to make 

 20 on this what slide are the two broadest benchmark 

 21 indices, the S&P GSCI and the Dow Jones -- index 

 22 have strict liquidity and price history 

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 1 requirements that they consider before even 

 2 placing that futures contract in the composition 

 3 of their index to mitigate any unwanted effects. 

 4 Next I'd like to address the where of 

 5 commodity index investing. As Dr. Fenton already 

 6 mentioned, 85 percent of this investment takes 

 7 place in the over-the- counter markets, and I just 

 8 wanted to make sure there's an understanding of 

 9 why that's the case. Firstly, the nature of 

 10 investing in 24 commodities as a passive 

 11 continuous investment requires quite a bit of 

 12 maintenance in that you need to roll those futures 

 13 contracts to always stay in the commodity and the 

 14 fact that there are 24 different commodities means 

 15 that it's a relatively time-consuming process if 

 16 you ever try to engage in doing that yourself, so 

 17 swap dealer with large staffs are well equipped to 

 18 handle that and take that burden off of the index 

 19 investor. Secondly, there is execution risk in 

 20 performing that function, and even if you did have 

 21 the staff, you wouldn't want to expose yourself to 

 22 missing the index or missing the settlements in 

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 1 such a way, and by setting it up this way and 

 2 giving it to an OTC swap dealer, they bear that 

 3 risk. Lastly, and this is a little bit more 

 4 complicated point, the GSCI for example does have 

 5 a futures contract which trades on the CME, but 

 6 that doesn't satisfy the need of all the index 

 7 investors because it can only represent one 

 8 rolling strategy and we have found that investors 

 9 like to diversify that risk and maybe not just 

 10 stay with exactly the defined rolling mechanism of 

 11 the S&P, GSCI, or Dow Jones manuals which 

 12 stipulate fifth to ninth business day of first and 

 13 second year by contracts or further out depending 

 14 if it's Dow Jones to something that may be more 

 15 customized and modified, and for that reason 

 16 modified rolls have developed which are really 

 17 only possible in the over- the-counter space 

 18 because it's not generic enough to be suitable for 

 19 the futures contracts. 

 20 The next point I want to address is the 

 21 who are the participants in these markets. This 

 22 was also commented on by Dr. Fenton. The point to 

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 1 be made here is that it is really a broad, 

 2 well-diversified class of investors ranging from 

 3 pension funds, foundations and endowments. No 

 4 single entity has an exceptional concentration of 

 5 interest in this space that could really create 

 6 any singular force in these markets; it's really 

 7 well diversified. 

 8 Lastly, turning to the how, I've put a 

 9 few pages in here that describe the rolling 

 10 mechanism of these index investments because I 

 11 think that's key to the understanding of the 

 12 effects they would have on these marketplaces. 

 13 Whether it's the standard generic roll that's 

 14 defined by the investment manuals or it's the 

 15 modified rolls that have been created by the swap 

 16 dealers to go over different times, the key point 

 17 is index investing is a passive continuous 

 18 investment that never takes physical delivery of 

 19 any single commodity, so hoarding commodities is 

 20 not really a concept of what the index investor 

 21 does. To elaborate a little further on that, 

 22 investments are typically made in the first near 

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 1 by futures contract, but at some time prior to 

 2 expiration of that futures contract, which if it's 

 3 well designated that futures contract should be 

 4 heading toward the physical price of that 

 5 commodity, the index investor needs to role out of 

 6 that contract and into a more deferred contract 

 7 thereby selling his investment back to the 

 8 marketplace in the spot of the market that is 

 9 closest to the physical market and investing 

 10 something further down the curve. It's that key 

 11 mechanism that is key to understand to make sure 

 12 that there is a relationship between physical 

 13 supply and demand fundamentals and the price that 

 14 is being paid by the index investor. 

 15 Lastly, the point I would like to make 

 16 on the how, and I think I find this relevant 

 17 because there have been so many publications of 

 18 the dollar amount invested in index investments in 

 19 the commodity space that been quite prevalent in 

 20 the press recently to truly understand and what 

 21 that data is telling you. Unlike corporate 

 22 hedgers which invest in commodity units, for 

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 1 example, an airline knows what their consumption 

 2 is and needs to buy a certain quality of jet fuel 

 3 or a producer knows what he produces and sells a 

 4 certain number of barrels into the forward market, 

 5 index investors are primarily concerned about the 

 6 dollar amount of their investments. So when we 

 7 get an order on an index desk to participate in 

 8 the commodities via an index swap for example it 

 9 will be stated, I would like to buy $10 million 

 10 worth of an index. Why that's important if the 

 11 cumulative investment hypothetically in January 

 12 2007 in commodity index represented $100 billion 

 13 worth of commodities, today that investment would 

 14 be worth $174 billion without a single new 

 15 commodity futures contract being purchased. The 

 16 futures contracts that were purchased back in 2007 

 17 just due to price appreciation alone would now be 

 18 worth $174 billion so there would be a $74 billion 

 19 increase on the amount invested in commodity 

 20 futures by index investors that is what you see in 

 21 the press without a single new barrel or bushel or 

 22 BTU of futures contracts being consumed by them 

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 1 and I think that's consistent with Dr. Fenton's 

 2 data showing that there hasn't been a large 

 3 increase in index investor future length in these 

 4 markets but at the same time it's consistent with 

 5 the fact that there is actually more index money 

 6 in the commodity space purely due to price 

 7 appreciation. 

 8 CHAIRMAN LUKKEN: Thank you, Don. Real 

 9 quick we'll turn to Bill McCoy from Morgan Stanley 

 10 and then open it up for comments and questions. 

 11 MR. MCCOY: Thank you very much, Mister 

 12 Chairman and Commissioners, and given that many of 

 13 Mr. Casturo's comments are similar to what many of 

 14 the traders at my firm have viewed regarding that, 

 15 I thought I would just take a few minutes to 

 16 elaborate a little bit more on the issues of how 

 17 the index trader implements trading in the futures 

 18 and the OTC markets particularly in the context of 

 19 the regulatory framework both of the CFTC and 

 20 actually just as if not often thought of, but the 

 21 SEC. Specifically, obviously as we have heard, 

 22 it's very difficult for an index investor to 

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 1 implement the strategy by buying and selling the 

 2 futures and options on futures of the underlying 

 3 futures components so some undoubtedly have put 

 4 together a desk that's capable of doing so. There 

 5 are the specific indices that the CME has of the 

 6 S&P, GSCI futures contract and -- Dow Jones AIG 

 7 contract but in order to try to conduct the 

 8 activity regarding it as we've heard, Dr. Fenton 

 9 indicated the majority of trading by the pension 

 10 plans and investment funds and other types of 

 11 institutions that are given access to among others 

 12 individual investors indirectly has been done 

 13 through transactions with dealers in the OTC 

 14 markets and I wanted to highlight that it 

 15 sometimes forms one or two different types. 

 16 One, using a pension plan as an example 

 17 may do so by entering into an over-the-counter 

 18 bilaterally negotiated contract, a swap agreement, 

 19 of a form that will arrange for the payment to be 

 20 made based on the performance of the index. In 

 21 order to qualify to enter into one of these 

 22 bilateral OTC transactions, the counterparties 

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 1 must qualify as what are called eligible contract 

 2 participants under Section 1(a)(12) of the 

 3 Commodity Exchange Act. As the Commissioners all 

 4 are well aware, this was a definition that was 

 5 incorporated into the Act under the Commodity 

 6 Futures Modernization Act after Congress amended 

 7 the Act in order to address concerns that existing 

 8 in the industry regarding the legal certainty of 

 9 swaps that people had raised prior to such 

 10 amendments. So in order for an entity to enter 

 11 into a bilaterally negotiated contract of this 

 12 type it would have to be what is often referred to 

 13 as an ECP. 

 14 The other type of product that is often 

 15 offered to types of institutions are structured 

 16 notes. Structured notes would come generally in 

 17 the form of a note that the pension plan might pay 

 18 the principal amount of where the return is linked 

 19 to interest rates as well as a return based on a 

 20 formulary return based on the actual index. In 

 21 order to issue the note essentially the issuance 

 22 must be subject to various SEC regulations here in 

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 1 the U.S. For example, the note might be 

 2 registered with the SEC and therefore made 

 3 available to a broad class of investors subject to 

 4 the various types of protections such as 

 5 prospectus delivery and the like. Similarly, the 

 6 issuance might be pursuant to SEC regulations that 

 7 would permit providing the note under other 

 8 conditions such as the party would have to qualify 

 9 as an accredited investor under what's called SEC 

 10 Regulation B or may be sold pursuant to the 

 11 private placement rules of the SEC. I don't want 

 12 to go into obviously the details in the interests 

 13 of time, but obviously there are a number of 

 14 regimes that address that. 

 15 I thought in the interests of time I'd 

 16 just like to summarize that the structure is 

 17 similar to what we've heard Dr. Fenton describe 

 18 with respect to the swap dealers may use the 

 19 futures markets on the designated contract markets 

 20 or other exchanges or perhaps contracts with other 

 21 dealers in order to manage the risk of the payment 

 22 of the transactions whether it is from acquiring 

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 1 the exposure under the swaps or the notes. With 

 2 that perhaps I'll just turn it back to yourself, 

 3 Mister Chairman, if you want to open it up to 

 4 questions. 

 5 CHAIRMAN LUKKEN: Thank you, Bill. 

 6 Let's open it up to questions both from the 

 7 Commission and around the table. Any thoughts or 

 8 comments? 

 9 MR. COTA: This is a question for Don 

 10 Casturo. When you were talking about the who in 

 11 the market and you listed investment funds, 

 12 endowments, foundations, high net worth, where do 

 13 sovereign wealth funds come into that? 

 14 MR. CASTURO: They are participants in 

 15 the commodity index products market as well. I 

 16 don't believe they're any more significant than 

 17 the other classes of investors within that space, 

 18 and again, it just broadens the depth and the 

 19 diversity of who participates in commodity index 

 20 investing. index investing. 

 21 CHAIRMAN LUKKEN: John? 

 22 MR. HEIMLICH: I think most of the 

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 1 people around the room agree with the statement 

 2 that in the end, fundamentals are what's 

 3 determining prices, but I think there's an issue 

 4 on timeframe and I think we need to amend that to 

 5 say that it's perception of the fundamentals that 

 6 determine the prices. Just today Mr. Casturo's 

 7 very talented agency raised the forecasts for 

 8 short term for this year to 122 per barrel I 

 9 believe for crude oil and next year to 126. In 

 10 December they were at 87 and I think they've been 

 11 playing catch-up and I would have to believe part 

 12 of the reason is that historically all their 

 13 resources have been poured into looking at 

 14 physical supply and demand fundamentals and 

 15 they're trying to get more resources to capture 

 16 risk and dollar and financial contribution. 

 17 What I'm getting at is if these very 

 18 companies which do a terrific job for their 

 19 clientele have the ability to influence perception 

 20 of supply and demand fundamentals by putting 

 21 reports from their research arms that may benefit 

 22 the trading arms, isn't it more than just the 

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 1 actual inventories around the world and what we do 

 2 or do not know about places like China in the 

 3 sense that they have the incentive to read the 

 4 news or interpret IEA reports with a somewhat 

 5 bullish lens. I'm not saying that there is 

 6 impropriety, but it's part of the perception of 

 7 how tight the markets are and what you expect for 

 8 a price. In particular in the last month or so it 

 9 has been precipitated large spikes of investment 

 10 money by research reports predicting something 

 11 analogous of a super spike. Isn't this an 

 12 inherent conflict we face as long as there are 

 13 particular exemptions on position limits? 

 14 MR. CASTURO: I'd first like to say that 

 15 there's a very clear separation between our 

 16 research department and our trading department. 

 17 We act well within the laws in terms of having no 

 18 advanced notice whatsoever, no insider trading 

 19 advantage whatsoever to what our research is 

 20 publishing. Secondly, I would just offer that 

 21 index investing as I'm trying to point out with 

 22 the separation between the spot curve and the 

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 1 forward curve, if the physical markets really did 

 2 not demand these products and these prices and the 

 3 index investor in the forward curve had driven 

 4 them to levels that were unwarranted, when he went 

 5 to roll those positions, the price that he would 

 6 have to sell back to the market when he was doing 

 7 his rolling mechanism would be significantly lower 

 8 than where the forward curve is which could 

 9 actually develop for a short period of time but 

 10 ultimately the cost of that rolling would be so 

 11 prohibitive that eventually the index investor 

 12 would be motivated to exit those markets. In the 

 13 oil market recently not only has that not 

 14 happened, but when the index investor got out of 

 15 the oil futures that represented where their 

 16 position was, the physical market which was 

 17 represented by the future heading into expiration 

 18 actually outperformed the contract in which the 

 19 index investor was in. 

 20 COMMISSIONER CHILTON: I have a quick 

 21 question. This is totally out of left field. 

 22 When Congress did Sarbanes-Oxley they separated 

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 1 the accounting from a government relations shop. 

 2 I'm not sure that some people don't regret a lot 

 3 of parts of that law, but that particular 

 4 provision seemed to have made sense for people. I 

 5 wonder about the same thing between the research 

 6 arm and the trading arm. They clearly I think 

 7 could have an impact on one another, and do people 

 8 think, and I'll just throw that out to everybody, 

 9 that that's some distinction that should be made 

 10 either by regulation or law or not at all? 

 11 I'd got a question then, far be it for 

 12 me to let it sit too long, for Mr. Fenton. John, 

 13 you said that swaps traders who are hedging their 

 14 swaps activity with index traders were considered 

 15 commercials because of the swaps activity. Do 

 16 they have a hedge exemption, and if so how many of 

 17 them are there? 

 18 MR. FENTON: In the energy markets, for 

 19 example crude oil, there are no federal limits so 

 20 swap dealers would not pursue a hedge exemption 

 21 with the CFTC. In the ag markets where there are 

 22 federal limits, swap dealers can and have applied 

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 1 for hedge exemptions in those cases related to 

 2 index trading. There have been more hedge 

 3 exemptions because it involves multiple 

 4 commodities, but 12 to 15 entities have requested 

 5 such hedge exemptions. 

 6 I just want to point out that it's not 

 7 just index trading that would be at issue here, 

 8 but any OTC activity, that it may not related to 

 9 index trading but that also could potentially 

 10 qualify for hedge exemption. 

 11 MR. COTA: One of the concerns that 

 12 we've had in general, and this question is going 

 13 to be Morgan Stanley and Goldman Sachs because 

 14 they're the best at what they do from what I 

 15 understand, I normally trade in the physical 

 16 market so the aspect of the index funds and the 

 17 derivative types of programs I'm not as familiar 

 18 with. The concerns that have come up recently are 

 19 with the increasing flow into the commodity 

 20 markets in general from former equity markets and 

 21 former dollar trades, that as this flow comes into 

 22 what is a relatively small market, how do the 

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 1 roles of margin accounts and the derivative 

 2 programs affect the multiplier effect as it moves 

 3 into these markets? Because eventually things tie 

 4 out to the commercial markets and I know how DCM 

 5 works, but I don't know how this works. Is there 

 6 an increased amount of leverage and how does this 

 7 flow increase the total value? 

 8 MR. MCCOY: From what I understanding in 

 9 talking about traders, the positions generally are 

 10 unleveraged and of course they're selling out of 

 11 the spot position shortened buying the deferred 

 12 month long and I would assume therefore it 

 13 wouldn't have an impact, but Mr. Casturo, do you 

 14 have any additional comments? 

 15 MR. CASTURO: I think the key point that 

 16 you made is that by and large these investments 

 17 are fully collateralized, that they represent 

 18 money that these entities actually have and have 

 19 put 100 percent into the commodity space. Us as 

 20 hedgers may not have to put up this same cash 

 21 because we're hedging with the futures market, but 

 22 we're only doing that on behalf of fully 

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 1 collateralized unleveraged participation on behalf 

 2 of our clients. 

 3 MR. COTA: So there's no leverage with 

 4 these groups moving in? 

 5 MR. CASTURO: No, by and large there is 

 6 not for the end investor. 

 7 MR. COTA: I'm not sure I understand 

 8 that fully, but I'm a quick study and I'll work on 

 9 it. 

 10 CHAIRMAN LUKKEN: John? 

 11 MR. HEIMLICH: Just to clarify, Dr. 

 12 Fenton, I'm not sure I heard you right. Are there 

 13 or aren't there position limits on oil contracts? 

 14 MR. FENTON: NYMEX has position limits 

 15 during the last 3 days of expiring futures. Those 

 16 limits are 3,000 contracts. For single months and 

 17 for all months combined there are position 

 18 accountability rules. There are not hard limits. 

 19 I think the number there is 20,000 contracts. Dr. 

 20 Newsome perhaps can talk about what NYMEX does to 

 21 implement those accountability rules. 

 22 MR. HEIMLICH: Depending on the 

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 1 intermediary, aren't some exempted from those 

 2 limits that are in place? 

 3 MR. FENTON: Yes, NYMEX grants hedge 

 4 exemptions during that last 3 days. 

 5 MR. NEWSOME: I think the confusing 

 6 comment was the federally mandated position limits 

 7 which are mandated in the ags. The others, energy 

 8 doesn't have federally mandated position limits 

 9 but we have internal position limits. So the end 

 10 effect is the same that there are position limits. 

 11 The only exemptions that we give are to 

 12 commercial participants who show the ability to 

 13 either make or take delivery from a physical 

 14 component and those are the only exemptions and we 

 15 consider those on a case by case basis and make 

 16 those exemptions based upon that need to either 

 17 make or take delivery of the physical product. 

 18 MR. FOX: Staying with that for a 

 19 minute, John, the last bullet item on the last 

 20 page of your presentation said that ICE Futures 

 21 Europe would be providing position accountability 

 22 levels. Those are soft limits as we say. What 

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 1 I'm asking is are you going to be getting the same 

 2 information from ICE Futures Europe on the 3 day 

 3 limits which are hard limits, and let's be frank, 

 4 they're a lot more onerous? 

 5 MR. FENTON: First of all I just want to 

 6 be clear that I didn't mean to imply by that 

 7 bullet that ICE Futures Europe was implementing 

 8 position accountability rules. I think the idea 

 9 is that when there's a position that would be at 

 10 or above the position accountability rules that 

 11 apply to the U.S. exchange, in this case NYMEX, 

 12 that we would be notified. 

 13 It is my impression that we would be 

 14 notified for positions above the spot month 3,000 

 15 contract limit. I think it's a good thing that we 

 16 be notified. I think it's an affirmative action 

 17 on the part of ICE to do that, but we will be 

 18 getting the large trader data. We will have seen 

 19 it for ourselves. We will know that the position 

 20 is at that level. 

 21 CHAIRMAN LUKKEN: Dr. Newsome, and then 

 22 a couple of Commission comments. 

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 1 MR. NEWSOME: Thank you, Mister 

 2 Chairman. I wanted to follow-up on Kevin's 

 3 question. I guess at the end of the day, getting 

 4 the information is one thing, John. How will you 

 5 use that information particularly if you have 

 6 concerns about the positions? 

 7 MR. FENTON: I think if we had concern 

 8 about the size of the position on either exchange 

 9 or in combination, we would pursue it jointly with 

 10 the FSA to take action in both markets if that 

 11 were necessary so that I think it would be a 

 12 collaborative effort on the government regulators 

 13 and ultimately the exchanges themselves that the 

 14 right think be done, but I think it would involve 

 15 joint activity. 

 16 COMMISSIONER DUNN: John, if you would 

 17 pull up your second slide which is your commitment 

 18 of traders report on NYMEX crude which is the WTI. 

 19 ICE has somewhere between 25 to 35 percent of that 

 20 contract in their market. What do you see in this 

 21 commitment of traders report from ICE and what is 

 22 reported in this? 

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 1 MR. FENTON: There is nothing in this 

 2 report regarding ICE's positions. There are just 

 3 positions on NYMEX. 

 4 COMMISSIONER DUNN: So we're not seeing 

 5 somewhere between 25 to 35 percent of the total 

 6 package then in this report? 

 7 MR. FENTON: No, not in this report. 

 8 COMMISSIONER DUNN: Will we be able to 

 9 see that as we begin implementing this new 

 10 agreement that we have with FSA and ICE? 

 11 MR. FENTON: I think we'll have 

 12 information that is similar to the information 

 13 that goes into this report, so internally we will 

 14 have this kind of information, but we have 

 15 produced commitment to traders reports for the 

 16 markets that we regulate. 

 17 COMMISSIONER DUNN: But it won't be 

 18 transparent to the rest of the consumers at large 

 19 then? 

 20 MR. FENTON: If we didn't make it 

 21 public, it wouldn't be known to the public. 

 22 COMMISSIONER CHILTON: On this vein I've 

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 1 got a question for Dr. Newsome and Mr. Short. 

 2 Let's step back. Whether or not there's anything 

 3 going on in the look alike contracts, we don't 

 4 know and we're gathering this information, but I'm 

 5 going to set the stage. Dr. Newsome, say you had 

 6 company X that had trading positions on NYMEX 

 7 below the position level, but since we don't have 

 8 similar position levels on ICE Europe, if those 

 9 were say twice the amount of the position limits 

 10 that you have on NYMEX, would that be a concern 

 11 for potential manipulation of the crude oil 

 12 market? 

 13 MR. NEWSOME: Commissioner, I think 

 14 certainly it wouldn't necessarily indicate that 

 15 there was manipulation, but it's one of the 

 16 primary tools that both we and the CFTC utilize to 

 17 evaluate whether or not there is possible 

 18 manipulation. So the bottom line answer is, yes, 

 19 that would cause concern and we would think it 

 20 should be looked at much more closely. 

 21 COMMISSIONER CHILTON: So then we have 

 22 the situation where, and again this is 

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 1 theoretically, company X is just under the 

 2 position limits on NYMEX, they've got twice or 

 3 two-thirds as much on U.K., then we've got to work 

 4 with as what Mr. Fenton was saying with the FSA 

 5 and with ICE to try and reduce that. So that 

 6 makes it sort of difficult because as Mr. Arbit 

 7 said, we don't have the legal certainty, in fact 

 8 we have legal certainly in the negative, we can't 

 9 regulate a foreign board of trade now. We can 

 10 work with them with our no action letters, et 

 11 cetera, but we don't have the ability to tell ICE 

 12 and the U.K. you have to set position limits and 

 13 you have to reduce them. Before I go to Mr. 

 14 Short, as I do have a question for him, I just 

 15 wanted to ask Mr. Newsome one more. So you are on 

 16 the Dubai exchange. You have a no action letter 

 17 for a WTI contract there that's not trading yet. 

 18 Do you or will you have position limits on that 

 19 and is so what will they be? Will they be akin 

 20 to, if you have them, the positions on NYMEX? 

 21 MR. NEWSOME: Currently with regard to 

 22 the Dubai Mercantile Exchange, WTI is not traded. 

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 1 We only trade the Amman physical contract. If and 

 2 when a WTI is traded of which we do have 

 3 regulatory approval to list a cash TI, we have not 

 4 listed it yet, when and if we do, we will submit 

 5 large trader reports and have position limits 

 6 similar to what NYMEX has today. 

 7 COMMISSIONER CHILTON: Mr. Short, one, 

 8 this information that ICE has been providing via 

 9 FSA is very helpful. We thank you for it, you've 

 10 been cooperative, and we look forward to improving 

 11 it both in how we receive it and looking at what 

 12 we think will be helpful. Feel free to comment on 

 13 anything I've asked now, but I'm interested more 

 14 in your global perspective. We don't produce all 

 15 this oil in the U.S. This is a global oil market. 

 16 How are we going to deal with that in the future? 

 17 These are 24-7-365 markets around the world. How 

 18 do you think we should be looking at that as 

 19 regulators and as an industry? 

 20 MR. SHORT: I'd be happy to answer that. 

 21 Just quickly giving some background information, 

 22 ICE Futures Europe presently has a position 

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 1 management system. It's not exactly the same as 

 2 the NYMEX system. We look at contracts, the first 

 3 PROMOF (?) contracts coming into expiration and 

 4 delivery and positions are monitored with an eye 

 5 toward preventing distortions. Getting back to 

 6 the question that Commissioner Chilton asked about 

 7 what would happen if NYMEX saw a position being 

 8 exceeded and had a concern about manipulation or 

 9 distortion in the market, I assume there would be 

 10 a dialogue with the CFTC. If we had a 

 11 communication from NYMEX, the CFTC, or the FSA 

 12 that they thought that a market participant was 

 13 engaging in any kind of manipulative activity and 

 14 needed to be ordered down, we would order that 

 15 market participant to decrease their position, no 

 16 two ways about that. There should not be any 

 17 concern about actually enforcing either NYMEX or 

 18 going back the other way if we had a concern about 

 19 market manipulation about that order being carried 

 20 out. 

 21 Just getting back to your last question 

 22 about how do you get your arms around the crude 

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 1 oil market, I think it's a very good question 

 2 because crude oil is by definition a global 

 3 market. We in this country import I think it's 

 4 approximately two thirds of our oil that we 

 5 consume so the idea that you can regulate crude 

 6 oil trading just by looking at one contract or one 

 7 market I don't think holds up at the end of the 

 8 day. There are lots of other parts of the world 

 9 that not only use the WTI contract, but they use 

 10 our Brent crude futures contract. And ultimately 

 11 I think any legislative or regulatory solution has 

 12 to involve mutual recognition of regulatory 

 13 regimes that are comparable and ultimately 

 14 regulatory cooperation if you want to get your 

 15 arms around the question. 

 16 MR. HEIMLICH: First of all, that last 

 17 recommendation I completely concur with, that we 

 18 need to look at this in the global context. 

 19 Perhaps ultimately it's going to take a treaty or 

 20 some type of global agreement. I think a lot of 

 21 this activity is going to be over the counter too 

 22 and it's not going to be enough to address ICE and 

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 1 NYMEX or even Dubai. By the way, I do believe you 

 2 have regulatory authority over U.S. persons or 

 3 U.S. entities who trade abroad and that's one way 

 4 of doing at this. 

 5 Commissioner Chilton, I appreciate that 

 6 you did get to a clarification of the question I 

 7 had for Dr. Fenton about the new reporting 

 8 initiatives which as he and Dr. Arbit were I was 

 9 saying this is a wonderful step in the right 

 10 direction, but it does sound like it's more 

 11 transparency to the regulator but not to the 

 12 general public and I would suggest that it's still 

 13 short of full transparency. So for example when 

 14 Mr. Harris goes up before the Senate and testifies 

 15 and talks about growth in commercial net length 

 16 versus commercial net length, we don't have the 

 17 level of granularity to say is this right, is this 

 18 wrong. We need I think as the public to be able 

 19 to dig into this new level of reporting 

 20 granularity that the regulators themselves will, 

 21 otherwise it's in the dark. 

 22 Lastly, if I could just add, if the 

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 1 majority of people around the room think that 137, 

 2 150, or 200 is completely supported by 

 3 fundamentals out there, I have a tough time 

 4 believing that it's very hard to find someone in 

 5 the production business, and perhaps Mr. Felmy can 

 6 comment, who can tell me that the marginal costs 

 7 of production of a barrel of oil these days is 

 8 triple digits or at least above 110 or pick your 

 9 number, but I can only take that inversely as the 

 10 conclusion. John, can you shed some light on 

 11 that? 

 12 MR. FELMY: Certainly for most of the 

 13 production it's not, but that's not the point. 

 14 It's the fundamentals of supply and demand 

 15 irrespective of the cost of production. This is a 

 16 very complex issue and there are a lot of very 

 17 smart people on both sides of it, but in terms of 

 18 that I just look at if you really believe that the 

 19 price is artificially high for any reason then 

 20 think about your econ 101's supply and demand 

 21 curves. Then you have a situation where supply is 

 22 greater than demand and you should see something 

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 1 happening like inventory accumulation. We're not 

 2 seeing that. Or is it perhaps that producers are 

 3 managing the situation so you don't have 

 4 inventories? Or is it a vertical demand curve in 

 5 the sense of extremely low? That's possible. Or 

 6 finally it is just the data is bad? So those are 

 7 really the fundamentals you've got to sort 

 8 through, otherwise just from simple econ 101, I 

 9 can't disagree that it's the fundamentals. 

 10 CHAIRMAN LUKKEN: I just want to comment 

 11 too about the commitment of trader data and the 

 12 information we're receiving from FSA. Certainly 

 13 we want first to get the information, to improve 

 14 it, to increase the transparency so that we 

 15 understand the participants and the end users in 

 16 the markets. There's a separate question of 

 17 whether we then publish that for the public as 

 18 part of the commitment of trader reports and 

 19 that's something we'll consider. I don't want to 

 20 make it sound like we've made a decision yet. We 

 21 have not crossed that bridge yet as the 

 22 Commission. There are things we'll have to 

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 1 consider what the public value of that might be. 

 2 But certainly that's something we'll consider as a 

 3 Commission and try to make decisions as that 

 4 information is improved. With that let's turn to 

 5 Laura Campbell. 

 6 MS. CAMPBELL: Thank you. My question 

 7 is for Mr. Casturo and Mr. McCoy. When an index 

 8 fund rolls forward, how far into the future do 

 9 they roll forward? 

 10 MR. CASTURO: Within the construct of 

 11 the benchmark S&P/GSCI, in the case of oil it's 

 12 from the first to the second year, by some of the 

 13 other commodities it may skip a year or two, but 

 14 key factor is the benchmark ones are always 

 15 rolling from the first to the more deferred either 

 16 second or slightly further contracts. The 

 17 modified rolls that over-the-counter and swap 

 18 dealers are now starting to implement are rolling 

 19 them a little bit further out the curve. We have 

 20 things that go in the case of oil out to the sixth 

 21 or twelfth year -- but generally it's first to 

 22 second or third. 

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 1 MS. CAMPBELL: Thank you. I guess my 

 2 concern as we're talking about economics 101 is 

 3 that there seems to be a lot of money that's in 

 4 the short term and not in the long term. It also 

 5 occurs to me that if you are an investor and 

 6 you're looking for this exposure, why not just 

 7 invest in an oil company like Exxon who I think 

 8 goes to great lengths that they follow that, they 

 9 don't do any hedging themselves, such that we can 

 10 bring the supply and demand picture back to where 

 11 we have more supply? Do you have any sense on the 

 12 commercial side why you have more people rolling 

 13 to the commodity side as opposed to equities? 

 14 MR. MCCOY: I think as Mr. Casturo had 

 15 indicated and I think our traders are seeing the 

 16 same that the primary interest that we're getting 

 17 from institutional investors is broad 

 18 diversification, diversifying their equity in bond 

 19 portfolios and with other interests and to protect 

 20 against inflation as well. So conceivably they 

 21 could take the course of just a broad 

 22 diversification in the equities market, but 

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 1 they're seeking diversifying further. 

 2 MR. CASTURO: I would add that companies 

 3 like Exxon are not capital constrained, they don't 

 4 need the investor to make infrastructure 

 5 investments, and what the investor in the 

 6 commodity space is doing is giving them the signal 

 7 that it's a safe environment to put their capital 

 8 to work in investing in infrastructure because the 

 9 forward curve price provides some certainty that 

 10 they'll return to employ that capital. 

 11 CHAIRMAN LUKKEN: I think Laura raises a 

 12 good question though and I think it's something 

 13 that the Commissioners think about too, these 

 14 practices developed by index traders over the 

 15 years developed many years go, the 5 day Goldman 

 16 roll that everybody is familiar with and how the 

 17 two nearby months -- my question is do we need to 

 18 rethink the practices of index funds and how they 

 19 enter the market? I think concerns in the public 

 20 are maybe this is an elephant sitting in a hot 

 21 tub, that it's sort of raising the water level for 

 22 everybody here, but are there ways to displace 

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 1 that? If you're looking for broad exposure, it 

 2 should be a 5 day roll, should it be a 10 day 

 3 roll, should it be a 30 day roll, should it be in 

 4 multiple months that may help actually the 

 5 commercials in farther out months looking for 

 6 exposure over the long term that maybe benefit 

 7 from that liquidity that you bring to the markets 

 8 that we agree that is beneficial? Are these some 

 9 of the things we should be thinking about as to 

 10 how index traders develop practices and how they 

 11 come into the markets? 

 12 MR. CASTURO: I think the industry has 

 13 already addressed that with what we're calling 

 14 enhanced strategies. The OTC business on our desk 

 15 right now is only 50 percent invested in the 

 16 generic initial benchmark indices and the other 50 

 17 percent is modified rolling strategies that get 

 18 exactly to your point. So whether we did it on an 

 19 OTC basis or the benchmark strategy is really the 

 20 difference that we're talking about. I think it 

 21 actually makes more sense to do it on an OTC 

 22 basis, again going back to my point of the 

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 1 diversification. If we try to do it on the 

 2 benchmark then we just have a concentration in 

 3 different places because there would be only one 

 4 possible solution, that one benchmark, and by 

 5 doing it OTC we can customize and let people 

 6 distribute their investments all over the curve on 

 7 a case by case basis. 

 8 COMMISSIONER DUNN: Mr. Casturo, your 

 9 handout I found very educational. It was very 

 10 helpful to me. But I'm wondering as we have the 

 11 notional values of these as they increase in value 

 12 in the example that you gave from January 2, 2007, 

 13 to June 5, 2008, where it went up $73.74 billion. 

 14 Then I go back and look at the initial investment 

 15 or the weight of the initial investment in 

 16 commodities. Are those readjusted over the time? 

 17 Say you start off with 20 percent crude oil and 5 

 18 percent wheat, the crude oil does very good, the 

 19 wheat doesn't do well, do you readjust to get back 

 20 to this original pie during the course of holding 

 21 this index? 

 22 MR. CASTURO: Yes, the index is 

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 1 continuously rebalanced to make sure that the 

 2 returns are representative of the index 

 3 distribution that's the targeted index 

 4 distribution of commodities. 

 5 COMMISSIONER DUNN: And that's done 

 6 during the roll? 

 7 MR. CASTURO: Yes. 

 8 CHAIRMAN LUKKEN: Just to clarify, 

 9 products that have increased proportionally higher 

 10 than other commodities you're actually selling 

 11 into this markets versus buying into others that 

 12 were underperforming? Is it countercyclical in 

 13 some ways? 

 14 MR. CASTURO: The mechanism you're 

 15 describing is correct. To keep the ratios -- 

 16 where they're targeted ratios, if one were to 

 17 overperform -- the one that underperforms, there 

 18 would be some redistribution of that. 

 19 CHAIRMAN LUKKEN: And a related 

 20 question, too, we saw a very large run-up in 

 21 prices on Friday to over $10. Is that something 

 22 that index trading typically -- it sounds like 

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 1 it's sort of the buy and hold strategy. Is that 

 2 something that index traders get involved in and 

 3 that's sort of a one day price move or were index 

 4 monies putting more money into that market during 

 5 that period of time? 

 6 MR. CASTURO: I guess my only comment on 

 7 that would be that the typical index investment is 

 8 by nature of the participants in index investing 

 9 done on a much longer term time horizon and it's 

 10 usually the process of a board approval to put 

 11 their endowment assets or pension fund assets to 

 12 work and not really relative to any short term 

 13 price signals in the market. 

 14 CHAIRMAN LUKKEN: I wonder if your 

 15 government observers have any thoughts or 

 16 questions or comments? Guy, do you have anything 

 17 to add? I'll take two more comments and then I 

 18 think we're going to take a short break for some 

 19 coffee and let everybody break. Let's first turn 

 20 to Paul Cicio, actually. 

 21 MR. CICIO: This has been very helpful. 

 22 Thank you. There are still a lot of things I'm 

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 1 not sure I quite understand, but it's helped my 

 2 educational process. I think what I'm hearing is 

 3 that index funds are not contributing to the 

 4 higher price of natural gas and crude oil. And at 

 5 the same time, crude oil, you have the major oil 

 6 companies saying that it should be somewhere 

 7 between $50 and $70, you have OPEC saying that 

 8 they think the price should be $70. On natural 

 9 gas it's not a global market, it's a regionally 

 10 priced product. We have adequate supply versus 

 11 demand, adequate inventories, yet over the last 

 12 year we've seen a 65 percent increase in the price 

 13 of natural gas. So something fundamental has 

 14 continued to happen or evolve in the marketplace. 

 15 If it's not index funds, what is it? I don't have 

 16 the answer, but I hope we do get there. Thank 

 17 you. 

 18 CHAIRMAN LUKKEN: Skip? 

 19 MR. HORVATH: Yes. I actually have a 

 20 pretty basic question for John Fenton. John, when 

 21 you talked earlier about I'm going to call it 

 22 anecdotal evidence that there's no correlation 

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 1 between the curves you showed and the price of the 

 2 commodity, is there more rigor behind that in 

 3 terms of have you analyzed, put a correlation on 

 4 it, you actually showed a negative correlation, is 

 5 it negative or is it zero, and for other 

 6 commodities as well and not just oil? 

 7 MR. FENTON: My surveillance group has 

 8 not done that. I think our chief economist folks 

 9 have looked at categories of traders and I believe 

 10 it includes index traders and have not found a 

 11 correlation. I think that actually in their case 

 12 they're looking at within a market, trading 

 13 activity, not across markets, but within a market 

 14 do changed positions correlate with or associated 

 15 with price moves. I wish they were here but I 

 16 think generally they have found that both managed 

 17 money traders, a subgroup of speculators in 

 18 general or larger professional managed money 

 19 traders, have found that they don't tend to lead 

 20 prices. I'm not sure if they're done the same 

 21 thing for index traders, but the long and short of 

 22 it is I think my group monitors trading day to day 

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 1 and positions day to day, and yesterday's trading 

 2 activity is an example now. I frankly had not 

 3 looked at the data to say on Friday there was any 

 4 reason to believe index traders were involved in 

 5 the market. I suspect they were not. So in 

 6 dealing with experiences in the various markets -- 

 7 appraising market earlier this year, we have not 

 8 found that when for example wheat prices or crude 

 9 prices are particularly strong that it's 

 10 associated with the build-up of index trader 

 11 positions. 

 12 For the reasons I mentioned earlier, we 

 13 don't have a complete handle on index trading. 

 14 The data is not good enough for the energy markets 

 15 and we're going to be improving it. But in the ag 

 16 markets where I think the data is quite good, we 

 17 have not seen a correlation between trading of 

 18 index positions and price moves, but it not based 

 19 on a rigorous study, it's based on watching the 

 20 market and a feel for the market. 

 21 MR. HORVATH: I guess the follow-up 

 22 question is, and maybe you can't answer this and 

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 1 maybe it's not even appropriate, but why is there 

 2 this widespread perception among the press and on 

 3 Capitol Hill that there is a strong correlation? 

 4 It seems almost to be conventional wisdom at this 

 5 point. 

 6 MR. FENTON: That probably isn't for me 

 7 to answer. In a way it's understandable. The 

 8 feeling is if there's $200 billion or whatever the 

 9 right number is that has come into the market in 

 10 the last few years and it's all on the long side, 

 11 I think the view is it's too much money chasing 

 12 too few goods and that doesn't necessarily have to 

 13 have an upward price effect. I think there are 

 14 some flaws in that reasoning. I'm not completely 

 15 dismissing it as a possibility. Certainly we're 

 16 open to the possibility that it is having an 

 17 effect on the market. But futures markets and 

 18 futures contracts are not fixed goods or fixed 

 19 demands. Your effect on the market is if you're a 

 20 buyer, first of all, you don't want an effect on 

 21 the market. You don't want your buying to be at 

 22 ever higher prices and ultimately your effect is 

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 1 the amount of price effect that is necessary to 

 2 draw liquidity on the sell side. Then one could 

 3 imagine that it must have some effect when it 

 4 comes into the market, but does it persist? Is it 

 5 embedded thereafter in the price or does it 

 6 dissipate? 

 7 CHAIRMAN LUKKEN: One more question and 

 8 then we're going to take a short break. 

 9 Commissioner Dunn? 

 10 COMMISSIONER DUNN: I had to ask you 

 11 when I saw your presentation if you'll go back to 

 12 your first slide that you have of the increase in 

 13 the price of crude oil. Looking at that I'd asked 

 14 you to prepare a similar chart based on the value 

 15 of the dollar versus that of the euro. Do you 

 16 have that chart with you? I know you're not here 

 17 to try to determine what is causing the increase 

 18 in crude oil, but it certainly is an educational 

 19 piece for me to see that the U.S. dollar is about 

 20 48 percent of that of the euro and it would occur 

 21 to me that our monetary policies have a great deal 

 22 to do with the run-up in price of crude oil. 

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 1 CHAIRMAN LUKKEN: Let's take a break. 

 2 There's plenty more to talk about. Fifteen 

 3 minutes for coffee and then we'll jump right back 

 4 into it. 

 5 (Recess) 

 6 CHAIRMAN LUKKEN: Welcome back. We're 

 7 going to try and pick up on some of the topics we 

 8 were already discussing and I wanted to start by 

 9 talking about the Foreign Board of Trade program 

 10 issue that we had raised earlier in the program. 

 11 The program that we've developed over time, 

 12 obviously we are trying to in a global atmosphere 

 13 develop a network of regulation around the world 

 14 that recognizes globalization. Something that has 

 15 been happening here at the CFTC since 1996 is our 

 16 Foreign Board of Trade no action process to allow 

 17 U.S. customers to foreign boards of trade 

 18 overseas. Obviously the WTI contract listed on 

 19 ICE raised some questions 2 years ago and we did a 

 20 thorough rule making and hearing to try to address 

 21 some of those concerns. But my concern is by 

 22 shutting off that type of a program we may lose 

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 1 access to all of those markets and I'm not sure we 

 2 can really control the flow of money to those 

 3 markets even if we decide to turn it off. I may 

 4 not like the evening news, but turning off the TV 

 5 does not stop the news from happening. So I want 

 6 to make sure that we have a found program that 

 7 makes sense, that's getting us the right 

 8 regulatory information to do our job to ensure 

 9 that there's not manipulation in the markets, that 

 10 people aren't gaming one market against another. 

 11 I thought it would be useful to turn to 

 12 an unlikely suspect to talk about this issue who 

 13 is Jim Newsome, somebody is competing against 

 14 somebody who is operating a foreign board of 

 15 trade, delisting a contract in competition to Jim. 

 16 You've had my seat before. We're trying to figure 

 17 this out. Are we doing the right things? Are we 

 18 asking for the right information? I wanted to 

 19 talk about you, that if we did shut it off, what 

 20 would be the ramifications not only for us in the 

 21 U.S., but also what would your competitive 

 22 ramifications as you try to seek access overseas 

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 1 and in other markets that may retaliate against 

 2 such actions in the United States? I just wanted 

 3 to get your views on this issue. 

 4 MR. NEWSOME: Thank you, Mister 

 5 Chairman. I'm more than happy to give you my 

 6 views, and fully recognizing that it is a very 

 7 sensitive topic. Also recognizing that the no 

 8 action process has worked very, very well for both 

 9 U.S. markets as well as foreign markets and 

 10 provided the kind of access to differing customer 

 11 bases without having to become regulated entities 

 12 of that foreign jurisdiction. 

 13 I think you are asking the right 

 14 questions. If anything, I might add that maybe 

 15 you're a little bit too sensitive in the way 

 16 you're some of the questions, and I'll raise a 

 17 couple of those thoughts. Certainly the big fear 

 18 from the exchange standpoint, I know a fear of the 

 19 Commission is that if you get too strict with 

 20 regard to requiring foreign boards of trade to 

 21 come in from a regulatory standpoint, then U.S. 

 22 exchanges open themselves to retribution from 

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 1 other foreign jurisdictions who make it more 

 2 difficult for us to access their customers and 

 3 certainly that is a concern. Certainly that's not 

 4 a path that we want to go down because right now 

 5 it's a very open marketplace with all legitimate 

 6 exchanges having access to global customers. 

 7 Some in the Congress have brought up 

 8 that there should be a revocation of foreign 

 9 boards of trade no action letters and I think 

 10 that's the worst thing that could happen. I do 

 11 think there's appropriate middle ground. The 

 12 Commission is asking the questions that you need 

 13 to to find that middle ground. But I guess when 

 14 we raised the issue 2 years ago when there was a 

 15 debate here at the Commission and among industry 

 16 participants, a lot of people made it seem like it 

 17 was a competitive issue between NYMEX and ICE and 

 18 we never took the position that ICE shouldn't have 

 19 the ability to list the contract. Our primary 

 20 concern was unfortunately pretty much the 

 21 situation we're in now in which the CFTC and 

 22 therefore the U.S. Congress doesn't have access to 

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 1 transparent information on key U.S. contracts. 

 2 To me when you look at the foreign board 

 3 of trade recognizing that it serves a very, very 

 4 important role, I thin it's a slippery path to 

 5 take if you started saying should we have to bring 

 6 somebody in who's currently under the no action 

 7 and require registration? That's a path that I 

 8 don't think that we should go down. However, the 

 9 reason that people come in for the no action 

 10 letters is because they want access to U.S. 

 11 customers and I think that's big stick for the 

 12 Commission to have without requiring registration. 

 13 I would contend that those no action letters could 

 14 conditioned to say we're happy giving you access 

 15 to U.S. customers but in cases that the Commission 

 16 determines appropriate whether it's the 

 17 sensitivity of the contracts at heart to say but 

 18 for this access we're going to require large 

 19 trader reports so that market can be completely 

 20 transparent and we want to make sure there is some 

 21 kind of position accountability. 

 22 Really the tools that John and his group 

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 1 use in market surveillance every day is the 

 2 cornerstone of what the Commission does that I 

 3 think is an appropriate tradeoff for access to 

 4 customers here. So in general, Mister Chairman, 

 5 those would be my thoughts. 

 6 CHAIRMAN LUKKEN: I think the Commission 

 7 recognizes we're always open for improvements, 

 8 enhancements and we do the best we can based on 

 9 the information we have, but we want to always try 

 10 to improve the program and harmonize with other 

 11 regulators on how we oversee the market and that 

 12 certainly is evidenced by our recent announcement 

 13 on getting better data. Paul Pantano, I think you 

 14 also had some thoughts from FIA's point of view on 

 15 this issue. 

 16 MR. PANTANO: Yes, thank you. First I'd 

 17 like to call everyone's attention to a statement 

 18 the FIA issued today which is related to this 

 19 topic, supporting the Commission's efforts to 

 20 improve price transparency and enhance market 

 21 surveillance. The FIA believes that the 

 22 Commission's approach to the foreign board of 

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 1 trade issue has been productive in a number of 

 2 ways some of which former Chairman Newsome 

 3 mentioned, but it has definitely increased trading 

 4 opportunities for customers, it's promoted some 

 5 interesting developments in electronic trading, it 

 6 has promoted competition among exchanges which is 

 7 always a good thing for customers, and it has 

 8 importantly fostered improved cooperation among 

 9 international regulators. Commissioner Dunn 

 10 pointed out today that this is an international 

 11 issue that the Commission is struggling with and I 

 12 think you've seen the benefit of the approach the 

 13 Commission has taken with the recent agreement 

 14 with FSA and ICE Futures Europe. We can't pretend 

 15 that these other jurisdictions don't exist as you 

 16 just pointed out, and it's important for the 

 17 regulators to cooperate and obtain information in 

 18 a number of different ways. John Fenton's slide 

 19 today identified all of the enhanced information 

 20 that the Commission is going to receive as a 

 21 result of that agreement and if the Commission 

 22 were to heed requests by some parties to withdraw 

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 1 no action requests, the Commission is going to 

 2 lose access to all of that valuable information. 

 3 CHAIRMAN LUKKEN: There are a lot of 

 4 traders around the room. I'd just be curious, 

 5 what do you choose one market versus another? Is 

 6 it price? Is it liquidity? Do the regulations, 

 7 the rules of the road of the market matter that 

 8 it's going to drive you to ICE because it's less 

 9 onerous? There aren't the position limits in the 

 10 last 3 days of days of trading as has been 

 11 indicated. What are the factors that bring you to 

 12 one place versus another? Any thoughts? 

 13 MR. STAINTON: I think maybe it's 

 14 helpful just for me to brief description of how we 

 15 run our business. Within the energy team at 

 16 Citadel we're a fundamental investor so we spend 

 17 our time evaluating supply and demand and making 

 18 our investment decisions based off of that. So as 

 19 we look at the different markets we can access, 

 20 what really brings us to markets is transparency, 

 21 liquidity, and oversea friction (?) costs. So 

 22 those are really the driving points that bring us 

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 1 to the market and so as we evaluate the different 

 2 instruments that we can use, those are key metrics 

 3 for us. 

 4 CHAIRMAN LUKKEN: Bo, I think you had a 

 5 comment. 

 6 MR. COLLINS: One of the huge drivers 

 7 for any trader just simply because of the 

 8 transactional nature and cost of transactions is 

 9 liquidity, and liquidity is a funny animal in that 

 10 it sort of begat -- so in the construction of any 

 11 market or any contract for that matter, you end up 

 12 reacting as a trader to a lot of very, very small 

 13 nuances and subtleties and this is where I think 

 14 it's reasonable to have a keen awareness of the 

 15 potential competitive forces in foreign 

 16 jurisdictions because once a moment of liquidity 

 17 begins to shift to another jurisdiction or another 

 18 exchange, it becomes very, very difficult to 

 19 recover, and I would say simply the formation of 

 20 liquidity is probably the biggest driver of what 

 21 traders pay attention to in terms of where they 

 22 want to conduct a transaction. 

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 1 CHAIRMAN LUKKEN: Much has been made too 

 2 about the fact that ICE is a cash settled contract 

 3 not requiring physical delivery of the West Texas 

 4 crude oil versus the NYMEX, the physical contract. 

 5 Does that matter for regulatory purposes? 

 6 Obviously we have position limits that are meant 

 7 to ensure that one trader is not able to hold in 

 8 the last month of trading a position that could 

 9 corner or squeeze the market. That has been 

 10 around since the beginning of the futures markets 

 11 and the Hunt silver crisis and everybody knows 

 12 about examples of those types of corners and 

 13 squeezes. But should it matter from a regulatory 

 14 point of view whether it's cash settled versus a 

 15 physical settle? Do limitations still matter, the 

 16 position limits in those types of market? 

 17 MR. COLLINS: I would say they certainly 

 18 matter. It's something that you want to play 

 19 close attention to. I do think ultimately it's 

 20 important for a commodity contract to reflect the 

 21 fundamental economic forces of the commodity it 

 22 represents. So ultimately within the construct of 

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 1 either a contract or a series of contracts, you 

 2 want one or some of them to be reflecting the 

 3 physical activity of that flow of commodity and 

 4 that's handled either through the reporting of 

 5 indices, it's handled through physical delivery, 

 6 or it's handled through having a series of 

 7 contracts that relate to one benchmark as they do 

 8 in the case of WTI and NYMEX. NYMEX has the 

 9 physical contract that sets the settlement for the 

 10 WTI contract and if you go through termination 

 11 with a position in that contract, you're required 

 12 to deliver it. 

 13 CHAIRMAN LUKKEN: Johnathan Short and 

 14 then Sean. 

 15 MR. SHORT: I just wanted to pick up on 

 16 one point that was made about liquidity and just 

 17 give some people a perspective about ICE futures 

 18 and Europe's markets. In talking about WTI, I 

 19 would just make sure that people know that our 

 20 other contract, the Brent crude futures contract, 

 21 we have the deepest liquidity in our markets for 

 22 that contract and a lot of the trading that occurs 

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 1 on ICE Futures Europe is actually spread trading 

 2 between the Brent crude futures contract and the 

 3 WTI contract and related trading. So I think 

 4 that's one of the reasons that some people have 

 5 looked to our markets. 

 6 MR. COTA: There is becoming a 

 7 disconnection between the physical markets and the 

 8 financial aspects of these. I was recently 

 9 talking with an investment banking person and they 

 10 said really right now there are three world 

 11 currencies. There's the U.S. dollar, the euro, 

 12 and commodities, and in particular energy within 

 13 those commodities, and that you can have an 

 14 economic model where you have demand destruction 

 15 in the underlying commodity that won't affect the 

 16 economic model of the financial instrument 

 17 particularly if that physical portion of the 

 18 market becomes a smaller and smaller portion. I'm 

 19 almost unique in the trading environment where I'm 

 20 actually taking physical delivery and bringing it 

 21 out to the retail consumer but that's a very, very 

 22 small amount. One of our concerns in the heating 

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 1 oil industry which although there's plenty of 

 2 supply and just so you all know there's been 

 3 demand destruction, sales are way down and EIA 

 4 data is all delayed and I've got people chopping 

 5 wood everywhere, so wood is going to replace me. 

 6 So what's happening is that as the 

 7 financial models for these types of trades become 

 8 a larger and larger portion, our supply network in 

 9 hearing oil in particular more so than the other 

 10 commodities relies on the physical delivery 

 11 contracts and if the physical delivery contracts 

 12 become marginalized because the financial segments 

 13 overtake that so people no longer even care about 

 14 the physical delivery, then I've lost my supply 

 15 and that's critical. I think you're seeing it 

 16 somewhat in the grain elevator scenarios where 

 17 they've said we're not going to price off from the 

 18 CME contracts, I think it's CME, because it's now 

 19 to the point of ridiculousness that we're not 

 20 going to be able to supply in these sorts of 

 21 volumes and there's a disconnect and I'm afraid 

 22 that we're getting the same disconnect. My 

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 1 concern is by the time that the large players, the 

 2 investment funds that are doing the long term 

 3 buying one directional, going long only, finally 

 4 realize that there's been complete demand 

 5 destruction, the market is going to collapse in a 

 6 very short order and this bubble when it bursts is 

 7 going to do it in a very disorderly way and I'm 

 8 not sure how that serves either the economy, I as 

 9 a person who buys futures contracts, or even the 

 10 traders. We need to deal with that issue some 

 11 place. There is a large group that is dominating 

 12 the industry to the point where the physical 

 13 markets are almost immaterial. 

 14 MR. HEIMLICH: I think this comes back 

 15 in part to the transparency issue. I think 

 16 everyone agrees here that we don't want to to the 

 17 extent we don't think there is a problem and we 

 18 don't want to push it to outside U.S. Borders, so 

 19 I think one suggestion is to have a global 

 20 consolidated commitment of traders report that is 

 21 sufficiently granular to understand the categories 

 22 of trades going on regardless of what geography 

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 1 they originate. I know that's a tough task. And 

 2 it should be able to account for the fact that 

 3 still I think oil on foreign boards of trade is 

 4 not subject to some of the closing we had in the 

 5 Farm Bill. We should look at the exemptions on 

 6 reporting requirements, and I think the threshold 

 7 is set too high now so that whatever that 

 8 consolidated report ends up looking like, it 

 9 should capture regardless of whether you're a 

 10 large trader or not. 

 11 CHAIRMAN LUKKEN: We do capture a lot of 

 12 -- I think John said 97 percent of the oil markets 

 13 and I think it was intended to ensure that we get 

 14 the large traders who can manipulate the markets, 

 15 so that we would have to evaluate obviously what 

 16 cost and value that getting that extra 3 percent 

 17 might mean, but certainly the point is well taken 

 18 that transparency is important for these markets. 

 19 Foster, I know you've been interested in 

 20 commitment of trader issues as well and I'm going 

 21 to pick on you since you're close to me. Do you 

 22 have thoughts on what we might be doing 

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 1 differently in this area? 

 2 MR. SMITH: I think we hit on it a 

 3 little bit before break, and unlike Don, I didn't 

 4 have the benefit of preparation since I only found 

 5 out a few minutes ago that you were going to call 

 6 on me, so everybody will be pleased that that will 

 7 probably keep me brief. 

 8 I think a lot of my peer group and 

 9 colleagues over the last let's say 5 to 7 years 

 10 probably all would agree that the information 

 11 that's contained in the commitment of traders 

 12 reports has become increasingly less useful and 

 13 that's just been a function of industry 

 14 participants changing and perhaps, I don't want to 

 15 say you guys not keeping up with that because 

 16 that's sort of an admonition and that's not what 

 17 I'm trying to say, but that's why you're asking us 

 18 how can we change it to perhaps make it a little 

 19 bit more useful and I think a step in the right 

 20 direction is the sort of collaborative agreement 

 21 that you guys have announced with the FSA and 

 22 that's great that you're going to be getting the 

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 1 information with respect to the WTI look alikes. 

 2 But as someone else pointed out a little bit ago, 

 3 if you just use that for your own kind of 

 4 consumption and don't take the step to disseminate 

 5 it in a more broad fashion then I think it really 

 6 doesn't benefit the right people. So I for one 

 7 would like to see just like for example 3 or 4 or 

 8 5 years ago when the NYMEX introduced the NN 

 9 contract which is essentially the NYMEX look alike 

 10 swap although I do think it's a futures contract 

 11 that's just cash settled, you guys have included 

 12 that Henry Hub swap in the composition of the COT 

 13 report and I think that's added to the usefulness. 

 14 But again in the interests of transparency and 

 15 trying to see the big picture, it still is not 

 16 telling the whole story if you look at futures and 

 17 options combined and you look at swaps and I guess 

 18 the NYMEX Cleared, the LN contract, options 

 19 combined, you're still missing a large piece of 

 20 what's going on. And to the extent that you guys 

 21 are going to begin getting that information on 

 22 WTI, I don't know, A, why you wouldn't be getting 

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 1 it on the nagas, and, B, why you wouldn't be 

 2 disseminating it to the broader public. 

 3 MR. FOX: Let me start off by saying 

 4 that I think the NYMEX is far more efficient today 

 5 as a result of the competition from the ICE. 

 6 Buy-ins are closing on 85 percent being traded 

 7 electronically as opposed to calling down to the 

 8 floor and executing in the pit, so that's a 

 9 benefit that all traders are happy with. 

 10 To answer your question about physical 

 11 versus financial settlement and whether it's 

 12 important, I would say at least for natural gas 

 13 it's critically important because most of the 

 14 natural gas is priced on the last day. Most of 

 15 the utilities, munies, co-ops, buy their gas at 

 16 index on the last day or maybe on the average of 

 17 the last 3 days or something along those lines. 

 18 They really just want to buy their gas at the 

 19 market so that their state regulators can be 

 20 convinced that they were prudent in their buying 

 21 practices and that they weren't speculating on 

 22 flat price. It's important that the index that is 

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 1 settled at the end of the day represents the 

 2 market, so really the last half-hour on the last 

 3 day is where the bulk of the natural gas in the 

 4 United States is priced. The limit for 

 5 speculators on the last day is 1,000 contracts and 

 6 that's 1,000 contracts for the entire entity. My 

 7 firm, for example, has four different entities 

 8 that trade natural gas and it includes option 

 9 delta so you have to add up all the participants 

 10 at your firm who trade natural gas including 

 11 option delta and make sure that you are within 

 12 plus or minus 1,000 on the last day. However, 

 13 that does not apply to ICE. In fact, on the last 

 14 day of trading I've seen some eye-popping volumes 

 15 on the buy side and I wonder sometimes how people 

 16 could buy such astronomical amounts of natural gas 

 17 on the last day. Clearly you couldn't do it on 

 18 the NYMEX because just the sheer size would cause 

 19 you to exceed the limit, so that's why it's 

 20 important that the limits apply to the financial 

 21 settlements as well. 

 22 CHAIRMAN LUKKEN: Thank you. Obviously 

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 1 I mentioned in my opening statement that we are 

 2 implementing the Farm Bill provisions that would 

 3 place responsibility on some of these types of 

 4 contracts including the ICE natural gas look alike 

 5 contract where they would be required to put 

 6 position limits and accountability limits on these 

 7 contracts after we do our rule makings in this 

 8 area. Laura, I think you have your card up. 

 9 MS. CAMPBELL: Yes. I'd just like to 

 10 add onto that you're exactly right, we do price 

 11 most of our natural gas at that last hearing and I 

 12 guess I'm wondering because there was a time when 

 13 it was priced over a longer period of time. 

 14 Perhaps there's a commercial reason why we've 

 15 changed that, but I'm suggesting that perhaps it 

 16 needs to be a longer period of time that we 

 17 calculate that price. Frankly, we buy our 

 18 physical gas often at the NYMEX price because we 

 19 manage our basis that way, we do a basis swap and 

 20 them just buy the physical at the NYMEX and it's 

 21 great deal that natural gas is priced at that 

 22 price. So unless somebody has a reason why that 

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 1 window has narrowed, I'd like for us to at least 

 2 explore widening that window again. 

 3 CHAIRMAN LUKKEN: This is something I've 

 4 personally been interested in since our ECM 

 5 hearing last fall, why people benchmark off of 

 6 certain periods of time on the markets and whether 

 7 we can develop practices that might help smooth 

 8 volatility for those who rely on these closing 

 9 prices on the markets. There might be better ways 

 10 to benchmark, and I agree that this is I think 

 11 something that we need to address as a committee 

 12 in the future about how we should look at these 

 13 closing windows and how people benchmark against 

 14 them. Comments? 

 15 MR. CICIO: I would just echo what was 

 16 just said about the importance of trying to extend 

 17 that from one day to a longer period of time. 

 18 Consumers are a suspicious group when 

 19 you have high prices like we've experienced. 

 20 We've already lost a lot of jobs, and CEOs from 

 21 these companies are very concerned about 

 22 maintaining their presence in the United States. 

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 1 If you're not aware, we've lost 3.3 million 

 2 manufacturing jobs just since 2000. That's 19 

 3 percent of all manufacturing jobs. Pretty 

 4 shocking isn't it? A lot of those jobs were due 

 5 to specifically the higher prices of natural gas. 

 6 So we should to all we can to be responsive to 

 7 helping price this product, and a longer pricing 

 8 period would be helpful. It would make consumers 

 9 a little more trusting of the system which they 

 10 are not today. 

 11 COMMISSIONER CHILTON: Mr. Cicio, I'm 

 12 curious, given that index funds roll their 

 13 positions every month and that physical traders 

 14 know that, doesn't that give a great comfort the 

 15 traders to go long and to keep the price up over 

 16 time? 

 17 MR. CICIO: Actually that's a good 

 18 point. It seems to be based on the charts that we 

 19 saw earlier that all those dollars are being 

 20 rolled forward and it appears that most of it's 

 21 long. So if I were someone who was playing the 

 22 market in the business to make money off of 

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 1 trading, and that's not my type of customer, my 

 2 customers need raw materials to stay in business 

 3 and be globally competitive. But to me if I were 

 4 a trader, that buildup month after month after 

 5 month is pretty predictable and if I were a trader 

 6 that probably would give me an impetus to consider 

 7 more long positions than short. It's common 

 8 sense. 

 9 CHAIRMAN LUKKEN: There are a lot of 

 10 traders around the room. That seems to be the 

 11 public perception that these long only funds are 

 12 pushing up prices. Is that your view as a trader 

 13 in the markets? Does it create sort of a piling 

 14 on effect? 

 15 MR. CASTURO: I'd first like to address 

 16 the physical future contract issue. We have every 

 17 vested interest even as paper players that futures 

 18 contracts represent the true physical fundamental 

 19 price for that commodity, otherwise our business 

 20 isn't really based on anything and even our 

 21 clients would have that same thought. I'm not 

 22 convinced that it requires physical delivery of 

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 1 the contract. If a cash settled contract gets its 

 2 price from the physically delivered contract, then 

 3 essentially you've accomplished that. But by all 

 4 means, it's vital to us that futures contracts do 

 5 represent the physical and have some element of 

 6 conversion. 

 7 Secondly, to address the point about 

 8 whether it's predictable that index investors are 

 9 driving the market up and wouldn't you just get 

 10 long, I don't know at what point you could 

 11 actually do that because the index investor does 

 12 sell back their investment in the first near by as 

 13 it's approaching the expiration, i.e., the point 

 14 where it becomes the physical market. So if you 

 15 were investing in the physical and hoping to 

 16 capitalize from index length, the fact is they're 

 17 actually going to be selling back to the market at 

 18 the time where you as a physical holder would be 

 19 hoping to capitalize and the flow would actually 

 20 go the wrong way. 

 21 CHAIRMAN LUKKEN: Satu and then John. 

 22 MR. PARIKH: I wanted to address a 

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 1 couple things. The first was again the physical 

 2 financial debate that we're hearing. I think 

 3 again that it doesn't really matter as long as you 

 4 have a proper index settlement that the contract 

 5 refers to rather than actual physical commodity. 

 6 For example, euro dollar futures are one of the 

 7 most liquid futures contracts in the world and 

 8 they settle to a price index. You don't actually 

 9 need to get a deposit in the house to ensure that 

 10 you're getting the appropriate price for your 

 11 interest rate, and similarly there are many 

 12 different contracts around the world, in Asia 

 13 there are plat settlements to swaps, there is 

 14 obviously the lean hogs contract which is cash 

 15 settlement. So you don't necessarily need to have 

 16 a physical delivery contract to have a liquid 

 17 market. 

 18 The second thing is I think to Laura's 

 19 point and to Paul's point, at the end if the day 

 20 if you want a market price, you want the tightest 

 21 window at the end point of the contract. That's 

 22 where the market is at. So assuming there's no 

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 1 market manipulation and assuming that no one is 

 2 actually gaining the actual settlement at close, 

 3 you actually are taking more market risk by having 

 4 a longer window. So if you want to take that 

 5 market risk that's fine, firms like our firm and 

 6 many of our competitors can price that. If you 

 7 want a 5 day window or 20 day averaging, no 

 8 problem we can price that. I think we have to be 

 9 careful that we're sort of not imposing regulation 

 10 on some of the more customized solutions that 

 11 firms could provide. 

 12 MR. HEIMLICH: I agree with Don that it 

 13 makes perfect sense that you don't want to have a 

 14 large position that doesn't reflect your 

 15 perception of the fundamentals, but again that 

 16 comes back to my earlier point about perception of 

 17 what the fundamentals are. In the good old days 

 18 when it was just EIA and IEA telling us in just an 

 19 occasional news announcement, that was our source 

 20 of everyone's perception of how tight the 

 21 supply-demand relationship was out there. 

 22 But things are different now, 24-7 news, 

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 1 the internet age, Wall Street analysts' reports 

 2 ping-pong around the globe and very quickly people 

 3 can change their perception of how tight the 

 4 market is. I know this may not be a popular 

 5 proposal, but since the room includes some folks 

 6 from other government agencies, I think we should 

 7 consider whether there should be disclosure rules 

 8 of the positions held by some of the companies 

 9 either by site or the commodity indexes of what 

 10 their stakes is in these investments. Boone 

 11 Pickens can come on the news without disclosing 

 12 anything and say I think the market's right, it's 

 13 going to go to $200 by October and without any 

 14 really fundamental news out there about a real 

 15 supply disruption or perceived threat of delivery 

 16 risk, you see the market respond instantaneously. 

 17 I think just as we have disclosure rules now on 

 18 the equity side, for example, airline equity 

 19 analysts have to disclose their firm's stock 

 20 holdings and who they do business with, I think 

 21 perhaps we should consider extending that to other 

 22 types of asset holdings. 

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 1 CHAIRMAN LUKKEN: Other comments? 

 2 MR. PARIKH: I actually strongly 

 3 disagree with that. People have the right to take 

 4 positions in different markets and not have 

 5 everyone else know about it. I think people have 

 6 views of the different markets, they have the 

 7 right to express them in a public forum, and again 

 8 I think the question is are people manipulating 

 9 the markets or are they using their own inside 

 10 information to affect markets and that's a 

 11 different question. But I don't know that the 

 12 answer to that having everyone's positions for 

 13 everyone else to see. That doesn't make sense. 

 14 COMMISSIONER CHILTON: Mister Chairman, 

 15 I'm curious, for the traders from Morgan, Merrill, 

 16 Lehman, and JP, to what extent do you believe that 

 17 the bilaterals in the energy space are having an 

 18 impact on price discovery? 

 19 MR. SMITH: I personally don't think 

 20 they're having any impact whatsoever. I think 

 21 like some of my competitors here, we do an 

 22 enormous amount of bilateral business on a daily 

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 1 basis that ultimately ends up being disseminated 

 2 back onto some electric platform, you either see 

 3 it on ICE or you see it on ClearPort or you see it 

 4 in the futures pits. So by and large when you see 

 5 price moves in a day that are sort of outside of 

 6 the norm, there was a piece of business that came 

 7 in and then it manifested itself in the price that 

 8 you guys see and that everybody sees when they 

 9 check Reuters or look up at CNBC, so I would say 

 10 that there's no impact whatsoever. 

 11 CHAIRMAN LUKKEN: Michael? 

 12 MR. PROKOP: Thank you. I would also 

 13 submit that I would say over the last 3 or 4 years 

 14 since we've seen the advent of clearing both from 

 15 ICE and the NYMEX, we currently as a facilitator 

 16 of these transactions, bilateral as well as those 

 17 types of transactions, we've seen a great deal of 

 18 those now go to clearing. Upwards to 65 percent 

 19 of nor natural gas transactions are now being 

 20 cleared on both the LCH, the ICE, and on the NYMEX 

 21 and probably about 35 percent of our electricity 

 22 contracts that we're doing right now. 

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 1 CHAIRMAN LUKKEN: Bob? 

 2 MR. PICKEL: I was just going to comment 

 3 on the bilaterals. The exchange serves as a price 

 4 discovery function and it effectively is a 

 5 clearinghouse for information, so anybody who's 

 6 trading on that exchange is sending a signal to 

 7 the entire market. In the bilateral situation, 

 8 the only person I'm sending a signal to when I 

 9 trade is my counterparty and they may read that 

 10 and in turn hedge in some way or I may decide I 

 11 need to hedge by going on the market, but that's 

 12 the relevant action that's going to provide 

 13 information to the broader marketplace, not that 

 14 bilateral trade. 

 15 COMMISSIONER CHILTON: Thank you, and I 

 16 should have asked you first, so I apologize for 

 17 that. But in my example earlier where you have 

 18 company X, they're long WTI on NYMEX, they're long 

 19 on the WTI look alike, on ICE, they've got some 

 20 OTC transaction, they've taken a large bilateral 

 21 transaction, isn't that something that we should 

 22 be concerned about, that it might have sort of a 

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 1 tangential impact on price discovery? Is there 

 2 some reason why it wouldn't? 

 3 MR. PICKEL: Drawing the connection 

 4 between the activity on the bilateral which 

 5 doesn't have that price effect and the trading on 

 6 either the exchange or on ICE, I don't know that 

 7 you can draw that connection. Ultimately parties 

 8 will decide that a portion of their position needs 

 9 to be hedged on the exchange and then they're 

 10 sending that signal to the marketplace that in 

 11 turn everybody will interpret and with drive 

 12 prices up or drive prices down. 

 13 COMMISSIONER CHILTON: So you don't 

 14 think it matters in the aggregate? If you take 

 15 all of their positions including bilateral and 

 16 what they're doing on the exchange, you don't 

 17 think that matters at all? 

 18 MR. PICKEL: I think there's more 

 19 relevance. If I have 50 trades I've done on a 

 20 bilateral basis, I may hedge 40 of those through a 

 21 series of bilateral trades leaving me in kind of a 

 22 net position where I might go out to the exchange. 

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 1 I think that net position that people go out to 

 2 the exchange for is the relevant analysis. 

 3 CHAIRMAN LUKKEN: On that issue, it's my 

 4 understanding and this group knows better than I 

 5 do, but a lot of these bilateral trades then come 

 6 in through ClearPort and other mechanisms to clear 

 7 and at that point we then start getting the large 

 8 trader information that we typically get on 

 9 futures contracts. Do people have a clue of how 

 10 much of the business is coming into the clearing 

 11 system at a time when people are critical of the 

 12 credit- default swaps and other interest rate 

 13 swaps that have no counterparty clearing 

 14 mechanism? I would think this is something we 

 15 want to keep encouraging come through not only for 

 16 the counterparty risk but also for the regulatory 

 17 purposes of us getting this transparency to this 

 18 information. Johnathan, do you have any more 

 19 information on how much -- 

 20 MR. SHORT: I was just going to say the 

 21 clear trend in our business is toward blocking in 

 22 those positions for clearing. When you look at 

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 1 ICE over time and the amount of bilateral trading 

 2 and cleared trading, clearly the trend is toward 

 3 clearing and then even transactions that occur 

 4 bilaterally off the market are not typically 

 5 blocked in through ICE, and I think Jim would 

 6 probably say that that's happening through 

 7 ClearPort as well. 

 8 MR. NEWSOME: I don't think there's any 

 9 doubt that there's a trend toward clearing. It's 

 10 substantial already in natural gas and it's 

 11 growing in some other contract areas as well. I 

 12 think one of the key questions is that the cleared 

 13 OTC business from ClearPort gets rolled into 

 14 futures and is submitted as part of our large 

 15 trader report and is counted against position 

 16 limits. But the other aggregated OTC volume is 

 17 not transparent, so I think the trend is good that 

 18 it's becoming clear that again it all goes back to 

 19 the transparency which we've been talking about 

 20 today in terms of who gets to see it and how you 

 21 can use it. 

 22 CHAIRMAN LUKKEN: Laura? 

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 1 MS. CAMPBELL: Actually, I'm very 

 2 pleased to hear that a lot of people are moving 

 3 toward clearing through ClearPort of one of those 

 4 mechanisms. From the utility perspective we like 

 5 ClearPort. For the credit risk, the concern that 

 6 we have and where we have to find some balance is 

 7 cash risk because now we're subject to the 

 8 margining and moving a lot of money very quickly 

 9 is not the utility's forte, so then it becomes a 

 10 limitation to us on the cash side and that's just 

 11 something to keep in mind, but we do like the 

 12 transparency that it affords. 

 13 CHAIRMAN LUKKEN: Thank you. Michael? 

 14 MR. PROKOP: I think you touched on 

 15 something there, Laura, that it is to the 

 16 individual corporation the decision whether to do 

 17 bilateral trades or clear trades on their economic 

 18 portfolio. Doing bilateral trades, extending 

 19 credit risk out to individual companies obviously 

 20 carries risk in itself and the cost of capital 

 21 putting aside that money to make those payments. 

 22 But then again having your surety of these 

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 1 exchanges whether it's the LCH or ClearPort, NYMEX 

 2 behind that, to have those guarantee funds behind 

 3 those transactions to make sure that they will 

 4 settle and not have that risk of default that we 

 5 saw. And keep in mind also these clearing 

 6 mechanisms came to be because of the credit 

 7 situation in the marketplace. After the Enron 

 8 debacle and the market fell apart, individual 

 9 counterparties that had swap dealer agreements in 

 10 place could no longer deal with each other but 

 11 really came in the next morning and had nowhere to 

 12 get out of their positions. So I would submit 

 13 that it is in fact a great mechanism for the 

 14 marketplace. It's allowed a great deal of 

 15 different types of individuals, companies, even 

 16 utilities and what have you to participate in the 

 17 market where they did not have access before 

 18 whether it be a restriction on a swap dealer 

 19 agreement or some type of restriction because of 

 20 their credit picture. 

 21 CHAIRMAN LUKKEN: Mark and then Kevin. 

 22 MR. STAINTON: I just wanted to comment 

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 1 on the reporting and some of the comments I've 

 2 heard around the table. I think as I mentioned 

 3 earlier what's critical to us in the marketplace 

 4 is transparency and liquidity. I think we've had 

 5 a good discussion around the benefits of 

 6 potentially extending some of that reporting and 

 7 increasing some of that transparency. One thing, 

 8 and maybe I'm extending a little bit, some of the 

 9 comments I've heard and whatever in the press 

 10 recently, one thing I think we should be very 

 11 cognizant of is to the extent to which we extend 

 12 that potentially thinking about over-the-counter 

 13 markets can potentially increase costs quite a lot 

 14 in the system or if you're asking individual 

 15 participants to report as opposed to exchanges, 

 16 that actually could change the dynamic of the 

 17 marketplace quite significantly. 

 18 Ultimately, one thing that I think would 

 19 be detrimental to the market is if you increase 

 20 costs to the point where you move the number of 

 21 participants out of the market. One of the things 

 22 that we value very highly is markets where there 

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 1 are a large number of participants and therefore 

 2 you're much more likely to get a fair and balanced 

 3 pricing process. So I think as we think about 

 4 extending this that it's something that we should 

 5 all be cognizant of. 

 6 MR. FOX: Back to Commissioner Chilton's 

 7 question about the aggregate of the three 

 8 positions, the NYMEX, plus ICE, plus OTC swaps. I 

 9 think it's very important that you do consider the 

 10 sum of those three in the context that they exceed 

 11 limits. Once again I'm back to limits. The 

 12 purpose of limits as I understand it is to protect 

 13 the small investor or the customer, the consumer, 

 14 and we have limits on only one of those three 

 15 right now. So my first point is that overall 

 16 limits are too low. I realize that may not be a 

 17 palatable recommendation to raise limits at this 

 18 point, but the fact of the matter is we have 

 19 limits on NYMEX positions. To the extent you want 

 20 to exceed that there are two other avenues on 

 21 which to do it, OTC swaps, and on ICE. So the 

 22 fact of the matter is the limits are higher than 

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 1 1,000 so we do need to consider the sum of those 

 2 three in order to achieve the objective which is 

 3 to make sure that participants stay within a 

 4 stated limit. I would argue that the limit is too 

 5 low, it needs to be raised, and it needs to be all 

 6 inclusive, that you should be indifferent as to 

 7 where a trader chooses to trade whether it be OTC, 

 8 ICE, or NYMEX. What is important is the sum of 

 9 those three positions and that it needs to be 

 10 within some limit that protects the interests of 

 11 the small investor. 

 12 CHAIRMAN LUKKEN: Jim Newsome and then 

 13 Tony. 

 14 MR. NEWSOME: Mister Chairman, I'm going 

 15 to have to leave in a few minutes to make some 

 16 meetings on the Hill. I just wanted to make a 

 17 couple of general comments. 

 18 Regardless of whether we've talked about 

 19 foreign boards of trade or delineation of further 

 20 information that's included in the large trader 

 21 reports, I think mostly importantly the primary 

 22 topic is transparency. We all know that 

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 1 transparency is key in competitive markets, and we 

 2 do have competitive markets here. The fact that 

 3 they're conducted in a U.S. market, in a foreign 

 4 market, or OTC, really is immaterial. They're 

 5 competitive markets and transparency is 

 6 fundamental for competitive marketplaces. 

 7 I think the Commission and your leaders 

 8 and the Commissioners' is appropriate and I 

 9 appreciate you putting together this group. I 

 10 know it's not easy. I know from experience that 

 11 it's not easy, but I think these are issues that 

 12 need to be addressed and quite frankly I think 

 13 they need to be addressed quickly. Obviously, 

 14 this is a touchy subject with the Congress, and 

 15 even with the best intent of the Congress, I think 

 16 in lieu of pretty quick action by the Commission, 

 17 the Congress could take some action that would be 

 18 damaging to the markets. The actions that are 

 19 being talked about around this room today are 

 20 actions that will be helpful to the market, but I 

 21 do think we risk damaging action to the markets if 

 22 we don't move and move on a quick basis, and I 

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 1 commend you and your fellow Commissioners for the 

 2 action that you are taking. 

 3 CHAIRMAN LUKKEN: Thank you. Tony and 

 4 then I think Commissioner Dunn has a question. 

 5 MR. MANSFIELD: Mister Chairman, I just 

 6 wanted to follow-up on a point that Mark made 

 7 which is I think one of the things we've heard 

 8 from a number of the entities that are actively 

 9 involved on the trading side is the paramount 

 10 importance of liquidity and we certainly support 

 11 and agree with that. I would also just make the 

 12 follow-up point that we too have concerns about 

 13 costs, and there was a point that was raised 

 14 earlier about the notion of what if surveillance 

 15 were to find something about this information 

 16 which is going to flow from these enhanced sharing 

 17 agreements and how would that be dealt with, and 

 18 there was a recognition that it might involve 

 19 multiple regulators dealing with different pieces. 

 20 I would encourage as part of the discussion of 

 21 transparency that to the extent that the 

 22 Commission can continue to inform the marketplace 

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 1 about its views about how these types of issues 

 2 are going to be handled, about its views about 

 3 what issues may be of concern to a U.S.-based 

 4 regulator versus an overseas regulator, that that 

 5 too will enhance transparency and it certainly is 

 6 very important to I think a lot of entities that 

 7 are trying to identify and comply with the rules 

 8 and making sure that they are staying consistent 

 9 with what is expected and that obviously is a 

 10 moving and evolving circumstance as the 

 11 marketplace recognizes that it is more global. 

 12 And I too thank you for today's discussion. 

 13 CHAIRMAN LUKKEN: Thank you, Tony. 

 14 Commissioner Dunn? 

 15 COMMISSIONER DUNN: Mr. Short, I'd like 

 16 to follow-up on Mr. Newsome's theme about onerous 

 17 regulations. I saw yesterday in "Gas Daily" that 

 18 according to your CFO Scott Hill, 

 19 IntercontinentalExchange is prepared to move its 

 20 screens and trading companies out of the U.S. if 

 21 Congress passes regulations that are too onerous. 

 22 I'd like to know, first, is that a correct quote, 

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 1 is that threat applicable to CFTC regulations as 

 2 well, and third, what's the definition of too 

 3 onerous? 

 4 MR. SHORT: You've asked a lot there. 

 5 I'll start with the easy part of that. That is an 

 6 incorrect quote. There was no interview given. 

 7 The statements that our CFO made were in response 

 8 to hypothetical questions that were raised by a 

 9 number of institutional investors who were quite 

 10 concerned with some of the noise on Capitol Hill 

 11 and were saying what will happen ultimately if 

 12 legislation is passed, and our initial response 

 13 was we're working very closely with the CFTC and 

 14 with Capitol Hill and expect a reasonable 

 15 legislative response here, and after being pushed 

 16 on multiple occasions what if, what if, what if 

 17 there's something that's really draconian, I think 

 18 Scott's response was we will follow ultimately 

 19 where the customers go and I think you need to 

 20 view his response in that context. It was 

 21 certainly not a threat to walk away from U.S. 

 22 regulation or U.S. jurisdiction. 

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 1 In terms of my view about what is too 

 2 onerous, there have been some suggestions that 

 3 anybody trading a WTI crude contract needs to be a 

 4 designated contract market. I think our position 

 5 has been clear on that over time that you can't 

 6 really suggest that crude oil is a domestic 

 7 contract, it's a global contract, and ultimately 

 8 the answer has to involve regulatory cooperation. 

 9 ICE Futures has been a recognized investment 

 10 exchange overseen by the FSA since 1986. I think 

 11 FSA regulation is comparable. I'm not suggesting 

 12 that there isn't room for improvement as the 

 13 expanded information sharing arrangement we 

 14 recently announced suggests, but certainly ICE is 

 15 not taking the view that it's running away from 

 16 regulation or any of its market responsibilities. 

 17 CHAIRMAN LUKKEN: John? 

 18 MR. FELMY: Yes. I'd just like to get 

 19 back into the spirit of the transparency to John 

 20 Heimlich's point. I think, John, that if you have 

 21 commentators, and we've had this discussion as 

 22 I've had with Paul, going on and they know their 

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 1 positions that just as stock analysts have to, 

 2 they should declare those positions. I just would 

 3 wonder why that isn't the case in the energy or 

 4 the trading markets, and not just complete 

 5 disclosure I think the way you were referring to, 

 6 but if you are going on, why don't you disclose 

 7 your position? 

 8 MR. HEIMLICH: That's right. 

 9 CHAIRMAN LUKKEN: Ron? 

 10 MR. OPPENHEIMER: Thank you. I just 

 11 want to maybe disagree slightly with something Jim 

 12 said with respect to the need for speed here. A 

 13 lot of the structures we have in place that 

 14 oversee these markets have worked very well over 

 15 time and a lot of them were put into place like 

 16 the CMFA after years and years of debate and the 

 17 Farm Bill as well. The Commission I think has 

 18 done an excellent job over time showing restraint 

 19 and allowing markets to function as markets and to 

 20 not try to tinker with markets because we're 

 21 uncomfortable with a particular price at a 

 22 particular time or its impact on a particular 

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 1 constituency. I think speed is important at the 

 2 current time, but it's not the overriding concern. 

 3 I think the overriding concern is to get it right 

 4 and I think the Commission is doing a terrific job 

 5 in gathering people here today. I think there's a 

 6 tremendous amount of pressure to act and I think 

 7 the Commission needs to do what it's done 

 8 historically and that is to consider what it's 

 9 going to do before it does it to make sure that 

 10 there aren't adverse unexpected consequences from 

 11 what it does. 

 12 CHAIRMAN LUKKEN: Paul, and then we're 

 13 going to turn it over to the Commissioners for one 

 14 final question or comment. 

 15 MR. CICIO: On the comment of 

 16 disclosure, let me give you a perspective. What 

 17 you don't see in the marketplace is a paper 

 18 company CEO standing up on Wall Street and saying 

 19 6 months from now the price of paper is going to 

 20 be X. You don't see a steel company saying in 3 

 21 months the price of steel is going to be Y, and so 

 22 forth. They're concerned about antitrust and that 

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 1 is a practice that's absent here, so we do need to 

 2 address that. Thank you. 

 3 CHAIRMAN LUKKEN: Do my Commission 

 4 colleagues have any further questions? It's 

 5 getting late in the day and we're going to have to 

 6 wrap things up. 

 7 COMMISSIONER CHILTON: I've got one, and 

 8 thanks again for doing this, and thanks to the 

 9 staff and thank you all for being here. This is a 

 10 little bit out of the box, but like I said 

 11 earlier, I'm sort of swinging around. There's 

 12 this issue of sovereign wealth funds and they are 

 13 monolithic in size. The Saudis are setting up one 

 14 that's $900 billion. They own 10 percent of one 

 15 of the folks around the table today, the giant 

 16 Chinese sovereign wealth fund. So when we look at 

 17 these, there's not country X's sovereign wealth 

 18 fund as a trader, it's not as clear as that, but 

 19 they might be working through one of you in 

 20 legitimate futures business. My question for the 

 21 traders is do any of the five who are here not 

 22 have a sovereign wealth fund client? I'll take 

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 1 that as you all do. Thank you. 

 2 CHAIRMAN LUKKEN: Mr. Cota? 

 3 MR. COTA: One of our concerns in the 

 4 industry where we're actually consuming the 

 5 product is that the impact of sovereign wealth 

 6 funds that relate to energy could have a real and 

 7 significant impact particularly on how they're 

 8 applied. It doesn't matter what the country is. 

 9 There are plenty of countries that don't 

 10 particularly like us. If it were Iran and they 

 11 were able through a sovereign wealth fund to do a 

 12 derivative deal where nobody would actually see 

 13 what was going on so they wouldn't have that 

 14 market visibility and visibility in markets is 

 15 important, they potentially in my opinion could 

 16 have leverage, they could damage the people that 

 17 they don't particularly like economically, they 

 18 could as part of that process rise the underlying 

 19 value of their commodity that generates all this 

 20 money, and in the opaque markets that we've got 

 21 right now, nobody would see it. There would be no 

 22 fingerprints. Why wouldn't they do it? Their 

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 1 returns would be ridiculously large at this point 

 2 in the market. So that's one of the retail 

 3 petroleum industry's concerns. This is just one 

 4 particularly very large example of how an opaque 

 5 market can truly damage not only the value of us 

 6 participating in these commodities but also the 

 7 economy and we're really concerned. We're seeing 

 8 demand destruction. Just so the rest of you folks 

 9 know it, again there is demand destruction 

 10 occurring in the U.S. and at the refinery level 

 11 it's showing up in refinery utilization. In my 

 12 area it's people cutting down wood and my 

 13 customers are bailing and going to alternative 

 14 sources, so that that's occurring. At some point 

 15 people are going to see that markets do react, but 

 16 if the dark part of the markets are controlling 

 17 what's occurring from a pricing mechanism and it's 

 18 more of an economic model rather than a supply and 

 19 demand model, then we're all being injured and 

 20 that's my concern. 

 21 CHAIRMAN LUKKEN: Commissioner Sommers? 

 22 COMMISSIONER SOMMERS: I want to 

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 1 follow-up on a couple of comments and make sure I 

 2 understand what Mark and Tony are talking about 

 3 when you talk about something that's too costly 

 4 and make sure that we understand in the vein of 

 5 regulations that are too onerous on businesses and 

 6 what becomes too costly for a business when we're 

 7 talking about reporting or the issues of 

 8 transparency. 

 9 MR. MANSFIELD: Commissioner, I'll 

 10 start. What I was referring to was working off of 

 11 a question that was posed in response to the 

 12 enhanced information sharing which is that if 

 13 surveillance were to identify what it perceived to 

 14 be a problem based on the information that it had 

 15 received that the concept that was thrown out was 

 16 that it might involve the FSA as well as the CFTC 

 17 pursuing conduct in pieces of what they had found. 

 18 I think what I was responding to or what I was 

 19 trying to raise was that certainly to the extent 

 20 that the roles of the respective regulators are 

 21 evolving, to the extent that the CFTC may be 

 22 playing a role that is advanced or different than 

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 1 it has historically, or the FSA, that there's a 

 2 cost potentially to the marketplace in terms of we 

 3 are spending a lot of time and effort trying to 

 4 make sure that we are putting in place systems to 

 5 conform and to act consistently with what we 

 6 perceive or understand to be our regulator in a 

 7 given marketplace. So all I was saying is that in 

 8 the context of that and in an effort for 

 9 transparency I think that there is also value to 

 10 the extent there can be transparency from the 

 11 regulator's perspective in terms of how they are 

 12 viewing markets, how they see their roles as their 

 13 roles are evolving and for that to be a part of 

 14 the discussion as well. 

 15 MR. STAINTON: I would echo those 

 16 comments. I think as I look at the costs there 

 17 are a number of costs that can be introduced into 

 18 the system, administrative costs, costs from 

 19 regulatory uncertainty over how positions and 

 20 entities will be governed, and I think ultimately 

 21 it's difficult to gauge exactly where the barrier 

 22 is, but I think at the moment we have very liquid 

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 1 and transparent markets and that that brings in a 

 2 number of participants which provides great 

 3 benefit to a number of companies and ultimately 

 4 the end consumers -- costs for transactions and 

 5 the transparency and confidence that they have in 

 6 prices is clear in the market so that I think 

 7 obviously actions that will be to the detriment I 

 8 think would be damaging for the markets. 

 9 COMMISSIONER DUNN: First let me begin 

 10 by thanking all of our participants. This has 

 11 been very enlightening for me and I appreciate all 

 12 of you giving up your time and coming and sharing 

 13 your vast knowledge with us to help us get it 

 14 right. 

 15 We've talked quite a bit about our 

 16 working with the FSA but there seems to be some 

 17 other externalities here even closer to home. The 

 18 Energy Policy Act of 2005 has given FERC 

 19 additional authorities and they have a definition 

 20 of manipulation there. The Energy Independence 

 21 and Security Act of 2007 has given the Federal 

 22 Trade Commission authorities over manipulation. 

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 1 I'd like to hear from those of you who would like 

 2 to express this how you think we ought to go 

 3 forward in working with those sister agencies here 

 4 in the United States to ensure that we do not have 

 5 a proliferation of regulations that really cripple 

 6 our energy industry. 

 7 MR. HORVATH: I'll take a stab. I just 

 8 think that both publicly and privately a persona 

 9 of cooperation with the agencies that you have a 

 10 common goal and pursue it. The reason that's so 

 11 important is when you don't and there are public 

 12 fights about jurisdiction, that raises regulatory 

 13 uncertainty in the market's mind and increases 

 14 prices unnecessarily and increases risk 

 15 unnecessarily. So please I beg you to cooperate 

 16 with your sister regulatory bodies. 

 17 This is not a unique situation. 

 18 Congress never gets it right in terms of drawing 

 19 arbitrary lines and expects you to cooperate, and 

 20 other agencies have done so. I know nothing but 

 21 highly competent people. All the regulatory 

 22 bodies you mentioned, I know you're all competent 

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 1 to do that, and I'm telling you the industry 

 2 expects you all to rise to that level of 

 3 cooperation and collaboration. 

 4 CHAIRMAN LUKKEN: Laura? 

 5 MS. CAMPBELL: From a consumer's 

 6 perspective, the consumer is hurt long before 

 7 there's ever any enforcement even, so to have more 

 8 cops on the beat so to speak is certainly fine 

 9 with us, but I do think that perhaps we just need 

 10 together. I'm no lawyer, I'm an engineer, and 

 11 when there is something new that comes in to 

 12 design, sometimes the electricals fight with the 

 13 mechanicals on who's going to get the new 

 14 opportunity, but typically we have a design 

 15 meeting and we all sit down and we decide who's 

 16 going to take the lead, but then also whoever is 

 17 not taking the lead is usually providing a lot of 

 18 support to the other engineer, so I would suggest 

 19 that perhaps something similar needs to take 

 20 place. 

 21 CHAIRMAN LUKKEN: Ron? 

 22 MR. OPPENHEIMER: I think this is a 

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 1 critically important question. As somebody who 

 2 has to give advice to traders all the time, we're 

 3 starting to look at a situation that's getting 

 4 very, very difficult. You've got statutes that 

 5 have different standards in them, you've got 

 6 regulations that have different standards in them, 

 7 you have three different regulatory agencies that 

 8 have different historical perspectives on how they 

 9 look at things. The FTC is more or less a 

 10 consumer protection agency to begin with or first 

 11 and foremost, the FERC had a background that was 

 12 basically rate making, the CFTC brings a different 

 13 perspective to markets, and unless the agencies 

 14 work together not only to share information about 

 15 what they see in the markets but to develop common 

 16 standards, legal standards, and to develop common 

 17 enforcement approaches to the markets, the things 

 18 that they see in the markets, people like me are 

 19 going to have a very difficult time advising 

 20 traders what to do and when traders don't have 

 21 good advice of what to do they withdraw from 

 22 markets because they're not going to take that 

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 1 risk, they take trading risk and not legal risk. 

 2 So I think it's critically important that maybe 

 3 the CFTC take a lead role I guess from my 

 4 perspective as the agency that's looked at these 

 5 markets for the longest period of time and foster 

 6 a working relationship as I said that goes 

 7 substantially deeper than just information 

 8 sharing. 

 9 CHAIRMAN LUKKEN: This has stirred up a 

 10 lot of conversation. We'll try to work our way 

 11 around the table. Bob and then Paul. 

 12 MR. ANDERSON: Thanks. Just a real 

 13 quick comment that I wanted to make. First, it's 

 14 interesting that the discussion has been largely 

 15 around regulating and understanding the markets as 

 16 opposed to regulating and understanding behaviors 

 17 and I think that maybe in a future discussion or 

 18 additional work we should do, we might want to 

 19 consider differentiating between the two. One I 

 20 think is quite easy, the other one we may never 

 21 get there. And I think it's important to remember 

 22 when you talking about markets that you understand 

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 1 why companies are doing what they're doing. We've 

 2 got lots of resources we can contribute on that 

 3 which brings me to the short point which is on 

 4 what Ron just said, in terms of what you could to, 

 5 the energy companies that I deal with unanimously 

 6 the number one concern they would have hoped that 

 7 we had been talking about were some simple things, 

 8 for example, can we come up with a single 

 9 definition amongst regulators for what is 

 10 manipulation? There are some very simple things 

 11 out there that are in writing by the various 

 12 regulators that kind of leave major participants 

 13 in these markets at a bit of a stint on how to 

 14 proceed, how to go forward, and I think there is 

 15 certainly some material impact on behaviors as a 

 16 result of some confusion around something as 

 17 simple as defining market manipulation and maybe 

 18 coming up with a standardized definition based on 

 19 the three or four that exist and even this group 

 20 could contribute in that area. 

 21 MR. PANTANO: Very briefly, Mister 

 22 Chairman, the FIA obviously favors the Commission 

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 1 strongly defending its exclusive jurisdiction over 

 2 the futures markets and I think just from a 

 3 resource allocation standpoint we do have 

 4 different regulators, we do have different 

 5 definitions of manipulation and it would be really 

 6 nirvana to get a consistent definition, but I 

 7 think given the different statutes and the 

 8 different regulations that's going to be 

 9 difficult. But even just from a resource 

 10 allocation standpoint, if the Commission could 

 11 persuade some of these other agencies to let the 

 12 CFTC take the lead when the futures markets are 

 13 involved that it would be very favorable for the 

 14 markets. 

 15 MR. PICKEL: I would largely echo what 

 16 Ron and Paul have just said. First of all, I 

 17 don't envy your situation in trying to work with 

 18 all those agencies who have a federal legislative 

 19 mandate to put in place those regulations. But I 

 20 guess your focus is market integrity and that is 

 21 very broadly speaking a lot of different issues, 

 22 and manipulation however that gets defined, 

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 1 however has oversight for that, is one piece of 

 2 that. So I think working with those agencies, the 

 3 FTC and FERC, to make sure that they have a means 

 4 to effect their legislative mandate but also their 

 5 understanding that you have that broader charge 

 6 from Congress is a very important basis for the 

 7 discussions. 

 8 CHAIRMAN LUKKEN: Last comment. Tony? 

 9 MR. MANSFIELD: Just to echo some of the 

 10 comments that have been heard, one of the things 

 11 that was really interesting about the FERC's 

 12 involvement in these recent processes was that 

 13 because of their show cause process there was such 

 14 an expansive discussion about the cases that they 

 15 were bringing and the theories, and certainly from 

 16 one perspective, if enforcement is ultimately 

 17 going to encourage or deter future conduct, you 

 18 look at the theories that came out of some of 

 19 these companion actions and it's very difficult to 

 20 try and articulate or come up with a way to have 

 21 not run afoul of those companion actions because 

 22 at least from one perspective the theories were 

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 1 very different in terms of what had been done that 

 2 was problematic. So I think that that's something 

 3 that we too would encourage very much, there to be 

 4 discussion within the agencies and to the extent 

 5 that there can be consistency because from a 

 6 standpoint of trying to comply with what the 

 7 agency or agencies have identified was a problem 

 8 in the past, it's very difficult to do that when 

 9 there seem to be such internal inconsistency in 

 10 terms of the theories that they articulated. 

 11 CHAIRMAN LUKKEN: Thank you very much. 

 12 It's been a great day. On this topic I start from 

 13 the proposition that we are one U.S. government 

 14 and we have to work together and that's one reason 

 15 we invited FERC and FTC today to participate as 

 16 government observers in this so that we can try to 

 17 work together and coordinate our efforts. I just 

 18 want to thank them and as well Bill Hederman from 

 19 CRS for coming today to listen and learn from the 

 20 discussions around the room. 

 21 I want to thank you for coming. I know 

 22 you guys are very busy and to take time out of 

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 1 your day to come and help us get through some of 

 2 these tough issues. It's very helpful. Most 

 3 importantly, I want to thank CFTC staff. As was 

 4 mentioned, there are a lot of efforts that go into 

 5 making these days work and come together and the 

 6 internet and everything that's happening while we 

 7 put these events together it's imperative that we 

 8 have good staff, and we certainly do have good 

 9 staff here at the CFTC to put these events 

 10 together. 

 11 Thank you so much again. We appreciate 

 12 it. I know we're going to have topics that we 

 13 didn't get to this time. Emissions trading 

 14 potentially was an interest of this group, best 

 15 practices that Laura brought up, and there are 

 16 other issues. So we look forward to and hopefully 

 17 can have another meeting before year's end. Thank 

 18 you so much. 

 19 (Whereupon, at 4:45 p.m., the 

 20 PROCEEDINGS were adjourned.) 

 21 * * * * * 

 22 

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