UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 PUBLIC MEETING TO EXAMINE FUTURES AND

 OPTIONS TRADING IN THE METALS MARKETS

 Washington, D.C.

 Thursday, March 25, 2010
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 1 PARTICIPANTS:

 2 Commission Members:

 3 GARY GENSLER, Chairman

 4 BURT CHILTON

 5 MICHAEL V. DUNN

 6 SCOTT D. O'MALIA

 7 JILL E. SOMMERS

 8 Staff:

 9 STEPHEN SHERROD

 10 DAN BERKOVITZ

 11 TOM LaSALA

 12 JEREMY CHARLES

 13 MARK EPSTEIN

 14 JEFF BURGHARDT

 15 DIARMUID O'HEGARTY

 16 TOM CALLAHAN

 17 DR. HENRY G. JARECKI

 18 BILL MURPHY

 19 KEVEIN NORRISH

 20 JOHN LOTHIAN

 21 RICHARD STRAIT

 22 SIMON GRENFELL
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 1 PARTICIPANTS (CONT'D):

 2 MIKE MASTERS

 3 HARVEY ORGAN

 4 JEFFREY CHRISTIAN

 5 ADRIAN DOUGLAS

 6

 7

 8 * * * * *

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

 2 CHAIRMAN GENSLER: Good morning. I'd

 3 like to call to order this public meeting of the

 4 Commodity Futures Trading Commission to examine

 5 the trading of futures and options in the precious

 6 and base metals markets and to consider federal

 7 position limits and related exemptions within

 8 these markets.

 9 I want to first start by thanking my

 10 fellow Commissioners, it's good to be all

 11 together, and the distinguished panelists that

 12 we'll be having here today. We look forward to

 13 hearing from a diverse group of participants about

 14 many aspects of the metals market.

 15 Today's meeting builds upon the ongoing

 16 look that we as a Commission have had in

 17 regulating futures and options and commodities --

 18 on commodities of finite supply. Some, as you

 19 recall, last July and August, the Commission had

 20 three open meetings to discuss the energy markets,

 21 and it was very informative and insightful. In

 22 January, the Commission had a public meeting, as
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 1 well, and voted out a proposed rule to possibly

 2 reestablish position limits in the energy markets

 3 and also a rule concurrent with that granting --

 4 bringing uniformity to granting exemptions in

 5 those markets. We continue to receive comment

 6 letters on that, and the public is encouraged and

 7 interested members certainly to continue to submit

 8 letters through April 26, next month. You can

 9 find the instructions at their web site,

 10 www.CFTC.gov.

 11 But in today's meeting, we turn to the

 12 metals markets. And the issues of position limits

 13 will be the central issue today, but actually the

 14 intent is a little broader than that, it's to hear

 15 and discuss the many issues related to the metals

 16 futures markets.

 17 In particular, at least I'm interested

 18 in hearing panelists' views on how the price

 19 discovery markets in metals work and how it

 20 relates to the cash markets, as well, interested

 21 in how the U.S. futures markets relate to the

 22 international markets in metals and the over-the-
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 1 counter metals derivatives marketplace, as well.

 2 And the panelists' views on differences

 3 between metals markets and energies markets, we

 4 sort of went in depth there, but to hear some of

 5 those differences; what significance is the fact

 6 that the metal markets are more concentrated than

 7 the energy markets mean. I'm also interested in

 8 the role of hedgers and speculators and exchange

 9 traded funds and index funds in the marketplace.

 10 So I look forward to hearing all of the panelists'

 11 views on this, and certainly their views on one of

 12 the central issues today, on whether we should

 13 reestablish position limits in the metals markets,

 14 and if so, what those limits would look like and

 15 whether, most importantly, whether they'd really

 16 promote the integrity and efficiency of the

 17 markets, which I think is a core mission of the

 18 CFTC.

 19 If they were reestablished, what

 20 formulas might be used? Might they be similar to

 21 what we proposed just a month or two ago in the

 22 energy markets or have been used in agriculture or
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 1 something else? What type of exemptions might be

 2 appropriate, if at all?

 3 So I look forward to hearing from

 4 everybody and getting and benefiting from the

 5 diversity of views. I think I'm supposed to say

 6 also that on this hearing, we're also weaving and

 7 encouraging the public to submit comments by April

 8 30, 2010. I think that there is a way to do that,

 9 which is, metalshearing@CFTC.gov. And if I can

 10 read it, it's m-e-t-a-l-s-h-e-a-r-i-ng@CTFC.gov.

 11 But with that, I was going to turn to

 12 see if any of my fellow Commissioners have just a

 13 little opening statement; Commissioner Dunn.

 14 COMMISSIONER DUNN: Thank you, Mr.

 15 Chairman. And I commend you for having these

 16 meetings. At the last one that we had on position

 17 limits and energy, we had a Latin lesson. It

 18 would seem today we're going to get a lesson in

 19 Greek, so I'm looking forward to hearing from the

 20 panelists.

 21 And it occurs to me that there was a

 22 great deal of effort that went in from all the
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 1 panelists that provided stuff for us, that gave us

 2 a good deal of background reading, I appreciate

 3 that.

 4 The mission of the CFTC is two-fold,

 5 it's to protect market users and the public from

 6 fraud, manipulation and abusive practices relating

 7 to the sale of commodities and financial futures

 8 and options, and two, to foster open, competitive

 9 and financially sound futures and options markets.

 10 I hope today that our panelists will be

 11 able to shed some light on how the metals markets

 12 are currently working and whether the CFTC is

 13 fulfilling its mission to keep the markets open,

 14 competitive and free from unlawful conduct.

 15 Over the last couple of years, some

 16 market users have raised concern that certain

 17 metal markets may not be free of abusive trading

 18 practices. When I first heard of these concerns,

 19 I asked our Division of Enforcement to examine the

 20 allegations of wrongdoing, and an investigation

 21 was opened and is still underway. Now, usually we

 22 don't tell folks when we're doing an
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 1 investigation, but former Chairman Lugin did make

 2 that announcement that we were looking at a

 3 particular metal -- an investigation.

 4 Well, we have not yet completed this

 5 investigation. I think it's important to remember

 6 that trading in the futures and options market is

 7 a zero sum game. For every winner, there is

 8 necessarily a loser. Several of today's panelists

 9 and market users have written the Commission and

 10 supported the implementation of position limits in

 11 metals markets.

 12 With potential position limits in the

 13 energy markets, I am concerned that position

 14 limits in regulated futures markets, without

 15 corresponding limits, and the over-the-counter

 16 markets may result in less transparency in our

 17 markets if those presently trading on exchanges

 18 move to over-the-counter and other opaque markets

 19 to circumvent CFTC regulations.

 20 I'm very interested in hearing from our

 21 panelists, their thoughts on this particular

 22 concern. I look forward to hearing from this
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 1 diverse group gathered here today to speak. I

 2 look forward to a lively, robust and educational

 3 discussion. I appreciate the efforts the

 4 Commission staff has put into this meeting, and I

 5 would like to thank the panelists for appearing

 6 today. Your time and efforts will be instrumental

 7 in helping the Commission to better understand how

 8 the metal markets are operating.

 9 My commitment to you is to listen with

 10 an open mind to your thoughts on the subjects. I

 11 think you in advance for your participation.

 12 CHAIRMAN GENSLER: Thank you,

 13 Commissioner Dunn. Commissioner Sommers.

 14 COMMISSIONER SOMMERS: Thank you, Mr.

 15 Chairman, and I want to thank all of you for being

 16 here today at this public meeting to examine the

 17 trading of futures and options in the precious and

 18 base metals markets. I'd like to thank in

 19 particular Commissioner Chilton for his leadership

 20 in this area.

 21 This has been an area of public interest

 22 since and I came to the Commission in 2007, and I
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 1 think that this is an appropriate time for us to

 2 look at these markets as we're considering

 3 position limits and other commodities like energy,

 4 that we also examine the metals markets. I also

 5 want to thank the Chairman for holding another

 6 public meeting. We've had a number of these

 7 public meetings during his chairmanship and I just

 8 want to reiterate how beneficial I think that

 9 these meetings are, not only to us at the

 10 Commission, but to the public, the general public

 11 that is interested in these futures markets to

 12 understand the complexity of the issues that are

 13 surrounding, issues like position limits. These

 14 are important issues, and we have a lot of things

 15 to consider when we are considering these limits.

 16 I'm also grateful to all the panelists.

 17 I think we have a very diverse group of people

 18 testifying today and I'm very interested in

 19 hearing more about these important issues. Thank

 20 you.

 21 CHAIRMAN GENSLER: Thank you,

 22 Commissioner Sommers. Commissioner Chilton.
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 1 COMMISSIONER CHILTON: Look, you all

 2 know my history on this issue, I support position

 3 limits in the metals complex to prevent and deter

 4 manipulation and stop excessive speculation. I

 5 think it's a professional grade regulatory tool

 6 that we need to protect consumers. And I hope

 7 this hearing helps put us on a fast track to

 8 getting the proposal out there. Thanks.

 9 CHAIRMAN GENSLER: Thank you,

 10 Commissioner Chilton. And I do thank you, as

 11 Commissioner Sommers said, for your leadership on

 12 this issue. Commissioner O'Malia.

 13 COMMISSIONER O'MALIA: Thank you, Mr.

 14 Chairman, and I'd like to thank all the panelists

 15 for their participation, especially the CFTC

 16 staff. I've now been a Commissioner at the CFTC

 17 for the past six months, it has been a very busy

 18 time. In particular since I started in October,

 19 I've received countless emails from participants

 20 in the metals markets.

 21 Today's meeting acknowledges that the

 22 Commission is heard, the concerns of the market
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 1 participants, therefore, I am pleased that we have

 2 a public meeting to receive information from this

 3 diverse group involved in these markets.

 4 Based on my initial review, it is clear

 5 to me that the metals markets are uniquely global

 6 in nature. One must acknowledge this as the

 7 starting point for any well rounded discussion on

 8 the subject.

 9 The United States, and more pointedly,

 10 the exchanges registered with the Commission, are

 11 not the markets epicenter. Significant price

 12 discovery in these markets takes place abroad in

 13 London; after all, it is the only location for the

 14 London fix for gold and silver. As for NYMEX --

 15 just as NYMEX's WTI contract provides the

 16 benchmark for global oil prices.

 17 In short, these markets are complex and

 18 involve diverse players with diverse objectives

 19 ranging from hedging manufacturing operations,

 20 maintaining central bank reserves, speculation on

 21 prices, and, of course, passionate retail

 22 investors. Therefore, any analysis of these
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 1 markets and any actions by the Commission must

 2 take into account the global nature of these

 3 markets.

 4 We must ensure that any rules and

 5 regulations do not offer any opportunities for

 6 regulatory arbitrage or deep creased transparency

 7 of U.S. markets or any other markets forcing

 8 activity to less transparent trading.

 9 I'd like to thank the staff and the

 10 Commission and the members of the panel for their

 11 hard work to represent the Commission with their

 12 testimony and responding to our questions. I also

 13 appreciate the hard work of the Division of

 14 Enforcement, the Division of Market Oversight in

 15 the Office of the Chief Economist to support our

 16 investigation of metals markets. I look forward

 17 to a well rounded discussion today. Thank you.

 18 CHAIRMAN GENSLER: Thank you,

 19 Commissioner O'Malia and all my fellow

 20 Commissioners. I'd like to -- our first panel,

 21 our General Council, Dan Berkovitz, our Acting

 22 Director, I like to say Director, our Division of
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 1 Market Oversight and Surveillance, Steve Sherrod,

 2 who both have done an excellent job in preparation

 3 for this hearing, but have testified so many times

 4 before, it seems that you're repeats here, and

 5 you'll be at the next hearings, too, guys. But I

 6 didn't recall which order we're going to do this

 7 in. Oh, all right.

 8 So General Council Berkovitz, please.

 9 And if you can try to keep it, you know, a little

 10 bit brief, but you're full -- to the public

 11 listening and to people in the audience, their

 12 full presentations are going to be on our web or

 13 may actually -- are they up? They're apparently

 14 already up on our web site, so that's good, so

 15 Dan.

 16 MR. BERKOVITZ: Thank you, Mr. Chairman

 17 and Commissioners. I will provide a short history

 18 of position limits in the futures markets for

 19 metals commodities. Since 1936, the Commodity

 20 Exchange Act has directed the CFTC to establish

 21 such limits on trading as it finds "are necessary

 22 to diminish, eliminate or prevent such undue
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 1 burdens on interstate commerce that result from

 2 excessive speculation and futures markets for

 3 those commodities." After the passage of the 1936

 4 Act, the Commission set position limits for wheat

 5 and other grains. Later, the Commission

 6 established position limits for cotton and several

 7 other agricultural commodities.

 8 Over the next several decades, for some

 9 of the commodity futures that were not traded on

 10 federally regulated exchanges such as the

 11 livestock commodities, the exchanges set their own

 12 position limits.

 13 In 1974, the CFTC was created and its

 14 jurisdiction expanded beyond the agricultural

 15 commodities listed in the CEA, to include futures

 16 contracts for any commodity. At the time, there

 17 were no position limits for any of the futures

 18 contracts for metals.

 19 In adopting the 1974 amendments, the

 20 Congress highlighted the need to regulate the

 21 futures market for silver. The Senate

 22 Agricultural Committee urged the Commission to
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 1 conduct hearing on "the proper speculative limit

 2 for silver futures trading."

 3 The Conference Committee urged the

 4 Commission to "regulate effectively futures

 5 trading in all commodities, including silver,

 6 immediately on the effective date of this Act."

 7 In the following years, the Commission studied and

 8 deliberated as to whether and how to establish

 9 position limits for the new commodities in its

 10 purview. In 1977, the Commission considered, but

 11 decided not to adopt position limits for the

 12 silver markets.

 13 The crisis in the silver market in 1979

 14 and 1980 precipitated by the Hunt Brothers because

 15 the catalyst for the Commission's proposed rule in

 16 late 1980 to establish position limits for all

 17 commodity futures.

 18 At one point during the crisis, two

 19 groups of traders, the Hunt Brothers and Conte

 20 Group held long positions in the March 1980 silver

 21 futures contract amounting to 122 percent of the

 22 total silver stocks and license depositories.
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 1 In 1981, the CFTC adopted a final rule

 2 to require the exchanges to establish position

 3 limits for commodities that were not already

 4 subject to Commission set limits. Prior to 1993,

 5 the Commission used several criteria to establish

 6 the levels of a single month and all months

 7 combined limits. These included the breadth and

 8 liquidity of the cash market, the financial

 9 exposure of traders in the event of limit price

 10 moves, and the extent to which limits would

 11 constrain trading. In 1993, the Commission

 12 adopted an open interest formula for determining

 13 position limits. The formula provided that the

 14 combined futures and options speculative position

 15 limits for both a single month and for all months

 16 combined be set at ten percent of open interest up

 17 to an open interest of 25,000 contracts, with a

 18 marginal increase of 2.5 percent thereafter. The

 19 Commission also permitted exchanges to establish

 20 position limits based on this formula.

 21 In 1992, the Commission granted an

 22 exemption from the position limit requirement to
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 1 permit the CME to use position accountability for

 2 several of its financial contracts. Position

 3 accountability levels were not fixed limits, but

 4 rather levels that would trigger further review of

 5 a trader's position.

 6 Six months later, the CFTC determined it

 7 would also grant requests to permit position

 8 accountability to be used for highly liquid energy

 9 and metals contracts. In 1999, the Commission

 10 issued a rule that formally recognized the

 11 practice of position accountability in months

 12 other than the spot month.

 13 Also in 1999, the Commission formally

 14 adopted a rule requiring that the spot month

 15 speculative position limit be no greater than 25

 16 percent of the spot month deliverable supply.

 17 Previously, since 1981, the Commission had applied

 18 this rule as a matter of administrative practice

 19 in reviewing applications for a designated

 20 contract market. The Commodity Futures

 21 Modernization Act of 2000 statutorily authorized

 22 the use of position accountability.
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 1 The CFMA did not alter, however, the

 2 Commission's mandate or authority in Section 4A to

 3 establish position limits as it finds it

 4 necessary. I'll now turn to a description of the

 5 metals commodity position limits.

 6 The first position limits for silver

 7 futures contracts were imposed by the Chicago

 8 Board of Trade in 1979, in October, 1979, as an

 9 emergency measure during the Hunt Silver Crisis.

 10 And you can see the silver is the black line on

 11 that chart that goes all the way back to 1980.

 12 You can see that's the first one and that was

 13 imposed in late 1979, during the Hunt Crisis.

 14 The COMEX imposed emergency limits in

 15 January, 1980, during the crisis. In April, 1980,

 16 the Commission approved permanent speculative

 17 limits for the silver futures contracts at the

 18 CBOT and COMEX at the same levels that had been

 19 opposed by the exchanges during the crisis. These

 20 limits at the COMEX were set at 500 contracts for

 21 the spot next month and 2,000 contracts for the

 22 all futures months combined. The CBOT's limit was
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 1 set at 600 contracts in any one future or all

 2 futures combined. In August, 1984, the CFTC

 3 approved amendments permitting the COMEX and CBOT

 4 to increase speculative position limits for the

 5 silver futures contract to 1,500 contracts in the

 6 spot month and 6,000 contracts in a single month

 7 and all months combined. And you can see the

 8 black line on that chart jump up in 1984, when

 9 that increase was approved.

 10 In 1992, the CFTC approved amendments to

 11 COMEX rules replacing speculative position limits

 12 with position accountability standards in the

 13 non-spot months for the silver futures contracts.

 14 The accountability levels were

 15 originally set at 7,500 contracts, but have since

 16 been reduced to 6,000 contracts. The spot month

 17 speculative position limits remained the same, at

 18 1,500 contracts. And you can see in the metals

 19 markets, the metals markets moved to

 20 accountability levels in the 1980's, where the

 21 energy markets did not move to the accountability

 22 levels until the 2000's, after the CFMA, but these
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 1 were imposed in the 1990's. I mean 1990's for the

 2 accountability levels. The silver and gold

 3 futures contracts that were formerly traded on the

 4 CBOT are now traded on NYSE Liffe. The NYSE Liffe

 5 silver and gold futures contracts have fixed

 6 position limits rather than accountability levels

 7 for individual months and all months combined.

 8 But the fixed position limits are numerically

 9 equivalent to the COMEX silver and gold futures

 10 contracts accountability levels.

 11 The 1983 speculative position limits

 12 were established for the COMEX gold futures

 13 contracts at 3,000 contracts for the spot month

 14 and 6,000 contracts for single month and all

 15 months combined. You can see gold here is on the

 16 -- the gold -- the red line, the gold is on the

 17 red line on these charts.

 18 As with silver, the COMEX, in 1992,

 19 replaced speculative position limits with the

 20 position accountability standards for non-spot

 21 months in the gold futures contracts. These were

 22 7,500 contracts. Again, like silver, the
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 1 accountability levels for gold were later reduced

 2 to 6,000 contracts in 1994.

 3 The other commodities are on the chart,

 4 copper, platinum, we can detail those if

 5 necessary. Also, we have a chart on the

 6 exemptions and the spot month limits showing

 7 exactly where those were. A number of exemptions

 8 from the spot month position limits have been

 9 issued in the gold, silver and copper markets.

 10 Five traders have been issued exemptions as of

 11 February 26, 2010, for gold, five for silver, and

 12 less than four for copper; I don't have the exact

 13 number for that. And that concludes my statement.

 14 I'd be happy to answer any particular questions.

 15 CHAIRMAN GENSLER: Why don't we hold our

 16 questions until Steve Sherrod gives his

 17 presentation, but I thank you, General Council

 18 Berkovitz.

 19 MR. SHERROD: Thank you. This morning

 20 I'll present two sets of information regarding

 21 gold, silver and copper. The first set is a

 22 summary of trading volume in select markets during
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 1 2009. And the second set of information provides

 2 a view of large traders and concentrations in

 3 those markets during a sample period of 2008,

 4 2009, and through this year to about a week ago.

 5 The information comes from our aggregate

 6 statistics, from our large trader reporting

 7 system, and by way of reminder, Section 8 of the

 8 Commodity Exchange Act does not generally permit

 9 the Commission to publish data and information

 10 that was separately disclosed to business

 11 transactions or market positions of any person.

 12 As the Chairman mentioned, gold, silver

 13 and copper are traded around the world on many

 14 different exchanges. Gold price discovery occurs

 15 around the world. And in 2009, for the cash

 16 forward and futures markets, in six different

 17 major markets, the London Bullion Market

 18 Association accounted for about half of the

 19 trading volume. The LBMA is a market portrayed

 20 spot cash and short dated forward contracts. It

 21 is a commercial market in that they trade

 22 participant to participant, but they do conduct a
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 1 central price discovery process every day that's

 2 called the Daily Fix, it occurs twice.

 3 There are five participants. They hold

 4 a conference call, and during this conference

 5 call, they reach out to their customer base, the

 6 chair starts the price discovery process. Each of

 7 the five participants on behalf of their customers

 8 enters orders to sell and buy. If there's a

 9 general match, the price is fixed; if there's an

 10 imbalance, they continue moving the price until

 11 there's a relative balance between the buys and

 12 sells. So that's about half of the volume in 2009

 13 moving through both the spot for markets in LBMA.

 14 COMEX accounts for about one- third.

 15 Turning to silver, in 2009, five venues,

 16 five of the leading venues that traded silver,

 17 COMEX accounted for about half of the trading

 18 volume, and the LBMA accounted for about

 19 one-third. These volumes, by the way, are

 20 equalized in terms of ounces and not in terms of

 21 number of contracts. Turning to copper, in 2009,

 22 the London Metal Exchange accounts were over half
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 1 of the trading volume. The Shanghai Futures

 2 Exchange accounts for over a third. And COMEX

 3 accounts for only a sliver of the world volume

 4 when we measure this in terms of tons.

 5 The second part of the data that I have

 6 for you today is aggregate data, as I mentioned.

 7 These are for the U.S. reporting markets that we

 8 collect data through our large trader reporting

 9 system.

 10 To provide transparency to the public,

 11 the Commission publishes in the form of a

 12 Commitment of Trader's Report, aggregate

 13 statistics based on Tuesday's open interest for

 14 markets in which there are 20 or more traders.

 15 The graph that we see here is gold on a

 16 net futures and options combined basis by traders.

 17 The trader classifications are, the green line is

 18 the producer, merchant, processor, user; the red

 19 line for swap dealers; money managers is the blue

 20 line; and other reportables that are traders that

 21 are non-commercials, but have positions above the

 22 reporting level is the purple line. And you can
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 1 see from the gold net futures and options

 2 combined, the largest shorts are in the

 3 producer/merchant category. Turning to silver,

 4 that pattern repeats, the largest shorts are in

 5 the producer/merchant category. And then turning

 6 to copper, generally that pattern repeats. And

 7 again, this would be for COMEX, for copper trade

 8 in the U.S.

 9 Another way that we provide transparency

 10 to the public is through the Commission's

 11 Participation Report that's published on a monthly

 12 basis. Because we publish this on a monthly

 13 basis, we include data less frequently to the

 14 public than the weekly commitment of traders.

 15 We publish the bank participation report

 16 where there are five or more banks in the market.

 17 These are divided into two categories of U.S.

 18 banks and non-U.S. Banks. If either one of those

 19 categories have less than four, then we do not

 20 publish the count of banks in the category. And

 21 generally you can see from the light red bars the

 22 leading short participants in these markets are
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 1 U.S. banks.

 2 I'll look briefly at silver. You can

 3 see the same pattern. And then I'm going to skip

 4 ahead for a few slides. These are, again, on our

 5 web sites. And I want to look at an overlay of

 6 the commitment of traders in the bank

 7 participation report. This is an example of how

 8 one might use the reports together. And what I've

 9 done is, I've replicated the bank participation

 10 report, and I show four red bars for each report,

 11 typically because the BPR only comes out monthly.

 12 And it's been widely inferred and reported that

 13 there was a dramatic increase in short open

 14 interest towards banks in August of 2008.

 15 However, you can see from the full categories and

 16 the commitment of traders, there's not a likewise

 17 jump in any one of these categories, and likewise,

 18 there wasn't a significant change in open interest

 19 in the marketplace.

 20 There are some alternative explanations

 21 that are plausible, and I'll offer two. And

 22 again, I can't comment on the specifics. One
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 1 would be that the change in sort open interest

 2 could have occurred because of a reclassification

 3 of a trade in category from a non-bank to a bank.

 4 Another would be because of a merger or an

 5 acquisition where a bank assumes the position of a

 6 non-bank entity and they're both in the same

 7 category.

 8 We also provide data to the public, a

 9 quarterly call currently, and we're going to move

 10 to a monthly basis, a special call in general.

 11 The special call data shows that the metals part

 12 of the index investment activity in the swap

 13 market is small in comparison to the energy

 14 markets. The last set of data is a quick look

 15 behind the public disaggregated commitment of

 16 trader's data. This has otherwise not been

 17 revealed to the public.

 18 The summary of traders at or above

 19 position accountability levels for that sample

 20 period of the last two calendar years through

 21 March 16th, it's 115 different Tuesdays, and you

 22 can see quickly for gold, there were 56 different
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 1 unique traders in all months combined that had a

 2 position over, and the maximum number on any one

 3 day was 26.

 4 We've graphed some of this data and

 5 provided it in the documents that we released on

 6 the web site. For the top four owners, the net

 7 long positions, you can see here the top line is

 8 for copper, gold is yellow, and silver is in

 9 silver color. We graph for comparison purposes

 10 wheat and corn on the Chicago Board of Trade, S&P

 11 500 on the CME, and the energy commodities is in

 12 the format from the reference energy commodity

 13 proposed rulemaking this year.

 14 And you can see from the next chart,

 15 which are short positions, that the largest

 16 concentrations on the short side of the market are

 17 in copper, gold and silver. And with that, I'll

 18 note that this last bit of data is at the owner

 19 level, not the trader level. So we consolidated

 20 all traders that are owned by a common entity.

 21 I'll be happy to answer any questions.

 22 CHAIRMAN GENSLER: I thank both our
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 1 panelists' excellent presentations. Again, for

 2 the public, you can find these 25 charts and the

 3 other presentations on our web. I'd just like to

 4 ask the General Council a couple of questions and

 5 maybe one question for Mr. Sherrod.

 6 But to the General Council, a question

 7 that's come up and it's been discussed by some

 8 individual Commissioners or CFTC staff, it may

 9 come up at this meeting, I note that some of the

 10 statements submitted by panelists today includes

 11 some specific allegations regarding market

 12 manipulation in the metals market, and so I'd like

 13 to hear from you to what extent it's appropriate

 14 for the Commissioners or the CFTC staff to discuss

 15 these types of issues at this meeting, at this

 16 time.

 17 MR. BERKOVITZ: As you noted, Mr.

 18 Chairman, the purpose of the meeting is to examine

 19 the trading of futures and options in the precious

 20 and base metals markets and to consider position

 21 limits and related hedge exemptions on CFTC

 22 regulated facilities in those markets. As the
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 1 CFTC's rules recognize, it is generally

 2 inappropriate for the Commission and its staff to

 3 publicly discuss the details of any possible

 4 enforcement investigations in this or any other

 5 area. The Commodity Exchange Act also prohibits

 6 the disclosure, the public disclosure of any

 7 information regarding individual positions or

 8 particular market participants by name.

 9 Accordingly, this particular form is not

 10 appropriate for the discussion of specific

 11 allegations of misconduct by specific parties and

 12 it's not what the Commission contemplated for the

 13 meeting.

 14 CHAIRMAN GENSLER: So in light of these

 15 restrictions on matters that the Commission may

 16 address in a public forum, I think it's

 17 appropriate for me as Chair to request that the

 18 Commission and the staff and witnesses, when

 19 you're on the other panels, refrain from

 20 discussing specific allegations against specific

 21 parties.

 22 COMMISSIONER CHILTON: Point of
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 1 clarification, Mr. Chairman. I mean I understand

 2 if we're not in a -- we can't comment on our

 3 investigation, and we don't want to jeopardize any

 4 of that, and so we may not want to ask questions,

 5 but are you saying that witnesses can't say what

 6 they want about these issues?

 7 CHAIRMAN GENSLER: Well, I look to the

 8 General Council's direction, but I think the

 9 witnesses --

 10 COMMISSIONER CHILTON: Serve an intrical

 11 part of this whole issue.

 12 CHAIRMAN GENSLER: -- should refrain

 13 from discussing specific allegations of specific

 14 parties; there are other venues to do that.

 15 COMMISSIONER CHILTON: But we're not --

 16 I'm sorry, I don't mean to interrupt.

 17 CHAIRMAN GENSLER: There are other

 18 venues to do that with our Division of

 19 Enforcement, I think.

 20 COMMISSIONER CHILTON: We're not

 21 censoring our witness' testimony.

 22 CHAIRMAN GENSLER: I don't think I'm
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 1 suggesting that in any way.

 2 COMMISSIONER CHILTON: Okay, that's all.

 3 Thank you.

 4 CHAIRMAN GENSLER: I'd also like to ask

 5 the General Council, if you might, to comment upon

 6 a statement that was in the testimony submitted by

 7 the CME Group today. Hi Jerry. But in the

 8 testimony, which I think is being presented by Mr.

 9 LaSala on our second panel, the CME states that in

 10 order for the CFTC to impose position limits under

 11 the Commodities Exchange Act, that the Commission

 12 actually is required to, "to find", and this is

 13 from their testimony, I understand, "to find that,

 14 one, there is, in fact, excessive speculation or

 15 that it is likely to occur in the metals, and two,

 16 position limits are necessary and will diminish,

 17 eliminate or prevent the burdens of such

 18 speculation before it may impose position limits.

 19 No such finding has been made, therefore, imposing

 20 limits would exceed the Commission's statutory

 21 authority"; I think I quote from their testimony.

 22 So I'd like you, as General Council to
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 1 this Commission, to tell us whether you agree with

 2 their interpretation of the Commodities Exchange

 3 Act, does the Commission have to make a finding

 4 that, in fact, there's been excessive speculation

 5 in order to impose position limits.

 6 MR. BERKOVITZ: Thank you, Mr. Chairman.

 7 First of all, I would just note as a factual

 8 matter that the purpose of the hearing is to

 9 gather information, and no findings have been

 10 made. But in the abstract, whether a finding

 11 would be necessary, an actual finding that there

 12 has been excessive speculation or an actual

 13 finding by the Commission that there have been

 14 particular undo burdens, our interpretation of the

 15 Act is that a specific finding that there actually

 16 has been excessive speculation is not a necessary

 17 predicate for imposing position limits. But I

 18 would add that that's not just the current Office

 19 of General Council's view, that is the view that

 20 the Commission has actually adopted and the

 21 Commission has stated as the basis for its

 22 rulemaking on position limits.
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 1 The rulemaking I mentioned in my

 2 testimony in 1991, where the Commission determined

 3 that the exchanges should have position limits for

 4 all the commodities that did not already have

 5 Commission imposed position limits such as the

 6 agriculture commodities.

 7 This issue was specifically raised in

 8 that rulemaking proceeding, and the Commission

 9 specifically addressed that very issue, that a

 10 number of commenters had raised a very similar

 11 comment back in the 1981 rulemaking questioning

 12 the Commission's authority.

 13 At that time, I just quote briefly from

 14 the previous rulemaking, "The historical and

 15 current reason for imposing position limits on

 16 individual contracts is to prevent unreasonable

 17 fluctuations or unwarranted changes in the price

 18 of a commodity which may occur by allowing any one

 19 trader or a group of traders acting in concert to

 20 hold extraordinarily large futures positions.

 21 This regulatory philosophy is a well established

 22 precept underlying the Act. From the earliest
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 1 days of federal regulation of the futures trading

 2 industry, Congress recognized that position limits

 3 could be an effective regulatory tool to prevent

 4 desperate market fluctuations." The commenters

 5 raised the very same comment in that rulemaking

 6 that the Commission hadn't made the actual finding

 7 that its excessive speculation has caused these

 8 burdens. The Commission's response was the

 9 Congress made the finding in Section 4A1. Section

 10 4A1 represents an expressed congressional finding

 11 that excessive speculation is harmful to the

 12 market, and the finding that speculative limits

 13 are an effective prophylactic measure.

 14 So Congress has said that the position

 15 limits already are an effective prophylactic

 16 measure, and such -- and gave the Commission the

 17 discretion when the Commission says we believe

 18 these particular position limit is appropriate to

 19 -- as a prophylactic measure.

 20 In many of the rulemakings, I haven't

 21 gone through every one, in the 1990's, and

 22 subsequent revisions on various rulemakings, the
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 1 Commission has included a very similar statement

 2 that Congress has found position limits are an

 3 appropriate preventative measure, obviously in

 4 advance of some harmful excessive speculation into

 5 the commodity markets. Also in the 1981

 6 rulemaking, the commenters said, you haven't

 7 demonstrated these particular levels or actually

 8 the levels that are absolutely necessary to

 9 prevent excessive speculation. And the Commission

 10 had basically the same response, that we do not --

 11 the Congress has set up a scheme where the

 12 Commission has to find they're reasonably

 13 necessary, you don't actually have to prove the

 14 specific numerical levels.

 15 Finally, I would add, I think as you

 16 noted in your earlier comment, Mr. Chairman, when

 17 we're talking about, for example, in the context

 18 of energy and metals, we're talking about

 19 reestablishing fixed Commission set position

 20 limits. This would essentially take it back to

 21 possibly -- to the situation where it was in the

 22 1980's, before we had position accountability.
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 1 But currently, under the same regime,

 2 under the same statutory authority, there are spot

 3 month limits and there's position accountability.

 4 The spot month limits and the current position

 5 accountability levels derive from the very same

 6 authority that we're talking about here, so those

 7 are not -- do not have those specific findings

 8 currently either. So we believe that there is

 9 adequate authority.

 10 CHAIRMAN GENSLER: All right. I thank

 11 you, and I apologize to Mr. Sherrod, but I'm going

 12 to hold my question and turn to my fellow

 13 Commissioners. We do actually have this little

 14 red light thing, we're trying to do this in five

 15 minutes, but Commissioner Dunn.

 16 COMMISSIONER DUNN: Thank you, Mr.

 17 Chairman. Don't worry, I'll give Mr. Sherrod his

 18 fair share. It's tough following the Chairman

 19 because he asked some of the questions that I was

 20 going to ask, so I don't know if that speaks well

 21 of you or ill.

 22 CHAIRMAN GENSLER: It just means we're a
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 1 good team, Mike.

 2 COMMISSIONER DUNN: Okay. Mr. Chairman,

 3 I would note that in the briefing books that the

 4 staff gave us, there is an excellent chronology of

 5 speculation limits for COMEX and NYMEX on the --

 6 delivered metals futures contracts. If that is

 7 not on the web site and there's no proprietary

 8 information in there, I would certainly hope that

 9 that could be put on the web site, as well, so the

 10 public would have access to that. I think they

 11 would find that very helpful looking at that

 12 entire history that our Chief Council began to

 13 enumerate.

 14 CHAIRMAN GENSLER: Is that a yes?

 15 MR. BERKOVITZ: That is in the written

 16 -- longer written statement, plus it's graphically

 17 displayed in the --

 18 CHAIRMAN GENSLER: So if it's not yet on

 19 the web site --

 20 MR. BERKOVITZ: It should be.

 21 CHAIRMAN GENSLER: Thank you.

 22 COMMISSIONER DUNN: Mr. Sherrod, we're
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 1 talking about the 4A that the General Council

 2 elaborated on, and it -- again, the CME contends

 3 that the Commission doesn't have the power to set

 4 position limits unless there is, in fact,

 5 excessive speculation or it has likely to occur,

 6 that's the prelatic side of what you were talking

 7 about, Mr. Berkovitz.

 8 The statute loosely defines excessive

 9 speculation as that which causes sudden or

 10 unreasonable fluctuations or unwarranted changes

 11 in price. Mr. Sherrod, has DMO seen this type of

 12 fluctuation or change in the metals market?

 13 MR. SHERROD: Once again, you ask tough

 14 questions. The price of metals has been quite

 15 volatile, particularly in 2008, and I would

 16 respectfully decline to comment. As you

 17 mentioned, there is an investigation underway.

 18 COMMISSIONER DUNN: I would have

 19 preferred a simple yes or no. On page 13 of your

 20 written testimony, you go through the summary of

 21 traders at or above positions accountability

 22 levels, and you enumerate the single month, all
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 1 month combined for gold, silver, copper of what's

 2 happening there. Please tell the Commission and

 3 the audience here, what does DMO do when someone

 4 exceeds their accountability level, and what does

 5 the exchanges do, and is there any definitive

 6 written guidelines, or is there a codification of

 7 how we interact with an exchange when we insert

 8 this?

 9 MR. SHERROD: In DMO, we use our large

 10 trader reporting system, and we began gathering

 11 data on traders through a special call, and we

 12 provide the trader with a form 40 and gather

 13 information on the traders far before they reach

 14 the position accountability level.

 15 We monitor their positions on a daily

 16 basis through the large trader reporting system in

 17 DMO. When a trader does equal -- their position

 18 equals or exceeds the position accountability

 19 level, the exchange automatically gets the consent

 20 of the trader to get information, and that would

 21 include traders that are non-members. If the

 22 trader is so ordered by the exchange, the trader
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 1 is not allowed to increase their position further,

 2 or the exchange could order the trader to reduce

 3 the position, and that's without declaring an

 4 emergency.

 5 On a regular basis, surveillance staff

 6 in DMO and surveillance staff in the reporting

 7 markets share reporting information and

 8 surveillance activities, so we do work hand and

 9 glove with the exchanges.

 10 COMMISSIONER DUNN: Is that codified in

 11 any agreement with the exchanges?

 12 MR. SHERROD: It's not codified in

 13 agreement, it's a work in practice.

 14 COMMISSIONER DUNN: So, in essence,

 15 you're telling me al of these -- when they went

 16 over the position limits, all of these were, in

 17 effect, sanctioned by the CFTC, is what you're

 18 telling me?

 19 MR. SHERROD: On page 13, we discuss the

 20 position accountability levels, and the -- the

 21 traders don't need any particular authority or

 22 approval for why the exchange or the CFTC to
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 1 exceed the position accountability levels. On the

 2 other hand, for the spot month, which are hard

 3 limits, the exchange has shared their exemptions

 4 with us, the unshared. There currently are five

 5 exemptions in each of gold and silver, and there

 6 are fewer than four in copper, and we have those

 7 specific exemptions that we get on a regular basis

 8 from the exchanges.

 9 COMMISSIONER DUNN: Again, my question,

 10 and let me zero in on this, because you're telling

 11 me that DMO is monitoring this on a real time

 12 basis, and that when you observe that someone has

 13 gone over an accountability level, not even --

 14 before the position limit on the spot month, that

 15 you take actions on it? That tells me that, in

 16 effect, you have sanctioned what's going on; it

 17 that -- am I being misled on that?

 18 MR. SHERROD: I want to try to be very

 19 clear. When a trader exceeds -- equals or exceeds

 20 a position accountability level, DMO surveillance

 21 staff does not do anything in particular. The

 22 exchange gathers information from the trader, it's
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 1 their rule book that allows them to gather

 2 additional information.

 3 We've gathered information from the

 4 trader at a much lower reporting level, when they

 5 exceed the reporting level. And as the exchange

 6 gathers information, we can obtain information

 7 that the exchange has. We don't do anything

 8 necessarily when a trader equals or exceeds the

 9 position accountability level.

 10 COMMISSIONER DUNN: My time has expired.

 11 CHAIRMAN GENSLER: To sort of clarify,

 12 it's really the exchanges that work with these

 13 accountability levels. We're aware of it, but

 14 you're saying DMO, this agency doesn't do

 15 something. Commissioner Sommers.

 16 COMMISSIONER SOMMERS: Thank you, Mr.

 17 Chairman. I'll continue on the same sort of line

 18 of questioning with Mr. Sherrod. And maybe you

 19 can give us an idea and the public an idea of what

 20 a trader -- what would justify a trader having

 21 these positions over accountability levels?

 22 MR. SHERROD: The trader doesn't have to
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 1 justify a position above a position accountability

 2 level. Their justification is only required when

 3 they're seeking an exemption from the spot limit,

 4 that's the hard limit.

 5 COMMISSIONER SOMMERS: And to get those

 6 exemptions, if you could give us some examples of

 7 what -- how traders justify those exemptions.

 8 MR. SHERROD: There are a variety of

 9 exemptions that would be available. The most

 10 typical example is for a bona fide hedging

 11 position consistent with Commission Regulation

 12 1.3Z2, where the trader holds a cash position in

 13 gold or silver, for example, and will take a short

 14 position in the futures contracts to hedge the

 15 price risk, holding that physical inventory.

 16 COMMISSIONER SOMMERS: Thank you.

 17 CHAIRMAN GENSLER: Thank you,

 18 Commissioner Sommers. Commissioner Chilton.

 19 COMMISSIONER CHILTON: Mr. Berkovitz,

 20 you mentioned the -- well, Mr. Sherrod mentioned

 21 the bank participation report, but I wanted to ask

 22 Mr. Berkovitz or counsel about it a little bit.
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 1 We have this dual issue that we have to balance,

 2 where we have Section 3 which says that we should

 3 promote price discovery, and then we have 8E of

 4 the Act that says that we can't reveal any

 5 individual trader.

 6 This decision to not list all four, you

 7 know, concerned me, and it wasn't something that

 8 the Commission as an entity made a decision on.

 9 I'm not an attorney, so I can't talk about

 10 litigation risk. Everything else tells me that

 11 making this less transparent, this report, was not

 12 a good thing. But can you explain the sort of

 13 legal reason why you've chosen to do that?

 14 And again, maybe this doesn't factor

 15 into it, but particularly at a time where we're

 16 talking about doing something on position limits,

 17 and where, if we've learned anything from the

 18 financial fiasco the last several years, it's that

 19 we need more transparency. So I'm just curious

 20 why we did this on a staff level, change this

 21 report.

 22 MR. BERKOVITZ: The statutory -- you
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 1 correctly referred to the statutory section,

 2 Section 8A that prohibits the disclosure of

 3 positions or business transactions, and the

 4 statutory provision that prohibits the Commission

 5 from disclosing those does not -- it's not a

 6 balancing test, it's would attempt to disclose or

 7 not. And so we do not -- in reviewing whether --

 8 what limits could be placed on -- or whether there

 9 should be limits or what information is

 10 appropriate to release, there's a certain boundary

 11 that the Commission is not -- can't cross, it's

 12 not a balancing test, and so we look at that as

 13 strictly for that purpose.

 14 COMMISSIONER CHILTON: Okay, thank you.

 15 So, Mr. Sherrod, I mean doesn't it tell you that

 16 it's so large that it's going to reveal who the

 17 trader is, that maybe that should peak the

 18 Commission's interest? By the nature of having to

 19 make such a decision, doesn't that tell us that

 20 maybe there's an issue here that the Commission

 21 should consider?

 22 MR. SHERROD: I think the answer is yes.
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 1 COMMISSIONER CHILTON: Okay. I'll

 2 accept that. All right. So I want to -- you can

 3 comment later if you want, Mr. Sherrod. So I want

 4 to commend you for your presentation. We get

 5 these -- we are privy to these sorts of

 6 presentations all the time by you and your staff,

 7 and they're very good and professional. Sometimes

 8 I feel like I'm a little -- like that song says,

 9 blinded by science, but today it was very good,

 10 and you're always very helpful.

 11 I was particularly pleased to see your

 12 accountability level chart and what it shows and

 13 what Commissioner Dunn and the Chairman and

 14 Commissioner Sommers are saying is, you know,

 15 they're infectional. I mean they don't -- I've

 16 said before, they're like speed limits on a dark

 17 desert highway, they just -- there's nothing to be

 18 done, and I think we should do something, which is

 19 why, in my view, we need mandatory hard cap

 20 position limits.

 21 If you go over them, you're in

 22 violation; if you continue to go over them, then
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 1 there's some sort of action, some sort of --

 2 there's a fine or a punishment or something. I

 3 don't know what that level is, and that's one of

 4 the things I'd like to ask some of our witnesses

 5 later about. I am curious, Mr. Sherrod, about --

 6 a lot of people write to us, and people will talk

 7 about it later today, about the physical side of

 8 this. I know that we look at the physical side to

 9 some extent, but the shortages that people have

 10 talked about, and then I'm going to let you talk,

 11 but the second part of my question is, over the

 12 last couple of years, and before you were in this

 13 position also, I've given individual emails, some

 14 of it actually forecast the market in silver and

 15 in gold will plummet, that it's going to happen,

 16 and they'll say look at 9:00, Paul Caplan, Andrew

 17 Maguire and others have said this sort of thing,

 18 so I wonder if those have been helpful and if you

 19 can give a general characterization, without

 20 getting into any specific example that may

 21 jeopardize anything that the Commission is doing,

 22 but if you can generally characterize if those
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 1 have been helpful and how you've looked at them.

 2 So two questions, the physical shortage

 3 and the examples that we've been given by

 4 individual traders that have been looking at these

 5 markets for years and years. Thank you.

 6 MR. SHERROD: I'll turn to the second

 7 one first. I always welcome comments from the

 8 public that would like to draw our attention to a

 9 particular matter. We investigate quite

 10 carefully, we have position data day by day and

 11 contract month by contract month for both futures

 12 and options at the individual trader level.

 13 That's the information we share with the

 14 Commission in the closed surveillance briefings

 15 each Friday. And as you know, we have looked at

 16 numerous complaints and looked at the trading

 17 intra day and examined those particular instances.

 18 I can't comment further on the results

 19 of those or else I would be revealing, as Dan

 20 said, the positions or strategies of individual

 21 traders. As to whether there's a physical

 22 shortage in terms of supplies that are available
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 1 in warehouses, we have not seen any difficulties

 2 with the delivery process in recent years.

 3 CHAIRMAN GENSLER: Thank you,

 4 Commissioner Chilton. Commissioner O'Malia.

 5 COMMISSIONER O'MALIA: Thank you. Mr.

 6 Sherrod, you did a great job in outlining the

 7 global nature of these markets. Can you give us

 8 an example of how these things are traded priced

 9 on a daily basis?

 10 MR. SHERROD: Well, for example, on a

 11 daily basis, the -- I'll probably get the names

 12 slightly wrong, but I think it's the London Silver

 13 Market Fixing Limited conducts that daily survey

 14 led by the chair, and there are three banks in

 15 that group, and they go to customers and they

 16 discover a clearing price, and that price, for

 17 example, is used for cash settlement by the due by

 18 silvers futures. If someone takes a cash

 19 settlement option, they're making or taking

 20 physical delivery. So some of those price

 21 discovery mechanisms that are in place around the

 22 world are widely viewed as reliable and used as a
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 1 basis of commercial transactions. And price

 2 discovery occurs in COMEX certainly, and around

 3 the globe in the visible and public trading

 4 markets.

 5 COMMISSIONER O'MALIA: Could you also

 6 touch on the relationship to ETF's and the rise in

 7 their investment in those classes of funds?

 8 MR. SHERROD: Well, ETF's provide a

 9 mechanism for, at least the ETF's that we're

 10 familiar with, for holding physical gold by the

 11 ETF and for a small investor to buy a share in the

 12 ETF. As the small investors make their

 13 independent decisions to buy shares, the ETF

 14 responds by buying the physical metal. And

 15 likewise, as the individual investors make their

 16 decisions to sell their shares, the ETF responds

 17 by selling the physical metal.

 18 So they are linked through arbitrage to

 19 our markets, but those particular ETF's, the

 20 leading ETF's in gold and silver in particular

 21 don't hold futures contracts.

 22 COMMISSIONER O'MALIA: Do you have any
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 1 concerns about their investment strategies and the

 2 relationship to futures markets?

 3 MR. SHERROD: I think it's important to

 4 know that the ETF's that I've mentioned, the ones

 5 that are actually holding the physical gold and

 6 silver -- don't have an investment strategy, per

 7 se, other than to match their investor's demands

 8 in shares with holding of the physical metals.

 9 CHAIRMAN GENSLER: I just wanted to ask

 10 one -- thank you, Commissioner O'Malia. Just for

 11 Mr. Sherrod, page, it's 17, it's this one, so I

 12 don't know if they're different numbers. But I

 13 just wanted to clarify, the green line on here is

 14 from one set of reports, our Commitment to Traders

 15 reports that come out weekly, and it suggests that

 16 there's 40 to 60 short in the producer/merchant

 17 category. The blocks are from a monthly report

 18 that labels things differently, and it suggests

 19 that the short give or take 40 on this is in the

 20 banks.

 21 So am I to take -- I mean sometimes we

 22 think of banks as swap dealers, and in this case
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 1 it doesn't line up without getting any particular

 2 names, but is there -- could you just help the

 3 public and the Commission understand?

 4 MR. SHERROD: Sure, and I'm going to do

 5 this very generically, as you mentioned, without

 6 getting names. Banks have for very long periods,

 7 decades, been very active merchants in gold and

 8 silver, and, for example, the five members of the

 9 London Gold Market Fixing Limited that publishes

 10 the two daily gold fixes that are publicized on

 11 the London Bullion Market Association are Bank of

 12 Nova Scotia, Barclay's Bank, Deutsche Bank, HSBC

 13 Bank USA, and Societe Generale.

 14 The three banks in the London Silver

 15 Market Fixing Limited are Bank of Nova Scotia,

 16 Deutsche Bank, and HSBC Bank USA. So there's a

 17 long history of banks being involved in the metals

 18 markets.

 19 CHAIRMAN GENSLER: As merchants, you're

 20 saying?

 21 MR. SHERROD: As dealer merchants.

 22 CHAIRMAN GENSLER: I see, okay. I
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 1 didn't have any other questions. I don't know if

 2 any of my fellow Commissioners have any. Not

 3 seeing any other questions, I want to thank our

 4 panelists. And if our -- I think it's officially

 5 our second panel could come up, we would greatly

 6 appreciate that. There will be a break after this

 7 panel, I was just checking.

 8 (Pause)

 9 CHAIRMAN GENSLER: Each of you, I know

 10 you have written testimony that's going on the

 11 record, but if it's a chance to sort of summarize

 12 in five minutes, that would be really helpful so

 13 that we could get to some questions. There will

 14 be those lights over that help out -- no, it's

 15 right here on the panel. And I hope that's not

 16 rude of us, but you'll see that happening.

 17 I'm just going to go from left to right.

 18 But Tom LaSala from the CME Group has I think

 19 testified before us, but -- we see you so often,

 20 Tom, I'm not sure.

 21 MR. LASALA: Not specifically before the

 22 Commission.
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 1 CHAIRMAN GENSLER: All right. Well,

 2 then it's terrific to welcome you here for the

 3 first time testifying before the full Commission.

 4 I hope you come away feeling it was terrific, as

 5 well.

 6 MR. LASALA: I hope so.

 7 CHAIRMAN GENSLER: And then -- I'm just

 8 trying to read, because my glasses aren't good,

 9 but Jeremy Charles from HSBC, who's global had a

 10 precious metals for HSBC, and I thank you so much

 11 for taking the time to be with us. Mark Epstein,

 12 who is an individual trader in these markets and

 13 has a long history of trading on COMEX, NYMEX, and

 14 CME, and CBOT on various activities, but has been

 15 very active in metals markets. Jeff, if you can

 16 help me with your last name, just so --

 17 MR. BURGHARDT: Burghardt.

 18 CHAIRMAN GENSLER: Burghardt, Jeff

 19 Burghardt, who's the Vice President, North

 20 American Metal Procurement of Luvata Buffalo, but

 21 this is a global manufacturer, the public may not

 22 be as aware of, but global manufacturer in the
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 1 copper based products and has over 6,000

 2 employees, 30 production facilities in 18

 3 countries, so it's very helpful that you're here

 4 today. And then, just turning to my notes to

 5 myself, but then we have, and you're going to help

 6 me with your name so that we don't --

 7 MR. O'HEGARTY: Yes, Chairman; it's

 8 Diarmuid O'Hegarty.

 9 CHAIRMAN GENSLER: All right.

 10 MR. O'HEGARTY: Diarmuid as in --

 11 CHAIRMAN GENSLER: What's that?

 12 MR. O'HEGARTY: Diar as in deer, and

 13 mid, the U doesn't help at all.

 14 CHAIRMAN GENSLER: Oh, all right, it's

 15 Diarmuid.

 16 MR. O'HEGARTY: It is, yes.

 17 CHAIRMAN GENSLER: O'Hegarty, who joins

 18 us as Deputy Chief Executive of the London Metal

 19 Exchange, that metal exchange that was being so

 20 discussed and is so central to these markets.

 21 He's been there for over ten years, first as

 22 General Council and Head of Enforcement, but was
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 1 more recently, I guess now, a handful of years

 2 ago, promoted to the Deputy Chief Executive, which

 3 I guess would make you the number two.

 4 MR. O'HEGARTY: I like to think so,

 5 yeah.

 6 CHAIRMAN GENSLER: That's good. So I

 7 thank you, all our panelists. And I will just --

 8 Tom, if you wish to start and we'll go across.

 9 MR. LASALA: Thank you, Chairman Gensler

 10 and Commissioners for this opportunity to present

 11 our views on position limits and hedge exemptions

 12 for U.S. regulated exchanges. I'm Tom Lasala,

 13 Managing Director and Global Chief Regulatory

 14 Officer of CME Group, Inc. I'd like to take a few

 15 moments and make brief points and then be happy to

 16 take your questions.

 17 First and foremost, excessive

 18 speculation of our markets and other metals

 19 markets has not occurred and is not a threat to

 20 orderly markets. Commission set position limits

 21 are not warranted by any subjective evidence.

 22 Second, the CME Group's position limit and
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 1 accountability regime for a highly successful

 2 COMEX metals markets fully comply with our

 3 regulatory obligations under applicable core

 4 principals and users of our markets value our

 5 transparent and well regulated metals markets.

 6 To ensure uniform understanding, allow

 7 me to describe that regime. We apply hard limits

 8 in the metals beginning the day before the

 9 delivery month. At all other times, we employ

 10 accountability levels. Each day, CME Group market

 11 surveillance analysts review their markets to

 12 identify entities over the accountability

 13 thresholds. On a weekly basis, a report is

 14 presented to market regulation management for

 15 additional review.

 16 During the period from January, 2008 to

 17 February, 2010, our surveillance staff exercised

 18 authority, granted under the accountability rules

 19 on 28 occasions, and issued instructions to

 20 entities either not to increase their position or

 21 to reduce their position.

 22 Additionally, the surveillance staff
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 1 monitors deliverable supplies in order to

 2 anticipate potential congestion or delivery

 3 problems. This regime fully complies with the CEA

 4 and Commission regulations and is administered by

 5 the exchanges with Commission oversight. Third,

 6 recent fringe complaints by organizations such as

 7 -- regarding allegedly depressed gold and silver

 8 prices are not supported by any credible evidence

 9 and lack any viable economic theory. Their claims

 10 are not representative of our broad customer base

 11 or value our well regulated and well functioning

 12 metals markets as compliments to the much larger

 13 and global metals cash markets.

 14 Fourth, the supply demand inventory and

 15 available trading venues and instruments and the

 16 price discovery alternatives in the global metals

 17 markets illustrate that a futures market hard

 18 position limit regime and restrictions on hedge

 19 exemptions would have no positive effect or impact

 20 on the global price discovery process or world

 21 supply demand equilibrium.

 22 Most likely restrictions in the form of
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 1 position limits on significant traders on U.S.

 2 regulated markets would simply inspire a shift of

 3 volume from U.S. exchanges to instruments and

 4 markets beyond the Commission's jurisdictional

 5 reach.

 6 For example, the volume of copper

 7 futures contracts traded on COMEX in 2009 was only

 8 seven percent of the volume of copper futures

 9 contracts traded globally. Platinum futures

 10 traded on NYMEX in 2009 represented approximately

 11 40 percent of the volume of such contracts traded

 12 on exchanges world-wide. A cash forward in ETF

 13 markets have taken over a major market share. And

 14 with respect to gold, for the three year period

 15 ending January, 2010, the number of ounces of gold

 16 actually delivered between clearing members on the

 17 LBMA system far exceeded the volume of gold traded

 18 on COMEX, with the exception of November, 2009 and

 19 January, 2010.

 20 The gold traded on LBMA dwarf's

 21 contracts of gold traded on COMEX. And I note

 22 that the numbers on LBMA are net deliveries, they
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 1 are not the total volume that is traded throughout

 2 a trading session.

 3 Aside from the loss of business to U.S.

 4 Companies, any policy that moves trading off

 5 regulated markets conflicts with the Commission's

 6 stated goals of strengthening market efficiency

 7 and integrity. Moreover, such action would

 8 undercut the national policy of enhancing market

 9 transparency, a policy that was reaffirmed by

 10 Congress and amendments to the CEA in 2008, and is

 11 being pursued today by Congress' efforts to reform

 12 regulation of the financial system. Thank you,

 13 and I look forward to your questions.

 14 CHAIRMAN GENSLER: Thank you so much,

 15 Mr. Lasala. Mr. Charles. Hold our questions and

 16 then try to do it as a panel.

 17 MR. CHARLES: Chairman Gensler,

 18 Commissioners, and staff, my name is Jeremy

 19 Charles, I am Global Head of HSBC's precious

 20 metals business. I would like to extend my thanks

 21 for the opportunity to join this panel today and

 22 to share some views on the subject of potential
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 1 limits and exemptions for precious metals trading

 2 on the U.S. futures exchanges.

 3 I have worked in the wholesale gold and

 4 silver market for 35 years, and the global

 5 business that I manage today is a significant user

 6 of the precious metals products offered by U.S.

 7 futures markets, as well as other significant

 8 markets and exchanges around the world.

 9 I have submitted a statement which I

 10 hope goes some way to describing how commercial

 11 institutions operate at an industry level and how

 12 participants such as HSBC use the futures markets

 13 as part of our every day activity in precious

 14 metals. We do believe that gold and silver are

 15 fundamentally different from the domestic

 16 agricultural commodities and from the energy

 17 products, and I trust that I have provided

 18 sufficient detail in my statement with respect to

 19 that. The fact is that the U.S. futures markets

 20 are an important component of the global precious

 21 metals trade. The liquidity and transparency they

 22 provide, along with the clear nature of the
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 1 contract, is very appealing to the industry.

 2 It should be remembered, however, that

 3 there are many markets around the world that could

 4 all provide similar services to the U.S. markets

 5 and which can quickly step in should inappropriate

 6 or overly burdensome restrictions be placed on the

 7 U.S. markets alone.

 8 The free movements of liquidity among

 9 all of the global markets is a key factor in

 10 ensuring a level playing field for all

 11 participants, and it is the global trading,

 12 hedging and market making activities particularly

 13 by the wholesale commercial participants that aid

 14 in maintaining more orderly markets with better

 15 price stability notwithstanding local supply and

 16 demand attributes of individual markets.

 17 This is a vital consideration for the

 18 Commission when discussing potential limits, and

 19 without the ability to freely trade and hedge, it

 20 may be the U.S. market that could find itself

 21 disadvantaged in terms of pricing and liquidity

 22 relative to other markets. HSBC, like other
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 1 commercial institutions, frequently maintains open

 2 positions on the U.S. futures exchanges. But as

 3 you may know from previous inquiries, positions of

 4 this nature are typically hedged against positions

 5 established in other markets, particularly the

 6 London cash market.

 7 If it wasn't for the ability of these

 8 commercial institutions to finance and warehouse

 9 physical cash positions in London, for example,

 10 which are then hedged against short futures

 11 positions in the U.S. market, then it may

 12 significantly restrict risk management activities,

 13 as well as the liquidity that would otherwise be

 14 available to investors seeking to establish and/or

 15 maintain long futures positions and economic

 16 rates.

 17 As far as consideration for any

 18 exemptions, I cannot emphasize strongly enough the

 19 importance of the commercial participants in the

 20 U.S. precious metals futures markets. The U.S.

 21 futures markets for precious metals have gained a

 22 supreme reputation from participants as a fair
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 1 transparent liquid and well regulated market,

 2 where rules covering large position reporting and

 3 accountability levels already fulfill the goals of

 4 regulated in terms of ensuring appropriate

 5 behavior by all market participants. I completely

 6 understand the need for the Commission to consider

 7 and investigate whether the implementation of

 8 additional limits is appropriate for each of the

 9 commodities markets. But certainly in the case of

 10 gold and silver, I believe that firm position

 11 limits are unnecessary, and were they to be

 12 imposed, it could be detrimental to the markets

 13 here in the U.S.

 14 I have in my statement commented on

 15 concerns on the imposition of position limits and

 16 the application of exemptions and would urge the

 17 Commission, should you determine to impose any

 18 such limits, to carefully consider in detail clear

 19 exemptions for bona fide hedging, risk management

 20 and market making activities.

 21 To summarize, the U.S. futures exchanges

 22 are but one of many choices that exist for
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 1 investors, institutions, and users to deal in

 2 precious metals. The free movement of liquidity

 3 among these various global markets is a key driver

 4 in providing the world-wide previous metals trade

 5 with transparent, economic, fair, and liquid

 6 pricing. Thank you.

 7 CHAIRMAN GENSLER: Thank you, Mr.

 8 Charles. Mr. Epstein. You might want to push

 9 the button, there you go.

 10 MR. EPSTEIN: Thank you. Good morning,

 11 Chairman Gensler, Commissioners, fellow panelists.

 12 My name is Mark Epstein, and I'm an individual

 13 trader in the futures markets. Thank you for the

 14 opportunity to participate in this panel

 15 discussion. I trade nearly every business day in

 16 all of the active futures markets listed on the

 17 CME, including metals, energies, interest rates,

 18 agricultural products, currencies, and equity

 19 indices, and I'm a member of the CME, the CBRT,

 20 NYMEX, and COMEX.

 21 I received a bachelor's degree in

 22 mathematics and a master's degree in computer
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 1 science from the University of Chicago, and I've

 2 been involved in the futures and options markets

 3 for nearly 25 years.

 4 Initially I worked as a technical

 5 analyst, researcher, and computer programmer, but

 6 for the past ten years or more, I've also been the

 7 trader. Currently I trade for my own individual

 8 account.

 9 In all of the futures markets that I

 10 participate, I'm a market maker. I provide

 11 liquidity. I make two sided markets nearly all

 12 day long. Using computers, I'm able to quickly

 13 adjust my markets in real time to respond to

 14 changing conditions and to manage the risk that

 15 I'm taking. I'm a short term speculator

 16 responding to the ebbs and flows of prices, buying

 17 and selling, and I go home each night with either

 18 more money or less money than I started with at

 19 the beginning of the day. I tend to close out my

 20 position, so I rarely have overnight risk. Each

 21 futures market has its own individual personality,

 22 they all behave differently, and I know a lot
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 1 about the personality of each of the markets that

 2 I trade. I place orders to buy and sell, working

 3 to make profit while avoiding danger.

 4 Second by second or even millisecond by

 5 millisecond, I have decisions to make and orders

 6 to place. To me, the markets are a complex puzzle

 7 of moving numbers. But behind the scenes, the

 8 markets are actually real people, real products

 9 and real activities, especially in the commodities

 10 markets of finite supply.

 11 Today I'm here to speak about the

 12 metals. I make markets in COMEX gold and silver

 13 futures, sometimes copper, as well, and I

 14 typically trade between 1,000 and 2,000 futures

 15 contracts in metals every day. I can tell you all

 16 kinds of statistics about the markets and the

 17 prices, but let's just take an example and look at

 18 10:15 a.m. on February 4, 2010.

 19 Somebody seems to have been in a rush to

 20 sell gold that day, and in less than a quarter of

 21 a second, they sold about 2,000 futures contracts,

 22 driving the price down instantly 100 ticks. This
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 1 represents 200,000 ounces of gold, or about

 2 $250,000 worth of gold at the time. It was a very

 3 big trade and it took place in the blink of a

 4 second, in the blink of an eye.

 5 There aren't many players in the gold

 6 market keep -- that big, and I'm not sure what

 7 motivated them to decide to overwhelm the price of

 8 gold instantly rather than selling more slowly,

 9 but this kind of thing happens in the metals

 10 market almost every day. Not even India's move to

 11 buy 6.7 billion worth of gold from the IMF on

 12 November 3rd created this big of a destruction to

 13 the action of the actual futures markets.

 14 Today I'd like to speak primarily about

 15 COMEX silver. I traded silver for a few years,

 16 but I've only became particularly interested in it

 17 when I started to buy physical silver back in May,

 18 2008. At that time, silver was trading at about

 19 the same price it is now, around $17 per ounce,

 20 but in between then and now, silver took a journey

 21 down to about $8.25 an ounce and visited a high of

 22 about $19.50 an ounce, and I traded every single
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 1 price in there.

 2 The futures markets for commodities of

 3 finite supply are very interesting and to maintain

 4 their integrity, there must be a tight

 5 relationship between the futures prices and the

 6 physical prices. This attracts speculators to

 7 participate and develop an effective marketplace

 8 for price discovery, which is -- bona fide

 9 producers and consumers of physical commodities to

 10 hedge the prices in their businesses. I followed

 11 the price of COMEX silver futures and the prices

 12 of physical silver market. Near the end of 2008,

 13 there appeared to be a divergence taking place

 14 between the price of COMEX silver futures and the

 15 price of physical silver.

 16 So I bought some silver futures and I

 17 took physical delivery of thousand ounce bars from

 18 the CME, melted them into 100 ounce bars and sold

 19 them in the retail marketplace. This price

 20 divergence lasted for a couple of months, and I

 21 wasn't the only one who noticed. The warehouse

 22 stocks of physical silver COMEX dropped about 20
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 1 million ounces as people realized the cheapest way

 2 to get physical silver on the planet was by

 3 draining the inventory from COMEX.

 4 Currently the COMEX silver warehouse

 5 stocks are down to about 115 million ounces. The

 6 accountability limits of COMEX silver or 6,000

 7 contracts are 30 million ounces, but the delivery

 8 -- 1,500 contracts are seven and a half million

 9 ounces. I believe this is too high. Initially,

 10 the current open interest is about 114,000

 11 contracts or 570 million ounces, almost a year's

 12 worth of mining production. From the commitment

 13 of trader's reports and the bank participation

 14 reports, it appears that the largest single

 15 position is held by a bank on the short side, and

 16 the size of that position is currently about

 17 30,000 contracts or 150 million ounces, which is

 18 about 120 million ounces larger than the current

 19 accountability limit.

 20 Presumably, they must have been granted

 21 an exemption to the position limits, but it seems

 22 wrong to me. Exemptions should only be granted to
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 1 bona fide hedgers. In studying the micro price

 2 move in personality of the COMEX silver market, I

 3 can tell you that it behaves like no other market.

 4 The typical available liquidity in the deck is

 5 tiny, yet we have average daily volumes in excess

 6 of 40,000 contracts.

 7 And as a result, there is significant

 8 price volatility for the market to absorb large

 9 orders. The existence of oversized market

 10 participants has a chilling effect on the market

 11 makers, which results in even less liquidity as

 12 market makers widen their prices to compensate for

 13 the increased risk they are taking, including

 14 myself. Consequently, the large orders wind up

 15 setting the prices rather than the proper function

 16 of futures markets to discover prices. The size

 17 of the open interest in COMEX silver is

 18 irresponsibly large given the reality of world

 19 inventories and production. Initially, there is a

 20 significant imbalance between largest long

 21 positions and the largest short positions, with

 22 the short being heavily concentrated.
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 1 And a physically delivered futures

 2 contract for commodity finite supply also exposes

 3 the marketplace to an unnecessary risk of failure

 4 to deliver at the COMEX. Such an event could

 5 destroy the COMEX silver market.

 6 I'm encouraged with the CFTC's stated

 7 intention to implement a consistent policy for

 8 position limits in all commodity markets of finite

 9 supply. For COMEX silver, I think the position

 10 limit for all markets should be reduced to 2,000

 11 contracts, with delivery limited to 1,000

 12 contracts. And most importantly, exemption should

 13 only be granted to bona fide hedgers. Thank you.

 14 CHAIRMAN GENSLER: Thank you, Mr.

 15 Epstein. Very interesting testimony. I like the

 16 part, some days you go home with a little bit more

 17 money and some days a little less money. Mr.

 18 Burghardt.

 19 MR. BURGHARDT: Thank you, good morning.

 20 First, Mr. Commissioner, fellow Commissioners, I'd

 21 like to thank you for the invitation to talk

 22 today. I am Jeff Burghardt, Vice President for
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 1 Luvata, but I am testifying today on behalf of the

 2 Copper and Brass Fabricators Council, and we

 3 appreciate the opportunity to present our view in

 4 this matter.

 5 The Council is a non-profit membership

 6 trade association whose members produce over 80

 7 percent of all the copper and brass products made

 8 in the U.S. Absolutely critical to the Council

 9 members is the available of copper units at

 10 commercially viable prices.

 11 In the last several years especially,

 12 the copper market has been subject to previously

 13 unprecedented fluctuations. The Commission's open

 14 meeting today to consider futures trading in the

 15 metals market is timely. It is our belief that

 16 investment funds have been the major driver behind

 17 the record high prices we have seen in many

 18 commodities in recent years, including copper, the

 19 primary raw material in our business.

 20 These high prices, which we do not

 21 believe are warranted based on fundamentals, have

 22 caused major challenges for our industry,
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 1 including increases in working capital and even

 2 more damaging substitution. One only has to look

 3 at the copper industry to see the disconnect

 4 between fundamentals and price. Since January of

 5 2009, the price of copper has increased over 100

 6 percent, while at the same time, the quantity and

 7 material stored in warehouses has also increased

 8 over 100 percent. Thus, while the copper market

 9 was in surplus, the price more than doubled.

 10 Because of these high prices primarily,

 11 but also the high volatility, we completely

 12 support the CFTC in taking action to reduce the

 13 influence of investment funds in commodity

 14 markets. Commodity markets were established to be

 15 the benchmarks for determining prices for the

 16 underlying commodity. This has always been and we

 17 believe should be their primary function.

 18 However, today it seems as though they have become

 19 primarily investment vehicles, with prices many

 20 times have little correlation to cost or

 21 fundamentals.

 22 We believe that if funds were to have
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 1 smaller positions in the markets, it would greatly

 2 reduce the volatility, bring prices more in line

 3 with fundamentals and cost. These results would

 4 be beneficial to our industry, our customers and

 5 to the academy in general. However, while we

 6 completely agree with the Commission that this

 7 situation warrants careful attention and we would

 8 like to see action taken, we'd like to offer a

 9 different method to accomplish this goal.

 10 We feel the method you are proposing

 11 would be very challenged to implement effectively.

 12 The questions that you sent out on position limits

 13 highlight the complexity of this method, issues

 14 such as developing quantitative methods. A

 15 percentage or a fixed number of contracts,

 16 spreads, trades, exemptions, et cetera, highlight

 17 the complexity.

 18 In addition, if limits were set high

 19 enough, they could impact -- it could end up

 20 impacting few, if any, firms. We'd like to

 21 suggest the CFTC consider a different approach to

 22 this challenge. It is our belief that imposing
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 1 significantly higher initial margin requirements

 2 for investment funds would be a more effective

 3 solution.

 4 While imposing position limits would

 5 potentially affect a few large funds, if any,

 6 raising the initial margin requirement would

 7 affect all investment funds immediately. While

 8 imposing position limits could achieve a goal of

 9 reducing speculation, we see higher margins as a

 10 better solution. Raising the initial margin

 11 offers several advantages. First, a system is

 12 already in place, funds are speculators that are

 13 already charged a higher amount for initial margin

 14 than hedgers or manufacturers. The fact that the

 15 system in place and being used today offers a

 16 significant advantage of implementation and should

 17 minimize any confusion.

 18 The approach should also be much easier

 19 than position limits to monitor and control as it

 20 eliminates the deal with many of the questions

 21 that arise when trying to manage position limits.

 22 Again, this change would immediately also effect
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 1 all funds across the board regardless of size.

 2 This is another advantage compared to position

 3 limits.

 4 For these reasons, we feel that

 5 increasing initial margin amounts charged to

 6 investment funds or speculators will be a more

 7 effective solution to the problem. However, in

 8 any solution that is implemented, we would not

 9 want to see position limits put on hedgers or see

 10 initial margin change for this group either.

 11 Futures markets are critical for us to

 12 use in establishing prices and being able to

 13 manage the price risk in our business. We only

 14 use futures markets as necessary in our day-to-day

 15 business to protect or to hedge our price risk,

 16 and it's critical we can do this in a cost

 17 effective manner. In summary, lower volatility in

 18 prices that reflect over time the real supply

 19 demand situation, not the excesses of speculation,

 20 would both be very beneficial to our industry. We

 21 fully support the CFTC in looking to limit the

 22 impact of investment funds and commodity markets,
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 1 however, we would appreciate your consideration of

 2 using initial margins as the approach to

 3 accomplish this purpose.

 4 However, regardless of the approach

 5 taken, the copper invest advocators would --

 6 council will be glad to work with the Commission

 7 if we can be of any assistance in developing

 8 effective solution, and we appreciate being able

 9 to be here today on this important topic. Thank

 10 you.

 11 CHAIRMAN GENSLER: Thank you, and Mr.

 12 O'Hegarty.

 13 MR. O'HEGARTY: Thank you, Chairman,

 14 thank you, Commissioners. I've very grateful to

 15 be invited to give evidence here today. I've been

 16 asked to briefly give a picture of the London

 17 metal exchanges across the market, and I've

 18 provided slides and various information, but I'm

 19 not going to talk you through them because it'll

 20 take too long, but we can talk about them later.

 21 The London metal exchange operates futures and

 22 options markets in seven industrial base metals,
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 1 alum -- copper, zinc, lead, nickel, tin and alum

 2 -- These are mature markets where the daily LME

 3 official prices have become the accepted reference

 4 prices for the world trade in those metals.

 5 Copper has been traded on the LME since 1877.

 6 Today the LME copper market has delivery locations

 7 in the U.S., Europe and Asia. The slide that I've

 8 provided give a picture of the physical nature of

 9 the LME contract.

 10 For example, copper -- that a good

 11 delivery against the LME contract represent 59

 12 percent of the world's production capacity in

 13 2009. The LME is an unexchanged forwards market.

 14 Each LME futures contract is an obligation to

 15 deliver metal against payment on the settlement

 16 date.

 17 On a trading day, the available

 18 settlement dates are every business date after

 19 three months, every Wednesday after six months,

 20 and every third Wednesday in the month up to ten

 21 years.

 22 Settlement of LME futures contracts is
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 1 first by offset and then by delivery of the

 2 balancing positions by means of LME warrants.

 3 This takes place on the settlement date, so

 4 ownership of metal changes hands on the day, there

 5 is no settlement window. An LME copper warrant is

 6 a bare warehouse facility that represents the

 7 ownership of a specific 25 tons of an identified

 8 producer brand stored in an identified shed

 9 operated by an LME approved warehouse company.

 10 The warranty to specify the number of bundles in

 11 the lot.

 12 The slides show the volume of copper

 13 that was delivered in, stored and delivered at a

 14 -- approved warehouse sheds in 2009. The LME

 15 devotes a great deal of effort to maintaining the

 16 brand listing and warehousing systems because the

 17 reliability of metal stored in LME approved

 18 warehouse sheds underpins the integrity of the

 19 trading, and therefore, the price discovery.

 20 An early settlement system means that

 21 anyone who does not want to or is not able to

 22 deliver a warrant against the natural position due
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 1 to settle tomorrow has until 12:30 London time

 2 today to postpone delivering by rolling that

 3 position forward by a day. This is referred to as

 4 tom/next trading, i.e., tom for tomorrow and next

 5 for the next day.

 6 The evidence of a settlement squeeze is

 7 the -- price that a short position holder has to

 8 pay to buy the tom/next spread. I've provided a

 9 copy of an LME notice that explains how the LME

 10 lending guidance protects the market from

 11 settlement squeezes. In effect, a dominant long

 12 position holder is obliged to lend to the short

 13 position holder by selling the tom/next spread at

 14 a fixed rate. I've also provided a slide that

 15 gives information on tom/next copper trading

 16 during 2009 and a slide that shows the number of

 17 times large positions appeared in open interest

 18 figures for each of the three months forward.

 19 One last point, the LME receives

 20 position reports by 8:30 a.m. each morning that

 21 give the total positions for each broker and each

 22 of its clients for all settlement dates as of the
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 1 close of business the night before. This allows

 2 the LME to have a total picture of the markets, to

 3 group together connected positions, and therefore,

 4 to apply the lending guidance.

 5 The LME also, sorry, the rules also give

 6 the LME the power to ask for OTC positions if

 7 there are unexchanged positions that need to be

 8 explained. You have the slides, so if you would

 9 like me to go through any of them, I might. If I

 10 have a bit more time, there are three slides I

 11 think that, given -- picture. The arbitrage

 12 between the Shanghai futures exchange and the LME

 13 is not possible for most people to be a cash

 14 arbitrage. You need to physically take metal out

 15 of one and deliver it into the other. So slide

 16 one, sorry, slide four shows the LME's share of

 17 futures trade of copper over the year, and you'll

 18 notice it dipped in July, that means Shanghai

 19 futures trading increased. If you then go to

 20 slide seven, this shows LME stocks in warehouses

 21 over the period.

 22 Now, one of the points is that the total
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 1 stock figure at the beginning of the year and the

 2 total stock figure at the end of the year, but you

 3 also get the net deliveries in and out, and you

 4 can see that more metal went in and out than

 5 actually stayed.

 6 But also, the interesting one, green is

 7 Asia, and during the July period, all -- there was

 8 no metal -- warehouses in Asia. That doesn't mean

 9 it wasn't going in, it was going in and coming

 10 out, but not staying.

 11 And then finally slide 13 shows the

 12 tom/next trading and the -- where there was a

 13 small degradation. The tom/next trading is in

 14 July. That shows how to connect where the markets

 15 are. Thank you.

 16 CHAIRMAN GENSLER: Thank you to all of

 17 our panelists for excellent testimony. I'm going

 18 to ask a couple questions and keep myself

 19 hopefully to my own five minute round. I had a

 20 question, it's probably to Mr. Charles and Mr.

 21 Epstein, but anybody have a view, and it's

 22 particularly around some of the slides that Mr.
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 1 Sherrod had earlier about the concentration in the

 2 precious metals markets, particularly in the

 3 silver market. But in comparison to the energy

 4 market, its slide suggested a more highly

 5 concentrated market, and Mr. Epstein said each of

 6 these markets have a personality.

 7 And one of the slides even showed a

 8 particular concentration on the short side of the

 9 marketplace. So without, you know, going into

 10 individual trading strategies, but what's the

 11 nature of the market, particularly in the silver

 12 market, that these publicly available information

 13 suggests the large concentrated short side of the

 14 marketplace? Either Mr. Charles --

 15 MR. CHARLES: Thank you. Of course, I'm

 16 in a position where I know what HSBC's position

 17 is, but I'm not aware of what everybody else's

 18 position is.

 19 CHAIRMAN GENSLER: But you're in a

 20 position where you can share your views from the

 21 seat that you sit in?

 22 MR. CHARLES: The positions in -- the
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 1 short future positions in -- on the futures

 2 markets, as I've mentioned in my statement, they

 3 are hedged against contracts primarily in the

 4 local London markets, certainly in our case. And

 5 the reason, you know, I can't comment on why there

 6 is such a concentration. We use the market as a

 7 mechanism -- as a hedging mechanism against our

 8 OTC, against our cash positions, and the reason we

 9 have cash positions is for a number of reasons.

 10 You know, we obviously trade in the market, we're

 11 a market maker, we're hedging client activity, and

 12 we also use the cash against futures positions to

 13 manage our liquidity positions.

 14 So I need to be long of cash, I need to

 15 hedge that, so I'm short a futures, and I use

 16 those cash positions to provide physical services

 17 to our clients and also provide loans to our

 18 clients, as well. So that's the reason why we

 19 maintain such a position of that nature.

 20 CHAIRMAN GENSLER: If I can just explore

 21 that, I'm sorry, but -- so if you're on the short

 22 side on the COMEX futures, the long cash position,
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 1 is this a merchant? I mean is it that you're

 2 providing physical bars of silver and gold?

 3 MR. CHARLES: Absolutely; so we maintain

 4 a cash position in London, which is in a physical

 5 bar form. London is a physical market. So we

 6 maintain a long position in the physical market.

 7 The reason we do that is so that we can provide

 8 our clients with the services that we supply to --

 9 CHAIRMAN GENSLER: And is that largely

 10 bought silver then?

 11 MR. CHARLES: Yes, it is.

 12 CHAIRMAN GENSLER: So you're not sort of

 13 shipping it out and shipping it in, but it's --

 14 MR. CHARLES: No; the metal is --

 15 against the short position certainly that we

 16 maintain anyway, we hold metal in the vault in

 17 London.

 18 CHAIRMAN GENSLER: I see. Mr. Epstein,

 19 did you have a view on this?

 20 MR. EPSTEIN: Yes; the idea that, you

 21 know, if somebody has a big pile of silver and

 22 they wish to avoid price risk, then it's natural
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 1 to sell silver futures, that's the role of the

 2 futures markets. If you imagine we didn't have

 3 futures markets at all, it would be terrible. The

 4 CFTC's role is very important, and the CME does a

 5 great job in providing liquid, highly active

 6 futures markets.

 7 The issue in silver specifically -- I

 8 looked at silver yesterday, I traded it, and I was

 9 kind of curious, you know, were there things about

 10 the short concentration that came to the forefront

 11 yesterday, for instance. And there was one

 12 example, 8:37 and 53 seconds Chicago time;

 13 somebody decided to sell a little bit of silver,

 14 similar to how they sold 2,000 gold contracts, you

 15 know, back a few weeks before, and it only -- they

 16 only sold 272 silver contracts, and silver

 17 dropped, you know, 14 ticks, which is almost a

 18 half a percent, and that's only 270 futures

 19 contracts, but they did it in 50 milliseconds.

 20 When you look at gold, you know, gold

 21 dropping 2,000 contracts, you know, one percent,

 22 you know, earlier, it's the size of these -- the
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 1 capability of people, individual, whether they're

 2 banks, whether they're individuals, whoever they

 3 are, to take a risk position, to sell 2,000

 4 futures. If somebody sold 2,000 futures in

 5 silver, it would be limit down instantly. I mean

 6 there's -- the market can't absorb that.

 7 If there weren't these big monster

 8 gorilla traders out there in a market that that's

 9 small, there would arrive a much more robust

 10 market making community. The markets would be

 11 much more effective at finding prices.

 12 CHAIRMAN GENSLER: Thank you. I just

 13 wanted to ask Mr. O'Hegarty a question. In

 14 December, the FSA -- you're regulated by the FSA?

 15 MR. O'HEGARTY: Yes.

 16 CHAIRMAN GENSLER: The FSA published

 17 something around over-the-counter derivatives --

 18 I'm going to ask my question the second round,

 19 because I'll keep myself to the five minutes, but

 20 I want to ask you about your -- how they use

 21 position management authority in London,

 22 Commissioner Dunn.
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 1 COMMISSIONER DUNN: Thank you, Mr.

 2 Chairman. Mr. Epstein, I'm going to pick on you

 3 just a little bit here, not because you're a

 4 silver trader, but because you have a mathematics

 5 degree from the University of Chicago, which, in

 6 my opinion, is the epicenter of high frequency

 7 trading through algorithms, which is what you

 8 have, in essence, developed in your program. And

 9 you talk about the big monstrous traders out

 10 there; do you see somebody on the other side of

 11 you using a much more powerful program than you

 12 might have?

 13 MR. EPSTEIN: Well, everybody that's

 14 trading in the futures market is buying or selling

 15 and there's a counterparty to every transaction,

 16 it's a fair game. If I make money, somebody else

 17 lost it, if I lose money, somebody else made it.

 18 The CME has a forum, you know, to allow buyers,

 19 small, large, to come in and out and place orders

 20 quickly, slowly, however they choose, it's a fair

 21 playing field, it's fico, you know, the first

 22 person who gets the order in, you know, trades
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 1 with the first person who got the order in the

 2 other direction. So whether somebody on the other

 3 side of my trade is large, I'm primarily providing

 4 liquidity, which means that I'm willing to buy

 5 when customers or other people in the world come

 6 in to sell, and I'm willing to sell when customers

 7 -- people that need to use the market come in.

 8 People that are providing liquidity are

 9 kind of the core, the core speculators to a

 10 futures market, whether they're in the pit years

 11 ago waving and yelling and screaming their hands

 12 or they're programming computers these days.

 13 So I see it as a very fair market and I

 14 think it's crucially important. The problem is,

 15 if people come in -- I mean one person, you know,

 16 whether it's a bank or somebody that wants to, you

 17 know, throw $5 million around, $10 million worth

 18 of silver, can massively disrupt the market very,

 19 very quickly. The market itself is small as a

 20 result of the big players having the ability to

 21 throw around large size.

 22 MR. BURGHARDT: If I could just make a
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 1 comment. My expertise is on copper, not silver,

 2 but he talked about, you know, the impact that

 3 these large players have. A little history on

 4 copper; if we look at 2002, copper moved -- less

 5 than 15 cents in the entire year, that was the

 6 range, from high to low, okay. Now we see ranges

 7 of 15 cents in a day, and it's the same thing in

 8 our market. Somebody comes in, takes very large

 9 positions in the trade, you know, which I'm

 10 representing today are not large enough to offset

 11 those positions, and you see volatility in a day

 12 that -- more in a day than you used to see in a

 13 year.

 14 COMMISSIONER DUNN: Mr. Epstein, back on

 15 your program, and you talk about the three

 16 milliseconds that you might have as the heads up

 17 on something, are you co-located with your

 18 position?

 19 MR. EPSTEIN: I am co-located at the

 20 CME. The CME has a wonderful program that's

 21 available to anybody to basically place their

 22 computers at a specified data center and get
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 1 access to be able to buy and sell quickly, and

 2 it's available to anybody.

 3 COMMISSIONER DUNN: Again, I apologize

 4 for picking on you. I just found your testimony

 5 so intriguing. We got, or I got a lot of letters,

 6 I imagine the other Commissioners did, as well,

 7 concerns about unable to purchase silver in the

 8 retail market at a particular time. You seem to

 9 be able to get around that by taking delivery. Is

 10 that something anybody could do?

 11 MR. EPSTEIN: I was kind of curious

 12 about it, and it was really easy, you know. I

 13 bought some futures contracts, as I do all day

 14 long, but rather than selling them to a lock and a

 15 profit or loss that day, I noticed the exchange,

 16 that I wanted to take physical delivery. Once I

 17 took physical delivery, I coordinated to have a

 18 truck pick it up, they took it out of the

 19 exchange.

 20 The metals that are sitting at the

 21 exchange, the 150 million ounces that are there

 22 right now, when I actually took delivery, nothing
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 1 happened, they just gave me a warehouse receipt

 2 that said these are your bars and you can keep

 3 them there.

 4 And everybody at the exchange and my

 5 clearing firm said, are you really sure you want

 6 to take these things out, because once you take

 7 those physical thousand ounce bars, each of them

 8 weighs about 75 pounds, off the exchange, if you

 9 want to sell them again to the, you know, on the

 10 futures market, you have to get them re-essayed to

 11 be able to put them back in the exchange

 12 legitimately, and it's an expensive process, so

 13 once you take them out, you got them, you know,

 14 you're not putting them back to sell in the

 15 futures market very easily. But I decided to try

 16 it out, and I took them, and I melted them, and I

 17 sold them in the physical market. And this really

 18 exemplifies how important it is for the futures

 19 markets to track physical markets. If you're

 20 trying to hedge your gold or silver, and the

 21 futures markets are mispriced by whether it's 50

 22 cents, a dollar, or in that situation, $2 or $3,
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 1 it's ridiculous. The futures markets are on

 2 longer serving their purpose. And everybody that

 3 noticed this and decided to take the initiative to

 4 try it out, you know, took physical bars at the

 5 cheapest that they could be found on the planet

 6 from the COMEX.

 7 COMEX could have lost all their bars.

 8 They had 1,500, seven and a half million is the

 9 most ounces you can take in a delivery month, you

 10 know. A half a dozen people, seven and a half

 11 million ounces isn't that much for people, so they

 12 could have -- they could have drained it.

 13 COMMISSIONER DUNN: I know my time is

 14 up, but it begs the question, what would happen if

 15 they drained the reserves at COMEX.

 16 MR. LASALA: What would happen? I

 17 think, number one, Commissioner, I don't think it

 18 would drain the vaults in the COMEX. Number two,

 19 I think that if prices dictated that there was a

 20 high demand for metal, metal would come in to the

 21 COMEX vaults. Remembering back to that global

 22 market, you know, local, London, traders would see
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 1 that arbitrage and bring metal in and replenish

 2 supplies. I'm not sure, quite frankly, what

 3 market Mr. Epstein sold his metal in, but I think,

 4 you know, someone questioned shortage, you know,

 5 in like a consumer chain, that's very different

 6 from the COMEX market.

 7 There have been certainly, you know,

 8 I've gotten emails about individual investors

 9 saying this is, you know, I've got high prices for

 10 coins, how come the COMEX is so much cheaper. The

 11 answer to that is simply, we're not a coin market.

 12 There's all kinds of steps in between and handling

 13 and middle men to go from a COMEX bar to a

 14 finished coin.

 15 CHAIRMAN GENSLER: Thank you,

 16 Commissioner Dunn, and I'm sure we'll keep

 17 following up on this. Commissioner Sommers.

 18 COMMISSIONER SOMMERS: Thank you, Mr.

 19 Chairman. I'd like to ask Mr. LaSala if he'd be

 20 willing to comment on Mr. Epstein's testimony on

 21 how the markets work at COMEX, and if you could

 22 give us an idea of how they're comparable to the
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 1 other markets you servile, especially the energy,

 2 the differences between how metals markets may

 3 compare to the energy markets.

 4 MR. LASALA: Well, I think it's, you

 5 know, the first thing I'd say, Commissioner, is,

 6 you know, relativity, meaning that COMEX metals

 7 markets I think has -- some charts were up earlier

 8 by Mr. Sherrod, are not the largest in the world

 9 by far, so there's going to be a relationship

 10 between COMEX markets and world markets.

 11 We're not going to, you know, I

 12 certainly am not saying we're not going to be a

 13 price discovery mechanism, because to many, you

 14 know, we certainly are relied upon, but we're not

 15 going to necessarily be the driver.

 16 Furthermore, again, depending on the

 17 market, some of the energies are going to be more

 18 liquid than some of the metals, some of the metals

 19 are going to be more liquid than some of the

 20 energies. You know, for example, you know, gold

 21 is going to, broadly speaking, be more liquid than

 22 some of our smaller New York Harbor energy
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 1 products. So they're all different.

 2 The structures of these markets have, in

 3 effect, changed in some regards with the advent of

 4 electronic trading. I'm not sure if Mr. Epstein

 5 ever stood in the pit; if he did, you know, he's

 6 not standing there anymore. It just seemed that

 7 -- when NYMEX moved to implement electronic

 8 trading, at least in the futures markets, there

 9 was more of a move, you know, it moved pretty

 10 radically away from the floor, and that definitely

 11 I think had an impact on people that traded in

 12 that pit community, where, when you were standing

 13 in the pit, there was almost a swell, you could

 14 feel the market.

 15 That sounds, you know, somewhat odd, but

 16 there was a certain feel that was obtained by

 17 being in the pit. There's no feel coming through

 18 that computer terminal anymore. So the market now

 19 is more global than ever. I'd like to say in many

 20 instances more liquid than ever.

 21 In some regards, some of these markets

 22 certainly are more volatile than others. And
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 1 generally speaking, the smaller the market, the

 2 more apt it is to be effected by orders in it. To

 3 his comment earlier about an event on a certain

 4 date, I don't know what occurred that day, was it

 5 someone putting in a large order in error when the

 6 book was particularly shallow, but that certainly

 7 can occur.

 8 I wouldn't, however, conclude that that

 9 was necessarily linked to in any way parties that

 10 were -- that have "concentrations." So in

 11 answering your question, again, I think it's all a

 12 matter of, you know, relative standing between the

 13 markets.

 14 COMMISSIONER SOMMERS: If I have time

 15 for one more question, I have another question for

 16 you with regard to the bona fide hedge exemption.

 17 MR. LASALA: Sure.

 18 COMMISSIONER SOMMERS: And if you could

 19 give us an example on either why you grant an

 20 exemption to somebody or why you wouldn't grant an

 21 exemption to somebody, and then on the other side,

 22 with accountability levels, why you may look at
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 1 someone's position and decide that it's justified

 2 versus looking at somebody's position and deciding

 3 it's not.

 4 MR. LASALA: Very good; I'll start with

 5 the hedge exemption. Obviously, applicable for

 6 the pendency of the front month, what we would be

 7 looking at, you know, with exemptions, and just to

 8 be clear to the Commission and to the public, this

 9 is not -- these exemptions are not granted just

 10 simply in a blanket capacity, meaning that it's

 11 not in gold where there's a 3,000 contract limit,

 12 you're exempted and you do as you please.

 13 You apply to us and you stipulate to us,

 14 give us, you know, your book, so to speak, what is

 15 behind the position. And we don't grant that

 16 exemption, as I said, just open, it's going to be

 17 for a finite number. What we're cognizant of in

 18 granting that number would be, is the underlying

 19 exposure there, and number two, in granting that

 20 position limit exemption, have we created a

 21 concentration.

 22 So I can give you examples, whether it
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 1 be in metals or in energies, where large entities,

 2 I have no doubt in my mind that they've got the

 3 underlying exposure that they're asking for the

 4 exemption, I just can't give them the level of

 5 exemption they may seek, because that size in and

 6 of itself could, in fact, cause a concentration,

 7 could, in fact, cause an anomaly in terms of

 8 pricing.

 9 With regard to accountability, I think

 10 you know, and by Mr. Sherrod's presentation, those

 11 accountability levels are at historical levels,

 12 meaning they're very small. We kept them that

 13 way, I pushed to keep them low to, quite frankly,

 14 maximize my ability to reach in when I thought it

 15 was appropriate.

 16 That stated, one of the key concerns

 17 that we seek to address in accountability

 18 inquiries is, quite frankly, around concentration.

 19 And I can tell you that, you know, we certainly,

 20 as demonstrated in the written testimony, and I

 21 mentioned my oral, and, you know, during a 14

 22 month period, we documented 28 particular
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 1 instances. Some of those would be certainly to

 2 commercial players, and I have to tell you that --

 3 I would say that some of those commercial entities

 4 might not be pleased, because, again, they have

 5 the corresponding exposure, but I'm looking at a

 6 greater picture, that being just simply the

 7 orderly operation of the marketplace.

 8 And to also just be clear and well

 9 rounded, in a given month, because that

 10 accountability level is low, we may have certainly

 11 checked out, you know, when an entity came in the

 12 market, who they are, what they are, what type of

 13 operation they conduct. They may be in excess of

 14 the accountability in a particular month, and the

 15 percentage of the marketplace is so low that other

 16 than the fact that we're always sensitive to

 17 activities in the market that could be

 18 manipulative or what not, that concentration

 19 doesn't pose a threat.

 20 CHAIRMAN GENSLER: Thank you,

 21 Commissioner Sommers. Commissioner Chilton.

 22 COMMISSIONER CHILTON: I want to thank
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 1 all of you for your testimonies. And before I

 2 start with Mr. LaSala, I just want to say I think

 3 the CME does a good job, we didn't have any major

 4 defaults during this economic fiasco, there wasn't

 5 a problem at your exchange or on the futures

 6 markets in general. So that said, it doesn't mean

 7 that we don't have issues, and I think there are

 8 some. You tell, as Commissioner Sommers was

 9 talking about, the accountability levels, and you

 10 note that you have taken 28 actions, and I want to

 11 make sure that everybody is clear. Those 28

 12 actions, those weren't just in the metals complex,

 13 right, that's 28 actions in all of the contracts?

 14 MR. LASALA: No, that's not correct,

 15 that was in the metals contracts.

 16 COMMISSIONER CHILTON: Okay. Thank you,

 17 I'm glad I clarified it. And of those in the

 18 metals contracts, what you say is to maintain or

 19 reduce, so some of your actions were to say

 20 everything is copasetic. Do you have any idea how

 21 many of them were to reduce positions?

 22 MR. LASALA: I can't -- I don't have
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 1 that information with me.

 2 COMMISSIONER CHILTON: Okay.

 3 MR. LASALA: I'll gladly supply it.

 4 COMMISSIONER CHILTON: But maintaining

 5 -- well, they violated it, but it's okay, so

 6 whatever.

 7 MR. LASALA: I'll be clear; when you say

 8 -- they didn't violate really anything.

 9 COMMISSIONER CHILTON: Right, they

 10 didn't violate a thing, okay. So did you instruct

 11 any shorts to reduce their positions during that

 12 time?

 13 MR. LASALA: I don't have those stats in

 14 front of me. My -- I will say --

 15 COMMISSIONER CHILTON: No problem.

 16 MR. LASALA: -- double check and circle

 17 back to you. My guess would be yes.

 18 COMMISSIONER CHILTON: If there's no

 19 objection, if you'd like to provide that for the

 20 record, without objection, Mr. Chairman, is that

 21 appropriate?

 22 CHAIRMAN GENSLER: Certainly, yes.
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 1 COMMISSIONER CHILTON: Okay.

 2 CHAIRMAN GENSLER: If you feel

 3 comfortable doing it.

 4 MR. LASALA: We'd be happy to

 5 subsequently submit it to you.

 6 COMMISSIONER CHILTON: So were there any

 7 enforcement actions taken with anybody who

 8 violated these accountability actions, any fines

 9 that were levied?

 10 MR. LASALA: There is at least one

 11 matter pending.

 12 COMMISSIONER CHILTON: Okay. One matter

 13 pending, okay. So you took 28 actions in the

 14 metals complex, some were to maintain, some were

 15 to reduce, it may have been on the shorts, and

 16 there's one case. But as Mr. Sherrod talked

 17 about, in the last two years, we have an average

 18 of abrogations, that may be too strong a word, but

 19 examples of traders exceeding the accountability

 20 level, that's in gold, up to 28, for the average.

 21 This is the average time the traders are in --

 22 I'll take your word, have exceeded the
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 1 accountability levels four times, and at one point

 2 there's a maximum of seven.

 3 So, you know, I think you can argue,

 4 people can make their decision on the merits of

 5 it, I think you can argue that, you know, from

 6 your perspective, the markets are okay, and maybe

 7 these levels don't impact and everything is all

 8 right. But to argue that the position limits are

 9 working, I think, you know, the statistics aren't

 10 on your side. Okay.

 11 Mr. Charles, I'm curious, you mentioned

 12 exemptions, which I appreciate, and you talked

 13 about the need to legitimately hedge your

 14 business, your customers; can I take it from that

 15 that you would not be opposed to having an

 16 exemption that would restrict your ability to

 17 trade in excess of the accountability level or a

 18 position level for your own book?

 19 MR. CHARLES: Sorry, can you just repeat

 20 that again, please?

 21 COMMISSIONER CHILTON: Okay. You got an

 22 exemption, and your testimony was that you need
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 1 such an exemption for your customer's account, to

 2 be able to cover their hedging. But would you

 3 agree that you, for your own book, for your bank,

 4 that you shouldn't be allowed to use your bank's

 5 funds, not your customer's funds, in excess of the

 6 accountability or position limits?

 7 MR. CHARLES: Well, we use the -- we

 8 would use the exemption to satisfy the hedging of

 9 one contract against another, and I think I

 10 explained this. You know, we take positions in

 11 the futures markets that are equal and opposite to

 12 the cash market. I think that's a general

 13 misconception that there are large open short

 14 positions out there. Certainly the positions that

 15 we run are matched off against the cash contract,

 16 primarily the local -- contract.

 17 COMMISSIONER CHILTON: You can only go

 18 -- accountability level or the -- for your

 19 legitimate business of your customers.

 20 MR. CHARLES: The issue there is, what

 21 is the legitimate business for our customers,

 22 because, of course --
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 1 COMMISSIONER CHILTON: (off mic) -- from

 2 your own book?

 3 MR. CHARLES: That would be extremely

 4 difficult, in my opinion.

 5 COMMISSIONER CHILTON: Okay.

 6 MR. CHARLES: It would be --

 7 COMMISSIONER CHILTON: It could -- like

 8 I said, it might be a headache. If you could do

 9 it, would you be opposed to saying that you can't

 10 trade in excess of the accountability levels or

 11 position limits for your own book? It's a

 12 proposal that, by the way, is in our energy

 13 proposal to do just that.

 14 MR. CHARLES: Well, I would find it

 15 extremely difficult to differentiate that,

 16 because, of course, you know, as I explained

 17 earlier, there is a reason why we do the hedging

 18 that we do, there's a reason why we hedge cash

 19 against futures, we need the cash positions to be

 20 able to service our customers.

 21 COMMISSIONER CHILTON: All right. Well,

 22 I won't ask you about the Volkcer rule then.
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 1 Thank you.

 2 CHAIRMAN GENSLER: Thank you,

 3 Commissioner Chilton. Commissioner O'Malia.

 4 COMMISSIONER O'MALIA: I guess I'd like

 5 to follow up. Mr. Epstein raised a serious

 6 concern regarding the physical inventories

 7 inadequate to back-up short positions, and Mr.

 8 LaSala, you touched on that a little bit. Maybe

 9 we could get Mr. Charles, Mr. O'Hegarty to comment

 10 on that, what you think the -- might be.

 11 MR. CHARLES: There's a slide from the

 12 gentleman who spoke earlier, Sherrod, there's

 13 considerably greater turnover in the London market

 14 than there is in COMEX. There is a massive amount

 15 of metal that sits in London's vault. It exceeds

 16 by some magnitude the stocks that are available in

 17 the United States, by some considerable magnitude.

 18 And any shortage of physical metal that has been

 19 mentioned a couple of times during this hearing,

 20 what's tended to happen is, there hasn't been a

 21 shortage of physical metal, there's been a

 22 shortage of one type of a particular product.
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 1 Physical metal is always available. If

 2 somebody wanted, you know, a million ounces of

 3 gold, you know, HSBC could supply that within 48

 4 hours, it's no problem. But if you wanted a

 5 million make believe coins, for example, you might

 6 find that slightly more difficult to achieve. So

 7 the physical metal is always available, it's just

 8 the type of physical metal that clients actually

 9 need at the time they require it that has been the

 10 cause of some concern. Physical metal, there is a

 11 massive stock in London.

 12 MR. O'HEGARTY: Thank you. I'd like to

 13 start by saying I do think there's a serious

 14 divide between the base metals and the precious

 15 metals in this, but the question about the copper

 16 stocks is, as I said, ours is a daily settlement

 17 contract, so there is no separation between the

 18 cash and the futures market.

 19 People are trading right up to tomorrow.

 20 And you see the stock movements going through the

 21 stocks. Settlement is by a warrant, and our

 22 statistics are roughly five percent of all
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 1 contracts result in a warrant changing hands, but

 2 of warrants changing hands, only five percent

 3 results in metal coming in or going out of a

 4 warehouse, and you still see the large volumes of

 5 metal going in and out.

 6 So the worry that there isn't enough

 7 metal left to meet the trading is not how you

 8 would look at it. The trading actually reflects

 9 the available supply of physical metal in the

 10 market, and I think the figures I'm trying to give

 11 about breaking down say by location, one of the

 12 advantages of us having warehouse locations in the

 13 three geographic regions is that it does

 14 illustrate why there's shortage in one and not

 15 shortage in another, and it reflects industrial

 16 demand in one and not in the other. And in

 17 copper, I think the big news in the last eight

 18 years has been China, you know, how much are they

 19 consuming, what is their production capacity.

 20 And I don't envy my friend, Jeff's job

 21 here, because he's competing with them for supply,

 22 but he's also competing with them for the pipes
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 1 he's selling, because they're turning it into

 2 pipes and selling it. And, you know, this has

 3 been an issue in the copper market since then

 4 about is there a right price, and the answer is,

 5 that's the right price.

 6 We've had debates with fabricators for a

 7 long time, because one of the issues in the copper

 8 market compared to say some of the other base

 9 metals markets is, there is more of a splitting

 10 between the producers as in those who have

 11 produced copper and those who fabricated.

 12 Up until 2002, it was more common for

 13 fabrication to be the value added business, and

 14 therefore, separated out, and the traditions in

 15 the market are that you pay for your copper on the

 16 nail when you buy it, and yet you sell your pipes

 17 on 30 days credit, which when prices double up,

 18 it's not a great business model. But our role in

 19 all of this is to discover the price, and are our

 20 mechanisms designed to make that a fair discovery

 21 of the price or does it amount to be a manipulated

 22 discovery of the prices is my daily job, and I
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 1 think that supply of copper is not one of the

 2 issues.

 3 And I think we've put a lot of work over

 4 the past hundred and something years to try and

 5 learn from the various mistakes in the market over

 6 the years, and what we've ended up with is I think

 7 as good as it gets. Thank you.

 8 CHAIRMAN GENSLER: Mr. Epstein, you want

 9 to -- I used you as an example, you're free to

 10 respond.

 11 MR. EPSTEIN: Thank you. The calendar

 12 role in silver, like right now the May/July role

 13 is typically trading at about two cents, that's

 14 more or less the cost to store the silver, and it

 15 always trades more or less two cents. Last --

 16 when we were in the situation where people were

 17 withdrawing physical silver from COMEX, it was

 18 trading ten cents the other direction, it was a

 19 massive move, and the perception -- and that

 20 doesn't happen by a few contracts. If you look at

 21 the market in the role, you know, it's often ten

 22 or 20 or even 30 or 40,000 contracts up, ten to
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 1 the penny wide, so for it to move 12 full cents,

 2 and I'm not talking about an expiration moment,

 3 I'm talking about during the 30 days of

 4 expiration, something significant was taking

 5 place, and the issue was that the draining of

 6 physical metals in Chicago or from COMEX was

 7 actually an easier way to get metal than any other

 8 place on the planet. That shouldn't happen in the

 9 futures markets.

 10 CHAIRMAN GENSLER: Thank you,

 11 Commissioner O'Malia. I'm going to allow another

 12 round because I had at least a question, but if

 13 you can work with me, keep your answers really

 14 short. So, Mr. O'Hegarty, I was just curious

 15 whether you're familiar with the FSA's, what they

 16 call position management approach, where they

 17 said, and this was in a public document in

 18 December, was their last week, and talk to them

 19 about it, that they work with the exchanges, not

 20 just your exchange, in what they call position

 21 management, not hard limits, but if one particular

 22 trader gets large or outsized or concentrated on
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 1 the market, they sort of have a dial-up with you

 2 about it.

 3 MR. O'HEGARTY: Yes; I'm afraid this is

 4 not me talking about us, because our market has

 5 the daily delivery and for the vending guidance is

 6 that tool. But on the physically settled markets

 7 in the UK, they tend to be monthly or bi-monthly

 8 contracts. So part because there's an issue about

 9 the commodities deteriorate over time. What they

 10 have is historic records of available supply in

 11 the settlement month, and all of these tools,

 12 including our lending guidance, are to guard

 13 against settlement squeezes.

 14 So what they're trying to make sure is

 15 that enough supply to meet the spot month

 16 deliveries. And what they have is, they get

 17 information from the position holders, and once

 18 they reach certain levels, I think they're a bit

 19 like the things the CME run, is, they trigger a

 20 potential action.

 21 And the rules of the exchange do allow

 22 them to force positions to be closed out. So
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 1 that's how, in effect, they actively manage the

 2 available -- the positions leading up to delivery.

 3 CHAIRMAN GENSLER: I take your answer

 4 is, you're familiar with their position management

 5 regime, though it's used on the other exchanges,

 6 and that they use it in a way to, as you said, to

 7 protect against squeezes in the delivery month?

 8 MR. O'HEGARTY: Yes.

 9 CHAIRMAN GENSLER: Thank you. I just

 10 had a quick question for Mr. LaSala. I noticed

 11 that the gold and silver markets currently have

 12 identical accountability levels, and the gold open

 13 interest, you know, is roughly five times the

 14 silver account. And I know they're historic

 15 numbers, but am just interested in why.

 16 MR. LASALA: I think you hit it,

 17 Commissioner, Mr. Chairman, I should say, that

 18 it's just simply a historical matter. You know,

 19 they were down -- those are very, very low, and we

 20 found that they give us, relative to the open

 21 interest, lots of latitude that plays contrary to

 22 the point --
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 1 CHAIRMAN GENSLER: Okay. So it's just

 2 historic?

 3 MR. LASALA: Historic.

 4 CHAIRMAN GENSLER: My last question,

 5 because I've run out of time, again for Mr.

 6 LaSala, you talked a lot with fellow Commissioners

 7 about how often you talk to people over the

 8 accountability levels, and I'm just curious, how

 9 often do you talk to the large -- I mean there's,

 10 you know, from Mr. Sherrod's thing, there's -- the

 11 top four have very concentrated positions, how

 12 often do you talk to those particular traders that

 13 have the very concentrated positions?

 14 MR. LASALA: I'd say to you where

 15 appropriate, and where necessary, and we -- I will

 16 share with you --

 17 CHAIRMAN GENSLER: Where necessary, how

 18 often is that, is that daily, is it weekly?

 19 MR. LASALA: No, it's -- no, it's not

 20 daily. If we, you know, have checked with them

 21 some months ago about the position and we know

 22 their business, so to speak, XYZ, Merchant Bank
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 1 has typically, for queries we've made with them,

 2 maintained short positions, and they --

 3 CHAIRMAN GENSLER: And you leave it

 4 alone?

 5 MR. LASALA: We would leave it alone.

 6 CHAIRMAN GENSLER: Mr. Charles, just

 7 quickly, on the physical long side, you say you're

 8 short futures and long cash, does that just stay

 9 in a vault, or do people actually deliver -- does

 10 HSBC deliver out and deliver in, are you dealing

 11 in that?

 12 MR. CHARLES: Part of the clearing

 13 system in London is the regular deliveries in and

 14 deliveries out. Typically we maintain

 15 considerable inventory. You know, the London

 16 market is a primary settlement location for

 17 physical markets globally, so producers, for

 18 example, would deliver metal into the vaults for

 19 credit to their account, and consumers will take

 20 metal out of the vaults. The metal that we tend

 21 to up charge against the futures market will stay

 22 -- will be kept in a vault.
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 1 CHAIRMAN GENSLER: I think it would be

 2 helpful for this discussion, not only for the

 3 Commission, but for the public to understand that,

 4 because there's been a lot focused on the large

 5 concentrated shorts, and as you've described it,

 6 at least for HSBC, you have this long position

 7 there, and just whatever the business model is,

 8 just to have a little bit more transparency I

 9 think would be helpful to understand that. Mr.

 10 LaSala, because --

 11 MR. LASALA: Thank you. Mr. Chairman,

 12 if I could just add, to follow up your -- the

 13 point you made earlier, we recently conducted a

 14 review of the large shorts in gold and silver, and

 15 I'd certainly be happy to share those results with

 16 the DMO folks at the conclusion of the meeting.

 17 CHAIRMAN GENSLER: That would be

 18 terrific, thank you.

 19 MR. LASALA: The results will be

 20 comparable to what we've seen in the past.

 21 CHAIRMAN GENSLER: Thank you.

 22 Commissioner Dunn.
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 1 COMMISSIONER DUNN: Quick to motion

 2 there, Mr. Chairman. I think that -- I

 3 understand on the precious metal one, gold to a

 4 large part and to silver, that when times get

 5 rough, the dollar gets high, people say, we want

 6 to hold that as a hedge a bit, and people get gold

 7 and they keep it, they don't -- it's not being

 8 utilized. But I have a real concern on the copper

 9 area.

 10 And, Mr. Burghardt, for you, people in

 11 your business, you're looking not only at that

 12 copper market as price discovery, but also to

 13 hedge, that you can -- when you're going to do a

 14 job and somebody comes in and wants to know how

 15 much copper they're going to have on a building,

 16 or the automobile industry says this is how much

 17 copper we need, you have to be able to hedge on

 18 that.

 19 And I am concerned about all the extra

 20 anilities (?) out there, when I see there's a big

 21 strike in the largest copper mine in Mexico, and

 22 then I see the economy go down, and then why are
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 1 the prices still up here, so if you could kind of

 2 talk a little bit about that concern of yours, and

 3 Mr. O'Hegarty, if you could respond, I'd

 4 appreciate that.

 5 MR. BURGHARDT: Certainly, you know, for

 6 our industry, you know, copper is the critical,

 7 it's the raw material for our industry, and so we

 8 need a couple things. First we need markets for

 9 it, and for that to happen, it has to be cost

 10 effective. You know, we've already seen where

 11 we've lost markets, you know, because of the price

 12 of copper, because of substitution, so it needs to

 13 be price effective or cost effective.

 14 What we see is, if you go back, copper

 15 was traded in a range of 70 cents to $1.70, and

 16 that was typically, you know, based on -- the cost

 17 was maybe 80 cents, 90 cents, you know, when

 18 copper was in the surplus, it went below, when it

 19 was in a shortage, it went well above, okay.

 20 Not all that much has changed

 21 dramatically. But now what we see in our business

 22 is, copper goes in a range of $1.40 to $4.00 in a
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 1 matter of a relatively short period of time.

 2 So, number one, we don't feel that's

 3 reflective of fundamentals and cost. You know,

 4 fundamentals as far as demand haven't changed as

 5 far as consumption. If you look at warehouse

 6 stocks, you know, I pointed out earlier, the

 7 market is in a surplus, you know, why is the price

 8 doubling when the market is in a surplus?

 9 So, clearly we feel that the market,

 10 which is so critical, you know, for our industry,

 11 because we use it to establish prices and to

 12 manage our risk, okay, but we feel it's gotten

 13 away from the fundamentals. We're still using it

 14 for price discovery, we still use it for risk,

 15 okay, we've applied for hedge exemptions in the

 16 past because we needed it to run our business, all

 17 right, but what we'd like to see is a reduction in

 18 speculation so that the price is now reflective of

 19 cost and fundamentals.

 20 It's interesting, most of you heard --

 21 I'm sure everyone heard of the large earthquake in

 22 Chile, you know, it occurred and it was a real,
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 1 you know, catastrophe down there. I think the

 2 price moved seven cents that day. It moves less

 3 on an event of that magnitude than it does when

 4 one large player comes into the market, and we

 5 don't feel that's correct.

 6 COMMISSIONER DUNN: Mr. O'Hegarty, if

 7 you'd response. Mr. LaSala, I'd like you to

 8 respond, as well.

 9 MR. O'HEGARTY: Okay. I actually have

 10 given you some slides. These are 2009 figures,

 11 because they cover the whole year. Slide five is

 12 the capacity of listed brands. This isn't just

 13 total capacity, this is listed brands. And

 14 according to those figures, it's 14 and a half

 15 million tons is the capacity. And then you look

 16 at the stocks, slide seven gives you the stocks in

 17 LME warehouses during that period. And again,

 18 I'll just try to point out that the net figure

 19 compared to the gross figure in and out, this is

 20 not metal that people are taking and keeping as an

 21 investment, this is metal going in and out. Now,

 22 our market is run on the assumption that it is the
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 1 delivery of last resort and the supply of last

 2 resort.

 3 I think when Jeff was talking about his

 4 risk, he doesn't use markets to sort his metal, he

 5 needs it direct from the producer. If that

 6 pricing is against an exchange contract, and

 7 although the -- provides that, but a U.S. Price

 8 discovery, because of our three geographic

 9 regions, we provided global price discovery, and

 10 most of the trade outside the U.S., and even the

 11 trade into China, is basis the LME price.

 12 So the volume you see trading on the LME

 13 is price risk trading, not metal trading, just in

 14 time, absolutely, but the three -- the most liquid

 15 contracts on our exchange is three month contract,

 16 it's a rolling three months, so every day you're

 17 trading for three months forward, that is price

 18 risk, it is not just in -- metal.

 19 MR. LASALA: Mr. Dunn, to follow the

 20 comments of Mr. O'Hegarty --

 21 CHAIRMAN GENSLER: Just trying to help,

 22 it's Commissioner Dunn.
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 1 MR. LASALA: Did I say -- I'm sorry.

 2 Commissioner Dunn, to follow Mr. O'Hegarty's, you

 3 know, comments, we'd agree that COMEX, in the

 4 copper, we've seen more movements in that in and

 5 out than the other metals. So it's been utilized

 6 by commercials to draw inventory more than others.

 7 It's been one contract also that we've made the

 8 most adjustments to in the context of the spot

 9 month limits.

 10 Back in 2006, those -- the available

 11 metal was down in less than 100 contracts worth of

 12 material. We had a number of initiatives, making

 13 adjustments to the limits, margins and the like.

 14 You know, further, to note Mr. Epstein's

 15 point about volatility in the market, in a

 16 International Copper Study Group, in 2009, found

 17 that there was a deficit of 140,000 metric tons in

 18 the first half of 2009, and then there's a half

 19 million dollar -- half million ton surplus in the

 20 second half.

 21 And a point I'm simply raising here is

 22 that these dynamics, this is not one smooth
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 1 playing surface, there are supply deficits, supply

 2 surpluses that the market is factoring in that

 3 will, in fact, lead to I think that volatility

 4 that's being noted. I don't see the investment, I

 5 think that may have been the genesis of your

 6 question, of -- in copper the same way as you do

 7 in more of the precious metals, gold and silver.

 8 Thank you.

 9 CHAIRMAN GENSLER: Thank you,

 10 Commissioner Dunn. Commissioner Sommers. No,

 11 Commissioner Chilton.

 12 COMMISSIONER CHILTON: I want to get

 13 briefly to exemption. And I appreciate Mr.

 14 Charles' response earlier. I will note, and I

 15 won't give a name, but representatives of other

 16 banks have told me that they actually could, not

 17 that it would be easy, but they could separate

 18 their own book from those of their customers, and

 19 therefore, they didn't have a problem with, at

 20 least one bank, they didn't have a problem with

 21 saying that they would use the exemption from any

 22 position limits for their own trading, for their
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 1 own speculative trading.

 2 That's sort of an important concept to

 3 me. I think it's maybe where we went awry on some

 4 other issues outside of our market. So I think,

 5 one, we should approve these exemptions. I'm not

 6 suggesting that the exchanges have done a poor job

 7 of it, but I think it's government responsibility,

 8 and I think we should do it, I think it's our job

 9 to step up to the plate. Two, I think they should

 10 be -- to the extent that we can craft one, make it

 11 targeted for legitimate business purposes and not

 12 for their own book, and I think it needs to be

 13 verifiable that we check on it all the time. And

 14 then finally, and this is in our energy proposal

 15 also, I think it should be transparent. I find it

 16 amazing that currently under our rules and regs,

 17 that we can't tell the public who has an exemption

 18 or even how many there are. So if we learned

 19 anything, it seems that, you know, the more

 20 transparency, the better.

 21 Mr. O'Hegarty, I'm curious about the,

 22 you know, you've got a massive supply in London in
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 1 metals, but are there multiple claims against some

 2 of those metals?

 3 MR. O'HEGARTY: It's not in London, it's

 4 -- at the areas of net consumption, we try and

 5 have our locations -- consumption.

 6 COMMISSIONER CHILTON: Okay.

 7 MR. O'HEGARTY: The matter is always

 8 owned by one -- at any point in time, and so

 9 there's never any argument about, you know, who

 10 owns it. The concept of futures trading is that

 11 if I'm going to deliver tomorrow, I better have

 12 metal or I'll pay for it. If I'm trading up to

 13 five years, the metal is -- I'll worry about -- at

 14 the time, and therefore, you can't really tie up

 15 the futures contracts with the available supply of

 16 metal except that there is a continuum.

 17 COMMISSIONER CHILTON: When you get to

 18 the spot month?

 19 MR. O'HEGARTY: Well, basically you

 20 start out at five years being price discovery,

 21 trading price risk, and both consumers and

 22 producers do that. A day out is physically
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 1 trading. Now, at what point in time it changes

 2 between the two is actually almost impossible to

 3 separate out.

 4 COMMISSIONER CHILTON: I think on

 5 average, maybe Mr. Sherrod can give me a number

 6 here, but I think on average the futures to

 7 physical is ten times greater -- ten times

 8 greater, the futures. Do we happen to know what

 9 it is on silver or gold, off the top of your head?

 10 Anybody happen to know that off the top of your

 11 head? Okay.

 12 MR. O'HEGARTY: Well, can I help you?

 13 COMMISSIONER CHILTON: Yes, please.

 14 MR. O'HEGARTY: The convention in the

 15 base metal markets is for producers and consumers

 16 to buy and sell basis a future price. So they

 17 will sell in a six month delivery basis what will

 18 then be the LME price. If they're both hedge, and

 19 they're both -- they'll agree to trade 100 tons,

 20 you get double the amount hedged on the exchange

 21 to put the hedge on, and then double the amount to

 22 take the hedge off again, so it's four times.
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 1 COMMISSIONER CHILTON: All right, thank

 2 you. And my time is -- I'll go real quick. Mr.

 3 Epstein, most of the large price moves that we see

 4 in silver and gold tends to take place when COMEX

 5 is open, yet, as Mr. Sherrod talked, there are

 6 plenty of other venues for trading of metals

 7 around the world, but COMEX seems to be where they

 8 have prices set; do you have a thought as to why

 9 that is?

 10 MR. EPSTEIN: The futures markets in the

 11 United States are great. You've got the

 12 counterparty risk managed to be the clearing firms

 13 and the exchanges, you've got fair price

 14 discovery. The CME does a great job of providing

 15 a -- market right there all the time. There's no

 16 reason that price discovery wouldn't take place at

 17 COMEX. The fact that it has to have a reality

 18 check against physical trading as you get close to

 19 spot month, absolutely.

 20 But in the gold and silver, particular

 21 more so than perhaps quite copper, I mean all of

 22 the trading takes place in spot months, and then
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 1 on a single day it switches to the next month.

 2 And the trading that's taking place in July or --

 3 right now doesn't take place in July -- it takes

 4 place in the May contract, because the roles are

 5 so clear and specific. So everything takes place

 6 in a single month in the precious metals.

 7 COMMISSIONER CHILTON: Thank you.

 8 CHAIRMAN GENSLER: Thank you,

 9 Commissioner Chilton. Commissioner O'Malia.

 10 COMMISSIONER O'MALIA: Thank you. If I

 11 can congratulate Mr. Burghardt for his coming up

 12 with an alternative strategy. In your testimony,

 13 you raised the proposal that significantly higher

 14 margin requirements for investment funds would be

 15 a more effective solution. In light of the global

 16 nature of these markets, could we get everybody to

 17 comment on the impact that might have on trading,

 18 liquidity, and pricing? Maybe Mr. Burghardt might

 19 want to explain the proposal and then everybody

 20 comment on it.

 21 MR. BURGHARDT: Sure; just to elaborate

 22 a little more, I think some of the discussions
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 1 we've had already show that while we have had

 2 position limits, question how effective they've

 3 been. Also, it's my view that a lot of those

 4 position limits have really been to prevent spot

 5 squeezes in a commodity, and that's really not

 6 what we're talking about here, one or two players

 7 trying to squeeze, you know, the spot month in the

 8 commodity, more, it's a large group of speculators

 9 coming into the market, not necessarily in spot

 10 positions. And the concern is, if we put position

 11 limits on, that more and more speculators could

 12 continue to come into the market and become a

 13 higher percentage of the market overall, okay. As

 14 long as they don't hit those position limits, you

 15 know, the speculation, the percent could increase

 16 overall in the market, and that's why the

 17 alternative.

 18 Many of the markets have margins of, you

 19 know, five to seven percent, which I feel is very

 20 low and certainly invites a lot of volume as

 21 people come in with dollars, they can trade a

 22 large number of contracts, so that's the reason
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 1 behind it.

 2 COMMISSIONER O'MALIA: So your proposal

 3 is to raise the margin?

 4 MR. BURGHARDT: Correct.

 5 COMMISSIONER O'MALIA: And then maybe we

 6 can get everybody to comment on that.

 7 MR. EPSTEIN: I thought it was kind of

 8 interesting when you said it. But the reality is

 9 that, you know, the large players aren't capital

 10 constrained, you know. If there's a five or seven

 11 percent margin or ten or 15 percent margin, you

 12 know, I mean right now the margin in silver is, I

 13 guess, you know, about seven -- eight percent, you

 14 know. If I had to post 100 percent margin, I'd

 15 still do all the same trading. So it's not -- and

 16 for the big people that are taking positions, you

 17 know, large financial institutions and so forth,

 18 you know, they can't take the risk of controlling,

 19 you know, an asset without having the reality that

 20 they can have a margin call the next morning.

 21 So I don't think raising the position --

 22 raising the margin is going to substantially
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 1 effect any of the trading. Reducing the size of

 2 the position limits, if that brought in a more

 3 robust marketplace through more participation, I

 4 think you'd wind up with fair price discovery

 5 through that mechanism.

 6 MR. CHARLES: I think my only comment

 7 would be that, as I made clear in my statement,

 8 that the markets are very, very global, there's a

 9 lot of markets around the world, the U.S. is just

 10 one market of many. If you disadvantage

 11 participants in the markets in the U.S. alone,

 12 then the potential is that customers will just

 13 take their business elsewhere.

 14 MR. LASALA: Commissioner O'Malia, I'd

 15 have to respectfully not support Mr. Burghardt's

 16 recommendation. That being, our methodology in

 17 the futures industry for setting margins has been

 18 in response to volatility, price movements. It

 19 sounds here like we're going to use somehow

 20 margins to, in effect, control it. It, to me, is

 21 the, you know, the opposite of what we're trying

 22 to achieve. Margins are in response to when we
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 1 raise, when volatility increases, we raise margins

 2 as appropriately needed. Thank you.

 3 MR. O'HEGARTY: Interesting; I think the

 4 point has been made so far that margin is a credit

 5 risk management tool, and therefore, once you

 6 start using a tool for different reasons, you

 7 start introducing unintended consequences, and

 8 there are various issues in that.

 9 Trading is still all about buying and

 10 selling it for more than you bought it for, and

 11 therefore, if you increase the cost of purchase,

 12 well, then somebody still has to sell it for more.

 13 Buying is driven by those who think they can sell

 14 it for more.

 15 And so I think it introduces -- whether

 16 it changes the fundamentals or perception of

 17 supply and demand, I'm not so sure. And the same

 18 way I think ultimately position limits and what we

 19 -- our lending guidance are effective tools for

 20 settlement squeezes. Whether they're effective

 21 tools for managing a price, and this is a big

 22 debate around the world, and -- had a conference
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 1 -- regularly has conferences discussing the role

 2 of markets as price discovery and creating proper

 3 price discovery for producers, farmers and the

 4 rest, but whether you can manage the price I think

 5 is always drifting into it, and I think that's

 6 where part of the difficulty is.

 7 If you can point to a mechanism in the

 8 exchange that it's failing, is there market

 9 failure, that's a useful way of working on what's

 10 going on. If what you're just saying is, you

 11 don't like high prices, that's tricky, because for

 12 the fabricators, copper prices at the moment might

 13 be a nuisance, but up until 2002, it was a real

 14 problem for the producers, and there was massive

 15 under investment in copper production for that

 16 same reason.

 17 It's a two-sided market. High prices

 18 are good news for one person who produces it and

 19 bad news for buyers, and vice versa.

 20 CHAIRMAN GENSLER: Commissioner O'Malia,

 21 I thank you. I think Commissioner Dunn has a

 22 couple more questions, I don't know if anybody
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 1 else does. I just wanted to also mention

 2 something that -- I hear you all talk about price

 3 discovery markets, which I think is fabulous, and

 4 I guess I can't lose an opportunity to say that's

 5 what at least this Commissioner wants to bring to

 6 the over-the- counter derivatives marketplace.

 7 When I hear Mr. Epstein talk about bringing market

 8 makers in and having real time, even electronic

 9 feeds to a market to see, even if it's co-

 10 located, I think that that would be an advancement

 11 in these right now opaque derivatives markets, but

 12 I'm going to turn to Commissioner Dunn to ask his

 13 follow-up question.

 14 COMMISSIONER DUNN: Well, let me

 15 associate myself with your comments on

 16 over-the-counter, not Mr. Dunn. And I whole

 17 heartedly agree with the Chairman on that, and I

 18 think it's extremely important that there not be a

 19 cut-out exemption by Congress for end users, that

 20 I would prefer that Congress give us the latitude

 21 of providing exemptions for those we think deserve

 22 an exemption on those end users.
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 1 That said, let me -- Mr. LaSala, if you

 2 couldn't tell from the tone of my questions with

 3 the DMO, I think that we're just entirely too

 4 loosey goosey on accountability level, and loosey

 5 goosey is the regulatory term that we use here.

 6 But would you -- first of all, how do you go about

 7 setting accountability levels? What type of

 8 impact does, or input does the industry have in

 9 setting those levels? And would you be opposed to

 10 the codification of working with DMO when someone

 11 exceeds accountability levels so that we at the

 12 Commission know that somebody is taking a look at

 13 it and there is positive action being taken when

 14 somebody steps over those accountability levels?

 15 MR. O'HEGARTY: If you can think about

 16 this for a second while he responds, and I'm

 17 intrigued with the lending guidance that you

 18 develop. In I guess '98, '99, you put together a

 19 paper, The Way Forward, and I'd like to understand

 20 the industry involvement in that and how you came

 21 up with those lending guidelines. So Mr. LaSala.

 22 MR. LASALA: Commissioner Dunn, insofar
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 1 as the accountability levels, I think I may have

 2 mentioned earlier that, you know, the key focus,

 3 as they are not in the front month and they're

 4 more distant months, has really been one of

 5 concentration.

 6 In regard to your question about have we

 7 worked with industry, not particularly solicited,

 8 you know, their exacting thoughts about it, but I

 9 think by virtue of the fact that we have reached

 10 out to players over time and to the effect of

 11 asking them not to increase when they hit a

 12 certain percentage or to decrease, I think that

 13 the trading community has got a pretty good idea

 14 of where those sensitivity points are. We do not

 15 make them, you know, we do not state them

 16 formally, and every market situation is different.

 17 I believe that the ability to have them flexible,

 18 quite frankly, is advantageous, and I'll just give

 19 you an example. As you start making them more

 20 rigid, they start more and more resembling limits

 21 that I, you know, just, quite frankly, think will

 22 lead to, for some entities -- some entities will
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 1 look at it as a nuisance and look for

 2 alternatives, some of them will just look at it as

 3 a barrier to conducting business.

 4 In more tight markets, you might look at

 5 a percentage of X that someone obtains and you're

 6 more sensitive to it; under different market

 7 conditions, it might be, you know, a little bit

 8 more than X. Flexibility is important. And I

 9 think we've done an admirable job of monitoring

 10 these markets and not allowing excessive

 11 concentrations to adversely effect them.

 12 That stated, to your point of would it

 13 be open to, you know, having discussions with DMO,

 14 we'd certainly be open to having that kind of a

 15 discussion. We've certainly, whether it be in the

 16 metals contracts or in the energies contracts, had

 17 discussions with DMO in particular market

 18 circumstances, to have a more global one to talk

 19 about our ideas about where those sensitive points

 20 are, I'd certainly be willing to have that

 21 discussion, but I say that with the caveat that I

 22 still ultimately would value having the discretion
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 1 at the exchange level because I think we are just,

 2 quite frankly, closest to these markets, and that

 3 by no means is a shot at the division market

 4 oversight in any way, shape or form.

 5 COMMISSIONER DUNN: Your answer then was

 6 on should we codify what we do at the point in

 7 time when someone exceeds accountability levels

 8 and that you think it would be all right, but you

 9 don't necessarily think it's a good idea?

 10 MR. LASALA: I would say that I'm not

 11 sure if it's a good idea, that's right.

 12 COMMISSIONER DUNN: Mr. O'Hegarty.

 13 MR. O'HEGARTY: Commissioner, thank you.

 14 Yes, the lending guidance came after what was no

 15 secret at the time in '96, a settlement squeeze on

 16 the exchange, that was -- had gone on for a while

 17 and was very dangerous. Two things came out of

 18 that, one was the exchange realized that it needed

 19 much better visibility on control of LME warrants.

 20 They are the currency for settling LME contracts.

 21 And so one of the things covered in the way

 22 forward was the available information to the
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 1 exchange. So today electronics have helped. We

 2 get electronic reports -- by 9:00 have a total

 3 picture of the market as of close of business

 4 yesterday. And the second point is, once you have

 5 the information, what do you do with it? And the

 6 lending guidance was built on the previous tool we

 7 had, which was a backwardation limit, in other

 8 words, imposing a limit to the price for trading

 9 tom/next is in effect, how you deal with the

 10 settlement squeeze.

 11 And it's -- the consultation that went

 12 on was, should there be position limits, should

 13 there be fixed backwardation limits that apply to

 14 the whole market, should they be on a percentage

 15 basis, should they be a fixed amount basis.

 16 And there are pluses and minuses in all

 17 of those areas. One issue about position limits,

 18 fixed ones, is that the available supply

 19 fluctuates depending on the cycle in the market.

 20 Similarly, the amount of money you talk about as a

 21 percentage of the cash price fluctuates. And so

 22 what we've ended up with was the lending guidance,
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 1 which is a more refined tool now than it was when

 2 it first came in '98, and that's why I submitted a

 3 notice we did in 2005 that talks you through how

 4 it works, because the principle is straight

 5 forward. Somebody with a dominant position has to

 6 lend into the market, in other words, sell

 7 tom/next at pre-determined rates. Like most

 8 things, the details get complicated for those who

 9 actually do it day by day, and that's what the

 10 document goes into.

 11 We, in effect, treat 90 percent as total

 12 control of our market, and therefore, anyone who

 13 has a 90 percent, on our calculation, it's not 90

 14 percent of the warrants, it's 90 percent of the

 15 warrants and entitlement to pick them up in the

 16 next two days. In other words, your net long

 17 position is over a three day period, in effect.

 18 So that's why it's possible to have a dominant

 19 position of well over 100 percent.

 20 Anything over 90 is treated as control,

 21 and therefore, you have to lend at level, you just

 22 have to give it away for a day. In practice, what
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 1 we've discovered is that the 50 to 80 percent

 2 bracket rarely has much effect on the market.

 3 Eighty to 90 starts showing, in effect, and this

 4 is why the backwardation is tightened on that by

 5 us. And 90 we treat as an effect of control.

 6 Is the advantage of it as a tool is open

 7 and a legitimate expectation on both sides of the

 8 market. The shorts and the longs know how it

 9 works. And in the last ten years of its

 10 operation, we have found that the role of

 11 concentration of positions in warrants and the

 12 settlement has stopped being the tail wagging the

 13 dog in our market. What drives our market is the

 14 three month price. That's three months forward.

 15 Again, you know, it takes a while to get your head

 16 around it, but it's a rolling three months, so

 17 there's no backwardation or -- in that price.

 18 Today it's three months, tomorrow it'll

 19 be three months from tomorrow, and, therefore, it

 20 is a pure commodity related price. The cash to

 21 three backwardation -- it's all contained in the

 22 moment is, what happens if you've left it a bit
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 1 late. Three months is a reasonable amount of time

 2 in the metals industry to plan, less than three

 3 months is, you're now just in time.

 4 And therefore, we have -- there are two

 5 measures going on. What's the three month price

 6 telling you? In other words, what's the

 7 perception of the commodity value? What's the

 8 cash in three prize telling you, is there a

 9 shortage of supply?

 10 CHAIRMAN GENSLER: Thank you,

 11 Commissioner Dunn. Is it on this point -- all

 12 right. Mr. Burghardt.

 13 MR. BURGHARDT: To just share one point,

 14 you know, he mentioned, you know, that currently

 15 everything isn't contained, well, you know,

 16 contangle markets occur generally when you have a

 17 surplus, you know, which is another indication,

 18 why we feel that the prices right now aren't

 19 reflecting fundamentals.

 20 CHAIRMAN GENSLER: Thank you. I want to

 21 thank our first panel. It's been very helpful to

 22 the Commission and in our deliberations. I called
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 1 the Commissioners just a short while ago and I

 2 just want to make sure, if we didn't take a ten

 3 minute break, whether -- all right. So if we can

 4 invite our next panel up if they're here. Again,

 5 I want to thank our panelists, and it'll probably

 6 take two or three minutes just to do so. I just

 7 want to say, for those who actually do leave the

 8 room, apparently you'll have to go back through

 9 the security that's out there again, so I just --

 10 I want to be, you know, be aware of that.

 11 (Recess)

 12 CHAIRMAN GENSLER: If I could ask the

 13 members of the public to find some seats. And I

 14 don't know if we have all five of our panelists,

 15 but we have three, we can start there. And I want

 16 to thank our panelists and -- here, I'll go from

 17 right to left in this circumstance just because we

 18 don't have all the seats filled here. But we have

 19 Tom Callahan, it's good to see you, Tom, who is

 20 head of U.S. Futures Business at NYSE Liffe, and

 21 responsible for the futures trading activity, and

 22 has been at -- I guess you've been at Euronext,
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 1 New York Stock Exchange, Euronext, for about 15

 2 years, if I have this right; is that right?

 3 MR. CALLAHAN: Two years.

 4 CHAIRMAN GENSLER: Two, well, then my

 5 notes -- oh, no, I'm misreading, after 15 years at

 6 Merrill Lynch, all right, but it just feels that

 7 way.

 8 MR. CALLAHAN: It just feels that way.

 9 CHAIRMAN GENSLER: All right. And Kevin

 10 Norrish, who's head of Commodities Research at

 11 Barclay's Capital, he's a Managing Director in the

 12 Commodities Research Team at Barclay's, and he's

 13 been really a leader in research in various ways

 14 before that. And, Kevin, I noticed also that your

 15 documents include a lot of use of CFTC data, so I

 16 guess, you know, somehow our transparency

 17 initiatives have been used by somebody, and so we

 18 thank you for that.

 19 Doctor Jarecki, it's so good to see you

 20 back. You last testified here last summer, I

 21 remember some very helpful dialogue and exchange

 22 at that point in time. And Doctor Jarecki, who's
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 1 Chairman of Gresham Investment Management, but has

 2 been a real leader in a number of fields, not only

 3 the fields that we're talking about here, but the

 4 fields of psychiatric treatment, a leading expert

 5 there, but more relevant -- is it right that you

 6 were the founder, maybe along with others, with

 7 the Mocatta Group years ago and was really the

 8 largest gold and silver trading company, and so

 9 his association with these issues goes back

 10 decades.

 11 DOCTOR JARECKI: (off mic)

 12 CHAIRMAN GENSLER: Okay. Well, now I

 13 didn't mean -- I thank you for that clarification,

 14 very good. I can see this is going to be a lively

 15 afternoon. And good to see you also, John -- I

 16 did it wrong the last time, so you're going to

 17 help us, Lothian, John Lothian, who's Chief

 18 Executive Officer of John J. Lothian and Company.

 19 But this online education and media company

 20 publishes newsletters, blogs, now wikis and so

 21 forth, and he follows these markets closely.

 22 And then our last panelist, Bill Murphy,
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 1 who is with the Gold Anti-Trust Action Committee,

 2 and he chairs the GATA Summit in South Africa, and

 3 he's been involved in many of these issues. So we

 4 thank all of our panelists, and we're going to go

 5 I guess from right to left. And if you have

 6 written statements, they'll be included and

 7 they'll be on our web site, but if you could try

 8 to help us summarize in four or five minutes, that

 9 would be terrific.

 10 MR. CALLAHAN: Absolutely; Chairman

 11 Gensler and members of the Commission, my name is

 12 Tom Callahan, I'm the CEO of NYSE Liffe U.S., the

 13 U.S. Futures Exchange of NYSE Euronext, and it's a

 14 great honor to appear before you today.

 15 Launched in September, 2008, NYSE Liffe

 16 U.S. is registered with the CFDC as a designated

 17 contract market. It currently clears its

 18 contracts through the options clearing -- The

 19 National Futures Association conducts day- to-day

 20 market surveillance of our exchange.

 21 Our parent company is NYSE Euronext, a

 22 leading global operator of financial markets and
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 1 one of the world's most highly regulated global

 2 financial firms. NYSE Liffe U.S. provides fully

 3 electronic liquid market for physically

 4 deliverable gold and silver futures, options on

 5 gold and silver futures, and many size gold and

 6 silver futures, as well.

 7 The lineage of our exchange traces back

 8 to what was once known as CBOT Metals, which was

 9 divested by CME Group in March, 2008, so as to

 10 observe competition in the U.S. metals market in

 11 the face of the pending CME merger with NYMEX,

 12 COMEX. NYSE Euronext is working hard to deliver

 13 on this objective to promote fair and effective

 14 competition. In the U.S., we directly compete

 15 with CME's COMEX exchange. Currently, our young

 16 exchange is trading roughly five percent of the

 17 total U.S. precious metals futures market by

 18 volume. In our attempts to establish a world

 19 class U.S. futures exchange, we are investing

 20 heavily in our platform and recently took on six

 21 important market participants as partners in this

 22 endeavor.
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 1 Today I'd like to address certain areas

 2 of focus for the Commission as you review

 3 regulation of the metals futures markets. We

 4 share the Commission's objective to ensure that

 5 the U.S. precious metals markets remain fair and

 6 competitive for obtaining the highest degree of

 7 integrity, the protection of investors.

 8 In its capacity as a CFTC registered DCM

 9 NSRO, NYSE Liffe U.S. currently places position

 10 limits on its metals futures products. Our

 11 current levels of position limits are extremely

 12 conservative and we believe protect the market

 13 from manipulation and excessive speculation.

 14 These limits are set by the exchange. NYSE Liffe

 15 U.S. has maintained these conservative limits

 16 because it retains the flexibility to adjust them

 17 as market conditions may demand. One of the clear

 18 lessons from the financial crisis is that the

 19 exchange traded and centrally cleared market model

 20 performed exceptionally well as the

 21 over-the-counter markets faltered. Accordingly,

 22 as new regulations such as position limits are
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 1 contemplated, the CFTC should be mindful that they

 2 are implemented in a way that does not force

 3 business away from regulation exchanges and into

 4 the over-the-counter markets or to foreign

 5 jurisdictions.

 6 In addition, the federal position limits

 7 are determined to be necessary for the metals

 8 markets. The CFTC should design the regime so not

 9 to solidify competitive advantages for the

 10 currently dominant exchanges or to hinder the

 11 migration of OTC business to a centrally cleared

 12 exchange traded environment.

 13 Someone suggested that the CFTC take

 14 into consideration the relative size of a market

 15 when administering certain position limits. For

 16 start of exchanges like NYSE Liffe U.S., it would

 17 be difficult, if not impossible, to gain market

 18 share against an existing exchange if position

 19 limits were administered in a manner that capped

 20 growth or growth potential.

 21 Should federal position limits be

 22 needed, either limited exemptions for new
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 1 competitors or minimum position limits should be

 2 in place to ensure that competition is not

 3 hindered by cross market position limit regimes

 4 that would lock in market share with an incumbent

 5 exchange. Finally, while I speak today as the

 6 head of our U.S. futures trading business, NYSE

 7 Euronext also has a significant exchange traded

 8 products business that will be impacted by

 9 position limit policies.

 10 An exchange traded product is an

 11 investment vehicle traded on a regulated security

 12 exchange which typically owns assets such as

 13 stocks or bonds, though more recently are

 14 diversifying into other assets like commodities.

 15 They provide retail investors with a cost

 16 effective way to invest in and hedge commodity

 17 exposures through regulated transparent

 18 marketplaces.

 19 Recent months have seen certain energy

 20 ETF's for commodities either close up or move

 21 overseas in advance of anticipated position

 22 limits. While rational position limits as we
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 1 impose on our exchange today are needed to protect

 2 against manipulation and excessive concentration,

 3 the Commission should be mindful that federally

 4 set position limits could have a serious negative

 5 impact on other markets that use futures contracts

 6 to either discovery prices or manage risks. As

 7 new entered into these markets, NYSE Liffe U.S. is

 8 committed to the derivatives marketplace and eager

 9 to compete for the benefit of investors and

 10 consumers. Thank you for allowing me to testify.

 11 CHAIRMAN GENSLER: Thank you, Mr.

 12 Callahan. Mr. Norrish.

 13 MR. NORRISH: Good morning, ladies and

 14 gentlemen. My name is Kevin Norrish, I'm a

 15 Managing Director in the Commodities Research Team

 16 at Barclay's Capital. I think the CFTC is to be

 17 commended for holding this debate and I'm very

 18 pleased to be here to make a contribution to it.

 19 My background is that I've spent 22

 20 years analyzing and researching industrial metals

 21 markets, and I've seen a number of big changes in

 22 the markets in that time. Two of the most
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 1 important I think are the real growth in the use

 2 of futures markets by producers and consumers to

 3 manage their very real day-to-day price risks.

 4 The other evolution that I've seen which

 5 I think is also very important, and particularly

 6 in the last ten years, is the increasing use of

 7 the commodities futures markets by financial

 8 market participants who are seeking commodity risk

 9 in order to protect against their own inflation

 10 risks or to diversify their portfolios. Now, I

 11 think those two developments are very mutually

 12 beneficial. What I want to do over the next few

 13 minutes or so is to really focus on three key

 14 issues which I think are really very important to

 15 this debate. I think the first point that I would

 16 make is that I think financial involvement in the

 17 commodities futures markets is a very good thing

 18 and we need more of it.

 19 And the reason for that I think is that

 20 we face over the next ten to 15 years a massive

 21 increase in demand for commodities, all sorts of

 22 different kinds of commodities, and that's being
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 1 driven by what's going on in the industrializing

 2 Asian nations, the rapid growth in

 3 industrialization, living standards and

 4 urbanization, which is driving huge additional

 5 demand for commodities, and that's going to

 6 continue for a long time.

 7 I've got one of my slides up on the

 8 screen here at the moment, and that shows you that

 9 the International Energy Agency believes that $25

 10 trillion needs to be spent over the next 20 years,

 11 just in energy supply infrastructure, not in other

 12 commodities, but just in energy supply

 13 infrastructure.

 14 Now, how is that demand going to be met?

 15 Well, this demand is coming at a time when it's

 16 very clear there are a number of supply

 17 constraints in many important commodities markets.

 18 That's partly due to a lack of deposits, a lack of

 19 expiration development activity, supplied

 20 bottlenecks, and a lack of qualified labor. So

 21 it's really very important I think that we have

 22 large liquid financial markets to assist producers
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 1 in being able to make these very big investments

 2 and to be able to protect the risks that they

 3 have.

 4 I remember very well the 1990's, when

 5 there was very little financial market involvement

 6 in the commodities markets. And back then,

 7 markets were depressed, and what we saw, the

 8 behavior from producers then was that producers

 9 would cut costs, there was very little liquidity

 10 for them to manage their risks, they would cut

 11 costs, and they cut back on exploration and

 12 development.

 13 That's part of the reason why we have

 14 high metals prices today. So I think it's very

 15 important that we have the financial market

 16 participation. I think there are two key things;

 17 first of all, there's a huge mismatch between

 18 producer's needs to manage their risks, very large

 19 capital intensive projects, often of very long

 20 time periods that they need to manage, and

 21 consumers who tend to be a lot smaller and have

 22 much shorter time periods to manage their risk
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 1 over, so the financial market participation helps

 2 to bridge that gap. I think I would say the other

 3 thing is that we need large financial institutions

 4 involved in these markets, as well, and that's

 5 because commodity market risk by its very nature

 6 tends to be lumpy and unpredictable. You know, we

 7 have large capital intensive projects to risk

 8 manage, large amounts of inventory to finance, and

 9 these things can only really be done by flexible

 10 large financial institutions that are able to lay

 11 off that risk in different ways, in the futures

 12 markets, in the over-the- counter markets, and in

 13 the physical markets.

 14 So I think we need more of this kind of

 15 activity. This kind of activity needs to be

 16 encouraged to grow. We don't need less of it. So

 17 that's my first point.

 18 My second point is that when it comes to

 19 the role of U.S. futures markets, commodity

 20 futures markets, and particularly the metals

 21 markets, that crucial role of price discovery and

 22 liquidity is very easily exportable, and I'll tell
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 1 you why, it's because we've seen a huge shift in

 2 the nature of commodity market demand over the

 3 last few years.

 4 Let's go back to 2002. Back then, the

 5 U.S. Consumed as much copper as China did.

 6 Today, China consumes three times as much copper

 7 as the U.S. does, and that number is just going to

 8 continue getting bigger. So I would say that

 9 given those sorts of changes, the U.S. Commodity

 10 futures markets, and particularly the metals

 11 markets are punching above their weight. They are

 12 continuing to play a very important role in global

 13 price discovery and in the addition of liquidity

 14 to markets, enabling people to use them to manage

 15 their risks.

 16 I think the danger is that if

 17 unnecessary position limits are imposed in U.S.

 18 markets, then it will drive that liquidity to

 19 other venues, and you will see a reduction in the

 20 relevance and importance of U.S. markets.

 21 And my final point is on the role of

 22 index investors specifically. There have been a
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 1 lot of wild things said about the impact of index

 2 investors on prices, and I think, you know, I

 3 would like to just correct the record a little

 4 bit.

 5 When we look at the role of index

 6 investors, my belief is that they act as price

 7 stabilizers, and that's because index investors

 8 are seeking commodity price exposure in order to

 9 diversify their portfolios, so they tend to buy

 10 when prices are low and sell when prices are high,

 11 and you can see that in my chart here in the oil

 12 market.

 13 So just to finish, I would say that U.S.

 14 markets need to continue to be a very important

 15 part of these global financial markets. We need

 16 to encourage speculation.

 17 CHAIRMAN GENSLER: If I could ask you to

 18 --

 19 MR. NORRISH: Yeah, I'm just making my

 20 final comments. Sorry, I've gone a little bit

 21 over my time. But I think we need to encourage

 22 financial market involvement. We need to consider
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 1 flexible accountability limits are the way to go,

 2 because commodity markets do need the flexibility.

 3 It's that flexibility which best serves all market

 4 participants, the producers, the consumers and the

 5 financial institutions.

 6 CHAIRMAN GENSLER: Excuse me, thank you.

 7 MR. NORRISH: Thanks very much.

 8 CHAIRMAN GENSLER: Doctor Jarecki.

 9 DOCTOR JARECKI: Good morning. My name

 10 is Henry Jarecki, I'm Chairman of Gresham

 11 Investment Management that provides advice and

 12 execution services to investors, large and small,

 13 who wish to diversify stock and bond portfolios by

 14 -- am I on the end? Now I'm good. I apologize.

 15 I hope you don't count this time against me. My

 16 name is Henry Jarecki --

 17 CHAIRMAN GENSLER: No, it started over.

 18 DOCTOR JARECKI: -- that provides advice

 19 and execution services to investors, large and

 20 small, who want to diversify their stock and bond

 21 portfolios by adding a diversified pool of

 22 commodities to them. And I thank the Commission
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 1 for inviting me to appear before it again, and I

 2 presume you have all brushed up on your Latin in

 3 preparation for my testimony.

 4 It is worth emphasizing first off that

 5 the futures markets have over the past two years

 6 proven themselves to be immune from the troubles

 7 and especially the risks and balance sheet fiddles

 8 that afflicted the over leverage stock, bond and

 9 real estate markets.

 10 I think this is because they deal with

 11 leverage in a rational way. Namely day in and day

 12 out, they mark all customers, big or little,

 13 commercial or speculator to market and they get

 14 good initial margins, safe initial margins to

 15 start this.

 16 Now, I know quite a bit about this. The

 17 bulk of my experience in trading commodities was

 18 gained when I was the Chief Executive of the

 19 Mocatta Group, which was for 300 years the largest

 20 precious metals dealer in the world. And in that

 21 capacity, and as a member of the COMEX Board, I

 22 witnessed firsthand the Hunt Brothers attempt to
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 1 corner the physical silver market. They moved the

 2 price up by buying physical supplies, and as they

 3 bought more and more, banks and brokers granted

 4 them more and more credit on their physical

 5 holding, and everybody started to worry that the

 6 bubble would burst, the Hunt's would fail, and

 7 they would take the banks and brokers down.

 8 The Treasury Department, the Federal

 9 Reserve asked the then Chairman James Stone to

 10 intervene in the markets, but he said that the

 11 markets had the ability to regulate themselves and

 12 the best thing to do was nothing at all.

 13 Perhaps he had heard of the ancient

 14 Greek who said (Greek) which is to say it takes

 15 great courage in a time of crisis to do nothing.

 16 Over the next few months, the price rose from $7

 17 all the way to $50, and the American public took

 18 its rings off, sold its silverware, and even took

 19 out its silver fillings and sold them. Billions

 20 of dollars worth of new silver was refined and

 21 came on the market. The Hunt's tried to buy it to

 22 prevent the price drop they thought would bankrupt
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 1 them, but the little guy had more silver than they

 2 had money and the corner failed. I'm going to

 3 comment more on metals in my written submission,

 4 but I wanted to mention the importance in thinking

 5 about position limits of disaggregating the

 6 positions of firms like ourselves who constantly

 7 tell our customers and the world at large just

 8 what mix of commodities is going to best lower the

 9 risks of stock and bond portfolios.

 10 We buy that mix for a customer only when

 11 that customer instructs us to do so and deposits

 12 with us all of the money that all those

 13 commodities would ultimately cost. His investment

 14 is thus fully funded, not partially margined, but

 15 fully margined with fully funded money.

 16 We don't trade for ourselves, we don't

 17 use leverage, we don't hold positions in spot

 18 months, we don't do it for our customers, and with

 19 that, all that, it's impossible to conceive

 20 excessive speculation or a squeeze. That's why we

 21 think of ourselves as passive mechanics of our

 22 customer's riches, and we think it's irrational
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 1 and anti-competitive to aggregate our dozens of

 2 customer's fully funded positions as if they were

 3 our positions.

 4 And I was happy to see that this passive

 5 mechanic concept was taken up by Chairman Gensler

 6 at the recent energy hearings, when he said that

 7 he didn't "see a Goldman Sachs or JP Morgan swap

 8 desk as a passive mechanic." It's a highly

 9 sophisticated risk business, not a passive

 10 mechanic. Still, those enterprises can take as

 11 large a position as they want to hedge their

 12 exposures. And it's astonishing to us that a firm

 13 as small as we are may be forced off the safety of

 14 the futures markets and onto over- the-counter

 15 markets while our big competitors stay on.

 16 Hereto, it was Salon the Apennine who

 17 said, laws are like cob webs, if any smaller

 18 creature falls into them, they hold it fast while

 19 something weightier can break through the web and

 20 run off.

 21 To sum up, I would make full

 22 recommendation to the Commission, number one,
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 1 position limits on metal futures can force such

 2 business into alternative channels such as

 3 over-the-counter, overseas markets, or most

 4 important, into physical storage, because our

 5 kinds of customers have all the money they need to

 6 fully buy the metals and we'll do so.

 7 Secondly, the CFTC should continue to

 8 collect trade data so it has a complete picture

 9 not only of who is implementing trades, but who is

 10 benefiting from them. Third, once you identify

 11 that an entity is merely the implementer and not

 12 the beneficiary of a fully funded, transparent, on

 13 exchange strategy, that entity's activities should

 14 be attributed to the ultimate beneficiary.

 15 Finally, don't tell yourselves that it's hard to

 16 identify the end users, it is administratively

 17 trivial to do so. You do most of it already by

 18 the large trader reports, and these would only

 19 need to be modified slightly to collect the data

 20 necessary to identify all those who control large

 21 and possibly dangerous positions. And I thank you

 22 for allowing me to offer my remarks on this
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 1 important subject, and I commend the Commission

 2 for its efforts.

 3 CHAIRMAN GENSLER: I thank you, Doctor

 4 Jarecki. It's a great honor to be quoted along

 5 with the Greeks and the others, so I don't know.

 6 Mr. Lothian.

 7 MR. LOTHIAN: Thank you. I'm the

 8 President and CEO of John J. Lothian and Company,

 9 a market focused new media firm and commodity

 10 trading advisor. I am also a futures broker and

 11 President of the Electronic Trading Division of

 12 the Price Futures Group, Incorporated, a Chicago

 13 based introducing broker. I am here representing

 14 my own views. Thank you for inviting me.

 15 I want to talk about gold. Gold is the

 16 most international of commodities. No one nation

 17 has a compelling right to monopolize or dominate

 18 the price discovery process. More and more

 19 futures exchanges around the world are introducing

 20 precious metals trading, catering to their local

 21 market participants, and impacting the global

 22 price discovery chain. Gold has little industrial
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 1 value, rather, it is -- it's value is based

 2 largely on a system of belief of its value as a

 3 store of wealth and is a replacement for paper

 4 money.

 5 No longer do nations back their currency

 6 in gold. However, history is replete with

 7 examples where gold has served as a risk

 8 management tool for times when nation's ability to

 9 repay its debt has been in doubt. In times of

 10 war, when the debt of a nation could be worthless

 11 depending on the outcome of the war, people have

 12 flocked to gold to hedge this default risk.

 13 Consider gold historically as the ultimate credit

 14 default swap.

 15 I believe gold emerged from the

 16 commodity bull markets of recent years in the

 17 financial crisis of 2008 as the commodity to own

 18 because there was no natural political

 19 constituency calling for lower gold prices. Gold

 20 became the commodity of choice in which to invest,

 21 not only because of its unique political dynamics,

 22 but also because of the dramatic rise in public
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 1 debt used to offset the impact of the financial

 2 crisis of 2008. Rising concerns about

 3 government's ability to repay the public debt

 4 through taxation renewed gold's value as a global

 5 CDS. The rush to invest in gold, gold derivatives

 6 like futures or securities like ETF's only fueled

 7 more demand as prices took off and breached

 8 historic levels.

 9 Also, low interest rates reduced the

 10 costs associated with holding physical gold and

 11 other metals contributing to higher prices. The

 12 rise in political populism in the U.S. also plays

 13 a role in gold in our society, in individual and

 14 hedge fund portfolios, and brings to the surface

 15 historical pressures between creditors and

 16 debtors.

 17 There are those who openly espouse the

 18 view that gold and silver prices should be

 19 dramatically higher, but gold and silver prices

 20 are manipulated by central bankers and others to

 21 somehow keep inflationary expectations low. This

 22 narrow view of the nature of inflationary
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 1 expectations is intellectually dishonest.

 2 Back in the late 1970's, when gold and

 3 silver had historic price moves and met higher

 4 levels of inflation, we did not have as many risk

 5 management tools to hedge inflation risk as we do

 6 today. Back in the 1970's, some traders and

 7 investors used things like soy beans, pork

 8 bellies, and gold and silver as a proxy to hedge

 9 against inflation. Bond futures were still in

 10 their infancy, and -- futures had yet to be

 11 invented. Today we have liquid futures markets

 12 around the world for investors, governments,

 13 corporations, individuals to hedge their specific

 14 inflation risks.

 15 Those who believe gold and silver

 16 markets are manipulated to keep prices low are

 17 nothing more than politically opportunistic rent

 18 seekers in my book. They are parasites on the

 19 body public profiting from selling fear and

 20 seeking political change that will benefit their

 21 world view and related market position by selling

 22 views which undermine the trust in the listed
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 1 metals futures markets, metal ETF securities, and

 2 even physical gold holdings of the U.S.

 3 government.

 4 These charlatans foster a view that

 5 distorts the metals markets and impacts

 6 efficiency. Healthy skepticism is right and

 7 proper, dogmatic mistrust is merely pseudo

 8 skeptical behavior which cherry picks evidence to

 9 "support pre-existing beliefs."

 10 In precious metals markets like gold,

 11 the category of financial hedger should be

 12 interpreted very broadly. While there are bona

 13 fide hedgers who mine and produce gold or consume

 14 it for electronics or jewelry, this activity

 15 dwarfs the trade in those using gold positions or

 16 holdings to hedge against political or financial

 17 uncertainty. Even the physical metals holdings of

 18 the central banks themselves could be considered a

 19 financial and political hedge.

 20 For those who see gold as a substitution

 21 for holding other assets, including U.S. dollars,

 22 any action which restricts their ability to move
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 1 into and out of physical metals futures or ETF's

 2 will be viewed negatively. These actions will not

 3 produce the intended results or intended effects.

 4 Position limits on financial hedgers in

 5 the U.S. Will merely move global interest in the

 6 markets through other markets outside the U.S.

 7 Position limits on gold should be liberally

 8 interpreted and exclude financial hedgers,

 9 however, there should be greater transparency for

 10 concentrated holdings of metals whether public

 11 funds or private investments. Accountability

 12 reporting should be expanded as positions grow

 13 larger. Think of harmonization between securities

 14 and futures.

 15 Lastly, position limits have their place

 16 in our markets, particularly in the futures and

 17 cash convergent process. However, I ask the

 18 Commission to act carefully in regard to proposal

 19 speculative position limits in metals before

 20 Congress acts on the issue of OTC trading in

 21 general. I believe acting hastily could put

 22 futures markets at a competitive disadvantage to
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 1 the OTC markets and non-U.S. futures markets.

 2 Thank you.

 3 CHAIRMAN GENSLER: Thank you very much.

 4 Mr. Murphy.

 5 MR. MURPHY: I'm going to have to make

 6 like the roadrunner here so bear with me as I read

 7 this. Dear Chairman Gensler, Commissioners, the

 8 Gold Anti-Trust Action Committee was formed in

 9 January, 1990 to expose and oppose the

 10 manipulation and suppression of the price of gold.

 11 What we have learned over the past 11 years is of

 12 great importance in regard to this hearing on

 13 position limits. Our efforts to expose

 14 manipulation to gold market parallel roles of

 15 Harry Markopolos to expose the Madoff Pozi scheme

 16 to the SEC.

 17 Initially we thought the manipulation of

 18 the gold market was undertaken as a coordinated

 19 profit scheme by certain bullion banks like JP

 20 Morgan, Chase Bank and Goldman Sachs and it

 21 violated federal and state anti-trust laws. But

 22 we soon -- bullion banks were working closely with
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 1 U.S. Treasury Department and Federal Reserve and a

 2 gold cartel, part of a broad scheme of

 3 manipulation of the currency, precious metals and

 4 bond markets. As an executive at Goldman Sachs in

 5 London, Robert Rubin developed an idea to borrow

 6 gold from central banks at minimal interest rates,

 7 around one percent, sell the bullion for cash and

 8 use that cash to fund Goldman Sachs operation.

 9 Rubin was confident central banks would control

 10 the gold price -- leasing of outright sales of

 11 their gold reserves, and then consequently that

 12 borrowed gold could be bought back without

 13 difficulty. This was the beginning of the gold

 14 carry trade.

 15 When Rubin became U.S. Secretary, he

 16 made a government policy to surreptitiously

 17 operate an identical gold carry trade, but on a

 18 much larger scale. This became the principle

 19 mechanism of what was called the strong dollar

 20 policy.

 21 Subsequent Treasury secretaries repeated

 22 a commitment to a strong dollar, suggesting they
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 1 were continuing to feed official gold into the

 2 market, more or less coinvescently to support the

 3 dollar and suppress interest rates and precious

 4 metals prices.

 5 Lawrence Summers, who followed Rubin as

 6 Treasury Secretary, was an expert in Gold's

 7 influence on financial markets. Previously, as a

 8 Professor at Harvard University, Summers

 9 co-authored an academic study titled Gibson's

 10 Paradox in the Gold Standards, which concluded

 11 that in a free market, gold prices move inversely

 12 -- interest rates, and conversely, if gold prices

 13 are fixed, then interest rates can be maintained

 14 at lower levels -- free market.

 15 Then chairman, Alan Greenspan, said

 16 Summers -- when he remarked that a 1993 meeting at

 17 the Federal Market Committee, "I was raising the

 18 question on the side with Governor Mullins and

 19 what would happen if the Treasury sold a little

 20 gold in the market." That's an interesting

 21 question here because if the gold price broke in

 22 that context, the thermometer would not just be a
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 1 measuring tool, it would basically effect the

 2 underlying psychology.

 3 President Obama has called for a greater

 4 transparency in both the federal government and

 5 financial markets. In pursuit of such

 6 transparency, God has made Freedom of Information

 7 Act request to the Fed and Treasury Department for

 8 a candid accounting of their involvement in the

 9 gold market.

 10 In a reply to GATA -- dated September

 11 17, 2009, Fed Governor Kevin Marks acknowledged

 12 that the Fed is gold, so -- with foreign banks,

 13 but insistent that such documents remain secret.

 14 As a result, last December, GATA sued the federal

 15 reserve in U.S. District Court -- feds with held

 16 record of gold swaps. Understanding the

 17 manipulation that price is gold is profoundly

 18 important to all markets in the American public,

 19 on January 31, 2008, GATA places a $264,000 ad in

 20 the Wall Street Journal. GATA -- this

 21 manipulation has been a primary cause of the

 22 catastrophic excesses in the market, but now
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 1 threaten the whole world. What GATA warned

 2 against has come to pass.

 3 GATA has long implicated the COMEX as

 4 being a mechanism by which gold and silver price

 5 suppression is implemented. The smoking gun is

 6 the excessive concentration of bullion bank

 7 positions whose concentration enables market

 8 manipulation just as market manipulation was a

 9 justification by the CFTC in 1980, when it acts

 10 against the Hunt Brothers for manipulating the

 11 silver market.

 12 The weekly commitment trader report

 13 documents the total net short position of

 14 commercial traders in the commodities market. The

 15 monthly bank participation reports disclose the

 16 U.S. banks at various markets. In a letter to

 17 GATA dated February 19, 2010, Warren Gata, a CFTC

 18 legal assistant wrote, "the Commission determined

 19 whether a number of banks in each reporting

 20 category is particular small, fewer than four

 21 banks. There exists the potential to extrapolate

 22 both the identity of individual banks and the
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 1 bank's position." As a result, as of December,

 2 2009, the CFTC no longer discloses the number of

 3 banks when it's less than four. The CFTC has been

 4 investigating possible manipulation of the silver

 5 market for more than a year, so this report change

 6 is disturbing.

 7 The CFTC's own reports of November,

 8 2009, show that just two banks held 43 percent of

 9 the commercial in that short position in gold and

 10 68 percent of the commercial in that short

 11 position in silver. In gold, these two banks were

 12 short 123,000 contracts, but long, only 523

 13 contracts. And in silver, they were short 41,000

 14 contracts, and long only 1,400 contracts. How

 15 improbable is it that these two banks attract most

 16 of the investors who want to sell short.

 17 It has been possible to extrapolate the

 18 two banks that hold these large manipulative short

 19 position to COMEX or JP Morgan, Chase and HSBC,

 20 because of their positions in the OTC derivatives

 21 market, whose regulator, the U.S. Office of the

 22 Control of the Currency does not provide anonymity
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 1 when it publishes market data. In the first

 2 quarter of 2009, OTC derivatives report, JP

 3 Morgan, Chase and HSBC held more than 95 percent

 4 of the gold and precious metals derivatives of all

 5 U.S. banks with a combined -- value of 120

 6 billion. This concentration dwarfs the

 7 concentration in the gold and silver futures

 8 market and -- great concern about the position of

 9 an issue.

 10 GATA has evidence there are huge

 11 physical short positions in the gold market that

 12 cannot be covered -- stress caused by -- physical

 13 demand is threatening to lead to a price explosion

 14 which restore the markets, the balance that

 15 regulation has failed to maintain. In our view,

 16 the COMEX -- becomes dysfunctional --

 17 CHAIRMAN GENSLER: If you can just try

 18 to sum -- finish up.

 19 MR. MURPHY: We're finishing up -- with

 20 -- having to be declared in the -- unable to -- on

 21 the obligations. We urge the CFTC to report fully

 22 and candidly on these markets and take appropriate
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 1 action. Thank you.

 2 CHAIRMAN GENSLER: Thank you. I want to

 3 thank all of our panelists. I'll just start with

 4 a question I sort of asked the earlier panel, too,

 5 but I don't know whether Mr. Norrish or anybody

 6 could have from their research. Just one of the

 7 issues, it's maybe a little bit more in the silver

 8 market and these other precious metals markets is

 9 the concentration of these markets is more than

 10 the concentration let's say in the energy markets

 11 that we explored last year, and just to help us

 12 understand that concentration and how that effects

 13 the fair and orderly markets, because I agree with

 14 an earlier panelist that this Commission is not a

 15 Commission to set prices, it's not a price agency

 16 in any way, it's -- our main mission is to make

 17 sure that these price discovery markets are free

 18 of fraud and manipulation and that they're open

 19 and fair.

 20 But I'm curious what you think about the

 21 large concentrations and how they effect that

 22 price discovery marketplace. So I'm just starting
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 1 with Mr. Norrish, but others can comment.

 2 MR. NORRISH: I mean I think, you know,

 3 as the remarks I was making in my introductory

 4 comments I think were relevant to this, it's very

 5 important I think that there is the ability within

 6 all commodities markets and within metals markets,

 7 as well, for financial participants to be able to

 8 be flexible in their approach and take large

 9 positions when they need to, because the very

 10 nature of commodity market risk does tend to be

 11 quite lumpy. As I said, you've got large physical

 12 position --

 13 CHAIRMAN GENSLER: Not to repeat what

 14 you've already said, my question is, though, when

 15 you get highly concentrated positions, whether the

 16 price discovery function is aided or whether, in

 17 fact, it might, you know, you might get sort of a

 18 tipping point, whether it's a balancing that you

 19 get, sort of maybe even less liquidity, because

 20 there's this, you know, I think Mr. Epstein used

 21 the term, I'm not sure, was it a big gorilla or

 22 something, but there was some term, but, you know,
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 1 that you have that in this situation. You want to

 2 hit your --

 3 MR. NORRISH: My experience is much more

 4 of the industrial metals markets. And I --

 5 CHAIRMAN GENSLER: So maybe other

 6 panelists. I mean I saw Doctor Jarecki was -- no.

 7 Mr. Lothian.

 8 MR. LOTHIAN: The natural being of

 9 things is for consolidation. We see that in the

 10 brokerage firms, we see that in the banks, we see

 11 that in the exchanges. And so there is a natural

 12 progression towards that, and it does approach a

 13 tipping point where it becomes an issue, and

 14 that's your challenge to be courageous or not

 15 depending on how you want to do something.

 16 That being said, it's present in all of

 17 our society, it's, you know, it's not any

 18 different there. I think the greater transparency

 19 in large concentrated positions can help offset

 20 some of that. We have lost a degree of

 21 transparency in the metals markets as things have

 22 moved from open outcry in electronic to electronic
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 1 trading, who the participants are and what they're

 2 doing, so it's harder to track. And so in my

 3 comment about harmonization, for example, if I

 4 take a five percent interest in a company, I have

 5 to disclose that, okay.

 6 So if we're getting into higher levels

 7 of participation, perhaps the CFTC rules should be

 8 changed and those things should be disclosed.

 9 CHAIRMAN GENSLER: Let me -- I see my

 10 light flashing. If I could ask maybe Doctor

 11 Jarecki, because you ran such a large precious

 12 metals company for -- and I apologize, I didn't

 13 mean that you were there in 1671, I confused it

 14 with some of your ancestors maybe. But you were

 15 maybe here when the gentleman from HSBC said that,

 16 at least in their experience, their large short on

 17 the futures markets was against some cash

 18 positions in London, that they were in vaults and

 19 so forth. Could you help us just understand, I'm

 20 still a little confused as to what the business

 21 model -- why would a large merchant hold so much

 22 physical inventory against a short that seems kind
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 1 of constant? I mean it's not like it's changing,

 2 you know, so I'm curious.

 3 DOCTOR JARECKI: Well, I think there are

 4 a number of different businesses involved in the

 5 Hong Kong -- gave a good summary of some of those.

 6 Let me give you one or two of them. There's a

 7 great deal of lending of metal that goes on from

 8 merchants to jewelry, fabricators, and to silver

 9 film producers, for example, and so they buy the

 10 metal, sell it forward, and lend the metal out to

 11 people who don't want to take the risk of metal

 12 because they want to fabricate jewelry, and then

 13 shortly before they are going to sell it, they buy

 14 in their hedge and sell the jewelry, so that

 15 requires physical stocks.

 16 The same to some extent is true of what

 17 is called cash and carry. There's a question

 18 raised why this happened, for example, in the

 19 copper market, that there were large stocks of

 20 copper and yet unusual prices. Well, there are

 21 people who buy copper and sell forward copper and

 22 other metals forward because the carry is
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 1 sufficiently high, three, four, five percent they

 2 can get to, and those of you who are familiar with

 3 the finance markets know that it's very hard to

 4 get even one percent.

 5 In other words, you're able to have a

 6 fully secured essentially collateralized loan

 7 which you're getting three percent on. These are

 8 important differences for people. Equally, they

 9 will buy metal in one facility and sell it in

 10 another by an arbitrage differential. Mr.

 11 Epstein pointed out that there came a moment

 12 where, as a result of sales or as a result of

 13 market movement, one market went lower than the

 14 other market, and sure enough, that's exactly what

 15 has happened over centuries, people have moved

 16 precious metals, particularly from a market where

 17 it was under priced to another market where it was

 18 over priced.

 19 So there are any number of events that

 20 happened in the metals markets, and perhaps in

 21 other markets, but I'm most familiar with the

 22 metal markets.
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 1 CHAIRMAN GENSLER: I thank you, and

 2 Commissioner Dunn.

 3 COMMISSIONER DUNN: Thank you, Mr.

 4 Chairman. And this is, indeed, a great panel.

 5 Some of the panelists have repeated here. Doctor

 6 Jarecki, I appreciate now the tutorage in Greek.

 7 After getting the Latin, I think after hearing you

 8 the last time, I went back and polished up my

 9 Latin from being an alter boy, and I was still

 10 waiting for some of the regulators to come out and

 11 say mea culpa -- mea max culpa because there has

 12 been the fault of the regulators in the meltdown

 13 that we've had and it's time that we do something

 14 about it, so I appreciate that. Mr. Murphy, I

 15 know you had a distinguished career in football,

 16 and I think if you give this up, you can become an

 17 auctioneer. That was a great speed reading there

 18 of getting through that.

 19 And my good friend, John Lothian, who

 20 claims the last time I pronounced his last name

 21 with an M on the end, wrote in his blog, how would

 22 Commissioner Dunn like it if I spelled his last
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 1 name with an M, so I have to be extremely careful

 2 here as I stumble through questions that I'm

 3 asking.

 4 But I'd like to get each of the

 5 panelists to respond to one of my major concerns,

 6 and that is, if, in fact, we put position limits

 7 in these markets, does it not, in effect, do the

 8 same thing that happened in the Modernization Act,

 9 where Congress told us don't look at

 10 over-the-counter trade and allow those things to

 11 go to an opaque marketplace and diminishes our

 12 ability to understand what is actually happening,

 13 and I'd like all of you in whatever order you'd

 14 like to to respond to that.

 15 DOCTOR JARECKI: I am completely

 16 concerned about that view. We have this notion in

 17 America, because we only look at our futures

 18 markets, many of us, and we think, oh, well,

 19 that's a pretty big market, but in truth, as we

 20 heard today, the London Bullion Market Association

 21 is in many ways already larger in the gold market

 22 than COMEX is, the CME is, certainly the copper
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 1 market is substantially larger.

 2 The COMEX copper market, let's put it in

 3 English, I've been a director of that, I'm not

 4 trying to offend them, but it is a market that is

 5 struggling. The CME market is a struggling

 6 market, and to do one more -- it's one more nail

 7 in the potential coffin. There are a lot of

 8 people that wonder, will there be an American

 9 copper futures market.

 10 But it is easy for us to chase markets

 11 overseas. Again, I want to speak to, since the

 12 Chairman took me to my 17th century roots, the

 13 gold and silver markets moved from a port of Spain

 14 to Antwerp, from Antwerp to Amsterdam, from

 15 Amsterdam to London, and they did so largely

 16 because of regulations, first from the

 17 inquisition, most of the gold dealers moved up

 18 north, and then ultimately moved to London for

 19 different reasons relating to the diamond --

 20 But markets do move, and they stay where

 21 they go until there's a good reason to go

 22 somewhere else. We're giving markets a good
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 1 reason to move somewhere else. The parent sweet

 2 market, since these discussions happened, has

 3 increased many. There is currently, I think it's

 4 ES&P is putting together an index made up only of

 5 offshore markets, and it says we're doing this in

 6 case over regulation happens in the United States.

 7 It is easy for us to chase markets

 8 overseas, and we will -- I'm somebody who's heard

 9 for the last 30 years every little thing that we

 10 do, oh, we're going to chase the markets to

 11 Europe, they said that about taxes, and they said

 12 it, you know, one thing or another, I never paid

 13 attention to those things.

 14 This thing I think is real and it's

 15 happening as we speak. There are many markets

 16 that are already larger than the American markets,

 17 and certainly the Chinese markets, many of which

 18 are bigger in many areas than ours today, and we

 19 ought to look at all of those together. Thank

 20 you.

 21 MR. CALLAHAN: If I may, Commissioner

 22 Dunn. My boss, Duncan -- had the unenviable job
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 1 of following in Chairman Gensler's footsteps two

 2 weeks ago at the Boca Raton conference after a

 3 great speech where he used Mrs. O'Leary's cow as

 4 a metaphor for what happened during the financial

 5 crisis, so we have been strongly supportive of the

 6 general direction that you have proposed in terms

 7 of derivatives regulation. But there certainly

 8 are a number of push me, pull you's going on.

 9 Certain of the proposed pieces of derivatives

 10 reform are pulling markets out of the opaque OTC

 11 markets and into the transparent centrally cleared

 12 exchange environment, and I think we would all

 13 support that as a goal in the wake of the

 14 financial crisis.

 15 Certain elements, and I'd probably put

 16 federally mandated position limits, at least if

 17 they're applied perhaps incautiously, would be of

 18 strong force in the other direction that would

 19 keep transactions away from central clearing, away

 20 from exchanges, and maintain the status quo, which

 21 I think would be unacceptable to a lot of people

 22 in this room. So at NYSE Euronext, Commissioner
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 1 Dunn, we share your concerns.

 2 CHAIRMAN GENSLER: And if I could ask,

 3 just because our time is, you know, management is

 4 to us, if you want to comment, if it's different,

 5 yes, but if it's sort of in the same vain, we

 6 might move on to Commissioner Sommers. No, Doctor

 7 Jarecki has already commented.

 8 MR. NORRISH: I would say that I think

 9 there is a danger of that, and I think it would be

 10 a shame. I mean you mentioned when you introduced

 11 me that there are a lot of my charts with CFTC

 12 data, and I think what you have in the U.S. is,

 13 you do have a lot of transparency, you do have a

 14 lot of data which enables analysts like me to make

 15 sense of what's going on in the markets.

 16 And, you know, the global metals markets

 17 are concentrated overseas. The Shanghai futures

 18 market now accounts for 40 percent of global

 19 metals trading. There's far less information

 20 available on what's happening on that market, but

 21 I think the danger is, if there are limits placed

 22 on U.S. futures markets, that's what will happen.
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 1 And then from an analyst point of view, the great

 2 data that you're providing becomes much less

 3 useful to us.

 4 MR. LOTHIAN: I would just add one

 5 thing, and that is that in the last several years,

 6 we've been banging away on speculators here in the

 7 United States and their role in the market, and at

 8 the same time, around the world, we see other

 9 futures markets maturing and being dominated by

 10 speculators, many of them small speculators,

 11 particularly in the Asian countries, so I think

 12 that there's a risk, if you limit the amount of

 13 speculation here, that it will grow other places,

 14 because it is already.

 15 MR. MURPHY: (off mic) I think position

 16 limits would be -- be the concentration of the big

 17 shorts, and then to get into the exemption issue,

 18 because if the -- there's no point in having

 19 position limits if the big boys can do whatever

 20 they want and there's no way to really know what

 21 they're doing.

 22 CHAIRMAN GENSLER: Commissioner Dunn,
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 1 thank you. Commissioner Sommers.

 2 COMMISSIONER SOMMERS: Thank you, Mr.

 3 Chairman. I don't have any questions, but just to

 4 say that I appreciated that last question by

 5 Commissioner Dunn, and I think it's important for

 6 us to weigh those kind of unintended consequences

 7 as we weigh the complexities of these issues, so

 8 thank you to this panel.

 9 CHAIRMAN GENSLER: Thank you,

 10 Commissioner Sommers. Commissioner Chilton.

 11 COMMISSIONER CHILTON: Mr. Callahan, you

 12 have position limits, you used position limits,

 13 correct?

 14 MR. CALLAHAN: Yes, sir.

 15 COMMISSIONER CHILTON: Okay. Now,

 16 that's in the U.S. you have position limits, you

 17 don't do it on NYSE Liffe in London, right?

 18 MR. CALLAHAN: We don't trade precious

 19 metals on --

 20 COMMISSIONER CHILTON: But on any other

 21 contracts in London, you don't have position

 22 limits, right?
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 1 MR. CALLAHAN: I'd be happy to send you

 2 -- we do have position limits on certain of our

 3 contracts in London, I'd be happy to supply those

 4 to you.

 5 COMMISSIONER CHILTON: Okay. So you

 6 have position limits in London, so this talk

 7 about, well, we're going to send markets overseas,

 8 without even knowing what level we would set the

 9 position limits at. For example, say you set the

 10 level at five times the accountability level, our

 11 proposal in energy we said would only impact,

 12 given what had happened historically, several

 13 traders, the numbers were between ten and I think

 14 27, so it's not a huge number of traders.

 15 So the concept of a position limit, for

 16 all these fears that we're going to lose markets,

 17 that we're going to -- it's going to go OTC, it's

 18 going to go overseas, we're going to lose

 19 liquidity, our kids are going to get kidnapped, I

 20 mean it seems to me that it's really the level

 21 that we would set it at. If you screw it down so

 22 much that people didn't have an avenue, but if you
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 1 -- but as a general concept, if the levels were so

 2 high, it might be ineffectual, but just the idea

 3 of a position limit I don't think should be so

 4 ugly scary. The concept to me seems like a solid

 5 concept. So I like having the possibility of a

 6 system.

 7 Now, Mr. Callahan, you come up with

 8 these position limits, as you just said, overseas

 9 and in the U.S., and how do you set those? What,

 10 for example, is too much concentration in a

 11 market? What's too much concentration in a

 12 market?

 13 MR. CALLAHAN: Well, I'm the CEO of our

 14 U.S. Exchange, and so I'll speak specifically to

 15 that, and as we look at the position limits that

 16 exist in our U.S. precious metals contracts right

 17 now, we are a very small percentage, as we are

 18 young start-up exchange right now, roughly five

 19 percent, give or take, of the U.S. precious metals

 20 market. So we have set those limits, they're

 21 actually the same ones we inherited when we

 22 acquired this platform from the CBOT.
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 1 We examined them when we acquired the

 2 platform and determined that, relative to the size

 3 of our market, and more importantly, relative to

 4 the size of the U.S. Market, that they were

 5 adequate.

 6 COMMISSIONER CHILTON: I mean you even

 7 make a point I think in your testimony that

 8 perhaps smaller or start-up exchanges should be

 9 exempt from these position limits for competition,

 10 but you have them, they already exist, and do you

 11 think it's working out well for you?

 12 MR. CALLAHAN: It's working out well,

 13 but I'd make the important distinction between a

 14 federally mandated position limit and one that is

 15 administered by the exchange. We are --

 16 COMMISSIONER CHILTON: Why? Because you

 17 can -- I mean Mr. LaSala said we're closer to the

 18 markets and everything, I mean isn't that our job,

 19 to be close to the markets, too?

 20 MR. CALLAHAN: I would say that we're in

 21 a time of unprecedented change and hopefully we're

 22 going to be seeing multiple OTC products migrate
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 1 towards exchanges if that's the case. What we now

 2 consider the exchange traded market could increase

 3 substantially. And I think the exchange is in a

 4 very good position to monitor and adjust those as

 5 needed. My concern would be that if they were

 6 federally mandated, they would be much less

 7 flexible, and you could see the situation where,

 8 again, you're pushing transactions away from the

 9 regulated transparent markets or into one of the

 10 14 odd global exchanges that currently trade

 11 precious metals. As Mr. Lothian correctly said,

 12 it is the ultimate global commodity.

 13 COMMISSIONER CHILTON: I'm pleased that

 14 you have them. I commend you for them. I agree

 15 that these are unprecedented times, and

 16 specifically because of these unprecedented times,

 17 I think what we've seen over the last ten or 11

 18 years is that government actually needs to step up

 19 and be part of this. And that's to say nothing

 20 negative about you, again, I commend you and

 21 Duncan -- for doing a good job, but it seems to me

 22 we've got a public responsibility to protect
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 1 consumers.

 2 We have a motive here that doesn't

 3 involve the word "profit", it involves consumers,

 4 and traders, and people that are part to these

 5 markets, so I think it's our job to get involved

 6 in this. I see my time is about to expire, but I

 7 would like Mr. Norrish to -- you're not going to

 8 be able to respond right now, but think about it.

 9 The question that I asked, I don't know if you

 10 heard it from HSBC, Mr. Charles, about trading for

 11 your own book under exemptions and could you

 12 separate that trading, so I'll try to ask you when

 13 we get around next time. Thank you.

 14 CHAIRMAN GENSLER: Thank you,

 15 Commissioner Chilton. Commissioner O'Malia.

 16 COMMISSIONER O'MALIA: As the newest

 17 member, I generally find most of my questions have

 18 already been asked. But also as the newest

 19 member, I'm trying to understand the relationship

 20 we've had with agricultural products that have had

 21 position limits for a very long time and they

 22 experienced some very record price increases in
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 1 2007/2008, and I'd like to get everybody's views

 2 on how metals position limits, in light of the AG

 3 demonstration, what would happen, do you think, if

 4 we put position limits, would we be spared price

 5 increases, what would happen?

 6 MR. CALLAHAN: Commissioner, as part of

 7 my written testimony, we did submit a chart on the

 8 back that looked at one year price increases of

 9 commodities that had federally mandated position

 10 limits versus those that doesn't, and it was

 11 actually data that came from the CFTC. I think

 12 the conclusion one would draw from that CFTC data

 13 is that it is inconclusive that federally mandated

 14 position limits are an effective tool for

 15 moderating excessive price movement.

 16 MR. NORRISH: Yeah; I think the result

 17 of that would probably be, we've seen volatility

 18 in agricultural markets, so I think that's -- it's

 19 clear that position limits don't necessarily act

 20 to take that volatility out. My feeling is that,

 21 you know, the most efficient markets are the

 22 bigger ones, the U.S. agricultural markets are
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 1 relatively small in a global scale, but the most

 2 efficient markets are the bigger ones, the

 3 industrial metals markets are very big and they

 4 are liquid, and if you put position limits in that

 5 start to remove that liquidity, you're not going

 6 to smooth out prices, you're probably going to end

 7 up making them more volatile in the short term.

 8 And my concern also is that if prices

 9 are artificially pushed down, even if it's only

 10 for a short period of time, that has longer term

 11 implications for the supply side of the business,

 12 as well.

 13 We need to see a lot of growth in supply

 14 on the industrial metals side, and my concern

 15 would always be that if we take liquidity and risk

 16 management ability out of the financial markets,

 17 then we're not going to get the growth in the

 18 physical markets that we really need.

 19 COMMISSIONER O'MALIA: Doctor Jarecki.

 20 DOCTOR JARECKI: The question is whether

 21 -- what the impact of position limits would be,

 22 both on prices and on volatility. I think that
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 1 the -- all the evidence that exist is that the

 2 high prices that have been seen in the last years

 3 existed in all markets, not only in futures

 4 markets, but equally in steel, and iron, and

 5 rhodium, a lot of things just ran up, and they ran

 6 up to some extent together with or separate from.

 7 What had happened really was that the

 8 government has printed so much money, that money

 9 is going into something, and we see -- it must go

 10 into commodities or real estate or one thing or

 11 another, and that's what brings prices up. And I

 12 don't think whether they're on an exchange, not on

 13 an exchange, is that relevant, except that an

 14 exchange moderates it because there are more

 15 people involved.

 16 Certainly, being on the exchange lowers

 17 volatility, that's been seen everywhere. The high

 18 drama of two or three decades ago, about four

 19 decades ago about onions, the onion market has

 20 been a disaster since it was taken off the futures

 21 markets. And I understand that there's a

 22 congressional mandate on the topic, but the truth
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 1 of the matter is that volatility is diminished

 2 when things are placed on exchanges because

 3 there's simply so many people looking at it and

 4 saying, that price is too high, this price is too

 5 low, and taking actions on it. So my view is,

 6 it'll increase volatility and it won't effect

 7 prices measurably or predictably.

 8 MR. LOTHIAN: Any time you add friction

 9 to markets, you're retarding the price signal, and

 10 the price signal is very important for producers,

 11 for consumers and the like. And when you're

 12 talking about the types of challenges that we're

 13 facing that have been outlined here in terms of

 14 the amount of investment that we need, okay, the

 15 higher prices are signaling to us, we need more

 16 production, we need more selling, and we talked

 17 about this before.

 18 And so anything that you're doing to

 19 retard that and say the prices should be lower, we

 20 need to restrict this, you know, not let it get to

 21 its free levels, or we're going to -- it's going

 22 to swing over here to the over-the- counter
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 1 because it, you know, can't find its natural

 2 equilibrium in the futures market, all of those

 3 things hurt that price signal. And futures

 4 markets are ultimately about two things, price

 5 discovery and risk transfer, okay. So -- but the

 6 first and foremost is the price discovery, so you

 7 want to look at what it's going to do relative to

 8 that equilibrium.

 9 COMMISSIONER O'MALIA: We might want to

 10 give Mr. Murphy the last --

 11 MR. MURPHY: I'll get the hang of this

 12 yet. Anything that will limit the ability of the

 13 big bullion banks to bully the market will be a

 14 big plus and will lead to greater price discovery.

 15 CHAIRMAN GENSLER: Thank you,

 16 Commissioner O'Malia. I don't know if there are

 17 other questions, I just wanted to say a few words

 18 on mine. Great, so we'll do another round, even

 19 better. And I suspect there will be a blog on

 20 this when I -- it did differ a little bit with Mr.

 21 Lothian. But you mentioned that friction retards

 22 -- anything that's friction retards the price
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 1 signals in the market, but I think that we live in

 2 a nation that we benefit from regulation in the

 3 securities markets, and certainly when any issuer

 4 has to file a 10K or a 10Q, somebody could say

 5 there's a cost in that. I think that we benefit

 6 in a nation of laws. We have traffic lights, you

 7 could say a green and a yellow and a red light is

 8 friction, it does slow down traffic, thank God, so

 9 --

 10 MR. LOTHIAN: Running into another car

 11 is also friction.

 12 CHAIRMAN GENSLER: What's that?

 13 MR. LOTHIAN: Running into another car

 14 is also friction, so I agree with you.

 15 CHAIRMAN GENSLER: Absolutely; so I

 16 think that we do benefit by having a regulated

 17 market economy, and then people like us get in

 18 these jobs and we have to sort through and have

 19 hearings like this to see where we come out. To

 20 me, it's not about prices. I appreciate

 21 Commissioner O'Malia's question and I think it was

 22 a very good question.
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 1 To me, it's a question of the position

 2 limit authority that we were vested with in the

 3 1930's, it's to promote these fair and orderly

 4 markets, and my central questions in this hearing

 5 has been about concentration because that's what

 6 at least I'm interested in, is, do the silver

 7 markets and gold markets with the higher

 8 concentration that they have, and sometimes very

 9 high concentration, are those, you know, the best

 10 functioning of the markets, do they bring that

 11 price discovery function together?

 12 Onions, by the way, I think was in the

 13 1950's, and I think it was a Congressman from

 14 Michigan named Gerald Ford that was involved in

 15 it, but -- what's that? And Commissioner O'Malia

 16 went there. I want to associate myself, because I

 17 don't have a question, I'm just going to associate

 18 myself with Doctor Jarecki's comments earlier and

 19 maybe appropriate them in later hearings. I think

 20 that we have found in the futures markets a

 21 rational way to deal with leverage, I think that

 22 was the words you used, that the clearing
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 1 mechanism invented in the late 19th century has

 2 survived through two World Wars and Great

 3 Depressions and many bank failures.

 4 It's not perfect, but I think it works

 5 well, and that's why I'm so much -- believe we

 6 have to bring it to the over-the-counter

 7 derivatives marketplace, as well, and I thank Mr.

 8 Callahan's comments, that I think if we can bring

 9 the transparencies, well, that's going to be big.

 10 But Commissioner Dunn.

 11 COMMISSIONER DUNN: Thank you, Mr.

 12 Chairman. I said during the position limit

 13 meeting on energy, for the large meltdown, that I

 14 thought three things ought to happen, there ought

 15 to be more transparency in the marketplace, that

 16 we need some type of reimplementation of the --

 17 Act, and that we needed to implement anti-trust,

 18 and since then, the administration has come out

 19 with the Volcker rule, which I think is a good

 20 direction to begin looking at. Mr. Norrish, I've

 21 just finished Secretary Paulson's book, On the

 22 Brink, and everybody takes away what they want to
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 1 take away when they read something like that, but

 2 my take away from it was that we had too many

 3 large financial institutions that were way too

 4 leveraged and exotic instruments, the

 5 securitization that they didn't understand that

 6 was a major problem as that housing bubble burst.

 7 But you're advocating here for us to have large

 8 financial institutions in there. Could you tell

 9 me why we're not walking into the same problem

 10 again?

 11 MR. NORRISH: Yes, I can. I think, you

 12 know, the first point, in answer to that question

 13 is, you know, we've had large financial

 14 institutions operating in the commodities markets

 15 over the last couple of years, and the commodities

 16 futures markets have been amongst those that have

 17 worked best.

 18 There hasn't been a lack of liquidity,

 19 there's been accurate price discovery, and there

 20 hasn't been the distress in the commodity markets

 21 that we've seen in many other financial markets,

 22 so I think that's an important point.
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 1 I think the other thing I'd say is that

 2 it isn't the nature of commodity markets that

 3 risks tend to be very large, they tend to be very

 4 lumpy. If you're building a new copper mine in

 5 the middle of Africa, that can cost $10 billion,

 6 and you may be producing 300,000 or 400,000 tons

 7 of copper every year. So you're trying to manage

 8 very large risks, and they can come into the

 9 market at various times with unpredictability, and

 10 if we don't have large financial institutions that

 11 are able to take on those risks, that perhaps are

 12 able to warehouse them for some time, that are

 13 able to feed them out into markets gradually and

 14 to use lots of different ways of doing that,

 15 over-the- counter markets, futures markets, and

 16 physical markets themselves, then I think, you

 17 know, you risk possibly the kind of volatility and

 18 market disruption that we've perhaps seen in some

 19 of the other markets over the last couple of years

 20 or so.

 21 So I think that role that the big

 22 financial institutions play in being able to
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 1 absorb those risks, to ameliorate them and then to

 2 gradually lay them out into the markets in a

 3 controlled way is actually a strength of the

 4 commodity and it's probably one of the reasons why

 5 those markets have worked well over the last

 6 couple of years.

 7 COMMISSIONER DUNN: I still have

 8 concerns about the interrelationship between those

 9 institutions and the other systemic risks that we

 10 may get at the end of the day. Let me get back to

 11 my previous question on -- and again, during the

 12 energy meeting, I said that we ought to look at

 13 getting the over-the-counter authority, which I

 14 think is very, very important, but the other

 15 aspect I said is that we needed to begin

 16 harmonizing our regulations with our sister

 17 agencies around the world.

 18 And I want to, Mr. Chairman, at this

 19 point give you a pat on the back for the great job

 20 you've done the last couple of weeks trying to

 21 sell that concept in the EU. I thought that was a

 22 tremendous opportunity or a great job that you did
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 1 of bringing this issue to the forefront, and, to

 2 me, I don't want to go forward unilaterally, I

 3 want to go multilaterally with other regulators

 4 around the world, but I also want to see that

 5 over-the-counter market.

 6 Again, I would like the panelists to

 7 respond to, if, in fact, we get OTC authority to

 8 regulate that, would that be a point in time where

 9 we could go ahead and put in position limits, or

 10 should we wait until we actually have Congress --

 11 have the ability to promulgate a regulation, and

 12 should it be doing those unilaterally, the OTC

 13 along with a position limit? Tom.

 14 MR. CALLAHAN: Thank you, Commissioner.

 15 I'd just like to set the record straight on an

 16 error that I made in my previous statement. We

 17 actually have no position limits in Europe. I

 18 thought there may have been one or two contracts

 19 that had those, but we do rely on the FSA's

 20 position management process, so Commissioner

 21 Chilton, I apologize for that, that was just a

 22 mistake on my part.
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 1 I would say that, especially as a global

 2 exchange operating in Europe and the U.S. in both

 3 the derivatives markets and in the cash markets,

 4 the idea of regulator harmonization is an

 5 essential first step on things like position

 6 limits because it's just very, very easy for these

 7 markets to move to foreign jurisdictions.

 8 As I said, I think there's 14 exchanges

 9 globally that trade gold right now. And if the

 10 U.S. position limit regime is particularly strict

 11 relative to others, it would be very easy not only

 12 for the gold markets, but for other markets, as

 13 well, in the world of electronic trading, for them

 14 to very easily move to foreign jurisdictions where

 15 they'd be out of reach of this Commission, so I

 16 would share your concern on that front, as well.

 17 COMMISSIONER DUNN: And on the timing of

 18 us, if we, in fact, do go forward with a position

 19 limit rule, if we have over-the-counter authority,

 20 should we wait until we are promulgating both

 21 rules simultaneously?

 22 MR. CALLAHAN: Well, I'm not convinced
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 1 that federally mandated position limits are

 2 required, but if they are determined by the

 3 Commission to be required, I think that doing that

 4 simultaneously would be the best course of action.

 5 DOCTOR JARECKI: The question of -- it's

 6 obviously correct that it is -- that any regime

 7 that limits only the position limits on the U.S.

 8 futures exchanges won't be maximally effective

 9 unless you can regulate also or participate in

 10 regulations. You pointed out the Chairman is

 11 seeking to do with overseas markets and also by

 12 getting authority for the over-the-counter

 13 markets, otherwise, it's simply a constraint of

 14 the American futures markets.

 15 But I think you have to recognize one

 16 other things, which is -- it has to do with the

 17 physical markets. And here I think we should

 18 specifically speak about the metals markets,

 19 because it's in the metals markets, in gold,

 20 silver and copper, where it is trivial to own

 21 physical material.

 22 Certainly, those who, like our
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 1 customers, pay 100 percent margin, for them it's

 2 easy to put down 100 percent margin and buy gold,

 3 silver or copper and leave it in warehouses, and

 4 many people do that. As a matter of fact, the

 5 bullion market operations in London, where people

 6 have physical bars, they're much -- they're very

 7 large, and many institutions want that. The issue

 8 of gold and silver has to do with trust in

 9 currencies in large measure, and the people who

 10 don't trust currencies, they don't want several

 11 levels of obligor, they don't want their broker to

 12 stand between them and the metal, they don't want

 13 their broker and an exchange to stand between

 14 them, their broker and an exchange and a

 15 clearinghouse to stand between them and large

 16 positions where a large institution could fail.

 17 Especially people who worry about

 18 inflationary matters, they want physical assets

 19 like gold, silver, copper in warehouses, things

 20 that don't spoil, things that are easy to

 21 transport, and for that reason, I think you have

 22 to focus on the fact that even when you have
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 1 control of all the rest, especially in the metal

 2 markets, you're going to risk that people move

 3 things into warehouses, and now you will actually

 4 have price impacts, namely, there will be

 5 shortages and prices will go up by leading to

 6 large physical storage, whereas the simple trading

 7 back and forth in the futures markets will not

 8 have an influence on the physical prices.

 9 CHAIRMAN GENSLER: Thank you,

 10 Commissioner Dunn. No questions. Commissioner

 11 Chilton.

 12 COMMISSIONER CHILTON: I want to go back

 13 just a little bit, Mr. Callahan, before I get to

 14 Mr. Norrish and Mr. Murphy. And also,

 15 Commissioner O'Malia talked about the AG limits,

 16 and met on the panel to answer that question, but

 17 I mean my view, and perhaps our last panelist, Mr.

 18 Masters, could speak to this, is that since this

 19 agency has existed, there has been position limits

 20 in AG, and so, yeah, there's been a lot of

 21 volatility in the AG markets in the last couple of

 22 years, but there's been a lot of volatility in
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 1 markets in the last couple of years. So I think,

 2 by and large, they've acted pretty well.

 3 The new thing is this $200 billion that

 4 came into the markets, you know, up until 2008,

 5 and in my view, you know, having some contributing

 6 impact, I'm not saying driving prices up or down,

 7 but having some contributive factor, the new

 8 speculators, and this is different in the metals,

 9 but in AG and in energy, these massive, passive

 10 investors differ in metals.

 11 But, Mr. Callahan, I want to make sure

 12 I'm clear that, while I commend you for having the

 13 position limits, I also think you're right on

 14 target with regard to having the flexibility to

 15 set them in an appropriate way. And one of the

 16 things that I guess I do, and if I were setting

 17 this whole position limit thing myself is, have it

 18 so that we are also flexible in working with you

 19 in tandem to make sure that we do have the right

 20 thing, the size of the market, what's going on.

 21 You don't want to slow down, you want to

 22 -- we do want to make sure that we're adaptive
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 1 regulators and adaptive exchanges so we don't lose

 2 market share. But I actually think that it's the

 3 contrary to what some of the witnesses have said.

 4 I think this builds confidence in

 5 markets, having sideboards, so that we still have

 6 free markets, but they're rational free markets

 7 with just some parameters, and again, it's how you

 8 set them that is the problem, I think, not whether

 9 or not they should exist, because you can set them

 10 so high that they'd be ineffectual in any regard.

 11 So I wanted to make sure I'm clear on that. I

 12 agree with what you're doing and I'd like to join

 13 you in that effort. Mr. Norrish, can you give us

 14 sort of a succinct response to what I was asking

 15 Mr. Charles earlier?

 16 MR. NORRISH: I'll try and keep it

 17 succinct.

 18 COMMISSIONER CHILTON: Thank you.

 19 MR. NORRISH: I think your Treasury

 20 Secretary, Timothy Geithner, has summed the issue

 21 up quite nicely actually when he said that it can

 22 be very difficult to distinguish between what is a
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 1 hedge position and what is a speculative position.

 2 And he gave the example of a farmer, for example,

 3 who sells forward what he expects to be his corn

 4 crop for the next harvest, and through bad

 5 weather, it turns out to be much less than he

 6 thought, so he's over hedged. Now, is that, you

 7 know, that's entered into in good faith, but is

 8 that a hedge position or is it a speculative

 9 position?

 10 What I would say is, imagine that

 11 situation multiplied many thousands of times, that

 12 is the situation that the large financial

 13 institutions are dealing with in the day-to-day

 14 activity of managing the real risks of producer

 15 and consumers.

 16 They are managing a very large and

 17 interconnected portfolio of all sorts of different

 18 trades. And the ability of those kinds of

 19 institutions to provide those risk managing

 20 services at low costs very much depends on their

 21 ability to do that with a lot of flexibility, and

 22 that --
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 1 COMMISSIONER CHILTON: Could you

 2 separate it, though? I mean it would be a pain

 3 for you, but could you? As I mentioned, there's

 4 -- one bank has told me that they could do it;

 5 could you physically do it, could you figure it

 6 out?

 7 MR. NORRISH: I work on the research

 8 side and I don't have the experience of managing

 9 those very, very large positions. I think it

 10 would be an extraordinarily complicated thing to

 11 do, and I think, you know, it would take away the

 12 flexibility that is required, as I've said

 13 earlier, to manage those very big, large,

 14 complicated, lumpy risks that come into these

 15 markets with a great deal of unpredictability.

 16 COMMISSIONER CHILTON: Okay.

 17 MR. NORRISH: And I think that's the key

 18 issue.

 19 COMMISSOINER CHILTON: Thank you. You

 20 know, it makes me think about the -- we have --

 21 saying that it's so complicated, first of all, I

 22 grant you, your example of South Africa, I'm not
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 1 saying that we shouldn't have exemptions. I think

 2 large financial institutions can be very

 3 important, so I'm not saying there are no

 4 exemptions, but I think they need to be targeted,

 5 and so I'm not particularly comforted by the fact

 6 that it's so scary complicated that we couldn't

 7 tell you. To some extent, that gives me a little

 8 bit of pause. I don't know what the exact right

 9 answer is, because I accept your premise that it's

 10 -- you do important work, but saying it's too

 11 complicated to figure out gets me a little queasy.

 12 Mr. Chairman, I do have a question, which I'll

 13 stop now, but I do have a question for Mr. Murphy

 14 at some point, so thank you.

 15 CHAIRMAN GENSLER: Why don't you do it.

 16 COMMISSIONER CHILTON: Thank you, I

 17 appreciate your patience and indulgence. So, Mr.

 18 Murphy, you know, you've been fairly critical of

 19 COMEX and saying that they've been complicit, I

 20 guess, in suppressing prices, but can you give the

 21 Commission some specific evidence, some specific

 22 examples of how you think that's occurring, when
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 1 you think that's occurring?

 2 MR. MURPHY: Yes, I can. And I had 11

 3 years worth of evidence, it all hangs together

 4 here, but something came to my attention two days

 5 ago of a whistle blowing nature that we're going

 6 to hand to the press afterwards, and we think it's

 7 very important for the American public and this

 8 hearing to have this information. On March 23,

 9 2010, GATA Director Adrian Douglas was contacted

 10 by a whistle blower by the name of Andrew Maguire.

 11 Mr. Maguire, formally of Goldman Sachs, is a metal

 12 trader in London. He has been told firsthand by

 13 traders working for JP Morgan and Chase that JPM

 14 manipulates the precious metals markets and they

 15 brag how they make money doing so.

 16 In November, 2009, he contacted the CFTC

 17 Enforcement Division to report this criminal

 18 activity. He described in detail in which the way

 19 JP signals to the market its intention to take

 20 down the precious metals. Traders recognized

 21 these signals and made money showing the metals

 22 along side JPM. He explains how there are routine
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 1 -- option -- non-fair pay releases, and COMEX

 2 contract rollover, as well as other ad hoc events.

 3 On February 3, he gave two days advance

 4 warning by email to Mr. Eliud Ramirez, a senior

 5 Investigator of the Enforcement Division, that the

 6 precious metal would be attacked upon the release

 7 of the non -- payroll -- on February 5. Then on

 8 February 5, as played out exactly as pernicious,

 9 predicted further emails were sent to Mr. Ramirez

 10 in real time while the manipulation was in

 11 progress. It would not be possible to predict

 12 such a move in advance unless the market was

 13 manipulated. In an email on that date, Mr.

 14 Maguire said, it is common knowledge here in

 15 London amongst the metal traders, it is JPM's

 16 intent to flush out and cover as many shorts as

 17 possible prior to any discussion in March about

 18 position limits. I feel sorry for all those not

 19 in the loop. A serious amount of money was made

 20 and lost today, in my opinion, as a result of the

 21 CFTC by your own definition of legal concentrated

 22 manipulated position allowed to continue.
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 1 Today is April -- option expire in the

 2 COMEX. There was a large open interest in strikes

 3 from 1100 to 1150 in gold. As always happens,

 4 month after month, HSBC and JPM sell short, and

 5 large -- overwhelm all bids and make unsuspecting

 6 option holders lose their money.

 7 As predicted in advance by GATA, the

 8 manipulation started on March 19th, when gold was

 9 trading 1126; by last night, it was down to 1085.

 10 This is how much the gold cartel feels the

 11 Enforcement Division. They thumb their noses at

 12 you because -- complaints in 18 months of the

 13 silver market manipulation investigation, nothing

 14 has been done to stop them. And this is why JPM's

 15 cocky and arrogant traders in London are able to

 16 brag that they manipulate the market. It is an

 17 outrage and we are making available the emails

 18 from our whistle blower, Andrew Maguire, to the

 19 press, where -- advance on manipulative event.

 20 Additionally, Mr. Maguire informed us that he has

 21 taped recordings of his telephone communications

 22 with the CFTC for which we are taking the
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 1 appropriate legal steps to acquire.

 2 COMMISSIONER CHILTON: All right. Well,

 3 that was more specific than I anticipated, but I

 4 thank you for it, sir, and I thank you for the

 5 indulgence. Again, I don't want to talk about any

 6 individual circumstances that the Chairman

 7 discussed earlier, but thank you.

 8 CHAIRMAN GENSLER: Thank you,

 9 Commissioner Chilton. Commissioner O'Malia.

 10 COMMISSIONER O'MALIA: Doctor Jarecki

 11 and Mr. Lothian, in previous testimony, Mr.

 12 Epstein testified that the oversized market

 13 position of market makers had a chilling effect on

 14 the liquidity in large orders wind up setting

 15 prices; could you comment on those concerns? And

 16 if you can keep it short because I have another

 17 question.

 18 MR. LOTHIAN: Sure; you know, what he

 19 didn't say was that what a market maker does is

 20 harass large orders and try to work themselves

 21 against them, and join the bid, and join the

 22 offer, and use the market data that he's getting
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 1 about the other orders in order to -- for where to

 2 position himself. And so a large order, you know,

 3 all of a sudden there's nobody offering at this

 4 price, I offer, you know, a couple hundred

 5 contracts, all of a sudden it's 400 contracts,

 6 okay, and depending upon the algorithm that's used

 7 in the market and all that.

 8 There are also very -- lots of instances

 9 where people want to come in and just execute all

 10 at one time, whether it's a CTA that wants to just

 11 get everything done for a client all at one time

 12 and not have any execution risk, you know, I mean

 13 price is price.

 14 There's also instances where large

 15 traders like to play with the market makers to

 16 teach them a lesson every once in a while, and

 17 that's -- those things occur, as well. So there's

 18 lots of different reasons why a particular trader

 19 may come in. It could be a stop that was in the

 20 market, and, you know, they expected better

 21 liquidity in there when that order was hit, and it

 22 just went down so suddenly.
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 1 And had they reflected upon it and been

 2 able to execute it over time better, then they

 3 probably would have been, but they were expecting

 4 better liquidity in there at the time.

 5 DOCTOR JARECKI: I'm sorry, I'm terribly

 6 sorry, I didn't understand what Mr. Epstein said.

 7 I understand that his work is high frequency

 8 trading, and I didn't understand what one could,

 9 in a machine system, do and how somebody could

 10 sell several thousand lots, find a big price drop.

 11 Doesn't the person who is selling all those lots

 12 ultimately get damaged because his last lots are

 13 sold very much lower than the then prevailing or

 14 the logical market? I didn't understand what he

 15 said, frankly, and so I can't help.

 16 COMMISSIONER O'MALIA: That's all right,

 17 we'll give you a shot at the next question. In

 18 your testimony, you laid out four recommendations,

 19 and one of them sounded like -- you talked about a

 20 look through to identify the end user, and I

 21 assume you meant for bona fide hedge exemptions.

 22 In the energy position limit proposal, we have a
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 1 dealer proposal that's two times the limit, and I

 2 would ask you to comment on what you think of that

 3 proposal, and then potentially does it relate to

 4 this look through proposal you have here in your

 5 recommendations.

 6 DOCTOR JARECKI: Well, I'm not sure that

 7 it makes sense to have position limits on dealers

 8 who have certain features, such as not being

 9 leveraged so they can't really be part of a

 10 speculative system not operating in the spot

 11 month, so they can't -- so their positions cannot

 12 be relevant to a squeeze, where all of their

 13 information and their advice to people is public

 14 information so it's completely transparent and

 15 it's all on exchanges and they have no positions

 16 of their own.

 17 It seems to me irrational to have any

 18 position limits. I'm very pleased that, if there

 19 were position limits, one would think of there

 20 being larger, double the size perhaps for someone

 21 in that situation. But ultimately, it should be

 22 -- fall into the position limits of the ultimate
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 1 buyer, and if you don't do that, you can get an

 2 ultimate buyer who is free of being looked at, and

 3 he could buy five different futures funds and have

 4 position limits larger than are intended.

 5 Now, what I've seen of the energy

 6 limits, and there I reflect on Commissioner

 7 Chilton's comment, it is, of course, from a

 8 practical standpoint, and as you -- of what the

 9 size of these limits are. But it is -- I have to

 10 say, in listening to some of the Commissioners

 11 today, it's as if regulation is good for its own

 12 sake, rather than understanding that traffic

 13 lights are there to stop people from killing each

 14 other, and that the SEC's goal was anti- fraud.

 15 Everything that this agency can do to prevent

 16 fraud, to prevent excessive speculation or

 17 manipulation or delivery squeezes, all that is

 18 wonderful, and transparency is wonderful, once you

 19 know who the people are. I don't even know

 20 whether I strongly object to this idea that there

 21 should be something like the SEC. If you have

 22 more than five percent of the open interest, maybe
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 1 you ought to tell somebody about it, maybe you

 2 ought to have an obligation, I don't know. That

 3 one I haven't thought through before today.

 4 But I, you know, but the idea that it's

 5 -- let's have some regulations because regulations

 6 are good for you, that I'm afraid I can't take on.

 7 CHAIRMAN GENSLER: Commissioner O'Malia,

 8 thank you. I don't have any other questions, but

 9 I think Doctor Jarecki is always inviting me to

 10 reply. And we have --

 11 DOCTOR JARECKI: Thank you.

 12 CHAIRMAN GENSLER: -- a nice -- I

 13 believe that the American public benefits by our

 14 market based economy, but it's a regulated market

 15 economy, it's not regulation for regulation sake.

 16 I think traffic lights do help in a complex

 17 network, we call it the highway network or the --

 18 if you go down any street on Main Street, it

 19 doesn't have to be New York City or Washington,

 20 but Main Street, you're glad there's traffic

 21 lights. And so I think this complex financial

 22 network also, it's appropriate to have traffic
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 1 lights, and that's what we're trying to do, we're

 2 trying to reach out and trying to understand from

 3 the public through hearings like this as to

 4 whether we might re-establish position limits.

 5 You know, we did have them in a period,

 6 you probably were active in the markets in the

 7 '80's and early '90's, in this metals market, so

 8 that's what we're trying to understand. And it's

 9 not about prices, to me at least, it's about

 10 making sure these markets are fair and open and

 11 orderly, and it's a question of concentrated

 12 positions and whether that's a beneficial side or

 13 not.

 14 I would like to ask Mr. Callahan if it's

 15 possible if you could follow-up. I would be

 16 interested to know from New York Stock Exchange

 17 your next, you know, what sort of position

 18 management regimes that you're under, not position

 19 limits, but position management you might be under

 20 in London, it would be terrific to learn that.

 21 But there might be a question, so --

 22 COMMISSIONER DUNN: I'd just like to
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 1 follow-up on my last question about the timing on

 2 regulations with Mr. Lothian, because he did have

 3 that in his testimony about over-the-counter.

 4 John, if you would, please.

 5 MR. LOTHIAN: Right; you know,

 6 ultimately, I think if you're talking about the

 7 over-the-counter market and you're getting

 8 responsibility for the over-the-counter market,

 9 you're only getting a piece of the

 10 over-the-counter market, and you're only getting a

 11 piece of the world futures trade. So it's not

 12 just a question of aligning U.S. futures and U.S.

 13 OTC markets. I would urge greater transparency

 14 there towards fostering a better understanding

 15 about the markets and the risks.

 16 Until you get global regulators to agree

 17 to some kind of a position limit or a greater

 18 transparency scheme or something like that,

 19 putting them here would be just putting us in a

 20 bad position too early.

 21 So, again, I know you're trying to work,

 22 you know, globally on this, and I would continue
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 1 to urge -- to work globally on this, because, you

 2 know, I mean if China has three times the demand

 3 of the copper market, or of copper production, why

 4 should that market be here, and why is it not

 5 going to be somewhere over -- somewhere else? You

 6 know, and they're building markets and the area is

 7 building markets, so maybe it should be over there

 8 and maybe it will move over there. So you have to

 9 look in that broader scheme is what I'm saying.

 10 CHAIRMAN GENSLER: I'd like to thank all

 11 five of the --

 12 COMMISSIONER CHILTON: I apologize.

 13 CHAIRMAN GENSLER: No, I didn't know.

 14 COMMISSIONER CHILTON: I'll be brief.

 15 Look, I mean this thing about, you know, waiting

 16 for other countries, I think there are some

 17 legitimate concerns there, but somebody has got to

 18 go first, and we've always been leaders, and you

 19 know, I think as long as we are cognizant of what

 20 we're doing, and again, it's the levels, and I

 21 appreciate Doctor Jarecki sort of acknowledging in

 22 a little way, even though I know you don't agree
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 1 with the concept of position limits, that it's

 2 somewhat the level.

 3 So my quick question for you, Doctor

 4 Jarecki, is there a level at which you say enough,

 5 I mean, you know, 20, 30, 40, if you have 51

 6 percent, is that too much, or is it just such a

 7 bad concept that we should just let the free

 8 markets roll?

 9 DOCTOR JARECKI: I don't know what the

 10 percentage would be of, and I -- my comment before

 11 about even transparency and letting people know if

 12 you've got a very large part of the soy beans of

 13 the world, I don't mean just a soy bean open

 14 interest, but if you own 20, 30 percent of the soy

 15 beans in the world, you're in a special and unique

 16 situation, and maybe people ought to know that

 17 before they trade, because otherwise, you know,

 18 you're, you know, you can get taken advantage of

 19 by those who do know those. Not even the owners

 20 necessarily. Let everybody know the same stuff.

 21 And I was really speaking, Commissioner,

 22 more of the practical implication. If you have a
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 1 practical implication that is so high that it's

 2 irrelevant, so be it. But then I fear you are

 3 just embracing the concept, well, regulation is

 4 good for its own sake, but if that were true, you

 5 might as well regulate the color of clothes people

 6 wear on the exchange and say, well, they ought to

 7 be regulated, they ought to not have this, and

 8 then you could regulate what their hours would be

 9 and whether they go out to lunch.

 10 COMMISSIONER CHILTON: No, that's a

 11 mischaracterization, like the Chairman said, too,

 12 that's -- I thought we were reaching some sort of

 13 common ground, but that's going the other way.

 14 CHAIRMAN GENSLER: Thank you very much.

 15 DOCTOR JARECKI: Sorry.

 16 CHAIRMAN GENSLER: As I was saying, I

 17 was going to thank the panel, wonderful to hear

 18 from each and every one of you. And I think if we

 19 can invite the other panelists up, as it

 20 inevitably will probably take us, you know, five

 21 or eight minutes just to sort of circle through

 22 here, and if you do leave and come back, there's
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 1 some security that's still there.

 2 (Pause)

 3 CHAIRMAN GENSLER: If I can call us back

 4 to order. Commissioner Dunn likes when I do that.

 5 COMMISSIONER DUNN: I'm amazed that it

 6 always works.

 7 CHAIRMAN GENSLER: Yeah; I learned it

 8 from -- in Baltimore, it does seem to work. I

 9 think it's inbred in us. I want to thank our

 10 fourth panel, third public panel for being here,

 11 their willingness to testify, and their patience

 12 as we continue to hear about trading in the

 13 precious and base metals markets and the

 14 consideration of these issues of possible position

 15 limits and otherwise -- I want to pause here for a

 16 second just to --

 17 (Pause)

 18 CHAIRMAN GENSLER: But I want to thank

 19 and just introduce each of our final panelists.

 20 Harvey Organ, who's an investor, now resides in

 21 Canada, he has been a very active investor both in

 22 the securities markets, stock markets, and
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 1 concentrating interest in the mining fields, and

 2 has been trading, at least from these notes here

 3 given to me, for the last nearly 40 years, and has

 4 been in other businesses, as well, but we thank

 5 him for being here.

 6 Mike Masters, I guess, Mike, it's a

 7 repeat performance here, who's founder and

 8 managing member of Masters Capital Management. I

 9 think it's also appropriate that you're here at

 10 this metals hearing because you co- authored with

 11 Adam, who I see here, too, Adam White, something

 12 called the Accidental Hunt Brothers, so here we

 13 have you at a metals hearing, but has been an

 14 advocate and appears actively on television, and

 15 appeared before Congress a great number of times

 16 talking about the need for reform of the

 17 over-the-counter derivatives marketplace.

 18 And then Richard Strait, Director of

 19 Marketing Strait, LLC, which is a guaranteed

 20 broker of Triland USA, which is part of the larger

 21 group, Mitsubishi Corporation. And so we thank

 22 all three of you for being here. Richard has
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 1 served on the Board of Gold and Silver Institutes,

 2 as well, and numerous exchange committees, and he

 3 currently serves as Chairman of Metro, New York

 4 Chapter of the International Precious Metals

 5 Institute and Advisor of the Board of Triland USA,

 6 so he brings a unique perspective on these

 7 markets. And so do we have a fourth panelist

 8 that's supposed to be here? Oh, by video

 9 conference, I apologize, that's right, we're using

 10 modern technology.

 11 So Jeffrey Christian, Managing Director

 12 and founder of CPM Group, which is a commodities

 13 research firm, and he's been doing this for now

 14 nearly three decades, commodities research, and

 15 CPM was founded in the middle of that period, and

 16 so somehow there we see Jeffrey. So hopefully

 17 this works, and if we can -- all your written

 18 testimony will be in the record, but if you can

 19 give us orally in five minutes. And I don't know

 20 if I went left to right, where Jeffrey fits in,

 21 but I'll start with Richard, and Jeffrey gets to

 22 wait until he's -- he'll be the clean-up hitter
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 1 here.

 2 MR. STRAIT: As he should be. Thank

 3 you, Chairman and Commissioners, it's really a

 4 great pleasure to be here to talk to you today

 5 about the metals markets in particular, which I

 6 have been trading for 30 years, servicing clients

 7 both in the futures and physical side of the

 8 business, and that would include ferrous and non-

 9 ferrous metals. In fact, I had the luxury of

 10 working for Doctor Jarecki for six years actually.

 11 Anyway, I really -- we've gone over a lot of

 12 points that are very easy to pass over, I'm not

 13 going to go into great detail about it because I

 14 think we've beaten pretty much every horse on

 15 every topic, so I'll just make my general

 16 statement about my points which is in the record.

 17 And I further want to discuss OTC

 18 clearing, which wasn't brought up at all today and

 19 where that stands. For example, the very robust

 20 platform like ClearPort, that has exercised a

 21 significant amount of clearing business and

 22 transparency to the marketplace and how that fits
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 1 into a greater scheme of things with regard to

 2 position limits.

 3 And OTC clearing, is this going to be --

 4 does the OTC mandate or the issue regarding OTC

 5 position limits, is that going to figure into

 6 ClearPort and ICE Clear, for example, and I think

 7 that's a very important discussion as we go

 8 forward, because you can't have position limits in

 9 the futures markets just to run them into OTC,

 10 particular a cleared product, you know.

 11 So Doctor Jarecki takes a point where,

 12 okay, the real gold bugs and the metal bugs are

 13 going to put it in a closet or in a warehouse some

 14 place, and, you know, not unlike what China has

 15 done, trying to diversify dollar holdings by

 16 owning metal over the past year or two actually,

 17 non-ferrous metals particularly. So anyway, I'll

 18 get to my point about that later, but I just think

 19 the exercising of position limits, I'm generally

 20 against it, with the exception of front end year

 21 by month position limits could be exercised by the

 22 exchanges.
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 1 I think the CFTC has done a wonderful

 2 job of supervising NFA and the exchange activities

 3 over the years. And it's been broad testimony

 4 today that the exchanges have done quite well

 5 regulating themselves with the supervision of CFTC

 6 over the last 15 -- 20 years, certainly as long as

 7 I've been in this business, which is when the CFTC

 8 started actually.

 9 The same story, if you're going to put

 10 limits on the markets, you're going to run

 11 offshore, for sure, without any question. We have

 12 a lot more alternatives than we had 15 -- 20 years

 13 ago. There were very few markets available to --

 14 alternative markets, and now there's plenty of

 15 them. They reach the Persian Gulf, we've got one

 16 starting in Hong Kong now, starting a gold

 17 contract, have energy contracts, there's a lot of

 18 alternatives for both the investor and the hedger.

 19 But I wanted to get to, without going into details

 20 about, you know, the reasons why, because I think

 21 we've all heard about the reasons why I think

 22 positions limits are somewhat misguided, and to
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 1 compare agricultural position limits with metals

 2 position limits I think is -- it's not a one size

 3 fits all thing.

 4 Minneapolis red wheat is different from

 5 international gold market or silver market, okay.

 6 There's only so much red wheat produced to be

 7 delivered over the Minneapolis market, and

 8 therefore, the agricultural, you know, position

 9 limits may or may not be, or certainly seem to be

 10 justified, very much so.

 11 But the hedge exemption, I want to get

 12 to that for a moment. A bona fide hedger really

 13 is -- I'm going to read it because I wrote it and

 14 this is what I believe it actually is, is a

 15 commercial or financial entity that will possess

 16 cash positions using the form of on exchange or

 17 off exchange physical inventory or forward

 18 physical obligations.

 19 These entities can be producers,

 20 manufacturers, stockists, financial intermediaries

 21 that service industry related to the underlying

 22 futures contracts. A bona fide hedger -- to a
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 1 bona fide hedger, exchanges are meant to be buyers

 2 and sellers of last resort, while speculators are

 3 needed to supply liquidity for futures markets to

 4 operate properly. They're both equally as

 5 important as one another in functioning markets

 6 and both continue to be a factor in the

 7 commodities markets with or without position

 8 limits. The only difference will be that, in the

 9 event of strictly mandated position limits,

 10 they'll seek, of course, commercial refuge in less

 11 regulated offshore markets and/or the global

 12 over-the-counter marketplace, creating this dark

 13 pool of what we had in the financial markets a

 14 couple of years ago.

 15 Okay. With regard to differences Mr.

 16 Epstein was discussing earlier in the silver price

 17 premium for 100 ounce bars, well, yeah, you know,

 18 that's not a metal thing, that's a product thing;

 19 100 ounce bars -- the most desired investor

 20 product, and they ran into short supply, so they

 21 were running a premium.

 22 Exchanges are meant to be places where
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 1 you go shop for -- it's not Walmart, where you're

 2 going to go buy a coin or you're going to go buy a

 3 kilo bar or something like that, it's a basis

 4 contract, it's a basis from which fabricated

 5 metals priced, such as Mr. Burghardt's sheet tube

 6 and brass products, and it's not meant to be the

 7 end all for the consumer, whereas you have, of

 8 course, layers of precious metals dealers around

 9 the country who can sell coins of small retail

 10 product and they are given the ability to have

 11 them manufactured and delivered and that's the

 12 reason for the delay, that's the reason for the

 13 mandated, I guess it's what, 20 some odd days,

 14 they're allowed to deliver the product against the

 15 contract. Very similarly --

 16 CHAIRMAN GENSLER: If you could just --

 17 MR. STRAIT: Oh, I'm sorry, I'm going

 18 over my time here. Anyway, I want to get back to

 19 the ClearPort, if I can. How is it --

 20 CHAIRMAN GENSLER: Can we do it in Q and

 21 A then? I'll promise you, I'll ask you about

 22 ClearPort.
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 1 MR. STRAIT: Yeah, okay, we'll come back

 2 to Q and A. Anyway, the point I'm trying to make

 3 is that, futures markets must be flexible, and I'm

 4 not sure position limits are really the right

 5 thing to do, and I'm not sure, I think it's a

 6 pipedream to think that you're going to get a

 7 broad mandate from foreign offshore -- offshore

 8 markets are going to go along with us, because

 9 they're going to view this as an opportunity.

 10 CHAIRMAN GENSLER: Okay.

 11 MR. STRAIT: Thank you.

 12 CHAIRMAN GENSLER: Thank you, Mr.

 13 Strait. Mr. Masters.

 14 MR. MASTERS: Thank you, Chairman

 15 Gensler, and Commissioner Sommers, Dunn, Chilton

 16 and O'Malia. I testified before the Commission on

 17 the topic of speculative position limits at the

 18 August 15th hearing, and for that reason, I don't

 19 want to delve into minutia, but instead highlight

 20 a few key points regarding position limits with a

 21 special focus on the metals markets.

 22 First, position limits can serve two
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 1 potential roles, the role of manipulation

 2 mitigation and excessive speculation prevention.

 3 Manipulation occurs when a small group of traders

 4 wheel large positions in order to unduly influence

 5 the market price. By limiting the size of

 6 positions the traders can hold, position limits

 7 make it harder for these traders to manipulate the

 8 markets.

 9 Regulators can also impose position

 10 limits to diminish, eliminate or prevent excessive

 11 speculation. Excessive speculation is a state of

 12 the marketplace as a whole, where the positions

 13 held by speculators, none of whom individually

 14 have manipulative intent, constitute such a high

 15 percentage of the total open interest that they

 16 become the driving force behind price discovery.

 17 By imposing speculative position limits,

 18 regulators can then reduce the size of speculative

 19 positions, and therefore, reduce their dominance

 20 over the price discovery function. The goal is

 21 not the restraint of any one trader, but rather an

 22 overall reduction in speculation. This removes
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 1 the potential for consumable commodities

 2 derivatives markets to experience speculative

 3 price bubbles.

 4 Because there are two roles for position

 5 limits, there are two distinct methodologies for

 6 setting position limits. If the goal is to

 7 mitigate the threat of manipulation, regulators

 8 should set the level of individual position limits

 9 at a specified percentage of total open interest.

 10 This will ensure a minimum number of market

 11 participants while limiting the ability of any

 12 single participant to manipulate prices.

 13 However, if the goal is to prevent

 14 excessive speculation, regulators should establish

 15 an acceptable level of speculation in the

 16 marketplace as a whole, expressed as a percentage

 17 of open interest. As a general rule of thumb,

 18 speculators should never represent more than 50

 19 percent of the open interest, because at that

 20 level, they will come to dominate the price

 21 discovery function. For many commodities, the

 22 speculation percentage composed only 25 percent of
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 1 open interest in the past. During this time,

 2 there were few complaints regarding liquidity, and

 3 we had no commodity speculative bubbles. The

 4 ideal of speculation will vary between markets,

 5 but 25 percent has been a reasonable level and is

 6 a solid starting point for discussions.

 7 Once the target level of speculation is

 8 determined, regulators should reduce individual

 9 position limits in order to reduce the overall

 10 speculative percentage until it falls within an

 11 acceptable range.

 12 Consumable commodities derivatives

 13 markets are unique because they are susceptible to

 14 both manipulation and excessive speculation.

 15 Regulators then should calculate position limits

 16 utilizing both methodologies and set the

 17 speculative limit at the tighter of the two.

 18 Today we need speculative position

 19 limits imposed by the CFTC in all consumable

 20 commodities derivatives markets. This will force

 21 some speculators to exit these markets, thereby

 22 reducing their dominance and eliminating the
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 1 possibility of speculative price bubbles. Copper

 2 is a consumable commodity, and therefore, needs

 3 speculative position limits to reduce excessive

 4 speculation. Concerning precious metals, they can

 5 be consumed, but they are more often thought of as

 6 investments. It is my belief that gold, silver

 7 and other precious metals need speculative

 8 position limits only for the purpose of preventing

 9 manipulation, not necessarily for the purpose of

 10 preventing excessive speculation.

 11 Since gold and silver have been

 12 considered currency and stores a value for many

 13 thousands of years, precious metals are typically

 14 considered capital assets and not commodity goods.

 15 Gold and silver have some industrial

 16 applications and a small amount are consumed each

 17 year. However, most precious metals are not

 18 consumed. For example, as much as 85 percent of

 19 all the gold -- is still held by investors. They

 20 are not then consumable commodities.

 21 Finally, one more point, the core of our

 22 current excessive speculation problem is a passive
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 1 speculation problem. Like one of those Russian

 2 dolls, we have a problem within the problem. The

 3 main reason the speculation in consumable

 4 commodities has grown so dramatically in the last

 5 seven years is the rise of passive speculation by

 6 those seeking to "invest" in multiple commodity

 7 and single commodity derivative structures. Today

 8 passive speculators outnumber active speculators

 9 and account for the -- share of speculative open

 10 interest in most consumable commodity derivatives.

 11 Active and passive speculators are two very

 12 different animals. Active speculators add

 13 beneficial liquidity to the market by buying and

 14 selling futures contracts with a goal of turning a

 15 profit. In contrast, passive speculators allocate

 16 and drain liquidity by buying and rolling large

 17 quantities with an extended duration.

 18 Passive speculators investment strategy

 19 is completely blind to supply and demand realities

 20 in the markets. As such, passive speculators not

 21 only undermine, but actually destroy the price

 22 discovery function of the market and make room for
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 1 the formation of speculative bubbles. The CFTC

 2 must address the issue of passive speculation. It

 3 will not go away on its own. Thank you.

 4 CHAIRMAN GENSLER: Thank you, Mr.

 5 Masters. Mr. Organ.

 6 MR. ORGAN: Mr. Chairman and

 7 Commissioners of the CFTC, I'd like to thank you

 8 for allowing me to present to the Commission as to

 9 whether there's a need for position limits on the

 10 precious metals such as silver and gold. The bank

 11 participation report of August, 2008, a report

 12 which the BIS uses to gauge risks to banks,

 13 revealed that one or two USA banks held a massive

 14 short position in silver, some 33,805 contracts,

 15 or 169 million ounces of silver. In the July, '08

 16 bank participation report, these same two banks

 17 held the short position of 6,199 contracts or 31

 18 million ounces. The increase in silver short was

 19 an astonishing 138 million ounces of silver.

 20 All mining activity throughout the world

 21 produces 680 million ounces of silver. This

 22 increase in the silver short represents 20 percent
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 1 of all mine production. With respect to the total

 2 short position of 169 million ounces, this

 3 represents 25 percent of all annual mine

 4 production of silver. To my knowledge, this is

 5 the largest concentration of a short position in

 6 any commodity.

 7 In gold, in the July, '08 bank

 8 participation report, the summary revealed that

 9 three or less banks held a short position of 7,787

 10 contracts of gold or 778,000 ounces. However, in

 11 the August, '08 bank participation report, there

 12 was a massive 11 fold increase in the short

 13 position by these same three or less banks, with

 14 the short position rising to 86,398 contracts or

 15 8.64 million ounces from the July report. The

 16 increase in the short position by these banks

 17 total 7.81 million ounces of gold. With world

 18 production of gold at 75 million ounces, the

 19 increase represented approximately 11 percent of

 20 annual world production. On November 12, 2009,

 21 the BIS released its regular semi-annual OTC

 22 report on precious metals derivatives of the major
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 1 banks and financial dealers in G10 and Switzerland

 2 ending June 30, 2009, covering the period January

 3 1, 2009 through to June 30, 2009.

 4 The release of the BIS report comes

 5 right after the violent activity on the COMEX from

 6 August through October, 2008. With respect to

 7 gold, according to the OCC, the total notional

 8 amount of gold derivatives in the USA actually

 9 fell from $107 billion to $99 billion, yet JP

 10 Morgan's position remained relative unchanged,

 11 falling from $82.5 billion worth of gold to $81.2

 12 billion worth of gold.

 13 As far as risk is concerned, JP Morgan

 14 has almost percent of the USA derivative risk. In

 15 the BIS report with respect to gold, the total

 16 gold derivatives attributed to the banks rose from

 17 $332 billion to $425 billion, which is made up of

 18 179 billion of forwards or swaps and 246 billion

 19 of options.

 20 In tonnage of gold, the increase in

 21 derivatives total 2,300 tons, wherein 1,800 tons

 22 of gold increase came by way of forwards and
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 1 swaps, and 500 tons by way of options. Clearly,

 2 the derivatives substantially increased, and thus

 3 exposing the banking sector to great risk. With

 4 respect to silver, the BIS calculated that the

 5 total derivatives had peaked at an all time high

 6 of $203 billion USA. In ounces of silver, the

 7 total forwards in silver generate -- which

 8 generally is perceived as the total short absent

 9 any better data totaled 7.5 billion ounces. The

 10 increase in derivatives in silver totaled 2.8

 11 billion ounces.

 12 The increase alone represented four

 13 times the annual production of silver. The total

 14 short or forward position in silver, that is, the

 15 7.5 billion ounces, represents over ten years of

 16 silver production.

 17 To my knowledge, this level of

 18 concentration has never happened in any commodity.

 19 It is important to realize that the BIS only

 20 records risk to its bankers. Thus, if a bank is

 21 long in one jurisdiction and short in another, the

 22 BIS would cancel the two as there is no risk to
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 1 the banks. However, despite the netting in gold

 2 and silver by the BIS, this central bank perceives

 3 considerable risk in the forwards on both silver

 4 and gold to the banks that they monitor. In

 5 silver, Ted Butler has calculated that the total

 6 short position in COMEX silver equates to

 7 approximately 500 million ounces, of which JP

 8 Morgan accounts for 200 million of those ounces.

 9 CHAIRMAN GENSLER: If I could just ask,

 10 because we do have your written statement, just if

 11 you could --

 12 MR. ORGAN: Okay. I'll finish now. I

 13 propose that all players -- in the turmoil of

 14 August, 2008, billions of dollars were lost by

 15 investors by the shorting action of the banks in

 16 question. Most commodities in the COMEX have

 17 position limits of approximately one to two

 18 percent of annual production. This has worked

 19 well over the years in gold and certainly in

 20 silver. These limits have been exceeded, and

 21 thus, we're witnessing manipulation on a daily

 22 basis on a rather large scale.
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 1 I urge the Commission to place position

 2 limits on the precious metals, and these limits

 3 must be placed whether it's on the long side or on

 4 the short side. I propose that all players

 5 wishing to hedge must deposit 40 percent of their

 6 short position in bullion in the COMEX warehouse

 7 and must sign an affidavit that the hedger has 100

 8 percent of the title to that metal and undertakes

 9 not to encumber the title in any way while it

 10 serves as collateral to the short position.

 11 Furthermore, no derivative position should be

 12 eligible to serve as collateral for a hedge

 13 position. I thank you for your attention.

 14 CHAIRMAN GENSLER: Thank you, Mr. Organ.

 15 And I just have to find, where do I look, but Mr.

 16 Christian is going to speak next.

 17 MR. CHRISTIAN: Hopefully you can hear

 18 me, Mr. Chairman.

 19 CHAIRMAN GENSLER: Absolutely, we can

 20 hear you fine.

 21 MR. CHRISTIAN: Okay, great. There is a

 22 time delay on this, so we'll be a little bit
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 1 awkward. My name is Jeffrey Christian and I run

 2 CPM Group. I've actually done commodities

 3 research in energies, as well as metals since the

 4 1970's, the middle of 1970's. I ran the J. Aron

 5 Research Department, which became the Goldman

 6 Sachs Commodities Research Group. In 1986, I

 7 managed a management buyout of the Commodities

 8 Research Group from Goldman to set up CPM.

 9 I have always been a strong advocate

 10 that the CFTC needed better regulations, clarified

 11 regulations and a strengthened posture for

 12 regulating the commodities markets. I've also

 13 been, since 1986, a strong advocate of some sort

 14 of regulatory oversight of over-the-counter

 15 derivatives markets. I'm a little bit concerned

 16 that some of the proposals I've heard recently

 17 don't sound like they would do any good in terms

 18 of real economic policy and regulatory goals in

 19 the OTC markets, but probably would be destructive

 20 of economic value in the U.S. investment banking

 21 market.

 22 The subject today is position limits,
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 1 and I give you a little bit of my background,

 2 vis-`-vis, my views of the CFTC, just so that you

 3 don't misunderstand my position toward CFTC

 4 mandated and managed position limits.

 5 My position is that CFTC managed

 6 position limits would do nothing to improve the

 7 efficiency, honesty, integrity or fairness of the

 8 metals commodities markets. Instead, I believe

 9 they would create a risk if they were ill

 10 conceived and ill applied of driving liquidity

 11 into the less regulated and less transparent

 12 markets overseas and over-the-counter.

 13 It seems most appropriate to me that the

 14 Commission continue to rely on the exchanges to

 15 impose and manage position limits, as it has since

 16 1975, albeit perhaps with greater CFTC input,

 17 oversight and advice. Now, there are good reasons

 18 for position limits to exist for non-commercial

 19 market participants. This may be even more true

 20 today than in the past given the rise of

 21 mechanically managed passive long only funds that

 22 will buy and hold commodities either in the
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 1 futures market or in the case of precious metals

 2 ETF's with physical metal.

 3 The structure of many of these funds

 4 pose some real risks that they could put a

 5 tremendous amount of money into the market buying

 6 and holding long positions, and then in some

 7 instances trying to liquidate unmanageably large

 8 positions, long positions in short periods of

 9 time.

 10 However, I think a more thorough

 11 analysis of the situation may suggest that a

 12 broader regulatory approach to the rise of these

 13 funds is needed and that position limits alone

 14 probably would not suffice -- be sufficient to

 15 protect the markets and market participants from

 16 the risks that these long only passive index funds

 17 provide.

 18 Viable alternative metals markets exist

 19 world- wide, people have said that over and over

 20 again. Regulatory arbitrage would take a moment

 21 to execute, and it would happen. In my 30 plus

 22 years of working with producers, processors,
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 1 users, institutional investors and high net worth

 2 individuals, not only in precious metals and

 3 copper, but also in energy and other commodities,

 4 most of the activity I have seen these groups do

 5 have occurred in the OTC markets. That's

 6 important for a couple reasons, but it's also

 7 important -- the first reason I bring it up for

 8 right now is to understand how fast volumes and

 9 liquidity can transfer to the OTC markets.

 10 Federally managed position limits I

 11 think would probably have the same effect on

 12 commodities as -- actually had on equities. It

 13 would drive a lot of liquidity off of U.S.

 14 regulated markets into private, less transparent,

 15 more opaque markets, and it would deprive the U.S.

 16 economy of significant revenue and stature in the

 17 international economy.

 18 Any position limits would have to have

 19 exemptions for commercial participants, including

 20 commodities trading banks and brokers. I've been

 21 a little bit surprised at the extent to which

 22 people talking today at these hearings have not
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 1 accepted the fact that banks are, in fact, bona

 2 fide hedgers. They are, and, in fact, they are

 3 the largest bona fide hedgers involved in exchange

 4 traded futures and options.

 5 Many producers and industrial users of

 6 commodities do not trade directly on the futures

 7 market, but rather trade on the OTC market with

 8 their banks and dealers. Their trading

 9 counterparts in the OTC market then use the

 10 futures to hedge their resulting price exposure.

 11 I also think it would be ill advised for the CFTC

 12 to proceed with an idea which is to disallow

 13 trading companies to serve as swap dealers,

 14 hedgers and proprietary traders simultaneously.

 15 Forcing diversified firms into this

 16 pseudo Salamanca decision as to which part of

 17 their baby they should choose to keep would

 18 severely damage market efficiency and

 19 intelligence.

 20 Now, much of the intelligence accrues to

 21 these diversified trading entities, but the fact

 22 is that the entire market does learn from them and
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 1 does benefit from their knowledge.

 2 I also get concerned when I hear people

 3 say that they should be solonistic camazars

 4 deciding who is a legitimate speculator and who

 5 has legitimately side speculative position, and

 6 there should be someone who can determine who

 7 belongs in the markets and who doesn't.

 8 CHAIRMAN GENSLER: Jeffrey --

 9 MR. CHRISTIAN: Now, my written

 10 testimony is about six times larger than this. In

 11 conclusion, I think the CFTC should take a medical

 12 approach to the application of its authority.

 13 First and foremost, it should do no harm. Thank

 14 you.

 15 CHAIRMAN GENSLER: I thank all the

 16 panelists, and I did promise Mr. Strait I'd ask

 17 about OTC, but I did -- I couldn't help but the

 18 invitation to Sorbanes-Oxley, some of you may

 19 know, I helped Senator Sorbanes, then Chairman of

 20 the Senate Banking Committee, on that bill. I

 21 think that that was a necessary regulation.

 22 I think that we had calamitous results
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 1 in the accounting field by accounting firms in a

 2 sort of self- regulatory environment at that time,

 3 and the main function of that bill set up

 4 oversight that was not self-regulatory, but the

 5 public accounting oversight board, so we probably

 6 have a little bit different view on that, Mr.

 7 Christian and I.

 8 And I don't think that there's been

 9 significant evidence that that bill itself sent

 10 issuers overseas. There were a lot of other

 11 things, a lot of other global issues going on, but

 12 since you just raised it, I decided to react.

 13 But, Mr. Strait, if I could just ask you about

 14 clearinghouses and what point you wanted to make

 15 on that.

 16 MR. STRAIT: Yeah; first, I think that

 17 what Jeff brought up is something that should have

 18 been brought up a long time ago, and that is that

 19 the FCM, the model of an FCM is really inherently

 20 American, okay. People don't do business with

 21 FCM's in Europe directly, they go to their bank.

 22 It's almost like a prime brokerage relationship
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 1 within the hedge fund world, if you will. And

 2 they supply everything, they supply the financing,

 3 they supply the look alike features products,

 4 okay. So to --

 5 CHAIRMAN GENSLER: Can you do it short,

 6 because I do have another question?

 7 MR. STRAIT: Yeah, I'm sorry. Okay.

 8 Just to say there is a big difference, and to

 9 segregate the books is not that easy. I do

 10 appreciate that, you know. It's not customer

 11 driven -- it's customer driven business and it's

 12 house driven, but it's pretty hard to segregate

 13 what that actually is since they're making markets

 14 their customers, okay.

 15 Now, with regard to OTC clearing, the

 16 event of the financial meltdown of two years ago

 17 has been a great boom to the OTC cleared products,

 18 particularly I've watched ClearPort very closely

 19 because we're major counterparts and we do a lot

 20 of clearing at ClearPort Triland, and we've seen

 21 that business grow dramatically where, you know,

 22 the --
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 1 CHAIRMAN GENSLER: I'm going to

 2 apologize. I really have other questions. Just

 3 what's your point on the clearing?

 4 MR. STRAIT: The point I'm trying to

 5 make is that that -- the CFTC and the industry in

 6 general and the FCM's in concert should be

 7 encouraging and standing by trying to bring in OTC

 8 clearing because it does -- it brings transparency

 9 and you can see what's going on in the price

 10 mechanism and so on.

 11 The question I have is, if you're going

 12 to try to implement, if the CFTC is looking to

 13 implement OTC position limits, how is that going

 14 to impact the traffic of business going through

 15 ClearPort, and for that matter, I --

 16 CHAIRMAN GENSLER: So if I understand

 17 it, and I think I deeply share your view, clearing

 18 helps lower risk --

 19 MR. STRAIT: Absolutely.

 20 CHAIRMAN GENSLER: -- to the financial

 21 system as a whole?

 22 MR. STRAIT: Right.
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 1 CHAIRMAN GENSLER: We want to encourage

 2 that in any way, working with Congress and other

 3 ways to do that, you're just saying that we have

 4 to be cognizant, in your view, that position

 5 limits may have some counter veiling effect?

 6 MR. STRAIT: Correct.

 7 CHAIRMAN GENSLER: Is that -- okay. I

 8 think I got it. Mr. Masters, I have a quick

 9 question. I didn't quite understand, on gold and

 10 silver, the precious metals, were you saying that

 11 they are not consumable commodities, and thus,

 12 maybe have a different approach than position

 13 limits? I just wasn't sure I was following.

 14 MR. MASTERS: Well, I was dividing

 15 position limits into two categories, you know, the

 16 consumable commodities category, you know, food,

 17 energy, copper in this case is consumable, versus

 18 precious metals, which would have a manipulative

 19 position limit set rather than an excessive

 20 speculation limit set, in other words, because

 21 it's -- I'm not considering it consumable because

 22 of its traditional role as a store --
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 1 CHAIRMAN GENSLER: I see; some panelists

 2 have said that to address manipulation, it's in

 3 the near month and the delivery function, and this

 4 broader role that we were given in the 1930's

 5 about excessive speculation is the all months

 6 combined, or at least that's how some have

 7 articulated; is that what you're suggesting, or is

 8 it --

 9 MR. MASTERS: Well, I'm saying that in

 10 terms of the regime in the sense of the all months

 11 combined, that would be one way of looking at

 12 excessive speculation in terms of a regime of

 13 position limits to combat excessive speculation as

 14 differing from manipulation.

 15 Additionally, what I was suggesting was

 16 that if you had two regimes, a whole notion of

 17 open interest in the market, where the market

 18 itself was deemed to be excessively speculative,

 19 more than 50 percent speculative open interest

 20 versus hedgers, for instance, then that could be

 21 brought back down to some more reasonable level

 22 than we've seen in the past.
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 1 CHAIRMAN GENSLER: I thank you. I have

 2 almost the red light, so Commissioner Dunn.

 3 COMMISSIONER DUNN: Thank you, Mr.

 4 Chairman. Mr. Strait and Mr. Masters, you both

 5 say that if we do something or don't do something,

 6 it's going to result in bubble. Mr. Strait, you

 7 said if we don't have over-the- counter authority,

 8 that it's going into the opaque markets and we'll

 9 end up with a bubble. Mr. Masters, you say if we

 10 don't have position limits, we're going to end up

 11 with a bubble. Could you two kind of work that

 12 out a little bit amongst yourselves?

 13 MR. STRAIT: May I share that with you?

 14 Okay. The answer is, yes, and what I think is

 15 being suggested here is that you're going to --

 16 there's a discussion about application of position

 17 limits specifically to futures contracts, okay.

 18 What I'm saying is, what are you going to do about

 19 ClearPort, what are you going to do about the

 20 emerging and very necessary, in my view, OTC

 21 clearing mechanisms that the exchanges have put in

 22 place, which I think -- I think the market needs,
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 1 and they shouldn't be jeopardized by some

 2 confusion with regard to position limits.

 3 How can you have position limits in a

 4 product in the futures market when the same

 5 clearinghouse is clearing an OTC product without

 6 position limits? That's the question I have for

 7 the Commissioners and the Chairman.

 8 MR. MASTERS: Yeah; I would just say

 9 that, you know, we've testified enumerable times

 10 that we need clearing. Clearing is a necessary

 11 systemic risk reducer for the markets. But with

 12 regard to position limits -- and until you really

 13 get clearing, it's hard to really have adequate

 14 position limits. And so when we've talked about

 15 this, we've always talked about the concept of

 16 aggregate position limits, which are position

 17 limits that go across markets that are done at the

 18 control entity level versus doing them on a

 19 market, a specific market level, because then

 20 you're discriminating against the CME or you're

 21 discriminating against OTC or whatever, so they

 22 need to be done, you know, across markets.
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 1 COMMISSIONER DUNN: Mr. Strait, you have

 2 talked about the Minneapolis exchange wheat

 3 contract and the difference between that and the

 4 metals contract, and there are actually three

 5 wheat contracts that we have, there's the

 6 Minneapolis Grain Exchange, the Chicago Board of

 7 Trade, which is -- sets the world price, and then

 8 there's Kansas City Board of Trade, all three of

 9 those are different types of wheat, and it's a

 10 high protein wheat in the Minneapolis Grain

 11 Exchange.

 12 And in March of 2008, when those prices

 13 went up, every time the price went up, price limit

 14 went up, and there was an offering, Japan tendered

 15 an offer, and the real problem there was catching

 16 up with the cash price with the futures price.

 17 And in those agricultural markets, we

 18 also have price limits that have an impact in

 19 those situations. People say that position limits

 20 may not have worked in the agricultural market, I

 21 would submit that at that particular time, the

 22 fundamentals were such, the supply and demand were
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 1 such that it was driving at market and not

 2 speculation or anything of that nature, although I

 3 think there were a lot of speculative money that

 4 went in there as a hedge against -- or a flight to

 5 safety, I guess, because it was the same time we

 6 were beginning to see a meltdown in the capital

 7 market.

 8 My question to you is, because you said

 9 this in the fact that this current contract on

 10 silver is something that not everybody is going to

 11 view like Mr. Epstein did and go out and buy it.

 12 Would -- is there a need for another type of

 13 silver market out there? Should an exchange look

 14 at coming up with a different type of a mini

 15 contract or something?

 16 MR. STRAIT: Commissioner Dunn, I

 17 believe that the silver market is largely an OTC

 18 market anyway. It's a market that's traded

 19 over-the-counter and traded in London, and if

 20 you're trading overnight in Japan and you're

 21 trading in Hong Kong or you're trading in Russia

 22 or anywhere else, you're doing basis good London
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 1 trading, you're not trading COMEX, right. So to

 2 say that we need another market, probably not, I

 3 don't think there's another need for a futures

 4 market in silver. I don't think there's enough

 5 volume to go around right now. So the answer is,

 6 no, I don't believe there should be another

 7 market.

 8 COMMISSIONER DUNN: So it's not a

 9 contract problem, per se?

 10 MR. STRAIT: No, it's not a contract,

 11 it's the nature of the commodity. We're talking

 12 about your wheat products are all different, and

 13 you're obviously very familiar with that. Silver

 14 is different than gold, and platinum and -- are

 15 different than silver and gold, which is another

 16 thing I want to bring up regarding the

 17 jurisdiction of ETF's. How anybody let a platinum

 18 plated ETF happen is beyond my comprehension, but

 19 it did. Somehow it slipped past, God must have

 20 been sleeping when it happened, but I'd like to

 21 discuss that at some point, as well.

 22 CHAIRMAN GENSLER: Thank you,
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 1 Commissioner Dunn. Commissioner Sommers.

 2 COMMISSIONER SOMMERS: Thank you, Mr.

 3 Chairman. I actually don't have any questions.

 4 I'd be glad to let you discuss your concerns with

 5 the --

 6 MR. STRAIT: All right, thank you, I

 7 appreciate that, Commissioner. Platinum/platium

 8 are strategic metals, and going back to the idea

 9 that all metals are different, as all agricultural

 10 commodities are also different, some are global

 11 and some are not. Platinum/platinum are strategic

 12 metals. Platinum group metals in general are

 13 strategic metals. During the height of the Cold

 14 War, we could import all we wanted from the Soviet

 15 Union without a duty, because it was deemed as a

 16 strategic metal, as chromium was, a nickel was,

 17 okay.

 18 To take a very complex group of metals,

 19 platinum/platinum, rhodium, ruthenium and iridium

 20 and take them and put them into an ETF so that the

 21 inventory ends up stocking an investor product, in

 22 my view, is insane. I have no other word to
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 1 describe it. You can not officially drive the

 2 prices up, and you're going to have --

 3 theoretically put these very, very important

 4 metals to our industry or space, tech, military

 5 and so on and so forth, in the hands of people who

 6 can trade them over their, you know, their E trade

 7 account, securities account.

 8 The question I have is, CFTC and the

 9 exchanges and the trade and supervision over the

 10 years by exchanges has been superlative and I

 11 think that the record shows that it has generally

 12 done very well and the CFTC's oversight has been

 13 wonderful. Exchanges have done a good job

 14 regulating their own markets. And, you know, I

 15 trade platinum and platium, and I've been through

 16 kind of the struggles with, you know, low

 17 warehouse stocks at NYMEX, and that's the only

 18 real futures market in the world apart from a

 19 small one in Japan, Tocom. What's going to happen

 20 when this economy recovers and people are going to

 21 need this stuff again and it's sitting in an ETF

 22 some place? What's going to be the price impact
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 1 of that?

 2 More importantly, why does the SEC have

 3 jurisdiction over this when it should be CFTC

 4 jurisdiction? That's my question. And the more

 5 this happens, the more those questions are going

 6 to arise. Because industry, in general, should be

 7 very concerned about the ETF's and certain

 8 strategic products, and these are two that are.

 9 Thank you.

 10 COMMISSIONER SOMMERS: Thank you for

 11 that answer. I think that as we have discussed

 12 the issues of position limits, not just in the

 13 metals complex, but in the other areas where ETF's

 14 are also prevalent, they raise a lot of really

 15 unique questions, and I'm hopeful that as we work

 16 through these issues, that there will be -- some

 17 of these concerns addressed with these kind of

 18 unique players in the market.

 19 CHAIRMAN GENSLER: Thank you,

 20 Commissioner Sommers. Commissioner Chilton.

 21 COMMISSIONER CHILTON: Well, Mr. Strait

 22 talked about, you know, these markets aren't
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 1 Walmart, and Commissioner Dunn started to get in

 2 this, too, and, you know, it's exactly right,

 3 which is why in 2008, when we had high demand,

 4 high retail price, and low futures price, where

 5 people actually went in and bought the stuff, like

 6 Walmart, they went and bought the stuff, and so

 7 that gave a number of us, you know, a concern that

 8 maybe this is something we needed to address, just

 9 like Mr. Epstein went and bought the stuff.

 10 And Mr. Christian, I appreciate his

 11 testimony. He had a lot of ills in his testimony.

 12 If we have ill conceived position limits and ill

 13 applied position limits, well, duh, of course,

 14 they wouldn't work if we ever ill conceived, I

 15 mean that's why we're having this hearing, we're

 16 trying to figure it out.

 17 But he did add something that I forgot

 18 when I talked about all the wicked, scary things

 19 that could happen with these position limits, he

 20 added communist, so I want to make sure I put that

 21 in the list of things. But I appreciate that

 22 we're trying to get down to the nub of this and
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 1 try to fix it. So, Mr. Masters, let me go to you

 2 and say, how would you apply these limits, would

 3 you come up with them individual, by individual

 4 contract, and should they be -- should there be

 5 any exemptions to these things? I have some

 6 sympathy for what Mr. Norrish said about banks

 7 need to be able to take on large risk, what's your

 8 view about how you would come up with these levels

 9 and about any exemptions to those levels?

 10 MR. MASTERS: Thanks, Commissioner.

 11 Well, a couple things, just to get the banks out

 12 of the way real quick. So banks are hedgers for

 13 commercial participants in some ways, so they wear

 14 a hat to do that, but in addition, they also have

 15 propped us, and they speculate themselves, so in

 16 one notion they're a hedger, in another notion,

 17 they're a speculator.

 18 I think that that needs to be separated,

 19 clearly. They need -- if they're a speculator,

 20 they need to have the rules applied to them that

 21 every other speculator are applied to. If they're

 22 doing a hedge transaction for a hedger, that's
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 1 another thing, and certainly that can be done and

 2 the technology exists to do that.

 3 With regard to position limits, you

 4 know, again, consumable commodities are different.

 5 And Rich was talking about platinum, some of these

 6 base metals, that's another consumable commodity.

 7 Whenever you get consumable commodities involved,

 8 then you've got a problem. Food, energy, anything

 9 that people actually have to use to consume, you

 10 have an issue, and that's why you need position

 11 limits against excessive speculation.

 12 So, you know, in my opinion, the easy

 13 way to solve it is, you greatly reduce the impact

 14 of passives. You could literally, you know, have

 15 a very severe --

 16 COMMISSIONER CHILTON: You're talking in

 17 the aggregate, Mr. Masters?

 18 MR. MASTERS: In the aggregate, that's

 19 right.

 20 COMMISSIONER CHILTON: So speculators,

 21 what I've called the massive passives as a group,

 22 as a type of speculator, you would say not more
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 1 than such and such percentage, and would you have

 2 individual limits, as well, and then in the

 3 aggregate?

 4 MR. MASTERS: I think you could do both.

 5 I think for --

 6 COMMISSIONER CHILTON: And how does that

 7 work? So say all of us are passive -- massive

 8 passives and we've got whatever, 30 percent of the

 9 market or 40 percent of the market, well, all of a

 10 sudden Doug Leslie wants to be a massive passive,

 11 too, what happens, do we reduce all of our

 12 positions a little bit, or is Doug not allowed to

 13 be part of this, how would that work? I haven't

 14 been able to figure it out myself, to be honest

 15 with you. I like the concept.

 16 MR. MASTERS: I think passive -- first

 17 of all, the difference between passives and

 18 regulator speculators needs to be clear, and that

 19 is, passives consume liquidity, traditional

 20 speculators don't. So we want traditional

 21 speculators, and the more passives you have, the

 22 less traditional speculators you can have with
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 1 regard to the role of position limits.

 2 So if I was running things, I would

 3 eliminate all the passives, I would say zero,

 4 because I don't think they contribute any --

 5 COMMISSIONER CHILTON: Well, let me ask

 6 you just a little bit about them. Sorry for

 7 interrupting, my time is about to go. So, you

 8 know, I have this concern about ETF's, as well,

 9 but to some extent, and this may be what

 10 Commissioner Sommers was getting at, I mean it is

 11 a way for individuals, retail folks to be

 12 investing in these markets, you know, what about

 13 that, is there another mechanism, I mean are you

 14 concerned about that, or is this not a place for

 15 those individuals to begin with?

 16 MR. MASTERS: I don't think it's a place

 17 for them to begin with for a lot of different

 18 reasons. I mean if you ask the average individual

 19 to explain what a contango is and how that effects

 20 this ETF in consumable commodities, for instance,

 21 the fact that the USO, when it came out in 2006,

 22 was $65, and today it's $39, and it's supposed to
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 1 track the price of crude, you know, 99 percent of

 2 them could answer that, so --

 3 COMMISSIONER CHILTON: It's tracking,

 4 it's just a year ago December.

 5 MR. MASTERS: Right, exactly. I mean

 6 it's, you know, all that is storage yield, and

 7 they don't -- that's not well understood. So

 8 there's a lot easier ways of tracking inflation.

 9 The tips, if you want to make the bet against the

 10 dollar, the currency markets are the most liquid

 11 thing in the world, go by the euro, go by the yen,

 12 it's easy. They're a lot more liquid, and then

 13 there's no issues with you interloping on hedgers.

 14 CHAIRMAN GENSLER: Commissioner Chilton,

 15 we're going to have another round, so Commissioner

 16 O'Malia.

 17 COMMISSIONER O'MALIA: First of all, if

 18 we're going to put on position limits, we need to

 19 put one on Mr. Masters' testimony, I think it's

 20 55 pages or something like that.

 21 MR. MASTERS: Appendices.

 22 COMMISSIONER O'MALIA: Okay, they don't
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 1 count. Let me build on what Commissioner Chilton

 2 has said in the struggle to kind of how are you

 3 going to reign in this class of investor. And

 4 you've written extensively, and you're well known

 5 for your comments and views on oil markets and

 6 energy markets, where the U.S. is really the

 7 dominant market, and what we struggled with here

 8 today, and some of the charts you may have seen

 9 earlier, the U.S. is not the dominant market in

 10 metals.

 11 And if we are going to put position

 12 limits on and concentration limits, whatever we're

 13 going to do, how do we make that stick, and how do

 14 we address some of the concerns you've raised in

 15 this market, in this metals market with the global

 16 nature? And I invite anybody to comment on that,

 17 as well.

 18 MR. MASTERS: I would just say that

 19 you're exactly right. I mean, you know, clearly,

 20 I mean the LME is the dominant market, and you

 21 don't have jurisdiction there, so it makes it a

 22 much different conversation. And again, you know,
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 1 just going back to the testimony, the only really

 2 market that you have much control over here is

 3 this copper market, and with the COMEX, and I

 4 think you could do what you can on the COMEX,

 5 personally, you know, I think the FSA should do a

 6 lot more. We're going to meet with them on this

 7 issue. So I hope that we can influence them from

 8 that standpoint, because they're the dominant

 9 market.

 10 COMMISSIONER O'MALIA: I've got another

 11 question, and this one is for Mr. Christian. I

 12 assume he can follow along here. But both Mr.

 13 Organ and Mr. Epstein on the second panel raised

 14 the concerns that short position exceed the

 15 physical supply. The second panel kind of argued

 16 that that wasn't a concern. Are you concerned

 17 that the shorts will not be able to deliver if

 18 called upon?

 19 MR. CHRISTIAN: No, I'm not at all

 20 concerned. For one thing, it's been persistently

 21 that way for decades. Another thing is that there

 22 are any number of mechanisms allowing for cash
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 1 settlements and problems. And the third thing is,

 2 as many people who are actually knowledgeable

 3 about the silver market and the gold market have

 4 testified today, almost all of those short

 5 positions are, in fact, hedges, the short futures

 6 positions are hedgers offsetting long positions in

 7 the OTC market. So I don't really see a concern

 8 there.

 9 COMMISSIONER O'MALIA: Mr. Organ, would

 10 you like to respond?

 11 MR. ORGAN: I do see a risk on this, and

 12 I think it's a risk that we have to be very

 13 careful of. As countries like China, and South

 14 Korea, Russia start demanding and taking physical

 15 delivery of their gold and moving it offshore to

 16 their shores and putting pressures on our -- on

 17 the COMEX, and we will probably come to a point in

 18 time where we will have a failure to deliver.

 19 MR. DOUGLAS: Can I make a comment?

 20 CHAIRMAN GENSLER: No; who are you?

 21 Okay. I don't -- no, I said no. I don't know who

 22 -- who is this?
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 1 MR. DOUGLAS: I'm Adrian Douglas, I'm

 2 assisting Harvey.

 3 CHAIRMAN GENSLER: All right, yes.

 4 MR. DOUGLAS: Is my microphone on?

 5 CHAIRMAN GENSLER: Yes.

 6 MR. DOUGLAS: I'd just like to make a

 7 comment about we're -- we're talking about the

 8 futures market hedging the physical market, but if

 9 you look at the physical market, the LBMA, it

 10 trades 20 million ounces of gold per day on a net

 11 basis, which is $22 billion, that's $5.4 trillion

 12 a year, that's half the size of the U.S. Economy,

 13 if you take the gross amount, it's about one-half

 14 times the U.S. economy. That is not trading 100

 15 percent metal, it's a fractional reserve basis.

 16 And you can tell that from the LBMA's web site,

 17 because they trade unallocated accounts. And if

 18 you look at their definition of unallocated

 19 account, they say you're an unsecured creditor.

 20 Well, if it's unallocated, if you buy

 21 100 tons of gold, even if you don't have the

 22 serial numbers, you should have 100 tons of gold,
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 1 so how can you be an unsecured creditor? Well,

 2 it's because it's fractional reserve accounting.

 3 I mean you can't trade that much gold, it doesn't

 4 exist in the world.

 5 So the people who are hedging these

 6 positions at LBMA are essentially, it's paper

 7 hedging paper. And Bob Chilton uses the

 8 expression, stop the pandemonium, you know, this

 9 is Pozi scheme. Because gold is a unique

 10 commodity, and people have mentioned this, that

 11 it's left in the vault, it's not consumed, that

 12 means that most people trust the bullion banks to

 13 hold their gold, and they trade it on a ledger

 14 entry. So one of the issues we've got to address

 15 here is the size of the LBMA and the OTC markets

 16 which are supposedly backing these positions which

 17 are hedging, but it's backing paper.

 18 CHAIRMAN GENSLER: I guess I get time.

 19 I don't have any other questions. Commissioner

 20 Dunn.

 21 COMMISSIONER DUNN: Thank you, Mr.

 22 Chairman. Mr. Christian, I appreciate the
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 1 difficulty of trying to do this by remote, but at

 2 the end of your testimony, you began talking about

 3 bona fide hedge exemptions for commercial traders

 4 must be part of position limits and not to grant

 5 hedge exemptions to swap dealers would be

 6 devastating to exchanges, liquidity and price

 7 discovery capacity and got into who determines

 8 what is legitimate or not. Could you amplify on

 9 that a bit and what you see is the danger there?

 10 MR. CHRISTIAN: I could definitely

 11 amplify on it. Amplifying on it a bit is a little

 12 bit more difficult because it's a very big

 13 subject. The first thing is, precious metals,

 14 copper, other metals, energies, they're all traded

 15 internationally, and these are fungible

 16 commodities by and large. I mean there's been a

 17 lot of strange things that have been misspoken

 18 about the, you know, the difference between the

 19 retail market and the wholesale market, and we

 20 don't have time to really go over those, I don't

 21 think, but the fact of the matter is, excuse me,

 22 I'm in a building that has motion sensitive lights
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 1 and it doesn't recognize what I do as human

 2 activity.

 3 CHAIRMAN GENSLER: Those were your

 4 words, not anybody here.

 5 MR. CHRISTIAN: Yeah; no, actually they

 6 were my wife's. If you start putting position

 7 limits on bona fide hedgers, for example, bullion

 8 banks, and the previous fellow was talking about

 9 hedges of paper on paper, and that's exactly

 10 right. Precious metals are financial assets, and

 11 like currencies and T bills and T bonds, they

 12 trade in the multiples of 100 times the underlying

 13 physical, and when people buy and sell those, they

 14 are voting and they're giving an economic view of

 15 the world or a view of the economic world as they

 16 see it.

 17 And when you start saying to a bank,

 18 okay, I have a number of people, you know,

 19 actually, let's go back to a concrete example of

 20 Mr. Organ. He was talking about August of 2008,

 21 when there was an explosion of the short positions

 22 in gold and silver held by bullion banks on the
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 1 futures market, and he seemed to imply that that

 2 was somehow driving the price down. If you

 3 understand how those bullion banks run their

 4 books, the reason they had an explosion of their

 5 short position was because they were selling gold

 6 and silver hand over fist in the forward market,

 7 in the physical market, and in the OTC option

 8 market. Everyone in the world was buying physical

 9 gold everywhere in the world. The bullion bankers

 10 and standard market makers were selling or making

 11 commitments to sell them material, and they had to

 12 hedge themselves, and they were using the futures

 13 markets to do that.

 14 If you put position limits on the

 15 futures markets, they will have to find some other

 16 mechanism to hedge themselves, and they will.

 17 COMMISSIONER DUNN: Jeffrey.

 18 MR. CHRISTIAN: Someone will provide

 19 that market because it's a big world out there.

 20 COMMISSIONER DUNN: Jeffrey, I'm going

 21 to have to cut you off because I want to ask one

 22 other question of Mr. Organ.
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 1 MR. CHRISTIAN: Go ahead.

 2 COMMISSIONER DUNN: All right, I'm

 3 sorry. Mr. Organ, in your testimony, you really

 4 posed a whole series of questions in saying, how

 5 do you conclude that such large and increase in

 6 short positions in gold could not be manipulative,

 7 and it kind of brings us full circle back to the

 8 first panel we had on -- and which were asking to

 9 define excessive speculation, that which causes

 10 unreasonable functions or unwarranted changes in

 11 price. And you're turning that question around

 12 saying how could we not find that when what we're

 13 charged with is how do we do find that, and could

 14 you tell us how we do find it rather than how we

 15 -- how could we not find it?

 16 MR. ORGAN: Well, I'm very concerned

 17 that the size of one bank, one or two banks, and

 18 how they're manipulating prices, and how on any

 19 particular day, like yesterday they would just

 20 whack, and they're controlling the price, and my

 21 understanding is that the COMEX should be a price

 22 discovery mechanism, and all of a sudden this
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 1 large bank or two are making sure that -- they are

 2 determining the price. And as Chairman Gensler

 3 says, that we should be a price discovery

 4 mechanism, and we're seeing the opposite, and

 5 that's what I'm trying to do -- relay in my

 6 remarks, that I would certainly like this to be a

 7 price discovery system and not having one or two

 8 gorillas, as some of the commentators have said,

 9 dictate the price.

 10 CHAIRMAN GENSLER: Thank you,

 11 Commissioner Dunn. Commissioner Sommers.

 12 Commissioner Chilton.

 13 COMMISSIONER CHILTON: One more; this

 14 issue of regulatory arbitrage, and I think you can

 15 -- there are valid arguments on both sides, I get

 16 it, I'm willing to acknowledge that you could have

 17 it, particularly if you retched down the limits so

 18 much. If they were, as Mr. Christian says, ill

 19 advised, ill conceived, et cetera, but not in my

 20 talking points, and that's where we're headed.

 21 I do think that anything -- any nations

 22 that sort of sought to have a less regulated
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 1 status, that it would be short lived, short sided,

 2 and that if we put an appropriate position limit

 3 mechanism in place, one that acknowledges the

 4 concerns about going to the OTC market or going

 5 overseas, that we could actually be, for lack of a

 6 better term, the gold standard for regulation, and

 7 that that would built confidence in these markets.

 8 Along that line, I wonder, Mr. Organ, if

 9 you think that, without implementing position

 10 limits, that there is some risk of markets leaving

 11 the U.S. And I appreciate this as a Canadian that

 12 you're saying it, but would you tell us what you

 13 think?

 14 MR. ORGAN: Well, first of all, the

 15 position limits are important, but it's not only

 16 that, but it's the huge exemptions that are given

 17 that has to be addressed. As a Canadian, of

 18 course, we have one large bullion bank, Bank of

 19 Nova Scotia, which owns Macotta, but I feel that

 20 if we have the position limits similar to let's

 21 say one or two percent of annual production, it

 22 should hold well, it's held well for all these
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 1 years, and then we look at the exemptions that we

 2 give and make sure that the exemptions to these

 3 bona fide hedgers is verifiable, that they put, if

 4 they are hedging, that they put in a 30 percent --

 5 40 percent of physical metal in COMEX, and it's

 6 verifiable, and then it should work well. And we

 7 should, at that point, should stop the

 8 manipulation, and I think we would have fair and

 9 free markets.

 10 COMMISSIONER CHILTON: Thank you. Mr.

 11 Masters, can I get your take on this, you know,

 12 migration of markets to OTC or foreign nations if

 13 we implement position limits?

 14 MR. MASTERS: I would just say that I

 15 think most fiduciaries today, and this is 2010,

 16 versus let's say two years ago, and people made

 17 the same argument, want more regulation, not less.

 18 They're going to regimes where there's more

 19 transparency and more, you know, the whole notion

 20 of too big to fail I think has been brought down.

 21 I think people, you know, the threat that, you

 22 know, we're all going to go to Hong Kong or we're
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 1 going to go to Dubois or somewhere to trade all

 2 these things, it's an empty threat, it's just not

 3 going to happen. You're not going to see folks go

 4 overseas, large fiduciaries, because, you know,

 5 what happens if we have another crisis, you know,

 6 will the government of Dubois stand behind those

 7 trades, you know, what's the counterparty? The

 8 whole notion for clearing, the whole reason

 9 fiduciaries, many fiduciaries now support clearing

 10 is because they want to take the credit component

 11 of their trade and separate that from the

 12 directional bet that they'd like to make, or the

 13 directional hedge.

 14 So I think it's really an empty threat.

 15 I think getting over the counter trades onto the

 16 same paradigm that listed trades are, with the

 17 notion of position limits that go across, you get

 18 a system where you have -- you don't have

 19 arbitrage between those two places, but you have a

 20 system where credit no longer is an issue for

 21 fiduciaries, and I think that's probably their

 22 number one concern now when, you know, making
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 1 trades.

 2 COMMISSIONER CHILTON: Thank you, Mr.

 3 Chairman.

 4 CHAIRMAN GENSLER: I did want to

 5 follow-up on Commissioner Dunn's question for Mr.

 6 Christian, if I might, because I didn't quite

 7 follow your answer on the bullion banks. You said

 8 the bullion banks had large shorts to hedge

 9 themselves selling elsewhere, and I didn't

 10 understand. I might just not have followed it,

 11 and you're closer to the metals markets, you've

 12 been doing this, but how do you short something to

 13 cover a sale? I didn't quite follow that.

 14 MR. CHRISTIAN: Actually, I misspoke.

 15 Basically what you were seeing in August of 2008

 16 was the liquidation of leveraged precious metals

 17 positions from a number of places, and the bullion

 18 banks were coming back to buy it, and they were

 19 hedging those positions by shorting -- by going

 20 short on the COMEX, and that's really what it was.

 21 CHAIRMAN GENSLER: All right. So I'm

 22 glad I asked, because I didn't follow that. But
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 1 if I think of the earlier charts that our head of

 2 the Division of the Market Oversight, Mr. Sherrod,

 3 had, these concentrated shorts have been, you

 4 know, reasonably consistent. They're not exactly

 5 the same one every day, but his chart showed a

 6 sort of similarity across a couple of years. So

 7 what -- I mean I'm just trying to understand, what

 8 are bullion banks hedging on the other side? We

 9 heard from the other panelists, but you seem to be

 10 familiar. What are they -- I mean is it -- is it

 11 warehouse receipts, is it -- what is it?

 12 MR. CHRISTIAN: No, it's a tremendous

 13 number of things. You were at Goldman I think

 14 shortly after me. We had a MIS system that kicked

 15 out -- bullion --

 16 CHAIRMAN GENSLER: That's really

 17 remarkable because we don't seem to have a lot of

 18 similar views, but, you know, a lot of people were

 19 at Goldman Sachs.

 20 MR. CHRISTIAN: Well, I didn't like the

 21 trends at Goldman, so I left in '86. But, you

 22 know, honestly, and bad jokes aside, if you look
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 1 at a bullion bank's book, it's gold book, for

 2 example, you will see an enormous number of

 3 things. There will be gold forward purchases from

 4 mining companies, there will be forward purchases

 5 from refineries, there will be gold that's been

 6 leased out to electronics manufacturers and

 7 component manufacturers and catalyst manufactures

 8 and jewelers.

 9 As gold flows through the beneficiation

 10 process, and again, you know, these are all long,

 11 complex issues that are hard to reduce, you know,

 12 a lot of producers will sell their gold the moment

 13 it leaves their position -- their possession at

 14 the mine, and it might be in concentrate form or

 15 it might be in -- form. It then goes to a smelter

 16 or a refiner. The bullion bank buys that. It

 17 agrees to a price at the time it's buying that,

 18 but it won't be allowed to sell that metal until

 19 it has refinery outturn, which may be two weeks,

 20 but it could be six months. So they will go into

 21 the market and short the market in order to cover

 22 the commitment they've made to buy at that price.
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 1 And then when they get the metal in the physical

 2 market, they can either sell that metal and unwind

 3 the hedge in the short position on the futures or

 4 in the forward market or do something else.

 5 There are all sorts of other derivative

 6 contracts that investment banks and bullion banks

 7 will sell to investors, to other banks, pension

 8 funds, to insurance companies, and each of those

 9 often time will have a long exposure in gold,

 10 which will be hedged with offsetting shore

 11 position.

 12 So if you looked at a bullion bank's

 13 gold book or a silver book, you would find a large

 14 range of topics. One of the things that the

 15 people who criticized the bullion banks and talk

 16 about this undue large positions don't understand

 17 is the nature of the long positions in the

 18 physical market, and we don't help it. The CFTC,

 19 when it did its most recent report on silver, used

 20 the term which we use in the market, the physical

 21 market, and we use that term, as did the CFTC in

 22 that report, to talk about the OTC market,
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 1 forwards, OTC options, physical metal and

 2 everything else. And people will say, well, there

 3 is, and you've heard it today, there is not that

 4 much physical metal out there, there isn't. But

 5 in the physical market, as the market uses that

 6 term, there is much more metal than that, there's

 7 100 times what there is.

 8 If I look at the large short positions

 9 of the COMEX silver contract, my question is,

 10 where are the other shorts being hedged, because

 11 the short position that I believe bullion banks

 12 use to hedge their physicals is larger than their

 13 short position on the COMEX, and the answer is,

 14 they hedge it in the OTC market in London.

 15 CHAIRMAN GENSLER: I thank you for that

 16 detailed discussion. And I thank all of our

 17 panelists for their expert testimony and their

 18 patience with us. And I think with that, unless

 19 there's other things for the Commission, this

 20 meeting is adjourned.

 21 Wait, do I have to have -- this comment

 22 period on this meeting is open until April 30th,
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 1 this record, I should say, it's not a comment

 2 period, the record of this meeting. There is a

 3 comment period on our position, energy position

 4 moments that's open until April 26th, and we

 5 invite the public to comment or send records in,

 6 that would be terrific. Thank you.

 7 (Whereupon, at 2:44 p.m., the

 8 PROCEEDINGS were adjourned.)

 9 * * * * *

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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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 1 ERRATA SHEET FOR THE DEPOSITION OF

 2 __________________________

 3 Case Name: ______________________________________

 4 CORRECTIONS

 5 Pg. Ln. Now Reads Should Read Reasons:

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 20 _____ _____________ ______________ _______________

 21 Reviewed by: Date:

 22 ________________________________ _______________
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 1 To the Witness:

 2 Please note any errors and the

 3 corrections thereof, on this errata sheet. Any

 4 change or correction should have a reason. It may

 5 be a general reason, such as "To correct

 6 stenographic error," or "To clarify the record,"

 7 or "To conform with the facts." Once you have

 8 completed the sheet, signed and dated it, return

 9 the sheet to your attorney, not to the court

 10 reporting agency. Attorneys should exchange

 11 errata sheets among the parties.

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