1 

 1 

 2 COMMODITY FUTURES TRADING COMMISSION 

 3 ------------------------------------------- 

 4 IN THE MATTER OF: 

 5 ENERGY & ENVIRONMENTAL MARKETS 

 6 ADVISORY COMMITTEE MEETING 

 7 ------------------------------------------- 

 8 

 140 Broadway 

 9 New York, New York 

 10 September 16, 2009 

 8:00 a.m. 

 11 

 12 

 B E F O R E: 

 13 

 COMMISSIONER BART CHILTON 

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 1 9/16/09 2 

 2 COMM. CHILTON: We'll call this 

 3 meeting of the CFTC's Energy & Environmental 

 4 Markets Advisory Committee to order and I 

 5 want to in advance thank our technology 

 6 folks who have been working so diligently to 

 7 ensure that this is as seamless an operation 

 8 as possible. 

 9 This is the second meeting that 

 10 we've had of this newly expanded EEMAC to 

 11 include environmental markets. We're going 

 12 to spend the first part of the meeting until 

 13 the break discussing any comments that 

 14 participants, that members of the EEMAC may 

 15 have on the hearings that the Chairman 

 16 called on position limits and hedge 

 17 exemptions, then we'll move to a 

 18 conversation on OTC derivatives and 

 19 proposals and potential proposals in the 

 20 House and Senate, we'll get a little 

 21 briefing on the status of those from John 

 22 Reilly who does legislative affairs for the 

 23 CFTC. Then we'll take a break whenever that 

 24 happens but no later than 9:45, and I plan 

 25 on 9:45. 

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 1 9/16/09 3 

 2 Then for the last hour we'll go 

 3 ahead and move on to discussion of green cap 

 4 and trade, green cap markets and we have 

 5 several presenters there, and then we'll 

 6 open it up for discussion. 

 7 You know, the first meeting that we 

 8 had was fairly lively, actually, and I 

 9 thought informative. That said, I'd like to 

 10 dig a little bit deeper today into some of 

 11 these issues and have a more in-depth 

 12 discussion on all the ones that I just 

 13 mentioned, position limits, hedge 

 14 exemptions, the OTC legislation and on 

 15 carbon. 

 16 So with that, let me give you just a 

 17 quick couple of housekeeping items. 

 18 Chairman Gensler and former Acting Chairman 

 19 Dunn are used to this list of things. First 

 20 is, let's all, including myself, turn our 

 21 Blackberries off because it will interfere, 

 22 if it hasn't already, with the audio. We 

 23 have people that are not only on video in 

 24 our various regional offices, but we also 

 25 have some folks who are calling in on 

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 1 9/16/09 4 

 2 speaker, they're piped through the system, 

 3 so they should hear us. This is also 

 4 streaming live on our webcast, so we're 

 5 hooked up electronically. 

 6 The other housekeeping item is for 

 7 the court reporter and for me for ease of 

 8 operation, I'd like to -- when people want 

 9 to talk, I'd like them to say their name and 

 10 their location so it's, this is Bart Chilton 

 11 in New York, so that we know where to go and 

 12 we can keep a good record of how this goes. 

 13 I know that's a little bit goofy 

 14 particularly once you've said it two or 

 15 three times and you have people sitting next 

 16 to you, but, believe me, it will help 

 17 particularly in this situation where we're 

 18 having this virtual meeting. 

 19 With that, I think I'm actually 

 20 going to move to our colleagues. I don't 

 21 really have an opening statement other than 

 22 there's been a lot going on lately and I 

 23 commend the Chairman specifically but my 

 24 colleagues for the work that they've done on 

 25 looking at these issues, the issues in the 

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 1 9/16/09 5 

 2 energy market and the aggressiveness that 

 3 we've been looking at other things too, 

 4 carbon markets. 

 5 Chairman Gensler testified, I 

 6 believe, last week on carbon markets, and so 

 7 I said at our town hall staff meeting last 

 8 week that I sort of felt like he was -- 

 9 Chairman Gensler was the fellow on the Ed 

 10 Sullivan spinning all the plates, trying to 

 11 keep them all in balance, but he is doing a 

 12 great job with the help of all the staff at 

 13 the CFTC which are superlative, every one of 

 14 them in all our divisions. 

 15 So with that, I'll go ahead and move 

 16 to our colleagues. We'll go to Chairman 

 17 Gensler and then Commissioner Dunn and 

 18 Commissioner Sommers. 

 19 Mr. Chairman, would you like to go 

 20 ahead? 

 21 CHAIRMAN GENSLER: This is Gary 

 22 Gensler from New York following the rules 

 23 here, but from D.C., it's a meeting from New 

 24 York. 

 25 Thank you, Commissioner Chilton, for 

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 1 9/16/09 6 

 2 chairing today's meeting and thank you 

 3 particularly to all the members of the 

 4 Energy Environmental Markets Advisory 

 5 Committee, I look forward to a productive 

 6 meeting where you give us valued advice and 

 7 contributions to our agenda. 

 8 Now, energy markets are at the 

 9 forefront of our regulatory mission and our 

 10 agenda, the top seven energy contracts, I 

 11 believe, if I got the numbers right last 

 12 night, have a notional value of over $700 

 13 billion in the futures market and that's not 

 14 speaking to the over-the-counter derivatives 

 15 markets, of course. 

 16 So, it's essential that this agency 

 17 continues to police the energy markets for 

 18 fraud, manipulation and other abuses, of 

 19 course, promote market integrity and market 

 20 transparency in these markets for the 

 21 benefit of all the American public that 

 22 whether they're particularly gassing up 

 23 their cars or thinking about energy as it 

 24 relates to the cost of so many other 

 25 products in their daily lives. 

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 1 9/16/09 7 

 2 Earlier this summer, as Commissioner 

 3 Chilton said, we had three valuable hearings 

 4 into whether the Commission should set 

 5 position limits on energy markets. As you 

 6 know, Congress mandated in our statute that 

 7 we set position limits to protect the 

 8 American public. We do so in the 

 9 agricultural markets, of course, and 

 10 actually working with the exchanges we did 

 11 so in the energy metals markets through 

 12 actually June. It's not that long ago that 

 13 we didn't do that. 

 14 In that regard, I even understand 

 15 that the major exchange today will be 

 16 releasing a white paper on position limits. 

 17 I thank them for their contribution to this 

 18 dialogue, I look forward to reviewing their 

 19 paper later today, and over the course of 

 20 this important discussion, I believe that we 

 21 -- I believe that we should continue to 

 22 seriously consider the benefits to market 

 23 integrity and promoting markets in this 

 24 topic area and I look forward to hearing 

 25 from the members of the EEMAC in that 

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 1 9/16/09 8 

 2 regard. 

 3 As Commissioner Chilton said, we 

 4 also testified recently, I had the honor to 

 5 do so on behalf of the Commission on the 

 6 trade part of cap and trade. There are 

 7 other agencies that are far better suited to 

 8 look at cap but we already oversee markets 

 9 trading -- programs that came out of the 

 10 acid rain program, sulfur dioxide, nitrous 

 11 oxide and so forth and even a carbon 

 12 initiative out of the regional greenhouse 

 13 gas initiative. 

 14 But the four larger markets that 

 15 might be a result of congressional action we 

 16 look forward to the members of the EEMAC 

 17 providing insight into how we can best do 

 18 that, moving forward if we're asked by 

 19 Congress to do so. 

 20 So, again, I just want to thank you 

 21 all, I look forward to learning from the 

 22 presenters and I guess I turn it back to 

 23 Commissioner Chilton. 

 24 COMM. CHILTON: Commissioner Dunn is 

 25 fine. 

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 1 9/16/09 9 

 2 COMMISSIONER DUNN: Thank you very 

 3 much, Mr. Chairman, for leading today's 

 4 meeting and I commend you for your work in 

 5 this vitally important area and look forward 

 6 to hearing from the participants you've 

 7 gathered today to speak about energy 

 8 markets, carbon markets, regulatory reform 

 9 and legislation for these areas. 

 10 I just returned last week from 

 11 Switzerland attending an international 

 12 meeting of futures regulators and the 

 13 futures of energy futures was a topic of 

 14 conversation and I was so proud, 

 15 Mr. Chairman, of the efforts that you, Laura 

 16 Dearer, and citing the MOU and sharing 

 17 information, that was certainly a topic of 

 18 what regulators ought to be doing in this 

 19 area. 

 20 Our goal as Commissioners is to 

 21 ensure that the energy markets we regulate 

 22 function property and are free of 

 23 manipulation and other abuses. Three days 

 24 of hearings regarding the possibility of 

 25 imposing position limits in energy markets 

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 1 9/16/09 10 

 2 that was held prior to the hearing. Most 

 3 importantly, can the CFTC effectively 

 4 regulate energy markets without having a 

 5 broad view into all the venues in which 

 6 these contracts are traded, are regulated 

 7 markets, over-the-counter markets and 

 8 oversea markets. 

 9 I am hopeful that this Advisory 

 10 Committee and the experts you've called to 

 11 speak today will be able to shed some light 

 12 on the best way forward in this area. I'm 

 13 also interested in hearing more about the 

 14 emergence of carbon markets and how best to 

 15 regulate this growing industry. 

 16 Lastly, I would like to hear from 

 17 the Advisory Committee, their thoughts on 

 18 what resources the CFTC will need to 

 19 effectively regulate energy markets and 

 20 carbon markets. I look forward to hearing 

 21 the experiences of our panelists and, once 

 22 again, Mr. Chairman, I thank you for calling 

 23 today's meeting. 

 24 COMM. CHILTON: Thank you, 

 25 Commissioner Dunn. Commissioner Sommers. 

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 1 9/16/09 11 

 2 COMMISSIONER SOMMERS: Thank you, 

 3 Commissioner Chilton and thanks for holding 

 4 this EEMAC meeting today and thanks to all 

 5 the members that are participating from New 

 6 York and Kansas City and here in D.C. 

 7 This is a very challenging time for 

 8 the CFTC, we're in the process, as you know, 

 9 of considering a number of very important 

 10 initiatives and I believe that the EEMAC 

 11 Committee is a critical source of input to 

 12 the Commission. There's such a wide range 

 13 of expertise and number of representatives 

 14 with a great deal of knowledge and 

 15 experience with our energy markets and it's 

 16 very important to us. 

 17 We're scheduled to discuss position 

 18 limits and the OTC regulatory proposal and 

 19 the legislative proposals regarding the 

 20 carbon markets, and I think that all of 

 21 these issues present very complicated 

 22 questions for the Commission. 

 23 I agree with Chairperson Gensler on 

 24 many of the initiatives and agree that it's 

 25 prudent for this agency to require greater 

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 1 9/16/09 12 

 2 transparency in our energy markets, and 

 3 before we make these policy changes we must 

 4 fully understand the consequences of 

 5 additional regulation in these markets. 

 6 Many of you and the organizations 

 7 that you represent have participated in the 

 8 meetings that we had over the last few weeks 

 9 and I think that today is just another step 

 10 in the process to inform this debate. So 

 11 thank you again for being here and I look 

 12 forward to the discussion. 

 13 COMM. CHILTON: Thank you very much. 

 14 Before we go ahead and start asking for 

 15 comments on the position limits and hedge 

 16 exemptions, we're going to have Steve 

 17 Sherrod give us a brief overview on energy 

 18 markets. 

 19 Do you have a Powerpoint, Steve? 

 20 MR. SHERROD: Thanks, Bart. No, I 

 21 don't have a Powerpoint. I should say 

 22 Commissioner Chilton. 

 23 COMM. CHILTON: No, that's fine, I'm 

 24 Bart to everybody. 

 25 MR. SHERROD: Good morning, I'm 

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 1 9/16/09 13 

 2 Steve Sherrod, I'm in D.C., it's a pleasure 

 3 to be with you here today. First, I'll 

 4 provide you with a brief look into my views 

 5 of what we do in surveillance at CFTC, and 

 6 second I'll give you a look into the 

 7 motivations behind our disaggregated 

 8 commitment of trader reports, we've broken 

 9 out the energy commodities specifically in 

 10 the first round of that new Disaggregated 

 11 Report, and third I'll briefly discuss the 

 12 index investment data that was released on 

 13 September 4th. 

 14 One of the central purposes that 

 15 we're all familiar with in the Commodity 

 16 Exchange Act is for us to detect, deter and 

 17 prevent price manipulation or any other 

 18 disruptions to market integrity and I think 

 19 of our role in surveillance as shining the 

 20 light on those who would engage in 

 21 disruptive or manipulative activity. 

 22 We fulfill this imperative of the 

 23 Act by detecting the traders who might 

 24 potentially disrupt positions, so we try to 

 25 find the traders before the disruption 

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 1 9/16/09 14 

 2 occurs and we do this through our large 

 3 trader reporting system, we also do this 

 4 from the transaction data that we obtain 

 5 from the exchanges, we obtain the 

 6 transaction data on a T plus 1 basis, so 

 7 we're looking into the markets trade by 

 8 trade on the next day and we're looking at 

 9 the unique positions of traders that we 

 10 receive from the large trader reporting 

 11 system. 

 12 After we detect potentially 

 13 disruptive situations, we like to work 

 14 cooperatively with the exchanges and in so 

 15 doing we're trying to determine the traders' 

 16 intentions. Sometimes we describe this 

 17 process that we go through of contacting the 

 18 traders jawboning, that is, we may ask a lot 

 19 of questions, we discuss what our 

 20 understanding is of the futures markets and 

 21 the cash markets, supply and demand 

 22 situations, the inventory situations, then 

 23 we ask the traders in light of this 

 24 information to explain their intentions, and 

 25 this jawboning often is sufficient to -- 

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 1 9/16/09 15 

 2 it's sufficient sometimes to result in the 

 3 traders resolving the situation before 

 4 there's a disruption. 

 5 We do have an escalation process 

 6 that we use, this includes sending warning 

 7 letters, we can refer activities that we 

 8 think are suspicious to our enforcement 

 9 division to take action, and the ultimate 

 10 action which rarely is taken is to request 

 11 the Commission take an emergency action. 

 12 So I think we focus in surveillance 

 13 on preventing disruptions so that, as 

 14 Commissioner Dunn said, the futures can play 

 15 their important role in the markets, in 

 16 price discovery and risk transference. We 

 17 focus on having fair trading, however, in 

 18 the last decade or so there have been a 

 19 number of occasions when traders have 

 20 engaged in disruptive activity by doing 

 21 things like banging the close. 

 22 Banging the close refers to the 

 23 practice of a trader acquiring a substantial 

 24 position during the day and then offsetting 

 25 that position before the end of the day 

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 1 9/16/09 16 

 2 during the closing period and that closing 

 3 period, of course, serves as a settlement 

 4 price for other over-the-counter or exchange 

 5 traded cash contracts, and we'll continue to 

 6 review carefully the trading during the day, 

 7 the transaction data that we have in the 

 8 large trader reporting system reports. 

 9 Turning to the Commitment Traders' 

 10 Report, we have implemented transparency 

 11 measures on Friday, September 4th, we 

 12 released a Disaggregated Commitment Traders' 

 13 Report along with the Legacy COT Report, so 

 14 we continue to release both reports. 

 15 The new report gives the public what 

 16 I think is a better view of positions of 

 17 traders in the futures markets, it's not a 

 18 perfect view but maybe it's a little better. 

 19 In the Legacy COT Report we provide 

 20 aggregate information on reportable 

 21 positions of traders from our large trader 

 22 reporting system, we break that out into two 

 23 categories in the Legacy Report, the 

 24 Commercial Traders and the Noncommercial 

 25 Traders. 

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 1 9/16/09 17 

 2 In the new Disaggregated COT Report 

 3 we break the commercial trader positions 

 4 down into two pieces, the first piece breaks 

 5 out in the reportable positions for a 

 6 category and it's a mouthful, it's called 

 7 Producer Merchant Processor User, we didn't 

 8 use marketing to come up with that, that 

 9 category basically covers the entities that 

 10 are predominantly engaged in handling the 

 11 physical activity. 

 12 We categorize traders, so we look to 

 13 their predominant activity. A trader that 

 14 might be physically handling the particular 

 15 commodity might also be engaged in other 

 16 activities, so we have to make a judgment 

 17 call to try to categorize, we do that based 

 18 upon the information we gather from our 

 19 large trader reporting system process, we 

 20 have what's called a Form 40, we gather 

 21 additional information from the traders, our 

 22 surveillance economists talk with the 

 23 traders, try to discern the balance of their 

 24 business, and it's basically fiscal handlers 

 25 predominantly that will categorize that 

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 1 9/16/09 18 

 2 trader in all of that trader's positions for 

 3 release to the public in this report. 

 4 The second piece of the commercial 

 5 positions that we break out are for swap 

 6 dealers. Now, swap dealers may be engaged 

 7 in a variety of other activities but a swap 

 8 dealer is in our Commitment Traders Report 

 9 is an entity that's predominantly engaged in 

 10 swap transactions. 

 11 The dealers' counterparties may be 

 12 engaged in speculative trading, the dealers' 

 13 counterparties may be engaged in commercial 

 14 clients, the counterparties could be 

 15 commercial clients that are engaged in 

 16 managing the risks arising out of their 

 17 physical commodity business. In the 

 18 Commitment Traders Report we can't currently 

 19 provide that look-through to the public. 

 20 For the noncommercial trader 

 21 categories, the Legacy COT Report reports 

 22 one set of numbers and we break those out in 

 23 this new Disaggregated Report into two 

 24 pieces, managed money and the rest of 

 25 noncommercial reportable positions as other 

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 2 reportables. 

 3 For managed money those are 

 4 positions that are held by a money manager 

 5 that will be someone like a registered 

 6 commodity pool operator, a CPO, a registered 

 7 commodity trading adviser, someone that 

 8 might not be registered with the Commission 

 9 that our staff is aware manages money for 

 10 others. Examples would be something like a 

 11 hedge fund, someone that has an exclusion 

 12 from registration as a CTA or CPO. 

 13 So, again, we categorize the 

 14 traders, not the transactions, and we use 

 15 data and judgment to try to break out and 

 16 provide a better view into the positions of 

 17 our large traders in this new disaggregated 

 18 report. 

 19 We have welcomed comment on this new 

 20 disaggregation on the website, on the first 

 21 page of our website there's a link to the 

 22 commitment of traders and at the bottom of 

 23 that page you can submit comments to market 

 24 reports at cftc.gov, and I remind everyone 

 25 in considering your comments that there is a 

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 1 9/16/09 20 

 2 limit on the amount of public information we 

 3 can disclose. 

 4 We generally are prohibited from 

 5 publishing data that would reveal the 

 6 position of an individual trader or the 

 7 business transactions of an individual 

 8 trader. 

 9 Finally, turning to the index 

 10 investment data. We released data in the 

 11 commodity futures markets based on data we 

 12 received from our continuing special call, 

 13 we're continuing the special call and intend 

 14 to release data at the end on a quarterly 

 15 basis, that data basically summarizes gross 

 16 long and gross short positions on activity, 

 17 it's typically categorized by a passive 

 18 strategy that's designed in exposure to 

 19 quality price movements and that's typically 

 20 part of a diversified portfolio strategy. 

 21 Investors, as we understand it, will 

 22 use two principal means to engage in index 

 23 investment activity, direct investments in 

 24 the futures markets and we certainly have a 

 25 handle on that, and indirect investments 

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 2 through over-the-counter swap agreements 

 3 with financial firms. 

 4 The data for these OTC swap 

 5 agreements comes from our special call, we 

 6 issue that to a variety of swap dealers and 

 7 index funds, we continue to review without 

 8 surveillance economists who we issued the 

 9 special call to and as we become aware of 

 10 large participants we will add firms to our 

 11 list of special call participants. 

 12 The index investment data represents 

 13 our best effort to provide a one-day 

 14 snapshot of the positions of the swap 

 15 dealers in the index funds and these figures 

 16 do not reflect any trading activity or 

 17 changes in positions that are taking place 

 18 during the quarter because, as I mentioned, 

 19 we will add firms to the list from time to 

 20 time. 

 21 We do provide data on numerous 

 22 energy markets in the in dex investment 

 23 data, including heating oil, natural gas, 

 24 the gasoline RBOB contract, the WFTI crude 

 25 oil markets. This investment data is more 

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 2 comprehensive than what we've previously 

 3 released as COT supplement that we began 

 4 publishing in January 2007, and in this 

 5 regard we can provide the notional value of 

 6 the commodity index business and we also 

 7 provide that on a futures equivalent basis. 

 8 That concludes my remarks about the 

 9 transparency measures that we have. Thanks. 

 10 COMM. CHILTON: Thank you, Steve, 

 11 that was helpful and I'm really glad you 

 12 talked about that stuff. I was also 

 13 thinking we ought to get a briefing on the 

 14 status of the energy markets, but in the 

 15 interest of time we'll go ahead and move 

 16 forward. 

 17 I do want to congratulate Steve, you 

 18 know, Steve was with the CFTC for a long 

 19 time and left, he's been back for I'm not 

 20 sure quite how long but a year or so, I 

 21 guess, he's our acting Deputy Director for 

 22 Market Surveillance and he's doing a great 

 23 job, and the work that he's been doing that 

 24 he's been talking about is a great example 

 25 of that. So we thank you, Steve. 

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 1 9/16/09 23 

 2 With that I want to move to this 

 3 whole discussion of position limits and 

 4 hedge exemptions, but maybe as a kickoff, 

 5 you know, Chairman Gensler mentioned a news 

 6 report and a white paper on position limits 

 7 and, you know, that has to do with this 

 8 exact subject, so I'm wondering, Deanna Dow 

 9 from CME, if you're there in D.C., if you'd 

 10 mind giving us an overview and informing 

 11 everybody who hasn't read the papers yet 

 12 this morning. 

 13 MS. DOW: Thank you, Commissioner 

 14 Chilton. I'm Deanna Dow, I'm here in the 

 15 Washington office. I wasn't expecting to be 

 16 asked to give an overview of our proposal 

 17 but I'm happy to kind of kick off the 

 18 discussion. 

 19 We are, in fact, this morning 

 20 releasing a white paper that is intended to 

 21 inform and shape the debate about position 

 22 limits. We have taken the lead, I guess you 

 23 would say or are interested in trying to 

 24 provide something of a framework that the 

 25 Commission, as well as the Congress, can use 

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 1 9/16/09 24 

 2 as a way of addressing perceived perceptions 

 3 of problems that I guess the general public 

 4 sees as affecting the price and volatility 

 5 of the markets, despite the fact that many 

 6 economists, noted economists and studies 

 7 even here at the CFTC have been done that 

 8 prove there's no support for the concerns 

 9 about speculated driving volatility in the 

 10 market, we recognize that that perception 

 11 can potentially take away or affect the 

 12 confidence that people have in our market, 

 13 so based on that we decided to look at this 

 14 issue and address some of the public policy 

 15 concerns by seeking a way that position 

 16 limits could potentially be implemented that 

 17 would do no harm to the markets. 

 18 We believe that, you know, in 

 19 drafting this proposed white paper, we're 

 20 putting it out, there are recommendations 

 21 for discussion, we certainly have not gone 

 22 forward to implement or to self-certify any 

 23 potential rule changes. We believe that 

 24 it's very important to preserve the 

 25 transparency and the liquidity and the price 

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 1 9/16/09 25 

 2 discovery function of our markets and in 

 3 order to do that we believe that it's 

 4 necessary that these position limits be 

 5 adopted across all markets, that being the 

 6 regulated markets, the over-the-counter 

 7 markets, the foreign board of trades that 

 8 provide access here as well. 

 9 So this is a first step to really 

 10 trigger the discussion, inform the debate 

 11 and we hope provide a framework that people 

 12 will find is a reasonable framework and one 

 13 that, in fact, does no harm to the market 

 14 and continues to preserve the goals, the 

 15 public policy goals that are out there. 

 16 As you all know, the 

 17 administration -- the Congress has been 

 18 looking to promote transparency and to push 

 19 more transactions into clearing more of the 

 20 OTC trade, into clearing it out of the dark 

 21 pools. We believe that the only way to do 

 22 that is to ensure that there's parity across 

 23 the markets, so to move too quickly to 

 24 impose limits on the regulated market 

 25 certainly and we've already seen this 

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 1 9/16/09 26 

 2 happen, you'll see the shift from the 

 3 regulated markets into the OTC space. 

 4 Again, the paper with all the 

 5 specifics and details will be coming out. 

 6 Just generally speaking, it would recommend 

 7 that there be a spot month limit, that there 

 8 also be single month limits as well as 

 9 limits across all markets and there are also 

 10 recommendations in there in terms of 

 11 aggregation across all markets. Thank you. 

 12 COMM. CHILTON: Thank you, Deanna. 

 13 This is Barton in New York again and I want 

 14 to apologize for sort of hitting you and 

 15 having you do it off the cuff but you did a 

 16 great job explaining it. 

 17 For my part, I'm really pleased that 

 18 people are sort of taking the charge of the 

 19 Chairman and thinking about these things and 

 20 I commend you putting your proposal forward. 

 21 You know, for my part, we're going to ensure 

 22 that whatever we do, I can't for the 

 23 Commissioners, but for myself I want to 

 24 ensure that whatever we do doesn't advantage 

 25 or disadvantage any individual exchange or 

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 1 9/16/09 27 

 2 any individual market participant but, you 

 3 know, I think to the extent that I have any 

 4 influence in this, we're going to reach the 

 5 right balance, we're going to do something 

 6 that is thoughtful, if we do something, and 

 7 we really appreciate the fact that people 

 8 are coming forward and giving ideas. 

 9 I did want to clarify one thing, if 

 10 any of my colleagues want to chime in on 

 11 this they're welcome to. When you talked -- 

 12 Deanna, when you talked about studies at the 

 13 CFTC that proved something and just to be 

 14 clear, the studies that we've done recently 

 15 have not proved that speculators haven't had 

 16 an impact, they've proved that they weren't 

 17 driving prices, and as we talked about at 

 18 our hearings, the possibility that there is 

 19 some movement is something that we have to 

 20 be concerned about under the law. So that 

 21 doesn't prejudge what we may or may not do 

 22 to any extent, but the fact that we've had 

 23 these studies doesn't definitively say 

 24 they're doing anything other than they 

 25 weren't driving prices last year, driving 

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 1 9/16/09 28 

 2 prices, they're not the leading indicator, 

 3 that doesn't mean they didn't have an impact 

 4 either way. 

 5 So, with that, let's go ahead and 

 6 open it up. Since we've been in D.C. for a 

 7 little bit, why don't we start in New York 

 8 if somebody wants to comment, anybody here 

 9 want to start? Mr. Cota, Sean Cota here in 

 10 New York. 

 11 MR. COTA: Good morning. I'm Sean 

 12 Cota in New York representing Petroleum 

 13 Marketers of America. The heating oil 

 14 industry has hedged for a long period of 

 15 time, so we're more cognizant of trading 

 16 practices and its impact on a lot of other 

 17 segments. 

 18 We're not anti-speculative, we are 

 19 pro exchange, we love what the CFTC does, we 

 20 would like everybody to be more in that 

 21 venue if we possibly can but we concur with 

 22 the comments made by the Chairman a month -- 

 23 I think it was a month ago with regard to 

 24 the impacts of what may be excessive 

 25 speculation or excessive trading in finite 

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 1 9/16/09 29 

 2 markets, and it's the finite markets like 

 3 energy that concern us. 

 4 We need to remember our examples in 

 5 history, one example was Amaranth, Amaranth 

 6 did part of its trading in over-the-counter, 

 7 part of it in ICE, part of it on the NYMEX. 

 8 One of the forensic analyses done by the 

 9 Senate, they discovered that at one point 

 10 their position in natural gas was 80 percent 

 11 above the total U.S. natural gas production. 

 12 MR. CHILTON: Well, if anybody owns 

 13 80 percent of any market that's, in my 

 14 opinion, too large of a market and it will 

 15 have a significant price impact. 

 16 MR. COTA: If they had not done part 

 17 of their trading on the New York Mercantile 

 18 Exchange at the time they would never have 

 19 been found out, so these positions both need 

 20 to be disclosed and there needs to be 

 21 limits, that's a real example of something 

 22 that has occurred. 

 23 The notion of index funds and 

 24 passive investors going into markets and 

 25 overwhelming these finite markets is a real 

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 1 9/16/09 30 

 2 concern of our industry, that a certain 

 3 percentage, the economic model for the 

 4 physical contract diverges from the economic 

 5 model of the financial contract. 

 6 The financial contract, and I like 

 7 to use the heating oil contract as an 

 8 example because it's the one I'm closest to, 

 9 you could call the coconut futures at a 

 10 certain point and it will still have an 

 11 economic model from a trading perspective, 

 12 but it won't have an economic model from a 

 13 physical perspective because you'll have 

 14 complete demand destruction. I think we're 

 15 not too far from that with the 

 16 over-the-counter trades that are not 

 17 recognized both for position and in size and 

 18 we have demand destruction that's very 

 19 significant in the heating oil industry. 

 20 I think it was 28 year high 

 21 inventories yet we're more than double the 

 22 price that we were in the spring in a lot of 

 23 these trades, so there's a disconnect with 

 24 the physical which I think shows up in these 

 25 position limits or the lack of position in a 

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 1 9/16/09 31 

 2 lot of the over-the-counter trade and we 

 3 want speculators in the markets but we're 

 4 concerned about that impact. 

 5 Like the comments made by the 

 6 Chicago Mercantile Exchange in Washington 

 7 just now, we're concerned that you need to 

 8 connect all of the dots. I applaud the CFTC 

 9 for its work, the FSA, I caught the press 

 10 release yesterday about sharing the data, I 

 11 think that needs to be done across a lot 

 12 more markets and you need to disclose what's 

 13 occurring in these markets. 

 14 I think that if a savvy trader knows 

 15 what's occurring in these markets both in 

 16 size and position, they will on their own 

 17 have a self-regulating effect, and that's 

 18 another reason why we believe as an industry 

 19 that more of these things should be -- come 

 20 off from over-the-counter, perhaps 

 21 over-the-counter to some extent but they 

 22 should be traded -- the back end needs to 

 23 be traded on exchanges and needs to be 

 24 cleared on exchanges, but exchanges will 

 25 have that function of regulating those 

 32 

 1 9/16/09 32 

 2 markets and they'll see when things have 

 3 gotten out of control and say, listen, time 

 4 out, either you need to change your position 

 5 or you need to pony up more cash or we're 

 6 going to liquidate those positions, and 

 7 unless a market knows that those impacts are 

 8 going to be done on a mark to market basis 

 9 and that's what exchanges do, is they force 

 10 people to deal with these swaps and pony up 

 11 money instead of just letting the deal hang 

 12 out forever until it gets to a trigger 

 13 point. 

 14 I think that the Commission and the 

 15 FSA and other regulatory agencies really 

 16 need to have that in back of their mind when 

 17 they develop these regulations and 

 18 reporting. I could go on forever but I'm 

 19 going to stop there. Thanks. 

 20 COMM. CHILTON: Thank you, Sean. 

 21 Anybody else, who's next? You want to head 

 22 back to D.C. or to Kansas City or Skip, did 

 23 you want -- Skip in New York here. 

 24 MR. HORVATH: Skip Horvath in New 

 25 York. Thank you, Commissioner. I just want 

 33 

 1 9/16/09 33 

 2 to touch briefly on the position limits and 

 3 go on to another point. I really appreciate 

 4 what I heard today which is that the CFTC is 

 5 cognizant of the need to be careful to 

 6 address a perceived problem in the country 

 7 without actually doing damage to the markets 

 8 if they're regulated. 

 9 I would suggest that the way you do 

 10 that is to use your authority to work with 

 11 the exchanges so that they will set the 

 12 limits based on the dynamic changes in the 

 13 marketplace rather than being imposed on 

 14 them and not responsive to the market 

 15 changes. I'll leave it at that but I am 

 16 encouraged by what I heard today. 

 17 A couple of minutes on another point 

 18 which is the notion of forced clearing or 

 19 management clearing on exchanges for energy 

 20 trading. The reason that's a concern to us 

 21 is the capital requirements that you have to 

 22 post in order to do that, the natural gas 

 23 industry is a very large industry, as you 

 24 all know, and we require a lot of -- 

 25 billions of dollars a year to put steel in 

 34 

 1 9/16/09 34 

 2 the ground to get the gas to consumers. 

 3 We always establish credit with each 

 4 other and use those estimates as collateral, 

 5 so we establish our credit based on that. 

 6 If forced to go on an exchange and take that 

 7 CAPEX money and put it as collateral, that's 

 8 money that's not being used to put steel in 

 9 the ground, the result is a decrease in 

 10 supply while the economy is recovering, 

 11 that's a portended disaster for the 

 12 consumers with high prices just 

 13 skyrocketing. 

 14 So we haven't done a full study of 

 15 this but we believe that as much as 25 to 30 

 16 percent going back looking over if we had to 

 17 collateralize our trades for the last year, 

 18 roughly 25 to 30 percent in some cases would 

 19 have to be put aside and not invested in the 

 20 ground or by CAPEX, that's a large amount of 

 21 natural gas that will not come out of the 

 22 ground, forces prices up. 

 23 So we ask that in looking at this 

 24 issue as you move forward to consider a way 

 25 of allowing the -- if mandatory clearing -- 

 35 

 1 9/16/09 35 

 2 if you go ahead with that, to find a way to 

 3 use the steel in the ground as collateral so 

 4 that we can follow the law without forcing 

 5 Americans to pay higher energy prices. 

 6 COMM. CHILTON: That's very helpful, 

 7 Skip and that's really part of, I think -- I 

 8 don't mean to minimize that at all, we'll 

 9 talk more about that, this is a concern that 

 10 when I spoke with APGA in August that it was 

 11 raised by a number of folks but that's, I 

 12 think, part of our second discussion here 

 13 when we get to talking about OTC 

 14 legislation, about clearing. So if it's 

 15 okay, I'd rather stick with for right now at 

 16 least the position limits and hedge 

 17 exemptions. 

 18 We also have folks on the phone, so 

 19 anybody who wants to chime in now, feel free 

 20 to let me know. Is somebody there in D.C. 

 21 or Kevin Fox in Kansas City or somebody on 

 22 the phone wants to chime in? 

 23 MR. FOX: Yes. This is Kevin Fox in 

 24 Kansas City. 

 25 COMM. CHILTON: Hi, Kevin. 

 36 

 1 9/16/09 36 

 2 MR. FOX: So in a little over a year 

 3 on this Committee I really haven't heard too 

 4 many people opposed to the concept of 

 5 limits, most people seem to be in favor of 

 6 imposing limits, so I suggest we more or 

 7 less accept that and move on to the next 

 8 phase which is who is going to set these 

 9 limits and the process by which these limits 

 10 are achieved. 

 11 In the past the exchanges have set 

 12 the limits and in one exchange it was not to 

 13 have any limits and the other exchange I 

 14 suspect had granted exemptions to those 

 15 limits to some of the biggest speculators in 

 16 the market. 

 17 The interesting thing about 

 18 Amaranth, the case that's currently out in 

 19 the public is this concept of banging the 

 20 close, when I read that $3,000 lots of 

 21 natural gas were sold in the last 30 minutes 

 22 that really only leaves one of two 

 23 situations, either they were exceeding the 

 24 position limits which on the last day would 

 25 be a thousand, so nobody could only really 

 37 

 1 9/16/09 37 

 2 have 3,000 to sell in the last 30 minutes. 

 3 If they hadn't done that, they had an 

 4 exemption which makes my case, I think, that 

 5 the actual setting of these limits should be 

 6 done by the CFTC and not left to the 

 7 exchanges. 

 8 I'd also like to express that the 

 9 limits need to be set in such a way that the 

 10 appropriate people are given the opportunity 

 11 to have input and I was going to suggest 

 12 some type of technical conference, but I 

 13 think maybe we could use this white paper 

 14 that the CME put out as a basis of 

 15 discussion, but certain markets -- take 

 16 electricity, for example, there are no 

 17 natural buyers out beyond a year or two, I 

 18 mean, people that need to sell electricity 

 19 would be independent power producers and 

 20 owners of merchant power plants, the only 

 21 real buyers of that power that's going to be 

 22 sold would be speculators, even there are no 

 23 ETFs that trade electricity that would give 

 24 retail access to that market. 

 25 So for a speculator, as ourselves, 

 38 

 1 9/16/09 38 

 2 would be able to step in and buy electricity 

 3 in 2012 or 2013, we need to be able to sell 

 4 natural gas, for example, that would be a 

 5 standard EEMAC trade. So when one imposes 

 6 limits on natural gas, there are 

 7 ramifications on other markets, and although 

 8 there are soft limits now that are set as a 

 9 percentage of the open interests, it's 

 10 really not a good limit because it's very 

 11 possible that the markets are thin back 

 12 there and a particular trader might have 

 13 what would look to be a large percent of the 

 14 open interest, could be 50 percent, but if 

 15 the total open interest is only a 100 lots, 

 16 who really cares if a trader has 50 lots of 

 17 that position. 

 18 So, it's a fairly complicated issue, 

 19 I think we need to get input from everybody 

 20 across the market as to how those limits 

 21 should be set, and lastly, I do think that 

 22 those limits have to be controlled by the 

 23 CFTC themselves and not left to the 

 24 exchanges. 

 25 COMM. CHILTON: Thank you, Kevin, 

 39 

 1 9/16/09 39 

 2 those are good points. I want to make sure 

 3 that my Commissioner colleagues don't have 

 4 questions here. I apologize if you've 

 5 wanted to speak and I haven't recognized 

 6 you, feel free to speak up folks and I will 

 7 make sure that I get to you, if you want to 

 8 say anything. I'll make sure that you don't 

 9 right now before we move on. 

 10 Mr. Chairman or Commissioners, 

 11 anybody want to comment on anything that's 

 12 been said or ask any questions. It's an 

 13 informal open conversation as best as we can 

 14 do virtually. 

 15 COMM. GENSLER: Thank you. Just on 

 16 the topic of position limits, I do think 

 17 that -- I can't remember who it was in New 

 18 York City but it might have been John, said 

 19 he appreciated how we're looking at this. I 

 20 can't speak for everybody in the room, at 

 21 least for the Commissioners, we're just 

 22 looking at how we can best promote the 

 23 market integrity and the transparency in the 

 24 markets, make sure they're fair and orderly. 

 25 We're not a price setting agency, 

 40 

 1 9/16/09 40 

 2 there may be some that wish us to be but 

 3 that's not what we're -- our mission is, 

 4 it's just how best to make sure that these 

 5 markets function. I mean, there's a lot of 

 6 debate whether position limits help in that 

 7 and that's a lively and healthy debate, but 

 8 I think we're all trying to promote fair and 

 9 orderly markets and making sure that the 

 10 risk management contracts, called futures, 

 11 and the risk management contracts, 

 12 over-the-counter swaps, if we were to 

 13 regulate them, that that price discovery 

 14 function works best for hedgers ultimately 

 15 in these marketplaces. 

 16 COMMISSIONER DUNN: First, as Steve 

 17 Sherrod, when he was talking about when we 

 18 look at the end of the day of where the 

 19 positions are, that we actually look at it, 

 20 I guess, twice a day when we're looking at 

 21 it, but it occurs to me with the algorithms 

 22 that folks have on trading that there is 

 23 probably a great deal of trading that takes 

 24 place interday and that trading may not get 

 25 too far out there because what happens with 

 41 

 1 9/16/09 41 

 2 the algorithms, the machine realizes that 

 3 there is an opportunity to do some arbitrage 

 4 between what spot price is in the out months 

 5 and it's done very quickly, and then in and 

 6 out and, of course, they can be programmed 

 7 to be flat at the middle of the day or the 

 8 end of the day when we tally up, so we 

 9 really don't know what is pushing those and 

 10 it says to me that we, as regulators, as we 

 11 look at the marketplace, have to shift from 

 12 the old mindset of looking at pits and look 

 13 at what goes on electronically and get some 

 14 expertise to be able to do that because I 

 15 think -- I suspect that that has as much 

 16 impact as who has open positions at the end 

 17 of the day on which directions the prices 

 18 are going. 

 19 The other issue and, again, I don't 

 20 want to ambush you again on what -- the 

 21 paper that came out, we will be getting that 

 22 and digesting that, but in view of the other 

 23 exchanges have had a great deal of 

 24 experience on setting position limits and I 

 25 am concerned about what type of 

 42 

 1 9/16/09 42 

 2 organizational structure do we have to have 

 3 here at the CFTC if at the end of the day we 

 4 end up setting position limits across the 

 5 board. 

 6 And the third aspect of that is, 

 7 again, coming back from this international 

 8 meeting, I find no other regulator in the 

 9 world that is sympathetic to setting 

 10 position limits and I'd like to know what 

 11 the impact that this Advisory Committee may 

 12 think this will have on our markets here in 

 13 the United States if we do this 

 14 unilaterally. 

 15 COMM. CHILTON: Before we go to -- 

 16 I'm sorry, go ahead, Deanna. 

 17 MS. DOW: I think you raised some 

 18 very, very important issues with respect to 

 19 setting the limits. I certainly would agree 

 20 that if you do it unilaterally it will have 

 21 a very negative impact on the domestic 

 22 markets, I think that goes without saying 

 23 from a competitive standpoint and from the 

 24 very ease of which market can move to other 

 25 jurisdictions, I think you will see that in 

 43 

 1 9/16/09 43 

 2 very short order in terms of the resources 

 3 and the impact of the Commission taking the 

 4 responsibility of setting position limits. 

 5 I think it will be a very difficult 

 6 task, I mean, this is quite a resource 

 7 intense activity that our compliance 

 8 department has to address day in and day 

 9 out, I mean, this is a routine daily 

 10 monitoring and calculating job that, you 

 11 know, it really is important to be there, to 

 12 know the market, to actually have the 

 13 contact with the participants to know their 

 14 trading patterns. 

 15 I think in terms of setting the 

 16 position limits, the formula needs to be 

 17 certainly something that the Commission has 

 18 blessed or signed off on and that is applied 

 19 across the board for all exchanges. I 

 20 understand the concerns about individual 

 21 exchanges setting limits in and of 

 22 themselves without it being a broad 

 23 application. 

 24 So, to me, the exchanges are in the 

 25 best position in terms of actually 

 44 

 1 9/16/09 44 

 2 implementing and enforcing those limits, but 

 3 certainly the formula under which those 

 4 limits come into place and come into 

 5 existence, I think, certainly is a process 

 6 that, you know, needs to be dealt with in 

 7 conjunction with, you know, all of the 

 8 markets and in working in cooperation with 

 9 the CFTC. 

 10 COMM. CHILTON: Go ahead, Mike. 

 11 COMMISSIONER DUNN: Mr. Chairman, 

 12 Tyson would like to respond to that, if 

 13 that's all right with you? 

 14 COMM. CHILTON: Yes. Go right 

 15 ahead, Tyson Slocum in D.C. there. 

 16 MR. SLOCUM: Thank you very much for 

 17 recognizing me, I appreciate it. This is 

 18 Tyson Slocum, I direct the energy program at 

 19 Public Citizen. Public Citizen is a leading 

 20 consumer advocacy group, so our constituents 

 21 including our membership which helps pay my 

 22 salary are households across the United 

 23 States. 

 24 First, I just want to thank the CFTC 

 25 for making August a not sleepy month in 

 45 

 1 9/16/09 45 

 2 Washington, D.C., we have been very 

 3 encouraged by a number of activities by the 

 4 Commission. I think that the Commission has 

 5 seized an important opportunity, recognized 

 6 that we have been undergoing an economic 

 7 crisis that was caused, in part, by a lack 

 8 of adequate transparency and regulation over 

 9 commodity and derivative markets, and I 

 10 think that the CFTC is making very important 

 11 positive steps in the right direction to 

 12 fill that regulatory void and enhance 

 13 transparency that I think are going to yield 

 14 a lot of benefits to all market participants 

 15 and ultimately to end consumers. 

 16 The conversation right now is on, 

 17 you know, what to be done about position 

 18 limits and hedge exemptions, the CFTC has 

 19 again showed some excellent leadership in 

 20 holding a series of hearings on this issue 

 21 and I'm going to find myself in the very 

 22 unusual position of agreeing with a 

 23 representative from a hedge fund probably 

 24 for the first time in my life, that it seems 

 25 that we are in agreement that some form of 

 46 

 1 9/16/09 46 

 2 position limits are required, and I strongly 

 3 support the CFTC being the entity that makes 

 4 that determination, and I very much 

 5 appreciate concerns by Commissioner Dunn and 

 6 others noting that there is widespread 

 7 encouragement by other regulators around the 

 8 globe to take on that kind of function, and 

 9 I think that the United States has been 

 10 recognized through the generations as a 

 11 global leader in a number of things and when 

 12 Americans are faced with a crisis, there's a 

 13 belief that America does things on it's own 

 14 and sets the standards, and I think it's 

 15 important to recognize the uniqueness and 

 16 seriousness of the economic challenges we 

 17 face and that the United States not 

 18 necessarily listen to naysayers who say, 

 19 well, regulators have never done this 

 20 before, this is not a job for regulators, 

 21 it's a job for exchanges, I think that the 

 22 CFTC needs to take decisive action to set 

 23 the bar high. 

 24 For those who fear that the CFTC 

 25 taking aggressive action to set position 

 47 

 1 9/16/09 47 

 2 limits and be the entity that sets those 

 3 position limits that this will result in a 

 4 fleeing from the U.S. marketplace, this 

 5 so-called race to the bottom mentality that 

 6 any time people talk about improving 

 7 regulatory oversight to strengthen 

 8 transparency is a negative thing, that as 

 9 long as there are other entities around the 

 10 globe that have weaker transparency rules 

 11 than us, that capital and trading activity 

 12 will flee to those areas. 

 13 I think that those folks 

 14 underestimate the concern that many market 

 15 participants have about the integrity of 

 16 markets and for the United States to take a 

 17 lead in aggressively setting firm new 

 18 transparency rules that would include the 

 19 CFTC leading action to set position limits, 

 20 that is going to be a signal that the U.S. 

 21 markets are safer, it is going to send a 

 22 signal not to flee the U.S. marketplace but 

 23 that U.S. markets are more trustworthy, that 

 24 those who say that markets and capital will 

 25 flee to those areas with a reputation of 

 48 

 1 9/16/09 48 

 2 being low regulation entities, I do not 

 3 think that the current crisis of confidence 

 4 in markets is going to support large-scale 

 5 capital or trading volume flight to low or 

 6 no regulation entities. 

 7 So I think that we have an 

 8 opportunity today for the United States to 

 9 assume its global lead in ensuring that 

 10 markets are well regulated. As I said back 

 11 on July 29th when I testified before the 

 12 CFTC, taking these strong transparency 

 13 efforts have a lot more in common with Adam 

 14 Smith in preserving market integrity than 

 15 they do with Karl Marks, there is nothing 

 16 radical about encouraging competition and 

 17 market transparency by establishing strong, 

 18 clear and effective rules. Thank you. 

 19 COMM. CHILTON: Thank you, Tyson. 

 20 Before we go to -- Mike, did you have 

 21 something? 

 22 COMMISSIONER DUNN: Yes. Mr. Cicio, 

 23 I think, would like to have an intervention 

 24 as well here. 

 25 COMM. CHILTON: You know what, 

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 1 9/16/09 49 

 2 though, if it's okay, when you started to 

 3 speak a little bit ago, Commissioner Dunn, 

 4 Bob Pickel on the phone tried to chime in 

 5 and I stopped him, so let's have -- Bob, if 

 6 you're still there, why don't you go ahead. 

 7 MR. PICKEL: (Inaudible) I had this 

 8 one question then a couple of points -- in 

 9 Steve Sherrod's description of all -- I know 

 10 that the Commission is analyzing that, I 

 11 guess they're in the process of perhaps 

 12 considering an updated report, I was just 

 13 wondering about any incites you're gleaning 

 14 from that data as it stands. 

 15 Secondly, a few questions just 

 16 regarding the kind of practicalities as we 

 17 look into the OTC space for collecting this 

 18 information and potentially looking to 

 19 impose position limits on aggregated 

 20 exchange, OTC and overseas basis. 

 21 I think that's really a question -- 

 22 the kind of things we looked at in recent 

 23 years was the ICE offerings that we 

 24 eventually introduced -- some additional 

 25 reporting kind of brought those into the 

 50 

 1 9/16/09 50 

 2 position limits we're seeing. 

 3 Then secondly, these are again, we 

 4 say it all the time, but it's helpful to 

 5 emphasize, these are bilateral contracts 

 6 where even if somebody has the worst of 

 7 intentions, they need to engage in bilateral 

 8 negotiations probably with many different 

 9 entities in order to build up positions that 

 10 would somehow, at least, have some effect on 

 11 the exchange prices. 

 12 So there's kind of a practicality of 

 13 what exactly is the situation that is going 

 14 into the transaction, and then assuming you 

 15 can even get over that hurdle, what would be 

 16 the requirements regarding unwinding 

 17 positions if you're looking at aggregated 

 18 exchanges, OTC and overseas situation. On 

 19 exchange -- contracts or cancel some of the 

 20 contracts for whatever the settlement price 

 21 is on the OTC side he would need effectively 

 22 to negotiate out of any number of different 

 23 transactions with any number of different 

 24 counterparties. 

 25 Like there are a lot of 

 51 

 1 9/16/09 51 

 2 practicalities here that we need to think 

 3 about as we look to expand if, in fact, 

 4 that's the direction we're going. 

 5 COMM. CHILTON: Thank you so much, 

 6 Bob, and I know you had to make a special 

 7 effort to be with us on the blower here, so 

 8 thanks very much. 

 9 We'll go to Paul in D.C. but I 

 10 wanted to just make a point. You know, 

 11 we've been putting position limits on ags 

 12 for a very long time and its worked out real 

 13 well and I don't think we see people sort of 

 14 running like Fred Flintstone overseas in the 

 15 ag markets. I'm convinced we can do it. 

 16 I have some other concerns that 

 17 Commissioner Dunn does about staffing and 

 18 how it's done, et cetera, but, you know, I'm 

 19 certainly not going to support anything 

 20 that's crazy or overzealous and going to 

 21 move things overseas, but there's an 

 22 appropriate balance, I think, that we can 

 23 reach, and I can tell you one thing 

 24 everybody, my colleagues are really smart 

 25 folks and whatever we do I think we'll get 

 52 

 1 9/16/09 52 

 2 right. 

 3 So, Mr. Cicio, Paul Cicio in D.C., 

 4 do you want to comment? 

 5 MR. CICIO: Yes, thank you, 

 6 Mr. Commissioner. I'll be brief. I would 

 7 like to simply identify with the remarks of 

 8 Mr. Slocum and I think he has captured it 

 9 very, very well. 

 10 I would add that the stakes are so 

 11 high, we've tried the old system, it doesn't 

 12 work, we need aggregate position limits, we 

 13 need position limits, just in that time 

 14 period of January to August of last year 

 15 with the run up of just natural gas it cost 

 16 consumers across the country $40 billion 

 17 just in one commodity, think about all the 

 18 commodities, there's too much at risk. 

 19 Finally, there simply is a lack of 

 20 confidence to allow the exchanges to set 

 21 these position limits. It can be done as 

 22 Bart you just said, it's been done well in 

 23 the agriculture area and to think that it 

 24 cannot be done and done well in these other 

 25 commodities is a scare tactic. 

 53 

 1 9/16/09 53 

 2 Consumers lack confidence in the 

 3 exchanges to set this, we do need their 

 4 expertise, we do need their help, we can do 

 5 this together, if we do it together there's 

 6 a win win for everyone including the 

 7 exchanges and we look forward to working 

 8 with them to achieve these fine results. 

 9 MS. DOW: Can I make one comment, 

 10 Mr. Chairman, in response to Mr. Cicio and 

 11 Mr. Slocum. I think in this particular case 

 12 it's not an issue of a race to the bottom, 

 13 it's an issue of the fact that there are 

 14 risk shifting and hedging needs out there 

 15 that sometimes require positions that may be 

 16 above the limits on exchange or that you can 

 17 carry in a market that's overseas that's a 

 18 foreign market and it's not subject to 

 19 position limits. 

 20 So the activity will continue, it's 

 21 not going to stop, just because you clamp 

 22 down on one market it does not stop, these 

 23 needs are still there, the hedging needs, so 

 24 the positions need to be placed somewhere, 

 25 so it's not a question of going to the 

 54 

 1 9/16/09 54 

 2 market that's at least regulated, it's going 

 3 to the market where there's the space and 

 4 the room to carry the positions that they 

 5 need to carry. 

 6 I would also add that, you know, the 

 7 energy markets have always been global 

 8 markets and the agricultural markets have 

 9 not been of that nature, so there is 

 10 definitely a difference between position 

 11 limits in agricultural markets and putting 

 12 position limits on energy markets that only 

 13 apply here in the U.S. 

 14 COMM. CHILTON: That's a good point, 

 15 Deanna. We're smart people, we can do this 

 16 stuff if we put our mind to it. We got two 

 17 people here in New York and then we'll go 

 18 back to D.C., if that's all right. 

 19 Bob Anderson, you wanted to speak, 

 20 and then we'll go to Jack Cogen and then 

 21 back to D.C. 

 22 MR. ANDERSON: Thank you, 

 23 Commissioner. I thought I should speak of 

 24 -- I'm Bob Anderson with the Committee of 

 25 Chief First Officers (sic) and we represent 

 55 

 1 9/16/09 55 

 2 in the gas, power and oil markets the 

 3 utilities, the producers, the generators, 

 4 transport companies. 

 5 I think in Steve's comments earlier 

 6 he mentioned a long name for a category 

 7 called the Producer Merchant Processor, et 

 8 cetera, that group of companies we represent 

 9 the larger part of, and what's unique, I 

 10 think, though, that I bring to the table 

 11 here is that the representatives from those 

 12 companies they are in the CCRO, are, in 

 13 fact, the risk management functions in each 

 14 of those companies, there are large 

 15 companies and small companies, and I think 

 16 there's a lot of analogous ideas, a lot of 

 17 analogous experience by risk managers in 

 18 these companies to what the CFTC is thinking 

 19 about doing to the markets overall, the 

 20 difference being that my representatives are 

 21 looking at their own company, trying to 

 22 manage those risks similar to the fashion 

 23 that you guys are thinking about in some way 

 24 for markets. 

 25 The two points I want to bring up in 

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 1 9/16/09 56 

 2 two minutes that I think really jump out at 

 3 me and compel me to speak up so that you 

 4 recognize the resource we represent, all we 

 5 do is research and write white papers about 

 6 best practices for companies around all 

 7 aspects of risk in all markets. 

 8 The companies that I'm representing, 

 9 we spend all of our time talking about how 

 10 all of the companies that participate in 

 11 both exchanges, I think somebody called dark 

 12 pools, the bilateral markets that are not 

 13 reported or seen, they're not transparent, 

 14 and the first thing that comes to mind is, 

 15 wow, we've been working for three years very 

 16 hard on transparency and transparency is not 

 17 just something that we need for the CFTC in 

 18 some way to police things, transparency is 

 19 also something that our risk managers want 

 20 very much, and that's why they're actually 

 21 working hard, we have a spinoff company that 

 22 we're working on having complete reporting 

 23 of all types of transactions into it in 

 24 order to provide that transparency not so 

 25 that we can risk markets, obviously, it's so 

 57 

 1 9/16/09 57 

 2 that we can simply have healthy markets that 

 3 can grow, particularly in power, there's a 

 4 lot of excitement around that, that 

 5 initiative, so transparency is something 

 6 that our members would very much like to see 

 7 as we go forward in the future anyways. 

 8 So knowing that, that's very 

 9 encouraging, hearing a lot of what you're 

 10 talking about and I think we're looking at 

 11 it in the very near term much more 

 12 transparent bilateral markets and that 

 13 brings then to mind, hearing these 

 14 discussions around position limits, the 

 15 comment I would make, as a group, we'd like 

 16 to certainly offer ourselves as a resource 

 17 and look very closely at the proposal in the 

 18 white paper that we talked about. 

 19 But the experience that companies 

 20 have setting limits on themselves is 

 21 something worth thinking about, mainly 

 22 because the most commonly used term is 

 23 unintended consequences, very often when 

 24 we talk about managing risk in any way, the 

 25 balloon analogy is one side of the balloon 

 58 

 1 9/16/09 58 

 2 flies very well. 

 3 If, however, we implement the 

 4 proposal carefully and in particular for my 

 5 constituents that are in those opaque or 

 6 less transparent markets, if we can think 

 7 about potential impact of the limits that 

 8 we're discussing, I think there would be a 

 9 lot of benefits overall to the group in the 

 10 sense that the unintended consequences might 

 11 be reduced or mitigated greatly. 

 12 So we'll certainly make ourselves 

 13 available and I think it's important that 

 14 this group of companies, the 

 15 Producer/Merchants/Processing Group it's 

 16 such a large part of OTC markets and has 

 17 such an important role in hedging in the 

 18 fiscal world, it will be real important that 

 19 we get their voice in on this whole issue. 

 20 COMM. CHILTON: Thank you, Bob. 

 21 We'll use you as a resource and let me just 

 22 say that, you know, the record of this 

 23 Advisory Committee meeting can include any 

 24 materials that you think that we should be 

 25 looking at now and that goes for all the 

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 1 9/16/09 59 

 2 EEMAC participants and for the general 

 3 public as well. 

 4 Jack Cogen here in New York. Jack. 

 5 MR. COGEN: Thank you, Commissioner 

 6 Chilton. I want to expand on a couple of 

 7 threads of the remarks that Bob Pickel and 

 8 Kevin Fox touched on. 

 9 When we hear about position limits 

 10 and most of the conversation is about the 

 11 more liquid commodities and the liquid 

 12 portions of the commodities and the trading, 

 13 and I'm coming from the environmental 

 14 commodity side, so it's a little different. 

 15 First of all, I'm not speaking on 

 16 these remarks as the Chairman of the 

 17 International Business Trading Association 

 18 but as an outsource. We find that there's 

 19 certain things, as Kevin said, if the entire 

 20 market is a hundred contracts, who cares, 

 21 but we find in the new market that's often 

 22 going to be the case, and so when you look 

 23 at the limits you also have to look at what 

 24 is the impact of violating the limits, it's 

 25 very different to be controlling the nearby 

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 1 9/16/09 60 

 2 contract in natural gas than it is to be 

 3 controlling five years out in carbon, it's a 

 4 very different experience, or even nearby 

 5 too. So we really have to not say all 

 6 commodities and all commodity futures are 

 7 the same. 

 8 Just to give an anecdotal position 

 9 that's rather an abstract statement, we had 

 10 great success two or so years ago in doing a 

 11 large CDM project in China for Petrol China 

 12 and in the process we purchased 45 million 

 13 tons of future carbon reductions. So the 

 14 futures market that we would want to go to 

 15 is the nearest -- you know, basis risk 

 16 market would be the secondary market in CER, 

 17 who had an open interest at the time of 

 18 maybe 100,000 contracts, 200,000 contracts 

 19 and we did 45 million. 

 20 Believe me, I would love to go to 

 21 the exchange and lay off the rest. We went 

 22 to a series of banks, we went to a series of 

 23 -- and all the risk got laid off, but on any 

 24 given day any position limit that you would 

 25 find were blown through. 

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 1 9/16/09 61 

 2 On the other hand, if we would not 

 3 have done reductions which take out 45 

 4 million tons of carbon from the atmosphere, 

 5 so you need to look at the limits but the 

 6 impact especially on new markets. 

 7 COMM. CHILTON: Thank you, Jack. I 

 8 want to make sure that -- we've got one more 

 9 speaker, Don, but we'll go after that back 

 10 to D.C. or Kansas City for maybe one or two 

 11 more, then I want to shift just a little bit 

 12 and talk about something we've actually 

 13 started talking about, but, Don, you want to 

 14 go ahead and make some comments first, then 

 15 we'll go back to D.C. if anybody wants. 

 16 MR. CASTURO: Thank you, 

 17 Commissioner. I just wanted to expound on 

 18 that topic a little bit more and move beyond 

 19 position limits to the idea of hedge 

 20 exemptions and as it relates to position 

 21 limits. 

 22 I want to commend the CME for 

 23 putting out their white paper on position 

 24 limits, I look forward to reviewing it, 

 25 particularly because they recognize that the 

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 1 9/16/09 62 

 2 markets are broader than just U.S. exchanges 

 3 and as was the basis for my testimony on 

 4 position limits and hedge exemptions, we 

 5 believe the sensible approach is to look at 

 6 the overall space, and in that regard that 

 7 is where the necessity for hedge exemptions 

 8 comes in for entities such as ourselves who 

 9 are swap dealers who deal across the broad 

 10 marketplace. 

 11 All we were trying to accomplish if 

 12 the position limits are on just U.S. future 

 13 exchanges is to address our imbalance across 

 14 the broader markets and bring our actual net 

 15 exposure, the exposure that I would think 

 16 that anyone should be concerned with if 

 17 they're looking for any potential for 

 18 manipulation is their net exposure across 

 19 the whole space, we need those hedge 

 20 exemptions if they're just on a U.S. 

 21 exchange basis to address an imbalance 

 22 across our space to get our net exposure 

 23 back down to a level that would be within 

 24 what we think would be a sensible position 

 25 limit across the whole space. 

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 1 9/16/09 63 

 2 MR. PANTANO: This is Paul Pantano 

 3 on the phone from the FIA, is it okay if I 

 4 make a quick comment? 

 5 COMM. CHILTON: Yes, thanks, I'm 

 6 glad you're with us, Paul, go right ahead. 

 7 MR. PANTANO: Thank you. I want to 

 8 bring to everybody's attention the testimony 

 9 that the -- the written testimony that the 

 10 FIA provided to the Commission on August 5th 

 11 on position limits. 

 12 The FIA has been a strong supporter 

 13 of increased transparency in the markets 

 14 but, you know, as we're talking about 

 15 position limits on U.S. futures exchanges, 

 16 the FIA is very concerned about the 

 17 migration of price discovery to foreign 

 18 markets and if you take a look at this 

 19 position paper that the FIA submitted to the 

 20 Commission it describes the examples of how 

 21 that can occur and while it's true that the 

 22 Commission is going to be very careful about 

 23 doing this, we just want to caution everyone 

 24 to think very carefully because companies 

 25 have exposure, they need to hedge that risk 

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 1 9/16/09 64 

 2 and if there are limits as the prior speaker 

 3 just described on the amount of risk they 

 4 can weigh off in the U.S. futures market, 

 5 that risk is going to be hedged in OTC 

 6 markets where at least at the current time 

 7 the CFTC may not have authority to set 

 8 limits and some of that exposure may move to 

 9 a foreign market and then the foreign market 

 10 could become the price leader in terms of 

 11 price discovery instead of the U.S. markets 

 12 which have been the price leaders for many 

 13 decades. 

 14 COMM. CHILTON: Thank you so much. 

 15 Anybody else in D.C.? 

 16 MR. FELDMAN: Ben Feldman from J.P. 

 17 Morgan. (Inaudible) we testified before the 

 18 Commission sort of establishing the broad 

 19 company position with regard to position 

 20 limits and hedge exemptions and I think that 

 21 Jack Cogen raised an interesting point that 

 22 just bears reemphasis about the different 

 23 market -- about how to effectively manage 

 24 the concern about excessive speculation 

 25 while still providing the ability to lay off 

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 1 9/16/09 65 

 2 risk, it needs to be laid off, you know, 

 3 from a natural position. 

 4 So one of the things that was 

 5 included in that testimony was the comment 

 6 that it may be important to look through the 

 7 swap dealer to the actual participant -- 

 8 market participant when thinking about the 

 9 position limits because if you take the swap 

 10 dealers who had net positions, just the 

 11 amount of risk management capacity that 

 12 would be available with respect to position 

 13 limits comes into question. 

 14 This is sort of a narrow point but 

 15 it's where would you apply such limits and 

 16 might you look through the aggregators to -- 

 17 if the concern is about speculative 

 18 positions, look at the actual market 

 19 participant versus the swap dealer side. 

 20 COMM. CHILTON: Okay. 

 21 CHAIRMAN GENSLER: I think I've got 

 22 one more in D.C. here, and if I'm allowed to 

 23 say one thing afterwards. 

 24 COMM. CHILTON: Mr. Chairman, say 

 25 whatever you want, of course, I'm your loyal 

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 1 9/16/09 66 

 2 subject. We'll do the one more in D.C. and 

 3 then we've got two here in New York. We can 

 4 go to you, Mr. Chairman, right now, if you'd 

 5 like. 

 6 COMM. GENSLER: I'm fine, I'll wait 

 7 my turn. 

 8 COMM. CHILTON: So we'll do one more 

 9 in D.C., we've got two here, then we'll go 

 10 to the Chairman then we'll sort of shift 

 11 gears with John Reilly. Go ahead D.C. 

 12 MR. PROKOP: Mr. Chairman, I'm 

 13 honored to have you defer to me. This is 

 14 Mike Prokop, I'm with AMREX down in Houston. 

 15 I did want to make sure that Commissioner 

 16 Dunn did have his original question that 

 17 started this conversation addressed and 

 18 that is basically the day trading, if you 

 19 will, the opening and closing of positions 

 20 during the day, whether electronic or 

 21 invoice markets or what have you. 

 22 Theoretically, obviously, those 

 23 positions if closed out on a rational basis 

 24 during the day shouldn't have an effect on 

 25 prices, they may have a very short-term 

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 1 9/16/09 67 

 2 effect during the day on the initial opening 

 3 positions but then perhaps the reverse 

 4 effect at the end of the day. 

 5 I think we've already addressed the 

 6 fact that I think it needs to be looked at 

 7 further -- (inaudible) -- as to the timing 

 8 of the closing positions and that's where 

 9 the potential for manipulation in these 

 10 markets exists. Obviously, the closing 

 11 price on these markets -- (inaudible) -- 

 12 whether it's for settlement of cash 

 13 transactions, financial transactions, what 

 14 have you, the interim interday trading does 

 15 not affect those prices, and in hearing 

 16 various comments of my colleagues around the 

 17 table here also, it seems like what a lot of 

 18 this comes down to is price transparency. 

 19 We have concerns now with position 

 20 limits settling to regulate, if you will, 

 21 the size of positions that various parties 

 22 are taking in the marketplace. This 

 23 transparency right now a lot of it is being 

 24 provided by clearing, there was an entity 

 25 that's in the marketplace right now, it's 

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 1 9/16/09 68 

 2 fully regulated, it's a DCM that provides 

 3 what I believe the perfect model for that 

 4 transparency which is to have these 

 5 transactions settle as futures positions 

 6 which are fully regulated and transparent. 

 7 There are other entities out there 

 8 that are clearing their transactions as 

 9 financially settled instruments and that's 

 10 where maybe some of the nontransparencies 

 11 happen. I know there have been many moves 

 12 recently to improve that but maybe that's 

 13 where the space needs to get looked at for 

 14 further thought on that. 

 15 I will have you notice a 

 16 over-the-counter -- probably 60 to 65 

 17 percent of our positions that we are 

 18 facilitating on a daily bases are cleared 

 19 right now between the two major entities 

 20 which is ICE and NYMEX and growing by the 

 21 day, natural gas is 35 to 40 percent. 

 22 So as we talk about the dark space, 

 23 if you will, the light is coming and has 

 24 been and actually clearing for us since 2004 

 25 has been one of the best things for our 

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 1 9/16/09 69 

 2 business. The large swap hedge funds that 

 3 you're talking about here can't enter into 

 4 business swap dealer agreements with other 

 5 entities, they have to clear, so with that 

 6 clearing, if reported correctly to the CFTC, 

 7 you're now looking into these markets where 

 8 you may not have had that before. Thank 

 9 you. 

 10 COMM. CHILTON: Thanks very much. 

 11 We'll go to Jeffrey Sprecher here in New 

 12 York. 

 13 MR. SPRECHER: Thank you. I'm in 

 14 New York and Jeff Sprecher with 

 15 Intercontinental Exchange. Just to follow 

 16 up with on a number of comments. It may 

 17 surprise some people but although we are an 

 18 exchange and although we have tremendous 

 19 expertise in these markets, working with 

 20 them everyday, working with all the market 

 21 participants that are material around the 

 22 world everyday we really believe the CFTC is 

 23 in the best position to not only put the 

 24 limits in place, if there are going to be 

 25 limits, but also deal with any exemptions. 

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 1 9/16/09 70 

 2 We also run agricultural markets in 

 3 the U.S. and as Commissioner Chilton has 

 4 pointed out, we find that that has worked 

 5 very, very well and, in fact, I have never 

 6 heard of a single complaint that's bubbled 

 7 up to my level of anyone that hasn't been 

 8 able to get an exemption that needs an 

 9 exemption and so I commend the staff at the 

 10 CFTC for working through those issues. 

 11 As Don Casturo mentioned that in 

 12 order to give a hedge exemption we would 

 13 necessarily need to see the entire global 

 14 position of a firm, that would include 

 15 positions on my competitors and in order to 

 16 grant the exemption there are no rules as to 

 17 what we might say that an entity should or 

 18 shouldn't do, particularly vis-a-vis with 

 19 their positions that are on the competitors, 

 20 so it's right that that policy of giving 

 21 hedge exemptions at the exchange level is 

 22 ripe for potential for anti-competitive 

 23 behavior. 

 24 I think, frankly, my company came up 

 25 with the idea of clearing OTC swaps, we put 

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 1 9/16/09 71 

 2 them electronic, we published the daily 

 3 tape, we have worked very closely with FSA 

 4 and the CFTC to bring more transparency to 

 5 overseas trading. We've been a leader in 

 6 trying to make these markets more 

 7 transparent, I'm very proud of what we've 

 8 done but I will tell you that the market 

 9 itself still does not have confidence in 

 10 what we have done or we wouldn't have this, 

 11 you know, group here today. 

 12 I really believe that this is an 

 13 area where the CFTC can provide the 

 14 leadership and we look anxiously to work 

 15 with you. I think Kevin Fox made the point 

 16 that some of these markets are quite 

 17 complicated and really will need the 

 18 technical expertise of the industry to help, 

 19 hopefully that will allay some of 

 20 Commissioner Dunn's concerns about 

 21 resources. I really think the resources are 

 22 probably within this room to help solve some 

 23 of these problems. Thank you. 

 24 COMM. CHILTON: Thank you, Jeff. 

 25 Bill McCoy from Morgan Stanley here in New 

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 1 9/16/09 72 

 2 York. 

 3 MR. McCOY: Thank you again. Bill 

 4 McCoy of Morgan Stanley in New York. I want 

 5 to thank the Commission as well for focusing 

 6 on these vital issues and I want to echo 

 7 some of the comments we've been hearing 

 8 regarding not just discussion of position 

 9 limits but the importance of the hedge 

 10 exemptions and continuing to preserve the 

 11 hedge exemptions obviously for swap dealers 

 12 and having a thoughtful approach to it. 

 13 I mean, what I would stress is the 

 14 need that any structure where we start 

 15 looking at potentially aggregating futures 

 16 and OTC positions that it be in the context 

 17 of a very dynamic and flexible framework for 

 18 limits and hedge funds whether it's at the 

 19 Commission itself or through the exchanges 

 20 and, obviously, anything that remains static 

 21 is not going to be able to address the 

 22 changing market forces that will apply for 

 23 the commodities, and as Jack Cogen 

 24 mentioned, all the commodities are different 

 25 and therefore how these things are being 

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 1 9/16/09 73 

 2 set. 

 3 As we heard at the hearing from 

 4 representatives from -- such as Goldman 

 5 Sachs and J.P. Morgan about this concept of 

 6 the success of the special call, we too have 

 7 seen that the special call has served 

 8 extremely useful for ourselves internally as 

 9 well as we believe for the Commission in 

 10 helping the Commission get a better view 

 11 into the OTC markets and so this concept of 

 12 if there were a way of applying positions on 

 13 an aggregate basis, this concept of looking 

 14 to swap dealers for the information and then 

 15 looking through to various market 

 16 participants, again I would say this is a 

 17 flexible and dynamic framework for applying 

 18 the hedge funds should consider many factors 

 19 such as considerations may be on the issue 

 20 of -- investment money issues may have to be 

 21 given as to making distinctions between 

 22 discretionary and passive investors and how 

 23 -- whether position limits or hedge funds 

 24 more likely to be -- hedge exemptions, 

 25 rather, are more likely to be administered 

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 1 9/16/09 74 

 2 and what effect it's going to have on 

 3 distinguishing say between small pension 

 4 plans versus large pension plans that may 

 5 result in the fact that a large -- a state 

 6 entirely populated with a large pension plan 

 7 may find that because of the limits it's 

 8 only allowed to permit a certain very small 

 9 portion of the assets allocated into the 

 10 markets, whereas, if you're a teacher in a 

 11 very small state because of the level of 

 12 limits you're able to get a much higher 

 13 portion of your asset allocation in the 

 14 pension plan to the price market, these are 

 15 complex issues, but it sort of underscores 

 16 again the need for having a flexible 

 17 framework. 

 18 COMM. CHILTON: Mr. Chairman. 

 19 COMM. GENSLER: Thank you, 

 20 Commissioner Chilton. I just listened to 

 21 this very important discussion and 

 22 everybody's contribution has been very 

 23 helpful, and two that I just want to come 

 24 back to. 

 25 One is, there may not be as much a 

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 1 9/16/09 75 

 2 difference between some of the panelists, 

 3 but it may be a question for Ms. Dow, in 

 4 response to Commissioner Dunn's questions, I 

 5 thought I heard Ms. Dow say that what was in 

 6 the white paper, and again we haven't read 

 7 your policy paper, maybe later today, that 

 8 you thought that the exchanges were in the 

 9 best place to enforce or implement position 

 10 limits but that the Commodity Futures 

 11 Trading Commission maybe working with the 

 12 exchanges was in a better position to 

 13 actually set the levels or the formula, 

 14 whether that's a formula that's annually set 

 15 or something, but there's sort of this 

 16 setting of the formula that you see is more 

 17 a Commission and maybe your words were 

 18 shared with the Commission but they're more 

 19 a Commission function and then there's the 

 20 sort of the day to day task of surveilling 

 21 the market and implementing it. Ms. Dow, is 

 22 that correct? 

 23 MS. DOW: Yes, that's correct. 

 24 COMM. GENSLER: I don't know where 

 25 we'll end up but it just seems like that -- 

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 1 9/16/09 76 

 2 I did want to confirm that because I thought 

 3 I heard that and that was helpful. 

 4 Maybe my second point is not a 

 5 question, it's just an observation that Bill 

 6 just -- I think it was Bill from Morgan 

 7 Stanley in New York just mentioned 

 8 something. I think you're correct, we've 

 9 found as a Commission the special call of 

 10 swap dealers and index investors which is 

 11 done for I think close to 45 participants 

 12 very helpful, it was very rough at first, it 

 13 was labor intensive a year ago, its gotten 

 14 smoothed out, we hope, through that process 

 15 to actually give monthly, quarterly index 

 16 investment data, but I'm not -- I just want 

 17 to offer a counterview to Ben from J.P. 

 18 Morgan and Don I think spoke for Goldman 

 19 Sachs, and I don't know where we'll end up 

 20 but it's just a counterview, that the swap 

 21 houses, very important aggregators of risk 

 22 as you're using the words, whether position 

 23 limits should be -- whether they should be 

 24 exempt, basically. 

 25 We have position limits for others 

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 1 9/16/09 77 

 2 but not for those very important complex 

 3 financial institutions and a counterview is 

 4 that at the core of what Congress laid out 

 5 in the 1930's and at the core of market 

 6 speculation is a good part of the markets, 

 7 that hedgers and speculators meet but there 

 8 might be a role for this Commission to play 

 9 to diminish or eliminate, prevent any 

 10 burdens that come from excessive 

 11 speculation. 

 12 Now, excessive speculation, what is 

 13 that, but concentrated positions, if we only 

 14 had the three of your firms in a market I 

 15 think there is a counterview as to whether a 

 16 market would have more liquidity or less 

 17 liquidity. If you have three great firms, 

 18 large firms, are aggregating and 

 19 internalizing so much the deal flow and that 

 20 deal flow is not coming to transparent 

 21 exchanges, so that's part of a healthy 

 22 debate. 

 23 There is a market better served if 

 24 there's only three automakers or three drug 

 25 companies, there ultimately are only three 

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 1 9/16/09 78 

 2 swap houses that internalize everything and 

 3 only bring their net position, as Don said 

 4 earlier, to their futures market and have 30 

 5 percent of the market or 40 percent of the 

 6 market where there's at least a minimum 

 7 number of actors on the stage and that's 

 8 what we're grappling with. 

 9 COMM. CHILTON: Thank you, 

 10 Mr. Chairman. Let's go ahead and sort of 

 11 shift the discussion to something actually 

 12 we started talking about a couple of times 

 13 and that's legislation on the Hill and the 

 14 OTC markets. John Reilly, are you there? 

 15 MS. MOLER: This is Betsy Moler from 

 16 Exxon, can I just make one brief comment? 

 17 COMM. CHILTON: Sure, Betsy, go 

 18 ahead. 

 19 MS. MOLER: Thank you very much. It 

 20 will be brief. It was my privilege to chair 

 21 the Federal Energy Regulatory Commission for 

 22 a number of years, and there is a regulatory 

 23 model that FERC has used successfully and 

 24 it's apropos of your comments, Mr. Chairman. 

 25 Industry working stakeholders 

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 1 9/16/09 79 

 2 working together submit proposed standards 

 3 to FERC, FERC establishes what the policy is 

 4 with respect to reliability, for example, 

 5 and with respect to what are known as open 

 6 access same time information systems, and 

 7 then the stakeholders such as the exchanges 

 8 in this case then actually do the oversight 

 9 and do the implementation of those 

 10 standards. 

 11 There's no need for this Commission 

 12 to duplicate the whole staff that the 

 13 exchanges have, but the exchanges would then 

 14 implement what our CFTC standards are. It 

 15 just strikes me that that regulatory model 

 16 might prove to be beneficial and successful 

 17 there. It's what is happening now, it's 

 18 fraught with some difficulty, to be fair, on 

 19 implementing reliability standards and 

 20 there's a tremendous amount of work. One of 

 21 the reasons FERC has adopted that model is 

 22 just resources and I would just commend it 

 23 to you as a possible model, if you might 

 24 consider it. 

 25 COMM. CHILTON: All right. 

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 1 9/16/09 80 

 2 COMM. GENSLER: I think you were 

 3 also Deputy Secretary of Energy? 

 4 MS. MOLER: I've had a checkered 

 5 career, yes, sir. 

 6 COMM. CHILTON: She's done a great 

 7 job. 

 8 MS. MOLER: But the model works and 

 9 it saves the government resources and you 

 10 have the benefit of the expertise of the 

 11 industry and other stakeholder groups. 

 12 COMM. CHILTON: Thank you, Betsy, 

 13 and we're really pleased that you've joined 

 14 the EEMAC. We are going to break at a 

 15 quarter to, so I've only got like eleven 

 16 minutes, but John Riley the Chairman has 

 17 brought over from the House Agriculture 

 18 Committee, he's our director of legislative 

 19 affairs at the CFTC and I've known John for 

 20 a long time, he does a great job and he's 

 21 going to give us an update on where things 

 22 stand on the Hill on OTC legislation and, 

 23 again, we're going to take a break in about 

 24 eleven minutes. Go ahead, John. 

 25 MR. RILEY: Thank you very much, 

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 1 9/16/09 81 

 2 Commissioner Chilton, it's a pleasure to be 

 3 here with the Advisory Committee today and 

 4 going into the discussion. 

 5 I was asked to kick it off a little 

 6 bit in terms of where Congress is on OTC 

 7 derivatives legislation, to do that I guess 

 8 I'll just briefly note some recent events to 

 9 keep fresh in your mind, I don't think that 

 10 there's anything that news to members of the 

 11 Advisory Committee or the Commissioners, but 

 12 just having these things together. 

 13 Chairman Frank was interviewed this 

 14 week and he kind of made note of a change in 

 15 the congressional schedule that Congress 

 16 looks like it's going to be in this session 

 17 through December and that he was sort of 

 18 addressing the question of whether or not 

 19 there was time this year to deal with OTC 

 20 derivatives legislation and he said, 

 21 December is the new October, Congress has 

 22 time to get the bill done this year. 

 23 His committee along with, of course, 

 24 the House Ag Committee and the Senate 

 25 Banking Committee and the Senate 

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 1 9/16/09 82 

 2 Agricultural Committee are going to be the 

 3 focus of a lot of attention. 

 4 Important news within the last 

 5 couple of weeks was that Senator Dodd is 

 6 going to remain as chairman of the Banking 

 7 Committee, Senator Harkin has taken over as 

 8 chairman of Health, Education and Pensions 

 9 Committee, and Senator Blanche Lincoln from 

 10 Arkansas has taken over as chairman of the 

 11 Senate Agriculture Committee, they all have 

 12 committed themselves as far as their agendas 

 13 to move forward on OTC derivatives 

 14 legislation, and all of those committees, of 

 15 course, have been pretty active this year. 

 16 The House Agriculture Committee had 

 17 a couple of hearings, both Senate Ag and 

 18 Banking Committees had hearings on OTC 

 19 derivatives in June, it was in July that 

 20 Secretary Geitner testified before a joint 

 21 meeting of the House Agriculture and 

 22 Financial Services Committee which is one of 

 23 Chairman Frank's opportunities to point out 

 24 that there's not going to be a big turf 

 25 fight this year, that the Ag Committee and 

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 1 9/16/09 83 

 2 the Financial Services Committee are going 

 3 to get along and continue to join us, and 

 4 the Financial Services Committee had a 

 5 hearing in July as well with Chairman 

 6 Gensler and SEC Chair Shapiro. 

 7 Also I'll just note that there has 

 8 already been some action this year, as a 

 9 reminder, on OTC derivatives legislation, it 

 10 was February 12th that the House Ag 

 11 Committee approved its Bill HR977, it 

 12 primarily consisted of provisionals that 

 13 were included in last year's -- the bill 

 14 passed by the House last year focusing on 

 15 speculation and energy and agriculture 

 16 markets, but new provisionals were added 

 17 that were intended to bring more 

 18 transparency and oversight to the OTC 

 19 derivatives markets and that bill was 

 20 reported as well to the Financial Services 

 21 Committee. 

 22 Going into some other events that 

 23 occurred recently that you know of, it was 

 24 July 30th Chairman Pearson and Chairman 

 25 Frank released what they call their 

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 1 9/16/09 84 

 2 description of principles for OTC 

 3 derivatives legislation, they held a joint 

 4 press conference on that, they were 

 5 committed to moving together based on those 

 6 principles and I'll tick them off real 

 7 quick, they were that there would be -- the 

 8 bill would have a robust oversight of 

 9 dealers in the markets, there would be full 

 10 clearing house regulation and that there 

 11 would be comprehensive trade reporting, 

 12 there would be mandatory clearing for OTC 

 13 derivatives with two exceptions, one is that 

 14 an appropriate regulator -- if an 

 15 appropriate regulator determines the product 

 16 is not sufficiently standardized to be 

 17 cleared or no qualified clearing mechanism 

 18 exists, the other would be if one party in 

 19 the transaction does not qualify as a major 

 20 market participant as determined by the 

 21 appropriate regulator. 

 22 They also had provisions for strong 

 23 capital market requirements within that 

 24 there would be higher capital market charges 

 25 for non-standardized transactions, not 

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 1 9/16/09 85 

 2 exchange traded as a principle for 

 3 protecting U.S. financial institutions from 

 4 lesser regulatory standards in other 

 5 countries, there was also a role in there 

 6 for a financial services oversight counsel 

 7 which would have the task of resolving any 

 8 disputes between the SEC and the CFTC over 

 9 products or jurisdiction. 

 10 Then another big event, of course, 

 11 is August 11th the Treasury Department 

 12 released their over-the-counter Derivatives 

 13 Market Act of 2009 which was the final piece 

 14 of the administration of the regulatory 

 15 reform agenda and, again, kind of taking off 

 16 some of the highlights in that, it's got 

 17 comprehensive regulation of OTC swaps for 

 18 all commodities by the CFTC and the SEC, it 

 19 requires registration and regulation of swap 

 20 dealers and major swap participants 

 21 including capital margin reporting and 

 22 record keeping requirements and business 

 23 conduct documentation and back office 

 24 standards, has provisions to require that 

 25 standardized swaps be cleared by clearing 

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 1 9/16/09 86 

 2 houses registered, regulated, and that 

 3 standardized swaps also would be traded -- 

 4 required to be traded on regulated exchanges 

 5 or in cases where they were regulated to 

 6 commercial and sophisticated parties on ASEF 

 7 which is the acronym standing for 

 8 Alternative Swap Execution Facilities. 

 9 The bill also has comprehensive 

 10 reporting and record keeping regime for 

 11 swaps and provisions for swap repositories 

 12 and large trader reporting for OTC products. 

 13 It would give the CFTC and the SEC the 

 14 authority to set aggregate position limits, 

 15 and as far as the dividing line for swaps, 

 16 it kind of adopts the model of the 

 17 Shar/Johnson Accords (sic) so that broad 

 18 based security index swaps will be under the 

 19 CFTC's jurisdiction, and narrow based or 

 20 single security based swaps would be in the 

 21 SEC's jurisdiction. 

 22 So some of the other events that are 

 23 further hearings that are coming up on the 

 24 OTC derivatives, the House Ag Committee is 

 25 actually having a hearing tomorrow to get 

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 1 9/16/09 87 

 2 industry views of OTC derivatives and 

 3 they're going to continue Tuesday and take 

 4 testimony from Chairman Gensler and SEC 

 5 Chair Shapiro in the aftermath of tomorrow's 

 6 hearing, and the Financial House Services 

 7 Committee they have to deal with the other 

 8 portions of the reform package including the 

 9 resolution of authority to systemic risk 

 10 regulator, Consumer Financial Protection 

 11 Agency, and it was yesterday that Chairman 

 12 Frank put out a schedule of eleven hearings 

 13 to be held between next week and October 9th 

 14 to cover the breadth of those issues 

 15 including one on October 7th specifically on 

 16 derivatives. 

 17 This is not an exhaustive list but I 

 18 thought I would just take a minute to kind 

 19 of highlight what I thought was sort of high 

 20 frequency questions members seem to be 

 21 asking in the hearings that have been held 

 22 so far, certainly not an exhaustive list but 

 23 just ones that have been coming up fairly 

 24 frequently. 

 25 Of course, the question over 

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 1 9/16/09 88 

 2 customization and standardized swaps and 

 3 where you draw that dividing line has been 

 4 raised as a concern across the gamut from 

 5 questions over whether or not restrictions 

 6 on customized swaps would impact hedging to 

 7 the other end of the spectrum where the 

 8 question of, if there are accommodations for 

 9 customization, do you lose comprehensive 

 10 effective regulation. 

 11 Another question raises concerns 

 12 about whether or not the U.S. should go 

 13 forward and what level of international 

 14 cooperation should we achieve in the course 

 15 of doing that. 

 16 Then the question that has been 

 17 raised a few times regarding clearing houses 

 18 has been, if we're going to have a regime 

 19 where in certain circumstances require that 

 20 swaps be cleared, are we also going to 

 21 require the clearing houses to take those 

 22 swaps. 

 23 Those are clearly not an exhaustive 

 24 list, as you all know, but those are the 

 25 ones that I kind of flagged as sort of high 

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 1 9/16/09 89 

 2 frequency areas where members I think are 

 3 looking for guidance. So that's all I had, 

 4 Commissioner Chilton. I turn it back over 

 5 to you. 

 6 COMM. CHILTON: Thank you, John, 

 7 that was very good. I did say I want to 

 8 take a break and that will be in a couple of 

 9 minutes from now, but I've gotten approval 

 10 from our technology people to go for another 

 11 five minutes. So who wants to speak up on 

 12 OTC stuff? 

 13 MR. SHELK: John Shelk from the 

 14 Electrical Power Supply Association. Skip 

 15 started to talk about this but I think 

 16 anybody that does the electricity sector 

 17 knows that different segments are often to 

 18 disagree much more frequently than we agree. 

 19 On the question of the OTC 

 20 derivatives and requiring them to be cleared 

 21 on exchange, this is an issue that has 

 22 brought all of the segments of the industry 

 23 together, I'm only here to represent the 

 24 Electric Power Supply Association which is 

 25 the competitor, also I think it's important 

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 1 9/16/09 90 

 2 to note that our colleagues on the 

 3 cooperatives and the public power and in the 

 4 investor and the utility community share 

 5 these concerns that Skip started to discuss, 

 6 and we've picked this opportunity to this 

 7 committee and others by working with the 

 8 Commission. 

 9 There's an important task here to 

 10 bring about transparency and confidence in 

 11 markets that are important to our members 

 12 and we view this as consumers of these 

 13 products, so the question I think John 

 14 mentioned is how do you address and achieve 

 15 your regulatory goals while allowing these 

 16 products to still be available. We have to 

 17 hedge risk with fuel coming into the plants, 

 18 we have to hedge the risk associated with 

 19 the price going -- of power for the output. 

 20 Paul touched on what gas prices were 

 21 like earlier last year, of course, now we 

 22 forget that prices are a fraction of what 

 23 they were in the peak, the same thing is 

 24 true with power prices, so it's important as 

 25 we go forward that we -- it would really 

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 2 impact the collateral and that's the number 

 3 one issue. 

 4 We're facing capital challenges 

 5 regardless of our type of company or -- 

 6 public power, it touches on the issue we're 

 7 going to talk about, climate change, or 

 8 we're expected to invest billion of dollars 

 9 in retiring plants and other environmental 

 10 requirements, cyber security, so if you look 

 11 at that, this is an industry that is a very 

 12 highly capital intensive industry and 

 13 becoming more so. 

 14 So we'd like to work with you and 

 15 make sure that you all understand how -- 

 16 electricity is -- things that are dealt with 

 17 by not just this Commission but any other 

 18 commission, electricity is literally 

 19 physically interactive. Betsy can speak to 

 20 that, having regulated that, so we want to 

 21 be sure that you understand that, and 

 22 there's a link, of course, to the climate 

 23 issue that we'll talk about after the break, 

 24 not only because of the investments that 

 25 were to address climate change but, of 

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 1 9/16/09 92 

 2 course, we support a cap and trade approach 

 3 as an organization, we support having this 

 4 agency handling the trading aspect, as the 

 5 Chairman mentioned, but these things are 

 6 interrelated not just electricity physically 

 7 but also what happens on mandating 

 8 over-the-counter derivatives being cleared 

 9 affects climate, so I think this Committee 

 10 and others are the best way to talk about 

 11 these things and we look forward to working 

 12 with you to do that. 

 13 COMM. GENSLER: Commissioner 

 14 Chilton, could I ask a question and it might 

 15 relate, I think Jeff Sprecher is in New 

 16 York, as well, and it may well be true that 

 17 NYMEX has these contracts, I just can't 

 18 remember, but there are electricity 

 19 contracts that are currently listed at least 

 20 at ICE and maybe it's at NYMEX too, I just 

 21 can't remember. 

 22 Those contractors currently require 

 23 the daily posting of margin and if so how 

 24 would you see that distinguished from what 

 25 we're thinking about in the over-the-counter 

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 1 9/16/09 93 

 2 space, but Jeff could comment to or anyone 

 3 else. 

 4 MR. SHELK: The concern has been 

 5 more -- I've heard more on the fuel side 

 6 than the input side, where if we had to 

 7 actually clear these on the exchanges, we're 

 8 talking about as our members have explained 

 9 it to me and this has risen to the CEO-CFO 

 10 level and to the risk level that Bob 

 11 mentioned, that you would have to post cash 

 12 collateral on these fuel contracts, that's 

 13 what I've heard about more often. 

 14 Obviously, I'll be able to speak more to the 

 15 output side a little bit more. 

 16 I've been told right now that 

 17 because we have physical assets, we're not 

 18 financial players, we're consuming these 

 19 products, that we post liens on the power 

 20 plants and other non-cash collateral 

 21 principally that the mandatory clearing 

 22 would shift to -- 

 23 COMM. GENSLER: I can't speak to 

 24 what Congress would do or even what my 

 25 fellow Commissioners. I could send a letter 

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 2 up to the Hill suggesting that endusers like 

 3 your association, so forth, could enter into 

 4 arrangements where there's non-cash 

 5 collateral as well, that there be a perfect 

 6 rule writing written into the statute so 

 7 that -- but, again, that's one person, I've 

 8 got a unique chair here but Congress has got 

 9 to sort through this. 

 10 MR. SHELK: We very much appreciate 

 11 you're doing that because it's not just any 

 12 chair, it's an important chair. 

 13 COMM. CHILTON: Jeff would want to 

 14 respond to you, I think, Mr. Chairman. 

 15 MR. SPRECHER: Thank you for posing 

 16 the question to me. I came out of the 

 17 electric power industry as well, I started 

 18 in the intercontinental exchange actually 

 19 and as we were looking with the industry to 

 20 clear electric contracts back in the year 

 21 2000 before Enron's collapse, the industry 

 22 really was not supportive at all. Today, a 

 23 lot, I would say a bulk of electricity is 

 24 cleared. 

 25 What's really happened in the 

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 2 interim is that many people do not post cash 

 3 collateral but their positions are actually 

 4 effectively cleared because their opposing 

 5 counterparty who typically is a swaps dealer 

 6 is putting their positions into clearing and 

 7 the swaps dealer is doing two things, one, 

 8 it's becoming the counterparty to the 

 9 transaction, but also it's a lender, and 

 10 what you've seen in the major swaps dealers 

 11 is the ability to both price the commodity 

 12 and the cost of capital and depending upon 

 13 how legislation would unfold it may 

 14 de-couple that. 

 15 I think the market has adapted so 

 16 quickly to clearing and I'm a strong 

 17 believer in market forces and I think that 

 18 there is a solution that will evolve whether 

 19 we help with legislation or not where 

 20 increasingly the positions will be in 

 21 clearing houses and for those who don't want 

 22 to post cash collateral there is a lending 

 23 function that can either be imbedded in the 

 24 price or separated from the price and often 

 25 we've seen futures commission merchants who 

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 1 9/16/09 96 

 2 are not dealers provide lending, if you 

 3 will, imbedded into the FCM piece. 

 4 COMM. CHILTON: We're going to take 

 5 a break here. Sorry to cut that 

 6 conversation a little bit short. You know, 

 7 there is an OTC piece in the climate change 

 8 bill, so if you want to continue a part of 

 9 this discussion when we get to the climate 

 10 change part of that, you're welcome to do 

 11 so. 

 12 We'll start sharply in ten minutes 

 13 from now. Thank you. 

 14 (Whereupon, a short recess was 

 15 taken.) 

 16 COMM. CHILTON: I'm going to call us 

 17 back to order. I know people are still 

 18 taking their seats and that's okay. I was 

 19 neglectful, Tony Mansfield wanted to get in, 

 20 he's on the line, the phone line, and I 

 21 wasn't able to get to him, so I'm going to 

 22 exert my Chairman's prerogative here and let 

 23 Tony go ahead and say a word before we move 

 24 on to our carbon discussion. Tony, why 

 25 don't you go ahead. 

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 1 9/16/09 97 

 2 MR. MANSFIELD: Thank you for your 

 3 time and thank you Commission for convening 

 4 this meeting, but I'm here as a 

 5 representative for Shell Trading U.S. 

 6 Company. I just wanted to briefly follow up 

 7 on some of the points that were made with 

 8 regard to the position limits and 

 9 specifically just to encourage the 

 10 Commission as it considers this issue of the 

 11 position limits to also recognize and 

 12 appreciate even within the group of 

 13 commodities that we have been referring to 

 14 as the energy commodities, I think there are 

 15 some meaningful distinctions. 

 16 We've heard from a number of people 

 17 who have talked about the natural gas 

 18 markets, but I think that there is an 

 19 important and potentially meaningful 

 20 distinction between the natural gas market 

 21 which is a more bounded market in the United 

 22 States versus the crude oil markets which 

 23 are a more global market and one of the most 

 24 robust markets, and I think as the 

 25 Commission considers the issue of position 

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 1 9/16/09 98 

 2 limits and the concerns and issues that were 

 3 raised based, for example, by Paul Pantano 

 4 on behalf of the FIA, I think the concern 

 5 about the activity moving overseas becomes 

 6 more real and more of a concern when you're 

 7 looking at the crude side, for example, with 

 8 respect or compared to some of the other 

 9 commodities that we would put in the energy 

 10 basket. 

 11 So I just wanted to make that point 

 12 to have you consider that certainly, but I 

 13 think that the crude markets in particular 

 14 that sensitivity about the flight to markets 

 15 outside the United States becomes more 

 16 acute. 

 17 COMM. CHILTON: Thank you so much 

 18 for that, and I'm sorry I didn't get to you 

 19 earlier. I want to make just one quick 

 20 comment before we go to carbon and that is 

 21 also on OTC stuff that we've had to break on 

 22 there for technical reasons. 

 23 First of all, you know, I think we 

 24 need OTC legislation and whatever the 

 25 Commission may or may not do regarding 

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 1 9/16/09 99 

 2 position limits and hedge exemptions, if it 

 3 needs to be done in tandem or just with full 

 4 knowledge of what may happen with doing one 

 5 without the other, I think we need both, so 

 6 I hope that happens, but I want to be clear 

 7 to people that think, you know, the 

 8 Commission may consider something 

 9 unilaterally, not the reflection of what 

 10 might happen in the future. 

 11 The other thing is, the 

 12 administration called for in the OTC space 

 13 additional requirements for margin and 

 14 capital on dealers for non-standardized 

 15 contracts, things that we might not be able 

 16 to get on exchange or Congress may not deem 

 17 appropriate to put on exchange. 

 18 I've been speaking with some people 

 19 actually just here in New York in the last 

 20 day and I just -- I don't know if something 

 21 should be done but I'm sort of thinking it 

 22 should, but dealers should have an 

 23 additional fiduciary duty, this is on the 

 24 non-standardized trades, that they should be 

 25 -- the pension funds, state, local 

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 1 9/16/09 100 

 2 governments, university endowments, that 

 3 they should be protected even if it's a 

 4 non-standardized trade from a legal 

 5 perspective. 

 6 You know, these are important funds, 

 7 these are important -- you know, university 

 8 endowments, et cetera, these are important 

 9 things to your economy, they're important to 

 10 people, the pension funds, and they may need 

 11 an added legal protection. 

 12 So, anyway, I'm hopeful that 

 13 Congress will think about those things also 

 14 as they go forward on OTC. 

 15 I want to move to carbon unless any 

 16 of my colleagues had anything else to say 

 17 since we ran out of time on the OTC stuff. 

 18 Mr. Chairman, Commissioner Dunn or 

 19 Commissioner Sommers, you all okay? 

 20 COMM. GENSLER: I think we're back 

 21 to you in New York. There is something not 

 22 from one of your fellow Commissioners but 

 23 Tyson Slocum. Okay, Tyson, go ahead. 

 24 MR. SLOCUM: Just very quick on that 

 25 OTC issue. I am very sensitive to my 

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 2 colleagues in the fossil fuel production and 

 3 electric power production industries who 

 4 have concerns about mandatory clearing for 

 5 their current hedging in the OTC markets, 

 6 and I guess I have two very quick comments 

 7 on that. 

 8 I guess first is, what the 

 9 industries did prior to the explosion of the 

 10 OTC market after the Commodity Futures 

 11 Modernization Act of 2000. I assume that 

 12 folks just relied upon the regulated 

 13 exchanges to hedge the risk that they 

 14 currently conduct in the OTC market, and 

 15 what I imagine has happened is that folks 

 16 are quite accustomed to the lower up front 

 17 costs associated with working with their 

 18 swaps dealers in the OTC market, they don't 

 19 have to post as high margin requirements, 

 20 their swaps dealer might do a number of 

 21 other activities for them as well, so they 

 22 might offer them discounts, I'm not quite 

 23 sure, but I think that the issue is that 

 24 it's akin to me having to have insurance on 

 25 my automobile, that there is an up front 

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 1 9/16/09 102 

 2 cost associated with me paying a monthly 

 3 premium but that there is a long-term 

 4 benefit in case if something happens, and I 

 5 think that the long-term benefit from 

 6 mandatory clearing is reduced systemic risk 

 7 and there are clear benefits to end 

 8 consumers, the households whose 

 9 contributions help pay my salary to that 

 10 kind of insurance policy, and so that's all 

 11 I want to say on that. Thank you. 

 12 COMM. CHILTON: Thank you, Tyson, 

 13 and you sort of raised some questions, but 

 14 actually I would like to go ahead and move 

 15 on to carbon unless any of my colleagues 

 16 have something, but you raise interesting 

 17 points and I know Skip and Laura Campbell 

 18 may have something to say. 

 19 Laura, are you on the line, by the 

 20 way? Doesn't appear so. Let's move right 

 21 to carbon. Roy Cheruvelil who is in the New 

 22 York office is one of the folks who works on 

 23 green cap markets, cap and trade and has 

 24 done a fantastic job, he's done a great job 

 25 helping me out over the two years I've been 

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 2 at the Commission. 

 3 We don't have as deep a bench as I 

 4 hope we will in the future but we've got a 

 5 strong bench and Roy is really good on that 

 6 along with Rafael and Irina. So Roy is 

 7 going to give us a quick presentation on 

 8 carbon, about five minutes or so, we'll get 

 9 a couple of other people to speak and then 

 10 we'll open it up after that. Roy, go right 

 11 ahead. 

 12 MR. CHERUVELIL: Thank you. Good 

 13 morning, Commissioners, Committee members, 

 14 Commission staff and guests. It's my 

 15 pleasure to sit with you today and lead off 

 16 our discussion on environmental markets. 

 17 Our meeting this past May was a 

 18 fantastic start and we here at the 

 19 Commission are looking forward to learning 

 20 from the experience and expertise of the 

 21 Committee members once again here today. 

 22 It's been only four months since we last met 

 23 but the dynamic nature of environmental 

 24 markets, particularly those for carbon 

 25 dioxide give us a lot to talk about here 

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 1 9/16/09 104 

 2 today as much has taken place in this period 

 3 of time. 

 4 I would like to add that the views I 

 5 express here today are my own and do not 

 6 necessarily reflect those of the Commission. 

 7 Can we move to the first slide of 

 8 the presentation, please. To start off I 

 9 would like to speak a bit about actual 

 10 emissions of carbon dioxide in the United 

 11 States. Carbon dioxide represents more than 

 12 80 percent of the total heat trapping 

 13 greenhouse gas emissions in the United 

 14 States, of that 80 percent carbon emissions 

 15 from the consumption of energy constitute 

 16 the vast majority. 

 17 On the chart you see before you we 

 18 have U.S. carbon dioxide emissions from 

 19 energy consumption plotted since 1990, as 

 20 well as the annual growth rate for each 

 21 year. From 1990 to 2008 energy related 

 22 carbon emissions grew 16 percent in 

 23 aggregate and at a rate of 0.83 percent per 

 24 year on average. Although there were a 

 25 couple of years where carbon emissions 

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 1 9/16/09 105 

 2 declined including 2008, overall the growth 

 3 in emissions has been consistently positive. 

 4 In 2008 peak energy prices and a 2.2 

 5 percent reduction in total energy 

 6 consumption coupled with lower economic 

 7 growth, particularly in the latter part of 

 8 the year, led to a 2.8 percent decrease in 

 9 energy related carbon emissions. The EIA 

 10 has estimated that energy related carbon 

 11 emissions will fall again for this year but 

 12 will resume its rise with the projected 

 13 economic recovery in 2010. 

 14 This has taken place while 

 15 atmospheric concentrations of carbon dioxide 

 16 approach 400 parts per million by volume, 

 17 the highest they have been in quite 

 18 sometime, some say thousands if not millions 

 19 of years. 

 20 Moving ahead to the next slide. In 

 21 response to the growth in carbon emissions, 

 22 robust carbon trading markets have developed 

 23 around the world with the goal of carbon 

 24 abatement. The following chart contains 

 25 information on the aggregated global carbon 

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 1 9/16/09 106 

 2 market since 2002 in terms of volume and 

 3 also by dollar value. 

 4 It shows very clearly that carbon 

 5 markets have experienced significant rapid 

 6 growth in this period of time. The market 

 7 reached a total transactional value of 

 8 approximately $126 billion in 2008, 

 9 essentially doubling in value from 2007. A 

 10 majority of this can be attributed to 

 11 transactions of allowances and derivatives 

 12 relating to the EU emission trading scheme, 

 13 or EUETS, the largest multi-national cap and 

 14 trade style, mandatory carbon abatement 

 15 program in the world, effectuated in 2005. 

 16 Voluntary carbon markets around the world 

 17 have also experienced rapid growth. 

 18 Industry sources have estimated that 

 19 the global carbon market in 2009 will be at 

 20 least as large despite weak economic 

 21 conditions and lower overall emissions. 

 22 Such explosive growth in global carbon 

 23 trading markets in tandem with a strong 

 24 prospect of a mandatory cap and trade 

 25 program in the U.S. which would drastically 

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 1 9/16/09 107 

 2 augment the size of the global marketplace 

 3 has kept us very closely attuned to these 

 4 market developments here at the CFTC. 

 5 Can we move on to the next slide, 

 6 please. The following chart provides a 

 7 breakdown of CFTC regulated emissions 

 8 futures contracts by open interest, current 

 9 and from one year ago. These contracts are 

 10 listed and traded on the Chicago Commodity 

 11 Futures Exchange and the New York Mercantile 

 12 Exchange, CFTC, DCMS. 

 13 Over the course of just a year total 

 14 open interest in emissions futures under the 

 15 CFTC's purview has grown approximately 53 

 16 percent from 66,000 at open interest to over 

 17 100,000. While the overall share of open 

 18 interest and carbon dioxide related futures 

 19 has remained relatively stable at 35 to 36 

 20 percent year on year, open interest in these 

 21 contracts has grown 48 percent, most of this 

 22 is represented by futures contracts 

 23 associated with the regional greenhouse gas 

 24 initiative allowances and with the carbon 

 25 financial instrument traded on the Chicago 

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 1 9/16/09 108 

 2 Climate Exchange, both of whom are 

 3 represented here today. 

 4 As many of you know, the Commission 

 5 recently put out a proposed determination 

 6 for public comment to classify the carbon 

 7 financial instrument contract traded as a 

 8 significant price discovery contract, such a 

 9 determination would give the CFTC full 

 10 oversight authority over the contract. 

 11 I'd also like to mention that we 

 12 have witnessed growth in the sulfur dioxide 

 13 and nitrogen dioxide allowance contracts 

 14 affiliated with the acid rain, budget 

 15 trading and clearing air market programs, 

 16 and have also seen the development of new 

 17 projects. 

 18 Experience with the regulation of 

 19 these markets has helped us gain a great 

 20 understanding and should place us in a good 

 21 position if and when a mandatory program is 

 22 active for carbon dioxide. 

 23 Moving on to the next slide, please. 

 24 The next slide charts the price of the EUA, 

 25 as I mentioned the most heavily traded 

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 1 9/16/09 109 

 2 carbon dioxide allowance globally against 

 3 crude oil, natural gas and coal converted to 

 4 energy equivalent since the beginning of 

 5 last year. 

 6 The graphic clearly demonstrates the 

 7 strong relationship between carbon 

 8 allowances and energy price movements. In 

 9 fact, daily price movements in EUA futures 

 10 were over 90 percent positively correlated 

 11 with the other energy commodities presented 

 12 over this time period, this is because many 

 13 energy market fundamentals impact markets 

 14 for carbon allowances as well. 

 15 For example, weather has a large 

 16 impact on energy and allowance records. 

 17 Extreme weather increases energy consumption 

 18 and so to carbon emissions through power and 

 19 heat generation. As emissions increase so 

 20 does the demand for allowances. 

 21 In addition, relative to the old 

 22 prices matter quite a bit particularly in 

 23 areas with a high propensity for fuel 

 24 switching. On the supply side, allocations 

 25 are determined by program administrators and 

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 1 9/16/09 110 

 2 unique programmatic rules. Globally we have 

 3 now a fragmented carbon market as different 

 4 programs exhibit unique supply/demand 

 5 dynamics and thus different price outcomes. 

 6 In all cases, however, the 

 7 relationship with the energy complex is very 

 8 strong and as Steve Sherrod told us this 

 9 morning, we take energy market analysis and 

 10 surveillance very seriously here at the 

 11 CFTC. 

 12 We can move on to the final chart. 

 13 Finally, before turning it over to our 

 14 Committee members, I'd like to add a note on 

 15 large traders and CFTC regulated emissions 

 16 markets. Every day for all of our markets 

 17 CFTC receives large trader position data 

 18 from reporting firms, this helps us to 

 19 assess individual trader activity and be on 

 20 the lookout for market power and abuses. 

 21 A healthy mix of market participants 

 22 contributes to the ultimate goal of futures 

 23 markets, price discovery and risk transfer. 

 24 As you can see from the slide, emissions 

 25 market contains those who would be 

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 1 9/16/09 111 

 2 considered traditional compliance entities, 

 3 oil and gas companies, utilities and large 

 4 industrials. 

 5 As with most of our markets, these 

 6 markets also contain the presence of 

 7 brokers, financial institutions, 

 8 intermediaries and hedge funds. Thus far 

 9 I'm happy to report that we have not had any 

 10 major surveillance issues or enforcement 

 11 actions with regards to CFTC regulated 

 12 emissions markets. 

 13 This does transition us to a couple 

 14 of important questions which I'd like to 

 15 toss out to our Committee members, if they 

 16 feel like addressing them. 

 17 There has been much public debate 

 18 about the role of financial institutions and 

 19 banks in a potentially mandatory -- in a 

 20 potential mandatory national cap and trade 

 21 market for carbon. 

 22 Some argue that the role of 

 23 financial institutions must be significantly 

 24 limited to prevent speculative bubbles, 

 25 while others say that financial institutions 

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 1 9/16/09 112 

 2 provide liquidity, market making and project 

 3 finance functions without which a carbon 

 4 market cannot function efficiently. 

 5 Further, also subject to much debate 

 6 has been the idea of an OTC derivatives 

 7 market in carbon. While some argue that OTC 

 8 derivatives and carbon would create new 

 9 large systemic and regulatory risks and that 

 10 all carbon allowances should be traded on 

 11 regulated exchanges only, others believe 

 12 that OTC derivatives such as swaps are 

 13 necessary to provide adequate risk 

 14 management services to those who need them, 

 15 services that would be infeasible on 

 16 exchange. 

 17 So I'd like to propose the following 

 18 questions to our Committee today and, again, 

 19 this overlaps a lot of what we started 

 20 discussing already in our earlier segment. 

 21 What is the proper role for 

 22 financial institutions in carbon allowance 

 23 markets, and secondly, what are the risks 

 24 and the benefits of OTC carbon derivatives? 

 25 Thank you very much. Though I don't take a 

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 1 9/16/09 113 

 2 position on either of these matters, I 

 3 believe the Committee's input on them would 

 4 be very valuable. Thank you. 

 5 COMM. CHILTON: Good job, Roy. 

 6 Thank you so much. I move to Eileen 

 7 Claussen in D.C. Eileen. 

 8 MS. CLAUSSEN: This is Eileen 

 9 Claussen, I'm in Washington. I was asked to 

 10 talk about legislative prospects for a 

 11 climate cap and trade bill. Since we met 

 12 before, something quite amazing happened and 

 13 that is that the House actually passed a cap 

 14 and trade bill, it was a very tight vote, 

 15 eight Republicans voted for it which helped 

 16 to get it passed, but it has and that's the 

 17 first time we've seen either House of the 

 18 Congress actually pass a bill of this kind. 

 19 But, I mean, I think we have to calm 

 20 down a little bit and think about the Senate 

 21 which is a very different institution. I 

 22 think we have a shot at getting an energy 

 23 climate bill that includes cap and trade 

 24 enacted in this Congress, but I think we 

 25 have to be very realistic about the timing. 

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 1 9/16/09 114 

 2 The Senate debate on an energy climate bill 

 3 will certainly wait for health care to be 

 4 resolved and for appropriations bills to be 

 5 enacted. 

 6 We also have to wait for the 

 7 financial services reform bill and to me 

 8 that suggests that the window is not 2009 as 

 9 many had hoped but possibly 2010, and if you 

 10 listen to what Senator Reed said yesterday, 

 11 2009 is really not on the table, but we also 

 12 have to understand that 2010 is an election 

 13 year and to me that means that the first 

 14 quarter is really the quarter we have to 

 15 think about, maybe it could spill over into 

 16 the second quarter, but you really have a 

 17 fairly narrow window here to see a climate 

 18 cap and trade bill passed. 

 19 I think there are some things that 

 20 could help us toward passage of a bill, 

 21 continued positive signals from China and 

 22 other developing countries, particularly 

 23 Copenhagen I think would help a Senate vote 

 24 and most importantly a legislative success 

 25 in health care would help a Senate vote. 

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 1 9/16/09 115 

 2 I think there are two things beyond 

 3 that that actually have to happen if we want 

 4 to see an energy and climate bill emerge 

 5 from the Congress. First, I think we can't 

 6 expect every Democratic Senator to vote for 

 7 an energy climate bill, so we will need a 

 8 pretty solid number of Republican votes. 

 9 Right now even Republican Senators with 

 10 years of leadership on climate change have 

 11 been reluctant to return to that leadership 

 12 role, and that's really because the mood in 

 13 Congress is deeply partisan. 

 14 I think to get a bill that would 

 15 have to change, we would have to see a 

 16 number of Republican Senators work 

 17 constructively with the Democrats and the 

 18 administration to develop and pass a bill. 

 19 Maybe even more important, I think the 

 20 administration would have to advance a 

 21 fairly detailed vision for what must be in a 

 22 bill and generally become much more involved 

 23 in the legislative process than it has been 

 24 to date, a little bit more like the first 

 25 Bush administration did in enacting the 

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 1 9/16/09 116 

 2 Clean Air Act Amendments of 1990 where there 

 3 was serious engagement, there was 

 4 legislative proposals looking forward and 

 5 there was a real working together that we 

 6 saw. 

 7 So my general take is that I think 

 8 it's possible that it could happen next year 

 9 but only if the administration becomes much 

 10 more involved, if we can get some 

 11 Republicans in the Senate to work on this in 

 12 a constructive way and if health care passes 

 13 in a satisfactory way. 

 14 Yes, I see the Chairman here 

 15 laughing but I think those -- 

 16 COMM. GENSLER: I'm just smiling. 

 17 MS. CLAUSSEN: That's my take on 

 18 where we are. 

 19 COMM. CHILTON: Thank you, Eileen. 

 20 Both Eileen and Deputy Secretary or 

 21 Chairwoman Moler, we're really pleased to 

 22 have you as part of the EEMAC. 

 23 Professor Stevens from Harvard. 

 24 MS. CLAUSSEN: I just want to add 

 25 one other thing which just struck me. I 

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 1 9/16/09 117 

 2 testified yesterday before the Energy 

 3 Committee in the Senate on cost containment 

 4 issues on a cap and trade bill, but one of 

 5 the things that really struck me was the 

 6 amount of discussion about market 

 7 manipulation and market oversight and it 

 8 came from some Senators who just don't like 

 9 markets and it came from some Senators who 

 10 probably would never vote for a bill of this 

 11 kind no matter what it says, but who are 

 12 using this as a reason not to vote for it, 

 13 and I think it's worth pointing that out, 

 14 that this whole issue is very key to what 

 15 actually might happen or not happen. 

 16 COMM. CHILTON: Professor Stevens, 

 17 are you on line with us? If not, I want to 

 18 go to really our regulated entities, RGGI 

 19 and CCX. John Shrag is here in New York 

 20 with Reggie Johnson. 

 21 MR. SHRAG: Thank you, Commissioner, 

 22 thanks for including the Regional Greenhouse 

 23 Gas Initiative and, as you know, I'm a 

 24 representative of Regional Greenhouse Gas 

 25 Initiative, Inc. which is a not for profit 

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 1 9/16/09 118 

 2 entity that administers the RGGI market, the 

 3 market set up by the ten participating 

 4 states, Maine through Maryland to implement 

 5 greenhouse gas reductions. 

 6 We just completed our first year and 

 7 I think, you know, we've really been working 

 8 hard at RGGI, Inc. to implement the market, 

 9 the states have succeeded in five options in 

 10 originating over 140 million allowances, 

 11 there's broad interest among market 

 12 participants, the trading is occurring as 

 13 you heard from Roy, Chicago as well as New 

 14 York Mercantile Exchange, mandatory 

 15 reporting of emissions from every pilot plan 

 16 in the region to the RGGI CO2 emissions 

 17 allowance tracking system to provide that 

 18 fundamental environmental integrity and 

 19 operational integrity to the system, a 

 20 series of public reports that emanate from 

 21 that emissions allowance tracking system, 

 22 and then the market monitoring program that 

 23 is effective in communicating with the 

 24 public what the -- what's happening in the 

 25 market and specifically dividing between the 

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 2 auctions that RGGI is known for and the 

 3 secondary market. 

 4 We've developed a very strong 

 5 relationship with your staff, Roy, Rafael 

 6 and Irina in understanding the secondary 

 7 market, the independent market monitor firm 

 8 has worked with them and created sets of 

 9 methodologies for doing market monitoring of 

 10 carbon markets and I think that the RGGI 

 11 states and RGGI, Inc. understand RGGI as a 

 12 playground, if you will, for that kind of 

 13 development for bidders, for analysts, for 

 14 journalists and for regulators, and that's 

 15 been very productive and we look forward to 

 16 continuing that. 

 17 I think if you talk about the 

 18 monitoring of the auctions, they are as 

 19 important as the originating device to the 

 20 extent that allowances are allocated and 

 21 originate through auctions, as important for 

 22 an overall sense of integrity as the 

 23 secondary markets are and the derivatives 

 24 markets. 

 25 The way that the RGGI program, which 

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 2 is what I will talk about here, we'll focus 

 3 on that monitoring of auctions, is through a 

 4 reserve price designed to prevent collusion, 

 5 and a reserve price which is pegged to a 

 6 current market price and that is specified 

 7 in state regulations. 25 percent bid 

 8 limitations at the auctions per entity and 

 9 with that the mandatory reporting of 

 10 corporate associations which are so complex 

 11 in the power sector, and so those are very 

 12 important pieces of the current RGGI plan 

 13 for making sure that the auctions are run in 

 14 a smooth way at the same time because these 

 15 are quarterly auctions, there is a very 

 16 deliberate reporting of information coming 

 17 out of those auctions. 

 18 I think that we have built good 

 19 meshing with the CFTC on the secondary 

 20 market, I think there's a lot more work that 

 21 we can do. On the key question that Roy 

 22 asked, I will just report the way that RGGI 

 23 works which is that we, RGGI, Inc., holds 

 24 auctions sponsored by the state that are 

 25 open to all, anyone can apply, winning a CO2 

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 2 allowance auction from one of the states is 

 3 an open and transparent process and I think 

 4 both the states and RGGI again as 

 5 contractors that we feel that that's an 

 6 essential element to the entire auction 

 7 approach which is to provide allowances at a 

 8 single price for any bidder. Thank you. 

 9 COMM. CHILTON: Thank you, Jonathan. 

 10 Richard Sander, are you on the line with us? 

 11 MR. SANDER: Yes, I am, Bart. 

 12 COMM. CHILTON: Go right ahead, 

 13 Richard. Thank you for being with us. I 

 14 know you had to fit this into a tight 

 15 schedule, so thank you and go right ahead. 

 16 MR. SANDER: My pleasure, 

 17 Mr. Commissioner and other Commissioners and 

 18 guests. I'm Richard Sander and chairman and 

 19 founder of the Chicago Climate Futures 

 20 Exchange which trades a variety of emissions 

 21 contracts, we are regulated by the CFTC, we 

 22 trade across sulfur dioxide under the 

 23 mandatory cap and trade, NOX, RGGI futures, 

 24 et cetera. 

 25 Our market has grown over the years, 

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 2 in 2006 we did 100 contracts a day, in '07 

 3 around 1,100, 1,800 in '08, and we're 

 4 averaging about 5,500 a day this year. RGGI 

 5 is by far the most successful contract on 

 6 the exchange, when we started the market the 

 7 bid-ask spread over-the-counter market was 

 8 about 40, 50 cents a ton and currently we 

 9 trade as much as a penny bid offer spread, 

 10 sometimes 20 up, 50 up contracts. 

 11 The exchange has about 135,000 open 

 12 interest and we also have national markets 

 13 in renewable energy certificates in 

 14 Connecticut, Massachusetts, New Jersey and 

 15 voluntary markets, CCAR, the California 

 16 registry, as well as a when issued U.S. 

 17 contract, that is a contract where the 

 18 delivery will be -- whatever is passed in 

 19 the legislation, we traded 2,013 futures, 

 20 it's got about 1.1 million tons open 

 21 interest and the market forecast is pricing 

 22 it at roughly $10.50 a ton. 

 23 We've been running these markets 

 24 for, as I said, three, four years now and we 

 25 seem to have performed the function of price 

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 2 transparency, no counterparty risk in 

 3 providing the hedging medium for those 

 4 people who are involved in that market. 

 5 We also run a voluntary cap and 

 6 trade called the Chicago Climate Exchange 

 7 and in that market we have a significant 

 8 number of players, about 600 million tons of 

 9 baseline which would make it about 30 

 10 percent of the Europe size as far as 

 11 underlying emissions. 

 12 We have two objectives in our group, 

 13 number one is to establish a market when 

 14 there is no mandate from a federal, state or 

 15 regional level and that is what we have done 

 16 in the United States and we have partnered 

 17 with the China National Petroleum 

 18 Corporation, Petro China, to establish such 

 19 a market and that is called the PNJ Climate 

 20 Exchange. 

 21 In the voluntary market which is 

 22 relevant to the debates, I'd like to briefly 

 23 describe what we do there. Even though we 

 24 were exempt under the CFTC, we opted for 

 25 oversight and chose to be regulated by FINRA 

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 2 that does monitoring verification and market 

 3 oversight because we felt that was a very 

 4 important part of our program to have 

 5 credibility. 

 6 In addition to that, having that 

 7 regulated and the futures regulated, while 

 8 we don't regulate the OTC market, we do 

 9 require that any member must report to us 

 10 any OTC position, so the exchange has a full 

 11 knowledge of regulated spots in futures 

 12 markets or oversight on the spot market and 

 13 reporting requirements for the OTC market. 

 14 That's an overview who we are and I 

 15 hope that provides some insight to the 

 16 people listening to the meeting. 

 17 COMM. CHILTON: Thank you, Richard. 

 18 Thanks again for being with us. What I 

 19 said, is it a regulated market, obviously we 

 20 have NYMEX and we may have another DCM in 

 21 the future, so I want to make note that 

 22 obviously there's some competition here and 

 23 competition is a good thing. 

 24 The last presenter before I want to 

 25 open it up to my colleagues is Jack Cogen. 

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 2 Are you NatSource, where are you now? 

 3 MR. COGEN: I'll speak on behalf of 

 4 IETA. I am NatSource, an aggregator and 

 5 portfolio manager of carbon, we are managing 

 6 approximately a million dollars worth of -- 

 7 (inaudible.) The remarks I'm going to make 

 8 actually represent my role as chairman of 

 9 the International Emissions Trading 

 10 Association. IETA represents or has 

 11 members, 170 corporations, approximately 50 

 12 percent being large industrial emiters, the 

 13 other 50 percent being financial 

 14 institutions, legal firms and the various 

 15 support and firms that are necessary for an 

 16 international carbon market. 

 17 IETA supports clear and stringent 

 18 market oversight policies to ensure that 

 19 carbon markets achieve the greatest possible 

 20 emissions reductions at the lowest possible 

 21 cost. We support measures to achieve 

 22 transparency, require robust disclosure 

 23 information to the regulator, create open 

 24 markets and provide fair competition in 

 25 order to enable covered industries, their 

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 2 consumers and investors to use the market to 

 3 meet emission reduction targets at the 

 4 lowest cost. We support provisions to 

 5 safeguard against fraud, market manipulation 

 6 and excessive speculation. 

 7 In order for carbon markets to fully 

 8 deliver the cost saving benefits, market 

 9 participants will need access to both 

 10 exchanges and over-the-counter markets. 

 11 Exchanges are well suited to standardize 

 12 contracts for short duration, OTC markets 

 13 are necessary for customized products, all 

 14 set to delegate contracts and long-term 

 15 transactions that limit price increases. 

 16 Given this important need, IETA 

 17 opposes prohibitions on OTC trading. IETA 

 18 believes that the Commodity Futures Trading 

 19 Commission is well suited to oversee the 

 20 carbon market given it's oversight related 

 21 energy markets. 

 22 As we heard previously, the carbon 

 23 markets in Europe are highly correlated with 

 24 energy markets or as our traders sometimes 

 25 say, except when they're not. We believe 

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 2 that the CFTC should be empowered to govern 

 3 carbon markets with the same set of tools 

 4 what are used in other markets, these 

 5 include prompt reporting trading data by 

 6 major participants, possible use of position 

 7 limits as we've discussed, and margin 

 8 requirements, training and licensing of 

 9 futures and options traders and strong 

 10 penalties against fraud, false reporting and 

 11 market abuse. 

 12 Echoing Chairman Gensler's remark 

 13 earlier today about the trade in cap and 

 14 trade, the cap in cap and trade is often the 

 15 focus of the environmental discussion but 

 16 the trade is the key cost containment 

 17 available to regulated point source emiters 

 18 in a carbon controlled regime. 

 19 The most economically efficient path 

 20 towards compliance with the emissions cap is 

 21 achieved by allowing each emiter to decide 

 22 whether to purchase carbon credits, sell 

 23 excess credits or retain credits for future 

 24 use. It is the emiter that is the party 

 25 with the most information about a particular 

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 2 source of emissions and can best manage this 

 3 process. 

 4 Exchanges are an important part of 

 5 many commodity markets, they are an 

 6 efficient platform for conducting the 

 7 trading of standardized contracts, they're 

 8 an important mechanism for price discovery, 

 9 but OTC markets provide customized products 

 10 that need regulated industries needs in ways 

 11 that standardized exchange products cannot 

 12 do. 

 13 Companies use the OTC markets in 

 14 carbon to structure contracts of longer term 

 15 time horizons that are tenable in exchange 

 16 products, companies use the OTC contracts to 

 17 meet buy-in needs that are different from 

 18 the standard lot sizes on exchanges, and 

 19 finally small industries and companies come 

 20 to the market infrequently, OTC markets 

 21 offer a simpler route to market than 

 22 exchanges, given the exchange access rules 

 23 and cash collateral requirements. 

 24 As skip alluded to this morning, OTC 

 25 markets allow for more efficient use of 

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 2 capital, OTC transactions are now covered 

 3 industries or offset producers to use their 

 4 physical assets as collateral instead of 

 5 posting cash as required by an exchange. 

 6 This is key and these firms will 

 7 often choose to go to OTC transactions since 

 8 they can free up capital to be used for 

 9 other more productive purposes, instead of 

 10 locking it up as collateral for years at a 

 11 time potentially in these type of 

 12 transactions for as long as ten years, the 

 13 result is a lower cost of financing in the 

 14 OTC market. 

 15 OTC markets without the long-terms 

 16 planning, unlike exchanges, OTC markets 

 17 allow for elongated contracts and therefore 

 18 enable the industry to manage its needs for 

 19 any duration necessary. OTC markets allow 

 20 for customization to business needs, a key 

 21 advantage of OTC transactions is the ability 

 22 to tailor the transaction to the exact 

 23 amount of the carbon or other energy 

 24 commodity needed, the ability to precisely 

 25 match the OTC transaction with the carbon 

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 2 exposure has very real accounting 

 3 implications and can negatively affect the 

 4 stability of profits of the corporation. 

 5 Finally, on this point, OTC markets 

 6 are absolutely necessary to develop offset 

 7 projects. OTC markets provide the 

 8 flexibility to develop contract structures 

 9 that are tailored to the finance needs of 

 10 offset projects. A typical offset structure 

 11 in the carbon market extends five to ten 

 12 years into the future and often allow best 

 13 efforts to deliver the volume as opposed to 

 14 the absolute need or an exchange for firm 

 15 delivery of the commodity. 

 16 Given the challenges in developing 

 17 offset projects and regulatory approvals as 

 18 well as the unpredictability of weather, 

 19 offsets would be impossible to trade on the 

 20 exchanges prior to the creation and 

 21 issuance. 

 22 IETA believes market oversight 

 23 policy should encourage a wide range of 

 24 market participation, including financial 

 25 institutions. The private sector would need 

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 2 to come up with the money to protect the 

 3 climate and spur on economic development and 

 4 job creation. Forcing banks or other 

 5 non-emitting sectors away from the carbon 

 6 market would remove the very source of 

 7 financing necessary to build new, more 

 8 efficient and cleaner manufacturing centers. 

 9 The participation would be essential 

 10 to drive innovative technology which will 

 11 protect the climate. In a proper carbon 

 12 market structure banks acting as financial 

 13 intermediaries will provide liquidity by 

 14 standing in the market and providing daily 

 15 offers to buy or sell allowances to carbon 

 16 industries. Banks will also provide tools 

 17 to help cover industry -- exposure to carbon 

 18 price risk. 

 19 These tools like forward sales and 

 20 options to purchase are designed to enable 

 21 companies to prudently manage their exposure 

 22 to market fluctuations and preserve capital 

 23 for productive investments. Prohibiting 

 24 financial institutions from participating in 

 25 the market would make the market less 

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 2 liquid, less efficient, more volatile and 

 3 more expensive, and increase overall 

 4 compliance costs due to the decreased market 

 5 efficiency and lack of liquidity. 

 6 For these reasons, IETA recommends 

 7 that the carbon market be accessible to all 

 8 segments of the economy and a carbon market 

 9 open to all participants with proper 

 10 oversight and regulation is the best 

 11 mechanism that we know of to achieve our 

 12 environmental policy while efficiently 

 13 deploying capital and creating jobs and new 

 14 industries in this new economy. Thank you. 

 15 COMM. CHILTON: Thank you very much, 

 16 Jack. I want to open it up to my colleagues 

 17 in Washington, if you have any questions or 

 18 comments. If not, we'll go to the other 

 19 people. Commissioner Dunn? 

 20 COMMISSIONER DUNN: I have nothing. 

 21 COMM. GENSLER: I was going to thank 

 22 everybody. I think in my testimony, I may 

 23 have even had it in my written testimony, 

 24 which means I was speaking on behalf of the 

 25 four Commissioners, but I certainly did it 

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 2 in my oral which would have been just for me 

 3 in full support that we have 

 4 over-the-counter carbon allowance swaps as 

 5 well as futures. 

 6 What I said then was 100 percent of 

 7 the futures should be born exchange, just as 

 8 it's true on acid rain emissions, sulfur 

 9 dioxide and nitrogen oxide contracts now and 

 10 corner wheat and oil, and that the 

 11 over-the-counter portion should be regulated 

 12 consistent with working with Congress trying 

 13 to do it that the dealers are regulated and 

 14 the standard producers come on to exchanges 

 15 and clearing, but there still is a role for 

 16 customized or tailored products and I think 

 17 I used the example of a seven or ten year 

 18 financing or even longer term financing to 

 19 finance a utility plant. 

 20 So, I know the Chairman agrees with 

 21 you largely about that, I think I might even 

 22 had it in my written testimony. 

 23 COMM. CHILTON: Thank you, 

 24 Mr. Chairman. Commissioner Sommers, did you 

 25 want to add anything? 

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 1 9/16/09 134 

 2 COMMISSIONER SOMMERS: I don't have 

 3 anything. 

 4 COMM. CHILTON: Others want to chime 

 5 in here? Sean Cota here has something. I 

 6 want to double-check to make sure that 

 7 Professor Stevens didn't join us. Rob, are 

 8 you there? Okay, we'll move on. Sean Cota 

 9 has a comment. 

 10 MR. COTA: I think that we need to 

 11 be careful as we go into these carbon 

 12 markets that we realize that there are going 

 13 to be a lot more connected to energy price 

 14 than were NOX or SOX, and the oversight is 

 15 differentials between NOX and SOX and how 

 16 it's been traded in the past is different 

 17 from what carbon trading will be because 

 18 there were different levels of oversight. 

 19 So with most large NOX and SOX 

 20 emiters, you've got the EPA as an additional 

 21 regulator because there are individual 

 22 permits for large power plants and large 

 23 consumers, in addition, you've got state 

 24 regulatory commissions that are overseeing 

 25 both power plant productions and our 

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 2 construction with their emission allowances 

 3 and any large emiter for a fixed point 

 4 pollution source is going to have those 

 5 calculations made about what their current 

 6 emissions are and what the improvements will 

 7 be in the future. So you've got various 

 8 overlaying regulatory agencies that are 

 9 taking a look at this. 

 10 When you move to a carbon trading as 

 11 that, although those players are large 

 12 players, there is going to be a huge 

 13 increase in the amount of players in the 

 14 market that are going to be affected by 

 15 that, you're not going to have an air 

 16 quality permit from a state regulatory 

 17 agency, it's not going to go and measure the 

 18 amount of air emissions that's on somebody's 

 19 Lamborgini, you're not going to do that, or 

 20 somebody's own home furnace, so as we go 

 21 forward with carbon regulations in the 

 22 carbon trading, it's going to be much more 

 23 connected to the price of that underlying 

 24 energy commodity and if we don't fix the 

 25 over-the-counter portions of that market, 

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 2 the transparency in the energy markets, 

 3 it's my opinion that the disruptions we 

 4 potentially have seen in the energy markets 

 5 will be even more compounded because the 

 6 carbon market is going to be so much bigger. 

 7 So that's my concern for the 

 8 Commission going forward and that the past 

 9 successes which in my opinion have been 

 10 successes and NOX and SOX will not 

 11 necessarily readily translate to carbon 

 12 without a significant amount of market 

 13 oversight. 

 14 COMM. CHILTON: Thank you, Sean. 

 15 Benjamin Feldman in D.C., did you want to 

 16 make a comment? 

 17 MR. FELDMAN: Thank you. First, 

 18 Bart, I would like to commend you on your 

 19 speech yesterday in New York on the subject 

 20 of cap and trade legislation and some of the 

 21 things that you laid out with which we 

 22 wholeheartedly agree. 

 23 Also, just to sort of refer back to 

 24 what Jack Cogen was mentioning and Roy's 

 25 basic question which is, what's the role of 

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 2 financial institutions within the context of 

 3 a carbon settlement. The first thing to 

 4 recognize is that the financial risk is the 

 5 passage of the legislation that creates the 

 6 position for the reduction. 

 7 I think what Jack really hit on, 

 8 what the key issues are which is -- one is a 

 9 tremendous capital mobilization over a 

 10 relatively short period of time while 

 11 changing the transportation of the stuff to 

 12 the manufacturer infrastructure, the energy 

 13 infrastructure, great big parts over a 

 14 relatively short time, it's about research 

 15 and development, climate technologies and 

 16 that really is a big capital call and that 

 17 capital has to be deployed efficiently to 

 18 make it through this. 

 19 Ultimately, financial institutions 

 20 in the capital markets are where we will 

 21 turn to finance this technology revolution 

 22 that seems to get clean energy -- and I 

 23 think that there is -- we wind up talking 

 24 with a level of polarity that really doesn't 

 25 exist between the linkage between the OTC 

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 2 market and the exchange market -- there's a 

 3 symbiotic relationship there it's important 

 4 to recognize. 

 5 Certainly exchanges provide, you 

 6 know, transparent, liquid, standardized 

 7 contracts that allow for very powerful risk 

 8 management solutions over short periods of 

 9 time for defined structures, but ultimately, 

 10 and Chairman Gensler, by the example that 

 11 you gave, ultimately we're talking about 

 12 long-lived capital assets -- 

 13 COMM. GENSLER: We do agree on some 

 14 things; is that right? 

 15 MR. FELDMAN: We absolutely do. I 

 16 think that's exactly right. When we talk 

 17 about long-lived capital assets and the 

 18 turnover of those long-lived capital assets 

 19 and the way that that capital will be 

 20 costed, the price of that capital, the risk 

 21 management tools simply have to be there to 

 22 manage this transition of the economy over 

 23 time, so I think that the important point to 

 24 recognize is the clearing and exchanges 

 25 offer tremendous value, they increase over 

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 2 time as the commodities mature, as we would 

 3 expect to see in the carbon market, and so 

 4 over the long arc it would be expected that, 

 5 you know, initially the tenured contracts -- 

 6 (inaudible) -- on exchange and other 

 7 customized contracts on the OTC. 

 8 In fact, it's the development of 

 9 those OTC contracts and their development 

 10 into standardization that leads to the 

 11 movement on to exchange and -- we talk in 

 12 polarities but really it's something that 

 13 transitions from one to the other. 

 14 COMM. GENSLER: I think that the 

 15 polarities that you talk about are the black 

 16 and white matrix, would help to be 

 17 addressed, we all saw that the 

 18 over-the-counter market was also fully 

 19 regulated by the dealer product as well as 

 20 standardized product, but dealers are 

 21 regulated not just for lower risk to capital 

 22 market but the transparency is there. 

 23 If the CFTC were to be given 

 24 oversight along with the SEC on these 

 25 markets, on all the transactions, and we 

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 1 9/16/09 140 

 2 could be the cop on the beat for the whole 

 3 marketplace, not just for the standard 

 4 because we're just the cop on the beat on 

 5 the one side, then there really is a black 

 6 and a white, and there really is a public 

 7 policy concern or gap, but if we're able to 

 8 see the whole market and police the whole 

 9 market then I think -- then you have more 

 10 opportunity to have standardized and 

 11 customized that are still overseen by the 

 12 market regulators. 

 13 MR. CHOWINS: I agree with the 

 14 Chairman. 

 15 MR. FELDMAN: I fully agree with the 

 16 need to act, regulatory enforcement tools to 

 17 make sure that there isn't market 

 18 manipulation, abuse or excessive speculation 

 19 across the spectrum. 

 20 COMM. GENSLER: Maybe the press will 

 21 pick up on that. 

 22 COMM. CHILTON: Thank you, Ben. I 

 23 want to go, I think, Tyson and then Betsy 

 24 had some comments here in Washington, then 

 25 we're going to sort of try to wrap it up 

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 1 9/16/09 141 

 2 pretty quickly after that. Tyson, did you 

 3 want to make some remarks? 

 4 MR. SLOCUM: Yes. Thank you very 

 5 much, Bart. First I just want to applaud 

 6 the CFTC for putting the question out there 

 7 whether or not the Chicago -- the carbon 

 8 product on the Chicago Climate Exchange, 

 9 whether it meets the test of influencing the 

 10 price. You know, Public Citizen definitely 

 11 supports bringing the Chicago Climate 

 12 Exchange under enhanced regulation, that 

 13 would increase reporting requirements and 

 14 position limits and I think importantly that 

 15 would provide the CFTC with access to the 

 16 cash market and I think that moves us closer 

 17 to where the Senate has been, where you've 

 18 got Senator Barbara Boxer supporting a 

 19 legislative action by Feinstein and Snow 

 20 that would give the CFTC jurisdiction over 

 21 both the cash and the futures market, 

 22 whereas the House bill that passed in June 

 23 kind of splits up jurisdiction between cash 

 24 and futures with FERC taking cash and CFTC 

 25 taking futures. 

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 2 So I believe that having one agency 

 3 oversee both markets would be better and I 

 4 appreciate Roy's presentation that showed 90 

 5 percent correlation between carbon dioxide 

 6 prices in Europe and futures prices with a 

 7 key fossil fuels, I think that really 

 8 underscores how important it is for the CFTC 

 9 to have jurisdiction over these markets 

 10 because they're all going to be interrelated 

 11 and it's really important that we have 

 12 strong regulatory jurisdiction over what are 

 13 going to be emerging carbon markets in the 

 14 United States. So that's all I wanted to 

 15 say. Thank you. 

 16 COMM. CHILTON: Thank you, Tyson. 

 17 Betsy. 

 18 MS. MOLER: Thank you. 

 19 Mr. Chairman, we noted your remarks last 

 20 week with great interest where you said you 

 21 did not support mandatory exchange trading 

 22 and we at Exxon and I believe the vast 

 23 majority of our sector agree with that. We 

 24 do need over-the-counter markets, we have 

 25 lots of very, very peculiar little products 

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 2 and the trading associated with regional 

 3 powers markets is huge, three-quarters of 

 4 the United States consumers are served by 

 5 regional power markets, so this is not a 

 6 trivial thing. 

 7 We have endorsed having the CFTC 

 8 have oversight over OTC markets and products 

 9 and absolutely understand the importance of 

 10 that, things like position limits and 

 11 disclosure and transparency and everything, 

 12 but if we're to have a successful cap and 

 13 trade market, we have to have the ability to 

 14 do the trading, develop the deep liquid 

 15 markets. 

 16 Here I think we can all put on our 

 17 consumer hats because if they're not 

 18 flexible enough and big enough, this whole 

 19 cap and trade thing is not going to work and 

 20 that's what's really important. It's also 

 21 true if you treat them as transmission 

 22 organizations then we would be happy to work 

 23 with you and your staff to understand these 

 24 creatures if that would be at all helpful. 

 25 COMM. CHILTON: Thank you, Betsy. I 

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 1 9/16/09 144 

 2 want to wrap up here unless there are other 

 3 people who feel a burning desire to make a 

 4 comment now and you're welcome to. Jack 

 5 Cogen here. 

 6 MR. COGEN: A very brief remark. 

 7 One of the things as we separate energy from 

 8 the beginning discussion and environmental 

 9 pieces, I think what we all seem to agree on 

 10 is don't separate -- (inaudible) -- we'll 

 11 take everything else, and that's one of the 

 12 things that we want to get through to the 

 13 Congress as well is that carbon is not 

 14 exceptional, it works, it's another 

 15 commodity and all the same rules should 

 16 apply. 

 17 COMM. CHILTON: Thank you, Jack. Is 

 18 there somebody else in D.C.? 

 19 MS. DOW: I just wanted to mention, 

 20 Mr. Chairman, you talked about the fact that 

 21 there is another venture out there, the 

 22 grain exchange venture, I just wanted to 

 23 acknowledge it's a partnership launched, 

 24 we're one of the founding partners, CME 

 25 Group, it involves environmental brokerage 

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 2 firms as well as some other financial 

 3 institutions. We have, you know, made 

 4 effort to get or help out with moving 

 5 legislation, and I want to say that Eileen 

 6 in terms of our meetings on the Hill, we 

 7 were told to take a step back because there 

 8 were a number of members or Senators up 

 9 there that were in favor of capping no trade 

 10 as they put it. 

 11 So while we were there to discuss 

 12 what would be viable cap and trade programs 

 13 and what some of the design features would 

 14 look like, we were told, you need to start 

 15 with why there should be a market at all and 

 16 obviously, you know, its mainly a cost 

 17 containment issue, we believe that the cap 

 18 and trade program is the best way to meet 

 19 the reduction requirements at the least cost 

 20 to those who are emitters, so I'm required 

 21 to meet these additional reduction 

 22 requirements and caps that are going to be 

 23 put on the emissions. That's all I have. 

 24 COMM. CHILTON: Thank you, Deanna. 

 25 COMM. GENSLER: I just wanted to ask 

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 1 9/16/09 146 

 2 -- Eileen said something earlier and just 

 3 make an offer, if you think there are 

 4 individuals, whether they're members on the 

 5 Hill or groups that are concerned about the 

 6 oversight of the trade side, again, we're 

 7 not leading this debate, others in the White 

 8 House and the Department of Energy and 

 9 elsewhere and the EPA properly are leading 

 10 it, but if there are people you think that 

 11 are concerned about the oversight of the 

 12 trade side, we make ourselves available to 

 13 talk about that, the T in the cap and trade. 

 14 MS. CLAUSSEN: We would be happy to 

 15 work with your staff and figure out how we 

 16 can best be deployed to make the case, the 

 17 trading was not a bad thing. 

 18 COMM. GENSLER: At least it would be 

 19 overseen well and it would be fair an 

 20 orderly markets free of fraud, that's what 

 21 we do, others can decide the greater public 

 22 policy issues at the cap. 

 23 COMM. CHILTON: Anything else from 

 24 my colleagues? All right, great, with that 

 25 I want to briefly talk about the next 

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 1 9/16/09 147 

 2 meeting. Comments from the EEMAC members 

 3 were that me sort of setting this date today 

 4 back at our other meeting was helpful as a 

 5 planning tool. You know, we did it as sort 

 6 of a to be determined thing and it ended up 

 7 being that day. I'd like to do that again 

 8 but I want to go a little bit further out, 

 9 you know, we've got other advisory 

 10 committees that Commissioner Dunn and 

 11 Commissioner Sommers chair and I don't want 

 12 to take up too much time without regard for 

 13 their other responsibilities. 

 14 So I'd like to propose as a TBD 

 15 April 20th which is a Tuesday, now that's 

 16 seven months away, so we may need to do 

 17 something sooner based upon the legislation. 

 18 That, by the way, is two days before the 

 19 40th anniversary of Earth Day, so it's very 

 20 apropos that we talk about not just energy 

 21 but carbon markets. It's not a firm thing 

 22 and I'll get back to you all at the 

 23 beginning of the year, and again I want to 

 24 make sure I'm not interfering with another 

 25 schedule that both my colleagues may have. 

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 2 But the other thing that I was told 

 3 from people during the break is that doing 

 4 this virtually has been very helpful and so 

 5 my intention would be at the next EEMAC 

 6 meeting we do the same thing. So finally in 

 7 that regard, I want to thank the CFTC staff. 

 8 First of all, really, the technical people, 

 9 Lamar Dunn in D.C. and John Rogers and 

 10 Robert Young here who we had the great 

 11 slides that we had earlier this year, we got 

 12 them here in New York, I'm sorry, we don't 

 13 have them all in D.C., but we're looking at 

 14 the Grand Canyon and the Tetons and it makes 

 15 for a nice environment, we thank Robert. 

 16 Also Laurie Chowns (phonetic) in 

 17 Kansas City, thank her. I thank our 

 18 presenters, Roy Cheruvelil and Steve Sherrod 

 19 and John Riley, and then finally our staff 

 20 Tammy Semega, Mandy and their staff, and 

 21 finally the folks -- the office directors, 

 22 Venel Hickson and Henry Hansen here and then 

 23 Holy Arines and Elizabeth Ritter and Laura 

 24 Gardy on my staff and all the Commissioners 

 25 and their staffs for working with us as we 

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 2 have been going forward. 

 3 Unless there's anything else from my 

 4 colleagues, anything? 

 5 COMM. GENSLER: I just want to make 

 6 a big thank you from the three Commissioners 

 7 here. It's great to get your advice, the 

 8 fidelity and the clarity with you addressing 

 9 these issues. 

 10 COMM. CHILTON: Thank you so much to 

 11 all of our presenters and all the EEMAC 

 12 members and as always our e-mails are open 

 13 and feel free to holler at us, tell us what 

 14 we're doing right and what we're doing wrong 

 15 more importantly. 

 16 Thank you. The meeting is 

 17 adjourned, have had a good day. 

 18 (Time noted: 11:05 a.m.) 

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 3 C E R T I F I C A T I O N 

 4 

 5 I, JAMES PUNGELLO, a Shorthand Reporter and 

 6 Notary Public in and for the State of New York do 

 7 hereby certify that the above is a true record of 

 8 the meeting taken before me. 

 9 

 10 

 ________________________ 

 11 JAMES PUNGELLO 

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