UNITED STATES OF AMERICA 

 COMMODITY FUTURES TRADING COMMISSION 

 AGRICULTURAL ADVISORY COMMITTEE MEETING 

 Washington, D.C. 

 Thursday, May 19, 2011 
 2 

 1 PARTICIPANTS: 

 2 CFTC Commissioners: 

 3 MICHAEL V. DUNN 

 4 BART CHILTON 

 5 GARY GENSLER 

 6 SCOTT O'MALIA 

 7 JILL SOMMERS 

 8 AAC Members: 

 9 HAYDEN WANDS 

 American Bakers Association 

 10 

 DIANA PRESTON 

 11 American Bankers Association 

 12 JORDAN LEA 

 American Cotton Shippers Association 

 13 

 KELLI LUDLUM 

 14 American Farm Bureau Federation 

 15 RYAN WESTON 

 American Sugar Alliance 

 16 

 JASON UNGAR 

 17 Commodity Markets Council 

 18 CHRISTINE COCHRAN 

 Commodity Markets Council 

 19 

 MARK SCANLAN 

 20 Independent Community Bankers of America 

 21 DANA J. PETERSON 

 National Association of Wheat Growers 

 22 
 3 

 1 PARTICIPANTS (CONT'D): 

 2 KEVIN NATZ 

 National Council of Farmer Cooperatives 

 3 

 DOUG SOMBKE 

 4 National Farmers Union 

 5 TODD KEMP 

 National Grain and Feed Association 

 6 

 EDGAR HICKS 

 7 National Grange 

 8 RYAN CRYAN 

 National Milk Producers Federation 

 9 

 ROBBIE BOONE 

 10 Farm Credit Council 

 11 NEIL DIERKS 

 National Pork Producers Council 

 12 

 BOB DINEEN 

 13 Renewable Fuels Association 

 14 FRED CLARK 

 U.S. Rice Producers Association 

 15 

 REECE Langley 

 16 USA Rice Federation 

 17 Panelists: 

 18 DAVID AMATO 

 Division of Market Oversight, CFTC 

 19 

 STEPHEN SHERROD 

 20 Division of Market Oversight, CFTC 

 21 DAVID VAN WAGNER 

 Division of Market Oversight, CFTC 

 22 
 4 

 1 PARTICIPANTS (CONT'D): 

 2 MARK FAJFAR 

 Office of the General Counsel, CFTC 

 3 

 LEE ANN DUFFY 

 4 Office of the General Counsel, CFTC 

 5 ANANDA RADHAKRISHNAN 

 Division of Clearing and Intermediary 

 6 Oversight, CFTC 

 7 

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 5 

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

 2 (9:06 a.m.) 

 3 CHAIRMAN DUNN: Good morning, ladies and 

 4 gentlemen. Let me just check and make sure our 

 5 colleague, Commissioner Chilton is onboard with us 

 6 in our Kent City office. Bart, are you there? 

 7 COMMISSIONER CHILTON: I am here, Mr. 

 8 Chairman. Thank you. 

 9 CHAIRMAN DUNN: Great. All right. 

 10 Today is -- we're doing our 35th meeting of the 

 11 Commodity Futures Agricultural Advisory Committee, 

 12 and I want to sincerely thank all the members of 

 13 the advisory committee for participating in this. 

 14 And also supplying us with the questions or the 

 15 subject matter because we polled you to ask you 

 16 what's important and you sent back and said these 

 17 are the items that are important with us. 

 18 The Ag Advisory Committee provides a 

 19 forum for building a base of knowledge at the 

 20 Commission on issues that matter to the 

 21 agricultural community. This is particularly 

 22 important at a time like this when the Commission 
 6 

 1 is tasked with writing dozens of regulations to 

 2 implement the Dodd-Frank Act. The Commission is 

 3 acutely aware of the far-reaching impact that 

 4 these regulations may have but we depend upon 

 5 those who will be impacted by our rules to provide 

 6 us with their thoughts and concerns in order to be 

 7 certain that the Commission's regulations do not 

 8 have unintended consequences. 

 9 Now that the Commission has essentially 

 10 finished the process of the proposed rules and has 

 11 received many comments from the public, this is an 

 12 ideal time to convene the Committee to discuss 

 13 some of the concerns that have been raised in 

 14 comment letters. Hopefully, the Agricultural 

 15 Advisory Committee also serves an important role 

 16 in making the Commission's work less opaque and 

 17 more accessible to the various components of the 

 18 trading industry and to the public at-large. 

 19 As I've stated on a number of occasions, 

 20 the Commission's process for proposing regulations 

 21 pursuant to Dodd-Frank have been more open than 

 22 any that I've ever been involved with and I 
 7 

 1 commend Chairman Gensler for his leadership in 

 2 this regard. It is my hope that today's meeting 

 3 will provide the public with further information 

 4 as to what the Commission is doing and why and 

 5 then we will have a meaningful dialogue regarding 

 6 both the Commission's proposals and the 

 7 Committee's concerns. 

 8 Thank you to everyone who is in 

 9 attendance, to my fellow commissioners, to 

 10 advisory committee members and commission staff 

 11 and the public. I especially want to thank the 

 12 panelists today who are each a valued member of 

 13 the Commission staff. As you all know, we have a 

 14 full-time job overseeing commodity trading over 

 15 the years and we have the additional privilege of 

 16 writing dozens of new regulations and implementing 

 17 the Dodd-Frank Act. 

 18 Today we'll hear a presentation from the 

 19 CFTC staff in four topic areas. This is based 

 20 upon current events and things that have been 

 21 ongoing with the Ag Advisory Committee and 

 22 requests by the membership of the Agricultural 
 8 

 1 Advisory Committee. First, an update on the 

 2 agricultural commodity markets in general, 

 3 focusing on the impacts of the recent floorings 

 4 and issues of convergence. Second is a 

 5 presentation on the Commission's proposed rule 

 6 regarding position limits and hedge exemptions. 

 7 Third is a presentation on the Commission's 

 8 proposed rule regarding swap dealer definition and 

 9 user exemption. And fourth, the presentation on 

 10 the Commission's proposed rule regarding margin 

 11 requirements. After each presentation the 

 12 Agricultural Advisory Committee members will have 

 13 an opportunity to ask questions and discuss the 

 14 issues raised in the presentation and the proposed 

 15 rule. 

 16 Again, I want to thank all of you for 

 17 participating in this important meeting and I'll 

 18 ask my fellow commissioners if they have any 

 19 opening statements. 

 20 COMMISSIONER GENSLER: Good morning. 

 21 Thank you, Commissioner Dunn for chairing today's 

 22 meeting of the Agricultural Advisory Committee and 
 9 

 1 for your leadership. Though there will be many 

 2 opportunities to thank and congratulate 

 3 Commissioner Dunn for his more than six years of 

 4 service at the CFTC and 25 years of service at the 

 5 Federal Government, I just want to take this 

 6 opportunity. It will probably be one of many. 

 7 You'll be here a while, Mike. 

 8 I want to take this opportunity to 

 9 publicly acknowledge Commissioner Dunn. Mike is a 

 10 trusted colleague for all of us and works 

 11 incredibly hard in service to the American public 

 12 and the CFTC. His significant and thoughtful 

 13 contributions have strengthened all of our efforts 

 14 at the Commission to promote transparency and 

 15 lower risk in the derivatives markets to protect 

 16 the American public. I'm honored to have worked 

 17 with Mike and to call Mike my friend. 

 18 I also join Commissioner Dunn in 

 19 thanking my fellow commissioners and the expert 

 20 panelists and staff who have joined us today. 

 21 This Agricultural Advisory Committee has been a 

 22 terrific source of input and advice as we've moved 
 10 

 1 through our rulemaking, but even on our normal 

 2 business. This meeting comes, of course, at a 

 3 crucial time as we're rule writing with regard to 

 4 implementing Dodd- Frank, and at this point we 

 5 have substantially completed, as Mike said, the 

 6 proposal phase of our rulemaking. And since the 

 7 president signed the act last July, the Commission 

 8 has promulgated rules covering all the areas of 

 9 the act for a swap regulation with the exception 

 10 of the Volcker rule. And we do have a testing and 

 11 supervision rule we will be putting out. 

 12 With the substantial completion of the 

 13 proposal phrase of the rulemaking, the public now 

 14 has the entire mosaic and it will allow you all to 

 15 give sort of comments with all these rules and how 

 16 they interplay. I'm particularly interested in 

 17 the views of this panel on the entire mosaic. I 

 18 know that we're going to be chatting about a 

 19 couple of topics but particularly how it 

 20 implements the agricultural derivatives markets. 

 21 There are two specific topics that are just 

 22 agricultural-focused, like the definition of 
 11 

 1 agricultural commodities and also how we treat 

 2 agricultural swaps, but there are other important 

 3 rulemakings that are much broader and have 

 4 implications for the agricultural markets, some of 

 5 which we'll be talking about, like the position 

 6 limits and hedge exemptions, the swap dealer 

 7 definition. I would put in also the forward 

 8 exemption as it was put in the product definition 

 9 area. The end-user exception I know is going to 

 10 be discussed and the margin requirements for 

 11 uncleared swaps. Again, I'd like to thank 

 12 Commissioner Dunn and my fellow commissioners, as 

 13 well as this committee's members. And I look 

 14 forward to today's full discussion. 

 15 CHAIRMAN DUNN: Thank you, Mr. Chairman. 

 16 Commissioner Sommers. 

 17 COMMISSIONER SOMMERS: Thank you, 

 18 Commissioner Dunn. Good morning. 

 19 As I think most all of you know, 

 20 Commissioner Dunn's term expires in June and the 

 21 White House has nominated his replacement. So 

 22 today at this Agricultural Advisory Committee 
 12 

 1 meeting, whether or not he ends up chairing 

 2 another one or not, I feel that it's appropriate 

 3 to echo the chairman's thanks to Commissioner Dunn 

 4 for his leadership, especially on the issues 

 5 important to the agricultural community and for 

 6 this advisory committee. I seek his advice on 

 7 many issues, but certainly these issues 

 8 particularly I will miss his advice and counsel. 

 9 I think that the group and the groups 

 10 represented around this table are the groups that 

 11 have traditionally been the ones advising the CFTC 

 12 on issues since the creation of this commission. 

 13 And while we were riding new rules implementing 

 14 Dodd-Frank and taking over responsibility for an 

 15 entire new marketplace, we have many people that 

 16 come in to speak to us every day that tell us 

 17 they've never been to the CFTC, they don't know 

 18 much about how we function, but they have a number 

 19 of issues with the proposals that we've done over 

 20 the past nine months. I am particularly heartened 

 21 today to see that some of the most important 

 22 issues that we are tackling in implementing Dodd- 
 13 

 1 Frank are on the agenda today and we're getting 

 2 the advice from our traditional constituency about 

 3 how these proposals will affect you and your 

 4 businesses. 

 5 So thank you, Commissioner Dunn, for a 

 6 great agenda and I really look forward to hearing 

 7 from all the panelists around the room and want to 

 8 say again thank you to Commissioner Dunn for his 

 9 leadership. 

 10 CHAIRMAN DUNN: Thank you, Commissioner 

 11 Sommers. Commissioner Chilton. 

 12 COMMISSIONER CHILTON: Thanks, Mr. 

 13 Chairman. I'll be brief but also echo my 

 14 colleagues' thanks to you. You've done a great 

 15 job at all of these Ag Advisory Commission 

 16 Committee meetings, Mike, and your staff has done 

 17 great. They're always well put together. Jason, 

 18 Nicole, and Bob did a great job on this one, too. 

 19 And thank you for doing it. I know it's often a 

 20 thankless chore. 

 21 A couple of years ago, April 22, 2008, 

 22 we had one of these and it was right when prices 
 14 

 1 started to become somewhat disconnected from 

 2 supply and demand. April 22, 2008. And it was 

 3 shortly after that that a lot of members of 

 4 Congress raised concerns about excessive 

 5 speculation. As we recall, in July, Senator Reed 

 6 offered a bill to deal with excessive speculation, 

 7 defeated on a cloture motion. Later that year the 

 8 House actually passed the bill with bipartisan 

 9 support to deal with excessive speculation. And, 

 10 you know, here we are again in 2009. Congress 

 11 passed Dodd-Frank, told us that we needed to put 

 12 these limits in place. And that's sort of a 

 13 drastic measure. We had the ability to put limits 

 14 in place back in 2008. 

 15 There's a Miranda Lambert song, a 

 16 country song now that talks about taking sort of 

 17 drastic measures. And I view it as sort of a 

 18 drastic measure when Congress has to tell the 

 19 regulators you will do something. And I'm a 

 20 little concerned that we -- I mean, I'm very 

 21 concerned that we haven't put position limits in 

 22 place. I'm a little concerned that some in 
 15 

 1 Congress -- and we've received letters in the last 

 2 couple of weeks, maybe over 100 congressmen and 

 3 senators telling us to implement position limits 

 4 now -- I'm a little concerned that we'll also be 

 5 faced with a drastic measure of Congress telling 

 6 us specifically how to implement position limits. 

 7 It won't have all the bells and whistles on it if 

 8 we get told how to do it in statute. It won't 

 9 have sort of the texture and granular nature that 

 10 I think we need on any rule that's so important. 

 11 So I really hope that we go forward. 

 12 I've talked about it again and again and 

 13 I know I'm like a broken record, particularly to 

 14 my colleagues on this. But we could do spot-month 

 15 position limits right now. We have them in the 

 16 Ags. We need them in Metals. We need them in 

 17 Energy. And I just continually get concerned that 

 18 as we're trying to be deliberative, which I 

 19 appreciate, we're also not moving fast enough on 

 20 putting them in place when Congress gave us this 

 21 deadline. So I think we need to get 'er done. 

 22 And I'm also interested in listening to the 
 16 

 1 Committee members tell us about the ag legacy 

 2 limits. If they should stay the same, if they 

 3 should change. And I know this isn't on the 

 4 agenda and we're not going to probably have enough 

 5 time to get to it, but I've been contacted by a 

 6 lot in the ag community and a couple this week, 

 7 raising some concerns about something that a lot 

 8 of us have talked about, particularly Commissioner 

 9 O'Malia, and that's the cheetah traders, the 

 10 high-frequency traders, and their impact on 

 11 markets. And there's lots -- there's an open book 

 12 on where we are on these things, but people 

 13 continue to raise concerns about they're having an 

 14 inordinate impact at times, at certain times in 

 15 markets. 

 16 So if people have thoughts on that I'd 

 17 appreciate it also. But thank you very much, 

 18 Commissioner Dunn. Again, I appreciate all your 

 19 work. 

 20 CHAIRMAN DUNN: Thank you, Commissioner 

 21 Chilton. Commissioner O'Malia. 

 22 COMMISSIONER O'MALIA: Let me be the 
 17 

 1 last word on the commissioner at least to echo my 

 2 thanks and appreciation for chairman of this 

 3 subcommittee and Commissioner Dunn's hard work and 

 4 leadership. He is my hall mate just down the hall 

 5 and I rely on his counsel frequently, especially 

 6 on these issues and other issues regarding the 

 7 Commission. So I can't express how much I 

 8 appreciate your support, your guidance, and your 

 9 counsel working here and your years of service to 

 10 this nation which we should all be grateful. 

 11 I'd like to thank you for hosting 

 12 today's meeting of the Agricultural Advisory 

 13 Committee. I look forward to the staff 

 14 presentations and a healthy discussion on each of 

 15 the areas that you recommended. And I appreciate 

 16 the chairman's desire to just open this up for 

 17 what the Ag Advisory Committee would like to talk 

 18 about. I don't ever think it's a bad idea to take 

 19 the time and stop and reassess where we're going 

 20 in order to make sure we are still moving in the 

 21 right direction, especially if we don't have a 

 22 roadmap. 
 18 

 1 A few weeks ago, the CFTC and the SEC 

 2 held a joint staff roundtable to discuss the 

 3 implementation process. We heard from all of the 

 4 members and participants. Very thoughtful 

 5 comments. And it was abundantly clear to me that 

 6 all the market participants are ready and willing 

 7 to comply with the rules but their capacity to do 

 8 so depends largely on the Commission's sharing its 

 9 implementation strategy. 

 10 I heard the same message over and over 

 11 again at this roundtable. Market participants 

 12 need an implementation strategy to make necessary 

 13 investments, hiring decisions, and reorganizations 

 14 in their companies to comply with the rules. 

 15 Despite the roundtable, the Commission has yet to 

 16 commit to drafting a comprehensive schedule for 

 17 sequencing of final rulemakings or an 

 18 implementation plan. I think it's time we 

 19 answered the call and let everyone know what we 

 20 intend to do and how we intend to do it. I will 

 21 continue to recommend the commissioner release a 

 22 comprehensive schedule on the sequencing of the 
 19 

 1 final rulemaking and a proposed implementation 

 2 plan in the federal register. After we receive 

 3 public comment, then we should release a final 

 4 schedule to the public. I believe this small 

 5 effort on the Commission's part will bring 

 6 transparency to the rulemaking process. 

 7 I'd also like to take this opportunity 

 8 to request of the full commission chairman to hold 

 9 a staff roundtable to discuss the swap dealer 

 10 proposal. I have publicly stated that I believe 

 11 the definition is too broad and the exceptions are 

 12 too narrow. The Commitment letter seemed to 

 13 support this as well. I appreciate a recent 

 14 effort to tackle individual sag, actually for the 

 15 second time, complicated issue. My compliments to 

 16 the chairman for taking the opportunity and our 

 17 pause to have that meeting. Next week? 

 18 CHAIRMAN DUNN: I think it's June 3rd. 

 19 COMMISSIONER O'MALIA: June 3rd? 

 20 Another great opportunity to get participants to 

 21 discuss the ramifications of these rules. And I 

 22 greatly appreciate that. 
 20 

 1 This is -- the swap dealer rulemaking is 

 2 an extremely important rulemaking as it relates to 

 3 who is and who is not subject to capital margin 

 4 rules which we'll discuss here among others. I 

 5 believe that a roundtable is necessary to hear 

 6 from the public and those entities that believe 

 7 they will be subject to regulation under the new 

 8 dealer rule. 

 9 Now, Chairman Dunn, a year and a half 

 10 ago I attended my first Agricultural Advisory 

 11 Committee meeting. It was my second or third week 

 12 on the job, my first public appearances, and I was 

 13 terrified we were taking on the easy topic of the 

 14 convergence in the wheat contract, which I had 

 15 very little knowledge of at the time. I was 

 16 impressed by the body of work that this committee 

 17 produced to uncover the fundamental flaws in the 

 18 wheat contract and offered a range of options. 

 19 Again, I'm pleased to have you chosen to focus on 

 20 the needs of the agriculture community, a group 

 21 that truly embodies end-users and who pose the 

 22 least amount of systemic risk but could pay a very 
 21 

 1 high price as a result of the proposed reforms 

 2 mandated under Dodd-Frank. I appreciate your 

 3 willingness to organize this forum to discuss 

 4 these important topics, and I look forward to our 

 5 presentations from staff and the discussion of the 

 6 members. Thank you again. 

 7 CHAIRMAN DUNN: Thank you, Commissioner 

 8 O'Malia for all the kind words I've gotten on my 

 9 advice and counsel. Let me remind everyone I get 

 10 that back fourfold, so I appreciate my fellow 

 11 commissioners. 

 12 If I could get the Advisory Committee to 

 13 introduce themselves and who they represent. And 

 14 Kevin, if I could start with you, please. 

 15 MR. NATZ: Kevin Natz with the National 

 16 Council Farmer Cooperatives. 

 17 MR. SOMBKE: Doug Sombke with National 

 18 Farmers Union. 

 19 MR. KEMP: Todd Kemp with the National 

 20 Grain and Feed Association and I'm sitting in this 

 21 morning for Matt Bruns, who is our regular 

 22 contributor to the Ag Advisory Committee. 
 22 

 1 MR. HICKS: Edgar Hicks, Nebraska 

 2 Grange. National Grange. I represent Nebraska. 

 3 MR. CRYAN: Roger Cryan with the 

 4 National Milk Producers Federation. 

 5 MR. DIERKS: Neil Dierks. I'm the 

 6 National Pork Producers Council staff. 

 7 MR. DINEEN: Bob Dineen with the 

 8 Renewable Fuels Association. 

 9 MR. CLARK: Fred Clark on behalf of the 

 10 U.S. Rice Producers Association. 

 11 MR. LANGLEY: Reece Langley, USA Rice 

 12 Federation. 

 13 MR. BOONE: Robbie Boone, Farm Credit 

 14 Council. 

 15 MS. PETERSON: Dana Peterson, National 

 16 Association of Wheat Growers. 

 17 MR. SCANLAN: Mark Scanlan, the 

 18 Independent Community Bankers of America. 

 19 MR. COCHRAN: Christine Cochran with the 

 20 Commodity Markets Council. But Jason Ungar will 

 21 be representing us once he arrives. 

 22 MR. LEA: I'm Jordan Lea. I'm 
 23 

 1 representing American Cotton Shippers. 

 2 MS. PRESTON: Diana Preston with the 

 3 American Bankers Association. 

 4 MR. WANDS: Hayden Wands with the 

 5 American Bakers Association. 

 6 CHAIRMAN DUNN: Thank you very much. 

 7 Let me introduce a couple of folks that are here 

 8 in our audience. Representing ranking member 

 9 Collin Peterson from the House Agricultural 

 10 Committee, Sharon Josephson. If you would stand 

 11 up, please. 

 12 And from the Senate Agricultural 

 13 Committee, Russ Bayhem. Am I saying that right, 

 14 Russ? 

 15 MR. BAYHEM: Yeah. 

 16 CHAIRMAN DUNN: Who is a new legislative 

 17 fellow on the Senate Agricultural Committee. So 

 18 everybody, keep your eye on him. And then Sharon 

 19 as well. 

 20 Is there anybody else here from the Hill 

 21 that I missed? 

 22 We also have representatives from the 
 24 

 1 various exchanges. And if they'd like to rise and 

 2 identify themselves. David, if I could start with 

 3 you. Anyone else from the exchanges here? Fine. 

 4 Let's then begin with our first panel. 

 5 And this is kind of an overview that we're going 

 6 to be getting on what's going on and a little 

 7 tie-up of some of the past business we've had on 

 8 convergence. And if I can please get Dave Amato, 

 9 who is the director of Agricultural Contracts, 

 10 Market Surveillance branch. Please give your 

 11 presentation, David. 

 12 MR. AMATO: Thank you, Commissioner 

 13 Dunn. As Commissioner Dunn just mentioned, I've 

 14 been asked to talk about current ag issues. We're 

 15 going to talk a little bit about prices, a little 

 16 bit about the flood, and finally, convergence. 

 17 I'd like to thank the AAC for this 

 18 opportunity to speak to you. And just to 

 19 reiterate what everyone has said about 

 20 Commissioner Dunn, thank you for all you've done. 

 21 You've been a great advocate for the ag community 

 22 and especially on the convergence issue. I think 
 25 

 1 a lot of headway was made because of your efforts. 

 2 So it's much appreciated. 

 3 To begin, this first chart is -- I'll 

 4 look at mostly the grains and we also have cotton 

 5 on this chart. Basically, nearby prices are 

 6 strong across the board for all these different 

 7 commodities. However, besides cotton and corn 

 8 which have had recent record highs hit, we're very 

 9 far away from the levels that we saw in 2008. 

 10 However, there's a lot of fundamentals that play, 

 11 a lot of weather issues. The flood issue. 

 12 There's a lot of impact on the market coming up, 

 13 especially this summer, that could have a big 

 14 impact on prices. And most of the fundamentals 

 15 are bullish right now. We also have this very low 

 16 interest rate environment and a weak dollar, which 

 17 many economists will say will have an impact on 

 18 commodity prices. 

 19 Just to highlight the corn, which hit a 

 20 nearby high back on April 11th, we're looking at 

 21 15-year lows for the ending stocks. Stocks use 

 22 ratio is also at a 15-year low. The ending stocks 
 26 

 1 translate to about a 20-day supply of old crop 

 2 corn when we start the new crop year for the 

 3 2011-2012 year. Cotton, also a very similar type 

 4 of fundamentals. We have the lowest ending stocks 

 5 since 1960. India, the second largest producer, 

 6 has put a restriction on exports of cotton. And 

 7 China, the largest producer, importer, and textile 

 8 manufacturer in the world, is forecast to import 

 9 about 40 percent more cotton than last year, and 

 10 it's expected about half of that to come from the 

 11 United States. 

 12 So we're not anywhere near where we've 

 13 been in 2008 in terms of the ag community in 

 14 general, but we definitely have bullish 

 15 fundamentals. And with some of the weather and 

 16 flood situations, things could definitely get even 

 17 more bullish. 

 18 Taking a look at the next graphic, this 

 19 is a look at corn historic volatility. This is 

 20 only the historic volatility in the month of 

 21 April. And historic volatility is a measure of 

 22 how much prices have changed during the month. 
 27 

 1 It's computed as an annualized standard deviation 

 2 of the percentage change in daily price. April, 

 3 actually if you look at all the months, April is 

 4 below the mean volatility of all the months. 

 5 July, if we had put that up, would be the most 

 6 volatile and that seems very intuitive because 

 7 it's a weather -- summer weather month and it's of 

 8 big importance in terms of the growing season. 

 9 There's been a general upswing in 

 10 volatility over time while at the same time we've 

 11 seen absolute price levels rise considerably. 

 12 This graph goes all the way back to the '80s. 

 13 Obviously, in the '80s and '90s, early '90s, we 

 14 had prices in the $2.00-$2.50 range, and if we go 

 15 all the way up to recent times today you're seeing 

 16 prices close to almost $8.00. So prices have 

 17 risen considerably, and also price limits have 

 18 been raised considerably over time. In the '90s 

 19 we had 10 cent limits. That was raised to 12 

 20 cents. Then in 2002, we raised it to -- or I 

 21 should say the Board of Trade raised it to 20 

 22 cents. And then 30 cents in 2008. 
 28 

 1 One final little piece of information on 

 2 this graph. I took a look at the daily price 

 3 moves from 2007 to 2011 for the April corn 

 4 contract. And we had an average dial move of 

 5 about 8-1/4 cents. So obviously that is -- when 

 6 you look back at where the price limits were back 

 7 in the '90s, a 10 cent limit, to have an 8 cent 

 8 move on average every day just shows you how 

 9 volatile the corn market has been. That 

 10 volatility has corresponded with years where we've 

 11 had bullish fundamentals and high prices. 

 12 The next graphic takes a look at some of 

 13 the planting progress and the conditions. 

 14 Obviously, we've had a tremendous amount of 

 15 precipitation this spring, especially in the 

 16 eastern corn belt. And we've also had very, very 

 17 cool weather. I'm from Chicago and we had 

 18 absolutely no spring. It's basically been like 

 19 November for the entire spring. So that's going 

 20 to have a big impact on the corn crop. 

 21 If you look at the 63 percent for the 

 22 completed progress, that doesn't look so bad next 
 29 

 1 to the five-year average of 75 percent. But I 

 2 broke it out there and you can see. The eastern 

 3 corn belt is only at 35 percent complete, where 

 4 the western corn belt is at 85 percent. So we 

 5 have sort of a dichotomy in the corn belt there. 

 6 And the other thing I wanted to 

 7 highlight is the winter wheat. We had very, very 

 8 poor conditions. The poor to fair conditions is 

 9 at 45 percent. The five-year average is only 

 10 eight percent. So that does not bode well in 

 11 terms of a quality crop. And that's going to be 

 12 very bullish going forward. We already said that 

 13 April was extremely volatile in 2011. With the 

 14 slow planting, and if we get any weather scares -- 

 15 and we always get weather scares during the 

 16 growing season -- we could see much more 

 17 volatility going forward. 

 18 This next graphic is the Mississippi 

 19 watershed. This view will show you the rivers 

 20 that flow into the Mississippi. I drew in the red 

 21 to show you where we had the flood. Obviously, 

 22 the biggest impact is going to be the Mississippi 
 30 

 1 River down towards the gulf where most of the 

 2 exports are shipped out. The causes for the flood 

 3 is we've had high levels of snow cover in the 

 4 upper Midwest. That led to a high snow melt and 

 5 runoff. In April, like I said, the rainfall in 

 6 the northern tier of the corn belt and the Great 

 7 Plains combined with that snow melt. So we have 

 8 the combination of rain and snow melt to the 

 9 tributaries of the Ohio, Missouri, upper 

 10 Mississippi Rivers, that led to a surge at Cairo, 

 11 Illinois. Cairo, Illinois is right where that 

 12 Birds Point levee is on the map there. 

 13 Between May 2nd and 6th, the Army Corps 

 14 of Engineers destroyed the levee at Birds Point. 

 15 This was an attempt to prevent the flooding of 

 16 Cairo. This is only the second time that the 

 17 floodway has ever been opened. On May 9th, the 

 18 Army Corps of Engineers opened the Bonnet Carre 

 19 spillway to release water from the Mississippi 

 20 River. This is going to allow water to reach the 

 21 Gulf of Mexico. And on May 14th, the Army Corps 

 22 of Engineers opened the Morganza Spillway north of 
 31 

 1 Baton Rouge to allow potentially about three 

 2 million acres in the Atchafalaya River basin to 

 3 flood. This is the first time in the history of 

 4 the country that all three of these flood control 

 5 devices have been used together, so obviously 

 6 we're in a very, very serious situation. 

 7 Taking a look at some of the 

 8 agricultural impact of this flood, again, this is 

 9 very, very preliminary. I have a feeling that 

 10 these numbers will change and probably get worse 

 11 in a lot of cases. You also have the human 

 12 element of people's homes being flooded, possible 

 13 loss of life, and things like that. But this is 

 14 just focusing on some of the initial agricultural 

 15 impacts of the flood. 

 16 Barges are not allowed to move south of 

 17 Natchez, Mississippi, and no grain vessel loading 

 18 for a while. Obviously, this could cost tens of 

 19 millions of dollars per day, so that could have a 

 20 huge economic impact on the country. The 

 21 different farm bureaus are estimating two million 

 22 acres of land in Arkansas, Tennessee, and 
 32 

 1 Mississippi are flooded or under flood threat. In 

 2 rice, in Arkansas, there are projections that 

 3 nearly 300,000 acres or about 21 percent of the 

 4 Arkansas planted acres could be lost. That would 

 5 be about 10 percent of total U.S. rice acres. 

 6 Between Arkansas, Louisiana, and Missouri, there's 

 7 a potential 40 percent reduction from last year's 

 8 planted rice acreage. 

 9 We see similar things happening in 

 10 winter wheat in Arkansas where about 120,000 of 

 11 550,000 projected planted acres will be abandoned. 

 12 That's a loss of millions and millions of dollars. 

 13 Cotton, again preliminary numbers, say 66 million. 

 14 That's expected to get a lot bigger. And finally, 

 15 with the closing of barges not being allowed to 

 16 pass Natchez we're seeing basically the export 

 17 market being greatly, greatly reduced. So this is 

 18 going to have a big impact going forward. 

 19 To take it and look at how that's 

 20 affecting actual futures contracts, this is a 

 21 special bulletin that was put out by the CME that 

 22 talks about these sorts of act of God kind of 
 33 

 1 situations and the contingency plans that are 

 2 made. Basically, with the flooding that's taking 

 3 place, load-outs are definitely affected on the 

 4 Ohio River and the St. Louis area. And so 

 5 different commercial firms have had to look and 

 6 negotiate different alternatives besides the 

 7 normal planned load-out that was expected to take 

 8 place. So again, not only is it affecting things 

 9 way down the Mississippi River and affecting 

 10 exports, it's also having an impact on our futures 

 11 contracts directly as well. 

 12 The final topic I'd like to talk about 

 13 is the convergence issue. Both Chicago's soft red 

 14 winter, Kansas hard red winter, and the Chicago 

 15 Board of Trade rough rice contracts have had 

 16 convergence problems. The standard to which the 

 17 CFTC holds the exchanges is to see that cash and 

 18 futures prices come together at the par points 

 19 upon or near contract expiration. Convergence is 

 20 core to the mission of the CFTC and it goes to the 

 21 heart of public confidence and price discovery and 

 22 risk management functions of future markets. The 
 34 

 1 problems have been more protracted in the soft red 

 2 winter wheat market, but in both wheat cases we've 

 3 seen the basis deteriorate as the calendar spreads 

 4 approach financial full carry. 

 5 In this scenario it's advantageous to 

 6 hold a delivery instrument from one contract 

 7 expiration to the next, earning a small return on 

 8 the spread. Load-outs are extremely unlikely to 

 9 occur when futures is above cash. Elevators are 

 10 hesitant to issue more shipping certificates or 

 11 warehouse receipts in these full carry markets as 

 12 they know the grain will not move for months and 

 13 the commercial firm will lose control of a portion 

 14 of their elevator space. At this point, the 

 15 arbitrage link between cash and futures appears to 

 16 be broken. 

 17 Why is this an important issue? There 

 18 are several side effects that happen when you have 

 19 poor convergence. The main one, futures markets 

 20 are supposed to, at their essence, be a price 

 21 discovery mechanism. When you have futures prices 

 22 that are 80, 100, or even 150 cents over the cash 
 35 

 1 market at par points like we've seen in the past 

 2 at Kansas City on the Kansas City Board of Trade 

 3 or at Toledo on the CBOT, price discovery is 

 4 obviously very weak. We look to the futures for 

 5 price discovery but at times the futures price at 

 6 both exchanges had seemed to be decoupled from the 

 7 physical cash market. 

 8 The second point is the hedge 

 9 effectiveness. Hedge effectiveness is hampered 

 10 when the basis loses its predictability and 

 11 producers are dealing with a very volatile basis 

 12 that becomes much more difficult for them to 

 13 hedge. 

 14 The third point, which is a very big 

 15 deal obviously to market surveillance at the CFTC, 

 16 is the potential for market manipulation. When 

 17 you have contracts that are not performing or not 

 18 sending out the right price signals it can lead to 

 19 actions that can appear economic and that puts the 

 20 market surveillance staff in situations where 

 21 investigations have to take place. 

 22 The fourth point would be the forward 
 36 

 1 contracting. A volatile basis and poor 

 2 convergence make some elevators not willing to 

 3 forward contract. WE did several interviews in 

 4 Kansas back in July of last year and talked to 

 5 some banks and different credit agencies. And 

 6 that ties into the fifth point, an agricultural 

 7 lending crunch. The volatile basis has forced 

 8 some banks to lend less and/or require more 

 9 collateral. 

 10 And finally, something that the USDA 

 11 deals with is the crop insurance program. When 

 12 you have the USDA using futures prices to 

 13 calculate estimated producer revenue and futures 

 14 are well above cash, it's an overstatement of the 

 15 projected revenue that a farmer is actually going 

 16 to be receiving. So again, that makes that 

 17 program much less effective. 

 18 In short, this is a huge issue for the 

 19 ag community, and that's why the CFTC has invested 

 20 so much time and effort to address the problem. 

 21 And what has been done to address the 

 22 problem is the following slide. Over a two and a 
 37 

 1 half year period, the CFTC has worked with the 

 2 CBOT through the Ag Advisory Committee and its 

 3 subcommittee on convergence. And the CFTC has 

 4 approved the following changes: In July of 2009, 

 5 we saw an expansion of the delivery territory, 

 6 quality specifications, and harvest premium 

 7 storage rate. In July of 2010, we saw the 

 8 variable storage mechanism for the CBOT take 

 9 effect. And basically, what the VSR does is it 

 10 triggers a higher storage rate when the spread 

 11 between the near and next to expire contract is 

 12 greater than 80 percent of financial full carry. 

 13 It also triggers a decrease in storage costs when 

 14 the spread is less than 50 percent. Currently, 

 15 the storage rate is 20 cents per bushel. 

 16 Kansas City also has had contract 

 17 changes proposed, and they will go into effect in 

 18 September of this year. The CFTC also worked 

 19 extensively with the Kansas City Board of Trade 

 20 and their Wheat Contract Committee last summer. 

 21 There was work being done with the Ag Advisory 

 22 Committee. There were numerous staff visits by 
 38 

 1 market surveillance working with the exchanges. 

 2 And there were also several commissioner visits 

 3 from the CFTC and even a chairman visit back in 

 4 July of 2010. 

 5 But as I said, the KCBOT has submitted 

 6 these contract changes which include increasing 

 7 the base storage rate 30 percent to six cents, 

 8 instituting a harvest premium storage rate of nine 

 9 cents, requiring monthly payment of storage, 

 10 establishing a power protein level of 11 percent, 

 11 and tightening the specifications on vomitoxin. 

 12 While these changes represent a 

 13 significant increase in the storage rates and will 

 14 likely result in improvement in cash futures 

 15 convergence, the CFTC will continue to monitor the 

 16 situation carefully to discern whether additional 

 17 changes are necessary. It's obviously much, much 

 18 too early to judge what kind of impact this will 

 19 have but I think these moves should have an impact 

 20 and should help to improve the contract. 

 21 And finally, the rice contract, which 

 22 hasn't gotten as much attention as the two wheats, 
 39 

 1 but we see a contract change being instituted in 

 2 September. Currently, the discounts in premiums 

 3 are based off of futures prices. With the rule 

 4 change, those discounts and premiums will be based 

 5 off a USDA five-year loan rate. And this rule 

 6 change should help to remove some of the 

 7 uncertainty of delivery values of rice, and in 

 8 fact, help the contract. 

 9 The CFTC continues to monitor the base 

 10 levels and convergence, particularly with respect 

 11 to the calendar spreads, carrying charges, changes 

 12 to world supply and demand, changes in absolute 

 13 and relative levels of participation by the 

 14 different market segments, whether they 

 15 commercials, index funds, or managed money. I'd 

 16 like to reiterate that although the CFTC was 

 17 assertive in drawing attention to the convergence 

 18 issue and the need for action, the CFTC did not 

 19 create or recommend the contract remedy for either 

 20 exchange. The VSR was designed within the CME 

 21 product research department and the KCBOT changes 

 22 were devised by their Wheat Contract Committee. 
 40 

 1 The following graphs give a little bit 

 2 more detail of what we've been looking at and 

 3 monitoring over time. What this graph is is the 

 4 Chicago Board of Trade soft red winter wheat 

 5 contract. The left side of the Y- axis in blue is 

 6 the basis on first delivery day and cents per 

 7 bushel. The right side of the Y-axis in red is 

 8 the percentage of full carry. As I mentioned 

 9 before, in general, as the percentage of full 

 10 carry goes above 80 percent, and especially as it 

 11 approaches 100 percent of fully carry, we tend to 

 12 have a weak basis. In these full carry markets, 

 13 some sorts deliver as futures is above cash, so 

 14 the futures market is the short's best sale. 

 15 Under non- full carry scenarios though -- I'm 

 16 sorry, under non-full carry scenarios these 

 17 deliveries would cause downward pressure on 

 18 futures prices. However, in fully carry markets, 

 19 longs are perfectly willing to take the deliveries 

 20 as their costs are being covered and oftentimes a 

 21 guaranteed profit as well. 

 22 In these instances, the long is looking 
 41 

 1 at the weak futures market like a financial 

 2 instrument instead of just grain. The long can 

 3 earn two to three percent guaranteed return, much 

 4 better than a short-term treasury and have all of 

 5 their costs covered. In the case of a market 

 6 disruption, they have what amounts to a free call 

 7 on the grain. 

 8 This graph shows that between 2008 -- 

 9 May of 2008 and May of 2010, the CBOT wheat 

 10 contract experienced very poor convergence and a 

 11 weak basis. The basis from July 2010 through the 

 12 May 2011 contract has showed marked improvement 

 13 and we've had good to decent convergence in four 

 14 of the five expirations. And that's since the VSR 

 15 has gone into effect. September, obviously, you 

 16 can see September of 2010, is the outlier there. 

 17 The reason why we tend to have bad convergence in 

 18 the September contracts and that's the case going 

 19 back through history, at that time with the corn 

 20 crop coming online, a lot of elevators drastically 

 21 drop their bids or make very, very low bids for 

 22 wheat. And we often see September being the worst 
 42 

 1 month for convergence. 

 2 We believe that the VSR has helped 

 3 convergence, but we also had a 40 percent smaller 

 4 soft red winter wheat crop from the 2010 -- I'm 

 5 sorry, from 2009 to 2010. So with a much smaller 

 6 crop it's hard to say how much of the impact is 

 7 the VSR but we have seen an improvement in the 

 8 basis. Going forward we're going to obviously 

 9 need more crop years to fully judge the 

 10 effectiveness of this VSR. The contracts at both 

 11 Chicago and Kansas City have tended to converge 

 12 when we've had either tight markets or more normal 

 13 supply and demand. The problems have come when 

 14 we've had these situations of oversupply. 

 15 Oversupply has led to these convergence problems. 

 16 An effective contract should be able to work no 

 17 matter what the fundamentals are, whether we have 

 18 a tight market or if we have a very large supply. 

 19 The Kansas City situation is very, very 

 20 similar, and this set-up on the graph is exactly 

 21 the same. The left axis is the basis on first 

 22 delivery day. The record is the percentage of 
 43 

 1 fully carry. In general, like I said, as we go 

 2 above 80 percent and approach 100 percent, we have 

 3 the wheat basis. The last nine expirations at 

 4 Kansas City have had very weak basis and poor 

 5 convergence. The May that went off the board just 

 6 recently on the 14th went off at 75 under on first 

 7 delivery day. 

 8 The Kansas City rule changes to improve 

 9 converge go into effect with the September 

 10 contract. There's a lot of confidence that that 

 11 will help, but obviously we haven't seen the 

 12 contract changes go into effect so we're going to 

 13 need time to evaluate that. It's much too soon to 

 14 judge. 

 15 And then the final graph that I have is 

 16 the same concept, 10-year look at rough rice. 

 17 Rough rice is a lot more difficult to really get a 

 18 handle on convergence because cash prices are much 

 19 harder to come by. It's a much more think market. 

 20 It's not liquid the way we see the wheats and the 

 21 corns and the soybeans. However, the same general 

 22 concept we're seeing, especially over the last 
 44 

 1 year. We're seeing very, very poor convergence. 

 2 You can see at several of those expirations in the 

 3 last year or so we've had basis levels $3 under or 

 4 $4 under. And the current May contract that went 

 5 off the board on the 14th went off the board $3.50 

 6 under the future. 

 7 Currently, we have a very large, poor 

 8 quality crop and again, as I said, that's what we 

 9 have observed pretty much across the board of all 

 10 the grain contracts. When you have large 

 11 supplies, we've tended to have the poor 

 12 convergence. It's our hope to have contracts that 

 13 can work no matter what the supply and demand 

 14 situation is. Next year's crop is expected to be 

 15 much smaller due to the flood. The USDA is 

 16 already showing an expected 17 percent decrease in 

 17 plantings. With the flood that's probably going 

 18 to be much, much worse. So we should have a 

 19 tighter crop situation and the convergence problem 

 20 will probably go away but that's only because of 

 21 the fundamentals change, not necessarily because 

 22 of any contract change. 
 45 

 1 The CFTC has been conducting trader 

 2 interviews with the rice industry in coordination 

 3 with market surveillance and product review as a 

 4 preliminary first step to address the convergence 

 5 issue. Overall, the work of the AAC and its 

 6 Convergence Subcommittee have had a positive 

 7 impact on convergence and I think going forward, 

 8 especially for the wheats, I think we're going to 

 9 see continued improvement. 

 10 And that's all I have. Thank you. 

 11 CHAIRMAN DUNN: Thank you, David. David 

 12 is one of the three Davids that I use out of the 

 13 Chicago office. I call them the Daves, and they 

 14 have just been invaluable to me during my tenure 

 15 here. So I appreciate this briefing, but all the 

 16 work that you've done in the past. 

 17 I also want to thank you for giving us 

 18 that quick overview of what's going on in the 

 19 agricultural sector, but more importantly that 

 20 very succinct briefing here of convergence and why 

 21 it is important to us as we see it in the 

 22 marketplace. And I also want to thank the 
 46 

 1 Agricultural Advisory Committee for working with 

 2 the Commission and working with the exchanges in 

 3 coming up to these fixes on convergence. It has 

 4 been an effort where I have seen the industry as a 

 5 whole dig in and work together. Although they 

 6 have some conflicting views on these things, 

 7 they've done a very, very good job and the 

 8 exchanges have been very open to their 

 9 suggestions. 

 10 With that I will open it up to the Ag 

 11 Advisory Committee for any comments or questions 

 12 to David on his briefing. 

 13 MR. AMATO: Commissioners. 

 14 CHAIRMAN DUNN: David, you've done your 

 15 job well. 

 16 COMMISSIONER GENSLER: I'm just struck 

 17 nobody's asking about convergence. I just want to 

 18 associate myself. I think your comments on page 

 19 eight and nine really got to the heart of why 

 20 convergence matters. It's really to the 

 21 confidence as to whether the hedgers can use the 

 22 product, futures, and have the confidence that 
 47 

 1 it's an open, transparent market that prices their 

 2 product. And if they wish to they could deliver 

 3 into the contract if there's this wide lack of 

 4 convergence. So good work, Dave. 

 5 MR. AMATO: Thank you. 

 6 COMMISSIONER GENSLER: I think there's 

 7 still more work to do on some of the products to 

 8 get to convergence. 

 9 MR. AMATO: Yes. 

 10 CHAIRMAN DUNN: Thank you again. Let's 

 11 then get panel number two in place. Steve 

 12 Sherrod, who is the acting director of our Market 

 13 Surveillance and David Van Wagner, who is chief 

 14 counsel. 

 15 MR. RADHAKRISHNAN: I thought I heard 

 16 Commissioner Chilton. He wanted to say something. 

 17 CHAIRMAN DUNN: I'm sorry. 

 18 Mr. CHILTON: Yeah, actually, since you 

 19 -- thank you, Ananda. And since you're still 

 20 there, Dave, I was struck by this chart on corn 

 21 historical volatility in April. You know, it 

 22 looks -- of 30 years, we had the third highest 
 48 

 1 volatility and I'm curious of two things. One, 

 2 Dave, is if we looked at that for, you know, wheat 

 3 and beans and rice, would it look similar? That's 

 4 the first part of the question. And the second 

 5 thing is, and I want to make sure I don't put 

 6 words in your mouth, but what I thought you said 

 7 in there in the middle was that the longs, and 

 8 these are folks that have been called 

 9 massive-passives, that they were looking at wheat 

 10 like a financial instrument. Maybe this is what 

 11 people call the financialization of commodities. 

 12 And so my question is, one, would it look the same 

 13 for rice, wheat, and beans, this volatility chart? 

 14 And two, do you think this financialization of 

 15 commodities that you were talking about correlates 

 16 with any of this in the more recent times -- the 

 17 2007 and this year, 2011? I'll just listen there. 

 18 Thank you very much. Thank you again, 

 19 Ananda. 

 20 MR. AMATO: Sure. I would say -- I 

 21 can't speak to rice because I have not looked at 

 22 rice. But soybeans would look similar. It has a 
 49 

 1 similar crop year. For wheat, it may not be April 

 2 but the general trend is for the grains that we 

 3 have had increased volatility. There's no doubt. 

 4 And I would imagine rice would be similar but like 

 5 I said, I have not directly looked at rice. 

 6 When I was talking about the financial 

 7 sort of aspect of the wheat as opposed to people 

 8 thinking of it as grain, I was talking about 

 9 people who decide to take delivery. So that could 

 10 be longs of any stripe. It doesn't have to 

 11 necessarily be what we would define as sort of the 

 12 index traders. And in fact, those index traders 

 13 tend to roll. And that's public knowledge. They 

 14 tend to roll before we get into the delivery 

 15 period. So these would be either commercials or 

 16 it could be a speculator taking advantage of this 

 17 full carry situation. 

 18 So I hope that answers your question. 

 19 COMMISSIONER GENSLER: Yeah. Thank you, 

 20 Dave. I appreciate it. Thanks for your 

 21 indulgence, Commissioner Dunn. 

 22 CHAIRMAN DUNN: Sure. Thank you. 
 50 

 1 MR. HICKS: Commissioner Dunn? 

 2 CHAIRMAN DUNN: Edgar. 

 3 MR. HICKS: I think part of the reason 

 4 why we haven't had many comments is this issue of 

 5 convergence goes to the heart of all the issues 

 6 that we have to address of volatility. And coming 

 7 from Nebraska and Kansas, my farmers were somewhat 

 8 losing confidence in the system, I guess. So if 

 9 we can't solve the issue of convergence, how are 

 10 we going to address the issues, you know, the 

 11 margin requirements and volatility? Because my 

 12 farmers are starting to think that this, too, is 

 13 becoming a speculative vehicle. And so, you know, 

 14 I don't have the answer but it just feels like -- 

 15 I feel less -- I feel less of the ability of the 

 16 Committee to -- the advisory committee to be of 

 17 service less this time than I did when I first 

 18 came last year. So we can't give up but it really 

 19 is a struggle. 

 20 And so -- and what I'm really worried 

 21 about is that as our bankers in rural communities 

 22 challenge our farmers when we most need the use of 
 51 

 1 the futures market, and so it's kind of hard to 

 2 have a comment. I appreciate the work you put in 

 3 it but, you know, how do we address the problem, I 

 4 guess. 

 5 CHAIRMAN DUNN: Well, Edgar, I think 

 6 you've kind of hit the nail on the head. And for 

 7 you -- Edgar represents the National Grange but 

 8 he's located in the Omaha area. Is it Omaha or 

 9 Lincoln? 

 10 MR. HICKS: It's either one. 

 11 CHAIRMAN DUNN: Omaha. But we've seen a 

 12 shift because originally the concern was on the 

 13 Kansas City Board of Trade wheat contract where we 

 14 first had the convergence problems. And 

 15 certainly, what David highlighted here of why it 

 16 matters to us or the types of things that you're 

 17 seeing. And now we have had a similar problem in 

 18 the Kansas City Board of Trade with their wheat 

 19 contract. And it really has hit home more for 

 20 produces in your particular area right now. And I 

 21 can understand that they've probably been a lot 

 22 more vocal to you than they would when it was on 
 52 

 1 the Chicago contract. But I feel that what this 

 2 committee has done, what the exchanges have done 

 3 in being open and frankly the Commission as a 

 4 whole. I know I've used this as a bully pulpit, 

 5 my position, as have other commissioners, and I 

 6 feel that there is genuine support out there to 

 7 address this problem and get it correct. And this 

 8 is an ongoing, continuing thing. Long after I'm 

 9 gone after chair of the Ag Advisory Committee 

 10 there will be people following up to see whether 

 11 or not we have found the right solution. And I 

 12 think it's incumbent upon all of you that are 

 13 going to still be members long after I'm gone to 

 14 hold our feet to the fire. 

 15 The one thing that Dave said in his 

 16 presentation is these aren't our contracts. They 

 17 belong to the exchanges. But the exchanges are 

 18 aware that the only -- that you are the customer 

 19 base out there and you have the ultimate control 

 20 of whether or not you're ever going to trade those 

 21 particular contracts. And you want to have them 

 22 have the convergence so that it can be utilized 
 53 

 1 for price discovery and risk mitigation. So I 

 2 appreciate your comments and I think they're right 

 3 spot on. 

 4 MR. CRYAN: Mr. Commissioner, is it me? 

 5 Okay. Commissioner Dunn, I also want to thank you 

 6 for your service. You've been invaluable to the 

 7 agriculture sector in your sensitivity to our 

 8 issues in this job and in your previous jobs. 

 9 On this convergence issue I think it's 

 10 important to recognize that the Dodd-Frank 

 11 regulations and requirements put the convergence 

 12 issue in a whole new light. Under the status quo, 

 13 the Exchange can do what it wants, and as long as 

 14 it's not egregious you say go ahead. If we have 

 15 new regulations that require clearing of all types 

 16 of -- of a very broad category of transactions, 

 17 there's going to be a limited number of exchanges 

 18 and clearing organizations set up to do these 

 19 things. And a lot of actors are going to be 

 20 forced into these transactions with these 

 21 exchanges that you regulate. And all of a sudden 

 22 allowing second best solutions is no longer 
 54 

 1 acceptable. It's going to be much more your 

 2 responsibility to define as nearly perfect a 

 3 solution as you can find in cooperation with the 

 4 exchanges. And the public and the users become 

 5 much more significant stakeholders in the actions 

 6 of the exchange. 

 7 You know, the flip side of that is, of 

 8 course, gets into issues of exemptions for 

 9 end-users and I've talked about this quite a bit. 

 10 I think that's the next topic. There has to be a 

 11 balance. We can't have our cake and eat it too. 

 12 We can't say the exchanges can do it however they 

 13 want and then force everybody to use the 

 14 exchanges. The alternative is to let the 

 15 exchanges do things the way they want to do them 

 16 but leave people an out. And I think that's very 

 17 important. 

 18 Thank you. 

 19 CHAIRMAN DUNN: Thank you, Roger. 

 20 MR. KEMP: One quick comment and it ties 

 21 back into what Edgar was talking about in terms of 

 22 lenders' reactions and impacts on producers. Our 
 55 

 1 industry has been concerned about a credit crunch 

 2 coming again. As commodity values stay high, 

 3 perhaps even go a little bit higher, there is at 

 4 some point a limit on what agribusiness lenders 

 5 can provide to their customers to buy the crop to 

 6 meet margin calls. There are rulemakings under 

 7 way, both in terms of Dodd-Frank and 

 8 implementation. And another good example is the 

 9 daily price limit proposal for CBOT corn. We 

 10 would sure urge the Commission to look carefully 

 11 at those issues in light of the agricultural 

 12 credit situation and in light of -- both points D 

 13 and E up on the screen are really related. 

 14 If it gets to the point where elevators 

 15 are faced with much higher margin calls, much 

 16 higher financial demands, at some point that eats 

 17 into their working capital and at some point it 

 18 will affect their ability to forward contract with 

 19 producers. That would have the effect of reducing 

 20 marketing opportunities for producers which is not 

 21 good certainly for them for our industry or for 

 22 U.S. Agriculture. 
 56 

 1 So we appreciate the recognition of 

 2 those facts and encourage the Commission and this 

 3 committee to keep it in mind. 

 4 CHAIRMAN DUNN: Thank you, Todd. 

 5 MR. WANDS: Commissioner Dunn, the ABA 

 6 also appreciates the comments that Mr. Kemp has 

 7 stated. Financial margin calls on the bakers have 

 8 been moving financial assets away from our core 

 9 businesses to something that we have very little 

 10 control over. And so we want to echo the comments 

 11 on -- the Commission take very serious 

 12 considerations on volatility. 

 13 And Chairman Chilton, to answer your 

 14 question, the ABA did a study on volatility and 

 15 the Chicago Board of Trade wheat on a monthly 

 16 average. And in 2005, January 2005, the monthly 

 17 volatility was 22 percent and in January of 2011, 

 18 the monthly volatility was 45 percent. So it 

 19 echoed the same as in the corn market. 

 20 MR. LEA: Mr. Commissioner, thank you 

 21 again on behalf of the cotton industry for all 

 22 your help and service and having worked with us at 
 57 

 1 our conventions. 

 2 Sort of along the lines of what Edgar 

 3 and Todd were saying, I am actually a cotton 

 4 merchant and if you could chart -- if David could 

 5 chart there would probably be no way the 

 6 volatility and convergence. The two quickly 

 7 divorce themselves. We've been about 175 percent 

 8 of volatility or average volatility in cotton over 

 9 the last year and as we move toward new crop and 

 10 out of a demand- driven cycle, we're quickly 

 11 seeing the market become less dependable. And 

 12 like Edgar said, the producers don't know what to 

 13 say. And as a merchant, my tagline is, well, it 

 14 doesn't matter. You know, here's your cash price. 

 15 It's still a profitable cash price, but 

 16 unfortunately, from a basis standpoint, it doesn't 

 17 illustrate convergence. It probably illustrates 

 18 the opposite of convergence. 

 19 And as an example of what was just said, 

 20 last year for me to hedge 1,000 bales of cotton 

 21 was $7,500 on initial margin with no maintenance 

 22 margin required. This year it's a total of 
 58 

 1 $100,000 just for 1,000 bales. And so if we're 

 2 looking at potentially a 20 million bale crop of 

 3 cotton, you can imagine the capital requirements. 

 4 And what happens, and you heard David mention what 

 5 a dramatically tight situation we're in with the 

 6 stocks relative to cotton and the lack of a 

 7 dependable marketplace, sort of like what Edgar 

 8 was talking about, the more it's seen as a 

 9 speculative tool or the lack of convergence is 

 10 just going to further discourage production 

 11 regardless of where the market price is because 

 12 the two become less and less closely associated. 

 13 CHAIRMAN DUNN: Thank you, Jordan. 

 14 MS. PETERSON: Mr. Chairman, thank you 

 15 again for your service and all that you've done 

 16 for the wheat industry. And thanks again to the 

 17 staff for being so helpful in this convergence 

 18 issue. 

 19 Over the last year and a half since I 

 20 came to the National Association, there's been a 

 21 lot of discussion amongst our growers about what 

 22 should our expectations be in this new market 
 59 

 1 environment. You know, with the convergence 

 2 issues, with the higher prices, everything is 

 3 uncertain for growers. And I think my question to 

 4 you, David, is when you were talking about the 

 5 changes to the contracts and it's too short of a 

 6 time to really tell whether they work, what is an 

 7 adequate amount of time to determine whether 

 8 they've worked? And when do we start looking at 

 9 the next level of surveillance? 

 10 MR. AMATO: I would think -- I would say 

 11 like for the Chicago Board of Trade, those major 

 12 changes went into effect last July. So we're 

 13 almost at a year. Unfortunately, like I mentioned 

 14 in the presentation, we had a dramatic reduction 

 15 in the soft red crop. And as I've said, these 

 16 contracts have worked when we've had small supply. 

 17 So I would argue that you can't really judge the 

 18 VSR. We have improved. Is that the VSR or is 

 19 that a smaller crop? It's probably a little bit 

 20 of both. I think you have to have a more normal 

 21 supply and demand year, an averageish kind of year 

 22 and then we can see if this contract has actually 
 60 

 1 improved. So I think that's the fairest way to 

 2 judge it. 

 3 MS. PETERSON: I think we're all looking 

 4 for a normal year. 

 5 MR. AMATO: Yes. 

 6 MS. DUNN: Dana, I agree with you. I 

 7 just don't know what normal is anymore, 

 8 unfortunately. 

 9 The problem you raised is a legitimate 

 10 problem and something that we've talked about all 

 11 along on convergence. You can't just flip the 

 12 light switch and say we're making a change in this 

 13 particular contract because there are people out 

 14 there that have financial interests in those 

 15 contracts. And again, I want to say the exchanges 

 16 have been very willing to come to the table and to 

 17 offer proposals to us. And some of the proposals 

 18 that were offered earlier on, for instance, with 

 19 the Kansas City Board of Trade, they listened to 

 20 the folks here. They went back and they adjusted 

 21 that. The same thing happened with the Kansas 

 22 City Board of Trade. They made an adjustment and 
 61 

 1 we looked at that through a year's cycle and then 

 2 we -- that really didn't fix it so they came back 

 3 with another fix. 

 4 And it's incumbent upon us to continue 

 5 to stay on top of this so your constituents out 

 6 there can look to the futures market for price 

 7 discovery and risk mitigation. And it's not going 

 8 to be an easy job. There are more and more 

 9 externalities that are going into there. 

 10 Commissioner Chilton talks about what he 

 11 calls the massive-passive. We also look at high 

 12 frequency traders. We look at externalities like 

 13 floods and those types of things. So I don't know 

 14 what a normal year is anymore. But we will 

 15 continue to do it. David and his colleagues in 

 16 our Chicago office are just a wealth of 

 17 information and will continue to work with any of 

 18 you. I know a lot of folks have visited the 

 19 offices and worked with them to get information, 

 20 and the same holds true for our Kansas City 

 21 regional office and our New York office, as well. 

 22 So any other questions or comments? 
 62 

 1 Doug. 

 2 MR. SOMBKE: Mr. Chairman. David. One 

 3 question about the weather issues that you 

 4 indicated in the watershed. I live in the James 

 5 River Valley area in South Dakota where the Big 

 6 Red spot is. And I've been at a number of 

 7 meetings in the last couple of months talking 

 8 about our disaster issue there and they're telling 

 9 us this is the fourth year of a 10-year cycle of 

 10 all this water, so don't expect things to change. 

 11 Is that going to be a good thing for this 

 12 convergence or a bad thing? I mean, Commissioner 

 13 Dunn, you mentioned what is normal anymore. 

 14 MR. AMATO: Well, like I said in the 

 15 presentation, I think contracts -- I think 

 16 everyone, the commissioners would agree and the 

 17 economists at the CFTC would agree, a good 

 18 contract works no matter what the supply and 

 19 demand situation is. I think the problem with the 

 20 contracts in the past is they've tended to work in 

 21 average crop years and when we've had tight supply 

 22 and demand issues it would tend to add the 
 63 

 1 convergence. Whenever we've had oversupplies or 

 2 big grain crops, we haven't seen convergence. 

 3 We've seen the exact opposite. We've, in fact, 

 4 seen divergence and we've seen the approach of 

 5 first delivery day and we're moving in the 

 6 opposite direction. So that's clearly a 

 7 disconnect between the futures and the cash. 

 8 So to answer your question, I would say 

 9 if a contract is designed correctly it should work 

 10 and converge no matter if we have floods, 

 11 droughts, abundant supply, or virtually no supply. 

 12 The cash in futures in a well operating contract 

 13 come together at the power points at first 

 14 delivery day. And by come together I'm not saying 

 15 zero because there's obviously differences, 

 16 delivery costs involved. There sometimes quality 

 17 differentials between the cash and the futures but 

 18 we should definitely be seeing a coming together. 

 19 We shouldn't be seeing this. 

 20 CHAIRMAN DUNN: Okay. 

 21 MR. SOMBKE: One other thing, Chairman, 

 22 I want to also commend you for your past service 
 64 

 1 and I hope this gives you an opportunity to come 

 2 to South Dakota and hunt pheasants a little more. 

 3 CHAIRMAN DUNN: I will, Doug, but you 

 4 know, we do have some in Iowa. 

 5 Let's go to our second panel now if we 

 6 could. And this is Position Limits and Hedge 

 7 Exemptions. And this is two of the things that 

 8 the advisory committee has already started talking 

 9 about. And certainly I look for this to be an 

 10 informative and spirited panel. Steve Sherrod and 

 11 Dave Van Wagner. 

 12 I don't any -- because we've got so much 

 13 pushed into this meeting I don't really have any 

 14 breaks involved in here so feel free to take a 

 15 break at any time. 

 16 MR. LEA: Doug, I've never been to South 

 17 Dakota. 

 18 MR. SHERROD: Good morning. I'm happy 

 19 to be here again to talk about proposed Dodd-Frank 

 20 rulemaking. 

 21 The Commission voted on and published 

 22 for public comment a Notice of Proposed Rulemaking 
 65 

 1 to establish additional federal position limits 

 2 and make a number of proposed changes to the way 

 3 the position limit regime would be applied. We 

 4 received about 12,000 comment letters, so we're 

 5 busy with a staff currently of about 15 people 

 6 trying to work to summarize those comment letters. 

 7 Before the Commission can go to the next step 

 8 implementing position limits by a vote of the 

 9 Commission, the staff needs to prepare the summary 

 10 of the comment letters and then we need to address 

 11 and recommend approaches for the Commissions to 

 12 publish in a final rulemaking. So that's a 

 13 somewhat involved process. We hope to be complete 

 14 with a summary of comments by the end of this 

 15 month. We certainly have a lot of people working 

 16 very diligently on that process. 

 17 The proposal that we have, I want to 

 18 contrast it for just a moment to the position 

 19 accountability regime that exists in some of the 

 20 exchanges. And what we're proposing basically are 

 21 bright lines, position limits that would be 

 22 applied and that speculators would not be able to 
 66 

 1 increase their positions above those levels. In 

 2 the position accountability regime, the exchange 

 3 needs a hook, if you will, reached to the 

 4 nonmembers of the exchange. At the CFTC, our hook 

 5 is when a trader becomes reportable. So we have 

 6 reportable positions and that gives us an ability 

 7 to ask through a special call for additional 

 8 information from a trader. 

 9 The exchange, once they have a hook 

 10 under position accountability, they, too, can ask 

 11 for additional information on requests to the 

 12 exchange. In the current proposed rulemaking we 

 13 have something called position visibility. That 

 14 essentially is an automatic special call once a 

 15 trader's position reaches a certain size. At the 

 16 exchanges, the last part of position 

 17 accountability is a trader, once they've exceeded 

 18 or reached the level of position accountability, 

 19 they've given the automatic consent to the 

 20 exchange upon order of the exchange to stand still 

 21 or actually to reduce the position. At the CFTC, 

 22 for us to use a similar authority we would need to 
 67 

 1 declare an emergency. So that's the first 

 2 difference between what we proposed, a bright line 

 3 test, and a position accountability regime. 

 4 The proposal applies to 28 different 

 5 core reference contracts. The current futures 

 6 limits only apply to nine enumerated contracts and 

 7 they're not aggregated. In this proposal, we 

 8 would aggregate across futures, foreign boards of 

 9 trade that offer linked contracts to the U.S. 

 10 referenced core contract where those foreign 

 11 boards of trade have direct access to U.S. 

 12 persons. And we would also include economically 

 13 equivalent swaps. So the limits in the proposal 

 14 would apply across a broad range of contracts, 

 15 whether they're traded on a board of trade, 

 16 whether they're traded on a swap execution 

 17 facility, or executed over the counter. 

 18 We have a number then of aggregation 

 19 provisions that apply to the different position 

 20 limits. And this gets a bit complicated in the 

 21 proposal. As much as we currently have in the 

 22 federal limits for grains, there's a spot-month 
 68 

 1 limit, there's an individual month limit, and then 

 2 there's an all-months combined limit for each of 

 3 these contracts. In a couple of minutes I'll go 

 4 over some examples and we'll illustrate how these 

 5 individual month and all month limits would work. 

 6 And then finally, there are aggregation provisions 

 7 by owner or controller that are tighter in the 

 8 proposal than what currently exists in the part 

 9 150 regulations. 

 10 So let's look quickly at the way the 

 11 all-months limits would look in the energy area 

 12 and then I'll look at an example of a few grain 

 13 contracts. For the all-months limits, as much as 

 14 we for a number of years have provided guidance to 

 15 the exchanges on acceptable practices for 

 16 complying with core principles, we use a formula 

 17 approach. And that formula is based upon open 

 18 interests. It is 10 percent of the first 25,000 

 19 contracts of open interest and then 2-1/2 percent 

 20 thereafter. So to get open interest, we need to 

 21 look at what's the open interest in the core 

 22 reference contract that trades on the designated 
 69 

 1 contract market. In an example of crude oil, it's 

 2 what trades on NYMEX in a physical delivery 

 3 contract. But there are also cassitle (?) 

 4 contracts that trade on exchanges and there are 

 5 swaps that settle to those cassitle contracts. So 

 6 we need to get more information about open 

 7 interests to set a level for all of the 

 8 economically-equivalent contracts. 

 9 What I can do by way of illustration is 

 10 show what's the open interest in the main 

 11 contract. In crude oil, for example, it's about 

 12 three million contracts. For the whole group of 

 13 contracts that feed into the crude oil contract, 

 14 it's a little more than 4.7 million contracts. 

 15 For the proposal that we have, as much as we're 

 16 thinking about a time period of an annual 

 17 adjustment, we would use the month-end open 

 18 interest for each of the 12 months and then 

 19 average that. So for 2010, in crude oil it was 

 20 about 4.2 million contracts, just in the contracts 

 21 that we can currently see, not including the 

 22 swaps. Applying our formula then we would come up 
 70 

 1 with a limit of about 108,000 contracts in crude 

 2 oil. So that's the way the math works. 

 3 And let's look at some of the contracts 

 4 traded on the Chicago Board of Trade. Corn and 

 5 soybeans and wheat. The current levels of open 

 6 interest are high. The open interest in the 

 7 agricultural contracts tends to be in a single, 

 8 main physical delivery contract that's traded on 

 9 the exchange. And there aren't a lot of 

 10 look-alike contracts other -- that's the 

 11 difference between the agricultural contracts and 

 12 the energy contracts, for example. 

 13 The average open interest in 2010 was 

 14 about 1.75 million or so contracts. It's a little 

 15 higher now. But using that 2010 average open 

 16 interest, we can look at what the levels of the 

 17 limits would be under the proposal. And this is 

 18 where we've provided some flexibility for how the 

 19 Commission might move to a final rule. In the 

 20 proposed rulemaking for corn, we've said the 

 21 existing limit in part 150 in all months combined 

 22 is 22,000 contracts. The Chicago Board of Trade 
 71 

 1 has petitioned the Commission to increase that 

 2 using the formula and applying it to, I believe, 

 3 the 2009 calendar year. And that formula would 

 4 result in 33,000 contracts as an all-months 

 5 combined limit. If we look at the 2010 level of 

 6 open interest, the average level of open interest 

 7 and apply the formula, then the all- months 

 8 combined limit would be 46,500 contracts. 

 9 So there are a variety of opinions that 

 10 have been expressed in the 12,000 comment letters 

 11 on how we might proceed. I look forward to 

 12 receiving your guidance on which of these possible 

 13 paths the Commission should pursue. 

 14 I'm going to turn to David Van Wagner to 

 15 talk a little bit about account aggregation. 

 16 MR. VAN WAGNER: Thanks. Yes, as part 

 17 of the position limit rulemaking, the proposed reg 

 18 would also establish requirements about how to 

 19 aggregate positions under common ownership control 

 20 for purposes of determining what is a position 

 21 that's going to be subject to position limits. 

 22 Conceptually, the aggregation 
 72 

 1 requirement is going to attribute to a particular 

 2 trader all the positions in which that trader 

 3 either has an ownership or equity interest of 

 4 greater than 10 percent or controls trading by 

 5 some power of attorney or otherwise. I should 

 6 point out that this basic aggregation requirement 

 7 is consistent with the way in which -- at least 

 8 it's a baseline -- is consistent with the way that 

 9 the Commission currently aggregates positions and 

 10 our expectations with respect to DCMs or exchanges 

 11 that have position limits. 

 12 Where the position aggregation 

 13 requirements start to vary from the current regs 

 14 is when it comes essentially to the exemptions 

 15 from position aggregation. The CFTC's proposal 

 16 would withdraw the current -- what's been come to 

 17 be known as the independent account controller 

 18 exemption -- and replace it with a series of more 

 19 narrowly focused exemptions to achieve 

 20 disaggregation. 

 21 So essentially, part 151, or position 

 22 limit regime, sets up three basic grounds for 
 73 

 1 disaggregation. The first area where 

 2 disaggregation is going to be available would be 

 3 for passive pool investors who have an interest 

 4 between 10 and 25 percent ownership -- investment 

 5 interest of between 10 and 25 percent in a pool. 

 6 Now, keep in mind, you know, otherwise, again, 

 7 being over 10 percent they would have otherwise 

 8 presumptively had to aggregate their position with 

 9 the pool's positions. 

 10 Anyway, the basic requirement is that 

 11 the investor in the pool doesn't supervise or 

 12 control the pool's trading in any way. The pool 

 13 operator has to have written procedures in place 

 14 to prevent investors from gaining knowledge of the 

 15 pool's trading strategies or positions. And also, 

 16 the pool operator is going to have to apply and 

 17 receive disaggregation relief from us so that we 

 18 will essentially evaluate the procedures that they 

 19 have in place to ensure a Chinese wall around the 

 20 information that they have. Again, this is only 

 21 for that band between 10 and 25 percent ownership 

 22 interest. 
 74 

 1 A second area of disaggregation 

 2 potential is for FCMs with respect to 

 3 discretionary accounts. FCMs who have trading 

 4 programs where the FCM doesn't control the trading 

 5 or maintains minimum kind of management to control 

 6 over the trading decisions and the account and 

 7 they have to be independently-made decisions from 

 8 the other trading decisions that the FCM is making 

 9 in his accounts. 

 10 And then finally -- 

 11 CHAIRMAN DUNN: David, I'm sure everyone 

 12 knows what an FCM is but just for me, would you -- 

 13 MR. VAN WAGNER: Oh, I'm sorry. 

 14 CHAIRMAN DUNN: -- would you explain 

 15 what it is and give me an example? 

 16 MR. VAN WAGNER: Well, an FCM is a 

 17 futures commission merchant. And we're 

 18 essentially talking about the largest investment 

 19 banks, I guess, to simply it. 

 20 An example. Do you want a name? Okay. 

 21 And in any case, and then there's a last category 

 22 of disaggregation. It's an awkward mouthful. 
 75 

 1 It's the owned nonfinancial entity category. So 

 2 it's essentially -- it allows an entity to 

 3 disaggregate the positions of a nonfinancial 

 4 entity, generally a nonfinancial operating 

 5 company, in which the investing entity owns a 10 

 6 percent or greater interest. So then the entity 

 7 that is seeking an exemption is going to have to 

 8 demonstrate that the nonfinancial entity, the 

 9 target of investment, is independently controlled 

 10 and managed. And then the regs, or proposed regs, 

 11 set out a list. And it's a nonexclusive list but 

 12 it's a list of basically sort of indicative of 

 13 independence. And some of those areas are the 

 14 entities have no knowledge of each other's trading 

 15 decisions, the nonfinancial entity has written 

 16 policies and procedures in place to preclude 

 17 knowledge of its trading strategies and positions, 

 18 and then the two entities, the investing entity 

 19 and then the nonfinancial entity in which the 

 20 investing entity has an ownership interest have 

 21 separate employees and risk management systems. 

 22 I should say, I mean, obviously these 
 76 

 1 are the three basic categories of disaggregation 

 2 we'll say or at least aggregation exemptions. One 

 3 thing that's sort of very philosophically 

 4 different from our current aggregation 

 5 requirements where the exemptions are essentially 

 6 self- effectuating and there's really no prior 

 7 submission or notice to us or any sort of approval 

 8 by the Commission. With each one of these 

 9 exemptions there's some level of vetting with the 

 10 Commission prior to being able to obtain 

 11 exemptions. So that's it, I guess, in a nutshell 

 12 for a fairly technical area. 

 13 MR. AMATO: So I want to talk a little 

 14 bit about the bona fide hedging exemption 

 15 proposal. In the Dodd- Frank law, Congress 

 16 directed the Commission to write a bona fide 

 17 hedging definition and they left out a word which 

 18 has in the past allowed the Commission's 

 19 regulation for bona fide hedging -- that's 1.3Z -- 

 20 to have a third part of it. So 1.3Z3 allowed 

 21 nonenumerated hedging exemptions. And those 

 22 exemptions were granted under our commission 
 77 

 1 regulation 1.47. For example, it allowed us to 

 2 grant swap dealers risk management exemptions 

 3 without regard to the characterization of the 

 4 counterparties' positions. Congress narrowed bona 

 5 fide hedging and directed the Commission to write 

 6 a new definition. 

 7 So in the proposal there's a new 

 8 definition for bona fide hedging. It provides 

 9 that in general the transactions must represent a 

 10 substitute for physical market transactions in the 

 11 case of physical commodity futures contracts. The 

 12 Commission can retain the existing provisions for 

 13 financial contracts on things like interest rates 

 14 and stock index futures, but for physical 

 15 commodities we can no longer allow a bona fide 

 16 hedging exemption for any risk management 

 17 activity. Instead, Congress narrowed that and 

 18 said to the extent a swap counterparty would have 

 19 been bona fide if they had approached the futures 

 20 markets directly, then the counterparty to that 

 21 transaction can use futures and essentially step 

 22 into the shoes of who would be their bona fide 
 78 

 1 counterparty. In that way, a swap dealer would be 

 2 allowed to manage the risk that they acquire by 

 3 providing risk management tools to bona fide 

 4 hedgers using swap transactions. 

 5 So that's a little bit of why the bona 

 6 fide hedging definition changes and would be -- if 

 7 I have a minute, Commissioner, I'd like to touch 

 8 on basically a little bit of the information we 

 9 currently obtained so that the members can give us 

 10 an idea about what else we might need to obtain. 

 11 Currently, we obtain information every 

 12 day through the Commission's large trader 

 13 reporting position. I mentioned earlier that's 

 14 our hook. Once a trader is reportable, the 

 15 futures commission merchant that carries their 

 16 account reports the position each and every day to 

 17 the CFTC. We obtain a trade capture report from 

 18 each of our exchanges that lists the transactions 

 19 during the day by what they call accounts. 

 20 So for an example, an executing broker 

 21 has an account in the electronic system that may 

 22 have orders from many different customers but at 
 79 

 1 least we get a trade capture report that says 

 2 these are the transactions that occurred for a 

 3 particular executing broker within the executing 

 4 broker's omnibus account. 

 5 And then finally, we can get access to 

 6 the orders that are input during the day, and 

 7 that's an enormous number of messages in these 

 8 electronic systems -- the bids and the offers. 

 9 And currently, quite frankly, we don't have the 

 10 resources to receive and process an order book on 

 11 a day in and day out basis, but we can inquire on 

 12 specific time periods and drill down and determine 

 13 what's the nature of the orders that are being 

 14 entered. 

 15 Under the broader proposals under 

 16 Dodd-Frank, and to facilitate both surveillance of 

 17 the swaps markets in setting and enforcing 

 18 position limits, the Commission has a swaps 

 19 position reporting rule that's out as a notice. 

 20 The comment period is closed and the staff has 

 21 summarized the comments. And the staff is busy 

 22 trying to finalize a recommendation to present to 
 80 

 1 the commissioners which essentially would create a 

 2 large trader reporting system for swaps as 

 3 reported to the Commission by swap dealers. 

 4 Down the road we'll get intraday 

 5 transaction information from swap execution 

 6 facilities, and down the road we will get 

 7 information from Swap Data Repositories that would 

 8 be comprehensive on commodity swaps. We would 

 9 receive either a lifecycle set of information from 

 10 a Swap Data Repository or perhaps just a snapshot 

 11 if it's an end- user exemption transaction. But 

 12 those are some of the other rules that will help 

 13 us increase the richness of the dataset so that we 

 14 can conduct surveillance in the full market for 

 15 commodities both in futures and in swaps. 

 16 And I would be happy to answer any 

 17 questions. 

 18 CHAIRMAN DUNN: I would open it up to 

 19 the Ag Advisory Committee. Remind you that 

 20 although we've already received over 12,000 

 21 comments on this particular subject matter, 

 22 everything that you say here today will also be 
 81 

 1 taken into account as part of the comments. So 

 2 you're going to get -- you get another bite of the 

 3 apple here. Also, because we are in the 

 4 rulemaking process, if you would address your 

 5 questions to the staff and not necessarily to the 

 6 commissioners, because we can't give you that give 

 7 and take as much as we might like to. 

 8 So with that I will open it up to the 

 9 Commission or committee for -- 

 10 COMMISSIONER O'MALIA: Oh, Mr. Chairman, 

 11 I have a question regarding the bona fide hedge 

 12 requirements. Maybe this might form some 

 13 questions as well. 

 14 Steve, can you -- what impact will the 

 15 change in the bona fide hedge rule have on the 

 16 positions that we see today? You mentioned in 

 17 some of your earlier slides this is what the open 

 18 interest and the rules -- how that would play out. 

 19 Does that include changes in the bona fide hedge 

 20 definition? 

 21 MR. SHERROD: Interesting question. I 

 22 have to think about it for a minute. 
 82 

 1 There are a number of changes in the way 

 2 that we would approach bona fide hedging. Much as 

 3 David mentioned, there are a number of changes in 

 4 the way we would approach aggregation. So for 

 5 setting the position limits we would use all open 

 6 interest regardless of whether a particular 

 7 trader's position was speculative or bona fide 

 8 hedging. In our exiting large trader reporting 

 9 system, the reporting system doesn't tell us 

 10 whether a particular trader's position is hedging 

 11 or speculative. It just tells us here are the 

 12 number of contracts open at the close of trading. 

 13 So under the existing rules in part 150, 

 14 we have traders, for example, that are holding 

 15 positions relying upon a self-executing bona fide 

 16 hedging exemption. In wheat, for example, we have 

 17 them file a monthly form that identifies the types 

 18 of positions in the cash market that are being 

 19 hedged, whether it's actual inventory of grain or 

 20 a fixed price purchase or a fixed price sale 

 21 contract. That information comes in once a month 

 22 from the commercials. 
 83 

 1 In the proposal, we would increase the 

 2 frequency of that collection. And so it would be 

 3 an additional burden to report more frequently on 

 4 the cash market positions that are being hedged. 

 5 That proposal, you know, I think about it in terms 

 6 of a bona fide hedger in the range of the three 

 7 different options that I laid out in the slide and 

 8 the additional options that were asked in the 

 9 questions about setting the level of the position 

 10 limits. 

 11 So a hedger, if we retained the existing 

 12 limits, would have an additional burden. If, for 

 13 example, the Commission were to adopt the formula 

 14 approach and substantially increase the position 

 15 limits from those that exist under part 150, then 

 16 a number of hedgers might no longer be over the 

 17 limit and they would have no reporting 

 18 requirement. So I hesitate to give a simple 

 19 answer because the proposed rule has a lot of 

 20 flexibility about how the Commission might 

 21 proceed. 

 22 COMMISSIONER O'MALIA: The bona fide 
 84 

 1 hedge changes are in the position limit proposal, 

 2 correct? And they require a rulemaking to be 

 3 effectuated? 

 4 MR. SHERROD: Congress directed the 

 5 Commission in Dodd-Frank to write a rule so the 

 6 existing bona fide hedging definition in 1.3Z is 

 7 in effect, 1.3Z3. 1.3Z3 would be the part of the 

 8 existing definition that would go away for 

 9 physical commodities. And that's the one that 

 10 allows us to have a bona fide hedge if it doesn't 

 11 represent a transaction be made in the physical 

 12 marketing channel but is more of an intermediary's 

 13 risk management trying to get flat on their 

 14 exposure as they provide liquidity to both 

 15 speculators and hedgers in perhaps the swap or 

 16 over-the- counter markets. 

 17 COMMISSIONER SOMMERS: On this same 

 18 subject, could you walk us through how the 

 19 reporting requirements might change for a swap 

 20 dealer who currently qualifies under 1.3Z3? Under 

 21 the new definition, how would they report with 

 22 regard to that look-through? 
 85 

 1 MR. SHERROD: So a swap dealer currently 

 2 that has applied under 1.47 has indicated their 

 3 needs for risk management and the staff under that 

 4 regulation gets 30 days to review it if it's an 

 5 initial application or 10 days if it's a change. 

 6 And the swap dealer then would need to keep 

 7 records under the current provisions. The 

 8 additional provisions, the swap dealer needs to 

 9 keep records about the representations of their 

 10 counterparties that have said they are bona fide. 

 11 And only those counterparties who are bona fide 

 12 will sort of count in this risk management regime. 

 13 So, for example, if a swap dealer has 

 14 100 contracts equivalent on the long side as their 

 15 exposure because there is a grain elevator that 

 16 wanted to short 100 contracts equivalent in a 

 17 swap, then the swap dealer, to the extent they 

 18 have that 100 contract long position with that 

 19 bona fide counterparty, can approach the futures 

 20 markets and go short 100 and rely upon a bona fide 

 21 hedging exemption. If that counterparty were a 

 22 speculator, then the swap dealer cannot exceed the 
 86 

 1 limit based on that speculator as a counterparty. 

 2 So they will have to identify in their books and 

 3 records the representations of their swap 

 4 counterparties at the times the swaps are entered 

 5 into, not on an ongoing basis but at the times the 

 6 swaps are entered into. And then the swap dealer 

 7 would need to make that available to us for 

 8 inspection if we wanted to review the details of 

 9 their counterparties. 

 10 COMMISSIONER SOMMERS: Okay, so they 

 11 don't report that to us? They're just required to 

 12 keep it? 

 13 MR. SHERROD: They wouldn't report the 

 14 details, no. Unless we asked for it. So there's 

 15 no -- there's no registration requirement, if you 

 16 will. The counterparty that's the bona fide 

 17 hedger to the swap transaction doesn't have to 

 18 file kind of a registration statement nor get a 

 19 registration number or anything on that side. 

 20 CHAIRMAN DUNN: With that we will now 

 21 open it up to the Committee. Roger. 

 22 MR. CRYAN: I like that approach. I 
 87 

 1 want to make one additional small comment about 

 2 cash settle contracts. There are some cash settle 

 3 contracts now that have scale down requirements on 

 4 the position limits which have no purpose, no 

 5 point. And I'd like to make sure that all those 

 6 things be considered as you're developing 

 7 individual position limits that you not put 

 8 one-size-fits-all things in where they don't fit. 

 9 And scale down requirements for cash settled 

 10 contracts is kind of pointless and actually to 

 11 quote Mayor Daley, it doesn't create disorder, it 

 12 preserves disorder. So, thank you. 

 13 CHAIRMAN DUNN: Todd. 

 14 MR. KEMP: A couple things. And I'll 

 15 address first the bona fide hedge exemption. 

 16 We actually told Congress we would have 

 17 preferred if they left it with CFTC to make that 

 18 determination. We think you all have done a good 

 19 job over the years. But having said that, we do 

 20 like the change in the definition that came out of 

 21 the legislation. We like the fact that a swap 

 22 dealer will only qualify for a hedge exemption to 
 88 

 1 the extent that the counterparty otherwise would 

 2 be a bona fide hedger. We think that the previous 

 3 -- the current risk management exemption basically 

 4 has been an open back door to futures markets in 

 5 an unlimited fashion for swap dealers and their 

 6 counterparties. In many cases those were 

 7 investors, funds, the massive-passives. We think 

 8 it's appropriate to put the brakes on just a 

 9 little bit and that it's a reasonable limitation. 

 10 I think that will aid in performance of some of 

 11 the enumerated ag contracts that have had some 

 12 challenges with convergence in recent years. 

 13 In terms of the -- in terms of the 

 14 position limits, we've, in our comment letter to 

 15 the Commission, we've supported retaining the 

 16 legacy limits that you all have proposed. We 

 17 think the current limits are appropriate for the 

 18 enumerated ad commodities. There are a lot of 

 19 moving parts right now with Dodd-Frank 

 20 implementation with changes to contracts in 

 21 Chicago and Kansas City. We think it would be 

 22 prudent to let those changes take effect. Let's 
 89 

 1 get the lay of the land and see how that all 

 2 shakes out before we look at increasing position 

 3 limits at least on the enumerated ag commodities. 

 4 And again, we think that will help in performance 

 5 of particularly the wheat contracts where we've 

 6 had some challenges. 

 7 CHAIRMAN DUNN: Thank you, Todd. 

 8 Others? 

 9 MR. WANDS: Steve and Dave, a terrific 

 10 presentation. Just a clarification. 

 11 It's been our contention that the index 

 12 funds have caused a dramatic increase in 

 13 volatility, especially in the smaller ag markets, 

 14 specifically the wheat contracts. So while I 

 15 didn't hear exactly you say index funds, where do 

 16 they fall in your bona fide hedging definition -- 

 17 and then will you also be looking at the -- 

 18 lifting those hedge exemptions or denying those 

 19 hedge exemptions that have been granted in the 

 20 past? 

 21 MR. SHERROD: So the first question is 

 22 is an index fund a bona fide hedger, and the 
 90 

 1 answer is no. So an index fund would be treated 

 2 as a speculator. And whether they approach the 

 3 futures markets directly or were opposite a swap 

 4 dealer, in neither case would there be a bona fide 

 5 that would pass to anyone. They would live within 

 6 the speculative position limits. 

 7 MR. WANDS: And in the exemptions that 

 8 have been granted in the past, would those be 

 9 lifted as well? 

 10 MR. SHERROD: In terms of the swap 

 11 dealers that have been granted an exemption under 

 12 1.47, the general approach that I think we should 

 13 recommend to the Commission and I think it makes a 

 14 bit of sense, the swap dealers have generally very 

 15 large -- some of them do -- very large books of 

 16 business. There are long side exposure and short 

 17 side exposure. The terms of the swaps may not 

 18 match and they hedge or manage the risk under the 

 19 existing regulations by plugging that imbalance 

 20 with futures contracts. So I think the way it 

 21 makes sense to phase out of the existing 1.47 

 22 exemptions is to grandfather the existing swaps. 
 91 

 1 And as those swaps age off the books, they would 

 2 not count anymore in their need for risk 

 3 management. They would not transfer over to bona 

 4 fide hedging. 

 5 So if, for example, a swap dealer had a 

 6 long exposure on a swaps that would last two 

 7 years, they could continue to manage that risk 

 8 with short futures for two years. Once that 

 9 existing book of business rolls off, the swap 

 10 dealer would be under the new provisions and would 

 11 no longer be able to use that risk management 

 12 provision. With the size of the positions that 

 13 are on in the swaps markets, I think it would be 

 14 disruptive to say to someone with a very large 

 15 futures position that is managing risk that you 

 16 need to get out and you need to somehow negotiate 

 17 your way out of lots of swaps if you want to 

 18 reduce your risk. So I think that's the only kind 

 19 of viable way to proceed without disrupting the 

 20 existing book of business. 

 21 COMMISSIONER CHILTON: Mr. Chairman, I'm 

 22 sorry, with respect to -- 
 92 

 1 CHAIRMAN DUNN: Bart. 

 2 COMMISSIONER CHILTON: I can wait for a 

 3 moment, Mike. 

 4 CHAIRMAN DUNN: Okay. Thank you. 

 5 Jason. 

 6 MR. UNGAR: I'm sorry about that, 

 7 Commissioner Chilton. 

 8 With respect to maintaining the legacy 

 9 limits, which just for everybody's information 

 10 were set back in 2005 based on 2004 open interest 

 11 data, these markets have seen -- and the entire 

 12 futures markets have seen a tremendous increase in 

 13 volume. And I know that it has been the 

 14 contention of some of those who submitted comments 

 15 that some of this is, in fact, fictitious volume 

 16 that has come about through some have called them 

 17 the massive-passives. 

 18 The fact is though that this is, as most 

 19 of the, I believe, arguments against the massive 

 20 passives are simply anecdotal, when anybody 

 21 actually looks at the facts, and this has been 

 22 done routinely by many, many academics and 
 93 

 1 professional economists, you can very easily 

 2 discern. For instance, if you look at the COT 

 3 data, the fact is that commercial short 

 4 open-interest has increased in the ag markets 

 5 anywhere from 1-1/2 to 2-1/2 times more rapidly 

 6 than speculative long open interests. So the fact 

 7 is that long interest is meeting a growing and 

 8 robust demand from commercial shorts. And I think 

 9 those who have been in these markets for a very 

 10 long period can remember a time when there was 

 11 insufficient long speculative liquidity and that 

 12 commercial hedgers had to sort of go begging to 

 13 find liquidity. 

 14 So we, CMC believes that not only that 

 15 the limit should be set using the same formula 

 16 that's been proposed, I believe, quite wisely for 

 17 the other markets, that being the open-interest 

 18 formula, and should always rely on the previous 

 19 years and it should be done systematically. I 

 20 think that the process of increasing limits should 

 21 be reformed, that it should not be a petition 

 22 process so that there is some level of consistency 
 94 

 1 and predictability to these markets. And 

 2 therefore, I don't think that the ag should be in 

 3 any way, or the so-called nonexempt market should 

 4 be in any way differentiated from the other 

 5 markets and that this should be a reliable 

 6 process. 

 7 Further, also keep in mind that if we 

 8 were to keep the legacy limits, we are now 

 9 introducing an entire new player into these -- 

 10 under these limits and those are the swaps. And 

 11 there are those who claim that there is not huge 

 12 agricultural interest in the swap markets but I 

 13 think that the fact is that a lot of the index 

 14 funds do have holdings and have been providing, I 

 15 think, very useful long speculative liquidity to 

 16 commercial hedgers. And that will now be brought 

 17 under limits. So the fact is that a large amount 

 18 of open-interest will now be -- that was 

 19 heretofore relied on the hedge exemption and was 

 20 not under limits -- will now be brought under new 

 21 limits. And I think that the open-interest 

 22 formula is a very rational, reasonable way and 
 95 

 1 again should be consistently applied across 

 2 markets and that the evidence or the hard facts 

 3 bear this out. 

 4 Thank you. 

 5 CHAIRMAN DUNN: Thank you, Jason. Bart, 

 6 you had a question? 

 7 COMMISSIONER CHILTON: Yeah, I was going 

 8 to follow up with Steve on the previous question, 

 9 although since that was talked about there I'll 

 10 just say very briefly I actually agree that we 

 11 need to update these legacy limits. I disagree 

 12 with about everything else you just said with 

 13 regard to massive-passives. 

 14 Here's what I know. There are so many 

 15 different economists who say different things on 

 16 this. And so when you say look at the facts, it's 

 17 whose facts do you want to look at? If you want 

 18 to look at the ones that say the massive-passives 

 19 are having an impact, go to CFTC.gov. Go to my 

 20 speeches and testimony. I put about 10 different 

 21 sites on there and some remarks I gave to FIA. 

 22 But you can find them on your side, too. They're 
 96 

 1 all over the map. You know, nobody I think is 

 2 suggesting that we don't need speculators and that 

 3 they're not important to these markets. And 

 4 nobody is saying that massive-passives are bad. 

 5 It's just whether or not they're having an 

 6 unintended impact on the market and we should put 

 7 some legitimate sideboards. Nobody is talking 

 8 about getting them out of the markets. 

 9 But my question, Mr. Sherrod, Steve, was 

 10 about the hedge exemptions. How would you 

 11 recommend to the Commission that we define who has 

 12 an underlying interest in the physical commodity? 

 13 You know, if there's a swaps dealer who has some 

 14 small interest in a home heating oil or something, 

 15 you know, would they be able to qualify -- I know 

 16 this is theoretical -- under the exemption? I 

 17 mean, one of the concerns I have is that, you 

 18 know, the exchanges have a view that they want 

 19 traded. I understand that. It's a business. 

 20 They want volume. But from our perspective, it 

 21 gets to the point where -- when Dave was talking 

 22 earlier about the financialization of some of the 
 97 

 1 commodities -- that's my phraseology -- but that, 

 2 you know, some of the financial players get in and 

 3 are using these markets as whatever. A hedge 

 4 against the dollar. Or some other hedging 

 5 strategy that's beyond what has been done perhaps 

 6 in the past. 

 7 So how would we define that? How would 

 8 you recommend to the Commission, Steve, that we 

 9 look at the specifics of a bona fide hedger? Do 

 10 they have to have some quantification of an 

 11 underlying interest in the physical commodity? 

 12 MR. SHERROD: So that's -- it's a 

 13 two-part answer. The first part is for decades 

 14 the Commission has recognized as bona fide hedging 

 15 anyone holding cash market positions. And anyone 

 16 that has entered into fixed price purchase and 

 17 fixed price sales contracts. And under the 

 18 current regime that's automatic recognition. You 

 19 don't need to file. You don't need to preapprove 

 20 with any of the Commission staff that you're 

 21 holding cash inventories. You don't need to 

 22 preapprove that your fixed price purchase or sales 
 98 

 1 contracts are okay. And under our existing 

 2 definition and 1.3Z, if you're cross hedging, you 

 3 don't' have to file that either. That is if your 

 4 expected price fluctuations in the cash commodity 

 5 that you hold are related to the price 

 6 fluctuations in the futures that you will use to 

 7 hedge then, that's a provision that's currently in 

 8 our 1.3Z bona fide hedging definition. 

 9 There are certain types of positions 

 10 that need preapproval under the current rules and 

 11 also under the proposed rules. And those would be 

 12 anticipated transactions. So if, for example, a 

 13 producer of a product uses as an input a physical 

 14 commodity and they have anticipated needs for the 

 15 next year under our current rules, we require that 

 16 anticipatory hedger to file their annual needs 

 17 over the last three years and to project their 

 18 needs over the next year. And then the staff 

 19 would review their information and approve the 

 20 anticipatory hedge exemption. 

 21 There's a similar provision in this 

 22 proposal. And to go back to the example that -- 
 99 

 1 the hypothetical that you posed, if a swap dealer, 

 2 in fact, had a heating oil business and an 

 3 affiliate, the heating oil business to the extent 

 4 they're buying heating oil or they're engaged in 

 5 fixed price purchase or sales contracts, they're a 

 6 bona fide hedger. Just because someone is engaged 

 7 in speculation doesn't mean they can't get the 

 8 bona fide hedging. And that goes back to the data 

 9 difficulties that we currently have. So someone 

 10 that's both engaged in speculation and hedging, we 

 11 get the positions every day and we have an 

 12 interest in having that hedger to the extent 

 13 they're over the limits provide us additional 

 14 information about the extent of their actual bona 

 15 fide hedging needs, whether it's cash or forward 

 16 fixed-price contracts. 

 17 So I hope that's responsive, 

 18 Commissioner Chilton. 

 19 COMMISSIONER CHILTON: Yes. Thank you. 

 20 And sorry to interrupt. I was just following up 

 21 on the other question. Thank you, Steve. 

 22 CHAIRMAN DUNN: Other members of the -- 
 100 

 1 Jordan? 

 2 MR. LEA: Two things. One, my initial 

 3 reaction to your grandfathering in would be very 

 4 positive. I think it's a good idea and a way to 

 5 handle that. But secondly, going sort of the 

 6 massive-passive thing, I know you all heard a lot 

 7 about how we feel about massive-passives and what 

 8 happened in cotton in 2008 and how it sort of laid 

 9 waste to the industry. And the flipside, we're 

 10 facing a liquidity crisis in cotton. We're 

 11 looking at increased consumption, increased 

 12 production, and decreasing volumes in a horribly 

 13 illiquid market. Yesterday I tried to hedge 1,000 

 14 bales of cotton. Coincidentally, not the same I 

 15 was talking about earlier, and it took me -- it 

 16 took a one percent move in the market for me to 

 17 execute 10 contracts in the open -- that's just 

 18 unacceptable, ridiculous, whatever. 

 19 We would welcome the liquidity the 

 20 massive- passives provide but the only tools -- we 

 21 feel like the tools are almost there or 

 22 potentially there, and that would be surveillance, 
 101 

 1 enforcement, and transparency. In 2008, if we had 

 2 known -- if we could have seen the open-interest, 

 3 if we knew anything about the open-interest, it 

 4 would have been an entirely different situation. 

 5 But unfortunately, now we are in a situation where 

 6 we know nothing about the open-interest. And with 

 7 the new phenomenon of exchange for swap, the ETFs, 

 8 again, we're willing to participate and play as 

 9 commercial hedgers with that. We welcome the 

 10 liquidity at this point. It's the devil we know, 

 11 the massive-passives. The ETFs. But we just need 

 12 some sort of -- we need confidence that, one, 

 13 there's transparency. We need the transparency 

 14 and open-interest. But we also need confidence 

 15 that there's enforcement and surveillance. 

 16 It broke my heart to see on the Wall 

 17 Street Journal a few months ago that the $16 

 18 million required for surveillance program was 

 19 going to be unavailable because we felt like as 

 20 merchants that was probably the most valuable tool 

 21 that the CFTC was in the process of offering us so 

 22 we could know more about the securities of our 
 102 

 1 markets. 

 2 CHAIRMAN DUNN: Any other comments or 

 3 questions? 

 4 MR. HICKS: Steve, you mentioned omnibus 

 5 accounts. The FCM that's carrying the omnibus 

 6 accounts, are they -- do you have access? Can you 

 7 see? Is there a transparency where you can see 

 8 the breakdown of what the FCM is carrying on those 

 9 omnibus accounts? 

 10 MR. SHERROD: So the breakdown is in two 

 11 different ways. The first breakdown is the FCM 

 12 reports every day the end of the day positions for 

 13 reportable traders. So we can see at the FCM 

 14 level the large positions that are reported each 

 15 and every day. Where it's a little more difficult 

 16 for us is the transactions that are completed. 

 17 When the FCM uses a single account, an omnibus 

 18 account, and executes orders, much as the 10 

 19 contracts for your firm and maybe contracts for 

 20 many other firms through a single account in the 

 21 trading system, then those are orders. And in 

 22 order to look at the order level detail, that's a 
 103 

 1 set of information that we have to get by 

 2 inquiring to the FCM to find the identity of the 

 3 individual order levels. 

 4 MR. HICKS: You will only do that if 

 5 there's a cost. I mean, if you have a reason to 

 6 do that. I mean, it isn't a random thing that you 

 7 would do it, right? 

 8 MR. SHERROD: That's correct. That's 

 9 correct. Now, a number of firms that approach the 

 10 electronic trading platforms directly, so they're 

 11 direct market access participants, they had their 

 12 own accounts and then we know for those very large 

 13 and very fast transaction accounts we can get the 

 14 identity of those accounts directly and see in the 

 15 daily trade capture report what they've done each 

 16 and every day. It's the smaller customers that 

 17 execute through FCMS through orders that we can't 

 18 see unless it's an inquiry back to the FCM. 

 19 MR. CLARK: Mr. Chairman, I apologize 

 20 for being later earlier this morning. I just want 

 21 to let you know and I want to commend you as well 

 22 for all the good work you've done on this 
 104 

 1 committee and on the Commission generally. And I 

 2 really want to commend all the commissioners. I 

 3 mean, I think with respect to agriculture, you 

 4 know, since it's sort of the origin of the futures 

 5 market, I think all of us feel like, of course, 

 6 the people in this room around this table, of 

 7 course, feel like agriculture is special. And we 

 8 all understand at the same time the way these 

 9 markets have grown, you know, around that sort of 

 10 core. And we appreciate the fact that everyone at 

 11 the Commission, particularly the commissioners, go 

 12 out of their way, I think, to acknowledge and 

 13 recognize how these markets are still different 

 14 and special in many respects. I just want to 

 15 acknowledge that and thank you for it. 

 16 And with regard to Dodd-Frank -- and I 

 17 do have a question -- but with regard to 

 18 Dodd-Frank, I just want to say -- I want to 

 19 commend everybody at the Commission, the 

 20 commissioners and the staff, because, you know, 

 21 Congress heaped a huge amount of work -- I know I 

 22 don't need to tell you -- on the Commission in 
 105 

 1 this regard. And since they've done that I know 

 2 you've had everybody around this table, everybody 

 3 in the audience, people in the press, people in 

 4 the industry, people at the other end of the 

 5 street, all telling you you should drive faster, 

 6 you should go slower, you should take our foot off 

 7 the accelerator and put it on the brake, put the 

 8 car in reverse. And you have an unenviable job. 

 9 So I just want -- I know you're all working very 

 10 hard and you've been given some impossible 

 11 deadlines. 

 12 CHAIRMAN DUNN: I know you're going to 

 13 want something now, Fred. 

 14 MR. CLARK: No, actually I just have a 

 15 pretty simple question. And that is with regard 

 16 to position limits -- and I'm asking because I'm 

 17 either ignorant or I've half forgotten -- does the 

 18 rule with the 12,000 comments include the position 

 19 limits across the spectrum of commodities? Not 

 20 just agriculture but also energies and everything 

 21 else? And is there any -- and can you inform us 

 22 all as to what expected timing is when you might 
 106 

 1 do a final rule? And then also whether it's your 

 2 intention, if you can say, to do a single rule 

 3 that covers all those commodities? Or I know 

 4 there's been a lot of people in other places 

 5 suggesting maybe some should be early harvested as 

 6 opposed to others. I'm just curious if you can 

 7 comment on sort of that set of issues and timing. 

 8 MR. SHERROD: So the good news for staff 

 9 is the 12,000 comment letters cover all 28 

 10 physical commodities. So it's not 12,000 just on 

 11 agriculture. 

 12 But the bad news is before we can move 

 13 forward we, under the Administrative Procedures 

 14 Act, need to consider each and every comment 

 15 letter, summarize them, and then consider how 

 16 we're going to respond to those comment letters. 

 17 We are driving to try to finish that first step of 

 18 reviewing and summarizing the comment letters by 

 19 the end of this month, in May. And then we have 

 20 the difficult task of trying to formulate 

 21 responses, which ideas that we want to try to 

 22 incorporate, which ideas that we don't think we 
 107 

 1 should incorporate, and formulate recommendations 

 2 for the commissioners and begin the process of 

 3 discussing with the commissioners the different 

 4 comment letters, the staff's views of the comment 

 5 letters, and get the input from the commissioners. 

 6 So how long that would take, I really can't 

 7 forecast. 

 8 The third part of the question is 

 9 whether different pieces of the rule could be 

 10 voted on separately. I think the answer, legally 

 11 David, is yes. Whether the commissioners want to 

 12 take that approach, again, I can't answer. 

 13 COMMISSIONER GENSLER: Commissioner 

 14 Dunn, I don't know if I'm allowed -- am I allowed 

 15 to answer any point? 

 16 CHAIRMAN DUNN: Yes. 

 17 COMMISSIONER GENSLER: There's another 

 18 role that's very related to this that we -- I want 

 19 to say we probably proposed in the fall -- we 

 20 didn't get 12,000 comments but Steve could tell us 

 21 -- called large trader reporting. And that's so 

 22 that we -- the Commission could be more informed 
 108 

 1 but ultimately the public could be more informed 

 2 on data. And so I could maybe ask Steve Sherrod 

 3 the same question. How many comments do we have 

 4 and what sort of timing? Because the large trader 

 5 reporting might be more ripe in a sense because it 

 6 was proposed earlier, fewer comments, and it's 

 7 about just getting data. 

 8 MR. SHERROD: So you're asking me a 

 9 number question and I don't remember the answer 

 10 but it's not thousands, it's more like dozens of 

 11 comment letters on the swaps position reporting 

 12 rulemaking. Staffs review the comments. We're 

 13 ready to begin the process of briefing the 

 14 commissioners on our recommendation. And then it 

 15 would be up to you, as the chair, to schedule when 

 16 it might be considered. 

 17 COMMISSIONER GENSLER: I was just 

 18 noting, I mean, there's proposals we've made. 

 19 There's every bit a reason that you've focused on 

 20 other things like running your business and so 

 21 forth but this large trader reporting role is 

 22 something we might also be able to move in a more 
 109 

 1 timely fashion and start to get data. 

 2 CHAIRMAN DUNN: The amount of 

 3 information since my tenure here, the Commission 

 4 has tried to be more transparent with the data 

 5 that we have. The Commitment of traders has 

 6 evolved over time. I think at one time we were 

 7 contemplating changing it and one of the questions 

 8 that we asked was should we keep the commitment to 

 9 trade report. And I think David said he got a 

 10 reply that said it's the only thing you guys do 

 11 right. Why would you get rid of that? But all of 

 12 that information has spawned many of those reports 

 13 that Commissioner Chilton talked about. And there 

 14 are reports that have been sent to us as part of 

 15 the comment on position limits. And so if you 

 16 want to find those on both sides of the issue, 

 17 those are on the website under those comments. 

 18 Let me recognize Christine from the CMC. 

 19 MS. COCHRAN: Excuse me. I'm sorry. 

 20 Jason, I don't mean to take over the microphone, 

 21 but I had a couple of questions that I wanted to 

 22 get some clarification on. And the first one was 
 110 

 1 on this anticipatory hedge exemption that you were 

 2 talking about. Just so that I'm clear, that, 

 3 however, would not apply to commercial 

 4 merchandising firms. So those types of firms that 

 5 take those types of positions, they would be 

 6 classified as speculative. Correct? 

 7 MR. SHERROD: To the extent that a 

 8 merchandiser would not have a fixed price purchase 

 9 or sales contract, that's correct. They would be 

 10 speculative. That's consistent with the existing 

 11 approach. 

 12 MS. COCHRAN: Okay. The other question 

 13 that I had related to -- relates to if you're a 

 14 commercial firm, you're going to be required to 

 15 track. And again, I apologize. This may be 

 16 somewhat repetitive but I just want to make sure 

 17 I'm very clear on it. You are going to be 

 18 required to trace your sale or purchase agreement 

 19 in the cash market to your position in the futures 

 20 market and report that on a daily basis. Correct? 

 21 MR. SHERROD: Not on a one-to-one basis. 

 22 So a commercial firm that, for example, has an 
 111 

 1 inventory of wheat, they'll report their total 

 2 inventory of wheat for the day. To the extent 

 3 they're over a position limit they'll report that 

 4 because they need to avail themselves -- to be 

 5 over the position limit means you have to have a 

 6 very large amount of wheat indeed because these 

 7 limit levels are rather large. So it's going to 

 8 be a large commercial firm reporting on their 

 9 current inventory position and as well, if it's 

 10 applicable, their fixed price purchase and sales 

 11 contracts as a daily matter. Right? 

 12 MS. COCHRAN: All right. Thank you. 

 13 COMMISSIONER GENSLER: Steve, is that 

 14 only if somebody is actually over the number? I 

 15 mean, so for the thousands of farmers that won't 

 16 be anywhere near these numbers, they don't have 

 17 any -- they don't have to track anything, do they? 

 18 MR. SHERROD: Well, they have to track a 

 19 lot of things but none of those have to do with 

 20 the futures market. 

 21 COMMISSIONER GENSLER: Yeah, but nothing 

 22 to do with us. 
 112 

 1 CHAIRMAN DUNN: Other questions or 

 2 comments from the Committee? 

 3 MR. WANDS: Commissioner Dunn, I have 

 4 just one more question. 

 5 I want to get -- and I don't want to 

 6 beat the drum here to death but on the index 

 7 funds, let's say a year ago a pension fund decided 

 8 to invest in a commodity fund, Goldman Sachs, just 

 9 to name one, commodity fund. And they elect to 

 10 stay in that commodity fund for a period of years. 

 11 So how would -- would they be phased out of this 

 12 eventually if, you know, they're going to treat 

 13 this like an asset class and they're going to stay 

 14 in commodities as they broaden their portfolio or, 

 15 you know, spread their risk out over their 

 16 portfolio, how is that going to change? Or is 

 17 this structure going to change that? 

 18 MR. SHERROD: So let me try to kind of 

 19 parse through that. There are two different 

 20 answers depending upon whether the pension fund is 

 21 entered into a swap with a swap dealer that has a 

 22 risk management exemption currently. In that 
 113 

 1 case, the swap dealer would be able to retain 

 2 their hedge exemption until the swap expires. In 

 3 the second case, a pension fund or other 

 4 speculator investing in a commodity pool that 

 5 invests or takes positions in futures contracts, 

 6 the commodity pool would be a speculator and they 

 7 would be subject to the limits. So as their 

 8 existing positions in futures expired, they would 

 9 need to get down to whatever the applicable 

 10 position limit was. 

 11 COMMISSIONER GENSLER: Jordan, can I ask 

 12 you a question about the cotton market just 

 13 because we're here? You mentioned the lack of 

 14 liquidity or less liquid certainly than wheat and 

 15 corn and so forth. Do you have a sense of why 

 16 that is? I mean, of course, it's a smaller market 

 17 but beyond just being a smaller market than the 

 18 oil markets or the wheat markets, why do you think 

 19 it is? 

 20 MR. LEA: It's a variety of concerns and 

 21 I was -- every time somebody says something, of 

 22 course, I want to pipe in but it's not my arena. 
 114 

 1 But going back to the first presentation, the 

 2 increase in volatility has probably led to an 

 3 increase in anxiety and I am sitting next to a 

 4 banker but banks -- there's a lack of financing. 

 5 There's a lack of -- there's a general lack of 

 6 participation, especially by the merchandising and 

 7 the cooperative community. I don't want to drag 

 8 Kevin unwillingly into this conversation but 

 9 because the marketplace has changed so 

 10 dramatically since 2008. We have a new exchange. 

 11 The ICE that we work with. It's no longer the old 

 12 exchange that we owned and operated ourselves. So 

 13 it's a different set of rules. It's more the 

 14 anxiety -- and I'm not criticizing the ICE. I 

 15 think they've done a good job this year of 

 16 managing a very volatile cotton market but their 

 17 rules -- it's not a CFTC situation as much as it 

 18 is an ICE situation. There's just a lot of 

 19 anxiety about a merchant's ability to establish, 

 20 or a co-op's ability to establish and maintain a 

 21 hedge. 

 22 We feel like the actual withdrawal of 
 115 

 1 commercial hedgers is the primary lack of 

 2 liquidity and when you couple our 

 3 non-participation, what you've seen is an increase 

 4 in volatility because of the lack of liquidity. 

 5 For example, I spoke with the guys in our -- the 

 6 representatives in our office here. I was talking 

 7 to Jim Newsome about it yesterday, about people 

 8 that want to participate in cotton from a 

 9 speculative standpoint within their limits but 

 10 don't because of the lack of liquidity. In other 

 11 words, they can't establish and maintain positions 

 12 because the market is so illiquid and reacts. So, 

 13 I mean, so volatile. I mean, well, so much in 

 14 either direction. 

 15 Honestly, I wake up every morning and 

 16 recheck the market and I know it's going to be 

 17 three cents -- it's going to move three cents. I 

 18 just don't know which way or why. And again, the 

 19 problem there is probably not fundamental. It's a 

 20 lack of liquidity issue. But it's apprehension 

 21 over participating based on, like I said, an 

 22 unavailability of funds, who's participating, and 
 116 

 1 what happened in March of 2008. For example, in 

 2 March of 2008, we had about 110,000 bales in my 

 3 firm and 807 short futures. Now I've got probably 

 4 60 short futures and about a 30,000 bale position. 

 5 And it's all because of, again, the expense of 

 6 hedging and apprehension over my ability to manage 

 7 risk. 

 8 COMMISSIONER CHILTON: Mr. Chairman? 

 9 CHAIRMAN DUNN: Yes. 

 10 COMMISSIONER CHILTON: I wanted to ask 

 11 Jordan a follow-up question on that. I don't have 

 12 any data but it seems to me, based upon the 

 13 notices that we've been getting, that we probably 

 14 had more limit ups and limit downs in cotton, 

 15 certainly than in recent years. And when I looked 

 16 at the first part of the year, the end of January 

 17 and the beginning of February, it was mainly limit 

 18 ups then. And of the, I think it was 14 -- it may 

 19 be 13 but I think it was 14, 11 of those limit ups 

 20 were occurring before trading even opened in New 

 21 York. So it was the overnight markets. And my 

 22 question, Jordan, is whether or not you think that 
 117 

 1 overnight trading where maybe it's the Chinese 

 2 coming and, look, you know, it's great to have 

 3 people in our markets, but I'm just curious when 

 4 there's light liquidity in these overnight hours, 

 5 whether or not even a relatively small trade 

 6 occurring when there's not a lot of people trading 

 7 can move the markets that way and if that is a 

 8 concern. Should -- some people suggested that 

 9 maybe the overnight hours be reduced to some 

 10 extent. I'm just curious your thoughts on that. 

 11 MR. LEA: My thoughts personally would 

 12 be yes, that is an issue and a problem. We met 

 13 last week here in Washington, I guess a week ago 

 14 today with the ICE. And the ICE, at our request, 

 15 provided us with some very useful information 

 16 regarding nighttime trading and when volumes were 

 17 being done. And I don't have it with me but about 

 18 60 percent of the volumes being done during our 

 19 traditional hours, which is sort of 10:30 Eastern 

 20 to 2:30, they, you know, we've had various 

 21 proposals to stay open when the Chinese markets 

 22 are open and close again. I would say the 
 118 

 1 American Cotton Shippers as a policy would like to 

 2 probably see less trading hours, primarily not so 

 3 much as a lifestyle issue because my company 

 4 doesn't -- we're not represented in Asia by 

 5 futures traders but most firms are. So managing 

 6 that is not a problem. It's just to concentrate 

 7 liquidity and create efficiency in the 

 8 marketplace. And we don't all agree that that 

 9 would solve that problem but it's obviously common 

 10 sense and our opinion would tell you that if more 

 11 business was being done in less hours like it used 

 12 to be, then we probably would see a more efficient 

 13 marketplace. 

 14 In those situations you mention this 

 15 year, again, ICE was very helpful. We went back 

 16 and looked and on a couple of those 14 occasions 

 17 you mentioned, it was literally like nine 

 18 contracts that locked the market limit up. And we 

 19 have a new provision now that when the market -- 

 20 the options market, you know, if the markets limit 

 21 up, we can use derivatives or options to get out 

 22 of our position but if options are double limit 
 119 

 1 up, then the market closes. And there was a three 

 2 contract order that when the market was about 150 

 3 points from limit up on one particular day, a 

 4 three contract order forced the market limit up 

 5 and closed the market. Obviously, that makes our 

 6 situation as commercial hedgers very difficult. 

 7 So long story short, you asked me what time it is 

 8 and I'm trying to explain how to make a watch, but 

 9 yes, we think that -- my opinion would be that 

 10 less trading hours or the trading hours aren't 

 11 part of the problem. It's very thin at night and 

 12 less trading hours would be beneficial to the 

 13 efficiency of the marketplace. 

 14 COMMISSIONER CHILTON: Thanks. 

 15 MR. WESTON: Thank you very much and I 

 16 apologize also for being a little late. We had 

 17 our annual -- 

 18 CHAIRMAN DUNN: You're excused, Ryan. 

 19 MR. WESTON: We had our little world 

 20 sugar dinner last night in New York and I 

 21 appreciate your staff being so helpful keeping me 

 22 filled in on what was going on. And I'm sorry I 
 120 

 1 missed the surveillance portion. I was very 

 2 interested in that. 

 3 But I would like to bring up -- it was 

 4 actually very good because I was talking to all of 

 5 our traders and everyone else last night that is 

 6 in this and our industry has become much more 

 7 vertically integrated so we're going all the way 

 8 from the field hedging on the futures market. 

 9 People are more interested in what will be 

 10 happening with the swaps market. 

 11 And I would like to say where we've got 

 12 the 11 world contract and the 16 domestics, we 

 13 haven't had a lot of problems but we're a lot 

 14 smaller on the domestic side, obviously. Much 

 15 like cotton. So we are following this closely, 

 16 and if there's going to be any changes between how 

 17 the world market is regulated versus the domestic 

 18 market, and there's probably been more glitches 

 19 right now in the world market, not many, but it is 

 20 something I think our traders are watching, our 

 21 people in charge of hedging are paying attention 

 22 to. And I hopefully plan on talking to ICE a 
 121 

 1 little bit about those in the future. But I do 

 2 appreciate the workload and appreciate, you know, 

 3 I guess I've got great respect for what you are 

 4 dealing with, much like Fred said. But we will 

 5 try to stay as involved as possible as you go 

 6 forward because I think now with our end-users 

 7 trying to figure out who the bona fide hedgers are 

 8 going to be, our companies are a little interested 

 9 -- are interesting in the fact that they grow it 

 10 at the beginning and then are selling it all the 

 11 way through the end process. So we actually hedge 

 12 probably a couple different ways depending on what 

 13 the product is, if it's the raw sugar or the 

 14 refined sugar at the very end. 

 15 I appreciate your time. Thank you. 

 16 CHAIRMAN DUNN: Commissioner Sommers. 

 17 COMMISSIONER SOMMERS: Thank you, Mr. 

 18 Chairman. I have one other question with regard 

 19 to the proposed limits. And the charts that we 

 20 have in the packet are with regard to the all 

 21 months. And I'm wondering if under our proposal 

 22 the changes -- are we also proposing changes to 
 122 

 1 spot-month limit based on deliverable supply? So 

 2 is deliverable supply now different than it was 

 3 when we set that or the exchanges, either one, set 

 4 spot-month limits? And if we believe that 

 5 spot-month limits will go up at the same kind of 

 6 levels that we're seeing here, the levels that are 

 7 based on open-interest? 

 8 MR. SHERROD: For the 28 commodities 

 9 that we have, the spot-month limits, the exchanges 

 10 essentially set those limits. Under the proposal, 

 11 once a year the exchanges would provide data and a 

 12 recommended spot-month limit that the Commission, 

 13 if we validate the exchanges' information, the 

 14 Commission then would adopt that spot- month limit 

 15 for the following year as the outerbound. Each of 

 16 the DCMs, the designated contract markets, could 

 17 set a limit on their exchange at that level or 

 18 lower. So if the exchange had a concern that the 

 19 deliverable supply was shrinking during the year, 

 20 they could set and administer a lower level. And 

 21 that's currently the case in our part 150 limits 

 22 where the exchange can petition to make them 
 123 

 1 bigger but they have the leeway to set a lower 

 2 spot month limit. 

 3 The formula that we proposed is 

 4 generally consistent with the current guidance to 

 5 the exchanges. We've certainly received comments 

 6 on the specifics of how the deliverable supply 

 7 should be estimated and how we should then take 25 

 8 percent of that to set the limit. There are some 

 9 comments regarding whether to the extent supplies 

 10 that are in storage that are subject to long-term 

 11 contracts should be considered part of the 

 12 deliverable supply. And so the staff is reviewing 

 13 those comments and we're going to try to make a 

 14 good recommendation to you as a commissioner. 

 15 COMMISSIONER SOMMERS: Thank you. 

 16 MR. HICKS: Jordan, I want to tell you 

 17 that the comments you made about the risk and 

 18 exposure and the lack of liquidity. When we were 

 19 sold a bill of goods on overnight trading, you 

 20 know, we needed to have -- to be able to trade the 

 21 crop reports before the Japanese. We needed to 

 22 have access to trading the news and the liquidity. 
 124 

 1 This was all supposed to help us and even the 

 2 NGFA, we support these things. But in the end, 

 3 I've come to the conclusion that it really doesn't 

 4 work in the best interests of the people around 

 5 this table who we represent because it helps the 

 6 speculation, it helps the volume, but it really 

 7 doesn't help the user. 

 8 We support, you know, when I was at 

 9 Cargill, we supported all of these concepts 

 10 because it was supposed to help. And in helping 

 11 us as commercials, it is also supposed to help the 

 12 farmer and the user and the cooperatives and that 

 13 extension piece. But somehow it creates the 

 14 revenue for the exchanges and the FCMs but it 

 15 really isn't serving -- it really isn't serving 

 16 us, I don't think, as users. I think if you 

 17 polled everyone that it represents, we wouldn't be 

 18 advocates for overnight trading anymore. 

 19 As the NGFA, I mean, you're outleading 

 20 grain organizations. You know, we were advocates 

 21 for this, just like we were advocates for the 

 22 Staggers Act and deregulation. But somehow this 
 125 

 1 whole process changes and the voice of the little 

 2 guy in this process gets drowned out by the 

 3 money-making opportunities we have for volume and 

 4 electronic trading. We won't get rid of 

 5 electronic trading because of the revenue it 

 6 generates. But it isn't in the best -- the farmer 

 7 hasn't generated any more additional need for 

 8 electronic trading. But the users on the 

 9 commercial side of the business, the spec side of 

 10 the business. I just think that's the issue. I 

 11 think that the volatility is connected to the 

 12 ability to trade more often and the user doesn't 

 13 -- the small guy doesn't get a chance to use this 

 14 process. I don't know, I guess -- 

 15 MR. LEA: Edgar, I would absolutely 

 16 agree with you. I mean, we buy cotton during the 

 17 day. Because cotton is now consumed in Asia, we 

 18 sell cotton at night. We liked the idea initially 

 19 but it, unfortunately for my farm and I think in 

 20 general for the marketplace, it's probably been a 

 21 failure. It has created volumes but it also 

 22 inevitably has created illiquidity and 
 126 

 1 inefficiency in our marketplace to a degree to 

 2 which it's ultimately the farmer who is impugned 

 3 the most in the process. And oddly enough, about 

 4 two months ago, I guess actually it was in January 

 5 we started an initial series of conference calls 

 6 with the ICE as the Cotton Committee and 

 7 interestingly enough, they wanted to talk about 

 8 expanding hours. One of the purposes of the call 

 9 was contracting them. 

 10 MR. HICKS: Commissioner Dunn, it just 

 11 seems like, you know, this table, the issues that 

 12 we'd address, we're at odds with the exchanges a 

 13 lot of times. And it just seems like we're 

 14 automatically -- you ask us to come, we come here. 

 15 But how do we implement the voice that the 

 16 majority of us -- the ideas that we have? We just 

 17 somehow are at odds with the policies. Well, you 

 18 know where I'm going with this. 

 19 CHAIRMAN DUNN: I understand, Edgar. 

 20 COMMISSIONER O'MALIA: Steve, can I ask 

 21 a question on your last -- on slide five you 

 22 talked about trade capture reports, order book 
 127 

 1 data. What's it going to take for us to develop 

 2 an intraday surveillance system? How much time 

 3 and how much cost? And then how does that relate 

 4 to implementation of the standing up of Swap Data 

 5 Repositories? 

 6 MR. SHERROD: You ask the impossible. 

 7 COMMISSIONER O'MALIA: You had a 

 8 throw-away line that we didn't have the resources 

 9 so I'm trying to figure out what -- how much is it 

 10 going to take. 

 11 MR. SHERROD: So our head of technology, 

 12 John Rogers, would probably have the better handle 

 13 and estimate on it. John and his staff have been 

 14 working for quite a while to try to scope out the 

 15 storage devices that would be necessary to even 

 16 store the high electronic message traffic from the 

 17 order book. If we were to be able to store it, 

 18 that's great. But we have to be able to get the 

 19 data somehow. So that means a substantial 

 20 transmission capacity to us. Once we obtain the 

 21 data in the order book we have the same problems 

 22 with order book data that we have with trade 
 128 

 1 capture report that we as staff addressed with the 

 2 Commission in the ownership control and reporting 

 3 rulemaking to try to understand the codes -- the 

 4 short codes, the account codes -- that are used in 

 5 the systems to be able to tie the activity back to 

 6 particular traders or operator IDs as the CME 

 7 would use tag ID. And the scope of that I really 

 8 don't have the numbers but it's in the many 

 9 millions of dollars for the technology capacity, 

 10 both for transmission and storage and it's 

 11 likewise a significant number of staff to be able 

 12 to manage that process and a significant number of 

 13 staff to have effective programs to extract from 

 14 the great degree of data some usable information. 

 15 So I don't have specifics for you. 

 16 COMMISSIONER O'MALIA: Mr. Commissioner, 

 17 I was going to add one more thing based on what 

 18 Edgar said. 

 19 Edgar, one thing I would say about 

 20 electronic trading, when we eliminate electronic 

 21 -- when we eliminated our open outcry in 

 22 market-making, and Mr. Chairman, we eliminated, 
 129 

 1 you know, efficiency and liquidity in the 

 2 process -- and I might rue the day that I made 

 3 this part of the public record, but at this point, 

 4 and I don't know if it's through Dodd-Frank or 

 5 not, we would probably welcome the entrance in a 

 6 large way or a somewhat large way of algorithmic 

 7 or high volume traders. I know what happened in 

 8 cocoa and sugar this year and we don't like that. 

 9 We had entered conversations with ICE last week, 

 10 it seems like they have some circuit breaker ideas 

 11 that might be effective. But we need the volume 

 12 back. So inasmuch as I said I might hate saying 

 13 it, at this point because the exchange -- the 

 14 locals aren't coming back to the exchanges, we 

 15 need locals. And if it comes in the form of 

 16 (inaudible) we'd probably welcome it. And we 

 17 think farmers might realize a benefit as a result. 

 18 CHAIRMAN DUNN: Doug stepped away but 

 19 one of the comments that they had sent in from the 

 20 National Farmers Union and said they'd like us to 

 21 address was that -- it says -- the statement is 

 22 the CFTC should hold emergency meetings as 
 130 

 1 prescribed by Dodd-Frank early and often to ensure 

 2 that position limits are effective and meaningful. 

 3 Steve, are there plans to hold emergency 

 4 meetings? What are the folks in DMO going to do? 

 5 Is there a notification process to the Commission 

 6 that you think we should be having meetings on 

 7 this? How will that take effect? 

 8 MR. SHERROD: So I don't -- I don't 

 9 think -- I'll turn to David here but there are 

 10 very specific statutory requirements for 

 11 emergencies. And I don't think the conditions for 

 12 emergencies are currently in play. We do have 

 13 emergency authority under 87 but they are very 

 14 specifically prescribed circumstances where time 

 15 is of the essence actually and in certain ways it 

 16 seems sort of odd to have planned emergency 

 17 meetings but nonetheless, I mean, so I think the 

 18 circumstances this person is probably talking 

 19 about are potentially sort of structural problems 

 20 which I think are sort of meetings like this on an 

 21 ongoing basis are more helpful towards. But 87 

 22 actions, there's not actually a public meeting 
 131 

 1 requirement around them and there are very 

 2 specific sort of prescribed conditions. 

 3 But I can actually -- if there's an 

 4 implication of a Dodd-Frank provision I'm going to 

 5 have to take a look at that because I'm not 

 6 particularly familiar with what might be referred 

 7 to there. 

 8 COMMISSIONER O'MALIA: If you would, I 

 9 would appreciate that. 

 10 MR. SHERROD: Sure thing. 

 11 COMMISSIONER O'MALIA: Also, is there an 

 12 opportunity for folks, be it the AAC or even their 

 13 constituents that they represent to request an 

 14 emergency meeting from the Commission? 

 15 MR. SHERROD: To request an emergency 

 16 meeting? There are certainly -- not that I'm 

 17 aware of. There are certainly procedures around 

 18 petitioning us to force reg changes which might 

 19 force rule changes at the exchanges. There is 

 20 certainly that. But forcing emergency actions, 

 21 not that I'm aware of. 

 22 CHAIRMAN DUNN: Thank you. If we could 
 132 

 1 get the next panel to step up, please, if there 

 2 are no more questions. 

 3 And while the next panel is coming up -- 

 4 it's Mark Fajfar and Lee Ann Duffy -- I would ask 

 5 the chairman to comment on a couple of things that 

 6 we also got questions on, and this was from the 

 7 CMC. They ask about the implementation timeline 

 8 and sequence of rulemaking and then international 

 9 harmonization effort and something that was 

 10 brought up at this last panel. So if the chairman 

 11 could quickly go over where we are on those two 

 12 issues. 

 13 COMMISSIONER GENSLER: A lot to cover 

 14 while Lee Ann and Mark are at the table. But on 

 15 implementation, the Dodd- Frank Act gives both the 

 16 SEC and CFTC latitude on setting effective dates. 

 17 It's not 100 percent latitude because it, of 

 18 course, has to be logical and so forth. We've had 

 19 some public roundtables and we've asked all of you 

 20 and the broad public to comment on effective 

 21 dates. And staff put out -- I guess it was about 

 22 three or four Fridays ago -- a list of concepts on 
 133 

 1 how -- I think there were 12 or 13 concepts in a 

 2 four-page document on thinking about 

 3 implementation. 

 4 But if we were successful over the 

 5 course of the rest of 2011 finalizing rules, just 

 6 because we finalized a rule in July of this year 

 7 or September of this year, October of this year, 

 8 does not mean that it would go effective in that 

 9 order. The order of effective dates could be 

 10 different. And in fact, I think you should all 

 11 anticipate it will be. If we can, for instance, 

 12 if after this discussion today, if we were able to 

 13 move forward and finalize rules on the definition 

 14 of agriculture commodity, you know, that that 

 15 doesn't need to wait. 

 16 The first concept in this 13 or 12 

 17 concepts was that it's lower cost to the public if 

 18 we phase implementation, if we don't have sort of 

 19 a big bang and everything has to be done on the 

 20 same day, the same month that it be phased. And 

 21 some of the concepts that it would be terrific to 

 22 get your feedback on and the staff concepts was 
 134 

 1 that the large infrastructures, meaning the 

 2 clearinghouses, the trading facilities, where 

 3 they're called swap execution facilities and 

 4 designated contract markets, and the data 

 5 repositories, that they have to get their 

 6 rulebooks in place before any market participants 

 7 really have to have what's called transaction 

 8 compliance. 

 9 And though just about all of you and 

 10 your members will be end-users -- I don't know 

 11 that there's anybody here that -- I know there's a 

 12 little bit of this debate about farm co-ops, but 

 13 let me just assume that you're all going to be 

 14 end-users for a moment and jump over that issue 

 15 for one or two moments. So there's not a clearing 

 16 requirement that would necessarily affect any of 

 17 your members but if the clearinghouses' rules were 

 18 finalized, if we were able to finalize them this 

 19 summer or early in the fall, then there would be a 

 20 period of time that the clearinghouses would have. 

 21 We have to come together on how much time but the 

 22 clearinghouses would have some time before they'd 
 135 

 1 have to comply with those new risk management 

 2 standards of the clearinghouse. The staff 

 3 concepts, just threw out an example and that's all 

 4 it was, it said could they possibly be open for 

 5 business and have their new rulebooks by December 

 6 31st of this year, of 2011. That was in those 

 7 concepts. 

 8 But even if that were the case, the 

 9 clearing mandate would follow afterwards. That 

 10 the clearing mandate, which would actually affect 

 11 financial entities, not your membership but 

 12 financial entities would follow later. And that's 

 13 sort of a concept. And so position limits is one 

 14 that we just discussed. If we were able to 

 15 finalize the large trader reporting rule it would 

 16 certainly be the hope of just the chairman -- I 

 17 can't speak for the commissioners -- that we could 

 18 finalize large trader reporting in the near term, 

 19 in the summer, so that we can start collecting 

 20 data. Obviously, if we have 12,000 comments on 

 21 position limits that might take a little while 

 22 longer. 
 136 

 1 But even in the proposed position limit 

 2 rule there was contemplating some phasing that the 

 3 position limit rule would be finalized, whether 

 4 it's this summer or early in the fall, you know, 

 5 whenever that's finalized. There's phasing even 

 6 contemplated in that position limit rule that we 

 7 need data. That that data needs to come in. What 

 8 we proposed, there had to be an order by the 

 9 Commission before the actual rule went into place. 

 10 So there's probably 20 more questions 

 11 that could come on phasing but we also opened a 

 12 public comment file on implementation phasing. We 

 13 opened that, I guess it was in April that please 

 14 send in thoughts. I think that comment file, and 

 15 it's just on our website, is open and I know it 

 16 will be open into June. On most of our rules, not 

 17 all of them but most of our rules we also reopened 

 18 the comment file for 30 days. That runs till June 

 19 3rd. As you see the whole mosaic it would be 

 20 really helpful to get feedback. 

 21 I don't know, Commissioner Dunn, if that 

 22 answers that first question. And the other one is 
 137 

 1 international harmonization. The staff here and 

 2 the commissioners have been working very well and 

 3 I think closely with regulators around the globe. 

 4 And Commissioner Sommers chairs our -- it's 

 5 another committee like this but a Global Markets 

 6 Advisory Committee. And Jackie Mesa gets all of 

 7 us when she can to travel overseas. Where it 

 8 stands is Japan moved actually before us, a month 

 9 or so before with a law last year. Europe is very 

 10 close. The European Parliament is considering a 

 11 law and it might take that up and vote on it in 

 12 the next few weeks. Canada already has its 

 13 authority so its regulators are starting to look 

 14 at implementing this. 

 15 There is a commitment amongst 20 

 16 nations. It's called the Group of 20 that was 

 17 made in September of 2009 to move forward on 

 18 derivatives regulation and have it in place by the 

 19 end of 2012. To have it effective by the end of 

 20 2012. I can't speak for all 20 of those nations 

 21 but I would say I remain reasonably optimistic 

 22 that Europe and the U.S. will be largely aligned. 
 138 

 1 We're different cultures, different political 

 2 systems. There will be differences. We will be 

 3 able to recognize their regulation to the extent 

 4 it's comparable and consistent. That doesn't mean 

 5 it has to be identical but it has to have some, 

 6 you know, consistency. That might be by topic 

 7 area and so forth. So there's a lot of work still 

 8 to be done and it's not just by the CFTC. It's, 

 9 of course, by the Treasury and the Federal Reserve 

 10 and the SEC and others as well trying to promote 

 11 harmonization. 

 12 Thank you, Mr. Chairman. 

 13 CHAIRMAN DUNN: Thank you. 

 14 MR. UNGAR: Mr. Chairman, if I could 

 15 just make one comment about phasing. I think it's 

 16 -- CMC certainly believes it's a great idea and 

 17 obviously preferable to instituting everything at 

 18 once. But I encourage you to keep in mind when 

 19 you're phasing these in the implications of 

 20 instituting, for instance, one part of a proposal 

 21 that it may have on current market participants. 

 22 For instance, doing away with the hedge exemption, 
 139 

 1 the swap hedge exemption before you raise limits 

 2 and the ags would be, I think, extremely 

 3 prejudicial to some of us. So I'm sure that you 

 4 have that in mind but we'd encourage you to, you 

 5 know, keep an open dialogue with regard to those 

 6 limits. 

 7 COMMISSIONER GENSLER: And I would 

 8 encourage you and others to please note those for 

 9 us. I mean, the one that you've raised is quite 

 10 clear. At least I can't speak for other 

 11 commissioners. To me they're sort of -- they have 

 12 a mutuality. Capital and margin is an example. 

 13 Again, not related to you, this group. But if -- 

 14 when in doubt please note it in a comment letter. 

 15 Let us know so that we don't inadvertently miss 

 16 that mutuality of something. 

 17 CHAIRMAN DUNN: It was an elaborate sham 

 18 to tease these things out of you, Mr. Chairman, so 

 19 I can make my schedule for the rest of the summer. 

 20 With that if we'll turn to our third 

 21 panel. And we're going to be running overtime. I 

 22 apologize in advance. I ask my fellow 
 140 

 1 commissioners to please check your schedules, see 

 2 if you can stay. I am committed to be here as 

 3 long as we can and I apologize to members of the 

 4 Ag Advisory Commission. But your questions have 

 5 certainly warranted us being here taking this 

 6 extra time. So let's go with the swap dealer 

 7 definition and user exemptions. 

 8 Mark. 

 9 MR. FAJFAR: Good morning. We'll go 

 10 quickly through our presentations and get directly 

 11 to your questions and comments. 

 12 The rulemaking on the swap dealer 

 13 definition was a joint rulemaking with the SEC. 

 14 It was proposed in December. We got about 200 

 15 comments in meetings, including many from the 

 16 agricultural community. And as the chairman just 

 17 said, we've extended the comment period. Like 

 18 Steve said, we're reviewing the comments and then 

 19 we'll go to a final rulemaking when the Commission 

 20 is ready to do so. 

 21 The definition of swap dealer largely 

 22 follows the definition in the statute that sets 
 141 

 1 out four sort of ways of being a swap dealer or 

 2 holding yourself out as a swap dealer, making a 

 3 market, being commonly known as a swap dealer or 

 4 regularly entering into swaps as an ordinary 

 5 course of business. In the rule proposal, we 

 6 tried to think of looking at those factors and the 

 7 comments from the public. What are some of the 

 8 characteristics that distinguish swap dealers? 

 9 And what the proposal said were ideas such as 

 10 accommodating demand, facilitating other parties' 

 11 interests in entering into swaps, proposing terms, 

 12 engaging in the activities that are thought of for 

 13 swap dealers. And this is obviously an area where 

 14 we've had a lot of comment on whether these 

 15 particularly are the right characteristics, how 

 16 they should be interpreted, whether there are any 

 17 others. So that's what we're doing now, reviewing 

 18 those comments. 

 19 The statue also has an exemption for a 

 20 person who engages in a de minimis quantity of 

 21 swap dealing. So in the proposal we tried to 

 22 think of what would be a level that one could say 
 142 

 1 is de minimis, very small, an area that wouldn't 

 2 require -- somebody could engage in swap dealing 

 3 but not register as a swap dealer. So we set out 

 4 the four thresholds that you see on the slide. 

 5 And this area, also we've had a lot of comment in 

 6 this area about whether these are the right sort 

 7 of factors to look at or where the numbers should 

 8 be set. So we're going through those comments and 

 9 analyzing them. 

 10 There is also in the statute an 

 11 exclusion for swaps that are in connection with 

 12 originating alone and this is for insured 

 13 depository institutions, banks. And generally in 

 14 the proposal we've said that this would apply to 

 15 swaps that are connected to the financial terms of 

 16 the loan. An interest rate swap connected to a 

 17 loan would be a classic example. And in this area 

 18 we've had a lot of comments and we're looking at 

 19 this both from the perspective of the bank and the 

 20 borrower and how this exclusion would affect the 

 21 swap market overall. We're considering all of 

 22 those factors. 
 143 

 1 Generally, another thing that the 

 2 proposal went into was, especially for the persons 

 3 who are not explicitly holding themselves out as a 

 4 swap dealer, we're trying to think of how do you 

 5 identify what a swap dealer is. And what we 

 6 propose is to look at a person and say are you 

 7 fulfilling the role of a swap dealer? Are you 

 8 accommodating demand? Are you connecting people 

 9 to the swap market? And again, this is an area 

 10 where we've had a lot of comment and extensive 

 11 meetings. One of the real issues that we've had 

 12 to face and deal with is that this is a definition 

 13 that applies across all different types of swap 

 14 markets and we've had to sort of balance the idea 

 15 of trying to provide guidance that's specific to a 

 16 type of market versus having a rule that's fair 

 17 and applies, has a level playing field across the 

 18 board. 

 19 We've also -- the rule proposal also 

 20 provides -- proposed some indicators of what it 

 21 means to be commonly known as a swap dealer, you 

 22 know, contacting people to solicit their interest 
 144 

 1 in swaps, developing new types of swaps. These 

 2 are the kind of things that we would be looking at 

 3 -- propose to look at to determine if somebody's 

 4 commonly known as a swap dealer. 

 5 And the next topic in the rule proposal 

 6 was how you actually go about being designated. 

 7 How would the process work? And generally, what 

 8 we proposed was that people would look at their 

 9 own activities and decide whether they fall within 

 10 the definition. And then they would register. 

 11 And also important in the agriculture market, we 

 12 recognize that many companies use swaps for a very 

 13 wide variety of different purposes within the same 

 14 company. And so only a part of their usage of 

 15 swaps could be related to their swap-dealing 

 16 business. And then in that case you would 

 17 designate that part of your swap activities as 

 18 being the dealer and that part would register as 

 19 the dealer. And your other swap activities would 

 20 not be considered swap dealing. So there's a 

 21 process we proposed for the company to come in and 

 22 make an application to do that. 
 145 

 1 And lastly, obviously, we note that the 

 2 rule proposal did talk about how the rule on -- 

 3 the swap dealer would interact with agricultural 

 4 swaps. In particular, we have a rule proposal out 

 5 on swaps and agricultural commodities and we asked 

 6 and we've received comment on a variety of 

 7 different topics on how the swap dealer definition 

 8 should be applied in the agricultural market. As 

 9 somebody said this morning, the agricultural swap 

 10 market is developed first in some ways and has 

 11 unique aspects that aren't part of other swap 

 12 markets. And as I said before, the real thing 

 13 that we're looking at in terms of the comments is 

 14 how do you balance wanting to provide specific 

 15 guidance for specific areas and be sensitive to 

 16 considerations over part of the market without 

 17 then having a balkanization of different rules for 

 18 different markets that wouldn't -- couldn't be 

 19 applied fairly across the board. So those are the 

 20 two interests that we're balancing. 

 21 CHAIRMAN DUNN: Thank you, Mark. Lee 

 22 Ann. 
 146 

 1 MS. DUFFY: The Commission approved 

 2 rulemaking for the end-user exception to mandatory 

 3 clearing of swaps in December. The initial 

 4 comment period closed in February and the comment 

 5 period -- 

 6 CHAIRMAN DUNN: Lee Ann, could you move 

 7 your mic closer? 

 8 MS. DUFFY: I'm sorry. 

 9 CHAIRMAN DUNN: Or could they ramp up 

 10 the volume a little bit in there? Thank you. 

 11 MS. DUFFY: The comment period closed in 

 12 February but it's been extended until June 3rd. 

 13 We've received over 1,300 comments to date and we 

 14 continue to take meetings with commenters. 

 15 The general clearing mandate in 

 16 Dodd-Frank is section 2H1, which makes it unlawful 

 17 for any person to engage in a swap unless that 

 18 person submits the swap for clearing to a 

 19 derivatives clearing organization if such swap is 

 20 required to be cleared. However, 2H7 provides the 

 21 end-user clearing exception, which says that if 

 22 one party to the swap is not a financial entity, 
 147 

 1 is using the swap to hedge or mitigate commercial 

 2 risk, and a notice is provided to either a Swap 

 3 Data Repository or the Commission regarding how it 

 4 generally meets its financial obligations 

 5 associated with entering into non-cleared swaps, 

 6 it can avail itself of the end-user clearing 

 7 exception. 

 8 Credit risk generally is handled 

 9 differently for cleared and non-cleared swaps. As 

 10 proposed by the Commission, the end-user exception 

 11 requires 10 disclosures about how a counterparty 

 12 meets credit risk. An end-user must answer five 

 13 questions about how it meets its financial 

 14 obligations with respect to uncleared swaps. The 

 15 questions are whether there is a written credit 

 16 support agreement, whether it meets its financial 

 17 obligations by pledging or segregating assets, 

 18 whether there is a third-party guarantee, whether 

 19 the end-user relies on its own resources or 

 20 whether other means of meeting credit risk are 

 21 involved. The end-user must also identify itself, 

 22 you know, who they are, whether they are a 
 148 

 1 financial entity, whether they're a captive 

 2 finance affiliate, and if there is an SEC filer 

 3 involved, whether the entering into of the swap 

 4 has been approved by a committee -- an appropriate 

 5 committee of the board or an equivalent 

 6 institutional organization. 

 7 There is also a tenth question, whether 

 8 the swap is being used to hedge or mitigate 

 9 commercial risk. Not all swaps are eligible for 

 10 the end-user exception. Only swaps used to hedge 

 11 or mitigate commercial risk qualify. The 

 12 Commission provided guidance on the definition. 

 13 Swaps that are eligible for hedge accounting 

 14 treatment or swaps that qualify for the hedge 

 15 exemption from position limits or swaps that 

 16 reduce risks relating to an end-user's assets, 

 17 liabilities, or services qualify as hedging or 

 18 mitigating commercial risk. The Commission also 

 19 provided guidance about which swaps would not 

 20 qualify for the end- user exception. Swaps used 

 21 for speculation, investing, or trading don't 

 22 qualify. And swaps used to hedge another swap, 
 149 

 1 unless the first swap is used as a hedge, also 

 2 don't qualify. 

 3 The definition of hedging or mitigating 

 4 commercial risk in the end-user proposal is 

 5 virtually the same as the definition proposed in 

 6 connection with major swap participants. The 

 7 Commission proposes to determine whether a swap 

 8 hedges or mitigates commercial risk by analyzing 

 9 the facts and circumstances at the time the swap 

 10 is entered into, taking into account the person's 

 11 overall hedging and risk mitigation strategies. 

 12 In general, the proposed definition of hedging or 

 13 mitigating commercial risk would not encompass any 

 14 swap position that is held for a purpose that is 

 15 in the nature of speculation, investing, or 

 16 trading. 

 17 Dodd-Frank directs the Commission to 

 18 consider whether to exempt small banks, savings 

 19 associations, or farm credit system institutions 

 20 and credit unions from the definition of financial 

 21 entity as used in the end-user exception. 

 22 Financial entities, as defined in Dodd-Frank, may 
 150 

 1 not use the end-user exception. The exemption 

 2 being considered by the Commission would allow 

 3 small financial institutions to elect to use the 

 4 clearing exception. The Commission has requested 

 5 comments from the public on the question of 

 6 whether small financial institutions should be 

 7 exempt and staff is reviewing the comments 

 8 received. 

 9 Dodd-Frank requires notice to the 

 10 Commission of how the end-user generally meets its 

 11 financial obligations associated with entering 

 12 into non-cleared swaps. The proposed rule states 

 13 that the notice is to be provided through a Swap 

 14 Data Repository if one is available. The 

 15 Commission has proposed a check-the-box approach 

 16 to providing notification. At the time a swap is 

 17 executed, information regarding the methods used 

 18 to mitigate counterparty credit risk or the 

 19 financial obligation notice and other pertinent 

 20 facts are provided to the Swap Data Repository 

 21 along with information about the swap itself 

 22 that's provided to the SDR. The Commission's 
 151 

 1 oversight and enforcement effort for end-users 

 2 will depend upon the information that is submitted 

 3 this way to the SDR. 

 4 COMMISSIONER GENSLER: Commissioner Dunn 

 5 asked if I could just -- until he returns, chair 

 6 for a few moments. Why don't we open it up to 

 7 questions for Mark and Lee Ann. 

 8 Commissioner O'Malia. 

 9 COMMISSIONER O'MALIA: I have -- Lee 

 10 Ann, on page four we have the five questions for 

 11 end-users. In the margin rule the prudential 

 12 regulator doesn't take -- doesn't seem to be able 

 13 to take noncash collateral. Will we ask a 

 14 question whether you're able to post noncash 

 15 collateral to another bank and then to get cash to 

 16 meet, to satisfy the prudential regulator, is that 

 17 nuance captured in these questions? 

 18 MS. DUFFY: No. 

 19 COMMISSIONER O'MALIA: All right. Thank 

 20 you. 

 21 COMMISSIONER GENSLER: I just ask -- on 

 22 all of these, this is, if I remember, and this is 
 152 

 1 just a proposal and the rule could change, but 

 2 this was a check-the-box sort of thing. Congress 

 3 said that to be a commercial end-user you had to 

 4 be nonfinancial. You had to be secondly hedging 

 5 your mitigating risk. But thirdly, you have to 

 6 say how you're managing your risk. Is that right? 

 7 MS. DUFFY: Yes. 

 8 COMMISSIONER GENSLER: And so on the 

 9 third one it was just we have this form that you'd 

 10 have to -- the end-users would sort of check the 

 11 boxes. 

 12 MS. DUFFY: Yes. 

 13 COMMISSIONER GENSLER: We don't plan to 

 14 do more or less than that from our proposal. Is 

 15 that right? 

 16 MS. DUFFY: Well, we asked for comment 

 17 on -- 

 18 COMMISSIONER GENSLER: Oh, yeah, we 

 19 asked for comment but I'm saying that if the 

 20 proposal were the final, we're not asking for 

 21 reporting to us or record-keeping to us. It's 

 22 just a form and the end-users check the 
 153 

 1 appropriate boxes on the form. Is that right? 

 2 MS. DUFFY: Yes. 

 3 MR. UNGAR: Okay. CMC has several 

 4 comments on this and would ask for some 

 5 clarifications. I think they all fall under the 

 6 general umbrella of what Christine mentioned 

 7 before about the possibility that some of the 

 8 hedge exemptions may be, in fact, as proposed, too 

 9 narrow going along with her initial comment about, 

 10 and I think dissatisfaction with the fact that 

 11 non-processors of food products would be, you 

 12 know, deemed speculative and not be allowed to be 

 13 -- to fall under the margin. I'm sorry, under the 

 14 hedge exemption. But if you could just please 

 15 clarify what you mean in the footnote 23 of the 

 16 end-user exemption. It's our understanding that 

 17 the Commission will not deem swap positions used 

 18 to hedge trading positions in the physical markets 

 19 as hedging commercial risk. Is that correct? 

 20 MR. FAJFAR: We've received comment on 

 21 that concept from a lot of different people on 

 22 what the distinction between hedging and 
 154 

 1 speculating in trading is. And we've received 

 2 multiple comments on each side going into 

 3 different industries. So we're going through 

 4 those on what that distinction would be and how it 

 5 would work in practice. This applies both for the 

 6 hedge exception and the major swap participant 

 7 test. So there's a lot of different 

 8 considerations. I couldn't characterize how 

 9 that's going to come out. 

 10 MR. UNGAR: We certainly appreciate that 

 11 that's a very -- the distinction between hedging 

 12 and speculating is a very difficult one to make. 

 13 And I would just encourage, or I think that many 

 14 of the largest speculators, and this goes back to 

 15 an older comment, you know, just because there may 

 16 be some small exposure to say heating oil in one 

 17 part of the business, that may represent only a 

 18 very small portion of the actual trading that's 

 19 going on. To me that seems -- and I understand 

 20 it's a huge devotion of resources, but in order to 

 21 make these, particularly for the CMC membership 

 22 and to ensure the hedging, that none of this -- 
 155 

 1 none of the Dodd-Frank really messes up the 

 2 hedging ability either on the swap or the futures 

 3 side, would encourage you to as much as possible 

 4 draw those distinctions as clearly as possible 

 5 because to me it seems that the greater risk is in 

 6 the very large speculators who were, you know, 

 7 claiming hedge exemptions under the existing laws 

 8 just because of very small commercial exposure, 

 9 whereas, for instance, in the case that Christine 

 10 brought up before, you know, nonprocessors who I 

 11 think have a very viable argument that they are 

 12 hedging commercial risk would not be considered 

 13 hedgers. 

 14 CHAIRMAN DUNN: Mark, I believe it was 

 15 in the end-user proposal, proposed rule, there is 

 16 a question asked of whether the exemption should 

 17 apply to swaps just with the origination of loan 

 18 or at any time during the life of the loan. And 

 19 our position was that you should apply at any time 

 20 during the life of the loan because the swap would 

 21 still be used for the same financial transaction. 

 22 And I mention that just because I see it on page 
 156 

 1 six of the presentation. 

 2 MR. FAJFAR: We definitely -- we see 

 3 that comment from different people. 

 4 MS. PRESTON: Mark, this is American 

 5 Bankers and we have similar concerns about the 

 6 lending exception. And certainly in the 

 7 agricultural context it's very difficult to 

 8 determine for the producers what their needs are 

 9 going to be over the life of a multi-term loan. 

 10 You look at things like crop rotation. You can't 

 11 predict that five years in advance always. You 

 12 can't predict the weather conditions. So these 

 13 are types of things that are very important to us 

 14 as we look at loans to agricultural producers. 

 15 CHAIRMAN DUNN: Robbie. 

 16 MR. BOONE: Yes. Commissioner Dunn, 

 17 since this is the first time I've spoken today I 

 18 want to echo the sentiment expressed by others 

 19 around this group about your service before the 

 20 CFTC. I've only been at Farm Credit for a couple 

 21 of years but I know your long-standing public 

 22 service also included a time at Farm Credit 
 157 

 1 System. And thank you for that as well. 

 2 And also I guess what Fred indicated as 

 3 well with respect to Dodd-Frank, regardless of 

 4 your individual views and their varied -- I 

 5 appreciate all the commissioners public service 

 6 because it's been a lot of work I know by all the 

 7 folks that are in this room and at this table, 

 8 staff included. Thank you for having these items 

 9 -- the end-user exception swap dealer definition 

 10 being considered today. I guess we've filed 

 11 extensive comment letters on both and we'll let 

 12 that largely stand. 

 13 I did want to quickly note, however, 

 14 about just our latest earnings came out the end of 

 15 March, at least the first quarter. And as many of 

 16 you know, the system continues to perform quite 

 17 well. The overall notional value of our 

 18 derivatives contracts are now down to about 41 

 19 billion, but an interesting thing is that, you 

 20 know, you get down. The notional value sounds, 

 21 you know, rather spectacular but when you get down 

 22 to the exposure net of collateral, which is sort 
 158 

 1 of the all-important, sky is falling-type 

 2 situation, that's 204 million. Which, if you take 

 3 that to our total loan level, not total assets but 

 4 total loans now in the system are $177.5 billion. 

 5 If you take that 204 million, I mean, that's in 

 6 basis points, that's 11 or 12 basis points for the 

 7 -- and again, that's just loan volume, not -- 

 8 total assets are actually tens of billions higher 

 9 than that. 

 10 But when you start, you know, we would 

 11 argue, I guess, when you start talking about 

 12 things like interconnectivity, systemic risk, you 

 13 know, we would at least hope the Commission will 

 14 understand it's sort of an uphill climb to sort of 

 15 at least as far as the Farm Credit system is 

 16 concerned, that there would be, you know, 

 17 implicating the system into that sort of risk 

 18 structure, you know, we think would be quite a 

 19 reach. But at the end of the day, you know, and 

 20 again this is laid out in our comment letters, you 

 21 know, if the system is treated, you know, 

 22 differently here, we do think there is going to be 
 159 

 1 some meaningful impact as far as, you know, 

 2 increased lending costs to our farmer-rancher, 

 3 rural American borrowers. So again, I'll leave it 

 4 at that. But thank you all for having this on the 

 5 agenda today. 

 6 CHAIRMAN DUNN: Thank you, Robbie. 

 7 Others? Kevin. 

 8 MR. NATZ: Thank you, Chairman Dunn. I 

 9 appreciate you having the meeting today. I don't 

 10 have a question. I guess I have a big question 

 11 but I won't ask that today. 

 12 But I would like to pick up on some of 

 13 the others' comments in the room. Earlier today I 

 14 heard a lot of concerns about increased 

 15 volatility, increased margin costs, and liquidity 

 16 issues. And these would be three major reasons 

 17 why our membership, the co-ops, have started using 

 18 the over-the-counter market. For example, margin 

 19 costs this year, if you have limit-up in wheat and 

 20 corn and soybeans in one day you might be talking 

 21 to your banker that night. However, co-ops have 

 22 been able to alleviate some of those stresses by 
 160 

 1 entering into swaps. And that has freed up 

 2 working capital. And by freeing up that working 

 3 capital, they're allowed to continue the forward 

 4 contract with farmers. This happened in 2008 and 

 5 it's happening today. Without the ability to 

 6 enter into the swaps, it would be more difficult 

 7 to continue to enter into forward contracts with 

 8 the local elevator when prices are high and when 

 9 farmers want to engage in those contracts. As you 

 10 know, our concern has been being swept in as a 

 11 swap dealer and we're working through some of 

 12 those issues. 

 13 Another issue I looked at -- we made 

 14 some comments on the end-user rule and we did have 

 15 a few questions and it had to do -- I'm going to 

 16 assume that co- ops are end-users and they enter 

 17 into swaps with customers from time to time. And 

 18 how end-user to end-user transactions will be 

 19 handled as far as some of the data reporting, some 

 20 of the financial reporting. And looking at those 

 21 issues, I think it's going to take some time to 

 22 work through all of this, even for end-users to 
 161 

 1 figure out exactly what they need to do at the end 

 2 of the day. So we appreciate your comments about 

 3 phasing some of the rules in. And understanding 

 4 that agriculture tends to be a high volume, low 

 5 margin industry, just keeping in mind as all these 

 6 rules are being layered on and all the reporting 

 7 requirements, etcetera, etcetera, are being put 

 8 together, keeping in mind that at the end of the 

 9 day that's going to end up as a large aggregate 

 10 cost and it'll trickle on down to producers 

 11 eventually. 

 12 I want to recognize your staff and the 

 13 commissioners for being very engaged with us in 

 14 this process. We appreciate that. We appreciate 

 15 the commissioners' comments back in January 

 16 highlighting some of our concerns, and we look 

 17 forward to working with you and your staff moving 

 18 forward as the bill -- the act is implemented. 

 19 Thank you. 

 20 CHAIRMAN DUNN: Kevin, it strikes me 

 21 hearing from you and hearing from the 

 22 representative of the three financial institutions 
 162 

 1 that there is a lot that the industry needs to do 

 2 on their own of getting prepared for this. And we 

 3 would encourage you to be having those types of 

 4 meetings and talking, you know, with the financial 

 5 institutions if there are certain types of lines 

 6 of credits or other guarantees that may be out 

 7 there, that you begin working with those. 

 8 Mr. Chairman, I'm going to offer up your 

 9 staff, the CFTC staff to help attend those 

 10 meetings as we go forward. It's all part of the 

 11 implementation aspect of what kind of instruments 

 12 are going to be needed out there. Where are we 

 13 going with that? And I think it would be prudent 

 14 if we could get that type of assistance. 

 15 COMMISSIONER GENSLER: I think the staff 

 16 always stands ready to take meetings with the 

 17 public. I don't know, particularly as it relates 

 18 to what we're trying to accomplish, but I also 

 19 leave them sort of on their own if they have to 

 20 deny a meeting because they can't travel somewhere 

 21 and they've got to get their work done on these 50 

 22 or so rules, too. So hopefully you were chatting 
 163 

 1 about here in Washington. 

 2 CHAIRMAN DUNN: Or videoconferences. 

 3 Todd. 

 4 MR. KEMP: Just a quick comment. One of 

 5 the things we like about Dodd-Frank is that we 

 6 think it probably opens up some new opportunities 

 7 for risk management tools, particularly to be 

 8 offered to producers. The old ag trade option 

 9 regime which never worked falls away. Those kinds 

 10 of instruments will be easier for agribusiness 

 11 firms to structure now to offer to producers. 

 12 Under the swap dealer definition rulemaking, 

 13 however, we have very similar concerns as you've 

 14 heard from the co-ops. If a country elevator out 

 15 in the middle of Kansas or out in the middle of 

 16 Iowa is viewed as a swap dealer, defined as a swap 

 17 dealer, those kinds of new tools are probably not 

 18 going to be developed. I don't think any of our 

 19 members, to the extent they can avoid it, wants to 

 20 be a swap dealer, nor believes they're a swap 

 21 dealer. 

 22 So we would suggest that as the 
 164 

 1 Commission continues in its rulemaking process, 

 2 keep in mind the kind of business function that 

 3 these agribusiness firms perform, not just co-ops 

 4 but also privately held companies. We've got 

 5 about 1,000 members. About half of those are 

 6 co-op; about half of those are private. Organized 

 7 a little differently but perform the same function 

 8 in helping producers with their marketing and risk 

 9 management plans. So we hope that there will be a 

 10 common sense way of resolving the swap dealer 

 11 definition issue. 

 12 MR. DIERKS: Commissioner Dunn, thank 

 13 you. And again, I'll join the chorus of thanking 

 14 you for your service and everything you've done. 

 15 And hope you've got your corn in. Thanks to the 

 16 commissioners also. 

 17 From an NPPC perspective, one thing I'll 

 18 just put forth and it relates to what was just 

 19 talked about, but as we look at our membership, 

 20 the potential -- and I would just ask the 

 21 commissioners as they deliberate this on this 

 22 issue about the definition of a dealer, things in 
 165 

 1 this order, that we see the greatest risk from our 

 2 membership of who is going to be impacted as a 

 3 smaller producer. Our larger producers have the 

 4 wherewithal, have the sophistication to deal with 

 5 whatever. If you do get in a situation as was 

 6 just put forth either by a local co-op or local ag 

 7 dealer, or in our case we have co-ops that market 

 8 hogs, that really don't do a lot of this type of 

 9 work. But if they get drawn into the definition 

 10 they'll step back. 

 11 The ramification is the reason they do 

 12 it is they're offering it to service small 

 13 producers that can't really justify the risk 

 14 management or the cost of getting the risk 

 15 management by getting into working with a normal 

 16 dealer or broker or whatever. So I just ask that 

 17 as we go through this that we -- that you 

 18 deliberate and recognize that as this comes 

 19 forward there could be ramifications on this 

 20 definition of the dealer that could have 

 21 ramifications to the smaller producer looking for 

 22 risk management also. 
 166 

 1 CHAIRMAN DUNN: Thank you, Neil. 

 2 MR. CRYAN: Kevin and Todd and Neil all 

 3 saved me a lot of time because I second everything 

 4 they said. That pretty much summarizes where we 

 5 stand on this. The first thing is the co-op. I 

 6 want to emphasize that. The co-op is the farmer 

 7 and the farmer is the co-op. I really hope it's a 

 8 no-brainer that the relationship between the co-op 

 9 and their members shouldn't be considered a swap 

 10 dealer relationship. 

 11 Beyond that, similar analogous 

 12 relationships exist between small -- all kinds of 

 13 processors and farmers. They provide risk 

 14 management opportunities because of direct 

 15 relationships that are directly involved with 

 16 marketing their milk, even if a marketer of a 

 17 farmer's product facilitates a swap with a third 

 18 party, I would hope that there is a lot of leeway 

 19 for that without chasing them off. Without 

 20 chasing off those folks by threatening to regulate 

 21 them as swap dealers because I agree with all 

 22 three of these gentlemen, that that kind of 
 167 

 1 paperwork and regulation is going to chase off a 

 2 lot of opportunities for the small farmers of the 

 3 small scale that don't exist otherwise. 

 4 And I also want to reiterate my 

 5 appreciation for the Commission's work, and 

 6 especially for reopening the comment period. Now 

 7 that we have a chance to see everything that's 

 8 very much appreciated. So thank you. And thank 

 9 you for having this hearing -- this meeting. 

 10 CHAIRMAN DUNN: Any other? 

 11 MS. PRESTON: I also want to recognize 

 12 the Commission and thank you for providing this 

 13 opportunity to talk. And I also would like to 

 14 compliment your staff on their professionalism and 

 15 responsiveness. When I have called with questions 

 16 I've been very impressed. So kudos to the staff. 

 17 I wanted to also point out in the small 

 18 -- the end-user -- I wanted to ask for 

 19 clarification on the small bank exemption. And as 

 20 I'm reading this it says that you will include one 

 21 in the final read or you're anticipating including 

 22 one. And I just wanted to ask for clarification 
 168 

 1 on that. 

 2 MS. DUFFY: The Commission is directed 

 3 in the statute to consider whether an exception is 

 4 appropriate. We've received comments and we are 

 5 reviewing the comments. 

 6 MS. PRESTON: Okay, so it's still at the 

 7 consideration phase. There's been no decision on 

 8 including it or not. Is that fair to say? 

 9 MS. DUFFY: No, there hasn't been a 

 10 decision yet. 

 11 CHAIRMAN DUNN: Other questions or 

 12 comments on this panel? 

 13 COMMISSIONER O'MALIA: Mr. Chairman. I 

 14 have -- Mark, I have two questions. And this is 

 15 kind of a combination for both Mark and Lee Ann. 

 16 Do we provide a clear guidance on 

 17 end-user to end-user transactions? Do we say that 

 18 these are clearly outside the swap dealer 

 19 definition or how do we -- do we provide 

 20 sufficient clarity on that? 

 21 And the second one, the chairman 

 22 mentioned large trader -- are you working with the 
 169 

 1 large trader team? Because it references swap 

 2 dealer. Who is a swap dealer if we put out a 

 3 large trader definition and reporting requirement 

 4 but have yet to do the swap dealer definition? 

 5 How do we -- how are you working with the teams 

 6 and how will we -- how will all of these people 

 7 deal with that going forward? 

 8 MR. FAJFAR: On the first question, I 

 9 think we received a lot of comments and these 

 10 weren't simplistic, you know, easy to read. They 

 11 were very detailed comments and I think there were 

 12 a lot of things in the proposal that need to be 

 13 clarified. 

 14 On the point of what's the status of 

 15 end-user to end-user trade, I don't think that was 

 16 directly addressed in the proposal because the 

 17 proposal talks about who is a swap dealer and 

 18 identifying swap dealers out of the many market 

 19 participants. And I think one thing that could 

 20 certainly be clarified is that if you're not 

 21 pulled out and identified as a swap dealer or a 

 22 major swap participant then you're not in that 
 170 

 1 status and you're not covered by those 

 2 requirements. That can certainly be more clear. 

 3 And then in terms of the -- how will 

 4 this rulemaking interact with the other teams. 

 5 That's sort of exactly why this process takes some 

 6 time of working through. Like I said, of all the 

 7 different -- looking at it from all the different 

 8 angles and making sure each one is covered. So 

 9 these are all issues that we're considering how 

 10 the swap dealer definition will then interact with 

 11 the other definitions. 

 12 CHAIRMAN DUNN: Thank you. Any other -- 

 13 Bart, did you have any questions? 

 14 COMMISSIONER CHILTON: No, thank you, 

 15 Mr. Chairman. 

 16 CHAIRMAN DUNN: If not, Mark, Lee Ann, 

 17 thank you both. We appreciate that. And we, as 

 18 usual, have saved the best for last. Ananda has 

 19 been sitting there but certainly the thing that I 

 20 think is on a lot of people's mind because I've 

 21 heard it mentioned over and over again and that's 

 22 the margin aspect. So when you're ready, Mr. 
 171 

 1 Director. 

 2 MR. RADHAKRISHNAN: Thank you, 

 3 Commissioner Dunn. I would ask somebody to pull 

 4 up my slideshow. While that's being done, just on 

 5 a personal note, it is very gratifying to hear all 

 6 of the great accolades that have been provided to 

 7 Commissioner Dunn, and I would echo them. I would 

 8 also make a plea to Commissioner Dunn that he 

 9 would consider staying with us as long as he can. 

 10 Not as long as he wants but as long as he can 

 11 because I think certainly speaking for the staff, 

 12 we would benefit from the wisdom and the guidance 

 13 that you provided to the staff since you've come 

 14 to the Commission. 

 15 CHAIRMAN DUNN: Ananda, my wife is 

 16 watching the streaming out in Iowa and you just 

 17 got on her bad list. 

 18 COMMISSIONER O'MALIA: Did you say your 

 19 wife is screaming out in Iowa? 

 20 CHAIRMAN DUNN: Streaming. She may be 

 21 screaming. 

 22 MR. RADHAKRISHNAN: So what I wanted to 
 172 

 1 do today, members of the Commission and members of 

 2 the committee, is to give you a summary of the 

 3 proposal making that the Commission issued with 

 4 respect to margin requirements for unclear swaps. 

 5 And this proposal was published in the Federal 

 6 Register Thursday, the 28th of April. It is page 

 7 23732 of volume 76 of the Federal Register. And 

 8 the comment period ends on the 11th of July, 2011 

 9 to coincide with the end of the comment period for 

 10 the Commission's proposed rule on capital 

 11 requirements on swap dealers and major swap 

 12 participants. 

 13 So to get to the authority, the statute 

 14 requires the Commission to impose both initial and 

 15 variation margin requirements on all swaps that 

 16 are not cleared by a derivatives clearing 

 17 organization that's registered with the 

 18 Commission. And this requirement is directed at 

 19 those entities that are swap dealers and major 

 20 swap participants for which there is not a 

 21 prudential regulator. So, for example, the 

 22 Commission's requirement -- the Commission's 
 173 

 1 eventual requirements will not apply to bank 

 2 holding companies, for example. That has been 

 3 addressed by a concurrent proposal-making, but all 

 4 of the prudential regulators have also issued -- 

 5 and this is in accordance with the provisions of 

 6 the Dodd-Frank Act. So if an entity is a swap 

 7 dealer but it is also a prudential regulator, then 

 8 they are subject to the requirements of the 

 9 prudential regulators. And for those who are not 

 10 also prudentially regulated, they're subject to 

 11 the requirements of the CFTC. 

 12 As the proposal making indicate, we have 

 13 strived to be as comparable to the requirements of 

 14 the prudential regulators. It's just one little 

 15 difference that -- well, two differences that we 

 16 made. And I'll highlight that. And also, the 

 17 other provision in the statute is that the 

 18 Commissioner is directed to permit the use of 

 19 non-cash collateral as a deterrence to be 

 20 consistent with preserving the financial integrity 

 21 of the markets trading swaps. And also the 

 22 stability of the U.S. financial system. 
 174 

 1 So at the outset, let me indicated -- 

 2 because I'm sure this will be of interest to you 

 3 -- that this proposal- making would not impose 

 4 margin requirements on commercial end-users, which 

 5 have been defined under the proposals as 

 6 non-financial entities. And as Chairman Gensler's 

 7 point about, you know, let's work on the 

 8 assumption that the entities that you represent 

 9 will fall under this category. So if you fall 

 10 under this category of commercial end-users, then 

 11 I will direct you to page 23736 of the Federal 

 12 Register release. It's not here but basically all 

 13 you are required to do is to -- well, all that the 

 14 swap dealer and MSP would be required to do is to 

 15 make sure that there are credit support 

 16 arrangements between them and commercial end-uses. 

 17 And basically, the parties will be free to set, 

 18 you know, initial end-margin requirements and 

 19 variation requirements as dictated by the credit 

 20 support agreement. 

 21 So basically, you've been required to 

 22 have -- the swap dealer and MSP would be required 
 175 

 1 to have a credit support agreement or an 

 2 arrangement to governing the swap relationship and 

 3 a credit support arrangement. And margin 

 4 requirements, if any, would be those that are 

 5 dictated by the credit support arrangement. 

 6 So let's go to the requirements. There 

 7 will be requirements between swap dealers and 

 8 MSPs. And in the proposed rulemaking, the 

 9 Commission calls them covered swap entities. So a 

 10 covered swap entity is a swap dealer, MSP, and 

 11 other swap dealers and MSPs. And here the rules 

 12 would require the payment and collection of both 

 13 initial and variation margin for each transaction. 

 14 With respect to trades between swap 

 15 dealers or covered swap entities and financial 

 16 entity end-users, the rules would require that the 

 17 swap dealer and MSP collect but not pay initial 

 18 and variation margins for each trade subject in 

 19 certain circumstances to permissible thresholds. 

 20 And then as I pointed out for trades 

 21 between covered swap entities and nonfinancial 

 22 entities, if would basically require the existence 
 176 

 1 of a credit support arrangement with 

 2 counterparties and for the counterparties to abide 

 3 by those arrangements. 

 4 Another important point of the proposal 

 5 is that the rules would not apply retroactively. 

 6 They would apply to uncleared swaps entered into 

 7 after the effective date of the regulations. So 

 8 whenever the Commission proposes for the final 

 9 rule to be effective, these will apply to swaps 

 10 entered after the effective date. 

 11 Let's go ahead and talk about the 

 12 calculation of initial margin. Initial margin 

 13 will be calculated using a model that is approved 

 14 by the Commission and is also used by a 

 15 derivatives clearing organization or DCO that is 

 16 registered with the Commission in a clear, related 

 17 swap. Sorry, clear swaps. Or is used by an 

 18 entity that is subject to oversight by a 

 19 prudential regulator. Model has been approved by 

 20 the prudential regulator. Or that's made 

 21 available for licensing to any market participant. 

 22 If no such model is available, then the 
 177 

 1 initial margin would be calculated by selecting a 

 2 comparable cleared swap or futures contract and 

 3 applying a multiplier that is set forth in the 

 4 rule. And in all instances, all initial margins 

 5 must cover 99 percent of 10-day price. With 

 6 respect to variation margin, variation margin will 

 7 be calculated to cover the current exposure 

 8 arising from changes in the market value of a swap 

 9 since the trade was executed or the previous time 

 10 the position was market to market. And the 

 11 proposals previously proposed for swap dealers and 

 12 swap participants will require that documentation 

 13 include an agreement on the methods, the 

 14 procedures, the rules and inputs for determining 

 15 the value of each swap at any time from the 

 16 execution of the swap to the termination, 

 17 maturity, or expiration of a swap. 

 18 Let's talk about the forms of margin. 

 19 The covered swap entities would be required to 

 20 accept only certain specified assets as initial or 

 21 variation margin from other SDs or MSPs offering 

 22 financial entities. And appropriate haircuts are 
 178 

 1 specified in the proposed rule. I direct you to 

 2 page -- sorry, 23738 of the third Register release 

 3 and the forms of initial margin are specified 

 4 there. 

 5 CHAIRMAN DUNN: Ananda, do you have the 

 6 number of that Federal Register or at least the 

 7 date so that people -- 

 8 MR. RADHAKRISHNAN: Oh, yeah. So it is 

 9 76 FR 23732. So volume 76 of the Federal 

 10 Register, starting on page -- I guess it's 23,732. 

 11 And the date is the 28th of April. 

 12 So the forms of initial margin appear 

 13 starting on page 23738. Basically, it's cash 

 14 denominated in U.S. Dollars or the currency in 

 15 which the payment obligation under the swap is 

 16 required to be settled. And this cash has to be 

 17 immediately available cash, which means in the 

 18 United States it's got to be in a bank deposit 

 19 account. Any obligation which is a direct 

 20 obligation of or fully guaranteed as to principal 

 21 and interest by the United States or an agency of 

 22 the United States, and any senior debt obligation 
 179 

 1 of Fannie Mae, Freddie Mac, Farmer Mac, the 

 2 Federal Agricultural Corporation, or any 

 3 obligation that is an insured obligation at that 

 4 time is defined in the Farm Credit System Bank. 

 5 And those are the limited forms of collateral but 

 6 we do ask questions as to whether we should expand 

 7 the forms of collateral. And the schedule of 

 8 haircuts appears on page 23739 of the Federal 

 9 Register. 

 10 Now, let's talk about location of the 

 11 collateral. Collateral for trades between covered 

 12 swap entities and other covered swap entities 

 13 would be required to be held at third-party 

 14 custodians and cannot be rehypothecated. And 

 15 covered swap entities would be required to offer 

 16 non- covered swap entities, the opportunity to 

 17 have any initial margin segregated. 

 18 So that is the end of my presentation. 

 19 It is a broad summary. I would urge all parties 

 20 who are interested to please look at the proposal 

 21 as it appears in the Federal Register. And if you 

 22 have any comments, please do submit your comments 
 180 

 1 on or before the deadline which is the 11th of 

 2 July, 2011. Thank you. 

 3 COMMISSIONER GENSLER: Ananda, I know 

 4 that you said this but just to reconfirm, so for 

 5 nonfinancial end-users, they're not covered by our 

 6 margin proposal as proposed. 

 7 MR. RADHAKRISHNAN: Correct. 

 8 COMMISSIONER GENSLER: And then 

 9 secondly, the dealer is not required to have 

 10 margin with them. The only thing is the two can 

 11 negotiate just as they do today, negotiate 

 12 whatever their credit support arrangements are. 

 13 MR. RADHAKRISHNAN: That's correct. 

 14 COMMISSIONER GENSLER: And thirdly, if 

 15 they have whatever arrangements they do, we 

 16 explicitly say that the dealer can -- as the 

 17 statute says, accept noncash collateral. 

 18 MR. RADHAKRISHNAN: Correct. 

 19 COMMISSIONER GENSLER: Of course, I 

 20 mean, it's still subject to their negotiation. 

 21 MR. RADHAKRISHNAN: Correct. 

 22 CHAIRMAN DUNN: Questions? Comments 
 181 

 1 from the Ag Advisory Committee? 

 2 MR. SCANLAN: Thank you, Mike. I would 

 3 also be remiss if I didn't say thanks to you, 

 4 Mike, for your efforts here at CFTC and over your 

 5 long history of serving American Agriculture. So 

 6 thank you. 

 7 Just a couple of comments. One of the 

 8 things that I've seen in a number of the proposed 

 9 rules is the assertion that off-comments -- excuse 

 10 me -- that over-the- counter swaps are inherently 

 11 more risky than exchange- traded swaps. And I 

 12 would simply say that I think that's painting with 

 13 too broad of a brush. A lot of the over-the- 

 14 counter swaps that, for example, our banks use are 

 15 simply customized based on the notational value of 

 16 the loan or they may not fit the model that the 

 17 exchange is using. And from my understanding, the 

 18 exchanges don't simply accept the low risk swaps; 

 19 they accept, you know, they accept swaps based on 

 20 the volume of business that they're doing. And so 

 21 a lot of the swaps that some of the community bank 

 22 would want to do with the mid-term or mid-level 
 182 

 1 swap dealers, they would like to be able to move 

 2 to the exchange traded platform but they're unable 

 3 to do so. 

 4 So I just raise that as a point because 

 5 in the proposal where it says that these -- the 

 6 capital could not be rehypothecated. From what 

 7 we've been told that could cause serious problems 

 8 for the ability of community banks to use 

 9 over-the-counter swaps because it could force a 

 10 number of the mid-level swap dealers out of 

 11 business. And therefore -- and those are the ones 

 12 that the community banks use. So the community 

 13 banks and their borrowers would therefore not have 

 14 a source to go to in order to engage in these 

 15 over-the-counter customized swaps. So we're going 

 16 to commenting on that but I just want to mention 

 17 it because it's a serious concern that I think 

 18 could affect our industry and our industry's 

 19 ability to serve farmers and ranchers. 

 20 CHAIRMAN DUNN: Thank you, Mark. 

 21 Robbie. 

 22 MR. BOONE: Just a quick, I guess, 
 183 

 1 process standpoint. Ananda, I appreciate your 

 2 comments about the prudential regulator who also 

 3 have sort of their own process. And we're 

 4 working, Farm Credit Systems is sort of aiming its 

 5 -- I'm expecting we're going to have a comment 

 6 letter. But I will say as I sit there, we're 

 7 trying to figure out whether or not we, you know, 

 8 either need to copy you all or answer your own 

 9 sort of margin proposed rule just from the 

 10 standpoint that there may be situations where 

 11 given, you know, how these contracts are entered 

 12 into, that we may find ourselves in a situation 

 13 where your rule is also relevant. But we're sort 

 14 of trying to work through all that now. So. 

 15 MR. RADHAKRISHNAN: Well, I will just 

 16 say that we worked very closely with all of the 

 17 prudential regulators and the SEC throughout the 

 18 process -- staff did throughout the process. And 

 19 this was directed by the statute. And, you know, 

 20 so there were drafts sent back and forth between 

 21 staff. 

 22 Certainly, we would welcome comment 
 184 

 1 letters and, you know, I think it could -- from a 

 2 staff perspective it could only be beneficial if 

 3 you were directing a comment to one of the 

 4 prudential regulators if you felt you could copy 

 5 us on it because that could inform staff thinking 

 6 and maybe the Commission thinking as well. 

 7 MR. BOONE: Yeah, I would just -- 

 8 obviously, the Farm Credit Administration is our 

 9 prudential regulator and so that's -- with that in 

 10 mind we're focused to that. Thank you. 

 11 COMMISSIONER GENSLER: But Robbie, I 

 12 would say -- and we do this as best we can also on 

 13 rules that the SEC has something similar. The 

 14 staffs here are, as best they can, sort of in 

 15 consultation with the other staffs and as 

 16 commissioners. So we are talking to the Farm 

 17 Credit, your regulator, as well as the bank 

 18 regulator. So since Congress has asked us to the 

 19 maximum extent practical I think it says or a 

 20 maximum extent, it's some words like that. We're 

 21 trying to stay consistent on these margin an 

 22 capital rules. To the extent you have comments to 
 185 

 1 them, we'll be -- you can feel free to go cc the 

 2 CFTC. But even if you didn't, I think we would be 

 3 looking at it. 

 4 MR. BOONE: Right. Thank you. That's 

 5 helpful. 

 6 CHAIRMAN DUNN: Other? Diana. 

 7 MS. PRESTON: Another process question. 

 8 First of all, I really appreciate you extending 

 9 the timeline to dovetail with the capital 

 10 proposal. It's very helpful. 

 11 As we obviously are focused on the 

 12 prudential regulator margin proposal and then 

 13 obviously incorporating in our analysis the CFTC's 

 14 proposal, I wonder if you would give consideration 

 15 or probably will be asking to give consideration 

 16 to also have time to include in our analysis the 

 17 SEC's anticipated proposal. 

 18 Now, I know it's hard to say long in 

 19 advance of the deadline, you know, hey, we'd like 

 20 some time. But I think it's become clear as we 

 21 look at the prudential proposal, and obviously 

 22 there are parts of it that nicely dovetail with 
 186 

 1 one another. We're all anticipating also the 

 2 SEC's proposals. So hard to comment in the 

 3 abstract. 

 4 COMMISSIONER GENSLER: Diana, I can't 

 5 speak for the Commission but I can speak for 

 6 myself. I think we could wait and wait and wait 

 7 but we also had a real financial crisis in 2008. 

 8 And we're supposed to try to move thoughtfully and 

 9 also lower regulatory uncertainty. So the SEC 

 10 will move forward on on important part of the 

 11 market related to single-name credit default swaps 

 12 and narrow- based credit default swaps and 

 13 securities based swaps and so forth. As Chairman 

 14 Shapiro has pointed out, you know, probably five, 

 15 six, seven percent of the swaps marketplace. 

 16 So I don't know the answer to your 

 17 question but to say, you know, please also 

 18 understand what we're trying to do is lower 

 19 regulatory uncertainty, finish our rules over the 

 20 course of 2011. I do think that they -- the SEC 

 21 has been doing an excellent job but they have 

 22 about twice the number of rules to do as we do. 
 187 

 1 And hopefully they'll move forward close to this 

 2 but -- and if it were out in June or July that 

 3 would be helpful for all of us but I can't speak 

 4 for them. 

 5 MS. PRESTON: And I just wanted to add, 

 6 I appreciate what you're saying about how much the 

 7 marketplace is under the CFTC's jurisdiction, but 

 8 there will be at least some part of the 

 9 marketplace that is the mixed swap that will be 

 10 subject to joint or whatever you want to deem it 

 11 jurisdiction. So that's something -- 

 12 COMMISSIONER GENSLER: Do you think 

 13 there will be many mixed swaps? 

 14 MS. PRESTON: That's an excellent 

 15 question. 

 16 CHAIRMAN DUNN: Kevin? 

 17 MR. NATZ: Thank you. I have one 

 18 question just because I have no idea what the 

 19 answer is and I think you can shed some light on 

 20 this for me today. Some of our co- ops enter into 

 21 commodity swaps with banks and I believe those 

 22 banks at some point have to take those trading 
 188 

 1 desks and, I guess, push them out. Will those 

 2 entities be under the capital and margin 

 3 requirements under CFTC rules? Or will they be 

 4 under the other prudential regulator rules? 

 5 MR. RADHAKRISHNAN: If they're not 

 6 subject to regulation by prudential regulator and 

 7 they're registered with the CFTC, then they'll be 

 8 subject to CFTC rules. Now, of course, if they're 

 9 also -- the other issue is whether they also have 

 10 to register as a security-based swap dealer, in 

 11 which case they're subject to the SEC's rules. So 

 12 the key is are you subject to regulation by 

 13 prudential regulator. 

 14 COMMISSIONER GENSLER: Kevin, I think 

 15 that you raise a very good point. I think that it 

 16 will be some time but the physical commodity 

 17 dealing, whether it's energy dealing, agricultural 

 18 dealing, as I understand it as the lawyers have 

 19 explained it to me, we ultimately have to be 

 20 pushed out from the banks to an affiliate within 

 21 their bank holding company. And thus, the capital 

 22 margin would be under the CFTC for the commodity 
 189 

 1 swaps. Ananda is correct. If it were credit 

 2 default swaps it might be the SEC. So I think 

 3 there would be some consistency and it would come 

 4 under the margin rules as we finalize them 

 5 ultimately if it's a non-bank affiliate of a bank 

 6 holding company. 

 7 Now, capital -- capital rules, of 

 8 course, because it's part of a whole bank holding 

 9 company it's a little bit different. Does that 

 10 answer your question? 

 11 MR. NATZ: I think so. And it's of 

 12 interest because I believe the other proposal 

 13 treats end-users different than your proposal 

 14 does. 

 15 CHAIRMAN DUNN: Other questions? 

 16 MR. HICKS: One question. Is there any 

 17 spillover from unclear swaps to list of contracts? 

 18 Is there anything that's going to happen that 

 19 might implicate or have impact on list of 

 20 contracts margins? 

 21 MR. RADHAKRISHNAN: I don't see it. I 

 22 mean, we do make references to, you know, you've 
 190 

 1 got to look -- in terms of initial margin, you've 

 2 got to make a reference to what a DCO does and so 

 3 on. Are you concerned about the other way around? 

 4 MR. HICKS: Well, I just, you know, now 

 5 we have -- I guess what I'm thinking about is now 

 6 the exchanges are, you know, most of them, maybe 

 7 all of them are for-profit now. And I'm just 

 8 wondering how this is going to -- how does this 

 9 connect to the little guy, I guess, the smaller 

 10 player who probably isn't -- who may not use 

 11 uncleared swaps. I just wonder about how that -- 

 12 MR. RADHAKRISHNAN: Well, usually, you 

 13 know, the exchanges set margin for the cleared 

 14 products. And, you know, they're always trying to 

 15 cover volatility with a certain amount of 

 16 statistical confidence and, you know, they send -- 

 17 they change it, they send it to us, we take a look 

 18 at them. And, you know, I am sensitive to some of 

 19 the comments that were expressed, which is that in 

 20 times of volatility it does become expensive to 

 21 maintain the futures contract. On the flipside, 

 22 we've got to be careful because we want to make 
 191 

 1 sure that exchanges behave responsible. So there 

 2 is a lot of volatility and if people don't raise 

 3 margins, then that triggers a question for us. 

 4 Like, why aren't you doing it? You know, why are 

 5 you so comfortable not raising margins if you see 

 6 extreme volatility? So I do see the tension there 

 7 if that's what you're talking about. 

 8 But I think to my mind I don't know 

 9 whether -- to me it would seem that the margin for 

 10 uncleared swaps may be influenced by what happens 

 11 in the cleared world. In fact, it's sort of -- 

 12 one of the proposals sort of ties it in that if 

 13 you don't have a model, you know, the alternative, 

 14 what we call -- what the Commission calls the 

 15 alternative approach is to make a reference to 

 16 margin in the cleared environment and then add a 

 17 multiplier. So it's the other way around. 

 18 MR. HICKS: You know, the most 

 19 significant thing I heard today was, you know, 

 20 when Jordan was giving the example of what's 

 21 happened to his industry, and as a student of the 

 22 commodity market the whole existence of why we're 
 192 

 1 here was created for the purpose of the way the 

 2 Board of Trade -- all this thing was set up was to 

 3 service those guys, you know. And now it almost 

 4 seems like they're the insignificant piece of 

 5 this. It's the size of which we've come to trade, 

 6 you know, the funds, you know, I mean, the focus 

 7 that we put on the money side of it because that's 

 8 where the money is generated now. And I just 

 9 think about like when I came into the industry it 

 10 was like you wanted to work for a commercial. You 

 11 know, those were the guys. And now it just seems 

 12 like they're the insignificant pieces of this pie 

 13 now. 

 14 MR. RADHAKRISHNAN: Well, I think 

 15 Commissioner Dunn had a good point when, I think, 

 16 Commissioner Dunn, you said it was imperative for 

 17 the exchanges and the users to have a frank 

 18 dialogue and staff could be a participant in that 

 19 because it seems to me that what I think you're 

 20 suggesting is the market is not of use anymore. 

 21 Is that what -- 

 22 MR. HICKS: I just think there's an 
 193 

 1 imbalance now. I mean, from where I was when I 

 2 came into the industry and where we are now, and 

 3 the positions and the attitudes I have about the 

 4 market have completely changed now. I never would 

 5 have thought I would be an advocate for position 

 6 limits because I never thought the market would be 

 7 that -- I never thought anything would be larger 

 8 than the Cargills and the ADMs and Bunkies of the 

 9 world. And I'm speaking about grain, 

 10 specifically. And they seem like the small 

 11 potatoes in this whole process now. And it's just 

 12 amazing the amount of money -- when I came into 

 13 the industry in the '70s, the amount of money. I 

 14 never would have dreamed that we would have had 

 15 this type of participation. And the global aspect 

 16 of it. 

 17 MR. LEA: Well, to further some of what 

 18 Eddie was saying, I mean, we do appreciate the 

 19 opportunities this sort of presents because we do 

 20 need, in addition to liquidity and efficiency, all 

 21 these different tools give, I think, us 

 22 opportunities to manage risk. And I would agree 
 194 

 1 with you wholeheartedly. As volatility goes up, 

 2 margin requirements should go up. I mean, the 

 3 clearinghouse has to remain financially viable. 

 4 And that's why we like the idea of some of these 

 5 margin ideas on swaps. 

 6 An additional comment, Edgar, just in 

 7 case, I'd have to say what you're saying, you're 

 8 not thinking it. It's basically fact. And the 

 9 conversation in a conference call we had with the 

 10 ICE again in January, they told us we weren't 

 11 their most important constituent, that the ETFs 

 12 were. 

 13 MR. HICKS: See, in my mind, that 

 14 defeats the whole purpose of why we have a futures 

 15 market. 

 16 MR. LEA: I couldn't agree with you 

 17 more. 

 18 CHAIRMAN DUNN: Any other comments from 

 19 the AG Advisory Committee? How about from the 

 20 commissioners? And I'll start with the chairman. 

 21 COMMISSIONER GENSLER: Well, I had a 

 22 question, but before I say the question, what 
 195 

 1 Jordan and Edgar just talked about is a challenge 

 2 for those of us who serve on the Commission. 

 3 Markets, since they were started, had hedgers and 

 4 speculators meeting in a marketplace. If you 

 5 wanted to lock in your price at harvest time, 

 6 which is the reason why the futures market 

 7 started, there was somebody on the other side that 

 8 was often a speculator on the other side of that 

 9 market, even 100 years ago. But now, as Edgar 

 10 says, the ratio shifts. In some of these markets, 

 11 the vast majority of the market are financial 

 12 participants rather than producer-merchants. You 

 13 know, what does that mean? We promote 

 14 transparent, open, competitive markets. We are 

 15 not a price-setting agency. It's about making 

 16 sure the markets are open and competitive and free 

 17 of fraud and manipulation and there's integrity. 

 18 But it's, I mean, this discussion probably will go 

 19 on for years but any advice you have will be very 

 20 helpful. 

 21 I want to just ask a question about the 

 22 agricultural commodity definition. It wasn't a 
 196 

 1 rule but just because we might move on that in the 

 2 next month or two and some of you -- I think there 

 3 was only 20 to 30 comment letters on it, but if 

 4 there was anything, you know, on anybody's mind, 

 5 that we hear that. And also there was a rule that 

 6 Congress said that they can't do agricultural 

 7 swaps unless we do a rule saying that you can do 

 8 agricultural swaps. And largely I might have this 

 9 a little off but what we said is yes, you can do 

 10 agricultural swaps in accordance with the rest of 

 11 Dodd-Frank. So those two -- the definition of 

 12 agriculture commodity and in essence the how 

 13 agricultural swaps will be treated are two 

 14 proposals that I don't want to assume anything but 

 15 if there was anything you want us to hear it would 

 16 be great to hear. 

 17 MR. UNGAR: Well, I would just be 

 18 echoing the CMC's comment letter that we believe 

 19 that all swaps should be treated consistently and 

 20 that there shouldn't be a distinction necessarily 

 21 on ag swaps. 

 22 MR. KEMP: We would agree with that. We 
 197 

 1 felt that both of those proposals were well done. 

 2 CHAIRMAN DUNN: Thank you, Todd. Any 

 3 others? Any final comments, Mr. Chairman? 

 4 COMMISSIONER GENSLER: Just mostly to 

 5 thank you again. I mean, I don't think you're 

 6 going anywhere anytime soon. I'm sorry that your 

 7 wonderful wife is watching me say this but Brooke 

 8 is going to, you know, get me. But your 

 9 leadership of this committee and the counsel that 

 10 you've given all of us and continue to give us on 

 11 the issues that are related to the core of our 

 12 market, because we started as an agricultural -- I 

 13 mean, over in the Department of Agriculture in the 

 14 1930s, we started just overseeing grain market. 

 15 But though it is a smaller percentage of what we 

 16 oversee, it is a big part of our culture and how 

 17 we look at markets. And Mike brings that 

 18 perspective which has been terrific. 

 19 CHAIRMAN DUNN: Jill, any final 

 20 comments? 

 21 COMMISSIONER SOMMERS: Just to say thank 

 22 you to all the participants here today. I think 
 198 

 1 that certainly your perspective on all of these 

 2 issues is very helpful to us. So thank you. 

 3 MR. HICKS: Mr. Commissioner, I would 

 4 like to take a shot at you but I guess I really 

 5 can't. Everybody's been so complimentary. But -- 

 6 COMMISSIONER O'MALIA: We can wait for 

 7 that. We'll have more opportunities. 

 8 MR. HICKS: I really do appreciate, you 

 9 know. But I guess my question is, you know, given 

 10 the service that you've given and the time, who's 

 11 going to replace you? I mean, what's going to 

 12 happen to, you know, I mean, we could always come 

 13 to you because we knew your background in 

 14 agriculture. So who's replacing you? You know, 

 15 who's replacing, you know, where's the Ag Advisory 

 16 Committee in all this process and who's going to 

 17 give that leadership now that you're leaving? 

 18 CHAIRMAN DUNN: Edgar, that's up to the 

 19 president and the members of the Senate on a 

 20 confirmation and whoever the chairman appoints as 

 21 my successor on the Agricultural Advisory 

 22 Committee. The official designee on here has 
 199 

 1 actually -- we've already passed that mantle and 

 2 Jason Gizzarelli who is on my staff is now the 

 3 official designee from the commission on the Ag 

 4 Advisory Committee. But my fellow commissioners 

 5 are all going to be listening and I do appreciate, 

 6 Edgar, over the times that you and I have talked 

 7 and you have brought to me special concerns that 

 8 you have from your constituents. 

 9 So, Bart, do you have any comments? 

 10 COMMISSIONER CHILTON: Just briefly, 

 11 Mike. I wanted to -- not that the exchanges need 

 12 to be defended. They've got enough lobbyists of 

 13 themselves to do a great job, but you know, look, 

 14 it's a balancing act for us to try to figure this 

 15 stuff out. But that's our job. That's what we're 

 16 supposed to do sort of 24/7, 365. 

 17 You know, ICE, for example, they're 

 18 concerned about HFTs and about the speculative 

 19 interest. They want to deal with that but they've 

 20 only got 10 percent of their market are HFTs. And 

 21 you know, we have to remember these markets, the 

 22 regulated futures exchanges, they work very well 
 200 

 1 in this economic calamity. You know, we've got 

 2 this big Dodd-Frank bill but the main part of that 

 3 is really dealing with OTC land. And Mark, you 

 4 talked about the bankers and how, you know, swaps 

 5 aren't dangerous. And certainly, I'm not 

 6 suggesting they are but, you know, credit default 

 7 swaps were pretty dangerous. They helped propel 

 8 AIG down and others. So it's getting a hold of 

 9 this new animal, the OTC land for us, for folks 

 10 who haven't dealt with it. And I think that's why 

 11 some of the proposals that have been out there 

 12 didn't hit the market exactly. It was a learning 

 13 curve for us and that, you know, when people see 

 14 proposals originally that scares some folks. 

 15 But this interim process that we're 

 16 going through, not only in this meeting but 

 17 through the comment period, that's really what, 

 18 you know, how regulators -- how regulations are 

 19 come up with. That's how they're devised. And so 

 20 it's very helpful and, you know, it's our job to 

 21 seek the balance. And I think we're going to do 

 22 that. We may not do it exactly in the time period 
 201 

 1 that all of us would like. I want limits now. 

 2 That doesn't look like it's going to happen. I'm 

 3 disappointed. But I understand that we're going 

 4 to have to get there on all of these things and 

 5 due course. 

 6 So I thank all the members and thank 

 7 Commissioner Dunn, Chairman Dunn, and thank 

 8 commissioner -- my other colleagues. And 

 9 particularly thank Chairman Gensler for his 

 10 leadership on all these important issues and 

 11 keeping the trains running as close to as 

 12 possible, Gary, on time. Thank you. 

 13 CHAIRMAN DUNN: Commissioner O'Malia. 

 14 COMMISSIONER O'MALIA: Let me thank you 

 15 for putting together a very high value meeting. 

 16 The staff presentations were excellent in type, 

 17 the comments were well thought out, and obviously, 

 18 we had the benefit of reviewing our rules and I 

 19 found a lot of value in this. So this was a very 

 20 worthwhile endeavor here and a great meeting. 

 21 Thank you. 

 22 CHAIRMAN DUNN: Well, thank you all. I 
 202 

 1 was remiss in not recognizing my predecessor on 

 2 the Ag Advisory Committee and Gary's predecessor 

 3 as the chairman of the commission. Jim, would you 

 4 stand up so we can all recognize Jim Newsome. 

 5 And I'm sure there were people who 

 6 thought when Jim Newsome stepped down, well, gee, 

 7 we're never going to find somebody to fill his 

 8 boots on the Ag Advisory Committee. Someone will 

 9 take my place. But it has been a real pleasure 

 10 and honor to work with the Advisory Committee. 

 11 Many of you I've known for years. Some for 

 12 decades. We've worked together and I appreciate 

 13 your counsel and your willingness to come here and 

 14 give your perspective to the commission. It does 

 15 help us as we make our decisions to get your 

 16 input. I appreciate it. But I really appreciate 

 17 my fellow commissioners. This has been a delight 

 18 for me to serve as the chair of the Ag Advisory 

 19 Committee simply because I've got such wonderful 

 20 people to work with. And what makes them so good 

 21 is their staff and the commission staff. So I 

 22 thank everybody. And with that we're adjourned. 
 203 

 1 (Whereupon, at 12:54 p.m., the 

 2 PROCEEDINGS were adjourned.) 

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 204 

 1 CERTIFICATE OF NOTARY PUBLIC 

 2 DISTRICT OF COLUMBIA 

 3 I, Stephen K. Garland, notary public in 

 4 and for the District of Columbia, do hereby certify 

 5 that the forgoing PROCEEDING was duly recorded and 

 6 thereafter reduced to print under my direction; 

 7 that the witnesses were sworn to tell the truth 

 8 under penalty of perjury; that said transcript is a 

 9 true record of the testimony given by witnesses; 

 10 that I am neither counsel for, related to, nor 

 11 employed by any of the parties to the action in 

 12 which this proceeding was called; and, furthermore, 

 13 that I am not a relative or employee of any 

 14 attorney or counsel employed by the parties hereto, 

 15 nor financially or otherwise interested in the 

 16 outcome of this action. 

 17 

 18 

 19 ----------------------------------- 

 20 Notary Public, in and for the District of Columbia 

 21 My Commission Expires: May 31, 2014 

 22