Commodity Futures Trading Commission 

Office of External Affairs 

Three Lafayette Centre 

 1155 21st Street, NW 

Washington, DC 20581 

 202.418.5080 

Testimony 

Written Testimony of Acting Chairman Walter Lukken Before 

the House Appropriations Subcommittee on Agriculture, 

Rural Development, Food and Drug Administration, and 

Related Agencies 

July 10, 2008 

Chairwoman DeLauro, Ranking Member Kingston, and other distinguished Members, 

thank you for inviting me to testify before this Subcommittee about the Commodity 

Futures Trading Commission’s (CFTC or Commission) FY09 budget request and the 

role of the agency in overseeing the dynamic futures and options markets. 

The CFTC’s mission is twofold: 1) protecting the public and market users from 

manipulation, fraud, and abusive practices and 2) promoting open, competitive and 

financially sound markets for commodity futures and options. These mandates are 

crucial because prices in the futures markets impact the cost of a loaf of bread, the price 

of a gallon of gas, and the interest rate on a student loan. If the futures markets fail to 

work properly, all consumers are impacted. 

Futures markets help participants efficiently bring supply and demand expectations from 

many sources to a central and transparent location to “discover” prices for a given 

commodity. Akin to a thermometer that reflects - rather than sets - temperatures, 

properly functioning futures exchanges are the messenger for prices. Lately these 

markets have been reflecting prices that are putting a considerable strain on American 

families and businesses. It is this agency’s mission to ensure that the futures markets 

are working properly and that prices are reflecting economic factors rather than 

manipulative forces. 

Evolving with Change 

The futures markets have changed dramatically in the last decade. Member-owned 

exchanges conducting open-outcry have largely been replaced by technology-driven 

corporations that trade electronically all around the globe. Approximately $5 trillion of 

notional transactions flow through these U.S. exchanges and clearing houses daily. 
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Since 2000, volume on U.S. exchanges has grown six-fold as traders increasingly seek 

the price certainty and clearing benefits of the regulated futures markets. 

The growth in the regulated marketplace has been scrutinized lately—and appropriately 

so—as prices in crude oil and agricultural commodities have risen to historic levels. 

Specifically, concerns have been raised recently regarding the role of speculators and 

index traders in commodity markets. Speculation has played a crucial role in the 

functioning of the U.S. futures markets since their founding more than 150 years ago. 

Without speculators, the futures markets would not be able to operate properly. 

Commercial participants cannot hedge their activities without someone willing to take 

the other side of the transaction. In futures markets, this counterparty role is often taken 

by speculators. The liquidity provided by speculators has tended to lower the costs of 

hedging to the benefit of commercial participants in the markets. 

Nevertheless, this agency recognizes that all market participants, including speculators, 

can detrimentally affect the functioning of the markets. Accordingly, the Commodity 

Exchange Act requires all traders of size to report their futures positions to the CFTC 

daily. This information enables our surveillance economists to monitor large traders to 

ensure that no one is attempting to manipulate the futures markets. The amount and 

detail of trade data collected and analyzed at the CFTC is unique among financial 

regulatory agencies and this system has proven to be extremely effective in the proper 

policing of this market. 

As the futures markets have changed, the CFTC has evolved to meet new challenges. 

In light of the recent market developments and the impact of high prices on consumers, 

the CFTC has embarked upon a series of initiatives and unprecedented steps to ensure 

greater transparency, implement tighter controls, and gather more energy market 

information. For example, the Commission recently announced several energy 

initiatives, including: (1) an agreement with the United Kingdom Financial Services 

Authority (FSA) to expand information-sharing concerning energy commodity contracts 

with U.S. delivery points that trade on both the New York Mercantile Exchange and ICE 

Futures Europe in London, as well as the imposition of position limits and accountability 

levels on these products equivalent to U.S. standards; (2) a call for additional 

information from swaps dealers regarding their index trading and a review of whether 

additional controls or classifications for these traders are needed; and (3) the existence 

of an ongoing seven-month nationwide crude oil investigation. 

The CFTC is committed to ensuring that our nation’s futures markets operate fairly and 

efficiently, and that the prices of commodities are determined by the fundamental forces 

of supply and demand, rather than abusive or manipulative practices. Regulatory 

evolution and thoughtful responses to market conditions are keys to effective market 

oversight in a dynamic and challenging global marketplace. The CFTC and its 

regulatory approach have evolved along with the futures markets, and the agency has 

pursued its mission while operating at historic low staffing levels. This is clearly a 

challenging time for the CFTC and I believe the agency has risen to the occasion – but 

we simply cannot sustain the current workload – let alone what is likely in the future – 

under our current budgetary limitations. 

Recent Timeline 
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During the last year, the Commission has worked to address the structural changes 

occurring in these markets, which have been brought on by globalization, electronic 

trading, and other factors. Using the flexibility of the agency’s principles-based 

regulatory framework, the agency is evolving with the markets and responding to 

structural changes. I’d like to walk you through that evolutionary timeline. 

July 2007 

• After an investigation spanning several months, the CFTC charged hedge fund 

Amaranth and its former head energy trader, Brian Hunter, with attempted 

manipulation of the price of natural gas futures on the New York Mercantile 

Exchange on February 24 and April 26, 2006. 

August 2007 

• The Commission announced that it filed and settled charges against Marathon 

Petroleum Company for attempting to manipulate the crude oil market. The 

Commission must complement robust market surveillance with a strong 

enforcement effort. The agency’s Division of Enforcement has been extremely 

effective in areas as diverse as internet fraud, foreign currency scams, energy 

market manipulation and hedge fund fraud. 

September 2007 

• In September 2007, the Commission convened a public hearing to examine the 

oversight of energy trading on Exempt Commercial Markets (ECMs). 

Recognized by Congress in 2000, ECMs increased competition and lowered 

costs for derivatives trading, but over time, certain energy contracts offered on 

ECMs evolved to function as virtual substitutes for contracts listed on regulated 

exchanges, with tight correlation and linking of prices and participants. This 

evolution required the Commission’s regulation of these markets to evolve in 

kind. During the September hearing, Commission staff, exchanges, ECMs, 

industry groups, and consumer organizations testified before the Commission in 

a productive debate. 

October 2007 

• Based on the agency’s ECM hearing, in October, the Commission presented a 

report to Congress detailing the Commission’s findings and recommendations 

regarding these energy markets. The report also recommended the creation of a 

new Energy Markets Advisory Committee to further examine energy issues. 

• The Commission convened a meeting of its Global Markets Advisory Committee 

focusing on issues affecting new exchanges and clearing structures in the U.S., 

and the European Union’s ongoing review of commodity derivatives regulation 

and possible changes to its regulatory approach. 

• The CFTC’s Division of Enforcement hosted its first annual international 

enforcement conference focused on commodity market manipulation. The twoday conference brought international regulators together to examine trends in the 
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on-exchange, cash, and over-the-counter commodity markets. Given the global 

nature of the futures markets, it is crucial for regulators to work cooperatively 

across borders to achieve the shared goals of detecting and deterring 

misconduct affecting commodity markets. 

• The agency continued its aggressive enforcement efforts and announced in late 

October that BP would pay a total of $303 million in sanctions to settle charges of 

manipulation and attempted manipulation in the propane market. Since 

December 2002, the Commission has filed 41 enforcement actions charging a 

total of 66 defendants with violations involving the energy markets. The agency 

has assessed almost half a billion dollars in civil monetary penalties in settlement 

of these enforcement actions. 

November 2007 

• After sending the agency’s ECM recommendations to Congress, during the fall 

and winter of 2007 and into early 2008, Commission staff provided technical 

assistance to Congressional staff as they considered CFTC reauthorization 

legislation. 

December 2007 

• The agency convened an Agricultural Advisory Committee meeting to examine 

agriculture market issues. Commissioner Michael Dunn led this hearing that 

involved industry discussion of changes in price discovery and market structure, 

the role of speculation in agricultural futures markets, and the role of agricultural 

over-the-counter markets. 

February 2008 

• The CFTC and the China Securities Regulatory Commission (CSRC) announced 

that the agencies agreed to hold regular meetings to promote enhanced 

cooperation and collaboration. These meetings will be designed to promote 

investor protection, market integrity, and the supervision of derivatives trading 

occurring on a cross-border basis between China and the U.S. 

• Following up on the agency’s Fall 2007 ECM report to Congress, the CFTC 

announced the creation of its new Energy Markets Advisory Committee (EMAC). 

The EMAC provides a public forum to examine emerging issues related to the 

energy markets and the CFTC’s role in these markets under the Commodity 

Exchange Act. It is charged with conducting public meetings, submitting reports 

and recommendations to the CFTC, and serving as a vehicle for discussion on 

matters of concern to exchanges, firms, end users and regulators regarding 

energy markets and their regulation by the CFTC. 

March 2008 

• The CFTC and the Securities Exchange Commission signed a ground-breaking 

mutual cooperation agreement to establish a closer working relationship between 

the agencies. The agreement establishes a permanent regulatory liaison 
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between the agencies, provides for enhanced information sharing, and sets forth 

several key principles guiding their consideration of novel financial products that 

may reflect elements of both securities and commodity futures or options. As 

innovation blurs financial sector lines and markets evolve, this agreement 

provides regulatory synergies between the agencies for the benefit of the public. 

April 2008 

• In early 2008, agriculture commodity prices, broadly, began trading at historically 

high levels. On April 22, following up on the agency’s December Agriculture 

Advisory Committee meeting, the CFTC convened a day-long public roundtable 

to examine the extraordinary times in the agricultural markets. The agency 

brought together a broad cross-section of agricultural market participants in an 

effort to share experience and help to form a collective understanding of what is 

occurring. More than 2,800 individuals watched the forum over the Internet. The 

topics discussed included price discovery, the role of speculators, index funds 

and hedgers, transparency, hedging, the role of agriculture swaps and risk 

management tools, the role of margin and the clearing system in the futures 

markets, and credit availability. 

May 2008 

• After years of work and bipartisan efforts, Congress enacted the CFTC 

reauthorization legislation, as part of the Farm Bill, which makes several 

improvements to the agency’s statutory authorities. Specifically, the legislation: 

o Closes the so-called “Enron Loophole” to require, for ECMs that trade 

contracts linked to regulated U.S. futures contracts or that otherwise 

perform a significant price discovery function, that the CFTC be provided 

with large trader reports and that the ECM impose position and 

accountability limits on such products. 

o Increases penalties for manipulation. 

o Clarifies anti-fraud authority for principal to principal energy trades. 

o Clarifies retail foreign currency fraud authority. 

o Reauthorizes CFTC through 2013. 

• A week after reauthorization enactment, the CFTC announced multiple energy 

market initiatives, including: 

o Confirmation of a six-month ongoing national crude oil investigation. 

o An agreement to receive enhanced data from ICE Futures Europe in 

London on certain of its crude oil markets to match our current information 

requirements for domestic exchanges. This allows the CFTC to see U.S. 

and foreign participants in the London market that the CFTC would not 

normally oversee. 
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o Requiring more detailed information from index traders and swaps dealers 

in the futures markets, including the energy markets, and reviewing 

whether classification of these types of traders can be improved for 

regulatory and reporting purposes. 

June 2008 

• In the first week of June, the CFTC announced several policy initiatives aimed at 

addressing agricultural futures markets concerns that were raised at its April 22nd

roundtable, including, among other things:

o The CFTC’s ongoing investigation of the February/March 2008 price runup in the cotton futures markets. 

o Requiring more detailed information from index traders and swaps dealers 

in the futures markets, including the agriculture markets, and reviewing 

whether classification of these types of traders can be improved for 

regulatory and reporting purposes. 

o A Commission vote to withdraw proposed rulemakings to increase the 

Federal speculative position limits on certain agricultural futures contracts 

and create a risk management hedge exemption from the Federal 

speculative position limits for agricultural futures and option contracts. 

• The initiatives announced in late May and June that were designed to improve 

the transparency of index traders and swaps dealers in the energy and 

agriculture markets require further explanation, as they represent a critical piece 

of the agency’s ongoing efforts to ensure the proper functioning of the futures 

markets. There is public concern about the amount of index money flowing into 

the futures markets. Pensions, endowments, and other long-term investors 

increasingly are investing a portion of their portfolios in a broad mix of 

commodities in order to diversify their holdings and reduce volatility and risk. 

Unlike traditional speculative trading by hedge funds and other managed money, 

index investors are typically non-leveraged entities utilizing a long-term buy and 

hold strategy. Most of this type of investment comes through major Wall Street 

swaps dealers that sell their clients broad exposure to the commodity markets 

through an over-the-counter (OTC) commodity index contract. After aggregating 

these transactions, swaps dealers then face a net commodity price risk and must 

utilize the futures markets to manage their own remaining exposure. This 

“netting out” of risk by swaps dealers before coming to the futures markets 

makes it difficult for regulators to determine the total amount of index trading 

occurring in the energy markets. 

As a result, the Commission decided to issue special calls for information about 

commodity index trading, principally to swaps dealers through whom most of this 

trading takes place in the OTC market. Some market commentary has pointed to 

long-only index trading as part of the reason for the sharp increases in energy 

prices. Through its large trader reporting system, the Commission has highly 

accurate information on all swaps dealer positions in all regulated U.S. futures 

markets, including energy futures markets. However, swaps dealers’ futures 
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positions can represent hedges of very complex “books” of many different types 

of OTC derivative and cash transactions. Therefore, swaps dealers’ futures 

positions do not necessarily correspond accurately with the amount of index 

trading that is occurring in the OTC market. In order to better understand the 

extent and possible impact of index trading, the Commission has issued special 

calls to swaps dealers requiring them to provide information on commodity index 

transactions. 

• In late June, the CFTC hosted its first EMAC meeting to examine the issue of 

transparency in the energy markets, as well as the role of index trading and 

energy trading on foreign boards of trade. 

• The CFTC formed an interagency working group with the Federal Reserve, 

Treasury Department, Securities and Exchange Commission, Department of 

Energy, Department of Agriculture, Federal Trade Commission, and Federal 

Energy Regulatory Commission to study investor practices, fundamental supply 

and demand factors, and the role of speculators and index traders in the 

commodity markets. The group has already met and is working expeditiously 

toward completing its public report. 

• Following up on the success of our first international enforcement conference in 

October 2007, in June 2008, the CFTC hosted its 2nd annual international 

regulators enforcement meeting in Washington DC with 10 different nations 

participating to discuss on-going manipulation cases and practices. 

• The CFTC announced further modifications to its direct access process for 

foreign boards of trade. After consultation with the U.K. FSA, the CFTC 

conditioned ICE Futures Europe’s direct access to U.S. customers on 

implementation of equivalent position limits and accountability levels on its linked 

crude oil contract. Pursuant to the further modifications, ICE Futures Europe 

also will adopt hedge exemption requirements similar to those in the U.S. and 

report any violations of those requirements to the CFTC. The CFTC staff has 

amended ICE Futures Europe’s direct access letter to reflect this change. 

• Following up on the May-June energy and agriculture initiatives to get further 

information about index traders and swaps dealers in the futures markets, this 

month, the CFTC also announced it will report to Congress as soon as 

practicable, and no later than September 15, 2008 regarding the scope of 

commodity index trading in the futures markets and recommendations for 

improved practices and controls, should they be required. 

July 2008 

• The CFTC announced that Commission staff has amended the May 27, 2007, 

“no-action relief letter” under which the Dubai Mercantile Exchange (DME) is 

permitted to make its electronic trading and order matching system available to 

DME members in the United States. The new conditions are designed to help 

the Commission carry out its market surveillance responsibilities and maintain 

the integrity of prices established on CFTC-regulated exchanges in light of the 
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fact that the DME may list for trading a cash-settled contract that settles on the 

price of a contract traded on a CFTC-regulated exchange. 

• CFTC is in the midst of implementing its the new authorities resulting from CFTC 

reauthorization – staff is currently drafting proposed rules for the ECM legislation 

and will meet the deadlines as outlined in statute. 

• On July 15, the agency’s Global Markets Advisory Committee, led by 

Commissioner Jill Sommers, will convene to get information from industry and 

market users regarding the risks and benefits of direct market access by 

customers trading on exchanges and whether there is a need for industry-wide 

guidance. 

• On July 29, the agency’s Agricultural Advisory Committee, led by Commissioner 

Michael Dunn, will meet to continue to develop solutions with the agricultural 

market participants to issues surrounding price convergence, margin 

requirements, financing, and alternatives to existing risk management tools. 

Looking back at the CFTC’s actions during the course of the year, both our agency and 

the marketplace we oversee are moving at an incredible pace. Based on our continual 

examination of futures industry issues, the CFTC is implementing a number of initiatives 

to tighten controls, increase transparency and improve the overall functioning of the 

markets. We have increased regulation and transparency of trading on Exempt 

Commercial Markets, and for Foreign Boards of Trade that have trading screens here in 

the U.S., and we are in the midst of bringing greater transparency to swaps dealers and 

institutional investors. 

It is important to remember that the actions listed above are on top of the Commission’s 

ongoing regular activities. For example, the Division of Enforcement continues to 

investigate and litigate violations of the CEA. The Division of Market Oversight 

continues to oversee exchange operations, examine the compliance programs of SelfRegulatory Organizations, review exchange rules, products and procedures, and most 

significant, conduct routine surveillance of the nation’s futures markets during this 

extraordinary period. The Division of Clearing and Intermediary Oversight continues its 

audit and review programs directed at clearing houses and intermediaries, all in an 

effort to protect customers and assure financial integrity. 

These efforts – both the daily work of overseeing the markets as well as new initiatives 

– are carried out each and every day by a Commission and staff dedicated to upholding 

the agency’s mission of ensuring the integrity of the futures and options markets. 

CFTC Funding 

Since the CFTC opened its doors 33 years ago, the volume on futures exchanges has 

grown 8,000 percent while the CFTC’s staffing numbers have fallen 12 percent. The 

following chart shows the exponential growth in contract volume, compared to CFTC 

staff numbers. 
Growth in Volume of Futures & Option Contracts Traded 

& CFTC Staffing Levels 

553 560 5 6 7 546 514 521 497 517 4 9 1 4 9 3 437 465 475

0

5 0 0

10 0 0

15 0 0

2 0 0 0

2 5 0 0

3 0 0 0

3 5 0 0

4 0 0 0

4 5 0 0

19 9 7 19 9 8 19 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8

E s t .

2 0 0 9

Est .

The CFTC’s resources simply have not kept pace with the growth of the markets and 

the growth of similar financial regulators. As you can see in the following charts, the 

CFTC lags other comparable agencies in funding levels by substantial margins. This 

agency’s lack of funding over the course of many years has had a negative impact on 

our staffing situation, rendering it unsustainable for the long run. 

FY 2007 Budget ($M) 

$876

$638

$225 $220

$98

SEC OCC FERC FTC CFTC

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FY 2007 FTEs 

3465

2934

1303

1061

437

SEC OCC FERC FTC CFTC

The agency appreciates the increased funding from Congress of about $111 million for 

FY 2008 – that funding is being put to use now on priority hiring and making longoverdue major technological investments. For example, last spring, the CFTC 

announced a major technology purchase that will modernize our trade practice 

surveillance system to enhance basic trade surveillance and permit nearly real-time 

analyses of all trading activity – funding will allow for the completion of this project more 

quickly. Investments in technology and personnel are critical for the CFTC to sort 

through the millions of pieces of information generated by these electronic markets 

daily. 

The dedicated and skilled individuals at the CFTC are working tirelessly to ensure the 

integrity of the markets. However, as the agency embarks on new authorities and 

initiatives in order to respond to changing market conditions, it is imperative that the 

CFTC receive additional funding.

As you are aware, the Administration has proposed for the Commission a budget of 

$130,000,000 for FY 2009. The Commission is very appreciative of the budget 

proposal – which reinforces the reversal of an almost two-decade-long downward trend 

in real funding. The $130,000,000 is greatly needed to continue the implementation of 

the long-delayed information technology modernization initiative first begun in FY 2008, 

and enables us to take continued steps to address our staffing shortage. In addition, 

last month, this Subcommittee marked up a funding bill that included $135,000,000 for 

the agency for FY 2009, which is deeply appreciated. We recognize the overall tight 

budgetary situation and appreciate the funding levels above the President’s budget. 

However, given these new authorities and the unprecedented market conditions of the 

day—conditions that could not have been anticipated when the FY 2009 budget was 

first formulated last summer—we welcome this hearing at a critical and opportune time. 

After reviewing the impact of recent initiatives and the projections associated with 

legislative changes, the Commission estimates it will require an additional $27,000,000 -

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- above the President’s FY 2009 budget of $130,000,000 and 475 FTEs -- for a total of 

$157,000,000 and 596 FTEs. 

The additional $27,000,000 is comprised of $21,000,000 and 92 FTEs originally 

requested last September in our FY 2009 Budget Estimate submitted to Office of 

Management and Budget – and to Congress as required by the Commodity Exchange 

Act – as well as an additional $6,000,000 to undertake new responsibilities as 

mandated in the Farm Bill of 2008. In making this request, the Commission is mindful of 

the need to maintain fiscal restraint in appropriations and the competing needs of other 

parts of the Federal Government. However, we believe that the proposed funding level 

of $157,000,000 is the appropriate level of resources required to fulfill our immediate 

responsibilities. The increase will restore staffing to a level last sustained almost two 

decades ago when market volume, innovation, and complexity were significantly less 

than today and when the agency did not yet have to face the expanded workload 

brought on by globalization of the marketplace and the emergence and widespread use 

of derivatives and hedge funds. 

In summary, I want to thank the Subcommittee for inviting me to testify today. The 

Commission shares the Subcommittee’s concern about current conditions in the energy 

markets and over the effects of high crude oil and gas prices on American consumers, 

workers, and businesses. These are difficult times in the futures markets, and the 

Commission recognizes the need to respond accordingly. I am deeply proud of our 

highly skilled and productive staff. This small Federal agency is working hard to protect 

the public and the market users from manipulation, fraud, and abusive practices in order 

to ensure that the futures markets are working properly. 

Thank you for the opportunity to appear before you today on behalf of the CFTC. I 

would be happy to answer any questions you may have.