1 

 U.S. COMMODITY FUTURES TRADING COMMISSION 

 AGRICULTURAL ADVISORY COMMITTEE 

 First Floor Hearing Room 

 Three Lafayette Center 

 1155 21st Street, N.W. 

 Washington, D.C. 20581 

 Wednesday, July 21, 2004 

 The meeting convened, pursuant to 

 notice, at 2:05 p.m. 

 BEFORE: 

 JIM NEWSOME, Chairman 

 WALT LUKKEN, Vice Chairman 

 SHARON BROWN-HRUSKA, Commissioner 
 2 

 PARTICIPANTS: 

 ROBERT CASHDOLLAR 

 FRED CLARK 

 TOM COYLE 

 BERNIE DAN 

 ROSS DAVIDSON 

 TOM ERICKSON 

 NEAL GILLEN 

 TRENNA GRABOWSKI 

 DAVID HEITMAN 

 REECE LANGLEY 

 PATRICK McCARTY 

 BOB METZ 

 JIM MILLER 

 TOM NEAL 

 JOE OTT 

 JAMES OVERDAHL 

 PAUL PETERSON 

 ERROL RICE 

 SEAVER SOWERS 

 SAM WILLETT 
 3 

 TABLE OF CONTENTS 

 Agenda Item Page 

 I. Call to order and introductions...... 4 

 II. Agriculture and the Commodity Futures 

 Modernization Act of 2000............ 13 

 III. Federal Speculative Position Limits 

 - Background from James Overdahl..... 26 

 - Presentation by Bernie Dan......... 34 

 - General Discussion................. 46 

 IV. Off-Exchange Risk Management Products for 

 Producers 

 - ATO Status Report from 

 Donald Heitman..................... 

 - HTA Update by Patrick McCarty...... 

 - Presentation by Ross Davidson...... 

 - General Discussion................. 

 V. Discussion of future meetings and 

 topic................................ 

 VI. Adjournment.......................... 
 4 

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

 2 I. CALL TO ORDER AND INTRODUCTIONS 

 3 CHAIRMAN NEWSOME: Welcome to the CFTC. If 

 4 everyone will go ahead and take their seats, we'll 

 5 get started. 

 6 Okay. I know that many of you flew in 

 7 today and have flights out this afternoon. I 

 8 apologize for being a few minutes late getting 

 9 started, but we'll try to conduct the meeting in a 

 10 timely manner and make sure that we get all the 

 11 issues appropriately addressed and finish on time 

 12 so that those of you that need to make flights can 

 13 do so. 

 14 My name is Jim Newsome. It is my honor 

 15 to chair the Commodity Futures Trading Commission. 

 16 I think this will be certainly my last public 

 17 meeting to chair the Commission and one of my last 

 18 meetings, period, at the Commission as Friday is my 

 19 last day. And I would like to say to this group, 

 20 as an aggy, it was the agriculture industry that 

 21 brought me to the table at the CFTC. That is 

 22 something that I have taken very seriously during 
 5 

 1 my tenure here, and I have appreciated the personal 

 2 relationships, the personal support, as well as the 

 3 support of the CFTC from many of you around this 

 4 table, and on behalf of my colleagues, I say thank 

 5 you to each of you for supporting the Commodity 

 6 Futures Trading Commission. 

 7 The industry over the last couple of 

 8 years has gone through some substantial changes, 

 9 most of which have been very positive. It's been 

 10 an exciting time to be at the CFTC over the last 

 11 several years as we've seen the addition of new 

 12 exchanges, the tremendous growth of existing 

 13 exchanges, record new contracts listed, records set 

 14 with regard to volume of which the agriculture 

 15 community has shared in a portion of that 

 16 record-setting volume. So many changes going on 

 17 within the business, but any time you have changes, 

 18 that always represents new challenges, new 

 19 challenges to you as market participants, new 

 20 challenges to us as the oversight regulator; and 

 21 several of those challenges, we're going to have 

 22 the opportunity to talk about today, and 
 6 

 1 Commissioner Lukken later in the program is going 

 2 to go into more detail about some of the changes 

 3 that are ongoing in the industry. 

 4 We don't have a long list of topics that 

 5 we're going to discuss today, but the topics that 

 6 we do have on the agenda, I think are very timely. 

 7 I know that they are very critical to many of you. 

 8 So I look forward to the debate. 

 9 I would remind everyone that as we get 

 10 into the sessions, when you speak, please turn on 

 11 your microphone, and then after you speak, turn it 

 12 off. Typically we don't get that feedback I've had 

 13 until two or three are turned on, but please 

 14 remember to try and do that. 

 15 I will ask my colleagues if they have 

 16 any comments, and then we will follow that with 

 17 self-introductions around the room. 

 18 So Commission Walt Lukken. 

 19 COMMISSIONER LUKKEN: Thank you, Jim. 

 20 I appreciate Chairman Newsome hosting 

 21 the meeting today as chairman of the Ag Advisory 

 22 Committee. I am also very excited to see some 
 7 

 1 familiar faces around the room. Many of you I have 

 2 worked with in the past either here at the 

 3 Commission--I recognize Commissioner Tom Erickson 

 4 here today--and also from the Senate Agriculture 

 5 Committee, when I worked with you on farm bills 

 6 and the CFMA and other things. 

 7 You know, the Agricultural Advisory 

 8 Committee, in my view is a very important voice for 

 9 the Commission. It provides us with guidance as a 

 10 barometer of how we gauge which policies we want to 

 11 take on at the Commission that affect agriculture. 

 12 It takes on an even more important role as we go 

 13 into reauthorization; and next year is a 

 14 reauthorization year for the CFTC. So it's good to 

 15 have these agriculture interests around the table 

 16 giving us views on where they would like us to go. 

 17 Like I said, I am going to keep my 

 18 presentation short. I will give a brief overview 

 19 of the CFMA, but to start off, Jim had mentioned 

 20 that this is his last week here at the Commission, 

 21 and we want to take this opportunity, Sharon and I, 

 22 to recognize him for his work on these markets and 
 8 

 1 for the agricultural community. In honor of that, 

 2 we want to publicly thank Jim for everything he has 

 3 done at the Commission, and in so doing, we want to 

 4 present him with a small token of our appreciation, 

 5 which Sharon will give to him. 

 6 We were going to save this until the 

 7 end, but I thought presenting him with a gavel at 

 8 the beginning of a meeting might be more 

 9 appropriate than at the end in case people go long 

 10 on their speeches. It says: James E. Newsome, 

 12 Chairman, Agricultural Advisory Committee, 

 13 for your service to agriculture, July 21, 2004 

 14 [Applause.] 

 15 COMMISSIONER BROWN-HRUSKA: I would just 

 16 like to say a couple of words, as well. It is a 

 17 pleasure to see many of you here, some familiar 

 18 faces and some new faces to me that I haven't had 

 19 the opportunity to meet. So I'm really looking 

 20 forward to having interaction with you. 

 21 I just want to say that Jim Newsome has 
 9 

 1 been an incredible leader at this agency. He has 

 2 been a mentor to me and I think Walt would agree with 

 3 that, as well. Jim’s leadership is strong. His 

 4 integrity is rich, and his heart is big, too. So we 

 5 have really accomplished a lot here so far. We 

 6 will miss him, but he gave us the tools and the 

 7 skills to go forward into our reauthorization year. 

 8 You know, we've got, I think, a very 

 9 strong team here, Walt and I, at this time, and I 

 10 think we're ready to go and am really looking 

 11 forward to interacting with the Ag Committee going 

 12 forward. But we couldn't be where we are today 

 13 without this guy, Jim Newsome, and I just want to 

 14 thank him very much for all that he's done for us. 

 15 CHAIRMAN NEWSOME: Well, thank you both. 

 16 That's very nice, a pleasant surprise. Hopefully, 

 17 since I know this group very well, I won't have to 

 18 use this gavel very much this afternoon, but thank 

 19 you. 

 20 I too wanted to welcome Commissioner Tom 

 21 Erickson back to the Commission. Tom was a good 

 22 friend and a colleague during his time with the 
 10 

 1 Commission, and I know that the one-year period is 

 2 up and we welcome you back with open arms, Tom. So 

 3 thank you. 

 4 MR. ERICKSON: I bet you wish you had 

 5 that gavel a little earlier in your career here. 

 6 Jim, congratulations to you, and I just 

 7 want to say that I'm living proof today that old 

 8 commissioners don't die; they show up at Ag 

 9 Advisory Committee meetings or any other advisory 

 10 committee meetings. Congratulations and all the 

 11 best to you. 

 12 CHAIRMAN NEWSOME: Thank you very much, 

 13 Tom. 

 14 Again, on behalf of my colleagues, we're 

 15 glad that you're here. We'll get into details, but 

 16 before we do, why don't we start with Reece and 

 17 let's go around and introduce yourself and who you 

 18 represent. 

 19 MR. LANGLEY: I'm Reece Langley with 

 20 Independent Community Bankers of America. 

 21 MR. MILLER: Jim Miller with the 

 22 National Farmers Union. 
 11 

 1 MS. GRABOWSKI: Trenna Grabowski with 

 2 the American Agri-Women. 

 3 MR. RICE: Good afternoon. I'm Errol 

 4 Rice with the National Cattlemen's Beef 

 5 Association. 

 6 MR. NEAL: I'm Tom Neal with the 

 7 National Grain Trade Council. 

 8 MR. CASHDOLLAR: Bob Cashdollar with the 

 9 National Farmers Organization. 

 10 MR. SOWERS: Seaver Sowers with the 

 11 American Bankers Association. 

 12 MR. WILLETT: Sam Willett, National Corn 

 13 Growers Association. 

 14 MR. METZ: Good afternoon. I'm Bob 

 15 Metz, First Vice President with the American 

 16 Savings Association. 

 17 MR. ERICKSON: Hi. I'm Tom Erickson 

 18 with Bungy North America, representing the North 

 19 American Export Grain Association. 

 20 MR. DAVIDSON: I'm Ross Davidson, the 

 21 administrator of the Risk Management Agency. 

 22 MR. GILLEN: Neal Gillen, American 
 12 

 1 Cotton Shippers Association. 

 2 MR. COYLE: Tom Coyle, representing the 

 3 National Grain and Feed Association. 

 4 CHAIRMAN NEWSOME: We do have several 

 5 others that are expected to be here today to join 

 6 us for this meeting. So we'll introduce them as 

 7 they come in. 

 8 At this point in the program, we thought 

 9 it would be useful, since so many changes have 

 10 taken place with regard to new rules and 

 11 regulations in the oversight of futures and options 

 12 trading, to ask Commissioner Walt Lukken to give an 

 13 overview of the Commodity Futures Modernization 

 14 Act. Many of you are familiar with that Act. Many 

 15 of you worked with the Congress several years ago 

 16 as they drafted that Act. Of course, 

 17 implementation of the Act took the agency almost a 

 18 year. We had numerous rule-makings and studies 

 19 that were part of this implementation, and since 

 20 we've finished the implementation, the industry has 

 21 responded very positively in using the tools that 

 22 were a part of the Act, and I think in great 
 13 

 1 portion, much of that is due or much of the growth 

 2 that we have seen in the industry is due to the 

 3 flexibility that is provided in the Act. 

 4 I wanted to mention Commissioner Lukken 

 5 serves as the Vice Chairman of this Advisory 

 6 Committee as well as Chairman of the Global Markets 

 7 Committee meeting and provides tremendous 

 8 leadership there. Commissioner Brown-Hruska chairs 

 9 our Technology Advisory Committee and provides 

 10 great leadership for that advisory committee as 

 11 well. So all of us are active within industry 

 12 groups, chairing advisories committees. We 

 13 consider these committees a key component of the 

 14 policy development at the agency. Certainly we 

 15 welcome your viewpoints, and this is an opportunity 

 16 to collect those as well as the many comment 

 17 periods that are open on numerous issues. 

 18 So at this point, Commissioner Lukken, 

 19 I'll turn it over to you. 

 20 II. AGRICULTURE AND COMMODITY FUTURES 

 21 MODERNIZATION ACT OF 2000 

 22 COMMISSIONER LUKKEN: Thank you, Jim. 
 14 

 1 This PowerPoint really is a very broad 

 2 overview of what occurred during the CFMA back in 

 3 2000. To start with, it's sort of broken up into 

 4 three sections. The first is the organizational 

 5 changes that have occurred at our Commission since 

 6 the last time this committee met and how we do 

 7 things in different divisions here at the 

 8 Commission; secondly, trends and demographics 

 9 of what has been occurring in the futures markets 

 10 over the last ten years or so that might be 

 11 relevant to the agricultural community; and, 

 12 lastly, the CFMA--what the structure was and 

 13 why Congress did what it did and its impact on the 

 14 agricultural sector. 

 15 Just a quick overview, we were created 

 16 30 years ago to monitor the futures and options 

 17 markets in the United States, primarily to protect 

 18 market participants against manipulation, abusive 

 19 trade practices, and fraud. Certainly for the 

 20 agricultural community, one of our mandates is to 

 21 foster price discovery and markets through liquid, 

 22 fair, and financially secure trading facilities. 
 15 

 1 Again, next year, our reauthorization expires at 

 2 the end of September 2005. Congress, the Senate 

 3 Agriculture Committee and the House Agriculture 

 4 Committee will be charged with writing that 

 5 reauthorization. 

 6 We are a part of the annual agricultural 

 7 appropriations bill. This year's budget was around 

 8 $90 million. We don't collect any type of industry 

 9 transaction fees. Our budget currently is tied up 

 10 in the agricultural appropriations bill which has 

 11 not been passed as of yet. 

 12 Here is the general organizational 

 13 structure of the CFTC. As you can see, since the 

 14 last time the AAC met, we have a new Division of 

 15 Market Oversight, a new Division of Clearing and 

 16 Intermediary Oversight, continue to have the 

 17 Division of Enforcement, General Counsel's Office, 

 18 and other divisions involved with analytical 

 19 research and administrative work at the agency. 

 20 The Division of Market Oversight--one of 

 21 their functions is to surveil the markets. They 

 22 oversee markets using our large trader reports, for 
 16 

 1 which traders provide data to our agency to ensure 

 2 that commodities are not being manipulated. 

 3 The Commission receives, a weekly surveillance 

 4 briefing in which different products are 

 5 highlighted to show which products may have the 

 6 potential to be manipulated and what we are doing 

 7 to prevent that. Often times, despite the 

 8 volume percentages of agricultural products, 

 9 they're one of the topics of our surveillance 

 10 briefings every week, those and other 

 11 physical commodities because of the potential of 

 12 manipulation. 

 13 DMO also does product and market review 

 14 to make sure that all products and markets that are 

 15 coming to the agency are meeting the Act as well as 

 16 compliance. DMO continues to audit those people once 

 17 they are designated as part of our oversight. 

 18 Again, we have a new Division of Clearing and 

 19 Intermediary Oversight. One of the things the CFMA 

 20 did was to break off clearing as a distinct 

 21 function of exchanges and require those 

 22 organizations to register. As a result, we, under 
 17 

 1 Chairman Newsome's leadership, thought it was 

 2 important to tailor our regulatory structure to 

 3 meet that recognition. So we now have DCIO, which 

 4 looks at both intermediary oversight, making sure 

 5 that they comply with the Act for financial 

 6 integrity of the firms as well as protection of 

 7 customer funds and clearing organizations to make 

 8 sure that we designate them, that they will be an 

 9 appropriately regulated clearing organization and 

 10 that they have financial integrity. 

 11 I sort of term those last two divisions 

 12 the pre-event divisions. We're trying to prevent 

 13 and detect things from occurring that are violating 

 14 the Commodity Exchange Act. If something does 

 15 occur that violates the Commodity Exchange 

 16 Act, we turn it over to our Division of Enforcement, 

 17 which is the largest division at the agency. This 

 18 is our litigation arm. These are the lawyers that 

 19 go to court to sue people for civil penalties, for 

 20 fraud manipulation, false reporting, trade 

 21 practice, and registration violations. 

 22 These are sort of the trends in the 
 18 

 1 industry. As you can see, volume has been in a 

 2 very strong upward trend. We broke a billion 

 3 contracts in 2002. We passed 1.2 billion last year 

 4 and on pace this year to set more records. So 

 5 certainly this business is growing. 

 6 If you look specifically at agricultural 

 7 volume, last year we were up over 100 million 

 8 contracts traded in agricultural bits. It was flat 

 9 over a period of time, but definitely agriculture 

 10 is growing as fast as the futures markets and this 

 11 year is on pace for a record year as well. If you 

 12 break that into percentages, you can see 

 13 agricultural commodities make up about 8.5 percent 

 14 of the total volume, interest rates being the 

 15 largest chunk of volume on the futures exchange, 

 16 the Euro dollar, the short-term interest rate 

 17 product at CME, the bond complex at the Chicago 

 18 Board of Trade with equity indexes at about 25 

 19 percent in foreign currency and small segment 

 20 energy about nine percent, slightly bigger than 

 21 agriculture. 

 22 Here is a break-down of the different 
 19 

 1 exchanges and the volume that they're handling: 

 2 The CME, about 50 percent; the Board of Trade, 

 3 about 36 percent; and NYMEX, third, about nine 

 4 percent. 

 5 This is a graph showing the trends in 

 6 electronic trading over the last four years. As 

 7 you can see, these are the Chicago Mercantile 

 8 Exchange numbers. Electronic trading now accounts 

 9 for over 50 percent of their trading volume, which 

 10 I think is very significant if we're looking as 

 11 policy makers at what we need to be doing. Here is 

 12 the Board of Trade also around 60 percent of the 

 13 trading. As far as agriculture, agriculture still 

 14 is a small percentage being traded electronically, 

 15 somewhere around two to three percent, but that 

 16 also is growing significantly. So these trends are 

 17 happening also in agriculture, although in a 

 18 smaller context. 

 19 Again, the Commodity Futures 

 20 Modernization Act of 2000 was our last 

 21 reauthorization effort four years ago. It really 

 22 was broadly based on the President's Working Group 
 20 

 1 report that was issued by this agency and the other 

 2 members of the President's Working Group: the 

 3 Department of Treasury, the Securities Exchange 

 4 Commission, and the Federal Reserve Board. The 

 5 three major elements of that report said that there 

 6 is public policy to provide legal certainty to the 

 7 over-the-counter derivatives market. There is a 

 8 public interest to provide regulatory reform for 

 9 the futures exchanges and their participants and 

 10 that lifting the ban on single- and narrow-based 

 11 security futures products is obtainable as long as 

 12 you provide a joint structure between the SEC and 

 13 the CFTC. 

 14 Congress used this report to write the 

 15 CFMA. The first of the three legs of the CFMA 

 16 was legal certainty for over-the-counter 

 17 derivatives. Generally our Act excludes 

 18 over-the-counter derivatives if the product that is 

 19 being traded is not ready susceptible to 

 20 manipulation, mainly financial products, and the 

 21 entities or persons trading those products are large 

 22 sophisticated customers. Part of the reasoning 
 21 

 1 behind them allowing this exclusion is that 

 2 institutional customers who are trading financial 

 3 products are generally regulated by other financial 

 4 regulators, either the Fed, the FDIC, the SEC, or 

 5 other state insurance regulators. 

 6 The second leg of the CFMA was dealing 

 7 with regulatory reform for the exchanges. It 

 8 created a tiered regulatory structure for the 

 9 exchanges based on the types of products being 

 10 traded and the sophistication level of those 

 11 trading. It also shifted the regulatory structure 

 12 from a front line structure to that of an oversight 

 13 structure through the adoption of core principles. 

 14 Instead of prescriptive regulations, we now have 

 15 flexible core principles that allow us to tailor 

 16 our regulatory efforts to the nature of the 

 17 markets. And it also allowed exchanges to 

 18 self-certify products and rules without prior CFTC 

 19 approval. 

 20 As I note there, there is an exception 

 21 for material rule changes on listed enumerated 

 22 agriculture products with open interest. I also 
 22 

 1 note that we continue to have authority and 

 2 oversight abilities over these rule approvals and 

 3 these product approvals, but the burden has 

 4 shifted from the exchange proving that they meet 

 5 the principles to us showing that they don't 

 6 or--that they don't. I think I stated that 

 7 correctly. So we still maintain authority over 

 8 these changes; however, we are not involved prior 

 9 to the rule going into effect. 

 10 Lastly, security futures products. The 

 11 ban on these products was lifted after 18 years. 

 12 The Act outlined a joint regulatory structure for 

 13 those products to trade between the SEC and the 

 14 CFTC. Two exchanges are now trading those 

 15 products, Chicago and NQLX, with limited success. 

 16 What are the agricultural issues that 

 17 came forward during the CFMA? The first is that 

 18 Congress continued to recognize agricultural 

 19 products as a special class of commodity deserving 

 20 of greater oversight. Agricultural products are 

 21 required to trade on the highest regulated exchange 

 22 designated, a designated contract market. They 
 23 

 1 also are specifically not allowed to participate in 

 2 different types of exclusions and exemptions. 

 3 Congress chose not to address in 2000 the HTA cases 

 4 or the cash or forward exclusions for agricultural 

 5 products. We will be discussing that a little 

 6 later. 

 7 And, obviously, Congress required a 

 8 report on making futures exchanges more accessible 

 9 to agricultural producers. This was completed a 

 10 year after the Act was done and delivered to 

 11 Congress, and if you're interested in reading that 

 12 report, you can get on our web site for that. 

 13 Well, what might be the possible issues 

 14 for agriculture next year during authorization? 

 15 These are from talking to people in the 

 16 agricultural community, but I saw three different 

 17 areas. One, is there a need for greater legal 

 18 and regulatory clarification for off-exchange risk 

 19 management products? Again, we'll be diving into 

 20 some of these subjects a little later. 

 21 Should “agricultural commodity” be defined 

 22 due to the term’s use in CFMA exclusions, 
 24 

 1 exemptions, and other sections? Although corn is 

 2 considered an agricultural product, should we also 

 3 protect ethanol as an agricultural product since it 

 4 is derived from corn? Lumber versus wood pulp? 

 5 How should we divide the line? It's not delineated 

 6 in the Act, but it's something we as policy makers 

 7 should think about. 

 8 Lastly, should Congress continue to 

 9 treat the oversight of agricultural products 

 10 differently from other commodities? Has the 

 11 agricultural community reached a point where they 

 12 don't need greater oversight or need some more 

 13 flexibility in this area? And that's something 

 14 that this group should think about. 

 15 So thank you very much. 

 16 CHAIRMAN NEWSOME: Thank you, Walt, for 

 17 a great overview of the CFMA, and I would mention 

 18 that it's not too soon for any of your 

 19 organizations to start thinking about the CFTC 

 20 reauthorization. We've had the opportunity to 

 21 bring it up in testimony a couple of times on the 

 22 Hill recently. I know that at least from the House 
 25 

 1 standpoint, Congressman Moran is looking at some 

 2 field hearings this fall with regard to 

 3 reauthorization. So I know that many of you in 

 4 your organizations, you have limited times to get 

 5 your boards together to talk about broad policy 

 6 items, but I would encourage you to go ahead and 

 7 start putting that on your agendas and discussing 

 8 it so that your view points will be heard and will 

 9 be heard early in the process. 

 10 Does anyone have any questions for 

 11 Commissioner Lukken before we move on with the 

 12 program? 

 13 Okay. Thanks again, Walt. 

 14 III. FEDERAL SPECULATIVE POSITION LIMITS 

 15 CHAIRMAN NEWSOME: One of the topics 

 16 that we thought was very timely to discuss today 

 17 was a request from the Chicago Board of Trade with 

 18 regard to Federal speculative position limits, and 

 19 that's an area that we definitely wanted to put on 

 20 the agenda for this meeting, to hear some 

 21 discussion, and I would add at the front end that 

 22 there's not parity among agricultural products with 
 26 

 1 regard to these position limits. The livestock 

 2 complex at the Chicago Mercantile Exchange does not 

 3 have Federal limits. Those are handled by the 

 4 exchange with consultation from the Commission. So 

 5 I mention that just to say that there's not parity 

 6 and not to assume that all ag products have these 

 7 Federal limits, because they don't. 

 8 So I think it's a very legitimate 

 9 discussion to bring to the table that the 

 10 Commission is considering at this point. Because 

 11 this issue is under consideration or is in front of 

 12 the Commission, I don't think you will hear any 

 13 viewpoints expressed by the three of us. We're 

 14 here to listen and to gather information. 

 15 So to start off this discussion, we've 

 16 asked Dr. Jim Overdahl, who is chief economist at 

 17 the CFTC, to provide some background on how we 

 18 gotten to the point we are. 

 19 Dr. Overdahl. 

 20 BACKGROUND FROM DR. JAMES OVERDAHL 

 21 DR. OVERDAHL: Okay. As Chairman 

 22 Newsome mentioned, we thought it would be helpful 
 27 

 1 here given the petition before us from the Chicago 

 2 Board of Trade and the Kansas Board of Trade and 

 3 the Minneapolis Grain Exchange to have just a 

 4 little bit of background or orientation on the 

 5 Federal speculative position limits and how we got 

 6 to the point we are today. 

 7 First of all, there are several 

 8 different types of position limits. We have the 

 9 spot month limits and then for other contract 

 10 months that are non-delivery months that are 

 11 non-spot individual limits and then all months 

 12 combined limits. In addition, there are 

 13 accountability limits, and actually there are 

 14 different types of accountability limits. I won't 

 15 go into the details there, but I think it's helpful 

 16 just to recognize that there are different types of 

 17 limits, and that will be part of the discussion 

 18 that we'll hear more of when Bernie Dan takes over. 

 19 And through the years, there have been 

 20 many proposed purposes for Federal limits, to 

 21 reduce potential threat of market manipulation or 

 22 congestion, to perhaps reduce the potential for 
 28 

 1 price distortions in the market, and to mitigate 

 2 clearinghouse credit risk. There is a long history 

 3 of Federal speculative limits that go back to at 

 4 least 1938, but at that point, the predecessor of 

 5 the CFTC, the old Commodity Exchange Commission, 

 6 established Federal limits on a certain set of 

 7 enumerated commodities, the wheat, corn, oats, 

 8 barley, flaxseed, the ones listed there in 1938, 

 9 and through the years, there have been other 

 10 commodities added and taken out of that list. 

 11 Currently, there are ten on the list. You'll see 

 12 1987, which is actually after the founding of the 

 13 CFTC, and that was added really for consistency 

 14 sake with soybean oil and soybean meal to be 

 15 consistent with the soybean contracts. 

 16 Interestingly, the Commodity Exchange 

 17 Commission never established speculative limits on 

 18 many agricultural commodities for which they did 

 19 have jurisdiction. You'll find a whole list of 

 20 those that they chose not to impose Federal 

 21 standards for. So it has not been a consistent 

 22 treatment across all agricultural commodities 
 29 

 1 through the year. In addition, we've seen that the 

 2 number of exchanges under their own authority have 

 3 established their own speculative position limits 

 4 prior to the CFTC, for example, the CME with pork 

 5 bellies and live hogs in 1966, and these are 

 6 actually even prior to their being placed under 

 7 jurisdiction of the Federal Government in Federal 

 8 oversight. 

 9 When the CFTC was established in 1974, 

 10 it retained these speculative position limits that 

 11 had been on the books prior to that, and these are 

 12 incorporated in CFTC regulation 150.2, and, in 

 13 fact, the petition that is before the CFTC is 

 14 related to this regulation. That is the one that's 

 15 in the Board of Trade petition and you can find in 

 16 the current Federal Register release. By the way, 

 17 if you're looking for the Federal Register release, 

 18 the CFTC web site has it available, CFTC.gov. 

 19 For each of these enumerated 

 20 commodities, Regulation 150.2 established position 

 21 limits in the spot month, the non-spot months, and 

 22 all months combined. So it really followed the 
 30 

 1 form of the pre-CFTC regulation. Going forward, in 

 2 1981, the CFTC passed a rule, 150.5, that required 

 3 exchanges to establish speculative position limits 

 4 for those commodities that were not subject to the 

 5 Federal limits. So we have here two different 

 6 types of regulation, one that has actual Federal 

 7 limits that are set by the CFTC and others that are 

 8 set through Commission oversight by the exchanges. 

 9 So to summarize, really, the history of 

 10 position limits, Federal speculative position 

 11 limits in the year 2000 and the passage of the 

 12 CFMA, we've had these limits on these ten 

 13 enumerated commodities that were brought into the 

 14 CFTC in 1974, and then we have another agricultural 

 15 commodities positions limits and accountability 

 16 limits that are set by the exchanges subject to 

 17 CFTC oversight and enforcement. 

 18 Just to list the ten commodities, here 

 19 they are. Most of them are on the Board of Trade. 

 20 We have two Minneapolis Grain Exchange products, 

 21 cotton at the New York Board of Trade, and the 

 22 Kansas City winter wheat contract. So there are 
 31 

 1 Federal limits on the single-month limits for the 

 2 non-delivery months, all months combined limits, 

 3 and then spot month limits. 

 4 So going forward, then, to the Commodity 

 5 Futures Modernization Act in 2000, this has, as 

 6 Commissioner Lukken mentioned, changed the way we 

 7 regulate commodities from prescriptive rules to 

 8 more of a principles-based approach, and you'll 

 9 find in the CFMA designation criteria and core 

 10 principles for which designated contract markets 

 11 must comply in order to maintain their designation. 

 12 The one that is most relevant--there are I think 18 

 13 core principles with respect to designated contract 

 14 markets. I say 18 because I think one of the 18 is 

 15 you shall abide by the core principles, so 17 or 

 16 18. One of the 18 is Core Principle 5 that deals 

 17 specifically with position limits and sets out or 

 18 requires that the exchanges adopt position limits 

 19 or position accountability limits for speculators 

 20 where necessary and appropriate. 

 21 The guidelines, which is a separate part 

 22 of our regulations, there is guidance to 
 32 

 1 interpretation of Core Principle 5, and the 

 2 guidance says, you know, that spot month limits 

 3 should be adopted in these markets, and there 

 4 should be those in which there are deliverable 

 5 supplies or where they may be constrained or where 

 6 there is susceptibility to market manipulation or 

 7 price distortions. In addition, markets may elect 

 8 not to provide all months combined or non-spot 

 9 month limits. So, really, the core principle, the 

 10 guidance says really just spot month. 

 11 The petitions that are before the 

 12 Commission currently would repeal the CFTC 

 13 Regulation 150.2, the Federal Speculative Position 

 14 Limits. In addition, the petitions ask that if the 

 15 regulations are retained, that the Chicago Board of 

 16 Trade has proposed certain levels that the limits 

 17 be set to, and the Kansas City Board of Trade and 

 18 the Minneapolis Grain Exchange have asked that 

 19 there be continuing parity in these limits across 

 20 the wheat contracts traded at the different 

 21 exchanges. 

 22 So what questions are we looking at here 
 33 

 1 at the CFTC? In the Federal Register release, 

 2 you'll see six questions, and here they are 

 3 summarized in this presentation. First of all, 

 4 should the Commission continue to impose these 

 5 Federal limits that are enumerated in 150.2? If we 

 6 do, should these commodities be treated differently 

 7 from other agricultural and non-agricultural 

 8 commodities where the Commission does not impose 

 9 these limits? We need to reconcile that in some 

 10 way. The third question we'll be asking is should 

 11 the CFTC Regulation 150.2 be modified to eliminate 

 12 either the non-spot month or the individual months 

 13 or the all months combined limits? And if 150.2 is 

 14 modified, what criteria should we use in 

 15 determining what acceptable position limits, what 

 16 they are? And if these position limits are 

 17 retained, should the increases requested by the 

 18 Chicago Board of Trade be granted and should the 

 19 request by the Kansas City Board of Trade and the 

 20 Minneapolis Grain Exchange for parity in setting 

 21 these limits be granted? And, finally, should the 

 22 acceptable practices, the guidance that we have for 
 34 

 1 Core Principle 5 be revised in light of these 

 2 petitions? 

 3 So with that, I will turn it over to 

 4 Bernie Dan. 

 5 CHAIRMAN NEWSOME: Okay. Thank you, 

 6 Dr. Overdahl. 

 7 Are there any questions for Jim before 

 8 we move to Bernie with regard to that overview? 

 9 Okay. Next on the program, we've got 

 10 Bernie Dan, who is the President and CEO of the 

 11 Chicago Board of Trade. 

 12 And, Bernie, I think by your presence 

 13 here, it shows the importance of not only this 

 14 advisory committee to the CFTC, but the importance 

 15 of this issue to the exchange, and we're glad that 

 16 you're here to share your thoughts behind the 

 17 request. 

 18 PRESENTATION BY BERNIE DAN, CHICAGO BOARD OF TRADE 

 19 MR. DAN: Thank you, Jim, and it is my 

 20 pleasure to be here today. It is a significant 

 21 issue for the Board of Trade and I think for the 

 22 agricultural industry at large, and what I am about 
 35 

 1 to present is some rationale about how we're 

 2 proposing to address a hopeful request to increase 

 3 limits for speculative users. 

 4 Before I get into that, I just want to 

 5 take one moment and thank Chairman Newsome for his 

 6 support as commissioner or as chairman of the CFTC, 

 7 and at the same time, we look forward to working 

 8 with Commissioner Lukken and Commissioner 

 9 Brown-Hrsuka during the transition and beyond. 

 10 They've been great supporters for the industry and 

 11 have really helped the industry grow. So I just 

 12 want to say thank you very much. 

 13 Good luck to you, Jim. You can join my 

 14 side of the fence, which is nice. 

 15 So what we're here to do today is talk 

 16 about the Board of Trade's petition to repeal the 

 17 CFTC Reg 150.2 and we want to talk about a proposal 

 18 to increase single- and all-month speculative 

 19 limits. Okay. When you talk about the proposal, 

 20 we're really focused on really three things. We 

 21 want business to be centrally located in terms of 

 22 price discovery. We want to have the benefit of 
 36 

 1 the regulation and the oversight that comes not 

 2 only from the exchange, but from the CFTC, and we 

 3 want to enhance the transparency associated with 

 4 how hedgers and speculators go through the price 

 5 discovery or risk management process. 

 6 So in doing so, and we're going to show 

 7 some data that leads to allowing the exchanges the 

 8 authority to establish and monitor these limits 

 9 that are consistent with CFTC guidelines and 

 10 include their oversight, but don't require their 

 11 approval, and at the same time, as we go forward, 

 12 we want to maintain those guidelines and oversight 

 13 to ensure that the integrity of the process and how 

 14 we monitor those markets, that we guard against 

 15 things like manipulation and excessive trading and 

 16 other practices that the Board of Trade through 

 17 their SRO duties has been performing very well for 

 18 many years. So we're addressing in this proposal 

 19 how we attempt to do both. 

 20 So why do we want to do it? First off, 

 21 it allows for quicker responses to the changing 

 22 market. The last time a change was requested, it 
 37 

 1 took seven years to fully implement, and it wasn't 

 2 necessarily it took seven years to make a decision, 

 3 but it was a very staged process in trying to 

 4 understand what the impact would be on the 

 5 increased limits. But nevertheless, seven years in 

 6 a dynamic market environment where the growth and 

 7 demand for access to price discovery for these 

 8 underlying products is clearly growing is in our 

 9 judgment not a reasonable path to follow going 

 10 forward in the future. Two, it enables the 

 11 regulated exchanges to better compete with the OTC 

 12 markets to attract the capital. One of the things 

 13 that really driving our comment here is that with 

 14 the report of large speculators in the market and 

 15 large hedgers in the market and with the growth of 

 16 OTC markets, we recognize that that growth is 

 17 always hedged back in the primary market of the 

 18 Board of Trade; however, it could distort the users 

 19 in the market and the data of who is the speculator 

 20 and who's the hedger. 

 21 So the advantage of having centralized 

 22 liquidity, allowing larger limits for the 
 38 

 1 speculators, will enhance the price discovery 

 2 associated with those seeking to use the market for 

 3 hedging and other risk management purposes. 

 4 Finally, we think that repealing this 

 5 regulation is consistent with the CFMA core 

 6 principles that Commissioner Lukken reported on 

 7 earlier. Specifically, this request will also 

 8 require some changes in the Board of Trade 

 9 Regulation 425.01 that governs our position limits. 

 10 So with respect to spot month limits, there would 

 11 be no changes at all. With respect to single-month 

 12 limits, these are again based on guidelines from 

 13 the CFTC, and we use data through 2003. We would 

 14 be proposing the following limits for single month: 

 15 Corn would move from 5,500 to 10,000 contracts; 

 16 wheat from 3,000 to 4,500 contracts; soybeans from 

 17 3,500 to 6,500 contracts; soybean oil from 3,000 to 

 18 4,500 contracts; and soybean meal from 3,000 to 

 19 4,500 contracts. 

 20 On the all-month limits, again, based on 

 21 data from the FTC and using 2003 data, corn would 

 22 move from 9,000 do to 17000; wheat from 4,000 to 
 39 

 1 5,500; soybeans from 5,500 to 10,000; soybean oil 

 2 from 4,000 to 6,500; soybean meal from 4,000 to 

 3 6,000. 

 4 So when we look at the CFTC guidelines 

 5 and what we base these recommendations on, spot 

 6 month guidelines is no greater than 25 percent of 

 7 the spot month deliverable supply. The guidelines 

 8 used to drive the Board of Trade's recommendation 

 9 for increased limits for single and all months is 

 10 no greater than ten percent of the average combined 

 11 futures and delta adjusted option month-end open 

 12 interest for the most recent calendar year up to 

 13 25,000 contracts with a marginal increase of 2.5 

 14 percent thereafter. So with respect to just that 

 15 statement, the largest increase that we've proposed 

 16 is for all months combined 17,000 for corn. So 

 17 we're still well within the guidelines in terms of 

 18 what the Board of Trade is proposing and well 

 19 within the structure that has been offered by the 

 20 CFTC. 

 21 The guidelines also suggest that the 

 22 breadth and liquidity of the underlying cash market 
 40 

 1 and arbitrage opportunities between the futures and 

 2 cash markets may also be relevant considerations, 

 3 and this begins to address the issue and concern 

 4 associated with parity amongst Kansas City, 

 5 Minneapolis, and the Board of Trade with respect to 

 6 the wheat product. 

 7 To give you a little bit of a breakdown 

 8 on just where some of the underlying products are 

 9 from a futures and options perspective, I have 

 10 several slides on just the products, and again, I 

 11 want to remind the advisory committee that we based 

 12 our recommendations on 2003 data, which is in the 

 13 reddish color. So the weekly average corn futures 

 14 and options open interest from 1999 to 2004 for 

 15 corn suggests that the data for 2003 is 

 16 representative of all the years prior and clearly 

 17 doesn't take into account some of the increased 

 18 growth that we've experienced in '04. Our approach 

 19 would be to look at this if, in fact, granted these 

 20 limits, is to look at the average open interest 

 21 over a several-year period like we have from 1999 

 22 to the year 2003 and not really respond to any one 
 41 

 1 year. So I have added what the weekly average open 

 2 interest is for 2004, and you can see it's almost 

 3 double, if not triple, what corn is for '03. 

 4 In wheat, it's a similar picture. We 

 5 base the data on 2003. Clearly, we have not taken 

 6 into consideration in our recommendation some of 

 7 the large volume years in 2000 and 2001, and this 

 8 should, again, give the committee some comfort that 

 9 we're considering all data. We're not just 

 10 focusing on any one year. We're focused on a 

 11 period. 

 12 Soybean futures and options for the same 

 13 period, again, it's representative of the prior 

 14 three years and does not take into consideration a 

 15 large growth in '04. Soybean oil, it's a 

 16 consistent story as is soybean meal. 

 17 So one of the reasons why we're here 

 18 before the committee is we firmly believe that more 

 19 liquidity helps hedgers and producers of all 

 20 levels. Markets have clearly attracted more 

 21 speculative capital from large traders, and they're 

 22 represented in lots of different types of users, 
 42 

 1 whether they be managed futures, trading arcades, 

 2 hedge funds, small commercial users, medium 

 3 commercial users, large commercial users. What 

 4 makes the market strong is the combination and the 

 5 diversity associated with those profiles. 

 6 Similarly, the data from the CFTC will 

 7 show that not only has large traders that are for 

 8 speculative purposes increased since the last 

 9 change, but also that the large hedgers have also 

 10 increased. We'll see some data on that in a 

 11 second. This speculative activity allows hedgers 

 12 to trade more effectively and reduce--and keep the 

 13 spreads tighter and deeper. The result is simply 

 14 more liquidity and open and transparent markets. 

 15 Transparency and real-time dissemination of prices 

 16 and trade data and the need to centralize it on one 

 17 trade medium ultimately helps all users because 

 18 price discovery is more ready available. It's more 

 19 transparent, and it encourages trading. 

 20 This is from the CFTC large trade data, 

 21 and I have highlighted soy beans just to show that 

 22 since 1999, when the last change was made, that the 
 43 

 1 percentage of open interest held by large 

 2 speculators was 18 percent. The percentage of open 

 3 interest held by large hedgers at that time in 1999 

 4 was 49 percent. The difference at that time was 

 5 31. After the changes and given some of the 

 6 industry growth that I've shown for soy beans and 

 7 other products, the relative percentages are the 

 8 same. In 2004, the percentage of open interest 

 9 held by large specs is 20 percent. The percentage 

 10 of open interest held by large hedgers in 2004 is 

 11 56 percent, and the difference is 36 percent. So 

 12 this should give the committee an indication that 

 13 by increasing the limits the last time and managing 

 14 that growth within the centralized market, we've 

 15 been able to maintain a relatively same level of 

 16 mix which supports how the industry has grown and 

 17 helps with the price discovery and efficient trade. 

 18 So, in summary, we think that repeal of 

 19 the CFTC speculative limits is good for regulated 

 20 markets, good for the overall ag pricing. Clearly, 

 21 we are strong proponents and supporters of 

 22 maintaining the guidelines and the oversight on 
 44 

 1 behalf of the CFTC, and we think increasing open 

 2 interest that we've seen from 1999 to 2004 supports 

 3 higher single- and all-month position limits, and 

 4 we also believe that price discovery is enhanced 

 5 with diverse market users. 

 6 I think that one of the things I'd like 

 7 to point out is that large traders--I'm assuming 

 8 that this request is approved--will continue to 

 9 report their positions to the exchange, and this 

 10 information in terms of large speculators and large 

 11 hedgers will still be made available, and we're 

 12 confident that be centralizing that at the Board of 

 13 Trade and other exchanges, that the ag industry 

 14 will benefit from that data and will accurately 

 15 redirect speculators and hedgers within the 

 16 agricultural world. Secondly is that on the 

 17 transition, we would manage the transition. While 

 18 we're asking for these limits, our approach would 

 19 be such that we would support these expanded limits 

 20 and we would introduce them on a graduated basis. 

 21 We would do so to ensure orderly markets, price 

 22 integrity, and trade certainty. So whether or not 
 45 

 1 we actually fulfill and exercise the authority 

 2 within the limits we're requesting, sitting here 

 3 today, I can't judge that, but we will do so on a 

 4 very measured basis to ensure that we don't 

 5 compromise the markets we have today. 

 6 Finally, I would like to say that 

 7 enhanced data and the dissemination of that data in 

 8 a centralized format clearly enhances the price 

 9 discovery that we all enjoy on the Board of Trade 

 10 today. 

 11 So with that, I would be happy to answer 

 12 any questions about the presentation or anything 

 13 else. 

 14 CHAIRMAN NEWSOME: Thank you very much, 

 15 Bernie. 

 16 Some on this committee are more familiar 

 17 with this topic than others. Some certainly have 

 18 more interest in this topic than others, and we 

 19 want everyone to feel very comfortable in terms of 

 20 asking questions or making comments. So regardless 

 21 of your interest or knowledge level, I would assure 

 22 you that no questions are too basic, and we would 
 46 

 1 invite anyone to make comments or ask questions. 

 2 So at this time, whether it be for members of our 

 3 staff or for Bernie, I would certainly like to open 

 4 it up for any questions or comments. 

 5 Neal. 

 6 GENERAL DISCUSSION 

 7 MR. GILLEN: Thank you. 

 8 Bernie, presuming everything happens 

 9 that you request, what procedures will you have in 

 10 place for non-members of the exchange to have a 

 11 voice in any potential increases in the future? 

 12 MR. DAN: I think there are two points 

 13 to make in that. Thanks for the question. First 

 14 off, we're going to follow the guidelines that are 

 15 outlined by the CFTC, and we will operate within 

 16 that 25,000 limit that I shared earlier and 

 17 incremental increases beyond that. With respect to 

 18 revisions above and beyond what we're asking today, 

 19 we would do exactly what we've done the first time, 

 20 is solicit the input from the industry, demonstrate 

 21 that we're operating within the guidelines. We 

 22 would still be subject to CFTC input at that level, 
 47 

 1 and so I would envision a similar process that 

 2 we're going through today, and it doesn't create 

 3 any sort of scope on the part of the Board of Trade 

 4 to exceed those that were requested today about 

 5 without good strong interaction with the users as 

 6 well as from the Commission. 

 7 CHAIRMAN NEWSOME: Okay. Other 

 8 questions? 

 9 Jim. 

 10 MR. MILLER: You indicated that the last 

 11 time the spec limits were changed, it took seven 

 12 years. Would you expect that if you went through 

 13 the process today, it would take seven years to 

 14 reach the end? 

 15 MR. DAN: No. I don't expect it would 

 16 take seven years today, but the point we're trying 

 17 to make there is that on recognizing and meeting 

 18 demand of users, defined as both hedgers and 

 19 speculators for our market, and responding to the 

 20 changing market conditions, that as a marketplace, 

 21 we want to be in a position to make those judgments 

 22 and determinations in the context of the Federal 
 48 

 1 guidelines and oversight in order to maintain our 

 2 market and meet the demand that's there. So we 

 3 only use that as an example to demonstrate that the 

 4 duplicity associated with this process doesn't add 

 5 any value in terms of why we all use these markets, 

 6 and we think it's better and consistent with the 

 7 Commodity Futures Modernization Act to streamline 

 8 processes and shift some of this responsibility 

 9 from the government regulatory body, the CFTC, to 

 10 the marketplace and do so consistent with their 

 11 guidelines, like we have many other practices 

 12 post-2000. 

 13 I think the other point I would like to 

 14 make on the seven years is that it was done in a 

 15 very organized fashion in the sense of there was 

 16 three phases, whereas part of the Commission, we 

 17 introduced some changes, did some studies, did some 

 18 other changes, etc., and they were all done in the 

 19 context of ensuring trade certainty, integrity 

 20 associated with pricing and orderly markets. Those 

 21 are principles and guidelines that the Board of 

 22 Trade is clearly self-interested in maintaining, 
 49 

 1 and those are areas that over the last 50-plus 

 2 years, we've demonstrated our ability to do so. 

 3 So we think that by asking for this 

 4 repeal, we as a marketplace are in a very strong 

 5 position to manage the transition and do some so in 

 6 conjunction with industry users as well as operate 

 7 within the guidelines that are provided. 

 8 CHAIRMAN NEWSOME: I would follow up on 

 9 that just a little bit too, Jim. On top of what 

 10 Bernie has said, even the things at the Commission 

 11 have changed greatly that wouldn't allow something 

 12 to drag out for that kind of time period as in the 

 13 past. One of the things with regard to the 

 14 Commodity Futures Modernization Act is that it not 

 15 only created the flexibility, but it created time 

 16 sensitivity as well, and I think over the last 

 17 couple of years, you've seen a number of general 

 18 areas at the Commission, for example, rule changes 

 19 or the addition of new contracts, that at one time 

 20 took months or even years, now takes days and weeks 

 21 as compared to how things have operated in the 

 22 past. 
 50 

 1 So I won't be here, but certainly I 

 2 wouldn't envision anything taking seven years. 

 3 Seaver. 

 4 MR. SOWERS: By way of background, I 

 5 should tell you that while I'm here with a banking 

 6 hat, a lot of the bankers that you will see out in 

 7 rural America, these country bankers that you all 

 8 know are often farmers themselves. So a lot of 

 9 times we will hear from bankers who may feel the 

 10 same way that, you know, Jim's members may feel or 

 11 Errol's members may feel. So I guess I just want 

 12 to make the point that bankers heavily invested 

 13 themselves in agricultural. 

 14 I guess my question was I guess the most 

 15 recent case we would have would be the BSE cases, 

 16 and I know that livestock is not one of the 

 17 enumerated commodities, but what should we learn 

 18 from the BSE case? I understand, actually, I guess 

 19 before the BSE came around, that, in fact, there 

 20 were some adjustments that were made on some of 

 21 these loss limits. So what should we gather and 

 22 what should we learn from that process? 
 51 

 1 MR. DAN: I think, Seaver, that's a 

 2 great question, and whether it's BSE or whether 

 3 it's energy or any product where there's a lot of 

 4 volatility associated with it, exchanges have the 

 5 authority to do a couple of things: Increase 

 6 margin requirements that represent the risk 

 7 associated with the underlying commodity to ensure 

 8 that those that are in the market are truly in 

 9 there for whatever reason they want to be in there, 

 10 and that helps reduce the speculative activity. 

 11 Two is that, you know, you can--there are price 

 12 limits that can be adjusted to keep the trading 

 13 intraday in a far tighter bid-ask or trading range 

 14 than prescribed, and we can do that within the 

 15 scope of our rules. And, three, during that time 

 16 with BSE, and I think the CME did a very good job, 

 17 is, you know, we have access through our regulatory 

 18 arms to understand the users of the market and 

 19 ensure, you know, their intentions in terms of 

 20 these positions, that they actually understand the 

 21 risks. And I think that as these situations arise 

 22 and if you look back even beyond the BSE situation, 
 52 

 1 one of the chief, you know, goals and objectives of 

 2 the marketplace is trade certainty and price 

 3 discovery. Those two objectives are the highest 

 4 priorities that we govern, and it's in our interest 

 5 as a marketplace to ensure that confidence 

 6 surrounds those, and we would follow similar 

 7 practices in the event of these increased limits. 

 8 Finally, I would like to say that I want 

 9 to reemphasize that we would introduce these limits 

 10 on a graduated basis. Our concern is, you know, we 

 11 don't want--the worst thing for the Board of Trade 

 12 is to have any issues associated with pricing 

 13 manipulation or anything like that, and so we would 

 14 do it on a graduated basis to ensure orderly 

 15 markets and these limits get absorbed. That is 

 16 another way that we would guard against, you know, 

 17 any sort of sudden change or any uncertainty 

 18 associated with these increased limits. 

 19 CHAIRMAN NEWSOME: I would follow up on 

 20 that too, Seaver, since we lived through the BSE 

 21 scenario. That was the example you used, and I 

 22 think it's relevant. Many of the senior staff 
 53 

 1 here--I see Paul from the Merc in the back. He 

 2 certainly lived through it. But I think, to me, 

 3 what that indicates is that the markets work. You 

 4 allow them the opportunity to work. Certainly, 

 5 some serious decisions had to be made on a very 

 6 timely basis with regard to the BSE outbreak. The 

 7 Merc was meeting almost daily in terms of how to 

 8 respond to the situation. Those discussions were 

 9 in consultation with the CFTC every step of the 

 10 way. 

 11 So I would expect, regardless of how it 

 12 moves forward, that that would be how things would 

 13 operate, whether it's the Board of Trade or the 

 14 Merc or anyone else. 

 15 Tom. 

 16 MR. ERICKSON: Bernie, have you given 

 17 any thought, looking forward, presuming the 

 18 petition is approved, to how the exchanges might 

 19 utilize that authority as far as when you would 

 20 have spec limit increases proposed? Would you look 

 21 out the 18-24 months where there's no open 

 22 interest, or would you look at making decisions in 
 54 

 1 the more term for dynamic--I guess to the respond 

 2 to the dynamic market change? 

 3 MR. DAN: We've talked about it. You 

 4 know, we've attempted to reach out to the various 

 5 industry associations to see how best to manage it, 

 6 because dependant on which path we choose, it 

 7 obviously has some impact and some discussion with 

 8 the CFTC. So we haven't reached a formal 

 9 conclusion on that yet, but we're quite--we're 

 10 quite prepared to just say looking out forward, if 

 11 people within the industry are too concerned about 

 12 making changes on the near-terms months. So I 

 13 think that's a valid question, and I don't have a 

 14 specific answer because that dialogue continues, 

 15 and as we go through this comment period, we're 

 16 seeking--as we feel we're gaining support and we're 

 17 talking about the implementation, but if the result 

 18 of this is that it's just looking forward, that is 

 19 something that we're prepared to live with and move 

 20 forward on. 

 21 CHAIRMAN NEWSOME: Yes, Robert. 

 22 MR. CASHDOLLAR: Just for background, as 
 55 

 1 I recall one other time looking at this issue, the 

 2 definition of whether someone is hedging or 

 3 speculating is a little bit loose and dependant 

 4 more on who they are than what they're doing. 

 5 Could you refresh my memory on that? 

 6 [Mr. Dan confers with Ms. Polaski.] 

 7 MR. DAN: I just was asking Ann Polaski 

 8 just so I don't misspeak. Essentially, a 

 9 definition of a hedger is anybody who has 

 10 deliverable stock or product. A speculator--maybe 

 11 it's better to define a speculator, somebody who 

 12 doesn't have any value associated with the supply 

 13 chain. 

 14 MR. CASHDOLLAR: I understand that 

 15 that's the dictionary definition. Is that how it 

 16 really works in the oversight of the market? 

 17 MR. DAN: Well, here's the thing, is 

 18 obviously we have hedge exemptions which are 

 19 granted through the Board of Trade, and as we 

 20 request information to support those hedge 

 21 exemptions through our surveillance and market 

 22 teams, it would reflect that, yes, that happens. 
 56 

 1 Okay. If people are beyond that, that's what 

 2 our--our audit and investigation group would 

 3 address that. But yes. 

 4 MR. CASHDOLLAR: But it's basically 

 5 assumed if you're Cargill or Tysons, that you are 

 6 hedging? 

 7 MR. DAN: There is an assumption made, 

 8 but they could have hedge exemptions beyond those 

 9 basically we will monitor. 

 10 MR. CASHDOLLAR: How often do they apply 

 11 for that exemption? 

 12 MR. DAN: It's reviewed every 18 months. 

 13 COMMISSIONER BROWN-HRUSKA: I would just 

 14 sort of pipe in, because I've actually looked at 

 15 some data over the years, and I think you raise a 

 16 really valid question, because I've seen 

 17 some cases where traders are classified as 

 18 non-commercials and subject to speculative position 

 19 limits, but they do, in fact, go into the market 

 20 and secure product and make delivery, and they can 

 21 take delivery and they do it on a very frequent 

 22 basis. So I think it's a good question, 
 57 

 1 something that I think needs further thought for 

 2 the exchanges to take look at that. 

 3 So I just wanted to mention that. 

 4 MR. CASHDOLLAR: My concern would be 

 5 more on the other side. 

 6 MR. WILLETT: I want to look backwards a 

 7 little bit. Obviously, the corn market has been 

 8 fairly volatile here in recent history. If your 

 9 petition, that is the repeal of the limits, had 

 10 been in place back when trading of corn was ceased 

 11 on one day, what could we have seen back then, if 

 12 the limits had been raised? I think earlier this 

 13 year, some trading was stopped when corn was going 

 14 to a certain level, and I can't recall the actual 

 15 value that day. What would the result have been? 

 16 MR. DAN: There would be no--I mean, if 

 17 we have a limit up or down period in corn, it's not 

 18 going to impact a speculative position, at least in 

 19 and of itself, and so I don't really understand 

 20 what--I mean the price movement each day is not 

 21 going to drive whether we're at 5,500 or 6,000. It 

 22 may in the case of the BSE example allow us to 
 58 

 1 adjust throughout, but a limit move where maybe the 

 2 market is taking a time-out for a while is not 

 3 going to change the limit. 

 4 MR. WILLETT: Okay. I'm just kind o 

 5 relating a question from one of our good producers 

 6 here earlier this week who had some questions about 

 7 the petition who saw it posted on the DTN. 

 8 MR. DAN: I think let me make two 

 9 points. Just on the spot month, maintaining that 

 10 position at 600, which I believe it is, is a 

 11 critical non-change and affirmation of as we get 

 12 down to that spot month, you know, how important it 

 13 is to maintain that. So we're focused on that. 

 14 Secondly, the price volatility throughout the life 

 15 of the product is not a determining factor in 

 16 either the current limits or how we would monitor 

 17 it. 

 18 MR. WILLETT: Thank you. 

 19 CHAIRMAN NEWSOME: Tom. 

 20 MR. COYLE: I don't have a question. I 

 21 guess I just have an observation. We've had a 

 22 fairly good dialogue at the Risk Management 
 59 

 1 Committee of the National Grain and Feed. We've 

 2 had some pretty good contact, amazingly very quick 

 3 response from each of the exchanges related to this 

 4 issue. As a general rule, the association supports 

 5 streamlining approval and increasing the 

 6 flexibility for the exchanges so that they can 

 7 support their customers and meet market 

 8 requirements. 

 9 On this specific issue, a lot of our 

 10 dialogue came after starting with the issue of 

 11 limits, really came down to market information, but 

 12 the limits themselves were not quite as critical as 

 13 long as there was some oversight and the exchanges 

 14 were required to follow the core principles, on 

 15 which they have stated they will and they're 

 16 require to do. So we support the request, and 

 17 we'll provide formal comments later. 

 18 But, really, the issue came down to the 

 19 information. It maybe gets to your question as 

 20 well about definition of hedgers and speculators. 

 21 To the extent that a traditional hedger actually 

 22 has off-exchange contracts, swaps or something 
 60 

 1 that's being hedged, it would seem to me that those 

 2 transactions would appear to be hedges when in 

 3 reality it's actually a speculative interest in a 

 4 market, so that by increasing the limits, those 

 5 contracts actually come direct to the Board of 

 6 Trade, and so that the transparency the market sees 

 7 would actually be better. 

 8 CHAIRMAN NEWSOME: Thank you, Tom. 

 9 And certainly any comments don't have to 

 10 be questions. Tom Neal, you've been pretty quiet 

 11 on this. I know it's something you're very 

 12 involved in. Any thoughts or comments from your 

 13 standpoint? 

 14 MR. NEAL: Well, having the pleasure of 

 15 appearing before you not as my company, as an 

 16 individual trader, I can speak on behalf of the 

 17 National Grain Trade Council, and after a very 

 18 thorough review and a lot of discussion, our 

 19 members came pretty much to the single point where 

 20 we would like to support the Chicago Board of Trade 

 21 in their petition and the Kansas City Board of 

 22 Trade and the Minneapolis Grain Exchange in their 
 61 

 1 desires as well. We, I think, share similar 

 2 comments made by Tom Coyle a moment ago where we 

 3 feel, really, that it's in the business interest of 

 4 the Board of Trade to run itself properly and in so 

 5 doing will conduct itself according to good 

 6 business realities as well as maintain a positive 

 7 and open type of communication with their 

 8 customers. In doing so, we really think that 

 9 something that the position limits can be 

 10 ultimately a vehicle to enhance, as Bernie said in 

 11 his presentation, the liquidity and the 

 12 transparency of the markets. 

 13 Not only do we recognize what has 

 14 occurred to date with regard to the existing 

 15 contracts, but with the new contracts and the 

 16 potential development of other cultural contracts 

 17 throughout the world, it is more important than 

 18 ever, from my perspective and I think from the 

 19 Grain Trade Council's perspective that we continue 

 20 to do whatever we can here in the U.S. to make our 

 21 markets as open and competitive and as transparent 

 22 and as user friendly as we can. 
 62 

 1 So as long as Bernie is on record on 

 2 behalf of the Board of Trade that he will endeavor 

 3 to do certain things that will enhance and create 

 4 good communication or good customer relations, I 

 5 think that these things ultimately will be very 

 6 much to the benefit of the marketplace. 

 7 Thank you. 

 8 CHAIRMAN NEWSOME: Okay. Thank you, 

 9 Tom. 

 10 Errol. 

 11 MR. RICE: Just to be on record on 

 12 behalf of the National Cattlemen's Beef 

 13 Association, obviously recently our livestock 

 14 complex had just gone through a bit of a 

 15 modification on the daily price moves and just to 

 16 encourage--maybe the first question from Mr. 

 17 Gillen--to encourage your industry involvement in 

 18 this sort of a transition, one of the things that 

 19 we experienced with our modification on a daily 

 20 price move of contract, there was obviously some 

 21 concerns as to being able to bear some of the 

 22 economic, so to speak, concerns about that. But 
 63 

 1 what we were able to do is we were able to bring 

 2 CME to the table, have some very open dialogue at 

 3 our annual meeting as well as having very open 

 4 dialogue with representatives of the CFTC to make 

 5 that a much smoother transition, so just to 

 6 encourage that. 

 7 CHAIRMAN NEWSOME: Other comments or 

 8 questions? 

 9 Yes, Jim. 

 10 MR. MILLER: Well, I'm not short of 

 11 questions, but I'm going to restrain myself. 

 12 Since my colleague from the wheat 

 13 growers is here, I would like to ask a question 

 14 because it appears in your approach, you're going 

 15 to use a formula, basically, to establish whatever 

 16 the spec limit would be. How does that create 

 17 parity between the exchanges when the volume and 

 18 characteristics of the contracts between the 

 19 various wheat contracts are so significantly 

 20 different? And if it doesn't end up with parity, 

 21 then I gather that doesn't present a problem for 

 22 the Kansas City or Minneapolis exchanges. 
 64 

 1 MR. DAN: I'm going to make a general 

 2 comment and then I'll turn it over. I mean, the 

 3 Board of Trade clearly supports spec limits in 

 4 wheat that enable arbitrage and spread trades 

 5 between Minneapolis, Kansas City, and the Chicago 

 6 Board of Trade, and we also support parity 

 7 generally. Okay. However, we don't support 

 8 reducing limits for Board of Trade wheat, as an 

 9 example, if that is necessary to maintain equal 

 10 limits for markets with significantly smaller open 

 11 interest than the characteristics that you just 

 12 defined. And that is how I would respond, but I 

 13 think it's from Kansas City's perspective that that 

 14 might be a better answer for you, because that is 

 15 where the open interest is different. 

 16 MR. OTT: Let me introduce myself first. 

 17 I'm Joe Ott. I'm vice president of compliance with 

 18 the Kansas City Board of Trade, and it is very 

 19 important for Kansas City both to maintain parity 

 20 with the other exchanges as far as position limits, 

 21 and the reason is because a great deal of our 

 22 volume is generated from market spreads between 
 65 

 1 Kansas City-Chicago as well as Kansas-Minneapolis, 

 2 and we if we don't have parity, then we felt like 

 3 that will reduce our trading volume and allow 

 4 people to maybe trade more in Chicago than they 

 5 would in Kansas City. 

 6 In addition to the formula specified in 

 7 the regulations, we feel it's also important for 

 8 the Commission to look at some other valid issues 

 9 such as the size of the underlying cash commodity 

 10 as well as the deliverable supply of the cash 

 11 commodity and the winter wheat, which is a contract 

 12 underlying our product. It's by far the dominant 

 13 wheat contract that is grown in the U.S. that 

 14 accounts for approximately 45 percent of the total 

 15 wheat production in the U.S., and because of that, 

 16 there is a greater potential for the deliverable 

 17 supply in our product. We feel with the potential 

 18 for bigger deliverable supply, that it would make 

 19 it more difficult for possible manipulation of our 

 20 market. 

 21 So we feel like with our large 

 22 underlying cash commodity, which is typically is 
 66 

 1 twice that of other wheat exchanges, and due to the 

 2 fact that typically our deliverable supply is equal 

 3 to pr in excess of the other exchanges, that we 

 4 feel like we should be able to go up to Chicago. 

 5 And I think Bernie does make a good point in that 

 6 by parity, we want to go up to Chicago, not force 

 7 Chicago to have to come down to us. So those are 

 8 some of the reasons that Kansas City feels like we 

 9 hope the Commission will look at some other things 

 10 besides the formulas brought about in Regulation 

 11 150.5. 

 12 MR. MILLER: But if the Commission 

 13 repeals its regulatory authority in this case, why 

 14 is the Commission going to have anything to say 

 15 about what Chicago does versus what Kansas City may 

 16 or may not wish was the situation, other than from 

 17 an oversight basis? 

 18 CHAIRMAN NEWSOME: I'll answer that. 

 19 Even if we repeal the specific rule, we still have 

 20 the general oversight responsibility of the core 

 21 principles, and we feel, not specific to this, but 

 22 that in general, you know, that the Commission 
 67 

 1 would have the authority to come in and make 

 2 changes or recommendations as needed. 

 3 COMMISSIONER LUKKEN: I just wanted to 

 4 add, as I mentioned in my presentation, if there is 

 5 a material rule change on an agricultural product 

 6 with open interest, we still have the ability to 

 7 have prior approval of that rule change. 

 8 Materiality is a case-by-case basis. We really 

 9 look at things such as, is the product more likely 

 10 to be manipulated or is it going to affect the 

 11 behavior of typical traders? So if the concern is 

 12 that the spot month spec limits might be 

 13 lowered to a point that might cause manipulation 

 14 problems or raised to a point to cause manipulation 

 15 problems or people to change behavior, most likely 

 16 we will have a chance to look at that prior to 

 17 that decision going into effect. 

 18 MR. DAN: Mr. Chairman, may I make a 

 19 comment? 

 20 Even today, as an example, where wheat 

 21 is at 3,000 today, you know, Minneapolis Grain 

 22 Exchange, for example, relative to the guidelines 
 68 

 1 is below that limit today. The markets still work 

 2 orderly. People are focused on how it works, and 

 3 parity is maintained. So I think with the 

 4 oversight and how well--all the controls that are 

 5 in place at each individual exchange, together with 

 6 the oversight of the CFTC, what our common 

 7 objective is is to recognize how users wish to 

 8 trade the market and at the same time balance the 

 9 integrity and trade certainty associated with each 

 10 individual marketplace, but meeting the demand. 

 11 So we're currently doing it today and we 

 12 have this issue of parity, even though we have it, 

 13 it's not prescribed, and even though some of the 

 14 smaller exchanges may not have sufficient open 

 15 interest to support it. 

 16 CHAIRMAN NEWSOME: Tom. 

 17 MR. NEAL: One other comment in this 

 18 regard: I think it is important to notice what has 

 19 occurred over the years, most recently the last 

 20 five to seven years in my experience in terms of 

 21 where the capital is coming from, that's coming on 

 22 the speculative side. You're seeing more and more 
 69 

 1 development of managed money groups, whether 

 2 they're private moneys or collected public moneys, 

 3 they're coming in with professional traders who are 

 4 well aware of the rules and are well aware of good 

 5 trading, and good discipline means good outcomes, 

 6 and here the dilemma for the smaller exchanges, 

 7 from my view, is really one that if you don't make 

 8 the door open large enough for these groups, then 

 9 they won't bring any capital at all. It's not like 

 10 they'll trade small smaller. They have certain 

 11 limits within their own organizations for certain 

 12 events for them to participate, that certain 

 13 conditions must occur, open interest, size of 

 14 trading, and so on. If there are artificial 

 15 constraints put on the level of activity in some of 

 16 the smaller exchanges, these contracts will die 

 17 from a lack of participation on the speculative 

 18 side, and I don't think that benefits anyone here. 

 19 CHAIRMAN NEWSOME: Okay. Thank you, 

 20 Tom. 

 21 We're glad to see Fred Clark, represents 

 22 U.S. Rice Producers has joined us. Thank you, 
 70 

 1 Fred. 

 2 I would just add as well, and, Seaver, I 

 3 still go back to your BSE example, because I think 

 4 that is a relevant example that is recent that many 

 5 of us lived through back in December of how the 

 6 system works during a crisis period, and certainly 

 7 with regard to a cattlemen, I can't think of a much 

 8 bigger crisis than the BSE announcement, and while 

 9 it is very unnerving time period and certainly 

 10 critical, I think the system did work, and the 

 11 discussion between the Chicago Mercantile Exchange, 

 12 the cattlemen, and the CFTC was an appropriate 

 13 discussion and dialogue, and, you know, we saw that 

 14 given the opportunity, the market worked even 

 15 though everyone was nervous about it at the time. 

 16 Sir. 

 17 MR. WILLETT: Just one more question: 

 18 With approval of the petition, what kind of 

 19 projections are you forecasting on liberalizing 

 20 this regime in terms of your volume of activity? 

 21 Because obviously you're on a nice increase right 

 22 now. 
 71 

 1 MR. DAN: Well, that has more to do with 

 2 just the fundamental demands of what's out there, 

 3 but what we would expect is more activity that's 

 4 represented as speculative would appear in the 

 5 exchange. It's back to the point of Tom, is that 

 6 maybe the overall, you know, mix of business, you 

 7 could argue isn't going to grow, but the way it 

 8 gets profiled will more represent the users, is one 

 9 point. Two is that we definitely expect an 

 10 increase from the very sources of capital that Mr. 

 11 Neal is referring to. Okay. We would expect that 

 12 those limits, as we introduce them on a graduated 

 13 basis, get absorbed by funds, hedge funds, etc., 

 14 together with other speculators that basically want 

 15 to have exposure to the commodity sector generally 

 16 and ag specifically. So we would expect them to 

 17 get used. 

 18 I think in terms of overall growth of 

 19 the Board of Trade, if that's what you're asking, 

 20 by modify, you know, we haven't quite done the math 

 21 of all the speculators out there and where they 

 22 have are in terms of full utilization of the limits 
 72 

 1 today, but we will see new participants. It's 

 2 difficult to put a number of on it because some 

 3 people don't participate at all because the current 

 4 levels are too low. 

 5 So it will be increased, and I think 

 6 I'll just leave it at that. It will better 

 7 represent speculators versus hedgers, which I think 

 8 is very important for agriculture. 

 9 MR. WILLETT: Would you foresee--with 

 10 this additional transparency, will that have an 

 11 indirect impact on the producer participation even 

 12 at their level? 

 13 MR. DAN: I think we've clearly 

 14 demonstrated, I think, in other markets that the 

 15 more open the market is and the speed with which 

 16 the data gets transmitted, the more participation 

 17 you have. So I think from a producer perspective, 

 18 it will benefit from more data readily available 

 19 and, as a result, more than likely use the markets 

 20 more. 

 21 MR. WILLETT: I hope so. CGA completed 

 22 a risk management survey, and we were somewhat 
 73 

 1 surprised by the current level of participation 

 2 and, in fact, kind of disappointed at where we are 

 3 at this point given where we are with the new farm 

 4 bill protection, some of the improvements in the 

 5 Federal crop insurance programs. 

 6 Thank you. 

 7 CHAIRMAN NEWSOME: Before Sharon makes 

 8 her comment, I want to give Paul a heads-up. I 

 9 don't want to put you on the spot over there, Paul, 

 10 but I think we would miss an opportunity to look at 

 11 a relevant scenario of a contract that doesn't have 

 12 the Federal spec limits that's currently traded. 

 13 So after Sharon gets through, Paul, would you just 

 14 on behalf of the Merc be willing to make any 

 15 comments about how the process has worked in the 

 16 livestock complex? 

 17 COMMISSIONER BROWN-HRUSKA: Thanks, Jim. 

 18 I just was going to add to what Sam was 

 19 saying, and it kind of goes back to what you were 

 20 talking about, Mr. Cashdollar, which is this issue 

 21 of large hedgers not necessarily hedging, but 

 22 actually speculating and going over the top. It 
 74 

 1 actually turns out that because what we've seen 

 2 sort of looking at the market, because you increase 

 3 this speculative interest on the part of pension 

 4 funds and large position holders that are capable 

 5 of actually going in and operating in the cash 

 6 market, you actually provide some market discipline 

 7 to some of these larger traders who have been by 

 8 virtue of their hedge exceptions able to be very 

 9 dominant in the marketplace. 

 10 So increasing--in some cases, it seems 

 11 increasing a speculative presence brings 

 12 information and liquidity to the markets that 

 13 actually decreases the power of large commercial 

 14 would-be speculators themselves. 

 15 CHAIRMAN NEWSOME: Thank you, Sharon. 

 16 Again, Paul, I apologize for putting you 

 17 on the spot, but I think your scenario with the 

 18 contracts at the Merc are just very relevant to 

 19 this discussion, and I would hate to the miss the 

 20 opportunity to get your thoughts about this 

 21 discussion today. 

 22 MR. PETERSON: Thank you. We have used 
 75 

 1 the mathematical method that Mr. Dan had in his 

 2 presentation where it's open interest-based, ten 

 3 percent of the open interest up to a certain point, 

 4 two and a half percent after that. We review this 

 5 annually with all of the open interest on our 

 6 livestock products, live cattle, feeder cattle, 

 7 hogs, and so forth. It's a very simple 

 8 straightforward process. It's easy to verify, and 

 9 as I said, we review it annually, and we find that 

 10 it requires adjustment only rarely. It takes a 

 11 substantial increase in open interest over an 

 12 extended period of time before it's really worth 

 13 the trouble to file for an increase. 

 14 Keep in mind that two and a half percent 

 15 of the marginal increase part in the last part of 

 16 that long paragraph there in the presentation, it 

 17 takes a big increase in underlying open interest 

 18 before that two and a half percent will amount to 

 19 any appreciable interest in a non-spot limit. So 

 20 we've used it quite successfully. 

 21 The spot month limits, of course, that 

 22 is based on a deliverable supply calculation and 
 76 

 1 that's a separate process that we're all subject 

 2 to. 

 3 CHAIRMAN NEWSOME: Okay. Thank you. 

 4 Neal. 

 5 MR. GILLEN: I would just like to add to 

 6 the dialogue here, and Commissioner Brown-Hruska 

 7 made the point with the advent on the funds, there 

 8 are no longer any big fishes in the small pond from 

 9 the commercial side, and going back to the last 

 10 time we had the petition for increase in the 

 11 limits, I was probably one those and a colleague in 

 12 the back for the three-stage. It was a compromise 

 13 we put together. That was Commissioner Sheila Behr 

 14 who put it together, but there was a great concern 

 15 about increasing the position limits. It was fear. 

 16 We requested a study. Unfortunately, 

 17 the study came during a bull market, so you 

 18 couldn't--so our fears weren't borne out in the 

 19 study, but I think that looking at the experience, 

 20 at least from a cotton perspective, because that is 

 21 all I have standing to quote on, state on, is that 

 22 I think it's been a positive experience all in all. 
 77 

 1 But I want to repeat my initial concern about input 

 2 from the industry. In the NYBOT new structure, we 

 3 have a cotton contract specification committee that 

 4 is made up of members of the trade, the ultimate 

 5 consumers the textile mills, the cooperatives. As 

 6 of yet, there are no non-member producers on the 

 7 committee, but that request has been made and is 

 8 being considered. I think that creates a very 

 9 healthy understanding for participants in the 

 10 market to go forward on and reach a consensus, and 

 11 I would encourage your exchanges to include 

 12 non-members on an active basis and, as opposed to 

 13 calling up a trade association executive or going 

 14 to a convention, that you should have meetings sort 

 15 of like this with participants in the market and to 

 16 develop a consensus and, more importantly, an 

 17 understanding, because what I have learned in my 40 

 18 years in the commodity industry is that fear is a 

 19 prevailing factor, and there is great 

 20 misunderstanding; and also to what the corn people 

 21 have said, there are not enough producers using the 

 22 markets. 
 78 

 1 Now, options have changed that, but more 

 2 education has to be done. That's why this 

 3 committee was set up. End of speech. 

 4 MR. DAN: Neal, I think it's great 

 5 advice, and I just want you to know that the 

 6 recommendations for soybeans, corn, and wheat came 

 7 from industry meetings we hosted at the Board of 

 8 Trade in '03, and we're firmly supportive of your 

 9 comments, and we've actively been engaging industry 

 10 in all the recommendations about the products, not 

 11 just the impacted limits. So I take your point and 

 12 we're doing it and we're going to continue to do 

 13 it. So I appreciate it. 

 14 CHAIRMAN NEWSOME: Okay. As we wrap up 

 15 part of the program, are there any final questions 

 16 or discussion points that anybody would like to 

 17 bring to the table? 

 18 Yes, sir. 

 19 MR. MILLER: You've talked about how 

 20 effective the market worked during the BSE 

 21 incident, and without wanting to belabor that, did 

 22 the spec limit change in the cattle market during 
 79 

 1 that period of time? 

 2 So really the spec limit had absolutely 

 3 nothing to do with the success or failure, 

 4 depending upon one's perspective of the market 

 5 action during that period? 

 6 CHAIRMAN NEWSOME: Right. And I didn't 

 7 mean to represent that it was relevant just to the 

 8 spec limit, but I was trying to talk about a 

 9 contract that operated under the standards that 

 10 we're talking about now and how the process in 

 11 general worked even though it didn't include spec 

 12 limits as part of that. 

 13 Any other questions or comments? 

 14 If not, we're going to take about a 

 15 ten-minute break. There are restrooms through this 

 16 door on the left, and there is coffee. So let's 

 17 hang in the area, and we'll try to get started in 

 18 ten minutes. 

 19 [Recess.] 

 20 V. OFF-EXCHANGE RISK MANAGEMENT PRODUCTS FOR 

 21 PRODUCERS 

 22 CHAIRMAN NEWSOME: If I could get 
 80 

 1 everyone to come to the table so we can get 

 2 started. 

 3 The next part of our program is going to 

 4 be a series of shorter presentations, and it 

 5 certainly doesn't mean that the topics are any less 

 6 important. Walt mentioned legal certainty earlier 

 7 in his comments as one of the primary components of 

 8 the CFMA, and that was most specific to the legal 

 9 certainty of over-the-counter products, but legal 

 10 certainty of all products, whether they be futures 

 11 or cash, we understand is very important not only 

 12 to the users, but to the markets that they serve, 

 13 and I think it's an area that the agency has made 

 14 some progress. I would be the first to admit that 

 15 there's still work to be done. 

 16 But we're going to start off this 

 17 discussion with an update from Don Heitman, who is 

 18 a senior counsel here at the Commission, with 

 19 regard to ag trade options. 

 20 So, Don, we'll start with you. 

 21 ATO STATUS REPORT FROM DON HEITMAN 

 22 MR. HEITMAN: It's kind of interesting 
 81 

 1 to be speaking to the committee. I have always 

 2 been at the previous ag advisory committee meetings 

 3 because I worked for the staff of the last three 

 4 years chairs of the committee, and may I say it's a 

 5 lot more fun to be a presenter than to be 

 6 responsible for logistics of the meeting. And I 

 7 would also like to compliment Commissioner Lukken 

 8 and his staff on the improved quality of the 

 9 cookies under the management. 

 10 At the last meeting of the AAC, Paul 

 11 Archisel, Chief Counsel of the Division of Economic 

 12 Analysis, was available to answer questions on 

 13 agricultural trade options. Now that Paul has left 

 14 and joined the private sector, I seem to have 

 15 inherited the title of resident legal expert on ag 

 16 trade options. I approach this role feeling rather 

 17 like a house painter who has been asked to stand in 

 18 for Vincent Van Gogh. Nevertheless, I'll do my 

 19 best to bring you up the date. 

 20 I've been asked to report on basically 

 21 three points involving ag trade options: A brief 

 22 history, statutory and regulatory history; a recap 
 82 

 1 of the discussions from the last Ag Advisory 

 2 Committee meeting when ag trade options were on the 

 3 agenda; and some questions regarding ag trade 

 4 options and other over-the-counter ag contracts 

 5 that the committee may wish to think about in 

 6 future meetings. 

 7 As far as history, going all the way 

 8 back to 1936, problems blamed on speculative abuses 

 9 led to a statutory ban on all options trading. The 

 10 ban applied to both on- and off-exchange options in 

 11 the basic agricultural commodities which were the 

 12 only commodities then regulated. When the CFTC was 

 13 created in 1974 and given expanded jurisdiction 

 14 over futures and options in all commodities, 

 15 including plenary authority over options trading in 

 16 non-agricultural commodities, the Commission used 

 17 that authority to allow exchange-traded options, 

 18 and the new non-agricultural commodities came under 

 19 its jurisdiction. 

 20 The statutory ban on agricultural 

 21 options was left in place, and it wasn't until the 

 22 Commission's 1982 reauthorization that that 
 83 

 1 statutory ban was lifted. That allowed the 

 2 Commission to authorize exchange-traded 

 3 agricultural options, which it did, and obviously 

 4 have been quite successful. Even then, the 

 5 Commission let stand a regulatory prohibition on 

 6 off-exchange agricultural trade options even though 

 7 trade options in all other commodities could be 

 8 offered to commercial users subject to only to 

 9 anti-fraud rules. It wasn't until 1997 that the 

 10 Commission finally proposed lifting the regulatory 

 11 ban and permitting ag trade options, and rules to 

 12 allow ag trade options subject to registration, 

 13 disclosure, record-keeping, reporting, and other 

 14 requirements were published in April 1998. The 

 15 rules met with what we in Washington would 

 16 characterize as limited success, which is to say 

 17 nobody participated in ag trade options. 

 18 In December 1999, the rules were further 

 19 amended in the cash settlement and streamline 

 20 registration and disclosures requirements, and 

 21 under the amended rules, one firm has registered as 

 22 an ag trade option user. 
 84 

 1 Recapping the discussions from the last 

 2 meeting, at the time of that meeting, which was in 

 3 March 2001, a little over three years, the 

 4 Commission was considering new regulations to 

 5 implement the provisions of the CFMA, and 

 6 Commissioner Lukken basically went through what the 

 7 Commission adopted. So the relevant agenda item 

 8 was entitled "Review of Ag Trade Options and Other 

 9 Risk Management Alternatives in Light of the CFMA 

 10 and Proposed Regulatory Changes", and we had three 

 11 witnesses, a panel of three speakers: Jack 

 12 Dougherty of Kent Feed, Phil Dodds of Anderson and 

 13 a member of NGFA, and Melinda Shram of the National 

 14 Introducing Brokers Association, and the committee 

 15 asked Mr. Dougherty to appear because his firm, 

 16 Kent Feed, was and still is the only firm to 

 17 register as an ag trade option merchant. He 

 18 explained that Kent Feed developed a program to 

 19 help their feed customers and the independent hog 

 20 producers to manage their risk and basically to 

 21 stay in business. By offering to put options to 

 22 producers, Kent allows them to lock at a minimum 
 85 

 1 price and at the same time, they can lock in a 

 2 price to the amount of feed necessary to raise the 

 3 number of hogs covered by the option. 

 4 The program is fairly simple and 

 5 straightforward. Mr. Dougherty said Kent did not 

 6 experience any problems complying with the 

 7 Commission's regulations. He did note that the 

 8 program wouldn't have been possible without the '99 

 9 amendments, the 1999 amendments, because the cash 

 10 settlement provision allowed Kent Feeds to offer 

 11 the option; otherwise, had it been left with the 

 12 delivery requirement, they wouldn't have been able 

 13 to take delivery, so they couldn't have 

 14 participated in the program. 

 15 Mr. Dodds from NGFA stated their view 

 16 that APO issues are simply a part of a much broader 

 17 issue, the need for greater legal certainty for 

 18 off-exchange forward agricultural contracts. He 

 19 noted that cash forward contracting is the 

 20 predominant form of risk management used by grain 

 21 producers and others, but uncertainty about how the 

 22 CFTC might use certain contract terms, and the 
 86 

 1 resulting perceived litigation risk may reduce the 

 2 use of otherwise beneficial contracts. Mr. Dodd 

 3 submitted hypothetical examples of a number of 

 4 contract terms and asked how the Commission would 

 5 view each example, and the Division of Economic 

 6 Analysis later replied to his question in August 

 7 2001, and we sent a copy of that letter out to all 

 8 the members of the committee. 

 9 With respect to the ag trade option 

 10 program specifically, Mr. Dodd suggested that the 

 11 Commission should approach commercials in the 

 12 grain, cotton, livestock, and other commodity 

 13 sectors and asked what changes are needed in the 

 14 APO program to attract them to begin writing trade 

 15 options. 

 16 Ms. Shram of the NIVA, National 

 17 Introducing Brokers Association, suggested her view 

 18 that the program is underutilized because, quote, 

 19 the current large players in the grain trade, 

 20 closed quote, are reluctant to open themselves up 

 21 to registration with the Commission or other 

 22 regulation. Instead, they are, quote, hiding 
 87 

 1 behind the forwards exclusion and offering 

 2 transactions that are very APO-like, but are doing 

 3 so without the disclosures and other customer 

 4 protections offered by the Commission's regulation. 

 5 Mrs. Shram suggested that if the APO regulations 

 6 were further relaxed, quote, the atmosphere for 

 7 fraud as a customer would definitely be increased. 

 8 And my third and final topic is just to 

 9 kind of go over some of the questions and issues 

 10 regarding the ag trade option and other 

 11 agricultural contracts that might be appropriate 

 12 for the committee to consider at some future 

 13 meeting. Let me just read through. These are 

 14 questions that were--some of them were sent out to 

 15 the Ag Advisory Committee prior to the last meeting 

 16 and still remain open, and others are issues that 

 17 have come up since that meeting. 

 18 The first and obvious question is why 

 19 hasn't the current ag trade option program been 

 20 more utilized? Is the program's limited use a 

 21 function of the ag trade option rules? Is it due 

 22 to the generally low commodity prices experienced 
 88 

 1 since the rules came into effect? In other words, 

 2 why use an option to lock in a loss? Is it due to 

 3 competition from government price support programs? 

 4 Why pay a premium for something you can get from 

 5 the government for free? Should ag trade option 

 6 rules be amended so that the exemption from the 

 7 rules is based only on the $10 million net worth 

 8 requirement rather than the current three-prong 

 9 test, which would then allow hedge funds to 

 10 participate in ag trade options and provide more 

 11 liquidity to over-the-counter agricultural 

 12 derivatives. 

 13 The third question is the CFMA's thrust 

 14 is to have tiered regulation based on the nature of 

 15 the participant. As noted, the ag trade option 

 16 rules provide for an exemption for participants 

 17 with $10 million in net worth. Should the net 

 18 worth exemption level be set at a lower level, 

 19 perhaps a million dollars, as some have suggested? 

 20 That in turn gives rise to the question, Would such 

 21 an approach disenfranchise smaller producers, 

 22 because if ag trade options could be offered to 
 89 

 1 producers with a million dollars net worth and 

 2 above without any regulatory requirements, would 

 3 elevators or other option grantors have any 

 4 incentive to offer the regulated instruments to the 

 5 smaller producers? In other words, would there be 

 6 a critical mass of potential customers that would 

 7 ever make the program? 

 8 If the ag trade option program is 

 9 further modified, should the Commission retain the 

 10 prohibition against producers writing ag trade 

 11 options and thereby assume the potentially greater 

 12 risks associated with the granting of options? 

 13 Should the Commission drop the ag trade option 

 14 program altogether and allow trade options and 

 15 agricultural commodities to trade without any 

 16 regulatory restrictions subject only to the general 

 17 anti-fraud rule just like trade options in all 

 18 other commodities? Finally, would allowing 

 19 unrestricted trading in ag trade options increase 

 20 the potential for fraud against producers? 

 21 And those are the ag trade option 

 22 questions. There are just three questions, also, 
 90 

 1 about other ag derivative contract: One, is any 

 2 significant amount of distance currently being done 

 3 in bilateral agricultural commodity swaps? Two, 

 4 the CFMA's swaps exclusion, which is Section 2(g) 

 5 of the Act, does not apply to agricultural 

 6 commodities. So if you're trading bilateral swaps, 

 7 you're basically exempt from everything in the Act 

 8 unless you're trading in agricultural commodities. 

 9 So agricultural swaps remain subject to the more 

 10 restrictive provisions of part 35 of the 

 11 Commission's rules, which is the pre-CFMA 

 12 regulatory swaps exemption. That stayed on the 

 13 books solely to govern agricultural swaps. So 

 14 question arises should part 35 be amended to allow 

 15 bilateral agricultural swaps to trade subject to 

 16 the less restrictive conditions that apply to all 

 17 other swaps, for example, allowing agricultural 

 18 swaps to be fungible and standardized? 

 19 The last question, the CFMA allows for 

 20 future CFTC rule-making to permit the new traded 

 21 agricultural commodities to trade on designated 

 22 transaction execution facilities, which has 
 91 

 1 basically been characterized as "exchange light". 

 2 It is the next step down from a designated contract 

 3 market. At what point in developing B to B trading 

 4 platforms should the Commission consider such rule 

 5 changes? What criteria should the Commission look 

 6 at in proposing the ground rules for agricultural 

 7 commodities on ETS, which is a little bit of a moot 

 8 issue, really, because so far, there are--nobody 

 9 has actually applied to be become a designated 

 10 transaction facility. We had talked with some 

 11 people about it, but nobody has actually applied. 

 12 So that is the update on ag trade 

 13 options. 

 14 CHAIRMAN NEWSOME: Okay. Thank you 

 15 very much, Don. 

 16 During my early tenure at the 

 17 Commission, at every Ag Advisory Committee meeting, 

 18 ag trade options were the topic of discussion, and 

 19 I think by anyone's stretch of the imagination, of 

 20 obviously the products have not been successful, 

 21 and I think it's up for discussion why that may be 

 22 the case, but certainly it's an issue that the 
 92 

 1 Commission is open to revisiting. I know some of 

 2 you have thoughts on that, but before we get into 

 3 it, I want to ask our general counsel, Pat McCarty, 

 4 to give us an update on the hedge-to-arrive cases, 

 5 and then I know, Tom, you guys have a statement. I 

 6 think that would be the more appropriate time. 

 7 HTA UPDATE BY PATRICK McCARTY 

 8 MR. McCARTY: Good afternoon. I know 

 9 this is everybody's favorite part, when the lawyers 

 10 get up and start talking about 2(g), 2(g), and all 

 11 of these other sections. I'm sure you guys are 

 12 just starting to say where is the coffee. 

 13 I want to say in advance, I'm going to 

 14 try to keep this a little above the minutia and 

 15 talk to you a little bit about where things have 

 16 gone on the HTA cases and then raise a couple of 

 17 questions about where things could go and see what 

 18 the feedback is. So, hopefully, in less than 15 

 19 minutes, I'm going to give you all something to 

 20 think about, and then hopefully you'll have some 

 21 comments you can provide us about where things are 

 22 in this world. 
 93 

 1 Just background-wise, I guess you all 

 2 know that these problems with the HTAs started back 

 3 in I guess in 1993 to 1995, and that, I guess, we 

 4 had all types of HTAs out there, the standard ones, 

 5 the flex ones, the cross-country ones. You know, 

 6 the minds of marketers, I guess spin in a lot of 

 7 different ways. But they're primarily for the corn 

 8 and grain people, and there's been lots of 

 9 litigation both in the state and Federal courts. 

 10 The primary issue has been whether, in 

 11 fact, a hedge-to-arrive contract is going to be a 

 12 cash forward contract, which is excluded from the 

 13 Act, or whether it's going to be a futures contract 

 14 that's subject to the Act. In fact, before the 

 15 provisions of the Act of 2000, if it was a futures 

 16 contract, it was off-exchange. It was illegal and 

 17 void. So it was a pretty big problem if, in fact, 

 18 it was a futures contract. 

 19 Well, let me just say that I guess there's 

 20 some good news, because I can tell you the cash 

 21 forward exclusion is alive and well. Based on my 

 22 review of the law in this area and the state and 
 94 

 1 Federal case law as well as the Commission 

 2 decisions, I think that all but one of the 

 3 decisions I've looked at in the last couple of days 

 4 basically have found HTA contracts to be cash 

 5 forwards, which are excluded from the Commodity 

 6 Exchange Act, and they're enforceable. So I think 

 7 that that's probably a positive. Now, I did read 

 8 Tom Coyle's comment in advance of this. I think 

 9 he's right. Even if you're correct on law, it 

 10 doesn't really help you if you have to spend 

 11 hundreds of thousands of dollars to defend and 

 12 enforce what you think is your right under a 

 13 contract, and I think that legal certainty is an 

 14 important issue. So, you know, once you're right, 

 15 whether you've spent hundreds of thousands of 

 16 dollars and maybe alienated some of your best 

 17 customers, it's probably not a good thing to have 

 18 that occur. 

 19 So, yes, legal certainty is a good idea. 

 20 Let me go through, I guess, the three 

 21 recent cases that we came out with, and, in fact, I 

 22 guess it's the trilogy that came out November 25, 
 95 

 1 2003. I'm going to give you a brief summary of the 

 2 facts, what we found, and I guess explain to what I 

 3 think they mean. Two of the cases actually 

 4 confirm that they're cash forward contracts. One 

 5 of them says basically this HTA is actually a 

 6 futures contract, and let me just tell you what 

 7 they do. 

 8 The first one, the Grain Land 

 9 Cooperative decision that came out basically said 

 10 that the contractual provisions permitting rolling 

 11 did not turn an HTA into a futures contract, and I 

 12 think that is a huge issue, people wondering if you 

 13 could roll, did that actually mean that you're 

 14 speculating and that you actually may not have to 

 15 deliver. I would like to qualify that a little by 

 16 saying rolling indefinitely so you never have to 

 17 deliver actually would probably put you into being 

 18 a futures contract, but I think the idea that if 

 19 you have a roll provision doesn't necessarily mean 

 20 that it's going to be a futures contract. I guess 

 21 nor having a cancellation provision is going to 

 22 turn it into a futures contract. 
 96 

 1 But the Commission in Grain Land 

 2 basically affirmed the totality of the 

 3 circumstances test that we have. We're going to 

 4 look to see if, in fact, deliveries are made, if 

 5 you are a producer, if you're an elevator or a 

 6 farmer, and you have product and you have need for 

 7 it, then I think the thing is if you see that there 

 8 actually is an intension to start with and, in 

 9 fact, you see a follow-through--not in every case 

 10 but in a certain number of cases--well, they're 

 11 probably going to be a cash forward. 

 12 Competitive strategies, this is the 

 13 outlier. This is the case where we actually ended 

 14 up with a bunch of, I guess, marketing of HTA 

 15 contracts, the cross-country HTA contracts, well 

 16 outside of a geographic area for the elevator, and 

 17 I think really what you should take out of this is 

 18 basically if you're--if it's impractical as a 

 19 matter of economics for a farmer who has entered 

 20 into an HTA with an elevator that is located two 

 21 states over, and the cost of actually delivering 

 22 into that particular elevator is not going to make 
 97 

 1 this a worthwhile transaction, then, in fact, it's 

 2 probably going to turn out to be that there is no 

 3 intention to ever deliver that, and you're not 

 4 going to be able to get into the cash forward 

 5 exclusion. So I think that is the one where the 

 6 facts in this situation indicated that the people 

 7 who were so far away from the elevators, it just 

 8 made no sense economically for anybody do that, 

 9 that, in fact, there really was no intention ever 

 10 to deliver product. 

 11 The last case is a summary affirmance in 

 12 the matter of Cargill. This is my favorite acronym 

 13 here, the POC, the Premium Offered Contract. This 

 14 case basically determined the fact--it was asserted 

 15 by the Enforcement Division that the premium 

 16 offered contract was an option. The court said 

 17 that--the ALJ said below, no, it's not an option, 

 18 and the Commission said you're right, it's not an 

 19 option, and therefore it's not within our 

 20 jurisdiction; this is not inside of the Commodity 

 21 Exchange Act. 

 22 I'd say that even though we've just 
 98 

 1 issued this trilogy, I thought we had finished with 

 2 everything in front of the Commission on HTA cases. 

 3 I have just been informed, no, we have one more. 

 4 It's the Wright case which is from Ohio, and the 

 5 ALJ decision in that case, initial decision, is 

 6 basically, no, it's not a futures contract and, no, 

 7 it's not an ag option. The Commission is currently 

 8 preparing an options memo that, and I think that it 

 9 will be resolved within the next three months. 

 10 At that point in time, we have no 

 11 further cases in front of us on HTAs, and I tell 

 12 you that the cases out there in the Seventh Circuit 

 13 and Eighth Circuit and Sixth Circuit are pretty 

 14 uniform. Hedge-to-arrive contracts, where it looks 

 15 like you've got a producer or farmer and you've got 

 16 an elevator and it looks to people that they do 

 17 that on a frequent basis in terms of delivery, it's 

 18 a cash forward. It's not a futures contract. 

 19 I have a list here of cases, and I'm not 

 20 going to bore you with that. I do want to mention 

 21 something before we move on. You may have heard of 

 22 it. There is a recent case in the Seventh Circuit 
 99 

 1 that came out that could have some impact on the 

 2 HTA case law. It is not about an ag. So it may be 

 3 of limited applicability, but I will mention it 

 4 nonetheless because it's got some play in the 

 5 press. It's the Zelner decision, which is a spot 

 6 forex case, and it was decided on June 30th, and 

 7 the Seventh Circuit ruled that, in fact, it was a 

 8 spot contract, not a futures contract as the 

 9 Enforcement Division had actual asserted. We're 

 10 reviewing that decision right now. We have a date, 

 11 August 14th, by which we have to file if we're 

 12 interested in getting a rehearing. We haven't made 

 13 any decisions yet, but that is out there, and it 

 14 could have some impact. And, in fact, actually if 

 15 you think about it along with the other case law 

 16 decisions, it means that things are moving in the 

 17 courts and others, are moving more into the 

 18 direction of calling something spot or forward as 

 19 opposed to calling it a futures. So I think that's 

 20 probably from your perspective a better thing. 

 21 Let me get around to, I guess, a couple 

 22 of things or an observation or two. I think the 
 100 

 1 big problem in the HTA area had been had the HTA 

 2 contracts been found to be futures contracts, they 

 3 would have actually been void. They would be 

 4 off-exchange futures contracts and therefore not 

 5 enforceable, nobody gets the benefit of their 

 6 bargain, and I guess part of this problem was 

 7 addressed in the CFMA which was enacted in 2000, 

 8 and both the Commissioner Lukken and Chairman 

 9 Newsome have alluded to this. One of the big 

 10 things that the CFMA did was provide legal 

 11 certainty for certain types of contracts, and it 

 12 was actually focused on the swaps market. It does 

 13 apply, however, to I guess the ag market in some 

 14 way, shape, or form, because under our Section 

 15 22(a)4, if you're an eligible counterparty, then it 

 16 says that no agreement shall be voidable or 

 17 unenforceable. 

 18 Now, you have to be an eligible contract 

 19 participant, and just to get away from the legal 

 20 stuff on this for a minute, it means that you 

 21 basically as an individual had to have $10 million 

 22 in total assets, not net, total. If, in fact, 
 101 

 1 you're an individual who is using it for hedging, 

 2 as a hedging contract, it's only five million. So 

 3 that may take care of a lot of the large farmers 

 4 who may enter into some of these agreements that 

 5 you find. So, in other words, part of the problem 

 6 with legally certainty may have been addressed 

 7 through the CFMA in terms of saying even if it's 

 8 found to be a futures contract, it may be okay, 

 9 and, in fact, the parties are eligible contract 

 10 participants. 

 11 So that actually may solve some of the 

 12 problems. It's not going to solve all if the 

 13 problems, and I think that's the question that I'll 

 14 leave you with here. Now that we've seen all this 

 15 case law come out, and it's all very positive in 

 16 terms of supporting the cash forward exclusion in 

 17 the Act, the question is whether, in fact, there 

 18 needs to be further clarification in the Act or 

 19 whether you actually need to try to extend the 

 20 legal certainty for a contract that's not with 

 21 someone who's got $10 million in total assets or 

 22 five million where the hedging is occurring with 
 102 

 1 respect to an asset that they have. That is 

 2 probably the issue for you all to consider about 

 3 HTA and where things have gone. I think a lot of 

 4 the problems have been resolved by the Act for the 

 5 large people, but the question becomes what does it 

 6 do for someone who doesn't meet those income 

 7 requirements or--excuse me--asset requirements. 

 8 And with that, hopefully I've stayed 

 9 under my time frame, and I hope I wasn't too 

 10 lawyerly for you. 

 11 Thank you. 

 12 CHAIRMAN NEWSOME: Okay. Thank you, Mr. 

 13 Counsel. 

 14 Before we go to our next presenter, I 

 15 want to take a few minutes to discuss this topic, 

 16 recognizing that it's been a while since it's been 

 17 on the agenda. So what I would suggest, even 

 18 though certainly we invite dialogue today, but I 

 19 would ask you to go back to your organizations, 

 20 look at the things that have been talked about 

 21 today, and just make written suggestions to the 

 22 Commission about your recommendations on how we 
 103 

 1 could move forward on these topics. 

 2 So I know when we were having the 

 3 discussion several years ago, there was no one more 

 4 active in this than the National Grain and Feed 

 5 Association. Certainly, even today, you still have 

 6 comments about it. Tom, I know that you guys have 

 7 prepared something, and I would invite you to make 

 8 whatever comment you need to make today. 

 9 MR. COYLE: Okay. Well, I will make 

 10 them very brief, because everybody has a copy of 

 11 our written comments. 

 12 I appreciate your comments, Mr. McCarty, 

 13 about the fact that legal clarity is important, 

 14 because, for us, it's really been the better part 

 15 of eight years that we've wrestling with this, and 

 16 I can say today that the market continues to 

 17 change, contract offerings continue to change, and 

 18 we continue to struggle with the legal issues and 

 19 the flexibility that we're adding to contracts. 

 20 I show a picture here. We were 

 21 looking--in fact, we had a commission at one point 

 22 that was for a bright line task force, we called 
 104 

 1 it, because there used to be quite a bright line 

 2 between a cash forward contract and a futures, and 

 3 then we started providing different kinds of 

 4 flexibility, and from this bright line came 

 5 something like this that had all kinds of different 

 6 kinds of contracts, some with farmers, some with 

 7 elevators, but as you start adding levels of 

 8 flexibility, we ourselves got a little lost on 

 9 what's appropriate, what's not appropriate. 

 10 The lack of clarity actually makes it 

 11 much more difficult for us and others in our 

 12 industry to create newer contracts. We are very 

 13 encouraged by the recent rulings that appear to 

 14 first recognize this relationship, this contractual 

 15 relationship, between an elevator and a farmer, and 

 16 also to appear to recognize a broader exclusion for 

 17 cash forward contracts, which we support. 

 18 At this point, I guess our real issue 

 19 today is we're wondering if it wouldn't be helpful 

 20 to try to further narrow this or clarify these 

 21 issues, if it wouldn't be possible to have some 

 22 kind of interpretive statement. Again, after eight 
 105 

 1 years of various rulings from the CFTC and from the 

 2 courts, that may be able to--even if it's in the 

 3 form of core principles, that these type of 

 4 contracts are or this certain environment is 

 5 acceptable, the contract terms are acceptable. We 

 6 struggle with the idea that no matter how you write 

 7 a contract, someone can use a contract improperly, 

 8 which was not intended, which again gets you into 

 9 this area of a futures contract. 

 10 So while we would like to see something 

 11 that's very clear and no look-back, that the terms 

 12 in the contract are understood, they're accepted as 

 13 being legal, as being not challengeable, because 

 14 what happened in this case back in '95, '96, is 

 15 that there was significant losses, and so people 

 16 looked for ways to identify when something is 

 17 off-exchange, which means it is void, which means 

 18 there isn't a contract, and then someone is held 

 19 with a hedge contract that isn't going to be 

 20 honored, but somehow to avoid that risk. 

 21 It appears from the recent rulings that 

 22 we're moving in the right direction. We're very 
 106 

 1 encouraged by that, and so we certainly want to be 

 2 part of the dialogue to try to get to the point 

 3 where we can put this behind us. 

 4 CHAIRMAN NEWSOME: Okay. Thank you, 

 5 Tom. 

 6 Sharon, did you want to make a comment? 

 7 COMMISSIONER BROWN-HRUSKA: I thought I 

 8 should make a few comments given what I had 

 9 actually written about these particular contracts, 

 10 and I actually would include sort of broadly the 

 11 trade options and the hedge-to-arrive cases 

 12 together in my thinking about this and going 

 13 forward. 

 14 I think that these type of contracts 

 15 really illustrate the challenge that we face when 

 16 the promotion of market solutions and market 

 17 innovation starts to rub up against our role of 

 18 protecting the markets and protecting market users. 

 19 How to reconcile these goals is the issue we face, 

 20 even more in agriculture where efforts to protect 

 21 participants sometimes extends into protecting 

 22 participants from the markets that they created and 
 107 

 1 that they use. 

 2 Walt's presentation made us aware of the 

 3 positive changes that took place in financial 

 4 markets beginning in the late 1990s when both 

 5 Congress and the Commission recognized that such 

 6 markets do not require the level of supervision 

 7 traditional applied to the exchange-traded markets 

 8 due to the sophistication or commercial expertise 

 9 of the participants in these markets and took a 

 10 number of actions to address this, culminating in 

 11 the passage of the Commodity Futures Modernization 

 12 Act of 2000. 

 13 Well, many of the positive changes 

 14 wrought by the CFMA really--Pat actually mentioned 

 15 this, have not been extended to the agricultural 

 16 derivatives markets and the over-the-counter 

 17 market. This is reflected in the in applicability 

 18 of the relief provisions of the Act, including 

 19 2(h)3 and 2(g) to the agricultural commodities 

 20 or transactions. It also extends in some 

 21 cases--in these hedge-to-arrive cases in 

 22 particular, it appears to me if you look back over 
 108 

 1 the history of the CFTC in dealing with these 

 2 cases, we sometimes acted to impede the 

 3 introduction of innovative financial tools to the 

 4 market, to agriculture. 

 5 Now, as Pat just outlined, the 

 6 Commission last November issued three decisions 

 7 involving the legality of innovative marketing 

 8 tools in the ag sector, Grain Land Cooperative, 

 9 Competitive Strategies, and Cargill. The issue in 

 10 all three cases really concerned whether the 

 11 contracts at issue were legal cash forward used for 

 12 merchandizing purposes or whether they were illegal 

 13 futures contract in the Grain Land and Competitive 

 14 Strategies matters or illegal options in the 

 15 Cargill matter. In separate opinions, I expressed 

 16 my concern with the Commission's adherence to a 

 17 legal approach for evaluating contracts that lacked 

 18 clarity and legal certainty and thereby discouraged 

 19 innovation in the ag market. 

 20 Now, I just want to explain what I mean. 

 21 The standard that the Commission employs in these 

 22 cases has its origins in some previous cases, the 
 109 

 1 1979 Stovall case and 1982 opinion in Co-Petro. 

 2 What they rely upon historically is this kind of 

 3 unpredictable interpretation of whether the parties 

 4 contemplated delivering in their dealings with each 

 5 other. To surmise whether the parties anticipated 

 6 delivery at the time they entered into their 

 7 hedge-to-arrive transactions, the Commission looks 

 8 back to the future, that is we look backward and 

 9 selectively count the deliveries that actually took 

 10 place. 

 11 The problem with this approach, and this 

 12 is something that the courts have recognized, and 

 13 Judge Easterbrook in the Seventh Circuit reminded 

 14 us that for contracting purposes, "it is essential 

 15 to know beforehand whether a contract is a futures 

 16 or a forward." Compounding that is our adherence 

 17 to an approach that looks at an exhaustive catalog 

 18 of futures conditions and actions that are present 

 19 during these transaction. It is called the facts 

 20 and circumstances approach or the totality of 

 21 circumstances approach, as Pat mentioned. 

 22 I submit in my separate opinions that 
 110 

 1 that approach itself does little to clarify for the 

 2 market what factors mattered the most and create 

 3 the kind of undesirable uncertainty that gave rise 

 4 to so many of the post-contractual lawsuits that 

 5 we actually saw in the nineties in this area. My 

 6 concern generally is that our application of this 

 7 standard may result in formal forward contractual 

 8 relationships being wrongly classified as futures 

 9 and therefore discouraged. 

 10 I believe that the Commission's approach 

 11 doesn't properly account for commercial reality. 

 12 For example, in the Competitive Strategies 

 13 decision, which I dissented on, a key innovation of 

 14 the contracts offered by Great Plains enabled 

 15 delivery to a third-party elevator at the option of 

 16 the farmer. Well, the Commission insisted that the 

 17 parties had to prove a connection between 

 18 deliveries to third-party elevators to Great Plains 

 19 contracts. My view is that this narrow 

 20 interpretation of what constitutes delivery 

 21 combined with the parties' failure to maintain 

 22 adequate documentation led the Commission to 
 111 

 1 dismiss the deliveries as merely coincidental and 

 2 to declare the contracts illegal off-exchange 

 3 futures contracts. The result is to legally 

 4 discourage an innovative financial tool that 

 5 allowed farmers to lock in a forward price while 

 6 also enabling flexibility in delivery. 

 7 I believe that the Commission can take 

 8 action to bring clarity to contracting practices in 

 9 the ag market so that innovators understand where 

 10 the boundaries are between what are legal cash 

 11 forward contracts and what crosses the line into 

 12 the Commission's jurisdiction. I strongly support 

 13 the Commission taking another look at the ag trade 

 14 option regulations to see whether a compromise can 

 15 be reached that would balance producer concerns, 

 16 the needs of the elevator industry, and the 

 17 regulatory obligations of the Commission so that 

 18 agricultural trade options could truly come to the 

 19 market. I also believe that innovative forward 

 20 contracts like that employed in Cargill's POC 

 21 contract and Competitive Strategies' cross-country 

 22 hedge-to-arrive contract should be encouraged by 
 112 

 1 the kind of legal certainty that we have afforded 

 2 to the financial industry. In my view, our goals 

 3 of promotion and protection can be accomplished by 

 4 providing clear guidance on where we will draw the 

 5 line between futures and physical transactions and 

 6 by adopting a less prescriptive approach. 

 7 I also would add that I firmly believe 

 8 that education and disclosure can also make a 

 9 significant contribution toward furthering our 

 10 goals. For example, I believe that the 

 11 requirements and the risks associated with these 

 12 kinds of contracts have to be properly documented 

 13 and accurately disclosed. I suspect that when 

 14 that does not occur, the Commission will initiate 

 15 strong action, as we really have in the forex area. 

 16 My making clear in our rule-makings and in our 

 17 enforcement actions and in our adjudicatory 

 18 decisions the lines of our determination of what 

 19 constitutes an illegal contract, we provide 

 20 importance guidance to the industry that will free 

 21 it to innovate and provide the variety of contracts 

 22 that will benefit farmers, merchants, and 
 113 

 1 consumers. 

 2 Thank you, Chairman. 

 3 CHAIRMAN NEWSOME: Thank you, Sharon. 

 4 Again, I think it's obvious throughout 

 5 this discussion that while everyone's goal is legal 

 6 certainty or to provide as much legal certainty as 

 7 possible, there continues to be differences of 

 8 opinion on how to address that. I think the main 

 9 point for members of this committee is that the 

 10 Commission is open the addressing it and wants to 

 11 address it, and those are areas in which we need 

 12 your support and counsel, and we could probably 

 13 spend two days in this room talking about these 

 14 very topics, and that is why I suggested that those 

 15 of you particularly who haven't thought about this 

 16 topic in some time, go back, discuss it with your 

 17 members, your boards, and submit thoughts to us in 

 18 writing about how the Commission can properly move 

 19 forward to provide the types of legal certainty 

 20 that the markets and the businesses need. 

 21 Yes, sir. 

 22 MR. CASHDOLLAR: I think it would be 
 114 

 1 useful if we could get the papers on HTA. I don't 

 2 think we have them in our folders. 

 3 CHAIRMAN NEWSOME: If they're not up 

 4 there, we'll sure get them for you. 

 5 Neal. 

 6 MR. GILLEN: I just want to say I 

 7 welcome the attitude I hear on this issue, and not 

 8 to be a heretic, but I just want to advise that 

 9 what we do in cotton, we don't have situations that 

 10 you have in the grains where you have a lot of 

 11 innovations. For example, I just had a call this 

 12 morning. In our model contracts, we do not 

 13 produce--we have delivery as a fixation on the 

 14 futures exchange where you have delivery of the 

 15 harvest. We do not permit a producer to roll over 

 16 into the crop year. Basically, we protect the 

 17 producer, and that is something that has to be 

 18 considered. 

 19 So it seems very narrow-minded and what 

 20 have you, but I found that we inserted this 

 21 provision four or five years ago after there was an 

 22 advisory issued by the Commission when the first 
 115 

 1 hedge-to-arrive cases arrived, but I think it has 

 2 been found to be very prudent on our part, because 

 3 it produces a lot of money by facing the music when 

 4 they should face it, not carrying it on into 

 5 bankruptcy over and over into a new year. 

 6 CHAIRMAN NEWSOME: Thank you, Neal. 

 7 Any other comments or questions that 

 8 anyone might have? 

 9 Well, thank you. Again, I would 

 10 encourage you to get us your thoughts about how we 

 11 can appropriately move forward. I can assure you 

 12 that the Commission would like to do so, and even 

 13 though I won't be there, I know Sharon and Walt 

 14 very well. This topic is important to both, and so 

 15 anything that we can do to provide certainty, 

 16 certainly we want to do. 

 17 PRESENTATION BY ROSS DAVIDSON, USDA/RMA 

 18 CHAIRMAN NEWSOME: Next on our agenda, 

 19 it's always good to have Ross Davidson, 

 20 Administrator from the Risk Management Agency with 

 21 us, and we've asked Ross to provide an update on 

 22 the new livestock products. 
 116 

 1 Ross, we're glad to have you with us 

 2 this afternoon. 

 3 MR. DAVIDSON: Thank you, Mr. Chairman. 

 4 I've been listening with a lot of 

 5 interest to the discussion here and particularly 

 6 your comments with regard to the innovative risk 

 7 management tools, and certainly we've talked about 

 8 these within a context, but there is a whole 

 9 different context within which innovative risk 

 10 management tools are being developed for 

 11 agricultural producers, and that's in the crop 

 12 insurance program. 

 13 And I will address the assigned topic, 

 14 the livestock products, but I should mention also 

 15 that we have a number of revenue products that 

 16 reference their prices on the exchanges and provide 

 17 innovative risk management tools such as crop 

 18 revenue coverage and revenue insurance and others, 

 19 and those products are in the process of evolution, 

 20 but they've been very popular with agricultural 

 21 producers and are providing some financial 

 22 innovation outside of the exchanges. 
 117 

 1 There has been some quite a bit of 

 2 interest in the Risk Management Agency's 

 3 involvement in price risk protection with regard to 

 4 livestock that emerged basically after Congress 

 5 gave some authority to the agency to consider new 

 6 products that the market might bring to us in the 

 7 clothing of insurance. Two of those products that 

 8 have come, livestock risk protection and livestock 

 9 gross margin, basically reference off the exchange 

 10 prices and cover a broad range of what might be 

 11 called contracts, but we call them policies, for 

 12 relatively similar time periods and relatively 

 13 similar classes of livestock. Both of these 

 14 products are not currently selling, although they 

 15 were quite popular, and we found out why they were 

 16 through BSE as well as an adverse margin movement 

 17 that took place. We have suspended, but we are 

 18 retooling those products and intend to have them 

 19 reproduced sometime in the fall. 

 20 The livestock risk protection product 

 21 uses futures contracts on the Chicago Mercantile 

 22 Exchange to set rates, provides coverage for swine, 
 118 

 1 fed and feeder cattle, and protects against a price 

 2 decline, and no other peril is included. 

 3 Typically, our insurance products include pretty 

 4 much all natural perils. This is just price 

 5 decline, and it will be available when reinstated 

 6 in a number of states. The board of directors has 

 7 approved it for swine in Illinois, Indiana, Iowa 

 8 Kansas, Minnesota, and Nebraska, Oklahoma, Texas, 

 9 Nevada, Utah, and Wyoming, as an example, and fed 

 10 cattle for Illinois, Iowa, and Nebraska, and feeder 

 11 cattle for Colorado, Iowa, Kansas, Nebraska, and a 

 12 number of other states. And we've been advised 

 13 that at our next board of directors meeting for 

 14 Federal Crop Insurance Corporation that there will 

 15 be a request to expand these even further in 

 16 anticipation of these products being available in 

 17 the fall. 

 18 The livestock gross margin is available 

 19 for swine, and it references or uses futures 

 20 contracts from the Chicago Board of Trade and the 

 21 Chicago Mercantile Exchange, for the CBOT for corn 

 22 and soybean meal, the CME for hogs, and it ensures 
 119 

 1 the difference between swine price and feed costs. 

 2 So there is a margin protection that's embedded in 

 3 this product. It's sold monthly. It's only 

 4 available in Iowa, but there is a move to expand 

 5 that as well. 

 6 There has been some relative--quite a 

 7 bit of interest for these products to have been as 

 8 young a as they were, and several hundred contracts 

 9 were sold in the early parts of their availability. 

 10 We have been working with the submitter of these 

 11 contracts to make some changes to them to deal with 

 12 the exposures that we found. One of our 

 13 requirements for these insurance products is that 

 14 they be actuarially sounds, in other words, that 

 15 the prices for the contracts be set in such a way 

 16 that the corporation can basically recover whatever 

 17 benefits may be paid out over a period of time and 

 18 found that in the BSE incident, the market became 

 19 so volatile and exposed some flaws, frankly, in the 

 20 design of the program that it created some 

 21 opportunities that shouldn't exist in the context 

 22 of insurance. 
 120 

 1 So we're making some changes at the 

 2 direction of our board of directors or having the 

 3 submitter and the owner of this product make 

 4 changes before they will be allowed to be reinsured 

 5 again in the crop insurance program, things like 

 6 adding language to prohibit offsetting positions, 

 7 to permit suspension of products due to 

 8 extraordinary events, such as BSE, a sales period 

 9 limited to starting after the validation of price 

 10 and rates on the last day of the price discovery 

 11 period and ending on the following day at 9 a.m. 

 12 central time. It was the stale pricing risk 

 13 involved in the original design of these products 

 14 that was exposed by the BSE, and then also 

 15 instituting some limits on premium volumes, 

 16 volatility. 

 17 As you know, as we all know here, the 

 18 cattle and swine markets have been volatile, and 

 19 RMA will continue to monitor these markets before 

 20 allowing sales even when the products are allowed 

 21 to be sold. We'll have certain market volatility 

 22 limit, up and down, and controls on when the 
 121 

 1 products will be available for sale. We also are 

 2 very conscious of the potential for future market 

 3 volatility resulting from some uncertainly with 

 4 regard to cattle markets, particularly the BSE, 

 5 testing also the soybean market and things of that 

 6 nature. So we're trying to make sure that these 

 7 programs are, as we call them, actuarially sound as 

 8 they as they go forward. 

 9 I believe personally that it is really 

 10 critical that we coordinate very carefully with 

 11 these so that we don't criss-cross too much and 

 12 particularly use your expert advice as these 

 13 products evolve. 

 14 I hope that's useful. 

 15 CHAIRMAN NEWSOME: Thank you very much, 

 16 Mr. Administrator. We're always glad to have you 

 17 at the Commission, and, Alan, always good to have 

 18 you back at the Commission as well. 

 19 CLOSING COMMENTS 

 20 CHAIRMAN NEWSOME: Before we adjourn, I 

 21 thought I would ask my colleagues if they have any 

 22 closing comments they would like to make and then 
 122 

 1 give everyone else that same opportunity. 

 2 Walt. 

 3 COMMISSIONER LUKKEN: I would just note 

 4 that all these discussion matters are pretty 

 5 weighty issues that we're dealing with over a 

 6 long-term period of time here at the Commission, 

 7 and certainly as your organizations give thoughts 

 8 on this, to please submit them to us, come in and 

 9 talk to us. This was not as much to get answers 

 10 today as to ask the big policy questions of 

 11 you and to have you think thoroughly about these 

 12 issues as we go into a reauthorization year. 

 13 Obviously, Congress is going to have 

 14 some views on some of these subject matters we 

 15 brought up. As I mentioned earlier, you know, 2000 

 16 occurred without them doing much in the area of 

 17 legal certainty for cash forward and cash contracts 

 18 and HTA cases. This might be an opportunity if, 

 19 indeed, these groups are on the table and want to 

 20 do something, to talk to us, talk to Congress about 

 21 it, and provide us guidance in that area. 

 22 So I would encourage you all to do that. 
 123 

 1 I look forward to talking with you individually in 

 2 the future, and thanks again for participating. 

 3 I would also like to note Andy Morton is 

 4 in the audience from the Senate who suffered 

 5 through the entire meeting without falling asleep, 

 6 but we appreciate him, as always, coming down to 

 7 visit. 

 8 CHAIRMAN NEWSOME: Commissioner 

 9 Brown-Hruska. 

 10 COMMISSIONER BROWN-HRUSKA: Thank you so 

 11 much. 

 12 I just wanted to second Walt's comment. 

 13 I think one thing that we have here at this 

 14 Commission, and it's been encouraged by Chairman 

 15 Newsome, is robust discussion about these very 

 16 important issues, and they're important to all of 

 17 you for a variety of reasons, and we want feedback 

 18 and we want your views on these issues going 

 19 forward. Some of these issues, I think, you know, 

 20 we can deal with getting that feedback ourself. I 

 21 think we're committed to, if we get it from you at 

 22 the Commission, we're committed to doing as much as 
 124 

 1 we can about it here to get to resolution of some 

 2 of these issues without necessarily carrying it to 

 3 the level of Congressional deliberation. 

 4 So while I would agree that we encourage 

 5 you to go to Congress if you have an issue with us, 

 6 I'd also first encourage you to come to us and let 

 7 us know what your concerns are, and we will do 

 8 everything we can to resolve it without legislative 

 9 intervention or action. I think we are responsive 

 10 to you and to Capitol Hill, and we're more than 

 11 happy to continue this dialogue and this 

 12 interaction. 

 13 Thanks. 

 14 CHAIRMAN NEWSOME: Thank you, Sharon. 

 15 Any kind of closing comments or thoughts 

 16 by any of the participants of the committee? 

 17 Seaver? 

 18 MR. SOWERS: Well, I again just thank 

 19 you for having us. I really appreciate the 

 20 opportunity to be here. I also, while the 

 21 Administrator is here, just wanted to say on behalf 

 22 of the banking community, you will probably not be 
 125 

 1 surprised to find out that the livestock programs 

 2 are very popular with the bankers. So we 

 3 definitely look forward to seeing those programs 

 4 come back on line. 

 5 Just a quick question, and I hope this 

 6 isn't putting the cart before the horse, but 

 7 assuming the program comes back on line in good 

 8 shape and particularly with the livestock risk 

 9 protection program, what is the process for going 

 10 beyond the pilot program? Is it your board that 

 11 makes that decision? Does Congress have to give 

 12 you new authority or how does that work today? 

 13 MR. DAVIDSON: Well, our board of 

 14 directors has the delegated responsibility from 

 15 Congress to determine when a pilot is finished. 

 16 Typically, we're allotted crop commodities. Pilot 

 17 have taken about three years to run their course 

 18 before we evaluate whether or not the pilot has 

 19 validated the actuarial soundness of the program 

 20 and whether or not it's meeting the producers' 

 21 needs. These are a little different in that you 

 22 have a lot of cycles taking place in one year as 
 126 

 1 opposed to just one cycle for a commodity, and as a 

 2 result of that, our board of directors has decided 

 3 that in a year, we will take a look at these 

 4 programs after they're reintroduced to determine 

 5 whether or not they ought to be moved to national 

 6 status. 

 7 I will say that the banks as well as the 

 8 insurance companies and the reinsurance companies 

 9 that are the capital market participant in this 

 10 program, I think you'll find that they have a 

 11 stronger interest after they take on some of these 

 12 risks, particularly the insurance companies, that 

 13 they'll be much more interested in purchasing 

 14 commodity contracts to cover their risk. The 

 15 aggregators of these risks, I think become very 

 16 important customers. 

 17 CHAIRMAN NEWSOME: I think that's a 

 18 good point, Ross. 

 19 I want to give credit where credit is 

 20 due. I've had the opportunity to chair this 

 21 meeting, but Commissioner Lukken and his staff are 

 22 responsible for the development of the agenda and 
 127 

 1 for scheduling everything as it has been today. I 

 2 thought it was a very good meeting, and thank you, 

 3 Walt and Erin and Dave and Elizabeth, all those 

 4 involved in the meeting. 

 5 Any other comments by the group? 

 6 Yes, sir. 

 7 MR. METZ: I certainly want to thank 

 8 you. I think this was an important meeting and 

 9 important to hear what our colleagues have to say 

 10 in this industry. The American Soybean Association 

 11 does not have a position right now, but obviously 

 12 after listening to comments, we'll go back along 

 13 with industry partners and forward our comments. 

 14 Again, for us, the primary issue is transparency in 

 15 the market and price discovery liquidity in the 

 16 market. As you know, almost half of the soybean 

 17 are now raised in South America. This gives us 

 18 great concern. 

 19 I was in Europe a couple of weeks ago 

 20 visiting with some of the other oil seed countries 

 21 around the world. They obviously don't feel that 

 22 the Chicago Board of Trade is right now meeting 
 128 

 1 their needs. So as those needs are met, we want to 

 2 make sure that our markets remain very liquid, very 

 3 transparent as well, and I think these are some of 

 4 the issues that we look forward to visiting with 

 5 you on. 

 6 The other issue, of course, would be 

 7 someday when soybean rust does hit this country, 

 8 that we're prepared for these market moves. They 

 9 pretty much fluctuate in a large way with the 

 10 possibility of a terrorist event upon our grain 

 11 markets and to make sure that we have the proper 

 12 things in place so that the markets don't 

 13 fluctuate, and we look forward to further comment. 

 14 Thank you. 

 15 CHAIRMAN NEWSOME: Thank you, sir. 

 16 Any other comments? 

 17 Jim. 

 18 MR. MILLER: On a little lighter note, 

 19 Jim, on behalf of my members, I just want to thank 

 20 you for your leadership during your tenure with the 

 21 Commission and particularly as chairman. You've 

 22 been a great individual to work with. What you've 
 129 

 1 brought to the job have allowed us all to have a 

 2 little better understanding of the weighty issues 

 3 that the Commission faces. That does raise one 

 4 other issue though. I noticed your organizational 

 5 chart is now going to have one more blank in it. 

 6 We do have some pretty significant issues and not 

 7 only the ones talked about today with 

 8 reauthorization, and it seems to me that we're 

 9 going to overload two other individuals greatly 

 10 with your departure, and I'm just wondering if you 

 11 have any perspective on that. 

 12 But certainly I want to wish you well in 

 13 the future with your new opportunity. 

 14 CHAIRMAN NEWSOME: Well, thank you much, 

 15 Jim, for those kind words. I would just say that 

 16 Sharon and Walt are both workhorses. They're up to 

 17 the load. 

 18 Seriously, the Commission has operated 

 19 with two before and has done so successfully. That 

 20 said, I think there's no question that the 

 21 Commission operates best when all the seats are 

 22 full, when you've got a dialogue of five 
 130 

 1 commissioners that are all bringing different 

 2 thoughts and ideas to the table, and I would 

 3 subject that on behalf of your organizations, you 

 4 know, you should encourage key members of the 

 5 authorizing committee, the White House, that having 

 6 these seats are important to you, and hopefully 

 7 they can get together and agree upon nominees and 

 8 move them forward as quickly as possible. 

 9 Yes, ma'am. 

 10 MR. GRABOWSKI: I'm with American 

 11 Agri-Women. I've been pretty quiet, but I would 

 12 like to thank you for including our organization 

 13 among the representatives here. We are primarily a 

 14 producer of all sorts of agricultural commodities, 

 15 and while we do not have a position on this 

 16 particular issue, we will discussing it and with 

 17 all things, because we're a diverse membership. We 

 18 may or may not be taking a position, but we thank 

 19 you very having us. 

 20 CHAIRMAN NEWSOME: We welcome to the 

 21 committee and certainly welcome the input that you 

 22 and your organization may have. 
 131 

 1 MS. GRABOWSKI: Thank you. 

 2 CHAIRMAN NEWSOME: Anything else? 

 3 Well, I would simply say I think it's 

 4 fitting that ag brought me to the table and my last 

 5 public meeting is the Ag Advisory Committee. It 

 6 seems that for some reason I continue to get 

 7 further away from home and further away from my 

 8 roots as an aggy. I think it is somewhat strange 

 9 that the only exchange that doesn't trade any 

 10 agricultural contracts is the one that I'm headed 

 11 to, but obviously energy is very important to 

 12 everyone sitting around this table and the 

 13 industries that you represent. So please consider 

 14 me your ag voice at the New York Mercantile 

 15 Exchange, and as issues arise or you need an 

 16 audience with regard to energy and/or metals, 

 17 please feel free to call me just as you have over 

 18 the last six years. 

 19 Anything else? 

 20 If not, this meeting of the Advisory 

 21 Committee is adjourned. 

 22 [Whereupon, at 4:48 p.m., the meeting adjourned.]