Prepared Statement of Managed Funds Association 

Before The Commodity Futures Trading Commission 

On Oversight of Energy Markets 

John G. Gaine 

President, Managed Funds Association 

September 18, 2007 
 

PREPARED STATEMENT OF MANAGED FUNDS ASSOCIATION 

BEFORE THE COMMODITY FUTURES TRADING COMMISSION 

ON OVERSIGHT OF ENERGY MARKETS 

SEPTEMBER 18, 2007 

Chairman Lukken and Members of the Commission. My name is John 

Gaine. I am appearing today in my capacity as President of the Managed Funds 

Association, commonly known as MFA. It is always a pleasure for me to return to the 

Commission. 

MFA is the voice of the global alternative investment industry. Our 

members include professionals in hedge funds, funds of funds and managed futures 

funds. It is estimated that MFA members represent the vast majority of the largest 

hedge fund groups in the world and manage a substantial portion of the over $1.5 trillion 

invested in absolute return strategies. 

MFA has a strong interest in the issues you are discussing today. Energy 

markets and energy derivatives are of increasing importance to our national economy 

and to market participants world-wide. MFA members trade on exchange and off 

exchange. We are neutral in any competitive battles that pit traditional exchanges 

against new trading platforms, or multi-lateral systems against bi-lateral dealer 

operations. Our members simply want access to efficient, transparent, fair and 

financially secure markets. In that sense, the interests of MFA members have been well 

served by the excellent work the Commission and its staff have been doing for many 

years. 
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MFA’s interests have also been well served by the Commodity Futures 

Modernization Act of 2000. In that statute, Congress adopted a cascading regulatory 

approach with different levels of oversight assigned to trading in different categories of 

commodities, market participants and order execution facilities. The Commission has 

been masterful in applying these new statutory provisions to allow new market forces to 

compete with traditional exchanges in a host of areas, especially in energy. MFA 

members have benefited from these CFMA-inspired innovations. 

As a collateral consequence of innovation, traditional exchanges have 

redoubled their efforts to improve and update their services to respond to competition 

from new platforms. This is just what Congress had in mind in Section 3 of the Act 

when it identified “responsible innovation” as one of the statute’s main purposes. These 

designated contract markets, known as DCMs, were built on a pioneer spirit, best 

exemplified when I was at the Commission by the many product innovations -- in the 

financial and stock index futures areas -- the exchanges championed. It is therefore no 

surprise that they have shown an ability to adapt to the new competitive realities and to 

thrive under them. 

MFA does not see a need for major changes to the CFMA. No case has 

been made to turn back the clock by re-regulating new trading platforms that have 

served an incubator function for derivatives trading innovation. MFA understands that 

the CFTC’s web-site has listed 19 Exempt Commercial Markets (ECMs) that have been 

created since the CFMA was passed. Those markets operate as principals only, manyto-many electronic trading venues for sophisticated well-capitalized market participants. 
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MFA believes it is both appropriate and important to cultivate those innovative 

enterprises. 

Less regulation does not mean no regulation. The Commission retains, as 

it should, the power to police price manipulation on ECMs. This power is vital, 

especially when an ECM offers a contract that is linked to the settlement price of a 

physical delivery contract traded on a DCM. In those circumstances, MFA understands 

that the Commission obtains from at least one ECM large trader reporting information 

about certain trades. We support the CFTC’s efforts to work with ECMs and others to 

obtain access to all relevant surveillance data so that the Commission may police 

effectively the US futures markets. 

Let me close with one historical observation. When the Commission was 

created in 1974, Congress entrusted it with exclusive jurisdiction over futures markets to 

make sure that no other agency -- whether it be the SEC, USDA or the Bureau of 

Mines -- would look over its shoulder and second-guess its regulatory judgments. 

Congress wanted an agency expert in futures markets to determine whether a threat of 

a manipulation existed or whether some other major market disturbance caused futures 

market prices not to reflect accurately the forces of supply and demand. In short, 

Congress wanted the Commission to be able to take appropriate action if it sniffed the 

possibility of manipulation in the air. Congress vested extraordinary emergency powers 

in the Commission to address that threat, powers the Commission once called the 

linchpin of the Act. The Commission has correctly used those powers very sparingly, 

but their existence serves a very important purpose. Exchanges and market 

participants alike know that the CFTC alone is ready to act when in its informed, expert 
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judgment, action is warranted. That power can not work if it is shared with other 

regulatory bodies, either at the federal level or the state level. 

Nor can more than one agency police price manipulation on futures 

markets themselves. Otherwise exchanges, intermediaries, advisors, funds and other 

market participants will find themselves facing at worst conflicting, and at best, 

duplicative, government regulation, the very ills Congress sought to cure with exclusive 

jurisdiction. Multiple regulators sharing concurrent jurisdiction will not strengthen 

regulation, it will just water down regulation at a considerable cost to market 

participants. MFA encourages the Commission to assert vigorously its exclusive 

jurisdiction as Congress intended it and the courts have interpreted it. 

Thank you for this opportunity to appear today. I would be happy to 

answer any questions you may have.