UNITED STATES OF AMERICA 

 COMMODITY FUTURES TRADING COMMISSION 

 ENERGY POSITION LIMITS AND HEDGE EXEMPTIONS 

 Washington, D.C. 

 Wednesday, August 5, 2009 

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 1 C O N T E N T S 

 2 Call to Order and Introduction: 

 3 CHAIRMAN GARY GENSLER 

 4 Opening Statements: 

 5 COMMISSIONER MICHAEL DUNN 

 6 COMMISSIONER JILL SOMMERS 

 7 COMMISSIONER BART CHILTON 

 8 Panel 1: 

 9 JOHN HYLAND 

 U.S. Commodity Funds 

 10 

 PAUL CICIO 

 11 Industrial Energy Consumers of America 

 12 STEVEN GRAHAM 

 Schneider National Inc.; American Trucking 

 13 Association 

 14 Panel 2: 

 15 ELLIOT CHAMBERS 

 Chesapeake Energy 

 16 

 PHIL VERLEGER 

 17 University of Calgary 

 18 JOHN ARNOLD 

 Centaurus 

 19 

 20 

 21 

 22 

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 1 Panel 3: 

 2 MIKE MASTERS 

 Masters Capital 

 3 

 MARK YOUNG 

 4 Kirkland & Ellis; Futures Industry Association 

 5 MICHAEL GREENBERGER 

 University of Maryland; AFL-CIO 

 6 

 7 

 8 * * * * * 

 9 

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

 2 (9:05 a.m.) 

 3 CHAIRMAN GENSLER: Good morning. I call 

 4 to order the meeting of the Commodity Futures 

 5 Trading Commission. This is the last of three 

 6 hearings which were considering whether federal 

 7 position limits should be set by the CFTC for 

 8 commodities of finite supply. I would like to 

 9 start by thanking my fellow Commissioners and our 

 10 distinguished witnesses for being here today. I 

 11 might note I particularly want to thank those on 

 12 the second and third panel for your patience with 

 13 three panels, and we'll try to stay in touch with 

 14 you as the day proceeds to get you free as you 

 15 can. 

 16 Last week the CFTC held its first two 

 17 hearings on setting position limits in the energy 

 18 markets. We have a very productive discussion on 

 19 the legislative history of position limits, the 

 20 current state of federal limits and exchange set 

 21 accountability levels and who would be best to set 

 22 position limits if we were to move forward. Of 

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 1 not, several major market participants including 

 2 exchanges and traders suggested their support for 

 3 position limits. The Chicago Mercantile Exchange 

 4 announced its support for adoption of a hard limit 

 5 regime including single month and all months 

 6 combined. This is a welcome and tangible change. 

 7 In addition, major traders testified 

 8 that they believe position limits in the energy 

 9 realm would be beneficial to the market. During 

 10 this hearing we will continue to discuss the 

 11 details of any possible limits including who 

 12 should set them, what level, whether noncommercial 

 13 exemptions should be granted, but the signal that 

 14 the exchanges and certain major traders sent of 

 15 their support to protect the markets and the 

 16 American public was very helpful. 

 17 I believe we should seriously consider 

 18 setting position limits in the energy markets. 

 19 Let me just outline three quick reasons and it 

 20 will help the panelists as we go forward because 

 21 my questions will be around this. First, it's in 

 22 our statute. In 1936 the Congress said to the 

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 1 CFTC said that we shall impose limits on trading 

 2 on positions to limit, diminish or prevent undue 

 3 burdens that may come as the result of excessive 

 4 speculation. So first we're directed by statute 

 5 to do it to protect the American public. 

 6 Secondly, while we current set and enforce 

 7 position limits on certain agricultural products, 

 8 we don't do so for energy markets. I believe that 

 9 position limits should be consistently applied 

 10 across markets for physical commodities for finite 

 11 supply. There are some differences between energy 

 12 markets and agricultural markets to be sure. 

 13 Agricultural markets are smaller than energy 

 14 markets. We are fortunate as a nation that 

 15 agricultural markets -- we're more an export 

 16 nation and in energy we're more an import nation 

 17 and there are other differences for sure, but I'm 

 18 not sure that those differences suggest that there 

 19 should be position limits in one market and not 

 20 the other. 

 21 The CFTC is directed by statute to 

 22 protect market integrity and I believe that we 

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 1 can't simply step back because the energy markets 

 2 are larger than the agricultural markets. There 

 3 has also been a lot of change since the early 

 4 1990s when the assumptions that embed why energy 

 5 markets aren't covered right now, and that was by 

 6 this Commission in the early 1990s when the first 

 7 exemptions were granted and when accountability 

 8 levels came into place. I think a lot has changed 

 9 in the markets in those 18 years. The size and 

 10 effects of the markets on the day-to-day lives of 

 11 the American public make it that much more 

 12 important that we aggressively fulfill our mandate 

 13 in the energy space just as we do in the 

 14 agricultural markets. 

 15 Thirdly, I believe that at the core, 

 16 promoting market integrity is ensuring markets do 

 17 not become too concentrated. This is even more 

 18 relevant today because financial markets have 

 19 become more concentrated since the first 

 20 exemptions were granted in 1991, and the position 

 21 accountability level regime was first implemented 

 22 around that time as well. The financial crisis 

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 1 has highlighted the risk to the markets and the 

 2 American public brought about by large 

 3 concentrated actors on the financial stage. When 

 4 the CFTC set position limits for certain 

 5 agricultural commodities, the agency sought to 

 6 ensure that the markets were made up of a broad 

 7 group of market participants with a diversity of 

 8 views. This is not the only place if I might note 

 9 that we do this in economic regulation. In a very 

 10 different context no doubt, we prevent market 

 11 concentration at the heart of our antitrust laws. 

 12 Similarly, even the FDIC has limits on how much 

 13 the aggregate of one bank could have on deposits 

 14 to protect the deposit insurance fund. 

 15 The very important question then to me 

 16 becomes how much concentration is too much? At 

 17 what point can market concentration, having a 

 18 trader being very large in a market detract from 

 19 liquidity rather than enhance liquidity or detract 

 20 from market integrity rather than enhance market 

 21 integrity? I think we'd all agree that if one 

 22 party controlled half a market, that party is more 

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 1 likely to lessen liquidity than enhance liquidity. 

 2 So position limits I believe should be put in 

 3 place to enhance market integrity, enhancing 

 4 liquidity by promoting more market participants 

 5 rather than having one party that has so much 

 6 concentration that it might actually lead to a 

 7 decrease in liquidity and market integrity. 

 8 I look forward to hearing from today's 

 9 witnesses on this very important issue. Last week 

 10 we heard a diversity of views and I look forward 

 11 to having additional experts and market 

 12 participants. Our record will stay open until 

 13 August 12, 2009. Please visit our website 

 14 cftc.gov for a link and instructions on how to 

 15 submit written comments for the record. I will 

 16 now turn to Commissioner Dunn for any opening 

 17 remarks. 

 18 COMMISSIONER DUNN: Thank you, Mister 

 19 Chairman. I will save any remarks for closing 

 20 remarks on the hearing itself, but during the 

 21 course of these hearings I have received and I'm 

 22 sure the rest of the Commissioners have received a 

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 1 lot of faxes and other mail from the public as a 

 2 whole and I want to ensure everyone that that will 

 3 be included as part of the public record and 

 4 hopefully that will take place. 

 5 CHAIRMAN GENSLER: Yes. I believe the 

 6 record is open until August 12 and whoever 

 7 actually makes sure it's in the record will do so. 

 8 Commissioner Sommers? 

 9 COMMISSIONER SOMMERS: Thank you, Mister 

 10 Chairman. I just wanted to take a couple of 

 11 minutes to point out what I think have been 

 12 several important takeaways over the 3 days of 

 13 hearings that we have had the witnesses who have 

 14 been so gracious with their time to participate in 

 15 this dialogue with us. I think all of our 

 16 witnesses have supported increased transparency in 

 17 our market and the Chairman has outlined some very 

 18 important immediate steps that this Commission can 

 19 take, but I think it's important for us to 

 20 continue to use all of our existing authority to 

 21 look at what we can do to provide additional 

 22 transparency to our markets. 

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 1 As the Chairman just pointed out in his 

 2 opening remarks, many major market participants 

 3 have also supported going forward with this 

 4 proposal to impose hard limits. I think that 

 5 applying these limits to the OTC markets is going 

 6 to be challenging, but we've heard a number of 

 7 different good suggestions and views about how to 

 8 do this, whether we have the current authority and 

 9 how this limits should be applied, but I think 

 10 across the board everyone has supported us getting 

 11 the needed authority that we need in this area. 

 12 Finally, for me there's the issue of the global 

 13 standards. We've heard a number of our witnesses 

 14 tell us that it is imperative as look to go 

 15 forward with this that we have consistent 

 16 regulatory regimes across borders. 

 17 There are a number of challenges ahead 

 18 of us as we look for workable solutions to these 

 19 complex issues end I ask for all of your patience 

 20 and your continued cooperation. I appreciate all 

 21 of these witnesses taking time out of their busy 

 22 schedules. Our mission is to protect the price 

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 1 discovery and hedging functions of the U.S. 

 2 futures markets and I know that this Commission is 

 3 committed to doing just that. Thank you all for 

 4 being here. 

 5 CHAIRMAN GENSLER: Commissioner Chilton? 

 6 COMMISSIONER CHILTON: Thanks, Mister 

 7 Chairman. I don't have much to say other than I 

 8 did notice a letter that was addressed to the 

 9 Chairman from the Commodity Markets Oversight 

 10 Coalition. I'm sure it will be included in the 

 11 record. One of the things that was important to 

 12 me as Commissioner Sommers was talking about is 

 13 this is a dual track. Whatever we do here, we do 

 14 need to have Congress involved in regulatory 

 15 reform also. I think a number have made that 

 16 point over the last several weeks and months and 

 17 I'm glad that the Commodity Markets Oversight 

 18 Coalition agrees with that. 

 19 I just want to again commend the 

 20 Chairman. These hearings show that we can be an 

 21 adaptive regulatory interested in anticipating 

 22 changes to the market and what we do will depend 

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 1 in large part by what we hear from you, what we've 

 2 heard in the last several hearings, and what we 

 3 will hear from the public as we do a comment 

 4 period, assuming we do a comment period. But it's 

 5 a very helpful in that regard and I again thank 

 6 the Chairman for setting on this new course. 

 7 Regardless of what we do, it's good effort and I 

 8 thank you and I thank our witnesses for being 

 9 here. 

 10 CHAIRMAN GENSLER: I thank my fellow 

 11 Commissioners. This is a team effort, so when 

 12 they keep thanking me, we wouldn't have even had 

 13 the hearings if we hadn't been able to decide to 

 14 move forward. I'm going to turn to our panelists. 

 15 We'll probably just to left to right. If you can, 

 16 there's a little light over here that might give 

 17 you a heads up. If you could summarize in 5 

 18 minutes. You've all given wonderful written 

 19 testimony and we've had a chance to read it in the 

 20 last few days. But if you'd maybe give us the 

 21 highlights in 5 minutes, and then we're going to 

 22 try to do questions in 5 minutes apiece as well. 

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 1 Thank you. 

 2 MR. HYLAND: Good morning, Chairman 

 3 Gensler and Commissioners. I appreciate the 

 4 opportunity to speak with you today on behalf of 

 5 the United States Commodity Funds. We have 

 6 already submitted written testimony to the 

 7 Commission including data and charts, and I will 

 8 briefly discuss our filing's main points. 

 9 In recent months, a number of reports 

 10 have attempted to make the case that last year's 

 11 run-up in crude oil prices and natural gas prices 

 12 were the result of investments made in the futures 

 13 market by large unleveraged and passive index 

 14 funds such as USO and UNG. The management of USO 

 15 and UNG believe these reports are completely 

 16 inaccurate. Our data contained in our written 

 17 filing shows that USO was a seller of contracts in 

 18 2008 while prices were rising, a buyer when prices 

 19 were falling, and a seller again in 2009 as prices 

 20 have been rising. The pattern is essentially the 

 21 same for UNG as well. 

 22 Since our funds' actual buying and 

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 1 selling actions were not consistent with driving 

 2 prices higher or lower as others have indicated, 

 3 management strongly believes that the activities 

 4 of USO and UNG could not possibly have caused the 

 5 extreme swings in the price of crude oil or 

 6 natural gas as alleged. Some of these claims 

 7 amount to to be quite honest little more than 

 8 self-serving statistical gibberish. If the 

 9 Commission would like to have me run through some 

 10 of this data in this hearing during the questions, 

 11 I would be happy to do so, but we believe that 

 12 instead of disrupting the futures market, the 

 13 funds provided a steadying force by adding 

 14 significant liquidity to the market and 

 15 potentially reducing the price volatility. USO 

 16 and UNG are highly transparent, unleveraged 

 17 passive index funds that allow hundreds of 

 18 thousands of retail and nonretail investors to 

 19 access commodity exposure. In that sense, the 

 20 funds behave as pass-through conduits as opposed 

 21 to acting like a single investor. We believe that 

 22 the following key attributes of the funds provide 

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 1 significant protection against concerns raised 

 2 about their impact on the energy futures market. 

 3 First, the funds are widely held. In 

 4 2008, nearly 325,000 investors gained access to 

 5 the futures market through investments in our two 

 6 funds. For 2009, we estimate that the total 

 7 number of shareholders is likely in excess of 

 8 600,000 investors. We further estimate that 75 

 9 percent to 90 percent of our shareholders are 

 10 ordinary individual investors, not institutional 

 11 or even high net worth investors, and these 

 12 investors certainly do not think of themselves as 

 13 speculators out to manipulate the markets. 

 14 Rather, they believe they have an investment 

 15 interest in obtaining commodity exposure or a 

 16 desire to hedge themselves against potentially 

 17 higher inflation. Last year our average 

 18 shareholder typically owned shares that would 

 19 equate to about one to two futures contracts 

 20 worth. Even among our nonretail investors, we 

 21 have not observed any very large concentrations by 

 22 a very small number of investors. For example, we 

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 1 have rarely had an investor file a 13(g) or a 

 2 13(f) with the SEC indicating that they own 5 

 3 percent or more of our shares for any of our 

 4 funds. A review of which brokerage firms are 

 5 shares also shows them widely held with no large 

 6 concentrations at just one or two brokerage firms. 

 7 Finally, the funds can see with a lag 

 8 our shareholder activity come tax reporting 

 9 season. As such, we can observe just how big our 

 10 biggest shareholders have been. The numbers are 

 11 surprisingly modest. For example, on December 31, 

 12 2008, the number of USO shareholders who held 

 13 enough shares to indirectly exceed the NYMEX 

 14 reporting threshold for crude oil which is 350 

 15 contracts was four. On that particular day, USO 

 16 had 79,608 shareholders. All of the funds' 

 17 positions held by the funds may appear to be large 

 18 in relation to each fund as the legal holder of 

 19 such positions. These investments represent the 

 20 aggregation of demand from hundreds of thousands 

 21 of individual shareholders seeking to reduce their 

 22 financial risk through hedging in the Community 

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 1 Futures Market. Our funds are not market 

 2 participants themselves. They are flow-through 

 3 vehicles. 

 4 In addition, the funds are highly 

 5 regulated by the CFTC, SEC, FINRA, NFA and NYSE 

 6 Arca. The funds are not levered, thus eliminating 

 7 our funds as likely sources of settlement risk to 

 8 the exchanges. And the funds' pricing and 

 9 investments are transparent with information on 

 10 the funds available on the funds' own website, on 

 11 NYSE Arca's website and from many other data 

 12 providers. 

 13 In conclusion, we understand that the 

 14 CFTC is currently reviewing its regulation of 

 15 energy markets. If it is determined that limits 

 16 are deemed appropriate for the energy markets, we 

 17 believe that the CFTC should extend futures 

 18 position relief or a hedge exemption to exchange 

 19 traded commodity funds tracking single commodity 

 20 benchmarks such as the funds if as we believe our 

 21 commodity funds are merely acting as highly 

 22 efficient aggregators of investment demand and not 

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 1 as agents of demand themselves, we believe it is 

 2 in the interests of the markets that we be treated 

 3 as such and dealt with as a flow-through vehicle 

 4 that could provide liquidity without actually 

 5 driving prices. Alternative approaches could have 

 6 the unintended effect of reducing market liquidity 

 7 while also harming our 600,000 shareholders. 

 8 Should the CFTC be concerned about the activities 

 9 of large investors who own shares themselves and 

 10 thus indirectly have exposure to futures 

 11 contracts, we believe fairly simple steps can be 

 12 taken to capture such information and permit 

 13 adequate surveillance. 

 14 CHAIRMAN GENSLER: Mr. Hyland, if you 

 15 just want to try to -- 

 16 MR. HYLAND: We're almost there. We 

 17 strongly encourage the CFTC to codify its prior 

 18 staff's position about index funds as potentially 

 19 useful investment strategies and we look forward 

 20 to seeing the results of the CFTC's current 

 21 regulatory review process. Thank you for your 

 22 time. 

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 1 CHAIRMAN GENSLER: Thank you very much. 

 2 Mr. Cicio? 

 3 MR. CICIO: Chairman Gensler and 

 4 Commissioners, thank you for the opportunity to 

 5 appear before you. 

 6 The Industrial Energy Consumers of 

 7 America is a trade association of manufacturing 

 8 companies with over $900 billion in annual 

 9 revenues and with more than 900,000 employees 

 10 nationwide. Natural gas is a vital fuel and 

 11 feedstock for the manufacturing sector and its 

 12 price often determines whether we are competitive 

 13 in global markets and whether we increase or 

 14 decrease jobs. 

 15 Excessive speculation in the natural gas 

 16 market is real. From January to August 2008, the 

 17 price of natural gas more than doubled because of 

 18 excessive speculation, not supply-demand 

 19 fundamentals. During that same time period, 

 20 production of natural gas rose by 8 percent, 

 21 inventories were well within the 5-year average, 

 22 and demand was essentially unchanged from the 

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 1 previous time period. The result of excessive 

 2 speculation cost consumers over $40 billion in 

 3 that short period of time. We believe that 

 4 speculative aggregate position limits are 

 5 essential. Other forms of position limits will 

 6 not work as well because traders will simply move 

 7 to platforms and products to avoid them. The 

 8 creation of the futures market was not intended to 

 9 be a substitute for a gambling casino for Wall 

 10 Street banks, hedge funds, sovereign funds and 

 11 index funds. The futures market was created to 

 12 serve the direct needs of buyers and sellers of 

 13 commodities and the managing of financial risk 

 14 associated with these transactions. Financial 

 15 speculators have an important role, but we must 

 16 keep speculative transactions tied to the physical 

 17 commodity as much as possible or we destroy the 

 18 integrity and price formation. 

 19 At the heart of excessive speculation 

 20 are these exempt financial speculative 

 21 transactions that are not tried directly to 

 22 managing risk of the underlying commodity. 

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 1 Speculative transactions based on other investment 

 2 objectives like diversification of investment 

 3 portfolios and a hedge against inflation is not 

 4 consistent with the managing of risk of the 

 5 underlying commodity. One example that we would 

 6 like to highlight is the United States Natural Gas 

 7 Fund that is exempt from speculative position 

 8 limits and a long only passive fund. It differs 

 9 in significant ways from the historic functioning 

 10 of the futures market in how price formation 

 11 occurs. The objective of their investors are 

 12 unrelated to financial risk management 

 13 transactions of the underlying commodity. For 

 14 example, their transactions have nothing to do 

 15 with what is happening and supply and demand of 

 16 the underlying commodity. Saying it a different 

 17 way, if prices go up, they but it. If prices go 

 18 down, they buy it. It doesn't matter. Unlike 

 19 other players, they predictably roll their 

 20 positions forward each month, and unlike other 

 21 players, they predictably let everyone know when 

 22 they are doing it. The combination of these 

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 1 characteristics and their significant volume 

 2 relative to other players and the size of the 

 3 physical market damages price formation. 

 4 Mister Chairman, price formation is not 

 5 passive. It is dynamic. It is a combination of 

 6 reaction and proaction and without a pattern. 

 7 Price formation is unpredictable, not predictable, 

 8 and it reflects changes in supply and demand of 

 9 the underlying commodity. Buyers and sellers of 

 10 futures do not buy every month, they do not sell 

 11 every month and they do not buy and sell at the 

 12 same time every month. Banks like Morgan Stanley 

 13 and Goldman or natural gas producers like BP and 

 14 Chesapeake Energy, and my companies, industrial 

 15 manufacturers, do not announce to the market how 

 16 much they are going to buy or sell or when they 

 17 are going to do so. Importantly, it is clear 

 18 common sense that there is market evidence that 

 19 this fund has in fact increased the price of 

 20 natural gas over the course of the last few 

 21 months. As the assets of this fund grew from $727 

 22 million in just 4 months to $4.5 billion this 

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 1 spring, the price of natural gas rose from $3.32 

 2 per million in May to $3.95 in July. That is a 19 

 3 percent increase. At the same time, each month 

 4 compared to the same month of the previous year, 

 5 domestic production rose, national inventories 

 6 rose and domestic consumption fell. Common sense 

 7 says that prices should have fallen. 

 8 The fund currently has 3 million shares 

 9 and that represents about 30 percent of the prop 

 10 market which is significant in its own right. Of 

 11 great concern, this fund is petitioning the SEC 

 12 for 1 billion, and we are quite concerned. Is 

 13 there any doubt that if one player has 30 percent, 

 14 40 percent, 50 percent, that they are not going to 

 15 impact price formation? In conclusion, Mister 

 16 Chairman, we urge the Commission to ban this fund 

 17 and ones like it from participating in the futures 

 18 market. 

 19 CHAIRMAN GENSLER: Thank you, Mr. Cicio. 

 20 Mr. Graham? 

 21 MR. GRAHAM: Good morning, Chairman 

 22 Gensler and Commissioners. My name is Steven 

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 1 Graham. I am Vice President of Schneider 

 2 National, a large trucking company based in Green 

 3 Bay, Wisconsin. I appear before you today on 

 4 behalf of the American Trucking Association. 

 5 Trucking is a highly competitive 

 6 industry with very low profit margins. The 

 7 dramatic rise in diesel prices combined with soft 

 8 demand for freight transportation services have 

 9 left trucking companies struggling to survive. 

 10 Diesel is the second highest expense for most 

 11 trucking companies. Every 1 cent increase in the 

 12 price of diesel costs the trucking industry an 

 13 additional $397 million. Schneider National 

 14 typically uses heating oil derivatives contracts 

 15 on the New York Mercantile Exchange to hedge our 

 16 exposure to diesel price movements. However, 

 17 there is a difference between hedging, speculating 

 18 and excessive speculation. While we cannot 

 19 quantify the extent to which excessive speculation 

 20 is responsible for the recent and dramatic 

 21 increases in the price of crude oil, we believe 

 22 that it is part of the problem. 

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 1 A recent example of the disconnect 

 2 between oil prices and market fundamentals 

 3 occurred earlier this year. On February 12, oil 

 4 hit a short-term low of $34 a barrel, yet during 

 5 those 4 months, global demand remained weak, crude 

 6 oil inventories in storage was well above average 

 7 and the dollar declined only 9 percent relative to 

 8 the euro even though oil went to $72 a barrel. In 

 9 the face of these market realities, excessive 

 10 speculation is the only other variable left 

 11 unaccounted for. 

 12 To address this market disconnect, we 

 13 believe that the federal government should take 

 14 steps to increase the transparency of derivatives 

 15 markets and establish reasonable aggregate 

 16 position limits. The establishment of aggregate 

 17 position limits will require CFTC to understand 

 18 the amount of influence that over-the-counter and 

 19 other off-exchange contracts have on the market. 

 20 Requiring reporting of these dark transactions 

 21 will provide valuable information on the positions 

 22 of entities that participate in the derivatives 

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 1 markets and allow CFTC to establish position 

 2 limits that prevent excessive speculation while 

 3 maintaining essential market liquidity. 

 4 We are concerned with the positions 

 5 taken by index funds. While we are not alleging 

 6 that these funds are manipulating the market, we 

 7 believe that the cumulative impact of their 

 8 enormous long only positions may contribute to the 

 9 disconnect between market prices and market 

 10 fundamentals. In establishing aggregate position 

 11 limits, CFTC must distinguish between commercial 

 12 participants that take possession of the 

 13 underlying commodity and noncommercial 

 14 participants or speculators. CFTC must redefine 

 15 who meets the definition of commercial participant 

 16 or bona fide hedger. In petroleum markets, a 

 17 commercial participant must take physical 

 18 possession of a petroleum product. The trucking 

 19 industry typically hedges diesel by purchasing 

 20 heating oil and crude oil derivatives. 

 21 Recognizing these hedging surrogates is important 

 22 to determining the status of various commercial 

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 1 participants. At the same time, those who seek to 

 2 hedge against inflation by purchasing petroleum 

 3 derivatives contracts should not be considered 

 4 commercial participants as these so-called hedgers 

 5 are more akin to pure speculators. 

 6 The next step in setting position limits 

 7 for commercial participants is to recognize that 

 8 each participant has a different need to hedge a 

 9 different amount of product based on their 

 10 physical possession of the underlying commodity. 

 11 To account for seasonal differences, organic 

 12 growth of the company and other business changes, 

 13 position limits applicable to commercial 

 14 participants should vary based on their physical 

 15 consumption of the underlying commodity over time. 

 16 Increasing market transparency and establishing 

 17 reasonable aggregate position limits that 

 18 distinguish between commercial and noncommercial 

 19 participants have no potential downside that we 

 20 can discern. Under a worst-case scenario, the 

 21 transparency of the market is improved but the 

 22 price of oil remains unaffected. More 

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 1 optimistically, these remedies would reduce 

 2 speculative bubbles, restore investor confidence 

 3 in futures markets and limit the participation of 

 4 asset accumulators in the futures markets, 

 5 strengthening the link between commodity prices 

 6 and market fundamentals. Thank you. 

 7 CHAIRMAN GENSLER: Mr. Graham, thank 

 8 you. I thank all of our witnesses. We'll 

 9 probably end up with a couple of panels but limit 

 10 ourselves to 5 minutes as well and then if need be 

 11 go through a couple times. 

 12 I'd like to find common ground where we 

 13 can. In listening to Mr. Cicio and Mr. Hyland, I 

 14 was going to ask Mr. Hyland first, I think there 

 15 is common ground while there are many differences 

 16 of course between your two testimonies. Did I 

 17 take it, Mr. Hyland, that you said that you feel I 

 18 think it's in your written testimony that the 

 19 funds that you manage, the oil fund and the 

 20 natural gas exchange traded fund, are price 

 21 takers? The start of your third paragraph says 

 22 "as price takers." Were you referring to your 

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 1 funds, that they're price takers in the markets? 

 2 MR. HYLAND: Yes. 

 3 CHAIRMAN GENSLER: Maybe there is a 

 4 similarity because I think Mr. Cicio was saying 

 5 that he feels that these large index funds are 

 6 more price takers than participating in the price. 

 7 MR. CICIO: Yes, that is a major point, 

 8 that the futures market is dynamic and each player 

 9 is very inconsistent in their buying and selling 

 10 while, and yes, they are a price taker, that is 

 11 all they are. That is not the way the futures 

 12 market works. Being a price taker does not 

 13 reflect the dynamics of price formation. 

 14 CHAIRMAN GENSLER: But on that common 

 15 ground then you divert a little bit on 

 16 conclusions. I'm back to Mr. Hyland. You think 

 17 that there should be no position limit set for any 

 18 speculative participants in the market, or it just 

 19 that they shouldn't be set on exchange traded 

 20 funds? 

 21 MR. HYLAND: Our position is largely 

 22 twofold. The first is that despite Paul's comment 

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 1 that common sense indicates X leads to Y, anytime 

 2 anybody tells you that common sense tells you 

 3 something, that's just a way of saying we don't 

 4 actually have the data to support it. We believe 

 5 our data is crystal clear. We are not driving 

 6 prices higher by our buying in the last run-up in 

 7 natural gas, we're not driving prices lower in 

 8 this current bout. The data shows that at best 

 9 you could make the argument that you UNG and USO 

 10 are acting to moderate price swings by being a 

 11 seller when prices are rising and a buyer when 

 12 prices are falling. Arguably, and I'm sure there 

 13 will be some academics who come on later in these 

 14 panels, they will argue that actually we are price 

 15 neutral. We certainly know that the studies done 

 16 by the CFTC staff last year, studies done by the 

 17 exchanges, have strongly indicated that buying and 

 18 selling by index participants is price neutral. 

 19 So our believe is that there is a big 

 20 difference if you are asking what should be the 

 21 position limit for somebody like us who's 

 22 aggregating the demand of hundreds of thousands of 

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 1 individual investors who are all on a given day 

 2 buying or selling their positions and comparing 

 3 that to the situation of a single trader sitting 

 4 at a hedge fund somewhere, it's a night and day 

 5 situation and we believe that there should be 

 6 exemptions on the position limits for us precisely 

 7 because we are flowing through lots and lots of 

 8 transactions and are not the fund itself taking a 

 9 position. 

 10 CHAIRMAN GENSLER: I'm sorry because my 

 11 time is almost up and I'll have to come back, and 

 12 I don't want Mr. Graham to feel like I'm not 

 13 thinking of you or the 17,000 employees you have 

 14 or your positions. Mr. Hyland, I understood that 

 15 you thought that USO and UNG should not be subject 

 16 to position limits, but I wasn't quite sure. Do 

 17 you think that position limits promote market 

 18 integrity possibly for other investors not 

 19 exchange traded funds? 

 20 MR. HYLAND: The exchange traded funds 

 21 are more transparent. They are typically 

 22 unlevered. 

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 1 CHAIRMAN GENSLER: I understand that. 

 2 My question for you is where are you on the hedge 

 3 funds or others? 

 4 MR. HYLAND: Should hedge funds, should 

 5 trading desks at a Morgan Stanley be more tightly 

 6 watched and controlled? I believe that's fair 

 7 because those are people making a single directed 

 8 trade, so I think it's fair that they certainly 

 9 should have greater oversight and transparency. 

 10 CHAIRMAN GENSLER: Should position 

 11 limits be applied to them? 

 12 MR. HYLAND: I think that to the extent 

 13 that they are the ultimate decider of what's being 

 14 bought or sold, then that's a fair direction to 

 15 go. 

 16 CHAIRMAN GENSLER: I thank you. I'll 

 17 turn to Commissioner Dunn. 

 18 COMMISSIONER DUNN: Thank you, Mister 

 19 Chairman. I think it's going to be difficult for 

 20 us to get all our questions answered. Let me 

 21 start again with Mr. Hyland. One of the letters 

 22 that I received was from a doctor from New Jersey 

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 1 who indicated that he thought being able to invest 

 2 in an ETF allowed him to do hedging against 

 3 energy. Do you see that as the role of your fund? 

 4 MR. HYLAND: I'm going to guess that 

 5 he's a shareholder of one of my funds. Since I 

 6 have about 600,000 of them, he's probably one of 

 7 them. That I believe is why we exist. We exist 

 8 to allow people to take these kinds of positions 

 9 whether they have an investment objective in the 

 10 energy field or whether they want to hedge 

 11 anticipated and unanticipated inflation changes, 

 12 and we give them an efficient method of doing it 

 13 that doesn't necessarily require them to directly 

 14 hold futures. He is the answer to why do we exist 

 15 and what's our purpose. 

 16 COMMISSIONER DUNN: So you view yourself 

 17 as the democratic opportunity for individuals to 

 18 be able to take part in the futures market? 

 19 MR. HYLAND: Absolutely. There's a 

 20 saying that I've given to some of the surveillance 

 21 staff before. George Soros doesn't pay retail. 

 22 If you're the George Soroses of the world or 

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 1 you're Morgan Stanley or Goldman Sachs, you don't 

 2 need USO, you don't need UNG, and you're certainly 

 3 not going to pay the 45 basis points or 60 basis 

 4 points that we charge. You would just do it 

 5 directly through futures or you'd do it directly 

 6 through swaps. We exist to serve people who 

 7 otherwise would find it difficult or undesirable 

 8 to themselves to buy futures, so we are a passive 

 9 vehicle for them. 

 10 COMMISSIONER DUNN: Thank you. Later on 

 11 we'll hear from Mr. Masters. I think he's on our 

 12 third panel when we get there. He advocates that 

 13 there ought to be a 5 percent level for these 

 14 passive investors. Mr. Cicio, I think you say 

 15 there should be a 10 percent level. Mr. Graham, 

 16 you put together different levels for different 

 17 classifications of folks and I've looked at that. 

 18 One of the points that I highly agree with Mr. 

 19 Cicio on is that we need adequate funding to be 

 20 able to do this and some of the things that you're 

 21 indicating I think are going to be very, very 

 22 costly for us. I'd like to hear from all three of 

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 1 you as to what do you think is an adequate level? 

 2 Is it 5 percent or 10 percent or 40 percent? Is 

 3 there a point in time when these passive investors 

 4 then become the accidental market manipulator? 

 5 MR. HYLAND: Are you referencing the 5 

 6 percent or percent or whatever the number as a 

 7 limit for passive indexers or for anybody? 

 8 COMMISSIONER DUNN: Since I quoted Mr. 

 9 Masters, let me say no single noncommercial entity 

 10 should ever be allowed to represent more than 4 

 11 percent of the market's total open interest under 

 12 any circumstances. So in that case, that's how he 

 13 comes up with the 5 percent. 

 14 MR. HYLAND: Forget the hedge funds and 

 15 the trading desks and everybody else. I don't 

 16 work for them. We would argue that the real 

 17 question is what percentage of a commodity market 

 18 or for that matter what percentage of the S&P 500 

 19 is it acceptable from a market regulation 

 20 standpoint to be held by passive indexers in the 

 21 first place? Is it okay for 40 percent of the S&P 

 22 500 to be held by index funds, 60 percent? This 

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 1 is a question maybe some of the academics will 

 2 deal with. Within that you then have a separate 

 3 question of let's say the result is 50 percent of 

 4 a market can be held by passive indexers and the 

 5 other 50 will simply determine the price. Is 

 6 there a rational reason then to say 50 percent is 

 7 going to be held by passive indexers, from a 

 8 market regulation or a market dynamic standpoint, 

 9 does it really make any difference whether 40 

 10 percent is held by one index fund and the other 10 

 11 is held by three or they just equally split it up? 

 12 Arguably you get less liquidity if you split it 

 13 up. That's almost certainly a true statement. So 

 14 I'm not really sure what the net benefit is. 

 15 You're just going to get 10 index funds instead of 

 16 three. 

 17 COMMISSIONER DUNN: May we hear from the 

 18 other two panelists? 

 19 MR. CICIO: Commissioner, the accidental 

 20 market manipulation is here. The United States 

 21 Natural Gas Fund has 300 million shares. They're 

 22 petitioning for 1 billion. They already have 

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 1 approximately 30 percent of open interest. Those 

 2 mutualization essentially of the futures market is 

 3 going to destroy the integrity of futures. 

 4 Remember, futures is special because it needs to 

 5 reflect the underlying supply-demand fundamentals 

 6 of the commodity. We don't want this to turn into 

 7 like a stock or a bond mutual fund kind of program 

 8 here. Supply of that commodity is essential. 

 9 Getting to your question, in our 

 10 testimony we call for aggregated position limits. 

 11 We think that is the way to go. It's more 

 12 efficient and better than let's say monthly and 

 13 all months position limits. But short of 

 14 aggregated position limit limits, we have 

 15 suggested no more than 10 percent of the physical 

 16 market. 

 17 MR. GRAHAM: As a commercial 

 18 participant, we want to be able to obviously hedge 

 19 what we hold in possession from a noncommercial 

 20 participant. We certainly need the liquidity to 

 21 make the markets work. We would want to see it 

 22 limited to the point where it can't drive the 

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 1 price artificially high. Commissioner Sommers's 

 2 comment of extremely complex I think holds very 

 3 true. I don't have a percent number. I would say 

 4 it would be relatively small, but enough to give 

 5 market liquidity but not enough to fix the markets 

 6 or drive prices up. 

 7 CHAIRMAN GENSLER: Thank you, 

 8 Commissioner Dunn. Commissioner Sommers? 

 9 COMMISSIONER SOMMERS: Thank you, Mister 

 10 Chairman. I'm going to continue on this line of 

 11 questioning with Mr. Hyland and ask you if your 

 12 funds are subjected to hard position limits, how 

 13 you envision you would gain exposure for your 

 14 600,000 participants, what you would then do, your 

 15 business plan to move forward. 

 16 MR. HYLAND: Obviously it would be a 

 17 disadvantage to my shareholders because any of the 

 18 alternative choices we would go to would probably 

 19 be either more expensive, expose them to a 

 20 potential credit risk or expose them to tracking 

 21 error against the desired benchmark. Certainly 

 22 you can go OTC, certainly you can go overseas, 

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 1 certainly you can do other things. Alternative, 

 2 remember that the strongest law in Wall Street and 

 3 in Washington, D.C., is the law of unintended 

 4 consequences. One of the possibilities is our 

 5 fund would get smaller. We'd just simply have to 

 6 cap ourselves out and take some steps. All that's 

 7 going to lead to is all my competitors are going 

 8 to get larger. You are going to be in exactly the 

 9 same boat. My 600,000 shareholders may become my 

 10 300,000 shareholders and 300,000 shareholders at 

 11 Barclays. That's why I'd raise the issue. 

 12 The real question is can you actually 

 13 justify with data and not with common sense what 

 14 amount of the market can be held by passive 

 15 indexers without having the benefit of additional 

 16 liquidity be overwhelmed by some sort of 

 17 distortion to price? That's your real question to 

 18 ask yourselves. Beyond that, the question of how 

 19 many commodity EFTs share that amount is totally a 

 20 secondary question. Arguably I could just split 

 21 the fund up four ways. What does that gain 

 22 everybody? It's more expensive for my 

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 1 shareholders and liquidity goes down. In 

 2 technology there's Metcalfe's Law which says that 

 3 as connections increase you get an exponential 

 4 benefit to a network. In trading it's the same 

 5 way. The market is better with bigger pools of 

 6 liquidity and not splitting it up into smaller 

 7 pools of liquidity. 

 8 COMMISSIONER SOMMERS: Thank you. I had 

 9 a question for Mr. Cicio. In your oral testimony 

 10 you said that you thought we should ban these 

 11 funds from participation. Is there any way that 

 12 you would support them gaining this kind of 

 13 exposure in cash settled contracts out of the spot 

 14 month? Just for your views on how index funds 

 15 could gain exposure to commodity markets. 

 16 MR. CICIO: We cannot see resolution to 

 17 that. Remember, I'm sorry I'm going to repeat 

 18 this over and over again, but futures are special. 

 19 Each transaction reflects supply and demand of the 

 20 underlying commodity and when you have these lazy 

 21 EFTs, these passive funds that don't buy and sell 

 22 and are not active and proactive where they're not 

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 1 planned purchases and notification of purchases, 

 2 those things are all inconsistent with how the 

 3 futures market works. I might add that the 

 4 futures market worked great. None of my companies 

 5 complained about the futures market prior to CFMA 

 6 and the creation of enormous exemptions and we did 

 7 fine before the United States Natural Gas Fund 

 8 existed. So we are not concerned about banning 

 9 EFTs. 

 10 COMMISSIONER SOMMERS: Thank you. I 

 11 still have time for one more question for Mr. 

 12 Graham. Mr. Graham, in your written testimony you 

 13 suggest that there are electronic exchanges and 

 14 exempt transactions not regulated by the CFTC that 

 15 have been a problem, and I was wondering if you 

 16 could elaborate if this is the ECMs that you're 

 17 talking about or what other kinds of markets, if 

 18 this is OTC. 

 19 MR. GRAHAM: Our view and my view would 

 20 be they would fall in even with the regulated, 

 21 that simply we can't explain through fundamentals 

 22 looking at supply, looking at demand day in and 

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 1 day out trying to predict and trying to forecast 

 2 what the price of fuel is going to do to our 

 3 business. There just isn't a good connection 

 4 between market fundamentals and prices. So I 

 5 would categorize those with even the exchange 

 6 funds. To the extent there's excessive 

 7 speculation, the way our fuel surcharge programs 

 8 work when we have prices that used to move 4 and 5 

 9 cents in a year, now you're happy for a day when 

 10 the price only moves 4 and 5 cents. It's just 

 11 difficult for us and other trucking companies to 

 12 keep up. So my comments would be to categorize 

 13 those all together and simply say they constitute 

 14 excessive speculation. 

 15 CHAIRMAN GENSLER: Thank you, 

 16 Commissioner Sommers. Commission Chilton? 

 17 COMMISSIONER CHILTON: Thanks, Mister 

 18 Chairman. Mr. Hyland, do you have a market 

 19 intelligence and research are at your company? 

 20 MR. HYLAND: No. We're an indexer, so, 

 21 no. 

 22 COMMISSIONER CHILTON: Do you have a 

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 1 view as to what you think these price swings were 

 2 due to if not supply and demand? 

 3 MR. HYLAND: Do we want to start with 

 4 crude oil last year? 

 5 COMMISSIONER CHILTON: Crude oil last 

 6 year, you can go with it as to why is it up 60 

 7 percent with the highest supply and lowest demand 

 8 this year. 

 9 MR. HYLAND: Actually, inventory has 

 10 come in since the lows in early February. I think 

 11 there are about 370 million barrels. 

 12 COMMISSIONER CHILTON: It was 60 

 13 percent, we had the lowest demand and highest 

 14 supply maybe it was a month ago or so and it was 

 15 up 60 percent. I think prices are still up 60 

 16 percent. I think it closed at $71.17 yesterday. 

 17 MR. HYLAND: Two comments. First, 

 18 remember that since early February USO has been a 

 19 large-scale seller. So any attempt to suggest 

 20 that the run-up in price was USO is gibberish. 

 21 COMMISSIONER CHILTON: I wasn't casting 

 22 and aspersions. I was asking what do you think it 

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 1 is? You think it's not you. 

 2 MR. HYLAND: I know it's not me. 

 3 COMMISSIONER CHILTON: What is it? 

 4 MR. HYLAND: Remember, we're indexers. 

 5 I don't care whether oil goes to 100 or it goes to 

 6 50. It doesn't make any difference to me. I'm an 

 7 indexer. I just follow it. I'm not surprised at 

 8 the run-up. You have to remember that in early 

 9 February the world was coming to an end. 

 10 Everything was going to hell in a hand basket. 

 11 Now the world is not coming to an end. So is 

 12 anybody really surprised that the price of oil has 

 13 gone up? Remember, Americans are still caught up 

 14 in this whole thing that American demand is down 

 15 and the next thing. The marginal price is no 

 16 longer being determined exclusively by what goes 

 17 on in the United States. It's China, it's India, 

 18 it's other people. Was I bit surprised that we 

 19 ran from $38 to $70 in this timeframe? I thought 

 20 it was a little premature because I'm not a big 

 21 proponent of green shoots at the moment. But if 

 22 you believe in green shoots, this is rational. 

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 1 The inventory has come in significantly 

 2 from where it was in February. Cantango has 

 3 shrunk dramatically as a result. This is not all 

 4 that irrational. And to the comments that there's 

 5 volatility, everything is more volatile in these 

 6 last 2 years. Your home price is more volatile. 

 7 The price of GM stock is more volatile if it still 

 8 trades. Why anybody would for the slightest 

 9 reason believe that somehow commodities were going 

 10 to go off on their own little path while what 

 11 happened in September and October occurred, of 

 12 courses the price of commodities collapsed and 

 13 with people believing that maybe there are green 

 14 shoots if not this year, next year, the price is 

 15 coming back up. If the green shoots are real, 

 16 maybe oil goes to $100. If the green shoots 

 17 aren't real, oil goes back to $40 or $50. 

 18 COMMISSIONER CHILTON: Mr. Cicio, what 

 19 do you say about that? 

 20 MR. CICIO: Futures is a special market 

 21 and it is based on the fundamentals of supply and 

 22 demand of a given commodity in a given point in 

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 1 time. When you have lots and lots of production 

 2 in the case of natural gas, plenty of inventory 

 3 and lower demand, one can mock the common sense 

 4 point of view, but if there's more supply than 

 5 demand, prices should fall. So we know that there 

 6 is something going on here that is interfering 

 7 with price formation. 

 8 COMMISSIONER CHILTON: We don't have all 

 9 the answers and this is why we're doing this, but 

 10 a lot of times I think that the questions needed 

 11 to be reversed. Somebody will say you can't prove 

 12 that excessive speculation has this amount of a 

 13 percentage. Turn it around. Prove that it's not. 

 14 Again, as the Chairman has talked about both at 

 15 the first hearing and again today, the statute 

 16 requires us to be adaptive and to guard against 

 17 possibilities. So a possibility that something is 

 18 happening is something that is in our charge, our 

 19 mission, our mandate, or mantra, if you will, to 

 20 guard against. 

 21 I'd like to turn the question around 

 22 some times and I know we'll have panelists that 

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 1 will do that later. Prove that excessive 

 2 speculation isn't having an impact. There's a key 

 3 word here and a lot of times, I talked about this 

 4 the other day, I think people talk past each 

 5 other, that there's a difference between driving 

 6 prices and having an impact. So just because 

 7 excessive speculation whatever that is may not be 

 8 driving prices doesn't mean that there might not 

 9 be some sort of impact. I think what the Chairman 

 10 started off this round of questions with was that 

 11 some common ground is important because for me if 

 12 it has the potential to have some uneconomic 

 13 impact divorced from supply and demand, it's 

 14 something we need to be looking at. I'm not 

 15 predisposing what we're going to do, but it seems 

 16 that's our responsibility in our jobs. We're not 

 17 businesses. We have lots of motives. But as I 

 18 said last week, none of those involved the word 

 19 profit. Thank you. 

 20 CHAIRMAN GENSLER: Thank you, 

 21 Commissioner Chilton. As you can see, we'll have 

 22 some more questions. I'm going to try to start 

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 1 with Mr. Graham in my round. I take it, Mr. 

 2 Graham, that you're recommending that we do adopt 

 3 position limits. Is that correct? 

 4 MR. GRAHAM: Yes, I would say that's 

 5 correct, but being very careful to say we know 

 6 there must be speculation to create market 

 7 liquidity. We need that market liquidity. 

 8 Without it there's a problem. 

 9 CHAIRMAN GENSLER: Right. By the way, I 

 10 agree with you that speculators are an important 

 11 part of our functioning capital markets and our 

 12 functioning futures markets as you said. But I 

 13 also take it that you suggest that you would still 

 14 want, and maybe you could explore this with us, 

 15 limits on the swap dealers as well, these position 

 16 limits would be set on swap dealers, but as I read 

 17 your testimony, you would have some pass through 

 18 that if the swap dealer had commercial hedgers on 

 19 the other side, if you could just tell me a little 

 20 bit more about that. 

 21 MR. GRAHAM: I'm certainly not an expert 

 22 on how these markets work, but to the extent a 

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 1 swap hedger has customers who are wanting to hedge 

 2 a physical product using oil as a surrogate, 

 3 certainly those swap hedgers would not be limited 

 4 by a certain percentage or a certain amount. If a 

 5 trading company had as a customer one of our 

 6 shippers who ultimately pays us for the fuel that 

 7 we burn in our trucks, certainly we would want 

 8 that shipper to be able to go to a trading company 

 9 had have those treated as a hedge position as a 

 10 commercial position. 

 11 CHAIRMAN GENSLER: That is helpful. Mr. 

 12 Hyland, by green shoots are you referring to 

 13 something that Larry Kudlow refers to at CNBC? 

 14 The only reference for my staff to green shoots 

 15 was something about Mr. Kudlow, so maybe you could 

 16 tell me. 

 17 MR. HYLAND: I was under the impression 

 18 that the green shoots reference was a common 

 19 reference about nascent economic recovery of the 

 20 economy. 

 21 CHAIRMAN GENSLER: I see. That's what 

 22 you're saying. 

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 1 MR. HYLAND: If you believe that's 

 2 coming, oil prices are completely rational in my 

 3 view as somebody who doesn't really care whether 

 4 oil goes to $100 or $50. If you don't believe 

 5 it's coming, then oil prices are going to go back 

 6 down and I think that's rational as well. 

 7 CHAIRMAN GENSLER: Did I take it that 

 8 you said that you're somebody who doesn't care of 

 9 oil goes to $150? 

 10 MR. HYLAND: I'm an indexer. If it goes 

 11 to $150 or if it goes to $30, it's pretty much the 

 12 same to me and my job is to follow it. If you 

 13 actually looked at the filing we did, however, 

 14 professionally we have a slight benefit because 

 15 clearly the data shows that we get more 

 16 shareholders as the price falls and we get fewer 

 17 shareholders as the price rises. I'm better off 

 18 it oil goes to $10 personally, but from a forecast 

 19 standpoint, oil seems rational if you believe the 

 20 economy is going to go up. 

 21 CHAIRMAN GENSLER: I think that's the 

 22 best indication that you're a price taker and as 

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 1 an indexer you're saying that your business model 

 2 is whatever it goes to. You said something 

 3 earlier, I'll probably get one last question. You 

 4 said you believe that markets are better when 

 5 there are bigger pools of liquidity and I took 

 6 that to mean that if the U.S. Natural Gas Fund was 

 7 bigger instead of being its current portion of the 

 8 market, it's a bigger portion of USO is bigger, 

 9 that somehow markets would be better. I don't 

 10 really understand that because to me that's not a 

 11 bigger pool of liquidity, that's one party with a 

 12 bigger market share and the bigger the market 

 13 share is -- do you have any studies you can point 

 14 to that the bigger the market share somebody is 

 15 provides more liquidity? I'm using the word 

 16 liquidity because you did. 

 17 MR. HYLAND: The fallacy is you're still 

 18 thinking of us as a single position. We're not. 

 19 View us this way instead. 

 20 CHAIRMAN GENSLER: I thought you were 

 21 referring to markets work better with bigger pools 

 22 of liquidity. So you weren't referring to any 

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 1 participant, you're just referring to you as an 

 2 exchange traded fund? 

 3 MR. HYLAND: Think of USO or UNG as 

 4 contributing pools of liquidity to the broader 

 5 market. If you fractionalize them, the aggregate 

 6 amount of liquidity being provided by shareholders 

 7 through these pass through vehicles will decline 

 8 because if you take four liquidity pools and add 

 9 them up -- 

 10 CHAIRMAN GENSLER: I'm sorry, Mr. 

 11 Hyland, my time is almost up. I get that you 

 12 don't want more index funds because it would be 

 13 better for your business model if you don't have 

 14 competitors. You'd earn your 60 basis points and 

 15 45 basis points. My question is you're a man of 

 16 finance. Just broadly speaking, do you think that 

 17 markets work better if there are only two or three 

 18 or four participants that are the big market 

 19 players, or does it work better for liquidity if 

 20 you have 10 or 20? 

 21 MR. HYLAND: Not to be difficult, but I 

 22 think you're trying to categorize us as saying 

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 1 what if there were three or four hedge funds and 

 2 they dominated the market and you're kind of 

 3 lumping us in with them. That's not probably the 

 4 analogy we're driving for. 

 5 CHAIRMAN GENSLER: I have to turn to 

 6 another Commissioner, but that is at the core of 

 7 at least this Commissioner's thinking, we're 

 8 supposed to protect and promote fairness and 

 9 orderly markets and what's at the core of our 

 10 agricultural limits is that there's got to be at 

 11 least a minimum number of actors on the stage. 

 12 MR. HYLAND: I have 600,000 actors. 

 13 That's a hell of a lot more than probably play in 

 14 most markets. 

 15 CHAIRMAN GENSLER: I'm going to turn to 

 16 Commissioner Dunn. 

 17 COMMISSIONER DUNN: Thank you, Mister 

 18 Chairman. Let me start on this end of the panel 

 19 this time, Mr. Graham. In your written testimony 

 20 you say, "It is critically important that 

 21 investment banks, hedge funds, swap dealers and 

 22 other market makers whose analysts offer 

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 1 predictions on commodity prices be required to 

 2 prominently disclose their net positions that they 

 3 and their customers hold at the same time that the 

 4 analysts' position is offered. The concept of 

 5 establishing a Chinese Walls between a firm's 

 6 analysts has not worked and these entities should 

 7 not be allowed to manipulate the market by holding 

 8 positions and then issuing an analysis that fairs 

 9 their positions." Could you amplify on that on 

 10 why you think that is important? 

 11 MR. GRAHAM: I think by saying that 

 12 we're simply saying as I talk to folks in our 

 13 industry we hear people saying oil is going to 

 14 $200 a barrel. Shippers and other trucking 

 15 companies get concerned when they see that. They 

 16 believe that maybe there is some truth that. If 

 17 the person who's making that statement benefits by 

 18 making that statement, that would be to me market 

 19 manipulation. I'm not a lawyer and I don't fully 

 20 understand what manipulation means from a legal 

 21 standpoint, but it would appear to me that that is 

 22 manipulating to try to drive prices higher. We're 

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 1 not opposed to analysts making those comments, but 

 2 if you're long in the market before you make those 

 3 comments, we believe you should disclose that you 

 4 have taken that long position to add perspective 

 5 and balance to the analysis that you're providing. 

 6 Does that make sense? 

 7 COMMISSIONER DUNN: I understand your 

 8 concept. We had heard an earlier panel say that 

 9 these firewalls exist but they are internally 

 10 regulated. Would you feel more confident if an 

 11 outside entity such as the CFTC had control over 

 12 that regulation? 

 13 MR. GRAHAM: I heard unintended 

 14 consequences said earlier, and I think be careful 

 15 what you wish for. That's something I would be 

 16 very cautious with, but I think it's something 

 17 that certainly should be considered and looked 

 18 into, but too much control would not be a good 

 19 thing either. 

 20 COMMISSIONER DUNN: Again I'd like to 

 21 thank you for your very, very thoughtful testimony 

 22 because you actually went through and gave us some 

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 1 examples of how you thought that speculation 

 2 limits ought to be set for various categories and 

 3 that was helpful. I would like folks to know that 

 4 annually there are about 6.6 billion trades in the 

 5 futures and options markets and about 10 percent 

 6 of those or 11 percent of those are in the energy 

 7 area. Again picking up on Mr. Cicio's testimony, 

 8 for us to be able to do the types of things that 

 9 are being advocated, it would be very, very human 

 10 and fiscal intent would be tremendous and I want 

 11 people to know that and I would ask you are you 

 12 willing to pay a transaction fee to ensure that 

 13 you've got that type of oversight? 

 14 MR. GRAHAM: Wanting to? No. Willing 

 15 to? That's a hard one to answer. Certainly we 

 16 don't want to, but certainly within reason we 

 17 understand that that possibility exists. A small 

 18 fee, maybe. Willing? Yes. Wanting? No. 

 19 COMMISSIONER DUNN: That was such a 

 20 great answer, I won't ask anybody else that 

 21 question. There has been a little banter back and 

 22 forth about the types of data that is included in 

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 1 whether or not conclusions are based on empirical 

 2 data. Mr. Graham, you said that spec limits is 

 3 the only other variable, and Mr. Cicio, you said 

 4 it was common sense. Later on we're going to hear 

 5 from a panelist who says a good part of this is 

 6 the result of environmental regulations. Did you 

 7 two take that into consideration when you looked 

 8 at your testimony? 

 9 MR. GRAHAM: As you raise it, that's an 

 10 interesting question to think about. Did I take 

 11 that into consideration? No. The impact of ultra 

 12 low sulfur diesel, biodiesel, it's a good 

 13 question. I didn't think about it. 

 14 MR. CICIO: No, sir, I'm sorry we didn't 

 15 consider that. 

 16 CHAIRMAN GENSLER: Thank you, 

 17 Commissioner Dunn. Commissioner Sommers? 

 18 COMMISSIONER SOMMERS: Thank you, Mister 

 19 Chairman. My question is for Mr. Cicio. In your 

 20 written testimony you state that you believe the 

 21 CFTC has the existing authority to implement 

 22 position limits. I was wondering if you have a 

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 1 view on more specifically how we would impose 

 2 those limits on the OTC market, whether or not we 

 3 use our information through the special call, how 

 4 you impose limits on swap dealers, on the ultimate 

 5 end user commercial hedger that may go through a 

 6 number of different swap dealers, if you have any 

 7 views on those complexities. 

 8 MR. CICIO: Thank you for that question. 

 9 We have not sufficiently put pen and paper 

 10 together to address the details of those important 

 11 questions, so unfortunately I can't answer that 

 12 question. They are all the right questions. We 

 13 had assumed that after these hearings there would 

 14 be opportunities driven by the CFTC asking those 

 15 specific details for us to respond to. 

 16 COMMISSIONER SOMMERS: The next question 

 17 is for Mr. Graham and this goes back a little bit 

 18 to what Commissioner Dunn was asking you about 

 19 your specific views on how to impose these limits, 

 20 and you did give us some very detailed 

 21 recommendations on your views. One of the views 

 22 is that the swap dealers' and market makers' 

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 1 position limits should rise and fall depending 

 2 upon the trades they exercise for their clients. 

 3 I'm wondering if you could elaborate on how that 

 4 would work for either their commercial clients, 

 5 their own internal book, how we would do that. 

 6 MR. GRAHAM: Our position would be for 

 7 the swap dealers who are in position to support 

 8 commercial participants whether a trucking company 

 9 is adding trucks and growing the size of their 

 10 fleet, other fundamentals that would increase and 

 11 decrease the amount of product they actually 

 12 consume, we want the swap dealers to have the 

 13 flexibility to increase based on those market 

 14 changes. I think that's all that I was trying to 

 15 say with that. We don't have a steady need at all 

 16 times. Our business goes up and down and we just 

 17 want to be able to flex up and down, and so the 

 18 extent the swap dealers are working with a 

 19 participant who consumes the product, they need to 

 20 increase and decrease those amounts. 

 21 COMMISSIONER SOMMERS: As a follow-up, I 

 22 want to make sure that I'm understanding this 

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 1 correctly. Do you think that the position should 

 2 be imposed on the dealer, not looking through to 

 3 the end user, or are you saying that the end 

 4 user's need or limit may rise and fall? 

 5 MR. GRAHAM: I think the end user's 

 6 limit may rise and fall and if the dealer that 

 7 they're working through is acting on their behalf, 

 8 then they would be able to rise and fall the same 

 9 amount. 

 10 COMMISSIONER SOMMERS: Do you know if 

 11 trucking companies and members of ATA use a number 

 12 of different dealers for their business? I'm just 

 13 wondering how that would work. 

 14 MR. GRAHAM: I know that we do, so I 

 15 would believe it would be safe to assume that they 

 16 would as well. 

 17 COMMISSIONER SOMMERS: How would that 

 18 work? If you're using a number of different 

 19 dealers, how does that work if we're imposing the 

 20 limit on the dealer? 

 21 MR. GRAHAM: I guess that gets into the 

 22 reporting requirements and the transparency 

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 1 requirements. Before I dig myself into too much 

 2 of a hole, I dealt with from my perspective of 

 3 having to buy and to explain to customers why 

 4 prices go up and down, some of my written 

 5 contributions were about the realities of what 

 6 happens, the how to. I must admit that I don't 

 7 claim to be an expert on that area. 

 8 COMMISSIONER SOMMERS: That's okay. 

 9 Thank you. I appreciate your views. 

 10 CHAIRMAN GENSLER: Thank you, 

 11 Commissioner Sommers. Commissioner Chilton? 

 12 COMMISSIONER CHILTON: A question for 

 13 Mr. Graham. In your testimony you talk about how 

 14 1 cent equals $397 million to the trucking 

 15 industry, a 1 cent increase in diesel. I want to 

 16 highlight that only because what I was saying 

 17 earlier about even if there is just a little 

 18 impact that it can have a big reverberation in 

 19 individual sectors of our economy and in the 

 20 aggregate. So thank you for that. But Mr. 

 21 Graham, with regard to position limits, do you 

 22 think there ought to be additional categories 

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 1 beyond the commercial and noncommercial categories 

 2 that we currently look at? 

 3 MR. GRAHAM: At the risk of being 

 4 difficult or not, having good knowledge of the 

 5 breadth of the topic, as a trucker who has to buy 

 6 the fuel, we're very sensitive to price 

 7 volatility, probably more to the volatility than 

 8 the absolute price as it goes up and down, and 

 9 there are probably other users who have legitimate 

 10 needs that I'm not aware of. I try to represent 

 11 our industry and probably don't have the breadth 

 12 to represent others. 

 13 COMMISSIONER CHILTON: You're doing a 

 14 good job. Mr. Cicio, since you support aggregate 

 15 position limits, do you think traders in other 

 16 physical commodities like metals, and I know 

 17 that's not your particular area of expertise, but 

 18 generically do you see a reason why we should 

 19 treat them differently? A follow-on to that is do 

 20 you think there is a difference between the 

 21 physical and the financials? Should we be looking 

 22 at them all the same? Are there important things 

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 1 that distinguish them each? 

 2 MR. CICIO: The futures market is about 

 3 supply- and-demand fundamentals of a given 

 4 commodity, so these basics that we've been talking 

 5 about should apply to all futures markets, metals 

 6 included. The question on the financial 

 7 organizations, every transaction, every player is 

 8 linked in market dynamics, so we need the same 

 9 rules of the road that apply to all players. The 

 10 key here to making this market work the way it is 

 11 supposed to is ensuring that each transaction, 

 12 when we get to this issue of exempt financial 

 13 transactions without position limits, I think 

 14 we've been too lax in giving exemptions away that 

 15 are not necessarily tied directly to the 

 16 underlying commodity and that has caused a big 

 17 part of our problem. So everybody needs to be 

 18 included with the same rules of the road. 

 19 COMMISSIONER CHILTON: Mr. Hyland, I'm 

 20 going to go back to what the Chairman was asking 

 21 about disaggregation of funds. I realize that you 

 22 have a parochial interest and I respect and good 

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 1 for you for having a thriving business. But why 

 2 would it be a bad idea to have more competition in 

 3 these markets? I know you're not going to be able 

 4 to take your hat off, but if you can just a little 

 5 bit, why would that be a bad idea to have more 

 6 competition in these markets? 

 7 MR. HYLAND: Aggregate liquidity in the 

 8 natural gas, crude oil or whatever our market is 

 9 will drop which will increase price volatility. 

 10 That's the simple answer. 

 11 COMMISSIONER CHILTON: Yes, but you said 

 12 that somebody else would pick it up, either your 

 13 competition or you would make it into four funds. 

 14 So the money would still be there. If you have 

 15 four funds and they're all yours it's just a shell 

 16 game. 

 17 MR. HYLAND: Aggregate liquidity would 

 18 still drop. Look at the other way. If you have 

 19 four pools and each has X amount of liquidity and 

 20 then you combine it into one pool, you don't have 

 21 4X liquidity, you have 8X liquidity or 12X 

 22 liquidity. As I referenced in technology that's 

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 1 known as Metcalfe's Law, and I'm sure one of the 

 2 academics can give you a similar name for this 

 3 function. So are you fractionalize it and 

 4 liquidity goes down, volatility goes up. Whether 

 5 that actually changes the ultimate price outcomes 

 6 except at the extremes is a more difficult 

 7 question. Clearly, the behavior over the last 2 

 8 years of the passive index funds have been to 

 9 dampen the volatility because we were net sellers, 

 10 oil prices were rising and net buyers and prices 

 11 were falling. The more you interrupt that, you're 

 12 just buying yourself more volatility and less 

 13 liquidity and that's going to be probably a bad 

 14 thing I would think. 

 15 COMMISSIONER CHILTON: Thank you. 

 16 CHAIRMAN GENSLER: Thank you, 

 17 Commissioner Chilton. With the patience of other 

 18 panelists, at least the Chairman has some more 

 19 questions. So I think we're going to have a third 

 20 round, but it will be the last round. And with 

 21 the patience of Mr. Graham and Mr. Cicio, I do 

 22 want to come back to what you were just talking 

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 1 about with Mr. Chilton. I think we have a 

 2 difference, you and I, in terms of liquidity. I'm 

 3 not familiar enough with the law that you just 

 4 cited in technology, but what you're suggesting is 

 5 that if one party internalizes the extreme, the 

 6 whole market, there would be more liquidity. I 

 7 don't think so at all. I think if one party 

 8 whether it's a hedge fund, whether it's a large 

 9 financial institution or even an exchange traded 

 10 fund internalizes all of that liquidity then the 

 11 tens of thousands of other users don't get to see 

 12 the bids and the offers, they don't get to see the 

 13 marketplace, and there's not competition. We 

 14 would say that the auto industry would be more 

 15 efficient if there were only one auto supplier or 

 16 the trucking industry would be more efficient if 

 17 there were only one trucking company or airline. 

 18 We could. And somebody might say that and they 

 19 might even quote some law on technology. But in 

 20 markets which I've been around for my whole adult 

 21 life, I believe that competition in markets is a 

 22 good thing, and as I said, we promote that 

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 1 elsewhere in the antitrust laws. So there just 

 2 may be a difference. I don't know if you want to 

 3 reply, but I'd love to know if there is an 

 4 individual study you can point to that says that 

 5 trading markets, capital markets or futures 

 6 markets, are better off if you had fewer actors. 

 7 MR. HYLAND: I'll leave that. I know 

 8 that you have at least one academic coming up on a 

 9 later panel. I'll leave him for the studies. 

 10 CHAIRMAN GENSLER: Do I take it your 

 11 answer is you are not familiar with any study? 

 12 MR. HYLAND: No. Like you though, I've 

 13 been in the markets a long time and I'm pretty 

 14 sure if you fractionalize markets that you get 

 15 less liquidity and not more. 

 16 CHAIRMAN GENSLER: Mr. Hyland, you say 

 17 fractionalize. We're not talking about putting 

 18 one market in the U.S. and one market on the moon. 

 19 We're talking about one market that has more 

 20 participants or fewer participants. That's not 

 21 fractionalizing a market. It's bringing to one 

 22 market, hopefully it's still a global market, 

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 1 these are pretty significant markets, but just 

 2 more actors on that stage. 

 3 MR. HYLAND: View USO or UNG not as an 

 4 actor but as a specialized form of exchange where 

 5 every day 30 or 40 million shares get traded that 

 6 represent equitized versions of the futures. It's 

 7 a highly efficient market and the bigger it gets 

 8 the more efficient it becomes and more liquid it 

 9 becomes. If you were to take it and split it up 

 10 four ways, you don't go from 40 million shares 

 11 trading a day to 10 million each, you go to 5 

 12 million each. 

 13 CHAIRMAN GENSLER: What if I stipulate 

 14 I'm not talking about exchange traded funds. I'm 

 15 trying to get your best expert thought about 

 16 markets and liquidity in markets. 

 17 MR. HYLAND: If the question was if you 

 18 had a limited number of participants who were sole 

 19 directors of their trading rather than the EFTs 

 20 which are really balancing these 40 million 

 21 trades, then you're going to end up in the 

 22 scenario that's going to look remarkably like iron 

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 1 ore where there are three non-American companies 

 2 that are the buyers, the Chinese steel companies, 

 3 and there are three non-American producers, and 

 4 those six people decide the price of iron ore for 

 5 everybody and there is no real futures market. In 

 6 a sense, if you follow some of the logic that some 

 7 of the other have suggested, that's the direction 

 8 you go. When people say let's get rid of those 

 9 evil speculators, as Commissioner Chilton said, 

 10 let's turn that around. What you're really saying 

 11 is the only people who should be allowed to trade 

 12 crude oil are oil companies and Morgan Stanley? 

 13 I'm not sure that's a good idea either. You want 

 14 lots of participants. I've got 600,000 of them in 

 15 my little subpocket which funnel liquidity and 

 16 price discovery and all these other things into 

 17 the broader market. Split it up and you get less 

 18 of that beneficial impact and volatility will 

 19 rise. 

 20 CHAIRMAN GENSLER: As I suspect, we 

 21 still have a difference between us. 

 22 MR. HYLAND: Yes. 

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 1 CHAIRMAN GENSLER: Commissioner Chilton 

 2 was I think not accurately quoted there. But in 

 3 any event, Mr. Cicio, did you have a comment on 

 4 our little back and forth here? 

 5 MR. CICIO: Yes, sir, Mister Chairman, I 

 6 do. As I said earlier and I stand by it, my 

 7 companies and my boards of directors are made up 

 8 of the top energy managers in these companies and 

 9 they represent the largest integrated steel 

 10 companies, recycled steel companies, paper 

 11 companies, commodities, chemicals, fertilizers, 

 12 specialty food processors, you name it, brick, 

 13 cement. These individuals will tell you that 

 14 prior to the CFMA and prior to EFTs the markets 

 15 worked just fine. The market worked better 

 16 without them. I think that if we longer had EFTs 

 17 the market would work just fine. We support the 

 18 idea that multiple players participating in this 

 19 market with transactions that are tied to the 

 20 commodity is what makes this market a great 

 21 market. 

 22 CHAIRMAN GENSLER: Thank you. I have no 

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 1 further questions. Commissioner Dunn? 

 2 COMMISSIONER DUNN: Thank you. First I 

 3 want to thank some great staffing that I've had 

 4 here. The Chairman has pointed out that I have 

 5 been mispronouncing Mr. Cicio's name. I apologize 

 6 for that. On an earlier panel, John Lothian was 

 7 here and gave us a hard time about how we 

 8 pronounced his last name. Unfortunately, John 

 9 writes a newsletter and he pointed out that I used 

 10 an M at the end of his name and he asked how would 

 11 I like that if he did the same to me. It doesn't 

 12 work out with Dunn very well. 

 13 The other great staffing from Jason 

 14 Gizzarelli who is the staff member who sits behind 

 15 me here pointed out when I said there were 6.6 

 16 billion trades, what I had inadvertently done was 

 17 in the notes that he had given me on the trading 

 18 that takes places, there's 2.8 billion in futures 

 19 and 5.12 million in options and the total he wrote 

 20 down was 3.3 billion and in my exuberance I added 

 21 all three figures. So I doubled it. So it was 

 22 only 3.3 billion, but almost 11 percent of that is 

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 1 in energy and it's still a large number. 

 2 Mr. Hyland, in your testimony you 

 3 indicate that the CFTC staff has granted no action 

 4 letters to two index based funds and you said that 

 5 you thought we ought to do ahead and codify that 

 6 and also extend it to positions to single 

 7 commodity tracking funds or the funds itself. I 

 8 understand what you're recommending here, but my 

 9 point is that this Commission as a lot of 

 10 Commissions do, do things on a shorthand method 

 11 sometimes by the no action caveat. I have trouble 

 12 with that because often times that is interplay 

 13 that goes on between Commission staff and the 

 14 person or entity that asks for that no action 

 15 letter. I think you make an excellent suggestion 

 16 that it ought to be codified. That to me means 

 17 rule making through the Administrative Procedure 

 18 Act that would allow all of the participants that 

 19 may be affected by this an opportunity to have 

 20 insight and make comment on that. Does the panel 

 21 feel that this is a better way? Senator Sanders 

 22 when he was here was very adamant about what we 

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 1 ought to be doing with no action letters. So 

 2 could I hear from the panel on that? 

 3 MR. CICIO: Yes, sir. We think that 

 4 would be a terrific step forward. 

 5 MR. GRAHAM: The same. 

 6 MR. HYLAND: I would agree. 

 7 Commissioner Chilton had raised the issue 

 8 concerning do there need to be more categories. 

 9 Let's be blunt. The current setup is pretty 

 10 outdated. It never envisioned that there would be 

 11 swap dealers. I'm not a swap dealer, but I think 

 12 there probably should be codified rules for them 

 13 that distinguish them from both 

 14 speculator/investors and from commercial 

 15 participants. They should have their own rules. 

 16 They should have a brand new set of reporting 

 17 requirements. I think there should be a separate 

 18 designation for those that are pass through 

 19 vehicles like ourselves. I think it's long 

 20 overdue to really kind of bring this setup, so we 

 21 would absolutely agree that it needs to be brought 

 22 into the 21st century. 

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 1 CHAIRMAN GENSLER: Thank you, 

 2 Commissioner Dunn. Commissioner Chilton? 

 3 COMMISSIONER CHILTON: Just briefly. 

 4 Thank you for that. Mr. Hyland, you said I think 

 5 in your testimony that you're highly regulated. 

 6 How does that impact you on a daily or weekly 

 7 basis? The accountability levels don't appear to 

 8 be regulating you. Right? 

 9 MR. HYLAND: We're subject to them. 

 10 I've had people say we're not subject to position 

 11 limits. We are. We're not subject to 

 12 accountability. We're subject to them. 

 13 COMMISSIONER CHILTON: But they're not 

 14 enforced. 

 15 MR. HYLAND: That's discretion that the 

 16 CFTC has granted the exchanges and the exchanges I 

 17 think have looked at our flow through nature and 

 18 have heretofore not seen the issue that perhaps 

 19 others have. I'm not going to badmouth the 

 20 exchanges. They might get mad at me, but it's 

 21 just the way it is. 

 22 COMMISSIONER CHILTON: I'm sorry to 

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 1 interrupt. What I'm curious about is if you set 

 2 up different categories, and I agree with you that 

 3 I think it's outdated and we need to look at 

 4 things differently, but how would you develop a 

 5 limit if we decided to develop sort of a hard 

 6 limit for EFTs? You say that they're not 

 7 impacting, so maybe your answer is there is no 

 8 limit, everybody else has a limit, but not us. 

 9 MR. HYLAND: I like that idea. 

 10 COMMISSIONER CHILTON: I thought you 

 11 would. 

 12 MR. HYLAND: The overarching question, 

 13 and I think it's probably may also be similar to 

 14 the issue of swap dealers who are essentially flow 

 15 through, they have people on the other side of the 

 16 swap, so I think you really need to be looking at 

 17 them, and with us you really need to be looking at 

 18 our shareholders and you need to change the rules 

 19 to make that permissible. The real ultimate 

 20 question is based on actual hard evidence, what 

 21 percentage of the total market will you conclude 

 22 can safely be held in aggregate by passive 

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 1 indexers, that number could be a number anywhere 

 2 from 20 percent to 90 percent, and you can talk to 

 3 the SEC about how they feel about S&P 500 index 

 4 funds. Once you've got that worked out, I then 

 5 think you have to decide how you envision this 

 6 aggregate position being parceled out among one or 

 7 multiple players or do you just let the market 

 8 decide, because the market's preference is one big 

 9 player because there's more liquidity that way. 

 10 That's why EFTs invariably end up in any given 

 11 sector, stocks, bonds, commodities, you end up 

 12 with one big player and several small players 

 13 because everybody wants to trade in the big 

 14 swimming pool. Nobody wants to trade in the 

 15 wading pool. You have to decide whether you want 

 16 to let the market determine that or whether you 

 17 want to impose something by fiat. 

 18 COMMISSIONER CHILTON: Thank you. Your 

 19 testimony has actually been very helpful, all of 

 20 you, but your testimony has been helpful, Mr. 

 21 Hyland. I did want to clarify what I was saying 

 22 earlier. You tried to paraphrase me. I'm not 

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 1 suggesting that we only need commercials in these 

 2 markets. I think we need all players. This 

 3 Commission has never been about saying you're not 

 4 tall enough to ride. But we may have said you 

 5 have to go with an adult or we have to put certain 

 6 sidebars on the trading. So speculation isn't a 

 7 four letter word and if people want to do it they 

 8 should be free to do it, but from my personal 

 9 perspective, I'm just concerned that there is an 

 10 unintended consequence of the aggregate long only 

 11 or passive speculation. I'm not suggesting that 

 12 it's the driving and it's the only force there, 

 13 but as I said earlier to Mr. Graham, even just a 

 14 little bit can have a huge impact on industries or 

 15 on our economy and it's our job to look out for 

 16 this and hopefully we're going to get it right. 

 17 So I thank you all. 

 18 CHAIRMAN GENSLER: I thank our 

 19 panelists, and I apologize to Mr. Hyland, I didn't 

 20 know if you wanted to clarify. The last thing you 

 21 said about the exchanges because you're in a 

 22 public hearing, did you want to clarify the 

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 1 exchanges -- there are two of them that you trade 

 2 on I know, ICE and NYMEX -- have said to you about 

 3 position limits or your size on each of their 

 4 respective markets? 

 5 MR. HYLAND: No. 

 6 CHAIRMAN GENSLER: No, you don't want to 

 7 clarify? 

 8 MR. HYLAND: Our general comment was 

 9 that obviously there are position limits are under 

 10 the current rules not really applicable to us. We 

 11 never hold far enough into them. There are 

 12 accountability limits. We have discussions with 

 13 the exchanges on these topics. Some people have 

 14 represented that we're not subject to them. We 

 15 are subject to them but it's at their discretion 

 16 and obviously we have ongoing discussions. What 

 17 the actual nature of those discussions are we 

 18 wouldn't publicly comment on because it has 

 19 potential unintended consequences and I'm sure the 

 20 exchanges would feel the same. 

 21 CHAIRMAN GENSLER: I thank all of our 

 22 witnesses and for your patience. We've got this 

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 1 little green light system over here. If you'll 

 2 watch it and if you're submitted some very 

 3 detailed and expert testimony, but if you could 

 4 try to summarize it would be great in 5 minutes 

 5 and then we'll try to keep ourselves to that same 

 6 discipline. Mr. Chambers? 

 7 MR. CHAMBERS: Mister Chairman and 

 8 fellow Commissioners, thank you for the 

 9 opportunity to testify today. I'm Elliot 

 10 Chambers, Corporate Finance Manager for Chesapeake 

 11 Energy Corporation. In that capacity, I am 

 12 responsible for Chesapeake's risk management 

 13 activities including out use of over-the-counter 

 14 or OTC derivatives. 

 15 I'd like to begin by saying that 

 16 Chesapeake Energy Corporation appreciates and 

 17 encourages regulatory efforts to prevent excessive 

 18 market speculation. As an end user that 

 19 extensively utilizes OTC commodity derivatives as 

 20 a vital risk management tool, we strongly support 

 21 increased transparency, accountability and market 

 22 integrity. Chesapeake is the most active -- and 

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 1 the largest producer of U.S. natural gas. As 

 2 such, we play a significant role in helping 

 3 enhance America's energy independence. Notably, 

 4 we reinvest 100 percent of our free cash flow 

 5 directly into finding and producing clean burning 

 6 natural gas right here in the United States. 

 7 With average daily natural gas 

 8 production of approximately 2.2 billion cubic feet 

 9 per day or about 3-1/2 percent of total U.S. 

 10 production, Chesapeake Energy's industry leading 

 11 efforts have helped the nation achieve 

 12 extraordinary growth in natural gas production and 

 13 reserves. Currently, Chesapeake has approximately 

 14 12-1/2 trillion cubic feet equivalent of proven 

 15 reserves and an inventory of over 36,000 net 

 16 drilling locations. In short, we have a lot of 

 17 natural gas to produce. 

 18 One of the reasons we are here today is 

 19 because commodity prices can be extremely volatile 

 20 with natural gas being no exception. For example, 

 21 on June 30, 2008, the NYMEX natural gas spot price 

 22 was approximately $13 per MMBtu. As of Friday, 

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 1 July 31, 2009, that price is approximately $3.60, 

 2 representing a 72 percent drop. Given such market 

 3 volatility and our active exploration and 

 4 production program, we heavily utilize risk 

 5 management tools such as OTC derivatives to 

 6 provide cash flow certainty while never creating 

 7 additional exposure through speculation. Without 

 8 the benefit of stability in our cash flow, whether 

 9 we drill one additional well or develop a new 

 10 potential gas field becomes a very problematic 

 11 decision. A prime example that our risk 

 12 management strategy helps enhance U.S. energy 

 13 independence can be seen with our discovery and 

 14 announcement of the Haynesville shale natural gas 

 15 plain in March 2008. The Haynesville in Louisiana 

 16 and Texas is possibly the largest natural gas 

 17 field discovered in North America and is estimated 

 18 to hold $245 trillion feet of natural gas, or 

 19 approximately 10 years of U.S. Consumption at 

 20 current levels. 

 21 Chesapeake appreciates and supports the 

 22 efforts of the CFTC to help make U.S. markets 

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 1 transparent, effective and efficient. We also 

 2 believe the Commission's concerns about excessive 

 3 speculation in the commodity markets are certainly 

 4 worthy of analysis and discussion. However, our 

 5 concerns around excessive speculation differ in 

 6 many cases to what has been discussed in the media 

 7 and by consumers of commodities. We do not agree 

 8 that commodity prices increased last year solely 

 9 because of speculative hedge positions. Instead, 

 10 we believe basic economic principles of supply and 

 11 demand served as the main cause of prices 

 12 increasing and subsequently decreasing. 

 13 With respect to the focus of this 

 14 hearing today, Chesapeake has serious concerns 

 15 that position limits on energy futures and a more 

 16 restrictive application of hedge exemptions could 

 17 negative impact our risk management efforts. 

 18 These concerns are primarily focused on reduced 

 19 market liquidity and related price instability. 

 20 Chesapeake is not specifically opposed to position 

 21 limits, but we do have concerns that if the limits 

 22 are too low, they will remove vital liquidity from 

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 1 the marketplace. For the same reasons that 

 2 Chesapeake is not actively selling our production 

 3 forward at currently depressed prices, we cannot 

 4 count on purchasers of natural gas to make a 

 5 market for us when prices increase and we want to 

 6 hedge. Thus, if too low a contract position is 

 7 implemented, we believe it will significantly dry 

 8 up liquidity needed for producers to protect 

 9 themselves. Chesapeake also has concerns 

 10 regarding removing hedge exemptions for swap 

 11 dealers. Without swap dealers, Chesapeake's risk 

 12 management program would not be possible. 

 13 Typically, when we place a hedge with a swap 

 14 dealer they quickly offload the risk by entering 

 15 into an offsetting position, thus running a 

 16 balanced derivative book. This is a vital risk 

 17 management activity. We believe that both sides 

 18 of this equation should be exempt from position 

 19 limits since our activities are inherently risk 

 20 producing. 

 21 I appreciate the opportunity to speak 

 22 here today and to reiterate that Chesapeake is 

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 1 supportive of your efforts. At the same time, as 

 2 a company that uses risk management tools to 

 3 responsibly manage our core business of finding 

 4 and producing natural gas, stringent position 

 5 limits and more restrictive hedge exemptions could 

 6 significant hurt our ability to continue 

 7 protecting our company. 

 8 In summary, if producers like Chesapeake 

 9 cannot mitigate commodity price risks, then we 

 10 will be forced to reduce drilling which will 

 11 reduce our nation's supply of clean, affordable 

 12 American natural gas. A reduction in the supply 

 13 of natural gas will put upward pressure on prices 

 14 paid by American consumers and weaken our nation's 

 15 energy independence efforts. We look forward to 

 16 continuing to work together to address these 

 17 important issues. Again, thank you, Mister 

 18 Chairman and fellow Commissioners. 

 19 CHAIRMAN GENSLER: Thank you, Mr. 

 20 Chambers. You were within the light limit. That 

 21 was very helpful. If you could help me just so I 

 22 pronounce your name correctly. 

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 1 MR. VERLEGER: It's Verleger. 

 2 CHAIRMAN GENSLER: Verleger. 

 3 MR. VERLEGER: There's a leg in the 

 4 middle. 

 5 CHAIRMAN GENSLER: Thank you. 

 6 MR. VERLEGER: Thank you, Mister 

 7 Commissioner. I've been studying and writing on 

 8 energy for 35 years. As an official in the 

 9 Treasury Department in the Carter administration, 

 10 I played a critical role in the removal of price 

 11 controls and I was an author of the Windfall 

 12 Profits Tax along with others who now decline to 

 13 claim credit. At Drexel Burnham I played a major 

 14 role in the creation of the crude oil futures 

 15 markets. I have written and worked on energy 

 16 commodity markets for three decades. In that 

 17 period I've observed the great success of the 

 18 commodity industry in breaking the control over 

 19 the energy market once held by OPEC and the 

 20 integrated oil companies. I believe consumers 

 21 have reaped billions of dollars in benefits. I'm 

 22 going to make five points today. 

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 1 First, the price increase from August 

 2 2007 to July 2008 was caused by a shortage of 

 3 light sweet crude. Passive investors and 

 4 speculators played no role in the price increase. 

 5 The price increase was called by the fall in 

 6 output in Nigeria, the policies of the Bush 

 7 administration related to the strategic reserve 

 8 and new environmental regulations introduced by 

 9 the E.U. The price collapse started the week DOE 

 10 stopped filling the SPR following the order from 

 11 Congress. Coincidence? I think not. I saw the 

 12 problem coming and wrote about it in 2006. I 

 13 testified to Congress in December 2007 that this 

 14 was coming and I was right. The IAEA this June 

 15 vindicated my views. I attached to my testimony 

 16 after working the IAEA the price section which 

 17 described in detail what happened. 

 18 Second, flows of cash into the ICE and 

 19 NYMEX light sweet crude contract have on impact on 

 20 price changes in the spot crude prices. I have 

 21 developed data on the cash flow in and out day by 

 22 day into these two contracts. If there were an 

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 1 influence, one would have observed on my left, 

 2 your right of this graph, a percent change in 

 3 investment, percent change of prices. 

 4 CHAIRMAN GENSLER: Is there a way that 

 5 they can put that on our screen? 

 6 MR. VERLEGER: They all lie on that 

 7 straight line. In fact, if you look to the next 

 8 graph on the hypothetical relationship, the points 

 9 are all over the place. The correlation is zero. 

 10 You have to go to the fourth decimal place to find 

 11 a point. There is no influence between cash flow 

 12 into or out of the WTI contracts. This is -- 

 13 observation in the change price. 

 14 Third, contrary to the suggestions of 

 15 those who have not examined the data, passive 

 16 investment in oil as a commodity exerts an 

 17 stabilizing force on prices. Portfolio managers 

 18 as we heard seem to sell as prices are rising 

 19 while buying when prices fall. Evidence is on 

 20 this third graph on my right. The oil prices 

 21 graphed in yellow on the right, the number of 

 22 contracts held by the index funds as calculated 

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 1 derived from CFTC data is shown on the left. 

 2 There is a strong countercyclical view. This 

 3 countercyclical view is reinforced by the next 

 4 graph which shows that the change in WTI prices 

 5 versus the percent change in open interest moves 

 6 in a countercyclical fashion. That is, as prices 

 7 rise, we see liquidation. This is a stabilizing 

 8 force. 

 9 Fourth, investment in commodities 

 10 promotes inventory accumulation. Inventory 

 11 accumulation has been a goal of those interested 

 12 in energy security for three decades. In the last 

 13 year we've begun to see large accumulation of 

 14 private stocks. These stocks as the IAEA points 

 15 out do not represent speculative stocks because 

 16 they're a hedge. We are seeing what happens in 

 17 the grain markets for 100 years what's been 

 18 written by many. They are private stocks which 

 19 add to the buffer in case of emergency. As you 

 20 can from this last figure, world inventories are 

 21 now nearing record levels. 

 22 Finally, I would argue that these 

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 1 markets are a essential component to continued 

 2 development of oil and gas reserves in a 

 3 competitive energy sector. Dependence on OPEC and 

 4 integrated oil companies has been reduced by the 

 5 entry of small firms. These firms continue to 

 6 develop new reserves. To do so, they require the 

 7 ability to hedge. They hedge to the financial 

 8 institutions such as J.P. Morgan. As Mr. Masters 

 9 pointed out last week in your hearings, these 

 10 banks book together the positions taking as 

 11 security values of assets which rise and fall with 

 12 prices. Imposition of position limits on banks or 

 13 increased margin requirements on EMP firms will 

 14 make it more costly and more difficult for firms 

 15 in the EMP business. Thus I strongly urge the 

 16 Commission not to impose limits on these parties. 

 17 The effect of such limits is really the effect of 

 18 capitulation to OPEC. I strongly encourage the 

 19 Commission not to impose position limits on index 

 20 traders through the spec energy market. I'll 

 21 leave out the agricultural markets. They're 

 22 different. Imposition of such limits could reduce 

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 1 the stabilizing impact of these investors. Prices 

 2 could fall causing reduced investment. The fall 

 3 in prices would cause less to be invested in both 

 4 oil and gas and alternatives. We would fall 

 5 behind in our efforts to develop alternatives. 

 6 Again, the consequences would be greater 

 7 dependence on OPEC. I strongly encourage you not 

 8 to capitulate to OPEC. Thank you. 

 9 CHAIRMAN GENSLER: Thank you, Mr. 

 10 Verleger. Mr. Arnold? 

 11 MR. ARNOLD: Thank you, Chairman 

 12 Gensler, distinguished Commissioners and staff of 

 13 the CFTC. Thank you for the opportunity to appear 

 14 before you today. My name is John Arnold and I 

 15 run a commodity focused hedge fund named Centaurus 

 16 Energy. We are active in a variety of businesses 

 17 and have over 70 employees in eight cities. Our 

 18 primary focus is financial trading of North 

 19 American natural gas. 

 20 We share the Commission's goals of 

 21 promoting efficiency, transparency and integrity 

 22 in the economic markets. We rely almost 

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 1 exclusively on fundamental analyses to guide our 

 2 trading strategies. As such, we depend on a 

 3 market that is governed by supply and demand and 

 4 that produces fair prices. Each market has unique 

 5 characteristics and demands a customized 

 6 regulatory framework. Today I will speak to 

 7 specifically about natural gas. 

 8 The challenge that the Commission faces 

 9 is how to temper unnecessary volatility and 

 10 promote transparency without damaging a market 

 11 that is generally robust and well functioning. I 

 12 would like to share with the Commission my views 

 13 on the factors that it should consider in 

 14 designing and managing an effective limit 

 15 structure of the natural gas market. In that 

 16 regard, I propose the following. First, the 

 17 Commission should impose hard limits on physical 

 18 natural gas futures as they approach expiry. The 

 19 expiration month limit should decrease in stair 

 20 step fashion at regular intervals as expiration 

 21 approaches. No hedge exemptions to these limits 

 22 should be granted to any party. 

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 1 Second, the Commission should consider 

 2 replacing accountability levels with hard limits 

 3 on the forward physical natural gas futures based 

 4 on maximum positions in any one month. There 

 5 should be no all month limit. Finally, the 

 6 Commission should have transparency and oversight 

 7 into all financially settled contract positions on 

 8 exchange and over the counter but should not 

 9 impose hard limits on financial contracts. Like 

 10 any market, natural gas needs rules to ensure 

 11 fairness and to safeguard its participants from 

 12 abuse. But as is also true of any other market, 

 13 the wrong regulations can be just as harmful as no 

 14 regulation at all. On June 5, two months prior to 

 15 these hearings, the NYMEX amended its rules to 

 16 establish hard limits on all financially settled 

 17 natural gas contracts effective next month with 

 18 the expiration of the October contract. If 

 19 allowed to take effect as currently structured, 

 20 the new NYMEX limits will have a range of 

 21 detrimental effects on the market including 

 22 pushing trading from exchanges to the less 

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 1 efficient and less transparent over-the-counter 

 2 markets, increasing volatility, reducing liquidity 

 3 especially during bid week, and increasing costs 

 4 for commercial hedgers. We already have started 

 5 to see traders move positions over the counter in 

 6 anticipation of this rule. I urge the Commission 

 7 to intervene immediately to take control of the 

 8 limit setting process and to suspend or rescind 

 9 the new NYMEX rules until the Commission can 

 10 implement a more appropriate regulatory framework. 

 11 In these hearings and several other 

 12 recent meetings, the Commission has received a 

 13 great deal of input regarding limits and 

 14 exemptions. I encourage the Commission to take a 

 15 considered, reasonable approach to the issue 

 16 rather than allowing each exemption to adopt 

 17 discrete regulations that are ineffective, harmful 

 18 to market efficiency and likely inconsistent with 

 19 the Commission's goals. I hope the resulting 

 20 structure will promote a well- functioning market 

 21 that continues to allow participants to 

 22 effectively manage risk. I thank Chairman Gensler 

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 1 and the Commissioners for the opportunity to share 

 2 my thoughts. 

 3 CHAIRMAN GENSLER: I thank all our 

 4 witnesses. I found as I was digging into your 

 5 testimony that we've got a great panel of nine 

 6 witnesses, they were terrific last week, but you 

 7 had such varied things I could myself probably go 

 8 three panels with any one of you. So I apologize 

 9 in advance get to all my questions. Mr. Arnold, 

 10 if I could just start with you. It's going to get 

 11 a little technical. You suggest with regard to 

 12 setting hard limits in the spot month and no 

 13 exemptions from that. Is that right? 

 14 MR. ARNOLD: Right. 

 15 CHAIRMAN GENSLER: Then you would also 

 16 have limits on any deferred month but not a 

 17 combined month regime, and I just thought I'd like 

 18 to understand why the first and not the latter. 

 19 MR. ARNOLD: I think the physical 

 20 futures contract is vital to the industry. It's 

 21 used as a benchmark both to settle financial 

 22 trades as well as privately negotiated 

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 1 transactions with physical gas. The deferred 

 2 contracts are used as a price discovery mechanism. 

 3 The problem with having limits on the combined 

 4 position is that you're reducing liquidity and 

 5 increasing transaction costs of the commercial 

 6 hedger who's trying to access the back of the 

 7 curve. So if you put a total limit on the 

 8 speculative community, you're incentivizing the 

 9 large speculator to concentrate his liquidity in 

 10 the front of the curve. 

 11 CHAIRMAN GENSLER: You're recommending 

 12 setting position limits not only on the nearest or 

 13 what's called the spot month, but also the 

 14 deferred contracts moving forward, the deferred 

 15 physical contracts? 

 16 MR. ARNOLD: Right. I think if you 

 17 establish a limit on the combined positions, 

 18 you're incentivizing the large speculator to 

 19 concentrate my positions in the front of the curve 

 20 that are naturally more volatile. A large 

 21 speculator is a natural liquidity provider in the 

 22 back of the curve. If you try to put a limit upon 

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 1 the activities of any one individual trader, I 

 2 think there is a natural tendency to move 

 3 positions to the more volatile part of the curve 

 4 which is in the front. 

 5 CHAIRMAN GENSLER: You mean the 

 6 liquidity providers, the risk hedge funds are more 

 7 likely to move to the volatile part because, 

 8 there's an old expression from Wall Street, 

 9 volatility is our friend? It's where they can 

 10 make more possible risk premiums and risk profits? 

 11 MR. ARNOLD: I think the deferred part 

 12 of the curve is naturally less volatile than the 

 13 prop month. So if I'm confined on the amount of 

 14 risk that I can take, I don't want my limits in 

 15 the deferred part of the curve that has very 

 16 little volatility. I'm going to move that 

 17 position to the front. So whenever a producer is 

 18 looking for a 5 year hedge and they call the bank 

 19 and the bank approaches the market, I think you're 

 20 reducing the liquidity and increasing the 

 21 transaction cost. 

 22 CHAIRMAN GENSLER: This is helpful. I'm 

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 1 going to try to sneak one more question because 

 2 it's flashing green. Mr. Chambers, in terms of 

 3 what you laid out, I think in my next round I'm 

 4 going to talk about the over-the-counter 

 5 derivatives part of it which would be very 

 6 helpful. With regard to position limits you said 

 7 don't set it too low. You're not opposed to it, 

 8 but don't set it too low. Do you have a view as 

 9 to what too low would be? If we were to move 

 10 forward, this is a very relevant question now as 

 11 to what level. 

 12 MR. CHAMBERS: I think that at the end 

 13 of the day there needs to be more analysis, more 

 14 information gathering to say what is the 

 15 appropriate level and that's the reason we were 

 16 hesitant to put a level into our testimony. 

 17 Listening to the various testimonies today and 

 18 reading the testimonies from last week, there are 

 19 widely divergent views. More transparency coming 

 20 from the marketplace would help arrive at the 

 21 right decision. We said too low because if the 

 22 limits are too low, frankly it ruins our risk 

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 1 management efforts. 

 2 CHAIRMAN GENSLER: If it's not a 

 3 competitive disadvantage, how many dealers do you 

 4 deal with right now? What's the universe of swap 

 5 dealers that you can hedge your risks with right 

 6 now? 

 7 MR. CHAMBERS: Between 10 and 15. 

 8 CHAIRMAN GENSLER: So between 10 and 15? 

 9 MR. CHAMBERS: Yes. 

 10 CHAIRMAN GENSLER: Thank you. 

 11 Commissioner Dunn? 

 12 COMMISSIONER DUNN: Thank you very much, 

 13 Mister Chairman. Mr. Verleger and Mr. Chambers, 

 14 you both indicate that you think basic economic 

 15 principles of supply and demand and also 

 16 environmental regulations served as the main cause 

 17 of price increases and subsequent declines. We're 

 18 going to hear on the next panel Mr. Masters and 

 19 Mr. Greenberger argue the exact opposite. Why 

 20 are you correct and they are wrong? 

 21 MR. CHAMBERS: From the information that 

 22 we have been able to review, since the second 

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 1 quarter of 2008 to the second quarter of 2009, 

 2 demand has dropped approximately 5 percent, 

 3 meanwhile supply has increased approximately 2 

 4 percent. So the drop in natural gas prices seems 

 5 evident to have been caused by a demand 

 6 destruction primarily coming from the industrial 

 7 sector. On the flip side of that, going back to 

 8 2007 to 2008, there was more demand than supply, 

 9 half a percent to 1 percent greater, so that's 

 10 what's driving our conclusions. 

 11 MR. VERLEGER: Sir, as I said, I laid 

 12 out the case for it, the International Energy 

 13 Agency which is the arbitrator in this has 

 14 confirmed the case and that's why I attached it, 

 15 that it was the light sweet crude that created the 

 16 constraint. There was a surplus of heavy crude 

 17 last year in June that couldn't be sold when oil 

 18 was at $147 a barrel because you couldn't make low 

 19 sulfur diesel meeting European standards or our 

 20 standards. For the first time last year we were 

 21 exporting diesel fuel to Europe because of their 

 22 switch and the strength of the euro. This year 

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 1 when prices were so low, something happened that 

 2 has happened a few times in the history of 

 3 commodity markets. Essentially it became 

 4 extremely profitable to build inventories. I had 

 5 a case that I described in my written testimony on 

 6 how J.P. Morgan has picked up something like 2 

 7 million barrels of heating oil. They bought it 

 8 and they sold in the forward market. According to 

 9 Bloomberg they are earning a return of anywhere 

 10 between 50 and 100 percent on that return. They 

 11 can do this because they can borrow at 1 or 2 

 12 percent or 3 percent through the Federal Reserve 

 13 Board and the forward prices are there promoting 

 14 inventory accumulation. 

 15 Part of the reason that we heard in the 

 16 previous panel is that forward prices are higher 

 17 than cash prices because investors fear inflation. 

 18 We saw the same thing in 1988 and 1999 when crude 

 19 prices collapsed to $10. The market didn't expect 

 20 crude prices to stay at $10, and they shouldn't. 

 21 We need something like $40 to $50 a barrel 

 22 according to the engineers to develop the oil. 

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 1 Chesapeake would say you need something I suspect 

 2 around $3 or $4 a thousand cubic feet, maybe $6 to 

 3 develop the natural gas so the forward prices stay 

 4 higher. What happens when you have high forward 

 5 prices and low cash prices as this agency has 

 6 known for 80 is that inventories accumulate. We 

 7 have just seen the most rapid development of 

 8 inventories all of which are sold forward. As the 

 9 IAEA says, this is not speculation, this is just 

 10 plain transferring to the future. I helped create 

 11 the Strategic Petroleum Reserve in the Carter 

 12 administration and one of the things we were 

 13 trying to do is build inventories because 

 14 inventories are a buffer against price spikes, and 

 15 we have just managed to get the first large 

 16 private increase I think I've seen in 30 years. 

 17 It's all fundamentals. I've made a living and I 

 18 now teach at the University of Calvary writing on 

 19 this and working with companies trying to take 

 20 advantage of market advantages. This is cash and 

 21 carry. This is how Cargill the great grain 

 22 company became so large from nothing. It's just 

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 1 buying when the forward price is there. 

 2 COMMISSIONER DUNN: In my agricultural 

 3 parlance, then it's the cost to carry. 

 4 MR. VERLEGER: It's cost of carry. I've 

 5 read it as cash and carry. There's long 

 6 literature. Jeffrey Williams at the University of 

 7 California at Davis has written about this. One 

 8 of the great things that has happened over the 

 9 last 20 years is we've applied all the things we 

 10 learned in agricultural economics to energy 

 11 markets. They are more competitive and the 

 12 consumer benefits. 

 13 COMMISSIONER DUNN: That would indicate 

 14 why Mr. Chambers for you it's so important to 

 15 understand what your break evens are. 

 16 MR. CHAMBERS: That's correct. We've 

 17 spent a lot of time analyzing our cost to find and 

 18 produce our gas and that's why we pay a lot of 

 19 attention to where we can layer in our hedges to 

 20 affect our risk management efforts. 

 21 CHAIRMAN GENSLER: Commission Dunn, 

 22 we'll definitely have more rounds. Commissioner 

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 1 Sommers? 

 2 COMMISSIONER SOMMERS: Mr. Verleger, I'm 

 3 going to continue on with some of the interesting 

 4 concepts that you have in your testimony. One of 

 5 the things that you talk about in your written 

 6 testimony is the concept of the missing long and 

 7 how the index investor has filled in this role, if 

 8 you could just talk about that for a minute. 

 9 MR. VERLEGER: Thank you, Commissioner 

 10 Sommers. When the oil market was first created 

 11 and you looked at other commodity markets, one of 

 12 the problems we had was in general, there were 

 13 firms that wanted to sell forward such as 

 14 Chesapeake and there were very often no longs. 

 15 The one exception was heating oil where consumers 

 16 in New England wanted to lock in their heating 

 17 costs and they were large enough consumers. The 

 18 logical long is the gasoline market and the 

 19 Petroleum Marketing Practices Act essentially 

 20 prevents that because there is no way that a 

 21 company like Shell can sell gasoline to the 

 22 consumer like you can sell a phone card because 

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 1 that would be telling an individual gasoline 

 2 station what you can charge for gasoline and 

 3 that's illegal. We didn't have Costco and 

 4 Walmart. Costco and Walmart can do this now 

 5 because they own their own business. So 

 6 essentially a large portion, if you think of a 

 7 seesaw and the one side, we didn't have the end 

 8 users the way we have the Bakers, the Millers and 

 9 other commodity markets that have made the grain 

 10 markets work so well for 50 or 100 years. The 

 11 investment funds first in 1990 and 1991 started 

 12 coming in with Gold Sachs and their first 

 13 commodity index, and then working forward created 

 14 that long and essentially created the balance and 

 15 then an imbalance to a certain extent which has 

 16 caused perhaps more inventory accumulation than 

 17 some would like. But essentially we did not have 

 18 any commercial end users because I the gasoline 

 19 consumer or you as a gasoline consumer cannot be 

 20 offered the opportunity to lock in our gasoline 

 21 prices under the current legislative situation we 

 22 have. 

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 1 COMMISSIONER SOMMERS: Thank you for 

 2 that explanation. I have a couple of questions 

 3 for Mr. Arnold on his testimony, specifically just 

 4 to clarify the NYMEX rules amendment that you are 

 5 asking to be rescinded, I think if I understood 

 6 you correctly you talk about how the unintended 

 7 consequence of that would be for those positions 

 8 to move OTC and move off exchange. 

 9 MR. ARNOLD: Correct. I think that's 

 10 the first response by the industry is to move 

 11 positions over the counter. We've already seen it 

 12 start. 

 13 COMMISSIONER SOMMERS: Because there 

 14 would not be those hard limits imposed? 

 15 MR. ARNOLD: Exactly. 

 16 COMMISSIONER SOMMERS: One of your other 

 17 suggestions is that we don't impose limits on the 

 18 OTC market. Wouldn't that have the same effect? 

 19 If we're imposing the hard limits on the 

 20 physically delivered contract and not the OTC 

 21 market, will we see some migration of positions 

 22 from exchange to the OTC market? 

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 1 MR. ARNOLD: I think if you maintain the 

 2 positions and strengthen the position limits on 

 3 the physical futures contract, that business stays 

 4 on the exchange. The question is where does the 

 5 financial hedging and the financial trading end 

 6 up. Is it over the counter or is it exchange? I 

 7 think there's been movement by the industry over 

 8 the past 10 years to put this onto the exchange. 

 9 Credit like the credit intermediation that the 

 10 exchange brings. Ninety-eight percent of our 

 11 positions are on the exchange for that reason. 

 12 The NYMEX rules run counter to that industry trend 

 13 and try to move that business back off the 

 14 exchange, but I think the physical contract is 

 15 going to maintain on exchange. 

 16 COMMISSIONER SOMMERS: Just to clarify, 

 17 help me understand that, because there are two 

 18 separate reasons for conducting business? There 

 19 are rules that should apply? 

 20 MR. ARNOLD: Exactly. The physical 

 21 futures contract and the financial contracts serve 

 22 different purposes. The physical futures contract 

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 1 helps to manage physical exposures in the 

 2 industry. It also creates the benchmark where 

 3 there is industry indifference on expiration at 

 4 that price where there's supply and demand for 

 5 physical gas for following month meet, and so the 

 6 industry is very comfortable using that as the 

 7 benchmark. The financial contract is used for a 

 8 number of reasons but it's not for physical. It's 

 9 used to hedge financial exposures in the industry, 

 10 it's used for speculation, it's used to arbitrage, 

 11 but these are two different products and they have 

 12 different purposes. The industry historically has 

 13 used the physical futures contract as a proxy to 

 14 hedge financial risk and I think that creates the 

 15 problem and creates excessive volatility in that 

 16 physical futures contract and that's why I propose 

 17 you strengthen the position limits on the physical 

 18 futures contract to decrease that excessive 

 19 volatility. 

 20 COMMISSIONER SOMMERS: Thank you. 

 21 CHAIRMAN GENSLER: Thank you, 

 22 Commissioner Sommers. Commission Chilton? 

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 1 COMMISSIONER CHILTON: Thanks, Mister 

 2 Chairman. A while back I talked about people 

 3 talking past each other. Another observation is 

 4 that it's a common debating tactic to label people 

 5 and put people into a certain category. Dr. 

 6 Verleger said that those who seek to impose 

 7 position limits would be capitulating to OPEC 

 8 which is a little bit stronger than you said in 

 9 your formal testimony. I don't think any of us 

 10 are going to be capitulating to OPEC and I think 

 11 it's an unfair categorization. It reminded me in 

 12 talking about OPEC, we had an economist here last 

 13 week who talked a little bit about OPEC and it 

 14 made me think about these sovereign wealth funds. 

 15 UAE has $627 billion in a sovereign wealth fund, 

 16 Saudi Arabia, $431 billion. Don't think for a 

 17 minute that they're not using some of that for OTC 

 18 swaps on energy. I don't want to unfairly 

 19 characterize the doctor, but it seems to me that 

 20 appropriate regulation of the OTC market makes 

 21 some sense. 

 22 Mr. Arnold, I really appreciate your 

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 1 testimony. In part I was particularly interested 

 2 when you said that you look at the market and you 

 3 place bets if they are biased and yourselves to 

 4 identify what's forcing the market to price a 

 5 product in an unfair value, and then you get in 

 6 and you try to push the price back to that value. 

 7 Do you think that the prices we've seen over the 

 8 last 2 years have been forced into an unfair 

 9 value? 

 10 MR. ARNOLD: You have to draw the 

 11 distinction between prop month and expiration 

 12 which is in supply and demand of physical gas for 

 13 the following month in the forward curve. There 

 14 has been a lot of academic literature done about 

 15 the forward curve is not the best price indicator 

 16 of where those contracts are. It is supply and 

 17 demand of forward price hedging. At times that 

 18 differs from where I foresee fair value and that's 

 19 how I try to make money in the industry is I try 

 20 to buy things whenever they're trading below what 

 21 your analysis shows to be fair value and sell 

 22 things whenever our analysis shows that the 

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 1 forward curve is higher than our analysis of fair 

 2 value. 

 3 COMMISSIONER CHILTON: You said, Mr. 

 4 Chambers, in your written testimony that you 

 5 didn't believe that commodity prices of last year 

 6 were due solely to speculation. I don't believe 

 7 they were solely due to speculation either. Can 

 8 you elaborate on that? Do you think there was 

 9 some part that was due to speculation? 

 10 MR. CHAMBERS: I think speculation had a 

 11 role to play, but we would argue that that 

 12 speculation is necessary for the fact that as 

 13 prices increase, Chesapeake and other producers 

 14 like ourselves who are already long the product 

 15 will look to sell in the future. So we need that 

 16 speculation on the other side to buy our 

 17 production forward. So I think it does have an 

 18 impact, but it's a positive one and it helps us 

 19 cap the price. 

 20 COMMISSIONER CHILTON: I'll try to get 

 21 one more in, Mister Chairman. This is 

 22 particularly for something that we're working on 

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 1 now and I notice we have some congressional staff 

 2 here, so maybe it will be helpful to them, maybe 

 3 not. You talk about clearing of OTC products and 

 4 how you used your assets as collateral and that if 

 5 you didn't have that freed-up capital you wouldn't 

 6 be able to explore, et cetera. Can you explain 

 7 that a little bit more? Why would requiring 

 8 clearing impact your business in a negative 

 9 fashion? 

 10 MR. CHAMBERS: In summary it boils down 

 11 to the end result of our strategy is to lock in 

 12 cash. If we are to hedge out into the future and 

 13 we are forced to clear, that creates a very big 

 14 cash question near term for our long term strategy 

 15 so that there is a disconnect in and of itself. 

 16 It really negates the whole point behind the 

 17 strategy. 

 18 COMMISSIONER CHILTON: Your swaps are 

 19 collateralized already. 

 20 MR. CHAMBERS: Yes. 

 21 COMMISSIONER CHILTON: And then you use 

 22 that capital for research or exploration, et 

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 1 cetera. So if you had to put up additional 

 2 capital to clear, it would impact your ability to 

 3 explore? Is that fair? 

 4 MR. CHAMBERS: Absolutely. A perfect 

 5 example of that is in 2008 when natural gas prices 

 6 were so high, we had been selling in the market 

 7 actively that price was above our break even. So 

 8 we had a fairly substantial mark to market loss 

 9 around June 30 of last year in excess of $6 

 10 billion. If we would have had to post that as 

 11 collateral on an exchange and cash collateralize 

 12 that, frankly, we don't know if we would have been 

 13 able to find that cash, number one, but it 

 14 definitely would have impacted our drilling 

 15 efforts. 

 16 CHAIRMAN GENSLER: Thank you, 

 17 Commissioner Chilton. I'm going to follow-up on 

 18 that very briefly on your testimony, Mr. Chambers, 

 19 that was very helpful. With regard to posting of 

 20 collateral, is it your position though that you 

 21 think that posting something other than cash 

 22 collateral, this is on the subject of 

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 1 over-the-counter derivatives and not position 

 2 limits, with regard to the administration's 

 3 proposals and this Commission's proposals as well 

 4 to bring regulation to over-the-counter 

 5 derivatives, we've promoted use of centralized 

 6 clearing but also regulating the deals for capital 

 7 on margin, and then in your testimony you raise 

 8 the issue of whether that has to be collateral or 

 9 noncash. I don't know if you saw Chairman 

 10 Peterson's and Chairman Frank's joint press 

 11 conference last week where they actually in a 

 12 couple of pages of bullet points said that they 

 13 thought they would be moving forward the market 

 14 regulators, the CFTC and SEC, able to write rules 

 15 so they could accept noncash collateral. Is your 

 16 point of view similar to what they were saying or 

 17 are you suggesting that there be no posting of 

 18 collateral whatsoever? 

 19 MR. CHAMBERS: Chesapeake's position on 

 20 that would be that we are completely fine and 

 21 supportive of posting collateral. It helps us 

 22 achieve our aims. To the extent for that to be 

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 1 arbitrarily set, or maybe not arbitrarily, but for 

 2 that to be set through regulatory means makes us a 

 3 little concerned because you could get to a much 

 4 different answer than what we have today. Going 

 5 back to whenever we owed over $6 billion in our 

 6 mark to market on our hedge positions, we had 

 7 around $11 billion worth of oil and gas properties 

 8 pledged. It's a question mark whether a 

 9 regulatory answer would have been $11 billion, $16 

 10 billion, $20 billion, $5 billion. It's a big 

 11 question and does cause us some concern. 

 12 CHAIRMAN GENSLER: I appreciate that. I 

 13 hope that anything that Congress does in writing 

 14 the statute or what this Commission or other 

 15 commissions do wouldn't be arbitrary. You're 

 16 right. It would be important to get it right. 

 17 You also mention in your testimony about 

 18 customized versus standardized products, so if I 

 19 can just address that. You don't need to respond. 

 20 I've testified on this a number of times and am a 

 21 firm believer that we have tens of thousands of 

 22 end users who still need to use risk management 

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 1 customized products in the marketplace for over- 

 2 the-counter derivatives, but the only way to bring 

 3 regulation is to regulate the dealers fully and 

 4 the dealers would have to report all those trades 

 5 and have business conduct standards and capital 

 6 for both customized and standardized and then 

 7 we've mandate moving the standardized product, not 

 8 the customized but the standardized products, into 

 9 clearing and centralized exchanges. You don't 

 10 need to comment, but your testimony had raised 

 11 that point. 

 12 Mr. Verleger, in terms of your charts, I 

 13 think it was chart six that was here, but if I 

 14 have the number wrong, I apologize, really goes to 

 15 what I'll call the macro view of a market. You 

 16 were looking at changes in total investment, and 

 17 it said total investment to the change in prices. 

 18 What I'm interested in is not what you researched 

 19 here which was interesting as well, but I'm 

 20 interested in a micro market question if I can 

 21 borrow a phase that you're probably more familiar 

 22 with because you have the Ph.D. and I don't, about 

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 1 the structure of markets, and I'm also interested 

 2 in Mr. Arnold's answer to this too. If we look at 

 3 liquidity in markets, if we look at the market 

 4 integrity of how a market is structured, are we 

 5 better off limiting the maximum size of any one 

 6 participant in the market? 

 7 MR. VERLEGER: I listened to your 

 8 questions in the previous panel. You are 

 9 absolutely correct, we would be better on 

 10 liquidity and I think volatility if we had five 

 11 ETFs to one ETFs and the five ETFs each presumably 

 12 would follow slightly different policies of how 

 13 they rolled their positions rather than having a 

 14 single ETF going forward. I've been a student of 

 15 your reports for 20 years and you look at the 

 16 detailed reports and you see the number of firms 

 17 and the percentages and I've always wanted 

 18 Herfindahl indices out of there so I could see the 

 19 real measure of the whole stream of things. 

 20 You're absolutely right, put a position 

 21 limit on and if other EFTs enter the business 

 22 because there's a position limit, it promotes more 

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 1 competition, just as, and I apologize for using 

 2 the capitulation word but I've been fighting this 

 3 battle for so long, as we got more producers in 

 4 the international oil markets, as my friend Andy 

 5 Hall complains, he's one of the people who broke 

 6 OPEC, that we want more producers and that tends 

 7 to give us lower prices. That's why the CFTC 

 8 pushes for these things. 

 9 CHAIRMAN GENSLER: Mr. Arnold, it could 

 10 be extended to hedge funds and other funds, this 

 11 concept of a micro market structure. 

 12 MR. ARNOLD: I agree on the physical 

 13 futures contract that there needs to be real 

 14 concern about market concentration. With respect 

 15 to the financial market, I think first of all it's 

 16 very hard to define what open interest and what 

 17 total financial risk exposure is on the financial 

 18 risk of natural gas. So to say that one 

 19 participant is 30 percent of the open interest on 

 20 the Intercontinental Exchange in a financial 

 21 product for 2011 I think is largely irrelevant 

 22 given that that exposure relative to total risk in 

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 1 the market is very small. 

 2 Second, I think I need to point that 

 3 financial trading is the single most competitive 

 4 market in the world. It allows competition solely 

 5 on the basis of price. The individual trading one 

 6 month is on the same playing field as ExxonMobil 

 7 trading thousands. If the individual wants to be 

 8 the most competitive buyer or the most competitive 

 9 seller, they have that right and I think you have 

 10 to allow the market to make the decisions about 

 11 who is the best buyer, who's the best seller, who 

 12 provides the best product with respect to an ETF, 

 13 who provides the best product with respect to 

 14 index funds. 

 15 CHAIRMAN GENSLER: Thank you. I turn to 

 16 Commissioner Dunn. 

 17 COMMISSIONER DUNN: Thank you, Mister 

 18 Chairman. Mr. Arnold, in your written testimony 

 19 you're critical of the NYMEX granting exemptions 

 20 and their ability to monitor that. Could you 

 21 amplify a bit on that, and if in fact the 

 22 Commission were to be granting these exemptions 

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 1 rather than the exchanges, what would you say we 

 2 ought to be doing in monitoring these exemptions 

 3 and the directions that they're going? 

 4 MR. ARNOLD: I think if I can comment on 

 5 hedge exemptions and little bit broader, I believe 

 6 that the 1,000 lots limit on last day in natural 

 7 gas is enough for any foreseeable commercial 

 8 situation. So if you start from there and say 

 9 that no commercial necessarily needs more than 

 10 1,000 lots in the history -- 

 11 COMMISSIONER DUNN: Your point was in 

 12 your testimony that it's expanded to 3,000? 

 13 MR. ARNOLD: Right. People have hedge 

 14 exemptions that allow them to have 3,000 to 5,000 

 15 lots on the second to the last day or the third to 

 16 the last day. I think hedge exemptions on the 

 17 physical futures contract is a Pandora's Box and 

 18 once you open it up and allow one counterparty to 

 19 have a hedge exemption then it's hard to stop, and 

 20 not let much of the industry to have hedge 

 21 exemptions, I think that would create volatility 

 22 in the market because you have participants who 

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 1 are hedging financial risk in using physical 

 2 contracts and they're keeping these contracts off 

 3 the market until the very end, the last day or 

 4 last 30 minutes or expiry and the market has a 

 5 hard time balancing and it makes the market more 

 6 opaque because the market doesn't know whether 

 7 those markets represent real demand for the 

 8 physical gas or whether they just represent a 

 9 proxy hedge for some financial risk. I think 

 10 hedge exemptions are prone to misuse and abuse. I 

 11 think the abuse is that they're granted for a 1 

 12 year period based upon some claim that a 

 13 commercial has in the market based upon that risk 

 14 on that day. The NYMEX doesn't know and I think 

 15 it would be hard for the CFTC to know the next day 

 16 if that risk disappears should that hedge 

 17 exemption still be there. I think they're very 

 18 difficult to monitor in real time. I think it's 

 19 misused because the industry continues to use the 

 20 physical futures contract as a proxy to hedge 

 21 financial risk and financial risk is best hedged 

 22 by the industry using a financial product. 

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 1 COMMISSIONER DUNN: Thank you. Mr. 

 2 Verleger, in looking at your charts, figure number 

 3 3 in your chart is the one that I labeled wow. At 

 4 a time when diesel was very, very high here in the 

 5 United States, we were exporting. 

 6 MR. VERLEGER: Yes. 

 7 COMMISSIONER DUNN: Explain how that 

 8 happens and also the impact that the strengthen 

 9 and weakness of the dollar has in this. 

 10 MR. VERLEGER: This graph shows by month 

 11 data on net exports of distal fuel oil as reported 

 12 by DOE and it goes from 1990 through 2008, and 

 13 what you can see is there was a surge. The story 

 14 began when Europe started to shift to ultra low 

 15 sulfur diesel in 2008. We had shifted in 2006. 

 16 This is 10 part per million diesel. European 

 17 refiners could not produce enough of it. The 

 18 European refiners could produce gasoline, and 

 19 Total on is website has complained that European 

 20 governments pushed everybody onto diesel but they 

 21 haven't built the refineries to make the diesel. 

 22 So what happened is we had the capacity, demand 

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 1 was down here as the witness from Schneider would 

 2 explain because the recession had already taken 

 3 hold here and pulled it up. What happened is that 

 4 the dollar went from I think it was 1.3 to the 

 5 euro to 1.6 to the euro at that point in time, and 

 6 of course the marginal buyer of diesel at the time 

 7 was the European consumer paying in euros. So as 

 8 the dollar strengthened, they were paying in 

 9 euros, the dollar price of diesel has to rise, and 

 10 essentially that sucked diesel fuel from the 

 11 United States to Europe. If you believe in free 

 12 trade as I do, the system is working. But that 

 13 pulled things up, and actually what we saw because 

 14 refiners couldn't take the sulfur out of crude 

 15 oil, the desulphurization units were full, 

 16 essentially all they could do was buy sweet crude 

 17 oil. A minor factoid is there are three kilos of 

 18 sulfur in a barrel of sour crude, about 100 grams 

 19 of sulfur in sweet crude, so what you do is you go 

 20 for the sweet crude. This is why myself and a 

 21 number of other people were trying to get DOE to 

 22 sell sweet crude from the SPR during this time of 

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 1 the exports. That would have eased the situation 

 2 and that would have stabilized the price. I have 

 3 been using this graph. This is the telling sign 

 4 of how our trade patterns got distorted and why we 

 5 were seeing such a pull on the price of sweet 

 6 crude oil last April, May, June and July. 

 7 CHAIRMAN GENSLER: Thank you, 

 8 Commissioner Dunn. Commissioner Sommers? 

 9 COMMISSIONER SOMMERS: Thank you, Mister 

 10 Chairman. My questions are for Mr. Chambers. I 

 11 appreciate your views specifically on this as a 

 12 user of the OTC markets and when we are 

 13 considering imposing position limits, what your 

 14 views would be on how we would impose those limits 

 15 on swap dealers and how that could affect your 

 16 ability to hedge and how we may look through or 

 17 impose them on the commercial end users. 

 18 MR. CHAMBERS: We think that if position 

 19 limits were imposed on swap dealers it would have 

 20 a very negative effect on Chesapeake and other 

 21 hedgers, and it's not just whether you're long or 

 22 short the product. They frankly make the market 

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 1 for us. Otherwise we would have to pick up the 

 2 phone and try to find somebody to enter into an 

 3 OTC derivative as you had to do 25 to 30 years 

 4 ago. We need them to help make this market. It's 

 5 the most efficient way. They help us find that 

 6 efficient price, and if you take away their 

 7 ability to do that, it would be very damaging. 

 8 COMMISSIONER SOMMERS: Just to 

 9 follow-up, can we make a system work where we 

 10 allow you the commercial end user to have a hedge 

 11 exemption even if you're going through a swap 

 12 dealer? 

 13 MR. CHAMBERS: I think that Chesapeake 

 14 and other end users would definitely need the 

 15 hedge exemption. We would argue that the swap 

 16 dealers would need it too to the extent that 

 17 they're offloading whatever business we take to 

 18 them and whatever business they offload to someone 

 19 else. Admittedly, and for the reasons we think 

 20 that speculation is a good thing for us is that 

 21 they help make that market and if they offload our 

 22 exposure to a speculator, to us that doesn't 

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 1 negate the fact that they are offloading a risk, 

 2 so they should be exempt. 

 3 COMMISSIONER SOMMERS: Thank you. Mr. 

 4 Verleger, in your testimony I want to try to 

 5 clarify what your views on the current system for 

 6 accountability levels, for position limits in the 

 7 last 3 days, the fact that we give edge exemptions 

 8 and no action relief to these index funds. Am I 

 9 right in assuming that you think the way the 

 10 current system works is what you would suggest? 

 11 MR. VERLEGER: Not entirely. As I said 

 12 in my testimony as I tried to work through this, 

 13 and I'm not a lawyer, I think there need to be 

 14 some sort of limitations in the last three 

 15 contracts. I picked the last three. I think it's 

 16 important empirically and test these. We saw in 

 17 February and March very serious disruptions in the 

 18 oil market when U.S. oil was rolling their 

 19 positions. Now they've their positions and 

 20 there's less impact. I believe that there are 

 21 other instruments that are more suitable for 

 22 investors. I cut out of my section of my 

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 1 testimony a discussion of the BP Royalty Trust. 

 2 I've been following this for 20 years. It's a way 

 3 that the investor can buy a piece of oil and it's 

 4 like a true asset where you have a flow of cash. 

 5 The assay gives you a flow of cash. The index 

 6 funds don't and they bother me that way. If you 

 7 buy a bond you get a flow of cash. The BP Royalty 

 8 Trust price is closely correlated with the price 

 9 of WTI so they can get the same exposure and I 

 10 think to a certain extent there should be some 

 11 encouragement of organizations to create a royalty 

 12 trust. In Canada we have a problem. I'm an 

 13 American but I teach up there. In Canada they've 

 14 decided that royalty trusts were costing them too 

 15 much money and they've limited them. But to 

 16 answer your question on the position limits, I 

 17 think as Mr. Arnold said that in the physical 

 18 market one wants to start imposing limits as these 

 19 contracts approach delivery and I actually am one 

 20 of the few people around here who remember the 

 21 Hunt silver thing and I was listening to Mr. 

 22 Jarecki and his testimony and he said it's an 

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 1 historical -- so there are a whole series of 

 2 things, and these are very complicated, and unless 

 3 you get down into the nitty-gritty of them, it's 

 4 very hard to come up with the exact prescription, 

 5 but I think you've got to go in that direction. 

 6 One concern I have is the banks which are writing 

 7 to Chesapeake and have bundled this risk from all 

 8 these different parties and take all these things 

 9 and I really worry about putting position limits 

 10 on them because then they'll stop lending and that 

 11 will turn the lights out in Calgary. 

 12 CHAIRMAN GENSLER: Thank you, 

 13 Commissioner Sommers. Commissioner Chilton? 

 14 COMMISSIONER CHILTON: Dr. Verleger, I 

 15 want to pick up on what Commissioner Sommers was 

 16 saying. Did you see movement in crude oil prices 

 17 that you would attribute to the U.S. oil roll? 

 18 MR. VERLEGER: Yes, I did. 

 19 COMMISSIONER CHILTON: I know you're 

 20 talking about the final days here and they changed 

 21 their roll to a 4 day roll. 

 22 MR. VERLEGER: Yes. 

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 1 COMMISSIONER CHILTON: Have you seen any 

 2 price movement with other EFTs? 

 3 MR. VERLEGER: The U.S. oil is the only 

 4 one that was so public and the largest, and for 

 5 years I've been following what's called the supply 

 6 of storage curve. It's an agricultural economics 

 7 tool of the spreads, and it went totally out of 

 8 whack in Cushing where it should apply in 

 9 February/March just at the period of time when it 

 10 rolled, and so you could see it there. That was 

 11 the one time I really noticed it, but the thing is 

 12 I watched from Colorado or from Calgary so I don't 

 13 have the inside information on what's going on. 

 14 You hear all these anecdotes and most of the 

 15 anecdotes turned out to be wrong. 

 16 COMMISSIONER CHILTON: Thank you, 

 17 Doctor. Mr. Arnold, I'm going to pick up on 

 18 another thing that Commissioner Sommers started to 

 19 ask about but a little bit different. Do you have 

 20 a position on the no action process with regard to 

 21 ICE Futures Europe and the NYMEX linked WTI crude 

 22 contract? What issues do you see being raised by 

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 1 continuing to allow those two trading venues to 

 2 exist without hard position limit? 

 3 MR. ARNOLD: As a user I appreciate that 

 4 there is competition between two exchanges. The 

 5 problem with one exchange obviously is that they 

 6 can charge monopolistic fees. So I certainly 

 7 support two exchanges. I think the presence of 

 8 two exchanges is exactly why the CFTC needs to 

 9 assume responsibility for much of the regulatory 

 10 oversight. One exchange cannot do it on its own, 

 11 and essentially this unique situation with this no 

 12 action letter where ICE has to follow NYMEX 

 13 regulations you get a strange situation where 

 14 NYMEX gets to put regulation on their competitor. 

 15 So I think the CFTC needs to assume responsibility 

 16 for much of the regulatory oversight that's now 

 17 done at the exchanges and create rules that are 

 18 good for the market as a whole. 

 19 COMMISSIONER CHILTON: I happen to agree 

 20 with you. Would you have it be an aggregate hard 

 21 position limit between the two exchanges? Would 

 22 you have it be a percentage of open interest? How 

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 1 would you do it? 

 2 MR. ARNOLD: I support tighter limits on 

 3 the physical futures contract which is only traded 

 4 on the NYMEX. On financial positions, I don't 

 5 think that there should be an position limit. I 

 6 think they increase volatility. I think they 

 7 reduce liquidity and the cost of commercial 

 8 hedging. 

 9 COMMISSIONER CHILTON: I have a little 

 10 more time and I'll try to get one more in and then 

 11 I'll be done, Mister Chairman. Mr. Chambers, this 

 12 is another one that may help our Capitol Hill 

 13 colleagues who are here because it's about OTC and 

 14 not necessarily about position limits or the hedge 

 15 exemptions. But this issue of standardization, I 

 16 cannot quite wrap my arms around that is defined. 

 17 If it's only defined as what a clearing entity can 

 18 make money on then that's easy enough. But how 

 19 would you define it? And don't we need to cover 

 20 more than just things that are standardized? I 

 21 understand what we were talking about earlier 

 22 about your concern about clearing everything, but 

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 1 this issue of standardization, have you thought 

 2 about it any? 

 3 MR. CHAMBERS: Absolutely. The 

 4 standardization question is key for a risk manager 

 5 for end users, really any risk manager. Take for 

 6 instance if Chesapeake issues debt that matures 10 

 7 days from this date. To force that to be 

 8 standardized would immediately create 

 9 inefficiencies in the hedge because you're not for 

 10 sure there will be a contract specific to hedge 

 11 that risk that you could put in a standardized 

 12 form onto an exchange. That in and of itself 

 13 creates problems from an economic offset 

 14 perspective as well as an accounting perspective. 

 15 And in some cases you might very well get the 

 16 economic offset that you seek, but you might not 

 17 get the accounting you see, so you're going to 

 18 have near term volatility in your income statement 

 19 that could quite frankly be confusing to 

 20 investors. 

 21 COMMISSIONER CHILTON: Thank you. 

 22 CHAIRMAN GENSLER: I'm going to allow 

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 1 myself a third round and any other Commissioners 

 2 who want it. I said I could do three rounds, and 

 3 any one of you may. Mr. Chambers, you said 

 4 earlier that you have 10 to 15 counterparties, or 

 5 if I could call them suppliers of risk management 

 6 which we call swap dealers. I suspect that you 

 7 feel that that's a good thing to have them 

 8 competing with each other to have 10 plus 

 9 competitors supplying you the risk management. 

 10 MR. CHAMBERS: Absolutely. The more 

 11 suppliers we have to affect our strategies the 

 12 better. 

 13 CHAIRMAN GENSLER: That seems to be 

 14 consistent with my earlier philosophy that the 

 15 more suppliers in a market, in this case suppliers 

 16 of risk management which we call swap dealers, is 

 17 a helpful thing to markets and to market 

 18 liquidity. You had also said just don't set 

 19 position limits too low, but if we set them in a 

 20 way that would help protect that you would have 10 

 21 to 15 dealers as opposed to maybe as the 

 22 automobile in this country concentrated down to 

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 1 three, I know that we had a lot of foreign folks, 

 2 but a lot of industries get highly concentrated 

 3 and not just in the financial services field. 

 4 Wouldn't that be beneficial to Chesapeake and 

 5 companies like yours to continue to have a diverse 

 6 set of suppliers of this risk management? 

 7 MR. CHAMBERS: Certainly. The more 

 8 participants in a market the better. We're 

 9 supportive of that. Our chief concern with using 

 10 position limits to effect that is just we feel 

 11 there needs to be more analysis and more data 

 12 gathered to get the position limit right, and 

 13 that's where going back to my previous statements, 

 14 that is necessary to make sure that we don't get 

 15 too low of a limit. 

 16 CHAIRMAN GENSLER: I understand, but 

 17 when we heard from the swap dealers last week that 

 18 they didn't want, one of them used I think the 

 19 term splintering of markets, I just thought they 

 20 just want to have a very large market share and I 

 21 would understand why that would be counter to your 

 22 interests. Mr. Arnold, if I could ask you a 

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 1 question about what we've proposed in 

 2 over-the-counter derivates. I know it's a little 

 3 off the topic of your written testimony, but do 

 4 you have a point of view, and if you don't I 

 5 understand -- we've called for the use of 

 6 centralized clearing for standard product and the 

 7 posting of margin. Do you have a point of view as 

 8 to the hedge fund community whether they should 

 9 come under that? We've heard from Mr. Chambers 

 10 that he thought that corporate end users maybe 

 11 would post noncash collateral, but I was 

 12 interested if you had a point of view of the hedge 

 13 fund community participating in posting of 

 14 collateral and whether that should be cash 

 15 collateral. 

 16 MR. ARNOLD: I think it's very natural 

 17 for hedge funds to want to clear on the exchange 

 18 to access the credit intermediation and I think 

 19 hedge funds would rather pay a small fee to the 

 20 exchange than take a credit risk on accepting the 

 21 swap dealer's credit, and vice versa, that the 

 22 swap dealer is reluctant to take a hedge fund's 

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 1 risk. We don't have $10 billion of producing 

 2 properties to set up as a reserve. We have cash 

 3 that guarantees our trades. So that's why we 

 4 clear 98 percent of our trades. I think it is 

 5 important in order to maintain a vibrant market to 

 6 understand that people access the market in 

 7 different ways. Chesapeake accesses the market 

 8 through the swap dealers. Centaurus accesses 

 9 directly to the exchanges. Some small speculators 

 10 access it through the UNG or USO vehicle. 

 11 Participants access the market in different ways, 

 12 but the Commission should support this and allow 

 13 this. 

 14 CHAIRMAN GENSLER: I thank you. 

 15 Commissioner Dunn? 

 16 COMMISSIONER DUNN: Thank you, Mister 

 17 Chairman. Mr. Chambers, you say in your testimony 

 18 on page 6 that, "Markets routinely overshoot when 

 19 correcting for significant economic events such as 

 20 we've seen since the second half of 2008." 

 21 Doesn't having passive investors in there 

 22 exacerbate that situation? 

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 1 MR. CHAMBERS: I'm not sure if I have 

 2 all the information to answer that, but I was 

 3 basing the concept of overshooting on really any 

 4 market that sustains a massive downturn, typically 

 5 the panic of unwinding your positions causes it to 

 6 go past what some would call a fair value. So you 

 7 do have investors jumping back into the market to 

 8 get back to what could be accepted as fair value. 

 9 COMMISSIONER DUNN: But if you have an 

 10 investor who is not reacting to market signals, 

 11 doesn't that skew the market in some way? 

 12 MR. CHAMBERS: If an investor doesn't 

 13 react to market signals and is not analyzing the 

 14 data, I think that that would have an impact. 

 15 COMMISSIONER DUNN: Mr. Verleger, you 

 16 looked up. Do you have a comment on that? 

 17 MR. VERLEGER: I think we've known for 

 18 decades, I remember Keynes writing about how just 

 19 because the price may fall to say 50 -- may be the 

 20 right price, the price will fall well below it 

 21 which is why he wrote of the need for commodity 

 22 stabilization agreements when he was coming up 

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 1 with the World Bank and the IMF. It's interesting 

 2 if you look at the data what happened is that 

 3 these index funds will reallocate. I hope we get 

 4 more data from the CFTC on their actual positions 

 5 because you have to just approximate what their 

 6 positions are in the oil community. They 

 7 reallocate so if oil prices rise relative to the 

 8 other commodities in the funds, they will sell oil 

 9 and tend to buy these other commodities. So last 

 10 year as prices were falling from $150 down to $30 

 11 at the end of December, they were actually buying 

 12 and buffering. They actually seen to be a 

 13 stabilizing force. I'm somewhat surprised to find 

 14 that in the data, but it makes sense, and we heard 

 15 from U.S. oil the way they work. It also makes 

 16 sense in terms of portfolio allocation theory, 

 17 that is that CalPERS or any of the other big 

 18 retirement funds buying commodities if they have a 

 19 rational portfolio allocation if they see 

 20 something rise in energy they will sell those 

 21 assets when they believe the price has risen too 

 22 far to maintain the portfolio balance. Again this 

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 1 is why I have been on both sides of this issue. I 

 2 think that the data seem to say that in case of 

 3 crude oil, and I won't say it about anything else, 

 4 they seem to have been exerting a stabilizing 

 5 influence. 

 6 COMMISSIONER DUNN: Thank you both. 

 7 Again Mr. Chambers, you go on to say that, "We 

 8 believe all of this puts the CFTC and other 

 9 regulators in a very difficult position." I agree 

 10 with that wholeheartedly. But I'd like to get 

 11 your thoughts, all the panelists' thoughts on 

 12 this, that we're in a unique position as we look 

 13 at the futures market and we look at the 

 14 commodities that we oversee and Congress has 

 15 different entities based on the jurisdiction of 

 16 the enabling committees that also work in those 

 17 areas. In our case it's FERC and the FTC and some 

 18 of the futures on energy markets. What do you see 

 19 the relationship between FERC and the CFTC ought 

 20 to be and understanding the types of things that 

 21 you've talked about on the supply that's out 

 22 there, the supply that may be out there on a 

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 1 tanker somewhere that we can't see so that we have 

 2 a better understanding about storage capacity and 

 3 what's really taking place in driving the markets? 

 4 MR. CHAMBERS: I'll go back to my 

 5 previous statements that one of the reasons why 

 6 this puts the Commission and regulators in a 

 7 difficult position is that you have a lack of 

 8 information. I think that information about 

 9 physical and financial positions would greatly 

 10 help out in making the appropriate decisions. 

 11 I'll leave my comments at that. 

 12 COMMISSIONER DUNN: In your opinion is 

 13 there a need for greater communication between 

 14 FERC and the CFTC, maybe even having joint 

 15 meetings to address some of these? 

 16 MR. ARNOLD: It sounds like a good idea. 

 17 MR. VERLEGER: Absolutely. You also 

 18 have the FTC with its new rules on what 

 19 constitutes speculation and you left out the 

 20 Federal Reserve Board, and the copper crisis I 

 21 recall Mr. Volker being over here kind of beating 

 22 on the CFTC to try to get them to do something. 

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 1 The silver crisis and not the copper crisis in 

 2 1980. I've watched this debate between the CFTC 

 3 and the FERC. The confidence on markets is here. 

 4 The experience on review of markets is here, 

 5 whereas the FERC has the kind of competence in the 

 6 pipeline regulation and the storage. As for data 

 7 on storage capacity and so on, I think it's 

 8 essential that you share information and that 

 9 there be much greater communication. But the 

 10 competence on markets and market regulation is 

 11 here. That's where it's been historically. 

 12 That's where the experience is and that's where it 

 13 ought to be. 

 14 CHAIRMAN GENSLER: Thank you, 

 15 Commissioner Dunn. Any others? Commissioner 

 16 Chilton? I want to thank the panelists. It was 

 17 an excellent review. I actually was delighted to 

 18 see that there is some commonality between the 

 19 professor from Calgary and, if I can, an 

 20 investment or hedge fund manager in New York. 

 21 Right? 

 22 MR. ARNOLD: Houston. 

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 1 CHAIRMAN GENSLER: Houston. I have to 

 2 know where you live. On the possibility of 

 3 setting position limits on the near months 

 4 physical. I thank you also, Mr. Chambers, for 

 5 your expert testimony. 

 6 (Recess) 

 7 CHAIRMAN GENSLER: I thank everybody. I 

 8 want to particularly thank our third panel for not 

 9 only their expert testimony but their patience. 

 10 We have with us Mr. Masters, Mr. Young and Mr. 

 11 Greenberger. I'll just turn it over again if it's 

 12 possible to try to give us the highlights. There 

 13 were very extensive submissions and it's all there 

 14 in the record. Mr. Masters, do you want me to 

 15 start with somebody else? There will be a green 

 16 light that flashes about three and yellow at about 

 17 4 that gives you a sense of what Doug's doing over 

 18 here. 

 19 MR. MASTERS: Thank you, Chairman 

 20 Gensler and Commissioners Dunn, Chilton and 

 21 Sommers, for the opportunity to be here today. 

 22 I strongly recommend that the Commission 

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 1 adopt the following measures. Number one, the 

 2 CFTC should set aggregate speculative position 

 3 limits that apply across all trading venues 

 4 including designated contract markets, foreign 

 5 boards of trade and the over-the-counter markets. 

 6 Number two, the CFTC should target an overall 

 7 level of speculation in the range of 25 to 35 

 8 percent of open interest. Number three, the CFTC 

 9 should convene a panel of bona fide physical 

 10 producers and consumers on a semiannual basis for 

 11 each commodity group to advise on position limits 

 12 and the level of liquidity in the commodity 

 13 derivatives markets. Number four, the CFTC should 

 14 wet a superlimit equal to 5 percent of open 

 15 interest for any noncommercial entity receiving 

 16 exemptions or engaged in spread trading. Finally, 

 17 number five, the CFTC should prohibit the strategy 

 18 of passive investment. 

 19 When I first testified in front of the 

 20 Senate in May 2008, I raised the alarm concerning 

 21 the damaging effects of index speculation and 

 22 today I want to reiterate that all forms of 

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 1 passive investment in the commodities markets are 

 2 clear and present danger to the economy and 

 3 American consumers. As I detailed in my written 

 4 testimony, Goldman Sachs has said repeatedly that 

 5 commercial producers were pushing down commodity 

 6 prices through their hedging transactions. They 

 7 took it upon themselves without consulting anyone 

 8 to create the long only passive indexer. This 

 9 artificial consumer was designed to add buying 

 10 pressure to the commodities markets and to prevent 

 11 prices from falling. This dramatically altered 

 12 the structure of the commodities futures markets. 

 13 In fact, this passive indexer has grown so large 

 14 that their buying pressure has overwhelmed the 

 15 selling pressure of commercial producers and 

 16 caused commodity prices to increase dramatically 

 17 and remained elevated for an extended period of 

 18 time. The presence of passive investors has led 

 19 to enormous volatility which correlates with 

 20 investment flows and has very little to do with 

 21 supply-and-demand factors. 

 22 There are three primary reason why 

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 1 passive investment inflicts so much damage on the 

 2 commodity markets. One, it drives prices much 

 3 higher as money flows in. Without passive 

 4 investment, prices would be much lower. Why 

 5 should consumers have to pay more for the 

 6 essentials of life because of an asset allocation 

 7 decision by investors? When passive investors 

 8 allocate large sums of money to these markets, 

 9 they do so with disregard for supply-and-demand 

 10 fundamentals. Therefore, commodity prices reflect 

 11 forces other than supply and demand. This 

 12 destroys the essential price discovery function of 

 13 the commodities markets. Because passive 

 14 investors are long term and they buy and roll 

 15 their positions, they remove liquidity from the 

 16 commodities markets. By consuming liquidity, they 

 17 add dramatically to the volatility of these 

 18 markets. This makes it much more difficult for 

 19 hedgers to do their job and hedge. 

 20 For these reasons, passive investment 

 21 strategies in the commodities markets should be 

 22 prohibited. These markets exist solely for bona 

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 1 fide physical hedgers, and as much as investors 

 2 want to take over these markets, nothing will 

 3 change that fundamental fact. Capital market 

 4 investors need to invest in the capital markets, 

 5 not the commodities markets. The idea of buying 

 6 and holding in stocks is helpful, but buy and hold 

 7 in oil and wheat is harmful. 

 8 These are not just economic issues. In 

 9 fact they are national security issues as well. 

 10 Today the old derivatives markets are inscrutable 

 11 to regulators because of the bulk of trading that 

 12 takes place over the counter. Therefore it is 

 13 quote conceivable that a rogue nation could use 

 14 these markets to push up oil prices. This would 

 15 cause tremendous damage to the U.S. economy. 

 16 There are many important reasons why we need 

 17 aggregate speculative position limits. The one in 

 18 particular is to effectively deter our enemy's 

 19 attempts to acquire large derivatives positions in 

 20 our commodities futures markets and negative 

 21 influence the outcome. 

 22 Having embarked on this set of hearings, 

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 1 the CFTC needs to take strong action to protect 

 2 the commodity derivatives markets from excessive 

 3 speculation. If it does not, then it will send a 

 4 signal to Congress that strong additional 

 5 authorities are not imperative and it will send 

 6 the signal to speculators that it is okay to push 

 7 billions of dollars back into these markets. 

 8 America has only one chance to get this right. It 

 9 would be better to do nothing so that at least 

 10 consumers are aware of the risk rather than 

 11 implement half-measures that have the appearance 

 12 of doing something while in fact leaving our 

 13 commodities derivatives markets open to fraud, 

 14 manipulation and excessive speculation. Thank you 

 15 very much. 

 16 CHAIRMAN GENSLER: Thank you, Mr. 

 17 Masters. Mr. Young? 

 18 MR. YOUNG: Mister Chairman, as you 

 19 know, I used to work at the Commission and when I 

 20 came back here a few weeks ago people asked me 

 21 whether there was electricity in the building when 

 22 I worked here 30 years ago, so apparently I 

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 1 haven't caught up with the technology. Excuse me. 

 2 Mister Chairman and members of the 

 3 Commission, my name is Mark Young. I'm appearing 

 4 today on behalf of the Futures Industry 

 5 Association. One good thing about being on the 

 6 last panel of the last hearing is that you know 

 7 how the time limits will be enforced and you know 

 8 how active the questioning will be. I've been 

 9 watching and I will try to brief. 

 10 FIA supports new authority and resources 

 11 for the Commission. We support extending the 

 12 Commission's transparent market surveillance and 

 13 reporting powers to certain OTC and foreign 

 14 transactions. We support changing the CO2 reports 

 15 to make them more granular. We support granting 

 16 the Commission standby position limit authority 

 17 for markets that settle off the prices of U.S. 

 18 futures contracts. 

 19 Giving the Commission new tools does not 

 20 mean we believe the Commission must use every tool 

 21 it has in every way. Reasoned, balanced analysis 

 22 should drive regulatory outcomes. That is why we 

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 1 are pleased the Commission has held these 

 2 informative hearings. We also understand the 

 3 Commission is updating it's September 2008 report 

 4 with new data. We look forward to public release 

 5 of that report and hopefully to equally 

 6 informative public hearings to examine its 

 7 conclusion when issued. 

 8 FIA's written statement describes our 

 9 views on price discovery and position limits. As 

 10 we explain, our major concern is market migration. 

 11 If the CFTC imposes rigid position limits we fear 

 12 price discovery in U.S. Markets will move 

 13 offshore or to less regulated venues. That will 

 14 compromise the Commission's market surveillance 

 15 capabilities and our members' business. We know 

 16 many do not believe this concern is real, but I am 

 17 sure everyone would concede that the world has 

 18 changed since 1936. Through technology, 

 19 globalization, financial engineering and the like, 

 20 U.S. markets do not operate in a vacuum. We are 

 21 part of the world. 

 22 Last month, Prime Minister Brown and 

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 1 President Sarkozy warned of the harms of market 

 2 volatility but recommended more transparency and 

 3 not position limits. If other regulators in other 

 4 countries do not believe that position limits will 

 5 not help price discovery in their markets, we have 

 6 to ask ourselves why. Is it because they tolerate 

 7 price manipulation or market disruptions, or their 

 8 market surveillance systems are better than ours, 

 9 or do their trading systems differ from ours? I 

 10 think we would all agree the answer to these 

 11 questions is no. This answer should give us 

 12 pause. Unless regulators in other countries see 

 13 position limits as a cure for their markets, FIA 

 14 believes there is a real danger that imposing 

 15 rigid position limits on U.S. markets will cause 

 16 market migration. That shift would harm price 

 17 discovery in the U.S. and the public interest that 

 18 the Commission and the Commodity Exchange Act 

 19 serve. 

 20 As our written statement makes clear, 

 21 before imposing position limits, the law requires 

 22 the Commission to find first that some level or 

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 1 form of speculation or speculative trading has 

 2 caused or will cause price fluctuations and 

 3 changes which are sufficiently unreasonable and 

 4 unwarranted to burden commerce. Then the 

 5 Commission must find that any limits it sets are 

 6 necessary to diminish, prevent or eliminate such a 

 7 burden. At this point, we see no consensus, and 

 8 based on the last panel I don't see how anyone 

 9 could see a consensus on whether the excessive 

 10 speculation standard has been met. The 

 11 Commission's update of its 2008 report will shed 

 12 additional light on this important question. We 

 13 look forward to reviewing it when it is available 

 14 and to answering your questions today. 

 15 CHAIRMAN GENSLER: Thank you, Mr. Young. 

 16 Mr. Greenberger? 

 17 MR. GREENBERGER: Thank you, Mister 

 18 Chairman. I also as an alumnus of the CFTC want 

 19 to congratulate you and the other Commissioners on 

 20 what I think have been three very excellent days 

 21 of hearings and probative questions. First of 

 22 all, I thank the Chairman for inviting me, and I 

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 1 was asked by the steering committee of Americans 

 2 for Financial Reform to speak on behalf of that 

 3 coalition and its 200 members. It's made up of 

 4 the nation's largest unions, civil rights 

 5 organizations and public citizen's groups. They 

 6 have a call to action seeking financial regulatory 

 7 reform, and last week they forwarded a letter to 

 8 the Hill leadership supporting the Obama 

 9 Administration White Paper proposal that 

 10 standardized contracts be moved onto exchange 

 11 trading and that swaps dealers who have large 

 12 volumes in these markets have their own regulatory 

 13 requirements applied to them. 

 14 For purposes of today's hearing, the 

 15 Commodity Exchange Act of 1939 may be old, but it 

 16 still the act. It was proposed to Congress by 

 17 President Roosevelt in conjunction with the 

 18 Securities Acts of 1933 and 1934 and I think the 

 19 SEC still finds those acts to be probative. I 

 20 think the Chairman in his opening statements has 

 21 made it clear that you feel yourself bound to the 

 22 statute as it now presents it itself to you, maybe 

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 1 it should be changed, but in this regard it 

 2 hasn't. And you noted, Mister Chairman, where 

 3 there is a potential of burdening interstate 

 4 commerce and excessive speculation is found, 

 5 position limits have to be imposed. That issue 

 6 has practically has been resolved for every 

 7 physical market. There are position limits for 

 8 every market. It may be you set them or the 

 9 exchanges you regulate set them, but they're 

 10 position limits. Nobody is coming here and saying 

 11 abandon the idea of position limits. Once you 

 12 accept position limits, you've accepted the 

 13 possibility of excessive speculation. 

 14 With regard to speculation as my 

 15 testimony points out and I think as you've tried 

 16 to point out, Mister Chairman, there is a lot of 

 17 confusion. The Commodity Exchange Act recognizes 

 18 that speculation can be and is necessary. 

 19 Physical hedgers cannot operate regulated 

 20 exchanges on their own and speculators however 

 21 they come to the exchange, whether as swaps 

 22 dealers, individual investors, commodity index 

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 1 funds, may be needed to create necessary 

 2 liquidity. Without the liquidity there would be 

 3 no exchanges. What the statute says is 

 4 speculation is good when it creates liquidity. 

 5 When it goes beyond that it is excessive and there 

 6 have to be controls. The controls are position 

 7 limits and we have position limits today. 

 8 We are bound by that statute in how to 

 9 go forward. There is a bona fide hedging 

 10 exemption. Who is not going to be subject to the 

 11 position limits? My reading of 4(c) is consistent 

 12 with the purposes of futures market again as 

 13 evidence as to what President Roosevelt wanted and 

 14 what the agricultural committees did in 1936. The 

 15 futures markets are unlike the equity and debt 

 16 markets. The futures markets are designed to 

 17 allow people to hedge their commercial risk. That 

 18 is their exclusive purpose. They are not designed 

 19 to have somebody come in and look at a company and 

 20 say that company is selling for a small price. I 

 21 can make $100 million investing $1 million. The 

 22 purpose is to allow commercial hedgers to hedge 

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 1 their risk. The tension between producers and 

 2 consumers in the hedging process creates a 

 3 reflection of supply and demand fundamentals. 

 4 Futures markets are price discovery. 

 5 Everybody accepts that. When you go to buy 

 6 something in the spot market, you look to see what 

 7 the futures price is. You are hoping and praying 

 8 that the purposes of the Exchange Act are met by 

 9 that tension of people who do care about what the 

 10 price is, that it will be a reasonable, fair, 

 11 open, orderly price. People are invited as 

 12 speculators who as the USFO person said, I don't 

 13 care what the price is. Yes, we want those people 

 14 in to create liquidity, but if you have as the 

 15 Senate White Report just reflected 60 percent of 

 16 the wheat market being speculators, you lose the 

 17 supply and demand function and consumers such as 

 18 those I represent are not paying according to 

 19 market fundamentals, they're paying according to 

 20 people who don't care what the price is except 

 21 that it meets its betting strategy. You have the 

 22 power to control that and you should control it. 

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 1 CHAIRMAN GENSLER: Thank you, Mr. 

 2 Greenberger, Mr. Young and Mr. Masters. If I 

 3 could start with a question for Mr. Young. Are 

 4 you familiar with General Counsel Berkovitz's 

 5 testimony to the Commission on our first day of 

 6 hearings about our legislative history and 

 7 background? 

 8 MR. YOUNG: I read his report. I didn't 

 9 see all of his testimony. 

 10 CHAIRMAN GENSLER: On that first day I 

 11 recall asking him, and we could ask him to come 

 12 back to the witness table, but if I can paraphrase 

 13 what I remember asking him, was whether this 

 14 Commission had to find that there actually was as 

 15 you just said -- what I'm trying to say is he 

 16 doesn't I don't think agree with what you said in 

 17 your opening statement, that this Commission does 

 18 under the Act, it says, shall set position limits 

 19 where necessary to eliminate, diminish or prevent 

 20 the burdens that may come to interstate commerce 

 21 from excessive speculation. So if we see those 

 22 burdens in the future, it's not about saying there 

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 1 was something in the past. That's how I recall 

 2 his testimony. We could ask him to come back up 

 3 and see if that's correct, but do you agree with 

 4 what I'm paraphrasing I think our General Counsel 

 5 told us? 

 6 MR. YOUNG: I have great respect for 

 7 your General Counsel. He can probably show me how 

 8 to use the microphone, and I'd be happy if he 

 9 wants to join the discussion. I'd start by simply 

 10 saying I agree with Michael Greenberger that you 

 11 have to apply the statute as written. The statute 

 12 says very clearly there are two components to the 

 13 Commission's speculative position limit power. 

 14 First, there is a finding of excessive speculation 

 15 which has caused price fluctuations or price 

 16 changes that are unreasonable or unwarranted. 

 17 CHAIRMAN GENSLER: I take the liberty of 

 18 the Chair that General Counsel Berkovitz testified 

 19 differently than that. 

 20 MR. YOUNG: If you'd like me, Mister 

 21 Chairman, I'll read you the first sentence. 

 22 CHAIRMAN GENSLER: No, I'm going to ask 

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 1 General Counsel Berkovitz. 

 2 MR. BERKOVITZ: Yes, Mister Chairman, 

 3 last week your summary was correct and basically 

 4 stated that we did not have to actually find that 

 5 there had been excessive speculation in order to 

 6 impose a position limit. In 1981 as the testimony 

 7 recounted, the Commission determined that the 

 8 exchanges should set position limits for the 

 9 commodities where the CFTC had not set limits when 

 10 the commodities were expanded in 1974 to include 

 11 all futures and the Commission exercised that 

 12 authority at the time without such a finding that 

 13 there had been excessive speculation in all those 

 14 additional commodities. 

 15 CHAIRMAN GENSLER: Thank you. Mr. 

 16 Masters, may I ask you a question? 

 17 MR. YOUNG: Mister Chairman, I never got 

 18 to answer the question. 

 19 CHAIRMAN GENSLER: I just think there's 

 20 a difference here, and he's our General Counsel. 

 21 MR. YOUNG: I'm perfectly comfortable 

 22 with the fact that there's a difference. On this 

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 1 there is no difference. The Commission does not 

 2 need to set position limits. There is no mandate 

 3 to set position limits. If there were, you'd be 

 4 in violation of that mandate today because in 1979 

 5 you determined that you didn't need any longer 

 6 daily trading limits which you repealed having 

 7 found that those limits were no longer necessary 

 8 to prevent excessive speculation. 

 9 CHAIRMAN GENSLER: We can see that it's 

 10 good to see where there are similarities, but what 

 11 I think our General Counsel is saying is there is 

 12 no need for this Commission to do anything more 

 13 than what the statute says which is to determine 

 14 whether it's necessary to diminish, eliminate or 

 15 prevent the burdens that may come, and it's not an 

 16 historical thing, it's also a prospective thing. 

 17 Is that right? 

 18 MR. BERKOVITZ: That's correct. 

 19 CHAIRMAN GENSLER: You might even agree 

 20 with him now. 

 21 MR. YOUNG: The words in the statute are 

 22 to diminish, eliminate or prevent such burdens. 

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 1 You can't diminish, eliminate or prevent a burden 

 2 if you haven't found it exists or could exist. 

 3 CHAIRMAN GENSLER: Could exist. 

 4 MR. YOUNG: Or could exist. 

 5 CHAIRMAN GENSLER: We are in the same 

 6 place. Could exist. Future. Thank you. I'm 

 7 going to turn to Commissioner Dunn. 

 8 COMMISSIONER DUNN: I'm not even sure 

 9 you got one whole question out there. 

 10 CHAIRMAN GENSLER: To me it was an 

 11 important one. It's our statute and our law. 

 12 COMMISSIONER DUNN: I have some concerns 

 13 about the Commission unilaterally establishing 

 14 position limits in the markets that we have 

 15 oversight and what that means. Mr. Young, in your 

 16 testimony you say that when we look at this we 

 17 ought to look at international arbitrage as well, 

 18 but it's been my experience since I've been on the 

 19 Commission that when there are times that we have 

 20 found people bumping up against accountability 

 21 levels or position limits, what they simply do is 

 22 move to another venue, sometimes an opaque venue, 

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 1 and that doesn't accomplish what we try to 

 2 accomplish at all. It simply puts it out of our 

 3 sight. I'm like all three panelists to address 

 4 how we do assure that if the Commission sets a 

 5 position limit that we're simply not setting 

 6 ourselves up for only seeing part of the problem. 

 7 MR. YOUNG: Commissioner Dunn, I think 

 8 that's a challenging question and I'm not arrogant 

 9 enough to think that I can sit here and tell you 

 10 the precise answer today. What we did tell you in 

 11 our testimony is that international arbitrage is a 

 12 consideration that the statute calls for you to 

 13 contemplate, so it's not a matter of whether you'd 

 14 like to or not like to consider it, the statute 

 15 calls for you to consider it. 

 16 The other thing that we said in our 

 17 testimony is that this is a challenge that not 

 18 only the Commission faces but also the exchanges 

 19 face. To date the exchanges have set position 

 20 limits in energy commodities. I don't believe 

 21 they've done it in a vacuum. The Commission has 

 22 been their partner. The Commission has been there 

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 1 every step of the way. And the Commission can say 

 2 to an exchange today your limit is too high or too 

 3 low and you have to change it. You have absolute 

 4 authority to do that. And the Commission can also 

 5 say to an exchange today your hedge exemptions 

 6 which all contain their own limit are set with a 

 7 limit that's too high or too low. So right now 

 8 what you have is a collaborative process and 

 9 through the informed judgment of the exchanges and 

 10 the Commission, you have an opportunity to set a 

 11 position limit that keeps international arbitrage 

 12 to a minimum and allows you, and this I think 

 13 Commissioner Dunn is exactly where we were going 

 14 with our testimony, to preserve the integrity of 

 15 the price discovery process by making sure that 

 16 price discovery occurs on U.S. exchanges. 

 17 MR. GREENBERGER: With regard to 

 18 international arbitrage, I'm a little caught off 

 19 guard to be candid where in setting position 

 20 limits or hedge exemptions, international 

 21 arbitrage is part of your statutory mission. And 

 22 even if it were, I can assure the Commission the 

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 1 G-20 has just set up by order of its last meeting 

 2 an international meeting to respond to this exact 

 3 question. The International Energy Forum is the 

 4 convener. I am a member of that group and I can 

 5 tell you that every country save possibly one is 

 6 greatly worried about this same problem. 

 7 Number two, after the economic meltdown, 

 8 let's leave London to the side. Is Chesapeake 

 9 really going to go to the Dubai Mercantile 

 10 Exchange and rely on the credit mechanisms or any 

 11 other Third World country? 

 12 Number three, if international arbitrage 

 13 were really a problem, the Intercontinental 

 14 Exchange Futures Europe would still have its 

 15 trading terminals in London. They are claiming 

 16 they are a United Kingdom. They claim they should 

 17 be regulated by the United Kingdom, and as you 

 18 know I have concerns about that. But they and 20 

 19 other foreign exchanges have come to this 

 20 Commission asking for the privilege of placing 

 21 terminals in the United States. When you're 

 22 trading United States benchmark futures, WTI, 

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 1 Henry Hub, you've got to do it in the United 

 2 States. If you didn't need to do it in the United 

 3 States, ICE Futures Europe wouldn't be in this 

 4 dilemma of having U.S. trading terminals, having 

 5 conditions imposed upon them that make them almost 

 6 a regulated exchange when they could be at the FSA 

 7 right now who doesn't require position limits. 

 8 People want to be in this country. 

 9 COMMISSIONER DUNN: My time ran out, but 

 10 I would like to hear from Mr. Masters. 

 11 MR. MASTERS: Thanks. I would echo Mike 

 12 Greenberger's comments and others'. There is 

 13 little doubt if you act decisively that other 

 14 members of the G-20 and the G-7 are going to 

 15 follow along with what you do. Everybody knows 

 16 that we have a problem. The idea that we don't 

 17 have a problem, that there's not excessive 

 18 speculation, is contrasted by the facts. We had 

 19 the largest move ever in history in commodities 

 20 prices unilaterally in the last 12 months. We've 

 21 had world wars, we've had depressions, we've had 

 22 various economic collapses, and we've had the 

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 1 largest single move in commodities prices in 12 

 2 months we've ever had in history. How else would 

 3 we define excessive speculation? So I think that 

 4 because this affects all nations it's very likely 

 5 that anything you do will be unilaterally followed 

 6 by other members of the G-7, and I think with 

 7 respect to Sarkozy and Gordon Brown that they 

 8 would echo those sentiments if they were here 

 9 today. 

 10 Finally, with regard to fiduciaries 

 11 themselves today, fiduciaries recognize that the 

 12 world has changed a great deal. There is very 

 13 little prospect for fiduciaries that run large 

 14 institutional pools of money to go overseas to 

 15 engage in regulatory arbitrage with credit 

 16 counterparties who are suspect to say the least. 

 17 We just went through a significant crisis where we 

 18 had these issues. That's the last thing that 

 19 fiduciaries want to do. They want to stay here 

 20 and trade. They want to clear. They want to 

 21 clear on U.S. regulated exchanges because their 

 22 boards are telling them to. So at any rate, 

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 1 that's my answer. 

 2 CHAIRMAN GENSLER: Thank you, 

 3 Commissioner Dunn. Commissioner Sommers? 

 4 COMMISSIONER SOMMERS: Thank you, Mister 

 5 Chairman. I have a couple of questions with 

 6 regard to the same line that I keep going down 

 7 with every one of the panels, and they're for Mr. 

 8 Young. In your written testimony you talk about 

 9 the CFTC lacking the authority to impose limits on 

 10 either the OTC markets or foreign exchanges and as 

 11 Commissioner Dunn was talking about, the 

 12 unintended consequences of pushing those trades to 

 13 another market. Do you have a view on additional 

 14 steps that we do have the authority to take at 

 15 this point with regard to position limits? 

 16 MR. YOUNG: I don't see how under the 

 17 statute as it's written now the Commission can 

 18 impose position limits in the over-the-counter 

 19 market. I also don't see how the Commission under 

 20 the statute as it's written now can impose 

 21 position limits on foreign boards of trade. I do 

 22 understand how the Commission can attempt to 

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 1 negotiate with the regulators overseas when there 

 2 is an exchange competition which we happen to like 

 3 at the FIA. We like trading platform competition. 

 4 When there is such a competition and one 

 5 competitor is overseas and one competitor is in 

 6 the United States, we believe the Commission has 

 7 the authority has to negotiate, communicate, 

 8 cooperate with their colleagues overseas, and if 

 9 Mr. Masters's prescient observation about the 

 10 prime minister and the president are correct that 

 11 France and Great Britain would embrace position 

 12 limits, a lot of our concern about migration would 

 13 be dissipated. 

 14 COMMISSIONER SOMMERS: Another part of 

 15 your testimony where I jut wanted you to clarify 

 16 is with regard to hedge exemptions. I think what 

 17 you suggest is that we should look at these only 

 18 in linked contracts, and if you could explain why 

 19 the Commission's authority is we should be looking 

 20 at those linked contracts. 

 21 MR. YOUNG: When an OTC instrument or a 

 22 foreign instrument is priced or settled against a 

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 1 U.S. dominant market price, we can understand how 

 2 that linkage would have an impact on the 

 3 Commission's ability to see the entire spectrum of 

 4 the market for price discovery purposes and we 

 5 believe that it is the most fundamental of the 

 6 Commodity Exchange Act that the Commission 

 7 preserve the integrity of the price discovery 

 8 process. So we could understand how that kind of 

 9 authority for the Commission would be consistent 

 10 with what we believe to be the key purpose of the 

 11 statute. 

 12 COMMISSIONER SOMMERS: Thank you. 

 13 Another part of your written testimony is the 

 14 commitment of trader's report and you talked about 

 15 it a little bit in your oral testimony. I wanted 

 16 to ask you if you had ideas about how we could 

 17 break out that data to make it more useful in 

 18 addition to some of the Chairman has talked about, 

 19 if you had additional views on how we break that 

 20 data down. 

 21 MR. YOUNG: I think the ideas that the 

 22 Chairman has expressed are ideas that we've 

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 1 endorsed and we think that would be helpful to the 

 2 marketplace. I think that there is a great deal 

 3 of misinformation and misunderstanding about the 

 4 different categories I think some people call 

 5 spreader speculators because they're 

 6 noncommercials. I think some people don't 

 7 attribute appropriate positions to so-called swap 

 8 dealers and appropriate positions to index 

 9 traders. We are of the view that the best 

 10 medicine here would be sunlight and the best thing 

 11 to do would be to let as many people see who's 

 12 really in the market and in what composition. 

 13 CHAIRMAN GENSLER: Thank you, 

 14 Commissioner Sommers. Commissioner Chilton? 

 15 COMMISSIONER CHILTON: Thanks, Mister 

 16 Chairman. Mr. Young, I want to make sure. I may 

 17 not have heard something correctly. I know that 

 18 you said if foreign boards of trade implemented 

 19 similar position limits that that would 

 20 potentially alleviate some of your concerns. Did 

 21 you say that if that were the case also if 

 22 Congress legislation further regulating OTC 

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 1 transactions so that they would also have position 

 2 limits? Essentially if you bought those on 

 3 exchange, would that also alleviate your concerns? 

 4 MR. YOUNG: Yes, because if the concern 

 5 is that the position limit is going to force 

 6 people into other market venues if there are OTC 

 7 positions that are priced off a regulated U.S. 

 8 futures contract, then having those positions be 

 9 subject to overarching position limit scheme 

 10 adopted by the Commission would prevent the 

 11 incentive that people might otherwise have to 

 12 migrate to an OTC venue. 

 13 COMMISSIONER CHILTON: There was a lot 

 14 of discussion on the Hill about which OTC products 

 15 would be included. You just mentioned the 

 16 standardized or the price discovery contracts. Do 

 17 you believe that any others would be in the area 

 18 that should be regulated? 

 19 MR. YOUNG: I think I mentioned price 

 20 discovery contracts in the sense that if you have 

 21 an OTC transaction and it is priced off a U.S. 

 22 futures contract, the U.S. Futures contract we 

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 1 all know serves a price discovery function and 

 2 therefore there would be a linkage there and a 

 3 nexus there that we could understand would be the 

 4 basis for imposition of some position limits. In 

 5 terms of overall authority for the Commission to 

 6 regulate the dealers as the Chairman and others 

 7 have talked about, you've got us at a little bit 

 8 of a disadvantage and you've got me at a little 

 9 bit of a disadvantage. I understand there is some 

 10 draft legislation circulating in Washington to do 

 11 some of these things and we'd sure like to see 

 12 before we comment further, but in general outline, 

 13 the idea that we need some what I'll some 

 14 gap-filling measures is something that the FIA 

 15 considers appropriate. 

 16 COMMISSIONER CHILTON: It seems to me 

 17 that there may be de minimis bilateral contracts 

 18 that may not have that much interest for 

 19 regulators or may be too time intensive or staff 

 20 intensive rather for us to view. At the same time 

 21 it seems like you could have one-offs so it's not 

 22 exactly like a U.S. regulated contract, it's got a 

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 1 little bell or whistle on it. Would you agree 

 2 that if Congress acts that we would need the 

 3 ability to have some flexibility in order to 

 4 address any of these one-offs that could 

 5 potentially have impact on price discovery even if 

 6 it's through an arbitrage mechanism? 

 7 MR. YOUNG: I think I was with you until 

 8 even if it's through an arbitrage mechanism 

 9 because I'm not sure what you meant by that. 

 10 COMMISSIONER CHILTON: You have a 

 11 one-off where you have a WTI contract but it's 

 12 delivered 100 miles from Henry Hub or something. 

 13 Something that's a little bit different. 

 14 MR. YOUNG: If you and I, Commissioner, 

 15 did a Henry Hub swap and we didn't tell anybody 

 16 about it and we performed on that swap, I don't 

 17 think that swap has any impact on price discovery. 

 18 COMMISSIONER CHILTON: What if I'm Saudi 

 19 Arabia and I've got a sovereign wealth fund and 

 20 it's a billion dollar swap and it's a one-off? 

 21 Are you concerned then or should we be concerned 

 22 as regulators? 

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 1 MR. YOUNG: Saudi Arabia should be 

 2 concerned if they're taking my credit risk. But 

 3 if Saudi Arabia did a completely private swap 

 4 transaction that no one ever knew about, I don't 

 5 see how that has a price discovery impact. 

 6 COMMISSIONER CHILTON: Mr. Masters, you 

 7 got into that and you heard some of the discussion 

 8 with Dr. Verleger earlier about OPEC, but you 

 9 mentioned rogue nations. I'm curious if you have 

 10 a view on what could happen in currently 

 11 unregulated markets with some of these sovereign 

 12 wealth funds or other problems that you see in 

 13 that regard. 

 14 MR. MASTERS: As we put in our 

 15 testimony, we think it is a big concern. If the 

 16 regulator can't see what's going on in markets 

 17 that directly affect markets that are traded on 

 18 listed futures exchanges, for instance, it has a 

 19 national security implication especially when from 

 20 our data analysis the vast majority of that 

 21 activity is trading on those markets. So I think 

 22 that it's a very big issue. If you're going to 

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 1 have some kind of regulatory scheme that it should 

 2 include those markets and it should include things 

 3 that are substantially similar in the sense of to 

 4 use the example that you just used with the swap, 

 5 certainly that's going to have an impact on price 

 6 discovery given the example that you set. So in 

 7 my view from a national security perspective, it's 

 8 a great argument for mandatory clearing and it's a 

 9 great argument for regulators to be able to have 

 10 the transparency they need to see what's going on. 

 11 It's also a great argument for position limits 

 12 because if hostile nations know that you have the 

 13 tools at your disposal to be able to fight 

 14 excessive speculation, then they're less likely to 

 15 engage in that kind of activity in my view. 

 16 COMMISSIONER CHILTON: Thank you. 

 17 CHAIRMAN GENSLER: Thank you, 

 18 Commissioner Chilton. I want to thank Mr. Young 

 19 for pointing out that a trade association that 

 20 lobbies the Hill thinks we're doing something 

 21 right, that you don't have draft legislation that 

 22 the Treasury has only shared with the CFTC and the 

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 1 SEC. So I thank you for making that observation 

 2 that a lobbyist doesn't have draft legislation 

 3 yet. Mr. Masters, if I can ask you on a more 

 4 serious note some specifics. You picked a limit 

 5 of 5 percent as a hard limit. What led you to 

 6 that number and why not some other number? 

 7 MR. MASTERS: We picked that number 

 8 because we thought that it was a reasonable number 

 9 to pick, quite frankly. Certainly that number 

 10 should be subject to some evaluation, but in our 

 11 view, we looked at from the standpoint of a single 

 12 participant that 5 percent or some other number 

 13 that you look at is a reasonable approximation of 

 14 economic power, that even if you're trading 

 15 spreads or you're trading something like that 

 16 you're going to have for instance during the roll 

 17 period for instance some of the ETFs are in some 

 18 cases bigger than that, they're going to have some 

 19 market impact, and our thought was that you want 

 20 to be able to limit that from the standpoint of 

 21 almost as you would limit an monopolist. 

 22 CHAIRMAN GENSLER: May I ask, did I take 

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 1 it from your testimony also that you would have 

 2 that limit, the 5 percent for any individual, and 

 3 then were talking about a class of investors when 

 4 you said 25 to 35 percent would also be limited? 

 5 MR. MASTERS: Right. We're making the 

 6 argument that given that speculation is there to 

 7 provide liquidity to the primary constituency 

 8 which is bona fide hedgers that in no case should 

 9 they ever be above 50 percent in terms of open 

 10 interest. We came up with that number, 25 percent 

 11 to 35 percent of the open interest and this is 

 12 across markets, because that was the way it was 10 

 13 years ago and 10 years ago there was plenty of 

 14 liquidity, we certainly wouldn't have been this 

 15 testimony, the idea of excessive volatility and 

 16 excessive speculation were issues that didn't have 

 17 to be addressed because the regulations took care 

 18 of things then. 

 19 CHAIRMAN GENSLER: Thank you -- unless 

 20 it was just on my earlier comment about not having 

 21 the legislation -- but Mr. Greenberger, you were 

 22 honored to serve here at the CFTC as the head of I 

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 1 think it was called a different thing, but the 

 2 Division of Market Oversight or Trading in 

 3 Markets. 

 4 MR. GREENBERGER: Trading in Markets. 

 5 CHAIRMAN GENSLER: So I was curious 

 6 about your perspective on the general subject of 

 7 no action letters, not specific to ICE, but just 

 8 generally, because I know that there no action 

 9 letters certainly when you were here, there are 

 10 probably some that you even signed because they 

 11 date from every decade of this agency. Do you 

 12 have a perspective on how we should look at the no 

 13 action letter process throughout the agency? 

 14 MR. GREENBERGER: First of all, you 

 15 wouldn't be here today if it weren't for the no 

 16 action with regard to the EFTs and the ETNs I 

 17 think. The no action process can be a very 

 18 dangerous process. You can have staff taking you 

 19 down a road that ultimately comes back to bite you 

 20 because it used to be the practice that no actions 

 21 were sent by the Commissioners just so they had 

 22 notice. I don't know if that's still done today. 

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 1 But the ICE Futures Europe situation is the result 

 2 of no action. 

 3 CHAIRMAN GENSLER: I understand. There 

 4 are hundreds. I was just curious if you have a 

 5 view on the whole process, not any one individual. 

 6 MR. GREENBERGER: I think they have to 

 7 be used with the greatest degree of care. When we 

 8 were here we set up a process because there used 

 9 to be no rules as to how they were applied. When 

 10 I walked in the door what I found is that you got 

 11 a letter from some very prominent lawyer in the 

 12 industry two pages long asking for a major 

 13 exemption and you couldn't understand what the 

 14 letter meant, and a lot of times it was approved. 

 15 Frankly, the thesis at the time was what was more 

 16 important than what was said in the letter was 

 17 which lawyer sent the letter to the Commission, 

 18 and we set up a set of rules that said what those 

 19 letters had to look like. I very much worry, I 

 20 think Commissioner Dunn said this, that no action 

 21 processes are establishing global rules and 

 22 regulations that come back to bite the Commission 

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 1 as a whole. I think that that was true in the 

 2 foreign boards of trade having U.S. terminals, I 

 3 think it's true in granting these exemptions from 

 4 the hedge exchanges. What my advice to you would 

 5 be as Commissioners, I think you have to make sure 

 6 because they're designed to be a safety valve to 

 7 take care of little problems. 

 8 CHAIRMAN GENSLER: I didn't want to cut 

 9 you off. Mr. Young, do you have something on 

 10 either of these questions? 

 11 MR. YOUNG: I actually had a response to 

 12 both of them if I might. The assertion has been 

 13 made that the only thing you should care about is 

 14 sufficient speculation to service hedgers, that 

 15 serving hedgers is the purpose of the Commodity 

 16 Exchange Act. That is wrong. The Congress found 

 17 that futures markets are affected with a national 

 18 public interest by providing a means for managing 

 19 and assuming price risks. That's one. Discovery 

 20 prices. That's two. Or disseminating pricing 

 21 information through trading in liquid, fair and 

 22 financially secure trading facility. My 

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 1 colleagues, the Mikes, may not like the idea that 

 2 price discovery and the integrity of price 

 3 discovery is central to the Commission's mission 

 4 and central to the Commodity Exchange Act, but 

 5 Congress has already made it so. Price discovery 

 6 is depend on supply-demand market principles. 

 7 MR. GREENBERGER: If you go back to 

 8 Roosevelt's letter to Congress or the agricultural 

 9 committees, the markets serve commercial hedgers. 

 10 I think that's indisputable because commercial 

 11 hedgers have an interest in assuring a fair price 

 12 to sell and a fair price to buy. Speculators 

 13 don't. If speculators take the markets over, the 

 14 market no longer becomes price discovery. I think 

 15 the wheat report shows that, and many of the 

 16 physical hedgers who have come here today are 

 17 abandoning these markets because they no longer 

 18 serve price discovery, and what you have in the 

 19 wheat report, 60 percent of the open is for 

 20 speculators. That's a casino. 

 21 CHAIRMAN GENSLER: I'm going to hand it 

 22 over to Commissioner Dunn, and any time you need. 

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 1 COMMISSIONER DUNN: Thank you, Mister 

 2 Chairman. I'd like to reflect a little bit on Mr. 

 3 Masters. When I left off talking with him you 

 4 said that the G-20 would probably follow the lead 

 5 of the United States on this, and in fact, Reuters 

 6 has a report out today that the FSA and the oil 

 7 industries are seeking a response to the CFTC. 

 8 They're doing it a little differently. Apparently 

 9 the FTC and Treasury will meet with oil industry 

 10 representatives in response to U.S. pressures for 

 11 more regulations in the commodity markets. It 

 12 will be by invitation only is what I'm reading 

 13 into this and it involves oil producers, traders, 

 14 banks and funds. They expect 20 to 30 

 15 organizations to meet at the FSA building. I 

 16 would much prefer this open and transparent method 

 17 that we're using here. Your contention that the 

 18 G-20 and the rest of the world is going to follow 

 19 this, the G-20 has set up an FSB, they changed the 

 20 FSF to the FSB. The chair of that has indicated 

 21 that he thinks that there needs to be more 

 22 harmonization internationally of financial 

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 1 regulations including those in the futures 

 2 industry and has indicated that they are going to 

 3 look for the IASCO, the international 

 4 representation of securities groups, to bring 

 5 forth some of the recommendations they have. The 

 6 problem I have with that is even though we are 

 7 associate members of IASCO and due to the 

 8 diligence of our staff we have been very active on 

 9 various committees on having input, but on the end 

 10 of the day, this Commission, the CFTC, has no vote 

 11 on what IASCO adopts. I think the American public 

 12 would be very, very concerned if they thought that 

 13 we had to acquiesce to an international body when 

 14 we had no vote, and it's something that I hope 

 15 gets changed in the future. 

 16 We began talking about no action letters 

 17 and I'm probably famous or infamous in the 

 18 industry for opposing no action letters. I think 

 19 they should only be used for emergency purposes. 

 20 I found out at one time that one division had over 

 21 600 no action letters out there. I have asked 

 22 previous Chairs or Acting Chairs to review those, 

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 1 to go through those, because some of those were a 

 2 couple of decades old going way back past the 

 3 tenure of both of these members here. I think 

 4 that they may in some cases be ticking time bombs 

 5 out there, that we need to go through and review 

 6 past Acting Chairs. When I was Acting Chair I had 

 7 asked staff to begin going through and reviewing 

 8 those. I know our current Chair has done the same 

 9 thing. The problem is lack of resources to be 

 10 able to do this. I'm sorry, Mr. Masters, this is 

 11 an inside CFTC thing, but I will ask our two almea 

 12 matres here about the level of resources that we 

 13 have at the CFTC from what you saw when you were 

 14 here and understanding the growth that we've had 

 15 since the passage of the Commodity Futures 

 16 Modernization Act, in your opinion as former 

 17 insiders do we have the resources that we need to 

 18 be an effective regulator? 

 19 MR. YOUNG: Commissioner, no. You asked 

 20 me to use the frame of reference when I was here. 

 21 That was a sly way of getting me to explain that I 

 22 was here from 1977 to 1982 well before Mr. 

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 1 Greenberger arrived. 

 2 COMMISSIONER DUNN: Back when we had 

 3 more staff. 

 4 MR. YOUNG: Back when you had, as you 

 5 have today, very capable and dedicated staff. You 

 6 could have used more of them then and you can use 

 7 more of them now. 

 8 The one point I would make about the no 

 9 action letters is that they grew out of a time 

 10 when the CFTC did not have exemptive authority. 

 11 That was created by Congress in 1992, and there 

 12 were no action letters and it was the practice of 

 13 no action letters before that time. After 1992 

 14 when the Commission got exemptive authority, the 

 15 Commission itself could grant appropriate 

 16 exemptions from different regulations and 

 17 different provisions, and one of the things, 

 18 Commissioner Dunn, you'll recall that the FIA 

 19 proposed in the context of the foreign board of 

 20 trade rules was that the Commission grant 

 21 exemptions in that area in lieu of no action 

 22 letters so that the imprimatur of the Commission 

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 1 was on the policy statement. 

 2 COMMISSIONER DUNN: So when we get into 

 3 situations where an entity has to exceed a spec 

 4 level or an accountability level such as the 

 5 unwinding of Lehman for instance and we were 

 6 looking for a counterparty to take over, we could 

 7 use 4(c) to achieve that? 

 8 MR. YOUNG: I think 4(c) is a very 

 9 flexible power and I believe you could use that if 

 10 you move quickly enough to address a particular 

 11 market exigency as the one you described. Yes, 

 12 you could use it. 

 13 MR. GREENBERGER: And as was said, it's 

 14 a transparent power. It's a public notice in the 

 15 Federal Register, a public comment, public 

 16 explanation. The no action process from what 

 17 you're telling me is not even transparent within 

 18 the Commission itself today or at least has been. 

 19 With regard to staff, Michael Masters and I have 

 20 testified together at many hearings that have been 

 21 quite contentious over these issues. I think the 

 22 one issue that there has been bipartisan support 

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 1 for is that the CFTC needs more staff. 

 2 CHAIRMAN GENSLER: Thank you, 

 3 Commissioner Dunn. Commissioner Sommers? 

 4 COMMISSIONER SOMMERS: Thank you, Mister 

 5 Chairman. A panelist on the previous panel today, 

 6 Mr. Arnold, had an I thought interesting proposal 

 7 on how we would impose limits. This question is 

 8 for Mr. Young on how you feel that imposing these 

 9 hard limits with no hedge exemptions just on the 

 10 physical markets and for us to be drawing this 

 11 very bright line between how we regulate the 

 12 physical markets versus how we regulate the 

 13 financially settled markets and how you view that. 

 14 MR. YOUNG: Even if I used the mike I'm 

 15 afraid I wouldn't be of much help. I wasn't 

 16 exactly sure the distinction that he was drawing 

 17 between physical and financial markets or months, 

 18 I wasn't sure whether he was talking about hard 

 19 limits in the delivery month and the deferred 

 20 months being financials. I was not clear exactly 

 21 as to what he was sayings so I don't think I'd 

 22 like to muddy the waters further on that. 

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 1 COMMISSIONER SOMMERS: I am not 

 2 positive, but what I thought I heard him say was 

 3 that we would regulate for instance the NYMEX 

 4 physically settled contract differently than we 

 5 would the ICE financially contract or OTC 

 6 contracts, that there would be a difference, and 

 7 if you think that that is prudent. 

 8 MR. YOUNG: There are differences in a 

 9 deliverable contract and a cash settled contract. 

 10 They do require regulatory considerations that are 

 11 different. It's hard to question that. In the 

 12 delivery month, mischief can be created by 

 13 speculators and by hedgers, and since I don't 

 14 think index funds are hedgers or speculators by 

 15 index funds, if you want me to add that as well. 

 16 I think most index funds aren't in the delivery 

 17 month so you don't really have to worry about 

 18 that. But I think the idea that's been expressed 

 19 before here about these accountability levels that 

 20 apply to the other months, it's inconsistent with 

 21 my understanding of accountability levels and 

 22 that's why I would tend to agree with the 

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 1 observation that was made. 

 2 The accountability levels are not 

 3 ceilings, they're warnings, and when you get a 

 4 warning you look to see what somebody is doing and 

 5 that's part of the market surveillance process 

 6 that the Commission has always applied to hedge 

 7 exemptions for market participants in the 

 8 commercial sector as well as I believe they apply 

 9 with respect to dealer exemptions and any 

 10 exemptions for index funds. So I think if you 

 11 accept the idea that accountability levels are 

 12 triggers for caution and for enhanced market 

 13 surveillance and for jawboning and things of that 

 14 nature, then that would make sense to me. 

 15 COMMISSIONER DUNN: I have time for one 

 16 more quick question. This is for Mr. Masters. I 

 17 wanted to clarify a question that the Chairman got 

 18 into with you about the percentage levels. I'm 

 19 not sure that I understand what you were referring 

 20 to as the superlimit of the 5 percent and then how 

 21 the Commission would practically impose a 25 to 35 

 22 percent level on a class. How do you make that 

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 1 fair to those participants in that class? 

 2 MR. MASTERS: There are theoretically a 

 3 lot of ways to do that in terms of making it fair. 

 4 With regard to the 5 percent, I believe that you 

 5 already a large trader identification scheme where 

 6 I think that you could probably use that at the 

 7 control entity level to be able to determine their 

 8 market impact. That argument really comes to the 

 9 whole notion of not letting a single participant 

 10 dominate from an economic standpoint. We want a 

 11 diverse group of participants in the markets, we 

 12 don't want someone dominating, and so we felt that 

 13 5 percent was a reasonable attempt at picking a 

 14 number out to do that. 

 15 With regard to the other question on the 

 16 open interest, open interest is published every 

 17 night by the exchanges. Clearly part of setting 

 18 position limits is having clearing, having the 

 19 capability to understand what's going on in the 

 20 markets. So the CFTC prospectively needs to be 

 21 able to see what's going on in the markets to be 

 22 able to effectively have position limits. 

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 1 Otherwise you'll drive people from an exchange to 

 2 an over-the-counter market. So the idea is to 

 3 bring CFTC's oversight to these various markets 

 4 and then you're really able to see on basically a 

 5 nightly basis, and if you didn't want to do that 

 6 you could do it on a longer interval, you could 

 7 potentially do it on a monthly basis or whatever, 

 8 that the market was not excessively speculative in 

 9 aggregate. Twenty-five to thirty-five percent was 

 10 a range that the market existed in 10 years ago 

 11 with regard to speculators and noncommercials 

 12 versus hedgers. It's now the reverse. So that's 

 13 the idea for that number. 

 14 CHAIRMAN GENSLER: Thank you, 

 15 Commissioner Sommers. Commissioner Chilton? 

 16 COMMISSIONER CHILTON: Thanks, Mister 

 17 Chairman. I asked this week of one panelist, but 

 18 as we have the possibility of having additional 

 19 tools either Congress or things that we do as a 

 20 possibility, I get concerned that we don't have 

 21 criminal authority to actually put people in jail 

 22 when they violate the Commodity Exchange Act. 

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 1 Seventy-five percent of our referrals to criminal 

 2 entities are rejected, and it's not because they 

 3 are crappy cases. One-hundred percent of those we 

 4 win, so they're good cases, but they're often 

 5 complex, and when Mr. Young worked here years ago 

 6 there were still differences about what the law 

 7 says, so you can imagine if you're a U.S. attorney 

 8 in the hinterlands and you get a Commodity 

 9 Exchange Act case, you may not want to take it up 

 10 even though it's a good case. There's a provision 

 11 in the House Agriculture Committee bill that was 

 12 passed with bipartisan support that gives the 

 13 Commission criminal authority, and I'm curious as 

 14 to whether or not the panelists have thought about 

 15 that and whether or not that's something that you 

 16 think we should have. 

 17 MR. GREENBERGER: This goes beyond my 

 18 brief for the people I'm speaking on behalf of, so 

 19 I want to say that I'm speaking for myself on this 

 20 issue, and also I have the wisdom of having left 

 21 the Commission after 2 years and worked for 

 22 Attorney General Reno for 2 years. I'm sure the 

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 1 Justice Department is not going to be happy about 

 2 that, but I will tell you I would fully support 

 3 the Commission being able to bring criminal 

 4 prosecution. As Dr. Verleger said, you know these 

 5 markets. Unfortunately as things now stand, if 

 6 you walk into the Justice Department Criminal 

 7 Provision with this kind of complexity, they're 

 8 not geared for that and you are. Talk about 

 9 increased staff. To move your Enforcement 

 10 Division from what they do now to being 

 11 experienced and able to bring criminal 

 12 prosecutions is no small measure and you would 

 13 really have to think that through very carefully 

 14 on how you're going to hire and train, et cetera. 

 15 But I think the future is that both the SEC and 

 16 the CFTC will be given and should be given the 

 17 ability to prosecute criminal cases. 

 18 MR. YOUNG: I agree with Mike about the 

 19 resources and I think it would be better to 

 20 allocate those resources to strengthening your 

 21 market surveillance capabilities than it would be 

 22 to developing the team of lawyers you'd need to 

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 1 handle criminal cases. Understandably you're not 

 2 staffed now to do that. The biggest quarrel I 

 3 have with this concept is that embedded in the 

 4 concept is the idea that the Commission's current 

 5 enforcement authority is somehow an inadequate 

 6 deterrent, and in my experience being on the other 

 7 side of that gun, that's just not the case. 

 8 COMMISSIONER CHILTON: Yes, I see it all 

 9 the time. 

 10 MR. YOUNG: You can ban people from the 

 11 market for life, you can fine people extreme 

 12 amounts of money, and I think this Commission has 

 13 been as good as they come in obtaining major fines 

 14 from people who have committed violations of your 

 15 Act. 

 16 COMMISSIONER CHILTON: Major fines, but 

 17 it's do the crime, do the time, not pay the fine. 

 18 There was a guy that we fined in Florida a few 

 19 years ago for a Forex scam, we fined him and this 

 20 year we got his wife, so that I don't think that 

 21 there's enough of a deterrent, but I appreciate 

 22 what you're saying about the staffing levels. 

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 1 Mr. Young, I had a question about your 

 2 testimony where you say that, "There is a 

 3 distinction between price risk offsetting hedging 

 4 and pure speculation." I'm curious as to if you 

 5 could elaborate on that a little bit. 

 6 MR. YOUNG: If I thought the market was 

 7 going up or going down and I wanted to get that 

 8 exposure one way or the other and I put on a 

 9 position to obtain that exposure, I'd consider 

 10 that speculation. If I had entered into a 

 11 contract with Mike to my right and Mike to my 

 12 left, and Mike to my right's contract was larger 

 13 than Mike to my left's and I had the net price 

 14 risk from that and I went to the futures market to 

 15 offset that price risk, I consider that to be 

 16 price offset, and that kind of price offset is 

 17 what I believe is at the core of the concept of 

 18 hedging in the Commodity Exchange Act. 

 19 COMMISSIONER CHILTON: I don't want to 

 20 put words in your mouth. Are you comfortable with 

 21 the status quo with regard to hedge exemptions? 

 22 MR. YOUNG: I'm comfortable with the 

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 1 status quo with regard to hedge exemptions if 

 2 there's no additional change to the law. We have 

 3 to be careful because we're dealing in two 

 4 universes, current law and what new law could 

 5 bring. But FIA has submitted to the Commission a 

 6 strong letter in favor of retaining the current 

 7 hedge exemption. That exemption doesn't mean that 

 8 the people who get the exemption can do whatever 

 9 they want. The dealers who get that exemption 

 10 when they engage in speculation independent of 

 11 their swap dealing business, they're subject to a 

 12 position limit and the hedge exemption itself, as 

 13 all hedge exemptions do, come with a position 

 14 limit. So, yes, under current law we'd be 

 15 comfortable with the current hedge exemption. 

 16 COMMISSIONER CHILTON: If I could just 

 17 get the Chair's indulgence. I may not have 

 18 another round. 

 19 CHAIRMAN GENSLER: As much as you want. 

 20 I think the other Commissioners don't need another 

 21 round, but if you need another one -- 

 22 COMMISSIONER CHILTON: Thank you. There 

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 1 was some discussion between ICE and CME last week 

 2 about this subject and I assume that you may have 

 3 watched that about hedge exemptions and they were 

 4 disagreeing about them I assume for competitive 

 5 advantage which would make sense given the 

 6 business they're in. It led me to the conclusion 

 7 that we should actually be the arbiters of these 

 8 hedge exemptions. When you say you pretty much 

 9 support the status quo, would you object to the 

 10 Commission establishing these exemptions? 

 11 MR. YOUNG: No. If the Commission 

 12 established the same exemptions for swap dealers, 

 13 no, we wouldn't object to that at all. The point 

 14 you're making is a very good one and it is another 

 15 core consideration for FIA. We've always been in 

 16 favor of competition among trading platforms and 

 17 when you have that competition which again is the 

 18 purpose of the Commodity Exchange Act, you have 

 19 two competitors who are each trying to win and the 

 20 Commission does need to prove an extra measures of 

 21 oversight and potentially some more affirmative 

 22 regulation to make sure that the public interest 

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 1 is being served there when we have these what we 

 2 think are welcome competitive battles among 

 3 trading platforms. 

 4 COMMISSIONER CHILTON: We may want to 

 5 change exactly the way that the hedge exemptions 

 6 are established. Would you have any 

 7 recommendations for how we would do that? Would 

 8 anybody who applies be able to receive one? 

 9 MR. YOUNG: I don't consider it 

 10 impertinent to say that I would never be in favor 

 11 of an exemption process where anybody who applies 

 12 can get any exemption. That would be bad for my 

 13 business. But your question is, I think, and I 

 14 think this is where we're going with this, should 

 15 the Commission impose additional standards or 

 16 additional considers in the context of those hedge 

 17 exemptions? 

 18 COMMISSIONER CHILTON: Yes. 

 19 MR. YOUNG: I think as long as they're 

 20 tied again to the preserving the integrity of the 

 21 price discovery process, absolutely you should. 

 22 COMMISSIONER CHILTON: Thank you, Mister 

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 1 Chairman. 

 2 CHAIRMAN GENSLER: Thank you, 

 3 Commissioner Chilton. I'm just going to check 

 4 again if Commissioner Sommers or Commissioner Dunn 

 5 had any further questions. I think that was a no. 

 6 We're going to have closing statements, 

 7 and actually I've been advised by staff I'm 

 8 supposed to go in reverse order. 

 9 COMMISSIONER CHILTON: I don't have a 

 10 closing statement. My opening statement which was 

 11 thanking you and suggesting that we were now being 

 12 an adaptive regulator, and regardless of what 

 13 action we take or don't take, the ability to do 

 14 this and hold these hearings and talk with people 

 15 I think is very important. I thank everybody who 

 16 has been here and I thank the staff who I think 

 17 does a great job, and I thank my fellow 

 18 Commissioners for the education I think we've all 

 19 received. Thank you. 

 20 CHAIRMAN GENSLER: Thank you, 

 21 Commissioner Chilton. Commissioner Sommers? 

 22 COMMISSIONER SOMMERS: Thank you, Mister 

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 1 Chairman. I just want to quickly say how helpful 

 2 these 3 days of hearings have been. I have 

 3 pointed out several different times and I guess 

 4 will do it one more time, these issues are very 

 5 complex. I feel that the Commission is facing one 

 6 of the greatest challenges that we have faced 

 7 since I've been involved in this industry, and I 

 8 just appreciate so much all of the participants in 

 9 the last 3 days and the staff who have helped us 

 10 prepare for this. It's extremely helpful. Thank 

 11 you, Mister Chairman. 

 12 CHAIRMAN GENSLER: Commissioner Dunn? 

 13 Thank you, Commissioner Sommers. 

 14 COMMISSIONER DUNN: Thank you, Mister 

 15 Chairman. I would first like the panelists who 

 16 have participated during the 3 days of our 

 17 hearings. Their testimony has been very helpful 

 18 and it will assist us with the difficult decisions 

 19 that we will be making in the days ahead. I would 

 20 also like to thank the Chairman for calling these 

 21 much needed hearings. Finally, I would thank the 

 22 staff of the CFTC for all the work that made these 

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 1 hearings possible. 

 2 During my opening statement last Tuesday 

 3 I made a commitment to listen with an open mind to 

 4 the information presented and to work with my 

 5 fellow Commissioners to ensure that we have a 

 6 functioning futures markets. In the coming weeks, 

 7 I will begin to digest the conflicting information 

 8 presented at these hearings and additional 

 9 information from our staff and the public, and my 

 10 commitment to keep an open mind on this subject 

 11 still stands. Getting this right is of paramount 

 12 importance to me and I will now be swayed by those 

 13 seeking hastily made decisions without careful 

 14 consideration of all consequences. Before I talk 

 15 about speculative position limits, I would briefly 

 16 like to mention two areas outside the stated 

 17 purpose of the hearing that I think require the 

 18 immediate attention of the Commission. First, I 

 19 believe we must begin to review to determine that 

 20 the proper firewalls between research reporting 

 21 and trading divisions at financial institutions 

 22 are in place, if they are adequate and whether 

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 1 oversight is necessary. I was delighted to hear 

 2 that Goldman Sachs and J.P. Morgan welcome this 

 3 type of review and possible regulation. I would 

 4 ask that our staff immediately begin this process. 

 5 The second area of interest raised 

 6 during the hearings was high frequency trading and 

 7 collocation. As the exchanges we regulate migrate 

 8 from open outcry to electronic trading, it's 

 9 imperative that the Commission focus on new 

 10 challenges posed by technological services. When 

 11 I first raised this issue prior to the hearings I 

 12 was encouraged by the Chairman's immediate 

 13 directive to the staff to begin an assessment that 

 14 high frequency trading and collocation might have 

 15 on the marketplace. I believe that it is 

 16 imperative that the CFTC acquire the human and 

 17 technical resources to address technological 

 18 issues as they develop. 

 19 During the 3 days of the hearings on 

 20 speculation positions, we have received many 

 21 recommendations on potential solutions to address 

 22 the questions posed by the Commission at these 

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 1 hearings. The CME and ICE have indicated that 

 2 they are working on approaches to address issues 

 3 within their jurisdictions as self-regulatory 

 4 organizations and I look forward to meeting with 

 5 each of them in the very near future to discuss 

 6 their preliminary proposals. However, after 

 7 listening to all of the panelists and reading all 

 8 of the written statements and background 

 9 materials, it is clear to me that the CFTC does 

 10 not have the authority to set speculative position 

 11 limits in all venues that may be affected by 

 12 excessive speculation, specifically, over the 

 13 counter and on foreign boards of trade. 

 14 Unilateral Commission action in only the markets 

 15 we currently regulate may not have the desired the 

 16 effect of reining in excessive speculation in the 

 17 futures markets. Without similar steps in the OTC 

 18 market and foreign boards of trade, those seeking 

 19 to evade the limits we set could simply move to 

 20 venues outside of our authority. 

 21 To achieve a true level of efficiency, 

 22 two additional events must take place. First, 

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 1 Congress must act to grant the Commission 

 2 jurisdiction to set speculative limits in the OTC 

 3 markets. Treasury Secretary Geithner raised this 

 4 issue in his May 13 letter to Congress, discussing 

 5 steps needed to establish a comprehensive 

 6 regulatory framework for over-the-counter 

 7 contracts. Second, truly effective regulations in 

 8 this area require greater harmonization of 

 9 international regulatory regimes. Since the 

 10 Commission issued its concept release, I have 

 11 heard many people attempt to explain what 

 12 constitutes excessive speculation and describe how 

 13 excessive speculation has affected the futures 

 14 markets. Many have concluded that if excessive 

 15 speculation exists, then speculation limits must 

 16 be set. What these limits should be, who should 

 17 set them, how they should be set and who should be 

 18 exempt from them are additional questions that 

 19 have been raised. At the end of the day, the CFTC 

 20 Commissioners are responsible to determine if 

 21 action is needed, and if so, the Commission must 

 22 do what is necessary to ensure that the markets we 

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 1 regulate are functioning properly. I also believe 

 2 that if we do act, the Commission access the 

 3 impact of those actions on a regular basis. I 

 4 would be remiss in my duties as a Commissioner if 

 5 I did not point out the obvious fact that many of 

 6 the actions advocated in these hearings go well 

 7 beyond the capabilities of the Commission given 

 8 our current staffing and funding levels. Adopting 

 9 a course of action by the Commission without the 

 10 monetary and human capital needed to successfully 

 11 complete the mission would be perpetuating a cruel 

 12 hoax on the public and all interested parties. 

 13 Again I want to thank everyone for their 

 14 participation and hard work. 

 15 CHAIRMAN GENSLER: Thank you, 

 16 Commissioner Dunn, Sommers and Chilton for all the 

 17 thoughtful remarks. I want to thank our staff who 

 18 did just a fabulous job these last 3 days in 

 19 organizing this regarding the well over 20 

 20 witnesses that we have on the 3 days. I think it 

 21 really helps to bring the public into this very 

 22 important debate about whether we set position 

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 1 limits on the products of finite supply and 

 2 particularly in the energy markets. 

 3 As I said at least in my opening 

 4 remarks, why I think we need to seriously consider 

 5 this is foremost because it really does affect 

 6 markets and it's critical to the American public. 

 7 Energy markets are at the core of every American 

 8 whether it's just filling up their tank during the 

 9 day or the effects on heating prices throughout 

 10 the seasons. I think that it's in our statute, we 

 11 do it in the agricultural markets, so I raise the 

 12 question with my fellow Commissioners why we do it 

 13 there and should we do it in the energy markets 

 14 and what's the difference between the two. As we 

 15 talked about more a little bit in the earlier 

 16 panels, what is the best way to promote market 

 17 integrity and liquidity in markets and to avoid 

 18 what's necessary to diminish, eliminate or prevent 

 19 the burdens that may come from excessive 

 20 speculation, and in this regard with regard to 

 21 concentration in markets? Is liquidity helped or 

 22 hurt if you have a highly concentrated actor? I 

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 1 look forward to the dialogue amongst the 

 2 Commissioners. The hearing record will be kept 

 3 open until August 12. 

 4 I too want to associate myself with two 

 5 comments made by Commissioner Dunn but in earlier 

 6 live hearings with regard to firewalls between the 

 7 trading side of the house and the research side of 

 8 the house. It's something that we've already 

 9 internally asked staff to take a very serious look 

 10 at, first, what's in our statute. Our statute is 

 11 different than the security statutes. What's in 

 12 our statute, what we can do, whether we need to 

 13 ask Congress for more authority or there are 

 14 things we can do there within our current 

 15 authority. With regard to high frequency trading 

 16 and collocation, I don't know if it's gone out 

 17 yet, but we're already drafting a pretty detailed 

 18 letter to the exchanges on this to get behind what 

 19 the current practices are. Again I thank 

 20 everybody. I particularly thank my fellow 

 21 Commissioners. 

 22 The next time we meet in public we'll 

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 1 actually be with the Securities and Exchange 

 2 Commission as we meet specifically to hear from 

 3 the public on the possibilities of harmonizing our 

 4 approach to the markets. 

 5 (Whereupon, at 1:19 p.m. the 

 6 PROCEEDINGS were adjourned.) 

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 1 CERTIFICATE OF NOTARY PUBLIC 

 2 I, Carleton J. Anderson, III do hereby 

 3 certify that the forgoing electronic file when 

 4 originally transmitted was reduced to text at my 

 5 direction; that said transcript is a true record 

 6 of the proceedings therein referenced; that I am 

 7 neither counsel for, related to, nor employed by 

 8 any of the parties to the action in which these 

 9 proceedings were taken; and, furthermore, that I 

 10 am neither a relative or employee of any attorney 

 11 or counsel employed by the parties hereto, nor 

 12 financially or otherwise interested in the outcome 

 13 of this action. 

 14 /s/Carleton J. Anderson, III 

 15 

 16 

 17 Notary Public in and for the 

 18 Commonwealth of Virginia 

 19 Commission No. 351998 

 20 Expires: November 30, 2012 

 21 

 22 

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