U.S. Commodity Futures Trading Commission

Office of the Inspector General

A Preliminary Investigation Regarding Position Limits

Rulemaking Efforts Undertaken by the Commodity Futures

Trading Commission Pursuant to the Dodd-Frank Act

REPORT OF PRELIMINARY INVESTIGATION

REDACTED

Prepared by the

Office ofthe Inspector General

Commodity Futures Trading Commission

February 15,2012

All redactions in this report have been made pursuant to FOIA Exemptions (b)(6) and (b)(7)(C).
EXECUTIVE SUMMARY

The Office ofthe Inspector General for the Commodity Futures Trading Commission

conducted a preliminary investigation ofthe process by which the Commodity Futures Trading

Commission proposed and adopted rules governing position limits under the Dodd Frank Act. 1

We undertook this preliminary investigation upon the receipt oftwo anonymous communications

alleging misconduct in connection with this rulemaking. We received the anonymous allegations

on August 29 and 31, 2011. One arrived by physical delivery, the other by email. We sought

more information from the anonymous emailer, and received one additional email.

The allegations were that the team leader for the position limits rulemaking "sneakily"

got himself appointed team lead and thereafter removed from the team the most experienced

members in order to use only newer CFTC employees that he could manipulate (presumably in

order to improperly influence the substance ofthe rule). The team leader was also alleged to

have engaged in improper communications with external entities while working on the rule. The

anonymous allegations additionally asserted that the position limits rulemaking would be

unworkable because it was not compatible with the large swaps trader reporting rule. In fact, the

position limits rulemaking team originally was combined with the large swaps trader reporting

team.

While vague, the allegations encompassed potentially criminal activity in a recent

mission-critical undertaking required under the Dodd-Frank Act because they generally alleged

dishonest conduct and corruption.

Finally, the anonymous submitters claimed they were afraid ofretaliation (or renewed

retaliation) in the Division of Market Oversight (DMO)2 We determined to take a closer look in

order to determine whether to make any referrals for further investigation.

We conducted interviews with 14 original members ofthe large swaps trader and position

limits rulemaking team, and with one additional team member later added. In addition, we

conducted additional interviews with seven CFTC employees also involved with the position

limits rulemaking, including Chairman Gensler and members of his staff; Rick Shilts, Director of

DMO (who supervised the team leads for the position limits and large swaps trader reporting

rulemakings); and CFTC employees who were consulted in connection with the position limits

rulemaking. We stressed to staff level employees that we would endeavor to keep confidential

the identities ofthe sources ofinformation provided in these interviews.

We found no evidence to sustain a preliminary finding of wrongdoing by any individual

connected with the position limits and large swaps trader reporting rulemakings. No witness

presented evidence of corruption or violations oflaw in connection with the drafting ofthe

1 Dodd-Frank Wall Street Reform and Consumer Protection Ac~ Public Law III-2m, 124 Stat 1376 (201 0)

("Dodd-Frank Act" or "Dodd-Frank").

2 Please see Appendix I for a list of all acronyms used in this report.
position limits rule by the team lead or any other person who worked on the rule. The team lead

for the position limits rulemaking received both praise and criticism for his management style.

Specifically, we found no evidence to indicate that the position limits rulemaking team

leader "sneakily" had himself appointed team lead. Witnesses uniformly asserted that the need

to split the teams arose from the volume ofwork involved with these two particular rules.

Witnesses also were uniform in their assertion that the person who was appointed team lead for

the position limits rulemaking team had superior experience with position limits, and did not ask

for the assignment.

We found no evidence that the position limits rulemaking team was managed by the team

lead so as to disregard more experienced CFTC employees in favor of less experienced ones that

could be manipulated. Witnesses told us that team members - both experienced and less

experienced - came and went with varying degrees of participation throughout the process, both

due to the fact their involvement was issue-specific, and in order to keep up with ongoing CFTC

work. The team members involved with drafting - the most time-consuming task - was

comprised of one lawyer and one economist each with over 10 years financial regulatory

experience; along with one lawyer with roughly two years industry experience dealing

specifically with energy trading and fewer than two years financial regulatory experience; and

one economist with fewer than two years' experience. The core drafting team was small of

necessity, as it would be time consuming to coordinate drafting and review by a large group and

still meet deadlines. In addition, witness interviews as well as our examination of numerous

email generated during the position limits rulemaking process show the team lead consulted not

only with the other team members, but also with CFTC employees with over 20 years'

experience throughout the process.

Finally, witnesses uniformly stressed that the position limits rulemaking, more so than

most other rulemakings, was heavily influenced throughout by the Chairman and

Commissioners, with more than one witness stating that the team lead's influence on policy for

this particular rule was somewhat limited due to the Commission's direct involvement.

We also found no evidence ofimproper communications with external sources; however,

this allegation was vague. The CFTC documented over 100 meetings with external sources

during the course ofthe position limits rulemaking process. No witness was aware of any

improper communications.

We found no evidence that the position limits rulemaking is fatally flawed due to its

incompatibility with the large swaps trader reporting rulemaking. The two rules are interrelated.

Information collected from large swaps traders will enable the CFTC to see the entire market and

will also be used to implement and enforce position limits in accord with the Dodd-Frank Act.

Throughout the rulemaking process, Commissioners publicly acknowledged the potential

complexity ofthe interrelation between these two rules, and acknowledged that large swaps

trader reporting necessarily would be subject to later adjustment to facilitate both the calculation

and enforcement of any position limits. The two rules initially were teamed together in order to

facilitate this data coordination.

11
Witnesses told us that data coordination issues came to a head as the position limits

rulemaking neared completion. Eventually it was determined that assuring the collection of

adequate data to establish and enforce position limits would be worked out during the

implementation stage oflarge swaps trader reporting. Based on our interviews we do not

conclude that corruption, incompetence, or misconduct by CFTC staff contributed to these

Issues.

Finally, we found no evidence that CFTC employees in DMO who have raised issues or

complained to management regarding the position limits rulemaking have been subjected to

retaliation. CFTC employees serving on the combined team and later the separate teams seemed

to have their preferred team lead throughout the rulemaking process for position limits and large

swaps trader reporting, with some praising the team lead for large swaps trader reporting and

others favoring the team lead for position limits. Moreover, we encountered witnesses who

disliked or had some degree of disagreement with each team leader's management style.

However, more than one witness told us that, when issues regarding the team leads were brought

to the attention ofDMO management, the response was effective and there was no retaliation.

Due to the uniform quality of information received from CFTC employees and

management, we did not take steps to refer this matter for further investigation.

111
TABLE OF CONTENTS

Executive Summary i

Table ofContents iv

Background: The Large Swaps Trader Reporting and Position Limits Rulemaking Team 1

Table 1: The Original Large Swaps Trader Reporting and Position Limits Rulemaking

Team (in alphabetical order) with Issue Assignments 1

Anonymous Allegations 3

Methodology ......................................................................•........................................................... 6

Findings 7

Allegation #1: Improper Control ofthe Team 7

Table 2: Experience on the Large Swaps Trader Reporting and Position Limits Rulemaking

Team 9

Table 3 - Everyone Who Worked on or Were Consulted in Connection with the Position

Limits and Large Swaps Trader Reporting Rulemaking 12

Allegation #2: Improper External Meetings 14

Allegation #3: The Position Limits Rule is not Workable Because it Conflicts with the Large

Swaps Trader Reporting Rule 14

Allegation #4: Fear ofRetaliation 20

Conclusions 20

APPENDICES 21

Appendix 1: Acronyms 22

Appendix 2: Disclosure 23

Exhibits 24

Exhibit 1: Anonymous Allegation Received by Physical Delivery on August 31,2011.. 25

Exhibit 2: Anonymous Allegations Received by EmaiL 27

IV
BACKGROUND: THE LARGE SWAPS TRADER REPORTING AND POSITION LIMITS

RULEMAKING TEAM

Following passage ofthe Dodd-Frank Act, the Chainnan and Division Directors created

30 rulemaking teams. 3 The position limits and large swaps trader reporting team began with 18

or 19 members, including the team leader, Bruce Fekrat. All were assigned various issues: 4

Table 1: The Original Large Swaps Trader Reporting and Position Limits Rulemaking Team (in alphabetical order) with Issue Assignments

Aggregate Position Setting Significant Price Foreign boards Large Trader

Years at (FTC (in Limits for Physical position Hedge Account of trade Reporting System NAME JobTitle (FTC Division 2011) Discovery Commodity limit exemptions aggregation (account nTRS") for Physical

Futures and Swaps levels Function Swaps aggregation) Commodity Swaps 1--' DMO 1to 2 years

International Attorney Affairs 1to 2 years

Economist DMO 1to 2 years

Fekrat, Attorney DMO 5tolOyears ./ Bruce

Senior IT 0115 1to 2 years

Risk 0(10 2Oto25years Management

Senior IT 0115 5tolOyears

Attorney Enforcement 1 to 2 years (plus 5

years at FERC)

Attorney DMO 1 to 2 years

Economist DMO 25to30years

Attorney OGe 5 to 10 years (plus

8 years SEC)

Attorney OGe 1 to 2 years

Economist DMO 1 to 2 years

Associate DMO 15to20years Director

Economist DMO 1 to 2 years

Attorney OGe lOto 15 years

International Attorney Affairs 15to20years

Economist OeE 1 to 2 years

Sherrod, Deputy DMO 5tol0years Steve Director

3 A 31" team was later created and tasked with developing conforming rules to update the CFTC's existing

regulations to take into account the provisions of Dodd-Frank Testimony of Chairman Gary Gensler before the

House Committee on Agriculture, February 11,2011, available at:

http://www.cftc.goviPressRoom/SpeechesTestimony!opagensler-68.htm1.

4 Bruce Fekrat, Memo re SUBJECT: Aggregate Position Limit Rulemaking for Physical Commodity Futures and

Swaps (including amendments to the Commission's Large Trader Reporting Rules), August 2010. We noticed a

minor discrepancy: while the opening memo lists 18 CFTC employees as team leaders or members, the

accompanying discussion includes one additional attorney from OGC,_. The representative from

aCE left the Agency early on; he was later replacedwith~1 to 2 years' experience at

CFTC during the relevant period during 2010-2011.

1
Rulemaking activities began after creation ofthe teams. On October 19, 2010, the

Commission held a public meeting addressing, among other things, large trader reporting for

swaps and physical commodities 5 The Commission approved the proposed rule for large swaps

trader reporting by unanimous vote that day, and the Federal Register published the proposed

rule for large trader reporting for swaps and physical commodities on November 2, 2010. 6

On December 16, 2010, the Commission held an Open Meeting on the Eighth Series of

Proposed Rulemakings Under the Dodd-Frank Act7 The position limits rulemaking was

discussed, and on January 26,2011, the Federal Register published the proposed rule for position

limits 8

The proposed rule for large swaps trader reporting proved relatively uncontroversial and

generated low levels ofinterest. The CFTC received 1,165 items addressing this proposed rule 9

In addition, Commission staff participated in four meetings with five outside entities 10 to discuss

the rule.

In contrast, the position limits rulemaking generated more interest. The CFTC received

14,143 items addressing the proposed position limits rulemaking. 11 In addition, the Commission

staff participated in 177 meetings with outside entities to discuss the rule. 12 Consequently, the

large swaps trader reporting rule moved more quickly through the final rule drafting process than

the position limits rule.

5 Open Meeting on the Second Series ofProposedRulemakings Under the Dodd-FrankAct, Washington, nc.,

October 19, 2010. Infonnation on this meeting is available here:

http://www.cftc. gOYiPressRoomiEvents/opaevent cftcdoddfrank101910.

675 FR 67258 (Nov. 2, 2010)( http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-

27538a.pdD.

7 Information on the Open Meeting on the Eighth Series ofProposedRules under the Dodd-FrankAct is available

here: http://www. dtc.goviPressRoomiEvents/opaevent cftcdoddfrankl21610.

876 FR 4752 (Jan. 26, 2011) (http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-

1154a.pdO.

9 This infonnation is found on the CFTC website at

http://comments.cftc.gov!PublicComments/CommentListaspx?id~889.

10 This infonnation is found on the CFTC website at

http://www.cftc.gov!LawRegulationIDoddFrankActiRulemakingsiXXXII.LargeSwapsTraderReporting/index.htm.

11 This infonnation is found on the CFTC website at

http://comments.cftc.gov!PublicComments/CommentListaspx?id~965, and includes comments to the interim final

position limits rule published on November 18, 2011 (76 FR 71626). In addition, the number of comments has been

estimated at 16,000. Open Meeting on Two Final Rule Proposals Under the Dodd-FrankAct (Oct 18, 2011),

http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmissionldfsubmission7 I01811-trans.pdf (hearing

transcript at page 146).

12 This infonnation is found on the CFTC website at

http://www.cftc.gov!LawRegulationIDoddFrankActiRulemakingsiDF26PosLimits/index.htm.

2
On July II, 20 II, the Commission held an Open Meeting on Five Final Rule Proposals

Under the Dodd-Frank Act, and the large swaps trader reporting rule was included. 13 The rule

passed by unanimous vote that day. The Federal Register published the final large trader swaps

reporting rule on July 22, 2011, with an effective date of September 20, 201114

On November 18, 2011, the Federal Register published the Commission's final rules

establishing federal position limits effective, in large part, 60 days after the term "swap" is

further defined under Dodd-Frank. IS A portion ofthe final rules, relating to the spot-month

position limits, was designated as an "interim final rule," which provided for an additional 60-

day comment period. Comments on the interim final rule were due on January 17, 2012.

On December 2,2011, the International Swaps Dealers Association (ISDA) and the

Securities Industry and Financial Markets Association (SIFMA) filed "challenges" to the

position limits rule in the U.S. District Court for the District ofColumbia and the U.S. Court of

Appeals for the District ofColumbia Circuit. 16

On December 12, 2011, the ISDA and SIFMA filed a motion to stay the effective date of

the position limits rule pending judicial review. On January 3,2012, the Commission denied the

mohon ." 17 lor stay.

On January 20,2012, the United States Circuit Court for the District of Columbia Circuit

dismissed the challenges filed by ISDA and SIFMA, concluding that Dodd-Frank did not

authorize challenges in that court. Litigation in the District Court is ongoing.

ANONYMOUS ALLEGATIONS

On August 29 and 31,2011, anonymous allegations arrived at CFTC OIG, one by email and

another ("the hard copy") simply slipped under the door to the OIG offices at CFTC

headquarters. 18 Both allegations concerned a position limits rulemaking (PLR) currently

ongoing as part ofthe CFTC's efforts to implement the Dodd-Frank Act. The hard copy19

alleged as follows (regarding the ongoing position limits rulemaking):

13 Open Meeting on Five Final Rule Proposals Under the Dodd-FrankAct, Washington, D. C. (July 7, 2011),

http://www.cftc. gOYIPressRoomlEvents/opaevent cftcdoddfrank07071I .

14 76 FR 43851 (July 22, 2011). http://www.cftc.gov/ucm/groups/public!@lrfederalregister/documents/file/2011-

18054a.pdf

15 76 FR 71626,71632 (Nov. 18,2011).

http://www.cftc. gOY/ucm/groups/public!@lrfederalregister/documents/file/2011-28809-1 a.pdf

16 Int'l Swaps andDerivatives Ass'n v. CFTC, NO.1: II-cv-2146 (D.D.C); (Int'l Swaps & Derivatives Ass'n v.

CFTC, No. 11-1469 (D.c. CiL). More information on these actions, including links to the complaint filed in the

US. District Court for the District of Columbia and the petition for review filed in the US. Court of Appeals for the

District of Columbia may be found here: http://www2.isda.org/news/isda-and-sifma-file-lawsuits-challengingcornillodity-futures-trading-cornillissions-rille-on-pasition-limits.

17 The motion for stay and the Commission's Order are available here:

http://www.cftc. gOY/ucm/groups/public!@newsroom/documents/file/orderOI0312.pdf

18 CFTC Headquarters is located at 1155 21" St, NW., Washington DC 20581:

19Attached as Exhibit I.

3
• "It's broken"

• "It cannot be implemented"

• The rulemaking effort includes "many internal mis-steps, waste, and improprieties"

• "The PLR can't be connected to the Swaps reporting rule upon which it depends for

implementation"

• "The leader ofthe PLR team is responsible for this wasted, misguided agency effort"

• The leader "culled experts from the original team because they disagreed with his point

of view"

• "There was [sic] about 15 people from across the agency, now there are only about 6"

• "All the current team members have less than 18 months of CFTC tenure. 3 have less

than 2 years offutures industry experience. 1 attorney and 1 statistician were hired

within the last year."

• The leader "selected these people because he knew they would not get in his way."

• "The final rule is not a committee/staff product, it is his alone."

• The leader "met with several industry lobby groups, so 1suspect some fraud and

dishonest effort here."

• The leader "is unethical and dishonest in his pursuits in this and other matters."

• "The rule effort has been a waste of agency resources and an abuse of power, and perhaps

some fraud."

The hard copy allegation did not identify the author by name, nor did the allegation state

whether the author was a CFTC employee. The emailed allegation states the author is a CFTC

employee. This employee alleged (concerning the position limits rulemaking):

• "1 believe the team lead of a crucial rulemaking team has acted dishonestly and led his

team to a point were [sic] their rule is not implementable."

• "The team was gradually trimmed until it was left with only the most inexperienced

staffers so that the team lead would have absolute control."

• The position limits team "chose to forge ahead with a plan that required a completely

different information set [from the swaps reporting rulemaking] and is thus planning to

propose something that cannot possibly be implemented. 1find it hard to believe this was

by accident... and suspect the motives ofthis person."

• "Gutting out the intent of Position Limits as required by Dodd-Frank, wasting taxpayer

monies, steamrolling over other staff, proposing a rule that cannot possibly be

implemented, is wasteful. More than that, it is dishonest."

The anonymous source ofthis allegation also stated that he was writing through a pseudonym

"since 1 am afraid ofrenewed retaliation." He stated that the team lead for the position limits

rulemaking "has acted dishonestly and led his team to a point were [sic] their rule is not

implementable." The allegation continued:

1 am referring to the rulemaking on position limits. The team was gradually

trimmed until it was left with only the most inexperienced staffers so that the team

lead would have absolute control. The position limit rule depends for its

implementation on the work of another rule, the swap large trader reporting. Since

4
you cannot limit positions unless you can measure them, the poslim rule is limited

by what the SLTR requires traders submit. The SLTR was thoughtfully written

and was out for comment, receiving just a handful ofminor comments. It is to be

implemented in three weeks. Yet, the poslim team lead chose to forge ahead with

a plan that required a completely different information set and is thus planning to

propose something that cannot possibly be implemented. I find it hard to believe

this was by accident (Is utter incompetence something you look at too?) and

suspect the motives ofthis person.

Gutting out the intent of Position Limits as required by Dodd-Frank, wasting

taxpayer monies, steamrolling over other staff, proposing a rule that cannot

possibly be implemented, is wasteful. More than that, it is dishonest. I hope you

investigate before it is too late. Perhaps there is a chance to rectify before the

CFTC damages markets and public confidence.

Because we had an email address associated with the anonymous allegation received by

email, on September 7 we sent a "return" email requesting further information. On September 9

we received a second communication from the anonymous email-er which stated:

I am simultaneously terrified of complaining and appalled by what is

going on with the rulemaking on position limits. By now it may be too late to do

anything: a proposal has been circulated, meetings with Comms are taking place

and a new draft with their comments and compromises is due end of next week.

Perhaps it is best to just let it come out and when you see all Comms

distancing themselves from it and all parties outraged, you will have more time

and sources to review how we ended in this mess.

In a nutshell, the rule on position limits depends on gathering information

in a very peculiar way, alien to industry practice, even academic practice, and

most importantly, alien to how the Large swaps Trader Reporting Rule was

designed. So, it is not implementable unless the SLTR is modified. However,

that rule was finalized with few comments and was supposed to be put in practice

starting in two weeks. Now [the team lead] is asking that SLTR rule to change to

fit his PosLim rule. This would require such major changes that it would have to

be delayed, reopen for comments, etc. crucially, the new data would perhaps help

his rule, but would make it nearly useless for any other purpose, like Risk

Surveillance or even market Surveillance.

Simultaneously, [the team lead] is drafting the new rule to be a complete

cave out [sic]. This way perhaps people out in industry will not notice the mess

as much. When the limits are so high and position so easy to offset, they would

NEVER get hit, How [sic] can anyone know that they are not really implemented?

This was a completely avoidable problem, the incompatibility oftwo rules

that should work together, since both rulemaking teams used to work together

5
under [one team leader]. [The PLR team leader] sneakily got [Bruce Fekrat]

kicked out and kept the PosLim staffed with inexperienced people whom he could

bully. There was no check on him, he worked nearly secretely [sic] (as he always

does) and upended the whole thing. Was this incompetence, mismanagement

from above, or outright sabotage. [sic] That is the question.

For those of us that devoted over a year of our professional lives to

rulemaking, it is devastating that we will have to hide in shame in our resume

what should have been a signal effort for an attorney at CFTC.

If you want to know more now though, I would suggest chatting

confidentially with the team on SLTR and some ofthe people in the PosLim rule

.... I am way to [sic] scared to come out to OIG, specially [sic] ifwhat I hear is

true and [the PLR team lead] ends up there. He would be all over me and I would

have to leave the agency.

I hope you do look into this for the credibility ofthe Agency. Working in

the OIG, I hope you have the courage I cannot find.

Best ofluck20

We received no further allegations or complaints regarding the position limits rulemaking from

any source.

METHODOLOGY

In order to complete our work, we reviewed drafts ofthe position limits rulemaking, staff

email, internal memoranda, transcripts of Commission meetings, and external comments. In

addition, we conducted interviews with 21 CFTC employees at staff and various management

levels who were involved with the position limits or swaps reporting rulemakings, and the

Chairman. Some were consulted multiple times. Witnesses generally were asked to describe

their involvement in the position limits and/or swaps reporting rulemakings, in a narrative form.

Depending on their level of involvement, they were also asked whether they had any information

indicating whether (or not) the team lead maneuvered or schemed to be appointed team lead,

reduced the team to its least experienced members, inserted himself improperly in the

rulemaking process, or engaged in improper communications with outside entities. We asked

whether the rule as constructed harmonized with the swaps reporting rule and, if not, to describe

any compatibility issues regarding the collection ofinformation under the swaps reporting rule

and enforcement of position limits. We asked witnesses in DMO whether they feared retaliation

or whether they had experienced or witnessed retaliation in the workplace, focusing on those

witnesses who worked in the same division as the team lead. We asked generally if anything

improper had occurred during the rulemaking.

While we had general allegations offraud, dishonesty, improper communications and

misconduct, we had no allegations ofspecific acts that would violate discrete federal criminal

20 The anonymous allegations received by email are attached as Exhibit 2.

6
prohibitions. For instance, reducing a rulemaking team to its least experienced members does

not violate any statute or regulation ofwhich we are aware, and so without additional evidence

of violative conduct, reducing the team would in fact be legal. An allegation ofimproper control

certainly may result in a serious management issue, but again there was no allegation of violative

conduct resulting from the alleged inappropriate control. The allegation ofsuspected improper

communications, without more, did not permit us to tailor our inquiry to uncover specific

violations ofinformation disclosure 21

or bribery or conflict of interest prohibitions. 22 Therefore

we did not conduct this investigation as a criminal investigation. We conducted this as a

preliminary investigation which might, or might not, result in detailed allegations sufficient to

support formal investigative efforts (by appropriate law enforcement authorities, if necessary).

We began interviews on September 21,2011. Interviews completed on November 9,

2011. We began review ofrecords pertaining to the position limits rulemaking on December 22,

2011, which triggered a few follow up inquiries with witnesses. Document review completed in

February 2012.

FINDINGS

Allegation #1: Improper Control ofthe Team

The anonymous allegations generally stated that the team lead for the position limits

rulemaking "sneakily" got himself appointed team lead, and then reduced the team to a group of

inexperienced individuals who would not question him and would permit him to control the rule.

We found insufficient evidence to support either allegation.

Simply reviewing the public record for the position limits rule, it appears clear to us that

Bruce Fekrat and Steve Sherrod were identified as leading the rulemaking effort throughout the

rulemaking process while the teams were combined.

On October 19, 2010, the Commission held a public meeting addressing, among other

things, large trader reporting for swaps and physical commodities in connection with the

anticipated rulemaking under the Dodd-Frank Act. 23 Addressing the proposed rules for large

swaps trader reporting on that day, the Chairman stated that Bruce Fekrat would be presenting,

along with Steve Sherrod. Both Bruce Fekrat and Steve Sherrod participated at the hearing, with

Bruce Fekrat giving an introductory statement and both employees answering questions posed by

the Commissioners. The Commission approved the proposed rule for large swaps trader

reporting by unanimous vote that day.

21 For instance, section 8 of the Commodity Exchange Act, 7 USC sec. 12, prohibits the Commission from

publishing data and infonnation that would separately disclose the business transactions or market position of any

person and trade secrets or names of customers. The Privacy Ac~ 5 USC 522a, prohibits the disclosure of certain

~ersonal infonnation.

2 Criminal prohibitions against bribery, graf~ and conflict of interest are located at 18 USC Chapter 11.

23 See fn 5.

7
The Federal Register published the proposed rule for position reports for physical

commodity swaps (i.e., large trader reporting for swaps and physical commodities) on November

2,201024 The notice of proposed rulemaking listed both team leads as contacts available to

discuss this rule, with Steve Sherrod listed before Bruce Fekrat.

On December 16, 2010, the Commission held an Open Meeting on the Eighth Series of

Proposed Rulemakings Under the Dodd-Frank Act25 The position limits rulemaking was

discussed, and both Steve Sherrod and Bruce Fekrat were present and were introduced together

at the beginning ofthe discussion ofthe rule, with Bruce Fekrat noted as "the attorney who led

most ofthe writing on the rule.,,26 On January 26,2011, the Federal Register published the

proposed rule for position limits for derivatives. 27 On this notice of proposed rulemaking, Steve

Sherrod was placed before Bruce Fekrat in the list ofCFTC contacts available to answer

questions about the proposed rule.

One witness stated to us that, at the start of his attendance at meetings for the large swaps

trader reporting and position limits rulemaking team, he did not know whether the lead was

Bruce Fekrat or Steve Sherrod. Another witness told us that while he served on the combined

team early on, he thought ofBruce Fekrat as the "back office" team lead and Steve Sherrod as

the "front office" team lead because Steve interacted with the Chairman and Commissioners to a

greater extent. Consequently, we are not sure ofthe impact or meaning ofthe title "team lead" in

the context ofthis team. The public and other team members were consistently given the

impression that both Bruce Fekrat and Steve Sherrod were leading the team.

The submitter of an anonymous allegation stated that the team leader "sneakily" managed

to become team leader. The team member and non-team member witnesses told us there was a

change in the team and its leadership which occurred after both the large swaps trader and

position limits rules were proposed, and near the close ofthe comment period for position limits.

Witnesses provided two reasons for the split. First, the two rules were proving to require too

much work for one team given the volume of comments received for position limits. Second, the

position limits rulemaking team was split from the large swaps trader reporting team after both

rules were proposed and it became clear based on the number of comments that, as expected,

position limits would prove controversial. That is, based on the number of comments the large

swaps trader reporting rule would likely be finalized faster than position limits, so the team

members working on swaps large trader reporting split offfrom the team members working on

position limits.

Every single witness with knowledge and an opinion told us that Steve Sherrod did not ask

for the position limits rulemaking team lead assignment because, as a Deputy Director, he felt he

already had enough work and responsibility day to day. Instead, Steve Sherrod was assigned the

position by his direct supervisor and the Chairman. According to each ofthe 22 witnesses we

24 75 FR 67258 (Nov. 2, 2010)( http://www.cftc.gov/ucra/groups/public/@lrfederalregister/documents/file/2010-

27538a.pdo.

25 See fn 7.

26 Open Meeting on the Eighth Series ofProposedRules under the Dodd-FrankAct, transcript p. 157. (The

transcript is available here:

http://www.cftc. govlucra/groups/public/@swaps/documents/dfsubraission/dfsubraission13 12161O-transcri. pdf).

27 See fn 8.

8
spoke with who had an opinion, it made sense to have Steve Sherrod, who had a strong

background in position limits in energy products, head the position limits rulemaking. Nobody

suggested that someone else was better qualified.

Our discussions with Bruce Fekrat and Steve Sherrod, as well as our review ofrelevant

email spanning the relevant period for both rulemakings, demonstrates that the two consulted

throughout the process, including after the teams split. Email records for the position limits

rulemaking also show that Bruce Fekrat was included on email regarding the position limits

rulemaking and was given drafts ofthe position limits rulemaking throughout the drafting

process.

We also asked team members and others about the allegation that the team was whittled

down to a few inexperienced individuals so that the team lead could control the position limits

rulemaking. Team members and other witnesses uniformly told us that active members on the

position limits and large swaps trader reporting rulemaking team fluctuated during the

rulemaking process. Many team members limited their involvement to the issue to which they

were assigned, largely out of necessity because they had other job duties. It appears most

members did not have comprehensive mastery ofthe entire rule.

In any event, the team started out in 2010 with 18 or 19 members, with subgroups

assigned discrete issues. Our breakdown ofthe relative experience ofthe original members of

the position limits and swaps large trader rulemaking team can be found below:

Table 2: Experience on the Large Swaps Trader Reporting and Position Limits Rulemaking Team

NAME Job Title

Attorney

Risk Mana ement

Economist

CFTC

Division

DMO

alA

DMO

OITS

DMO

OGC

DMO

DMO

aCE

aCE

DOE

DMO

OITS

DMO

OGC

OGC

DMO

alA

DCIO

DMO

9

Years at CFTC (in 2011)

1 to 2

1 to 2

1 to 2

1 to 2

1 to 2

1 to 2

1 to 2

1 to 2

1 to 2

1 to 2

1t02 ears(

5 to 10

5 to 10

5 to 10

5 to 10 ears (

10 to 15 ears

15 to 20 ears

15 to 20 years

20 to 25 ears

25 to 30 ears
While the original large swaps trader reporting and position limits rulemaking team was

set out in the team opening memo in August 2010, there appears to have been no official

memorialization ofthe new position limits rulemaking team created from the split28 Moreover,

we were not able to get a date certain for the decision to split the team.

Steve Sherrod stated that his core team dedicated to drafting consisted of himself, _

., and had a combined 15 years of experience

with CFTC and SEC. had 1 to 2 years experience at CFTC, and additional

derivatives and energy transactional experience in the private sector dating to 2006.

had 1 to 2 years' experience with CFTC,

the youngest member ofthe core drafting team.

The economist from the Office ofChief Economist who took the lead drafting the costbenefit analysis started at CFTC in 2010 and ; however, email addressing

the position limits rulemaking demonstrated and confirmed that.was supervised

directly by the Division Director, Andrei Kirilenko, specifically in connection with this rule.

Mr. Sherrod did not wo~sitionlimits rule during part ofthe summer of2011

while on leave of absence, and_took over in his absence as lead during the comment

review process. The remaining members ofthe position limits rulemaking team "core" reviewed

the over 14 thousand comments with assistance, and witnesses and email reviewed by OIG

confirmed that during the Summer of 20 11 approximately 15 people reviewed the thousands of

comments received; however, at the end ofthis process the team returned to its core to begin

drafting the final rule.

Steve Sherrod and others told us that drafting ofthe proposed and final rule, the most

intensive work performed by team, was performed by fewer team members somewhat of

necessity, there being little time to circulate portions ofthe draft to so many people during the

process. Witnesses volunteered that the newer employees on the team often would be in a better

position to put in the long hours drafting a single issue or a single document, while more

experienced (and knowledgeable) employees would usually be too busy doing their regular

supervisory and technical work at CFTC. The ebb and flow ofteam members throughout the

process was described to us as an ordinary aspect ofrulemaking. Team members told us that

members would drop in and drop out as their specific areas of expertise and issues were

addressed, and as they were pulled on to other CFTC work during the relevant period. Witnesses

certainly described a variety of issues and disputes among staff during the process, along with

hurt feelings, but we did not receive any specific allegations ofmisconduct, abuse, or improper

control. Witnesses both praised and criticized the management styles for both the large swaps

trader reporting and position limits rulemaking team leaders.

28 However, Steve Sherrod publicly thanked the following CFTC employees during the Open Meeting on Two Final

Rule Proposals Under the Dodd-Frank Act (October 18, 2011): Rick Shilts, Salman Banaei, Ken Danger, Tom

Littlefield, Martin Murray, John Forkkio, David Kass, Dave Amato, Vincent Varisano, Raphael Martinez, Jordan

Grimm, Jim Outen, Gary Martinaitis, Hannah Ropp, Stephen Kane, Andrei Kirilenko, Dan Berkovitz, Neal Kumar,

Carlene Kim, and Mark Higgins.

http://www.cftc. govlucm/groups/public/@swaps/documents/dfsubmission/dfsubmission7 10181 I-trans.pdf (hearing

transcript at page 135-136).

10
Steve Sherrod told us the draft proposed and final rule was circulated to the larger team

for review and proofreading. The completed draft was then circulated to the Chairman's staff for

review and comment. Requested amendments from the Office ofthe Chairman were performed

by the Team Lead and the smaller group that had participated in drafting. The revised draft was

then submitted to the Commissioners for review and comment. The Commissioners were briefed

on the draft rule, as requested. Changes requiring re-drafting were performed again by the core

group that performed the drafting.

Multiple witnesses told us that the position limits rulemaking, more than most, generated

input from the Commissioners and the Chairman. One witness remarked that he considered

Steve Sherrod to be more a "technical" team leader because, due to the input by the Commission,

he was not recommending policy as much as would normally be the case in a rulemaking.

Another team member joked that he believed Steve Sherrod could never win debates with the

Chairman for this rule.

At the end ofthe process, the final draft was circulated to a larger group ofreviewers,

including two CFTC employees with more than 20 years' experience, each, at CFTC. Table 3,

on the next page, expands on the original team shown at Table 1, and shows all CFTC employees

identified as working on the position limits and large swaps trader reporting rules:

11
Left

Agency

and did

no work

consulted or core

asked to review drafting

fi nal team

Assisted or

NAME Job TItle

Table 3 - Everyone Who Worked on or Were Consulted in Connection with the Position Limits and Large Swaps Trader Reporting Rulemaking

Aggregate Position setting Foreign boards Large Trader

Significant Price

YearsatCFTC(in Limits for Physical position Hedge Account of trade ReportingSystem supervised

CFTCDivision 2010) Commodity limit Discovery exemptions aggregation (account ("LTRS") for Physical team Function Swaps Futures and Swaps levels aggregation) Commodity Swaps member(s)

Sto 10 years

1to 2 years

1to 2 years

,(

,(

,(

,(

lOto IS years

lS-2Oyears

lSto2Oyears

2Oto2Syears

2Sto30years

1to 2 years

1to 2 years

Ito2years(plus

Syears at FERC)

1to 2 years

1to 2 years

1to 2 years

1to 2 years

Sto 10 years

1to 2 years

1to 2 years

Sto 10 years

(pi us 8 years SEC v'

I

Sto 10 years

• Altomev DMD

Attorney DIA

Bruce

Fekrat Attorney DMD

Attorney OGC

Attorney OGC

Economist DMD

Associate DMD

Di rector

Economist DCE

Senior IT OITS

Economist DMD

Senior IT OITS

Economist DMD

Attorney ENE

Economist DCE

Attorney OGC

Attorney DIA

Economist DMD

Sup'vy Risk DClD

Analyst

Steve Deputy DMD

Sherrod Di rector

"Economist DMD

12
Left

Agency

and did

no work

consulted or core

asked to review drafting

final team

Assisted or

supervised

team

member{s)

Years at CFTC (in

2010)

NAME Job Title CFTC Division

Table 3 - Everyone Who Worked on or Were Consulted in Connection with the Position Limits and Large Swaps Trader Reporting Rulemaking (continued)

Aggregate Position Setting Foreign boards Large Trader

Si gn ificant Pri ce Limits for Physical position Hedge Account of trade Reporting System Discovery Commodity limit exemptions aggregation (account ("LTRS") for Physical Function Swaps Futures and Swaps levels aggregation) Commodity Swaps

Andrei Director aCE 3t05years Kirilenko

Attorney ENF 2 years (pi us 18

years FERC)

Sup'vy DMO 15t020years Economist

Attorney DMO 20 to 25years

Attorney DMO 25t030years

Attorney COM 5to 10years

Economist ENF 2years{plus6

years at DOE)

Economist aCE 5to 10years

Economist DMO 1 to 2 years

Economist DMO 30-35years

Economist DMO 3t05years

Rick Shilts Director DMO 35t040years

Attorney DMO 1 to 2 years

Economist aCE 1 to 2 years

Attorney DMO 20 to 25years

Deputy ENF 10 to 15years Director

Sup'vy DMO 15t020years Economist

Law Clerk DMO 1 to 2 years

13
We find that the position limits rulemaking team was created by the Chairman after

publication ofthe notices of proposed rulemaking issued for the large swaps trader reporting and

position limits rulemaking. The position limits rulemaking team was created because the two

rules were too much work for one team, and because the position limits rulemaking was proving

to have thousands more comments to digest and, therefore, issues to address in the final

rulemaking. We find the Chairman appointed Steve Sherrod to be the leader ofthe new team

upon his own recommendation and the recommendation ofRick Shilts, Director, DMO. We find

that Steve Sherrod did not of his own volition endeavor to be made the head ofthis rulemaking

team, "sneakily" or otherwise.

The new position limits rulemaking team started out with approximately 15 members

who reviewed the thousands of comments received for the proposed rule, then got small for

drafting with a core offour individuals drafting the final rule, and then large again for the last

reviews, including inclusion ofCFTC employees with over 20 years' experience to give fresh

eyes to the draft. Where a young economist with 1-2 years' experience had a key drafting role

for the cost-benefit consideration, she was supervised directly by the Division Director. While

the core team performing the drafting was small, we do not find that the team lead committed

any misconduct. We are influenced also by the fact witnesses were uniform in expressing their

view that the Commission, and not the team lead, had the greater influence in policy for the

position limits rulemaking.

Allegation #2: hnproper External Meetings

One ofthe anonymous allegation stated that the position limits rulemaking team leader

"met with several industry lobby groups, so I suspect some fraud and dishonest effort here." A

review ofthe public record for the position limits rulemaking shows that there were 177 external

meetings in which this rule was discussed. 29 The source ofthe anonymous allegation offered no

detail whatsoever regarding the date of or parties to any meeting where "fraud and dishonest

effort" took place, nor did we receive any description of what the "fraud and dishonest effort"

specifically involved. We asked each witness about external meetings, specifically whether they

witnessed anything improper. Each witness stated that they had not witnessed anything improper

happening at any external meeting. Due to the lack ofspecificity in the allegation, we were not

able to probe the allegation in any real depth.

Allegation #3: The Position Limits Rule is not Workable Because it Conflicts with the Large

Swaps Trader Reporting Rule

The anonymous allegations contained the following assertions:

• "The PLR can't be connected to the Swaps reporting rule upon which it depends for

implementation"

29 This infonnation is found on the CFTC website at

http://www.eftc.gov!LawRegulation/DoddFrankAetiRulemakingsiDF26PosLimits/index.htm.

14
• The position limits team "chose to forge ahead with a plan that required a completely

different information set [from the swaps reporting rulemaking] and is thus planning to

propose something that cannot possibly be implemented. I find it hard to believe this was

by accident... and suspect the motives ofthis person."

• In a nutshell, the rule on position limits depends on gathering information in a very

peculiar way, alien to industry practice, even academic practice, and most importantly,

alien to how the Swaps Large Trader Reporting Rule was designed. So, it is not

implementable unless the SLTR is modified. However, that rule was finalized with few

comments and was supposed to be put in practice starting in two weeks. Now [the team

lead] is asking that SLTR rule to change to fit his PosLim rule. This would require such

major changes that it would have to be delayed, reopen for comments, etc. crucially, the

new data would perhaps help his rule, but would make it nearly useless for any other

purpose, like Risk Surveillance or even market Surveillance.

Interdependency between the large swaps trader reporting and the position limits

rulemakings was acknowledged in Commission publications during the rulemaking process for

both rules. Indeed, in the first sentence ofthe proposed rule titled "Position Reports for Physical

Commodity Swaps,,30 - the large swaps trader reporting rule - stated:

The Commodity Futures Trading Commission ("Commission" or "CFTC") is

proposing reporting regulations that are reasonably necessary for implementing

and enforcing aggregate position limits for certain physical commodity

derivatives.

The notice of proposed rulemaking also stressed that swaps reporting will assist market

surveillance 31 The final large swaps trader reporting rule continued to acknowledge that large

trader reports would be used for both surveillance and enforcement purposes:

The Reporting Rules, as finalized and adopted herein, will allow the Commission

to administer its regulatory responsibilities under the Commodity Exchange Act

("CEA or Act") by implementing and conducting effective surveillance of

economically equivalent physical commodity futures, options and swaps. The

Reporting Rules will directly support the Commission's transparency initiatives

such as its dissemination ofCommitments of Traders and Index Investment Data

Reports and will allow the Commission to monitor compliance with the trading

requirements ofthe Act32

Likewise, the notice of proposed rulemaking for the position limits rule recognized the

importance ofthe large swaps trader reports, stating that the position limits would be set in the

future, based on information reported by large swaps traders:

30 75 FR 67258 (Nov. 2, 2010).

31 Id. at 67264. 32 76 FR 43851 (July 22,2011).

15
Because the Commission will not be able to implement a comprehensive

system for gathering swap positional data for some time, this notice of proposed

rulemaking does not propose to determine the numerical non-spot-month position

limits for exempt and agricultural commodity derivatives resulting from the

application ofthe open interest formulas in proposed Sec. 151.4. Rather, this

notice ofrulemaking provides for the determination ofsuch limits when the

Commission receives data regarding the levels of open interest in the swap

markets to which these limits will apply.

The Commission anticipates fixing initial position limits pursuant to the

formulas proposed herein through the issuance of a Commission order. As

proposed, CFTC-set position limits after the transitional period would be

recalculated every year based on the formulas set forth in proposed Sec. 151.4,

subj ect to any changes to the formulas that may be proposed and adopted based

on the Commission's surveillance ofthe markets for referenced contracts. In this

regard, as discussed in further detail below, the proposed position visibility

regulations, which would effectuate reporting requirements that are similar to

current reporting requirements for large bona fide hedgers, may facilitate

evaluating the efficacy and appropriateness ofthe proposed position limit

framework if adopted. 33

In addition, the interrelationship between the large swaps trader reporting and the

position limits rulemakings was discussed at length in public meetings held to address both rules.

In an October 2010 public meeting to discuss the large swaps trader reporting rule it was clearly

recognized that the large swaps trader and position limits rulemakings would be interrelated:

Ifthe Commission adopts aggregate position limits, the swaps data will be

essential for staffto conduct surveillance and determine compliance with such

limits 34

By July 2011, the discussion was drilling into the discrepancies and difficulties of

coordination between large swaps trader reporting and position limits enforcement:

COMMISSIONER DUNN: I'm a little concerned because this data is what we

will be basing position limits on and ifwe don't

have a clear idea ofwhat the total universe is out

there, won't it be difficult for us to be establishing

these position limits based on that proposed rule?

MR. SHILTS: As we go to make a proposal on limits, the idea is

that we would be getting this information and/or

3376 FR 4752,4753 (Jan. 26, 2011).

34 Transcript, Open Meeting on the Second Series ofProposedRulemakings Under the Dodd-FrankAct ("Second

Open Meeting"), Washington, nc., October 19, 2010, page 36-37.

http://www.cftc. gOY/ucra/groups/publie!@swaps!documents!dfsubraission!dfsubraissionI9 10191O-transcri. pdf

16
have this available. And I think as Bruce said, as

this starts coming in and as we do further work

working with the potential swap data repositories,

we should be getting a much better feel for the

scope ofthe information that we're getting. And as I

said, I think in some areas I think we do have a

pretty good feel for roughly the amount ofswaps

that potentially would be captured because, as I

said, for some commodity areas there is a

significant amount that's already being cleared

through the various initiatives ofthe clearinghouses,

but it's something that we'll have to continue to

focus on and see how as we get the information and

as we do further with the swap data repositories, we

should get a much better handle on that. 35

Even early on, Commissioners realized certain unavoidable difficulties attendant to

issuing large swaps trader reporting rules prior to position limits:

Commissioner Sommers: Even ifthe proposed rule we are discussing today were

effective by November 30th, it will not provide complete

information sufficient to impose position limits. Under

these circumstances, when considering the imposition of

aggregate position limits on exempt and agricultural

commodities, I believe that the Commission should find

that imposing such limits is not appropriate in the absence

offull and complete data and analysis ofthe open interest

of each market. I believe it is a mistake to interpret the

arbitrary 180- and 270-day deadlines as somehow trumping

the requirement that the Commission make an

appropriateness determination before imposing any

position limit.

* * *

Commissioner Chilton: I'm actually somewhat sympathetic to the predicament that

we're in that Commissioner Sommers described, sort of

putting the cart before the horse to some extent. Even

when we have talked about this, you know, a year ago in

35 Transcript, Open Meeting on Five Final Rule Proposals Under the Dodd-Frank Act, Washington, nc. (July 7,

2011), page 100-101.

http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmissionldfsubmissionmult 070711-trans.pdf

17
our hearings and then in January, one ofthe suggestions I

had in general on limits was that we do no harm .... 36

We believe the fact that the interrelationship between the two rules was made public may

explain why the discrete issue raised in the anonymous allegation apparently was not raised in

any ofthe more than 14,000 comments received for the position limits rulemaking.

We asked the team members whether there were compatibility problems between the

large swaps trader reporting and position limits rulemakings. We learned from witnesses that the

issue was very technical and does not go to the actual calculation of position limit amounts that

the Commission may impose. Instead, the issue goes to the type ofswap transaction that will be

counted toward the tally of each large trader's position when determining whether limits are

violated.

In order to conduct market surveillance, the Commission wants to see a very broad class

ofswaps; however, we were told that for purposes of calculating position limits, the Dodd-Frank

Act exempts certain swaps, such as swaps that pre-date the Dodd-Frank Act and swaps positions

that contribute to certain technical hedging strategies. This means that, in some instances, the

transaction type is relevant. Identifying the subset ofswaps that will be counted by each large

trader for purposes of calculating compliance with position limits that may eventually set by the

Commission was not covered in the swaps reporting rule. Nevertheless, separate identification

ofthe subset ofswaps that count toward the Agency's calculation of each large trader's

compliance with position limits will necessarily be a part oflarge swaps trader reporting.

At some point during the process of drafting the position limits rulemaking, the disparity

between the reports required under the final large swaps trader reporting rule that facilitate

market surveillance, and the narrower class ofswaps that contribute to position limit calculations

-- specifically how to define the data fields and regulate reporting in the implementation phase of

the swaps reporting rule -- became an issue after the large swaps trader reporting rule was

finalized. Witnesses told us that implementation would present a real challenge because the

large swaps trader reporting rule as finalized did not support position limit reporting. During

staff-level debates at the end of Summer 2011, some people were dismayed at the amount of

work left to be done to implement large swaps trader reporting and certainly staff differed on

how best to resolve the attendant issues.

During our interviews, staff and management opined that it will be possible to address these

issues during the implementation phase ofswaps large trader reporting, as well as through the

use ofspecial calls and staff interpretations.

On September 16, 2011, the Commission issued temporary and conditional relieffrom

certain requirements ofthe regulations regarding large swaps trader reporting. Specifically, by

delegated authority the Director ofthe Division of Market Oversight determined to relieve

clearing organizations and clearing members as a class from certain reporting requirements until

36 Transcript, Open Meeting on the Second Series ofProposedRulemakings Under the Dodd-FrankAct ("Second

Open Meeting"), Washington, nc., October 19, 2010, page 44-45.

http://www.cftc. gOYlucra/groups/public/@swaps/documents/dfsubraission!dfsubraission19 10191 O-transcri. pdf

18
November 21,2011, for cleared swaps, and until January 20,2012, for uncleared swaps37 The

reason for the relieffollows:

Division staff is actively engaged in ongoing compliance and implementation

discussions with clearing organizations, clearing members, potential swap dealers,

and data service providers, both separately and through the International Swaps

and Derivatives Association and the Futures Industry Association. The Division

believes that the participants in these discussions are representative ofthe parties

that will be subject to the reporting rules. The Division further believes that the

continuing participation of expected reporting parties in discussions to address

compliance and implementation issues raised by the reporting rules represents a

good faith attempt to comply with the requirements of part 20. Accordingly,

consistent with the authority delegated by § 20.8(a)(S), the Director ofthe

Division has determined to relieve clearing organizations and clearing members

as a class from the reporting requirements of §§ 20.3 and 20.4 until November 21,

2011 for cleared swaps, and January 20, 2012 for uncleared swaps.

On November 18, 2011, the Commission again issued temporary and conditional relief

from certain requirements ofthe regulations regarding large swaps trader reporting. Specifically,

by delegated authority the Director ofthe Division of Market Oversight determined to relieve

clearing organizations and clearing members as a class from certain reporting requirements until

March 20, 201238 The reason for the relieffollows:

Division staff is actively engaged in ongoing compliance and implementation

discussions with clearing organizations, clearing members, potential swap dealers,

and data service providers, separately and through the International Swaps and

Derivatives Association and the Futures Industry Association. The Division

believes that the participants in these discussions are representative ofthe parties

that will be subject to the reporting rules.

The Division also believes that substantial progress has been made towards

finalizing reporting guidance and an XML-based reporting format and record

layout, and facilitating the ability ofreporting parties to comply with such

guidance and format requirements. The Division intends to issue and publicly

distribute in the coming days a guidebook for part 20 reports to provide formal

reporting guidance. The guidebook will include a final XML-based reporting

format and record layout. The Division notes that an additional XML-based

reporting format and record layout for §§ 20.3 and 20.4 reports may be accepted

prior to March 20, 2012.

On December 17, 2011, the Commission announced the publication of a Guidebook for

Part 20 Reports providing additional guidance and detailed instructions for submitting large

37 http://www.cftc.gov/ucm/groups/public/@newsroom/documents/fileIrelief letter 091611.pdf

38 http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/relief letter 111811.pdf

19
swaps trader reports to the Commission39 The 45-page guidebook contains detailed technical

instructions for large trader swaps reporting. 40

The swaps large trader reporting rule, as adopted, currently does not address all

complexities specific to position limit establishment and enforcement. However, it is clear that

the Commissioners and Commission staff were aware ofthese issues to a sufficient extent

throughout the rulemaking process, and made public this awareness, and it appears that issues

pertaining to position limit monitoring and enforcement will be addressed during the

implementation phase for large swaps trader reporting. We do not detect any cause for these

issues that may be attributed to misconduct by CFTC staff.

Allegation #4: Fear of Retaliation

The anonymous allegations generally conveyed a fear ofretaliation in DMO, but did not

give specific examples of acts ofretaliation against named individuals in response to protected

disclosures or complaints. We asked each witness who works in DMO to tell us whether they

believe there is a fear ofretaliation. They all replied in the negative. To be sure, team members

on both teams, as well as other witnesses, held both positive and negative opinions ofBruce

Fekrat and Steve Sherrod. We received praise and complaints about both regarding their

leadership and management styles. However, team members told us that, when DMO

management was notified of perceived issues with either team lead, steps were taken by

management within DMO that resolved the situation. No team member stated that they believed

Steve Sherrod (or Bruce Fekrat) had committed any illegal acts.

CONCLUSIONS

We encourage the submission of allegations to the CFTC Office ofInspector General.

Although the allegations at issue here were very serious, the lack ofspecificity regarding acts

that would violate statutory or regulatory provisions, or amount to fraud, waste, abuse, or

retaliation, made our task somewhat difficult in connection with this preliminary investigation.

We offer no opinion on the position limits rule or pending legal challenges. We did not find any

improper conduct by CFTC staff and management in connection with the creation ofthis rule.

39 http://www.cftc. gOYiPressRoomiPressReleases/pr6156-11 .

40 http://www.cftc. gOY/ucm/groups/publie!@newsroom/documents/file/ltrguidebookI20711.pdf

20
APPENDICES

21
Appendix 1: Acronyms

/

Acronym Title /

DMO Division of Market Oversight , .

OIA Office of International Affairs

OITS Office of Information Technology Services (now the Office of Data and

Technology)

DCIO Division ofClearing and Intermediary Oversight

DOE Division of Enforcement

OGC Office of General Counsel

OCE Office ofChief Economist I

COM Office ofthe Chairman and Commissioners

OIG Office of Inspector General /

CFTC Commodity Futures Trading Commission

During the summer 2011, the CFTC replaced the Division ofClearing and Intermediary

Oversight with two new divisions:

Division ofClearing and Risk

Division of Swap Dealer and Intermediary Oversight

In addition, the CFTC replaced the Office ofInformation Technology Services, which previously

acted as a sub-division ofthe Office ofthe Executive Director, with the new Office of Data and

Technology. The Office of Data and Technology is separate from the Office ofthe Executive

Director, and is restructured to include some data specialists formerly working in other CFTC

Divisions.

We are using the division names and acronyms that were in place during the majority ofthe

relevant period (July 20l0-December 2012) for reasons of convenience.

22
Appendix 2: Disclosure

On March 31, 2011, the Office ofInspector General for the Federal Election Commission

(FEC) issued a required peer review ofthe CFTC OIG audit function which recommended,

among other things, the hiring of experienced audit staff. 41 Prior to publication ofthe peer

review report, CFTC OIG retained the services of a former Inspector General with over 20 years

of directly applicable federal audit experience to supervise remediation efforts, including all

audits and audit-related activities. Following publication ofthe peer review report, we received

job inquiries from Steve Sherrod and other CFTC employees interested in working as an auditor,

with some stopping by to discuss the peer review recommendation and others submitting

resumes. Although we have been impressed by the resumes we have received from CFTC

employees, during the relevant period OIG did not post a job listing for an auditor and no CFTC

employee was formally considered for employment with CFTC OIG. We do not believe that the

receipt ofjob inquiries when we are not currently engaged in the hiring process causes an

insurmountable conflict in connection with a preliminary investigation (otherwise all CFTC

employees would seek employment with OIG). During our field work, two CFTC employees

suggested that the anonymous allegations were an attempt by other CFTC employees to derail

any attempt by Steve Sherrod to work in the OIG. We have no opinion.

41 The peer review report is available here:

http://www.cftc.gov/ucm/groups/public/@aboutcftc/documents/file/oig peerreview.pdf.

23
EXHIBITS

24
Exhibit 1: Anonymous Allegation Received by

Physical Delivery on August 31, 2011

25
E><hibit2

PI~~,;" i""e~jg~te the posiTion limits ",1c'makin~ (PI R!rn~,,'" Ih"1 ha' IHk"" ria,'"

he~ at CFTC. Thi~ ruk il ~OO~I to en fi,,~I. h:,~ if, !lr"ken, it cannm he

impl~m~TlI(·u. W!tet1 ~he i"<I~~\ry (nr the Hill) ~ee~ thi~, ti'ey will invesdgate the

pT"V'.'''~~ ami the mnny inlen'al 11l:~-~ef'><, w('.Me. a:td in'proprieties will s\lrface,

As writtcn. ~"'~ PLR ~"n1 I:x: "<.'!\II""I"U I~ Ilw S"~>"! n:p<mino: rok up<Jn ",hid, it

d"I",,,d, fur' i"'l'lementltion. If ~po'tjng d~~ on, 311nw few II", cnlculminllS "I'

po.;tio~, (as r"'luin:d by lh" n,'") Ihl.". p<Jsiliun limit, ,'annUl be ~nfo,c.d. The

S"'''I'' Tule 11l1S I;o"ell well r"c~i,'~d ""d .iewed '" ",a'UfI>,bl~, Ilwul:hlflll. and

i'"I",le"u'lahle

Slc,'C SINn:"O,J th~ Ic"deT of lh~ PLR W,m I, responsible for lhi. wnoted. m;,/;uiJc,1.

Jilency eifort fonl1e f(Jll(JwLn~.,eJ..I(J"I,

I Ie e"lIe<l eXP<'rl~ rroltllh~ ..,ri;:imlll~~m OCCLIU","' t,,~y disaJl,reed with hi~ jl(J;"i ~f

view for the dirtction c>f thi~ role. I he f"ml n11~ ij tlllt H C()mmill~~I~\allprodue\.

il i~ Ilil HIOl\~, H~ hal met with several il1du.ltry l(Jhhy gmul'S, so I su,~el somc

fraull a'id ,1i~orl~ll ~ITor\ h~n:,

TI1ere w~s allOl'l 15 p"o\!l~ lro," ~~rul, lh~ Hgc'n~~', now thore are only 311(Jut 1>. AII

the cur~nt tenm mellll>er:l hn\'e I~,< ,I'Hn 18 "''-'lTlh, ~rCFTC lenure. j have le~~

,11>1" 2 ye""l offUIUTCI inUlLMT)' ~xpcriCT1cc, 1 attomey nnd I ~ln(i~li,;iHII w~n: hirr..xJ

wilhin lht In<,t yeaT. Slev~ ",,1""k,1 the," p"Opk boC"I'5\: he kn~w the)' w,)"I<.I ''''I

gel in his w~y. PI"","", im..v;ew th~ m.mlle'" "!'Ihe "r;gi",1 lull 'e",ll. tl1cy will

verify lhi•.

The ruk i, broken unci I tea, th'l ;f;nvc<tigoted exterll31ly, the ('I''I'(' will l:"'",ly

~Tlff~r. S" Ill'''')' sllltT~", hllki"l:: "be'"l (hi, th"t I "1", think it will prohohl)' lea~

UIII. Th'" is un"c""ptablc.

Thc CITe will My,' to live with the re~TlIt~ Mtlli~ Ioro~et' r,,1e lur yca",. Somc

"lI>er~ nre h.:silJi'lt 10 ~om~ [urlll be~HU>C lhls nde gets ~o much attemi"". II is"

major Jg.el:dn Item (Jftlle Cllai""mu. 1Ie i~ a P'J"~rr\11 p'r,on. 8UI, this i~ Il ve,')'

scriO\15 ll1~tlcr.

J11e r~le effol't has l>e~" a WU,te (jl'u~em'y r".""",,~s ~nll ~n ~b\l~e of power, nnd

pc'rhaps so:nc fraud. \ofr Sherrod i< unethic~1 a"d di~Ir""(,,1 in hi, I",,,,,i" in this

,,,,,I "1",,, 1l1~1I,'~, ll'lh:~ ~~(, O~I, (to the Hill 1. lhe dam3ge w,'uld be immeTlS/l.
Exhibit 2: Anonymous Allegations Received by

Email

27
~~~jiiiijiii~----- Sent: Wednesday, August 31, 20112:33 PM

To: OIGEmaii

SUbject: Insider reports dishonest effort in rulemaking, sabotage of rule, potential market harm

Dear Sir or Madam,

I am a CITC employee writing through pseudonym since I am afraid ofrenewed retaliation. I believe a team

lead of a crucial rulemaking team has acted dishonestly and led his team to a point were their rule is not

implementable.

I am referring to the rulemaking on position limits. The team was gradually trimmed until it was left with only

the most inexperienced staffers so that the team lead would have absolute control. The posilion limit rule

depends for its implementation on the work of another rule, the swap large trader reporting. Since you cannot

limit positions unless you can measure them, the poslim rule is limited by what the SLTR requires traders

submit. The SLTR was thoughtfully written and was out for comment, receiving just a handful ofminor

comments. It is to be implemented in three weeks. Yet, the poslim team lead chose to forge ahead with a plan

that required a completely different information set and is thus planning to propose something that cannot

possibly be implemented. I find it hard to believe this was by accident (Is utter incompetence something you

look at too?) and suspect the motives ofthis person.

Gutting out the intent ofPosilion Limits as required by Dodd-Frank, wasting taxpayer monies, stearnrolling

over other staff, proposing a rule that cannot possibly be implemented, is wasteful. More than that, it is

dishonest. I hope you investigate before it is too late. Perhaps there is a chance to rectify before the CFTC

damages markets and public confidence.

Thank you,

Anonymous.

28
~~~~~------ Sent: 09.20119:33 AM To: ____

Subject: Re: Reply to your email-Urgent

Thank you,~or responding.

I am simultaneously terrified of complaining and appalled by what is going on with the rulemaking on position

limits. By now it may be too late to do anything: a proposal has been circulated, meetings with Comms arc

taking place and a new draft with their comments and compromises is due end ofnext week.

Perhaps it is best to just let it come out and when you see all Comms distancing themselves from it and all

parties outraged, you will have more time and sources to review how we ended in this mess.

In a nutshell, the rule on position limits depends on gathering information in a very peculiar way, alien to

industry practice. even academic practice, and most importantly, alien to how the Swaps Large Trader

Reporting Rule was designed. So, it is not implementable unless the SLTR is modified. However, that rule was

finalized with few comments and was supposed to be put in practice starting in two weeks. Now Sherrod is

asking that SLTR rule to change to fit his PosLim rule. This would require such major changes that it would

have to be delayed, reopen for comments, etc. Crucially, the new data would perhaps help his rule, but would

make it nearly useless for any other purpose, like Risk Surveillance or even Market Surveillance.

Simultaneously, Sherrod is drafting the new rule to be a complete cave out. This way perhaps people out in

industry will not notice the mess as much. When the limits are so high and positions so easy to offset, they

would NEVER get hit, How can anyone know that they are not really implemented?

This was a completely avoidable problem, the incompatibility oftwo rules that should work together, since

both rulemaking teams used to work together under Bruce Fekrat. Sherrod sneakily got Bruce kicked out and

kept the PosLim staffed with inexperienced people whom he could bully. There was no check on him, he

worked nearly secretely (as he always does) and upended the whole thing. Was this incompetence,

mismanagement from above, or outright sabotage. That is the question.

For those of us that devoted over a year ofour professional lives to rulemaking, it is devastating that we will

have to hide in shame in our resume what should have been a signal effort for an attorney at the CFTC.

Ifyou want to know more now though, I would suggest chatting confidentially with the team on SLTR and

some ofthe people in the PosLim rule (e.g. Salman, Kim, etc)

1am way to scared to come out to OIG, specially ifwhat I hear is true and Sherrod ends up there. He would be

allover me and 1would have to leave the agency.

1hope you do look into this for the credibility ofthe Agency. Working at the OIG, I hope you have the

courage 1cannot find.

Best ofluck.

AP

.......p 7, 2011 at 9:06 PM, cftc. ov> wrote:

Thank you for expressing your concerns about the proposed position limit rules and related matters.

29
Can you please provide me with more specific details so that we can efficiently evaluate your concerns?

Members ofthe Office ofthe Inspector General are available to confidentially meet with you at any location to

acquire any information you have on the matters you slated in the email dated August 31, 20II.

1 can be reached at 202-418-5115.

Time is ofthe essence.

Waiting to hear from you,

-

2

30