UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 AGRICULTURAL ADVISORY COMMITTEE MEETING

 Washington, D.C.

 Tuesday, December 9, 2014
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 1 PARTICIPANTS:

 2 Opening Statements:

 3 AAC CHAIR DR. RANDALL FORTENBERY

 4 CFTC CHAIRMAN & AAC SPONSOR TIMOTHY MASSAD

 5 CFTC COMMISSIONER SHARON BOWEN

 6 CFTC COMMISSIONER J. CHRISTOPHER GIANCARLO

 7 CFTC COMMISSIONER MARK WETJEN

 8 The State of the Agricultural Economy:

 9 TOM VILSACK, Secretary, US Department of

 Agriculture

 10

 Panel No. 1: Implications of the Agricultural

 11 Economy for CFTC and DCMs:

 12 DAVID LEHMAN, Managing Director, Commodity

 Research and Product Development CME Group

 13

 GREG KUSERK, Deputy Director, Product Review,

 14 Division of Market Oversight, Commodity Futures

 Trading Commission

 15

 Panel No. 2: Position Limits, Deliverable Supply,

 16 and Bona Fide Hedging:

 17 CHRISTA LACHENMAYR, Economist, Division of Market

 Oversight, Commodity Futures Trading Commission

 18

 STEPHEN SHERROD, Senior Economist, Division of

 19 Market Oversight, Commodity Futures Trading

 Commission

 20

 OTHER PARTICIPANTS:

 21

 JOHN ANDERSON, American Farm Bureau Federation

 22
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 1 PARTICIPANTS (CONT'D):

 2 MJ ANDERSON, National Grain and Feed Association

 3 ROBBIE BOONE, Farm Credit Council

 4 BEN BOROUGHS, North American Millers' Association

 5 MIKE BROWN, National Chicken Council

 6 ZACK CLARK, National Farmers Union

 7 GEOFF COOPER, Renewable Fuels Association

 8 SCOTT CORDES, National Council of Farmer

 Cooperatives

 9

 BRYAN DIERLAM, Cargill, on behalf of the

 10 International Swaps and Derivatives Association,

 Inc.

 11

 12 ED ELFMANN, American Bankers Association

 13 CURT FRIESEN, National Corn Growers Association

 14 ED GALLAGHER, National Milk Producers Federation

 15 HARRY HILD, Division of Market Oversight,

 Commodity Futures Trading Commission

 16

 CLAYTON HOUGH, International Dairy Foods

 17 Association

 18 DUDLEY HOSKINS, National Association of State

 Departments of Agriculture

 19

 TOM KADLEC, ADM, on behalf of the Futures Industry

 20 Association

 21 BRENDAN KALB, AQR, on behalf of the Managed Funds

 Association

 22
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 1 PARTICIPANTS (CONT'D):

 2 CHELSIE KEYS, National Pork Producers Council

 3 LANCE KOTSCHWAR, Gavilon, on behalf of the

 Commodity Markets Council

 4

 JOE KOVANDA, National Cattlemen's Beef Association

 5

 KENT LANCLOS, USDA Risk Management Agency

 6

 RON LEE, National Cotton Council

 7

 ED LUTTRELL, National Grange

 8

 BOB MACK, R-CALF

 9

 BILL MAY, American Cotton Shippers

 10

 DORIS MOLD, American Agri-Women

 11

 PAUL PENNER, National Association of Wheat Growers

 12

 JAMES RADINTZ, USDA FSA Loans

 13

 PAUL RINIKER, National Farmers Organization

 14

 MARK SCANLAN, Independent Community Bankers

 15 Association

 16 TOM SMITH, Division Swap Dealer and Intermediary

 Oversight, Commodity Futures Trading Commission

 17

 STEPHEN STRONG, North American Export Grain

 18 Association

 19 STEVE WELLMAN, American Soybean Association

 20 RYAN WESTON, American Sugar Alliance

 21 TREVOR WHITE, National Sorghum Producers

 22 * * * * *
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 1 P R O C E E D I N G S

 2 (10:00 a.m.)

 3 DR. FORTENBERY: Good morning. I'd like

 4 to call the 32nd -- 37th, I'm sorry, meeting of

 5 the Agricultural Advisory Committee to session.

 6 My name is Randy Fortenbery. I'm serving as the

 7 Chairman of the committee. To all of you who have

 8 been on the committee in the past, welcome back.

 9 Thanks for attending. For all the new members,

 10 welcome as well and we're very glad you're

 11 participating. We have a pretty full agenda

 12 today.

 13 A couple of quick housekeeping items.

 14 One, please remember to either mute or turn your

 15 cell phones off. I say that not for you, but to

 16 remind myself to do that. Also, when you decide

 17 to speak during the discussion, please push the

 18 button in the center of your microphone and then

 19 when you're not talking, please don't push that

 20 button and that'll keep everything orderly. As we

 21 go through the discussion, if you can sort of

 22 signal me that you would like to speak while
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 1 someone else is speaking, I'll try to keep track

 2 of that and we'll keep it a little bit orderly.

 3 But, please, everybody participate in the

 4 discussion and anything that you think is

 5 important to comment on, please do so. We're very

 6 fortunate this morning to have all four sitting

 7 Commissioners with us. So to my right, Chairman

 8 Massad, to my left, Commissioner Giancarlo, and

 9 then Commissioner Wetjen, and Commissioner Bowen

 10 off to the right side of the table. So I think

 11 what we'll do this morning is start with some

 12 comments from the commissioners and I'll turn it

 13 over to the Chairman.

 14 CHAIRMAN MASSAD: Thank you, Randy.

 15 Good morning to everyone. Thank you for coming.

 16 We really appreciate it. The secretary is on his

 17 way, but we'll go ahead and get started. Let me

 18 begin by thanking the CFTC staff who've worked

 19 very hard to put this together, in particular,

 20 Christa and Cory and others. I really appreciate

 21 the dedication of all of our professional staff.

 22 And let me also thank Randy for continuing to
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 1 serve as committee chair. I was quite pleased

 2 when he agreed to do that. And I'm grateful to

 3 him for flying all the way from Lewiston, Idaho to

 4 get here and we appreciate his extensive knowledge

 5 and ability to keep us running on time.

 6 You know, much of what we do here at the

 7 CFTC can seem removed from everyday life. Most

 8 Americans don't participate directly in the

 9 markets we oversee. But as all of you know, the

 10 Agency's origins are in agriculture. An industry

 11 that is as basic and important to the lives of

 12 American families as perhaps any other or more

 13 than any other. Futures on agricultural

 14 commodities have been traded in the U.S. since the

 15 19th Century and have been regulated at the

 16 federal level since the 1920's. And today,

 17 agricultural derivatives remain fundamentally

 18 important even though they may just be one piece

 19 of the markets that we oversee. The ability of

 20 participants in the agriculture sector to hedge

 21 commercial exposure is critical to having a

 22 successful agricultural industry and to putting
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 1 food on the table for all of us.

 2 Now, the way I think of the CFTC's job

 3 in overseeing these markets is not simply to help

 4 participants be able to hedge effectively. We

 5 should be helping these markets thrive and in turn

 6 helping the agricultural economy thrive. And I

 7 know that strengthening the ag economy, fostering

 8 investment and new opportunities in the ag economy

 9 are important to all of you and to our special

 10 guest, Secretary Vilsack. Our ability to oversee

 11 these markets successfully requires listening to

 12 market participants and that's why we're having

 13 this meeting today. It is helpful to hear your

 14 thoughts on what we are or what we should be

 15 doing.

 16 Now, I know traveling to Washington two

 17 weeks before the holidays, which is a very busy

 18 time, is not always easy. But I know I speak for

 19 all the commissioners in saying that your presence

 20 and your participation on this committee are much

 21 appreciated. I joined the Commission about six

 22 weeks ago -- six months ago, excuse me, as did
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 1 Commissioners Bowen and Giancarlo. And the three

 2 of us have also benefited from Commissioner Wetjen

 3 whose experience helped us as we got up to speed.

 4 I'm very, very pleased that all of us could be

 5 here today. We've all been listening and learning

 6 from market participants like you. And in the

 7 last six months, we have focused on moving forward

 8 with important reforms to promote greater

 9 transparency, but also we've made it a priority to

 10 address areas where our rules may not be working

 11 as well as they should, particularly as that

 12 pertains to end-users whether they be farmers,

 13 ranchers, manufacturers, or other businesses. Our

 14 goal is not to create unnecessary burdens on

 15 commercial end-users, but to build a reliable

 16 orderly framework for oversight in which vibrant

 17 markets can thrive. And we've taken a number of

 18 steps in the last few months to that end as you

 19 may have read. Some of these actions I know are

 20 especially important to the agricultural industry

 21 such as our proposed change to the rules on

 22 residual interest and our changes to certain
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 1 recordkeeping requirements. We've also addressed

 2 other issues such as contracts with volumetric

 3 optionality, making sure publically-owned

 4 utilities can access the energy swap markets

 5 effectively, and making sure end-users can use

 6 their treasury affiliates for swap transactions

 7 and still benefit from the congressional end- user

 8 exemptions.

 9 Today, we will discuss a few topics

 10 particularly important to the agricultural

 11 markets. And we've decided upon that agenda in

 12 consultation with you. We'll first discuss how

 13 the current agricultural economy is impacting CFTC

 14 regulated markets. And then discuss how to best

 15 calculate deliverable supply for commodities, a

 16 topic that is critically important to establishing

 17 position limits. We'll also spend a little more

 18 time discussing what the Agency has been doing

 19 lately and what we should consider having this

 20 committee discuss in the future. So thank you

 21 again for being here and contributing your ideas.

 22 I look forward to a productive discussion.
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 1 DR. FORTENBERY: Thank you.

 2 Commissioner Wetjen, any comments?

 3 COMMISSIONER WETJEN: Thank you, Randy.

 4 Thank you, Chairman Massad. And welcome everyone

 5 back to the CFTC. It's been, I guess it's been

 6 just over a year since this group was last

 7 convened, so it's a pleasure to see everyone again

 8 today. I was going to make some remarks about the

 9 Secretary, but maybe I'll wait on that until after

 10 he arrives. But let me just say for now it's

 11 obviously a real honor to have him here with us

 12 today. He continues in a strong tradition of

 13 having secretaries of agriculture from the great

 14 State of Iowa, my home state. And carries on a

 15 very good tradition in that respect, so we're

 16 eager to hear what his report is on the state of

 17 the ag economy.

 18 I have some semblance of my own small

 19 report. I was back in my home state a couple of

 20 weeks ago and spent some time with some market

 21 participants back there, but also did some other

 22 visits. And one of them was visiting the World
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 1 Food Prize and the leader of that organization

 2 former Ambassador Quinn. I spent a good amount of

 3 time with him talking about the history of that

 4 organization, of course, its founder, Norman

 5 Borlaug, who I'm sure is someone that a lot of

 6 people in this room know a great deal about. But

 7 that's someone whose name I had heard before but,

 8 frankly, wasn't familiar with as much of his

 9 history as perhaps I should have been. And I see

 10 the Secretary coming in now. But I raise it

 11 because, again, it's a reminder to me that what we

 12 do here has a great impact on what's happening in

 13 the cash markets and the real physical markets for

 14 a number of different physical commodities, but

 15 perhaps most importantly, ag. And these markets

 16 are in service to the physical ones and so it's

 17 very, very important that our policies here make

 18 sense, that they're workable, and so it's

 19 important that we continue having this discussion

 20 about what it means with respect to physical -- or

 21 excuse me, bona fide hedging. And that's

 22 something that we've been spending some time on
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 1 already, but continue to work through and try and

 2 craft a reasonable definition and conception of

 3 what that means to make sure again that these

 4 markets are in service to the physical ones and

 5 remain an effective place for ag producers and

 6 others to hedge.

 7 Mr. Secretary, welcome. Great to see

 8 you again. And with that, I'll turn it back over

 9 to Randy.

 10 DR. FORTENBERY: Thank you.

 11 Commissioner Bowen.

 12 COMMISSIONER BOWEN: Yes, thank you.

 13 Good morning everyone. I am happy to be here at

 14 this meeting of the Commission's Agricultural

 15 Advisory Committee. Farmers and ranchers have

 16 been at the very heart of our commodities markets

 17 since its inception. We need to make sure that

 18 our rules and regulations remain responsive to

 19 their concerns. I look forward to hearing the

 20 views about the issues facing small farmers and

 21 ranchers and I hope my staff and I can be a

 22 resource to this community.
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 1 I also welcome the chance to discuss

 2 position limits, which is a key rule on the

 3 Commission's docket. I support the effort to

 4 reopen the comment period on this rule. And I

 5 look forward to hearing the views of stakeholders

 6 and how we can best enhance this rule. That said,

 7 it's been over a year since we reproposed this

 8 rule and it is incumbent upon us to release the

 9 final rule soon. Thank you.

 10 DR. FORTENBERY: Commissioner Giancarlo.

 11 COMMISSIONER GIANCARLO: Thank you,

 12 Randy. This Committee serves as a sounding board

 13 for the CFTC's original constituency, agriculture.

 14 Our official seal features the image of a field

 15 plow. It's a reminder that the well-being of

 16 America's agriculture must remain foremost as we

 17 put forward regulation. The importance of the ag

 18 community and ag commodity futures is reinforced

 19 by the service of this committee. And I commend

 20 Chairman Massad for its sponsorship, which gives

 21 matters before the committee their rightful

 22 permanence. It's also highlighted by the
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 1 attendance today of Secretary Vilsack, and I look

 2 forward to his comments.

 3 Earlier this year, the UN Food and

 4 Agriculture Organization issued a report called

 5 The State of Food Insecurity in the World. It

 6 makes fascinating reading. Approximately 800

 7 million people around the world today are

 8 undernourished. That is roughly one in nine of

 9 the world's 7.2 billion people. It's a staggering

 10 shortfall. Now, consider that the Census Bureau

 11 estimates that there will be another two billion

 12 people on earth in the next 30 years. How will

 13 all these people be fed? Clearly, American

 14 agriculture will play a big part in feeding the

 15 globe just as the U.S. is emerging as a

 16 self-sufficient producer and major supplier of

 17 energy to global markets thanks to American

 18 ingenuity and entrepreneurship. So also, the U.S.

 19 Is an enormous producer and supplier of food to

 20 the world thanks to the hard work and intelligence

 21 of the American farmer.

 22 American agriculture and energy
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 1 producers will respond to the rising global demand

 2 with the vital support of U.S. financial and

 3 derivative markets regulated by this Commission.

 4 Efficient and well-regulated markets will remain

 5 essential to American food production. They will

 6 facilitate return on capital for investment in

 7 equipment and technology necessary to serve the

 8 world's growing appetite. In short, America's

 9 farmers supported by America's derivative markets

 10 stand ready, willing, and able to feed the world's

 11 growing population. Yet, while these global

 12 trends are playing out, America's farming

 13 community is itself undergoing transition. Fewer

 14 and fewer Americans are becoming farmers.

 15 Approximately two percent of the U.S. population

 16 is engaged in farming necessary to feed all the

 17 rest of us. It's a challenging endeavor that

 18 involves long hours, hard work, and thin profit

 19 margins. Regulation must not increase those

 20 challenges.

 21 Today we will discuss the CFTC's

 22 proposed position limits. They should be
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 1 carefully considered and examined and, if

 2 necessary, reexamined. We will review deliverable

 3 supply numbers for ag products, some of which were

 4 calculated years ago. I'm interested to know if

 5 the data remains relevant. Congress told the CFTC

 6 to impose position limits to curb excessive

 7 speculation. Yet, the vast majority of farmers,

 8 ranchers, and other agriculture participants are

 9 not wanton speculators, let alone excessive

 10 speculators. They should be wholly excluded from

 11 the new CFTC position limits regime. They should

 12 not be second- guessed on whether hedges they use

 13 in their farm production satisfy regulators'

 14 concept of bona fide hedges. What do we know

 15 about hedging ag production? If we replace

 16 farmers' commercial risk management decisions with

 17 Washington's risk management assumptions, we're

 18 all in for a lot of trouble.

 19 In closing, we must always ensure that

 20 the rules we write are smart, efficient, and do no

 21 harm. When it comes to ag futures markets, our

 22 actions could have a larger impact than we
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 1 realize. Feeding the globe, not just next month,

 2 but 30 years from now, it's a hungry world and

 3 getting hungrier. Thank goodness for the American

 4 farmer and efficient U.S. markets. Thank you,

 5 Randy.

 6 DR. FORTENBERY: Thank you. At this

 7 point, I'm going to turn it back to Chairman

 8 Massad, also the sponsor of our committee by the

 9 way, to have him introduce our first speaker this

 10 morning, Chairman.

 11 CHAIRMAN MASSAD: Thank you, Randy. I'm

 12 very pleased to introduce our honored guest,

 13 Secretary Tom Vilsack. As you all know,

 14 throughout his career as a governor of Iowa, and

 15 now a secretary, he has been a tremendous leader.

 16 He's always focused on trying to do things to

 17 improve the lives of Americans. And I know he's

 18 particularly focused these days on how to

 19 strengthen the agricultural economy, how to

 20 strengthen rural communities, how to get more

 21 investment into that agricultural economy in those

 22 communities, how to foster innovation. And that's
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 1 why I'm particularly excited that he's here and

 2 excited to potentially have opportunities to work

 3 together because as I was saying earlier, I think

 4 of our job as not only regulating these markets so

 5 as to achieve transparency and integrity, but also

 6 to help them help the futures options and swaps

 7 markets, particularly as they pertain to

 8 agricultural commodities, continue to thrive,

 9 which should in turn, help strengthen the

 10 agricultural economy. So I'm hopeful that we can

 11 collaborate and coordinate in the future. And

 12 again, I'm very, very honored that he could be

 13 with us today, Secretary Vilsack.

 14 MR. VILSACK: Mr. Chairman, thank you

 15 very much. And to the Commission, thank you for

 16 reconstituting this Agricultural Advisory

 17 Committee and thanks to the members and to the

 18 Committee for your willingness to serve in this

 19 important role. I must say that I'm always a bit

 20 puzzled when I'm asked to speak about the state of

 21 the agricultural economy because I often want to

 22 ask the question, which agricultural economy would
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 1 you like me to talk about? Do you want me to talk

 2 about the agricultural economy that impacts

 3 roughly 200,000 producers in this country that

 4 produce 85 percent of what we grow and raise? Or

 5 do you want me to talk about the bulk and majority

 6 of American producers in this country who are

 7 finding it more difficult each and every year to

 8 be able to profit simply from farming, which

 9 requires them to seek off farm income for

 10 themselves and their family and the efforts by the

 11 United States Department of Agriculture to provide

 12 those opportunities. Or do you want me to talk

 13 about the global impact of agriculture generally

 14 and the opportunities that exist in the future?

 15 Let me touch on all three very briefly and then

 16 I'll hopefully have time for questions. And I

 17 apologize to the Chair and the Commission, the

 18 President's speaking to senior executive service

 19 personnel at a function that is a command

 20 performance and so I may have to leave just a few

 21 minutes early for that.

 22 Let me speak first and foremost about
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 1 the extraordinary work of production agriculture

 2 in this country that indeed produces for every

 3 single farmer enough food not only for their

 4 farmer and family, but also for 150 people around

 5 the world. For most commodities, we've seen a

 6 very strong and solid agricultural market the last

 7 several years. Despite the challenges in the

 8 livestock industry, we have seen a rebound

 9 recently and we have seen increased interest on

 10 the part of export opportunities in terms of our

 11 livestock industry. And with the resumption of

 12 the Farm Bill disaster programs, we've seen

 13 465,000 checks sent out to producers across the

 14 country for disasters that they had to struggle

 15 through in 2011, '12, and '13, pumping an

 16 additional $4.2 billion into the ag economy this

 17 year. Record income overall in American

 18 agriculture and record exports in the last five

 19 years. In fact, last year we reached a record in

 20 overall ag exports at $152 billion, and a record

 21 ag surplus. In other words, we sell a lot more to

 22 the world than we purchase from the world at $43
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 1 billion.

 2 We expect and anticipate another strong

 3 year this year. The current projections are

 4 slightly below the record level of last year, but

 5 that was also the prediction at this point last

 6 year, so I'm confident that if we continue to

 7 press our trade advantage that we'll continue to

 8 see strong exports, which should support commodity

 9 markets and should support those producers who are

 10 involved in production agriculture. They

 11 represent the bulk of what we produce. If you

 12 want to take to a finer point, 33,000 farming

 13 operations produce 50 percent of what we produce

 14 in this country. There are roughly 2.1 million

 15 farmers by the definition that we use at USDA,

 16 which is anyone who sells or produces more than

 17 $1,000 worth of product value. That's obviously a

 18 pretty liberal definition of farmer. But 1.3

 19 million of those people are what we refer to as

 20 residential farmers. These are folks who have a

 21 small acreage. They produce something, perhaps

 22 they sell it at farmer's market. They are not
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 1 making a great deal of money from their farming

 2 operation. In fact, many of them operate it at a

 3 loss. But they don't need the farm income.

 4 Roughly 700,000 producers are in the

 5 middle. They produce less than 250 to $300,000

 6 worth of product. They are the ones that

 7 consistently struggle each and every year. And

 8 what we have attempted to do for those individuals

 9 is to create new alternative market opportunities.

 10 So production agriculture focused primarily on the

 11 export opportunities that exist and the high value

 12 opportunities that exist in our economy. For

 13 medium-sized producers who are struggling, we are

 14 looking at ways in which we can create local and

 15 regional markets in which producers can directly

 16 negotiate with their customer. It may be a

 17 farmer's market. It may be a food hub. It may be

 18 a farm to school effort. About 200,000 producers

 19 today are participating in that direct to consumer

 20 sales opportunity. It's roughly a $7 billion

 21 industry and it's the fastest growing aspect of

 22 agriculture. The future for that market is good
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 1 and solid as well. The reality is that there is a

 2 lot of upside potential, particularly in the farm-

 3 to-school market, which is a multi- billion dollar

 4 opportunity. Roughly 10 percent of the food

 5 that's sold to schools today is locally and

 6 regionally produced. So there's a tremendous

 7 amount of upside potential there. We've seen a

 8 rapid increase in farmer's markets and food hubs.

 9 So I'm confident that we're going to continue to

 10 create market opportunities for those small to

 11 medium-sized producers.

 12 Our ability to continue to help

 13 production agriculture will depend in part on our

 14 capacity to continue to engage the world in

 15 trading relationships. That's why it's

 16 extraordinarily important in 2015 that Congress

 17 sees its way to provide the President with the

 18 trade production authority, trade promotion

 19 authority, and that we conclude at least the

 20 negotiations with reference to the Transpacific

 21 Partnership. This is a trade agreement that

 22 impacts 40 percent of gross domestic product
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 1 globally, a third of all world trade. And it is

 2 the place where there is going to be a substantial

 3 expansion of middle class consumers who will be

 4 interested in American high value products.

 5 To give you a sense of this, there are

 6 roughly 525 million middle-class consumers in the

 7 countries that are engaged in the TPP discussions.

 8 It is expected by the year 2030 that that number

 9 will exceed 2 billion. So there is a tremendous

 10 opportunity for us with the TPP. The negotiations

 11 are continuing. They are focused from an ag

 12 perspective on expanded market access,

 13 particularly in the Japanese market. The

 14 negotiations have not been easy in part because we

 15 don't have trade promotion authority. It's hard

 16 for those we're negotiating with to understand our

 17 capacity to deliver on a trade agreement if there

 18 is the risk or the possibility that Congress could

 19 seek to amend or modify the agreement. But I'm

 20 confident that we will eventually get trade

 21 promotion authority and I'm very confident that

 22 agriculture will benefit from a strong and
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 1 progressive and high standards agreement that

 2 we'll be able to negotiate through a Transpacific

 3 Partnership.

 4 We are also engaged in negotiations with

 5 the EU. Were those negotiations to conclude, we

 6 would have the largest trade agreement in the

 7 history of mankind. It would open up an

 8 opportunity for us to shrink the gap that

 9 currently exists between EU imports into the

 10 United States and U.S. exports to the EU market.

 11 It's an opportunity, an upside market opportunity,

 12 but there are significant and serious issues

 13 engaged in that trade negotiation, not the least

 14 of which is the stance on biotechnology, the

 15 stance on geographic indicators, and some of the

 16 beef and livestock issues, which are difficult.

 17 So trade promotion and trade for production

 18 agriculture, local and regional market

 19 opportunities for the small to mid-sized operator,

 20 that is the focus.

 21 The last thing I would say without going

 22 into specifics, which perhaps the questions we'll
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 1 get into, is that it is important for us to be

 2 focused on high value additional opportunities,

 3 market opportunities, for agricultural products.

 4 It is not going to be enough in the future for us

 5 to rely solely on exports and solely on local and

 6 regional food systems. It will be necessary for

 7 us to look for creative ways to use agricultural

 8 products to produce other materials and items

 9 within the economy. It's what I refer to as the

 10 bioeconomy. Most often we think of it in terms of

 11 fuel and energy and the use of crops and crop

 12 residue and woody biomass, et cetera, to produce

 13 fuel and energy. Certainly a critical component

 14 of this, but it's now expanded significantly

 15 beyond fuel and energy. It now relates to

 16 chemicals and polymers and other fabrics and

 17 fibers, all of which open up enormous

 18 manufacturing opportunities, particularly for

 19 rural areas.

 20 In order to maximize that opportunity,

 21 it's going to be necessary for us to continue to

 22 invest in infrastructure, continue to attract
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 1 credit and capital to rural America. Candidly, we

 2 simply will not have sufficient resources within

 3 the USDA to make the investments necessary, so

 4 we've got to figure out ways in which we can

 5 leverage our resources. Last July we held a

 6 conference here in Washington, the Rural

 7 Opportunity Investment Conference, where we

 8 invited 600 participants, investment bankers,

 9 commercial bankers, venture capitalists, pension

 10 plans, and others to begin the process of

 11 educating them about the deals that do exist in

 12 rural America. From that conference, we received

 13 a commitment from CoBank to invest up to $10

 14 billion in infrastructure in rural America, and

 15 the Farm Credit System put together a $150 million

 16 equity fund that will help small businesses with

 17 equity funding. We hope to be able to expand the

 18 number of those kinds of funds in 2015.

 19 So we're looking for ways in which we

 20 can use agricultural products in creative and

 21 innovative ways through partnerships and leverage.

 22 We believe that there is an unlimited opportunity
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 1 to redefine the rural economy, to create new

 2 opportunities for income for producers with waste

 3 product and crop residue and unproductive land.

 4 We think there's an opportunity to create the jobs

 5 that will support those mid-sized operators and

 6 their families with additional income. We believe

 7 we can also then make the case to young people to

 8 want to be in the agricultural business, to want

 9 to return to their small communities. And there

 10 are a substantial number of these young people we

 11 want to welcome back, particularly returning

 12 veterans. Many of them come from these rural

 13 areas and we are engaged in an aggressive effort

 14 at USDA to assist returning veterans to become

 15 beginning farmers.

 16 And so I think the future for ag is

 17 bright. I think there's solid opportunities for

 18 us to expand production opportunities with a solid

 19 income already. I think there are tremendous new

 20 opportunities to use what we grow and what we

 21 raise in rural America in more creative ways,

 22 which I think will strengthen the agricultural
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 1 economy and the rural economy. Mr. Chairman, I'm

 2 happy to answer questions. I will tell you that I

 3 am a generalist among all these experts here and

 4 specialists. If you start asking me about swaps

 5 and things of that nature, you're going to get the

 6 blank stare. But I'm happy to talk about the

 7 rural economy. I'm happy to talk about what USDA

 8 is doing and other specific questions about the ag

 9 economy.

 10 DR. FORTENBERY: Thank you, Mr.

 11 Secretary. Do we have any questions while he has

 12 some time for us?

 13 COMMISSIONER WETJEN: Randy, I have a

 14 quick question.

 15 DR. FORTENBERY: Sure.

 16 COMMISSIONER WETJEN: Great to see you

 17 again, Mr. Secretary. You'd mentioned creating

 18 new opportunities both for the younger generations

 19 as well as veterans. To what degree has the cost

 20 of land proven a challenge in those efforts and

 21 what specifically has the Department done to try

 22 and deal with that challenge?
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 1 MR. VILSACK: When the commodity prices

 2 were particularly high, it had a tendency to

 3 increase both the value of land and the rental

 4 costs of access to land. As we have seen a

 5 moderating of commodity prices, we have not

 6 necessarily seen a corresponding moderating of

 7 land values or rental values. We would anticipate

 8 and expect that there will be some adjustment to

 9 rental rates over time if these commodity prices

 10 remain where they are today, which will make it a

 11 little bit easier.

 12 We've done a couple of things in terms

 13 of access to land. We are engaged right now in

 14 consolidating some of our lab resources that we

 15 have that do research at USDA. And these lab

 16 resources are surrounded by thousands of acres of

 17 land, oftentimes. And as we close labs and

 18 consolidate labs, the law requires us to turn

 19 these lands over to the land grant university that

 20 we may be associated with, with reference to the

 21 lab. We have now begun a process of asking those

 22 land grant universities to make that land more
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 1 readily available to beginning farmers so that

 2 they have access, better access, more reasonable

 3 access to land.

 4 You know, candidly, the discussion about

 5 land and future generations often results in a

 6 conversation in farm country about estate taxes,

 7 which I think, frankly, is the wrong conversation.

 8 The reality is that hardly anybody pays estate

 9 tax. And there a multitude of ways in which smart

 10 operators can avoid the payment of estate tax.

 11 The problem is the income tax. And the reason

 12 it's a problem is that a lot of land is owned now

 13 by older farmers and farm families and those who

 14 have survived a farm member. In fact, there are

 15 three times the number of farmers over the age of

 16 65 than there are under the age of 35, so there's

 17 going to be a significant land transfer here over

 18 the course of the next couple of generations. And

 19 the reality is that we don't have any incentive in

 20 the tax code today that encourages someone like

 21 myself. My wife and I own roughly 600 acres in

 22 Iowa. When we purchased this farm and got this
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 1 farm, we purchased it at a place when it was

 2 relatively low value. It has appreciated since

 3 we've owned it nine times. Now, I could sell it

 4 tomorrow and pay a substantial amount of tax. Or

 5 I could wait to die and my wife could die and our

 6 sons could inherit this property and sell it the

 7 next day and not pay a penny in income tax because

 8 of stepped-up basis.

 9 There is no incentive in the tax code

 10 today for me to even consider the possibility of

 11 selling it to a beginning farmer, selling it to a

 12 returning veteran. So I've been encouraging

 13 members of Congress to think about this particular

 14 issue in a different way apart from sort of the

 15 tired and old conversation about the estate tax,

 16 which really is not really the burden. It really

 17 isn't. The burden is that there is no incentive

 18 right now for me or people like me, absent

 19 landowners, to even consider the possibility of

 20 selling to a young farmer or beginning farmer. If

 21 there could be a way in which that farmer could

 22 absorb our basis, transfer a basis or there was a
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 1 way in which we could be incented so at the end of

 2 the day we end up with a little more money in our

 3 pocket than we would have if we didn't sell it or

 4 if we sold it to someone whose been around for a

 5 while, there might be more opportunity for access

 6 to land.

 7 The last thing I would say is that we

 8 are focused on trying to encourage small producers

 9 to start small and build over time, which is the

 10 history of many farming operations. And so we

 11 have created within the farm credit system a

 12 Microloan program, which has been quite popular

 13 since we instituted it. Over 8,000 loans have

 14 already been made. And this allows people to

 15 start small. To use up to $50,000 in credit to

 16 purchase a piece of equipment, to rent a piece of

 17 land, to buy the supplies to start small. Now, it

 18 obviously is not going to be the kind of thing

 19 that's going to enable somebody to buy 100 acres

 20 or 1,000 acres, but it is a way in which they can

 21 get into the business. And then through a series

 22 of other steps that we've taken to make crop
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 1 insurance more readily available and less

 2 expensive and other risk management tools, we are

 3 trying to find ways in which we can encourage more

 4 folks to consider starting small and then building

 5 over time. So whether it's using our own land,

 6 encouraging other federal agencies to consider

 7 renting and leasing land, or providing land to

 8 beginning farmers, or creating new market

 9 opportunities, new credit opportunities, or

 10 advocating for changes in tax laws, we are engaged

 11 in a broad array of steps to try to help beginning

 12 farmers get rooted.

 13 DR. FORTENBERY: I think we might have

 14 time for one more question. Does anybody from the

 15 committee have a question or a comment?

 16 MR. VILSACK: I was told this was a --

 17 yeah, there we go, there's somebody in the --

 18 DR. FORTENBERY: Yes, sir.

 19 MR. PENNER: Yes, thank you, Chairman.

 20 Thank you for meeting with us, Mr. Secretary. We

 21 appreciate the comments you have made. One

 22 question I have as a wheat grower, as well a
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 1 leader of an organization that does work with

 2 wheat exports, you know, U.S. wheat is part of one

 3 of the arms that helps with export trade. With

 4 the TPP agreements, at what point do you decide

 5 whether to conclude the agreement outside of

 6 Japan's insistence on maintaining the sacred

 7 commodities that they want to have as an

 8 exception? Is there a point where you would go

 9 ahead with an agreement with the other countries

 10 or would you continue to try to negotiate with

 11 Japan?

 12 MR. VILSACK: Well, I think the goal

 13 here is to have a solid agreement. And the

 14 reality is that it would be difficult to obtain

 15 the necessary congressional approval if we don't

 16 have a solid high standard agreement. I think we

 17 are confident that continued negotiations will

 18 lead to an opportunity to have greater market

 19 access in Japan in some of these commodities that

 20 have been at issue. You know, candidly, you know,

 21 I think progress has been made on a couple of key

 22 issues with reference to the Japanese, which is
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 1 indicated to me anyway and I think to Ambassador

 2 Froman who I was with yesterday that there is

 3 still a pathway to a solid high standards

 4 agreement that includes Japan. And the reality is

 5 I think other members of the TPP negotiations,

 6 particularly those Asian members, are quite

 7 interested in having Japan be part of this.

 8 Now, here's why this is important. It's

 9 not as if this negotiation is happening in a

 10 vacuum or by itself. There are two other forces

 11 at play here that we need to be conscious of in

 12 the U.S. One is that there are contingent

 13 negotiations, one-off agreements between

 14 individual countries or small groups of countries.

 15 In fact, there are roughly 250 of these smaller

 16 trade agreements. The U.S. is only a party to 14

 17 of them. So if we are able to fashion a TPP

 18 agreement, take advantage of this huge market

 19 opportunity, that's not going to prevent other

 20 countries from reaching agreements individually

 21 that will make it much more difficult for us to be

 22 competitive in those markets.
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 1 Secondly, and perhaps even more

 2 worrisome, is that China is trying to encourage

 3 Asian countries to disregard TPP and focus on an

 4 agreement that China would help to fashion. Well,

 5 this is an agreement that would not take into

 6 consideration the multitude of issues that we're

 7 trying to address with a high standards agreement,

 8 and it would obviously not create the kind of

 9 opportunities that we're looking for from a U.S.

 10 Perspective. So we don't want to cede this

 11 opportunity to China. We don't want to be left

 12 out of agreements that will clearly take place if

 13 we can't conclude TPP. So I think we have to

 14 continue to be vigilant, especially with the

 15 Japanese.

 16 Now, having said that, we still have one

 17 other participant in this agreement who has not

 18 stepped up as much as they ought to have given

 19 what's at stake, and that's our Canadian friends.

 20 They have refused up to this point to even enter

 21 into negotiations. Candidly, I think it's ill-

 22 advised and it's unfortunate. And it may very
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 1 well be that if that attitude persists, that you

 2 could find an agreement that does exclude a

 3 country. But I don't believe at the end of the

 4 day it will be Japan.

 5 DR. FORTENBERY: Mr. Secretary, thank

 6 you very much for spending some time with us this

 7 morning. We certainly appreciate it. I

 8 understand you have other commitments, but --

 9 MR. VILSACK: Well, I apologize for this

 10 and I look forward to future opportunities. I

 11 would certainly welcome the opportunity to come

 12 back when it's convenient and appropriate from

 13 time to time.

 14 CHAIRMAN MASSAD: And let me just add my

 15 thanks also and I look forward to continuing to

 16 work together. Hopefully, there will be many

 17 opportunities where we can coordinate and

 18 collaborate. Thank you.

 19 MR. VILSACK: Thank you.

 20 DR. FORTENBERY: So we're just a few

 21 minutes ahead of schedule. Let me ask quickly

 22 before we take a break, is there any other
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 1 discussion or comments for the benefit of the

 2 commissioners that any of the committee members

 3 would like to engage in to follow-up on Secretary

 4 Vilsack's comments? Any of the commissioners have

 5 anything they would like to add or?

 6 Okay, so here's what I think we'll do.

 7 We're going to go ahead and break a few minutes

 8 early. I'll call us back into session in about 15

 9 minutes and we'll begin with our first panel. So

 10 enjoy coffee, water, introduce yourselves to each

 11 other and we'll be back in 15 minutes.

 12 (Recess)

 13 DR. FORTENBERY: Thank you. I'd like to

 14 call the AAC meeting back to order. One other

 15 quick note. As we're entering into the

 16 discussion, if you have an opportunity to

 17 introduce yourself and your organization at least

 18 when you first speak, that would be helpful

 19 probably to the rest of the committee so everybody

 20 knows who's talking and what their affiliation is.

 21 What we're going to do this morning is start with

 22 our first panel. The panelists are going to be
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 1 speaking about the implications of the

 2 agricultural economy for the CFTC and DCMs. We

 3 have two panel speakers this morning. The first

 4 is Greg Kuserk who's the Deputy Director of

 5 Product Review at the CFTC Division of Market

 6 Oversight. And then we have David Lehman, who's

 7 the Managing Director of Commodity and Product

 8 Development at the CME Group. What I'll ask is

 9 that we allow both presenters to present and then

 10 we'll open the floor for discussion. And so at

 11 this point, I'll turn it over to Mr. Kuserk.

 12 MR. KUSERK: Okay, thank you. I'm just

 13 going to get the slides up here a moment. Good

 14 morning. I'd like to begin by thanking the

 15 Agriculture Advisory Committee and the

 16 participants in today's meeting for taking the

 17 time to be here today to share your thoughts and

 18 views on the agricultural commodity markets.

 19 Also, I would just like to clarify that the

 20 comments and opinions that I share here today are

 21 my own and do not necessarily reflect those of the

 22 Commission or other staff. Meetings such as these
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 1 are important because not only does it give the

 2 public the opportunity to comment on issues of

 3 importance, but it contributes to a better

 4 informed staff of the Commission, which helps us

 5 to better carry out our mission.

 6 Listening to the Secretary earlier, I

 7 think that we can all agree that agriculture is

 8 not a static industry. There are years of good

 9 yield and high production followed by lean years.

 10 Likewise with demand, there is a constant shifting

 11 of needs throughout the world, as well as the

 12 development of new production sources and product

 13 uses. The impact of these changes on the futures

 14 market is that the Commission, as the regulator,

 15 and the exchanges, as developers of contracts,

 16 must stay current to ensure that contracts being

 17 offered to the public remain relevant and safe

 18 from a regulatory perspective.

 19 What I'd like to do is spend a little

 20 time talking about what we in the Product Review

 21 branch do with respect to the agricultural

 22 contracts and how the treatment or scrutiny that
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 1 is given contracts on agricultural commodities

 2 differs in some respects than for other

 3 commodities. In some ways, there is not much

 4 difference in the treatment of a contract on an

 5 agricultural commodity and that on any other

 6 commodity. Under Core Principle 3 of the Act,

 7 contracts listed on the DCM must not be readily

 8 susceptible to manipulation. And this core

 9 principle must be met on an ongoing basis. From

 10 the start, when a contract is listed, staff will

 11 perform a review of the contract to determine

 12 whether the contract appears to mirror cash market

 13 practices. They will look at the availability of

 14 deliverable supply at delivery points. They will

 15 look at the mix of market participants and they

 16 may look at any number of other factors that might

 17 come into play with respect to the design of a

 18 contract. And staff will talk with market

 19 participants in forums such as this or through

 20 special roundtables or hearings or public comment

 21 periods to gain the public's input on contract

 22 design.
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 1 For contracts that are already being

 2 traded, staff continues to monitor the performance

 3 of those contracts. The surveillance group here

 4 at the Commission constantly monitors contract

 5 performance as that contract goes from one

 6 delivery expiration to the next. Through that

 7 monitoring, they will note whether the cash prices

 8 and futures prices tend to converge from one

 9 expiration to the next. They will note whether

 10 there are delivery issues from one expiration to

 11 the next. If issues arrive, the division staff

 12 both product review and surveillance staff monitor

 13 the situation carefully in order to gauge whether

 14 problems appear to be isolated instances or

 15 whether they are more systemic in nature and

 16 possibly related to the design of the contract. I

 17 would also add that we regularly have

 18 conversations with the product development and

 19 market regulation staff at the exchanges. And I

 20 understand that Dave Lehman is going to share with

 21 you some of the analyses that they recently shared

 22 with us on their convergence monitoring program.
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 1 In terms of what happens when the

 2 exchange believes it's necessary to amend a

 3 contract, the Act provides different levels of

 4 scrutiny depending on the type of commodity

 5 underlying the contract, the level of activity in

 6 the contract and the complexity of the change

 7 being proposed. The figure I have put up maps out

 8 the decision tree that is followed when a contract

 9 amendment is sent to the Commission. In terms of

 10 the type of commodity involved, certain

 11 commodities, what we refer to as the enumerated

 12 commodities, are afforded a higher level of review

 13 than for other commodities. And these enumerated

 14 commodities are listed there on the left side of

 15 the slide and basically those are outlined in

 16 Section 1a(9) of the Act.

 17 So the first question that is asked is

 18 whether the amendment is for an enumerated

 19 commodity. If not, then the commodity can go

 20 forward with a 10-day certification, meaning that

 21 the exchange can certify that the amendment is

 22 compliant with the Act and Commission regulations
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 1 and it can go into effect in 10 business days. If

 2 the commodity is one of the enumerated

 3 commodities, the next question that is asked is

 4 whether there is open interest in the contract.

 5 If not, again, it can go to a 10-day certification

 6 process. If there is open interest, then the

 7 question is asked is the amendment material? In

 8 making this determination, staff typically asks

 9 whether the change would have affected market

 10 participants' decisions to enter into the contract

 11 or make or take delivery. Also, would the change

 12 be expected to change the value of the existing

 13 contracts? And would the change cause the

 14 contract to no longer be in compliance with one of

 15 the core principles?

 16 If the change is determined to be

 17 material, then the contract would need to be sent

 18 in for formal approval. Under that process, there

 19 is a 45-day period in which staff has the

 20 opportunity to review the contract for compliance

 21 with the core principles. In addition, if staff

 22 determined that the contract should not be
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 1 approved, it could only do so if the contract was

 2 found to be inconsistent or appear inconsistent

 3 with the Act or Commission regulations. Finally,

 4 if the proposed amendment was found to raise novel

 5 or complex issues that require additional time or

 6 if the application was incomplete, the Commission

 7 could extend the period by another 45 days to

 8 complete the review.

 9 The approval process would involve the

 10 most formal review of contract amendments. In

 11 that case, the amendments would be put on the

 12 Commission's website and staff would welcome any

 13 views of the public. Regardless of whether an

 14 amendment is self-certified or approved by the

 15 Commission, the exchange is always required to

 16 note any substantial opposing views that it may

 17 have received from market participants. In

 18 addition, all amendments are posted on the

 19 Commission's website and because of the continuing

 20 obligation for compliance with core principles, we

 21 would welcome any feedback on contract

 22 performance.
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 1 That's a general overview of the

 2 amendment review process and I look forward to the

 3 discussion to follow. Thank you.

 4 DR. FORTENBERY: Thank you, Greg. Dave

 5 Lehman from CME Group.

 6 MR. LEHMAN: One second here while I

 7 change slide decks. Here we go. Well, thank you

 8 very much, Chairman Massad and the committee,

 9 Christa and Cory for inviting CME to participate

 10 today. I've been asked to give a little review of

 11 how we monitor convergence in our physically

 12 delivered contracts. And then I'll also talk a

 13 little bit about corn contract review that we are

 14 in the process of now where we're reviewing the

 15 terms and conditions of our corn futures contract.

 16 So in terms of convergence monitoring,

 17 we -- as I said -- monitor convergence at either

 18 expiration or first delivery day for all of our

 19 physically delivered contracts. And the goal

 20 there, obviously, is to assure that cash and

 21 futures prices converge during the delivery

 22 period. The first step of that process is to
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 1 collect cash price data and this is somewhat

 2 difficult in some markets. In the grain markets,

 3 we do have USDA data that the Agricultural

 4 Marketing Service collects and publishes on a

 5 daily basis. And these are bid prices from

 6 consumers, from grain elevators, ethanol plants,

 7 to farmers for spot delivery.

 8 This chart is a chart of the September

 9 Wheat expiration and so just to give you an idea

 10 of the areas that we look at, the different

 11 locations. We're looking at the cash price or

 12 basis for about 90 days prior to expiration. And

 13 in (CBOT) Wheat we have multiple delivery points.

 14 We have a primary delivery point in Toledo, Ohio.

 15 We also have a delivery point in Chicago. Those

 16 are both at par. We have delivery on the Ohio

 17 River, which is at par as well, and then delivery

 18 on the southern Mississippi River. This chart

 19 doesn't have a price for southern Mississippi.

 20 But the other prices are charted here. And as you

 21 can see, the primary delivery point in Toledo is

 22 the gray, kind of light gray line. And it showed
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 1 essentially a zero basis just after the delivery

 2 period began. So the vertical black line in the

 3 chart is first delivery day, and that's the day

 4 that we look for convergence. Obviously, it could

 5 converge throughout the delivery period, but

 6 that's what we're looking at.

 7 This chart is Kansas City Wheat. The

 8 only other data point we have other than Kansas

 9 City terminal wheat prices is for the Gulf, New

 10 Orleans Gulf. The Gulf has been very strong in

 11 wheat, so that kind of dampens the price, so I've

 12 charted just the Kansas City basis with respect to

 13 KCHRW futures in this chart. And as you can see

 14 on first delivery day that we're right on delivery

 15 value.

 16 This is the Corn chart. This is

 17 September Corn. The other two charts were

 18 September Wheat as well. So these are the latest

 19 expirations that we have. Again, we're looking at

 20 Chicago. Northern Illinois River is our primary

 21 delivery territory from Chicago to Peoria,

 22 Illinois on the Illinois Waterway. And so we're
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 1 looking at the northern Illinois River cash price

 2 as reported by USDA. We're also looking at

 3 central Illinois, which is obviously a large

 4 consumption area, large production and consumption

 5 area with the processing that's located there, and

 6 then the Gulf as well. And as you can see, strong

 7 Gulf prices and that's been the case in all of

 8 these key commodities in corn, wheat, and soybeans

 9 even into the, you know, the current period

 10 through harvest where we've had a really big crop.

 11 We're still seeing very strong prices at the Gulf

 12 and strong basis values in Chicago. You can see

 13 the Chicago basis on first delivery day just maybe

 14 four cents, five cents under futures.

 15 This is the November Soybean expiration,

 16 so a little more current. Same, you know, process

 17 here, same delivery points. The difference in the

 18 (CBOT) Soybean delivery territory is it extends

 19 all the way to St. Louis on the Illinois Waterway.

 20 So we have a few additional points. Southern

 21 Illinois, we don't have a price for southern

 22 Illinois. It's not reported by USDA, but we are
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 1 again looking at northern Illinois River as the

 2 primary delivery point, Chicago, and again,

 3 looking at central Illinois. So soybean basis

 4 looks very good as well with a gray line for

 5 Chicago showing right at futures value.

 6 So what do we do with this data when we

 7 collect these cash bids and then look at the basis

 8 on first delivery day for each location and

 9 compare that to the historical average? And so

 10 historical average for us is three years, the most

 11 recent three years of data for the basis on first

 12 delivery day. If the value at any of the

 13 locations is more than two standard deviations

 14 away from that historical average, that triggers

 15 in our view a possible convergence issue. And the

 16 two standard deviation test is simply...that's a

 17 statistical measure of value where two standard

 18 deviations isn't deemed to be statistically

 19 significantly different than the average.

 20 So we look at mean and standard

 21 deviation as I said on first delivery day, each

 22 location. We calculate the confidence interval of
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 1 two standard deviations and then we measure the

 2 basis, the current basis compared to that. And if

 3 this measurement...if we have an outlier outside

 4 the two standard deviation range for two

 5 consecutive expirations, then we inform our market

 6 regulation department. If it falls outside for

 7 three consecutive expirations, then we'll begin

 8 reaching out to the marketplace. And, you know,

 9 we talk to the marketplace all the time. That's

 10 really how we ensure that our contracts are

 11 meeting our customers' needs, how we ensure that

 12 contract terms and conditions are consistent with

 13 the underlying market. So while I say we're

 14 talking to the marketplace in this situation where

 15 we have some basis weakness, this would be a more

 16 formal outreach to the market where we collect

 17 some feedback from the marketplace and get their

 18 views on what might be going on.

 19 If a majority of those that we contact

 20 feel that there are concerns with contract

 21 performance, then we would initiate a more formal

 22 survey or review industry meeting and reach out to
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 1 a wider cross-section of the market. And if we

 2 see it go away after two expirations, then, you

 3 know, that issue we're deeming to be a temporary

 4 dislocation of supply and demand or some other

 5 fundamental event.

 6 As I mentioned, the corn contract review

 7 is underway right now. And this is a standard

 8 procedure that we employ at CME Group to, as I

 9 said, ensure that our contracts are meeting our

 10 customers' needs, ensure that the terms and

 11 conditions are consistent with the underlying

 12 market. We do this periodically for all of our

 13 contracts. And the way we conduct this is we form

 14 a focus group of 10 to 20 market participants, a

 15 cross-section of buy side, sell side, a few market

 16 makers or proprietary trading firms, investors in

 17 the market. We hold individual calls or meetings

 18 with each of those focus group members and go

 19 through a set of questions about the contract

 20 terms. The (CBOT) Corn contract I think we have

 21 15 questions that we're asking. So everything

 22 from the grade, deliverable grade and
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 1 differentials for non-par delivery grades,

 2 location differentials, contract months. In this

 3 review, we asked also whether the contracts should

 4 be pricing in metric tons rather than in bushels.

 5 We're the only marketplace in the world that uses

 6 bushels. But as you can imagine, that feedback

 7 came back pretty strongly keep it in bushels.

 8 That's the market here in the U.S. and that's what

 9 the contract is based on.

 10 But anyway, we'll do these one-on-one

 11 meetings and then synthesize that feedback,

 12 summarize it, and then hold a meeting, call

 13 everyone to a joint meeting where we discuss this

 14 feedback. We don't attribute the feedback to any

 15 individual firm. It's all obtained on a

 16 confidential basis. And we discuss in a group

 17 setting then the feedback that we've heard and

 18 areas where we think there might be a need for a

 19 contract adjustment.

 20 So in the case of the corn contract as

 21 mentioned, it was comprised of commercials,

 22 brokers, proprietary trading firms, hedge funds,
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 1 index funds. The individual calls were held in

 2 August through November. The focus group meeting

 3 was held on November 19 in Chicago. The overall

 4 kind of feedback from the focus group is that this

 5 contract is working very well. It's an extremely

 6 liquid contract. Be very careful about any

 7 adjustments you make because we kind of view this

 8 as the gold standard, if you will, of agricultural

 9 contracts. However, there were recommendations

 10 for some adjustments in contract specifications

 11 and we're continuing to review that feedback and

 12 continuing to consider whether adjustments should

 13 be made.

 14 So that's the end of my presentation.

 15 And I also look forward to questions from the

 16 committee. Thank you.

 17 DR. FORTENBERY: Thank you, Dave.

 18 Before I open it up for discussion from the group

 19 on the floor, we do have a couple of committee

 20 members that have connected with us by telephone.

 21 So let me first ask if anybody on the phone has a

 22 question or a comment for Greg or Dave?
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 1 MR. COOPER: No questions.

 2 DR. FORTENBERY: Okay, thank you. So

 3 let's open it up to general discussion on the

 4 floor. Any committee members or commissioners

 5 questions or comments? Go ahead, sorry.

 6 MR. RINIKER: Do I hold this down while

 7 I talk, or...?

 8 DR. FORTENBERY: Push it once and it's

 9 on. Push it once and it's off.

 10 MR. RINIKER: Okay, Paul Riniker with

 11 the National Farmers Organization. I've got a

 12 question on the corn. The basis in our area,

 13 which is northeast Iowa, when the corn started

 14 going in reverse after the 2012 drought back up

 15 the river, how could we be pulled out of the

 16 market on a 90 cent basis drop, I believe, in one

 17 day? In two days, I believe, we were like a plus

 18 basis at the time, probably a buck ten and almost

 19 in two days' time it was almost a $2 drop just

 20 from some corn coming back up the river into

 21 Dubuque, Iowa. How is the basis regulated? It

 22 seems like the buyers were kind of setting the
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 1 basis at the time, you know, of the corn. That's

 2 the question I have. Who regulates the basis?

 3 MR. LEHMAN: Well, I'll start on that.

 4 Obviously, our contract reflects the flat price,

 5 the price of corn in Chicago and on the northern

 6 Illinois River, Chicago and Burns Harbor. The

 7 basis is a component of the market that you can't

 8 manage with our contract. We recognize that's a

 9 separate risk. And so I don't know that the basis

 10 is regulated. It's a cash price essentially. And

 11 I'll let Greg comment on that. But we have looked

 12 at listing basis contracts -- so a separate

 13 contract that would reflect the basis in a certain

 14 location. We tried three of these that were

 15 relevant to the ethanol industry in western Iowa

 16 and eastern Nebraska. This has been four or five

 17 years ago and the contracts simply weren't traded.

 18 So the basis is a part of the market that is

 19 discovered between sellers and buyers and really

 20 something that we recognize as a source of risk

 21 that can't be managed in our contract.

 22 MR. KUSERK: Yeah, and I would add,
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 1 right, that the basis isn't something that, you

 2 know, anybody in particular determines or that we

 3 would regulate. I mean, it's a function of the

 4 price discovered in the futures market versus

 5 prices discovered in local cash markets. And I

 6 think some of the slides that Dave showed he's

 7 basically, you know, looking at bases at different

 8 locations. But what you might see is at certain

 9 locations because, you know, issues really related

 10 more to the cash market might be out of line, you

 11 know, with other bases that you would see. And I

 12 guess with, you know, for us it would be, you

 13 know, it would be an issue if you -- over time --

 14 you see problems over and over again at certain,

 15 you know, at certain points, particularly if it's

 16 certain delivery points that might suggest that

 17 there's a problem. But, you know, at any one

 18 point in time, you know, it could be a problem or

 19 an issue that's related to conditions at that

 20 local cash market, you know, versus more broadly

 21 at, you know, at other cash markets.

 22 DR. FORTENBERY: Ed, did you have a
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 1 question?

 2 MR. GALLAGHER: Yes, I do. Thank you.

 3 My name is Ed Gallagher. I'm representing the

 4 National Milk Producers Federation. I am employed

 5 by Dairy Farmers of America who is their largest

 6 dairy cooperative member and for Dairy Farmers of

 7 America, I am the President of their Risk

 8 Management Division. I've got a question. It's

 9 not on corn basis. It's more for helping me

 10 better understand some things for our discussion

 11 later in the day on position limits. And so my

 12 question is when you're thinking about having a

 13 new contract or you're proposing a new futures

 14 contract, what's the process that you go through

 15 now both the CME and then the CFTC to determine

 16 what the position limits for the new contract

 17 would be and how does deliverable supply enter

 18 into that process of determining the position

 19 limit?

 20 MR. LEHMAN: Well, I think it's outlined

 21 in the attachment that was sent out, the Appendix

 22 C guideline on new product design and that an
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 1 exchange must ensure that a new product has a

 2 sufficient deliverable supply to achieve

 3 convergence. So really how we look at it, and I

 4 think there's a guideline on what a position limit

 5 must be in a new contract as well. I believe it's

 6 1,000 or 1,500 contract, something like that in a

 7 single month or all months combined. But the

 8 deliverable supply question is obviously more

 9 relevant to a spot month position limit and we

 10 look at -- what we want to ensure -- is that the

 11 delivery territory for a new contract or any

 12 contract for that matter, is located in the

 13 commercial flow, the predominant flow of the

 14 commodity that's marketed in that underlying

 15 physical market.

 16 A new contract that's relatively new for

 17 CME is our ethanol futures contract. It's a

 18 physically delivered contract. There aren't many

 19 new physically delivered contracts being launched

 20 these days. But in that case, Chicago was one of

 21 the mandated markets where ethanol was mandated in

 22 the fuel blends to meet EPA requirements and so
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 1 there was a significant flow of ethanol from

 2 plants in the Midwest area into Chicago via rail.

 3 And so that's how we constructed the delivery

 4 mechanism for that contract. It's ethanol that's

 5 delivered to Chicago. It's in 29,000 gallon units

 6 because that's what a rail car, you know, handles.

 7 And we feel that's a predominant flow in the

 8 underlying market.

 9 In the grain contracts, they were

 10 redesigned in the late nineties as the underlying

 11 markets changed from terminal storage markets to

 12 more on-farm storage and more flow markets.

 13 That's when the Illinois Waterway delivery system

 14 was adopted. And what we did there is we looked

 15 for the kind of predominant cash market at the

 16 origin of production. Some suggested the Gulf,

 17 New Orleans Gulf, which is our main export point.

 18 But that is at the destination and is limited in

 19 its flexibility for how a producer might use that.

 20 So we preferred to design the contract with origin

 21 delivery and the Illinois Waterway, Illinois River

 22 area was the most active cash market that we could
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 1 find that was homogenous and had enough capacity

 2 in terms of loading barges and receiving grain

 3 into those facilities.

 4 MR. KUSERK: Yeah, so I would add, yeah,

 5 as Dave mentioned, the guidelines we have on the

 6 deliverable supply are in Appendix C to our Part

 7 38 regulations. But, yeah, generally, I mean, I

 8 think, you know, and we'll talk about this, I

 9 guess, more this afternoon about, you know,

 10 deliverable supply and how you go about

 11 calculating it. But, you know, basically we're

 12 looking, you know, at the delivery points in terms

 13 of what's more or less freely available. So it's

 14 not just, you know, just storage capacity or

 15 capacity of pipelines and transportations, but,

 16 you know, there's guidance there on, you know, how

 17 you consider a commodity. It may be tied up in

 18 long-term supply contracts and things like that.

 19 So anyway, but, I mean, we would review

 20 when the exchange comes in. You know, they would

 21 give us, you know, their analysis of deliverable

 22 supplies. And we would look at that and try to,
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 1 you know, ascertain whether, you know, the

 2 assumptions and things that they've made are

 3 reasonable. And we would look at our, you know,

 4 our own, you know, figures, you know, whatever

 5 information we could collect. You know, that

 6 would look at deliverable supplies in areas and

 7 try to come to a conclusion as to whether the

 8 analysis that they've done is reasonable or not.

 9 DR. FORTENBERY: Curtis.

 10 MR. FRIESEN: I'm a --

 11 DR. FORTENBERY: Could you push your

 12 button, please, on your microphone?

 13 MR. FRIESEN: It's pushed. There we go.

 14 It just didn't light up. I am a small producer.

 15 Our group's the National Corn Growers, but I'm a

 16 small producer from Nebraska, a corn and soybean

 17 farmer. And I know the convergence issue came up

 18 probably because of what happened in wheat quite a

 19 few years ago. And as a hedger, I watched that

 20 with a lot of interest because I use the CME to

 21 hedge almost all of my production. So from that

 22 aspect, when I look at the long timeframe you're
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 1 going to take to study a problem with convergence

 2 if something happens and I'm hedging in a certain

 3 month, if it happens in wheat, I mean, to me

 4 that's a disaster. Then I can no longer trust the

 5 CME to be a true reflection of price and I would

 6 no longer be able to use that as a hedging tool.

 7 So I'm a little concerned about the long timeframe

 8 before you act or do anything. But maybe you've

 9 got policy in place now that that won't happen.

 10 I'm sure that's what you're trying to address.

 11 But do you feel you've addressed that situation

 12 totally?

 13 MR. LEHMAN: Well, in wheat you

 14 mentioned the convergence issues that occurred in

 15 that market and I believe we do have a change in

 16 contract specifications that addressed that issue.

 17 In that contract we've implemented a variable

 18 storage rate structure so that we measure the

 19 nearby spread relative to financial full carry and

 20 if that spread trades at 80 percent or above

 21 financial full carry during the observation

 22 period, then the storage rate is adjusted for the
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 1 next expiration. So this is something that acts

 2 very quickly and when we implemented it we had, I

 3 think, about five consecutive increases in storage

 4 rates until the market sort of self-corrected.

 5 And then those storage rates came right back down

 6 almost consecutively as well. So we're now back

 7 at the same storage rate in the wheat contract

 8 that we have in corn and soybeans.

 9 I understand your concern about the time

 10 -- you know, of us taking say two consecutive

 11 expirations of a basis abnormality, if you will.

 12 Is that too long? Maybe it is, but we want to

 13 make sure that we're not reacting to a short-term

 14 supply demand situation that really isn't

 15 something that a contract design change could

 16 address. It is more, you know, as I said, a

 17 market condition that's being reflected and our

 18 feedback that we collect from the marketplace is

 19 always to be very cautious in making contract

 20 changes. Do no harm, if you will. These

 21 contracts are used by many and we appreciate your,

 22 you know, your use of the corn and wheat contracts
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 1 to hedge your business. But we want to be sure

 2 that we're not reacting to something that is

 3 really not a contract design issue, but a

 4 fundamental market issue.

 5 CHAIRMAN MASSAD: Can I also add the

 6 following to Curtis' question? I think it might

 7 be helpful to remember there's the contract design

 8 process, which David has done a great job

 9 explaining. There's also market surveillance.

 10 And maybe Greg, or if Harry's still here or, yeah,

 11 maybe you could talk about, I mean, if we saw a

 12 significant difference even in one delivery

 13 period, we're not going to wait around for another

 14 one in terms of looking into that. Harry, do you

 15 want to talk about that a little bit?

 16 MR. HILD: Yeah, very briefly. I don't

 17 want to expand too much beyond the scope of the

 18 meeting here. But, yes, there is definitely a

 19 different function and it's the surveillance

 20 function. I'm Harry Hild. I'm with the Division

 21 of Market Oversight and I lead the group of

 22 analysts charged with surveillance on the
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 1 agricultural markets. So there's definitely

 2 different mechanisms that we do use, we can use.

 3 And it's a very, very different function. We get

 4 rather specific with the information that we do

 5 request and ask when we're in the moment of an

 6 expiration. And I don't want to get too specific

 7 on that, but I'm sure that there are participants

 8 here. We've talked to a lot of your participants,

 9 your traders, and it's definitely very situation-

 10 specific. So there are definitely tools and

 11 processes that we can follow in the surveillance

 12 function.

 13 DR. FORTENBERY: Other questions or

 14 comments for Greg or Dave or -- here we go.

 15 MR. GALLAGHER: Yeah, I'd like to, if

 16 you don't mind, while we have these two experts

 17 here, I'd like to continue to ask them a couple

 18 more questions on deliverable supply since that's

 19 going to be a big topic of our conversation. So

 20 in your discussion about new contracts, you

 21 mentioned deliverable supply. You didn't really

 22 talk about the significance of deliverable supply
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 1 and setting position limits. We're going to later

 2 talk about a formulaic process of determining

 3 position limits based on deliverable supply. And

 4 so in existing contracts, not necessarily new

 5 contracts, how often do you, the CME, how often do

 6 you review deliverable supply? When you do that,

 7 does it play a role in consideration of changing

 8 position limits? And then how often do you change

 9 position limits for different contracts based on

 10 anything?

 11 MR. LEHMAN: Well, the position limits

 12 in the grain, the legacy grain contracts as

 13 they're referred to or the enumerated contracts

 14 are federal limits. They're CFTC limits and so

 15 they don't get changed very often. It requires a

 16 petition process by the exchange to change those

 17 limits and that then involves typically an

 18 industry comment period and so those limits in the

 19 spot month rarely change. Outside of the spot

 20 month, same process, requires a petition to CFTC

 21 by the exchange to request a change and then a

 22 pretty lengthy review and comment period. So
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 1 those non-spot month limits have been updated. I

 2 believe the last time was in 2012, and this was

 3 based on analysis of both the Commission and the

 4 exchanges did on the level of open interest. And

 5 that's a different kind of formula approach. But

 6 I think, Ed, you're really talking about spot

 7 month limits more so than the single month limits.

 8 In terms of monitoring deliverable

 9 supply, we monitor that constantly. We update our

 10 own estimates annually. But we look at flows on a

 11 monthly basis and so the deliverable supply for

 12 corn, for example, is based on stocks in Chicago

 13 and Burns Harbor, which are terminal markets with

 14 large storage capacity. So we look at those

 15 stocks. We actually report that data weekly on

 16 our website. It's called the stocks of grain,

 17 weekly stocks of grain report. So the market can

 18 monitor deliverable supply from that report. But

 19 probably more importantly is what flows through

 20 the shipping stations on the Illinois River and

 21 that's data that the USDA's Agricultural Marketing

 22 Service publishes, collects and publishes. And as
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 1 I said, we look at that monthly and look at it for

 2 the month prior to the delivery month and we

 3 believe that's an accurate, you know, reflection

 4 of what could be delivered against the contract.

 5 Those are conservative, very

 6 conservative numbers because we're not measuring

 7 any of the stocks held in areas tributary to the

 8 delivery point. So, you know, grain elevators

 9 that are 25 miles to 50 miles from the delivery

 10 points typically are where the flow comes from.

 11 Now, those may be counted on the river because

 12 we're counting the flows that are actually shipped

 13 on the river. But there's plenty of grain in

 14 storage that doesn't come to the river. It may go

 15 to a processing plant. It may go to a livestock

 16 feeding operation that we aren't counting even

 17 though it's what we would consider to be tributary

 18 to the delivery points.

 19 And in the livestock contracts, we look

 20 at, you know, slaughter cattle marketed. In the

 21 dairy contracts, its USDA publishes a Class III

 22 milk price that is a national price, and so that
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 1 data is reported to USDA under mandatory reporting

 2 rules, and the prices are. The supplies we

 3 collect again from USDA data. So it's pretty much

 4 all public data. The one exception might be in

 5 soybean oil. One of the reports that USDA had

 6 published was discontinued due to budget

 7 constraints. There was a little gap there. That

 8 was picked up then by the National Oilseed

 9 Processors Association. And now I believe the

 10 USDA has restarted that report on its own. So we

 11 look at this all the time. It's part of our, you

 12 know, our continual monitoring of contract

 13 performance. And we have databases of this data

 14 that we maintain at the exchange.

 15 DR. FORTENBERY: Yeah, Chelsie.

 16 MS. KEYS: Hi, this is Chelsie Keys with

 17 the National Pork Producers Council, and I have a

 18 question for Mr. Lehman. I believe it was in

 19 August of this year the CME Group had proposed

 20 some changes to the lean hog contract. And they

 21 included lengthening the averaging period and

 22 adding additional calendar months in which
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 1 contracts would be available. And there were

 2 comments submitted by industry participants on

 3 that proposal. I just wonder if you could share

 4 where the CME is in the process of reviewing

 5 comments, making the changes, sort of status.

 6 MR. LEHMAN: Yeah, thank you, Chelsie.

 7 That's correct. This was another one of our

 8 standard contract review processes that we

 9 conducted for the lean hog contract. This is a

 10 little different contract than most agricultural

 11 contracts. It settles to an index or it's

 12 financially settled. We have two contracts that

 13 are financially settled, the lean hog index

 14 contract as well as the feeder cattle contract.

 15 And the data that again is used to create this

 16 index, we create it at CME. Our staff actually

 17 calculate the index. But the data comes from USDA

 18 from mandatory reporting by packers to USDA.

 19 There was some concern about the volatility of the

 20 index, if you will. It's a two-day average of

 21 this data that is reported by packers to USDA.

 22 And as you noted, there were some suggestions that
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 1 we linked in that averaging period to three, four,

 2 five, some even ten days.

 3 We heard very, kind of inconsistent

 4 feedback in the industry meeting that we held to

 5 review the one-on-one feedback that we collected.

 6 So we decided to do a more in-depth study of the

 7 effect of changing that index averaging period.

 8 And that study, I've seen a preliminary report,

 9 but not the final. The final report we'll have by

 10 the end of this month. We actually asked Kansas

 11 State University to do that study for us and the

 12 results are kind of surprising in that expanding

 13 the averaging period really isn't what causes a

 14 change in volatility of the index. It's more the

 15 pattern of volatility as you lead into an

 16 expiration whether volatility is increasing or

 17 declining. So as I said, those are preliminary

 18 results. And we should have a final decision, if

 19 not toward the end of this month, early next year.

 20 The other issues that we looked at, you

 21 mentioned contract months. There's some interest

 22 in listing every month, expiration month, of the
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 1 calendar. The feedback there was that that likely

 2 would not be successful, that to develop

 3 liquidity, enough liquidity to make those months

 4 efficient for a hedger would be very difficult.

 5 We have a contract month that was added in this

 6 product, the May expiration several years ago, and

 7 it still suffers from very, very poor liquidity.

 8 So we don't think that would really help the

 9 contract. What we have heard though is that

 10 perhaps listing additional option contracts on

 11 those off months, what we call serial options,

 12 that would be options on the index rather than

 13 options on the future, would be something that

 14 there's interest in. So we're exploring that

 15 further.

 16 DR. FORTENBERY: Go ahead, Mark.

 17 COMMISSIONER WETJEN: Thanks, Randy. I

 18 have a question. In some ways it might be more of

 19 an academic one, but since we have all this

 20 expertise in the room, I wanted to see if anyone

 21 had any reaction to this. It just seems like

 22 there is special sensitivity to basis risk. I've
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 1 heard a couple of producers now point to that.

 2 And so I'm just kind of wondering...why has it

 3 been the case that over history there hasn't been

 4 more of an OTC market in the ag space? And is

 5 there anything about our policies here at the CFTC

 6 that have stood in the way of that? In other

 7 words, if you've got some lender or some other

 8 financial institution with the wherewithal to do

 9 it, why haven't we seen more, I suppose, bespoke

 10 contracts made directly to producers so that they

 11 can eliminate this basis risk that they are always

 12 going to have when trading in a standardized

 13 futures product at the CME or CBOT. I'm just kind

 14 of curious why that's been so.

 15 MR. LEHMAN: Well, I'll start off and

 16 I'm sure there are many in the room that probably

 17 have a better answer to that question,

 18 Commissioner Wetjen, than I would. But as I

 19 mentioned, we did list basis swaps for, I believe,

 20 three or five regions of the corn belt that were

 21 kind of concentrated around the ethanol processing

 22 industry in, I believe, in 2009 is when those were
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 1 listed. We applied to CFTC. That was prior to

 2 Dodd-Frank. And to list an agricultural swap we

 3 had to go through a petition process and we went

 4 through that and got approval to list those. And,

 5 you know, we were very careful about how we

 6 described the regions that the basis would

 7 represent so that it had sufficient transactions

 8 so that the prices that would be used to settle

 9 that would be reflective of the market and we used

 10 DTN prices.

 11 And so this is one difference that I

 12 think is clear between the agricultural markets

 13 and the energy markets is there really aren't --

 14 USDA is such a well-known and trusted source of

 15 market information, the market really looks to

 16 their data as the, you know, the best source of

 17 data for where cash markets are, where supply and

 18 demands are. But those are bid prices. They're

 19 one side of the market. In other markets, in

 20 energy markets, there are companies that do

 21 assessments. They look at bids. They look at

 22 offers. They look at transactions and come up
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 1 with an assessment of the market. And that simply

 2 doesn't take place in the agricultural markets.

 3 It may be beginning to take place, but I think

 4 that was probably the reason for the failure of

 5 those contracts is the market perhaps didn't

 6 really trust the, you know, the indexes that were

 7 being created based on these bid prices. Again,

 8 I'd kind of open that up for others in the room

 9 here who may trade in those markets and have

 10 observations on that as well.

 11 COMMISSIONER GIANCARLO: Just a

 12 follow-up to that. In that program and that

 13 product that didn't take off, were there committed

 14 market makers to that or might that have been a

 15 product design missing ingredient?

 16 MR. LEHMAN: That's a very good point,

 17 Commissioner Giancarlo. We did not have committed

 18 market makers in those products. And that's

 19 something that we do in nearly every new product

 20 that we list we do want to have market makers that

 21 are there willing to make a two-sided market.

 22 These are pretty niche markets when you get into a
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 1 basis in western Iowa or eastern Nebraska. Where

 2 you might think it makes more sense is trading a

 3 basis contract on the New Orleans Gulf between

 4 Chicago and New Orleans, which is the primary

 5 export point or the Pacific Northwest, which is

 6 also a major export point. But again, we just

 7 haven't gotten the market support to move ahead

 8 with those kinds of products. We have big

 9 commercial firms that are very active in those

 10 markets. They do trade those markets on a paper.

 11 They trade paper in many of these markets. But

 12 again, they aren't cleared markets, you know, they

 13 haven't gotten to the scale, I guess, or haven't

 14 experienced the kind of counterparty risk that

 15 would motivate central counterparty clearing.

 16 DR. FORTENBERY: We'll take one more

 17 question from MJ and then we'll need to move on.

 18 MR. MJ ANDERSON: MJ Anderson. I

 19 represent National Grain and Feed Association and

 20 I'm employed by the Andersons out of Maumee, Ohio.

 21 I just wanted to address that question,

 22 Commissioner Wetjen. My firm in particular and
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 1 many of the firms I'm here representing will make

 2 a market in basis for producers today through

 3 2016. I'll lock-in just the basis with you. If

 4 you wanted to lock-in the flat price, we would

 5 lock-in the flat price. And that gets into some

 6 of the stuff we're going to talk in this

 7 afternoon, about what is a bona fide hedge and why

 8 I am able to offer that to producers here.

 9 DR. FORTENBERY: Okay, thank you to Greg

 10 and Dave. We're going to move on on the agenda.

 11 Our next topic this morning is going to be talking

 12 about residual interest implementation. And to

 13 get it started, we're just going to have a few

 14 comments from Tom Smith, who's the Deputy Director

 15 of Division Swap Dealer in Intermediary Oversight.

 16 And welcome, Tom. Thank you.

 17 MR. SMITH: Okay, thank you. Again,

 18 I'll just do a very brief explanation of the

 19 residual interest so that we can then move on with

 20 the discussion.

 21 Last November, the Commission finalized

 22 several rule amendments intended to enhance
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 1 protections afforded to customers and to the funds

 2 customers deposit with FCMs to margin their

 3 accounts. One of the amendments, the so-called

 4 "residual interest requirement," requires FCMs to

 5 maintain a sufficient amount of their own capital

 6 or residual interest in segregated accounts to

 7 cover any futures customers' accounts that are

 8 under margined. Operationally, an FCM is required

 9 to identify customer futures accounts that are

 10 undermargined and compute the total amounts of the

 11 under margin amounts as of the close of business

 12 each day. The FCM also is required to ensure that

 13 it maintains its own capital or residual interest

 14 in the customers' segregated accounts in an amount

 15 sufficient to cover the aggregate under margin

 16 amount of the customers by the residual interest

 17 deadline. The residual interest deadline is

 18 defined under the rule as the time of the next

 19 business day of the daily settlement cycles of the

 20 derivative clearing organizations that clear the

 21 respective futures positions.

 22 In adopting the rule, the Commission
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 1 established a phased-in compliance period. First,

 2 the compliance date for FCMs and market

 3 participants was set at November 14, 2014, one

 4 year after publication of the final rules.

 5 Second, the rule provides that the residual

 6 interest deadline for futures shall be 6:00 p.m.

 7 Eastern time on the next business day pending the

 8 publication of a report by Commission staff

 9 addressing the practicability for both FCMs and

 10 market participants of moving the 6:00 p.m.

 11 Eastern time deadline to the time of the DCO's

 12 daily settlement cycle or some other point in

 13 time.

 14 The rule requires staff to seek public

 15 comments and to hold a public roundtable regarding

 16 specific issues to be covered by the report and

 17 the report is required to be published for public

 18 comment by May 16, 2016. Lastly, the rule

 19 provides that absent Commission action after the

 20 publication of the report, the residual interest

 21 deadline will change on December 31, 2018 from

 22 6:00 p.m. eastern time to the time of the DCO's
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 1 daily settlement cycles.

 2 Subsequent to the issuance of the final

 3 rule, staff of the Division of Swap Dealer and

 4 Intermediary Oversight issued an interpretation in

 5 response to request for guidance from FCMs and

 6 market participants. This interpretation

 7 effectively provides that an FCM may credit

 8 customers' accounts upon the FCM's initiation of

 9 an ACH withdrawal from the customers' bank account

 10 provided that the customer has granted the FCM

 11 authority to initiate ACH withdrawals. The

 12 interpretation provides that an FCM is not

 13 required to wait until the ACH transaction clears

 14 the FCM's segregated bank account before recording

 15 a credit to the customers' trading account. The

 16 interpretation is consistent with the Division's

 17 previously issued and long-standing review

 18 regarding the recording of checks deposited by

 19 customers upon the receipt of the check by the

 20 FCM.

 21 The Commission also has proposed

 22 amendments to the residual interest requirement.
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 1 The proposal was published on November 14, 2014 in

 2 the Federal Register for public comment and would

 3 amend the residual interest requirement to provide

 4 that the residual interest deadline will only be

 5 changed through a formal Commission rulemaking

 6 after the publication of the staff report.

 7 Accordingly, if adopted as final, the residual

 8 interest deadline would remain 6:00 p.m. eastern

 9 time pending Commission action via a rulemaking.

 10 The proposal will not alter the requirement for

 11 staff to host a public roundtable or issue a

 12 report by May 16. The comment period on the

 13 proposed amendment closes on January 13, 2015.

 14 DR. FORTENBERY: Thank you. Comments,

 15 questions, discussion? Yes, sir.

 16 MR. FRIESEN: I was at the committee

 17 meeting the last time we met about a year ago and

 18 I guess I'll just reiterate the same comments I

 19 made then. I'll go back to my example. I'm a

 20 small producer, roughly 1,000, 1,100 acres, which

 21 would be an average-sized farmer. And currently

 22 with the farm program the way it is and crop
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 1 insurance products out there, if I'm willing to

 2 use the futures market to do a lot of hedging in

 3 the cycles that we're in, I can sometimes be

 4 hedging two, three years out if I see an

 5 opportunity out there. And this helps provide

 6 that safety net we've been asking for.

 7 But what you've done now by including a

 8 bona fide hedger in this, I don't think we've ever

 9 caused a problem with a bankruptcy of an FCM or

 10 anything like that. And we're a small hedger, but

 11 at the same time, I probably could have, I would

 12 say 200,000 to 400,000 bushels of coverage out

 13 there, which is a substantial amount. But my FCM

 14 now wants to ask me for an ACH for direct access

 15 to my checking account and I'm not going to grant

 16 it. I will quit using futures positions. I will

 17 find some other way to hedge my grain. You've

 18 driven me out of the market if you continue to do

 19 this. I still think the trade plus two, I can

 20 move money in that amount of time. Sometimes I'm

 21 out of cell contact or whatever. They've had

 22 trouble reaching me, but I will not grant them
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 1 access to my checking account. It just gives

 2 someone an opportunity to steal more money from me

 3 then in the future, and I won't let that happen.

 4 I'll find a different way to hedge.

 5 So I guess the impact to the small bona

 6 fide hedger, whether he's a producer like me, or

 7 an end-user, a bona fide end-user, any costs you

 8 incur on them gets passed down to me. So in the

 9 end, I would hope that you look at true hedgers

 10 differently than you do the speculative market.

 11 And I have nothing against speculators. I

 12 appreciate it when they drive the market too high.

 13 I appreciate it when they drive it too low. I'll

 14 take advantage of either one. So it's not as

 15 though I want them punished or anything, but I

 16 think they should be treated differently than a

 17 bona fide hedger. Thank you.

 18 MR. SMITH: I understand your point.

 19 And I think though we have to take into

 20 consideration what the statute provides. And the

 21 statute does provide that a futures commission

 22 merchant can't use the funds of one customer to
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 1 margin or guarantee positions of any other person

 2 but that customer. So if there is an under

 3 margined account at the FCM, they need to cover

 4 that in one way or the other. They need to either

 5 use their own capital, which is what is sort of

 6 required by this rule, or try to call and receive

 7 margin funds from the under margined customer. As

 8 you know, that's sort of the intent of this rule

 9 as well.

 10 DR. FORTENBERY: Excuse me, Tom, I think

 11 Scott and then we'll come to you. Go ahead.

 12 MR. CORDES: Thank you. Scott Cordes,

 13 I'm here with the National Council of Farmer

 14 Cooperatives. I'm employed by CHS, and probably

 15 more importantly for this discussion is, I head up

 16 our futures commission merchant, CHS Hedging. I

 17 want to commend the Commission and thank you for

 18 taking some steps to make some amendments to the

 19 rule. The way it was originally written headed

 20 towards a T-plus-1 was going to be a real problem

 21 for the industry. We were looking at it with our

 22 customers whether it's farmers, ranchers, or local
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 1 cooperatives that are mainly hedgers, we're going

 2 to have to prefund their margin accounts, and that

 3 was going to be a real problem. Probably

 4 addresses a little bit to the gentleman to my left

 5 about, you know, where's that money, where that

 6 access is, and you want to have some say in that

 7 to make sure that your funds are good.

 8 The proposal to change the T-plus-1,

 9 we're living in that environment today. I would

 10 tell you so far it's going pretty well. It's

 11 probably something we can live with. I would like

 12 to see some more results when we get a major

 13 market move. Most of our hedgers recently since

 14 it's been implemented, the markets have been going

 15 down or sideways. I'd like to see what happens

 16 when we go from $5 corn to $7 corn to see what

 17 stress we put on our systems, et cetera. But

 18 currently, where we are today, is working, but I

 19 think we still need some time to bear this out. I

 20 know we've taken the approaches, our firm, that we

 21 have to deal with a lot of folks that still deal

 22 with checks, ACHs. We know we probably are going
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 1 to put some more capital in our balance sheet to

 2 handle some of that. We'll work through that. We

 3 figure that's part of our mission of who owns us

 4 to go through. But certainly this is a topic

 5 that's going to need to see some further review as

 6 we go, but I want to commend the Commission at

 7 least for taking a positive step. And let's take

 8 a time-out here and not push towards T-plus-0 so

 9 quickly.

 10 DR. FORTENBERY: Tom.

 11 MR. KADLEC: Thank you. Tom Kadlec

 12 representing the Futures Industry Association, and

 13 my day job is I'm the President of ADM Investor

 14 Services. I echo Scott's comments and appreciate

 15 the dialog with the Commission on a multitude of

 16 issues. The ACH interpretation, I have worked

 17 with Tom Smith and it is a good solution. We have

 18 very high standards in terms of the way we

 19 communicate with hedgers and it's very

 20 well-documented. That's part of the CFTC dialog.

 21 We are working through the challenges of T-plus-1

 22 and I'm very interested in being a part of the
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 1 CFTC study on this. It's imperative that we

 2 calculate the costs and the effects on all of our

 3 customers.

 4 I would ask Tom, and we had the benefit

 5 of talking a little bit in the dialog, what

 6 additional tools should we contemplate, could we

 7 use, to move money efficiently through the system

 8 to meet the current standards that have been

 9 passed? If you have ideas, I think we should

 10 continue to look and explore for things like ACHs,

 11 whatever they may be. And I also think we should

 12 work with ACHs with the banking associations to

 13 better document. There's a claw back provision,

 14 for example in ACHs, that I get concerned about as

 15 an FCM. How can we mitigate that effect? But

 16 anyway, thank you for having this meeting.

 17 MR. SMITH: Yeah, I think we'd be very

 18 interested in continuing looking at what other

 19 alternatives there are for customers to finance

 20 their futures positions and, you know, again we're

 21 trying to address risks that can build up if any

 22 particular customers are under margined, we want
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 1 that customer to be called for margin and we don't

 2 want other customers to be exposed to that

 3 customer's potential shortfall.

 4 DR. FORTENBERY: Scott, let me just

 5 check-in real quick with our phone participants

 6 and see if there's a question from there. Okay,

 7 Scott, go ahead.

 8 MR. CORDES: Just a follow-up and you

 9 talked about protecting customers' monies and if I

 10 had my comptroller here she could explain it

 11 better. But there's a provision in the rule right

 12 now or how it's implemented that we also have

 13 customers with excess funds. They would like

 14 those back as quickly as possible. I think today

 15 if we send that out inter-day it counts against us

 16 on some calculation. And I don't quite know

 17 exactly how it all works, but I just want to bring

 18 it up as something that needs to be reviewed. So

 19 we talk about protecting customers. We've got to

 20 think about it in both directions. We've got to

 21 be able to send the money back to the people it

 22 belonged to, yet not say we got to hold that up
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 1 for a day because it's going to impact us on a

 2 regulatory item.

 3 MR. SMITH: I believe the issue you're

 4 referring to is there is a requirement that before

 5 funds are returned to customers each day that the

 6 firm must do its daily segregation calculation.

 7 That needs to be done by 12:00 noon, demonstrate

 8 that they are in compliance that not only do they

 9 have enough funds to meet any under margined

 10 customers, but they actually have sufficient funds

 11 in segregation to meet all of its obligations to

 12 every single customer. That's one of the key

 13 protections of customer funds. It's not only, you

 14 know, you...basically every FCM needs to have

 15 enough funds in the account at all points in time

 16 to pay back every customer if they all walk in the

 17 door at one point. So I think that's the issue

 18 there. The intent is that we want to make sure

 19 that there is sufficient funds at the firm before

 20 withdrawals are made.

 21 DR. FORTENBERY: Other questions or

 22 comments? Okay, Tom, thank you very much for your
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 1 time. We have a few minutes before lunch so I'm

 2 going to do something, we probably should have

 3 done at the beginning, but we were a little bit

 4 time constrained early on, and that is to have

 5 everyone introduce themselves and the organization

 6 they're with and then we'll break for lunch. So

 7 are the folks still on the phone?

 8 MR. COOPER: Yes. This is Geoff Cooper

 9 with Renewable Fuels Association.

 10 DR. FORTENBERY: Thank you, Geoff.

 11 Doris, you want to start with us?

 12 MS. MOLD: I'm Doris Mold. I represent

 13 American Agri-Women and I have my own consulting

 14 business and I'm a dairy farmer in addition.

 15 MR. ELFMANN: Ed Elfmann with American

 16 Bankers Association.

 17 MR. MAY: Bill May with the American

 18 Cotton Shippers Association representing cotton

 19 merchants in the U.S.

 20 MR. J. ANDERSON: John Anderson with the

 21 American Farm Bureau Federation.

 22 MR. WELLMAN: Steve Wellman with the
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 1 American Soybean Association, farmer from

 2 Nebraska.

 3 MR. KOTSCHWAR: Lance Kotschwar

 4 representing the Commodity Markets Council.

 5 MR. BOONE: Robbie Boone representing

 6 the Farm Credit Council Farm Credit System.

 7 MR. KADLEC: Tom Kadlec, Futures

 8 Industry Association representing them and

 9 President of ADM Investor Services.

 10 MR. SCANLAN: Mark Scanlan, Independent

 11 Community Bankers of America.

 12 MR. HOUGH: Clay Hough, International

 13 Dairy Foods Association.

 14 MR. DIERLAM: My name is Bryan Dierlam.

 15 I work with Cargill and I'm here today

 16 representing the International Swaps and

 17 Derivatives Association.

 18 MR. KALB: Brendan Kalb representing the

 19 Managed Funds Association.

 20 MR. STRONG: Steve Strong representing

 21 NAEGA. My day job is with Bunge and maybe some of

 22 the people that have some basis gyration
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 1 questions, we can get together at lunch.

 2 MR. BOROUGHS: Ben Boroughs with the

 3 North American Millers Association.

 4 MR. LUTTRELL: Ed Luttrell with the

 5 National Grange.

 6 MR. PENNER: Paul Penner, farmer from

 7 Kansas, President of the National Association of

 8 Wheat Growers.

 9 MR. KOVANDA: Joe Kovanda representing

 10 National Cattlemans Beef Association,

 11 Vice-President Bartlett Cattle Company, Division

 12 of Bartlett Grain.

 13 MR. LEE: Ron Lee representing the

 14 National Cotton Council. I'm a cotton farmer and

 15 ginner in Georgia.

 16 MR. CORDES: Scott Cordes representing

 17 the National Council Farmer Cooperatives and I'm

 18 also President of CHS Hedging.

 19 MR. FRIESEN: Curt Friesen from

 20 Nebraska, producer representing National Corn

 21 Growers.

 22 MR. RINIKER: Paul Riniker, National
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 1 Farmers Organization, a cattle farmer, and I raise

 2 corn in northeast Iowa.

 3 MR. CLARK: Zack Clark with National

 4 Farmers Union.

 5 MR. MJ ANDERSON: MJ Anderson with the

 6 Andersons, representing National Grain & Feed

 7 Association.

 8 MR. GALLAGHER: Ed Gallagher

 9 representing the National Milk Producers

 10 Federation, and I'm the President of DFA Risk

 11 Management.

 12 MS. KEYS: Chelsie Keys representing the

 13 National Pork Producers Council.

 14 MR. WHITE: Trevor White representing

 15 the National Sorghum Producers.

 16 MR. RADINTZ: Jim Radintz, USDA Farm

 17 Loan Programs.

 18 MR. LANCLOS: Kent Lanclos, USDA Risk

 19 Management Agency.

 20 DR. FORTENBERY: Thank you very much.

 21 I'm Randy Fortenbery from Washington State

 22 University. For the committee members we will be
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 1 having lunch up on the ninth floor. Your white

 2 badge is your ticket to get on the elevator.

 3 There'll be some security folks that'll escort us

 4 up to the ninth floor. For everyone else who's

 5 interested, we'll be reconvening at 1:15. So at

 6 this point we'll take a break for lunch. Thank

 7 you.

 8 (Recess)

 9 DR. FORTENBERY: Okay, I'm going to go

 10 ahead and call the meeting back to order as we

 11 kind of find our seats. This afternoon we're

 12 going to take up the topic of position limits. So

 13 we have a panel of two speakers, Christa

 14 Lachenmayr, who's with the Division of Market

 15 Oversight with CFTC, and Steve Sherrod, who's a

 16 Senior Economist with the same group. So as this

 17 morning, let's let them both make their formal

 18 remarks and then we'll open it for discussion and

 19 questions. So with that, Christa.

 20 MS. LACHENMAYR: Thanks, Randy,

 21 Chairman, and Commissioners. And I'd also like to

 22 thank the Committee members. Can you hear me?
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 1 Okay. I'd also like to thank the Committee

 2 members. I know that some of you have traveled a

 3 great distance to be here today and we really

 4 appreciate that. Before I start, I'd like to

 5 offer the standard disclaimer that the views

 6 discussed in the presentation are my own and do

 7 not necessarily reflect those of the Commission or

 8 its staff. So we thought it would be worthwhile

 9 to set up the discussion for deliverable supply by

 10 briefly summarizing how the term is defined by the

 11 Commission and its significance. And then the

 12 Commission's last public and in-depth experience

 13 with calculating deliverable supplies.

 14 The most concise summary of the

 15 significance of deliverable supplies that I've

 16 come across is from a Federal Register -- sorry, I

 17 guess I speak at a frequency that is not well

 18 heard. Okay, the most concise summary of the

 19 significance of deliverable supplies that I've

 20 come across is from the Federal Register Notice

 21 issued November of 1997, after the Commission

 22 notified the Chicago Board of Trade that it needed
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 1 to amend the terms of its corn and soybeans

 2 futures contracts. At that time, we said, "[T]he

 3 Commission believes that in order to meet the

 4 statutory requirements of tending to prevent or

 5 diminish price manipulation, market congestion, or

 6 the abnormal movement of a commodity in interstate

 7 commerce, a futures contract should have a

 8 deliverable supply that for all delivery months on

 9 the contract is sufficiently large and available

 10 to market participants that futures deliveries, or

 11 the credible threat thereof, can assure

 12 appropriate convergence of cash and futures

 13 prices.

 14 So there are two things that I'd like to

 15 highlight from that quote, which relate to the

 16 presentations from this morning about convergence

 17 and contract design. As this group in particular

 18 knows, most short positions do not result in

 19 actual physical delivery but it's the potential

 20 for arbitrage -- buying cash and selling futures

 21 -- that bring those markets together and that is

 22 the critical link between the two markets. So at
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 1 a very basic level when we're talking about

 2 deliverable supply, if we don't have an adequate

 3 amount, then that potential for arbitrage, or that

 4 credible threat of delivery, doesn't exist or, at

 5 the very least, it's compromised.

 6 Secondly, I'll give a little more detail

 7 about this in the next slide, that for any futures

 8 contract settled by physical delivery, the terms

 9 and conditions as a whole inform the levels of

 10 deliverable supply, the quantity, the quality, the

 11 other specifications. And that level needs to be

 12 sufficient to ensure compliance with Core

 13 Principle 3, that a DCM shall not list a contract

 14 that is susceptible for manipulation. And that

 15 goes back to Greg's presentation of this morning.

 16 So as Greg also talked about, and Dave Lehman, the

 17 Commission's guidance for DCMs for calculating

 18 deliverable supply is located in Appendix C to

 19 Part 38. We distributed that as a part of the

 20 info packet and the questions in advance of the

 21 meeting. It's also posted on the website for more

 22 information.
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 1 So not to be confused with supply,

 2 generally, deliverable supply is the quantity of a

 3 commodity that could potentially be made available

 4 for sale on a spot basis at current price levels

 5 at the contracts' delivery points. There are a

 6 number of qualifiers that you see on the slide,

 7 which I won't go into detail about because you'll

 8 notice that they are also remarkably similar to

 9 the items that we review when we're looking at

 10 contracts for compliance with Core Principles 3

 11 and 5. But I'd like to highlight two of those

 12 qualifiers.

 13 First, that the commodity can be

 14 reasonably expected to be readily available to

 15 short traders and saleable by long traders and

 16 also the clause that says barring abnormal

 17 movement in interstate commerce. The first

 18 qualifier relates to long standing Commission

 19 policy to exclude the amount of the commodity

 20 committed for long-term supply agreements in the

 21 calculation of deliverable supplies, which goes to

 22 the "readily available" part. The second
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 1 qualifier relates to the exclusion of quantities

 2 of the commodity that are not economically

 3 obtainable or deliverable at prevailing price

 4 levels. So that also goes to the "abnormal

 5 movement of interstate commerce."

 6 I'd like to point out that the guidance

 7 in the calculation of deliverable supplies is

 8 located in the Appendix under the heading for

 9 contracts settled by physical delivery, but we

 10 also look at deliverable supplies when reviewing

 11 cash settled contracts. And then also there's no

 12 commodity-specific guidance in the Appendix C.

 13 So finally, I'll just note that I have a

 14 lot of other supplemental materials from both the

 15 rulemaking and then also the 1996-98 review of

 16 deliverable supplies for corn and soybeans, but we

 17 can get into those if necessary and they're

 18 available for your information. Thank you.

 19 MR. SHERROD: Thanks, Randy. Under the

 20 Commission's December 12, 2013, Position Limit

 21 Notice of Proposed Rulemaking, an exchange listing

 22 a core referenced futures contract must supply the
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 1 Commission with an estimate of deliverable supply.

 2 The exchange must describe the methodology it used

 3 and they have to include any statistical data

 4 supporting the estimate. An exchange may use the

 5 guidance regarding deliverable supply in Appendix

 6 C of Part 38 that Christa's discussed, but they

 7 don't have to. The Commission proposed to verify

 8 whether an exchange's estimate of deliverable

 9 supply is reasonable, and if so, to use that

 10 estimate to reset the levels of spot month limits.

 11 If not, the Commission could rely on its own

 12 estimate of deliverable supply. The CME Group

 13 provided estimates of deliverable supply to the

 14 Commission and the Commission proposed that as an

 15 alternative in setting the initial spot month

 16 limits under the proposal. The exchanges would be

 17 required under the proposal to submit an estimate

 18 of deliverable supply to the Commission at least

 19 every two years. And I look forward to getting

 20 the committee's input on the proposal.

 21 DR. FORTENBERY: Okay, we're going to

 22 open it up for discussion. Maybe what I'll ask
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 1 this afternoon is if you think about it, you can

 2 turn your name tag upright so I can try to keep

 3 better track of the order and who would like to

 4 participate. I have trouble seeing some of the

 5 lights and some of the lights don't work. Let me

 6 first start, I think he has a time constraint, so

 7 let me see if Geoff is on from the Renewable Fuels

 8 Association, see if he has any questions or

 9 comments first. Okay, I guess not. So we'll open

 10 it to the floor. Discussion, questions, comments?

 11 Yeah, MJ.

 12 MR. MJ ANDERSON: MJ with National Grain

 13 and Feed. Maybe kind of a broad statement and we

 14 can discuss from there. But to our members what

 15 is really critical is the convergence of the cash

 16 and futures. We believe that all the exchanges

 17 have a vested interest in making their contract

 18 successful and they understand that that

 19 convergence issue is a requirement for that

 20 contract to be successful. If we're going to use

 21 deliverable supply, there's talk about updating

 22 them and we would agree if you're going to use
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 1 that deliverable supply, you might as well use the

 2 most current. But we also strongly endorse the

 3 CFTC to allow these exchanges to maintain the

 4 ability to set limits less than what may be

 5 recommended by deliverable supply. Some of the

 6 issues, one how do you have an orderly exit from

 7 the whole month limit to a spot month limit. And

 8 then if you increase spot month limits, are you

 9 increasing speculation in a time where you really

 10 need to be focusing on the convergence of cash and

 11 futures, which is what the commercial entities are

 12 trying to do in that timeframe.

 13 DR. FORTENBERY: Any response from the

 14 panel or from the Commissioners? Yes, sir.

 15 MR. KOTSCHWAR: Randy, I'd just like to

 16 second what MJ said. The Commodity Markets

 17 Council, we're, you know, very much in favor of

 18 updating the estimates of deliverable supply, but

 19 we too want to make sure that the primary purpose

 20 of these contracts, is to make sure convergence

 21 continues to happen. So we definitely need the

 22 exchanges to continue to have the ability to go
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 1 lower than whatever number we come up with. So

 2 that's critical.

 3 DR. FORTENBERY: Go ahead.

 4 MR. CLARK: Yes, for the MFA, I think

 5 taking a step back, we'd like to see some more

 6 clear guidance on what exactly what goes into the

 7 deliverable supply computation. For example, we'd

 8 love to see some guidance on the inclusion of

 9 remotely located commodities in the deliverable

 10 supply computation or whether certain conditions

 11 must first exist before the inclusion of those

 12 commodities are appropriate. We believe this

 13 would provide some clarity. Also, we'd welcome

 14 some guidance on barge traffic and would request

 15 that the Commission confirm that commodities

 16 transported to a delivery point and priced within

 17 a specified percentage of the prevailing spot

 18 price are appropriately included in any DCM's

 19 estimated deliverable supply calculation.

 20 DR. FORTENBERY: Go ahead, Ed.

 21 MR. GALLAGHER: Ed Gallagher with

 22 National Milk Producers Federation. Seems that
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 1 from the earlier discussion from Dave Lehman, that

 2 at least for the CME that they've got a process in

 3 place already that does a pretty good job of going

 4 out looking, finding information to use for

 5 deliverable supply. Maybe they're not going as

 6 far as some of us would like in some cases, but

 7 maybe they haven't done that because they haven't

 8 necessarily seen the need to do that. And so I

 9 guess as I look at it from an outsider looking in,

 10 what I'm impressed with, the way commodity

 11 regulation seems to have worked so far, is that

 12 there's really strong public, private partnership

 13 between the CFTC and the exchanges to provide some

 14 kind of oversight of what's going on in the

 15 commodity and the derivatives industry. And I

 16 think that's a real strength that we need to

 17 lever.

 18 And so I think with the contacts that

 19 the exchanges have made, I know with my

 20 interactions with them at the CME, they have

 21 people that have gained a strong expertise in the

 22 dairy industry. And that they have the contacts,
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 1 they know the people to reach out to to, have

 2 discussions with, to determine what else should be

 3 included in deliverable supply. And I think a

 4 real opportunity here isn't necessarily recreating

 5 everything at the CFTC. Obviously to create

 6 oversight and to encourage, but I think the CME

 7 has the expertise and the ability and the contacts

 8 to be able to go through and determine the

 9 deliverable supply and I would encourage that

 10 process to continue.

 11 DR. FORTENBERY: Yes.

 12 MR. CORDES: Scott Cordes again. A

 13 question I've got for you and maybe I should have

 14 asked Dave too when he's here. One of the

 15 thoughts I have is you get into deliverable supply

 16 and probably specifically if you look at like corn

 17 along the Illinois River, is there factors in

 18 there for load out capacity at all? Because one

 19 of the thoughts I have is you can have a lot of

 20 supply, but if you can't get it onto the river,

 21 you know, how does that impact especially when you

 22 get into the spot months, just curious if that's
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 1 part of the discussion or not?

 2 MS. LACHENMAYR: Yeah, I think that goes

 3 a little bit to the contract design element and

 4 review process. We look at, you know, three years

 5 of data and we look at anomalies with

 6 transportation and logistics and do a full cash

 7 market study that also informs our review of

 8 deliverable supply. So that's absolutely a good

 9 point. I think, you know, when there are

 10 logistical issues, those need to be

 11 well-understood and incorporated into our review.

 12 MR. STRONG: Yes, Scott, you know that

 13 there are minimum load out requirements by the

 14 delivery houses. The reality is echoing some of

 15 these other comments that the CME is a very good

 16 custodian of liquidation of their contracts and of

 17 convergence. It's certainly been my experience

 18 that you don't load out corn to load a boat. But

 19 yet, the process of this convergence drives prices

 20 slightly above delivery equivalent and at that

 21 point, the cash market responds. And the cash

 22 market gives you what you need, not necessarily a
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 1 certain level of deliverable supply that turns

 2 into a Panamax of corn, so.

 3 DR. FORTENBERY: Are there -- yes, go

 4 ahead.

 5 MR. KOVANDA: Joe Kovanda. Just to echo

 6 a little bit off of what Stephen was saying there.

 7 I think that creates a challenge, frankly, in

 8 measuring deliverable supply in physically settled

 9 contracts because if the convergence in the

 10 contract is working accurately, you'll never be

 11 able to practically experience the amount of

 12 deliverable supply that's available if it were

 13 not. Now, in a cash settled contract, you're

 14 observing that every day, every expiration because

 15 it goes into the quantification of the financial

 16 settlement. But I think it's prudent on the CFTC

 17 and the DCMs to continue to monitor that

 18 deliverable supply. In particular, I speak for

 19 the cattle market, a commodity that is perhaps

 20 more dynamically changing in quality and

 21 specifications than other commodities here today.

 22 This is something that needs to be monitored not
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 1 just like was discussed earlier this morning on

 2 the, you know, two expirations of problems in that

 3 process, but on an ongoing basis, how dynamically

 4 that commodity changes and how it might affect the

 5 listing of very deferred months in a livestock

 6 market that, well, in particular to put some meat

 7 to the bones of what I'm talking about, I mean, we

 8 have record livestock prices today and a

 9 dramatically, they're not record input feed grain

 10 prices, but they're dramatically lower. It's

 11 almost a structural shift in shock in industry and

 12 it's having implications on the quality and the

 13 size of the underlying physical commodity. The

 14 contract design and the position limits need to

 15 reflect that and be monitored as such.

 16 MR. DIERLAM: I have a question. The

 17 deliverable supply is used as a benchmark to set

 18 limits, exchange limits. However, from an ISDA

 19 point of view, the limits that are established in

 20 the proposed position limits rule are used to set

 21 limits across all the positions that a particular

 22 trader may hold be it across exchanges or
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 1 potentially in swaps. Could you shed any light or

 2 make any commentary or insight into how

 3 deliverable supply calculation might go into how a

 4 specific trader or firm may hold positions across

 5 categories of instruments and how it works in that

 6 context?

 7 MR. SHERROD: So, Bryan, I think you're

 8 asking about our general approach?

 9 MR. DIERLAM: Yes, specifically, or yes,

 10 generally.

 11 MR. SHERROD: Generally, okay, let's

 12 deal with the general one first. The Commission

 13 for a long time has in its guidance to the DCMs

 14 suggested that for a cash settled contract, use

 15 the same analysis to deliverable supply that you

 16 would as if it were physical delivery. So look at

 17 the quantity that's trading in the normal cash

 18 market that's underlying your cash settlement

 19 index and use that same benchmark, the upper

 20 benchmark we use, the outer limit in setting the

 21 spot month limit as 25 percent of that estimate of

 22 deliverable supply. So that's kind of at the high
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 1 end.

 2 And what we've observed and what a

 3 number of commenters have observed, is that in

 4 practice the exchanges often set their spot month

 5 limits at less than 25 percent of estimated

 6 deliverable supply. And certainly under the

 7 proposal, the Commission has provided that leeway

 8 so that an exchange need not set their limit at

 9 the federal level, which would be based on 25

 10 percent of deliverable supply. They can set it at

 11 what lower level they're experience and judgment

 12 leads them to believe is appropriate for

 13 maintaining an orderly market and meeting their

 14 objectives in their own marketplace. So maybe you

 15 could ask a follow-on question if you want more,

 16 Bryan. Are you good? Okay.

 17 MR. GALLAGHER: Yeah, let me just a

 18 quick follow- up question on that. So there'll be

 19 a separate limit for financially settled

 20 instruments and separate limit for physically

 21 settled instruments or is there one limit

 22 combining both?
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 1 MR. SHERROD: Ed, it's a good question.

 2 I've answered this a lot so hopefully this will be

 3 clearer this time. We have our federal limits

 4 just like we do in the existing nine agricultural,

 5 but those only apply to futures contracts. Under

 6 the proposal, the federal limits would apply to

 7 what we call referenced contracts. So whether

 8 it's a futures or a swap that has the same

 9 characteristics, we add them together for purposes

 10 of the federal limit. Outside of the spot month,

 11 in the non-spot limits, the Commission's proposal

 12 is to net everything together so a long swap and a

 13 short future would be netted together outside of

 14 the spot month. Within the spot month, the

 15 Commission's proposal is to have two separate

 16 limits. One for physically delivered contracts

 17 and another for a cash settled contract. And a

 18 little bit of the motivation behind that is if I

 19 had a very large long position in a physical

 20 delivery futures contract and a short position in

 21 a cash settled contract, if I netted those in the

 22 spot month, I would have a zero position. And yet
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 1 I might be demanding as a long futures position

 2 holder more than could possibly be delivered. So

 3 that's the federal level.

 4 At the exchange level where we have a

 5 federal limit, the exchanges would need to have a

 6 limit. And so in the current system where the

 7 exchanges currently have a limit on a physical

 8 delivery contract or a cash settled contract, they

 9 would also continue to have those limits at a

 10 level no greater than the federal level.

 11 MR. GALLAGHER: Follow-up? So currently

 12 then there are no limits on swap transactions,

 13 right?

 14 MR. SHERROD: The only limits the

 15 Commission has on swap transactions were those

 16 that were a result of the 2008 Farm Bill on the

 17 significant price discovery contracts, right? And

 18 a number of those have been shifted from swaps

 19 trading to futures, right?

 20 MR. GALLAGHER: Okay, and so in many

 21 cases then we're going from really an infinite X

 22 on swaps to something less. I guess my question
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 1 is has there been convergence issues because

 2 there's been infinite X on swaps?

 3 MR. SHERROD: In many respects, we

 4 haven't known the answer until we started

 5 receiving the Part 20 data. As we've said

 6 publically again and again, we've had problems

 7 with the quality of the Part 20 data, but it's

 8 getting better and we appreciate the efforts of

 9 the industry to give us that better data. Now

 10 that we can get an insight day-to-day into that

 11 data, we can start to answer those questions. But

 12 literally, Ed, we haven't known about a trader's

 13 position in a cash settled contract that's a swap

 14 unless we've gone out with a special call after

 15 we've seen some sort of price anomaly. So the

 16 answer is we're looking at it. I don't have

 17 something to share with you right now.

 18 DR. FORTENBERY: Scott.

 19 MR. CORDES: I would say for our

 20 membership, probably of greater concern than what

 21 the actual position limits are is the definition

 22 around the bona fide hedge. And I know we've got
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 1 comments on the record and I'd like to reiterate

 2 them that that needs to be right. We're more

 3 concerned about what a hedge exemption is and how

 4 that fits. And one of the biggest ones we have a

 5 hardest time with that's not included today is

 6 these unpriced contracts. We think there's very

 7 valid reasons why they should be considered a

 8 hedge and part of that calculation. And I just

 9 want to bring that up to reemphasize it. I think

 10 that needs to continue to be looked at and get

 11 better defined as this rule gets finalized.

 12 MR. SHERROD: Do you want to say a

 13 little more to help us out?

 14 MR. CORDES: Yeah, typically, you know,

 15 probably the biggest example we've got is if

 16 you've got a basis sale on and you probably

 17 haven't priced the futures because you may be it's

 18 a long period of time. You got counterparty risk

 19 you might be worried about so you want to price

 20 that as you get closer to actual shipment. Well,

 21 as you start getting in those delivery months and

 22 you want convergence to come together, you need to
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 1 maintain your positions on how that is. So it's

 2 that calculation as we go.

 3 MR. SHERROD: Is that something that you

 4 would be engaging in say a calendar-month spread

 5 to lock-in your basis?

 6 MR. CORDES: It could be a

 7 calendar-month or it might just be on the trading

 8 months that are taking place. You know, it might

 9 be a situation where you've got a sale for

 10 something June that you're managing your risk in

 11 the May corn contract as it works its way towards

 12 that delivery period.

 13 DR. FORTENBERY: Yes, go ahead.

 14 MR. STRONG: So before we leave, I sense

 15 we want to move off the deliverable supply issue,

 16 but before we do, I guess most of NAEGA's members

 17 are most familiar with the CME Group for the

 18 agricultural commodities. And I guess everything

 19 I'm hearing here is going to still preserve the

 20 ability of CME to determine their own limits. And

 21 I think initially when we saw that many of our

 22 members saw the 25 percent of deliverable supply,
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 1 some members immediately projected in their head,

 2 oh my gosh, it's automatically going to go up

 3 limits, and in particular spot month limits, which

 4 we thought was really going to make the job of the

 5 market and the CME harder in determining or in

 6 creating convergence. So as long as your

 7 intentions are to preserve the CME's or the local

 8 exchange's ability to have a lower limit that they

 9 deem that the market can handle and they're

 10 customary and can manage correctly, NAEGA's is in

 11 support of a review of deliverable supply if it

 12 creates a potential higher federal limit that we

 13 know the exchange can self-manage.

 14 MR. SHERROD: Right, that's correct.

 15 The Commission's proposal only sets a cap, an

 16 upper limit, on what the exchange can set.

 17 DR. FORTENBERY: Other questions,

 18 comments? We have, sir, yeah, go ahead.

 19 CHAIRMAN MASSAD: Steve, did you want to

 20 ask any other particular questions that you had on

 21 the standard of review or anything like that or

 22 what do you want to do?
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 1 MR. SHERROD: So I do have a set of

 2 questions that the Chairman's office sent out to

 3 the committee members. And, you know, I don't

 4 want to put anyone on the spot today, but to the

 5 extent during the comment period that's open until

 6 I think January 22, if you would think about them

 7 and provide some input if you don't have any

 8 thoughts today.

 9 I did want to circle back to one of the

 10 comments from one of the committee members about

 11 what if we can move a commodity into delivery

 12 position? And it's long been our view that if a

 13 commodity can be moved into delivery position in

 14 the normal flow of commerce, it can be included in

 15 deliverable supply. We did have some commenters

 16 though that asked some -- or made some comments

 17 that left me scratching my head. We had some

 18 commenters that suggested permitting a commodity

 19 that's not currently of deliverable quality on a

 20 futures exchange, about whether that should be

 21 included in deliverable supply if the exchange

 22 would allow an EFP including during the spot month
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 1 with that non-deliverable commodity. I don't know

 2 if any of you have faced that in the agricultural

 3 space, but I'd be interested in anyone's views.

 4 MR. KOVANDA: I read that in your

 5 advance and that does not seem logical at all.

 6 I'm not sure why the EFP was connected to that.

 7 But if the commodity is not the correct

 8 specification to deliver, it should not be a part

 9 of deliverable supply. It's going to negatively

 10 affect convergence. Maybe someone else can

 11 enlighten me on how it may, but it just doesn't

 12 make logical sense to me.

 13 MR. SHERROD: Well, that's good that I'm

 14 not alone in being a bit confused. I could

 15 understand if a commodity could be readily

 16 converted through a quick process and placed in a

 17 deliverable position that that might make some

 18 sense. But for a commodity that's never able to

 19 be converted, I'm kind of at a loss.

 20 MR. KOVANDA: So, Stephen, it could be

 21 that way, but as we all know there's probably a

 22 cost in converting that. So it's not the same
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 1 product because there's a cost involved in getting

 2 it to a deliverable spec. So it's going to create

 3 a wider potential basis for that to become a part

 4 of the deliverable supply. That's the way I would

 5 look at it.

 6 MR. SHERROD: Well, we touched on a

 7 little earlier the issue of physical delivery

 8 versus cash settled contracts. And I think Bryan

 9 asked the question about what's our approach and

 10 our approach traditionally has been generally to

 11 use the same methodology for a cash settled

 12 contract as for a physical delivery contract. And

 13 I wondered if anyone had any thoughts about for a

 14 particular contract, whether the deliverable

 15 supply estimate for setting a spot month limit is

 16 the reasonable approach to use.

 17 MR. GALLAGHER: I guess it all depends

 18 on the number you come up with. How's that for an

 19 answer? So the main markets that I trade in would

 20 be cash settled futures. And the particular one

 21 that's open for this proceeding is Class III, and

 22 it's a USDA formula that determines the Class III
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 1 price, the futures, end of the day settling

 2 against that Class III price. There doesn't seem

 3 to be any convergence problem. And just because

 4 of the commodity in and of itself, tanker loads of

 5 milk that is highly perishable, I don't think

 6 there's any way to inventory that to have any type

 7 of an impact on trying to manipulate that market.

 8 And so I think it's a little bit -- I guess where

 9 I'm going with this is that and I've commented on

 10 this and probably you've all read my comments, is

 11 that be careful not to do a one size fits all

 12 regulation because each commodity has some nuance

 13 that's slightly different. And certainly, you

 14 know, Class III would be one that's out there, and

 15 I'm sure there are others that at the end of the

 16 day it needs to work for the bona fide hedgers.

 17 And, you know, at the end of the day if something

 18 happens that creates a need to take positions off,

 19 I think you create volatility at the end of the

 20 day in that market that isn't necessary.

 21 And then leading on to another topic

 22 that was one that you asked about, or in talking
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 1 about this, this comes to my mind, is if you do

 2 every two years you look at deliverable supply and

 3 determine if you need to make a change to it. And

 4 if you do, then how much time before the change

 5 occurs. And I'd be interested in what others

 6 would have to say about this. But I'm sure that

 7 there are lots of strategies that have been put in

 8 place that if you make the change maybe too soon,

 9 that it may have an impact on trading that may

 10 create some volatility in the markets that would

 11 be because of regulation as opposed to trading

 12 strategies. And so I don't know what the right

 13 answer is. If the right answer is to wait until

 14 you've gone through enough months or you

 15 preannounce the new position limit levels that may

 16 impact what the CME does or the other exchanges

 17 do. You preannounce them so that they're far

 18 enough off in the future that it doesn't impact

 19 contract months where there's a lot of open

 20 interest.

 21 MR. SHERROD: So, Ed, if I understand

 22 you right, when we look at the USDA price series,
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 1 that's the Class III milk formula that's

 2 underlying the market for cheese and whey and -- I

 3 never get it right -- dry powdered milk? Non-fat

 4 dry milk. I have my aide on the side. When we

 5 look at that type of a contract, we look at the

 6 cash market transactions and the size of what's

 7 flowing, actually going into the index. And we

 8 absolutely recognize that milk's not storable, but

 9 the cheese and the whey and the non-fat dry milk

 10 are storable and they are actively traded. And so

 11 we look at the size of that as the estimate of the

 12 supply. And so it makes good sense that we try

 13 and circle back to the exchange that lists those

 14 contracts and that's exactly what we did at the

 15 Chairman's direction. We solicited input from the

 16 exchanges to give us those estimates and the CME

 17 responded. And for those in the wheat industry,

 18 Minneapolis, for example, said we don't need to

 19 update our estimate. The current spot month limit

 20 accurately reflects 25 percent of the estimate.

 21 So we do look back to the exchanges.

 22 And I also look to the committee to
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 1 anyone else in the written process about this

 2 issue that Ed says preannounce in advance and how

 3 far in advance. For those of you with trading

 4 strategies, it would be useful for us to know how

 5 far in advance. We've also asked the question of

 6 if the last three years have been a relatively low

 7 production cycle relative to the longer historic

 8 norms, because we only ask for three years' of

 9 data, should maybe the Commission have a

 10 discretion not to drop the federal spot month

 11 limit, particularly if the exchanges are already

 12 at that level? So I ask that question of the

 13 group. Does anyone have any thoughts about

 14 whether the Commission should kind of stick on the

 15 way down and wait and see for another cycle of two

 16 years whether we really need to lower the federal

 17 level?

 18 DR. FORTENBERY: Any response to that?

 19 MR. DIERLAM: I think I might respond.

 20 And I think in many of the conversations, you

 21 know, leading up to coming here today, I think

 22 that to the extent that you can allow the
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 1 exchanges to evaluate their markets and the

 2 commodities and the contracts in conjunction with

 3 the industry and market participants, I think that

 4 that's the place you want to be. I think that as

 5 was testified to earlier today, you know, they're

 6 watching these markets very regularly as is the

 7 CFTC. I think that simply, you know, going

 8 through a mechanical process of changing them

 9 every three years just because -- regularly to

 10 update it, just because -- the supply and demand,

 11 you know, may have gone up or down, isn't

 12 necessary regularly and routinely if the markets

 13 are working appropriately. I think that that's

 14 what the first slides were placed up there to

 15 demonstrate is basis occurring? Is convergence

 16 occurring? And if it's occurring, then that's a

 17 good sign that the markets are working

 18 appropriately. That doesn't mean you don't look

 19 at them. But I don't think that the limits need

 20 to be adjusted, you know, every month or every

 21 contract month three years out. I mean, I think

 22 that...are the exchanges doing their job? Are you
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 1 doing your job watching the exchange do their job?

 2 And I think if that's the case, then that's a good

 3 place to be.

 4 MR. GALLAGHER: So following up, a

 5 question for you, Bryan. So would you suggest

 6 something that they don't necessarily have to make

 7 a change at all, but just regularly look at all

 8 the factors, see if the markets are working well,

 9 and if they are, regardless of what the

 10 deliverable supply calculation is, you might just

 11 leave them alone?

 12 MR. DIERLAM: Yeah, I think that what

 13 we've heard today is that the deliverable supply

 14 calculation is updated on an annual basis and

 15 that, you know, a key component to whether or not

 16 the markets are working right is are you seeing

 17 convergence? And I think the question Steve asked

 18 is whether or not the actual position limits would

 19 be adjusted by some amount during that delivery

 20 during that spot month period or even during the

 21 outer month, and would that happen during some

 22 period, would the CFTC require that or would the
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 1 exchanges do that? And would we be notified

 2 through comment? Would there be a comment period?

 3 Would there be some public notification? I think

 4 that's the question being asking is how often

 5 would the position limits be changing?

 6 And I think that it's not that would you

 7 be subject to a situation where the position

 8 limits are constantly changing as crop size gets

 9 bigger or smaller. I think what you want to know

 10 is are the markets working and is there

 11 convergence? I mean, conceivably could you end up

 12 in a scenario where you've got a different limit

 13 on different contracts throughout the, you know,

 14 over the course of three years, could you have

 15 different limits on different months if you were

 16 constantly changing them? I mean, the question

 17 is, is the market working based upon the current

 18 data? I don't think you want to go through a

 19 process where you're constantly adjusting limits

 20 within marginal changes of marginal crop changes,

 21 unless I'm missing something.

 22 MR. GALLAGHER: I guess by my question,
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 1 maybe I'm suggesting maybe there's an alternative

 2 approach. Congress didn't mandate that we do 25

 3 percent of deliverable supply, correct? That's

 4 sort of CFTC decided maybe that's a good way to do

 5 it, right? So we're not bound by something

 6 legally necessarily. So would it make sense then

 7 that to start the process, you use your formula 25

 8 percent of deliverable supply. Every two years,

 9 you look at deliverable supply. You go through

 10 all the analysis, maybe even a little bit more in

 11 depth than what Dave was explaining earlier. And

 12 then you look and see has there been an issue? Do

 13 you foresee an issue? And if there hasn't been an

 14 issue, you don't necessarily change position

 15 limits and you don't tie it that, every two years,

 16 it's a recalculation of 25 percent of deliverable

 17 supply. It's just the starting point and then you

 18 adjust it as you need to if there's an issue.

 19 MR. SHERROD: So I guess I go back,

 20 yeah, to Bryan's point which is the ISDA comment

 21 letter about whether there would be an opportunity

 22 for notice and comment when the Commission resets
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 1 every two years. It's proposed basically just to

 2 have it on autopilot, if you will, that the

 3 Commission would have limited discretion. It

 4 could set the levels of the limits for spot months

 5 at 25 percent of the estimate of deliverable

 6 supply. And that's pretty much the default under

 7 the proposal that would just be reset. So what I

 8 hear you saying is, you know, maybe if there's a

 9 bad series of crops for a few years, just leave it

 10 where it is, if convergence is working. And give

 11 the Commission that discretion not to tighten down

 12 if there doesn't appear to be a problem. Is that

 13 fair?

 14 MR. DIERLAM: I think that's correct,

 15 yes.

 16 MS. LACHENMAYR: Can I just clarify? I

 17 wanted to remind you that it's "not greater than"

 18 25 percent is the current Commission guidance. So

 19 it's not necessarily an automatic 25 percent of

 20 deliverable supply. And kind of what I'm hearing

 21 Bryan and Ed say kind of goes to our question

 22 about additional factors that the Commission
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 1 should consider when they're looking at the

 2 estimates of deliverable supply and coming up with

 3 a spot month speculative position limit. So I

 4 draw your attention to that question.

 5 MR. MJ ANDERSON: To that question

 6 specifically, I think we would argue continue to

 7 look at convergence. Then continue to rely on the

 8 exchange. Again, Steve made the point, they're

 9 watching the orderly liquidation of these

 10 contracts. But it's the convergence that's the

 11 biggest thing for all of us.

 12 MR. J. ANDERSON: I want to echo what MJ

 13 is saying here. I'm John Anderson with American

 14 Farm Bureau. It's hard for me to overstate how

 15 serious convergence issues are to our members.

 16 When there are convergence problems, it's a

 17 serious problem and I guess the one caution I

 18 might have is I'm sort of hearing and maybe I'm

 19 misunderstanding, but I'm sort of hearing what

 20 sounds like a really backward looking process to

 21 set these limits. And so I agree that monitoring

 22 convergence, which is a real time concept, I think
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 1 is really important to make sure that we don't get

 2 behind the curve and end up with a problem that

 3 we're seeing too late.

 4 MR. KOTSCHWAR: I want to refer back to

 5 something that Scott mentioned a little bit

 6 earlier when he was talking about we also want to

 7 discuss a little bit more about bona fide hedging

 8 here. I think there is a connection here with the

 9 deliverable supply. I think, you know, everybody

 10 would expect if we update deliverable supplies,

 11 we're probably going to be probably increasing in

 12 many cases, the position limits. And that's fine.

 13 So that's probably going to give us some higher

 14 speculative limits. At the same time, we have

 15 some concerns about if we need to be -- so we're

 16 going to be increasing supply at the exchange. We

 17 also need to be thinking about increasing demand.

 18 And that's all about bona fide hedging. We've got

 19 a lot of legitimate risk reducing activity that we

 20 use the exchange for right now. It's not

 21 currently being treated as bona fide hedging here

 22 and, you know, if you look down the road if you're
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 1 only increasing the supply and we're keeping

 2 demand limited there, a lot of unintended

 3 consequences could occur. We could get away from

 4 the exchange being, you know, the market of last

 5 resort and have it become, you know, basically an

 6 origination market. We don't want that. You

 7 could be driving supply to delivery. We probably

 8 don't want that either.

 9 So we need to make sure that as we're

 10 looking at deliverable supply, we look at all the

 11 other things that make a market function correctly

 12 too at the same time. So just keep that in mind.

 13 We'd like to see these move together. Dodd-Frank

 14 was four and a half years ago. Anticipatory

 15 merchandising was added to the Act four and a half

 16 years ago. We're still waiting. We're still

 17 waiting for that part of the Commission action.

 18 So it's really important to keep these together,

 19 we think.

 20 MR. MJ ANDERSON: I'd just like to pile

 21 on to that too. You know, the strictest

 22 interpretation that could exclude a lot of
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 1 commonly used transactions that our industry's

 2 taking every day to hedge risk, and that in effect

 3 allows us better pricing to producers, many of

 4 which are represented here by a lot of you.

 5 Further on to Lance's point, if we're

 6 limited by that, we may move more to cash markets

 7 and move away from futures markets. Commissioner

 8 Giancarlo mentioned in his opening comments the

 9 concept of that food security. The forward market

 10 has a lot of ability to send price signals to

 11 producers to grow the crop that returns the most.

 12 If you limit participation in the futures market,

 13 you may blur some of those signals to the producer

 14 of what he needs to be growing, which in turn can

 15 lead to a supply disruption down the road. So we

 16 really encourage you to take a close look at that

 17 bona fide hedge and we'll certainly submit more

 18 written comments as well.

 19 MR. DIERLAM: John, on the bona fide

 20 hedge, I couldn't agree with Lance and MJ anymore.

 21 On the bona fide hedge piece I know hundreds of

 22 comments have been submitted on the bona fide
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 1 hedge piece; many firms, many trade associations

 2 on the importance of recognizing that many of the

 3 transactions that firms have long used should be

 4 considered bona fide hedges by the Commission as

 5 you finalize this position limits rule. There are

 6 terms that are in that we now commonly use that

 7 didn't exist a few years ago.

 8 Lance used the phrase a merchandising

 9 hedge, or anticipatory merchandising hedge. That

 10 really wasn't used a few years ago until it kind

 11 of came up in the context of post Dodd-Frank. We

 12 now talk about irrevocable bids or offers. You

 13 know, those were terms that we didn't necessarily

 14 use before, but we had to begin talking about them

 15 in the context of Dodd-Frank. Those really are

 16 types of transactions that are used commonly in

 17 the industry to bid to farmers or to offer

 18 products to customers that create risk on the part

 19 of commercial enterprises as we conduct our

 20 operations. They're risk. We try to hedge that

 21 risk and we need to be able -- that should be

 22 considered a bona fide hedge by the CFTC when you
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 1 finalize this rule. That's real risk that has

 2 real consequences if it can't be managed. And

 3 like MJ said, if you can't manage it in the

 4 futures market, it's going to have to be managed

 5 in the cash market. And that's real consequences

 6 to farmers, real consequences to customers,

 7 ultimately, real consequences to consumers.

 8 DR. FORTENBERY: Any other questions or

 9 comments for Stephen or Christa?

 10 COMMISSIONER GIANCARLO: Steve, perhaps

 11 you could just remind those in the room the logic

 12 behind the 25 percent deliverable supply. Why

 13 that figure? Why not 30 percent? Why not 20

 14 percent? What was the thinking behind that?

 15 MR. SHERROD: Well, like most things in

 16 position limits, these things have been around

 17 since the thirties. And at the time when limits

 18 were initially adopted, I think they picked if I

 19 remember the numbers right, 3 million bushels,

 20 which with a 5,000 bushel contract, is 600

 21 contracts. It sounds a lot like the spot month

 22 limit today in certain agricultural commodities.
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 1 It turns out it's kind of a rule of

 2 thumb that's worked over the decades since the

 3 thirties, but the Commission has long articulated

 4 in its rulemakings that spot month limits and

 5 non-spot month limits, it's not an exact science.

 6 There's a range of what may be a reasonable

 7 position limit level. And the Commission has

 8 provided back in the old days we used to call it

 9 Guideline Number One. It's now the Appendix C to

 10 Part 38. We provided that guidance to the

 11 exchanges on what would be kind of the outer

 12 bounds of making something big. So a spot month

 13 limit, you know, when you deal, I don't know if

 14 you guys know this better than I probably, but I

 15 think 3 million bushels of wheat is probably about

 16 a four-mile long train full of wheat. It's not a

 17 small amount.

 18 So we look at these amounts as guidance

 19 to the exchanges on where they should be on the

 20 top end. In realistic terms, four traders that

 21 were all speculators could have 25 percent of the

 22 market of the deliverable supply. They would be
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 1 at that spot month limit. And if those four

 2 traders acting independently all demanded

 3 delivery, they would be taking all the estimated

 4 deliverable supply and that certainly would be

 5 potentially a problem. At that point, you know,

 6 prior to that occurring, both the exchange

 7 surveillance staff and the CFTC surveillance staff

 8 would be on the phones behind the scenes with

 9 those traders asking about their intentions,

 10 asking about what they intend to do with that

 11 commodity if they do take delivery. Because as

 12 we've said before, just because someone is below a

 13 spot month speculative position limit, does not

 14 make that a defense against a charge of attempting

 15 to manipulate or corner the market. So that's a

 16 little bit of the flavor of how we use these as

 17 guidance to the exchanges and how in the

 18 Commission's proposal, we've used these formulas

 19 to set kind of the upper bounds for the federal

 20 limits, with leeway for the exchanges to set

 21 tighter levels.

 22 COMMISSIONER GIANCARLO: And do we have
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 1 any current analysis that these levels originally

 2 established in the 1930's are still valid for

 3 contemporary markets?

 4 MR. SHERROD: No, I think that's a good

 5 question. I think the proof of what's a good

 6 level is looking at the current exchanges where

 7 they set their spot month limits. And the current

 8 exchange spot month limits outside of the federal

 9 limits, generally are set at levels much lower

 10 than 25 percent. Some of them are quite tight.

 11 As Greg mentioned earlier, the process for an

 12 exchange to change a rule is simply to submit it.

 13 We review it. And so if the exchanges were

 14 wanting to increase those levels other than the

 15 nine federal limits, they certainly could do that

 16 at any time. And the fact that they haven't is

 17 some evidence that the exchanges believe those

 18 were appropriate levels.

 19 COMMISSIONER GIANCARLO: Just lastly,

 20 Steve, when we then review those, what methodology

 21 do we use to review those limits?

 22 MR. SHERROD: Similar to the process we
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 1 used in Table 12 in the reproposal. We will look

 2 at the size of the traders in the marketplace.

 3 Historically, we've looked at the size of the

 4 traders to see whether traders are extraordinarily

 5 large relative to other traders. The surveillance

 6 department in the Division of Market Oversight is

 7 in fairly regular contact with the very largest

 8 traders to have an understanding of what's the

 9 purpose of their positions, whether they're

 10 hedging fixed-price sales contracts, fixed-price

 11 purchase contracts, or whether they're simply

 12 engaged in speculation. If those large traders

 13 appear to be kind of clustered together,

 14 historically we've looked at that and said, no one

 15 of those large speculative traders looks

 16 extraordinarily large relative to the others. So

 17 in Table 12 in the reproposal, we gave a flavor of

 18 that because we gave sizes of those speculative

 19 traders or hedgers, without identifying one or the

 20 other, to get a count of how many people were over

 21 certain percentages of the proposed limit levels.

 22 COMMISSIONER GIANCARLO: Thank you.
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 1 MR. GALLAGHER: I've got another

 2 position limit issue that is embedded in the

 3 embedded volumetric optionality issue. And I

 4 appreciate the CFTC's coming out with a new

 5 proposed rule helping to clarify the seven steps.

 6 Speak up still? Sorry. I appreciate the -- oh,

 7 that is better isn't it? I appreciate the CFTC

 8 coming out clarifying the seven steps. But I am

 9 concerned that there could be an interpretation

 10 difference at the end of the day where a marketer

 11 may go through the seven steps and absolutely 100

 12 percent feel that that transaction that they have

 13 is an excluded forward contract. And later on

 14 maybe a CFTC review comes in and says, "you know

 15 what, you're wrong for these reasons," and my fear

 16 is we lose that argument. And if we had, we

 17 frequently we've had a lot of growth in our

 18 forward contracting business with dairy farmers

 19 understanding that the risk in the marketplace is

 20 so great that they absolutely have to find ways to

 21 forward price their product in order to make sure

 22 they'll make a profit and stay in business.
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 1 We've had tremendous growth in use of

 2 our programs where we're at a point where at least

 3 once a year it seems like I'm calling the CME

 4 suggesting they need to relook at our position

 5 limit again, our hedge exemption again because I'm

 6 afraid we're going to go over it. And so if we're

 7 in a situation like that and for whatever reason

 8 what we thought was an excluded forward contract,

 9 was actually an agricultural trade option, and

 10 somehow that then got added into our position

 11 limit, we would, our members, we'd have to stop

 12 doing stuff for our members that would

 13 economically harm them. And so my request would

 14 be that in those cases, that if it does get

 15 changed to an ATO, that it doesn't get added to

 16 our position limit.

 17 DR. FORTENBERY: Any other discussion?

 18 Yes, go ahead.

 19 MR. KOVANDA: There was a question in

 20 the advance packet about the estimation of supply

 21 committed to long-term contracts and how you've

 22 relied on confidential business information. I
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 1 wondered if you could give us an example of that

 2 idea there and how it impacts the measurement of

 3 deliverable supply.

 4 MR. SHERROD: So the guidance the

 5 Commission has provided, the baseline, is if

 6 something's subject to a long- term contract, it's

 7 out of the estimate unless the exchange can

 8 provide evidence that the people that are on the

 9 long side of the cash transaction regularly make

 10 that available to the shorts in the derivative

 11 markets or would make it available at a fair

 12 value. Those are the discussions that the

 13 exchange would have in the first instance with the

 14 commercials in the cash market. And so the

 15 commercials would be revealing confidential

 16 information about the extent to which they're

 17 engaged in long-term contracting and of that

 18 amount, what portion of it would they have leeway

 19 to remarket, if you will.

 20 The Commission's approach then would be

 21 to verify through doing cash market interviews

 22 with some of the same people that what the
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 1 exchange has done was a reasonable process to

 2 estimate first the long-term contracting amount

 3 and then of that amount, what's readily made

 4 available in the secondary market after someone's

 5 contracted for a long term. I know that sounds

 6 sort of circular, but that's just the process.

 7 MR. KOVANDA: So to follow-up, how do

 8 you measure then that it is available? That it

 9 would be available by the owners of those

 10 long-term contracts?

 11 MR. SHERROD: Right, so that's simply a

 12 representation that the person on the purchasing

 13 side of the long-term contract has made back to

 14 the exchange or back to the Commission staff that

 15 are verifying the exchange's estimate.

 16 MR. KOVANDA: So you're taking their

 17 word for it?

 18 MR. SHERROD: Generally, we expect when

 19 people are providing us with information, it's

 20 truthful.

 21 DR. FORTENBERY: MJ.

 22 MR. MJ ANDERSON: I want to bounce back
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 1 to the bona fide hedge. I can't overemphasize how

 2 important that is to us. So just as the

 3 Commission moves towards a final rule, we'd really

 4 encourage you guys to continue to read the

 5 examples that have been submitted and continue to

 6 engage industry members, all of whom would love to

 7 spend time with you and walk through those

 8 examples. Again, we think that's critical to our

 9 industry to hedge risk and also to provide the

 10 most competitive bids we can to the agricultural

 11 industry.

 12 CHAIRMAN MASSAD: Thanks, Ed. I

 13 appreciate that and I know others here feel the

 14 same way. As I've said publically, we want to

 15 make sure we get it right. We're very aware of

 16 the importance of enabling participants to engage

 17 in bona fide hedging. And that's why we are

 18 spending a lot of time digesting the comments and

 19 we'll certainly contact you if there are things in

 20 someone's comment that we aren't clear about, but

 21 we are giving it a good close look, thanks.

 22 Mr. KOTSCHWAR: I'm going to completely
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 1 go off the agenda here, but this was not on the

 2 agenda, but I want to remind folks that this is

 3 still an issue and that's my favorite issue of

 4 1.35. We appreciate the Commission's efforts and

 5 the continued efforts to try and make it workable,

 6 but the expansion of the 1.35 relief to include

 7 text messages has been illusory to many members of

 8 the Commodity Markets Council, my company

 9 included. I don't even know what a text message

 10 is. I just know here if you text more than one

 11 person at a time, it turns it into something

 12 called multi-media messages. Is that a text

 13 message? My IT people tell me absolutely not.

 14 Similarly, what about the propriety messaging

 15 system on Apple devices? Or Blackberry Messenger?

 16 There are all these different kinds of

 17 communication, which begs the question, we need to

 18 get to the real issue of 1.35, which is the notion

 19 of what membership is on an exchange and whether

 20 members of an exchange today are properly in this

 21 pool with the members of yesterday. We're a

 22 member of an exchange. We don't have a fiduciary
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 1 duty. We're a customer. That's why we're a

 2 member of the exchange. And the text message

 3 relief I'm still now required to keep all sorts of

 4 pretrade communications. That's not something I

 5 normally do. It's a gigantic headache and I just

 6 want to remind folks that's still an issue.

 7 DR. FORTENBERY: Okay, thank you Stephen

 8 and Christa. Appreciate your time. What we want

 9 to do now is move toward looking forward just a

 10 little bit. I think the idea going forward is

 11 that we would try to meet about every six months.

 12 So that would make a meeting sometime early or

 13 maybe even mid-summer for our next meeting time.

 14 And what would be useful is to get some ideas

 15 about topics that we should be investigating and

 16 discussing at our next meeting. And maybe at the

 17 same time, either panel members or presenters that

 18 you would like to see giving you some guidance or

 19 some input or some insight that would help lead

 20 your discussion going forward. So let me just

 21 throw it open and see if we have suggestions for

 22 the kinds of things we should pursue for our next
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 1 meeting. Yes, go ahead.

 2 MR. STRONG: So there wasn't a

 3 presentation here on what is a bona fide hedge or

 4 points that are currently being debated by the

 5 Commissioners. So I would suggest the bona fide

 6 hedge question needs further venting within this

 7 realm of this group with a presentation and a bit

 8 more time to dress out the issues.

 9 DR. FORTENBERY: Other members agree

 10 with that as a topic? Yes, MJ does, okay, good.

 11 Are you thinking about a presentation from CFTC

 12 staff? Are you thinking about potential hedgers?

 13 Who would be most useful?

 14 MR. STRONG: So I know some of the

 15 written comments that NAEGA and NGFA presented and

 16 I guess maybe I'm not exactly clear where those

 17 are in the Commission's minds. And are maybe some

 18 of the concerns that, were unknown the decision on

 19 really, the Commission has put to rest that they

 20 will be considered a bona fide hedge or maybe

 21 they're still up for debate. So, yeah, I would I

 22 guess I am asking for some kind of a staff
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 1 presentation of, you know, your four hot buttons

 2 that are still up for debate or kind of unknown or

 3 need a little more information on or walk me

 4 through these examples one or two more times.

 5 And if the forum for that is a smaller

 6 group and a smaller trip here, that's fine. And

 7 if the correct forum is this group, that's fine

 8 too. But it seemed, I mean, if I heard around

 9 here we had a lengthy talk on position limits.

 10 And it seemed like there were a number of people

 11 around the room who wanted to go to bona fide

 12 hedging. So it seems to me there's a need there

 13 at least from some people around this table.

 14 DR. FORTENBERY: Other suggestions? Is

 15 that an entire meeting? Yes, go ahead, Scott.

 16 MR. STRONG: That plus Lance's 1.35.

 17 MR. CORDES: One of the other thoughts

 18 I've had is with all the new regulation, there's a

 19 lot more market data being collected. It'd

 20 probably be helpful maybe for this group to

 21 understand what the Commission's doing with it,

 22 how it's being used to understand, okay,
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 1 everything's being put in. Is this just busy

 2 work? You know, what's taking place with this

 3 stuff?

 4 DR. FORTENBERY: Lance, do you think the

 5 1.35 six months from now is a point we should be

 6 taking up again?

 7 MR. KOTSCHWAR: God, I hope not.

 8 DR. FORTENBERY: Okay.

 9 MR. KOTSCHWAR: Sadly, alas, probably

 10 so, yes.

 11 DR. FORTENBERY: Any other suggestions?

 12 Go ahead, Mr. Massad.

 13 CHAIRMAN MASSAD: Let me just say this

 14 isn't your last opportunity. I'm sure we'll be in

 15 touch with people as we get into next year in the

 16 spring and start looking at potential dates for

 17 the meeting. We'll certainly be reaching out to

 18 you and getting your input then on what we should

 19 be talking about.

 20 DR. FORTENBERY: Yeah, we have a couple

 21 of minutes left still and so I didn't know if

 22 there were specific bona fide hedging questions
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 1 anybody would still like to ask today. We'll

 2 certainly put that down as a topic for the later

 3 meeting. There were several asked. I didn't know

 4 if that was --

 5 MR. STRONG: Well, should we get

 6 specific?

 7 MR. MJ ANDERSON: My comment was going

 8 to be we could probably spend four hours this

 9 afternoon going through them, so I don't know if

 10 it's the best use of five minutes here.

 11 CHAIRMAN MASSAD: Okay.

 12 DR. FORTENBERY: Okay.

 13 CHAIRMAN MASSAD: Yeah, I mean, I guess

 14 I would say I don't think anybody should feel a

 15 need to repeat what you've already given to us in

 16 writing. We're certainly aware that there have

 17 been a lot of comments on this. As I said, we're

 18 certainly trying to digest and think about those.

 19 If someone feels like there's a point that maybe

 20 hasn't been raised, we certainly welcome that.

 21 Steve, I don't know if you want to raise any

 22 questions for anyone or have anything to add.
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 1 MR. SHERROD: You know, I wasn't able to

 2 attend the staff roundtable this summer, but the

 3 most relevant person did attend. What I did hear

 4 was a willingness of the CME Group, exchanges --

 5 from Tom LaSala, and likewise from ICE Futures

 6 U.S. -- to entertain a process that we described

 7 in staff questions to the exchanges and that would

 8 be that the Commission could, as one of the

 9 alternatives, delegate to the exchanges

 10 effectively the ability to process a request for a

 11 non-enumerated bona fide hedge. The exchanges

 12 would then process that, decide whether to grant

 13 it, and then provide to the Commission a summary

 14 of those non-enumerated bona fide hedges granted

 15 at the exchange level. So I refer you back to the

 16 transcript and the webcast that's on our website

 17 for that discussion. I think Tom LaSala was

 18 pretty clear in discussing that. And that would

 19 be one way forward to address numerous

 20 non-enumerated exemptions that could be granted by

 21 the exchanges subject to Commission review. Any

 22 thoughts?
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 1 MR. DIERLAM: Yeah, Steve, I'm glad you

 2 raised that. I won't try to go through the list

 3 because I would miss some, but I do know having

 4 reviewed many of the comments that numerous

 5 organizations in their comment letters spoke about

 6 modifying from the Commission's proposed rule into

 7 allowing some sort of a process to allow

 8 enumerated hedges along the lines of -- an

 9 exchange process to allow enumerated hedges. I

 10 think going through the Commission going through a

 11 public notice and comment, you know, candidly, I

 12 think that's too burdensome, too onerous. But I

 13 think allowing in a final rule whenever that's

 14 done, a Commission process to allow enumerated

 15 hedges I think would be a streamlined process that

 16 that could be a step in the right direction.

 17 I think we are sorry that you weren't

 18 here back in June for the roundtable. I think if

 19 you think about things that maybe haven't been

 20 said, I think it's easy to look at many of the

 21 examples that have been submitted by companies, by

 22 firms, by trade associations, and they're often
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 1 provided to you in a one-off instance. They say

 2 here's an irrevocable bid or offer. Here's a

 3 merchandising hedge. Here's an example of a

 4 specific hedge. And it ought to be considered

 5 bona fide. And I think that, as a stand alone

 6 example, to us it's correct. It ought to be

 7 considered bona fide.

 8 But I think what's often maybe not

 9 included or talked about is, its business, is not

 10 they're not one-off instances. Business is done

 11 in a continuum, meaning, you buy something, in our

 12 case a farmer, and it goes all the way through an

 13 ultimate customer. So all of those examples that

 14 are used are part of one continuous flow of

 15 business. You might use an irrevocable bid or

 16 offer to acquire something from a farmer, an

 17 irrevocable offer to sell something to a customer,

 18 a merchandising hedge to manage it, to manage your

 19 inventory, a processing hedge to manage it, and

 20 you might have a firm basis contract or a firm

 21 contract in there that would meet, kind of, your

 22 letter test that you're looking at today, but
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 1 during that entire process, there's all matter of

 2 things that are happening around the world.

 3 Russia invades Ukraine. Argentina freezes you

 4 out. There's weather here, there's weather there.

 5 All of these risks that affect all of that. So I

 6 think that's a large portion of the reason why so

 7 many of these types of examples we use are being

 8 looked at by commercial entities as ought to be

 9 considered bona fide. Because while trying to

 10 engage in the business we're engaged in on a

 11 regular basis, we're trying to manage the risks in

 12 the external world. And while we look at them as

 13 bona fide, we believe that you should too.

 14 DR. FORTENBERY: Steve.

 15 MR. STRONG: Were you talking about Tom

 16 LaSala's description in that hypothetical example

 17 he was given of a new company that bought a bunch

 18 of futures anticipating they were going to do

 19 business or not? Or was there a different example

 20 I should be looking for in that roundtable?

 21 MR. SHERROD: The staff had asked the

 22 question and Tom was responding to the question
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 1 and one of the keys was he was concerned as was

 2 the ICE representative about whether they would be

 3 held accountable for a core principle violation if

 4 they granted a bona fide hedge and then the

 5 Commission staff came back and said you shouldn't

 6 have granted that. You should not have granted

 7 that. So that's a little bit of the context.

 8 We'll get the point, the time in the videotape and

 9 we can have that sent out to the Committee so that

 10 you can conveniently find that, okay?

 11 MR. KOTSCHWAR: I'd just like to

 12 follow-up on what Bryan said. You know, there are

 13 a lot more risks that we think about than just

 14 price risk. And in addition to price risk, price

 15 risk is always not just fixed-price risk either.

 16 Volatility is a risk. And there are ways today

 17 that we use the futures markets to manage risk, to

 18 reduce risk.

 19 So, we just, it's evolution and we need

 20 to be thinking about how we're using these markets

 21 today. And, you know, let's look at what Congress

 22 did. You know, Congress has added the words
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 1 anticipatory merchandising to the Act, which we're

 2 still waiting for the rules on. But that's an

 3 extreme broadening of where we were before that.

 4 So, you know, that's...I just can't

 5 overemphasize, we need to be thinking broadly

 6 about what bona fide hedging is because we manage

 7 a lot of different kinds of risk beyond price

 8 risk. And it's not always fixed-price risk

 9 either.

 10 DR. FORTENBERY: Okay, as we move

 11 forward if you have other ideas or suggestions

 12 about what we might want to cover in the next

 13 meeting, feel free to email Cory, Christa, or

 14 myself and let us know. In the meantime, I really

 15 want to thank Cory and Christa for all of their

 16 significant efforts in helping put this together

 17 and keeping us with an agenda and moving forward.

 18 And now what I'd like to do is turn to Chairman

 19 Massad and the rest of the Commissioners for some

 20 closing remarks.

 21 CHAIRMAN MASSAD: Well, I just want to

 22 say first of all, thank you to all of you for
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 1 coming and participating. This is extremely

 2 valuable for us and I really appreciate your time.

 3 I look forward to the next meeting. I want to

 4 thank Randy for chairing, for doing a great job as

 5 chair and for his guidance and advice as we put

 6 together this meeting and as we turn to the next

 7 one. I want to thank the various members of our

 8 staff who helped put the meeting together and also

 9 made the presentations, Greg, Tom, Christa, Steve.

 10 I really appreciate all the staff

 11 effort. And let me also thank my fellow

 12 Commissioners. It's great that we had everybody

 13 here. Most of us were able to be here for the

 14 entire session, which is, I think, indicative of

 15 the fact that the entire Commission cares very

 16 much about the agricultural issues and the

 17 agricultural sector. And we intend to make it a

 18 priority in terms of the things that we're

 19 thinking about and doing. Thank you.

 20 DR. FORTENBERY: Commissioner Bowen,

 21 any?

 22 COMMISSIONER BOWEN: I just want to say
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 1 thank you as well. And my door is open. You need

 2 not wait until your next committee meeting. Feel

 3 free to engage me at any time.

 4 DR. FORTENBERY: Okay, any last

 5 comments? If not, thank you very much for

 6 participating. I appreciate everybody's

 7 participation. Please travel safely. And again,

 8 thank you very much to the CFTC staff for making

 9 this possible. I adjourn the meeting now.

 10 (Whereupon, at 2:32 p.m., the

 11 PROCEEDINGS were adjourned.)

 12 * * * * *

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Agricultural Advisory Committee Meeting Page: 161

Anderson Court Reporting -- 703-519-7180 -- www.andersonreporting.net

 1 CERTIFICATE OF NOTARY PUBLIC

 2 DISTRICT OF COLUMBIA

 3 I, Carleton J. Anderson, III, notary

 4 public in and for the District of Columbia, do

 5 hereby certify that the forgoing PROCEEDING was

 6 duly recorded and thereafter reduced to print

 7 under my direction; that the witnesses were sworn

 8 to tell the truth under penalty of perjury; that

 9 said transcript is a true record of the testimony

 10 given by witnesses; that I am neither counsel for,

 11 related to, nor employed by any of the parties to

 12 the action in which this proceeding was called;

 13 and, furthermore, that I am not a relative or

 14 employee of any attorney or counsel employed by

 15 the parties hereto, nor financially or otherwise

 16 interested in the outcome of this action.

 17 (Signature and Seal on File)

 18 -----------------------------------

 19 Notary Public, in and for the

 20 District of Columbia My Commission

 21 Expires: March 31, 2017

 22