UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 ENERGY AND ENVIRONMENTAL MARKETS ADVISORY

 COMMITTEE MEETING

 

 

 Washington, D.C.

Thursday, February 25, 2016
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 PARTICIPANTS:

 Opening Remarks:

CHAIRMAN TIMOTHY G. MASSAD

COMMISSIONER SHARON BOWEN

COMMISSIONER CHRISTOPHER GIANCARLO

 Panel I: Do Commission Exemptions for RTO/ISOs

 Transactions Strike the Right Balance?

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COMMISSIONER KENNETH W. ANDERSON, JR.

 Public Utility Commission of Texas

 KENNETH W. ANDERSON, JR.

Senior Vice President & Chief Risk

 Officer, ACES

 PAUL J. PANTANO, JR.

ISO-RTO Commenters

 Panel II: CFTC Staff Swap Dealer De Minimis

 Exception Preliminary Report

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 EILEEN FLAHERTY

Director, Division of Swap Dealer &

Intermediary Oversight

SAYEE SRINIVASAN

Chief Economist, Office of the Chief

Economist

LAEL E. CAMPBELL

Commodity Markets Council

DAVID T. MCINDOE

Commercial Energy Working Group

 

 

 

 

 

 

 

 

 
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 1 PARTICIPANTS (CONT'D):

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 Other Participants:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 JOSEPH ALLEN

Caterpillar Inc.

JAMES ALLISON

 ConocoPhillips

 SUSAN BERGLES

American Gas Association

SHARON BROWN-HRUSKA

Tulane University, Energy Institute

BRYAN DURKIN

 CME Group

 ARUSHI FRANK

Electric Power Supply Association

MICHAEL GILL

 Independent Petroleum Association of

America

PAUL HUGHES

Southern Company

 BENJAMIN JACKSON

ICE Futures U.S.

VINCENT JOHNSON

 BP Integrated Supply and Trading

RAYMOND KAHN

Futures Industry Association

SUE KELLY

 American Public Power Association

 WILLIAM MCCOY

Morgan Stanley
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 1 PARTICIPANTS (CONT'D):

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 RON OPPENHEIMER

Commercial Energy Working Group

MICHAEL PADGETT

 Alcoa Energy

 LOPA PARIKH

Edison Electric Institute

CRAIG PIRRONG

 Bauer College of Business, University

of Houston

 MICHAEL PROKOP

Deloitte & Touche, LLP

VICTORIA SHARP 

 Citigroup Energy Inc.

 TYSON SLOCUM

Public Citizen

RUSSELL WASSON

 National Rural Electric Cooperative

Association

DENA WIGGINS

 Natural Gas Supply Association

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

 (10:03 a.m.)

COMMISSIONER GIANCARLO: Good morning,

everyone. We'll get started. Welcome to the

first 2016 meeting of the Energy and Environmental

Markets Advisory Committee. I'd like to welcome

new members to the committee and to today's

meeting. Susan Bergles, Assistant General

Counsel, American Gas Association; Ray Kahn, Board

Member, FIA; Michael Padgett, Vice President,

Energy and Carbon Strategy at Alcoa; and Arushi

Sharma Frank, Director of Regulatory Affairs and

Counsel at the Electric Power Supply Association.

In addition, Professor Craig Pirrong, who was

formerly an associate member, is now a full

member. And I also want to welcome the Honorable

Ken Anderson, Jr., Commissioner of the Texas

Public Utility Commission, who has come up from

Austin to participate in our first panel. And I

also want to recognize and thank EEMAC member Dena

Wiggins, who will serve as today's meeting chair.

 At our last meeting last year, I talked
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about severe declines in the price of physical

commodities. Those declines have since

intensified. Indeed, according to data of the

CFTC Office of the Chief Economist, the Bloomberg

Investable Commodity Index is down 53 percent

since December 2010. According to another measure

commodity prices are at their weakest level in 43

years. Falling commodity prices are acutely

reflected in energy prices with oil hovering

around $30 a barrel. This is having a direct

impact on American jobs, with U.S. energy

producers, merchandisers, transporters, refiners,

and processors now facing their second and third

rounds of layoffs. The collapse in oil prices is

also weighing heavily on U.S. and European banking

sectors with ballooning loan losses and credit

default spreads. It has adverse implications for

commercial lending, the stock market, and overall

U.S. and global economic growth.

 Of course, the CFTC plays no role in

setting the price of the commodities regardless of

whether they are high or low. Still, the CFTC
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must take care that it not inflict needless stress

on our trading markets that are integral to the

health of the American economy.

 When farmers struggle to put food on

their tables, energy producers face further

layoffs, and energy sector firms teeter at the

edge of bankruptcy, this agency must adopt

policies that do not thwart the ability to hedge

against plummeting prices. In this time of low

growth economics, what we must do is provide

market participants with regulations whose

benefits unambiguously justify their costs.

 On our first panel this morning we will

examine the CFTC's proposed order exempting from

provisions of the CEA and CFTC rules certain

transactions in the market administered by

Southwest Power Pool, a regional transmission

organization, or RTO. As most of you know, FERC

created RTOs and independent system operators to

encourage competition by facilitating development

of regional power markets and enhancing trading

opportunities for our regional buyers and sellers.
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RTOs and ISOs are public utilities that FERC

nationally and state public utility commissioners

interstate regulate more extensively than other

public utilities or other commodity markets.

Dodd-Frank recognized that FERC and state

regulators maintain their authority to regulate

transactions entered into pursuant to tariffs they

approve. It instructed the CFTC and other

electric power regulators to harmonize and

streamline regulation of these vital markets. The

CFTC, however, has proposed to retain authority to

police fraud, manipulation, and similar violations

of the CEA. Although the proposed regulatory text

was silent on the matter, the preamble of the

order suggests that the CFTC intends to permit

third parties to bring private lawsuits pursuant

to Section 22 of the CEA. It also appears that

the CFTC intends the same result, that is,

permitting private lawsuits, in a similar final

order exempting certain transactions offered or

entered into on six other RTOs or ISOs.

Now concerns have been raised that
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permitting private lawsuits will undermine

regulatory certainty. It could disrupt the finely

calibrated electric market structure --

electricity market structure that state and

federal regulators have enacted over the last

several decades. It may needlessly subject

millions of American rate payers to higher utility

bills as a result of a consequent increase in

litigation, legal expense, and settlement costs.

So, appropriately, today's panel will

examine these issues, consider the need for

exemptive relief for RTO-ISO transactions, and

review the Commission's exemptive orders in light

of the congressional mandate for a streamlined,

consistent regulatory approach to our nation's

vital electricity markets.

 On our second panel, we'll address the

CFTC staff's preliminary report regarding the swap

dealer de minimis exemption. As you know, the de

minimis exemption permits a market participant to

engage in a limited amount of swap dealing,

currently $8 billion, without having to register
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as a swap dealer. Without further Commission

action, that level will automatically drop to $3

billion at the end of next year. It is widely

reported that many market participants are

planning to reduce their market activity in

anticipation of the automatic de minimis

reduction. The Preliminary Staff Report candidly

acknowledges that the data it examined was

limited, not least because SDR data does not 

indicate whether a transaction was made for

dealing purposes. The data was particularly

spotty for non-financial commodity swaps, such as

energy swaps, where total gross notional value of

an entity's dealing activity was not available.

As a result, it is impossible to assess the

consequences of changing the de minimis threshold

for energy swaps and similar products. Instead

the staff suggested an alternative using some very

broad assumptions to identify dealing activity

particularly for non-financial commodity and

energy swaps. Faced with this uncertainty,

Congress recently expressed its preference that
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the CFTC complete a rule-making raising the de

minimis threshold to eight billion or higher and

get it done by February 16, 2016, a deadline that

has now passed. Today's panel will examine the

CFTC staff's report, its underlying assumptions,

the available data, and the range of policy

responses available to the Commission.

 Last year, for the first time since

Dodd-Frank was enacted, the EEMAC satisfied its

congressional mandate to hold meetings. In fact,

it held two. Today, again for the first time

under Dodd-Frank, the EEMAC submitted a report and

recommendation to the Commission. Pursuant to the

law, this report was voted on by EEMAC's nine

statutory members and was not considered by its

associate members. Adopted with an 8 to 1 vote,

this report summarizes the EEMAC's work in 2015

primarily focused on the CFTC's position limits

proposal. The report also contains a pointed

dissent, again, as authorized by Dodd-Frank.

 The report concludes that the CFTC

should not finalize the position limits rule as
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proposed. It further provides recommendations to

the Commission to improve the proposal.

 During our third panel, Jim Allison, a

member of EEMAC and chair of its first meeting in

2015, will summarize the report and its

recommendations. Next EEMAC member Tyson Slocum,

of Public Citizen, will summarize the dissent.

Thereafter, Dena Wiggins will moderate a

discussion.

 It must be noted that the U.S. District

Court of the District of Columbia has concluded

that the Commission is not under any unambiguous

mandate to impose position limits. Based upon the

recommendations of EEMAC before us today, I submit

for the record that the CFTC should not and need

not finalize its current position limits proposal.

In light of the value destruction plaguing U.S.

Energy and commodity markets it would be imprudent

to move forward with the current proposal without

lessening its adverse impact on orderly risk

management by America's commodity and energy

producers and the consumers they serve.
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 Thank you to all the witnesses who have

prepared thoughtful presentations and thank you to

the CFTC staff who worked so hard to arrange this

meeting. I'm grateful to you the members and

associate members of EEMAC for volunteering your

time and expertise. And I would be remiss if I

did not note the characteristic grace and

fortitude of my two fellow commissioners in

participating in this second market advisory

committee in the past 72 hours. And we have a

roundtable coming up next week as well. We three

work hard to cover a lot of ground. I now

recognize the Chairman and Commissioner Bowen for

their opening remarks.

 CHAIRMAN MASSAD: Well, thank you,

Chris. And let me also thank all of you and

welcome all of you, particularly those of you who

have flown in. You know, we really appreciate you

being here. The EEMAC, like all of our

committees, is very important to us. We get a lot

of good input. The discussions are very helpful.

And I want to thank Commissioner Giancarlo for all
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of his efforts with respect to the committee

organizing this meeting. There's a lot of work

that goes into this and developing the agenda. I

also want to thank his staff and all of our staff

who are involved in putting this together. I also

want to thank Commissioner Bowen for being here,

and she brings that same enthusiasm to her

sponsorship of the Market Risk Advisory Committee.

 Let me also just say that I think all of

us have been very focused since we took office on

looking at our rules and making sure that we are

addressing the concerns of commercial end-users in

these markets, and we've taken a lot of actions in

that regard as all of you know. And meetings like

this where we do have input from commercial

end-users are very helpful to us in that regard.

 Today's agenda covers a number of

important issues. Commissioner Giancarlo has

already described it. I'm not going to say much

about any of those just because I'd rather get on

with the discussion. I may have comments as we

get into it. I will say just a couple of words on
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one topic just because it is I think so important,

and that is the de minimis threshold. And what I

want to talk about in that regard is how this does

reflect how far we've come since 2008 when we

really had no information on the market. And, you

know, I know the data is imperfect. I know there

are gaps as I'm sure will be pointed out in the

discussion. But we are a long way from 2008. We

have much better insight into the market. We're

working to improve that data constantly. And

market participants now have greater price

information, which contributes to competition and

transparency. And we're taking a number of steps

to improve the data. In fact, at this very moment

our Chief Information Officer, John Rogers, is

testifying on Capitol Hill along with a number of

other people about the efforts we're making to

improve data quality. There's a lot going on

there. 

 And so we'll get into a discussion of

the report. It is a preliminary report. As you

know, it doesn't make recommendations. It just
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sets forth the data we have and a lot of issues.

And obviously this meeting and the other ways in

which we're getting input on this are very helpful

to us as the staff looks to finalize that report,

which will put us in a position to decide what

action, if any, we need to take.

 So with that let me stop so that we can

get on to the discussion. But first, of course,

I'll turn it over to Commissioner Bowen.

 COMMISSIONER BOWEN: Thank you and good

morning. It's good to be here today for another

meeting of the Energy and Environmental Markets

Advisory Committee. I want to express my

appreciation to the committee and our Commission

staff for the time that you've devoted to today's

meeting. This meeting is particularly timely

given the numerous challenges that energy

end-users face today, including volatile fuel

prices, global pressures, and the reduced capacity

of their traditional counterparties, the banks, to

enter into transactions because of their own

capital pressures. Thus, as a general matter, I
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am very interested in hearing from our

participants about how they are coping in the

current environment.

 The specific topics today are also very

important. I look forward to feedback from this

committee about the proposed -- sorry, I --

Southwest Power Pool Order. Regional transmission

organizations, RTOs, and independent system

operators, ISOs, play a crucial role in providing

a reliable power grid for our nation. Thus, a

4(c) exemption for Southwest Power makes sense

because we've extended that exemption for other

RTOs and ISOs. I'm also interested in hearing

from participants today about any issues or

concerns you may have about aspects of this

relief, including allowing private rights of

action. I also look forward to the discussion

about the preliminary study on the de minimis

exception to the swap dealer definition. After

the 2008 crisis it became clear that we needed

robust, specialized regulation of firms that acted

as swap dealers so that no one could be a massive
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player in the swaps market without being subject

to appropriate oversight. At the same time, we

did not cast the net so wide that the swap dealer

definition would encompass small market players

who continue to play a crucial role in our markets

and pose little systemic risk.

 Thus was born the de minimis threshold.

Firms that engage in swap dealing under certain

thresholds would not be subject to swap dealer

regulation. We set that threshold at $3 billion

with an $8 billion phase-in that would terminate

at the end of 2017. Now that we've had a halfdecade of post-crisis swap activity reported, it

is time to assess whether there is any data-based

rationale for deviating from the path laid out in

these rules, namely, ending the phase-in in 2017

and then dropping the threshold to $3 billion. I

will be following the discussion closely today to

discern if there is strong evidence that such a

rationale exists.

 I would also like to renew my call to

finalize the position limits rule. We've
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discussed the same issues in multiple forums and

for far too long while end-users clearly have

waited for clarity and certainty. It's time to

make a decision on outstanding issues like

delegation and aggregation. Let's finalize this

rule and close the book on this chapter of the

position limit saga.

 Thank you again to the committee and the

sponsorship of Commissioner Giancarlo for

providing the opportunity for us to hear from you

today.

 COMMISSIONER GIANCARLO: Thank you. And

now, Ajay you will -- have a statement to make.

 MR. SUTARIA: Good morning, all. I've

been asked to remind you that these microphones

are push to talk. Please keep the microphone a

few inches away when you wish to speak. Press the

white button on the base. When your indicator

light appears red your microphone is on. When

you've finished talking please press the

microphone again to turn it off. Only a limited

number of microphones can be active at one time.
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Please turn your microphone off after speaking to

allow others to speak without issue and please

refrain from putting any mobile cell device on the

table as it may cause radio interference. Please

be advised that this meeting is being recorded and

we will have some EEMAC members participating by

phone. With that, as the federal officer for this

meeting, I declare it open. Thank you very much

and I'll turn things over to Dena.

 MS. WIGGINS: Thank you very much.

Commissioner Giancarlo, thank you very much for

your sponsorship of this group. We very much

appreciate what you and your staff have done to

facilitate our discussions and our interactions.

Mr. Chairman and Commissioner Bowen, thank you

very much also for your attention and

participation. We look forward to an interesting

conversation today. I think as has been our

tradition in the past, when it comes to the

discussion part of this meeting, if people who

wish to speak will put their tent cards up on end

and then I will try to do my best to keep the
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trains running on time and recognize people in the

order in which they have requested to speak. As

Ajay mentioned, we do have a few people

participating by phone. I've got my cell phone on

the table here because they're supposed to text

me. So lest you think I am texting with my kids,

the people who want to are -- to -- who are on the

phone who want to have something to say will be

texting me and then I will recognize them for

participation in this meeting. We're going to

turn it over to our first panel and the

Commissioner. And after the panel has finished

speaking we will open it up to the floor for

comments and questions from our EEMAC members.

Commissioner?

 COMMISSIONER ANDERSON: Thank you. And

on behalf of the PUCT of Texas I'd like to thank

you all for the opportunity to be here. The

Public Utility Commission of Texas -- with one

important exception, obviously -- you know,

obviously supports the CFTC's proposed order

exempting SPP. The proposed exemption is
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consistent with the exemptions -- it would've been

previously granted. However, our concern really

is in the preamble language, and it's a deep

concern. Retaining private causes of action in

both, with respect to SPP as well as opening up

the orders, the previous orders, would be very,

very difficult and also unnecessary.

 And let me give a little background

because I think that -- I'm sorry. Oh, there.

Okay, let me give a little background because the

Commission may not be aware of our unique status.

You know, we are unlike the other 49 states in the

U.S., because PUCs are really limited or primarily

limited to retail, retail rates, and that sort of

thing. We've been regulating -- we designed and

have been regulating in a wholesale market now for

20 years. And I believe that generally it's

considered the most competitive market in the

country. Both on the real -- it's an integrated

market. There is -- the distinction between

wholesale and retail is -- really does not exist,

unlike the other markets. It's a market that has
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over 1,400 participants, and it's an energy-only

market, which means that the generation -- and I

-- we're the only energy-only market, at least in

the U.S., which means the generators really have

to look to the energy market for all their

revenue. The importance of that I'll discuss in a

minute when we get down to our specific concerns.

 The CFTC's -- in the preamble -- the

CFTC's stated intent -- in there to preserve

private claims really raises a number of troubling

issues. Currently, the process both at FERC and

the PUC is designed, you know, to arbitrate those

disputes that arise within the energy markets.

But generally it's more efficient, at least at the

PUC, than private legal proceedings. We generally

can resolve -- we resolve cases in well under a

year. Allowing private claims will allow

collateral attacks both on the FERC and

PUC-authorized, valid market rules, which in turn

will undermine the efficient operation and

regulation of the energy markets.

 And then finally, allowing private
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claims, which will necessarily, I think, over time

involve the RTOs, ISOs, and CELs will -- those

RTOs and ISOs will incur costs that'll be directly

passed down to the customers. To remind you,

these RTOs are all -- I believe all of them are

non-profits. And certainly ERCOT and SPP are

non-profits. And so their expenses are routinely

passed on to consumers. So whether it's

attorneys' fees or whether it's damages imposed,

that flows right down. And if I were an

enterprising retail regulator, you know, I'd make

sure the customer knows on the bill insert exactly

what that charge is for and whom they can call

with their complaints.

 Both FERC and PUC, the design of the

markets at the very beginning, as I mentioned,

were designed in part to arbitrate these disputes.

First, of course, we have enforcement -- at PUCT

we have enforcement divisions. We have

independent market monitors. In the case of

Texas, it's actually a contract employee of the

Commission. They review all transactions. They
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work very closely with our market participants.

And most importantly, in the context of the issue

before us, those market participants who are

aggrieved and other third parties with standing,

you know, can bring their disputes either before

the Commission or FERC. In Texas our PUC staff

has the option to participate in those proceedings

if they believe the public interest is implicated.

And in that way the issues are, you know, are 

guided. The Commission is guided, you know, by

previous -- first off by our expertise and also by

our previous -- you know, by our previous

decisions.

We also have -- by the other rules that

bring inconsistent outcomes, you know, before us

before -- in order to resolve these matters. I

would also think it's important to mention that

neither the Federal Power Act, you know, or PURA

even provides for private causes of action. And I

believe Congress, you know, intended -- well,

going back, I actually participated early on on

the Senate side of the Dodd-Frank -- when
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Dodd-Frank was going through the Senate. And I

worked specifically on an amendment that was

introduced by John Cornyn and by Senator Bingman

which would have resolved this issue. It went

over to the House and in conference the current

language, which contemplated an exemption, was

adopted. But it was relayed to me because we were

deeply concerned about the final solution in

Dodd-Frank, we were told at the time that, don't

worry. This exemption is designed to get in the

same place, you know, while making it clear that

the CFTC still has its enforcement jurisdiction.

With that assurance we got comfortable. And in

the meetings, at least early on with CFTC, this

issue of private rights of action was never --

were never raised. And when the orders were

actually issued we all assumed that the orders did

not include the private cause of action because,

again, what was represented at the time was that

the RTOs would be put, with the exemptions, would

be put functionally, be put back into the position

they were in before Dodd-Frank.
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 These private causes of action -- sorry,

will allow collateral attacks on the rules and the

processes of both the RTOs and frankly of FERC and

the Commission. Now I'm not here defending FERC's

jurisdiction, but I am concerned obviously about

ERCOT. Transactions that are lawful under our

rules will be able to be challenged under the CEA

by third parties without the participation of the

regulator in the proceedings. That actually --

should concern the CFTC as well. Federal courts

will be interpreting both FERC and PUC rules and

regulations and the RTO-ISO market rules, you

know, instead of the regulatory authority. That's

likely to lead to inconsistent determinations by

different federal courts. This in turn will

weaken the market and regulatory structure and

cause market uncertainty regarding what conduct is

permitted under the rules. And again I would just

point out that CFTC ought to be concerned about

that as well because a district court in some

court of appeals district may well decide that

this means X and that's not what the CFTC has
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interpreted.

 I think the potential for courts and

these inconsistent results rather than an expert

regulator could provide any number of problems.

An example, the CFTC has exempted explicitly from

the CEA transactions that exist under the

Day-Ahead Markets and the Real-Time Markets. But

what happens if somebody who participates in the

DAM, you know, makes a claim against another

Day-Ahead Market participant, you know, claiming

that there's been price -- that there's price

manipulation because it's a futures, because the

DAM is a futures market or because the financial

transmission right is a swap. You know, what's --

then you get into, again, the problem of what the

federal court decides in effect could eliminate or

cause uncertainty regarding the exemption. And

depending on how they rule, it might also be 

against the position or against the viewpoint of

the CFTC.

 And then finally to wrap this up,

private causes of action will increase the cost to
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consumers. It can, particularly, if the RTO or

ISO, you know, is forced to become a party or

because, as could happen, they're sued themselves,

you know, claiming that somehow their action, you

know, violated, you know, constituted a swap or

violated some other provision of the CEA or

constituted market manipulation. And an example, 

we have a complaint. I won't get into the merits

because it's currently pending before us. But we

have a market participant who has complained about

an ERCOT decision. Well if they could bring that

in federal court, all those costs, not to mention

the resettlement costs, you know, if they

prevailed, would be bypassing the regulatory

expertise of the Commission, and all those costs

would flow right through to consumers on a loadshare ratio basis.

 With that, I'll end and look forward to

answering any of your questions. And again, thank

you for having me.

 MR. WALKER: ACES acts as legal agent

for more than 20 electorate cooperatives and other
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electric utilities. ACES members participate as

load-serving entities in five of the seven RTOs

and ISOs in the United States where their

generation and transmission assets operate or 

where their electric customers are located.

Sometimes an ACES member also participates in a

second adjacent RTO as well. RTOs are only used

regionally by physical location of load,

generation, and/or transmission. ACES has members

that participate regionally in some but certainly

not all of the six original RTOs in the 2013

exemption order. In addition, ACES has some

members that participate in SPP. And most

importantly, ACES has members that participate

regionally away from SPP, say, only in MISO or

only in PJM, but do not participate in SPP. There

are electric cooperative ACES members and

municipally-owned electric utility ACES customers

located in the Midwest or in the Mid-Atlantic.

And since transactions on MISO are exempt from the

CEA, say, for the 15 enforcement provisions in the

exemption order, a MISO-only electric utility has
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no reason to read CFTC releases about SPP, and,

for that matter, about ICE or CME, for its MISO

compliance.

 As consumer-owned commercial entities,

ACES members most reflect the public interests.

ACES members are not-for-profit electric entities

and engage in ISO transactions as part of the

ordinary course of their electric operations to

purchase electricity, transmission services,

capacity, and to hedge commercial risk arising

from their ongoing utility operations, which are

to provide reliable and affordable electric

service to electric consumers. Each ACES member

or any other electric cooperative or municipal

electric utility hedges its unique commercial risk

to serve end-use American businesses and consumers

in each RTO market. So we believe these types of

consumer-owned commercial entities most reflect

the public interest.

 Stepping back from the focus down in the

weeds, let's take a look at some RTO facts. RTO

transactions have nothing to do with systemic risk
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to the global financial markets or the global

banks or insurance companies or swap dealers.

Each RTO is designed to maintain the reliable flow

of electricity in their region and between the

regions. Nothing indicates the RTO markets were

or are opaque pools of interconnected financial

entity transactions or instruments.

 Six of the seven RTOs are

comprehensively regulated by FERC, the federal

agency under whose tariff the RTO was created, and

also by the National Electric Reliability

Organization, namely NERC. Market participation

in an RTO is not open to all comers. The public,

consumers -- or consumers cannot buy high-voltage

wholesale electricity, energy, capacity, or FTR

products at retail in the RTO.

 RTOs do not geographically cover the

entire U.S. No RTO is a national, much less

global, market. RTO market participants are

diverse and include both large and small electric

utilities, transmission owners, and state public

utility commissions from their geographic region.
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 Pivoting to the 2013 exemption order, it

plainly states that the exemption is from all

provisions of the CEA except for 15 enforcement

provisions. There's no ambiguity in the language

in 2013. We understood that all presumably means

all, save the 15. So ACES members have transacted

in four of the original six RTO markets for over

two years now relying on the plain language of the

2013 exemption order. The Commission has also

granted other exemption orders and ACES' 21

members and other commercial end-users continually

rely upon the plain language of those commission

exemption orders as well.

 Above all, RTO market participants, risk

managers, and compliance officers really need to

be able to rely upon the plain language of CFTC

exemption orders applicable to their businesses

unless an amendment rule-making process is

announced and public comments are considered.

This is critical to commercial end-users.

 Now to SPP. SPP has developed its RTO

marketplace and the relevant provisions of the SPP
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tariff. SPP requested a parallel exemption order

neither more expansive nor more narrowly focused

than the 2013 exemption order. SPP did not raise

a question about whether its exemption order would

allow private rights of action. In the text of

the proposed SPP exemption order by the

Commission, it says all the 15 enforcement

provisions. The Commission did not request public

comments on whether the SPP exemption order should

contain another CEA section, Section 22, with the

15 reserved sections. There was no consideration

of how such a provision would affect the carefully

balanced public interest analysis.

 So the preamble paragraph in the

proposed SPP order was unsolicited and surprised a

lot of electric companies. When disinterested

parties in the electric industry learned about the

paragraph through the grapevine, the reaction was

pretty consistent: the unsolicited paragraph

should be deleted. The CFTC has not re-proposed

or requested comment on another version of the SPP

order. So there's a lack of evidence to base
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making a public interest determination to have the

SPP order include Section 22 as a 16th reserved

CEA section. Furthermore, adding conditions and

limitations now to either the 2013 exemption order

or to the proposed SPP order will add legal and

regulatory uncertainty for commercial end-users

such as ACES members and other electric utilities,

especially without a careful analysis of whether

and how such additional restrictions are in the

public interest. FERC should weigh in. SPP

itself should weigh in and the market participants

who face the additional legal and regulatory

uncertainty should also be consulted.

 So what are some examples of this cloud

of uncertainty for regulatory and legal lack of

clarity? Well, let's say that a generation owner

has experienced tube leaks in its boiler. So its

generating unit is de-rated below full capacity.

The generation owner can decide to either limp

along and postpone the repair outage for a week or

two, or it can take the outage now and proceed

with the repairs. And so the -- today the
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generation owner decides it's going to start the

repair outage tomorrow. So what does it do? It

goes out to hedge its shorts position today for

the outage duration coming up starting tomorrow.

And they do that in either forward contracts or

swaps or futures or trade options. So they get

their hedges in place and tomorrow the unit begins

a repair outage and coincidentally, local RTO

prices spike.

 There's another market participant who

incurs losses on its short physical position in an

RTO, whether for its load or otherwise, since it

didn't anticipate the price spikes. And what does

it do? It files a Section 22 action against the

generation owner from market manipulation in one

of the 100 or so federal district courts.

Furthermore, Section 22 does not require the

plaintiff to prove that the generation owner was

not acting in a prudent utility practice manner

when scheduling the repair outage. That is legal

uncertainty.

Next, let's say that a NERC designated
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transmission operator calls a generation owner and

requests voltage support to stabilize the

reliability of the transmission grid. So the

generation owner is required by NERC to drop its

output of megawatts so that it can produce

reactive power. It's a similar situation that

could occur where another market participant sees

that it's hurt because prices spike as a result of

the generator having to back down its generator --

to the generation owner having to back down its

generator to balance the system and support the

voltage support.

 Or let's say that a NERC designated

reliability coordinator, which is oftentimes an

RTO, calls the generation owner and requests a low

re-dispatch of the generation owner's unit due to

congestion it's causing in the RTO.

Coincidentally, local prices spike and in real

time no one has time to forward hedge in this

scenario, but you can still have the same scenario

with another market participant alleging damages

in court because they were short when the price
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spikes occurred. Furthermore, Section 22 does not

require the plaintiff to prove that the generation

owner was acting for its own economic best

interest instead of responding to federal

reliability standards for the electric grid.

That's legal uncertainty.

 And lastly, let's say a pair of buy-sell

parties engage in private bilateral forward

contracts within SPP and accordingly they follow

SPP's protocol to inform SPP of the point of

delivery and receipt for the schedule for the

bilateral forward so that SPP knows that when it's

doing its settlements of charges and credits,

which locational price in the SPP market the

buyer/seller parties are to be credited and

charged respectively for energy delivered, SPP

transmission congestion, and SPP energy losses.

SPP refers to this information schedule as either

a bilateral settlement schedule or a financial

schedule. And this term, financial schedule, is

common because the RTO does not take any

responsibility for the physical obligation of the
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private bilateral buy-sell parties in their

performance of the bilateral schedule.

 Now let's say that a third party

believes it has suffered damages in SPP somehow

resulting from this buy-sell transaction. And it

seeks to establish that this so-called financial

schedule in SPP is a Dodd-Frank swap in one of the

100 or so federal district courts. That's legal

and regulatory uncertainty.

 Overall these are the kinds of examples

CFTC would want to consider in reevaluating the

public interest determination as a whole if

Section 22 is added to the litany of reserved

enforcement provisions. But I would expect that

FERC and SPP would have much more to say about

potential conflict and confusion created for their

market.

 If you look back at the evolution of the

regulation of RTOs, 10 years ago we had FERC. In

2007 NERC was added for reliability standards. In

2010 Dodd-Frank came along. In 2013 we had a

limitation in the CEA that applies to the RTOs as
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a result of the 2013 exemption. But now in 2013

we're looking at adding in 100 or so federal

district courts. And that is a quantum leap in

uncertainty both legally and regulatory-wise.

Thank you.

 MR. PANTANO: Good morning. My name is

Paul Pantano and I'm here on behalf of three RTOs

and ISOs that filed comments on the proposed SPP

exemption. That's PJM, ERCOT, and CAL ISO. We

also represented PJM and ERCOT when they obtained

their exemption from the CEA in 2013. And we

filed an amicus brief on behalf of the same three

RTOs and ISOs that commented on the SPP exemption

in the Aspire case, which Commissioner Anderson

mentioned a few minutes ago. I'm going to address

three topics briefly this morning. The first is

the benefits of a public interest exemption for

the RTOs and just as importantly for the

Commission and members of the public. The history

of the CFTC's public interest exemptions, that's

very important because the CFTC has been granting

these exemptions for the past 24 years and so far
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has no experience with what will happen if it

permits private rights of action based on

transactions for which it has granted an

exemption. And finally, the adverse consequences

of allowing private claims based solely on

transactions that have been -- that take place in

RTO and ISO markets.

 We've been facing regulatory uncertainty

about these types of transactions for almost two

decades. In 1998 PJM filed the first of several

no-action requests seeking confirmation from the

Commission that it would not regulate transactions

in PJM as futures contracts. Twelve years later

as part of the Dodd-Frank Act, Congress sought to

eliminate some of the uncertainty about which

agency has jurisdiction over these types of

transactions by directing the Commission to grant

exemptions if, as it did in the 2013 exemption, it

finds that those exemptions are in the public

interest.

 There are many benefits of public

interest exemptions for -- as I mentioned the RTOs
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and ISOs, the Commission, and members of the

public. First, with respect to the RTOs and the

ISOs, an exemption provides them with regulatory

certainty about which regulatory regime they need

to operate under and it provides certainty for

their members and the enforceability of

transactions that occur in their markets. It also

provides benefits for the CFTC in a number of

different ways. It avoids disputes between the

CFTC and other regulators, in this case, either

the FERC or the PUCT, about who has jurisdiction

over a particular type of transaction or conduct.

It helps the Commission conserve its limited

resources because it doesn't have to divert them

to regulating these transactions. It can rely

instead on the pervasive regulation of these

markets and the transactions that take place in

them by the FERC and the Public Utility Commission

of Texas. And importantly, it preserves the

ability of the Commission to take enforcement

action against wrongdoers even in these markets in

a controlled way. And I'm going to come back and
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talk about that, but you know, under the current

regime and at least in the 2013 order, which does

not permit private rights of action, it's the

Commission that would bring an enforcement case if

for some reason it felt that was necessary and

didn't want to rely on the FERC to do that

exclusively. And it's also important to remember

that both the FERC and the CFTC, if they bring a

manipulation enforcement action against the

wrongdoer, can seek restitution of damages for any

party that's injured as a result of alleged

manipulative conduct.

 And the advantage to members of the

public of these exemptions is, you know, assurance

that these transactions in these markets are going

to be regulated by expert regulators and that they

are going to do so in a way that just -- that

produces just and reasonable rates for the

different products, including electricity.

 Turning to the history of these

exemptions. The Section 4(c) was added to the

Commodity Exchange Act in 1992. And shortly after
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that, the Commission issued exemptions related to

swaps. It issued an exemption for energy --

bilateral energy transactions. And in those

exemptions it reserved its authority to bring

anti-manipulation and anti-fraud enforcement

matters -- claims, but it did not preserve private

rights of action. As far as we've been able to

determine, in the last 24 years there's only been

two occasions when the CFTC expressly preserved

private rights of action in exemptions. And that

-- those two exemptions were superseded eight days

after they were issued by Congress when it passed

the Commodity Futures Modernization Act. And it

included exemptions in the statute that covered

the same transactions that were previously covered

by those two regulatory exemptions. And it did so

by preserving the Commission's enforcement

authority, but not preserving private rights of

action for, you know, claims based on those exempt

transactions. So as I mentioned a minute ago, as

we sit here today, the Commission does not have

experience with what will happen in these markets
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if it allows private rights of action to go

forward.

 In light of that history, the

Commission's statement in the preamble to the SPP

exemption is curious because the Commission

describes it -- well, the Commission said it would

be highly unusual for it to preserve its

enforcement authority while not at the same time

preserving private rights of action. But in fact,

over the 24-year period that I just described,

that's exactly what it has done and we think for

good reason.

 There are many adverse consequences that

we think will flow from allowing private rights of

action for transactions that occur in RTO markets.

You know, one of the benefits of Section 4(c) is

that it allows the Commission to grant exemptions

for transactions without determining whether they

are futures contracts, swaps, or options. And

that is a way that enables a mechanism that

enables the Commission to grant exemptions without

raising jurisdictional disputes within -- in this
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case with other regulators. We think that if the

Commission allows private rights of action for RTO

transactions it's going to undermine the

regulatory certainty that's provided by the

exemptions. And it has the potential, even in a

worst-case scenario, to divest the FERC and the

PUCT of jurisdiction over some transactions that

occur in those markets.

 And let me give you an example of a way

that that could happen. And in this example I'm 

going to focus just on claims based on

transactions that occur exclusively within an RTO

market, not on a claim that involves, you know,

alleged related position manipulation where

somebody claims that a market participant is

manipulating prices in one market to benefit

positions in another market, either one of those

being subject to the CFTC's jurisdiction. I want

to just focus on transactions that are either

regulated by the FERC or the Public Utility

Commission of Texas.

 So assume for our hypothetical that
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private party A sues private party B for

manipulating the price of an FTR. To prevail on

that private claim under Section 22 of the

Commodity Exchange Act, that private party has to

prove that an FTR is either a swap or a futures

contract. That's the first element that they have

to show to move forward with that claim. Let's

assume that a federal district court agrees that

the plaintiff established that an FTR is a swap

and ultimately that a court of appeals agrees with

that determination. Now let's assume that the

FERC brings an enforcement case against that same

defendant for manipulating prices of those same

FTRs. That defendant is going to claim in that

case that FERC can't bring that action because

this FTR is a swap and consequently it's subject

to the exclusive jurisdiction of the CFTC as the

court held in a -- in the Amaranth case, obviously

involving different transactions.

 Let's repeat this scenario in multiple

-- different courts. As Jeff mentioned, there's

almost 100 federal district courts. There's over
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400 federal district court judges. We have a

number of courts that rule that FTRs are swaps.

That means that they're subject to the CFTC's

exclusive jurisdiction. And it also means that no

other regulator, either federal or state, can

regulate those transactions. If the FERC and the

PUCT are precluded from regulating those

transactions, who's going to regulate them? You

know, presumably the CFTC does not want to step

into that void because it has limited resources

and would be -- it would be -- make more sense for

the CFTC to then defer to the expertise of the two

agencies that have been regulating these

transactions for decades.

 And if you contrast a private claim with

a CFTC enforcement claim, a CFTC enforcement claim

does not raise the same jurisdictional issues

because the CFTC, unlike a private party, can

prosecute a manipulation of the price of a

commodity in interstate commerce. So it does not

have to prove, for example, that whatever

transactions are involved in the alleged
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manipulation are futures contracts or swaps; it

has much broader jurisdiction. So it doesn't have

to raise the question that has the potential to

divest these other agencies of jurisdiction. And

there are other adverse consequences of these

kinds of private actions. As Commissioner

Anderson mentioned, it would allow private parties

to collaterally attack the transactions and prices

that are set based on rules that have been

approved by FERC and the public utility Texas of

-- I'm sorry, the Public Utility Commission of

Texas. It will allow private parties to challenge

filed rates, which is something that the courts

historically in the antitrust area have not

permitted and have deferred to the Federal Energy

Regulatory Commission and the PUCT for those kinds

of claims. And it will also, you know, have

adverse consequences on the MOU between FERC and

the CFTC, which they've used to cooperate in terms

of conducting enforcement investigations and

bringing enforcement proceedings.

 So to us it seems that the many
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disadvantages of allowing private rights of action

greatly outweigh any advantages of permitting

those kinds of actions. And for that reason, we

think that the CFTC should not permit private

claims for exempt RTO and ISO transactions. And

that instead it should continue to work closely

with the Federal Energy Regulatory Commission and

the Public Utility Commission of Texas to regulate

those transactions and to prevent manipulation and

fraud in those markets. Thank you.

 MS. WIGGINS: Thank you all for the

presentations. Do we have anyone who wishes to

comment? Jim?

 MR. ALLISON: Thank you. We heard the

assertion that private right of action will add

costs to the system. Do we have any way to think

about the magnitude of the costs that would be

added, and do we have any way to think about how

those costs will ultimately be borne? So

Commissioner Anderson talked about at least some

of the costs being borne by retail consumers,

which I guess includes all of us around this
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table. So I suppose, Ajay, you should note that

we all have a direct interest in this question.

What tools do we have to think about the magnitude

of the extra costs? What tools do we have to

think about who bears those costs ultimately?

 COMMISSIONER ANDERSON: Well it would

depend on the claim, but there's currently, as I

mentioned there's a -- I won't get to the merits

because it's a contested case before us. But

there's a claim that ERCOT needs to resettle

involving transactions in the Day-Ahead Market as

well as Real-Time. The initial allegation is that

the claimant would involve -- well it's millions

of dollars. And if they could bring that claim in

federal court and if they prevailed -- or even if

ERCOT was forced to settle, for example, that cost

would go right down, in addition to the attorneys'

fees, that cost would go right down to consumers

and it would be done on a load share basis. And

so, you know, consumers -- the Commission I

suppose would have to decide exactly how to

allocate that cost, but generally it would go in
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the administrative expenses that are passed on to

consumers through the wholesale market on a, you

know, a megawatt-hour basis. And incidentally if

the claim was large enough, that means ERCOT would

have to draw on its line of credit and there would

be interest expenses. Although in the current

interest rate -- you know, environment that's

probably not a big expense. But I remember the

days when prime was 18 or 19 percent, so.

 MR. PANTANO: One thing to add to

Commissioner Anderson's remarks. If you just look

at the pending FERC manipulation enforcement

actions against parties for allegedly manipulating

transactions in RTOs and ISOs it's probably about

eight proceedings at this point. And I think you

could assume that there would be at least eight

private claims that were brought on the heels of

those claims by the FERC. So there would be, I

think -- you know, I think it's fair to say there

will be a lot of private litigation that results

from permitting private claims under these

exemptions and that they will generate huge
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expense for RTOs and their members.

 MS. WIGGINS: Jeff, did you have

anything to add on that?

 MR. WALKER: FERC does have data on

enforcement, numbers of investigations, but also

settlements, since about 2008, and that would --

might be another way of looking at this in terms

of what kind of a financial impact it could have.

 

 

MS. WIGGINS: Lopa?

MS. PARIKH: Thank you, Dena. Thank

you, Commissioners, for discussing this very

important topic today. This is a very important

issue for EEI members, who are all of the

investor-owned utilities in the United States.

EEI members serve approximately 70 percent of all

end-use customers. About two-thirds of all

electric customers in the United States are served

by markets that are operated by RTOs and ISOs.

And so this is a very important issue for us. EEI

members take very seriously their responsibility

to provide just -- provide electricity at just and

reasonable rates and to maintain reliability. And
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because of that they have invested significant

amounts of capital in the long-term infrastructure

of the markets.

 So just for illustrative purposes,

between 2010 and 2015 they've invested every

single year 70 billion or more dollars in

generation transmission and distribution. In 2015

alone it was projected that they have invested

$108.6 billion. Of that amount about 32 percent

is generation, 18 percent is transmission, both of

which are regulated by FERC. And so this a huge

issue for our members.

 And because of this I want to raise two

points from a little bit of a different

perspective. And I agree with all of the comments

that were made by the three speakers here today.

And I especially want to highlight the need for

regulatory certainty. In order to make these

types of investments in the electric markets --

there are 15, 20, 30, 40-year capital investments

-- there needs to be regulatory certainty. Now we

understand that market rules change, regulators
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change, but there needs to be a process so that we

have input into the market rules so that we are

able to make these long-term investments.

 When the 2013 RTO/ISO order came out we

weren't happy with everything in it, but it did

provide regulatory certainty and set a clear

delineation of what was FERC's jurisdiction and

what the CFTC had retained. The inclusion of the

language in the SPP order threw all of that into

doubt since, as has already been indicated, it had

not previously been discussed or contemplated or

commented upon. And so because of this it raises

serious concerns as to whether at any given time

that exemption order can be changed without

opportunity for notice or comment simply by a

statement in an unrelated docket, which raises a

lot of regulatory uncertainty. Even if the

Commission decides to only apply this to the SPP

RTO, since that's the proposed order in which the

issue was raised, that still creates a lot of

uncertainty for EEI members, primarily because

most EEI members operate in more than one RTO.
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And even -- and so there needs to be equal

treatment and the regulatory rules need to be the

same for all RTOs in order to minimize conflicts

and to create certainty.

 Thirdly, as has already been mentioned,

the Commission did not address what -- whether

these products were actually swaps. And so now to

have the possibility of a number of district

courts and lower-level courts opining on this

decision further creates regulatory uncertainty

for our members as to how these transactions will

be regulated and how they will be addressed.

 The second important issue that I want

to bring up is that it's really important for my

members that conflicts between their regulatory

agencies are minimized. We are -- our members are

regulated by the CFTC, by FERC, by state

commissions, by environmental regulators. And

that's just to name a few. And so it's very

important that in areas where there might be

conflicting jurisdiction or overlap, that these be

minimized to the extent possible to provide
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regulatory certainty. In this case since the

Federal Power Act specifically does not allow

third-party rights of actions, by giving a

third-party right of action through the CFTC for

an area which hasn't been clarified that creates a

lot of regulatory uncertainty and creates a lot of

conflict for market participants as to what rules

will govern going forward.

 And so for these reasons we would

respectfully request that the court issue an order

in the SPP case as requested by SPP without any

reference to CEA Section 22. If the Commission

still decides that third-party rights of action

need to be given, then it should do so with the

issuance of a proposed change to the exemption

orders with full opportunity for notice and

comment so that people can plan their regulatory

lives and have some certainty as to what rules are

governing their transactions.

 And so this is a very important issue.

I really appreciate the opportunity to address it

and am happy to address any questions.
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MS. WIGGINS: Lael?

MR. CAMPBELL: Yeah, thanks Dena. And

thanks Lopa and I just want to follow up a little

bit on Jim's question on costs, and I think Lopa

hit on an important point about, you know,

business certainty, regulatory certainty, and

making long-term investments. So certainly if

there's significant regulatory uncertainty,

additional costs due to threat -- threats of 

lawsuits, meritless or not, that's going to impact

the equation of whether someone wants to invest in

a generation asset or build a generation asset or

buy a generation asset and participate in these

markets.

 And I want to focus on another aspect as

well where the regulatory uncertainty can impact

businesses participating in these markets and

ultimately the consumer. And an important thing

to mention -- I appreciate Jeff. I thought your

comments were great, and I think Jeff really

pointed out an important fact that these are

markets. They are marketplaces. And much like
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the DCMs, the traditional markets that the CFTC

regulates, the things that are important to make

those markets work are also important to make the

ISO and RTO markets work. And that is

transparency, liquidity, people playing by the

rules. And when you add regulatory uncertainty

into the equation you're impacting those things

that are essential to a well-functioning market.

And in particular liquidity. I mean, some of

these products, the financial transmission rights,

virtual transactions, they're essential to

generators like us being able to manage our risk.

Basic FTRs allow us to manage basis risks between

locations within the ISO and RTOs. For

electricity transmission, Day-Ahead and Real-Time

virtual markets allow us to manage the risk

between a price that comes out in the Day-Ahead

and a price that comes out in the Real-Time. And

when there's regulatory uncertainty, the fear is

you're going to lose liquidity in these markets so

that a generator like us go to to manage those

risks. And that ultimately is going to increase
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the cost of doing business, and ultimately those

costs will be passed on to consumers. So that's

just another angle to consider as far as the

regulatory uncertainty and the potential impact

here.

MS. WIGGINS: I just want to note that

as far as I know no one on the phone has requested

to speak. So if someone is on the phone and wants

to speak, please let me know. Arushi?

 MS. FRANK: Thank you. Thank you,

Commissioners and thank you speakers for

addressing this issue today. The other side of

the coin on uncertainty isn't just for the

regulated industry but it's also for the

regulators. And I want to make that point by

emphasizing this whole notion of jurisdiction with

district courts and the typical way in which you

would traditionally see a decision by an agency on

an order, rule, or appeal, which is through the

federal courts of appeal.

 The courts of appeal as we know -- if

you're in litigation of the Federal Power Act,
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have developed expertise to be able to look to

doctrines like Chevron and give deference to the

agency on its areas of expertise. By creating

this new private right of action venue for private

suits to take place in the federal district courts

it unwinds the agencies' ability to create settled

expectations for themselves in negotiations and in

the policymaking and all the work that this

Commission is probably doing now and continues to

do in its coordination with the FERC and with

other regulators. If the (inaudible) unwound in

district court creates a new specter of

uncertainty for the agency itself. It's all of

the work, all of the time, all of the resources

that this Commission spends on deciding what it

will regulate, what it won't regulate. Even as

aspirational goals, what it thinks -- should be

regulated in the future. The private right of

action issue just by virtue of the fact that it

creates the specter of an entirely new course of

litigation that is not subject to the traditional

ways in which an agency would be able to defend
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its own position in the federal courts of appeal.

It's a very serious concern. And you can see that

play out in a lot of the discussions that have

happened around the lack of a very specific

provision in Dodd-Frank that would permit the

challenge for final CFTC rules and orders in the

federal courts of appeal. The fact that those

cases can also be brought in district court under

general jurisdiction, Section 1221 of the U.S.

Code. The fact that we already have that is

already an issue, and creating this entirely new

area where you can go to the district courts and

effectively upend what this Commission has done

and the work it will do to determine where it will

be regulating and where it won't, that creates a

problem for the agency too.

 So the concern is from all sides. It's

not just for the industry. I think there is a lot

of value in thinking about what kind of problems

does this create for the agency's own position and

the aspirations it has for the markets it wishes

to regulate and the ones that it wishes to forward
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to -- would rather defer regulation to other

regulators.

MS. WIGGINS: Sue, and then we'll turn

it back to Jim.

 MS. KELLY: Thank you. I believe that

Lopa has raised a very good point when she talks

about the procedural implications of proceeding

this way by simply putting this in the SPP order

instead of having a notice and comment and a full

airing of the issue. Having worked a lot on these

issues in the years right after the passage of

Dodd-Frank, there were times when the relations

between the CFTC and the FERC were rocky. And I

think we've come into a period of relative calm

more recently, which I think those in the industry

have welcomed. So this could potentially -- you

know, there's no one from FERC here, so let me

just say it for them: this could really ruffle

some feathers. So I think if you are going to

tread into this area you need to do so very

carefully and respectfully of the two agencies'

jurisdictions and have a real full airing of this
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issue. I would just like to make that point.

 

 

MS. WIGGINS: Jim?

MR. ALLISON: Thank you. A legal

question from one of the non-lawyers in the room.

So all three panelists and the subsequent

commentaries have argued vigorously that a right

of private -- private right of action is not

appropriate in this context. So is there a

context elsewhere in the U.S. legal system in

which private right of action does work and if so

how do we distinguish the current context from

that context? I guess start with Paul on that

one.

 MR. PANTANO: Well, there have been --

you know, it's been permissible to file a private

right of action for, you know, a loss that you've

incurred trading futures contracts, and now swaps.

Or getting advice about those kinds of

transactions. And those cases, you know, involve

exclusively CFTC-regulated products. And, you

know, they don't raise the jurisdictional

questions that -- allowing those kinds of claims
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would raise when you're dealing with exempt

transactions. And as I mentioned at the

beginning, you know, there -- all the exemptions

that have -- that have been granted over the

course of, you know, almost a quarter of a century

have not permitted private rights of action

because I -- you know, I think for good reason

because if you allow private claims based on

exempt transactions then it raises all the

jurisdictional questions that the, you know,

exemption is intended to avoid.

 

 

MS. WIGGINS: Lopa?

MS. PARIKH: And I'd also like to note

that there is a venue for there to be private

rights of action at FERC. As noted in the

comments that EEI, APPA, EPSA, and NRECA filed on

the proposed order, there is a provision in the

Federal Power Act under Section 306 which allows

private complainants to bring complaints to FERC

on violations of the Federal Power Act. And so

there is a provision for private parties to go to

FERC if they feel like there is a concern. In
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addition to the FERC enforcement, through their --

enforcement division on the market manipulation --

market monitors in the RTOs, ISOs, there's a

significant oversight to make sure that there

aren't any complaints or aren't any issues. So --

but there is a provision. So it's not like there

isn't anything that addresses the issue.

 COMMISSIONER GIANCARLO: Lopa, do you

know if that medium has been utilized in the past?

Do you know if aggrieved parties have utilized

that ability?

 MS. PARIKH: I believe there have been

some cases in which it's been utilized. I don't

have any cites right now. I believe there was one

in our filing that we made and I can provide more

if needed.

 MS. WIGGINS: If there are no other

questions from the group, I have one question for

--

 COMMISIONER GIANCARLO: (inaudible) the

Chairman.

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Mr. Chairman. Go ahead. No, please. Very

quickly then. I just have one question. I do

want to make sure we get to the Chairman's

question obviously. And that is you mentioned in

your comments that you didn't think there was any

systemic risk to the RTOs or to the U.S. financial

system that would flow from an RTO or a ISO

transaction. I was just wondering if you could

expand on that a little bit?

 MR. WALKER: Well, I think, you know,

the RTOs don't involve global insurance companies,

global swap dealers perhaps. Maybe they do in

some cases. But the scope and scale of an RTO is

certainly not something that would cause a global

systemic issue like we saw back in 2008 to the

financial system. And we don't see that any -- if

you look at the RTOs they're all based upon

location. They're not national markets. And so

since they're not national they can't even be

global either. And so I think you've got a lot of

participation primarily by physical entities. And

obviously the electric companies have to use
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those. There may be others there. It could be a

swap dealer, but we don't see the impact from

within an RTO going to a global systemic issue in

any way.

 

 

MS. WIGGINS: Mr. Chairman?

CHAIRMAN MASSAD: Well, I appreciate all

of the discussion and the comments. And this is

an issue we're thinking about very carefully. I

would just like to make one point which is I guess

I appreciate the desire of anyone in business to

have regulatory certainty or to have less

uncertainty. There's no question it's a lot

easier to run your business when you know exactly

what the rules are and what will happen in the

future. The fact is we have a system involving

administrative agencies that regulate and then

many decisions go to courts. And there've been a

lot of comments about the risk of, well, there

could be a court action to which the

administrative agency isn't a party. Or there

could be district courts that render different

decisions that are in conflict. We face that
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every day. There are courts that have proceedings

that affect our enforcement and interpretation of

the law and we are not a party to those

proceedings. We file amicus briefs in those

cases. There are courts that render inconsistent

decisions and we then have to deal with that. So

I don't think that issue is really unique here.

I'm not saying that to minimize your concerns. We

certainly want to balance the value of regulatory

certainty, if you will, with the need to make sure

that there is adequate recourse for private

actors. And, you know, our law does -- the CEA

does provide for private rights of action.

 So, you know, I'm still thinking about

all these issues. I think we have taken a lot of

public comments on this in the context of the SPP

order. I think there's different views as to the

history of what we've done in the past, whether,

as Paul says, we've never preserved things or

whether we've simply not been explicit. But in

any event, I think the discussion was a very good

one. It illuminated a lot of concerns in detail,
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and that was very, very helpful. I think all of

us, again, are trying to strike the right balance

here. Thanks.

 MS. WIGGINS: I think with that we are

out of time for this panel and for this

discussion. So thank you very much to all of our

panelists who are coming here and sharing your

thoughts and views with us. We very much

appreciate it. And now we will take about a

15-minute break and reconvene here at 11:45 for

our next panel discussion. Thank you.

 (Recess)

 MS. WIGGINS: Eileen, I think you're

leading us off, so whenever you're ready please

feel free to start.

 MS. FLAHERTY: Okay. Thank you. Good

morning. My name is Eileen Flaherty and I'm the

director of the Division of Swap Dealer and

Intermediary Oversight. And what I'd like to do

is just give a brief overview of this topic, the

discussion on the de minimis. My colleague Sayee

and I will briefly discuss it, but we'll try not
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to take up too much time so we can allow the

maximum for the committee members to give their

views.

So we have issued jointly between my

division and the Office of the Chief Economist,

staff has issued a report on the de minimis level.

It is a preliminary report. It was issued in

November with a request for public comment. In

simple terms, the requirement of the rule is an

entity that engages in dealing activity in swaps

at a level of $8 billion or more is required to

register as a swap dealer, and that is a

significant undertaking with a lot of consequences

that come with it and we're well aware of that.

 We're in what's called a phase-in period

right now. And set in December of 2017 that level

drops to $3 billion if nothing happens, if the

Commission takes no action. So the rule required

that staff, using the data that was available,

come up with a report to try and help inform the

discussion, get public comment, get the

conversation going. So the report has different
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aspects, different sections, discusses different

things. It talks about the purpose of swap dealer

registration. The importance of that, why

Congress wanted that, what's in the public

interest.

 It also talks about the need to have a

de minimis exception to allow entities to engage

in a certain about of swap dealing activity

without having to trigger that obligation to

become registered as a swap dealer. The report

also talks about the $8 billion notional level and

whether that really is a good level, and whether

that makes sense. It talks about there were

possibly other ways to look at it: Transaction

counts, counter party counts, maybe in combination

with a notional threshold, and whether that makes

any sense.

 And the report also talks about, and

raises the question, whether swaps that are

dealing or non-dealing swaps, if they are executed

or traded on a SEF or a designated contract market

and/or cleared should they even be counted in that
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$8 billion notional level or that $3 billion

notion level. So it asks those questions in an

effort to try and help draw out the discussion and

help to inform the Commissioners, ultimately, if

they choose to make any decisions.

 So I'd like to ask my colleague, Sayee,

to maybe comment on some of the methodology used.

 MR. SRINIVASAN: Thanks. Eileen. My

name is Sayee Srinivasan. I'm the chief economist

in the Office of the Chief Economist. Looking at

this report was an interesting experience. This

is the first time we were putting out a report

using swaps data. Staff in our office and in

other divisions worked with this data, and we have

been publishing this thing called the weekly swaps

report since October 2013, and so we leveraged

that data to perform the analysis for the study.

 A lot has been written about, and also

reflected in the comments, about the quality of

the data. There are two big challenges we face

when we are doing the analysis. Missing data,

since required fields are there and people haven't
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been filling in those fields. And in the data we

describe some of the challenges that come from not

having the further information. For instance, for

interest-rate swaps, about 15 percent of the

transactions that we were looking at did not have

relevant LEI, so we want to do sort of analysis of

who's doing what, and if the LEI information's not

there it's a problem.

 And the second issue is also the fact

that we don't require all the relevant fields that

we might need. For instance, if we want to study

dealing activity then is there a flag for dealing

activity? Now it's a big question in terms of

whether we should even require people, can people

even identify at the time of a transaction whether

it's a dealing act or hedging act.

 So the SDR data as such is a work in

progress. Just a couple of days ago we had the

Technology Advisory Committee further discussions

about the data and the efforts that need to be put

in place to improve the quality of the data. So

in the report we spend quite a bunch of time to
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describe the data that we have, missing fields,

and then when we started doing analysis, and this

goes as an economist doing empirical work, you

never have perfect data. There'll always be

missing data. You wouldn't have information

relevant for the questions that you're trying to

answer, so you would ordinarily make some

assumptions, and what you try to do in the report

is list all the assumptions.

 So once again, returning to the issue of

dealing activity, because we don't have a flag

which identifies dealing activity, we come up with

some proxies. And we describe the proxies, so we

looked at number of counterparties, number of

transactions, and there are many more that we

could look at. But we just said for the purpose

of the report that (inaudible).

 We asked a bunch of questions in terms

of the methodology. I won't go into all the

detailed findings in there, but I think we

resisted trying to draw any conclusions from our

findings, but we also comment on how to interpret
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the findings. One of the challenges we had in

conducting that study is that -- one challenge,

it's an interesting issue is with each of the

asset classes they have different market

structures. So I think it's in one of the comment

letters it was identified that if you look at

rates, credit, and FX, you have a dealer on at

least one side of over 90 percent of the trades.

But if you look at commodities that's not the

case.

 And even within commodities it's, as we

know, it's difficult to identify the notional USIs

of the trade, and when we look at commodity

transactions, if a commercial end user is using a

swap transaction to hedge the risk, if you want to

look at the economic trade, the economic trade

would be represented by four or five different

individual USIs. So somebody uses an option

structure, and many corporates use option

structures to hedge their trades, you have to look

at the SDR data and figure out which are the

relevant transactions, and how do you sort of
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combine them and figure out what's the economic

trade that was done?

 So there's all these complications that

are there, and we have sort of limited resources

in terms of being able to sort of get to that

level of granularity. But we have sort of taken a

good first crack at doing the analysis and

presenting the results. And I'm sort of going to

give it back to Eileen to sort of describe the

next steps.

 MS. FLAHERTY: Sure. Before I talk

about the next steps, just maybe some observations

on the comments because we've had some time to

look at them. We received 24 comments, and this

is a very important process for organizations to

come forward and really give their views, and they

did. Received 24 comments and some of these

comments represent organizations that have large

constituencies, so it really was a good cross

section of comments, and a really good period for

that.

 Some of the observations, again, without
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drawing any conclusions, but some of the

observations. Two of the commenters preferred to

go to the $3 billion level, and they thought that

that was appropriate. The majority of the

commenters believe that the $8 billion level or

greater should be the level, and many, many

commenters requested that the Commission take

action to adopt an interim final rule so as not to

allow the level to drop from $8 billion to $3

billion.

 Many commenters also said that trying

to, you know, use transaction counts in addition

to a notional or counterparty counts, those other

two, the transaction counts and counterparty

counts can be misleading for different types of

market sectors, and they suggested not using and

not going to that. And then another group

commented on the insured depository institution

exception, the exemption, stating that it was too

complicated, mostly regional banks and groups like

that were very interested in having some further

views on that and for us to look at that further.
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 So people say, so what now? And what

are the next steps? The next steps are a good

analysis of the comments and really, kind of,

getting our arms around those, and to draft a

final report. So staff working collectively

between the divisions, we will be producing a

final report. Thank you.

 MR. CAMPBELL: Thanks, Eileen. Good

afternoon. Chairman Massad, Commissioner Bowen,

Commissioner Giancarlo, fellow members, and

associate members of the EEMAC. Lael Campbell.

I'm here today on behalf of the Commodity Markets

Council, which did submit comments in this docket.

But full disclosure, though, I am an associate

member of the EEMAC and representing my company,

Exelon Corporation, and in particular, its

subsidiaries, Exelon Generation and Constellation.

 It's a pleasure to be invited here to

present on what is a very important topic to

commercial energy firms, and to be able to do it

alongside longtime friend and colleague, David

McIndoe. The purpose of our presentation is to
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discuss the perspective of commercial end users on

the recent preliminary report submitted on the

swap dealer de minimis exception. Many of the

perspectives we're going to discuss today were

covered in comments or submitted by the Commodity

Markets Council, Commercial Energy Working Group,

and other associations and organization

representing the interest of commercial commodity

firms.

 Chairman Massad, I just want to say at

the outset, appreciate your thoughtful comments

this morning on this topic. We certainly

understand that it is a preliminary report, and

hopefully the comments that you received from a

broad array of folks in the marketplace will help

the Commission as they move along here with this.

What am I doing?

 

 

MR. MCINDOE: Let's do this.

MR. CAMPBELL: Okay. I am just adding

icons everywhere.

 

 

MR. MCINDOE: There we go.

MR. CAMPBELL: All right. No.
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 MR. MCINDOE: How about that? There we

go.

 MR. CAMPBELL: All right. Just want to

start off with the recommendations we'd like to

make in these presentation. We recommend that the

EEMAC should recommend to the Commission that

first it issue an interim final rule setting the

de minimis threshold at $8 billion, and that the

Commission do this as soon as possible.

 There is some urgency here. Changes are

going to be -- need to be made beginning this

year, 2016, and well before the end of the year.

As of right now, the de minimis threshold is set

to drop by as much as 60 percent at the end of

2017. But because the threshold is calculated

using a 12 month lookback, really, people are

going to need to make changes heading into 2016,

and those changes are going to have to happen,

probably, well in advance of the end of the year

because it's going to involve significant changes

to policies and procedures within companies, and

business decisions that those companies are going
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to make. Those business decisions not only impact

the individual companies but also the broader

marketplace. So, again, these is some urgency,

and the urgency is in 2016.

 The other recommendation is that we

dramatically improve the information it receives

before taking any other action regarding the de

minimis threshold. The CFTC identifies specific

regulatory objectives that are not sufficiently

met with the de minimis structure at its current

$8 billion. And also, in addition to that,

analyze the costs and the benefits of obtaining

these objectives. What are the objectives here?

What are the costs and benefits of attaining these

objectives?

 Finally, and very important, getting

back to the business certainty decisions that need

to be made. As the de minimis drops, people will

be making business decisions. A key component of

that should be what the final capital rule is for

swap dealers. It's very hard to make important

business decisions about what it means to be a
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swap dealer or not when we don't yet have a final

capital rule.

 MR. MCINDOE: All right. I'm going to

talk about some of the concerns of commercial

firms that are addressed by the proposals that

Lael had just talked about. What would happen if

there was an automatic drop in the de minimis

threshold? I think the important thing for EEMAC

and the Commission to think about is would there

be any policy objectives served by letting that

happen? And we think the answer is no. In fact,

looking at the preliminary report, and granted,

this observation is limited to the rates and the

credit markets. That a drop to $3 billion would

take in only 83 firms. That's about 1 percent to

2 percent of the market measured by notional

amounts.

 Now, that observation assumes that those

83 firms wouldn't change their behavior, and I

think one of the themes that we want to bring

across in this presentation is that if you lower

the de minimis threshold you should expect firms
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to change their behavior, going to the point Lael

said about business planning.

 The other thing that we're going to talk

about more in this presentation is the harm that

commercial markets will suffer as a result of the

lower de minimis threshold. And if you

automatically let it drop you will have,

essentially, not performed a cost-benefit analysis

that really is crucially important to the market

right now.

 Now, I want to say some initial

observations about the preliminary report. I will

say it was very well-received by the commercial

markets. We thought it was quite balanced. We

noted the staff did a great job of saying, this is

what our challenges are, here are the creative

solutions, and here are some good proposals. We

encourage that kind of dialogue with the

commercial markets, the Commercial Energy Working

Group, Commodity Markets Council, and many of the

other EEMAC members and their organizations. This

is the kind of process where getting dialogue with
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the market, I think, instructs the Commission

well. So we'd like to salute the good efforts

from the staff.

 One of the concerns that we had about

the report though was the return of the concept of

the counterparty count and the transaction count.

You know, the market has adjusted to the swap

dealer definitions, albeit with some flaws. One

of the concerns that we have though is every time

we, essentially, put in new criteria to measure

swap dealing firms have to implement measures in

compliance structures to adopt these new changes.

Not seeing any policy objective by putting on

commercial firms more compliance measures for a

definition that's pretty well understood right

now.

 Also, you know, counterparty counts and

transaction counts are measurements of numerical

things. But the swap dealer definition goes to

what is essentially a quality of behavior.

There's a disconnect. Lots of people may do many

transactions, but they may be doing it for
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purposes other than swap dealing.

The last point, and this has come up a

lot in this presentation in the prior panel, is

that the $8 billion threshold right now is

something that businesses can plan to. But as it

currently stands, there is uncertainty in the

market. What will the Commission do? How do we

make business decisions about the fact that the de

minimis threshold may lower? That is a cost to

businesses that they incur right now.

 All right. Let's talk about the next

one. I think on the other side of it we want to

note and ask the Commission to note that the $8

billion threshold has actually worked pretty well.

You've already captured a very large swath of the

OTC market. You know, looking at the OCC data,

granted that it's limited to commercial banks,

that data already tells us in its most recent

report that the top four commercial banks have

about 90 percent of the OTC market. We note that

those four banks, in fact, the top 12 banks

identified in the OCC report are already
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registered as swap dealers.

 We also know from the preliminary report

that about 78 percent of the transactions that you

have information for involved a swap dealer

already. Arguably, your $8 billion threshold

currently meets the regulatory objectives that

were set out by Congress, and identified by the

Commodity Futures Trading Commissions when putting

out the swap dealer rule. And again, commercial

firms have been able to adapt their businesses

quite well to $8 billion. They've set up

infrastructure to know where they are relative to

that structure.

 MR. CAMPBELL: So I'll talk a little bit

about, you know, the cost side of the equation

with lowering the de minimis. The first bullet up

here talks about regulatory costs since,

obviously, a factor for the Commission to

consider. You know, are these additional costs

worth it to change, what is essentially, a very

limited portion of the market?

 The most important cost, you know, is
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the cost to the market itself, to participants in

the market. You know, there is going to be a

natural business decision to lower your activity

and swap dealing, and we're going to talk a little

bit about an example we've already seen of that in

the past. Less liquidity has a significant

impact, ultimately, to end use consumers.

Decreased liquidity, increased concentration of

transactions into a limited number of

counterparties increases hedging costs, increases

bid ask spreads, volatility in commodity prices.

And ultimately, those costs are passed on to the

end use consumer.

 We saw this. We saw this after the

original swap dealer definition came out and there

was a separate threshold for transactions with

special entities. That threshold was

significantly lower than the $8 billion. It was

only $20 million. Businesses reacted, most

businesses reacted in the way that we suspect they

will act again if the de minimis is lowered again

in that they ceased transacting with these
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entities.

 I remember sitting here in this room on 

a roundtable to discuss this issue of the special

entity de minimis threshold. I was at the table,

and, you know, APPA, Munis, Ags, Co-ops. Many of

these counterparties that are physical

counterparties with us were here to say, listen,

we've lost liquidity. We are losing

counterparties. There are people that will not

transact with us anymore, and we're one of those

parties. We made this decision not to do

financial transactions with these entities. That

was a business decision that we made. They were

quick to point out, and there's a quote here from

testimony before Congress, about just the impacts

they've seen. The inability to hedge, and the

fact that they were suddenly being subjected to

wider bid ask spreads. So when these Munis and

Co-ops are seeing wider spreads, more volatility,

higher prices, those prices are ultimately passed

on to the customers of those Munis and Co-ops.

 MR. MCINDOE: I think one of the
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encouraging things about hearing from staff

already is that they've noticed that this

commercial market, and the market for commodity

derivatives, is different from other markets.

Look, it's a very small slice of the overall OTC

market. Looking at Bank of International

Settlements and its data, and again, going to the

point that no dataset is perfect, it does suggest

that the market is about 1 percent of the OTC

market.

 Also, it's important to realize that the

players in the commodities derivatives

transactions, to the extent that they represent

commercial firms, really are not the firms that

are presenting systemic risk, one of the stated

goals of the swap dealer definition. Important,

and also echoed earlier, was that it's a very

different market. A lot of people trade in a

bilateral transaction, and in many of those

transactions there is no swap dealer. This has

been a repeated theme across many commercial

commentators, even from the very beginning of the
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Dodd-Frank and derivatives reform under that

legislation, which is the derivative markets

involving commodities often have transactions

where no swap dealer is present and no swap

dealing is being conducted.

 The other comment that's been frequently

made is that typically many of the transactions

are done ancillary to a physical purchase and sale

of a commodity. All right? We're going to talk

about that in one of our examples.

 MR. CAMPBELL: Thanks, David. You know,

before I get into the example I just want to talk

about the reason why non-swap dealers can meet

each other in these markets, in these bilateral

OTC swaps markets and transact with each other

without their being a swap dealer present.

 First of all, a lot of these

transactions happen between counterparties that

transact with each other all the time in the

physical space. So you already have a credit

relationship established with that counterparty, a

business relationship with that counterparty. You
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know who they are, who to call to discuss a

transaction. There could also be collateral

efficiency reasons why you'd want to transact with

those counterparties. I mean, remember, when

you're exchanging credit between counterparties

you're factoring in all your exposure to that

counterparty, both physical and financial, so

there could also be specific reasons why

transacting with another commercial entity is much

more beneficial than transacting with a

traditional financing entity, swap dealer, or

bank.

 Secondly, the physical commodity markets

are diverse. There are participants on all points

in the supply chain. And so throughout that

supply chain you will have natural longs and

shorts. People that are long the physical or

short the physical that would have a natural

reason to want to conduct a transaction with each

other where it would serve as a hedge for both

parties, so.

 MR. MCINDOE: Are you going to try that?
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 MR. CAMPBELL: I'm going to brave it

again and try to touch this clicker.

 

 

MR. MCINDOE: I hear it.

MR. CAMPBELL: I don't know if that's

the right thing. All right. Here we go. All

right. So I'm going to use this mouse here to

sort of walk through this chart. I mean, this is

a -- everybody should have a copy of this and this

will be made available, so people will be able to

stare at it later on if they don't quite

understand it.

 But this actually is a somewhat common

transaction that occurs in the electricity

markets. This will be a transaction in an

organized electricity market where there are

competitive retail suppliers. So in the bottom

middle here that is a retail supply. That's an

entity that's able under state regulations to go

out and sell electricity to retail customers,

customers over here. These could be businesses.

These could be houses -- you know, just you and I.

You know, right now we're in the PJM footprint and
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the General Services Administration actually has a

contract with a retail supplier to purchase

electricity that's probably lighting up this

building.

 So there's a retail supplier here, and

that retail supplier has customers. So the dotted

lines here are the actual electrons. Those are

the megawatts. So that retail supplier is selling

electricity to the customer, and in return that

retail supplier is receiving what is typically in

these retail contracts a fixed price. Now, the

key here is in these ISO and RTO markets, you

know, we talked about on the last panel, these are

our marketplaces.

 And in these markets, there are

wholesale electric markets, physical electric

markets where all the power flows through the

centralized marketplace. And that centralized

marketplace has an hourly price signal that is

changing, variable price signals every single

hour. So both people that are selling into that

market, and people that are buying from that
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market, unless they hedge that price risk, they

are going to be subject to that hourly change in

prices that is constantly happening.

 So for that supplier who has to procure

his supply from the wholesale market to ultimately

provide it to his customer, that supplier is

exposed to those changes in market prices.

Obviously, he's going to want to, ultimately,

hedge his risks so that he's procuring his

wholesale supply or has hedged in a way that his

cost of procuring wholesale supply are lower than

the fixed price he's receiving from his customer.

The other way around, he'd be a pretty bad

businessman and wouldn't be a retail supplier for

very long.

 Okay. Moving over to the left side here

you have a generator, and so the generator is --

and so by the way, the retailer supplier is

naturally short the physical supply. He has to

sell it to his customer. He has to buy it from

the market. The generator here on the left, he's

long the physical commodity. He is generating
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megawatts and selling those megawatts into the

marketplace. Again, price changes every hour.

That generator would certainly prefer to sell his

generation forward at a fixed price so he has

certainty of how much the value of his generation

is long term, and not be exposed to this hourly

volatility in prices. So both supplier and

generator are exposed to this ever-changing,

floating price in the market.

 The blue lines here sort of represent

how that floating price is transferred in this

transaction. So in this case, the generator who

is naturally long and exposed to these market

prices and wants to sell forward at a fixed price

meets up with the supplier, who wants to buy at a

fixed price, presumably a fixed price that is

lower than the fixed price he's selling to his

customer. So here you have a swap transaction,

natural long, natural short, meeting in the

marketplace, and neither party to this transaction

is transacting for swap dealing purpose. Both are

hedging legitimate risk that is incurred due to
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price changes in the market that occur every hour.

 MR. MCINDOE: This slide starts off with

a bit of a misnomer by talking about information

problems because really we're talking about

problems that -- in the information that would

suggest either allowing the de minimis threshold

to drop or making a change downward in de minimis

threshold.

 I think one of the central themes that

Lael and I are trying to get across is you have

the data available to you to make a policy

decision to keep the $8 billion de minimis

threshold based on the data that you have. You

have data that suggests that you have a broad

application of the swap dealer rule, and you have

application -- you have data that suggests that

that rule and its implementation has been

reasonably dispersed in costs.

 However, when you're looking at what

data is out there and how it might impact the

commercial and the commodity derivatives market

that data is thin, and that's acknowledged by
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staff, and we applaud staff for saying that. But

we do think that making a decision that's going to

impose costs on a commercial market really needs

to be done in an informed decision-making process,

and currently, that data isn't there.

 We do think that in making a decision

it's better to go get the data that you need to

make the decision than finding an alternative path

through other measures, particularly when that has

impacts on the way other people understand the

definitely of swap dealer.

 The preliminary report. Again, I'd like

to echo that the Commercial Energy Working Group

felt that that report was very balanced and fair.

One of the first things that we noted, and has

been said earlier, the report itself notes that

for commodity derivatives, better information is

necessary. And essentially, one of the biggest

concerns that we had representing many firms that

actively trade and often do swap dealing in

connection with their ancillary business is that

reintroducing the concept of a counterparty test
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and a transaction test is the wrong way to go

about this problem. Again, go back and find

information that you need, recognizing that your

$8 billion threshold right now is perfectly

effective.

 One of the other things that we were

concerned about, and echoes the comments made

earlier, is that not every transaction involves a

dealing transaction, and that the data that was

available to staff was probably over inclusive of

what we would call just trading data or

speculative transactions. The report also had

some suggestions about other ways to look at the

de minimis threshold and, perhaps, implement the

de minimis threshold.

 For the most part the commercial energy

market said, we do not support any of these ideas.

Basically, it boils down to the comment said

earlier, that new ideas require new compliance

measures, which just translates into costs. It

ultimately gets passed through to end users.

 We summarize our thoughts in these
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bullet points, but at this point we'd just like to

open up for questions and comments. And again,

both Lael and I very much appreciate the chance to

sit and talk about the concerns of commercial

firms. Thank you.

MS. WIGGINS: Thank you all very much.

I have lots of tent cards going up now. Lopa, I

believe I saw yours go up first.

 MS. PARIKH: So I agree with all of the

comments that were made by Lael and David, and I

actually just want to add one more item to that

that wasn't really reflected in their comments.

 That is that for energy commodity swaps,

in particular, as Lael noted, the price of that

can be very volatile. And so it's very important

that the aggregate effective notional amount is

set at a level to accommodates that volatility.

For example, right now traded gas and power

products are at levels much lower than they were

just a few years ago.

 If prices go up then, even for the same

level of swap dealing activity, the gross notional
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value for a utility engaging in that activity will

go up. And so the threshold has to be high enough

to reflect the underlying volatility in the

commodity markets. And so that's why we filed

comments supportive of the $8 billion de minimis

limit. And in our comments that we filed with the

Commission on the preliminary report we attached

an example that kind of shows this volatility in

the markets and the need for the notional value

amount to be reflective of that.

MS. WIGGINS: Professor?

MR. PIRRONG: Yes. I was actually going

to make a comment that follows up on what Lopa

said. The use of notional amount sort of reminds

me about the old joke about the drunk looking for

his keys under the lamppost because the light's

better there. You know, the notional amount

doesn't really match up with risk.

 You know, so for example, right now we

see an oil vix that has traded as high as 80 in

the last couple days, but the oil price is low,

and so notional amounts would be correspondingly
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low for new transactions. So there's just not

necessarily a good matchup between risk and

notional amount. So we're not really capturing

what we want to measure, and what we want to

regulate. Also, the comments about the quality of

the data suggest that maybe even the light end of

the lamppost isn't that bright either.

 Another comment I'd like to make, or

actually a question, relates to the issue of, you

know -- definition of how you would know what a

swap dealer is. Well, the main characteristic of

a swap dealer is there's somebody that has a

relatively low net position, but they might have a

large gross position? And was that one of the

metrics that was used in order to identify who

might be a swap dealer? And is that a metric that

could potentially be explored going forward in

order to come up with a more discriminating

identification of who is and who is not a swap

dealer?

 MS. WIGGINS: Tyson, I think I saw your

tent card go up next.
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 MR. SLOCUM: Great. Thank you very

much. I actually have a bunch of observations and

questions, and so maybe I could just ask a few,

and then yield my time back. Because I don't want

to monopolize it all at once if that's okay?

MS. WIGGINS: Thank you. That's fine.

MR. SLOCUM: So my first point is just

an observation for the Advisory Committee. We've

been presented a very interesting presentation

here, but for the purposes of -- in the future, if

the nine member advisory committee seeks to draw

conclusions through any report I think that the

record needs to show that we only heard from one

side of the debate on this issue.

 As the CFTC mentioned, there were other

commenters that advocated for the threshold to

drop to $3 billion. The Advisory Committee has

not heard from those commenters, and I think that

it is critical that the Advisory Committee, before

it makes any sort of conclusions in the future in

any formal way that it must hear from those

presenters as well, so that we have an opportunity
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to see all sides of the debate.

 My next question is for Mr. McIndoe, am

I saying your name right?

 

 

MR. MCINDOE: Yes.

MR. SLOCUM: So I've got questions about

who exactly the Commercial Energy Group is? I'm

not clear as to your organization. Who are your

members, for example?

 MR. MCINDOE: Sure. That's a good

question. We have, in every single one of our

comment letters, described our organization as

representing a cross section of the commercial

energy space. The group has not decided to

publish the list of its members, so I'm not in a

position here to tell you who our members are, but

I appreciate the question.

 MR. SLOCUM: Could you? I mean, your

organization serves as an associate member of an

Advisory Committee. Would you publicly reveal the

names of your member related to your service on a

federal advisory committee?

 MR. MCINDOE: I'm not aware of our
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organization currently being on any advisory

committee.

 

 

MR. SLOCUM: You --

MR. MCINDOE: We would welcome the

opportunity --

 MR. SLOCUM: Is not the Commercial

Energy Working Group an associate member?

 

 

 

MR. MCINDOE: Are we?

MR. SLOCUM: Yes, you are.

MR. MCINDOE: Ron, I'm not aware of

that. But if we are it still puts me in the same 

position of the same answer that I'd have to give

that I have for you which is that would have to

come to a vote of the members. We haven't put

that vote of the members, but I'm happy to put it

to a vote of members in light of your question.

 MR. SLOCUM: Just a couple more

questions, if I may. So I haven't been able to

find any 990 annual reports that your organization

files with the Internal Revenue Service or any

registrations with any state or other entity. So

is the Commercial Energy Working Group a legal
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entity? I'm not clear as --

 

 

 

MR. MCINDOE: No. It's --

MR. SLOCUM: -- to exactly what it is.

MR. MCINDOE: That's a fair question,

Tyson. The Commercial Energy Working Group is a

non-organized, in other words, we have no legal

entity to which any of those filings would apply.

It is a group of firms that are held together by

their own consensus. They're free to go at any

time. And essentially, it's just a working group.

Just a bunch of firms got together, the lynchpin

is Southerland, and our representation of them and

working together. But it's not the same kind of

entity that your questions are aimed at.

 MR. SLOCUM: I'd like to yield, but I'd

first just like to say something for the record.

That I think that if an organization is going to

be providing formalized advice in the format of a

federal advisory committee format, and it's going

to participate as an associate member I think that

it needs to operate with more transparency than

what we see here. I think that it has to publicly
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identify its members. I think it's got to be a

legal entity that at least has -- I mean, every

other organization and company here has to

incorporate somewhere. I have to file 990 forms

with the Internal Revenue Service, and I think

that that should be a minimum request of

participation in a format such as this. I yield,

temporarily, my time. Thank you.

 

 

MS. WIGGINS: Ron?

MR. OPPENHEIMER: I don't think I can

respond to any of that. But at the risk of being

a little bit of a captain obvious, I just wanted

to underscore the timing issue that we have with

respect to the de minimis level. It's been said

that firms need time to plan their operations,

decide their business mix, establish compliance

procedures and systems, and if we need to start

counting dealing transactions under a new paradigm

by January 1 of 2017 that activity has to take

place early in 2016.

 We have to contrast that with the

notion, and we commend the Commission for the
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process it's following with respect to de minimis

having a preliminary report, having a final

report, a proposed rule, an opportunity for

comment, and then a final rule. But that leads

you to the obvious conclusion that we won't know

with certainty until at best very, very close to

the end of the year. That's a collision course

that I think we really ought to try to avoid. So

an early decision in the form of, potentially, an

interim final rule which just extends that

deadline and avoids the collision course that we

know is headed our way would be a very good thing

to do.

MS. WIGGINS: Thank you. Michael?

MR. PROKOP: Thank you very much. I

promise that Ron and I didn't visit in the hallway

before the talk. Great segue about what I'm going

to say. Lael, you brought up the economic impact

of the potential of this going through as is right

now. I would submit right now that the economic

impact is actually already being felt. There are

some firms that are being prudent, if you will.
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That are already looking at what the overall cost

is and the change to their business if this should

go to $3 billion.

 You know, we have a safe zone down below

$3 billion where people operate. They know they

won't fall into any trouble. We have those that

are now our listed dealers. I refer to it as the

no man's land between three and eight where we're

seeing a lot of activity still in the five to

seven, so there are firms that have to take that

impact look. And the various costs that they have

to incur for their business, whether it's people,

policies, procedures, the overwhelming cost of

capital, which in some cases is probably about 65

percent to 70 percent of the total spend of

becoming a dealer if they so choose. And then

really looking at changing their business model,

potentially are they doing it just to hedge? Are

they possibly doing it as an opportunity to

provide market liquidity as a dealer in the

marketplace?

 There are those decisions that need to
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be made. I speak publicly and I do it on the

record very often that if a firm is looking at

doing something like this I encourage them to do

it more sooner than later. My biggest fear is

that the phones start ringing in September 2017

and there won't be anybody there to answer. There

are going to be a lot firms very far down the road

in becoming dealers, potentially, if this goes to

three, and I would encourage those out there to

get started as quickly as possible if they have

that inclination. Thank you.

 MS. WIGGINS: Let me just review the

people I have with tent cards up. We have Russ,

Sue, Jim, Tyson, and Sharon. And, again, I do not

have any indication of anyone on the phone that

they wish to speak. And Paul also, so Russ?

 MR. WASSON: Well, first I'd like to

just state for the record that electric

cooperatives are not special entities. We are not

special entities, but we have a real concern about

the lowering of the de minimis threshold because

some of our larger members use utility operations
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related swaps to hedge their commercial risk. In

these cases we typically only have one, or perhaps

at most, two counterparties. Those counterparties

are usually large and best run utilities. The

idea of being a swap dealer to them is so

repulsive we are almost certain that if you lower

the threshold that they will pull out of that

market, and then our members will be exposed to

more price volatility than they otherwise would

have been prior to the lowering of the threshold.

 

 

MS. WIGGINS: Sue?

MS. KELLY: My members are special

entities, unlike Russ, and it's true, we were

forced to wear the scarlet letter when the special

entities provision was implemented in this energy

space. We very much appreciate the fact that the

CFTC saw fit to reverse that, and I just am here

to say thank you very much. We greatly appreciate

that.

 In preparation for this meeting I

actually looped back to our members to see how is

it going since, and have been told that their
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counterparties, by and large, have returned. That

they very much appreciate that. Some said, you

know, I lost three counterparties and they have

now come back. And they feel like this has been a

great assistance to them and, obviously, one of

the reasons we're still pursuing legislation is,

you know, having been burned once we'd like to

make sure that never happens again. But, you

know, in the meantime, we're very appreciative of

the relief that has been granted.

 I also did poll those same members to

ask them about the three versus eight issue and

actually got some mixed signals. Some are

concerned, some less so, but I think that

reinforces the need for the careful study that

staff has been talking about, and a, you know,

close review of this, so that we fully understand

what a reduction would mean and, you know, if we

need more time to study that I think that should

be taken.

MS. WIGGINS: Jim, I think you were

next.
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 MR. ALLISON: Let me join in commending

the Commission for creating this report and

getting it into the public's hands so quickly so

that we can have this discussion. I am something

of a data hog, and I've turned immediately to

Table 19 on Page 48, and at risk of creating, yet

again, the problem that Craig's old joke talked

about. This is, admittedly, limited to the

interest rate and credit default swap markets, but

it's really, really, really good data, or at least

it appears to be. I'm speaking to the usefulness

of the information, not necessarily the quality of

the data.

 And the question I was asking myself

was, suppose we had had this data in 2012 when we

were debating the level of the de minimis

threshold in the first place, before the rule was

put in place? Where's the sweet spot for the

threshold based on the data we have in Table 19?

My first observation is the sweet spot may be a

number bigger than any of the scenarios considered

in Table 19 because if I look at Column three of
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Table -- Column 1 is the threshold, Column 3 is

the notional value captured at that threshold.

 In both cases, denominated in billions

of U.S. dollars. I note that in Column 1 the

numbers are one or two or three digits. In Column

three the numbers are six digits. As you lower

the threshold from 100 billion down to 1 billion

you capture all of an additional 2 percent of the

notional value. If you go from 100 billion to 8

billion the number of entities captured as swap

dealers goes up by 130 percent. The notional

value goes up by 1 percent. Going from 100

billion to 1 billion you increase the number of

entities by 280 percent for 2 percent of notional

value.

 My conclusion is that of these scenarios

represented in this table, the closest thing to a

sweet spot is not one or three or eight, but at

least 100 billion. And that by setting the

threshold, admittedly, the Commission did not have

these data when it set the threshold. But by

setting the threshold so low the Commission has
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overinvested in regulating swap dealers. In the

private sector we would normally complain about

all the costs that imposes on the private sector

entities that are regulated. Yes, that's true.

There is a dead weight cost to that. In the grand

scheme of the global economy, not a big deal.

A more important issue. The Commission

has a finite budget. I will carefully duck the

question of how big that budget should be. But

whatever the number is, it's finite which means

that overinvestment in one activity forces you to

underinvest in some other activity. The concern

for me from this table is you are substantially

overinvesting in regulating swap dealers.

Something is going undone because of that. The

biggest concern for me was the -- again, the data

quality issue that the Commission staff, that

David, that others, that everybody recognizes.

We've been reporting swap data since 2013, yet we

don't seem to be able to generate for the public

or for ourselves what we really need. Something's

wrong in there.
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 I am concerned that the Commission

resources that have been devoted inefficiently to

regulating swap dealers could, perhaps, be better

devoted to trying to figure out how we fix the

reporting issues. Again, this data was not

available in 2012 when the level was set, but my

interpretation of Table 19 is the level doesn't

need to drop. The level is already dramatically

lower than the sweet spot for setting the

threshold. And, yes, I recognize we are only

looking at the IR and CDS swap markets. But

they're a huge part of the market, and that means

if you actually looked at the total market that 8

billion or 100 billion would be an ever smaller

percentage of the total, so.

 MS. WIGGINS: Tyson? I think you're up

again.

 MR. SLOCUM: Yes. So we've heard from

the presentation, and again, thank you very much.

Decreasing that exemption threshold from 8 billion

to 3 billion would create some harm, and I see

some vague pronouncements about harm. And so the
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general feeling here is that a swap dealer that's

got between $3 billion and just under $8 billion

is what? A small business? Is an entity that has

trouble finding compliance officers to comply with

CFTC regulations? What is the burden of a

business doing $3 billion to $8 billion?

 MR. MCINDOE: A good question, Tyson.

Your question brings a good point which is what is

the cost of being a swap dealer? There are lots

of different compliance items. In fact, the item

that's probably most important is unknown,

especially if you're a commercial firm, which

would be the cost of capital. That's one of the

reasons why at the beginning you have to think

about what would be the cost of capital.

 We advocate that one of the things the

CFTC should do before making a drop or allowing a

drop to happen is finalize the capital rules, thus

allowing businesses to make and be in a better

position to answer your question. Right now the

question says, okay, what is the cost? Nobody can

tell you right now. However, we do know from the
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experience of firms that have registered that

there are a lot of compliance costs. You have the

external business conduct standards. You become

subject to the margin rules. Those are costs that

have to be dealt with and they go to different

people.

Now, there are two ways to react to

those costs. You could either pass them along to

your counterparties, which are many of the end

user firms that people may trade with or you can

slide back from that business and say I do not

want to incur that cost. So I think you have a

good question. I think the point to the

Commission and to the staff is we don't have the

data right now to fully answer your question.

 MR. SLOCUM: I'd just like to say I

think that Congress was pretty clear about the

need to have some sort of transparency to swap

dealers and to the swap market. And that, you

know, I believe that moving that threshold from $8

billion to $3 billion, what captures 83 firms or

thereabouts, it doesn't seem to be that
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burdensome. These are dealers that are doing very

large amounts of business, and if having to comply

with some Commission regulations is overly

burdensome for an entity doing in excess of $3

billion I think that firm has greater problems

than CFTC compliance.

 I do have a couple of additional

questions just on the data issue for the CFTC

witness unless -- I'm happy to yield to other --

 MS. WIGGINS: While we're on the subject

that you had teed up there.

 

 

MR. SLOCUM: Sure.

MS. WIGGINS: I know there are two other

cards that have jumped. Did you have something to

say that's directly relevant to the conversation

that Tyson was just having with David?

 MR. ALLISON: Yes, I was -- real world

example, so at Conoco Phillips when the

registration requirements were first being debated

in -- well, first is probably the wrong word,

2011/2012 we raised with management the strategic

question, should we let our business become big
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enough that we are required to register and, if

so, having to register, do we then grow the

business? Do we intentionally stay below the

level or do we just run our business and if we

have to register we have to register?

 The strategic answer from management was

unambiguously, do whatever you have to do to keep

the business below the level at which you'll have

to register. Driven both by the knowledge of the

explicit costs associated with registration, and

the uncertainty about the other costs, including

the additional CFTC exposure that might be brought

about by registration even though it wasn't

identified as an explicit cost. But it was very

clearly an explicit order from management to alter

the business as however might be necessary to stay

below the thresholds that would require

registration. And the business is, sadly, smaller

today than it was then, but it's still a pretty

darn big business.

 MS. WIGGINS: Tyson, I know you have

some more questions. If you don't mind --
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MR. SLOCUM: No.

MS. WIGGINS: -- if we could go to Paul

and then we'll come back to you?

 

 

 

MR. SLOCUM: Of course.

MS. WIGGINS: Okay. Paul?

MR. HUGHES: I'll try to be quick. A

couple of things. We've mentioned this a little

bit. I think we have to acknowledge the

volatility in the market. Lopa mentioned that

earlier. We are at a -- it is -- the market is

much different today than it was when this first

came in. It's a different stage in the market.

Fortunately, at this point we're able to pass on

low fuel prices to our customers and whatnot, and

that's great. But there's also an element to the

energy market where guys are struggling right now.

 If you look at what's happening in the

markets and what is expected in the next, you

know, over the next summer and the number of

companies, and folks that may be subject to

bankruptcies, this, that, and the other. The

truth of the matter is, for an element or a sector
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in the energy market margins are thin, and yet, we

have wide bid ask spreads. And so I get concerned

when we start talking about this and Lael

pointedly mentioned it and we have the same issue.

Liquidity cannot be just tossed around lightly.

We have to tread very, very lightly on anything

that could impact liquidity.

 This is a little bit different situation

that we've had. We actually have some pretty good

recent history. He brought this up as well. And

the APPA in their issue where they had too low a

threshold before, obviously, they felt it. We

pulled back from that activity as well, and we

say, well, you know, we want to show transparency.

There's some very noble things that we want to do,

but what we don't want to do is somehow drive

folks away. And we talk about the costs and we

don't know. They're uncertain.

 What we do know is certain because

almost all of us in there hedge, and the reason we

hedge is because uncertainty is expensive. And we

cannot forget that. We saw -- you know, even with
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the $8 billion we saw counterparties, we saw what

would be considered traditional swap dealers leave

the market. I can't say with certainty that those

swap dealers left because of the $8 billion

threshold. There's a whole lot of different

elements and activities that have gone on in the

last five or six years. I fully acknowledge that.

But this is just one more.

 And you look where we are now as a

market, you just throw in one more pebble in the

pile, so to speak. At some point you hit a

tipping point. If we do this without a whole lot

of thought and tread very, very lightly then you

hit a tipping point where we lose more liquidity

in the markets, and that would be the absolute

worst-case scenario.

 

 

MS. WIGGINS: Tyson?

MR. SLOCUM: Yeah, my question is for

the two CFTC panelist. First of all, thank you

very much for your time and for your work. I'm

interested in some of these data issues. You had

mentioned that some of the incomplete data was a
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result of missing fields where not enough

information was entered in. Is that something

that the Commission has -- what's the reason that

this data is not in there, and is there a way to

forcibly compel those missing fields to be entered

again? I'm just trying to understand some of this

problem, and then I've got other questions about

the data as well.

 MR. SRINIVASAN: I'll stay away from

forcing people to sort of report data. There are

challenges. There also are challenges across the

different asset classes. And some have to do with

plumbing, some have to do with operational

challenges, some have to do with maybe lack of

clarity from our perspective.

 So I think what you have done is just,

you know, said this is what we have. These are

the challenges that we have. And even in, sort

of, the exchange-traded markets it took a while

for us to get good data. It's just that this is

going to be how the process works. So, once

again, it's -- there are, as I said, there are
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rules in terms of when you missing LEIs one reason

could be there are small firms who haven't updated

an LEI yet. So if there is -- one of the

counterparties for the trade is a registered swap

dealer than the reporting burden is on --

responsibility is on the swap dealer.

 If both the counterparties to the trade

are not dealers than they have to decide who is

going to be reporting. It's possible they don't

have an LEI yet. So there are all sorts of

challenges, and, you know, it's hard for us to

even go and -- given the large number of

transactions, the large number of participants

with the resources we have we just can't chase

down and figure out why people haven't done it.

So what we're trying to do is, at least from an

analysis perspective, this is the data we have and

what do we do?

 But the presumption is that, the hope is

that as time goes on actually the quality of data

will be better, and there are multiple efforts

underway. And many of the focus actually would be
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on the rates and credit side because they're

larger markets and the most standardized. But the

expectation is that, you know, in the next few

years we get better quality data, so.

 MR. SLOCUM: Thank you very much. You

had also mentioned that another limitation was

that the Commission doesn't require the disclosure

of some of this data, and so I guess my questions

are is this just something that is elective on the

part of the Commission that you haven't figured

out a way to ask for this data or is it that you

have the lack of authority to ask for this data?

 MR. SRINIVASAN: So this goes back to

this question of when we started when the rules

were adopted we didn't have any information in the

marketplace, so we didn't have any -- so we had a

fair idea of the market structure, but then the

devil is in the details, and it's (inaudible).

And data reporting is at a level of granularity

where we can capture the aspect of the trade. So

it tends to be an iterative process, and we speak

about that in the data. Even in sort of moving
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away from commodity markets to the so-called more

standardized markets and sort of the rates and

credit. There are all sorts of challenges.

 If you look at the transactions, and the

market is typically evolving also, when

transactions get into clearing what happens with

the trades is the ultimate trade is reported.

What we call an alpha swap. And then when it gets

to central clearing it gets novated. The original

swap is novated and torn and replaced by two

different swaps.

 Now, when we wrote the report, when we

wrote the additional rules we didn't differentiate

between these different types of swaps. Now, we

could have said that, you know, we can comment

that we should have anticipated these things.

Because I'm saying it's like we wrote the report

with sort of an understanding in mind, as we

understand the data better, the market better, we

are in the process of adopting new rules. But

once again, it's a consolidation process that's

underway, so.
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 MR. SLOCUM: That's very helpful. I'd

just like to say for the record that I think it's

critical that the Commission have the resources it

needs to make sure that we've got adequate

transparency and regulation over these markets.

You know, Mr. Allison, you made a comment that I

would echo. I just come to a different conclusion

in that the Commission does have finite resources,

but I don't think that finite resources should

force us to conclude that, well, we don't have the

resources to deal with these swaps markets, so we

should not do it.

 I think that instead one of the jobs of

the advisory committee should be advocating

strenuously to Congress to ensure that this

Commission has all the resources at its disposal

to effectively carry out its duty to ensure that

markets are operating with integrity and that

consumers are ultimately protected. Thank you.

 

 

MS. WIGGINS: Sharon?

MS. BROWN-HRUSKA: Thank you very much.

Boy, there's so much raised here from when I put
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my card originally up. I just kept going. I

mean, very excellent discussion and I especially

appreciate Jim Allison's comments, which I think,

you know, the idea that -- or at least, the

endeavor to explore with -- in a rigorous manner

the optimal level of the de minimis threshold is

really where the Commission and then the good

economists should also look after there's some

action to create certainty with regard to where

the Commission is going to go with the $8 billion

threshold.

 You know, we, in fact, when I was --

earlier, we did do a study at NERA Economic 

Consulting of the costs and benefits of the swap

dealer de minimis level, and how much, based on a

sampling of commercial energy firms, how much, in

terms of the costs that they would face as a

result of registering as a swap dealer using 2012

swap data. We were able to find that the

incremental costs imposed on a typical

non-financial energy company regulated as a swap

dealer was $153 million in increased margin costs,
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$204 million in capital costs. Again, that was

based on proposed capital requirements which are

still largely uncertain. And $31 million to

comply with business conduct reporting and record

keeping requirements for a total of $388 million,

which we found to be non -- you know, trivial.

 And also, I think even more important,

and I think this is the work that really is more

interesting and also more important, is to

determine the impact of the level on market

quality. And that's where I've been the most

concerned as a former regulator of these markets,

wanting to see them flourish because they are so

important to the hedging and risk management

activities of not only these firms that are

producing energy, but to those firms and those

people that consume and utilize that. It's the

backbone of our economy, and so the impact on the

markets have been felt. And we've definitely seen

a price discovery, I think, hard by that.

 We see liquidity. The stories that I

hear from market users that their bid ask spreads
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have increased. The entities that are no longer

using swaps because of concerns that they cannot

-- that they would, you know, push up against or

get the attention of the regulatory authorities,

would push up against the swap dealer registration

requirements. And the potential that we will see

more concentration in market share among the large

players and the financial entities.

 We are also seeing, and I recently did a

little study, sort of back of the envelope

calculations for Risk Magazine, where we looked at

swap dealers and, you know, given the confluence

of the leverage ratios, the capital requirements,

and other compliance costs, which are significant.

That those led many traditional financial players

to want to divest their swap dealer activity and

to, basically, spin it off to private equity

firms.

 So we're seeing substantial changes in

the marketplace as a result of these proposals and

the uncertainty that they create. I hope that --

and I'm always happy to help, you know, try to
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think through these things, but I hope that the

Commission in its effort will continue to seek

more information and do a rigorous cost-benefit of

those impacts on market quality.

 

 

MS. WIGGINS: Raymond?

MR. KAHN: Thank you for the Commission

for allowing me to participate as the FIA

representative for the first time on this

important and, you know, helping work through a

number of complex issues. I think what everyone

has said --and the individuals to the right that

have presented very good data.

 Our commercial and end user members are

looking to the ability to hedge their risk and not

have limitations -- have the least amount of

limitations. I think the recent activity that

we've seen in the market basically shows the

rationale and the importance of being able to

hedge strategically and pragmatically. At the

same time, I think, and what Sharon just alluded

to and Paul alluded to that before, what I did

hear is that liquidity, business planning, cost of
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capital, all the major commercial users are trying

to figure that so they can basically figure how

they can best hedge their risk, best run their

businesses.

 I think it's far more challenging than

it was two or three years ago. Part of that

reason is because of conditions that are market

conditions that, obviously, get better and worse,

and that's just a factor of free and open markets.

At the same time, when you, as the Commission, are

trying to decide what is the right number, and I

don't know what the right number is, honestly say.

I think we have to put in the added challenges

that we now know exist, and Sharon just spoke to

that. If you are trying to hedge your risk,

depending on what products you're using, you have

higher capital requirements coming from your

clearers, right? So you may have higher bid-ask

spreads. That may go away. That may not. That's

a market condition.

 You also have more challenges in order

to find clearing capacity, which is a capital
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issue which we don't need to really discuss here,

but that's -- so when you factor in all these

various challenges of, basically, hedging risk and

entering into these types of transactions what the

FIA, really end user, commercial user is just

looking for and asking us to help with is trying

to, basically, reduce the amount of hurdles they

may have so they're allowed to, basically, execute

their business plans in a way that has the least

amount of potential hindrances that can be

avoided.

 None of them are trying to avoid

regulation or trying to avoid that. They're just

trying to run their businesses in a pragmatic way

with -- and so whether that's $3 billion, $8

billion, I don't know. I can't answer that. But

I think it needs to be factored in what Paul said,

you know, the challenges. What the panelists

said. What Sharon said. All the -- basically,

the challenges that the, basically, the commercial

end users have, and then, basically, make the

final decision based on that along with the
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challenges you have with the data, which has

gotten much better, but continue to be movements.

Thanks.

MS. WIGGINS: I want to sort of take off

my hat here as trying to moderate this discussion

and just be a member of EEMAC here for a moment

and just echo some of the comments that have

already been made. The Natural Gas Supply

Association has submitted comments and I just want

to briefly point out a couple of those concerns

that we have raised in the past which are similar

to many that have been raised here before today,

which is we are very concerned about having this

threshold drop from $8 billion to $3 billion.

 We are very concerned that it will force

market participants to make choices to leave the

market rather than bear the cost of having to

register as a swap dealer. And I was just

wondering, this is a question to -- I guess this

would go to David and Lael, if you all have an

estimate as to -- even for those who want to stay

in the registration business, if the de minimis
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threshold drops I'm assuming that there are

computer systems and other kinds of compliance

systems that will have to be retooled. And do you

have an estimate for the cost of that, sort of,

retooling?

 MR. MCINDOE: I don't have a good

estimate for you. However, I will say that a

preponderance of my clients would echo what Jim

had said which is the natural reaction is to make

a business decision, and many of the firms suggest

that they will curtail their activity which then

brings into the liquidity and the widening and

volatility for the expense. So in some sense,

when we're talking about the rule here it's not

the expense to firms, but it's going to be the

expense as that commodity flows through the value

chain, and is ultimately consumed by households.

 MR. CAMPBELL: Just one thing to add

because there's been a lot of questions around the

cost side of that equation, that business

decision. But I think one thing we mentioned in

our presentation is that, you know, you've also
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got to factor in what's the business value of

being in this business to these entities, right?

The key thing we said was this is not our main

business. You know, commercial firms aren't doing

these types of transactions, like, as the core of

their business. These are ancillary transactions

that happen every now and again, for the most

part.

 I think what they would really have to

weigh is, you know, how valuable is, sort of,

going all in on this business to me versus cost.

So the cost side actually may not need to be that

high for a business to say, yeah, let's just focus

on what we do best which is generating, producing,

and delivering commodities, so.

 MS. WIGGINS: I'll reclaim my moderator

hat. Michael?

 MR. PROKOP: Thank you. Just an

interesting answer to your question. So each firm

that's looked at is unique, obviously. You have

to look at the commodities they trade, where they

trade, what they trade, how they trade. It can be
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as high, I think Sharon you're in the neighborhood

of about 300 to 350. But the last one I did was

upwards of $1 billion. They were in agricultural

markets. They had the full gamut of energy

markets, but, you know, when you talked about the

compliance systems and things like that there's so

much more to that.

There's the record keeping. The

retention. There's the reporting, which is

tremendous. The people that have new

responsibilities: Training, compliance, all

around that. Obviously, additional risk, new risk

that people are now aware of. All have to be

trained and more people hired. Of course, as I

submitted before, again, the cost of capital.

 I think we're in a little bit of a lull

right now in our attitude around this, if you

will, because we're looking at the cost of what it

means to become a dealer. And I think Lopa hit it

right on the head. We're sitting here with oil

where it is, natural gas where it is. You may

make a decision to stay at about, you know, $2.5
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billion. Real quickly, with a couple of good

market moves, you could be at $4 billion, and very

quickly. So not only do you have to hover just

under $3 billion. I feel that you have to go way

below it if you're going to make that conscious

decision it goes down below $3 billion, so thank

you.

 

 

MS. WIGGINS: Paul and then Sharon.

MR. HUGHES: I really just want to ask a

question, and I'm not exactly sure -- it may be

directed more towards you guys and your study. It

may be just kind of open. We have, like Lael

said, talked a lot about cost versus benefit, and

there -- you know, kind of what is the benefit

from the perspective of the commercial business?

I'm curious to know what is the real benefit of

adding an additional, you know, or trying to

capture some higher percentage that's not being

captured right now with the $8 billion? Is that

going to give us better-quality data? Is it to

get a quantity of data and reporting that we

currently don't have that's going to be a
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tremendous advantage based on what we have today?

Or is it in any way going to enhance the quality?

 Because I think what I heard was you

said, and it makes sense, you know, this is kind

of an iterative process. Nobody had done this

before when we first started. You're trying to

get the data. What do we ask for exactly? How do

we communicate that? How do we fill out these

data forms? And then how do we turn in this mass

of data? And so I get it. It's an enormous

amount. What do you do with it?

 Let's say we do go to $3 billion, and

I'm just kind of setting aside all our issues and

concerns, but what does that -- how -- is there

much enhancement? Is the -- you know, we're

talking about how high the cost is, but is the

benefit -- it seems like the benefit may not be as

high as we -- we're assuming it's really high, but

I'm struggling to see the benefit on the other

side. Can somebody else maybe help me out on

that?

 MS. FLAHERTY: I will let my colleague,
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Sayee, who's an economist, comment on the data.

And we don't have a view, as staff, so -- but in

the report it discusses what Congress suggested

were some of the factors that were behind

requiring swap dealer registration, which are

systemic risk, more transparency, counterparty

protections, which are some of them. So, again, I

guess those are some of the reasons -- some of the

things that Congress believed would be captured by

swap dealer registration. If you want to comment

on that data?

 MS. BROWN-HRUSKA: I was just going to

say, I mean, I think we looked at a lot of those

firms that would have been pulled into the

requirements of registration if they fell below

the threshold, and we evaluated them to the extent

that we could see their financials. You know, the

expectation, of course, the benefits that the

Commission and I think Congress hoped would advert

to regulating these entities as swap dealers are,

of course, yes, increase transparency as Eileen

mentioned, and also a reduction in systemic risk,
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and, you know, that there would not be a chance

for these firms to -- their credit or their bad

business practices or to pose a risk to the

financial system such that we would, again, have

to have a government backstop.

 In our analysis, those risks were not

there. That these entities didn't pose systemic

risk of the nature that I think Congress was

concerned about. You know, I think it would be

useful to take a fresh look at the numbers given

so much has changed. It occurred to me in the

discussion that when we did our back-casting to

try to make a determination about margin and

capital costs we had to make assumptions based on

proposed rules, and also based on the assumption

that the amount of margin that would be required

to support -- because as you know, if you have to

register as a swap dealer you have to post margin

on all of your swaps transactions.

 And so we also used the values that we

anticipated which were for cleared margins.

That's all we really had at the time, but in light
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of the fact that the large majority of the swaps

that were held by these energy entities were

uncleared -- were not cleared, who would have

thought we'd create a term uncleared when I was

back at the -- when I was at the Commission. I

mean, it was an OTC derivative that usually has

customized attributes that really wasn't amenable

to clearing, and that we do see that the cost to

clear these transactions or the cost to support

these transactions in terms of collateral capital

is even greater than in the clearing environment,

so I think we vastly underestimated the cost, and

I think Michael's probably update is well-received

as more likely the cost.

 

 

MS. WIGGINS: Chairman?

CHAIRMAN MASSAD: As always, it's been a

very interesting, helpful discussion. I've made

comments earlier on the de minimis level and its

importance. And, obviously, we'll take all the

comments we're getting into account. I just want

to make one comment to the budget point that was

raised and, obviously, I've expressed the view
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that I think our budget is not commensurate with

our responsibilities, but I'm not going to get

into that.

 It was suggested, if I understood the

comment, that our limited resources should somehow

be considered in where we set the level, and I

don't think that is how we should think about it.

Obviously, the limits on our resources affect how

we allocate things and we should, and we do, think

about risk and priorities, particularly when it

comes to compliance and enforcement.

 But with a rule like this, and frankly,

with all of our swap dealer oversight regime, we

set the rules based on what we think is the right

policy in light of the goals articulated by

Congress. And we assume people will comply. We

don't set them based on how much we have for

enforcement of that compliance. And I assume

everybody in this room would say they also do

comply without us taking enforcement action. So I

don't really think that should be a relevant

consideration, if I understood the comment
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correctly.

 

 

MS. WIGGINS: Arushi?

MS. FRANK: Thank you, Mr. Chairman.

Just to respond, not to the direct point, which I

think is very valuable and relevant, but to

something that was raised at the TAC meeting on

Tuesday, and I think it's valuable to raise it

here, too, is that one of the ways that the

Commission can get more resources towards

analyzing the data it has, and its staff can

figure out how to get this data more accurate,

complete, and reliable is to reconvene the data

standardization harmonization committee. Bring

the SDRs, bring the SROs back in the room and

create more opportunities and interaction so that

that data can be reviewed and looked at more

comprehensively.

 I think another part of that is going to

also be looking at the exogenous factors on the

marketplace, and figuring out now whether the

problem that we're trying to solve by reducing the

threshold is at the same level or is greater than
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the problem we're trying to solve on the data

reporting side, in general, with Part 45. So

while I'm not making a case on prioritizing the de

minimis threshold versus Part 45, at least for end

users, my member companies being among them. I

think that the Part 45 data challenge, the amount

of compliance we do, and the fact that the

commission is really trying to figure out how to

make that data that's already being reported more

relevant. That's where the money's at for my

members and for a lot of those who are in this

room.

 And so in terms of resources, A, the

committee being reconvened will be really helpful

to get that work done more quickly, and we also

think it will be really helpful for us, as

industry, to be able to see the Commission

fulfilling its priorities, all of them, through

more outreach to industry. But also to the SROs

and to the other warehouses of data that the

Commission is actually quite fortunate to have.

Unlike other energy market regulators, who really
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don't have that type of outside expertise at their

disposal.

 MS. WIGGINS: I think that's all the

time we have.

MR. SLOCUM: One quick little comment

just to the --

MS. WIGGINS: Okay.

MR. SLOCUM: -- on the budget and

financing. So, you know, Public Citizen has

vigorously supported appropriations efforts and

other efforts to make sure that the Commission has

all of the adequate resources at its disposal. I

think one thing that's interesting is learning a

lesson from the Federal Energy Regulatory

Commission, which is another agency that I spend a

lot of time working before.

 And it is a self-financing agency and,

of course, that's beyond the capabilities of this

Commission to undertake. It's a measure of

Congress. But Congress gave FERC that

self-financing authority in the 1968 Omnibus

Budget Act as a deficit reduction effort. I think
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that that's, you know, in light of discussions in

Congress today about making sure we have a

balanced budget, and at the same time, making sure

that the Commission can have 100 percent of its

needed resources to undertake all of its

responsibilities. Thank you.

MS. WIGGINS: Now, we really have used

up all of our time on the subject, so thank you

all for the presentation. Thank everyone for the

discussion and the input. We really appreciate

everyone's thoughts and feedback on the issues

that we discussed. And I think it's now time to

move to the last item on our agenda.

 We're not going to take a break now,

right? We're just going to move on. Okay. The

last item on our agenda is the presentation of

EEMAC's report summarizing its 2015 proceedings

and closing remarks. As Commissioner Giancarlo

said at the outside of our meeting today, there

are several objectives that EEMAC is supposed to

pursue pursuant to what we -- the authority that

we were given under Dodd-Frank, and one of them is
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to conduct public meetings, which we've done today

and did twice in 2015.

 And another is to submit reports and

recommendations to the Commission, including

dissenting or minority views, if any. And today

we have a report to present. I'm going to ask Jim

Allison to present an overview of the report. As

you all know, there was a dissenting opinion that

was also filed, and after Jim presents his

overview of the report I'll ask Tyson to present

his overview and summary of his dissenting opinion

on that, and then we will have a discussion,

hopefully focused on the merits of the report. So

Jim?

 MR. ALLISON: Thank you, Dena. And I

trust that all of you have a copy of the report

available to you at this point. One technical

point. The statutory authority to issue the

report went along with the committee that the

statute created which was this nine-person

committee. The Commission, I think wisely,

expanded the activities around this table
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substantially versus that nine members in order to

do a better job capturing the scope and spread and

diversity of the energy and environmental markets.

 For the paper, however, the vote to

release the paper was limited to those nine

members. And our names are in the report along

with the direction in which we voted, but the --

what we call -- sometimes call the associate

members were not invited to vote, and I think it's

appropriate to recognize that as we make the

presentation on the report.

 As Dena said, we had meetings in 2015.

We had two meetings. We generated hundreds of

pages of transcript. We generated additional

comments in the comment filings, including some

comments that were actually new. Those have been

somewhat rare of late. We did generate some new

comments, and now we have a report.

Let me focus on four points: Necessity,

liquidity, the scope of the bona fide hedge

definition, and what I'll call some practical

challenges that will have to be addressed if,
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indeed, the Commission does proceed to finalize a

federal speculative position limits regime.

 First, with respect to necessity. The

conclusions from our meetings, as reflected in the

transcript, found little to no evidence that a

federal position limit regime would be necessary

to reduce or deter excessive speculation. Now,

we've reviewed academic literature. We heard, in

particular, from Craig Pirrong. There is some

divergence in the academic literature, but the

best consensus of the academic literature is that

the evidence does not support the conclusion of

excessive speculation. And I would note that in

the comment filings after that February meeting,

and this is in Footnote 11, there was an

additional academic study filed that further

supports that conclusion and rebuts one of the

earlier studies that appeared to show a connection

between speculative activity and pricing.

 We also heard from the Energy

Information Agency and Administrator Sieminski,

who made it very clear that the change in energy
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prices that we were observing and that has

continued since then was driven by supply and

demand considerations, the fundamentals. In

particular, what we call the shale oil revolution.

In the absence of more complete information about

the necessity for a rule, the report concludes

that it is unlikely that any federal speculative

position limit rule could pass a cost-benefit

test.

Second, liquidity. We heard in both

meetings last year and have heard again today

about the reduction in trading liquidity both in

physical markets and in derivative markets, the

adverse effect that has already had and is

continuing to have on the ability of entities that

are interested in hedging and finding

counterparties and the correct hedging

instruments. The liquidity issues are more severe

the further out you go on the curve, and are more

severe at specific delivery points versus the

NYMEX delivery points, for example, with the

physical futures contracts. Unfortunately, it's
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that specificity of time and location that is

necessary for an efficient hedge, so the mere fact

that there is still good liquidity at Cushing or

Henry Hub is not sufficient to get good liquidity

for efficient hedging. We also saw evidence on

widening of bid-ask spreads and reduction in depth

of market.

Third, the scope of the definition of

what is a bona fide hedge. This has been the

topic of many, many pages in comment letters. We

heard presentations, specifically from Ron, about

particular examples of hedges that are commonly

used to reduce risk in the commercial space that

would not appear to be authorized as bona fide

hedges under the rule as it currently stands. And

we were not able to elicit any cogent rationale to

explain why they were excluded. The limitation on 

what is allowed as a bona fide hedge would, again,

have significant effects on entities that wish to

hedge.

 Finally, if the commission does decide

to go ahead and finalize the rule, there are
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several practical challenges that I think should

be addressed in finalizing it. Practical

challenges in terms of where do the resources come

from to manage all of the details that must be

managed in a federal regime. The exchanges have

substantial resources and substantial experience

doing this, and exploiting those resources and

that experience would seem useful.

I don't think that will reduce all of

the potential harms of the proposal. We also

talked about using, in the out months,

accountability levels rather than position limits

in order to reduce some of the threats of the

regime. Again, based on what we heard eight

members of the committee voted in favor of the

report, one voted against it.

 In terms of the proposals, again, if the

committee goes forward, we would recommend that

the flaws in the bona fide hedging restriction be

addressed. We need access to bona fide hedging

treatment for all of the hedging strategies that

have traditionally been used to reduce risk. And
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the rule as proposed grossly restricts that.

 That can be done through expanding the

list of enumerated hedges. It can be done through

an effective and efficient process for handling

non-enumerated hedges. Most likely to be a

combination of the two.

 Second, the recommendation was imposing

a position limit only in a spot month and doing

only that, originally, reserving any action for

the out months until we've got more experience

with how the federal regime affects things in the

spot month.

 Third, the position limits as they stand

now are predicated on deliverable supply

estimates. The deliverable supply estimates we've

been working with are grossly out of date, and we

must have deliverable supply estimates that are up

to date and reflect particular characteristics of

each commodity. There have been proposals from

both CME and ICE on updating deliverable supply

estimates. Those, I think, have not yet gone

through.
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 The rule that was vacated provided for

updating position limits -- updating deliverable

supply estimates every two years. I would note

that we are now well beyond when we should have

updated the updated results that were tentatively

mentioned in the current proposed rule. So we are

out of date on deliverable supply, and we are

getting further out of date every day. The market

has changed radically. Again, that is part of the

shale revolution that has radically altered the

deliverable supply at these delivery locations.

 Finally, I mentioned earlier the 

expertise, the resources, the experience the

exchanges bring to bear on these issues. I

believe the exchanges are willing to participate

in administering the regime. And I believe it

would be wise, and the report suggests it would be

wise, for the Commission to find a way to engage

the exchanges actively in helping to administer a

federal regime if one is, indeed, created. Let me

stop there.

 MS. WIGGINS: Thank you, Jim. Tyson?
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 MR. SLOCUM: Thank you very much.

First, I believe that our meeting is scheduled to

end at 1:30, and if that is the case, I think our

discussion needs more time than that and I would

just -- I don't know if I need to make a motion to

be able to extend the time of this meeting so that

we can discuss, as much time as the advisory

committee needs to address these issues?

 MS. WIGGINS: I don't intend to cut you

off at 1:30, don't worry.

 MR. SLOCUM: Okay. But not just me, but

I would imagine --

 

 

MS. WIGGINS: No.

MR. SLOCUM: -- we've got a lot of

people here at the table that would probably like

to weigh in.

 

 

MS. WIGGINS: No.

MR. SLOCUM: So, you know, my dissent is

part of the public record. I hope that you all

have read it. I'm not going to read it word for

word. This has been one of the most strangest

experiences that I've had in that it was not a
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collaborative or consultative process. At neither

of our two public meetings that we had in 2015 was

there any discussion at either one of those

meetings that the advisory committee was going to

embark on writing a report. There was no

discussion about forming a subcommittee. There

was no appointments of people to lead efforts to

write a report. There were no public mentions at

all.

 It is in the statute, and I can tell you

as an advisory committee member I received no

offline communications. No phone calls, no

emails, no smoke signals indicating that two

individuals were taking independent initiative on

their own to offer a report that would speak for

all nine members of the advisory committee.

 I know that an advisory committee is

supposed to be a collaborative process, so there

was absolutely nothing collaborative in the way

that this report was produced, and I don't think

it's a valid report of this committee because it

failed to engage, from the very beginning, the
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members or the associate members. And I

understand that the associate members, by statute,

cannot vote. That does not mean that they cannot

be consulted. There's nothing in the statute that

says a report shall not consult at all with all of

the associate members.

 And to be honest, if I was an associate

member I would be a little offended that I'm asked

to come here, attend meetings, listen in, give my

voice, but when it came time to issue a formal

report you're not consulted at all. Think about

me as an actual member of the nine-member

committee. I was not consulted that a report was

forthcoming. When the report was finally provided

to me on February 5th I was given two weeks to

accept the conclusions of the report or to issue a

dissent.

 Had I been involved or consulted with

that a report was being created I would have

worked collaboratively. We may not have agreed on 

issues. I would have suggested academic research.

I would have suggested other witnesses. I would
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have suggested associate members to consult with.

I was not in the loop, and I do have a number of

questions for the two co-authors about how they

decided to initiate this process because that

still has never been explained to me. I

appreciate your initiative, but I don't appreciate

not being consulted.

And then when we get to the conclusions

of the report it becomes a self-referencing echo

chamber where it references previous meetings of

the advisory committee which did not feature,

necessarily, balanced panels that were providing

multiple points of view on some of these very

technical and detailed issues. We cannot produce

a report that relies on bad data. And relying on

transcripts of meetings that did not have a robust

presentation of views and ideas is bad data. And

I think for that second reason this report cannot

be considered a valid product.

 So at this point, you know, again, the

details of my dissent are available for anyone to

read. And I have a lot of questions. I'm sure
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other people do, so I don't know how you would

like to proceed?

 MS. WIGGINS: I think we should open it

up to members to make comments or ask questions,

and just one IT-related issue. I believe one of

our participants on the phone, Todd Cook, would

like to make a comment at some point. We can

recognize him now, but I'm not sure how to do

that.

 

 

 

 

 

 

MR. CREEK: Can you hear me now?

MR. SLOCUM: My goodness.

MS. WIGGINS: There, there. Okay. Yes.

MR. CREEK: Wonderful.

MS. WIGGINS: Please go ahead.

MR. CREEK: Thank you. It's actually

Todd Creek, that's okay. I'm with ICAP Energy.

We're a leading global energy intermediary. I'm

also an associate member of EEMAC. As an

interdealer broker we feel like we have a unique

perspective on the commodity market activity. We

deal, primarily, in spread trade markets that

trade at low frequency, and typically for large
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size. These include the, you know, increasingly

illiquid electricity and natural gas basis markets

that are important to the utilities and other end

users.

 It's important to note that these

markets serve in quite contrast to, let's say, a

front-month futures contract, which is typically

the domain of a high-frequency trader that

generates headline volumes. That's not the market

that we provide services for today.

 Since the inception of Dodd-Frank we've

seen a material decrease in the liquidity for the

markets that we serve. The depth of market has

decreased. The ability to efficiently hedge is

materially diminished as there are less

counterparties willing to take the other side.

Since the inception of Dodd-Frank we've seen 20

percent decrease in the number of active

counterparties in natural gas alone, and all of

this results in increased costs to the end user,

the customer. So we feel that the position limit

rules as proposed will only increase the liquidity
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challenge that has already been created, and we

support the report. Thank you.

 

 

MS. WIGGINS: Craig?

MR. PIRRONG: Yes, thanks. Just a

couple of brief comments about the process. You

said independent effort, initiative like I just

decided to, hey, I think I'll write a report and

get everybody to agree to it. That's not the way

that it happened.

 

 

MR. SLOCUM: How did it happen?

MR. PIRRONG: Excuse me, sir, don't

interrupt me again, please, okay?

 

 

MR. SLOCUM: Sure.

MR. PIRRONG: Thank you. Commissioner

Giancarlo told me that under Dodd-Frank the

Commission had to produce a report. He asked me

to produce the report and that would then be

submitted to the members of the committee in order

to have their evaluation, feedback, and an

ultimate vote. I viewed my task as being a

faithful scribe of what transpired during the two

meetings. As a result, I spent several days
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reviewing the transcripts, summarizing the

transcripts, taking notes on the transcripts, and

then summarizing those transcripts.

 You have not made any substantive

objections to the representations that I made of

the transcript. And I think that it stands. And 

everybody here can read it. Everybody can go back

to the transcript and they can see that, in fact,

it does, you know, faithfully reflect what

transpired during the two meetings. It's that

simple.

 COMMISSIONER GIANCARLO: Thank you,

Professor. Let me jump in here. Thank you,

Professor. Let me just make very clear it's on

me. I asked Mr. Allison and Professor Pirrong to

go to the transcripts and stay within the scope of

the transcripts and very carefully to summarize

what is there. I chose those gentlemen because of

Jim Allison's long history and encyclopedic

knowledge of the industry and his stature in the

industry, frankly, and the Professor because of

his understanding of the academic literature.
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 I asked them to stay within the confines

of that as well as the record. All of the

transcripts they use are on the CFTC's website.

They strayed not an inch from what was discussed

last year in two meetings pursuant to Dodd-Frank,

and they summarized those. That was the extent of

their work. They broke no new ground. It was

then submitted to the nine members, any one of

whom could have dissented, as you did, entirely

within your right, could have challenged that the

work was not within the transcript. But, in fact,

they agreed with it.

 Really that is the extent of it. We

could spend a lot of time, but the fact of the

matter is it's the substance that we are here to

discuss. You know, the EEMAC is a unique

creature. I've often said that when it comes to

Title VII I think Congress got it right. And I've

often said that referring to a lot of provisions

for swaps rules. EEMAC is a creature of Title

VII, but it's one of the more unique ones, and I

have to say that until I joined the CFTC and, in
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consultation with my colleagues, agreed to take on

EEMAC, I hadn't really studied its charter. But

it presents some unique challenges.

 It asks us to cover a broad waterfront

with only nine members. And it restricts the

formal activities of the committee to those nine

members. So within nine members, and I'll read

you who we have to look to, we have to address

matters of concerns to exchanges, firms, and I'm

not sure what firms mean, but I'm not sure it only

includes incorporated entities, end users, and

regulators regarding energy and environmental

markets.

 Now, as you know, the United States has

one of the biggest and deepest energy markets in

the world. Everything from natural gas to

electric power to oil to coal to renewables, as

well as environmental. And we need to do that and

take into account of the views of exchanges, of

utilities, of end users, of producers, a broad

cross section of people. We try to do that with

nine members, but as someone noted, I think Jim
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did, we decided to create a category of associate

members to broaden that mandate, and even that was

challenging to get the right balance.

 Now, accept that the process of

balancing a committee like this is not a onetime

event. It's an ongoing event. But just for the

record, the current balance was approved by the

full commission unanimously, including four

members, so it wasn't just at my discretion. It

was broadly shared.

 It is possible that going forward in the

future we'll continue to look to balance the

membership and bring broader views. But as for

this report, this report is a report on two

meetings that took place last year, and you may

have concerns about the shortcomings of the views

expressed, but the fact of the matter is this

report is in the four corners of what was

expressed at those meetings.

 MS. WIGGINS: Thank you. Sue, I think

your tent card was up next and then Tyson and then

Sharon.
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 MS. KELLY: Thank you, Dena. First of

all, I want to express appreciation for the

opportunity to be an associate member, you know,

kind of I guess the JV team of this committee. So

I just want to say thank you. Don't take anything

I'm going to say henceforth as in any way, you

know, kicking about that. And I do appreciate Mr.

Allison's explanation of the fact that the JV team

did not vote on this report.

 I do think it's important to also make

clear that we did not see this report and did not

have an opportunity to comment on this report.

You know, I think it has to be made clear to --

you know, to this group and to the wider world

that APPA doesn't necessarily endorse what's in

this report. Although I can say that there's one

footnote that I strongly support which is

indicated where you took a poll, and yes, we

participated in that poll, Footnote 17. We

definitely agree that trade options and forward

contracts with volumetric optionality should be

excluded from position limits. Yes, we're with
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you on that point.

 As to the rest, I can't say that that's

APPA's position and we stand by, you know, the

comments we have filed with the Commission on

these issues, including the comments we filed on

March 30th regarding proposed speculative position

limits. So I just want to make that clear and

thank you for the opportunity to do that.

 COMMISSIONER GIANCARLO: Let me just say

that the decision not to circulate it to the

associate members was a deliberate one because

there was some concern expressed that that would

be exceeding the role of EEMAC which specifically

says it's the nine members who shall prepare and

submit the report.

 

 

MS. WIGGINS: Tyson?

MR. SLOCUM: Commissioner, I very much

appreciate your explanation. But again, the nine

members did not prepare the report, right? I

mean, two people. One, and with all due respect,

Professor, you weren't a member of -- you weren't

one of the nine members at the time of your co- 
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authorship of the report. So we only have one

actual member that prepared the report, and then

offered what, essentially, was a final draft for

the other eight members to consult.

 So I think that makes it not a valid

product of this advisory committee. Especially,

Mr. Commissioner, if the initiative for drafting

the report came from you. I know that you're the

sponsor of the committee, but you're actually not

technically a member of the advisory committee.

And so I think the origins of the report did not

come from the advisory committee, but from its

sponsor. I don't think it's a valid product at

this point, and I think that it needs to be

recommitted for further consideration by the

advisory committee.

 And I do think that there is some --

there are a lot of substantive issues. I didn't

have, necessarily, the time in my dissent. But,

for example, in the sections talking about that

there is no evidence of excessive speculation, one

of the footnotes goes to the witness from the
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Energy Information Administration. His remarks

absolutely did not confirm the absence of

excessive speculation, and so he is being

misattributed. There was nothing in his

presentation.

 And so I do actually think that the

advisory committee has more work to do to review

this report, and I don't think it should be

submitted formally to the Commission because it's

still a work in progress because the nine members

did not produce this report. Voting on it is not

producing a report.

 COMMISSIONER GIANCARLO: I've never 

participated in a nine-person drafting committee,

but I do know that the nine members of this

committee are very, very busy people. I think if

we had asked all nine to form a drafting committee

our report on our 2015 activities may have been

ready in 2017 and not serve much recommendation

power to the Commission.

 MR. SLOCUM: I take my service very

seriously. If I had been asked I would have been
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more than happy to dedicate the time necessary.

I've attended every meeting. I don't go out for

phone calls. I've been an active participant in

both meetings, and to not include me in the

process, I think, is an unfortunate oversight.

MS. WIGGINS: Sharon?

MS. BROWN-HRUSKA: I just wanted to just

commend the drafters of the report. I did think

it was a faithful representation of what was

discussed at the meetings. I think that, you

know, it is, to Commissioner Giancarlo's credit he

picked some people that I have great regard for in

terms of their understanding of how these markets

work and their experience in working with them.

So I do support the report and I think that, you

know, it will -- I hope that we will have

additional opportunity to comment as required or

as Tyson has requested. I think that I would look

forward to his additional comments in addition to

his first shot at the report.

 I think there are some excellent

academics out there who could do some more
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rigorous and useful analyses of these issues, some

of them even affiliated with Public Citizen, so I

would say that it would be great to see more work

in this area, but I think that in terms of the

conclusions that came out of the report based on

the body of the record that came out of those two

meetings, and the public comment process

associated with it, I would, again, commend the

Commission and Commissioner Giancarlo for putting

it forward.

 

 

MS. WIGGINS: Benjamin?

MR. JACKSON: Thanks, Dena. I want to

thank, as well, the drafters of that report as

well as the Commissioner, as I thought it was an

accurate reflection of the discussions that we had

in those EEMAC meetings. And, in fact, I used the

term when I read it internally and we were talking

about it at ICE, I used the term that it was

actually read like meeting minutes. That it

actually accurately reflected all the discussions

that we had.

 Just to pivot off the report onto the
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context around position limits and how important

it is for the people that are customers at

Intercontinental Exchange. And to correct a

little bit of a misperception that's out there

because every time these meetings come out I see

articles that come out around these meetings that

paint a picture for the public that there are no

limits out there. And to be clear, there are

limits in all these markets.

 And the discussions around position

limits is about substantial modifications being

applied to a regime in place that the effects are

still being understood. Thus, a thoughtful,

data-driven approach while thinking about the

obligation that I mentioned in the first EEMAC

meeting that the Commission and all of us should

have is do no harm to these markets is necessary

while we're thinking about implementing changes.

 Third thing I'd highlight is that it's

not clear from any of the discussions we have had

that federal limits, in addition to the existing

exchange limits that are in place, will offer any
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added protections to our markets. And it is clear

that if they're not applied correctly they can be

harmful. So let's wait and assess the impact of

the existing position limit regime before

implementing changes.

 Final comment I want is to highlight

something that Jim mentioned a little while ago

that where our focus should be right now is on

getting accurate deliverable supply estimates in

place that reflect current market conditions in an

expanding energy market in the United States.

Thank you.

 

 

MS. WIGGINS: Bryan? 

MR. DURKIN: I, too, on behalf of CME

Group and as a member of this committee, want to,

first of all, thank and commend the Commission for

having this committee formed. A lot of us have

put a great deal of time and effort and commitment

over the past year to deal with very, very

substantive issues that could impact the

fundamental operations of these markets that are

important to the entire global economy, and so
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none of us takes lightly around this table our

responsibility to this assignment.

 As to Craig and to Jim Allison, I want

to thank you for your efforts in summarizing very

articulately, and in a very concise manner, the

substance of those meetings that we've held. And

everyone around this table has had an opportunity

to make their viewpoints known, and those

viewpoints are on the record. So what has been

summarized here is an accurate reflection of the

discussions that were held in those meetings.

There's opportunity here for us to move forward.

There was great progress that has been made as a

result of those meetings in the context of

fundamental issues of hedge exemptions, for

example.

 I, for one, walked away from those

meetings feeling like the Commission very much

appreciated the dialogue that took place during

those meetings. And I have faith that there will

be some consideration as a result of the people

around this table, and the comments that have been
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provided during the wonderful comment period. And

I commend the Commission for having extended that

comment period on a number of occasions because it

reflected that there was a need for more

validation and consideration of the information.

 But if you take a look at the

recommendations that are in this report, they're

very reasonable in terms of a step forward, and

there's an acknowledgement here that if the

Commission were to move forward, let's do it in a

very pragmatic and judicious fashion, as I'm sure

it will. Look at the spot month limits, consider

the accountability regime that's been in place and

is operating very effectively for non-spot month

contracts, address the issues and challenges

associated with hedge exemptions which, again, I

believe will happen.

 I just kind of had that hope and faith

because a lot came out in these meetings and there

were comment periods that allowed the Commission

to give greater consideration to that definition.

And, also, we are very committed as exchanges to
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assist in this endeavor and carry out our

responsibilities, as we have. Again, echoing

Ben's comments, very frustrating to see out in the

public domain a lack of acknowledgment that there

is a regime that is in place, and a regime that

has worked very effectively for many, many decades

to preserve the integrity of these markets.

 MS. WIGGINS: Thank you. I am mindful

of the clock. I'm mindful of the fact that we

have a few more tent cards that were up, and I was

hoping that we could ask people to make fairly

brief comments, and hopefully we can get people

out of here and perhaps off to lunch or back to

whatever else they need to attend to by about

2:00. And the list I have is Susan, Tyson, and

then Vincent, if you would be so kind as to wrap

this up for us. So Susan?

 MS. BERGLES: Thank you. The American

Gas Association certainly appreciates the fact

that it can participate as an associate member on

this committee and it has been broadened. AGA has

gone on record several times in the position
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limits proceedings to make its position known on

its concerns with the proposed rule, and in terms

that we appreciate the efforts that have gone into

putting together this report. And it appears to

be consistent with what has been discussed by this

committee on position limits, and we particularly

agree with the comment on trade options and

forward contracts with volumetric optionality

should not be included. Appreciate it. Thank

you.

 MR. SLOCUM: Thank you. I just have a

quick question and then a quick comment. So for

the two co- authors, how long did the preparation

of the report take from when the Commissioner

asked you to do it to where a draft was produced?

 MR. PIRRONG: This took place over

several months. The actual time involved with my

review of the transcripts and then subsequently

writing it probably, you know, it was probably

three or four full days of activity. Maybe even

more than that. But, you know, so then the -- you

know, Mr. Allison and I exchanged, you know,
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comments, made edits, and then provided that to

Commissioner Giancarlo.

 MR. ALLISON: The single most time

consuming aspect of it was reviewing the

transcripts because our mandate was not to create

new material, but to summarize the transcript and

to highlight the key points in the transcript. So

the time spent reviewing the transcripts was the

critical part of this.

 MR. PIRRONG: So, and just let me add to

that, I mean, if you look in the report it

meticulously, you know, cites the comments, who

made them, what pages of the transcript they are

on, so it's very easy for someone to go back and

review the actual transcripts in order to see what

was actually said, and to see whether that was --

you know, what is represented in the report

actually reflects what was said during the

meeting.

 MR. SLOCUM: I agree that it's very easy

to follow. My point is, and this follows on the

comment by the gentleman from CME that said
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everyone had an opportunity. You had several

months. I had two weeks. That's not equal. I

was kept in the dark about this process. If I had

several months I could have produced a very

similar dissent report that addressed a number of

substantive issues. I was not given that

opportunity. So this was not an equal process,

and I think that it's only fair that this report

be sent back to the advisory committee so that --

I'm still going to be alone in my dissent, but at

least a dissent report can be added to, and that I

be given the same amount of time that the two

primary authors of the majority report were given.

 And then I just have one more quick

comment. I know that we're short on time, but

again, the gentleman from CME is speaking very

passionately about a system that's been in place 

for decades, this accountability regime. And I

just need to remind people that Amaranth, under

CME's accountability regime at the time, exceeded

those accountability regime limits 14 times and

was given exemptions on 12 of them. This is one
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of the biggest market disasters we saw in natural

gas over the last decade. And it demonstrated an

absolute failure of the for-profit exchanges'

administration of the accountability regime.

 I know very well about these issues.

And it is important that the public interest

through government regulators take the lead on

mandates from Congress in setting and regulating

and enforcing position limits as articulated in

Dodd-Frank. Thank you.

 

 

MS. WIGGINS: Vincent?

MR. JOHNSON: I'll be quick. First of

all, on behalf of BP I want to thank you for

allowing us to be an associate member. And my

quick point is, first of all, I want to say thanks

for the report and for Jim, the professor, we

support it. I also want to thank staff. It may

be covered here, but everybody's talked about the

deliver supply estimates, and I want to thank CFTC

staff because they have reached out to us from our

natural gas to our oil and other business, to

discuss deliverable supply.
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 But specifically, the methodology on

deliverable supply. I think if there was one

thing, if I had a wish list, to add, it would be

more around -- because we had a really good,

robust discussion, we brought in some of our

traders to discuss with them on our thoughts on

deliverable supply, so in the methodology for

calculating that, and in light of all the changes.

I just think if I had one wish list it would just

be more of an enhancement of what's the proper

methodology to determine deliverable supply?

 MS. WIGGINS: Commissioner Giancarlo, I

think I will turn it back to you for final

comments. Before I do, I just want to express my

appreciation to everyone here for the quality of

the discussion. I know we don't always agree, but

a civil conversation about both agreements and

disagreements, I think, can only advance the

interests that we're trying to advance here. So

thank you all and thank you Commissioners,

Chairman and Commissioners, for hosting us here

and for your hospitality in enabling us to have
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this conversation.

COMMISSIONER GIANCARLO: Dena, that was

extremely well said. I thank everybody for their

participation, their candor, their preparedness,

their thoughtfulness on some of these very, very

important issues. And I want to thank my fellow

commissioners who, as I mentioned at the outset,

work very hard. We cover a broad waterfront, the

three of us, and I think we are somewhat

unprecedented in our attendance at our various

hearings. We truly demonstrate, I think, what is

characteristic amongst this Commission and that is

the desire to understand the issues thoroughly and

be well-briefed. Whatever our policy choices are,

I think we go into every one of them extremely

well-considered, and I think that is a public

service to the public that we're all proud to

bear. So thank you all very much for your public

service, and I think we're finished for the day.

Thank you very much, Dena.

 CHAIRMAN MASSAD: I think Commissioner

Bowen wants to speak.
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COMMISSIONER GIANCARLO: I'm very sorry.

COMMISSIONER BOWEN: No problem. I'll

be really, really brief. I, too, appreciate the

feedback that we received today from the

committee. Regarding position limits, all of

these recommendations have been made before. I

don't mind hearing them twice, sometimes multiple

times. But as I said during my confirmation

hearing almost two years ago, I will consider all

viewpoints.

 And I said then, and I want to stress

today, I want to represent the views of the

voiceless who have no seat at the table. That

message is as important today as it was then.

That means for me to have the opportunity to hear

all viewpoints with a diversity of perspectives.

Those who represent the ultimate end user or

everyday citizen. I look forward to hearing from

those voices, as well, as I consider what I heard

today.

 CHAIRMAN MASSAD: Let me add a couple of

thoughts too. First of all, I agree with
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everything that Commissioner Bowen said. I think

the report sets forth various observations that,

as she noted, have kind of already been made. It

does have a tone of being quite negative about a

position limits rule; the basic message, at least

in the first few pages, seems to be that a

position limits rule isn't necessary and nothing

should be done.

 I would note that many of the EEMAC

committee members here today, including several of

the eight who supported the report, I believe, are

affiliated with organizations that have filed

comment letters which, at least to my mind, were

much more nuanced. And while their letters

clearly express concerns about some of the

specifics of the rule, one letter, for example,

says, "Position limits are, in my opinion,

valuable and necessary for the fair and smooth

functioning of physically deliverable

commodities." Another says they "support position

limits if property applied." Another said the

energy markets "can function well under a position
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limits regime as long as the limits are set

appropriately."

 So I guess it's my hope that we can come

together and try to come up with a rule that

works. It seems to me that's our job. And I say

that for a few reasons. One is, I think Congress

has directed us to establish a rule. Second, I

think it's been noted, first of all, we have had

federal position limits in place in agricultural

commodities for decades. There's still liquidity

in those markets. And third, being against any

position limits rule on the basis that it may

affect liquidity or constrict hedging strikes me

as a difficult position to defend from a practical

standpoint.

 It strikes me a bit like saying you're

against speed limits because they may make you

late for work. If there's a speed limit of 10

miles an hour on Interstate 95, yeah, that would

be highly inefficient and would discourage people

from using the highway. But having no speed

limits can put everyone at risk. So if we get
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this right it should not constrict liquidity or

affect hedging, and that, obviously, goes to where

you set the limits and how you write the

exemptions. And it does surprise me that there

was actually, despite having said position limits

may restrict liquidity, there was no discussion of

the actual limits. Seems to me that's something 

that's quite relevant.

 So I would just say that, you know, it's

my desire to try to work with my fellow

commissioners to come up with a rule that works.

And I would hope that all of you would lend your

expertise and support to that end. Thank you.

 COMMISSIONER GIANCARLO: We're done.

Thank you.

(Whereupon, at 2:00 p.m., the

PROCEEDINGS were adjourned.)

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 -----------------------------------

 

 

 

 

CERTIFICATE OF NOTARY PUBLIC

DISTRICT OF COLUMBIA

 I, Stephen K. Garland, notary public in

and for the District of Columbia, do hereby certify

that the forgoing PROCEEDING was duly recorded and

thereafter reduced to print under my direction;

that the witnesses were sworn to tell the truth

under penalty of perjury; that said transcript is a

true record of the testimony given by witnesses;

that I am neither counsel for, related to, nor

employed by any of the parties to the action in

which this proceeding was called; and, furthermore,

that I am not a relative or employee of any

attorney or counsel employed by the parties hereto,

nor financially or otherwise interested in the

outcome of this action.

 (Signature and Seal on File)

 Notary Public, in and for the District of Columbia

 My Commission Expires: May 31, 2018